<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1998.
REGISTRATION NO. 333-58501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EASYRIDERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0811505
(STATE OR JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
2721
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
567 SAN NICHOLAS DRIVE, SUITE 400
NEWPORT BEACH, CALIFORNIA 92660
(949) 718-4630
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NAME: WILLIAM E. PRATHER
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
567 SAN NICHOLAS DRIVE, SUITE 400
NEWPORT BEACH, CALIFORNIA 92660
(949) 718-4630
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ROBERT N. WILKINSON, ESQ.
GATEWAY TOWER EAST, SUITE 900
SALT LAKE CITY, UTAH 84133
(801) 533-9645
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the
reorganization (the "Reorganization") of Newriders, Inc. ("Newriders"), Paisano
Publications, Inc., certain affiliates of Paisano Publications, Inc., M & B
Restaurants, L.C., Easyriders Sub, Inc., and Easyriders, Inc. (the "Registrant")
as described in the Prospectus/Proxy Statement included herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par
value...................... 10,000,000(1) shares $4.16(2) $41,600,000(2) $12,272
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated maximum number of shares of the Registrant's Common
Stock, $.001 par value, to be issued in connection with the Reorganization
described herein, determined by dividing by two (2) the number of
outstanding shares of the Common Stock, $.001 par value, of Newriders,
("Newriders Common Stock") as of June 30, 1998 (18,498,316) plus an estimate
of the number of shares of Newriders Common Stock issuable pursuant to
certain convertible notes and convertible debentures convertible prior to
the expected closing date of the Reorganization, and certain warrants.
(2) Estimated pursuant to Rule 457(f) and 457(c) under the Securities Act of
1933 solely for the purpose of calculating the registration fee based on the
average of the bid and asked prices of Newriders Common Stock on June 30,
1998, multiplied by two (2).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
NEWRIDERS, INC.
567 SAN NICOLAS DRIVE, SUITE 400
NEWPORT BEACH, CALIFORNIA 92660
August 31, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Newriders, Inc. ("Newriders"), which will be held at the Radisson Hotel and
Conference Center, 30100 Agoura Road, Agoura Hills, California, at 10:00 a.m.,
local time, on September 22, 1998 (together with all adjournments and
postponements thereof, the "Annual Meeting").
The enclosed materials describe a number of proposals that you will be
asked to vote on at the Annual Meeting or by signing the enclosed Proxy.
1. You will be asked to approve a series of proposed transactions
(collectively referred to as the "Reorganization") that would result in:
A. Easyriders, Inc., a Delaware corporation and a wholly-owned
subsidiary of Newriders ("Easyriders"), acquiring all of the issued and
outstanding common stock of Paisano Publications, Inc., a California
corporation, and certain affiliated corporations (the "Paisano Companies"),
which are engaged in publishing special interest magazines relating to
motorcycles and tattooing, marketing motorcycle apparel and accessories,
promoting events relating to motorcycles, and franchising retail stores
which market motorcycle apparel and accessories;
B. Easyriders acquiring all of the issued and outstanding membership
interests of M & B Restaurants, L.C., a Texas limited liability company
("El Paso") which is engaged in the operation of four restaurants under the
name "El Paso Bar-B-Que"; and
C. Easyriders Sub, Inc., a Nevada corporation and wholly-owned
subsidiary of Easyriders ("Easyriders Sub I"), merging into Newriders (the
"Merger") pursuant to an Agreement and Plan of Merger and Reorganization by
and among Newriders, Easyriders and Easyriders Sub I (the "Merger
Agreement"). A vote in favor of the Reorganization will be a vote in favor
of the approval and adoption of the Merger Agreement. As a result of the
Merger, the following will occur:
(i) All of the issued and outstanding shares of the common stock of
Newriders (the "Newriders Common Stock") will be exchanged for shares of
the common stock of Easyriders (the "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 (other than
those exercising rights of dissent and appraisal) will become
stockholders of Easyriders;
(ii) All of the outstanding options, warrants and other convertible
securities exercisable for or convertible into Newriders Common Stock
will be exchanged for the right to purchase or convert into Easyriders
Common Stock on the basis of one share of Easyriders Common Stock for
each two shares of Newriders Common Stock subject to such options,
warrants or convertible securities, 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) Each of Newriders, the Paisano Companies and El Paso will
become wholly-owned subsidiaries of Easyriders. Immediately following
the Reorganization, Easyriders will transfer the El Paso membership
interests to Newriders, with the result that El Paso will become a
wholly-owned subsidiary of Newriders.
2. You will be asked to approve the adoption of the Newriders 1997
Executive Incentive Compensation Plan (the "Newriders Plan"). 5,000,000 shares
of Newriders Common Stock will be reserved for issuance under the Newriders
Plan. Upon consummation of the Reorganization, the Newriders Plan will terminate
and all awards granted thereunder will be exchanged for awards under the
Easyriders Plan referred to in Item 3 below.
<PAGE> 3
3. You will be asked to approve the adoption of the Easyriders 1998
Executive Incentive Compensation Plan (the "Easyriders Plan"). 2,800,000 shares
of Easyriders Common Stock will be reserved for issuance under the Easyriders
Plan. The Easyriders Plan will become effective only if the Reorganization is
consummated.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE REORGANIZATION
AND THE MERGER AGREEMENT ARE FAIR AND REASONABLE AND IN THE BEST INTERESTS OF
NEWRIDERS AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO APPROVE THE REORGANIZATION. Additionally, because of the personal
interests of certain Board members in the Reorganization, which interests are
described in detail in the enclosed Prospectus/Proxy Statement the three
non-interested members of the Board of Directors separately voted on and
unanimously approved the Reorganization.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE NEWRIDERS PLAN IS IN THE
BEST INTERESTS OF NEWRIDERS, AND RECOMMENDS THAT THE STOCKHOLDERS APPROVE THE
ADOPTION OF THE NEWRIDERS PLAN. YOUR BOARD OF DIRECTORS HAS ALSO DETERMINED THAT
THE EASYRIDERS PLAN IS IN THE BEST INTERESTS OF NEWRIDERS AND EASYRIDERS AND
RECOMMENDS THAT THE STOCKHOLDERS APPROVE THE ADOPTION OF THE EASYRIDERS PLAN.
Additionally, you will be asked to approve Items 4 and 5 below as a
precaution against the possibility that the Reorganization may not be
consummated. If the Reorganization is consummated, you will own stock in
Easyriders, not Newriders. Newriders will be a wholly-owned subsidiary of
Easyriders and the members of the Board of Directors and independent auditors of
Easyriders will be as set forth under "The Reorganization-Board of Directors and
Management of Easyriders After the Reorganization" and "Ratification of
Appointment of Independent Auditors" in the Prospectus/Proxy Statement.
4. You will be asked to elect members of the Newriders Board of Directors
for the ensuing year.
5. You will be asked to ratify the appointment of Deloitte & Touche LLP as
independent auditors for Newriders for the fiscal year ending December 31, 1998.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE ELECTION OF DIRECTORS AS
NOMINATED BY THE BOARD OF DIRECTORS AND THE RATIFICATION OF THE APPOINTMENT OF
DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS FOR NEWRIDERS WOULD BE IN THE BEST
INTERESTS OF NEWRIDERS, AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE DIRECTORS SO NOMINATED AND RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE
LLP AS INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 1998.
The accompanying Prospectus/Proxy Statement contains information about
Easyriders, the Paisano Companies and El Paso, and describes the transactions
contemplated by the Reorganization. The accompanying Prospectus/Proxy Statement
also contains information about the proposed adoption of the Newriders Plan and
the Easyriders Plan. Please give the information contained in the accompanying
Prospectus/Proxy Statement your most careful attention. You are being asked to
consider and vote either by attending the Annual Meeting, or by signing and
returning your Proxy.
Regardless of whether you are able to attend the Annual Meeting, please
complete, sign and date the enclosed Proxy and return it in the enclosed
envelope as soon as possible. If you attend the Annual Meeting, you may revoke
your Proxy and vote your shares in person if you wish.
PLEASE SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY.
Very truly yours,
/s/ WILLIAM E. PRATHER
--------------------------------------
William E. Prather
Chief Executive Officer,
President and Director
<PAGE> 4
NEWRIDERS, INC.
567 SAN NICOLAS DRIVE, SUITE 400
NEWPORT BEACH, CALIFORNIA 92660
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 22, 1998
To our Stockholders:
The Annual Meeting of Stockholders of Newriders, Inc. ("Newriders"), will
be held at the Radisson Hotel and Conference Center, 30100 Agoura Road, Agoura
Hills, California, on September 22, 1998 at 10:00 a.m., local time, for the
following purposes:
1. To approve a series of proposed transactions (collectively referred to
as the "Reorganization") that would result in:
A. Easyriders, Inc., a Delaware corporation and a wholly-owned
subsidiary of Newriders ("Easyriders"), acquiring all of the issued and
outstanding common stock of Paisano Publications, Inc., a California
corporation, and certain affiliated corporations (the "Paisano Companies"),
which are engaged in publishing special interest magazines relating to
motorcycles and tattooing, marketing motorcycle apparel and accessories,
promoting events relating to motorcycles, and franchising retail stores
which market motorcycle apparel and accessories;
B. Easyriders acquiring all of the outstanding membership interests of
M & B Restaurants, L.C., a Texas limited liability company ("El Paso")
which is engaged in the operation of four restaurants under the name "El
Paso Bar-B-Que"; and
C. Easyriders Sub, Inc., a Nevada corporation and wholly-owned
subsidiary of Easyriders ("Easyriders Sub I"), merging into Newriders (the
"Merger") pursuant to an Agreement and Plan of Merger and Reorganization by
and among Newriders, Easyriders and Easyriders Sub I (the "Merger
Agreement"). A vote in favor of the Reorganization will be a vote in favor
of the approval and adoption of the Merger Agreement. In connection with
the Merger, the following will occur:
(i) All of the issued and outstanding shares of the common stock of
Newriders will be exchanged for shares of the common stock of Easyriders
(the "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 (other than those exercising rights of dissent
and appraisal) will become stockholders of Easyriders;
(ii) All of the outstanding options, warrants and other convertible
securities exercisable for or convertible into Newriders Common Stock
will be exchanged for the right to purchase or convert into Easyriders
Common Stock on the basis of one share of Easyriders Common Stock for
each two shares of Newriders Common Stock subject to such options,
warrants or convertible securities, at an exercise price per share equal
to two times the exercise price or conversion ratio provided for in
stock option, warrant or other agreements evidencing such options,
warrants or other convertible securities; and
(iii) Each of Newriders, the Paisano Companies and El Paso will
become wholly-owned subsidiaries of Easyriders. Immediately following
the Reorganization, Easyriders will transfer the El Paso membership
interests to Newriders, with the result that El Paso will become a
wholly-owned subsidiary of Newriders.
2. To approve the adoption of the Newriders 1997 Executive Incentive
Compensation Plan (the "Newriders Plan"). 5,000,000 shares of Newriders Common
Stock will be reserved for issuance under the
<PAGE> 5
Newriders Plan. Upon consummation of the Reorganization, the Newriders Plan will
terminate and all awards granted thereunder will be exchanged for awards under
the Easyriders Plan referred to in Item 3 below.
3. To approve the adoption of the Easyriders 1998 Executive Incentive
Compensation Plan (the "Easyriders Plan"). 2,800,000 shares of Easyriders Common
Stock will be reserved for issuance under the Easyriders Plan. The Easyriders
Plan will become effective only if the Reorganization is consummated.
4. To elect members of the Newriders Board of Directors for the ensuing
year.
5. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for Newriders for the fiscal year ending December 31, 1998.
6. To consider such other business as may properly come before the meeting.
You are asked to approve Items 4 and 5 above as a precaution against the
possibility that the Reorganization may not be consummated. If the
Reorganization is consummated, you will own stock in Easyriders, not Newriders.
Newriders will be a wholly-owned subsidiary of Easyriders and the members of the
Board of Directors and independent auditors of Easyriders will be as set forth
under "The Reorganization-Board of Directors and Management of Easyriders After
the Reorganization" and "Ratification of Appointment of Independent Auditors" in
the Prospectus/Proxy Statement.
Only stockholders of record at the close of business on August 27, 1998,
are entitled to notice of and vote at the Annual Meeting and any adjournments
thereof.
STOCKHOLDERS WHO OPPOSE THE PROPOSED MERGER WILL HAVE THE RIGHT TO RECEIVE
PAYMENT FOR THE VALUE OF THEIR SHARES AS SET FORTH IN SECTIONS 92A.300 THROUGH
92A.500, INCLUSIVE, OF THE NEVADA REVISED STATUTES ATTACHED AS APPENDIX E TO THE
PROSPECTUS/PROXY STATEMENT WHICH ACCOMPANIES THIS NOTICE. SUCH DISSENTER'S
RIGHTS WILL BE AVAILABLE ONLY TO STOCKHOLDERS OF NEWRIDERS WHO (i) BEFORE THE
VOTE TO AUTHORIZE THE MERGER, NOTIFY NEWRIDERS IN WRITING OF THEIR INTENTION TO
DEMAND PAYMENT FOR THEIR SHARES OF NEWRIDERS COMMON STOCK, AND (ii) REFRAIN FROM
VOTING IN FAVOR OF THE MERGER. VOTING AGAINST THE MERGER WILL NOT CONSTITUTE
NOTIFYING NEWRIDERS OF THE INTENTION TO DEMAND PAYMENT IF THE MERGER IS
EFFECTUATED.
BY ORDER OF THE BOARD OF DIRECTORS,
Dated August 31, 1998 /s/ HAL H. BOLEN II
--------------------------------------
Secretary
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE MARK, SIGN,
DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE. ANY PERSON GIVING A PROXY HAS THE POWER TO REVOKE IT AT ANY TIME PRIOR
TO ITS EXERCISE AND, IF PRESENT AT THE ANNUAL MEETING, MAY WITHDRAW IT AND VOTE
IN PERSON.
<PAGE> 6
NEWRIDERS, INC.
PROXY STATEMENT
EASYRIDERS, INC.
PROSPECTUS
------------------------
This Prospectus/Proxy Statement is furnished by Newriders, Inc., a Nevada
corporation ("Newriders") to the holders of its common stock, par value $0.001
per share ("Newriders Common Stock"), in connection with the solicitation of
proxies by the Board of Directors of Newriders (the "Newriders Board of
Directors") for use at the Annual Meeting of Stockholders to be held at the
Radisson Hotel and Conference Center, 30100 Agoura Road, Agoura Hills,
California, on September 22, 1998, at 10:00 a.m., local time, and at any
adjournments or postponements thereof (the "Annual Meeting").
At the Annual Meeting, the stockholders of Newriders will be asked (i) to
consider and vote upon a proposal to approve a series of proposed transactions
(collectively referred to as the "Reorganization") as hereinafter described, and
in connection therewith, to approve and adopt an Agreement and Plan of Merger
and Reorganization dated June 30, 1998 (the "Merger Agreement"), by and among
Newriders, Easyriders, Inc., a Delaware corporation and a wholly owned
subsidiary of Newriders ("Easyriders"), and Easyriders Sub, Inc., a Nevada
corporation and a wholly owned subsidiary of Easyriders ("Easyriders Sub"), (ii)
to consider and vote upon a proposal to approve the Newriders 1997 Executive
Incentive Compensation Plan (the "Newriders Plan"), (iii) to consider and vote
upon a proposal to approve the Easyriders 1998 Executive Incentive Compensation
Plan (the "Easyriders Plan"), and, as a precaution against the possibility that
the Reorganization may not be consummated, (iv) to elect the Newriders Board of
Directors, and (v) to ratify the appointment of Deloitte & Touche LLP as
independent auditors of Newriders for the year ending December 31, 1998, and in
any event, (vi) to authorize the persons designated as proxies to vote in their
discretion upon such other matters as may properly come before the Annual
Meeting.
(continued on next page)
------------------------
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO CERTAIN RISKS. SEE "RISK
FACTORS" AT PAGE 18.
THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY WITHIN ANY
JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION WITHIN SUCH JURISDICTION. NO AGENT OR OFFICER OF NEWRIDERS OR
EASYRIDERS, NOR ANY OTHER PERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY NEWRIDERS OR EASYRIDERS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION" OR "SEC") NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/ PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS AUGUST 31, 1998
<PAGE> 7
The Reorganization as proposed will include 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 are engaged 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
is engaged in the operation of four restaurants under the name "El Paso Bar-B-
Que;" and (iii) the merger (the "Merger") of Easyriders Sub with and into
Newriders pursuant to the Merger Agreement. A vote in favor of the
Reorganization will be a vote in favor of the approval and adoption of the
Merger Agreement.
As a result of the Merger (i) the Newriders Common Stock will be exchanged
for common stock of Easyriders $0.001 par value (the "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 (other than those exercising rights of dissent and appraisal under
applicable Nevada law ("Dissenting Stockholders")) will become stockholders of
Easyriders, (ii) all of the outstanding options, warrants and other convertible
securities exercisable for or convertible into Newriders Common Stock will be
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 will become wholly-owned subsidiaries of Easyriders. Immediately
following the Reorganization, Easyriders will transfer the El Paso membership
interests to Newriders, with the result that El Paso will become a wholly-owned
subsidiary of Newriders. The Merger Agreement is attached to this
Prospectus/Proxy Statement as Addendum A. As of August 24, 1998, there were
issued and outstanding 17,962,316 shares of Newriders Common Stock. As of August
15, 1998, there were issued and outstanding options, warrants and other
convertible securities exercisable for or convertible into approximately
6,080,000 shares of Newriders Common Stock at a weighted average exercise price
of approximately $2.31 per share. This assumes exercise/conversion of such
securities as of August 15, 1998. Conversion prices of certain convertible
securities and the number of shares of Newriders Common Stock issuable upon
their conversion vary based upon the market price of Newriders Common Stock at
or prior to the date of conversion.
In the Paisano Acquisition, Easyriders and a subsidiary of Easyriders
("Easyriders Sub II") will receive all of the issued and outstanding stock (the
"Paisano Companies Stock") of each of the corporations that comprise the Paisano
Companies. The Paisano Companies are Paisano Publications, Easyriders of
Columbus, Inc., an Ohio corporation ("Columbus"), Easyriders Franchising, Inc.,
a California corporation ("Easyriders Franchising"), Teresi, Inc., a California
corporation ("Teresi, Inc."), Bros Club, Inc., a California corporation ("Bros
Club") and Associated Rodeo Riders on Wheels, a California corporation ("Rodeo
Riders"). Mr. Joseph Teresi, the sole stockholder of each of the Paisano
Companies, will receive in exchange for the Paisano Companies Stock, total
consideration in the amount of $48,000,000, consisting of 6,493,507 shares of
Easyriders Common Stock (representing approximately 34.3% of Easyriders Common
Stock issued and outstanding immediately following the Reorganization) with an
estimated fair value of $3.08 per share, and promissory notes aggregating
$28,000,000, consisting of a promissory note of Easyriders Sub II in the
principal amount of $15,000,000 which is payable in cash immediately after the
Merger has occurred, and three promissory notes of Easyriders (the "Contributor
Notes") in the aggregate amount of $13,000,000. The aggregate amount received by
Mr. Teresi is subject to adjustment upward or downward, dollar for dollar, based
on the amount by which the Paisano Companies' combined working capital exceeds
or is less than $4,537,000 as of the consummation of the Paisano Acquisition. As
of June 30, 1998, the Paisano Companies combined working capital was
approximately $2,987,000. In connection with the Paisano Acquisition, the
Paisano Companies will distribute certain assets to Mr. Teresi and Mr. Teresi
will assume certain liabilities of the Paisano Companies with the anticipated
effect of increasing the working capital of the Paisano Companies. See
"Unaudited Pro Forma Condensed Financial Statements -- Proforma Combined
Condensed Balance Sheet (Unaudited)." As contemplated in connection with the
Paisano Acquisition, Mr. Teresi has received a
ii
<PAGE> 8
dividend of $7,000,000 from Paisano Publications, which has been funded by a
loan in that amount to Paisano Publications with the understanding that such
loan will be repaid by Paisano Publications upon consummation of the
Reorganization. As of June 30, 1998, the net assets of the Paisano Companies
were approximately $3,780,000. After deducting the $7,000,000 dividend paid to
Mr. Terisi, the deficiency in net assets of the Paisano Companies as of June 30,
1998, on a pro forma basis, would have been approximately $3,220,000. Mr. Teresi
will also have the right, subject to the approval of the Compensation Committee
of Easyriders, 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. The terms of the Paisano Acquisition are prescribed by the
Stock Contribution Agreement dated June 30, 1998, (the "Paisano Agreement")
among Newriders, Easyriders, Easyriders Sub II, the Paisano Companies and Mr.
Teresi, a copy of which is attached to this Prospectus/Proxy Statement as
Addendum B. The Contributor Notes will 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 Easyriders 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 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. See
"The Reorganization -- Martin Stock Purchase."
In the El Paso Acquisition, John E. Martin, William E. Prather and his
wife, Marna Prather (collectively, the "El Paso Owners"), who together own all
of the outstanding membership interests of El Paso, will receive a total of
2,000,000 shares of Easyriders Common Stock in exchange for all of the
outstanding membership interests of El Paso. Mr. Martin is the Chairman of the
Board of Directors of Newriders, and will be the Chairman of the Board of
Directors of Easyriders after the Reorganization. Mr. Prather is the President
of Newriders and a member of its Board of Directors, and will be the President
and a member of the Board of Directors of Easyriders after the Reorganization.
The terms of the El Paso Acquisition are prescribed by an LLC Interest
Contribution Agreement dated June 30, 1998 (the "El Paso Agreement"), among
Newriders, Easyriders, El Paso and the El Paso Owners, a copy of which is
attached to this Prospectus/Proxy Statement as Addendum C.
In the event that the Paisano Acquisition and the El Paso Acquisition are
not consummated, the Board of Directors of Newriders has determined that it
would not be in the best interests of the stockholders of Newriders to complete
the Merger. The Paisano Acquisition will be completed only if, among other
conditions, (i) debt financing can be obtained in the amount of approximately
$22,000,000, and (ii) Mr. Martin purchases approximately 4,036,797 shares of
Easyriders Common Stock for $12,300,000 to be paid $5,000,000 in cash and by two
promissory notes aggregating $7,300,000 (the "Martin Notes").
The Martin Notes will consist of a full recourse promissory note in the
amount of $5,000,000 (the "Martin Mirror Note"), which note will be pledged by
Easyriders to secure the Contributor Mirror Note, and a full recourse promissory
note in the amount of $2,300,000 (the "Other Martin Note"). The Martin Mirror
Note has a term of five years and 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 period of five years and bears interest
at an annual rate between six and ten percent. See "The Reorganization -- Martin
Stock Purchase."
In connection with the Reorganization, Mr. Martin and Mr. Teresi will enter
into a Stockholders' Voting Agreement in the form attached to this
Prospectus/Proxy Statement as Addendum D (the "Stockholders' Agreement"). The
Stockholders' Agreement will provide that Mr. Martin and Mr. Teresi shall each
be entitled to designate four individuals to serve on the Board of Directors of
Easyriders, and that Mr. Martin and Mr. Teresi will each vote their shares for
the persons designated by the other to so serve. One of the persons designated
by Mr. Teresi is required to be a "non-employee director" within the meaning of
Rule 16b-3 under
iii
<PAGE> 9
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
"outside directors" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Upon consummation of the Reorganization,
Mr. Martin and Mr. Teresi will respectively be the beneficial owners of, and be
entitled to vote, approximately 5,132,947 and 6,993,507 shares of Easyriders
Common Stock, respectively, representing an aggregate of approximately 64% of
the number of shares of Easyriders Common Stock outstanding after the
Reorganization. Accordingly, Mr. Martin and Mr. Teresi will together control the
election of all of the directors of Easyriders for the foreseeable future, and
stockholders other than Mr. Martin and Mr. Teresi will not have any power to
elect directors of Easyriders.
If the Reorganization is not consummated, those persons elected as
directors of Newriders at the Annual Meeting will continue to serve as such
until their successors are duly elected and qualified, or until their earlier
resignation or removal. See "Election of Newriders Directors (Proposal 4)." If
the Reorganization is consummated, the persons specified under "The
Reorganization-Board of Directors and Management of Easyriders After the
Reorganization" as the prospective members of the Easyriders Board of Directors
will be elected as such by Newriders, in its capacity as the sole stockholder of
Easyriders, and will continue to serve as such after the Reorganization until
their successors are duly elected and qualified, or until their earlier
resignation or removal. A vote in favor of approval of the Reorganization is
effectively also a vote in favor of the election of such persons as directors of
Easyriders.
The Stockholders of Newriders are being asked to approve the Newriders Plan
so that, among other reasons, the Newriders Plan will meet certain requirements
under Section 162(m) of the Code. Upon consummation of the Reorganization, the
Newriders Plan will terminate, assuming that the stockholders of Newriders
approve the Easyriders Plan, and all awards granted under the Newriders Plan
will be exchanged for awards under the Easyriders Plan. Pursuant to the
Easyriders Plan, if Easyriders, on a consolidated basis achieves certain
predetermined levels of earnings (generally, for 1999, 125% of Easyriders'
earnings before income taxes, depreciation and amortization ("EBITDA") for 1998;
and for each year thereafter, 125% of the average EBITDA of Easyriders for the
two years immediately prior to such year (the "Annual EBITDA Targets")), Mr.
Martin will be eligible to receive annual cash bonuses equal to (1) the total
amount of interest he is obligated to pay in cash to Easyriders under the Martin
Notes multiplied by (2) a fraction, the numerator of which is one and the
denominator of which is one minus the highest marginal rate for federal, state
and local income taxes applicable to Mr. Martin in the year the bonus is paid.
Mr. Martin will also be eligible to receive a one-time bonus equal to (1) the
amount of principal and accrued interest then remaining on the Martin Notes,
multiplied by (2) a fraction, the numerator of which is one and the denominator
of which is one minus the highest marginal rate for federal, state and local
income taxes applicable to Martin in the year the bonus is paid, up to a maximum
of $13,000,000, if and when Paisano Publications repays in full (a) all amounts
due pursuant to a senior credit agreement (the "Senior Credit Agreement"),
between Paisano Publications as borrower, Easyriders as guarantor, and the
financial institution which is the lender thereunder, and (b) the Contributor
Notes, provided Easyriders has achieved certain predetermined levels of earnings
during the prior year (generally, for 1999, positive EBITDA during 1998; and for
each year thereafter, at least 80% of the Annual EBITDA Target for the prior
year or for each of the second and third years preceding such year). Although
Easyriders expects that bonuses paid to Mr. Martin under the Easyriders Plan
will be tax deductible pursuant to Section 162(m) of the Code, no assurance can
be given that such payments will actually be deductible by Easyriders. Bonus
payments to Mr. Martin are not contingent upon deductibility. Upon consummation
of the Reorganization, Mr. Nordstrom will receive, under the Easyriders Plan,
200,000 shares of Easyriders Common Stock. Additionally, subject to the approval
of the Compensation Committee of Easyriders, options to acquire an aggregate of
300,000 shares of Easyriders Common Stock will be issued to certain persons
recommended by Mr. Teresi under the Easyriders Plan. The Easyriders Plan will
become effective only if the Reorganization is consummated.
The directors of Newriders know of no other matters to be presented at the
Annual Meeting.
This Prospectus/Proxy Statement is first being mailed to stockholders of
Newriders (the "Stockholders") on or about September 1, 1998. A Stockholder who
has given a proxy may revoke it at any time prior to its exercise. Only
stockholders of Newriders of record at the close of business on August 27, 1998
(the
iv
<PAGE> 10
"Record Date"), are entitled to notice of and vote at the Annual Meeting and any
adjournments thereof. See "The Annual Meeting -- Who is Entitled to Vote; Record
Date; Proxy Voting."
This Prospectus/Proxy Statement, together with the Addenda attached hereto,
constitutes Easyriders' Prospectus, which was filed with the Securities and
Exchange Commission as part of a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Registration Statement"), with respect
to up to 10,000,000 shares of Easyriders Common Stock to be issued in connection
with the Merger. Easyriders has supplied all the information contained herein
with respect to Easyriders. Newriders has supplied all the information contained
herein with respect to Newriders. The several companies comprising the Paisano
Companies have supplied all the information contained herein with respect to the
Paisano Companies. El Paso has supplied all the information contained herein
with respect to El Paso. The principal executive offices of both Newriders and
Easyriders are located at 567 San Nicolas Drive, Suite 400, Newport Beach,
California 92660. The information telephone number of Newriders and Easyriders
with respect to this transaction is (714) 718-4630 (Attn: William R. Nordstrom,
Executive Vice President Finance and Administration).
Newriders Common Stock is traded in the over-the-counter market and quoted
on the NASD Bulletin Board under the symbol "NWRD". Easyriders intends to apply
for a listing of Easyriders Common Stock on the American Stock Exchange. No
assurance can be given that Easyriders Common Stock will be approved for listing
on the American Stock Exchange.
Certain information contained herein contains forward-looking statements
that involve a number of risks and uncertainties. A number of factors could
cause results to differ materially from those anticipated by such
forward-looking statements. These factors include, but are not limited to, the
factors set forth under "Risk Factors". In addition, such forward-looking
statements are necessarily dependent upon assumptions (including, but not
limited to, assumptions regarding the application of tax or other laws to the
Reorganization and other transactions), estimates and data that may be incorrect
or imprecise. Accordingly, any forward-looking statements included herein or
incorporated herein by reference do not purport to be predictions of future
events or circumstances and may not be realized. Forward-looking statements
contained herein include statements relating to the management and business
focus of Easyriders following consummation of the Reorganization and certain tax
consequences of the Reorganization, including statements in "Risk Factors,"
"Newriders' Management's Discussion and Analysis of Results of Operations and
Financial Condition as of December 31, 1997 and June 30, 1998," "Paisano
Companies' Management's Discussion and Analysis of Results of Operations and
Financial Conditions as of December 30, 1997 and June 30, 1998" and "El Paso's
Management's Discussion and Analysis of Results of Operations and Financial
Condition as of December 31, 1997 and June 30, 1998."
Neither the delivery of this Prospectus/Proxy Statement nor any sale or
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs or operations of Newriders,
Easyriders, the Paisano Companies or El Paso since the date hereof.
v
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 1
PROSPECTUS SUMMARY.......................................... 2
RISK FACTORS................................................ 18
General Risk Factors Related to Easyriders After the
Reorganization........................................ 18
Risk Factors Related Primarily to the Publishing
Business.............................................. 26
Risk Factors Related Primarily to the Restaurant
Industry.............................................. 28
Risk Factors Related to Motorcycle Accessories and
Apparel Business...................................... 30
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 31
THE ANNUAL MEETING.......................................... 36
General................................................ 36
Who is Entitled to Vote; Record Date; Proxy Voting..... 36
Quorum................................................. 36
Tabulation of Votes.................................... 36
Vote Required for Approval............................. 37
Proxy Solicitation..................................... 38
THE REORGANIZATION (Proposal 1)............................. 38
Background of the Reorganization....................... 38
Reasons for the Reorganization......................... 40
Overview of Transaction................................ 42
The Merger............................................. 42
The Paisano Acquisition................................ 42
The El Paso Acquisition................................ 43
Stockholders' Agreement................................ 43
Initial Performance Awards to be Granted Under the
Easyriders Plan....................................... 44
Martin Stock Purchase.................................. 44
Terms of the Reorganization............................ 44
Interests of Certain Persons in the Reorganization..... 44
Consideration to Be Received by Stockholders........... 46
Effective Time of the Merger........................... 46
Exchange of Certificates............................... 46
Accounting Treatment................................... 47
Conditions to the Reorganization....................... 47
Termination of the Reorganization Agreements........... 49
Terms of the Senior Credit Agreement................... 50
Sources and Uses of Funds.............................. 52
Board of Directors and Management of Easyriders After
the Reorganization.................................... 52
Executive Compensation................................. 54
Operations After the Reorganization.................... 54
Effect of the Reorganization on Certain Options and
Option Plans.......................................... 54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 55
</TABLE>
(i)
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FEDERAL INCOME TAX CONSEQUENCES............................. 58
Tax Consequences to Newriders and the Holders of
Newriders Common Stock................................ 58
Tax Consequences to the El Paso Owners, Mr. Teresi and
Easyriders............................................ 59
Tax Consequences to Easyriders upon Receipt of the
Assets and Issuance of Easyriders Common Stock........ 60
Tax Consequences to El Paso in the Reorganization...... 60
Other Tax Consequences Not Included in Deloitte &
Touche's Opinion...................................... 60
RIGHTS OF DISSENTING STOCKHOLDERS........................... 61
CHANGES AFFECTING STOCKHOLDERS.............................. 62
FEES AND EXPENSES........................................... 62
RESALES OF EASYRIDERS COMMON STOCK.......................... 62
INFORMATION ABOUT EASYRIDERS................................ 63
INFORMATION ABOUT NEWRIDERS................................. 63
Description of Business -- General..................... 63
Recent Developments.................................... 64
Newriders' Restaurant -- Merchandise Store Concept..... 64
Layout and Design...................................... 65
Site Selection......................................... 65
Merchandising.......................................... 66
Menu................................................... 66
Service................................................ 66
Unit Locations and Expansion........................... 66
Advertising and Promotion.............................. 67
Franchise Agreement -- Easyriders...................... 67
Unit Operations and Management......................... 67
Purchasing and Distribution............................ 67
Competition............................................ 68
Employees.............................................. 68
Governmental Regulation................................ 68
Trademarks............................................. 69
Insurance.............................................. 69
Description of Property................................ 69
NEWRIDERS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION AS OF DECEMBER 31,
1997 AND JUNE 30, 1998.................................... 71
PAISANO PUBLICATIONS AND AFFILIATES SELECTED HISTORICAL
FINANCIAL INFORMATION FOR THE YEARS ENDED DECEMBER 31,
1996 AND 1997............................................. 75
INFORMATION ABOUT THE PAISANO COMPANIES..................... 76
General Description of the Paisano Companies........... 76
Print Media Publishing Overview........................ 76
Video Magazines........................................ 78
Publishing Operations Overview......................... 79
</TABLE>
(ii)
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Editorial Staff........................................ 79
Printing and Production................................ 79
Distribution and Marketing............................. 80
Apparel Sales, Franchising and Store Operations
Overview.............................................. 81
Apparel and Other Product Sales........................ 81
Customers and Marketing................................ 81
Operations............................................. 82
Easyriders Franchising Overview........................ 82
Easyriders Marketing................................... 83
Easyriders Operations.................................. 83
Franchise Locations.................................... 83
Company-Owned Stores................................... 84
Bros Club.............................................. 85
Event Promotion and Management Activity................ 85
Competition............................................ 85
Employees.............................................. 86
Properties............................................. 86
Recent Development..................................... 86
PAISANO COMPANIES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF
DECEMBER 31, 1997 AND JUNE 30, 1998....................... 87
INFORMATION ABOUT EL PASO................................... 93
General................................................ 93
Development of Business................................ 93
Description of Menu.................................... 94
Restaurant Decor -- Layout and Design.................. 94
Service................................................ 94
Advertising and Promotion.............................. 94
Restaurant Operations and Management................... 94
Purchasing and Distribution............................ 94
Competition............................................ 95
Employees.............................................. 95
Governmental Regulation................................ 95
Trademarks............................................. 96
Insurance.............................................. 96
Site Selection Criteria................................ 96
Future Expansion....................................... 96
Description of Present Sites........................... 97
EL PASO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION AS OF DECEMBER 30, 1997
AND JUNE 30, 1998......................................... 98
DESCRIPTION OF NEWRIDERS SECURITIES......................... 101
</TABLE>
(iii)
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General................................................ 101
Historical Prices and Dividends of Newriders Common
Stock................................................. 103
DESCRIPTION OF EASYRIDERS COMMON STOCK...................... 104
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 104
Authorized Capital Stock............................... 104
Directors.............................................. 105
Amendments to Articles or Certificate of
Incorporation......................................... 108
Repurchase and Redemption of Shares.................... 108
Payment of Dividends to Stockholders................... 108
Amendments to By-laws.................................. 109
Stockholder Approval of Merger and Other Business
Combinations.......................................... 109
Anti-Takeover Provisions............................... 110
Rights of Dissenting Stockholders...................... 110
Special Meetings of Stockholders....................... 111
Stockholder Consent to Action Without a Meeting........ 111
NEWRIDERS PLAN (Proposal 2)................................. 112
Nature and Purpose..................................... 112
Duration............................................... 112
Administration......................................... 113
Shares Subject to Newriders Plan....................... 113
Eligibility............................................ 113
Options and SARs....................................... 114
Stock Based Awards..................................... 115
Performance Awards..................................... 116
Change in Control...................................... 116
Federal Income Tax Consequences........................ 117
EASYRIDERS PLAN (Proposal 3)................................ 120
Primary Differences Between Newriders Plan and
Easyriders Plan; Initial Performance Awards............ 120
Nature and Purpose..................................... 121
Duration............................................... 121
Administration......................................... 121
Shares Subject to Easyriders Plan...................... 122
Eligibility............................................ 122
Options and SARs....................................... 122
Stock Based Awards..................................... 124
Performance Awards..................................... 124
Change in Control...................................... 125
Federal Income Tax Consequences........................ 126
ELECTION OF NEWRIDERS DIRECTORS (Proposal 4)................ 129
Newriders Board of Directors........................... 129
Newriders Board of Directors Committees and Meetings... 130
</TABLE>
(iv)
<PAGE> 15
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXECUTIVE COMPENSATION -- NEWRIDERS......................... 130
Employment Agreements; Termination of Employment and
Change-in-Control Arrangements........................ 131
Option Grants in Year Ended December 31, 1997.......... 132
Aggregate Option Exercises in Year Ended December 31,
1997 and Fiscal Year Ended
Option Values........................................ 133
Newriders Plan......................................... 133
Retirement Plan........................................ 133
Long-Term Incentive Plan "LTIP" Awards................. 133
Certain Relationships and Related Party Transactions... 133
Newriders Directors' Compensation...................... 136
Compensation Committee Report on Executive Committee... 137
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(Proposal 5).............................................. 138
LEGAL MATTERS............................................... 138
EXPERTS..................................................... 139
STOCKHOLDER PROPOSALS FOR 1999.............................. 139
GLOSSARY.................................................... 140
NEWRIDERS CONSOLIDATED FINANCIAL STATEMENTS................. F-1
PAISANO COMPANIES CONSOLIDATED FINANCIAL STATEMENTS......... F-28
EL PASO CONSOLIDATED FINANCIAL STATEMENTS................... F-46
</TABLE>
<TABLE>
<S> <C>
ADDENDUM A -- MERGER AGREEMENT
ADDENDUM B -- PAISANO AGREEMENT
ADDENDUM C -- EL PASO AGREEMENT
ADDENDUM D -- STOCKHOLDERS' VOTING AGREEMENT
ADDENDUM E -- STATUTES PERTAINING TO DISSENTERS' RIGHTS
ADDENDUM F -- NEWRIDERS PLAN
ADDENDUM G -- EASYRIDERS PLAN
ADDENDUM H -- FORM OF PROXY
ADDENDUM I -- EASYRIDERS CERTIFICATE OF INCORPORATION
ADDENDUM J -- EASYRIDERS BYLAWS
ADDENDUM K -- PRESS RELEASE -- JULY 31, 1998
ADDENDUM L -- PRESS RELEASE -- AUGUST 26, 1998
</TABLE>
[This Space Left Blank Intentionally]
(v)
<PAGE> 16
AVAILABLE INFORMATION
Easyriders has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the SEC covering the shares of Easyriders Common Stock
to be issued in connection with the Reorganization. This Prospectus/Proxy
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to Easyriders and Easyriders Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus/Proxy Statement as to the contents of
any agreement or any other document to which reference is made are not
necessarily complete, and, in each instance, if such agreement or document is
filed as an exhibit, reference is made to the copy of such agreement or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference to such exhibit. This Registration
Statement, including exhibits and schedules thereto, may be inspected and copied
at the principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material may be obtained from such office at prescribed
rates. In addition, Easyriders is required to file electronic versions of these
documents with the SEC through the SEC's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Newriders is subject to the information requirements of the Exchange Act,
and in accordance therewith files periodic reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
filed by Newriders can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices maintained by the SEC: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048;
Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; Denver Regional Office at 1801 California Street,
Suite 4800, Denver, Colorado 80202-2648, and Pacific Regional Office, 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. Copies of
such materials can also be obtained from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Upon consummation of the Reorganization, Easyriders will become subject to
substantially similar informational requirements as Newriders and will file
reports, proxy statements and other information with the SEC in accordance with
the Exchange Act.
1
<PAGE> 17
PROSPECTUS SUMMARY
The following is a summary of certain significant information contained in
this Prospectus/Proxy Statement or in documents incorporated herein by
reference. This summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus/Proxy Statement, the Addenda
hereto, and the documents incorporated herein by reference. Stockholders are
urged to carefully read this Prospectus/ Proxy Statement and the attached
Addenda in their entireties.
NEWRIDERS..................... 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 temporarily closed for remodeling.
See "Information About Newriders."
Newriders' principal executive offices are
located at 567 San Nicolas Drive, Suite 400,
Newport Beach, California 92660. Newriders'
information telephone number with respect to
this transaction is (949) 718-4630 (Attn:
William R. Nordstrom, Executive Vice President
Administration and Finance).
EASYRIDERS.................... Easyriders is a newly-formed subsidiary of
Newriders, organized under the laws of the
State of Delaware for the purpose of the
Reorganization. Assuming the Reorganization is
consummated, Easyriders will be the parent
company of Newriders, the Paisano Companies and
El Paso. Easyriders will derive all of its
revenues from the operations of Newriders, the
Paisano Companies and El Paso. Shares of
Easyriders Common Stock will be traded over-
the-counter and quotations will be reported on
the Bulletin Board reporting system maintained
by the NASD.
Easyriders has the same principal executive
offices as Newriders, which are located at 567
San Nicolas Drive, Suite 400, Newport Beach,
California 92660. Easyriders's information
telephone number with respect to this
transaction is (949) 718-4630 (Attn: William R.
Nordstrom, Executive Vice President
Administration and Finance).
PAISANO COMPANIES............. The Paisano Companies consist of Paisano
Publications, Inc., Easyriders of Columbus,
Inc., Easyriders Franchising, Inc., Teresi,
Inc., Bros Club, Inc. and Associated Rodeo
Riders on Wheels. All of the issued and
outstanding capital stock of each of the
Paisano Companies is owned by Mr. Joseph
Teresi. Paisano Publications publishes eleven
(11) special interest magazines directed to
motorcycle and tattoo enthusiasts, including
the well-known motorcycle magazine, Easyriders.
Other Paisano Companies market a line of
apparel and other products designed to appeal
to motorcycle and tattoo interests, and own
three (3) Easyriders stores and have franchised
twenty-two (22) additional stores (other than
those owned by Newriders) which sell Easyriders
apparel, customized new and used American-made
motorcycles and motorcycle accessories. See
"Information About the Paisano Companies."
The principal executive offices of the Paisano
Companies are located at 28210 Dorothy Drive,
Agoura Hills, California 91301. The Paisano
Companies' information telephone number with
respect to this transaction is (818) 889-8740
(Attn: Joseph Teresi, Chairman).
2
<PAGE> 18
EL PASO....................... El Paso is a Texas limited liability company
which owns and operates four (4) barbecue and
smoked meat restaurants, three (3) of which are
located in Arizona and one (1) of which is
located in Oklahoma. The restaurants owned by
El Paso are operated under the name "El Paso
Bar-B-Que." See "Information About El Paso."
The principal executive offices of El Paso are
located at 2126 West Indian School Road,
Phoenix, Arizona 85015. El Paso's information
telephone number with respect to this
transaction is (602) 212-1947 (Attn: William E.
Prather, Chief Executive Officer and
President).
PURPOSE OF ANNUAL MEETING..... The Annual Meeting of Newriders will be held on
September 22, 1998, at 10:00 a.m., local time,
for the purpose of asking the stockholders of
Newriders to vote to: (i) approve the
Reorganization and in connection therewith
approve and adopt the Merger Agreement; (ii)
approve the Newriders Plan; (iii) approve the
Easyriders Plan; and, as a precaution against
the possibility that the Reorganization may not
be consummated, (iv) elect directors for
Newriders and (v) ratify the appointment of
Deloitte & Touche LLP as independent auditors
for Newriders for the year ending December 31,
1998; and, in any case, (vi) conduct such other
business that may be properly brought before
the meeting.
THE REORGANIZATION............ The Reorganization as proposed consists of the
Paisano Acquisition, the El Paso Acquisition
and the Merger, each of which is described
below.
THE PAISANO ACQUISITION....... In the Paisano Acquisition, Easyriders and
Easyriders Sub II will receive all of the
issued and outstanding stock of the Paisano
Companies. Mr. Teresi, the sole stockholder of
each of the Paisano Companies, will receive
total consideration in the amount of
$48,000,000, consisting of 6,493,507 shares of
Easyriders Common Stock (representing
approximately 34.3% of Easyriders Common Stock
issued and outstanding immediately following
the reorganization) with an estimated fair
value of $3.08 per share, and promissory notes
aggregating $28,000,000 consisting of a
promissory note of Easyriders Sub II in the
principal amount of $15,000,000 which is
payable in cash immediately after the Merger
has occurred, and the Contributor Notes in the
aggregate amount of $13,000,000. See "Unaudited
Pro Forma Condensed Financial Statements -- Pro
Forma Combined Condensed Balance Sheet
(unaudited)." The aggregate amount received by
Mr. Teresi is subject to adjustment under the
terms of the Paisano Agreement. As contemplated
in connection with the Paisano Acquisition, Mr.
Teresi has received a dividend of $7,000,000
from Paisano Publications, which has been
funded by a loan in that amount to Paisano
Publications with the understanding that such
loan will be repaid by Paisano Publications
upon consummation of the Reorganization. Mr.
Teresi will also have the right to recommend
that certain employees or consultants of the
Paisano Companies receive options to purchase
an aggregate of 300,000 shares of Easyriders
Common Stock exercisable at $5.00 per share,
subject to the approval of the Compensation
Committee of Easyriders. See "The
Reorganization -- The Paisano Acquisition."
3
<PAGE> 19
The Contributor Notes will consist of the
Contributor Subordinated Note in the amount of
$5,000,000, the Contributor Mirror Note in the
amount of $5,000,000 secured by the Martin
Mirror Note, and 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 Easyriders 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 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. See "The
Reorganization -- Martin Stock Purchase."
THE EL PASO ACQUISITION....... In the El Paso Acquisition, Mr. Martin, William
E. Prather and his wife, Marna Prather
(collectively the "El Paso Owners"), who
together own all of the outstanding membership
interests of El Paso, will receive a total of
2,000,000 shares of Easyriders Common Stock in
exchange for all of the outstanding membership
interests of El Paso. Mr. Martin is the
Chairman of the Board of Directors of
Newriders, and will be the Chairman of the
Board of Directors of Easyriders after the
Reorganization. Mr. Prather is the President of
Newriders and a member of its Board of
Directors, and will be the President and a
member of the Board of Directors of Easyriders
after the Reorganization. See "The
Reorganization -- The El Paso Acquisition."
THE MERGER.................... In the Merger, Easyriders Sub will merge with
and into Newriders, with the following results:
(i) all of the issued and outstanding shares of
Newriders Common Stock will be exchanged for
shares of 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, other than Dissenting
Stockholders, will become stockholders of
Easyriders, (ii) all of the outstanding
options, warrants and other convertible
securities exercisable for or convertible into
Newriders Common Stock will be exchanged for
the right to purchase or convert into
Easyriders Common Stock on the basis of one
share of Easyriders Common Stock for each two
shares of Newriders Common Stock subject to
such options, warrants or convertible
securities, 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) each of
Newriders, the Paisano Companies and El Paso
will become wholly-owned subsidiaries of
Easyriders. Immediately following the
Reorganization, Easyriders will transfer the El
Paso membership interests to Newriders, with
the result that El Paso will become a
wholly-owned subsidiary of Newriders. As of
August 24, 1998, there were issued and
outstanding 17,962,316 shares of Newriders
Common Stock. As of August 15, 1998, there were
issued and outstanding options, warrants and
other convertible securities exercisable for,
or convertible into approximately
4
<PAGE> 20
6,080,000 shares of Newriders Common Stock at a
weighted average exercise price of
approximately $2.31 per share. This assumes
exercise/conversion of such securities as of
August 15, 1998. Conversion prices of certain
convertible securities and the number of shares
of Newriders Common Stock issuable upon their
conversion vary based upon the market price of
Newriders Common Stock at or prior to the date
of conversion. "See "The Reorganization -- The
Merger."
THE REORGANIZATION
AGREEMENTS.................... The terms of the Reorganization are set forth
in the Merger Agreement, the Paisano Agreement
and the El Paso Agreement (collectively the
"Reorganization Agreements"), copies of which
are attached hereto as Addendum A, Addendum B
and Addendum C, respectively.
FINANCING REQUIREMENT......... The Paisano Acquisition, and accordingly, the
Reorganization, cannot be completed without
financing in the approximate amount of
$22,000,000. Newriders has received a
commitment from a large financial institution
(the "Senior Lender") to lend Paisano
Publications up to $22,000,000 in the
aggregate. See "The Reorganization -- Terms of
the Senior Credit Agreement" for a description
of the terms.
FAIRNESS OF REORGANIZATION.... The terms of the Paisano Acquisition were
negotiated at arm's length, and are considered
fair by the Board of Directors of Newriders.
Because of the ownership of El Paso by Mr.
Martin and Mr. Prather, members of the Board of
Directors of Newriders, the terms of the El
Paso Acquisition should not be considered to
have been negotiated at arm's length, but are
nonetheless considered fair by the Board of
Directors of Newriders. Newriders has not
retained an independent financial advisor to
render an opinion on the fairness of the
Reorganization or the constituent parts thereof
to Newriders or the stockholders of Newriders.
STOCKHOLDER APPROVAL OF
REORGANIZATION.............. Approval of the Reorganization by the
stockholders of Newriders is a condition to
each of the Paisano Agreement and El Paso
Agreement. Approval of the Merger Agreement by
the stockholders of Newriders and by Easyriders
as the sole stockholder of Easyriders Sub, is
required by applicable corporate law.
Easyriders has agreed to vote its shares of
common stock of Easyriders Sub in favor of the
approval and adoption of the Merger Agreement.
See "The Reorganization -- Conditions to the
Reorganization," "Description of Easyriders
Securities," and "Comparative Rights of
Stockholders."
EASYRIDERS COMMON STOCK....... The shares of Easyriders Common Stock to be
issued in connection with the Merger will be
entitled, along with all other outstanding
shares of Easyriders Common Stock, to receive
dividends when, as and if declared by the Board
of Directors of Easyriders. Holders of
Easyriders Common Stock are entitled to one
vote for each share held. The holders of
Easyriders Common Stock do not have any
preemptive rights to subscribe for additional
shares of Common Stock of Easyriders. See
"Description of Easyriders Securities."
5
<PAGE> 21
RECOMMENDATION OF BOARD OF
DIRECTORS................... THE BOARD OF DIRECTORS OF NEWRIDERS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR THE APPROVAL OF THE REORGANIZATION AND
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT,
FOR THE APPROVAL OF THE NEWRIDERS PLAN, FOR THE
APPROVAL OF THE EASYRIDERS PLAN, FOR THE
ELECTION OF DIRECTORS AS NOMINATED BY THE BOARD
OF DIRECTORS, AND FOR THE RATIFICATION OF THE
SELECTION OF DELOITTE & TOUCHE LLP AS
INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 1998. Because of the personal
interests of certain members of the Board of
Directors in the Reorganization, the three
non-interested members of the Board of
Directors voted separately on, and unanimously
approved, the Reorganization.
PERSONS ENTITLED TO VOTE;
RECORD DATE................... Persons who were holders of Newriders Common
Stock at the close of business on the Record
Date, August 27, 1998 are entitled to notice of
and to vote at the Annual Meeting. See "The
Annual Meeting -- Who is Entitled to Vote;
Record Date; Proxy Voting."
TIME AND PLACE OF ANNUAL
MEETING....................... Newriders Stockholders will meet on September
22, 1998, at the Radisson Hotel and Conference
Center, 30100 Agoura Road, Agoura Hills,
California at 10:00 a.m., local time, for the
purpose of holding the Annual Meeting. See "The
Annual Meeting."
REVOCABILITY OF PROXY
INSTRUCTIONS.................. Newriders Stockholders may designate and
instruct proxies to vote on their behalf at the
Annual Meeting. Delivered together with this
Prospectus/Proxy Statement is a form of proxy
which may be used to designate and instruct
certain proxies to vote at the Annual Meeting,
whether or not a Stockholder plans to attend
the Annual Meeting in person. Any Stockholder
who has given a proxy may revoke it at any time
prior to its exercise at the Annual Meeting
either by revoking it in writing sent to the
Secretary of Newriders prior to the Annual
Meeting, by duly executing and delivering a new
and different proxy bearing a later date or by
appearing at such Annual Meeting and, by
addressing the chair of the Meeting, (a) orally
revoking the proxy and (b) voting contrary to
such proxy in person when the call for voting
occurs at the Annual Meeting.
The mere presence at the Annual Meeting of a
person who has previously designated and
instructed a proxy will not revoke such
designation and instruction. See "The Annual
Meeting -- Who is Entitled to Vote; Record
Date; Proxy Voting."
QUORUM........................ The presence, either in person or by proxy, of
the holders of more than fifty percent (50%) of
the outstanding shares of Newriders Common
Stock as of the Record Date entitled to vote at
the Annual Meeting is necessary to constitute a
quorum at the Annual Meeting. See "The Annual
Meeting -- Quorum."
NEWRIDERS STOCKHOLDER VOTE
REQUIRED.................... The affirmative vote of the holders of a
majority of the outstanding shares of Newriders
Common Stock as of the Record Date entitled
6
<PAGE> 22
to vote at the Annual Meeting is required to
approve the Merger Agreement, and accordingly
also the Reorganization.
The affirmative vote of holders of a majority
of the shares of Newriders Common Stock present
and entitled to vote at the meeting is required
to approve the Newriders Plan.
The affirmative vote of holders of a majority
of the shares of Newriders Common Stock present
and entitled to vote at the meeting is required
to approve the Easyriders Plan.
The directors and executive officers of
Newriders and certain persons affiliated with
them, as a group, hold in the aggregate and are
entitled to vote approximately 54.0% of the
issued and outstanding shares of Newriders
Common Stock, and they have indicated their
intention to vote such shares in favor of all
of the proposals to be brought before the
stockholders of Newriders at the Annual
Meeting. In addition, Mr. Teresi owns
approximately 5.6% of the issued and
outstanding shares of Newriders Common Stock,
and has indicated his intention to vote in
favor of all of the proposals to be brought
before the stockholders of Newriders at the
Meeting.
The affirmative vote of the holders of a
plurality of the outstanding shares of
Newriders Common Stock as of the Record Date is
required to elect the Newriders directors.
See "The Annual Meeting -- Vote Required for
Approval."
CLOSING DATE AND EFFECTIVE
TIME.......................... It is currently expected that the
Reorganization will be consummated on or before
September 30, 1998, unless another date is
agreed to by the parties to the Reorganization
(the "Closing Date"). The Merger will become
effective upon filing of the Articles of Merger
with the Nevada Secretary of State (the
"Effective Time"). See "The
Reorganization -- Effective Time of the
Merger."
CONDITIONS TO THE PAISANO
ACQUISITION................. The obligations of Newriders and Easyriders to
consummate the Paisano Acquisition are subject
to the following conditions, unless waived by
Newriders and Easyriders: (a) the business of
each Paisano Company shall have been conducted
in the ordinary course, and there shall have
been no material adverse change to the business
of any Paisano Company; (b) there shall have
been no threatened or pending litigation
against any Paisano Company which is material;
(c) except for a distribution of certain
excluded assets and the distribution of
$7,000,000 to Joseph Teresi, there shall have
been no dividend, redemption or similar
distribution, recapitalization or stock
issuance of any kind, by any Paisano Company
since December 31, 1997; (d) all filings with
and material consents and approvals of third
parties and governmental agencies required for
the consummation of the Paisano Acquisition
shall have been obtained; (e) consummation of
the financing necessary to complete the Paisano
Acquisition on terms acceptable to Newriders
and Easyriders; (f) receipt of a tax opinion
from Deloitte & Touche LLP, satisfactory to
Newriders and Easyriders; (g) a
proxy/registration statement on Form S-4 shall
have been
7
<PAGE> 23
declared effective by the SEC; (h) the
representations and warranties of Mr. Teresi
and the Paisano Companies shall be true and
correct in all material respects as of the date
of the Paisano Agreement and shall be true and
correct in all material respects as of the
closing date of the Paisano Acquisition as if
made on the closing date, and Mr. Teresi shall
have delivered to Newriders and Easyriders a
certificate dated as of the closing date, to
such effect; (i) Joseph Teresi and the Paisano
Companies shall have performed all obligations
required to be performed by them under the
Paisano Agreement at or prior to the closing of
the Paisano Acquisition; (j) delivery by Mr.
Teresi and the Paisano Companies of an opinion
of Masters & Ribakoff and an opinion of
Fulwider, Patton, Lee & Utecht, LLP; (k) Mr.
Teresi shall have entered into the Teresi
Employment Agreement; (l) the Acquisition
Agreements shall have been entered into by all
of the parties thereto; (m) the stockholders of
Newriders shall have approved the transactions
contemplated by the Acquisition Agreements at a
duly constituted meeting; (n) the El Paso
Acquisition shall have closed prior to or
simultaneous with the closing of the Paisano
Acquisition; (o) Michael T. Purcell, Leon
Hatcher, Rick L. Pierce and C.W. Doyle shall
have transferred to Newriders an aggregate of
6,156,480 shares of their Newriders Common
Stock (of which 536,000 shares have already
been transferred and cancelled, but which
Newriders will be required to reissue if the
Reorganization is not consummated); (p)
stockholders of Newriders representing more
than 3% of the outstanding shares of Newriders
shall not have exercised their right to dissent
in respect of the Reorganization; and (q) the
Stockholders' Agreement shall have been entered
into by Messrs. Teresi and Martin.
The obligations of Joseph Teresi to consummate
the Paisano Acquisition are subject to the
following conditions, unless waived by Mr.
Teresi: (a) except for (i) any issuance of
capital stock upon conversion of convertible
debentures or notes which have been or may be
issued by Newriders (but not to exceed 850,000
shares of common stock), (ii) any issuance of
stock upon exercise of stock options granted
under Newriders' or Easyriders' stock option
plans, (iii) the issuance of 2,000,000 shares
of Easyriders Common Stock in connection with
the El Paso Acquisition, (iv) the issuance of
1,000,000 shares of Newriders Common Stock to
Mr. Teresi based upon prior contractual
obligation, (v) the issuance of 200,000 shares
of Easyriders Common Stock to William R.
Nordstrom and (vi) the issuance of an aggregate
of 4,036,797 shares of Easyriders Common Stock
to John E. Martin in consideration of cash and
notes, there shall have been no dividend,
redemption or similar distribution,
recapitalization or stock issuance of any kind
by Newriders or Easyriders since December 31,
1997; (b) all filings with and material
consents and approvals of third parties and
governmental agencies required for the
consummation of the Paisano Acquisition shall
have been obtained; (c) receipt of a tax
opinion from Deloitte & Touche LLP,
satisfactory to Joseph Teresi; (d) the
representations and warranties of Newriders and
Easyriders set forth in the Paisano Agreement
shall be true and
8
<PAGE> 24
correct in all material respects as of the date
of the Paisano Agreement and shall be true and
correct in all material respects as of the
closing date as if made on the closing date,
and Easyriders and Newriders shall have
delivered to Mr. Teresi a certificate, dated as
of the closing date, to such effect; (e)
Newriders and Easyriders shall have performed
all obligations required to be performed by
them under the Paisano Agreement at or prior to
the closing of the Paisano Acquisition; (f)
delivery of an opinion of counsel to Newriders
and Easyriders; (g) Michael T. Purcell, Leon
Hatcher, Rick L. Pierce and C.W. Doyle shall
have transferred to Newriders an aggregate of
6,156,480 shares of their Newriders Common
Stock (of which 536,000 shares have already
been transferred and cancelled, but which
Newriders will be required to reissue if the
Reorganization is not consummated); (h)
approval by Joseph Teresi, which approval shall
not be unreasonably withheld, of any person
that is not an institutional investor
recognized within the investment community that
is providing any portion of the Financing; and
(h) the Stockholders' Agreement shall have been
entered into by Messrs. Teresi and Martin. See
"The Reorganization -- Conditions to the
Reorganization."
CONDITIONS TO THE EL PASO
ACQUISITION................... The obligations of Newriders and Easyriders to
consummate the El Paso Acquisition are subject
to the following conditions, unless waived by
Newriders and Easyriders: (a) the business of
El Paso shall have been conducted in the
ordinary course, and there shall have been no
material adverse change to the business of El
Paso or its prospects; (b) there shall have
been no threatened or pending litigation
against El Paso which is material; (c) all
filings with and material consents and
approvals of third parties and governmental
agencies required for the consummation of the
El Paso Acquisition, including but not limited
to certain consents of lessors or lenders,
shall have been obtained; (d) receipt of a tax
opinion from Deloitte & Touche LLP,
satisfactory to Newriders and Easyriders; (e) a
proxy/registration statement on Form S-4 shall
have been declared effective by the SEC; (f)
the representations and warranties of the El
Paso Owners and El Paso set forth in the El
Paso Agreement shall be true and correct as of
the date of the El Paso Agreement and shall be
true and correct as of the closing date as if
made on the closing date, and the El Paso
Owners shall have delivered to Newriders and
Easyriders a certificate dated as of the
closing date, to such effect; (g) the El Paso
Owners and El Paso shall have performed all
obligations required to be performed by them
under the El Paso Agreement at or prior to the
closing; (h) delivery of an opinion of
Dillingham Cross, P.L.C.; (i) the Merger
Agreement shall have been entered into by all
of the parties thereto; (j) the stockholders of
Newriders shall have approved the transactions
contemplated by the Acquisition Agreements at a
duly constituted meeting; (k) consummation of
the financing necessary to fund the cash
portion of the Paisano Acquisition; (l) any
indebtedness of the El Paso Owners or True and
Elizabeth Knowles (former owners of El Paso
equity interests), or any of their respective
affiliates to El Paso shall have been paid,
9
<PAGE> 25
and any indebtedness of El Paso or any
affiliate of El Paso to the El Paso Owners,
True and Elizabeth Knowles, or any of their
respective affiliates shall have been forgiven;
(m) the Paisano Acquisition shall have closed
prior to or simultaneous with the El Paso
Closing; and (n) stockholders of Newriders
representing more than 3% of the outstanding
shares of Newriders shall not have exercised
their right to dissent in respect of the
Reorganization.
The obligations of the El Paso Owners and El
Paso to consummate the El Paso Acquisition are
subject to the following conditions, unless
waived by the El Paso Owners: (a) except for
(i) any issuance of capital stock upon
conversion of convertible debentures or notes
which have been or may be issued by Newriders
(but not to exceed 850,000 shares of Newriders
Common Stock), (ii) any issuance of stock upon
exercise of stock options granted under
Newriders' or Easyriders' stock option plans,
(iii) the issuance of 6,493,507 shares of
Easyriders Common Stock in connection with the
Paisano Acquisition, (iv) the issuance of
1,000,000 shares of Newriders Common Stock to
Joseph Teresi based upon a prior contractual
obligation, (v) the issuance of 200,000 shares
of Easyriders Common Stock to William R.
Nordstrom, and (vi) the issuance of an
aggregate of 4,036,797 shares of Easyriders
Common Stock to John E. Martin in consideration
of cash and notes, there shall have been no
dividend, redemption or similar distribution,
recapitalization or stock issuance of any kind,
by Newriders or Easyriders since December 31,
1997; (b) all filings with and material
consents and approvals of third parties and
governmental agencies required for the
consummation of the El Paso Acquisition shall
have been obtained; (c) receipt of a tax
opinion from Deloitte & Touche LLP,
satisfactory to the El Paso Owners; (d) the
representations and warranties of Newriders and
Easyriders set forth in the El Paso Agreement
shall be true and correct as of the date of the
El Paso Agreement and shall be true and correct
as of the closing date as if made on the
closing date, and Easyriders and Newriders,
shall have delivered to the El Paso Owners a
certificate, dated as of the closing date, to
such effect; (e) Newriders and Easyriders shall
have performed all obligations required to be
performed by them under the El Paso Agreement
at or prior to the closing; (f) delivery of an
opinion of counsel to Newriders and Easyriders;
(g) the Merger Agreement shall have been
entered into by all of the parties thereto; (h)
the stockholders of Newriders shall have
approved the Merger at a duly constituted
meeting; (i) the Paisano Acquisition shall have
closed prior to or simultaneous with the
closing; and (j) Newriders and Mr. Prather
shall have entered into an employment
agreement. See "The
Reorganization -- Conditions to the
Reorganization."
CONDITIONS TO THE MERGER...... The Merger Agreement is conditioned upon the
prior or simultaneous consummation of the
Paisano Acquisition and the El Paso
Acquisition. See "The
Reorganization -- Conditions to the
Reorganization."
10
<PAGE> 26
AMENDMENT OF REORGANIZATION
AGREEMENTS.................. The Reorganization Agreements may not be
amended after approval of the Reorganization by
the Stockholders except in nonmaterial ways by
the parties. "Nonmaterial" amendments do not
include changes to the share exchange ratio or
tax consequences.
TERMINATION OF THE PAISANO
AGREEMENT..................... The Paisano Agreement may be terminated at any
time prior to the Effective Time by (i) either
Newriders or Easyriders, on the one hand, or
Mr. Teresi and the Paisano Companies, on the
other hand, if a material breach of any
provision of the Paisano Agreement has been
committed by the other party and such breach
has not been waived; (ii) by Newriders or
Easyriders if any of the conditions to
Newriders' and Easyriders' obligations under
the Paisano Agreement has not been satisfied as
of the closing date or if satisfaction of such
a condition is or becomes impossible (other
than through the failure of Newriders or
Easyriders to comply with its obligations under
the Paisano Agreement) and Newriders or
Easyriders has not waived such condition on or
before the closing date; or by Mr. Teresi or
the Paisano Companies if any of the conditions
to Mr. Teresi's obligations under the Paisano
Agreement has not been satisfied as of the
closing date or satisfaction of such a
condition is or becomes impossible (other than
through the failure of Mr. Teresi or the
Paisano Companies to comply with their
obligations under the Paisano Agreement) and
Mr. Teresi or the Paisano Companies have not
waived such condition on or before the closing
date; (iii) by mutual consent of Newriders or
Easyriders, on the one hand, and Mr. Teresi and
the Paisano Companies, on the other hand; or
(iv) by either party if the closing has not
occurred (other than through the failure of any
party seeking to terminate the Paisano
Agreement to comply fully with its obligations
under the Paisano Agreement) on or before July
8, 1998 or such later date as the parties may
agree upon, except that Newriders and
Easyriders may extend the closing until August
15, 1998 if, as of July 8, 1998, they have
provided to Mr. Teresi an expression of
interest and term sheet of a lender offering a
credit facility to fund the Paisano
Acquisition.
If the Paisano Agreement is terminated, all
further obligations of the parties under the
Paisano Agreement will terminate, with certain
limited exceptions; provided however, that if
the Paisano Agreement is terminated by a party
because of the breach of the Paisano Agreement
by the other party or because one or more of
the conditions to the terminating party's
obligations under the Paisano Agreement is not
satisfied as a result of the other party's
failure to comply with its obligations under
the Paisano Agreement, the terminating party's
right to pursue all legal remedies will survive
such termination unimpaired. See "The
Reorganization -- Termination of the
Reorganization Agreements."
TERMINATION OF THE EL PASO
AGREEMENT..................... The El Paso Agreement may be terminated at any
time prior to the Effective Time by (i) either
Newriders or Easyriders, on the one hand, or
the El Paso Owners and El Paso, on the other
hand, if a material breach of any provision of
the El Paso Agreement has
11
<PAGE> 27
been committed by the other party and such
breach has not been waived; (ii) by Newriders
or Easyriders if any of the conditions to
Newriders' and Easyriders' obligations under
the El Paso Agreement has not been satisfied as
of the closing date or if satisfaction of such
a condition is or becomes impossible (other
than through the failure of Newriders or
Easyriders to comply with its obligations under
the El Paso Agreement) and Newriders or
Easyriders has not waived such condition on or
before the closing date; or by the El Paso
Owners or El Paso if any of the conditions to
the El Paso Owners and El Paso's obligations
under the El Paso Agreement has not been
satisfied as of the closing date or
satisfaction of such a condition is or becomes
impossible (other than through the failure of
the El Paso Owners or El Paso to comply with
their obligations under the El Paso Agreement)
and the El Paso Owners or El Paso have not
waived such condition on or before the Closing
Date; (iii) by mutual consent of Newriders or
Easyriders, on the one hand, and by the El Paso
Owners and El Paso, on the other hand, or (iv)
by any party if the closing has not occurred
(other than through the failure of any party
seeking to terminate the El Paso Reorganization
Agreement to comply fully with its obligations
under the El Paso Agreement) on or before
December 31, 1998 or such later date as the
parties may agree upon in writing.
If the El Paso Agreement is terminated, all
further obligations of the parties under the El
Paso Agreement will terminate, with certain
limited exceptions; provided however, that if
the El Paso Agreement is terminated by a party
because of the breach of the El Paso Agreement
by the other party or because one or more of
the conditions to the terminating party's
obligations under the El Paso Agreement is not
satisfied as a result of the other party's
failure to comply with its obligations under
the El Paso Agreement, the terminating party's
right to pursue all legal remedies will survive
such termination unimpaired. See "The
Reorganization -- Termination of the
Reorganization Agreements."
MANAGEMENT OF EASYRIDERS AFTER
REORGANIZATION.............. Upon consummation of the Reorganization,
management of Easyriders will be comprised of
the following individuals
<TABLE>
<S> <C>
Chairman of the Board: John E. Martin
President and CEO: William E. Prather
Executive Vice President and CFO: William R. Nordstrom
Directors: John E. Martin
William E. Prather
Wayne L. Knyal
Daniel J. Gallery
Joseph Teresi
Ellen Meagher
Robert Davis
Joseph J. Jacobs
</TABLE>
See "The Reorganization -- Board of Directors
and Management of Easyriders After the
Reorganization."
12
<PAGE> 28
STOCKHOLDERS' AGREEMENT....... In connection with the Paisano Acquisition,
John E. Martin, the Chairman of the Board of
Newriders, and Joseph Teresi, the sole
stockholder of the Paisano Companies, will
enter into a Stockholders' Voting Agreement, in
the form attached hereto as Addendum D (the
"Stockholders' Agreement"). The Stockholders'
Agreement will provide that Mr. Martin and Mr.
Teresi shall each be entitled to designate four
individuals to serve on the Board of Directors
of Easyriders, and that they each agree to vote
their shares for the persons designated by the
other to so serve. One of the persons
designated by Mr. Teresi is required to be a
non-employee director within the meaning of
Rule 16b-3 under the Exchange Act and Section
162(m) of the Code. Upon consummation of the
Reorganization, Mr. Martin and Mr. Teresi will
respectively be the beneficial owners of, and
be entitled to vote, approximately 5,132,947
and 6,993,507 shares of the Easyriders Common
Stock, respectively, representing an aggregate
of approximately 64% of the number of shares of
Easyriders Common Stock issued and outstanding
after the consummation of the Reorganization.
Accordingly, Mr. Martin and Mr. Teresi will
together control the election of all of the
directors of Easyriders for the foreseeable
future, and stockholders other than Mr. Martin
and Mr. Teresi will not have any power to elect
directors of Easyriders. See "The
Reorganization -- Stockholders' Agreement."
INTERESTS OF CERTAIN PERSONS
IN VOTING MATTERS............. As of the Record Date, the directors and
executive officers of Newriders and certain
persons affiliated with them (Messrs. Purcell
and Pierce), as a group, beneficially held in
the aggregate and are entitled to vote
approximately 9,703,000 shares, or
approximately 54.0% and Mr. Teresi held
1,000,000 shares, or approximately 5.6% of the
outstanding shares of Newriders Common Stock
entitled to vote at the Annual Meeting, and all
of them have indicated their intention to vote
such shares FOR the Reorganization, FOR
approval of the Newriders Plan, FOR approval of
the Easyriders Plan, FOR the persons nominated
as directors of Newriders and FOR ratification
of the selection of Deloitte & Touche LLP as
independent auditors of Newriders for the year
ending December 31, 1998. The number of shares
which will assure the approval of all matters
submitted to stockholders at the Annual Meeting
is 8,981,159.
All of Newriders' directors and certain of its
executive officers own shares of Newriders
Common Stock and/or options to acquire shares
of Newriders Common Stock, which will be
converted and/or exchanged in the Merger on the
same terms and conditions as apply to all other
shares of Newriders Common Stock. Other than as
described herein, none of these directors and
executive officers have agreements for
additional compensation or any other rights
which become effective upon a change in
control.
John E. Martin and William E. Prather
(directors of Newriders) and Marna Prather, the
wife of Mr. Prather, will receive a total of
2,000,000 shares of Easyriders Common Stock in
the El Paso Acquisition.
13
<PAGE> 29
Immediately upon consummation of the
Reorganization, Mr. Martin will purchase an
aggregate of 4,036,797 shares of Common Stock
of Easyriders for a purchase price of
$12,300,000 consisting of $5,000,000 in cash,
and the Martin Notes. The Martin Notes will
consist of a full recourse promissory note in
the amount of $5,000,000 (the "Martin Mirror
Note"), which will be pledged by Easyriders to
secure the Contributor Mirror Note, and a full
recourse promissory note in the amount of
$2,300,000 (the "Other Martin Note"). The
Martin Mirror Note has a term of five years and
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.
Pursuant to the Easyriders Plan, if Easyriders,
on a consolidated basis achieves the Annual
EBITDA Targets, Mr. Martin will be eligible to
receive annual cash bonuses equal to (1) the
total amount of interest he is obligated to pay
in cash to Easyriders under the Martin Notes
multiplied by (2) a fraction, the numerator of
which is one and the denominator of which is
one minus the highest marginal rate for
federal, state and local income taxes
applicable to Mr. Martin in the year the bonus
is paid. Mr. Martin will also be eligible to
receive a one-time bonus equal to (1) the
amount of principal and accrued interest then
remaining on the Martin Notes, multiplied by
(2) a fraction, the numerator of which is one
and the denominator of which is one minus the
highest marginal rate for federal, state and
local income taxes applicable to Martin in the
year the bonus is paid, up to a maximum of
$13,000,000, if and when Paisano Publications
repays in full (a) all amounts due pursuant to
the Senior Credit Agreement between Paisano
Publications as borrower, Easyriders as
guarantor, and the Senior Lender, and (b) the
Contributor Notes, provided Easyriders has
achieved certain predetermined levels of
earnings during the prior year (generally, for
1999, positive EBITDA during 1998; and for each
year thereafter, at least 80% of the Annual
EBITDA Target for the prior year or for each of
the second and third years preceding such
year). Although Easyriders expects that bonuses
paid to Mr. Martin under the Easyriders Plan
will be tax deductible pursuant to Section
162(m) of the Code, no assurance can be given
that such payments will actually be deductible
by Easyriders. Bonus payments to Mr. Martin are
not contingent upon deductibility. Upon
consummation of the Reorganization, Mr.
Nordstrom will receive, under the Easyriders
Plan, 200,000 shares of Easyriders Common
Stock. See "The Reorganization -- Interests of
Certain Persons in the Reorganization" and "The
Reorganization -- Initial Performance Awards to
be Granted Under the Easyriders Plan."
RETURN/CANCELLATION OF STOCK
AND OPTIONS................... In connection with the Reorganization, Leon
Hatcher, Michael Purcell, C.W. Doyle and Rick
Pierce have agreed to return to Newriders as
treasury shares 1,334,850, 1,804,821,
1,172,809, and 1,844,000 shares of Newriders
Common Stock held by them,
14
<PAGE> 30
respectively, conditional upon consummation of
the Reorganization. Of the 1,844,000 shares to
be returned by Rick Pierce, Leon Hatcher has
agreed that a total of 1,000,000 shares held of
record by Rick Pierce, but beneficially owned
by Leon Hatcher, may be included. A total of
536,000 shares previously owned of record by
Rick Pierce, but beneficially owned by Leon
Hatcher, have been returned to Newriders and
cancelled, but would be required to be reissued
if the Reorganization is not consummated.
Additionally, John E. Martin, William E.
Prather, William R. Nordstrom, Wayne L. Knyal,
and Daniel J. Gallery have agreed to the
cancellation of their options to purchase
2,000,000, 750,000, 500,000, 20,000 and 20,000
shares of Newriders Common Stock, respectively,
conditional upon consummation of the
Reorganization. These individuals will receive
no consideration from Newriders for the
return/cancellation of their stock and options.
FEDERAL INCOME TAX
CONSEQUENCES.................. Newriders and Easyriders will receive, at
closing, an opinion from Deloitte & Touche LLP
with respect to certain federal income tax
consequences of the Merger. In summary, it is
anticipated that, for federal income tax
purposes, the Merger will constitute a
nontaxable reorganization and that no gain or
loss will be recognized by stockholders who
exchange their Newriders Common Stock solely
for Easyriders Common Stock. Gain or loss will
be recognized by dissenting stockholders who
receive solely cash for their shares of
Newriders Common Stock. The opinions are based
on certain assumptions and representations.
Cash received in the exercise of Dissenter's
Rights could be treated as a dividend (rather
than sales proceeds) if the dissenting
stockholder actually or constructively owns
Newriders Common Stock following the Merger.
See "Federal Income Tax Consequences."
EXCHANGE OF CERTIFICATES...... As promptly as practicable after the Effective
Time, transmittal materials will be provided to
each holder of record of Newriders Common Stock
for use in exchanging such holder's stock
certificates for stock certificates evidencing
shares of Easyriders Common Stock to be issued
to them in the Merger. Stockholders of
Newriders are requested not to surrender their
certificates of Newriders Common Stock until
they receive such transmittal materials. See
"The Reorganization -- Exchange of
Certificates."
DISSENTERS' RIGHTS............ Newriders stockholders who dissent from the
Merger have the right to demand payment for
their shares and to receive cash, if the Merger
is consummated, equal to the fair value of
their shares as determined by the procedures
set out in Sections 92A.300 to 92A.500,
inclusive, of the Nevada Revised Statutes, as
amended. Generally, to preserve dissenter's
rights, a Newriders stockholder must (i) before
the vote at the Annual Meeting, deliver a
written notice of intent to demand payment for
the shares owned by the stockholder, (ii) not
vote in favor of the Merger, and (iii) upon
receiving a dissenter's notice from Newriders
or Easyriders following the Annual Meeting,
file with Newriders a "payment demand" as
provided in the dissenter's notice demanding
payment in cash of the fair value of his
Newriders Common Stock, and (iv) deposit the
certificate(s) representing the stockholders'
Newriders Common Stock as directed in the
dissenter's notice. See "Rights of
15
<PAGE> 31
Dissenting Stockholders;" Addendum "E".
Dissenting stockholders who receive cash for
their shares of Newriders Common Stock will
recognize gain or loss with respect to such
shares, unless the payment is treated as a
dividend, in which case the payment may be
treated as ordinary income to the dissenting
stockholder. See "Federal Income Tax
Consequences."
MARKET PRICE COMPARISON....... Shares of Newriders Common Stock are traded in
the over-the-counter market and quoted on the
NASD Bulletin Board. The following table shows
the closing bid price of Newriders Common Stock
on the NASD Bulletin Board on October 10, 1997,
the last trading day prior to the public
announcement of the execution of the Letter of
Intent between Newriders, El Paso and the
owners of El Paso, and on January 13, 1998, the
last trading day prior to the public
announcement of the execution of the Letter of
Intent between Newriders, Mr. Teresi and the
Paisano Companies.
<TABLE>
<CAPTION>
CLOSING BID PRICE PER SHARE
DATE OF NEWRIDERS COMMON STOCK
---- ---------------------------
<S> <C>
October 10, 1997................. $ 3.00
January 13, 1998................. $4.1875
</TABLE>
The market price per share of Newriders Common
Stock was $1.281 per share on the Record Date.
There is no recognized market for shares of
Easyriders Common Stock or the common stock of
any of the Paisano Companies or for any equity
interests in El Paso.
NEWRIDERS PLAN................ The Newriders Plan permits Newriders to grant
annual and long term awards to employees,
directors, officers and consultants of
Newriders to provide them with incentives to
expend their maximum efforts in the creation of
value for Newriders' stockholders. The
Newriders Plan empowers Newriders to grant
incentive and non-qualified stock options,
stock appreciation rights, awards of restricted
stock, bonus stock in lieu of other obligations
of Newriders, or dividend equivalent awards,
and participation in incentive award programs
and other performance awards. A total of
5,000,000 shares of Newriders Common Stock
(subject to certain adjustments) are subject to
the Newriders Plan. The Newriders Plan is
administered by a committee appointed by the
Newriders Board of Directors and consisting of
at least two directors who must be outside
directors for purposes of Section 162(m) of the
Code and "non-employee directors" as that term
is used in Rule 16b-3 under the Exchange Act.
See "Newriders Plan (Proposal 2)." Upon
consummation of the Reorganization, the
Newriders Plan will terminate and all awards
granted thereunder will be exchanged for awards
under the Easyriders Plan. Consummation of the
Reorganization may trigger a change in control
under the Newriders Plan, causing all options
granted thereunder to become immediately
exercisable and giving each holder of an option
the right to redeem such option for a cash
payment equal to the difference between the
market price of Newriders Common Stock on the
date the Reorganization is consummated and the
exercise price of such option. Newriders
management is attempting to
16
<PAGE> 32
obtain agreements from all such option holders
to waive any such rights upon consummation of
the Reorganization.
EASYRIDERS PLAN............... The Easyriders Plan permits Easyriders to grant
annual and long term awards to employees,
directors, officers and consultants of
Easyriders to provide them with incentives to
expend their maximum efforts in the creation of
value for Easyriders' stockholders. The
Easyriders Plan empowers Easyriders to grant
incentive and non-qualified stock options,
stock appreciation rights, awards of restricted
stock, bonus stock in lieu of other obligations
of Easyriders, or dividend equivalent awards,
and participation in incentive award programs
and other performance awards. A total of
2,800,000 shares of Easyriders Common Stock
(subject to certain adjustments) are subject to
the Easyriders Plan. The Easyriders Plan will
be administered by a committee appointed by the
Easyriders Board of Directors and consisting of
at least two directors who must be outside
directors for purposes of Section 162(m) of the
Code and "non-employee directors" as that term
is used in Rule 16b-3 under the Exchange Act.
See "Easyriders Plan (Proposal 3)." For a
description of certain awards to be granted
pursuant to Easyriders Plan, see "The
Reorganization -- Initial Performance Awards to
be Granted Under the Easyriders Plan."
ELECTION OF BOARD OF
DIRECTORS..................... If the Reorganization is approved by the
Newriders stockholders, the persons specified
under "The Reorganization -- Directors and
Management After the Reorganization" as the
prospective members of the Easyriders Board of
Directors will be elected as such by Newriders,
in its capacity as the sole stockholder of
Easyriders, and will continue to serve as such
after the Reorganization until their successors
are duly elected and qualified, or until their
earlier resignation or removal. A vote in favor
of approval of the Reorganization is
effectively also a vote in favor of the
election of such persons as directors of
Easyriders. If the Reorganization is not
consummated, those persons elected as directors
of Newriders at the Annual Meeting will
continue to serve as such until their
successors are duly elected and qualified, or
until their earlier resignation or removal. See
"Election of Newriders Directors (Proposal 4)."
RATIFICATION OF AUDITORS...... The Newriders Board of Directors has appointed
Deloitte & Touche LLP, independent auditors, to
audit the consolidated financial statements of
Newriders for the fiscal year ending December
31, 1998, in the event the Reorganization is
not consummated, and seeks ratification of such
appointment. See "Ratification of Appointment
of Independent Auditors (Proposal 5)."
17
<PAGE> 33
RISK FACTORS
In addition to the other information in this Prospectus/Proxy Statement,
stockholders of Newriders should consider carefully the following factors in
evaluating the Reorganization.
Statements in this Prospectus/Proxy Statement which are not historical
facts are forward-looking statements made on a good faith basis. Examples of
forward-looking statements include, without limitation, statements by Newriders,
Easyriders, the Paisano Companies and El Paso regarding financial projections,
expectations for demand and sales of new and existing products, market
opportunities, business strategies, business opportunities, objectives of
management for future operations and market segment growth. All forward-looking
statements involve risks and uncertainties. Actual results may differ materially
from forward-looking statements for reasons including, but not limited to,
changes in the patterns of restaurant or publishing industry growth, the markets
for or customer interest in the products and services of Newriders, the Paisano
Companies or El Paso, product, services and market competition, or delays or
problems in the development and commercialization of products or services.
GENERAL RISK FACTORS RELATED TO EASYRIDERS AFTER THE REORGANIZATION
Dependence on Management
The success of Easyriders will depend, to a great extent, upon the
continued service of John E. Martin, Newriders' Chairman, and William E.
Prather, Newriders' President and Chief Executive Officer. Newriders entered
into a three year employment agreement with Mr. Martin in 1997 and upon
consummation of the Reorganization, intends to acquire approximately $1,000,000
key person insurance on his life payable to Easyriders. Newriders has entered
into a five year employment agreement with Mr. Prather and, upon consummation of
the Reorganization, intends to acquire approximately $1,000,000 key person
insurance on his life payable to Easyriders. The loss of Mr. Martin's or Mr.
Prather's services or the services of other members of senior management could
have a material adverse effect on Easyriders' results of operations and
financial condition. As Easyriders expands its operations, the success of its
business will depend increasingly upon Easyriders' ability to attract and retain
skilled management personnel. There can be no assurance that Easyriders will be
able to attract and retain sufficient personnel, and the inability to do so
would have a material adverse effect on Easyriders' results of operations and
financial condition.
The success of Easyriders will also depend, to a great extent, on the
services of Joseph Teresi and the senior management team of the Paisano
Companies. In connection with the Paisano Acquisition, Paisano Publications will
enter into an employment agreement with Joseph Teresi. The employment agreement
with Mr. Teresi provides that Mr. Teresi will serve as Chairman and Publisher of
Paisano Publications for at least five years or the date that the Contributor
Notes are repaid, whichever comes first. The employment agreement restricts Mr.
Teresi's ability to compete with Easyriders during such employment period and
for five years thereafter. The Company intends to enter into employment
agreements with Robert Davis, Rick Busman, Brian Wood and Keith Ball under which
they will serve as senior executives of the Paisano Companies, although the
terms of such employment agreements have not yet been finalized. All of these
individuals have significant experience in the magazine publishing and/or
motorcycle industry. Although Easyriders believes it could replace such key
employees in an orderly fashion should the need arise, the loss of any such key
personnel could have a material adverse effect on the Paisano Companies' and
Easyriders' results of operations and financial condition. Under the Senior
Credit Agreement, Paisano Publications is required to carry $2,000,000 of life
insurance on the life of Mr. Teresi, of which the Senior Lender is the
beneficiary and assignee. Otherwise, Easyriders will not maintain key person
insurance for any of the officers and employees of the Paisano Companies.
Future Capital Needs; Newriders Going Concern Opinion
Easyriders believes that cash from operations will be sufficient upon
consummation of the Reorganization to fund the working capital needs and
anticipated expansion of its combined businesses for the next 12 months. In
order to complete its anticipated expansion through 1999, Easyriders may be
required to incur short-term or
18
<PAGE> 34
long-term indebtedness or issue, in public or private transactions, equity or
debt securities. Due to the nudity in, and adult content of, certain magazines
published by Paisano Publications, it may be more difficult for Easyriders to
acquire such financing since certain lenders and/or investors may be unwilling
to lend and/or invest in the Paisano Companies. If such financing is obtainable,
it may be more expensive or on terms less desirable to Easyriders due to the
nudity and adult content of certain magazines published by Paisano Publications.
There can be no assurance that such debt or equity financing will be available
on terms acceptable to Easyriders, if at all. See "Paisano Companies'
Management's Discussion and Analysis of Results of Operations and Financial
Condition as of December 31, 1997 and June 30, 1998 -- Liquidity and Capital
Resources", "Newriders' Management's Discussion and Analysis of Results of
Operations and Financial Condition as of December 31, 1997 and June 30,
1998 -- Liquidity and Capital Resources", and "El Paso's Management's Discussion
and Analysis of Results of Operations and Financial Condition as of December 30,
1997 and June 30, 1998 -- Liquidity and Capital Resources."
The cash investment required to open new restaurant, apparel and accessory
locations, is expected to vary greatly from location to location with many
factors, including local building costs, the extent of landlord participation,
and facility size and seating capacity. Real estate costs will vary depending
upon whether Easyriders or one of its subsidiaries purchases or leases
properties and depending upon market conditions and location of the properties.
Presently Newriders and El Paso own no real estate. There can be no assurance
that the actual cost of opening Newriders' anticipated Units or future El Paso
restaurant locations will not be significantly greater than anticipated by
Easyriders generally or for any particular location. Easyriders may choose to
finance expansion of its proposed restaurant and motorcycle apparel and
accessories businesses through positive cash flow generated by the Paisano
Companies, landlord participation, debt or equity financing, or any combination
of the foregoing.
Newriders' independent accountant, Deloitte & Touche LLP, has issued an
opinion in connection with its audit of the financial statements for the fiscal
year ended December 31, 1997, indicating that substantial doubt exists as to
Newriders' ability to continue as a going concern. Newriders has incurred losses
from its inception through June 30, 1998, and by that time had an accumulated
deficit of $11,046,190. Assuming that the Reorganization is consummated,
Easyriders believes it will have adequate cash resources to sustain operations
for the foreseeable future, and Easyriders believes that it will be able to
generate capital internally to support its operations. See "Newriders'
Management's Discussion and Analysis of Results of Operations and Financial
Condition as of December 31, 1997 and June 30, 1998 -- Liquidity and Capital
Resources."
During 1996 and 1997 Newriders and El Paso had negative cash flow from
operations. Newriders has historically funded its working capital needs through
private placements of its debt and equity securities. Prior to consummation of
the Reorganization, Newriders may be required to seek additional financing to
meet its working capital requirements. The Paisano Companies have generally had
a positive cash flow in recent operating periods. Easyriders estimates that its
capital expenditures during the last six months of Fiscal 1998 will aggregate
approximately $1,000,000 and will be used to remodel and reopen the Fresno
location.
Paisano Publications will be subject to certain restrictions in the Senior
Credit Agreement that will severely restrict or limit its ability to transfer
funds to its parent company, Easyriders, or to its other affiliates following
consummation of the Reorganization. Although Easyriders' management believes
that a limited amount of funds from Paisano Publishing may be available to
assist other subsidiary companies in sustaining their operations following the
consummation of the Reorganization, Easyriders may have to seek additional
capital through sales of its equity or debt securities in order to generate
funds for anticipated expansion. Easyriders can offer no assurance that such
funds will be available to it on terms acceptable to Easyriders, if at all.
Management of Growth
Future growth of Easyriders will depend in part upon increases in magazine
sales, attracting additional advertising and expansion of the business segments
into new geographic areas through the opening of restaurants and/or motorcycle
accessory and apparel stores at new locations and the sale of additional
franchises. There can be no assurance that such expansion will be successful.
Expansion plans could place a
19
<PAGE> 35
significant strain on management, working capital and financial and management
control systems. Results of operations will be adversely affected if revenues do
not increase sufficiently to compensate for the increase in operating expenses
resulting from any expansion and there can be no assurance that any expansion
will be profitable or that it will not adversely affect Easyriders' results of
operations and financial condition. In addition, the success of any expansion
plans will depend in part upon the ability to continue to improve and expand
financial and management control systems, to attract, retain and motivate key
employees, and to finance expansion through operations from the combined
entities or through other sources. There can be no assurance that Easyriders
will be successful in these regards.
The ability to expand the publishing and franchising businesses, and open
and operate new restaurants or apparel and accessory shops on a timely and
profitable basis is subject to various contingencies, some of which will be
beyond Easyriders' control. These contingencies include, among others, the
ability to secure suitable sites on a timely basis and on satisfactory terms, to
obtain required governmental permits and approvals, to complete construction on
a cost-effective and timely basis, to hire, train and retain skilled management
and other personnel, to obtain adequate financing or other capital resources and
to successfully integrate new restaurants and shops into Easyriders' existing
operations. There can be no assurance that planned expansion can be achieved or
that expansion will be profitable. Profitability may be adversely affected by
costs associated with developing a significant number of new restaurants and
shops over a relatively short period of time. New restaurants and shops
typically incur above-average operating costs during the first several months of
operation, which have a negative effect on the profitability of such restaurants
and shops during such period. In addition, Easyriders will open new restaurants
and shops in geographic markets where it has no previous operating experience.
Failure of Easyriders to achieve its planned expansion on a profitable basis
could have a material adverse effect on Easyriders' results of operations and
financial condition.
Restrictions Imposed under Financing
The Reorganization is contingent on the financing pursuant to the Senior
Credit Agreement being obtained by Newriders and/or Paisano Publications. A
commitment from a large financial institution was recently received by Newriders
and Paisano Publications to provide the Senior Credit Agreement. It is
anticipated that the terms and conditions of the Senior Credit Agreement will
impose significant operating and financial restrictions on Easyriders' and its
subsidiaries' ability to, among other things, incur additional indebtedness or
guarantees, create liens, sell assets, make investments, engage in mergers or
consolidations or fundamental changes, pay dividends or transfer funds to
affiliated companies and engage in certain other transactions with affiliates.
The Senior Credit Agreement will likely limit the amount which Easyriders may
spend on capital expenditures and require Easyriders to comply with certain
financial covenants. These requirements may limit the ability of Easyriders to
meet other obligations. The Senior Credit Agreement will also contain events of
default for failure to pay loans and other obligations (including a
cross-default to other debt), breach of representations and warranties or
failure to comply with covenants, certain insolvency events, changes of control,
material judgments and other matters. The ability of Easyriders to comply with
the covenants in the Senior Credit Agreement may be affected by events beyond
the control of Easyriders. Failure to comply with any of these covenants could
result in a default under the Senior Credit Agreement, and such default could
result in acceleration of payments due thereunder and the exercise of remedies
by the lender against Easyriders and its subsidiaries and the collateral,
including the stock of the Paisano Companies. Any such acceleration or exercise
of remedies may make it difficult for Easyriders and its affiliates to obtain
other financing. It is expected that the obligations of Paisano Publications
under the Senior Credit Agreement will be secured by a first priority security
interest in substantially all tangible and intangible assets (owned or hereafter
acquired) of Easyriders and the Paisano Companies. Easyriders will be required
to guarantee the obligations of Paisano Publishing under the Senior Credit
Agreement, and Easyriders' guarantee will be secured by all of its assets,
including 100% of the outstanding shares or equity interests of the Paisano
Companies, Newriders and El Paso. See "Newriders Management's Discussion and
Analysis of Financial Condition and Results of Operations as of December 31,
1997 and June 30, 1998 -- Liquidity and Capital Resources" and "The
Reorganization -- Terms of the Senior Credit Agreement."
20
<PAGE> 36
Integration of Business Operations
Easyriders, Newriders, the Paisano Companies and El Paso have entered into
the Reorganization with the expectation that the Reorganization will result in
beneficial synergies for the combined companies. If the Reorganization is
consummated, Easyriders will face a significant challenge to integrate and
manage its overall business effectively. There can be no assurance that
Easyriders will be able to integrate successfully the administrative, management
and service operations of Newriders, the Paisano Companies and El Paso, that
such integration will occur in a timely and efficient manner, if at all, or that
the uncertainty associated with such integration will not result in the loss of
customers or key employees. The successful combination of the various companies
will require, among other things, the timely integration of such companies'
respective product and service offerings and coordination of their respective
sales, marketing, development, finance and administrative activities. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The failure to achieve such
integration in a timely, effective or efficient manner could have a material
adverse effect on the business, operating results and financial condition of
Easyriders. There can be no assurance that Easyriders will not incur additional
charges in subsequent quarters to reflect costs associated with the
Reorganization or that management will be successful in its efforts to integrate
the operations of the entities involved. See "Operations After The
Reorganization."
Effect of Initial Performance Awards on Liquidity
Following consummation of the Reorganization, Mr. Martin and Mr. Nordstrom
will be granted certain initial performance awards under the Easyriders Plan.
The bonuses that Mr. Martin may receive under the initial performance award that
will be granted to him, if paid, will have a significant negative impact on the
cash resources and liquidity of Easyriders. See "The Reorganization -- Initial
Performance Awards to be Granted Under the Easyriders Plan."
Newriders and El Paso Limited Operating Histories; Operating Losses
Newriders commenced its operations through its subsidiary, Newriders
Limited, in July 1995. Accordingly, Newriders has a limited operating history.
Stockholders have only a brief operating record to review in evaluating the
performance of Newriders. Newriders had net losses of $1,036,240 and $4,776,874
for its fiscal years ended December 31, 1996 and 1997, respectively. For the
first six months of fiscal year 1998, Newriders had a net loss of $5,197,174 and
an accumulated deficit of $11,046,190. There is no assurance that Newriders will
be profitable in fiscal 1998 or thereafter.
El Paso was organized on September 13, 1994, and the first two conversions
of existing restaurants into El Paso owned barbecue restaurants in Tulsa,
Oklahoma and Glendale, Arizona were completed in May 1991 and May 1992,
respectively. El Paso incurred a loss of $36,000 in fiscal 1997. El Paso had net
income of $45,000 and $324,550 in Fiscal 1996 and the six months ended June 30,
1998, respectively. There can be no assurance that El Paso's operations will be
profitable in the future.
Concentration of Stock Ownership
Immediately following consummation of the Reorganization and certain
related transactions, including the return to Newriders of certain shares of
Newriders Common Stock by Newriders affiliates, Mr. Martin's purchase of an
additional 4,036,797 shares of Easyriders Common Stock, the issuance of 200,000
shares of Easyriders Common Stock to Mr. Nordstrom, and assuming none of the
Newriders stockholders exercise and perfect dissenters' rights, the directors
and executive officers of Easyriders and their affiliates as a group will
beneficially own approximately 71% of the shares of Easyriders Common Stock then
issued and outstanding (not including additional shares issuable upon the
exercise of warrants and options or shares of Easyriders Common Stock issuable
to Mr. Nordstrom pursuant to the Easyriders Plan). In addition, after
consummation of the Reorganization, assuming none of the Newriders stockholders
exercise and perfect dissenters' rights, John E. Martin and Joseph Teresi will
beneficially own, and be entitled to vote, approximately 5,132,947 and 6,993,507
shares of Easyriders Common Stock, respectively, representing an aggregate of
approximately 64% of the number of shares of Easyriders Common Stock issued and
outstanding upon consummation of the
21
<PAGE> 37
Reorganization. In connection with the Reorganization, Messrs. Martin and
Teresi, will enter into a Stockholders' Agreement that will provide that Mr.
Martin and Mr. Teresi shall each be entitled to designate four individuals to
serve on the Board of Directors of Easyriders, and that Mr. Martin and Mr.
Teresi shall each vote their shares for the persons designated by the other to
so serve. As a result of their stock ownership, Messrs. Martin and Teresi will
be able to elect all 8 persons to the board of directors and exert significant
influence over all matters requiring Board of Directors or stockholder approval,
including the approval of significant corporate transactions. Messrs. Martin and
Teresi will together control the election of all of the directors of Easyriders
for the foreseeable future, and stockholders other than Mr. Martin and Mr.
Teresi will not have any power to elect directors of Easyriders. This
concentration of ownership in such persons could also have the effect of making
it more difficult for a third party to acquire, or could discourage a third
party from attempting to acquire, control of Easyriders, and, therefore, may
limit the price that certain investors might be willing to pay in the future for
shares of Easyriders Common Stock. See "Security Ownership of Certain Beneficial
Owners and Management," and "The Reorganization -- Stockholders' Agreement."
Dependence on Continued Popularity of American-Made Motorcycles
Easyriders' business as a whole after the Reorganization will be related to
the popularity of Harley-Davidson and other American-made motorcycles. There are
over 600,000 Harley-Davidson motorcycles currently registered in the United
States. Newriders believes, based upon Harley-Davidson's current production
plans, that the number of Harley-Davidson motorcycles registered in the United
States will increase to approximately 900,000 by 1999. There can be no assurance
that the current popularity of Harley-Davidson and other American-made
motorcycles will continue or that the expected production rate of new
Harley-Davidson motorcycles will actually occur.
Benefits to Insiders
Consummation of the Reorganization will result in certain benefits being
received by certain insiders and affiliates. In addition to the consideration
Mr. Teresi will receive for the sale of the Paisano Companies, Mr. Teresi will
enter into an employment agreement with Newriders at an annual salary of
$150,000, and a consulting agreement at $5,000 per month for the first three
months following consummation of the Reorganization, which will increase by
$2,500 per month thereafter, provided, however, that monthly payments under the
agreement will not exceed $25,000. Mr. Teresi will recommend to the Easyriders
Compensation Committee that certain Paisano Company employees and consultants be
granted options to purchase up to an aggregate of 300,000 shares of Easyriders
Common Stock exercisable at $5.00 per share. Mr. Teresi could, subject to
Easyriders Compensation Committee approval, be granted an option covering a
portion of these shares. Mr. Teresi will terminate existing leases on buildings
and real estate located in Agoura Hills, California, and execute new leases with
Easyriders. In addition to the 1,000,000 shares of Easyriders Common Stock Mr.
Martin will receive for the transfer of his interest in El Paso, Mr. Martin will
purchase 4,036,797 additional shares of Easyriders Common Stock for $5 million
in cash and notes aggregating $7.3 million, and he will become eligible to
receive under a bonus plan annual cash bonuses of up to the amount of interest
he is obligated to pay to Easyriders with respect to the Martin Notes and a
one-time bonus of up to $13,000,000 if certain conditions are met upon and
following consummation of the Reorganization. In connection with the El Paso
Acquisition, Mr. Prather will receive 1,000,000 shares of Easyriders Common
Stock for the transfer of his interest in El Paso, and Mr. Prather will enter
into a five-year employment agreement with Newriders at $200,000 per year. Upon
consummation of the Reorganization, Mr. Nordstrom will receive 200,000 shares of
Easyriders Common Stock as consideration for certain services provided by Mr.
Nordstrom in connection with the Reorganization. For a more detailed discussion
of these benefits and others to be received by insiders and affiliates in
connection with the Reorganization, see "The Reorganization" and "Executive
Compensation -- Newriders."
Lack of Independent Financial Appraisal
The Board of Directors of Newriders elected not to seek and obtain an
independent financial appraisal or fairness opinion concerning the relative
values of the companies involved in the Reorganization and the
22
<PAGE> 38
fairness of the terms and conditions of the Reorganization to Newriders'
stockholders. As a result, the stockholders of Newriders do not have the
assurance associated with an independent financial analyst's opinion that fair
prices are being paid for the acquisitions and that benefits to insiders are
appropriate or comparable to others in similar situations. Management of
Newriders weighed the benefits of an independent financial appraisal and/or
fairness opinion, against its anticipated expense, and decided not to seek to
obtain one.
Premium Paid for Goodwill
Under the terms of the acquisition agreements, Easyriders has agreed to pay
to Mr. Teresi as the owner of the Paisano Companies, and to Mr. Martin and Mr.
and Mrs. Prather as the owners of El Paso, consideration which substantially
exceeds the net tangible book value of the assets of the Paisano Companies and
El Paso. Newriders' management believes much of the premium being paid to the
owners of the Paisano Companies and El Paso for these acquisitions is associated
with the goodwill of these businesses. The acquisitions of the Paisano Companies
and El Paso will be accounted for as a purchase and as a result, will give rise
to significant goodwill. On a pro forma basis, had the acquisitions been
completed as of June 30, 1998, goodwill of approximately $59.1 million would be
recorded on Easyriders' consolidated balance sheet. On a percentage basis,
goodwill would represent approximately 72% of Easyriders pro forma consolidated
total assets as of June 30, 1998. Additionally, amortization of goodwill will
result in an annual charge, currently estimated to be approximately $2 million
per year, to the Easyriders consolidated statement of operations.
Litigation Risks
Each of Newriders, El Paso and the Paisano Companies is subject to
litigation incidental to the conduct of its respective business in the ordinary
course of operations.
Newriders was recently 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. See "Legal Matters."
Newriders has been served with a summons and complaint in a lawsuit brought
by Palisades Capital, Inc. and Palisades Holdings, Inc. (collectively
"Palisades") 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 proposes to vigorously defend this action
and file a counterclaim seeking damages in excess of the amount due under the
promissory note. See "Legal Matters."
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. See "Legal Matters."
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 El Paso believes its insurance is adequate. See "Legal Matters."
Distributions on Common Stock Unlikely -- Effect of Debt Financing
Newriders has not paid any cash dividends on Newriders Common Stock since
its organization, and it is not anticipated that any cash dividends will be paid
in the foreseeable future. Easyriders intends to retain earnings to support its
growth strategy and reduce indebtedness and does not anticipate paying dividends
in the foreseeable future. It is anticipated that payments to service the debt
to be incurred to finance the Reorganization will significantly and adversely
impact the availability of cash to pay dividends for the foreseeable future. As
a holding company, Easyriders' ability to pay dividends in the future is
dependent upon the receipt of dividends or other payments from its principal
operating subsidiaries. The payment of dividends
23
<PAGE> 39
by such subsidiaries to Easyriders for the purpose of paying dividends to
holders of Common Stock will likely be prohibited or severely restricted by the
Senior Credit Agreement. Furthermore, the Senior Credit Agreement will likely
prohibit Easyriders from paying any dividends to holders of Easyriders Common
Stock. See "Description of Newriders Securities -- Historical Prices and
Dividends of Newriders Common Stock," "Description of Easyriders Securities" and
The Reorganization -- Terms of the Senior Credit Agreement."
Volatility of Stock Prices
Newriders Common Stock has experienced, and Easyriders Common Stock is
expected to experience, substantial price volatility in response to actual or
anticipated quarterly variations in results of operations, announcements of
material developments by Easyriders, its subsidiaries or its competitors,
developments related to new sites, developments in relationships with customers,
suppliers or any future strategic partners of Easyriders, and other events or
factors. In addition, any shortfall or changes in revenue, gross margins,
earnings or other financial results from analysts' expectations could cause the
price of Easyriders Common Stock to fluctuate significantly. In recent years,
the stock market in general has experienced extreme price and volume
fluctuations, which have particularly affected the market price of many
companies and which have often been unrelated to the operating performance of
those companies. These broad market fluctuations may adversely affect the market
price of Easyriders Common Stock. Newriders Common Stock has a limited trading
history. See "Description of Newriders Securities -- Historical Prices and
Dividends of Newriders Common Stock." Easyriders has no history of a public
trading market for its Common Stock. There can be no assurance as to the market
value, if any, of Easyriders Common Stock on the Closing Date.
Potential Dilutive Effect on Earnings
Easyriders believes that beneficial synergies will result from the
Reorganization; however, there can be no assurance that the combination of the
respective businesses of Newriders, the Paisano Companies and El Paso, even if
achieved in an efficient, effective and timely manner, will result in combined
operating results and financial condition superior to what would have been
achieved by each company independently. The Reorganization, on a pro-forma
basis, would have been dilutive to Newriders' results of operations in fiscal
1997 and the six months ended June 30, 1998. The degree of future dilution, if
any, will depend on revenue and expenses of Newriders, the Paisano Companies and
El Paso subsequent to closing.
Substantial Expenses Resulting from the Reorganization
Easyriders (including its future subsidiaries) expects to incur costs and
expenses of approximately $3,500,000 in connection with the Reorganization which
will be capitalized as goodwill. Additionally, costs will be incurred subsequent
to the Reorganization associated with combining certain aspects of Easyriders'
operations. These costs will negatively impact operating results for the fiscal
quarters subsequent to the consummation of the Reorganization. Although
Easyriders does not believe that the costs will exceed this estimate, there can
be no assurance that this estimate is correct or that unanticipated
contingencies will not occur that will substantially increase the costs of
combining the operations of the companies or will result in a material adverse
effect on the operating results of the companies in future periods.
Limited Scope of Tax Opinions
Deloitte and Touche LLP will deliver to Newriders an opinion as of the date
of closing with respect to certain of the expected federal income tax
consequences of the Reorganization. The tax opinions are limited to the matters
set forth therein and do not address any other issues, including, but not
limited to, any state, local, foreign, consolidated return, employee benefit,
and Code Section 382 issues related to the limitations on the utilization of net
operating loss carryforwards, or alternative minimum tax consequences to the
parties to the Transactions. The tax opinions assume that Newriders Common
Stock, the El Paso Interests or the Paisano Companies' Common Stock, as the case
may be, will be held as capital assets by the holders thereof immediately prior
to the respective effective times of the Reorganization and do not address the
tax consequences that may be relevant to a particular Stockholder subject to
special treatment under certain federal income tax laws. Holders of Newriders
Common Stock are advised to consult their own tax advisers as
24
<PAGE> 40
to the specific tax consequences of the Reorganization to them, including the
application and effect of state, local and foreign income and other tax laws.
See "Certain Federal Income Tax Consequences."
Penny Stock Rules
Newriders' Common Stock, as of the date of this Prospectus/Proxy Statement,
is within the definitional scope of a penny stock. As a result, the regulations
on penny stocks could limit the ability of broker/dealers to sell Newriders'
securities and thus the ability of purchasers of Newriders' securities to sell
their securities in the secondary market. In the event the Reorganization is
consummated, these rules will also apply to shares of Easyriders Common Stock
unless and until the shares of Easyriders Common Stock no longer fall within the
definitional scope of penny stock or until an exemption therefrom is obtained,
such as a NASDAQ SmallCap listing or an American Stock Exchange listing.
Presently, Newriders Common Stock is subject to Rules 15g-1 through 15g-6,
inclusive, promulgated under the Exchange Act that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally, a person
with assets in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 together with a spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rules may affect the ability of broker-dealers to sell
Easyriders' securities and may affect the ability of investors to sell their
securities in the secondary market.
The Securities and Exchange Commission has also adopted regulations which
define a "penny stock" to be any equity security that has a market price (as
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a
so-called penny stock, unless exempt, the regulations require the delivery,
prior to the transaction, of a disclosure schedule relating to the penny stock
market. The broker-dealer must also disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. While many NASDAQ-listed and American Stock
Exchange-listed securities are covered by the definition of penny stock,
transactions in such securities are exempt from all but the sole market-maker
provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if
the issuer has not been in continuous operation for three years), (ii)
transactions in which the customer is an institutional accredited investor, or
(iii) transactions that are not recommended by the broker-dealer.
Outstanding Options and Warrants
As of the date of this Prospectus/Proxy Statement, Newriders has granted
options to purchase approximately 3,972,000 shares of Newriders Common Stock at
a price of $2.50 to $3.00 per share and warrants to purchase 771,291 shares of
Newriders Common Stock at prices ranging from $1.50 to $4.05 per share. This
includes options to purchase 3,290,000 shares of Newriders Common Stock that
will be relinquished upon consummation of the Reorganization. The remaining
Newriders options and warrants will be exchanged for Easyriders options and
warrants exercisable to purchase Easyriders Common Stock on the basis of one
share of Easyriders' Common Stock for each two shares of Newriders Common Stock
subject to such options and warrants at an exercise price per share equal to two
times the exercise price provided for in the stock option and warrant agreements
evidencing such options and warrants. In connection with obtaining the Senior
Credit Agreement, Easyriders will grant a warrant to the Senior Lender which may
be exercised to purchase up to approximately 1.5% of the shares of Easyriders
Common Stock to be outstanding as of the date on which the Senior Credit
Agreement is established. Under the terms of the options and warrants, the
holders are given the opportunity to profit from a rise in the market price of
the Common Stock, and their exercise may dilute the book value per share of the
Easyriders Common Stock. The existence of the options may adversely affect the
terms on which Easyriders may obtain additional equity financing since the
holders are likely to exercise their options at a time when Easyriders would
otherwise be able to obtain needed capital on
25
<PAGE> 41
terms more favorable to Easyriders than could be obtained through the exercise
of such options. See "Description of Newriders Securities."
RISK FACTORS RELATED PRIMARILY TO THE PUBLISHING BUSINESS
General
The Paisano Companies are engaged in a specialty magazine publishing
business serving the motorcycle and tattoo markets, the sale of motorcycle
accessories and apparel at wholesale and through catalogue sales, the operation
of stores specializing in sales of motorcycle accessories and motorcycle
oriented apparel, sponsorship of motorcycle and tattoo events and the business
of franchising stores specializing in sales of motorcycle accessories and
motorcycle oriented apparel, and has franchised the use of the name "Easyriders"
to Newriders for motorcycle themed restaurants. Such activities expose the
Paisano Companies, and, after consummation of the Reorganization, will expose
Easyriders to risks particular to the publishing business, a franchising
operation, and a motorcycle accessories and motorcycle oriented apparel sales
business. See "Risk Factors -- Risk Factors Related to Motorcycle Accessories
and Apparel Business -- Competition -- Motorcycle Accessories and Apparel
Business."
Risks Associated with Fluctuations in Paper Costs and Postal Rates
The principal raw material used in the publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 25%, 21%, 14% and 15%
of Paisano Publication's production, selling and other direct costs for the
fiscal years ended December 31, 1995, 1996 and 1997, and for the six months
ended June 30, 1998, 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 Paisano's results of operations or financial condition.
The profitability of Paisano Publication's magazine publishing operations
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 Paisano Publications' results of
operations or financial condition. No assurance can be given that Paisano
Publications 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 quarterly comparisons of the results of
operations and financial condition of Paisano Publications. See "Paisano
Companies' Management's Discussion and Analysis of Results of Operations and
Financial Condition as of December 31, 1997 and June 30, 1998 -- Overview."
Risks Relating to the Importance of Certain Publications
Certain publications of Paisano Publications have historically represented
a significant portion of Paisano Publication's gross revenues and operating
contribution, and Paisano Publications expects that such publications will
continue to do so in the future. Easyriders and V-Twin amounted to approximately
23% of Paisano Publications' gross circulation revenues. As compared to industry
standards, Paisano Publications believes it has a diversified portfolio of
special-interest publications and is not dependent on any single publication;
however, a significant decline in the performance of any of these publications
could have a material adverse effect on Paisano Publications' results of
operations and financial condition.
Risks Relating to Concentration of Advertising Revenues
For the twelve months ended December 31, 1997, motorcycle manufacturers and
retailers of original equipment and aftermarket parts, manufacturers and
retailers of motorcycle apparel and accessories and tattoo equipment accounted
for approximately 67%, 24% and 5% of Paisano Publication's advertising revenues,
respectively. A significant decline in the advertising spending of the
motorcycle industry could have a material adverse effect on Paisano
Publications's results of operations, and could have an effect on quarterly
comparisons of the results of operations and financial condition of Paisano
Publications. In addition, advertising spending can be adversely affected by
legislation, which may affect the cost of advertising or the demand for the
products of Paisano Publications' advertisers. Paisano Publications anticipates
that its
26
<PAGE> 42
revenues from manufacturers of tobacco related products will decrease in the
future as a result of the resolution of certain litigation involving such
manufacturers. Advertising revenues from such manufacturers were $84,643, or 2%
of Paisano Publication's net revenues, for the twelve months ended December 31,
1997, and $69,830, or 4% of Paisano Publications' net revenues, for the six
months ended June 30, 1998.
Risks Relating to Foreign Sales
Approximately 20% of the Paisano Publication's magazine sales during the
year ended December 31, 1997 were made in foreign countries. Paisano
Publications is subject to certain risks associated with sales in foreign
countries including fluctuating currency exchange rates, and the instability of
foreign economies that may affect customers' ability to make payment for goods.
Cyclicality and Limited Seasonality of Revenue; Potential Volatility of Future
Operating Results
Paisano Publications' magazine revenues are principally derived from
advertising and circulation. Circulation revenues are generated from
subscription, newsstand and list rental sales. For the six months ended June 30,
1998, approximately 29% of Paisano Publications' gross revenues were from
advertising, 70% were from circulation and 1% were from other sources.
Advertising revenues of Paisano Publications are cyclical and are dependent upon
general economic conditions. Historically, increases in advertising revenues
have corresponded with economic recoveries while decreases, as well as changes
in advertising mix, have corresponded with general economic downturns and
regional and local economic recessions. Historically, revenue from the
publishing business has also been somewhat seasonal with higher revenue during
the holiday seasons when cover prices of magazines are generally higher, and
lower revenue during the first fiscal quarter when cover price of magazines are
generally lower. For a discussion of the cyclical and seasonal nature of Paisano
Publications' revenues, see "Paisano Companies' Management's Discussion and
Analysis of Financial Condition and Results of Operations as of December 31,
1997 and June 30, 1998."
The Paisano Companies' operating results may fluctuate on a quarterly basis
as a result of a number of factors, including advertising and newsstand sales,
magazine start-up costs and timing and success of events. Fluctuations in
quarterly results could affect the market price of Easyriders Common Stock in a
manner unrelated to the long-term operating performance of the Paisano
Companies.
Consolidation of Principal Vendors
Paisano Publications' principal vendors include paper suppliers, printers,
fulfillment houses and national newsstand distributors. Each of these industries
is currently experiencing significant consolidation among their principal
participants. Such consolidation may result in (i) decreased competition for
providing such services and thus increased prices; (ii) interruptions and delays
in services provided by such vendors; and (iii) greater dependence on certain
vendors. Consolidation could adversely affect Paisano Publications's results of
operations and financial condition.
In addition, the historical patterns of newsstand distribution have changed
as a result of the on-going consolidation of newsstand wholesalers and the
shifting focus of such wholesalers to servicing retail outlets instead of
geographic areas. These changes, among others, have led to a decrease in
newsstand sales on an industry-wide basis. Wholesale newsstand sales accounted
for approximately 40% and 55% of Paisano Publications' gross revenues for the
twelve months ended December 31, 1997 and the six months ended June 30, 1998,
respectively. Paisano Publications believes that such changes in newsstand
distribution may have an adverse impact on its results of operations and
financial condition.
Competition -- Publishing
The consumer magazine publishing business is highly competitive. Paisano
Publications principally competes for advertising and circulation revenues with
publishers of other special-interest consumer magazines. Certain of such
competitors are larger and have greater financial resources than Paisano
Publications. Other such competitors are smaller and are capable of quickly
identifying a niche publication
27
<PAGE> 43
that could compete for Paisano Publications' readers and advertisers. In
addition to other special-interest magazines, Paisano Publications also competes
for advertising revenues with general-interest magazines and other forms of
media, including broadcast and cable television, radio, newspaper, direct
marketing and electronic media. There can be no assurance that Paisano will be
able to compete effectively with such other forms of advertising in the future.
See "Information about Paisano Companies -- Competition."
RISK FACTORS RELATED PRIMARILY TO THE RESTAURANT INDUSTRY
General
Newriders has been engaged in the operation of two combined
restaurant/apparel and merchandise operations, and proposes to resume the
operations at the Fresno, California location at some time after consummation of
the Reorganization, and El Paso is engaged in the operation of four restaurants.
As such, Newriders and El Paso are exposed to many of the risks associated with
restaurant operation. Upon consummation of the Reorganization, these risks will
affect Easyriders due to its ownership of Newriders and El Paso. See
"Information About Newriders."
Competition -- Restaurant Industry
The restaurant industry is highly competitive. Newriders and El Paso
compete with a broad range of restaurants, including national and regional
casual dining chains, themed restaurants (such as the Hard Rock Cafe, Planet
Hollywood and Harley-Davidson Cafe), as well as locally-owned restaurants, some
of which operate with concepts similar to that of Newriders and El Paso. Many of
Newriders' and El Paso's competitors are well established and have substantially
greater market presence and financial and other resources than Newriders or El
Paso. The entrance of new competitors into Newriders' or El Paso's market areas
or the expansion of operations by existing competitors could have a material
adverse effect on their respective results of operations and financial
condition. In addition, Newriders and El Paso compete with other restaurant
companies and retailers for sites, labor and, in many cases, customers.
Newriders and El Paso believe that the key competitive factors in the restaurant
industry are quality of food and service, price, location and concept. To the
extent that one or more of their competitors becomes more successful in respect
of any key competitive factor, their respective businesses could be adversely
affected. See "Information About Newriders -- Competition," "Information about
El Paso -- Competition."
Geographic Concentration; Small Restaurant Base
Of the four restaurants currently owned and operated by El Paso, three are
located in Arizona. Consequently, El Paso's results of operations will be
materially affected by Arizona's economy. Also, adverse publicity in Arizona
relating to El Paso's restaurants could have a more pronounced effect on El
Paso's results of operations than might be the case if its restaurants were
broadly dispersed geographically. Further, there can be no assurance that
continued expansion in El Paso's current market areas will not adversely affect
the financial performance of other restaurants already operated by El Paso in
those areas. The restaurant owned by Newriders is located in California, and
accordingly, Newriders' results of operations will be affected by the economy of
that state. The small number of restaurants operated by El Paso and Newriders
increases their respective sensitivity to local economic fluctuations and other
local factors.
The operating results achieved to date by El Paso's relatively small
restaurant base may not be indicative of the future operating results of a
larger number of restaurants. In addition, due to El Paso's small restaurant
base, poor operating results at any one restaurant could adversely affect the
results of operations of the entire company.
Seasonality and Fluctuations in Quarterly Results
Newriders' restaurant sales and earnings have fluctuated seasonally at its
former Myrtle Beach, South Carolina location in the first year of its initial
operations, where its highest sales and earnings historically have occurred in
its second and third fiscal quarters. Restaurant sales at the Fresno, California
location showed very
28
<PAGE> 44
little seasonal change during the time it operated. El Paso's Scottsdale,
Arizona restaurant has shown the most significant seasonality of El Paso's
restaurants with it largest revenues occurring during the first fiscal quarter.
It is anticipated that restaurants located at tourist destinations will have
greater seasonal fluctuations. In addition, quarterly results are significantly
affected by the timing of new restaurant openings, as new restaurants incur
above-average operating costs during the first several months of operation.
Accordingly, to the extent that restaurant openings are concentrated in any
fiscal period, results of operations for such fiscal period and subsequent
fiscal periods may be materially adversely affected. Due to the seasonality of
Newriders' business and the impact of new restaurant openings, results of
operations may fluctuate significantly from quarter to quarter, and Newriders'
results of operations for any particular quarter are not necessarily indicative
of the results that may be achieved for the full fiscal year. See "Newriders'
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1997 and June 30, 1998 -- Seasonality and
Quarterly Results."
Adverse Changes in Food, Labor and Other Costs; Supply Risks
The profitability of Newriders and El Paso is significantly dependent on
their ability to anticipate and react to changes in food, labor, employee
benefits and similar costs over which they have little or no control. Newriders
and El Paso are dependent on frequent deliveries of fresh meats and produce.
Shortages or interruptions in the supply of fresh meats and produce, which may
be caused by adverse weather or other conditions, could have a material adverse
effect on their results of operations and financial condition.
Government Regulation Concerning Restaurant Operations, Employees and
Alcoholic Beverages
Newriders, El Paso and Columbus may be subject to numerous federal, state
and local government laws and regulations, including those relating to the sale
of food and alcoholic beverages and the development, construction and operation
of Newriders' and El Paso's restaurants. The failure to comply with any such
laws and regulations, including the failure to obtain or maintain any liquor
licenses, could have a material adverse effect on Newriders', El Paso's,
Columbus' and Easyriders' results of operations and financial condition.
Newriders, El Paso and Columbus are also subject to laws governing their
relationships with employees, including minimum wage requirements, laws and
regulations relating to overtime and working and safety conditions and
citizenship requirements. Material increases in the minimum hourly wage,
unemployment tax rates, sales taxes or the cost of compliance with any
applicable law or regulation could have a material adverse effect on Newriders,
El Paso and Columbus. Newriders, El Paso and Columbus may also be subject in
certain states to "dram-shop" statutes which generally provide a person injured
by an intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. Any liability
of Newriders, El Paso and Columbus under such statutes could have a material
adverse effect on their respective results of operations and financial
condition. See "Information about Newriders -- Governmental Regulation" and
"Information About El Paso -- Governmental Regulation."
Risks Associated with the Food Service Industry
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. Dependence
on fresh meats and produce also subjects restaurant companies to the risk that
shortages or interruptions in supply could adversely affect the availability,
quality or cost of ingredients. In addition, factors such as inflation,
increased food, labor and employee benefit costs and the availability of
qualified management and hourly employees also may adversely affect the
restaurant industry generally and Newriders' and El Paso's restaurants in
particular. The success and future profitability of Newriders and El Paso will
depend in part on their ability to identify and respond to changing conditions
within the restaurant industry. Newriders and El Paso could also be
substantially adversely affected by publicity resulting from food quality,
illness, injury or other health concerns or alleged discrimination or other
operating issues stemming from one location or a limited number of locations,
whether or not Newriders or El Paso is liable. In addition, factors such as
increased costs of goods, regional weather conditions and the potential scarcity
of experienced management
29
<PAGE> 45
and hourly employees may have a material adverse effect on the food service
industry in general and the results of operations and financial condition of
Newriders and El Paso.
RISK FACTORS RELATED TO MOTORCYCLE ACCESSORIES AND APPAREL BUSINESS
Competition -- Motorcycle Accessories and Apparel Business
The motorcycle accessories and apparel market in which Newriders and
Paisano Publications compete is highly competitive. One significant source of
competition is the licensed Harley-Davidson motorcycle dealer network which
primarily sells new Harley-Davidson motorcycles, accessories and parts and
provides repair/maintenance service on all Harley-Davidson models. Newriders and
Paisano Publications believe that most of the licensed Harley-Davidson dealers
do not emphasize the sale of used Harley-Davidson motorcycles or sell
aftermarket accessories and apparel. In addition, there are a substantial number
of motorcycle shops which provide aftermarket parts, services and accessories to
Harley-Davidson motorcycle owners. Newriders believes that most of the
aftermarket motorcycle shops are small, privately owned businesses with limited
facilities, capital and other resources. There can be no assurance, however,
that current competitors will not expand their facilities and operations or that
new competitors with substantial capital and other resources will not enter the
market. See "Information About Newriders -- Competition."
Merchandise Risk
Consumers' fashion tastes and preferences change from time to time as new
and modified fashions and styles are introduced. Newriders and the Paisano
Companies are subject to the risk that it may become difficult to liquidate
existing inventories of motorcycle apparel should such apparel become obsolete
due to changes in consumer fashion tastes and preferences.
Franchising Activities
Easyriders Franchising has a network of 24 franchised Easyriders locations
located throughout the United States, two of which are owned by Newriders, and
agreements have been signed for an additional six stores which are expected to
open in 1998. Federal and state franchise laws have broad enforcement
provisions, and under certain state laws potential and existing franchisees may
have a private cause of action for franchise violations. Although Easyriders
Franchising knows of no such violations, two franchises have filed arbitration
claims against Easyriders Franchising and it is possible that other claims may
be filed in the future. Another franchisee has filed a claim letter against
Easyriders Franchising. See "Legal Matters."
30
<PAGE> 46
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Reorganization had been consummated, nor is it
necessarily indicative of future operating results or financial position. The
unaudited pro forma combined financial statements have been derived from the
historical financial statements of the Paisano Companies, El Paso and Newriders,
and give effect to (i) the distribution of certain assets, liabilities and
undistributed S corporation earnings to Mr. Teresi immediately prior to the
Reorganization, (ii) the contribution of Newriders common stock to Newriders by
certain Newriders Stockholders immediately prior to the Reorganization, (iii)
the sale of common stock for cash and notes receivable by Easyriders, (iv) the
acquisition of the Paisano Companies and El Paso by Easyriders, and (v) costs
associated with the consummation of the Reorganization. The unaudited pro forma
combined balance sheet gives effect to the combination as if it had occurred on
June 30, 1998 using the Paisano Companies' and El Paso's June 30, 1998 combined
condensed financial statements. The unaudited pro forma combined statements of
operations give effect to the combination as if it had occurred (i) on January
1, 1997, the beginning of the last full fiscal year for each company and (ii) on
January 1, 1998, the period from the most recent fiscal year-end to the most
recent interim date for which a balance sheet is required. The pro forma
adjustments are based on preliminary estimates, available information and
certain assumptions that management deems appropriate. The pro forma financial
information does not purport to represent what the combined company's financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates or to project the combined company's
financial position or results of operations for any future period. The unaudited
pro forma combined financial statements should be read in conjunction with the
Paisano Companies', El Paso's and Newriders' financial statements and the notes
thereto included elsewhere herein.
31
<PAGE> 47
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
PAISANO PRO FORMA
NEWRIDERS COMPANIES EL PASO ----------------------------------------
JUNE 30, JUNE 30, JUNE 30, ACQUISITION
1998 1998 1998 ADJUSTMENTS COMBINED
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......... $ 358,014 $ (637,148) $ 224,008 $ 4,525,153(3)(5)(6)(8) $ 4,470,027
Accounts receivable, net........... 3,397,863 166,735 3,564,598
Inventory.......................... 187,362 6,122,383 37,673 (54,000)(10) 6,293,418
Other current assets............... 787,136 2,842,205 38,600 (742,743)(2) 2,925,198
------------ ----------- ---------- ----------- -----------
Total current assets........ 1,332,512 11,725,303 467,016 3,728,410 17,253,241
------------ ----------- ---------- ----------- -----------
Property and equipment, net.......... 852,413 1,161,658 2,654,717 (677,500)(2)(10) 3,991,288
Goodwill............................. 59,146,303(1)(6)(7) 59,146,303
Other assets......................... 360,969 200,279 1,130,669 (37,000)(10) 1,654,917
------------ ----------- ---------- ----------- -----------
Total assets................ $ 2,545,894 $13,087,240 $4,252,402 62,160,213 $82,045,749
============ =========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable................... $ 752,196 $ 1,693,364 $ 313,399 (64,023)(10) 2,694,936
Deferred advertising and
subscription income.............. 3,221,036 3,221,036
Current portion of long-term
debt............................. 768,645 232,545 6,525,674(3) 7,526,864
Note payable to Stockholder........ 34,350 2,921,587 78,413(2)(6) 3,034,350
Accrued expenses and other current
liabilities...................... 227,257 902,541 478,354 3,419,486(1)(10) 5,027,638
------------ ----------- ---------- ----------- -----------
Total current liabilities... 1,782,448 8,738,528 1,024,298 9,959,550 21,504.824
------------ ----------- ---------- ----------- -----------
Long-term debt, net of current
maturities......................... 1,894,052 2,251,194 14,729,738(3) 18,874,984
Note payable to Stockholder.......... 10,000,000(6) 10,000,000
Other long-term liabilities.......... 95,669 568,488 250,000 914,157
------------ ----------- ---------- ----------- -----------
Total liabilities........... 3,772,169 9,307,016 3,525,492 34,689,288 51,293,965
Stockholders' Equity:
Capital stock...................... 18,498 209,000 816,360 (1,006,056)(6)(7)(8)(9) 37,802
Additional paid-in capital......... 10,551,417 40,498,718(4)(6)(7)(8)(9) 51,050,135
Treasury stock..................... (4)
Receivables from sale of stock..... (7,300,000)(8)(9) (7,300,000)
Stock subscription receivable...... (750,000) (750,000)
Retained earnings (deficit)........ (11,046,190) 3,571,224 (89,450) (4,721,737)(2)(5)(7)(10) (12,286,153)
------------ ----------- ---------- ----------- -----------
Total stockholders' equity....... (1,226,275) 3,780,224 726,910 27,470,925 30,751,784
------------ ----------- ---------- ----------- -----------
Total stockholders' equity and
liabilities.................... $ 2,545,894 $13,087,240 $4,252,402 $62,160,213 $82,045,749
============ =========== ========== =========== ===========
Book Value Data:
Book value per common share........ $ (0.06) $ 1.63
</TABLE>
- ---------------
(1) Adjustment to record the estimate of transaction costs related to the
acquisitions.
(2) Adjustment to remove certain assets with a fair market value of $949,068
distributed to and Note payable to the Paisano stockholder with a fair
market value of $2,921,587 assumed by the Paisano stockholder as part of
the acquisitions.
(3) Adjustment to record the issuance of debt and related warrants used to
finance the acquisitions.
(4) Adjustment to record contribution of 6,156,480 shares of Newriders common
stock to Newriders from certain Newriders Stockholders and the issuance of
those shares as consideration for the Paisano Acquisition.
(5) Adjustment to reflect a $7 million dividend payable in cash to the Paisano
stockholder, comprising the estimated and adjusted Paisano Companies
previously earned and undistributed S corporation earnings at June 30,
1998. Such
32
<PAGE> 48
adjusted earnings reflect distribution of certain assets and liabilities
distributed to the Paisano Stockholder as part of the acquisitions. See note
(2).
(6) Adjustment to record the issuance of cash, notes and shares to former
Stockholder of Paisano Companies and recording of goodwill calculated as
follows:
<TABLE>
<S> <C>
Cash paid................................................... $15,474,847
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 value of options issued to employees of Paisano
Companies................................................. 697,434
Fair value of liabilities assumed........................... 6,385,429
Other acquisition costs..................................... 3,000,000
Fair value of tangible and identifiable assets acquired..... (5,344,497)
-----------
Excess of cost over identifiable assets acquired
(goodwill)................................................ $53,213,213
===========
</TABLE>
The $3.08 per share amount represents the estimated fair value of
Easyriders (the Registrant) 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 executed sale agreements dated June 30, 1998. During a
short period subsequent to the initial filing of this Proxy
Statement/Prospectus with the Securities and Exchange Commission,
Newriders stock averaged approximately $3.06 per share, on a one for two
split adjusted basis.
(7) Adjustment to record the issuance of shares to former Stockholders of El
Paso Bar-B-Que and recording of goodwill calculated as follows:
<TABLE>
<S> <C>
Fair market value of stock (2,000,000 shares at $3.08 per
share).................................................... $ 6,160,000
Other acquisition costs..................................... 500,000
Fair value of liabilities assumed........................... 3,525,492
Fair value of tangible and identifiable assets acquired..... (4,252,402)
-----------
Excess of cost over identifiable assets acquired
(goodwill)................................................ $ 5,933,090
===========
</TABLE>
The $3.08 per share amount represents the estimated fair value of
Easyriders (the Registrant) 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 executed sale agreements dated June 30, 1998. During a
short period subsequent to the initial filing of this Proxy
Statement/Prospectus with the Securities and Exchange Commission,
Newriders stock averaged approximately $3.06 per share, on a one for two
split adjusted basis.
(8) Adjustment to record the sale of 4,036,767 shares of common stock of
Easyriders to an officer of Easyriders for cash and a note receivable. Such
note receivable may not be ultimately settled in cash due to certain bonus
arrangements included in the officer's employment agreement. See discussion
elsewhere in this Proxy Statement/Prospectus.
(9) Adjustment to record the issuance of 200,000 shares of Easyriders Common
Stock at $3.08 per share to an officer of Newriders in exchange for
services performed related to the Reorganization.
(10) Adjustments to reflect the disposal of certain assets and liabilities with
a net book value of $623,963 related to the Myrtle Beach restaurant by
Newriders in July of 1998.
33
<PAGE> 49
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
PAISANO PRO FORMA
NEWRIDERS COMPANIES EL PASO ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ACQUISITION DECEMBER 31,
1997 1997 1997 ADJUSTMENTS 1997
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 2,932,708 $33,748,729 $8,562,000 $(1,146,339)(4)(8) $44,097,098
Operating Costs and Expenses:
Cost of revenues............... 1,670,146 25,865,353 6,631,000 (520,412)(4)(8) 33,646,087
Payroll and employee
benefits..................... -- 2,221,377 -- (321,037)(6)(7) 1,900,340
General and administrative..... 5,701,017 2,938,726 1,789,000 (1,179,083)(1)(4)(8) 9,249,660
Amortization of goodwill....... -- -- -- 2,013,495(2) 2,013,495
----------- ----------- ---------- ----------- -----------
Total operating costs
and expenses.......... 7,371,163 31,025,456 8,420,000 (7,037) 46,809,582
Operating Loss from
Franchising.................... -- (96,032) -- (108,480)(4) (204,512)
----------- ----------- ---------- ----------- -----------
Income (Loss) from Operations.... (4,438,455) 2,627,241 142,000 (1,247,782) (2,916,996)
Other (Expense) Income:
Interest income................
Interest expense............... (338,419) (194,809) (183,000) (2,749,622)(3) (3,465,850)
Other income................... -- 260,360 5,000 --(1)(3) 265,360
----------- ----------- ---------- ----------- -----------
Total other (expense)
income................ (338,419) 65,551 (178,000) (2,749,622) (3,200,490)
----------- ----------- ---------- ----------- -----------
Income (Loss) before Provision... (4,776,674) 2,692,792 (36,000) (3,997,404) (6,117,486)
Provision for Income Taxes....... -- 53,709 -- (52,109)(5) 1,600
----------- ----------- ---------- ----------- -----------
Net Income (Loss)................ $(4,776,874) $ 2,639,083 $ (36,000) $(3,945,295) $(6,119,086)
=========== =========== ========== =========== ===========
Basic and diluted weighted
average number of shares
outstanding.................... 18,242,563
===========
Basic and diluted net loss per
share.......................... $ (0.34)
===========
</TABLE>
- ---------------
(1) Adjustment to remove depreciation expense and interest expense related to
assets and liabilities distributed to the former stockholder of Paisano
Companies as part of the acquisition.
(2) Adjustment to recognize amortization of goodwill arising from the
acquisition over 30 years.
(3) Adjustment to recognize additional interest expense and interest income
related to the short-term and long-term debt issued and receivables from
sale of stock received as part of the Reorganization. Assumed interest rates
represent current estimates and range from 6% to 10%, with a weighted
average interest rate of 9.2%. A change in the interest rate of 0.125%
causes a change in net interest expense of $34,625 per annum.
(4) Adjustment to eliminate certain transactions between Newriders and the
Paisano Companies.
(5) Adjustment to recognize provision for income taxes related to the Paisano
Companies being taxed as a C corporation on a consolidated basis.
(6) Adjustment to eliminate compensation paid to the Paisano Companies' former
stockholder for amounts in excess of employment contracts.
(7) Adjustment to recognize compensation expense related to the issuance of
shares to an officer of Newriders in exchange for services performed related
to the Reorganization.
(8) Adjustments to reflect the elimination of certain revenues and expenses
related to the Myrtle Beach restaurant disposed in July of 1998. Revenues,
cost of revenues and general and administrative expenses eliminated were
$1,034,251, $408,324, and $1,068,603, respectively, for the year ended
December 31, 1997.
34
<PAGE> 50
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PAISANO JUNE 30, 1998
NEWRIDERS COMPANIES EL PASO PRO FORMA
SIX MONTHS SIX MONTHS SIX MONTHS -------------------------------
ENDED ENDED ENDED COMBINED
JUNE 30, JUNE 30, JUNE 30, ACQUISITION JUNE 30,
1998 1998 1998 ADJUSTMENTS 1998
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 824,155 $16,698,144 $5,444,650 $ (845,989)(4)(8) $22,120,960
Operating Costs and Expenses:
Cost of revenues.................. 386,964 13,854,241 3,168,460 (384,302)(4)(8) 17,025,363
Payroll and employee benefits..... -- 916,034 -- 546,612(6)(7) 1,462,646
General and administrative........ 4,690,864 1,074,178 1,814,771 (596,103)(1)(4)(8) 6,983,710
Amortization of goodwill.......... -- -- -- 993,335(2) 993,335
----------- ----------- ---------- ----------- -----------
Total operating costs and
expenses...................... -- 15,844,453 4,983,231 559,542 26,465,054
Operating Loss from Franchising..... (4,253,673) (234,530) -- (31,277)(4) (265,807)
----------- ----------- ---------- ----------- -----------
Income (Loss) from Operations....... -- 619,161 461,419 (1,436,808) (4,609,901)
Other (Expense) Income:
Interest income................... -- 4,628 -- --(3) 4,628
Interest expense.................. (943,501) (106,945) (136,869) (1,412,944)(1)(3) (2,600,259)
Other income...................... -- 11,789 -- -- 11,789
----------- ----------- ---------- ----------- -----------
Total other (expense) income.... (943,501) (90,528) (136,869) (1,412,944) (2,583,842)
----------- ----------- ---------- ----------- -----------
Income (Loss) before Provision...... (5,197,174) 528,633 324,550 (2,849,752) (7,193,743)
Provision for Income Taxes.......... -- 23,362 -- (21,762)(5) 1,600
----------- ----------- ---------- ----------- -----------
Net Income (Loss)................... $(5,197,174) $ 505,271 $ 324,550 $(2,827,990) $(7,195,343)
=========== =========== ========== =========== ===========
Basic and diluted weighted average
number of shares outstanding...... 18,336,128
===========
Basic and diluted net loss per
share............................. $ (0.39)
===========
</TABLE>
- ---------------
(1) Adjustment to remove depreciation expense and interest expense related to
assets and liabilities distributed to the former stockholder of Paisano
Companies as part of the acquisition.
(2) Adjustment to recognize amortization of goodwill arising from the
acquisition over 30 years.
(3) Adjustment to recognize additional interest expense and interest income
related to the short-term and long-term debt issued and receivables from
sale of stock received as part of the Reorganization. Assumed interest rates
represent current estimates and range from 6% to 10%, with a weighted
average interest rate of 9.2%. A change in the interest rate of 0.125%
causes a change in net interest expense of $34,625 per annum.
(4) Adjustment to eliminate certain transactions between Newriders and the
Paisano Companies.
(5) Adjustment to recognize provision for income taxes related to the Paisano
Companies being taxed as a C corporation on a consolidated basis.
(6) Adjustment to eliminate compensation paid to the Paisano Companies' former
stockholder for amounts in excess of employment contracts.
(7) Adjustment to recognize compensation expense related to the issuance of
shares to an officer of Newriders in exchange for services performed related
to the Reorganization.
(8) Adjustments to reflect the elimination of certain revenues and expenses
related to the Myrtle Beach restaurant disposed in July of 1998. Revenues,
cost of revenues and general and administrative expenses eliminated were
$766,502, $304,815 and $560,826, respectively, for the six months ended June
30, 1998.
35
<PAGE> 51
THE ANNUAL MEETING
GENERAL
This Prospectus/Proxy Statement is being furnished to stockholders of
Newriders in connection with the solicitation of votes and/or proxy designations
and instructions from such stockholders, to be voted at the Annual Meeting of
Stockholders to be held at the Radisson Hotel and Conference Center, 30100
Agoura Road, Agoura Hills, California at 10:00 a.m., local time, on September
22, 1998, and at any adjournments thereof (the "Annual Meeting"). Each Newriders
stockholder is entitled to one vote for each share of Newriders stock held by
him or her. The purposes of the Annual Meeting are: (i) to consider and vote
upon a proposal to approve the Reorganization and adopt the Merger Agreement;
(ii) to consider and vote upon a proposal to approve the Newriders Plan; (iii)
to consider and vote upon a proposal to approve the Easyriders Plan; and, as a
precaution against the possibility that the Reorganization may not be
consummated, (iv) to elect the Newriders Board of Directors; (v) to ratify the
appointment of Deloitte & Touche LLP as independent auditors for the fiscal year
ending December 31, 1998 and, in any event, and (vi) to consider such other
matters as may properly come before the Annual Meeting. No other matters will be
presented by the Newriders Board of Directors for consideration at the Annual
Meeting.
WHO IS ENTITLED TO VOTE; RECORD DATE; PROXY VOTING
The Board of Directors of Newriders has fixed the close of business on the
Record Date for determination of the stockholders entitled to notice of and to
vote at the Annual Meeting. Accordingly, only stockholders of record of
Newriders Common Stock at the close of business on the Record Date will be
entitled to notice of and to vote at the Annual Meeting. As of the Record Date,
there were 17,962,316 shares of Newriders Common Stock issued and outstanding,
held by approximately 295 holders of record.
Shares represented at the Annual Meeting by any person holding a properly
executed proxy in the form furnished herewith, will, unless such proxy has been
previously revoked, be voted in accordance with such instructions. If no
instructions are indicated on a signed and delivered Proxy, such shares will be
voted FOR THE APPROVAL OF THE REORGANIZATION AND APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT, FOR THE APPROVAL OF THE NEWRIDERS PLAN, FOR THE APPROVAL OF
THE EASYRIDERS PLAN, FOR THE ELECTION OF DIRECTORS AS NOMINATED BY THE BOARD OF
DIRECTORS, AND FOR THE RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS
INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 1998. If any other matters
are properly presented at the Annual Meeting for action, the proxies named in
the form of proxy will have discretion to vote on such matters in accordance
with their best judgment, unless such authorization is withheld.
Any Stockholder who has designated and instructed a proxy may revoke it at
any time prior to its exercise at the Annual Meeting either by filing an
instrument revoking it with the Secretary of Newriders prior to the Annual
Meeting, by duly executing a new and different form of proxy bearing a later
date or by appearing at the Annual Meeting and, by addressing the Chairman of
the Annual Meeting, (a) orally revoking such proxy and (b) voting contrary to
such proxy in person at the time that the vote is called for at the Annual
Meeting. The mere presence at the Annual Meeting of a person who has executed a
proxy will not revoke such proxy.
QUORUM
The presence, either in person or by properly designated and instructed
proxies, of the holders of more than fifty percent (50%) of the issued and
outstanding shares of Newriders Common Stock entitled to vote at the Annual
Meeting is necessary to constitute a quorum at the Annual Meeting.
TABULATION OF VOTES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspector of elections appointed for the Annual Meeting who will determine
whether or not a quorum is present. The inspector of elections will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the
36
<PAGE> 52
presence of a quorum on all matters, but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. Broker
non-votes will be counted as shares present for purposes of determining the
presence of a quorum, but will not be treated as shares entitled to vote on a
matter in determining the number of affirmative votes required for approval of
the matter. The term "broker non-votes" refers to shares held by a broker in
street name which are present by proxy but are not voted on a matter pursuant to
rules prohibiting brokers from voting on non-routine matters, such as approval
of Proposal No. 1 (the Reorganization), without instructions from the beneficial
owner of the shares.
VOTE REQUIRED FOR APPROVAL
Pursuant to the terms of the Acquisition Agreements and the Nevada
Statutes, the affirmative vote of the holders of at least a majority of the
shares of Newriders Common Stock as of the Record Date entitled to vote at the
Annual Meeting is required to approve the Merger Agreement, and accordingly, the
Reorganization. Abstentions and broker non-votes will count as votes against the
Reorganization.
The holders of a majority of the outstanding shares of Easyriders Sub also
must approve the Merger. Easyriders holds all of the outstanding common stock of
Easyriders Sub, and will cause Easyriders Sub to approve the Merger.
The Newriders Plan requires the approval of Newriders' stockholders. Under
Newriders' Bylaws and the Nevada Statutes, the affirmative vote of holders of at
least a majority of the shares represented at the Annual Meeting will, assuming
the presence of a quorum, be required for the approval of the Newriders Plan.
Abstentions will count as votes against the Newriders Plan, but broker non-votes
will have no effect on the outcome of the vote.
The Easyriders Plan requires the approval of Newriders as the sole
stockholder of Easyriders and the approval of Newriders' stockholders. Under
Newriders' Bylaws and the Nevada Statutes, the affirmative vote of holders of at
least a majority of the shares represented at the Annual Meeting will, assuming
the presence of a quorum, be required for the approval of the Easyriders Plan.
Abstentions will have the effect of a vote against the Easyriders Plan, but
broker non-votes will have no effect on the outcome of the vote.
Under Newriders' Bylaws and the Nevada Statutes, every Newriders
stockholder of record is entitled to one vote for each share of Newriders Common
Stock held in the name of such Newriders stockholder on the records of Newriders
as of the Record Date. Directors of Newriders must be elected by a plurality of
the votes present in person or represented by proxy at the Annual Meeting.
Accordingly, to be elected as a director of Newriders, a nominee must receive a
plurality of the votes cast at the Annual Meeting. The Board of Directors of
Newriders consists of eight (8) persons, and all of the present directors are
standing for reelection at the Annual Meeting. Abstentions and broker non-votes
with respect to the election of directors will not be included in determining
whether nominees have received the vote of a plurality.
Under Newriders' Bylaws, the affirmative vote of holders of at least a
majority of the shares represented at the Annual Meeting will, assuming the
presence of a quorum, be required for the ratification of the appointment of
Deloitte & Touch LLP as independent auditors for the year ending December 31,
1998. Abstentions will count as votes against such ratification, but broker
non-votes will have no effect on the outcome of the vote.
Each stockholder is entitled to one vote at the Annual Meeting for each
share of Newriders Common Stock held of record by the stockholder on the Record
Date. As of the Record Date, directors and executive officers of Newriders and
certain persons affiliated with them, hold in the aggregate and are entitled to
vote approximately 54.0% of the outstanding shares of Newriders Common Stock,
and they have indicated their intention to vote such shares in favor of the
approval and adoption of the Merger Agreement and the Reorganization, in favor
of the adoption of the Newriders Plan, in favor of the adoption of the
Easyriders Plan, for the election of directors as nominated by the Board of
Directors, and in favor of the ratification of Deloitte & Touche LLP as auditors
for the year ending December 31, 1998. Such shares represent sufficient votes on
each matter to be presented at the Annual Meeting to determine the outcome of
the vote. In addition,
37
<PAGE> 53
Mr. Teresi owns approximately 5.4% of the issued and outstanding shares of
Newriders Common Stock, and has indicated his intention to vote in favor of all
of the proposals described above.
PROXY SOLICITATION
Proxies are being solicited by and on behalf of the Board of Directors of
Newriders through the use of this Prospectus/Proxy Statement. Newriders will
bear the costs incurred in connection with preparing and mailing this
Prospectus/Proxy Statement and Annual Meeting expenses.
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of Newriders in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated for such activities, but may be reimbursed
for out-of-pocket expenses in connection with such solicitation. As necessary,
arrangements will be made with banks, custodians, nominees and fiduciaries for
the forwarding of proxy solicitation material to beneficial owners of Newriders
Common Stock held of record by such persons, and in connection therewith such
firms will be reimbursed for reasonable expenses in forwarding such materials.
Any stockholder who has given a proxy may revoke it at any time prior to
its exercise at the Annual Meeting either by (a) revoking it in writing sent to
the Secretary of Newriders prior to the Annual Meeting, (b) by duly executing
and delivering a new and different proxy bearing a later date, or (c) by
appearing at such Annual Meeting and, by addressing the chairman of the Annual
Meeting, (1) orally revoking the proxy, and (2) voting contrary to such proxy in
person when the call for voting occurs at the Annual Meeting. The mere presence
at the Annual Meeting of a person who has previously designated and instructed a
proxy will not revoke such designation and instruction.
THE REORGANIZATION
(PROPOSAL 1)
BACKGROUND OF THE REORGANIZATION
Prior to commencing negotiations with Newriders, Joseph Teresi, the owner
of the Paisano Companies, signed a non-binding Letter of Intent with another
company, under which that company agreed to purchase the stock of Paisano
Publications, Inc. and Bros Club, Inc. Easyriders Franchising, Inc., Easyriders
of Columbus, Inc., Teresi, Inc. and Associated Rodeo Riders on Wheels were not
included in that transaction. That agreement provided that in the event the
parties failed to enter a final Letter of Intent by April 14, 1997, the
prospective Purchaser's rights of exclusivity would expire. Such Letter of
Intent was not entered into by the required date. Subsequently, at a time when
it was contractually permissible to do so, Mr. Teresi and representatives of
Newriders had preliminary discussions regarding the possible purchase of some or
all of the Paisano Companies, but these discussions never reached the stage of
serious negotiations.
On July 3, 1997, the prospective purchaser referred to above made a new
offer to Mr. Teresi under which only the publishing assets of Paisano
Publications, rather than stock, would be purchased. After considerable
discussion, a further Letter of Intent dated August 21, 1997, was entered into
which gave the prospective purchaser a period of exclusivity, up to September 5,
1997 within which to enter a formal purchase agreement with Paisano
Publications. Because a formal purchase agreement had not been entered into by
September 5, 1997, Mr. Teresi terminated discussions with the potential
purchaser.
John E. Martin and William R. Nordstrom joined the Board of Directors of
Newriders on July 8, 1997. In early August 1997, they learned that Joseph Teresi
was considering the sale of the assets of Paisano Publications. Informal
discussions concerning the possibility of acquiring the then available Paisano
Companies took place. In August, 1997, the Board of Directors of Newriders,
authorized Mr. Martin to pursue the possible acquisition of the Paisano
Companies. Although informal discussions were held between Mr. Martin and Mr.
Teresi on the subject, they were inconclusive. At the end of September 1997, Mr.
Martin learned that the negotiations with the potential purchaser to acquire the
assets of Paisano Publications had been abandoned and there now was a
possibility of Newriders acquiring all of the Paisano Companies, including
Paisano
38
<PAGE> 54
Publications. Further discussion between Mr. Teresi and Mr. Martin led to the
execution on October 10, 1997, of a non-binding preliminary Letter of Intent.
On January 13, 1998, a meeting was held for the purpose of reaching an
agreement on a revised and more detailed Letter of Intent. This meeting was
attended by Mr. Hatcher representing certain shareholders of Newriders, Mr.
Martin, Mr. Nordstrom, Mr. Prather, Mr. Teresi, investment bankers representing
Newriders, and legal and accounting representatives of Newriders. The terms and
conditions agreed to at that meeting were incorporated in a revised Letter of
Intent dated February 25, 1998.
Prior to the execution of the revised Letter of Intent, it became apparent
that the resultant reorganized company would be unable to accommodate the stock
requirements of Mr. Teresi and Mr. Martin within the then authorized stock
capitalization of Newriders. This led to an agreement with certain stockholders
of Newriders set forth in a letter agreement dated February 9, 1998, pursuant to
which they agreed to return to Newriders an aggregate of 6,156,480 shares of
their Newriders Common Stock. Between February 25 and June 30, 1998, there were
protracted negotiations between representatives of Newriders and Mr. Teresi with
respect to the terms and conditions of a final Stock Contribution Agreement,
which was executed June 22, 1998. The terms and conditions of the Stock
Contribution Agreement, attached hereto as Addendum B, are essentially the same
as the Letter of Intent dated February 25, 1998, except that a portion of the
cash compensation to be paid to Mr. Teresi was converted to promissory notes,
and it was agreed that Mr. Teresi would receive a larger percentage of shares of
Easyriders stock upon consummation of the Reorganization.
In late September 1997, Mr. Martin contacted William E. Prather about the
possibility of becoming the Chief Executive Officer of Newriders. Mr. Martin and
Mr. Prather had been friends and business associates for approximately 20 years.
As discussions progressed between Mr. Martin and Mr. Prather concerning the
possibility of Mr. Prather serving as the Chief Executive Officer of Newriders,
the discussions expanded to include the possibility of Newriders acquiring El
Paso. Mr. Martin reported these discussions to the Board of Directors of
Newriders on August 12, 1997. At that time, the Board of Directors authorized
Mr. Martin to pursue the possible acquisition of El Paso, and to pursue Mr.
Prather as a possible Chief Executive Officer for Newriders. Negotiations then
continued between Mr. Martin and Mr. Prather until a letter of intent was
executed on October 7, 1997 (the "El Paso Letter of Intent"), between Newriders,
El Paso, Mr. Prather and his wife and the other owner of El Paso, pursuant to
which Newriders agreed to acquire ownership of El Paso. The El Paso Letter of
Intent also provided that Mr. Prather would become the Chief Executive Officer
of Newriders, and Mr. Prather would receive an option to purchase up to 750,000
shares of Newriders Common Stock at $2.50 per share with the option vesting
fifty percent (50%) after one year of service by Mr. Prather, and the remaining
fifty percent (50%) after two years of service. In connection with the
Reorganization, Mr. Prather has agreed to relinquish the option. Mr. Prather
began serving as the President and Chief Executive Officer of Newriders upon
election by the Newriders Board of Directors on October 7, 1997. On March 10,
1998, John E. Martin purchased for $1.5 million cash the 49% interest in El Paso
which was not held by Mr. and Mrs. Prather. As a result of Mr. Martin's purchase
of that interest, the terms of the El Paso Acquisition changed significantly,
with the parties agreeing that Newriders would complete the El Paso Acquisition
solely for equity, instead of for a combination of equity and cash as earlier
contemplated in the El Paso Letter of Intent.
On January 13, 1998, Newriders entered into a letter agreement engaging
Imperial Capital, LLC ("Imperial Capital"), a Beverly Hills based full service
investment bank, to act as exclusive financial advisor and placement agent with
respect to a transaction between Newriders and the Paisano Companies. Imperial
Capital assisted Newriders in structuring the Paisano Acquisition and the El
Paso Acquisition and negotiating the Paisano Agreement and the El Paso
Agreement. Imperial also sought financing proposals from institutional lenders
throughout the U.S. beginning in May 1998. Thereafter, Imperial assisted
Newriders in analyzing the financing proposals and selecting a lender. On June
18, 1998, Newriders and Paisano Publications executed a commitment letter from
the Senior Lender which agreed, subject to certain terms and conditions more
fully described herein, to provide the Senior Credit Agreement described under
"The Reorganization-Terms of the Senior Credit Agreement."
39
<PAGE> 55
On June 9, 1998, the Board of Directors of Newriders met to consider the
Reorganization and certain remaining unresolved issues. At the June 9, 1998
meeting, the Board unanimously determined that the terms and conditions of the
Paisano Agreement, the El Paso Agreement and the Merger Agreement are fair and
reasonable to Newriders and its stockholders, and that it is advisable and in
the best interests of Newriders and its stockholders that Newriders enter into
and consummate the transactions contemplated thereby. At the June 9, 1998 Board
of Directors meeting, the Newriders Board of Directors unanimously approved and
adopted the Paisano Agreement, the El Paso Agreement and the Merger Agreement,
and recommended that said agreements and the Reorganization be approved by the
stockholders of Newriders. Other related matters and transactions were also
unanimously approved at the same meeting. Because of the personal interests of
certain directors in various aspects of the Reorganization, the three
non-interested directors also voted separately on, and unanimously approved, the
Reorganization.
REASONS FOR THE REORGANIZATION
The acquisition by Newriders of the Paisano Companies and El Paso will
create an enterprise engaged in a combined publishing, entertainment, apparel,
accessory and restaurant business, which will market services and products to
persons who identify with the "freedom of the road" lifestyle surrounding the
American-made cruiser motorcycle. Newriders believes that such persons comprise
an identifiable international demographic group which is growing. To become a
supplier of choice of products and services to such persons, to improve the
existing operations of the Paisano Companies, and to offer more of such products
and services to more persons, Easyriders proposes to focus on several important
strategies including:
(i) Increasing magazine advertising revenues for Paisano Publications;
(ii) Utilizing the expertise of Easyriders' management in franchising
to restructure and expand the franchise system created by the Paisano
Companies;
(iii) Building additional restaurants incorporating the "Easyriders"
theme; and
(iv) Expanding the publication, product marketing and restaurant
offerings of the combined operations.
Management Experience
Upon consummation of the Reorganization, it is anticipated that Easyriders
will have a diversified group of experienced directors and executives. John E.
Martin, the Chairman of the Board of Newriders, will be Chairman of the Board of
Easyriders. He has in the past acted as president and chief executive officer of
Taco Bell for Pepsico. In addition to his restaurant experience, Mr. Martin
brings knowledge relevant to managing a franchise operation, developing
corporate name recognition and brand name marketing.
Newriders' president and chief executive officer, Mr. William E. Prather,
has accumulated 25 years of experience in the franchise restaurant and
hospitality industries. Mr. Prather will serve as President and chief executive
officer of Easyriders. Mr. Prather began his career at Burger King where, over a
14-year period, he rose to executive vice president of worldwide operations. Mr.
Prather has more recently served as chief executive officer of Hardee's, and the
chief executive officer of Furr/Bishop's, Inc., the owner-operator of 105 family
style cafeteria restaurants. Mr. Prather is also the founder and president of El
Paso.
Mr. Joseph Teresi, the president, chairman and publisher of Paisano
Publications, founded Paisano Publications in 1970. Mr. Teresi will remain as
chairman and publisher of Paisano Publications after the Reorganization, will
serve as a director of Easyriders and will be the single largest stockholder of
Easyriders, with approximately 37% of the outstanding Easyriders Common Stock
upon consummation of the Reorganization. See "The Reorganization -- Board of
Directors and Management of Easyriders After the Reorganization."
40
<PAGE> 56
Consumer Demographics
The demographic profile of the American-made cruiser motorcycle owner and
enthusiast has altered significantly over the past two (2) decades. As recently
as 18 years ago, the typical Harley-Davidson motorcycle owner was relatively
uneducated and tended to be on the fringes of society. A survey by Burt
Marketing Research conducted in 1980 indicated that 63% of motorcycle owners
were under the age of 30, with only 2% earning more than $50,000. However, today
the profile of the typical owner of a heavyweight American-made motorcycle falls
into a highly desirable consumer demographic. According to Harley-Davidson,
Inc., the typical customer for heavyweight American touring and cruising
motorcycles is a male between the ages of 35 and 65, with a household income of
approximately $70,000. The age and gender component of this demographic profile
is appealing to advertisers and suppliers of products, in as much as this group
is relatively high among all age and gender groups in annual spending per
consumer on all recreational products. In addition, as the demographics have
changed, so too has the public image evidenced by the numerous respected and
high profile celebrities, politicians and business people who have become
Harley-Davidson owners.
Opportunity to Increase Advertising Revenue
The advertising revenues of the Paisano Companies are approximately 25% of
total magazine revenues. The Paisano Companies have only recently focused on
advertising, having increased advertising revenues from $5.1 million in 1996 to
$6.3 million in 1997. Easyriders anticipates further improvement of advertising
revenues based on: (i) the dominant market share of Paisano in the motorcycle
and tattoo markets; (ii) the attractive demographics of its target market as
noted above; and (iii) the generally motivated buyer base of specialty
magazines, i.e., often looking for advertised products meeting their lifestyle
needs. In an effort to expand its focus on advertising, Paisano Companies have
recently hired two individuals, Grady Pfeiffer and Greg Andes, with significant
contacts and experience in advertising.
Technology of Publications Division
Paisano Publications has incorporated state-of-the-art direct plate
pre-press technology. This technology allows Paisano Publications to transfer
the content of its magazines onto high capacity discs or to send the information
over ISD and high-speed phone lines to the printer. This allows Paisano
Publications to eliminate many of the most time consuming and costly steps in
the pre-press process. Rather than creating a version of the magazine on film
and then redigitizing the content of the printers, the magazine content can be
transferred digitally, directly to printing plates. Paisano Publications
believes that it has reduced its pre-press costs since it began to incorporate
this new system approximately two years ago. Given the current capabilities of
Paisano Publications, Easyriders expects limited incremental capital
expenditures for printing technology over the next several years. Further, this
technology will allow Easyriders to quickly and cost-effectively respond to
market opportunities for new magazines.
Library
Over its 27 years of publishing motorcycle and tattoo magazines, Paisano
Publications has developed a substantial library of content which it has stored
digitally with the use of its recently developed pre-press technology. Paisano
Publications' ability to effectively manage its library has allowed it to (i)
respond quickly to fill new niches in the motorcycle and tattoo magazine
industry; and (ii) develop a library of video content which it intends to use in
its Easyriders video magazine and pay-per-view cable programming.
Increase Ancillary Revenues
While circulation and advertising still make up the majority of revenue for
magazine publishers, Paisano Publications expects significant revenue from
ancillary products. Paisano Publication's 1996 ancillary revenues represent 23%
of its 1996 total revenue evidencing the significant demand for products and
services to meet
41
<PAGE> 57
the needs of lifestyle consumers. Easyriders sees significant potential to fill
still untapped needs among these consumers.
THE BOARD OF DIRECTORS OF NEWRIDERS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE TO APPROVE THE REORGANIZATION.
OVERVIEW OF TRANSACTION
On June 30, 1998, Newriders entered into the Paisano Agreement, the El Paso
Agreement and the Merger Agreement, all of which together establish the terms
for the Reorganization. The Reorganization will result in: (i) the Paisano
Acquisition, which will comprise the acquisition by Easyriders of all of the
issued and outstanding common stock of the Paisano Companies; (ii) the El Paso
Acquisition, which will comprise the acquisition by Easyriders of all of the
outstanding membership interests of El Paso; and (iii) the Merger, which is the
proposed merger of Easyriders Sub with and into Newriders.
In connection with the Reorganization, the persons specified under "The
Reorganization -- Board of Directors and Management of Easyriders After the
Reorganization" as the prospective members of the Easyriders Board of Directors
will be elected as directors of Easyriders by Newriders, as the sole Stockholder
of Easyriders, and will continue to serve as such after the Reorganization until
their successors are duly elected and qualified, or until their earlier
resignation or removal. A vote in favor of approval of the Reorganization is
effectively also a vote in favor of the election of such persons as directors of
Easyriders.
Consummation of the Reorganization is subject to various conditions,
including, but not limited to: (i) the approval of the Reorganization and the
adoption and approval of the Merger Agreement by the Stockholders of Newriders;
and (ii) the receipt of the Financing to be provided by the Senior Lender.
THE MERGER
Upon consummation of the Merger (i) all of the issued and outstanding
shares of Newriders Common Stock will be exchanged for shares of 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 (other than
the Dissenting Shareholders) will become stockholders of Easyriders, (ii) all of
the outstanding options and warrants and other convertible securities
exercisable for or convertible into Newriders Common Stock will be exchanged for
the right to purchase or convert into Easyriders Common Stock on the basis of
one share of Easyriders Common Stock for each two shares of Newriders Common
Stock subject to such options, warrants or convertible securities, at an
exercise price or conversion ratio per share equal to two times the exercise
price or conversion ratio provided for in option, warrant or other agreements
evidencing such options, warrants or other convertible securities, and (iii)
each of Newriders, the Paisano Companies and El Paso will become wholly-owned
subsidiaries of Easyriders. Immediately following the Reorganization, Easyriders
will transfer the El Paso membership interests to Newriders, with the result
that El Paso will become a wholly-owned subsidiary of Newriders.
In the event that the Paisano Acquisition and the El Paso Acquisition do
not occur, the Board of Directors of Newriders has determined that it would not
be in the best interests of the Stockholders to complete the Merger.
THE PAISANO ACQUISITION
In the Paisano Acquisition, Easyriders and Easyriders Sub II will acquire
all of the Paisano Companies Stock. Mr. Teresi, the sole stockholder of each of
the Paisano Companies, will receive in exchange for contributing the Paisano
Companies Stock, total consideration in the amount of $48,000,000, consisting of
6,493,507 shares of Easyriders Common Stock (representing approximately 34.3% of
Easyriders Common Stock issued and outstanding immediately following the
Reorganization) with an estimated fair value of $3.08 per share, and promissory
notes aggregating $28,000,000 consisting of a promissory note of Easyriders Sub
II in the principal amount of $15,000,000 which is payable in cash immediately
after the Merger has occurred, and the Contributors Notes in the aggregate
amount of $13,000,000. See "Unaudited Pro Forma Condensed
42
<PAGE> 58
Financial Statements -- Pro Forma Combined Condensed Balance Sheet (Unaudited)."
The aggregate amount received by Mr. Teresi is subject to adjustment upward or
downward, dollar for dollar, based on the amount by which the Paisano Companies'
working capital exceeds or is less than $4,537,000 as of the closing of the
Paisano Acquisition. As contemplated in connection with the Paisano Acquisition,
Mr. Teresi has received a dividend of $7,000,000 from Paisano Publications,
which has been funded by a loan in that amount to Paisano Publications, with the
understanding that this loan will be repaid of Paisano Publications upon
consummation of the Reorganization. Mr. Teresi will also have the right, subject
to the approval of the Compensation Committee of Easyriders, to recommend
certain employees or consultants of the Paisano Companies receive options to
purchase an aggregate of 300,000 shares of Easyriders Common Stock, exercisable
at $5.00 per share.
The terms of the Paisano Acquisition are prescribed by the Stock
Contribution Agreement dated June 30, 1998, (the "Paisano Agreement") between
Newriders, Easyriders, the Paisano Companies and Mr. Teresi, a copy of which is
attached to this Prospectus/Proxy Statement as Addendum B. The Contributor Notes
will consist of the Contributor Subordinated Note in the amount of $5,000,000,
the Contributor Mirror Note in the amount of $5,000,000 secured by the Martin
Mirror Note and 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 Easyriders 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 rate between six
and ten percent. The Contributor Short-Term Subordinated Note has a term of
ninety days and bears interest at a rate of ten percent.
The Paisano Acquisition, and accordingly, the Reorganization, cannot be
completed without financing in the approximate amount of $22,000,000. Newriders
has received a commitment from the Senior Lender to lend Paisano Publications up
to $22,000,000 in the aggregate. See "The Reorganization -- Terms of the Senior
Credit Agreement" for a description of the terms.
THE EL PASO ACQUISITION
In the El Paso Acquisition, the El Paso Owners will receive a total of
2,000,000 shares of Easyriders Common Stock in exchange for all of the
outstanding membership interests of El Paso. Mr. Martin is the Chairman of the
Board of Directors of Newriders, and will be the Chairman of the Board of
Directors of Easyriders after the Reorganization. Mr. Prather is the President
of Newriders and a member of its Board of Directors, and will be the President
and a member of the Board of Directors of Easyriders after the Reorganization.
The terms of the El Paso Acquisition are prescribed by an LLC Interest
Contribution Agreement dated June 30, 1998 (the "El Paso Agreement"), among
Newriders, Easyriders, El Paso and the El Paso Owners, a copy of which is
attached to this Prospectus/Proxy Statement as Addendum C.
STOCKHOLDERS' AGREEMENT
In connection with the Reorganization, Mr. Martin and Mr. Teresi will enter
into the Stockholders' Agreement in the form attached to this Prospectus/Proxy
Statement as Addendum D. The Stockholders' Agreement will provide that Mr.
Martin and Mr. Teresi shall each be entitled to designate four individuals to
serve on the Board of Directors of Easyriders, and that Mr. Martin and Mr.
Teresi shall each vote their shares for the persons designated by the other to
so serve. Two of the persons designated by Mr. Teresi are required to be
"non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Code. Upon
consummation of the Reorganization, Mr. Martin and Mr. Teresi will respectively
be the beneficial owners of, and be entitled to vote, approximately 5,132,947
and 6,993,507 shares of Easyriders Common Stock, respectively, representing an
aggregate of approximately 64% of the number of shares of Easyriders Common
Stock outstanding upon consummation of the Reorganization. Accordingly, Mr.
Martin and Mr. Teresi will together control the election of all of the directors
of Easyriders for the foreseeable future and stockholders other than Mr. Martin
and Mr. Teresi will not have any power to elect directors of Easyriders.
43
<PAGE> 59
INITIAL PERFORMANCE AWARDS TO BE GRANTED UNDER THE EASYRIDERS PLAN
Pursuant to the Easyriders Plan, if Easyriders, on a consolidated basis
achieves the Annual EBITDA Targets, Mr. Martin will be eligible to receive
annual cash bonuses equal to (1) the total amount of interest he is obligated to
pay in cash to Easyriders under the Martin Notes multiplied by (2) a fraction,
the numerator of which is one and the denominator of which is one minus the
highest marginal rate for federal, state and local income taxes applicable to
Mr. Martin in the year the bonus is paid. Mr. Martin will also be eligible to
receive a one-time bonus equal to (1) the amount of principal and accrued
interest then remaining on the Martin Notes, multiplied by (2) a fraction, the
numerator of which is one and the denominator of which is one minus the highest
marginal rate for federal, state and local income taxes applicable to Martin in
the year the bonus is paid, up to a maximum of $13,000,000, if and when Paisano
Publications repays in full (a) all amounts due pursuant to the Senior Credit
Agreement, between Paisano Publications as borrower, Easyriders as guarantor,
and the Senior Lender, and (b) the Contributor Notes, provided Easyriders has
achieved certain predetermined levels of earnings during the prior year
(generally, for 1999, positive EBITDA during 1998; and for each year thereafter,
at least 80% of the Annual EBITDA Target for the prior year or for each of the
second and third years preceding such year). Although Easyriders expects that
bonuses paid to Mr. Martin under the Easyriders Plan will be tax deductible
pursuant to Section 162(m) of the Code, no assurance can be given that such
payments will actually be deductible by Easyriders. Bonus payments to Mr. Martin
are not contingent upon deductibility. Upon consummation of the Reorganization,
Mr. Nordstrom will receive, under the Easyriders Plan, 200,000 shares of
Easyriders Common Stock.
MARTIN STOCK PURCHASE
Simultaneously with the consummation of the Reorganization, Easyriders will
issue to John E. Martin, the Chairman of Newriders and the proposed Chairman of
Easyriders, 4,036,797 shares of Easyriders Common Stock, for a purchase price of
$12,300,000, to be paid $5,000,000 in cash and by delivery of the Martin Notes.
The Martin Notes will consist of the Martin Mirror Note in the amount of
$5,000,000, which note will be 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 and 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.
TERMS OF THE REORGANIZATION
The detailed terms of and conditions of the Reorganization are set forth in
the Paisano Agreement, the El Paso Agreement and the Merger Agreement, copies of
each of which are attached hereto as Addendum A, Addendum B and Addendum C and
incorporated herein by this reference. The description in this Prospectus/ Proxy
Statement of the terms of and conditions of the Reorganization is qualified by,
and made subject to, the more complete information set forth in the text of the
Reorganization Agreements.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
In considering the recommendation of the Newriders Board of Directors with
respect to the Reorganization and the transactions contemplated thereby,
Newriders Stockholders should be aware that certain of the executive officers
and the directors of Newriders, as well as Mr. Teresi and a former employee of
El Paso, have certain interests in the Reorganization that are in addition to
the interests of stockholders of Newriders generally. In particular:
(1) Mr. Martin has agreed to purchase simultaneously with the
consummation of the Reorganization, 4,036,797 shares of Easyriders Common
Stock, in exchange for $5,000,000 in cash and $7,300,000 in the Martin
Notes.
(2) Pursuant to the Easyriders Plan, if Easyriders, on a consolidated
basis achieves the Annual EBITDA Targets, Mr. Martin will be eligible to
receive annual cash bonuses equal to (1) the total amount of interest he is
obligated to pay in cash to Easyriders under the Martin Notes multiplied by
(2) a
44
<PAGE> 60
fraction, the numerator of which is one and the denominator of which is one
minus the highest marginal rate for federal, state and local income taxes
applicable to Mr. Martin in the year the bonus is paid. Mr. Martin will
also be eligible to receive a one-time bonus equal to (1) the amount of
principal and accrued interest then remaining on the Martin Notes,
multiplied by (2) a fraction, the numerator of which is one and the
denominator of which is one minus the highest marginal rate for federal,
state and local income taxes applicable to Martin in the year the bonus is
paid, up to a maximum of $13,000,000, if and when Paisano Publications
repays in full (a) all amounts due pursuant to the Senior Credit Agreement
between Paisano Publications as borrower, Easyriders as guarantor, and a
large financial institution as lender, and (b) the Contributor Notes,
provided Easyriders has achieved certain predetermined levels of earnings
during the prior year (generally, for 1999, positive EBITDA during 1998;
and for each year thereafter, at least 80% of the Annual EBITDA Target for
the prior year or for each of the second and third years preceding such
year). Although Easyriders expects that bonuses paid to Mr. Martin under
the Easyriders Plan will be tax deductible pursuant to Section 162(m) of
the Code, no assurance can be given that such payments will actually be
deductible by Easyriders. Bonus payments to Mr. Martin are not contingent
upon deductibility.
(3) Upon consummation of the Reorganization, pursuant to the El Paso
Agreement Mr. Martin will receive 1,000,000 shares of Easyriders Common
Stock in exchange for his interest in El Paso.
(4) In connection with the El Paso Acquisition, Newriders will enter
into an employment agreement with Mr. Prather at an annual salary of
$200,000.
(5) Upon consummation of the Reorganization, pursuant to the El Paso
Agreement, Mr. Prather and his wife will receive an aggregate of 1,000,000
shares of Easyriders Common Stock in exchange for their interests in El
Paso.
(6) Upon consummation of the Reorganization, Mr. William Nordstrom
will receive, under the Easyriders Plan, 200,000 shares of Easyriders
Common Stock for services rendered in connection with the Reorganization.
(7) Upon consummation of the Reorganization Mr. Teresi will receive an
aggregate of approximately 6,493,507 shares of Easyriders Common Stock,
cash in the amount of $15,000,000, and the Contributor Notes aggregating
$13,000,000. Mr. Teresi will also have the right, subject to approval of
the Easyriders Compensation Committee, to recommend that certain employees
or consultants of the Paisano Companies receive options to purchase an
aggregate of 300,000 shares of Easyriders Common Stock. In connection with
the Paisano Acquisition, Paisano Publications will enter into an employment
agreement with Joseph Teresi at an annual salary of $150,000. Pursuant to
this employment agreement, Mr. Teresi will agree to serve as Chairman and
Publisher of Paisano Publications for at least five years or the date that
the Contributor Notes are repaid, whichever first occurs. Additionally,
Paisano Publications and Mr. Teresi will enter into a consulting agreement
in order to compensate Mr. Teresi for additional services to be performed
by him following the Reorganization. Payments under the Consulting
Agreement will be $5,000 per month for the first three months and then
increase by an additional $2,500 per month thereafter, provided, however,
that monthly payments under the agreement will not exceed $25,000. The
Consulting Agreement is terminable by the Board of Directors of Easyriders
at any time and upon such termination, no additional payments will be due
to Mr. Teresi.
Upon consummation of the Reorganization, Mr. Teresi will terminate his
existing leases for the building structures and real estate located at
28210 Dorothy Drive and 28216 Dorothy Drive, Agoura Hills, California, 605
Main Street, Daytona Beach, Florida and 611 Broad Street, Columbus, Ohio.
Simultaneously with the termination of such leases, Mr. Teresi will enter
into new leases with Easyriders for each of the four premises described
above. The new leases between Mr. Teresi and Easyriders will be standard
triple net leases with CPI adjustments for a five-year period with renewal
options for additional five-year periods.
(8) In connection with the Paisano Acquisition, each of Messrs.
Purcell, Hatcher, Doyle and Pierce have granted proxies over all of their
shares of Newriders Common Stock to Mr. Teresi. The proxy
45
<PAGE> 61
agreement requires that Messrs. Purcell, Hatcher, Doyle and Pierce refrain
from transferring their shares of Newriders Common Stock for a period of 2
years following consummation of the Reorganization.
(9) Rich Dillon, a former employee of El Paso, will receive $300,000
of Easyriders Common Stock to be calculated on the per share price of
Easyriders Common Stock thirty days after the consummation of the
Reorganization.
(10) Upon consummation of the Reorganization, Mr. William E. Prather
will be employed by Newriders as the Chief Executive Officer of both
Newriders and Easyriders for a period of 5 years at an annual salary of
$200,000. In the event Mr. Prather is terminated without cause, or Mr.
Prather resigns with sufficient cause (as defined in the employment
agreement), Mr. Prather shall be entitled to receive the balance of his
salary under the employment agreement, not to exceed 30 months, and he may
require Easyriders to register the shares of Easyriders Common Stock held
by Mr. and Mrs. Prather.
Each of the above described transactions when entered into were, in the
opinion of the Board of Directors of Newriders, at least as favorable to
Newriders as could have been obtained from independent third parties.
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS
The Merger Agreement provides for the exchange of shares of Newriders
Common Stock into shares of Easyriders Common Stock on the basis of one share of
Easyriders Common Stock for each two shares of Newriders Common Stock. The
exchange ratio was not determined by arm's length negotiations. The critical
economic determinations involved in the Reorganization are the terms of the
Paisano Acquisition, which were determined by arms-length negotiations, and the
terms of the El Paso Acquisition, which were not determined by arms-length
negotiations. In determining whether to enter into the proposed Reorganization,
Newriders' directors reviewed and considered, among other things, the historical
and current financial position and results of operations of Newriders, the
Paisano Companies and El Paso, the business prospects for Newriders, the Paisano
Companies and El Paso, and the general economic, market, and financial
conditions relating to Newriders, the Paisano Companies and El Paso.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of Articles of Merger,
executed in accordance with the relevant provisions of the Nevada Statutes, with
the Secretary of State of the State of Nevada. Under the Merger Agreement, this
filing is expected to be made as soon as reasonably practicable after the
consummation of the Paisano Acquisition and the El Paso Acquisition.
EXCHANGE OF CERTIFICATES
At the Effective Time, the Newriders stockholders will cease to have any
rights as Newriders stockholders, and their sole rights will be to receive
shares of Easyriders Common Stock, or, in the case of any Dissenting
Stockholders, the right to receive a cash payment in the amount of the fair
value of their shares as determined in accordance with Nevada law. See "Rights
Of Dissenting Stockholders."
Prior to the Effective Time, Easyriders and Newriders will enter into an
Agreement with a national or state bank or a stock transfer agent selected by
Easyriders (the "Exchange Agent"), which will provide that Easyriders will
deposit with the Exchange Agent as of the Effective Time for the benefit of
holders of Newriders Common Stock, certificates representing the shares of
Easyriders Common Stock issuable pursuant to the Merger Agreement in exchange
for outstanding shares of Newriders Common Stock.
As promptly as practicable after the Effective Time, the Exchange Agent
will mail to all former Newriders stockholders transmittal materials required to
exchange their shares in the Merger, including a Letter of Transmittal for use
in exchanging certificates of Newriders Common Stock for certificates of
Easyriders Common Stock. As soon as practicable after the Letter of Transmittal
is properly completed and returned along with the certificates of Newriders
Common Stock to the Exchange Agent, Easyriders will cause to be issued to the
person specified in the Letter of Transmittal, certificates for the appropriate
number of shares of Easyriders Common Stock. The risk of loss of certificates
mailed to the Exchange Agent will be on the tendering stockholder. Stockholders
claiming rights based on stock certificates that are lost or stolen
46
<PAGE> 62
must provide the Exchange Agent with a bond or insurance undertaking sufficient
to indemnify Easyriders in the event a third party also makes a claim based on
the same certificates.
If any certificate for shares of Easyriders Common Stock is to be issued in
a name other than that in which the Newriders share certificate surrendered in
exchange therefor is registered, the Newriders certificate so surrendered must
be properly endorsed and otherwise in proper form for transfer, and the person
requesting such exchange must pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of a certificate for shares of
Easyriders Common Stock in any name other than that of the registered holder of
the certificate surrendered, or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
Each share of Easyriders Common Stock issued in connection with the Merger
will be deemed to have been issued at the Effective Time. Accordingly, Newriders
stockholders who receive Easyriders Common Stock in the Merger will be entitled
to receive any dividends or other distributions which may be payable to all
holders of record of Easyriders Common Stock as of any date after the Effective
Time. However, no stockholder will be entitled to receive shares of Easyriders
Common Stock, and no dividends or other distributions will actually be paid with
respect to any shares of Easyriders Common Stock, until the certificate or
certificates formerly representing the shares of Newriders Common Stock have
been surrendered in accordance with the procedures described above. At the time
such surrender has been accomplished, a certificate representing the appropriate
number of shares of Easyriders Common Stock will be issued and accrued dividends
and other distributions on such shares of Easyriders Common Stock will be paid
without interest and less taxes, if any, imposed thereon.
ACCOUNTING TREATMENT
The Reorganization will be accounted for under the purchase method of
accounting in accordance with Accounting Principles Board (APB) Opinion No. 16,
Business Combinations. Under this method of accounting, the purchase price will
be allocated to assets acquired and liabilities assumed based on their estimated
fair value at the Effective Time.
CONDITIONS TO THE REORGANIZATION
The obligations of Newriders and Easyriders to consummate the Paisano
Acquisition are subject to the following conditions, unless waived by Newriders
and Easyriders: (a) the business of each Paisano Company shall have been
conducted in the ordinary course, and there shall have been no material adverse
change to the business of any such Paisano Company; (b) there shall have been no
threatened or pending litigation against any Paisano Company which is material;
(c) except for a distribution of certain excluded assets and the distribution of
$7,000,000 to Joseph Teresi, there shall have been no dividend, redemption or
similar distribution, recapitalization or stock issuance of any kind, by any
Paisano Company since December 31, 1997; (d) all filings with and material
consents and approvals of third parties and governmental agencies required for
the consummation of the Paisano Acquisition shall have been obtained; (e)
consummation of the financing necessary to complete the Paisano Acquisition on
terms acceptable to Newriders and Easyriders; (f) receipt of a tax opinion from
Deloitte & Touche LLP, satisfactory to Newriders and Easyriders; (g) a
proxy/registration statement on Form S-4 shall have been declared effective by
the SEC; (h) the representations and warranties of Mr. Teresi and the Paisano
Companies shall be true and correct in all material respects as of the date of
the Paisano Agreement and shall be true and correct in all material respects as
of the closing date of the Paisano Acquisition as if made on the closing date,
and Mr. Teresi shall have delivered to Newriders and Easyriders a certificate
dated as of the closing date, to such effect; (i) Joseph Teresi and the Paisano
Companies shall have performed all obligations required to be performed by them
under the Paisano Agreement at or prior to the closing of the Paisano
Acquisition; (j) delivery by Mr. Teresi and the Paisano Companies of an opinion
of Masters & Ribakoff and an opinion of Fulwider, Patton, Lee & Utecht, LLP; (k)
Mr. Teresi shall have entered into the Teresi Employment Agreement; (1) the
Merger Agreement shall have been entered into by all of the parties thereto; (m)
the stockholders of Newriders shall have approved the transactions contemplated
by the Merger Agreement at a duly constituted meeting; (n) the El Paso
Acquisition shall have closed prior to or simultaneous with the closing of the
Paisano Acquisition; (o) Michael T. Purcell, Leon Hatcher,
47
<PAGE> 63
Rick L. Pierce and C.W. Doyle shall have transferred to Newriders an aggregate
of 6,156,480 shares of their Newriders Common Stock (of which 536,000 shares
have already been transferred and cancelled, but which Newriders will be
required to reissue if the Reorganization is not consummated); (p) stockholders
of Newriders representing more than 3% of the outstanding shares of Newriders
shall not have exercised their right to dissent in respect of the
Reorganization; and (q) the Stockholders' Agreement shall have been entered into
by Messrs. Teresi and Martin.
The obligations of Joseph Teresi to consummate the Paisano Acquisition are
subject to the following conditions, unless waived by Mr. Teresi: (a) except for
(i) any issuance of capital stock upon conversion of convertible debentures or
notes which have been or may be issued by Newriders or Easyriders (but not to
exceed 850,000 shares of common stock), (ii) any issuance of stock upon exercise
of stock options granted under Newriders' or Easyriders' stock option plans,
(iii) the issuance of 2,000,000 shares of Easyriders Common Stock in connection
with the El Paso Acquisition, (iv) the issuance of 1,000,000 shares of Newriders
Common Stock to Mr. Teresi based upon prior contractual obligation, (v) the
issuance of 200,000 shares of Easyriders Common Stock to William Nordstrom and
(vi) the issuance of an aggregate of 4,036,797 shares of Easyriders Common Stock
to John E. Martin in consideration of cash and notes, there shall have been no
dividend, redemption or similar distribution, recapitalization or stock issuance
of any kind, by Newriders or Easyriders since December 31, 1997; (b) all filings
with and material consents and approvals of third parties and governmental
agencies required for the consummation of the Paisano Acquisition shall have
been obtained; (c) receipt of a tax opinion from Deloitte & Touche LLP,
satisfactory to Joseph Teresi; (d) the representations and warranties of
Newriders and Easyriders set forth in the Paisano Agreement shall be true and
correct in all material respects as of the date of the Paisano Agreement and
shall be true and correct in all material respects as of the Paisano Closing
Date as if made on the closing date, and Easyriders and Newriders shall have
delivered to Mr. Teresi a certificate, dated as of the closing date, to such
effect; (e) Newriders and Easyriders shall have performed all obligations
required to be performed by them under the Paisano Agreement at or prior to the
closing of the Paisano Acquisition; (f) delivery of an opinion of counsel to
Newriders and Easyriders; (g) Michael T. Purcell, Leon Hatcher, Rick L. Pierce
and C.W. Doyle shall have transferred to Newriders an aggregate of 6,156,480
shares of their Newriders Common Stock (of which 536,000 shares have already
been transferred and cancelled, but which Newriders will be required to reissue
if the Reorganization is not consummated); (h) approval by Joseph Teresi, which
approval shall not be unreasonably withheld, of any person that is not an
institutional investor recognized within the investment community and that is
providing any portion of the Financing; and (h) the Stockholders' Agreement
shall have been entered into by Messrs. Teresi and Martin.
The obligations of Newriders and Easyriders to consummate the El Paso
Acquisition are subject to the following conditions, unless waived by Newriders
and Easyriders: (a) the business of El Paso shall have been conducted in the
ordinary course, and there shall have been no material adverse change to the
business of El Paso or its prospects; (b) there shall have been no threatened or
pending litigation against El Paso which is material; (c) all filings with and
material consents and approvals of third parties and governmental agencies
required for the consummation of the El Paso Acquisition, including but not
limited to certain consents of lessors or lenders, shall have been obtained; (d)
receipt of a tax opinion from Deloitte & Touche LLP, satisfactory to Newriders
and Easyriders; (e) the proxy/registration statement on Form S-4 shall have been
declared effective by the SEC; (f) the representations and warranties of the El
Paso Owners and El Paso set forth in the El Paso Agreement shall be true and
correct as of the date of the El Paso Agreement and shall be true and correct as
of the closing date as if made on the closing date, and the El Paso Owners shall
have delivered to Newriders and Easyriders a certificate dated as of the closing
date, to such effect; (g) the El Paso Owners and El Paso shall have performed
all obligations required to be performed by them under the El Paso Agreement at
or prior to the closing; (h) delivery of an opinion of Dillingham Cross, P.L.C.;
(i) the Merger Agreement shall have been entered into by all of the parties
thereto; (j) the stockholders of Newriders shall have approved the Merger at a
duly constituted meeting; (k) consummation of the financing necessary to fund
the cash portion of the Paisano Acquisition; (l) any indebtedness of the El Paso
Owners or True and Elizabeth Knowles, or any of their respective affiliates to
El Paso shall have been paid and any indebtedness of El Paso or any affiliate of
El Paso to the El Paso Owners, True and Elizabeth Knowles, or any of their
respective affiliates shall have been forgiven; (m) the Paisano Acquisition
shall have closed prior to or simultaneous with
48
<PAGE> 64
the El Paso Closing; and (n) stockholders of Newriders representing more than 3%
of the outstanding shares of Newriders shall not have exercised their right to
dissent in respect of the Reorganization.
The obligations of the El Paso Owners and El Paso to consummate the El Paso
Acquisition are subject to the following conditions, unless waived by the El
Paso Owners: (a) except for (i) any issuance of capital stock upon conversion of
convertible debentures or notes which have been or may be issued by Newriders or
Easyriders (but not to exceed 850,000 shares of common stock), (ii) any issuance
of stock upon exercise of stock options granted under Newriders' or Easyriders'
stock option plans, (iii) the issuance of 6,493,507 shares of Easyriders Common
Stock in connection with the Paisano Acquisition, (iv) the issuance of 1,000,000
shares of Newriders Common Stock to Joseph Teresi in consideration for the
forgiveness of certain indebtedness owed to him by Newriders, (v) the issuance
of 200,000 shares of Easyriders Common Stock to William Nordstrom and (vi) the
issuance of an aggregate of 4,036,797 shares of Easyriders Common Stock to John
E. Martin in consideration of cash and notes, there shall have been no dividend,
redemption or similar distribution, recapitalization or stock issuance of any
kind, by Newriders or Easyriders since December 31, 1997; (b) all filings with
and material consents and approvals of third parties and governmental agencies
required for the consummation of the El Paso Acquisition shall have been
obtained; (c) receipt of a tax opinion from Deloitte & Touche LLP, satisfactory
to the El Paso Owners; (d) the representations and warranties of Newriders and
Easyriders set forth in the El Paso Agreement shall be true and correct as of
the date of the El Paso Agreement and shall be true and correct as of the
closing date as if made on the closing date, and Easyriders and Newriders, shall
have delivered to the El Paso Owners a certificate, dated as of the closing
date, to such effect; (e) Newriders and Easyriders shall have performed all
obligations required to be performed by them under the El Paso Agreement at or
prior to the closing; (f) delivery of an opinion of counsel to Newriders and
Easyriders; (g) the Merger Agreement shall have been entered into by all of the
parties thereto; (h) the stockholders of Newriders shall have approved the
Merger at a duly constituted meeting; and (i) the Paisano Acquisition shall have
closed prior to or simultaneous with the closing, and (j) Newriders and Mr.
Prather shall have entered into an employment agreement.
The Merger Agreement is conditioned upon prior or simultaneous consummation
of the Paisano Acquisition and the El Paso Acquisition.
TERMINATION OF THE REORGANIZATION AGREEMENTS
The Paisano Agreement may be terminated at any time prior to the Effective
Time by (i) either Newriders or Easyriders, on the one hand, or Mr. Teresi and
the Paisano Companies, on the other hand, if a material breach in any provision
of the Paisano Agreement has been committed by the other party and such breach
has not been waived; (ii) by Newriders or Easyriders if any of the conditions to
Newriders and Easyriders obligations under the Paisano Agreement has not been
satisfied as of the closing date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Newriders or Easyriders to
comply with its obligations under the Paisano Agreement) and Newriders or
Easyriders has not waived such condition on or before the closing date; or by
Mr. Teresi or the Paisano Companies if any of the conditions to Mr. Teresi's
obligations under the Paisano Agreement has not been satisfied as of the closing
date or satisfaction of such a condition is or becomes impossible (other than
through the failure of Mr. Teresi or the Paisano Companies to comply with their
obligations under the Paisano Agreement) and Mr. Teresi or the Paisano Companies
have not waived such condition on or before the closing date; (iii) by mutual
consent of Newriders or Easyriders, on the one hand, and Mr. Teresi and the
Paisano Companies, on the other hand; or (iv) by either party if the closing has
not occurred (other than through the failure of any party seeking to terminate
the Paisano Agreement to comply fully with its obligations under the Paisano
Agreement) on or before July 8, 1998 or such later date as the parties may agree
upon, except that Newriders and Easyriders may extend the closing until August
15, 1998 if, as of July 8, 1998, they have provided to Mr. Teresi an expression
of interest and term sheet of a lender offering a credit facility to fund the
Paisano Acquisition.
If the Paisano Agreement is terminated, all further obligations of the
parties under the Paisano Agreement will terminate, with certain limited
exceptions; provided however, that if the Paisano Agreement is terminated by a
party because of the breach of the Paisano Agreement by the other party or
because one or more of the conditions to the terminating party's obligations
under the Paisano Agreement is not satisfied as a
49
<PAGE> 65
result of the other party's failure to comply with its obligations under the
Paisano Agreement, the terminating party's right to pursue all legal remedies
will survive such termination unimpaired.
The El Paso Agreement may be terminated at any time prior to the Effective
Time by (i) either Newriders or Easyriders, on the one hand, or the El Paso
Owners and El Paso, on the other hand, if a material breach in any provision of
the El Paso Agreement has been committed by the other party and such breach has
not been waived; (ii) by Newriders or Easyriders if any of the conditions to
Newriders' and Easyriders' obligations under the El Paso Agreement has not been
satisfied as of the closing date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Newriders or Easyriders to
comply with its obligations under the El Paso Agreement) and Newriders or
Easyriders has not waived such condition on or before the closing date; or by
the El Paso Owners or El Paso if any of the conditions to the El Paso Owners and
El Paso's obligations under the El Paso Agreement has not been satisfied as of
the closing date or satisfaction of such a condition is or becomes impossible
(other than through the failure of the El Paso Owners or El Paso to comply with
their obligations under the El Paso Agreement) and the El Paso Owners or El Paso
have not waived such condition on or before the Closing Date; (iii) by mutual
consent of Newriders or Easyriders, on the one hand, and by the El Paso Owners
and El Paso, on the other hand, or (iv) by any party if the closing has not
occurred (other than through the failure of any party seeking to terminate the
El Paso Agreement to comply fully with its obligations under the El Paso
Agreement) on or before December 31, 1998 or such later date as the parties may
agree upon in writing.
If the El Paso Agreement is terminated, all further obligations of the
parties under the El Paso Agreement will terminate, with certain limited
exceptions; provided however, that if the El Paso Agreement is terminated by a
party because of the breach of the El Paso Agreement by the other party or
because one or more of the conditions to the terminating party's obligations
under the El Paso Agreement is not satisfied as a result of the other party's
failure to comply with its obligations under the El Paso Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired.
TERMS OF THE SENIOR CREDIT AGREEMENT
Newriders and Paisano Publications have received a commitment from the
Senior Lender to lend Paisano Publications up to $22,000,000 in the aggregate,
$17,000,000 of which will consist of term loans (the "Term Loans") and
$5,000,000 of which will consist of revolving loans (the "Revolving Loans" and
collectively with the Term Loans, the "Senior Loans").
The Term Loans plus up to $3,500,000 of the Revolving Loans will be used to
repay the $15,000,000 note issued by Easyriders Sub II to Mr. Teresi and to
repay a portion of the loan incurred by Paisano Publications in order to fund
the $7,000,000 dividend paid to Mr. Teresi by Paisano Publications prior to the
Paisano Acquisition and up to $500,000 of expenses. The remaining portion of the
Revolving Loans may be used by Paisano Publications for working capital
purposes. $15,000,000 of the Senior Loans will initially be lent to Easyriders
Sub II, which will use the proceeds thereof to repay the promissory note in the
principal amount of $15,000,000 issued by it to Mr. Teresi in connection with
the Paisano Acquisition. Simultaneously therewith, Easyriders Sub II will be
merged with and into Paisano Publications, with Paisano Publications being the
surviving company and the obligor on the Senior Loans.
The Senior Loans will be guaranteed (the "Guarantees") by Easyriders and
the Paisano Companies other than Paisano Publications (the "Guarantors"). The
Senior Loans will mature on the third anniversary of the date that the
Reorganization is consummated, will 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 will be 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 will constitute the sole senior secured
indebtedness of Paisano Publications and the Guarantors and will rank senior to
all other indebtedness of Paisano Publications and the Guarantors, including the
$13,000,000 of Contributor Notes. Paisano Publications will pay the Senior
Lender a fee equal to 0.25% per annum of the average daily undrawn amount of the
Revolving Loans.
50
<PAGE> 66
At the end of each six-month period in which the Term Loans are
outstanding, Paisano Publications will be required to prepay the Term Loans in
an aggregate principal amount equal to 35% of Excess Cash Flow for such period.
Excess Cash Flow will be defined as the sum of (i) net income, plus (ii) net
non-cash charges (net of credits), reduced by allowable capital expenditures and
changes in working capital, plus (or minus) (iii) net losses (or net gains)
resulting from any asset sale.
Subject to certain limitations on dividends, provided that no event of
default has occurred, Paisano Publications may loan funds to Easyriders monthly,
limited to the lesser of $100,000 or 35% of the Excess Cash Flow for the
preceding monthly period.
The net proceeds from any public offering or Rule 144A 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 debt or equity 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 will be
issued and sold to the Senior Lender on the closing date of the Reorganization
at nominal cost. The exercise price of the Warrants will be $3.00 per share. 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.
The Senior Credit Agreement and the Guarantees will contain affirmative and
negative covenants concerning Paisano Publications and the Guarantors and their
subsidiaries. Affirmative covenants under the Senior Credit Agreement and the
Guarantees will include, but not be limited to, compliance with contractual
obligations and law, maintenance of existence, inspection rights, payment of
taxes and other claims, maintenance of property and insurance, further
assurances and notices and reporting. Negative covenants under the Senior Credit
Agreement and the Guarantees will include, but not be limited to, the following:
limitations on liens and negative pledges; limitations on sale/leasebacks;
limitations on indebtedness, capital leases, contingent obligations and
preferred stock; restrictions on the creation of any subsidiaries; limitations
on dividends or any payments on, or redemptions or repurchases of, the capital
stock and other restricted payments; limitations on the sale of assets and
transactions with affiliates; limitations on payments under operating leases;
limitations on mergers and/or consolidations; limitations on investments,
acquisitions and joint ventures; limitations on changes of control; and
financial covenants including, but not limited to, minimum net worth, minimum
working capital, interest coverage ratio, leverage ratio and EBITDA levels,
provisions related to environmental liabilities, ERISA, conduct of business and
capital expenditures.
The Senior Credit Agreement and the Guarantees will contain default
provisions including, but not limited to: failure to pay principal or interest
on the Senior Loans when and as due; failure to comply with any of the covenants
or other terms of the Senior Loans, the Guarantees or other documents
(including, without limitation, security documents); breach of any
representation or warranty in the Senior Credit Agreement, the Guarantees or
other documents (including, without limitation, security documents);
cross-default on other obligations of Paisano Publications or any Guarantor or
other subsidiary; certain events of bankruptcy of Paisano Publications or any
Guarantor or other subsidiary; ERISA -- related events; change of control of
Paisano Publications or Easyriders (Easyriders will be required to own 100% of
Paisano Publications); material judgments against Paisano Publications or any
Guarantor or other subsidiary; failure to maintain perfected security interests
for the Senior Loans or the Guarantee; and invalidity or disaffirmation of any
of the Guarantees.
51
<PAGE> 67
SOURCES AND USES OF FUNDS
The proceeds from the Financing and the sale of 4,036,797 shares of
Easyriders Common Stock to Mr. John E. Martin will be used to fund the $15.0
million cash portion of the Paisano Acquisition, pay off a $7 million loan to
Paisano Publications, pay the fees and expenses of the Financing and the
Reorganization, refinance certain indebtedness and provide for general working
capital. The following table outlines the pro forma sources and uses of funds
for the Financing:
<TABLE>
<CAPTION>
SOURCES OF FUNDS (000S USE OF FUNDS (000S
---------------- OMITTED) ------------ OMITTED)
<S> <C> <C> <C>
Revolver............................. $ 3,500 Consideration for Purchase of Paisano
Equity (includes repayment of $7
million loan to Paisano
Publications)........................ $55,000
Term Loans........................... 17,000 Transaction Fees and Expenses(b)..... 3,500
Contributor Notes.................... 13,000
Teresi Common Stock(a)............... 20,000
Martin Common Stock.................. 5,000
------- -------
Total Sources of Funds............... $58,500 Total Uses of Funds.................. $58,500
======= =======
</TABLE>
- ---------------
(a) As consideration for a portion of the purchase price for the Paisano
Companies, Easyriders will issue to Joseph Teresi 6,493,507 shares of
Easyriders Common Stock for $3.08 per share for a total of approximately $20
million.
(b) Transaction fees and expenses include legal, accounting, financial advisory
and other fees and expenses.
BOARD OF DIRECTORS AND MANAGEMENT OF EASYRIDERS AFTER THE REORGANIZATION
After consummation of the Reorganization, Easyriders will be managed by a
Board of Directors consisting of eight members, all of whom will be designated
by Mr. Martin and Mr. Teresi in accordance with the Stockholders' Agreement. The
following four directors will be designated by Mr. Martin: John E. Martin,
William E. Prather, Wayne L. Knyal, and Daniel J. Gallery, each of whom is a
current director of Newriders. The following four directors will be designated
by Mr. Teresi: Joseph Teresi, Ellen Meagher, Robert Davis, and Joseph J. Jacobs.
The names and ages of all persons who will be directors of Easyriders upon
consummation of the Reorganization appear in the table below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John E. Martin............ 52 Director and Chairman of the Board of Easyriders
William E. Prather........ 51 President, Chief Executive Officer and Director of
Easyriders
Daniel J. Gallery......... 43 Director of Easyriders
Wayne L. Knyal............ 51 Director of Easyriders
Joseph Teresi............. 56 Director of Easyriders and Publisher of Paisano
Publications
Robert Davis.............. 50 Director of Easyriders and Chief Financial Officer
of Paisano Publications
Ellen Meagher............. 43 Director of Easyriders
Joseph J. Jacobs.......... 73 Director of Easyriders
</TABLE>
Mr. John E. Martin has been the Chairman of the Newriders Board of
Directors since July 1997. He served as Chief Executive Officer of Newriders
from July 1997 until October 1997. Mr. Martin served as President and Chief
Executive Officer of Taco Bell Corp. from August 1983 until October 1995. In
October 1995, Mr. Martin became Chairman and continued as Chief Executive
Officer of Taco Bell Corp. until October 1996. From October 1996 until June
1997, Mr. Martin was Chairman and Chief Executive Officer of PepsiCo Casual
Dining International, a division of PepsiCo. Mr. Martin is a member of the
Educational Foundation of the National Restaurant Association's Board of
Trustees, and is a founding member of the Chief Executive Round Table at the
University of California, Irvine. Mr. Martin is a director of The Good
52
<PAGE> 68
Guys, Inc., Williams-Sonoma, Inc., Franchise Mortgage Acceptance Company, LLC
("FMAC") and Chevy's Mexican Restaurants, Inc.
Mr. William E. Prather has been the President and Chief Executive Officer
of Newriders since October 1997. Mr. Prather was employed by Burger King in
various capacities beginning 1972 until 1986, which capacities included at
different times Regional Manager, Head of European Operations and Executive Vice
President of Worldwide Operations. Mr. Prather was Chief Executive Officer of
Hardee's from March 1986 to July 1991, and the Chief Executive Officer of Furr's
Bishop's Cafeteria, Inc. from February 1992 to October 1994. Mr. Prather is the
founder and President of El Paso.
Mr. Wayne L. "Buz" Knyal has served as a director of Newriders since August
1997. Mr. Knyal has been the President, Chief Executive Officer and a Director
of FMAC since its inception in June 1995. Prior to founding FMAC's predecessor
in 1991, Mr. Knyal founded and owned CBI Insurance Services, Inc. and
concurrently served as President of CBI Mortgage Company, a residential mortgage
banker. From 1968 to 1980, Mr. Knyal was an Executive Vice President of
Krupp/Taylor Advertising and served clients in the fast food industry.
Mr. Daniel J. Gallery has served as a director of Newriders since August
1997. Mr. Gallery is a co-founder of Carts of Colorado, Inc., which is engaged
in mobile and modular merchandising and the utilization of non-traditional
locations for food service operations, including airports, stadiums and arenas,
convenience stores, and golf courses. Mr. Gallery continues as Executive Vice
President for Carts of Colorado, Inc., a position he has held for a period of
more than five years. He is a member of the Board of Directors of Cohabaco Cigar
Company, a private venture engaged in cigar marketing, Monterey Pasta Company, a
pasta manufacturing company, and the National Association of Concessionaires.
Mr. Joseph Teresi, age 56, founded Paisano Publications in 1970 and since
1986 has been the sole stockholder of Paisano Publications. He has served as
Chairman of the Board of Directors of Paisano Publications and the other
companies comprising the Paisano Companies for more than the past five years,
respectively, or such shorter time as they may have been in existence. From 1968
to 1978, Mr. Teresi was involved with the manufacturing, distribution and
retailing of motorcycle parts and accessories.
Ms. Ellen Meagher, age 43, is a director of Paisano Publications. Ms.
Meagher joined Paisano Publications in 1986 and has held positions as
Controller, Treasurer, Chief Financial Officer and Chief Operating Officer. Ms.
Meagher is also Secretary and Director of Easyriders Franchising and President
of Columbus.
Mr. Robert Davis, age 50, is currently the Vice President of Finance of
Paisano Publications. Mr. Davis has been with Paisano Publications since
January, 1993. Mr. Davis is also Treasurer and Director of Easyriders
Franchising and Treasurer of Columbus.
Mr. Joseph J. Jacobs, age 73, has been an independent legal consultant on
merger and acquisition matters since 1992. Between November 1989 and December
1991, he served as Vice President and General Counsel of Graphic Scanning Corp.
where he negotiated the acquisition of that company by Bell South Corporation,
and subsequent to that acquisition in 1992 was Vice President and General
Counsel of Ram/BSE LP, a wireless and paging partnership in which Bell South
Corporation had a 50% interest. Mr. Jacobs served in various legal positions
between 1954 and 1961, with American Broadcasting Company, including Assistant
to the President for Legal and Broadcasting Division Affairs -- Washington, and
Assistant General Counsel, and in 1961 as General Attorney of Metromedia, Inc.
Between 1961 - 1971 he served as Director of Program and Talent Negotiation for
United Artists Television and Vice President and Counsel of United Artists
Broadcasting. Between 1972 - 1987, he was Director of Legal Affairs for ITT
Corporation's Communications Operations Group and Vice President and General
Counsel of both ITT World Communications, Inc. and United States Transmission
Systems, Inc. In 1988, Mr. Jacobs became Counsel to the law firm of Seyfarth,
Shaw, Fairweather and Geraldson. Prior to joining American Broadcasting Company,
he was an Associate with the law firm of Proskauer, Rose, Goetz and Mendelsohn.
The Compensation Committee of the Board of Directors of Easyriders will
consist of Joseph J. Jacobs and Daniel J. Gallery. The Audit Committee of the
Board of Directors of Easyriders will consist of Joseph J. Jacobs, Ellen
Meagher, Daniel J. Gallery and Wayne L. Knyal. The Executive Officers of
Easyriders will be
53
<PAGE> 69
John E. Martin, Chairman of the Board, William E. Prather, President and Chief
Executive Officer and William R. Nordstrom, Vice President, Chief Financial
Officer, Treasurer and Secretary.
Assuming ratification of the appointment of Deloitte & Touche LLP as
independent auditors of Newriders for the fiscal year ending December 31, 1998,
and the completion of the Reorganization, Deloitte & Touche LLP will be the
independent auditors of Easyriders for the fiscal year ending December 31, 1998.
EXECUTIVE COMPENSATION
Information with respect to compensation paid to persons designated to
become members of the Board of Directors of Easyriders who are executive
officers of Newriders is set forth elsewhere in this Prospectus/Proxy Statement.
See "Executive Compensation -- Newriders." The following table sets forth
information concerning compensation paid by Paisano Publications to persons
designated to become members of the Board of Directors of Easyriders for
services rendered in all capacities to Paisano Publications for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY BONUS
--------------------------- ------------ -------- ----------
<S> <C> <C> <C>
Joseph Teresi........................................... 1997 $287,037(1) $ 800,000
President 1996 279,205 1,000,000
1995 272,890 2,000,000
Ellen Meagher........................................... 1997 $196,154 $ 8,419
Director 1996 159,999 8,000
1995 154,583 10,000
Robert Davis............................................ 1997 $159,893 $ 7,158
Vice President Finance 1996 154,999 8,000
1995 149,583 10,000
</TABLE>
- ---------------
(1) In addition, Mr. Teresi received dividends of $1,500,000 in 1997 from
Paisano Publications.
OPERATIONS AFTER THE REORGANIZATION
As proposed, Easyriders Sub, a wholly owned subsidiary of Easyriders, will
merge with and into Newriders with Newriders being the surviving corporation.
Easyriders will be a holding company for Newriders, the individual corporations
in the Paisano Companies, and EL Paso. The ownership interests in El Paso will
be transferred from Easyriders to Newriders following consummation of the
Reorganization, with the result that El Paso will be a wholly-owned subsidiary
of Newriders.
Upon consummation of the Reorganization, Mr. Teresi will terminate his
existing leases for the building structures and real estate located at 28210
Dorothy Drive and 28216 Dorothy Drive, Agoura Hills, California, 605 Main
Street, Daytona Beach, Florida and 611 Broad Street, Columbus, Ohio.
Simultaneously with the termination of such leases, Mr. Teresi will enter into
new leases with Easyriders for each of the four premises described above. The
new leases between Mr. Teresi and Easyriders will be standard triple net leases
with CPI adjustments for a five-year period with renewal options for additional
five-year periods.
EFFECT OF THE REORGANIZATION ON CERTAIN OPTIONS AND OPTION PLANS
In connection with the Reorganization, stockholders of Newriders are being
asked to approve the Easyriders Plan. See "Easyriders Plan (Proposal 3)."
Assuming stockholder approval of the Reorganization and the Easyriders Plan,
upon consummation of the Reorganization, the Newriders Plan will be terminated
and the Easyriders Plan will be implemented. Awards such as options granted
under the Newriders Plan will be exchanged for similar awards under the
Easyriders Plan.
All outstanding options and warrants of Newriders will be exchanged for
options and warrants of Easyriders to purchase shares of Easyriders Common Stock
on the basis of one share of Easyriders Common Stock for each two shares of
Newriders Common Stock subject to such options or warrants at an exercise price
per share equal to two times the exercise price provided for in the existing
options and warrants. Other
54
<PAGE> 70
convertible securities of Newriders such as convertible notes and convertible
debentures will be amended or exchanged for new convertible notes and
convertible debentures which shall be convertible into shares of Easyriders
Common Stock on the basis of one share of Easyriders Common Stock for each two
shares of Newriders Common Stock subject to such convertible notes or
convertible debentures at an exercise price per share equal to two times the
exercise price provided for in the convertible notes and convertible debentures.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Newriders Common Stock, and, after the Reorganization,
Easyriders Common Stock, by: (a) each person known by Newriders to beneficially
own more than 5% of the Newriders Common Stock, (b) each person known by
Newriders who will, assuming consummation of the Reorganization, own more than
5% of the then outstanding Easyriders Common Stock, (c) each director of
Newriders, (d) any person who will, assuming consummation of the Reorganization,
be a Director of Easyriders, (e) all directors and executive officers of
Newriders, as a group, and (f) all persons who, assuming consummation of the
Reorganization, will be directors and executive officers of Easyriders, as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OUTSTANDING COMMON OF BENEFICIAL OUTSTANDING
OWNERSHIP OF STOCK OF NEWRIDERS OWNERSHIP OF COMMON STOCK OF
NEWRIDERS PRIOR TO PRIOR TO EASYRIDERS AFTER EASYRIDERS AFTER
NAME OF BENEFICIAL OWNER REORGANIZATION(1) REORGANIZATION REORGANIZATION(2) REORGANIZATION(3)
------------------------ ------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
John E. Martin(4)(14).......... 1,567,300 8.1% 5,257,947 27.8%
William E. Prather(5).......... 0 0.0% 1,000,000 5.3%
William R. Nordstrom(6)(14).... 692,300 3.7% 421,150 1.7%
Michael T. Purcell(7).......... 2,751,000 15.3% 473,089 2.5%
Leon Hatcher(8)................ 2,835,918 15.8% 518,534 2.7%
C.W. Doyle(9).................. 1,887,809 10.5% 357,500 1.9%
Wayne L. Knyal(10)(14)(15)..... 483,553 2.6% 238,027 1.3%
Daniel J.
Gallery(11)(14)(15).......... 82,500 0.5% 37,500 0.2%
Hal H. Bolen II(12)............ 50,000 0.3% 25,000 0.1%
Rick L. Pierce(13)............. 1,501,000 8.4% 330,500 1.8%
Joseph Teresi.................. 1,000,000 5.6% 6,993,507 37.0%
Ellen Meagher.................. 0 0.0% 0 0.0%
Robert Davis................... 0 0.0% 0 0.0%
Joseph J. Jacobs............... 0 0.0% 0 0.0%
All Executive Officers and
Directors of Newriders as a
group (8 persons)(14)........ 7,419,378 36.9%
All Executive Officers and
Directors of Easyriders as a
group (9 persons)(15)........ 14,362,815 75.2%
</TABLE>
- ---------------
(1) As of the date of this Prospectus/Proxy Statement there are a total of
17,962,316 issued and outstanding shares of Newriders Common Stock.
(2) Assumes that the Reorganization closes together with the following related
transactions: (a) the return to Newriders as treasury shares of 6,156,480
shares of Newriders Common Stock by Leon Hatcher (1,334,850 shares),
Michael Purcell (1,804,821 shares), C. W. Doyle (1,172,809 shares) and Rick
Pierce (1,844,000 shares) of which 1,000,000 shares are beneficially owned
by Leon Hatcher, but are held in Rick Pierce's name (of which 536,000
shares have already been returned and cancelled, but which Newriders will
be required to reissue if the Reorganization is not consummated); (b) the
purchase by John E. Martin of 4,036,797 shares of Easyriders Common Stock;
(c) the issuance to William R. Nordstrom of 200,000 shares of Easyriders
Common Stock; and (d) the relinquishment of options, exercisable at $2.50
per share, to purchase shares of Newriders Common Stock by John E.
55
<PAGE> 71
Martin -- 2,000,000 shares, William R. Nordstrom -- 500,000 shares, William
E. Prather -- 750,000 shares, Wayne L. Knyal -- 20,000 shares and Daniel J.
Gallery -- 20,000 shares.
(3) Upon consummation of the Reorganization as presently contemplated, and
assuming no further issuances of Newriders Common Stock between the date
hereof and the consummation of the Reorganization, except as may be
contemplated herein, there will be issued and outstanding approximately
18,862,222 shares of Easyriders Common Stock plus the number of additional
shares to be issued to Richard Dillon, a former El Paso employee, which is
equal to $300,000 divided by the price of Easyriders Common Stock on the
30th day following consummation of the Reorganization. For purposes of the
table, 60,000 shares have been established to be issued to Mr. Dillon.
(4) Newriders share total prior to the Reorganization for Mr. Martin includes:
(a) warrants to purchase up to 250,000 shares at $4.00 per share anytime on
or before April 21, 1999; and (b) stock options to purchase up to 500,000
shares at $2.50 per share anytime on or before July 8, 2007, 200,000 shares
at $2.50 per share anytime between July 8, 1998 and July 8, 2008 and
250,000 shares at $2.50 per share anytime between July 8, 1998 and July 8,
2008. Mr. Martin also owns 192,300 shares through the John E. Martin
Revocable Trust dated June 16, 1992, of which Mr. Martin is trustee and
beneficiary. The share total prior to Reorganization does not include: (a)
other options held by Mr. Martin not exercisable within the next 60 days;
(b) 1,000,000 shares of Easyriders Common Stock issuable to Mr. Martin upon
consummation of the El Paso Acquisition; and (c) 4,036,797 shares of
Easyriders Common Stock to be purchased by Mr. Martin from Easyriders.
Easyriders share total after Reorganization for Mr. Martin includes: (a)
warrants to purchase up to 125,000 shares at $8.00 per share anytime on or
before April 21, 1999; (b) 1,000,000 shares issuable to Mr. Martin upon
consummation of the El Paso Acquisition; (c) 96,150 shares through the John
E. Martin Revocable Trust dated June 16, 1992, of which Mr. Martin is
trustee and beneficiary; and (d) 4,036,797 shares issuable to Mr. Martin
from Easyriders. The options currently held by Mr. Martin are to be canceled
upon consummation of the Reorganization, and none of the shares covered by
the options to be canceled have been included in the share total for Mr.
Martin after the Reorganization.
(5) Newriders share total prior to the Reorganization for Mr. Prather does not
include: (a) 1,000,000 shares of Easyriders Common Stock to be issued to
Mr. Prather (and Mr. Prather's spouse) upon closing of the El Paso
Acquisition; or (b) an option to purchase up to 750,000 shares exercisable
at $2.50 per share which vests 50% after one year of service in October
1998, and 50% after two years of service in October 1999.
Easyriders share total after the Reorganization for Mr. Prather includes
1,000,000 shares to be issued to Mr. Prather (and Mr. Prather's spouse)
upon consummation of the El Paso Acquisition, but does not include the
option described immediately above which is to be cancelled upon
consummation of the Reorganization.
(6) Newriders share total prior to the Reorganization for Mr. Nordstrom
includes warrants to purchase up to 250,000 shares at $4.00 per share
anytime on or before April 21, 1999. Mr. Nordstrom has options to purchase
500,000 additional shares which have not been included since they are not
exercisable within the next 60 days.
Easyriders share total after the Reorganization for Mr. Nordstrom
includes: (a) warrants to purchase up to 125,000 shares at $8.00 per share
anytime on or before April 21, 1999; and (b) 200,000 shares issuable to
Mr. Nordstrom upon consummation of the Reorganization.
(7) Address is 415 43rd Ave. North, Myrtle Beach, South Carolina 29577.
Easyriders share total after the Reorganization for Mr. Purcell reflects
the return to Newriders as treasury shares of 1,804,821 shares of Newriders
Common Stock conditional upon consummation of the Reorganization.
(8) Address is 8117 North Fowler, Clovis, California 93611.
Easyriders share total after the Reorganization for Mr. Hatcher reflects
the return to Newriders as treasury shares of 1,334,850 shares of Newriders
Common Stock registered in Mr. Hatcher's name and 1,000,000 shares of
Newriders Common Stock registered in Mr. Pierce's name which are
beneficially
56
<PAGE> 72
owned by Mr. Hatcher (of which 536,000 shares have already been returned
and cancelled but which Newriders will be required to reissue if the
Reorganization is not consummated); conditional upon consummation of the
Reorganization.
(9) Address is 21 Valley View, P.O. Box 1775, West Dover, Vermont 05356.
Easyriders share total after the Reorganization for Mr. Doyle reflects the
return to Newriders as treasury shares of 1,172,809 shares of Newriders
Common Stock conditional upon consummation of the Reorganization.
(10) Mr. Knyal holds an option to purchase up to 50,000 shares of Newriders
Common Stock exercisable at $2.50 per share. The option is exercisable to
the extent of 50% of the shares immediately, 25% on July 8, 1998, after one
year of service as a director, and 25% on July 8, 1999, after two years of
service as a director. The option expires ten years after each increment
vests. Conditional upon consummation of the Reorganization, Mr. Knyal has
agreed to cancel a portion of his existing option, such that he will then
hold an option to purchase up to 30,000 shares of Newriders Common Stock
exercisable at $2.50 per share, which will be fully vested, and which will
be exchanged for options to purchase up to 15,000 shares of Easyriders
Common Stock exercisable at $5.00 per share upon consummation of the
Reorganization. On June 10, 1998, Mr. Knyal purchased $1,000,000 face value
of Newriders convertible debentures. The debentures are convertible into
shares of Newriders Common Stock at the lesser of $2.375 per share or 75%
of the average closing bid price of Newriders Common Stock during the five
trading period prior to conversion. For purposes of this table the
conversion ratio of $2.375 per share has been used, which would provide for
the issuance of 421,053 shares of Newriders Common Stock upon conversion.
In connection with Mr. Knyal's purchase of the debentures, Mr. Knyal was
also issued a warrant to purchase up to 25,000 shares of Newriders Common
Stock exercisable at a price equal to 115% of the conversion price of the
debentures.
(11) Mr. Gallery holds an option to purchase up to 50,000 shares of Newriders
Common Stock exercisable at $2.50 per share. The option is exercisable to
the extent of 50% of the shares immediately, 25% on July 8, 1998, after one
year of service as a director, and 25% on July 8, 1999, after two years of
service as a director. The option expires ten years after each increment
vests. Conditional upon consummation of the Reorganization, Mr. Knyal has
agreed to cancel a portion of his existing option, such that he will then
hold an option to purchase up to 30,000 shares of Newriders Common Stock
exercisable at $2.50 per share, which will be fully vested, and which will
be exchanged for options to purchase up to 15,000 shares of Easyriders
Common Stock exercisable at $5.00 per share upon consummation of the
Reorganization. The Newriders share total for Mr. Gallery also includes
35,000 shares held of record by G3 Holdings, LLC, a limited liability
company in which Mr. Gallery, his brother and his sister are co-managers
and owners.
(12) Newriders issued 40,000 shares of Newriders Common Stock to Mr. Bolen's law
firm, Bolen, Fransen & Boostrom LLP in the exchange for $60,000 of legal
services provided by the law firm. Mr. Bolen beneficially owns 20,000 of
the shares issued to his law firm, and he disclaims ownership of the
remaining 20,000 shares which are beneficially owned by another law
partner. Mr. Bolen also owns 10,000 shares in his self-directed account in
the Bolen, Fransen & Boostrom Pension Plan.
(13) Address is P.O. Box 379, Cambria, California 93428.
Easyriders share total after the Reorganization for Mr. Pierce reflects the
return to Newriders as treasury shares of 1,844,000 shares of Newriders
Common Stock (of which 1,000,000 shares are beneficially owned by Leon
Hatcher, and of which 536,000 shares have already been returned and
cancelled, but which Newriders will be required to reissue if the
Reorganization is not consummated) conditional upon consummation of the
Reorganization.
(14) Newriders has treated as issued and outstanding 1,375,000 shares covered by
warrants and/or options granted to Mr. Martin that are exercisable within
the next 60 days, 500,000 shares covered by warrants and/or options granted
to Mr. Nordstrom that are exercisable within the next 60 days, 62,500
shares each covered by options granted to Mr. Knyal that are exercisable
within the next 60 days, 37,500 shares covered by options granted to Mr.
Gallery that are exercisable within the next 60 days and 421,053 shares
issuable to Mr. Knyal upon conversion of certain debentures.
57
<PAGE> 73
(15) Easyriders has treated as issued and outstanding, 27,500 shares covered by
options granted to Mr. Knyal, 15,000 shares covered by options granted to
Mr. Gallery, and 421,053 shares issuable to Mr. Knyal upon conversion of
certain convertible debentures.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain material federal
income tax consequences expected to occur as a result of the Reorganization to
Newriders, the Paisano Companies, El Paso, Easyriders, the El Paso Owners, Mr.
Teresi and the holders of Newriders Common Stock. Deloitte & Touche LLP
("Deloitte & Touche") has rendered an opinion on certain federal income tax
aspects of the Reorganization, and the following discussion describes this
opinion and presents the material federal income tax aspects of the
Reorganization expected to occur. Deloitte & Touche's opinion is based on
relevant provisions of the Code, Treasury regulations promulgated thereunder
(the "Regulations") and published positions of the Internal Revenue Service
("IRS") in effect on the date of Deloitte & Touche's opinion, all of which are
subject to change. Any such changes may be retroactively applied in a manner
that could adversely affect the participants in the Reorganization and the
Deloitte & Touche opinion will not be updated for any changes that may occur
after the date of issuance thereof. In addition, Deloitte & Touche's opinion and
the following discussion are also based on (a) the Paisano Agreement, (b) the El
Paso Agreement, (c) the Merger Agreement, (d) the Contributor Notes, (e) the
Martin Notes, (f) the Pledge Agreement to be entered into by and between
Easyriders, as a pledgor and Mr. Teresi, as pledgee pursuant to the Paisano
Agreement (the "Pledge Agreement"), (g) certain representations set forth in
letters from Mr. Teresi, Easyriders, Mr. Martin, Mr. Prather and Newriders each
dated August 27, 1998, (the "Representative Letters") and (h) Opinion Letters
dated August 27, 1998. The Paisano Agreement, the El Paso Agreement, the Merger
Agreement, the Contributor Notes, the Martin Notes, the Pledge Agreement and the
Representative Letters are collectively referred to as the "Documents." An
ultimate finding that the facts are other than as represented in the Documents
could render the opinions invalid. The opinions represent Deloitte & Touche's
best judgment but are not binding on the IRS or the courts. A ruling will not be
requested from the IRS regarding the tax consequences of the Reorganization.
Accordingly, there can be no assurance that the IRS will not take a position
contrary to the views expressed herein and that such position would not be
sustained. This discussion does not comment on all tax matters that potentially
may affect Newriders, the Paisano Companies, El Paso, Easyriders, the El Paso
Owners, Mr. Teresi and the holders of Newriders Common Stock, including any
state, local, foreign or other tax matters and does not consider various facts
or limitations that may be applicable to any particular holder of Newriders
Common Stock, the El Paso Owners, and Mr. Teresi, or special tax rules that may
apply to certain of such holders such as non-United States person, banks,
tax-exempt organizations or insurance companies that may modify or alter all or
some portion of the discussion with respect to such holders. Accordingly, each
holder of Newriders Common Stock, the El Paso Owners and Mr. Teresi should
consult their own tax advisor concerning the specific tax consequences of the
Reorganization to such holder.
The opinion of Deloitte & Touche is filed as an exhibit to the Registration
Statement on Form S-4 filed with the SEC, of which this Prospectus/Proxy
Statement constitutes a part. The opinion is not filed as an appendix to the
Prospectus/Proxy Statement. Upon receipt of a written request by an El Paso
Owner, Mr. Teresi or a holder of Newriders Common Stock (or its representative
who has been so designated in writing) to William R. Nordstrom, Newriders, Inc.,
567 San Nicolas Drive, Suite 400, Newport Beach, California 92660, telephone
(949) 718-4630, a copy of the opinion will be transmitted promptly, without
charge, by Newriders.
TAX CONSEQUENCES TO NEWRIDERS AND THE HOLDERS OF NEWRIDERS COMMON STOCK
Tax Consequences to Newriders, Easyriders Sub and Easyriders
Deloitte & Touche has rendered an opinion that provided that the Merger is
a statutory merger under applicable Nevada law, no gain or loss should be
recognized by Newriders on the receipt of the assets of Easyriders Sub in
exchange for Newriders common stock. Moreover, no gain or loss should be
recognized by Easyriders Sub on the transfer of its assets to Newriders in
exchange for Newriders common stock, and no
58
<PAGE> 74
gain or loss should be recognized by Easyriders upon the exchange of its
Easyriders Sub stock solely for Newriders common stock. The basis of the assets
of Easyriders Sub to be received by Newriders should be the same as the basis of
those assets in the hands of Easyriders Sub immediately before the exchange. The
holding periods of assets to be received by Newriders should include the period
during which such assets were held by Easyriders Sub.
Receipt of Easyriders Common Stock by the Holders of Newriders Common Stock
Deloitte & Touche has rendered an opinion that no gain or loss should be
recognized by the holders of Newriders Common Stock upon the exchange of their
Newriders Common Stock solely for Easyriders Common Stock or to holders of
rights to acquire Newriders Common Stock upon exchange of such rights solely for
rights to acquire Easyriders Common Stock. Each stockholders' aggregate basis in
shares of Easyriders Common Stock or rights received in exchange for shares of
Newriders Common Stock or rights will be the same, in each instance, as such
stockholder's basis in the shares of the Newriders Common Stock or rights
surrendered in exchange therefor. The holding period of the Easyriders Common
Stock or rights will include the holding period of the Newriders Common Stock or
rights surrendered in exchange therefor, provided that Newriders Common Stock or
rights was held as a capital asset on the date of exchange.
Any holder of Newriders Common Stock who dissents from the Merger and
receives cash for his Newriders Common Stock should treat the cash as a
distribution in redemption of his Newriders Common Stock and should recognize
gain. Such holder of Newriders Common Stock should consult his/her tax advisor
to determine the amount of gain and character of such gain.
Tax Consequences to Newriders Upon Receipt of the El Paso Interest from
Easyriders
Deloitte & Touche has rendered an opinion that no gain or loss should be
recognized to Newriders upon the receipt of the El Paso interest transferred to
it by Easyriders solely in exchange for its stock. Additionally, no gain or loss
should be recognized to Easyriders upon the transfer of the El Paso interest to
Newriders solely in exchange for its stock.
TAX CONSEQUENCES TO THE EL PASO OWNERS, MR. TERESI AND EASYRIDERS
Contribution of Assets to Easyriders
Deloitte & Touche has rendered an opinion that no gain or loss should be
recognized by Mr. Teresi, the El Paso Owners and the holders of Newriders Common
Stock (collectively referred to as the "Transferors") upon the transfer to
Easyriders of the following: (i) the stock of the Paisano Companies (Mr.
Teresi), (ii) interest in El Paso (the El Paso Owners), and (iii) the Martin
Notes and cash (Martin) (collectively i-iii are referred to as the "Assets") and
in exchange solely for Easyriders Common Stock and the assumption of
liabilities. To the extent that Mr. Teresi receives cash and notes in the
Reorganization, Mr. Teresi should recognize gain, but not in excess of the
amount of money received ($15 million) and the fair market value of the
Contributor Notes (aggregating a face amount of $13 million). No loss will be
recognized to Mr. Teresi, the El Paso Owners or the holders of Newriders Common
Stock.
The basis of the Easyriders Common Stock to be received by Mr. Teresi
should be the same as the basis of the stock of the Paisano Companies
transferred by Mr. Teresi to Easyriders, decreased by the sum of (a) the fair
market value of any property received and (b) the amount of money received. The
basis of the Easyriders Common Stock to be received by Mr. and Mrs. Prather
(collectively referred to as the "Prathers"), two of the El Paso Owners, should
be the same as the basis of their respective interests in El Paso transferred to
Easyriders, decreased by their respective share of El Paso's liabilities assumed
by Easyriders, the release of which is treated as a payment of money to the
Prathers. This deemed distribution of money will result in income to the
Prathers to the extent the money deemed distributed to the Prathers exceeds the
adjusted basis of their interests in El Paso immediately before the
distribution. To the extent that any deemed cash distributions exceed the
Prathers' basis in their El Paso interest, capital gain should be recognized to
the Prathers, provided the El Paso interest is a capital asset in the hands of
the Prathers. The capital gain recognized by the Prathers will be long-term,
provided the Prathers' holding period in their El Paso interest
59
<PAGE> 75
exceeds 12 months. The basis of the Easyriders Common Stock to be received by
Mr. Martin, the remaining El Paso Owner, should be the same as the basis of his
respective interest in El Paso transferred to Easyriders, his basis in the
Martin Notes transferred to Easyriders and $5 million in cash transferred to
Easyriders, decreased by his respective share of the El Paso liabilities assumed
by Easyriders, the release of which is treated as a payment of money to Mr.
Martin. This deemed distribution of money will result in income to Mr. Martin to
the extent the money deemed distributed to Mr. Martin exceeds the adjusted basis
of his interest in El Paso immediately before the distribution. To the extent
that any deemed cash distribution exceeds Mr. Martin's basis in his El Paso
interest, capital gain should be recognized to Mr. Martin, provided the El Paso
interest is a capital asset in the hands of Mr. Martin. The capital gain
recognized by Mr. Martin will be long-term, provided Mr. Martin's holding period
in his El Paso interest exceeds eighteen months.
The holding period of the Easyriders Common Stock to be received by Mr.
Teresi should include the period during which he held the stock of the Paisano
Companies that are to be transferred to Easyriders, provided that the stock of
the Paisano Companies to be transferred was a capital asset on the date of the
exchange. The El Paso Owners should have a holding period in the Easyriders
Common Stock received in the exchange for their respective El Paso interests
which includes the holding period for the El Paso interests transferred, except
that the holding period of the Easyriders Common Stock that was received by the
El Paso Owners in exchange for their interest in assets that are not capital
assets (i.e., essentially ordinary income assets) begins on the day following
the date of the exchange.
TAX CONSEQUENCES TO EASYRIDERS UPON RECEIPT OF THE ASSETS AND ISSUANCE OF
EASYRIDERS COMMON STOCK
Deloitte & Touche has rendered an opinion that no gain or loss should be
recognized to Easyriders upon the receipt of the Assets (including assets
subject to liabilities) and the assumption of liabilities transferred to it by
the Transferor solely in exchange for its stock. Moreover, Easyriders should
recognize no gain or loss on its receipt of the assets of El Paso upon the
dissolution and liquidation of El Paso.
The basis of the stock of the Paisano Companies to be transferred to
Easyriders should be the same as the basis of such property in the hands of Mr.
Teresi immediately before the transfer, increased by the amount of gain
recognized to Mr. Teresi in the exchange. Easyriders' basis in the assets of El
Paso received upon El Paso's dissolution and liquidation should equal the total
basis of the El Paso Owner's interests in El Paso. The basis of the Martin Notes
to be transferred to Easyriders should be the same as the basis of such property
in the hands of Mr. Martin immediately before the transfer.
TAX CONSEQUENCES TO EL PASO IN THE REORGANIZATION
Deloitte & Touche has rendered an opinion that El Paso should terminate
(for tax purposes) upon the transfer to Easyriders of the El Paso Owner's
interests in El Paso.
OTHER TAX CONSEQUENCES NOT INCLUDED IN DELOITTE & TOUCHE'S OPINION
Section 382 of the Code and certain provisions of the regulations governing
consolidated corporate groups will, as a result of the Merger, limit the use of
net operating loss carryovers of Newriders to offset income of Easyriders.
Management is of the belief, however, that these limitations will not have a
materially adverse impact on ultimate utilization of such net operating losses.
Under Section 3406 of the Code, stockholders may be subject to "backup
withholding," at the rate of 31%, on "reportable payments" (including dividends)
to be received by them if they fail to furnish their correct taxpayer
identification numbers or for certain other reasons. Easyriders will report to
those persons and to the IRS for each calendar year the amount of any reportable
payments during the year and the amount of tax withheld, if any, with respect to
those reportable payments. The amount of any backup withholding from a payment
to a stockholder will be allowed as a credit against such stockholder's federal
income tax liability and may entitle such stockholder to a refund, provided that
the required information is furnished to the IRS.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS INTENDED TO
BE A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX CONSIDERA-
60
<PAGE> 76
TIONS OF THE REORGANIZATION. IT IS NOT INTENDED AS AN ALTERNATIVE FOR INDIVIDUAL
TAX PLANNING. EACH HOLDER OF NEWRIDERS COMMON STOCK, SHOULD CONSULT HIS OR HER
OWN TAX ADVISOR CONCERNING THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES
OF THE TRANSACTION TO SUCH HOLDER.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders who oppose the proposed Merger will have the right to receive
payment for the value of their shares as set forth in Sections 92A.300 through
92A.500, inclusive, of the Nevada Statutes attached as Addendum E. Such
dissenter's rights will be available only to stockholders of Newriders who (i)
before the vote to authorize the Merger, notify Newriders in writing of their
intention to demand payment for their shares of Newriders Common Stock, and (ii)
refrain from voting in favor of the Merger. Voting against the Merger will not
constitute notifying Newriders of the intention to demand payment if the Merger
is effectuated.
A Newriders stockholder of record may assert dissenter's rights as to fewer
than all of the shares that the stockholder owns of record only if such
stockholder dissents with respect to all shares of Newriders Common Stock
beneficially owned by such person and notifies Newriders in writing of the name
and address of each person on whose behalf such stockholder asserts dissenter's
rights. A Newriders stockholder exercising dissenter's rights with respect to
shares that the stockholder owns beneficially may not exercise dissenter's
rights for fewer than all the shares of which he is the beneficial stockholder
or over which he has the power to direct the vote.
Since the vote to authorize the Merger will take place at the Meeting,
Newriders will be required to notify by mail those Newriders stockholders who,
by virtue of a timely notice of their intention to demand payment and having
refrained from voting in favor of the Merger, are entitled to payment for their
shares ("Dissenters' Notices"). Dissenters' Notices must be sent no later than
10 days after consummation of the Merger. The Dissenters' Notices must (i) state
where demand for payment must be sent, (ii) state where and when certificates
must be deposited, (iii) state the restrictions on transfer of shares that are
not evidenced by a certificate once demand has been made, (iv) supply a form on
which to demand payment, (v) set a date by which demand must be received, and
(vi) include a copy of the relevant portions of the Nevada Statutes.
Unless a Newriders stockholder acquired his or her shares on or after the
date Newriders sends the Dissenters' Notices, Newriders must calculate the fair
value of the shares plus interest, and within 30 days of the date Newriders
receives the demand, pay this amount to any Newriders stockholder that properly
exercised dissenters' rights and deposited certificates with Newriders. If
Newriders does not pay within 30 days, a Newriders stockholder may enforce in
court Newriders' obligation to pay. The payment must be accompanied by (i)
Newriders' balance sheet as of the end of its fiscal year, statement of income
for such fiscal year, statement of changes in the stockholders' equity for such
fiscal year, and latest interim balance sheet, (ii) a statement of Newriders'
estimate of the fair value of the shares, (iii) an explanation of how the
interest was calculated, (iv) a statement of dissenters' rights to demand
payment, and (v) a copy of the relevant portions of the Nevada Statutes.
Within 30 days of when Newriders pays or offers to pay a dissenting
stockholder for his or her shares, the stockholder has the right to challenge
Newriders' calculation of the fair value of the shares and interest due, and
must notify Newriders by demand in writing of the amount that he or she believes
to represent the true fair market value of and interest due on the shares. If
Newriders and the stockholder are not able to settle on an amount, Newriders
shall petition a court within 60 days of receiving the demand from the
dissenting stockholder. If Newriders does not either settle with the stockholder
or petition a court for a determination within the 60 days, Newriders is
obligated to pay the stockholder the amount demanded less any amount paid to the
dissenting stockholder plus interest. All dissenters are entitled to judgment
for the amount by which the fair value of their shares is found to exceed the
amount previously remitted, with interest.
If stockholders representing more than 5% of the outstanding shares of
Newriders Common Stock deliver Dissenters' Notices, the Senior Lender may
determine not to consummate the transactions contemplated by the Senior Credit
Agreement. It is a condition to consummation of the Reorganization that
stockholders
61
<PAGE> 77
representing no more than 3% of the outstanding Newriders Common Stock exercise
their rights to dissent in respect of the Reorganization. See "The
Reorganization -- Conditions to the Reorganization."
ANY STOCKHOLDER CONTEMPLATING THE EXERCISE OF DISSENTERS' RIGHTS WITH
RESPECT TO HIS OR HER SHARES IS URGED TO REVIEW CAREFULLY THE PROVISIONS OF
ADDENDUM E INASMUCH AS DISSENTERS' RIGHTS MAY BE LOST IF THE REQUIREMENTS OF THE
NEVADA STATUTES ARE NOT FULLY AND PRECISELY SATISFIED.
CHANGES AFFECTING STOCKHOLDERS
Differences between Nevada and Delaware law will result in certain changes
affecting Stockholders. For a discussion of certain significant differences
between Nevada and Delaware law, see "Comparison of Stockholders Rights."
The Easyriders Certificate of Incorporation is substantially similar to the
Articles of Incorporation of Newriders in all material respects, except that the
Easyriders Certificate of Incorporation will authorize shares of preferred
stock. A copy of the Easyriders Certificate of Incorporation is included as
Addendum I hereto.
The Bylaws of Easyriders are substantially similar to the Bylaws of
Newriders in all material respects, except that they provide certain changes
necessary to conform to Delaware Law. See "Comparative Rights of Stockholders."
A copy of the Easyriders Bylaws is included as Addendum J hereto.
FEES AND EXPENSES
The legal expenses of Newriders, El Paso, Mr. Martin and Mr. and Mrs.
Prather incurred in connection with the Reorganization will be borne by
Newriders. The legal expenses of the Paisano Companies and Mr. Teresi incurred
in connection with the Reorganization will be borne by Mr. Teresi. All other
expenses of the Reorganization will be borne by Newriders, including the
expenses of soliciting stockholder approval, SEC registration fees, exchange
listing fees, and other legal, accounting and printing fees. The legal expenses
of the Senior Lender associated with the Senior Credit Agreement will be borne
by Newriders. The solicitation of stockholders is being made by mail. However,
additional solicitations may be made by fax, telephone or in person by officers
and regular employees or consultants of Newriders.
The total cash expenditures to be incurred by Newriders in connection with
the Reorganization are estimated to be approximately $3,500,000.
RESALES OF EASYRIDERS COMMON STOCK
The shares of Easyriders Common Stock to be issued to Newriders'
stockholders in connection with the Merger will be registered with the
Securities and Exchange Commission under the provisions of the Securities Act.
Based on a claim to the provisions of applicable exemptions under state laws, no
registration or qualification of such shares will be pursued in any state in
which any Newriders stockholder currently resides.
Resales of the Easyriders Common Stock received in connection with the
Merger will need to be made in compliance with applicable state securities laws
and regulations, and this compliance will be the responsibility of the selling
or transferring stockholder.
Easyriders shares registered under Easyriders' Form S-4 Registration
Statement and received by persons who are deemed to be "affiliates" of
Easyriders and/or Newriders for purposes of Rule 145 under the Securities Act
may be resold by them only in transactions permitted by such Rule, or as
otherwise permitted under the Securities Act. Rule 145 applies certain of the
requirements and provisions of Rule 144 (applicable to unregistered shares) to
registered shares received by an affiliate of a party to a merger transaction.
Certificates representing registered shares received by such affiliates will
bear legends referring to such restrictions, and such affiliates will be
requested to execute a representation letter acknowledging that they are aware
of such restrictions.
62
<PAGE> 78
INFORMATION ABOUT EASYRIDERS
Easyriders, Inc., a Delaware corporation and newly formed, wholly-owned
subsidiary of Newriders, was incorporated in the State of Delaware on May 13,
1998. Assuming the consummation of the Reorganization, Easyriders will be the
parent company of Newriders, the Paisano Companies and El Paso. Easyriders will
derive all of its revenues from the operations of Newriders, the Paisano
Companies and El Paso. Easyriders has not commenced operations and has no assets
or liabilities. Easyriders is a party to the Paisano Agreement and the El Paso
Agreement, and will become a party to other agreements in connection with the
consummation of the Reorganization, but otherwise has no contingent liabilities
or commitments.
INFORMATION ABOUT NEWRIDERS
DESCRIPTION OF BUSINESS -- GENERAL
Newriders, Inc., a Nevada corporation, and Newriders Limited, a California
corporation, entered into a Plan of Reorganization on June 28, 1996, whereby
Newriders, Inc. acquired 100% of the outstanding common stock of Newriders
Limited in exchange for issuing 13,250,000 shares of the common stock of
Newriders, Inc. to the former Stockholders of Newriders Limited. A total of
11,000,000 of these shares were newly issued and 2,250,000 shares were
concurrently reacquired from an existing Stockholder and reissued as part of the
acquisition. Newriders, Inc. was incorporated in the State of Nevada on July 13,
1995, under the name of American Furniture Wholesale, Inc. In connection with
the acquisition of Newriders Limited, American Furniture Wholesale, Inc. amended
its Articles of Incorporation effective July 1, 1996, to change its name to
Newriders, Inc.
Newriders Limited owns an Easyriders Cafe Restaurant, an Easyriders Apparel
and Merchandise Store, and an Easyriders Motorcycle and Accessory Shop in
Fresno, California. Subsequent to December 31, 1997, the Fresno location was
closed for remodeling, which is presently in progress. Reopening of the Fresno
location is presently expected in late 1998 or early 1999. In May 1997,
Newriders opened its second location in Myrtle Beach, South Carolina, which
consists of an approximately 8,900-square-foot cafe and apparel store. Newriders
sold its Myrtle Beach location on July 22, 1998, to a related party. Newriders
has developed and proposes to continue to develop restaurant, apparel and
accessory stores as "Units," which will generally include an Easyriders Cafe
Restaurant and an Easyriders Apparel and Merchandise store, and in some
instances may also include an Easyriders Motorcycle and Accessory Shop.
Newriders is a party to franchise agreements with Easyriders Franchising,
Inc., a California corporation affiliated with Paisano Publications, Inc. and
the publisher of "Easyriders Magazine," to operate "Easyriders" apparel,
motorcycle and accessory shops, restaurants and the right to use the name
"Easyriders" in connection with their operation. (See "Information about
Newriders -- Franchise Agreement -- Easyriders.")
The theme restaurants developed by Newriders, Easyriders Cafe in Fresno,
California and in Myrtle Beach, South Carolina, were designed to provide a
unique dining and entertaining experience that emphasizes the appeal of
Harley-Davidson and other American-made motorcycles, and the
"Freedom-of-the-Road" lifestyle. The integrated retail apparel and merchandise
stores offered a broad selection of premium-quality merchandise displaying
Newriders' logos.
Newriders' Units have offered and propose to offer high-quality, popular
cuisine, excellent service and an atmosphere of excitement created by combining
unique layouts and decor with motorcycle and Easyriders memorabilia, and, in
some Units, live music entertainment. In late 1997, Newriders decided to shift
its menu emphasis from California-American cuisine to Southwestern barbecue
cuisine.
Newriders' objectives are to reopen its Fresno location and open additional
Units. Its primary strategy in pursuing these objectives is to increase the
number and geographic diversity of its Units to generate greater consumer
enthusiasm for its theme concept. Newriders believes that there are significant
opportunities for additional Easyriders Cafe Units, particularly in major
tourist markets, both domestic and international. In addition, Newriders intends
to seek joint ventures and licensing agreements that will capitalize on the
public awareness of its restaurants, apparel and merchandise Units, motorcycle
shops, and the brand name
63
<PAGE> 79
merchandise offered through its Units, including a variety of items under the
Easyriders brand, such as beer, wine and condiments.
RECENT DEVELOPMENTS
The assets comprising Newriders' second Unit, located in Myrtle Beach,
South Carolina, were sold as of July 22, 1998 to a corporation, 50% of whose
outstanding common stock is owned by Leon Hatcher, a director of Newriders and
beneficial owner of more than 5% of the outstanding Newriders Common Stock, and
the other 50% of whose outstanding common stock is owned by a person not
affiliated with Newriders, the Paisano Companies or El Paso. The purchase price
for the assets was $607,420 plus the assumption of certain liabilities. The
purchase price was paid in the form of a $100,000 cash down payment, and a
promissory note for the balance, bearing interest at the rate of 12% per annum,
payable in full on September 5, 1998. The promissory note is secured by a first
priority lien on 300,000 shares of Newriders Common Stock owned by Mr. Hatcher.
The purchaser assumed and agreed to pay all of Newriders' duties, debts,
covenants and obligations under certain equipment leases, the lease for the
premises, and all of Newriders' accrued payroll obligations, accrued employer
tax obligations, accounts payable, debts and other obligations of Newriders with
respect to the Myrtle Beach Unit. However, the purchaser did not assume a
financing obligation secured by some of the equipment included in the sale, and
Newriders is required to use its reasonable best efforts to obtain a release of
such equipment from that obligation and cause the delivery of marketable title
to the equipment to the purchaser.
Mr. Michael T. Purcell resigned as an officer and director of Newriders in
July 1998 for personal reasons not related to the Reorganization.
Mr. Joseph Teresi may advance up to $100,000 to Newriders, without security
or interest, for operating expenses, payable upon receipt by Newriders of
payment of the balance of the sales price from the sale of Newriders' former
Myrtle Beach operations.
Newriders has leased space in Tulsa, Oklahoma, in which the El Paso
Bar-B-Que Restaurant presently operated in Tulsa, Oklahoma, is proposed to be
relocated. The Easyriders Motorcycle and Accessory Shop presently operated in
Tulsa, Oklahoma, by an Easyriders' franchisee, will be relocated into adjacent
space. By the operation of the restaurant and motorcycle shop in close
proximity, Newriders proposes to test its concept of having the two operations
together in the hope of increasing traffic from persons in Newriders' principal
marketing target groups.
NEWRIDERS' RESTAURANT -- MERCHANDISE STORE CONCEPT
The key elements of Newriders' restaurant-merchandise store concept are as
follows:
Broad-based theme. Newriders focuses on a theme that it believes has
developed into universal appeal. The Harley-Davidson motorcycle and biker
lifestyle theme has grown to great acceptance over the last twenty five
years. Bikers are no longer considered the renegade outlaws of the past,
but are more commonly affluent middle and upper-class men and women who
enjoy the freedom and excitement of the sport.
Distinctive design features. Newriders plans to characterize its Units
with a physical design and layout intended to suggest a roadhouse barbecue,
and which includes a smoker which produces an appetizing aroma to attract
attention. It is expected that the Units will also gain attention from the
array of patron motorcycles typically parked outside of the restaurants.
High-profile locations. Newriders intends to select its Unit locations
based on a variety of considerations, including real estate values, traffic
patterns, income and age demographics and tourism.
Extensive retail merchandising. Each Unit will include an integrated
retail store offering premium-quality merchandise displaying Easyriders'
distinctive brands and proprietary and licensed logo designs. Merchandising
provides additional off-site promotion of Easyriders' brands.
64
<PAGE> 80
Quality food. Each Unit serves freshly prepared, high-quality, popular
barbecue cuisine, including a variety of smoked meats such as salmon, pork,
chicken and beef, designed to appeal to a variety of tastes and budgets,
with an emphasis on reasonably priced signature items and items of
particular appeal to the local market.
Quality and excellent service. In order to maintain its unique image,
Newriders has provided and proposes to provide attentive and friendly
service and to invest heavily in the training and supervision of its
service personnel.
The cost of the first Unit in Fresno, California, which included an
Easyriders Cafe Restaurant, an Apparel and Merchandise Store, and a Motorcycle
Shop, prior to extensive remodeling begun in January 1998, was approximately
$1,200,000. The cost of the Myrtle Beach, South Carolina Easyriders Cafe and
Apparel Store was approximately $1,400,000.
LAYOUT AND DESIGN
Newriders anticipates that its Units will generally range in size from
approximately 7,500 to 15,000 square feet and in seating capacity from 140 to
400 persons. Each Easyriders Cafe will feature authentic motorcycle memorabilia,
such as a replica of the motorcycle "Captain America" from the 1969 movie "Easy
Rider," which was displayed in the Fresno, California Unit, and the actual
motorcycle that holds the motorcycle land speed record, which is on display in
the Myrtle Beach, South Carolina Unit. Other props and custom Harley-Davidson
and other American-made motorcycles are displayed in the restaurants and will be
displayed in future restaurants. The Units are intended to also display prints
and original works of art that feature the Easyriders lifestyle. The restaurants
are also proposed to have recorded music and live bands that provide late-night
entertainment, depending upon local ordinances. A dance floor is available for
those that wish to dance in the former Myrtle Beach Unit, and dance floors may
be incorporated into some future Units.
Newriders' former Myrtle Beach Unit was developed at Broadway at the Beach,
adjacent to the main entrance and next to an existing Hard Rock Cafe. The site
consists of 8,900 square feet and an 800 square foot patio, and seating capacity
for 240 persons. It features a clean, modern motif with three full bars, a
display kitchen and an entertainment stage. An air dam allows an entire sliding
glass wall of the restaurant to be opened during business hours to include the
patio within the restaurant. Approximately 250 square feet is dedicated to the
roadwear apparel store.
Newriders originally planned to operate a motorcycle and accessory shop in
Myrtle Beach, South Carolina. A lease for the Myrtle Beach motorcycle shop was
executed by Newriders on June 6, 1997 for a term of twenty years. Rent is
payable at the rate of $2,200.00 per month with cost of living adjustments at
the end of each five-year period. Effective March 1, 1998, the lease was
assigned to Leon Hatcher, a director and principal stockholder of Newriders, who
intends to operate the motorcycle and accessory shop. See "Executive
Compensation-Certain Relationships and Related Party Transactions."
SITE SELECTION
Newriders intends to locate its Units at high-profile sites in highly
populated markets and key urban centers. Newriders will evaluate markets already
established by other theme restaurants such as the "Hard Rock Cafe" and "Planet
Hollywood," for example. By locating Units in high-profile, heavy-traffic areas,
Newriders hopes to be able to attract both destination customers, as well as
passers-by who would be drawn to the Units' unique facades, the display of
patrons' motorcycles typically parked outside and the exciting environment.
Proper site selection is essential to the success of a Unit, and Newriders
devotes significant time and resources to analyzing each prospective location.
In addition to assessing demographic information for each prospective site,
management considers factors such as visibility, traffic patterns,
accessibility, proximity to entertainment centers and theme parks, and other
tourist attractions, the area's restaurant competition, and average income
levels for the area. Once a particular city has been approved for a Unit,
Newriders may search for appropriate sites, either independently or through
regional and national developers.
65
<PAGE> 81
MERCHANDISING
Each Unit's apparel store will offer premium-quality fashion merchandise
such as jackets, T-shirts, sweatshirts, hats, pants, leather jackets, vests,
gloves and other items. Each store will also offer Harley-Davidson and
Easyriders patches, pins, key chains, bandannas, glasses, watches, jewelry, and
a variety of other souvenir and everyday items. Many items not on display at a
store are available from the Easyriders Roadware Apparel Catalog that lists
hundreds of items, which is available to shoppers and diners at their table. The
merchandise can be purchased at the Units or at other Easyriders Apparel
Franchise Units that prominently display the Easyriders' colorful and
distinctive trademark and logo design and typically the name of the city in
which the Unit is located, which enhances the collectible nature of the items.
Each Unit's mix will vary to meet the demand of the particular market in which
the Unit is located. Newriders' merchandise sales provide additional off-site
promotion for Newriders.
MENU
Newriders' Units will offer generous portions of a wide variety of popular
foods with a Southwestern barbecue emphasis, including smoked meats such as
salmon, lamb, pork, chicken and beef, and salads and a variety of appetizers and
desserts. This represents a change in emphasis effective in late 1997 from the
California-American cuisine previously offered by Newriders' Units. Menu items
are chosen on the basis of sales popularity, ease of preparation and
profitability. Newriders emphasizes high-quality food prepared fresh daily
according to recipes created by Newriders. Menu items will generally be the same
at all Units, with certain specialties in each market to accommodate local
preferences. Prices typically range from $1.75 to $6.95 for appetizers, $2.95 to
$7.50 for salads, $5.75 to $21.95 for entrees and $2.50 to $4.75 for desserts. A
full bar service makes available specialty alcoholic and nonalcoholic drinks and
a variety of wines. Newriders is also marketing its own private-label beer, wine
and certain condiments. Newriders expects that alcoholic beverage sales will
generally represent approximately 30% of a Unit's total food and beverage sales,
depending on the market.
SERVICE
Newriders emphasizes excellent customer service in order to make each
patron's visit an enjoyable and memorable experience. Newriders is committed to
providing its customers with prompt, friendly, attentive service. Accordingly,
it attempts to maintain a high ratio of service personnel to customers, and
staffs each Unit with an experienced management team to ensure that its high
service standards are maintained. New employees are trained by experienced
employees who are familiar with Newriders' policies, and newly promoted or
recently hired managers are required to complete a training program prior to
commencing their duties.
UNIT LOCATIONS AND EXPANSION
As of December 31, 1997, Newriders operated two Units located in Fresno,
California and Myrtle Beach, South Carolina, respectively. The Fresno,
California Unit opened on May 1, 1996, and consists of an Easyriders Cafe
Restaurant, Easyriders Roadware Apparel Store, and an Easyriders Motorcycle and
Accessory Shop. Newriders opened its second Easyriders Cafe Unit at "Broadway at
the Beach" in Myrtle Beach, South Carolina, in May 1997. This Unit has since
been sold to a related party. The Fresno, California Unit was closed in January
1998 for remodeling, and is expected to reopen in late 1998 or early 1999.
Newriders has no plans to open additional Units in 1998. Newriders plans on
opening as many as three Units in 1999. Future cities being considered for new
Units include: Orange County, California; Los Angeles, California; Orlando,
Florida; and Las Vegas, Nevada.
There can be no assurance that Newriders will meet its plans to open three
Units in 1999. Newriders's growth will depend on such factors as its
profitability and its ability to raise additional capital and/or borrow
additional funds.
66
<PAGE> 82
Newriders anticipates that all Company-owned Units will be located on
leased sites. The Fresno Unit is leased for five years with renewal options. The
Myrtle Beach Unit is leased for ten years, also with renewal options.
Management generally will seek to operate future sites as Company-owned
Units as well as joint venture arrangements. Newriders also expects to pursue
franchise and joint venture arrangements in international markets where the
local region presents certain political or economic risks, where an association
with local owners would be advantageous due to their market expertise or
connections with the local business and industry, or where required by local
laws.
ADVERTISING AND PROMOTION
Newriders believes it will attract new customers through word-of-mouth; the
visibility of its branded merchandise, radio and print advertising; extensive
coverage in "Easyriders" magazine; billboards; and the broad-based media
coverage typically associated with grand openings of new Units. In connection
with Unit openings, local public relations firms will be retained to generate
local interest, and industry magazines and television shows will be alerted to
the upcoming potential "photo opportunities" with any celebrities who may be
expected to attend. Newriders also hosts and will continue to host fund-raising
events for local charities at its Units.
FRANCHISE AGREEMENT -- EASYRIDERS
Newriders and Easyriders Franchising are parties to a franchising
agreement. Pursuant to which Newriders was granted the exclusive territorial
areas of Fresno, California and Myrtle Beach, South Carolina in which to operate
an Easyriders apparel and motorcycle accessories and restaurant business. Upon
consummation of the Reorganization, this franchising arrangement will no longer
be necessary.
UNIT OPERATIONS AND MANAGEMENT
Newriders will strive to maintain quality and consistency in its Units
through careful training and supervision of personnel and the establishment of
standards relating to food and beverage preparation, maintenance of facilities
and conduct of personnel. The onsite management for all Company-owned Units is
intended to consist of a general manager, kitchen manager, merchandise manager,
and several floor managers, who collectively are responsible for every aspect of
the Unit's operation. Units that maintain a motorcycle shop will also have a
shop manager.
In an effort to ensure that its employees properly implement Newriders'
commitment to consistent high-quality, popular food and friendly and attentive
service, Newriders has developed manuals regarding its policies and procedures
for all aspects of Unit operations, including food handling and preparation and
dining room and beverage service operations. New employees are to be trained by
experienced employees who have demonstrated their familiarity with the ability
to consistently implement Company policies. Newriders requires continual
evaluation and testing of employees on job-related skills in order to provide
the highest quality of customer service. In addition, hourly employees who
demonstrate a positive business attitude along with leadership skills are
encouraged to proceed into management training.
PURCHASING AND DISTRIBUTION
Newriders' management negotiates directly with suppliers of food and
beverage products to try to achieve uniform quality and freshness of food
products in its Units and to obtain competitive prices. New Units will purchase
a majority of its needs from a list of pre-approved local producers and
wholesalers. Management believes that its food and beverage products are
available from alternate sources and suppliers.
Newriders' merchandise is procured from a variety of sources; however, a
majority of the items are provided from the "Easyriders Roadware Catalog" and
are subject to the Franchise Agreement. The items are chosen on the basis of
cost and reliability of both domestic and foreign suppliers.
67
<PAGE> 83
Currently, merchandise is shipped directly to the Units in Myrtle Beach,
South Carolina and Fresno, California, where ample space is available for
storage.
COMPETITION
The restaurant and retail merchandising industries are affected by changes
in consumer tastes and by international, national, regional and local economic
conditions and demographic trends. Changes in discretionary spending priorities;
traffic patterns; tourist travel; weather conditions; employee availability; and
the type, number and location of competing restaurants also directly affect the
performance of an individual Unit. Changes in any of these factors in the
markets where Newriders currently operates and will operate Units could
adversely affect Newriders' results of operations. Moreover, the theme
restaurant industry is relatively young, is particularly dependent on tourism
and has seen the emergence of a number of new competitors. Established
competitors include the "Hard Rock Cafe," "Planet Hollywood," "NASCAR Cafe",
"All Star Cafe", and "Harley-Davidson Cafe."
The restaurant and retail merchandising industries are highly competitive
based on the type, quality and selection of the food or merchandise offered,
price, service, location and other factors. Newriders believes its existing
Units and future Units will be distinguished from those of its competitors by
their exciting and high-energy environments, extensive displays of unique
memorabilia, high-quality popular barbecue cuisine and excellent service.
Nevertheless, many well-established restaurant companies with greater financial,
marketing and other resources than Newriders compete with Newriders. It is
anticipated they will compete with Newriders in most markets in which Newriders
proposes to operate.
EMPLOYEES
As of August 15, 1998, Newriders employed 8 full-time employees, 7 of whom
were corporate management and 1 of which was a restaurant and merchandise
operations manager. Newriders' employees are not covered by a collective
bargaining agreement, and Newriders has never experienced an organized work
stoppage, strike or labor dispute. Newriders considers relations with its
employees to be excellent.
GOVERNMENTAL REGULATION
Alcoholic Beverage Regulation
Newriders' existing Units and future Units and Easyriders of Columbus' cafe
are subject to licensing and regulation by a number of governmental authorities.
Newriders is required to operate its Units in strict compliance with federal
licensing requirements imposed by the Bureau of Alcohol, Tobacco and Firearms of
the United States Department of Treasury, as well as the licensing requirements
of the states and municipalities where its Units are located. Alcoholic beverage
control regulations will require each of Newriders' Units to apply to a state
authority and, in certain locations, county and municipal authorities for a
license and permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the current Units and future Units, including minimum
age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic
beverages. Newriders has obtained all regulatory permits and licenses necessary
to operate its two Units that are currently open, and intends to do the same for
all future Units. Failure on the part of Newriders to comply with federal,
state, or local regulations could cause Newriders' licenses to be revoked and
force it to terminate the sale of alcoholic beverages at the Units affected. To
reduce this risk, Newriders plans that each Company Unit will be operated in
accordance with procedures intended to ensure compliance with applicable laws
and regulations. The failure to receive or retain, or any delay in obtaining, a
liquor license in a particular location could adversely affect Newriders'
ability to obtain such a license elsewhere.
Newriders may be subject to "dram-shop" laws that exist in many states.
These laws generally provide a person injured by an intoxicated person with the
right to recover damages from an establishment that wrongfully served alcoholic
beverages to such person. While Newriders carries liquor liability coverage as
part
68
<PAGE> 84
of its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all. The imposition of a judgment
substantially in excess of Newriders' insurance coverage, or the failure or
inability of Newriders to obtain and maintain insurance coverage, could
materially and adversely affect Newriders.
Other Regulations
Newriders' current Units and future Units will be subject to regulation by
federal and foreign agencies and to licensing and regulation by foreign, state
and local health, sanitation, building, zoning, safety, fire and other
departments relating to the development and operation of restaurants and retail
establishments. These regulations include matters relating to environmental,
building construction, zoning requirements and the preparation and sale of food
and beverages. Various federal, foreign and state labor laws govern Newriders'
relationship with its employees, including minimum wage requirements, overtime,
working conditions and citizenship requirements. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities could have an adverse effect
on Newriders. Delays or failure in obtaining the required construction and
operating licenses, permits or approvals could delay or prevent the opening of
new Units.
The Federal Americans With Disabilities Act ("ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. Newriders' current Units are designed to be accessible to the
disabled. Newriders intends to continue to comply in future Units with the ADA
and future regulations relating to accommodating the needs of the disabled, and
Newriders does not anticipate that such compliance will have a material effect
on its operations.
Future Units which may be established in countries other than the United
States will be subject to governmental regulations in the jurisdictions in which
they are established, principally in respect to sales of liquor, construction of
premises and working conditions of employees. Newriders does not believe that
such regulations will materially adversely affect its business.
TRADEMARKS
Newriders, at this time, does not have a registered trademark with the
United States Patent and Trademark Office. Newriders regards its name,
"Newriders," and logo as having significant value and as being an important
factor in the marketing of Newriders' products, and has applied for a trademark
registration under its design logo. The "Easyriders" trademark is registered
with the United States Patent and Trademark Office and is the property of
Paisano Publications, Inc. Newriders has the right to use the "Easyriders"
trademark pursuant to the Franchise Agreements.
INSURANCE
Newriders maintains general liability and property insurance. The costs of
insurance coverage vary generally and the availability of certain coverage has
fluctuated in recent years. While Newriders believes that its present insurance
coverage is adequate for its current operations, there can be no assurance that
the coverage is sufficient for all future claims or will continue to be
available in adequate amounts or at reasonable rates.
DESCRIPTION OF PROPERTY
Newriders presently occupies two retail properties in Fresno, California,
one retail property in Myrtle Beach, South Carolina and corporate office space
at one location in Newport Beach, California, described as follows:
1. Fresno Retail Sites: Newriders leases two retail locations in Fresno,
California. They are housed in two buildings, separated by a common parking lot.
Both are located within one-half block from the
69
<PAGE> 85
intersection of the two main thoroughfares in the City of Fresno and are passed
by approximately 60,000 vehicles per day on average. The Cafe and Roadware
Apparel store have been closed for remodeling since January 1998, and are
expected to reopen in Fall 1998. The remodeled cafe will seat approximately 175
persons.
The Fresno motorcycle and accessory shop is located in a 4,000-square-foot
area adjacent to the Cafe. It features a modern showroom in which up to 15 new,
customized and used motorcycles can be displayed and offered for sale. A full
line of aftermarket motorcycle parts is offered. In addition, a complete
motorcycle customizing and repair shop is included, in which motorcycles can be
repaired, customized or built from the frame up. The Fresno motorcycle and
accessory shop has also been closed since January 1998 while the cafe is being
remodeled.
Fresno Leases: The Fresno cafe and apparel store lease became effective on
August 1, 1995. It is a triple net lease with the following rent structure:
<TABLE>
<S> <C>
Commencement to 5/31/00........................... $ 84,000 annually
6/1/00 to 5/31/05................................. 102,000 annually
6/1/05 to 5/31/10................................. 117,120 annually
6/1/10 to 5/31/15................................. 133,740 annually
</TABLE>
Newriders also pays annual property taxes of approximately $8,000 pursuant
to the lease.
The motorcycle and accessory shop space begins at $48,000 annually with
incremental increases on a percentage basis reflecting the rent increases in the
cafe lease.
3. Corporate Offices: Newriders utilizes corporate office space located in
Newport Beach, California. Newriders pays an office services fee of $7,000 per
month to John E. Martin, Newriders' Chairman of the Board of Directors, which
includes use of certain equipment and support services.
70
<PAGE> 86
NEWRIDERS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AS OF DECEMBER 31, 1997 AND JUNE 30, 1998
Newriders has restated its financial statements for the year ended December
31, 1996. References herein to financial information for that period are based
on the financial statements for that period as restated.
RESULTS OF OPERATIONS
THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1996.
Newriders' sales for the year ended December 31, 1997 were $2,932,708 in
contrast to sales of $1,161,520 for the year ended December 31, 1996. Newriders'
sales were not reflective of any direct marketing or advertising conducted by
Newriders. Newriders' gross margin for the year ended December 31, 1997 was
$1,262,562, or approximately 43% of sales. Newriders' gross margin for the year
ended December 31, 1996 was $629,033, or approximately 54% of sales. Newriders
attributes the smaller percentage gross margin in 1997 to price discounts and
giveaways associated with the opening of its Myrtle Beach location.
Total cost of sales for the year ended December 31, 1997 was $1,670,146 or
56.9% of Sales. Total cost of sales for the year December 31, 1996 was $532,487
or approximately 45.8% of Sales. Restaurant and store operating expenses were
$2,661,424 in the year ended December 31, 1997, and approximately $1,013,888 in
the year ended December 31, 1996. Selling, general and administrative expenses
were $1,067,464 in the year ended December 31, 1997, and approximately $507,383
in the year ended December 31, 1996. The increases in sales and expenses are
primarily attributable to the addition of the former Myrtle Beach Unit from May,
1997. Selling, general and administrative expenses increased due primarily to
the expansion of corporate staff and increased activities in furtherance of
contemplated corporate expansion. Newriders to date has spent only limited funds
on advertising or marketing of its restaurants and motorcycle shop. Newriders
anticipates budgeting approximately $60,000 annually for advertising of any Unit
it operates.
Of 1997 sales, $1,398,823 represent sales for the former Myrtle Beach Unit,
while $1,533,885 represent sales from the Fresno Unit. Myrtle Beach costs of
sales for 1997 were $530,646, while Fresno costs of sales were $1,139,500.
Restaurant and store operating expenses in 1997 were $1,216,403 for the former
Myrtle Beach Unit and $1,445,021 for the Fresno Unit. While the Fresno Unit
remains closed, it will, of course, generate no revenues. But while operating
expenses will be reduced during closure, some operating expenses will continue
to accrue, and capital expenditures for remodeling will be incurred. Fresno Unit
revenues will likely be much lower for 1998 than 1997 while operating expenses
for Fresno are also expected to be lower for 1998 than for 1997. However, the
decrease in operating expenses will not likely be in proportion to the decrease
in revenue.
Newriders incurred compensation expense of $1,244,000 from stock and option
issuances in 1997, and wrote off leasehold improvements of $628,129 in 1997 as a
result of Newriders' decision to substantially rebuild its restaurant in Fresno,
California in December 1997. Net loss for the year ended December 31, 1997 was
$4,776,874 or $0.29 per share in contrast to a net loss of $1,036,240 or $0.07
per share for the year ended December 31, 1996. Newriders attributes its losses
largely to development of its restaurant, apparel and motorcycle shop concept
and the initial implementation of this concept, and corporate staff increases
incurred to facilitate Newriders' planned acquisitions and expansion.
The level of public acceptance for Newriders' restaurant, apparel and
motorcycle shops remains undetermined, and Newriders anticipates making further
adjustments in its menu, designs, products and marketing approach from time to
time to better achieve public acceptance, to hopefully improve revenues, and
adjust to changing market conditions. Such adjustments may result in higher
expense levels than would otherwise be incurred by a more established
enterprise.
Newriders' business is somewhat seasonal, given its marketing to the
motorcycle riding public, although this may vary from location to location. The
Fresno Unit did not appear to be affected significantly by seasonal business
fluctuations, while the former Myrtle Beach Unit did appear to be subject to
some seasonal business
71
<PAGE> 87
fluctuation. Other Units which may be developed in the future may be affected by
seasonal fluctuations, and it is anticipated that this factor will be considered
in selecting sites for additional Units.
Newriders believes that the timing of its opening of the former Myrtle
Beach Unit in May 1997, was particularly beneficial to Newriders' initial
success of that location. Not only is May the traditional beginning of the
summer tourist season, it is the month in which Myrtle Beach hosts the longest
running continuous annual motorcycle rally in the United States. An estimated
50,000 motorcycle riders converge on the community over a one-week period.
Newriders' theme and products are precisely targeted to this lucrative customer
base.
While the Spring through Fall tourist seasons in Myrtle Beach receive the
most traffic, the Winter, featuring a temperate climate, also lends itself to
the conditions conducive to enjoyment of motorcycle touring. Newriders has also
begun an extensive campaign to position itself as a popular place for "locals".
Further, Newriders has embarked upon a promotional campaign to attract many of
the thousands of golfers who descend upon Myrtle Beach's more than 100 golf
courses during the winter season.
THE SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH THE SIX MONTHS ENDED JUNE
30, 1997.
During the six months ended June 30, 1998, Newriders experienced a net loss
in the amount of $5,197,174, in contrast to the net loss of $760,302 for the six
months ended June 30, 1997. Net loss per share was ($0.30) for the six months
ended June 30, 1998.
Newriders attributes the increased losses for the six month period ended
June 30, 1998 primarily to an increase in expenses, although Newriders also
reported a decrease in sales for the six month period ended June 30, 1998. The
components of the increase in expenses of $3,507,769 for the six month period
ended June 30, 1998, as compared to the six month period ended June 30, 1997,
were increases of $127,179 in restaurant and store operating expenses, $857,737
in selling, general and administrative expenses, $1,888,867 in stock issuance
expense and a $631,986 loss on sale of restaurant and apparel store to a related
party.
Increased restaurant and store operating expenses for the six month period
ended June 30, 1998 are the result of the operation of the Myrtle Beach location
in the period, and the continuing fixed costs associated with the Fresno
location. Fixed costs for the Fresno location continued despite the closing of
that location for remodeling. For the six months ended June 30, 1997, restaurant
and store operating expenses related primarily to the Fresno location; the
Myrtle Beach location having opened in May, 1997.
Newriders attributes increased selling, general and administrative expenses
to increased overhead for accounting, legal and professional fees and the
addition of corporate staff related to the Reorganization and the anticipated
administrative needs of Newriders following the Reorganization. General and
administrative expenses should generally be viewed as likely to recur in the
normal course of business, although the amounts of such expenditures will vary.
Stock issuance expense for the six month period ended June 30, 1998 relates
to the issuance of 1,000,000 shares of Newriders' Common Stock to Joseph Teresi.
The stock issuance expense represents the difference between the fair market
value of the shares issued and the forgiveness of $211,133 in accounts payable
by Mr. Teresi.
The loss on sale of restaurant to related party recorded as of June 30,
1998, relates to the sale of Newriders' restaurant and apparel store in Myrtle
Beach, South Carolina to Easyriders of Myrtle Beach, Inc., and represents the
difference between the price at which such assets were sold an the historical
cost basis of Newriders in such assets. Easyriders of Myrtle Beach, Inc. is a
South Carolina corporation, 50% of the outstanding common stock is owned by Leon
Hatcher, a director and beneficial owner of more than 5% of the outstanding
Newriders Common Stock. The purchase price for the assets was $607,420 plus the
assumption of certain liabilities. The consideration was paid in the form of a
$100,000 cash down payment, and a promissory note for the balance, bearing
interest at the rate of twelve percent (12%) per annum, payable in full on
September 5, 1998. The promissory note is secured by a first priority lien on
300,000 shares of Newriders Common Stock owned by Leon Hatcher.
72
<PAGE> 88
Easyriders of Myrtle Beach, Inc. has assumed and agreed to pay all of
Newriders' duties, debts, covenants and obligations under certain equipment
leases, the Myrtle Beach, South Carolina premises lease and all of Newriders'
accrued payroll obligations, accrued employer tax obligations, accounts payable,
debts and other obligations with respect to the Myrtle Beach, South Carolina
restaurant, bar and apparel shop. The buyer's assumption of certain liabilities
does not include a certain financing obligation ("FMAC Obligation") with
Franchise Mortgage Acceptance Corporation ("FMAC") secured by some of the
equipment included in the sale. Newriders is to use its reasonable best efforts
to obtain a release of such equipment from the FMAC Obligation and cause
marketable title to be delivered to the buyer. Until that occurs, Newriders will
remain responsible to pay the remaining payments under the FMAC Obligation.
Total sales for the six months ended June 30, 1998 was $824,155, down
$324,956 (28%) from the $1,149,111 reported for the six months ended June 30,
1997. Total sales for all reported periods were comprised of revenue from sales
of restaurant items, Easyriders apparel and merchandise, and motorcycle
accessories. The decrease in sales reflects the closure of Newriders' Fresno,
California location for remodeling in January 1998, and different levels of
sales at the different locations.
Cost of sales for the six months ended June 30, 1998 was $386,964, or
approximately 47% of total sales. Cost of sales for the six months ended June
30, 1997 was $718,957, or approximately 62% of total sales. Cost of sales
consists primarily of the cost of food, alcoholic and non-alcoholic beverages,
apparel, motorcycle parts and accessories and direct labor costs.
Gross margin for the six months ended June 30, 1998 was $437,191, up $7,037
from the $430,154 reported for the six months ended June 30, 1997. This
represents the net effect of more efficient operations at the Myrtle Beach
location as compared to the Fresno location and continued accrual of fixed costs
associated with the Fresno location while closed for remodeling.
LIQUIDITY AND CAPITAL RESOURCES
The Company's stockholders' equity decreased $1,529,117 in the six months
ended June 30, 1998, from $302,842 as of December 31, 1997 to a deficit of
$1,226,275 as of June 30, 1998. Cash and cash equivalents decreased $904,619 to
$358,014 at June 30, 1998, from $1,262,633 at December 31, 1997 due primarily to
net cash used in operating activities of $2,107,736. Cash used in operating
activities reflects a net loss of $5,197,174, partially offset by non-cash
expenses of $1,888,867 for common stock issued for services, loss on sale of
restaurant of $631,986, $903,755 of non-cash interest expense and $122,988
related to the depreciation and amortization of property and equipment. Cash
flows from changes in operating assets and liabilities reflect a decrease in
inventories of $98,260, an increase in deferred acquisition costs of $553,477,
increased prepaid expenses of $217,921 and increased deposits and other assets
of $2,609. Also, accounts payable increased by $195,305 and deferred rent
increased by $22,284.
These decreases in cash and cash equivalents were partially offset by net
cash provided by financing activities through the issuance of $2,100,000 of debt
partially offset by $752,002 of payments on debt, capital lease obligations and
advances. Newriders additionally utilized $144,881 of cash for capital
requirements for the remodeling of Newriders' Fresno facility and for the
purchase of property and equipment.
Newriders' most significant cash needs in 1998 include working capital to
remodel Newriders' facilities in Fresno, California, to investigate and
negotiate terms and conditions for additional sites for restaurants (if the
Reorganization does not occur) and to complete the Reorganization. Newriders'
present cash resources are not adequate to sustain operations through 1998
unless the Reorganization is completed. If the Reorganization is completed,
Newriders should have adequate cash resources to sustain operations for the
foreseeable future. If the Reorganization is not completed during 1998,
Newriders will be required to raise additional capital through borrowing or
additional sale of equity. Even assuming the reopening of the Fresno location,
revenues would likely not be adequate to support the present headquarters
executive staff, and Newriders would be required to substantially reduce its
corporate overhead.
The Reorganization as presently contemplated would have numerous
significant impacts on the liquidity of Newriders. The significant contribution
to the cash of Newriders represented by the Reorganization will be
73
<PAGE> 89
offset to some extent by Newriders' need to make payments as required to service
the indebtedness incurred to effect the Reorganization. The net effect of the
Reorganization on the liquidity of Newriders is expected to be positive, but
will depend upon the terms of the financing which Newriders obtains and the
future operating results of the Paisano Companies and El Paso.
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 Newriders' 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, Newriders 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 significant operational
problems for its computer systems. As a result, all costs associated with this
conversion will be expensed as incurred. Newriders will also initiate
communications with all of its significant suppliers to determine the extent to
which Newriders' 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 Newriders' systems rely will be timely
converted and would not have an adverse affect on Newriders' systems.
Newriders will utilize both internal and external resources to reprogram,
or replace, and test software for Year 2000 modifications. Newriders 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 Newriders' Year 2000 remediation efforts is not
expected to have material effect on Newriders' results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, which is effective for annual and interim periods
beginning after December 15, 1997. This statement requires that all items that
are required to be recognized under accounting standards as comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements.
74
<PAGE> 90
PAISANO PUBLICATIONS AND AFFILIATES
SELECTED HISTORICAL FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
The following selected historical financial information of the Paisano
Companies has been derived from the companies' respective historical combined
financial statements, and should be read in conjunction with such combined
financial statements and the notes thereto, which are included in this Proxy
Statement/ Prospectus.
The selected historical financial information of the Paisano Companies as
of and for the years ended December 31, 1996 and 1997 has been derived from the
combined financial statements audited by Deloitte & Touche LLP, independent
accountants, included elsewhere in this Proxy Statement/Prospectus. The selected
historical financial information of the Paisano Companies as of and for the
years ended December 31, 1993, 1994, and 1995 and the related interim periods
has been derived from the unaudited combined financial statements.
In the opinion of the Paisano Companies' management, the unaudited combined
financial statements include all adjustments, consisting only of normal
recurring accruals, that management of the Paisano Companies considered
necessary for a fair presentation of the results of operations and financial
position for each of the periods presented. Operating results for the Paisano
Companies for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
The financial statement data set forth should be read in conjunction with,
and are qualified in its entirety by reference to, the financial statements and
notes related thereto included elsewhere in this Proxy Statement/ Prospectus.
See "Paisano Companies' Management's Discussion and Analysis of Results of
Operations and Financial Condition as of December 31, 1997 and June 30, 1998."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------------ -------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statement of
Operations Data:
Revenues................. $ 31,467,708 $ 33,516,355 $ 34,641,942 $ 34,029,907 $ 33,748,729 $16,776,089 $16,698,144
Operating Expenses....... (29,100,513) (32,194,587) (34,493,983) (34,453,225) (31,025,456) (15,017,204) (15,844,453)
Operating Loss from
Franchise Operations... (6,602) (483,820) (435,791) (235,732) (96,032) (33,493) (234,530)
------------ ------------ ------------ ------------ ------------ ----------- -----------
Income (Loss) from
Operations............. 2,360,593 837,948 (287,832) (659,050) 2,627,241 1,725,392 619,161
Other Income (Expense),
Net.................... 67,508 88,419 296,207 (243,388) 65,551 121,254 (90,528)
------------ ------------ ------------ ------------ ------------ ----------- -----------
Income (Loss) Before
Provision for Income
Taxes.................. 2,428,101 926,367 8,375 (902,438) 2,692,792 1,846,646 528,633
Provision for Income
Taxes.................. 27,261 29,200 21,697 5,144 53,709 38,350 23,362
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net Income (Loss)........ $ 2,400,840 $ 897,167 $ (13,322) $ (907,582) $ 2,639,083 $ 1,808,296 $ 505,271
============ ============ ============ ============ ============ =========== ===========
Combined Balance Sheet
Data:
Total Assets............. $ 15,551,375 $ 11,532,998 $ 12,554,021 $ 11,497,250 $ 12,885,891 $13,649,201 $13,724,388
============ ============ ============ ============ ============ =========== ===========
Note Payable to
Stockholder............ $ 2,000,000 $ 2,194,105 $ 2,350,958 $ 2,921,587 $ 2,921,587 $ 2,921,587 $ 2,921,587
============ ============ ============ ============ ============ =========== ===========
Dividends................ $ 3,653,900 $ -- $ -- $ -- $ 1,500,000 $ -- $ 125,854
============ ============ ============ ============ ============ =========== ===========
</TABLE>
75
<PAGE> 91
INFORMATION ABOUT THE PAISANO COMPANIES
GENERAL DESCRIPTION OF THE PAISANO COMPANIES
Paisano Publications is a California corporation which was organized on
November 17, 1970. It presently has approximately 107 employees, and is engaged
in the business of publishing magazines for the motorcycle and tattoo markets.
Easyriders of Columbus is an Ohio corporation which was organized on
January 3, 1994. It presently has approximately 12 employees and it owns and
operates a flagship store which sells Easyriders apparel and offers motorcycle
customization, custom and pre-owned motorcycle sales, motorcycle parts and
accessory sales, motorcycle servicing, a cafe, custom leather and embroidery and
a tatoo studio.
Easyriders Franchising is a California corporation organized on June 23,
1993. It presently has 10 employees, and is engaged in the business of selling
franchises to third parties to sell Easyriders apparel and motorcycle
accessories.
Teresi, Inc. is a California corporation organized on April 7, 1982. It
presently has 3 employees, and is engaged in the business of organizing
promotional events.
Bros Club is a California corporation organization February 17, 1994. It
presently has no separate employees, and relies on services provided by other
Paisano Companies. Bros Club is engaged in the business of soliciting
memberships for an association of motorcycle enthusiasts and provides various
services such as arranging group insurance for members.
Associated Rodeo Riders on Wheels is a California corporation organized on
February 29, 1988. It presently has no employees and no material operations.
PRINT MEDIA PUBLISHING OVERVIEW
Paisano Publications publishes ten special interest magazines which are
sold worldwide, and a trade magazine provided free to motorcycle shops.
Including foreign language editions, there are 26 separate versions of the
eleven magazines. These magazines are targeted at the Harley-Davidson and tattoo
markets, which Paisano Publications is generally regarded as the market leader.
Following are the magazines published by Paisano:
MOTORCYCLE LIFESTYLE MAGAZINES
Easyriders
Easyriders is Paisano Publications' original magazine. It was first
published in 1971, and remains the Paisano Publications' flagship magazine. The
magazine has been closely associated with Harley-Davidson enthusiasts since the
early 1970's and has an extremely strong following in the U.S. and abroad.
"Easyriders" has developed a degree of brand name recognition, and is used by
Paisano Publications on products and for its retail and franchise operations.
Easyriders is focused on what has been referred to as the "Harley-Davidson
lifestyle," featuring motorcycles, people, and events involving Harley-Davidson
motorcycles. In addition, Easyriders has served as a means of promoting other
products and services offered by Paisano Publications. Easyriders is published
monthly in a fixed format, including approximately 152 pages, generally
two-thirds in color and one-third in black-and-white. The magazine is
adult-oriented, including some nudity, and sells at U.S. newsstands for $4.99.
There are six special annual issues of Easyriders, including two product
catalogs, one buyers' guide, and one related to an annual Columbus, Ohio
motorcycle event. These annual issues have additional pages and sell for $5.99.
76
<PAGE> 92
Easyriders V-Twin
Easyriders V-Twin ("V-Twin") is similar in content and format to
Easyriders, but does not include any nudity. V-Twin allows Paisano to broaden
the reach of its flagship magazine into additional newsstands and to a larger
segment of Harley-Davidson enthusiasts to whom the nudity contained in
Easyriders may be objectionable. V-Twin was started in 1989. As with Easyriders,
V-Twin retails for $4.99 and has six special issues with additional pages that
retail for $5.99.
In the Wind
In the Wind is focused on people and events associated with the
Harley-Davidson lifestyle. It was started in 1979. The magazine is designed to
appeal to persons specifically interested in candid photographs and profiles of
people at motorcycle events or "on the road." The magazine contains photographs
(mostly submitted by readers), with little or no copy. In the Wind is published
bimonthly in a fixed format of approximately 128 pages, with generally one-half
color and one-half black-and-white. The magazine retails for $4.99.
Biker
Biker magazine is targeted at the oldest segment of the Harley-Davidson
market. The magazine includes the "most explicit" photography among Paisano's
motorcycle titles, including nudity and adult-oriented text. As with other
titles, the magazine is part of Paisano Publications' strategy of dominating all
segments of its target markets. Biker was acquired in 1986 from McMullen
Publishing. It has been published since 1974. Biker is published twelve times a
year and is a fixed-format publication of 96 pages. The magazine is one-half
color and one-half black-and-white. It retails for $3.99.
VQ
VQ was started in 1994 to serve a more upscale segment of the
Harley-Davidson market. The popularity of Harley-Davidson motorcycles has grown
among higher income individuals and VQ was created to target this market
segment. VQ is focused primarily on "custom" Harley-Davidsons and other hybrid
American-made motorcycles and their designers and builders. VQ is a
high-quality, "coffee table" style magazine which is published bimonthly. The
magazine retails for $5.99.
Quick Throttle
Quick Throttle was introduced in the spring of 1995. It is targeted at
speed and performance enthusiasts within the Harley-Davidson market. Quick
Throttle is a bimonthly publication which retails for $3.99. The magazine is
published in a fixed format of 96 pages and is one-half color and one-half
black-and-white.
Eagle's Eye
Eagle's Eye is a monthly trade publication which is distributed at no
charge to motorcycle and motorcycle accessory shops. The magazine is focused on
merchandising within the Harley-Davidson market including Paisano Publications'
franchised Easyriders stores. Eagle's Eye is designed primarily to promote
Paisano Publications' products to retailers. In addition, the magazine also
includes advertising from other suppliers to the industry.
TATTOO LIFESTYLE MAGAZINES
Tattoo
Tattoo is Paisano Publications' original entry into the tattoo market. It
was purchased from McMullen Publishing in 1986. The magazine is targeted at the
growing number of tattoo enthusiasts and includes profiles of individuals,
information about events, and other related topics. Management believes Tattoo
controls a majority of its market. Tattoo is a monthly publication produced in a
fixed format of 96 pages primarily in
77
<PAGE> 93
color and coated paper, with a limited number of pages on newsprint. The
magazine retails for $3.99 in the U.S. There are six special issues of Tattoo
with additional pages related to tattoo and motorcycle events that are sold
throughout the year. These special issues retail for $4.99.
Tattoo Flash
Tattoo Flash was started in 1993 and also targets the tattoo market. Tattoo
Flash is a gallery of individual examples of tattoo art. The magazine has no
advertising content. Tattoo Flash is an all-color, heavier paper, bimonthly
publication. It retails for $4.99 in the U.S.
Tattoo Savage
Tattoo Savage is the third Paisano Publications title targeted at the
tattoo market. The magazine was started in 1994. Tattoo Savage features more
"extreme" uses of tattoos. Along with its tattoo focus, Tattoo Savage includes
body piercing content and photography. Like tattooing, body piercing has
experienced strong growth in popularity recently. Tattoo Savage, when introduced
to the music store market in 1994 (such as BlockBuster Music, The Wherehouse and
Tower Records, etc.) rose to number two in sales behind Spin Magazine and ahead
of Rolling Stone. Tattoo Savage is published bimonthly in a fixed format of 96
pages and retails in the U.S. for $4.99.
HOT ROD MAGAZINES
American Rodder
American Rodder is the only Paisano Publications title which does not
target the Harley-Davidson or tattoo markets. American Rodder targets hot rod
enthusiasts and focuses on the restoration and customization of "classic" hot
rods. This market has many similarities with the Harley-Davidson "customization"
market. American Rodder was started in 1987. American Rodder is a monthly
publication retailing for $3.99 in the U.S. It is published in a fixed format of
112 pages, with one-half color and one-half black-and-white. There are four
special annual issues of American Rodder with additional pages, including three
related to events and one swimsuit issue. These special issues retail for $4.99.
OTHER MATERIALS
In addition to its magazine publications, Paisano Publications also
periodically publishes calendars, buyer guides and other printed materials.
VIDEO MAGAZINES
Paisano Publications produces video magazine versions of its Easyriders
magazine. The videos are produced as periodicals and are sold like magazines, as
single copies or as subscriptions. Paisano Publications has built a large
library of footage for its videos. The videos are produced in-house in Paisano
Publications' editing studio. Paisano Publications began producing Easyriders
Video Magazine in 1987. The video has a similar format to Easyriders magazine,
focusing on all aspects of the Harley-Davidson lifestyle. The video is produced
quarterly and retails for $24.95. In addition, Paisano Publications has had
success offering several modified versions of its video magazines on
pay-per-view programming. The video magazines contain some adult content and are
not rated.
Paisano Publications markets its video magazines to motorcycle shops and
some video stores through an in-house, direct marketing campaign. Mail order
sales and subscriptions to the video magazines are marketed primarily through
the Company's magazines. Video tapes are shipped by Paisano Publications'
contracted videotape duplicator based on a shipping list provided by Paisano
Publications. Paisano Publications has released 34 video titles to date. Paisano
Publications generated approximately $597,000 from video magazine sales and
subscriptions in 1997.
78
<PAGE> 94
PUBLISHING OPERATIONS OVERVIEW
Paisano Publications publishes its 11 magazine titles with 26 separate
versions including foreign language editions for Germany, France, Italy, Spain
and Japan. All magazines are published in-house. Articles and photography are
typically acquired from a select group of freelance writers and photographers.
Paisano Publications believes that its in-house technical capabilities, emphasis
on production efficiency, and extensive library of source materials has allowed
it to quickly launch new titles in response to market conditions and to dominate
its markets.
Paisano Publications' titles are typically published in a fixed format,
with the number of pages, article layouts, advertising layouts, and color pages
predetermined. Paisano Publications believes this method provides a convenient
format for its readers and also allows for greater efficiency in the production
process. With fixed format publications, individual sections can be worked on
without affecting other sections.
EDITORIAL STAFF
The editorial staff at Paisano Publications consists of 8 editors, 6
associate editors, 3 foreign language coordinators, a managing editor, a copy
editor, and 3 support staff. Most of its titles are staffed with one editor and
one associate editor. The editor for each title decides on the content for each
issue and has responsibility for day-to-day coordination of the magazine
production.
Periodically, each magazine is reviewed for format changes and content
changes. Each editor will work with senior management on deciding any format or
directional changes to the magazine.
As indicated, external advertising sales have not been a major focus for
Paisano Publications. As part of its strategy to provide a variety of products
and services to the market segments served by its magazines, Paisano
Publications has extensively advertised its own products in its publications.
This strategy has been key to the success of some of its non-magazine products
and services. Typically, Paisano Publications will alter its internal
advertising allotment for individual publications according to fluctuations in
external advertising sales.
Paisano Publications has an advertising sales staff of four sales people,
four assistants, and one outside representative. These individuals have
responsibility for new account generation, advertising space sales for each
issue, advertising billing, and advertising customer support.
Paisano Publications has only recently focused on advertising, and
increased advertising revenues from $3.7 million in 1996 to $4.9 million in
1997. Paisano Publications' attractiveness to advertisers is a result of: (i)
its market share in the motorcycle and tattoo markets; (ii) the demographics of
its readers; and (iii) the general motivation that specialty magazines are
believed to possess (i.e. often looking for advertised products meeting their
lifestyle needs). Paisano Publications anticipates advertising revenues
increasing to $8 million in 1998 or 30% of the total revenues generated by its
publications based on a more aggressive approach to exploiting its demographic
and market share strengths. In an effort to expand its new focus on advertising,
Paisano Publications recently hired two individuals with significant contacts
and expertise in advertising.
PRINTING AND PRODUCTION
Magazine and calendar printing and production is handled by RR Donnelly &
Sons Company under contract with Paisano Publications. The agreement provides
for RR Donnelly & Sons Company to provide all printing requirements for a period
of five years from 1996 for designated publications, and to provide printing for
additional publications upon notice, subject to availability of adequate
equipment.
79
<PAGE> 95
DISTRIBUTION AND MARKETING
Paisano Publications' magazine and video products are marketed and
distributed in four major ways:
North American Newsstand Sales
Magazines are distributed to newsstands in the U.S., Canada, and a limited
number of foreign countries under a distribution agreement with Curtis
Circulation Company. Paisano Publications recently extended its contract with
Curtis, through July 1, 2001, and Curtis Circulation Company has the option to
extend the distribution agreement through July 1, 2002 upon payment of a
one-time extension fee to Paisano Publications. The distributor's
responsibilities are primarily marketing related and include:
(i) Marketing magazines to newsstands.
(ii) Maintaining relationships with magazine wholesalers, who deliver
the magazines to the newsstands.
(iii) Monitoring purchasing activity and directing the number of each
issue the wholesaler delivers to each newsstand account.
(iv) Providing shipping labels to the printer for each issue of the
magazines. Magazines are then shipped by the printer to the wholesalers.
(v) Tracking magazine returns which are picked up, counted, and
destroyed by the wholesaler.
Subscription Sales
Subscriptions are handled through a national fulfillment house. Paisano
Publications has a contract with the fulfillment house Publishers Creative
Systems ("PCS") to handle its subscription sales in the U.S. and Canada. There
are no subscription sales to other countries. The fulfillment house maintains
the database of current and past subscribers. For each magazine issue, the
fulfillment house sends a list of current subscribers to the printer. The
printer, in turn, mails the magazines to subscribers.
Subscriptions are marketed primarily through Paisano Publications'
magazines. Each magazine includes information about other Paisano Publications'
magazines. To increase subscribers, Paisano also runs sweepstakes through its
magazines and by direct mail. Paisano Publications has not extensively used
mailing lists to market its magazines to its target market. Management believes
there are significant growth opportunities in subscription sales.
Non-Newsstand Retail Sales
Due to the target markets served by Paisano Publications, its magazines are
often carried at retail locations which do not otherwise carry magazines.
Primarily, these "non-newsstand" accounts are motorcycle and tattoo shops. These
non-newsstand accounts are maintained by Paisano Publications.
Paisano Publications has a direct marketing effort which targets
non-newsstand customers. Paisano Publications maintains a database of accounts
and prospects for non-newsstand retail sales. Paisano Publications provides
mailing labels to the printer for each issue of the magazines, who then, in
turn, ships to the non-newsstand customers. Paisano Publications refers to these
non-newsstand sales as "bulk" magazine sales.
Foreign Newsstand Sales
Paisano Publications uses several distributors to handle the distribution
and marketing of its magazines outside North America. The printer ships the
magazine to foreign break-up points, based on shipping lists provided by Paisano
Publications.
80
<PAGE> 96
APPAREL SALES, FRANCHISING AND STORE OPERATIONS OVERVIEW
Paisano Publications has used its access to the Harley-Davidson and hybrid
American-made motorcycle market by creating and selling apparel and other
products. Originally sold through Paisano Publications' magazines and mail order
catalogs, Paisano Publications has expanded the marketplace for such products to
include three stores, and has recently introduced a franchise program for
motorcycle specialty shops.
Management of Paisano Publications believes that the market for
Harley-Davidson and hybrid American-made motorcycle related products is
under-served. Further, management of Paisano Publications believes that the
demand for Harley-Davidson products reaches beyond individuals who currently own
Harley-Davidsons due to the popularity of the Harley-Davidson image. Paisano
Publications believes that the quality line of products offered by Paisano
Publications coupled with its new franchise program and new Roadware catalog
will allow it to increase its product sales rapidly.
APPAREL AND OTHER PRODUCT SALES
Paisano Publications has been selling apparel and related goods since its
inception. Paisano Publications plans to continue to use its Easyriders brand
name by adding additional products and by selling those products through several
channels including franchise stores. Paisano Publications also plans to
concentrate more on tattoo products, a market that is virtually non-existent
today.
Historically, Paisano Publications has focused on the sale of apparel and
other motorcycle related soft goods. As other members of the Paisano Companies
establish a base of franchised stores, the Paisano Companies plan on offering
motorcycle customization and service. Some of the products currently offered by
Paisano Publications includes clothing, belts, buckles and pins, boots, jewelry,
kids caps, tee shirts, toys, leather apparel, hats, collectibles, bike
accessories and greeting cards.
In addition to the above, the Paisano Companies-owned stores and franchise
stores have added a variety of other products and services. While they differ
somewhat from location-to-location, the products and services offered by the
stores include the products listed above, as well as motorcycle sales, service
and customization, tattooing, and food services.
The Paisano Companies have negotiated discount prices for its franchisees
on motorcycle parts and other products from third party vendors. This allows the
franchise stores to benefit from the purchasing power created by the combined
Easyriders stores. Easyriders Franchising, in return, receives a rebate from
some of the manufacturers on the total products sold to the system.
CUSTOMERS AND MARKETING
Paisano sells its products through several channels:
Mail-Order/Retail Customers: Historically, products have been sold through
advertisements in Paisano Publications' magazines and through annual Easyriders
product catalogs. In 1995, Paisano Publications introduced two separate
newsstand catalogs under the name Roadware in order to increase mail-order sales
of its products and to provide nationwide marketing support for its franchise
stores.
Easyriders Stores: The Paisano Companies sell products to its franchised
stores as well as The Paisano Companies-owned stores. Management believes this
will be a significant growth area for product sales.
Other Customers: The Paisano Companies sell apparel and other products at
wholesale to non-Easyriders stores. These stores include a variety of motorcycle
and accessory shops. Also included are three Easyriders eighteen wheel trucks,
which have been developed by a third party to sell products at events attended
by many of The Paisano Companies' target customers throughout the U.S.
Paisano Publications uses its magazine titles to market for all of the
above distribution channels. Advertisements for the products, the catalogs, and
the Easyriders stores are included throughout the various Paisano Publications'
magazines.
81
<PAGE> 97
OPERATIONS
The Paisano Companies' central operations for the sale and distribution of
products is handled by Paisano Publications in its corporate offices. Paisano
Publications' operations include the following staff and facilities utilized for
product sales:
Product Design and Purchasing Staff. The Paisano Companies have a product
design and purchasing staff which designs custom Easyriders apparel and other
products, works with manufacturers to have products made to specifications, and
negotiates purchasing discounts for The Paisano Companies and Easyriders stores.
In-House Advertising Agency. The Paisano Companies' in-house advertising
agency produces product catalogs and all advertising and brochures for The
Paisano Companies and its products.
Telemarketing/Order Processing Staff. The Paisano Companies have an order
processing staff responsible for receiving orders from mail-order customers,
Easyriders stores, and other wholesale customers.
Warehouse and Distribution Facilities. The Paisano Companies have a
computerized, modern warehouse facility to inventory and ship products to mail
order customers, company-owned stores, franchised stores, and other wholesale
accounts. The facility is integrated with the order processing and accounting
systems. The facility uses automated order picking equipment which has
additional capacity and is easily replicated to accommodate sales growth
resulting from the roll-out of the franchise operations.
EASYRIDERS FRANCHISING OVERVIEW
As a result of opening stores to sell Easyriders apparel and other
products, Paisano Publications received numerous inquiries from individuals who
wanted to use the Easyriders name for motorcycle accessory and apparel stores.
In 1992, Paisano Publications began licensing the name Easyriders and by 1994
had 14 U.S. licensed stores, with a wide range of formats and products.
In 1994, Paisano Publications decided the tremendous potential for the
stores would be best served by a franchise arrangement. Paisano Publications
developed a strategy to convert appropriate licensed stores to franchise stores
and create a program for additional franchise stores. Of the 14 licensed stores,
8 converted to franchised stores and the remainder ceased using the Easyriders
name. Paisano Publications currently has 22 franchised stores (two of which are
owned by Newriders) and agreements have been signed for an additional six stores
which are and expected to open in 1998.
Management believes Easyriders franchising stores will meet an under-served
demand for products and services to the Harley-Davidson and hybrid American-made
motorcycle market. Following are several areas management believes are specific
opportunities:
Apparel. The growth in popularity for Harley-Davidson and hybrid
American-made motorcycles and accessories has occurred in a variety of age and
income groups. Further, the demand for products related to the Harley-Davidson
lifestyle extends beyond Harley-Davidson owners due to the special position
Harley-Davidson possesses within the American culture. Paisano Publications
believes its wide range of apparel and other products is ideally suited to meet
demand from a variety of Harley-Davidson enthusiasts.
Retail Locations. Retailing and merchandising of Harley-Davidson related
apparel and accessories has historically not been a sophisticated industry and
locations are often in less desirable areas. The Paisano Companies' management
believes that locating Easyriders stores in more upscale and traditional
retailing areas will be better suited to current customer demand and will
increase awareness and demand for its products.
Store Formats. Paisano Publications' management believes the Easyriders
stores should be viewed as "entertainment" in order to best capture the demand
for the Harley-Davidson lifestyle. For this reason, The Paisano Companies expect
many stores to offer non-traditional products and services, such as motorcycle
customizing services, custom motorcycle sales, cafes, tattoo studios, as well as
others. The stores are expected to be large for the industry, ranging from 4,000
to 20,000 square feet.
82
<PAGE> 98
New Hybrid American-Made Motorcycles. In addition to the growth in demand
for Harley-Davidson motorcycles, the market for American-made motorcycles is
expected to grow due to the entrance of several new manufacturers of hybrid
American-made motorcycles which are similar to Harley-Davidson motorcycles in
look and feel. The products of these new manufacturers, which include Titan, Big
Dog, California Motorcycle Company and American Eagle, will be sold at
Easyriders franchised stores. Typically hybrid American-made motorcycles sell
for between $16,000 and $40,000, in excess of the range of Harley-Davidson
motorcycles which sell for between $7,500 and $18,000. The Company believes that
as the number of hybrid motorcycle sales increases that there will be a
corresponding increase in the sale of apparel and publications which address
this market as owners of hybrid motorcycles will typically have a higher
disposable income then that of the typical Harley-Davidson owner.
The Paisano Companies' management believes a store can be supported by a
surrounding population of approximately 400,000 depending on demographics.
EASYRIDERS MARKETING
Easyriders Franchising has developed significant demand for its franchise
locations through minimal marketing. The Paisano Companies have used advertising
in Paisano Publications' magazines and in The Wall Street Journal to generate
leads for franchisees. In addition, the existing locations have been
instrumental in developing demand.
EASYRIDERS OPERATIONS
Easyriders Franchising has a separate staff located in separate offices at
its corporate headquarters. Senior management and some functions are shared with
Paisano Publications. Since inception in 1994, Easyriders Franchising has
focused on creating a growth strategy, creating necessary legal documentation,
developing store and merchandising formats, and developing the necessary
infrastructure for growth.
Easyriders Franchising intends to sell franchise operations to experienced
entrepreneurs and allow them a high degree of autonomy so they can react to
their individual markets. For this reason, the support functions provided by
Easyriders franchising will be relatively limited. The franchisees will receive
use of the Easyriders name, broad specifications for store format and
merchandising display, consultation on product and service ideas, discounts on
products sold by Paisano, discounts on products on the approved vendor list
through system-wide negotiated prices with the manufacturers, nationwide
advertising support funded by a portion of royalty fees paid by franchisees, and
training.
Additionally, Easyriders Franchising is in the process of developing a
turn-key financing program for its franchisees.
In return for the above, franchisees are expected to purchase products only
from Paisano or an approved vendor list in order to maintain company image and
consistency, submit financial information on a daily basis, pay an up-front
franchise fee, and pay a royalty based on sales on a weekly basis.
Prospective franchisees must complete an application and interview process
which includes a visit to Paisano Publications' Columbus store and to Paisano
Publications' headquarters. Franchisees are selected based on their financial
strength as well as management's assessment of their ability to manage the
location.
FRANCHISE LOCATIONS
Easyriders Franchising has currently signed franchise agreements with 30
franchisees. Of these, 24 are opened as of June 2, 1998 and the remainder are
expected to be open by the end of 1998. In addition, Paisano Publications has a
licensing agreement for a location in Japan.
83
<PAGE> 99
Following is a list of Easyriders franchised store locations:
<TABLE>
<CAPTION>
STORES OPENED
STATE CITY
----- ----
<S> <C>
Arizona Scottsdale
California Fresno
Santa Cruz
Canada Ontario
Colorado Denver
Georgia Atlanta
Columbus
Illinois Chicago
Indiana Merrillville
Louisiana New Orleans
Maryland Gaithersburg
Michigan Detroit
Missouri St. Louis
Nevada Las Vegas
Reno
New Mexico Albuquerque
North Carolina Charlotte
Greensboro
Ohio Cleveland
South Carolina Myrtle Beach
Tennessee Memphis
Texas Dallas
Houston
Washington Bellevue
</TABLE>
Easyriders Franchising also has franchise agreements with respect to stores
not yet opened in Fort Lauderdale, Florida, Minneapolis, Minnesota, Cincinnati,
Ohio, Tulsa, Oklahoma, Salt Lake City, Utah and Puerto Vallarta, Mexico.
COMPANY-OWNED STORES
The Paisano Companies entered the retail business primarily to take
advantage of potential product sales from Bike Week, a motorcycle event in
Daytona Beach, Florida. In addition, the Paisano Companies' management decided
to open a flagship store in Columbus, Ohio to provide a template for franchise
locations and to help train franchisees. By choosing a franchise strategy
instead of opening company-owned stores, management believes it is better able
to focus on the Paisano Companies' key strengths in publishing and product
sales, while still benefiting from the significant increase in demand generated
for Paisano Publications' products.
Following are descriptions of Paisano-owned stores:
Easyriders of Columbus
Easyriders of Columbus is designed to be a flagship Easyriders store and
has been incorporated separately from Paisano Publications and Easyriders
Franchising. The store is a large format of 20,000 square feet. Aside from
selling Easyriders apparel, this location offers motorcycle customization,
custom and pre-owned motorcycle sales, motorcycle parts and accessory sales,
motorcycle servicing, a cafe', custom leather and embroidery, and a tattoo
studio. The store is designed to be "entertainment", not just a retailer of
apparel.
84
<PAGE> 100
Daytona Beach, Florida and Camarillo, California
The Daytona Beach and Camarillo Easyriders stores are owned by Paisano. The
Daytona Beach store is the original Easyriders store. The store only offers
Easyriders apparel. The Camarillo Easyriders store is in an outlet location and
sells overstocked and discontinued items at outlet pricing.
BROS CLUB
Bros Club is a motorcycle travelers' service club. The program was
developed to support the Easyriders franchise stores by providing a product
which closely ties the stores to their customers. Paisano Publications is
encouraging each franchised store to form a Bros Club chapter and to include a
membership with each motorcycle purchase. The program is expected to grow as the
franchise effort is rolled-out.
Bros Club members pay annual service fees of $29.95 and receive emergency
road service and access to insurance for custom bikes. Paisano Publications
contracts with Road America to provide 24 hour road-side assistance and towing
to members. Road America has over 12,000 24 hour locations in the U.S. Members
can purchase insurance on their custom equipped Harley-Davidsons, which are
difficult to insure properly through regular insurance channels.
As of June 15, 1998, there were approximately 9,000 Bros Club members.
EVENT PROMOTION AND MANAGEMENT ACTIVITY
Teresi, Inc. promotes events intended to appeal to the interest of
motorcycle enthusiasts, including motorcycle rodeos, motorcycle shows, and
tattoo shows. Teresi, Inc. may either promote such an event for its own account
and incur the risk of all associated expenses against the prospect of collecting
all revenues for ticket sales, or Teresi, Inc. may provide services to the party
taking such role on a fee basis. Services provided may include organization,
advertising, arranging for attractions, locations, insurance, concessions, and
contest supervision. Teresi, Inc. maintains trucks to attend events from which
to market magazines, motorcycle accessories and related products, and
motorcycles.
COMPETITION
Paisano Publications' seven motorcycle titles (including the trade
publication, Eagle's Eye) have circulation among the largest in the U.S. of the
motorcycle magazine segment with a collective circulation of approximately 4.1
million copies as of December 31, 1997. Paisano directly competes with six other
Harley-Davidson oriented motorcycle magazines (see description below).
The following is a description of the six magazine titles which directly
compete with Paisano in the American-made, Harley-Davidson oriented motorcycle
magazine segment:
Hot Rod Bikes: Hot Rod Bikes is a part of Peterson Publishing's stable of
more then 40 magazine titles. The magazine was launched in conjunction with
another title called Cruiser (focused on Japanese made motorcycles that are
visually similar to Harley-Davidson motorcycles). While Petersen has the size
and financial resources to stay in the market, they are not currently a major
competitor. Paisano believes that Hot Rod Bikes competes with their VQ and Quick
Throttle publications.
Big Twin: Big Twin is aimed specifically at the up-scale market. While it
is operated by Hatchette Filipacci Magazines, a large, internationally
recognized company with substantial financial resources, Big Twin is the only
American-made motorcycle title in their stable of approximately 30 titles and
its sales have been declining. Big Twin competes most directly with Paisano's VQ
title.
Hot Bike: Hot Bike is owned by Primedia (formerly K-III). The publication
is a direct competitor to Paisano's Quick Throttle. The publication does well in
its category and has some brand awareness by virtue of it having been published
for over 20 years.
American Rider, Iron Works and American Iron: Each of these titles competes
with both Easyriders and V-Twin in that they focus primarily on lifestyle
issues. Their common selling point is that they do not contain
85
<PAGE> 101
nudity and are, therefore, the alternate choice for advertisers. All of these
titles are relatively new, the product of small publishing companies and with
the exception of American Iron, derive no synergy or cross selling benefits from
other companion titles.
EMPLOYEES
As of June 1, 1998, the Paisano Companies employed approximately 132
full-time and part-time employees. None of the Paisano Companies' employees are
covered by a collective bargaining agreement and none of the Paisano Companies
has ever experienced an organized work stoppage, strike or labor dispute.
PROPERTIES
The Paisano Companies lease their current principal executive offices,
which consist of approximately 21,000 square feet, at 28210 Dorothy Drive,
Agoura Hills, California 91301. The warehouse and advertising departments, which
occupy approximately 17,840 square feet, are located at 28216 Dorothy Drive,
Agoura Hills, California 91301. A retail facility consisting of approximately
3,200 square feet is located at 605-609 Main Street, Daytona Beach, Florida
32118. A manager's residence and photography studio of approximately 1,450
square feet is located at 10 Oleander Street, Daytona Beach, Florida 32118.
Another retail facility, consisting of approximately 10,000 square feet, is
located at 611 East Broad Street, Columbus, Ohio 43215. Another retail facility,
consisting of approximately 1,200 square feet, is located at 850 Ventura
Boulevard, Suite 702, Camarillo, California.
RECENT DEVELOPMENT
On July 27, 1998, Paisano Publications borrowed $7,000,000 from SunTrust
Bank, South Florida, N.A. Interest on the loan accrues at the rate of 7.5% per
annum. One payment of interest only is due on August 30, 1998. A final payment
of all unpaid principal and accrued interest is due and payable on September 30,
1998. The $7,000,000 proceeds of the loan has been distributed as a dividend to
Mr. Joseph Teresi, the sole shareholder of Paisano Publications.
86
<PAGE> 102
PAISANO COMPANIES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AS OF DECEMBER 31, 1997 AND JUNE 30, 1998
The following discussion and analysis should be read in conjunction with
the Paisano Companies' Combined Financial Statements and Notes thereto included
elsewhere in this Prospectus/Proxy Statement. All statements contained herein
that are not historical facts including, but not limited to, statements
regarding the Paisano Companies' current business strategy, the Paisano
Companies' projected sources and uses of cash, and the Paisano Companies' plans
for future development and operations, are based upon current expectations. Such
statements are forward-looking in nature and involve a number of risks and
uncertainties. Consequently, actual results may differ materially from the
forward-looking statements. Among the factors that could cause actual results to
differ materially are the following: the availability of sufficient capital to
finance the Paisano Companies' business plans on terms satisfactory to the
Paisano Companies; the impact of competitive products and pricing; changes in
labor, equipment, food and capital costs; changes in, or the failure to comply
with, regulations affecting the Paisano Companies' business; future acquisitions
or strategic partnerships; the availability, locations and terms of sites for
development; the timing and costs associated with new location openings;
acceptance of new guests of the Paisano Companies' brands and concepts as the
Paisano Companies continue to expand into new brands and/or regions; success of
the Paisano Companies' franchisees and licensees and the manner in which they
promote, operate and develop the Paisano Companies' brands; general business and
economic conditions.
RESULTS OF OPERATIONS -- TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1997
The Paisano Companies publish special-interest magazines, sell products
related to the interests on which its magazines are focused by mail order,
through distributors and through retail stores, and are engaged in certain other
activities related to and intended to capitalize on its access to persons having
interests in the subjects on which its magazines are focused. These other
activities include a franchising operation and an event production business.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Publishing operations............................. $23,638,937 $23,548,358
Product Sales..................................... 7,350,166 7,904,524
Other Company-owned operations.................... 2,759,626 2,577,025
----------- -----------
33,748,729 34,029,907
----------- -----------
COST OF REVENUES
Publishing operations............................. 17,377,652 20,290,245
Product sales..................................... 6,790,623 7,242,660
Other Company-owned operations.................... 1,697,078 1,817,840
----------- -----------
25,865,353 29,350,745
----------- -----------
INCOME FROM COMPANY-OWNED OPERATIONS
Publishing operations............................. 6,261,285 3,258,113
Product sales..................................... 559,543 661,864
Other Company-owned operations.................... 1,062,548 759,185
----------- -----------
7,883,376 4,679,162
UNALLOCATED CORPORATE EXPENSES.................... 5,160,103 5,102,480
OPERATING LOSS FROM FRANCHISE OPERATIONS.......... 96,032 235,732
INCOME (LOSS) FROM OPERATIONS..................... $ 2,627,241 $ (659,050)
----------- -----------
</TABLE>
87
<PAGE> 103
PUBLISHING OPERATIONS
Operating Revenues
For the year ended December 31, 1997, magazine publishing revenues were
$23,638,937, or 70% of total revenues as compared to $23,548,358, or 69% of
total revenues for the year ended December 31, 1996. This increase of $90,579 in
sales is primarily attributable to an increase in advertising revenues of
approximately $1.2 million partially offset by a decrease in the number of
magazine copies sold from 7.0 million copies in the year ended December 31, 1996
to 6.7 million copies in the year ended December 31, 1997.
The Paisano Companies' principal sources of revenues from the publication
of its magazines are derived from advertising and circulation. Circulation
revenues are generated from subscription and newsstand. For the year ended
December 31, 1997, approximately 19.5% of the Paisano Companies' revenues were
from advertising, 61.3% were from circulation (including 13.4% from subscription
sales and 47.9% from newsstand sales).
Newsstand sales occur primarily through independent distributors. For 1997
and 1996, 22.0% and 29.7% of total revenues represented net sales to a single
distributor, Curtis Circulation Company. No other distributor represented over
5% of total revenues in either period.
Advertising revenues of the Paisano Companies, as well as those of the
consumer magazine industry in general, are cyclical and dependent upon general
economic conditions. The advertisers which have individually comprised more than
5%, but less than 10%, of the Paisano Companies' advertising revenues during any
of the last three years were Custom Chrome, Drag Specialties, and
Harley-Davidson, representing gross revenues of $685,821, $638,581 and $805,000,
respectively. In addition, the Paisano Companies' top 10 advertisers accounted
for approximately 19.6% of total advertising revenues for the twelve months
ended December 31, 1997 and 19.5% of total advertising revenues of the twelve
months ended December 31, 1997.
Approximately 82% of the Paisano Companies' revenues for 1997 were
generated from domestic sources (for these purposes deemed to include Canada),
and 18% were generated from foreign sources. Approximately 86% of the Paisano
Companies revenues for 1996 were generated from domestic sources, including
Canada, and 14% were generated from foreign sources.
Cost of Revenues
For the year ended December 31, 1997, cost of revenues for magazine
publishing represented $17,377,652, or 73.5% of revenues as compared to
$20,290,245, or 86.2% of revenues for the year ended December 31, 1996. The
decrease of $2,912,593 in cost of revenues is primarily attributable to a
decrease in paper costs as a percentage of production, selling and other direct
costs from 21% in the year ended December 31, 1996 to 14% in the year ended
December 31, 1997.
The principal components of the Paisano Companies' publishing business
production and selling costs are raw materials, costs of goods sold, printing
and binding, and editorial expenses, which represented approximately 16%, 11%,
13% and 6%, respectively, of the Paisano Companies' cost of sales in the year
ended December 31, 1997, and approximately 23%, 11%, 15% and 4%, respectively,
of the Paisano Companies' cost of sales in the year ended December 31, 1996.
The Paisano Companies' principal raw material is paper. Paper supply and
prices are subject to volatility. The supply and prices of paper may be
significantly affected by many factors, including market fluctuations and
economic, political and weather conditions. The Paisano Companies presently have
secured sufficient paper to meet projected raw material needs through the end of
1998 at a fixed price. There can be no assurance as to the price the Paisano
Companies will pay for paper in 1999 and beyond. The Paisano Companies typically
carry sufficient paper in inventory for two to four months of operations.
Paisano Publications has an agreement through September 11, 2001 with R.R.
Donnelley to print all of the Paisano Companies' magazines. The Paisano
Companies advertising and sales expense is comprised of printing and paper
costs, salaries and commissions, advertising agency discounts, travel,
entertainment and research. See
88
<PAGE> 104
"Risk Factors -- Risk Factors Related Primarily to the Publishing
Business -- Risks Associated with Fluctuations in Paper Costs and Postal Rates.
PRODUCT SALES
Operating Revenues
For the year ended December 31, 1997, product sales represented $7,350,166,
or 21.8% of total revenues as compared to $7,904,524, or 23.2% of total revenues
for the year ended December 31, 1996. This decrease of $554,358 in sales is
primarily attributable to a decrease of $424,140 in store sales, $304,711 of
which relates to the Company's flagship store in Columbus, Ohio. The decrease in
the Columbus store sales was primarily attributable to a transition away from
motorcycle service operations and the corresponding decrease in parts and
service sales.
Product sales were comprised of revenues from direct retail sales (through
magazine advertisements), sales through retail outlets, including stores owned
by companies in the Paisano Companies, stores operating under franchises with
companies in the Paisano Companies, and retail stores altogether independent of
the Paisano Companies.
Cost of Revenues
For the year ended December 31, 1997, cost of revenues for product sales
represented $6,790,623, or 92.4% of operating revenues as compared to
$7,242,660, or 91.6% of operating revenues for the year ended December 31, 1996.
This decrease of $452,037 in cost of revenues is primarily attributable to the
decrease in product sales.
The primary component of costs associated with product sales is product
costs. The Paisano Companies purchases products from independent manufacturers.
Some products are specially designed by the Paisano Companies, or represent
products ordered with custom logos or printed designs, but most represent
selections made by the Paisano Companies from existing offerings of other
manufacturers or suppliers. Product costs as a percentage of product sales for
the years ended December 31, 1997 and 1996 were 69% and 70%, respectively. The
Paisano Companies ordered products from three suppliers in excess of 5% of total
product costs from Avon (75%), Cove Shoe (5%) and Hanes (5%) in the year ended
December 31, 1997.
OTHER COMPANY-OWNED OPERATIONS
The Paisano Companies engage in event production and promotion activities,
such as motorcycle rodeos and tours. These events generate ticket and
participation revenues. Through Bros Club, the Paisano Companies also generates
insurance commission revenues and club membership dues. In addition, the Paisano
group receives licensing revenues as a percentage of gross sales with respect to
the permitted use of its trademarks in connection with certain restaurant
operations, including those of Newriders. Such activities generated operating
revenues of $2,759,626 in 1997 and $2,577,025 in 1996. Cost of revenues for the
other operations decreased from $1,817,840 to $1,697,078 from the year ended
December 31, 1996 to December 31, 1997. These changes were primarily
attributable to an increase in licensing income of $180,307, with relatively no
increase in related costs.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses were $5,160,103 for December 31, 1997, and
$5,102,480 for December 31, 1996. The increase of $57,623 is due to an
approximately $257,000 increase in payroll resulting from additional personnel,
and cost of living salary increases, offset by an approximately $200,000
decrease in compensation to the sole shareholder.
FRANCHISE OPERATIONS
Franchise revenues consist of up-front franchise fees and royalties on the
franchisee's gross sales. Historically, royalties have been set at 3% of gross
sales. Franchise revenues were $604,777 in 1997 and
89
<PAGE> 105
$318,186 in 1996. The increase is primarily attributable to the increase in
stores under franchise to 25 stores under franchise in 1997 from 18 stores under
franchise in 1996.
Franchise expenses include payroll and employee benefits attributable to
employees whose primary activities are related to the franchise operation, and
certain general and administrative expenses identifiable to the franchise
operation. Total expenses of the franchise operation for 1997 and 1996 were
$700,809 and $553,918, respectively. The increase in franchise expenses of
$166,891 is primarily the result of the increase in marketing efforts to
increase stores under franchise and to promote stores currently under franchise.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Publishing operations........................... $11,875,510 $11,992,993
Product Sales................................... 3,620,205 3,691,776
Other Company-owned operations.................. 1,202,429 1,091,320
----------- -----------
16,698,144 16,776,089
----------- -----------
COST OF REVENUES
Publishing operations........................... 9,952,132 9,084,459
Product sales................................... 2,788,541 2,929,102
Other Company-owned operations.................. 1,113,568 615,472
----------- -----------
13,854,241 12,629,033
----------- -----------
INCOME FROM COMPANY OWNED OPERATIONS
Publishing operations........................... 1,962,769 2,908,534
Product sales................................... 831,664 762,674
Other Company-owned operations.................. 88,861 475,848
----------- -----------
2,883,294 4,147,056
UNALLOCATED CORPORATE EXPENSES.................... 2,029,603 2,388,171
OPERATING LOSS FROM FRANCHISE OPERATIONS.......... 234,530 33,493
----------- -----------
INCOME FROM OPERATIONS............................ 619,161 1,725,392
=========== ===========
</TABLE>
PUBLISHING OPERATIONS
Operating Revenues
For the six months ended June 30, 1998, magazine publishing revenues were
$11,875,510 as compared to $11,992,993 for the six months ended June 30, 1997.
This decrease of $117,483 is primarily attributable to a decrease in newsstand
sales for certain of the Paisano Companies' magazines.
Cost of Revenues
For the six months ended June 30, 1998, cost of revenues for magazine
publishing represented $9,952,132, or 83.8% of operating revenues as compared to
$9,084,459, or 75.8% of operating revenues for the six months ended June 30,
1997. This increase of $867,673 in cost of revenue is attributable to an
increase in paper costs representing 19.5% of publishing operations revenue for
the six months ended June 30, 1998 versus paper costs of 15.4% of publishing
operations revenue for the six months ended June 30, 1997. It is also
attributable to the startup of Airbrush magazine, and the increase in the
frequency of publication of two magazines. Both had low gross margins in 1998,
resulting in an increase of cost of sales of 3.9%, from June 30, 1997 to June
30, 1998.
90
<PAGE> 106
PRODUCT SALES
Operating Revenues
For the six months ended June 30, 1998, product sales were $3,620,205 as
compared to $3,691,776 for the six months ended June 30, 1997. This decrease of
$71,571 in sales is primarily attributable to a decrease of $108,253 resulting
from the closure of one retail facility on January 31, 1998.
Cost of Revenues
For the six months ended June 30, 1998, cost of revenues for product sales
was $2,788,541, or 77.0% of operating revenues as compared to $2,929,102, or
79.4% for the six months ended June 30, 1997. The increase in cost of revenues
as a percentage of revenues is primarily attributable to a change in the mix of
products sold and the publication of a sales catalog in the six months ended
June 30, 1998.
OTHER OPERATIONS
Event production and promotion activities, insurance commission revenues
and club membership dues and licensing revenues generated operating revenues of
$1,202,429 and $1,091,320 for the six months ended June 30, 1998 and 1997,
respectively. Cost of revenues for the other operations increased from $615,472
to $1,113,568 from the six months ended June 30, 1997 to the six months ended
June 30, 1998, respectively. The increase in sales was primarily related to an
increase in ticket revenue from the Paisano Companies' event production
operations. The increase in cost of sales was primarily attributable to a
one-time promotional event for the Harley-Davidson 95th Anniversary Celebration,
as well as the timing of other promotional costs.
UNALLOCATED CORPORATE EXPENSES
The Paisano Companies unallocated corporate expenses include payroll
expenses, property expenses, and other general and administrative expenses not
allocated to any specific segment of the Paisano Companies' business.
Unallocated corporate expenses decreased from $2,388,171 for the six months
ended June 30, 1997 to $2,029,603 for the six months ended June 30, 1998. The
decrease of $358,568 is due primarily to the accrual for bonuses of $41,000,000
for the six months ended June 30, 1997. No bonus was accrued for the six months
ended June 30, 1998.
FRANCHISE OPERATIONS
Franchise revenues were $405,897 and $406,203 for the six months ended June
30, 1998 and 1997, respectively. The increase is primarily attributable to the
increase in stores under franchise. Franchise expenses, including payroll and
employee benefits attributable to employees whose primary activities are related
to the franchise operation and certain general and administrative expenses
identifiable to the franchise operation were $746,880 and $546,774 for the six
months ended June 30, 1998 and 1997, respectively. The increase in franchise
expenses of $200,106 is primarily the result of the increase in salaries and
professional fees related to maintaining and increasing stores currently under
franchise.
INCOME TAXES
For income tax purposes, the Paisano Companies are taxed as S corporations,
and like partnerships, the income (loss) of each of the Paisano Companies is
recognized on the personal tax returns of its shareholder. In connection with
the transaction, the Paisano Companies will become C Corporations and be subject
to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to zero at June 30, 1998 from $362,527
at December 31, 1997. The cause of this decrease was $166,050 used in operating
activities and $196,477 in capital expenditures. Cash provided by operations
included net income of $505,271, a net increase in operating liabilities of
$489,080 and $173,676 related to depreciation and amortization of property and
equipment and intangibles. These additions
91
<PAGE> 107
were offset by an increase in operating assets of $1,334,077 related primarily
to the increase in accounts receivable. Accounts receivable from magazine
distributors increased as a result of an overall increase in percentage of
magazine sales. Advertising accounts receivable increased as a result of an
increased emphasis on enhancing advertising revenue. Paper inventory increased
as the result of increased paper purchases as well as the introduction of new
paper types for enhanced quality in the Easyriders magazine.
At June 30, 1998 and December 31, 1997 working capital totaled $2,986,775
and $2,576,365, respectively. The increase in working capital from December 31,
1997 to June 30, 1998 resulted primarily from an increase in inventory and
accounts receivable related to an increase in advertising sales.
The Paisano Companies' most significant cash needs in 1998 include working
capital to publish future issues of the Paisano Companies' magazines. The
Companies present cash resources combined with expectations regarding future
cash provided by operations are expected to be adequate to sustain operations
for the foreseeable future. Any significant increase in the level of bad debts
or decrease in magazine revenues could have a material impact on the Paisano
Companies' current cash resources and could provide some uncertainty regarding
the Paisano Companies ability to sustain operations.
SEASONALITY
Paisano Publications' business is slightly seasonal with slightly greater
revenues being generated during holiday seasons when cover prices of magazines
are generally higher, and slightly smaller revenues being generated in the first
fiscal quarter when cover prices of magazines are generally lower. See "Risk
Factors -- Risk Factors Related Primarily to the Publishing
Business -- Cyclicality and Limited Seasonality of Revenue."
INFLATION
The Paisano Companies believe that inflation has not had a material impact
on its results of operations for the periods discussed herein.
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 the Paisano Companies' 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, the Paisano Companies 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 significant operational
problems for its computer systems. As a result, all costs associated with this
conversion will be expensed as incurred. The Paisano Companies will also
initiate communications with all of its significant suppliers and service
providers to determine the extent to which the Paisano Companies' 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 Paisano Companies' systems rely will be timely converted and would
not have an adverse affect on the Paisano Companies' systems.
The Paisano Companies will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The
Paisano Companies 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 the Paisano
Companies' Year 2000 remediation efforts is not expected to have material effect
on the Paisano Companies' results of operations.
92
<PAGE> 108
INFORMATION ABOUT EL PASO
GENERAL
M & B Restaurants, L.C., a Texas limited liability company ("El Paso"), was
formed on September 13, 1994. El Paso currently operates four El Paso Bar-B-Que
Restaurants. The restaurants are located in Tulsa, Oklahoma, Glendale, Arizona,
Scottsdale, Arizona, and Phoenix, Arizona.
El Paso's restaurants offer high-quality, southwestern barbecue cuisine and
excellent service in a southwestern atmosphere.
El Paso's objectives are to enhance and expand its existing operations. It
plans to increase the number and geographic diversity of its restaurants to
generate greater consumer enthusiasm for its concept. El Paso believes that
there are significant opportunities for additional El Paso Bar-B-Que Restaurants
throughout the southwestern U.S.
DEVELOPMENT OF BUSINESS
Mr. William E. Prather has been responsible for the creation of the El Paso
Bar-B-Que Restaurant concept which was developed in 1993. While serving as the
Chief Executive Officer and Vice-Chairman of Furr's/Bishop's Cafeteria, Inc.
("Furr's"), a $300 million restaurant chain, the first three El Paso Bar-B-Que
Restaurants were developed as an alternative concept for lower-performing
cafeteria real estate sites. The first three converted restaurants were located
in Tulsa, Oklahoma, the Denver suburb of Arvada, Colorado, and Glendale,
Arizona. The Arvada, Colorado restaurant was subsequently closed in September
1994, after being open for approximately one and a half years. El Paso's
management believes that the Arvada, Colorado restaurant had been opened at a
poor location.
In October 1994, Mr. Prather resigned as Chief Executive Officer of Furr's,
while simultaneously founding El Paso with his wife, Marna Prather. As part of
his exit from Furr's, Mr. Prather negotiated and consummated a Trademark License
and Development Agreement dated September 30, 1994, between Cafeteria Operators,
L.P. ("Cafeteria Operators") and El Paso (the "Trademark Agreement"), which
provided that El Paso would operate the two El Paso Bar-B-Que Restaurants then
existing, and it also gave El Paso rights to exclusively develop an additional
25 El Paso Bar-B-Que Restaurants by the year 2003. The Trademark Agreement
included a buy-out option provision which allowed El Paso to acquire any and all
El Paso interests owned by Furr's between 1999 and 2003.
In the fourth quarter of 1995, El Paso developed and opened the third El
Paso Bar-B-Que Restaurant site in Scottsdale, Arizona. In the spring of 1996,
Cafeteria Operators proposed an early exercise by El Paso of its buy-out option
of the Trademark Agreement, and the parties agreed upon El Paso's purchase of
the three El Paso Bar-B-Que Restaurants then established from Cafeteria
Operators.
El Paso paid $950,000 to Cafeteria Operators for:
(1) all proprietary rights and licenses of El Paso Bar-B-Que
Restaurants; and
(2) the elimination of any future fees, and/or royalties owed to
Furr's by El Paso.
The following transactions were covered by a lease agreement between
Cafeteria Operators and El Paso, and related amendments:
(1) the transfer of all the equipment and leasehold interests of the
Glendale, Arizona El Paso Bar-B-Que Restaurant, and all leasehold interests
in the Tulsa, Oklahoma El Paso Bar-B-Que Restaurant; and
(2) an annual lease reduction of $100,000 on the Glendale, Arizona and
Tulsa, Oklahoma restaurant sites, with Furr's being reduced to the role of
landlord only with respect to the Tulsa, Oklahoma and Glendale, Arizona
restaurant sites.
Subsequently, in July 1997, a fourth El Paso Bar-B-Que Restaurant site was
opened in Phoenix, Arizona.
93
<PAGE> 109
DESCRIPTION OF MENU
The El Paso Bar-B-Que Restaurants offer pecan-smoked meats, featuring El
Paso's proprietary seasoning rub, and a variety of entrees including salmon,
turkey, lamb, and smoked prime rib. The primary menu items concentrate on high
quality, genuine hickory-smoked barbecue. All dishes include an assortment of
unique and proprietary side items, along with a variety of El Paso's barbecue
sauces.
RESTAURANT DECOR -- LAYOUT AND DESIGN
The El Paso Bar-B-Que Restaurants have a southwestern decor, with a
flagstone entryway, peal poles, cottonwood bar and stone fireplace. El Paso
considers its El Paso Bar-B-Que Restaurants to be upscale barbecue destination
restaurants with a casual dining experience. The restaurants have been designed
with attention to aesthetic appeal in a traditional southwestern motif.
The existing restaurants range in size from approximately 6,900 to 11,000
square feet and in seating capacity from approximately 275 to 350 persons. El
Paso anticipates that its future restaurants will range in size from
approximately 7,000 to 12,000 square feet and in seating capacity from
approximately 250 to 350 persons.
SERVICE
El Paso emphasizes excellent customer service in order to make each
patron's visit an enjoyable, memorable experience. El Paso is committed to
providing its customers with prompt, friendly, attentive service. Accordingly,
it attempts to maintain an adequate ratio of service personnel to customers, and
staffs each restaurant with an experienced management team to ensure that its
high service standards are maintained. New employees are to be trained by
experienced employees who are familiar with El Paso's policies, and newly
promoted or recently hired managers are required to complete a training program
prior to commencing their duties.
ADVERTISING AND PROMOTION
El Paso believes it will attract new customers through word-of-mouth, the
visibility of its radio and print advertising, and the broad-based media
coverage typically associated with grand openings of new restaurants.
RESTAURANT OPERATIONS AND MANAGEMENT
El Paso will strive to maintain quality and consistency in its restaurants
through careful training and supervision of personnel and the establishment of
standards relating to food and beverage preparation, maintenance of facilities
and conduct of personnel.
The onsite management for its restaurants is intended to consist of a
general manager, kitchen manager and several floor assistants, who collectively
are responsible for every aspect of each restaurant's operation.
In an effort to ensure that its employees properly implement El Paso's
commitment to consistent high-quality, popular food and friendly and attentive
service, El Paso has developed manuals regarding its policies and procedures for
all aspects of restaurant operations, including food handling and preparation
and dining room and beverage service operations. New employees are to be trained
by experienced employees who have demonstrated their familiarity with the
ability to consistently implement El Paso policies. El Paso requires continual
evaluation and testing of employees on job-related skills in order to provide
the highest quality of customer service. In addition, hourly employees who
demonstrate a positive business attitude along with leadership skills are
encouraged to proceed into management training.
PURCHASING AND DISTRIBUTION
El Paso's management negotiates directly with suppliers of food and
beverage products to try to achieve uniform quality and freshness of food
products in its restaurants and to obtain competitive prices. New
94
<PAGE> 110
restaurants will purchase a majority of its supplies from a list of pre-approved
local producers and wholesalers. Management believes that its food and beverage
products are available from alternate sources and suppliers.
COMPETITION
The restaurant industry is affected by changes in consumer tastes and by
international, national, regional and local economic conditions and demographic
trends. Changes in discretionary spending priorities; traffic patterns, tourist
travel, weather conditions, employee availability and the type, number and
location of competing restaurants also directly affect the performance of an
individual restaurant. Changes in any of these factors in the markets where El
Paso currently operates, and will operate restaurants, could adversely affect El
Paso's results of operations.
The restaurant industry is highly competitive based on the type, quality
and selection of the food offered, price, service, location and other factors.
El Paso believes its existing restaurants and future restaurants will be
distinguished from those of its competitors by their exciting and high-energy
environments, extensive displays of unique memorabilia, high-quality popular
barbecue cuisine and excellent service.
Nevertheless, many well-established restaurant companies with greater
financial, marketing and other resources than El Paso compete with El Paso. It
is anticipated they will compete with El Paso in most markets in which El Paso
proposes to operate. In addition, some competitors have design and operating
concepts similar to those of El Paso and they may choose to locate their
restaurants in close proximity to established competitors at locations believed
to be desirable for locating restaurants.
EMPLOYEES
As of June 1, 1998, El Paso employed approximately 400 full-time and
part-time employees, 2 of whom are corporate management, 32 of whom are
restaurant management personnel, and the balance are restaurant employees. El
Paso's employees are not covered by a collective bargaining agreement, and El
Paso has never experienced an organized work stoppage, strike or labor dispute.
El Paso considers relations with its employees to be excellent.
GOVERNMENTAL REGULATION
Alcoholic Beverage Regulation. El Paso's existing restaurants and future
restaurants are subject to licensing and regulation by a number of governmental
authorities. El Paso is required to operate its restaurants in strict compliance
with federal licensing requirements imposed by the Bureau of Alcohol, Tobacco
and Firearms of the United States Department of Treasury, as well as the
licensing requirements of the states and municipalities where its restaurants
are located. Alcoholic beverage control regulations require each of its
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the current restaurants and
future restaurants, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages. El Paso has obtained all
regulatory permits and licenses necessary to operate its four restaurants that
are currently open, and intends to do the same for all future restaurants.
Failure on the part of El Paso to comply with federal, state, or local
regulations could cause El Paso's licenses to be revoked and force it to
terminate the sale of alcoholic beverages at the restaurants affected. To reduce
this risk, El Paso intends to operate each restaurant in accordance with
procedures intended to ensure compliance with applicable laws and regulations.
The failure to receive or retain, or any delay in obtaining, a liquor license in
a particular location could adversely affect El Paso's ability to obtain such a
license elsewhere.
El Paso may be subject to "dram-shop" laws that exist in many states. These
laws generally provide a person injured by an intoxicated person with the right
to recover damages from an establishment that wrongfully served alcoholic
beverages to such person. While El Paso carries liquor liability coverage as
part of its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a
95
<PAGE> 111
judgment in excess of such insurance coverage or that it will be able to obtain
or continue to maintain such insurance coverage at reasonable costs, or at all.
The imposition of a judgment substantially in excess of El Paso's insurance
coverage, or the failure or inability of El Paso to obtain and maintain
insurance coverage, could materially and adversely affect El Paso.
Other Regulations. El Paso's current restaurants and future restaurants are
subject to regulation by federal and foreign agencies and to licensing and
regulation by foreign, state and local health, sanitation, building, zoning,
safety, fire and other departments relating to the development and operation of
restaurants and retail establishments. These regulations include matters
relating to environmental, building construction, zoning requirements and the
preparation and sale of food and beverages. Various federal, foreign and state
labor laws govern El Paso's relationship with its employees, including minimum
wage requirements, overtime, working conditions and citizenship requirements.
Significant additional government-imposed increases in minimum wages, paid
leaves of absence and mandated health benefits, or increased tax reporting and
tax payment requirements for employees who receive gratuities could have an
adverse effect on El Paso. Delays or failure in obtaining the required
construction and operating licenses, permits or approvals could delay or prevent
El Paso from opening of new restaurants.
The Federal Americans With Disabilities Act ("ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. El Paso's current restaurants are designed to be accessible to the
disabled. El Paso intends to continue to comply in future restaurants with the
ADA and future regulations relating to accommodating the needs of the disabled,
and El Paso does not anticipate that such compliance will have a material effect
on its operations.
Future restaurants which may be established in countries other than the
United States will be subject to governmental regulations in the jurisdictions
in which they are established, principally in respect to sales of liquor,
construction of premises and working conditions of employees. El Paso does not
believe that such regulations will materially adversely affect its business.
TRADEMARKS
El Paso has six registered trademarks with the United States Patent and
Trademark Office. The Company regards its restaurant name, El Paso Bar-B-Que and
logo as having significant value and as being an important factor in the
marketing of El Paso's business. El Paso has obtained trademark registrations
under the names "El Paso Bar-B-Que Company", "Bar-B-Que With An Attitude", "El
Paso Chili Burger" and "El Paso Cantina" and the design logos for "El Paso
Bar-B-Que Company" and "El Paso Cantina."
INSURANCE
El Paso maintains general liability and property insurance. The cost of
insurance coverage varies generally and the availability of certain coverage has
fluctuated in recent years. While El Paso believes that its present insurance
coverage is adequate for its current operations, there can be no assurance that
the coverage will be sufficient for all future claims or will continue to be
available in adequate amounts or at reasonable rates.
SITE SELECTION CRITERIA
Site selection criteria for current site development is limited to the
western and southwestern United States. Some of the markets presently being
considered include Albuquerque, New Mexico; Tucson, Arizona; Denver, Colorado;
Kansas City/Overland Park, Kansas/Missouri, San Antonio, Texas; Fort Worth,
Texas; Dallas, Texas; Houston, Texas; and Lubbock, Texas.
FUTURE EXPANSION
El Paso is exploring utilizing a combination of available financing
vehicles such as joint ventures or leases which may require less capital outlay,
enhanced financial benefits, accelerate the anticipated development
96
<PAGE> 112
schedule, and provide some potential tax advantages and economies of scale.
Development financing will be evaluated on a site-by-site basis.
DESCRIPTION OF PRESENT SITES
El Paso presently occupies four restaurant properties and one office site.
Its restaurant sites are between 6,900 square feet and 11,000 square feet, with
occupancy between 275 and 350 persons. Monthly lease rates are from $5,000 to
$15,000. All leases are "triple-net." The leases have remaining terms from five
to ten years, and all but the Tulsa location have options to renew for up to two
terms of five years.
97
<PAGE> 113
EL PASO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
AS OF DECEMBER 30, 1997 AND JUNE 30, 1998
PLAN OF OPERATION
El Paso's plan of operation for the next twelve months consists of the
following:
(1) Complete the Reorganization.
(2) Acquire and develop a restaurant site in Las Vegas, Nevada.
(3) Redefine and improve the performance of the existing operations.
(4) Research, identify and secure up to two sites for expansion in
1999.
El Paso, which was formed on September 13, 1994, currently operates four
restaurants in Tulsa, Oklahoma and Phoenix, Glendale and Scottsdale, Arizona
offering high quality southwestern barbecue cuisine.
RESULTS OF OPERATIONS
THE FISCAL YEAR ENDED DECEMBER 30, 1997 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1996
During the fiscal year ended December 30, 1997, El Paso had revenues of
$8,562,000, an increase of $1,861,000 or 27.8% from the fiscal ended December
31, 1996. El Paso's sales were comprised of revenues from the sale of food. The
Company attributes the increase in sales to improved operations at its Tulsa,
Oklahoma, Glendale, Arizona and Scottsdale, Arizona restaurants and the addition
of the Phoenix, Arizona restaurant during the third quarter of 1997.
Cost of sales for the fiscal year ended December 30, 1997 was $6,631,000,
up $1,273,000 from the fiscal year ended December 31, 1996. Cost of sales
consists primarily of the cost of food, alcoholic and non-alcoholic beverages,
apparel and direct labor costs.
Gross margin for the fiscal year ended December 30, 1997, was $1,931,000 or
22.6% of sales. Gross margin for the fiscal year ended December 31, 1996 was
$1,343,000 or 20.0% of sales. El Paso attributes the resulting increase in gross
margin to a reduction of food costs, labor costs and other costs of goods sold
as a percent of sales from 32.1%, 34.7% and 13.2%, respectively, in the fiscal
year ended December 31, 1996 to 31.6%, 33.5% and 12.3% respectively in the
fiscal year ended December 30, 1997.
General and administrative costs increased by $460,000 in the fiscal year
ended December 30, 1997 to $1,527,000. General and administrative costs
increased as a percent of sales in the fiscal year ended December 30, 1997, to
17.8%. General and administrative expenses were 15.9% of sales in the fiscal
year ended December 31, 1996. General and administrative expenses are primarily
comprised of costs relating to public relations, corporate accounting, legal
services, travel, lodging, advertising and executive salaries.
Depreciation and amortization was $262,000 for the fiscal year ended
December 30, 1997 an increase of $171,000 from the fiscal year ended December
31, 1996. The increase in depreciation and amortization was primarily related to
the addition of capitalized assets during the fiscal years ended December 30,
1997, and December 31, 1996.
Interest expense was $183,000 for the fiscal year ended December 30, 1997,
compared to interest expense of $153,000 in the fiscal year ended December 31,
1996. The increase in interest expense of $30,000 was primarily due to an
increase in notes payable of $1,475,000 for the fiscal year ended December 30,
1997 representing a loan from AT&T Small Business Lending Corporation.
For the fiscal year ended December 30, 1997, El Paso had a net loss of
$36,000 compared to net income of $45,000 in the fiscal year ended December 31,
1996. The decrease in income was primarily the result of increases in general
and administrative costs and an increase in depreciation and authorization.
98
<PAGE> 114
THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JULY 1,
1997
During the six months ended June 30, 1998, El Paso had revenues of
$5,444,650, an increase of $1,731,682 or 46.6% from the six months ended July 1,
1997. El Paso's sales were comprised of revenues from the sale of food. El Paso
attributes the increase in sales to improved operations at its existing
locations and from the operations of the Phoenix, Arizona restaurant which
opened during the third quarter of 1997.
Cost of sales for the six months ended June 30, 1998, was $3,168,460, up
$899,681 from the six months ending July 1, 1997. Cost of sales consists
primarily of the cost of food, alcoholic and non-alcoholic beverages, apparel
and direct labor costs.
Gross margin for the six months ended June 30, 1998 was $2,276,190 or 41.8%
of sales. Gross margin for the six months ended July 1, 1997, was 38.9% of
sales. El Paso attributes the increase in gross margin to a reduction of food
costs, labor costs and other costs of goods sold as a percent of sales from
30.2%, 29.0% and 1.9%, respectively, in the six months ended July 1, 1997, to
28.1%, 28.1% and 2.0%, respectively, in the six months ended June 30, 1998.
General and administrative costs increased by $437,703 during the six
months ended June 30, 1998 to $1,610,556. However, general and administrative
costs decreased as a percent of sales during the six months ended June 30, 1998
to 29.6%. General and administrative expenses were 31.6% of sales during the six
months ended July 1, 1997. General and administrative expenses are primarily
comprised of costs relating to public relations, corporate accounting, legal
services, travel, lodging, advertising and executive salaries.
Depreciation and amortization was $204,215 for the six months ended June
30, 1998, an increase of $118,047 from the six months ended July 1, 1997. The
increase in depreciation and amortization was primarily related to the addition
of capitalized assets during the six months ended June 30, 1998 and the fiscal
year ended December 30, 1997.
Interest expense was $136,869 for the six months ended June 30, 1998,
compared to interest expense of $79,447 during the six months ended July 1,
1997.
For the six months ended June 30, 1998 El Paso had net income of $324,550
compared to net income of $105,721 during the six months ended July 1, 1997.
INCOME TAXES
For income tax purposes, El Paso is taxed as a partnership whereby the
income (loss) of the Company is recognized on the personal tax returns of its
members. In connection with the transaction, El Paso will become a C Corporation
and be subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
El Paso's members' equity increased by $150,910 during the six months ended
June 30, 1998, from $576,000 at December 31, 1997, to $726,910. The increase is
the result of a net income of $324,550 partially offset by distributions to
members.
Cash and cash equivalents increased $5,414 to $224,008 at June 30, 1998
from $218,594 at December 30, 1997 as a reflection of principal payments on
long-term debt of $126,480 and distributions to members of $173,282. The uses of
cash were partially offset by an increase in cash provided from operating
activities of $341,150.
El Paso's most significant cash needs for the fiscal year ending December
31, 1998 include working capital to improve current operations at its four
restaurants. In addition, El Paso's operating plan includes the addition of at
least one new restaurant in Las Vegas, Nevada during the fiscal year ending
December 31, 1998. El Paso's present cash resources are expected to be adequate
to sustain operations through fiscal 1998. El Paso does anticipate that it will
need to procure financing for the opening of additional restaurants.
99
<PAGE> 115
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 El Paso's 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, El Paso 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 significant operational
problems for its computer systems. As a result, all costs associated with this
conversion will be expensed as incurred. El Paso will also initiate
communications with all of its significant suppliers to determine the extent to
which El Paso's 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 El Paso's systems rely will be timely
converted and would not have an adverse affect on El Paso's systems.
El Paso will utilize both internal and external resources to reprogram, or
replace, and test software for Year 2000 modifications. El Paso 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 El Paso's Year 2000 remediation efforts is not
expected to have material effect on El Paso's results of operations.
100
<PAGE> 116
DESCRIPTION OF NEWRIDERS SECURITIES
GENERAL
Common Stock
Newriders has authorized 25,000,000 shares of Common Stock, $.001 par value
per share, of which 17,962,316 shares were issued and outstanding as of August
24, 1998. All presently outstanding shares of Newriders Common Stock are validly
issued, fully paid and non-assessable. The holders of Newriders Common Stock do
not and will not have any preemptive or other subscription rights to subscribe
for or purchase any additional securities issued by Newriders, nor will they
have any redemption or conversion rights. Holders of Newriders Common Stock are
entitled to one vote per share. Newriders does not have cumulative voting.
The holders of Newriders Common Stock are entitled to receive dividends,
when, as and if declared by the Board of Directors out of funds legally
available therefore. It is highly unlikely that dividends will be paid by
Newriders in the foreseeable future on Newriders Common Stock.
The holders of Newriders Common Stock are entitled to receive on
liquidation of Newriders a pro rata distribution of the assets of Newriders,
subject to rights of creditors and holders of any Preferred Stock then
outstanding. At this time there is no Preferred Stock authorized, issued or
outstanding.
Shares Eligible for Future Sale
Newriders has 17,962,316 shares of Newriders Common Stock issued and
outstanding as of August 24, 1998. Of the 17,962,316 shares of Newriders Common
Stock outstanding, Newriders estimates that approximately 9,996,632 are free
trading and the balance are "Restricted Securities" as defined under the
Securities Act and Rule 144 promulgated thereunder ("Rule 144"). In general,
under Rule 144 a person who has satisfied a one year holding period, under
certain circumstances, may sell within any three-month period a number of shares
which does not exceed the greater of one percent of the then outstanding shares
of that class of securities or the average weekly trading volume in such shares
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity or other
limitation by a person who is not an affiliate of Newriders and who has
satisfied a two year holding period. Any sales of a substantial amount of
Newriders Common Stock in the open market, under Rule 144 or otherwise, could
have a material adverse effect on the market price of Newriders Common Stock.
Convertible Notes
Newriders presently has outstanding $316,667 face value of convertible
notes issued on December 12, 1997 in reliance on Regulation S. The convertible
notes bear interest at 8% per annum. The notes are convertible into shares of
Newriders Common Stock at 80% of the average closing bid price during the five
days preceding conversion of the convertible notes. Interest is payable in
shares of Newriders Common Stock semi-annually on June 1 and December 1. The
notes mature on December 12, 2000. The holders of such convertible notes will
execute agreements with Easyriders to the effect that upon consummation of the
Reorganization, the convertible notes will be convertible into shares of
Easyriders Common Stock.
Convertible Debentures
On May 11, 1998, Newriders issued $500,000 face value of convertible
subordinated debentures (the "May Debentures") in a transaction exempt from
federal and state securities registration. The May Debentures are convertible
into shares of Newriders Common Stock at the lower of: (a) $2.10 per share of
Newriders Common Stock; or (b) 75% of the average closing bid price during the
five trading days prior to the date of conversion. The May Debentures bear
interest at 8% percent per annum, and the interest is payable upon conversion or
at maturity in cash or shares of Newriders Common Stock, at Newriders' election.
The May Debentures become due and payable on May 11, 2000. The obligations of
Newriders under the May Debentures are also secured by 400,000 shares of
Newriders Common Stock pledged under an accommoda-
101
<PAGE> 117
tion pledge arrangement by Leon Hatcher. Newriders has certain obligations to
register shares of Newriders Common Stock into which the May Debentures are
convertible. Following consummation of the Reorganization, Easyriders will
assume the registration rights obligations. Following the consummation of the
Reorganization, the May Debentures will become convertible into shares of
Easyriders Common Stock subject to adjustment in the conversion price to reflect
the exchange ratio used in the Reorganization. The holders of the May Debentures
will execute agreements with Easyriders to the effect that upon consummation of
the Reorganization, the May Debentures will become convertible into shares of
Easyriders Common Stock.
On June 10, 1998, Newriders issued $1 million face value of convertible
subordinated debentures (the "June Debentures") to Wayne L. Knyal, a director of
Newriders, in a transaction exempt from federal and state securities
registration. The June Debentures are convertible into shares of Newriders
Common Stock at the lower of: (a) $2.375 per share of Newriders Common Stock; or
(b) 75% of the lowest closing bid price during the five trading days prior to
the date of conversion. The June Debentures bear interest at 8% percent per
annum which is payable upon conversion or at maturity in cash or shares of
Newriders Common Stock, at Newriders' election. The June Debentures become due
and payable on June 30, 2000. Newriders has certain obligations to register
shares of Newriders Common Stock into which the June Debentures are convertible.
Following consummation of the Reorganization, Easyriders will assume the
registration rights obligations. The holders of the June Debentures will execute
agreements with Easyriders to the effect that upon consummation of the
Reorganization, the June Debentures will become convertible into shares of
Easyriders Common Stock.
Warrants
Newriders has warrants outstanding to purchase up to a maximum of 771,291
shares of Newriders Common Stock. The outstanding warrants have various exercise
prices ranging from a low of $1.50 per share to a high of $4.05 per share and
expiration dates ranging from one year to seven years. The holders of
outstanding warrants will execute agreements with Easyriders to the effect that
upon consummation of the Reorganization, the warrants will be exchanged for
warrants to purchase shares of Easyriders Common Stock on the basis of one share
of Easyriders Common Stock for each two shares of Newriders Common Stock subject
to such warrants at an exercise price per share equal to two times the exercise
price provided for in the warrants.
Options
Newriders has options outstanding to purchase up to a maximum of 3,972,000
shares of Newriders Common Stock. The outstanding options have various exercise
prices ranging from a low of $2.50 per share to a high of $3.00 per share and
expiration dates ranging from one year to ten years. Of the outstanding options,
the following individuals have agreed to relinquish the following described
options conditional upon closing of the Reorganization: (a) John E.
Martin -- options covering 2,000,000 shares exercisable at $2.50 per share; (b)
William E. Prather -- options covering 750,000 shares exercisable at $2.50 per
share; (c) William R. Nordstrom -- options covering 500,000 shares exercisable
at $2.50 per share; (d) Wayne L. Knyal -- options covering 20,000 shares
exercisable at $2.50 per share; (e) Daniel J. Gallery -- options covering 20,000
shares exercisable at $2.50 per share. The holders of outstanding options will
execute agreements with Easyriders to the effect that, upon consummation of the
Reorganization, the options will be exchanged for options to purchase shares of
Easyriders Common Stock on the basis of one share of Easyriders Common Stock for
each two shares of Newriders Common Stock subject to such options at an exercise
price per share equal to two times the exercise price provided for in the option
agreements. Consummation of the Reorganization may trigger a change in control
under the Newriders Plan, causing all options granted thereunder to become
immediately exercisable and giving each holder of an option the right to redeem
such option for a cash payment equal to the difference between the market price
of Newriders Common Stock on the date the Reorganization is consummated, and the
exercise price of such option. Newriders' management is attempting to obtain
agreements from all such option holders to waive any such rights upon
consummation of the Reorganization.
102
<PAGE> 118
HISTORICAL PRICES AND DIVIDENDS OF NEWRIDERS COMMON STOCK
Market Information
Newriders Common Stock is traded in the over-the-counter market and quoted
on the NASD Bulletin Board under the symbol "NWRD". The shares were first quoted
on the Bulletin Board in April 1996. The following table sets forth, for the
respective periods indicated, the prices of Newriders Common Stock in the
over-the-counter market, based on inter-dealer bid prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions. The quotations have been provided by market makers in Newriders
Common Stock and/or the National Quotation Bureau.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
June 30, 1996.......................................... $5.25 $5.25
September 30, 1996..................................... $5.75 $1.00
December 31, 1996...................................... $2.50 $1.00
March 31, 1997......................................... $8.563 $1.00
June 30, 1997.......................................... $4.125 $1.8125
September 30, 1997..................................... $4.125 $1.8125
December 31, 1997...................................... $4.875 $2.4375
March 31, 1998......................................... $4.25 $2.75
June 30, 1998.......................................... $2.688 $1.75
</TABLE>
Number of Stockholders of Record
As of August 24, 1998, there were approximately 295 Stockholders of record.
Dividend Information
Newriders has not paid any dividends in the past. Until consummation of the
Reorganization, Newriders intends to retain all earnings to finance the
development and expansion of its operations and does not anticipate paying cash
dividends or making any other distributions on its shares of Newriders Common
Stock. If the Reorganization is not consummated, Newriders' future dividend
policy will be determined by its Board of Directors on the basis of various
factors, including Newriders' results of operations, financial condition,
business opportunities and capital requirements.
Under the Nevada Statutes, no dividends may be paid if, after giving effect
to the dividends: (a) Newriders would not be able to pay its debts as they
become due in the usual course of business; or (b) except as otherwise
specifically allowed by Newriders' Articles of Incorporation, Newriders' total
assets would be less than the sum of its total liabilities plus the amount that
would be needed, if Newriders were to be dissolved at the time of distribution,
to satisfy the preferential rights, upon dissolution, of stockholders whose
preferential rights are superior to those receiving the dividend.
103
<PAGE> 119
DESCRIPTION OF EASYRIDERS COMMON STOCK
Common Stock
Easyriders has authorized 50,000,000 shares of Common Stock, $.001 par
value per share, of which one (1) share is issued and outstanding and owned by
Newriders. All presently outstanding shares of Easyriders Common Stock are
validly issued, fully paid and non-assessable. Holders of Easyriders Common
Stock do not and will not have any preemptive or other subscription rights to
subscribe for or purchase any additional securities issued by Easyriders, nor
will they have any redemption or conversion rights. Holders of Easyriders Common
Stock are entitled to one vote per share. Easyriders does not have cumulative
voting.
The holders of Easyriders Common Stock are entitled to receive dividends,
when, as and if declared by the Board of Directors out of funds legally
available therefor. It is highly unlikely that dividends will be paid by
Easyriders in the foreseeable future on its Common Stock. The holders of
Easyriders Common Stock are entitled to receive on liquidation of Easyriders a
pro rata distribution of the assets of Easyriders, subject to rights of
creditors and holders of any Preferred Stock then outstanding.
Easyriders' Certificate of Incorporation authorizes the issuance of up to
10,000,000 shares of Easyriders preferred stock ("Easyriders Preferred Stock")
with rights, preferences and limitations to be determined by the Easyriders
Board of Directors. Presently there are no shares of Easyriders Preferred Stock
issued and outstanding. However, the Easyriders Board of Directors may issue
shares of Easyriders Preferred Stock in the future which have rights and
preferences, including but not limited to dividend, redemption and liquidation
rights, that are superior to those of Easyriders Common Stock.
COMPARATIVE RIGHTS OF STOCKHOLDERS
The current rights of the Newriders stockholders are governed by the Nevada
Statutes and the Articles of Incorporation, as amended (the "Newriders
Articles"), and By-Laws, as amended, of Newriders (the "Newriders By-Laws").
Upon consummation of the Merger, Newriders stockholders who do not perfect
appraisal rights will become stockholders of Easyriders, a Delaware corporation.
As stockholders of Easyriders, their rights will be governed by the Delaware
General Corporation Law ("DGCL") and the Certificate of Incorporation and
By-Laws of Easyriders. The Newriders Articles and Newriders By-Laws differ from
the Certificate of Incorporation and By-Laws of Easyriders in certain respects.
Although it is not practical to compare all such differences, the following is a
summary of certain of the more significant differences. These summaries are
qualified in their entirety by reference to, as applicable, the Nevada Statutes,
the DGCL, the Newriders Articles and Newriders By-Laws, and the Certificate of
Incorporation and By-Laws of Easyriders.
AUTHORIZED CAPITAL STOCK
Newriders. Under Newriders Articles, Newriders is authorized to issue
25,000,000 shares of one class of Common Stock, par value $0.001 per share, and
no shares of Preferred Stock. All shares of Newriders Common Stock are identical
in rights and preferences and have one vote per share. Newriders Common Stock
does not have cumulative voting rights. Newriders Common Stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to Newriders Common Stock, and the
outstanding shares of Newriders Common Stock are fully paid and nonassessable.
The holders of Newriders Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors from funds legally
available therefor, and upon liquidation are entitled to receive pro rata all
assets of Newriders available for distribution to such holders.
Easyriders. Under Easyriders Certificate of Incorporation, the aggregate
number of shares of capital stock that Easyriders is authorized to issue is
50,000,000 shares of one class of Common Stock, par value of $0.001 per share,
and 10,000,000 shares of Preferred Stock, par value of $0.001 per share.
All shares of Easyriders Common Stock are identical in rights and
preferences and have one vote per share. Easyriders Common Stock does not have
cumulative voting rights. Easyriders Common Stock has no
104
<PAGE> 120
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to Easyriders Common Stock, and
the outstanding shares of Easyriders Common Stock are fully paid and
nonassessable. Subject to preferences that may be applicable to any Preferred
Stock that may be outstanding, the holders of Easyriders Common Stock are: (1)
entitled to such dividends as may be declared from time to time by the Board of
Directors from funds legally available therefor, and (2) upon liquidation are
entitled to receive pro rata all assets of Easyriders available for distribution
to such holders.
The Easyriders Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to 10,000,000 shares of Preferred Stock in one or more series. Each such
series of Preferred Stock shall have such number of shares, designations,
relative powers, preferences, rights, qualifications, limitations and
restrictions as shall be determined by the Easyriders Board of Directors, which
may include, among others, dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and conversion rights, which in
any case could be superior to the rights associated with Easyriders Common
Stock.
The purpose of authorizing the Easyriders Board of Directors to issue one
or more series of Preferred Stock and determine its rights and preferences is to
eliminate delays associated with a stockholder vote on specific issuances of
Preferred Stock. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire control of
the outstanding voting stock of Easyriders. Easyriders has no present plans to
issue any shares of Preferred Stock.
DIRECTORS
Number. Newriders' Articles provide that the number of its directors may be
increased or decreased from time to time in such manner as shall be provided by
the Newriders By-Laws, provided that the number of directors shall be not less
than one. The Newriders By-Laws provide that the Board of Directors shall
consist of seven (7) members, until changed by amendment of the Newriders
Articles or by an amendment to the Newriders By-Laws, and there shall not be
less than one director. Currently Newriders has seven (7) directors.
Easyriders' By-Laws provide that the number of its directors shall not be
less than three (3) nor more than nine (9), with the exact number to be set from
time to time by the Board of Directors. Currently Easyriders has three (3)
Directors.
Non-Classification of Board. Neither the Newriders Board of Directors nor
the Easyriders Board of Directors is classified. The directors of both companies
serve for a term of one year and until their successors have been duly elected
and qualified.
Election. Both the Nevada Statutes and the DGCL provide that members of the
board of directors are elected by a vote of the stockholders, with each share
being entitled to one vote, unless the articles or by-laws or certificate of
incorporation provide otherwise. Neither Newriders nor Easyriders allows
cumulative voting with respect to the election of directors. As a result, the
holders of more than 50% of the outstanding shares of common stock of one of the
companies voting for the election of directors of that company can elect all of
the directors of that company if they choose to do so, and, in such event, the
holders of the remaining shares of outstanding common stock will not be able to
elect any person or persons to the respective company's Board of Directors. In
connection with the Reorganization, Messrs. Martin and Teresi will enter into
the Stockholders' Agreement in the form attached to this Prospectus/Proxy
Statement as Addendum D. The Stockholders' Agreement will provide that Mr.
Martin and Mr. Teresi shall each be entitled to designate four individuals to
serve on the Board of Directors of Easyriders, and that Mr. Martin and Mr.
Teresi shall each vote their shares for the persons designated by the other to
so serve. Upon consummation of the Reorganization, Mr. Martin and Mr. Teresi
will respectively be the beneficial owners of, and be entitled to vote,
approximately 5,132,947 and 6,993,507 shares of Easyriders Common Stock,
respectively, representing an aggregate of approximately 64% of the number of
shares of Easyriders Common Stock outstanding upon consummation of the
Reorganization. Accordingly, Mr. Martin and Mr. Teresi will together control the
election of all of the
105
<PAGE> 121
directors of Easyriders for the foreseeable future, and stockholders other than
Mr. Martin and Mr. Teresi will not have any power to elect directors of
Easyriders. See "The Reorganization -- Stockholders' Agreement."
Removal. The Nevada Statutes provide that one or more directors may be
removed from office by the vote of stockholders representing not less than
two-thirds of the voting power of the issued and outstanding stock entitled to
vote. The DGCL provides that one or more directors of a corporation may be
removed with or without cause at a meeting of stockholders by the holders of a
majority of the shares then entitled to vote at an election of directors.
The Newriders By-Laws provide that directors may be removed at any time,
with or without cause, but only by the affirmative vote or written consent of
the holders of not less than two-thirds of the issued and outstanding shares
then entitled to vote. This requirement may also have the effect of discouraging
possible takeovers of Newriders by impeding or delaying replacement of the
members of the Board of Directors.
The By-Laws of Easyriders provides that any or all of the directors may be
removed at any time, either with or without cause, by a majority vote of the
stockholders entitled to vote generally in the election of directors.
Indemnification. The Nevada Statutes provide that a director, employee,
officer or agent of a corporation may be indemnified against liability (other
than in an action by or in the right of the corporation) and other expenses
actually and reasonably incurred by such person in connection with such
proceeding, provided such person acted in good faith and in a manner such person
reasonably believed to be in, and not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe the conduct was unlawful. For actions or suits brought by or in
the name of the corporation, the Nevada Statutes provide that a director,
employee, officer or agent of a corporation may be indemnified against expenses
actually and reasonably incurred by such person in connection with such
proceeding or for amounts paid in settlement to the corporation if such person
acted in good faith and in a manner such person reasonably believed to be in and
not opposed to, the best interests of the corporation, except that if such
person is adjudged to be liable to the corporation or for amounts paid in
settlement to the corporation, such person can be indemnified if and only to the
extent that a court determines upon application, in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. To the extent that
such person has been successful or the merits or otherwise, he must be
indemnified by the corporation against expenses. Indemnification is mandatory.
the following subsection captioned "Director's Liability" for a discussion of
the differences in the standards of liability for Newriders Directors compared
to Easyriders Directors.
Under the Nevada Statutes, the determination of whether an officer or
director is entitled to indemnification (that is, whether or not the person has
met the statutory standard of conduct required for indemnification) is to be
made by independent legal counsel, if a majority of the directors who were not
parties to the proceeding so order.
The Newriders By-Laws provide for indemnification of its officers and
directors against any and all expenses incurred by them, and each of them
including but not limited to legal fees, judgments and penalties which may be
incurred, rendered or levied in any legal action brought against any or all of
them for or on account of any act or omission alleged to have been committed
while acting within the scope of their duties as officers or directors.
The DGCL provides that a corporation may indemnify against certain
liabilities and expenses of an officer, director, employee or agent of the
corporation, or a person serving at the request of the corporation as a
director, officer, employee or agent of another entity, who is made a party to
certain proceedings by reason of his or her service in such capacity if such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. However, under the DGCL, a corporation may not indemnify any
person with respect to any claim or issue as to which such person was found
liable to the corporation in a proceeding by or in the right of the corporation,
unless indemnification of expenses is ordered by a court. The DGCL provides that
a corporation must indemnify against reasonable
106
<PAGE> 122
expenses a director, officer, employee or agent of the corporation who is made a
party to any proceeding by reason of his or her service in such capacity and who
is successful, on the merits or otherwise, in the defense of any claim, issue or
matter therein. The DGCL permits a corporation to advance expenses to a director
or officer under certain conditions.
Easyriders' Certificate of Incorporation provides that Easyriders shall
indemnify to the fullest extent permitted by Section 145 of the DGCL, as amended
from time to time, each person that such section grants to a corporation the
power to indemnify. In addition, the By-Laws of Easyriders provides that
Easyriders shall indemnify each current or former director, officer, employee or
agent of the corporation, to the fullest extent permitted by the DGCL, from and
against any and all expenses, liabilities or other matters referred to in or
covered by the DGCL.
Director's Liability. The Nevada Statutes allow a corporation to include in
its articles of incorporation, a provision that limits or eliminates the
liability of a director for monetary damages for breach of fiduciary duty as a
director but must not limit or eliminate the liability of a director for acts or
omissions which involve (i) the amount of financial benefit received by a
director to which he/she is not entitled; (ii) an intentional infliction of harm
on the corporation or the stockholders; (iii) unlawful distributions to
stockholders; or (iv) an intentional violation of criminal law. These provisions
have the effect of protecting a corporation's directors against personal
liability from breaches of their duty of care.
The Newriders Articles contain a provision stating that no director or
officer of the corporation shall be personally liable to the corporation or any
of its stockholders for damages for breach of fiduciary duty as a director or
officer involving any act or omission of any such director or officer; provided,
however, that the foregoing provision shall not eliminate or limit the liability
of a director or officer (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or (ii) the payment of
dividends in violation of section 78.300 of the Nevada Revised Statutes. Any
repeal or modification of this provision of Newriders Articles is to be
prospective only and shall not adversely affect any limitation on the personal
liability of a director or officer of Newriders for actual omissions prior to
such repeal or modification.
The DGCL provides that the charter documents of a Delaware corporation may
include provisions which limit or eliminate the personal liability of directors
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided such liability does not arise from
certain proscribed conduct, including: (i) breach of the duty of loyalty; (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) the payment of unlawful dividends or expenditure
of funds for unlawful stock purchases or redemptions; or (iv) transactions from
which such director derived an improper personal benefit. Easyriders Certificate
of Incorporation contains a provision limiting the liability of its directors to
the fullest extent permitted by the DGCL.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE 1933 ACT MAY
BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF EASYRIDERS,
EASYRIDERS HAS BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
1933 ACT AND IS, THEREFORE, UNENFORCEABLE. IN THE EVENT THAT A CLAIM FOR
INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN THE PAYMENT BY EASYRIDERS
OF EXPENSES INCURRED OR PAID BY A DIRECTOR, OFFICER OR CONTROLLING PERSON OF
EASYRIDERS IN A SUCCESSFUL DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS
ASSERTED BY SUCH DIRECTOR, OFFICER OR CONTROLLING PERSON IN CONNECTION WITH THE
SECURITIES BEING REGISTERED, EASYRIDERS WILL, UNLESS IN THE OPINION OF ITS
COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A COURT
OF APPROPRIATE JURISDICTION THE QUESTION OF WHETHER SUCH INDEMNIFICATION BY IT
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE 1933 ACT AND WILL BE GOVERNED BY
THE FINAL ADJUDICATION OF SUCH ISSUE.
107
<PAGE> 123
AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
The Nevada Statutes and the DGCL permit the board of directors to adopt a
resolution of its own volition setting forth a proposed amendment to the
corporation's articles or certificate of incorporation, declaring its
advisability, and directing that such proposed amendment be submitted to a vote
at a meeting of stockholders. Neither corporation's articles or certificate of
incorporation require a super-majority vote for such an amendment. Accordingly
the general provisions of the Nevada Statutes and the DGCL apply, to Newriders
and Easyriders, respectively, which allow the adoption of an amendment to the
articles or certificate of incorporation with the approval of holders of a
majority of the outstanding shares of the respective corporation's common stock
entitled to vote thereon.
REPURCHASE AND REDEMPTION OF SHARES
The Nevada Statutes permit the redemption or repurchase of stock if, after
the redemption or repurchase, (a) the corporation is able to pay its debts as
they become due in the usual course of business, or (b) the corporation's total
assets exceed its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of redemption or repurchase, to
satisfy the preferential rights upon dissolution of stockholders whose rights
upon dissolution are superior to those whose shares are being redeemed or
repurchased. Newriders Articles do not authorize the issuance of a class of
preferred stock.
The DGCL permits the redemption or repurchase of stock of a Delaware
corporation, provided that, no Delaware corporation shall:
1. Purchase or redeem its own shares of capital stock for cash or
other property when the capital of the corporation is impaired or when such
purchase or redemption would cause any impairment of the capital of the
corporation, except that a corporation may purchase or redeem out of
capital any of its own shares which are entitled upon any distribution of
its assets, whether by dividend or in liquidation, to a preference over
another class or series of its stock if such shares will be retired upon
their acquisition and the capital of the corporation reduced in accordance
with sections 243 and 244 of the DGCL;
2. Purchase, for more than the price at which they may be redeemed,
any of its shares which are redeemable at the option of the corporation; or
3. Redeem any of its shares unless the redemption is authorized by
section 151(b) of the DGCL and then only in accordance with such section
and the certificate of incorporation.
While Easyriders presently has no shares of preferred stock outstanding,
the Certificate of Incorporation of Easyriders authorizes the issuance of
preferred stock, which might have a preferential right upon dissolution, if the
Board of Directors of Easyriders were to so determine upon the issuance of the
preferred stock.
PAYMENT OF DIVIDENDS TO STOCKHOLDERS
The Nevada Statutes generally allow a corporation, subject to restrictions
in its articles of incorporation, to declare and pay dividends in cash or
property, but only if the corporation is solvent and payment of the dividend
would not render the corporation insolvent (using the insolvency standard
described above under "Comparative Rights of Shareholders -- Repurchase and
Redemption of Shares"). Such limitations are applied on a consolidated basis.
Newriders' Articles of Incorporation place no further restrictions on
distributions.
The DGCL provides that a Delaware corporation may pay dividends not only
out of surplus (the excess of assets over capital) but also out of net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year, subject to any restrictions contained in the certificate of
incorporation. The ability of a Delaware corporation to pay dividends or to make
repurchases or redemptions of its shares is dependent on the financial status of
the corporation alone, not on a consolidated basis. Under the DGCL, surplus may
be created by a reduction of capital and may be distributed by board action, as
long as capital is maintained in an amount not less than the aggregate par value
of the remaining issued and outstanding shares of all classes having a
preference upon distribution of assets plus the stated value of any shares not
having par value. Similarly, Easyriders' Certificate of Incorporation places no
further restrictions on distributions.
108
<PAGE> 124
AMENDMENTS TO BY-LAWS
Under Nevada law, the procedure to amend a corporation's By-Laws may be
specified in the corporation's articles of incorporation and/or by-laws. The
DGCL provides that after the issuance of stock by a Delaware corporation, that
the power to amend the By-Laws shall be in the stockholders entitled to vote,
unless the Delaware corporation has provided in its Certificate of Incorporation
that the power to amend By-laws is conferred upon the directors of the
corporation. Easyriders' By-Laws provide that the Easyriders Board of Directors
shall have the power to make, alter or repeal the By-Laws.
Neither Newriders Articles nor Easyriders Certificate of Incorporation
restricts the authority of the Board of Directors to amend its By-Laws, with the
exception that Newriders By-Laws, as amended, permit amendments to be made by
both the directors and the stockholders, and require that any amendment adopted
by the directors must not be inconsistent with or contrary to the provision of
any amendment adopted by the stockholders. The By-Laws of both Newriders and
Easyriders provide that they may be amended at any meeting of the Board of
Directors of the corporation by a majority of the Directors present at the
meeting. The By-Laws of both Newriders and Easyriders provide that they may also
be amended by a stockholder vote, with the Newriders' By-Laws providing that the
stockholders owning a majority of the shares and entitled to vote thereat may
amend the Newriders By-Laws, and the Easyriders By-Laws provide that the
Easyriders stockholders entitled to exercise a majority of the voting power of
the corporation may amend the Easyriders' By-Laws.
STOCKHOLDER APPROVAL OF MERGER AND OTHER BUSINESS COMBINATIONS
The Nevada Statutes provide that any proposed exchange, sale, lease or
other disposition of all or substantially all of the assets of a corporation,
and any merger or consolidation of a corporation, must be approved by a majority
of all votes entitled to be cast. If stockholders of separate classes of stock
are so entitled, the transaction must be separately approved by each voting
group entitled to vote by a majority of all the votes entitled to be cast by
that voting group. The transaction must also be approved by the Board of
Directors. The Nevada Statutes do not require a stockholder vote of the
surviving corporation in a merger if (a) the merger does not amend the existing
articles of incorporation of the surviving corporation; (b) each stockholder of
the surviving corporation will hold the same number of shares after the merger
as before, with the same rights and preferences; (c) the number of voting shares
outstanding immediately after the merger, plus the number of voting shares
issuable as a result of the merger, will not exceed by more than twenty percent
(20%) the total number of voting shares of the surviving corporation outstanding
immediately before the merger; and (d) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger, will not exceed by more than twenty
(20%) the number of participating shares outstanding immediately before the
merger.
The Newriders Articles do not contain a blanket requirement for a vote
greater than that required by the Nevada statutes for such transactions.
The DGCL requires the approval of the Delaware corporation's Board of
Directors and the holders of a majority of the outstanding shares of Easyriders'
Common Stock entitled to vote thereon for mergers or consolidations, and for
sales, leases or exchange of substantially all of Easyriders' property and
assets. The DGCL would permit Easyriders to merge with another corporation
without obtaining the approval of Easyriders' stockholders if: (a) Easyriders is
the surviving corporation of the merger; (b) the merger agreement does not amend
Easyriders' Certificate of Incorporation; (c) each share of Easyriders' Common
Stock outstanding immediately prior to the effective date of the merger is to be
an identical outstanding or treasury share of Easyriders' Common Stock after the
merger; and (d) either no shares of Easyriders' Common Stock and no shares,
securities or obligations convertible into such Easyriders' Common Stock are to
be issued or delivered under the plan of merger, or any authorized but unissued
shares or treasury shares of Easyriders' Common Stock to be issued or delivered
under the plan of merger plus those initially issuable upon conversion of any
other shares, securities or obligations to be issued or delivered under such
plan do not exceed twenty percent (20%) of the shares of Easyriders' Common
Stock outstanding immediately prior to the effective date of the merger.
109
<PAGE> 125
ANTI-TAKEOVER PROVISIONS
Newriders is subject to section 78.438 of the Nevada Statutes, which
provides that, subject to certain exceptions, Newriders, a resident domestic
corporation, may not engage in any "combination" with any "interested
stockholder" for a period of three years from the date such person became an
interested stockholder, unless the combination is approved in a prescribed
manner and certain other exceptions apply. For purposes of section 78.439,
"combination" is defined broadly to include reorganizations, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is any person or entity who,
together with affiliates and associates, owns (or within the three immediately
preceding years did own) ten percent (10%) or more of the voting power of the
outstanding shares of the corporation.
Section 203 of the DGCL prohibits, subject to certain exceptions, certain
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
of the transaction in which the person or entity became an interested
stockholder, unless the business combination is approved in a prescribed manner
or certain other exceptions apply. For purposes of section 203, "business
combination" is defined broadly to include reorganizations, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is any person or entity who,
together with affiliates and associates, owns (or within the three immediately
preceding years did own) fifteen percent (15%) or more of the corporation's
voting stock. A Delaware corporation may elect in its Certificate of
Incorporation to not be governed by Section 203 of the DGCL. Easyriders has
elected in its Certificate of Incorporation not to be governed by Section 203 of
the DGCL.
RIGHTS OF DISSENTING STOCKHOLDERS
Under the Nevada Statutes, stockholders dissenting from a merger,
consolidation, statutory share exchange or sale, lease, exchange or other
disposition of all or substantially all of a Nevada corporation's assets and who
follow statutory procedures may receive payment for the "fair value" of their
shares as determined by agreement of the parties or a court of competent
jurisdiction. Dissenting stockholders of a Nevada corporation do not have
appraisal rights to receive payment of the "fair value" of their shares in the
event that they are stockholders of any class or series of stock which, at the
record date, were either listed on a national securities exchange, or designated
as a national market system security on a interdealer quotation system by the
National Association of Securities Dealers, Inc., or held by at least 2,000
stockholders of record, unless: (a) the articles of incorporation provide
otherwise; or (b) the holders of the class or series are required under the plan
of merger or exchange to accept for the shares anything other than: (1) cash,
owner's interests or owner's interests and cash in lieu of fractional shares of:
(i) the surviving or acquiring entity; or (ii) any other entity which, at the
effective date of the plan of merger or exchange, were either listed on a
national securities exchange, or designated as a national market system by the
National Association of Securities Dealers, Inc., or held of record by at least
2,000 stockholders of record; or (2) a combination of cash and shares of the
kind described in subparagraphs (i) and (ii) above. Additionally, there is no
right of dissent for any holders of stock of the surviving domestic corporation
if the plan of merger does not require action of the stockholders of the
surviving domestic corporation. See "Rights of Dissenting Stockholders."
Under the DGCL, stockholders of Delaware corporations are entitled to
certain limited rights of appraisal to receive the "fair value" of their shares
as determined by a court of competent jurisdiction. No appraisal rights shall be
available, however, for the holders of any shares of a stock a constituent
Delaware corporation to a merger if that corporation survives the merger and the
merger did not require for its approval the vote of the stockholders of such
constituent Delaware corporation. Moreover, the under the DGCL, no appraisal
rights are available to stockholders of a Delaware constituent corporation to a
merger for any shares of stock which, at the record date for the vote on such
merger, were either (a) listed on a national securities exchange or designated
as a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or (b) held of record by more
than 2,000 stockholders. Appraisal rights are available to Delaware stockholders
in any event if such stockholders are required by the terms of an agreement of
merger or consolidation to accept for such stock of the constituent corporation
anything
110
<PAGE> 126
except: (1) shares of stock of the corporation surviving or resulting from such
merger or consolidation; (2) shares of stock of any other corporation, which at
the effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders; (3) cash in
lieu of fractional shares of the corporation described in clauses (1) and (2)
above; or (4) any combination of the shares of stock and cash into a fractional
shares described in clauses (1), (2) and (3) above.
SPECIAL MEETINGS OF STOCKHOLDERS
The Nevada Statutes provide that special meetings of a corporation's
stockholders may be called by the President, Vice President, Secretary or
Assistant Secretary or by such other persons as are designated by the board of
directors or in the Nevada corporation's articles of incorporation or bylaws.
Newriders' Articles do not give any additional person the authority to call
special meetings of the stockholders. If the bylaws do not permit persons
holding a specified percentage of the voting power from calling a special
meeting, they may be able to take action by written consent, unless this right
is eliminated in either the articles of incorporation or by-laws.
Newriders' Bylaws provide that such meetings may also be called by the
President or Secretary, and shall be called by the President with or without
Board approval on the written request of stockholders owning at least fifty
percent (50%) of all shares issued and outstanding and entitled to vote.
Under the DGCL, special meetings of stockholders may be called by a
corporation's Board of Directors, Chairman of the Board or such person or
persons as may be authorized by such corporation's Certificate of Incorporation
or By-Laws. Easyriders' Certificate of Incorporation does not give any
additional person the authority to call special meetings of the stockholders.
Easyriders' By-Laws provide that such meetings may also be called by the
Board, Chairman of the Board of Directors or the President, and shall be called
by the President or Secretary upon the written request (stating the purpose or
purposes of the meeting) of stockholders owing at least fifty percent (50%) of
the outstanding shares entitled to vote or directors then in office. Easyriders'
By-Laws provide that only business related to the purposes set forth in the
notice of the meeting may be transacted at a special meeting.
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
Under the Nevada Statutes, unless otherwise provided in a corporation's
articles of incorporation or upon a proposed voluntary dissolution by
stockholders, any action which may be taken at any meeting of stockholders of a
Nevada corporation may be taken without a meeting and a vote if a written
consent stating the action is signed by a majority of the stockholders entitled
to vote with respect to the subject matter thereof, except that if a different
proportion of voting power is required for such an action at a meeting, that
proportion of written consents is required. Newriders' By-Laws provide that any
action required to be taken at a meeting of the stockholders or any other action
which may be taken at a meeting of the stockholders except the election of
directors may be taken without a meeting if a consent in writing setting forth
the action so taken shall be signed by all the stockholders entitled to vote
with respect to the subject matter thereof.
Under the DGCL, unless otherwise provided in the Certificate of
Incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
Easyriders' By-Laws provide that any action required or permitted to be taken at
any meeting of stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than a
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voting. Easyriders' By-Laws provide that prompt notice of the taking of any such
action shall be given to those stockholders who did not consent in writing.
111
<PAGE> 127
NEWRIDERS PLAN
(PROPOSAL 2)
The Newriders Board of Directors unanimously adopted the Newriders Plan on
November 20, 1997, subject to the approval of the stockholders of Newriders. The
Newriders Board of Directors recommends that the stockholders consider and
approve the Newriders Plan. Such approval at the Annual Meeting will require the
affirmative vote of the holders of a majority of the shares of Newriders Common
Stock present in person or represented by proxy and entitled to vote. If the
Reorganization is consummated, the Newriders Plan will terminate and the awards
granted thereunder will be converted to similar awards to be granted under the
Easyriders Plan, subject to the approval of the Newriders' stockholders. See
"Easyriders Plan (Proposal 3)."
THE NEWRIDERS BOARD OF DIRECTORS UNANIMOUSLY BELIEVES THE NEWRIDERS PLAN IS
ADVISABLE AND IN THE BEST INTERESTS OF NEWRIDERS AND RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE NEWRIDERS PLAN.
The following constitutes a brief discussion of the material features of
the Newriders Plan and is qualified in its entirety by reference to the
Newriders Plan, the full text of which is attached hereto as Addendum F and is
incorporated herein by reference. All stockholders of Newriders are urged to
read Addendum F in its entirety.
NATURE AND PURPOSE
The stated purpose of the Newriders Plan is to secure for Newriders and any
subsidiaries of Newriders the benefits arising from capital stock ownership and
the receipt of capital stock-based incentives by those employees, directors,
officers and consultants of Newriders and any subsidiaries who will be
responsible for Newriders' future growth and continued success.
The Newriders Plan is designed to meet these objectives by granting stock
incentive awards to those persons whose performance or potential contribution
will benefit Newriders. The Newriders Plan empowers Newriders to grant to
employees (including officers), directors and consultants of Newriders and its
subsidiaries incentive and non-qualified stock options ("Options"), stock
appreciation rights ("SARs"), awards of restricted stock, deferred stock, bonus
stock in lieu of other obligations of Newriders, or dividend equivalent awards
(collectively and generically, "Stock Based Awards"), and participation in
incentive award programs and other awards ("Performance Awards"). The Newriders
Plan also empowers Newriders to grant to eligible individuals any combination of
any or all of these Options, SARs and Stock Based Awards, subject to certain
limitations.
Persons to whom grants of Options, SARs, Stock Based Awards and Performance
Awards are made are sometimes referred to as "participants." References to
"incentive stock options" are to incentive stock options within the meaning of
Section 422 of the Code.
DURATION
The Newriders Plan provides that it will terminate upon the date on which
no shares of Newriders Common Stock remain available for issuance under the
Newriders Plan and Newriders has no further rights or obligations with respect
to outstanding Options, SARs, Stock Based Awards, or Performance Awards under
the Newriders Plan. Options, SARs, Stock Based Awards and Performance Awards
outstanding on the termination date of the Newriders Plan will continue to have
full force and effect in accordance with the provisions of the instruments
evidencing the Options, SARs, Stock Based Awards and Performance Awards. The
Newriders Board of Directors may modify, amend, terminate or suspend the
Newriders Plan from time to time or at any time without stockholder approval,
including amending the Newriders Plan to increase the number of shares of
Newriders Common Stock subject to the Newriders Plan, provided that stockholder
approval may be required in the event of a material change to the Newriders Plan
or to comply with applicable federal or state law or regulation, or applicable
stock exchange or automated quotation system regulation. Any such modification,
amendment, termination or suspension of the Newriders Plan will not impair the
rights of any person with respect to any Option, SAR, Stock Based Award or
Performance Award previously granted.
112
<PAGE> 128
ADMINISTRATION
The Newriders Plan is administered by a committee appointed by the
Newriders Board of Directors and consisting of at least two directors, who must
be "outside directors" as that term is used in the regulation related to Section
162(m) of the Code and "non-employee directors" as that term is used in Rule
16b-3 promulgated under the Exchange Act. The committee's construction and
interpretation of the terms and provisions of the Newriders Plan are final and
conclusive. The Newriders Board of Directors has designated the Newriders'
Compensation Committee as the committee to administer the Newriders Plan.
Members of the Compensation Committee serve at the discretion of the Newriders
Board of Directors. The Compensation Committee may in its sole discretion grant
Options and SARs, issue shares upon exercise of such Options and SARs, and grant
Stock Based Awards and Performance Awards, all as provided in the Newriders
Plan. The Compensation Committee has the authority, subject to the express
provisions of the Newriders Plan, to construe the Newriders Plan and its related
agreements, to prescribe, amend and rescind the rules and regulations relating
to the Newriders Plan, to determine the terms and provisions of the respective
Option, SARs, Stock Based Award and Performance Award agreements, which need not
be identical, and to make all other determinations in the judgment of the
Compensation Committee necessary or desirable for the administration of the
Newriders Plan.
SHARES SUBJECT TO THE NEWRIDERS PLAN
The stock to be offered under the Newriders Plan consists of shares of
Newriders Common Stock. The last sale price for Newriders Common Stock on August
26, 1998, as reported by the NASD Electronic Bulletin Board was $1.156 per
share. The maximum number of shares of Newriders Common Stock in respect of
which Options, SARs and Awards may be granted pursuant to the provisions of the
Newriders Plan may not exceed 5,000,000 (subject to adjustment for stock splits,
stock dividends, recapitalizations and the like). The shares may be either
authorized and unissued shares, treasury shares or shares purchased on the open
market. The Compensation Committee has broad discretion over the procedures used
to count the number of shares subject to Options, SARs and Awards, and pursuant
to such authority if Newriders reacquires unvested shares issued pursuant to
Awards under the Newriders Plan, or if an Option or SAR expires or terminates
without having been exercised in full, the reacquired or unexercised shares may
be made available for subsequent grant under the Newriders Plan. Shares of
Newriders Common Stock issued pursuant to the Newriders Plan may be subject to
such restrictions on transfer, repurchase rights or other restrictions as may be
determined by the Compensation Committee.
ELIGIBILITY
All employees (including officers) of Newriders or any of its subsidiaries
are eligible to receive incentive stock options pursuant to the Newriders Plan.
All employees (including officers), directors and consultants of Newriders or
any of its subsidiaries are eligible to receive non-qualified options, SARs,
Stock Based Awards and Performance Awards. As of the Record Date, approximately
20 persons were eligible to participate in the Newriders Plan.
The selection of participants in, and the nature and size of grants under,
the Newriders Plan are wholly within the discretion of the Compensation
Committee. However, under the Newriders Plan, the maximum number of shares with
respect to which Options, SAR, Stock Based Awards or Performance Awards may be
granted to any employee in any fiscal year shall be limited to 2,000,000 shares
of Newriders Common Stock. Cash awards are subject to an annual ceiling of
$1,000,000 per participant, and the total cash award permitted with respect to
any performance period award is $5,000,000. The Compensation Committee's
designation of a participant in any year does not require the Compensation
Committee to designate such person to receive a grant in any other year. The
table below shows the number of Options granted under the Newriders Plan to such
persons or groups listed in such table during 1997.
113
<PAGE> 129
<TABLE>
<CAPTION>
NUMBERS OF OPTIONS
NAME AND POSITION GRANTED IN 1997(1)
----------------- ------------------
<S> <C>
All current executive officers as a group................... 0
All current directors who are not executive officers, as a
group..................................................... 0
All current employees, including all current officers who
are not executive officers, as a group.................... 196,000
</TABLE>
- ---------------
(1) All such options were non-qualified options. Three Options for 25,000 shares
in the aggregate were immediately exercisable. Options for 20,000 shares
become fully exercisable after one year from the date of grant. Three
options for 50,000 shares each were each exercisable with respect to 5,000
shares beginning on the first anniversary of the date of grant, an
additional 15,000 shares beginning on the second anniversary of the grant,
and an additional 20,000 shares beginning on the third anniversary of the
date of grant. One option for 1,000 shares was made exercisable with respect
to 500 shares beginning on the first anniversary of the date of grant, and
an additional 500 shares beginning on the second anniversary of the date of
grant. All Options were granted at exercise prices of $2.50 per share,
except for the option for 1,000 shares which has an exercise price of $3.00
per share. They expire from one to ten years from the respective dates of
grant.
OPTIONS AND SARS
Options
Options granted under the Newriders Plan may be in the form of incentive
stock options or non-qualified stock options. Options may be granted under the
Newriders Plan on such terms and conditions not inconsistent with the provisions
of the Newriders Plan and in such form as the Compensation Committee may from
time to time approve.
The exercise price per share of Newriders Common Stock purchasable under an
Option granted under the Newriders Plan shall be determined by the Compensation
Committee at the time of grant. The exercise price of an incentive stock option,
however, shall not be less than the fair market value of Newriders Common Stock
on the date of grant or, in the case of an incentive stock option to be granted
to a participant owning stock having more than 10% of the total combined voting
power of all classes of stock of Newriders or any subsidiary, the exercise price
per share shall be not less than 110% of the fair market value of such stock on
the date of grant. The exercise price of a non-qualified stock option shall not
be less than 50% of the fair market value of Newriders Common Stock on the date
of grant.
The term of each Option granted under the Newriders Plan shall be fixed by
the Compensation Committee.
An Option granted under the Newriders Plan shall be exercisable at such
time or times and subject to such conditions as shall be determined by the
Compensation Committee at the date of grant and as set forth in the instrument
evidencing the Option. With respect to incentive stock options, the aggregate
fair market value (determined as of the date of grant) of the number of shares
with respect to which such incentive stock options are exercisable for the first
time by a participant during any calendar year may not exceed $100,000 or such
other limit as may be established under Section 422 of the Code.
An Option granted under the Newriders Plan may be exercised as provided in
the instrument evidencing the Option. Payment of the exercise price may be made
with cash, with shares of Newriders Common Stock or with a combination of cash
and stock, as the Compensation Committee may determine. The Compensation
Committee may also permit participants to simultaneously exercise options and
sell the shares of Newriders Common Stock thereby acquired, pursuant to a
brokerage or similar arrangement, approved in advance by the Compensation
Committee, and to use the proceeds from such sale as payment of the purchase
price. The Compensation Committee may, in its discretion, accelerate the date of
exercise of any installments of any Options, provided that no acceleration will
be made that would violate the annual vesting limitation contained in Section
422(d) of the Code with respect to incentive stock options.
114
<PAGE> 130
No shares of Newriders Common Stock will be issued under the Newriders Plan
unless counsel for Newriders is satisfied that such issuance will be in
compliance with applicable federal and state securities laws or any applicable
listing requirements of any national securities exchange on which Newriders
Common Stock is then listed. Any participant in the Newriders Plan may be
required to represent and agree in writing that the stock acquired by the
participant is being acquired for investment.
Stock Appreciation Rights
Under the Newriders Plan, an SAR may be granted in tandem with, in addition
to, or independent of any other grant. An SAR is the right to receive, without
payment, an amount equal to the excess, if any, of the fair market value of a
share of Newriders Common Stock on the date of exercise over the grant price of
such share, multiplied by the number of shares as to which the SARs shall have
been exercised. Newriders will pay such amount to the holder in cash or in
shares of Newriders Common Stock or a combination thereof, as the Compensation
Committee may determine.
An SAR may be exercised by a participant in accordance with procedures
established by the Compensation Committee. The Compensation Committee may also
determine that an SAR shall be automatically exercised on one or more specified
dates.
Employment
The Compensation Committee may determine whether Options and SARs shall
terminate if the participant ceases to be employed by Newriders or a subsidiary.
Except as otherwise provided in the instrument evidencing the Option or SAR, if
a participant dies while an employee of Newriders or a subsidiary, any Option or
SAR granted to such participant may be exercised by the participant's personal
representatives or heirs to the extent that the participant could have exercised
the Option or SAR on the date of his or her death.
Transferability
No Option or SAR granted under the Newriders Plan, and no right or interest
therein, is assignable or transferable by a participant except by will or the
laws of descent and distribution or, with respect to non-qualified stock options
and SARs, except to the extent the participant's agreement granting such
non-qualified stock option or SAR provides otherwise.
STOCK BASED AWARDS
The Compensation Committee may grant a participant a Stock Based Award of
shares of Newriders Common Stock, on such terms and conditions and subject to
such restrictions as the Compensation Committee may determine. Such restrictions
may include restrictions on the pledging, sale, assignment, transfer or other
disposition of such shares and the requirement that the participant forfeit all
or a portion of such shares to Newriders upon termination of employment. Each
participant receiving an Award may be required to enter into a stock restriction
agreement with Newriders agreeing to such restrictions. Shares issued pursuant
to Stock Based Award are held by the participant as holder of record for all
purposes, including voting and receipt of dividends.
Transferability
Shares of Newriders Common Stock issued pursuant to a Stock Based Award may
not be sold, assigned, transferred or otherwise disposed of, except, subject to
the terms of any stock restriction agreement, by will or the laws of descent and
distribution, and may not be pledged or hypothecated as collateral for a loan,
prior to the lapse of restrictions on such shares. Any attempt by the
participant to dispose of or encumber the shares issued pursuant to a Stock
Based Award prior to the lapse of restrictions on such shares will cause the
participant's interest in such shares to terminate.
115
<PAGE> 131
Employment
Except as otherwise provided in any stock restriction agreement, if prior
to the lapse of the restrictions on the stock the participant ceases to be an
employee of Newriders or a subsidiary for any reason, all such shares which
remain subject to restrictions shall be forfeited to Newriders.
PERFORMANCE AWARDS
The Committee has broad authority to grant cash awards and awards of other
property, based on the achievement of pre-established performance goals. The
Committee's authority is virtually unlimited in this regard as to persons other
than those as to whom some portions of their compensation may exceed the limits
on deductibility established by Code Section 162(m). To the extent the
participant is such a person whose compensation is likely to be subject to the
limitations of Code Section 162(m), the Committee is required to structure such
awards and the criteria upon which such awards are granted so that the
Performance Awards qualify as "performance-based compensation" under Code
Section 162(m). Within these broad parameters, performance goals may be selected
on a number of bases, including (1) total stockholder return, (2) a comparison
of total stockholder return to a publicly available index, (3) net income, (4)
pre-tax earnings, (5) earnings before interest expense, taxes, depreciation and
amortization, (6) pre-tax operating earnings after interest expense and before
bonuses, services fees, and extraordinary special items, (7) operating margin,
(8) earnings per share, (9) growth in earnings per share, (10) return on equity,
(11) return on capital, (12) return on investment, (13) operating earnings, (14)
working capital or inventory, or (15) ratio of debt to stockholders' equity.
Achievement of performance goals may be measured over a performance period
of up to 10 years. Performance goals are to be established not later than 90
days after the beginning of any performance period applicable to such
Performance Award, or other date required or permitted for "performance-based
compensation" under Code Section 162(m).
The Committee may establish an unfunded pool for purposes of measuring
Newriders performance in connection with Performance Awards. The amount of such
pool shall be based upon the achievement of a performance goal based on the
business criteria discussed above. The amount of the pool may be established as
a percentage of any such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
Settlement of Performance Awards may be in cash, stock, other awards or
other property, as the Compensation Committee may determine. The Compensation
Committee may reduce the amount of a settlement otherwise to be made in
connection with a Performance Award. The Compensation Committee is required to
specify the circumstances in which such Performance Award shall be paid or
forfeited in the event of termination of employment by the participant prior to
the end of a performance period, or a settlement of Performance Awards.
The Newriders Plan also provides that the Compensation Committee may
establish annual incentive award pools. The amount of such annual incentive
award pools shall be based on the achievement of performance goals based on
business criteria discussed above. The persons to potentially participate in
such annual incentive awards are to be designated not later than the 90th day of
each fiscal year, except as may otherwise be permitted in the case of awards
intended to be "Performance Based Compensation" under Code Section 162(m). After
the end of each year, the Compensation Committee is to determine the amount, if
any, of the annual incentive award pool, in the maximum amount of award payable
to each participant in the pool. These amounts are subject to discretionary
reduction by the Compensation Committee. The Committee is required to specify
the circumstances in which such an award may be paid or forfeited in the event
of a termination of employment prior to the end of a fiscal year or settlement
of the annual award.
CHANGE IN CONTROL
The Newriders Plan provides that certain changes beneficial to participants
will occur upon a "Change in Control." A Change in Control occurs if (i) any
person acquires beneficial ownership of shares of Newriders
116
<PAGE> 132
Common Stock then outstanding, and such acquisition results in the person
beneficially owning 25% or more of the Newriders Common Stock outstanding, or
25% or more of the combined voting power of the Newriders Common Stock
outstanding, (ii) the stockholders of Newriders approve a reorganization,
merger, consolidation, complete liquidation or dissolution of Newriders, sale or
disposition of all or substantially all of the assets of Newriders, or similar
corporate transaction (generically a "Corporate Transaction"), or (iii) the
composition of the Board of Directors is changed so that those directors prior
to the change cease to constitute at least a majority of the Board. Upon the
occurrence of a Change in Control, certain provisions of the Newriders Plan will
apply to enhance certain benefits to persons who have received an Award, Option
or SAR under the Newriders Plan as follows:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of the
time of the Change of Control, and shall remain exercisable and vested for
the balance of the stated term of such Award without regard to any
termination of employment by the recipient;
(ii) Any Optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in lieu
of acquiring the shares of Stock covered by such Option, to receive, and
Newriders shall be obligated to pay, in cash, the excess of the Change in
Control price over the exercise price of such Option, multiplied by the
number of shares of stock covered by such Option;
(iii) Limited SARs (and all SARs if so provided by their terms) shall
become exercisable for amounts, in cash, determined by reference to the
Change in Control Price;
(iv) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Newriders Plan
shall lapse, and such Awards shall be deemed fully vested as of the time of
such Change in Control; and
(v) With respect to any such Outstanding Award subject to achievement
of performance goals and conditions under the terms of the Newriders Plan,
such performance goals and other conditions shall be deemed to be met if
and to the extent so provided by the Committee in the Award Agreement
relating to such Award.
For these purposes, the Change in Control Price means an amount of cash
equal to the higher of (i) the amount of cash and fair market value of property
that is the highest price per share paid (including extraordinary dividends) in
any Corporate Transaction triggering the Change in Control, or any liquidation
of shares following a sale of substantially all assets of Newriders, or (ii) the
highest fair market value per share at any time during the 60-day period
preceding and 60-day period following the Change in Control.
The effect of the above-described Change in Control provisions of the
Newriders Plan may have the effect of discouraging transactions involving a
Change of Control. Newriders anticipates that inasmuch as the market value of
Newriders Common Stock for the past 60 days has remained less than the exercise
price of any options outstanding under the Plan, that holders of options under
the Plan will have no right to receive payment under the Change of Control
Provisions because of the Reorganization. However, Newriders has obtained
waivers from all such persons of any rights under the Change in Control
Provision of the Newriders Plan, including a waiver of the acceleration of
vesting schedules of the outstanding options.
FEDERAL INCOME TAX CONSEQUENCES
Based on current provisions of the Code, and the existing regulations
thereunder, certain anticipated federal income tax consequences with respect to
the several types of grants are described below.
Grant of Options and SARs
A participant will not recognize any taxable income at the time an Option
or SAR is granted, and the Company will not be entitled to a federal income tax
deduction at that time.
117
<PAGE> 133
Incentive Stock Options
No ordinary income will be recognized by a participant holding an incentive
stock option at the time of exercise. The excess of the fair market value of the
shares at the time of exercise over the aggregate option exercise price will be
an adjustment to alternative minimum taxable income for purposes of the federal
"alternative minimum tax" at the date of exercise. If the participant holds the
shares for the greater of two years after the date the option was granted or one
year after the acquisition of such shares, the difference between the amount
realized upon disposition of the shares and the aggregate option exercise price
will constitute a long-term capital gain or loss, as the case may be, and
Newriders will not be entitled to a federal income tax deduction. If the shares
are disposed of in a sale, exchange or other "disqualifying disposition"
(including the use of the shares to exercise subsequent options) within two
years after the date of grant or within one year after the date of exercise, the
participant will realize taxable ordinary income in an amount equal to the
excess of the fair market value of the shares purchased at the time of exercise
over the aggregate option exercise price, and Newriders generally will be
entitled to a federal income tax deduction equal to such amount. In addition,
the participant will have a taxable capital gain equal to the difference, if
any, between: (i) the amount realized upon disposition of the shares, and (ii)
the sum of the aggregate option exercise price plus the amount of ordinary
income on which the participant was taxed.
Non-Qualified Stock Options
Taxable ordinary income will be recognized by the participant at the time
of exercise of a non-qualified stock option in an amount equal to the excess of
the fair market value of the shares purchased at the time of such exercise over
the aggregate option exercise price. Newriders generally will be entitled to a
corresponding federal income tax deduction. At the time of a subsequent sale of
the shares, the participant will generally recognize a taxable capital gain or
loss based upon the difference between the aggregate selling price of the shares
and the aggregate fair market value of the shares at the time of exercise.
Stock Appreciation Rights
Upon the exercise of an SAR, the participant will realize taxable ordinary
income on the amount of cash received and/or the then current fair market value
of the shares of Newriders Common Stock received, and Newriders generally will
be entitled to a corresponding federal income tax deduction. The participant's
basis in any shares of Newriders Common Stock received will be equal to the
amount of ordinary income upon which the participant was taxed. Upon any
subsequent disposition, any gain or loss realized will be a capital gain or
loss.
Stock Based Awards
Unless a participant makes the election described below, a participant
receiving a Stock Based Award will not recognize income, and Newriders will not
be allowed a deduction, at the time of grant of such Stock Based Award. While
the restrictions on the shares are in effect, a participant will recognize
compensation income equal to the amount of the dividends received, and Newriders
will be allowed a deduction in a like amount. When the restrictions on the
shares are removed or lapse, the fair market value of the shares on the date the
restrictions are removed or lapse in excess of the amount, if any, paid by the
participant will be ordinary income to the participant and generally will be
allowed as a deduction for federal income tax purposes to Newriders. Upon
disposition of the shares, the gain or loss recognized by the participant shall
be equal to the difference between the amount realized on such disposition and
the fair market value of the shares on the date the restrictions were removed or
lapsed. Such amount will be treated as capital gain or loss, and the capital
gain or loss will be short-term or long-term depending upon the period of time
the shares are held by the participant following the removal or lapse of the
restrictions. If the restrictions do not lapse and the shares are forfeited by
the participant and thus returned to Newriders, there will be no federal income
tax consequences to either the participant or Newriders. If required by the
Compensation Committee, no participant shall make, in connection with a stock
grant, the election permitted under Section 83(b) of the Code. If permitted, by
properly filing an election pursuant to Section 83(b) of the Code with the IRS
within 30 days after the date of grant (assuming that the date of grant is the
date the participant acquires a beneficial
118
<PAGE> 134
interest in the Stock Based Award), a participant's ordinary income and
commencement of the holding period and Newriders' deduction will be determined
as of the date of grant. In such a case, the amount of ordinary income
recognized by such a participant and deductible by Newriders will be equal to
fair market value of the shares as of the date of grant. If such election is
made and a participant thereafter forfeits his or her stock, no refund or
deduction will be allowed for the amount previously included in such
participant's income. The Newriders Plan permits the Compensation Committee to
restrict the ability of a participant to make the Section 83(b) election.
Performance Awards
Payments of cash and property pursuant to Performance Awards will typically
constitute ordinary income to the participant and be deductible by Newriders,
except to the extent of the limitations under Section 162(m) of the Code.
Performance Awards under the Newriders Plan are required to be structured so as
to qualify for the performance-based exemption under Section 162(m).
Special Rules
To the extent a participant pays all or part of the option exercise price
of a non-qualified stock option by tendering shares of Newriders Common Stock
owned by the participant, the tax consequences described above apply except that
the number of shares received upon such exercise which is equal to the number of
shares surrendered in payment of the option exercise price shall have the same
tax basis and holding period as the shares surrendered. The additional shares
received upon such exercise shall have a tax basis equal to the amount of
ordinary income recognized on such exercise and a holding period which commences
on the date of exercise. To preserve Newriders' deductions with respect to the
non-qualified options and SARs, the Compensation Committee may be required to
set the exercise or grant price for such non-qualified options and SARs at the
fair market value of a share of Newriders Common Stock on the date of grant.
Withholding Taxes
Withholding taxes must be paid by the participant at the time of exercise
of any non-qualified stock option or SAR prior to the delivery of shares. In
respect of Stock Based Awards, incentive stock options, and Performance Awards,
withholding taxes must be paid by the participant when income to the participant
is recognized for tax purposes.
Section 162(m)
Under 162 of the Code, Newriders is entitled to a federal income tax
deduction for compensation paid to the extent that such compensation is
"reasonable compensation for services rendered." Whether a payment of
compensation is reasonable for these purposes is a factual question. Even if
compensation is reasonable for the services rendered, under Section 162(m) of
the Code, Newriders is not entitled to a federal income tax deduction for
compensation in excess of $1 million paid in any year to its chief executive
officer and its four other most highly compensated executive officers ("Covered
Employees"), subject to certain exceptions. Compensation that qualifies as
"performance-based" under Section 162(m) is exempt from this limitation. Options
and SARs granted under the Newriders Plan at an exercise price that is not less
than the fair market value of Newriders Common Stock on the date of grant are
designed to satisfy the requirements for the performance-based exemption.
However, Stock Based Awards granted under the Newriders Plan would not qualify
for the performance-based exemption under Section 162(m). Performance Awards to
persons deemed likely to be Covered Employees are required to be structured so
as to qualify for the performance-based exemption under Code Section 162(m).
General
Because the tax consequences to a participant may vary depending upon the
participant's individual situation, and because such tax consequences are
subject to change due to changes in tax laws or regulations, each participant
should consult his or her personal tax advisor regarding the federal, and any
state, local or foreign, tax consequences to the participant.
119
<PAGE> 135
EASYRIDERS PLAN
(PROPOSAL 3)
The Newriders Board of Directors and Easyriders Board of Directors
unanimously adopted the Easyriders Plan, subject to the approval of the
stockholders of Easyriders and Newriders. The Easyriders and Newriders Boards of
Directors have unanimously recommended that the stockholders of Newriders
consider and approve the Easyriders Plan. To become effective, the Easyriders
Plan must be approved by the Newriders stockholders. Such approval at the Annual
Meeting will require the affirmative vote of the holders of a majority of the
shares of Newriders Common Stock present in person or represented by proxy and
entitled to vote. If approved, the Easyriders Plan will become effective only if
the Reorganization is consummated. If the Reorganization is not consummated, the
substantially identical plan of Newriders will become effective, subject to the
approval of the Newriders stockholders. See "Newriders Plan (Proposal 2)."
THE EASYRIDERS AND NEWRIDERS BOARDS OF DIRECTORS UNANIMOUSLY BELIEVE THE
EASYRIDERS PLAN IS ADVISABLE AND IN THE BEST INTERESTS OF EASYRIDERS AND
NEWRIDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
EASYRIDERS PLAN.
The following constitutes a brief discussion of the material features of
the Easyriders Plan and is qualified in its entirety by reference to the
Easyriders Plan, the full text of which is attached hereto as Addendum G and is
incorporated herein by reference. All stockholders of Newriders are urged to
read Addendum G in its entirety.
PRIMARY DIFFERENCES BETWEEN NEWRIDERS PLAN AND EASYRIDERS PLAN; INITIAL
PERFORMANCE AWARDS
After giving effect to the exchange ratio being used in the Reorganization,
the Easyriders Plan is substantially identical to the Newriders Plan, except for
the following significant differences:
1. Eligible persons in the Easyriders Plan include officers,
directors, employees and consultants of Easyriders and its subsidiaries,
while eligible persons in the Newriders Plan include officers, directors,
employees and consultants of Newriders and its subsidiaries;
2. The Easyriders Plan covers 2,800,000 shares of Easyriders Common
Stock, while the Newriders Plan covers 5,000,000 shares of Newriders Common
Stock;
3. Under the Easyriders Plan, non-employee directors will receive an
option to purchase 15,000 shares of Easyriders Common Stock each year
exercisable at the closing bid price on the date of grant. Under the
Newriders Plan, this option, granted annually, currently covers 50,000
shares of Newriders Common Stock.
4. The Easyriders Plan provides for certain Initial Performance Awards
to Mr. Martin as described below, and for certain awards to Mr. Nordstrom,
as described below. The Newriders Plan does not provide for Initial
Performance Awards.
Pursuant to the Easyriders Plan, if Easyriders, on a consolidated basis,
achieves Annual EBITDA Targets, Mr. Martin will be eligible to receive annual
cash bonuses equal to (1) the total amount of interest he is obligated to pay in
cash to Easyriders under the Martin Notes multiplied by (2) a fraction, the
numerator of which is one and the denominator of which is one minus the highest
marginal rate for federal, state and local income taxes applicable to Mr. Martin
as the year the bonus is paid. Mr. Martin will also be eligible to receive a
one-time bonus equal to (1) the amount of principal and accrued interest then
remaining on the Martin Notes, multiplied by (2) a fraction, the numerator of
which is one and the denominator of which is one minus the highest marginal rate
for federal, state and local income taxes applicable to Martin in the year the
bonus is paid, up to a maximum of $13,000,000, if and when Paisano Publications
repays in full (a) all amounts due pursuant to the Company's Senior Credit
Agreement, and (b) the Contributor Notes provided Easyriders has achieved
certain pre-determined levels of earnings during the prior year (generally, for
1999, positive EBITDA during 1998; and for each year thereafter, at least 80% of
the Annual EBITDA Target for the prior year or for each of the second and third
years preceding such year). Although Easyriders expects that bonuses
120
<PAGE> 136
paid to Mr. Martin under the Easyriders Plan will be tax deductible pursuant to
Section 162(m) of the Code, no assurance can be given that such payments will
actually be deductible by Easyriders. Bonus payments to Mr. Martin are not
contingent upon deductibility.
Upon consummation of the Reorganization, Mr. Nordstrom will receive, under
the Easyriders Plan, 200,000 shares of Easyriders Common Stock.
NATURE AND PURPOSE
The stated purpose of the Easyriders Plan is to secure for Easyriders and
any subsidiaries of Easyriders the benefits arising from capital stock ownership
and the receipt of capital stock-based incentives by those employees, directors,
officers and consultants of Easyriders and any subsidiaries who will be
responsible for Easyriders' future growth and continued success.
The Easyriders Plan is designed to meet these objectives by granting stock
incentive awards to those persons whose performance or potential contribution
will benefit Easyriders. The Easyriders Plan empowers Easyriders to grant to
employees (including officers), directors and consultants of Easyriders and its
subsidiaries incentive and non-qualified stock options ("Options"), stock
appreciation rights ("SARs"), awards of restricted stock, deferred stock, bonus
stock in lieu of other obligations of Easyriders, or dividend equivalent awards
(collectively and generically, "Stock Based Awards"), and participation in
incentive award programs and other awards ("Performance Awards"). The Easyriders
Plan also empowers Easyriders to grant to eligible individuals any combination
of any or all of these Options, SARs and Stock Based Awards, subject to certain
limitations.
Persons to whom grants of Options, SARs, Stock Based Awards and Performance
Awards are made are sometimes referred to as "participants." References to
"incentive stock options" are to incentive stock options within the meaning of
Section 422 of the Code.
DURATION
The Easyriders Plan provides that it will terminate upon the date on which
no shares of Easyriders Common Stock remain available for issuance under the
Easyriders Plan and Easyriders has no further rights or obligations with respect
to outstanding Options, SARs, Stock Based Awards, or Performance Awards under
the Easyriders Plan. Options, SARs, Stock Based Awards and Performance Awards
outstanding on the termination date of the Easyriders Plan will continue to have
full force and effect in accordance with the provisions of the instruments
evidencing the Options, SARs, Stock Based Awards and Performance Awards. The
Easyriders Board of Directors may modify, amend, terminate or suspend the
Easyriders Plan from time to time or at any time without stockholder approval,
including amending the Easyriders Plan to increase the number of shares of
Easyriders Common Stock subject to the Easyriders Plan, provided that
stockholder approval may be required in the event of a material change to the
Easyriders Plan or to comply with applicable federal or state law or regulation,
or applicable stock exchange or automated quotation system regulation. Any such
modification, amendment, termination or suspension of the Easyriders Plan will
not impair the rights of any person with respect to any Option, SAR, Stock Based
Award or Performance Award previously granted.
ADMINISTRATION
The Easyriders Plan is administered by a committee appointed by the
Easyriders Board of Directors and consisting of at least two directors, who must
be "outside directors" as that term is used in the regulation related to Section
162(m) of the Code and "non-employee directors" as that term is used in Rule
16b-3 under the Exchange Act. The Committee's construction and interpretation of
the terms and provisions of the Easyriders Plan are final and conclusive. The
Easyriders Board of Directors has designated the Easyriders' Compensation
Committee as the committee to administer the Easyriders Plan. Members of the
Compensation Committee serve at the discretion of the Easyriders Board of
Directors. The Compensation Committee may in its sole discretion grant Options
and SARs, issue shares upon exercise of such Options and SARs, and grant Stock
Based Awards and Performance Awards, all as provided in the Easyriders Plan. The
Compensation Committee has the authority, subject to the express provisions of
the Easyriders Plan, to construe the Easyriders Plan and its related agreements,
to prescribe, amend and rescind the rules and regulations relating
121
<PAGE> 137
to the Easyriders Plan, to determine the terms and provisions of the respective
Option, SAR, Stock Based Award and Performance Award agreements, which need not
be identical, and to make all other determinations in the judgment of the
Compensation Committee necessary or desirable for the administration of the
Easyriders Plan.
SHARES SUBJECT TO THE EASYRIDERS PLAN
The stock to be offered under the Easyriders Plan consists of shares of
Easyriders Common Stock. There is currently no public market for Easyriders
Common Stock. The maximum number of shares of Easyriders Common Stock in respect
of which Options, SARs and Awards may be granted pursuant to the provisions of
the Easyriders Plan may not exceed 2,800,000 (subject to adjustment for stock
splits, stock dividends, recapitalizations and the like). The shares may be
either authorized and unissued shares, treasury shares or shares purchased on
the open market. The Compensation Committee has broad discretion over the
procedures used to count the number of shares subject to Options, SARs and
Awards, and pursuant to such authority if Easyriders reacquires unvested shares
issued pursuant to Awards under the Easyriders Plan, or if an Option or SAR
expires or terminates without having been exercised in full, the reacquired or
unexercised shares may be made available for subsequent grant under the
Easyriders Plan. Shares of Easyriders Common Stock issued pursuant to the
Easyriders Plan may be subject to such restrictions on transfer, repurchase
rights or other restrictions as may be determined by the Compensation Committee.
The Paisano Agreement provides that Joseph Teresi has the right to
recommend to the Easyriders Compensation Committee that certain Paisano
Companies employees and/or consultants should receive grants of options
aggregating 300,000 shares of Easyriders Common Stock. The Compensation
Committee will then make a decision concerning Mr. Teresi's recommendations. It
is anticipated that any of the options recommended by Mr. Teresi that are
approved by the Compensation Committee will be exercisable at $5.00 per share,
will expire 5 years after vesting and shall vest immediately.
ELIGIBILITY
All employees (including officers) of Easyriders or any of its subsidiaries
are eligible to receive incentive stock options pursuant to the Easyriders Plan.
All employees (including officers), directors and consultants of Easyriders or
any of its subsidiaries are eligible to receive non-qualified options, SARs,
Stock Based Awards and Performance Awards.
The selection of participants in, and the nature and size of grants under,
the Easyriders Plan are wholly within the discretion of the Compensation
Committee. However, under the Easyriders Plan, the maximum number of shares with
respect to which Options, SAR, Stock Based Awards or Performance Awards may be
granted to any employee in any fiscal year shall be limited to 1,000,000 shares
of Easyriders Common Stock. Cash awards are subject to an annual ceiling of
$1,000,000 per participant, and the total cash award permitted with respect to
any performance period award is $5,000,000, plus, in the case of those
Participants receiving Initial Performance Awards, the amounts of their
respective Initial Performance Awards. The Compensation Committee's designation
of a participant in any year does not require the Compensation Committee to
designate such person to receive a grant in any other year. No Options, SARs,
Stock Based Awards or Performance Awards were granted under the Easyriders Plan
in 1997. Options granted under the Newriders Plan in 1997 will be converted to
Options under the Easyriders Plan if the Reorganization is consummated. However,
the Easyriders options granted in exchange for the Newriders options will be for
one-half the number of shares, and they will be exercisable at two times the
exercise price, in order to reflect the two-for-one exchange ratio used in the
Reorganization.
OPTIONS AND SARS
Options
Options granted under the Easyriders Plan may be in the form of incentive
stock options or non-qualified stock options. Options may be granted under the
Easyriders Plan on such terms and conditions not
122
<PAGE> 138
inconsistent with the provisions of the Easyriders Plan and in such form as the
Compensation Committee may from time to time approve.
The exercise price per share of Easyriders Common Stock purchasable under
an Option granted under the Easyriders Plan shall be determined by the
Compensation Committee at the time of grant. The exercise price of an incentive
stock option, however, shall not be less than the fair market value of
Easyriders Common Stock on the date of grant or, in the case of an incentive
stock option to be granted to a participant owning stock having more than 10% of
the total combined voting power of all classes of stock of Easyriders or any
subsidiary, the exercise price per share shall be not less than 110% of the fair
market value of such stock on the date of grant. The exercise price of a
non-qualified stock option shall not be less than 50% of the fair market value
of Easyriders Common Stock on the date of grant.
The term of each Option granted under the Easyriders Plan shall be fixed by
the Compensation Committee.
An Option granted under the Easyriders Plan shall be exercisable at such
time or times and subject to such conditions as shall be determined by the
Compensation Committee at the date of grant and as set forth in the instrument
evidencing the Option. With respect to incentive stock options, the aggregate
fair market value (determined as of the date of grant) of the number of shares
with respect to which such incentive stock options are exercisable for the first
time by a participant during any calendar year may not exceed $100,000 or such
other limit as may be established under Section 422 of the Code.
An Option granted under the Easyriders Plan may be exercised as provided in
the instrument evidencing the Option. Payment of the exercise price may be made
with cash, with shares of Easyriders Common Stock or with a combination of cash
and stock, as the Compensation Committee may determine. The Compensation
Committee may also permit participants to simultaneously exercise options and
sell the shares of Easyriders Common Stock thereby acquired, pursuant to a
brokerage or similar arrangement, approved in advance by the Compensation
Committee, and to use the proceeds from such sale as payment of the purchase
price. The Compensation Committee may, in its discretion, accelerate the date of
exercise of any installments of any Options, provided that no acceleration will
be made that would violate the annual vesting limitation contained in Section
422(d) of the Code with respect to incentive stock options.
No shares of Easyriders Common Stock will be issued under the Easyriders
Plan unless counsel for Easyriders is satisfied that such issuance will be in
compliance with applicable federal and state securities laws or any applicable
listing requirements of any national securities exchange on which Easyriders
Common Stock is then listed. Any participant in the Easyriders Plan may be
required to represent and agree in writing that the stock acquired by the
participant is being acquired for investment.
Stock Appreciation Rights
Under the Easyriders Plan, an SAR may be granted in tandem with, in
addition to, or independent of any other grant. An SAR is the right to receive,
without payment, an amount equal to the excess, if any, of the fair market value
of a share of Easyriders Common Stock on the date of exercise over the grant
price of such share, multiplied by the number of shares as to which the SARs
shall have been exercised. Easyriders will pay such amount to the holder in cash
or in shares of Easyriders Common Stock or a combination thereof, as the
Compensation Committee may determine.
An SAR may be exercised by a participant in accordance with procedures
established by the Compensation Committee. The Compensation Committee may also
determine that an SAR shall be automatically exercised on one or more specified
dates.
Employment
The Compensation Committee may determine whether Options and SARs shall
terminate if the participant ceases to be employed by Easyriders or a
subsidiary. Except as otherwise provided in the instrument evidencing the Option
or SAR, if a participant dies while an employee of Easyriders or a subsidiary,
any Option or SAR granted to such participant may be exercised by the
participant's personal
123
<PAGE> 139
representatives or heirs to the extent that the participant could have exercised
the Option or SAR on the date of his or her death.
Transferability
No Option or SAR granted under the Easyriders Plan, and no right or
interest therein, is assignable or transferable by a participant except by will
or the laws of descent and distribution or, with respect to non-qualified stock
options and SARs, except to the extent the participant's agreement granting such
non-qualified stock option or SAR provides otherwise.
STOCK BASED AWARDS
The Compensation Committee may grant a participant a Stock Based Award of
shares of Easyriders Common Stock, on such terms and conditions and subject to
such restrictions as the Compensation Committee may determine. Such restrictions
may include restrictions on the pledging, sale, assignment, transfer or other
disposition of such shares and the requirement that the participant forfeit all
or a portion of such shares to Easyriders upon termination of employment. Each
participant receiving an Award may be required to enter into a stock restriction
agreement with Easyriders agreeing to such restrictions. Shares issued pursuant
to Stock Based Award are held by the participant as holder of record for all
purposes, including voting and receipt of dividends.
Transferability
Shares of Easyriders Common Stock issued pursuant to a Stock Based Award
may not be sold, assigned, transferred or otherwise disposed of, except, subject
to the terms of any stock restriction agreement, by will or the laws of descent
and distribution, and may not be pledged or hypothecated as collateral for a
loan, prior to the lapse of restrictions on such shares. Any attempt by the
participant to dispose of or encumber the shares issued pursuant to a Stock
Based Award prior to the lapse of restrictions on such shares will cause the
participant's interest in such shares to terminate.
Employment
Except as otherwise provided in any stock restriction agreement, if prior
to the lapse of the restrictions on the stock the participant ceases to be an
employee of Easyriders or a subsidiary for any reason, all such shares which
remain subject to restrictions shall be forfeited to Easyriders.
PERFORMANCE AWARDS
The Committee has broad authority to grant cash awards and awards of other
property, based on the achievement of pre-established performance goals. The
Committee's authority is virtually unlimited in this regard as to persons other
than those as to whom some portions of their compensation may exceed the limits
on deductibility established by Code Section 162(m). To the extent the
participant is such a person whose compensation is likely to be subject to the
limitations of Code Section 162(m), the Committee is required to structure such
awards and the criteria upon which such awards are granted so that the
Performance Awards qualify as "performance-based compensation" under Code
Section 162(m). Within these broad parameters, performance goals may be selected
on a number of bases, including (1) total stockholder return, (2) a comparison
of total stockholder return to a publicly available index, (3) net income, (4)
pre-tax earnings, (5) earnings before interest expense, taxes, depreciation and
amortization, (6) pre-tax operating earnings after interest expense and before
bonuses, services fees, and extraordinary special items, (7) operating margin,
(8) earnings per share, (9) growth in earnings per share, (10) return on equity,
(11) return on capital, (12) return on investment, (13) operating earnings, (14)
working capital or inventory, or (15) ratio of debt to stockholders' equity.
Achievement of performance goals may be measured over a performance period
of up to 10 years. Performance goals are to be established not later than 90
days after the beginning of any performance period
124
<PAGE> 140
applicable to such Performance Award, or other date required or permitted for
"performance-based compensation" under Code Section 162(m).
The Committee may establish an unfunded pool for purposes of measuring
Easyriders performance in connection with Performance Awards. The amount of such
pool shall be based upon the achievement of a performance goal based on the
business criteria discussed above. The amount of the pool may be established as
a percentage of any such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
Settlement of Performance Awards may be in cash, stock, other awards or
other property, as the Compensation Committee may determine. The Compensation
Committee may reduce the amount of a settlement otherwise to be made in
connection with a Performance Award. The Compensation Committee is required to
specify the circumstances in which such Performance Award shall be paid or
forfeited in the event of termination of employment by the participant prior to
the end of a performance period, or a settlement of Performance Awards.
The Easyriders Plan also provides that the Compensation Committee may
establish annual incentive award pools. The amount of such annual incentive
award pools shall be based on the achievement of performance goals based on
business criteria discussed above. The persons to potentially participate in
such annual incentive awards are to be designated not later than the 90th day of
each fiscal year, except as may otherwise be permitted in the case of awards
intended to be "Performance Based Compensation" under Code Section 162(m). After
the end of each year, the Compensation Committee is to determine the amount, if
any, of the annual incentive award pool, in the maximum amount of award payable
to each participant in the pool. These amounts are subject to discretionary
reduction by the Compensation Committee. The Committee is required to specify
the circumstances in which such an award may be paid or forfeited in the event
of a termination of employment prior to the end of a fiscal year or settlement
of the annual award.
CHANGE IN CONTROL
The Easyriders Plan provides that certain changes beneficial to
participants will occur upon a "Change in Control." A Change in Control occurs
if (i) any person acquires beneficial ownership of shares of Easyriders Common
Stock then outstanding, and such acquisition results in the persons beneficially
owning 25% or more of the Easyriders Common Stock outstanding, or 25% or more of
the combined voting power of the Easyriders Common Stock outstanding, (ii) the
stockholders of Easyriders approve a reorganization, merger, consolidation,
complete liquidation or dissolution of Easyriders, sale or disposition of all or
substantially all of the assets of Easyriders, or similar corporate transaction
(generically a "Corporate Transaction"), or (iii) the composition of the Board
of Directors is changed so that those directors prior to the change cease to
constitute at least a majority of the Board. Upon the occurrence of a Change in
Control, certain provisions of the Easyriders Plan will apply to enhance certain
benefits to persons who have received an Award, Option or SAR under the
Easyriders Plan as follows:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of the
time of the Change of Control, and shall remain exercisable and vested for
the balance of the stated term of such Award without regard to any
termination of employment by the recipient;
(ii) Any Optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in lieu
of acquiring the shares of Stock covered by such Option, to receive, and
Easyriders shall be obligated to pay, in cash, the excess of the Change in
Control price over the exercise price of such Option, multiplied by the
number of shares of stock covered by such Option;
(iii) Limited SARs (and all SARs if so provided by their terms) shall
become exercisable for amounts, in cash, determined by reference to the
Change in Control Price;
125
<PAGE> 141
(iv) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Easyriders Plan
shall lapse, and such Awards shall be deemed fully vested as of the time of
such Change in Control; and
(v) With respect to any such Outstanding Award subject to achievement
of performance goals and conditions under the terms of the Easyriders Plan,
such performance goals and other conditions shall be deemed to be met if
and to the extent so provided by the Committee in the Award Agreement
relating to such Award.
For these purposes, the Change in Control Price means an amount of cash
equal to the higher of (i) the amount of cash and fair market value of property
that is the highest price per share paid (including extraordinary dividends) in
any Corporate Transaction triggering the Change in Control, or any liquidation
of shares following a sale of substantially all assets of Easyriders, or (ii)
the highest fair market value per share at any time during the 60-day period
preceding and 60-day period following the Change in Control.
The effect of the above-described Change in Control provisions of the
Easyriders Plan may have the effect of discouraging transactions involving a
Change of Control.
FEDERAL INCOME TAX CONSEQUENCES
Based on current provisions of the Code, and the existing regulations
thereunder, certain anticipated federal income tax consequences with respect to
the several types of grants are described below.
Grant of Options and SARs
A participant will not recognize any taxable income at the time an Option
or SAR is granted, and the Company will not be entitled to a federal income tax
deduction at that time.
Incentive Stock Options
No ordinary income will be recognized by a participant holding an incentive
stock option at the time of exercise. The excess of the fair market value of the
shares at the time of exercise over the aggregate option exercise price will be
an adjustment to alternative minimum taxable income for purposes of the federal
"alternative minimum tax" at the date of exercise. If the participant holds the
shares for the greater of two years after the date the option was granted or one
year after the acquisition of such shares, the difference between the amount
realized upon disposition of the shares and the aggregate option exercise price
will constitute a long-term capital gain or loss, as the case may be, and
Easyriders will not be entitled to a federal income tax deduction. If the shares
are disposed of in a sale, exchange or other "disqualifying disposition"
(including the use of the shares to exercise subsequent options) within two
years after the date of grant or within one year after the date of exercise, the
participant will realize taxable ordinary income in an amount equal to the
excess of the fair market value of the shares purchased at the time of exercise
over the aggregate option exercise price, and Easyriders generally will be
entitled to a federal income tax deduction equal to such amount. In addition,
the participant will have a taxable capital gain equal to the difference, if
any, between: (i) the amount realized upon disposition of the shares, and (ii)
the sum of the aggregate option exercise price plus the amount of ordinary
income on which the participant was taxed.
Non-Qualified Stock Options
Taxable ordinary income will be recognized by the participant at the time
of exercise of a non-qualified stock option in an amount equal to the excess of
the fair market value of the shares purchased at the time of such exercise over
the aggregate option exercise price. Easyriders generally will be entitled to a
corresponding federal income tax deduction. At the time of a subsequent sale of
the shares, the participant will generally recognize a taxable capital gain or
loss based upon the difference between the aggregate selling price of the shares
and the aggregate fair market value of the shares at the time of exercise.
126
<PAGE> 142
Stock Appreciation Rights
Upon the exercise of an SAR, the participant will realize taxable ordinary
income on the amount of cash received and/or the then current fair market value
of the shares of Easyriders Common Stock received, and Easyriders generally will
be entitled to a corresponding federal income tax deduction. The participant's
basis in any shares of Easyriders Common Stock received will be equal to the
amount of ordinary income upon which the participant was taxed. Upon any
subsequent disposition, any gain or loss realized will be a capital gain or
loss.
Stock Based Awards
Unless a participant makes the election described below, a participant
receiving Stock Based Award will not recognize income, and Easyriders will not
be allowed a deduction, at the time of grant of such Stock Based Award. While
the restrictions on the shares are in effect, a participant will recognize
compensation income equal to the amount of the dividends received, and
Easyriders will be allowed a deduction in a like amount. When the restrictions
on the shares are removed or lapse, the fair market value of the shares on the
date the restrictions are removed or lapse in excess of the amount, if any, paid
by the participant will be ordinary income to the participant and generally will
be allowed as a deduction for federal income tax purposes to Easyriders. Upon
disposition of the shares, the gain or loss recognized by the participant shall
be equal to the difference between the amount realized on such disposition and
the fair market value of the shares on the date the restrictions were removed or
lapsed. Such amount will be treated as capital gain or loss, and the capital
gain or loss will be short-term or long-term depending upon the period of time
the shares are held by the participant following the removal or lapse of the
restrictions. If the restrictions do not lapse and the shares are forfeited by
the participant and thus returned to Easyriders, there will be no federal income
tax consequences to either the participant or Easyriders. If required by the
Compensation Committee, no participant shall make, in connection with a stock
grant, the election permitted under Section 83(b) of the Code. If permitted, by
properly filing an election pursuant to Section 83(b) of the Code with the IRS
within 30 days after the date of grant (assuming that the date of grant is the
date the participant acquires a beneficial interest in the Stock Based Award), a
participant's ordinary income and commencement of the holding period and
Easyriders' deduction will be determined as of the date of grant. In such a
case, the amount of ordinary income recognized by such a participant and
deductible by Easyriders will be equal to fair market value of the shares as of
the date of grant. If such election is made and a participant thereafter
forfeits his or her stock, no refund or deduction will be allowed for the amount
previously included in such participant's income. The Easyriders Plan permits
the Compensation Committee to restrict the ability of a participant to make the
Section 83(b) election.
Performance Awards
Payments of cash and property pursuant to Performance Awards will typically
constitute ordinary income to the participant and be deductible by Easyriders,
except to the extent of the limitations under Section 162(m) of the Code.
Performance Awards under the Easyriders Plan are required to be structured so as
to qualify for the performance-based exemption under Section 162(m).
Special Rules
To the extent a participant pays all or part of the option exercise price
of a non-qualified stock option by tendering shares of Easyriders Common Stock
owned by the participant, the tax consequences described above apply except that
the number of shares received upon such exercise which is equal to the number of
shares surrendered in payment of the option exercise price shall have the same
tax basis and holding period as the shares surrendered. The additional shares
received upon such exercise shall have a tax basis equal to the amount of
ordinary income recognized on such exercise and a holding period which commences
on the date of exercise. To preserve Easyriders' deductions with respect to the
non-qualified options and SARs, the Compensation Committee may be required to
set the exercise or grant price for such non-qualified options and SARs at the
fair market value of a share of Easyriders Common Stock on the date of grant.
127
<PAGE> 143
Withholding Taxes
Withholding taxes must be paid by the participant at the time of exercise
of any non-qualified stock option or SAR prior to the delivery of shares. In
respect of Stock Based Awards, incentive stock options, and Performance Awards,
withholding taxes must be paid by the participant when income to the participant
is recognized for tax purposes.
Section 162(m)
Under Section 162 of the Code, Easyriders is entitled to a federal income
tax deduction for compensation paid to the extent that such compensation is
"reasonable compensation for services rendered." Whether a payment of
compensation is reasonable for these purposes is a factual question. Even if
compensation is reasonable for the services rendered, under Section 162(m) of
the Code, Easyriders is not entitled to a federal income tax deduction for
compensation in excess of $1 million paid in any year to its chief executive
officer and its four other most highly compensated executive officers ("Covered
Employees"), subject to certain exceptions. Compensation that qualifies as
"performance-based" under Section 162(m) is exempt from this limitation. Options
and SARs granted under the Easyriders Plan at an exercise price that is not less
than the fair market value of Easyriders Common Stock on the date of grant are
designed to satisfy the requirements for the performance-based exemption.
However, Stock Based Awards granted under the Easyriders Plan would not qualify
for the performance-based exemption under Section 162(m). Performance Awards to
persons deemed likely to be Covered Employees are required to be structured so
as to qualify for the performance-based exemption under Code Section 162(m).
Options covering up to 300,000 shares of Easyriders Common Stock may be
granted to employees and consultants to, the Paisano Companies with an option
exercise price of $5.00 per share. At the present time it is not expected that
any of such Paisano employees and consultants will be Covered Employees.
However, if the fair market value of Easyriders Common Stock on the date of
grant of such an option is more than $5.00 and the optionee is a Covered
Employee on the date the option is exercised, the resulting compensation income
will not be performance based.
General
Because the tax consequences to a participant may vary depending upon the
participant's individual situation, and because such tax consequences are
subject to change due to changes in tax laws or regulations, each participant
should consult his or her personal tax advisor regarding the federal, and any
state, local or foreign, tax consequences to the participant.
128
<PAGE> 144
ELECTION OF NEWRIDERS BOARD OF DIRECTORS
(PROPOSAL 4)
NEWRIDERS BOARD OF DIRECTORS
The Newriders Board of Directors has nominated each of the persons set
forth below as a director of Newriders to serve until the next annual meeting of
the stockholders of Newriders and until his successor is elected and qualified
or until his earlier resignation or removal. Each nominee is currently a
director of Newriders. All of the nominees have indicated a willingness to serve
as directors, but if for any reason any nominee should be unavailable to serve
as a director at the time of the Annual Meeting, a contingency which the
Newriders Board of Directors does not expect, a different person designated by
the Newriders Board of Directors may be nominated in his stead. THE NEWRIDERS
BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF NEWRIDERS VOTE FOR SUCH
NOMINEES.
If the Reorganization is completed as proposed, Newriders will become a
wholly-owned subsidiary of Easyriders, and the directors of Newriders will be
subject to removal or replacement by Easyriders. In accordance with the
Stockholders' Agreement, Newriders anticipates that John E. Martin, William E.
Prather, Wayne L. Knyal and Daniel Gallery will be directors of Easyriders from
the Board of Directors of Newriders. In addition, Joseph Teresi, Ellen Meagher,
Robert Davis and Joseph J. Jacobs will be designated by Mr. Teresi as directors
of Easyriders. Messrs. C. W. Doyle, Leon Hatcher, and William R. Nordstrom will
not serve as directors of Easyriders. If the Reorganization is consummated it is
anticipated that Messrs. C. W. Doyle, Leon Hatcher and William R. Nordstrom will
resign as directors of Newriders.
If the Reorganization is not consummated, the Board of Directors of
Newriders will consist of persons elected at the Annual Meeting.
The names and ages of all directors and all persons nominated or chosen to
become directors of Newriders appear in the table below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NEWRIDERS
---- --- -----------------------
<S> <C> <C>
John E. Martin 53 Chairman of the Board of Directors
William E. Prather 50 President, Chief Executive Officer
and Director
William R. Nordstrom 56 Executive Vice President of Finance
and Administration and Director
Leon Hatcher 46 Director
C.W. Doyle 63 Director
Wayne L. Knyal 51 Director
Daniel Gallery 43 Director
</TABLE>
Mr. Nordstrom has served as Executive Vice President of Finance and
Administration and as a director of Newriders since July 1997. He was Chairman
and CEO of National Investors Council until August, 1997, which is a financial
publishing and communications firm, which he founded in 1987. Prior to
establishing National Investors Council, Mr. Nordstrom provided management
consultation services, sales training and organizational development
consultation services to a number of organizations, including Integrated Barter
International, Inc. (a publicly held corporate barter and excess inventory
re-marketing specialist), Jallow International, Inc. (an international economic
consulting firm established by Dr. Raymond Jallow, former chief economist for
First Interstate Bank), and Corporate Capital Resources, Inc. (a publicly held
business development company specializing in the financing of start-up
businesses). Mr. Nordstrom serves as a director of Leading Edge Earth Products,
Inc., a publicly held building panel manufacturing company.
Mr. Leon Hatcher is a co-founder of Newriders Limited and has served as a
director of Newriders Limited since inception on November 8, 1994. Mr. Hatcher
served as Chairman of the Board of Directors of Newriders from July 1996 until
July 1997 and as President from July 1996 until August 1996. He has served as
Vice President from July 1997 until December 1997. He has served as a director
of Newriders since July
129
<PAGE> 145
1996. He has also served in various capacities with Easyriders Rodeos, Custom
Bike, Tatoo, Show, and Apparel Outlets since 1980. Since 1980, Leon Hatcher has
been owner of Hatcher Inc., which has been an independent contractor of Teresi,
Inc.
Mr. C.W. "Bill" Doyle has served as a director of Newriders since August
1996. Mr. Doyle is a retired attorney and airline pilot. Mr. Doyle served as a
check pilot in the TWA Flight School Operations. As a Captain he piloted 747's
on international routes. While with TWA, Mr. Doyle obtained a law degree from
Seton Hall University and is a member of the New York and New Jersey Bars. Mr.
Doyle was associated with the Roy Cohen Law Firm in New York City. Mr. Doyle has
been retired for more than the last five years.
See "Board of Directors and Management of Easyriders after the
Reorganization" for a description of the business biographies of John E. Martin,
William E. Prather, Wayne L. Knyal and Daniel Gallery.
NEWRIDERS BOARD OF DIRECTORS COMMITTEES AND MEETINGS
The standing committees of Newriders Board of Directors are the Audit
Committee and the Compensation Committee. Newriders Board of Directors does not
have a standing nominating committee.
The Compensation Committee of the Board of Directors was formed in November
1997. Currently the Compensation Committee consists of Wayne L. Knyal, Daniel J.
Gallery and William R. Nordstrom. The Compensation Committee reviews the
compensation of officers of Newriders and Newriders' compensation policies and
practices. The Compensation Committee also administers the Newriders Plan,
including the grant of stock options thereunder. The Compensation Committee did
not meet during 1997.
Newriders' Audit Committee consists of Wayne L. Knyal, Daniel J. Gallery
and William R. Nordstrom. The Audit Committee oversees Newriders' system of
internal accounting controls, recommends to Newriders Board of Directors the
appointment of a firm of independent certified auditors to conduct the annual
audit of Newriders' financial statements, reviews the scope of the audit,
reviews reports from the independent certified auditors, and makes such
recommendations to Newriders Board of Directors in connection with the annual
audit as it deems appropriate. The Audit Committee did not meet during 1997.
The Newriders Board of Directors held fifteen meetings during 1997. Each
director attended at least 75% of the aggregate of (i) the total number of
meetings of Newriders Board of Directors and (ii) the total number of meetings
held by all committees of Newriders Board of Directors on which such director
served.
EXECUTIVE COMPENSATION -- NEWRIDERS
The following table sets forth information concerning compensation paid to
Newriders' Chief Executive Officer, as well as annual compensation of $100,000
or more paid to any executive officer of Newriders ("Named Executive Officers")
for services rendered in all capacities to Newriders for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SECURITIES
YEAR ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY OPTIONS COMPENSATION
--------------------------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
John E. Martin....................... 1997 $114,583(1) 2,000,000(5) $75,000(4)
Chairman of the.................... 1996 -- -- --
Board of Directors................. 1995 -- -- --
William E. Prather................... 1997 $ 41,667(2) 750,000(5) --
President and Chief................ 1996 -- -- --
Executive Officer.................. 1995 -- -- --
Michael T. Purcell................... 1997 $100,000(3) -- --
Vice President and................. 1996 -- -- --
Director........................... 1995 -- -- --
</TABLE>
- ---------------
(1) In July 1997, Mr. Martin became Chairman of the Board of Directors of
Newriders and the interim Chief Executive Officer (a position he held until
October 1997) at an annual base salary of $250,000. Mr. Martin's salary for
1997 accrued during the year, and was paid in January 1998. Mr. Martin has
130
<PAGE> 146
agreed to a reduction of his salary to $150,000 per year to become effective
upon consummation of the Reorganization.
(2) In October 1997, Mr. Prather became the President and Chief Executive
Officer of Newriders at an annual base salary of $200,000. Mr. Prather's
salary for 1997 accrued during the year, and was paid in January 1998.
(3) Mr. Purcell served as Newriders' Chief Executive Officer until July 1997.
Mr. Purcell resigned as an officer and director of Newriders in July 1998.
During 1997, Newriders accrued a salary obligation to Mr. Purcell in the
amount of $100,000 for compensation accrued and earned in 1997 which is
being paid monthly from January, 1998 through December, 1998.
(4) Fair market value of 50,000 shares of Newriders Common Stock at the time of
issuance.
(5) The options held by Messrs. Martin and Prather are to be relinquished upon
consummation of the Reorganization.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Newriders presently has an employment agreement with Mr. Martin. Newriders
presently has no other employment agreements with any of its Named Executive
Officers, all of whom other than Mr. Martin are employed on an "at-will" basis.
The employment agreement with Mr. Martin initially provided that Mr. Martin be
paid a base salary of $250,000 annually while Mr. Martin serves as either or
both Chief Executive Officer and Chairman of the Board of Directors. Mr. Martin
has agreed to a reduction in salary to $150,000 per year effective upon
consummation of the Reorganization. Mr. Martin has served as Chairman of the
Board of Directors since July 1997. Mr. Martin's salary was to accrue and its
payment was to be deferred until Mr. Martin determined, in his judgment, that
Newriders had sufficient cash flow to begin to pay Mr. Martin's salary and all
other executive salaries being deferred, on a pro rata basis. The accrual of Mr.
Martin's 1997 salary was paid in January 1998. Mr. Martin is entitled to an
office reimbursement expense allowance of $84,000 per year in addition to
reimbursement of specific business expenses reasonably incurred on behalf of
Newriders. In addition, pursuant to his employment agreement, Mr. Martin has
received options to purchase up to 1,500,000 shares of Newriders Common Stock at
$2.50 per share. The options vest 50% on July 8, 1998 and 50% on July 8, 1999,
and are exercisable for a period of ten years following vesting, subject to Mr.
Martin serving as Chairman of the Board of Directors for a minimum of three
years (unless Mr. Martin earlier terminates his position for good cause as
defined in his employment agreement).
In addition to the compensation provided to Mr. Martin by his employment
agreement, Newriders agreed to compensate Mr. Martin separately for his
agreement to serve as a director of Newriders as follows: (a) issuing 50,000
shares of Newriders Common Stock to him and registering those shares on a Form
S-8 registration statement; and (b) granting an option to acquire up to 500,000
additional shares of Newriders Common Stock exercisable at $2.50 per share. The
option immediately vests with respect to the right to purchase up to 250,000
shares. The right to purchase up to an additional 125,000 shares vests after
completing one year as a director, and the right to purchase up to an additional
125,000 shares vests after completing two years as a director. Mr. Martin's
options covering 2,000,000 shares are to be relinquished upon consummation of
the Reorganization.
Pursuant to the Easyriders Plan, if Easyriders, on a consolidated basis
achieves the Annual EBITDA Targets. Mr. Martin will be eligible to receive
annual cash bonuses equal to (1) the total amount of interest he is obligated to
pay in cash to Easyriders under the Martin Notes multiplied by (2) a fraction,
the numerator of which is one and the denominator of which is one minus the
highest marginal rate for federal, state and local income taxes applicable to
Mr. Martin in the year the bonus is paid. Mr. Martin will also be eligible to
receive a one-time bonus equal to (1) the amount of principal and accrued
interest then remaining on the Martin Notes, multiplied by (2) a fraction, the
numerator of which is one and the denominator of which is one minus the highest
marginal rate for federal, state and local income taxes applicable to Martin in
the year the bonus is paid, up to a maximum of $13,000,000 if and when Paisano
Publications repays in full (a) all amounts due pursuant to the Company's Senior
Credit Agreement, and (b) the Contributor Notes, provided Easyriders has
achieved certain pre-determined levels of earnings during the prior year
(generally, for 1999, positive EBITDA during 1998; and for each year thereafter,
at least 80% of the Annual EBITDA Target for the prior
131
<PAGE> 147
year or for each of the second and third years preceding such year). Although
the Company expects that bonuses paid to Mr. Martin under the Easyriders Plan
will be tax deductible pursuant to Section 162(m) of the Code, no assurance can
be given that such payments will actually be deductible by Easyriders. Bonus
payments to Mr. Martin are not contingent upon deductibility.
In connection with the El Paso Acquisition, Newriders will enter into a
5-year employment agreement with Mr. Prather at an annual salary of $200,000 per
year. Mr. Prather's employment agreement will provide that he is to serve as
President and Chief Executive Officer of both Newriders and Easyriders. In the
event Mr. Prather is terminated without cause, or Mr. Prather resigns with
sufficient cause (as defined in the employment agreement), Mr. Prather shall be
entitled to receive the balance of his salary under the employment agreement,
not to exceed 30 months, and he may require Easyriders to register the shares of
Easyriders Common Stock held by Mr. and Mrs. Prather.
In connection with the Paisano Acquisition, Paisano Publications will enter
into an employment agreement with Joseph Teresi at an annual salary of $150,000.
Pursuant to this employment agreement, Mr. Teresi will agree to serve as
Chairman of the Board and Publisher of Paisano Publications. Additionally,
Paisano Publications and Mr. Teresi will enter into a consulting agreement in
order to compensate Mr. Teresi for additional services to be performed by him
during the limited transition period immediately following the Reorganization.
Payments under the Consulting Agreement will be $5,000 per month for the first
three months and then increase by an additional $2,500 per month thereafter,
provided, however, that monthly payments under the agreement will not exceed
$25,000. The Consulting Agreement is terminable by the Board of Directors of
Easyriders at any time and upon such termination, no additional payments
pursuant to this agreement will be due to Mr. Teresi.
There currently is no compensatory plan or arrangement, including payments
to be received from Newriders, with respect to a Named Executive Officer, which
plan or arrangement results or will result from the resignation, retirement or
any other termination of such Named Executive Officer's employment with
Newriders and its subsidiaries or from a change-in-control of Newriders or a
change in the Named Executive Officer's responsibilities following a change in
control, with the exception of the Newriders Plan and its effect on options and
other awards granted under the Newriders Plan. "Newriders Plan (Proposal
2) -- Change in Control."
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
The following table provides information with respect to options granted in
the year ended December 31, 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
COMMON STOCK TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) FISCAL YEAR(2) ($/SH) DATE
---- --------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Individual Grants
John E. Martin........... 2,000,000(3)(5) 53.7% (3) (3)
William E. Prather....... 750,000(4)(5) 20.2% (4) (4)
Michael T. Purcell....... -- -- -- --
</TABLE>
- ---------------
(1) All options described were granted at an exercise price equal to or greater
than the fair market value of a share of Newriders Common Stock on the date
of grant.
(2) Based on 3,721,000 shares of common stock underlying options and/or warrants
granted to employees during the year ended December 31, 1997.
(3) Includes: (a) an option to purchase up to 500,000 shares of Newriders Common
Stock exercisable at $2.50 per share which vested 50% on July 8, 1997, and
will vest 25% on July 8, 1998 and 25% on July 8, 1999, subject to continued
service as a director through such dates; and (b) an option to purchase up
to 1,500,000 shares of Newriders Common Stock at $2.50 per share which vests
50% on July 8, 1998 and 50% on July 8, 1999, subject to continued service as
a director through such dates. The options expire 10 years after vesting.
132
<PAGE> 148
(4) The option is exercisable at $2.50 per share, and vests 50% on October 7,
1998 and 50% on October 7, 1999, subject to Mr. Prather's continued service
through such dates. It expires 10 years after vesting.
(5) These options are to be relinquished upon consummation of the
Reorganization.
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997 AND FISCAL YEAR ENDED
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT FISCAL YEAR ENDED FISCAL
ACQUIRED 12/31/97 YEAR ENDED 12/31/97 (1)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John E. Martin............... -- -- 250,000 1,750,000 $125,000 $875,000
William E. Prather........... -- -- -- 750,000 -- 375,000
Michael T. Purcell........... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The value of an "in-the-money" stock option represents the difference
between the aggregate estimated fair market value of the underlying
securities, based on the closing price of $3.00 per share of Newriders
Common Stock on December 31, 1997 and the aggregate exercise price of the
subject stock option.
NEWRIDERS PLAN
On November 20, 1997, the Newriders Board of Directors adopted the
Newriders Plan, subject to approval of Newriders' stockholders at Newriders'
1998 meeting of stockholders. The Newriders Plan is described in "Newriders Plan
(Proposal 2)." The Newriders Plan will be terminated upon consummation of the
Reorganization.
RETIREMENT PLAN
Newriders has not adopted any retirement plan at this time. However,
Newriders is investigating a variety of plans, and if the Reorganization is not
completed, may establish a retirement plan in the near future.
LONG-TERM INCENTIVE PLAN "LTIP" AWARDS
Newriders made no awards to a Named Executive Officer in the year ended
December 31, 1997 under any long-term incentive plan.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the granting of certain options to acquire Newriders Common
Stock to certain officers and/or directors of Newriders as described in
"Description of Newriders Securities", and "Security Ownership of Certain
Beneficial Owners and Management." Since January 1, 1996, Newriders, Paisano
Publications and El Paso have entered into (or now contemplate entering into)
the following significant related party transactions:
1. Purcell Advertising acted as Newriders' advertising agency until
approximately August 30, 1997, for which Purcell Advertising received a
standard 15% commission paid by advertising vendors with which Newriders
advertises. Michael Purcell, a former officer and director of Newriders, is
the owner and sole proprietor of Purcell Advertising. Commissions earned in
1996 were approximately $6,000 and in 1997 were approximately $41,133.
2. Bolen, Fransen & Boostrom LLP provides legal services for Newriders
and charges its standard rates for such services. In 1996, Newriders paid
$5,000 for legal services provided by Bolen, Fransen & Boostrom LLP. In
1997, Newriders paid approximately $44,315 for legal services provided by
Bolen, Fransen & Boostrom LLP. In addition, in 1997, Newriders issued
40,000 shares of Newriders Common Stock to Bolen, Fransen & Boostrom LLP
for $60,000 of legal services provided to Newriders by that
133
<PAGE> 149
firm. Hal H. Bolen II is a partner in Bolen, Fransen & Boostrom LLP. As of
December 31, 1997 Newriders owed Bolen, Fransen & Boostrom LLP
approximately $44,143 for services rendered in 1997.
3. Pursuant to Newriders' employment agreement with John E. Martin,
Newriders agreed to pay $7,000 per month to Mr. Martin for office expenses.
As a result, Newriders utilizes certain corporate office space in Newport
Beach, California which is being leased by Mr. Martin. Newriders also uses
certain equipment and support services under this arrangement.
4. During 1997, Newriders borrowed $305,000 from certain of its
officers, directors, principal stockholders and one other individual. This
amount included a $107,000 loan from John E. Martin, a $25,000 loan from
William R. Nordstrom, a $35,000 loan from Leon Hatcher, and a $50,000 loan
from Joseph Teresi. The loans bore interest at 10% per annum and were
unsecured. The loans from Messrs. Martin, Nordstrom, Hatcher and Teresi
were fully repaid, together with interest totaling approximately $7,500 in
January 1998. Additionally, loans with a balance of $34,350 owed to Rick
Pierce were reflected as a liability at March 31, 1998.
5. Officer salaries totaling $222,465 were accrued to John E. Martin,
William E. Prather and William R. Nordstrom during 1997. These salary
accruals were paid in January 1998.
6. On February 9, 1998, Leon Hatcher, a Vice President and director of
Newriders, received an assignment of Newriders' obligation under an
operating lease agreement effective March 1, 1998. The lease had been
entered into by Newriders for the purpose of operating a motorcycle retail
sales and repair facility in Myrtle Beach, South Carolina. Under the terms
of the lease and assignment, Mr. Hatcher assumed monthly lease payments of
$2,200 through the end of the lease term in May 2017.
7. During April 1997, prior to John E. Martin and William R. Nordstrom
becoming officers and directors of Newriders, Mr. Martin and Mr. Nordstrom
each purchased from Newriders 192,300 shares of Newriders Common Stock and
a warrant to purchase up to an additional 250,000 shares of Newriders
Common Stock exercisable at $4.00 per share, at any time prior to April 21,
1999. Mr. Martin and Mr. Nordstrom each paid $250,000 to Newriders for the
Newriders Common Stock and warrants.
8. On October 7, 1997, Newriders entered into a letter of intent to
acquire all of the ownership interest of El Paso. William E. Prather, who
became President and Chief Executive Officer of Newriders on October 20,
1997, and his wife Marna Prather own 51% of El Paso. On March 18, 1998,
John E. Martin, Newriders' Chairman of the Board of Directors, purchased
the remaining 49% of El Paso for $1,500,000 cash. Under the letter of
intent, Newriders originally agreed to purchase El Paso for $3,000,000
cash, 1,000,000 shares of Newriders Common Stock and the assumption of up
to $2,500,000 debt. After Mr. Martin's purchase of 49% of El Paso, the
parties verbally modified the purchase terms, pursuant to which Newriders
would issue 2,970,000 shares of Newriders' Common Stock to the present
owners of El Paso, and Newriders would assume approximately $2,600,000 of
El Paso debt in the transaction. No cash would be paid to the El Paso
owners in the purchase. The letter of intent provides that Mr. Prather is
to receive an employment agreement to serve as Newriders' President and
Chief Executive Officer at a salary of $200,000 per year for a period of
five years. It also provides that Mr. Prather is to receive an option to
purchase up to 750,000 shares of Newriders' Common Stock exercisable at
$2.50 per share for a period of ten years. The option vests 50% after one
year of service and 50% after two years of service. Certain terms of the
letter of intent were superseded by the El Paso Agreement, which provides
for the issuance of 2,000,000 shares of Easyriders Common Stock to the El
Paso Owners.
9. On October 21, 1997, Newriders borrowed a total of $1,050,000 from
Franchise Mortgage Acceptance Company, LLC ("FMAC") by entering into three
secured installment promissory notes for $475,000, $475,000 and $100,000,
respectively. Wayne L. Knyal serves as Chief Executive Officer and
President of FMAC. John E. Martin serves as a director of FMAC. The
promissory notes provide for repayment of the principal together with
interest at 13.5% per annum payable in monthly installments over a five
year period. One of the $475,000 promissory notes is secured by all
furniture, fixtures and equipment now or hereafter owned, acquired, held or
used by Newriders in its operation of the Fresno, California Easyriders
Cafe restaurant, all additions, attachments, accessions thereto,
substitutions for,
134
<PAGE> 150
and all replacements of, any of the foregoing, cash and non- cash, and
proceeds of the foregoing collateral, including general intangibles. The
other two promissory notes are secured by similar collateral located at the
Myrtle Beach, South Carolina Easyriders Cafe. Payment of all three
promissory notes has been personally guaranteed by all of Newriders'
directors (except Wayne L. Knyal) and some of their spouses.
10. Leon Hatcher, Michael Purcell, C.W. Doyle, and Rick Pierce have
agreed to return to Newriders as treasury shares, a total of 6,156,480
shares of Newriders Common Stock held by them conditional upon the closing
of the Paisano Acquisition. These stockholders will receive no
consideration from Newriders for the return of the shares. A total of
536,000 of these shares have already been returned to the Company and
cancelled. If the Reorganization is not consummated, Newriders will be
required to reissue the 536,000 shares to Mr. Hatcher.
11. Upon consummation of the Reorganization, Mr. Teresi will terminate
his existing leases for the building structures and real estate located at
28210 Dorothy Drive and 28216 Dorothy Drive, Agoura Hills, California, 605
Main Street, Daytona Beach, Florida and 611 Broad Street, Columbus, Ohio.
Simultaneously with the termination of such leases, Mr. Teresi will enter
into new leases with Easyriders for each of the four premises described
above. The new leases between Mr. Teresi and Easyriders will be standard
triple net leases with CPI adjustments for a five-year period with renewal
options for additional five-year periods. The first year lease rates of the
new leases are equal to the lease rates under the existing leases.
12. Michael Purcell, Leon Hatcher, C.W. Doyle and Rick Pierce have
collectively agreed to transfer to Mr. Teresi a total of 500,000 shares of
Newriders Common Stock held by them in the event that the Reorganization is
not consummated, unless the failure to consummate the Reorganization is due
to the acts or omissions of Mr. Teresi.
13. At the time of completion of the Reorganization, Easyriders will
issue to John E. Martin 4,036,797 shares of Easyriders Common Stock for a
purchase price of $12,300,000, to be paid $5,000,000 in cash and by
delivery of the Martin Notes, aggregating $7,300,000. See "The
Reorganization -- Martin Stock Purchase."
14. Joseph J. Jacobs was paid approximately $87,303 in 1997 from the
Paisano Companies for legal and consulting services provided by Mr. Jacobs.
15. On June 10, 1998, Newriders issued $1 million face value of
convertible subordinated debentures (the "June Debentures") to Wayne L.
Knyal, a director of Newriders, in a transaction exempt from federal and
state securities registration. The June Debentures are convertible into
shares of Newriders Common Stock at the lower of: (a) $2.375 per share of
Newriders Common Stock; or (b) 75% of the lowest closing bid price during
the five trading days prior to the date of conversion. The June Debentures
bear interest at 8% percent per annum which is payable upon conversion or
at maturity in cash or shares of Newriders Common Stock, at Newriders'
election. The June Debentures become due and payable on June 30, 2000.
Newriders has certain obligations to register shares of Newriders Common
Stock into which the June Debentures are convertible. Following
consummation of the Reorganization, Easyriders will assume the registration
rights obligations.
16. On January 13, 1998, Newriders entered into a letter agreement
engaging Imperial Capital, LLC ("Imperial Capital"), a Beverly Hills based
full service investment bank, to act as exclusive financial advisor and
placement agent with respect to a transaction between Newriders and the
Paisano Companies. Imperial Capital assisted Newriders in structuring the
Paisano Acquisition and the El Paso Acquisition and negotiating the Paisano
Agreement and the El Paso Agreement. The agreement with Imperial Capital,
LLC provides that Imperial Capital, LLC will receive cash compensation of
approximately $1,485,000 and warrants to purchase up to 2.5% of the
outstanding Easyriders Common Stock on a fully diluted basis at an exercise
price of $4.3125, Franchise Mortgage Acceptance Company ("FMAC") will
receive 10% of the cash compensation to be paid to Imperial Capital under a
finder's arrangement. Mr. Wayne Knyal is the Chairman and Chief Executive
Officer of FMAC, and indirectly
135
<PAGE> 151
owns approximately 19% of the equity interests of FMAC. Imperial Credit
Industries owns approximately 60% of the equity interests of Imperial
Capital and approximately 38% of the equity interests of FMAC.
17. On June 22, 1998, Newriders entered into the El Paso Agreement
pursuant to which, upon consummation of the Reorganization, Mr. Martin
shall receive 1,000,000 shares of Easyriders Common Stock and Mr. and Mrs.
Prather shall receive a total of 1,000,000 shares of Easyriders Common
Stock, in exchange for their ownership interests in El Paso. See "The
Reorganization -- The El Paso Acquisition."
18. Upon consummation of the Reorganization, Mr. Martin and Mr.
Nordstrom will receive certain initial performance awards under the
Easyriders Plan. See "The Reorganization -- Initial Performance Awards to
be Granted Under the Easyriders Plan."
19. Upon consummation of the Reorganization, Easyriders will issue
200,000 shares of Easyriders Common Stock to William R. Nordstrom in
consideration of services rendered by Mr. Nordstrom in connection with the
Reorganization.
20. On July 22, 1998, the assets comprising the Myrtle Beach
Easyriders Cafe and Easyriders Apparel and Merchandise Store were sold by
Newriders to Myrtle Beach, Inc., a South Carolina corporation, 50% of whose
outstanding common stock is owned by Mr. Leon Hatcher. The purchase price
of $607,420, plus the assumption of certain liabilities, resulted in the
recognition of a loss to Newriders on the transaction of $631,986,
representing the difference between the purchase price and the historical
cost basis of Newriders in the assets. The purchase price was paid in the
form of a $100,000 cash down payment, and a promissory note for the
balance, bearing interest at the rate of 12% per annum, with interest to
accrue only if the note is not paid by September 5, 1998. The note is
secured by 300,000 shares of Newriders Common Stock owned by Mr. Hatcher.
21. Mr. Joseph Teresi may advance up to $100,000 to Newriders, without
security or interest, for operating expenses, payable upon receipt by
Newriders of payment of the balance of the sales price from the sale of
Newriders' former Myrtle Beach operations.
22. On July 29, 1998, as contemplated in connection with the
Reorganization, Mr. Joseph Teresi received a dividend of $7,000,000 from
Paisano Publications, Inc.
23. On June 19, 1998, Newriders issued 1,000,000 shares of Newriders
Common Stock to Joseph Teresi in consideration of the forgiveness of
$211,133 in accounts payable owed by Newriders to one or more of the
Paisano Companies.
Each of the above described transactions when entered into, was, in the
opinion of management, at least as favorable to Newriders as could have been
obtained from independent third parties.
NEWRIDERS DIRECTORS' COMPENSATION
Newriders' directors do not receive any cash compensation for service on
the Newriders Board of Directors or any committee thereof but are reimbursed for
expenses incurred in connection with attending meetings of Newriders Board of
Directors and any committee thereof. Mr. Martin has been separately compensated
for his services as a director with 50,000 shares of Newriders Common Stock and
an option to purchase an additional 500,000 shares of Newriders Common Stock.
This option is exercisable at $2.50 per share, and it vests (become exercisable)
as to 250,000 shares from the date of grant, and as to an additional 125,000
shares after one year's service as a director, and as to an additional 125,000
shares after completing two years' service as a director. Employees of Newriders
other than Mr. Martin and the non-employee directors, are not compensated for
serving on the Board of Directors or on committees of the Board of Directors.
Non-employee directors, under the Newriders Plan, are to receive options to
purchase up to 50,000 shares of Newriders Common Stock per year. The exercise
price is to be equal to the closing bid price on date of grant. Assuming
approval of the Reorganization and the Easyriders Plan, this award will change
to an option to purchase 15,000 shares of Easyriders Common Stock per year. See
"Easyriders." All directors, except Wayne L. Knyal and Daniel J. Gallery,
receive compensation as officers and employees, but they
136
<PAGE> 152
receive no separate compensation for the services they provide to Newriders as
directors, except as described above. They receive no additional compensation
for any committee participation or special assignments.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report on executive
compensation:
Under the supervision of the Compensation Committee, Newriders has
developed and implemented compensation policies which seek to enhance the
profitability of Newriders, and thus stockholder value, by aligning the
financial interests of Newriders' executive officers with those of its
stockholders. In furtherance of these goals, Newriders relies to a large degree
on long-term incentive compensation provided through the Newriders Plan to
attract and retain corporate officers and other key employees of outstanding
abilities and to motivate them to perform to the full extent of their abilities.
Total compensation for executive officers of Newriders presently consists
of both cash and equity based compensation. The Compensation Committee
determines the salary of executive officers based upon competitive norms. In
1997, total compensation was paid to senior management on individual performance
and on the extent to which the business plans for individual areas of
responsibility were achieved or exceeded. Base compensation was determined by an
assessment of each executive's performance, current salary in relation to the
salary range designated for the job, experience and potential for advancement as
well as by the performance of Newriders. While many aspects of performance can
be measured in financial terms, the Compensation Committee also evaluated the
success of the management team in areas of performance that cannot be measured
by traditional accounting tools, including the development and execution of
strategic plans, the development of management and employees and the exercise of
leadership within the industry and in the communities that Newriders serves. All
of these factors were collectively taken into account by management and the
Compensation Committee in determining the appropriate level of base compensation
and base salary increases.
Under the Newriders Plan, the Compensation Committee may grant Options,
SARs, Stock Based Awards and Performance Awards under the Newriders Plan. See
"Newriders Plan (Proposal 2)." To date, the Compensation Committee has only
granted stock options. The Compensation Committee has the authority to determine
the individuals to whom such options are awarded, the terms at which option
grants shall be made and the terms of the options and the number of shares
subject to each option. The size of option grants are based upon competitive
practice and position level. Through the award of stock option grants, the
objective of aligning executive officers' long-range interests with those of the
stockholders are met by providing executive officers with the opportunity to
build a meaningful stake in Newriders. Salary levels and stock option awards may
be adjusted up or down for an executive's achievement of specified objectives
and individual job performance.
In October 1997, William E. Prather was named President and Chief Executive
Officer of Newriders. The Board of Directors agreed to compensate Mr. Prather at
the rate of $200,000 per year. No specific formula was used in determining or
agreeing to Mr. Prather's compensation. Based upon Mr. Prather's performance of
his duties in fiscal 1997, the Board of Directors determined to continue to
compensate Mr. Prather at the previously negotiated rate of $200,000 per year
for fiscal 1998.
It is the Compensation Committee's policy to consider deductibility under
Section 162(m) of the Code in determining compensation arrangements for
Newriders' "covered employees," and the Compensation Committee intends to
optimize the deductibility of compensation to the extent deductibility is
consistent with the objectives of the management compensation program. The
Compensation Committee, however, intends to weigh the benefits of full
deductibility with the objectives of the management compensation program and, if
the Compensation Committee believes to do so is in the best interest of
Newriders and its stockholders, will make compensation arrangements which may
not be fully deductible under Section 162(m). Grants of stock options under the
Newriders Plan, when approved by the stockholders, are expected to qualify for
deductibility under Section 162(m). The Compensation Committee expects that the
stock options granted in 1997 to Newriders' elected officers will, together with
their 1997 salaries and any other compensation paid to them in
137
<PAGE> 153
1997, qualify for deductibility. Other awards under the Newriders Plan may, but
need not, qualify for deductibility as performance-based compensation under
Section 162(m). Mr. Prather has been granted an option to purchase 750,000
shares of Newriders Common Stock outside of the Newriders Plan. If Mr. Prather
is a Covered Employee for the year any such option is exercised, and the
compensation recognized by him upon such an exercise plus all other non
performance-based compensation paid to him for such year exceeds $1 million, the
excess over $1 million will not be deductible. In addition, payments that may be
made to John E. Martin under the Martin Bonus Plan may exceed the $1,000,000
limit set by Section 162(m) of the Code, and therefore not qualify for
deductibility under section 162(m). In approving Mr. Prather's option and the
Martin Bonus Plan, the Compensation Committee and the Board of Directors weighed
the benefits of full deductibility against the anticipated benefit of
compensating such individuals. Under these circumstances, the Compensation
Committee and the Board of Directors believed that the options granted to Mr.
Prather and the Martin Bonus Plan to be in the best interests of Newriders and
its stockholders.
THE COMPENSATION COMMITTEE
Wayne L. Knyal
Daniel Gallery
William R. Nordstrom
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
(PROPOSAL 5)
The Board of Directors has appointed Deloitte & Touche LLP, independent
auditors, to audit the consolidated financial statements of Newriders for the
fiscal year ending December 31, 1998, and seeks ratification of such
appointment. In the event of a negative vote on such ratification, the Board of
Directors will reconsider its appointment. Assuming ratification of the
appointment of Deloitte & Touche LLP as independent auditors of Newriders for
the fiscal year ending December 31, 1998, and the completion of the
Reorganization, Deloitte & Touche LLP will be the independent auditors of
Easyriders for the fiscal year ending December 31, 1998.
Deloitte & Touche LLP has acted as Newriders' independent auditors since
January 1998. Representatives of Deloitte & Touche LLP are expected to be
present at the Annual Meeting, will have the opportunity to make a statement if
they desire to do so, and are expected to be available to respond to appropriate
questions.
LEGAL MATTERS
The legality of the Easyriders Common Stock offered hereby and certain
other matters with respect to the Merger will be passed upon for Easyriders by
Robert N. Wilkinson, Esq., 10 East South Temple Street, Suite 900, Salt Lake
City, Utah 84133.
Each of Newriders, El Paso and the Paisano Companies are subject to
litigation incidental to the conduct of their respective businesses in the
ordinary course of operations.
Newriders was recently 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 was recently 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
138
<PAGE> 154
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 franchise.
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 El Paso believes its insurance is adequate.
EXPERTS
The consolidated financial statements of Newriders as of December 31, 1997
and for the year then ended, included in this prospectus/proxy statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Newriders as of December 31, 1996,
and for the year then ended, included in this prospectus/proxy statement have
been audited by Jones, Jensen & Company, independent auditors, as stated in
their report, included herein and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of El Paso as of December 31, 1997
and 1996, and for each of the three years in the period ended December 31, 1997
included in this prospectus/proxy statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, appearing herein
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of the Paisano Companies as of
December 31, 1997 and 1996, and for each of the two years in the period ended
December 31, 1997, included in this prospectus/proxy statement have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report,
appearing herein and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
STOCKHOLDER PROPOSALS FOR 1999
Any Newriders stockholder who wishes to present a proposal for action at
the 1999 Annual Meeting of the stockholders of Newriders (if the Reorganization
is not consummated) must submit his proposal in writing by Certified
Mail -- Return Receipt Requested, to Newriders or Easyriders, as the case may
be, Attention: William R. Nordstrom, 567 San Nicolas Drive, Suite 400, Newport
Beach, California 92660, on or before May 4, 1999.
139
<PAGE> 155
GLOSSARY
As used in this Prospectus/Proxy Statement, the following are the meanings
for the terms set forth below:
"ABC" means the Audit Bureau of Circulations.
"ADA" means the Federal Americans with Disabilities Act.
"ANNUAL EBITDA TARGETS" means the predetermined levels of earnings
established under the Easyriders Plan as a condition to receipt of annual
bonuses by Mr. John E. Martin (generally for 1999, 125% of Easyriders'
EBITDA for 1998; and for each year thereafter, 125% of the average EBITDA
of Easyriders for the two years immediately prior to such year).
"ANNUAL MEETING" means the Annual Meeting of the Stockholders of
Newriders to be held at the Radisson Hotel and Conference Center, 30100
Agoura Road, Agoura Hills, California, at 10:00 a.m., local time, on
September 22, 1998.
"BROS CLUB" means Bros Club, Inc,. a California corporation
"CLOSING DATE" means the date upon which Closing occurs.
"CLOSING" means the closing of the transactions contemplated by the
Merger Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLUMBUS" means Easyriders of Columbus, Inc., an Ohio corporation.
"COMMISSION" means the U. S. Securities and Exchange Commission.
"CONTRIBUTOR MIRROR NOTE" means a limited recourse promissory note
issued by Easyriders in the principal amount of $5,000,000 payable to Mr.
Joseph Teresi and secured by the Martin Mirror Note.
"CONTRIBUTOR NOTES" means collectively the Contributor Subordinated
Note, the Contributor Mirror Note, and the Contributor Short-Term
Subordinated Note.
"CONTRIBUTOR SHORT-TERM SUBORDINATED NOTE" means a subordinated
promissory note issued by Easyriders in the principal amount of $3,000,000
payable to Mr. Joseph Teresi.
"CONTRIBUTOR SUBORDINATED NOTE" means a subordinated promissory note
issued by Easyriders in the principal amount of $5,000,000 payable to Mr.
Joseph Teresi.
"EASYRIDERS" means Easyriders, Inc., a Delaware corporation and a
wholly owned subsidiary of Newriders.
"EASYRIDERS COMMON STOCK" means the common stock of Easyriders, $0.001
par value.
"EASYRIDERS FRANCHISING" means Easyriders of Columbus, Inc., an Ohio
corporation.
"EASYRIDERS PLAN" means the Easyriders 1998 Executive Incentive
Compensation Plan.
"EASYRIDERS SUB" means Easyriders Sub, Inc., a Nevada corporation and
a wholly owned subsidiary of Easyriders.
"EBITDA" means earnings before income taxes, depreciation and
amortization.
"EFFECTIVE TIME" means the date on which the Articles of Merger are
filed with the Nevada Secretary of State's office at which time the Merger
becomes effective.
"EL PASO" means M & B Restaurants, L.L.C., a Texas limited liability
company.
"EL PASO ACQUISITION" means the acquisition by Easyriders of all of
the outstanding membership interests of M & B Restaurants, L.L.C., dba El
Paso Bar-B-Que.
"EL PASO AGREEMENT" means the LLC Interest Contribution Agreement
dated June 30, 1998, among Newriders, Easyriders, El Paso and the El Paso
Owners.
140
<PAGE> 156
"EL PASO MEMBERSHIP INTERESTS" means all issued and outstanding
limited liability company membership interests of M & B Restaurants, L.L.
C., a Texas limited liability company.
"EL PASO OWNERS" means John E. Martin, William E. Prather, and Marna
Prather.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"EXCHANGE AGENT" means Pacific Stock Transfer Company, P.O. Box 93385,
Las Vegas, Nevada 89193, telephone (702) 361-3033, fax (702) 732-7890.
"FINANCING" means financing in the approximate amount of $22,000,000
to consummate the Paisano Acquisition and the El Paso Acquisition.
"FMAC" means Franchise Mortgage Acceptance Company.
"FRANCHISED BUSINESS" means territorial areas of Fresno, California
and Myrtle Beach, South Carolina that Newriders can operate an Easyriders
apparel and motorcycle accessories and restaurant business.
"FRANCHISOR" means Easyriders Franchising, Inc., a California
corporation.
"FURR'S" means Furr's/Bishop's Cafeteria, Inc.
"IRS" means the United States Internal Revenue Service.
"MARTIN MIRROR NOTE" means the full recourse promissory note issued by
Mr. John E. Martin in the principal amount of $5,000,000 payable to
Easyriders.
"MARTIN NOTES" means collectively, the Martin Mirror Note and the
Other Martin Note.
"MARTIN SHARES" 4,740,260 shares of the common stock of Easyriders
issued to John E. Martin.
"MERGER" means the merger of Easyriders Sub with and into Newriders as
contemplated by the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Reorganization
dated as of June 30, 1998, among Newriders, Easyriders and Easyriders Sub.
"NAMED EXECUTIVE OFFICERS" means any executive officer of Newriders,
Inc.
"NEVADA STATUTES" means the Nevada Revised Statutes, as amended, and
any portion thereof such as the Nevada General Corporation Law.
"NEWRIDERS" means Newriders, Inc., a Nevada corporation.
"NEWRIDERS BOARD OF DIRECTORS" means the Board of Directors of
Newriders, Inc.
"NEWRIDERS COMMON STOCK" means common stock, par value $0.001 per
share of Newriders, Inc.
"NEWRIDERS STOCKHOLDERS" means holders of Newriders common stock as of
the Record Date.
"NEWRIDERS PLAN" means the Newriders 1997 Executive Incentive
Compensation Plan.
"OTHER MARTIN NOTE" means a full recourse promissory note issued by
Mr. John E. Martin in the principal amount of $2,300,000 payable to
Easyriders.
"PAISANO ACQUISITION" means the acquisition by Easyriders of all of
the outstanding common stock of the Paisano Companies, pursuant to the
Paisano Agreement.
"PAISANO AGREEMENT" means that certain Stock Contribution Agreement
dated June 30, 1998, among Newriders, Easyriders, the Paisano Companies and
Mr. Teresi.
"PAISANO COMPANIES" means collectively Paisano Publications, Columbus,
Easyriders Franchising, Teresi, Inc., Bros Club and Rodeo Riders.
141
<PAGE> 157
"PAISANO COMPANIES STOCK" means the issued and outstanding stock of
each of the corporations that comprise the Paisano Companies.
"PAISANO PUBLICATIONS" means Paisano Publications, Inc., a California
corporation.
"RECORD DATE" means the close of business on August 27, 1998.
"REGISTRATION STATEMENT" means the registration statement of
Easyriders on Form S-4 filed with the Securities and Exchange Commission
under the Securities Act.
"REGULATIONS" means the regulations promulgated by the U. S.
Department of the Treasury under the Code.
"REORGANIZATION" means a series of proposed transactions consisting of
the Paisano Acquisition, the El Paso Acquisition, and the Merger, that
through the Merger, the Paisano Acquisition and the El Paso Acquisition,
stockholders of Newriders will become stockholders in Easyriders.
"REORGANIZATION AGREEMENTS" means collectively the Merger Agreement,
the Paisano Agreement and the El Paso Agreement.
"REORGANIZATION TAX OPINION" means the opinion of Deloitte & Touche
LLP as to certain expected federal income tax consequences of the
Reorganization.
"RODEO RIDERS" means Associated Rodeo Riders on Wheels, a California
corporation.
"SEC" means the U. S. Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR CREDIT AGREEMENT" means the proposed Senior Credit Agreement
between Paisano Publications as borrower, Easyriders as guarantor and the
Senior Lender, pursuant to which the Senior Lender proposes to lend an
aggregate of $22,000,000 to Paisano Publications.
"SENIOR LENDER" means the financial institution which has committed to
lend an aggregate of $22,000,000 to Paisano Publications.
"STOCKHOLDERS", when used without identification to a particular
entity, refers to the holders of record on the Record Date of one or more
shares of Newriders Common Stock.
"STOCKHOLDERS AGREEMENT" means a Stockholders' Voting Agreement
between Mr. John E. Martin and Mr. Joseph Teresi in the form attached to
this Prospectus/Proxy Statement as Addendum D.
"TERESI, INC." means Teresi, Inc., a California corporation.
"UNIT" means an enterprise operated or franchised by Newriders or an
affiliate of Newriders consisting of one or more of the following: an
Easyriders Cafe Restaurant, an Easyriders Apparel and Merchandise Store and
an Easyriders Motorcycle and Accessory Shop.
142
<PAGE> 158
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEWRIDERS, INC. AND SUBSIDIARY
Independent Auditors' Report -- Deloitte & Touche LLP....... F-2
Consolidated Balance Sheet as of December 31, 1997.......... F-3
Consolidated Statement of Operations for the Year Ended
December 31, 1997......................................... F-4
Consolidated Statement of Stockholders' Equity for the Year
Ended December 31, 1997................................... F-5
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1997......................................... F-6
Notes to the Consolidated Financial Statements.............. F-7
Independent Auditors' Report -- Jones, Jensen & Company..... F-14
Consolidated Balance Sheet as of December 31, 1996.......... F-15
Consolidated Statement of Operations for the Year Ended
December 31, 1996......................................... F-16
Consolidated Statement of Stockholders' Equity for the Year
Ended December 31, 1996................................... F-17
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996......................................... F-18
Notes to the Consolidated Financial Statements.............. F-19
Condensed Consolidated Balance Sheets for June 30, 1998
(unaudited) and December 31, 1997......................... F-22
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1998 and 1997 (unaudited)........... F-23
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1997 and the Six Months
Ended June 30, 1998....................................... F-24
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (unaudited)........... F-25
Notes to Unaudited Consolidated Financial Statements
(unaudited)............................................... F-26
PAISANO PUBLICATIONS, INC. AND AFFILIATES
Independent Auditors' Report................................ F-28
Combined Balance Sheets as of December 31, 1997 and 1996.... F-29
Combined Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 (unaudited).............. F-30
Combined Statements of Shareholder's Equity for the Years
Ended December 31, 1997, 1996 and 1995 (unaudited)........ F-31
Combined Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 (unaudited).............. F-33
Notes to Combined Financial Statements...................... F-34
Condensed Combined Balance Sheets as of June 30, 1998
(unaudited)............................................... F-42
Condensed Combined Statements of Operations for the Six
Months Ended June 30, 1998 and 1997 (unaudited)........... F-43
Condensed Combined Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (unaudited)........... F-44
Notes to Condensed Combined Financial Statements for the Six
Months Ended June 30, 1998 and 1997 (unaudited)........... F-45
M & B RESTAURANTS, L.C.
Independent Auditor's Report................................ F-46
Balance Sheets for the Years Ended December 30, 1997 and
December 31, 1996......................................... F-47
Statements of Operations for the Years Ended December 30,
1997 and December 31, 1996................................ F-48
Statements of Changes in Members' Equity for the Years Ended
December 30, 1997 and December 31, 1996................... F-49
Statements of Cash Flows for the Years Ended December 30,
1997 and December 31, 1996................................ F-50
Notes to Financial Statements............................... F-51
Condensed Balance Sheet as of June 30, 1998 (unaudited)..... F-56
Condensed Statements of Operations for the Six Months Ended
June 30, 1998 and July 1, 1997 (unaudited)................ F-57
Statements of Cash Flows for the Six Months Ended June 30,
1998 and July 1, 1997 (unaudited)......................... F-58
Notes to Financial Statements for the Six Months Ended June
30, 1998 and July 1, 1997 (unaudited)..................... F-59
</TABLE>
F-1
<PAGE> 159
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Newriders, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Newriders,
Inc. and subsidiary as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Newriders, Inc. and subsidiary
as of December 31, 1997, and the results of their operations and their cash
flows for the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred losses from
its inception and does not have an established source of revenues sufficient to
cover its operating costs which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 17, 1998
F-2
<PAGE> 160
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,262,633
Inventories (Note 4)........................................ 285,622
Prepaid expenses............................................ 15,738
-----------
Total current assets.............................. 1,563,993
PROPERTY AND EQUIPMENT, net (Note 3)........................ 1,487,598
ORGANIZATION COSTS, net..................................... 142,158
DEPOSITS AND OTHER ASSETS................................... 107,503
DEFERRED FINANCING COSTS, net (Note 8)...................... 161,103
-----------
$ 3,462,355
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 517,904
Accrued expenses............................................ 54,567
Accrued compensation and benefits (Note 7).................. 340,940
Advances from stockholders (Note 7)......................... 201,350
Other advances (Note 7)..................................... 50,000
Current obligation under capital lease (Note 6)............. 21,184
Current portion of long-term debt (Note 9).................. 157,694
-----------
Total current liabilities......................... 1,343,639
DEFERRED RENT............................................... 128,003
OBLIGATION UNDER CAPITAL LEASE, less current obligation
(Note 6).................................................. 10,382
CONVERTIBLE DEBENTURES, net of discount of $214,817 (Note
8)........................................................ 785,183
LONG-TERM DEBT (Note 9)..................................... 892,306
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 7, 8, 10 and 11):
Common stock; 50,000,000 shares authorized of $0.001 par
value;
17,181,425 shares issued and outstanding.................. 17,181
Additional paid-in capital.................................. 6,884,677
Common stock subscription receivable (Note 10).............. (750,000)
Accumulated deficit......................................... (5,849,016)
-----------
Total stockholders' equity........................ 302,842
-----------
$ 3,462,355
===========
</TABLE>
See independent auditor's report and notes to consolidated financial statements.
F-3
<PAGE> 161
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
SALES....................................................... $ 2,932,708
COST OF SALES............................................... 1,670,146
-----------
GROSS MARGIN................................................ 1,262,562
EXPENSES:
Restaurant and store operating expenses..................... 2,661,424
Selling, general and administrative......................... 1,167,464
Compensation expense from stock and option issuances (Note
11)....................................................... 1,244,000
Write-off of leasehold improvements (Note 12)............... 628,129
-----------
Total expenses.................................... 5,701,017
-----------
LOSS FROM OPERATIONS........................................ (4,438,455)
OTHER EXPENSE:
Interest expense............................................ (27,542)
Interest expense -- noncash (Note 8)........................ (310,877)
-----------
Total other expense............................... (338,419)
-----------
NET LOSS.................................................... $(4,776,874)
===========
NET LOSS PER SHARE -- BASIC................................. $ (.29)
===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -- BASIC...................................... 16,635,065
===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-4
<PAGE> 162
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
---------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997............. 16,168,000 $16,168 $3,570,992 $(1,000,000) $(1,072,142)
Common stock issued in conjunction
with convertible debentures (Note
8)................................. 293,825 294 610,523
Discount on convertible debentures
issuance (Note 8).................. 481,667
Warrants issued in connection with
convertible debentures (Note 8).... 105,130
Sale of common stock (Note 7)........ 384,600 384 499,616
Common stock issued for services
(Notes 8 and 11)................... 335,000 335 572,165
Services rendered in satisfaction of
common stock receivable (Note
10)................................ 250,000
Compensatory options issued to
nonemployees (Note 11)............. 671,500
Capital contributed by
stockholders....................... 373,084
Net loss............................. (4,776,874)
---------- ------- ---------- ----------- -----------
BALANCE, December 31, 1997........... 17,181,425 $17,181 $6,884,677 $ (750,000) $(5,849,016)
========== ======= ========== =========== ===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-5
<PAGE> 163
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,776,874)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock issued for services.......................... 572,500
Compensatory options issued to nonemployees............... 671,500
Services rendered in satisfaction of common stock
receivable............................................. 250,000
Depreciation and amortization............................. 223,169
Write-off of leasehold improvements....................... 628,129
Noncash interest expense.................................. 310,877
Changes in operating assets and liabilities:
Decrease in inventories................................ 299,268
Increase in prepaid expenses........................... (13,703)
Increase in deposits and other assets.................. (69,700)
Increase in organization costs......................... (32,799)
Increase in accounts payable and accrued expenses...... 744,243
Increase in deferred rent.............................. 128,003
-----------
Net cash used in operating activities................ (1,065,387)
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of fixed assets.................................. (1,338,738)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation........................ (27,723)
Issuance of convertible debentures.......................... 1,600,000
Issuance of long-term debt.................................. 1,150,000
Payment of long-term debt................................... (100,000)
Cash contributions to capital............................... 373,084
Common stock issued for cash................................ 500,000
Deferred financing costs.................................... (100,000)
Issuance of notes payable to stockholders................... 339,350
Payment of notes payable to stockholders.................... (88,000)
-----------
Net cash provided by financing activities............ 3,646,711
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,242,586
CASH AND CASH EQUIVALENTS, beginning of year................ 20,047
-----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,262,633
===========
SUPPLEMENTAL CASH FLOW INFORMATION --
Cash paid for interest.................................... $ 21,482
===========
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of debt (Note 8).......... $ 610,817
===========
Convertible debentures issued with conversion discount...... $ 481,667
===========
Issuance of warrants in connection with debenture
issuance.................................................. $ 105,130
===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-6
<PAGE> 164
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Newriders, Inc. (the Company) was incorporated under the laws of the State
of Nevada on July 15, 1995. On June 28, 1996, the Company acquired all of the
outstanding common stock of Newriders Limited (the Subsidiary) for 13,250,000
shares of the Company's common stock. Of the common shares issued, 11,000,000
were new issues and 2,250,000 were concurrently reacquired from an existing
shareholder and reissued as part of the acquisition. The acquisition of the
Subsidiary was recorded as a recapitalization of the Subsidiary, whereby the
acquired company is treated as the surviving entity for accounting purposes.
As of December 31, 1997, the Company operates an Easyriders Cafe Restaurant
and an Easyrider Apparel and Merchandise Store in Myrtle Beach, South Carolina.
The Company is a party to franchise agreements with Easyriders Franchising,
Inc., a California corporation, and an affiliate of Paisano Publications, the
publisher of "Easyriders Magazine," to operate Easyriders apparel, motorcycle
and accessory shops and the right to use the name Easyriders in connection with
their operation (Note 12).
Consolidation -- The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary. Material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition -- Revenue is recognized at the point of sale to the
customer.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents.
Inventories -- Inventories consist of retail merchandise, food, beverages
and other restaurant supplies and are valued at the lower of cost (first-in,
first-out method) or market.
Property and Equipment -- Depreciation on property and equipment is
computed on the straight-line method for financial reporting purposes, based on
the shorter of the estimated useful lives or the term of the underlying leases
of the related assets, which ranged from three to 20 years.
Pre-Opening Costs -- Cost incurred prior to commencement of a restaurant's
operations are expensed as incurred.
Organization Costs -- Organization costs are being amortized over five
years.
Deferred Financing Costs -- Costs incurred in obtaining financing are
deferred and amortized over the term of the related debt.
Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No.
121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be recoverable.
As of December 31, 1997, no impairment has been indicated.
Deferred Rent -- Lease expenses are recognized on the straight-line basis.
Differences between cash lease payments and accrued lease expenses are
recognized as either an increase or decrease to deferred rent.
Income Taxes -- The Company accounts for income taxes using SFAS No. 109,
Accounting for Income Taxes, which requires that the Company recognize deferred
tax assets and liabilities based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities, using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance related to
F-7
<PAGE> 165
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
deferred tax assets is recorded when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Additionally, the Company accounts for stock-based compensation to nonemployees
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation (Note
11).
Earnings Per Share -- The Company computes earnings per share in accordance
with SFAS No. 128, Earnings Per Share. Earnings per share is computed using the
weighted average number of common shares outstanding during the reporting
period. Earnings per share assuming dilution is computed using the weighted
average number of common shares outstanding and dilutive effect of potential
common shares outstanding. Diluted earnings per share is not presented at
December 31, 1997 due to the antidilutive effect on earnings per share.
New Accounting Pronouncements -- In 1997, SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, were issued and are effective for fiscal
years beginning after December 15, 1997. The Company is reviewing the impact of
these statements on its financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has incurred losses from its inception
through December 31, 1997 and has an accumulated deficit of $5,849,016. The
Company does not have an established source of revenues sufficient to cover its
operating costs which raises substantial doubt about its ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. It is the
intent of the Company to seek additional financing through offerings of its
common stock and other debt and equity financing in order to expand its
operations (Notes 8 and 13).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Leasehold improvements...................................... $1,085,240
Store and office equipment.................................. 471,386
Assets under capital lease.................................. 74,264
----------
1,630,890
Less accumulated depreciation............................... (143,292)
----------
Property and equipment, net................................. $1,487,598
==========
</TABLE>
F-8
<PAGE> 166
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Food........................................................ $ 48,586
Motorcycles and parts....................................... 137,055
Apparel..................................................... 99,981
========
$285,622
========
</TABLE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets as of
December 31, 1997 are primarily composed of net operating loss carryforwards,
accrued compensation and basis difference in assets. Such deferred tax assets
are offset in full by valuation allowances at December 31, 1997.
The Company has net operating loss carryforwards of approximately
$5,538,000 available to reduce future income subject to income taxes. These
carryforwards will expire in 2010 thorough 2012 and usage may be limited due to
a change in ownership of the Company (Note 13).
6. COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases its facilities and certain equipment under
both capital and triple net operating lease agreements. Under the terms of the
operating leases, the Company is required to pay certain costs of the leased
properties including taxes, insurance and utilities. Rent expense for the year
ended December 31, 1997 was $433,188, of which $42,000 was paid to a director of
the Company.
Minimum annual payments under these agreements as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
Year ending December 31:
1998.................................................. $24,255 $ 316,762
1999.................................................. 10,780 360,513
2000.................................................. 386,186
2001.................................................. 396,143
2002.................................................. 430,024
Thereafter............................................ 3,118,486
------- ----------
Total minimum lease payments.................. 35,035 $5,008,113
==========
Amount representing interest............................ (3,469)
-------
Present value of future minimum lease payments.......... 31,566
Current portion......................................... (21,184)
-------
Long-term portion....................................... $10,382
=======
</TABLE>
Royalty Agreement -- The Company has entered into agreements with Easyrider
Franchising, Inc. which requires the Company to pay royalties of 5% of sales to
Easyrider Franchising, Inc. (Note 12). Included in restaurant and store
operating expenses are $213,391 of amounts paid or payable to Easyrider
Franchising, Inc. for royalties and merchandise purchases. The Franchisor has
the right of first refusal if the shareholders of the Company should decide to
sell the Company, or the business and its assets to another party.
F-9
<PAGE> 167
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
Employment Agreements -- The Company has entered into employment agreements
with two officers of the Company. The agreement with the Company's chairman,
entered into July 8, 1997, requires annual compensation of $250,000 for a
minimum of three years and reimbursement of remote office expenses of $85,000
per year.
The agreement for the Company's chief executive officer, entered into on
October 10, 1997, requires annual compensation of $200,000 for a five-year
period.
Litigation -- The Company is currently involved in litigation incidental to
its business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on the accompanying financial
statements.
7. RELATED-PARTY TRANSACTIONS
Remote Office Expenses -- Pursuant to the chairman's annual employment
agreement (Note 6), payments for remote office expenses of $42,000 were made.
Advances from Stockholders and Other Advances -- During 1997, advances
aggregating $339,350 were received from stockholders of the Company and a
stockholder of Paisano Publications, Inc. (Note 13). The advances bear interest
at 10% and were fully repaid by the Company in January 1998.
Accrued Compensation -- As provided for in the Officers' employment
agreement, direct compensation of $222,465 has been deferred until payment is
reasonably justified based on the Company's cash flows.
Lease Assignment -- On February 9, 1998, a shareholder and director assumed
the Company's obligation under an operating lease agreement effective March 1,
1998. Under the terms of the lease, monthly lease payments of $2,200 have been
assumed through the end of the lease term in May 2017.
Stock Issuances -- During 1997, the Company issued 384,600 shares of common
stock to certain officers for $500,000. Shares were issued at their fair value
at the date of sale. In connection with stock issuance, the Company issued
warrants to purchase 500,000 shares of common stock at $4.00 per share. The
warrants issued are immediately exercisable and expire on April 21, 1999.
Legal Expenses -- During 1997, the Company made cash payments of $44,315
and issued 40,000 shares of common stock with a fair value of $60,000 to a
stockholder and director of the Company for legal services.
Advertising Expenses -- During 1997, the Company made payments of $41,133
to a stockholder and director of the Company for advertising services.
8. CONVERTIBLE DEBENTURES
During the year ended December 31, 1997, the Company issued two tranches of
convertible debentures (the Debentures) with face values of $600,000 and
$1,000,000 in private placements to institutional investors. The Debentures
accrue interest at rates of 10% and 8% per year, respectively, payable
semi-annually. The Debentures are convertible at the option of the holder into
shares of the Company's common stock based upon the following terms:
Tranche A -- The Debentures in Tranche A were converted into common
stock at 72.5% of the five-day average closing bid price on the conversion
date and were converted into common shares during 1997. The Company issued
a total 293,825 shares of its common stock in connection with the
conversion of the $600,000 of the original principal amount of the
Debentures, plus interest accrued through the conversion date of $10,523.
F-10
<PAGE> 168
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
Tranche B Due December 12, 2000 -- Convertible into common shares at
the lesser of the five-day average closing bid price on the closing date or
80% of the five-day average closing bid price on the conversion date, as
defined. The Debentures in Tranche B are convertible at the holder's
option: one-third after January 26, 1998; one-third after February 25, 1998
and one-third after March 27, 1998. The Debentures are convertible at the
option of the issuer at any time after December 12, 1998.
The conversion of the Debentures at discount of the Company's common stock
results in the Debentures being issued at a discount (the conversion discount).
The conversion discount, which aggregated $481,667 at the dates of issuance, is
being recognized by the Company as noncash interest expense over the shortest
expected term to anticipated conversion of the Debentures with a corresponding
increase to the original principal amount of the Debentures. Upon conversion of
the Debentures, any portion of the conversion discount not previously recognized
is recorded as interest expense on the conversion date. During the year ended
December 31, 1997, a total of $277,990 of noncash interest expense was recorded
relating to the Debentures.
In conjunction with the issuance of the Convertible Debentures, the Company
issued an aggregate 50,000 shares to a financial advisor as compensation for
arranging the Convertible Debenture issuances. The fair value of the shares has
been recorded as debt issuance costs and was amortized through the conversion
date of the Convertible Debentures.
Additionally, in conjunction with the issuance of the Convertible
Debentures, the Company issued five-year broker warrants for 41,529 shares of
common stock with exercise prices from $3.83 to $4.05. The fair value of the
warrants has been recorded as debt issuance costs and is being amortized over
the term of the Convertible Debentures.
9. LONG-TERM DEBT
On December 1, 1997, the Company borrowed $1,050,000 under a secured
installment promissory note agreement with a commercial lender. Borrowings under
the notes agreement bear interest at 13.5% per annum and require monthly
payments of principal and interest of $24,160 through December 2002. This note
is collateralized by all of the assets of the Company. Principal payments of
$157,694, $180,350, $206,264, $235,899 and $269,793 are required for each of the
five years ended December 31, 2002, respectively.
10. COMMON STOCK SUBSCRIPTION
In November 1996, the Company entered into an agreement with a barter
service to issue 400,000 shares of common stock in exchange for $1,000,000 of
barter advertising and other services and merchandise. As of December 31, 1997,
the Company had utilized services in satisfaction of $250,000 of the
subscription receivable. The remaining $750,000 subscription receivable has been
reflected as a reduction of stockholders' equity in the accompanying
consolidated financial statements.
11. STOCKHOLDERS' EQUITY
Common Stock Issued for Services -- During 1997, the Company issued 335,000
shares (including 50,000 issued to a financial advisor (Note 8)) for consulting
and other services. Shares were issued at their fair value at the date of
issuance and ranged from $1.50 to $2.10 per share.
Stock Option Plan -- In November 1997, the Company adopted its 1997
Executive Incentive Compensation plan (the Plan), which provides for the grant
of stock options and other awards to certain officers, key employees,
consultants or other persons affiliated with the Company. The maximum number of
shares of common stock that may be issued pursuant to the Plan is 5,000,000.
Following the adoption of such plan, the Company granted options to purchase an
aggregate of 2,721,000 shares of the Company's common stock at
F-11
<PAGE> 169
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997
prices ranging from $2.50 to $3.00 per share, which the Company's Board of
Directors deemed to be equal to, or in excess of, fair market value of the
common stock at the dates of grants, to employees of the Company. Additionally,
options were granted for the purchase of up to 395,000 common shares at $2.50
per share to certain nonemployees of the Company. The Company recorded
compensation expense equivalent to the fair value of the options granted to
nonemployees, totaling approximately $671,500. These options vested upon grant.
The following table summarizes the activity under the Plan along with
common stock warrant activity for the period indicated:
<TABLE>
<CAPTION>
WEIGHTED PRICE WEIGHTED
PRICE OF AVERAGE RANGE OF AVERAGE
OPTIONS OPTION EXERCISE WARRANT EXERCISE
OUTSTANDING GRANTS PRICE WARRANTS GRANTS PRICE
----------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING,
January 1, 1997.......... -- $ -- $ -- -- $ -- $ --
1997 grants................ 3,116,000 $2.50 - 3.00 $2.50 541,291 $3.83 - 4.05 3.99
--------- -------
OUTSTANDING,
December 31, 1997........ 3,116,000 541,291
========= =======
</TABLE>
At December 31, 1997, 299,208 options and 541,291 warrants to purchase
shares were exercisable. The weighted average exercise price of the exercisable
options and warrants is $2.50 and $3.99, respectively.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does
not require companies to record compensation cost for employee stock option
grants. The Company has chosen to continue to account for employee option grants
using APB Opinion No. 25. No compensation expense has been recognized for
employee stock option grants. Had compensation expense for the employee stock
option grants been determined based on the fair value at the grant dates
consistent with SFAS No. 123, the Company's net loss and net loss per share for
the year ended December 31, 1997 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<S> <C>
Net loss applicable to common stock:
As reported............................................... $(4,776,874)
Pro forma................................................. $(6,107,953)
Net loss per common share:
As reported............................................... $ (0.29)
Pro forma................................................. $ (0.37)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: zero dividend yield, expected volatility of
109%, risk-free interest rate of 5.9% and expected lives of three years.
12. WRITE-OFF OF LEASEHOLD IMPROVEMENTS
In December 1997, the Company initiated plans to substantially rebuild its
restaurant located in Fresno, California. As a result, the Company recorded a
write-down of $628,129 with respect to leasehold improvements and store fixtures
at the Fresno location.
13. ACQUISITION OF BUSINESSES
On October 7, 1997, the Company signed a binding letter of intent to
acquire the stock of M & B Restaurants, L.C. (M&B) for a combination of stock
and the issuance of notes payable. M&B is the owner of four restaurants located
in Ahwatukee, Glendale and Scottsdale, Arizona and Tulsa, Oklahoma. The
F-12
<PAGE> 170
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
acquisition of M&B requires approval by the Company's shareholders. An officer
and director of the Company has an ownership interest in M&B. Additionally, a
member of M&B became chief executive officer of the Company.
On October 30, 1997, the Company signed a binding letter of intent to
acquire the stock of Paisano Publications, Inc., Easyriders Franchising, Inc.
and other affiliated companies for a combination of stock, cash and notes
payable. Paisano is the publisher of Easyriders Magazine and several other
motorcycle lifestyle magazines, and is the franchiser for motorcycle shops,
apparel stores and cafes using the Easyriders name. The acquisition of these
companies requires approval by the Company's shareholders and obtaining
sufficient financing for the transaction.
F-13
<PAGE> 171
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Newriders, Inc. and Subsidiary
Fresno, California
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Newriders, Inc. and Subsidiary for the
year ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated statements of operations,
stockholders' equity and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated statements of operations, stockholders' equity
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated statements of operations, stockholders' equity
and cash flows. We believe that our audit of the consolidated statements of
operations, stockholders' equity and cash flows provides a reasonable basis for
our opinion.
In our opinion, the consolidated statements of operations, stockholders'
equity and cash flows referred to above present fairly, in all material
respects, the consolidated results of the operations and the cash flows of
Newriders, Inc. and Subsidiary for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, certain
errors resulting in overstatement of previously reported amounts in Property and
Equipment, Deferred Charges, Common Stock and Additional Paid-in Capital as of
December 31, 1996, were discovered by management of the Company during the
current year. Accordingly, an adjustment has been made to the above mentioned
accounts as of December 31, 1996 to correct the errors. These errors have no
effect on net loss for the year ended December 31, 1996.
The accompanying consolidated statements of operations, stockholders'
equity and cash flows have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 3 to the consolidated financial
statements, the Company has incurred losses from its inception and does not have
an established source of revenues sufficient to cover its operating costs which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
June 3, 1997
F-14
<PAGE> 172
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(AS RESTATED
SEE NOTE 7)
<S> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 20,047
Inventory................................................. 584,890
Prepaid expenses.......................................... 2,035
-----------
Total Current Assets.............................. 606,972
-----------
PROPERTY AND EQUIPMENT -- Net............................... 973,448
-----------
OTHER ASSETS
Deferred charges -- net................................... 157,494
Deposits.................................................. 16,378
-----------
Total Other Assets................................ 173,872
-----------
TOTAL ASSETS...................................... $ 1,754,292
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 154,975
Accrued expenses.......................................... 25,010
Current obligation under capital lease.................... 27,723
-----------
Total Current Liabilities......................... 207,708
-----------
OBLIGATION UNDER CAPITAL LEASE, Less Current Obligation..... 31,566
-----------
STOCKHOLDERS' EQUITY
Common stock; 25,000,000 shares authorized of $0.001 par
value; 16,168,000 shares
issued and outstanding................................. 16,168
Additional paid-in capital................................ 3,570,992
Common stock subscription receivable...................... (1,000,000)
Accumulated deficit....................................... (1,072,142)
-----------
Total Stockholders' Equity........................ 1,515,018
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 1,754,292
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 173
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
SALES....................................................... $ 1,161,520
COST OF SALES............................................... 532,487
-----------
GROSS MARGIN................................................ 629,033
-----------
EXPENSES
Selling, general and administrative....................... 1,520,271
Depreciation and amortization............................. 129,277
-----------
Total Expenses.................................... 1,649,548
-----------
Loss from Operations.............................. (1,020,515)
-----------
OTHER INCOME (EXPENSE)
Interest income........................................... 36
Other income.............................................. 3,613
Interest expense.......................................... (18,365)
Bad debt expense.......................................... (1,009)
-----------
Total Other Income (Expense)...................... (15,725)
-----------
NET LOSS.................................................... $(1,036,240)
===========
NET LOSS PER SHARE.......................................... $ (0.07)
===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 15,770,351
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 174
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON
---------------------- STOCK
ACCUMULATED ADDITIONAL PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
----------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............. 11,000,000 $11,000 $ 755,756 $ - $ (35,902)
Issuance of common stock to acquire New
Riders Limited (Note 1).............. 4,581,000 4,581 58,110 -- --
Common stock issued through private
placement at $2.50 per share......... 87,000 87 217,413 -- --
Capital contributed through debt
relief............................... 158,000 158 214,749 -- --
Common stock subscription for future
goods and services................... 400,000 400 999,600 (1,000,000) --
Common stock issued for services....... 100,000 100 249,900 -- --
Capital contributed by shareholders.... -- -- 1,496,080 -- --
Net loss for the period ended December
31, 1996............................. -- -- -- -- (1,036,240)
---------- ------- ---------- ----------- -----------
Balance, December 31, 1996 (Previously
reported)............................ 16,326,000 16,326 3,991,608 (1,000,000) (1,072,142)
Correction of errors (Note 7).......... (158,000) (158) (420,616) -- --
---------- ------- ---------- ----------- -----------
Restated balance, December 31, 1996.... 16,168,000 $16,168 $3,570,992 $(1,000,000) $(1,072,142)
========== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 175
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
(AS RESTATED
SEE NOTE 7)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(1,036,240)
Adjustments to reconcile net loss to net cash used by
operating activities:
Common stock issued for services....................... 250,000
Depreciation and amortization.......................... 129,277
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........... 1,009
(Increase) decrease in inventory..................... (258,822)
(Increase) decrease in deferred charges.............. (139,810)
(Increase) decrease in prepaid expenses.............. (2,035)
(Increase) decrease in deposits...................... 3,214
Increase (decrease) in accounts payable and accrued
expenses............................................ 177,428
-----------
Net Cash Used by Operating Activities............. (875,979)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets.................................. (567,585)
-----------
Net Cash Used by Investing Activities.................. (567,585)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital lease obligation.................... 74,264
Cash contributions to capital............................. 1,116,429
Common stock issued for cash.............................. 217,500
-----------
Net Cash Provided by Financing Activities.............. 1,408,193
-----------
NET INCREASE (DECREASE) IN CASH............................. (35,371)
CASH AT BEGINNING OF YEAR................................... 55,418
-----------
CASH AT END OF YEAR......................................... $ 20,047
===========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest.................................................. $ 18,365
Income taxes.............................................. $ --
NON CASH FINANCING ACTIVITIES:
Capital contributions through debt relief................. $ 214,907
Common stock issued for services.......................... $ 250,000
Capital contributions of fixed assets..................... $ 21,568
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 176
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION AND DESCRIPTION OF BUSINESS
Newriders, Inc. (the Company) was incorporated under the laws of the State
of Nevada on July 15, 1995 as American Furniture Wholesale, Inc. The Company was
originally organized to engage in activities in the furniture business. On June
28, 1996 the Company changed its name to Newriders, Inc.
On June 28, 1996 the Company acquired all of the outstanding common stock
of New Riders Limited (the Subsidiary) for 13,250,000 shares of the Company's
common stock. Of the common shares issued, 11,000,000 were new issues and
2,250,000 were concurrently reacquired from an existing shareholder and reissued
as part of the acquisition. The acquisition of the Subsidiary was recorded as a
recapitalization of the Subsidiary, whereby the acquired company is treated as
the surviving entity for accounting purposes. The Subsidiary was formed on
November 8, 1994 in the State of California and is engaged in the restaurant and
retail motorcycle business.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a December 31 year end.
b. Net Loss Per Share
The computation of net loss per share of common stock is based on the
weighted average number of common shares outstanding during each period
presented.
c. Provision for Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109). Under FAS 109 the asset and liability
method is used in calculating deferred income taxes.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,072,000 that may be offset against future taxable income
through 2011. No tax benefit has been reported in the consolidated financial
statements. Because of the Company's history of operating losses, the Company
believes there is a 50% or greater likelihood the carryforwards will expire
unused. Accordingly, the potential tax benefits of the loss carryforwards have
been offset by a valuation allowance of the same amount. Utilization of the
carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
loss carryforwards before utilization.
d. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
e. Principles of Consolidation
The consolidated financial statements include those of Newriders, Inc. and
New Riders Limited. All significant intercompany accounts and transactions have
been eliminated.
f. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-19
<PAGE> 177
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 -- GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has incurred losses from its inception
through December 31, 1996. The Company does not have an established source of
revenues sufficient to cover its operating costs which raises substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. It is the intent of the Company to seek additional financing
through offerings of its common stock and other debt and equity financing in
order to expand its operations.
NOTE 4 -- LEASE COMMITMENTS
Shop Lease -- The Company leases its motorcycle shop facility under an
operating lease. The lease agreement expires July 31, 2005, with two five year
options to renew. Lease expense for the year ended December 31, 1996 was $4,019
per month, and will continue as such until August 1, 1997 when the rent shall
increase 4% per year. An additional $659 per month is due to the lessor for
common area maintenance charges. These charges are redetermined every year, and
include real estate taxes and liability insurance.
Cafe Lease -- The Company leases its cafe facility under an operating
lease. The lease agreement expires July 31, 2015. Lease expense is $7,000 per
month for the period ended December 31, 1996. This lease calls for the payment
of real estate taxes, common area maintenance and liability insurance in
addition to monthly rent charges. Monthly rent will increase to $8,550 on June
1, 2000, $9,760 on June 1, 2005 and $11,145 on June 1, 2010.
Total rent expense for the year ended December 31, 1996 was $89,682.
Employee Lease -- The Company has entered into two agreements by which it
leases its employees from a human resources company. The lease agreements have
been renewed and will expire on November 1, 1997. One lease calls for the
payment of a monthly administrative fee of $1,920 in addition to all wages,
medical and workers' compensation coverage, 401K plan, applicable payroll taxes
and other administration costs. A second agreement calls for a monthly fee of
$160 in addition to those other costs previously listed.
Capital Lease Obligation -- In January, 1996, the Company entered into an
agreement to lease computer hardware and software having a cost of $74,264 to be
used in its Fresno, California cafe. The term of the lease is 36 months and
calls for monthly payments of $2,695. This is a capital lease with the cost of
the assets capitalized as property and equipment (see Note 3) and the related
liability reflected as an obligation under capital lease in the accompanying
consolidated financial statements. Maturities of the obligation under capital
lease are as follows: 1997 $27,723, 1998 $28,911, 1999 $2,655.
NOTE 5 -- COMMON STOCK SUBSCRIPTION
In November 1996, the Company entered into an agreement with a barter
service to issue 400,000 shares of common stock in exchange for $1,000,000 of
barter advertising and other services and merchandise. As of December 31, 1996,
the Company had not utilized any of the barter services or merchandise. This
amount has been reflected as a reduction of stockholders' equity in the
accompanying consolidated financial statements.
F-20
<PAGE> 178
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6 -- SUBSEQUENT EVENTS
In May 1997, the Company opened a new cafe location in Myrtle Beach, South
Carolina with the intention of opening a motorcycle retail and repair facility
at the same location in the near future. The Company has entered into a ten year
lease agreement in conjunction with those new facilities and has also acquired
and leased certain operating equipment used at this new location. The Company
has invested approximately $1,000,000 in this operation financed primarily by
additional shareholder capital contributions including $500,000 advanced from
unrelated parties which will be converted to debt or equity financing as yet to
be determined.
NOTE 7 -- CORRECTION OF ERRORS
Certain errors, resulting in an overstatement of previously reported assets
and equity, were discovered during the current year. Correction of these errors
had no effect on previously reported net loss for the year ended December 31,
1996.
The following schedule details the nature and amount of each error:
<TABLE>
<S> <C>
Overstatement of fixed assets............................... $(350,774)
Overstatement of deferred charges........................... (70,000)
Overstatement of common stock............................... 158
Overstatement of additional paid-in capital................. 420,616
---------
Net Change........................................ $ --
=========
</TABLE>
F-21
<PAGE> 179
NEWRIDERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 358,014 $ 1,262,633
Inventories............................................... 187,362 285,622
Deferred acquisition costs................................ 553,477 0
Prepaid expenses.......................................... 233,659 15,738
------------ -----------
Total Current Assets.............................. 1,332,512 1,563,993
------------ -----------
PROPERTY AND EQUIPMENT -- net............................... 852,413 1,487,598
------------ -----------
ORGANIZATION COSTS, net..................................... 121,736 142,158
DEPOSITS AND OTHER ASSETS................................... 110,112 107,503
DEFERRED FINANCING COSTS, net............................... 129,121 161,103
------------ -----------
TOTAL ASSETS...................................... $ 2,545,894 $ 3,462,355
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 752,196 $ 517,904
Accrued expenses.......................................... 97,272 54,567
Accrued compensation and benefits......................... 57,219 340,940
Advances from stockholders................................ 34,350 201,350
Other advances............................................ 55,000 50,000
Current obligation under capital lease.................... 17,766 21,184
Current portion of long-term debt......................... 768,645 157,694
------------ -----------
Total Current Liabilities......................... 1,782,448 1,343,639
------------ -----------
DEFERRED RENT............................................... 95,669 128,003
OBLIGATION UNDER CAPITAL LEASE, Less Current Obligation..... 0 10,382
CONVERTIBLE DEBENTURES, net................................. 1,088,899 785,183
LONG-TERM DEBT.............................................. 805,153 892,306
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; 25,000,000 shares authorized of $0.001 par
value; 17,368,130 and 17,181,425 shares issued and
outstanding at 1998 and 1997, respectively............. 18,498 17,181
Additional paid-in capital................................ 10,551,417 6,884,677
Common stock subscription receivable...................... (750,000) (750,000)
Accumulated deficit....................................... (11,046,190) (5,849,016)
------------ -----------
Total Stockholders' Equity (Deficit).............. (1,226,275) 302,842
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 2,545,894 $ 3,462,355
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 180
NEWRIDERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SALES....................................................... $ 824,155 $ 1,149,111
COST OF SALES............................................... 386,964 718,957
----------- -----------
GROSS MARGIN................................................ 437,191 430,154
----------- -----------
EXPENSES
Restaurant and store operating expenses................... 898,885 771,706
Selling, general and administrative....................... 1,271,126 413,389
----------- -----------
Stock issuance expense.................................... 1,888,867 0
Loss on sale of restaurant to related party............... 631,986 0
Total Expenses.................................... 4,690,864 1,185,095
----------- -----------
Loss from Operations...................................... (4,253,673) (754,941)
----------- -----------
OTHER EXPENSE
Interest expense.......................................... (39,746) (5,361)
Interest expense -- noncash............................... (903,755) 0
----------- -----------
Total Other Expense............................... (943,501) (5,361)
----------- -----------
NET LOSS.................................................... $(5,197,174) (760,302)
=========== ===========
NET LOSS PER SHARE.......................................... $ (0.30) $ (0.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC...... 17,401,846 16,168,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 181
NEWRIDERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL STOCK
-------------------- PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
---------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997................ 16,168,000 $16,168 $ 3,570,992 $(1,000,000) $ (1,072,142)
Common stock issued in conjunction with
convertible debentures................ 293,825 294 610,523
Discount on convertible debenture
issuance.............................. 481,667
Warrants issued in connection with
convertible debentures................ 105,130
Sale of common stock.................... 384,600 384 499,616
Common stock issued for services........ 335,000 335 572,165
Services rendered in satisfaction of
common stock subscription
receivable............................ 250,000
Compensatory options issued to
nonemployees.......................... 671,500
Capital contributed by shareholders..... 373,084
Net loss for the period ended December
31, 1997.............................. (4,776,874)
---------- ------- ----------- ----------- ------------
Balance, December 31, 1997.............. 17,181,425 17,181 6,884,677 (750,000) (5,849,016)
Common stock issued in conjunction with
convertible debentures (Unaudited).... 316,891 317 691,547
Warrants issued in connection with
issuance of debt (Unaudited).......... 542,858
Common Stock issued for services and in
satisfaction of accounts payable
(Unaudited)........................... 1,000,000 1,000 2,099,000
Discount on convertible debenture
issuance (Unaudited).................. 333,335
Net loss for the six months ended June
30, 1998 (Unaudited).................. (5,197,174)
---------- ------- ----------- ----------- ------------
Balance, June 30, 1998
(Unaudited)........................... 18,498,316 $18,498 $10,551,417 $ (750,000) $(11,046,190)
========== ======= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 182
NEWRIDERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(5,197,174) $ (885,303)
Adjustments to reconcile net loss to net cash used by
operating activities:
Common stock issued for services....................... 1,888,867 250,000
Services rendered in satisfaction of common stock
receivable............................................ -- 125,000
Depreciation and amortization.......................... 122,988 64,638
Loss on sale of restaurant to related party............ 631,986 --
Non-cash interest expense.............................. 903,755 --
Changes in operating assets and liabilities:
(Increase) decrease in inventories................... 98,260 (5,651)
(Increase) decrease in deferred acquisition costs...... (553,477) --
(Increase) decrease in prepaid expenses.............. (217,921) 2,035
(Increase) decrease in deposits and other assets..... (2,609) 35,462
Increase (decrease) in accounts payable and accrued
expenses............................................ 195,305 645,634
Increase (decrease) in deferred rent................. 22,284 --
----------- -----------
Net Cash Used by Operating Activities............. (2,107,736) 231,815
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and equipment........................ (144,881) (1,032,772)
----------- -----------
Net Cash Used by Investing Activities............. (144,881) (1,032,772)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligation................... (13,800) (2,696)
Issuance of Debt....................................... 2,100,000 --
Payment of long-term debt and convertible debentures... (576,202) --
Cash contributions to capital.......................... -- 303,653
Common stock issued for cash........................... -- 500,000
Payment of stockholders' and other advances............ (162,000) --
----------- -----------
Net Cash Provided by Financing Activities......... 1,347,998 800,957
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (904,619) 0
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD...................................... 1,262,633 0
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD............................................ $ 358,014 $ 0
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest................................. $ 60,451 $ 5,833
NON CASH FINANCING ACTIVITIES:
Common stock issued in settlement of accounts payable..... 211,133 --
Common stock issued in settlement of debt................. $ 691,864 --
Issuance of Warrants in connection with debt issuance..... $ 542,858 --
Convertible debentures issued with conversion discount.... $ 333,335 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 183
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
NOTE 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 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
financial statements and notes thereto included in the Company's December 31,
1997 audited consolidated financial statements. The results of operations for
the periods ended June 30, 1998 and 1997 are not necessarily indicative of the
operating results for the full year.
NOTE 2 -- DEBT
On March 17, 1998, the Company borrowed $500,000 under a securities
purchase agreement. Borrowings under the agreement bear interest at 12% per
annum, and are due on demand. Borrowing under this agreement are included in the
current portion of long-term debt in the accompanying financial statements.
Additionally, the agreement requires the issuance of 20,000 warrants to purchase
common stock of the Company at $1.50 per share be issued for the period ended
March 31, 1998 and an additional 160,000 warrants to purchase common stock of
the Company at $1.50 per share be issued for the period ending June 30, 1998.
The fair value of the warrants for the periods ended March 31, 1998 and June 30,
1998 has been recorded at as debt issuance costs and were amortized during the
periods ended March 31, 1998 and June 30, 1998, respectively.
On May 11, 1998, the Company 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 repaid in
cash on June 12, 1998. Additionally, in conjunction with the issuance of the
convertible debentures, the Company issued warrants for the purchase of 25,000
shares of the Company'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.
On June 11, 1998, the Company issued convertible debentures with a face
value of $1,000,000 due June 30, 2000 in a private placement transaction. The
debentures accrue interest at 8% per year with interest payable quarterly. The
debentures are convertible at the option of the holder into shares of the
Company's common stock at the at the lesser of the five-day average closing bid
price on the closing date or 75% of the five-day average closing bid price on
the conversion date, as defined. The debentures are convertible at the holder's
option anytime after August 10, 1998. The discount available at conversion
results in the debentures being issued at a discount. The conversion discount,
which was $333,335 at the date of issuance, is being recognized by the Company
as noncash interest expense over the shortest expected term to anticipated
conversion of the debentures with a corresponding increase to the original
principal amount of the debentures. During the quarter ended June 30, 1998,
$105,567 of noncash interest expense was recorded relating to the debentures.
Additionally, in conjunction with the issuance of the convertible debentures,
the Company issued warrants for the purchase of 25,000 shares of the Company's
common stock with an exercise price of $2.98 per share during the next three
years. The fair value of the warrants, aggregating $41,518, has been recorded as
debt issuance costs and is being amortized over the term of the debentures.
F-26
<PAGE> 184
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
NOTE 3 -- SALE OF RESTAURANT TO RELATED PARTY
On July 22, 1998, the Company sold its Myrtle beach Restaurant to a
stockholder and director of the Company. As a result, the Company recorded a
write-down of $596,986 with respect to leasehold improvements and store fixtures
to reflect the net realizable value of the Myrtle Beach location.
NOTE 4 -- COMMON STOCK ISSUANCE
During June 1998, the Company issued 1,000,000 shares of the Company's
Common Stock to a stockholder of Paisano Publication, Inc. for services to the
Company and the forgiveness of certain trade payables. The fair value of the
shares, net of the forgiven trade payables, was recorded as stock issuance
expense in the accompanying financial statements.
NOTE 5 -- 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 June 30, 1998
due to the antidilutive effect on earnings per share.
NOTE 6 -- CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence as other
annual financial statements. This statement also requires that an entity
classify items of other comprehensive earnings by their nature in an annual
financial statement. For example, other comprehensive earnings may include
foreign currency translation adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive loss for the three months ended June 30, 1998 and 1997
equaled the reported net loss on the Company's statements of operations.
F-27
<PAGE> 185
INDEPENDENT AUDITORS' REPORT
The Shareholder
Paisano Publications, Inc. and affiliates
We have audited the accompanying combined balance sheets of Paisano
Publications, Inc. and affiliates (the Companies) as of December 31, 1997 and
1996, and the related combined statements of operations, shareholder's equity
and cash flows for the years then ended. These combined financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Paisano Publications, Inc.
and affiliates as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 15, 1998
F-28
<PAGE> 186
PAISANO PUBLICATIONS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 362,527 $ 837,772
Restricted cash............................................. 210,000 105,141
Available-for-sale securities............................... 189,236
Accounts receivable, less allowance for bad debts of
$275,106 (1997) and $190,000 (1996)....................... 2,431,610 1,852,747
Inventories (Note 3)........................................ 5,516,155 5,243,056
Prepaid publication costs................................... 683,428 664,545
Deferred promotion costs.................................... 431,213 126,700
Prepaid expenses and other (Note 11)........................ 617,731 364,854
Notes and advances receivable -- employees (Note 4)......... 632,800 515,344
Accounts receivable, related parties (Note 11).............. 389,564 124,067
Receivable from shareholder (Note 11)....................... 234,305
----------- -----------
Total current assets.............................. 11,509,333 10,023,462
PROPERTY AND EQUIPMENT, net (Note 5)........................ 1,125,675 1,246,590
INTANGIBLE ASSETS, net...................................... 183,085 209,450
OTHER ASSETS................................................ 37,798 17,748
----------- -----------
$12,855,891 $11,497,250
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,970,256 $ 1,701,748
Accrued payroll and other expenses.......................... 809,728 822,299
Current portion of deferred subscription and advertising
income.................................................... 3,145,269 3,236,785
Pension contribution payable (Note 8)....................... 86,128 176,798
Note payable, shareholder (Note 11)......................... 2,921,587 2,921,587
----------- -----------
Total current liabilities......................... 8,932,968 8,859,217
LONG-TERM PORTION OF DEFERRED SUBSCRIPTION AND ADVERTISING
INCOME.................................................... 446,846 153,439
OTHER LONG-TERM LIABILITIES................................. 75,270 40,370
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDER'S EQUITY:
Paisano Publications, Inc. -- Common stock, $50 par value;
500 shares authorized; 50 shares issued and outstanding... 2,500 2,500
Teresi, Inc. -- Common stock, no par value; 10,000 shares
authorized; 1,000 shares issued and outstanding........... 1,000 1,000
Easyrider Franchising, Inc. -- Common stock, no par value;
10,000 shares authorized; 1,000 shares issued and
outstanding............................................... 100,000 100,000
Easyrider Columbus, Inc. -- Common stock, no par value; 750
shares authorized; 100 shares issued and outstanding...... 100,000 100,000
Bros Club, Inc. -- Common stock, no par value; 10,000 shares
authorized; 500 shares issued and outstanding............. 5,000 5,000
Associated Rodeo Riders on Wheels, Inc. -- Common stock, no
par value; 100,000 shares authorized; 500 shares issued
and outstanding........................................... 500 500
Retained earnings........................................... 3,191,807 2,052,724
Unrealized holding gains -- available-for-sale securities... 182,500
----------- -----------
Total shareholder's equity........................ 3,400,807 2,444,224
----------- -----------
$12,855,891 $11,497,250
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 187
PAISANO PUBLICATIONS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES, net (Notes 2, 9, 10 and 11)............... $33,748,729 $34,029,907 $34,641,942
OPERATING COSTS AND EXPENSES
(Notes 7 and 11):
Cost of revenues (Note 2)........................... 25,865,353 29,350,745 28,523,483
Payroll and employee benefits....................... 2,938,726 3,264,186 4,215,630
General and administrative.......................... 2,221,377 1,838,294 1,754,870
----------- ----------- -----------
Total operating costs and expenses........ 31,025,456 34,453,225 34,493,983
OPERATING LOSS FROM FRANCHISE OPERATIONS, net (Notes
6 and 11)......................................... (96,032) (235,732) (435,791)
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (Note 10)............. 2,627,241 (659,050) (287,832)
OTHER INCOME (EXPENSE), net (Note 11)............... 65,551 (243,388) 296,207
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES..... 2,692,792 (902,438) 8,375
PROVISION FOR INCOME TAXES.......................... 53,709 5,144 21,697
----------- ----------- -----------
NET INCOME (LOSS)......................... $ 2,639,083 $ (907,582) $ (13,322)
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE> 188
PAISANO PUBLICATIONS, INC. AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------------------------------------------------
PAISANO EASYRIDER EASYRIDER
PUBLICATIONS, INC. TERESI, INC. FRANCHISING, INC. COLUMBUS, INC. BROS CLUB, INC.
------------------- --------------- ----------------- ----------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- ------ ------ ------ -------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994
(unaudited)............. 50 $2,500 1,000 $1,000 1,000 $100,000 100 $100,000 500 $5,000
Net income (loss)
(unaudited).............
-- ------ ----- ------ ----- -------- --- -------- --- ------
BALANCE, December 31,
1995.................... 50 2,500 1,000 1,000 1,000 100,000 100 100,000 500 5,000
Net (loss) income.........
Increase in unrealized
holding gains...........
-- ------ ----- ------ ----- -------- --- -------- --- ------
BALANCE, December 31,
1996.................... 50 2,500 1,000 1,000 1,000 100,000 100 100,000 500 5,000
Net income (loss).........
Dividends.................
Decrease in unrealized
holding gains...........
-- ------ ----- ------ ----- -------- --- -------- --- ------
BALANCE, December 31,
1997.................... 50 $2,500 1,000 $1,000 1,000 $100,000 100 $100,000 500 $5,000
== ====== ===== ====== ===== ======== === ======== === ======
<CAPTION>
COMMON STOCK
---------------
ASSOCIATED
RODEO
RIDERS ON
WHEELS
---------------
SHARES AMOUNT
------ ------
<S> <C> <C>
BALANCE, January 1, 1994
(unaudited)............. 500 $500
Net income (loss)
(unaudited).............
--- ----
BALANCE, December 31,
1995.................... 500 500
Net (loss) income.........
Increase in unrealized
holding gains...........
--- ----
BALANCE, December 31,
1996.................... 500 500
Net income (loss).........
Dividends.................
Decrease in unrealized
holding gains...........
--- ----
BALANCE, December 31,
1997.................... 500 $500
=== ====
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE> 189
PAISANO PUBLICATIONS, INC. AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
RETAINED EARNINGS
--------------------------------------------------------------------------------
ASSOCIATED UNREALIZED
PAISANO EASYRIDER EASYRIDER RODEO HOLDING GAINS-
PUBLICATIONS, TERESI, FRANCHISING, COLUMBUS, BROS CLUB, RIDERS AVAILABLE-FOR-SALE
INC. INC. INC. INC. INC. ON WHEELS SECURITIES
------------- -------- ------------ ----------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994 (unaudited)... $ 3,993,725 $137,244 $ (486,235) $ (664,084) $ (1,528) $(5,494) $106,500
Net income (loss)
(unaudited)........ 1,162,081 (221,772) (474,743) (477,944) (150) (794)
----------- -------- ----------- ----------- -------- ------- --------
BALANCE, December 31,
1995............... 5,155,806 (84,528) (960,978) (1,142,028) (1,678) (6,288) $106,500
Net (loss) income.... (394,336) 75,137 (454,536) (132,247) (800) (800)
Increase in
unrealized holding
gains.............. 76,000
----------- -------- ----------- ----------- -------- ------- --------
BALANCE, December 31,
1996............... 4,761,470 (9,391) (1,415,514) (1,274,275) (2,478) (7,088) 182,500
Net income (loss).... 3,264,267 6,295 (309,737) (309,158) (12,102) (482)
Dividends............ (1,500,000)
Decrease in
unrealized holding
gains.............. (182,500)
----------- -------- ----------- ----------- -------- ------- --------
BALANCE, December 31,
1997............... $ 6,525,737 $ (3,096) $(1,725,251) $(1,583,433) $(14,580) $(7,570) $ --
=========== ======== =========== =========== ======== ======= ========
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE, January 1,
1994 (unaudited)... $ 3,289,128
Net income (loss)
(unaudited)........ (13,322)
-----------
BALANCE, December 31,
1995............... $ 3,275,806
Net (loss) income.... (907,582)
Increase in
unrealized holding
gains.............. 76,000
-----------
BALANCE, December 31,
1996............... 2,444,224
Net income (loss).... 2,639,083
Dividends............ (1,500,000)
Decrease in
unrealized holding
gains.............. (182,500)
-----------
BALANCE, December 31,
1997............... $ 3,400,807
===========
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE> 190
PAISANO PUBLICATIONS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $2,639,083 $ (907,582) $ (13,322)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 404,699 418,183 434,334
Gain on sale of available-for-sale securities............. (173,412)
Gain on sale of property and equipment.................... (13,308)
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash................. (104,859) 22,425 (128,802)
(Increase) decrease in accounts receivable............. (578,863) 302,730 145,901
(Increase) decrease in inventory....................... (273,099) 1,371,783 (1,942,266)
(Increase) decrease in prepaid publication costs....... (18,883) 143,016 80,887
(Increase) decrease in deferred promotion costs........ (304,513) 206,143 (332,843)
(Increase) decrease in prepaid expenses and other...... (252,877) 42,357 (365,325)
(Increase) decrease in notes and advances
receivable -- employees............................... (117,456) (57,007) 10,362
Increase in accounts receivable -- related parties..... (265,497) (124,067)
(Increase) decrease in shareholder receivable.......... (234,305) 12,625
(Increase) decrease in other assets.................... (20,050) 1,197 51,112
Increase (decrease) in accounts payable................ 268,508 (1,690,504) 1,531,115
(Decrease) increase in accrued payroll and other
expenses.............................................. (12,571) 164,632 176,295
Increase in deferred subscription and advertising
income................................................ 201,891 138,085 93,996
(Decrease) increase in pension contribution payable.... (90,670) (6,789) 23,962
Increase (decrease) in other long-term liabilities..... 34,900 (85,016) 35,160
---------- ----------- -----------
Net cash provided by (used in) operating
activities.......................................... 1,102,026 (73,722) (186,809)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................... (272,801) (221,629) (308,334)
Proceeds from sale of property and equipment................ 15,382 82,648
Purchase of magazine titles................................. (97,450) (152,674)
Proceeds from sale of available-for-sale securities......... 180,148
---------- ----------- -----------
Net cash used in investing activities................ (77,271) (236,431) (461,008)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on note payable -- shareholder................... $ -- $ 570,629 $ 156,853
Payment of dividends........................................ (1,500,000)
---------- ----------- -----------
Net cash (used in) provided by financing
activities.......................................... (1,500,000) 570,629 156,853
---------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS........................................ (475,245) 260,476 (490,964)
CASH AND CASH EQUIVALENTS, beginning of year................ 837,772 577,296 1,068,260
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 362,527 $ 837,772 $ 577,296
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash
paid during the year for:
Interest.................................................. $ 196,542 $ 15,418 $ 101,271
========== =========== ===========
Income taxes.............................................. $ 181,692 $ 83,660 $ 8,600
========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-33
<PAGE> 191
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPAL INDUSTRY
Principles of Combination -- The combined financial statements include the
accounts of Paisano Publications, Inc. (Paisano); Teresi, Inc.; Easyrider
Franchising, Inc.; Easyrider Columbus, Inc.; Bros Club, Inc.; and Associated
Rodeo Riders on Wheels (collectively, the Companies). The Companies are wholly-
owned by a sole shareholder. All significant intercompany balances and
transactions are eliminated in combination.
Principal Industry -- The Companies are primarily involved in the
publishing of magazines that are sold to distributors on a worldwide basis. The
Companies are also engaged in mail order, retail, event production and
franchising businesses. The Companies perform ongoing credit evaluations of
their customers and generally do not require collateral. Losses incurred
associated with the granting of credit have historically been within
management's expectations.
Revenue Recognition -- The Companies' revenues stem primarily from the sale
of magazines, magazine advertising space, products, and franchise rights and
related royalties. The Companies record revenue based on the following:
Magazine Revenues -- Advertising revenues are recognized upon the
magazines' on-sale date, net of provisions for estimated rebates,
adjustments and discounts. Proceeds from subscriptions are recorded as
deferred subscription income when received and are included in revenue over
the terms of the subscription services, generally one to two years.
Subscriptions expiring within one year are included as a current liability
and the portion of the subscriptions in excess of one year are classified
as a long-term liability. Sales to newsstand distributors are recognized as
revenue in the month of distribution, using historical experience to
estimate the ultimate sales of magazines to the newsstand. In the event
that actual sales differ from estimates, adjustments are made in subsequent
months. Historically, these adjustments have not been material.
Franchising Revenues -- Easyrider Franchising, Inc. grants franchise
rights to third parties. The Companies provide management expertise,
training and store operating assistance in exchange for up-front franchise
fees and royalties of 3% of the franchised venue's gross sales. The
up-front franchise fees are recognized upon completion of services to the
franchisee, which is generally when the venue opens. Royalties are accrued
as earned.
Other Revenues -- Event production revenues are recognized upon
completion of events. Retail and mail order revenues are recognized upon
product shipment.
Cash and Cash Equivalents -- For purposes of these combined financial
statements, investments purchased with original maturities of three months or
less are considered cash equivalents.
Restricted Cash -- As part of certain advertising and promotion activities,
the Companies are required to maintain certain minimum deposits with a financial
institution. The deposit amount has been included as restricted cash in the
accompanying combined balance sheets.
Available-for-Sale Securities -- Marketable securities, consisting
primarily of equity securities, have been classified as available-for-sale and
are reported at fair value, based on quoted market prices, in current assets in
the accompanying combined balance sheet. Unrealized gains, net of applicable
income taxes, are reported as a separate component of shareholder's equity. At
December 31, 1996, the Companies had unrealized gains in these securities of
$182,500. During the year ended December 31, 1997, these equity securities were
sold for proceeds of $180,148, resulting in a realized gain of $173,412.
Inventories -- Inventories, consisting primarily of paper for magazine
production and retail merchandise, are stated at the lower of cost (first-in,
first-out method) or market.
F-34
<PAGE> 192
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
Prepaid Publication Costs -- Publication costs of magazines and videos,
including editorial, postage and typesetting costs are included in prepaid
publications costs until the issue is released for sale, at which time the
related costs are charged to cost of revenues.
Deferred Promotion Costs -- The Companies account for promotion costs,
which consist primarily of printing and mailing costs, on direct mail promotions
for its general circulation magazines in accordance with American Institute of
Certified Public Accountants' Statement of Position 93-7. These costs, which are
deferred to the extent of additional subscription revenues less incremental
fulfillment costs, are amortized over the periods of the magazine subscriptions
generated from these promotions, not to exceed one year. All other advertising
expenses are expensed at the time the advertising takes place. Total advertising
and promotion expense for the years ended December 31, 1997, 1996 and 1995, was
approximately $911,426, $1,014,116 and $959,211 (unaudited), respectively.
Property and Equipment -- Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization is
provided for by using the accelerated and straight-line methods, using the
estimated useful lives of the respective asset or, as to leasehold improvements,
the term of the related lease if less than the estimated service life. The
useful lives range from five to ten years.
Intangible Assets -- Intangible assets consist of goodwill and a covenant
not-to-compete associated with the acquisition of two magazine titles in 1995
and 1996. Intangible assets are amortized on a straight-line basis over periods
ranging from five to fifteen years. At each balance sheet date, management
assesses whether there has been a permanent impairment in the value of
intangible assets. If the carrying value of the assets exceeds the estimated
undiscounted future cash flows from operating activities of the related
business, a permanent impairment is deemed to have occurred. In this event, the
assets are written down to fair value. Accumulated amortization associated with
intangible assets was $67,039 and $40,674 at December 31, 1997 and 1996,
respectively.
Deferred Rent -- The Companies recognize rent expense on a straight-line
basis over the term of the leases (Note 7).
Fair Value of Financial Instruments -- The Companies' financial instruments
consist primarily of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued liabilities. The carrying value of all
financial instruments are representative of their fair values because of their
short-term maturities.
Income Taxes -- The Companies have elected to be taxed as S corporations
under the provisions of the Internal Revenue Code (the Code) and similar
statutes in the State of California. Accordingly, the Companies' taxable income
is treated as if it were distributed to the shareholder, who is responsible for
payment of taxes thereon. Additionally, in accordance with state laws regarding
S corporations, the Companies are subject to a 1.5% California franchise tax.
New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, which is effective for annual and
interim periods beginning after December 15, 1997. This statement requires that
all items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also established standards for related
F-35
<PAGE> 193
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
disclosures about product and services, geographical areas and major customers.
The adoption of this standard is not expected to have a material effect on the
Companies' financial reporting.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits, which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits and,
to the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer as
useful as they were under previous statements.
2. CERTAIN RISKS AND UNCERTAINTIES
Paper Price Volatility -- A primary component of the Companies' cost of
revenues in the magazine publishing segment is the cost of paper. Consequently,
increases in paper prices can adversely impact the Companies' results of
operations.
Distributor Concentration -- Net sales to a major distributor of the
Companies' magazines accounted for 22.0%, 29.7% and 30.6% of net sales for the
years ended December 31, 1997, 1996 and 1995, respectively. A substantial
decline in purchases by this distributor could have a material adverse effect on
the Companies' results of operations.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Companies' most significant estimates are related to provisions for
estimated magazine returns, rebates, discounts, and adjustments and allowances
for doubtful accounts and inventories.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials......................................... $1,537,978 $1,761,260
Finished goods........................................ 3,978,177 3,481,796
---------- ----------
$5,516,155 $5,243,056
========== ==========
</TABLE>
The Companies' raw materials consist primarily of paper used in magazine
production.
4. NOTES AND ADVANCES RECEIVABLE -- EMPLOYEES
Notes receivable from employees consist of both secured and unsecured
notes. These notes bear interest at rates ranging from 6% to 10% per year and
are due upon demand. Advances to employees totaled $152,812 and $63,601 at
December 31, 1997 and 1996, respectively.
F-36
<PAGE> 194
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment................................ $ 1,314,774 $ 1,139,190
Furniture, fixtures and equipment................. 2,276,412 2,234,097
Leasehold improvements............................ 191,099 186,853
----------- -----------
3,782,285 3,560,140
Less accumulated depreciation and amortization.... (2,656,610) (2,313,550)
----------- -----------
$ 1,125,675 $ 1,246,590
=========== ===========
</TABLE>
6. FRANCHISE OPERATIONS
Results of franchise operations are summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Franchise income:
Royalty income......................... $371,113 $ 152,811 $ 39,467
Franchise fees......................... 200,000 165,000 85,278
Other.................................. 33,664 375 45,000
-------- --------- ---------
Total franchise income.............. 604,777 318,186 169,745
-------- --------- ---------
Franchise expenses:
Payroll and employee benefits.......... 311,517 261,036 220,986
General and administrative............. 389,292 292,882 45,060
-------- --------- ---------
Total franchise expenses............ 700,809 553,918 266,046
-------- --------- ---------
Operating loss from franchise
operations............................. $(96,032) $(235,732) $(435,791)
======== ========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Leases -- The Companies are committed under noncancelable operating leases
expiring at various dates through 2004 for their offices, warehouse and retail
facilities. The offices and warehouse are leased from the shareholder of the
Companies (Note 11). Minimum future annual rentals under these leases, by year,
are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
---------- --------
<S> <C> <C>
Year ending December 31:
1998............................................... $ 515,124 $ 41,952
1999............................................... 535,729 37,078
2000............................................... 557,158 38,561
2001............................................... 579,444 40,104
2002............................................... 602,622 41,708
Thereafter......................................... 1,278,523
---------- --------
$4,068,600 $199,403
========== ========
</TABLE>
F-37
<PAGE> 195
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
Rent expense is summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Related party.......................... $ 629,124 $ 629,124 $ 629,124
Other.................................. 445,743 415,986 394,972
---------- ---------- ----------
$1,074,867 $1,045,110 $1,024,096
========== ========== ==========
</TABLE>
Litigation -- The Companies are currently involved in litigation incidental
to the Companies' business. In the opinion of management, the ultimate
resolution of such litigation will not have a significant effect on the
accompanying financial statements.
8. PENSION PLAN
The Companies have a noncontributory defined benefit pension plan (the
Plan) covering a majority of their employees. The funded status of the Plan is
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Plan assets, at fair value.......................... $ 970,624 $ 996,796
Actuarial present value of benefit obligations:
Vested benefits................................... 988,597 1,040,888
Nonvested benefits................................ 59,013 50,502
---------- ----------
Accumulated benefit obligations..................... $1,047,610 $1,091,390
========== ==========
Projected benefit obligations for services rendered
to date........................................... $1,047,610 $1,091,390
Excess of projected benefit obligations over Plan
assets............................................ 76,986 94,594
Unrecognized net gains.............................. 72,970 2,477
Unrecognized net transition asset................... (112,328) (117,678)
---------- ----------
Accrued pension costs............................... $ 37,628 $ 20,607
========== ==========
</TABLE>
The net periodic pension cost of the Plan includes the following
components:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Service costs -- benefits earned during the year..... $ 146,164 $ 134,640
Interest cost on projected benefit obligations....... 52,562 51,379
Actual return on Plan assets......................... 31,880 (210,106)
(Loss) asset gain deferred........................... (100,739) 174,928
Amortization of unrecognized net transition asset.... 5,350 5,350
--------- ---------
Net periodic pension cost............................ $ 135,217 $ 156,191
========= =========
</TABLE>
The Companies intend to terminate the Plan during the year ended December
31, 1998. Actuarial assumptions used to determine pension costs and net periodic
pension cost reflect this intent to terminate.
The discount rate used in determining the actuarial present value of
projected benefit obligations was 7.0% in 1997 and 1996. The expected long-term
rate of return on Plan assets was 5.0% in 1997 and 1996.
Plan assets consist principally of United States government securities. The
Companies' policy is to fund pension costs as they are accrued.
F-38
<PAGE> 196
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
9. FOREIGN SALES
Net sales are summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Domestic............................ $27,569,169 $29,374,815 $28,555,702
International....................... 6,179,560 4,655,092 6,086,240
----------- ----------- -----------
$33,748,729 $34,029,907 $34,641,942
=========== =========== ===========
</TABLE>
Domestic sales include Canada.
10. BUSINESS SEGMENTS
The Companies operate principally in two business segments: magazine
publishing and product sales. Other businesses include event production.
Income from Company-owned operations before unallocated corporate expenses
is the excess of operating revenues over operating expenses, including certain
corporate expenses, which are allocated to operations of the segments.
Identifiable assets by segment are those assets used in the Companies'
operations in each business segment.
<TABLE>
<CAPTION>
MAGAZINE PRODUCT OTHER
PUBLISHING SALES BUSINESSES CONSOLIDATED
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1997
Operating revenues............................ $23,638,937 $7,350,166 $2,759,626 $33,748,729
=========== ========== ========== ===========
Income from Company-owned operations before
unallocated corporate expenses.............. $ 6,261,285 $ 559,543 $1,062,548 $ 7,883,376
Unallocated corporate expenses................ (5,160,103)
Operating loss from franchise operations...... (96,032)
-----------
Income from operations........................ $ 2,627,241
===========
Identifiable assets........................... $ 5,991,771 $5,495,008 $ 594,259 $12,081,038
Corporate assets.............................. 804,853
-----------
Total assets.................................. $12,885,891
===========
Depreciation and amortization of property and
equipment................................... $ 158,201 $ 78,564 $ 141,569 $ 378,334
Amortization of intangibles................... $ 11,830 $ -- $ 14,535 $ 26,365
Capital expenditures.......................... $ 119,995 $ 68,517 $ 84,289 $ 272,801
</TABLE>
F-39
<PAGE> 197
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
MAGAZINE PRODUCT OTHER
PUBLISHING SALES BUSINESSES CONSOLIDATED
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1996
Operating revenues............................ $23,548,358 $7,904,524 $2,577,025 $34,029,907
=========== ========== ========== ===========
Income from Company-owned operations before
unallocated corporate expenses.............. $ 3,258,113 $ 661,864 $ 759,185 $ 4,679,162
Unallocated corporate expenses................ (5,102,480)
Operating loss from franchise operations...... (235,732)
-----------
Loss from operations.......................... $ (659,050)
===========
Identifiable assets........................... $ 5,299,258 $5,204,072 $ 435,889 $10,939,219
Corporate assets.............................. 558,031
-----------
Total assets........................ $11,497,250
===========
Depreciation and amortization of property and
equipment................................... $ 158,458 $ 84,652 $ 153,296 $ 396,406
Amortization of intangibles................... $ 7,242 $ -- $ 14,535 $ 21,777
Capital expenditures.......................... $ 91,505 $ 65,848 $ 64,276 $ 221,629
1995 (UNAUDITED)
Operating revenues............................ $25,761,930 $6,387,287 $2,492,725 $34,641,942
=========== ========== ========== ===========
Income from Company-owned operations before
unallocated corporate expenses.............. $ 5,655,641 $ 39,236 $ 423,582 $ 6,118,459
Unallocated corporate expenses................ 5,970,500
Operating loss from franchise operations...... (435,791)
-----------
Loss from operations.......................... $ 287,832
===========
Identifiable assets........................... $ 6,646,603 $5,661,723 $ 368,618 $12,676,944
Corporate assets.............................. 560,851
-----------
Total assets........................ $13,237,795
===========
Depreciation and amortization of property and
equipment................................... $ 193,114 $ 90,158 $ 132,165 $ 415,437
Amortization of intangibles................... $ 1,746 $ -- $ 17,151 $ 18,897
Capital expenditures.......................... $ 137,537 $ 78,467 $ 92,330 $ 308,334
</TABLE>
11. TRANSACTIONS WITH RELATED PARTIES
The Companies lease substantially all of their offices, warehouse
facilities and retail stores from the shareholder (Note 7). The total rent
expense related to these leases was $629,124 for each of the three years ended
December 31, 1997. At December 31, 1997 and 1996, the Companies had prepaid
expenses and deposit balances related to the leases of $52,417.
The Companies have two unsecured notes payable due to their shareholder,
both due December 31, 1998. The balance of one note was $1,241,908 at December
31, 1997 and 1996. Included in other expense related to interest on this note
are $74,514, $54,357 and $14,075 (unaudited) for the years ended December 31,
1997, 1996 and 1995, respectively. The balance of the second note was $1,679,679
at December 31, 1997 and 1996. Included in other expense related to this note is
$120,000 for the years ended December 31, 1997 and 1996, and $50,000 (unaudited)
for the year ended December 31, 1995.
F-40
<PAGE> 198
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
Included in the combined balance sheet at December 31, 1997 is a receivable
of $234,305 from the shareholder. The advance bears no interest and is due on
demand.
Newriders, Inc. (Note 12) is a franchise of Easyrider Franchising, Inc.
Included in operating loss from franchise operations are royalties from
Newriders, Inc. of $108,480 and $5,670 for the years ended December 31, 1997 and
1996, respectively. Accounts receivable, related parties, include $114,150 and
$5,670 at December 31, 1997 and 1996, respectively, related to these royalty
fees.
As part of their franchise operations, Newriders, Inc. purchases product
from the Companies. Included in revenues are purchases by Newriders, Inc. of
$112,088 and $98,322 for the years ended December 31, 1997 and 1996,
respectively. Included in accounts receivable, related parties, are $99,240 and
$9,477 at December 31, 1997 and 1996, respectively, related to these product
purchases. A shareholder of Newriders, Inc. also purchases product from the
Companies, independent of purchases by Newriders, Inc. Included in product
revenues related to these purchases are $271,342, $356,809 and $393,283
(unaudited) for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in accounts receivable, related parties, are $176,174 and $108,920 at
December 31, 1997 and 1996, respectively, related to these product purchases.
12. SUBSEQUENT EVENT
On October 30, 1997, the Companies' sole shareholder signed a binding
letter of intent to sell his interests in the Companies to Newriders, Inc. (Note
11) for a combination of stock, cash and notes payable. The acquisition of the
Companies by Newriders, Inc. requires approval by the Newriders, Inc.
shareholders and sufficient financing for the transaction.
F-41
<PAGE> 199
PAISANO PUBLICATIONS, INC. AND AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 1998 (UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Restricted cash............................................. $ 238,000
Accounts receivable, less allowance for bad debts of
$205,956.................................................. 3,397,863
Inventories................................................. 6,122,383
Prepaid publication costs................................... 685,138
Deferred promotion costs.................................... 432,310
Prepaid expenses and other.................................. 380,283
Notes and advances receivable -- employees.................. 568,802
Accounts receivable, related parties........................ 488,525
Receivable from shareholder................................. 49,147
-----------
Total current assets................................... 12,362,451
PROPERTY AND EQUIPMENT, net................................. 1,161,658
INTANGIBLE ASSETS, net...................................... 169,903
OTHER ASSETS................................................ 30,376
-----------
$13,724,388
===========
CURRENT LIABILITIES:
Bank overdraft.............................................. $ 637,148
Accounts payable............................................ 1,693,364
Accrued payroll and other expenses.......................... 829,740
Current portion of deferred subscription and advertising
income.................................................... 3,221,036
Pension contribution payable................................ 72,801
Note payable, shareholder................................... 2,921,587
-----------
Total current liabilities......................... 9,375,676
LONG-TERM PORTION OF DEFERRED SUBSCRIPTION AND ADVERTISING
INCOME.................................................... 524,593
OTHER LONG-TERM LIABILITIES................................. 43,895
COMMITMENTS AND CONTINGENCIES...............................
SHAREHOLDER'S EQUITY:
Paisano Publications, Inc. -- Common stock, $50 par value;
500 shares authorized; 50 shares issued and outstanding... 2,500
Teresi, Inc. -- Common stock, no par value; 10,000 shares
authorized; 1,000 shares issued and outstanding........... 1,000
Easyrider Franchising, Inc. -- Common stock, no par value;
10,000 shares authorized; 1,000 shares issued and
outstanding............................................... 100,000
Easyrider Columbus, Inc. -- Common stock, no par value; 750
shares authorized; 100 shares issued and outstanding...... 100,000
Bros Club, Inc. -- Common stock, no par value; 10,000 shares
authorized; 500 shares issued and outstanding............. 5,000
Associated Rodeo Riders on Wheels, Inc. -- Common stock, no
par value; 100,000 shares authorized; 500 shares issued
and outstanding........................................... 500
Retained earnings........................................... 3,571,224
-----------
Total shareholder's equity........................ 3,780,224
-----------
$13,724,388
===========
</TABLE>
See accompanying notes to combined financial statements.
F-42
<PAGE> 200
PAISANO PUBLICATIONS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES.................................................... $16,698,144 $16,776,089
OPERATING COSTS AND EXPENSES:
Cost of revenues............................................ 13,854,241 12,629,033
Payroll and employee benefits............................... 916,034 1,324,425
General and administrative.................................. 1,074,178 1,063,746
----------- -----------
Total operating costs and expenses................ 15,844,453 15,017,204
OPERATING LOSS FROM FRANCHISE OPERATIONS.................... 234,530 33,493
----------- -----------
INCOME FROM OPERATIONS...................................... 619,161 1,725,392
OTHER INCOME (EXPENSE), net................................. (90,528) 121,254
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 528,633 1,846,646
PROVISION FOR INCOME TAXES.................................. 23,362 38,350
----------- -----------
NET INCOME.................................................. $ 505,271 $ 1,808,296
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-43
<PAGE> 201
PAISANO PUBLICATIONS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 505,271 $1,808,296
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 173,676 196,723
Gain on sale of available-for-sale securities............. -- (173,412)
Changes in operating assets and liabilities:
Increase in restricted cash............................ (28,000) (4,859)
Increase in accounts receivable........................ (1,092,107) (987,518)
Increase in inventory.................................. (606,228) (559,134)
Increase in prepaid publication costs.................. (67,407) (36,683)
Increase in deferred promotion costs................... (1,097) (282,514)
Decrease in prepaid expenses and other................. 303,145 30,875
Decrease (increase) in notes and advances
receivable -- employees............................... 63,998 (1,473)
(Increase) decrease in accounts receivable -- related
parties............................................... (98,961) 121,567
Decrease (increase) in shareholder receivable.......... 185,158 (66,559)
Decrease (increase) in other assets.................... 7,422 (2,643)
Increase in bank overdraft............................. 637,148 --
Decrease in accounts payable........................... (276,892) (359,958)
Increase (decrease) in accrued payroll and other
expenses.............................................. 20,012 311,752
Increase in deferred subscription and advertising
income................................................ 153,514 661,159
Increase in pension contribution payable............... (13,327) (86,798)
(Decrease) (used in) in other long-term liabilities.... (31,375) --
----------- ----------
Net cash (used in) provided by operating
activities.......................................... (166,050) 568,821
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................... (196,477) (90,893)
Proceeds from sale of available-for-sale securities......... -- 180,148
----------- ----------
Net cash (used in) provided by investing
activities.......................................... (196,477) 89,255
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (362,527) 658,076
CASH AND CASH EQUIVALENTS, beginning of period.............. 362,527 837,772
----------- ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ -- $1,495,848
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash
paid during the period for interest....................... $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS --
Dividend of accounts receivable at fair value............. $ 125,854 --
=========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-44
<PAGE> 202
PAISANO PUBLICATIONS, INC. AND AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The information set forth in these condensed financial statements as of
June 30, 1998 and for the six months ended June 30, 1998 and 1997 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 six months ended June 30, 1998 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.
The information in these interim statements should be read in conjunction
with the Company's audited financial statements as of December 31, 1997
contained elsewhere in this Prospectus.
F-45
<PAGE> 203
INDEPENDENT AUDITORS' REPORT
To M & B Restaurants, L.C.
(dba El Paso Bar-B-Que Company):
We have audited the accompanying balance sheets of M & B Restaurants, L.C.
(dba El Paso Bar-B-Que Company) (the Company) as of December 30, 1997 and
December 31, 1996, and the related statements of operations, members' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of M & B Restaurants, L.C. at December 30, 1997
and December 31, 1996, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 2, 1998
F-46
<PAGE> 204
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 219,000 $ 488,000
Accounts receivable, net.................................... 74,000 63,000
Inventories (Note 2)........................................ 37,000 33,000
Prepaid expenses and other.................................. 56,000 39,000
---------- ----------
Total current assets................................... 386,000 623,000
PROPERTY AND EQUIPMENT, net (Notes 3, 4 and 5).............. 2,746,000 1,767,000
DEPOSIT ON TRADEMARK........................................ 275,000
TRADEMARK, net.............................................. 924,000
DEFERRED FINANCING COSTS, net............................... 161,000 70,000
OTHER ASSETS................................................ 156,000 51,000
---------- ----------
Total assets........................................... $4,373,000 $2,786,000
========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4)............... $ 240,000 $ 143,000
Accounts payable............................................ 537,000 224,000
Accrued expenses and other current liabilities.............. 400,000 374,000
---------- ----------
Total current liabilities.............................. 1,177,000 741,000
DEFERRED LEASE INCENTIVE (Note 5)........................... 250,000 250,000
LONG-TERM DEBT, net of current maturities (Note 4).......... 2,370,000 1,087,000
COMMITMENTS AND CONTINGENCIES (Note 5)
MEMBERS' EQUITY:
Members' capital............................................ 990,000 1,086,000
Accumulated deficit......................................... (414,000) (378,000)
---------- ----------
Total members' equity.................................. 576,000 708,000
---------- ----------
Total liabilities and members' equity............. $4,373,000 $2,786,000
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-47
<PAGE> 205
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
SALES....................................................... $8,562,000 $6,701,000
OPERATING EXPENSES:
Cost of sales:
Food costs................................................ 2,708,000 2,152,000
Labor costs............................................... 2,871,000 2,321,000
Other..................................................... 1,052,000 885,000
---------- ----------
Total cost of sales............................... 6,631,000 5,358,000
GENERAL AND ADMINISTRATIVE.................................. 1,527,000 1,067,000
DEPRECIATION AND AMORTIZATION............................... 262,000 91,000
---------- ----------
Total operating expenses.......................... 8,420,000 6,516,000
---------- ----------
OPERATING INCOME............................................ 142,000 185,000
INTEREST EXPENSE, net....................................... 183,000 153,000
OTHER INCOME, net
(5,000) (13,000)
---------- ----------
NET (LOSS) INCOME........................................... $ (36,000) $ 45,000
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-48
<PAGE> 206
M & B RESTAURANTS L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
<TABLE>
<CAPTION>
MEMBERS' ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
BALANCE, January 1, 1996................................... $ 299,000 $(423,000) $ (124,000)
Member contributions....................................... 1,000,000 1,000,000
Distributions to members................................... (213,000) (213,000)
Net income................................................. 45,000 45,000
---------- --------- ----------
BALANCE, December 31, 1996................................. 1,086,000 (378,000) 708,000
Member contributions....................................... 150,000 150,000
Distributions to members................................... (246,000) (246,000)
Net loss................................................... (36,000) (36,000)
---------- --------- ----------
BALANCE, December 30, 1997................................. $ 990,000 $(414,000) $ 576,000
========== ========= ==========
</TABLE>
See accompanying notes to the financial statements.
F-49
<PAGE> 207
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (36,000) $ 45,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................. 262,000 91,000
Gain from sale of asset................................... (1,000)
Changes in assets and liabilities:
Accounts receivable.................................... (11,000) (16,000)
Inventories............................................ (4,000) (3,000)
Prepaid expenses and other............................. (17,000) 33,000
Other assets........................................... (105,000) (31,000)
Accounts payable....................................... 313,000 114,000
Accrued expenses and other current liabilities......... 26,000 22,000
----------- -----------
Net cash provided by operating activities......... 428,000 254,000
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Sale of vehicle............................................. 10,000
Purchases of property and equipment......................... (1,169,000) (452,000)
Purchase of trademark....................................... (720,000) (275,000)
----------- -----------
Net cash used in investing activities............. (1,889,000) (717,000)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Capital contributions....................................... 150,000 1,000,000
Proceeds from long-term debt................................ 1,573,000 1,267,000
Principal payments on long-term debt........................ (193,000) (1,101,000)
Deferred financing costs.................................... (92,000) (60,000)
Distributions to members.................................... (246,000) (213,000)
----------- -----------
Net cash provided by financing activities......... 1,192,000 893,000
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (269,000) 430,000
CASH AND CASH EQUIVALENTS, beginning of year................ 488,000 58,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 219,000 $ 488,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION --
Cash paid for interest.................................... $ 171,000 $ 159,000
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY -- During 1996, the
Company entered into a lease extension for its Glendale, Arizona facility (Note
5). Under the terms of the extension agreement, equipment with a fair value of
$250,000 was conveyed to the Company as a lease incentive.
See accompanying notes to the financial statements.
F-50
<PAGE> 208
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 30, 1997 AND DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation -- M & B Restaurants, L.C. (dba El
Paso Bar-B-Que Company) (the Company) was formed September 13, 1994 as a limited
liability company under the Texas Limited Liability Company Act.
The financial statements reflect the accounts and activities of the
Company's four restaurant locations: the Tulsa, Oklahoma location, and the
Ahwatukee, Glendale and Scottsdale, Arizona locations.
Fiscal Year -- The Company operates on a fifty-two or fifty-three week
fiscal year ending on the Tuesday nearest December 31.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Credit Risk -- Accounts receivable are primarily due from customers of the
Company's restaurants and major credit card companies. No significant losses on
accounts receivable were experienced during fiscal years 1997 and 1996.
Cash and Cash Equivalents -- For purposes of the statement of cash flows,
cash equivalents include cash on hand and highly-liquid investments with
original maturities of three months or less.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment -- Property and equipment are recorded at cost. When
assets are considered to be impaired they are recorded at the lower of cost or
estimated at fair value. All property and equipment is depreciated at annual
rates based upon the estimated useful lives of the assets on the straight-line
method. Restaurant equipment is generally depreciated over a period of one to
five years. Leasehold improvements are amortized based on the estimated useful
lives of the assets or terms of the leases, whichever is shorter.
Trademark -- During the year ended December 30, 1997, the Company completed
its acquisition of the El Paso Bar-B-Que Company trademark from a third party
for aggregate consideration of $995,000. The trademark is being amortized over
seven years using the straight-line method. Accumulated amortization totaled
$71,000 at December 30, 1997.
Deferred Financing Costs -- Costs incurred in obtaining financing are
deferred and amortized over the term of the related debt.
Income Taxes -- For income tax purposes, the Company is taxed as a
partnership whereby the income (loss) of the Company, as well as income tax
credits and tax preference items, are recognized on the personal income tax
returns of the members of the Company. Accordingly, income taxes are not
reflected in these financial statements.
Start-Up and Preopening Costs -- Start-up and preopening costs incurred in
connection with a new restaurant becoming operational are charged to expense as
incurred.
F-51
<PAGE> 209
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 1997 AND DECEMBER 31, 1996
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Food................................................. $23,000 $20,000
Liquor............................................... 13,000 13,000
Souvenirs............................................ 1,000 --
------- -------
$37,000 $33,000
======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment costs consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cafeteria equipment................................ $1,186,000 $ 667,000
Leasehold improvements and office equipment........ 1,834,000 1,128,000
Automobiles........................................ 19,000 --
Construction in progress........................... -- 82,000
---------- ----------
3,039,000 1,877,000
Less accumulated depreciation...................... (293,000) (110,000)
---------- ----------
$2,746,000 $1,767,000
========== ==========
</TABLE>
F-52
<PAGE> 210
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 1997 AND DECEMBER 31, 1996
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Note payable to AT&T Small Business Lending Corporation,
dated June 30, 1997 in the amount of $1,500,000. The note
bears interest at 11% with monthly principal and interest
payments of $20,663 through July 1, 2007 and is
collateralized by property and equipment................. $1,457,000 $ --
Notes payable to The Plains National Bank, dated May 1,
1996 with original principal amounts of $1,017,000. The
notes payable are collateralized by all property and
equipment and require monthly principal and interest
payments of $15,364 and are due in January 2001. Interest
is variable based upon the prime rate plus 1% (9.5% at
December 30, 1997)....................................... 858,000 958,000
Note payable to SWH, L.L.C. originated as a result of a
lease agreement entered into on May 15, 1995, for
improvements to the leased property that is located in
Scottsdale, Arizona. The note payable requires monthly
payments of principal and interest of $3,373 through
February 2006 and bears interest at 10.5%................ 220,000 236,000
Capital lease payable to CLG, Inc. dated April 12, 1995.
Original amount of $78,120 due in monthly payments of
$2,622 with a maturity date of April 1998. The note bears
interest at 19.5% and is collateralized by computer
equipment................................................ 8,000 36,000
Capital lease payable to CDP Services (Ramanco
International) dated April 14, 1997. Original amount of
$43,205 due in monthly payments of $987 through May 1,
2002. The note bears interest at 13.20% and is
collateralized by certain equipment...................... 40,000
Capital lease payable to Lease Acceptance Corporation dated
May 22, 1997. Original amount of $5,200 due in monthly
payments of $178 through March 1, 2000. The note bears
interest at 13.99% and is collateralized by leased
equipment................................................ 4,000 --
Capital lease payable to Lease Acceptance Corporation dated
August 18, 1997. Original amount of $5,200 due in monthly
payments of $166 through August 13, 2000. The note bears
interest at 9.29% and is collateralized by leased
equipment................................................ 5,000
Capital lease payable to Budget Resale Incorporated dated
July 23, 1997. Original amount of $19,422 due in monthly
payments of $485 through August 1, 2001. The note bears
interest at 9.00% and is collateralized by the leased
automobile............................................... 18,000
---------- ----------
2,610,000 1,230,000
Less principal maturities due within one year.............. (240,000) (143,000)
---------- ----------
Total long-term debt and capital lease
obligations.................................... $2,370,000 $1,087,000
========== ==========
</TABLE>
F-53
<PAGE> 211
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 1997 AND DECEMBER 31, 1996
At December 30, 1997, maturities of long-term debt and capital lease
obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE LONG-TERM
OBLIGATIONS DEBT
------------- ----------
<S> <C> <C>
Fiscal year ending:
1998.............................................. $ 29,000 $ 216,000
1999.............................................. 26,000 239,000
2000.............................................. 19,000 259,000
2001.............................................. 16,000 663,000
2002.............................................. 5,000 169,000
Thereafter........................................ 989,000
-------- ----------
95,000 $2,535,000
==========
Less amounts representing interest.................. (20,000)
--------
Present value of net minimum lease payments......... $ 75,000
========
</TABLE>
The present value of net minimum lease payments of $24,000 at December 30,
1997 is included in the accompanying consolidated balance sheets under current
portion of long-term debt.
Property under capital leases at December 30, 1997 consists of the
following:
<TABLE>
<S> <C>
Office equipment............................................ $132,725
Less accumulated depreciation............................... (31,216)
--------
$101,509
========
</TABLE>
5. OPERATING LEASES
The Company leases certain of its facilities and equipment under triple net
operating leases. Under the terms of the leases, the Company is required to pay
certain costs of the leased properties including taxes, insurance and utilities.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1998............................................. $ 506,000
1999............................................. 509,000
2000............................................. 516,000
2001............................................. 563,000
2002............................................. 566,000
Thereafter....................................... 2,379,000
----------
$5,039,000
==========
</TABLE>
Tulsa, Oklahoma and Glendale, Arizona Leases -- On September 30, 1994, the
Company entered into a lease and sublease agreement (the Lease Agreement) with
Cafeteria Operators, L.P. for certain properties, property improvements and
existing equipment in Tulsa, Oklahoma and Glendale, Arizona. On September 30,
1996, the Lease Agreement was amended. As amended, the Lease Agreement expires
for the Tulsa, Oklahoma property on December 31, 2003, without option. The Lease
Agreement also is extended for the Glendale, Arizona property through December
31, 2007, with two five-year options available. In connection with the
amendment, Cafeteria Operators, L.P. conveyed to the Company all equipment with
a fair value of $250,000 located at the Glendale, Arizona property. The
conveyance of the equipment was recorded as a deferred lease incentive on the
Company's balance sheets.
F-54
<PAGE> 212
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 1997 AND DECEMBER 31, 1996
Rent expense relating to such operating leases aggregated $550,000 and
$407,000 for the years ended December 30, 1997 and December 31, 1996,
respectively.
6. SALE OF COMPANY
On October 7, 1997, the Members of the Company entered into a binding
letter of intent to exchange their ownership interests in the Company for an
ownership interest in Newriders, Inc. The acquisition of the Company by
Newriders, Inc. requires approval by Newriders, Inc. shareholders. An officer of
Newriders, Inc. also has an ownership interest in the Company. Additionally,
William Prather, a member of the Company, became Chief Executive Officer of
Newriders, Inc.
F-55
<PAGE> 213
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998 (UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 224,008
Accounts receivable, net.................................... 166,735
Inventories................................................. 37,673
Prepaid expenses and other.................................. 38,600
----------
Total current assets.............................. 467,016
PROPERTY AND EQUIPMENT, net................................. 2,654,717
TRADEMARK, net.............................................. 856,269
DEFERRED FINANCING COSTS, net............................... 152,200
OTHER ASSETS................................................ 122,200
----------
Total assets...................................... $4,252,402
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................ $ 232,545
Accounts payable............................................ 313,399
Accrued expenses and other current liabilities.............. 478,354
----------
Total current liabilities......................... 1,024,298
DEFERRED LEASE INCENTIVE.................................... 250,000
LONG-TERM DEBT, net of current maturities................... 2,251,194
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY:
Members' capital............................................ 816,360
Accumulated deficit......................................... (89,450)
----------
Total members' equity............................. 726,910
----------
Total liabilities and members' equity............. $4,252,402
==========
</TABLE>
See accompanying notes to the financial statements.
F-56
<PAGE> 214
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JULY 1, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
SALES....................................................... $5,444,650 $3,712,968
OPERATING EXPENSES:
Cost of sales:
Food costs................................................ 1,532,638 1,121,691
Labor costs............................................... 1,528,307 1,076,408
Other..................................................... 107,515 70,680
---------- ----------
Total cost of sales............................... 3,168,460 2,268,779
GENERAL AND ADMINISTRATIVE.................................. 1,610,556 1,172,853
DEPRECIATION AND AMORTIZATION............................... 204,215 86,168
---------- ----------
Total operating expenses.......................... 4,983,231 3,527,800
---------- ----------
OPERATING INCOME............................................ 461,419 185,168
INTEREST EXPENSE, net....................................... 136,869 79,447
---------- ----------
NET INCOME........................................ $ 324,550 $ 105,721
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-57
<PAGE> 215
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JULY 1, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $324,550 $ 105,721
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 204,215 86,168
Changes in assets and liabilities:
Accounts receivable.................................... (92,680) 6,435
Inventories............................................ (433) 3,987
Prepaid expenses and other............................. 17,122 (151,477)
Other assets........................................... 33,501 (540,751)
Accounts payable....................................... (223,601) 67,516
Accrued expenses and other current liabilities......... 78,484 266,805
-------- ---------
Net cash provided by (used in) operating
activities...................................... 341,158 (155,596)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Trademark..................................... -- (720,000)
Purchases of property and equipment....................... (35,982) (947,647)
-------- ---------
Net cash used in investing activities..................... (35,982) (1,667,647)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................ -- 1,518,843
Principal payments on long-term debt........................ (126,480) (12,520)
Deferred financing costs.................................... -- (30,000)
Capital contributions....................................... 0 50,000
Distributions to members.................................... (173,282) (83,412)
-------- ---------
Net cash provided by (used in) financing
activities...................................... (299,762) 1,442,911
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 5,414 (380,332)
CASH AND CASH EQUIVALENTS, beginning of period.............. 218,594 488,000
-------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $224,008 $ 107,668
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION -- Cash paid for
interest.................................................. $125,214 $ 94,322
======== =========
</TABLE>
See accompanying notes to the financial statements.
F-58
<PAGE> 216
M & B RESTAURANTS, L.C.
(DBA EL PASO BAR-B-QUE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JULY 1, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The information set forth in these condensed financial statements as of
June 30, 1998 and for the six months ended June 30, 1998 and July 1, 1997 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 six months ended June 30, 1998
and July 1, 1997 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.
The information in these interim statements should be read in conjunction
with the Company's audited annual financial statements as of December 31, 1997
contained elsewhere in this Prospectus.
F-59
<PAGE> 217
ADDENDUM A
MERGER AGREEMENT
<PAGE> 218
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization (this "Agreement") is
made and entered into as of June 30, 1998 by and among Newriders, Inc., a Nevada
corporation ("Newriders"), Easyriders, Inc., a Delaware corporation and
wholly-owned subsidiary of Newriders ("Newco #1") and Easyriders Sub, Inc., a
Nevada corporation and wholly-owned subsidiary of Newco #1 ("Newco #2").
RECITALS
WHEREAS, simultaneously with the execution of this Agreement, Newriders,
Newco #1, Joseph Teresi and several companies owned by Mr. Teresi (the "Paisano
Companies") are entering into a stock contribution and sale agreement (the
"Paisano Agreement") whereby Mr. Teresi will contribute to Newco #1 and
Easyriders Sub II, Inc., a California corporation and wholly-owned subsidiary of
Newco #1 ("Newco #3"), all of the outstanding shares of capital stock of the
Paisano Companies in exchange for 6,493,507 shares of common stock of Newco #1,
a promissory note of Newco #3 in the principal amount of $15,000,000 payable at
closing, and notes aggregating $13,000,000, as part of a transaction (the
"Section 351 Transaction") described in Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code");
WHEREAS, simultaneously with the execution of this Agreement, Newriders,
Newco #1, John Martin, William E. Prather and Marna Prather and M&B Restaurants
LC, d/b/a El Paso Barbeque ("El Paso") are entering into an LLC interest
contribution agreement (the "El Paso Agreement") whereby Mr. Martin and Mr. and
Mrs. Prather will contribute to Newco #1 all of the outstanding LLC interests of
El Paso in exchange for an aggregate of 2,000,000 shares of common stock of
Newco #1, as part of the Section 351 Transaction;
WHEREAS, immediately after the transactions contemplated by Sections 2.1
and 2.2(a) and (b) of the Paisano Agreement and 2.2 of the El Paso Agreement
have occurred but before the transactions specified in Sections 2.2 (c) and (d)
of the Paisano Agreement have occurred, (i) Newco #2 will merge into Newriders,
(ii) the common stock of Newco #2 held by Newco #1 will be converted into one
share of Newriders common stock (constituting all of the outstanding capital
stock of Newriders) and (iii) the common stock of Newriders not held by Newco #1
will be converted into common stock of Newco #1 on the basis of one half of one
share of common stock of Newco #1 for each share of common stock of Newriders
not held by Newco #1 (the "Reorganization").
WHEREAS, for federal income tax purposes, the parties intend and expect
that the Reorganization qualifies as a reorganization under the provisions of
Sections 368(a)(1)(A), 368(a)(2)(E) and 351 of the Code.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the provisions set
forth below, and subject to the terms and conditions set forth herein, the
parties agree as follows:
ARTICLE 1.
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, immediately after the transactions contemplated by Sections 2.1 and
2.2(a) and (b) of the Paisano Agreement and 2.2 of the El Paso Agreement have
occurred but before the transactions specified in Sections 2.2 (c) and (d) of
the Paisano Agreement have occurred, articles of merger, in the form attached
hereto as Exhibit A ("Articles of Merger") providing for the merger of Newco #2
with and into Newriders (the "Merger") shall be duly prepared, executed and
filed by Newriders, as the Surviving Corporation (the "Surviving Corporation")
in accordance with the relevant provisions of Chapter 92A of the Nevada Revised
Statutes (the "NRS") and the parties hereto shall take any and all other actions
required by law to make the Merger effective. Following the
A-1
<PAGE> 219
Merger, Newriders shall continue as the Surviving Corporation and the separate
corporate existence of Newco #2 shall cease. The time the Merger becomes
effective is referred to herein as the "Effective Time," and the date on which
the Effective Time occurs is referred to as the "Closing Date." Prior to the
filing of the Articles of Merger, a closing shall take place at the offices of
Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite
1600, Los Angeles, California 90067.
SECTION 1.2 Effects of the Merger. The Merger shall have the effects set
forth in the NRS. As of the Effective Time, the Surviving Corporation shall be a
wholly owned subsidiary of Newco #1.
SECTION 1.3 Directors. The directors of Newco #2 immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation.
SECTION 1.4 Officers. The officers of Newco #2 immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation.
SECTION 1.5 Certificate of Incorporation. Newriders' Certificate of
Incorporation, as in effect immediately before the Effective Time, will be
amended and restated to read in its entirety as set forth in Exhibit B, and as
so amended will be the Certificate of Incorporation of the Surviving
Corporation.
SECTION 1.6 Bylaws. Newriders' by-laws, as in effect immediately before
the Effective Time, will be amended and restated to read in their entirety as
set forth in the attached Exhibit C, and as so amended and restated will be the
by-laws of the Surviving Corporation.
SECTION 1.7 Conversion. At the Effective Time, by virtue of the Merger and
without any action on the part of Newco #1, Newco #2, Newriders or the holders
of any of the following securities:
(a) All of the issued and outstanding shares of common stock, par value
$.01 per share, of Newco #2, shall be converted into the right to receive one
share of the Surviving Corporation (constituting all of the outstanding capital
stock of the Surviving Corporation).
(b) Each issued and outstanding share of the common stock of Newriders
not held by Newco #1 ("Newriders Stock") (other than any Dissenting Shares (as
defined below)) shall be converted into the right to receive one half of one
fully paid and nonassessable share of common stock, par value $.001 per share,
of Newco #1 (the "Newco #1 Stock").
(c) The shares of common stock of Newriders held directly or indirectly
by Newriders (the "Treasury Shares") will be canceled and will cease to exist,
and no payment will be made with respect thereto.
(d) The issued and outstanding share of the common stock of Newco #1
held by Newriders shall be canceled and retired and cease to exist.
SECTION 1.8 Dissenting Shares. Each share of common stock of Newriders
that, immediately before the Effective Time, was held by any person who has duly
exercised the appraisal rights afforded to dissenting stockholders pursuant to
Section 92A.380 of the NRS ("Dissenting Shares") will not be converted into or
represent the right to receive the consideration referred to in Section 1.7(b)
hereof. Instead, the holders of Dissenting Shares will be entitled to receive
payment of the appraised value of such shares in accordance with the provisions
of the NRS, except that all Dissenting Shares held by stockholders who withdraw,
fail to perfect, or otherwise lose their appraisal rights with respect to
Dissenting Shares will thereupon be deemed to have converted such shares into
shares of common stock of Newco #1 pursuant to Section 1.7 hereof.
SECTION 1.9 Tax Consequences. It is intended by the parties that the
Merger and Reorganization shall constitute a reorganization within the meaning
of Sections 368(a)(1)(A), 368(a)(2)(E) and 351 of the Code, and that this
Agreement shall constitute a "plan of reorganization" for the purposes of
Section 368 of the Code.
A-2
<PAGE> 220
ARTICLE 2.
EXCHANGE PROCEDURES
SECTION 2.1 Certificates. After the Effective Time, stock certificates
(each, a "Certificate," and collectively, the "Certificates") representing
shares of Newriders Stock that have been converted in the Merger into the right
to receive shares of Newco #1 Stock will be conclusively deemed to represent
such shares of Newco #1 Stock.
SECTION 2.2 Exchange of Certificates. As promptly as practicable after the
Effective Time, Newco #1 or its transfer agent for Newco #1 Stock will send to
each former Newriders stockholder transmittal materials for use in exchanging
their Certificates for certificates for the shares of Newco #1 Stock into which
such shares of Newriders Stock have been converted. Upon surrender of a
Certificate to Newco #1 or its transfer agent, as the case may be, together with
a duly executed letter of transmittal and any other reasonably required
documents, the holder of such Certificate will be entitled to receive, in
exchange therefor, a certificate for the number of shares of Newco #1 Stock to
which such holder is entitled and such Certificate will be canceled. Upon
exchange hereunder Newco #1 shall not be required to issue stock certificates
representing fractions of shares of Newco #1 Stock. Instead Newco #1 will issue
one additional share of Newco #1 Stock in lieu of the final fraction of a share
of Newco #1 Stock.
SECTION 2.3 Distributions. No dividend or other distribution payable after
the Effective Time with respect to Newco #1 Stock will be paid to the holder of
any unsurrendered Certificate until the holder thereof surrenders such
Certificate, at which time such holder will receive all dividends and
distributions, without interest thereon, previously payable but withheld from
such holder pursuant hereto.
SECTION 2.4 No Transfers. After the Effective Time, no transfers of shares
of Newriders Stock will be made in the stock transfer books of Newriders. If,
after the Effective Time, Certificates are presented (for transfer or otherwise)
to the Surviving Corporation or its transfer agent for Newriders Stock, they
will be canceled and exchanged for the shares of Newco #1 Stock deliverable in
respect thereof as determined in accordance with this Agreement (or returned to
the presenting person, if such Certificate represents Dissenting Shares).
SECTION 2.5 Termination of Rights. After the Effective Time, holders of
Newriders Stock will cease to be, and will have no rights as, stockholders of
Newriders, other than (i) in the case of shares other than Dissenting Shares,
the right to receive shares of Newco #1 Stock into which such shares of
Newriders Stock have been converted, as provided in this Agreement, and (ii) in
the case of Dissenting Shares, the rights afforded to the holders thereof under
the NRS.
SECTION 2.6 Abandoned Property. Neither Newco #1, Newriders nor any other
person will be liable to any holder or former holder of shares of Newriders
Stock for any shares, or any dividends or other distributions with respect
thereto, properly delivered to a public official pursuant to applicable
abandoned property, escheat, or similar laws.
SECTION 2.7 Lost Certificates, Etc. In the event that any Certificate has
been lost, stolen, or destroyed, then upon receipt of appropriate evidence as to
such loss, theft or destruction, and to the ownership of such Certificate by the
person claiming such Certificate to be lost, stolen or destroyed, and the
receipt by Newco #1 or its transfer agent for Newco #1 Stock of appropriate and
customary indemnification, Newco #1 or such transfer agent will issue in
exchange for such lost, stolen or destroyed Certificate the shares of Newco #1
stock and the fractional share payment, if any, deliverable in respect thereof
as determined in accordance with this Agreement.
SECTION 2.8 Company Stock Options. After the Effective Time, each option
to purchase shares of Newriders Stock granted under Newriders Stock Option Plan
that is outstanding immediately before the Effective Time (a "Newriders Option")
will be deemed to be an option granted pursuant to Newco #1's Stock Option Plan
and the holder thereof will be entitled, in accordance with the terms of such
Newriders Option, to purchase from Newco #1 up to a number of whole shares of
Newco #1 Stock equal to one half of the number of shares of Newriders Stock
subject to such Newriders Option at an exercise price per share
A-3
<PAGE> 221
equal to two times the exercise price per share of such Newriders Option. All
other options, warrants and other convertible securities of Newriders
outstanding immediately before the Effective Time will be deemed to be an
option, warrant or other convertible security exercisable for or convertible
into Newco #1 Stock in an amount equal to one half of the number of shares of
Newriders Stock subject to such option, warrant or other convertible security,
at an exercise price or conversion ratio equal to two times the exercise price
or conversion ration applicable to such option, warrant or other convertible
security of Newriders. No scrip or fractional share interests will be issued in
connection with the exercise of any Newriders Option or any other option,
warrant or other convertible security of Newriders. Instead, Newco #1 will issue
one additional share of Newco #1 Stock in lieu of the final fraction of a share
of Newco #1 Stock. Except for the foregoing, each Newriders Option and all other
options, warrants or other convertible securities of Newriders will remain
subject after the Effective Time to the same terms and conditions (including
without limitation those with respect to dates on which and the proportionate
extent to which such Newriders Options or such other option, warrant or other
convertible security of Newriders may be exercised or converted) as were
applicable to such Newriders Option or such other options, warrants or other
convertible securities of Newriders immediately before the Effective Time.
ARTICLE 3.
CLOSING CONDITIONS
SECTION 3.1 Conditions to the Obligations of the Parties. The obligations
of each of the parties hereto to complete the Reorganization is subject to the
prior or simultaneous consummation of the transactions contemplated by the
Paisano Agreement and the El Paso Agreement.
ARTICLE 4.
MISCELLANEOUS
SECTION 4.1 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal law, and not the law
pertaining to conflicts or choice of law, of the State of Nevada.
SECTION 4.2 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 4.3 Complete Agreement. This Agreement, the Paisano Agreement and
the El Paso Agreement contain or will contain the entire agreement among the
parties with respect to the Reorganization and shall supersede in its entirety
all previous oral and written and all contemporaneous oral negotiations,
commitments and understandings.
SECTION 4.4 Modifications, Amendments and Waivers. This Agreement may be
modified, amended or otherwise supplemented by a writing signed by all of the
parties. No waiver of any right or power hereunder shall be deemed effective
unless and until a writing waiving such right or power is executed by the party
waiving such right or power.
SECTION 4.5 Equitable Remedies. In addition to legal remedies, in
recognition of the fact that remedies at law may not be sufficient, the parties
(and their permitted successors and assigns) shall be entitled to equitable
remedies for breaches or defaults hereunder, including, without limitation,
specific performance and injunction.
SECTION 4.6 Attorneys Fees and Costs. Should any party institute any
action or proceeding in any court to enforce any provision of this Agreement,
the prevailing party shall be entitled to receive from the losing party
reasonable attorneys' fees and costs incurred in such action or proceeding,
whether or not such action or proceeding is prosecuted to judgment.
A-4
<PAGE> 222
SECTION 4.7 Further Assurances. Each party shall execute and deliver such
further instruments and take such further actions as any other party may
reasonably request in order to carry out the intent of this Agreement and to
consummate the Reorganization.
SECTION 4.8 Contract Interpretation: Construction of Agreement.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.
(b) No party, nor its respective counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement, and
all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
NEWRIDERS
NEWRIDERS, INC.
a Nevada corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President and Chief Executive
Officer
NEWCO #1
EASYRIDERS, INC.
a Delaware corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President
NEWCO #2
EASYRIDERS SUB, INC.
a Nevada corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President
A-5
<PAGE> 223
EXHIBIT A
ARTICLES OF MERGER
OF
EASYRIDERS SUB, INC.
INTO
NEWRIDERS, INC.
FIRST: The name of the surviving entity is NEWRIDERS, INC., and its place
of organization and governing law is the State of Nevada. The name of the
corporation being merged into the surviving entity is EASYRIDERS SUB, INC., and
its place of organization and governing law is the State of Nevada.
SECOND: An Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") was adopted by the board of directors of Easyriders Sub, Inc. and
the board of directors of Newriders, Inc.
THIRD: The Merger Agreement was approved by Easyriders, Inc. as the parent
entity and sole stockholder of Easyriders Sub, Inc. by written consent. The
Merger Agreement was submitted to the owners of Newriders, Inc. pursuant to
Chapter 92A of the Nevada Revised Statutes. The holders of common stock of
Newriders, Inc. were entitled to 100% of the vote on the Merger Agreement. The
total number of outstanding shares of common stock of Newriders, Inc. entitled
to vote on the Merger Agreement was and is shares. The percentage
vote required was more than 50%. The number of shares of common stock voting to
approve the Merger Agreement was or %.
FOURTH: The Merger Agreement is hereinafter set forth in its entirety as
Exhibit A, attached hereto.
FIFTH: The Certificate of Incorporation of Newriders, Inc. will be amended
and restated to read in its entirety as set forth in Exhibit B, attached hereto,
and as so amended will be the Certificate of Incorporation of the surviving
entity.
SIXTH: This merger shall be effective on , 1998.
NEWRIDERS, INC.,
A Nevada corporation
By:
--------------------------------------
William E. Prather, President
By:
--------------------------------------
Hal H. Bolen II, Secretary
EASYRIDERS SUB, INC.,
A Nevada corporation
By:
--------------------------------------
William E. Prather, President
By:
--------------------------------------
William R. Nordstrom, Secretary
A-6
<PAGE> 224
STATE OF NEVADA
COUNTY OF
ss:
The foregoing instrument was acknowledged before me on this
day of , 1998, by William E. Prather, as President of Newriders,
Inc. on behalf of the corporation.
--------------------------------------
NOTARY PUBLIC
My commission expires:
-----------------------------------------------------------------------
STATE OF NEVADA
COUNTY OF
ss:
The foregoing instrument was acknowledged before me on this day of
, 1998, by Hal H. Bolen II, as Secretary of Newriders, Inc. on
behalf of the corporation.
--------------------------------------
NOTARY PUBLIC
My commission expires:
-----------------------------------------------------------------------
STATE OF NEVADA
COUNTY OF
ss:
The foregoing instrument was acknowledged before me on this
day of , 1998, by William E. Prather, as President of Easyriders
Sub, Inc. on behalf of the corporation.
--------------------------------------
NOTARY PUBLIC
My commission expires:
-----------------------------------------------------------------------
STATE OF NEVADA
COUNTY OF
ss:
The foregoing instrument was acknowledged before me on this
day of , 1998, by William R. Nordstrom, as Secretary of Easyriders
Sub, Inc. on behalf of the corporation.
--------------------------------------
NOTARY PUBLIC
My commission expires:
-----------------------------------------------------------------------
A-7
<PAGE> 225
ADDENDUM B
PAISANO AGREEMENT
<PAGE> 226
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
STOCK CONTRIBUTION AND SALE AGREEMENT........................................ B-1
ARTICLE 1. DEFINITIONS..................................................... B-2
ARTICLE 2. CONTRIBUTION OF STOCK........................................... B-5
Section 2.1 Contribution of Stock....................................... B-5
Section 2.2 Exchange.................................................... B-5
Section 2.3 Exchange Amount Adjustment.................................. B-6
Section 2.4 Adjustment Procedure........................................ B-6
Section 2.5 Closing..................................................... B-7
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR INDIVIDUALLY......
B-7
Section 3.1 Authorization............................................... B-7
Section 3.2 Ownership of Stock.......................................... B-7
Section 3.3 Consents and Approvals...................................... B-7
Section 3.4 Newco #1 Shares............................................. B-7
Section 3.5 Brokerage Fees.............................................. B-8
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR AND THE PAISANO
COMPANIES....................................................... B-8
Section 4.1 Authorization............................................... B-8
Section 4.2 Consents and Approvals...................................... B-8
Section 4.3 Organization and Good Standing.............................. B-9
Section 4.4 Licenses and Permits........................................ B-9
Section 4.5 Capital Stock............................................... B-9
Section 4.6 Subsidiaries................................................ B-9
Section 4.7 Corporate Books............................................. B-9
Section 4.8 Financial Statements........................................ B-9
Section 4.9 Inventory................................................... B-10
Section 4.10 Indebtedness................................................ B-10
Section 4.11 Absence of Undisclosed Liabilities.......................... B-10
Section 4.12 Accounts Receivable......................................... B-10
Section 4.13 Absence of Certain Changes.................................. B-11
Section 4.14 Real Property............................................... B-12
Section 4.15 Assets...................................................... B-12
Section 4.16 Machinery, Equipment and Other Personal Property, etc....... B-12
Section 4.17 Intangible Personal Property................................ B-12
Section 4.18 Licensing Interests; Easyriders Cafe........................ B-14
Section 4.19 Labor and Employment Agreements............................. B-14
Section 4.20 Compliance with ERISA....................................... B-15
Section 4.21 Material Contracts and Relationships........................ B-17
Section 4.22 Absence of Certain Business Practices....................... B-18
Section 4.23 Transactions with Affiliates................................ B-18
Section 4.24 Compliance with Laws........................................ B-19
Section 4.25 Taxes....................................................... B-19
Section 4.26 Insurance................................................... B-21
Section 4.27 No Powers of Attorney or Suretyships........................ B-21
Section 4.28 Litigation.................................................. B-21
Section 4.29 Banking Facilities.......................................... B-21
</TABLE>
i
<PAGE> 227
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.30 Environmental Liabilities................................... B-22
Section 4.31 Circulation................................................. B-22
Section 4.32 Relationships with Franchisees.............................. B-23
Section 4.33 Customer, Advertiser, Subscriber and Mailing Lists.......... B-23
Section 4.34 Advertising................................................. B-23
Section 4.35 Events...................................................... B-24
Section 4.36 Model Releases.............................................. B-24
Section 4.37 Brokerage Fees.............................................. B-24
Section 4.38 Disclosure.................................................. B-24
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF NEWRIDERS AND NEWCO #1........
B-24
Section 5.1 Organization and Corporate Authority........................ B-24
Section 5.2 Consents and Approvals...................................... B-24
Section 5.3 Newco #1 Shares; Newco #1 Capital Stock..................... B-25
Section 5.4 Newriders SEC Reports....................................... B-25
Section 5.5 Brokerage Fees.............................................. B-25
Section 5.6 Labor....................................................... B-25
Section 5.7 Compliance with ERISA....................................... B-25
Section 5.8 Absence of Certain Business Practices....................... B-27
Section 5.9 Taxes....................................................... B-27
Section 5.10 Environmental Liabilities................................... B-27
Section 5.11 Licenses and Permits........................................ B-28
Section 5.12 Newriders Capital Stock; Subsidiaries....................... B-28
Section 5.13 Projected Financial Data.................................... B-28
Section 5.14 Insurance................................................... B-28
Section 5.15 No Powers of Attorney or Suretyships........................ B-29
Section 5.16 Contracts with Affiliates................................... B-29
Section 5.17 Absence of Undisclosed Liabilities.......................... B-29
Section 5.18 Disclosure.................................................. B-29
ARTICLE 6. COVENANTS OF CONTRIBUTOR AND THE PAISANO COMPANIES PRIOR TO
CLOSING DATE.................................................... B-29
Section 6.1 Access and Investigation.................................... B-29
Section 6.2 Operation of the Business of the Paisano Companies.......... B-29
Section 6.3 Negative Covenant........................................... B-29
Section 6.4 Required Approvals.......................................... B-29
Section 6.5 Notification................................................ B-30
Section 6.6 Exclusivity................................................. B-30
Section 6.7 Best Efforts................................................ B-30
Section 6.8 Leases...................................................... B-30
Section 6.9 Management Employment Contracts............................. B-30
ARTICLE 7. COVENANTS OF NEWRIDERS AND NEWCO #1 PRIOR TO CLOSING DATE.......
B-31
Section 7.1 Access and Investigation.................................... B-31
Section 7.2 Approvals of Governmental Bodies............................ B-31
Section 7.3 Best Efforts................................................ B-31
</TABLE>
ii
<PAGE> 228
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 8. CERTAIN AGREEMENTS AND UNDERSTANDINGS........................... B-31
Section 8.1 Board of Directors.......................................... B-31
Section 8.2 Agreement Not to Compete.................................... B-31
Section 8.3 Paisano Employee Options.................................... B-32
Section 8.4 Directors' and Officers' Insurance.......................... B-32
Section 8.5 Use of Excluded Assets...................................... B-32
Section 8.6 Termination of Pension Plan................................. B-32
Section 8.7 Employees; Employee Benefits................................ B-33
ARTICLE 9. CONDITIONS...................................................... B-33
Section 9.1 Conditions to Obligations of Newriders and Newco #1......... B-33
Conditions to Obligations of Contributor and the Paisano
Section 9.2 Companies................................................... B-34
ARTICLE 10. INDEMNIFICATION................................................. B-35
Section 10.1 Survival.................................................... B-35
Section 10.2 Indemnification by Contributor.............................. B-35
Section 10.3 Limitations................................................. B-35
Indemnification by Contributor for Pension Plan
Section 10.3A Liabilities................................................. B-36
Section 10.4 Indemnification by Contributor for Tax Liabilities.......... B-36
Section 10.5 Claims for Indemnification.................................. B-37
Section 10.6 Defense of Claims........................................... B-37
Section 10.7 Manner of Indemnification................................... B-38
Section 10.8 Submission of Claims For Indemnification.................... B-38
Section 10.9 Claims by Contributor....................................... B-38
ARTICLE 11. TERMINATION..................................................... B-38
Section 11.1 Termination Events.......................................... B-38
Section 11.2 Effect of Termination....................................... B-38
ARTICLE 12. DELIVERY OF CLOSING DOCUMENTS................................... B-39
Section 12.1 Deliveries by Contributor and the Paisano Companies......... B-39
Section 12.2 Deliveries by Newriders, Newco #1 and Newco #3.............. B-39
ARTICLE 13. MISCELLANEOUS................................................... B-40
Section 13.1 Notices..................................................... B-40
Section 13.2 Assignability and Parties in Interest....................... B-40
Section 13.3 Governing Law............................................... B-40
Section 13.4 Counterparts................................................ B-40
Section 13.5 Complete Agreement.......................................... B-41
Section 13.6 Modifications, Amendments and Waivers....................... B-41
Section 13.7 Expenses.................................................... B-41
Section 13.8 Limit on Interest........................................... B-41
Section 13.9 Equitable Remedies.......................................... B-41
Section 13.10 Attorneys Fees and Costs.................................... B-41
Section 13.11 Further Assurances.......................................... B-41
Section 13.12 Contract Interpretation: Construction of Agreement.......... B-41
Section 13.13 Jurisdiction; Service of Process............................ B-41
Section 13.14 Public Announcements; Confidentiality....................... B-41
</TABLE>
iii
<PAGE> 229
SCHEDULES
<TABLE>
<CAPTION>
NUMBER TITLE
------ -----
<S> <C>
Schedule 4.3 Jurisdictions
Schedule 4.4 Licenses, Permits and Qualifications
Schedule 4.5 Capital Stock
Schedule 4.8 Financial Statements
Schedule 4.10(a) Indebtedness
Schedule 4.11 Disclosed Liabilities
Schedule 4.12 Accounts Receivable
Schedule 4.13 Absence of Certain Changes
Schedule 4.14 Real Property
Schedule 4.15 Excluded Assets
Schedule 4.16 Personal Property
Schedule 4.17(a) Intellectual Property
Schedule 4.17(b) Intellectual Property Exceptions
Schedule 4.17(c) Copyright Exceptions
Schedule 4.18 Publications
Schedule 4.19 Labor and Employment Agreements
Schedule 4.20(a) Benefit Plans
Schedule 4.20(b) Material Changes to Benefit Plans
Schedule 4.20(j) Benefit Plans Exceptions
Schedule 4.21(a) Material Contracts
Schedule 4.21(d) Contracts with Distributors, Suppliers and Agents
Schedule 4.23 Transactions with Affiliates
Schedule 4.24 Compliance with Laws
Schedule 4.25 Taxes
Schedule 4.25(r) Schedule of Tax Accruals
Schedule 4.25(s) S Corporation Election Dates
Schedule 4.26 Insurance
Schedule 4.27 Powers of Attorney or Suretyships
Schedule 4.28 Litigation
Schedule 4.29 Banking Facilities
Schedule 4.30 Environmental Liabilities
Schedule 4.31(a) Declines in Circulation
Schedule 4.32 Franchisees
Schedule 4.34 Advertising
Schedule 4.35 Events
Schedule 5.4 Exceptions to SEC Reports
Schedule 5.7(a) Newriders Benefit Plans
Schedule 5.7(b) Material Changes to Newriders Benefit Plans
Schedule 5.7(f) Newriders Benefit Plans Exceptions
Schedule 5.7(h) Newriders Benefit Plans Exceptions
Schedule 5.9 American Furniture Wholesale Inc. Taxes
Schedule 5.10 Environmental Liabilities
Schedule 5.11 Licenses and Permits
Schedule 5.12(a) Transfer Agent List
Schedule 5.12(b) Subsidiaries
Schedule 5.14 Insurance
</TABLE>
iv
<PAGE> 230
<TABLE>
<CAPTION>
NUMBER TITLE
------ -----
<S> <C>
Schedule 5.15(a) Powers of Attorney or Suretyships
Schedule 5.16 Contracts with Affiliates
Schedule 8.3 Options
Schedule 9.1(q) Additional Conditions
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
NUMBER TITLE
------ -----
<S> <C>
Exhibit A Securities Act Legend
Exhibit B-1 Newco #1 Mirror Note
Exhibit B-2 Newco #1 Pledge Agreement
Exhibit B-3 Newco #1 Subordinated Note
Exhibit B-4 Newco #1 Short-Term Subordinated Note
Exhibit C Leases
Exhibit D-1 Employment Agreement with Brian Wood
Exhibit D-2 Employment Agreement with Robert Davis
Exhibit D-3 Employment Agreement with Keith Ball
Exhibit D-4 Employment Agreement with Rick Busman
Exhibit E-1 Opinion of Masters & Ribakoff
Exhibit E-2 Opinion of Fulwider, Patton, Lee & Utecht, LLP
Exhibit F-1 Teresi Employment Agreement
Exhibit F-2 Teresi Employment Agreement
Exhibit G Agreement and Plan of Merger and Reorganization
Exhibit H Opinion of Newriders' and Newco #1's counsel
Exhibit I Stockholders' Agreement
Exhibit 2.2(b) Newco #3 Note
</TABLE>
v
<PAGE> 231
STOCK CONTRIBUTION AND SALE AGREEMENT
STOCK CONTRIBUTION AND SALE AGREEMENT (this "Agreement") dated as of June
30, 1998, by and among Newriders, Inc., a Nevada corporation ("Newriders"),
Easyriders, Inc., a Delaware corporation and wholly-owned subsidiary of
Newriders ("Newco #1"), Easyriders Sub II, Inc., a California corporation and a
wholly-owned subsidiary of Newco #1 ("Newco #3"), Paisano Publications, Inc., a
California corporation ("MagCo"), 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 (each a "Paisano
Company" and collectively, the "Paisano Companies") and Mr. Joseph Teresi, as
sole stockholder of each Paisano Company ("Contributor").
WITNESSETH:
WHEREAS, Contributor is the owner of all of the issued and outstanding
shares of capital stock of each Paisano Company (the "Capital Stock");
WHEREAS, Contributor desires to contribute certain of the Capital Stock to
Newco #1 and sell certain of the Capital Stock to Newco #3, and Newco #1 desires
to issue to Contributor common stock in exchange for such Capital Stock and
Newco #3 desires to pay certain consideration in exchange for such Capital Stock
pursuant to this Agreement in a transaction described in Section 351 and
302(b)(2) of the Code (the "Section 351 Transaction");
WHEREAS, it is the intention of the parties hereto that, immediately
following consummation of the contribution to Newco #1 and sale to Newco #3 of
the Capital Stock pursuant to this Agreement, Newco #1 and Newco #3 shall
collectively own all of the outstanding shares of capital stock of each Paisano
Company;
WHEREAS, Newriders and Newco #3 anticipate that they will fund the cash
portion of the exchange amount with senior/subordinated debt of approximately
$22,000,000 (the "Financing");
WHEREAS, simultaneously with or prior to the execution of this Agreement,
Newriders, Newco #1, John Martin, William Prather and Marna Prather and M&B
Restaurants L.C., d/b/a El Paso Barbeque ("El Paso") will enter into an LLC
interest contribution agreement (the "El Paso Agreement") whereby Mr. Martin and
Mr. and Mrs. Prather will agree to contribute to Newco #1 all of the outstanding
LLC interests of El Paso in exchange for an aggregate of 2,000,000 shares of
common stock of Newco #1 as part of the Section 351 Transaction; and
WHEREAS, simultaneously with or immediately following the execution of this
Agreement and the El Paso Agreement, Newriders, Newco #1 and Easyriders Sub,
Inc., a Nevada corporation and wholly-owned subsidiary of Newco #1 ("Newco #2"),
will enter into an Agreement and Plan of Merger and Reorganization (the
"Agreement and Plan of Merger and Reorganization") whereby (i) Newco #2 will
merge into Newriders, (ii) the common stock of Newco #2 held by Newco #1 will be
converted into one share of Newriders common stock (constituting all of the
outstanding capital stock of Newriders) and (iii) the common stock of Newriders
not held by Newco #1 will be converted into common stock of Newco #1 on a
one-for-two basis, all as part of a transaction described in Sections
368(a)(1)(A), 368(a)(2)(E) and 351 of the Code (the "Reorganization").
B-1
<PAGE> 232
NOW, THEREFORE, in consideration for the premises set forth above and the
provisions set forth below, the parties agree as follows:
ARTICLE 1.
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"ABC" shall have the meaning set forth in Section 4.31(a).
"Accountants" shall have the meaning set forth in Section 2.4(a).
"Accounts Receivable" shall have the meaning set forth in Section 4.12.
"Adjustment Amount" shall have the meaning set forth in Section 2.3.
"Affiliate" shall mean, in respect of any specified Person, any other
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person or if such specified Person bears a
familial relationship with such other Person.
"Agreement" shall have the meaning set forth in the preamble.
"Agreement and Plan of Merger and Reorganization" shall have the meaning
set forth in the recitals.
"Articles of Merger" shall have the meaning set forth in Section 2.2(a).
"Assets" shall have the meaning set forth in Section 4.15.
"Balance Sheets" shall have the meaning set forth in Section 4.8(a).
"Benefit Liabilities" shall have the meaning set forth in Section 4.20(f).
"Benefit Plans" shall have the meaning set forth in Section 4.20(a).
"Capital Stock" shall have the meaning set forth in the recitals.
"Cash Portion" shall have the meaning set forth in Section 2.2(b).
"Closing" shall have the meaning set forth in Section 2.5.
"Closing Date" shall have the meaning set forth in Section 2.5.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidential Information Memorandum" means the Confidential Information
Memorandum, dated March 1998, prepared by Imperial Capital, LLC, as revised in
April 1998.
"Contribution" shall have the meaning set forth in Section 2.1.
"Contributor" shall have the meaning set forth in the preamble.
"Contributor's Advisors" shall have the meaning set forth in Section 7.1.
"Contributor Terminated Leases" shall have the meaning set forth in Section
6.8.
"Copyrights" shall have the meaning set forth in Section 4.17(c).
"Damages" shall have the meaning set forth in Section 10.2.
"Draft Closing Balance Sheet" shall have the meaning set forth in Section
2.4(a).
"El Paso" shall have the meaning set forth in the recitals.
"El Paso Agreement" shall have the meaning set forth in the recitals.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
B-2
<PAGE> 233
"ERISA Affiliate" shall mean with respect to any Person (a) any corporation
which is a member of a controlled group of corporations, within the meaning of
Section 414(b) of the Code, of which that Person is a member, (b) any trade or
business (whether or not incorporated) which is a member of a group of trades or
businesses under common control, within the meaning of Section 414(c) of the
Code, of which that Person is a member, and (c) any member of an affiliated
service group, within the meaning of Section 414(m) and (o) of the Code, of
which that Person or any entity described in clause (a) or (b) is a member.
"Environmental Laws" shall mean any and all federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees
or requirements of any governmental authority regulating, relating to or
imposing liability or standards of conduct concerning any Hazardous Material or
environmental protection or health and safety, as now or may at any time
hereafter be in effect, including without limitation, the Clean Water Act also
known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. sec. 1251
et seq., the Clean Air Act ("CAA"), 42 U.S.C. sec.sec. 7401 et seq., the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. sec.sec. 136 et
seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C.
sec.sec. 1201 et seq., the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. sec. 9601 et seq., the Superfund
Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99 - 499, 100
Stat. 1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"),
42 U.S.C. sec. 11001 et seq., the Resource Conservation and Recovery Act
("RCRA"), 42 U.S.C. sec. 6901 et seq., the Occupational Safety and Health Act as
amended ("OSHA"), 29 U.S.C. sec. 655 and sec. 657, together, in each case, with
any amendment thereto, and the regulations adopted and the official publications
promulgated thereunder and all substitutions thereof.
"Exchange Amount" shall have the meaning set forth in Section 2.2.
"Excluded Assets" shall have the meaning set forth in Section 4.15.
"Fair Value" shall have the meaning set forth in Section 2.3.
"Final Closing Balance Sheet" shall have the meaning set forth in Section
2.4(a).
"Financials" shall have the meaning set forth in Section 4.8.
"Financing" shall have the meaning set forth in the recitals.
"GAAP" shall mean generally accepted accounting principles as in effect at
the time in question.
"Government Authorizations" means any approval, consent, license, permit,
waiver, or other authorization issued, granted, given or otherwise made
available by or under the authority of any governmental body or pursuant to any
Legal Requirement.
"Hazardous Materials" shall mean any flammable materials, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, or similar materials defined in any Environmental Law.
"Intangible Personal Property" shall have the meaning set forth in Section
4.17(a).
"IRS" shall mean the Internal Revenue Service.
"Lease" shall have the meaning set forth in Section 4.14.
"Legal Requirement" means any federal, state, local, municipal, foreign,
international, multinational or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute or treaty.
"Licenses" shall have the meaning set forth in Section 4.17(a).
"MagCo" shall have the meaning set forth in the recitals.
"Management Employment Contracts" shall have the meaning set forth in
Section 6.9.
"Marks" shall mean trademarks, service marks, service names, brand names,
certification marks, trade names, trade dress, assumed names, slogans, trade
names and other indications of origin owned by or licensed to any Paisano
Company, whether or not registered; and to the extent any of the foregoing is
owned, the
B-3
<PAGE> 234
associated goodwill and registrations and applications to register in any
jurisdiction any of the foregoing, including any extension, modification or
renewal of any such registration or application.
"Material Contracts" shall have the meaning set forth in Section 4.21.
"Multiemployer Plan" shall mean a plan described in Section 3(37) of ERISA.
"Newco #1" shall have the meaning set forth in the preamble.
"Newco #1 Notes" shall have the meaning set forth in Section 2.2(d).
"Newco #1 Pledge Agreement" shall have the meaning set forth in Section
2.2(d).
"Newco #1 Shares" shall have the meaning set forth in Section 2.2(a).
"Newco #2" shall have the meaning set forth in the recitals.
"Newco #3" shall have the meaning set forth in the recitals.
"Newco #3 Note" shall have the meaning set forth in Section 2.2 (b).
"Newriders" shall have the meaning set forth in the preamble.
"Newriders' Advisors" shall have the meaning set forth in Section 6.1.
"Newriders' Benefit Plans" shall have the meaning set forth in Section
5.7(a).
"Paisano Companies" shall have the meaning set forth in the preamble.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor
thereto.
"Person" shall mean any natural person or any corporation, partnership,
limited liability company, joint venture or other entity.
"Personal Property" shall have the meaning set forth in Section 4.16.
"Plan" shall mean an employee benefit plan within the meaning of Section
3(3) of ERISA.
"Protected Countries" shall have the meaning set forth in 4.17(a).
"Publications" shall have the meaning set forth in Section 4.18(a).
"Real Property" shall have the meaning set forth in Section 4.14.
"Registration Statement" shall have the meaning set forth in Section
9.1(g).
"Reorganization" shall have the meaning set forth in the recitals.
"Reportable Event" shall mean any reportable event as defined in Section
4043(b) of ERISA, other than a reportable event as to which provision for 30-day
notice to the PBGC would be waived under applicable regulations had the
regulations in effect on the Closing Date been in effect on the date of
occurrence of such reportable event.
"Representative" with respect to a particular Person means any director,
officer, employee, agent, consultant, advisor or other representative of such
Person, including legal counsel, accountants and financial advisors.
"Sale Transfer" shall have the meaning set forth in Section 2.1(b).
"SEC" shall have the meaning set forth in Section 5.4.
"SEC Reports" shall have the meaning set forth in Section 5.4.
"Section 351 Transaction" shall have the meaning set forth in the recitals.
"Securities Act" shall have the meaning set forth in Section 2.2(a).
"Stockholders' Agreement" shall have the meaning set forth in Section
9.1(r).
B-4
<PAGE> 235
"Subsidiary" shall mean with respect to any Person, any corporation,
association, joint venture, partnership, limited liability company or other
business entity (whether now existing or hereafter organized) of which at least
a majority of the voting stock or other ownership interests having ordinary
voting power for the election of directors (or the equivalent) is, at the time
as of which any determination is being made, owned or controlled by such Person
or one or more Subsidiaries of such Person or by such Person or one or more
Subsidiaries of such person.
"Tax" or "Taxes" shall mean any and all taxes of any kind whatsoever
imposed or required to be collected by any federal, state or local taxing
authority in the United States, or by any foreign taxing authority, including,
without limitation, all income, gross receipts, sales, use, personal property,
use and occupancy, business occupation, mercantile, ad valorem, transfer,
license, withholding, payroll, employment, excise, escheat, real estate,
environmental, capital stock, franchise, alternative or add-on minimum,
estimated or other similar tax, including any interest, penalties and other
additions thereto.
"Taxing Authority" shall mean any federal, state, local or foreign
governmental authority, or any political subdivision, agency or instrumentality
thereof with taxing jurisdiction over any Paisano Company, Contributor,
Newriders or Newco #1.
"Teresi Employment Agreement" shall have the meaning set forth in Section
9.1(k).
"Transactions" shall mean, in respect of any party, all transactions
contemplated by this Agreement that involve, relate to or affect such party.
"UFOCs" shall have the meaning set forth in Section 4.32(c).
"Working Capital" shall mean Total Current Assets minus Total Current
Liabilities of the Paisano Companies as such terms are used in the Paisano
Estimated 1997 balance sheet contained in the Confidential Information
Memorandum.
ARTICLE 2.
CONTRIBUTION OF STOCK
SECTION 2.1 (a) Contribution of Stock. Subject to the terms and conditions
herein stated, Contributor agrees to contribute, assign, transfer and deliver to
Newco #1 on the Closing Date, and Newco #1 agrees to accept from Contributor on
the Closing Date, all of the shares of Capital Stock of all Paisano Companies
other than MagCo and seventy percent (70%) of the outstanding shares of MagCo
(the "Contribution"). The certificate(s) representing such Capital Stock shall
be duly endorsed in blank, or accompanied by stock powers duly executed in
blank, by Contributor.
(b) Sale of Stock. Subject to the terms and conditions herein stated,
Contributor agrees to sell, assign, transfer and deliver to Newco #3 on the
Closing Date, and Newco #3 agrees to accept from Contributor on the Closing
Date, thirty percent (30%) of the outstanding shares of MagCo (the "Sale
Transfer"). The certificate(s) representing such Capital Stock shall be duly
endorsed in blank, or accompanied by stock powers duly executed in blank, by
Contributor.
SECTION 2.2 Exchange. In exchange for the Contribution and the Sale
Transfer:
(a) Newco #1 shall, on the Closing Date and prior to the filing and
acceptance by the Secretary of State of the State of Nevada of articles of
merger (the "Articles of Merger") pursuant to the Reorganization, issue and
transfer 6,493,507 shares (the "Newco #1 Shares") of common stock of Newco #1 to
Contributor, which stock will constitute restricted securities as defined in
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
and contain a legend to the effect set forth in Exhibit A hereto;
(b) Newco #3 shall, on the Closing Date and prior to the filing and
acceptance by the Secretary of State of the state of Nevada of the Articles of
Merger pursuant to the Reorganization, issue a promissory note in the form
attached hereto as Exhibit 2.2(b) (the "Newco #3 Note") in the principal amount
of $15,000,000 to the Contributor;
B-5
<PAGE> 236
(c) Newco #3 shall, on the Closing Date, immediately after the filing
with and acceptance by the Secretary of State of the State of Nevada of the
Articles of Merger pursuant to the Reorganization, pay Contributor $15,000,000
in cash by wire transfer of immediately available funds (the "Cash Portion") in
repayment of the Newco #3 Note; and;
(d) Newco #1 shall, on the Closing Date, immediately after the filing
with and acceptance by the Secretary of State of Nevada of the Articles of
Merger pursuant to the Reorganization (i) deliver to Contributor a promissory
note in the amount of $5,000,000 substantially in the form attached hereto as
Exhibit B-1, which note will be secured pursuant to a pledge agreement (the
"Newco #1 Pledge Agreement") substantially in the form attached hereto as
Exhibit B-2; (ii) deliver to Contributor a promissory note in the amount of
$5,000,000 substantially in the form attached hereto as Exhibit B-3; and (iii)
deliver to Contributor a promissory note in the amount of $3,000,000
substantially in the form attached hereto as Exhibit B-4 (the notes referred to
in this paragraph are collectively referred to herein as the "Newco #1 Notes").
The Newco #1 Shares, the Cash Portion and the Newco #1 Notes are together
referred to as the Exchange Amount.
SECTION 2.3 Exchange Amount Adjustment. The Exchange Amount will be
adjusted upward or downward, dollar for dollar, based on the amount by which the
Paisano Companies' Working Capital as of the Closing Date exceeds or is less
than $4,537,000 (the "Adjustment Amount"). Downward adjustments in the Exchange
Amount will be applied first against the Cash Portion of the Exchange Amount,
next against the principal amount of the Newco #1 Notes (in such order as Newco
#1 shall determine) and last against the Newco #1 Shares (based on the average,
over the ten trading days immediately preceding the date of such adjustment, of
the last sale price of the Newco #1 common stock as reported on the NASDAQ
National Market System or SmallCap Market or, if a last sale reporting quotation
is not available for the Newco #1 common stock, the average of the bid and asked
prices of the Newco #1 common stock as reported by NASDAQ or on the NASD's OTC
Bulletin Board Service, or if not so reported, as listed in the National
Quotation Bureau, Inc.'s "Pink Sheets" (the "Fair Value")). Upward adjustments
in the Exchange Amount will be paid by delivering to Contributor additional
shares of common stock of Newco #1 with a value (based on the Fair Value) equal
to the Adjustment Amount.
SECTION 2.4 Adjustment Procedure.
(a) Newco #1 will prepare and will cause Deloitte & Touche LLP to audit
a draft combined balance sheet ("Draft Closing Balance Sheet") of the Paisano
Companies as at the Closing Date, from which the amount of Working Capital as at
the Closing Date may be calculated. Newco #1 will deliver the Draft Closing
Balance Sheet to Contributor within 180 days after the Closing Date. If within
thirty days following delivery of the Draft Closing Balance Sheet, Contributor
has not given Newco #1 notice of his objection to the Draft Closing Balance
Sheet (such notice must contain a statement of the basis of Contributor's
objection), then the Draft Closing Balance Sheet shall be considered the final
closing balance sheet (the "Final Closing Balance Sheet") which will be used in
computing the Adjustment Amount, and Newco #1 shall cause Deloitte & Touche LLP
to issue such Final Closing Balance Sheet. If Contributor gives such notice of
objection, then the parties will attempt, in good faith, to resolve the dispute
among themselves. If, after ten days, the parties cannot resolve the issues in
dispute, then such issues will be submitted to Ernst & Young, LLP, certified
public accountants (the "Accountants"), for resolution, and the Accountants will
attempt to resolve such dispute within thirty days of the date of the submission
of such dispute to them. If issues in dispute are submitted to the Accountants
for resolution, (i) each party will furnish to the Accountants such work papers
and other documents and information relating to the disputed issues as the
Accountants may request and are available to that party (or its independent
public accountants), and will be afforded the opportunity to present to the
Accountants any material relating to the determination and to discuss the
determination with the Accountants; (ii) the determination by the Accountants,
as set forth in a notice delivered to all parties by the Accountants, will be
binding and conclusive on the parties, unless such determination is found by a
court of competent jurisdiction to have been materially affected by fraud
committed by any party hereto other than the party (or an Affiliate thereof)
seeking to have such
B-6
<PAGE> 237
determination set aside; and (iii) Newriders and Newco #1, on the one hand and
Contributor, on the other hand will each bear 50% of the fees of the Accountants
for such determination.
(b) On the business day immediately following the final determination of
the Adjustment Amount, Newco #1 or Contributor, as appropriate, will pay the
Adjustment Amount to the other party or other adjustments to the Exchange Amount
will be made as set forth in Section 2.3. Cash payments must be made by wire
transfer in immediately available funds.
SECTION 2.5 Closing. The closing of the Contribution referred to in
Section 2.1 (the "Closing") shall take place at the offices of Kaye, Scholer,
Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Los Angeles, California,
on July 8, 1998 or on such later date that the last to be satisfied of the
conditions specified in Article 9 is satisfied or waived. Such time and date are
herein referred to as the "Closing Date."
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR INDIVIDUALLY
Contributor hereby represents and warrants to Newriders, Newco #1 and Newco
#3, as of the date hereof and as of the Closing Date, that:
SECTION 3.1 Authorization. Contributor has full power and authority to
enter into this Agreement and to perform his obligations hereunder and to
consummate the Transactions. This Agreement and all agreements or instruments
herein contemplated to be executed by Contributor are the valid and binding
agreements of Contributor, enforceable against him in accordance with their
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights generally and to general principles
of equity.
SECTION 3.2 Ownership of Stock. Contributor is the record and beneficial
owner of all of the Capital Stock, free and clear of any liens, encumbrances,
pledges, security interests, restrictions, prior assignments and claims of any
kind or nature whatsoever. Upon consummation of the Transactions, Newco #1 and
Newco #3 shall collectively be the owner, beneficially and of record, of all of
the outstanding Capital Stock, free and clear of any liens, encumbrances,
pledges, security interests, restrictions, prior assignments and claims of any
kind or nature whatsoever. No Person has made or threatened to make any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, any of the Paisano Companies, or
(b) is entitled to all or any portion of the Exchange Amount payable for the
Capital Stock.
SECTION 3.3 Consents and Approvals. Neither the execution and delivery of
this Agreement by Contributor nor the consummation of the Transactions by
Contributor will violate, result in a breach of any of the terms or provisions
of, constitute a default (or any event that, with the giving of notice or the
passage of time or both, would constitute a default) under, result in the
acceleration of any indebtedness under or result in any right of termination of,
increase any amounts payable under, or conflict with, any agreement, indenture
or other instrument to which Contributor is a party or by which any of
Contributor's properties are bound, or any judgment, decree, order or award of
any court, governmental body or arbitrator (domestic or foreign) applicable to
Contributor. All consents, approvals and authorizations of, and declarations,
filings and registrations with, and payments of all Taxes, fees, fines, and
penalties to, any governmental or regulatory authority (domestic or foreign) or
any other Person (either governmental or private) required in connection with
the execution and delivery by Contributor of this Agreement or the consummation
of the Transactions by Contributor have been obtained, made and satisfied.
SECTION 3.4 Newco #1 Shares.
(a) Contributor acknowledges that the Newco #1 Shares issued pursuant to
Section 2.2 of this Agreement have not been and will not be registered under (i)
the Securities Act, (ii) the securities laws of any state or (iii) any other
applicable securities laws;
B-7
<PAGE> 238
(b) Contributor is acquiring the Newco #1 Shares to be issued to
Contributor hereunder for investment for his own account and not with a view to
or for sale in connection with any distribution and resale thereof, with no
intention of distributing or reselling the same; and Contributor is not aware of
any particular occasion, event or circumstance upon the occurrence or happening
of which he intends to dispose of such shares;
(c) Contributor is an "accredited investor" as defined in Rule 501(a)
promulgated under the Securities Act; Contributor is aware that such Newco #1
Shares constitute "restricted," "letter" or "investment" securities and
Contributor by reason of his business or financial experience has the capacity
to protect his own interest in connection with the Transactions; and
(d) Contributor agrees not to sell, transfer, assign, pledge,
hypothecate or otherwise dispose of the Newco #1 Shares received in this
Transaction without registration under the Securities Act, and any other
applicable federal or state securities laws, or without an opinion of counsel
satisfactory to Newco #1 that the transaction by which such shares are proposed
to be disposed of is exempt from the Securities Act, and all other applicable
federal or state securities laws, and acknowledges that Newco #1 will place a
legend on the certificate(s) representing such shares substantially to such
effect concerning these restrictions.
SECTION 3.5 Brokerage Fees. Except for the fees payable to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, financial advisors to Contributor and the
Paisano Companies in connection with the Transactions, which fees will be paid
by Contributor, no Person is entitled to any brokerage or finder's fee or other
commission from Contributor or the Paisano Companies in respect of this
Agreement or the Transactions. Contributor acknowledges that the fees of
Imperial Capital, LLC, financial advisors to Newriders in connection with the
Transactions, will be paid at the Closing out of the proceeds of the Financing.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR AND THE PAISANO COMPANIES
Contributor and each Paisano Company (as to the Paisano Companies, only
prior to but not after the Closing), hereby jointly and severally represents and
warrants to Newriders and Newco #1, as of the date hereof and as of the Closing
Date, that:
SECTION 4.1 Authorization. Each Paisano Company has full corporate power
and authority to enter into this Agreement and to perform its respective
obligations hereunder and to consummate the Transactions. All necessary action,
corporate or otherwise, required to have been taken by or on behalf of each
Paisano Company by applicable law, each corporation's respective charter
documents or otherwise to authorize (i) the approval, execution and delivery on
behalf of each Paisano Company of this Agreement and (ii) the performance by
each Paisano Company of its obligations under this Agreement and the
consummation of the Transactions has been taken. This Agreement and all
agreements or instruments herein contemplated to be executed by the Paisano
Companies are the valid and binding agreements of such Paisano Companies,
enforceable against them in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights generally and to general principles of equity.
SECTION 4.2 Consents and Approvals. Neither the execution and delivery of
this Agreement by the Paisano Companies nor the consummation of the Transactions
by Contributor or the Paisano Companies will violate, result in a breach of any
of the terms or provisions of, constitute a default (or any event that, with the
giving of notice or the passage of time or both, would constitute a default)
under, result in the acceleration of any indebtedness under or result in any
right of termination of, increase any amounts payable under, or conflict with,
any agreement, indenture or other instrument to which any Paisano Company is a
party or by which any of their properties are bound, the charter or by-laws of
the Paisano Companies, or any judgment, decree, order or award of any court,
governmental body or arbitrator (domestic or foreign) applicable to the Paisano
Companies. All consents, approvals and authorizations of, and declarations,
filings and registrations with, and payments of all Taxes, fees, fines, and
penalties to, any governmental or regulatory authority (domestic or foreign) or
any other Person (either governmental or private) required in connection with
the execution and
B-8
<PAGE> 239
delivery by each Paisano Company of this Agreement or the consummation of the
Transactions by each Paisano Company have been obtained, made and satisfied.
Without limiting the generality of the foregoing, the Reorganization and this
Agreement have been duly approved by the Board of Directors and sole stockholder
of each Paisano Company in accordance with applicable law.
SECTION 4.3 Organization and Good Standing. Each Paisano Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and each Paisano Company is duly
qualified or authorized to do business in each jurisdiction in which it does or
has done business, or owns or has owned property, or where such qualification or
authorization is otherwise required, except for such failure to be so qualified
or licensed and in good standing that would not, individually or in the
aggregate, have a material adverse affect on the assets, liabilities (whether
absolute, accrued, contingent or otherwise), condition (financial or otherwise),
results of operations or business of such Paisano Company. Schedule 4.3 sets
forth a complete and correct list of all jurisdictions in which each Paisano
Company does business or is otherwise required to be qualified or authorized to
transact business or own property.
SECTION 4.4 Licenses and Permits. Each Paisano Company is, and at all
times has been, duly licensed, with all requisite permits and qualifications, as
required by applicable law for the purpose of conducting its business or owning
its properties or both, in each jurisdiction in which it does business or owns
property or in which such license, permit or qualification is otherwise
required. Each Paisano Company is in compliance with all such licenses, permits
and qualifications. Schedule 4.4 sets forth a list of all such licenses, permits
and qualifications, and the expiration dates thereof. There are no proceedings
pending or threatened, and Contributor and each Paisano Company know of no facts
that could be the basis of a proceeding to revoke or terminate any such
presently existing license, permit or qualification.
SECTION 4.5 Capital Stock. Each share of Capital Stock has been duly and
validly authorized and issued, is fully paid and nonassessable, and was issued
in full compliance with all applicable laws, rules, regulations and ordinances.
The Capital Stock constitutes all the issued and outstanding shares of all
classes of capital stock of each Paisano Company and there exist no (a)
outstanding options, warrants or rights to purchase or subscribe for any equity
securities or other ownership interests of any Paisano Company, (b) outstanding
options, warrants or rights to sell to any Paisano Company or any other Person
any equity securities or other ownership interests of any other business entity,
(c) obligations of any Paisano Company, whether absolute or contingent, to issue
any shares of equity securities or other ownership interests or to share or make
any payments based on its revenues, profits, cash flow or net income, or (d)
indebtedness or securities directly or indirectly convertible or exchangeable
into any equity securities of any Paisano Company. Schedule 4.5 sets forth the
authorized, issued and outstanding capital stock of all classes of each Paisano
Company.
SECTION 4.6 Subsidiaries. No Paisano Company has any Subsidiaries or any
other equity interest in any corporation, partnership, limited liability company
or other entity.
SECTION 4.7 Corporate Books. The corporate minute books of each Paisano
Company are complete, each of the minutes contained therein reflect with
reasonable accuracy the transactions that occurred at the meeting for which the
minutes were taken, the meetings of directors or stockholders referred to in the
minutes were duly called and held, and the signatures contained on all documents
in the minute books are the true signatures of the persons purporting to have
signed the same.
SECTION 4.8 Financial Statements.
(a) Schedule 4.8 contains the combined balance sheets of the Paisano
Companies at December 31, 1997, December 31, 1996, Paisano Publications at
December 31, 1995 and Easyriders Franchising at December 31, 1995 and 1994 (the
"Balance Sheets") and the combined statements of operations and retained
earnings and statements of cash flows of such Paisano Companies for the 12
months then ended and notes thereto (collectively, the "Financials"). The
Financials (i) have been prepared from the books and records of the Paisano
Companies in accordance with GAAP consistently applied with prior periods, (ii)
are complete and correct and fairly present the combined financial condition and
results of operations of the Paisano
B-9
<PAGE> 240
Companies as of the dates and for the periods indicated thereon, and (iii)
contain and reflect adequate reserves in accordance with GAAP for all
liabilities and obligations of the Paisano Companies of any nature, whether
absolute, contingent or otherwise. No financial statements of any Person other
than the Paisano Companies are required by GAAP to be included in the
Financials. The Financials have been reviewed by the independent accounting firm
of Deloitte & Touche LLP, whose unqualified reports thereon are part of Schedule
4.8.
(b) The books of account of the Paisano Companies have been maintained
in all material respects in accordance with sound business practices, and there
have been no transactions involving any Paisano Company that properly should
have been set forth therein in accordance with GAAP that have not been
accurately so set forth.
(c) The projected financial data of the Paisano Companies provided by
Contributor and the Paisano Companies to Imperial Capital, LLC for use in the
Confidential Information Memorandum is based upon good faith estimates and
assumptions believed by Contributor and the Paisano Companies to be reasonable.
Neither Contributor nor the Paisano Companies have any reason to believe that
they will not achieve the financial performance reflected in such projected
financial data, assuming the assumptions underlying such projected financial
data are followed.
SECTION 4.9 Inventory. All inventory of the Paisano Companies, whether or
not reflected in the Balance Sheets, consists of a quality and quantity usable
and salable in the ordinary course of business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value in the Balance Sheets or on the accounting records
of the Paisano Companies as of the Closing Date, as the case may be. All
inventories not written off have been priced at the lower of cost or market on a
first in, first out basis. The quantities of each item of inventory (whether raw
materials, work-in-process, or finished goods) are not excessive, but are
reasonable in the present circumstances of the Paisano Companies.
SECTION 4.10 Indebtedness.
(a) Except as disclosed on Schedule 4.10(a), no Paisano Company has any
debt other than ordinary course-of-business trade payables due and payable
within 60 days and the $7,000,000 note payable to a financial institution. The
note referred to in this Section 4.10(a) may be prepaid, in whole or in part,
without any penalties whatsoever.
(b) The Paisano Companies' payables to Contributor in the amount of
$3,136,000 have been contributed by Contributor to the capital of the Paisano
Companies.
(c) Neither Contributor nor any Affiliate of Contributor (other than a
Paisano Company) is indebted to any Paisano Company; no Paisano Company is
indebted to Contributor or any Affiliate of Contributor (other than a Paisano
Company).
SECTION 4.11 Absence of Undisclosed Liabilities. There are no liabilities
or obligations of any nature of any Paisano Company, whether known or unknown,
whether absolute, accrued, contingent or otherwise, and whether due or to become
due, not reflected on or reserved for in the Financials. Except as set forth in
Schedule 4.11, there is no fact or circumstance that is likely to result in a
reduction in revenues, increase in expenses or any other loss to the Paisano
Companies.
SECTION 4.12 Accounts Receivable. Schedule 4.12 is an accurate aging of
the accounts, notes and other receivables of each Paisano Company (the "Accounts
Receivable") at December 31, 1997. The Accounts Receivable and any Accounts
Receivable arising since December 31, 1997 are collectible in amounts not less
than the amounts thereof set forth in the combined balance sheet of the Paisano
Companies at December 31, 1997 or the Final Closing Balance Sheet, respectively.
B-10
<PAGE> 241
SECTION 4.13 Absence of Certain Changes. Except as disclosed on Schedule
4.13, since December 31, 1997, there has not occurred:
(a) Any adverse change in the assets, liabilities (whether absolute,
accrued, contingent or otherwise), condition (financial or otherwise), results
of operations, business or, to the knowledge of Contributor or any Paisano
Company, prospects of any Paisano Company;
(b) Any increase in indebtedness or lease obligations of any Paisano
Company over the level reflected on the combined balance sheet of the Paisano
Companies at December 31, 1997, any guarantee by any Paisano Company of any
obligation, or any mortgage, pledge or encumbrance on any of the properties or
assets of any Paisano Company or any cancellation or waiver of any claims or
rights with a value in excess of $50,000;
(c) Any amendment, modification, termination, breach or default of any
Material Contract, or of any agreement which was in existence at any time on or
after December 31, 1997 but is not in existence on the date hereof, and which
would have been categorized as a Material Contract were such agreement in
existence on the date hereof;
(d) Any entering into of any written or oral agreements, contracts,
commitments or transactions that extend beyond the first anniversary hereof or
have obligations thereunder in excess of $50,000;
(e) Any increase of more than $5,000 in the compensation (including,
without limitation, commissions) payable to, or any payment of a cash or other
bonus of more than $5,000 to, any officer, director or employee of, or
consultant to, or any Affiliate of, any of the Paisano Companies;
(f) Any transaction by any Paisano Company, whether or not covered by
the foregoing, not in the ordinary course of business, including, without
limitation, any purchase, lease, license or sale of any assets;
(g) Any alteration in the manner of keeping the books, accounts or
records of the Paisano Companies, or in the accounting practices therein
reflected;
(h) Any declaration or payment of any dividends or distributions by any
Paisano Company, any acquisition or redemption by any Paisano Company of any of
its equity securities or any loan by any Paisano Company to any of its
Affiliates or security holders, except for the distribution to Contributor of
the Excluded Assets and $7,000,000;
(i) Any change in any Paisano Company's authorized or issued capital
stock, any grant of any stock option or right to purchase shares of capital
stock of any Paisano Company, any issuance of any security convertible into such
capital stock, or any grant of any registration rights;
(j) Any amendment to the charter or by-laws of any Paisano Company;
(k) Any adoption of, or increase in the payments to or benefits under,
any profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of any
Paisano Company;
(l) Any publication of any magazine by any Paisano Company other than
the Publications;
(m) Any termination or cessation of employment of any officer or key
employee of any Paisano Company;
(n) Any mortgage, deed of trust, pledge, lien or encumbrance on any of
the Assets, whether now owned or hereafter acquired;
(o) Any loss or threatened loss of a distributor;
(p) Any damage or destruction to, or loss of, any assets or property
owned, leased or used by any Paisano Company (whether or not covered by
insurance); or
(q) Any agreement, whether written or oral, to do any of the things
described in the preceding subsections (a) - (p) of this Section 4.13.
B-11
<PAGE> 242
SECTION 4.14 Real Property. Schedule 4.14 sets forth a complete and
correct description of each parcel of real property (collectively, the "Real
Property") leased to any Paisano Company or otherwise used by any Paisano
Company, which description consists of a legal description for each such parcel
and an identification of each lease (a "Lease") of real property under which
such Paisano Company is either a lessee, sublessee, lessor or sublessor. No
Paisano Company owns any Real Property. Except as set forth in Schedule 4.14:
(a) Each Lease other than a Contributor Terminated Lease is a valid and
binding obligation of the Paisano Company party thereto, and all such Leases are
valid and binding obligations of each of the other parties thereto;
(b) Neither the Paisano Companies nor any other party to a Lease is in
default with respect to any material term or condition thereof, and no event has
occurred that, with the passage of time or the giving of notice or both, would
constitute a default thereunder or would cause the acceleration of any
obligation of any party thereto or the creation of a lien or encumbrance upon
any asset of any Paisano Company;
(c) To the best knowledge of Contributor and the Paisano Companies, all
of the buildings, fixtures and other improvements located on the Real Property
are in good operating condition and repair, and the operation thereof as
presently conducted does not violate any applicable code, zoning ordinance,
environmental law or regulation or other applicable law or regulation in any
material manner; and
(d) Each Paisano Company holds all necessary permits and licenses
required by applicable law relating to the operation and use of the Real
Property.
SECTION 4.15 Assets. Each Paisano Company has, and at the Closing will
have, good and marketable title to, or, to the extent such Paisano Company's
interest is limited to a leasehold, valid leasehold interests in, all the Assets
(as hereinafter defined), free and clear of all liens and indebtedness. "Assets"
includes all of the assets owned by any Paisano Company or necessary for or used
or useful in the conduct of its business in the manner in which it is presently
or is contemplated as being or has been conducted by such Paisano Company,
including the assets shown in the consolidated balance sheet of the Paisano
Companies at December 31, 1997 and the rights under the Material Contracts,
except for the assets listed in Schedule 4.15 (the "Excluded Assets").
SECTION 4.16 Machinery, Equipment and Other Personal Property, etc. Each
Paisano Company owns or leases all of the machinery, equipment, vehicles,
furniture, fixtures, leasehold improvements, repair parts, tools and other
property (collectively, the "Personal Property") used by or relating to such
Paisano Company. All such Personal Property is in good operating condition and
sufficient to carry on the business of the Paisano Companies in the normal
course as it is presently conducted and is free from defects, whether patent or
latent, that would interfere with the operation of the Paisano Companies in the
ordinary course of business. Except as set forth in Schedule 4.16, it is not
necessary for any Paisano Company to acquire or obtain the use of any additional
personal property to carry on its business as presently and foreseeably to be
conducted.
SECTION 4.17 Intangible Personal Property.
(a) Schedule 4.17(a) sets forth (i) a complete and correct list of each
Copyright, Copyright application, Mark (including, where applicable, the
registration number and date for each Mark for which a registration has been
issued, or the application number and date for each Mark for which an
application for registration is pending in, the United States Patent and
Trademark Office or other similar office in any foreign jurisdiction) and all
other intellectual property or usage rights, including all intellectual property
relating to the Publications owned by any Paisano Company (collectively, the
"Intangible Personal Property") and the name of the Paisano Company which owns
it, and (ii) a complete and correct list of all material licenses or similar
agreements or arrangements ("Licenses") to which each Paisano Company is a party
either as licensee or licensor for each such item of Intangible Personal
Property. The Paisano Companies have all right, title and interest in and to the
Intangible Personal Property in the countries listed in Schedule 4.17(a) (the
"Protected Countries") insofar as such Intangible Personal Property is used in
the operation of the business of the Paisano Companies and the Intangible
Personal Property consists of all intellectual property which is used or useful
in the operation of the business of the Paisano Companies.
B-12
<PAGE> 243
(b) Except as set forth on Schedule 4.17(b):
(i) Since January 1, 1993, there have been no actions, judicial or
arbitration proceedings or other formal proceedings commenced or pending
involving any Paisano Company concerning any item of Intangible Personal
Property, and no such action or proceeding is threatened and no claim or other
demand has been made by any Person relating to any item of Intangible Personal
Property;
(ii) None of the Paisano Companies is subject to any continuing
decree of any court, governmental body or arbitration panel concerning any item
of Intangible Personal Property;
(iii) The Paisano Companies have the right and authority to use each
item of Intangible Personal Property in the Protected Countries in connection
with the conduct of its businesses in the manner presently conducted and to
convey such right and authority, and such use does not conflict with, infringe
upon or violate any intellectual property or usage rights of any other person or
entity;
(iv) The conduct by the Paisano Companies of their business does not
conflict in any material way with the valid intellectual property or usage
rights of others;
(v) Neither Contributor nor any Paisano Company pays any royalty to
anyone for the use of any of the Marks, and neither Contributor nor any Paisano
Company pays any royalty outside of the ordinary course of business to anyone
for the use of any other item of Intangible Personal Property;
(vi) Each Paisano Company owns all of the Marks necessary to the
conduct of their respective businesses, and each Paisano Company owns or
licenses all other Intangible Personal Property necessary to the conduct of
their respective businesses;
(vii) As of the Closing, Newriders and Newco #1 shall have the same
rights in and to the Intangible Personal Property used in connection with the
business of the Paisano Companies as of the date hereof and as of the Closing
Date as the Paisano Companies have on the date of this Agreement and on the
Closing Date and shall be able to use and exploit the Intangible Personal
Property to the full extent provided by applicable law without any material
restriction on such use or exploitation; and
(viii) None of the Intangible Personal Property used in the conduct
of the business, or the exploitation thereof by any Paisano Company, or the
transfer thereof pursuant to this Agreement, libels, defames, infringes,
violates the rights of privacy or publicity, or violates any trademark, trade
dress or service mark, common law or other similar right of any Person. No
Paisano Company has received any notice or demand letter relating to any claim
thereof.
(c) (i) Except as set forth in Schedule 4.17(c), (A) all copyrights (the
"Copyrights") that are owned or controlled by a Paisano Company are valid,
existing, unexpired and enforceable in the United States and all countries party
to the Universal Copyright Convention or the Berne Convention; and (B) none of
the Copyrights is in the public domain in the United States or any country party
to the Universal Copyright Convention or the Berne Convention. No Paisano
Company has received notice to the effect that the validity of any Copyright is
contested.
(ii) A registration for each Copyright set forth in Schedule 4.17(c)
has been properly issued by the United States Copyright Office in the applicable
Paisano Company's name (and are owned in each case by such Paisano Company). The
application to register each Copyright listed in Schedule 4.17(c) was duly and
properly filed in the United States Copyright Office, and required materials
have been deposited with the Library of Congress and the United States Copyright
Office. Schedule 4.17(c) sets forth the registered title, registration number
and registration date for each such registered Copyright.
(iii) No other Person uses, has the right to use or claims the right
to use the Copyrights.
(iv) Each Paisano Company has taken all necessary steps to secure,
protect and maintain the Copyrights in the United States and has disclosed in a
Schedule herein all infringements or potential infringements, known to
Contributor or the Paisano Companies.
B-13
<PAGE> 244
(d) (i) Each Mark that is necessary or useful to the conduct of the
business is valid, subsisting, unexpired, enforceable and has not been
abandoned. Each application for the federal registration in the United States of
a Mark (including, without limitation, any renewals thereof) has been duly and
properly filed, and each registration has been properly issued.
(ii) There are no marks held by Persons other than the Paisano
Companies that conflict with or infringe on the Marks owned or used by any of
the Paisano Companies in the conduct of their business, third party claims
against such Marks, or potential infringements against such Marks.
(iii) No other Person uses, has the right to use or claims the right
to use the Marks or any combination or derivation thereof.
(iv) Each Paisano Company has taken all necessary steps to secure,
protect and maintain the Marks in the United States and has disclosed in a
Schedule herein all infringements or potential infringements, known to
Contributor or the Paisano Companies.
SECTION 4.18 Licensing Interests; Easyriders Cafe.
(a) The Paisano Companies own all of the licensing interests relating to
the magazine and calendar titles (the "Publications") set forth on Schedule 4.18
hereto. The Paisano Companies own all of the publishing interests currently
owned or controlled by Contributor; and
(b) Contributor and the Paisano Companies own all interests in and to
the Easyriders Cafe concept.
SECTION 4.19 Labor and Employment Agreements.
(a) Schedule 4.19 sets forth a complete and correct list of the
following:
(i) Each collective bargaining agreement and other labor or
employment agreement to which any Paisano Company is a party or by which it is
bound;
(ii) Each agreement relating to the employment of any employee or the
rendering of services by any independent contractor which, in the case of any
independent contractor, provides for payments to the independent contractor of
$25,000 or more per annum or is outside of the ordinary course of business, and
any severance agreements with respect to any employee or independent contractor
or leased employee to which any Paisano Company is a party, by which it is bound
or under which it could otherwise be liable for the payment of any amount; and
(iii) The name of each employee or agent or independent contractor of
or consultant to each Paisano Company who since December 31, 1996 was or is
being paid $25,000 or more per year or monthly compensation at a rate equal to
or greater than $2,500.
As used in this Section 4.19, the word "agreement" includes both oral
and written contracts, understandings, arrangements and other agreements.
(b) Each Paisano Company has complied in all material respects with all
applicable laws, rules and regulations (domestic and foreign) relating to labor
relations and the employment of labor, including, without limitation, those
related to wages, hours, benefits, non-discrimination, immigration, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate authorities, or is holding for payment not yet due to such
authorities, all amounts required to be withheld from such employees and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing. The Paisano Companies do not and have not
"leased" any employees except in full compliance with applicable law.
(c) No unfair labor practice complaint is pending against any Paisano
Company before the National Labor Relations Board or any federal, state or local
agency (domestic or foreign), and no labor strike, slowdown, picketing, boycott,
work stoppage or employee grievance or other labor trouble affecting any Paisano
Company is pending or threatened. There is no lockout of any employees by
Contributor and no such action is contemplated by Contributor.
B-14
<PAGE> 245
(d) No organization effort, no sex discrimination, racial
discrimination, age discrimination or other employment-related allegation,
claim, suit or proceeding, has been made or is pending with respect to the
employees of any Paisano Company and no such effort, allegation, claim, suit or
proceeding has been made, raised or brought within the three-year period prior
to the date of this Agreement.
(e) No arbitration proceeding arising out of or under any collective
bargaining agreement is pending and no basis for any such proceeding exists.
(f) No Person who performs services for any Paisano Company who has not
been classified or treated as an employee (whether for purposes of ERISA, the
Code or otherwise) should be treated as an employee for any such purpose.
(g) To the best knowledge of Contributor and the Paisano Companies, no
employee of any Paisano Company is a party to, or otherwise bound by, any
agreement or arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee and any other Person that in
any way adversely affects or will affect the performance of his duties as an
employee of any Paisano Company or Newco #1. To the best of Contributor's and
the Paisano Companies' knowledge, no officer or other key employee of any
Paisano Company intends to terminate his or her employment.
(h) All reasonably anticipated obligations of the Paisano Companies,
whether arising by operation of law, contract, past custom or otherwise, for
unemployment compensation benefits, workers compensation benefits, disability
benefits, pension or profit sharing benefits, advances, salaries, bonuses,
vacation and holiday pay, sick leave and other forms of compensation payable to
the employees, independent contractors or other agents of the Paisano Companies
in respect of the services rendered by any of them on or prior to the date of
the Financials have been paid or adequate accruals therefor have been made in
the books and records of the Paisano Companies and in the Financials (or in the
case of services rendered after the date of the Financials, will be paid or
adequate accruals therefor will be made in the books and records of the Paisano
Companies and in the Final Closing Balance Sheet). All such obligations in
respect of services rendered on or prior to the date hereof have been paid as of
the date hereof or adequate accruals therefor have been made. All accrued
obligations of each Paisano Company applicable to its employees, whether arising
by operation of law, contract, past custom or otherwise, for payments to trusts
or other funds or to any governmental agency, with respect to unemployment
compensation benefits, social security benefits or any other benefits for
employees, with respect to employment of said employees through the date of the
Financials have been paid or adequate accruals therefor have been made on the
books and records of the Paisano Companies and in the Financials (or in the case
of accrued obligations arising after the date of the Financials, will be paid or
adequate accruals therefor will be made in the books and records of the Paisano
Companies and in the Final Closing Balance Sheet). All such obligations with
respect to employment of employees through the date hereof have been paid as of
the date hereof or adequate accruals therefor shall have been made.
SECTION 4.20 Compliance with ERISA.
(a) Except as set forth or Schedule 4.20(a), no Paisano Company
maintains or contributes to or has any obligation with respect to, and none of
the employees of any of the Paisano Companies is covered by, any bonus, deferred
compensation, severance pay, pension, profit-sharing, retirement, insurance,
stock purchase, stock option, or other fringe benefit plan, arrangement or
practice, written or otherwise, or any other "employee benefit plan," as defined
in Section 3(3) of ERISA, whether formal or informal (collectively, the "Benefit
Plans"). None of the Benefit Plans is (i) a Multiemployer Plan, (ii) a "multiple
employer plan," as defined in ERISA or the Code, or (iii) a funded welfare
benefit plan, as defined in Section 419 of the Code. No Paisano Company has ever
contributed to any Plan subject to Section 412 of the Code, Title I, Subtitle B,
Part 3 of ERISA or Title IV of ERISA other than the Paisano Publications, Inc.
Defined Benefit Pension Plan. No Paisano Company has any agreement or commitment
to create any additional Benefit Plan or to modify or change any existing
Benefit Plan. No Paisano Company has any other ERISA Affiliates.
(b) With respect to each Benefit Plan, the Paisano Companies have
heretofore delivered or caused to be delivered to Newriders true, correct and
complete copies of (i) all documents which comprise the most current version of
each of such Benefit Plans, including any related trust agreements, insurance
contracts, or
B-15
<PAGE> 246
other funding or investment agreements and any amendments thereto, and (ii) with
respect to each Benefit Plan that is a Plan, (A) the three most recent Annual
Reports (Form 5500 Series) and accompanying schedules for each of the Plans for
which such a report is required, (B) the most current summary plan description
(and any summary of material modifications), (C) the three most recent certified
financial statements and actuarial valuations for each of the Plans for which
such a statement or actuarial valuation is required or was prepared, (D) the
Forms PBGC-1 filed in each of the three most recent plan years for the Pension
Plan, and (E) for each Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code, all the Internal Revenue Service determination
letters issued with respect to such Plan. Except as set forth on Schedule
4.20(b), since the date of the documents delivered, there has not been any
material change in the assets or liabilities of any of the Benefit Plans or any
change in their terms and operations which could reasonably be expected to
affect or alter the tax status or materially affect the cost of maintaining such
Benefit Plan, and none of the Benefit Plans has been or will be amended prior to
the Closing Date. Each of the Benefit Plans can be amended, modified or
terminated by a Paisano Company within a period of thirty (30) days, without
payment of any additional compensation or amount or the additional vesting or
acceleration of any such benefits, except to the extent that such vesting is
required under the Code upon the complete or partial termination of any Plan
intended to be qualified within the meaning of Section 401(a) of the Code.
(c) Each Paisano Company has performed and complied in all respects with
all of its obligations under and with respect to each of the Benefit Plans and
each of the Benefit Plans has, at all times, in form, operation and
administration complied in all material respects with its terms, and, where
applicable, the requirements of the Code, ERISA and all other applicable laws
and regulations. Each Plan which is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified and nothing has occurred which reasonably
could be expected to adversely affect such qualified status.
(d) There are no unpaid contributions due prior to the date hereof with
respect to any Benefit Plan that are required to have been made under its terms
and provisions, any related insurance contract or any applicable law or
regulation.
(e) (i) With respect to the Pension Plan, there has occurred no failure
to meet the minimum funding standards of Section 412 of the Code (whether or not
waived in accordance with Section 412(d) of the Code) or failure to make by its
due date a required installment under Section 412(m) of the Code, and (ii) (A)
no Paisano Company has withdrawn from the Pension Plan during a plan year in
which it was a "substantial employer," as defined in Section 4001(a)(2) of
ERISA, where such withdrawal could result in liability of such substantial
employer pursuant to Section 4062(e) or 4063 of ERISA, (B) no Paisano Company
has filed a notice of intent to terminate the Pension Plan or adopted any
amendment to treat any such Plan as terminated, (C) the PBGC has not instituted
proceedings to terminate the Pension Plan, (D) no other event or condition has
occurred which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, the Pension Plan,
(E) no accumulated funding deficiency, whether or not waived, exists with
respect to the Pension Plan, and no condition has occurred or exists which by
the passage of time would be expected to result in an accumulated funding
deficiency as of the last day of the current plan year of the Pension Plan, (F)
all required premium payments to the PBGC have been paid when due, (G) no
reportable event, as described in Section 4043 of ERISA (whether or not waived),
has occurred with respect to the Pension Plan, (H) no excise taxes are payable
under the Code, (I) no amendment with respect to which security is required
under Section 307 of ERISA or Section 401(a)(29) of the Code has been made or is
reasonably expected to be made, and (J) there has been no event which could
subject any of the Paisano Companies to liability under Section 4064 or 4069 of
ERISA.
(f) With respect to the Pension Plan, (i) the funding method used in
connection with the Pension Plan is acceptable under ERISA and the actuarial
assumptions used in connection with funding such Plan meet the requirements of
Section 302 of ERISA and (ii) the actuarial present value of vested and
nonvested "benefit liabilities," as defined in Section 4001(a)(16) of ERISA,
calculated on a termination basis and taking into account all contingent and
subsidized benefits (the "Benefit Liabilities") of the Pension Plan, determined
as of the date hereof for such Plan, did not, and as of the Closing Date will
not, exceed the fair market value of the assets of such Plan as of such date.
B-16
<PAGE> 247
(g) All group health plans covering employees of any of the Paisano
Companies have been operated in compliance with the requirements of Section
4980B of the Code (and any predecessor provisions) and Part 6 of Title I of
ERISA ("COBRA").
(h) No Paisano Company has any obligation to provide any deferred
compensation, pension or non-pension benefits to retired or other former
employees, except for health benefits as specifically required by COBRA or
pension benefits payable from a Plan intended to be "qualified" within the
meaning of Section 401(a) of the Code.
(i) No Paisano Company, nor any other "disqualified person" or "party in
interest," as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction," as defined in Section
4975 of the Code or Section 406 of ERISA, with respect to any Benefit Plan nor
have there been any fiduciary violations under ERISA which could subject any
Paisano Company (or any officer, director or employee thereof) to any penalty or
tax under Section 502(i) of ERISA or Sections 4971 and 4975 of the Code.
(j) Except as set forth on Schedule 4.20(j), with respect to any Benefit
Plan: (i) no filing, application or other matter is pending with the Internal
Revenue Service, the PBGC, the United States Department of Labor or any other
governmental body, (ii) there is no action, suit or claim pending (nor, to the
knowledge of any of the Paisano Companies, any basis for such a claim), other
than routine claims for benefits, and (iii) there are no outstanding liabilities
for taxes, penalties or fees.
(k) No Paisano Company has incurred any liability or taken any action,
and no Paisano Company has any knowledge of any action or event that could cause
any one of them to incur any liability, (i) under Section 412 of the Code or
Title IV of ERISA with respect to any "single-employer plan" (as defined in
Section 4001(a)(15) of ERISA), (ii) on account of a partial or complete
withdrawal (as defined in Sections 4203 and 4205 of ERISA, respectively) with
respect to any Multiemployer Plan, or (iii) on account of unpaid contributions
to any Multiemployer Plan.
(l) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the contemplated transactions will: (i) entitle
any current or former employee of a Company to severance pay, unemployment
compensation or any similar payment, (ii) accelerate the time of payment or
vesting or increase the amount of any compensation due from any Paisano Company
to any such employee or former employee, or (iii) directly or indirectly result
in any payment made or to be made to or on behalf of any person to constitute a
"parachute payment" within the meaning of Section 280G of the Code.
SECTION 4.21 Material Contracts and Relationships.
(a) Schedule 4.21(a) sets forth a complete and correct list of the
following:
(i) Each agreement (or group of agreements) between the Paisano
Companies and any customer, distributor or supplier thereof (or any Affiliate of
such customer, distributor or supplier) which has not been fully satisfied and
which involves the payment of more than $25,000;
(ii) All agreements now in effect that relate to the borrowing or
lending by any Paisano Company of any money or that create or continue any
material claim, lien, charge or encumbrance against, or right of any third party
with respect to, any asset of any Paisano Company;
(iii) All agreements now in effect by which any Paisano Company
leases any real property, has the right to lease any real property or leases
capital equipment and all other leases involving any Paisano Company as lessee
or lessor;
(iv) All agreements now in effect to which any Paisano Company, on
the one hand, and Contributor or any of its Affiliates (other than a Paisano
Company), on the other hand, are parties or by which they are bound;
(v) All contracts or commitments now in effect relating to the
employment of any Person or any commission or finder's fee arrangements with
others;
B-17
<PAGE> 248
(vi) All franchise agreements now in effect to which any Paisano
Company is a party;
(vii) All license agreements now in effect to which any Paisano
Company is a party, whether as licensor or licensee, which pertain to (i) any of
the Marks, or (ii) any other Intangible Personal Property if the amount payable
by the licensee thereunder is or could be greater than $25,000 per year or if
such agreement is outside of the ordinary course of business of the applicable
Paisano Company;
(viii) All agreements now in effect, whether written or oral, between
Contributor or any Paisano Company, on the one hand, and any stockholder of
Newriders, on the other hand;
(ix) All other agreements now in effect to which any Paisano Company
is a party or by which it is bound and that involve $25,000 or more or that
extend for a period of one year or more;
(x) All other agreements now in effect to which any Paisano Company
is a party or by which it is bound and that are material to the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of any
Paisano Company; and
(xi) All agreements now in effect to which any Paisano Company is a
party and which are not in the ordinary course of business.
As used in this Section 4.21 the word "agreement" includes both oral and written
contracts, leases, understandings, arrangements and all other agreements. The
term "Material Contracts" means the agreements of any Paisano Company required
to be disclosed on Schedule 4.21(a), whether or not disclosed, including
agreements specifically identified in other Schedules.
(b) All of the Material Contracts are in full force and effect, are
valid and binding and are enforceable in accordance with their terms in favor of
each applicable Paisano Company. There are no material liabilities of any party
to any Material Contract arising from any breach or default of any provision
thereof and no event has occurred that, with the passage of time or the giving
of notice or both, would constitute a breach or default by any party thereto.
(c) Each Paisano Company has fulfilled all material obligations required
pursuant to each Material Contract to have been performed by such Paisano
Company prior to the date hereof, and each Paisano Company will be able to
fulfill, when due, all of its respective obligations under each of the Material
Contracts that remain to be performed after the date hereof.
(d) Schedule 4.21(d) sets forth a complete and correct list of each (i)
distributor with whom the Paisano Companies did an aggregate of $25,000 or more
of business during the last fiscal year, (ii) supplier (or related group of
suppliers) with whom the Paisano Companies did an aggregate of $25,000 or more
of business during the last fiscal year, and (iii) agent (or related group of
agents) or representative (or related group of representatives) who was paid an
aggregate of $25,000 or more by the Paisano Companies during the last fiscal
year, respectively, which lists itemize the actual dollar amounts.
(e) The Paisano Companies have maintained and continue to maintain good
relations with their distributors, suppliers and agents.
SECTION 4.22 Absence of Certain Business Practices. No Paisano Company or
any of its Affiliates or Representatives, including, but not limited to,
Contributor, has, directly or indirectly, given or agreed to give any gift or
similar benefit to any customer, supplier, competitor or governmental employee
or official (domestic or foreign) (i) that would subject any Paisano Company to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding or (ii) that, if not given in the past, would have had a material
adverse effect on the assets, liabilities (whether absolute, accrued, contingent
or otherwise), condition (financial or otherwise), results of operations or
business of any Paisano Company.
SECTION 4.23 Transactions with Affiliates. Except as set forth on Schedule
4.23, there have been no material transactions, including purchases or sales of
assets or entities, by or between any Paisano Company and Contributor or any of
his Affiliates (other than any Paisano Company) since December 31, 1995 and
there are no agreements or understandings now in effect between any Paisano
Company and Contributor or any of his Affiliates (other than any Paisano
Company). Schedule 4.23 also (i) states, as of the date hereof,
B-18
<PAGE> 249
the amounts due from each Paisano Company to Contributor or any of his
Affiliates (other than any Paisano Company) and the amounts due from Contributor
or his Affiliates (other than any Paisano Company) to each Paisano Company, (ii)
describes the transactions out of which such amounts due arose and (iii)
describes any interest of Contributor or any of his Affiliates (other than any
Paisano Company) in any supplier or customer of, or any other entity that has
had business dealings with, any Paisano Company since December 31, 1994. After
the Closing, there will be no obligations or other liabilities between any
Paisano Company, on the one hand, and Contributor or any of its Affiliates
(other than any Paisano Company), on the other hand, other than pursuant to this
Agreement and the Transactions contemplated hereby.
SECTION 4.24 Compliance with Laws. Except as set forth on Schedule 4.24,
the operation, conduct and ownership of the property or business of the Paisano
Companies are being, and at all times have been, conducted, in all material
respects, in full compliance with all federal, state, local and other (domestic
and foreign) laws, rules, regulations and ordinances (including without
limitation, those relating to employment discrimination, occupational safety,
environmental compliance, conservation or corrupt practices) and all judgments
and orders of any court, arbitrator or governmental authority applicable to it.
Neither the Paisano Companies nor Contributor is aware of any proposed
ordinance, order, judgment, decree, governmental taking, condemnation or other
proceeding that would be applicable to the business, operations or properties of
any Paisano Company and that could have a material adverse effect on the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of any
Paisano Company.
SECTION 4.25 Taxes. Except as set forth on Schedule 4.25:
(a) Each Paisano Company has timely filed all Tax returns and reports
required to have been filed by it for all taxable periods ending on or prior to
the date hereof, and each Paisano Company or Contributor has paid all Taxes due
to any Taxing Authority with respect to all taxable periods ending on or prior
to the date hereof, or otherwise attributable to all periods prior to the date
hereof. The Tax returns and reports filed are true and correct in all material
respects. None of the Paisano Companies has requested any extensions of time
within which to file returns and reports in respect of any Taxes;
(b) None of such returns contain, or will contain, a disclosure
statement under Section 6662 of the Code (or any predecessor statute) or any
similar provision of state, local or foreign law;
(c) Neither Contributor nor any Paisano Company has received notice that
the IRS or any other Taxing Authority has asserted against a Paisano Company or
Contributor with respect to the business or operations of any Paisano Company
any deficiency or claim for additional Taxes in connection therewith;
(d) All Tax deficiencies asserted or assessed against any Paisano
Company have been paid or finally settled;
(e) All Tax obligations of the Paisano Companies or Contributor with
respect to the business or operations of any Paisano Company have been paid or
reported when due and any unpaid Taxes relating to periods for which Tax returns
have not yet been filed have been fully booked and properly accrued on the books
of each Paisano Company or Contributor;
(f) There is not pending or threatened any action, audit, proceeding, or
investigation with respect to (i) the assessment or collection of Taxes or (ii)
a claim for refund made by any Paisano Company or Contributor with respect to
Taxes previously paid with respect to the business or operations of a Paisano
Company and (iii) with respect to any such actions, audits, proceedings or
investigation (whether or not identified in Schedule 4.25), no Paisano Company
will have liability in respect of or resulting therefrom;
(g) All amounts that are required to be collected or withheld by the
Paisano Companies, or with respect to Taxes of the Paisano Companies, have been
duly collected or withheld; all such amounts that are required to be remitted to
any Taxing Authority have been duly remitted;
(h) Neither the IRS nor any state, foreign or local Taxing Authority has
examined any income tax return of any Paisano Company or Contributor with
respect to the business or operations of any Paisano Company;
B-19
<PAGE> 250
(i) None of the Paisano Companies have waived any statute of limitations
with respect to the assessment of any Tax;
(j) No Paisano Company has taken any action not in accordance with past
practice that would have the effect of deferring any Tax liability of any
Paisano Company or Contributor from any taxable period ending on or before the
date hereof to any taxable period ending after such date;
(k) No consent has been filed under Section 341(f) of the Code with
respect to any Paisano Company;
(l) There are no liens for Taxes due and payable upon any assets of any
Paisano Company;
(m) None of the Paisano Companies has participated in, or cooperated
with, an international boycott within the meaning of Section 999 of the Code;
(n) None of the Paisano Companies is required to include in income any
adjustment pursuant to Section 481(a) of the Code (or similar provisions of
other law or regulations) by reason of a change in accounting method nor is the
IRS (or other Taxing Authority) proposing, or considering, any such change in
accounting method;
(o) None of the Paisano Companies is a party to any agreement, contract,
arrangement or plan (or group of agreements, contracts, arrangements or plans)
that could result in the payment of any "excess parachute payment" within the
meaning of Section 280G of the Code or, after the culmination of all
Transactions, could create a loss of deduction under Section 162(m) of the Code;
(p) None of the assets of the Paisano Companies is property that is
required to be treated as owned by any other person pursuant to the "safe harbor
lease" provisions of former Section 168(f)(8) of the Code as in effect
immediately prior to the enactment of the Tax Reform Act of 1986 and none of the
assets of the Paisano Companies is "tax exempt use property" within the meaning
of Section 168(h) of the Code;
(q) There are no currently binding elections with respect to Taxes
affecting the Paisano Companies for any period beginning on or after the Closing
Date;
(r) The pre-Closing Tax liabilities of the Paisano Companies (whether
imposed before or after Closing and whether imposed upon filing of a Tax return
or as a result of an audit or examination) which are unpaid as of the close of
business on the Closing Date will not exceed the reserves for Tax liabilities as
set forth in the account for accrued Taxes payable or similar account included
in the Balance Sheet of the Paisano Companies as of December 31, 1997 or in the
Final Closing Balance Sheet. Attached hereto as Schedule 4.25(r) is a schedule
of the accruals for taxes included in the Financials of the Paisano Companies as
of December 31, 1997; and
(s) (i) As used herein the term "S corporation" means, with respect to
any specified period, a corporation that has in effect throughout such period a
valid election under Section 1362(a) of the Code to be an S corporation which
is, and whose shareholders are, subject to the tax treatment provided for under
the provisions of Section 1361 et seq. of the Code.
(ii) The taxable year of each Paisano Company for federal and state
income tax purposes is the calendar year. Each Paisano Company has made a valid
election to be taxed as an S corporation on or before the dates specified in
Schedule 4.25(s), and for all periods of each Paisano Company commencing on and
after such dates. For federal Tax purposes each Paisano Company was and is an S
corporation. For all periods with respect to which each Paisano Company has been
an S corporation, for federal Tax purposes such Company's Tax returns have been
prepared and filed on a basis consistent with its status as an S corporation.
(iii) Schedule 4.25(s) contains a true and complete list of each
state in which each Paisano Company is treated, for such state's income and/or
franchise tax purposes, in a manner comparable to the federal Tax treatment of
an S corporation and each state where each Paisano Company is not so treated.
For purposes of this representation, the state Tax treatment shall be deemed
comparable to that of an S corporation if the state's income or franchise Tax on
the corporation's net income is eliminated or not material and such net income
(net of state corporate taxes, if any) is treated as taxable to Contributor
whether
B-20
<PAGE> 251
or not distributed thereto. Schedule 4.25(s) also specifies, for each such state
listed therein, the period during which each Paisano Company has been subject to
such comparable S corporation state Tax treatment.
SECTION 4.26 Insurance. Schedule 4.26 sets forth a complete and correct
list of all insurance policies (including self-insurance arrangements) and of
all claims made by each Paisano Company on any liability or other insurance
policies during the past two years (other than worker's compensation claims).
Each Paisano Company has reasonably adequate liability and other insurance
policies insuring it against the risks of loss arising out of or related to its
assets and business. Without limitation, as to the tangible real and personal
property of the Paisano Companies, such insurance (including self-insurance
arrangements) is adequate to cover the full replacement cost, less deductible
amounts, of such tangible real and personal property. Schedule 4.26 is a
complete and correct list of all insurance currently in place and accurately
sets forth the coverages, deductible amounts, carriers and expiration dates
thereof. Schedule 4.26 is a complete and correct list of all insurance with
respect to which the policy period has expired, but for which certain of the
coverage years are still subject to audit or retrospective adjustment by the
carrier, and accurately sets forth such coverage years and the coverages,
deductible amounts, carriers and expiration dates thereof. No Paisano Company
has been informed of any outstanding requirements or recommendations by any
insurance company that issued any policy of insurance to any Paisano Company or
by any board of or by any governmental authority exercising similar functions
that require or recommend any changes in the conduct of the business of any
Paisano Company or any repairs or other work to be done on or with respect to
any Paisano Company's assets. Except as set forth on Schedule 4.26, no notice or
other communication has been received by any Paisano Company from any insurance
company within the two years preceding the date hereof canceling or materially
amending or materially increasing the annual or other premiums payable under any
of its insurance policies, and no such cancellation, amendment or increase of
premiums is threatened.
SECTION 4.27 No Powers of Attorney or Suretyships. Except as set forth on
Schedule 4.27, (a) no Paisano Company has granted any general or special powers
of attorney (other than to statutorily required agents for service of process)
and (b) no Paisano Company has any obligation or liability (whether actual,
contingent or otherwise) as guarantor, surety, co-signer, endorser, co-maker,
indemnitor, obligor on an asset or income maintenance agreement or otherwise in
respect of the obligation of any Person.
SECTION 4.28 Litigation. Schedule 4.28 sets forth a complete and correct
list of all legal, administrative, arbitration or other proceedings, or
governmental investigations, to which any Paisano Company was a party or was
otherwise affected (or by which any of its properties were affected), or was
otherwise affected during the past five years, together with a description of
the nature and status thereof in reasonable detail. Except as set forth on
Schedule 4.28, (i) there is no legal, administrative, arbitration or other
proceeding, or any governmental investigation, pending or threatened against or
otherwise affecting any Paisano Company, or any of its or their assets, that, if
determined against such Paisano Company, would have a material adverse effect on
the assets, liabilities (whether absolute, accrued, contingent or otherwise),
condition (financial or otherwise), results of operations or business of such
Paisano Company; (ii) no claim not already fully discharged that involves or may
involve $25,000 or more has been made against any Paisano Company; and (iii) all
potential losses and liabilities of any Paisano Company that may result from the
matters disclosed on Schedule 4.28 are fully covered by insurance policies of
the Paisano Companies, which policies are or were in full force and effect
during their respective coverage periods (and to the extent such insurance
policies are no longer in effect, the Paisano Companies have the present right
to seek recovery thereunder), except for any applicable deductible amount that
does not exceed $25,000, or any applicable self-insured retention that does not
exceed $100,000, for any one claim or action. Each Paisano Company has given in
a timely manner to its insurers all notices required to be given under its
insurance policies with respect to all of the claims and actions disclosed on
Schedule 4.28, and no insurer has denied coverage of any of such claims or
actions or rejected any of the claims with respect thereto except as set forth
in Schedule 4.28.
SECTION 4.29 Banking Facilities. Schedule 4.29 sets forth a complete and
correct list of:
(a) Each bank, savings and loan or similar financial institution in
which any Paisano Company has an account or safety deposit box and the numbers
of such accounts or safety deposit boxes maintained thereat; and
B-21
<PAGE> 252
(b) The names of all persons authorized to draw on each such account or
to have access to any such safety deposit box, together with a description of
the authority (and conditions thereto, if any) of each person with respect
thereto.
SECTION 4.30 Environmental Liabilities.
(a) Except as set forth on Schedule 4.30 hereto, no Paisano Company has
used, stored, treated, transported, manufactured, refined, handled, produced or
disposed of any Hazardous Materials on, under, at, from, or in any way
affecting, any of their properties or assets, or otherwise, in any manner which
violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials and, to the best knowledge of Contributor and the Paisano
Companies, no prior owner of such property or asset or any tenant, subtenant,
prior tenant or prior subtenant thereof has used Hazardous Materials on or
affecting such property or asset, or otherwise in any manner which violated any
Environmental Law governing the use, storage, treatment, transportation,
manufacture, refinement, handling, production or disposal of Hazardous
Materials.
(b) (i) No Paisano Company has any obligations or liabilities, known or
unknown, matured or not matured, absolute or contingent, assessed or unassessed,
where such would reasonably be expected to have a materially adverse effect on
the business or condition (financial or otherwise) of any Paisano Company, and
(ii) no claims have been made against any Paisano Company during the past five
years and no presently outstanding citations or notices have been issued against
any Paisano Company, where such could reasonably be expected to have a
materially adverse effect on the business or condition (financial or otherwise)
of any Paisano Company, which in either case have been or are imposed by reason
of or based upon any provision of any Environmental Law, including, without
limitation, any such obligations or liabilities relating to or arising out of or
attributable, in whole or in part, to the manufacture, processing, distribution,
use, treatment, storage, disposal, transportation or handling of any Hazardous
Materials by any Paisano Company, or any of their employees, agents,
representatives or predecessors in interest in connection with or in any way
arising from or relating to the Paisano Companies or any of their respective
properties, or, to the best knowledge of Contributor and the Paisano Companies,
relating to or arising from or attributable, in whole or in part, to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of any such substance, by any other Person at or on
or under any of the real properties owned or used by any Paisano Company or any
other location where such could have a materially adverse effect on the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of any
Paisano Company.
SECTION 4.31 Circulation.
(1) Accurate and complete copies of the two most recent six-month
audit reports issued by the Audit Bureau of Circulations ("ABC") with respect to
each Publication, the circulation of which is audited by ABC, are attached to
Schedule 4.31(a) hereto. Except as disclosed on Schedule 4.31(a), from the date
of the latest such ABC audit report, there has been no decline in the total
circulation revenue (excluding advertising revenue) of any Publication.
(2) All representations contained in any materials which were
submitted by Contributor or the Paisano Companies to the ABC for the periods
covered by such audit reports and which were used by the ABC in connection with
the preparation of such audit reports were true and correct.
(3) Since December 31, 1994, except with respect to special editions
of the Publications, the Paisano Companies have not made any material change in
their policies for the pricing of circulation for the Publications.
(4) Section 4.31(d) sets forth current lists, as of December 31, 1997
or such later date as is specified in such lists, of all of the Paisano
Companies' (i) independent contractors which distribute the Publications and
(ii) current dealers of the Publications.
(a) The Paisano Companies have not, during the past twelve months, sold
copies of any Publication whose circulation is audited by the ABC at discounts
which, if known to the ABC, would have resulted in the
B-22
<PAGE> 253
ABC not including such sales in its reports with respect to the circulation of
such Publication during such period.
SECTION 4.32 Relationships with Franchisees.
(a) Except as set forth in Section 4.32, (i) since December 31, 1994, no
franchisee of any Paisano Company has canceled or otherwise modified its
relationship with such Paisano Company, (ii) to the best knowledge of
Contributor and the Paisano Companies, no such franchisee has threatened or has
any intention to do so, and (iii) the consummation of the Transactions will not
give any such franchisee the right to terminate its relationship with such
Paisano Company or reduce the amount of royalties payable by such franchisee to
such Paisano Company. Schedule 4.32 contains a true, complete and accurate list
of all franchisees of each Paisano Company as of the date hereof. True and
complete copies of the franchise agreement with each such franchisee have been
provided to Newriders and Newco #1.
(b) Schedule 4.32 sets forth a true and complete list of (a) all states
in which the Paisano Companies are, as of the date of this Agreement, registered
to sell franchises; (b) all states in which the Paisano Companies have received
an official notice from the appropriate state officials that the Paisano
Companies offer to sell and the sale of their franchises are exempt from the
registration provisions of such jurisdiction's franchise registration law; and
(c) all other states in which the Paisano Companies have offered to sell or have
sold their franchises based upon a claimed exemption from the registration
provisions of such state's applicable franchise registration laws. True and
correct copies of all notices of registrations and all notices of exemption, as
described in clauses (a) and (b) above, have been furnished to Newriders and
Newco #1, and such registration and exemption notices are in full force and
effect as of the date hereof except as set forth in Schedule 4.32.
(c) Contributor has delivered to Newriders and Newco #1 true and correct
copies of the Paisano Companies' Uniform Franchise Offering Circulars ("UFOCs"),
which are currently being used in connection with the offers to sell and the
sales of its franchises. The UFOCs, and all UFOCs heretofore used by the Paisano
Companies (i) comply in all material respects with all applicable federal and
state laws and regulations pertaining to offers to sell and the sale of
franchises, including, without limitation the Federal Trade Commission's
Disclosure Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures", 16 C.F.R. Section 436; and (ii)
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 4.33 Customer, Advertiser, Subscriber and Mailing
Lists. Contributor has maintained and currently possesses all rights to
subscriber lists (subject to applicable statutory law or common law decisions
regarding the use of subscriber lists), customer lists, advertiser lists and
mailing lists used in connection with the conduct of its business as currently
conducted, including all such lists necessary to continue the operation of its
business consistent with current practice, and all of such lists are in such
condition as is required in connection with the operation of its business, as
currently conducted.
SECTION 4.34 Advertising.
(a) Schedule 4.34 sets forth a complete and correct list of the
published rates for advertising lineage for each of the Publications and a
complete and correct list of and the amount of revenues generated by each of the
Publication's largest (by dollar amount) ten advertisers for the past year.
(b) Since December 31, 1995, no Paisano Company has had any actual or
threatened cancellation, non-renewal or material modification of any agreements
or relationships with advertisers who, during any 12-month period, accounted for
more than $50,000 in revenues to the Paisano Companies, which advertisers are
listed in Schedule 4.34, nor has any Paisano Company made any material change in
its written policies for the pricing of advertising for the Publications and no
advertiser listed in Schedule 4.34 has provided written notice of its intent to
(i) cancel previously scheduled or contracted for advertising in the
Publications for the period following the Closing, or (ii) terminate or modify
significantly their relationship with any Paisano Company.
B-23
<PAGE> 254
SECTION 4.35 Events. Schedule 4.35 lists all commitments of Contributor
and each Paisano Company to sponsor any motorcycle or other events in 1998.
SECTION 4.36 Model Releases. Each Paisano Company has obtained all
necessary releases from models appearing for commercial purposes in Publications
or videos owned or produced by such Paisano Company.
SECTION 4.37 Brokerage Fees. Except for the fees payable to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, financial advisors to Contributor and the
Paisano Companies in connection with the Transactions, which fees will be paid
by Contributor, no Person is entitled to any brokerage or finder's fee or other
commission from any Paisano Company in respect of this Agreement or the
Transactions, except that Contributor is aware that the fees of Imperial
Capital, LLC, financial advisors to Newriders in connection with the
Transactions, will be paid at the Closing, out of the proceeds of the Financing.
Without limiting the generality of the foregoing, except as set forth above, the
Paisano Companies are not subject to any binding obligations or any restrictions
with respect to the sale of the Paisano Companies other than pursuant to this
Agreement.
SECTION 4.38 Disclosure. The information provided by Contributor and the
Paisano Companies in connection with this Agreement, including, without
limitation, the exhibits and schedules hereto, and in any other writing
furnished pursuant hereto, does not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated herein or
therein or necessary to make the statements and facts contained herein or
therein, in light of the circumstances under which they are made, not false or
misleading. Copies of all documents heretofore or hereafter delivered or made
available by Contributor or the Paisano Companies to Newriders pursuant hereto
were or will prior to the Closing be complete and accurate records of such
documents.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF NEWRIDERS AND NEWCO #1
Newriders, Newco #1 and Newco #3 hereby jointly and severally represent and
warrant to Contributor and the Paisano Companies, as of the date hereof and as
of the Closing Date, that:
SECTION 5.1 Organization and Corporate Authority. Newriders, Newco #1 and
Newco #3 are corporations duly organized, validly existing and in good standing
under the laws of each such corporation's respective state of incorporation.
Newriders, Newco #1 and Newco #3 have all requisite corporate power and
authority to enter into this Agreement and to consummate the Transactions. All
necessary action, corporate or otherwise, required to have been taken by or on
behalf of Newriders, Newco #1 and Newco #3 by applicable law, each corporation's
respective charter documents or otherwise to authorize (i) the approval,
execution and delivery on behalf of Newriders, Newco #1 and Newco #3 of this
Agreement and (ii) the performance by Newriders, Newco #1 and Newco #3 of their
obligations under this Agreement and the consummation of the Transactions has
been taken or will have been taken on or prior to the Closing. This Agreement
and all agreements and instruments herein contemplated to be executed by
Newriders, Newco #1 and Newco #3 are the valid and binding agreements of
Newriders, Newco #1 and Newco #3, enforceable against Newriders, Newco #1 and
Newco #3 in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity.
SECTION 5.2 Consents and Approvals. Neither the execution and delivery of
this Agreement nor the consummation of the Transactions will violate, result in
a breach of any of the terms or provisions of, constitute a default (or any
event that, with the giving of notice or the passage of time or both, would
constitute a default) under, result in the acceleration of any indebtedness
under, result in any right of termination of, increase any amounts payable
under, or conflict with, any agreement, indenture or other instrument to which
Newriders, Newco #1 or Newco #3 is a party or by which any of their property is
bound, their charter or by-laws, or any judgment, decree, order or award of any
court, governmental body or arbitrator (domestic or foreign) applicable to
Newriders, Newco #1 or Newco #3. All consents, approvals and
B-24
<PAGE> 255
authorizations of, and declarations, filings and registrations with, any
governmental or regulatory authority (domestic or foreign) or any other Person
(either governmental or private) required in connection with the execution and
delivery by Newriders, Newco #1 and Newco #3 of this Agreement or the
consummation of the Transactions have been obtained, made and satisfied, except
for any filings required to be made after the date hereof pursuant to state law,
the Securities Act or the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder.
SECTION 5.3 Newco #1 Shares; Newco #1 Capital Stock.
(a) The Newco #1 Shares to be issued at the Closing, when issued and
delivered, will be duly authorized, validly issued, fully paid and nonassessable
and free of any preemptive rights or any liens, charges, claims or encumbrances
(other than pursuant to the Transactions or arising from the acts or omissions
of Contributor). Newco #1 makes no representation as to the market price which
Contributor will realize upon the ultimate disposition of such shares, it being
acknowledged by Contributor that such shares will constitute "restricted
securities" under applicable securities laws and the market price of publicly
traded securities will be affected by many factors which are outside the control
of Newriders, Newco #1 and Newco #3 and as to which Newriders, Newco #1 and
Newco #3 can offer no assurance.
(b) As of the Closing Date, there will be no more than 20,500,000 shares
of common stock of Newco #1 issued or subject to issuance pursuant to options,
warrants or other convertible securities.
SECTION 5.4 Newriders SEC Reports. Newriders has furnished to Contributor
its report on Form 10-SB dated June 30, 1997 (including all amendments thereto),
its Annual Report on Form 10-KSB for the period ended December 31, 1997 and its
Quarterly Report -- Form 10-QSB for the quarter ended March 31, 1998, each as
filed with the Securities and Exchange Commission ("SEC") (the "SEC Reports").
The SEC Reports did not, on their respective dates of filing, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except as set forth on
Schedule 5.4 or as stated in such SEC Reports, all financial statements included
in the SEC Reports, (i) were prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated therein), (ii) fairly present the consolidated financial position
results of operations and cash flows of Newriders as of the respective dates
thereof and for the periods referred to therein, including all liabilities or
obligations of Newriders, whether known or unknown, whether absolute, accrued,
contingent or otherwise, and whether due or to become due, and (iii) were
consistent with the books and records of Newriders and its subsidiaries. Except
as contemplated in connection with the Transactions or as disclosed in or
contemplated in the SEC Reports or other filings of Newriders with the SEC, all
of which Contributor acknowledges having reviewed, since the date of the latest
SEC Report there has not occurred any material adverse change in the results of
operations or financial position of Newriders and its subsidiaries considered as
a whole.
SECTION 5.5 Brokerage Fees. Except for the fees payable to Imperial
Capital, LLC, financial advisors to Newriders in connection with the
Transactions, which fees will be paid out of the proceeds of the Financing, no
Person is entitled to any brokerage or finder's fee or other commission from
Newriders, Newco #1 or Newco #3 in respect of this Agreement or the
Transactions.
SECTION 5.6 Labor. Newriders has complied in all material respects with
all applicable laws, rules and regulations (domestic and foreign) relating to
labor relations and the employment of labor, including, without limitation,
those related to wages, hours, benefits, non-discrimination, immigration,
collective bargaining and the payment and withholding of taxes and other sums as
required by appropriate governmental authorities and has withheld and paid to
the appropriate authorities, or is holding for payment not yet due to such
authorities, all amounts required to be withheld from such employees and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing. Newriders does not and has not "leased" any
employees except in full compliance with applicable law.
SECTION 5.7 Compliance with ERISA.
(a) Except as set forth on Schedule 5.7 (a), Newriders does not maintain
or contribute to or have any obligation with respect to, and none of the
employees of Newriders is covered by, any bonus, deferred
B-25
<PAGE> 256
compensation, severance pay, pension, profit-sharing, retirement, insurance,
stock purchase, stock option, or other fringe benefit plan, arrangement or
practice, written or otherwise, or any other "employee benefit plan," as defined
in Section 3(3) of ERISA, whether formal or informal (collectively, the
"Newriders Benefit Plans"). None of the Newriders Benefit Plans is (i) a
Multiemployer Plan, (ii) a "multiple employer plan," as defined in ERISA or the
Code, (iii) a Plan subject to Section 412 of the Code or Title I, Subtitle B,
Part 3 or Title IV of ERISA, or (iv) a funded welfare benefit plan, as defined
in Section 419 of the Code. Newriders does not have any agreement or commitment
to create any additional Newriders Benefit Plan or to modify or change any
existing Newriders Benefit Plan.
(b) With respect to each Newriders Benefit Plan, Newriders has
heretofore delivered or caused to be delivered to Contributor true, correct and
complete copies of (i) all documents which comprise the most current version of
each of such Newriders Benefit Plan, including any related trust agreements,
insurance contracts, or other funding or investment agreements and any
amendments thereto, and (ii) with respect to each Newriders Benefit Plan that is
a Plan, (A) the three most recent Annual Reports (Form 5500 Series) and
accompanying schedules for each of the Plans for which such a report is
required, (B) the most current summary plan description (and any summary of
material modifications), (C) the three most recent certified financial
statements for each of the Plans for which such a statement is required or was
prepared, and (D) for each Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code, all the Internal Revenue Service determination
letters issued with respect to such Plan. Except as set forth on Schedule 5.7
(b), since the date of the documents delivered, there has not been any material
change in the assets or liabilities of any of the Newriders Benefit Plans or any
change in their terms and operations which could reasonably be expected to
affect or alter the tax status or materially affect the cost of maintaining such
Newriders Benefit Plan, and none of the Newriders Benefit Plans has been or will
be amended prior to the Closing Date. Each of the Newriders Benefit Plans can be
amended, modified or terminated by Newriders within a period of thirty (30)
days, without payment of any additional compensation or amount or the additional
vesting or acceleration of any such benefits, except to the extent that such
vesting is required under the Code upon the complete or partial termination of
any Plan intended to be qualified within the meaning of Section 401(a) of the
Code.
(c) Newriders has performed and complied in all material respects with
all of its obligations under and with respect to each of the Newriders Benefit
Plans and each of the Newriders Benefit Plans has, at all times, in form,
operation and administration complied in all material respects with its terms,
and, where applicable, the requirements of the Code, ERISA and all other
applicable laws and regulations. Each Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified and nothing has occurred which
reasonably could be expected to adversely affect such qualified status.
(d) There are no unpaid contributions due prior to the date hereof with
respect to any Newriders Benefit Plan that are required to have been made under
its terms and provisions, any related insurance contract or any applicable law
or regulation.
(e) All group health plans covering employees of Newriders have been
operated in compliance with the requirements of Section 4980B of the Code (and
any predecessor provisions) and Part 6 of Title I of ERISA ("COBRA").
(f) Except as set forth on Schedule 5.7 (f), Newriders has no obligation
to provide any deferred compensation, pension or non-pension benefits to retired
or other former employees, except for health benefits as specifically required
by COBRA or pension benefits payable from a Plan intended to be "qualified"
within the meaning of Section 401(a) of the Code.
(g) Neither Newriders nor any other "disqualified person" or "party in
interest," as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction," as defined in Section
4975 of the Code or Section 406 of ERISA, with respect to any Newriders Benefit
Plan nor have there been any fiduciary violations under ERISA which could
subject Newriders (or any officer, director or employee thereof) to any penalty
or tax under Section 502(i) of ERISA or Sections 4971 and 4975 of the Code.
B-26
<PAGE> 257
(h) Except as set forth on Schedule 5.7 (h), with respect to any
Newriders Benefit Plan: (i) no filing, application or other matter is pending
with the Internal Revenue Service, the PBGC, the United States Department of
Labor or any other governmental body, (ii) there is no action, suit or claim
pending (nor, to the knowledge of Newriders, any basis for such a claim), other
than routine claims for benefits, and (iii) there are no outstanding liabilities
for taxes, penalties or fees.
(i) Newriders has not incurred any liability or taken any action, and
Newriders has no knowledge of any action or event that could cause it to incur
any liability, (i) under Section 412 of the Code or Title IV of ERISA with
respect to any "single-employer plan" (as defined in Section 4001(a)(15) of
ERISA), (ii) on account of a partial or complete withdrawal (as defined in
Sections 4203 and 4205 of ERISA, respectively) with respect to any Multiemployer
Plan, or (iii) on account of unpaid contributions to any Multiemployer Plan.
(j) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the contemplated transactions will: (i) entitle
any current or former employee of Newriders to severance pay, unemployment
compensation or any similar payment or (ii) accelerate the time of payment or
vesting or increase the amount of any compensation due to any such employee or
former employee.
SECTION 5.8 Absence of Certain Business Practices. Neither Newriders nor
any of its Affiliates or Representatives has, directly or indirectly, given or
agreed to give any gift or similar benefit to any customer, supplier, competitor
or governmental employee or official (domestic or foreign) (i) that would
subject Newriders to any damage or penalty in any civil, criminal or
governmental litigation or proceeding or (ii) that, if not given in the past,
would have had a material adverse effect on the assets, liabilities (whether
absolute, accrued, contingent or otherwise), condition (financial or otherwise),
results of operations or business of Newriders.
SECTION 5.9 Taxes.
(a) Except as set forth on Schedule 5.9, Newriders (including its
predecessor-in-interest, American Furniture Wholesale Inc.), has timely filed
all Tax returns and reports required to have been filed by it for all taxable
periods ending on or prior to the date hereof, and has paid all Taxes due to any
Taxing Authority with respect to all taxable periods ending on or prior to the
date hereof, or otherwise attributable to all periods prior to the date hereof.
The Tax returns and reports filed are true and correct in all material respects;
(b) Except as set forth on Schedule 5.9, there is not pending or
threatened any action, audit, proceeding, or investigation with respect to (i)
the assessment or collection of Taxes or (ii) a claim for refund made by
Newriders with respect to Taxes previously paid with respect to the business or
operations of Newriders and (iii) with respect to any such actions, audits,
proceedings or investigation (whether or not identified in Schedule 5.9),
Newriders will not have liability in respect of or resulting therefrom; and
(c) All Tax deficiencies asserted or assessed against Newriders have
been paid or finally settled.
SECTION 5.10 Environmental Liabilities.
(a) Except as set forth on Schedule 5.10 hereto, Newriders has not used,
stored, treated, transported, manufactured, refined, handled, produced or
disposed of any Hazardous Materials on, under, at, from, or in any way
affecting, any of its properties or assets, or otherwise, in any manner which
violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials and no prior owner of such property or asset or any tenant,
subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials
on or affecting such property or asset, or otherwise in any manner which
violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials.
(b) (i) Newriders has no obligations or liabilities, known or unknown,
matured or not matured, absolute or contingent, assessed or unassessed, where
such would reasonably be expected to have a materially adverse effect on the
business or condition (financial or otherwise) of Newriders, and (ii) no claims
have been made against Newriders during the past five years and no presently
outstanding citations or notices have been issued against Newriders, where such
could reasonably be expected to have a materially adverse effect on the
B-27
<PAGE> 258
business or condition (financial or otherwise) of Newriders, which in either
case have been or are imposed by reason of or based upon any provision of any
Environmental Law, including, without limitation, any such obligations or
liabilities relating to or arising out of or attributable, in whole or in part,
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of any Hazardous Materials by Newriders, or any of
its employees, agents, representatives or predecessors in interest in connection
with or in any way arising from or relating to Newriders or any of its
respective properties, or relating to or arising from or attributable, in whole
or in part, to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation or handling of any such substance, by any
other Person at or on or under any of the real properties owned or used by
Newriders or any other location where such could have a materially adverse
effect on the assets, liabilities (whether absolute, accrued, contingent or
otherwise), condition (financial or otherwise), results of operations, business
or prospects of Newriders.
SECTION 5.11 Licenses and Permits. Newriders, Newco #1 and Newco #3 are,
and at all times have been, duly licensed, with all requisite permits and
qualifications, as required by applicable law for the purpose of conducting
their business or owning their properties or both, in each jurisdiction in which
they do business or own property or in which such license, permit or
qualification is otherwise required. Newriders, Newco #1 and Newco #3 are in
compliance with all such licenses, permits and qualifications. Schedule 5.11
sets forth a list of all such licenses, permits and qualifications, and the
expiration dates thereof. There are no proceedings pending or threatened, and
Newriders, Newco #1 and Newco #3 know of no facts that could be the basis of a
proceeding to revoke or terminate any such presently existing license, permit or
qualification.
SECTION 5.12 Newriders Capital Stock; Subsidiaries.
(a) As of March 19, 1998, there were 17,368,130 shares of Newriders
common stock outstanding. Attached hereto as Schedule 5.12(a) is a copy of the
stockholders list provided by Newriders' transfer agent to Newriders on March
19, 1998.
(b) Except as set forth on Schedule 5.12(b), neither Newriders nor Newco
#1 has any Subsidiaries or any other equity interest in any corporation,
partnership, limited liability company or other entity.
SECTION 5.13 Projected Financial Data. The projected financial data of
Newriders provided by Newriders to Imperial Capital, LLC for use in the
Confidential Information Memorandum is based upon good faith estimates and
assumptions believed by Newriders to be reasonable. Newriders has no reason to
believe that it will not achieve the financial performance reflected in such
projected financial data, assuming the assumptions underlying such projected
financial data are followed.
SECTION 5.14 Insurance. Schedule 5.14 sets forth a complete and correct
list of all insurance policies and of all claims made by Newriders on any
liability or other insurance policies during the past five years (other than
worker's compensation claims). Newriders has reasonably adequate liability and
other insurance policies insuring it against the risks of loss arising out of or
related to its assets and business. Without limitation, as to the tangible real
and personal property of Newriders, such insurance is adequate to cover the full
replacement cost, less deductible amounts, of such tangible real and personal
property. Schedule 5.14 is a complete and correct list of all insurance
currently in place and accurately sets forth the coverages, deductible amounts,
carriers and expiration dates thereof. Schedule 5.14 is a complete and correct
list of all insurance with respect to which the policy period has expired, but
for which certain of the coverage years are still subject to audit or
retrospective adjustment by the carrier, and accurately sets forth such coverage
years and the coverages, deductible amounts, carriers and expiration dates
thereof. There are no outstanding requirements or recommendations by any
insurance company that issued any policy of insurance to Newriders or by any
board of or by any governmental authority exercising similar functions that
require or recommend any changes in the conduct of the business of Newriders or
any repairs or other work to be done on or with respect to Newriders' assets.
Except as set forth on Schedule 5.14, no notice or other communication has been
received by Newriders from any insurance company within the five years preceding
the date hereof canceling or materially amending or materially increasing the
annual or other premiums payable under any of its insurance policies, and no
such cancellation, amendment or increase of premiums is threatened.
B-28
<PAGE> 259
SECTION 5.15 No Powers of Attorney or Suretyships. Except as set forth on
Schedule 5.15(a) Newriders has not granted any general or special powers of
attorney (other than to statutorily required agents for service of process) and
(b) has no obligation or liability (whether actual, contingent or otherwise) as
guarantor, surety, co-signer, endorser, co-maker, indemnitor, obligor on an
asset or income maintenance agreement or otherwise in respect of the obligation
of any Person.
SECTION 5.16 Contracts with Affiliates. Except as set forth on Schedule
5.16, since January 1, 1997 there has been no material contract or arrangement
between Newriders and/or Newriders Ltd., on the one hand, and any Affiliate of
Newriders, on the other hand.
SECTION 5.17 Absence of Undisclosed Liabilities. Except as set forth on
Schedule 5.17, there are no liabilities or obligations of any nature of
Newriders, Newco #1 or Newco #3, whether known or unknown, whether absolute,
accrued, contingent or otherwise, and whether due or to become due, not
reflected on or reserved for in the financial statements included in the SEC
Reports.
SECTION 5.18 Disclosure. The information provided by Newriders, Newco #1
and Newco #3 in this Agreement, including, without limitation, the exhibits and
schedules hereto, and in any other writing furnished pursuant hereto, does not
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated herein or therein or necessary to make the
statements and facts contained herein or therein, in light of the circumstances
under which they are made, not false or misleading.
ARTICLE 6.
COVENANTS OF CONTRIBUTOR AND THE PAISANO COMPANIES PRIOR TO CLOSING DATE
SECTION 6.1 Access and Investigation. Between the date of this Agreement
and the Closing Date, Contributor and the Paisano Companies will (a) upon
reasonable prior notice and during normal business hours, afford Newriders,
Newco #1 and Newco #3 and their Representatives and prospective lenders and
their Representatives (collectively, "Newriders' Advisors") full and free access
to each Paisano Company's personnel, properties, contracts, books and records,
and other documents and data, (b) furnish Newriders and Newco #1 and Newriders'
Advisors with copies of all such contracts, books and records, and other
existing documents and data as Newriders, Newco #1 and Newco #3 may reasonably
request, and (c) furnish Newriders, Newco #1 and Newco #3 and Newrider's
Advisors with such additional financial, operating, and other data and
information as Newriders, Newco #1 and Newco #3 may reasonably request.
SECTION 6.2 Operation of the Business of the Paisano Companies. Except for
the sale, distribution or other disposition of the Excluded Assets, between the
date of this Agreement and the Closing Date, Contributor and the Paisano
Companies will:
(a) conduct the business of each Paisano Company only in the ordinary
course of business;
(b) confer with Newriders, Newco #1 and Newco #3 concerning operational
matters of a material nature; and
(c) otherwise report periodically to Newriders, Newco #1 and Newco #3
concerning the status of the business, operations, and finances of each Paisano
Company.
SECTION 6.3 Negative Covenant. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date,
Contributor and the Paisano Companies will not, without the prior consent of
Newriders, Newco #1 and Newco #3, take any action, or fail to take any
reasonable action, as a result of which any of the changes or events listed in
Section 4.13 could occur.
SECTION 6.4 Required Approvals. As promptly as practicable after the date
of this Agreement, Contributor and the Paisano Companies will make all filings
required by Legal Requirements to be made by them in order to consummate the
Transactions. Between the date of this Agreement and the Closing Date,
Contributor and the Paisano Companies will (a) cooperate with Newriders, Newco
#1 and Newco #3 with respect to all filings that Newriders, Newco #1 and Newco
#3 elect to make or are required by Legal
B-29
<PAGE> 260
Requirements to make in connection with the Transactions, and (b) cooperate with
Newriders, Newco #1 and Newco #3 in obtaining all consents referred to in
Section 5.2.
SECTION 6.5 Notification. Between the date of this Agreement and the
Closing Date, Contributor and the Paisano Companies will promptly notify
Newriders, Newco #1 and Newco #3 in writing if Contributor or any Paisano
Company becomes aware of any fact or condition that causes or constitutes a
breach of any of Contributor's or the Paisano Companies' representations and
warranties as of the date of this Agreement, or if Contributor or any Paisano
Company becomes aware of the occurrence after the date of this Agreement of any
fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. During the same period, Contributor and the
Paisano Companies will promptly notify Newriders, Newco #1 and Newco #3 of the
occurrence of any breach of any covenant of Contributor or any Paisano Company
in this Section 6 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 9 impossible or unlikely.
SECTION 6.6 Exclusivity. Until August 15, 1998, Contributor and the
Paisano Companies agree that neither they nor their Representatives will solicit
or encourage, directly or indirectly, in any manner, any discussion with or
furnish or cause to be furnished any information to any Person other than
Newriders, Newco #1 or Newco #3 or their Representatives, in connection with, or
negotiate for or otherwise pursue the sale of the Capital Stock of any Paisano
Company, or all or substantially all of the assets of any Paisano Company or any
business combination or merger of any Paisano Company with any other party.
Contributor and the Paisano Companies agree to promptly inform Newriders, Newco
#1 and Newco #3 of any inquiries or proposals with respect to the foregoing.
SECTION 6.7 Best Efforts. Between the date of this Agreement and the
Closing Date, Contributor and the Paisano Companies will use their reasonable
best efforts to cause the conditions in Article 9 to be satisfied.
SECTION 6.8 Leases. Contributor, as landlord, will terminate, effective as
of the Closing, its existing leases (the "Contributor Terminated Leases") with
the applicable Paisano Companies, as tenants, of the land and buildings located
at 28210 Dorothy Drive, Agoura Hills, California, 28216 Dorothy Drive, Agoura
Hills, California, 605 Main Street, Daytona Beach, Florida, and 611 East Broad
Street, Columbus, Ohio. Notwithstanding anything to the contrary in the leases,
such terminations shall be without cost or liability to the tenants or to
Newriders or Newco #1. Contributor will enter into new leases with Newriders or
Newco #1 (or such Affiliate(s) of Newriders or Newco #1 as they may designate
provided that such leases are guaranteed by Newco #1), as tenant, for each of
the four (4) premises described above. The new leases will be "standard triple
net" leases, having terms no less favorable to the tenant as corresponding terms
in the existing leases (except as otherwise expressly provided in this
paragraph) and will be in the form attached hereto as Exhibit C. Each of the new
leases shall have an initial term of five (5) years commencing immediately upon
the Closing and shall contain an option, exercisable by Newriders or Newco #1,
to extend the lease for one (1) option period of five (5) years. The leases
shall not contain cross-default provisions and the renewal options for each
lease shall be exercisable without regard to whether Newriders or Newco #1 or
their Affiliate(s) exercise the options for any other lease. Each new lease
shall provide for base rent during the first twelve months of the initial term
in an amount equal to the base rent currently in effect under the existing lease
for the same premises (taking into account any CPI adjustments heretofore made
to the base rent payable under such lease). Base rent shall be subject to CPI
increases on the first day of each subsequent twelve month period. As used
herein "CPI" shall mean the "United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index For All Urban Consumers" for the metropolitan
area in which the respective premises are located, or, if no longer published,
any substantially equivalent official index published by the Bureau of Labor
Statistics or its successor. Effective the first day of the option term, rent
shall be adjusted to an amount equal to the then fair market rental for the
premises in question (based on a review of the rental rates for comparable
premises in the same area), which amount shall be subject to CPI increases at
the beginning of each subsequent year of each option term.
SECTION 6.9 Management Employment Contracts. Contributor will use his best
efforts consistent with sound business practice to cause each of Brian Wood,
Robert Davis, Keith Ball and Rick Busman to enter into
B-30
<PAGE> 261
an employment contract, in the form attached hereto as Exhibit D-1, D-2, D-3 and
D-4, respectively, with Newco #1 or such Affiliate thereof as is designated by
Newco #1 (the "Management Employment Contracts").
ARTICLE 7.
COVENANTS OF NEWRIDERS, NEWCO #1 AND NEWCO #3 PRIOR TO CLOSING DATE
SECTION 7.1 Access and Investigation. Between the date of this Agreement
and the Closing Date, Newriders, Newco #1 and Newco #3 will, (a) upon reasonable
prior notice and during normal business hours, afford Contributor and his
Representatives (collectively, "Contributor's Advisors") full and free access to
Newriders, Newco #1's and Newco #3's personnel, properties, contracts, books and
records, and other documents and data, (b) furnish Contributor and Contributor's
Advisors with copies of all such contracts, books and records, and other
existing documents and data as Contributor may reasonably request, and (c)
furnish Contributor and Contributor's Advisors with such additional financial,
operating, and other data and information as Contributor may reasonably request.
SECTION 7.2 Approvals of Governmental Bodies. As promptly as practicable
after the date of this Agreement, Newriders, Newco #1 and Newco #3 will and will
cause each of their Affiliates to, make all filings required by Legal
Requirements to be made by them to consummate the Transactions. Between the date
of this Agreement and the Closing Date, Newriders, Newco #1 and Newco #3 will
(i) cooperate with Contributor with respect to all filings that Contributor is
required by Legal Requirements to make in connection with the Transactions, and
(ii) cooperate with Contributor in obtaining all consents referred to in
Sections 3.3 and 4.2; provided that this Agreement will not require Newriders
and Newco #1 to dispose of or make any change in any portion of its business or
to incur any other burden to obtain a Governmental Authorization.
SECTION 7.3 Best Efforts. Except as set forth in the proviso to Section
7.2, between the date of this Agreement and the Closing Date, Newriders, Newco
#1 and Newco #3 will use their reasonable best efforts to cause the conditions
in Article 9 to be satisfied.
ARTICLE 8.
CERTAIN AGREEMENTS AND UNDERSTANDINGS
SECTION 8.1 Board of Directors. Subject to applicable corporate law and
until payment in full of the Newco #1 Notes, Newriders and Newco #1 agree to use
their reasonable best efforts to cause the number of directors on Newco #1's
Board of Directors to not be increased to more than eight without Contributor's
approval. Newriders and Newco #1 further agree that, upon Closing, they will
cause Contributor to be appointed to fill a vacancy on Newco #1's Board of
Directors. In addition, until payment in full of the Newco #1 Notes, Contributor
will have the right to nominate himself and three directors, at least one of
whom will be a non-employee director (as such term is defined in Rule 16b-3
under the Exchange Act and Section 162(m) of the Code and provided that such
individuals have not been involved in any legal proceedings of the type
specified in Item 401(f) of Regulation S-K) to become members of Newco #1's
eight-member Board of Directors. The two outside directors designated by
Contributor will, upon election by the stockholders of Newco #1, become members
of the Audit, Compensation and S8 Stock Committees of the Board of Directors.
SECTION 8.2 Agreement Not to Compete.
(a) For a period beginning on the Closing Date and extending until five
years from the expiration of the term of the Teresi Employment Agreement,
Contributor agrees that except as specifically allowed below, he shall not, for
any reason, directly or indirectly, engage or be interested in the publication
or distribution of magazines primarily devoted to automotive, motorcycle and
tattoo subject matter, and shall not, directly or indirectly, have any interest
in, own, manage, operate, control, be connected with as a stockholder, joint
venturer, officer, partner, employee or consultant, or otherwise engage or
invest or participate in, the
B-31
<PAGE> 262
publication or distribution of magazines primarily devoted to automotive,
motorcycle and tattoo subject matter, in any county or any other political
subdivision of any state of the United States of America or of any other country
in the world where the Paisano Companies conducted any business at any time
during the two (2) year period preceding the date hereof. The parties agree that
the covenant contained in this Section 8.2 has a value of $25,000. However, it
is specifically agreed that Contributor shall have the right to (i) own, invest
in, or render services in connection with magazines devoted to subject matter
which is not competitive with the magazines presently published by the Paisano
Companies or presently contemplated to be published by the Paisano Companies
(for example, boating and fishing magazines) or (ii) own, invest in, or render
services in connection with motorcycle and/or automotive related projects of a
non-publishing nature (excluding motorcycle shops, apparel stores and cafes)
which are not competitive with or adverse to the business activities of Newco
#1, Newriders or the Paisano Companies. All of the parties agree that the
duration and area for which the covenant set forth in this Section 8.2 is to be
effective are reasonable. In the event that any court determines that the time
period or the geographical areas provided for in this Section 8.2, or both of
them, are unreasonable and that such covenant is to that extent unenforceable,
such covenant shall remain in full force and effect for the greatest time period
and in the greatest geographical area that would not render it unenforceable.
The parties intend that this covenant shall be deemed to be a series of separate
covenants, one for each and every county of each and every state of the United
States of America and for any other country in the world where this covenant is
intended to be effective.
(b) The parties agree that damages would be an inadequate remedy for
Newco #1 and Newriders in the event of a breach or threatened breach of the
covenant contained in this Section 8.2 and thus, in any such event, Newco #1 and
Newriders may, either with or without pursuing any potential damage remedies,
immediately seek an injunction prohibiting Contributor from violating this
covenant.
SECTION 8.3 Paisano Employee Options. As soon as practicable following the
Closing, Newco #1 will grant to such persons chosen by Contributor (in a written
notice delivered to Newco #1 or Newriders on or before the Closing), who at the
Closing Date are either employees of one of the Paisano Companies and who enter
into employment agreements with Newco #1, Newriders or any of their Affiliates
or are consultants of any Paisano Company, options to purchase an aggregate of
300,000 shares of the common stock of Newco #1, subject only to the approval of
the Compensation Committee of the board of directors of Newco #1. Such options
will have an exercise price of $5.00 per share, shall vest immediately, be
non-transfererable except in the case of death, to the estate of the recipient
and shall expire five years from the Closing Date. These options will be in
addition to any options which such persons may otherwise become entitled to
under Newriders' or Newco #1's stock option plan.
SECTION 8.4 Directors' and Officers' Insurance. Newco #1 will maintain for
a period of three (3) years directors' and officer's liability insurance and
errors and omissions insurance in amounts to be determined by the board of
directors of Newco #1.
SECTION 8.5 Use of Excluded Assets. Newriders and Newco #1 shall have the
right to use and display all Excluded Assets currently being used by the Paisano
Companies as display items in its theme cafes until 90 days after Contributor
gives notice to Newriders and Newco #1 to deliver such Excluded Assets to
Contributor.
SECTION 8.6 Termination of Pension Plan. As soon as practicable, and in
all events prior to the Closing Date, Contributor shall cause the Paisano
Companies to take the following actions with respect to the Pension Plan: (a)
amend the Pension Plan to cease all benefit accruals and fully vest participants
in their accrued benefits, and promptly issue the notice to participants and
beneficiaries required by Section 204(h) of ERISA as soon as practicable after
such amendment is made, and (b) all other actions necessary to terminate the
Pension Plan effective as of the earliest date permitted under applicable law,
but in no event later than the day before the Closing Date, in accordance with
the terms of the Pension Plan and the procedures for standard terminations
contained in Section 4041(b) of ERISA, and (c) file Form 5310 (and all required
attachments) with the IRS to secure a determination that the Pension Plan, as
amended and terminated, continues to be a qualified plan.
B-32
<PAGE> 263
Recognizing that it will not be possible under existing law to complete the
termination of the Pension Plan and the distribution of its assets to
Participants prior to the Closing Date, Contributor agrees to reimburse Newco #1
or one of the Paisano Companies, as directed by Newco #1, for all costs relating
to the termination of the Pension Plan and the distribution of benefits
thereunder that are incurred on or after the Closing Date and are not paid from
the assets of the Pension Plan. Notwithstanding anything herein to the contrary,
if the assets of the Pension Plan are not sufficient to discharge all Benefit
Liabilities for any reason: (i) prior to the Closing Date the Paisano Companies
shall contribute sufficient assets to the Pension Plan to discharge all such
Benefit Commitments, and (ii) on or after the Closing Date, Contributor shall
pay Newco #1 or any one of the Paisano Companies, as directed by Newco #1,
within ten (10) days after demand, such additional contributions as are
necessary to discharge all such Benefit Commitments.
SECTION 8.7 Employees; Employee Benefits. Nothing herein expressed or
implied shall confer upon (a) Newco #1 or any of the Paisano Companies the
obligation to continue any of the Benefit Plans for any period after the
Closing, or (b) any of the employees of the Paisano Companies any rights or
remedies, including, without limitation any right to employment, or continued
employment for any specified period, of any nature or kind whatsoever under or
by reason of this Agreement, except as specifically provided under a written
employment agreement. Subject to the foregoing, employees of the Paisano
Companies who remain employed after the Closing shall be credited with their
pre-Closing service for the Paisano Companies for purposes of eligibility and
vesting under each and every employee benefit plan, program or arrangement,
including fringe benefit arrangements, in the nature of the Benefit Plans under
which they become covered after the Closing, unless credit for pre-Closing
service is not granted to similarly situated employees of Newriders.
ARTICLE 9.
CONDITIONS
SECTION 9.1 Conditions to Obligations of Newriders, Newco #1 and Newco
#3. The obligations of Newriders, Newco #1 and Newco #3 to complete the
Transactions are subject to the satisfaction at or prior to the Closing of the
following conditions, unless waived by Newriders, Newco #1 and Newco #3:
(a) the business of each Paisano Company shall have been conducted in
the ordinary course, and there shall have been no material adverse change to the
business of any such Paisano Company;
(b) there shall have been no threatened or pending litigation against
any Paisano Company which is material;
(c) except for (i) distribution of the Excluded Assets and (ii)
distribution of $7,000,000 to Contributor (provided that a financial institution
has lent a Paisano Company $7,000,000), there shall have been no dividend,
redemption or similar distribution, recapitalization or stock issuance of any
kind, by any Paisano Company since December 31, 1997;
(d) all filings with and material consents and approvals of third
parties and governmental agencies required for the consummation of the
Transactions shall have been obtained;
(e) consummation of the Financing on terms acceptable to Newriders,
Newco #1 and Newco #3;
(f) receipt of a tax opinion from Deloitte & Touche LLP, satisfactory to
Newriders, Newco #1 and Newco #3, with respect to the Section 351 Transaction
and the Reorganization;
(g) a Proxy/Registration Statement on Form S-4 (the "Registration
Statement") shall have been declared effective by the SEC;
(h) the representations and warranties of Contributor and the Paisano
Companies set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and shall be true and correct in all
material respects as of the Closing Date as if made on the Closing Date, and the
Contributor shall have delivered to Newriders, Newco #1 and Newco #3 a
certificate dated as of the Closing Date, to such effect;
B-33
<PAGE> 264
(i) Contributor and the Paisano Companies shall have performed all
obligations required to be performed by them under this Agreement at or prior to
the Closing;
(j) delivery of an opinion of Masters & Ribakoff, in the form attached
hereto as Exhibit E-1, and an opinion of Fulwider, Patton, Lee & Utecht, LLP, in
the form attached hereto as Exhibit E-2;
(k) Contributor shall have entered into an employment contract and a
consulting agreement with Newco #1 or such Affiliate thereof as is designated by
Newco #1, in the forms attached hereto as Exhibits F-1 and F-2 (collectively,
the "Teresi Employment Agreement");
(l) the Agreement and Plan of Merger and Reorganization in the form
attached hereto as Exhibit G shall have been entered into by all of the parties
thereto;
(m) the stockholders of Newriders shall have approved the transactions
contemplated by this Agreement, the El Paso Agreement and the Agreement and Plan
of Merger and Reorganization at a duly constituted meeting;
(n) the transactions contemplated by the El Paso Agreement shall have
closed prior to or simultaneous with the Closing;
(o) Michael T. Purcell, Leon Hatcher, Rick L. Pierce and C.W. Doyle
shall have transferred to Newriders an aggregate of 6,156,480 shares of their
Newriders common stock;
(p) Stockholders of Newriders representing more than 3% of the
outstanding shares of Newriders shall not have exercised their right to dissent
in respect of the Reorganization;
(q) the conditions specified on Schedule 9.1(q); and
(r) the Stockholders' Agreement (the "Stockholders' Agreement") in the
form attached hereto as Exhibit I shall have been entered into by Contributor
and John Martin.
SECTION 9.2 Conditions to Obligations of Contributor and the Paisano
Companies. The obligations of Contributor to consummate the Transactions are
subject to the satisfaction at or prior to the Closing of the following
conditions unless waived by Contributor:
(a) except for (i) any issuance of capital stock upon conversion of
convertible debentures or notes which have been or may be issued by Newriders or
Newco #1 (but not to exceed 850,000 shares of common stock), (ii) any issuance
of stock upon exercise of stock options granted under Newriders' or Newco #1's
stock option plans, (iii) the issuance of 2,000,000 shares of Newco #1 common
stock in connection with the transactions contemplated by the El Paso Agreement,
(iv) the issuance of 1,000,000 shares of Newriders common stock to Contributor
based upon a prior contractual obligation, (v) the issuance of 200,000 shares of
Newco #1 common stock to William Nordstrom in consideration for the
relinquishment of certain options and (vi) the issuance of an aggregate of
4,036,797 shares of Newco #1 common stock to John Martin in consideration of
cash and notes, there shall have been no dividend, redemption or similar
distribution, recapitalization or stock issuance of any kind, by Newriders or
Newco #1 since December 31, 1997;
(b) all filings with and material consents and approvals of third
parties and governmental agencies required for the consummation of the
Transactions shall have been obtained;
(c) receipt of a tax opinion from Deloitte & Touche LLP, satisfactory to
Contributor, with respect to the Section 351 Transaction and the Reorganization;
(d) the representations and warranties of Newriders, Newco #1 and Newco
#3 set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and shall be true and correct in all
material respects as of the Closing Date as if made on the Closing Date, and
Newco #1, Newriders and Newco #3, shall have delivered to Contributor a
certificate, dated as of the Closing Date, to such effect;
(e) Newriders, Newco #1 and Newco #3 shall have performed all
obligations required to be performed by them under this Agreement at or prior to
the Closing;
B-34
<PAGE> 265
(f) delivery of an opinion or opinions of counsel to Newriders, Newco #1
and Newco #3, covering the matters set forth in Exhibit H;
(g) Michael T. Purcell, Leon Hatcher, Rick L. Pierce and C.W. Doyle
shall have transferred to Newriders an aggregate of 6,156,480 shares of their
Newriders common stock;
(h) approval by Contributor, which approval shall not be unreasonably
withheld, of any Person that is not an institutional investor recognized within
the investment community and that is providing any portion of the Financing; and
(i) the Stockholders' Agreement shall have been entered into by
Contributor and John Martin.
ARTICLE 10.
INDEMNIFICATION
SECTION 10.1 Survival. All representations, warranties, covenants, and
obligations in this Agreement, including the Exhibits and Schedules hereto, and
any certificate or document delivered pursuant to this Agreement, will survive
the Closing. All representations and warranties shall survive for two years
after the Closing, except for the representations in Sections 4.20, 4.25, 5.7
and 5.9, which shall survive until 90 days after all applicable statutes of
limitations (with extensions, if any) have expired with respect thereto and
except for the representations in Sections 3.2, 4.5, 4.30, 5.3 and 5.10 which
shall survive indefinitely.
SECTION 10.2 Indemnification by Contributor. Contributor shall indemnify
and hold harmless Newriders, Newco #1 and Newco #3 and each of their Affiliates
and Representatives in respect of any and all losses, damages, liabilities,
penalties, interest, costs and expenses (including, without limitation, any
reasonable attorneys', accountants' and consultants' fees and other expenses)
incurred by Newriders, Newco #1 or Newco #3 or their respective Affiliates or
Representatives, together with interest on cash disbursements in connection
therewith, at an annual rate equal to the rate of interest payable by Newriders,
Newco #1 and Newco #3 under their senior credit facility then in effect, from
the date such cash disbursements were made by Newriders, Newco #1 or Newco #3 or
any of their Affiliates or Representatives until paid by Contributor
(collectively "Damages") in connection with each and all of the following:
(a) Any breach of any representation or warranty made by Contributor or
any Paisano Company in this Agreement as of the date of this Agreement and as if
such representation and warranty were made on and as of the Closing Date;
(b) Any misrepresentation contained in any written statement or
certificate furnished by Contributor or any Paisano Company pursuant to this
Agreement or in connection with the Transactions; and
(c) Any breach of any covenant, agreement or obligation of Contributor
or any Paisano Company contained in this Agreement or any other instrument
contemplated by this Agreement or the Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Newriders, Newco #1 or Newco
#3 or their Affiliates and they in no way limit the remedies that may be
available to Contributor for a breach of this Agreement by Newriders, Newco #1
or Newco #3.
SECTION 10.3 Limitations.
(a) No claim, demand, suit or cause of action shall be brought against
Contributor under Section 10.2 unless and until the aggregate amount of Damages
under Section 10.2 exceeds $250,000, and then only for the amount by which such
Damages exceed $250,000. In addition, from and after the time, if any, that the
aggregate amount of Damages under Section 10.2 exceeds $250,000, claims,
demands, suits or causes of action may only be brought against Contributor from
time to time under Section 10.2 if the aggregate amount thereof at such time
exceeds $5,000. However, this Section 10.3(a) will not apply to any breach of
any of the Contributor's or the Paisano Companies' representations and
warranties of which either Contributor or any of the Paisano Companies had
knowledge at any time prior to the date on which such representation and
warranty is made or any intentional breach by Contributor or any Paisano Company
of any covenant or
B-35
<PAGE> 266
obligation, and Contributor and the Paisano Companies will be jointly and
severally liable for all Damages with respect to such breaches.
(b) Contributor shall pay Newriders, Newco #1 and Newco #3 for Damages
from time to time as follows:
(i) first, an amount equal to the lesser of the amount of such
Damages and the Cash Indemnification Amount (as hereinafter defined) shall be
paid by Contributor in cash. The Cash Indemnification Amount at any time shall
be an amount equal to $15,000,000 minus any cash payments theretofore made by
Contributor under this Section 10.3(b)(i), plus the amount of any principal
payments received by Contributor on the Newco #1 Notes and plus the amount of
any net proceeds received (or, if such disposition was without consideration,
the Fair Value on the date of such disposition) upon the sale or other
disposition of any of his shares of Newco #1 common stock;
(ii) second, after the Cash Indemnification Amount has been reduced
to zero, Newco #1 may offset the amount of any remaining Damages against the
unpaid principal amount of and accrued interest on the Newco #1 Notes in such
order as Newco #1 may choose; and
(iii) third, at such time, if any, as the entire principal amount of
and accrued interest on the Newco #1 Notes has been offset as provided in (ii)
above or otherwise reduced to zero, Contributor shall be obligated to contribute
to the capital of Newco #1 a number of shares of common stock of Newco #1 equal
to the lesser of (A) the amount of any remaining Damages divided by the Fair
Value of such shares at the time of such contribution and (B) the number of such
shares then held by the Contributor, it being the intention of the parties that
Contributor's obligation to contribute stock cannot exceed the number of shares
then in his possession.
(c) the amount of Damages recoverable hereunder shall be reduced by the
amount of any insurance proceeds actually received by Newriders, Newco #1 or
Newco #3 but shall be increased by the amount of any costs incurred by
Newriders, Newco #1 or Newco #3 due to such insurance recovery, including, but
not limited to, retrospective premium adjustments, experience-based premium
adjustments and indemnification obligations to the insurance carrier.
SECTION 10.3A Indemnification by Contributor for Pension Plan
Liabilities. In addition to, and not by way of limitation on, the indemnities
set forth in this Article 10, Contributor shall indemnify and hold harmless the
Pension Plan, Newriders, Newco #1, Newco #3 and each of the Paisano Companies
for (a) any loss or damage resulting from any claim against any one of them (or
any of their officers, directors, employees or agents), which alleges any
violations of ERISA, the Code or any other law arising out of or in connection
with the Paisano Companies' maintenance or termination of the Pension Plan,
regardless of the date on which the action which gives rise to such claim
occurred, together with any expenses (including, without limitation, settlement
costs and any legal, accounting and other expenses) incurred in connection with
such claims and together with interest at an annual rate equal to the rate of
interest payable by Newriders, Newco #1 and Newco #3 under their senior credit
facility then in effect, and (b) the full amount of any costs relating to the
termination of the Pension Plan and the distribution of benefits thereunder and
contribution made to the Pension Plan of after the Closing Date, as provided in
Section 8.6 hereof.
SECTION 10.4 Indemnification by Contributor for Tax Liabilities. In
addition to, and not by way of limitation on, the indemnification provisions set
forth in Section 10.2, Contributor shall indemnify and hold harmless Newriders,
Newco #1, Newco #3 and each of the Paisano Companies on an after-tax basis
against all Taxes of the Paisano Companies for all taxable periods ending on or
before the Closing or otherwise attributable to the operations, transactions,
assets, or income of the Paisano Companies prior to the date of the Closing or
otherwise attributable to consummation of the Transactions, together with any
expenses (including, without limitation, settlement costs and any legal,
accounting and other expenses) incurred in connection with the contesting,
collection or assessment of such Taxes, and together with interest at an annual
rate equal to the rate of interest payable by Newriders, Newco #1 and Newco #3
under their senior credit facility then in effect. For Taxes of a periodic
nature where the Tax cannot be specifically attributable to the period prior to
the Closing, such Tax will be allocated to that period based on the number of
days in the period that are prior
B-36
<PAGE> 267
to the Closing Date versus the total number of days in such period. For purposes
of this Section 10.4, the term "after-tax basis" means determined after giving
effect to (i) the receipt by Newriders, Newco #1 or Newco #3 of any payments
made to them by Contributor, if such receipt is taxable and (ii) any tax
deduction available on account of the payment of such Taxes; assuming for
purposes of all calculations that income Taxes on income are imposed at the
highest combined federal/state marginal tax rate and tax deductions create
benefits at the highest combined federal/state marginal tax rate. Newco #1 shall
have the responsibility for, and the right to control, at Newco #1's expense,
the audit (and disposition thereof) of any Tax return and, subject to the
following sentence, to approve the disposition of any audit adjustment under
such circumstances. Contributor shall have the right directly or through their
designated representatives, to review in advance and comment upon all
submissions made in the course of audits or appeals thereof to any governmental
entity relating to periods ending on or prior to the Closing and to approve,
which approval shall not be unreasonably withheld, Newco #1's disposition of any
audit adjustment with respect to such periods if such disposition will or might
reasonably be expected to result in an increase in Taxes of the Paisano
Companies, any successor thereof or any consolidated group which includes the
Paisano Companies, for any period ending on or prior to the Closing.
SECTION 10.5 Claims for Indemnification. Whenever any claim shall arise
for indemnification hereunder, Newriders, Newco # 1 or Newco #3 shall promptly
notify Contributor of the claim and, when known, the facts constituting the
basis for such claim; provided, however, that the failure to so notify
Contributor shall not relieve Contributor of its obligation hereunder to the
extent such failure does not materially prejudice Contributor. In the event of
any claim for indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third party, the notice to Contributor shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom.
SECTION 10.6 Defense of Claims. In connection with any claim giving rise
to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, Contributor at its
sole cost and expense and with counsel reasonably satisfactory to Newriders,
Newco #1 or Newco #3 may, upon written notice to Newriders, Newco #1 or Newco
#3, assume the defense of any such claim or legal proceeding if (a) Contributor
acknowledges to Newriders, Newco #1 and Newco #3 in writing, within fifteen (15)
days after receipt of notice from Newriders, Newco #1 or Newco #3, its
obligations to indemnify Newriders, Newco #1 and Newco #3 with respect to all
elements of such claim, (b) Contributor provides Newriders, Newco #1 and Newco
#3 with evidence reasonably acceptable to Newriders, Newco #1 and Newco #3 that
the Contributor will have the financial resources to defend against such
third-party claim and fulfill its indemnification obligations hereunder, (c) the
third-party claim involves only money damages and does not seek an injunction or
other equitable relief, and (d) settlement or an adverse judgment of the third
party claim is not, in the good faith judgment of Newriders, Newco #1 and Newco
#3 likely to establish a pattern or practice adverse to the continuing business
interests of Newriders, Newco #1 and Newco #3. Newriders, Newco #1 and Newco #3
shall be entitled to participate in (but not control) the defense of any such
action, with its counsel and at its own expense; provided, however, that if
there are one or more legal defenses available to Newriders, Newco #1 and Newco
#3 that conflict with those available to Contributor, or if Contributor fails to
take reasonable steps necessary to defend diligently the claim after receiving
notice from either Newriders, Newco #1 or Newco #3 that it believes Contributor
has failed to do so, Newriders, Newco #1 and Newco #3 may assume the defense of
such claim; provided, further, that Newriders, Newco #1 and Newco #3 may not
settle such claim without the prior written consent of Contributor, which
consent may not be unreasonably withheld. If Newriders, Newco #1 and Newco #3
assume the defense of the claim, Contributor shall reimburse Newriders, Newco #1
and Newco #3 for the reasonable fees and expenses of counsel retained by
Newriders, Newco #1 and Newco #3 and Contributor shall be entitled to
participate in (but not control) the defense of such claim, with its counsel and
at its own expense. The parties agree to render, without compensation, to each
other such assistance as they may reasonably require of each other in order to
insure the proper and adequate defense of any action, suit or proceeding,
whether or not subject to indemnification hereunder. Notwithstanding the
foregoing, if Contributor assumes the defense of a claim for Taxes for which it
is obligated to indemnify Newriders, Newco #1 or Newco #3, then such
indemnifying party shall not settle or otherwise agree to a resolution of a
dispute with respect to such claim if that settlement or resolution would have
an adverse impact on the liability of Newriders, Newco #1 or Newco #3 for any
B-37
<PAGE> 268
taxable period ending after the date hereof without the express written consent
of Newriders, Newco #1 or Newco #3, which consent will not be unreasonably
withheld or delayed.
SECTION 10.7 Manner of Indemnification. All indemnification payments to be
made hereunder in cash shall be effected by payment of cash or delivery of a
certified or official bank check in the amount of the indemnification liability.
SECTION 10.8 Submission of Claims For Indemnification. Notwithstanding the
provisions of Section 10.1 with respect to survival of the representations,
warranties, covenants and obligations in this Agreement, such representations,
warranties, covenants and obligations shall survive (i) as to any matter as to
which a claim is submitted in writing to Contributor prior to such period
specified in Section 10.1 and identified as a claim for indemnification pursuant
to this Agreement or (ii) as to any matter that is based upon willful fraud by
Contributor, until such time as such claims and matters are resolved.
SECTION 10.9 Claims by Contributor. No claim, demand, suit or cause of
action shall be brought against Newriders, Newco #1 or Newco #3 as a result of
any breach of any representation or warranty made by Newriders, Newco #1 or
Newco #3 in this Agreement or in any written statement or certificate furnished
by Newriders, Newco #1 or Newco #3 pursuant to this Agreement or in connection
with the Transactions or any breach of any covenant, agreement or obligation of
Newriders, Newco #1 or Newco #3 contained in this Agreement or any other
instrument contemplated by this Agreement or the Transactions unless and until
the aggregate amount of all Damages suffered by Contributor and the Paisano
Companies as a result thereof exceeds $250,000, and then only for the amount by
which such Damages exceed $250,000.
ARTICLE 11.
TERMINATION
SECTION 11.1 Termination Events. This Agreement may, by notice given prior
to or at the Closing, be terminated:
(a) by either Newriders, Newco #1 or Newco #3, on the one hand, or
Contributor and the Paisano Companies, on the other hand, if a material breach
of any provision of this Agreement has been committed by the other party and
such breach has not been waived;
(b) (i) by Newriders, Newco #1 or Newco #3 if any of the conditions in
Section 9.1 has not been satisfied as of the Closing Date or if satisfaction of
such a condition is or becomes impossible (other than through the failure of
Newriders, Newco #1 or Newco #3 to comply with its obligations under this
Agreement) and Newriders, Newco #1 or Newco #3 has not waived such condition on
or before the Closing Date; or (ii) by Contributor or the Paisano Companies if
any of the conditions in Section 9.2 has not been satisfied as of the Closing
Date or if satisfaction of such a condition is or becomes impossible (other than
through the failure of Contributor or the Paisano Companies to comply with their
obligations under this Agreement) and Contributor or the Paisano Companies have
not waived such condition on or before the Closing Date;
(c) by mutual consent of Newriders, Newco #1 or Newco #3 , on the one
hand, and Contributor and the Paisano Companies, on the other hand; or
(d) by either party if the Closing has not occurred (other than through
the failure of any party seeking to terminate this Agreement to comply fully
with its obligations under this Agreement) on or before July 8, 1998 or such
later date as the parties may agree upon, except that Newriders, Newco #1 and
Newco #3 may extend the Closing until August 15, 1998 if, as of July 8, 1998,
they have provided to Contributor an expression of interest and term sheet of a
lender offering a credit facility to fund the Transactions.
SECTION 11.2 Effect of Termination. Each party's right of termination
under Section 11.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
11.1, all
B-38
<PAGE> 269
further obligations of the parties under this Agreement will terminate, except
that the obligations in Sections 13.7 and 13.14 will survive; provided, however,
that if this Agreement is terminated by a party because of the breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
ARTICLE 12.
DELIVERY OF CLOSING DOCUMENTS
SECTION 12.1 Deliveries by Contributor and the Paisano
Companies. Contemporaneously with the Closing, Contributor will deliver to
Newriders, Newco #1 and Newco #3 the following:
(a) Stock certificates evidencing all of the Capital Stock, duly
endorsed for transfer or accompanied by separate instruments of transfer, by
Contributor;
(b) Opinion of Contributor's counsels, in the forms attached hereto as
Exhibits E-1 and E-2;
(c) All Management Employment Agreements that have been executed;
(d) Executed Teresi Employment Agreement;
(e) Executed Newco #1 Pledge Agreement;
(f) The certificate contemplated by Section 9.1(h) hereof;
(g) Good standing certificates for the Paisano Companies as of a date
not more than ten days prior to the Closing Date, issued by the Secretary of
State of each Paisano Company's state of incorporation, and each state where the
Paisano Companies are qualified to do business;
(h) Certified copies of resolutions of each Paisano Company approving
this Agreement and the Transactions; and
(i) All other documents, certificates, instruments or writings as
Newriders or Newco #1 shall reasonably request in connection with the
Transactions.
SECTION 12.2 Deliveries by Newriders, Newco #1 and Newco
#3. Contemporaneously with the Closing, Newriders, Newco #1 and Newco #3 will
deliver the following:
(a) Stock certificates evidencing the Newco #1 Shares, duly endorsed for
transfer or accompanied by separate instruments of transfer;
(b) Opinion or opinions of counsel to Newriders, Newco #1 and Newco #3
covering the matters set forth in Exhibit H;
(c) All Management Employment Agreements that have been executed;
(d) Executed Teresi Employment Agreement;
(e) Executed Newco #1 Notes;
(f) Executed Newco #1 Pledge Agreement;
(g) Executed Newco #3 Note;
(h) The certificate contemplated by Section 9.2(d) hereof;
(i) Certified copies of resolutions of Newriders and Newco approving
this Agreement and the Transactions; and
(j) All other documents, certificates, instruments or writings as
Contributor shall reasonably request in connection with the Transactions.
B-39
<PAGE> 270
ARTICLE 13.
MISCELLANEOUS
SECTION 13.1 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by facsimile transmission (with subsequent letter
confirmation by mail) or three days after being mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties,
their successors in interest or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to Newriders, Newco #1 or Newco #3 Newriders, Inc.
1040 East Herndon Avenue
Suite 102
Fresno, California 93720
Attention: William E. Prather
With a concurrent copy to:
Kaye, Scholer, Fierman
Hays & Handler, LLP
1999 Avenue of the Stars
Suite 1600
Los Angeles, California 90067
Attention: Barry L. Dastin
If to Contributor:
Mr. Joseph Teresi
c/o Paisano Publications, Inc.
28210 Dorothy Drive
Agoura Hills, California 91301
With concurrent copies to:
Joseph J. Jacobs, Esq.
6380 Sweet Maple Lane
Boca Raton, Florida 33433
and
Masters & Ribakoff
100 Wilshire Boulevard
Suite 1000
Santa Monica, California 90401-1113
Attention: Alan P. Ribakoff
SECTION 13.2 Assignability and Parties in Interest. This Agreement shall
not be assignable by any of the parties, except that Newriders, Newco #1 and
Newco #3 may assign their rights hereunder to, and have their obligations
hereunder assumed by, a wholly-owned subsidiary of Newriders, Newco #1 or Newco
#3; provided, however, that no such assignment shall release Newriders, Newco #1
and Newco #3 from their obligations under this Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties and their respective
permitted successors and assigns.
SECTION 13.3 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal law, and not the law
pertaining to conflicts or choice of law, of the State of California.
SECTION 13.4 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
B-40
<PAGE> 271
SECTION 13.5 Complete Agreement. This Agreement, the Exhibits and
Schedules and the documents delivered or to be delivered pursuant to this
Agreement contain or will contain the entire agreement among the parties with
respect to the Transactions and shall supersede in its entirety all previous
oral and written and all contemporaneous oral negotiations, commitments and
understandings, including the letter of intent with respect to the Transactions.
SECTION 13.6 Modifications, Amendments and Waivers. This Agreement may be
modified, amended or otherwise supplemented by a writing signed by all of the
parties. No waiver of any right or power hereunder shall be deemed effective
unless and until a writing waiving such right or power is executed by the party
waiving such right or power.
SECTION 13.7 Expenses. Except as otherwise expressly provided elsewhere in
this Agreement, each party shall pay all fees and expenses incurred by it in
connection with the Transactions contemplated by this Agreement.
SECTION 13.8 Limit on Interest. Notwithstanding anything in this Agreement
to the contrary, no party shall be obligated to pay interest at a rate higher
than the maximum rate permitted by applicable law. In the event that an interest
rate provided in this Agreement exceeds the maximum rate permitted by applicable
law, such interest rate shall be deemed to be reduced to such maximum
permissible rate.
SECTION 13.9 Equitable Remedies. In addition to legal remedies, in
recognition of the fact that remedies at law may not be sufficient, the parties
(and their permitted successors and assigns) shall be entitled to equitable
remedies for breaches or defaults hereunder, including, without limitation,
specific performance and injunction.
SECTION 13.10 Attorneys Fees and Costs. Should any party institute any
action or proceeding in any court to enforce any provision of this Agreement,
the prevailing party shall be entitled to receive from the losing party
reasonable attorneys' fees and costs incurred in such action or proceeding,
whether or not such action or proceeding is prosecuted to judgment.
SECTION 13.11 Further Assurances. Each party shall execute and deliver
such further instruments and take such further actions as any other party may
reasonably request in order to carry out the intent of this Agreement and to
consummate the Transactions.
SECTION 13.12 Contract Interpretation: Construction of Agreement.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.
(b) No party, nor its respective counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement, and
all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
SECTION 13.13 Jurisdiction; Service of Process. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of California, County of Los Angeles, or, if it has or can acquire jurisdiction,
in the United States District Court for the Central District of California, and
each of the parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on any party anywhere in the world.
SECTION 13.14 Public Announcements; Confidentiality.
(a) The parties hereto will maintain in confidence and will cause their
respective Affiliates and Representatives to maintain in confidence unless the
other parties hereto consent in writing, (i) any written, oral or other
information obtained in connection with this Agreement, unless (A) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (B) the use of such information is necessary or appropriate in
making
B-41
<PAGE> 272
any filing or obtaining any consent or approval required for the consummation of
the Transactions, or (C) the furnishing or use of such information is required
by any legal proceedings and (ii) the existence of this Agreement and the
proposed sale described herein, except that the parties may disclose to
Newriders', Newco #1's and Newco #3's financing sources and Representatives
financial information reasonably required by them. If the Transactions are not
consummated, each party will return or destroy as much of such written
information as the other party may reasonably request.
(b) Any public announcements or press releases relating to the
Transactions must be approved by both Contributor, on the one hand, and
Newriders, Newco #1 and Newco #3, on the other hand, in writing before being
made or released. Newriders, Newco #1 and Newco #3 shall have the right to issue
a press release without Contributor's written approval if in the opinion of
Newriders', Newco #1's and Newco #3's counsel it is reasonably required,
provided Contributor receives a copy of such release before issue.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
NEWRIDERS
NEWRIDERS, INC.
a Nevada corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President and Chief Executive
Officer
NEWCO #1
EASYRIDERS, INC.
a Delaware corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President
CONTRIBUTOR
/s/ JOSEPH TERESI
------------------------------------
Joseph Teresi
B-42
<PAGE> 273
THE PAISANO COMPANIES
PAISANO PUBLICATIONS, INC.
a California corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: Chairman
EASY RIDERS OF COLUMBUS, INC.
an Ohio corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: Secretary
EASYRIDERS FRANCHISING, INC.
a California corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: Sole Shareholder
TERESI, INC.
a California corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: President
BROS CLUB, INC.
a California corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: President
ASSOCIATED RODEO RIDERS ON WHEELS
a California corporation
By: /s/ JOSEPH TERESI
------------------------------------
Name: Joseph Teresi
Title: President
B-43
<PAGE> 274
NEWCO #3
EASYRIDERS SUB II, INC.
a California corporation
By: /s/ WILLIAM E. PRATHER
------------------------------------
Name: William E. Prather
Title: President
B-44
<PAGE> 275
ADDENDUM C
EL PASO AGREEMENT
<PAGE> 276
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
LLC INTEREST CONTRIBUTION AGREEMENT............................................... C-1
ARTICLE 1 DEFINITIONS......................................................... C-1
ARTICLE 2 CONTRIBUTION OF INTERESTS........................................... C-4
Section 2.1 Contribution of Interests................................... C-4
Section 2.2 Exchange.................................................... C-4
Section 2.3 Closing..................................................... C-4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF CONTRIBUTORS
INDIVIDUALLY................................................ C-5
Section 3.1 Authorization............................................... C-5
Section 3.2 Consents and Approvals...................................... C-5
Section 3.3 Newco #1 Shares............................................. C-5
Section 3.4 Brokerage Fees.............................................. C-5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PRATHER AND THE
COMPANY..................................................... C-6
Section 4.1 Authorization............................................... C-6
Section 4.2 Consents and Approvals...................................... C-6
Section 4.3 Organization and Good Standing.............................. C-6
Section 4.4 Licenses and Permits........................................ C-6
Section 4.5 Interests................................................... C-7
Section 4.6 Subsidiaries................................................ C-7
Section 4.7 Corporate Books............................................. C-7
Section 4.8 Financial Statements........................................ C-7
Section 4.9 Inventory................................................... C-8
Section 4.10 Indebtedness................................................ C-8
Section 4.11 Absence of Undisclosed Liabilities.......................... C-8
Section 4.12 Accounts Receivable......................................... C-8
Section 4.13 Absence of Certain Changes.................................. C-8
Section 4.14 Real Property............................................... C-9
Section 4.15 Assets...................................................... C-9
Section 4.16 Machinery, Equipment and Other Personal Property, etc....... C-10
Section 4.17 Intangible Personal Property................................ C-10
Section 4.18 Labor and Employment Agreements............................. C-11
Section 4.19 Compliance with ERISA....................................... C-12
Section 4.20 Material Contracts and Relationships........................ C-14
Section 4.21 Absence of Certain Business Practices....................... C-15
Section 4.22 Transactions with Affiliates................................ C-15
Section 4.23 Compliance with Laws........................................ C-16
Section 4.24 Taxes....................................................... C-16
Section 4.25 Insurance................................................... C-17
Section 4.26 No Powers of Attorney or Suretyships........................ C-17
Section 4.27 Litigation.................................................. C-17
Section 4.28 Banking Facilities.......................................... C-18
Section 4.29 Environmental Liabilities................................... C-18
Section 4.30 Brokerage Fees.............................................. C-18
</TABLE>
i
<PAGE> 277
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.31 Business Licenses........................................... C-19
Section 4.32 Disclosure.................................................. C-19
ARTICLE 5 CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS
OF MARTIN................................................... C-19
Section 5.1 Assignment.................................................. C-19
Section 5.2 Representation.............................................. C-19
Section 5.3 Ownership of Martin Interests............................... C-19
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF NEWRIDERS AND
NEWCO #1.................................................... C-20
Section 6.1 Organization and Corporate Authority........................ C-20
Section 6.2 Consents and Approvals...................................... C-20
Section 6.3 Newco #1 Shares............................................. C-20
Section 6.4 Newriders SEC Reports....................................... C-20
Section 6.5 Brokerage Fees.............................................. C-21
Section 6.6 Disclosure.................................................. C-21
ARTICLE 7 COVENANTS OF CONTRIBUTORS AND THE COMPANY PRIOR TO
CLOSING DATE................................................ C-21
Section 7.1 Access and Investigation.................................... C-21
Section 7.2 Operation of the Business of the Company.................... C-21
Section 7.3 Negative Covenant........................................... C-21
Section 7.4 Required Approvals.......................................... C-21
Section 7.5 Notification................................................ C-21
Section 7.6 Exclusivity................................................. C-22
Section 7.7 Best Efforts................................................ C-22
ARTICLE 8 COVENANTS OF NEWRIDERS AND NEWCO #1 PRIOR TO CLOSING
DATE........................................................ C-22
Section 8.1 Approvals of Governmental Bodies............................ C-22
Section 8.2 Best Efforts................................................ C-22
ARTICLE 9 CONDITIONS.......................................................... C-22
Section 9.1 Conditions to Obligations of Newriders and Newco #1......... C-22
Section 9.2 Conditions to Obligations of Contributors and the Company... C-23
ARTICLE 10 INDEMNIFICATION..................................................... C-24
Section 10.1 Survival.................................................... C-24
Section 10.2 Indemnification............................................. C-24
Section 10.3 Indemnification by Contributors for Tax Liabilities......... C-25
Section 10.4 Claims for Indemnification.................................. C-25
Section 10.5 Defense of Claims........................................... C-25
Section 10.6 Manner of Indemnification................................... C-26
Section 10.7 Submission of Claims For Indemnification.................... C-26
Section 10.8 Limitations................................................. C-26
ARTICLE 11 TERMINATION......................................................... C-26
Section 11.1 Termination Events.......................................... C-26
Section 11.2 Effect of Termination....................................... C-27
ARTICLE 12 DELIVERY OF CLOSING DOCUMENTS....................................... C-27
Section 12.1 Deliveries by Contributors.................................. C-27
</TABLE>
ii
<PAGE> 278
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 12.2 Deliveries by Newriders and Newco #1........................ C-27
ARTICLE 13 MISCELLANEOUS....................................................... C-28
Section 13.1 Notices..................................................... C-28
Section 13.2 Assignability and Parties in Interest....................... C-28
Section 13.3 Governing Law............................................... C-28
Section 13.4 Counterparts................................................ C-29
Section 13.5 Complete Agreement.......................................... C-29
Section 13.6 Modifications, Amendments and Waivers....................... C-29
Section 13.7 Expenses.................................................... C-29
Section 13.8 Limit on Interest........................................... C-29
Section 13.9 Equitable Remedies.......................................... C-29
Section 13.10 Attorneys Fees and Costs.................................... C-29
Section 13.11 Further Assurances.......................................... C-29
Section 13.12 Contract Interpretation: Construction of Agreement.......... C-29
Section 13.13 Jurisdiction; Service of Process............................ C-29
Section 13.14 Public Announcements; Confidentiality....................... C-29
</TABLE>
iii
<PAGE> 279
SCHEDULES
<TABLE>
<CAPTION>
NUMBER TITLE
------ -----
<S> <C>
Schedule 3.2 Consents and Approvals
Schedule 4.3 Jurisdictions
Schedule 4.4 Licenses, Permits and Qualifications
Schedule 4.5 Capital Stock
Schedule 4.8 Financial Statements
Schedule 4.12 Accounts Receivable
Schedule 4.13 Absence of Certain Charges
Schedule 4.14 Real Property
Schedule 4.15 Assets
Schedule 4.16 Personal Property
Schedule 4.17(a) Intellectual Property
Schedule 4.17(b) Intellectual Property Exceptions
Schedule 4.18 Labor and Employment Agreements
Schedule 4.19(a) Benefit Plans
Schedule 4.19(b) Material Changes to Benefit Plans
Schedule 4.19(j) Benefit Plan Exceptions
Schedule 4.20(a) Material Contracts
Schedule 4.20(d) Contracts with Distributors, Suppliers and Agents
Schedule 4.22 Transactions with Affiliates
Schedule 4.23 Compliance with Laws
Schedule 4.24 Taxes
Schedule 4.24(r) Schedule of Tax Accruals
Schedule 4.25 Insurance
Schedule 4.26 Powers of Attorney or Suretyships
Schedule 4.27 Litigation
Schedule 4.28 Banking Facilities
Schedule 4.29 Environmental Liabilities
Schedule 4.31 Business Licenses
Schedule 6.4 Exceptions to SEC Reports
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
NUMBER TITLE
------ -----
<S> <C>
Exhibit A Securities Act Legend
Exhibit B Opinion of Contributor's Counsel
Exhibit D Agreement and Plan of Merger and Reorganization
Exhibit E Opinion of Newriders' and Newco #1's counsel
Exhibit F Prather Employment Agreement
</TABLE>
iv
<PAGE> 280
LLC INTEREST CONTRIBUTION AGREEMENT
LLC INTEREST CONTRIBUTION AGREEMENT (this "Agreement") dated as of June 30,
1998, by and among Newriders, Inc., a Nevada corporation ("Newriders"),
Easyriders, Inc., a Delaware corporation and wholly-owned subsidiary of
Newriders ("Newco #1"), William Prather and Marna Prather (collectively,
"Prather"), John Martin ("Martin" and collectively with Prather, the
"Contributors") and M & B Restaurants, L.C., a Texas limited liability company,
d/b/a El Paso Barbeque Company (the "Company").
WITNESSETH:
WHEREAS, Martin and Prather own of all of the limited liability company
interests of the Company (the limited liability company interests of Martin are
hereinafter referred to as the "Martin Interests," the limited liability company
interests of Prather are hereinafter referred to as the "Prather Interests" and
the Martin Interests and Prather Interests are collectively referred to as the
"Interests");
WHEREAS, Contributors desire to contribute the Interests to Newco #1, and
Newco #1 desires to issue to Contributors common stock in exchange for the
Interests pursuant to this Agreement in a transaction described in Section 351
of the Code (the "Section 351 Transaction");
WHEREAS, it is the intention of the parties hereto that, immediately
following consummation of the contribution to Newco #1 of the Interests pursuant
to this Agreement, Newco #1 shall own all of the limited liability company
interests of the Company;
WHEREAS, simultaneously with or prior to the execution of this Agreement,
Newriders, Newco #1, Easyriders Sub II, Inc., a California corporation and
wholly-owned subsidiary of Newco #1, Joseph Teresi, Paisano Publications Inc.,
Easyriders of Columbus, Inc., Easyriders Franchising, Inc., Teresi, Inc., Bros
Club, Inc. and Associated Rodeo Riders on Wheels (the "Paisano Companies") are
entering into a stock contribution and sale agreement (the "Paisano Agreement")
whereby Mr. Teresi will contribute to Newco #1 all of the outstanding shares of
capital stock of the Paisano Companies in exchange for 6,493,507 shares of
common stock of Newco #1, a promissory note in the principal amount of
$15,000,000 payable at closing, and notes aggregating $13,000,000, as part of
the Section 351 Transaction; and
WHEREAS, simultaneously with or immediately following the execution of this
Agreement and the Paisano Agreement, Newriders, Newco #1 and Easyriders Sub,
Inc., a Nevada corporation and wholly-owned subsidiary of Newco #1 ("Newco #2"),
will enter into an Agreement and Plan of Merger and Reorganization (the
"Agreement and Plan of Merger and Reorganization") whereby (i) Newco #2 will
merge into Newriders, (ii) the common stock of Newco #2 held by Newco #1 will be
converted into one share of Newriders common stock (constituting all of the
outstanding Interests of Newriders) and (iii) the common stock of Newriders not
held by Newco #1 will be converted into common stock of Newco #1 on a
one-for-two basis, all as part of a transaction described in Sections
368(a)(1)(A), 368(a)(2)(E) and 351 of the Code (the "Reorganization").
NOW, THEREFORE, in consideration for the premises set forth above and the
provisions set forth below, the parties agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"Accounts Receivable" shall have the meaning set forth in Section 4.12.
"Affiliate" shall mean, in respect of any specified Person, any other
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person or if such specified Person bears a
familial relationship with such other Person.
C-1
<PAGE> 281
"Agreement" shall have the meaning set forth in the preamble.
"Agreement and Plan of Merger and Reorganization" shall have the meaning
set forth in the recitals.
"Assets" shall have the meaning set forth in Section 4.15.
"Assigned Rights" shall have the meaning set forth in Section 5.1.
"Balance Sheets" shall have the meaning set forth in Section 4.8(a).
"Benefit Plans" shall have the meaning set forth in Section 4.19.
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the preamble.
"Confidential Information Memorandum" means the Confidential Information
Memorandum, dated March 1998, prepared by Imperial Capital, LLC, as revised in
May 1998.
"Contribution" shall have the meaning set forth in Section 2.1.
"Contributors" shall have the meaning set forth in the preamble.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
"ERISA Affiliate" shall mean with respect to any Person (a) any corporation
which is a member of a controlled group of corporations, within the meaning of
Section 414(b) of the Code, of which that Person is a member, (b) any trade or
business (whether or not incorporated) which is a member of a group of trades or
businesses under common control, within the meaning of Section 414(c) of the
Code, of which that Person is a member, and (c) any member of an affiliated
service group, within the meaning of Section 414(m) and (o) of the Code, of
which that Person or any entity described in clause (a) or (b) is a member.
"Environmental Laws" shall mean any and all federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees
or requirements of any governmental authority regulating, relating to or
imposing liability or standards of conduct concerning any Hazardous Material or
environmental protection or health and safety, as now or may at any time
hereafter be in effect, including without limitation, the Clean Water Act also
known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. sec. 1251
et seq., the Clean Air Act ("CAA"), 42 U.S.C. sec.sec. 7401 et seq., the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. sec.sec. 136 et
seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C.
sec.sec. 1201 et seq., the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. sec. 9601 et seq., the Superfund
Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat.
1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"), 42
U.S.C. sec. 11001 et seq., the Resource Conservation and Recovery Act ("RCRA"),
42 U.S.C. sec. 6901 et seq., the Occupational Safety and Health Act as amended
("OSHA"), 29 U.S.C. sec. 655 and sec. 657, together, in each case, with any
amendment thereto, and the regulations adopted and the official publications
promulgated thereunder and all substitutions thereof.
"Financing" means the senior/subordinated debt of approximately
$22,000,000, which Newriders and Newco #1 anticipate using to fund the cash
portion of the exchange amount under the Paisano Agreement.
"Financials" shall have the meaning set forth in Section 4.8(a).
"Former Owners" means True Knowles and Elizabeth Knowles.
"GAAP" shall mean generally accepted accounting principles as in effect at
the time in question.
C-2
<PAGE> 282
"Government Authorizations" means any approval, consent, license, permit,
waiver, or other authorization issued, granted, given or otherwise made
available by or under the authority of any governmental body or pursuant to any
Legal Requirement.
"Hazardous Materials" shall mean any flammable materials, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, or similar materials defined in any Environmental Law.
"Intangible Personal Property" shall have the meaning set forth in Section
4.17(a).
"Interests" shall have the meaning set forth in the recitals.
"IRS" shall mean the Internal Revenue Service.
"Knowles Agreements" shall have the meaning set forth in Section 5.1.
"Lease" shall have the meaning set forth in Section 4.14.
"Legal Requirement" means any federal, state, local, municipal, foreign,
international, multinational or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute or treaty.
"Martin" shall have the meaning set forth in the preamble.
"Martin Interests" shall have the meaning set forth in the recitals.
"Marks" shall mean trademarks, service marks, service names, brand names,
certification marks, trade names, trade dress, assumed names, slogans, trade
names and other indications of origin owned by or licensed to the Company,
whether or not registered; and to the extent any of the foregoing is owned, the
associated goodwill and registrations and applications to register in any
jurisdiction any of the foregoing, including any extension, modification or
renewal of any such registration or application.
"Material Contracts" shall have the meaning set forth in Section 4.20(a).
"Multiemployer Plan" shall mean a plan described in Section 3(37) of ERISA.
"Newco #1" shall have the meaning set forth in the preamble.
"Newco #1 Shares" shall have the meaning set forth in Section 2.2.
"Newriders" shall have the meaning set forth in the preamble.
"Paisano Agreement" shall have the meaning set forth in the recitals.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Debt" shall have the meaning set forth in Section 4.10(a).
"Person" shall mean any natural person or any corporation, partnership,
limited liability company, joint venture or other entity.
"Personal Property" shall have the meaning set forth in Section 4.16.
"Plan" shall mean an employee benefit plan within the meaning of Section
3(3) of ERISA.
"Prather" shall have the meaning set forth in the preamble.
"Prather Interests" shall have the meaning set forth in the recitals.
"Real Property" shall have the meaning set forth in Section 4.14.
"Registration Statement" shall have the meaning set forth in Section
9.1(f).
"Reorganization" shall have the meaning set forth in the recitals.
"Reportable Event" shall mean any reportable event as defined in Section
4043(b) of ERISA, other than a reportable event as to which provision for 30-day
notice to the PBGC would be waived under applicable
C-3
<PAGE> 283
regulations had the regulations in effect on the Closing Date been in effect on
the date of occurrence of such reportable event.
"Representative" with respect to a particular Person means any director,
officer, employee, agent, consultant, advisor or other representative of such
Person, including legal counsel, accountants and financial advisors.
"Restaurants" shall have the meaning set forth in Section 4.15.
"Securities Act" shall have the meaning set forth in Section 2.2.
"Subsidiary" shall mean with respect to any Person, any corporation,
association, joint venture, partnership, limited liability company or other
business entity (whether now existing or hereafter organized) of which at least
a majority of the voting stock or other ownership interests having ordinary
voting power for the election of directors (or the equivalent) is, at the time
as of which any determination is being made, owned or controlled by such Person
or one or more Subsidiaries of such Person or by such Person or one or more
Subsidiaries of such person.
"Tax" or "Taxes" shall mean any and all taxes of any kind whatsoever
imposed or required to be collected by any federal, state or local taxing
authority in the United States, or by any foreign taxing authority, including,
without limitation, all income, gross receipts, sales, use, personal property,
use and occupancy, business occupation, mercantile, ad valorem, transfer,
license, withholding, payroll, employment, excise, escheat, real estate,
environmental, Interests, franchise, alternative or add-on minimum, estimated or
other similar tax, including any interest, penalties and other additions
thereto.
"Taxing Authority" shall mean any federal, state, local or foreign
governmental authority, or any political subdivision, agency or instrumentality
thereof with taxing jurisdiction over the Company, Contributors, the Former
Owner, Newriders or Newco #1.
"Transactions" shall mean, in respect of any party, all transactions
contemplated by this Agreement that involve, relate to or affect such party.
ARTICLE 2
CONTRIBUTION OF INTERESTS
SECTION 2.1 Contribution of Interests. Subject to the terms and conditions
herein stated, Contributors agree to contribute, assign, transfer and deliver to
Newco #1 on the Closing Date, and Newco #1 agrees to accept from Contributors on
the Closing Date, all of the Interests (the "Contribution"). The certificate(s)
representing the Interests, if any, shall be duly endorsed in blank, or
accompanied by stock powers duly executed in blank, by Contributors.
SECTION 2.2 Exchange. In exchange for the Contribution, Newco #1 shall, on
the Closing Date, issue and transfer 2,000,000 shares (the "Newco #1 Shares") of
common stock of Newco #1 to Contributors to be allocated 1,000,000 to Martin and
1,000,000 to Prather, which stock will constitute restricted securities as
defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), and contain a legend to the effect set forth in Exhibit A
hereto.
SECTION 2.3 Closing. The closing of the Contribution referred to in
Section 2.1 (the "Closing") shall take place at the offices of Kaye, Scholer,
Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Los Angeles, California,
on July 8, 1998 or on such later date that the last to be satisfied of the
conditions specified in Article 9 is satisfied or waived. Such time and date are
herein referred to as the "Closing Date."
C-4
<PAGE> 284
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF CONTRIBUTORS INDIVIDUALLY
Each of Martin and Prather, as to himself only, hereby represents and
warrants to Newriders and Newco #1, as of the date hereof and as of the Closing
Date, that:
SECTION 3.1 Authorization. Each Contributor has full power and authority
to enter into this Agreement and to perform his or her obligations hereunder and
to consummate the Transactions. This Agreement and all agreements or instruments
herein contemplated to be executed by Contributors are the valid and binding
agreements of each Contributor, enforceable against each Contributor in
accordance with their terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights
generally and to general principles of equity.
SECTION 3.2 Consents and Approvals. Except as set forth in Schedule 3.2,
neither the execution and delivery of this Agreement by Contributors nor the
consummation of the Transactions by Contributors will violate, result in a
breach of any of the terms or provisions of, constitute a default (or any event
that, with the giving of notice or the passage of time or both, would constitute
a default) under, result in the acceleration of any indebtedness under or result
in any right of termination of, increase any amounts payable under, or conflict
with, any agreement, indenture or other instrument to which any Contributor is a
party or by which any of their properties are bound, or any judgment, decree,
order or award of any court, governmental body or arbitrator (domestic or
foreign) applicable to any Contributor. Except as set forth in Schedule 3.2, all
consents, approvals and authorizations of, and declarations, filings and
registrations with, and payments of all Taxes, fees, fines, and penalties to,
any governmental or regulatory authority (domestic or foreign) or any other
Person (either governmental or private) required in connection with the
execution and delivery by Contributors of this Agreement or the consummation of
the Transactions by Contributors have been obtained, made and satisfied.
SECTION 3.3 Newco #1 Shares.
(a) Contributors acknowledge that the Newco #1 Shares issued pursuant to
Section 2.2 of this Agreement have not been and will not be registered under (i)
the Securities Act, (ii) the securities laws of any state or (iii) any other
applicable securities laws;
(b) Contributors are acquiring the Newco #1 Shares to be issued to
Contributors hereunder for investment for their own accounts and not with a view
to or for sale in connection with any distribution and resale thereof, with no
intention of distributing or reselling the same; and none of the Contributors is
aware of any particular occasion, event or circumstance upon the occurrence or
happening of which he or she intends to dispose of such shares;
(c) Each Contributor is an "accredited investor" as defined in Rule
501(a) promulgated under the Securities Act; each Contributor is aware that the
Newco #1 Shares constitute "restricted," "letter" or "investment" securities and
each Contributor by reason of his or her business or financial experience has
the capacity to protect his or her own interest in connection with the
Transactions; and
(d) Each Contributor agrees not to sell, transfer, assign, pledge,
hypothecate or otherwise dispose of the Newco #1 Shares received in this
Transaction without registration under the Securities Act, and any other
applicable federal or state securities laws, or without an opinion of counsel
satisfactory to Newco #1 that the transaction by which such shares are proposed
to be disposed of is exempt from the Securities Act, and all other applicable
federal or state securities laws, and acknowledges that Newco #1 will place a
legend on the certificate(s) representing such shares substantially to such
effect concerning these restrictions; except that Newriders and Newco #1
acknowledge that Martin may transfer all or a portion of his Newco #1 Shares to
a revocable trust of which he is the trustee.
SECTION 3.4 Brokerage Fees. No Person is entitled to any brokerage or
finder's fee or other commission from any Contributor or the Company in respect
of this Agreement or the Transactions based upon agreement or acts of either
Contributor or the Company. Contributors acknowledge that the fees of
C-5
<PAGE> 285
Imperial Capital, LLC, financial advisors to Newriders in connection with the
Transactions, will be paid at the Closing out of the proceeds of the Financing.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PRATHER AND THE COMPANY
Prather and the Company (as to the Company, only prior to but not after the
Closing), hereby jointly and severally represent and warrant to Newriders and
Newco #1, as of the date hereof and as of the Closing Date, that:
SECTION 4.1 Authorization. The Company has full corporate power and
authority to enter into this Agreement and to perform its obligations hereunder
and to consummate the Transactions. All necessary action, corporate or
otherwise, required to have been taken by or on behalf of the Company by
applicable law, the Company's organizational documents or otherwise to authorize
(a) the approval, execution and delivery on behalf of the Company of this
Agreement and (b) the performance by the Company of its obligations under this
Agreement and the consummation of the Transactions has been taken. This
Agreement and all agreements or instruments herein contemplated to be executed
by the Company are the valid and binding agreements of the Company enforceable
against it in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity.
SECTION 4.2 Consents and Approvals. Except as set forth on Schedule 3.3,
neither the execution and delivery of this Agreement by the Company nor the
consummation of the Transactions by Contributors or the Company will violate,
result in a breach of any of the terms or provisions of, constitute a default
(or any event that, with the giving of notice or the passage of time or both,
would constitute a default) under, result in the acceleration of any
indebtedness under or result in any right of termination of, increase any
amounts payable under, or conflict with, any agreement, indenture or other
instrument to which the Company is a party or by which any of its properties are
bound, the organizational documents of the Company, or any judgment, decree,
order or award of any court, governmental body or arbitrator (domestic or
foreign) applicable to the Company. Except as set forth on Schedule 3.3, all
consents, approvals and authorizations of, and declarations, filings and
registrations with, and payments of all Taxes, fees, fines, and penalties to,
any governmental or regulatory authority (domestic or foreign) or any other
Person (either governmental or private) required in connection with the
execution and delivery by the Company of this Agreement or the consummation of
the Transactions by the Company have been obtained, made and satisfied. Without
limiting the generality of the foregoing, the Reorganization and this Agreement
have been duly approved by all of the members of the Company in accordance with
applicable law and the Company's organizational documents.
SECTION 4.3 Organization and Good Standing. The Company is a limited
liability company duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation, and is duly qualified or
authorized to do business in each jurisdiction in which it does or has done
business, or owns or has owned property, or where such qualification or
authorization is otherwise required. Schedule 4.3 sets forth a complete and
correct list of all jurisdictions in which the Company does business or is
otherwise required to be qualified or authorized to transact business or own
property.
SECTION 4.4 Licenses and Permits. The Company is, and at all times has
been, duly licensed, with all requisite permits and qualifications, as required
by applicable law for the purpose of conducting its business or owning its
properties or both, in each jurisdiction in which it does business or owns
property or in which such license, permit or qualification is otherwise
required. The Company is in compliance with all such licenses, permits and
qualifications. Schedule 4.4 sets forth a list of all such licenses, permits and
qualifications, and the expiration dates thereof. There are no proceedings
pending or threatened, and Prather and the Company know of no facts that could
be the basis of a proceeding to revoke or terminate any such presently existing
license, permit or qualification.
C-6
<PAGE> 286
SECTION 4.5 Interests.
(a) The Interests have been duly and validly authorized and issued, are
fully paid and nonassessable, and were issued in full compliance with all
applicable laws, rules, regulations and ordinances and the Company's
organizational documents. The Interests constitute all the ownership interests
of the Company and there exists no (a) outstanding options, warrants or rights
issued or granted by the Company or Prather to purchase or subscribe for any
ownership interests or other equity securities of the Company, (b) outstanding
options, warrants or rights to sell to the Company any ownership interests or
other equity securities of any other business entity, (c) obligations of the
Company, whether absolute or contingent, to issue any ownership interests or
other equity securities or to share or make any payments based on its revenues,
profits, cash flow or net income, or (d) indebtedness or securities directly or
indirectly convertible or exchangeable into any ownership interest or other
equity securities of the Company. Schedule 4.5 sets forth all the ownership
interests or other equity securities of the Company.
(b) Prather owns all of the Prather Interests, free and clear of any
liens, encumbrances, pledges, security interests, restrictions, prior
assignments and claims of any kind or nature whatsoever, except for liens
securing Permitted Debt. Upon consummation of the Transactions, Newco #1 shall
be the owner, beneficially and of record, of all of the Prather Interests, free
and clear of any liens, encumbrances, pledges, security interests, restrictions,
prior assignments and claims of any kind or nature whatsoever, except for liens
securing Permitted Debt. No Person has made or threatened to make any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any of the Prather
Interests, or any other voting, equity, or ownership interest in, the Company,
or (b) is entitled to all or any portion of the Newco #1 Shares payable for the
Prather Interests.
SECTION 4.6 Subsidiaries. The Company has no Subsidiaries or any other
equity interest in any corporation, partnership, limited liability company or
other entity.
SECTION 4.7 Corporate Books. The corporate minute books of the Company are
complete, each of the minutes contained therein accurately reflect the
transactions that occurred at the meeting for which the minutes were taken, the
meetings of members referred to in the minutes were duly called and held, and
the signatures contained on all documents in the minute books are the true
signatures of the persons purporting to have signed the same.
SECTION 4.8 Financial Statements.
(a) Schedule 4.8 contains the balance sheets of the Company at December
31, 1997 and December 31, 1996 (the "Balance Sheets") and the statements of
operations and retained earnings and statement of cash flows of the Company for
the 12 months then ended and notes thereto (collectively, the "Financials"). The
Financials (i) have been prepared from the books and records of the Company in
accordance with GAAP consistently applied with prior periods except as expressly
noted in the Financials, (ii) are complete and correct and fairly present the
financial condition and results of operations of the Company as of the dates and
for the periods indicated thereon, and (iii) contain and reflect adequate
reserves for all liabilities and obligations of the Company of any nature,
whether absolute, contingent or otherwise. No financial statements of any Person
other than the Company is required by GAAP to be included in the Financials. The
Financials have been reviewed by the independent accounting firm of Deloitte &
Touche LLP, whose unqualified reports thereon are part of Schedule 4.8. Schedule
4.8 also contains the unaudited balance sheet of the Company at May 5, 1998 and
the Consolidated Statement of Operations for the period January 1, 1998 through
May 5, 1998 (the "Interim Financials"). The Interim Financials (i) have been
prepared from the books and records of the Company in accordance with GAAP
consistently applied with prior periods, except for normal year-end adjustments
and except that no footnotes appear in the Interim Financials, (ii) are complete
and correct and fairly present the financial condition and results of operations
of the Company as of the dates and for the periods indicated thereon, and (iii)
contain and reflect adequate reserves for all liabilities and obligations of the
Company of any nature, whether absolute, contingent or otherwise.
(b) The books of account of the Company have been maintained in all
material respects in accordance with sound business practices, and there have
been no transactions involving the Company that
C-7
<PAGE> 287
properly should have been set forth therein in accordance with GAAP that have
not been accurately so set forth.
(c) The projected financial data of the Company included in the
Confidential Information Memorandum is based upon good faith estimates and
assumptions believed by Prather and the Company to be reasonable. Neither
Prather nor the Company have any reason to believe that they will not achieve
the financial performance reflected in such projected financial data.
SECTION 4.9 Inventory. All inventory of the Company, whether or not
reflected in the Balance Sheets, consists of a quality and quantity usable and
salable in the ordinary course of business, except for obsolete items and items
of below-standard quality, all of which have been written off or written down to
net realizable value in the Balance Sheets or on the accounting records of the
Company as of the Closing Date, as the case may be. All inventories not written
off have been priced at the lower of cost (first in, first out method) or
market. The quantities of each item of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable in the
present circumstances of the Company.
SECTION 4.10 Indebtedness.
(a) Except ordinary course-of-business trade payables and outstanding
loans owing to the Plains Bank and to AT&T (SBA) aggregating not more than
$2,500,000 principal balance ("Permitted Debt"), the Company has no debt.
(b) None of the Contributors nor the Former Owner nor any of their
respective Affiliates is indebted to the Company; neither the Company nor any
Affiliate of the Company is indebted to any of the Contributors, the Former
Owner or any of their respective Affiliates, except as noted in the Financials
or the Interim Financials.
SECTION 4.11 Absence of Undisclosed Liabilities. There are no liabilities
or obligations of any nature of the Company, whether known or unknown, whether
absolute, accrued, contingent or otherwise, and whether due or to become due,
not reflected on or reserved for in the Financials or the Interim Financials.
There is no fact or circumstance that is likely to result in a reduction in
revenues, increase in expenses or any other loss to the Company.
SECTION 4.12 Accounts Receivable. Schedule 4.12 is an accurate aging of
the accounts, notes and other receivables of the Company (the "Accounts
Receivable") at December 31, 1997. The Accounts Receivable and any Accounts
Receivable arising since December 31, 1997 are fully collectible, net of the
reserves set forth in the balance sheet of the Company at December 31, 1997 or
for Accounts Receivables arising after December 31, 1997, in the books and
records of the company, all of which reserves are adequate.
SECTION 4.13 Absence of Certain Changes. Except as disclosed on Schedule
4.13, since December 31, 1997, there has not occurred:
(a) Any adverse change in the assets, liabilities (whether absolute,
accrued, contingent or otherwise), condition (financial or otherwise), results
of operations, business or prospects of the Company;
(b) Any increase in indebtedness or lease obligations of the Company
over the level reflected on the balance sheet of the Company at December 31,
1997, any guarantee by the Company of any obligation, or any mortgage, pledge or
encumbrance on any of the properties or assets of the Company or any
cancellation or waiver of any claims or rights with a value in excess of
$10,000;
(c) Any amendment, modification, termination, breach or default of any
Material Contract, or of any agreement that would have been a Material Contract
were such agreement in existence on the date hereof;
(d) Any entering into of any written or oral agreements, contracts,
commitments or transactions that extend beyond the first anniversary hereof or
have obligations thereunder in excess of $10,000;
(e) Any increase in the compensation (including, without limitation, the
rate of commissions) payable to, or any payment of a cash or other bonus to, any
member, officer or employee of, or consultant to, or any Affiliate of the
Company other than such persons earning less than $35,000 per year;
C-8
<PAGE> 288
(f) Any transaction by the Company, whether or not covered by the
foregoing, not in the ordinary course of business, including, without
limitation, any purchase, lease, license or sale of any assets;
(g) Any alteration in the manner of keeping the books, accounts or
records of the Company, or in the accounting practices therein reflected;
(h) Any declaration or payment of any distributions by the Company, any
acquisition or redemption by the Company of any of its Interests or other equity
securities or any loan by the Company to any of its Affiliates or security
holders;
(i) Any change in the Company's authorized or issued membership
interests, any grant of any option or right to purchase membership interests of
the Company, or any issuance of any security convertible into such membership
interests, or any grant of any registration rights;
(j) Any amendment to the organizational documents of the Company;
(k) Any adoption of, or increase in the payments to or benefits under,
any profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company;
(l) Any termination or cessation of employment of any officer or key
employee of the Company;
(m) Any mortgage, deed of trust, pledge, lien or encumbrance on any of
the Assets, whether now owned or hereafter acquired;
(n) Any damage or destruction to, or loss of, any assets or property
owned, leased or used by the Company (whether or not covered by insurance); or
(o) Any agreement, whether written or oral, to do any of the things
described in the preceding subsections (a) - (n) of this Section 4.13.
SECTION 4.14 Real Property. Schedule 4.14 sets forth a complete and
correct description of each parcel of real property (collectively, the "Real
Property") owned by or leased to the Company or otherwise used by the Company,
which description consists of a legal description for each such owned parcel and
an identification of each lease (a "Lease") of real property under which the
Company is either a lessee, sublessee, lessor or sublessor. Except as set forth
in Schedule 4.14:
(a) The Company does not own any Real Property;
(b) Each Lease is a valid and binding obligation of the Company, and all
such Leases are valid and binding obligations of each of the other parties
thereto;
(c) Neither the Company nor any other party to a Lease is in default
with respect to any material term or condition thereof, and no event has
occurred that, with the passage of time or the giving of notice or both, would
constitute a default thereunder or would cause the acceleration of any
obligation of any party thereto or the creation of a lien or encumbrance upon
any asset of the Company;
(d) All of the buildings, fixtures and other improvements located on the
Real Property are in good operating condition and repair, and the operation
thereof as presently conducted does not violate any applicable code, zoning
ordinance, environmental law or regulation or other applicable law or
regulation;
(e) The Company holds all necessary permits and licenses required by
applicable law relating to the operation and use of the Real Property;
(f) No Leases are in effect which contain any covenant or representation
which would prohibit the Company, after the Closing, from operating any
Restaurant in its intended manner; and
(g) The Restaurants are properly zoned for use as restaurants.
SECTION 4.15 Assets. The Company has, and at the Closing will have, good
and marketable title to, or, to the extent the Company's interest is limited to
a leasehold, valid leasehold interests in, all the Assets (as hereinafter
defined), free and clear of all liens and indebtedness, except for liens
securing Permitted Debt.
C-9
<PAGE> 289
"Assets" includes all of the assets owned by the Company or necessary for or
used or useful in the conduct of its business in the manner in which it is
presently or is contemplated as being or has been conducted by the Company,
including the assets shown in the balance sheet of the Company at December 31,
1997, the rights under the Material Contracts and all assets used in connection
with any of the restaurants owned or operated by the Company (the
"Restaurants"), which Restaurants are listed on Schedule 4.15.
SECTION 4.16 Machinery, Equipment and Other Personal Property, etc. The
Company owns or leases all of the machinery, equipment, vehicles, furniture,
fixtures, leasehold improvements, repair parts, tools and other property
(collectively, the "Personal Property") used by or relating to the Company. All
such Personal Property is in good operating condition and is sufficient to carry
on the business of the Company in the normal course as it is presently conducted
and is free from defects, whether patent or latent. Except as set forth in
Schedule 4.16, it is not necessary for the Company to acquire or obtain the use
of any additional personal property to carry on its business as presently and
foreseeably to be conducted.
SECTION 4.17 Intangible Personal Property.
(a) Schedule 4.17(a) sets forth (i) a complete and correct list of each
patent, patent application, copyright, copyright application, Mark (including,
where applicable, the registration number and date for each Mark for which a
registration has been issued, or the application number and date for each Mark
for which an application for registration is pending in, the United States
Patent and Trademark Office or other similar office in any foreign jurisdiction)
and all other intellectual property or usage rights, owned by the Company
(collectively, the "Intangible Personal Property"), and (ii) a complete and
correct list of all material licenses or similar agreements or arrangements
("Licenses") to which the Company is a party either as licensee or licensor for
each such item of Intangible Personal Property. The Company has all right, title
and interest in and to the Intangible Personal Property and the Intangible
Personal Property consists of all intellectual property which is used or useful
in the operation of the business of the Company.
(b) Except as set forth on Schedule 4.17(b):
(i) There have been no actions or other judicial or adversary
proceedings involving the Company concerning any item of Intangible Personal
Property, and no such action or proceeding is threatened and no claim or other
demand has been made by any Person relating to any item of Intangible Personal
Property;
(ii) To Prather's knowledge, the Company has the right and authority
to use each item of Intangible Personal Property in connection with the conduct
of its business in the manner presently conducted and to convey such right and
authority, and such use does not conflict with, infringe upon or violate any
intellectual property or usage rights of any other person or entity;
(iii) To Prather's knowledge, the conduct by the Company of its
business does not conflict with the intellectual property or usage rights of
others;
(iv) Neither Contributors nor the Company pays any royalty to anyone
for the use of any item of Intangible Personal Property; and
(v) The Company owns all Intangible Personal Property necessary to
the conduct of its businesses.
(vi) After the Closing, the Company shall have the same rights in and
to the Intangible Personal Property used in connection with the business of the
Company as the Company has on the date of this Agreement and on the Closing Date
and shall be able to use and exploit the Intangible Personal Property to the
full extent provided by applicable law without any material restriction on such
use or exploitation.
(vii) To Prather's knowledge, none of the Intangible Personal
Property used in the conduct of the business, any element thereof as they
currently exist, or the exploitation thereof by the Company, or the transfer
thereof pursuant to this Agreement, libels, defames, violates the rights of
privacy or publicity, or violates any trademark or service mark, common law or
other similar right of any Person or violates any other applicable law. The
Company has not received any notice relating to any claim thereof.
C-10
<PAGE> 290
(c) The Company does not own or control any copyrights that are material
to the conduct of its business.
(d) (i) Each Mark that is necessary or useful to the conduct of the
business is valid, subsisting, unexpired, enforceable and has not been
abandoned. Each application for the federal registration in the United States of
a Mark (including, without limitation, any renewals thereof) has been duly and
properly filed, and each registration has been properly issued.
(ii) There are no marks held by Persons other than the Company that
conflict with or infringe on the Marks owned or used by the Company in the
conduct of their business, third party claims against such Marks, or potential
infringements against such Marks.
(iii) No other Person uses, has the right to use or claims the right
to use the Marks or any combination or derivation thereof.
(iv) The Company has taken all necessary steps to secure, protect and
maintain the Marks in the United States and has disclosed in a Schedule herein
all infringements or potential infringements, known to Contributors or the
Company.
SECTION 4.18 Labor and Employment Agreements.
(a) Schedule 4.18 sets forth a complete and correct list of the
following:
(i) Each collective bargaining agreement and other labor or
employment agreement to which the Company is a party or by which it is bound;
(ii) Each agreement relating to the employment of any employee or the
rendering of services by any independent contractor, and any severance
agreements with respect to any employee or independent contractor or leased
employee to which the Company is a party, by which it is bound or under which it
could otherwise be liable for the payment of any amount; and
(iii) The name of each employee or agent or independent contractor of
or consultant to the Company who since December 31, 1996 was or is being paid
$35,000 or more per year or $3,500 or more per month.
As used in this Section 4.18, the word "agreement" includes both oral
and written contracts, understandings, arrangements and other agreements, other
than agreements terminable by the Company at will or by notice of not more than
30 days without any obligation being incurred thereunder by the Company.
(b) The Company has complied in all material respects with all
applicable laws, rules and regulations (domestic and foreign) relating to labor
relations and the employment of labor, including, without limitation, those
related to wages, hours, benefits, non-discrimination, immigration, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate authorities, or is holding for payment not yet due to such
authorities, all amounts required to be withheld from such employees and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing. The Company does not and has not "leased" any
employees except in full compliance with applicable law.
(c) No unfair labor practice complaint is pending against the Company
before the National Labor Relations Board or any federal, state or local agency
(domestic or foreign), and no labor strike, slowdown, picketing, boycott, work
stoppage or employee grievance or other labor trouble affecting the Company is
pending or threatened. There is no lockout of any employees by the Company and
no such action is contemplated by the Company.
(d) No organization effort, no sex discrimination, racial
discrimination, age discrimination or other employment-related allegation,
claim, suit or proceeding, has been made or is pending with respect to the
employees of the Company and no such effort, allegation, claim, suit or
proceeding has been made, raised or brought within the three-year period prior
to the date of this Agreement.
C-11
<PAGE> 291
(e) No arbitration proceeding arising out of or under any collective
bargaining agreement is pending and no basis for any such proceeding exists.
(f) No Person who performs services for the Company who has not been
classified or treated as an employee (whether for purposes of ERISA, the Code or
otherwise) should be treated as an employee for any such purpose.
(g) To Prather's knowledge, no Person who performs services for the
Company is a party to, or is otherwise bound by, any agreement or arrangement,
including any confidentiality, noncompetition, or proprietary rights agreement,
between such employee and any other Person that in any way adversely affects or
will affect the performance of his or her duties as an employee of the Company.
To Prather's knowledge, no officer or other key employee of the Company intends
to terminate his or her employment.
(h) All reasonably anticipated obligations of the Company, whether
arising by operation of law, contract, past custom or otherwise, for
unemployment compensation benefits, workers compensation benefits, disability
benefits, pension or profit sharing benefits, advances, salaries, bonuses,
vacation and holiday pay, sick leave and other forms of compensation payable to
the employees, independent contractors or other agents of the Company in respect
of the services rendered by any of them on or prior to the date of the Monthly
Unaudited Financials have been paid or adequate accruals therefor have been made
in the books and records of the Company and in the Financials or the Monthly
Unaudited Financials (or in the case of services rendered after the date of the
Monthly Unaudited Financials, have been paid when due). All such obligations in
respect of services rendered on or prior to the date hereof have been paid when
due. All accrued obligations of the Company applicable to its employees, whether
arising by operation of law, contract, past custom or otherwise, for payments to
trusts or other funds or to any governmental agency, with respect to
unemployment compensation benefits, social security benefits or any other
benefits for employees, with respect to employment of said employees through the
date of the Monthly Unaudited Financials have been paid or adequate accruals
therefor have been made on the books and records of the Company and in the
Financials or the Monthly Unaudited Financials (or in the case of accrued
obligations arising after the date of the Monthly Unaudited Financials, have
been paid when due). All such obligations with respect to employment of
employees through the date hereof have been paid when due.
SECTION 4.19 Compliance with ERISA.
(a) Except as set forth or Schedule 4.19(a) and except for non-monetary
de minimis fringe benefits customarily provided to restaurant employees (e.g.,
meals), the Company does not (i) maintain or contribute to or have any
obligation with respect to, and none of the employees of the Company are covered
by, any bonus, deferred compensation, severance pay, pension, profit-sharing,
retirement, insurance, stock purchase, stock option, or other fringe benefit
plan, arrangement or practice, written or otherwise, or any other "employee
benefit plan," as defined in Section 3(3) of ERISA, whether formal or informal
(collectively, the "Benefit Plans"). None of the Benefit Plans is (i) a
Multiemployer Plan, (ii) a "multiple employer plan," as defined in ERISA or the
Code, or (iii) a funded welfare benefit plan, as defined in Section 419 of the
Code. The Company does not have any agreement or commitment to create any
additional Benefit Plan or to modify or change any existing Benefit Plan. The
Company does not have any other ERISA Affiliates.
(b) With respect to each Benefit Plan, the Company has heretofore
delivered or caused to be delivered to Newriders true, correct and complete
copies of (i) all documents which comprise the most current version of each of
such Benefit Plans, including any related trust agreements, insurance contracts,
or other funding or investment agreements and any amendments thereto, and (ii)
with respect to each Benefit Plan that is a Plan, (A) the three most recent
Annual Reports (Form 5500 Series) and accompanying schedules for each of the
Plans for which such a report is required, (B) the most current summary plan
description (and any summary of material modifications), (C) the three most
recent certified financial statements and actuarial valuations for each of the
Plans for which such a statement or actuarial valuation is required or was
prepared, (D) the Forms PBGC-1 filed in each of the three most recent plan years
for each of the Plans for which such form was required to be filed, and (E) for
each Plan intended to be "qualified" within the meaning of Section 401(a) of the
Code, all the Internal Revenue Service determination letters issued with respect
to such Plan. Except as set forth on Schedule 4.19(b), since the date of the
documents
C-12
<PAGE> 292
delivered, there has not been any material change in the assets or liabilities
of any of the Benefit Plans or any change in their terms and operations which
could reasonably be expected to affect or alter the tax status or materially
affect the cost of maintaining such Benefit Plan, and none of the Benefit Plans
has been or will be amended prior to the Closing Date. Each of the Benefit Plans
can be amended, modified or terminated by the Company within a period of thirty
(30) days, without payment of any additional compensation or amount or the
additional vesting or acceleration of any such benefits, except to the extent
that such vesting is required under the Code upon the complete or partial
termination of any Plan intended to be qualified within the meaning of Section
401(a) of the Code.
(c) The Company has performed and complied in all respects with all of
its obligations under and with respect to each of the Benefit Plans and each of
the Benefit Plans has, at all times, in form, operation and administration
complied in all material respects with its terms, and, where applicable, the
requirements of the Code, ERISA and all other applicable laws and regulations.
Each Plan which is intended to be "qualified" within the meaning of Section
401(a) of the Code has been determined by the Internal Revenue Service to be so
qualified and nothing has occurred which reasonably could be expected to
adversely affect such qualified status.
(d) There are no unpaid contributions due prior to the date hereof with
respect to any Benefit Plan that are required to have been made under its terms
and provisions, any related insurance contract or any applicable law or
regulation.
(e) (i) With respect to each Plan subject to Section 412 of the Code,
there has occurred no failure to meet the minimum funding standards of Section
412 of the Code (whether or not waived in accordance with Section 412(d) of the
Code) or failure to make by its due date a required installment under Section
412(m) of the Code, and (ii) with respect to each Plan which is an "employee
pension benefit plan," as defined in Section 3(2) of ERISA, (A) the Company has
not withdrawn from such Plan during a plan year in which it was a "substantial
employer," as defined in Section 4001(a)(2) of ERISA, where such withdrawal
could result in liability of such substantial employer pursuant to Section
4062(e) or 4063 of ERISA, (B) the Company has not filed a notice of intent to
terminate any such Plan or adopted any amendment to treat any such Plan as
terminated, (C) the PBGC has not instituted proceedings to terminate any such
Plan, (D) no other event or condition has occurred which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any such Plan, (E) no accumulated funding
deficiency, whether or not waived, exists with respect to any such Plan, and no
condition has occurred or exists which by the passage of time would be expected
to result in an accumulated funding deficiency as of the last day of the current
plan year of any such Plan, (F) all required premium payments to the PBGC have
been paid when due, (G) no reportable event, as described in Section 4043 of
ERISA (whether or not waived), has occurred with respect to any such Plan, (H)
no excise taxes are payable under the Code, (I) no amendment with respect to
which security is required under Section 307 of ERISA or Section 401(a)(29) of
the Code has been made or is reasonably expected to be made, and (J) there has
been no event which could subject any of the Company to liability under Section
4064 or 4069 of ERISA.
(f) With respect to each Plan that is subject to the provisions of Title
I, Subtitle B, Part 3 of ERISA, (i) the funding method used in connection with
such Plan is acceptable under ERISA and the actuarial assumptions used in
connection with funding such Plan meet the requirements of Section 302 of ERISA,
(ii) the actuarial present value (based on the actuarial assumptions used in the
most recent actuarial valuation) of vested and nonvested "benefit liabilities,"
as defined in Section 4001(a)(16) of ERISA (calculated on a termination basis
and taking into account all contingent and subsidized benefits) of each such
Plan, determined as of the most recent valuation date for each such Plan, did
not exceed the fair market value of the assets of such Plan as of such date, and
(iii) since the most recent valuation date for each such Plan, there has been no
amendment or change to such Plan that would increase the amount of benefit
liabilities thereunder and there has been no event or occurrence that would
materially increase or decrease the value of such assets or liabilities.
C-13
<PAGE> 293
(g) All group health plans covering employees of the Company have been
operated in compliance with the requirements of Section 4980B of the Code (and
any predecessor provisions) and Part 6 of Title I of ERISA ("COBRA").
(h) The Company has no obligation to provide any deferred compensation,
pension or non-pension benefits to retired or other former employees, except for
health benefits as specifically required by COBRA or pension benefits payable
from a Plan intended to be "qualified" within the meaning of Section 401(a) of
the Code.
(i) Neither the Company, nor any other "disqualified person" or "party
in interest," as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction," as defined in Section
4975 of the Code or Section 406 of ERISA, with respect to any Benefit Plan nor
have there been any fiduciary violations under ERISA which could subject the
Company (or any officer, director or employee thereof) to any penalty or tax
under Section 502(i) of ERISA or Sections 4971 and 4975 of the Code.
(j) Except as set forth on Schedule 4.19(j), with respect to any Benefit
Plan: (i) no filing, application or other matter is pending with the Internal
Revenue Service, the PBGC, the United States Department of Labor or any other
governmental body, (ii) there is no action, suit or claim pending (nor, to the
knowledge of the Company, any basis for such a claim), other than routine claims
for benefits, and (iii) there are no outstanding liabilities for taxes,
penalties or fees.
(k) The Company has not incurred any liability or taken any action, and
the Company has no knowledge of any action or event that could cause it to incur
any liability, (i) under Section 412 of the Code or Title IV of ERISA with
respect to any "single-employer plan" (as defined in Section 4001(a)(15) of
ERISA), (ii) on account of a partial or complete withdrawal (as defined in
Sections 4203 and 4205 of ERISA, respectively) with respect to any Multiemployer
Plan, or (iii) on account of unpaid contributions to any Multiemployer Plan.
(l) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the contemplated transactions will: (i) entitle
any current or former employee of the Company to severance pay, unemployment
compensation or any similar payment, (ii) accelerate the time of payment or
vesting or increase the amount of any compensation due to any such employee or
former employee, or (iii) directly or indirectly result in any payment made or
to be made to or on behalf of any person to constitute a "parachute payment"
within the meaning of Section 280G of the Code.
(m) Nothing herein contained is to be construed as a commitment by
Newriders or Newco #1 that it will continue any specific pension or other
employee benefit or fringe benefit plans.
SECTION 4.20 Material Contracts and Relationships.
(a) Schedule 4.20(a) sets forth a complete and correct list of the
following:
(i) All agreements (or groups of agreements with one or more related
entities) between the Company and any customer or supplier in excess of $25,000
and all agreements extending beyond twelve months;
(ii) All agreements that relate to the borrowing or lending by the
Company of any money or that create or continue any material claim, lien, charge
or encumbrance against, or right of any third party with respect to, any asset
of the Company;
(iii) All agreements by which the Company leases any real property,
has the right to lease any real property or leases capital equipment and all
other leases involving the Company as lessee or lessor;
(iv) All agreements to which the Company is a party not in the
ordinary course of business;
(v) All agreements to which the Company, on the one hand, and any
Contributor or any of their Affiliates, on the other hand, are parties or by
which they are bound;
C-14
<PAGE> 294
(vi) All contracts or commitments relating to the employment of any
Person or any commission or finder's fee arrangements with others other than
agreements terminable by the Company at will or by notice of not more than
thirty (30) days without any obligation being incurred thereunder by the
Company;
(vii) All franchise agreements to which the Company is a party;
(viii) All license agreements to which the Company is a party,
whether as licensor or licensee;
(ix) All other agreements to which the Company is a party or by which
it is bound and that involve $25,000 or more or that extend for a period of one
year or more; and
(x) All other agreements to which the Company is a party or by which
it is bound and that are or may be material to the assets, liabilities (whether
absolute, accrued, contingent or otherwise), condition (financial or otherwise),
results of operations, business or prospects of the Company.
As used in this Section 4.20 the word "agreement" includes both oral and written
contracts, leases, understandings, arrangements and all other agreements. The
term "Material Contracts" means the agreements of the Company required to be
disclosed on Schedule 4.20(a), whether or not disclosed, including agreements
specifically identified in other Schedules.
(b) All of the Material Contracts are in full force and effect, are
valid and binding and are enforceable in accordance with their terms in favor of
the Company. There are no material liabilities of any party to any Material
Contract arising from any breach or default of any provision thereof and no
event has occurred that, with the passage of time or the giving of notice or
both, would constitute a breach or default by any party thereto.
(c) The Company has fulfilled all material obligations required pursuant
to each Material Contract to have been performed by the Company prior to the
date hereof, and the Company will be able to fulfill, when due, all of its
obligations under each of the Material Contracts that remain to be performed
after the date hereof.
(d) Schedule 4.20(d) sets forth a complete and correct list of each (i)
supplier (or related group of suppliers) with whom the Company did an aggregate
of $25,000 or more of business during the last fiscal year, and (ii) agent (or
related group of agents) or representative (or related group of representatives)
who was paid an aggregate of $25,000 or more by the Company during the last
fiscal year, which lists itemize the actual dollar amounts.
(e) The Company has maintained and continues to maintain good relations
with its suppliers and agents.
SECTION 4.21 Absence of Certain Business Practices. Neither the Company
nor any of its Affiliates or Representatives, including, but not limited to, the
Contributors or the Former Owner, have, directly or indirectly, given or agreed
to give any gift or similar benefit to any customer, supplier, competitor or
governmental employee or official (domestic or foreign) (a) that would subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding or (b) that, if not given in the past, would have had a
material adverse effect on the assets, liabilities (whether absolute, accrued,
contingent or otherwise), condition (financial or otherwise), results of
operations, business or prospects of the Company.
SECTION 4.22 Transactions with Affiliates. Except as set forth on Schedule
4.22 or as described elsewhere in this Agreement, there have been no
transactions, including purchases or sales of assets or entities, by or between
the Company, on the one hand, and any Contributor or the Former Owner or any of
their respective Affiliates, on the other hand, since December 31, 1994 and
there are no agreements or understandings now in effect between the Company, on
the one hand, and any Contributor or the Former Owner or any of their respective
Affiliates, on the other hand. Schedule 4.22 also (a) states, as of the date
hereof, the amounts due from the Company to any Contributor or the Former Owner
or any of their respective Affiliates and the amounts due from any of the
Contributors or the Former Owner or their Affiliates to the Company, (b)
describes the transactions out of which such amounts due arose and (c) describes
any interest of any Contributor and the Former Owner or any of their respective
Affiliates in any supplier of, or any other
C-15
<PAGE> 295
entity that has had business dealings with, the Company since December 31, 1994.
After the Closing, there will be no obligations or other liabilities between the
Company, on the one hand, and any Contributor or the Former Owner or any of
their respective Affiliates, on the other hand, other than pursuant to this
Agreement and the Transactions contemplated hereby.
SECTION 4.23 Compliance with Laws. Except as set forth on Schedule 4.23,
the operation, conduct and ownership of the property or business of the Company
is being, and at all times has been, conducted, in all material respects, in
full compliance with all federal, state, local and other (domestic and foreign)
laws, rules, regulations and ordinances (including without limitation, those
relating to employment discrimination, occupational safety, environmental
compliance, conservation or corrupt practices) and all judgments and orders of
any court, arbitrator or governmental authority applicable to it. Neither the
Company nor Prather is aware of any proposed ordinance, order, judgment, decree,
governmental taking, condemnation or other proceeding that would be applicable
to the business, operations or properties of the Company and that could have a
material adverse effect on the assets, liabilities (whether absolute, accrued,
contingent or otherwise), condition (financial or otherwise), results of
operations, business or prospects of the Company.
SECTION 4.24 Taxes. Except as set forth on Schedule 4.24:
(a) The Company has timely filed all Tax returns and reports required to
have been filed by it for all taxable periods ending on or prior to the date
hereof, and the Company or Contributors have paid all Taxes due to any Taxing
Authority with respect to all taxable periods ending on or prior to the date
hereof, or otherwise attributable to all periods prior to the date hereof. The
Tax returns and reports filed are true and correct in all material respects. The
Company has not requested any extensions of time within which to file returns
and reports in respect of any Taxes;
(b) None of such returns contain, or will contain, a disclosure
statement under Section 6662 of the Code (or any predecessor statute) or any
similar provision of state, local or foreign law;
(c) Neither Prather nor the Company has received notice that the IRS or
any other Taxing Authority has asserted against the Company or any Contributor
with respect to the business or operations of the Company any deficiency or
claim for additional Taxes in connection therewith;
(d) All Tax deficiencies asserted or assessed against the Company have
been paid or finally settled;
(e) All Tax obligations of the Company or Prather with respect to the
business or operations of the Company have been paid or reported when due and
any unpaid Taxes relating to periods for which Tax returns have not yet been
filed have been fully booked and properly accrued on the books of the Company or
Prather;
(f) There is not pending or threatened any action, audit, proceeding, or
investigation with respect to (i) the assessment or collection of Taxes or (ii)
a claim for refund made by the Company or any Contributor with respect to Taxes
previously paid with respect to the business or operations of the Company and
(iii) with respect to any such actions, audits, proceedings or investigation
(whether or not identified in Schedule 4.24), the Company will not have
liability in respect of or resulting therefrom;
(g) All amounts that are required to be collected or withheld by the
Company, or with respect to Taxes of the Company, have been duly collected or
withheld; all such amounts that are required to be remitted to any Taxing
Authority have been duly remitted;
(h) Neither the IRS nor any state, foreign or local Taxing Authority has
examined any income tax return of the Company or Prather with respect to the
business or operations of the Company;
(i) The Company has not waived any statute of limitations with respect
to the assessment of any Tax;
(j) The Company has not taken any action not in accordance with past
practice that would have the effect of deferring any Tax liability of the
Company or Prather from any taxable period ending on or before the date hereof
to any taxable period ending after such date;
(k) There are no liens for Taxes due and payable upon any assets of the
Company;
C-16
<PAGE> 296
(l) The Company has not participated in, or cooperated with, an
international boycott within the meaning of Section 999 of the Code;
(m) The Company is not required to include in income any adjustment
pursuant to Section 481(a) of the Code (or similar provisions of other law or
regulations) by reason of a change in accounting method nor is the IRS (or other
Taxing Authority) proposing, or considering, any such change in accounting
method;
(n) The Company is not a party to any agreement, contract, arrangement
or plan (or group of agreements, contracts, arrangements or plans) that could
result in the payment of any "excess parachute payment" within the meaning of
Section 280G of the Code or, after the culmination of all Transactions, could
create a loss of deduction under Section 162(m) of the Code;
(o) None of the assets of the Company is property that is required to be
treated as owned by any other person pursuant to the "safe harbor lease"
provisions of former Section 168(f)(8) of the Code as in effect immediately
prior to the enactment of the Tax Reform Act of 1986 and none of the assets of
the Company is "tax exempt use property" within the meaning of Section 168(h) of
the Code;
(p) There are no currently binding elections under Sections 108, 179,
195, 197, 444, 703(b), 709(b), 754, 761(a), 1033 of the Code and Treasury
Regulations Sections 3.01.7701-03 with respect to Taxes affecting the Company
for any period beginning on or after the Closing Date.
(q) The pre-Closing Tax liabilities of the Company (whether imposed
before or after Closing and whether imposed upon filing of a Tax return or as a
result of an audit or examination) which are unpaid as of the close of business
on the Closing Date will not exceed the reserves for Tax liabilities as set
forth in the account for accrued Taxes payable or similar account included in
the Balance Sheet of the Company as of December 31, 1997 or in the books and
records of the Company. Attached hereto as Schedule 4.24(r) is a schedule of the
accruals for taxes included in the Financials of the Company as of December 31,
1997.
SECTION 4.25 Insurance. Schedule 4.25 sets forth a complete and correct
list of all insurance policies and of all claims made by the Company on any
liability or other insurance policies during the past five years (other than
worker's compensation claims). The Company has adequate liability and other
insurance policies insuring it against the risks of loss arising out of or
related to its assets and business. Without limitation, as to the tangible real
and personal property of the Company, such insurance is adequate to cover the
full replacement cost, less deductible amounts, of such tangible real and
personal property. Schedule 4.25 is a complete and correct list of all insurance
currently in place and accurately sets forth the coverages, deductible amounts,
carriers and expiration dates thereof. Schedule 4.25 is a complete and correct
list of all insurance with respect to which the policy period has expired, but
for which certain of the coverage years are still subject to audit or
retrospective adjustment by the carrier, and accurately sets forth such coverage
years and the coverages, deductible amounts, carriers and expiration dates
thereof. There are no outstanding requirements or recommendations by any
insurance company that issued any policy of insurance to the Company or by any
board of or by any governmental authority exercising similar functions that
require or recommend any changes in the conduct of the business of the Company
or any repairs or other work to be done on or with respect to the Company's
assets. Except as set forth on Schedule 4.25, no notice or other communication
has been received by the Company from any insurance company within the five
years preceding the date hereof canceling or materially amending or materially
increasing the annual or other premiums payable under any of its insurance
policies, and no such cancellation, amendment or increase of premiums is
threatened.
SECTION 4.26 No Powers of Attorney or Suretyships. Except as set forth on
Schedule 4.26 or in the security documents relating to the Permitted Debt, (a)
the Company has not granted any general or special powers of attorney and (b)
the Company has no obligation or liability (whether actual, contingent or
otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor,
obligor on an asset or income maintenance agreement or otherwise in respect of
the obligation of any Person.
SECTION 4.27 Litigation Schedule 4.27 sets forth a complete and correct
list of all pending legal, administrative, arbitration or other proceedings, to
which the Company is a party or is otherwise affected (or by which any of its
properties are affected), together with a description of the nature and status
thereof in reasonable detail. Except as set forth on Schedule 4.27, (a) there is
no legal, administrative, arbitration or
C-17
<PAGE> 297
other proceeding, or any governmental investigation, pending or to Prather's
knowledge, threatened against or otherwise affecting the Company, or any of its
or its assets, that, if determined against the Company, would have a material
adverse effect on the assets, liabilities (whether absolute, accrued, contingent
or otherwise), condition (financial or otherwise), results of operations,
business or prospects of the Company; (b) no claim not already fully discharged
that involves or may involve $25,000 or more has been made against the Company;
and (c) all potential losses and liabilities of the Company that may result from
the matters disclosed on Schedule 4.27 are fully covered by insurance policies
of the Company, which policies are in full force and effect on and as of the
date hereof, except for any applicable deductible amount that does not exceed
$25,000, or any applicable self-insured retention that does not exceed $25,000,
for any one claim or action. The Company has given in a timely manner to its
insurers all notices required to be given under its insurance policies with
respect to all of the claims and actions disclosed on Schedule 4.27, and no
insurer has denied coverage of any of such claims or actions or rejected any of
the claims with respect thereto.
SECTION 4.28 Banking Facilities. Schedule 4.28 sets forth a complete and
correct list of:
(a) Each bank, savings and loan or similar financial institution in
which the Company has an account or safety deposit box and the numbers of such
accounts or safety deposit boxes maintained thereat; and
(b) The names of all persons authorized to draw on each such account or
to have access to any such safety deposit box, together with a description of
the authority (and conditions thereto, if any) of each person with respect
thereto.
SECTION 4.29 Environmental Liabilities.
(a) Except as set forth on Schedule 4.29 hereto, the Company has not
used, stored, treated, transported, manufactured, refined, handled, produced or
disposed of any Hazardous Materials on, under, at, from, or in any way
affecting, any of their properties or assets, or otherwise, in any manner which
violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials and no prior owner of such property or asset or any tenant,
subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials
on or affecting such property or asset, or otherwise in any manner which
violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials.
(b) (i) The Company has no obligations or liabilities, known or unknown,
matured or not matured, absolute or contingent, assessed or unassessed, where
such would reasonably be expected to have a materially adverse effect on the
business or condition (financial or otherwise) of the Company, and (ii) no
claims have been made against the Company during the past five years and no
presently outstanding citations or notices have been issued against the Company,
where such could reasonably be expected to have a materially adverse effect on
the business or condition (financial or otherwise) of the Company, which in
either case have been or are imposed by reason of or based upon any provision of
any Environmental Law, including, without limitation, any such obligations or
liabilities relating to or arising out of or attributable, in whole or in part,
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of any Hazardous Materials by the Company, or any of
its employees, agents, representatives or predecessors in interest in connection
with or in any way arising from or relating to the Company or any of their
respective properties, or relating to or arising from or attributable, in whole
or in part, to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation or handling of any such substance, by any
other Person at or on or under any of the real properties owned or used by the
Company or any other location where such could have a materially adverse effect
on the assets, liabilities (whether absolute accrued, contingent or otherwise),
condition (financial or otherwise), results of operations, business or prospects
of the Company.
SECTION 4.30 Brokerage Fees. No Person is entitled to any brokerage or
finder's fee or other commission from the Company based upon agreement or acts
of Prather or the Company in respect of this Agreement or the Transactions,
except that Contributors are aware that the fees of Imperial Capital, LLC,
financial advisors to Newriders in connection with the Transactions, will be
paid at the Closing. Without
C-18
<PAGE> 298
limiting the generality of the foregoing, the Company is not subject to any
binding obligations or any restrictions with respect to the sale of the Company
other than pursuant to this Agreement.
SECTION 4.31 Business Licenses. Schedule 4.31 is a complete and accurate
list of all business licenses or permits (the "Business Licenses") owned by or
held by, or granted to, the Company with respect to the operation of the
Restaurants. Each Business License is in full force and effect without default.
The consummation of the Transactions will not violate any Business License.
SECTION 4.32 Disclosure. The information provided by Contributors and the
Company in connection with this Agreement, including, without limitation, the
exhibits and schedules hereto, and in any other writing pursuant hereto, does
not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated herein or therein or necessary to
make the statements and facts contained herein or therein, in light of the
circumstances under which they are made, not false or misleading. Copies of all
documents heretofore or hereafter delivered or made available by Contributors or
the Company to Newriders pursuant hereto were or will prior to the Closing be
complete and accurate records of such documents.
ARTICLE 5
CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MARTIN
SECTION 5.1 Assignment. Martin hereby assigns to Newriders and Newco #1
all rights (the "Assigned Rights") that accrue to his benefit under the
Agreement for Purchase and Sale of Limited Liability Company Interest, dated
March 1998 between Former Owners and Martin as Trustee of the John Martin
Revocable Trust dated June 16, 1992 (the "Martin Trust") and the Assignment of
Membership Interest between Former Owners and the Martin Trust whereby the
Martin Trust acquired the Martin Interests from Former Owners (the "Knowles
Agreements"). Martin agrees that he will cooperate with Newriders and Newco #1
to enforce the Assigned Rights against Former Owners (or any
successor-in-interest to the obligations of Former Owners under the Knowles
Agreements) and that in the event that any or all of the Assigned Rights are not
assigned hereunder (whether because they are not susceptible to assignment of
otherwise), Martin will vigorously enforce the Assigned Rights against Former
Owners (or any successor-in-interest to the obligations of Former Owners under
the Knowles Agreements) for the benefit of Newriders and Newco #1.
SECTION 5.2 Representation. Martin hereby represents and warrants to
Newriders and Newco #1 as of the date hereof and as of the Closing Date, that
each of the representations, warranties, covenants and agreements of Former
Owners under the Knowles Agreements was, when made, and is as of the date hereof
and as of the Closing Date, true and correct in all respects. Attached to
Schedule 5.2 is a true and complete copy of the Knowles Agreements.
SECTION 5.3 Ownership of Martin Interests. Martin owns all of the Martin
Interests, free and clear of any liens, encumbrances, pledges, security
interests, restrictions, prior assignments and claims of any kind or nature
whatsoever which are attributable to agreements to which Martin is a party or
actions on the part of Martin, except for liens securing Permitted Debt. Upon
consummation of the Transactions, Newco #1 shall be the owner, beneficially and
of record, of all of the Martin Interests, free and clear of any liens,
encumbrances, pledges, security interests, restrictions, prior assignments and
claims of any kind or nature whatsoever which are attributable to agreements to
which Martin is a party or actions on the part of Martin, except for liens
securing Permitted Debt. To the knowledge of Martin, no Person has made or
threatened to make any claim asserting that such Person (a) is the holder or the
beneficial owner of, or has the right to acquire or to obtain beneficial
ownership of, any of the Martin Interests, or any other voting, equity, or
ownership interest in, the Company, or (b) is entitled to all or any portion of
the Newco #1 Shares payable for the Martin Interests.
C-19
<PAGE> 299
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF NEWRIDERS AND NEWCO #1
Newriders and Newco #1 hereby jointly and severally represent and warrant
to Contributors and the Company, as of the date hereof and as of the Closing
Date, that:
SECTION 6.1 Organization and Corporate Authority. Newriders and Newco #1
are corporations duly organized, validly existing and in good standing under the
laws of each such corporation's respective state of incorporation. Newriders and
Newco #1 have all requisite corporate power and authority to enter into this
Agreement and to consummate the Transactions. All necessary action, corporate or
otherwise, required to have been taken by or on behalf of Newriders and Newco #1
by applicable law, each corporation's respective charter documents or otherwise
to authorize (a) the approval, execution and delivery on behalf of Newriders and
Newco #1 of this Agreement and (b) the performance by Newriders and Newco #1 of
their obligations under this Agreement and the consummation of the Transactions
has been taken or will have been taken on or prior to the Closing. This
Agreement and all agreements and instruments herein contemplated to be executed
by Newriders and Newco #1 are the valid and binding agreements of Newriders and
Newco #1, enforceable against Newriders and Newco #1 in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights generally and to general
principles of equity.
SECTION 6.2 Consents and Approvals. Neither the execution and delivery of
this Agreement nor the consummation of the Transactions will violate, result in
a breach of any of the terms or provisions of, constitute a default (or any
event that, with the giving of notice or the passage of time or both, would
constitute a default) under, result in the acceleration of any indebtedness
under, result in any right of termination of, increase any amounts payable
under, or conflict with, any agreement, indenture or other instrument to which
Newriders or Newco #1 is a party or by which any of their property is bound,
their charter or by-laws, or any judgment, decree, order or award of any court,
governmental body or arbitrator (domestic or foreign) applicable to Newriders or
Newco #1. All consents, approvals and authorizations of, and declarations,
filings and registrations with, any governmental or regulatory authority
(domestic or foreign) or any other Person (either governmental or private)
required in connection with the execution and delivery by Newriders and Newco #1
of this Agreement or the consummation of the Transactions have been obtained,
made and satisfied, except for any filings required to be made after the date
hereof pursuant to state law, the Securities Act or the Securities Exchange Act
of 1934, as amended, and the regulations promulgated thereunder.
SECTION 6.3 Newco #1 Shares. The Newco #1 Shares to be issued at the
Closing, when issued and delivered, will be duly authorized, validly issued,
fully paid and nonassessable and free of any preemptive rights or any liens,
charges, claims or encumbrances (other than pursuant to the Transactions or
arising from the acts or omissions of Contributors). Newco #1 makes no
representation as to the market price which Contributors will realize upon the
ultimate disposition of such shares, it being acknowledged by Contributors that
such shares will constitute "restricted securities" under applicable securities
laws and the market price of publicly traded securities will be affected by many
factors which are outside the control of Newriders and Newco #1 and as to which
Newriders and Newco #1 can offer no assurance.
SECTION 6.4 Newriders SEC Reports. Newriders has furnished to Contributors
its report on Form 10-SB dated June 30, 1997 (including all amendments thereto)
and its Annual Report Form 10-KSB for the period ended December 31, 1997, each
as filed with the Securities and Exchange Commission ("SEC") (the "SEC
Reports"). The SEC Reports did not, on their respective dates of filing, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Except as
set forth on Schedule 6.4 or as stated in such SEC Reports, all financial
statements included in the SEC Reports, (a) were prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby
(except as may be indicated therein), (b) fairly present the financial position,
results of operations and cash flows of Newriders as of the respective dates
thereof and for the periods referred to therein, and (c) were consistent with
the books and records of Newriders and its subsidiaries. Except as
C-20
<PAGE> 300
contemplated in connection with the Transactions or as disclosed in or
contemplated in the SEC Reports or other filings of Newriders with the SEC, all
of which have been provided by Newriders to each Contributor prior to the date
hereof, since the date of the latest SEC Report there has not occurred any
material adverse change in the results of operations or financial position of
Newriders and its subsidiaries considered as a whole.
Section 6.5 Brokerage Fees. Except for the fees payable to Imperial
Capital, LLC, financial advisors to Newriders in connection with the
Transactions, no Person is entitled to any brokerage or finder's fee or other
commission from Newriders or Newco #1 in respect of this Agreement or the
Transactions.
SECTION 6.6 Disclosure. The information provided by Newriders and Newco #1
in this Agreement and in any other writing furnished pursuant hereto does not
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated herein or therein or necessary to make the
statements and facts contained herein or therein, in light of the circumstances
under which they are made, not false or misleading.
ARTICLE 7
COVENANTS OF CONTRIBUTORS AND THE COMPANY PRIOR TO CLOSING DATE
Section 7.1 Access and Investigation. Between the date of this Agreement
and the Closing Date, Prather and the Company will (a) upon reasonable prior
notice and during normal business hours, afford Newriders and Newco #1 and their
Representatives and prospective lenders and their Representatives (collectively,
"Newriders' Advisors") full and free access to the Company's personnel,
properties, contracts, books and records, and other documents and data, (b)
furnish Newriders and Newco #1 and Newriders' Advisors with copies of all such
contracts, books and records, and other existing documents and data as Newriders
and Newco #1 may reasonably request, and (c) furnish Newriders and Newco #1 and
Newrider's Advisors with such additional financial, operating, and other data
and information as Newriders and Newco #1 may reasonably request.
Section 7.2 Operation of the Business of the Company. Between the date of
this Agreement and the Closing Date, Prather and the Company will:
(a) conduct the business of the Company only in the ordinary course of
business;
(b) confer with Newriders and Newco #1 concerning operational matters of
a material nature; and
(c) otherwise report periodically to Newriders and Newco #1 concerning
the status of the business, operations, and finances of the Company.
SECTION 7.3 Negative Covenant. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, Prather
and the Company will not, without the prior consent of Newriders and Newco #1,
take any action, or fail to take any action, as a result of which any of the
changes or events listed in Section 4.13 could occur.
SECTION 7.4 Required Approvals. As promptly as practicable after the date
of this Agreement, Contributors and the Company will make all filings required
by Legal Requirements to be made by them in order to consummate the
Transactions. Between the date of this Agreement and the Closing Date,
Contributors and the Company, at no cost to any of them, will (a) cooperate with
Newriders and Newco #1 with respect to all filings that Newriders and Newco #1
elect to make or are required by Legal Requirements to make in connection with
the Transactions, and (b) cooperate with Newriders and Newco #1 in obtaining all
consents referred to in Section 6.2.
SECTION 7.5 Notification. Between the date of this Agreement and the
Closing Date, Contributors and the Company will promptly notify Newriders and
Newco #1 in writing if any Contributor or the Company becomes aware of any fact
or condition that causes or constitutes a breach of any of Contributors' or the
Company's representations and warranties as of the date of this Agreement, or if
any Contributor or the Company becomes aware of the occurrence after the date of
this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) cause or constitute a breach of any such
C-21
<PAGE> 301
representation or warranty had such representation or warranty been made as of
the time of occurrence or discovery of such fact or condition. During the same
period, Contributors and the Company will promptly notify Newriders and Newco #1
of the occurrence of any breach of any covenant of any Contributor or the
Company in this Section 7 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 9 impossible or unlikely, to the
extent it is aware of any such occurrence.
SECTION 7.6 Exclusivity. Until this Agreement is terminated pursuant to
Section 11.1(d), Contributors and the Company agree that neither they nor their
Representatives will solicit or encourage, directly or indirectly, in any
manner, any discussion with or furnish or cause to be furnished any information
to any Person other than Newriders or Newco #1 or their Representatives, in
connection with, or negotiate for or otherwise pursue the sale of the Interests,
or all or substantially all of the assets of the Company or any business
combination or merger of the Company with any other party. Contributors and the
Company agree to promptly inform Newriders and Newco #1 of any inquiries or
proposals with respect to the foregoing.
SECTION 7.7 Best Efforts. Between the date of this Agreement and the
Closing Date, Contributors and the Company will use their best efforts to cause
the conditions in Article 9 to be satisfied.
ARTICLE 8
COVENANTS OF NEWRIDERS AND NEWCO #1 PRIOR TO CLOSING DATE
SECTION 8.1 Approvals of Governmental Bodies. As promptly as practicable
after the date of this Agreement, Newriders and Newco #1 will and will cause
each of their Affiliates to, make all filings required by Legal Requirements to
be made by them to consummate the Transactions. Between the date of this
Agreement and the Closing Date, Newriders and Newco #1 will (a) cooperate with
Contributors with respect to all filings that Contributors are required by Legal
Requirements to make in connection with the Transactions, and (b) cooperate with
Contributors in obtaining all consents referred to in Sections 3.3 and 4.2;
provided that this Agreement will not require Newriders and Newco #1 to dispose
of or make any change in any portion of its business or to incur any other
burden to obtain a Governmental Authorization.
SECTION 8.2 Best Efforts. Except as set forth in the proviso to Section
8.1, between the date of this Agreement and the Closing Date, Newriders and
Newco #1 will use their best efforts to cause the conditions in Article 9 to be
satisfied.
ARTICLE 9
CONDITIONS
SECTION 9.1 Conditions to Obligations of Newriders and Newco #1. The
obligations of Newriders and Newco #1 to complete the Transactions are subject
to the satisfaction at or prior to the Closing of the following conditions,
unless waived by Newriders and Newco #1:
(a) the business of the Company shall have been conducted in the
ordinary course, and there shall have been no material adverse change to the
business of the Company or its prospects.
(b) there shall have been no threatened or pending litigation against
the Company which is material;
(c) there shall have been no redemption or similar distribution,
recapitalization or LLC interest issuance of any kind, by the Company since
December 31, 1997.
(d) all filings with and material consents and approvals of third
parties and governmental agencies required for the consummation of the
Transactions, including but not limited to consents of lessors or lenders set
forth in Schedule 3.3, shall have been obtained;
(e) receipt of a tax opinion from Deloitte & Touche LLP, satisfactory to
Newriders and Newco #1, with respect to the Section 351 Transaction and the
Reorganization;
C-22
<PAGE> 302
(f) a Proxy/Registration Statement on Form S-4 (the "Registration
Statement") shall have been declared effective by the SEC.
(g) the representations and warranties of Contributors and the Company
set forth in this Agreement shall be true and correct as of the date of this
Agreement and shall be true and correct as of the Closing Date as if made on the
Closing Date, and the Contributors shall have delivered to Newriders and Newco
#1 a certificate dated as of the Closing Date, to such effect;
(h) Contributors and the Company shall have performed all obligations
required to be performed by them under this Agreement at or prior to the
Closing;
(i) delivery of an opinion of Dillingham Cross, P.L.C., in the form
attached hereto as Exhibit B;
(j) the Agreement and Plan of Merger and Reorganization in the form
attached hereto as Exhibit C shall have been entered into by all of the parties
thereto;
(k) the stockholders of Newriders shall have approved the transactions
contemplated by this Agreement, the Paisano Agreement and the Agreement and Plan
of Merger and Reorganization at a duly constituted meeting;
(l) consummation of the Financing;
(m) any indebtedness of Contributors or Former Owner or any of their
respective Affiliates to the Company shall have been paid and any indebtedness
of the Company or any Affiliate of the Company to Contributors, the Former Owner
or any of their respective Affiliates shall have been forgiven;
(n) the transactions contemplated by the Paisano Agreement shall have
closed prior to or simultaneous with the Closing; and
(o) Stockholders of Newriders representing more than 3% of the
outstanding shares of Newriders shall not have exercised their right to dissent
in respect of the Reorganization.
SECTION 9.2 Conditions to Obligations of Contributors and the Company. The
obligations of Contributors and the Company to consummate the Transactions are
subject to the satisfaction at or prior to the Closing of the following
conditions unless waived by Contributors:
(a) except for (i) any issuance of capital stock upon conversion of
convertible debentures or notes which have been or may be issued by Newriders or
Newco #1 (but not to exceed 850,000 shares of common stock), (ii) any issuance
of stock upon exercise of stock options granted under Newriders' or Newco #1's
stock option plans, (iii) the issuance of 6,493,507 shares of Newco #1 common
stock in connection with the transactions contemplated by the Paisano Agreement,
(iv) the issuance of 1,000,000 shares of Newriders common stock to Joseph Teresi
based upon a prior contractual obligation, (v) the issuance of 200,000 shares of
Newco #1 common stock to William Nordstrom (vi) the issuance of an aggregate of
4,036,797 shares of Newco #1 common stock to John Martin in consideration of
cash and notes, there shall have been no dividend, redemption or similar
distribution, recapitalization or stock issuance of any kind, by Newriders or
Newco #1 since December 31, 1997.
(b) all filings with and material consents and approvals of third
parties and governmental agencies required for the consummation of the
Transactions shall have been obtained;
(c) receipt of a tax opinion from Deloitte & Touche LLP, satisfactory to
Contributors, with respect to the Section 351 Transaction and the
Reorganization;
(d) the representations and warranties of Newriders and Newco #1 set
forth in this Agreement shall be true and correct as of the date of this
Agreement and shall be true and correct as of the Closing Date as if made on the
Closing Date, and Newco #1 and Newriders, shall have delivered to Contributors a
certificate, dated as of the Closing Date, to such effect;
(e) Newriders and Newco #1 shall have performed all obligations required
to be performed by them under this Agreement at or prior to the Closing;
C-23
<PAGE> 303
(f) delivery of an opinion or opinions of counsel to Newriders and Newco
#1, covering the matters set forth in Exhibit D;
(g) the Agreement and Plan of Merger and Reorganization in the form
attached hereto as Exhibit C shall have been entered into by all of the parties
thereto;
(h) the stockholders of Newriders shall have approved the transactions
contemplated by the Paisano Agreement, the El Paso Agreement and the Agreement
and Plan of Merger and Reorganization at a duly constituted meeting;
(i) the transactions contemplated by the Paisano Agreement shall have
closed prior to or simultaneous with the Closing; and
(j) the employment agreement between the Company and Prather (the
"Prather Employment Agreement"), substantially in the form attached hereto as
Exhibit F, shall have been entered into by Prather and the Company.
ARTICLE 10
INDEMNIFICATION
SECTION 10.1 Survival. All representations, warranties, covenants, and
obligations of Contributors in this Agreement, including the Exhibits and
Schedules hereto, and any certificate or document delivered pursuant to this
Agreement, will survive the Closing. All representations and warranties shall
survive for two years after the Closing, except for the representations in
Sections 4.19 and 4.24, which shall survive until 90 days after all applicable
statutes of limitations (with extensions, if any) have expired with respect
thereto, the representation in Section 5.2 which shall survive for the same
length of time as each of the representations of Former Owner under the Knowles
Agreement and the representations in Sections 3.2, 4.5 and 4.29 which shall
survive indefinitely.
SECTION 10.2 Indemnification. Subject to Section 10.8, Prather (jointly
and severally with respect to William and Marna Prather) and Martin shall
separately indemnify, and hold harmless Newriders and Newco #1 and each of their
Affiliates and Representatives in respect of any and all claims, losses,
damages, liabilities, declines in value, penalties, interest, costs and expenses
(including, without limitation, any attorneys', accountants' and consultants'
fees and other expenses) incurred by Newriders or Newco #1 or their respective
Affiliates or Representatives, together with interest on cash disbursements in
connection therewith, at an annual rate equal to the rate of interest payable by
Newriders and Newco #1 under their senior credit facility then in effect, from
the date such cash disbursements were made by Newriders or Newco #1 or any of
their Affiliates or Representatives until paid by Contributors ("Damages"), in
connection with each and all of the following:
(a) As to Prather, any breach of any representation or warranty made by
Prather or the Company in this Agreement and as to Martin, any breach of any
representation or warranty made by Martin in this Agreement, each as of the date
of this Agreement and as if such representations and warranties were made on and
as of the Closing Date;
(b) As to Prather, any misrepresentation contained in any written
statement or certificate furnished by Prather or the Company pursuant to this
Agreement or in connection with the Transactions and as to Martin, any
misrepresentation contained in any written statement or certificate furnished by
Martin pursuant to this Agreement or in connection with the Transactions; and
(c) As to Prather, any breach of any covenant, agreement or obligation
of Prather or the Company contained in this Agreement or any other instrument
contemplated by this Agreement or the Transactions and as to Martin, any breach
of any covenant, agreement or obligation of Martin contained in this Agreement
or any other instrument contemplated by this Agreement or the Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Newriders or Newco #1 or their
Affiliates.
C-24
<PAGE> 304
SECTION 10.3 Indemnification by Contributors for Tax Liabilities. In
addition to, and not by way of limitation on, the indemnities set forth in this
Article 10, Prather (jointly and severally with respect to William and Marna
Prather) shall indemnify and hold harmless Newriders, Newco #1 and the Company
on an after-tax basis against all Taxes of the Company for all taxable periods
ending on or before the Closing Date or otherwise attributable to the
operations, transactions, assets, or income of the Company prior to the Closing
Date, together with any expenses (including, without limitation, settlement
costs and any legal, accounting and other expenses) incurred in connection with
the contesting, collection or assessment of such Taxes, and together with
interest at an annual rate equal to the rate of interest payable by Newriders
and Newco #1 under their senior credit facility then in effect. For purposes of
this Section 10.3, the term "after-tax basis" means determined after giving
effect to (a) the receipt by Newriders, Newco #1 or the Company of any payments
made to them hereunder by Prather, if such receipt is taxable and (b) any tax
deduction available on account of the payment of such Taxes; assuming for
purposes of all calculations that income Taxes on income are imposed at the
highest combined federal/state marginal tax rate and tax deductions create
benefits at the highest combined federal/state marginal tax rate. Newco #1 shall
have the responsibility for, and the right to control, at Newco #1's expense,
the audit (and disposition thereof) of any Tax return and, subject to the
following sentence, to approve the disposition of any audit adjustment under
such circumstances. Prather shall have the right directly or through their
designated representatives, to review in advance and comment upon all
submissions made in the course of audits or appeals thereof to any governmental
entity relating to periods ending on or prior to the Closing and to approve,
which approval shall not be unreasonably withheld, Newco #1's disposition of any
audit adjustment with respect to such periods if such disposition will or might
reasonably be expected to result in an increase in Taxes of the Company, any
successor thereof or any consolidated group which includes the Company, for any
period ending on or prior to the Closing.
SECTION 10.4 Claims for Indemnification. Whenever any claim shall arise
for indemnification hereunder, Newriders or Newco #1 shall promptly notify
Contributors of the claim and, when known, the facts constituting the basis for
such claim; provided, however, that the failure to so notify Contributors shall
not relieve any Contributor of his or her obligation hereunder to the extent
such failure does not materially prejudice such Contributor. In the event of any
claim for indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third party, the notice to Contributors shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom.
SECTION 10.5 Defense of Claims. In connection with any claim giving rise
to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, any Contributor at
his or her sole cost and expense and with counsel reasonably satisfactory to
Newriders or Newco #1 may, upon written notice to Newriders or Newco #1, assume
the defense of any such claim or legal proceeding if (a) such Contributor
provides Newriders and Newco #1 with evidence reasonably acceptable to Newriders
and Newco #1 that such Contributor will have the financial resources to defend
against such third-party claim and fulfill their indemnification obligations
hereunder, (b) the third-party claim involves only money damages and does not
seek an injunction or other equitable relief, and (c) settlement or an adverse
judgment of the third party claim is not, in the reasonable judgment of
Newriders and Newco #1, likely to establish a pattern or practice adverse to the
continuing business interests of Newriders and Newco #1. Newriders and Newco # 1
shall be entitled to participate in (but not control) the defense of any such
action, with its counsel and at its own expense; provided, however, that if
there are one or more legal defenses available to Newriders and Newco # 1 that
conflict with those available to such Contributor, or if such Contributor fails
to take reasonable steps necessary to defend diligently the claim after
receiving notice from either Newriders or Newco #1 that it believes such
Contributor has failed to do so, Newriders and Newco #1 may assume the defense
of such claim; provided, further, that Newriders and Newco #1 may not settle
such claim without the prior written consent of such Contributor, which consent
may not be unreasonably withheld. If Newriders and Newco #1 assumes the defense
of the claim, Contributors shall reimburse Newriders and Newco #1 for the
reasonable fees and expenses of counsel retained by Newriders and Newco #1 and
Contributors shall be entitled to participate in (but not control) the defense
of such claim, with its counsel and at its own expense. The parties agree to
render, without compensation, to each other such assistance as they may
reasonably require of each other in order to insure the proper and adequate
defense of any action, suit or proceeding, whether or not subject to
indemnification hereunder. Notwithstanding the foregoing, if any
C-25
<PAGE> 305
Contributor assumes the defense of a claim for Taxes for which it is obligated
to indemnify Newriders or Newco #1, then such indemnifying party shall not
settle or otherwise agree to a resolution of a dispute with respect to such
claim if that settlement or resolution would have an adverse impact on the
liability of Newriders or Newco #1 for any taxable period ending after the date
hereof without the express written consent of Newriders or Newco #1, which
consent will not be unreasonably withheld or delayed.
SECTION 10.6 Manner of Indemnification. All indemnification payments
hereunder shall be effected by payment of cash or delivery of a certified or
official bank check in the amount of the indemnification liability.
SECTION 10.7 Submission of Claims For Indemnification. Notwithstanding the
provisions of Section 10.1 with respect to survival of the representations,
warranties, covenants and obligations in this Agreement, such representations,
warranties, covenants and obligations shall survive (a) as to any matter as to
which a claim is submitted in writing to a Contributor prior to such period
specified in Section 10.1 and identified as a claim for indemnification pursuant
to this Agreement or (b) as to any matter that is based upon willful fraud by a
Contributor, until such time as such claims and matters are resolved.
SECTION 10.8 Limitations.
(a) No claim, demand, suit or cause of action shall be brought against
Prather as a result of a breach of any representation or warranty of Prather in
this Agreement unless and until the aggregate amount of Damages (excluding
interest from the date notice of the claims giving rise to such Damages is given
pursuant to Section 10.4) under Section 10.2 exceeds $50,000, and then only for
the amount by which such Damages (excluding interest on the first $50,000 of
Damages from the date notice of the claims giving rise to such Damages is given
pursuant to Section 10.4) exceed $50,000. However, this Section 10.8 will not
apply to any breach of any of Prather's or the Company's representations and
warranties of which Prather or the Company had knowledge at any time prior to
the date on which such representation and warranty is made or any knowing breach
by Prather or the Company of any covenant or obligation, and Prather and the
Company will be jointly but not severally liable for all Damages with respect to
such breaches.
(b) No claim, demand, suit or cause of action shall be brought against
Martin for a breach of Section 5.2 for any amount greater than the amount that
is collected from Former Owners (or any successor-in-interest to Former Owners)
for a breach by the Former Owners under the Knowles Agreements.
ARTICLE 11
TERMINATION
SECTION 11.1 Termination Events. This Agreement may, by notice given prior
to or at the Closing, be terminated:
(a) by either Newriders or Newco #1, on the one hand, or Contributors
and the Company, on the other hand, if a material breach of any provision of
this Agreement has been committed by the other party and such breach has not
been waived;
(b) (i) by Newriders or Newco #1 if any of the conditions in Section 9.1
has not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Newriders
or Newco #1 to comply with its obligations under this Agreement) and Newriders
or Newco #1 has not waived such condition on or before the Closing Date; or (ii)
by Contributors or the Company if any of the conditions in Section 9.2 has not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Contributors or the
Company to comply with their obligations under this Agreement) and Contributors
or the Company have not waived such condition on or before the Closing Date;
(c) by mutual consent of Newriders or Newco #1, on the one hand, and
Contributors and the Company, on the other hand; or
C-26
<PAGE> 306
(d) by any party if the Closing has not occurred (other than through the
failure of any party seeking to terminate this Agreement to comply fully with
its obligations under this Agreement) on or before December 31, 1998 or such
later date as the parties may agree upon in writing.
SECTION 11.2 Effect of Termination. Each party's right of termination
under Section 11.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
11.1, all further obligations of the parties under this Agreement will
terminate, except that the obligations in Sections 13.7 and 13.14 will survive;
provided, however, that if this Agreement is terminated by a party because of
the breach of the Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired.
ARTICLE 12
DELIVERY OF CLOSING DOCUMENTS
SECTION 12.1 Deliveries by Contributors. Contemporaneously with the
Closing, Contributors will deliver to Newriders and Newco #1 the following:
(a) Certificates evidencing all of the Interests, duly endorsed for
transfer or accompanied by separate instruments of transfer, by Contributors;
(b) Opinion of Dillingham Cross, P.L.C., in the form attached hereto as
Exhibit B;
(c) The certificate contemplated by Section 9.1(g) hereof;
(d) Good standing certificates for the Company as of a date not more
than ten days prior to the Closing Date, issued by the Secretary of State of the
Company's state of formation, and each state where the Company is qualified to
do business;
(e) Certified copies of resolutions of the Company approving this
Agreement and the Transactions;
(f) The executed Prather Employment Agreement; and
(g) All other documents, certificates, instruments or writings as
Newriders or Newco #1 shall reasonably request in connection with the
Transactions.
SECTION 12.2 Deliveries by Newriders and Newco #1. Contemporaneously with
the Closing, Newriders and Newco #1 will deliver the following:
(a) Stock certificates evidencing the Newco #1 Shares, duly endorsed for
transfer or accompanied by separate instruments of transfer;
(b) Opinion or opinions of counsel to Newriders and Newco #1 covering
the matters set forth in Exhibit D;
(c) The certificate contemplated by Section 9.2(d) hereof;
(d) Certified copies of resolutions of Newriders and Newco approving
this Agreement and the Transactions;
(e) The executed Prather Employment Agreement; and
(f) All other documents, certificates, instruments or writings as
Contributors shall reasonably request in connection with the Transactions.
C-27
<PAGE> 307
ARTICLE 13
MISCELLANEOUS
SECTION 13.1 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by facsimile transmission (with subsequent letter
confirmation by mail) or three days after being mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties,
their successors in interest or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to Newriders or Newco #1
Newriders, Inc.
1040 East Herndon Avenue
Suite 102
Fresno, CA 93720
Attention: William Nordstrom
With a concurrent copy to:
Kaye, Scholer, Fierman Hays & Handler, LLP
1999 Avenue of the Stars
Suite 1600
Los Angeles, CA 90067
Attention: Barry L. Dastin
If to Contributors:
William and Marna Prather
4415 N. Arcadia Lane
Phoenix, AZ 85018
With a concurrent copy to:
Dillingham Cross, P.L.C.
5080 North 40th Street, Suite 335
Phoenix, AZ 85018
Attention: James W. Reynolds
John Martin
18931 Glenmont Terrace
Irvine, CA 92612
With a concurrent copy to:
Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP
2603 Main Street
East Tower -- Suite 1300
Irvine, CA 92614
Attention: Alan H. Wiener
SECTION 13.2 Assignability and Parties in Interest. This Agreement shall
not be assignable by any of the parties, except that Newriders and Newco #1 may
assign their rights hereunder to, and have their obligations hereunder assumed
by, a wholly-owned subsidiary of Newriders or Newco #1; provided, however, that
no such assignment shall release Newriders and Newco #1 from their obligations
under this Agreement. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
SECTION 13.3 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal law, and not the law
pertaining to conflicts or choice of law, of the State of California.
C-28
<PAGE> 308
SECTION 13.4 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 13.5 Complete Agreement. This Agreement, the Exhibits and
Schedules and the documents delivered or to be delivered pursuant to this
Agreement contain or will contain the entire agreement among the parties with
respect to the Transactions and shall supersede in its entirety all previous
oral and written and all contemporaneous oral negotiations, commitments and
understandings, including the letter of intent with respect to the Transactions.
SECTION 13.6 Modifications, Amendments and Waivers. This Agreement may be
modified, amended or otherwise supplemented by a writing signed by all of the
parties. No waiver of any right or power hereunder shall be deemed effective
unless and until a writing waiving such right or power is executed by the party
waiving such right or power.
SECTION 13.7 Expenses. Except as otherwise expressly provided elsewhere in
this Agreement, Newriders and Newco #1 shall pay all fees and expenses incurred
by all parties in connection with the Transactions contemplated by this
Agreement.
SECTION 13.8 Limit on Interest. Notwithstanding anything in this Agreement
to the contrary, no party shall be obligated to pay interest at a rate higher
than the maximum rate permitted by applicable law. In the event that an interest
rate provided in this Agreement exceeds the maximum rate permitted by applicable
law, such interest rate shall be deemed to be reduced to such maximum
permissible rate.
SECTION 13.9 Equitable Remedies. In addition to legal remedies, in
recognition of the fact that remedies at law may not be sufficient, the parties
(and their permitted successors and assigns) shall be entitled to equitable
remedies for breaches or defaults hereunder, including, without limitation,
specific performance and injunction.
SECTION 13.10 Attorneys Fees and Costs. Should any party institute any
action or proceeding in any court to enforce any provision of this Agreement,
the prevailing party shall be entitled to receive from the losing party
reasonable attorneys' fees and costs incurred in such action or proceeding,
whether or not such action or proceeding is prosecuted to judgment.
SECTION 13.11 Further Assurances. Each party shall execute and deliver
such further instruments and take such further actions as any other party may
reasonably request in order to carry out the intent of this Agreement and to
consummate the Transactions.
SECTION 13.12 Contract Interpretation: Construction of Agreement.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.
(b) No party, nor its respective counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement, and
all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
SECTION 13.13 Jurisdiction; Service of Process. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of California, County of Los Angeles, or, if it has or can acquire jurisdiction,
in the United States District Court for the Central District of California, and
each of the parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on any party anywhere in the world.
SECTION 13.14 Public Announcements; Confidentiality.
(a) The parties hereto will maintain in confidence and will cause their
respective Affiliates and Representatives to maintain in confidence unless the
other parties hereto consent in writing, (i) any written,
C-29
<PAGE> 309
oral or other information obtained in connection with this Agreement, unless (A)
such information is already known to such party or to others not bound by a duty
of confidentiality or such information becomes publicly available through no
fault of such party, (B) the use of such information is necessary or appropriate
in making any filing or obtaining any consent or approval required for the
consummation of the Transactions, or (C) the furnishing or use of such
information is required by any legal proceedings and (ii) the existence of this
Agreement and the proposed sale described herein, except that the parties may
disclose to Newriders' and Newco #1's financing sources and Representatives
financial information reasonably required by them. If the Transactions are not
consummated, each party will return or destroy as much of such written
information as the other party may reasonably request.
(b) Any public announcements or press releases relating to the
Transactions must be approved by Contributors, on the one hand, and Newriders
and Newco #1, on the other hand, in writing before being made or released.
Newriders and Newco #1 shall have the right to issue a press release without
Contributors' written approval if in the opinion of Newriders' and Newco #1's
counsel it is reasonably required, provided Contributors receive a copy of such
release before issue.
C-30
<PAGE> 310
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
NEWRIDERS
NEWRIDERS, INC.
a Nevada corporation
By: /s/ WILLIAM NORDSTROM
------------------------------------
Name: William Nordstrom
Title: Executive Vice President
and Chief Financial Officer
NEWCO #1
EASYRIDERS, INC.
a Delaware corporation
By: /s/ WILLIAM NORDSTROM
------------------------------------
Name: William Nordstrom
Title: Secretary and Treasurer
CONTRIBUTORS
/s/ WILLIAM PRATHER
--------------------------------------
William Prather
/s/ MARNA PRATHER
--------------------------------------
Marna Prather
/s/ JOHN MARTIN
--------------------------------------
John Martin
THE COMPANY
M & B RESTAURANTS, L.C.,
d/b/a El Paso Barbeque Company
a Texas limited liability company
By: /s/ WILLIAM PRATHER
------------------------------------
Name: William Prather
Title: President and C.E.O.
C-31
<PAGE> 311
ADDENDUM D
STOCKHOLDERS VOTING AGREEMENT
<PAGE> 312
STOCKHOLDERS' VOTING AGREEMENT
Stockholders' Voting Agreement, dated as of , 1998, by and
between John Martin ("Martin") and Joseph Teresi ("Teresi").
WHEREAS, Newriders, Inc., a Nevada corporation ("Newriders"), Easyriders,
Inc., a Delaware corporation and wholly-owned subsidiary of Newriders ("Newco
#1"), Easyriders Sub II, Inc., a California corporation and wholly-owned
subsidiary of Newco #1 ("Newco #3"), Teresi and several companies owned by
Teresi (the "Paisano Companies") entered into a stock contribution agreement
(the "Paisano Agreement") whereby Teresi will contribute to Newco #1 all of the
outstanding shares of capital stock of the Paisano Companies in exchange for
6,483,507 shares of common stock of Newco #1, a promissory note of Newco #3 in
the principal amount of $15,000,000 payable at closing, assumption of $7,000,000
of debt and three notes in an aggregate principal amount of $13,000,000 (the
"Teresi Notes"), as part of a transaction described in Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, Newriders, Newco #1, William Prather and Marna Prather
(collectively, "Prather"), Martin and M & B Restaurants, L.C., a Delaware
limited liability company, d/b/a El Paso Barbeque Company entered into an LLC
interest contribution agreement (the "El Paso Agreement") whereby Martin and
Prather will contribute to Newco #1 all of their limited liability company
interests in El Paso in exchange for an aggregate of 2,000,000 shares of common
stock of Newco #1, as part of a transaction described in Section 351 of the
Code;
WHEREAS, Newriders, Newco #1 and Easyriders Sub, Inc., a Nevada corporation
and wholly-owned subsidiary of Newco #1 ("Newco #2), will enter into an
Agreement and Plan of Merger and Reorganization (the "Agreement and Plan of
Merger and Reorganization") whereby (i) Newco #2 will merge into Newriders, (ii)
the common stock of Newco #2 held by Newco #1 will be converted into one share
of Newriders common stock (constituting all of the outstanding capital stock of
Newriders) and (iii) the common stock of Newriders not held by Newco #1 will be
converted into common stock of Newco #1 on a one-for-one basis, all as part of a
transaction described in Sections 351, 368(a)(1)(A) and 368(a)(2)(E) of the
Code;
WHEREAS, immediately following consummation of the transactions
contemplated by the Paisano Agreement, the El Paso Agreement and the Agreement
and Plan of Merger and Reorganization, Martin and Teresi will be the beneficial
owners of, and be entitled to vote, approximately 5,132,947 and 6,993,507 shares
of common stock of Newco #1, respectively (along with all other voting
securities of Newco #1 beneficially owned by Martin and Teresi, respectively,
and all voting securities of Newco #1 purchased by (whether through open market
purchases, privately negotiated transactions or otherwise) or which otherwise
become beneficially owned by Martin and Teresi, respectively, after the date
hereof, the "Shares");
WHEREAS, Martin desires to vote his Shares in favor of Teresi's Director
Designees (as defined below) and Teresi desires to vote his Shares in favor of
Martin's Director Designees; and
WHEREAS, Martin desires to appoint Teresi as his attorney in fact and proxy
and Teresi desires to appoint Martin as his attorney in fact and proxy, with
respect to the Shares each is entitled to vote at any meeting of stockholders of
Newco #1 or by written consent of the holders of voting securities of Newco #1
without a meeting, on, and only on, the election and removal of directors of
Newco #1;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
SECTION 1. Election of Directors.
(a) Each of Martin and Teresi shall be entitled to designate to the other
four individuals to be voted for and to serve on the board of directors of Newco
#1 (each a "Director Designee") (provided that such individuals have not been
involved in any legal proceedings of the type specified in Item 401(f) of
Regulation S-K). Each of Martin and Teresi shall, and shall use his best efforts
to cause each of their respective affiliates (as used in this Agreement,
"affiliate" shall include, without limitation, any person or entity which,
directly or indirectly, controls, is controlled by or under common control with
such person or entity, members of any individual's immediate family and any
trusts, the trustee and all beneficiaries of which are such persons or members
of such individual's immediate family), to (i) nominate for election and
D-1
<PAGE> 313
(ii) vote all of his Shares entitled to vote thereon for the election of the
other party's Director Designees at any meeting of stockholders of Newco #1 or
by written consent of the holders of voting securities of Newco #1 without a
meeting.
(b) If at any time either Martin or Teresi shall notify Newco #1 of such
party's desire to have one or more of their respective Director Designees
removed, each of Martin and Teresi shall, and shall use his best efforts to
cause each of their respective affiliates to, subject to all applicable
requirements of law, vote all of his Shares entitled to vote thereon for the
removal of such director at any meeting of the stockholders of Newco #1 or by
written consent of the holders of voting securities of Newco #1 without a
meeting.
(c) Whenever any Director Designee ceases to serve on the board of
directors of Newco #1 (whether by reason of death, resignation, removal or
otherwise), the successor director shall be acceptable to the party who
designated the Director Designee creating the vacancy. In the event the board of
directors of Newco #1 fills a vacancy with a person not acceptable to the party
who designated the Director Designee creating the vacancy, Martin and Teresi
agree to immediately jointly request the Secretary of Newco #1 to call a special
meeting of stockholders of Newco #1 for the election of directors.
(d) Martin and Teresi agree to jointly request the Secretary of Newco #1 to
call a special meeting of stockholders of Newco #1 if either Martin or Teresi
requests such a meeting.
SECTION 2. Irrevocable Proxy. Each of Martin and Teresi hereby irrevocably
constitutes and appoints the other as his attorney in fact and proxy pursuant to
the provisions of Section 212(c) of the Delaware General Corporation Law, with
full power of substitution, to vote all of such party's Shares entitled to vote
thereon for the election or removal of the other party's Director Designees at
any meeting of stockholders of Newco #1 or by written consent of the holders of
voting securities of Newco #1 without a meeting and to execute and deliver any
and all consents, instruments or other agreements or documents in order to take
any and all such actions in connection with or in furtherance of the obligations
of each of Martin and Teresi set forth in this Section 2. THIS PROXY AND POWER
OF ATTORNEY IS IRREVOCABLE, SUBJECT TO SECTION 3, AND COUPLED WITH AN INTEREST.
Each of Martin and Teresi hereby revokes all other proxies and powers of
attorney with respect to their Shares that he may have heretofore appointed or
granted, and no subsequent proxy or power of attorney shall be given or written
consent executed (and if given or executed, shall not be effective) by each of
Martin and Teresi with respect thereto. All authority herein conferred or agreed
to be conferred shall survive the death or incapacity of Martin or Teresi and
any obligation of Martin and Teresi under this Agreement shall be binding upon
the heirs, personal representatives, successors and assigns of Martin and
Teresi.
SECTION 3. Termination. This Agreement shall terminate on the date the
outstanding principal of, and any and all accrued but unpaid interest on, the
Teresi Notes is repaid in full or the date on which Teresi advises the Secretary
of Newco #1 that he elects to waive the benefit of this Agreement, whichever
first occurs.
SECTION 4. Transfer of Shares. During the term of this Agreement, the
parties shall be free to transfer their Shares to any person, except that no
such transfer shall be made unless prior thereto the other party to this
Agreement shall have been notified of such proposed transfer and the transferee
shall have agreed in writing to be bound by the provisions of this Agreement as
if a party named herein.
SECTION 5. Legend. A copy of this Agreement shall be filed with the
Secretary of Newco #1 and shall be kept at its principal executive office. Upon
the execution of this Agreement, each of the parties hereto shall cause each
certificate representing Shares to carry a legend as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
PROVISIONS OF A STOCKHOLDERS' VOTING AGREEMENT, DATED AS OF ,
1998, AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT AS THEREIN PROVIDED. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
OFFICES OF THE COMPANY.
D-2
<PAGE> 314
SECTION 6. Notices. All notices and other communications shall be effective
(a) upon receipt if (i) hand delivered or (ii) sent by facsimile transmission
and confirmed by mail, (b) the third day after mailing, postage prepaid return
receipt requested and (c) one day after sending by recognized "over-night"
delivery service. Any notice not contemplated above shall be effective upon
receipt. For the purposes of this Section 6, the addresses of the parties to
which notices shall be sent shall be as follows:
If to Martin:
John Martin
18931 Glenmont Terrace
Irvine, California 92612
with a copy to:
Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP
2603 Main Street, Suite 1300
Irvine, California 92614
Attention: Alan Wiener, Esq.
If to Teresi:
Joseph Teresi
c/o Paisano Publications
28210 Dorothy Drive
Agoura Hills, California 91310
with a copy to:
Joseph J. Jacobs
6380 Sweet Maple Lane
Boca Raton, Florida 33433
Each of the parties hereto may change the address to which such
communications are to be directed by notice to the other parties as provided in
this Section 6.
SECTION 7. Complete Agreement. This is the complete agreement between the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and agreements with respect thereto. There are no representations,
warranties, covenants, conditions, terms, agreements, promises, understandings,
commitments or other arrangements with respect to the subject matter hereof
other than those expressly set forth herein.
SECTION 8. Governing Law. This Agreement shall be governed by, construed
under and enforced in accordance with, the laws of the State of California
without regard to any conflict of law principles thereof.
SECTION 9. Binding Agreement; Successors. This Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties hereto and each
of their respective successors, assigns, heirs and other representatives.
SECTION 10. Headings. The section headings herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement, nor are they deemed to constitute a part of this Agreement.
SECTION 11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
SECTION 12. Attorneys' Fees. In any action or proceeding brought to enforce
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the successful party shall be entitled to recover
reasonable and actual attorneys' fees (including any such fees incurred in
connection with enforcement of any judgments) in addition to his costs and
expenses and any other available remedies.
D-3
<PAGE> 315
SECTION 13. Waiver; Amendment. Any waiver of any provision or breach of
this Agreement must be in writing, executed by the waiving party. No waiver of
any provision or breach of this Agreement shall be a waiver of any other
provision or breach of this Agreement or any subsequent breach. Any amendment or
modification of this Agreement must be in writing and executed by all of the
parties hereto.
SECTION 14. Specific Performance. Each of the parties hereto acknowledges
that money damages would be both incalculable and an insufficient remedy for any
breach of this Agreement by a party hereto and that any such breach would cause
the other party hereto irreparable harm. Accordingly, each party hereto agrees
that in the event of any actual or threatened breach of this Agreement by any
party hereto, the other parties hereto shall be entitled to specific
performance. Such remedy shall not be the exclusive remedy for any breach of
this Agreement, but shall be in addition to all other remedies available at law
or equity to such party.
SECTION 15. Interpretation. The parties hereto agree that each party has
participated in the drafting and preparation of this Agreement, and,
accordingly, in any construction or interpretation of this Agreement, the same
shall not be construed against any party by reason of the source of drafting.
SECTION 16. Further Assurances. Each party shall execute and deliver such
further instruments and take such further actions as the other party may
reasonably request in order to carry out the intent of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written.
John Martin
Joseph Teresi
ACKNOWLEDGMENT OF STOCKHOLDERS' VOTING AGREEMENT
Easyriders, Inc. hereby acknowledges the existence of the foregoing
Stockholders' Voting Agreement.
EASYRIDERS, INC.
By:
--------------------------------------
Name:
Title:
D-4
<PAGE> 316
ADDENDUM E
STATUTES PERTAINING TO DISSENTERS' RIGHTS
<PAGE> 317
RIGHTS OF DISSENTING OWNERS
92A.300. DEFINITIONS.
As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise
requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have
the meanings ascribed to them in those sections. (1995, ch. 586, sec. 35,
p. 2086.)
92A.305. "BENEFICIAL STOCKHOLDER" DEFINED.
"Beneficial stockholder" means a person who is a beneficial owner of shares
held in a voting trust or by a nominee as the stockholder of record. (1995,
ch. 586, sec. 36, p. 2087.)
92A.310. "CORPORATE ACTION" DEFINED.
"Corporate action" means the action of a domestic corporation. (1995,
ch. 586, sec. 37, p. 2087.)
92A.315. "DISSENTER" DEFINED.
"Dissenter" means a stockholder who is entitled to dissent from a domestic
corporation's action under NRS 92A.380 and who exercises that right when and in
the manner required by NRS 92A.410 to 92A.480, inclusive. (1995, ch. 586,
sec. 38, p. 2087.)
92A.320. "FAIR VALUE" DEFINED.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which he
objects, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable. (1995, ch. 586, sec. 39,
p. 2087.)
92A.325. "STOCKHOLDER" DEFINED.
"Stockholder" means a stockholder of record or a beneficial stockholder of
a domestic corporation. (1995, ch. 586, sec. 40, p. 2087.)
92A.330. "STOCKHOLDER OF RECORD" DEFINED.
"Stockholder of record" means the person in whose name shares are
registered in the records of a domestic corporation or the beneficial owners of
shares to the extent of the rights granted by a nominee's certificate on file
with the domestic corporation. (1995, ch. 586, sec. 41, p. 2087.)
92A.335. "SUBJECT CORPORATION" DEFINED.
"Subject corporation" means the domestic corporation which is the issuer of
the shares held by a dissenter before the corporate action creating the
dissenter's right becomes effective or the surviving or acquiring entity of that
issuer after the corporate action becomes effective, (1995, ch. 586, sec. 42. p.
2087.)
92A.340. COMPUTATION OF INTEREST.
Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be
computed from the effective date of the action until the date of payment, at the
average rate currently paid by the entity on its principal bank loans or, if it
has no bank loans, at a rate that is fair and equitable under all of the
circumstances (1995, ch. 586. sec. 43. p. 2087.)
92A.350. RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP.
A partnership agreement of a domestic limited partnership or, unless
otherwise provided in the partnership agreement, an agreement of merger or
exchange may provide that contractual rights with respect to the partnership
interest of a dissenting general or limited partner of a domestic limited
partnership are
E-1
<PAGE> 318
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity. (1995, ch. 586, sec. 47, p. 2088.)
92A.360. RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY COMPANY.
The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity. (1995, ch. 586, sec.
48, p. 2088.)
92A.370. RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2 and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1. (1995, ch. 586,
sec. 46, p. 2088.)
92A.380. RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND TO
OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation and
he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's interests
will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders
in the event that the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation. (1995, ch. 586, sec. 44, p. 2087.)
92A.390. LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR
SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
E-2
<PAGE> 319
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or (b) The holders of the class or series are
required under the plan of merger or exchange to accept for the shares
anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan
of merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by at
least 2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of
paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130. (1995, ch.
586, sec. 45, p. 2088.)
92A.400. LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO
SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
(1995, ch. 586, sec. 49, p. 2089.)
92A.410. NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430. (1995, ch. 586, sec. 50, p. 2089; 1997, ch.
208, sec. 78, p. 730.)
EFFECTIVE DATE. -- The 1997 amendment is effective October 1, 1997.
EFFECT OF AMENDMENT. -- The 1997 amendment inserted "by written consent of
the stockholders or" near the beginning of subsection 2.
E-3
<PAGE> 320
92A.420. PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 is
not entitled to payment for his shares under this chapter. (1995, ch. 586,
sec. 51, p. 2089.)
92A.430. DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDER ENTITLED TO ASSERT RIGHTS;
CONTENTS.
1. If a proposed corporate action creating dissenter's rights is authorized
at a stockholders' meeting, the subject corporation shall deliver a written
dissenter's notice to all stockholders who satisfied the requirements to assert
those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand
for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(1995, ch. 586, sec. 52, p. 2089.)
92A.440. DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS OF
STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter. (1995, ch. 586, sec. 53,
p. 2090; 1997, ch. 208, sec. 79, p. 730.)
EFFECTIVE DATE -- The 1997 amendment is effective October 1, 1997.
EFFECT OF AMENDMENT -- The 1997 amendment inserted "before the proposed
corporate action is taken" in subsection 2.
E-4
<PAGE> 321
92A.450. UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND FOR
PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action. (1995, ch. 586, sec. 54, p. 2090.)
92A.460. PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive. (1995, ch. 586,
sec. 55, p. 2090.)
92A.470. PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S
NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480. (1995, ch. 586,
sec. 56, p. 2091.)
92A.480. DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
E-5
<PAGE> 322
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
(1995, ch. 586, sec. 57, p. 2091.)
92A.490. LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation shall
commence a proceeding within 60 days after receiving the demand and petition the
court to determine the fair value of the shares and accrued interest. If the
subject corporation does not commence the proceeding within the 60-day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The appraisers have the powers described in the order appointing
them, or any amendment thereto. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470, (1995, ch. 586, sec. 58, p. 2091.)
92A.500. LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND FEES.
1. The court in a proceeding to determine fair value shall determine all of
the costs of the proceeding, including the reasonable compensation and expenses
of any appraisers appointed by the court. The court shall assess the costs
against the subject corporation, except that the court may assess costs against
all or some of the dissenters, in amounts the court finds equitable, to the
extent the court finds the dissenters acted arbitrarily, vexatiously or not in
good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with
the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by NRS 92A.300 to 92A.500,
inclusive.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
E-6
<PAGE> 323
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115. (1995, ch. 586, sec. 59, p. 2092.)
E-7
<PAGE> 324
ADDENDUM F
NEWRIDERS PLAN
<PAGE> 325
ADDENDUM F
NEWRIDERS, INC.
1997 EXECUTIVE INCENTIVE COMPENSATION PLAN
1. Purpose. The purpose of this 1997 Executive Incentive Compensation Plan
(the "Plan") is to assist Newriders, Inc. (the "Company") and its subsidiaries
in attracting, motivating, retaining and rewarding high-quality executives and
other employees, officers, Directors and independent contractors enabling such
persons to acquire or increase a proprietary interest in the Company in order to
strengthen the mutuality of interests between such persons and the Company's
stockholders, and providing such persons with annual and long term performance
incentives to expend their maximum efforts in the creation of shareholder value.
The Plan is also intended to qualify certain compensation awarded under the Plan
for tax deductibility under Section 162(m) of the Code (as hereafter defined) to
the extent deemed appropriate by the Committee (or any successor committee) of
the Board of Directors of the Company.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof.
(a) "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of
a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR), Restricted
Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or
Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 10(b) hereof. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means person, persons, trust or trusts entitled by will or the
laws of descent and distribution to receive such benefits.
(d) "Beneficial Owner," "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3
under the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee designated by the Board to
administer the Plan; provided, however, that the Committee shall consist
solely of at least two directors, each of whom shall be (i) a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange
Act, unless administration of the Plan by "disinterested persons" is not
then required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined
under Section 162(m) of the Code, unless administration of the Plan by
"outside directors" is not then required in order to qualify for tax
deductibility under Section 162(m) of the Code.
(j) "Corporate Transaction" means a transaction as defined in Section
9(b) of the Plan.
F-1
<PAGE> 326
(k) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, cash or a combination thereof at the
end of a specified deferral period.
(m) "Director" means a member of the Board.
(n) "Disability" means a permanent and total disability (within the
meaning of Section 22(e) of the Code), as determined by a medical doctor
satisfactory to the Committee.
(o) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g) hereof, to receive cash, Stock, other Awards or other
property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(p) "Effective Date" means the effective date of the Plan, which shall
be November 20, 1997, the date on which the Plan was adopted by the
Company's Board of Directors.
(q) "Eligible Person" means each executive officer of the Company(as
defined under the Exchange Act) and other officers, Directors and employees
of the Company or of any subsidiary, and independent contractors with the
Company or any subsidiary. The foregoing notwithstanding, no Non-Employee
Director shall be an Eligible Person for purposes of receiving any Awards
under this Plan other than Formula Grants of Options granted under Section
6(b)(iv) of the Plan and Formula Grants of Restricted Stock granted under
Section 6(d)(v) of the Plan. An employee on leave of absence may be
considered as still in the employ of the Company or a subsidiary for
purposes of eligibility for participation in the Plan.
(r) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(s) "Executive Officer" means an executive officer of the Company as
defined under the Exchange Act.
(t) "Fair Market Value" means the fair market value of Stock, Awards
or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value of Stock as of any given date shall be the closing
sale price per share reported on a consolidated basis for stock listed on
the principal stock exchange or market on which Stock is traded on the date
as of which such value is being determined or, if there is no sale on that
date, then on the last previous day on which a sale was reported.
(u) "Formula Grants" means the Formula Grant Options and Formula Grant
Restricted Stock granted to Non-Employee Directors pursuant to Sections
6(b)(iv) and 6(d)(v) of the Plan.
(v) "Incentive Stock Option" or "ISO" means any Option intended to be
designated as an incentive stock option within the meaning of Section 422
of the Code or any successor provision thereto.
(w) "Incumbent Board" means the Board as defined in Section 9(b) of
the Plan.
(x) "Limited SAR" means a right granted to a Participant under Section
6(c) hereof.
(y) "Non-Employee Director" shall mean a member of the Board who is
not an employee of the Company or any subsidiary, and who meets the
definition of a Non-Employee Director described in Rule 16b-3.
(z) "Option" means a right granted to a Participant under Section (b)
hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
(aa) "Other Stock-Based Awards" means Awards granted to a Participant
under Section 6(h) hereof.
(ab) "Participant" means a person who has been granted an Award under
the Plan which remains outstanding, including a person who is no longer an
Eligible Person.
F-2
<PAGE> 327
(ac) "Performance Award" means a right, granted to a Eligible Person
under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee.
(ad) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
and shall include a "group" as defined in Section 13(d) thereof.
(ae) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(af) "Retire" or "Retirement" means termination of service as a
Director after having attained at least age 62 and having served as a
Director for at least 5 years, other than by reason of death, Disability or
the Director's willful misconduct or negligence.
(ag) "Rule 16b-3" and "Rule 16a-l(c)(3)" means Rule 16b-3 and Rule
16a-l(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.
(ah) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(ai) "Stock Appreciation Rights" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority, in each case
subject to and consistent with the provisions of the Plan, to select
Eligible Persons to become Participants, grant Awards, determine the type,
number and other terms and conditions of, and all other matters relating
to, Awards, prescribe Award agreements (which need not be identical for
each Participant) and rules and regulations for the administration of the
Plan, construe and interpret the Plan and Award agreements and correct
defects, supply omissions or reconcile inconsistencies therein, and to make
all other decisions and determinations as the Committee may deem necessary
or advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall
exercise sole and exclusive discretion on any matter relating to a
Participant then subject to Section 16 of the Exchange Act with respect to
the Company to the extent necessary in order that transactions by such
Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee shall be final, conclusive and binding on all
persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons
claiming rights from or through a Participant, and stockholders. The
express grant of any specific power to the Committee, and the taking of any
action by the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to officers or
managers of the Company or any subsidiary, or committees thereof, the
authority, subject to such terms as the Committee shall determine, (i) to
perform administrative functions, (ii) with respect to Participants not
subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, and (iii) with respect to Participants
subject to Section 16, to perform such other functions of the Committee as
the Committee may determine to the extent performance of such functions
will not result in the loss of an exemption under Rule 16b-3 otherwise
available for transactions by such persons, in each case to the extent
permitted under applicable law and subject to the requirements set forth in
Section 8(d). The Committee may appoint agents to assist it in
administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any executive officer other officer
or employee of the Company or a subsidiary, the Company's independent
auditors, consultants or any other agents assisting in the administration
of the Plan. Members of the Committee and any officer or employee of the
Company or a subsidiary acting at the direction or on behalf of the
F-3
<PAGE> 328
Committee shall not be personally liable for any action or determination
taken or made in good faith with respect to the Plan, and shall, to the
extent permitted by law, be fully indemnified and protected by the Company
with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Overall Number of Shares Subject to Awards. Subject to adjustment
as provided in Section 10(c) hereof, the total number of shares of Stock
that may be subject to the granting of Awards under the Plan at any point
in time during the term of the Plan shall be equal to 5,000,000 shares. Any
shares of Stock delivered under the Plan may consist, in whole or in part,
of authorized and unissued shares or treasury shares. In no event shall the
aggregate number of shares of stock which may be issued pursuant to ISOs
exceed 5,000,000 shares.
(b) Application of Limitations. The limitation contained in Section
4(a) shall apply not only to Awards that are settleable by the delivery of
shares of stock but also to Awards relating to shares of stock but
settleable only in cash (such as cash-only SARs). The Committee may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and
make adjustments if the number of shares of Stock actually delivered
differs from the number of shares previously counted in connection with an
Award.
5. Eligibility; Per-Person Award Limitations. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of which
the Plan is in effect, an Eligible Person may not be granted Awards relating to
more than 2,000,000 shares of Stock, subject to adjustment as provided in
Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 6(h),
8(b) and 8(c). In addition, the maximum amount that may be earned as a final
Annual Incentive Award or other cash Award in any fiscal year by any one
Participant shall be $1,000,000, and the maximum amount that may be earned as a
final Performance Award or other cash Award in respect of a performance period
by any one Participant shall be $5,000,000.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof, at the date of grant or thereafter (subject to
Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including
terms requiring forfeiture of Awards in the event of termination of
employment by the Participant and terms permitting a Participant to make
elections relating to his or her Award. The Committee shall retain full
power and discretion to accelerate, waive or modify, at any time, any term
or condition of an Award that is not mandatory under the Plan. Except in
cases in which the Committee is authorized to require other forms of
consideration under the Plan, or to the extent other forms of consideration
must be paid to satisfy the requirements of Nevada law, no consideration
other than services may be required for the grant (but not the exercise) of
any Award.
(b) Options. The Committee is authorized to grant Options to
participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee. The
exercise price may be less than the Fair Market Value of a share of
Stock on the date of grant of such Option, unless the option being
granted is an Incentive Stock Option which must comply with Section 422
of the Code.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the time or times
at which Options shall cease to be or become exercisable following
termination of employment or upon other conditions, the methods by which
such exercise price may be paid or deemed to be paid, the form of such
payment, including, without limitation, cash, Stock, other Awards or
awards granted
F-4
<PAGE> 329
under other plans of the Company or any subsidiary, or other property
(including notes or other contractual obligations of Participants to
make payment on a deferred basis), and the methods by or forms in which
Stock will be delivered or deemed to be delivered to Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Section 422 of the Code.
Anything in the Plan to the contrary notwithstanding, no term of the
Plan relating to ISOs (including any SAR in tandem therewith) shall be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify either the Plan
or any ISO under Section 422 of the Code, unless the Participant has
first requested the change that will result in such disqualification.
(iv) Formula Grants of Options to Non-Employee Directors. Subject
to adjustment as provided in the first sentence of Section 10(c) hereof,
each Non-Employee Director shall receive (A) on the date of his or her
appointment as a Director of the Company, an Option to purchase 50,000
shares of Stock, and (B) each year, on the day the Company issues its
earnings release for the prior fiscal year, an Option to purchase 50,000
shares of Stock. Options granted to Non-Employee Directors pursuant to
this Section shall be for a term of 10 years and shall become
exercisable at the rate of 33 1/3% per year commencing on the first
anniversary of the date on which the Option is granted; provided,
however, that the Options shall be fully exercisable in the event that,
while serving as a Director, the Non-Employee Director dies, suffers a
Disability, or Retires. The per share exercise price of all Options
granted to Non-Employee Directors pursuant to this paragraph (iv) shall
be equal to the Fair Market Value of a share of Stock on the date such
Option is granted. Unless otherwise extended in the sole discretion of
the Committee, the unexercised portion of any Option granted pursuant to
this paragraph (iv) shall become null and void (C) three months after
the date on which such Non-Employee Director ceases to be a Director of
the Company for any reason other than the Non-Employee Director's
willful misconduct or negligence, Disability, death or Retirement, (D)
immediately in the event of the Non-Employee Director's willful
misconduct or negligence, (E) one year after the Non-Employee Director
ceases to be a Director by reason of his Disability, (F) at the
expiration of its original term, if the Non-Employee Director ceases to
be a Director by reason of his Retirement, and (G) twelve months after
the date of the Non-Employee Director's death in the event that such
death occurs prior to the time the Option otherwise would become null
and void pursuant to this sentence.
(c) Stock Appreciation Rights. The Committee is authorized to grant
SARs to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of
(A) the Fair Market Value of one share of stock on the date of exercise
(or, in the case of a "Limited SAR," the Fair Market Value determined by
reference to the Change in Control Price, as defined under Section 9(c)
hereof), over (B) the grant price of the SAR as determined by the
Committee. The grant price of an SAR shall not be less than the Fair
Market Value of a share of Stock on the date of grant except as provided
under Section 7(a) hereof.
(ii) Other Terms. The Committee shall determine at the date of
grant or thereafter, the time or times at which and the circumstances
under which a SAR may be exercised in whole or in part (including based
on achievement of performance goals and/or future service requirements),
the time or times at which SARs shall cease to be or become exercisable
following termination of employment or upon other conditions, the method
of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or
deemed to be delivered to Participants, whether or not a SAR shall be in
tandem or in combination with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised in
connection with a Change in Control or other event as specified by the
Committee may be granted on such terms, not inconsistent with this
Section 6(c), as the Committee may determine. SARs and Limited SARs may
be either freestanding or in tandem with other Awards.
F-5
<PAGE> 330
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which restrictions
may lapse separately or in combination at such times, under such
circumstances (including based on achievement of performance goals
and/or future service requirements), in such installments or otherwise,
as the Committee may determine at the date of grant or thereafter. In no
event shall the restricted period be less than three years unless the
Restricted Stock is subject to performance conditions in accordance with
Section 8 of this Plan, in which case the restricted period shall not be
less than one year. Except to the extent restricted under the terms of
the Plan and any Award agreement relating to the Restricted Stock, a
Participant granted Restricted Stock shall have all of the rights of a
stockholder, including the right to vote the Restricted Stock and the
right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee). During the
restricted period applicable to the Restricted Stock, subject to Section
10(b) below, the Restricted Stock may not be sold, transferred, pledged,
hypothecated, margined or otherwise encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the Committee at
the time of the Award, upon termination of a Participant's employment
during the applicable restriction period, the Participant's Restricted
Stock that is at that time subject to restrictions shall be forfeited
and required by the Company; provided that the Committee may provide, by
rule or regulation or in any Award agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the name
of the Participant, the Committee may require that such certificates
bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock, that the Company
retain physical possession of the certificates, and that the Participant
deliver a stock power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an Award
of Restricted Stock, the Committee may require that any cash dividends
paid on a share of Restricted Stock be automatically reinvested in
additional shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined by the
Committee, Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be subject
to restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other property has
been distributed.
(v) Formula Grants of Restricted Stock to Non-Employee
Directors. Subject to adjustment as provided in the first sentence of
Section 10(c) hereof, commencing at the end of the Company's fiscal year
that begins January 1, 1997, each Non-Employee Director shall receive
each year, on the day the Company issues its earnings release for the
prior fiscal year, an Award of shares of Restricted Stock, in an amount
to be determined annually by the Board of Directors. Each Award of
Restricted Stock shall become non-forfeitable on the third anniversary
of the date on which the Restricted Stock is granted; provided, however,
that all Restricted Stock granted to a Non-Employee Director shall
become nonforfeitable in the event that, while serving as a Director,
the Non-Employee Director dies, suffers a Disability, or Retires. In the
event that a Non-Employee Director ceases to serve as a Director for any
reason other than the death, Disability or Retirement of the Non-
Employee Director, the Restricted Stock that is at that time subject to
restrictions shall be forfeited and required by the Company.
F-6
<PAGE> 331
(e) Deferred Stock. The Committee is authorized to grant Deferred
Stock to Participants, which are rights to receive Stock, cash, or a
combination thereof at the end of a specified deferral period, subject to
the following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified for
such Deferred Stock by the Committee (or, if permitted by the Committee,
as elected by the Participant). In addition, Deferred Stock shall be
subject to such restrictions (which may include a risk of forfeiture) as
the Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times
(including based on achievement of performance goals and/or future
service requirements), separately or in combination, in installments or
otherwise, as the Committee may determine. In no event shall an Award of
Deferred Stock payable in Stock have a deferral period of less than
three years unless the Award is subject to performance conditions in
accordance with Section 8 of the Plan, in which case the deferral period
shall be for not less than one year. Deferred Stock may be satisfied by
delivery of Stock, cash equal to the Fair Market Value of the specified
number of shares of Stock covered by the Deferred Stock, or a
combination thereof, as determined by the Committee at the date of grant
or thereafter. Prior to satisfaction of an Award of Deferred Stock, an
Award of Deferred Stock carries no voting or dividend or other rights
associated with share ownership.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of a Participant's employment during the applicable
deferral period thereof to which forfeiture conditions apply (as
provided in the Award agreement evidencing the Deferred Stock), the
Participant's Deferred Stock that is at that time subject to deferral
(other than a deferral at the election of the Participant) shall be
forfeited; provided that the Committee may provide, by rule or
regulation or in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Deferred
Stock shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases
waive in whole or in part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by the
Committee at date of grant, Dividend Equivalents on the specified number
of shares of Stock covered by an Award of Deferred Stock shall be either
(A) paid with respect to such Deferred Stock at the dividend payment
date in cash or in shares of unrestricted Stock having a Fair Market
Value equal to the amount of such dividends, or (B) deferred with
respect to such Deferred Stock and the amount or value thereof
automatically deemed reinvested in additional Deferred Stock, other
Awards or other investment vehicles, as the Committee shall determine or
permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in
lieu of Company obligations to pay cash or deliver other property under the
Plan or under other plans or compensatory arrangements, provided that, in
the case of Participants subject to Section 16 of the Exchange Act, the
amount of such grants remains within the discretion of the Committee to the
extent necessary to ensure that acquisitions of Stock or other Awards are
exempt from liability under Section 16(b) of the Exchange Act. Stock or
Awards granted hereunder shall be subject to such other terms as shall be
determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to a Participant entitling the Participant to receive
cash, Stock, other Awards, or other property equal in value to dividends
paid with respect to a specified number of shares of Stock, or other
periodic payments. Dividend Equivalents may be awarded on a free-standing
basis or in connection with another Award. The Committee may provide that
Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles, and subject to such restrictions on transferability
and risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Stock, as deemed by the
F-7
<PAGE> 332
Committee to be consistent with the purposes of the Plan, including,
without limitation, convertible or exchangeable debt securities, other
rights convertible or exchangeable into Stock, purchase rights for Stock,
Awards with value and payment contingent upon performance of the Company or
any other factors designated by the Committee, and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries or business units. The Committee
shall determine the terms and conditions of such Awards. Stock delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation,
cash, Stock, other Awards or other property, as the Committee shall
determine. Cash awards, as an element of or supplement to any other Award
under the Plan, may also be granted pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of
the Company, any subsidiary, or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is
granted in substitution or exchange for another Award or award, the
Committee shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards may be
granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any subsidiary, in which the
value of Stock subject to the Award is equivalent in value to the cash
compensation (for example, Deferred Stock or Restricted Stock), or in which
the exercise price, grant price or purchase price of the Award in the
nature of a right that may be exercised is equal to the Fair Market Value
of the underlying Stock minus the value of the cash compensation
surrendered (for example, Options granted with an exercise price
"discounted" by the amount of the cash compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such period as
may be determined by the Committee; provided that in no event shall the
term of any Option or SAR exceed a period of ten years (or such shorter
term as may be required in respect of an ISO under Section 422 of the
Code).
(c) Form and Timing of Payment Under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made
by the Company or a subsidiary upon the exercise of an Option or other
Award or settlement of an Award may be made in such forms as the Committee
shall determine, including, without limitation, cash, Stock, other Awards
or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such
settlement, in the discretion of the Committee or upon occurrence of one or
more specified events (in addition to a Change in Control). Installment or
deferred payments may be required by the Committee (subject to Section
10(e) of the Plan) or permitted at the election of the Participant on terms
and conditions established by the Committee. Payments may include, without
limitation, provisions for the payment or crediting of a reasonable
interest rate on installment or deferred payments or the grant or crediting
of Dividend Equivalents or other amounts in respect of installment or
deferred payments denominated in Stock.
(d) Exemptions From Section 16(b) Liability. It is the intent of the
Company that this Plan comply in all respects with applicable provisions of
Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that
neither the grant of any Awards to nor other transaction by a Participant
who is subject to Section 16 of the Exchange Act is subject to liability
under Section 16(b) thereof (except for transactions acknowledged in
writing to be non-exempt by such Participant). Accordingly, if any
provision of this Plan or any Award agreement does not comply with the
requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any
such transaction, such provision will be construed or deemed amended to the
extent necessary to conform to the applicable requirements of Rule 16b-3 or
Rule 16a-1(c)(3) so that such Participant shall avoid liability under
Section 16(b). In addition, the
F-8
<PAGE> 333
purchase price of any Award conferring a right to purchase Stock shall be
not less than any specified percentage of the Fair Market Value of Stock at
the date of grant of the Award then required in order to comply with Rule
16b-3.
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as may be specified by the
Committee. The Committee may use such business criteria and other measures
of performance as it may deem appropriate in establishing any performance
conditions, and may exercise its discretion to reduce the amounts payable
under any Award subject to performance conditions, except as limited under
Sections 8(b) and 8(c) hereof in the case of a Performance Award or Annual
Incentive Award intended to qualify under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees. If and
to the extent that the Committee determines that a Performance Award to be
granted to an Eligible Person who is designated by the Committee as likely
to be a Covered Employee should qualify as "performance-based compensation"
for purposes of Code Section 162(m), the grant, exercise and/or settlement
of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section
8(b).
(i) Performance Goals Generally. The performance goals for such
Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such
criteria, as specified by the Committee consistent with this Section
8(b). Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m) and regulations thereunder including
the requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being
"substantially uncertain." The Committee may determine that such
Performance Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise
and/or settlement of such Performance Awards. Performance goals may
differ for Performance Awards granted to any one Participant or to
different Participants.
(ii) Business Criteria. One or more of the following business
criteria for the Company, on a consolidated basis, and/or specified
subsidiaries or business units of the Company (except with respect to
the total stockholder return and earnings per share criteria), shall be
used exclusively by the Committee in establishing performance goals for
such Performance Awards: (1) total stockholder return; (2) such total
stockholder return as compared to total return (on a comparable basis)
of a publicly available index such as, but not limited to, the Standard
& Poor's 500 Stock Index or the S&P Specialty Retailer Index; (3) net
income; (4) pretax earnings; (5) earnings before interest expense,
taxes, depreciation and amortization; (6) pretax operating earnings
after interest expense and before bonuses, service fees, and
extraordinary or special items; (7) operating margin; (8) earnings per
share; (9) growth in earnings per share; (10) return on equity; (11)
return on capital; (12) return on investment; (13) operating earnings;
(14) working capital or inventory; and (15) ratio of debt to
stockholders' equity. One or more of the foregoing business criteria
shall also be exclusively used in establishing performance goals for
Annual Incentive Awards granted to a Covered Employee under Section 8(c)
hereof.
(iii) Performance Period; Timing for Establishing Performance
Goals. Achievement of performance goals in respect of such Performance
Awards shall be measured over a performance period of up to ten years,
as specified by the Committee. Performance goals shall be established
not later than 90 days after the beginning of any performance period
applicable to such Performance Awards, or at such other date as may be
required or permitted for "performance-based compensation" under Code
Section 162(m).
F-9
<PAGE> 334
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes of
measuring Company performance in connection with Performance Awards. The
amount of such Performance Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance with
Section 8(b)(iii) hereof. The Committee may specify the amount of the
Performance Award Pool as a percentage of any of such business criteria,
a percentage thereof in excess of a threshold amount, or as another
amount which need not bear a strictly mathematical relationship to such
business criteria.
(v) Settlement of Performance Awards; Other Terms. Settlement of
such Performance Awards shall be in cash, Stock, other Awards or other
property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in
connection with such Performance Awards. The Committee shall specify the
circumstances in which such Performance Awards shall be paid or
forfeited in the event of termination of employment by the Participant
prior to the end of a performance period or settlement of Performance
Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If and to the extent that the Committee determines that an
Annual Incentive Award to be granted to an Eligible Person who is
designated by the Committee as likely to be a Covered Employee should
qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise and/or settlement of such Annual Incentive
Award shall be contingent upon achievement of preestablished performance
goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may establish an
Annual Incentive Award pool, which shall be an unfunded pool, for
purposes of measuring Company performance in connection with Annual
Incentive Awards. The amount of such Annual Incentive Award pool shall
be based upon the achievement of a performance goal or goals based on
one or more of the business criteria set forth in Section 8(b)(ii)
hereof during the given performance period, as specified by the
Committee in accordance with Section 8(b)(iii) hereof. The Committee may
specify the amount of the Annual Incentive Award pool as a percentage of
any such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the end of
the 90th day of each fiscal year, or at such other date as may be
required or permitted in the case of Awards intended to be
"performance-based compensation" under Code Section 162(m), the
Committee shall determine the Eligible Persons who will potentially
receive Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual Incentive
Award pool established by such date under Section 8(c)(i) hereof or as
individual Annual Incentive Awards. In the case of individual Annual
Incentive Awards intended to qualify under Code Section 162(m), the
amount potentially payable shall be based upon the achievement of a
performance goal or goals based on one or more of the business criteria
set forth in Section 8(b)(ii) hereof in the given performance year, as
specified by the Committee; in other cases, such amount shall be based
on such criteria as shall be established by the Committee. In all cases,
the maximum Annual Incentive Award of any Participant shall be subject
to the limitation set forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end of each
fiscal year, the Committee shall determine the amount, if any, of (A)
the Annual Incentive Award pool, and the maximum amount of potential
Annual Incentive Award payable to each Participant in the Annual
Incentive Award pool, or (B) the amount of potential Annual Incentive
Award otherwise payable to each Participant. The Committee may, in its
discretion, determine that the amount payable to any Participant as a
final Annual Incentive Award shall be reduced from the amount of his or
her potential Annual Incentive Award, including a determination to make
no final Award whatsoever. The Committee shall specify the circumstances
in which an Annual Incentive Award shall be paid
F-10
<PAGE> 335
or forfeited in the event of termination of employment by the
Participant prior to the end of a fiscal year or settlement of such
Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee as to
the establishment of performance goals, the amount of any Performance Award
pool or potential individual Performance Awards and as to the achievement
of performance goals relating to Performance Awards under Section 8(b), and
the amount of any Annual Incentive Award pool or potential individual
Annual Incentive Awards and the amount of final Annual Incentive Awards
under Section 8(c), shall be made in writing in the case of any Award
intended to qualify under Code Section 162(m). The Committee may not
delegate any responsibility relating to such Performance Awards or Annual
Incentive Awards.
(e) Status of Section 8(b) and Section 8(c) Awards Under Code Section
162(m). It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Section 8(b) and 8(c) hereof granted to persons who
are designated by the Committee as likely to be Covered Employees within
the meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e),
including the definitions of Covered Employee and other terms used therein,
shall be interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the
Committee cannot determine with certainty whether a given Participant will
be a Covered Employee with respect to a fiscal year that has not yet been
completed, the term Covered Employee as used herein shall mean only a
person designated by the Committee, at the time of grant of Performance
Awards or an Annual Incentive Award, as likely to be a Covered Employee
with respect to that fiscal year. If any provision of the Plan or any
agreement relating to such Performance Awards or Annual Incentive Awards
does not comply or is inconsistent with the requirements of Code Section
162(m) or regulations thereunder, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements.
9. Change In Control.
(a) Effect of "Change in Control." In the event of a "Change in
Control," as defined in Section 9(b), the following provisions shall apply:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of
the time of the Change in Control and shall remain exercisable and
vested for the balance of the stated term of such Award without regard
to any termination of employment by the Participant, subject only to
applicable restrictions set forth in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in
lieu of acquiring the shares of Stock covered by such Option, to
receive, and the Company shall be obligated to pay, in cash the excess
of the Change in Control Price over the exercise price of such Option,
multiplied by the number of shares of Stock covered by such Option;
provided, however, that no optionee who is subject to Section 16 with
respect to the Company at the time of the Change in Control shall be
entitled to make such an election if the acquisition of the right to
make such election would represent a non-exempt purchase under Section
16(b) by such optionee;
(iii) Limited SARs (and other SARs if so provided by their terms)
shall become exercisable for amounts, in cash, determined by reference
to the Change in Control Price;
(iv) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the
Change in Control, except to the extent of any waiver by the Participant
and subject to applicable restrictions set forth in Section 10(a)
hereof; and
F-11
<PAGE> 336
(v) With respect to any such outstanding Award subject to
achievement of performance goals and conditions under the Plan, such
performance goals and other conditions will be deemed to be met if and
to the extent so provided by the Committee in the Award agreement
relating to such Award.
(b) Definition of "Change in Control." A "Change in Control" shall be
deemed to have occurred upon:
(i) An acquisition by any Person of Beneficial Ownership of the
shares of Common Stock of the Company then outstanding (the "Company
Common Stock Outstanding") or the voting securities of the Company then
outstanding entitled to vote generally in the election of directors (the
"Company Voting Securities Outstanding") if such acquisition of
Beneficial Ownership results in the Person's Beneficially Owning 25% or
more of the Company Common Stock outstanding or 25% or more of the
combined voting power of the Company Voting Securities Outstanding; or
(ii) The approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, sale or disposition of all or substantially
all of the assets of the Company, or similar corporate transaction (in
each case referred to in this Section 9(b) as a "Corporate Transaction")
or, if consummation of such Corporate Transaction is subject, at the
time of such approval by stockholders, to the consent of any government
or governmental agency, the obtaining of such consent (either explicitly
or implicitly); provided, however, that any merger, consolidation, sale,
disposition or other similar transaction to or with one or more
Participants or entities controlled by one or more Participants shall
not constitute a Corporate Transaction in respect of such
Participant(s); or
(iii) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board (such
Board shall be hereinafter referred to as the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board; provided,
however, for purposes of this Section 9(b), that any individual who
becomes a member of the Board subsequent to the Effective Date whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board
(or deemed to be such pursuant to this provision) shall be considered as
though such individual were a member of the Incumbent Board; and,
provided, further, that any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election
contest subject to Rule 14a-11 of Regulation 14A under the Exchange Act,
including any successor to such Rule, or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board shall in no event be considered as a member of the
Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of
this Section 9(b), the following shall not constitute a Change in Control for
purposes of the Plan: (1) any acquisition by or consummation of a Corporate
Transaction with any entity that was a subsidiary of the Company immediately
prior to the transaction or an employee benefit plan (or related trust)
sponsored or maintained by the Company or an entity that was a subsidiary of the
Company immediately prior to the transaction if, immediately after such
transaction (including consummation of all related transactions), the surviving
entity is controlled by no Person other than such subsidiary, employee benefit
plan (or related trust) and/or other Persons who controlled the Company
immediately prior to such transaction; or (2) any acquisition or consummation of
a Corporate Transaction following which more than 50% of, respectively, the
shares then outstanding of common stock of the corporation resulting from such
acquisition or Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote generally in
the election of directors is then Beneficially Owned, directly or indirectly, by
all or substantially all of the individuals and entities who were Beneficial
Owners, respectively, of the Company Common Stock Outstanding and Company Voting
Securities Outstanding immediately prior to such acquisition or Corporate
Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or
F-12
<PAGE> 337
Corporate Transaction, of the Company Common Stock Outstanding and Company
Voting Securities Outstanding, as the case may be.
(c) Definition of "Change in Control Price." The "Change in Control
Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share
paid (including extraordinary dividends) in any Corporate Transaction
triggering the Change in Control under Section 9(b)(ii) hereof or any
liquidation of shares following a sale of substantially all assets of the
Company, or (ii) the highest Fair Market Value per share at any time during
the 60-day period preceding and 60-day period following the Change in
Control.
10. General Provisions.
(a) Compliance with Legal and Other Requirements. The Company may, to
the extent deemed necessary or advisable by the Committee, postpone the
issuance or delivery of Stock or payment of other benefits under any Award
until completion of such registration or qualification of such Stock or
other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or
automated quotation system upon which the Stock or other Company securities
are listed or quoted, or compliance with any other obligation of the
Company, as the Committee may consider appropriate, and may require any
Participant to make such representations, furnish such information and
comply with or be subject to such other conditions as it may consider
appropriate in connection with the issuance or delivery of Stock or payment
of other benefits in compliance with applicable laws, rules, and
regulations, listing requirements, or other obligations. The foregoing
notwithstanding, in connection with a Change in Control, the Company shall
take or cause to be taken no action and shall undertake or permit to arise
no legal or contractual obligation, that results or would result in any
postponement of the issuance or delivery of Stock or payment of benefits
under any Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed on
the 90th day preceding the Change in Control.
(b) Limits on Transferability; Beneficiaries. No Award or other right
or interest of a Participant under the Plan, including any Award or right
which constitutes a derivative security as generally defined in Rule
16a-l(c) under the Exchange Act, shall be pledged, hypothecated or
otherwise encumbered or subject to any lien, obligation or liability of
such Participant to any party (other than the Company or a subsidiary), or
assigned or transferred by such Participant otherwise than by will or the
laws of descent and distribution or to a Beneficiary upon the death of a
Participant, and such Awards or rights that may be exercisable shall be
exercised during the lifetime of the Participant only by the Participant or
his or her guardian or legal representative, except that Awards and other
rights (other than ISOs and SARs in tandem therewith) may be transferred to
one or more Beneficiaries or other transferees during the lifetime of the
Participant, and may be exercised by such transferees in accordance with
the terms of such Award, but only if and to the extent such transfers and
exercises are permitted by the Committee pursuant to the express terms of
an Award agreement (subject to any terms and conditions which the Committee
may impose thereon, and further subject to any prohibitions or restrictions
on such transfers pursuant to Rule 16b-3). A Beneficiary, transferee, or
other person claiming any rights under the Plan from or through any
Participant shall be subject to all terms and conditions of the Plan and
any Award agreement applicable to such Participant, except as otherwise
determined by the Committee, and to any additional terms and conditions
deemed necessary or appropriate by the Committee.
(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, stock or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that an
adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the rights of Participants under the
Plan, then the Committee shall, in such manner as it may deem equitable,
adjust any or all of (i) the number and kind of shares of Stock which may
be delivered in connection with Awards granted thereafter, (ii) the number
and kind of shares of Stock by which annual per-person Award limitations
are measured under
F-13
<PAGE> 338
Section 5 hereof, (iii) the number and kind of shares of Stock subject to
or deliverable in respect of outstanding Awards and (iv) the exercise
price, grant price or purchase price relating to any Award and/or make
provision for payment of cash or other property in respect of any
outstanding Award. In addition, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual
Incentive Awards and any Annual Incentive Award pool or performance goals
relating thereto) in recognition of unusual or nonrecurring events
(including, without limitation, events described in the preceding sentence,
as well as acquisitions and dispositions of businesses and assets)
affecting the Company, any subsidiary or any business unit, or the
financial statements of the Company or any subsidiary, or in response to
changes in applicable laws, regulations, accounting principles, tax rates
and regulations or business conditions or in view of the Committee's
assessment of the business strategy of the Company, any subsidiary or
business unit thereof, performance of comparable organizations, economic
and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall
be authorized or made if and to the extent that such authority or the
making of such adjustment would cause Options, SARs, Performance Awards
granted under Section 8(b) hereof or Annual Incentive Awards granted under
Section 8(c) hereof to Participants designated by the Committee as Covered
Employees and intended to qualify as "performance-based compensation" under
Code Section 162(m) and the regulations thereunder to otherwise fail to
qualify as "performance-based compensation" under Code Section 162(m)and
regulations thereunder.
(d) Taxes. The Company and any subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take
such other action as the Committee may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to
make cash payments in respect thereof in satisfaction of a Participant's
tax obligations, either on a mandatory or elective basis in the discretion
of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the
annual meeting next following such Board action if such amendment
represents a material change to the Plan or such stockholder approval is
required by any federal or state law or regulation (including, without
limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock
exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine
to submit other such changes to the Plan to stockholders for approval;
provided that, without the consent of an affected Participant, no such
Board action may materially and adversely affect the rights of such
Participant under any previously granted and outstanding Award. The
Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue or terminate any Award theretofore granted and any
Award agreement relating thereto, except as otherwise provided in the Plan;
provided that, without the consent of an affected Participant, no such
Committee action may materially and adversely affect the rights of such
Participant under such Award. Notwithstanding anything in the Plan to the
contrary, if any right under this Plan would cause a transaction to be
ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee may
modify or adjust the right so that pooling of interest accounting shall be
available, including the substitution of Stock having a Fair Market Value
equal to the cash otherwise payable hereunder for the right which caused
the transaction to be ineligible for pooling of interest accounting.
Notwithstanding anything herein to the contrary, the provisions of Section
6(b)(iv) and Section 6(d)(v) of this Plan which govern formula grants of
Options and Restricted Stock to Non-Employee Directors, shall not be
amended more than once every six months other than to comport with changes
to the Code or the rules promulgated thereunder or the Employee Retirement
Income Security Act of 1974, as amended, or the rules
F-14
<PAGE> 339
promulgated thereunder, or with rules promulgated by the Securities and
Exchange Commission, unless such limit on amendments is not required under
Rule 16b-3 or other applicable law.
(f) Limitation on Rights Conferred Under Plan. Neither the Plan nor
any action taken hereunder shall be construed as (i) giving any Eligible
Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a subsidiary; (ii)
interfering in any way with the right of the Company or a subsidiary to
terminate any Eligible Person's or Participant's employment at any time,
(iii) giving an Eligible Person or Participant any claim to be granted any
Award under the Plan or to be treated uniformly with other Participants and
employees, or (iv) conferring on a Participant any of the rights of a
stockholder of the Company unless and until the Participant is duly issued
or transferred shares of Stock in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the
Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company, provided that the
Committee may authorize the creation of trusts and deposit therein cash,
Stock, other Awards or other property, or make other arrangements to meet
the Company's obligations under the Plan. Such trusts or other arrangements
shall be consistent with the "unfunded" status of the Plan unless the
Committee otherwise determines with the consent of each affected
Participant. The trustee of such trusts may be authorized to dispose of
trust assets and reinvest the proceeds in alternative investments, subject
to such terms and conditions as the Committee may specify and in accordance
with applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by
the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board or a committee thereof to adopt such other incentive arrangements as
it may deem desirable including incentive arrangements and awards which do
not qualify under Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee, in the event of a forfeiture of an
Award with respect to which a Participant paid cash or other consideration,
the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards or other property shall be issued or paid in
lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the laws of the State of California without
giving effect to principles of conflicts of laws, and applicable federal
law.
(k) Plan Effective Date and Stockholder Approval; Termination of
Plan. The Plan shall become effective on the Effective Date, subject to
subsequent approval at the Company's 1998 Annual Meeting of Stockholders,
by stockholders of the Company eligible to vote in the election of
directors, by a vote sufficient to meet the requirements of Code Sections
162(m) and 422, Rule 16b-3 under the Exchange Act, applicable NASDAQ
requirements (if the Company's Common Stock is then listed on NASDAQ), and
other laws, regulations, and obligations of the Company applicable to the
Plan. Awards may be granted subject to stockholder approval, but may not be
exercised or otherwise settled in the event stockholder approval is not
obtained. The Plan shall terminate at such time as no shares of Common
Stock remain available for issuance under the Plan and the Company has no
further rights or obligations with respect to outstanding Awards under the
Plan.
F-15
<PAGE> 340
ADDENDUM G
EASYRIDERS PLAN
<PAGE> 341
ADDENDUM G
EASYRIDERS, INC.
1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
1. Purpose. The purpose of this 1998 Executive Incentive Compensation Plan
(the "Plan") is to assist Easyriders, Inc. (the "Company") and its subsidiaries
in attracting, motivating, retaining and rewarding high-quality executives and
other employees, officers, Directors and independent contractors enabling such
persons to acquire or increase a proprietary interest in the Company in order to
strengthen the mutuality of interests between such persons and the Company's
stockholders, and providing such persons with annual and long term performance
incentives to expend their maximum efforts in the creation of stockholder value.
The Plan is also intended to qualify certain compensation awarded under the Plan
for tax deductibility under Section 162(m) of the Code (as hereafter defined) to
the extent deemed appropriate by the Committee (or any successor committee) of
the Board of Directors of the Company.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof.
(a) "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of
a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR), Restricted
Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or
Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 10(b) hereof. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means person, persons, trust or trusts entitled by will or the
laws of descent and distribution to receive such benefits.
(d) "Beneficial Owner," "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3
under the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee or subcommittee designated by the
Board to administer the Plan; provided, however, that the Committee shall
consist of at least two directors, each of whom shall be (i) a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange
Act, unless administration of the Plan by "Non-Employee Directors" is not
then required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined
under Section 162(m) of the Code, unless administration of the Plan by
"outside directors" is not then required in order to qualify for tax
deductibility under Section 162(m) of the Code.
(j) "Corporate Transaction" means a transaction as defined in Section
9(b) of the Plan.
G-1
<PAGE> 342
(k) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, cash or a combination thereof at the
end of a specified deferral period.
(m) "Director" means a member of the Board.
(n) "Disability" means a permanent and total disability (within the
meaning of Section 22(e) of the Code), as determined by a medical doctor
satisfactory to the Committee.
(o) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g) hereof, to receive cash, Stock, other Awards or other
property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(p) "Effective Date" means the effective date of the Plan, which shall
be the date on which the Reorganization is consummated, subject to approval
by stockholders as provided in Section 10(k).
(q) "Eligible Person" means each executive officer of the Company(as
defined under the Exchange Act) and other officers, Directors and employees
of the Company or of any subsidiary, and independent contractors with the
Company or any subsidiary. The foregoing notwithstanding, no Non-Employee
Director shall be an Eligible Person for purposes of receiving any Awards
under this Plan other than Formula Grants of Options granted under Section
6(b)(iv) of the Plan and Formula Grants of Restricted Stock granted under
Section 6(d)(v) of the Plan. An employee on leave of absence may be
considered as still in the employ of the Company or a subsidiary for
purposes of eligibility for participation in the Plan.
(r) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(s) "Executive Officer" means an executive officer of the Company as
defined under the Exchange Act.
(t) "Fair Market Value" means the fair market value of Stock, Awards
or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value of Stock as of any given date shall be the closing
sale price per share reported on a consolidated basis for stock listed on
the principal stock exchange or market on which Stock is traded on the date
as of which such value is being determined or, if there is no sale on that
date, then on the last previous day on which a sale was reported.
(u) "Formula Grants" means the Formula Grant Options and Formula Grant
Restricted Stock granted to Non-Employee Directors pursuant to Sections
6(b)(iv) and 6(d)(v) of the Plan.
(v) "Incentive Stock Option" or "ISO" means any Option intended to be
designated as an incentive stock option within the meaning of Section 422
of the Code or any successor provision thereto.
(w) "Incumbent Board" means the Board as defined in Section 9(b) of
the Plan.
(x) "Initial Performance Awards" means those Performance Awards
described on Exhibit A to the Plan.
(y) "Limited SAR" means a right granted to a Participant under Section
6(c) hereof.
(z) "Non-Employee Director" shall mean a member of the Board who is
not an employee of the Company or any subsidiary, and who meets the
definition of a Non-Employee Director described in Rule 16b-3.
(aa) "Option" means a right granted to a Participant under Section (b)
hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
(ab) "Other Stock-Based Awards" means Awards granted to a Participant
under Section 6(h) hereof.
G-2
<PAGE> 343
(ac) "Participant" means a person who has been granted an Award under
the Plan which remains outstanding, including a person who is no longer an
Eligible Person.
(ad) "Performance Award" means a conditional right, granted to a
Participant under Section 8 hereof, to receive a cash payment, Stock or
other Award, based upon performance criteria specified by the Committee,
including the Initial Performance Awards.
(ae) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
and shall include a "group" as defined in Section 13(d) thereof.
(af) "Reorganization" means a series of reorganization transactions
which include: (i) the Company's acquisition of all of the issued and
outstanding stock of Paisano Publications, Inc., a California corporation,
and certain affiliated corporations; (ii) the Company's acquisition of all
of the outstanding membership interests of M & B Restaurants, L.C., a Texas
limited liability company; and (iii) the merger of Easyriders Sub, Inc., a
Nevada corporation and a wholly owned subsidiary of the Company, into
Newriders, Inc., a Nevada corporation.
(ag) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(ah) "Retire" or "Retirement" means termination of service as a
Director after having attained at least age 62 and having served as a
Director for at least 5 years, other than by reason of death, Disability or
the Director's willful misconduct or negligence.
(ai) "Rule 16b-3" and "Rule 16a-l(c)(3)" means Rule 16b-3 and Rule
16a-l(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.
(aj) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(ak) "Stock Appreciation Rights" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority, in each case
subject to and consistent with the provisions of the Plan, to select
Eligible Persons to become Participants, grant Awards, determine the type,
number and other terms and conditions of, and all other matters relating
to, Awards, prescribe Award agreements (which need not be identical for
each Participant) and rules and regulations for the administration of the
Plan, construe and interpret the Plan and Award agreements and correct
defects, supply omissions or reconcile inconsistencies therein, and to make
all other decisions and determinations as the Committee may deem necessary
or advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall
exercise sole and exclusive discretion on any matter relating to a
Participant then subject to Section 16 of the Exchange Act with respect to
the Company to the extent necessary in order that transactions by such
Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee shall be final, conclusive and binding on all
persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons
claiming rights from or through a Participant, and stockholders. The
express grant of any specific power to the Committee, and the taking of any
action by the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to officers or
managers of the Company or any subsidiary, or committees thereof, the
authority, subject to such terms as the Committee shall determine, (i) to
perform administrative functions, (ii) with respect to Participants not
subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, and (iii) with respect to Participants
G-3
<PAGE> 344
subject to Section 16, to perform such other functions of the Committee as
the Committee may determine to the extent performance of such functions
will not result in the loss of an exemption under Rule 16b-3 otherwise
available for transactions by such persons, in each case to the extent
permitted under applicable law and subject to the requirements set forth in
Section 8(d). The Committee may appoint agents to assist it in
administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any executive officer other officer
or employee of the Company or a subsidiary, the Company's independent
auditors, consultants or any other agents assisting in the administration
of the Plan. Members of the Committee and any officer or employee of the
Company or a subsidiary acting at the direction or on behalf of the
Committee shall not be personally liable for any action or determination
taken or made in good faith with respect to the Plan, and shall, to the
extent permitted by law, be fully indemnified and protected by the Company
with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Overall Number of Shares Subject to Awards. Subject to adjustment
as provided in Section 10(c) hereof, the total number of shares of Stock
that may be subject to the granting of Awards under the Plan at any point
in time during the term of the Plan shall be equal to 2,800,000 shares. Any
shares of Stock delivered under the Plan may consist, in whole or in part,
of authorized and unissued shares or treasury shares. In no event shall the
aggregate number of shares of stock which may be issued pursuant to ISOs
exceed 2,800,000 shares.
(b) Application of Limitations. The limitation contained in Section
4(a) shall apply not only to Awards that are settleable by the delivery of
shares of stock but also to Awards relating to shares of stock but
settleable only in cash (such as cash-only SARs). The Committee may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and
make adjustments if the number of shares of Stock actually delivered
differs from the number of shares previously counted in connection with an
Award.
5. Eligibility; Per-Person Award Limitations. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of which
the Plan is in effect, an Eligible Person may not be granted Awards relating to
more than 1,000,000 shares of Stock, subject to adjustment as provided in
Section 10(c),in the aggregate under Sections 6(b), 6(c), 6(d), 6(e), 6(f),
6(g), 6(h), 8(b) and 8(c). In addition, the maximum amount that may be earned as
a final Annual Incentive Award or other cash Award in any fiscal year by any one
Participant shall be $1,000,000, and the maximum amount that may be earned as a
final Performance Award or other cash Award in respect of a performance period
by any one Participant shall be $5,000,000, plus, in each case for any
Participant receiving one or more Initial Performance Awards, the amount of such
Awards as set forth on Exhibit A to the Plan.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof, at the date of grant or thereafter (subject to
Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including
terms requiring forfeiture of Awards in the event of termination of
employment by the Participant and terms permitting a Participant to make
elections relating to his or her Award. The Committee shall retain full
power and discretion to accelerate, waive or modify, at any time, any term
or condition of an Award that is not mandatory under the Plan. Except in
cases in which the Committee is authorized to require other forms of
consideration under the Plan, or to the extent other forms of consideration
must be paid to satisfy the requirements of Nevada law, no consideration
other than services may be required for the grant (but not the exercise) of
any Award.
G-4
<PAGE> 345
(b) Options. The Committee is authorized to grant Options to
participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee. The
exercise price may be less than the Fair Market Value of a share of
Stock on the date of grant of such Option, unless the option being
granted is an Incentive Stock Option which must comply with Section 422
of the Code.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the time or times
at which Options shall cease to be or become exercisable following
termination of employment or upon other conditions, the methods by which
such exercise price may be paid or deemed to be paid, the form of such
payment, including, without limitation, cash, Stock, other Awards or
awards granted under other plans of the Company or any subsidiary, or
other property (including notes or other contractual obligations of
Participants to make payment on a deferred basis), and the methods by or
forms in which Stock will be delivered or deemed to be delivered to
Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Section 422 of the Code.
Anything in the Plan to the contrary notwithstanding, no term of the
Plan relating to ISOs (including any SAR in tandem therewith) shall be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify either the Plan
or any ISO under Section 422 of the Code, unless the Participant has
first requested the change that will result in such disqualification.
(iv) Formula Grants of Options to Non-Employee Directors. Subject
to adjustment as provided in the first sentence of Section 10(c) hereof,
each Non-Employee Director shall receive (A) on the date of his or her
appointment as a Director of the Company, an Option to purchase 15,000
shares of Stock, and (B) each year, on the day the Company issues its
earnings release for the prior fiscal year, an Option to purchase 15,000
shares of Stock. Options granted to Non-Employee Directors pursuant to
this Section shall be for a term of 10 years and shall become
exercisable at the rate of 33 1/3% per year commencing on the first
anniversary of the date on which the Option is granted; provided,
however, that the Options shall be fully exercisable in the event that,
while serving as a Director, the Non-Employee Director dies, suffers a
Disability, or Retires. The per share exercise price of all Options
granted to Non-Employee Directors pursuant to this paragraph (iv) shall
be equal to the Fair Market Value of a share of Stock on the date such
Option is granted. Unless otherwise extended in the sole discretion of
the Committee, the unexercised portion of any Option granted pursuant to
this paragraph (iv) shall become null and void (C) three months after
the date on which such Non-Employee Director ceases to be a Director of
the Company for any reason other than the Non-Employee Director's
willful misconduct or negligence, Disability, death or Retirement, (D)
immediately in the event of the Non-Employee Director's willful
misconduct or negligence, (E) one year after the Non-Employee Director
ceases to be a Director by reason of his Disability, (F) at the
expiration of its original term, if the Non-Employee Director ceases to
be a Director by reason of his Retirement, and (G) twelve months after
the date of the Non-Employee Director's death in the event that such
death occurs prior to the time the Option otherwise would become null
and void pursuant to this sentence.
(c) Stock Appreciation Rights. The Committee is authorized to grant
SARs to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of
(A) the Fair Market Value of one share of stock on the date of exercise
(or, in the case of a "Limited SAR," the Fair Market Value determined by
reference to the Change in Control Price, as defined under Section 9(c)
hereof), over (B) the grant price of the SAR as determined by the
Committee. The grant price of an SAR shall not be less than
G-5
<PAGE> 346
the Fair Market Value of a share of Stock on the date of grant except as
provided under Section 7(a) hereof.
(ii) Other Terms. The Committee shall determine at the date of
grant or thereafter, the time or times at which and the circumstances
under which a SAR may be exercised in whole or in part (including based
on achievement of performance goals and/or future service requirements),
the time or times at which SARs shall cease to be or become exercisable
following termination of employment or upon other conditions, the method
of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or
deemed to be delivered to Participants, whether or not a SAR shall be in
tandem or in combination with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised in
connection with a Change in Control or other event as specified by the
Committee may be granted on such terms, not inconsistent with this
Section 6(c), as the Committee may determine. SARs and Limited SARs may
be either freestanding or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which restrictions
may lapse separately or in combination at such times, under such
circumstances (including based on achievement of performance goals
and/or future service requirements), in such installments or otherwise,
as the Committee may determine at the date of grant or thereafter. In no
event shall the restricted period be less than three years unless the
Restricted Stock is subject to performance conditions in accordance with
Section 8 of this Plan, in which case the restricted period shall not be
less than one year. Except to the extent restricted under the terms of
the Plan and any Award agreement relating to the Restricted Stock, a
Participant granted Restricted Stock shall have all of the rights of a
stockholder, including the right to vote the Restricted Stock and the
right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee). During the
restricted period applicable to the Restricted Stock, subject to Section
10(b) below, the Restricted Stock may not be sold, transferred, pledged,
hypothecated, margined or otherwise encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the Committee at
the time of the Award, upon termination of a Participant's employment
during the applicable restriction period, the Participant's Restricted
Stock that is at that time subject to restrictions shall be forfeited
and required by the Company; provided that the Committee may provide, by
rule or regulation or in any Award agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the name
of the Participant, the Committee may require that such certificates
bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock, that the Company
retain physical possession of the certificates, and that the Participant
deliver a stock power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an Award
of Restricted Stock, the Committee may require that any cash dividends
paid on a share of Restricted Stock be automatically reinvested in
additional shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined by the
Committee, Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be subject
to restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other property has
been distributed.
G-6
<PAGE> 347
(v) Formula Grants of Restricted Stock to Non-Employee
Directors. Subject to adjustment as provided in the first sentence of
Section 10(c) hereof, commencing at the end of the Company's fiscal year
that begins January 1, 1998, each Non-Employee Director shall receive
each year, on the day the Company issues its earnings release for the
prior fiscal year, an Award of shares of Restricted Stock, in an amount
to be determined annually by the Board of Directors. Each Award of
Restricted Stock shall become non-forfeitable on the third anniversary
of the date on which the Restricted Stock is granted; provided, however,
that all Restricted Stock granted to a Non-Employee Director shall
become nonforfeitable in the event that, while serving as a Director,
the Non-Employee Director dies, suffers a Disability, or Retires. In the
event that a Non-Employee Director ceases to serve as a Director for any
reason other than the death, Disability or Retirement of the Non-
Employee Director, the Restricted Stock that is at that time subject to
restrictions shall be forfeited and required by the Company.
(e) Deferred Stock. The Committee is authorized to grant Deferred
Stock to Participants, which are rights to receive Stock, cash, or a
combination thereof at the end of a specified deferral period, subject to
the following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified for
such Deferred Stock by the Committee (or, if permitted by the Committee,
as elected by the Participant). In addition, Deferred Stock shall be
subject to such restrictions (which may include a risk of forfeiture) as
the Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times
(including based on achievement of performance goals and/or future
service requirements), separately or in combination, in installments or
otherwise, as the Committee may determine. In no event shall an Award of
Deferred Stock payable in Stock have a deferral period of less than
three years unless the Award is subject to performance conditions in
accordance with Section 8 of the Plan, in which case the deferral period
shall be for not less than one year. Deferred Stock may be satisfied by
delivery of Stock, cash equal to the Fair Market Value of the specified
number of shares of Stock covered by the Deferred Stock, or a
combination thereof, as determined by the Committee at the date of grant
or thereafter. Prior to satisfaction of an Award of Deferred Stock, an
Award of Deferred Stock carries no voting or dividend or other rights
associated with share ownership.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of a Participant's employment during the applicable
deferral period thereof to which forfeiture conditions apply (as
provided in the Award agreement evidencing the Deferred Stock), the
Participant's Deferred Stock that is at that time subject to deferral
(other than a deferral at the election of the Participant) shall be
forfeited; provided that the Committee may provide, by rule or
regulation or in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Deferred
Stock shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases
waive in whole or in part the forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by the
Committee at date of grant, Dividend Equivalents on the specified number
of shares of Stock covered by an Award of Deferred Stock shall be either
(A) paid with respect to such Deferred Stock at the dividend payment
date in cash or in shares of unrestricted Stock having a Fair
Market Value equal to the amount of such dividends, or (B) deferred with
respect to such Deferred Stock and the amount or value thereof
automatically deemed reinvested in additional Deferred Stock, other
Awards or other investment vehicles, as the Committee shall determine or
permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in
lieu of Company obligations to pay cash or deliver other property under the
Plan or under other plans or compensatory arrangements, provided that, in
the case of Participants subject to Section 16 of the Exchange Act, the
amount of such grants remains within the discretion of the Committee to the
extent necessary to ensure that acquisitions of Stock or other Awards
G-7
<PAGE> 348
are exempt from liability under Section 16(b) of the Exchange Act. Stock or
Awards granted hereunder shall be subject to such other terms as shall be
determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to a Participant entitling the Participant to receive
cash, Stock, other Awards, or other property equal in value to dividends
paid with respect to a specified number of shares of Stock, or other
periodic payments. Dividend Equivalents may be awarded on a free-standing
basis or in connection with another Award. The Committee may provide that
Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles, and subject to such restrictions on transferability
and risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Stock, as deemed by the
Committee to be consistent with the purposes of the Plan, including,
without limitation, convertible or exchangeable debt securities, other
rights convertible or exchangeable into Stock, purchase rights for Stock,
Awards with value and payment contingent upon performance of the Company or
any other factors designated by the Committee, and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries or business units. The Committee
shall determine the terms and conditions of such Awards. Stock delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation,
cash, Stock, other Awards or other property, as the Committee shall
determine. Cash awards, as an element of or supplement to any other Award
under the Plan, may also be granted pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of
the Company, any subsidiary, or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is
granted in substitution or exchange for another Award or award, the
Committee shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards may be
granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any subsidiary, in which the
value of Stock subject to the Award is equivalent in value to the cash
compensation (for example, Deferred Stock or Restricted Stock), or in which
the exercise price, grant price or purchase price of the Award in the
nature of a right that may be exercised is equal to the Fair Market Value
of the underlying Stock minus the value of the cash compensation
surrendered (for example, Options granted with an exercise price
"discounted" by the amount of the cash compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such period as
may be determined by the Committee; provided that in no event shall the
term of any Option or SAR exceed a period of ten years (or such shorter
term as may be required in respect of an ISO under Section 422 of the
Code).
(c) Form and Timing of Payment Under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made
by the Company or a subsidiary upon the exercise of an Option or other
Award or settlement of an Award may be made in such forms as the Committee
shall determine, including, without limitation, cash, Stock, other Awards
or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such
settlement, in the discretion of the Committee or upon occurrence of one or
more specified events (in addition to a Change in Control). Installment or
deferred payments may be required by the Committee (subject to Section
10(e) of the Plan) or permitted at the election of the Participant on terms
and conditions established by the
G-8
<PAGE> 349
Committee. Payments may include, without limitation, provisions for the
payment or crediting of a reasonable interest rate on installment or
deferred payments or the grant or crediting of Dividend Equivalents or
other amounts in respect of installment or deferred payments denominated in
Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of the
Company that this Plan comply in all respects with applicable provisions of
Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that
neither the grant of any Awards to nor other transaction by a Participant
who is subject to Section 16 of the Exchange Act is subject to liability
under Section 16(b) thereof (except for transactions acknowledged in
writing to be non-exempt by such Participant). Accordingly, if any
provision of this Plan or any Award agreement does not comply with the
requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any
such transaction, such provision will be construed or deemed amended to the
extent necessary to conform to the applicable requirements of Rule 16b-3 or
Rule 16a-1(c)(3) so that such Participant shall avoid liability under
Section 16(b). In addition, the purchase price of any Award conferring a
right to purchase Stock shall be not less than any specified percentage of
the Fair Market Value of Stock at the date of grant of the Award then
required in order to comply with Rule 16b-3.
8. Performance and Annual Incentive Awards.
(a) Performance Awards. The right of a Participant to exercise or
receive a grant or settlement of any Award made under the Plan, and the
timing thereof, may be subject to such performance conditions as may be
specified by the Committee. In addition, any Eligible Person selected by
the Committee may be granted one or more Performance Awards under this
Section 8, which shall entitle such Eligible Person to a conditional right
to receive a cash payment, Stock or other Award, if the conditions set by
the Committee are met. The value of such a Performance Award may be linked
to the market value, book value, net profits or other measure of the value
of the Stock or any other performance goals determined to be appropriate by
the Committee, including, without limitation, the business criteria set
forth in Section 8(b)(ii), in each case on a specified date or dates or
over a period or periods determined by the Committee. The Committee may use
such business criteria and other measures of performance as it may deem
appropriate in establishing any performance conditions, and may exercise
its discretion to reduce the amounts payable under any Award subject to
performance conditions, except as limited under Sections 8(b) and 8(c)
hereof in the case of a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m). In making such
determinations, the Committee shall consider such factors as it deems
relevant in light of the specific type of Award, such as the contributions,
responsibilities, and other compensation of the Eligible Person receiving
the Award. Notwithstanding the foregoing or anything in the Plan to the
contrary, the Committee shall have the right to determine whether or not a
Performance Award to be granted to an Eligible Person who is designated by
the Committee as likely to be a Covered Employee should qualify as
"performance-based" compensation for purposes of Code Section 162(m), and
may grant one or more Performance Awards that do not so qualify to such an
Eligible Person if it deems appropriate in the circumstances.
(b) Performance Awards Granted to Designated Covered Employees. If and
to the extent that the Committee determines that a Performance Award to be
granted to an Eligible Person who is designated by the Committee as likely
to be a Covered Employee should qualify as "performance-based compensation"
for purposes of Code Section 162(m), the grant, exercise and/or settlement
of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section
8(b).
(i) Performance Goals Generally. The performance goals for such
Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such
criteria, as specified by the Committee consistent with this Section
8(b). Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m) and regulations thereunder including
the requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being
"substantially uncertain." The Committee may determine that such
Performance Awards shall be granted, exercised and/or settled
G-9
<PAGE> 350
upon achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise
and/or settlement of such Performance Awards. Performance goals may
differ for Performance Awards granted to any one Participant or to
different Participants.
(ii) Business Criteria. One or more of the following business
criteria for the Company, on a consolidated basis, and/or specified
subsidiaries or business units of the Company (except with respect to
the total stockholder return and earnings per share criteria), shall be
used by the Committee in establishing performance goals for such
Performance Awards unless the Committee, in its sole discretion,
determines to use one or more other business criteria that meet the
requirements of Code Section 162(m) and the regulations thereunder: (1)
total stockholder return; (2) such total stockholder return as compared
to total return (on a comparable basis) of a publicly available index
such as, but not limited to, the Standard & Poor's 500 Stock Index or
the S&P Specialty Retailer Index; (3) net income; (4) pretax earnings;
(5) earnings before interest expense, taxes, depreciation and
amortization; (6) pretax operating earnings after interest expense and
before bonuses, service fees, and extraordinary or special items; (7)
operating margin; (8) earnings per share; (9) growth in earnings per
share; (10) return on equity; (11) return on capital; (12) return on
investment; (13) operating earnings; (14) working capital or inventory;
and (15) ratio of debt to stockholders' equity. One or more of the
foregoing business criteria shall also be exclusively used in
establishing performance goals for Annual Incentive Awards granted to a
Covered Employee under Section 8(c) hereof.
(iii) Performance Period; Timing for Establishing Performance
Goals. Achievement of performance goals in respect of such Performance
Awards shall be measured over a performance period of up to ten years,
as specified by the Committee. Performance goals shall be established
not later than 90 days after the beginning of any performance period
applicable to such Performance Awards, or at such other date as may be
required or permitted for "performance-based compensation" under Code
Section 162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes of
measuring Company performance in connection with Performance Awards. The
amount of such Performance Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance with
Section 8(b)(iii) hereof. The Committee may specify the amount of the
Performance Award Pool as a percentage of any of such business criteria,
a percentage thereof in excess of a threshold amount, or as another
amount which need not bear a strictly mathematical relationship to such
business criteria.
(v) Settlement of Performance Awards; Other Terms. Settlement of
such Performance Awards shall be in cash, Stock, other Awards or other
property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in
connection with such Performance Awards. The Committee shall specify the
circumstances in which such Performance Awards shall be paid or
forfeited in the event of termination of employment by the Participant
prior to the end of a performance period or settlement of Performance
Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If and to the extent that the Committee determines that an
Annual Incentive Award to be granted to an Eligible Person who is
designated by the Committee as likely to be a Covered Employee should
qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise and/or settlement of such Annual Incentive
Award shall be contingent upon achievement of preestablished performance
goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may establish an
Annual Incentive Award pool, which shall be an unfunded pool, for
purposes of measuring Company performance in connection with Annual
Incentive Awards. The amount of such Annual Incentive Award pool shall
G-10
<PAGE> 351
be based upon the achievement of a performance goal or goals based on
one or more of the business criteria set forth in Section 8(b)(ii)
hereof during the given performance period, as specified by the
Committee in accordance with Section 8(b)(iii) hereof. The Committee may
specify the amount of the Annual Incentive Award pool as a percentage of
any such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the end of
the 90th day of each fiscal year, or at such other date as may be
required or permitted in the case of Awards intended to be
"performance-based compensation" under Code Section 162(m), the
Committee shall determine the Eligible Persons who will potentially
receive Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual Incentive
Award pool established by such date under Section 8(c)(i) hereof or as
individual Annual Incentive Awards. In the case of individual Annual
Incentive Awards intended to qualify under Code Section 162(m), the
amount potentially payable shall be based upon the achievement of a
performance goal or goals based on one or more of the business criteria
set forth in Section 8(b)(ii) hereof in the given performance year, as
specified by the Committee; in other cases, such amount shall be based
on such criteria as shall be established by the Committee. In all cases,
the maximum Annual Incentive Award of any Participant shall be subject
to the limitation set forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end of each
fiscal year, the Committee shall determine the amount, if any, of (A)
the Annual Incentive Award pool, and the maximum amount of potential
Annual Incentive Award payable to each Participant in the Annual
Incentive Award pool, or (B) the amount of potential Annual Incentive
Award otherwise payable to each Participant. The Committee may, in its
discretion, determine that the amount payable to any Participant as a
final Annual Incentive Award shall be reduced from the amount of his or
her potential Annual Incentive Award, including a determination to make
no final Award whatsoever. The Committee shall specify the circumstances
in which an Annual Incentive Award shall be paid or forfeited in the
event of termination of employment by the Participant prior to the end
of a fiscal year or settlement of such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee as to
the establishment of performance goals, the amount of any Performance Award
pool or potential individual Performance Awards and as to the achievement
of performance goals relating to Performance Awards under Section 8(b), and
the amount of any Annual Incentive Award pool or potential individual
Annual Incentive Awards and the amount of final Annual Incentive Awards
under Section 8(c), shall be made in writing in the case of any Award
intended to qualify under Code Section 162(m). The Committee may not
delegate any responsibility relating to such Performance Awards or Annual
Incentive Awards.
(e) Status of Section 8(B) and Section 8(C) Awards Under Code Section
162(M). It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Section 8(b) and 8(c) hereof granted to persons who
are designated by the Committee as likely to be Covered Employees within
the meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e),
including the definitions of Covered Employee and other terms used therein,
shall be interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the
Committee cannot determine with certainty whether a given Participant will
be a Covered Employee with respect to a fiscal year that has not yet been
completed, the term Covered Employee as used herein shall mean only a
person designated by the Committee, at the time of grant of Performance
Awards or an Annual Incentive Award, as likely to be a Covered Employee
with respect to that fiscal year. If any provision of the Plan or any
agreement relating to such Performance Awards or Annual Incentive Awards
does not comply or is inconsistent with the requirements of Code Section
162(m) or regulations thereunder, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements.
G-11
<PAGE> 352
9. Change in Control.
(a) Effect of "Change in Control." In the event of a "Change in
Control," as defined in Section 9(b), the following provisions shall apply
unless the Board of Directors provides otherwise at least fifteen (15) days
prior to such Change in Control:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as of
the time of the Change in Control and shall remain exercisable and
vested for the balance of the stated term of such Award without regard
to any termination of employment by the Participant, subject only to
applicable restrictions set forth in Section 10(a) hereof;
(ii) Any optionee who holds an Option shall be entitled to elect,
during the 60-day period immediately following a Change in Control, in
lieu of acquiring the shares of Stock covered by such Option, to
receive, and the Company shall be obligated to pay, in cash the excess
of the Change in Control Price over the exercise price of such Option,
multiplied by the number of shares of Stock covered by such Option;
provided, however, that no optionee who is subject to Section 16 with
respect to the Company at the time of the Change in Control shall be
entitled to make such an election if the acquisition of the right to
make such election would represent a non-exempt purchase under Section
16(b) by such optionee;
(iii) Limited SARs (and other SARs if so provided by their terms)
shall become exercisable for amounts, in cash, determined by reference
to the Change in Control Price;
(iv) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the
Change in Control, except to the extent of any waiver by the Participant
and subject to applicable restrictions set forth in Section 10(a)
hereof; and
(v) With respect to any such outstanding Award subject to
achievement of performance goals and conditions under the Plan, such
performance goals and other conditions will be deemed to be met if and
to the extent so provided by the Committee in the Award agreement
relating to such Award.
(b) Definition of "Change in Control." A "Change in Control" shall be
deemed to have occurred upon:
(i) An acquisition by any Person of Beneficial Ownership of the
shares of Common Stock of the Company then outstanding (the "Company
Common Stock Outstanding") or the voting securities of the Company then
outstanding entitled to vote generally in the election of directors (the
"Company Voting Securities Outstanding") if such acquisition of
Beneficial Ownership results in the Person's Beneficially Owning 25% or
more of the Company Common Stock outstanding or 25% or more of the
combined voting power of the Company Voting Securities Outstanding; or
(ii) The approval by the stockholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, sale or disposition of all or substantially
all of the assets of the Company, or similar corporate transaction (in
each case referred to in this Section 9(b) as a "Corporate Transaction")
or, if consummation of such Corporate Transaction is subject, at the
time of such approval by stockholders, to the consent of any government
or governmental agency, the obtaining of such consent (either explicitly
or implicitly); provided, however, that any merger, consolidation, sale,
disposition or other similar transaction to or with one or more
Participants or entities controlled by one or more Participants shall
not constitute a Corporate Transaction in respect of such
Participant(s); or
(iii) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board (such
Board shall be hereinafter referred to as the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board; provided,
however, for purposes of this Section 9(b), that any individual who
becomes a member of the Board subsequent to the
G-12
<PAGE> 353
Effective Date whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of
those individuals who are members of the Board and who were also members
of the Incumbent Board (or deemed to be such pursuant to this provision)
shall be considered as though such individual were a member of the
Incumbent Board; and, provided, further, that any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest subject to Rule 14a-11 of Regulation 14A
under the Exchange Act, including any successor to such Rule, or other
actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board shall in no event be considered as a
member of the Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of
this Section 9(b), the following shall not constitute a Change in Control for
purposes of the Plan: (1) any acquisition by or consummation of a Corporate
Transaction with any entity that was a subsidiary of the Company immediately
prior to the transaction or an employee benefit plan (or related trust)
sponsored or maintained by the Company or an entity that was a subsidiary of the
Company immediately prior to the transaction if, immediately after such
transaction (including consummation of all related transactions), the surviving
entity is controlled by no Person other than such subsidiary, employee benefit
plan (or related trust) and/or other Persons who controlled the Company
immediately prior to such transaction; or (2) any acquisition or consummation of
a Corporate Transaction following which more than 50% of, respectively, the
shares then outstanding of common stock of the corporation resulting from such
acquisition or Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote generally in
the election of directors is then Beneficially Owned, directly or indirectly, by
all or substantially all of the individuals and entities who were Beneficial
Owners, respectively, of the Company Common Stock Outstanding and Company Voting
Securities Outstanding immediately prior to such acquisition or Corporate
Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or Corporate Transaction, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding, as the case
may be.
(c) Definition of "Change in Control Price." The "Change in Control
Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share
paid (including extraordinary dividends) in any Corporate Transaction
triggering the Change in Control under Section 9(b)(ii) hereof or any
liquidation of shares following a sale of substantially all assets of the
Company, or (ii) the highest Fair Market Value per share at any time during
the 60-day period preceding and 60-day period following the Change in
Control.
10. General Provisions.
(a) Compliance with Legal and Other Requirements. The Company may, to
the extent deemed necessary or advisable by the Committee, postpone the
issuance or delivery of Stock or payment of other benefits under any Award
until completion of such registration or qualification of such Stock or
other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or
automated quotation system upon which the Stock or other Company securities
are listed or quoted, or compliance with any other obligation of the
Company, as the Committee may consider appropriate, and may require any
Participant to make such representations, furnish such information and
comply with or be subject to such other conditions as it may consider
appropriate in connection with the issuance or delivery of Stock or payment
of other benefits in compliance with applicable laws, rules, and
regulations, listing requirements, or other obligations. The foregoing
notwithstanding, in connection with a Change in Control, the Company shall
take or cause to be taken no action and shall undertake or permit to arise
no legal or contractual obligation, that results or would result in any
postponement of the issuance or delivery of Stock or payment of benefits
under any Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed on
the 90th day preceding the Change in Control.
G-13
<PAGE> 354
(b) Limits on Transferability; Beneficiaries. No Award or other right
or interest of a Participant under the Plan, including any Award or right
which constitutes a derivative security as generally defined in Rule
16a-l(c) under the Exchange Act, shall be pledged, hypothecated or
otherwise encumbered or subject to any lien, obligation or liability of
such Participant to any party (other than the Company or a subsidiary), or
assigned or transferred by such Participant otherwise than by will or the
laws of descent and distribution or to a Beneficiary upon the death of a
Participant, and such Awards or rights that may be exercisable shall be
exercised during the lifetime of the Participant only by the Participant or
his or her guardian or legal representative, except that Awards and other
rights (other than ISOs and SARs in tandem therewith) may be transferred to
one or more Beneficiaries or other transferees during the lifetime of the
Participant, and may be exercised by such transferees in accordance with
the terms of such Award, but only if and to the extent such transfers and
exercises are permitted by the Committee pursuant to the express terms of
an Award agreement (subject to any terms and conditions which the Committee
may impose thereon, and further subject to any prohibitions or restrictions
on such transfers pursuant to Rule 16b-3). A Beneficiary, transferee, or
other person claiming any rights under the Plan from or through any
Participant shall be subject to all terms and conditions of the Plan and
any Award agreement applicable to such Participant, except as otherwise
determined by the Committee, and to any additional terms and conditions
deemed necessary or appropriate by the Committee.
(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, stock or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that an
adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the rights of Participants under the
Plan, then the Committee shall, in such manner as it may deem equitable,
adjust any or all of (i) the number and kind of shares of Stock which may
be delivered in connection with Awards granted thereafter, (ii) the number
and kind of shares of Stock by which annual per-person Award limitations
are measured under Section 5 hereof, (iii) the number and kind of shares of
Stock subject to or deliverable in respect of outstanding Awards and (iv)
the exercise price, grant price or purchase price relating to any Award
and/or make provision for payment of cash or other property in respect of
any outstanding Award. In addition, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual
Incentive Awards and any Annual Incentive Award pool or performance goals
relating thereto) in recognition of unusual or nonrecurring events
(including, without limitation, events described in the preceding sentence,
as well as acquisitions and dispositions of businesses and assets)
affecting the Company, any subsidiary or any business unit, or the
financial statements of the Company or any subsidiary, or in response to
changes in applicable laws, regulations, accounting principles, tax rates
and regulations or business conditions or in view of the Committee's
assessment of the business strategy of the Company, any subsidiary or
business unit thereof, performance of comparable organizations, economic
and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall
be authorized or made if and to the extent that such authority or the
making of such adjustment would cause Options, SARs, Performance Awards
granted under Section 8(b) hereof or Annual Incentive Awards granted under
Section 8(c) hereof to Participants designated by the Committee as Covered
Employees and intended to qualify as "performance-based compensation" under
Code Section 162(m) and the regulations thereunder to otherwise fail to
qualify as "performance-based compensation" under Code Section 162(m)and
regulations thereunder.
(d) Taxes. The Company and any subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take
such other action as the Committee may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to
make cash payments in respect thereof in
G-14
<PAGE> 355
satisfaction of a Participant's tax obligations, either on a mandatory or
elective basis in the discretion of the Committee.
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the
annual meeting next following such Board action if such amendment
represents a material change to the Plan or such stockholder approval is
required by any federal or state law or regulation (including, without
limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock
exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine
to submit other such changes to the Plan to stockholders for approval;
provided that, without the consent of an affected Participant, no such
Board action may materially and adversely affect the rights of such
Participant under any previously granted and outstanding Award. The
Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue or terminate any Award theretofore granted and any
Award agreement relating thereto, except as otherwise provided in the Plan;
provided that, without the consent of an affected Participant, no such
Committee action may materially and adversely affect the rights of such
Participant under such Award. Notwithstanding anything in the Plan to the
contrary, if any right under this Plan would cause a transaction to be
ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee may
modify or adjust the right so that pooling of interest accounting shall be
available, including the substitution of Stock having a Fair Market Value
equal to the cash otherwise payable hereunder for the right which caused
the transaction to be ineligible for pooling of interest accounting.
Notwithstanding anything herein to the contrary, the provisions of Section
6(b)(iv) and Section 6(d)(v) of this Plan which govern formula grants of
Options and Restricted Stock to Non-Employee Directors, shall not be
amended more than once every six months other than to comport with changes
to the Code or the rules promulgated thereunder or the Employee Retirement
Income Security Act of 1974, as amended, or the rules promulgated
thereunder, or with rules promulgated by the Securities and Exchange
Commission, unless such limit on amendments is not required under Rule
16b-3 or other applicable law.
(f) Limitation on Rights Conferred Under Plan. Neither the Plan nor
any action taken hereunder shall be construed as (i) giving any Eligible
Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a subsidiary; (ii)
interfering in any way with the right of the Company or a subsidiary to
terminate any Eligible Person's or Participant's employment at any time,
(iii) giving an Eligible Person or Participant any claim to be granted any
Award under the Plan or to be treated uniformly with other Participants and
employees, or (iv) conferring on a Participant any of the rights of a
stockholder of the Company unless and until the Participant is duly issued
or transferred shares of Stock in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the
Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company, provided that the
Committee may authorize the creation of trusts and deposit therein cash,
Stock, other Awards or other property, or make other arrangements to meet
the Company's obligations under the Plan. Such trusts or other arrangements
shall be consistent with the "unfunded" status of the Plan unless the
Committee otherwise determines with the consent of each affected
Participant. The trustee of such trusts may be authorized to dispose of
trust assets and reinvest the proceeds in alternative investments, subject
to such terms and conditions as the Committee may specify and in accordance
with applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by
the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board or a committee or subcommittee thereof to adopt such other incentive
arrangements
G-15
<PAGE> 356
as it may deem desirable including incentive arrangements and awards which
do not qualify under Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee, in the event of a forfeiture of an
Award with respect to which a Participant paid cash or other consideration,
the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether
cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the laws of the State of California without
giving effect to principles of conflicts of laws, and applicable federal
law.
(k) Plan Effective Date and Stockholder Approval; Termination of
Plan. The Plan which has been unanimously approved by all of the members of
the Board of Directors of the Company and Newriders, Inc., and by
Newriders, Inc. as the sole shareholder of the Company, shall become
effective on the Effective Date, subject to the approval at the 1998 Annual
Meeting of Stockholders of Newriders, Inc., by stockholders of Newriders,
Inc. eligible to vote in the election of directors, by a vote sufficient to
meet the requirements of Code Sections 162(m) and 422, Rule 16b-3 under the
Exchange Act, applicable NASDAQ requirements (if the Company's Common Stock
is then listed on NASDAQ), applicable AMEX requirements (if the Company's
Common Stock is then listed on AMEX), and other laws, regulations, and
obligations of the Company applicable to the Plan, and the ratification of
the Plan by the Committee. Awards may be granted subject to stockholder
approval and Committee ratification, but may not be exercised or otherwise
settled in the event such approval and ratification is not obtained. The
Plan shall terminate at such time as no shares of Common Stock remain
available for issuance under the Plan and the Company has no further rights
or obligations with respect to outstanding Awards under the Plan.
G-16
<PAGE> 357
TERM SHEET
FOR
INITIAL AWARD
UNDER THE EASYRIDERS 1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
TO
WILLIAM NORDSTROM
<TABLE>
<S> <C>
Grant Date: The date the Reorganization is consummated.
Grant: 200,000 shares of Easyriders Common Stock, pursuant to a
Restricted Share Agreement to be entered into between
Easyriders and Mr. Nordstrom.
Vesting: The 200,000 shares will be 100% vested on the Grant Date.
</TABLE>
G-17
<PAGE> 358
TERM SHEET
FOR
ANNUAL INCENTIVE AWARDS/LONG-TERM INCENTIVE PERFORMANCE AWARD
TO
JOHN MARTIN
UNDER THE
EASYRIDERS 1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
1. CONDITIONS: The Annual Incentive Awards and the Long-Term Incentive
Performance Award described herein, including the performance targets, will be
attached as an Exhibit to the Easyriders 1998 Executive Incentive Compensation
Plan (the "Easyriders Plan"), which will be unanimously approved by the Boards
of Directors of Newriders, Inc. (the "Company") and Easyriders, Inc.
("Easyriders"), and by the public shareholders of the Company, and will be
ratified by the Easyriders Compensation Committee immediately after the
Reorganization, at the same time it ratifies the Easyriders Plan. The
description of the Easyriders Plan in the Registration/Proxy Statement of
Easyriders and the Company on Form S-4 (the "S-4") will contain a description of
these awards, which are intended to qualify as "performance-based" compensation
for purposes of Code Section 162(m). The Bonuses are payable by the Company.
2. ANNUAL INCENTIVE AWARD:
a. Annual Incentive Performance Periods -- Each of the calendar years
1999 through 2004 or, if earlier, the end of the calendar year during which
all principal and interest on the Promissory notes aggregating $7.3 million
referred to in the Stock Purchase Agreement dated June 30, 1998, between
Easyrider and John Martin (the "Martin Notes") is paid or forgiven.
b. Amount -- If the EBITDA Target is met for any Performance Period,
Martin will be entitled to a cash bonus in an amount equal to (1) the total
amount of interest he is obligated to pay in cash to Easyriders for such
Performance Period with respect to the Martin Notes (i.e., the cash bonus
will not include interest deferred by Martin pursuant to the terms of the
Martin Notes), multiplied by (2) a fraction, the numerator of which is one
and the denominator of which is one minus the highest marginal rate for
federal, state and local income taxes applicable to Martin in the year the
bonus is paid.
c. Payment -- The payment of an Annual Incentive Award for any
Performance Period will be made to Martin by the Company no later than
three business days after the Compensation Committee of Easyriders
certifies that the EBITDA Target for such Performance Period has been met,
provided that, the Company shall retain an amount equal to any accrued
interest then owed by Martin to Easyriders with respect to the Martin Notes
but not yet paid, and apply such amount against Martin's obligation to pay
such accrued interest.
d. EBITDA Targets -- The EBITDA Target (i) for the 1999 Performance
Period will be 125% of EBITDA(1) of Easyriders for calendar year 1998 and
(ii) for each Performance Period beginning with and including the year 2000
will be 125% of the average EBITDA of Easyriders for the two calendar years
immediately prior to such Performance Period. For example, if Easyrider's
EBITDA for the year 1998 is $10,000,000, then the EBITDA Target for the
year 1999 Performance Period will be $12,500,000 (125% of $10,000,000); if
Easyrider's EBITDA for the year 1998 is $10,000,000 and Easyrider's EBITDA
for the year 1999 is $12,000,000, then the EBITDA Target for the year 2000
Performance Period will be $13,750,000 (125% of $11,000,000); and if
Easyrider's EBITDA for the year 1998 is $10,0000 and Easyrider's EBITDA for
the year 1999 is $8,000,000, then the EBITDA Target for the year 2000
Performance Period will be $11,250,000 (125% of $9,000,000). The
Compensation Committee of Easyriders will be given the discretion to adjust
the EBITDA Target within the first 90 days of a Performance Period to
reflect extraordinary corporate transactions.
- ---------------
1As such term is used in the Operating Summary that appears on page 43 of the
Revised Confidential Information Memorandum of Newriders, Inc., dated May 1998,
prepared with the assistance of Imperial Capital, LLC.
G-18
<PAGE> 359
e. Bonus for 1998: If Martin is a director of the Company or is
performing services under his employment agreement with the Company through
the end of 1998, Martin will be entitled to a bonus from the Company for
1998 equal to (1) the total amount of interest he is obligated to pay in
cash to Easyriders for 1998 with respect to the Martin Notes (i.e., the
cash bonus will not include interest deferred by Martin pursuant to the
terms of the Martin Notes), multiplied by (2) a fraction, the numerator of
which is one and the denominator of which is one minus the highest marginal
rate for federal, state and local income taxes in effect for 1999
applicable to Martin. This bonus will be paid no later than March 31, 1999.
3. LONG-TERM INCENTIVE PERFORMANCE AWARD:
a. Long-Term Incentive Performance Period -- Consummation of
Reorganization through the tenth anniversary of such date, or if earlier,
the end of the calendar year during which all principal and interest on the
Martin Notes is paid or otherwise forgiven.
b. Amount -- If the Long-Term Incentive Targets set forth below are
met at any time during the Long-Term Incentive Performance Period, Martin
will be entitled to a cash bonus (the "Long-Term Incentive Performance
Award") in an amount equal to (1) the remaining principal amount (and any
accrued interest) on the Martin Notes, multiplied by (2) a fraction, the
numerator of which is one and the denominator of which is one minus the
highest marginal rate for federal, state and local income taxes applicable
to Martin in the year the bonus is paid, up to a maximum payment of
$13,000,000.
c. Payment -- The payment of the Long-Term Incentive Performance Award
will be made to Martin no later than three business days after the
Compensation Committee of Easyriders certifies that the Long-Term Incentive
Targets have been met by Easyrides by applying the amount of such Award
against Martin's obligation to pay the remaining principal amount (and any
accrued interest) on the Martin Notes.
d. Long-Term Incentive Target -- Easyrider's successful completion of
a public or private offering of equity or debt securities and the
application of the proceeds thereof to the payment in full of (a) all
amounts due pursuant to Easyrider's Senior Credit Agreement (as such term
is defined in the S-4), and (b) the Contributor Notes (as such term is
defined in the S-4), provided that if such offering occurs at any time
during 1999, there was a positive amount of EBITDA for Easyriders for
calendar year 1998, and if such offering occurs at any time on or after
January 1, 2000, at least 80% of the EBITDA Target with respect to the
Annual Incentive Award for the year immediately preceding the year in which
the offering is made has been met or at least 80% of the EBITDA Target with
respect to the Annual Incentive Award for each of the second and third
calendar years preceding the year in which the offering is made have been
met. For example, if the EBITDA Target for the year 2001 is $10,000,000 and
EBITDA for 2001 is $8,000,000, then the proviso to the foregoing sentence
shall have been satisfied for any date in the year 2002; and if the EBITDA
Target for the years 2001, 2000, and 1999 is $10,000,000, $9,000,000 and
$8,000,000, respectively, and EBITDA for such years is $7,000,000,
$7,200,000 and $6,400,000, respectively, then the proviso to the foregoing
sentence shall have been satisfied for any date in the year 2002.
4. TERMINATION OF MARTIN'S EMPLOYMENT: At such time as Martin ceases to be
a director of the Company and to perform services under his employment agreement
with the Company, no further bonuses shall be payable pursuant hereto.
G-19
<PAGE> 360
ADDENDUM H
FORM OF PROXY
<PAGE> 361
PROXY
NEWRIDERS, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS -- TO BE HELD SEPTEMBER 22, 1998
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) William E. Prather and William R. Nordstrom,
or either of them, with full power of substitution, as proxies of the
undersigned to represent and vote as designated herein, all shares of stock of
Newriders, Inc. ("Newriders") which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Stockholders of Newriders to be held
at the Radission Hotel and Conference Center, 30100 Agoura Road, Agoura Hills,
California, on September 22, 1998 at 10:00 a.m., local time, and at any
adjournment thereof.
1. To approve and adopt the Reorganization, and in connection therewith, to
approve and adopt the Agreement and Plan of Merger, pursuant to which (i)
Easyriders Sub, Inc., a Nevada corporation and wholly-owned subsidiary of
Easyriders Inc., a Delaware corporation ("Easyriders") and wholly-owned
subsidiary of Newriders, will be merged into Newriders, with Newriders being the
surviving corporation; (ii) Newriders will become a wholly-owned subsidiary of
Easyriders; (iii) the stockholders of Newriders will receive shares of
Easyriders Common Stock in exchange for shares of Newriders Common Stock on the
basis of one share of Easyriders Common Stock for each two shares of Newriders
Common Stock; (iv) the holders of shares of stock in Paisano Publications, Inc.,
a California corporation, and its affiliated corporations (the "Paisano
Companies"), and equity interests in M & B Restaurants, L.C., a Texas limited
liability company ("El Paso") will contribute those shares of stock and equity
interests in exchange for shares of Easyriders Common Stock; and (v) the Paisano
Companies and El Paso will become wholly-owned subsidiaries of Easyriders
(collectively, the "Reorganization"). FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To approve the adoption of the Newriders 1997 Executive Incentive
Compensation Plan (the "Newriders Plan"). Upon consummation of the
Reorganization, the Newriders Plan will terminate and all awards granted
thereunder will be exchanged for awards under the Easyriders Plan referred to in
Item 3 below. FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 362
3. To approve the adoption of the Easyriders 1998 Executive Incentive
Compensation Plan (the "Easyriders Plan"), which will become effective only if
the Reorganization is consummated. FOR [ ] AGAINST [ ] ABSTAIN [ ]
Items 4 and 5 below are being voted on as a precaution against the possibility
that the Reorganization may not be consummated.
4. Election of directors of Newriders
<TABLE>
<S> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY TO
(except as marked to the contrary below) vote for all nominees listed below
</TABLE>
John E. Martin William E. Prather William R. Nordstrom Wayne L. Knyal
Daniel J. Gallery Leon Hatcher C.W. Doyle
Instructions: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.
-------------------------------------------------------------------------
5. To ratify the appointment of Deloitte & Touche LLP as independent auditors
for Newriders for the fiscal year ending December 31, 1998. FOR [
] AGAINST [ ] ABSTAIN [ ]
6. In their discretion, upon any and all such other matters as may properly come
before the meeting or any adjournment or postponement thereof, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3, 4 and 5.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder(s). If no direction is given, this proxy will be
voted FOR Proposals 1, 2, 3, 4 and 5. The undersigned may revoke this proxy at
any time before it is voted by executing and delivering to Newriders a proxy
bearing a later date, by delivering a written notice to the Secretary of
Newriders stating that the proxy is revoked, or by voting in person at the
meeting.
Please sign exactly as your name(s)
appears on your stock
certificate(s). If shares are held
in the names of two or more persons
(including husband and wife, as
joint tenants or otherwise) all
persons must sign. If shares are
held by a corporation, the proxy
should be signed by the president or
vice president and the secretary or
assistant secretary. Fiduciaries who
execute the proxy should give their
full title.
------------------------------------
Signature
------------------------------------
Signature
Dated:
RETURN PROXY TO: EASYRIDERS, INC., 567 San Nicholas Drive, Suite 400, Newport
Beach, California 92660
<PAGE> 363
ADDENDUM I
EASYRIDERS CERTIFICATE OF INCORPORATION
<PAGE> 364
ADDENDUM I
CERTIFICATE OF INCORPORATION
OF
EASYRIDERS, INC.
1. The name of the Corporation is EASYRIDERS, INC.
2. The address of the Corporation's registered office in Delaware is 1013
Centre Road, Wilmington, Delaware 19805. The Prentice-Hall Corporation System,
Inc. is the Corporation's registered agent at that address.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
4. The Corporation shall have authority to issue two classes of capital
stock, designated Common Stock and Preferred Stock. The amount of total
authorized capital stock of the Corporation is 60,000,000 shares, consisting of
50,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000
shares of Preferred Stock, par value $.001 per share.
The Preferred Stock may be issued in one or more series. The Board of
Directors is hereby authorized to issue the shares of Preferred Stock in such
series and to fix, from time to time before issuance, the number of shares to be
included in any series and the designation, relative powers, preferences,
rights, qualifications, limitations or restrictions of all shares of such
series. The authority of the Board of Directors with respect to each series
shall include, without limiting the generality of the foregoing, the
determination of any or all of the following:
a. the number of shares of any series and the designation to
distinguish the shares of such series from the shares of all other series;
b. the voting powers, if any, and whether such voting powers are full
or limited, in any such series;
c. the redemption provisions, if any, applicable to such series,
including the redemption price or prices to be paid;
d. whether dividends, if any, shall be cumulative or noncumulative;
e. the dividend rate, or method of determining the dividend rate, of
such series, and the dates and preferences of dividends of such series;
f. the rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the Corporation;
g. the provisions, if any, pursuant to which the shares of such series
are convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
stock, or any other security, of the Corporation or any other corporation,
and the price or prices or the rates of exchange applicable thereto;
h. the right, if any, to subscribe for or to purchase any securities
of the Corporation or any other corporation;
i. the provision, if any, of a sinking fund applicable to such series;
and
j. any other relative, participating, optional or other special
powers, preferences, rights, qualifications, limitations or restrictions
thereof;
all of which shall be stated in a resolution or resolutions providing for the
issuance of such Preferred Stock (a "Preferred Stock Designation").
Each holder of Common Stock entitled to vote shall have one vote for each
share thereof held.
I-1
<PAGE> 365
Except as may be provided by the Board of Directors in a Preferred Stock
Designation or by law, the Common Stock shall have the exclusive right to vote
for the election of directors and for all other purposes, and holders of
Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote or consent.
5. The name of the sole incorporator is Dennis Barsky and his address is
c/o Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite
1600, Los Angeles, California 90067.
6. The Board of Directors shall have the power to make, alter or repeal the
by-laws of the Corporation.
7. The election of the Board of Directors need not be by written ballot.
8. The Corporation shall indemnify to the fullest extent permitted by
section 145 of the Delaware General Corporation Law, as amended from time to
time, each person that such section grants the Corporation the power to
indemnify.
9. No director shall be personally liable to the Corporation or its
stockholders for monetary damage for breach of fiduciary duty as a director for
any act or omission occurring except that he may be liable (a) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under section 174 of the Delaware General
Corporation Law or (d) for any transaction from which the director derived an
improper personal benefit.
10. The Corporation elects not to be governed by section 203 of the
Delaware General Corporation Law.
Dated: May 12, 1998
/s/ DENNIS BARSKY
--------------------------------------
Dennis Barsky
Sole Incorporator
I-2
<PAGE> 366
ADDENDUM J
EASYRIDERS BYLAWS
<PAGE> 367
ADDENDUM J
BY-LAWS
OF
EASYRIDERS, INC.,
A DELAWARE CORPORATION
ARTICLE 1
STOCKHOLDERS
1.1 Annual Meetings. An annual meeting of stockholders shall be held for
the election of directors at such date, time and place as may be designated by
the board of directors (the "Board") from time to time. Any other proper
business may be transacted at the annual meeting.
1.2 Special Meetings. Special meetings of the stockholders may be called
at any time by the Board or by the Chairman of the Board or the President and
shall be called by the President or Secretary upon the written request (stating
the purpose or purposes of the meeting) of the directors then in office or of
the holders of at least fifty percent (50%) of the outstanding shares entitled
to vote. Only business related to the purposes set forth in the notice of the
meeting may be transacted at a special meeting.
1.3 Place and Time of Meetings. Meetings of the stockholders may be held
within or without the State of Delaware at the place and time specified by the
Board or the directors or by the written consent of all persons entitled to vote
thereat, given either before or after the meeting and filed with the Secretary
of the Corporation.
1.4 Notice of Meetings; Waiver of Notice. Written notice of each meeting
of stockholders shall be given to each stockholder entitled to vote at the
meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a signed waiver of notice before or after the meeting,
and (b) no notice of an adjourned meeting need be given except when required
under Section 1.5 of these by-laws or by law. Unless otherwise provided by law,
the Certificate of Incorporation or these by-laws, each notice of a meeting
shall be given, personally or by mail, not less than ten (10) nor more than
sixty (60) days before the meeting and shall state the time and place of the
meeting, and unless it is the annual meeting, shall state at whose direction or
request the meeting is called and the purposes for which it is called. If
mailed, notice shall be deemed to be given when deposited in the United States
mail, postage prepaid, mailed to a stockholder at his address on the
Corporation's records. The attendance of any stockholder at a meeting, without
protesting at the beginning of the meeting that the meeting is not lawfully
called or convened, shall constitute a waiver of notice by him. Proof that
notice was given shall be made by affidavit of the Secretary, Assistant
Secretary, transfer agent or director, or of the person acting under the
direction of any of the foregoing, who gives such notice, and such proof of
notice shall be made a part of the minutes of the meeting. Such affidavit shall
constitute prima facie evidence of the giving of such notice.
1.5 Quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these by-laws, at any meeting of stockholders, the presence in
person or by proxy of the holders of a majority of the shares entitled to vote
shall constitute a quorum for the transaction of any business. In the absence of
a quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as Secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present any action may be taken which might have
been taken at the meeting as originally called. No notice of an adjourned
meeting need be given if the time and place are announced at the meeting at
which the adjournment is taken except that, if adjournment is for more than
thirty (30) days or if, after the adjournment, a new record date is fixed for
the meeting, notice of the adjourned meeting shall be given pursuant to Section
1.4.
1.6 Organization. Meetings of stockholders shall be presided over by the
Chairman of the Board, if any, or in his absence by the President, or in his
absence by a Vice President, or in the absence of the foregoing persons by a
director or stockholder, appointed by the stockholders at the meeting, shall
preside. The
J-1
<PAGE> 368
Secretary shall act as Secretary of the meeting, but in his absence the Chairman
of the meeting may appoint any person to act as Secretary of the meeting.
1.7 Voting; Proxies. Except as otherwise provided by the Certificate of
Incorporation or in these by-laws, each stockholder of record shall be entitled
to one (1) vote for every share registered in his name. Corporate action to be
taken by stockholder vote, including the election of directors, shall be
authorized by a majority of the votes cast at a meeting of stockholders, except
as otherwise provided by law, by Section 1.10 of these by-laws or elsewhere in
these by-laws. Voting need not be by ballot unless requested by a stockholder at
the meeting or ordered by the Chairman of the meeting; however, all elections of
directors shall be by written ballot, unless otherwise provided in the
Certificate of Incorporation. Each stockholder entitled to vote at any meeting
of stockholders or to express consent to or dissent from corporate action in
writing without a meeting may authorize another person to act for him by proxy.
Every proxy must be signed by the stockholder or his attorney-in-fact. No proxy
shall be valid after eleven (11) months from its date unless it provides
otherwise. A proxy shall be irrevocable if it states that it is irrevocable and
if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke a proxy which is not
irrevocable by attending the meeting and voting in person, by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Secretary of the Corporation.
1.8 Record Date. The Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board, for the determination of the stockholders entitled to notice of,
and to vote at, any meeting of stockholders or entitled to receive any dividend
or distribution, or to any change, conversion or exchange of shares. The record
date so fixed, unless otherwise required by law, shall be not more that sixty
(60) days nor less than ten (10) days prior to the date of the meeting or event
for the purposes for which it is fixed. When a record date is so fixed, only
stockholders of record on that date are entitled to notice of and to vote at the
meeting or to receive the dividend, distribution or allotment of rights, or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after the record date. If no record date
is fixed, unless otherwise provided by law, only persons in whose names shares
entitled to vote stand on the stock records of the Corporation at the close of
business on the business day next preceding the day on which notice is given
shall be entitled to notice of a stockholders' meeting or to vote at such
meeting. In the event notice is waived, only persons in whose names shares
entitled to vote stand on the stock records of the Corporation at the close of
business on the business day next preceding the day on which the meeting is held
shall be entitled to vote.
1.9 List of Stockholders. Not less than ten (10) days prior to the date of
any meeting of stockholders, the Secretary of the Corporation shall prepare a
complete list of stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in his name. For a period of not less than ten (10) days prior
to the meeting, the list shall be available during ordinary business hours for
inspection by any stockholder for any purpose germane to the meeting. During
this period, the list shall be kept either (a) at a place within the city where
the meeting is to be held, if that place shall have been specified in the notice
of the meeting, or (b) if not so specified, at the place where the meeting is to
be held. The list shall also be available for inspection by stockholders at the
time and place of the meeting. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of stockholders.
1.10 Action by Consent Without a Meeting. Unless otherwise restricted by
law or the Certificate of Incorporation, any action required or permitted to be
taken at any meeting of stockholders may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voting. Prompt notice of the taking of any such action shall be
given to those stockholders who did not consent in writing.
J-2
<PAGE> 369
ARTICLE 2
BOARD OF DIRECTORS
2.1 Number; Qualifications; Powers. The Board shall consist of not fewer
than three (3) nor more than nine (9) members. The exact number of members of
the Board shall be fixed from time to time by the Board. Directors need not be
stockholders. The Board shall have full power to conduct, manage and direct the
business and affairs of the Corporation, except as specifically reserved or
granted to the stockholders by statute, the Certificate of Incorporation or
these by-laws.
2.2 Election; Resignation; Removal; Vacancies. At the first annual meeting
of stockholders and at each annual meeting thereafter, the stockholders shall
elect directors, each of whom shall hold office for a term of one (1) year or
until his successor is duly elected and qualified. Any director may resign at
any time upon written notice to the Corporation. Any or all of the directors may
be removed at any time, either with or without cause, by a majority vote of the
stockholders entitled to vote generally in the election of directors.
Notwithstanding the foregoing, and except as otherwise required by law, whenever
the holders of any one or more classes of stock shall have the right, voting
separately as a class, to elect one or more directors, the provisions of this
section regarding removal shall not apply with respect to the director or
directors elected by such holders. Subject to applicable law and any agreement
among the stockholders to the contrary, any vacancy occurring on the Board for
any reason shall be filled by a majority of the remaining members of the Board,
although such majority is less than a quorum, or by a plurality of the votes
cast at a meeting of stockholders entitled to vote thereon, and each director so
elected shall hold office until the expiration of the term of office of the
director whom he has replaced or until his successor is duly elected and
qualified.
2.3 Quorum and Manner of Acting. Except as may be otherwise specifically
provided by law, the Certificate of Incorporation or these by-laws, the presence
of a majority of the authorized number of directors shall be required to
constitute a quorum for the transaction of business at any meeting of the Board,
and all matters shall be decided at any such meeting, a quorum being present, by
an affirmative vote of a majority of the directors present. In the absence of a
quorum, a majority of directors present at any meeting may adjourn the same from
time to time until a quorum shall be present. Notice of any adjourned meeting
need not be given. The directors shall act only as a Board, and the individual
directors shall have no powers as such.
2.4 Meetings. Meetings of the Board may be at any place within or without
the State of Delaware. Annual meetings of the Board, for the election of
officers and consideration of other matters, shall be held either (a) without
notice immediately after the annual meeting of stockholders and at the same
place, or (b) as soon as practicable after the annual meeting of stockholders,
on notice as provided in Section 2.6 of these by-laws. Regular meetings of the
Board may be held without notice at such times and places as the Board
determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 Special Meetings. Special meetings of the Board may be called by the
Chairman of the Board, the President or by any of the directors.
2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place of
each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him or her at his or her
residence or usual place of business or by delivering or telephoning or
telegraphing it to him or her at least forty-eight (48) hours before the
meeting. Notice of a special meeting shall also state the purpose or purposes
for which the meeting is called. Notice need not be given to any director who
submits a signed waiver of notice before or after the meeting or who attends the
meeting without protesting at the beginning of the meeting the transaction of
any business because the meeting was not lawfully called or convened. Notice of
any adjourned meeting need not be given, other than by announcement at the
meeting at which the adjournment is taken.
2.7 Board or Committee Action Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these by-laws, any action
required or permitted to be taken by the Board or by any committee of the Board
may be taken without a meeting if all of the members of the Board or of the
committee consent in writing to the adoption of a resolution authorizing the
action. The resolution and the written consents by the members of the Board or
the committee shall be filed with the minutes of the proceeding of the Board or
of
J-3
<PAGE> 370
the committee. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.
2.8 Participation in Board or Committee Meetings by Conference
Telephone. Any or all members of the Board or of any committee of the Board may
participate in a meeting of the Board or of the committee by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at the meeting.
2.9 Fees and Compensation. One or more of the directors may, by resolution
of the Board, receive a stated salary for services as director and may be
allowed a fixed fee, with or without expense, for attendance at each meeting.
Nothing herein contained shall be construed or preclude any director from
serving the Corporation in any capacity as an officer, agent, employee or
otherwise, and receiving compensation therefor.
ARTICLE 3
COMMITTEES
3.1 Executive Committee. The Board, by resolution adopted by the entire
Board, may designate an Executive Committee of one or more directors which shall
have all the powers and authority of the Board, except the power to (a) fill
vacancies on the Board or any committee, (b) fix compensation of directors, (c)
adopt, amend or repeal the by-laws, (d) amend or repeal resolutions of the Board
which are expressly nonamendable or repealable, (e) declare a dividend or
distribution to stockholders or authorize the repurchase of the Corporation's
shares except at a rate, in a periodic amount or within a range, determined by
the Board, (f) establish other committees of the Board, (g) approve any action
which in addition to Board approval requires stockholder approval or (h) as
otherwise provided in the resolution, section 141(c) of the Delaware General
Corporation Law, or any other applicable law. The members of the Executive
Committee shall serve at the pleasure of the Board. All action of the Executive
Committee shall be reported to and subject to the approval of the Board at its
next meeting.
3.2 Other Committees. The Board, by resolution adopted by the entire
Board, may designate other committees of directors of one or more directors,
which shall serve at the Board's pleasure and have such powers and duties as the
Board determines, subject to the restrictions stated in Section 3.1 above.
3.3 Rules Applicable to Committees. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Unless the Board otherwise provides, each
committee shall adopt, alter and repeal rules of procedure for the conduct of
its business and shall meet as provided by those rules or by resolutions of the
Board.
ARTICLE 4
OFFICERS
4.1 Required Officers. The executive officers of the Corporation shall be
the President, a Treasurer and a Secretary, and may be one or more Vice
Presidents (including an executive Vice President, if the Board so determines),
a Chief Executive Officer or a Chief Financial Officer. Any two or more offices
may be held by the same person. Officers may be, but need not necessarily be,
selected from the members of the Board or from the stockholders. The Board may
require any officer, agent or employee to give security for the faithful
performance of his duties. The Board may delegate to any executive officer or to
any committee the power to appoint and define the powers and duties of any
subordinate officers, agents or employees.
4.2 Other Officers. The Board may from time to time appoint such other
officers, agents or employees including but not limited to a Chairman of the
Board, one or more Vice Presidents or Assistant Vice
J-4
<PAGE> 371
Presidents, a Treasurer, and one or more Assistant Secretaries, as may be deemed
expedient, to hold office at the pleasure of the Board, with such authority as
may be specifically delegated to such officers by the Board.
4.3 Election; Term of Office. The executive officers of the Corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his or her
successor, subject to the provisions of Section 4.4.
4.4 Resignation and Removal of Officers. Any officer may resign at any
time by delivering his or her resignation in writing to the President or
Secretary of the Corporation, to take effect at the time specified in the
resignation; the acceptance of a resignation, unless required by its terms,
shall not be necessary to make it effective. Any officer appointed by the Board
or appointed by an executive officer or by a committee may be removed at any
time by the affirmative vote of a majority of the Board either with or without
cause, and in the case of an officer appointed by an executive officer or by a
committee, by the officer or committee who appointed him or her or by the
President. Such removal shall be without prejudice to the contractual rights of
such officer, if any, with the Corporation.
4.5 Vacancies. A vacancy in any office may be filled for the unexpired
term by the Board or otherwise in the manner prescribed in Sections 4.1 - 4.3 of
these by-laws for election or appointment to the office.
4.6 Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by such one or more officers and any such officer or
other person who is from time to time so authorized by the Board. Any such
officer or other person may, in the name of and on behalf of the Corporation,
take all such action as such officer or other person deems advisable, and may
vote in person or by proxy at any meeting of security holders of any Corporation
in which the Corporation may own securities, and at any such meeting shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities which, as the owner thereof, the Corporation might have
exercised and possessed if present.
4.7 Salaries. The Board may fix the officers' salaries, if any, or it may
authorize the President to fix the salary of any other officer.
ARTICLE 5
SHARES
5.1 Certificates. Every owner of shares in this Corporation shall be
entitled to have a certificate in the form approved by the Board, certifying the
number of shares and class or series owned by such stockholder. Each certificate
shall be signed by the President or a Vice President and by the Secretary or an
Assistant Secretary, and shall be sealed with the Corporation's seal or a
facsimile of the seal. Any or all of the signatures on the certificate may be a
facsimile. Each certificate issued shall bear all statements or legends required
by law to be affixed thereto. There shall be set forth on the face or back of a
certificate which the Corporation shall issue to represent a class or series of
stock one of the following: (a) statement of the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, or (b) a summary of the
statement described in subsection (a) above. If a security of the Corporation is
subject to a restriction on the transfer or registration thereof, such
restriction shall be noted, in writing, conspicuously upon the certificate
representing the security.
5.2 Transfers. Shares shall be transferable only on the Corporation's
books by the registered holder thereof or by such other person as may under law
be authorized to endorse such shares for transfer, or by such stockholder's
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary or with the transfer agent or transfer clerk. Except as otherwise
provided by law, upon surrender to the Corporation or its transfer agent of a
certificate for shares duly endorsed and accompanied by all applicable taxes
thereon, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction upon its books. The Secretary or transfer agent may require that all
signatures shall be guaranteed. Whenever any transfer of shares shall be made
for collateral security and not absolutely, such facts shall be so expressed in
the entry of transfer if, when the certificate or
J-5
<PAGE> 372
certificated shall be presented to the Corporation for transfer, both the
transferor and transferee request the Corporation so to do.
5.3 Lost, Stolen, Destroyed or Mutilated Certificates. The holder of any
shares of the Corporation shall immediately notify the Corporation of any loss,
theft, destruction or mutilation of the certificate therefor. The Board shall
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, or upon the surrender of any mutilated
certificate, if the Corporation shall not theretofore have received notice that
the certificate alleged to have been lost, destroyed or stolen has been acquired
by a bona fide purchaser thereof, and the Board may, at its discretion require
the owner of the lost, stolen, or destroyed certificate or such owner's legal
representatives to give the Corporation a bond in such sum, limited or
unlimited, in such form and with such surety or sureties as the Board shall, in
its uncontrolled discretion, determine, to indemnify the Corporation against any
claim that may be made against it on account of alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
5.4 Registered Stockholders. Except as otherwise provided by law, the
Corporation shall be entitled to recognize as the exclusive owner of shares or
other securities of the Corporation for all purposes as regards the Corporation,
the person in whose name the shares or other securities stand registered on its
books as the owner and such person exclusively shall be entitled to receive
dividends and to vote as such owner. To the extent permissible under law, the
Corporation shall be entitled to hold liable for calls and assessments a person
registered on its books as the owner of the shares or other securities, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares or other securities on the part of any person, whether or
not it shall have express or other notice thereof.
5.5 Regulations. The Board shall have the power and authority to make all
such rules and regulations not inconsistent with law or with the Certificate of
Incorporation as may be deemed expedient concerning the issue, transfer and
registration of certificates for shares of the capital stock of the Corporation,
and may appoint transfer agents, transfer clerks and registrars thereof.
5.6 Payment of Dividends. Except as limited by law or the Certificate of
Incorporation, the Board shall have the full power to determine whether any,
and, if so, what part, of the funds legally available for the payment of
dividends shall be declared in dividends and paid to the stockholders of the
Corporation. The Board may set aside out of any of the funds of the Corporation
available for dividends a reserve for any proper purposes, and from time to time
may increase, diminish and vary such fund.
ARTICLE 6
INDEMNIFICATION
6.1 Indemnification Rights. To the fullest extent permitted by the
Delaware General Corporation Law, as the same may be amended and supplemented,
the Corporation shall indemnify each current or former director, officer,
employee or agent of the Corporation from and against any and all expenses,
liabilities or other matters referred to in or covered by the Delaware General
Corporation Law, including, without limitation, by reason of his or her current
or former position with the Corporation or by reason of the fact that he or she
is or was serving, at the request of the Corporation, as a director, officer,
partner, trustee, employee or agent of another Corporation, partnership, joint
venture, trust or other enterprise.
6.2 Nonexclusivity. The indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person. Except as
may otherwise be specifically provided in these by-laws, no provision of these
by-laws is intended by the Corporation to be construed as limiting, prohibiting,
denying or abrogating any of the general or specific powers or rights conferred
under the Delaware General Corporation Law upon the Corporation, upon its
stockholders, bondholders and security holders, and upon its directors,
officers, employees or agents, including in particular the power of the
Corporation to furnish indemnification to directors, officers, employees and
J-6
<PAGE> 373
agents in the capacities defined and prescribed by the Delaware General
Corporation Law and prescribed rights of said persons to indemnification as the
same are conferred by the Delaware General Corporation Law.
6.3 Advancement of Expenses. The rights granted herein shall include the
right to be paid by the Corporation all reasonable expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of such expenses shall be made only upon delivery to the
Corporation of an undertaking by or on behalf of such director, officer,
employee or agent, to repay all amounts so advanced if it shall ultimately be
determined that such director, officer, employee or agent is not entitled to
indemnification.
ARTICLE 7
MISCELLANEOUS
7.1 Seal. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the Corporation's name, the date of its
incorporation and the state in which it was incorporated.
7.2 Fiscal Year. The Board may determine the Corporation's fiscal year.
7.3 Voting of Shares in Other Corporations. Shares in other Corporations
which are held by the Corporation may be represented and voted by the President
or a Vice President of this Corporation or by proxy or proxies appointed by one
of them. The Board may, however, appoint some other person to vote the shares.
7.4 Amendments. By-laws of this Corporation may be adopted, amended or
repealed by the vote or written consent of either (a) the Board or (b) the
stockholders entitled to exercise a majority of the voting power of the
Corporation.
7.5 Corporate Records; Inspection. The Corporation shall maintain adequate
and correct accounts, books and records of its business and properties. All of
such books, records and accounts shall be kept at this Corporation's principal
executive office, as fixed by the Board from time to time, and, to the extent
provided by law, shall be open to inspection of directors, stockholders and
voting trust certificate holders, in the manner provided by law. The Corporation
shall, upon the written request of any stockholder, furnish to such stockholder
a copy of these by-laws as amended to date.
7.6 Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened, and does so object. Neither the business to be transacted at, nor the
purpose of any regular or special meeting of the stockholders, directors or
members of a committee of directors need be specified in any written waiver of
notice.
7.7 Notices. Any notice, request or communication required or permitted to
be given to the Corporation or any other person by law, the Certificate of
Incorporation or these by-laws, shall be in writing and either delivered in
person or sent by telex, telegram or certified or registered mail, postage
prepaid, return receipt requested, (a) if to the Corporation, to the Secretary
of the Corporation and shall be effective only upon receipt by the Secretary,
and (b) if to any other person, to that person at his last address on the
Corporation's records.
7.8 Construction and Definitions. Unless the context otherwise requires,
the general provisions, rules of construction and definitions contained in the
Delaware General Corporation Law shall govern the construction of these by-Laws.
Without limiting the generality of the foregoing, the masculine gender includes
the feminine and neuter, the singular number includes the plural and the plural
number includes the singular, and the term "person" includes a Corporation as
well as a natural person.
J-7
<PAGE> 374
SECRETARY'S CERTIFICATE OF ADOPTION OF BY-LAWS
OF
EASYRIDERS, INC.
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Easyriders,
Inc., a Delaware corporation.
2. That the foregoing by-laws constitute the by-laws of said
Corporation as adopted by the directors of said Corporation effective as of
May 14, 1998, and such by-laws have not been altered or repealed and are in
full force and effect as of the date set forth below.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 14th day
of May , 1998.
William R. Nordstrom, Secretary
J-8
<PAGE> 375
ADDENDUM K
PRESS RELEASE -- JULY 31, 1998
NEWRIDERS COMMENTS ON STOCK PRICE
NEWPORT BEACH, Calif. -- (BUSINESS WIRE) -- July 31, 1998 -- In response to
inquiries from shareholders and other interested parties, officials at Newriders
Inc. (OTC/BB:NWRD -- news) say they know of no reason for the recent weakness in
the company's stock price.
The stock has dropped from $2.00 to just over $1.00 over the last several
weeks. The company is proceeding toward the completion of its merger
transactions with Paisano Publications Inc. and its affiliated companies, and
the El Paso Bar-B-Que chain of restaurants. These transactions are subject to
approval by the stockholders of Newriders.
Bill Prather, chief executive officer of Newriders, said: "We met with our
senior lender this week, and they gave us every indication that they wanted to
proceed to closing as soon as possible. We fully expect to close the financing
and merger transactions by the end of September or sooner."
A Proxy/Registration Statement on Form S-4 (the "S-4") relating to the
above-described transactions has been filed with the Securities and Exchange
Commission, but has not yet become effective. Such transactions are described in
detail in the S-4 and the statements made herein are qualified in their entirety
by reference to the S-4. The S-4 will be forwarded to the stockholders of
Newriders after the Securities and Exchange Commission has completed the review
of the S-4. (This news release shall not constitute a solicitation with respect
to the shares of Newriders not shall it constitute an offer to sell or the
solicitation of an offer to buy shares of Newriders of any of its affiliates.)
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements involve known
and unknown risks and uncertainties that may cause the company's actual results
or outcomes to be materially different from those anticipated and discussed
herein.
Contact:
Newriders Inc. Bill Nordstrom, Chief Financial Officer
714/718-4630
<PAGE> 376
ADDENDUM L
PRESS RELEASE -- AUGUST 26, 1998
NEWRIDERS SIGNS LEASE FOR NEW EL PASO
BAR-B-QUE RESTAURANT AT EASYRIDERS PLAZA IN TULSA, OKLA.
NEWPORT BEACH, Calif. -- (BUSINESS WIRE) -- Aug. 26, 1998 -- Newriders Inc.
(NASDBB: NWRD -- news) has agreed to open an 8,500 square foot El Paso
Bar-B-Que(R) restaurant in the upscale Woodland Hills area of Tulsa, Okla.
Located in what will be known a Easyriders Plaza, the restaurant adjoins
the planned Easyriders of Tulsa motorcycle and apparel store. Currently under
construction, Easyriders Plaza is expected to be open for business before the
end of the year.
Jerry Gordon, who is developing the site and is the Easyriders franchise in
Tulsa, said, "We think barbecue and motorcycles are a natural combination, and
we're proud to be the first Easyriders Franchise in the country to test this
concept."
Bill Prather, chief executive officer of Newriders, said, "We already have
an El Paso Bar-B-Que Restaurant in Tulsa. Jerry Gordon's development of
Easyriders Plaza is a perfect opportunity for us to upgrade our presence in
Tulsa, and, perhaps even more importantly, to test the possible synergies
between a barbecue restaurant and an Easyriders retail shop and apparel store.
"If the combination works like we hope it will, it will provide a great
platform for us to begin rolling out the Easyriders Roadhouse Bar-B-Que(R)
restaurant concept."
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements involve known
and unknown risks and uncertainties that may cause Newriders Inc. actual results
or outcomes to be materially different from those anticipated and discussed
herein.
Contact:
Newriders Inc., Newport Beach
Bill Nordstrom, 714/718-4630
<PAGE> 377
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that the personal
liability of the directors of the Registrant shall be limited to the fullest
extent permitted by the provisions of Section 102(b)(7) of the General
Corporation Law of the State of Delaware (the "DGCL"). Section 102(b)(7) of the
DGCL generally provides that no director shall be liable personally to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, however, the Certificate of Incorporation does not eliminate the
liability of a director for (i) any breach of the director's duty of loyalty to
the Registrant or its stockholders; (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii) acts or
omissions in respect of certain unlawful dividend payments or stock redemptions
or repurchases; or (iv) any transaction from which such director derives an
improper personal benefit. The effect of this provision is to eliminate the
rights of the Registrant and its stockholders (through stockholder's derivatives
suits on behalf of the Registrant) to recover monetary damages against a
director for breach of his or her fiduciary duty of care as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i) through (iv) above. The
limitations summarized above, however, do not affect the ability of the
Registrant or its stockholders to seek nonmonetary remedies, such as injunction
or rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers,
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission (the "Commission"), such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In addition, the Certificate of Incorporation of the Registrant provides
that the Registrant shall, to the fullest extent permitted by Section 145 of the
DGCL, indemnify all persons whom it may indemnify pursuant to Section 145 of the
DGCL. Section 145 of the DGCL permits a company to indemnify an officer or
director who was or is a party or is threatened to be made a party to any
proceeding because of his or her position, if the officer of director acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Registrant and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
The Registrant's Certificate of Incorporation, (the "Charter"), provides
that the Registrant shall, to the fullest extent permitted by applicable law,
indemnify any person who was or is a party or is threatened to be made a party
to any action, suit or proceeding of the type described above by reason of the
fact that he or she is or was or has agreed to become a director or officer of
the Registrant, or is serving at the request of the Registrant as director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, provided that with respect to any action, suit
or proceeding initiated by a director or officer, the Registrant shall indemnify
such director or officer only if the action, suit or proceeding was authorized
by the Registrant's Board of Directors or is a suit for enforcement of rights to
indemnification or advancement of expenses in accordance with the procedure
therefor prescribed in the Charter. The Charter also provides that the expenses
of directors and officers incurred as a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, shall be paid by the Registrant as they are incurred and in
advance of the final disposition of the action, suit or proceeding, provided
that if applicable law so requires, the advance payment of expenses shall be
made only upon receipt by the Registrant of an undertaking by or on behalf of
the director or officer to repay all amounts so advanced in the event it is
ultimately determined by a final decision, order or decree of a court of
competent jurisdiction that the director or officer is not entitled to be
indemnified for such expenses under the Charter.
The Registrant currently maintains an insurance policy which, within the
limits and subject to the terms and conditions thereof, covers certain expenses
and liabilities that may be incurred by directors and officers in connection
with or as a consequence of certain actions, suits or proceedings that may be
brought against them as a result of an act or omission committed or suffered
while acting as a director or officer of the Registrant.
II-1
<PAGE> 378
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
2.1 Agreement and Plan of Merger and Reorganization dated June
30, 1998, by and among Newriders, the Registrant and
Easyriders Sub, Inc., attached to this registration
statement as Addendum A to the Prospectus/Proxy Statement
and incorporated by reference herein.
2.2 Stock Contribution and Sale Agreement, dated June 30, 1998
("Stock Contribution and Sale Agreement"), by and among
Newriders, the Registrant, Easyriders Sub II, Inc., Paisano
Publications, Inc., Easyriders of Columbus, Inc., Easyriders
Franchising, Inc., Teresi, Inc., Bros Club, Inc., Associated
Rodeo Riders on Wheels and Mr. Joseph Teresi, attached to
this registration statement as Addendum B to the
Prospectus/Proxy Statement and incorporated by reference
herein. List of exhibits and schedules to Stock Contribution
and Sale Agreement.
2.3 LLC Interest Contribution Agreement, dated June 30, 1998
("LLC Interest Contribution Agreement"), by and among
Newriders, the Registrant, William E. Prather, Marna
Prather, John E. Martin, and M & B Restaurants, L.C.,
attached to this registration statement as Addendum C to the
Prospectus/Proxy Statement and incorporated by reference
herein. List of exhibits and schedules to LLC Interest
Contribution Agreement.
3.1 Certificate of Incorporation of the Registrant, attached to
this registration statement as Addendum I to the
Prospectus/Proxy Statement and incorporated by reference
herein.
3.2 Bylaws of the Registrant, attached to this registration
statement as Addendum J to the Prospectus/Proxy Statement
and incorporated by reference herein.
4.1 Specimen of the Registrant's Common Stock Certificate.
5.1 Opinion and Consent of Robert N. Wilkinson as to the
legality of the shares to be registered.
8.1 Opinion of Deloitte & Touche LLP as to certain federal
income tax consequences of the Reorganization.
10.1.1 Assignment of Motorcycle Shop Lease Agreement -- Myrtle
Beach, SC by Newriders to Leon Hatcher, incorporated by
reference from Exhibit 10.2.5 to Newriders' Annual Report on
Form 10-KSB for the year ended December 31, 1997.
10.1.2 Employment Letter Agreement between Newriders and John
Martin -- Incorporated by reference from Exhibit 10.2 to
Newriders' Registration Statement on Form S-8 filed November
24, 1997.
10.1.3 Employment Letter Agreement between Newriders and William R.
Nordstrom dated August 22, 1997, incorporated by reference
from Exhibit 10.4.2 to Newriders' Annual Report on Form
10-KSB for the year ended December 31, 1997.
10.1.4 Stock Purchase Agreement for Restricted Shares and Warrants
between Newriders and John E. Martin dated April 21, 1997,
incorporated by reference from Exhibit 10.4.3 to Newriders'
Annual Report on Form 10-KSB for the year ended December 31,
1997.
10.1.5 Stock Purchase Agreement for Restricted Shares and Warrants
between Newriders and William R. Nordstrom dated April 21,
1997, incorporated by reference from Exhibit 10.4.4 to
Newriders' Annual Report on Form 10-KSB for the year ended
December 31, 1997.
</TABLE>
II-2
<PAGE> 379
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.1.6 Letter of Intent dated October 7, 1997 between Newriders and
M & B Restaurants, L.C., incorporated by reference from
Exhibit 10.5.1 to Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997.
10.1.7 Letter Agreement dated January 13, 1998 between Newriders
and the Paisano Companies, incorporated by reference from
Exhibit 10.5.2 to Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997.
10.1.8 Secured Installment Promissory Note between Newriders as
Maker and Franchise Mortgage Acceptance Company, LLC as
Lender dated October 21, 1997 for $475,000 (Loan #
11441-102) (See Note 1), incorporated by reference from
Exhibit 10.6.1 to Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997.
10.1.9 Security Agreement between Newriders and Franchise Mortgage
Acceptance Company, LLC dated October 21, 1997 (Loan #
11441-102) (See Note 1), incorporated by reference from
Exhibit 10.6.2 to Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997.
Guaranty dated October 21, 1997 signed by Leon Hatcher and
10.1.10 Sandra Hatcher (See Note 2), incorporated by reference from
Exhibit 10.6.3 to Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997.
Newriders 1997 Executive Incentive Compensation Plan,
10.1.11 attached to this registration statement as Addendum F and
incorporated by reference herein.
Form of Agreement to Exchange Options and Waive Change in
10.1.12+ Control Rights.
Newriders, Inc. 8% Convertible Debenture Due June 30, 2000
10.1.13+ in the amount of $1,000,000 payable to Wayne L. Knyal.
Newriders, Inc. Warrant dated June 10, 1998 in favor of
10.1.14+ Wayne L. Knyal for 25,000 shares.
Newriders, Inc. 8% Convertible Debenture Due May 11, 2000,
10.1.15+ in the amount of $500,000 payable Silenus, Ltd.
Newriders, Inc. Warrant dated May 11, 1998 in favor of
10.1.16+ Silenus, Ltd. for 25,000 shares.
Security Agreement between Leon Hatcher as pledgor and
10.1.17+ Silenus, Ltd. as secured party dated May 11, 1998 pledging
400,000 shares of Newriders Common Stock as security.
Letter Agreement dated January 13, 1998 between Imperial
10.1.18+ Capital, LLC and Newriders, Inc.
Newriders, Inc. Convertible Note due December 12, 2000 in
10.1.19+ the amount of $300,000 payable to Offshore Nominees, Ltd.
Newriders, Inc. Convertible Note due December 12, 2000 in
10.1.20+ the amount of $400,000 payable to Offshore Investment Fund.
Proxy dated April 19, 1998, for 800,000 shares of Newriders
10.1.21+ Common Stock given by Michael T. Purcell in favor of Mr.
Joseph Teresi.
Proxy dated April 20, 1998, for 640,000 shares of Newriders
10.1.22+ Common Stock given by Mr. C. W. Doyle in favor of Mr. Joseph
Teresi.
Proxy dated April, 1998, for 1,300,000 shares of Newriders
10.1.23+ Common Stock given by Mr. Leon Hatcher in favor of Mr.
Joseph Teresi.
Letter Agreement for Return of Common Stock dated February
10.1.24+ 9, 1998 executed by Cyril Doyle, Leon Hatcher and Michael T.
Purcell.
</TABLE>
II-3
<PAGE> 380
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
Letter Agreement for Return of Common Stock dated February
10.1.25+ 10, 1998, executed by Rick Pierce.
Agreement to Relinquish Stock Options dated June 25, 1998,
10.1.26+ by and among Newriders, Inc., John Martin, William
Nordstrom, William Prather, Wayne Knyal and Daniel Gallery.
Form of Agreement for Exchange of Conversion Rights.
10.1.27
Easyriders 1998 Executive Incentive Compensation Plan,
10.2.1+ attached to this registration statement as Addendum G to the
Prospectus/Proxy Statement and incorporated by reference
herein.
Distribution Agreement dated April 1, 1987 between Curtis
10.3.1* Circulation Company and Paisano Publications, Inc.
Letter Agreement dated April 20, 1998, between Curtis
10.3.2*+ Circulation Company and Paisano Publications, Inc., amending
Distribution Agreement dated April 1, 1987.
Letter Agreement between RR Donnelley & Sons Company and
10.3.3* Paisano Publications, Inc. dated September 11, 1996.
Form of Limited Recourse Subordinated Promissory Note
10.4.1+ comprising Exhibit B-1 to Stock Contribution and Sale
Agreement, to be executed upon consummation of the
Reorganization by Easyriders in favor Joseph Teresi in the
amount of $5,000,000.
Form of Pledge Agreement comprising Exhibit B-2 to Stock
10.4.2+ Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization by Easyriders as pledgor
and Joseph Teresi as pledgee.
Form of Subordinated Promissory Note comprising Exhibit B-3
10.4.3+ to Stock Contribution and Sale Agreement, to be executed
upon consummation of the Reorganization by Easyriders in
favor Joseph Teresi in the amount of $5,000,000.
Form of Subordinated Promissory Note comprising Exhibit B-4
10.4.4+ to Stock Contribution and Sale Agreement, to be executed
upon consummation of the Reorganization by Easyriders in
favor Joseph Teresi in the amount of $3,000,000.
Form of Employment Agreement between Paisano Publications,
10.4.5+ Inc. and Bob Davis comprising Exhibit D-2 to Stock
Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization.
Form of Employment Agreement between Paisano Publications,
10.4.6+ Inc. and Joseph Teresi comprising Exhibit F-1 to Stock
Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization.
Form of Consulting Agreement between Paisano Publications,
10.4.7+ Inc. and Joseph Teresi comprising Exhibit F-2 to Stock
Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization.
10.4.8 Form of Stockholders Voting Agreement comprising Exhibit I
to Stock Contribution and Sale Agreement, to be executed
upon consummation of the Reorganization by John E. Martin
and Joseph Teresi, attached to this registration statement
as Addendum D to the Prospectus/Proxy Statement and
incorporated by reference herein.
Form of Promissory Note comprising Exhibit 2.2(a) to Stock
10.4.9+ Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization by Easyriders Sub II,
Inc. in favor Joseph Teresi in the amount of $15,000,000.
Stock Purchase Agreement dated June 30, 1998, between
10.4.10+ Easyriders and John E. Martin ("Stock Purchase Agreement").
</TABLE>
II-4
<PAGE> 381
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
Form of Promissory Note comprising Exhibit A to Stock
10.4.11+ Purchase Agreement, to be executed upon consummation of the
Reorganization by John E. Martin in favor Easyriders in the
amount of $5,000,000.
Form of Promissory Note comprising Exhibit B to Stock
10.4.12+ Purchase Agreement, to be executed upon consummation of the
Reorganization by John E. Martin in favor Easyriders in the
amount of $2,300,000.
Form of Commercial Lease -- Daytona, Florida, comprising
10.4.13+ Exhibit C to the Stock Contribution and Sale Agreement, to
be executed upon consummation of the Reorganization by
Joseph Teresi and Easyriders.
Form of Commercial Lease -- Columbus, Ohio, comprising
10.4.14+ Exhibit C to the Stock Contribution and Sale Agreement, to
be executed upon consummation of the Reorganization by
Joseph Teresi and Easyriders.
Form of Commercial Lease -- 28216 Dorothy Drive, Agoura
10.4.15+ Hills, California, comprising Exhibit C to the Stock
Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization by Joseph Teresi and
Easyriders.
Form of Commercial Lease -- 28210 Dorothy Drive, Agoura
10.4.16+ Hills, California, comprising Exhibit C to the Stock
Contribution and Sale Agreement, to be executed upon
consummation of the Reorganization by Joseph Teresi and
Easyriders.
Employment Agreement between Newriders and William E.
10.4.17 Prather comprising Exhibit F to the LLC Interest
Contribution Agreement to be executed upon consummation of
the Reorganization.
Letter Agreement dated August 15, 1998 regarding extension
10.4.18 of Stock Contribution and Sale Agreement, by and among
Newriders, the Registrant, Easyriders Sub II, Inc., Paisano
Publications, Inc., Easyriders of Columbus, Inc., Easyriders
Franchising, Factory Tours, Inc., Bros Club, Inc.,
Associated Rodeo Riders on Wheels, and Mr. Joseph Teresi
10.5.1 Form of Note and Warrant Purchase Agreement between
Easyriders, Inc., Easyriders Sub II, Inc. and Senior Secured
Lender, to be executed at or prior to consummation of the
Reorganization. List of exhibits and schedules to Note and
Warrant Purchase Agreement.
10.5.2 Form of Guarantee of Easyriders, Inc., Easyriders of
Columbus, Inc., Easyriders Franchising, Inc., Teresi, Inc.,
Bros Club, Inc. and Associated Rodeo Riders on Wheels in
favor of Senior Secured Lender, to be executed at or prior
to consummation of the Reorganization.
10.5.3 Form of Pledge and Security Agreement in favor of Senior
Secured Lender to be executed by Easyriders, Inc.,
Easyriders of Columbus, Inc., Easyriders Franchising, Inc.,
Teresi, Inc., Bros Club, Inc. and Associated Rodeo Riders on
Wheels, to be executed at or prior to consummation of the
Reorganization.
10.5.4 Form of Intellectual Property Security Agreement in favor of
Senior Secured Lender to be executed by Easyriders, Inc.,
Easyriders of Columbus, Inc., Easyriders Franchising, Inc.,
Teresi, Inc., Bros Club, Inc. and Associated Rodeo Riders on
Wheels, to be executed at or prior to consummation of the
Reorganization.
10.5.5 Form of Warrant to Purchase Shares of Common Stock of
Easyriders, Inc. to be issued to Senior Secured Lender, to
be executed at or prior to consummation of the
Reorganization.
10.5.6 Form of Registration Rights Agreement between Easyriders,
Inc. and Senior Secured Lender, to be executed at or prior
to consummation of the Reorganization.
</TABLE>
II-5
<PAGE> 382
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.6 Agreement for Sale and Purchase of Business Property dated
July 22, 1998 between Newriders and Easyriders of Myrtle
Beach, Inc., incorporated by reference from Exhibit 2.1 to
Newriders' Current Report on Form 8-K for Event Dated July
22, 1998, as filed August 5, 1998.
23.1 Consent of Deloitte & Touche LLP -- Newriders.
23.2 Consent of Deloitte & Touche LLP -- Paisano Publications,
Inc. and Affiliates.
23.3 Consent of Deloitte & Touche LLP -- M & B Restaurants, LLC
(dba El Paso Bar-B-Que Company).
23.4 Consent of Jones, Jensen & Company -- Newriders.
23.5 Consent of Deloitte & Touche LLP -- Tax Opinion.
24.1 Power of Attorney of Registrant, included in the signature
page of this registration statement.
99.1 Consent of Director Nominees.
</TABLE>
- ---------------
* Confidential treatment requested.
+ Previously filed.
Note 1: Newriders also executed an identical Secured Promissory Note for
$475,000 and an identical Security Agreement as of the same date,
relating to Loan # 11441-100, with the exception that the Security
Agreement involves similar collateral located at the Myrtle Beach, SC
Easyriders Cafe. Also on the same date Newriders executed an identical
Secured Promissory Note and an identical Security Agreement as of the
same date, relating to Loan # 11441-101, with the exception that the
Secured Promissory Note is for a $100,000 principal amount with a
proportionately smaller monthly payment, and the Security Agreement
involves similar collateral located in the Myrtle Beach, SC Easyriders
Cafe.
Note 2: Identical Guaranty documents were executed by John E. Martin, William R.
Nordstrom and Sherry Nordstrom, William Prather and Marna Prather,
Daniel Gallery and Dixie Gallery, C.W. Doyle and Georgette Doyle, and
Michael Purcell.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and, therefore, have been omitted.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the more recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-6
<PAGE> 383
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE> 384
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Easyriders has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Newport Beach, California on the 27th
day of August, 1998.
EASYRIDERS, INC.
By /s/ WILLIAM E. PRATHER
--------------------------------------
William E. Prather
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William E. Prather and William R. Nordstrom, and
each of them, with full power of substitution, for him in any and all
capacities, to sign any amendments to this Registration Statement, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM E. PRATHER Director, President and August 27, 1998
- -------------------------------------------------------- Chief Executive Officer
William E. Prather
/s/ JOHN E. MARTIN Chairman and Director August 27, 1998
- --------------------------------------------------------
John E. Martin
/s/ WILLIAM R. NORDSTROM Director, Secretary, August 27, 1998
- -------------------------------------------------------- Treasurer
William R. Nordstrom and chief financial officer
</TABLE>
II-8
<PAGE> 1
EXHIBIT 4.1
DESCRIPTION OF SPECIMEN STOCK CERTIFICATE OF REGISTRANT
The face of the stock certificate has a border which is a continuous intricate
design all the way around. The upper left and right corners contain a different
irregular shaped wavy round design. In the center of the face at the top is a
decorative arch. Below the decorative arch is the company name in logo fashion.
Below the company logo in the center of the certificate is a light shaded
rectangle in which the words "THIS CERTIFIES THAT" and "is the record holder
of," which appears in black ink, and the word "SPECIMEN" which appear stamped in
red ink. The word "SPECIMEN" is also stamped within the border at the bottom on
either side of the corporate seal. The border, upper left and right corners and
the decorative arch are all in purple ink, the company logo is in black and blue
ink and the rest of the text is in black ink.
The following is the text which appears in black on the face of the stock
certificate starting in the upper lefthand corner and moving left to right and
down:
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF CUSIP
THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $ .001 PER
SHARE, OF
EASYRIDERS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated
/s/ SIG /s/ SIG
SECRETARY CHIEF EXECUTIVE OFFICER
CORPORATE SEAL
COUNTERSIGNED AND REGISTERED:
PACIFIC STOCK TRANSFER COMPANY, INC.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
The following is the text in black ink which appears on the reverse of the stock
certificate starting in the upper left hand corner and moving left to right and
down:
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- Custodian
-----------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-------------------
(State)
UNIF TRF MIN ACT -- Custodian (until age )
-----------------------
under Uniform Transfers
---------------
(Minor)
to Minors Act
---------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
[BOX]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________ Shares of the common stock represented
by the within Certificate, and do hereby irrevocably constitute and appoint
_________________________ Attorney to transfer the said stock on the books of
the within named Corporation with full power of
substitution in the premises.
Dated
-----------------------------
x
--------------------------------
(SIGNATURE)
x
--------------------------------
(SIGNATURE)
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
AFFIX MEDALLION SIGNATURE GUARANTEE IMPRINT BELOW
ABOVE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION SUCH
AS A SECURITIES BROKER/DEALER, COMMERCIAL BANK & TRUST COMPANY, SAVINGS AND
LOAN ASSOCIATION OR A CREDIT UNION PARTICIPATING IN A MEDALLION PROGRAM
APPROVED BY THE SECURITIES TRANSFER ASSOCIATION, INC.
<PAGE> 1
EXHIBIT 5.1
[ROBERT N. WILKINSON, ESQ. LETTERHEAD]
August 27, 1998
Easyriders, Inc.
567 San Nicolas Drive, Suite 400
Newport Beach, California 92660
Gentlemen:
I have served as counsel for Easyriders, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to the Company's Registration
Statement on Form S-4 (the "Registration Statement"), of up to 10,000,000 shares
of the authorized but unissued common stock, par value $.001 per share, of the
Company (the "Shares"), to be issued pursuant to that certain Agreement and Plan
of Merger dated as of June 30, 1998, by and among the Company, Newriders, Inc.,
a Nevada corporation, and Easyriders Sub, Inc., a Nevada corporation (the
"Merger Agreement").
As counsel to the Company, I have examined the Registration Statement,
including the Proxy Statement/Prospectus contained therein, and such other
documents as I have deemed necessary or appropriate in order to express the
opinion set forth below. In connection with my opinion hereinafter given, I have
examined and relied upon originals, or copies, certified or otherwise,
identified to my satisfaction, of such agreements, documents, certificates and
other statements of government officials, corporate officers and representatives
and other documents as I have deemed relevant and necessary as a basis for such
opinion. In such examination, I have assumed the genuineness of all signatures
and the authenticity of all documents submitted to me as originals and the
conformity with the original documents of documents submitted to me as copies.
Based upon the foregoing, I am of the opinion that when (i) the
Registration Statement shall have become effective under the Securities Act, and
(ii) the Shares shall have been issued and delivered in the manner and on the
terms set forth in the Merger Agreement, the Shares will be validly issued,
fully paid and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the heading "Legal
Matters" in the Proxy Statement/Prospectus included in the Registration
Statement. In giving this consent, I do not thereby admit that I come within the
category of persons whose consent is
<PAGE> 2
Easyriders, Inc.
August 27, 1998
Page 2
required under Section 7 of the Securities Act or the rules and regulations of
the Securities and Exchange Commission.
Very truly yours,
/s/ ROBERT N. WILKINSON
------------------------
Robert N. Wilkinson
<PAGE> 1
EXHIBIT 8.1
[DELOITTE & TOUCHE LLP LETTERHEAD]
August 27, 1998
Mr. William E. Prather
Newriders, Inc.
1040 East Herndon Avenue
Suite 102 Fresno, CA 93720
Dear Mr. Prather:
This letter is in response to your request for our opinion as to the federal
income tax consequences of: (i) the proposed transfer by Joseph Teresi
("Teresi") of all of his stock interest in Easyriders of Columbus, Inc.
("ECI"), Easyriders Franchising, Inc. ("EFI"), Teresi, Inc. ("TI"), Bros Club,
Inc. ("BCI") and Associated Rodeo Riders On Wheels ("ARROW") (collectively ECI,
EFI, TI, BCI and ARROW are referred to as the "Paisano Companies"), and part of
his stock interest in Paisano Publications, Inc. ("PPI"), to Easyriders, Inc.
("Easyriders") in exchange for stock of Easyriders and notes; (ii) the proposed
sale by Teresi of his remaining stock interest in PPI to Easyriders Sub II,
Inc. ("Easyriders Sub II") in exchange for a note; (iii) the proposed transfer
by Marna Prather and William Prather ("Prather") of their interests in M&B
Restaurants, L.C., d/b/a El Paso Barbecue ("El Paso") to Easyriders in exchange
for stock of Easyriders; (iv) the proposed transfer by John Martin ("Martin")
of his interest in El Paso, notes and cash to Easyriders in exchange for stock
of Easyriders; (v) the issuance of Easyriders common stock to William Nordstrom
("Nordstrom") for services rendered in connection with the Proposed
Transaction, as defined below; (vi) the proposed merger of Easyriders Sub.,
Inc. ("Easyriders Sub") with and into Newriders whereby the shares of
Easyriders Sub stock held by Easyriders will be converted into one share of
Newriders common stock and the shareholders of Newriders will exchange their
Newriders common stock for shares of Easyriders common stock; and (vii) the
proposed transfer by Easyriders of the entire interest in El Paso to Newriders.
The proposed transactions discussed above are collectively referred to as the
"Proposed Transactions". Specifically, you have requested our opinion as to
whether the transfers described above and the merger of Easyriders Sub with and
into Newriders should qualify as a tax-free transactions pursuant to Section
351, 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended (the "Code")(1).
Our opinion is based upon the facts which have been provided to us. In
rendering this opinion, we have (with your permission) reviewed and relied
upon, inter alia, (a) the Stock Contribution and Sale Agreement dated as of
June 30, 1998 by and among Newriders, Easyriders, Easyriders
- ----------
(1) All Section references are to the Internal Revenue Code of 1986, as
amended, unless otherwise specified.
<PAGE> 2
August 27, 1998
Page 2
Sub II, the Paisano Companies, PPI and Teresi, (the "Stock Contribution
Agreement"), (b) the LLC Interest Contribution Agreement dated as of June 30,
1998, by and among Newriders, Easyriders, Prather, Martin and El Paso, (the
"LLC Agreement"), (c) the Agreement and Plan of Merger and Reorganization dated
as of June 30, 1998, by and among Newriders, Easyriders and Easyriders Sub,
(the "Reorganization Agreement") (d) the Form S-4 Registration Statement for
Easyriders, Inc. dated August 31, 1998 to be filed with the Securities and
Exchange Commission on August 27, 1998, (the "Form S-4"), (e) the Limited
Recourse Promissory Note with a principal amount of $5 million payable by
Easyriders to Teresi (the "Easyriders Mirror Note"), (f) the Subordinated
Promissory Note with a principal amount of $5 million payable by Easyriders to
Teresi ("Easyriders Subordinated Note"), (g) the Subordinated Promissory Note
with a principal amount of $3 million payable by Easyriders to Teresi
("Easyriders Short-Term Subordinated Note"), (h) the Promissory Note with a
principal amount of $2.3 million payable by Martin to Easyriders (the "Martin
Note"), (i) the Promissory Note with a principal amount of $5 million payable
by Martin to Easyriders (the "Martin Mirror Note"), (j) an undated draft Pledge
Agreement, by and between Easyriders, as pledgor and Teresi, as pledgee (the
"Pledge Agreement"), (k) certain representations set forth in letters from
Teresi, Prather, Martin, Newriders and Easyriders each dated August 27, 1998,
(l) assumptions which we have deemed necessary and essential to our opinion and
which are contained herein. The Stock Contribution Agreement, the LLC
Agreement, the Reorganization Agreement, the Form S-4, the Easyriders Mirror
Note, the Easyriders Subordinated Note, the Easyriders Short-Term Subordinated
Note, the Martin Note, the Martin Mirror Note, the Pledge Agreement, and the
Representation Letters are collectively referred to as the "Documents". Any
material variations or differences in the facts, representations, or
assumptions as stated or incorporated in the materials referred to above may
affect our conclusions.
What follows is a summary of the essential facts relating to the Proposed
Transactions which our opinion covers.
ESSENTIAL FACTS
Newriders is a publicly traded subchapter C corporation that was organized
under the laws of the State of Nevada in 1995. Newriders is an accrual basis
taxpayer that joins with its subsidiary in the filing of a consolidated federal
income tax return on a calendar year basis. As of August 24, 1998, Newriders
had 25,000,000 authorized shares of common stock par value $.001 per share, of
which there were 17,962,316 shares outstanding. Newriders common stock is
traded in the over-the-counter market and quoted on the NASD Bulletin Board
under the symbol "NWRD". Michael T. Purcell, Leon Hatcher, Rick L. Pierce and
C.W. Doyle (collectively "Founding Shareholders") are the founding shareholders
of Newriders, and they own collectively 9.5 million shares of the common stock
of Newriders. William Nordstrom ("Nordstrom") is the chief financial officer of
Newriders. Newriders owned an Easyriders restaurant and apparel store in
<PAGE> 3
August 27,1998
Page 3
Myrtle Beach, South Carolina, which was sold on July 18, 1998. Newriders owns,
through its wholly owned subsidiary, Newriders Limited, an Easyriders Cafe
restaurant, an Easyriders apparel and merchandise store, and an Easyriders
Motorcycle and Accessory Shop in Fresno, California.
Easyriders, a Delaware corporation, was formed to effectuate the Proposed
Transactions. As of May 12, 1998, Easyriders had 50,000,000 authorized shares
of common stock par value $.001 per share, of which there was one share
outstanding and 10,000,0000 authorized shares of preferred stock par value
$.001 per share, of which there were no shares outstanding. Easyriders is a
wholly owned subsidiary of Newriders.
Easyriders Sub, a California corporation, was formed to effectuate the
Proposed Transactions. As of August 26, 1998, Easyriders Sub had 1,000,000
authorized shares of common stock par value $.01 per share, of which there was
one share outstanding. Easyriders Sub is a wholly owned subsidiary of
Easyriders.
Easyriders Sub II, a Nevada corporation, was formed to effectuate the Proposed
Transactions. As of July 15, 1998, Easyriders Sub II had 1,000 authorized
shares of common stock no par value, of which there were 100 shares
outstanding. Easyriders Sub II is a wholly owned subsidiary of Easyriders.
PPI is a subchapter S corporation that was organized under the laws of the
State of California in 1972. PPI originally was a subchapter C corporation and
on November 1, 1982, PPI made an election to be taxed under subchapter S. PPI
is an accrual basis taxpayer that files federal income tax returns on a
calendar year basis. As of April 30, 1998, PPI had 500 authorized shares of
common stock par value $50 per share, of which there were 50 shares
outstanding. All of the common stock of PPI is owned by Teresi. PPI is engaged
in the business of publishing 15 motorcycle and tattoo lifestyle magazines,
calendars and special publications.
ECI is a subchapter S corporation that was organized under the laws of the
State of Ohio. ECI originally was a subchapter C corporation and on January 2,
1994, ECI made an election to be taxed under subchapter S. ECI is an accrual
basis taxpayer that files federal income tax returns on a calendar basis. As of
April 30, 1998, ECI had 750 authorized shares of no par value common stock, of
which there were 100 shares outstanding. All of the common stock of ECI is
owned by Teresi. ECI owns the flagship Easyriders store, which sells motorcycle
accessories.
EFI is a subchapter S corporation that was organized under the laws of the
State of California. EFI originally was a subchapter C corporation and on June
22, 1993, EFI made an election to be taxed under subchapter S. EFI is an
accrual basis taxpayer that files federal
<PAGE> 4
August 27, 1998
Page 4
income tax returns on a calendar basis. As of April 30, 1998, EFI had 10,000
authorized shares of no par value common stock, of which there were 1,000
shares outstanding. All of the common stock of EFI is owned by Teresi. EFI
franchises specialty stores using the Easyriders concept.
TI is a subchapter S corporation that was organized under the laws of the State
of California. TI originally was a subchapter C corporation and on June 2,
1982, TI made an election to be taxed under subchapter S. TI is an accrual
basis taxpayer that files federal income tax returns on a calendar basis. As of
April 30, 1998, TI had 10,000 authorized shares of no par value common stock,
of which there were 1,000 shares outstanding. All of the common stock of TI is
owned by Teresi. TI organizes promotional events.
BCI is a subchapter S corporation that was organized under the laws of the
State of California. BCI originally was a subchapter C corporation and on
April 14, 1994, BCI made an election to be taxed under subchapter S. BCI is an
accrual basis taxpayer that files federal income tax returns on a calendar
basis. As of April 30, 1998, BCI had 10,000 authorized shares of no par value
common stock, of which there were 500 shares outstanding. All of the common
stock of BCI is owned by Teresi. BCI solicits memberships for an association of
motorcycle enthusiasts and provides various services such as arranging group
insurance for members.
Arrow is an inactive subchapter C corporation that was organized under the laws
of the State of California. Arrow is an accrual basis taxpayer that files
federal income tax returns on a calendar basis. As of April 30, 1998, Arrow had
100,000 authorized shares of no par value common stock, of which there were 500
shares outstanding. All of the common stock of Arrow is owned by Teresi.
El Paso is a limited liability company that was organized under the laws of the
State of Texas. El Paso is classified as a partnership for federal income tax
purposes and files an information return on a 52-53 week fiscal year (ending
the Saturday closest to December 31). Prather owns 51% of the equity of El
Paso. Martin owns 49% of the equity of El Paso. Martin purchased his El Paso
interest in a taxable exchange for cash from True Knowles, an individual, in
March of 1998.
For business reasons discussed below, pursuant to one overall plan, Teresi,
Prather and Martin and the shareholders of Newriders (subject to a vote by the
Newriders shareholders) have agreed to effectuate the Proposed Transactions in
the following manner and in accordance with the Documents:
STEP 1: Immediately prior to the closing, as defined in the Stock
Contribution Agreement (the "Closing"), the Founding Shareholders
will transfer 6,156,480 shares of Newriders common stock to
Newriders for no consideration, but conditioned upon
<PAGE> 5
August 27, 1998
Page 5
consummation of the proposed transactions (536,000 shares have
already been transferred and cancelled, which Newriders will be
required to reissue if the proposed transactions are not
consummated. Additionally, Martin, Prather, Nordstrom, Wayne L.
Knyal and Daniel J. Gallery have agreed to the cancellation of
their options to purchase 2,000,000, 750,000, 500,000, 20,000 and
20,000 shares of Newriders common stock respectively, conditional
upon consummation of the proposed transactions.
STEP 2: Prior to the Closing, Newriders issued 1,000,000 shares of its
common stock to Teresi in consideration for the forgiveness of
certain indebtedness owed to Teresi.
STEP 3: (a) The payables of the Paisano Companies and PPI to Teresi in
the amount of $3,136,000 have been contributed by Teresi to
the capital of the Paisano Companies and PPI.
(b) Prior to Closing, PPI borrowed $7 million in cash from an
unrelated third party (the "$7 Million Third Party Note") and
paid such amount to Teresi as a distribution with respect to
his PPI stock. In addition, prior to the Closing, the Paisano
Companies and PPI will distribute certain excluded assets
with a fair market value of $949,068 to Teresi.
STEP 4: Teresi will transfer all of the shares of the Paisano Companies
stock, and part of the PPI stock, to Easyriders in exchange for
6,493,507 shares of Easyriders common stock and three notes, the
Easyriders Mirror Note, the Easyriders Subordinated Note and the
Easyriders Short-Term Subordinated Note. The consideration
received by Teresi will be adjusted upward or downward, on a
dollar for dollar basis, based on the amount by which the Paisano
Companies and PPI's working capital at the date of closing exceeds
or is less than $4,537,000.
STEP 5: Teresi will transfer his remaining shares of PPI to Easyriders Sub
II in exchange for a $15 million promissory note from Easyriders
Sub II (the "$15 million Easyriders Sub II Note").
STEP 6: Both Prather and Martin will transfer all of their interests in El
Paso to Easyriders in exchange for 2,000,000 shares of Easyriders
common stock. Both Prather and Martin each will receive one
million shares of Easyriders common stock. Newriders and
Easyriders will pay all expenses incurred by all parties in the
contribution of the El Paso interests to Easyriders.
<PAGE> 6
August 27, 1998
Page 6
STEP 7: Martin will transfer two notes, the Martin Note and the Martin Mirror
Note, and $5 million in cash to Easyriders in exchange for 4,036,797
shares of Easyriders common stock.
STEP 8: Nordstrom will receive 200,000 shares of Easyriders common stock for
services rendered in connection with the Proposed Transactions.
STEP 9: Easyriders Sub will merge with and into Newriders (the "Merger"),
pursuant to the laws of the State of Nevada, whereby the separate
existence of Easyriders Sub shall cease and Newriders will be the
surviving corporation. Pursuant to the Reorganization Agreement, all
of the issued and outstanding shares of Easyriders Sub common stock
shall be converted into the right to receive one share of Newriders
common stock. Each issued and outstanding share of Newriders common
stock not held by Easyriders (other than any dissenting shares) shall
be converted into the right to receive one half of one fully paid and
nonassessable share of Easyriders common stock. The shareholders of
Newriders will receive 6,170,918 shares of Easyriders common stock
which will be equal to 32.6 percent of Easyriders common stock that
will be issued and outstanding immediately after the transaction.
None of the Easyriders common stock to be issued will be held back or
placed in escrow. With the exception of the certain specified
individuals listed on page fourteen of the Form S-4 who agree to
cancel their options to purchase Newriders stock, all of the
outstanding Newriders options and warrants will be converted into
Easyriders options and warrants that entitle the holders of such
options and warrants to purchase the same number of shares of
Easyriders common stock at the same per share exercise price, as if
they had exercised immediately prior to the time of the Proposed
Transactions (i.e. the number of shares divided by 2 and the exercise
price times 2). No fractional shares will be issued in the
transaction, those shareholders or option holders who would otherwise
be entitled to a fractional share will be rounded up to the nearest
whole share.
The obligation of Newriders and Easyriders to consummate the
acquisition of the Paisano Companies and PPI is conditioned upon
stockholders of Newriders representing no more than 3% of the
outstanding shares of Newriders having exercised their right to
dissent to the Merger. Dissenting stockholders of Newriders will be
paid by Newriders.
STEP 10: Easyriders will contribute all of its interest in El Paso to
Newriders.
STEP 11: An unrelated third party will lend $22 million to Easyriders Sub II
(the "$22 Million Third Party Note"), and Easyriders Sub II will
transfer $15 million of the
<PAGE> 7
August 27, 1998
Page 7
proceeds to Teresi in payment of the $15 Million Easyriders Sub II
Note. Easyriders Sub II will merge with and into PPI with PPI being the
surviving entity. PPI will receive $7 million of the remaining proceeds
and assume the $22 Million Third Party Note. PPI will use the $7 million
to pay off the $7 Million Third Party Note.
It is believed that the Proposed Transactions will create an enterprise engaged
in a combined publishing, entertainment, apparel, accessory and restaurant
business, which will market services and products to persons who identify with
the "freedom of the road" lifestyle surrounding the American-made cruiser
motorcycle. Such persons, it is believed, comprise an indentifiable
international demographic group which is growing. The Proposed Transactions
should enhance the ability of Newriders, El Paso, the Paisano Companies and PPI
to become a supplier of choice of products and services to such persons as well
as allow for improvement in existing operations. The proposed transfer of the
El Paso interests from Easyriders to Newriders will allow Easyriders to operate
as a holding company.
REPRESENTATIONS
Transfer of Assets to Easyriders
In order to determine the federal income tax consequences of the proposed
transfer by Teresi of all of the stock of each of the Paisano Companies and
part of the stock of PPI to Easyriders in exchange for Easyriders common stock
and three notes, the following representations of fact were made to us by
Teresi in his representation letter dated July 9, 1998.
1. Teresi will receive Easyriders stock and other property approximately
equal to the fair market value of the stock of the Paisano Companies and
PPI transferred to Easyriders.
2. No stock or securities will be issued to Teresi for services rendered to
or for the benefit of Easyriders in connection with the proposed
transaction.
3. No stock or securities will be issued to Teresi for indebtedness of
Easyriders that is not evidenced by a security or for interest on
indebtedness of Easyriders which accrued on or after the beginning of the
holding period of the transfer for the debt.
4. Teresi will not retain any rights in the stock of the Paisano Companies or
PPI transferred to Easyriders.
5. None of the assets being transferred to Easyriders were received by Teresi
as part of a plan of liquidation of another corporation.
<PAGE> 8
August 27, 1998
Page 8
6. With the exception of the Easyriders Subordinated Note, the Easyriders
Mirror Note and the Easyriders Short-Term Subordinated Note, there is no
indebtedness between Easyriders and Teresi and there will be no
indebtedness created in favor of Teresi as a result of the transaction.
7. Teresi has no plan or intention to sell or otherwise dispose of any of the
stock of Easyriders to be received in the exchange.
8. None of the assets of the Paisano Companies or PPI will be leased back to
Teresi.
9. No liabilities of Teresi will be assumed by Easyriders in the transaction
and the stock of the Paisano Companies and PPI being transferred to
Easyriders will not be subject to any liabilities.
10. Teresi will pay his own expenses, if any, incurred in connection with the
proposed transaction.
11. Teresi is not under the jurisdiction of a court in a Title 11 or similar
case (within the meaning of Section 368(a)(3)(A)) and the stock or
securities received in the exchange will not be used to satisfy the
indebtedness of such debtor.
12. The transfer is not the result of the solicitation by a promoter, broker,
or investment house.
13. All exchanges will occur on the same date.
14. There will be no debt relating to the stock of the Paisano Companies or
PPI to be transferred that was incurred to acquire such stock.
15. The Easyriders stock to be issued will not be placed in escrow, and none
of the Easyriders stock will be issued later under a contingent stock
arrangement.
16. No accounts receivable or commissions due, are being transferred by Teresi
to Easyriders.
17. No licenses or leases, etc., of the Paisano Companies, PPI or Teresi will
be granted in exchange for stock or securities of Easyriders.
18. PPI intends that the $22 Million Easyriders Sub II Note will be repaid by
PPI solely with earnings of PPI.
<PAGE> 9
August 27, 1998
Page 9
19. PPI will have no C corporation earnings and profits and will likely have
undistributed accumulated adjustment account earnings as of the date of
closing ( , 1998).
In order to determine the federal income tax consequences of the proposed
transfer by Prather of their membership interests in El Paso to Easyriders in
exchange for Easyriders common stock, the following representations of fact
were made to us by Prather in their representation letter dated July 9, 1998.
1. Prather will receive Easyriders stock approximately equal to the fair
market value of the property transferred to Easyriders.
2. No stock or securities will be issued to Prather for services rendered to
or for the benefit of Easyriders in connection with the proposed
transaction.
3. No stock or securities will be issued to Prather for indebtedness of
Easyriders that is not evidenced by a security or for interest on
indebtedness of Easyriders which accrued on or after the beginning of the
holding period of the transferor for the debt.
4. Prather will not retain any rights in the property transferred to
Easyriders.
5. The liabilities of Prather to be assumed by Easyriders were incurred in
the ordinary course of business and are associated with the assets to be
transferred.
6. None of the assets to be transferred to Easyriders were received by
Prather as part of a plan of liquidation of another corporation.
7. There is no indebtedness between Easyriders and Prather and there will
be no indebtedness created in favor of Prather as a result of the
transaction.
8. Prather has no plan or intention to sell or otherwise dispose of any of
the stock of Easyriders to be received in the exchange.
9. None of the property to be transferred to Easyriders will be leased back
to Prather.
10. The adjusted basis and the fair market value of the property to be
transferred by Prather to Easyriders will, in each instance, be equal to
or exceed the sum of the liabilities to be assumed by Easyriders plus any
liabilities to which the transferred property are subject.
<PAGE> 10
August 27, 1998
Page 10
11. Prather is not under the jurisdiction of a court in a Title 11 or similar
case (within the meaning of Section 368(a)(3)(A)) and the stock or
securities received in the exchange will not be used to satisfy the
indebtedness of such debtor.
12. The value of the Easyriders stock received in exchange for accounts
receivable will be equal to the net value of the accounts transferred (i.e.,
the face amount of the accounts receivable previously included in income
less the amount of the reserve for bad debts).
13. The transfer is not the result of the solicitation by a promoter, broker, or
investment house.
14. All exchanges will occur on approximately the same date.
15. There will be no debt relating to the property to be transferred that was
incurred to acquire such property.
16. The Easyriders stock to be issued will not be placed in escrow, and none of
the Easyriders stock will be issued later under a contingent stock
arrangement.
17. No licenses or leases, etc. will be granted in exchange for stock or
securities of Easyriders.
In order to determine the federal income tax consequences of the proposed
transfer by Martin of his membership interests in El Paso, cash and two notes to
Easyriders in exchange for Easyriders common stock, the following
representations of fact were made to us by Martin in his representation letter
dated July 10, 1998.
1. Martin will receive Easyriders stock approximately equal to the fair market
value of the property transferred to Easyriders.
2. No stock or securities will be issued for services rendered to or for the
benefit of Easyriders in connection with the proposed transaction.
3. No stock or securities will be issued for indebtedness of Easyriders that is
not evidenced by a security or for interest on indebtedness of Easyriders
which accrued on or after the beginning of the holding period of the
transferor for the debt.
4. Martin will not retain any rights in the property transferred to Easyriders.
5. The liabilities of Martin to be assumed by Easyriders were incurred in the
ordinary course of business and are associated with the assets to be
transferred.
<PAGE> 11
August 27, 1998
Page 11
6. None of the assets to be transferred to Easyriders were received by Martin
as part of a plan of liquidation of another corporation.
7. Except for Martin notes to be created in the transaction, there is no
indebtedness between Easyriders and Martin and there will be no
indebtedness created in favor of Martin as a result of the transaction.
8. Martin has no plan or intention to sell or otherwise dispose of any of the
stock of Easyriders to be received in the exchange.
9. None of the property to be transferred to Easyriders will be leased back
to Martin, any other shareholder, or a related party.
10. The adjusted basis and the fair market value of the property to be
transferred by Martin to Easyriders will, in each instance, be equal to or
exceed the sum of the liabilities of Martin to be assumed by Easyriders
plus any liabilities to which the transferred property are subject.
11. Martin is not under the jurisdiction of a court in a Title 11 or similar
case (within the meaning of Section 368(a)(3)(A)) and the stock or
securities received in the exchange will not be used to satisfy the
indebtedness of such debtor.
12. The value of the Easyriders stock received in exchange for accounts
receivable will be equal to the net value of the accounts transferred
(i.e., the face amount of the accounts receivable previously included in
income less the amount of the reserve for bad debts).
13. The transfer is not the result of the solicitation by a promoter, broker,
or investment house.
14. All exchanges will occur on the same date.
15. There will be no debt relating to the property to be transferred that was
incurred to acquire such property.
16. The Easyriders stock to be issued will not be placed in escrow, and none
of the Easyriders stock will be issued later under a contingent stock
arrangement.
17. No licenses or leases, etc. will be granted in exchange for stock or
securities of Easyriders.
<PAGE> 12
August 27, 1998
Page 12
In order to determine the federal income tax consequences of the proposed
transfers to Easyriders by Teresi, Prather, and Martin, as described above, the
following representations of fact were made to use by Easyriders in its
representation letter dated July 10, 1998.
1. None of the compensation received by Teresi, Prather or Martin will be
separate consideration for, or allocable to, any of their shares of the
Paisano Companies, shares of PPI or any interest in El Paso; none of the
shares of Easyriders common stock received by any shareholder-employees
will be separate consideration for, or allocable to, any employment
agreement; and the compensation paid to any shareholder-employees will be
for services actually rendered and will be commensurate with amounts paid
to third parties bargaining at arm's-length for similar services.
2. Easyriders is not an investment company within the meaning of Section
351(e)(1) and Treas. Reg. Section 351-1(c)(1)(ii) (i.e., a corporation more
than 80 percent of the value of whose assets consist of money; stocks and
other equity interests in a corporation; evidence of indebtedness options,
forwards or futures contracts, notional principal contracts and
derivatives; foreign currency; interests in precious metals (unless used in
an active trade or business after the contribution); and/or interests in a
regulated investment company or a real estate investment trust, common
trust funds, and publicly-traded partnerships). In making the 80%
determination, stock and securities in any subsidiary corporation shall be
disregarded and the parent corporation shall be deemed to own its ratable
share of the subsidiary's assets, and a corporation shall be considered a
subsidiary if the parent owns 50% or more of the combined voting power of
all classes of stock entitled to vote, or 50% or more of the total value of
shares of all classes of stock outstanding.
3. Easyriders will not be a "personal service corporation" within the meaning
of Section 269A. A personal service corporation means a corporation the
principal activity of which is the performance of personal services and
such services are substantially performed by employee-owners.
4. Easyriders will report items which, but for the transfer would have
resulted in income or deduction to a transferor in a period subsequent to
the transfer and such items will constitute income or deductions to
Easyriders when received or paid by it.
5. With respect to the El Paso interests, the proceeds received in collection
of income items will be included as ordinary income in computing the
taxable income of Easyriders.
6. The transfers will occur under a plan agreed upon before the proposed
transactions in which the rights of the parties will be defined.
<PAGE> 13
August 27, 1998
Page 13
7. Easyriders will remain in existence and retain and use the property
transferred to it in a trade or business. There is no plan or intention by
Easyriders to dispose of the transferred property, other than in the
ordinary course of business operations, and other than the transfer of the
El Paso assets to Newriders.
8. Easyriders has no plan or intention to redeem or otherwise reacquire any
of its stock or indebtedness to be issued in the proposed transaction.
9. Taking into account any issuance of additional shares of Easyriders stock;
any issuance of stock for services; the exercise of any Easyriders stock
rights, warrants, or subscriptions; a public offering of Easyriders stock;
and the sale, exchange, transfer by gift, or other disposition of any of
the stock of Easyriders to be received in the exchange, Teresi together
with John Martin, William and Marna Prather and the public shareholders of
Newriders, will be in "control" of Easyriders within the meaning of
Section 368(c). For this purpose "control" means stock possessing at least
80% of the combined voting power of all voting stock and at least 80% of
the total number of shares of each other class of stock.
10. Easyriders intends that the $22 Million Easyriders Sub II Note will be
repaid by PPI solely with earnings from PPI.
Merger of Easyriders Sub with and into Newriders
In order to determine the federal income tax consequences of the merger of
Easyriders Sub with and into Newriders, with Newriders surviving, the following
representations of fact have been made to us by Newriders in its representation
letter dated July 9, 1998.
1. The fair market value of Easyriders voting stock received by each
shareholder of Newriders will be approximately equal to the fair market
value of the Newriders stock surrendered in the Merger.
2. There is no plan or intention by the shareholders of Newriders who own 5%
or more of the Newriders stock and, to the best of the knowledge of the
management of Newriders, there is no plan or intention on the part of the
remaining shareholders of Newriders to sell, exchange, or otherwise
dispose of the stock of Easyriders to be received in the Merger that would
reduce the Newriders shareholders' ownership of Easyriders stock to a
number of shares having a value, as of the date of the Merger, of less
than 50% of the value of all of the formerly outstanding stock of
Newriders as of the same date. For purposes of this representation, shares
of Newriders stock exchanged for cash or other property, or surrendered by
dissenters will be treated as outstanding Newriders stock on the date of
the Merger. Moreover, shares of Newriders stock and shares of Easyriders
stock held by
<PAGE> 14
August 27, 1998
Page 14
Newriders shareholders and otherwise sold, redeemed or disposed of prior or
subsequent to the Merger will be considered in making this representation.
3. There will be no fractional shares of Easyriders stock.
4. Following the Merger, Newriders will hold at least 90% of the fair market
value of its net assets and at least 70% of the fair market value of its
gross assets and at least 90% of the fair market value of Easyriders Sub's
net assets and at least 70% of the fair market value of Easyriders Sub's
gross assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by Newriders or Easyriders Sub to dissenters,
amounts paid by Newriders or Easyriders Sub to shareholders who receive
cash or other property, amounts used by Newriders or Easyriders Sub to pay
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by Newriders will be included as assets of
Newriders or Easyriders Sub, respectively, immediately prior to the Merger.
5. In the Merger, shares of the Newriders stock representing control of
Newriders, as defined in Section 368(e), will be exchanged solely for
Easyriders voting common stock. "Control" means stock possessing at least
80% of the combined voting power of all voting stock and at least 80% of
the total number of shares of each other class of stock. For purposes of
this representation, shares of Newriders stock exchanged for cash or other
property originating with Easyriders will be treated as outstanding
Newriders stock on the date of the Merger.
6. Following the Merger, Newriders will continue its historic business or use
a significant portion of its historic business assets in its business.
7. On the date of the Merger, the fair market value of the assets of
Newriders will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
8. Newriders is not an investment company within the meaning of Section
368(a)(2)(F)(iii) and (iv) (i.e., a regulated investment company, a
real estate investment trust, or a corporation 50 percent or more of the
value of whose total assets (excluding cash and cash equivalents) are
stock and securities and 80 percent or more of whose total assets are
assets held for investment). In making the 50% and 80% determinations,
stock and securities in any subsidiary corporation shall be disregarded
and the parent corporation shall be deemed to own its ratable share of the
subsidiary's assets, and a corporation shall be considered a subsidiary if
the parent owns 50% or more of the combined voting power of all classes of
stock entitled to vote, or 50% or more of the total value of shares of all
classes of stock outstanding.
<PAGE> 15
August 27, 1998
Page 15
9. There is no intercorporate indebtedness existing between Easyriders and
Newriders or between Easyriders Sub and Newriders that was issued,
acquired, or will be settled at a discount.
10. Newriders and Newriders' shareholders will each pay their own expenses, if
any, which are incurred in connection with the Merger.
11. Newriders is not under the jurisdiction of a court in a Title 11, or
similar case within the meaning of Section 368(a)(3)(A).
12. Newriders has no plan or intention to issue additional shares of its
stock that would result in Easyriders losing control of Newriders within
the Section 368(c).
13. Except for options that are being exchanged in the reorganization, at the
time of the Merger, Newriders will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to
which any person could acquire stock in Newriders that, if exercised or
converted, would affect Easyriders' acquisition and retention of control
of Newriders, as defined in Section 368(c).
14. None of the compensation received by any shareholder-employees of
Newriders will be separate consideration for, or allocable to, any of
their shares of Newriders common stock; none of the shares of Easyriders
common stock received by any shareholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
15. Easyriders does not own, nor has it owned during the past five years, any
shares of the stock of Newriders.
16. Easyriders will acquire Newriders common stock solely in exchange for
Easyriders common stock. For purposes of this representation, Easyriders
common stock redeemed for cash or other property furnished by Easyriders
will be considered as acquired by Easyriders. Further, no liabilities of
Newriders or Newriders shareholders will be assumed by Easyriders, nor
will any of the Newriders common stock be subject to any liabilities.
17. The proceeds from the sale of the Easyriders restaurant and apparel store
in Myrtle Beach, South Carolina, which was sold on July 18, 1998, will be
retained and used by Newriders in its continuing business.
<PAGE> 16
August 27, 1998
Page 16
18. The assets of the Easyriders restaurant and apparel store in Myrtle Beach,
South Carolina, which was sold on July 18, 1998 will represent less than
30% of the fair market value of Newriders' gross assets and less than 10%
of the fair market value of Newriders' net assets.
In order to determine the federal income tax consequences of the merger of
Easyriders Sub with and into Newriders, with Newriders surviving, the following
representations of fact have been made to us by Easyriders in its representation
letter dated July 10, 1998.
1. Easyriders has no plan or intention to liquidate Newriders; to merge
Newriders with or into another corporation; to sell or otherwise dispose
of the stock of Newriders except for transfers of such stock to
corporations controlled by Easyriders; or to cause Newriders to sell or
otherwise dispose of any of its assets or of any of the assets acquired
from Easyriders Sub, except for dispositions made in the ordinary course
of business or transfers of assets to a corporation controlled by
Newriders.
2. Easyriders has no plan or intention to reacquire any of its stock or
indebtedness issued in the Merger.
3. Easyriders and Easyriders Sub will each pay their own expenses, if any,
which are incurred in connection with the proposed Merger.
4. Prior to the Merger, Easyriders will be in control of Easyriders Sub
within the meaning of Section 368(c). For this purpose "control" means
stock possessing at least 80% of the combined voting power of all voting
stock and at least 80% of the total number of shares of each other class
of stock.
5. Easyriders Sub will have no liabilities assumed by Newriders, and will not
transfer to Newriders any assets subject to liabilities in the Merger.
6. Easyriders does not own, nor has it owned during the past five years, any
shares of the stock of Newriders.
7. Easyriders will acquire Newriders common stock solely in exchange for
Easyriders common stock. For purposes of this representation, Easyriders
common stock redeemed for cash or other property furnished by Easyriders
will be considered as acquired by Easyriders. Further, no liabilities of
Newriders or Newriders shareholders will be assumed by Easyriders, nor
will any of the Newriders common stock be subject to any liabilities.
8. None of the compensation received by any shareholder-employees of
Newriders, will be separate consideration for, or allocable to, any of
their Newriders common stock; none of the
<PAGE> 17
August 27, 1998
Page 17
shares of Easyriders common stock received by any shareholder-employees will
be separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
9. Easyriders Sub will not be an investment company within the meaning of
Section 368(a)(2)(F)(iii) and (iv)(i.e., a regulated investment company, a
real estate investment trust, or a corporation 50 percent or more of the
value of whose total assets (excluding cash and cash equivalents) are stock
and securities and 80 percent or more of whose total assets are assets held
for investment). In making the 50% and 80% determinations, stock and
securities in any subsidiary corporation shall be disregarded and the
parent corporation shall be deemed to own its ratable share of the
subsidiary's assets, and a corporation shall be considered a subsidiary if
the parent owns 50% or more of the combined voting power of all classes of
stock entitled to vote, or 50% or more of the total value of shares of all
classes of stock outstanding.
10. The fair market value of Easyriders voting stock received by each
shareholder of Newriders will be approximately equal to the fair market
value of the Newriders stock surrendered in the Merger.
11. There is no intercorporate indebtedness existing between Easyriders and
Newriders, between Easyriders Sub and Newriders, between Easyriders and the
Paisano Companies, between Easyriders and PPI or between Easyriders and El
Paso, that was issued, acquired, or will be settled at a discount.
In order to determine the federal income tax consequences of the merger of
Easyriders Sub II with and into PPI, with Newriders surviving, the following
representations of fact have been made to us by Easyriders in its
representation letter dated July 10, 1998.
1. As part of one overall plan described in Easyriders' Form S-4 filed with
the Securities and Exchange Commission (dated July 2, 1998), Easyriders Sub
II will merge with and into PPI pursuant to the laws of the State of
California.
2. The merger of Easyriders Sub II with and into PPI will be effectuated by
filing a Certificate of Merger with the California Secretary of State.
Transfer of El Paso Interests By Easyriders to Newriders
In order to determine the federal income tax consequences of the proposed
transfer of the El Paso interests received by Easyriders (from Martin and
Prather) to Newriders, the following
<PAGE> 18
August 27, 1998
Page 18
representations of fact were made to us by Newriders in its representation
letter dated July 9, 1998.
1. Taking into account any issuance of additional shares of Newriders stock;
any issuance of stock for services; the exercise of any Newriders stock
rights, warrants, or subscriptions; a public offering of Newriders stock;
and the sale, exchange, transfer by gift, or other disposition of any of
the stock of Newriders to be received in the exchange, Easyriders will be
in "control" of Newriders within the meaning of Section 368(c). For this
purpose "control" means stock possessing at least 80% of the combined
voting power of all voting stock and at least 80% of the total number of
shares of each other class of stock.
2. Newriders will remain in existence and retain and use the property
transferred to it in trade or business. There is no plan or intention by
Newriders to dispose of the transferred property other than in the normal
course of business operations.
3. There is no plan or intention on the part of Newriders to redeem or
otherwise reacquire any stock or indebtedness to be issued in the proposed
transaction.
4. Newriders is not an investment company within the meaning of Section
351(e)(1) and Treas. Reg. Section 1.351-1(c)(1)(ii)(i.e., a corporation
more than 80 percent of the value of whose assets consist of money; stocks
and other equity interests in a corporation; evidence of indebtedness
options, forwards or futures contracts, notional principal contracts and
derivatives; foreign currency; interests in precious metals (unless used in
an active trade or business after the contribution); and/or interests in a
regulated investment company or a real estate investment trust, common
trust funds, and publicly-traded partnerships). In making the 80%
determination, stock and securities in any subsidiary corporation shall be
disregarded and the parent corporation shall be deemed to own its ratable
share of the subsidiary's assets, and a corporation shall be considered a
subsidiary if the parent owns 50% or more of the combined voting power of
all classes of stock entitled to vote, or 50% or more of the total value of
shares of all classes of stock outstanding.
5. Newriders will not be a "personal service corporation" within the meaning
of Section 269A. A personal service corporation means a corporation the
principal activity of which is the performance of personal services and
such services are substantially performed by employee-owners.
6. Newriders will report items which, but for the transfer would have resulted
in income or deduction to a transferor in a period subsequent to the
transfer and such items will constitute income or deductions to Newriders
when received or paid by it.
<PAGE> 19
August 27, 1998
Page 19
7. The proceeds received in collection of income items will be included as
ordinary income in computing the taxable income of Newriders.
In order to determine the federal income tax consequences of the proposed
transfer of the El Paso interests received by Easyriders (from Martin and
Prather) to Newriders, the following representations of fact were made to us
by Easyriders in its representation letter dated July 10, 1998.
1. Newriders will not issue stock or securities to or for the benefit of
Easyriders in connection with the contribution to Newriders by Easyriders
of the El Paso assets received from Martin and Prather.
2. No stock or securities will be issued to Easyriders for services rendered
to or for the benefit of Newriders in connection with the proposed
transaction.
3. No stock or securities will be issued to Easyriders for indebtedness of
Newriders that is not evidenced by a security or for interest on
indebtedness of Newriders which accrued on or after the beginning of the
holding period of the transferor for the debt.
4. Easyriders will not retain any rights in the property transferred to
Newriders.
5. The liabilities of Easyriders to be assumed by Newriders were incurred in
the ordinary course of business and are associated with the assets to be
transferred.
6. None of the assets to be transferred to Newriders were received by
Easyriders as part of a plan of liquidation of another corporation.
7. There is no indebtedness between Newriders and Easyriders and there will
be no indebtedness created in favor of Easyriders as a result of the
transaction.
8. Easyriders has no plan or intention to sell or otherwise dispose of any of
the stock of Newriders to be received in the exchange.
9. None of the property to be transferred to Newriders will be leased back to
Easyriders or a related party.
10. The adjusted basis and the fair market value of the property to be
transferred by Easyriders to Newriders will, in each instance, be equal to
or exceed the sum of the liabilities to be assumed by Newriders plus any
liabilities to which the transferred property are subject.
<PAGE> 20
August 27, 1998
Page 20
11. Each of the parties to the transaction will pay its or his/her own
expenses, if any, incurred in connection with the proposed transaction,
except that Easyriders will pay all of the expenses associated with the
acquisition of El Paso.
12. Easyriders is not under the jurisdiction of a court in a Title 11 or
similar case (with the meaning of Section 368(a)(3)(A)) and the stock or
securities received in the exchange will not be used to satisfy the
indebtedness of such debtor.
13. The transfer is not the result of the solicitation by a promoter, broker,
or investment house.
14. All exchanges will occur on approximately the same date.
15. There will be no debt relating to the property to be transferred that was
incurred to acquire such property.
16. No licenses or leases, etc. will be granted in exchange for stock or
securities of Newriders.
17. The transfer will occur under a plan agreed upon before the transaction
in which the rights of the parties will be defined.
18. The transfer of the El Paso Interest will be effectuated by a simple
agreement between Newriders and Easyriders.
OPINION
Transfer of Assets to Easyriders
Based on the facts described herein and in the Documents, with respect to the
transfer of assets to Easyriders it is our opinion that:
1. Teresi, Prather, Martin, and the shareholders of Newriders (collectively
referred to as the "Transferors") should each be treated as transferors
for purposes of the control requirement of Section 351(a). Rev. Rul.
68-357, 1968-2 C.B. 144.
2. No gain or loss should be recognized by the Transferors upon the transfer
to Easyriders of the following: (i) the stock of the Paisano Companies
and part of the stock of PPI (Teresi), (ii) interests in El Paso (Martin
and Prather), and (iii) the Martin Note, Martin Mirror Note and cash
(Martin), in exchange solely for Easyriders common stock and the
assumption of liabilities, if any. Sections 351(a), 357(a) and 357(c).
<PAGE> 21
August 27, 1998
Page 21
3. Teresi should recognize gain in the proposed transaction, but not in
excess of the fair market value of the Easyriders Mirror Note, the
Easyriders Subordinate Note and the Easyriders Short-Term Subordinate
Note (aggregating a face amount of $13 million) received by Teresi in the
proposed transaction. Such gain will be capital gain provided the stock
of the Paisano Companies and the stock of PPI were capital assets in the
hands of Teresi at the time of the exchange. The capital gain will be
long-term provided Teresi's holding periods in his stock of the Paisano
Companies and PPI exceed eighteen months. No loss will be recognized to
Teresi. Section 351(b).
4. Martin and Prather should recognize gain in the proposed transaction, but
not in excess of the expenses paid by Newriders and Easyriders on behalf
of them, respectively.
5. Absent any election out of Section 453, Teresi should be entitled to
report any gain recognized on his exchange of all of the stock of the
Paisano Companies and part of the stock of PPI for the Easyriders Mirror
Note, the Easyriders Subordinate Note and the Easyriders Short-Term
Subordinate Note on the installment Mirror Note, the method in
accordance with Sections 453 and 453A.
6. No gain or loss should be recognized to Easyriders upon the receipt of
the property transferred to it by the Transferors solely in exchange for
its stock. Section 1032(a).
7. The transfer of PPI stock by Teresi to Easyriders Sub II in exchange for
the $15 Million Easyriders Sub II Note, followed by an unrelated third
party loan of $22 million to Easyriders Sub II, followed by Easyriders
Sub II transferring $15 million of the proceeds to Teresi in payment of
the $15 Easyriders Sub II Note, followed by the merger of Easyriders Sub
II with and into PPI with PPI assuming the $22 Million Third Party Note,
should be treated for federal income tax purposes as a transfer of $15
million by PPI to Teresi in redemption of a portion of the PPI stock held
by Teresi provided that the $15 million is paid solely with the earnings
of PPI. Rev. Rul. 78-250, 1978-1 C.B. 83.
8. The redemption by PPI of its stock held by Teresi should qualify as a
substantially disproportionate redemption within the meaning of Section
302(b)(2). The $15 million distributed should be treated as a
distribution in full payment in exchange for the PPI stock redeemed as
provided in Section 302(a).
9. El Paso should terminate upon the transfer to Easyriders of Martin's and
Prather's interests in El Paso, Section 708(b)(1)(A).
10. The basis of the Easyriders common stock to be received by Teresi in the
proposed transaction should be the same as the basis of the stock of the
Paisano Companies and PPI transferred by
<PAGE> 22
August 27, 1998
Page 22
Teresi to Easyriders, decreased by the sum of (a) the fair market value of
any property received (the Easyriders Mirror Note, the Easyriders
Subordinated Note, and the Easyriders Short-Term Subordinated Note) and (b)
the amount of money received, if any, and increased by the amount of gain
recognized to Teresi in the proposed transaction. Section 358 (a) and (b)
and Treas. Reg. Section 1.358-1.
11. The basis of the Easyriders common stock to be received by Prather in the
proposed transaction should be the same as the basis of Prather's respective
interest in El Paso transferred to Easyriders, decreased by (a) Prather's
respective shares of El Paso's liabilities assumed by Easyriders, the
release of which is treated as a payment of money to the Prathers under
Sections 752(d) and 358(d), and (b) the fair market value of the property
deemed received in payment of expenses. This deemed distribution of money
and property will result in income to the Prathers to the extent that the
amount of money and fair market value of the property exceeds the adjusted
basis of their interests in El Paso immediately before the distribution.
Section 731(a). To the extent that any deemed cash or property distribution
exceeds Prather's basis in their El Paso interest, capital gains should be
recognized to Prather, provided the El Paso interest is a capital asset in
the hands of Prather. The capital gain recognized by Prather will be
long-term provided Prather's holding period in their El Paso interests
exceed eighteen months.
12. The basis of the Easyriders common stock to be received by Martin in the
proposed transaction should be the same as the basis of Martin's respective
interest in El Paso transferred to Easyriders, Martin's basis in the Martin
Note and Martin Mirror Note transferred to Easyriders and $5 million in cash
transferred to Easyriders, decreased by (a) Martin's respective share of El
Paso's liabilities assumed by Easyriders, the release of which is treated as
a payment of money to Martin under Sections 752(d) and 358(d), and (b) the
fair market value of the property deemed received in payment of expenses.
This deemed distribution of money and property will result in income to the
Martin to the extent the money and property deemed distributed to Martin and
the fair market value of the property exceeds the adjusted basis of his
interest in El Paso immediately before the distribution. Section 731(a). To
the extent that any deemed cash or property distribution exceeds Martin's
basis in his El Paso interest, capital gains should be recognized to Martin,
provided the El Paso interest is a capital asset in the hands of Martin. The
capital gain recognized by Martin will be long-term provided Martin's
holding period in his El Paso interest exceeds eighteen months.
13. Easyriders should recognize no gain or loss on its receipt of the El Paso
interests transferred to Easyriders by El Paso solely in exchange for
Easyriders stock.
14. El Paso will terminate upon the transfer to Easyriders of Prather's and
Martin's respective El Paso interests. Section 708(b)(1)(A) and Rev. Rul.
84-111, 1984-2 C.B. 88, Situation 3.
<PAGE> 23
August 27, 1998
Page 23
Moreover, Easyriders should recognize no gain or loss on its receipt of the
assets of El Paso upon the dissolution and liquidation of El Paso. Section
1032.
15. The basis of the stock of the Paisano Companies and PPI to be transferred to
Easyriders should be the same as the basis of such property in the hands of
Teresi immediately before the transfer, increased by the amount of gain
recognized to Teresi in the proposed transaction, (but excluding any gain
recognized by Teresi with respect to the redemption of his shares in PPI for
$15 million, and the gain, if any, as a result of the distribution of $7
million as described in Step 3 above.) Section 362(a).
16. Easyriders' basis in the assets of El Paso received upon El Paso's
dissolution and liquidation should equal the total basis of Prather's and
Martin's interests in El Paso, increased by the amount of gain recognized to
Prather in the proposed transaction. The total basis should be allocated in
accordance with Section 732(c). Section 732(b). The basis of the Martin Note
and Martin Mirror Note to be transferred to Easyriders should be the same as
the basis of such property in the hands of Martin immediately before the
transfer. Section 362(a).
17. The holding period of the Easyriders stock to be received by Teresi should
include the period during which it held the stock of the Paisano Companies
that are to be transferred to Easyriders, provided that the stock of the
Paisano Companies to be transferred were capital assets on the date of the
exchange. Section 1223(1).
18. Prather and Martin should have a holding period in their Easyriders stock
received in the exchange for their respective El Paso interests which
includes the holding period for the El Paso interests transferred, except
that the holding period of the Easyriders stock that was received by Prather
and Martin in exchange for their interests in Section 751 assets of El Paso
that are neither capital assets nor Section 1231 assets, begins on the day
following the date of exchange. Section 1231(1).
19. Easyriders' holding period in the assets it received upon the dissolution
and liquidation of El Paso should include El Paso's holding period in the
assets. Section 1223(2) and Rev. Rul. 84-111, 1984-2 C.B. 88, Situation 3.
20. The holding period of the stock of the Paisano Companies and PPI to be
transferred to Easyriders in the proposed transaction should include the
period during which the stock of the Paisano Companies and PPI transferred
were held by Teresi. Section 1223(2).
21. The basis of the Easyriders common stock to be received by Nordstrom in the
proposed transaction should be equal to the fair market value on the date of
receipt of the stock. Section 358(a)(2).
<PAGE> 24
August 27, 1998
Pate 24
22. Nordstrom will recognize taxable income in the amount of the fair market
value on the date of receipt of the Easyriders stock, received for services
rendered in connection with the Proposed Transactions. Section 83.
Merger of Easyriders Sub with and Into Newriders
Based on the facts stated herein and in the Documents, with respect to the
merger of Easyriders Sub with and into Newriders, it is our opinion that:
23. Provided that the Merger is a statutory merger under applicable Nevada law
and since (a) after the Merger, Newriders will hold substantially all of
its properties and substantially all of the properties of Easyriders Sub
and (b) in the Merger, the Newriders shareholders will exchange an amount
of stock constituting control of Newriders solely for Easyriders voting
stock, the Merger should constitute a reorganization within the meaning of
Section 368(a)(1)(A). The reorganization should not be disqualified by
reason of the fact that common stock of Easyriders is used in the
transaction by reason of the application of Section 368(a)(2)(E). For
purposes of this opinion, "substantially all" means at lease 90 percent of
the fair market value of the net assets and at least 70 percent of the fair
market value of the gross assets of each of Newriders and Easyriders Sub.
Newriders, Easyriders Sub and Easyriders should each be "a party to a
reorganization" within the meaning of Section 368(b).
24. No gain or loss should be recognized by Newriders on the receipt of the
assets of Easyriders Sub in exchange for Newriders common stock. Section
362(a).
25. No gain or loss should be recognized by Easyriders Sub on the transfer of
its assets to Newriders in exchange for Newriders common stock. Section
361(a).
26. The basis of the assets of Easyriders Sub to be received by Newriders
should be the same as the basis of those assets in the hands of Easyriders
Sub immediately before the exchange. Section 362(b).
27. The holding periods of assets to be received by Newriders should include
the period during which such assets were held by Easyriders Sub. Section
1223(2).
28. No gain or loss should be recognized by Easyriders upon the exchange of its
Easyriders Sub stock solely for Newriders common stock. Section 354(a)(1).
29. As the Merger qualifies as both a reverse triangular merger under Section
368(a)(2)(E) and as a stock acquisition under Section 368(a)(1)(B)
Easyriders' basis in its Newriders stock is
<PAGE> 25
August 27, 1998
Page 25
based either on Newriders' net asset basis or on the aggregate basis of
the Newriders stock surrendered in the transaction (as if the transaction
were a reorganization under Section 368(a)(1)(B)). Reg. Section
1.358-6(c)(2)(ii).
30. No gain or loss should be recognized by Newriders' shareholders upon the
exchange of their Newriders common stock solely for Easyriders common
stock. Section 354(a)(1).
31. The basis of the Easyriders common stock to be received by the Newriders
shareholders should be the same as the basis of the Newriders common stock
surrendered in the exchange therefor. Section 358(a).
32. The holding period of the Easyriders common stock in the hands of the
Newriders shareholders should include the holding period of the Newriders
common stock surrendered in exchange therefor, provided that Newriders
common stock was held as a capital asset on the date of exchange. Section
1223(1).
33. Any Newriders shareholder who dissents to the Merger and received cash for
his Newriders stock should treat the cash as a distribution in redemption
of his/her Newriders stock subject to the provisions and limitations of
Section 302.
34. Pursuant to Rev. Rul. 98-10, I.R.B. 1998-10, 11 no gain or loss should be
recognized to the Newriders option and warrant holders upon the conversion
of such options and warrants into Easyriders options and warrants pursuant
to the Reorganization Agreement.
Transfer of Interest in El Paso to Newriders
35. For federal income tax purposes, the transfer of the El Paso interests by
Easyrider to Newriders should be treated as a transfer of El Paso assets
by Easyriders to Newriders. Section 708(b)(1)(B), Rev. Rul. 84-111, 1984-2
C.B. 88, Situation 3.
36. Easyriders will recognize no gain or loss upon the transfer to Newriders
of the El Paso assets in constructive exchange for Newriders stock and the
assumption of liabilities, if any. Section 351(a), Rev. Rul. 64-155,
1964-1 C.B. 138 and Rev. Rul. 77-449, 1977-2 C.B. 110.
37. Newriders should recognize no gain or loss upon its receipt of the assets
and liabilities of El Paso in constructive exchange of Newriders stock.
Section 1032(a).
38. The basis of the assets of El Paso to be transferred to Newriders should
be the same as the basis of such assets in the hands of Easyriders
immediately before the transfer. Section 362(a).
<PAGE> 26
August 27, 1998
Page 26
39. The basis of the Newriders stock held by Easyriders will be increased by
the basis of the assets of El Paso transferred by Easyriders to Newriders,
less the amount of liabilities to be assumed, if any, plus the amount of
the liabilities to which the assets may be subject, if any, Section 358(a).
40. Newriders' holding period in the assets of El Paso it receives from
Easyriders should, in each instance, include the period Easyriders held
such assets. Section 1223(2).
CONCLUSION
This opinion is based solely upon:
1. the representations, information, documents, and facts that we have
included or referenced in this opinion letter;
2. our assumption (without independent verification) that all of the
representations and all of the originals, copies, and signatures of
documents reviewed by us are accurate, true, and authentic;
3. our assumption (without independent verification) that there will be
timely execution and delivery of and performance as required by the
representations and documents;
4. the understanding that only the specific Federal income tax issues and tax
consequences opined upon herein are covered by this tax opinion, and no
other federal, state, or local taxes of any kind are addressed;
5. the law, regulations, cases, rulings, and other tax authority in effect as
of the date of this letter. If there are any significant changes of the
foregoing tax authorities (for which we shall have no responsibility to
advise the Transferors), such changes may result in our opinion being
rendered invalid or necessitate (upon the Transferors' request) a
reconsideration of the opinion;
6. the Transferors' understanding that this opinion is not binding on the IRS
or the courts and should not be considered a representation, warranty, or
guarantee that the IRS or the courts will concur with our opinion;
7. the Transferors' understanding that this opinion letter is solely for the
Transferors information and benefit, is limited to the described
transaction, and may not be relied upon,
<PAGE> 27
August 27, 1998
Page 27
distributed, disclosed, made available to, or copied by anyone, without
prior written consent or as described herein; and
8. the Transferors' understanding that our opinion is limited to the specific
federal income tax consequences contained in paragraphs 1 through 40 above.
Sincerely yours,
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
<PAGE> 1
EXHIBIT 10.1.27
AGREEMENT FOR EXCHANGE OF CONVERSION RIGHTS
___________________________________________________________ ("Investor")
presently holds a convertible note, convertible debenture, or other security
convertible into a number of shares (which may be based on a formula) of
Newriders, Inc. common stock (the "Newriders Convertible Security").
The Investor is aware that there is presently proposed a reorganization
transaction (the "Reorganization") which, if consummated, will result in
Newriders, Inc., Paisano Publications, Inc., certain corporations affiliated
with Paisano Publications, Inc. and M & B Restaurants, L.C. becoming wholly
owned subsidiaries of Easyriders, Inc. Under the Reorganization, as presently
proposed, holders of Newriders, Inc. common stock will receive one share of
Easyriders, Inc. common stock for each two shares of Newriders, Inc. common
stock held by them (the "Exchange Ratio") upon consummation of the
Reorganization.
Conditional upon consummation of the Reorganization, the parties hereby
agree that the conversion rights associated with the Newriders Convertible
Security held by the Investor shall hereby be modified to make the Newriders
Convertible Security convertible into shares of Easyriders, Inc. common stock,
instead of Newriders, Inc. common stock. The conversion terms shall be adjusted
to reflect the Exchange Ratio referred to above, with the result that upon
conversion, the Investor will only receive one share of Easyriders, Inc. common
stock for each two shares of Newriders, Inc. common stock that the Investor
would have received had the Reorganization not been consummated. Any conversion
formula applicable to the Newriders Convertible Security shall be based upon
market values of Easyriders, Inc. common stock, not Newriders, Inc. common
stock.
In the event that the Exchange Ratio to be used in the Reorganization
hereafter changes for any reason, the undersigned hereby agrees that a further
appropriate adjustment shall be made to reflect any change hereafter made in
the Exchange Ratio.
DATED ____________, 1998.
NEWRIDERS, INC. INVESTOR:
By: By:
----------------------------- ----------------------------
Its: Its:
------------------------- ------------------------
EASYRIDERS, INC.
By:
-----------------------------
Its:
-------------------------
<PAGE> 1
EXHIBIT 10.3.1
Information marked with "*****" has been omitted from the public filing and
filed separately with the Commission pursuant to a request for confidential
treatment filed by Easyriders, Inc.
CURTIS CIRCULATION COMPANY
DISTRIBUTION AGREEMENT
DATED APRIL 1, 1987
Between Curtis Circulation Company, 433 Hackensack Avenue, Hackensack, New
Jersey 07601 (hereinafter called "Curtis") and Paisano Publications, Inc.,
28210 Dorothy Drive, Agoura Hills, California 91301 (hereinafter called
"Publisher").
1. Curtis shall be the exclusive distributor in the United States and
Canada of the English language publications published, under this agreement, by
Publisher, its subsidiaries or affiliates at any time during the term of this
agreement, (hereinafter called "Publications").
In all other countries of the world where Publisher can give Curtis
such rights, provided Publisher and Curtis mutually agree to all terms (e.g.
brokerage, advance, settlement dates and cover price) and said specific terms
of each country are documented and attached hereto, as they are agreed upon,
Curtis shall also be exclusive distributors of the English language
publications published by Publisher under this agreement in said countries.
Curtis's distribution shall be exclusive under the terms of this
agreement except that the publisher may solicit and fill orders to retailers
(not serviced by wholesalers or Curtis), single copy orders, as well as sell
copies to subscribers.
2. The Publications to be distributed under this agreement, the issues
thereof to be so distributed and the frequency of Publication are listed on
Attachment A.
3. Publisher warrants and represents to Curtis the following:
(a) Publisher is the owner of (i) each of the titles to the
Publications covered by this distribution agreement, (ii) the logos and/or
(iii) trademarks to be used in connection with such Publications and there are
no liens or encumbrances on those titles, logos and trademarks;
(b) Publisher has the ability and authority to deliver to Curtis
without liens or encumbrances, sufficient copies of each issue of the
Publications covered by this
-1-
<PAGE> 2
agreement in salable condition to comply with the terms contained herein;
(c) Publisher has the full right, power and authority to enter into
this agreement and neither the execution or delivery of this agreement nor the
consummation of the transactions contemplated by this agreement shall
constitute or result in a breach of any agreement to which the Publisher is a
party.
(d) Upon completion and delivery of each issue of each Publication
covered by this agreement, Publisher will own or control to the fullest extent
permitted by applicable law all rights of whatsoever kind and character in and
to: (i) the title of the Publication, (ii) its logo, (iii) trademark, (iv)
copyright for each issue and (v) the material contained in each issue, without
any mortgages, liens or encumbrances of any kind and without rights being in
other persons not party hereto;
(e) Upon completion and delivery of each issue of the publications
covered by this agreement, nothing contained in each of such issues will be
grounds for an action either to prevent distribution thereof or for damages by
reason of the fact that the material contained therein is libelous, slanderous,
obscene, invades any right of privacy, a violation of any copyright or other
personal or property rights or for any other reason whatsoever; and
(f) Publisher will regularly issue each issue of the Publications
covered by this agreement during the term of this agreement and any renewal
thereof and will cause its printer(s) to send to Curtis written notice
confirming that all copies of the respective issues of each Publication have
been printed and shipped to Curtis's wholesalers and/or retailers ("customers")
in accordance with the galleys prepared by Curtis pursuant to paragraph 7
(hereinafter such notice shall be referred to as "Notice of Completion of
Shipment").
4. If Publisher desires to change the frequency of publishing issues of
any Publications, it shall first obtain the consent of Curtis at lest 60 days
before the proposed shipping date of any affected issue. Publisher will supply
to Curtis a schedule of shipping and on-sale for each issue of the Publication
at least 6 (six) months in advance of the on-sale date and at such times
thereafter as requested.
5. The colophon of the Curtis Circulation Company shall be printed on
the cover of each magazine distributed by Curtis hereunder. The publication's
code number assigned by Curtis shall also appear on each cover. The print order
for distribution hereunder will be mutually agreed upon by
-2-
<PAGE> 3
Curtis and Publisher. Publisher hereby authorizes Curtis to adjust claims made
by any of Curtis's customers for delivery shortages or damages to copies of the
issues of the Publications upon proper claims being received by Curtis.
6. Publisher shall be responsible for shipping and traffic costs
(including, without limitation, import and other duties) incurred to ship
copies of the Publications to all customers of Curtis located throughout the
world.
7. Individual shipments to Curtis's customers shall be specified on a
galley which, with the Publisher's cooperation, Curtis shall supply to the
Publisher sufficiently in advance so that shipments can be prepared and shipped
to arrive at customers' locations approximately 10 (ten) days prior to the
Publications' on-sale dates. Any cost incurred for reshipping copies at
Publisher's request while a Publication is on sale will be borne by Publisher.
All copies of Publication shall be fully returnable. Publisher will accept
whole copies, front covers, headings, Curtis's certification or customers'
affidavit statements as the basis for the adjustment of unsold copies covered
by such acceptance. Should Publisher require whole copy returns, notice of the
quantities and full return address must be supplied to Curtis at least 15
(fifteen) days prior to off-sale date. Curtis will use its best efforts to
comply with Publisher's request for whole copy returns, for which Publisher
shall pay Curtis the actual charge made by its customers, and pay all freight,
shipping and other charges incurred by Curtis for Curtis's agents in connection
therewith. Publisher shall bear the risk of loss for all copies of Publications
until the time they are received by Curtis's customers and during any time they
are being returned or reshipped at Publisher's instructions. Publisher shall
keep all returned whole copies from entering the stream of commerce for at
least 180 days after off-sale date, except to fill subscriptions and mail
order requests, or such other sale as is mutually agreed upon.
8. Publisher authorizes Curtis to offer on Publisher's behalf, a Retail
Display Allowance ("RDA") to any retailer which engages in the sale of
Publications and agrees to be bound by the terms of Publisher's RDA program.
Publisher further warrants that it will give notice at least once a year to
retailers of the availability of this allowance. Publisher hereby authorizes
Curtis to charge against the account of Publisher, Curtis's expense for
administering this plan and also the Retail Display Allowance listed in
Attachment C of the cover price of each copy sold of Publications to the extent
that such Retail Display Allowance shall become payable by Curtis.
9. Publisher shall pay Curtis for its distribution service ***** of cover
price in the United States and Canada of
-3-
<PAGE> 4
each copy of each issue of any Publication sold through primary wholesalers
(the "distribution fee"). Curtis's distribution fee for sale through Curtis's
Specialty Sales Operation (sales to retail accounts and secondary wholesalers)
will be the difference between the amount per copy remitted to Publisher for
sales to primary wholesalers and the price per copy charged accounts serviced
by the Specialty Sales Operation, as provided on Attachment A. Curtis's
distribution fee on sold copies in countries other than the United States and
Canada will be mutually agreed to on a country by country basis.
10. For all copies distributed in certain wholesaler areas as listed on
Attachment "B" and other such areas as may be so classified from time to time by
Curtis, or to wholesalers which Publisher presently pays subsidies or grants
discounts of any kind, Curtis may bill Publisher and Publisher will pay to
Curtis the greater of (a) such additional amounts per copy as shown on the
attachment hereto or (b) the amount(s) presently paid by Publisher. Curtis will
attempt to limit areas and amounts to those specified in Attachment "B".
Payment to Publisher for copies of Publications sold other than in
the United States will be paid by Curtis to Publisher in United States funds at
the exchange rates Curtis is charged by its banks. Distribution fees will be
the agreed upon percentage of cover price per country and paid at the same
exchange rate.
11. Curtis shall advance to Publisher the following amounts at the
following times with respect to each issue of each Publication distributed
hereunder:
(a) FIRST ADVANCE: ***** of gross billing plus transportation paid 10
days after receipt of completion of shipment notice for all publications other
than the calendar, the advance on which will be 30% of gross billings plus
transportation.
(b) SECOND ADVANCE: ***** of Curtis's ENS less any previous
advance(s) and Curtis's distribution fee paid 30 days after on-sale date.
(c) THIRD ADVANCE: ***** of Curtis's ENS less any previous advance(s)
and Curtis's distribution fee paid 60 days after off-sale date.
(d) Payment for all copies sold in countries other than the United
States and Canada, will be mutually agreed to on a country by country basis.
12. (a) Final Settlement for each issue of each Publication distributed
hereunder shall be made 120 days after off-sale date except for copies sold in
countries
-4-
<PAGE> 5
other than the United States and Canada, for these sales the final settlement
date will be mutually agreed to. Publisher agrees to accept returns thereafter
until 360 days after the off-sale date and hereby authorizes Curtis to charge
such returns against any other open or subsequent issues of Publications.
(b) The balance due to Publisher, or overadvances due to Curtis, as
the case may be, as of Final Settlement, shall be determined by multiplying the
price per copy charged by Curtis to its customers by the number of copies sold
and not returned and subtracting therefrom to the extent same have not been
previously paid, (i) the fees of Curtis for distribution, (ii) all other costs,
expenses and charges for which Publisher is responsible under the terms of this
agreement, and (iii) all other costs, expenses, and charges incurred by Curtis
on behalf of Publisher.
(c) Publisher's suggested price per copy to Curtis's customers will
be the cover price less those discounts as described on Attachment A and B and
other attachments (or as otherwise provided by Paragraph 10 hereof). Any
exceptions shall be mutually agreed upon.
(d) (i) The fees of Curtis for distribution, (ii) all other costs,
expenses and charges for which Publisher is responsible under the terms of this
agreement (e.g. reship allowances, special discounts and return handling
allowances, RDA Administration, RDA audits, shortages) and (iii) all other
costs, expenses and charges incurred by Curtis on behalf of Publisher, (e.g.
RDA payments) may be deducted from any advances or payments due Publisher on
any issue of any Publication distributed hereunder.
(e) The Final Settlement for each issue of each Publication shall be
shown by a written statement prepared by Curtis, setting forth the totals of
all items debited and credited and the resultant balance and Publisher agrees
to accept such statement as an account stated and the items therein enumerated
as true and correct, except as to any specific item or items to which Publisher
may object in writing within 60 (sixty) days from the date of the mailing of
such statements.
13. In the event a customer of Curtis shall take advantage of any federal
or state insolvency statute or shall cease its business operation with the
effect that such customer shall not return its unsold copies of the
Publication(s), Curtis shall use the average net sale percentage of the
Publication(s) as reported by such retailer, distributor or customer for the 12
(twelve) months (or lesser period if applicable) prior to those months for
which such retailer, wholesaler or customer shall not have submitted unsold
copies of the Publication(s). This average
-5-
<PAGE> 6
shall be used in determining and computing the net sales of the Publication(s)
shipped to such retailer, wholesaler or customer for said months.
14. If for any reason publisher is in an overadvanced position at any
time on any title, based on actual returns, Curtis will notify publisher in
writing, publisher will then have two options: (i) To pay Curtis amounts
overadvanced within 10 days. (ii) To pay six equal monthly payments on the
existing overadvance plus 1% per month interest on the unpaid balance (not to
exceed $150,000 in the aggregate). If publisher is in breach of the preceding
provisions, Curtis may at its option, deduct any amount from any advances or
settlements on any titles distributed by Curtis for publisher, up to the
amount of the overadvance. Any overadvance must be paid prior to the
termination date of the agreement.
If any error in payment is made at any time to you by Curtis or by
you to Curtis and that results ultimately in any overpayment, you and Curtis
mutually agree to verify and adjust such overpayment within 30 days of receipt
of written notice of such overpayment setting forth the calculation, regardless
if this agreement has been terminated.
15. Publisher hereby authorizes Curtis to administer all Publisher
requests for the Audit Bureau of Circulation reports. No charge will be made
for the State Circulation analyses for the Publication(s) or Audit Bureau of
Circulation county reports.
16. At no cost to Publisher, Curtis shall give such space as it deems
reasonable in its house magazine and/or bulletins for the promotion of the
Publications. However, the cost of all special promotions, authorized by
Publisher shall be borne by Publisher. Publisher agrees that in all trade press
advertising pertaining to single copy circulation, it will include a phrase
substantially as follows: "Exclusively distributed by Curtis Circulation
Company, Hackensack, New Jersey".
17. Publisher shall indemnify and hold harmless Curtis, its parent,
subsidiary or affiliated corporations, their officers, agents, representatives
or any of its customers, wholesalers, and their respective retailers against
any loss, damages, fines, judgments, expenditures or claims including counsel
fees, legal expenses and other costs, actually incurred by them or any of them
in connection with the distribution of any Publications, or any issue thereof,
or any promotional material provided by Publisher, or in defending or settling
any claim, civil action or criminal prosecution against them or any of them
arising out of the use of the title of said Publication or the contents and
printed matter.
-6-
<PAGE> 7
including advertisements, pictures or photographs contained in the covers or any
page of said Publication, or in any supplementary or other proceeding or action.
Should any such event occur or reasonably be anticipated, Curtis may retain a
reasonable reserve from any monies payable to Publisher hereunder as security
for this indemnity provision. Publisher will name Curtis as an additional named
insured under any publisher's liability insurance carried by Publisher and will
deliver a certificate of such insurance to Curtis.
18. (a) Curtis shall not take title to any of the copies of any of the
issues of any of the Publications covered by this agreement and, for all
purposes covered by this agreement, the parties mutually understand and agree
that Curtis is acting as an agent for the sale of such copies of such issues of
such Publications on behalf of Publisher as its principal, except as specified
at subparagraph (b) of this paragraph.
(b) All monies paid by, or due and owing from Curtis's customers for
copies of Publications not returned to Curtis, are and shall at all times belong
to and remain the absolute property of Curtis, it being distinctly understood
and agreed by the parties that the obligation of Curtis to make any remittances
to Publisher under the terms of this agreement is that of the obligation of a
debtor to a creditor only. Curtis alone shall bill its customers for such monies
and Curtis alone shall have the right to demand payment or institute legal
proceedings for collection thereof.
(c) Notwithstanding anything to the contrary contained in this
agreement (except as provided for in paragraph 14) Curtis shall have the right
to withhold all or any portion of any advance payments in order to protect
itself from a potentially overpaid position, providing it has reasonable
grounds to anticipate that such overpaid position may ultimately exist.
19. The term of this agreement shall be 2 (two) years from the latest
off-sale date of the title(s) listed on Attachment A. This agreement shall be
renewable for additional 3 (three) year terms automatically, unless advance
written notice is given by either party to the other at least 90 (ninety) days
prior to the commencement of the following renewable term.
Curtis shall be under no obligation to distribute the Publications
in any jurisdiction where any claims, litigations, prosecutions, or proceedings
are pending or threatened against the Publications or any seller thereof, or
refusal of any customer, direct or indirect, to offer the Publications for sale.
-7-
<PAGE> 8
20. Publisher and Curtis have mutally agreed upon an assignment form
attached hereto.
21. Curtis shall have the unqualified right to refuse to distribute any
titles published by Publisher not listed in Attachment A.
22. For purposes of this agreement, the "On-Sale" date shall mean the
date a Publication is placed on sale to the public and the "Off-Sale" date
shall mean the date that Publisher and Curtis agree that a Publication should
be removed from such sale.
23. Notwithstanding anything contained in this agreement, Curtis shall
not be obligated to make any payments hereunder on copies of each issue of the
Publication that are not printed and shipped by Publisher's printer(s) to
Curtis's customers in accordance with the galleys prepared by Curtis pursuant
to Paragraph 7 on the approximate date provided in the Notice of Completion of
Shipment sent to Curtis by Publisher's printer(s).
24. This agreement sets forth the understanding of the parties with
respect to the distribution of Publications and may not be amended except in
writing signed by the parties and shall be binding upon the parties, their
respective successors and assignees; and, in particular, this agreement shall
be binding for its terms upon any transferees, successors or assigns of
Publisher who shall publish any of the Publications, it being the intent of the
parties that this agreement run with and apply to all Publications. This
agreement is to be signed in two counterparts, both of which shall be deemed to
be originals.
(PUBLISHER) CURTIS CIRCULATION COMPANY
BY: /s/ JOSEPH TERESI BY: [SIG]
--------------------------- -------------------------------
TITLE: Pres. TITLE: EXEC. VP
------------------------ ----------------------------
DATE: 4/3/87 DATE: 4/8/87
------------------------- -----------------------------
-8-
<PAGE> 9
ATTACHMENT A
<TABLE>
FREQUENCY INITIAL ISSUE
OF TO BE COVER PRICE PUBLISHER'S
TITLES PUBLICATION DISTRIBUTED U.S. CANADA SUGGESTED DISCOUNT
- ------ ----------- --------------- -------------- ---------------------------
(Approximately)
<S> <C> <C> <C> <C> <C>
EASYRIDERS X 12 400 M $2.95 $3.95 1. Primary Wholesalers
(those who receive the
IN THE WIND X 4 200 M $3.50 $3.95 full line of Curtis
titles) discount is
AMERICAN RODDER X 6 125 M $2.50 $2.95 ***% off cover price.
WOMANS ENTERPRISE X 6 150 M $2.50 $2.95 2. Secondary Wholesaler
(those who do not
BIKER LIFESTYLE X 6 125 M $2.50 $2.95 receive the full line
of Curtis titles)
TATTOO X 4 125 M $3.50 $3.95 discount is ***% off
cover price.
EASYRIDERS CALENDAR X 1 160 M $2.95 $3.95
3. Individual Retailers
discount is ***% off
cover price.
</TABLE>
<PAGE> 10
ATTACHMENT B
CURTIS CIRCULATION COMPANY
DESIGNATED WHOLESALER AREAS
<TABLE>
<CAPTION>
DISCOUNT OFF PER COPY RETURN
NET BILLING TO HANDLING
WHOLESALERS WHOLESALER ALLOWANCE
----------- -------------- ---------------
<S> <C> <C>
North Bergen, New Jersey @ 4/8/87 J.T. 7.0% @ 4/8/87 J.T. 1c @ 4/8/87 J.T.
Brooklyn, New York 6.0% 1c
Melville, New York 7.0% 1c
Edison, New Jersey 7.0% 1c
Passaic, New Jersey 6.0% 1c
Paterson, New Jersey 6.0% 1c
Spring Valley, New York 1.5% 1c
Chicago, Illinois 3.5% 1c
Philadelphia, Pennsylvania 2.0% 1c
Detroit, MI .5% 1c
Boston, MA 1.0% 1c
</TABLE>
STARS & STRIPES - EUROPE - 5c PER COPY SOLD
<PAGE> 1
EXHIBIT 10.3.3
Information marked with "*****" has been omitted from the public filing and
filed separately with the Commission pursuant to a request for confidential
treatment filed by Easyriders, Inc.
[RR DONNELLEY & SONS COMPANY LETTERHEAD]
Paisano Publications, Inc.
28210 Dorothy Drive
Agoura Hills, CA 91301-2693
PROPOSAL FOR MAGAZINES September 11, 1996
DESCRIPTION
This Agreement covers the production by us of the annual requirements of
your publications, EASY RIDERS/V TWIN Magazines, TATTOO Magazine, IN THE
WIND Magazine, QUICK THROTTLE Magazine, SAVAGE Magazine, FLASH Magazine,
BIKER Magazine, AMERICAN RODDER Magazine, V. Q. Magazine, ROADWARE
Catalog, MAGALOG, RETAIL Catalog and CALENDAR(S) for a period of five
years. Commencement of production shall begin in 1996 and continue through
production of 5 years annual requirements for each title. There after this
Agreement shall remain in effect for additional twelve (12) month terms
unless either party provides notice of termination to the other party
ninety (90) days prior to the expiration of the initial term or any one
(1) year term thereafter.
It is further understood that from time to time you may acquire the right
to publish new titles, one shots, calendars and other publications (the
"New Title(s)". Should you require print and print-related services for
one or more New Titles during the term of this Agreement, you agree to
notify us. Provided we can produce the new Title(s) on equipment available
in our plant, on a schedule reasonably satisfactory to you, provided the
specifications fall within the parameters of the specifications as listed
in Exhibit C and new Title(s) are not currently produced by us, then such
New Title(s) will be deemed part of the "Work" described herein, and we
shall produce such New Title(s) on the terms and conditions set forth
herein for the remaining term of this Agreement.
TRIM SIZE, QUANTITY OF WORK TO BE PRODUCED, SPECIFICATIONS AND PRODUCTION
SCHEDULE
All work to be performed hereunder shall be in accordance with the
specifications set forth herein and in Exhibit C, and completed in
accordance with a production schedule which shall be submitted for your
approval.
If at any time you desire to make changes in the specifications (including
pages and count except those described in Exhibit C) set forth herein or
in the production schedule, we will cooperate with you in putting such
changes into effect within a reasonable period of time, provided such
changes do not have a materially adverse effect on our operations. In the
event any such change results in an increase or decrease in the cost of
performing the work, the prices for the work shall be adjusted to fairly
reflect such increase or decrease. In addition, should such change result
in our inability to use any materials on hand or ordered for you in the
production of your work, you will pay us reasonable costs associated with
such materials and their disposition.
<PAGE> 2
TRIM SIZE, QUANTITY OF WORK TO BE PRODUCED, SPECIFICATIONS AND PRODUCTION
SCHEDULE (continued)
It is agreed that you may have the european language editions of each of
the titles covered under this Agreement produced elsewhere. This will not
be considered a breach of this Agreement nor will it affect the prices in
Exhibit A provided your resulting production requirements remain within
the specifications as outlined in Exhibit C.
OVERTIME
If overtime is required to meet your delivery or quantity requirements, or
if you should change the delivery date, quantity requirements, or any
other specification that necessitates overtime after a production
schedule is agreed upon, we will use our best efforts to make any
necessary overtime available and will charge for such overtime at our then
current rates. If overtime is worked due to our internal scheduling
problems arising after a production schedule is agreed upon, and not
caused by your failure to comply with the production schedule, overtime
charges will not be made. No chargeable overtime will be worked without
your prior approval, and in the absence of such approval, delivery of the
work will be made as promptly as practicable consistent with our then
available capacity.
FORECAST
To assist us in providing for your requirements, you agree to submit a
forecast once every six (6) months showing the total requirements for work
hereunder, including count, number of pages, colors, copies to be bound
and delivery dates for each issue for the next twelve (12) months. We will,
within thirty (30) days of receipt of such forecasts, develop
manufacturing schedules for the production of the work based on the
forecasts you furnish. You will notify us as promptly as practical of any
significant change in forecasted requirements. It is our intent to provide
for any changes from your forecast whenever possible; however, an increase
in count or number of pages above that specified in the manufacturing
schedules developed from your forecasts will be subject to our ability to
obtain materials and to schedule the increased work.
PRELIMINARY OPERATIONS
You are to furnish material for offset preliminary work f.o.b. our plant of
manufacture in accordance with the production schedules in the following
manner:
Furnished Film
(A) All full page ads shall be furnished as screened offset film that are
in one piece, per color, per page, in good printing condition. Film
must have suitable register and platemaking marks, folio and color
identification within the untrim area of each page, and in all other
respects be to our specifications. Film having line or tone elements
taped, mounted or otherwise affixed to a carrier shall not be
considered as one piece film. Any alterations, corrections, splitting
of illustrations or of spread film and all adapting of film that have
been prepared for an untrim size that is different from that of these
pages will be extra.
<PAGE> 3
PRELIMINARY OPERATIONS (CONTINUED)
Ads should be accompanied by suitable OK'd Cromalin proofs or offset
progressive proofs made from that same film using AAAA/MPA Standard inks
and paper stocks specified for this job, and in all other respects to our
specifications. Film shall also be accompanied by authorized copy proofs
which shall be ozalid, dylux, velox or suitable proofs, identified as to
job name, issue, folio and color. Such authorized copy proofs shall be
furnished as one piece, per color, per page. All queries and the proof
itself must be initialed or stamped and dated to indicate your approval
and authorization to print.
For pages which you choose not to supply a Cromalin proof or progressive
proofs, we shall use our best efforts to provide a commercially acceptable
product based upon the guidance you provide. You agree to assume the risk
of any variation from desired copy match for all pages not accompanied by
suitable OK'd proofs.
We shall perform a mechanical check of furnished film which shall consist only
of checking for scratches or damage as a result of shipping and a visual
register check. In the event such check uncovers any defective film, we shall
notify you and you shall either:
1. Replace the defective film.
2. Give us your approval to run the film as is, or
3. Have us make corrections (if it is possible to do so) at an extra
cost to you.
(B) Partial page ads for combining with the edit portion of the page shall be
in all respects to our specifications.
(C) For ad pickups, you shall supply the original OK'd proof from the previous
time and tear sheet copy pasted down on the layout indicating the issue and
page number from which the ad can be picked up.
Four-Color Separations
All four-color is to be supplied as separations with color and folio clearly
identified within the untrim area of the film and in all aspects to our
specifications.
Mechanicals
For each page or pair of pages, you will furnish a pasted-up type mechanical
with all type and line elements in position, with the sole exception of artwork
requiring sizing or cropping. Elements not in position will be charged as
strip-ins.
A minimum of 5/16 inch must be maintained between trim edge and any type or
non-bleed artwork.
Layouts
A layout submitted in addition to or in lieu of the base mechanical must
clearly show the exact size, position and cropping of halftone copy and loose
line art. Four-color subjects and pickup artwork will be identified by stats
pasted down in position. Color breaks, screens, and reverses must be clearly
indicated on a tissue overlay.
Layouts must be exact in all dimensions and positions. (Type and line elements
submitted on a vinyl overlay with the layout instead of on the base mechanical
must be at printing size and accurately positioned.)
<PAGE> 4
PRELIMINARY OPERATIONS (CONTINUED)
Page Proofs
We will submit two sets of color-separated proofs of complete assembled
pages. These proofs will be produced from final printing film and will be
identified as to job name, issue, folio and color. We will inspect to
verify page elements for completeness, position, bleed, and trim margin.
(No proofreading of type.) We will stamp and our inspector will sign the
top sheet of each set of proofs to indicate as our authorized proof.
You will review these proofs for content and position, and answer all
queries. You will sign the top sheet of one set of proofs and return that
set to us as an OK-to-Print. You will retain the second set for reference.
Disposition and Storage
All material you furnish will be returned immediately after completion of
binding of the issue for which such material was used. All packing and
handling of such material will be billed as an extra charge. Such material
will be returned f.o.b. our plant of manufacture.
All furnished printing film and intermediate film produced by us may be
held in storage at no charge for a maximum of one year after completion of
binding of the issue for which such material was used. Additional storage,
if requested, will be billed as an extra charge.
If You Use A Desk Top System
For each page you will furnish us, on diskette or other electronic medium,
with a digital file, containing page geometry and text.
You will also furnish us with loose transparencies, which we are to scan,
random proof, and incorporate with your supplied file. You will also
supply a laser proof indicating size, position, orientation and crop of
each 4/c image.
Swatch matching or other deviation is additional. You will be charged
additionally for mechanical operations such as tints, colored or reverse
type and rules if they are not correctly designated on your file.
Silhouetting of photographs and creation of key-only shadows will be
performed by us and will be charged additionally. We will provide one
prepress color proof for your review and approval plus two sets of position
proofs for copy and margin OK. Any additional proofing will be charged as
an extra.
Any replacement files that we process due to changes that you have made,
or alterations that you request us to make, will be billed as incurred
based upon the point in the production cycle at which they occur. We will
retain final form pages, either as digital files or film, for a period of
three months after the data or film has been shipped to the printing
division. Storage for a longer period, if requested, will be charged as an
additional.
We will maintain a substantial library of Adobe and Bitstream fonts. If
you elect to use any font that is not in our library, we must reach prior
agreement on the font acquisition cost.
<PAGE> 5
PRELIMINARY OPERATIONS (CONTINUED)
Digital File Input for Computer To Plate Platemaking
(DIGITAL FILES -- QUARKXPRESS, Aldus Pagemaker or other off the shelf
DTP software):
For each page you will furnish us, on optical disk, removable hard
disk or other mutually acceptable electronic medium, with a complete
digital file, written in native application language, containing text
and page geometry with all trapping completed, with high resolution
images placed within or linked to picture boxes and ready to output
for platemaking in accordance with our specifications. File codes
will be provided that identify each folio. If multiple files are
transmitted across telephone lines via modem, an additional charge
may apply.
Along with the page document, you will supply a hard copy proof as a
verification of file contents as well as an authorized color proof
(random or final form) of sufficient quality to serve as press
guidance. Checking of files prior to output will be limited to a
cursory element check. No editing of images will be performed.
If you fail to supply required proofs, we will assume no
accountability for any missing or incomplete data, but we will
generate one color proofs from your files to serve as OK's for our
pressroom, and you will be charged additionally for those proofs.
Our prices are based on standard times for Raster Image Processing
and writing PostScript that have been established based on tests
performed on your supplied materials. If after each six month period
during the term of this Agreement, we determine that your pages
repeatedly exceeds that standard time due to unusually large image
files, the use of blends, extensive rotation and scaling, or for any
other reason, we will review our charges and mutually agree on
revised prices to reflect the changes in your pages and our then
current rates for computer operations.
If we are unable to output your files due to incorrect format,
damaged disk or other reason attributable to your files, you will
re-submit the files. We will charge additionally, at the current hour
rate for computer operations, for the initial effort to output
the file(s) and will apply the contract prices to processing of the
corrected files.
We will maintain a substantial library of fonts, but if you elect to
use any font that is not in our library, we must reach prior
agreement on the font acquisition cost.
It is understood that CTP technology continues to evolve and
improve. If during the term of this Agreement, there are significant
changes in the technology used by us or in the volume of CTP work we
are actually processing on existing systems, the benefits derived
from such technology charges or increased usage will be shared with
you, after allowance for our recovery of capital investment, start-up
and operating expenses.
OWNERSHIP OF FILM, COPY, PLATES, CYLINDERS, ETC.
Copy and any film furnished by you will be used solely for your work
and will remain your property. Film, electronic data files, prints,
reproduction mediums and plates made by us will be used solely for
your work but will remain our property.
<PAGE> 6
PRESSWORK
All forms are to be carefully made ready and printed by the web offset
process in uniform color using good grades of ink as follows:
Four-Color Cover Forms - in four-color process cover inks.
Four-Color Body Forms - in four-color process body inks.
One and Two-Color Body Forms - in black only or black and a second
nonmetallic color ink.
Self-cover forms may require the use of cover inks which will be invoiced
at the cover ink prices.
CUSTOMER FURNISHED PAPER
You shall furnish f.o.b. our plant of manufacture all paper required for
the printing of your publications outlined in Exhibit C in the weights,
kinds and sizes set forth herein or as we shall otherwise mutually agree
upon in accordance with a mutually agreeable delivery schedule and in
sufficient time to meet the production schedule. All paper furnished by
you shall be of good quality and with mechanical properties suitable for
efficient performance of the work for which it is intended.
Paper shall be delivered to us in rolls with cores to our specifications,
properly wrapped and wound with pasters plainly flagged. Returnable cores
shall be returned by us in accordance with your directions at your
expense. We shall reimburse you for the cost of any returnable cores
received by us for the work and not returned by us to the mills from which
such cores were shipped.
Paper not conforming to specifications, concealed damage and defective
paper shall be rejected by us, reported promptly to you, and held for your
instructions as to the disposition thereof. Should you require us to use
defective paper or paper not conforming to specifications and should we
incur additional costs as a result of the use of such paper, we shall
charge you an amount fairly reflecting such additional costs. Without
limiting the foregoing, it is agreed that roll stock causing more than a
ratio of five (5) proven paper caused web breaks per one-hundred (100)
rolls of each type of stock and basis weight within a series identified as
a month's production of the mill shall not be considered of suitable
mechanical quality and that to the extent the paper falls below this
standard we shall be entitled to make an additional charge as aforesaid.
Should you furnish paper which is designed for use in another printing
process than that set forth in this Agreement, we will make every
reasonable effort to utilize such paper, it being understood that any
additional costs resulting from the use of such paper in producing an
acceptable product will be your responsibility.
We shall further submit to you written reports regarding any defective
paper or paper received in a damaged condition as soon as reasonably
practicable after the damage shall have been discovered. In the case of
any paper received in a damaged condition, we shall prepare affidavits
describing such damage for you. We shall give you all such assistance as
you may reasonably request to assist you in recovering for such damage or
defect.
CUSTOMER FURNISHED PAPER USAGE
We will provide a monthly usage statement of furnished paper.
<PAGE> 7
CUSTOMER FURNISHED PAPER ACCOUNTING
We shall make the first accounting of paper sixty (60) days after
completion of the December 1996 issue with respect to the paper consumed in
the production of your publications during such production period. Annually
thereafter, we shall make a similar accounting for all paper furnished by
you for publications produced and delivered during the preceding twelve
(12) month period. Said annual accounting is to be made available on or
about sixty (60) days after completion of the twelve (12) month period
during which time you shall supply us such information needed to determine
the average price of said paper. Should the total paper consumption during
any such period exceed the paper requirements specified herein, adjusted
for light and/or heavy paper, we shall pay you for such excess at the
average cost of said paper to you, provided such excess consumption shall
not be due to defects in the paper or to the condition in which it shall
have been delivered. Should the total paper consumption during any such
period be less than the paper requirements specified herein, adjusted for
light and/or heavy paper, you shall pay us an amount equal to the cost of
said paper so saved at the average cost of the paper used. The value of
underconsumption, if any, of one kind of paper shall be credited against
the overconsumption, if any, of other kinds of paper. Manufacturing waste
shall become our property.
CUSTOMER FURNISHED PAPER STORAGE
We shall provide storage space without additional charge for blank roll
paper stock delivered by you for the work under this Agreement for the
current issue in production or to be produced plus the next two succeeding
forecasted issues for all monthly titles. Therefore, the storage is not at
any time to exceed the amount equivalent to that used for printing three (3)
issues. For bimonthly and quarterly titles we shall provide storage space
without additional charge for blank paper stock delivered by you for the
work under this Agreement for up to sixty (60) days for the current issue
in production or to be produced. If you require storage space in excess of
that provided above we shall store up to a maximum of one half the
preceding amount of stock at our plant if space permits at the rates set
forth herein, or at the prevailing rates at another location including
applicable handling and freight.
DONNELLEY FURNISHED PAPER (Optional)
We shall supply paper necessary for the production of your publications in
the types and weights and at the prices and for the period of term of this
Agreement as we may mutually agree.
The price to be charged you for paper shall be our invoice cost (inclusive
of volume discounts earned to date) plus ***** percent (*****). Paper shall
be billed to you on our regular invoice for production under this Agreement
subject to our then current Terms of Payment as described herein.
The above shall reflect the then current commitment from our suppliers for
a specified period. Paper prices for the term of the Agreement not covered
above shall be mutually agreed upon.
Upon review of the price quotations Paisano Publications, Inc. shall
determine who is to furnish paper and for what length of time for the next
period of the term of this Agreement.
<PAGE> 8
DONNELLEY FURNISHED PAPER (OPTIONAL) (CONTINUED)
Provided however, it is agreed that paper ordered for work under this
Agreement by either party shall be used on a "first in" "first out"
basis. In addition, Paisano Publications, Inc. shall be responsible
for the cost of any materials on hand or ordered for them for the
production of their publications and will pay us for such materials
along with reasonable costs associated with such materials and their
disposition should they not be used in the production of the Paisano
Publications, Inc. publications.
BINDING, MAILING AND BUNDLING
We will gather, saddlewire stitch and trim flush three sides up to 20
sections (including cover) for delivery upon completion f.o.b. our
plant of manufacture.
We will gather, adhesive bind, affix a cover to the backbone and trim
flush three sides up to 36 sections. Each copy shall caliper between
.125" minimum and .500" maximum in thickness at the center of the
head or foot measured on the bound book before the cover is affixed.
It is understood that the first and last signatures of each copy
adhesive bound shall contain eight or more pages unless other
specifications and prices are manually agreed upon. Delivery of
copies will be upon completion f.o.b. our plant of manufacture.
All furnished card inserts, special inserts, subscription order cards
or other material furnished for binding shall be delivered f.o.b. our
plant of manufacture by you in time to meet the production schedule
and in a manner that we reasonably specify. Such furnished material
shall also conform to our specifications, (which we shall submit to
you) including size, which will permit inserting and binding
without undue interference with the normal performance of the machine
or extra costs will be charged i.e. makereadies and equipment
slowdowns. All such material shall be furnished to meet the net
quantity of copies ordered to be bound for the issue plus an
allowance for binding spoilage which we shall reasonably specify.
The prices for addressing and mailing herein apply to copies mailed
either second or third class.
Second class mailing is based on postal regulations and procedures in
effect as of this contract date which require mandatory ZIP Code
Sortation. If postal regulations or procedures change so as to
affect our costs for mailing the magazines as provided herein, the
prices shall be adjusted to fairly reflect any increase or decrease
in such costs. We shall be responsible for preparing and submitting
applicable Post Office form(s).
Third class mailing is based on postal regulations and procedures in
effect as of this contract date which require mandatory ZIP Code
sortation that will result in a minimum mail sack weight of 15 pounds
or 125 pieces. Use of optional ZIP Code sortation levels that result
in the minimum sack weight falling below 125 pieces or 15 pounds will
result in additional charges. If postal regulations or procedures
change so as to affect our costs for mailing the magazines as provided
herein, the prices herein shall be adjusted to fairly reflect any
increase or decrease in such costs. We shall be responsible for
preparing and submitting applicable Post Office form(s).
Copies to be mailed shall be addressed by affixing a paper address
label or printing by ink jet a label on the outside of the magazine
in a position mutually agreed to, subject to the limitations of the
equipment to be used for the work. You are to furnish all labels and
bag tags or mag tape in compliance with current Donnelley Label
Specifications and Graphic Communications Association Specifications,
in time to meet the mailing schedule, and sorted in accordance with
applicable postal mailing regulations and procedures
<PAGE> 9
BINDING, MAILING AND BUNDLING (continued)
including ZIP Code requirements and separated for sequence of mailing. All
labels and bag tags or mag tape for a given mailing lot shall be furnished
at one time. All supplied labels are to be imprinted with an indicator
which can be used in separating ZIP Codes. We shall place such subscription
copies in mail bags, affix the hasp tag and delivery shall be made f.o.b.
our plant of manufacture.
At such time that we establish a system for pooled mailing or second-class
mail (known as "co-mailing"), we shall offer to you the opportunity to
purchase such co-mailing services at a price no greater than that then
being offered to any of our other customers, which customers have work with
similar specifications (i.e., total quantities per year or as otherwise may
be mutually agreed upon), including mail break-up. If you agree to purchase
such co-mailing services, then such prices shall be added to Exhibit A
hereof and thereafter shall be subject to all terms and conditions of this
Agreement.
You shall be responsible, if necessary, for establishing an account at the
U.S. Post Office with sufficient funds to cover mailing.
Nothing herein contained shall require us to do any act in violation of the
United States Postal Laws, regulations or procedures.
The newsstand copies will be wrapped in bundles (up to 40# per bundle and
in accordance with our machine specifications) and tied both ways with
suitable strapping material. Your furnished labels will be affixed for
delivery f.o.b. our plant of manufacture.
You are to furnish a magnetic tape to our specifications of newsstand
counts by destination in lieu of labels for those copies to be shipped in a
newsstand pool. Labels will be produced by the ATRACS computer systems.
Late receipt or tape not to our specifications may result in extra charges.
Our prices are based on binding, mailing or bundling in a single lot per
issue. In the event you designate more than one binding, mailing or
bundling lot per issue, such additional work shall be charged for as an
extra.
Certain copies for miscellaneous distribution such as back issue copies,
expire copies, preferred lists or others that may be required from time to
time, shall be bundled, wrapped, packed or inserted into envelopes and
mailed or shipped as directed to you. We shall make a charge which shall
fairly compensate us for such work.
All postage, permits, freight or other charges shall be paid by you.
FREIGHT
We will arrange for shipment of your finished materials from our plant of
manufacture. You agree to pay all distribution charges, and we shall be
entitled to retain any brokerage commissions or other service charges
earned by us or our wholly owned subsidiaries.
<PAGE> 10
POOL FREIGHT
During the term of this Agreement, we will arrange to have the newsstand
bundle portion of your work shipped in our freight pool at *****/cwt.,
through December 31, 1996. Notwithstanding any other price adjustment
clause in this Agreement, the pool freight price shall be requoted in
September of each year, to become effective on January 1 of the following
year. You must participate in the freight pool for at least one year, and
may opt out of the pool by providing written notice to us at least ninety
(90) days prior to the end of any one-year term.
Notwithstanding the above, should there be a drastic change in the cost of
operating the pool due to (1) changes in governmental regulations or (2)
withdrawal of one or more of our customers from the pool, causing us to
lose ten percent (10%) or more of the tonnage upon which the pool freight
price was based, we shall be entitled to re-quote the price, or to
discontinue the pool. If we re-quote the price pursuant to the foregoing,
you shall have the right to withdraw from the pool by providing written
notice to us within thirty (30) days after announcement of the new price.
Any such withdrawal notice shall become effective sixty (60) days after
receipt.
In the event that we arrange for shipment of any of your finished
materials not included in the pool, we shall be entitled to retain any
brokerage commissions or other service charges earned by us or our
wholly-owned subsidiaries.
OVERRUNS AND UNDERRUNS
Variations in quantity of one percent (1%) less than quantities ordered
(no over allowed) will constitute acceptable delivery, and the price will
be adjusted at the under delivery per thousand copy price. If the work
involves more than one version, the under percent for each version shall
depend upon ordered quantity of that version, as separately quoted. There
will be no chargeable overrun. If printed quantities are more than one
percent (1%) below ordered quantities, we will notify you.
MATERIALS AND PURCHASED SERVICES
Unless otherwise provided, we will supply the materials (paper, ink,
binding materials, etc.) or purchased services specified herein or their
equivalents. It is understood and agreed that should we be unable to obtain
such materials or services or their equivalents in necessary quantities,
the parties shall select mutually agreeable substitute materials or
services. Should the use of such substitute materials or services increase
or decrease the cost of performing the work, the prices will be adjusted to
fairly reflect any such increase or decrease in cost. The unavailability of
materials or services will not be considered a breach of this Agreement.
Should any volume or trade discounts be earned on materials or services,
they will be retained by us. All scrap and by-products will become our
property.
<PAGE> 11
Page 11
STORAGE
Unless otherwise specified, the prices in this Agreement contain no
storage of paper, other materials, work in process or finished goods
beyond the production schedule span. If you delay completion of the work
or postpone delivery of finished goods beyond the date specified in the
production schedule, or if your furnished materials arrive prior to the
dates specified in the production schedule, storage will be charged at the
prevailing rates for each month up to twelve months the finished goods,
work in process or furnished materials remain in our possession. Such rate
will be doubled for each month after the first twelve months of storage.
If, following the eighteenth month of storage we receive no direction from
you as to the disposition of the stored items, such items will be
destroyed.
Notwithstanding the above we shall store up to 1,000 copies of each issue
of each title for up to six months at no charge. If at the end of six
months there are remaining copies in storage we shall ship at your expense
500 copies to your specified destination and destroy the remainder.
EDITING OF COPY
The price quoted does not, unless otherwise stated, include the editing of
copy.
PRICES
You shall pay us for the work at the prices in effect pursuant to this
Agreement set forth in Exhibit A.
Such prices apply to all work as outlined in the clause entitled
Description on page one (1) of this Agreement regardless of the plant of
manufacture.
PRICE ADJUSTMENTS
The prices for direct materials (ink and paper) and any purchased services
stated in this Agreement are based upon the costs of materials and
purchased services (except pool paper) as of the date hereof, and will be
adjusted based upon actual changes in these costs which we shall
substantiate to your satisfaction. For purposes of adjusting the ink
prices herein it is agreed that we will base any such change upon the
average change in the then current prices of three major suppliers of ink
i.e. Flint Ink, Sun Chemical, and INX. Should any change become effective
after part of the work has been performed, such adjustments shall apply
only to that work produced after such change except as specifically
provided otherwise. Except as specifically provided otherwise, should any
volume or trade discounts be earned on materials or purchased services,
they shall be retained by Donnelley.
The manufacturing prices which include binding and disposition materials,
stated in this Agreement shall be adjusted on March 1 of each year during
the term ("the date of adjustment") as follows: In February of each year
during the term of this Agreement, Donnelley will calculate the percentage
of change in the Consumers Price Index ("the CPI") from the fifteenth
month preceding the date of adjustment to the third month preceding the
date of adjustment. Should this calculation show that there has been an
increase in the CPI, then effective on the date of adjustment, all of the
manufacturing prices shall be increased by eighty percent (80%) of the
percentage of increase in the CPI. Should this calculation show that there
has been no change in the CPI, or that the CPI has decreased, then no
change shall be made in the manufacturing prices for the next twelve
months. In such event, at the next date of adjustment at which the
foregoing
<PAGE> 12
Page 12
PRICE ADJUSTMENTS (continued)
calculation indicates an increase in the CPI, the percentage of change
in the CPI for the purpose of determining the price adjustment
hereunder, if any, will be calculated from the CPI upon which the last
adjustment of manufacturing prices was based. For purposes of this
paragraph, the CPI means the Consumers Price Index (1982-84=100), all
Urban Wage Earners and Clerical Workers, U.S. City Average, published
monthly by the Bureau of Labor Statistics, U.S. Department of Labor.
If the CPI as defined is revised or discontinued, the calculation
described herein shall be made using the price index with which the
Bureau of Labor Statistics replaces it.
Any sales, retailers occupation, service occupation, value added or
use tax imposed on account of this transaction will be added as an
extra charge.
TERMS OF PAYMENT
Net cash 45 days from date of invoice.
DISPUTES
Should any portion of an invoice become disputed, you agree to pay the
undisputed portion according to its terms and you will notify us
promptly of the dispute. Both parties agree to use their best efforts
to resolve the disputed portion of such invoice within thirty (30)
days of learning of the dispute.
INTEREST AND COLLECTION COSTS
Our obligation to perform work hereunder is subject to prompt payment
of all invoices pursuant to the terms of this and other agreements we
may have with you. Should any invoice issued hereunder become past
due, you agree to pay interest at the rate of one and one-half percent
(1-1/2%) per month, or the lawful limit if less, on all amounts past
due. Progress billing of interest due or failure to bill for interest
due shall not constitute a waiver of our right to charge interest on
all amounts past due to the date payment is received.
If you fail to pay our invoice in accord with these terms, you agree
to pay all costs of collection, including but not limited to,
reasonable attorney's fees.
INTERIM BILLING
If you delay completion of manufacture beyond the period contemplated
by the production schedule or if partial shipment is made prior to the
completion of the entire quantity, interim billing may be made.
CREDIT REVIEW
The above provisions may be reviewed by us and should there be a
substantial adverse change in your credit standing with us we shall
notify you and meet with you to discuss any concerns we may have, or
in the event that you do not comply with terms of these provisions, we
will have the right to change terms of payment, and our obligation to
perform further work will be subject to reaching mutual agreement on
revised terms.
<PAGE> 13
LIEN ON PROPERTY
As security for payments of any sum due or to become due us under the
terms of this Agreement, we shall have the right, if necessary, to retain
possession of, and shall have a lien on all property owned by you and in
our possession, and all work in process and undelivered work.
BANKRUPTCY
If either party shall be adjudicated a bankrupt, institute voluntary
proceedings for bankruptcy or reorganization, make an assignment for the
benefit of its creditors, apply for or consent to the appointment of a
receiver for it or its property, or admit in writing its inability to pay
its debts as they become due, the other party may terminate this Agreement
by written notice. Any such termination shall not relieve either party
from any accrued obligations hereunder.
GUARANTEE AND LIMITATION OF LIABILITY
We will perform the work in a good and workmanlike manner and in
accordance with the specifications and production schedule. In the event
the work is defective or delayed due to our fault (including negligence),
we shall not be liable for special or consequential damages, including,
but not limited to, lost profits or business. Further, we shall not be
liable for any damages, whether direct or indirect, special or
consequential, associated with our shipment of any of your work on
contract or common carriers.
RESPONSIBILITY FOR SUBJECT MATTER
In furnishing us matter to reproduce or to have incorporated in the
completed product, you represent and warrant that none of such matter
(either as furnished to us by you or as altered by us at your direction)
infringes any copyright, is libelous, or otherwise violates the rights of
or will cause damage or injury to other persons, and you agree to
indemnify and save us harmless from all losses, damages and expenses,
including attorneys' fees, which we may suffer as the result of any claim
of such violation, damage or injury.
WORK STOPPAGES
Neither party shall be liable for delays or non-performance of this
Agreement occasioned by strikes, fires, accidents, or by causes beyond
their control including, but not limited to, the unavailability of
materials, purchased services, utilities or fuel. During such interruption
this Agreement shall continue in full force and effect and neither your
failure to provide material to us, nor our failure to produce work for you
during any such interruption shall be construed as a breach of this
Agreement. However, if any such interruption should occur, the other party
shall have the absolute right to make immediate arrangements for the
production of its work elsewhere (for you) or to take on other work (for
us) and shall not be liable to the other party for the removal of said
work or taking on the other work or for loss of profits or damage arising
from such removal or other production. You agree to return the work to us
at the termination of any interruption of work affecting us and further
agree not to enter into any agreements longer than reasonably necessary to
produce the work during an interruption of work affecting us.
<PAGE> 14
RR DONNELLEY & SONS COMPANY
Paisano Publications, Inc.
Page 14
September 11, 1996
- --------------------------------------------------------------------------------
DISCONTINUANCE OF PUBLICATION
Should you decide to discontinue any of the publications covered under
this Agreement in any medium without publishing a successor, whether
titled the same or not, you shall use your best efforts to give us 90 days
advance written notice of such decision. Without limiting the foregoing,
you shall be obligated to pay for work done or in process. In addition,
you shall reimburse us for costs which we cannot avoid through reasonable
effort.
SALE OF PUBLICATION
If you shall propose to sell any of the publications covered under this
Agreement or any successor, whether titled the same or not, you shall give
us written notice not less than ninety (90) days prior to any contemplated
sale, stating the name of the prospective purchaser and the proposed date
of sale. Thereafter you shall keep us fully advised of the progress of any
such proposed sale and we shall keep such information confidential. Within
sixty (60) days after receipt of such notice, we shall advise you in
writing as to whether we will consent to an assignment of your rights and
obligations under this Agreement to the prospective purchaser. Our consent
shall be based upon the financial strength of the proposed purchaser and
shall not be unreasonably withheld. If we shall consent, you shall require
the purchaser concurrently with the consummation of such sale, to assume
all your obligations under this Agreement by an instrument in writing
satisfactory to us for a minimum period of one hundred and twenty (120)
days.
If we shall not consent to the assignment by you to such prospective
purchaser, this Agreement shall terminate upon the first to occur of the
following events: (i) the consummation of such sale, or (ii) the
expiration of one hundred and eighty (180) days after we advise you that
we will not consent to the proposed assignment, unless within such one
hundred and eighty (180) days period you notify us that you do not propose
to consummate such sale.
ASSIGNMENT
Neither party to this Agreement shall assign any right or rights hereunder
without the prior written consent of the other party, except that we may
assign payments due us to our wholly-owned subsidiaries without consent.
Subject to this consent, this Agreement shall inure to the benefit of and
shall bind the successors and assigns of the parties hereto.
INSURANCE
We will carry at our expense fire, sprinkler leakage and extended coverage
insurance, subject to the usual exclusions, limitations, and conditions of
such policies on the actual cash value of all our materials, work in
process, and all production completed and not shipped, and on the actual
cash value of all positives, copy, artwork, paper and other materials
furnished by you, while in our care, custody and control. If your property
is damaged as a result of an insured peril under the applicable insurance
policy, then, at our option, we will either replace your damaged property
or reimburse you for the actual cash value of the damaged property. If we
elect to reimburse you for the damaged property's actual cash value, the
amount payable to you shall be limited to the proceeds of such policy plus
any related deductible, if any, applied to the claim for damage to your
property. For positives and other media our insurance coverage and our
liability shall be limited to the cost of blank film or other media and
the cost of duplication from an original or other copy.
<PAGE> 15
PASSING OF TITLE
Title and possession shall pass to you upon delivery or upon the date of
final invoicing, whichever is earlier, f.o.b. our final plant of
manufacture.
GOVERNING LAW
This Agreement shall be governed by the laws of the State of California.
NO JOINT VENTURE
Nothing herein contained shall in any way constitute a partnership
between, or joint venture by, the parties hereto or be construed to
evidence the intention of the parties to constitute such. Neither of the
parties shall hold itself out contrary to the terms of this paragraph by
advertising or otherwise, and neither party shall be or become liable or
bound by any representation, act or omission whatsoever of the other party
contrary to the provisions of this paragraph.
EXHIBITS
This Agreement includes the following Exhibit(s) which are attached hereto
and made a part hereof:
EXHIBIT A - PRICE SCHEDULE
EXHIBIT B - PAPER REQUIREMENT
EXHIBIT C - TITLES AND SPECIFICATIONS
CAPTIONS
The captions on this Agreement have been placed thereon for the mere
convenience of the parties hereto, and shall not be considered in any
question of interpretation or construction of this Agreement.
<PAGE> 16
If this proposal meets with your approval, kindly sign below. This
proposal shall remain in effect for a period of thirty days from the date
hereof and is subject to the availability of equipment at the time the
approved proposal is submitted to us for confirmation. Following your
approval and upon confirmation by an officer of R. R. Donnelley & Sons
Company, the approved proposal will then constitute a contract between us.
Respectfully submitted,
R. R. DONNELLEY & SONS COMPANY
By [SIG]
-----------------------------------------
Sales Representative
Approved:
By [SIG]
----------------------------------------
Authorized officer, partner, owner, etc.
Date September 20, 1996
<PAGE> 17
Paisano Publications, Inc. EXHIBIT A Page A-1
All Titles PRICE SCHEDULE September 11, 1996
PRELIMINARY
<TABLE>
<CAPTION>
Four-Color Separations Price
SEPARATIONS (Scanning Charges)
<S> <C>
2 x 3........................................................................... $***
3 x 4........................................................................... $***
4 x 5........................................................................... $***
5 x 7........................................................................... $***
8 x 10.......................................................................... $***
10 x 12......................................................................... $***
11 x 14......................................................................... $***
12 x 16......................................................................... $***
16 x 20......................................................................... $***
Copy Conversions................................................................ $***
Conventional Stripping Charges
Base Operation, per edit page................................................... $***
Shoot mechanical, per page...................................................... $***
Opaque separate, per color - handwork........................................... $***
Shoot halftone, each............................................................ $***
Shoot duotone, each............................................................. $***
Shoot tritone, each............................................................. $***
Square finish window, each...................................................... $***
Non-square window, each......................................................... $***
Butt to rule, per subject....................................................... $***
Outlining, per subject.......................................................... $***
Mortise or abutment, each....................................................... $***
Reverse, per color, per page.................................................... $***
Tints, per color, per strength, per page........................................ $***
Velox proof, each............................................................... $***
Ozalid proof, each.............................................................. $***
Dylux proof, each............................................................... $***
Book blues, per page............................................................ $***
Direct contact, per color, per page............................................. $***
Receive and check or pick-up, per piece of film................................. $***
Pick & Pack
1st page in package........................................................ $***
Each additional page....................................................... $***
RSL/Key Line.................................................................... $***
Late pages O.T. charge.......................................................... $***
One-color cromalin, per page.................................................... $***
Two-color cromalin, per page.................................................... $***
Three-color cromalin, per page.................................................. $***
</TABLE>
<PAGE> 18
Paisano Publications, Inc. EXHIBIT A Page A-2
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<S> <C>
Four-color cromalin, per page................................. $***
Film storage per issue per month.............................. $***
System Charges
System work, per hour........................................ $***
Image storage, per year...................................... $***
Computer To Plate Charges
Per 32 pg. 4/Color form...................................... $***
Per 16 pg. 4/Color form...................................... $***
Per 32 pg. 1/Color form...................................... $***
Per plate changed............................................ $***
Scan per color, per page..................................... $***
Stripping first image........................................ $***
Stripping per image, same page............................... $***
Stripping per image, same page...............................
Laser Proof, each:
4/Color composite...................................... $***
1/Color................................................ $***
Corrections (System time per hour):
Color corrections, per hour............................ $***
File/system management, per hour....................... $***
</TABLE>
<PAGE> 19
Paisano Publications, Inc. EXHIBIT A Page A-3
All Titles PRICE SCHEDULE September 11, 1996
PRESSWORK
Cover Forms:
<TABLE>
<CAPTION>
Run Per
1,000
Includes all plates, receive, check and log Makeready Copies
in furnished film; ink and paper are extra. --------- -------
<S> <C> <C>
4 Page as 1/4 .............................................. $*** $***
6 Page Low-Folio Gatefold .................................. $*** $***
8 Pages as 1/8 or 2/4's .................................... $*** $***
8 Pages as Double Gatefold ................................. $*** $***
Additional for sheeter MR .................................. $*** --
Varnish OSO ................................................ $*** $***
U.V. Solid Coating 1 side only* ............................ $*** --
U.V. Coating w/ Window 1 side only* ........................ $*** --
4 Pages .................................................. -- $***
6 Pages .................................................. -- $***
8 Pages .................................................. -- $***
Open 5th unit .............................................. $*** --
4 Pages .................................................. -- $***
6 or 8 Pages ............................................. -- $***
12 or 16 Pages ........................................... -- $***
Open 5th unit, second side ................................. $*** --
Press stop ................................................. $*** --
Plate changed .............................................. $*** --
* Paper and coating material are additional.
</TABLE>
Body Forms:
<TABLE>
<CAPTION>
Run Per
1,000
Includes all plates, receive, check and log Makeready Copies
in furnished film; ink and paper are extra. --------- -------
<S> <C> <C>
Five-Color Body Forms:
16 Pages as 2/8's .......................................... $*** $***
8 Pages as 1/8 or 2/4's .................................... $*** $***
8 Page form as Double Gatefold ............................. $*** $***
6 Page form as 1/6 (Low-Folio Gatefold) .................... $*** $***
4 Pages as 1/4 ............................................. $*** $***
Press stop ................................................. $*** --
Plate changed .............................................. $*** --
</TABLE>
<PAGE> 20
Paisano Publications, Inc. EXHIBIT A Page A-4
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000
PRESSWORK (CONTINUED) Makeready Copies
- --------------------- --------- -------
<S> <C> <C>
Four-Color Body Forms:
----------------------
32 Pages as 2/16's or 4/8's..................... $*** $***
24 Pages as 2/12's.............................. $*** $***
16 Pages as 2/8's............................... $*** $***
12 Pages as 1/12................................ $*** $***
8 Pages as 1/8 or 2/4's......................... $*** $***
8 Page form as Double Gatefold.................. $*** $***
6 Page form as 1/6 (Low-Folio Gatefold)......... $*** $***
4 Pages as 1/4.................................. $*** $***
2 Pages as 1/2.................................. $*** $***
Press stop...................................... $*** -
Plate changed................................... $*** -
Two-Color
---------
32 Pages as 2/16's.............................. $*** $***
24 Pages as 2/12's.............................. $*** $***
16 Pages as 1/16 or 2/8's....................... $*** $***
12 Pages as 1/12................................ $*** $***
8 Pages as 1/8 or 2/4's......................... $*** $***
4 Pages as 1/4.................................. $*** $***
2 Pages as 1/2.................................. $*** $***
Press stop...................................... $*** -
Plate changed................................... $*** -
One-Color
---------
32 Pages as 2/16's.............................. $*** $***
24 Pages as 2/12's.............................. $*** $***
16 Pages as 1/16 or 2/8's....................... $*** $***
12 Pages as 1/12................................ $*** $***
8 Pages as 1/8 or 2/4's......................... $*** $***
4 Pages as 1/4.................................. $*** $***
2 Pages as 1/2.................................. $*** $***
Press stop...................................... $*** -
Plate changed................................... $*** -
4/4, 2/2 Combo Forms:
---------------------
32 Pages as 2/16's or 4/8's..................... $*** $***
24 Pages as 2/12's.............................. $*** $***
16 Pages as 1/16 or 2/8's....................... $*** $***
12 Pages as 1/12................................ $*** $***
</TABLE>
<PAGE> 21
Paisano Publications, Inc. EXHIBIT A Page A-5
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000
PRESSWORK (continued) Makeready Copies
- --------------------- --------- -------
<S> <C> <C>
4/4, 1/1 Combo Forms:
- ---------------------
32 Pages as 2/16's or 4/8's..................... $*** $***
24 Pages as 2/12's ............................. $*** $***
16 Pages as 1/16 or 2/8's....................... $*** $***
12 Pages as 1/12................................ $*** $***
</TABLE>
<TABLE>
<CAPTION>
Run Per
1,000
MISCELLANEOUS PRESSWORK Makeready Copies
- ----------------------- --------- -------
<S> <C> <C>
Less Plate, per plate........................... $*** --
Press stop*..................................... $*** --
Plate change, per plate*........................ $*** --
Press stop and rubout (mail indicia)*........... $*** --
Open 5th or 9th unit............................ $*** --
4 Pages................................... -- $***
6 or 8 Pages.............................. -- $***
12 or 16 Pages............................ -- $***
Open 5th unit, second side...................... $*** --
Split fountain, including washup, per split..... $*** --
Drop Web*....................................... $*** --
Change Paper*................................... $*** --
Press Paste 8 Pages*............................ $*** $***
Press Paste 12 Pages*........................... $*** $***
Press Paste 16 Pages*........................... $*** $***
Perf Head to Foot*.............................. $*** $***
Litho Perf 8 Pages*............................. $*** $***
Litho Perf 16 Pages*............................ $*** $***
Press stop and washup for uncoated
forms, per M equivalent 32-page impressions*.... $***
*Paper is additional
</TABLE>
<PAGE> 22
Paisano Publications, Inc. EXHIBIT A Page A-6
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000
INK Copies
- --- -------
<S> <C>
Cover:
Black ink, per page........................................ $***
Color ink, per color, per page............................. $***
U.V. Coating, per page..................................... $***
Body:
Black ink, per page........................................ $***
Color ink, per color, per page............................. $***
PAPER:
Paper requirements are specified in Exhibit B.
Paper handling, per cwt. .................................. $*** /cwt.
Excess Paper Storage, per cwt.
First month or fraction thereof...................... $*** /cwt.
Additional month or fraction thereof................. $*** /cwt.
</TABLE>
<TABLE>
<CAPTION>
Run Per
1,000
BINDING Makeready Copies
- --------------------- --------- -------
<S> <C> <C>
Basic - Saddlewire stitch and trim................. $*** $***
Each section.................................... -- $***
Order card fed flat from permanent card feeder..... -- $***
Envelope or full size order card................... -- $***
Blow in card....................................... -- $***
6 Page Gatefold (add'l to section charge).......... -- $***
8 Page Double Gatefold (add'l to section charge)... -- $***
Vacuum opener...................................... $*** $***
A/B Split (two sections running half time)......... $*** --
Lot change, per section............................ $*** --
Saddlewire Slowdowns:
1% Saddlewire Slowdown, per thousand............... -- $***
2% Saddlewire Slowdown, per thousand............... -- $***
3% Saddlewire Slowdown, per thousand............... -- $***
4% Saddlewire Slowdown, per thousand............... -- $***
5% Saddlewire Slowdown, per thousand............... -- $***
6% Saddlewire Slowdown, per thousand............... -- $***
7% Saddlewire Slowdown, per thousand............... -- $***
8% Saddlewire Slowdown, per thousand............... -- $***
9% Saddlewire Slowdown, per thousand............... -- $***
10% Saddlewire Slowdown, per thousand.............. -- $***
11% Saddlewire Slowdown, per thousand.............. -- $***
12% Saddlewire Slowdown, per thousand.............. -- $***
</TABLE>
<PAGE> 23
Paisano Publications, Inc. EXHIBIT A Page A-7
All Titles PRICE SCHEDULE September 14, 1996
<TABLE>
<CAPTION>
Run Per
1,000
BINDING (continued) Makeready Copies
- ------------------- --------- -------
<S> <C> <C>
15% Saddlewire Slowdown, per thousand.................................... - $***
18% Saddlewire Slowdown, per thousand.................................... - $***
20% Saddlewire Slowdown, per thousand.................................... - $***
25% Saddlewire Slowdown, per thousand.................................... - $***
30% Saddlewire Slowdown, per thousand.................................... - $***
35% Saddlewire Slowdown, per thousand.................................... - $***
40% Saddlewire Slowdown, per thousand.................................... - $***
45% Saddlewire Slowdown, per thousand.................................... - $***
50% Saddlewire Slowdown, per thousand.................................... - $***
Additional Makeready Hours, per hour..................................... - $***
Add'l crew for Saddle Line, per person, per thousand..................... - $***
</TABLE>
<TABLE>
<CAPTION>
Run Per
1,000 Materials
Makeready Copies in Price
--------- ------- ---------
<S> <C> <C> <C>
Basic - Patent bind and trim.................................... $*** $*** $***
Each section.................................................... - $*** $***
Order card fed flat from permanent card feeder.................. - $*** -
Envelope or full size order card................................ - $*** -
Blow in card.................................................... - $*** -
6 Page Gatefold (add'l to section charge)....................... - $*** -
8 Page Double Gatefold (add'l to section charge)................ - $*** -
Reverse bind one 4-page to create a 6-page gate................. - $*** -
Lot change, per person.......................................... $*** - -
Patent Binding Slowdown:
------------------------
1% Patent Slowdown, per thousand................................ - $*** -
2% Patent Slowdown, per thousand................................ - $*** -
3% Patent Slowdown, per thousand................................ - $*** -
4% Patent Slowdown, per thousand................................ - $*** -
5% Patent Slowdown, per thousand................................ - $*** -
6% Patent Slowdown, per thousand................................ - $*** -
7% Patent Slowdown, per thousand................................ - $*** -
8% Patent Slowdown, per thousand................................ - $*** -
9% Patent Slowdown, per thousand................................ - $*** -
10% Patent Slowdown, per thousand............................... - $*** -
11% Patent Slowdown, per thousand............................... - $*** -
12% Patent Slowdown, per thousand............................... - $*** -
15% Patent Slowdown, per thousand............................... - $*** -
</TABLE>
<PAGE> 24
Paisano Publications, Inc. EXHIBIT A Page A-8
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000 Materials
BINDING (CONTINUED) Makeready Copies in Price
- ------------------- --------- --------- ---------
<S> <C> <C> <C>
18% Patent Slowdown, per thousand.......................... - $*** -
20% Patent Slowdown, per thousand.......................... - $*** -
25% Patent Slowdown, per thousand.......................... - $*** -
30% Patent Slowdown, per thousand.......................... - $*** -
35% Patent Slowdown, per thousand.......................... - $*** -
40% Patent Slowdown, per thousand.......................... - $*** -
45% Patent Slowdown, per thousand.......................... - $*** -
50% Patent Slowdown, per thousand.......................... - $*** -
Additional Makeready Hours, per hour....................... - $*** -
Add'l crew for Patent Line, per person, per thousand.. - $*** -
Run Per
1,000 Materials
MAILING AND BUNDLING Makeready Copies in Price
- -------------------- --------- ---------- ---------
Standard Mail - Basic - Address, bag and load
bound books........................................... $*** $*** $***
Each section.......................................... - $*** $***
Additional for shrinkwrapped bundles....................... - $*** $***
Palletized Mail - Basic - Address, bag and load
bound books (use in lieu of standard mail)............ $*** $*** $***
Each section.......................................... - $*** $***
Off-Line mail - bag & load bound books..................... $*** $*** $***
Additional for peel-off pressure sensitive labels.......... - $*** -
Bundle, ATRACS label, tie and load bound books (up to 40#
per bundle and in accordance with our machine specs.):
Bundle 100's.......................................... $*** $*** $***
Bundle 95's........................................... $*** $*** $***
Bundle 90's........................................... $*** $*** $***
Bundle 85's........................................... $*** $*** $***
Bundle 80's........................................... $*** $*** $***
Bundle 75's........................................... $*** $*** $***
Bundle 70's........................................... $*** $*** $***
Bundle 65's........................................... $*** $*** $***
Bundle 60's........................................... $*** $*** $***
Bundle 55's........................................... $*** $*** $***
</TABLE>
<PAGE> 25
Paisano Publications, Inc. EXHIBIT A Page A-9
All Titles PRICE SCHEDULE September 11, 1996
MAILING AND BUNDLING (CONTINUED)
<TABLE>
<CAPTION>
Run Per
1,000 Materials
Makeready Copies in Price
--------- ------ ---------
<S> <C> <C> <C>
Bundle 50's ............................... $*** $*** $***
Bundle 45's ............................... $*** $*** $***
Bundle 40's ............................... $*** $*** $***
Bundle 35's ............................... $*** $*** $***
Bundle 30's ............................... $*** $*** $***
Bundle 25's ............................... $*** $*** $***
Bundle 20's ............................... $*** $*** $***
Bundle 15's ............................... $*** $*** $***
Bundle 10's ............................... $*** $*** $***
Bundle 5's ................................ $*** $*** $***
Sitma Wrapper - Wrap (no film included), address,
bag and load bound books (up to 144 pages)
all (onserts are additional) ................... $*** $*** $***
Additional for clear film ...................... $ -- $*** $***
Additional for pre-printed generic film ........ $ -- $*** $***
Additional for books with more than 144 pages:
Up to and including 300 pages, per M ......... $ -- $*** $***
Over 300 to 400 pages, per M ................. $ -- $*** $***
Over 400 pages, per M ........................ $ -- $*** $***
Sitma Lot Change, each ......................... $*** $ -- $ --
Additional if RRD supplied 6" x 4" indicia card
(return address and indicia only printed 1/C one
side on 7pt stock .............................. $ -- $*** $***
</TABLE>
<PAGE> 26
Paisano Publications, Inc. EXHIBIT A Page A-10
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000 Materials
MAILING AND BUNDLING (CONTINUED) Makeready Copies in Price
- -------------------------------- --------- ------- ---------
<S> <C> <C> <C>
NON-SELECTIVE ONSERTING:
Makeready, per onsert...................................... $*** - -
Run Per M, per onsert:
A two-page 6" x 4" onsert card........................ - $*** -
A multipage onsert up to 24 pages..................... - $*** -
A multipage onsert over 24 pgs to 48 pgs.............. - $*** -
A multipage onsert over 50 pgs to 72 pgs.............. - $*** -
A multipage onsert over 74 pgs to 96 pgs.............. - $*** -
SELECTIVE ONSERTING - THESE PRICES ARE ADDITIONAL
TO BASE SITMA WRAPPING PRICES
Basic machine makeready.................................... $*** - -
Makeready each selectively controlled box.................. $*** - -
A two-page 6" x 4" onsert card
Base running, (applied to entire run), per M.......... - $*** -
Each onsert fed (copies requiring onserts), per M..... - $*** -
A multi-page onsert up to 24 pages
Base running, (applied to entire run), per M.......... - $*** -
Each onsert fed (copies requiring onserts), per M..... - $*** -
A multi-page onsert over 24 pages up to 48 pages
Base running, (applied to entire run), per M.......... - $*** -
Each onsert fed (copies requiring onserts), per M..... - $*** -
Miscellaneous Sitma Operations:
Insert one or more cards (6" x 4") into
Book (Random Location)................................ $*** $*** -
Onsert Gluer (1 gun hot melt).............................. $*** $*** $***
Onsert Gluer (2 guns hot melt)............................. $*** $*** $***
Add'l for Perforated film.................................. $*** $*** -
Add'l for Registered film.................................. $*** $*** -
</TABLE>
<PAGE> 27
Paisano Publications, Inc. EXHIBIT A Page A-11
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000 Materials
MAILING AND BUNDLING (CONTINUED) Makeready Copies in Price
- -------------------------------- --------- ------- ---------
<S> <C> <C> <C>
Sitma Wrap (no film included) - pile down on
skids ( up to 144 pages) $*** $*** *
*Add mailing film prices to per M run price
Sitma Wrapping Slowdowns:
-------------------------
1% Sitma Slowdown, per thousand................................................ - $*** -
2% Sitma Slowdown, per thousand................................................ - $*** -
3% Sitma Slowdown, per thousand................................................ - $*** -
4% Sitma Slowdown, per thousand................................................ - $*** -
5% Sitma Slowdown, per thousand................................................ - $*** -
6% Sitma Slowdown, per thousand................................................ - $*** -
7% Sitma Slowdown, per thousand................................................ - $*** -
8% Sitma Slowdown, per thousand................................................ - $*** -
9% Sitma Slowdown, per thousand................................................ - $*** -
10% Sitma Slowdown, per thousand............................................... - $*** -
11% Sitma Slowdown, per thousand............................................... - $*** -
12% Sitma Slowdown, per thousand............................................... - $*** -
15% Sitma Slowdown, per thousand............................................... - $*** -
18% Sitma Slowdown, per thousand............................................... - $*** -
20% Sitma Slowdown, per thousand............................................... - $*** -
25% Sitma Slowdown, per thousand............................................... - $*** -
30% Sitma Slowdown, per thousand............................................... - $*** -
35% Sitma Slowdown, per thousand............................................... - $*** -
40% Sitma Slowdown, per thousand............................................... - $*** -
45% Sitma Slowdown, per thousand............................................... - $*** -
50% Sitma Slowdown, per thousand............................................... - $*** -
Additional Makeready Hours, per hour........................................... - $*** -
Add'l crew for Sitma Line, per person, per thousand............................ - $*** -
</TABLE>
<PAGE> 28
Paisano Publications, Inc. EXHIBIT A Page A-12
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
MAILING AND BUNDLING (continued) 1,000 Materials
Supplement Mailing Operations Makeready Copies in Price
--------- ------ --------
<S> <C> <C> <C>
Additional to prepare postal forms
number #3451 and #3452, 1st form........................... $*** - -
Each additional form................................ $*** - -
Additional to prepare 3rd Class Postal
permit number #3602, per issue, per form............ $*** - -
Additional to prepare export documents,
per issue, per form................................. $*** - -
MISCELLANEOUS PRICES Materials
Price in Price
----- ---------
Cartoning and cartons (up to 40# per carton), per carton....................... $*** $***
Interplant handling, per skid.................................................. $*** $***
Packing in non-returnable Power Paks (up to 2,000 # per
container), per container............................................... $*** $***
Pack and Band Cartons or bundles on skis, per skid............................. $*** $***
Receiving furnished inserts, etc...per cwt...................................... $*** -
Newspaper Spec packing, per M equivalent 8 pages............................... $*** -
OVERTIME Price
- -------- -----
Preliminary (Platemaking), per hour*................................................................... $***
Presswork
Single Web overtime, per hour*.................................................................. $***
Double Web overtime, per hour*.................................................................. $***
Binding
Saddlewire Binding overtime, per hour*.......................................................... $***
Patent Binding overtime, per hour*.............................................................. $***
Mailing or Bundling overtime, per hour*................................................................ $***
Sitma Wrap and Mail overtime, per hour*................................................................ $***
*Doubletime, per hour, @ 200% of the rates above.
</TABLE>
<PAGE> 29
Paisano Publications, Inc. EXHIBIT A Page A-13
All Titles PRICE SCHEDULE September 11, 1996
MISCELLANEOUS PUB ROOM PRICES
<TABLE>
<CAPTION>
Run Per
1,000 Materials
Makeready Copies in Price
--------- --------- ---------
<S> <C> <C> <C>
Clerical and set-up allowance (includes getting books,
materials and setting up layout. A batch consists of
natural breakdown of customer's orders into separate orders
to the Pub Room in the form of "to shipper move tickets"
generally broken down by the different versions, routings,
methods of preparation and arrivals of labels.) These clerical
prices are to apply to all Pub Room operations.
U.S. Mail or UPS, per batch (each setup)......................... $*** - -
Other than U.S. Mail or UPS, per batch (each setup).............. $*** - -
Insert single copy in envelope (price includes affix label,
rubber stamp, affix metered postage, and seal envelope if
necessary), per thousand copies (envelopes are extra)............ - $*** -
Weigh and stamp parcel, look up rate, pull meter tape, affix
and record on postage or UPS requisition, per package,
book or bundle.............................................. $*** - -
Additional to bag mail (sorting packages and bundles into
proper mail sort, usually into SCF, state or mixed state,
pickup and hang bags, bag according to sort, select correct
bag tag and insert and pile down), per thousand copies........... - $*** $***
Kraftwrap Bundling:
10 books, per thousand copies............................... - $*** $***
15 books, per thousand copies............................... - $*** $***
20 books, per thousand copies............................... - $*** $***
25 books, per thousand copies............................... - $*** $***
</TABLE>
<PAGE> 30
Paisano Publications, Inc. EXHIBIT A Page A-14
All Titles PRICE SCHEDULE September 11, 1996
<TABLE>
<CAPTION>
Run Per
1,000 Materials
MISCELLANEOUS PUB ROOM PRICES (Continued) Makeready Copies in Price
- ----------------------------------------- --------- ------- ---------
<S> <C> <C> <C>
Shrinkwrap Bundles (Off Line):
10 books, per thousand copies................................................ - $*** $***
15 books, per thousand copies................................................ - $*** $***
20 books, per thousand copies................................................ - $*** $***
25 books, per thousand copies................................................ - $*** $***
50 books, per thousand copies................................................ - $*** $***
100 books, per thousand copies............................................... - $*** $***
Affix labels by hand, sort, strap and bag per M copies......................... - $*** -
Carton Specials, based on using 8-14" double stack
telescoping cartons, (Maximum 100 books per carton.)
Carton 100's, per thousand copies............................................ - $*** $***
Carton 25's, per thousand copies............................................. - $*** $***
Carton 20's, per thousand copies............................................. - $*** $***
Carton 15's, per thousand copies............................................. - $*** $***
HANDWORK Price
- -------- -----
Preliminary, per man hour...................................................................................... $***
Bindery or Pub-Room, per man-hour (skilled).................................................................... $***
Bindery or Pub-Room, per man-hour (unskilled).................................................................. $***
STORAGE
- -------
Product storage (assume 1,400 pounds per skid). If this price
is used for Magazine back Issue Storage, note that a skid cannot
combine issues - only one issue per skid. Price
-----
First month or fraction thereof (includes in and out
plus storage), per skid...................................................................................... $***
Each additional month (storage), per skid...................................................................... $***
</TABLE>
<PAGE> 31
Paisano Publications, Inc. EXHIBIT A Page A-15
All Titles PRICE SCHEDULE September 11, 1996
SELECTRONIC(R) IMAGING:
- -----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SADDLEWIRE BINDING
------------------
Ink-Jet Address Cover only...................................... $*** $*** ***
Ink-Jet Address Cover and One Inside Location................... $*** $*** ***
Full Message - Up to 6 lines of 50 characters each*............. *** $*** ***
Post Net Bar Coding, per thousand............................... *** $*** ***
*additional to addressing price
PATENT BINDING
--------------
Ink-Jet Address Cover only...................................... $*** $*** ***
Ink-Jet Address Cover and One Inside Location................... $*** $*** ***
Full Message - Up to 6 lines of 50 characters each*............. *** $*** ***
Post Net Bar Coding, per thousand............................... *** $*** ***
======================================================================
*additional to addressing price
</TABLE>
<PAGE> 32
Paisano Publications, Inc. Page B-1
All Titles 9/17/96
EXHIBIT B
PAPER REQUIREMENTS
<TABLE>
7 3/4" x 10 1/2" BASIS MAKEREADY RUN/M
PAPER REQUIREMENTS WT. POUNDS POUNDS
- ------------------------ ----- --------- ------
<S> <C> <C> <C>
4 Page Cover (4/4) 60 886 24.9
4 Page Cover (5/5) 60 1,063 25.0
Press Stops, Each 60 177 --
Plate Changes, each 60 44 --
6 Page Gatefold Cover (4/4) 60 639 36.4
6 Page Gatefold Cover (5/5) 60 767 36.7
Press Stops, Each 60 128 --
Plate Changes, each 60 32 --
4 Page Body (1/1) 40 293 16.3
4 Page Body (2/2) 40 352 16.3
4 Page Body (4/4) 40 469 16.3
4 Page Body (5/5) 40 586 16.4
8 Page Body (1/1) 40 293 32.3
8 Page Body (2/2) 40 352 32.4
8 Page Body (4/4) 40 469 32.7
8 Page Body (5/5) 40 586 32.8
8 Page Body (1/1 + 1/1) 40 586 32.2
8 Page Body (4/4 + 1/1) 40 703 32.3
8 Page Body (4/4 + 4/4) 40 938 32.5
8 Page Body (5/5 + 4/4) 40 1,055 32.7
8 Page Gatefold (4/4) 60 973 46.2
8 Page Gatefold (5/5) 60 1,135 46.5
Press Stops, Each 60 162 --
Plate Changes, each 60 41 --
8 Page Poster (4/4) 60 1,054 50.1
8 Page Poster (5/5) 60 1,231 50.6
Press Stops, Each 60 176 --
Plate Changes, each 60 44 --
12 Page Body (1/1 + 40 293 32.2
1/1) 40 147 16.1
12 Page Body (4/4 + 40 352 32.3
1/1) 40 176 16.2
12 Page Body (4/4 + 40 469 32.5
4/4) 40 234 16.2
12 Page Body (5/5 + 40 527 32.7
4/4) 40 264 16.4
16 Page Body (1/1) 40 293 64.7
16 Page Body (2/2) 40 352 65.0
16 Page Body (4/4) 40 469 65.3
16 Page Body (5/5) 40 586 65.5
16 Page Body (1/1 + 1/1) 40 586 64.4
16 Page Body (4/4 + 1/1) 40 703 64.7
16 Page Body (4/4 + 4/4) 40 938 65.0
16 Page Body (5/5 + 4/4) 40 1,055 65.5
</TABLE>
*For trim size of 8" x 10 3/4" add 8.0%
<PAGE> 33
PAGE B-2
Paisano Publications, Inc.
All Titles
EXHIBIT B
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
7-3/4" X 10-1/2" BASIS MAKEREADY RUN/M
PAPER REQUIREMENTS WT. POUNDS POUNDS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
24 Page Body (1/1 + 40 293 64.4
1/1) 40 147 32.2
24 Page Body (4/4 + 40 352 64.7
1/1) 40 176 32.4
24 Page Body (4/4 + 40 469 65.0
4/4) 40 234 32.5
24 Page Body (5/5 + 40 527 65.5
4/4) 40 264 32.7
32 Page Body (1/1 + 1/1) 40 586 128.8
32 Page Body (4/4 + 1/1) 40 703 129.4
32 Page Body (4/4 + 4/4) 40 938 130.0
32 Page Body (5/5 + 4/4) 40 1,055 131.1
Press Stops, per web 40 117 --
Press Stops, per web 40 59 --
Plate Changes, each 40 29 --
Plate Changes, each 40 15 --
- -------------------------------------------------------------------------------
</TABLE>
*For trim size of 8" x 10-3/4" add 8.0%
<PAGE> 34
EXHIBIT B
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
2 3/4" X 10 1/2" BASIS MAKE READY RUN/M
PAPER REQUIREMENTS WT. POUNDS POUNDS
<S> <C> <C> <C>
4 Page Cover (4/4) 50 739 20.8
4 Page Cover (5/5) 50 886 20.9
Press Stops, Each 50 148 --
Plate Changes, Each 50 37 --
6 Page Gatefold Cover (4/4) 50 532 30.3
6 Page Gatefold Cover (5/5) 50 639 30.6
Press Stops, Each 50 106 --
Plate Changes, Each 50 27 --
4 Page Body (1/1) 35 256 14.2
4 Page Body (2/2) 35 308 14.2
4 Page Body (4/4) 35 410 14.3
4 Page Body (5/5) 35 513 14.4
8 Page Body (1/1) 35 256 28.3
8 Page Body (2/2) 35 308 28.4
8 Page Body (4/4) 35 410 28.7
8 Page Body (5/5) 35 513 28.7
8 Page Body (1/1+1/1) 35 513 28.2
8 Page Body (4/4+1/1) 35 615 28.3
8 Page Body (4/4+4/4) 35 821 28.4
8 Page Body (5/5+4/4) 35 923 28.6
8 Page Gatefold (4/4) 60 973 46.2
8 Page Gatefold (5/5) 60 1,135 46.5
Press Stops, Each 60 162 --
Plate Changes, Each 60 41 --
8 Page Poster (4/4) 60 1,054 50.1
8 Page Poster (5/5) 60 1,231 50.6
Press Stops, Each 60 176 --
Plate Changes, Each 60 44 --
12 Page Body (1/1+ 35 256 28.3
1/1) 35 128 14.1
12 Page Body (4/4+ 35 308 28.4
1/1) 35 154 14.2
12 Page Body (4/4+ 35 410 28.4
4/4) 35 205 14.2
12 Page Body (5/5+ 35 462 28.7
4/4) 35 231 14.3
16 Page Body (1/1) 35 256 56.6
16 Page Body (2/2) 35 308 56.9
16 Page Body (4/4) 35 410 57.1
16 Page Body (5/5) 35 513 57.4
16 Page Body (1/1+1/1) 35 513 56.4
16 Page Body (4/4+1/1) 35 615 56.6
16 Page Body (4/4+4/4) 35 822 56.9
16 Page Body (5/5+4/4) 35 923 57.4
</TABLE>
*For trim size of 8" x 10 3/4" add 8.0%
<PAGE> 35
EXHIBIT B
PAISANO PUBLICATIONS, INC.
ALL TITLES
PAPER REQUIREMENTS
<TABLE>
7 3/4" X 10 1/2" BASIS MAKEREADY RUN/M
PAPER REQUIREMENTS WT POUNDS POUNDS
------------------ ----- --------- ------
<S> <C> <C> <C>
24 Page Body (1/1 + 35 256 56.4
1/1) 35 128 28.2
24 Page Body (4/4 + 35 308 56.6
1/1) 35 154 28.4
24 Page Body (4/4 + 35 410 56.9
4/4) 35 205 28.4
24 Page Body (5/5 + 35 462 57.4
4/4) 35 231 28.7
32 Page Body (1/1 + 1/1) 35 513 112.8
32 Page Body (4/4 + 1/1) 35 615 113.3
32 Page Body (4/4 + 4/4) 35 822 113.7
32 Page Body (5/5 + 4/4) 35 923 114.8
Press Stops, per web 35 102 --
Press Stops, per web 35 51 --
Plate Changes, each 35 26 --
Plate Changes, each 35 13 --
</TABLE>
*For trim size of 8" x 10 3/4" add 8.0%
<PAGE> 36
Paisano Publications, Inc. Page C-1
ALL TITLES September 11, 1996
EXHIBIT C-TITLES AND SPECIFICATIONS
<TABLE>
<CAPTION>
Title Trim Size Page Range Quantity Binding Style Frequency
- ----- ---------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Easy Riders/V. Twin 7-3/4" x 10-1/2" 156 to 188 450M to 650M Saddlewire Monthly
Tattoo 7-3/4" x 10-1/2" 96 to 128 125M to 300M Saddlewire Monthly
Biker 7-3/4" x 10-1/2" 80 to 112 100M to 250M Saddlewire Monthly
American Rodder 7-3/4" x 10-1/2" 112 to 128 90M to 150M Saddlewire Monthly
In The Wind 7-3/4" x 10-1/2" 112 to 144 90M to 250M Saddlewire Bi-Monthly
Quick Throttle 7-3/4" x 10-1/2" 80 to 112 80M to 150M Saddlewire Bi-Monthly
Savage 7-3/4" x 10-1/2" 88 to 112 80M to 200M Saddlewire Bi-Monthly
Flash 7-3/4" x 10-1/2" 80 to 112 80M to 175M Saddlewire Bi-Monthly
V.Q. 8" x 10-3/4" 80 to 112 135M to 250M Patent Bi-Monthly
Roadware (Catalog) 8" x 10-3/4" 80 to 112 90M to 125M Patent Annual
Calendar (3 versions) 7-3/4" x 10-1/2" 28 to 32 175M to 250M Saddlewire Annual
Magalog 7-3/4" x 10-1/2" 8 500M to 1,000M Saddlewire Annual
Retail Catalog (Overrun) 7-3/4" x 10-1/2" 32 100M to 150M Saddlewire 2 Times/Yr.
</TABLE>
<PAGE> 1
EXHIBIT 10.4.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
________________, 1998, by and between Newriders, Inc., a Nevada corporation
(the "Company") and William Prather (the "Executive").
WITNESSETH:
WHEREAS, the Company and its affiliates are engaged in a combined
publishing, entertainment, apparel, accessory and restaurant business which
markets services and products to persons who identify with the "freedom of the
road" lifestyle surrounding the American-made cruiser motorcycle;
WHEREAS, the Executive has executed that certain LLC Interest Contribution
Agreement dated June ____, 1998, by and among the Executive, the Company and
other parties therein named (the "Contribution Agreement") pursuant to which the
Executive has agreed to contribute to Easyriders, Inc., ("Easyriders") all of
the Executive's interest in M&B Restaurants, L.C., a Texas limited liability
company, subject to, among other things, the execution of this Agreement;
WHEREAS, the Executive, by education and experience, possesses
extraordinary qualifications to serve as chief executive officer of the Company
and Easyriders; and
WHEREAS, the Company desires to employ the Executive and the Executive
desires to accept such employment with the Company, in each case upon the terms
and subject to the conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, it is agreed as follows:
1. EMPLOYMENT. The Company agrees to employ the Executive, and the
Executive agrees to be employed by the Company, subject to the terms and
conditions set forth herein. This Agreement shall become effective only upon the
closing date of the transactions contemplated by the Contribution Agreement (the
"Effective Date").
2. TERM. Subject to the provisions hereof, the term of the Executive's
employment by the Company under this Agreement shall be for a period of five (5)
years commencing on the Effective Date, provided that such term of employment
shall continue thereafter unless and until terminated by either the Company or
the Executive upon no less than sixty (60) days' prior written notice to the
other of the desire to terminate such employment. The term of the Executive's
employment hereunder, including any continuation of the original term, is
hereinafter referred to as the "Employment Period."
3. POSITION AND DUTIES. During the Employment Period, the Executive agrees
to be employed by and to serve the Company as its President and Chief Executive
Officer,
<PAGE> 2
and the Company agrees to employ and retain the Executive in such capacities.
The Executive shall also perform similar services as chief executive officer for
Easyriders and other any other Affiliates (as hereinafter defined) of the
Company without additional compensation, as may be requested from time to time
by the Board of Directors of the Company. In such capacities, the Executive
shall render such managerial, administrative and other services as are
customarily associated with or incident to such positions and shall have the
authority necessary or appropriate to perform such duties and responsibilities.
The Executive shall devote his business time, energy, and skill to the affairs
of the Company on a full-time basis and the Executive shall report to the
Company's and Easyriders' board of directors. The Company shall not appoint any
individual to whom the Executive shall report, or who shall have the right to
supervise the Executive, provided, however, that the Company's board of
directors may appoint one or more members of the board of directors to
coordinate the reporting from the Executive to the board of directors.
4. DEFINITIONS. For the purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Affiliate" of the Company means any person, corporation or other
entity that, directly or indirectly through one or more
intermediaries, controls, is controlled by or is under common control
with the Company.
(b) "Termination For Cause" shall mean termination by the Company of the
Executive's employment by the Company by reason of the Executive's
willful dishonesty towards or fraud upon the Company, or by reason of
the Executive's willful material breach of this Agreement which has
resulted in material injury to the Company. No act or failure to act
shall be considered "willful" if it is done by the Executive in the
good faith belief that his act or omission furthered the interests of
the Company.
(c) "Termination Other Than For Cause" shall mean termination by the
Company of the Executive's employment by the Company (other than a
Termination For Cause).
(d) "Voluntary Resignation" shall mean termination by the Executive of
the Executive's employment by the Company other than (i) a
Resignation for Sufficient Reason and (ii) a termination by reason of
the Executive's death or disability as described herein.
(e) "Resignation For Sufficient Reason" means termination by the
Executive of the Executive's employment by the Company (i) within six
(6) months following a "Change in Control," or (ii) at any time after
the Company changes the Executive's title, working conditions,
duties, status or authority in a manner that is not consistent with
the office of chief executive officer of the Company and Easyriders
or otherwise breaches this Agreement in any material respect.
2
<PAGE> 3
(f) "Change in Control" shall mean (i) the time that the Company first
determines that any person (and all other persons who constitute a
group within the meaning ofSection 13 (d) (3) of the Securities
Exchange Act of 1934 ("Exchange Act")), other than a person who is a
director or officer of the Company or Easyriders on the Effective
Date, has acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of twenty percent
(20%) or more of Easyriders' outstanding securities, or (ii) the
first day on which a majority of the members of Easyriders' board of
directors are not "Continuing Directors."
(g) "Continuing Directors" shall mean, as of any date of determination,
any member of Easyriders' board of directors who (i) was a member of
that board of directors on the Effective Date, (ii) has been a member
of that board of directors for the two years immediately preceding
such date of determination, or (iii) was nominated for election or
elected to Easyriders' board of directors with the affirmative vote
of a majority of the Continuing Directors who were members of
Easyriders' board of directors at the time of such nomination or
election.
5. TERMINATION FOR CAUSE. Termination For Cause may be effected by the Company
at any time during the Employment Period, effective upon written notification to
the Executive which specifies the reasons therefor. Upon Termination For Cause,
the Executive shall promptly be paid all accrued salary, bonus compensation to
the extent earned, vested deferred compensation (other than pension or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Company or its Affiliates in which
the Executive is a participant to the full extent of the Executive's rights
under such plans, accrued vacation pay and any appropriate business expenses
incurred by the Executive in connection with his duties hereunder, all to the
date of termination, but the Executive shall not be paid any other compensation
or reimbursement of any kind, including without limitation, Severance
Compensation.
6. RESIGNATION FOR SUFFICIENT REASON OR TERMINATION OTHER THAN FOR CAUSE. The
Company may effect a Termination Other Than For Cause at any time upon giving
written notice to the Executive at least sixty (60) days prior to the effective
date of termination specified in such notice. Resignation for Sufficient Reason
may be effected by the Executive at any time, effective upon written notice of
resignation to the Company which specifies the reasons therefor. Upon any
Termination Other Than For Cause or upon any Resignation For Sufficient Reason,
the Executive shall promptly be paid all accrued salary, bonus compensation to
the extent earned, vested deferred compensation (other than pension plan or
profit sharing plan benefits which will be paid in accordance with the
applicable plan), any benefits under any plans of the Company or its Affiliates
in which the Executive is a participant to the full extent of the Executive's
rights under such plans (including accelerated vesting, if any, of awards
granted to the Executive under Easyriders' stock option plan), accrued vacation
pay and any appropriate business expenses incurred by the Executive in
connection with his duties hereunder, all to the date of termination, and all
Severance Compensation as hereinafter provided.
3
<PAGE> 4
7. TERMINATION BY REASON OF DISABILITY. If, during the Employment Period, the
Executive, in the reasonable judgment of the Company's board of directors, has
failed to perform his duties under this Agreement on account of illness or
physical or mental incapacity, and such illness or incapacity continues for a
period of more than ninety (90) consecutive days, the Company shall have the
right to terminate the Executive's employment hereunder by written notification
to the Executive and payment to the Executive of all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Company or its
Affiliates in which the Executive is a participant to the full extent of the
Executive's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by the Executive in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of the initial
five-year Employment Period, but the Executive shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
Severance Compensation.
8. DEATH. In the event of the Executive's death during the Employment Period,
Executive's employment shall be deemed to have terminated as of the last day of
the month during which his death occurs and the Company shall promptly pay to
his estate or such beneficiaries as the Executive may from time to time
designate all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Company or its Affiliates in which the Executive is a
participant to the full extent of the Executive's rights under such plans,
accrued vacation pay and any appropriate business expenses incurred by the
Executive in connection with his duties hereunder, all to the date of
termination, but the Executive's estate shall not be paid any other compensation
or reimbursement of any kind, including without limitation, Severance
Compensation.
9. VOLUNTARY RESIGNATION. The Executive shall give the Company written notice of
his Voluntary Resignation at least sixty (60) days prior to the effective date
of termination of employment. In the event of a Voluntary Resignation, the
Company shall promptly pay all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company or its Affiliates in which the Executive
is a participant to the full extent of the Executive's rights under such plans,
accrued vacation pay and any appropriate business expenses incurred by the
Executive in connection with his duties hereunder, all to the date of
termination, but no other compensation or reimbursement of any kind, including
without limitation, Severance Compensation. For a period of one year following a
Voluntary Resignation of the Executive, the Executive agrees that he shall not,
directly or indirectly, engage or be interested in and shall not, directly or
indirectly, have any interest in, own, manage, operate, control, be connected
with as a stockholder, joint venturer, officer, partner, employee, or
consultant, or otherwise engage or invest or participate in any restaurant
business that specializes in barbecue menu items, or that utilizes a
motorcycle-based theme or decor, at any location that is within five (5) miles
of any restaurant owned or operated by the Company or any its Affiliates on the
date of such Voluntary Resignation.
10. BASE SALARY. As payment for the services to be rendered by the Executive as
provided in Section 3, the Company agrees to pay to the Executive during the
Employment Period a base salary at the annual rate of two hundred thousand
dollars ($200,000) payable in installments in accordance with the Company's
customary payroll practices. The Executive's base salary shall be reviewed
annually by the Compensation Committee of Easyriders' board of directors
("Compensation Committee"), and the Base Salary for each year (or portion
thereof)
4
<PAGE> 5
beginning on the first anniversary of the Effective Date, may be increased (but
not decreased) to conform to the Company's compensation policies for senior
management.
11. BONUSES. The Executive shall be eligible to receive a discretionary bonus
for each year (or portion thereof) during the Employment Period, with the actual
amount of any such bonus to be determined in the sole discretion of the
Company's board of directors based upon its evaluation of the Executive's
performance during such year. All such bonuses shall be reviewed annually by the
Compensation Committee.
12. ADDITIONAL BENEFITS. During the term of this Agreement, the Executive shall
be entitled to the following fringe benefits:
(a) Executive Benefits. The Executive shall be eligible to participate in
such of the Company's and Easyriders' benefits and deferred compensation plans
as are now generally available or later made generally available to executive
officers or senior employees of the Company or Easyriders, including, without
limitation, the Company's and Easyriders' stock option plan, profit sharing
plans, annual physical examinations, dental and medical plans, personal
catastrophe and disability insurance, financial planning, retirement plans and
supplementary executive retirement plans, if any.
(b) Vacation. The Executive shall be entitled to four (4) weeks of
vacation during each year during the Employment Period, prorated for partial
years.
(c) Life Insurance.During the Employment Period, the Company or an
Affiliate thereof shall at its expense procure and keep in effect term life
insurance on the life of the Executive payable to the Employee's designated
beneficiaries in the aggregate amount of $1,000,000. The Company or an Affiliate
thereof shall also maintain at its cost all life insurance policies on the
Executive's life which are required by the Company's (or its Affiliates')
lenders and, at any such time as such policy is no longer so required, the
Company shall offer to assign and transfer such policy to the Executive for an
amount equal to its then cash value (if any).
(d) Reimbursement for Expenses. During the Employment Period, the
Corporation shall reimburse the Executive for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by the Executive
in connection with his duties under this Agreement. The Company also shall
furnish the Executive, without charge, with all necessary or appropriate office
facilities and secretarial support.
13. SEVERANCE COMPENSATION. In the event the Executive's employment is
terminated by a Termination Other Than For Cause or by a Resignation For
Sufficient Reason within the initial five-year term of the Employment Period,
the Executive shall be paid as severance compensation ("Severance Compensation")
his base salary (at the rate payable at the time of such termination), for a
period equal to the remaining portion of the initial five-year Employment
Period, not to exceed thirty (30) months. The Severance Compensation payable to
the Executive during such period shall NOT be reduced by the amount of any
compensation that the Executive actually receives from any new employer after
the date of termination and the Executive is under no obligation to mitigate the
amount owed the Executive pursuant to this
5
<PAGE> 6
Section by seeking other employment or otherwise. Notwithstanding anything in
this Section to the contrary, the Executive may in the Executive's sole
discretion, by delivery of a notice to the Company within sixty (60) days
following a Termination Other Than For Cause or a Resignation For Sufficient
Reason, elect to receive from the Company a lump sum Severance Compensation
payment by bank cashier's check equal to the present value (discounted at the
rate of 5% per annum) of the flow of cash payments that would otherwise be paid
to the Executive as Severance Compensation under this Section. The Executive
shall also be entitled to an accelerated vesting of any awards granted to the
Executive under the Company's or Easyriders' stock option plan to the extent
provided in the stock option agreement entered into at the time of grant. The
Executive shall continue to accrue retirement benefits and shall continue to
enjoy any medical, dental, disability and other benefits under any plans of the
Company or its Affiliates in which the Executive is a participant to the full
extent of the Executive's rights under such plans, including any perquisites
provided under this Agreement, through the remaining term of the initial
five-year Employment Period not to exceed thirty (30) months; provided, however,
that the benefits under any such plans of the Company or its Affiliates in which
the Executive is a participant, including any such perquisites, shall cease upon
re-employment of Executive by a new employer.
14. REGISTRATION RIGHTS. Within 90 days after the request of the Executive
following a Termination Other Than For Cause or a Resignation For Sufficient
Cause, the Company shall cause Easyriders to file (and cause Easyriders to use
its best efforts to cause to become effective within 120 days after such
request), maintain, supplement and update for a period of at least 30 days from
its effective date, a registration statement in accordance with the applicable
rules and regulations of the Securities and Exchange Commission which permits
the Executive to sell or distribute all of the Executive's shares of Easyriders'
common stock which constitute Restricted Securities (as defined below) or such
lesser number of shares specified in the Executive's request; provided that
Easyriders shall have no obligation to file more than one such registration
statement. "Restricted Securities" means all of Easyriders common stock received
by Executive pursuant to the Contribution Agreement; provided, however, that any
Restricted Securities shall cease to be Restricted Securities when such
Restricted Securities may be sold under Rule 144 (or any similar provision then
in force) under the Securities Act of 1933, as amended. In connection with the
offering of any of Easyriders' shares pursuant to this section, the Company
shall also take such action as may be reasonably necessary to qualify or
register such shares under the "blue sky" or securities laws of such states as
may be reasonably requested by the Executive. All reasonable costs and expenses
of registration (excluding underwriter's compensation) of the Executive's shares
of Easyriders' stock shall be borne by the Company or Easyriders. The rights and
obligations of the Executive and the Company under this Section 14 shall be
subject to such other terms and conditions, mutually satisfactory to the
Executive and the Company, as are customarily contained in registration rights
agreements, including, but not limited to, with respect to priorities,
holdbacks, blackouts, selection of underwriters, registration procedures and
indemnification.
15. OUTSIDE ACTIVITIES. Nothing in this Agreement shall preclude the Executive
from devoting time during reasonable periods required for investing personal
assets and/or those of family members in such form or manner that will not
violate this Agreement, including but not limited to Sections 3 and 18 hereof.
6
<PAGE> 7
16. PAYMENT OBLIGATIONS. The Company's obligation to pay the Executive the
Severance Compensation and to make the arrangements provided herein shall be
unconditional, and the Executive shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Termination Other Than For Cause or a
Registration For Sufficient Reason shall be brought to enforce or interpret any
provision contained herein, the Company, to the extent permitted by applicable
law and the Company's articles of incorporation and bylaws, hereby indemnifies
and agrees to reimburse the Executive for the Executive's reasonable attorneys'
fees and disbursements incurred in such litigation if the Executive prevails in
such litigation.
17. COVENANT NOT TO DISCLOSE. The Executive covenants and agrees that he will
not, at any time during or after the termination of his employment by the
Company, communicate or disclose to any person, corporation or other entity, or
use for his own account, or advise, discuss with, or in any way assist any other
person, corporation or entity in obtaining or learning about, without the prior
written consent of the Company, confidential information concerning the business
and affairs of the Company or any of its Affiliates. The Executive further
covenants and agrees that he shall retain all such knowledge and information
concerning the foregoing in trust for the sole benefit of the Company and its
Affiliates and their respective successors and assigns.
18. AGREEMENT NOT TO COMPETE.For a period beginning on the Effective Date and
ending on the later of (i) the expiration or other termination (for any reason)
of the Employment Period or (ii) the expiration of the period, if any, for which
the Executive is entitled to receive Severance Compensation under Section 13
hereof, Executive agrees that he shall not, for any reason, directly or
indirectly, engage or be interested in, and shall not, directly or indirectly,
have any interest in, own, manage, operate, control, be connected with as a
stockholder, joint venturer, officer, partner, employee or consultant, or
otherwise engage or invest or participate in any restaurant business that
specializes in barbecue menu items, or that utilizes a motorcycle-based theme or
decor, at any location which is within five (5) miles of any restaurant owned or
operated by the Company or any of its Affiliates on the date of expiration or
other termination of the Employment Period. Executive agrees that the duration
and area for which the covenant set forth in this Section 18 and in Section 9
are to be effective are reasonable. In the event that any court determines that
the time period or the geographical areas provided for in this Section 18 or in
Section 9, or both of them are unreasonable and that such covenant is to that
extent unenforceable, such covenant shall remain in full force and effect for
the greatest time period and in the greatest geographical area that would not
render it unenforceable.
19. ESSENTIAL NATURE OF COVENANTS. The covenants contained in Sections 17 and 18
and in the final sentence of Section 9 of this Agreement (the "Restrictive
Covenants") shall be construed as independent of any other provision of this
Agreement and the existence of any claim or cause of action of the Executive
against the Company or any of its Affiliates, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Company of the Restrictive Covenants. The Executive understands that the
Restrictive Covenants are essential elements of the transactions contemplated by
this Agreement and, but for the agreement of the Executive to be bound by the
Restrictive Covenants, the Company would not have agreed to enter into such
transactions. The Executive has been advised to consult with his counsel in
order to be informed in all respects
7
<PAGE> 8
concerning the reasonableness and propriety of the Restrictive Covenants with
specific regard to the nature of the business conducted by the Company, and the
Executive acknowledges that the Restrictive Covenants are reasonable in all
respects.
20. REMEDIES. In the event of a breach or threatened breach by the Executive of
the Restrictive Covenants, the Company shall be entitled to make application for
a temporary restraining order and an injunction restraining the Executive from
the commission of such breach. Nothing herein contained shall be construed as
prohibiting the Company from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
21. WAIVER OF BREACH. The waiver by either party of a breach of any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any subsequent breach by the other party.
22. BINDING EFFECT. This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective permitted successors,
assigns, heirs and legal representatives. The Company may assign this Agreement
to an Affiliate only with the prior written consent of the Executive, which
consent shall not be unreasonably withheld. The Executive may not assign this
Agreement.
23. SEVERABILITY. The invalidity of all or any part of any section of this
Agreement shall not render invalid the remainder of this Agreement or the
remainder of such section. If any provision of this Agreement is so broad as to
be unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
24. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall, when executed, be deemed to be an original, but all of
which together shall constitute one and the same instrument.
25. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with the laws of the state of California.
26. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties hereto and supersedes all prior agreements, understandings and
arrangements, oral or written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NEWRIDERS, INC.
By: -------------------------------- ----------------------------------------
Name: WILLIAM PRATHER
Title:
8
<PAGE> 1
NEWRIDERS, INC.
567 San Nicholas Drive, Suite 400
Newport Beach, CA 92660
August 15, 1998
Mr. Joseph Teresi
C/o Paisano Publications, Inc.
28210 Dorothy Drive
Agoura Hills, CA 91301
Dear Mr. Teresi:
Reference is made to that certain Stock Contribution and Sale Agreement,
dated as of June 30, 1998, by and among Newriders, Inc., a Nevada corporation,
Easyriders, Inc., a Delaware corporation, Easyriders Sub II, Inc., a California
corporation, 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 and you in your individual capacity
(the "Agreement").
Section 11.1(d) of the Agreement states that the "Agreement may, by
notice given prior to or at the Closing, be terminated . . . (d) by either
party if the Closing has not occurred . . . on or before July 8, 1998 or such
later date as the parties may agree upon . . . ."
By signing below in your individual capacity and on behalf of each of the
corporations owned by you and party to the Agreement, you and each such
corporation agree that the date by which the Closing must occur before any
party to the Agreement has a right of termination under Section 11.1(d) shall
be changed from July 8, 1998 (which date had previously been extended to August
15, 1998) to September 30, 1998.
Except as modified by this amendment, the Agreement remains in full force
and effect.
Very truly yours,
<TABLE>
<S> <C> <C>
NEWRIDERS, INC. EASYRIDERS, INC. EASYRIDERS SUB II, INC.
a Nevada corporation a Delaware corporation a California corporation
By: /s/ WILLIAM E. PRATHER By: /s/ WILLIAM E. PRATHER By: /s/ WILLIAM E. PRATHER
---------------------- ---------------------- ----------------------
William E. Prather William E. Prather William E. Prather
President and President President
Chief Executive
Officer
</TABLE>
<PAGE> 2
Agreed and Acknowledged this 15th day of August, 1998:
JOSEPH TERESI
/s/ Joseph Teresi
- --------------------------
PAISANO PUBLICATIONS, INC.
a California corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
Chairman
EASYRIDERS OF COLUMBUS, INC.
an Ohio corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
Secretary
EASYRIDERS FRANCHISING, INC.
a California corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
Sole Shareholder
TERESI, INC.
a California corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
President
BROS CLUB, INC.
a California corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
President
ASSOCIATED RODEO RIDERS ON WHEELS
a California corporation
By: /s/ Joseph Teresi
-----------------------
Joseph Teresi
President
<PAGE> 1
EXHIBIT 10.5.1
================================================================================
EASYRIDERS, INC.
EASYRIDERS SUB II, INC.
(to be merged with and into PAISANO PUBLICATIONS, INC.)
NOTE AND WARRANT PURCHASE AGREEMENT
with
NOMURA HOLDING AMERICA INC.
Up to $5,000,000 Senior Secured Guaranteed Revolving Notes Due 2001
$17,000,000 Senior Secured Guaranteed Term Notes Due 2001
Warrants to Purchase Shares of Common Stock
Dated as of September __, 1998
================================================================================
<PAGE> 2
NOTE AND WARRANT PURCHASE AGREEMENT
NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") dated as of
September __, 1998, by and among EASYRIDERS, INC., a Delaware corporation of
which the Company is a wholly-owned Subsidiary (together with its successors,
the "Parent"), EASYRIDERS SUB II, INC. (to be merged with and into PAISANO
PUBLICATIONS, INC.), a California corporation ("Easyriders Sub II") and NOMURA
HOLDING AMERICA INC., a Delaware corporation (together with its successors,
assigns and transferees, the "Purchaser").
RECITALS
WHEREAS, the Parent and Paisano Publications (capitalized terms used
herein without definition have the meanings provided in Section 1 hereof) have
agreed to consummate the Reorganization, which will include (i) the acquisition
(the "Paisano Acquisition") by the Parent of all the outstanding Capital Stock
of Paisano Publications and the other Paisano Companies, pursuant to the Paisano
Stock Contribution Agreement, (ii) the acquisition (the "El Paso Acquisition")
by the Parent of all of the membership interests of El Paso pursuant to the El
Paso Contribution Agreement and (iii) the merger (the "Newriders Merger") of
Easyriders Sub, Inc., a Nevada corporation and Wholly-owned Subsidiary of the
Parent ("Easyriders Sub I") with and into Newriders Inc., a Nevada corporation
("Newriders") pursuant to the Newriders Merger Agreement. As a result of the
Newriders Merger, Newriders, the Paisano Companies and El Paso will become
Wholly-owned Subsidiaries of the Parent. Immediately following the
Reorganization, Easyriders will transfer the El Paso membership interests to
Newriders.
WHEREAS, in the Paisano Acquisition, the Parent and Easyriders Sub II will
receive all of the issued and outstanding stock (the "Paisano Companies Stock")
of each of the corporations that comprise the Paisano Companies. Mr. Joseph
Teresi ("Teresi"), the sole stockholder of each of the Paisano Companies, will
receive in exchange for the Paisano Companies Stock, 6,493,507 shares of
Easyriders Common Stock, a promissory note of Easyriders Sub II in the principal
amount of $15,000,000 (the "Easyriders Sub II Note") which is payable in cash
immediately after the Newriders Merger has occurred, and the Subordinated Seller
Notes.
WHEREAS, immediately following the Newsriders Merger, Easyriders Sub II
will merge with and into Paisano Publications, with Paisano Publications as the
surviving corporation (the "Paisano Merger").
<PAGE> 3
WHEREAS, in order to provide financing to repay a portion of the
Easyriders Sub II Note simultaneously with the consummation of the Paisano
Merger, to refinance certain existing Indebtedness of Paisano Publications and
to provide working capital and funds for other general corporate purposes, the
Company has proposed to issue and sell to the Purchaser (i) its Senior Secured
Guaranteed Revolving Notes Due 2001 in an aggregate principal amount not to
exceed $5,000,000 at any time outstanding and (ii) its Senior Secured Guaranteed
Term Notes Due 2001 in an aggregate principal amount of $17,000,000, all for the
consideration and upon the terms and conditions hereinafter provided.
WHEREAS, in consideration of the purchase of such notes by the Purchaser,
the Parent has agreed to issue to the Purchaser its warrants to purchase under
certain circumstances up to an aggregate of 348,157 shares of Common Stock then
outstanding at an initial exercise price of $3.00 per share (subject to
adjustment as therein provided).
NOW, THEREFORE, the Parent, the Company and the Purchaser agree as
follows:
Section 1. Definitions.
Section 1.1. Defined Terms. For the purposes of this Agreement, the
following terms shall have the following respective meanings:
"ABC" has the meaning specified in Section 4.37.
"Accountants" has the meaning specified in Section 7.
"Accounts" means, as at any date of determination, with respect to any
Person, all "accounts" (as such term is defined in the Uniform Commercial Code
in effect in the State of New York on the date hereof), customer accounts,
claims, rights of action, book debts and ancillary rights, of such Person,
including, without limitation, the unpaid portion of the obligation of a
customer of such Person in respect of Inventory purchased by and shipped to such
customer, or in respect of services rendered to such customer, as stated on the
respective invoice of such Person, net of any credits, rebates or offsets owed
to such customer.
"Affiliate" means, as to any Person, any Person which directly or
indirectly controls, is controlled by, or is under common control with such
Person. For purposes of this definition, "control" of a Person shall mean the
power, direct or indirect, (a) to vote or direct the voting of 5% or more of the
outstanding shares of Voting Stock of such Person, or (b) to direct or cause the
direction of the management and policies of such Person whether by ownership of
Capital Stock, by contract or otherwise; provided, however, that the Purchaser
shall not be deemed to be an Affiliate of any Credit Party by reason of its
ownership of any Capital Stock of the Parent or Warrants.
"After Acquired Real Property" has the meaning specified in Section 9.5.
-2-
<PAGE> 4
"Assignee" has the meaning specified in Section 14.4(b).
"Assignment of Representations, Warranties, Covenants and Indemnitees" has
the meaning specified in Section 5.11.
"Authorized Officer" means, for any corporation, the President, the Chief
Executive Officer, the Chief Financial Officer or the Treasurer of such
corporation.
"Bankruptcy Code" means 11 U.S.C. Sec. 101 et seq., as from time to time
hereafter amended, and any successor or similar statute.
"Base Rate" means, in respect of interest accrued on the Notes during each
calendar month (or portion thereof) during the period in which the Notes shall
be outstanding, the Prime Rate per annum which normally is published in the
"Money Rates" section of The Wall Street Journal (or if such rate ceases to be
so published, as quoted from such other generally available and recognizable
source as the Purchaser may select). The Base Rate shall be determined (i) on
the first Business Day immediately prior to the Closing Date and (ii)
thereafter, on the last Business Day of each calendar month for calculation of
interest for the following month. It is understood and agreed that the Base Rate
as herein defined is not necessarily the lowest rate of interest charged by the
Purchaser in connection with promissory notes and other debt instruments
purchased by it.
"Benefit Plans" has the meaning provided in Section 4.19(a).
"Blocked Account Agreement" means an agreement substantially in the form
of Exhibit M hereto, with respect to one or more Depositary Accounts now or
hereafter maintained by any Credit Party, among the Credit Party maintaining
such Depositary Account, the bank, broker, dealer, other financial intermediary
or other institution at which such Depositary Account is maintained, and the
Purchaser.
"Business Day" means any day on which commercial banks are not authorized
or required to close in New York City.
"Capital Expenditures" means the expenditures of any Person which should
be capitalized on the balance sheet of such Person in accordance with GAAP
(including that portion of Capitalized Lease Obligations which should be
capitalized on a consolidated balance sheet of such Person in accordance with
GAAP) and which are made in connection with the purchase, construction or
improvement of items properly classified on such balance sheet as property,
plant, equipment or other fixed assets or intangibles.
-3-
<PAGE> 5
"Capital Stock" means and includes (a) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (b) all partnership interests (whether general or limited) in
any Person which is a partnership, (c) all membership interests or limited
liability company interests in any limited liability company, and (d) all equity
or ownership interests in any Person of any other type.
"Capitalized Lease" means, as to any Person, a lease of (or other
agreement conveying the right to use) real and/or personal Property to such
Person as lessee, with respect to which the obligations of such Person to pay
rent or other amounts are required to be classified and accounted for as a
capital lease on a balance sheet of such Person in accordance with GAAP
(including Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board).
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a Capitalized Lease and, for
purposes of this Agreement, the amount of such obligation shall be the
capitalized amount thereof, determined in accordance with GAAP.
"Cash Equivalents" means (a) marketable obligations maturing within six
months after acquisition thereof issued or fully guaranteed by the United States
of America or an instrumentality or agency thereof (provided that the full faith
and credit of the United States of America is pledged in support thereof), (b)
open market commercial paper, maturing within 180 days after acquisition
thereof, which has the highest credit rating of either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (c) certificates of deposit or
bankers acceptances or other obligations maturing within six months after
acquisition thereof issued by a domestic commercial bank which is a member of
the Federal Reserve System and has capital and surplus and undivided profits in
excess of $500,000,000, and (d) other certificates of deposit maturing within
six months after acquisition thereof in respect of deposits fully insured by the
Federal Deposit Insurance Corporation. Notwithstanding the foregoing, (x) items
referred to in the foregoing clauses (a) and (b) shall constitute Cash
Equivalents only if held on behalf of a Credit Party in a Depositary Account
with a bank, securities broker or dealer or other financial intermediary
reasonably satisfactory to the Purchaser and with which such Credit Party shall
have entered into a Blocked Account Agreement covering such items; and (y) items
referred to in the foregoing clauses (c) and (d) shall constitute Cash
Equivalents only if pledged and delivered to the Purchaser in accordance with
the provisions of the Security Agreement.
"Casualty" means any actual or constructive loss of any Property of any
Credit Party by reason of fire, explosion, theft or other casualty occurrence.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, as amended.
-4-
<PAGE> 6
"Certified" when used with respect to any financial information of any
Person to be certified by any of its officers, indicates that such information
is to be accompanied by a certificate to the effect that such financial
information has been prepared in accordance with GAAP consistently applied,
subject in the case of interim financial information to normal year-end audit
adjustments and absence of the footnotes required by GAAP, and presents fairly,
in all material respects, the information contained therein as at the dates and
for the periods covered thereby.
"Change of Control" means any transaction or event as a direct or indirect
result of which (i) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors of Parent
(together with any new directors (x) whose election by such Board of Directors
or whose nomination for election by the shareholders of Parent was approved by a
vote of 66-2/3% of the directors of Parent then still in office who were either
directors at the beginning of such period or whose election was previously so
approved or (y) who are appointed or elected by Martin or Teresi pursuant to the
Shareholders' Agreement) cease for any reason to constitute a majority of the
Board of Directors of Parent then in office, (ii) any Person (other than the
Permitted Holders) is or becomes the beneficial owner (as defined in Rules 13d-3
and 13d-5 under the Exchange Act), directly or indirectly, of greater than 25%
of the outstanding shares of Voting Stock of the Parent, (iii) the Parent owns
less than 100% of the outstanding shares of Capital Stock of any Paisano Company
or (iv) Teresi shall no longer be the Company's Chairman and Publisher or no
longer have substantially the same duties and responsibilities as on the Closing
Date.
"Closing Date" has the meaning specified in Section 2.4(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means, collectively, all Property of the Credit Parties in
which any of such Person is granting or may hereafter grant a Lien to the
Purchaser pursuant to the Security Documents.
"Commitment Letter" has the meaning specified in Section 2.6(a).
"Common Stock" means the Parent's common stock, no par value, and any
Capital Stock of any other class of the Parent hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Parent.
"Company" means at any time prior to the Paisano Merger, Easyriders Sub
II, and, at any time from and after the Paisano Merger, Paisano Publications.
-5-
<PAGE> 7
"Consigned Inventory" shall mean Inventory of any Credit Party consisting
of magazines which are on consignment to distributors in the ordinary course of
business.
"Consolidated Current Assets" means, as of any date with respect to the
Paisano Group, all assets of the Paisano Group on a consolidated basis as of
such date which, in accordance with GAAP, are properly classified as current
assets, excluding cash and Cash Equivalents.
"Consolidated Current Liabilities" means, as of any date with respect to
the Paisano Group, all liabilities of the Paisano Group on a consolidated basis
as of such date which, in accordance with GAAP, are properly classified as
current liabilities, excluding current maturities of long-term Indebtedness and
excluding Indebtedness under the Revolving Notes.
"Consolidated EBITDA" means, for any period, with respect to the Paisano
Group, the sum of (a) Consolidated Net Income (Loss) plus (b) in each case to
the extent deducted in determining such Consolidated Net Income (Loss), the sum
of (i) Consolidated Interest Expense, plus (ii) Consolidated Income Tax Expense,
plus (iii) depreciation expense, plus (iv) amortization expense, plus (v) all
other non-cash charges, all as determined for the Paisano Group for such period
on a consolidated basis in accordance with GAAP.
"Consolidated Income Tax Expense" means, for any period, with respect to
the Paisano Group, the amount which, in conformity with GAAP, should be included
as provision for current and deferred income taxes on a consolidated income
statement of the Paisano Group for such period.
"Consolidated Interest Expense" means, for any period, with respect to the
Paisano Group, all amounts which, in conformity with GAAP, should be included as
interest expense on a consolidated income statement of the Paisano Group) for
such period.
"Consolidated Net Income (Loss)" means, for any period, with respect to
either (i) the Paisano Group or (ii) the Parent and its Subsidiaries (other than
the Restaurant Subsidiaries) (collectively, the "Applicable Person"), the net
income (or loss) of the Applicable Person on a consolidated basis for such
period taken as a single accounting period, determined in accordance with GAAP;
provided that in determining Consolidated Net Income (Loss) there shall be
excluded (a) the income (or loss) of any other Person which is not a Subsidiary
of the Applicable Person, except to the extent of the amount of dividends or
other distributions actually paid to the Applicable Person by such other Person
during such period, (b) the income (or loss) of any other Person accrued prior
to the date it becomes a Subsidiary of the Applicable Person or is merged into
or consolidated with the Applicable Person or that other Person's assets are
acquired by the Applicable Person, (c) the proceeds of any life insurance
policy, (d) gains (or losses) from the sale, exchange, transfer or other
disposition of Property not in the ordinary course of business of the Applicable
Person, (e)
-6-
<PAGE> 8
any other extraordinary or non-recurring gains (or losses) of the Applicable
Person, (f) the income of any Subsidiary of the Applicable Person to the extent
that the declaration or payment of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted by operation of the terms
of its charter or of any agreement, instrument, judgment, decree, Order or
Statute applicable to that Subsidiary, and (g) the Newriders Management Fees.
"Consolidated Net Worth" as of any date of determination with respect to
the Parent shall mean (a) stated capital, plus (b) the amount of surplus and
retained earnings (or, in the case of a deficit in the amount of surplus or
retained earnings, minus the amount of such deficit), minus (c) cost of treasury
shares, minus (d) minority interests in consolidated Subsidiaries of such Person
(other than the Restaurant Subsidiaries), if any, all as determined as of such
date for the Parent and its Subsidiaries (other than Restaurant Subsidiaries) on
a consolidated basis in accordance with GAAP.
"Consolidated Total Indebtedness" means, as of any date with respect to
the Paisano Group, the total amount of Indebtedness of the Paisano Group,
determined as of such date on a consolidated basis in accordance with GAAP.
"Consolidated Working Capital" means, at any time, Consolidated Current
Assets less Consolidated Current Liabilities.
"Contingent Obligations" means any guarantee, suretyship or other
contingent liability (other than any endorsement for collection or deposit in
the ordinary course of business), direct or indirect, with respect to any
obligations of another Person, through an agreement or otherwise, including,
without limitation, (a) any other endorsement or discount with recourse or
undertaking substantially equivalent to or having economic effect similar to a
guarantee in respect of any such obligations and (b) any agreement (i) to
purchase, or to advance or supply funds for the payment or purchase of, any such
obligations, (ii) to purchase, sell or lease Property, products, materials or
supplies, or transportation or services, in respect of enabling such other
Person to pay any such obligation or to assure the owner thereof against loss
regardless of the delivery or nondelivery of the Property, products, materials
or supplies or transportation or services or (iii) to make any loan, advance or
capital contribution to or other investment in, or to otherwise provide funds to
or for, such other Person in respect of enabling such Person to satisfy any
obligation (including any liability for a dividend, stock liquidation payment or
expense) or to assure any financial ratio, minimum net worth, working capital or
other balance sheet condition in respect of any such obligation. The amount of
any Contingent Obligation shall be equal to the outstanding amount of the
obligations directly or indirectly guaranteed.
"Continuing Indebtedness" has the meaning specified in Section 4.10(a).
"Contributor Short-Term Subordinated Note" has the meaning specified in
the definition of Subordinated Seller Notes.
-7-
<PAGE> 9
"Copyrights" has the meaning provided in paragraph (c) of the definition
of Intellectual Property.
"Credit Parties" means the Parent and each of its Subsidiaries (other than
the Restaurant Subsidiaries).
"Default" means any event or condition which, with due notice or lapse of
time or both, would become an Event of Default.
"Default Rate" has the meaning specified in Section 2.1(b).
"Depositary Account" means with respect to any Person any demand, time,
savings, passbook, money market or other depositary account maintained by such
Person with any bank, savings and loan association, credit union or other
depositary institution, other than an account evidenced by a certificate of
deposit, or any securities account maintained by such Person with any bank,
securities broker or dealer, or other financial intermediary, in which such
bank, broker, dealer or financial intermediary either directly or through a
nominee or depository holds investment securities for the account of such
Person.
"Dollars" and "$" shall mean lawful money of the United States of America.
"Easyriders Common Stock" means the Easyriders' Common Stock, $.001 par
value.
"Easyriders of Columbus" means Easyriders of Columbus, Inc., an Ohio
corporation.
"Easyriders Sub I" has the meaning in the specified in the Recitals.
"Easyriders Sub II" has the meaning set forth in the introductory
paragraph of this Agreement.
"Easyriders Sub II Note" has the meaning specified in the Recitals.
"El Paso" means M&B Restaurants, L.C., a Texas limited liability company.
"El Paso Acquisition" has the meaning specified in the Recitals.
"El Paso Contribution Agreement" means the LLC Interest Contribution
Agreement, dated as of June 30, 1998, among Newriders, the Parent, El Paso,
Martin, Prather and Marna Prather.
"Employment Agreements" has the meaning specified in Section 5.26.
-8-
<PAGE> 10
"Environmental Laws" means any and all Federal, state, local, and foreign
Statutes, Orders, permits, authorizations, concessions, grants, franchises,
licenses, agreements or governmental restrictions relating to pollution, the
protection of the environment or the generation, treatment, storage, handling,
processing, use, maintenance, recycling, transportation, release, destruction or
disposal of Hazardous Materials, including, without limitation, CERCLA, the
Resource Conservation and Recovery Act, the Emergency Planning and Community
Right to Know Act, the Safe Drinking Water Act, the Hazardous Materials
Transportation Act, the Clean Air Act, the Clean Water Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Noise Control Act, the
Occupational Safety and Health Act, the Toxic Substances Control Act, any
so-called "Superfund" or "Superlien" law, and any regulation promulgated under
any of the foregoing, all as now or at any time hereafter may be in effect.
"Environmental Matter" means any claim, investigation, litigation or
administrative proceeding, whether pending or threatened, or judgment or Order,
asserted, arising or entered under or pursuant to any Environmental Law, or
relating to any Hazardous Materials, in each case against or pertaining to any
Credit Party, the respective operations of such Persons, or any Properties
owned, leased or used by any of such Persons.
"ERISA" means the Employee Retirement Income Security Act of 1974, as from
time to time amended.
"ERISA Affiliate" means any corporation which is a member of the same
controlled group (within the meaning of Section 414(b) of the Code) of
corporations or other Persons as the Parent or which is under common control
(within the meaning of Section 414(c) of the Code) with the Parent or any
corporation or other Person which is a member of an affiliated service group
(within the meaning of Section 414(m) of the Code) with the Parent or any
corporation or other Person which is required to be aggregated with the Parent
pursuant to Section 414(o) of the Code or the regulations promulgated
thereunder.
"Estoppel Letter" means an estoppel letter, subordination and
nondisturbance agreement or other agreement, waiver or confirmation executed by
any bailee or lessor which owns or operates any location where any Credit Party
maintains any of the Collateral, each of which shall be in substantially the
form of Exhibit N hereto or such other form as shall be acceptable to the
Purchaser in its sole discretion.
"Event of Default" has the meaning specified in Section 11.1.
"Excess Cash Flow" means, for any period, the sum of (a) Consolidated Net
Income (Loss) plus (b) in each case to the extent deducted in determining such
Consolidated Net Income (Loss), the sum of (i) depreciation expense, plus (ii)
amortization expense, plus (iii) all other non-cash charges (net of credits),
minus (c) Capital Expenditures, minus (or plus) (d) any increase (any decrease)
in Consolidated Working Capital during such period, plus
-9-
<PAGE> 11
(or minus) (e) any net losses (or gains) on the sale of assets, all as
determined with respect to the Paisano Group in accordance with GAAP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any similar statute then in effect, and a reference to a particular section
thereof shall include a reference to the comparable section, if any, of any such
similar statute.
"Fair Market Value" means what a willing buyer would pay to a willing
seller in an arm's-length transaction.
"Financial Statements" has the meaning specified in Section 4.5(a).
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America, applied on a consistent basis both
as to classification of items and amounts.
"Governmental Body" means any federal, state, provincial, county, city,
town, village, municipal or other government or governmental department,
commission, council, board, bureau, agency, authority or instrumentality, of or
within the United States of America or its territories or possessions, or of or
within any other country, or of any international community established by
treaty.
"Guarantee" means the Guarantee, in the form of Exhibit C, to be executed
and delivered by the Parent and each Subsidiary of the Parent (other than the
Company and the Restaurant Subsidiaries) on or prior to the Closing Date
pursuant to Section 5.8, and to be executed and delivered by any future
Subsidiary of the Parent (other than the Company and the Restaurant
Subsidiaries) pursuant to Section 9.6.
"Hazardous Material" and "Hazardous Materials" shall mean as follows:
(a) any "hazardous substance" as defined in, or for purposes of, the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C.A. SectionSection 9601 & 9602, as may be amended from time to time,
or any other so-called "superfund" or "superlien" law and any judicial
interpretation of any of the foregoing;
(b) any "regulated substance" as defined pursuant to 40 C.F.R. Part
280;
(c) any "pollutant or contaminant" as defined in 42 U.S.C.A. Section
9601(33);
(d) any "hazardous waste" as defined in, or for purposes of, the
Resource Conservation and Recovery Act;
(e) any "hazardous chemical" as defined in 29 C.F.R. Part 1910;
-10-
<PAGE> 12
(f) any "hazardous material" as defined in, or for purposes of, the
Hazardous Materials Transportation Act; and
(g) any other substance, regardless of physical form, or form of
energy or pathogenic agent that is subject to any other past, present or
future law or requirement of any Governmental Body regulating, relating
to, or imposing obligations, liability, or standards of conduct concerning
the protection of human health, plant life, animal life, natural
resources, Property or the reasonable enjoyment of life or Property from
the presence in the environment of any solid, liquid, gas, odor, pathogen
or form of energy, from whatever source.
Without limiting the generality of the foregoing, the term "Hazardous
Material" thus includes, but is not limited to, any material, waste or substance
that contains petroleum or any fraction thereof, asbestos, or polychlorinated
biphenyls, or that is flammable, explosive or radioactive.
"Indebtedness" with respect to any Person means, without duplication, (a)
all indebtedness of such Person for borrowed money, (b) any obligation incurred
for all or any part of the purchase price of Property or services, other than
(i) accounts payable and accrued expenses included in current liabilities in
accordance with GAAP and incurred in respect of Property or services purchased
in the ordinary course of business and (ii) deferred subscription and
advertising income incurred in the ordinary course of business, (c) indebtedness
or obligations evidenced by bonds, notes or similar written instruments, (d) all
reimbursement obligations of such Person (whether contingent or otherwise) in
respect of letters of credit, bankers' acceptances, surety or other bonds and
similar instruments, (e) any obligation (whether or not such Person has assumed
or become liable for the payment of such obligation) secured by a Lien on any
Property of such Person, (f) Capitalized Lease Obligations of such Person, (g)
all obligations, contingent or otherwise, of such Person with respect to any
interest rate swap, cap or collar agreement or similar arrangement between such
Person and one or more financial institutions providing for the transfer or
mitigation of interest rate or expense risks either generally or under specific
contingencies, (h) all obligations, contingent or otherwise, of such Person
under any foreign exchange contract, currency swap agreement or other similar
agreement or arrangement designed to protect such Person against fluctuations in
currency values, and (i) all Contingent Obligations of such Person of
obligations of any other Person of the types described in clauses (a) through
(h) of this definition, inclusive.
"Intangible Personal Property" has the meaning specified in Section 4.24.
"Intellectual Property" of any Person means:
-11-
<PAGE> 13
(a) all trademarks, trade names, trade styles, service marks, logos,
emblems, prints and labels, all elements of package or trade dress of
goods, and all general intangibles of like nature, of such Person,
together with the goodwill of such Person's business connected with the
use thereof and symbolized thereby, and all applications, registrations
and recordings thereof, including, without limitation, applications,
registrations and recordings in the United States Patent and Trademark
Office or in any similar office or agency of the United States of America
or in any office of the Secretary of State (or equivalent) of any state
thereof, or in any similar office or agency of any country or political
subdivision thereof throughout the world, together with all extensions,
renewals and corrections thereof and all licenses thereof or pertaining
thereto, including, without limitation, all License Agreements with
respect thereto (collectively the "Marks"),
(b) all letters patent of such Person and applications therefor, and
all registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States
of America or any state thereof, or in any similar office or agency of any
country or political subdivision thereof throughout the world, together
with all re-examinations, reissues, continuations, continuations-in-part,
divisions, improvements and extensions thereof and all licenses and claims
for infringement thereof or pertaining thereto including, without
limitation, all License Agreements with respect thereto, and the rights to
make, use and sell, and all other rights with respect to, the inventions
disclosed or claimed therein, all inventions, designs, proprietary or
technical information, know-how, other data or information, software,
databases, all embodiments or fixations thereof and the Reorganization
Documents, and all other trade secret rights not described above,
(c) all copyrights of such Person in works of authorship of any
kind, and all applications, registrations and recordings thereof in the
Office of the United States Register of Copyrights, Library of Congress,
or in any similar office or agency of any country or political subdivision
thereof throughout the world, together with all extensions, renewals and
corrections thereof and all licenses and claims for infringement thereof
or pertaining thereto, including, without limitation, all License
Agreements with respect thereto (collectively, "Copyrights"), and
(d) all customer lists and other records of such Person relating to
the distribution of products bearing any of the items described in
subparagraphs (a), (b) or (c) of this definition.
"Intellectual Property Security Agreement" means the Intellectual Property
Security Agreement, in the form of Exhibit E, to be executed and delivered by
the Parent and each Subsidiary of the Parent (other than the Company and the
Restaurant Subsidiaries) on or
-12-
<PAGE> 14
prior to the Closing Date pursuant to Section 5.9, and to be executed and
delivered by any future Subsidiary of the Parent (other than the Company and the
Restaurant Subsidiaries) pursuant to Section 9.6.
"Intercreditor Agreement" means the intercreditor and subordination
agreement executed and delivered by Teresi pursuant to Section 5.14(b) with
respect to the Subordinated Seller Notes.
"Internal Revenue Service" means the United States Internal Revenue
Service and any successor or similar agency performing similar functions.
"Inventory" means with respect to any Person all of the "inventory" (as
such term is defined in the Uniform Commercial Code in effect in the State of
New York on the date hereof) of such Person, including, but not limited to, all
merchandise, raw materials, parts, supplies, work-in-process, property in stock
and finished goods intended for sale, together with all the containers, packing,
packaging, shipping and similar materials related thereto, and including such
inventory as is temporarily out of such Person's custody or possession,
including inventory on the premises of others and items in transit.
"Investment" when used with reference to any Person means any investment
of such Person so classified under GAAP, and, whether or not so classified,
includes (a) any Indebtedness owed by any other Person to such Person, (b) any
Contingent Obligation or other contingent obligation of such Person of
Indebtedness or other obligations of any other Person, and (c) any Capital Stock
held by such Person in any other Person; and the amount of any Investment shall
be the original principal or capital amount thereof less all cash returns of
principal or equity thereof (and without adjustment by reason of the financial
condition of such other Person).
"Leases" has the meaning specified in Section 5.26.
"License Agreement" with respect to any Person means any agreement entered
into by such Person, whether as licensor or licensee, providing for the license
or use of any Intellectual Property and related or similar rights, and all
rights of such Person in connection with any of the foregoing and in connection
with any agreement related thereto.
"Lien" means any security interest, mortgage, pledge, hypothec, lien,
claim, charge, prior claim, encumbrance, assignment, resolutory right, trust,
conditional sale or title retention agreement, lessor's interest under a
Capitalized Lease or analogous instrument, in, of or on any of a Person's
Property (whether held on the date hereof or hereafter acquired), or any signed
or filed financing statement which names such Person as the debtor, or the
execution of any security agreement or the like authorizing any other Person as
the secured party thereunder to file such a financing statement.
-13-
<PAGE> 15
"Marks" has the meaning provided in paragraph (a) of the definition of
Intellectual Property.
"Martin" means Mr. John E. Martin.
"Martin Equity Investment" has the meaning specified in Section 5.13(b).
"Martin Notes" has the meaning specified in Section 5.13(b).
"Material Adverse Effect" means any change or changes or effect or effects
that individually or in the aggregate are materially adverse to (a) the assets,
business, operations, income, prospects or condition (financial or otherwise) of
the Company, individually, or the Credit Parties, taken as a whole, (b) the
legality, validity or enforceability of this Agreement, the Notes, the Warrants
or any other Note Documents, or (c) the ability of any Credit Party to fulfill
its obligations under this Agreement, the Notes, the Warrants or any other Note
Documents.
"Material Contract" means any contract or agreement (including, without
limitation any supply agreement, requirements contract, customer agreement,
services agreement, lease, License Agreement, franchise agreement, royalty
agreement, distribution agreement, marketing agreement, advertising agreement,
joint venture agreement, partnership agreement, stockholders agreement, asset
purchase agreement, stock purchase agreement, merger agreement, escrow
agreement, tax sharing agreement, agency agreement, investment banking
agreement, fidelity or surety contract, power of attorney, non-competition
agreement) to which any Credit Party is a party and which either (a) has a face
amount or otherwise involves aggregate payments or obligations in excess of
$50,000, (b) if terminated is reasonably likely to cause a Material Adverse
Effect , (c) is otherwise material to the business of the Credit Parties taken
as a whole or (d) is a "Material Contract" as defined in the Paisano Stock
Contribution Agreement.
"Material Loss Amount" means an amount equal to $150,000.
"Maturity Date" means September , 2001.
"Maximum Revolving Commitment" means as of any time of determination (a)
$5,000,000, minus, (b) the aggregate amount of all reductions therein (if any)
pursuant to Section 3.4, and shall be $0 upon any termination of the obligations
of the Purchaser to purchase Revolving Notes hereunder pursuant to Section
3.1(a), 3.4, 11.1 or otherwise.
"Mortgage" means any mortgage, trust deed or deed of trust executed (i) on
or prior to the Closing Date pursuant to Section 5.9(g) and (ii) after the
Closing Date pursuant to Section 9.5 in respect of After Acquired Real Property.
"Mortgage Policies" has the meaning specified in Section 5.9(g)(ii).
-14-
<PAGE> 16
"Multiemployer Plan" means a multiemployer plan as defined in Section
3(37) or Section 4001(a)(3) of ERISA or Section 414(f) of the Code contributed
to by any Credit Party or any ERISA Affiliate.
"Net Cash Proceeds" means, with respect to any Credit Party (a) an
incurrence by any such Person of any Indebtedness or (b) the issuance and sale
by such Person of any of its Capital Stock, the aggregate amount of cash
consideration received by such Person in connection with such transaction after
deduction of all reasonable and customary fees, costs and expenses directly
incurred by such Credit Party in connection therewith, including, without
limitation, reasonable and customary underwriting discount, brokerage or selling
commissions, if any, taxes paid or reasonably anticipated to be payable as a
result of such transaction, and the reasonable fees and disbursements of counsel
paid by such Credit Party in connection therewith.
"Newriders" has the meaning specified in the Recitals.
"Newriders Merger" has the meaning set forth in the Recitals.
"Newriders Merger Agreement" means the Agreement and Plan of Merger and
Reorganization, dated as of June 30, 1998, by and among Newriders, the Parent
and Easyriders Sub I.
"Newriders' Executive Compensation Plan" means the Newriders' 1997
Executive Incentive Compensation Plan.
"Newriders Management Agreement" means a management security agreement
between Newriders and the Company in form and substance satisfactory to the
Purchaser.
"Newriders Management Fees" means fees payable by the Company to Newriders
under the Newriders Management Agreement; provided such fee shall be paid only
by advances made by Newriders to the Company under the Newriders Subordinated
Note.
"Newriders Subordinated Note" means a subordinated promissory note in form
and substance satisfactory to the Purchaser which evidences advances made by
Newriders to the Company used to pay the Newriders Management Fees, which note
shall be unsecured and subordinated in subject of payment to the Obligations,
have a maturity date no earlier than September 30, 2003 and provide that no
principle or interest payments are payable until the Obligations have been paid
in full and the Termination Date has occurred.
"Non-Continuing Indebtedness" has the meaning specified in Section
4.10(a).
-15-
<PAGE> 17
"Note Documents" means this Agreement, the Notes, the Warrants, the
Registration Rights Agreement, the Guarantee, the Security Documents, the
Intercreditor Agreement, the Assignment of Representations, Warranties,
Covenants and Indemnities and all other agreements, instruments and documents
now or hereafter executed and delivered pursuant to or in connection therewith,
as each of such agreements, instruments and documents may from time to time be
amended, modified or supplemented in accordance with its terms.
"Notes" means collectively the Revolving Notes and the Term Notes and
"Note" means any one of such Notes. The Revolving Notes and Term Notes are each
sometimes referred to herein as a "class" of Notes.
"NRS" has the meaning specified in Section 5.18.
"Obligations" mean, collectively, (a) the obligations of the Company to
pay any and all of the unpaid principal of, and interest on (including, without
limitation, interest accruing after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding, relating
to the Company, whether or not a claim for postfiling or post-petition interest
is allowed in such proceeding) the Notes, (b) the obligations of the Credit
Parties to pay any and all fees, expenses, costs, indemnities and other amounts,
whether direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with, this Agreement, the Notes or any other Note Document, and (c) the
obligations of the Credit Parties to pay, perform, discharge, observe and comply
with any and all covenants, agreements and other obligations required to be
performed, discharged, observed or complied with by such Credit Party pursuant
to this Agreement, the Notes and the other Note Documents.
"Officer's Certificate" means with respect to any corporation, a
certificate signed by an Authorized Officer of the specified corporation.
"Operating Lease" means any lease of real or personal Property (other than
any Capitalized Lease) having an original term greater than one year (including
any option to renew or extend such lease, whether or not exercised).
"Order" means any order, writ, injunction, decree, judgment, award,
determination or written direction or demand of any court, arbitrator or
Governmental Body.
"Paisano Acquisition" has the meaning set forth in the Recitals.
"Paisano Companies" means Paisano Publications, Easyriders of Columbus,
Inc. Easyriders Franchising, Inc., a California corporation, Teresi, Inc., a
California corporation, Bros Club, Inc., a California corporation, Associated
Rodeo Riders on Wheels, a California corporation, and any Subsidiary now or
hereafter existing of any such Person.
-16-
<PAGE> 18
"Paisano Companies Stock" has the meaning set forth in the Recitals.
"Paisano Group" means the Paisano Companies other than Easyriders of
Columbus.
"Paisano Merger" has the meaning set forth in the Recitals.
"Paisano Merger Agreement" means .
"Paisano Publications" means Paisano Publications, Inc., a California
corporation.
"Paisano Stock Contribution Agreement" means the Stock Contribution and
Sale Agreement, dated as of June 30, 1998, among, Newriders, the Parent,
Easyriders Sub II, the Paisano Companies and Teresi.
"Parent" has the meaning set forth in the introductory paragraph of this
Agreement.
"Parent 1998 Executive Compensation Plan" shall mean the Parent's 1998
Executive Incentive Compensation Plan as in effect on the Closing Date pursuant
to which up to 2,800,000 shares of Common Stock may be issued.
"PBGC" means the Pension Benefit Guaranty Corporation, and any successor
agency or Governmental Body performing similar functions.
"Pension Plan" means an employee pension benefit plan, as defined in
Section 3(2) of ERISA, excluding any Multiemployer Plans, established,
maintained by or contributed to by any Credit Party or any ERISA Affiliate.
"Permitted Business" means the business of publishing special interest
magazines and other publications relating to hot rods, motorcycles, tattooing
and airbrushing, marketing motorcycle apparel and accessories, promoting tattoo
and motorcycle related events, mail order sales of various products, licensing
the use of various trademarks, the production and distribution of motorcycle
related videos, sales of road side assistance plans for motorcycles, sales of
videos to pay-per-view television, the development, production and distribution
of other forms of media related to hot rods, motorcycles and tattooing and
franchising retail stores which market motorcycles and motorcycle apparel and
accessories and any businesses which are reasonably related thereto.
"Permitted Holders" means Teresi, Martin and Prather.
"Permitted Lien" means any of the Liens permitted by Section 10.2.
-17-
<PAGE> 19
"Person" means and includes an individual, a partnership, an association,
a joint venture, a corporation, a limited liability company, a trust, a
syndicate, an unincorporated organization and any Governmental Body.
"Plan" and "Plans" means any employee benefit plan as defined in Section
3(3) of ERISA, established, maintained or contributed to for the benefit of
employees of any Credit Party or any ERISA Affiliate.
"Prather" means Mr. William E. Prather.
"Principal Office" means the principal office of the Purchaser, located at
the address of the Purchaser set forth in Section 14.5 hereof, or at such other
location as the Purchaser may from time to time hereafter specify by written
notice to the Company.
"Property" with respect to any Person, means any interest in any kind of
property or asset, whether real, personal or mixed, movable or immovable,
tangible or intangible, corporeal or incorporeal, of such Person.
"Protected Countries" has the meaning specified in Section 4.24.
"Publications" has the meaning specified in Section 4.36.
"Purchaser" has the meaning specified in the first paragraph hereof.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, to be dated as of and entered into on the Closing Date, between the
Parent and the Purchaser, in the form of Exhibit E-2.
"Registration Statement" means the Registration Statement on Form S-4 of
the Parent, Registration No.333-58501, as filed with the SEC under the
Securities Act on July 6, 1998, as amended by Amendment No. 1, as filed with the
SEC under the Securities Act on , 1998.
"Reorganization" shall mean the Paisano Acquisition, the El Paso
Acquisition, the Newriders Merger, the Paisano Merger, the Martin Equity
Investment and the other transactions contemplated by the Reorganization
Documents.
"Reorganization Documents" means the Registration Statement, Paisano Stock
Contribution Agreement, the El Paso Contribution Agreement, the Newriders Merger
Agreement, the Paisano Merger Agreement, the Subordinated Seller Notes, and all
other agreements, instruments and documents executed pursuant thereto or in
connection therewith.
-18-
<PAGE> 20
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder for which the 30-day notice requirement is
not waived.
"Restaurant Subsidiaries" means El Paso and Newriders and each of their
Subsidiaries.
"Restricted Investment" means any Investment other than
(a) any Investment in Cash Equivalents,
(b) any Investment existing on the Closing Date after giving
effect to the Transactions contemplated to occur on the Closing Date, and
described in Schedule 4.10B,
(c) the Guarantee,
(d) Indebtedness permitted under Sections 10.1(c), (f) and (g)
hereof,
(e) any Investment in or capital contribution by the Parent to
any member of the Paisano Group, and
(f) Investments received by the Credit Parties in connection with
barter arrangements for excess advertising space entered into in the
ordinary course of business consistent with part practices so long as in
any fiscal year the fair market value of such advertising space does not
exceed $[ ] in the aggregate.
"Restricted Payment" means, with respect to any Person,
(a) the declaration or payment of any dividend or other
distribution on, or the incurrence of any liability to make any other
payment in respect of, Capital Stock of such Person, other than (i)
Restricted Payments payable solely in the same class of Capital Stock of
such Person and (ii) so long as no Event of Default has occurred and is
continuing, dividends by the Company to the Parent in an amount per fiscal
month which, when added to the principal of intercompany loans made by the
Company to the Parent during such fiscal month pursuant to Section
10.1(f), is not in excess of the lesser of (x) 35% of Excess Cash Flow for
the preceding fiscal month and (y) $100,000,
(b) any payment or distribution on account of the purchase,
redemption, defeasance (including in-substance or legal defeasance) or
other retirement by any Person of any Capital Stock of such Person, or of
any warrant, option or other right to acquire such Capital Stock (whether
directly or indirectly, and including, without limitation, any purchase or
other acquisition of such Capital
-19-
<PAGE> 21
Stock, or of any warrant, option or other right to acquire such Capital
Stock, by any Subsidiary of such Person),
(c) any other payment or distribution by such Person in respect
of its Capital Stock, whether directly or indirectly or through any
Subsidiary of such Person, excluding the declaration and payment of cash
dividends by a Wholly-owned Subsidiary of the Company on its Capital Stock
to the Company,
(d) any payment or distribution by such Person on account of the
principal of or prepayment charge, if any, or, interest or other amounts,
with respect to any Indebtedness of any Credit Party which is subordinated
in right of payment to the prior payment of any of the Notes (including,
without limitation, any such payment or distribution on account of the
Indebtedness represented by the Subordinated Seller Notes), other than
regularly scheduled interest payments on the Subordinated Seller Notes to
the extent permitted under the Subordinated Seller Notes (including
without limitation the subordination provisions thereof) as in effect on
the Closing Date and the Intercreditor Agreement, and
(e) any management fee, consulting fee, advisory fee, investment
banking or transaction fee or commission, bonus, salary, or similar
remuneration paid or payable to any holder of Capital Stock of such Person
or to any Affiliate of any such holder, excluding (i) directors' fees
payable in the ordinary course of business, (ii) amounts payable under the
Employment Agreements, (iii) amounts payable under the Parent 1998
Executive Compensation Plan and any other employee compensation and
benefits payable in the ordinary course of business, in each case, to any
officer or employee of the Credit Parties (other than Teresi, Martin and
Prather), (iv) so long as no Default or Event of Default has occurred and
is continuing, awards payable to Martin under Exhibit A to the Parent 1998
Executive Compensation Plan, (v) so long as no Default or Event of Default
has occurred and is continuing and the payment of such fees are
subordinated (on terms and conditions satisfactory to the Purchaser) in
right of payment to the prior payment of the Notes pursuant to a written
agreement between the Purchaser and Teresi satisfactory to the Purchaser,
consulting fees to Teresi in an amount not to exceed $25,000 per month,
(vi) fees payable to Imperial Capital LLC to the extent described in
Section 4.15, and (vii) payments made by any Credit Party to the Parent
pursuant to a tax sharing agreement in form and substance satisfactory to
the Purchaser so long as such tax sharing agreement complies with the
treasury regulations under Section 1502 of the Code.
The amount of any Restricted Payment made in the form of Property shall be
deemed to be the greater of the Fair Market Value or the net book value of such
Property.
"Revolving Note" and "Revolving Notes" have the meanings specified in
Section 2.1(a)(i).
-20-
<PAGE> 22
"Revolving Note Purchase Request" has the meaning specified in Section
2.2(b).
"SEC" means the Securities and Exchange Commission and any successor
agency, authority, commission or Governmental Body.
"Securities Act" means as of any date the Securities Act of 1933, as
amended, or any similar federal statute then in effect, and a reference to a
particular section thereof shall include a reference to the comparable section,
if any, of any such similar Federal statute.
"Security Agreement" means the Security Agreement, in the form of Exhibit
D, to be executed and delivered by the Parent and each Subsidiary of the Parent
(other than the Company and the Restaurant Subsidiaries) on or prior to the
Closing Date pursuant to Section 5.9, and to be executed and delivered by any
future Subsidiary of the Parent (other than the Company and the Restaurant
Subsidiaries) pursuant to Section 9.6.
"Security Documents" means the Security Agreement, the Intellectual
Property Security Agreement, the Mortgages, the Blocked Account Agreements,
trust deeds, short form mortgages, financing statements, fixture filings,
assignments and other agreements, instruments and documents in respect of the
Collateral and the Liens of the Purchaser therein that may now or hereafter be
executed, delivered, filed or recorded pursuant thereto or in connection
therewith, or pursuant to Section 5.9, 9.5, 9.6, 9.7 or 9.9 of this Agreement.
"Shareholders' Agreement" has the meaning specified in Section 5.26.
"Solvent" means, when used with respect to any Person, that (a) the fair
value of the property of such Person is greater than the total amount of
liabilities (including, without limitation, contingent liabilities) of such
Person, (b) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liabilities of
such Person on its debts as they become absolute and matured, (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (d) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's assets
would constitute unreasonably small capital. For such purposes, any contingent
liability (including, without limitation, pending litigation, Contingent
Obligations, pension plan liabilities and claims for federal, state, local and
foreign taxes, if any) is valued at the amount that, in light of all the facts
and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
"Statute" means any statute, ordinance, code, treaty, directive, law, rule
or regulation of any Governmental Body.
-21-
<PAGE> 23
"Subordinated Seller Notes" means (i) the subordinated promissory note in
the original aggregate principal amount of $5,000,000, (ii) the limited recourse
subordinated promissory note in the original aggregate principal amount of
$5,000,000 and (iii) the subordinated promissory note (the "Contributor
Short-Term Subordinated Note") in the original aggregate principal amount
$3,000,000, in each case issued to Teresi by the Parent in connection with
Reorganization.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which at least a majority of the outstanding Voting Stock is at the
time directly or indirectly owned or controlled by such Person or by one or more
of any entities directly or indirectly owned or controlled by such Person. For
the purposes of this definition, "control" of a Person shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of its management or policies, whether through the ownership of voting
securities, by contract or otherwise.
"Taking" shall mean a taking of the ownership or use of any Property of
any Credit Party, or any part thereof, pursuant to eminent domain or
condemnation proceedings, or by any settlement or compromise of such
proceedings.
"Taxes" has the meaning specified in Section 3.6(a).
"Teresi" has the meaning set forth in the Recitals.
"Term Note" and "Term Notes" have the meanings specified in Section
2.1(a)(ii).
"Termination Date" means the earlier of (i) the Maturity Date or (ii) any
date on which the Maximum Revolving Commitment of the Purchaser shall be or
shall have been reduced to $0, whether pursuant to the provisions of Section
3.2, or pursuant to an acceleration of the maturity of the Notes pursuant to
Section 11.1, or by reason of the passage of time, or otherwise.
"Transaction Documents" means the Note Documents and the Reorganization
Documents.
"Transactions" means the Reorganization, the purchase of the Notes by, and
issuance of the Warrants to, the Purchaser on the Closing Date as provided
herein, and the other transactions contemplated by the Transaction Documents to
occur on or prior to the Closing Date.
"UFOCs" has the meaning specified in Section 4.38(c).
"U.S. Government" means the federal government of the United States of
America or any department, agency or instrumentality thereof.
-22-
<PAGE> 24
"U.S. Person" means a citizen or resident of the United States of America,
a corporation, partnership or other entity created or organized in or under any
laws of the United States of America or of any State thereof, or any estate or
trust that is subject to federal income taxation regardless of the source of its
income.
"U.S. Taxes" has the meaning specified in Section 3.6(b).
"Voting Stock" with respect to any Person shall mean Capital Stock of such
Person of any class or classes, the holders of which are ordinarily, in the
absence of contingencies, entitled to vote for the election of members of the
Board of Directors (or Persons performing similar functions) of such Person.
"Warrant" and "Warrants" have the meanings specified in Section 2.1(c).
"Warrant Stock" means (i) all shares of Common Stock issued or issuable
upon the exercise of any Warrant, and (ii) any securities issued or issuable by
the Parent with respect to shares of such Common Stock referred to in the
foregoing clause (i) by way of a stock dividend or stock split or in connection
with a combination or subdivision of shares, reclassification, merger,
consolidation or other reorganization of the Parent.
"Wholly-owned Subsidiary" shall mean, with respect to any Person, any
Subsidiary of such Person all of the shares of Capital Stock of which, other
than directors' qualifying shares, are owned, beneficially and of record, by
such Person and/or one or more Wholly-owned Subsidiaries of such Person.
Section 1.2. Accounting Terms. All accounting terms used in this Agreement
shall be applied on a consolidated basis for the applicable person and its
Subsidiaries, unless otherwise specifically indicated herein, provided that all
accounting terms used in this Agreement with respect to the Parent on a
consolidated basis shall exclude the Restaurant Subsidiaries. Any accounting
terms not specifically defined herein shall have the meanings customarily given
them in accordance with GAAP.
Section 1.3. Rules of Construction. The words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular Section or subsection. Reference herein to any Section
or subsection refers to such Section or subsection (as the case may be) hereof.
Words in the singular include the plural, and words in the plural include the
singular. Each covenant or agreement contained herein shall be construed (absent
express provision to the contrary) as being independent of each other covenant
or agreement contained herein, so that compliance with any one covenant or
agreement shall not (absent such an express contrary provision) be deemed to
excuse compliance with any other covenant or agreement. Where any provision
herein refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such
-23-
<PAGE> 25
Person. All references to any instruments or agreements, including references to
any of the Transaction Documents, shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof, in each case,
made in accordance with the terms of the Transaction Documents. All references
to Persons include their respective successors and assigns (to the extent
permitted under the Note Documents).
Section 2. Sale and Purchase of Notes and Warrants.
Section 2.1. Authorization of Notes and Warrants.
(a) The Company has duly authorized the issue, sale and delivery of:
(i) its Senior Secured Guaranteed Revolving Notes Due
2001, in an aggregate principal amount at any time outstanding not
to exceed the Maximum Revolving Commitment, to be dated the date of
issue thereof, to bear interest from such date on the unpaid
principal amount thereof (calculated on the basis of a 360-day year
and actual days elapsed) at a variable rate per annum equal at any
time to the sum of (a) the Base Rate in effect at such time plus (b)
1.85%, such interest to be payable monthly in arrears on the first
day of each month (commencing October 1, 1998), and at maturity, to
mature on the Maturity Date, and to be substantially in the form of
Exhibit A-1 hereto attached (all such Notes issued pursuant to this
Agreement, or delivered in substitution or exchange for any thereof,
being collectively called the "Revolving Notes" and individually a
"Revolving Note");
(ii) its Senior Secured Guaranteed Term Notes Due 2001,
in the aggregate principal amount of $17,000,000, to be dated the
date of issue thereof, to bear interest from such date on the unpaid
principal amount thereof (calculated on the basis of a 360-day year
and actual days elapsed) at a rate per annum equal at any time to
the sum of (a) the Base Rate in effect at such time plus (b) 1.85%,
such interest to be payable monthly in arrears on the first day of
each month (commencing October 1, 1998), and at maturity, to mature
on the Maturity Date, and to be substantially in the form of Exhibit
A-2 hereto attached (all such Notes issued pursuant to this
Agreement, or delivered in substitution or exchange for any thereof,
being collectively called the "Term Notes" and individually a "Term
Note");
(b) So long as any Default or Event of Default shall have occurred
and be continuing and at the election of the Purchaser confirmed by written
notice to the Company, the interest rates applicable to the Notes shall be
increased by three percent (3%) per annum above the rates of interest otherwise
applicable hereunder ("Default Rate"), and all outstanding Obligations shall
bear interest at the Default Rate applicable to such Obligations. Interest at
the Default Rate shall accrue from the initial date of such Default or
-24-
<PAGE> 26
Event of Default until that Default or Event of Default is cured or waived and
shall be payable upon demand.
(c) The Parent has duly authorized the issuance and sale of its
warrants to the Purchaser, which warrants shall be exercisable under certain
circumstances to purchase up to an aggregate of 348,157 shares of Common Stock
then outstanding at an initial exercise price of $3.00 per share (subject to
adjustment as therein provided), each to be substantially in the form of Exhibit
E-1 hereto attached (all such warrants issued pursuant to this Agreement, or
delivered in substitution or exchange for any thereof, being collectively called
the "Warrants" and individually a "Warrant").
Section 2.2. Sale and Purchase of Revolving Notes.
(a) Subject to the applicable terms and conditions set forth in this
Agreement (including, without limitation, the applicable conditions set forth in
Section 6 hereof), the Company will issue, reissue and sell to the Purchaser,
and the Purchaser will purchase from the Company, from time to time during the
period from and including the Closing Date to but not including the Termination
Date or, if earlier, the date on which the Maximum Revolving Commitment of the
Purchaser shall have been reduced to $0, Revolving Notes at a purchase price
equal to 100% of the principal amount thereof; provided that the aggregate
outstanding principal amount of the Revolving Notes shall not exceed the Maximum
Revolving Commitment then in effect.
(b) Each issuance and sale of Revolving Notes hereunder shall be
made upon written notice by the Company to the Purchaser in the form of Exhibit
B hereto (each such notice a "Revolving Note Purchase Request") delivered not
later than 11:00 A.M. (New York City time) on the fifth Business Day prior to
the date such sale is to be effected, which notice shall specify (i) the
requested date of such sale (which shall not be on or after the Termination
Date) and (ii) the aggregate principal amount of Revolving Notes to be sold to
the Purchaser on such date (which shall be $250,000 or any greater amount which
is an integral multiple of $50,000). Not more than two sales of Revolving Notes
shall be effected during any one calendar month.
(c) The closing of each sale of Revolving Notes shall take place at
12:00 noon (New York City time) at the Principal Office of the Purchaser or at
such other place or places as the Company and the Purchaser may agree (except
for any sale of Revolving Notes effected on the Closing Date, which shall take
place at the time and place provided in Section 2.4).
(d) The Revolving Notes issued pursuant hereto shall evidence the
principal amount of Revolving Notes sold on the Closing Date (if any) and all
subsequent principal amounts of Revolving Notes sold hereunder, and the date and
the principal amount of each sale of Revolving Notes to the Purchaser by the
Company, as well as each payment
-25-
<PAGE> 27
or prepayment made on account of the principal thereof, and the resulting
aggregate unpaid principal balance thereof, shall be noted by the Purchaser on
the schedule attached to the Revolving Note held by it or any extension thereof;
provided, further, that failure by the Purchaser to make any such notation shall
not affect the obligations of the Company hereunder or under such Revolving
Note. Each such notation by the Purchaser shall be conclusive and binding for
all purposes in the absence of manifest error.
Section 2.3. Sale and Purchase of Term Notes and Warrants. Subject to the
applicable terms and conditions set forth in this Agreement, on the Closing
Date, the Company will issue and sell to the Purchaser, and the Purchaser will
purchase from the Company, Term Notes as provided in Section 2.4(b)(ii) in the
aggregate principal amount of $17,000,000 and the Warrants, at an aggregate
purchase price equal to 100% of the principal amount of the Term Notes.
Section 2.4. Closing.
(a) The initial closing of the sale and delivery of Notes and
Warrants shall take place at the offices of Paul, Hastings, Janofsky & Walker
LLP, 399 Park Avenue, New York, New York at 10:00 A.M., New York time on
September __, 1998 or such other date as the parties shall agree (herein called
the "Closing Date").
(b) On the Closing Date, the Company will deliver to the Purchaser:
(i) a single Revolving Note registered in the name of
the Purchaser or its nominee, duly executed and dated the Closing
Date, in the principal amount of $5,000,000, and
(ii) a single Term Note registered in the name of the
Purchaser or its nominee, duly executed and dated the Closing Date,
in the principal amount of $17,000,000,
(c) On the Closing Date, the Company will deliver to the Purchaser
the Warrants in such denominations as the Purchaser shall specify, duly executed
by the Parent and dated the Closing Date.
Section 2.5. Payments. Each payment by the Company hereunder of the
principal amount of the Notes, interest thereon, fees, costs, expenses,
indemnities and other amounts due hereunder shall be made in Dollars by wire
transfer or other immediately available funds, without deduction (except as
provided in Section 3.6(b)), set-off or counterclaim, to the Purchaser at the
Principal Office, not later than 2:00 P.M. (New York City time) on the date on
which such payment shall become due (each such payment made after such time on
such due date to be deemed to have been made on the next succeeding Business
Day). Whenever any payment hereunder or under the Notes shall be stated to be
due on a day other than a
-26-
<PAGE> 28
Business Day, that payment shall be made on the next succeeding Business Day and
the extension of time shall be included in the computation of interest due
thereon.
Section 2.6. Fees.
(a) On the Closing Date, the Company will pay to Nomura Securities
International, Inc. a non-refundable Structuring Fee referred to in paragraph
4(a) of that certain letter agreement (the "Commitment Letter") dated June 18,
1998, among Newriders, the Company and the Purchaser.
(b) In addition to all other fees and other amounts payable or paid
by the Company pursuant to this Agreement, the Note Documents or otherwise, on
the Closing Date, the Company shall pay to the Purchaser the non-refundable
Funding Fee referred to in paragraph 4(b) of the Commitment Letter.
(c) In addition to all other fees and other amounts payable or paid
by the Company pursuant to this Agreement, the Note Documents or otherwise, the
Company shall pay to the Purchaser an unused facility fee equal to 0.25% per
annum on the average daily balance of the excess of the Maximum Revolving
Commitment over the aggregate unpaid principal amount of Revolving Notes,
payable in arrears (i) for the preceding calendar month, on the first Business
Day of the succeeding calendar month commencing October 1, 1998, and (ii) on the
Termination Date. All computations of the foregoing fee shall be made by the
Purchaser on the basis of a three hundred sixty (360) day year, and for the
actual number of days occurring in the period for which such fee is payable.
(d) The Purchaser is hereby authorized to, and at its sole
discretion may, charge to the balance of the Revolving Notes (which shall
constitute an issuance and purchase of Revolving Notes hereunder) on behalf of
the Company and cause to be paid in full all fees, expenses, charges and costs
and interest and principal (other than principal of the Revolving Notes) owing
by the Credit Parties under this Agreement or any of the other Note Documents if
and to the extent any Credit Party fails to promptly pay any such amounts as and
when due, even if such charges would cause the aggregate principal amount of the
outstanding Revolving Notes of the Purchaser to exceed the Maximum Revolving
Commitment and notwithstanding the provisions of Section 2.2(b); provided that,
so long as no Default or Event of Default has occurred and is continuing, the
Purchaser shall give the Company 3 Business Days prior notice that any such
fees, expenses, charges and costs (other than principal and interest) are due
and owing prior to so charging the balance of the Revolving Notes. At the
Purchaser's option and to the extent permitted by law, any charges so made shall
constitute part of the principal under the outstanding Revolving Notes.
Section 2.7. Interest Rate Limitation. Notwithstanding any provisions of
this Agreement, the Notes or the other Note Documents, in no event shall the
amount of interest paid or agreed to be paid by the Company exceed an amount
computed at the highest rate of
-27-
<PAGE> 29
interest permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of this Agreement, the Notes or the
other Note Documents at the time performance of such provision shall be due,
shall involve exceeding the interest rate limitation validly prescribed by law
which a court of competent jurisdiction may deem applicable hereto, then, ipso
facto, the obligations to be fulfilled shall be reduced to an amount computed at
the highest rate of interest permissible under applicable law, and if for any
reason whatsoever the Purchaser shall ever receive as interest an amount which
would be deemed unlawful under such applicable law such interest shall be
automatically applied to the payment of principal of the Notes outstanding
hereunder (whether or not then due and payable), without prepayment charge,
premium or penalty, and not to the payment of interest, or shall be refunded to
the Company if such principal and all other obligations of the Company to such
Purchaser have been paid in full.
Section 2.8. Allocation of Purchase Price. It is hereby agreed that, for
purposes of Treasury Regulations 1.1273-2(h),(A)(i) the aggregate "issue price"
of the investment unit consisting of the Term Notes and the Warrants to be
issued pursuant to this Agreement on the Closing Date is equal to 100% of the
principal amount of such Term Notes, (ii) the aggregate fair market value and
aggregate purchase price of the Term Notes is the aggregate principal amount
thereof less the amount referred to in clause (iii) of this Section, (iii) the
aggregate fair market value and aggregate purchase price of the Warrants is
$[__________], and (iv) the aggregate fair market value and aggregate purchase
price of any Revolving Notes issued on or after the Closing Date is equal to
100% of the principal amount of such Notes. The Credit Parties and the Purchaser
agree to use the foregoing issue price, purchase prices and fair market values
for U.S. federal income tax purposes with respect to this transaction (unless
otherwise required by a final determination by the Internal Revenue Service or a
court of competent jurisdiction).
Section 3. Prepayments of Notes.
Section 3.1. Mandatory Payments and Prepayments.
(a) On the Maturity Date, the unpaid principal balance of the Notes
to the extent not sooner paid or prepaid hereunder, shall be paid in full,
together with accrued interest and fees thereon and all expenses, indemnities
and other amounts payable under the terms of the Notes, this Agreement or the
other Note Documents, and the Maximum Revolving Commitment shall automatically
and without notice or other action on the part of any Person be permanently
reduced to $0.
(b) In the event that the aggregate unpaid principal amount of the
Revolving Notes shall at any time and for any reason (including, without
limitation, a reduction in the Maximum Revolving Commitment pursuant to Section
3.4 exceed the amount of the Maximum Revolving Commitment then in effect, the
Company shall, without notice or demand by the Purchaser, (i) immediately notify
the Purchaser in writing of such
-28-
<PAGE> 30
event, specifying the amount of such excess and (ii) within one (1) Business Day
thereafter pay the amount of such excess to the Purchaser for application to the
unpaid principal amounts of the outstanding Revolving Notes in accordance with
the applicable provisions of Section 3.3 hereof, together with accrued interest
and fees on the principal amount so paid to the date of such payment, without
prepayment charge, premium or penalty.
(c) Commencing with the six-month period ending on March 31, 1999
and for each six-month period thereafter beginning on the first day after the
end of the previous six-month period, not later than 20 days after the end of
such period the Company shall deliver to the Purchaser an Officer's Certificate
setting forth in reasonable detail a calculation of Excess Cash Flow for such
period. Unless within 10 days after receipt of such notice, the Purchaser shall
deliver a written notice to the Company declining to accept any prepayment of
Notes from such Excess Cash Flow, not later than thirty (30) days after the end
of such period, an amount in cash equal to the lesser of (i) 35% of such Excess
Cash Flow and (ii) the aggregate unpaid principal amount of the Term Notes shall
be paid to the Purchaser, for application to the unpaid principal amounts of the
outstanding Term Notes in accordance with the applicable provisions of Section
3.3, without prepayment charge, premium or penalty. Nothing in this subsection
(c) shall be construed to permit, or to waive any required consent with respect
to, any transaction that is prohibited by another provision of this Agreement or
the other Note Documents.
(d) Not later than 30 days prior to any date on which (i) any Credit
Party shall issue or sell any of its Capital Stock (other than shares of Common
Stock issued pursuant to the Parent 1998 Executive Compensation Plan or upon
exercise of the Warrants and other than Capital Stock sold to another Credit
Party), or (ii) any Credit Party shall incur any Indebtedness for borrowed money
(other than Indebtedness permitted by Section 10.1), the Company shall deliver
to the Purchaser an Officer's Certificate setting forth in reasonable detail a
description of such issuance or sale of Capital Stock or incurrence of
Indebtedness (as the case may be), and stating the date such issuance or sale of
Capital Stock or incurrence of Indebtedness is expected to occur and the amount
of the Net Cash Proceeds expected to be received by such Person in connection
therewith and, if applicable, whether the Parent proposes to use any such Net
Cash Proceeds for the purposes described in the last sentence of this clause
(d). Concurrently with the receipt by such Person of such Net Cash Proceeds, an
amount in cash equal to the lesser of (i) 100% of such Net Cash Proceeds and
(ii) the aggregate unpaid principal amount of the Term Notes shall be paid to
the Purchaser, for application to the unpaid principal amounts of the
outstanding Term Notes in accordance with the applicable provisions of Section
3.3, without prepayment charge, premium or penalty. Nothing in this subsection
(d) shall be construed to permit or to waive any required consent with respect
to any transaction that is prohibited by another provision of this Agreement or
the Reorganization Documents. Notwithstanding the foregoing, the Parent shall be
permitted to retain up to $5,000,000 in the aggregate of the Net Cash Proceeds
resulting from the transactions described in clauses (i) and/or (ii) of the
first sentence of this subsection (d), to the extent that the Parent uses such
Net Cash Proceeds (x) to repay, within
-29-
<PAGE> 31
five (5) Business Days of receipt of such Net Cash Proceeds, principal and
interest owing under the Contributor Short-Term Subordinated Note and/or (y) to
fund up to $2,000,000 of operating expenses of any Credit Party.
Section 3.2. Optional Prepayments of the Notes.
(a) Upon notice given as provided in Section 3.2(b), the Company, at
its option, may prepay at any time all or from time to time any part (in an
aggregate amount of $250,000 or any greater amount which is an even multiple of
$50,000, or in an amount equal to the aggregate principal balance of all of the
Notes) of the principal amount of the Notes, together with accrued but unpaid
interest on the principal amount being prepaid to the date of such prepayment,
but without prepayment charge, premium or penalty; provided that not more than
two prepayments pursuant to this Section 3.2(a) shall be made in any calendar
month. Each prepayment made pursuant to this Section 3.2(a) shall be applied as
provided in Section 3.3(c).
(b) The Company shall call Notes for prepayment pursuant to Section
3.2(a) by giving written notice thereof to the Purchaser, not less than 5
Business Days prior to the date fixed for such prepayment, which notice shall
specify (i) the date fixed for such prepayment, (ii) the principal amount to be
prepaid on such date, and (iii) the amount of accrued interest to be paid or
anticipated to be paid on such date. Notice of prepayment having been so given,
the aggregate principal amount of the Notes so to be prepaid as specified in
such notice, together with interest accrued thereon to such date fixed for
prepayment, shall become due and payable on the specified prepayment date.
Section 3.3. Application of Principal Payments.
(a) All payments and prepayments of the principal amount of the
Notes made pursuant to Section 3.1(c) or (d) shall be applied to the outstanding
principal amount of the Term Notes until paid in full. The Term Notes, to the
extent paid or prepaid as herein provided, shall not be reissued.
(b) All payments and prepayments of principal made pursuant to
Section 3.1(b) shall be applied to the outstanding principal amount of the
Revolving Notes, any such payment or prepayment shall not affect the Maximum
Revolving Commitment and such Revolving Notes, notwithstanding such payment or
prepayment, may be reissued and sold in the manner and to the extent provided in
Section 2.2.
(c) All payments and prepayments of principal made pursuant to
Section 3.2(a) shall be applied first to the outstanding principal amount of the
Revolving Notes until such principal amount shall be reduced to $0, and
thereafter shall be applied to the outstanding principal amount of the Term
Notes. Amounts applied to the Revolving Notes pursuant to this subsection (c)
shall not affect the Maximum Revolving Commitment,
-30-
<PAGE> 32
and such Revolving Notes, notwithstanding such prepayment, may be reissued and
sold in the manner and to the extent provided in Section 2.2. The Term Notes, to
the extent prepaid as herein provided, shall not be reissued.
(d) In the event that, at the time any payment or prepayment
provided for herein shall be applied to the Revolving Notes or the Term Notes,
more than one Revolving Note or more than one Term Note shall be outstanding,
then such payment or prepayment shall be applied to the Revolving Notes or the
Term Notes (as the case may be) pro rata in accordance with the respective
outstanding principal amounts of the Notes of the applicable type.
(e) In any case in which a payment of the principal amount of the
Term Notes made pursuant to Section 3.1 (c) or (d) or Section 3.2 shall include
the entire unpaid principal amount of all Term Notes at the time outstanding,
such payment shall be accompanied by a payment of all interest accrued on such
principal amount to the date of such payment. In the case of any payment
pursuant to any of such provisions of less than the entire unpaid principal
amount of the Term Notes, interest accrued on the principal amount so paid to
the date of such payment shall be paid on the next regular date for payment of
interest on the Term Notes as provided in Section 2.1(a). In any case in which a
payment of the principal amount of the Revolving Notes made pursuant to Section
3.1(b) shall include the entire unpaid principal amount of all Revolving Notes
at the time outstanding, such payment shall be accompanied by a payment of all
interest accrued on such principal amount to the date of such payment. In the
case of any payment pursuant to such provision of less than the entire unpaid
principal amount of the Revolving Notes, interest accrued on the principal
amount so paid to the date of such payment shall be paid on the next regular
date for payment of interest on the Revolving Notes as provided in Section
2.1(a).
Section 3.4. Reductions of Commitments. The Company may terminate or
reduce the amount of the Maximum Revolving Commitment at any time or from time
to time, provided that (i) the Company shall give written notice to the
Purchaser of each such termination or reduction at least 5 Business Days prior
to the effective date thereof, which notice shall specify such effective date
and the amount of such reduction, (ii) each partial reduction of the Maximum
Revolving Commitment shall be in an aggregate amount at least equal to $250,000
or any greater amount which is an even multiple of $50,000, (iii) each such
reduction of the Maximum Revolving Commitment, and any such termination, shall
be irrevocable and permanent and (iv) no such reduction shall reduce the Maximum
Revolving Commitment to an amount that is less than the aggregate principal
amount of the Revolving Notes at the time outstanding.
Section 3.5. Purchase of Notes. The Company will not, nor will it permit
any of its Subsidiaries or Affiliates to, acquire directly or indirectly by
purchase or prepayment or otherwise any of the outstanding Notes except by way
of payment or prepayment in accordance with the provisions of such Notes and of
this Agreement. If the Company or any
-31-
<PAGE> 33
of its Subsidiaries or Affiliates acquires any Notes in violation of this
Section 3.5 or in any other manner, such Notes shall thereafter be cancelled and
shall not be reissued, no Note shall be issued in substitution therefor, and
such Notes shall not be deemed to be outstanding for any purpose under this
Agreement.
Section 3.6. Taxes.
(a) All payments by the Company under this Agreement or the Notes to
the Purchaser shall be made free and clear of and without deduction for any and
all present or future taxes, levies, imposts, deductions, charges or
withholdings imposed on or with respect to such payments, and all liabilities
with respect thereto, excluding (except as provided in subsection (b) of this
Section 3.6) net income or franchise taxes imposed on or measured by such
holder's net income and imposed as a result of the holder being organized under
the laws of, or having its lending office in, the jurisdiction imposing such tax
(other than any office arising solely from the holder having executed, delivered
or performed its obligations or received a payment under, or enforced, this
Agreement in such jurisdiction) (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes").
(b) If the Company shall be required by law to deduct any taxes,
levies, imposts, deductions, charges or withholdings imposed by the United
States of America or any taxing authority thereof ("U.S. Taxes") from or in
respect of any sum payable hereunder to any holder which is not a U.S. Person,
(i) except as provided in subsection (f) below, the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
3.6), such holder receives an amount equal to the sum it would have received had
no such deductions been made, (ii) the Company shall make such deductions and
(iii) the Company shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law. Upon the
occurrence of any event giving rise to the operation of this Section 3.6(b) with
respect to any holder, such holder shall, if requested by the Company, use
reasonable efforts to designate another office of such holder through which its
Notes are held, with the object of preventing the consequence of the event
giving rise to the operation of this Section 3.6(b); provided that such
designation would not (y) result, in the sole opinion of the holder, in any
material cost, expense or other detriment to such holder, or (z) violate any
Statute or Order to which such holder or the Company is then subject.
(c) In addition, the Company agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies that arise from any payment made under this Agreement or the
Notes or from the execution, delivery, transfer, enforcement or registration of,
or otherwise with respect to, this Agreement, the Notes or any other Note
Document (hereinafter referred to as "Other Taxes").
-32-
<PAGE> 34
(d) Except as provided in subsection (f) of this Section 3.6, the
Company will indemnify each holder of Notes for the full amount of Taxes, U.S.
Taxes or Other Taxes imposed by any jurisdiction and paid by such holder, and
any liability (including penalties, additions to tax, interest and expenses)
arising therefrom or with respect thereto, whether or not such Taxes, U.S. Taxes
or Other Taxes were correctly or legally asserted. This indemnification shall be
made within 30 days from the date such holder makes written demand therefor
(which demand shall identify the nature and amount of Taxes, U.S. Taxes or Other
Taxes for which indemnification is being sought and shall include a copy of the
relevant portion of any written assessment from the relevant taxing authority
demanding payment of such Taxes, U.S. Taxes or Other Taxes).
(e) Within 30 days after the date of any payment of Taxes, U.S.
Taxes or Other Taxes, the Company will furnish to the Purchaser the original or
a certified copy of any receipt furnished by the relevant taxing authority
evidencing payment thereof.
(f) The Company shall have no obligation to pay additional amounts
in respect of U.S. Taxes to any holder of Notes which is not a U.S. Person
pursuant to subsection (b) of this Section 3.6, or to indemnify such holder in
respect of such U.S. Taxes pursuant to subsection (d) of this Section 3.6, if
such U.S. Taxes are imposed solely by reason of such holder's failure (i) to
provide the Company, immediately prior to the time such Person becomes a holder,
with two duly completed copies of United States Internal Revenue Service Form
1001 or 4224 or successor applicable form, as the case may be, certifying in
each case that the holder is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes and
Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the
case may be, to establish an exemption from United States backup withholding
tax, or (ii) to provide the Company, on or before the date that any form
previously supplied to the Company pursuant to this Section 3.6(f) expires or
becomes obsolete or immediately subsequent to the occurrence of any event
requiring a change in the form most recently supplied by it to the Company, two
further copies of such Form 1001 or 4224 and Form W-8 or W-9, or successor
applicable forms, certifying that the holder is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes and is exempt from United States backup withholding tax
unless a change in treaty, law or regulation or interpretation thereof has
occurred prior to the date on which the delivery of the forms required by this
Section 3.6(f)(ii) would otherwise be due renders any such form inapplicable or
prevents the holder from duly completing and delivering any such form and the
holder advises the Company that it is no longer capable of receiving payments
without deduction or withholding. Each holder agrees that it will designate a
different lending office to receive payments on the Notes if such designation
will avoid the need for, or reduce the amount of, such Taxes and will not, in
the sole opinion of such holder, be disadvantageous to such holder.
-33-
<PAGE> 35
(g) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section 3.6
shall survive the payment in full of principal, interest, fees and any other
amounts payable hereunder (other than amounts payable pursuant to this Section
3.6).
Section 4. Representations and Warranties of the Parent and the Company.
The Parent and the Company jointly and severally represent and warrant to the
Purchaser that:
Section 4.1. Corporate Existence and Power. Each Credit Party is a
corporation, partnership and/or limited liability company duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization and is duly qualified to do business in each additional
jurisdiction where the failure to so qualify is reasonably likely to have a
Material Adverse Effect. Each Credit Party has all requisite organizational
power to own its Properties and to carry on its businesses as now being
conducted and as proposed to be conducted and to execute, deliver and perform
its obligations under this Agreement, the Notes, the Warrants and the other
Transaction Documents to which it is a party.
Section 4.2. Corporate Authority. The execution, delivery and performance
by each Credit Party of this Agreement, the Notes, the Warrants and the other
Transaction Documents to which it is a party are within its organizational power
and have been duly authorized by all necessary organizational action on the part
of its Board of Directors and stockholders.
Section 4.3. Binding Effect. This Agreement, the Notes, the Warrants and
each of the other Transaction Documents to which any Credit Party is a party
have been duly executed and delivered by such Credit Party which is a party
thereto, and are the legal, valid and binding obligations of such Credit Party,
as the case may be, enforceable against it in accordance with their terms,
except, in each of the foregoing cases, as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other laws
relative to or affecting the enforcement of creditors' rights generally in
effect from time to time and by general principles of equity.
Section 4.4. Capital Stock.
(a) As of the Closing Date after giving effect to the Transactions,
the authorized and issued shares of each class of Capital Stock of each Credit
Party are as set forth in Schedule 4.4 hereto. All of the issued and outstanding
shares of Capital Stock of each Credit Party are validly issued, fully paid and
non-assessable. As of the Closing Date after giving effect to the Transactions,
except for the Warrants and as otherwise set forth on Schedule 4.4 hereto, there
are no securities outstanding that are convertible into or exchangeable for any
shares of Capital Stock of any Credit Party, nor are there outstanding any
rights to subscribe for or purchase, or any options or warrants for the purchase
of, or any agreements (contingent or otherwise) providing for the issuance of,
or any calls, commitments or claims of any character relating to, any shares of
Capital Stock of any Credit
-34-
<PAGE> 36
Party or any securities convertible into or exchangeable for any such shares.
Each Credit Party has good title to all of the shares of Capital Stock it owns,
free and clear in each case of any Lien (except Liens created by the Security
Documents).
(b) On the Closing Date, after giving effect to the Transactions, no
Credit Party will be subject to any obligation (contingent or otherwise) to
repurchase, acquire or retire (i) any of its Capital Stock, (ii) any securities
convertible into or exchangeable for any of its Capital Stock, or (iii) any
options, warrants or other rights to subscribe for, purchase or acquire any of
its Capital Stock, except for shareholders' appraisal rights in connection with
the Reorganization under Nevada law and the obligation of Parent to convert
and/or exchange options and warrants to acquire shares of common stock of
Newriders into or for options and/or warrants for Common Stock.
(c) The shares of Common Stock issuable upon exercise of the
Warrants have been duly and validly reserved for issuance upon such exercise
and, when issued and delivered against payment therefor as provided therein,
will be duly authorized, validly issued, fully paid and non-assessable and
subject to no Liens in respect of the issuance thereof.
Section 4.5. Business Operations and Other Information: Financial
Condition.
(a) The Credit Parties have delivered to the Purchaser true and
complete copies of (i) the audited consolidated balance sheets of each of (1)
the Paisano Companies, (2) Newriders and its Subsidiaries and (3) El Paso and
its Subsidiaries, in each case as of December 31, 1996 and 1997, and the related
audited consolidated statements of income, shareholders' equity and cash flows
for each of the fiscal years then ended of each of (1) the Paisano Companies,
(2) Newriders and its Subsidiaries and (3) El Paso and its Subsidiaries,
together with the notes thereto and the reports thereon of Deloitte & Touche LLP
(or with respect to Newriders and its Subsidiaries as of and for the fiscal year
ended December 31, 1996, Jones, Jensen & Company), and (ii) the unaudited
balance sheets of each of (1) of the Paisano Companies, (2) Newriders and its
Subsidiaries and (3) El Paso and its Subsidiaries, in each case as of March 31,
1998 and June 30, 1998, and the related unaudited statements of income,
shareholders' equity and cash flows for each of the fiscal quarters then ended,
together with the notes thereto (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with GAAP (subject, in the
case of the unaudited quarterly financial statements, to normal year-end audit
adjustments and absence of certain of the notes required by GAAP), and present
fairly, in all material respects, the consolidated financial position and
related consolidated results of operations and cash flows of the Paisano
Companies, Newriders and El Paso, as applicable, as at each of the dates and for
each of the periods respectively covered thereby.
(b) As of the date of each of the balance sheets included in the
Financial Statements, no Credit Party had any Indebtedness or liability,
absolute or contingent, liquidated or unliquidated, except Indebtedness and
liabilities reflected or reserved against
-35-
<PAGE> 37
on such respective balance sheets or described in the notes thereto. Except as
set forth on Schedule 4.5B, since December 31, 1997, no Material Adverse Effect
has occurred;
(c) Attached hereto as Schedule 4.5C is a true and complete copy of
the latest (as of the Closing Date) projections of the consolidated net income
and cash flow of (i) the Parent and its Subsidiaries on a consolidated basis and
(ii) the Paisano Group, (assuming completion of the Transactions) for each of
the fiscal years of the Parent in the period from the Closing Date through
December 31, 2001. Such projections have been prepared by management of the
Parent on the basis of assumptions, set forth in Schedule 4.5C, which such
management reasonably believes as of the Closing Date are fair and reasonable in
light of the historical financial performance of the Credit Parties and of
current and reasonably foreseeable business conditions, and represent such
management's best estimate of the Credit Parties' future financial performance
(after giving effect to the Transactions).
(d) Attached hereto as Schedule 4.5D is a true and complete copy of
a pro forma balance sheet for (i) the Parent and its Subsidiaries on a
consolidated basis and (ii) the Paisano Group, prepared by management of the
Parent on the basis of the historical unaudited balance sheet of the Paisano
Companies as of March 31, 1998, as though the Transactions had been completed
immediately prior to such date. Such pro forma balance sheet fairly presents in
all material respects the consolidated financial position of the (i) Parent and
its Subsidiaries and (ii) the Paisano Group, respectively, on a consolidated
basis as of the close of business on such date on a pro forma basis as if the
Transactions had been completed immediately prior to such date, and contains all
pro forma adjustments necessary in order to fairly reflect such assumption.
(e) Attached as Schedule 4.5E is a true and complete statement of
the sources and uses of all funds to be received or expended by the Credit
Parties in connection with the Transactions, including, without limitation, an
itemized statement of all costs and expenses which, as of the Closing Date, are
expected to be incurred in connection with the Transactions.
Section 4.6. Subsidiaries. Except as set forth on Schedule 4.6, (i) none
of the Credit Parties has any Subsidiaries, or, except as set forth on Schedule
4.10B, owns any shares of Capital Stock of, or has any direct or indirect equity
interest in, any other Person, and (ii) each Credit Party has good title to all
of the shares of Capital Stock it owns of each such Subsidiary, free and clear
of any Lien (except Liens created by the Security Documents).
Section 4.7. Litigation; No Violation of Governmental Orders or Laws.
(a) Except as set forth on Schedule 4.7, there are no judicial,
administrative, arbitral or other actions, suits or proceedings pending, or, to
the knowledge of the Company or the Parent after due inquiry, threatened against
or affecting any Credit Party or any Properties or rights of any of them (i)
which, if adversely determined,
-36-
<PAGE> 38
individually or in the aggregate is reasonably likely to have a Material Adverse
Effect, or (ii) which seek to enjoin, or otherwise prevent the consummation of,
the Transactions or to recover any damages or obtain any relief as a result of
any of the Transactions in any court or before any arbitrator of any kind or
before or by any Governmental Body.
(b) No Credit Party is in default under or in violation of any Order
of any court, arbitrator or Governmental Body, or of any Statute which default
or violation, individually or in the aggregate together with all other such
defaults and violations, has had or is reasonably likely to have a Material
Adverse Effect.
Section 4.8. No Conflicts with Agreements, Statutes, Orders, Etc. Neither
the execution and delivery by any Credit Party of this Agreement, the Notes, the
Warrants or any of the other Transaction Documents to which it is a party, nor
the offering, issuance or sale of the Notes or the Warrants, nor the fulfillment
of or compliance with the terms and provisions hereof or thereof, will conflict
with, or result in a breach or violation of the terms, conditions or provisions
of, or constitute a default under, or result in the creation of any Lien (other
than Liens created pursuant to the Security Documents) on any Properties of any
Credit Party pursuant to, the charter or by-laws of any Credit Party, or any
contract, agreement, mortgage, indenture, lease or instrument to which either of
them is a party or by which either of them is bound or to which either of them
or any of their assets are subject, or any Order or Statute to which either of
them or any of their assets are subject.
Section 4.9. Consents, Etc. No consent, approval or authorization of or
declaration, registration or filing with any Governmental Body or any
nongovernmental Person (including, without limitation, any creditor or
stockholder of any Credit Party, and also including, without limitation, any
consent, approval, authorization, declaration or filing or the expiration of any
waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976),
is required in connection with the execution, delivery or performance by any
Credit Party of this Agreement, the Notes, the Warrants or the other Transaction
Documents, or as a condition to the legality, validity or enforceability of this
Agreement, the Notes, the Warrants or any other Transaction Document or to the
consummation of the Transactions, except for (a) filing of financing statements,
filing of assignments of patents, trademarks, copyrights and similar items and
recording of Mortgages and fixture filings, required in each case in order to
perfect the Liens of the Purchaser in the Collateral, and (b) such consents,
approvals, authorizations, declarations, registrations, filings and other
actions as are listed in Schedule 4.9, all of which listed consents, approvals,
authorizations, declarations, registrations, filings and other actions have been
or will on or prior to the Closing Date be obtained and are or will then be in
full force and effect.
Section 4.10. Outstanding Indebtedness; Investments. (a) Schedule 4.10A
sets forth a correct and complete list and brief description as of the Closing
Date of all Indebtedness for borrowed money of each Credit Party and all Liens
securing such Indebtedness (excluding any Indebtedness evidenced by the Notes
and any Liens created by the Security
-37-
<PAGE> 39
Documents) existing on the Closing Date before giving effect to the
Transactions, indicating which such Indebtedness and Liens will be discharged
and paid in full on the Closing Date (the "Non-Continuing Indebtedness") and
which such Indebtedness and Liens will be continuing after giving effect to the
Transactions (the "Continuing Indebtedness"). On the Closing Date after giving
effect to the Transactions, no default or event of default has occurred and is
continuing with respect to any Continuing Indebtedness.
(b) Schedule 4.10B sets forth a correct and complete list and brief
description of all Investments of each Credit Party as of the Closing Date after
giving effect to the Transactions.
Section 4.11. Assets and Properties.
(a) As of the Closing Date after giving effect to the Transactions,
no Credit Party owns any real Property. Schedule 4.11 sets forth a true and
complete list, as of the Closing Date after giving effect to the Transactions,
of all leases of real Property to which any Credit Party is a party, identifying
the parties to each such lease and the Property to which it relates, as of the
Closing Date after giving effect to the Transactions contemplated to occur on
the Closing Date. True and complete copies of all such leases, together with all
amendments, modifications and supplements thereto to the date of this Agreement,
have been delivered to the Purchaser or its representatives. Each Credit Party
has good and marketable title to all of its respective Properties (other than
Properties leased from others), subject to no Lien of any kind except Permitted
Liens.
(b) The Properties owned by, leased to or used by each Credit Party
are in good operating condition and repair, ordinary wear and tear excepted, and
are able to serve the function for which they are currently being used in all
material respects. Neither this Agreement nor any other Transaction Document,
nor any of the Transactions, will materially adversely affect any right, title
or interest of any Credit Party in and to any of the assets or properties owned,
leased or used by Credit Party.
Section 4.12. Taxes. Each Credit Party has filed, or on behalf of each of
them there have been filed, all tax returns and informational returns which are
required to have been filed, and there have been paid all taxes shown to be due
and payable on such returns and all other material taxes and assessments payable
by any of them, except to the extent that any such tax liability is being
diligently contested in good faith and such Credit Party has adequately reserved
against such tax liability on its books and financial statements in accordance
with GAAP. No material tax liens have been filed and no material claims are
being asserted with respect to any such taxes as of the date hereof. No material
tax assessment against any Credit Party has been proposed, and all of their
respective tax liabilities are adequately provided for on their respective books
and financial statements in accordance with GAAP.
-38-
<PAGE> 40
Section 4.13. Disclosure. Neither this Agreement nor any other document,
certificate or statement (including, without limitation, the Registration
Statement, but in any event excluding the Confidential Information Memorandum,
dated March 1998, prepared by Imperial Capital, LLC) furnished to the Purchaser
by or on behalf of any Credit Party in connection herewith contained, as of its
respective date, or now contains, any untrue statement of a material fact or as
of any such date omitted, or now omits, to state a material fact necessary in
order to make the statements contained herein and therein not misleading,
provided that any statement or other disclosure contained in the Registration
Statement (or any amendments thereto which are filed with the SEC prior to the
Closing Date), which provides correct and complete information with respect to
any untrue statement of material fact or omission of material fact otherwise
contained in any document, certificate or statement previously furnished to the
Purchaser, shall be deemed to correct such untrue statement or omission. Except
as set forth on Schedule 4.5B, neither the Parent nor the Company knows of any
facts (other than matters of a general economic or political nature) that
individually or in the aggregate have had a Material Adverse Effect or are
reasonably likely to have a Material Adverse Effect in the future.
Section 4.14. Offering of Securities. No Credit Party nor any
representative thereof has, directly or indirectly, offered any of the Notes or
Warrants or any security similar to any of them for sale to, or solicited any
offers to buy any of the Notes or Warrants or any security similar to any of
them from, or otherwise approached or negotiated with respect thereto with, more
than [10] Persons including the Purchaser, and no Credit Party nor its
representatives has taken or will take any action which would subject the
issuance or sale of any of the Notes or the Warrants to the provisions of
Section 5 of the Securities Act or violate the provisions of any securities or
Blue Sky laws of any applicable jurisdiction.
Section 4.15. Broker's or Finder's Commissions. Except for compensation to
Imperial Capital LLC due on the Closing Date consisting of (x) a cash fee of
approximately $1,485,000 (10% of which shall be paid to Franchise Mortgage
Acceptance Company) plus (y) warrants to purchase up to an aggregate of 2.5% (on
a fully diluted basis) of shares of Common Stock then outstanding at an exercise
price of $4.3125, no broker's or finder's fee or commission will be payable by
any Credit Party with respect to the issuance and sale of the Notes or Warrants
or any of the Transactions. The Company agrees to indemnify the Purchaser and
hold it harmless against any loss, cost, claim or liability (including, without
limitation, reasonable attorneys' fees and disbursements for the investigation
and defense of claims) arising out of or relating to any such actual or alleged
fee or commission.
Section 4.16. Labor Matters. Except as set forth in Schedule 4.16, during
the three years preceding the Closing Date, there has been no strike, work
stoppage, slowdown or other labor dispute or grievance involving any Credit
Party thereof or the employees of any of such Persons, nor to the knowledge of
the Company or the Parent after due inquiry is any such action, dispute or
grievance pending or threatened against any Credit Party thereof as of the
Closing Date. No Credit Party is a party to any collective bargaining agreement
and
-39-
<PAGE> 41
neither the Company nor the Parent has knowledge after due inquiry of any
pending or threatened effort to organize any of their employees. Except as set
forth in Schedule 4.16, there are no pending retaliatory or wrongful discharge
claims or employment discrimination charges or complaints or administrative or
judicial complaints arising therefrom pending against any Credit Party, or
against any employees of any of such Persons, before any Governmental Body,
which have had or could reasonably be expected to have a Material Adverse
Effect, nor to the knowledge of the Company or the Parent after due inquiry are
any such charges or complaints threatened against any Credit Party. Each Credit
Party is in compliance with all applicable Statutes and Orders relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, bonuses, collective bargaining agreements, equal pay,
occupational safety and health, equal employment opportunity and wrongful or
retaliatory termination of employment, except for such noncompliance as in the
aggregate is not reasonably likely to, and will not, result in a Material
Adverse Effect.
Section 4.17. Environmental Matters. Except as set forth in Schedule 4.17:
(a) there is no pending Environmental Matter, and after due inquiry
neither the Company nor the Parent is aware of any facts that could reasonably
be expected to result in any Environmental Matter. No Credit Party has agreed to
assume by contract or otherwise any liability of any other Person for cleanup,
compliance, or required Capital Expenditures in connection with any
Environmental Matter;
(b) the Properties used, owned, leased, operated, managed or
controlled at any time by each Credit Party are free of contamination from
Hazardous Materials, including, without limitation, any contamination of the
associated air, soil, groundwater or surface waters, and are free of any other
potentially harmful chemical or physical conditions that would reasonably be
expected to have a Material Adverse Effect;
(c) each Credit Party is in material compliance with all applicable
Environmental Laws and is not currently in receipt of any notice of violation of
any Environmental Law or of any potential liability for cleanup of Hazardous
Materials. Each Credit Party holds and is in material compliance with all
governmental permits, licenses, and authorizations necessary to operate their
businesses that relate to siting, wetlands, coastal zone management, air
emissions, discharges to surface or ground water, discharges to any sewer or
septic system, noise emissions, solid waste disposal or the generation, use,
transportation or other management of Hazardous Materials. To the best knowledge
of the Company and the Parent after due inquiry, no Credit Party has at any time
generated, manufactured, refined, recycled, discharged, emitted, released,
buried, processed, produced, reclaimed, stored, treated, transported, or
disposed of any Hazardous Materials except in material compliance with all
applicable Statutes and Orders;
(d) no real Property used, owned, leased, operated, managed or
controlled by any Credit Party is (i) listed or proposed for listing on the
National Priorities List under
-40-
<PAGE> 42
CERCLA or is (ii) listed in the Comprehensive Environmental Response,
Compensation, Liability Information System List promulgated pursuant to CERCLA,
or on any comparable list maintained by any Governmental Body;
(e) no Properties of any Credit Party are subject to any Lien or
claim for Lien in favor of any Person as a result of any Environmental Matter or
response thereto; and
(f) no Credit Party has any liabilities, absolute or contingent on
the date hereof with respect to Hazardous Materials, except for such liabilities
as are not in the aggregate reasonably likely to have a Material Adverse Effect.
Section 4.18. Margin Regulations. No Credit Party owns or now intends to
acquire any "margin stock" as defined in Regulation U of the Board of Governors
of the Federal Reserve System of the United States (12 CFR 221). No part of the
proceeds from the sale of the Notes will be used, and no part of the proceeds of
any loans repaid with the proceeds from the sale of the Notes was used, directly
or indirectly, for the purpose of buying or carrying any margin stock within the
meaning of such Regulation U, or for the purpose of buying or carrying or
trading in any securities under such circumstances as to involve any Credit
Party in a violation of Regulation X of said Board (12 CFR 224) or to involve
any broker or dealer in a violation of Regulation T of said Board (12 CFR 220).
No Credit Party or any agent acting on behalf of any Credit Party, has taken or
will take any action which might cause this Agreement, the Notes or the other
Note Documents to violate Regulation T, Regulation U, Regulation X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the Exchange Act, in each case as in effect now or as the same may hereafter be
in effect. As used in this Section, the term "purpose of buying or carrying" has
the meaning assigned thereto in the aforesaid Regulation U.
Section 4.19. Compliance with ERISA.
(a) Except as set forth on Schedule 4.l9(a), no Credit Party
maintains or contributes to or has any obligation with respect to, and none of
the employees of any of the Credit Parties is covered by, any bonus, deferred
compensation, severance pay, pension, profit-sharing, retirement, insurance,
stock purchase, stock option, or other fringe benefit plan, arrangement or
practice, written or otherwise, or any other "employee benefit plan," as defined
in Section 3(3) of ERISA, whether formal or informal (collectively, the "Benefit
Plans" ). None of the Benefit Plans is (i) a Multiemployer Plan, (ii) a
"multiple employer plan," as defined in ERISA or the Code, or (iii) a funded
welfare benefit plan, as defined in Section 419 of the Code. No Credit Party has
ever contributed to any Plan subject to Section 412 of the Code, Title I,
Subtitle B, Part 3 of ERISA or Title IV of ERISA other than the Paisano
Publications, Inc. Defined Benefit Pension Plan. No Credit Party has any
agreement or commitment to create any additional Benefit Plan or to modify or
change any existing Benefit Plan. No Credit Party has any other ERISA
Affiliates.
-41-
<PAGE> 43
(b) With respect to each Benefit Plan, the Credit Parties have
heretofore delivered or caused to be delivered to Newriders true, correct and
complete copies of (i) all documents which comprise the most current version of
each of such Benefit Plans, including any related trust agreements, insurance
contracts, or other funding or investment agreements and any amendments thereto,
and (ii) with respect to each Benefit Plan that is a Plan, (A) the three most
recent Annual Reports (Form 5500 Series) and accompanying schedules for each of
the Plans for which such a report is required, (B) the most current summary plan
description (and any summary of material modifications), (C) the three most
recent certified financial statements and actuarial valuations for each of the
Plans for which such a statement or actuarial valuation is required or was
prepared, (D) the Forms PBGC-l filed in each of the three most recent plan
years for the Pension Plan, and (E) for each Plan intended to be "qualified"
within the meaning of Section 401(a) of the Code, all the Internal Revenue
Service determination letters issued with respect to such Plan. Except as set
forth on Schedule 4.19(b), since the date of the documents delivered, there has
not been any material change in the assets or liabilities of any of the Benefit
Plans or any change in their terms and operations which could reasonably be
expected to affect or alter the tax status or materially affect the cost of
maintaining such Benefit Plan, and none of the Benefit Plans has been or will be
amended prior to the Closing Date. Each of the Benefit Plans can be amended,
modified or terminated by a Credit Party within a period of thirty (30) days,
without payment of any additional compensation or amount or the additional
vesting or acceleration of any such benefits, except to the extent that such
vesting is required under the Code upon the complete or partial termination of
any Plan intended to be qualified within the meaning of Section 401(a) of the
Code.
(c) Each Credit Party has performed and complied in all respects
with all of its obligations under and with respect to each of the Benefit Plans
and each of the Benefit Plans has, at all times, in form, operation and
administration complied in all material respects with its terms, and, where
applicable, the requirements of the Code, ERISA and all other applicable laws
and regulations. Each Plan which is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified and nothing has occurred which reasonably
could be expected to adversely affect such qualified status.
(d) There are no unpaid contributions due prior to the date hereof
with respect to any Benefit Plan that are required to have been made under its
terms and provisions, any related insurance contract or any applicable law or
regulation.
(e) (i) With respect to the Pension Plan, there has occurred no
failure to meet the minimum funding standards of Section 412 of the Code
(whether or not waived in accordance with Section 412(d) of the Code) or failure
to make by its due date a required installment under Section 412(m) of the Code,
and (ii) (A) no Credit Party has withdrawn from the Pension Plan during a plan
year in which it was a "substantial employer," as defined in Section 4001(a)(2)
of ERISA, where such withdrawal could result in liability of such
-42-
<PAGE> 44
substantial employer pursuant to Section 4062(e) or 4063 of ERISA, (B) no Credit
Party has filed a notice of intent to terminate the Pension Plan or adopted any
amendment to treat any such Plan as terminated, (C) the PBGC has not instituted
proceedings to terminate the Pension Plan, (D) no other event or condition has
occurred which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, the Pension Plan,
(E) no accumulated funding deficiency, whether or not waived, exists with
respect to the Pension Plan, and no condition has occurred or exists which by
the passage of time would be expected to result in an accumulated funding
deficiency as of the last day of the current plan year of the Pension Plan, (F)
all required premium payments to the PBGC have been paid when due, (G) no
reportable event, as described in Section 4043 of ERISA (whether or not waived),
has occurred with respect to the Pension Plan, (H) no excise taxes are payable
under the Code, (I) no amendment with respect to which security is required
under Section 307 of ERISA or Section 401 (a)(29) of the Code has been made or
is reasonably expected to be made, and (J) there has been no event which could
subject any of the Credit Parties to liability under Section 4064 or 4069 of
ERISA.
(f) With respect to the Pension Plan, (i) the funding method used in
connection with the Pension Plan is acceptable under ERISA and the actuarial
assumptions used in connection with funding such Plan meet the requirements of
Section 302 of ERISA and (ii) the actuarial present value of vested and
nonvested "benefit liabilities," as defined in Section 4001(a)(16) of ERISA,
calculated on a termination basis and taking into account all contingent and
subsidized benefits (the "Benefit Liabilities") of the Pension Plan, determined
as of the date hereof for such Plan, did not, and as of the Closing Date will
not, exceed the fair market value of the assets of such Plan as of such date.
(g) All group health plans covering employees of any of the Credit
Parties have been operated in compliance with the requirements of Section 4980B
of the Code (and any predecessor provisions) and Part 6 of Title I of ERISA
("COBRA").
(h) No Credit Party has any obligation to provide any deferred
compensation, pension or non-pension benefits to retired or other former
employees, except for health benefits as specifically required by COBRA or
pension benefits payable from a Plan intended to be "qualified" within the
meaning of Section 401(a) of the Code.
(i) No Credit Party, nor any other "disqualified person" or "party
in interest," as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction," as defined in Section
4975 of the Code or Section 406 of ERISA, with respect to any Benefit Plan nor
have there been any fiduciary violations under ERISA which could subject any
Credit Party (or any officer, director or employee thereof) to any penalty or
tax under Section 502(i) of ERISA or Section 4971 and 497 of the Code.
-43-
<PAGE> 45
(j) Except as set forth on Schedule 4.19(j), with respect to any
Benefit Plan: (i) no filing, application or other matter is pending with the
Internal Revenue Service, the PBGC, the United States Department of Labor or any
other governmental body, (ii) there is no action, suit or claim pending (nor, to
the knowledge of any of the Credit Parties, any basis for such a claim), other
than routine claims for benefits, and (iii) there are no outstanding liabilities
for taxes, penalties or fees.
(k) No Credit Party has incurred any liability or taken any action,
and no Credit Party has any knowledge of any action or event that could cause
any one of them to incur any liability, (i) under Section 412 of the Code or
Title IV of ERISA with respect to any "single-employer plan" (as defined in
Section 4001(a)(15) of ERISA), (ii) on account of a partial or complete
withdrawal (as defined in Sections 4203 and 4205 of ERISA, respectively) with
respect to any Multiemployer Plan, or (iii) on account of unpaid contributions
to any Multiemployer Plan.
(l) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the Transactions will: (i) entitle any current or
former employee of a Credit Party to severance pay, unemployment compensation or
any similar payment, (ii) accelerate the time of payment or vesting or increase
the amount of any compensation due from any Credit Party to any such employee or
former employee, or (iii) directly or indirectly result in any payment made or
to be made to or on behalf of any person to constitute a "parachute payment"
within the meaning of Section 280G of the Code.
Section 4.20. Material Contracts. Schedule 4.20 contains a list of all
Material Contracts to which any Credit Party is a party as of the Closing Date
after giving affect to the Transactions contemplated to occur on the Closing
Date. True and complete copies of each of such Material Contracts, with all
amendments, modifications and supplements thereto to the date hereof, have
previously been furnished by the Company to the Purchaser or its
representatives. Each of such Material Contracts is valid, subsisting and in
full force and effect and no Material Contract (and no present or future
interest of any Credit Party, in whole or in part, in, to or under any such
Material Contract) is currently assigned, pledged, hypothecated or otherwise
transferred to any Person. No Credit Party is in breach or violation of any of
the terms, conditions or provisions of any of such Material Contracts and to the
knowledge of the Company and the Parent no third party to any of the Material
Contracts is in breach or violation of any of the terms, conditions or
provisions thereof. No Credit Party is a party to any Material Contract or
subject to any restriction contained in its charter or by-laws which
individually or in the aggregate has had or is reasonably likely to have a
Material Adverse Effect.
Section 4.21. Insurance. Schedule 4.21 sets forth a true and complete list
and brief descriptions of all policies of workers compensation, general
liability, fire, property, casualty, marine, business interruption, errors and
omissions, flood, earthquake and other insurance carried by the Credit Parties,
true and complete copies of which policies have previously been delivered to the
Purchaser. Such policies are in full force and effect, and
-44-
<PAGE> 46
none of the Credit Parties has received notice of cancellation with respect to
any such policy. All premiums payable with respect to such policies have been or
will then have been paid in respect of the coverage periods specified in
Schedule 4.21.
Section 4.22. Possession of Franchises, Licenses, Etc. The Credit Parties
possess all franchises, security clearances, certificates, licenses, permits,
registrations, and other authorizations from Governmental Bodies, free from
burdensome restrictions, that are necessary for the ownership, maintenance and
operation of its Properties and assets, and for the conduct of its businesses as
now conducted, and none of the Company and their Subsidiaries is in violation of
any thereof in any material respect, except for such matters as in the aggregate
are not reasonably likely to, and will not, result in a Material Adverse Effect.
Section 4.23. Use of Proceeds. The proceeds of the issuance and sale of
the Term Notes will be used to repay a portion of the Easyriders Sub II Note
simultaneously with the consummation of the Paisano Merger, to repay the other
Non-Continuing Indebtedness, and to pay related fees and expenses. The proceeds
of the issuance and sale of the Revolving Notes will be used to pay fees and
expenses incurred by the Company in connection with the Reorganization and for
working capital and other corporate purposes of the Credit Parties.
Section 4.24. Intellectual Property.
(a) Schedule 4.24(a) sets forth (i) a complete and correct list of
each Copyright, Copyright application, Mark (including, where applicable, the
registration number and date for each Mark for which a registration has been
issued, or the application number and date for each Mark for which an
application for registration is pending in, the United States Patent and
Trademark Office or other similar office in any foreign jurisdiction) and all
other Intellectual Property or usage rights, including all Intellectual Property
relating to the Publications owned by any Credit Party (collectively, the
"Intangible Personal Property") and the name of the Credit Party which owns it,
and (ii) a complete and correct list of all material License Agreements to which
each Credit Party is a party either as licensee or licensor for each such item
of Intangible Personal Property. The Credit Parties have all right, title and
interest in and to the Intangible Personal Property in the countries listed in
Schedule 4.24(a) (the "Protected Countries") insofar as such Intangible Personal
Property is used in the operation of the business of the Credit Parties and the
Intangible Personal Property consists of all intellectual property which is used
or useful in the operation of the business of the Credit Parties.
(b) Except as set forth on Schedule 4.24(b):
(i) Since January l, 1993, there have been no actions,
judicial or arbitration proceedings or other formal proceedings commenced or
pending involving any Credit Party concerning any item of Intangible Personal
Property, and no such action or
-45-
<PAGE> 47
proceeding is threatened and no claim or other demand has been made by any
Person relating to any item of Intangible Personal Property;
(ii) None of the Credit Parties is subject to any continuing
decree of any court, governmental body or arbitration panel concerning any item
of Intangible Personal Property;
(iii) The Credit Parties have the right and authority to use
each item of Intangible Personal Property in the Protected Countries in
connection with the conduct of its businesses in the manner presently conducted
and to convey such right and authority, and such use does not conflict with,
infringe upon or violate any intellectual property or usage rights of any other
person or entity;
(iv) The conduct by the Credit Parties of their business does
not conflict in any material way with the valid intellectual property or usage
rights of others;
(v) Neither Teresi nor any Credit Party pays any royalty to
anyone for the use of any of the Marks, and neither Teresi nor any Credit Party
pays any royalty outside of the ordinary course of business to anyone for the
use of any other item of Intangible Personal Property;
(vi) Each Credit Party owns all of the Marks necessary to the
conduct of their respective businesses, and each Credit Party owns or licenses
all other Intangible Personal Property necessary to the conduct of their
respective businesses;
(vii) As of the Closing Date, the Credit Parties shall
continue to have the same rights in and to the Intangible Personal Property used
in connection with the business of the Credit Parties as the Credit Parties have
on the date of this Agreement and shall be able to use and exploit the
Intangible Personal Property to the full extent provided by applicable law
without any material restriction on such use or exploitation; and
(viii) None of the Intangible Personal Property used in the
conduct of the business, or the exploitation thereof by any Credit Party, or the
transfer thereof pursuant to the Paisano Stock Contribution Agreement, libels,
defames, infringes, violates the rights of privacy or publicity, or violates any
trademark, trade dress or service mark, common law or other similar right of any
Person. No Credit Party has received any notice or demand letter relating to any
claim thereof.
(c) (i) Except as set forth in Schedule 4.24(c), (A) all
Copyrights that are owned or controlled by a Credit Party are valid, existing,
unexpired and enforceable in the United States and all countries party to the
Universal Copyright Convention or the Berne Convention; and (B) none of the
Copyrights is in the public domain in the United States or any country party to
the Universal Copyright Convention or the Berne Convention.
-46-
<PAGE> 48
No Credit Party has received notice to the effect that the validity of any
Copyright is contested;
(ii) A registration for each Copyright set forth in Schedule
4.24(c) has been properly issued by the United States Copyright Office in the
applicable Credit Party's name (and are owned in each case by such Credit
Party). The application to register each Copyright listed in Schedule 4.24(c)
was duly and properly filed in the United States Copyright Office, and required
materials have been deposited with the Library of Congress and the United States
Copyright Office. Schedule 4.24(c) sets forth the registered title, registration
number and registration date for each such registered Copyright;
(iii) No other Person uses, has the right to use or claims the
right to use the Copyrights; and
(iv) Each Credit Party has taken all necessary steps to
secure, protect and maintain the Copyrights in the United States and has
disclosed in a Schedule herein all infringements or potential infringements,
known to the Credit Parties.
(d) (i) Each Mark that is necessary or useful to the conduct of
the Credit Parties' business is valid, subsisting, unexpired, enforceable and
has not been abandoned. Each application for the federal registration in the
United States of a Mark (including, without limitation, any renewals thereof)
has been duly and properly filed, and each registration has been properly
issued;
(ii) There are no marks held by Persons other than the Credit
Parties that conflict with or infringe on the Marks owned or used by any of the
Credit Parties in the conduct of their business, third party claims against such
Marks, or potential infringements against such Marks;
(iii) No other Person uses, has the right to use or claims the
right to use the Marks or any combination or derivation thereof; and
(iv) Each Credit Party has taken all necessary steps to
secure, protect and maintain the Marks in the United States and has disclosed in
a Schedule herein all infringements or potential infringements, known to the
Credit Parties.
(d) Each Credit Party has the sole and exclusive right to bring
actions for infringement or unauthorized use of the Intellectual Property and
software that is listed on Schedule 4.24 owned by such Credit Party, as the case
may be.
Section 4.25. Depositary Accounts. Schedule 4.25 hereto contains a true
and complete list of all Depositary Accounts maintained as of Closing Date by
any Credit Party, setting forth the name and address of each bank, savings
institution, securities broker or
-47-
<PAGE> 49
dealer, other financial intermediary or other depositary institution at which
each such Depositary Account is maintained, and stating the title and account
number of each such Depositary Account.
Section 4.26. Suppliers; Distributors; Printers. The Company does not know
or have any reason to believe that R.R. Donnelley & Sons Company, Curtis
Circulation Company or any supplier of paper to any Credit Party will cease to
do business with any Credit Party after the consummation of the Reorganization
in the same manner and at the same levels as previously conducted with such
Credit Party. To the best knowledge of each Credit Party, no such Person has
notified such Credit Party of any expected or projected increase in the cost of
goods or services provided by such Person.
Section 4.27. Status under Certain Laws. No Credit Party is an "investment
company" or a "person directly or indirectly controlled by or acting on behalf
of an investment company" within the meaning of the Investment Company Act of
1940, as amended, or a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended. No Credit Party is subject to
regulation as a "common carrier" or "contract carrier" or any similar
classification by the Interstate Commerce Commission or under the laws of any
state, or is subject to regulation under any other Statute which limits its
ability to incur Indebtedness.
Section 4.28. Foreign Assets Control Regulations. No Credit Party nor, to
the best of the Company's or Parent's knowledge after due inquiry, any Affiliate
of the Company, is by reason of being a "national" of a "designated foreign
country" or a "specially designated national" within the meaning of the
Regulations of the Office of Foreign Assets Control, United States Treasury
Department (31 C.F.R., Subtitle B, Chapter V), or for any other reason, in
violation of, any United States Federal Statute or Presidential Executive Order
concerning trade or other relations with any foreign country or any citizen or
national thereof or the ownership or operation of any Property.
Section 4.29. Certain Transactions. Except for the Indebtedness
represented by the Subordinated Seller Notes or as set forth on Schedule 4.29
hereto and with respect to salaries and related employee compensation and
expense reimbursement, no Credit Party is indebted, directly or indirectly, to
any of their respective officers, directors or shareholders or to any of the
respective spouses or children of any of such Persons in any amount whatsoever;
and, except as set forth on Schedule 4.29, none of such officers, directors or
shareholders, or any member of their immediate families, is indebted to any
Credit Party in any amount whatsoever. Except as set forth on Schedule 4.29
hereto (or, as to Material Contracts or relationships arising subsequent to the
date of this Agreement which are permitted under this Agreement, as otherwise
promptly disclosed to the Purchaser in writing), no officer, director or
shareholder of any Credit Party, or any member of their immediate families, is,
directly or indirectly, interested in any Material Contract with any Credit
Party.
-48-
<PAGE> 50
Section 4.30. Places of Business. (i) The principal place of business and
the chief executive office of each Credit Party is located at the respective
locations listed in Schedule 4.30, (ii) the books and records (including,
without limitation, all records of Accounts) of the Credit Parties are located
only at the locations set forth in Schedule 4.30 and designated therein as
locations of Accounts, (iii) Inventory of each Credit Party is located only at
the locations set forth in Schedule 4.30 and designated therein as locations of
Inventory, except for Inventory which is currently in transit to such locations
and Consigned Inventory, and (iv) Equipment (as defined in the Security
Agreement) of each Credit Party is located only at the locations set forth in
Schedule 4.30 and designated therein as locations of Equipment. Other than
Consigned Inventory, no Inventory of any Credit Party is in the possession or
control of any warehouseman, bailee or any of such Credit Party's agents or
processors. References in this Section to Schedule 4.30 shall mean such Schedule
as it may be supplemented from time to time by timely notices delivered pursuant
to Section 10.16 hereof.
Section 4.31. Other Names. The business conducted by each Credit Party has
not been conducted under any corporate, trade or fictitious name other than
those names listed on Schedule 4.31 (or, after the Closing Date, in compliance
with the applicable provisions of Section 10.16).
Section 4.32. Reorganization Documents; Transaction Documents. Each
Reorganization Document to which any Credit Party is a party has been duly
executed and delivered by such Credit Party and by the parties thereto other
than Credit Party and is in full force and effect. The Company has delivered to
the Purchaser and its special counsel true and correct copies of each such
Reorganization Document (including all exhibits and schedules thereto),
including all amendments, modifications and supplements thereto, and of each
document, certificate or statement required to be executed or delivered by any
party thereunder (there being no amendments or modifications to such documents,
and no waiver of any rights thereunder by the Company, nor of any condition to
the obligations of such Persons under any thereof, except as heretofore
disclosed to the Purchaser in writing). This Agreement and the other Transaction
Documents constitute the only material agreements relating to the Transactions
to which the Credit Parties are party. The representations and warranties of the
Credit Parties contained in each Transaction Document are true and correct in
all material respects on the date hereof and will be true and correct in all
material respects on the Closing Date, and the Purchaser shall be entitled to
rely upon such representations and warranties with the same force and effect as
if they were incorporated in this Agreement and made to the Purchaser directly.
To the best knowledge of the Company and the Parent, the representations and
warranties of each party (other than the Credit Parties) to each Transaction
Document contained therein are true and correct in all material respects on the
date hereof and on the Closing Date as if made on and as of the date hereof and
the Closing Date. To the best knowledge of Company and Parent, none of the
documents delivered to the Company's shareholders in connection with the
Reorganization contains any untrue
-49-
<PAGE> 51
statement of a material fact or omits to state a material fact necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. The offer, issuance and sale of the shares of Capital
Stock of the Company and the Subordinated Seller Notes and any other securities
or Indebtedness issued pursuant to the Reorganization have been registered under
the Securities Act or are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act, and have been registered
or qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
Section 4.33. Solvency. Each Credit Party is Solvent on the Closing Date
both before and after giving effect to the Transactions to be effected on the
Closing Date and the application of the net proceeds of the issuance and sale of
the Notes to be issued on the Closing Date.
Section 4.34. Ranking of Notes and other Obligations. The Obligations of
each Credit Party pursuant to the Note Documents to which it is a party are
secured by a first priority Lien on the Collateral pledged by such Credit Party
and constitute senior Indebtedness of such Credit Party, as the case may be, and
rank pari passu in right of payment with all unsubordinated Indebtedness of such
Credit Party, and senior in right of payment to any subordinated Indebtedness of
such Credit Party.
Section 4.35. Business of Parent. The Parent has not prior to the date
hereof been engaged in any business other than the negotiation, execution and
delivery of the Reorganization Documents, and the consummation of the
Reorganization and other activities incidental to its organization and
capitalization or contemplated in any of the foregoing documents.
Section 4.36. Licensing Interests; Easyriders Cafe.
(a) The Paisano Companies own all of the licensing interests
relating to the magazine and calendar titles (the "Publications") set forth on
Schedule 4.36 hereto. The Paisano Companies own all of the publishing interests
currently (prior to consummation of the Transaction) owned or controlled by
Teresi.
(b) [Teresi and] the Paisano Companies own all interests in and to
the Easyriders Cafe concept.
Section 4.37. Circulation.
(a) Accurate and complete copies of the two most recent six-month
audit reports issued by the Audit Bureau of Circulations ("ABC") with respect to
each Publication, the circulation of which is audited by ABC, are attached to
Schedule 4.37(a) hereto. Except as disclosed on Schedule 4.37(a), from the date
of the latest such ABC audit report, there has
-50-
<PAGE> 52
been no decline in the total circulation revenue (excluding advertising revenue)
of any Publication.
(b) All representations contained in any materials which were
submitted by Teresi or the Credit Parties to the ABC for the periods covered by
such audit reports and which were used by the ABC in connection with the
preparation of such audit reports were true and correct.
(c) Since December 31, 1994, except with respect to special editions
of the Publications, the Credit Parties have not made any material change in
their policies for the pricing of circulation for the Publications.
(d) Section 4.37(d) sets forth current lists, as of December 31,
1997 or such later date as is specified in such lists, of all of the Credit
Parties' (i) independent contractors which distribute the Publications and (ii)
current dealers of the Publications.
(e) The Credit Parties have not, during the past twelve months, sold
copies of any Publication whose circulation is audited by the ABC at discounts
which, if known to the ABC, would have resulted in the ABC not including such
sales in its reports with respect to the circulation of such Publication during
such period.
Section 4.38. Relationships with Franchisees.
(a) Except as set forth in Section 4.38, (i) since December 31,
1994, no franchisee of any Credit Party has canceled or otherwise modified its
relationship with such Credit Party, (ii) to the best knowledge of the Paisano
Companies, no such franchisee has threatened or has any intention to do so, and
(iii) the consummation of the Transactions will not give any such franchisee the
right to terminate its relationship with such Credit Party or reduce the amount
of royalties payable by such franchisee to such Credit Party. Schedule 4.38
contains a true, complete and accurate list of all franchisees of each Credit
Party as of the date hereof. True and complete copies of the franchise agreement
with each such franchisee have been provided to Purchaser.
(b) Schedule 4.38 sets forth a true and complete list of (i) all
states in which the Credit Parties are, as of the date of this Agreement,
registered to sell franchises; (ii) all states in which the Credit Parties have
received an official notice from the appropriate state officials that the Credit
Parties' offer to sell and the sale of their franchises are exempt from the
registration provisions of such jurisdiction's franchise registration law; and
(iii) all other states in which the Credit Parties have offered to sell or have
sold their franchises based upon a claimed exemption from the registration
provisions of such state's applicable franchise registration laws. True and
correct copies of all notices of registrations and all notices of exemption, as
described in clauses (i) and (ii) above, have been furnished to
-51-
<PAGE> 53
Purchaser, and such registration and exemption notices are in full force and
effect as of the date hereof except as set forth in Schedule 4.38.
(c) The Credit Parties have delivered to Purchaser true and correct
copies of the Credit Parties' Uniform Franchise Offering Circulars ("UFOCs"),
which are currently being used in connection with the offers to sell and the
sales of its franchises. The UFOCs, and all UFOCs heretofore used by the Credit
Parties (i) comply in all material respects with all applicable federal and
state laws and regulations pertaining to offers to sell and the sale of
franchises, including, without limitation the Federal Trade Commission's
Disclosure Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures", 16 C.F.R. Section 436; and (ii)
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Section 4.39. Customer, Advertiser, Subscriber and Mailing Lists. The
Credit Parties have maintained and currently possesses all rights to subscriber
lists (subject to applicable statutory law or common law decisions regarding the
use of subscriber lists), customer lists, advertiser lists and mailing lists
used in connection with the conduct of its business as currently conducted,
including all such lists necessary to continue the operation of its business
consistent with current practice, and all of such lists are in such condition as
is required in connection with the operation of its business, as currently
conducted.
Section 4.40. Advertising.
(a) Schedule 4.40 sets forth a complete and correct list of the
published rates for advertising lineage for each of the Publications and a
complete and correct list of and the amount of revenues generated by each of the
Publication's largest (by dollar amount) ten advertisers for the past year.
(b) Since December 31, 1995, no Credit Party has had any actual or
threatened cancellation, non-renewal or material modification of any agreements
or relationships with advertisers who, during any 12-month period, accounted for
more than $50,000 in revenues to the Credit Parties, which advertisers are
listed in Schedule 4.40, nor has any Credit Party made any material change in
its written policies for the pricing of advertising for the Publications and no
advertiser listed in Schedule 4.40 has provided written notice of its intent to
(i) cancel previously scheduled or contracted for advertising in the
Publications for the period following the Closing Date, or (ii) terminate or
modify significantly their relationship with any Credit Party.
Section 4.41. Model Releases. Each Credit Party has obtained all necessary
releases from models appearing for commercial purposes in Publications or videos
owned or produced by such Credit Party.
-52-
<PAGE> 54
Section 4A. Representations of the Purchaser. The Purchaser hereby
represents that it is purchasing the Notes and Warrants hereunder for its own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof, except in compliance with applicable
provisions of the Securities Act.
Section 5. Closing Conditions. The Purchaser's obligation to
purchase and pay for the Notes to be purchased by it hereunder on the Closing
Date shall be subject to the satisfaction, on or before the Closing Date, of the
following conditions:
Section 5.1. Proceedings Satisfactory. All corporate and other
proceedings taken or to be taken in connection with the transactions
contemplated to occur on the Closing Date and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Purchaser and its
special counsel, and the Purchaser and its special counsel shall have received
all such counterpart originals or certified or other copies of such documents as
they may reasonably request, including, without limitation:
(a) certificates dated as of a recent date prior to the Closing
Date as to the good standing and payment of taxes of each Credit Party in
each jurisdiction where any of such Person is organized or is authorized
to do business as a foreign corporation;
(b) certified copies of the certificate or articles of
incorporation (or other comparable constituting document) of each Credit
Party with all amendments thereto to the Closing Date;
(c) certified copies of the by-laws (or other comparable
constituting document) of each Credit Party, with all amendments thereto
to the Closing Date;
(d) certified copies of resolutions of the Board of Directors of
each Credit Party authorizing the execution, delivery and performance of
this Agreement, the Notes, the Warrants and the other Note Documents to
which such Credit Party is a party, as applicable; and
(e) certificates as to the incumbency and signatures of each of
the officers of each Credit Party who shall execute this Agreement or any
Note, Warrant or other Note Document on behalf of such respective party.
Section 5.2. Opinion of Purchaser's Special Counsel. The Purchaser
shall have received from Paul, Hastings, Janofsky & Walker LLP, special counsel
for the Purchaser in connection with the Transactions, a favorable legal opinion
dated the Closing Date and addressed to the Purchaser, covering such matters as
the Purchaser may reasonably request.
-53-
<PAGE> 55
Section 5.3. Opinions of Counsel to the Credit Parties; Tax Opinion;
Reliance Letters.
(a) The Purchaser shall have received from (i) Kaye, Scholer,
Fierman, Hays & Handler, LLP, special counsel to the Parent, Newriders,
Easyriders Sub I and Easyriders Sub II in connection with the Paisano
Acquisition and the El Paso Acquisition and special counsel to the Credit
Parties in connection with the purchase of the Notes by, and the issuance of the
Warrants to, the Purchaser, (ii) Robert N. Wilkinson, Esq., special securities
law counsel to the Parent, Newriders, Easyriders Sub I and Easyriders Sub II in
connection with the Transactions, (iii) Bolen, Fransen & Boostrom LLP, corporate
counsel to the Parent, Newriders, Easyriders Sub I and Easyriders Sub II, (iv)
Fulwider, Patton, Lee and Utecht LLP, intellectual property counsel to the
Paisano Companies, (v) Masters & Ribakoff, corporate counsel to the Paisano
Companies and (vi) Dillingham Cross, corporate counsel to El Paso, favorable
legal opinions, each dated the Closing Date and addressed to the Purchaser,
covering such matters incident to the Transactions as the Purchaser may
reasonably request. The Purchaser shall also have received such favorable legal
opinions of local or special counsel to the Credit Parties as the Purchaser may
request (including, without limitation, as to matters related to the
Reorganization and real estate matters), dated the Closing Date and addressed to
the Purchaser, covering the matters incident to the Transactions as the
Purchaser may reasonably request.
(b) The Purchaser shall have received from Deloitte & Touche LLP, a
favorable tax opinion, dated the Closing Date and addressed to the Purchaser,
covering matters incident to the Transactions as the Purchaser may reasonably
request.
(c) The Purchaser shall have received reliance letters in form and
substance satisfactory to the Purchaser with respect to each legal opinion
delivered under or in connection with the Reorganization Documents from counsel
rendering such opinion stating that the Purchaser may rely on such opinion as if
such opinion were addressed to the Purchaser.
Section 5.4. Representations and Warranties True, Etc.; Certificates. The
representations and warranties of the Parent and the Company contained in
Section 4 and elsewhere in this Agreement and of the Credit Parties in the other
Note Documents shall be true on and as of the Closing Date with the same effect
as if such representations and warranties had been made on and as of the Closing
Date after giving effect to the Transactions. Each of the Credit Parties shall
have performed all agreements on its part required to be performed under this
Agreement on or prior to the Closing Date, and there shall exist no Default or
Event of Default on the Closing Date after giving effect to the Transactions.
The Company shall have delivered to the Purchaser an Officer's Certificate,
dated the Closing Date, to the effect of the matters stated in the foregoing
sentences of this Section 5.4 and in Sections 5.5 and 5.6.
-54-
<PAGE> 56
Section 5.5. Absence of Material Adverse Effect, Etc. Since December 31,
1997, no Material Adverse Effect shall have occurred.
Section 5.6. Consents and Approvals. All necessary consents, waivers,
approvals and authorizations of, and declarations, registrations and filings
with, Governmental Bodies and nongovernmental Persons required in order to issue
and sell the Notes and the Warrants as contemplated hereby and to consummate the
Transactions shall have been obtained or made and shall be in full force and
effect.
Section 5.7. Absence of Litigation, Orders, Etc. Except as disclosed on
Schedule 4.7 attached hereto, there shall not be pending or, to the knowledge of
the Parent or the Company after due inquiry, threatened, any action, suit,
proceeding, governmental investigation or arbitration against or affecting any
Credit Party or its Property (and, as to any action, suit, proceeding,
governmental investigation or arbitration so disclosed, there shall not have
occurred since the date of this Agreement any development) which seeks to enjoin
or restrain any of the Transactions or which the Purchaser reasonably believes
is likely to have a Material Adverse Effect. No Order of any court, arbitrator
or Governmental Body shall be in effect which purports to enjoin or restrain any
of the Transactions or which the Purchaser reasonably believes to constitute a
Material Adverse Effect.
Section 5.8. Guarantee. Each Credit Party (other than the Company and the
Restaurant Subsidiaries) shall have executed and delivered the Guarantee.
Section 5.9. Security Documents. The Purchaser shall have received each of
the following documents executed by the parties thereto, which shall be
satisfactory to the Purchaser in form and substance in all respects:
(a) The Security Agreement, duly executed by each Credit Party
(other than the Restaurant Subsidiaries) existing on the Closing Date together
with:
(i) duly executed financing statements in proper form for
filing under the Uniform Commercial Code in all such jurisdictions as the
Purchaser may deem necessary or desirable in order to perfect and protect
the Liens created by the Security Agreement, covering the Collateral
described in the Security Agreement,
(ii) stock certificates representing all of the issued and
outstanding shares of Capital Stock of each such Credit Party's
Subsidiaries existing on the Closing Date, accompanied by stock powers
satisfactory to the Purchaser in form and substance duly executed by the
respective Credit Party in blank, and any intercompany notes held by each
such Credit Party, each accompanied by a bond power satisfactory to the
Purchaser duly executed by such Credit Party in blank,
-55-
<PAGE> 57
(iii) an acknowledgment of the Security Agreement duly executed
by each Subsidiary whose Capital Stock is pledged thereunder pursuant to
preceding clause (ii),
(iv) the promissory note of Martin in favor of the Parent, in
the principal amount of $2,300,000, accompanied by a bond power
satisfactory to the Purchaser duly executed by the Parent in blank, and
(v) such other instruments of assignment and other documents
in respect of the Collateral as the Purchaser may request.
(b) The Intellectual Property Security Agreement duly executed by
each Credit Party (other than the Restaurant Subsidiaries) existing on the
Closing Date, together with duly executed assignments in proper form for filing
with the United States Patent and Trademark Office and any necessary state and
foreign patent or trademark offices (as necessary).
(c) A Blocked Account Agreement with respect to each Depositary
Account listed in Schedule 4.25 hereto (other than Depositary Accounts of the
Restaurant Subsidiaries), in each case executed by the applicable Credit Party
maintaining such Depositary Account and the bank or other depositary institution
at which such Depositary Account is maintained, together with duly executed
financing statements in proper form for filing under the Uniform Commercial Code
and all other documents required thereby or which, in the sole judgment of the
Purchaser, may be necessary or appropriate to grant to the Purchaser valid and
perfected first priority Liens in such Depositary Account.
(d) Such consents, approvals and authorizations of, and
declarations, registrations and filings with, Governmental Bodies, and such
consents, waivers, amendments and Estoppel Letters of bailees, lessors of real
and personal Property owned or used by the Credit Parties, and of other
nongovernmental third parties, as the Purchaser may deem necessary or desirable
in connection with the use, occupancy or the operation of the real Properties
subject to the Mortgages (including without limitation, certificates of
occupancy) or otherwise in order to protect its rights and interests in the
Collateral.
(e) Searches, by a Person satisfactory to the Purchaser, of the
Uniform Commercial Code (or the equivalent thereof in foreign jurisdictions),
and judgment and tax lien filings which may have been filed with respect to the
Collateral confirming that all Collateral constituting personal Property is (or
will be upon release of the Liens securing the Non-Continuing Indebtedness)
subject to no Liens except Permitted Liens.
(f) Evidence satisfactory to the Purchaser that valid policies of
insurance are in full force and effect in accordance with the requirements of
this Agreement and the
-56-
<PAGE> 58
Security Documents, in each case naming the Purchaser as loss payee and
additional insured, as its interests may appear.
(g) Deeds of trust, trust deeds and mortgages, each substantially in
the form of Exhibit G hereto (with appropriate local variations) and covering
all leasehold Property of the Credit Parties located in Agoura Hills, California
(collectively, together with any such documents subsequently executed and
delivered pursuant to Section 9.5, the "Mortgages"), duly executed by the
applicable Credit Party, together with:
(i) certificates, affidavits, questionnaires or returns as
shall be required in connection with the recording or filing of the
Mortgages and evidence that all mortgage recording taxes, filing fees and
recording charges incurred in connection with the filing or recording of
the Mortgages have been paid or provided for;
(ii) extended coverage title insurance policies ("Mortgage
Policies") issued to the Purchaser by Commonwealth Land Title Insurance
Company or such other title insurer or insurers as shall be acceptable to
the Purchaser, in such forms, with such endorsements and in such amounts
as shall be acceptable to the Purchaser, insuring each of the Mortgages to
be valid and perfected first priority Liens on the Property described
therein, free and clear of all defects (including, but not limited to,
mechanics' and materialmen's liens) and encumbrances, dated the Closing
Date, paid for by the applicable Credit Party and providing for such other
affirmative insurance and with such reinsurance with such other title
insurers as the Purchaser may deem necessary or desirable and with such
affidavits, certificates and instruments of indemnification as shall be
reasonably required to induce the title insurers to issue the Mortgage
Policies;
(iii) ALTA surveys, dated not more than 30 days before the
Closing Date, certified to the Purchaser and the issuer of the Mortgage
Policies in a manner satisfactory to the Purchaser by a land surveyor duly
registered and licensed in the states in which the Property described in
such surveys is located and acceptable to the Purchaser, showing all
buildings and other improvements, any off-site improvements, the location
of any easements, parking spaces, rights of way, building set-back lines
and other dimensional regulations and the absence of encroachments, either
by such improvements or on to such Property, and other defects, other than
encroachments and other defects acceptable to the Purchaser;
(iv) an appraisal of such real Property subject to a Mortgage
as the Purchaser may require by an appraiser satisfactory to the
Purchaser;
(v) evidence satisfactory to the Purchaser that there does not
exist any material violation of any law, regulation or order affecting the
real Properties
-57-
<PAGE> 59
subject to the Mortgages, including, without limitation, those laws,
regulations and Orders relating to zoning, subdivision and building
restrictions; and
(vi) evidence that all other action that the Purchaser may
deem necessary or desirable in order to create valid and perfected first
priority Liens on the Property described in the Mortgages has been taken.
Section 5.10. Employee Stock Options. (a) The Purchaser shall have
received satisfactory evidence that (i) the stockholders of Newriders shall have
approved the Parent 1998 Executive Compensation Plan, (ii) the Newriders'
Executive Compensation Plan shall have terminated and (iii) all awards granted
under the Newriders' Executive Compensation Plan shall have been be exchanged
for awards under the Parent 1998 Executive Compensation Plan.
(b) The Purchaser shall have received true and correct copies of the
Parent 1998 Executive Compensation Plan which shall be in form and substance
satisfactory to the Purchaser.
Section 5.11. Assignment of Representations, Warranties, Covenants and
Indemnities. The Purchaser shall have received a duly executed copy of an
Assignment of Representations, Warranties, Covenants, Indemnities and Rights in
the form of Exhibit J hereto (the "Assignment of Representations, Warranties,
Covenants and Indemnities"), in respect of the Parent's and the Company's rights
under the Paisano Stock Contribution Agreement and the El Paso Contribution
Agreement, respectively, which assignments shall be expressly permitted under
the Paisano Stock Contribution Agreement and the El Paso Contribution Agreement
or shall have been consented to in writing by the respective sellers under such
agreements.
Section 5.12. Initial Revolving Note Purchase Request. On or prior to the
Closing Date, the Purchaser shall have received a Revolving Note Purchase
Request with respect to the Revolving Notes to be sold to the Purchaser on the
Closing Date (if any). The aggregate unpaid principal amount of the Revolving
Notes, immediately after giving effect to the purchase of Revolving Notes to be
effected on the Closing Date (if any), shall not exceed $3,000,000.
Section 5.13. Reorganization Transactions. (a) All of the terms,
conditions and provisions of each of the Reorganization Documents shall be
satisfactory to the Purchaser and its counsel in all respects in form and
substance and no term, condition or provision thereof shall have been
supplemented, amended, modified or waived without the Purchaser's prior written
consent. Each of the Reorganization Documents shall have been duly executed and
delivered by the respective parties thereto and shall be in full force and
effect. The Purchaser shall have received a copy of each of the Reorganization
Documents (including all amendments, modifications and supplements thereto to
and including the Closing Date),
-58-
<PAGE> 60
certified by a duly authorized officer of the Company as true, correct and
complete. All conditions to the consummation of the Reorganization shall have
been satisfied (or waived with the written approval of the Purchaser) and such
transactions (other than the Paisano Merger) shall have been consummated (and
the Paisano Merger will be consummated simultaneously with the initial purchase
of Notes hereunder) in accordance with the terms of the Reorganization
Documents.
(b) Martin shall have purchased approximately 4,036,797 shares of
Common Stock from the Parent for $12,300,000 (the "Martin Equity Investment"),
on terms and conditions satisfactory to the Purchaser in all respects, which
amount shall be paid by $5,000,000 in cash and by issuance of two promissory
notes by Martin to the Parent in the aggregate principal amount of $7,300,000
(the "Martin Notes"). The Purchaser shall have received such certificates and
other evidence with respect to the foregoing as it shall request.
Section 5.14. Subordinated Seller Notes; Intercreditor Agreement. (a) The
Parent shall have issued the Subordinated Seller Notes to Teresi on terms
(including without limitation subordination provisions) and conditions
satisfactory to the Purchaser in all respects and in an aggregate original
principal amount of $13,000,000.
(b) The Purchaser shall have received from Teresi, a duly executed
and delivered intercreditor and subordination agreement with respect to the
Subordinated Seller Notes on terms and conditions satisfactory to the Purchaser
in all respects.
Section 5.15. Discharge of Non-Continuing Indebtedness. All principal
amounts, prepayment charge, if any, accrued interest, and fees, charges and
other obligations of the Company and the other Credit Parties in respect of the
Non-Continuing Indebtedness shall have been paid and discharged in full
(including, without limitation, all obligations in respect of outstanding
letters of credit issued in connection therewith), and the Purchaser shall have
received the originals or copies authenticated to its satisfaction of (i) all
promissory notes outstanding in connection therewith, duly cancelled by the
respective payees thereof, (ii) duly executed discharge letters and receipts
evidencing payment in full of all amounts due thereunder, (iii) duly executed
releases and UCC-3 Termination Statements satisfactory in form and substance to
the Purchaser, effectively releasing and discharging all Liens incurred in
connection with such Non-Continuing Indebtedness (including duly cancelled stock
powers), in proper form for filing or recording, as applicable and (iv) such
other documents as the Purchaser may reasonably request in order to evidence the
discharge of such Non-Continuing Indebtedness and obligations and the release of
such Liens.
Section 5.16. Fees. The fees required to be paid on the Closing Date
pursuant to Section 2.6(a) and (b) shall be paid concurrently with the issuance
and sale of Notes to be sold on the Closing Date. The fees and expenses incurred
by Paul, Hastings, Janofsky & Walker LLP and any local or special counsel to the
Purchaser in connection with the preparation of this Agreement, the Notes the
Warrants and the other Note Documents, and
-59-
<PAGE> 61
in connection with the other Transactions contemplated hereby, shall be paid by
the Company on the Closing Date.
Section 5.17. Wire Instructions. The Purchaser shall have received not
less than two Business Days prior to the Closing Date wire instructions prepared
by the Company as to all wire transfers or other payments to be effected on the
Closing Date in connection with the Transactions to be consummated on the
Closing Date pursuant to this Agreement or the other Transaction Documents,
which wire instructions shall identify the payor and payee of each such wire
transfer or payment, shall describe the manner of transfer or payment and shall
otherwise be satisfactory in form and substance to the Purchaser.
Section 5.18. Shareholder Approval. The Purchaser shall have received
evidence satisfactory to it that (i) the Reorganization shall have been approved
by a majority of the outstanding shares of Newriders common stock as of the
record date established for the purpose of determining those stockholders of
Newriders that are entitled to notice of and to vote at the annual meeting of
shareholders at which the Reorganization was considered and (ii) holders of no
more than 5% of such outstanding shares of Newriders common stock have delivered
to Newriders a written notice of intention to demand payment for such holders'
shares pursuant to subsection 1 of Section 92A of the Nevada Revised Statutes
("NRS")
Section 5.19. Mergers. Without limiting any other section of this
Agreement, including Section 5.13, (a) the Purchaser shall have received
evidence satisfactory to it that the Newriders Merger shall have been
consummated in accordance with the relevant provisions of Chapter 92A of the
NRS, including without limitation, by the execution and filing of the articles
of merger in respect thereof, all in form and substance satisfactory to the
Purchaser and (b) the Paisano Merger shall be consummated simultaneously with
the initial purchase of Notes hereunder pursuant to Section 1100 et seq. of the
California General Corporation Law.
Section 5.20. Transaction Costs; Payables. The Purchaser shall have
received satisfactory evidence that the aggregate costs of the Transactions
(including fees, expenses and assumed Indebtedness) shall not exceed
$58,500,000. On the Closing Date, the Credit Parties' trade payables shall be
current and all expenses and liabilities shall have been paid in the ordinary
course of business and without acceleration of sales.
Section 5.21. Solvency Opinion. The Purchaser shall have received a
solvency opinion in form and substance satisfactory to it from Murray, Devine &
Co., Inc. (or another valuation or investment banking firm acceptable to the
Purchaser) to the effect that, as of the Closing Date and before and after
giving effect to the initial purchase of Notes hereunder, and the consummation
of the Transactions, the Credit Parties, on a consolidated basis, are Solvent.
In addition, the Purchaser shall have received an analysis from the Chief
Financial Officer of Paisano Publications to the effect that, as of the Closing
Date and before and after giving effect to the Transactions, including (x) the
assumption by Paisano
-60-
<PAGE> 62
Publications, as the surviving corporation of the Paisano Merger, of all of the
obligations of Easyriders Sub I hereunder and (y) the execution and delivery of
the Guarantee, each Paisano Company is Solvent.
Section 5.22. Insurance. (a) The Purchaser shall have received
certificates of insurance and other evidence satisfactory to the Purchaser that
the insurance required under Section 9.4 is in full force and effect.
(b) The Company shall have obtained key person insurance coverage
for Teresi, in the amount of $2,000,000 from a reputable insurance company
satisfactory to the Purchaser, naming the Purchaser as beneficiary and assignee.
Section 5.23. Certificate As to Use of Proceeds. The Purchaser shall have
received a certificate of the Company's Chief Financial Officer certifying in
reasonable detail the Company's use of the proceeds of the issuance and sale of
the Notes and Warrants.
Section 5.24. Due Diligence Reports. The Purchaser shall have completed
its due diligence review in respect of the Permitted Holders, and the results of
such review shall be satisfactory to the Purchaser, in its sole judgment, and in
all respects.
Section 5.25. Registration Rights Agreement. Each of the parties thereto
shall have executed and delivered the Registration Rights Agreement.
Section 5.26. Employment Agreements; Shareholders' Agreements; Leases. The
Purchaser shall have received true and correct copies of:
(i) all employment agreements entered into by Teresi, Prather,
Martin, Mr. Robert Davis, Mr. Brian Wood, Mr. Rick Busman and Mr. Keith
Ball, in connection with the Reorganization (the "Employment Agreements");
(ii) the shareholders' agreements entered into by Teresi and
Martin in connection with the Reorganization (the "Shareholders'
Agreement");
(iii) all leases of real property entered into by any Credit
Party and effective after giving effect to the Reorganization (the
"Leases");
all of which Employment Agreements, Shareholders' Agreement and Leases shall be
informant substances satisfactory to the Purchaser.
Section 5.27. Registration Statement. The Purchaser shall have received
evidence that the Registration Statement shall have been declared effective by
the SEC.
Section 6. Additional Conditions to Obligations to Purchase Revolving
Notes. The obligations of the Purchaser to purchase Revolving Notes at any time
after the Closing Date
-61-
<PAGE> 63
shall be subject to the satisfaction, at or before the time of such purchase, of
the following additional conditions:
Section 6.1. Note Purchase Request. The Purchaser shall have received a
Revolving Note Purchase Request with respect to the Revolving Notes to be
purchased in accordance with the provisions of Section 2.2 hereof.
Section 6.2. Representations and Warranties True. The representations and
warranties of the Credit Parties contained in Section 4 and elsewhere in this
Agreement and the representations and warranties of the Credit Parties contained
in the other Note Documents shall be true and correct on and as of the date of
such purchase with the same effect as if such representations and warranties had
been made on and as of such date, except that any such representation or
warranty which is expressly made only as of a specified date need be true only
as of such date. Except as set forth on Schedule 4.5B, no Material Adverse
Effect shall have occurred since December 31, 1997. Each request to purchase
Revolving Notes shall constitute, and each Revolving Note Purchase Request shall
contain, a representation and warranty by the Company on the date of such
purchase as to the matters referred to in this Section 6.2 and in Sections 6.3
and 6.4 hereof.
Section 6.3. No Default or Event of Default. On the date of such purchase
of Notes, both immediately before and immediately after giving effect thereto,
no Default or Event of Default shall have occurred and be continuing or would
result from such purchase.
Section 6.4. Credit Limit Not Exceeded. Immediately after giving effect to
such purchase, the aggregate unpaid principal amount of the outstanding
Revolving Notes shall not exceed the Maximum Revolving Commitment as in effect
on the date of such purchase.
Section 6.5. Legal Prohibitions. Such purchase shall not violate any Order
of any court, arbitrator or Governmental Body or any Statute at the time
applicable to the Purchasers.
Section 6.6. Other Requirements. The Purchaser shall have received, in
form and substance satisfactory to it, all certificates, orders, authorizations,
consents, affidavits, schedules, instruments, Security Documents and other
documents which are provided for hereunder, or which the Purchaser may at any
time reasonably request after reasonable notice.
Section 7. Financial Statements and Information. The Company will furnish
to the Purchaser until all of the Obligations have been indefeasibly paid in
full and no Notes are outstanding and the Termination Date has occurred (and,
with respect to the documents and information referred to in subsections (a),
(b)(i), (c)(i), (e), (f) and (g), so long as they shall hold any Warrants or any
shares of Warrant Stock):
-62-
<PAGE> 64
(a) as soon as available and in any event within 30 days after the
end of each month, copies of the consolidated and consolidating balance sheets
of each of (i) the Parent and its Subsidiaries and (ii) the Parent and its
Subsidiaries (other than the Restaurant Subsidiaries), in each case as of the
end of such month and the related consolidated and consolidating statements of
income for such month and for the portion of the fiscal year ended with the last
day of such month, and stating in comparative form the corresponding figures
from the consolidated budget for such period and the prior year, all Certified
by the Chief Financial Officer of the Parent;
(b) as soon as available and in any event within 45 days after the
end of each quarterly accounting period (other than the fourth quarterly
accounting period) in each fiscal year of the Parent,
(i) copies of the consolidated and consolidating balance
sheets of each of (i) the Parent and its Subsidiaries and (ii) the Parent
and its Subsidiaries (other than the Restaurant Subsidiaries), in each
case as of the end of such accounting period, together with, in each case,
the related consolidated and consolidating statements of income,
shareholders' equity and cash flows for such accounting period and for the
portion of the fiscal year ended with the last day of such accounting
period, all in reasonable detail and stating in comparative form (i) the
consolidated and consolidating figures as of the end of and for the
corresponding date and period in the previous fiscal year and (ii) the
corresponding figures from the consolidated budget for such period, all
Certified by the Chief Financial Officer of the Parent, and
(ii) a written statement of the Chief Financial Officer of the
Parent setting forth computations in reasonable detail showing whether or
not as at the end of such fiscal quarter there existed any Default or
Event of Default resulting from a breach or violation of any of Sections
10.1, 10.7, 10.10, 10.11 and 10.18 hereof;
(c) as soon as available and in any event within 90 days after the
end of each fiscal year of the Parent,
(i) copies of the audited consolidated and unaudited
consolidating balance sheets of each of (i) the Parent and its
Subsidiaries and (ii) the Parent and its Subsidiaries (other than the
Restaurant Subsidiaries), in each case as of the end of such fiscal year,
together with, in each case, the related audited consolidated and
unaudited consolidating statements of income, shareholders' equity and
cash flows for such fiscal year, and the notes thereto, all in reasonable
detail and stating in comparative form (i) the respective audited
consolidated and unaudited consolidating figures as of the end of and for
the previous fiscal year or part thereof and (ii) the corresponding
figures from the consolidated budget for such fiscal year, (x) in the case
of each of such audited consolidated financial statements, accompanied by
a report thereon of Deloitte & Touche LLP, or other independent public
accountants
-63-
<PAGE> 65
of recognized national standing selected by the Parent and reasonably
acceptable to the Purchaser (the "Accountants"), which report shall be
unqualified as to going concern and scope of audit and shall state that
such consolidated financial statements present fairly, in all material
respects, the consolidated financial position of such Credit Parties as at
the end of such fiscal year and the consolidated results of operations and
cash flows for such fiscal year in conformity with GAAP and that the
examination by the Accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards, and (y) in the case of such unaudited consolidating
financial statements, Certified by the Chief Financial Officer of the
Parent; and
(ii) a written statement of the Accountants (x) setting forth
computations in reasonable detail showing whether or not as at the end of
such fiscal year there existed any Default or Event of Default resulting
from a breach or violation of any of Sections 10.1, 10.7, 10.10, 10.11 and
10.18 hereof, and (y) stating that in making the examination necessary for
their report on such financial statements they obtained no knowledge of
any default by any Credit Party in the fulfillment of any of the terms,
covenants, provisions or conditions of this Agreement or any of the other
Note Documents, or if such Accountants shall have obtained knowledge of
any such default, specifying the nature and status thereof;
(d) concurrently with the financial statements furnished pursuant to
subsections (b) and (c) of this Section 7, an Officer's Certificate of the
Company stating that, based upon such examination or investigation and review of
this Agreement as in the opinion of the signer is necessary to enable the signer
to express an informed opinion with respect thereto, no Default or Event of
Default exists or has existed during such period or, if such a Default or Event
of Default shall exist or have existed, the nature and period of existence
thereof and what action the applicable Credit Party has taken, is taking or
proposes to take with respect thereto;
(e) concurrently with the financial statements furnished pursuant to
subsections (b) and (c) of this Section 7, a brief management discussion and
analysis of the financial condition and results of operations of the Credit
Parties, as of the end of and for the period covered by such financial
statements (including a comparison thereof with the financial condition and
results of operations of the Credit Parties, as of the end of and for the
comparable period in the prior fiscal year), and describing any significant
events relating to the Credit Parties occurring during such period;
(f) promptly after the same are available and in any event within 10
days thereof, copies of all such proxy statements, financial statements, notices
and reports as any Credit Party shall send or make available generally to their
security holders, and copies of all regular and periodic reports and of all
registration statements (other than on Form S-8 or a similar form) which any
Credit Party may file with the SEC or with any securities exchange;
-64-
<PAGE> 66
(g) promptly after the receipt thereof by any Credit Party, and in
any event within 10 days thereof, copies of any management letters and any
reports as to material inadequacies in accounting controls (including reports as
to the absence of any such inadequacies) submitted to any such corporation by
the Accountants in connection with any audit of such corporation made by the
Accountants;
(h) promptly (and in any event within 5 days) after becoming aware
of (1) the existence of any Default or Event of Default on the part of any
Credit Party, an Officer's Certificate of the Company specifying the nature and
period of existence thereof and what action the applicable Credit Party is
taking or proposes to take with respect thereto; or (2) any Indebtedness of any
Credit Party being declared due and payable before its expressed maturity, or
any holder of such Indebtedness having the right to declare such Indebtedness
due and payable before its expressed maturity, because of the occurrence of any
default (or any event which, with notice and/or the lapse of time, shall
constitute any such default) under such Indebtedness, an Officer's Certificate
of the Company describing the nature and status of such matters and what action
the applicable Credit Party is taking or proposes to take with respect thereto;
(i) promptly and in any event within 10 days after any Credit Party
or any ERISA Affiliate knows or, in the case of a Pension Plan has reason to
know, that any event or condition described in Section 4.19 hereof has occurred
or exists, or is reasonably likely to occur or exist, an Officer's Certificate
of the Company setting forth information as to such occurrence and what action,
if any, the applicable Credit Party or such ERISA Affiliate is required or
proposes to take with respect thereto, together with any notices concerning such
occurrences which are (i) required to be filed by any Credit Party or any ERISA
Affiliate or the plan administrator of any Pension Plan controlled by any Credit
Party, or any ERISA Affiliate with the Internal Revenue Service or the PBGC,
(ii) received by any Credit Party, or any ERISA Affiliate from any plan
administrator of a Pension Plan not under their control or from a Multiemployer
Plan, or (iii) proposed to be given;
(j) within five Business Days after the annual report (Form 5500) of
each Plan or Pension Plan is filed with the Internal Revenue Service, a complete
copy thereof (including schedules and attachments) to the Purchaser;
(k) promptly after becoming aware of any Material Adverse Effect
with respect to which notice is not otherwise required to be given pursuant to
this Section 7, an Officer's Certificate of the Company setting forth the
details of such Material Adverse Effect and stating what action the applicable
Credit Party has taken or proposes to take with respect thereto;
(l) promptly (and in any event within 10 days) after the Parent or
the Company knows of (i) the institution of, or threat of, any action, suit,
proceeding,
-65-
<PAGE> 67
governmental investigation or arbitration against or affecting any Credit Party
or any Property of any of them, or (ii) any material development in any such
action, suit, proceeding, governmental investigation or arbitration, which, in
either case, if adversely determined, is likely to have a Material Adverse
Effect, an Officer's Certificate of the Company describing the nature and status
of such matter in reasonable detail;
(m) as soon as available (and in any event not later than 30 days
after the beginning of each fiscal year of the Company), a copy of a
consolidated and consolidating budget of the Credit Parties, in each case
prepared by the Company for such fiscal year, and all amendments thereto which
may be in effect from time to time;
(n) at least once in each fiscal year, a report of a reputable
insurance broker with respect to all insurance maintained by the Credit Parties,
together with a certificate of insurance evidencing the effectiveness of the
policies of insurance required to be maintained by the provisions of Section
9.4(a);
(o) together with each delivery of financial statements pursuant to
subsection (b) or (c) of this Section 7, a report as to any new trademark,
patent and copyright registrations or applications, license agreements or other
matters referred to in Section 5.2 of the Intellectual Property Security
Agreement, together with any instruments of assignment with respect thereto
required thereunder;
(p) promptly following, and in any event within ten Business Days of
any Casualty or Taking involving Property of any Credit Party with a value equal
to or greater than the Material Loss Amount, an Officer's Certificate of the
Company describing the nature and status of such occurrence;
(q) promptly (and in any event within 10 days) after the Parent or
the Company knows of the institution of any action, suit or proceeding against
any Credit Party pursuant to Section 1300 et seq. of the California General
Corporation Law or otherwise relating to the Transactions;
(r) to the extent not otherwise provided for in Section 14.7, as
soon as available, any press release or other public announcement or statement
by any Credit Party; and
(s) any other information, including financial statements and
computations, relating to the performance of obligations arising under this
Agreement and/or the affairs of the Credit Parties that the Purchaser may from
time to time reasonably request and which is capable of being obtained, produced
or generated by such Credit Party or of which any of them has knowledge.
-66-
<PAGE> 68
It is further understood and agreed that, for the purpose of effecting
compliance with Rule 144A promulgated by the SEC in connection with any resales
of Notes and Warrants that may hereafter be effected pursuant to the provisions
of such Rule, (a) each prospective purchaser of Notes or Warrants designated by
a holder thereof shall have the right to obtain from the Parent, upon the
written request of such holder, copies of (i) the consolidated balance sheet of
the Credit Parties as of the end of then most recently completed fiscal year of
the Company (or, if such fiscal year shall have ended within the preceding 90
days, as of the end of the next preceding fiscal year), together with the
related consolidated statements of income, shareholders' equity and cash flows
for the fiscal year then ended, (ii) similar financial statements for such part
of the two preceding fiscal years of the Parent (which financial statements, and
the financial statements referred to in clause (i) of this paragraph, shall be
audited to the extent reasonably available), (iii) a consolidated balance sheet
of the Credit Parties as of the end of then most recently completed fiscal
quarter of the Parent (or, if such fiscal quarter shall have ended within the
preceding 60 days, as of the end of the next preceding fiscal quarter), together
with the related consolidated statements of income, shareholders' equity and
cash flows for the portion of the current fiscal year then ended, and (iv) any
other information that is necessary to comply with such Rule, and (b) each such
holder and each such prospective purchaser shall have the right to obtain from
the Parent, upon the written request of such holder, a very brief statement of
the nature of the business of the Credit Parties and the products and services
it offers, dated as of a date within 12 months prior to the date of resale of
such Notes or Warrants (as the case may be).
The Company and the Parent will keep at its principal executive office a
true copy of this Agreement, and cause the same to be available for inspection
at said office during normal business hours by any holder of Notes or Warrants
or by any prospective purchaser of Notes or Warrants designated in writing by
the holder thereof.
Section 8. Inspection of Properties and Books. The Purchaser, until all of
the Obligations have been indefeasibly paid in full and no Notes are outstanding
and the Termination Date has occurred, shall have the right to visit and inspect
any of the Properties of the Credit Parties, to examine their books of account
and records, to make copies and extracts therefrom at their expense, and to
discuss their affairs, finances and accounts with, and to be advised as to the
same by, their officers and employees and their independent public accountants
(whose fees and expenses shall be paid by the Parent, and by this provision the
Parent authorizes the Accountants to discuss its affairs, finances and accounts
and those of its Subsidiaries, and agrees to make such Accountants available to
the Purchaser for such discussions, whether or not any of such officers or
employees is present, it being understood that nothing contained in this Section
8 is intended to confer any right to exclude any such officers or employees from
such discussions), during the Parent's normal business hours with reasonable
frequency and (except upon the occurrence and during the continuance of an Event
of Default) upon reasonable prior notice to the Parent. The Parent and the
Company agree jointly and severally to pay all reasonable out-of-pocket expenses
incurred by the Purchaser in connection with the Purchaser's exercise of their
rights under this Section
-67-
<PAGE> 69
8 at any time when a Default or Event of Default shall have occurred and be
continuing. The Purchaser, through their representatives, shall be entitled to
meet with the senior management of the Parent at least once during each fiscal
quarter of the Parent to discuss the Parent's, and its Subsidiaries' financial
statements, business, assets, operations and prospects.
Section 9. Affirmative Covenants. The Parent and the Company jointly and
severally covenant and agree that, until all of the Obligations have been
indefeasibly paid in full and no Notes are outstanding and the Termination Date
has occurred it shall and shall cause each of it Subsidiaries to comply with the
following covenants:
Section 9.1. Payment of Principal and Interest. The Company will duly and
punctually pay the principal of and interest on the Notes, and will timely pay
and perform all of its other Obligations, in accordance with the terms of such
Notes, this Agreement and the other Note Documents. The Credit Parties will
comply with all of the covenants, agreements and conditions contained in this
Agreement and the other Note Documents.
Section 9.2. Payment of Taxes and Claims. Each Credit Party will pay
before they become delinquent:
(a) all taxes, assessments and governmental charges or levies
imposed upon such Credit Party (or any other Subsidiaries of any Credit Party
which are part of any affiliated group, within the meaning of Section 1504(a)(1)
of the Code, with any Credit Party) or their income or profits or upon their
Property, real, personal or mixed, or upon any part thereof;
(b) all claims for labor, materials and supplies which, if unpaid,
would result in the creation of a Lien upon Property of any Credit Party; and
(c) all claims, assessments, or levies required to be paid by such
Credit Party or any ERISA Affiliates pursuant to any Pension Plan, Multiemployer
Plan or other Plan, or any agreement, contract, Statute or Order governing or
relating to any thereof;
provided, that the taxes, assessments, claims, charges and levies described in
Section 9.2(a) and (b) need not be paid while being diligently contested in good
faith and by appropriate proceedings so long as (i) adequate book reserves have
been established with respect thereto in accordance with GAAP and (ii) such
Credit Party's title to and right to use its Property is not materially
adversely affected by such non-payment. Each Credit Party will timely file all
tax returns required to be filed in connection with the payment of taxes
required by this Section 9.2. If an Event of Default shall have occurred and be
continuing and any such contested items shall have resulted in a Lien or claim
upon any Credit Party's Property, the Purchaser may, at its election (but shall
not be obligated to), (a) procure the release and discharge of any such Lien or
claim and any judgment or decree thereon, without inquiring into or
investigating the amount, validity or enforceability of such Lien or claim and
(b) effect any settlement or compromise of the same, and any amounts expended by
the
-68-
<PAGE> 70
Purchaser in connection therewith including premiums paid or security furnished
in connection with the issuance of any surety company bonds, shall be reimbursed
by the Company within five Business Days of demand therefor by the Purchaser.
Section 9.3. Maintenance of Properties, Records and Corporate Existence.
Each Credit Party will:
(a) maintain its Properties in good condition, reasonable wear and
tear excepted, and make all necessary renewals, repairs, replacements,
additions, betterments, and improvements thereto;
(b) keep books of records and accounts in which full and correct
entries will be made of all their respective business transactions and will
reflect in their financial statements adequate accruals and appropriations to
reserves, all in accordance with GAAP at the time in effect and consistently
applied;
(c) maintain the same fiscal year during and after the current
fiscal year ending December 31, 1998;
(d) do or cause to be done all things necessary to preserve and keep
in full force and effect their respective corporate existence, and material
rights, powers and franchises including, without limitation, any necessary
qualification or licensing in any foreign jurisdiction;
(e) comply with all applicable Statutes, Orders, franchises,
authorizations, licenses and permits of, and all applicable restrictions imposed
by, any Governmental Body, in respect of the conduct of its business and the
ownership of its Properties (including, without limitation, all applicable
Statutes and Orders relating to Environmental Laws, the violation of which would
have a Material Adverse Effect on the Credit Parties taken as a whole); and
(f) keep any Property owned or operated by it free of contamination
from Hazardous Materials and any other potentially materially harmful chemical
or physical conditions. If any Credit Party receives notice or becomes aware of
any Environmental Matter or contamination with Hazardous Materials that relates
to any of them or their respective Properties, then the Company shall promptly
provide written notice thereof to the Purchaser and, upon written request from
the Purchaser, shall provide the Purchaser with such reports, certificates,
engineering studies or other written material or data as the Purchaser may
request so as to satisfy the Purchaser that the Credit Parties are in compliance
with their obligations under this subsection (f) and subsection (e) of this
Section 9.3. The Purchaser shall also have the right, at any time and from time
to time after receipt of notice or knowledge of any such Environmental Matter or
contamination, to require the Company at its expense to employ a qualified
environmental consultant acceptable to the Purchaser to conduct an environmental
review, audit, assessment or report with respect thereto concerning
-69-
<PAGE> 71
the Credit Parties' operations and Property. The Credit Parties agree to
cooperate fully with such consultant in connection with any such review, audit,
assessment or report, including, without limitation, by providing such access to
the Credit Parties' books, records, Properties, employees and agents and by
furnishing such written and oral information as such consultant may reasonably
request in connection with any such review, audit, assessment or report.
Section 9.4. Insurance.
(a) The Credit Parties will carry and maintain in full force and
effect at all times, with financially sound and reputable insurance companies or
associations rated [AA] (Class [12]) or better by A.M. Best & Co. (or, as to
workers' compensation or similar insurance, in an insurance fund or by
self-insurance authorized by the jurisdiction in which its operations are
carried on): (i) insurance against loss or damage to the tangible real and
personal Property of the Credit Parties by fire, theft, explosion, spoilage,
flood and other perils covered by a "special form" insurance policy and all
other hazards and risks ordinarily insured against by other owners or users of
such Property in similar businesses, (ii) all workers' compensation or similar
insurance as may be required under the laws of any jurisdiction, (iii) public
liability insurance against claims for libel and slander and for personal
injury, death or property damage suffered upon, in or about any premises
occupied by any of them or occurring as a result of the ownership, maintenance
or operation by any of them of any automobile, truck or other vehicle or as a
result of the use of products manufactured, constructed or sold by any of them,
or services rendered by any of them, (iv) business interruption insurance
covering risk of loss as a result of the cessation of any substantial part of
the business conducted by any of them, (v) key person insurance coverage for
Teresi in the amount of no less than $2,000,000, naming the Purchaser as
beneficiary and assignee and (vi) insurance against such other risks as are
usually insured against by corporations of established reputation engaged in the
same or similar businesses and similarly situated. In addition, should any
Credit Party maintain any key person insurance coverage on any of its officers
or directors, the Purchaser shall be named as beneficiary thereunder and
assignee thereof.
(b) Insurance specified in clause (a)(i) of this Section 9.4 shall
(i) be maintained in such form and amounts and having such coverage as may be
reasonably satisfactory to the Purchaser, and in any event in an amount not less
than the full insurable value of the Property covered thereby, (ii) provide that
no cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at least 30 days after receipt by the Purchaser
of written notice thereof, (iii) name the Purchaser as loss payee, (iv) provide
for waivers of subrogation by the respective issuers in favor of the Purchaser
and (v) be reasonably satisfactory to the Purchaser in all other respects. Each
Credit Party hereby directs all insurers under such policies of insurance, and
all Persons making any payment with respect to any Taking of Property of the
Credit Parties, to pay all proceeds of such insurance policies arising out of
any Casualty, and all amounts payable in respect of any such Taking, to any of
the Collateral, directly to the Purchaser (and if any Credit Party shall
-70-
<PAGE> 72
receive any such proceeds or amounts such Credit Party will hold, such proceeds
and amounts in trust for the benefit of the Purchaser and immediately pay the
same to the Purchaser); provided that, if the amount of such loss or damage is
less than the Material Loss Amount, such proceeds may be paid by such insurers
directly to such Credit Party. The Purchaser shall release such insurance
proceeds to the applicable Credit Party upon the written request of the Company
when and as necessary to pay for the repair, replacement or reconstruction of
the Properties subject to such Casualty, provided that:
(i) at the time of any requested release of funds, no Default or
Event of Default shall have occurred and be continuing);
(ii) the repair, replacement or reconstruction of such assets shall
be substantially completed within 180 days of such Casualty; and
(iii) each release of funds shall be conditioned upon receipt by the
Purchaser of architect's certificates, completion certificates, waivers of
mechanics liens and such other documentation as the Purchaser or the
Purchaser may reasonably request.
In the event the conditions set forth above are not met, the Purchaser may elect
to apply the proceeds of casualty insurance policies to the prepayment of the
outstanding principal amount of the Term Notes, pro rata in accordance with the
outstanding principal amounts thereof, together with accrued interest on the
amount so paid, and thereafter to the outstanding principal amount of the
Revolving Notes, pro rata in accordance with the outstanding principal amounts
thereof, together with accrued interest on the amount so paid (and to the extent
of such prepayment of principal, the Maximum Revolving Commitment shall be
permanently reduced).
(c) In the event of a Casualty (or a Taking) with respect to any
Collateral which is equal to or greater than the Material Loss Amount, the
Purchaser shall have the right, but not the obligation to settle insurance
claims (and condemnation proceeds or awards, as the case may be), with respect
to such Property; provided, however, the Purchaser shall have the right, but not
the obligation, to settle all such claims (and proceedings) with respect to any
Property of the Credit Parties following the occurrence and during the
continuance of an Event of Default. If the Purchaser elects not to settle such
claim or proceeding, the Company shall do so; provided, however, any settlement
of any such claim or proceeding reached by the Company shall be subject to the
Purchaser's prior written approval. The Purchaser will endeavor to consult with
the Company in connection with the Purchaser's exercise of any such right;
provided that the failure of the Purchaser to so consult with the Company after
the occurrence and during the continuance of a Default or Event of Default shall
not subject the Purchaser to any liability hereunder.
(d) Insurance specified in clauses (a)(iii), (a)(iv) and (a)(vi) of
this Section 9.4 shall be maintained in such amounts (and with co-insurance,
deductibles and
-71-
<PAGE> 73
self-insured retention, if any) as such insurance is usually carried by
corporations of established reputation engaged in the same or similar businesses
and similarly situated. Insurance specified in clause (a)(v) shall be maintained
in an amount no less than that existing on the Closing Date. All such insurance
shall name the Purchaser as additional insured, as their interests may appear.
(e) If any Credit Party shall fail to obtain, maintain or renew any
insurance required pursuant to this Section 9.4, or to pay the premiums
therefor, or to deliver to the Purchaser proper evidence thereof beyond any
applicable notice and cure period, if any, for the performance of such actions,
the Purchaser, at its sole option and without any obligation to do so, may
procure and pay for such insurance, and any sums expended by it to procure any
such insurance shall be repaid by the Company, together with any late charge
imposed by any such insurer, if applicable, within five Business Days after
receipt of bills therefor from the Purchaser.
(f) All proceeds of any key person insurance covering any Permitted
Holder or any other officer of a Credit Party shall, upon receipt by the
Purchaser, be applied to the prepayment of the outstanding principal amount of
the Term Notes, pro rata in accordance with the outstanding principal amounts
thereof, together with accrued interest on the amount so paid, and thereafter to
the outstanding principal amount of the Revolving Notes, pro rata in accordance
with the outstanding principal amounts thereof, together with accrued interest
on the amount so paid (and to the extent of such prepayment of principal, the
Maximum Revolving Commitment shall be permanently reduced).
Section 9.5. After Acquired Real Property. Without affecting the
obligations of any of the Company or any of its Subsidiaries under any of the
Security Documents, in the event that any Credit Party at any time after the
date hereof acquires (whether as an owner, a lessee or otherwise) any interest
in any real Property (each such interest, an "After Acquired Real Property"),
such Credit Party shall immediately provide written notice thereof to the
Purchaser, setting forth with specificity a description of the interest
acquired, the identity of the acquirer, the location of the After Acquired Real
Property, any structures or improvements thereon and the Fair Market Value of
such real property. As soon as practicable thereafter, such Credit Party shall
cause the acquirer with respect to such After Acquired Real Property to execute
and deliver to the Purchaser a Mortgage substantially in the form of the
document set forth as Exhibit G hereto (with appropriate local variations and
appropriate variations if the After Acquired Real Property covered thereby is a
fee interest), together with (x) such of the other documents and instruments
described in Section 5.9(g) and (y) an environmental review and audit report as
described in Section 9.13, all as the Purchaser shall reasonably require. In no
event shall any title insurance policy covering such After Acquired Real
Property obtained pursuant to the requirements set forth herein be in an amount
which is less than the Fair Market Value of such After Acquired Real Property.
Such Credit Party shall also deliver to the Purchaser one or more opinions of
counsel for the Company or such Subsidiary (including opinions of local counsel)
covering such legal
-72-
<PAGE> 74
matters with respect to such mortgages, trust deeds and other instruments and
documents as the Purchaser may reasonably request. The applicable Credit Party
shall pay all reasonable fees and expenses, including, without limitation,
attorneys' fees and expenses of counsel for the Purchaser, and all title
insurance charges and premiums, in connection with its obligations under this
Section 9.5.
Section 9.6. Future Guarantors and Securing Subsidiaries. Promptly upon
any Person becoming a direct or indirect Subsidiary of the Parent (other than
the Restaurant Subsidiaries), such Subsidiary shall immediately provide written
notice thereof to the Purchaser, setting forth with specificity a description of
such Subsidiary and of all material real and personal Property owned or leased
by it. In the event that such Subsidiary shall own or lease any interest in real
Property, such interest shall be deemed to be After Acquired Property and the
Parent shall promptly cause such Subsidiary to comply with all of the provisions
of Section 9.5 with respect thereto. The Parent shall also promptly cause such
Subsidiary to execute and deliver to the Purchaser the Guarantee, the Security
Agreement and the Intellectual Property Security Agreement, together with such
additional security agreements and other documents as may be required or
appropriate under the law of the jurisdiction in which such Subsidiary or its
Property is located, and such assignments, financing statements and other
documents as shall in the sole opinion of the Purchaser be necessary or
advisable in order that such Subsidiary grant to the Purchaser valid and
perfected first priority Liens in all of the personal Property of such
Subsidiary. The Parent shall also deliver (or caused to be delivered) to the
Purchaser pursuant to the Security Agreement(and the Parent hereby agrees to
make any modifications thereto necessary to effectuate such delivery), as
applicable, stock certificates representing all of the Capital Stock of such
Subsidiary held by the Parent or by any Subsidiary thereof, accompanied by stock
powers duly executed in blank. The Parent shall also identify all Depositary
Accounts maintained by such Subsidiary and shall deliver to the Purchaser a
Blocked Account Agreement with respect to each such Depositary Account duly
executed by such Subsidiary and by the bank or other depositary institution at
which such Depositary Account is maintained. The Parent or such Subsidiary shall
also deliver one or more opinions of counsel to the Parent or such Subsidiary
(including opinions of local counsel) covering such legal matters with respect
to such agreements and other instruments and documents as the Purchaser may
reasonably request. All of such agreements, instruments, opinions and documents
shall be reasonably satisfactory in form and substance in all respects to
counsel to the Purchaser.
Section 9.7. New Depositary Accounts. Immediately following the
establishment by any Credit Party of any new Depositary Account not in existence
on the Closing Date, such Credit Party shall deliver to the Purchaser (a) a
written notice stating the name and address of the bank or depositary
institution at which such Depositary Account is maintained, and identifying the
type and number of such Depositary Account, and (b) a Blocked Account Agreement
with respect to that Depositary Account duly executed by the applicable Credit
-73-
<PAGE> 75
Party (as the case may be) and the bank or depositary institution at which such
Depositary Account is maintained.
Section 9.8. ERISA Covenants. Each Credit Party and each ERISA Affiliate
will (i) continue to meet the representations and warranties set forth under
Section 4.19 of this Agreement, (ii) not establish or adopt any new Pension Plan
or modify any existing Pension Plan so as to increase its obligations thereunder
(except in the ordinary course of business, consistent with past practice)
which, in the opinion of the Purchaser, could have a Material Adverse Effect and
(iii) not establish or adopt an employee welfare benefit plan as defined in
Section 3(1) of ERISA that provides for employer-provided benefits for employees
after they leave the employment of the Credit Parties or ERISA Affiliates (other
than any such benefits required to be provided by the Consolidated Omnibus
Budget Reconciliation Act of 1985 or other similar federal or state law).
Section 9.9. Further Assurances. Promptly following the Purchaser's
request, each Credit Party from time to time execute, acknowledge, notarize,
deliver, record, register and file any and all further financing statements,
security agreements, pledge agreements, mortgages, hypothecs, deeds of trust,
deeds of pledge, intellectual property assignments and security agreements, and
other agreements, instruments and documents (including, without limitation, the
substantial equivalents of any of the foregoing in any foreign jurisdiction),
and take all further actions (including, without limitation, the payment of all
filing, recording, registration, notary and other fees and charges which may be
incurred in connection with any of the foregoing), which may in any such case be
required under applicable law, or which the Purchaser otherwise may reasonably
request, in order to effectuate the transactions contemplated by this Agreement
and in order to grant, preserve, protect and perfect the validity and first
priority of the Liens and security interests created by the Security Documents.
Section 9.10. Year 2000. Each Credit Party has made an assessment of the
microchip and computer-based systems and the software used in its business and
based upon such assessment believes that the Credit Parties will be "Year 2000
Compliant" by January 1, 2000. For purposes of this paragraph, "Year 2000
Compliant" means that all software, embedded microchips and other processing
capabilities utilized by, and material to the business operations or financial
condition of, the Credit Parties are able to interpret, store, transmit, receive
and manipulate data on and involving all calendar dates in and after the Year
2000. From time to time, at the request of the Purchaser, the Company shall
provide to the Purchaser such updated information as is requested regarding the
status of its efforts to become Year 2000 Compliant.
Section 9.11. Early Refinancing. The Parent and the Company understand and
agree that the Notes are intended to serve as a temporary financing arrangement
until the Company is able to undertake a permanent refinancing of its
Indebtedness, which it anticipates completing prior to the Maturity Date.
-74-
<PAGE> 76
Section 9.12. Consummation of Paisano Merger. The Parent will, immediately
upon consummation of the Reorganization and in any event prior to 5 p.m. (New
York time) on the Closing Date, cause (a) Easyriders Sub II and Paisano
Publications to consummate the Paisano Merger, and (b) Easyriders Sub II to
execute and deliver the Assumption Agreement attached at the end of this
Agreement and all other documents to be executed and delivered by the Company
under Section 5, and to take all other actions and deliver all instruments,
documents and agreements which the Purchaser requires in furtherance thereof.
Section 9.13. Environmental Reports. Promptly following the Purchaser's
request, the Credit Parties shall from time to time deliver (x) Phase I
Environmental Site Assessment Reports, consistent with American Society of
Testing and Materials (ASTM) Standard E1527-94, and applicable state
requirements, on any of the real Property of the Credit Parties encumbered, or
to be encumbered, by a Mortgage, dated no more than 6 months prior to the date
of delivery to the Purchaser, prepared by environmental engineers satisfactory
to the Purchaser, all of which shall be in form and substance satisfactory to
the Purchaser in its sole discretion, (y) such environmental review and audit
reports, including Phase II reports, with respect to the real Property of any
Credit Party as the Purchaser may from time to time request, all of which shall
be in form and substance satisfactory to the Purchaser in its sole discretion
and (z) letters executed by the environmental firms preparing any such
environmental reports, in form and substance satisfactory to the Purchaser,
authorizing the Purchaser to rely on such reports.
Section 10. Negative and Maintenance Covenants. The Parent and the Company
jointly and severally covenant and agree that, until all of the Obligations have
been indefeasibly paid in full and no Notes are outstanding and the Termination
Date has occurred, it shall and shall cause each of its Subsidiaries to comply
with the following covenants:
Section 10.1. Restrictions on Indebtedness. No Credit Party will incur,
create, assume, guarantee or in any way become liable for, or permit to exist,
Indebtedness other than:
(a) Indebtedness incurred pursuant to this Agreement, the Notes and
the other Note Documents;
(b) Indebtedness of the Credit Parties existing on the Closing Date
and described on Schedule 4.10A hereto (in each case after giving effect to the
Transactions, including the Subordinated Seller Notes but excluding in any event
the Non-Continuing Indebtedness);
(c) Indebtedness of any Wholly-owned Subsidiary of the Parent (other
than the Restaurant Subsidiaries and Easyriders of Columbus) to the Parent or to
another
-75-
<PAGE> 77
Wholly-owned Subsidiary of the Parent (other than the Restaurant Subsidiaries),
provided that such Indebtedness is evidenced by a subordinated demand note, in
form and substance (including the terms of subordination provisions)
satisfactory to the Purchaser, which note shall be pledged and delivered to the
Purchaser pursuant to the Security Agreement as additional collateral for the
Obligations;
(d) Indebtedness consisting of Liens permitted by subsections (a)
through (e), inclusive, of Section 10.2;
(e) Indebtedness secured by Liens permitted by Section 10.2(g)
hereof, provided that the aggregate outstanding principal amount of Indebtedness
incurred pursuant to this subsection (e) shall not at any time exceed $500,000;
(f) so long as no Event of Default has occurred and is continuing,
Indebtedness consisting of intercompany loans by the Company to the Parent in a
principal amount per fiscal month not in excess of the lesser of (x) 35% of
Excess Cash Flow for the preceding fiscal month and (y) $100,000; and
(g) Indebtedness evidenced by the Newriders Subordinated Note.
Section 10.2. Restrictions on Liens. No Credit Party will directly or
indirectly, create, assume or suffer to exist any Lien upon any of their
respective Properties whether now owned or hereafter acquired, except for:
(a) Liens for taxes, assessments or governmental charges or claims
the payment of which is not at the time required by Section 9.2;
(b) statutory Liens of landlords, if any, Liens of carriers,
warehousemen, mechanics, materialmen, if any, and other Liens imposed by law
incurred in the ordinary course of business, in each case for sums the payment
of which is not at the time required by Section 9.2;
(c) Liens (other than any Lien imposed by ERISA, and other than any
Lien securing an obligation for the payment of borrowed money) incurred or
deposits made in the ordinary course of business in connection with obligations
not due or delinquent with respect to workers' compensation, unemployment
insurance and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return-of-money bonds and other similar
obligations; provided, that no such Lien shall be permitted to the extent it
encumbers any real Property of any Credit Party;
(d) any attachment or judgment Lien (including judgment or appeal
bonds) which shall, within 30 days after the entry thereof, have been discharged
or execution thereof stayed pending appeal, or which shall have been discharged
within 30 days after the
-76-
<PAGE> 78
expiration of any such stay or which is being diligently contested in good faith
so long as a reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor; provided that such Liens shall
not in any event exceed $100,000 in the aggregate at any time outstanding;
(e) zoning restrictions, easements, licenses, reservations,
restrictions on the use of real Property or minor irregularities incident
thereto (and, with respect to leasehold interests, Liens and other encumbrances
that are incurred, created, assumed or permitted to exist on or with respect to
the leased Property and arise by, through or under or are asserted by a landlord
or owner of the leased Property, with or without consent of the lessee) which
(i) in the case of any such Lien encumbering real Property of a Credit Party
which is not also encumbered by a Mortgage, were not incurred in connection with
the borrowing of money and which do not in the aggregate materially detract from
the value of the Property of any Credit Party or impair the use of such Property
for the purposes for which such Property is held by such Credit Party, or (ii)
in the case of any such Lien encumbering real Property which is also encumbered
by a Mortgage, constitute Permitted Exceptions (as defined in such Mortgage);
(f) Liens (including Liens created pursuant to Capitalized Leases)
existing on the Closing Date and described in Schedule 4.10A hereto (in each
case after giving effect to the Transactions contemplated to occur on the
Closing Date, but excluding in any event Liens securing Non-Continuing
Indebtedness which Liens shall be fully terminated and released on the Closing
Date);
(g) Liens (including Liens created pursuant to Capitalized Leases)
in respect of personal Property acquired by any Credit Party after the Closing
Date, which Liens exist or are created at the time of acquisition of such
Property or within six months thereafter, to secure Indebtedness permitted by
Section 10.1(e) which is assumed or incurred to finance all or any part of the
purchase price of acquisition of such Property, but any such Lien shall cover
only the Property so acquired and any improvements thereto, and may not exceed
the lesser of (x) 100% of the Fair Market Value of such Property or (y) the
purchase price of such acquisition; and
(h) the Liens created by the Security Documents.
Section 10.3. Limitation on Sale and Leasebacks. No Credit Party will
enter into any arrangement whereby any such Credit Party shall sell or transfer
any Property owned by such Credit Party to any Person and thereupon such Credit
Party shall lease or intend to lease, as lessee, the same Property.
Section 10.4. Consolidation, Merger or Disposition of Assets;
Acquisitions. No Credit Party will enter into any transaction of merger,
amalgamation or consolidation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell,
-77-
<PAGE> 79
lease, license, transfer or otherwise dispose of, in one transaction or a series
of transactions, all or any part of the business or Property (tangible or
intangible, including, without limitation, any Intellectual Property or License
Agreement) of any Credit Party whether now owned or hereafter acquired, or
acquire by purchase or otherwise any of the outstanding Capital Stock of, or all
or any substantial part of the business, operating assets and Property of, any
Person, except that (i) any Credit Party may in the ordinary course of business
sell Inventory owned by them, (ii) any Credit Party may sell or otherwise
dispose of Property (other than Intellectual Property) having a net book value
at the time of such sale or disposition of not more than $100,000 in any fiscal
year, provided that the aggregate net book value of all such Property sold or
disposed of pursuant to this clause (ii) shall not exceed [$175,000], (iii)
after giving effect to the Reorganization, the Capital Stock of El Paso may be
transferred to Newriders, and (iv) the Credit Parties may acquire the Capital
Stock or assets of any Person so long as the aggregate consideration paid by the
Credit Parties for such acquisition in any fiscal year does not exceed $250,000
and the Purchaser shall be satisfied in its discretion with the nature and
extent of any Indebtedness and other liabilities (including without limitation
contingent liabilities) assumed (by contract, operation of law or otherwise) by
the Credit Parties in connection with such acquisition.
Section 10.5. Sale or Discount of Receivables. No Credit Party will,
directly or indirectly, sell with recourse, or discount or otherwise sell for
less than the face value thereof, any of their respective Accounts or notes
receivable , except that the Company may discount its Accounts or notes
receivable in the ordinary course of business and consistent with past
practices.
Section 10.6. Conduct of Business. The Parent will not engage in a
business other than the ownership, directly or indirectly, of the Capital Stock
of its Subsidiaries. No member of the Paisano Group will, engage in any business
other than the Permitted Business. Easyriders of Columbus will not engage in any
business other than the operation of its store, cafe and tatoo studio located in
Columbus, Ohio, the sale of Easyriders apparel, and the businesses of motorcycle
customization, custom and pre-owned motorcycle sales, motorcycle parts and
accessory sales, motorcycle servicing, and custom leather embroidery, and any
businesses that are reasonably related thereto.
Section 10.7. Restricted Payments and Restricted Investments.
(a) No Credit Party will, directly or indirectly, make any
Restricted Payment.
(b) No Credit Party will make any Restricted Investment.
Section 10.8. Issuance of Capital Stock. No Credit Party will issue or
have outstanding any shares of Capital Stock (or any warrants, options,
conversion rights, or other rights to subscribe for, purchase or acquire such
Capital Stock), except (i) Capital Stock,
-78-
<PAGE> 80
warrants, options, conversion rights or other such rights outstanding on the
Closing Date and listed on Schedule 4.4, (ii) Common Stock issued under the
Parent 1998 Executive Compensation Plan, and (iii) Common Stock issued by the
Parent after the Closing Date.
Section 10.9. Transactions with Affiliates. Subject to the immediately
succeeding sentence, no Credit Party will, directly or indirectly, enter into or
permit to exist any transaction (including, without limitation, the purchase,
sale, lease or exchange of any Property or the rendering of any service), with
any Affiliate of such Credit Party unless such transaction is otherwise not
prohibited under this Agreement, is in the ordinary course of such Credit
Party's business, is on fair and reasonable terms that are not less favorable to
such Credit Party, as the case may be, than those that would be obtainable at
the time in an arms' length transaction with a Person who is not such an
Affiliate and such transaction has been approved by the disinterested directors
of the Parent, provided that Restricted Payments as described in clauses (vii)
and (viii) of paragraph (e) of the definition thereof shall be permitted.
Notwithstanding the foregoing and other than the transactions described on
Schedule 10.9, no Credit Party will, directly or indirectly, enter into or
permit to exist any transaction (including, without limitation, the purchase,
sale, lease or exchange of any Property or the rendering of any service) with
(i) any Restaurant Subsidiary, (ii) Easyriders of Columbus (other than
transactions with respect to magazine sales and which satisfy the conditions of
the immediately preceding sentence) or (iii) any Permitted Holder.
Section 10.10. Capital Expenditures. No Credit Party will make any Capital
Expenditure or incur such any contractual commitment with respect thereto,
except that so long as no Event of Default has occurred and is continuing the
Paisano Group may make Capital Expenditures and incur commitments therefor to
the extent that, after giving effect thereto, the aggregate amount of all
Capital Expenditures by the Paisano Group shall not exceed, for each fiscal year
of the Paisano Group set forth below, the corresponding amount set forth
opposite such fiscal year:
-79-
<PAGE> 81
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, Permitted Amount
------------ ----------------
<S> <C>
1998 $550,000
1999 $550,000
2000 $550,000
2001 $550,000
</TABLE>
Section 10.11. Operating Leases. No Credit Party will enter into (as
lessee) any Operating Lease if, after giving effect thereto, the aggregate
amount of rentals and other payments required to be made by such Credit Parties
under all Operating Leases during any fiscal year shall be greater than
$[____________].
Section 10.12. Certain Contracts. No Credit Party will enter into or
be a party to:
(a) any contract providing for the making of loans, advances or
capital contributions to any Person other than the Credit Parties, or for the
purchase of any Property from any Person, in each case primarily in order to
enable such Person to maintain working capital, net worth or any other balance
sheet condition or to pay debts, dividends or expenses, or
(b) any contract for the purchase of materials, supplies or other
Property or services if such contract (or any Reorganization Document) requires
that payment for such materials, supplies or other Property or services shall be
made regardless of whether or not delivery of such materials, supplies or other
Property or services is ever made or tendered, or
(c) any contract to rent or lease (as lessee) any real or personal
Property if such contract (or any Reorganization Document) provides that the
obligation to make payments thereunder is absolute and unconditional under
conditions not customarily found in commercial leases then in general use or
requires that the lessee purchase or otherwise acquire securities or obligations
of the lessor (provided, that this subsection (c) shall not be construed to
prevent any Credit Party from being a party to or complying with any provision
of any lease to which any of them is a party on the date hereof), or
(d) any contract for the sale or use of materials, supplies or other
Property, or the rendering of services, if such contract (or any Reorganization
Document) requires that payment for such materials, supplies or other Property,
or the use thereof, or payment for such services, shall be subordinated to any
Indebtedness (of the purchaser or
-80-
<PAGE> 82
user of such materials, supplies or other Property or the Person entitled to the
benefit of such services) owed or to be owed to any Person, or
(e) except as permitted by Section 10.1, and except for Investments
which are not Restricted Investments, any other contract which, in economic
effect, is substantially equivalent to a Contingent Obligation.
Section 10.13. Limitation on Dividend Restrictions Affecting Subsidiaries.
Except pursuant to this Agreement, no Credit Party will permit any of its
Subsidiaries directly or indirectly to create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction which by its
terms restricts the ability of any such Subsidiary to (a) pay dividends or make
any other distributions on such Subsidiary's Capital Stock, (b) pay any
Indebtedness owed to the Company or any other Credit Party, (c) make any loans
or advances to the Company or any other Credit Party or (d) transfer any of its
Property or assets to the Company or any other Credit Party.
Section 10.14. No Amendment of Charter, By-Laws. No Credit Party will
effect any amendment to or modification of its charter documents or by-laws,
except in each case with the prior written consent of the Purchaser.
Section 10.15. Acquisition of Margin Securities. No Credit Party will own,
purchase or acquire (or enter into any contract to purchase or acquire) any
"margin security" as defined by any regulation of the Board of Governors of the
United States Federal Reserve System as now in effect or as the same may
hereafter be in effect unless, prior to any such purchase or acquisition or
entering into any such contract, the Purchaser shall have received an opinion of
counsel satisfactory to the Purchaser to the effect that such purchase or
acquisition will not cause this Agreement or the Notes to be in violation of
Regulation T or Regulation U or any other regulation of such Board then in
effect.
Section 10.16. Collateral Locations; Other Names. Except with the express
prior written approval of the Purchaser, neither the location of the principal
place of business and chief executive office of any Credit Party, nor the
locations of Collateral respectively granted or pledged by them as set forth on
Schedule 4.30 hereto, shall be changed nor shall there be established additional
places of business or additional locations at which any such Collateral is
stored, kept or processed, nor shall any Credit Party conduct business under any
corporate, trade or fictitious name other than the names listed on Schedule
4.30, unless (i) the Company shall give to the Purchaser at least 30 days prior
notice of any such changed chief executive office or changed or additional
places of business or locations of Collateral or change of corporate, trade or
fictitious name, and (ii) prior to making any such change of location, place of
business, chief executive office or corporate, trade or fictitious name or
establishing such new place of business or location of Collateral, the Company
shall execute and file, and shall cause each other Credit Party to execute and
file, any additional financing statements or other documents or notices
reasonably required by the Purchaser in order to preserve the
-81-
<PAGE> 83
perfection of security interests in such Collateral and, if such location is not
owned by such Credit Party, the Company shall obtain, and shall cause such
Credit Party to obtain, and deliver to the Purchaser such duly executed Estoppel
Letters in respect of such location as may be reasonably required by the
Purchaser. Following the occurrence of an Event of Default, the Company shall,
upon the request of the Purchaser, notify any such warehouseman, bailee or
processor which has not already delivered an Estoppel Letter to the Purchaser of
the Liens created in favor of the Purchaser, and shall instruct such Person to
hold all Collateral located on premises owned or operated by such Person for the
Purchaser's account subject to the Purchaser's instructions.
Section 10.17. Amendments to Certain Documents. Without the prior written
consent of the Purchaser, no Credit Party will (i) consent to or request any
amendment, modification or supplement to any provision of any Reorganization
Document or (ii) amend, modify or supplement in any material respect, any
Material Contract which has a face amount or otherwise involves aggregate
payments or obligations in excess of $250,000.
Section 10.18. Financial Covenants.
(a) Consolidated Working Capital. The Company shall not permit
Consolidated Working Capital of the Paisano Group, measured as at the end of
each fiscal quarter of the Paisano Group, to be less than $______.
(b) Minimum Consolidated Net Worth. The Company shall not permit
Consolidated Net Worth of the Parent as of the end of any fiscal quarter to be
less than the sum of (i) [$_________] plus (ii) 100% of the aggregate amount of
the Consolidated Net Income of the Parent and its Subsidiaries (other than the
Restaurant Subsidiaries) for each fiscal quarter of the Parent ending on or
after December 31, 1998 with respect to which the Consolidated Net Income of the
Parent and its Subsidiaries (other than the Restaurant Subsidiaries) was greater
than zero.
(c) Maintenance of Leverage Ratio. The Company shall not permit the
ratio of (i) Consolidated Total Indebtedness (other than the Subordinated Seller
Notes) as of each date set forth below to (ii) Consolidated EBITDA, of the
Paisano Group for the four consecutive fiscal quarters of the Parent ended on
such date (or, in the case of any such date which is earlier than September 30,
1999, for the period from the Closing Date to and including such date), to
exceed the corresponding amount set forth opposite such date:
<TABLE>
<CAPTION>
Fiscal Quarter Ended: Ratio
- ----------------- --------
<S> <C>
December 31, 1998 8.5:1.00
March 31, 1999 5.5:1.00
</TABLE>
-82-
<PAGE> 84
<TABLE>
<S> <C>
June 30, 1999 4.0:1.00
September 30, 1999 3.4:1.00
December 31, 1999 3.5:1.00
March 31, 2000 3.4:1.00
June 30, 2000 3.3:1.00
September 30, 2000 3.2:1.00
December 31, 2000 3.1:1.00
March 31, 2001 3.1:1.00
June 30, 2001 3.0:1.00
September 30, 2001 3.0:1.00
</TABLE>
(d) Minimum Consolidated EBITDA. The Company shall not permit the
Consolidated EBITDA of the Paisano Group, measured as of each date set forth
below for the period of four consecutive full fiscal quarters of the Paisano
Group ended on such date, to be less than the corresponding amount set forth
opposite such date; provided, however, that in the case of any such measuring
date which is earlier than September 30, 1999, the applicable measuring period
shall be the period from the Closing Date to and including such measuring date:
<TABLE>
<CAPTION>
Measuring Date Amount
-------------- ------
<S> <C>
December 31, 1998 $2,500,000
March 31, 1999 $3,925,000
June 30, 1999 $5,400,000
September 30, 1999 $6,350,000
December 31, 1999 $6,000,000
March 31, 2000 $6,175,000
June 30, 2000 $6,400,000
September 30, 2000 $6,600,000
December 31, 2000 $6,800,000
March 31, 2001 $7,000,000
June 30, 2001 $7,400,000
September 30, 2001 $7,800,000
</TABLE>
(e) Maintenance of Interest Coverage Ratio. The Company will not
permit the ratio of (i) Consolidated EBITDA less Capital Expenditures made
during any period of determination, in each case, of the Paisano Group to (ii)
Consolidated Interest Expenses of the Paisano Group, measured as of each date
set forth below for the period of four consecutive full fiscal quarters of the
Paisano Group ended on such date, to be less than the ratio set forth opposite
such date; provided, however, that in the case of any such
-83-
<PAGE> 85
measuring date which is earlier than September 30, 1999, the applicable
measuring period shall be the period from the Closing Date to and including such
measuring date:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- -----
<S> <C>
December 31, 1998 3.5:1.00
March 31, 1999 3.0:1.00
June 30, 1999 2.9:1.00
September 30, 1999 2.9:1.00
December 31, 1999 2.7:1.00
March 31, 2000 2.8:1.00
June 30, 2000 2.9:1.00
September 30, 2000 3.0:1.00
December 31, 2000 3.1:1.00
March 31, 2001 3.2:1.00
June 30, 2001 3.4:1.00
September 30, 2001 3.5:1.00
</TABLE>
Section 10.19. Board Observer Rights. The Parent will give to the
Purchaser notice of all regular meetings and all special meetings of the
Parent's Board of Directors at the time notice is given to the directors, and
will permit an employee of the Purchaser or any Affiliate of the Purchaser
designated by the Purchaser to attend such meetings as an observer (but with no
voting rights), and will provide such designee with all information provided to
directors of the Parent at the time such information is provided to the
directors.
Section 11. Events of Default.
Section 11.1. Events of Default; Remedies. If any of the following events
(herein called "Events of Default") shall have occurred and be continuing
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or by operation of law or otherwise and such Event of Default
shall be deemed to be continuing until waived by the Purchaser in accordance
with the terms hereof):
(a) the Company shall default in the due and punctual payment or
prepayment of all or any part of the principal of any Note when and as the same
shall become due and payable, whether at stated maturity, by acceleration, by
notice of prepayment or otherwise;
(b) any Credit Party shall default in the due and punctual payment
or prepayment of any interest or fees on any Note or any other Obligations
(other than principal
-84-
<PAGE> 86
of any Note) when and as such interest, fees or other Obligations, shall become
due and payable, and such default shall continue for a period of five days;
(c) any Credit Party shall default in the performance or observance
of any of the covenants, agreements or conditions contained in Section 10 of
this Agreement;
(d) any Credit Party shall default in the performance or observance
of any of the covenants, agreements or conditions contained in this Agreement
(other than those referred to in any subsection of this Section 11.1 other than
this subsection (d)), or any Credit Party shall default in the performance or
observance of any of the covenants, agreements or conditions contained in any of
the other Note Documents, and such default shall continue for a period of 30
days;
(e) (i) any Credit Party shall fail to pay any principal of, premium
or interest on or any other amount payable in respect of Indebtedness of such
Person that is outstanding in a principal amount of at least $100,000 in the
aggregate (excluding Indebtedness represented by the Notes) when the same
becomes due and payable (whether at scheduled maturity, or by required
prepayment, acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Indebtedness; or (ii) any other event shall occur or
condition shall exist under any agreement or instrument relating to any such
Indebtedness and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event or
condition is to permit the acceleration of the maturity of such Indebtedness
(whether or not such acceleration occurs); or (iii) any such Indebtedness shall
be declared to be due and payable or required to be prepaid (other than by a
regularly scheduled required prepayment), redeemed, purchased or defeased, or an
offer to prepay, redeem, purchase or defease such Indebtedness shall be required
to be made, in each case prior to the stated maturity thereof;
(f) any Credit Party shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its Property, (ii) be
generally unable to pay its debts as such debts become due, (iii) make a general
assignment for the benefit of its creditors, (iv) commence a voluntary case
under the Bankruptcy Code or the foreign equivalent thereof, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) fail to controvert in a timely or appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Bankruptcy Code or the foreign equivalent thereof, (vii) admit in writing its
inability to pay its debts generally as such debts become due, (viii) take any
action under the laws of its jurisdiction of organization analogous to any of
the foregoing, or (ix) take any requisite action for the purpose of effecting
any of the foregoing;
-85-
<PAGE> 87
(g) a proceeding or case shall be commenced, without the application
or consent of any Credit Party in any court of competent jurisdiction, seeking
(i) the liquidation, reorganization, dissolution, winding up of any Credit Party
or composition or readjustment of the Indebtedness of any of them, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of any
Credit Party or of all or any substantial part of the assets of any of them, or
(iii) similar relief in respect of any Credit Party under any law providing for
the relief of debtors, and such proceeding or case shall continue undismissed,
or unstayed and in effect, for a period of 30 days; or an order for relief shall
be entered in an involuntary case under the Bankruptcy Code, against any Credit
Party; or action under the laws of the jurisdiction of organization of any
Credit Party analogous to any of the foregoing shall be taken with respect to
any Credit Party and shall continue undismissed, or unstayed and in effect, for
a period of 30 days;
(h) final judgment for the payment of money shall be rendered by a
court of competent jurisdiction against any Credit Party and such Credit Party
shall not discharge the same or provide for its discharge in accordance with its
terms, or procure a stay of execution thereof, within 30 days from the date of
entry thereof and within said period of 30 days, or such longer period during
which execution of such judgment shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal, and such judgment
together with all other such judgments shall exceed in the aggregate $125,000;
(i) any representation, warranty or statement made by or on behalf
of any Credit Party or any officer of any Credit Party in this Agreement, or any
representation, warranty or statement made by or on behalf of such Credit Party
or any officer of such Credit Party in any of the Transaction Documents or in
any financial statement, Officer's Certificate or other instrument or document
now or hereafter delivered pursuant to or in connection with any provision of
this Agreement or the Transaction Documents, shall prove to be false or
incorrect or breached in any material respect on the date as of which made;
(j) any event or condition described in Section 4.19 hereof shall
occur or exist and, as a result of such event or condition, together with all
other such events or conditions, any Credit Party or any ERISA Affiliate shall
incur, or in the opinion of the Purchaser is reasonably likely to incur, a
liability of any kind under ERISA or otherwise that, in the opinion of the
Purchaser, could have a Material Adverse Effect;
(k) any provision of any of this Agreement, the Notes or the other
Note Documents shall, for any reason, not be or shall cease to be in full force
and effect, or not be, or be asserted in writing by any Credit Party not to be,
valid, binding and enforceable against any Person purported to be bound by it;
(l) any of the Security Documents shall not give or shall cease to
give the Purchaser the Liens and the rights, powers and privileges purported to
be created thereby, including, without limitation, a valid, enforceable and
perfected first priority security interest in, and Lien on, all of the
Collateral subject thereto in favor of the Purchaser, superior and
-86-
<PAGE> 88
prior to the rights of all third Persons (except as otherwise expressly
permitted by this Agreement or the Security Documents); or
(m) any Change of Control shall occur;
then (i) upon the occurrence of any Event of Default described in subsection (f)
or (g), the unpaid principal amount of all Notes, together with the interest
accrued thereon and all fees, costs, expenses, indemnities and other amounts
payable hereunder or under the other Note Documents shall automatically become
immediately due and payable, and all obligations of the Purchaser to purchase
Revolving Notes hereunder shall terminate, without presentment, demand, notice,
declaration, protest or other requirements of any kind, all of which are hereby
expressly waived, or (ii) upon the occurrence of any other Event of Default, the
Purchaser may, by written notice to the Company, declare the unpaid principal
amount of all Notes to be, and the same shall forthwith become, immediately due
and payable, together with the interest accrued thereon and all fees, costs,
expenses, indemnities and other amounts payable hereunder or under the other
Note Documents, and/or terminate all obligations of the Purchaser to purchase
Revolving Notes hereunder, all without presentment, demand, notice, protest or
other requirements of any kind, all of which are hereby expressly waived.
Section 11.2. Suits for Enforcement; Remedies Against Collateral. If any
Event of Default shall have occurred and be continuing, the Purchaser may,
proceed to protect and enforce its rights, either by suit in equity or by action
at law, or both, whether for the specific performance of any covenant or
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement, and may proceed to enforce the payment of all sums
due upon such respective Notes, and such further amounts as shall be sufficient
to cover the costs and expenses of collection (including, without limitation,
reasonable counsel fees and disbursements), or to enforce any other legal or
equitable right of the Purchaser. In addition, the Purchaser shall have all of
the rights and remedies of a secured creditor under the applicable provisions of
the Uniform Commercial Code or the foreign equivalent thereof, and all rights
and remedies provided for in the Security Documents or at law or in equity or
otherwise.
Section 11.3. Remedies Cumulative. No remedy conferred in this Agreement
or in the other Note Documents upon the Purchaser, the holder of any Note or the
Purchaser is intended to be exclusive of any other remedy and each and every
such remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
Section 11.4. Remedies Not Waived. No course of dealing between any Credit
Party and the Purchaser, and no delay or failure in exercising any rights
hereunder or under such Note or the Note Documents in respect thereof, shall
operate as a waiver of any of the rights of the Purchaser.
-87-
<PAGE> 89
Section 12. Registration; Exchange; and Transfer of Notes. The Company
will keep at its principal executive office a register, in which, subject to
such reasonable regulations as it may prescribe, but at its expense (other than
transfer taxes, if any), the Company will provide for the registration and
transfer of Notes. Whenever any Note or Notes shall be surrendered either at the
principal executive office of the Company, or at the place of payment named in
the Note, for transfer or exchange, accompanied (if so required by the Company)
by a written instrument of transfer in form reasonably satisfactory to the
Company duly executed by the holder thereof or by such holder's attorney duly
authorized in writing, the Company will execute and deliver in exchange therefor
a new Note or Notes of the same class in such denominations as may be requested
by such holder, of like tenor and in the same aggregate unpaid principal amount
as the aggregate unpaid principal amount of the Note or Notes so surrendered.
Any Note issued in exchange for any other Note or upon transfer thereof shall
carry the rights to unpaid interest and interest to accrue which were carried by
the Note so exchanged or transferred, and neither gain nor loss of interest
shall result from any such transfer or exchange. Any transfer tax or
governmental charge relating to such transaction shall be paid by the holder
requesting the exchange. The Company and any of its agents may treat the Person
in whose name any Note is registered as the sole and exclusive record and
beneficial holder and owner of such Note for the purpose of receiving payment of
the principal of, and interest and other amounts on such Note and for all other
purposes whatsoever, whether or not such Note be overdue.
Section 13. Lost, Stolen, Damaged and Destroyed Notes. At the request of
any holder of any Note, the Company will issue and deliver at its expense, in
replacement of any Note or Notes lost, stolen, damaged or destroyed, upon
surrender thereof, if mutilated, a new Note or Notes in the same aggregate
unpaid principal amount, and otherwise of the same tenor, as the Note or Notes
so lost, stolen, damaged or destroyed, duly executed by the Company. The Company
may condition the replacement of a Note or Notes reported by the holder thereof
as lost, stolen, damaged or destroyed, upon the receipt from such holder of an
indemnity and/or security reasonably satisfactory to the Company; provided that
if such holder shall be the Purchaser or its nominee, such Purchaser's unsecured
agreement of indemnity shall be sufficient for purposes of this Section.
-88-
<PAGE> 90
Section 14. Miscellaneous.
Section 14.1. Amendment and Waiver.
(a) No amendment or waiver of any provision of this Agreement, the
Notes or (except as otherwise expressly provided therein) any other Note
Document, or any consent to any departure by any Credit Party therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Purchaser and the Parent.
(b) Any such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. Neither any failure nor
any delay on the part of the Purchaser in exercising any right, power or
privilege hereunder or under the Notes or any of the other Note Documents shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. Except as otherwise provided herein or in the Notes
or any other Note Document, no notice to or demand on any Credit Party in any
case shall entitle such Credit Party to any other or further notice or demand in
the same, similar or other circumstances.
Section 14.2. Expenses. The Parent and the Company, jointly and severally
agree, whether or not the transactions hereby contemplated shall be consummated,
to pay and save the Purchaser harmless against any and all liability for the
payment of all reasonable out-of-pocket expenses arising in connection with the
preparation, negotiation, execution and delivery of this Agreement, the Notes,
the other Note Documents and the other instruments and documents hereby and
thereby contemplated and the closing of the transactions contemplated hereby,
all such expenses incurred with respect to the enforcement of any provision of
any such agreement or instrument, all reasonable expenses incurred in connection
with the copying and compilation of such agreements and instruments and all
stamp and other similar taxes (together in each case with interest and
penalties, if any, to the extent permitted by applicable law) which may be
payable in respect of the execution and delivery of such agreement or
instruments, all fees, taxes and other charges incurred in connection with the
filing or recording of any Security Documents and in connection with any Lien,
tax and judgment searches, including appraisal, survey and other title costs,
the reasonable fees and disbursements of Paul, Hastings, Janofsky & Walker LLP
and of any special, local or foreign counsel in connection with the preparation
of such agreements and instruments and the transactions hereby and thereby
contemplated, and the fees and disbursements of the Accountants, and the
reasonable out-of-pocket expenses incurred by the Purchaser in the
administration of the provisions of this Agreement and the other Note Documents,
including, without limitation, expenses incurred in connection with the exercise
of the Purchaser's rights of visitation and inspection pursuant to Section 8 and
attendance at meetings of the Board of Directors of the Parent and committees
thereof pursuant to Section 10.19. The Credit Parties, jointly and severally,
also agree to pay all reasonable expenses incurred by the Purchaser (including
counsel fees and disbursements) in connection
-89-
<PAGE> 91
with any amendment or requested amendment of, or waiver or consent or requested
waiver or consent under or with respect to, this Agreement, the Notes or any of
the other Note Documents, whether or not the same shall become effective, and
all reasonable expenses incurred by Purchaser (including counsel fees and
disbursements) following the occurrence and during the continuance of any
Default or Event of Default or incident to the negotiation of any workout,
restructuring or similar arrangement relating to any Credit Party. The
obligations of the Parent and the Company under this Section 14.2 shall survive
the payment or prepayment in full or transfer of any Note, the termination of
the Purchaser's obligations to purchase Revolving Notes, the enforcement of any
provision hereof or thereof, any such amendments, waivers or consents, any such
Default or Event of Default, and any such workout, restructuring or similar
arrangement.
Section 14.3. Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by or on
behalf of any party to this Agreement or otherwise in connection herewith, shall
(i) survive the execution and delivery of this Agreement and the delivery of the
Notes to the Purchaser and shall continue in effect, until all of the
Obligations have been indefeasibly paid in full and no Notes are outstanding and
the Termination Date has occurred and thereafter as provided in Sections 14.2
and 14.6, and (ii) be deemed to be material and to have been relied upon by the
Purchaser, regardless of any investigation made by such Purchaser or on its
behalf.
Section 14.4. Successors and Assigns.
(a) This Agreement shall be binding upon and inure to the benefit of
the Parent, the Company, the Purchaser and their respective successors and
assigns; provided, however, that neither the Parent nor the Company shall have
the right to assign its rights hereunder or any interest herein or to delegate
any of its duties or obligations hereunder without the prior written consent of
the Purchaser.
(b) The Purchaser may at any time sell or assign to any Person (each
an "Assignee") all or any part of its interests in the Notes, this Agreement and
the Note Documents and in the obligations of the Credit Parties under this
Agreement, the Notes and the Note Documents, and each such Assignee shall assume
the obligations of the Purchaser hereunder and thereunder (including, without
limitation, the obligation of the Purchaser to purchase Revolving Notes), to the
extent provided in such assignment, and to the extent of such assumption the
Purchaser shall be released from its obligations hereunder and thereunder. Upon
execution and delivery of such an instrument, such Assignee shall be a party to
this Agreement and shall have the rights and obligations of a Purchaser
(including, without limitation, its rights under this Section 14.4(b)), to the
extent of such assignment, and the Purchaser shall be released from its
obligations hereunder to a corresponding extent. Upon the consummation of any
assignment pursuant to this Section 14.4(b), the Purchaser and the Company shall
make appropriate arrangements so that, if required, new Notes shall be issued to
the Purchaser and the Assignee. The Purchaser shall give the Company prior
-90-
<PAGE> 92
written notice of the date that any such assignment shall become effective,
which date shall be no less than ten days after the date such notice is given.
From and after the date of such assignment, the term "Purchaser" as used in this
Agreement shall be deemed to refer collectively to the holders of Notes at the
time outstanding.
Section 14.5. Notices. All notices hereunder shall be in writing and shall
be conclusively deemed to have been received and shall be effective (a) on the
day on which delivered if delivered personally or transmitted by telex or
telegram or telecopier, or (b) one Business Day after the date on which the same
is delivered to a nationally recognized overnight courier service, and shall be
addressed:
(i) in the case of the Parent or the Company, to:
Paisano Publications, Inc.
28210 Dorothy Drive
Agoura Hills, CA 91301
Attention: Mr. Joseph Teresi
Telecopy No.: (818) 889-4726
with a copy to:
Kaye, Scholer, Feirman, Hays & Handler, LLP
1999 Avenue of the Stars
Suite 1600
Los Angeles, CA 90067
Attention: Barry L. Dastin
Telecopy No.: (310) 788-1200
(ii) in the case of the Purchaser to:
Nomura Holding America Inc.
2 World Financial Center, Building B
New York, NY 10281-1198
Attention: Howard Gellis, or his authorized representative
Telecopy No.: (212) 667-1029
-91-
<PAGE> 93
with a copy to:
Nomura Holding America Inc.
2 World Financial Center, Building B
New York, NY 10281-1198
Attn: Legal Department
Telecopy No.: (212) 667-1024; and
or at such other address and/or telecopy number and/or to the attention of such
other Person as any of such Persons shall have advised the others by notice in
the manner herein specified.
Section 14.6. Indemnification. In consideration of the execution and
delivery of this Agreement by the Purchaser, the Parent and the Company hereby,
jointly and severally, agree to defend, indemnify, exonerate and hold harmless
the Purchaser and its officers, directors, stockholders, affiliates, trustees,
employees and agents, and each other Person, if any, controlling any the
Purchaser or any of its Affiliates (herein collectively called the
"Indemnitees") from and against any and all actions, causes of action, suits,
losses, liabilities and damages, and expenses in connection therewith,
including, without limitation, reasonable counsel fees and disbursements
incurred in the investigation and defense of claims and actions (herein
collectively called the "Indemnified Liabilities"), incurred by the Indemnitees
or any of them as a result of, or arising out of or relating to:
(i) the execution, delivery and performance of the
Reorganization Documents and the consummation of the Reorganization
contemplated thereby,
(ii) the execution, delivery, performance or enforcement of
this Agreement, the Notes, the Warrants, any other Note Document, or any
instrument or document contemplated hereby or thereby by any of the
Indemnitees, or any act, event or transaction related or attendant thereto
or contemplated hereby or thereby, or any action or inaction by any
Indemnitee under or in connection therewith, or
(iii) any Environmental Matter, any Environmental Law or the
actual or alleged existence or release of any Hazardous Material,
except for any such Indemnified Liabilities that are finally judicially
determined to have resulted from the respective Indemnitee's gross negligence,
bad faith or willful misconduct, and if and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Parent and the Company
hereby, jointly and severally, agree to make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The obligations of the Parent and the Company
under this Section 14.6 shall be in addition to any liability that the Parent
and the Company may otherwise have and shall survive the payment or prepayment
in full or transfer of any Note,
-92-
<PAGE> 94
the termination of any Purchaser's obligations to purchase Revolving Notes and
the enforcement of any provision hereof or thereof.
Section 14.7. Public Announcements. The Parent and the Company agree that
neither of them nor any other Credit Party will issue any press release or make
any other public announcement, statement or filing with regard to this
Agreement, the Notes, the Warrants or the other Note Documents or the
Transactions without the prior approval of the Purchaser, which approval shall
not be unreasonably withheld and shall in no event be withheld in any case where
such press release, public announcement, statement or filing is required by
applicable law (including applicable rules and regulations of the SEC).
Section 14.8. No Fiduciary Relationship. The relationship between the
Purchaser, on the one hand, and the Credit Parties on the other hand, is solely
that of creditor and debtor, and the Purchaser shall not be deemed to have any
fiduciary or other special relationship with any Credit Party. No provision of
this Agreement, the Notes or any of the other Note Documents shall be construed
to create a fiduciary duty on the part of the Purchaser or any trustee or agent
therefor in favor of any Credit Party or their Affiliates, or their respective
director, officers, employees, agents, stockholders or creditors.
Section 14.9. Integration and Severability. This Agreement, the Notes and
the other Note Documents (including the schedules and exhibits thereto) embody
the entire agreement and understanding among the Purchaser and the Credit
Parties, and supersede all prior agreements and understandings relating to the
subject matter hereof. In case any one or more of the provisions contained in
this Agreement, the Notes or any other Note Document, or any application
thereof, shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and therein, and any other application thereof, shall not in any way be
affected or impaired thereby.
Section 14.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same instrument.
SECTION 14.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 14.12. SUBMISSION TO JURISDICTION: WAIVER OF SERVICE AND VENUE.
(a) EACH OF THE PARENT AND THE COMPANY CONSENTS AND AGREES TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK, AND WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON
CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND AGREES
-93-
<PAGE> 95
THAT, EXCEPT WITH THE WRITTEN CONSENT OF THE PURCHASER, ANY DISPUTE CONCERNING
THE RELATIONSHIP BETWEEN THE PURCHASER, ON THE ONE HAND, AND THE PARENT AND THE
COMPANY, ON THE OTHER HAND, OR THE CONDUCT OF ANY PARTY IN CONNECTION WITH THIS
AGREEMENT OR OTHERWISE, SHALL BE HEARD ONLY IN THE COURTS DESCRIBED ABOVE.
(b) EACH OF THE PARENT AND THE COMPANY HEREBY WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE BY HAND DELIVERY TO THE COMPANY AT ITS ADDRESS SET FORTH
BELOW, OR, AT THE OPTION OF THE PURCHASER, BY SERVICE UPON CT CORPORATION, WHICH
EACH OF THE PARENT AND THE COMPANY IRREVOCABLY APPOINTS AS ITS AGENT FOR THE
PURPOSE OF ACCEPTING SERVICE OF PROCESS WITHIN THE STATE OF NEW YORK. IN
ADDITION, THE PURCHASER AGREES TO PROMPTLY FORWARD BY REGISTERED MAIL ANY
PROCESS SO SERVED UPON SAID AGENT TO THE COMPANY AT ITS ADDRESS SET FORTH ABOVE
IN SECTION 14.5. THE COMPANY HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID.
(c) NOTHING IN THIS SECTION 14.12 SHALL AFFECT THE RIGHT OF THE
PURCHASER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST THE PARENT
OR THE COMPANY OR THEIR PROPERTY IN THE COURTS OF ANY
OTHER JURISDICTION.
SECTION 14.13. WAIVER OF RIGHT TO TRIAL BY JURY. EACH OF THE PARENT, THE
COMPANY AND THE PURCHASER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (I) ARISING UNDER THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
OR (II) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. EACH
OF THE PARENT, THE COMPANY AND THE PURCHASER HEREBY AGREES AND CONSENTS THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
-94-
<PAGE> 96
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
Section 14.14. Dating. Although this Agreement is dated as of the date
first written above for convenience, this Agreement shall be effective on
September , 1998.
-95-
<PAGE> 97
IN WITNESS WHEREOF, the Company, the Parent and the Purchaser have
executed this Agreement by their duly authorized officers.
EASYRIDERS, INC.
By:
-------------------------------
Its:
EASYRIDERS SUB II, INC.
(to be merged with and into
PAISANO PUBLICATIONS, INC.)
By:
-------------------------------
Its:
NOMURA HOLDING AMERICA INC.
By:
-------------------------------
Its: Attorney-In-Fact
-96-
<PAGE> 98
Assumption Agreement
PAISANO PUBLICATIONS, INC., successor to Easyriders Sub II, Inc. by
merger, hereby assumes all obligations and liabilities of Easyriders Sub II,
Inc. under the foregoing Note and Warrant Purchase Agreement, dated as of
September__, 1998 between Easyriders, Inc., Easyriders Sub II, Inc. and Nomura
Holding America Inc., and all the Notes and Note Documents referred to therein
to which Easyriders Sub II, Inc. is a party and joins in the foregoing Note and
Warrant Purchase Agreement and such Notes and Note Documents for the purpose of
agreeing to be bound by all covenants and agreements attributable to it in said
Note and Warrant Purchase Agreement and such Notes and Note Documents.
PAISANO PUBLICATIONS, INC.
By:
-------------------------------
Name:
Title:
-97-
<PAGE> 99
TABLE OF CONTENTS
(Not Part of Agreement)
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C> <C>
1. Definitions...........................................................................................2
1.1. Defined Terms.................................................................................2
1.2. Accounting Terms.............................................................................23
1.3. Rules of Construction........................................................................23
2. Sale and Purchase of Notes and Warrants..............................................................24
2.1. Authorization of Notes and Warrants..........................................................24
2.2. Sale and Purchase of Revolving Notes.........................................................25
2.3. Sale and Purchase of Term Notes and Warrants.................................................26
2.4. Closing......................................................................................26
2.5. Payments.....................................................................................26
2.6. Fees.........................................................................................27
2.7. Interest Rate Limitation.....................................................................27
2.8. Allocation of Purchase Price.................................................................28
3. Prepayments of Notes.................................................................................28
3.1. Mandatory Payments and Prepayments...........................................................28
3.2. Optional Prepayments of the Notes............................................................30
3.3. Application of Principal Payments............................................................30
3.4. Reductions of Commitments....................................................................31
3.5. Purchase of Notes............................................................................32
3.6. Taxes........................................................................................32
4. Representations and Warranties of the Parent and the Company.........................................34
4.1. Corporate Existence and Power................................................................34
4.2. Corporate Authority..........................................................................34
4.3. Binding Effect...............................................................................34
4.4. Capital Stock................................................................................35
4.5. Business Operations and Other Information: Financial Condition...............................35
4.6. Subsidiaries.................................................................................37
4.7. Litigation; No Violation of Governmental Orders or Laws......................................37
4.8. No Conflicts with Agreements, Statutes, Orders, Etc..........................................37
4.9. Consents, Etc................................................................................37
4.10. Outstanding Indebtedness; Investments.......................................................38
4.11. Assets and Properties.......................................................................38
4.12. Taxes.......................................................................................39
4.13. Disclosure..................................................................................39
4.14. Offering of Securities......................................................................39
4.15. Broker's or Finder's Commissions............................................................40
4.16. Labor Matters...............................................................................40
</TABLE>
-i-
<PAGE> 100
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C> <C>
4.17. Environmental Matters.......................................................................40
4.18. Margin Regulations..........................................................................41
4.19. Compliance with ERISA.......................................................................42
4.20. Material Contracts..........................................................................45
4.21. Insurance...................................................................................45
4.22. Possession of Franchises, Licenses, Etc.....................................................45
4.23. Use of Proceeds.............................................................................45
4.24. Intellectual Property.......................................................................46
4.25. Depositary Accounts.........................................................................48
4.26. Suppliers; Distributors; Printers...........................................................48
4.27. Status under Certain Laws...................................................................49
4.28. Foreign Assets Control Regulations..........................................................49
4.29. Certain Transactions........................................................................49
4.30. Places of Business..........................................................................49
4.31. Other Names.................................................................................50
4.32. Reorganization Documents; Transaction Documents.............................................50
4.33. Solvency....................................................................................50
4.34. Ranking of Notes and other Obligations......................................................51
4.35. Business of Parent..........................................................................51
4.36. Licensing Interests; Easyriders Cafe........................................................51
4.37. Circulation.................................................................................51
4.38. Relationships with Franchisees..............................................................52
4.39. Customer, Advertiser, Subscriber and Mailing Lists..........................................53
4.40. Advertising.................................................................................53
4.41. Model Releases..............................................................................53
4A. Representations of the Purchaser.....................................................................53
5. Closing Conditions...................................................................................54
5.1. Proceedings Satisfactory.....................................................................54
5.2. Opinion of Purchaser's Special Counsel.......................................................54
5.3. Opinions of Counsel to the Credit Parties; Tax Opinion; Reliance Letters.....................54
5.4. Representations and Warranties True, Etc.; Certificates......................................55
5.5. Absence of Material Adverse Effect, Etc......................................................55
5.6. Consents and Approvals.......................................................................56
5.7. Absence of Litigation, Orders, Etc...........................................................56
5.8. Guarantee....................................................................................56
5.9. Security Documents...........................................................................56
5.10. Employee Stock Options......................................................................59
5.11. Assignment of Representations, Warranties, Covenants and Indemnities........................59
5.12. Initial Revolving Note Purchase Request.....................................................59
5.13. Reorganization Transactions.................................................................59
5.14. Subordinated Seller Notes; Intercreditor Agreement..........................................60
5.15. Discharge of NonContinuing Indebtedness.....................................................60
</TABLE>
-ii-
<PAGE> 101
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C> <C>
5.16. Fees........................................................................................61
5.17. Wire Instructions...........................................................................61
5.18. Shareholder Approval........................................................................61
5.19. Merger......................................................................................61
5.20. Transaction Costs; Payables.................................................................61
5.21. Solvency Opinion............................................................................61
5.22. Insurance...................................................................................62
5.23. Certificate As to Use of Proceeds...........................................................62
5.24. Due Diligence Reports.......................................................................62
5.25. Registration Rights Agreement...............................................................62
5.26. Employment Agreements; Shareholders' Agreements; Leases.....................................62
5.27. Registration Statement......................................................................63
6. Additional Conditions to Obligations to Purchase Revolving Notes.....................................63
6.1. Note Purchase Request........................................................................63
6.2. Representations and Warranties True..........................................................63
6.3. No Default or Event of Default...............................................................63
6.4. Credit Limit Not Exceeded....................................................................63
6.5. Legal Prohibitions...........................................................................63
6.6. Other Requirements...........................................................................63
7. Financial Statements and Information.................................................................64
8. Inspection of Properties and Books...................................................................69
9. Affirmative Covenants................................................................................69
9.1. Payment of Principal and Interest............................................................69
9.2. Payment of Taxes and Claims..................................................................69
9.3. Maintenance of Properties, Records and Corporate Existence...................................70
9.4. Insurance....................................................................................71
9.5. After Acquired Real Property.................................................................74
9.6. Future Guarantors and Securing Subsidiaries..................................................74
9.7. New Depositary Accounts......................................................................75
9.8. ERISA Covenants..............................................................................75
9.9. Further Assurances...........................................................................75
9.10. Year 2000...................................................................................76
9.11. Early Refinancing............................................................................76
9.12. Consummation of Paisano Merger...............................................................76
9.13. Environmental Reports........................................................................76
10. Negative and Maintenance Covenants..................................................................76
10.1. Restrictions on Indebtedness................................................................77
10.2. Restrictions on Liens.......................................................................77
10.3. Limitation on Sale and Leasebacks...........................................................79
10.4. Consolidation, Merger or Disposition of Assets; Acquisitions................................79
10.5. Sale or Discount of Receivables.............................................................79
10.6. Conduct of Business.........................................................................79
</TABLE>
-iii-
<PAGE> 102
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C> <C>
10.7. Restricted Payments and Restricted Investments..............................................80
10.8. Issuance of Capital Stock...................................................................80
10.9. Transactions with Affiliates................................................................80
10.10. Capital Expenditures.......................................................................80
10.11. Operating Leases...........................................................................81
10.12. Certain Contracts..........................................................................81
10.13. Limitation on Dividend Restrictions Affecting Subsidiaries.................................82
10.14. No Amendment of Charter, ByLaws............................................................82
10.15. Acquisition of Margin Securities...........................................................82
10.16. Collateral Locations; Other Names..........................................................82
10.17. Amendments to Certain Documents............................................................83
10.18. Financial Covenants........................................................................83
10.19. Board Observer Rights......................................................................85
11. Events of Default...................................................................................85
11.1. Events of Default; Remedies.................................................................85
11.2. Suits for Enforcement; Remedies Against Collateral..........................................88
11.3. Remedies Cumulative.........................................................................88
11.4. Remedies Not Waived.........................................................................89
12. Registration; Exchange; and Transfer of Notes.......................................................89
13. Lost, Stolen, Damaged and Destroyed Notes...........................................................89
14. Miscellaneous.......................................................................................90
14.1. Amendment and Waiver........................................................................90
14.2. Expenses....................................................................................90
14.3. Survival of Representations and Warranties..................................................91
14.4. Successors and Assigns......................................................................91
14.5. Notices.....................................................................................92
14.6. Indemnification.............................................................................93
14.7. Public Announcements........................................................................94
14.8. No Fiduciary Relationship...................................................................94
14.9. Integration and Severability................................................................94
14.10. Counterparts...............................................................................94
14.11. Governing Law..............................................................................94
14.12. Submission to Jurisdiction: Waiver of Service and Venue....................................94
14.13. Waiver of Right to Trial by Jury...........................................................95
14.14. Dating.....................................................................................96
</TABLE>
-iv-
<PAGE> 103
SCHEDULES
Schedule 4.4 - Capital Stock
Schedule 4.5B - Certain Changes
Schedule 4.5C - Projections
Schedule 4.5D - Pro Forma Balance Sheet
Schedule 4.5E - Sources and Uses of Funds
Schedule 4.6 - Subsidiaries
Schedule 4.7 - Litigation
Schedule 4.9 - Consents
Schedule 4.10A - Existing Indebtedness
Schedule 4.10B - Existing Investments
Schedule 4.11 - Real Property
Schedule 4.16 - Labor Matters
Schedule 4.17 - Environmental Matters
Schedule 4.19 - ERISA
Schedule 4.20 - Material Contracts
Schedule 4.21 - Insurance
Schedule 4.24 - Intellectual Property
Schedule 4.25 - Depositary Accounts
Schedule 4.29 - Related Party Transactions
Schedule 4.30 - Places of Business
Schedule 4.31 - Other Names
-v-
<PAGE> 104
Schedule 4.36 - Licensing Interests
Schedule 4.37 - Certification
Schedule 4.38 - Franchises
Schedule 4.40 - Advertising
Schedule 10.9 - Transactions with Affiliates
-vi-
<PAGE> 105
EXHIBITS
Exhibit A-1 - Form of Revolving Note
Exhibit A-2 - Form of Term Note
Exhibit B - Form of Revolving Note Purchase Request
Exhibit C - Form of Guarantee
Exhibit D - Form of Security Agreement
Exhibit E - Form of Intellectual Property Security Agreement
Exhibit F-1 - Form of Warrant
Exhibit F-2 - Form of Registration Rights Agreement
Exhibit G - Form of Mortgage
Exhibit H - Form of Blocked Account Agreement
Exhibit I - Form of Estoppel Letter
Exhibit J - Form of Assignment of Representations, Warranties,
Covenants and Indemnities
-vii-
<PAGE> 106
The following schedules and exhibits have been omitted from the Notes and
Warrant Purchase Agreement attached to this registration statement as
Exhibit 10.5.1
SCHEDULES
Number Title
- ------ -----
Schedule 4.4 - Capital Stock
Schedule 4.5B - Certain Changes
Schedule 4.5C - Projections
Schedule 4.5D - Pro Forma Balance Sheet
Schedule 4.5E - Sources and Uses of Funds
Schedule 4.6 - Subsidiaries
Schedule 4.7 - Litigation
Schedule 4.9 - Consents
Schedule 4.10A - Existing Indebtedness
Schedule 4.10B - Existing Investments
Schedule 4.11 - Real Property
Schedule 4.16 - Labor Matters
Schedule 4.17 - Environmental Matters
Schedule 4.19 - ERISA
Schedule 4.20 - Material Contracts
Schedule 4.21 - Insurance
Schedule 4.24 - Intellectual Property
Schedule 4.25 - Depositary Accounts
Schedule 4.29 - Related Party Transactions
Schedule 4.30 - Places of Business
Schedule 4.31 - Other Names
Schedule 4.36 - Licensing Interests
<PAGE> 107
Schedule 4.37 - Certification
Schedule 4.38 - Franchises
Schedule 4.40 - Advertising
Schedule 10.9 - Transactions with Affiliates
<PAGE> 108
EXHIBITS
Number Title
- ------ -----
Exhibit A-1 - Form of Revolving Note
Exhibit A-2 - Form of Term Note
Exhibit B - Form of Revolving Note Purchase Request
Exhibit C - Form of Guarantee
Exhibit D - Form of Security Agreement
Exhibit E - Form of Intellectual Property Security Agreement
Exhibit F-1 - Form of Warrant
Exhibit F-2 - Form of Registration Rights Agreement
Exhibit G - Form of Mortgage
Exhibit H - Form of Blocked Account Agreement
Exhibit I - Form of Estoppel Letter
Exhibit J - Form of Assignment of Representations, Warranties,
Covenants and Indemnities
The Registrant agrees to furnish supplementally a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request.
-2-
<PAGE> 1
EXHIBIT 10.5.2
EXHIBIT C TO THE NOTE AND WARRANT PURCHASE AGREEMENT
(Form of Guarantee)
GUARANTEE
THIS GUARANTEE, dated as of September [__], 1998 (as from time to
time amended, modified or supplemented in accordance with the terms hereof, this
"Guarantee"), is made and entered by EACH SIGNATORY HERETO (each individually,
together with its successors and assigns, a "Guarantor", and collectively, the
Guarantors"), in favor of NOMURA HOLDING AMERICA INC. (together with its
successors, assigns and transferees, the "Purchaser").
W I T N E S S E T H:
WHEREAS, pursuant to and subject to the terms and conditions of
that certain Note and Warrant Purchase Agreement dated as of September [__],
1998 (as amended, supplemented or otherwise modified from time to time, the
"Note Purchase Agreement"), by and among Easyriders, Inc., a Delaware
corporation (the "Parent"), Easyriders Sub II, Inc. (to be merged with and into
Paisano Publications, Inc.), a California corporation (the "Company"), and the
Purchaser, the Company issued and the Purchaser purchased the Notes (as defined
in the Note Purchase Agreement; capitalized terms used herein but not otherwise
defined in this Guarantee shall have the respective meanings given to such terms
in the Note Purchase Agreement);
WHEREAS, the Company is a member of an affiliated group of
companies that include each Guarantor;
WHEREAS, proceeds of the Notes shall confer, directly or
indirectly, an economic benefit on the Guarantors; and
WHEREAS, pursuant to the terms of the Note Purchase Agreement, each
Guarantor is required to enter into this Guarantee in favor of the Purchaser;
NOW, THEREFORE, in consideration of the premises, the Guarantors
hereby agree with the Purchaser as follows:
SECTION 1. THE GUARANTEE. The guarantee of each Guarantor hereunder
is as follows:
SECTION 1.1 Guarantee of Obligations. Each Guarantor hereby,
jointly and severally, unconditionally and irrevocably guarantees to the
Purchaser and its successors, endorsees, transferees and assigns, the prompt and
complete payment when
<PAGE> 2
due (whether at stated maturity, by acceleration or otherwise) and performance
of all of the Company's Obligations under, and as defined in, the Note Purchase
Agreement (the "Company Obligations"). Each Guarantor agrees that this Guarantee
is a guarantee of payment and performance and not of collection, and that its
obligations under this Guarantee shall be joint and several with any other
Persons which may at any time or from time to time be or become directly or
indirectly financially responsible to the Purchaser with respect to the Company
Obligations and shall be under all circumstances primary, absolute and
unconditional, irrespective of, and unaffected by:
(a) the genuineness, validity, regularity, enforceability or any
future amendment of, or change in this Guarantee, the Note Purchase Agreement,
any other Note Document or other agreement, document or instrument to which any
Credit Party or any Guarantor is or may become a party;
(b) the absence of any action to enforce this Guarantee, the Note
Purchase Agreement, any other Note Document or the waiver or consent by the
Purchaser with respect to any of the provisions hereof or thereof;
(c) the existence, value or condition of, or failure of the
Purchaser to perfect its Lien against, any security, if any, for the Company
Obligations or any action, or the absence of any action, by the Purchaser in
respect thereof (including, without limitation, the release of any such
security);
(d) any bankruptcy, insolvency, reorganization, arrangement,
adjustment, composition, liquidation or the like of any Credit Party or any
Guarantor, including, but not limited to, (i) the Purchaser's election, in any
proceeding instituted under Title 11 of the United States Code (11 U.S.C. 101 et
seq.), as amended, or any replacement or supplemental federal statutes dealing
with the bankruptcy of debtors (the "Bankruptcy Code"), of the application of
Section 1111(b)(2) of the Bankruptcy Code, (ii) any borrowing or grant of a
security interest by any Credit Party or any Guarantor as debtor-in-possession,
under Section 364 of the Bankruptcy Code, or (iii) the disallowance of all or
any portion of the claim(s) of the Purchaser for repayment of the Company
Obligations under Section 502 of the Bankruptcy Code;
(e) any merger or consolidation of any Credit Party or any
Guarantor into or with any other Person, or any sale, lease or transfer of any
or all of the assets of any Credit Party or any Guarantor to any other Person;
(f) any circumstance which might constitute a defense available to,
or a discharge of, any Credit Party or any Guarantor;
(g) absence of any notice to, or knowledge by, any Guarantor of the
existence or occurrence of any of the matters or events set forth in the
foregoing subdivisions (a) through (f);
(h) any sale, transfer or other disposition by any stockholder of
(or holder of an ownership interest in) any Guarantor of any stock of (or
ownership interest in) any Guarantor; or
-2-
<PAGE> 3
(i) any other fact or circumstance;
it being agreed by each Guarantor that its obligations under this Guarantee
shall not be discharged until the Company Obligations, including without
limitation, each class of Notes, have been indefeasibly paid in full and the
Purchaser has no obligation to purchase Notes under the Note Purchase Agreement
(the "Termination Date") or release in writing of such Guarantor by the
Purchaser of the Guarantor's obligations hereunder, whichever shall occur first.
Each Guarantor shall be regarded, and shall be in the same position, as
principal debtor with respect to the Company Obligations and specifically agrees
that, notwithstanding any discharge of any Credit Party or any other Person or
the operation of any other provision of the Bankruptcy Code with respect to the
Company Obligations or any such Persons, each Guarantor shall be fully
responsible for paying all interest and costs of enforcement which may at any
time accrue with respect to the Company Obligations or which would accrue but
for the operation of any provision of or doctrine with respect to the Bankruptcy
Code. Each Guarantor expressly waives all rights it may have now or in the
future under any Statute, Order, or at common law, or at law or in equity, or
otherwise, to compel the Purchaser to proceed in respect of the Company
Obligations against any Credit Party or any other Person or against any security
for the payment and performance of the Company Obligations before proceeding
against, or as a condition to proceeding against, such Guarantor. The Guarantors
agree that any notice or directive given at any time to the Purchaser which is
inconsistent with the waiver in the immediately preceding sentence shall be null
and void and may be ignored thereby, and, in addition, may not be pleaded or
introduced as evidence in any litigation relating to this Guarantee for the
reason that such pleading or introduction would be at variance with the written
terms of this Guarantee unless the Purchaser has specifically agreed otherwise
in writing. It is agreed between the Guarantors and the Purchaser that the
foregoing waivers are of the essence of the transaction contemplated by the Note
Purchase Agreement and the other Note Documents and that, but for this Guarantee
and such waivers, the Purchaser would not extend or continue to extend credit
under the Note Purchase Agreement or the Notes.
SECTION 1.2 Maximum Guaranteed Amount. Notwithstanding any other
provision of this Guarantee to the contrary, the obligations of each Guarantor
other than the Parent (each a "Subsidiary Guarantor" and, collectively, the
"Subsidiary Guarantors") under this Guarantor shall be limited to an amount not
to exceed as of any date of determination the greater of:
(a) the net amount of all proceeds of any Notes and other
extensions of credit under the Note Purchase Agreement and directly or
indirectly re-loaned or otherwise transferred to, or incurred for the benefit
of, such Subsidiary Guarantor, plus interest thereon at the applicable rate
specified in the Note Purchase Agreement;
(b) the amount of which could be claimed by the Purchaser from such
Subsidiary Guarantor under this Guarantee without rendering such claim voidable
or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any
applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance
Act or similar statute or common law after taking into account, among other
things, such
-3-
<PAGE> 4
Subsidiary Guarantor's right of contribution and indemnification from each other
Subsidiary Guarantor under Section 1.3 hereof.
SECTION 1.3 Contribution Rights.
(a) To the extent that any payment is made under this Guarantee (a
"Guarantor Payment"), by a Subsidiary Guarantor, which Guarantor Payment, taking
into account all other Guarantor Payments then previously or concurrently made
by all other Subsidiary Guarantors, exceeds the amount which such Subsidiary
Guarantor would otherwise have paid if each Subsidiary Guarantor had paid the
aggregate Company Obligations satisfied by such Guarantor Payment in the same
proportion that such Subsidiary Guarantor's Allocable Amount (as defined below)
(in effect immediately prior to such Guarantor Payment) bore to the aggregate
Allocable Amounts of all of the Subsidiary Guarantors in effect immediately
prior to the making of such Guarantor Payment, then, following the Termination
Date, such Subsidiary Guarantor shall be entitled to receive contribution and
indemnification payments from, and be reimbursed by, each of the other
Subsidiary Guarantors for the amount of such excess, pro rata based upon their
respective Allocable Amounts in effect immediately prior to such Guarantor
Payment.
(b) As of any date of determination, the "Allocable Amount" of any
Subsidiary Guarantor shall be equal to the maximum amount of the claim which
could then be recovered from such Subsidiary Guarantor under this Guarantee
without rendering such claim voidable or avoidable under Section 548 of Chapter
11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent
Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common
law.
(c) This Section 1.3 is intended only to define the relative rights
of the Subsidiary Guarantors and nothing set forth in this Section 1.3 is
intended to or shall impair the obligations of the Subsidiary Guarantors,
jointly and severally, to pay any amounts as and when the same shall become due
and payable in accordance with the terms of this Guarantee.
(d) The rights of the parties under this Section 1.3 shall be
exercisable upon the Termination Date.
(e) The parties hereto acknowledge that the right of contribution
and indemnification hereunder shall constitute assets of any Subsidiary
Guarantor to which such contribution and indemnification is owing.
SECTION 1.4 Demand by the Purchaser. In addition to the terms of
this Guarantee set forth in Section 1.1 hereof, it is expressly understood and
agreed that, if the then outstanding principal amount of the Company Obligations
(together with all accrued interest thereon) becomes due and payable, then the
Guarantors shall, upon demand in writing therefor by the Purchaser to the
Guarantors, pay to the Purchaser the outstanding Company Obligations due and
owing thereto. Payment by the Guarantors shall be made to the Purchaser, to be
credited and applied against the Company Obligations, in Dollars by wire
transfer or other immediately available funds to an account designated thereby
or
-4-
<PAGE> 5
at the Principal Office or at any other address that may be specified in writing
from time to time by the Purchaser.
SECTION 1.5 Enforcement of Guarantee. In no event shall the
Purchaser have any obligation (although it is entitled, at the option of the
Purchaser) to proceed against the Company or any other Person or any real or
personal property, if any, pledged to secure the Company Obligations before
seeking satisfaction from the Guarantors, and the Purchaser may proceed, prior
or subsequent to, or simultaneously with, the enforcement of any rights
hereunder of the Purchaser, to exercise any right or remedy which they or any of
them may have against any property, real or personal, as a result of any Lien
the Purchaser may have as security for all or any portion of the Company
Obligations.
SECTION 1.6 Waiver. In addition to the waivers contained in Section
1.1 hereof, the Guarantors waive, and agree that they shall not at any time
insist upon, plead or in any manner whatsoever claim or take the benefit or
advantage of, any appraisal, valuation, stay, extension, marshaling of assets or
redemption laws, or exemption, whether now or at any time hereafter in force,
which may delay, prevent or otherwise affect the performance by the Guarantors
of their obligations under, or the enforcement by the Purchaser of, this
Guarantee. The Guarantors hereby waive diligence, presentment and demand
(whether for nonpayment or protest or of acceptance, maturity, extension of
time, change in nature or form of the Company Obligations, acceptance of further
security, release of further security, composition or agreement arrived at as to
the amount of, or the terms of, the Company Obligations, notice of adverse
change in the Company's financial condition or any other fact which might
materially increase the risk to the Guarantors) with respect to any of the
Company Obligations or all other demands whatsoever and waive the benefit of all
provisions of law which are or might be in conflict with the terms of this
Guarantee. The Guarantors hereby waive any requirement on the part of the
Purchaser to mitigate the damages resulting from any default with respect to
such Company Obligations. The Guarantors, jointly and severally, represent,
warrant and agree that, as of the date of this Guarantee, their obligations
under this Guarantee are not subject to any offsets or defenses of any kind
against the Purchaser, the Company or any other Person that executes a Note
Document. The Guarantors further jointly and severally agree that their
obligations under this Guarantee shall not be subject to any counterclaims,
offsets or defenses of any kind which may arise in the future against the
Purchaser, the Company or any other Person that executes a Note Document.
SECTION 1.7 Benefit of Guarantee. The provisions of this Guarantee
are for the benefit of the Purchaser and its successors, transferees, endorsees
and assigns. In the event all or any part of the Company Obligations are
transferred, endorsed or assigned by the Purchaser, as the case may be, to any
Person or Persons in accordance with the terms of the Note Purchase Agreement,
any reference to the "Purchaser" herein, as the case may be, shall be deemed to
refer equally to such Person or Persons.
SECTION 1.8 Modification of Company Obligations. If the Purchaser
shall at any time or from time to time, with or without the consent of, or
notice to, the Guarantors:
-5-
<PAGE> 6
(a) change or extend the manner, place or terms of payment of, or
renew or alter all or any portion of, the Company Obligations;
(b) take any action under or in respect of the Note Purchase
Agreement or any other Note Document in the exercise of any remedy, power or
privilege contained therein or available to it at law, equity or otherwise, or
waive or refrain from exercising any such remedies, powers or privileges;
(c) amend or modify, in any manner whatsoever, the Note Purchase
Agreement or any other Note Document;
(d) extend or waive the time for and of any Guarantor's or any
other Person's performance of, or compliance with, any term, covenant or
agreement on its part to be performed or observed under the Note Purchase
Agreement or any other Note Document, or waive such performance or compliance or
consent to a failure of, or departure from, such performance or compliance;
(e) take and hold security or collateral for the payment of the
Company Obligations, or sell, exchange, release, dispose of, or otherwise deal
with, any property pledged, mortgaged or conveyed, or in which the Purchaser has
been granted a Lien, to secure any indebtedness of any Guarantor or any Credit
Party to the Purchaser;
(f) release or limit the liability of any Person who may be liable
in any manner for the payment of any amounts owed by any Guarantor or any Credit
Party to the Purchaser;
(g) modify or terminate the terms of any intercreditor or
subordination agreement pursuant to which claims of other creditors against any
Guarantor or any Credit Party are subordinated to the claims of the Purchaser;
and/or
(h) apply any sums by whomever paid or however realized to any
amounts owing by any Guarantor or any Credit Party to the Purchaser in such
manner as the Purchaser shall determine in its discretion;
then the Purchaser shall not incur any liability to the Guarantors pursuant
hereto as a result thereof and no such action shall impair or otherwise affect
or release the obligations of the Guarantors or any of them under this
Guarantee.
SECTION 1.9 Reinstatement. This Guarantee shall remain in full
force and effect and continue to be effective in the event any petition is filed
by or against the Company, any Guarantor or any of the Company's other
Affiliates for liquidation or reorganization, in the event that any of them
becomes insolvent or makes an assignment for the benefit of creditors or in the
event a receiver or trustee is appointed for all or any significant part of any
of their assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Company Obligations,
or any part thereof, is, pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by the Purchaser, whether as a
"voidable preference," "fraudulent conveyance," or otherwise, all as though such
payment or performance had
-6-
<PAGE> 7
not been made. In the event that any payment, or any part thereof, is rescinded,
reduced, restored or returned, the Company Obligations shall be reinstated and
deemed reduced only by such amount paid and not so rescinded, reduced, restored
or returned.
SECTION 1.10 No Subrogation Prior to Termination Date.
Notwithstanding any payment or payments made by any Guarantor hereunder, or any
set-off or application of funds of any Guarantor by the Purchaser, the
Guarantors shall not be entitled to be subrogated to any of the rights of the
Purchaser against the Company or against any collateral security or guaranty or
right of offset held by the Purchaser for the payment of the Company
Obligations, nor shall any Guarantor seek any reimbursement from the Company in
respect of payments made by such Guarantor hereunder, until the Termination
Date. If any amount shall be paid to any Guarantor on account of such
subrogation rights at any time prior to the Termination Date, such amount shall
be held by such Guarantor in trust for the Purchaser, segregated from other
funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be
turned over to the Purchaser in the exact form received by such Guarantor (duly
indorsed by such Guarantor to the Purchaser or as otherwise directed thereby, if
required), to be applied against the Company Obligations, whether matured or
unmatured, in the manner provided in the Note Purchase Agreement.
SECTION 1.11 Continuing Guarantee. This Guarantee is a continuing
guaranty and shall (i) remain in full force and effect until the Termination
Date, (ii) be binding upon the Guarantors and their successors and permitted
assigns, and (iii) inure, together with the rights and remedies of the Purchaser
hereunder, to the benefit thereof and their successors, transferees and assigns.
SECTION 2. DELIVERIES. In a form satisfactory to the Purchaser,
each Guarantor shall deliver to the Purchaser, concurrently with the execution
of this Guarantee, such Note Documents, if any, and other instruments,
certificates and documents as are required to be delivered by the Guarantors to
the Purchaser under the Note Purchase Agreement and the other Note Documents.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Each
Guarantor, jointly and severally, hereby makes all representations and
warranties, and agrees to comply with all of the obligations, requirements and
restrictions in the representations, warranties and covenants contained in the
Note Purchase Agreement and the other Note Documents, to the extent such
obligations, requirements and restrictions are applicable to such Guarantor.
(b) Each Guarantor, jointly and severally, further represents and
warrants to the Purchaser that: (i) such Guarantor is a corporation, partnership
and/or limited liability company duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; (ii) the execution,
delivery and performance by such Guarantor of this Guarantee are within such
Guarantor's organizational powers, have been duly authorized by all necessary
organizational action, require no action by or in respect of, or filing with,
any Governmental Body, do not contravene, or constitute a default under, any
provision of applicable law or regulation or of the organization or internal
governance documents of such Guarantor or of any agreement, judgment,
injunction,
-7-
<PAGE> 8
order, decree or other instrument binding upon the Guarantor and will not result
in the creation or imposition of any Lien on any asset of such Guarantor; and
(iii) this Guarantee has been duly authorized, executed and delivered by such
Guarantor and constitutes a legal, valid and binding obligation of such
Guarantor, enforceable against such Guarantor in accordance with its terms,
except as such enforceability may be limited by the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general principles of equity.
SECTION 4. FURTHER ASSURANCES; ADDITIONAL GUARANTORS. (a) Each
Guarantor agrees, upon the request of the Purchaser, and at the Guarantor's
expense, to execute and deliver to the Purchaser, from time to time, any
additional instruments or documents considered necessary by the Purchaser to
cause this Guarantee to be, become or remain valid and effective in accordance
with its terms.
(b) The initial Guarantors hereunder shall be the Parent and those
Subsidiaries of the Parent (other than the Company) as are signatories hereto on
the date hereof. From time to time subsequent to the date hereof, additional
Subsidiaries of the Parent may become parties hereto, as additional Guarantors
(each, an "Additional Guarantor"), by executing a counterpart of this Agreement
substantially in the form of Appendix I attached hereto. Upon delivery of any
such counterpart to the Purchaser, notice of which is hereby waived by the
Guarantors, each Additional Guarantor shall be a Guarantor and shall be as fully
a party hereto as if such Additional Guarantor were an original signatory
hereto. Each Guarantor expressly agrees that its obligations arising hereunder
shall not be affected or diminished by the addition or release of any other
Guarantor hereunder nor by any election of the Purchaser not to cause any
Subsidiary of the Parent to become an Additional Guarantor hereunder. This
Agreement shall be fully effective as to any Guarantor that is or becomes a
party hereto regardless of whether any other Person becomes or fails to become
or ceases to be a Guarantor hereunder.
SECTION 5. PAYMENTS FREE AND CLEAR OF TAXES. Any and all payments
by the Guarantors to or for the benefit of the Purchaser shall be made free and
clear of and without deduction or withholding for or on account of any present
or future Taxes to the same extent as provided for payments under the Note
Purchase Agreement or the Notes pursuant to Section 3.6 of the Note Purchase
Agreement.
SECTION 6. MISCELLANEOUS PROVISIONS.
SECTION 6.1 Amendments. Any amendment or waiver of any provision of
this Guarantee and any consent to any departure by any Guarantor from any
provision of this Guarantee, shall be effective only if made pursuant to a
written instrument executed by each Guarantor and the Purchaser (or, if a waiver
or a consent, a written letter or agreement executed thereby).
SECTION 6.2 Headings. The headings in this Guarantee are for
purposes of reference only and shall not otherwise affect the meaning or
construction or any provision of this Guarantee.
-8-
<PAGE> 9
SECTION 6.3 Severability. The provisions of this Guarantee are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction, or any other clause or provision of this
Guarantee in any jurisdiction.
SECTION 6.4 Notices. All notices hereunder shall be in writing and
shall be conclusively deemed to have been received and shall be effective (a) on
the day on which delivered if delivered personally or transmitted by telecopier,
(b) one Business Day after the date on which the same is delivered to a
nationally recognized overnight courier service, or (c) three Business Days
after being sent by registered or certified United States mail, return receipt
requested, and shall be addressed, in the case of the Guarantors, to c/o Paisano
Publications, Inc., 28210 Dorothy Drive, Agoura Hills, California 91301,
attention: President, telecopier no.: (818) 889-4726 or, in the case of the
Purchaser, to its address set forth in Section 14.5 of the Note Purchase
Agreement or as otherwise indicated in writing by the Purchaser.
SECTION 6.5 Remedies Cumulative. Each right, power and remedy of
the Purchaser provided in this Guarantee or now or hereafter existing at law or
in equity or by Statute, Order or otherwise shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Guarantee or now or hereafter existing at law or in equity or by Statute,
Order or otherwise. The exercise or partial exercise by the Purchaser of any one
or more of such rights, powers or remedies shall not preclude the simultaneous
or later exercise thereby of all such other rights, powers or remedies, and no
failure or delay on the part of the Purchaser to exercise any such right, power
or remedy shall operate as a waiver thereof.
SECTION 6.6 Statute of Limitations. To the full extent permitted by
applicable law, each Guarantor hereby waives the right to plead any statute of
limitations as a defense to performance of its obligations under, or enforcement
of, this Guarantee.
SECTION 6.7 Final Expression. This Guarantee, together with any
other agreement executed in connection herewith, is intended by the parties as a
final expression of this Guarantee and is intended as a complete and exclusive
statement of the terms and conditions hereof. Acceptance of or acquiescence in a
course of performance rendered under this Guarantee shall not be relevant to
determine the meaning of this Guarantee even though the accepting or acquiescing
party had knowledge of the nature of the performance and opportunity for
objection.
SECTION 6.8 Financial Status. Each Guarantor hereby assumes
responsibility for keeping itself informed of the financial condition of the
Company and any and all endorsers and/or other Guarantors of any instrument or
document evidencing all or any part of the Company Obligations and of all other
circumstances bearing upon the risk of nonpayment or nonperformance of the
Company Obligations or any part thereof that diligent inquiry would reveal, and
each Guarantor, jointly and severally, hereby agrees that the Purchaser shall
not have any duty to advise the Guarantors of information known thereto
regarding such condition or any such circumstances. In the
-9-
<PAGE> 10
event the Purchaser, in its sole discretion, undertakes at any time or from time
to time to provide any such information to the undersigned, it shall be under no
obligation to (i) undertake any investigation not a part of its regular business
routine, (ii) disclose any information which, pursuant to accepted or reasonable
commercial lending practices, the Purchaser wishes to maintain confidential, or
(iii) make any other or future disclosures of such information or any other
information to the Guarantors.
SECTION 6.9 Assignability. This Guarantee shall be binding on each
Guarantor and its successors and permitted assigns and shall inure to the
benefit of the successors, transferees and assigns of the Purchaser. No
Guarantor may assign this Guarantee without the prior written consent of the
Purchaser.
SECTION 6.10 Non-Waiver. The failure of the Purchaser to enforce
any right or remedy hereunder, or promptly to enforce any such right or remedy,
shall not constitute a waiver thereof, nor give rise to any estoppel against the
Purchaser, nor excuse any Guarantor from its obligations hereunder.
SECTION 6.11 GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 6.12 SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND
VENUE. (a) EACH GUARANTOR CONSENTS AND AGREES TO THE JURISDICTION OF ANY STATE
OR FEDERAL COURT SITTING IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, WAIVES
ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION
INSTITUTED THEREIN, AND AGREES THAT, EXCEPT UPON THE WRITTEN CONSENT OF THE
PURCHASER, ANY DISPUTE CONCERNING THE RELATIONSHIP BETWEEN THE PURCHASER, ON THE
ONE HAND, AND ANY GUARANTOR, ON THE OTHER HAND, OR THE CONDUCT OF ANY PARTY IN
CONNECTION WITH THIS GUARANTEE, ANY OTHER NOTE DOCUMENT OR OTHERWISE, SHALL BE
HEARD ONLY IN THE COURTS DESCRIBED ABOVE.
(b) EACH GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY
HAND DELIVERY TO THE GUARANTOR AT THE ADDRESS SET FORTH ABOVE, OR, AT THE OPTION
OF THE PURCHASER, BY SERVICE UPON CT CORPORATION, WHICH EACH GUARANTOR
IRREVOCABLY APPOINTS AS ITS AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF
PROCESS WITHIN THE STATE OF NEW YORK. IN ADDITION, THE PURCHASER, BY ITS
ACCEPTANCE OF THIS GUARANTEE, AGREES THAT IT SHALL PROMPTLY FORWARD BY
REGISTERED MAIL ANY PROCESS SO SERVED UPON SAID AGENT TO THE GUARANTOR AT THE
ADDRESS SET FORTH ABOVE. EACH GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS AS
AFORESAID.
-10-
<PAGE> 11
(c) NOTHING IN THIS SECTION 6.12 SHALL AFFECT THE RIGHT OF THE
PURCHASER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST ANY
GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
SECTION 6.13 WAIVER OF RIGHT TO TRIAL BY JURY. EACH OF THE
GUARANTORS AND THE PURCHASER BY ITS ACCEPTANCE OF THIS GUARANTEE HEREBY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (I)
ARISING UNDER THIS GUARANTEE, ANY NOTE, ANY OTHER NOTE DOCUMENT, OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
OR THEREWITH OR (II) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO THIS GUARANTEE, ANY
NOTE, ANY OTHER NOTE DOCUMENT, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE GUARANTORS AND THE
PURCHASER BY ACCEPTANCE OF THIS GUARANTEE HEREBY AGREE AND CONSENT THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
GUARANTEE WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHTS TO TRIAL BY JURY.
SECTION 6.14 ACKNOWLEDGMENTS. EACH GUARANTOR HEREBY ACKNOWLEDGES
THAT:
(a) IT HAS BEEN ADVISED BY COUNSEL IN THE NEGOTIATION, EXECUTION
AND DELIVERY OF THIS GUARANTEE;
(b) THE PURCHASER DOES NOT HAVE ANY FIDUCIARY RELATIONSHIP TO THE
GUARANTORS, AND THE RELATIONSHIP BETWEEN THE PURCHASER, ON THE ONE HAND, AND THE
GUARANTORS, ON THE OTHER HAND, IS SOLELY THAT OF CREDITOR AND DEBTOR,
RESPECTIVELY; AND
(c) NO JOINT VENTURE EXISTS AMONG THE GUARANTORS AND THE PURCHASER.
SECTION 6.15 DATING. Although this Guarantee is dated as of the
date first written above for convenience this Agreement shall be effective on
September [__], 1998.
-11-
<PAGE> 12
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-12-
<PAGE> 13
IN WITNESS WHEREOF, each Guarantor has caused this Guarantee to be
duly executed and delivered by its authorized officer as of the date first above
written.
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
<PAGE> 14
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
<PAGE> 15
APPENDIX I
TO
GUARANTEE
COUNTERPART TO GUARANTEE
This counterpart, dated _________, [199__][200__], is delivered
pursuant to Section 4(b) of that certain Guarantee dated as of September [__],
1998 (as from time to time amended, modified or supplemented, the "Guarantee";
the terms defined therein and not otherwise defined herein being used as therein
defined), made by Easyriders, Inc. and certain of its Subsidiaries party thereto
in favor of Nomura Holding America Inc. The undersigned hereby agrees (i) that
this counterpart may be attached to the Guarantee, and (ii) that the undersigned
shall be a Guarantor under the Guarantee and shall fully comply with all the
terms and conditions of the Guarantee as if it were an original signatory
thereto.
[NAME OF ADDITIONAL GUARANTOR]
By:
------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.5.3.
EXHIBIT D TO NOTE AND WARRANT PURCHASE AGREEMENT
(Form of Security Agreement)
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT, dated as of September
[__], 1998 (as from time to time amended, modified or supplemented in accordance
with the terms hereof, this "Agreement"), is made and entered into by and among
EACH SIGNATORY HERETO (together with their successors and assigns, collectively,
the "Grantors" and individually, a "Grantor"), as debtors, and NOMURA HOLDING
AMERICA INC. (together with its successors, assigns and transferees, the
"Purchaser"), as secured party.
W I T N E S S E T H
WHEREAS, pursuant to the Note and Warrant Purchase Agreement
dated as of the date hereof (as from time to time amended, modified or
supplemented in accordance with the terms thereof, the "Note Purchase
Agreement"), by and among Easyriders, Inc., a Delaware corporation (the
"Parent"), Easyriders Sub II, Inc. (to be merged with and into Paisano
Publications, Inc.), a California corporation (the "Company"), and the
Purchaser, the Purchaser has agreed to purchase the Notes of the Company
referred to in the Note Purchase Agreement upon the terms and subject to the
conditions set forth therein;
WHEREAS, the Grantors (other than the Company) have executed
and delivered to the Purchaser a Guarantee dated as of the date hereof (as from
time to time amended, modified or supplemented in accordance with the terms
thereof, the "Guarantee"), pursuant to which such Grantors have guaranteed the
Obligations of the Company under, and as defined in, the Note Purchase
Agreement; and
WHEREAS, it is a condition precedent to the obligation of the
Purchaser to purchase, and to continue to purchase, the Notes and to extend
credit under the Note Purchase Agreement that the Grantors shall have executed
and delivered this Agreement to pledge and grant to the Purchaser a security
interest in all of the Grantors' personal property (other than the Grantors'
intellectual property) as collateral security for the Secured Obligations (as
defined below);
NOW, THEREFORE, in consideration of the premises set forth
above and to induce the Purchaser to purchase, and to continue to purchase, the
Notes and to extend credit thereunder and under the Note Purchase Agreement, the
Grantors hereby agree with the Purchaser as follows:
<PAGE> 2
Section 1. Defined Terms.
1.1 Note Purchase Agreement Definitions. Unless otherwise
defined herein, terms defined (or defined by reference) in the Note Purchase
Agreement, as applicable, and used herein shall have the meanings given to them
in such other agreement, including, without limitation, the terms "Accounts,"
"Inventory", "Obligations" and "Permitted Liens".
1.2 UCC Definitions. The following terms which are defined in
the Uniform Commercial Code in effect in the State of New York on the date
hereof are used herein as so defined: "Chattel Paper", "Documents", "Equipment",
"Farm Products", "General Intangibles" and "Instruments".
1.3 Other Definitions. The following terms shall have the
following meanings:
"Agreement" has the meaning specified in the Preamble.
"Code" means the Uniform Commercial Code as from time to time
in effect in the State of New York.
"Collateral" has the meaning specified in Section 2 of this
Agreement.
"Collateral Account" has the meaning specified in Section
5.3(a) of this Agreement.
"Contracts" means all the contracts (including without
limitation the Material Contracts), undertakings, or agreements (other than
rights evidenced by Chattel Paper, Documents or Instruments) in or under which
any Grantor may now or hereafter have any right, title or interest, including
without limitation, (a) all rights of the Grantors to receive moneys due and to
become due to it thereunder or in connection therewith, (b) all rights of the
Grantors to damages arising out of or for breach or default in respect thereof
and (c) all rights of the Grantors to exercise all remedies thereunder.
"Grantor" and "Grantors" have the meanings specified in the
Preamble.
"Indebtedness Collateral" means:
(a) the Pledged Indebtedness and all Proceeds thereof; and
(b) whether or not otherwise constituting Proceeds, all rights
and privileges of the Grantors with respect to the Pledged Indebtedness, all
securities, moneys or property representing a payment or distribution upon or in
respect of the Pledged Indebtedness, or received in exchange therefor.
-2-
<PAGE> 3
"Investment Property" has the meaning ascribed thereto in
Section 9-115 of the Code in those jurisdictions in which such definition has
been adopted and shall include (i) all securities, whether certificated or
uncertificated, including stocks, bonds, interests in limited liability
companies, partnership interests, treasuries, certificates of deposit, and
mutual fund shares; (ii) all securities entitlements of any Grantor, including
the rights of any Grantor to any securities account and the financial assets
held by a securities intermediary in such securities account and any free credit
balance or other money owing by any securities intermediary with respect to that
account; (iii) all securities accounts held by any Grantor; (iv) all commodity
contracts held by any Grantor; and (v) all commodity accounts held by any
Grantor.
"Issuers" means the issuers of the Pledged Stock or Pledged
Indebtedness.
"Material Contract" means the contracts and agreements listed
in Annex A attached hereto, as the same may be amended, modified or otherwise
supplemented from time to time.
"Pledged Indebtedness" means the Indebtedness evidenced by
promissory notes and Instruments in which any Grantor holds an interest from
time to time, as listed in Annex B hereto (as the same may be amended, modified
or supplemented in accordance with Section 7.2(c) of this Agreement).
"Pledged Stock" means the shares of, or interests,
participations or other equivalents of or interests in, Capital Stock in which
any Grantor holds an interest from time to time, as listed in Annex B hereto (as
the same may be amended, modified or supplemented in accordance with Section
7.2(c) of this Agreement).
"Proceeds" means all "proceeds" and "products" as defined in
the Code and includes, without limitation and whether or not the following
constitute proceeds under the Code, (i) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Grantor from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable to any Grantor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Body (or any
Person acting under color of Governmental Body), (iii) all dividends and
distributions from the Pledged Stock and all principal, interest and other
income from any Instruments pledged hereunder, and (iv) any and all other
amounts from time to time paid or payable to any Grantor upon the sale,
exchange, collection or other disposition of, or under or in connection with,
any part of the Collateral.
"Secured Obligations" means, collectively, (i) in the case of
the Company, all of its Obligations under the Note Purchase Agreement and (ii)
in the case of the other Grantors, all of their obligations under the Guarantee.
"Stock Collateral" means:
(a) the Pledged Stock and all Proceeds thereof;
-3-
<PAGE> 4
(b) whether or not otherwise constituting Proceeds, all rights
and privileges of the Grantors with respect to the Pledged Stock, all shares,
securities, moneys or property representing a distribution or return of capital
upon or in respect of the Pledged Stock, or resulting from a split-up, revision,
reclassification or other like change of the Pledged Stock or otherwise received
in exchange therefor, and any subscription warrants, rights or options issued to
the holders of, or otherwise in respect of, the Pledged Stock; and
(c) without affecting the obligations of the Grantors under
any provision prohibiting such action hereunder or in any other documents, in
the event of any consolidation or merger of an Issuer in which such Issuer is
not the surviving corporation, all shares of each class of the capital stock of
the successor corporation formed by or resulting from such consolidation or
merger.
1.4 Miscellaneous Definitional Provisions. The words "hereof,"
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and section and paragraph references are to this Agreement
unless otherwise specified.
1.5 Singular and Plural Form. The meanings given to terms
defined herein shall be equally applicable to both the singular and plural forms
of such terms.
1.6 Annexes. All references to Annexes to this Agreement
include such Annexes as amended, modified or supplemented pursuant to the terms
of this Agreement.
Section 2. Grant of Security Interest.
2.1 Collateral. As collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Secured Obligations, the Grantors hereby
jointly and severally pledge and grant to the Purchaser a security interest in
all of the following property now owned or at any time hereafter acquired or
created by any Grantor or in which any Grantor now has or at any time in the
future may acquire or create any right, title or interest (collectively, the
"Collateral"):
(a) all Accounts;
(b) all Chattel Paper;
(c) all Contracts;
(d) all Documents;
(e) all Equipment;
(f) all General Intangibles;
-4-
<PAGE> 5
(g) all Instruments;
(h) all Inventory;
(i) all Investment Property and other Stock Collateral;
(j) all Pledged Indebtedness and other Indebtedness
Collateral;
(k) all bank accounts (and all checks, drafts and other orders
of payments and all funds on deposit therein) and all investment accounts (and
all shares, participations, interests, obligations or other securities, whether
certificated or uncertificated, and all other investments maintained therein);
(l) cash, other moneys, and all other tangible and intangible
Property of the Grantors;
(m) all books and records pertaining to the foregoing,
including, without limitation, all diskettes and other magnetic media,
correspondence, credit files, records, invoices and other papers, including
without limitation all tapes, cards, computer runs and other papers and
documents in the possession or under the control of any Grantor or any computer
bureau or service company from time to time acting for any Grantor; and
(n) to the extent not otherwise included, all Proceeds of any
and all of the foregoing.
Notwithstanding anything to the contrary set forth above, the types or items of
Collateral described above shall not include any rights or interests in any
Contract, if under the terms of such Contract, the valid grant of a security
interest or Lien therein to the Purchaser is prohibited and such prohibition has
not been or is not waived or the consent of the other party to such Contract has
not been or is not otherwise obtained; provided that (i) the foregoing exclusion
shall in no way be construed so as to limit, impair or otherwise affect the
Purchaser's unconditional continuing security interests in and Liens upon any
rights or interests of any Grantor in or to moneys due or to become due under
any such Contract, (ii) the foregoing exclusion shall not apply with respect to
any such Contract once any such applicable prohibition is no longer in effect
and (iii) no Grantor shall on or after the Closing Date enter into any Contract
containing any such prohibition, which are, either individually or in the
aggregate, material to the operation of such Grantor's business.
Section 3. Representations and Warranties. Each Grantor,
jointly and severally, hereby represents and warrants that:
3.1 Title; No Other Liens. Except for the security interest
granted to the Purchaser pursuant to this Agreement and the other Liens
permitted to exist on the Collateral pursuant to the Note Purchase Agreement,
each Grantor owns each item of the Collateral upon which it purports to grant a
Lien hereunder, free and clear of any and all
-5-
<PAGE> 6
Liens or claims of others. No security agreement, financing statement or other
public notice with respect to all or any part of the Collateral is on file or of
record in any public office, except such as have been filed in favor of the
Purchaser pursuant to this Agreement or as are permitted pursuant to the Note
Purchase Agreement.
3.2 Perfected First Priority Liens. The security interests
granted pursuant to this Agreement (a) upon completion of the filings and other
actions specified on Annex C attached hereto will constitute a first priority,
perfected security interests in the Collateral in favor of the Purchaser,
subject to no Liens other than Permitted Liens, (b) are prior to all other Liens
on the Collateral in existence on the date of this Agreement except for
Permitted Liens which are specifically noted on Schedule 4.10A to the Note
Purchase Agreement as being prior to the Liens created hereunder and (c) are
enforceable as such against all creditors of and purchasers from the Grantors,
except purchasers of Inventory in the ordinary course of business, except as
enforceability may be affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, and general equitable principles (whether
considered in a proceeding in equity or at law).
3.3 Inventory and Equipment. The Inventory and the Equipment
of the Grantors are kept at the Inventory and Equipment locations identified
pursuant to Sections 4.30 and 10.16 of the Note Purchase Agreement.
3.4 Chief Executive Office. Each Grantor's chief executive
office and chief place of business, and the place where each Grantor keeps its
records concerning its Accounts, is located at the office identified pursuant to
Sections 4.30 and 10.16 of the Note Purchase Agreement.
3.5 Farm Products. None of the Collateral constitutes, or is
the Proceeds of, Farm Products.
Section 4. Covenants. Each Grantor, jointly and severally,
covenants and agrees with the Purchaser that from and after the date of this
Agreement until this Agreement is terminated and the security interests created
hereby are released:
4.1 Delivery of Instruments and Chattel Paper. If any amount
payable to a Grantor by any other Person, whether under or in connection with
any of the Collateral, pursuant to Section 4.10 hereof, or otherwise, shall be
or become evidenced by any Instrument or Chattel Paper, such Instrument or
Chattel Paper shall be immediately delivered to the Purchaser, duly endorsed in
a manner satisfactory to the Purchaser, to be held as Collateral pursuant to
this Agreement; provided, that so long as no Event of Default shall have
occurred and be continuing, a Grantor may retain for collection in the ordinary
course any Instruments received by such Grantor in the ordinary course of
business in satisfaction of trade payables evidencing loans to employees, and
the Purchaser shall, promptly upon the request of such Grantor, make appropriate
arrangements for making any other Instrument pledged by such Grantor available
to such Grantor for purposes of presentation, collection or renewal (any such
arrangement to be
-6-
<PAGE> 7
effected, to the extent deemed appropriate by the Purchaser, against trust
receipt or like document).
4.2 Marking of Records. Each Grantor will mark its books and
records pertaining to the Collateral to evidence this Agreement and the security
interests created hereby.
4.3 Maintenance of Insurance. Each Grantor will maintain
insurance policies (i) insuring the Inventory, Equipment and other Collateral of
such Grantor, and (ii) insuring such Grantor and the Purchaser against liability
for personal injury and property damage relating to such Inventory, Equipment
and other Collateral, in each case, as and to the extent provided in Section 9.4
of the Note Purchase Agreement.
4.4 Payment of Taxes, etc. The Grantors will pay and discharge
or otherwise satisfy at or before maturity or before they become delinquent, as
the case may be, all taxes, assessments and governmental charges or levies
imposed upon the Collateral as and to the extent provided in Section 9.2 of the
Note Purchase Agreement.
4.5 Maintenance of Perfected Security Interest; Further
Assurances; Additional Grantors.
(a) The Grantors shall maintain the security interest created
by this Agreement as a first priority, perfected security interest subject only
to Permitted Liens and shall defend such security interest against claims and
demands of all Persons whomsoever.
(b) At any time and from time to time, upon the written
request of the Purchaser and at the sole expense of the Grantors, the Grantors
will promptly and duly execute and deliver such further instruments and
documents and take such further action as the Purchaser may reasonably request
for the purpose of effectuating the transactions contemplated by the Note
Purchase Agreement and obtaining and preserving the full benefits of this
Agreement and of the rights and powers herein granted, including, without
limitation, the recording, filing and registration of any financing or
continuation statements under the Uniform Commercial Code in effect in any
jurisdiction with respect to the security interests created hereby. The Grantors
shall furnish reasonably satisfactory evidence to the Purchaser of every such
recording, filing and registration filed by the Grantors.
(c) Pursuant to Section 9-402 of the Code, the Grantors
authorize the Purchaser to file financing statements with respect to the
Collateral without the signature of the Grantors in such form and in such filing
offices as the Purchaser reasonably determines appropriate to perfect the
security interest of the Purchaser under this Agreement. A carbon, photographic
or other reproduction of this Agreement shall be sufficient as a financing
statement for filing in any jurisdiction. The Purchaser will provide the
Grantors with a copy of each such filing filed by the Purchaser; provided that
the failure to furnish the Grantors with any such copy shall not relieve the
Grantors of any of their obligations hereunder or subject the Purchaser to any
liability.
-7-
<PAGE> 8
(d) The initial Grantors hereunder shall be the Parent and
those Subsidiaries of the Parent as are signatories hereto on the date hereof.
From time to time subsequent to the date hereof, additional Subsidiaries of the
Parent may become parties hereto, as additional Grantors (each, an "Additional
Grantor"), by executing a counterpart of this Agreement substantially in the
form of Appendix II attached hereto. Upon delivery of any such counterpart to
the Purchaser, notice of which is hereby waived by the Grantors, each Additional
Grantor shall be a Grantor and shall be as fully a party hereto as if such
Additional Grantor were an original signatory hereto. Each Grantor expressly
agrees that its obligations arising hereunder shall not be affected or
diminished by the addition or release of any other Grantor hereunder nor by any
election of the Purchaser not to cause any Subsidiary of the Parent to become an
Additional Grantor hereunder. This Agreement shall be fully effective as to any
Grantor that is or becomes a party hereto regardless of whether any other Person
becomes or fails to become or ceases to be a Grantor hereunder. Each Additional
Grantor shall execute and file such financing statements and such other
instruments or notices or as the Purchaser may reasonably request, in order to
perfect the security interests granted or purported to granted hereunder.
4.6 Changes in Locations, Name, etc. No Grantor will:
(a) permit any of the Inventory or Equipment to be kept at a
location other than those identified pursuant to Sections 4.30 and 10.16 of the
Note Purchase Agreement; or
(b) change the location of its chief executive office and
chief place of business, or remove its books and records concerning the
Accounts, from that identified pursuant to Sections 4.30 and 10.16 of the Note
Purchase Agreement; or
(c) change its name, identity or corporate structure to such
an extent that any financing statement filed by the Purchaser in connection with
this Agreement would become seriously misleading, unless it shall have given the
Purchaser prior written notice of such change pursuant to Section 10.16 of the
Note Purchase Agreement.
4.7 Further Identification of Collateral. The Grantors will
furnish to the Purchaser from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Purchaser may reasonably request, all in reasonable
detail.
4.8 Notices. The Grantors will advise the Purchaser promptly,
in reasonable detail, of:
(a) any Lien (other than Permitted Liens) on, or claim
asserted against, any of the Collateral; and
(b) of the occurrence of any other event which could
reasonably be expected to have a material adverse effect on the aggregate value
of the Collateral or on the security interest created hereby.
- 8 -
<PAGE> 9
4.9 Indemnification. The Grantors, jointly and severally,
agree to pay, and to save the Purchaser harmless from, any and all liabilities,
costs and reasonable expenses (including, without limitation, legal fees and
expenses) (a) with respect to, or resulting from any failure or delay in paying,
any and all excise, sales, stamp or other taxes which may be payable or
determined to be payable with respect to any of the Collateral and (b) with
respect to, or resulting from, any failure or delay in complying with any
Statute or Order of any Governmental Body, applicable to any of the Collateral.
4.10 Intercompany Advances. At the request of the Purchaser
and without limiting any provision of the Note Purchase Agreement or any other
provision hereof, each Grantor shall cause all outstanding loans and advances
made by such Grantor to any Subsidiary or Affiliate of such Grantor to be
evidenced by an Instrument and all such Instruments to be pledged and delivered
to the Purchaser not later than ten (10) Business Days following any such
request.
4.11 Provisions Relating to Inventory. The Grantors, jointly
and severally, agree that all Inventory manufactured or processed by the
Grantors will be manufactured and processed in accordance with the Federal Fair
Labor Standards Act of 1938, as amended, and all rules, regulations, and orders
thereunder.
Section 5. Provisions Relating to Accounts.
5.1 The Grantor to Remain Liable under Accounts. Anything
herein to the contrary notwithstanding, each Grantor shall remain liable under
each of the Accounts now owned or hereafter acquired by it to observe and
perform all the conditions and obligations to be observed and performed by it
thereunder, all in accordance with the terms of any agreement giving rise to
each such Account. The Purchaser shall have no obligation or liability under any
such Account (or any agreement giving rise thereto) by reason of or arising out
of this Agreement or the receipt by the Purchaser of any payment relating to
such Account pursuant hereto, nor shall the Purchaser be obligated in any manner
to perform any of the obligations of any Grantor under or pursuant to any such
Account (or any agreement giving rise thereto), to make any payment, to make any
inquiry as to the nature or the sufficiency of any payment received by it or as
to the sufficiency of any performance by any party under any Account (or any
agreement giving rise thereto), to present or file any claim, to take any action
to enforce any performance or to collect the payment of any amounts which may
have been assigned to it or to which it may be entitled at any time or times.
5.2 Analysis of Accounts. The Purchaser shall have the right
after consultation with a Grantor but with or without such Grantor's consent to
make test verifications of the Accounts now owned and hereafter acquired by such
Grantor in any manner and through any medium that it reasonably considers
advisable, and such Grantor shall furnish all such assistance and information as
the Purchaser may reasonably require in connection with such test verifications.
At any time and from time to time, upon the Purchaser's request and at the
expense of such Grantor, such Grantor shall cause independent public accountants
or others satisfactory to the Purchaser to furnish to the Purchaser reports
showing reconciliations, aging and test verifications of, and trial
- 9 -
<PAGE> 10
balances for, such Accounts. After consultation with a Grantor but with or
without such Grantor's consent, the Purchaser in its own name or in the name of
others may communicate with account debtors on the Accounts to verify with them,
to the Purchaser's satisfaction, the existence, amount and terms of any such
Accounts.
5.3 Collections on Accounts. (a) The Purchaser hereby
authorizes each Grantor to collect the Accounts now owned and hereafter acquired
by such Grantor, and the Purchaser may curtail or terminate said authority or
direct and control collections by such Grantor at any time after the occurrence
and during the continuance of a Default or Event of Default. If required by the
Purchaser at any time after the occurrence and during the continuance of a
Default or Event of Default, any payments of such Accounts, when collected by
such Grantor, (i) shall be forthwith (and, in any event, within two Business
Days) deposited by the Grantor in the exact form received, duly endorsed by the
Grantor to the Purchaser if required, in an account of the Purchaser maintained
by the Purchaser in a depositary institution selected by the Purchaser and under
the Purchaser's sole dominion and control (each a "Collateral Account"), and
(ii) until so turned over, shall be held by the Grantor in trust for the
Purchaser, segregated from other funds of the Grantor.
(b) Each such deposit of Proceeds of Accounts shall be
accompanied by a report identifying in reasonable detail the nature and source
of the payments included in the deposit.
(c) At the Purchaser's request, the Grantors shall deliver to
the Purchaser all original and other documents evidencing, and relating to, the
agreements and transactions which gave rise to the Accounts, including, without
limitation, all original orders, invoices and shipping receipts.
5.4 Representations and Warranties. No amount payable to any
Grantor under or in connection with any Account is evidenced by any Instrument
or Chattel Paper which has not been delivered to the Purchaser.
5.5 Covenants. (a) The amount represented by each Grantor to
the Purchaser as owing by each account debtor or by all account debtors in
respect of the Accounts as of any date shall be the correct amount actually
owing by such account debtor or debtors thereunder as of such date.
(b) Other than in the ordinary course of business as generally
conducted by each Grantor consistent with past and commercially reasonable
practices, each Grantor will not grant any extension of the time of payment of
any of the Accounts, compromise, compound or settle the same for less than the
full amount thereof, release, wholly or partially, any Person liable for the
payment thereof, or allow any credit or discount whatsoever thereon.
- 10 -
<PAGE> 11
Section 6. Provisions Relating to Contracts.
6.1 Each Grantor to Remain Liable under Contracts. Anything
herein to the contrary notwithstanding, each Grantor shall remain liable under
each of the Contracts to which it is a party to observe and perform all the
conditions and obligations to be observed and performed by it thereunder, all in
accordance with and pursuant to the terms and provisions of each such Contract.
The Purchaser shall have no obligation or liability under any Contract by reason
of or arising out of this Agreement or the receipt by the Purchaser of any
payment relating to such Contract pursuant hereto, nor shall the Purchaser be
obligated in any manner to perform any of the obligations of any Grantor under
or pursuant to any Contract, to make any payment, to make any inquiry as to the
nature or the sufficiency of any payment received by it or as to the sufficiency
of any performance by any party under any Contract, to present or file any
claim, to take any action to enforce any performance or to collect the payment
of any amounts which may have been assigned to it or to which it may be entitled
at any time or times.
6.2 Communication With Contracting Parties. After consultation
with the Grantors but with or without the Grantors' consent, the Purchaser in
its own name or in the name of others may communicate with parties to the
Contracts to verify with them to the Purchaser's satisfaction the existence,
amount and terms of any Contracts.
6.3 Representations and Warranties. (a) Except for the
consents listed on Schedule 4.9 of the Note Purchase Agreement:
(i) no consent of any party (other than the Grantors) to
any Material Contract is required, or purports to be required, in
connection with the execution, delivery and performance of this
Agreement;
(ii) each Material Contract is in full force and effect
and constitutes a valid and legally enforceable obligation of each
Grantor which is a party thereto and, to the Grantors' knowledge, of the
other party(s) thereto, except as enforceability may be affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally, and general equitable principles (whether considered
in a proceeding in equity or at law);
(iii) no Grantor, nor to the best of the Grantors'
knowledge, any other party to any Material Contract is in default in the
performance or observance of any of the terms thereof;
(iv) each Grantor has fully performed, in all material
respects, all its obligations under each Material Contract to which it
is a party; and
(v) the right, title and interest of each Grantor in, to
and under each Material Contract to which it is a party are not subject
to any defense, offset, counterclaim or claim which would materially
adversely affect the value of such
-11-
<PAGE> 12
Material Contract as Collateral, nor have any of the foregoing been
asserted or alleged in writing against any Grantor as to any Material
Contract.
(b) The Grantors have delivered to the Purchaser a complete and
correct copy of each Material Contract.
(c) No amount payable to any Grantor under or in connection with
any Contract is evidenced by any Instrument or Chattel Paper which has not been
delivered to the Purchaser.
6.4 Covenants. (a) Each Grantor will perform and comply in all
material respects with all its contractual obligations relating to the
Collateral and all its other material obligations under the Contracts.
(b) Each Grantor shall promptly and diligently exercise each and
every material right which it may have under each Material Contract (other than
any right of termination).
(c) No Grantor will fail to deliver to the Purchaser a copy of
each material demand, notice or document received by it relating in any way to
any Contract.
Section 7. Provisions Relating To Stock Collateral.
7.1 Representations and Warranties. (a) The shares of Pledged
Stock listed on Annex B (as such Annex may be supplemented pursuant to Section
7.2) constitute all of the issued and outstanding shares of Capital Stock of the
Subsidiaries that are directly owned (in whole or in part) by the Grantors and
all other shares of, or interests, participations or other equivalents of or
interests in, Capital Stock directly owned by the Grantors. Notes and other
Instruments representing the Pledged Indebtedness listed on Annex B (as such
Annex may be supplemented pursuant to Section 7.2) constitute all of the
Instruments that are directly owned (in whole or in part) by the Grantors.
(b) All of the shares of, or interests, participations or other
equivalents of or interests in, the Pledged Stock have been duly authorized and
validly issued and are fully paid and nonassessable and none of such Pledged
Stock is subject to any contractual restriction pursuant to any shareholders or
partners agreement, voting trust agreement or any other agreement in respect of
the rights of shareholders, partners or participants, or any restriction under
the charter or by-laws or organization agreement of any of the Issuers, upon the
transfer of such Pledged Stock (except for any such restriction contained herein
or in the other Note Documents or any such restriction imposed by any state or
federal securities laws). There are no existing options, warrants, calls, or
commitments of any character whatsoever relating to any of the Pledged Stock of
any Grantor. The Pledged Indebtedness has been duly authorized, authenticated or
issued and delivered by, and is the legal, valid and binding obligations of, the
Issuer, and no such Issuer is in default thereunder. Except as disclosed on
Annex B none of the Pledged Indebtedness is
-12-
<PAGE> 13
subordinated in right of payment to other Indebtedness (except for the Secured
Obligations) or subject to the terms of an indenture.
(c) The Grantors are the record and beneficial owner of, and have
good and marketable title to, the Pledged Stock and Pledged Indebtedness, free
of any and all Liens or options in favor of, or claims of, any other Person,
except the security interest created by this Agreement.
(d) Annex B correctly identifies, as at the date of this
Agreement, (i) with respect to Pledged Stock, each Issuer, the respective class
and par value of the shares or the nature and extent of each Grantor's interest
comprising such Pledged Stock and the respective number of shares or
proportionate interest (and registered owners thereof) evidenced by each such
certificate or other evidence of interest in such Issuer, and (ii) with respect
to Pledged Indebtedness, the initial principal amount, issue date, maturity date
and interest rate of such Pledged Indebtedness.
(e) There are no restrictions upon the voting rights associated
with, or upon the transfer of, any of the Pledged Stock or Pledged Indebtedness.
(f) The stock powers accompanying the Pledged Stock and the
allonges accompanying the Pledged Indebtedness are duly authorized and executed
in blank.
7.2 Affirmative Covenant. (a) Each Grantor covenants and agrees
with the Purchaser that, from and after the date of this Agreement until this
Agreement is terminated and the security interests created hereby are released
if such Grantor shall, as a result of its ownership of the Pledged Stock or
Pledged Indebtedness or otherwise become entitled to receive or shall receive
any stock certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate issued in
connection with any reorganization), option or rights, whether in addition to,
in substitution of, as a conversion of, or in exchange for any shares of or
other interests in the Pledged Stock, or otherwise in respect thereof or any
note or Instrument of any Issuer or promissory notes or Instruments required to
be pledged to the Purchaser pursuant to Section 4.1 hereof or any other Note
Document, such Grantor shall accept the same as the agent of the Purchaser, hold
the same in trust for the Purchaser and deliver the same forthwith to the
Purchaser in the exact form received, together with in the case of Pledged Stock
an undated stock power or other suitable transfer document covering such
certificate duly executed in blank by such Grantor and with, if the Purchaser so
requests, signature guaranteed and together with in the case of any Pledged
Indebtedness an allonge or other endorsement duly executed in blank by such
Grantor, to be held by the Purchaser, subject to the terms hereof, as additional
collateral security for the Secured Obligations. Any sums paid upon or in
respect of the Pledged Stock or Pledged Indebtedness upon the liquidation or
dissolution of any Issuer shall be paid over to the Purchaser to be held by it
hereunder as additional collateral security for the Secured Obligations, and in
case any distribution of capital shall be made on or in respect of the Pledged
Stock or any property shall be distributed upon or with respect to the Pledged
-13-
<PAGE> 14
Stock or Pledged Indebtedness pursuant to the recapitalization or
reclassification of the capital of any Issuer or pursuant to the reorganization
thereof or otherwise, the property so distributed shall be delivered to the
Purchaser to be held by it hereunder as additional collateral security for the
Secured Obligations. If any sums of money or property so paid or distributed in
respect of the Pledged Stock shall be received by any Grantor, such Grantor
shall, until such money or property is paid or delivered to the Purchaser, hold
such money or property in trust for the Purchaser, segregated from other funds
of such Grantor, as additional collateral security for the Secured Obligations.
If requested by the Purchaser, to evidence any of the foregoing such Grantor
shall promptly enter into a Pledge Supplement substantially in the form of
Appendix I hereof (a "Pledge Supplement"). The Grantors hereby authorize the
Purchaser to attach each executed Stock Collateral Pledge Supplement to this
Agreement and agree that all Capital Stock covered thereby delivered to the
Purchaser shall for all purposes hereunder constitute Pledged Stock and Stock
Collateral and all notes and Instruments covered thereby delivered to the
Purchaser shall for all purposes hereunder constitute Pledged Indebtedness and
Indebtedness Collateral.
(b) The Grantors agree to deliver to the Purchaser a supplement
to Annex B updating Annex B at the time of each delivery of additional Pledged
Stock and Pledged Indebtedness and, if requested by the Purchaser, a Pledge
Supplement pursuant to Section 7.2(a) hereof. By delivery of such Pledge
Supplement by a Grantor, such Grantor shall be deemed to have represented and
warranted to Purchaser that the representations and warranties in Section 7.1
shall be true and correct as to any such Pledged Stock and Pledged Indebtedness
as of the date of such Pledge Supplement.
7.3 Negative Covenants. Without the prior written consent of the
Purchaser, no Grantor will (a) vote to enable, or take any other action to
permit, any Issuer to issue any stock or other equity securities of any nature
or to issue any other securities convertible into or granting the right to
purchase or exchange for any stock or other equity securities of any nature of
any Issuer except in connection with the issuance of directors' qualifying
shares to directors, or stock or equity securities to such Grantor or any of its
Subsidiaries, (b) sell, assign, transfer, exchange, or otherwise dispose of, or
grant any option with respect to, the Stock Collateral, (c) create, incur or
permit to exist any Lien or option in favor of, or any claim of any Person with
respect to, any of the Stock Collateral or Indebtedness Collateral, or any
interest therein, except for Permitted Liens, or (d) enter into any agreement or
undertaking restricting the right or ability of such Grantor or the Purchaser to
sell, assign or transfer any of the Stock Collateral.
7.4 Cash Dividends; Voting Rights. Unless an Event of Default
shall have occurred and be continuing and the Purchaser shall have given notice
to the Grantors of the Purchaser's intent to exercise its corresponding rights
pursuant to Section 8.6 below, the Grantors shall be permitted to receive all
cash dividends paid out of legal surplus of the Issuers in respect of the
Pledged Stock and to exercise all voting and corporate rights with respect to
the Pledged Stock; provided, however, that no vote shall be cast or corporate
right exercised or other action taken which would impair the Collateral or which
would be inconsistent with or result in any violation of any provision of this
Agreement, the Note Purchase Agreement, the Notes or any other Note Document.
-14-
<PAGE> 15
7.5 Irrevocable Authorization and Instruction to Issuers. Each
Grantor hereby authorizes and instructs the Issuers to comply with any
instruction received by any of them from the Purchaser in writing that (a)
states that an Event of Default has occurred and (b) is otherwise in accordance
with the terms of this Agreement, without any other or further instructions from
such Grantor, and each Grantor agrees that the Issuers shall be fully protected
in so complying.
Section 8. Remedies.
8.1 Notice to Account Debtors and Contract Parties. Upon the
request of the Purchaser at any time after the occurrence and during the
continuance of a Default or Event of Default, each Grantor shall notify its
respective account debtors on the Accounts and parties to the Contracts that the
Accounts and the Contracts have been assigned to the Purchaser and that payments
in respect thereof shall be made directly to the Purchaser.
8.2 Proceeds to be Turned Over To the Purchaser. In addition to
the rights of the Purchaser specified in Section 5.3 with respect to payments of
Accounts, if a Default or Event of Default shall occur and be continuing all
Proceeds received by any Grantor consisting of cash, checks and other near-cash
items shall be held by such Grantor in trust for the Purchaser, segregated from
other funds of such Grantor, and shall, if requested by the Purchaser forthwith
upon receipt by such Grantor, be turned over to the Purchaser in the exact form
received by such Grantor (duly endorsed by such Grantor to the Purchaser, if
required) and held by the Purchaser in a Collateral Account. All Proceeds while
held by the Purchaser in a Collateral Account (or by such Grantor in trust for
the Purchaser) shall continue to be held as collateral security for all the
Secured Obligations and shall not constitute payment thereof until applied as
provided in Section 8.3.
8.3 Application of Proceeds. At such intervals as may be agreed
upon by the Grantors and the Purchaser, or, if an Event of Default shall have
occurred and be continuing, at any time at the Purchaser's election, the
Purchaser may apply all or any part of Proceeds held in any Collateral Account
in payment of the Secured Obligations in such order as the Purchaser may elect
consistent with the terms of the Note Purchase Agreement, and any part of such
funds which the Purchaser elects not so to apply and deems not required as
collateral security for the Secured Obligations shall be paid over from time to
time by the Purchaser to the Grantors or to whomsoever may be lawfully entitled
to receive the same. Any balance of such Proceeds remaining after the Secured
Obligations shall have been paid in full on (or after) the Termination Date
shall be paid over to the Grantors or to whomsoever may be lawfully entitled to
receive the same. Without limiting the foregoing or any other provision of this
Agreement, the Grantors and the Purchaser agree that, if an Event of Default has
occurred, it shall be commercially reasonable for the Purchaser to dispose of
all or any part of the Proceeds held in the Collateral Account or any cash or
other moneys or securities held in any Depositary Account, by applying the same
in payment of the Secured Obligations in such order as the Purchaser may elect
consistent with the terms of the Note Purchase Agreement and this Agreement and
that in connection therewith no public or private sale is necessary.
-15-
<PAGE> 16
8.4 Code Remedies. If an Event of Default shall occur and be
continuing, the Purchaser may exercise, in addition to all other rights and
remedies granted to it in this Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Code and such additional rights
and remedies to which a secured party is entitled under the laws in effect in
any jurisdiction where any rights and remedies hereunder may be asserted to
exercise all voting, consensual and other powers of ownership pertaining to the
Collateral as if the Purchaser was the sole and absolute owner thereof (and each
Grantor agrees to take all such action as may be necessary or appropriate to
give effect to such right). Without limiting the generality of the foregoing,
the Purchaser, without demand of performance or other demand, presentment,
protest, advertisement or notice of any kind (except any notice required by law
referred to below) to or upon any Grantor or any other Person (all and each of
which demands, defenses, advertisements and notices are hereby waived to the
extent allowed by law), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase, or otherwise
dispose of and deliver the Collateral or any part thereof (or contract to do any
of the foregoing), in one or more parcels at public or private sale or sales, at
any exchange, broker's board or office of the Purchaser or elsewhere upon such
terms and conditions as it may deem advisable and at such prices as it may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. The Purchaser shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption in any Grantor, which right or equity is hereby waived
or released. Each Grantor further agrees, at the Purchaser's request, to
assemble the Collateral and make it available to the Purchaser at places which
the Purchaser shall reasonably select, whether at such Grantor's premises or
elsewhere. The Purchaser shall apply the net Proceeds of any such collection,
recovery, receipt, appropriation, realization or sale, after deducting all
reasonable costs and expenses of every kind incurred therein or incidental to
the care or safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of the Purchaser hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Secured Obligations, in such order as the Purchaser may
elect consistent with the terms of the Note Purchase Agreement, and only after
such application and after the payment by the Purchaser of any other amount
required by any provision of law, including, without limitation, Section
9-504(1)(c) of the Code, need the Purchaser account for the surplus, if any, to
the Grantors. To the extent permitted by applicable law, each Grantor waives all
claims, damages and demands it may acquire against the Purchaser arising out of
the exercise by it of any rights hereunder. If any notice of a proposed sale or
other disposition of Collateral shall be required by law, such notice shall be
deemed reasonable and proper if given at least 10 days before such sale or other
disposition.
8.5 Irrevocable Proxy. Each Grantor hereby grants to the
Purchaser an irrevocable proxy to vote the Pledged Stock and other Collateral
with voting rights, which proxy shall be effective immediately upon the
occurrence of, and during the continuance of, an Event of Default.
-16-
<PAGE> 17
8.6 Additional Remedies in Respect of Pledged Stock. If an Event
of Default shall occur and be continuing and the Purchaser shall give notice of
its intent to exercise such rights to the Grantors, (a) the Purchaser shall have
the right to receive any and all cash dividends or distributions paid in respect
of the Pledged Stock and make application thereof to the Secured Obligations in
such order as the Purchaser may determine consistent with the terms of the Note
Purchase Agreement, and (b) all shares of or other interests in the Pledged
Stock shall be registered in the name of the Purchaser or its nominee, and the
Purchaser or its nominee may thereafter exercise (i) all voting, corporate,
partnership and other rights pertaining to such shares of or other interests in
the Pledged Stock at any meeting of shareholders of any Issuer or otherwise and
(ii) any and all rights of conversion, exchange, subscription and any other
rights, privileges or options pertaining to such shares of or other interests in
the Pledged Stock as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the
Collateral upon the merger, consolidation, reorganization, recapitalization or
other fundamental change in the corporate or organizational structure of any
Issuer, or upon the exercise by any Grantor or the Purchaser of any right,
privilege or option pertaining to any of the Collateral, and in connection
therewith, the right to deposit and deliver any and all of the Collateral with
any committee, depositary, transfer agent, registrar or other designated agency
upon such terms and conditions as the Purchaser may determine), all without
liability except to account for Property actually received by it, but the
Purchaser shall have no duty to any Grantor to exercise any such right,
privilege or option and shall not be responsible for any failure to do so or
delay in so doing.
8.7 Registration Rights; Private Sales. (a) If the Purchaser
shall determine to exercise its right to sell any or all of the Pledged Stock
pursuant to this Section 8, and if in the opinion of the Purchaser it is
necessary or advisable to have the Pledged Stock, or that portion thereof to be
sold, registered under the provisions of the Securities Act, the Grantors will
cause the Issuer thereof (i) to execute and deliver, and cause the directors and
officers of such Issuer to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts as may be, in the
opinion of the Purchaser, necessary or advisable to register the Pledged Stock,
or that portion thereof to be sold, under the provisions of the Securities Act,
(ii) to use their best efforts to cause the registration statement relating
thereto to become effective and to remain effective for a period of one year
from the date of the first public offering of the Pledged Stock, or that portion
thereof to be sold, and (iii) to make all amendments thereto and/or to the
related prospectus which, in the opinion of the Purchaser, are necessary or
advisable, all in conformity with the requirements of the Securities Act and the
rules and regulations of the Securities and Exchange Commission applicable
thereto. The Grantors agree to cause such Issuer to comply with the provisions
of the securities or "Blue Sky" laws of any and all jurisdictions which the
Purchaser shall designate and to make available to its security holders, as soon
as practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of Section 11(a) of the Securities Act.
(b) The Grantors recognize that the Purchaser may be unable to
effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be
-17-
<PAGE> 18
compelled to resort to one or more private sales thereof to a restricted group
of purchasers which will be obliged to agree, among other things, to acquire
such securities for their own account for investment and not with a view to the
distribution or resale thereof. The Grantors acknowledge and agree that any such
private sale may result in prices and other terms less favorable than if such
sale were a public sale and, notwithstanding such circumstances, agrees that any
such private sale shall be deemed to have been made in a commercially reasonable
manner. The Purchaser shall be under no obligation to delay a sale of any of the
Pledged Stock for the period of time necessary to permit the Issuer thereof to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if such Issuer would agree to do so.
(c) The Grantors further agree to use its best efforts to do or
cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Pledged Stock pursuant to this Section 8.7
valid and binding and in compliance with any and all applicable Statutes,
Orders, writs, injunctions, decrees or awards of any and all Governmental
Bodies, having jurisdiction over any such sale or sales. The Grantors further
agree that a breach of any of the covenants contained in this Section 8.7 will
cause irreparable injury to the Purchaser, that they will have no adequate
remedy at law in respect of such breach and, as a consequence, that each and
every covenant contained in this Section 8.7 shall be specifically enforceable
against the Grantors, and the Grantors hereby waive and agree not to assert any
defenses against an action for specific performance of such covenants except for
a defense that no Event of Default has occurred and is then continuing under the
Note Purchase Agreement.
8.8 Deficiency. The Grantors shall remain jointly and severally
liable for any deficiency if the Proceeds of any sale or other disposition of
the Collateral are insufficient to pay the Secured Obligations, including
without limitation, the reasonable fees and disbursements of any attorneys
employed by the Purchaser to collect such deficiency.
Section 9. Purchaser's Appointment as Attorney-in-Fact;
Purchaser's Performance of the Secured Obligations.
9.1 Powers. Effective upon and during the continuance of an Event
of Default, each Grantor hereby irrevocably constitutes and appoints the
Purchaser and any officer or agent thereof, with full power of substitution, as
its true and lawful attorney-in-fact with full irrevocable power and authority
in the place and stead of such Grantor and in the name of such Grantor or in its
own name, from time to time in the Purchaser's discretion, for the purpose of
carrying out the terms of this Agreement, to take any and all appropriate action
and to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement, and, without limiting
the generality of the foregoing, each Grantor hereby gives the Purchaser the
power and right, on behalf of such Grantor, without notice to or assent by such
Grantor, to do the following:
-18-
<PAGE> 19
(a) in the case of any Account, in the name of such Grantor or
its own name, or otherwise, to take possession of and endorse and collect any
checks, drafts, notes, acceptances or other instruments for the payment of
moneys due under any Account, Instrument, General Intangible or Contract or with
respect to any other Collateral and to file any claim or to take any other
action or proceeding in any court of law or equity or otherwise deemed
appropriate by the Purchaser for the purpose of collecting any and all such
moneys due under any Account, Instrument, General Intangible or Contract or with
respect to any other Collateral whenever payable;
(b) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance called
for by the terms of this Agreement or the Note Purchase Agreement and to pay all
or any part of the premiums therefor and the costs thereof;
(c) to execute, in connection with the sale provided for in
Section 8.4 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral;
(d) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due thereunder
directly to the Purchaser or as the Purchaser shall direct;
(e) to ask or demand for, collect, receive payment of and receipt
for, any and all moneys, cash and non-cash Proceeds, claims and other amounts
due or to become due at any time in respect of or arising out of any Collateral;
(f) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications, notices and other documents in connection with any
of the Collateral;
(g) to commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of any
Collateral;
(h) to defend any suit, action or proceeding brought against such
Grantor with respect to any Collateral;
(i) to settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, to give such discharges or releases as
the Purchaser may deem appropriate;
(j) generally, to sell, transfer, pledge and make any agreement
with respect to or otherwise deal with any of the Collateral as fully and
completely as though the Purchaser were the absolute owner thereof for all
purposes, and to do, at the Purchaser's option and such Grantor's expense, at
any time, or from time to time, all acts and things (including exercising all
rights and remedies of such Grantor pursuant to any leases of real property)
which the Purchaser deems necessary to protect, preserve or
-19-
<PAGE> 20
realize upon the Collateral and the Purchaser's security interests therein and
to effect the intent of this Agreement, all as fully and effectively as such
Grantor might do;
(k) to release its interest in, make exchanges or substitutions
for and/or surrender, all or any part of such Grantor's interest in all or any
part of the Collateral;
(l) to remove from such Grantor's place(s) of business all books,
records, ledger sheets, correspondence, invoices and documents relating to or
evidencing any of the Collateral (so long as the Purchaser shall supply copies
of all documents removed within a reasonable time after removal), or without
cost or expense to the Purchaser, to make such use of such Grantor's place(s) of
business as may be reasonably necessary to administer, control and/or collect
the Collateral;
(m) to repair, alter or supply goods, if any, necessary to
fulfill in whole or in part the purchase order of any account debtor;
(n) to endorse the name of such Grantor upon any items of payment
relating to the Collateral or upon any proof of claim in bankruptcy against any
account debtor;
(o) to receive and open all mail addressed to such Grantor and,
upon the occurrence of an Event of Default, notify the Post Office authorities
to change the address for the delivery of mail to such Grantor to such address
as the Purchaser may designate; and
(p) to file financing statements and continuation statements
covering the Collateral and execute the same on behalf of such Grantor.
9.2 Performance by Purchaser of the Secured Obligations. If any
Grantor fails to perform or comply with any of its agreements contained herein,
the Purchaser, at its option, but without any obligation so to do, may perform
or comply, or otherwise cause performance or compliance, with such agreement.
9.3 The Grantors' Reimbursement Obligations. The expenses of the
Purchaser incurred in connection with actions undertaken as provided in this
Section 9, together with interest thereon at the Default Rate from the date of
payment by the Purchaser to the date reimbursed by the Grantors, shall be
jointly and severally payable by the Grantors to the Purchaser on demand and
shall constitute part of the Secured Obligations.
9.4 Ratification; Power Coupled With An Interest. The Grantors
hereby ratify all that said attorneys shall lawfully do or cause to be done by
virtue hereof. All powers, authorizations and agencies contained in this
Agreement are coupled with an interest and are irrevocable until this Agreement
is terminated and the security interests created hereby are released.
-20-
<PAGE> 21
Section 10. Duty of the Purchaser. The Purchaser's sole duty with
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the Code or otherwise, shall be to
deal with it in the same manner as the Purchaser deals with similar property for
its own account.
Neither the Purchaser nor any of its directors, officers,
employees or agents shall be liable for failure to demand, collect or realize
upon any of the Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
any Grantor or any other Person or to take any other action whatsoever with
regard to the Collateral or any part thereof. The powers conferred on the
Purchaser hereunder are conferred solely to enable the Purchaser to protect the
Purchaser's interests in the Collateral and shall not impose any duty upon the
Purchaser to exercise any such powers. The Purchaser shall be accountable only
for amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or agents
shall be responsible to any Grantor for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction.
Section 11. Miscellaneous.
11.1 Notices. All notices, requests and demands to or upon the
Purchaser or any Grantor hereunder shall be made or delivered in the manner
provided in Section 14.5 of the Note Purchase Agreement.
11.2 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.3 Amendments in Writing. None of the terms or provisions of
this Agreement may be waived, amended, supplemented or otherwise modified except
by a written instrument executed by each Grantor and the Purchaser; provided
that any provision of this Agreement may be waived by the Purchaser in a letter
or agreement executed by the Purchaser or by facsimile transmission from the
Purchaser.
11.4 No Waiver by Course of Conduct. The Purchaser shall not by
any act (except by a written instrument pursuant to Section 11.3 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of the Purchaser, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Purchaser of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Purchaser would
otherwise have on any future occasion.
-21-
<PAGE> 22
11.5 Remedies Cumulative. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
11.6 Integration. This Agreement, together with the Note Purchase
Agreement and the other Note Documents represent the entire agreement of the
parties with respect to the subject matter hereof and there are no promises or
representations by the Purchaser relative to the subject matter hereof not
reflected herein or therein.
11.7 Section Headings. The section and subsection headings used
in this Agreement are for convenience of reference only and are not to affect
the construction hereof or be taken into consideration in the interpretation
hereof.
11.8 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Grantors and the Purchaser and their respective
successors and assigns; provided, however, that no Grantor shall have the right
to assign its duties hereunder without the prior written consent of the
Purchaser.
11.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall together constitute one and the same instrument.
11.10 ACKNOWLEDGMENTS. EACH GRANTOR HEREBY ACKNOWLEDGES THAT:
(a) IT HAS BEEN ADVISED BY COUNSEL IN THE NEGOTIATION, EXECUTION
AND DELIVERY OF THIS AGREEMENT;
(b) THE PURCHASER DOES NOT HAVE ANY FIDUCIARY RELATIONSHIP TO THE
GRANTORS, AND THE RELATIONSHIP BETWEEN THE PURCHASER, ON THE ONE HAND, AND THE
GRANTORS, ON THE OTHER HAND, IS SOLELY THAT OF SECURED PARTY AND DEBTOR,
RESPECTIVELY; AND
(c) NO JOINT VENTURE EXISTS BETWEEN THE PURCHASER AND THE
GRANTORS.
11.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
11.12 Dating. Although this Agreement is dated as of the date
first written above for convenience, this Agreement shall be effective on
September [_________], 1998.
-22-
<PAGE> 23
IN WITNESS WHEREOF, each of the undersigned has caused this
Agreement to be duly executed and delivered by its duly authorized officers.
NOMURA HOLDING AMERICA INC.
By: ________________________________
Name:
Title:
EASYRIDERS, INC.
By: ________________________________
Name:
Title:
PAISANO PUBLICATIONS, INC.
By: ________________________________
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By: ________________________________
Name:
Title:
EASYRIDERS FRANCHISING, INC.
<PAGE> 24
By: ________________________________
Name:
Title:
TERESI, INC.
By: ________________________________
Name:
Title:
BROS CLUB, INC.
By: ________________________________
Name:
Title:
ASSOCIATED RODEO RIDERS ON
WHEELS
By: ________________________________
Name:
Title:
<PAGE> 25
Annex A
to Pledge and Security Agreement
MATERIAL CONTRACTS
<PAGE> 26
Annex B
to Pledge and Security Agreement
<TABLE>
<CAPTION>
PLEDGED STOCK
-------------
Grantor Issuer Class of Stock(1/) Stock Certificate No. No. of Shares
------- ------ ------------------ --------------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
PLEDGED INDEBTEDNESS
--------------------
Initial
Principal Maturity
Grantor Issuer Amount Issue Date Date Interest Rate
- ------- ------ ------ ---------- ---- -------------
<S> <C> <C> <C> <C> <C>
</TABLE>
- --------
(1/) Stock is assumed to be common stock unless otherwise indicated.
<PAGE> 27
Annex C
to Pledge and Security Agreement
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
UNIFORM COMMERCIAL CODE FILINGS
<TABLE>
<CAPTION>
[STATE] [STATE]
Secretary [ ] [ ] Secretary of [ ]
Debtor Name of State County County State County
----------- -------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 28
APPENDIX I
PLEDGE SUPPLEMENT
This Pledge Supplement, dated __________, [199_][200_] (this
"Pledge Supplement"), is delivered pursuant to Section 7.2 of the Security
Agreement referred to below. The undersigned hereby agrees (i) that this Pledge
Supplement may be attached to the Pledge and Security Agreement dated as of
September [__], 1998 (as from time to time amended, modified or supplemented,
the "Security Agreement"; the terms defined therein and not otherwise defined
herein being used as therein defined), made by Easyriders, Inc. and certain of
its Subsidiaries signatory thereto in favor of Nomura Holding America Inc., (ii)
that the shares, or interests, participations or other equivalents listed on
this Pledge Supplement shall be and become part of the Pledged Stock and Stock
Collateral referred to in the Security Agreement and shall secure all the
Secured Obligations and (iii) that the notes and Instruments listed on this
Pledge Supplement shall become part of the Pledged Indebtedness and Indebtedness
Collateral referred to in the Security Agreement and shall secure all of the
Secured Obligations.
The undersigned agrees that the shares, or interests,
participations or other equivalents listed on the attached Schedule shall for
all purposes constitute Pledged Stock and Stock Collateral and shall be subject
to the security interest created by the Security Agreement and (b) that the
notes and Instruments listed on this Pledge Supplement shall become part of the
Pledged Indebtedness and Indebtedness Collateral referred to in the Security
Agreement and shall secure all of the Secured Obligations.
The undersigned hereby certifies that the representations and
warranties set forth in Section 7.1 of the Security Agreement of the undersigned
are true and correct as to the Collateral listed herein on and as of the date
hereof.
[NAME OF GRANTOR]
By:_________________________________________
Name:
Title:
<PAGE> 29
Schedule to Pledge Supplement
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DESCRIPTION OF PLEDGED STOCK
----------------------------
Issuer Class of Stock(*/) Stock Certificate No. No. of Shares
- ------ ------------------ --------------------- -------------
<S> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
PLEDGED INDEBTEDNESS
--------------------
Initial
Principal Maturity
Grantor Issuer Amount Issue Date Date Interest Rate
- ------- ------ ------ ---------- ---- -------------
<S> <C> <C> <C> <C> <C>
</TABLE>
- --------
(*/) Stock is assumed to be common stock unless otherwise indicated.
I-2
<PAGE> 30
APPENDIX II
COUNTERPART TO PLEDGE AND SECURITY AGREEMENT
This counterpart, dated _________, [199__][200__], is delivered
pursuant to Section 4.5(d) of that certain Pledge and Security Agreement dated
as of September [__], 1998 (as from time to time amended, modified or
supplemented, the "Security Agreement"; the terms defined therein and not
otherwise defined herein being used as therein defined), made by Easyriders,
Inc. and certain of its Subsidiaries signatory thereto in favor of Nomura
Holding America Inc. The undersigned hereby agrees (i) that this counterpart may
be attached to the Security Agreement, and (ii) that the undersigned shall be a
Grantor under the Security Agreement and shall comply with all the terms and
conditions of the Security Agreement as if it were an original signatory
thereto.
[NAME OF ADDITIONAL GRANTOR]
By:_________________________________________
Name:
Title:
<PAGE> 31
ACKNOWLEDGMENT AND CONSENT
The undersigned, [NAME OF ISSUER], hereby acknowledges receipt of
a copy of the Pledge and Security Agreement dated as of September [__], 1998 (as
from time to time amended, modified or supplemented in accordance with the terms
thereof, the "Security Agreement"), made and entered into by and among
Easyriders, Inc. and certain of its Subsidiaries signatory thereto and Nomura
Holding America Inc. (the "Purchaser"). The undersigned agrees for the benefit
of the Purchaser as follows:
1. The undersigned will be bound by the terms of the Security
Agreement and will comply with such terms insofar as such terms are applicable
to the undersigned.
2. The undersigned will notify the Purchaser promptly in writing
of the occurrence of any of the events described in paragraph 7.2 of the
Security Agreement.
3. The terms of paragraph 8.7(c) of the Security Agreement shall
apply to it, mutatis mutandis, with respect to all actions that may be required
of it under or pursuant to or arising out of Section 8.7 of the Security
Agreement.
[NAME OF ISSUER]
By:________________________________________
Name:
Title:
Date:
II-2
<PAGE> 1
EXHIBIT E TO NOTE AND WARRANT PURCHASE AGREEMENT
(Form of Intellectual Property Security Agreement)
INTELLECTUAL PROPERTY SECURITY AGREEMENT
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT, dated as of
September [__], 1998 (as from time to time amended, modified or supplemented in
accordance with the terms hereof, this "Agreement"), is made and entered into by
and among EACH SIGNATORY HERETO (each individually, together with its successors
and assigns, a "Grantor", and collectively, the "Grantors" ), as debtors, and
NOMURA HOLDING AMERICA INC., a Delaware corporation (together with its
successors, assigns and transferees, the "Purchaser"), as secured party.
W I T N E S S E T H:
WHEREAS, pursuant to the Note and Warrant Purchase Agreement
dated as of the date hereof (as from time to time amended, modified or
supplemented in accordance with the terms thereof, the "Note Purchase
Agreement"), by and among Easyriders, Inc., a Delaware corporation (the
"Parent"), Easyriders Sub II, Inc. (to be merged with and into Paisano
Publications, Inc.), a California corporation (the "Company") and the Purchaser,
the Purchaser has agreed to purchase the Notes of the Company referred to in the
Note Purchase Agreement upon the terms and subject to the conditions set forth
therein;
WHEREAS, the Grantors (other than the Company) have executed and
delivered to the Purchaser a Guarantee dated as of the date hereof (as from time
to time amended, modified or supplemented in accordance with the terms thereof,
the "Guarantee"), pursuant to which such Grantors have guaranteed the
Obligations of the Company under, and as defined in, the Note Purchase
Agreement;
WHEREAS, the Grantors have also executed and delivered to the
Purchaser a Pledge and Security Agreement dated as of the date hereof (as from
time to time amended, modified or supplemented in accordance with the terms
thereof, the "Security Agreement"), pursuant to which the Grantors have pledged
and granted to the Purchaser a security interest in all of their personal
property (other than their intellectual property) as collateral security for the
Secured Obligations (as defined below); and
WHEREAS, it is a condition precedent to the obligations of the
Purchaser to purchase, and to continue to purchase, the Notes and to extend
credit thereunder and under the Note Purchase Agreement that the Grantors shall
have executed and delivered
<PAGE> 2
this Agreement to pledge and grant to the Purchaser a security interest in all
of the Grantors' intellectual property as collateral security for the Secured
Obligations;
NOW, THEREFORE, in consideration of the premises set forth above
and to induce the Purchaser to purchase, and to continue to purchase, the Notes
and to extend credit thereunder and under the Note Purchase Agreement, the
Grantors hereby agree with the Purchaser as follows:
Section 1. Defined Terms.
1.1. Definitions. Unless otherwise defined herein, terms defined
(or defined by reference) in the Note Purchase Agreement, as applicable, and
used herein shall have the meanings given to them in such other agreement.
1.2. Other Definitions. The following terms shall have the
following meanings:
"Agreement" has the meaning specified in the Preamble.
"Code" means the Uniform Commercial Code as from time to time in
effect in the State of New York.
"Collateral" has the meaning specified in Section 2 of this
Agreement.
"Copyrights" has the meaning specified in Section 2.1(c) of this
Agreement.
"License Agreements" means all license agreements entered into by
each Grantor, whether as licensor or licensee, providing for the license of
trademarks, patents, copyrights, technology and related or similar rights, as
the same may be renewed, extended or modified, and all rights of the Grantors in
connection with any of the foregoing and in connection with any agreement
related thereto.
"Patents" has the meaning specified in Section 2.1(b) of this
Agreement.
"Proceeds" means all "proceeds" and "products" as defined in the
Code and includes, without limitation and whether or not the following
constitute proceeds under the Code, (i) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to each Grantor from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable to each Grantor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Body (or any
Person acting under color of Governmental Body), and (iii) any claims by each
Grantor against third parties for infringement of the trademarks, patents or
copyrights belonging to such Grantor and any royalties from licenses to third
parties thereof, and (iv) any and all other amounts from time to time paid or
payable to each Grantor upon the sale, exchange, collection or other disposition
of, or under or in connection with, any part of the Collateral.
-2-
<PAGE> 3
"Secured Obligations" means, collectively, (i) in the case of the
Company, all of its Obligations under the Note Purchase Agreement and (ii) in
the case of the other Grantors, all of their obligations under the Guarantee.
"Trademarks" has the meaning specified in Section 2.1(a) of this
Agreement.
1.3. Miscellaneous Definitional Provisions. The words "hereof,"
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and section and paragraph references are to this Agreement
unless otherwise specified.
1.4. Singular and Plural Form. The meanings given to terms
defined herein shall be equally applicable to both the singular and plural forms
of such terms.
1.5. Annexes. All references to Annexes to this Agreement include
such Annexes as amended, modified or supplemented pursuant to the terms of this
Agreement.
Section 2. Grant of Security Interest.
2.1. Collateral. As collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Secured Obligations, the Grantors jointly and
severally hereby grant to the Purchaser, a security interest in all of the
following property now owned or at any time hereafter acquired or created by the
Grantors or in which the Grantors now have or at any time in the future may
acquire or create any right, title or interest (collectively, the "Collateral"):
(a) trademarks, trade names, trade styles, service marks, logos,
emblems, prints and labels, all elements of package or trade dress of goods, and
all general intangibles of like nature, together with the goodwill of each
Grantor's business connected with the use thereof and symbolized thereby, and
all applications, registrations and recordings thereof, including, without
limitation, applications, registrations and recordings in the United States
Patent and Trademark Office, or in any similar office or agency of the United
States, or in any office of the Secretary of State (or equivalent) of any state
thereof, or in any similar office or agency of any country or political
subdivision thereof throughout the world, including, but not limited to, those
described in Annex A (as from time to time amended, modified or supplemented in
accordance with the terms hereof) attached hereto and made a part hereof,
together with all extensions, renewals and corrections thereof and all licenses
thereof or pertaining thereto, including, without limitation, the License
Agreements with respect thereto (all of the foregoing assets encompassed by this
subparagraph (a) being hereinafter collectively referred to as the
"Trademarks");
(b) letters patent and applications therefor, and all
registrations and recordings thereof, including, without limitation,
applications, registrations and
-3-
<PAGE> 4
recordings in the United States Patent and Trademark Office, or in any similar
office or agency of the United States, or any state thereof, or in any similar
office or agency of any country or political subdivision thereof throughout the
world, including, but not limited to, those described in Annex B (as from time
to time amended, modified or supplemented in accordance with the terms hereof)
attached hereto and made a part hereof, together with all re-examinations,
reissues, continuations, continuations-in-part, divisions, improvements and
extensions thereof and all licenses and claims for infringement thereof or
pertaining thereto including, without limitation, the License Agreements with
respect thereto, and the rights to make, use and sell, and all other rights with
respect to, the inventions disclosed or claimed therein, all inventions,
designs, proprietary or technical information, know-how, other data or
information, software, databases, all embodiments or fixations thereof and
related documentation, and all other trade secret rights not described above
(all of the foregoing assets encompassed by this subparagraph (b) being
hereinafter collectively referred to as the "Patents");
(c) copyrights in works of authorship of any kind, and all
applications, registrations and recordings thereof in the Office of the United
States Register of Copyrights, Library of Congress, or in any similar office or
agency of any country or political subdivision thereof throughout the world,
together with all extensions, renewals and corrections thereof and all licenses
and claims for infringement thereof or pertaining thereto, including, without
limitation, the License Agreements with respect thereto (all of the foregoing
assets encompassed by this subparagraph (c) hereinafter collectively referred to
as the "Copyrights");
(d) all customer lists and other records of each Grantor relating
to the distribution of products bearing the Trademarks, Patents and Copyrights;
and
(e) to the extent not otherwise included, all Proceeds of any and
all of the foregoing, including, without limitation, the Proceeds from any
claims by each Grantor against third parties for infringement of the Trademarks,
Patents or Copyrights and any royalties from licenses of the Trademarks, Patents
or Copyrights.
Section 3. Perfection. Prior to or concurrently with the delivery and
execution of this Agreement, each Grantor shall file or execute and deliver for
filing such financing statements, assignments for security and other documents
in such offices and take such other actions as may be required by the Purchaser
under Section 5.1 hereof or as the Purchaser may otherwise reasonably request to
perfect the security interests granted by this Agreement. Each Grantor shall
further take such other action (including the timely filing of continuation
statements or other similar documents) in order to continue the perfection of
the security interests granted under this Agreement in such offices as may be
necessary or as the Purchaser shall request to continue the perfection of such
interests, including, without limitation, any such action as may be required or
requested pursuant to Section 5.2 or 5.9 hereof.
Section 4. Representations and Warranties. The Grantors, jointly and
severally, hereby represent and warrant that:
-4-
<PAGE> 5
4.1. Title to Trademarks. Each Grantor has the sole beneficial
ownership of each of the Trademarks set forth on Annex A hereto under such
Grantor's name for the goods and services with which the Trademarks are used,
and any registrations thereof are valid and subsisting and in full force and
effect.
4.2. Use of Trademarks. Each Grantor (either itself or through
its licensees) will continue to use its Trademarks on each and every trademark
class of goods applicable to its current lines of goods as reflected in its
current catalogs, brochures and price lists in order to maintain its Trademarks
in full force and effect, in the ordinary course of business, free from any
claim of abandonment for nonuse and each Grantor will not (and will not permit
any licensee thereof to) do any act or omit to do any act whereby such Trademark
may become invalidated; provided, however, that any Grantor may choose to
abandon such Trademark or take any action or refuse or omit to take any action
whereby such Trademark may be abandoned if, in such Grantor's reasonable
business judgment, to do so is in the best business interests of such Grantor's
business. Prior to the intentional abandonment of any such Trademark by a
Grantor, such Grantor agrees to notify the Purchaser in writing.
4.3. Title to Patents. Each Grantor has the sole beneficial
ownership of each of the Patents set forth on Annex B hereto under the Grantor's
name and such patents are valid and subsisting and in full force and effect and
have not been claimed or adjudged invalid or unenforceable in whole or in part.
Each Grantor shall diligently prosecute any patent application now pending or
acquired or made by it during the term of this Agreement, shall make
applications on unpatented but patentable inventions, and shall preserve and
maintain all rights of any kind in such Patents, which, in each case, such
Grantor believes in its reasonable business judgment is in the best business
interests of such Grantor. None of such Patents have been abandoned or, to the
knowledge of the Grantors, dedicated, and no Grantor will do any act, or omit to
do any act, nor permit any licensee thereof to do any act, whereby any such
Patent may become abandoned or dedicated and shall notify the Purchaser
immediately if it knows of any reason why or has reason to know that any such
Patent may become abandoned or dedicated; provided, however, that any Grantor
may choose to abandon or dedicate any Patent, if, in the Grantor's reasonable
business judgment, to do so is in the best business interests of such Grantor's
business. Prior to the intentional abandonment or dedication of any such Patent
by a Grantor, such Grantor agrees to notify the Purchaser in writing.
4.4. Title to Copyrights. Each Grantor has the sole, full and
clear title to each of the Copyrights set forth under such Grantor's name on
Annex C hereto and any registrations thereof are valid and subsisting and in
full force and effect. Each Grantor (either itself or through its licensees)
will place appropriate notice of copyright on all copies embodying such
copyrighted works which are hereafter publicly distributed and no Grantor will
(and will not permit any licensee thereof to) do any act or omit to do any act
whereby any such Copyright may become invalidated or dedicated to the public
domain; provided, however, that any Grantor may choose to abandon or dedicate
any such Copyright or permit the same to become abandoned, dedicated or
invalidated if, in such Grantor's reasonable business judgment, to do so is in
the best business interests of such Grantor's business. Prior to the intentional
abandonment, dedication or invalidation of any Copyright by a Grantor, such
Grantor agrees to notify the Purchaser in writing.
-5-
<PAGE> 6
4.5. Perfected First Priority Liens. The security interests granted
by the Grantors pursuant to this Agreement (a) upon completion of the filings
and other actions specified in Section 5 hereof (and any necessary filings under
the Uniform Commercial Code contemplated by the Security Agreement) will
constitute perfected security interests in the Collateral located in the United
States of America in favor of the Purchaser, (b) are prior, to the extent such
Liens in such Collateral can be perfected by filing or possession, to all other
Liens on the Collateral in existence on the date hereof, and (c) are enforceable
as such against all creditors of and purchasers from the Grantors.
4.6. Other Agreements; No Other Liens. The Grantors have not entered
into any oral or written agreements which would prevent the Grantors from
complying with the terms hereof. Except for the security interest granted to the
Purchaser pursuant to this Agreement, and except as contemplated by Section 4.5
hereof, the Grantors own each item of the Collateral free and clear of any and
all Liens. No security agreement, financing statement or other public notice
with respect to all or any part of the Collateral is on file or of record in any
public office, except such as have been filed in favor of the Purchaser pursuant
to this Agreement or the other Security Documents.
4.7. No Other Trademarks or Patents. As of the date of this
Agreement the Grantors have no registered Trademarks or Patents other than those
described in Annexes A and B hereto.
Section 5. Covenants. The Grantors, jointly and severally, covenant and
agree with the Purchaser, that from and after the date of this Agreement until
this Agreement is terminated and the security interests created hereby are
released:
5.1. Perfection of Security Interest. Each Grantor will promptly
perform all acts and execute all grants of security in forms suitable for
recording with the United States Patent and Trademark Office and the United
States Register of Copyrights, substantially in the form of Appendices I, II and
III hereto, and make all other filings and registrations requested by the
Purchaser at any time to evidence, perfect, maintain, record or enforce the
Purchaser's interest in Collateral or otherwise in furtherance of the provisions
of this Agreement.
5.2. Acquisition of New Rights to Trademarks, Patents, and
Copyrights. In the event that any Grantor, either itself or through any
Subsidiary, affiliate, agent, employee, licensee or designee, shall adopt,
acquire or obtain rights to or enter into any License Agreement (other than any
License Agreement for the use of computer software or other works of authorship
which are generally available at commercially reasonable prices) in connection
with any Trademark, Patent or Copyright or work for which a trademark, patent or
copyright application has been or is expected to be filed, or become entitled to
the benefit of any Trademark, Patent or Copyright, (a) such Grantor shall inform
the Purchaser of any such event or action in quarterly reports which it shall
deliver to the Purchaser pursuant to Section 7(o) of the Note Purchase Agreement
and (b) such Grantor shall execute and deliver (or cause its Subsidiary to
execute and deliver, as the case may be) such grants of security substantially
in the form of Appendix I, II, or III hereto, as the case may be, or any and all
other assignments,
-6-
<PAGE> 7
registrations, filings, agreements, instruments, documents and papers as are
necessary or appropriate or as the Purchaser may request to evidence the
Purchaser's interest in such Collateral; provided, however, no Grantor will
adopt, acquire or obtain rights or enter into any such License Agreement in
connection with any Trademark, Patent or Copyright or work for which a
trademark, patent or copyright application has been or is expected to be filed,
which prohibits or restricts the pledge, transfer, assignment or hypothecation
of such rights or such License Agreement without the Purchaser's written
consent. At the time of each quarterly report pursuant to this paragraph, the
Grantors will also deliver to the Purchaser supplemental annexes to the Annexes
hereto to include any future Trademark, Patent or Copyright registrations or
applications which may be acquired or made by the Grantors.
5.3. No Conveyance of Rights in Collateral. Except to the extent
that the Purchaser, upon prior written notice from the Grantors, shall consent,
or to the extent permitted by the Note Purchase Agreement, the Grantors will not
assign, sell, lease, transfer, hypothecate, grant, incur, permit or suffer to
exist a Lien upon, grant an exclusive license, or otherwise dispose of any of
the Collateral pledged by the Grantors, and nothing in this Agreement shall be
deemed a consent by the Purchaser to any such action except as expressly
permitted herein. The Grantors shall maintain the security interest created by
the Grantors under this Agreement and will defend the Collateral pledged by the
Grantors against and take such other action as is necessary to remove any Lien
on the Collateral other than a Permitted Lien.
5.4. Maintenance of Rights in Collateral. The Grantors will take all
necessary steps in any proceeding before the United States Patent and Trademark
Office, the United States Register of Copyrights, Library of Congress, or
similar office or agency of the United States or any office of the Secretary of
State (or equivalent) of any state or province thereof, to obtain and maintain
each application and registration of the Collateral pledged by the Grantors,
including, without limitation, filing of renewals, extensions, affidavits of use
and incontestability, and opposition, interference and cancellation proceedings
(except to the extent that dedication, abandonment or invalidation is permitted
under this Agreement). Each Grantor shall notify the Purchaser promptly in
writing if any application or registration relating to any Collateral owned by
it may become abandoned or dedicated or subject to an adverse final
determination in any proceeding in the United States Patent and Trademark
Office, the United States Register of Copyrights, Library of Congress, or in any
similar office or agency of any country or political subdivision thereof
throughout the world or in any court regarding such Grantor's ownership of such
Patent or Trademark, its right to register same, or to keep or maintain the
validity of same.
5.5. Infringement or Misappropriation of Rights in Collateral. In
the event that any Grantor acquires actual knowledge that any valid and
subsisting Trademark, Patent or Copyright is being infringed, misappropriated or
diluted in any material respect by a third party, such Grantor shall promptly
notify the offending party and attempt to obtain recompense for such
infringement, and where necessary and appropriate, or upon the reasonable
request of the Purchaser, sue for infringement, misappropriation and/or dilution
and to obtain injunctive relief and recover damages therefor, unless such
Grantor shall in its reasonable business judgment and without
-7-
<PAGE> 8
violation of this Agreement, abandon any such Trademark, Patent or Copyright of
such Grantor, and such Grantor shall take such other actions reasonably required
to protect such Trademark, Patent or Copyright as such Grantor shall deem
appropriate in its reasonable business judgment under the circumstances. Upon
and during the continuance of an Event of Default, the Purchaser shall have the
right, but in no way shall be obligated, to bring suit in its own name to
enforce the Trademarks, Patents and Copyrights and any licenses thereunder, in
which event such Grantor shall, at the request of the Purchaser, do any and all
lawful acts reasonably requested by the Purchaser and execute any and all
documents reasonably required by the Purchaser to aid such enforcement, and such
Grantor shall, upon demand, promptly reimburse and indemnify the Purchaser for
all costs and expenses incurred in such enforcement.
5.6. Marking of Records; Inspection. Each Grantor shall maintain at
its own cost and expense complete and accurate records of the Collateral owned
by it, including, without limitation, a record of all payments received and all
credits granted with respect to the Collateral and all other dealings with the
Collateral. Each Grantor will mark its books and records pertaining to the
Collateral to evidence this Agreement and the security interests created hereby.
The Purchaser shall have a security interest in all of the Grantor's books and
records pertaining to the Collateral and, upon the occurrence and during the
continuation of any Event of Default, the Grantors shall deliver and turn over
any such books and records (or true and complete copies thereof to the Purchaser
at any time on demand. Each Grantor shall allow any representative of the
Purchaser to inspect such books and records at any time during reasonable
business hours on reasonable notice and will provide photocopies thereof at such
Grantor's expense to the Purchaser upon request of the Purchaser.
5.7. Payment of Taxes; etc. Each Grantor will pay and discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all taxes, assessments and governmental charges or levies imposed
upon the Collateral owned by it as and to the extent provided in Section 9.2 of
the Note Purchase Agreement.
5.8. Changes in Locations, Name, etc. Except as provided in Section
10.16 of the Note Purchase Agreement, no Grantor will (a) change the location of
its chief executive offices from that specified in the other Security Documents
to which it is a party; or (b) change its name, identity or corporate structure
to such an extent that any financing statement or other document filed in
connection with this Agreement would become seriously misleading.
5.9. Maintenance of Perfected Security Interest; Further Assurances.
At any time and from time to time, upon the written request of the Purchaser,
and at the sole expense of each Grantor, such Grantor will promptly and duly
execute, deliver, file and record such further instruments and documents
(including, without limitation, any financing statements and amendments thereto,
continuation statements and notices under the Uniform Commercial Code in effect
in any jurisdiction with respect to the security interests created hereby) and
take such further action as the Purchaser may reasonably request for the purpose
of effectuating the transactions contemplated by the Note Purchase Agreement and
obtaining and preserving the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, causing any or all
-8-
<PAGE> 9
of the Collateral to be transferred of record into the name of the Purchaser or
nominee following the occurrence and during the continuance of an Event of
Default; provided that in the absence of such request by the Purchaser, no
Grantor shall be relieved of its obligations under Section 3 of this Agreement.
Section 6. Remedies. At any time after and during the continuation of an
Event of Default, the Purchaser shall have the following rights and remedies,
all such rights and remedies being cumulative, not exclusive and enforceable
alternatively, successively or concurrently, without (except as provided herein)
notice to, or consent by, the Grantors:
6.1. Enforcement of Rights. The Purchaser may (without assuming any
obligations or liability thereunder) enforce (and shall have the exclusive right
to enforce) against any licensee or sublicensee all rights and remedies of the
Grantors in, to and under any one or more License Agreements with respect to the
Collateral, and take or refrain from taking any action under any thereof, and
the Grantors hereby release the Purchaser from, and agree to hold the Purchaser
free and harmless from and against any claims arising out of, any action taken,
or omitted to be taken with respect to any such License Agreement other than
those arising out of the gross negligence or willful misconduct of the
Purchaser.
6.2. Power to Dispose of Collateral. The Purchaser may, upon ten
(10) days' prior notice to the Grantors, (a) assign, sell, or otherwise dispose
of the Collateral or any of it, either with or without special or other
conditions or stipulations, and do all other acts and things for completing the
assignment, sale or disposition which the Purchaser shall, in its sole
discretion, deem appropriate or proper and the Purchaser shall have the power to
buy all or any part of the Collateral and (b) prohibit the Grantors from making
any use of the Trademarks or any mark similar thereto or the Patents or
Copyrights for any purpose.
6.3. Power to License Collateral. The Purchaser may, upon ten (10)
days' prior notice to the Grantors, require the Grantors to license any of the
Trademarks, Patents or Copyrights, which are not subject to an exclusive
license, for such term or terms, on such conditions, and in such manner, as the
Purchaser shall in its sole discretion determine; provided, however, that the
licensee shall be an entity in a business substantially similar to the business
engaged in by the Grantors on the date hereof.
6.4. Execution of Instruments. In addition to the foregoing, in
order to implement the assignment, sale, license or other disposal of any of the
Collateral pursuant to Sections 6.1, 6.2(a) and 6.3 hereof, the Purchaser may
execute and deliver on behalf of the Grantors one or more instruments of
assignment, sale, license or other disposition of the Collateral. Each Grantor
agrees to pay when due all expenses and costs incurred in any such transfer of
the Collateral owned by it, including any taxes and reasonable attorneys' fees.
The Purchaser may apply the proceeds actually received from any such license,
assignment, sale or other disposition in payment of the Secured Obligations.
Nothing herein contained shall be construed as requiring the Purchaser to take
any such action at any time.
-9-
<PAGE> 10
6.5. Proceeds to be Turned Over to the Purchaser. If an Event of
Default shall occur and be continuing, then upon the Purchaser's request all
Proceeds received by any Grantor consisting of cash, checks and other near-cash
items shall be held by such Grantor in trust for the Purchaser, segregated from
other funds of such Grantor, and shall, forthwith upon receipt by such Grantor,
be turned over to the Purchaser in the exact form received by such Grantor (duly
endorsed by such Grantor to the Purchaser, if required) and held by the
Purchaser in the Collateral Account maintained by the Purchaser pursuant to the
Security Agreement.
6.6. Application of Proceeds. All Proceeds while held by the
Purchaser in such Collateral Accounts (or by any Grantor in trust for the
Purchaser) shall continue to be held as collateral security for all the Secured
Obligations and shall not constitute payment thereof until applied as provided
in the Security Agreement.
6.7. Code Remedies. (a) If an Event of Default shall occur and be
continuing, the Purchaser may exercise, in addition to all other rights and
remedies granted to it in this Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Code and such additional rights
and remedies to which a secured party is entitled under the laws in effect in
any jurisdiction where any rights and remedies hereunder may be asserted to
exercise all voting, consensual and other powers of ownership pertaining to the
Collateral as if the Purchaser was the sole and absolute owner thereof (and the
Grantors, jointly and severally, agree to take all such action as may be
necessary or appropriate to give effect to such right). Without limiting the
generality of the foregoing, after the occurrence and during the continuance of
an Event of Default, the Purchaser, without demand of performance or other
demand, presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to the Grantors or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
waived to the extent allowed by law), may in such circumstances forthwith
collect, receive, appropriate, realize upon, sell, lease, assign, give option or
options to purchase, or otherwise dispose of and deliver the Collateral or any
part thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Purchaser or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Purchaser may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the sale may be so adjourned. The Purchaser shall have the
right upon any such public sale or sales, and, to the extent permitted by law,
upon any such private sale or sales, to purchase the whole or any part of the
Collateral so sold, free of any right or equity of redemption in the Grantors,
which right or equity is hereby waived or released. Each Grantor further agrees,
at the Purchaser's request, to assemble the Collateral and make it available to
the Purchaser at places which the Purchaser shall reasonably select, whether at
such Grantor's premises or elsewhere.
(b) The Purchaser shall apply the net Proceeds of any
collection, recovery, receipt, appropriation, realization or sale of Collateral,
after
-10-
<PAGE> 11
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Purchaser hereunder, including,
without limitation, reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Secured Obligations, in such order as the Purchaser
may elect consistent with the terms of the Note Purchase Agreement, and only
after such application and after the payment by the Purchaser of any other
amount required by any provision of law, including, without limitation, Section
9-504(1)(c) of the Code, need the Purchaser account for the surplus, if any, to
the Grantors. To the extent permitted by applicable law, the Grantors waive all
claims, damages and demands it may acquire against the Purchaser arising out of
the exercise by it of any rights hereunder. If any notice of a proposed sale or
other disposition of Collateral shall be required by law, such notice shall be
deemed reasonable and proper if given at least 10 days before such sale or other
disposition.
6.8. Deficiency. The Grantors shall remain jointly and severally
liable for any deficiency if the proceeds of any sale or other disposition of
the Collateral are insufficient to pay the Secured Obligations of the Grantors
and the costs, fees and expenses of disposing of the Collateral of the Grantors.
Section 7. Purchaser's Appointment as Attorney-in-Fact; Purchaser's
Performance of the Grantors' Secured Obligations.
7.1. Powers. Effective upon and during the continuance of an Event
of Default, each Grantor hereby irrevocably constitutes and appoints the
Purchaser and any officer or agent thereof, with full power of substitution, as
its true and lawful attorney-in-fact with full irrevocable power and authority
in the place and stead of such Grantor and in the name of such Grantor or in its
own name, from time to time in the Purchaser's discretion, for the purpose of
carrying out the terms of this Agreement and to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Agreement, and,
without limiting the generality of the foregoing, each Grantor hereby gives the
Purchaser the power and right, on behalf of such Grantor, without notice to or
assent by such Grantor, to do the following:
(a) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral;
(b) to execute, in connection with any sale provided for in Sections
6.2 or 6.7 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral;
(c) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due thereunder
directly to the Purchaser or as the Purchaser shall direct;
(d) to ask or demand for, collect, receive payment of and receipt
for, any and all moneys, cash and non-cash Proceeds, claims and other amounts
due or to become due at any time in respect of or arising out of any Collateral;
-11-
<PAGE> 12
(e) to sign and endorse any assignments, verifications, notices and
other documents in connection with any of the Collateral;
(f) to commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction or before any
administrative agency to collect the Collateral or any part thereof and to
enforce any other right in respect of such Collateral;
(g) to defend any suit, action or proceeding brought against any
Grantor with respect to any Collateral;
(h) to settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, to give such discharges or releases as
the Purchaser may deem appropriate;
(i) generally, to sell, transfer, pledge and make any agreement with
respect to or otherwise deal with any of the Collateral as fully and completely
as though the Purchaser were the absolute owner thereof for all purposes, and to
do, at the Purchaser's option and such Grantor's expense, at any time, or from
time to time, all acts and things which the Purchaser deems necessary to
protect, preserve or realize upon the Collateral and the Purchaser's security
interests therein and to effect the intent of this Agreement, all as fully and
effectively as such Grantor might do;
(j) to release its interest in, make exchanges or substitutions for
and/or surrender, all or any part of such Grantor's interest in all or any part
of the Collateral;
(k) to remove from such Grantor's place(s) of business all books,
records, ledger sheets, correspondence, invoices and documents relating to or
evidencing any of the Collateral (so long as the Purchaser shall supply copies
of all documents removed within a reasonable time after removal), or without
cost or expense to the Purchaser to make such use of such Grantor's place(s) of
business as may be reasonably necessary to administer, control and/or collect
the Collateral;
(l) to endorse the name of such Grantor upon any items of payment
relating to the Collateral or upon any proof of claim in bankruptcy against any
account debtor; and
(m) to file financing statements and continuation statements
covering the Collateral and execute the same on behalf of such Grantor.
7.2. Performance by the Purchaser of the Secured Obligations. If any
Grantor fails to perform or comply with any of its agreements contained herein,
the Purchaser, at its option, but without any obligation so to do, may perform
or comply, or otherwise cause performance or compliance, with such agreement.
7.3. The Grantors' Reimbursement Obligation. The expenses of the
Purchaser incurred in connection with actions undertaken as provided in this
Section 7, together with interest thereon at the interest rate then applicable
to amounts overdue
-12-
<PAGE> 13
under the Notes from the date of payment by the Purchaser to the date reimbursed
by the Grantors, shall be jointly and severally payable by the Grantors to the
Purchaser on demand and shall constitute part of the Secured Obligations.
7.4. Ratification; Power Coupled With An Interest. The Grantors
hereby ratify all that said attorneys shall lawfully do or cause to be done by
virtue hereof. All powers, authorizations and agencies contained in or granted
pursuant to this Agreement are coupled with an interest and are irrevocable
until this Agreement is terminated and the security interests created hereby are
released.
7.5. Execution of Power of Attorney. Concurrently with the execution
and delivery hereof, the Grantors are executing and delivering to the Purchaser,
in the form of Appendix IV hereto, three (3) originals of a Power of Attorney
for the implementation of any assignment, sale or other disposition of the
Trademarks, Patents or Copyrights or any of them pursuant to Sections 6.1, 6.2
and 6.3 hereof. All powers of attorney granted hereunder shall be deemed in
addition to any powers of attorney granted under any other Security Document.
Section 8. Duty of the Purchaser. The Purchaser's sole duty with respect
to the custody, safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the Code or otherwise, shall be to deal with
it in the same manner as the Purchaser deals with similar property for its own
account.
Neither the Purchaser nor any of its directors, officers,
employees or agents shall be liable for failure to demand, collect or realize
upon any of the Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
any Grantor or any other Person or to take any other action whatsoever with
regard to the Collateral or any part thereof. The powers conferred on the
Purchaser hereunder are conferred solely to enable the Purchaser to protect the
Purchaser's interests in the Collateral and shall not impose any duty upon the
Purchaser to exercise any such powers. The Purchaser shall be accountable only
for amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or agents
shall be responsible to any Grantor for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct.
Section 9. Execution of Financing Statements. Pursuant to Section 9-402 of
the Code, the Grantors authorize the Purchaser to file financing statements with
respect to the Collateral without the signature of the Grantors in such form and
in such filing offices as the Purchaser reasonably determines appropriate to
perfect the security interests of the Purchaser under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction. The Purchaser will provide
the Grantors with a copy of each such filing filed by the Purchaser pursuant to
this Section 9; provided that the failure to furnish the Grantors with any such
copy shall not relieve the Grantors of any of their obligations hereunder or
subject the Purchaser to any liability.
Section 10. Miscellaneous.
-13-
<PAGE> 14
10.1. Notices. All notices, requests and demands to or upon the
Purchaser or the Grantors hereunder shall be made or delivered in the manner
provided in the Guarantee.
10.2. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.3. Amendments in Writing. None of the terms or provisions of this
Agreement may be waived, amended, supplemented or otherwise modified except by a
written instrument executed by the Grantors and the Purchaser; provided that any
provision of this Agreement may be waived by the Purchaser in a letter or
agreement executed by the Purchaser or by facsimile transmission from the
Purchaser.
10.4. No Waiver by Course of Conduct. The Purchaser shall not by any
act (except by a written instrument pursuant to Section 10.3 hereof) delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of the Purchaser, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Purchaser of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Purchaser would
otherwise have on any future occasion.
10.5. Remedies Cumulative. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
10.6. Integration. This Agreement, together with the Note Purchase
Agreement and the other Note Documents represent the entire agreement of the
parties with respect to the subject matter hereof and there are no promises or
representations by the Purchaser relative to the subject matter hereof not
reflected herein or therein.
10.7. Section Headings. The section and subsection headings used in
this Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
10.8. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of each Grantor and the Purchaser and their respective
successors and assigns; provided, however, that no Grantor shall have the right
to assign its duties hereunder without the prior written consent of the
Purchaser.
10.9. Additional Grantors. The initial Grantors hereunder shall be
the Parent and those Subsidiaries of the Parent as are signatories hereto on the
date hereof.
-14-
<PAGE> 15
From time to time subsequent to the date hereof, additional Subsidiaries of the
Parent may become parties hereto, as additional Grantors (each, an "Additional
Grantor"), by executing a counterpart of this Agreement substantially in the
form of Appendix V attached hereto. Upon delivery of any such counterpart to the
Purchaser, notice of which is hereby waived by the Grantors, each Additional
Grantor shall be a Grantor and shall be as fully a party hereto as if such
Additional Grantor were an original signatory hereto. Each Grantor expressly
agrees that its obligations arising hereunder shall not be affected or
diminished by the addition or release of any other Grantor hereunder nor by any
election of the Purchaser not to cause any Subsidiary of the Parent to become an
Additional Grantor hereunder. This Agreement shall be fully effective as to any
Grantor that is or becomes a party hereto regardless of whether any other Person
becomes or fails to become or ceases to be a Grantor hereunder. Each Additional
Grantor shall execute the filings specified in Section 5 hereof and such other
filings, registrations or instruments as the Purchaser may reasonably request,
in order to perfect the security interests granted or purported to granted
hereunder.
10.10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall together constitute one and the same instrument.
10.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
10.12. ACKNOWLEDGMENTS. EACH GRANTOR HEREBY ACKNOWLEDGES THAT:
(a) IT HAS BEEN ADVISED BY COUNSEL IN THE NEGOTIATION, EXECUTION AND
DELIVERY OF THIS AGREEMENT;
(b) THE PURCHASER DOES NOT HAVE ANY FIDUCIARY RELATIONSHIP TO ANY
GRANTOR, AND THE RELATIONSHIP BETWEEN THE PURCHASER, ON THE ONE HAND, AND THE
GRANTORS, ON THE OTHER HAND, IS SOLELY THAT OF SECURED PARTY AND DEBTOR,
RESPECTIVELY; AND
(c) NO JOINT VENTURE EXISTS BETWEEN THE PURCHASER AND THE GRANTORS.
10.13. Dating. Although this Agreement is dated as of the date first
written above for convenience, this Agreement shall be effective on September
[__], 1998.
-15-
<PAGE> 16
IN WITNESS WHEREOF, each of the undersigned has caused this
Agreement to be duly executed and delivered by its authorized officer as of the
date first written above.
NOMURA HOLDING AMERICA INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
PAISANO PUBLICATIONS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
<PAGE> 17
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
<PAGE> 18
ANNEX A
TRADEMARKS
<PAGE> 19
ANNEX B
PATENTS
<PAGE> 20
ANNEX C
COPYRIGHTS
<PAGE> 21
APPENDIX I
ASSIGNMENT FOR SECURITY
(TRADEMARKS)
THIS ASSIGNMENT FOR SECURITY dated as of September [__], 1998 (this
"Assignment"), is made by EACH SIGNATORY HERETO (each, together with its
successors and assigns, a "Grantor" and collectively, the "Grantors").
W I T N E S S E T H:
WHEREAS, the Grantors have adopted, used, are using or intend to use
the trademarks listed on Annex A to the Agreement referred to below (a copy of
which Annex A is attached hereto), which trademarks are registered or the
subject of pending applications for registration in the United States Patent and
Trademark Office (the "Trademarks"); and
WHEREAS, the Grantors have entered into a Intellectual Property
Security Agreement dated as of September [__], 1998 (as from time to time
amended, modified or supplemented in accordance with the terms thereof, the
"Agreement"; capitalized terms used herein without definition have the meanings
assigned to those terms in the Agreement), in favor of Nomura Holding America
Inc. (the "Purchaser"), in order to secure the prompt and complete payment,
observance and performance of the Secured Obligations (as defined in the
Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each Grantor does hereby assign
unto the Purchaser and grant to the Purchaser a security interest in, and
mortgage on, all right, title, and interest of such Grantor in and to the
Trademarks, and the applications and registrations thereof, together with the
goodwill of the business connected with the use of and symbolized by the
Trademarks, and all Proceeds (as defined in the Agreement) thereof, including,
without limitation, any and all royalties for any licenses thereof (the
"Trademark Collateral"), to secure the prompt and complete payment, performance
and observance of the Secured Obligations. Each Grantor does hereby further
acknowledge and affirm that the rights and remedies of the Purchaser with
respect to the assignment of and security interest in the Trademark Collateral
made and granted hereby are more fully set forth in the Agreement, the terms and
provisions of which are hereby incorporated herein by reference as if fully set
forth herein.
THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 22
IN WITNESS WHEREOF, each Grantor has caused this Assignment to be
duly executed by its authorized officer as of the date first written above.
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
PAISANO PUBLICATIONS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
-2-
<PAGE> 23
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 24
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On this __ day of September, 1998 before me personally appeared the
above-named ______, to me known, who being by me duly sworn according to law, on
his/her oath stated that he/she is the ___________ of [NAME OF GRANTOR] and
acknowledged that he/she signed, sealed and delivered the foregoing instrument
as the free and voluntary act and deed of said corporation.
Notary Public
My Commission Expires:
- ---------------------
-4-
<PAGE> 25
APPENDIX II
ASSIGNMENT FOR SECURITY
(PATENTS)
THIS ASSIGNMENT FOR SECURITY dated as of September [__], 1998 (this
"Assignment"), is made by EACH SIGNATORY HERETO (each, together with its
successors and assigns, a "Grantor", and collectively, the "Grantors").
W I T N E S S E T H:
WHEREAS, the Grantors own the letters patent, and applications for
letters patent, of the United States more particularly described on Annex B to
the Agreement referred to below, a copy of which Annex B is attached hereto (the
"Patents"); and
WHEREAS, the Grantors have entered into a Intellectual Property
Security Agreement dated as of September [__], 1998 (as from time to time
amended, modified or supplemented in accordance with the terms thereof, the
"Agreement"; capitalized terms used herein without definition have the meanings
assigned to those terms in the Agreement), in favor of Nomura Holding Company
Inc. (the "Purchaser"),in order to secure the prompt and complete payment,
observance and performance of the Secured Obligations (as defined in the
Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each Grantor does hereby assign
unto the Purchaser and grant to the Purchaser a security interest in, and
mortgage on, all right, title and interest of such Grantor in and to the
Patents, together with any application, issue, re-examination, reissue,
continuation, continuation-in-part, division, improvement or extension thereof,
and all Proceeds (as defined in the Agreement) thereof, including, without
limitation, any and all causes of action for infringement thereof for the full
term of the Patents and any and all royalties for any licenses thereof (the
"Patent Collateral"), to secure the prompt and complete payment, performance and
observance of the Secured Obligations. Each Grantor does hereby further
acknowledge and affirm that the rights and remedies of the Purchaser with
respect to the assignment of and security interest in the Patent Collateral made
and granted hereby are more fully set forth in the Agreement, the terms and
provisions of which are hereby incorporated herein by reference as if fully set
forth herein.
THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 26
IN WITNESS WHEREOF, each Grantor has caused this Assignment to be
duly executed by its authorized officer as of the date first written above.
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
PAISANO PUBLICATIONS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
-2-
<PAGE> 27
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 28
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On this __ day of September, 1998 before me personally appeared the
above-named __________, to me known, who being by me duly sworn according to
law, on his/her oath stated that he/she is the _________ of [NAME OF GRANTOR]
and acknowledged that he/she signed, sealed and delivered the foregoing
instrument as the free and voluntary act and deed of said corporation.
Notary Public
My Commission Expires:
- ---------------------
-4-
<PAGE> 29
APPENDIX III
ASSIGNMENT FOR SECURITY
(COPYRIGHTS)
THIS ASSIGNMENT FOR SECURITY dated as of September [__], 1998 (this
"Assignment"), is made by EACH SIGNATORY HERETO (each, together with its
successors and assigns, a "Grantor", and collectively, the "Grantors").
W I T N E S S E T H:
WHEREAS, the Grantors own those certain works, and their respective
copyrights, listed on Annex C to the Agreement referred to below, a copy of
which Annex C is attached to this Assignment (hereinafter referred to as the
"Works"); and
WHEREAS, the Grantors have entered into a Intellectual Property
Security Agreement dated as of September [__], 1998 (as from time to time
amended, modified or supplemented in accordance with the terms thereof, the
"Agreement"; capitalized terms used herein without definition have the meanings
assigned to those terms in the Agreement), in favor of Nomura Holding America
Inc. (the "Purchaser"), in order to secure the prompt and complete payment,
observance and performance of the Secured Obligations (as defined in the
Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each Grantor does hereby assign
and grant to the Purchaser a security interest in, and mortgage on, all right,
title and interest of such Grantor in and to the Works, including, without
limitation, all reproduction and allied rights necessary for production,
distribution and exploitation of said Works throughout the world in perpetuity,
and all copyrights therein and all renewals and extensions thereof, and all
translations, adaptations and other versions of the Works now made or hereafter
created. Each Grantor does hereby acknowledge that it has entered into the
Agreement in favor of the Purchaser in order to secure the prompt and complete
payment, observance and performance of the Secured Obligations and does hereby
affirm that the rights and remedies of the Purchaser with respect to the
assignment of and security interest in the Works made and granted hereby are
more fully set forth in the Agreement, the terms and provisions of which are
hereby incorporated herein by reference as if fully set forth herein.
THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 30
IN WITNESS WHEREOF, each Grantor has caused this Agreement to be
duly executed by its authorized officer as of the date first written above.
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
PAISANO PUBLICATIONS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
-2-
<PAGE> 31
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 32
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On this __ day of September, 1998 before me personally appeared the
above-named _____________, to me known, who being by me duly sworn according to
law, on his/her oath stated that he/she is the of [NAME OF GRANTOR] and
acknowledged that he/she signed, sealed and delivered the foregoing instrument
as the free and voluntary act and deed of said corporation.
Notary Public
My Commission Expires:
- ---------------------
-4-
<PAGE> 33
APPENDIX IV
POWER OF ATTORNEY
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, that EACH SIGNATORY HERETO (each,
together with its successors and assigns, a "Grantor", and collectively, the
"Grantors"), hereby appoint and constitute Nomura Holding America Inc. (the
"Purchaser"), its true and lawful attorney, with full power of substitution, and
with full power and authority to perform the following acts on behalf of such
Grantor:
1. for the purpose of assigning, selling or otherwise disposing of
all right, title and interest of such Grantor in and to any letters patent or
patent applications of the United States or any other country or political
subdivision thereof throughout the world, and all registrations, recordings,
reissues, continuations, continuations-in-part, divisions, improvements, and
extensions thereof, and all pending applications therefor, and for the purpose
of the recording, registering and filing of, or accomplishing any other
formality with respect to, the foregoing, to execute and deliver any and all
agreements, documents, instruments of assignment or other papers necessary or
advisable to effect such purpose;
2. for the purpose of assigning, selling or otherwise disposing of
all right, title and interest of such Grantor in and to any trademarks, trade
names, trade styles and service marks, and all registrations, recordings,
reissues, extensions and renewals thereof, and all pending applications
therefor, and for the purpose of the recording, registering and filing of, or
accomplishing any other formality with respect to, the foregoing, to execute and
deliver any and all agreements, documents, instruments of assignment or other
papers necessary or advisable to effect such purpose;
3. for the purpose of assigning, selling or otherwise disposing of
all right, title and interest of such Grantor in and to any works of authorship
capable of copyright protection and all copyright registrations, recordings,
extensions and renewals thereof, and all pending applications therefor, and for
the purpose of the recording, registering and filing of, or accomplishing any
other formality with respect to, the foregoing, to execute and deliver any and
all agreements, documents, instruments of assignment or other papers necessary
or advisable to effect such purpose; and
4. to execute any and all documents, statements, certificates or
other papers necessary or advisable in order to obtain the purposes described
above as the Purchaser may in its sole discretion determine.
<PAGE> 34
This Power of Attorney is made pursuant to a Intellectual Property
Security Agreement dated as of September [__], 1998 (as from time to time
amended, modified, or supplemented in accordance with the terms hereof, the
"Agreement"; capitalized terms used herein without definition herein have the
meanings assigned to those terms in the Agreement), between the Grantors and the
Purchaser, and takes effect solely for the purposes of Section 7 of the
Agreement and is subject to the conditions thereof and may not be revoked until
the prompt and complete payment, observance and performance of all Secured
Obligations shall have been made, the Agreement has been terminated and all
Collateral has been released pursuant to the terms of the Agreement. This Power
of Attorney is not exercisable by the Purchaser at any time other than after and
during the continuance of an Event of Default (as defined in the Note Purchase
Agreement).
-2-
<PAGE> 35
IN WITNESS WHEREOF, this Power of Attorney has been duly executed
and delivered by the Grantors as of this __________ day of September, 1998.
EASYRIDERS, INC.
By:
------------------------------------
Name:
Title:
PAISANO PUBLICATIONS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS OF COLUMBUS, INC.
By:
------------------------------------
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:
------------------------------------
Name:
Title:
-3-
<PAGE> 36
TERESI, INC.
By:
------------------------------------
Name:
Title:
BROS CLUB, INC.
By:
------------------------------------
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:
------------------------------------
Name:
Title:
-4-
<PAGE> 37
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On this __ day of September, 1998 before me personally appeared the
above-named _______________, to me known, who being by me duly sworn according
to law, on his/her oath stated that he/she is the of [NAME OF GRANTOR] and
acknowledged that he/she signed, sealed and delivered the foregoing instrument
as the free and voluntary act and deed of said corporation.
Notary Public
My Commission Expires:
- ---------------------
-5-
<PAGE> 38
APPENDIX V
COUNTERPART TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
This counterpart, dated _________, [199__][200__], is delivered
pursuant to Section 10.9 of that certain Intellectual Property Security
Agreement dated as of September [__], 1998 (as from time to time amended,
modified or supplemented, the "Intellectual Property Security Agreement"; the
terms defined therein and not otherwise defined herein being used as therein
defined), made by the Easyriders, Inc. and certain of its Subsidiaries signatory
thereto in favor of Nomura Holding America Inc. The undersigned hereby agrees
(i) that this counterpart may be attached to the Intellectual Property Security
Agreement, and (ii) that the undersigned will comply with all the terms and
conditions of the Intellectual Property Security Agreement as if it were an
original signatory thereto.
[NAME OF ADDITIONAL GRANTOR]
By:
------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.5.5
EXHIBIT F-1 TO NOTE AND WARRANT PURCHASE AGREEMENT
(Form of Warrant)
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN
EXEMPTION FROM REGISTRATION, UNDER SAID ACT AND LAWS.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
EASYRIDERS, INC.
Expires September __, 2005
New York, New York
September __, 1998
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, EASYRIDERS, INC., a Delaware corporation (together with its
successors and assigns, the "Issuer"), hereby certifies that
NOMURA HOLDING AMERICA INC.
or its registered assigns is entitled to subscribe for and purchase, during the
period specified in this Warrant, 348,157 shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and
non-assessable Common Stock of the Issuer, at an exercise price per share equal
to the Warrant Price then in effect, subject, however, to the provisions and
upon the terms and conditions hereinafter set forth. Capitalized terms used in
this Warrant and not otherwise defined herein shall have the respective meanings
specified in Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant
Stock represented hereby shall commence on the date of issuance of this Warrant
and shall expire at 5:00 P.M., Eastern Time, on September [__], 2005 (such
period being the "Term").
<PAGE> 2
2. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange.
(a) Time of Exercise. The purchase rights represented by this Warrant
may be exercised in whole or in part at any time and from time to time during
the Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder's election (i) by certified or official bank
check, (ii) by surrender to the Company for cancellation of (x) first, a
Revolving Note or Revolving Notes and (y) after such time as no Revolving Notes
remain outstanding, a Term Note or Term Notes (in respect of any such Notes the
Holder shall be the sole legal and beneficial owner) to the extent of a portion
of the principal amount thereof or (at the election of the Holder) accrued and
unpaid interest thereon which is equal in the aggregate to the aggregate Warrant
Price of the shares of Warrant Stock being purchased upon such exercise (and, if
Holder makes such election, for such purposes, all interest accrued on such
Notes to the date of such exercise shall first be applied to such payment before
any of the principal amount thereof shall be so surrendered and applied), or
(iii) by surrender to the Issuer for cancellation of a portion of this Warrant
representing that number of unissued shares of Warrant Stock which is equal to
the quotient obtained by dividing (A) the product obtained by multiplying the
Warrant Price by the number of shares of Warrant Stock being purchased upon such
exercise by (B) the difference obtained by subtracting the Warrant Price from
the Current Market Price per share of Warrant Stock as of the date of such
exercise, or (iv) by a combination of the foregoing methods of payment selected
by the Holder of this Warrant. In any case where the consideration payable upon
such exercise is being paid in whole or in part pursuant to the provisions of
clause (ii) or clause (iii) of this Section 2(b), such exercise shall be
accompanied by written notice from the Holder of this Warrant specifying the
manner of payment thereof, and in the case of an application of clause (ii),
stating the respective amounts of principal and interest of the Notes to be
applied to such payment, and in the case of an application of clause (iii),
containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares to be issued after giving effect to such surrender. If, pursuant to
clause (ii) above, less than the entire unpaid principal amount of any Note
shall be applied toward payment of the consideration payable upon any exercise
of this Warrant, the Holder thereof shall surrender the Note and the Issuer
shall issue a new Note (dated the date of the Note being surrendered)
representing the balance of the unpaid principal amount of the Note so
surrendered, payable to such Holder or as such Holder may otherwise direct.
(c) Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Business Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have
-2-
<PAGE> 3
been exercised (less any amount thereof which shall have been cancelled in
payment or partial payment of the Warrant Price as hereinabove provided) shall
also be issued to the Holder hereof within such time.
(d) Transferability of Warrant. Subject to the provisions of Section
2(e) hereof, this Warrant may be transferred on the books of the Issuer by the
Holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant at the principal office of the Issuer, properly endorsed (by the Holder
executing an assignment in the form attached hereto) and upon payment of any
necessary transfer tax or other governmental charge imposed upon such transfer.
This Warrant is exchangeable at the principal office of the Issuer for Warrants
for the purchase of the same aggregate number of shares of Warrant Stock, each
new Warrant to represent the right to purchase such number of shares of Warrant
Stock as the Holder hereof shall designate at the time of such exchange. All
Warrants issued on transfers or exchanges shall be dated the Closing Date and
shall be identical with this Warrant except as to the number of shares of
Warrant Stock issuable pursuant hereto.
(e) Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Warrant Stock to be
issued upon exercise hereof are being acquired solely for the Holder's
own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued
upon exercise hereof except pursuant to an effective registration
statement, or an exemption from registration, under the Securities Act
and any applicable state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant
and all certificates representing shares of Warrant Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN
EXEMPTION FROM REGISTRATION, UNDER SAID ACT AND LAWS.
(iii) The restrictions imposed by this Section 2(e) upon the
transfer of this Warrant and the shares of Warrant Stock to be
purchased upon exercise hereof shall terminate (A) when such securities
shall have been effectively registered under the Securities Act, or (B)
upon the Issuer's receipt of an opinion of counsel, in form and
substance reasonably satisfactory to the Issuer (it being understood
that in-house counsel to the Holder shall be deemed to be acceptable
counsel), addressed to the Issuer to the effect that such restrictions
are no longer required to ensure compliance with the Securities Act.
Whenever such restrictions shall cease and terminate as to any such
securities, the Holder thereof shall be entitled to receive from the
Issuer (or its transfer agent and registrar), without expense (other
than applicable transfer taxes, if any), new Warrants (or, in the case
of shares of Warrant Stock, new stock
-3-
<PAGE> 4
certificates) of like tenor not bearing the applicable legends required
by paragraph (ii) above relating to the Securities Act and state
securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at
any time after each exercise of this Warrant, upon the request of the Holder
hereof or of any shares of Warrant Stock issued upon such exercise, acknowledge
in writing the extent, if any, of its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if any such
Holder shall fail to make any such request, the failure shall not affect the
continuing obligation of the Issuer to afford such rights to such Holder.
3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and
agrees that all shares of Warrant Stock which may be issued upon the exercise of
this Warrant or otherwise hereunder will, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and
charges created by or through Issuer. The Issuer further covenants and agrees
that during the period within which this Warrant may be exercised, the Issuer
will at all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(b) Reservation. If any shares of the Common Stock required to be
reserved for issuance upon exercise of this Warrant or as otherwise provided
hereunder require registration or qualification with any governmental authority
under any federal or state law before such shares may be so issued, the Issuer
will in good faith use its best efforts as expeditiously as possible at its
expense to cause such shares to be duly registered or qualified. If the Issuer
shall list any shares of Common Stock on any securities exchange it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange,
and will maintain such listing of, any other securities which the Holder of this
Warrant shall be entitled to receive upon the exercise of this Warrant if at the
time any securities of the same class shall be listed on such securities
exchange by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of the Holder
hereof against impairment. Without limiting the generality of the foregoing, the
Issuer will (i) not permit the par value, if any, of its Common Stock to exceed
the then effective Warrant Price, (ii) not amend or modify any provision of the
Certificate of Incorporation or by-laws of the Issuer in any manner that would
adversely affect in any way the powers, preferences or relative participating,
optional or other special rights of the Common Stock or which would
-4-
<PAGE> 5
adversely affect the rights of the Holders of the Warrants, (iii) take all such
action as may be reasonably necessary in order that the Issuer may validly and
legally issue fully paid and nonassessable shares of Common Stock, free and
clear of any liens, claims, encumbrances and restrictions (other than as
provided herein) upon the exercise of this Warrant, and (iv) use its best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be reasonably
necessary to enable the Issuer to perform its obligations under this Warrant.
(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
(it being understood and agreed that if the holder of such Warrant is Nomura
Holding America Inc., then a written agreement of indemnity given by Nomura
Holding America Inc. alone shall be satisfactory to the Issuer and no further
security shall be required) or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant, the Issuer will make and deliver, in
lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like
tenor and representing the right to purchase the same number of shares of Common
Stock.
(e) Rights and Obligations under the Registration Rights Agreement.
This Warrant is entitled to the benefits and subject to the terms of the
Registration Rights Agreement dated as of September __, 1998 between the Issuer
and the Holders (as amended from time to time, the "Registration Rights
Agreement"). The Issuer shall keep or cause to be kept a copy of the
Registration Rights Agreement, and any amendments thereto, at its chief
executive office and shall furnish, without charge, copies thereof to the Holder
upon request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale. (i) In case the Issuer after the Closing Date shall do any of
the following (each a "Triggering Event") (a) consolidate with or merge into any
other Person and the Issuer shall not be the continuing or surviving corporation
of such consolidation or merger, or (b) permit any other Person to consolidate
with or merge into the Issuer and the Issuer shall be the continuing or
surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the extent this Warrant
is not exercised prior to such Triggering Event, or is redeemed in connection
with such Triggering Event, to receive at the Warrant Price in effect at the
time immediately prior to the consummation of such Triggering Event in lieu of
the Common Stock issuable upon such exercise of this Warrant prior to such
Triggering Event, the Securities, cash and property to which such Holder would
have been entitled upon the consummation of such Triggering Event if such Holder
had
-5-
<PAGE> 6
exercised the rights represented by this Warrant immediately prior thereto,
subject to adjustments (subsequent to such corporate action) as nearly
equivalent as possible to the adjustments provided for in Section 4 hereof or
(y) to sell this Warrant (or, at such Holder's election, a portion hereof) to
the Person continuing after or surviving such Triggering Event, or to the Issuer
(if Issuer is the continuing or surviving Person) at a sales price equal to the
amount of cash, property and/or Securities to which a holder of the number of
shares of Common Stock which would otherwise have been delivered upon the
exercise of this Warrant would have been entitled upon the effective date or
closing of any such Triggering Event (the "Event Consideration"), less the
amount or portion of such Event Consideration having a fair value equal to the
aggregate Warrant Price applicable to this Warrant or the portion hereof so
sold.
(ii) Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (a) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (b) the obligation to deliver to such Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this Section
4(a), such Holder shall be entitled to receive, and such Person shall have
similarly delivered to such Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to such Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this paragraph (a))
shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
(iii) If with respect to any Triggering Event, the Holder of this
Warrant has exercised its right as provided in clause (y) of subparagraph (i) of
this Section 4(a) to sell this Warrant or a portion thereof, the Issuer agrees
that as a condition to the consummation of any such Triggering Event the Issuer
shall secure such right of Holder to sell this Warrant to the Person continuing
after or surviving such Triggering Event and the Issuer shall not effect any
such Triggering Event unless upon or prior to the consummation thereof the
amounts of cash, property and/or Securities required under such clause (y) are
delivered to the Holder of this Warrant. The obligation of the Issuer to secure
such right of the Holder to sell this Warrant shall be subject to such Holder's
cooperation with the Issuer, including, without limitation, the giving of
customary representations and warranties to the purchaser in connection with any
such sale. Prior notice of any Triggering Event shall be given to the Holder of
this Warrant in accordance with Section 11 hereof.
(b) Subdivision or Combination of Shares. If the Issuer, at any time
while this Warrant is outstanding, shall subdivide or combine any shares of
Common Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of Holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant
-6-
<PAGE> 7
Price shall be proportionately increased (as at the effective date of such
combination or, if the Issuer shall take a record of Holders of its Common Stock
for the purpose of so combining, as at the applicable record date, whichever is
earlier) to reflect the reduction in the total number of shares of Common Stock
outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time
while this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor) of,
shares of Common Stock, the Warrant Price shall be adjusted, as at the
date the Issuer shall take a record of the Holders of the Issuer's
Capital Stock for the purpose of receiving such dividend or other
distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying
the Warrant Price in effect immediately prior to such record date (or
if no such record is taken, then immediately prior to such payment or
other distribution), by a fraction (1) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (2) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the event that
the Issuer paid cash for fractional shares, the number of additional
shares which would have been outstanding had the Issuer issued
fractional shares in connection with said dividends); or
(ii) Liquidating Dividends, etc. Make a distribution of its
property to the Holders of its Common Stock as a dividend in
liquidation or partial liquidation or by way of return of capital other
than as a dividend payable out of funds legally available for dividends
under the laws of the State of Delaware, the Holder of this Warrant
shall, upon exercise (including without limitation payment of the
Warrant Price), be entitled to receive, in addition to the number of
shares of Warrant Stock receivable thereupon, and without payment of
any additional consideration therefor, a sum equal to the amount of
such property as would have been payable to such Holder had such Holder
been the Holder of record of such Warrant Stock on the record date for
such distribution or if no such record is taken, on the date of such
distribution; and appropriate provision therefor shall be made a part
of any such distribution, or
(iii) Other Dividends. Make a distribution of cash or property
to the Holders of its Common Stock (other than as described in clause
(i) or (ii) of this Section 4(c)), the Issuer shall give the Holder of
this Warrant notice no less than 30 days prior to the record date for
such distribution or if no such record is taken, the date of such
distribution, which notice shall describe the nature of the proposed
distribution.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at
any time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than as provided in the foregoing subsections (a)
through (c) of this Section 4), at a price per share less than the Current
Market Price then in effect or (at any time after September __, 1999) less than
the Warrant Price then in effect, or at any time without consideration, then the
Warrant Price upon each such issuance shall be adjusted to that price
-7-
<PAGE> 8
(rounded to the nearest cent) determined by multiplying the Warrant Price then
in effect by a fraction:
(i) the numerator of which shall be equal to the sum of (A)
the number of shares of Common Stock outstanding immediately prior to
the issuance of such Additional Shares of Common Stock plus (B) the
number of shares of Common Stock (rounded to the nearest whole share)
which the aggregate consideration for the total number of such
Additional Shares of Common Stock so issued would purchase at a price
per share equal to the Current Market Price then in effect or (at any
time after September __, 1999), if greater, the Warrant Price then in
effect, and
(ii) the denominator of which shall be equal to the number of
shares of Common Stock outstanding immediately after the issuance of
such Additional Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this Section 4 or (y) no adjustment was required pursuant to
subsection (e) of this Section 4.
(e) Issuance of Common Stock Equivalents. If the Issuer, at any time
while this Warrant is outstanding, shall issue any Common Stock Equivalent and
the price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Current Market Price then in effect or (at any time after September __, 1999)
less than the Warrant Price then in effect, or if, after any such issuance of
Common Stock Equivalents, the price per share for which Additional Shares of
Common Stock may be issuable thereafter pursuant to such Common Stock Equivalent
is amended or adjusted, and such price as so amended shall be less than the
Current Market Price or (at any time after September __, 1999) less than the
Warrant Price, in each case in effect at the time of such amendment, then the
Warrant Price upon each such issuance or amendment shall be adjusted as provided
in the first sentence of subsection (d) of this Section 4 on the basis that (1)
the maximum number of Additional Shares of Common Stock issuable pursuant to all
such Common Stock Equivalents shall be deemed to have been issued (whether or
not such Common Stock Equivalents are actually then exercisable, convertible or
exchangeable in whole or in part) as of the earlier of (A) the date on which the
Issuer shall enter into a firm contract for the issuance of such Common Stock
Equivalent, or (B) the date of actual issuance of such Common Stock Equivalent,
and (2) the aggregate consideration for such maximum number of Additional Shares
of Common Stock shall be deemed to be the minimum consideration received or
receivable by the Issuer for the issuance of such Additional Shares of Common
Stock pursuant to such Common Stock Equivalent. No adjustment of the Warrant
Price shall be made under this subsection (e) upon the issuance of any
Convertible Security which is issued pursuant to the exercise of any warrants or
other subscription or purchase rights therefor, if any adjustment shall
previously have been made in the Warrant Price then in effect upon the issuance
of such warrants or other rights pursuant to this subsection (e). If no
adjustment is required under this subsection (e) upon issuance of any Common
Stock Equivalent or once an adjustment is made under
-8-
<PAGE> 9
this subsection (e) based upon the Current Market Price in effect on the date of
such adjustment, no further adjustment shall be made under this subsection (e)
based solely upon a change in the Current Market Price after such date.
(f) Purchase of Common Stock by the Issuer. If the Issuer at any time
while this Warrant is outstanding shall, directly or indirectly through a
Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares of
Common Stock at a price per share greater than the Current Market Price then in
effect, then the Warrant Price upon each such purchase, redemption or
acquisition shall be adjusted to that price determined by multiplying such
Warrant Price by a fraction (i) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such purchase,
redemption or acquisition minus the number of shares of Common Stock which the
aggregate consideration for the total number of such shares of Common Stock so
purchased, redeemed or acquired would purchase at the Current Market Price; and
(ii) the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such purchase, redemption or acquisition. For the
purposes of this subsection (f), the date as of which the Current Market Price
shall be computed shall be the earlier of (x) the date on which the Issuer shall
enter into a firm contract for the purchase, redemption or acquisition of such
Common Stock, or (y) the date of actual purchase, redemption or acquisition of
such Common Stock. For the purposes of this subsection (f), a purchase,
redemption or acquisition of a Common Stock Equivalent shall be deemed to be a
purchase of the underlying Common Stock, and the computation herein required
shall be made on the basis of the full exercise, conversion or exchange of such
Common Stock Equivalent on the date as of which such computation is required
hereby to be made, whether or not such Common Stock Equivalent is actually
exercisable, convertible or exchangeable on such date.
(g) Other Provisions Applicable to Adjustments Under this Section 4.
The following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received
by the Issuer shall be deemed to be the following: to the extent that
any Additional Shares of Common Stock or any Common Stock Equivalents
shall be issued for a cash consideration, the consideration received by
the Issuer therefor, or if such Additional Shares of Common Stock or
Common Stock Equivalents are offered by the Issuer for subscription,
the subscription price, or, if such Additional Shares of Common Stock
or Common Stock Equivalents are sold to underwriters or dealers for
public offering without a subscription offering, the public offering
price, in any such case excluding any amounts paid or receivable for
accrued interest or accrued dividends and without deduction of any
compensation, discounts, commissions, or expenses paid or incurred by
the Issuer for or in connection with the underwriting thereof or
otherwise in connection with the issue thereof; to the extent that such
issuance shall be for a consideration other than cash, then, except as
herein otherwise expressly provided, the fair market value of such
consideration at the time of such issuance as determined in good faith
by the Board. The consideration for any Additional Shares of Common
Stock issuable pursuant to any Common Stock Equivalents shall be the
consideration received by the Issuer for issuing such Common Stock
Equivalents, plus the additional consideration payable to the Issuer
upon the exercise, conversion or exchange of such Common Stock
Equivalents. In case of the issuance at any time of
-9-
<PAGE> 10
any Additional Shares of Common Stock or Common Stock Equivalents in
payment or satisfaction of any dividend upon any class of Capital Stock
of the Issuer other than Common Stock, the Issuer shall be deemed to
have received for such Additional Shares of Common Stock or Common
Stock Equivalents a consideration equal to the amount of such dividend
so paid or satisfied. In any case in which the consideration to be
received or paid shall be other than cash, the Board shall notify the
Holder of this Warrant of its determination of the fair market value of
such consideration prior to payment or accepting receipt thereof. If,
within thirty days after receipt of said notice, the Majority Holders
shall notify the Board in writing of their objection to such
determination, a determination of the fair market value of such
consideration shall be made by an Independent Appraiser selected by the
Majority Holders with the approval of the Board (which approval shall
not be unreasonably withheld), whose fees and expenses shall be paid by
the Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or
termination of the right to convert, exchange or exercise any Common
Stock Equivalent the issuance of which effected an adjustment in the
Warrant Price, if such Common Stock Equivalent shall not have been
converted, exercised or exchanged in its entirety, the number of shares
of Common Stock deemed to be issued and outstanding by reason of the
fact that they were issuable upon conversion, exchange or exercise of
any such Common Stock Equivalent shall no longer be computed as set
forth above, and the Warrant Price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any
other adjustments in the Warrant Price made pursuant to the provisions
of this Section 4 after the issuance of such Common Stock Equivalent)
had the adjustment of the Warrant Price been made in accordance with
the issuance or sale of the number of Additional Shares of Common Stock
actually issued upon conversion, exchange or issuance of such Common
Stock Equivalent and thereupon only the number of Additional Shares of
Common Stock actually so issued shall be deemed to have been issued and
only the consideration actually received by the Issuer (computed as in
clause (i) of this subsection (g)) shall be deemed to have been
received by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common
Stock at any time outstanding shall (a) not include any shares thereof
then directly or indirectly owned or held by or for the account of the
Issuer or any of its Subsidiaries, and (b) shall be deemed to include
all shares of Common Stock then issuable upon conversion, exercise or
exchange of any then outstanding Common Stock Equivalents or any other
evidences of Indebtedness, shares of Capital Stock or other Securities
which are or may be at any time convertible into or exchangeable for
shares of Common Stock or Other Common Stock.
(h) Other Action Affecting Common Stock. In case after the Closing Date
hereof the Issuer shall take any action affecting its Common Stock, other than
an action described in any of the foregoing subsections (a) through (g) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
-10-
<PAGE> 11
(i) Adjustment of Warrant Share Number. Upon each adjustment in the
Warrant Price pursuant to any of the foregoing provisions of this Section 4, the
Warrant Share Number shall be adjusted, to the nearest one hundredth of a whole
share, to the product obtained by multiplying the Warrant Share Number
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which shall be the Warrant Price immediately before giving effect
to such adjustment and the denominator of which shall be the Warrant Price
immediately after giving effect to such adjustment. If the Issuer shall be in
default under any provision contained in Section 3 of this Warrant so that
shares issued at the Warrant Price adjusted in accordance with this Section 4
would not be validly issued, the adjustment of the Warrant Share Number provided
for in the foregoing sentence shall nonetheless be made and the Holder of this
Warrant shall be entitled to purchase such greater number of shares at the
lowest price at which such shares may then be validly issued under applicable
law. Such exercise shall not constitute a waiver of any claim arising against
the Issuer by reason of its default under Section 3 of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to a "big six" national
accounting firm selected by the Holder, provided that the Issuer shall have ten
days after receipt of notice from such Holder of its selection of such firm to
object thereto, in which case such Holder shall select another such firm and the
Issuer shall have no such right of objection. The firm selected by the Holder of
this Warrant as provided in the preceding sentence shall be instructed to
deliver a written opinion as to such matters to the Issuer and such Holder
within thirty days after submission to it of such dispute. Such opinion shall be
final and binding on the parties hereto. The fees and expenses of such
accounting firm shall be paid by the Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be
issued in connection with and exercise hereof, but in lieu of such fractional
shares, the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Current Market Price then
in effect.
7. Definitions. For the purposes of this Warrant, the following terms
have the following meanings:
"Additional Shares of Common Stock" means all shares of Common
Stock issued by the Issuer after the Closing Date, and all shares of
Other Common, if any, issued by the Issuer after the Closing Date,
except (i) Warrant Stock, (ii) any shares of Common Stock issuable upon
exercise of the Outstanding Common Stock Equivalents (other than those
issued pursuant to the Issuer's 1998 Executive Incentive Compensation
Plan) provided that the number of shares excluded by reason of this
clause (ii) shall be limited to [____] and (iii) any shares of Common
Stock
-11-
<PAGE> 12
issuable upon exercise of the Common Stock Equivalents issued pursuant
to the Issuer's 1998 Executive Incentive Compensation Plan, provided
that the number of shares excluded by reason of this clause (iii) shall
be limited to 2,800,000.
"Board" shall mean the Board of Directors of the Issuer.
"Business Day" means any day except a Saturday, a Sunday or a
legal holiday in New York City.
"Capital Stock" means and includes (i) any and all shares,
interests, participations or other equivalents of or interests in
(however designated) corporate stock, including, without limitation,
shares of preferred or preference stock and any "phantom" stock rights,
(ii) all partnership interests (whether general or limited) in any
Person which is a partnership, (iii) all membership interests or
limited liability company interests in any limited liability company,
and (iv) all equity or ownership interests in any Person of any other
type.
"Certificate of Incorporation" means the Certificate of
Incorporation of the Issuer as in effect on the Closing Date as
hereafter from time to time amended, modified, supplemented or restated
in accordance with the terms hereof and thereof and pursuant to
applicable law.
"Closing Date" means September , 1998.
"Common Stock" means the Common Stock, no par value, of the
Issuer and any other Capital Stock into which any such stock may
hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or
warrant, option or other right to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Security.
"Company" means Paisano Publications, Inc., a Delaware
corporation and wholly-owned Subsidiary of the Issuer.
"Convertible Securities" means evidences of Indebtedness,
shares of Capital Stock or other Securities which are or may be at any
time convertible into or exchangeable for Additional Shares of Common
Stock. The term "Convertible Security" means one of the Convertible
Securities.
"Current Market Price" as in effect on any day means the
average of the daily market prices of the Common Stock for the period
of 30 consecutive trading days ending three trading days preceding such
date. The market price for each such day shall be the last sale price
on such day as reported on the New York Stock Exchange Consolidated
Tape, or, if the Common Stock is not listed on the New York Stock
Exchange, Inc. or reported on such Consolidated Tape, then the last
sale price on such day on the principal domestic stock exchange on
which such Stock is then listed or admitted to trading, or, if no sale
takes place on such day on such exchange, the average of the closing
bid and asked prices on such day as officially quoted on such exchange,
or, if the Common Stock is not then listed or admitted to trading on
any
-12-
<PAGE> 13
domestic stock exchange but is quoted in the Nasdaq Stock Markets
National Market System ("NMS/NASDAQ") of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), then
the Current Market Price for each such trading day shall be the last
sale price on such day as quoted by NMS/NASDAQ, or, if no sale takes
place on such day or if the Common Stock is neither listed or admitted
to trading on any domestic stock exchange nor quoted on such
NMS/NASDAQ, then the Current Market Price for each such trading day
shall be the average of the reported closing bid and asked price
quotations on such day in the over-the-counter market, as reported by
NASDAQ, or, if not so reported, as furnished by the National Quotation
Bureau, Inc., or if such firm at the time is not engaged in the
business of reporting such prices, as furnished by any similar firm
then engaged in such business as selected by the Issuer, or if there is
no such firm, as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Issuer with the written
approval of the Majority Holders. If at any time the Common Stock is
not listed on any domestic exchange or quoted in the domestic
over-the-counter market, the Current Market Price shall be deemed to be
an amount determined in good faith by the Board and agreed upon in
writing by the Majority Holders within fifteen days of notice by the
Board to the Holders of its determination of the Current Market Price.
If no agreement as to Current Market Price is so reached, the Current
Market Price shall be the fair market value per share of Common Stock
as determined by an Independent Appraiser selected by the Majority
Holders and consented to by the Issuer (which consent shall not be
unreasonably withheld), whose fees and expenses shall be paid by the
Issuer. The determination of fair market value by such Appraiser shall
be based upon the fair market value of the Issuer determined on a going
concern basis as between a willing buyer and a willing seller and
taking into account all relevant factors determinative of value, and
shall be final and binding on all parties. In determining the fair
market value of any shares of Common Stock, no consideration shall be
given to any restrictions on transfer of the Common Stock imposed by
agreement or by federal or state securities laws, or to the existence
or absence of, or any limitations on, voting rights.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute at the time in effect.
"Holders" mean the Persons who shall from time to time own any
Warrant. The term "Holder" means one of the Holders.
"Indebtedness" has the meaning provided in the Note Agreement.
"Independent Appraiser" means a nationally recognized
investment banking firm or other nationally recognized firm that is
regularly engaged in the business of appraising the Capital Stock or
assets of corporations or other entities as going concerns, and which
is not affiliated with either the Issuer or the Holder of any Warrant.
"Issuer" means Easyriders, Inc., a Delaware corporation, and
its successors.
-13-
<PAGE> 14
"Majority Holders" means at any time the Holders of Warrants
exercisable for a majority of the shares of Warrant Stock issuable
under the Warrants at the time outstanding.
"Notes" means the notes of the Company issued pursuant to the
Note Agreement.
"Note Agreement" means the Note and Warrant Purchase
Agreement, dated as of September [__], 1998 among the Issuer, the
Company and Nomura Holding America Inc., as purchaser, as such
agreement may from time to time be amended, modified or supplemented in
accordance with its terms.
"Other Common" means any Capital Stock of the Issuer of any
class which shall be authorized at any time after the date of this
Warrant (other than Common Stock) and which shall have the right to
participate in the distribution of earnings and assets of the Issuer
without limitation as to amount.
"Outstanding Common Stock Equivalents" means the Common Stock
Equivalents outstanding on the Closing Date and listed on Schedule 1
hereto.
"Person" means an individual, a corporation, a partnership, a
trust, an unincorporated organization or a government organization or
an agency or political subdivision thereof.
"Securities" means any debt or equity securities of the
Issuer, whether now or hereafter authorized, any instrument convertible
into or exchangeable for Securities or a Security, and any option,
warrant or other right to purchase or acquire any Security.
"Security" means one of the Securities.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose
outstanding Voting Stock shall at the time be owned directly or
indirectly by the Issuer or by one or more of its Subsidiaries, or by
the Issuer and one or more of its Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
"Voting Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however
designated) having ordinary voting power for the election of a majority
of the members of the Board of Directors (or other governing body) of
such corporation, other than Capital Stock having such power only by
reason of the happening of a contingency.
"Warrants" means the Warrants issued and sold pursuant to the
Note Agreement, including, without limitation, this Warrant, and any
other warrants of like tenor issued in substitution or exchange for any
thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof
or of any of such other Warrants.
-14-
<PAGE> 15
"Warrant Price" means initially $3.00 and such other prices as
shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number
of shares of Warrant Stock which may at such time be purchased upon
exercise of this Warrant, after giving effect to all prior adjustments
to such number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of
any Warrant or Warrants or otherwise issuable pursuant to any Warrant
or Warrants.
8. Information. The Issuer shall deliver to the Holder hereof and to
each holder of shares of Warrant Stock (i) if the Issue is subject to reporting
requirements under the Exchange Act, copies of all regular and periodic reports
and registration statements (other than on Form S-8 or similar form) which the
Issuer may file with the SEC or any securities exchange, or (ii) in all other
circumstances, the documents and other information required under paragraphs
(a), (b)(i), (c)(i), (e), (f), and (g) of Section 7 of the Note Agreement within
the applicable time period specified therein and regardless of whether or not
the Note Agreement is then in effect or the Term has expired.
9. Amendment and Waiver. Any term, covenant, agreement or condition in
this Warrant may be amended, or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
Issuer and the Majority Holders; provided, however, that no such amendment or
waiver shall reduce the Warrant Share Number, increase the Warrant Price,
shorten the period during which this Warrant may be exercised or modify any
provision of this Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
11. Notices. All notices and other communications provided for
hereunder shall be in writing and delivered by hand or sent by first class mail
or sent by telecopy (with such telecopy to be confirmed promptly in writing sent
by first class mail), and if to the Holder of this Warrant or of Warrant Stock
issued pursuant hereto, addressed to such Holder at its last known address or
telecopy number appearing on the books of the Issuer maintained for such
purposes, and if to the Issuer, addressed to:
Easyriders, Inc
567 San Nicholas Drive
Suite 400
Newport Beach, California 92660
Attention: President
Telecopy No.: (714) 718-4630
or to such other address or addresses or telecopy number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. All such communications shall be deemed to have been given or
made when so delivered by hand or sent by telecopy, or three business days after
being so mailed.
-15-
<PAGE> 16
12. Remedies. The Issuer stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Issuer in the performance of or compliance with any of the terms of this Warrant
are not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
13. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Issuer, the Holder hereof and (to the extent provided herein) the
Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such Holder or Holder of Warrant Stock
14. Modification and Severability. If, in any action before any court
or agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
15. Integration. This Warrant and the other Warrants issued pursuant to
the Note Agreement replace all prior agreements, supersede all prior
negotiations and constitute the entire agreement of the parties with respect to
the transactions contemplated herein. References to the Note Agreement herein
shall, to the extent that the Notes and other obligations thereunder have been
repaid and such Note Agreement has terminated, mean the Note Agreement as in
effect immediately prior to its termination.
16. Headings. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
EASYRIDERS, INC.
By: _______________________________
Its President
-16-
<PAGE> 17
EXERCISE FORM
EASYRIDERS, INC.
The undersigned _________________, pursuant to the provisions of the within
Warrant, hereby elects to purchase ______ shares of Common Stock of EASYRIDERS,
INC. covered by the within Warrant.
Dated: _____________ Signature ___________________________________________
Address _______________________________
_______________________________
ASSIGNMENT
FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers unto
_______________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _______________, attorney, to transfer the
said Warrant on the books of the within named corporation.
Dated: _____________ Signature ___________________________________________
Address _______________________________
_______________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
_________________ the right to purchase ________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint _____________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _____________ Signature ___________________________________________
Address _______________________________
_______________________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-____ cancelled (or transferred or exchanged) this ___ day
of__________, 19_, shares of Common Stock issued therefor in the name of
___________________, Warrant No. W-____ issued for _____ shares of Common Stock
in the name of_______________________
-17-
<PAGE> 18
Schedule 1
OUTSTANDING COMMON STOCK EQUIVALENTS
-18-
<PAGE> 1
EXHIBIT 10.5.6
EXHIBIT F-2 TO NOTE AND WARRANT PURCHASE AGREEMENT
(Form of Registration Rights Agreement)
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
September ___, 1998, is made by and between EASYRIDERS, INC., a Delaware
corporation (together with its successors, the "Company"), and Nomura Holding
America Inc., a Delaware corporation (together with its successors and assigns,
"Nomura").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Note and Warrant Purchase Agreement
dated as of even date herewith (the "Note Agreement"), Paisano Publications,
Inc., a California corporation, has agreed to issue and sell to Nomura the Notes
(capitalized terms used but not otherwise defined herein shall have the
respective meanings given to such terms in Article I hereof) and the Company has
agreed to issue and sell to Nomura the Warrants to purchase shares of its Common
Stock;
WHEREAS, it is a condition precedent to the purchase of such securities
by Nomura that the Company and Nomura enter into this Agreement; and
WHEREAS, the Company and Nomura deem it to be in their respective best
interests to enter into this Agreement to provide certain rights to Nomura in
connection with the Warrants;
NOW, THEREFORE, to implement the foregoing and in consideration of the
mutual terms, conditions and covenants contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Defined Terms. Capitalized terms used but not otherwise
defined herein shall have the respective meanings given to such terms in the
Note Agreement. The following terms shall have the following meanings:
"Common Stock" means the Company's Common Stock, no par value per share.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any similar federal statute then in effect.
"Majority Holders" means on any date the holders of a majority of the
Registrable Securities on such date.
<PAGE> 2
"managing underwriter" means, with respect to any Underwritten Offering,
the investment banker (or investment bankers) selected by the Company that shall
manage the offering.
"Public Offering" means any primary or secondary public offering of Common
Stock pursuant to an effective registration statement under the Securities Act,
other than pursuant to a registration statement on Form S-4 or Form S-8 or any
successor or similar form.
"Registrable Securities" shall mean (a) all shares of Common Stock issued
or issuable upon the exercise of any Warrant and (b) any securities issued or
issuable by the Company with respect to shares of Common Stock referred to in
the foregoing clause (a) by way of a stock dividend or stock split or in
connection with a combination or subdivision of shares, reclassification,
merger, consolidation or other reorganization of the Company; provided, however,
that as to any particular Registrable Securities that have been issued, such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of under such registration statement, (ii) they shall have been distributed to
the public pursuant to Rule 144, (iii) they shall have been otherwise
transferred or disposed of, and new certificates therefor not bearing a legend
restricting further transfer shall have been delivered by the Company, and
subsequent transfer or disposition of them shall not require their registration
or qualification under the Securities Act or any similar state law then in
force, or (iv) they shall have ceased to be outstanding. For the purposes of
Article II hereof, the holder of any Warrant shall be deemed to be a holder of
the Registrable Securities issuable upon exercise, exchange or conversion of
such Warrant, and such Registrable Securities shall be deemed to be issued and
outstanding.
"Registration Expenses" shall mean any and all expenses incident to the
Company's performance of or compliance with Article II hereof, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, listing fees, fees and disbursements of legal counsel for
the Company, reasonable fees and disbursements of one legal counsel for the
holders of Registrable Securities, Blue Sky fees and expenses (including the
reasonable fees and disbursements of underwriters' counsel in connection with
Blue Sky qualifications and filings), fees and expenses of the transfer agent
and registrar for the Registrable Securities, and the fees and expenses of any
special audits and/or "cold comfort" letters required by or incident to such
performance and compliance, but excluding underwriting discounts and commissions
and applicable transfer and documentary stamp taxes, if any, which shall be
borne by the seller of the securities in all cases.
"Rule 144" means Rule 144 under the Securities Act, as such rule may be
amended from time to time.
"SEC" means the United States Securities and Exchange Commission, and any
successor agency or governmental body.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect.
-2-
<PAGE> 3
"Stock" means any capital stock of the Company or other securities
convertible into or exchangeable therefor, including warrants, options or other
rights to acquire capital stock or any interest therein.
"Underwritten Offering" means any public offering of securities
distributed by means of a firm commitment underwriting.
Section 1.2. Other Definitional Provisions. The meanings given to terms
defined herein shall be equally applicable to both the singular and plural forms
of such terms, and words of the masculine gender shall mean and include
correlative words of the feminine and neuter genders. The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision.
References herein to any Section or subsection are to the corresponding Section
or subsection to this Agreement unless otherwise specified. Any headings
preceding the texts of the several Sections and subsections of this Agreement
are solely for convenience of reference and shall not constitute a part of this
Agreement nor in any way define, limit or extend the scope or otherwise affect
the meaning thereof.
ARTICLE II.
REGISTRATION RIGHTS
2.1. Piggyback Registration Rights. (a) If the Company at any time
proposes to register under the Securities Act any shares of its Common Stock now
or hereafter authorized, other than a registration on Form S-4 or S-8 or any
successor form, whether for sale for its own account or for the account of any
selling stockholder, on a form and in a manner that would permit registration of
Registrable Securities for sale to the public under the Securities Act, it will
give written notice to all the holders of Registrable Securities promptly, and
in any event no later than 20 days (10 days if the registration is a Form S-3)
before the initial filing with the SEC of a registration statement, of its
intention to do so, describing such securities and specifying the form and
manner and the other relevant facts involved in such proposed registration
(including, without limitation, (i) whether or not such registration will be in
connection with an underwritten offering of securities and, if so, the identity
of the managing underwriter and whether such offering will be pursuant to a
"best efforts" or "firm commitment" underwriting, (ii) the price at which such
securities are reasonably expected to be sold to the public, and (iii) the
amount of the underwriting discount reasonably expected to be incurred in
connection therewith). Upon the written request of any such holder delivered to
the Company within 10 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
holder and the intended method of disposition thereof), the Company will
(subject to the provisions of Section 2.1(c) hereof) include in such
registration all of the Registrable Securities that the Company has been so
requested to register; provided, however, that if, at any time after giving such
written notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to proceed with
such registration, the Company may at its election give written notice of such
determination to each holder of Registrable Securities who made a request as
hereinabove provided and thereupon the Company shall be
-3-
<PAGE> 4
relieved of its registration obligations (but not from its obligation to pay
Registration Expenses in connection therewith).
(b) The Registration Expenses incurred in connection with each
registration of Registrable Securities requested pursuant to this Section 2.1
shall be paid by the Company.
(c) If a registration pursuant to this Section 2.1 involves an
Underwritten Offering and the managing underwriter advises the Company that, in
its opinion, the number of securities proposed to be included in such offering
exceeds the number of securities which can be sold therein without adversely
affecting the marketability of the offering, then the Company will promptly so
advise each holder of Registrable Securities that has requested registration,
and will include in such registration: first, authorized but unissued or
treasury shares of Common Stock which the Company desires to include in such
registration; and second, Registrable Securities requested to be included
therein and other outstanding shares of Common Stock requested to be included in
such registration ("Other Securities"), allocated pro rata among the holders of
Registrable Securities and Other Securities based on the number of Registrable
Securities with respect to which each such holder has requested registration, in
each case until the aggregate number of securities included in such registration
is equal to the number thereof that, in the opinion of such managing
underwriter, can be sold without adversely affecting the marketability thereof.
2.2. Registration Procedures. (a) Whenever any holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to Section 2.1 hereof (subject to the applicable terms and conditions contained
therein), the Company will use its best efforts to effect the registration of
such securities under the Securities Act and the sale thereof in accordance with
the intended method of disposition thereof, and in connection therewith the
Company will, as expeditiously as possible:
(i) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and cause such registration
statement to become and remain effective until the earlier of (A) six
months or, if such registration statement relates to an Underwritten
Offering, such longer period as in the opinion of counsel for the
underwriters a prospectus is required by law to be delivered in connection
with sales of Registrable Securities by an underwriter or dealer, or (B)
such shorter period as is required to complete the distribution of all of
the securities covered by such registration statement (but in any event
not before the expiration of any longer period required under the
Securities Act);
(ii) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the seller or
sellers thereof set forth in such registration statement;
-4-
<PAGE> 5
(iii) prior to filing with the SEC any such registration statement,
prospectus, or amendment or supplement thereto, furnish copies thereof to
counsel for the sellers of Registrable Securities under such registration
statement, which documents will be subject to review by such counsel;
(iv) furnish to each seller of Registrable Securities covered by the
registration statement and to each underwriter, if any, of such
Registrable Securities, such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included
in such registration statement (including each preliminary prospectus) and
such other documents as such seller may reasonably request in order to
facilitate the public sale or other disposition of the Registrable
Securities owned by such seller;
(v) use its best efforts to register or qualify such Registrable
Securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as each seller shall
reasonably request, and do any and all other acts and things which may be
reasonably necessary or advisable to enable such seller to consummate the
disposition of the Registrable Securities owned by such seller in such
jurisdictions, except that the Company shall not be required (A) to
qualify to do business as a foreign corporation in any jurisdiction where,
but for the requirements of this Section 2.2(a), it is not then so
qualified, (B) to subject itself to taxation in any such jurisdiction, or
(C) to take any action which would subject it to service of process in any
such jurisdiction where it is not then so subject;
(vi) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered or qualified with
or approved by such other governmental agencies or authorities (including,
without limitation, state securities commissions) as may be necessary to
enable the seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(vii) immediately notify each seller of Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, if
the Company becomes aware that the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing, and, at the request of any such
seller, deliver a reasonable number of copies of an amended or
supplemental prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances then existing;
(viii) cause all Registrable Securities covered by the registration
statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
-5-
<PAGE> 6
(ix) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(x) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities (including
participating in "road shows" and engaging in other customary marketing
efforts);
(xi) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent
retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such
seller, underwriter, attorney, accountant or agent in connection with such
registration statement;
(xii) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC and make generally available to its
security holders, in each case as soon as practicable but in no event
later than 45 days after the close of the period covered thereby (or 90
days in case the period covered corresponds to a fiscal year of the
Company), an earnings statement of the Company which will satisfy the
provisions of Section 11(a) of the Securities Act;
(xiii) immediately notify each seller of Registrable Securities
covered by such registration statement in the event of the issuance of any
stop order suspending the effectiveness of a registration statement, or of
any order suspending or preventing the use of any related prospectus or
suspending the qualification of any Registrable Securities included in
such registration statement for sale in any jurisdiction, and use its best
efforts promptly to obtain the withdrawal of such order;
(xiv) obtain and furnish a "cold comfort" letter, dated the
effective date of such registration statement (and, if such registration
involves an Underwritten Offering, dated the date of the closing under the
underwriting agreement), signed by the Company's independent public
accountants and addressed to the holders of the Registrable Securities, in
customary form and covering such matters as are customarily covered by
comfort letters by independent public accountants in such public offerings
and such other financial matters as the holders of a majority of the
Registrable Securities being sold may reasonably request; and
(xv) furnish a legal opinion of the Company's counsel, dated the
effective date of such registration statement (and, if such registration
involves an Underwritten Offering, dated the date of the closing under the
underwriting agreement) and addressed to the holders of the Registrable
Securities, with respect to the registration statement, each amendment and
supplement thereto, the prospectus included therein (including the
preliminary prospectus) and other
-6-
<PAGE> 7
documents relating thereto, in customary form and covering such matters as
are customarily covered by legal opinions of issuers' counsel in such
public offerings.
(b) It shall be a condition precedent to the obligation of the
Company to take any action pursuant to this Section 2.2 in respect of
Registrable Securities that the holders requesting registration thereof shall
furnish to the Company such information regarding the Registrable Securities
held by such holder and the intended method of disposition thereof as the
Company shall reasonably request and as shall be required in connection with the
action taken by the Company; provided, however, that the failure of any holder
of Registrable Securities to furnish such information shall not affect the
obligations of the Company pursuant to this Section 2.2 with respect to any
holder of Registrable Securities who furnishes such information to the Company.
Notwithstanding any provision to the contrary contained herein, no holder of
Registrable Securities shall be required to furnish any information or make any
representations or warranties to the Company or the underwriters other than
representations and warranties contained in a writing furnished by such holder
expressly for use in the registration statement to be filed in connection with
such registration solely with regard to such holder's identity, its ownership of
securities of the Company, the class and number of such securities it intends to
include in such offering, its intended method of distribution, other information
pertinent to such holder in its capacity as a selling holder, and any other
information with respect to such holder required by law to be disclosed in such
registration statement.
(c) If a registration pursuant to Section 2.1 involves an
Underwritten Offering:
(i) The right of any holder of Registrable Securities to
such registration shall be conditioned upon such holder's participation in
such underwriting and the inclusion of such holder's Registrable
Securities in the underwriting to the extent provided herein. The holders
of Registrable Securities to be distributed by the underwriters thereof
shall be parties to the underwriting agreement between the Company and
such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part
of, the Company to and for the benefit of such underwriters shall also be
made to and for the benefit of such holders of Registrable Securities and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to
the obligations of such holders of Registrable Securities. No such holder
of Registrable Securities shall be required to make any representations or
warranties to, or agree to any indemnities or contribution provisions
with, the Company or the underwriters other than representations,
warranties, indemnities and contribution provisions with respect to
information required to be furnished by such holder in writing pursuant to
subsection (b) of this Section 2.2.
(ii) Each holder of Registrable Securities included in such
registration agrees not to sell, grant any option to purchase, acquire any
option to sell, make any short sale of or otherwise dispose of or reduce
its investment risk in any securities of the Company (other than as part
of such Underwritten Offering), without the consent of the managing
underwriter, for a period of 30 days in all cases (or such lesser or
greater number as the managing underwriter shall designate) after the
effective date of such registration. At the request of the
-7-
<PAGE> 8
managing underwriter, each such holder of Registrable Securities shall
execute a separate agreement with such managing underwriter to the
foregoing effect.
(iii) The Company agrees, if so required by the managing
underwriter, not to effect any sale or distribution of any of its equity
or debt securities, as the case may be, or securities convertible into or
exchangeable or exercisable for any of such equity or debt securities, as
the case may be, (other than as part of such Underwritten Offering) for a
period of 30 days in all other cases after the effective date of such
registration, except in connection with a stock option plan, stock
purchase plan, dividend reinvestment plan, savings or similar plan.
(iv) Any holder of Registrable Securities requesting to be
included in such registration may elect, in writing, prior to the
effective date of the registration statement filed in connection with such
registration, not to register such securities in connection with such
registration.
2.3. Sale of Registrable Securities. In the case of any offering subject
to the provisions of Section 2.1 hereof, in lieu of the holders of any
Registrable Securities including such Registrable Securities in any registration
statement filed in connection therewith and/or exercising any Warrant,
simultaneously with the sale of any securities, each such holder may at its
option sell its Registrable Securities and Warrant to the Company to the extent
such Registrable Securities could have been included in such registration
statement pursuant to Section 2.1.
2.4. Indemnification. (a) In the event of any registration of any
securities under the Securities Act pursuant to Section 2.1 hereof, the Company
will, and it hereby agrees to, indemnify and hold harmless, to the extent
permitted by law, each seller of any Registrable Securities covered by such
registration statement, its directors, officers, general and limited partners,
employees, agents and representatives (and directors and officers thereof and,
if such seller is a portfolio or investment fund, its investment advisors or
agents), each other Person who participates as an underwriter in the offering or
sale of such securities and each other Person, if any, who controls such seller
or any such underwriter within the meaning of Section 15 of the Securities Act,
as follows:
(i) against any and all loss, liability, claim, damage, attorneys'
fee or expense whatsoever arising out of or based upon an untrue statement
or alleged untrue statement of a material fact contained in any
registration statement (or any amendment or supplement thereto), including
all documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
arising out of an untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or prospectus (or
any amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement (a
"Settlement
-8-
<PAGE> 9
Payment") of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Company; and
(iii) against any and all expense (other than any Settlement
Payment) reasonably incurred by them in connection with investigating,
preparing or defending against any litigation, or investigation or
proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, to the extent that any such
expense is not paid under clauses (i) or (ii) above;
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any such seller or underwriter
expressly for use in the preparation of any registration statement (or any
amendment thereto) or any preliminary prospectus or prospectus (or any amendment
or supplement thereto); and provided, further, that the Company will not be
liable to any Person who participates as an underwriter in the offering or sale
of Registrable Securities (or, if such offering and sale are not effected by or
through an underwriter, then such seller) or any other Person, if any, who
controls such underwriter (or seller, as the case may be) within the meaning of
Section 15 of the Securities Act, under the indemnity agreement in this Section
2.4(a) with respect to any preliminary prospectus or final prospectus or final
prospectus as amended or supplemented, as the case may be, to the extent that
any such loss, claim, damage or liability of such underwriter or controlling
Person results from the fact that such underwriter (or seller, as the case may
be) sold Registrable Securities to a Person to whom there was not sent or given,
at or prior to the written confirmation of such sale, a copy of the final
prospectus or of the final prospectus as then amended or supplemented, whichever
is most recent, if the Company has previously furnished copies thereof to such
underwriter (or seller, as the case may be). Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
seller or any such director, officer, general or limited partner, investment
advisor or agent, underwriter or controlling Person and shall survive the
transfer of such securities by such seller.
(b) The Company may require, as a condition to including any
Registrable Securities in any registration statement filed in accordance with
Section 2.1 hereof that the Company shall have received an undertaking
reasonably satisfactory to it from the prospective seller of such Registrable
Securities to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Section 2.4(a) hereof) the Company, the underwriters, if
any, each Person who controls the Company or any such underwriter (within the
meaning of Section 15 of the Securities Act) and their respective officers,
directors, partners, employees, agents and representatives, with respect to any
statement in or omission from such registration statement, any preliminary,
final or summary prospectus contained therein, or any amendment or supplement,
if such statement or alleged statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by or on
-9-
<PAGE> 10
behalf of such seller specifically for use in the preparation of such
registration statement, preliminary, final or summary prospectus or amendment or
supplement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company, the underwriters, or any
such director, officer, partner, employee, agent, representative or controlling
Person and shall survive the transfer of such securities by such seller. The
obligations of the Company and such seller pursuant to this Section 2.4 are to
be several and not joint; provided, however, that, with respect to each claim
pursuant to this Section 2.4, the Company shall be liable for the full amount of
such claim, and each such seller's liability under this Section 2.4 shall be
limited to an amount equal to the net proceeds (after deducting the
underwriters' discount and expenses) received by such seller from the sale of
Registrable Securities by it pursuant to such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding involving a claim
referred to in this Section 2.4, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to such indemnifying party of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under this
Section 2.4, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an indemnified party, unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist in respect of such claim, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that it may wish with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
(d) The Company and each seller of Registrable Securities shall
provide for the foregoing indemnities (with appropriate modifications) in any
underwriting agreement with respect to any required registration or other
qualification of securities under any federal or state law or regulation of any
governmental authority.
2.5. Contribution. In order to provide for just and equitable contribution
in circumstances under which the indemnity contemplated by Section 2.4 hereof is
for any reason not available, the parties required to indemnify by the terms
thereof shall contribute to the aggregate losses, liabilities, claims, damages
and expenses of the nature contemplated by such indemnity agreement incurred by
the Company, any seller of Registrable Securities and one or more of the
underwriters, except to the extent that contribution is not permitted under
Section 11(f) of the Securities Act. In determining the amounts which the
respective parties shall contribute, there shall be considered the relative
benefits received by each party from the offering of the Registrable Securities
(taking into account the portion of the proceeds of the offering realized by
each), the parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to correct
and prevent any statement or omission and any other equitable considerations
appropriate under the circumstances.
-10-
<PAGE> 11
The Company, each such seller and the underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
capita allocation (even if the underwriters were treated as one entity for such
purpose) or for the underwriters' portion of such contribution to exceed the
percentage that the underwriting discount bears to the initial public offering
price of the Registrable Securities. For purposes of this Section 2.5, each
Person, if any, who controls an underwriter within the meaning of Section 15 of
the Securities Act shall have the same rights to contribution as such
underwriter, and each director and each officer of the Company who signed the
registration statement, and each Person, if any, who controls the Company or a
seller of Registrable Securities shall have the same rights to contribution as
the Company or a seller of Registrable Securities, as the case may be.
Notwithstanding the foregoing, no seller of Registrable Securities shall be
required to contribute any amount in excess of the amount such seller would have
been required to pay to an indemnified party if the indemnity under Section 2.4
hereof were available.
2.6. Current Public Information. At all times after the Company has filed
a registration statement with the SEC pursuant to the requirements of either the
Securities Act or the Exchange Act, and as long as any Warrant shall remain
outstanding or the holders thereof shall hold any Registrable Securities, the
Company will file all reports required to be filed by it under the Securities
Act and the Exchange Act and the rules and regulations adopted by the SEC
thereunder, and will take such further action as any holder or holders of
Registrable Securities may reasonably request, all to the extent required to
enable such holders to sell Registrable Securities pursuant to Rule 144 under
the Securities Act (as such rule may be amended from time to time) or any
similar rule or regulation hereafter adopted by the SEC.
2.7. Survival. The provisions of Sections 2.1 through 2.6 hereof,
inclusive, shall survive the exercise of the Warrants with respect to all Shares
issued upon exercise thereof. Without limiting the generality of the foregoing,
in the event that any Warrant shall expire after being exercised in part, the
provisions of such Sections shall survive such expiration with respect to all
Shares issued upon the exercise thereof prior to such expiration.
2.8. Other Registration Rights. (a) The Company represents and warrants to
Nomura that, other than as provided herein or as set forth on Schedule 2.8
hereto, there are no agreements, understandings or commitments, oral or written,
between the Company and the holders of any of its securities pursuant to which
such holders have a right to require the Company to register or qualify any of
its securities under the Securities Act or any applicable state securities laws.
(b) Except for the rights granted herein and the rights described in
Section 2.8(a) above, without the prior written consent of the Majority Holders,
the Company will not grant to any Person registration rights superior to those
granted to the holders of the Registrable Securities hereunder.
-11-
<PAGE> 12
ARTICLE III.
MISCELLANEOUS
Section 3.1. Term of Agreement. This Agreement shall terminate (i) upon
written consent to such termination by each of the Company and the Majority
Holders, and (ii) on September ___, 2005.
Section 3.2. Notices. Any notice, request, instruction or other document
required or permitted to be given hereunder by any party hereto to another party
hereto will be in writing and will be given to such party by certified mail at
its address set forth below:
If to Nomura:
Nomura Holding America Inc.
2 World Financial Center, Building B
New York, NY 10281-1198
Attention: Howard Gellis, or his
authorized representative
Telecopy No.: (212) 667-1029
with a copy to:
Nomura Holding America Inc.
2 World Financial Center, Building B
New York, NY 10281-1198
Attention: Legal Department
Telecopy No.: (212) 667-1024
If to Company:
Easyriders, Inc.
567 San Nicholas Drive, Suite 400
Newport Beach, California 92660
Attention: Secretary
Telecopy No.: (714) 718-4630
or, in the case of any transferee of any holder of Registrable Securities, to
the address of such transferee specified by it upon notice given in accordance
with the terms hereof, or to such other address as the party to whom notice is
to be given may provide in a written notice to the party giving such notice, a
copy of which written notice will be on file with the Secretary of the Company.
Each such notice, request or other communication will be effective (a) if given
by certified mail, 96 hours after such communication is deposited in the mails
with certified postage prepaid addressed as aforesaid, (b) one Business Day
after being furnished to a nationally recognized overnight courier for next
Business Day delivery, and (c) on the date sent if sent by electronic facsimile
transmission, receipt confirmed.
-12-
<PAGE> 13
Section 3.3. Specific Performance. In addition to any other remedy
provided at law or equity, the parties hereto shall be entitled to specific
performance of this Agreement.
Section 3.4. Assignment. This Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties hereto;
provided that the Company may not assign its obligations hereunder without the
prior written consent of the Majority Holders; provided further that if any
transferee of any holder of Registrable Securities shall acquire any Registrable
Securities in any manner, whether by operation of law or otherwise, such
transferee by taking and holding such Registrable Securities, shall be entitled
to the benefits of and be deemed to be bound by this Agreement.
Section 3.5. Choice of Law; Jurisdiction; Waiver of Jury Trial. This
Agreement shall be governed by and construed in accordance with the law of the
State of New York. Each party hereto hereby submits to the jurisdiction of the
United States District Court and of any state court sitting in the State of New
York (and of the appropriate appellate courts) for the purposes of all legal
proceedings arising out of or relating to this Agreement and irrevocably waives,
to the fullest extent permitted by applicable law, any objection to venue laid
therein. Process in any such proceeding may be served on such party, and any
judgment thereon may be enforced against such party, anywhere in the world,
whether within or without the State of New York. Each party hereto hereby
waives, to the fullest extent permitted by applicable law, any right it may have
to a trial by jury in respect of any matter directly or indirectly arising out
of or otherwise relating to this Agreement.
Section 3.6. Amendments; Waivers. (a) No failure or delay on the part of
any party in exercising any right, power or privilege hereunder will operate as
a waiver thereof, nor will any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided will be cumulative and not
exclusive of any rights or remedies provided by law.
(b) Neither this Agreement nor any term or provision hereof may be
amended or waived except by an instrument in writing signed, by the Majority
Holders and to the extent the rights, duties or obligations of the Company are
modified or supplemented thereby, the Company.
Section 3.7. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be invalid, illegal
or unenforceable in any jurisdiction, the validity, legality and enforceability
of the remaining provisions, or of such provision in any other jurisdiction,
shall not in any way be affected or impaired thereby.
Section 3.8. Entire Agreement. This Agreement and the other Transaction
Documents (as defined in the Note Agreement) contain the entire understanding of
the parties hereto with respect to the subject matter hereof and supersede all
prior agreements, discussions and understandings among such parties with respect
to such subject matter.
-13-
<PAGE> 14
Section 3.9. Further Assurances. Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby. Neither the Company nor any Holder shall
voluntarily undertake any course of action inconsistent with satisfaction of the
requirements applicable to them set forth in this Agreement and each shall
promptly do all such acts and take all such measures as may be appropriate to
enable them to perform as early as practicable the obligations herein and
therein required to be performed by them.
Section 3.10. Dating. Although this Agreement is dated as of the date
first written above for convenience, this Agreement shall be effective on
September [ ], 1998.
Section 3.11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same Agreement.
[Signature Page Follows]
-14-
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed and delivered by their duly authorized officers
as of the date first above written.
EASYRIDERS, INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this amended Registration Statement (File No.
333-58501)of Easyriders, Inc., on Form S-4 of our report dated March 17, 1998
(which includes an explanatory paragraph relating to substantial doubt about the
Company's ability to continue as a going concern), on the financial statements
of Newriders, Inc. as of and for the year ended December 31, 1997 appearing in
the Proxy Statement/Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
August 26, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this amended Registration Statement (File No.
333-58501) of Easyriders, Inc. on Form S-4 of our report dated April 15, 1998,
on the combined financial statements of Paisano Publications, Inc. and
affiliates as of and for the years ended December 31, 1997 and 1996 appearing in
the Proxy Statement/Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Financial Information" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
August 26, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this amended Registration Statement (File No.
333-58501) of Easyriders, Inc. on Form S-4 of our report dated March 2, 1998, on
the financial statements of M&B Restaurants, L.L.C. (dba El Paso Bar-B-Que
Company) as of and for the years ended December 30, 1997 and December 31, 1996
appearing in the Proxy Statement/ Prospectus, which is a part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
August 26, 1998
<PAGE> 1
[JONES, JENSEN & COMPANY, LLC LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this amended Registration Statement (File No.
333-58501) of Easyriders, Inc., the financial statements of Newriders, Inc., on
Form S-4 of our report dated June 3, 1997 (which includes an explanatory
paragraph relating to substantial doubt about the Company's ability to continue
as a going concern), on the financial statements of Newriders, Inc. as of and
for the year ended December 31, 1997 appearing in the Proxy
Statement/Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ JONES, JENSEN & COMPANY
- ---------------------------
Jones, Jensen & Company
Salt Lake City, Utah
August 27, 1998
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the filing of our opinion dated August 27, 1998 as an
exhibit to the amended Registration Statement (File No. 333-58501) on S-4 of
Easyriders, Inc. We also consent to the references to such tax opinion and to
Deloitte & Touche LLP contained in the Registration Statement.
DELOITTE & TOUCHE LLP
Washington, D.C.
August 27, 1998
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEES
We hereby consent to be named in the Registration Statement of Easyriders,
Inc. on Form S-4 (Registration No. 333-58501) as persons nominated to become
directors of Easyriders, Inc., and we consent to serve as directors of
Easyriders, Inc. in the event the Reorganization (as defined in the Registration
Statement) is consummated.
/s/ Robert Davis /s/ Wayne L. Knyal
- ------------------------ -------------------------
Robert Davis Wayne L. Knyal
/s/ Daniel J. Gallery /s/ Ellen Meagher
- ------------------------ -------------------------
Daniel J. Gallery Ellen Meagher
/s/ Joseph J. Jacobs /s/ Joseph Teresi
- ------------------------ -------------------------
Joseph J. Jacobs Joseph Teresi
