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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-14509
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EASYRIDERS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0811505
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organixation)
28210 Dorothy Drive, Agoura Hills, California 91301
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (818)889-8740
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Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001
par value per share
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average bid and asked prices of such stock on
April 9, 1999, was $10,320,606. There were 20,512,785 shares of Common Stock
outstanding as of April 9, 1999.
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PART I
Item 1. Business
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INFORMATION ABOUT EASYRIDERS
General
Easyriders, Inc. ("Easyriders" or the "Company") is a newly formed
corporation, organized under the laws of the state of Delaware on May 13, 1998.
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications, Inc. ("Paisano Publications"), a California
corporation, and M & B Restaurants, L.C. ("El Paso"), a Texas limited liability
company.
Reorganization
On September 23, 1998, Easyriders consummated a series of transactions (the
"Reorganization") including the following: (i) the acquisition by Easyriders
from Joseph Teresi of all of the outstanding common stock of Paisano
Publications and certain affiliated corporations (the "Paisano Companies") that
engage in publishing special interest magazines relating to motorcycles and
tattooing, marketing motorcycle apparel and accessories, promoting motorcycle
and tattoo related events, and franchising retail stores that market motorcycle
apparel and accessories; (ii) the acquisition by Easyriders of all of the
outstanding membership interests of El Paso, which engages in the operation of
four restaurants under the name "El Paso Bar-B-Que"; and (iii) the merger (the
"Merger") of a subsidiary of Easyriders with and into Newriders, Inc., a Nevada
corporation ("Newriders").
As a result of the Merger (i) each two shares of Newriders common stock,
par value $.01 per share (the "Newriders Common Stock") were exchanged for one
share of Easyriders common stock, par value $.001 per share ("Easyriders Common
Stock"), and the shareholders of Newriders immediately prior to the Merger
became stockholders of Easyriders, (ii) all of the outstanding options, warrants
and other convertible securities exercisable for or convertible into Newriders
Common Stock were exchanged for the right to purchase or convert into one-half
the number of shares of Easyriders Common Stock at an exercise price or
conversion ratio per share equal to two times the exercise price or conversion
ratio provided for in the stock option, warrant or other agreements evidencing
such options, warrants or other convertible securities, and (iii) Newriders, the
Paisano Companies and El Paso became wholly-owned subsidiaries of Easyriders.
At the time of the Reorganization, Easyriders and Paisano Publications
entered into a Note and Warrant Purchase Agreement (the "Credit Agreement") with
Nomura Holding America Inc. (the "Lender"), pursuant to which the Lender agreed,
subject to the satisfaction of certain terms and conditions, to lend Paisano
Publications up to $22,000,000 (the " Nomura Indebtedness"). $20,500,000 was
borrowed under the Credit Agreement at the time of the Reorganization and used
as a portion of the consideration paid by Easyriders to Joseph Teresi to acquire
the Paisano Companies. As of April 9, 1999, $1,250,000 is available for
borrowing under the Credit Agreement.
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Recent Developments
On April 8, 1999, in order to alleviate a cashflow shortage at Easyriders
resulting from restrictions under the Credit Agreement on the distribution of
funds from the Paisano Companies to Easyriders, the Company raised additional
capital by selling shares of its Common Stock to John Martin and Joseph Teresi
for $1,500,000 each. The shares were sold to Messrs. Martin and Teresi at a 25%
discount from market price, market price being determined as the average daily
closing price of the Common Stock on the American Stock Exchange over a certain
number of consecutive trading days ending on and including April 8, 1999. Each
of Messrs. Martin and Teresi received 1,397,950 shares of Easyriders Common
Stock as a result of such purchases. Mr. Martin paid cash for his shares, and
Mr. Teresi paid for his shares by forgiving $75,000 of interest and $1,425,000
of principal owed to him by the Company. As a result of such sales, the total
number of shares of Easyriders Common Stock owned by Mr. Martin increased from
5,269,497 (22.3% of the outstanding number of shares of Easyriders Common Stock
on a fully diluted basis) immediately before such sales to 6,667,447 (25.2% of
the outstanding number of shares of Easyriders Common Stock on a fully diluted
basis) immediately after such sales, and the total number of shares of
Easyriders Common Stock owned by Mr. Teresi increased from 6,993,507 (29.6% of
the outstanding number of shares of Easyriders Common Stock on a fully diluted
basis) immediately before such sales to 8,391,457 (31.7% of the outstanding
number of shares of Easyriders Common Stock on a fully diluted basis)
immediately after such sales. $718,163 of the cash paid by Mr. Martin for his
shares was used to repay the principal of and accrued interest on amounts
borrowed by the Company from Messrs. Martin and Teresi (the "Bridge Note
Proceeds") on February 23, 1999, which Bridge Note Proceeds were used to make a
$500,000 prepayment on the Nomura Indebtedness and for working capital at the
Paisano Companies and Easyriders. The remainder of the cash paid by Mr. Martin
for his shares will be used by the Company for working capital purposes. The
sale of Easyriders Common Stock to Messrs. Martin and Teresi was unanimously
approved by the members of the Board of Directors (other than Messrs. Martin and
Teresi) after extensive consideration of the circumstances, including but not
limited to, the cash needs of the Company and the absence of any viable
alternative funding sources. The Board of Directors also received and relied
upon, a written opinion of Imperial Capital, LLC ("Imperial") that the
$1,500,000 cash paid by Mr. Martin for his shares and the $1,500,000 forgiveness
of interest and principal given by Mr. Teresi in exchange for his shares are
fair to the Company's stockholders from a financial point of view.
On April 15, 1999, the Lender agreed to waive defaults under the Credit
Agreement relating to restricted payments, maximum leverage ratios, minimum
consolidated EBITDA and minimum interest coverage ratios. In addition, the
Lender agreed to amend the Credit Agreement in order to loosen certain covenants
for the 1999 calendar year relating to the maintenance of required levels of
working capital and EBITDA, maximum leverage ratios and minimum interest
coverage ratios. In addition, the Credit Agreement was amended to provide that
the results of operations Easyriders Franchising, Inc. and Teresi, Inc., will
not be consolidated with the other Paisano Companies for purposes of calculating
compliance with certain financial maintenance tests. The Credit Agreement was
also amended to provide that
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excess cash flow (as defined in the Credit Agreement) be used to prepay the
Nomura Indebtedness on a monthly basis (as opposed to bi-annually as previously
provided in the Credit Agreement). In consideration of the foregoing waivers and
amendments, the Company agreed to reduce the exercise price on warrants to
purchase 355,920 shares of Easyriders Common Stock, issued to the Lender at the
time the Credit Agreement was originally entered into, from $3.00 to $1.625.
In accordance with the agreement pursuant to which the Company acquired the
Paisano Companies from Joseph Teresi, a post-closing adjustment was to be made
based upon the amount by which working capital of the Paisano Companies as of
the closing of the acquisition exceeded or was less than $4,537,000. Based upon
a closing date balance sheet prepared by the Company, the Company determined
that the working capital of the Paisano Companies as of the closing was less
than $4,537,000. Mr. Teresi disputed that determination. After protracted
negotiations, the Board of Directors of the Company agreed on March 19,1999 to
accept a payable from Mr. Teresi (the "Teresi Payable") in the amount of
$398,085 in satisfaction of the working capital adjustment. The Teresi Payable
does not bear interest and, subject to prior payment in the circumstances
described below, is due when the entire principal and interest on the
$13,000,000 of promissory notes (the "Seller Notes") issued by the Company to
Mr. Teresi as partial consideration for the acquisition of the Paisano Companies
has been paid in full. Certain aged receivables of the Company which have been
fully reserved by the Company have been identified (the "Receivables") and to
the extent collections are received on the Receivables, a percentage of such
collections will be credited against the Teresi Payable. In addition, if the
Company determines that the amount of a pension accrual with respect to pre-
Reorganization operations of the Paisano Companies should be decreased, the
Teresi Payable will be reduced by the amount of such decrease. Furthermore, to
the extent that certain fully reserved inventory of the Company is sold or used
by the Company for promotional purposes, the Teresi Payable will be reduced by
the amount of sale proceeds or value assigned by the Company to such promotional
use. Also, if the Company receives a refund of any portion of a specified
foreign tax payable by the Company, the Teresi Payable will be reduced by the
amount of such refund. From and after the time the Teresi Payable has been
reduced to zero, Mr. Teresi will be entitled to receive (in cash, or if any of
the Nomura Indebtedness is outstanding, in the form of a non-interest bearing
receivable from the Company) the applicable percentage of collections on the
Receivables and all amounts, if any, attributable to a reduction in such pension
accrual and the sale or promotional use of such inventory.
On March 31, 1999, Joseph Teresi waived the default which existed on that
date with respect to the non-payment of interest on a $3,000,000 promissory note
from the Company. In addition, Mr. Teresi agreed that between March 31, 1999
and March 31, 2000 he would not make any claim of default in connection with the
non-payment of interest or principal which were due as of March 31, 1999 or
which would accrue between March 31, 1999 and March 31, 2000 on the $3,000,000
promissory note and two $5,000,000 promissory notes given to Mr. Teresi as part
of the consideration for the acquisition from him of the Paisano Companies.
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INFORMATION ABOUT THE PAISANO COMPANIES
General
Paisano Publications is a California corporation that was organized on
November 17, 1970. It presently has 113 employees, and is engaged in the
business of publishing magazines for the motorcycle and tattoo markets.
Easyriders of Columbus is an Ohio corporation that was organized on January
3, 1994. It presently has 12 employees and it owns and operates a flagship store
that 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 tattoo studio.
Easyriders Franchising ("Easyriders Franchising") is a California
corporation organized on June 23, 1993. It presently has 5 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 4 employees, and is engaged in the business of organizing
promotional events.
Bros Club is a California corporation organized on 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, provided by third parties, 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 eleven special interest magazines that are
sold worldwide, and a trade magazine provided free to motorcycle shops.
Including foreign language editions for Germany, France, Italy, Spain and Japan,
there are 26 separate versions of the eleven magazines. Ten of these magazines
are targeted at the motorcycle and tattoo markets, as to which Paisano
Publications is generally regarded as the market leader. One of these magazines
is targeted at the hot rod market. All magazines are published in-house.
Articles and photography are typically acquired from a select group of freelance
writers and photographers.
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 Paisano Publications' flagship magazine. The
magazine has been closely associated
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with Harley-Davidson enthusiasts since the early 1970's and has an extremely
strong following in the U.S. and abroad. The "Easyriders" name has acquired 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. The magazine sells at U.S.
newsstands for $5.99.
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 $6.99.
Other Motorcycle Lifestyle Magazines
Other motorcycle lifestyle magazines published by Paisano Publications
include Easyriders V-Twin, In the Wind, Biker, VQ, and Quick Throttle with
newsstand prices that range from $3.99 to $5.99 per issue. In addition, Paisano
Publications publishes a monthly trade publication, Eagle's Eye, distributed at
no charge to motorcycle and motorcycle accessory shops.
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
has a majority share of the readers in its market. Tattoo is a monthly
publication produced in a fixed format of 96 pages primarily in color and on
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 is a gallery of individual examples of tattoo art that retails
for $4.99 in the U.S. The magazine has no advertising content.
Tattoo Savage
Tattoo Savage features more "extreme" uses of tattoos. Along with its
tattoo focus, Tattoo Savage includes body piercing content and photography.
Tattoo Savage retails in the U.S. for $4.99.
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Hot Rod Magazine
American Rodder targets hot rod enthusiasts and focuses on the restoration
and customization of "classic" hot rods. American Rodder is a monthly
publication retailing for $3.99 in the U.S. 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.
Heavy Metal Magazine
In February 1998, Paisano Publications entered into an exclusive licensing
agreement with Dennis Publishing of London, for the North American distribution
rights to Metal Hammer, Britain's premier heavy metal music magazine. Metal
Hammer showcases a musical genre that combines traditional rock, hardcore punk
and urban rap to create today's heavy metal music. Paisano will print and
distribute the publication which will be on sale beginning April 20, 1999.
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 and has released 39 video titles to date. The
videos are produced in-house in Paisano Publications' editing studio and have a
similar format to Easyriders magazine, focusing on all aspects of the Harley-
Davidson lifestyle. The videos are produced quarterly and retail for up to
$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.
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 beginning in 1996 for designated publications and to provide
printing for additional publications upon notice, subject to availability of
adequate equipment.
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Distribution and Marketing
Paisano Publications' magazine and video products are marketed and
distributed through four major avenues:
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 that runs through June 1, 2001. Curtis 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 related to marketing and include (i) marketing magazines to
newsstands; (ii maintaining relationships with magazine wholesalers, who deliver
the magazines to the newsstands; (ii monitoring purchasing activity and
directing the number of each issue the wholesaler delivers to each newsstand
account; (iv providing shipping labels for each issue of the magazines to the
printer, who then ships to the wholesalers; and (v) tracking magazine returns
which are picked up, counted, and destroyed by the wholesaler.
Subscription Sales
Subscription sales in the U.S. and Canada are handled through a contract
with the fulfillment house Publishers Creative Systems ("PCS"). There are no
subscription sales to other countries. PCS maintains a database of current and
past subscribers. For each magazine issue, PCS 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 that 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 that 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.
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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.
Apparel Sales, Franchising and Store Operations Overview
Paisano Publications has used its access to the Harley-Davidson and hybrid
American-made motorcycle market to sell apparel and other products it creates.
Originally sold through Paisano Publications' magazines and mail order catalogs,
Paisano Publications has expanded the marketplace for such products to include
two stores, and has recently introduced a franchise program for motorcycle
specialty shops.
Apparel and Other Product Sales
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 to offer
motorcycle customization and service. Some of the products currently offered by
Paisano Publications include clothing, belts, buckles and pins, boots, jewelry,
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 offer 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 their combined purchasing power.
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. Since 1995, Paisano Publications has produced 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 Easyriders Stores includes the Paisano Companies-
owned stores as well as its franchised stores. The Easyriders Stores sell
products purchased from the Paisano Companies. Management believes this will be
a significant growth area for product sales.
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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 two Easyriders eighteen wheel
trucks that were 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 magazines 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.
Easyriders Franchising Overview
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 that the potential for the stores
would be best served by a franchise arrangement. Paisano Publications developed
a strategy to convert appropriate licensed stores to franchised 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 approximately 20 franchised stores and
agreements have been signed for an additional six stores which are expected to
open in 1999.
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.
Easyriders Franchising Operations
Easyriders Franchising sells franchise operations to experienced
entrepreneurs and allows them a high degree of autonomy so they can react to
their individual markets. The franchisees 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 Companies,
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.
Franchisees are expected to purchase products only from Paisano Companies
or an approved vendor 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 weekly sales.
Prospective franchisees must complete an application and interview process
that includes a visit to Paisano Publications' Columbus store and headquarters.
Franchisees are selected based on their financial strength as well as
management's assessment of their ability to manage the location.
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Company-Owned Stores
Easyriders of Columbus
Easyriders of Columbus is designed to be a test store for merchandising
Easyriders products and services and was incorporated separately from Paisano
Publications and Easyriders Franchising. The store is 10,000 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.
Daytona Beach, Florida
The Daytona Beach store is the original Easyriders store. It is owned by
Paisano Companies and offers only Easyriders apparel.
Bros Club
Bros Club is a motorcycle travelers' service club. The program was
developed to support the Easyriders franchise stores by providing a product that
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 a third party to provide 24-hour road-side assistance and towing
to members. This third party has over 12,000 24-hour locations in the U.S.
As of March 17, 1999, there were approximately 8,000 Bros Club members.
Event Promotion and Management Activity
Teresi, Inc. promotes events intended to appeal to 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 on a fee basis to the party taking
such role. Services provided may include organization, advertising, arranging
for attractions, locations, insurance, concessions, and contest supervision.
Teresi, Inc. contracts with a third party who provides trucks to attend events
from which it markets magazines, motorcycle accessories, soft goods and related
products.
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Competition
Paisano Publications' seven motorcycle titles (including the trade
publication, Eagle's Eye) have among the largest circulation in the U.S. of the
motorcycle magazine segment. Paisano directly competes with the following six
other Harley-Davidson oriented motorcycle magazines: Hot Rod Bikes, Big Twin,
Hot Bike, American Rider, Iron Works and American Iron.
Employees
As of March 22, 1999 the Paisano Companies employed approximately 134 full-
time and part-time employees. None of the Paisano Companies' employees is
covered by a collective bargaining agreement and the Paisano Companies have
never experienced an organized work stoppage, strike or labor dispute. The
Paisano Companies believe its relations with its employees are generally good.
INFORMATION ABOUT EL PASO
General
M & B Restaurants, L.C., a Texas limited liability company ("El Paso"), was
formed on September 13, 1994 and was acquired by the Company on September 23,
1998. 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.
Description of Menu
The El Paso Bar-B-Que Restaurants offer smoked meats featuring El Paso's
proprietary seasoning rub, and a variety of entrees including salmon, turkey,
lamb, and 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 existing restaurants range in size from approximately 6,900 to 11,000
square feet and seat from 275 to 350 persons.
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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 generally 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 strives to maintain quality and consistency in its restaurants
through carefully training and supervising its personnel and by establishing
standards relating to food and beverage preparation, maintenance of facilities
and conduct of personnel. The onsite management for its restaurants consists 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 trained by
experienced employees who have demonstrated their familiarity with and ability
to consistently implement El Paso policies. El Paso requires continual
evaluation and testing of employees' 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 restaurants
will be required to purchase a majority of their supplies from a list of pre-
approved 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
13
<PAGE>
performance of an individual restaurant. Changes in any of these factors in the
markets where El Paso currently operates, and intends to operate, 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 are, 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 compete with El Paso. El Paso
anticipates that competitors with significantly more resources 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
El Paso may choose to locate their restaurants in close proximity to established
competitors at locations believed to be desirable.
Employees
As of March 17, 1999, El Paso employed approximately 300 full-time and
part-time employees, of which 2 are corporate management, approximately 32 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 believes its relations with its employees are generally good.
Governmental Regulation
El Paso's 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
restaurant 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
affect numerous aspects of the daily operations of the current and future El
Paso 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.
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 judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at
14
<PAGE>
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.
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."
Recent Developments
In March of 1999, El Paso received commitments from three development
financing companies to provide financing to enable El Paso to complete the
build-out of its El Paso Bar-B-Que in Tulsa, Oklahoma. Franchise Finance
Corporation of America, Imperial Bank and First Sierra are committed to provide
financing of $6.7 million, $1.5 million and $1.2 million, respectively.
Item 2. Properties.
----------
The principal executive offices of Easyriders and the Paisano Companies,
which consist of approximately 21,000 square feet, are located 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. All of
these facilities are owned by Joseph Teresi, Easyriders director, and are leased
to Easyriders at rents that are believed by management to be at or below market
rates.
El Paso presently occupies four restaurant properties. Its restaurant sites
are between 6,900 square feet and 11,000 square feet, with maximum 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.
Item 3. Legal Proceedings.
-----------------
Easyriders and its subsidiaries are subject to litigation incidental to the
conduct of their respective businesses in the ordinary course of operations.
15
<PAGE>
Newriders has been named as a defendant in a lawsuit brought by Palisades
Capital, Inc. and Palisades Holdings, Inc. (collectively "Palisades") in the
Superior Court of California, County of Los Angeles, number BC194913, filed July
27, 1998, for payment of a promissory note in the amount of $100,000, plus
interest, together with damages arising out of, among other things, Newriders'
alleged breach of commitments to enter into certain financial relationships with
Palisades and other parties. Newriders believes that Palisades breached its
agreement to provide certain funding to Newriders, and accordingly, Newriders
will 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 franchises, Steel Horses, Inc. and Totem Pole, Inc.,
alleging fraud and breach of contract in American Arbitration Association, Los
Angeles, California, Case No. 72-114-165-98. Each Claimant is seeking
compensatory damages in excess of $500,000, punitive damages and attorney fees.
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 actions has yet been taken.
An involuntary bankruptcy proceeding was filed against Rick Pierce, a
former shareholder of Newriders, on September 23, 1998 in the United States
Bankruptcy Court, Eastern District of California, Fresno Division Case No. 98-
19111-A-11. The bankruptcy was filed against Mr. Pierce before Pierce had
returned certain stock certificates evidencing shares of Newriders Common Stock
to Newriders in accordance with certain contractual arrangements regarding the
Reorganization. By complaint filed November 20, 1998 and amended in February
1999, Easyriders and Newriders commenced an adversary proceeding against the
Pierce Bankruptcy Estate and other parties who claim an interest in the share
certificates through various transactions with Mr. Pierce. The action sought a
declaratory judgment confirming that the Newriders certificates were canceled
pursuant to the merger and that the Bankruptcy Estate has no claim to the
Newriders certificates and a decision enjoining any transfer of Newriders stock.
In March 1999, Mr. Pierce, as debtor in possession, filed an amended
counterclaim and cross-claim seeking reinstatement and return of his Newriders
stock certificate, delivery of the Easyriders stock due in the Reorganization
and seeking damages of at least $20 million based on various claims including
breach of contract, breach of fiduciary duty, fraud, fraudulent transfer and
generally arising out of the Reorganization. The claims have been asserted
against Easyriders, Newriders, Messrs. Martin and Teresi and a former officer of
Easyriders and others now claiming an interest in the shares through
transactions with Mr. Pierce. By stipulation among the parties, responsive
pleadings from Newriders and Easyriders are due on April 30, 1999. Easyriders
denies these allegations and will vigorously defend such claims.
Item 4. Submission of Matters to a Vote of Security-Holders.
---------------------------------------------------
None.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------
Matters.
- --------
Easyriders' common stock, $0.001 par value ("Easyriders' Common Stock") has
been listed on the American Stock Exchange ("AMEX") since September 23, 1998
(AMEX: EZR). Prior to that time, Common Stock of Newriders, Easyriders'
predecessor, was traded on the OTC Electronic Bulletin Board. The following
tables set forth the range of high and low closing bid quotations for Newriders'
common stock as reported on the OTC Bulletin Board for each quarterly period
from January 1, 1997 through September 23, 1998 and high and low sales prices
for Easyriders' Common Stock as reported on AMEX for each full quarterly period
from September 24, 1998 through December 31, 1998 and for the period January 1,
1999 through March 31, 1999. Such quotations represent prices between dealers
without adjustment for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Newriders' Common Stock
-----------------------
Bid Price
---------
High Low
---- ---
<S> <C> <C>
1997
----
First Quarter $8.56 $1.00
Second Quarter $4.13 $1.813
Third Quarter $4.13 $1.813
Fourth Quarter $4.88 $2.44
1998
----
First Quarter $4.50 $2.38
Second Quarter $2.88 $1.75
Third Quarter (ending $2.06 $1.00
September 23, 1998)
</TABLE>
<TABLE>
<CAPTION>
Easyriders' Common Stock
------------------------
Bid Price
---------
High Low
---- ---
<S> <C> <C>
1998
----
Third Quarter (from $4.25 $2.50
September 24, 1998)
Fourth Quarter $3.00 $1.12
1999
----
First Quarter $2.75 $1.38
</TABLE>
17
<PAGE>
On March 31, 1999, the closing sale price of the Easyriders Common Stock as
reported on the AMEX was $1.31. As of March 31, 1999 there were approximately
265 record holders of Common Stock.
Since its incorporation, the Company has not paid or declared dividends on
the Newriders Common Stock or the Easyriders Common Stock, nor does it intend to
pay or declare cash dividends on the Easyriders Common Stock in the foreseeable
future.
Item 6. Selected Financial Data (in thousands except per share data).
-----------------------
Newriders was incorporated on July 15, 1995 as American Furniture
Wholesale, Inc. On July 28, 1996, it changed its name to Newriders. Easyriders
was incorporated on May 13, 1998 and for financial reporting purposes is the
successor to Newriders. The following selected financial data includes the
results of American Furniture Wholesale, Inc., Newriders and Easyriders, from
the period of original inception, July 15, 1995 through December 31, 1998 and
has been derived from the Company's audited financial statements. The following
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Report.
July 15, 1995(Date of Inception) to December 31, 1998
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------
1995 1996 1997 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $250,818 $1,161,520 $2,932,708 $13,760,318
Cost of sales 189,344 532,487 1,670,146 10,457,224
-----------------------------------------------------------
Gross margin 61,474 629,033 1,262,562 3,303,094
Selling, general, and administrative 87,731 1,520,271 3,729,500 7,664,959
Depreciation and amortization 9,884 129,277 99,388 1,056,538
Other operating expenses 1,872,129 4,354,627
------------------------------------------------------------
Loss from operations 36,141 1,020,515 4,438,455 9,773,030
Interest expense 18,365 338,419 2,532,637
Other income 239 2,640 182,078
Provision for income taxes 8,300
------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net loss-basic and diluted/1/ $ 35,902 $1,036,240 $4,776,874 $12,131,889
Net loss per share $ - $ 0.07 $ 0.57 $ 1.04
Total assets $733,411 $2,175,066 $3,462,355 $77,137,622
Long-term liabilities $ - $ 31,566 $1,815,874 $37,830,175
Total equity $730,854 $1,935,792 $ 302,842 $29,056,980
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
Overview
Easyriders is a newly formed corporation, organized under the laws of the
state of Delaware on May 13, 1998. Easyriders currently derives substantially
all of its revenues from the operations of Paisano Publications and El Paso
On September 23, 1998, Easyriders consummated a series of transactions
including the following: (i) the acquisition by Easyriders from Joseph Teresi of
all of the outstanding common stock of Paisano Publications and certain
affiliated corporations that engage in publishing special interest magazines
relating to motorcycles and tattooing, marketing motorcycle apparel and
accessories, promoting motorcycle and tattoo related events, and franchising
retail stores that market motorcycle apparel and accessories; (ii) the
acquisition by Easyriders of all of the outstanding membership interests of El
Paso, which engages in the operation of four restaurants under the name "El Paso
Bar-B-Que"; and (iii) the merger of a subsidiary of Easyriders with and into
Newriders. (See Note 3 to the Consolidated Financial Statements).
As a result of the Merger (i) each two shares of Newriders Common Stock
were exchanged for one share of Easyriders Common Stock and the shareholders of
Newriders immediately prior to the Merger became stockholders of Easyriders,
(ii) all of the outstanding options, warrants and other convertible securities
exercisable for or convertible into Newriders Common Stock were exchanged for
the right to purchase or convert into one-half the number of shares of
Easyriders Common Stock at an exercise price or conversion ratio per share equal
to
- --------------------------
/1/ Gives effect to a 1 for 2 exchange of common stock in conjunction with the
acquisition of the Paisano Companies and El Paso (See Note 1 to
Consolidated Financial Statements).
19
<PAGE>
two times the exercise price or conversion ratio provided for in the stock
option, warrant or other agreements evidencing such options, warrants or other
convertible securities, and (iii) Newriders, the Paisano Companies and El Paso
became wholly-owned subsidiaries of Easyriders. The Merger was accounted for as
a combination of entities under common control, similar to a pooling of
interest. Therefore, the historical financial statements represent the combined
financial statements of the Company and Newriders. The acquisitions of the
Paisano Companies and El Paso were accounted for as a purchase (See Note 2 to
Consolidated Financial Statements). The following financial information includes
the results of the Paisano Companies and El Paso from the date of acquisition,
September 23, 1998.
The acquisitions of the Paisano Companies and El Paso had, and will
continue to have, a material impact on the Company's financial statements for
the reporting period ending December 31, 1998 and for the reporting periods
thereafter; accordingly, current and future financial statements may not be
directly comparable to the Company's historical financial statements.
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of the Company includes, among other factors, an analysis of
changes in the operating income of the business segments before interest
expense, depreciation and amortization ("EBITDA") in order to eliminate the
effect on the operating performance of the Paisano Companies and El Paso of
significant amounts of amortization of intangible assets and interest expense
recognized through the Reorganization. Financial analysts generally consider
EBITDA to be an important measure of comparative operating performance for the
businesses of the Company and its subsidiaries, and when used in comparison to
debt levels or the coverage of interest expense as a measure of liquidity.
However, EBITDA should be considered in addition to, not as a substitute for,
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles.
20
<PAGE>
Results of Operations
The following table sets forth certain operating data for Easyriders and
Newriders for the years ended December 31, 1998 and 1997 and for the Paisano
Companies and El Paso for the period September 23, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
Easyriders and Paisano
Newriders Companies El Paso Consolidated Newriders
---------------------------------------------------------------------------------
Twelve Months September 23, September 23, Twelve Months Twelve Months
Ended 1998 to 1998 to Ended Ended
December 31, December 31, December 31, December 31, December 31,
1998 1998 1998 1998 1997
<S> <C> <C> <C> <C> <C>
SALES
Publishing $ - $ 6,954,082 $ - $ 6,954,082 $ -
Goods and services 281,272 2,284,042 2,565,314
Food service 679,859 2,847,452 3,527,311 2,932,708
Other operations 8,293 705,318 713,611
---------------------------------------------------------------------------------
969,424 9,943,442 2,847,452 13,760,318 2,932,708
COST OF SALES
Publishing 5,275,939 5,275,939
Goods and services 129,543 1,891,694 2,021,237
Food service 449,334 1,812,111 2,261,445 1,670,146
Other operations 898,603 898,603
---------------------------------------------------------------------------------
578,877 8,066,236 1,812,111 10,457,224 1,670,146
GROSS MARGIN
Publishing - 1,678,143 - 1,678,143
Goods and services 151,729 392,348 - 544,077
Food service 230,525 - 1,035,341 1,265,866 1,262,562
Other operations 8,293 (193,285) - (184,992)
---------------------------------------------------------------------------------
390,547 1,877,206 1,035,341 3,303,094 1,262,562
EXPENSES
Publishing 492,990 492,990
Goods and services 303,245 303,245
Food service 261,241 1,051,696 1,312,937 3,828,888
Other operations 761,994 761,994
Unallocated expenses 8,192,329 2,012,629 10,204,958 1,872,129
---------------------------------------------------------------------------------
8,453,570 3,570,858 1,051,696 13,076,124 5,701,017
INCOME (LOSS) FROM OPERATIONS
Publishing - 1,185,153 - 1,185,153
Goods and services 151,729 89,103 - 240,832
Food service (30,716) - (16,355) (47,071) (2,566,326)
Other operations 8,293 (955,279) - (946,986)
Unallocated (8,192,329) (2,012,629) - (10,204,958) (1,872,129)
---------------------------------------------------------------------------------
$(8,063,023) $(1,693,652) $ (16,355) $ (9,773,030) $(4,438,455)
=================================================================================
NET INCOME $(9,752,943) $(2,303,461) $ (75,485) $(12,131,889) $(4,776,874)
(LOSS)
=================================================================================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Easyriders and Paisano
Newriders Companies El Paso Consolidated Newriders
<S> <C> <C> <C> <C> <C>
EBITDA $(7,647,081) $(1,079,859) $ 184,225 $ (8,542,715) $(4,339,067)
=================================================================================
</TABLE>
The fiscal year ended December 31, 1998 compared to the fiscal year ended
December 31, 1997
Results of Operations of Easyriders and Newriders
During the twelve months ended December 31, 1998, the Company experienced a
net loss in the amount of $12,131,889, compared with a net loss of $4,776,874
for the year ended December 31, 1997. The Company's net loss per share was $1.04
for the year ended December 31, 1998, compared to a net loss of $.57 per share
for the year ended December 31, 1997. The Company experienced a negative EBITDA
in the amount of $8,542,715 for the year ended December 31, 1998, compared with
a negative EBITDA of $4,339,067 for the year ended December 31, 1997.
The Company attributes the increased losses for the year ended December 31,
1998 primarily to its subsidiary, Newriders. During the year ended December 31,
1998, Newriders closed its Fresno restaurant location for remodeling and sold
its Myrtle Beach restaurant location to a related party. Prior to July of 1998,
these locations generated all of Newriders' revenues, which amounted to $969,424
and $2,932,708 for the years ended December 31, 1998 and 1997, respectively.
The related gross margin on these sales were $390,547 and $1,262,562 for the
years ended December 31, 1998 and 1997, respectively.
The increase in operating expenses for the combined operations of the
Company and Newriders of $2,752,553 and the increase in interest expense of
$1,351,501 also contributed to the increased Newriders' losses for the year
ended December 31, 1998. Significant components of these increases are
summarized as follows:
. Newriders incurred a loss of $1,099,760 related to the sale of the Myrtle
Beach restaurant to a related party during the year ended December 31,
1998. (See Note 14 to the Condensed Consolidated Financial Statements).
. Stock issuance expense was $2,504,867 for the year ended December 31,
1998, as compared to $1,244,000 for the year ended December 31, 1997.
During the year ended December 31, 1998, Newriders issued 1,000,000 shares
(pre-split) of Newriders Common Stock to Joseph Teresi for the forgiveness
of certain trade payables. Newriders recorded a stock issuance expense of
$1,888,867 associated with this transaction. The remaining stock issuance
expense of $616,000 related to stock issued to a former employee as
consideration for services performed associated with consummating the
acquisitions of El Paso and the Paisano Companies.
. Easyriders recorded a $750,000 write-off of a stock subscription
receivable related to a barter arrangement for which it was determined that
no probable future economic benefit would be realized.
22
<PAGE>
. For the first nine months of 1998, Newriders incurred significant general
and administrative costs, primarily associated with being a public company,
without the leverage of an adequate revenue base.
. Newriders recorded noncash interest expense of $1,369,536 and $310,877 for
the year ended December 31, 1998 and 1997, respectively, associated with
conversion discounts and stock purchase warrants granted to certain parties
in conjunction with the sale of convertible debentures and certain notes
issued by Newriders and Easyriders. (See Notes 2, 3, and 6 to the condensed
Consolidated Financial Statements.)
Results of Operations: Paisano Companies
The operating results of the Company for the year ended December 31, 1998,
include the results for the Paisano Companies for the period from September 23,
1998 through December 31, 1998.
The Paisano Companies' sales totaling $9,943,442, includes sales from the
publishing segment of $6,954,082, sales from the goods and services segment of
$2,284,042, and sales from other segments of $705,318. The Paisano Companies'
gross margin totaling $1,877,206, includes margin from the publishing segment of
$1,678,143, margin from the goods and services segment of $392,348, and a
negative margin from other segments of $193,285. The Paisano Companies' loss
from operations totaling $1,693,652, includes income from operations of
$1,185,153 from the publishing segment, income from operations of the goods and
services segment of $89,103, loss from operations of other segments of $955,279
and expenses not allocated to any segment of $2,012,629.
The Paisano Companies' publishing segment includes sales generated from
subscription sales, newsstand sales and advertising sales related to the
Companies' eleven special interest magazines. The related cost of sales
includes direct costs related to the sales consisting primarily of printing,
publication and distribution costs. The goods and services segment includes
sales generated from the sale of apparel and other products through its mail
order catalogs, two retail stores, and franchise programs. The related cost of
sales includes the costs of the apparel and other products. The Paisano
Companies' other segments primarily include Easyriders Franchising and Teresi,
Inc. Easyriders Franchising sales are generated through royalties and franchise
fees charged to the Companies' 24 operating franchisees. Teresi, Inc. generates
primarily all of its sales from the sale of tickets to its motorcycle rodeos,
motorcycle shows, and tattoo shows. Cost of sales for the other segments
represent direct costs of promoting the events.
The Paisano Companies' operating expenses of $3,570,858 include $1,558,229
of expenses specifically allocated to individual segments and $2,012,629 which
have not been allocated to any one segment. The allocated expenses include
payroll, promotion, and other general and administrative expenses specifically
attributable to the business segment. The unallocated expenses include payroll
and related benefits, professional fees and depreciation and amortization not
specifically attributable to any one segment. Unallocated payroll and related
benefits for the Paisano Companies for the period from September 23 through
December 31, 1998 totaled $594,694. Depreciation and amortization for the same
period totaled $587,337
23
<PAGE>
related primarily to $509,635 in amortization of the $56,368,752 in goodwill
created out of the Paisano Companies' acquisition by the Company.
Interest expense for the Paisano Companies totaled $658,313, primarily
attributable to the debt issued to finance the Company's acquisition of the
Paisano Companies.
Net loss for the Paisano Companies was $2,303,461 for the year ended
December 31, 1998, with a negative EBITDA of $1,079,859.
The principal raw material used in publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 18% and 14% of Paisano
Publications' production, selling and other direct costs for the fiscal years
ended December 31, 1998 and 1997, respectively. Certain commodity grades of
paper have shown considerable price volatility over the last decade. There can
be no assurance that future fluctuations in paper prices will not have a
material adverse effect on the Paisano Companies' results of operations or
financial condition.
The profitability of the Paisano Companies' publishing segment is also
affected by the cost of postage and could be materially adversely affected if
there is an increase in postal rates. Future fluctuations in postal rates could
have a material adverse effect on the publishing segments' results of operations
or financial condition. No assurance can be given that the publishing segment
can recoup paper or postal cost increases by passing them through to its
advertisers and readers. In addition, future fluctuations in paper prices or
postal rates could have an effect on comparisons of the results of operations
and financial condition of the publishing segments.
Results of Operations: El Paso
The operating results of the Company for the year ended December 31, 1998,
include the results for E1 Paso for the period from September 23, 1998 through
December 31, 1998. The results for 1997 do not include any of the results of El
Paso.
E1 Paso's sales from its four El Paso Bar-B-Que Restaurants totaled
$2,847,452, and cost of sales, which included food and direct payroll costs
related to the operations of the restaurants of $833,406 and $978,705,
respectively, totaled $1,812,111 for the period September 23,1998 through
December 31, 1998. The gross margin was $1,035,341, or 36.4% of sales.
Operating expenses for El Paso for the period totaled $1,051,696, or 36.9% of
sales, and include depreciation and amortization of $195,873. Interest expense
associated with debt used to finance the restaurants and capital leases was
$63,837 for period ended December 31, 1998. Net loss for the period September
23, 1998 through December 31, 1998 was $75,485, and EBITDA was $184,225.
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
24
<PAGE>
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.
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. Selling, general and administrative expenses
were $3,828,888 in the year ended December 31, 1997, and approximately
$1,609,548 in the year ended December 31, 1996.
Newriders incurred compensation expenses 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 $0.57 per share in contrast to a net loss of
$1,036,240 or $0.07 per share for the year ended December 31, 1996.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's working
capital needs, primarily accounts receivable, inventory and prepaid expenses and
to service its debt. On December 31, 1998, the Company had negative working
capital of $905,264 due primarily from the loss sustained during the year ended
December 31, 1998 and deferred subscription and advertising income.
Cash used in operating activities during 1998 totaled $1.9 million. The
operating loss of $12.1 million was offset by non-cash charges of $2.5 million
for common stock issued for services, $1.1 million for depreciation and
amortization, a $1.1 million loss on the sale of a restaurant to a third party,
a $0.7 million write-off of a stock subscription receivable, $1.4 million of
amortization of debt issuance costs, and changes in operating accounts, net of
acquisitions, of $3.2 million.
Net cash used in investing activities totaled $19.0 million, which was
primarily comprised of cash paid for the acquisition of the Paisano Companies
which was financed with short and long term debt.
Upon its acquisition by the Company, Paisano Publications obtained an
aggregate of $22,000,000 in financing (the "Nomura Indebtedness") from Nomura
Holding American, Inc. (the "Lender"). This financing was comprised of
$17,000,000 of senior term loans (the "Term Loans") and $5,000,000 of revolving
loans (the "Revolving Loans"). The proceeds from the Term Loans plus $3,500,000
of the Revolving Loans were used to repay certain promissory notes issued to the
shareholder of the Paisano Companies in conjunction with the Paisano Acquisition
(See Note 2 to Consolidated Financial Statements) and to pay certain acquisition
expenses. To the extent that Paisano Publications is in compliance with the
terms of the Nomura Indebtedness, any unused portion of the Revolving Loans may
be used by Paisano Publications for working capital purposes. At December 31,
1998, there were no available borrowings under the Revolving Loans because the
Company was not in compliance with the terms of the Nomura Indebtedness. As
discussed above under Item 1. Business - Information about Easyriders -
-------------------------------------------------
25
<PAGE>
Recent Developments, the Lender has waived the defaults that existed under the
- -------------------
Nomura Indebtedness as of December 31, 1998 and the Company is now in compliance
with the terms of the Nomura Indebtedness.
The Nomura Indebtedness is guaranteed (the "Guarantees") by the Company and
the Paisano Companies, other than Paisano Publications (the "Guarantors"). The
Nomura Indebtedness will mature on September 23, 2001, and bears interest at an
annual rate equal to the prime rate of the Lender from time to time plus 1.85%,
payable monthly. The Nomura Indebtedness and the Guarantees are secured by a
first priority security interest in substantially all of the tangible and
intangible assets (owned or hereafter acquired) of the Company and the Paisano
Companies, including all of the capital stock or equity interests of the Paisano
Companies, Newriders, and El Paso. The Nomura Indebtedness and the Guarantees
constitute the sole senior secured indebtedness of Paisano Publications and
Guarantors and rank senior to all other indebtedness of Paisano Publications and
the Guarantors.
At the end of each one-month period in which the Term Loans are
outstanding, Paisano Publications is required to prepay the Term Loans in an
aggregate principal amount equal to 35% of Excess Cash Flow, as defined in the
Credit Agreement, for such period, to the extent such Excess Cash Flow is
achieved. Because this prepayment is dependent upon Excess Cash Flow, no
amounts have been classified as current at December 31, 1998.
Subject to certain limitations on dividends, provided that no event of
default has occurred, Paisano Publications may loan funds to the Company
monthly, limited to the lessor of $100,000 or 35% of the Excess Cash Flow for
the preceding monthly period. As of December 31, 1998, Paisano Publications did
not achieve such excess cash flow and therefore, Paisano Publications was unable
to provide funds to the Company. The inability of Paisano Publications to
provide funds to the Company can adversely impact the ability of the Company to
repay certain expenses of the Company (See Note 12 to Consolidated Financial
Statements).
Because the Nomura Indebtedness includes restrictions on the ability of the
Paisano Companies to transfer funds to the Company in the form of cash
dividends, loans or advances, the net assets of the Paisano Companies are
considered to be restricted. The restricted net assets of the Paisano Companies
on December 31, 1998 total $39,394,334.
The Nomura Indebtedness contains numerous operating and financial
covenants, including but not limited to, payment of dividends, limitations on
indebtedness and the maintenance of minimum net worth, minimum working capital,
interest coverage ratios and the achievement of cash flow measures.
In connection with the Paisano Acquisition, the Company issued notes in the
aggregate amount of $13,000,000 to Joseph Teresi (the sole shareholder of the
Paisano Companies prior to the Paisano Acquisition). Of the total, $10,000,000
of the notes consist of variable rate, five-year subordinated notes (the
"Contributor Notes"). The Contributor Notes bear interest at an annual rate
that may vary from 6% to 10% and may be extended for an additional five years.
The remaining $3,000,000 was issued as a 90 day note that bears interest at an
annual rate of 10%. As of December 31, 1998, the Company was in arrears for
interest of $242,500 on the
26
<PAGE>
Contributor Notes. It also was in arrears in repayment of the $3,000,000 short-
term note which was due December 23, 1998. On March 31, 1999, Joseph Teresi
waived the default which existed on that date with respect to the non-payment of
interest on a $3,000,000 promissory note from the Company. In addition, Mr.
Teresi agreed that between March 31, 1999 and March 31, 2000 he would not make
any claim of default in connection with the non-payment of interest or principal
which were due as of March 31, 1999 or which would accrue between March 31, 1999
and March 31, 2000 on the $3,000,000 promissory note and two $5,000,000
promissory notes given to Mr. Teresi as part of the consideration for the
acquisition from him of the Paisano Companies.
The Company believes that projected cash flow from operations, projected
availability under the Credit Agreement and the funds raised in April 1999 (see
Recent Developments) from the sale of stock to Messrs. Martin and Teresi will be
sufficient to meet its anticipated cash needs for at least the next 12 months.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If current cash, cash that may be generated from
operations and borrowings available from the Credit Agreement are insufficient
to satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities. The sale of additional equity or debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all.
Forward-Looking Information and Certain Factors
Certain statements in this Form 10-K and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
forward-looking statements are subject to numerous risks and uncertainties that
could cause actual results to differ materially from those set forth in such
forward-looking statements. Such risks and uncertainties include, without
limitation, risks associated with future capital needs, management of growth,
availability of adequate financing, integration of business operations,
concentration of stock ownership, restrictions imposed on the Company by the
Lender, the magazine publishing and restaurant business, paper, pork and other
raw material prices and other factors discussed herein, in the Company's
Prospectus/Proxy Statement on Form S-4 dated September 8, 1998 and other filings
submitted to the Securities and Exchange Commission.
Year 2000 Readiness Disclosure
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000 issue"). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which the Company
operates. Additionally, companies must coordinate with other entities with
which they electronically interact, such as customers and creditors.
27
<PAGE>
The Company has reviewed its business processes and internal information
systems, including its computer systems to determine whether the Company's
software applications and computer and information systems are compliant with
the Year 2000. The Company is in the process of upgrading its computer system
to be Year 2000 compliant and anticipates completing this process by June, 1999.
In addition, the Company is querying all of its major suppliers and customers as
to their progress in identifying and addressing Year 2000 problems. The
Company's products do not have any material Year 2000 problems. While the
Company believes that its business processes and internal information systems
will be fully compliant for the Year 2000, there can be no assurance that the
Company will not experience unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
business processes or internal information systems, which are comprised
predominantly of third party software and hardware. The Company does not
currently anticipate that the Year 2000 issue will have a material impact on its
business, financial condition or results of operations as total costs are not
anticipated to exceed $150,000.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to process transactions, or engage in normal business
activities at the Company or its vendors and suppliers. The Company currently
does not have a contingency plan with respect to potential Year 2000 failures of
its suppliers or customers. If these failures would occur, depending upon their
duration and severity, they could have a material adverse effect on the
Company's business, results of operations and financial condition.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 1999. This standard establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not believe that the adoption of this new
standard will have a material impact on its financial position or results of
operations.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The Company is exposed to a variety of risks, including paper price
volatility and changes in interest rates affecting the cost of its debt.
Paper Price Volatility
A primary component of the Company's cost of revenues in the magazine
publishing segment is the cost of paper. Consequently, increases in paper
prices can adversely impact the Company results of operations.
Interest Rates
28
<PAGE>
The Company is subject to certain interest rate risk related to the Term
Loans. The Term Loans mature on September 23, 2001 and bear interest at an
annual rate equal to the prime rate of the Lendor plus 1.85% payable monthly.
The interest rate on the balance of $20,750,000 outstanding on December 31, 1998
was 9.6%. An increase in the prime rate of the lendor by 1% would result in an
increase in interest expense of approximately $200,000.
The Company's remaining long-term debt and convertible debentures have
fixed interest rates and therefore the Company does not believe a 10% increase
in interest rates would have a material impact on the Company's consolidated
financial statements.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The information required by this item appears beginning on page F-1.
29
<PAGE>
Item 9. Changes In and Disagreements With Accountants On Accounting and
----------------------------------------------------------------
Financial Disclosure.
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
Information concerning directors and officers of the Company is included in
the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
Item 11. Executive Compensation.
----------------------
Information concerning directors and officers of the Company is included in
the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
Information concerning directors and officers of the Company is included in
the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
30
<PAGE>
Information concerning directors and officers of the Company is included in
the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
(1) Financial Statements
The financial statements filed as a part of this report appear
beginning on page F-1.
(2) Financial Statement Schedules
The financial statement schedules filed as a part of this report are
listed in Exhibit 27.
(b) Reports on Form 8-K
Current Report of the Company on Form 8-K, as filed on October 8,
1998.
(c) Exhibits
31
<PAGE>
Exhibit
No. Description
- ------ -----------
2.1 Agreement and Plan of Merger and Reorganization dated June
30, 1998, by and among Newriders, the Registrant and
Easyriders Sub, Inc. (incorporated by reference to Exhibit
2.1 of the Registrant's Registration Statement on Form S-4,
filed July 6, 1998).
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. (incorporated
by reference to Exhibit 2.2 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998). List of exhibits
and schedules to Stock Contribution and Sale Agreement
(incorporated by reference to Exhibit 2.2 on the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
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.
(incorporated by reference to Exhibit 2.3 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
3.1 Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
3.2 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Registration Statement on
Form S-4, filed July 6, 1998).
4.1 Specimen of the Registrant's Common Stock Certificates
(incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-4/A, filed
August 28, 1998).
10.1 Assignment of Motorcycle Shop Lease Agreement -- Myrtle
Beach, SC by Newriders to Leon Hatcher (incorporated by
reference to Exhibit 10.2.5 to Newriders' Annual Report on
Form 10-KSB for the year ended December 31, 1997).
10.2 Employment Letter Agreement between Newriders and John
Martin (incorporated by reference to Exhibit 10.2 of
Newriders' Registration Statement on Form S-8, filed
November 24, 1997).
32
<PAGE>
10.3 Employment Letter Agreement between Newriders and William R.
Nordstrom dated August 22, 1997 (incorporated by reference
to Exhibit 10.4.2 of Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997).
10.4 Stock Purchase Agreement for Restricted Shares and Warrants
between Newriders and John E. Martin dated as of April 21,
1997 (incorporated by reference to Exhibit 10.4.3 of
Newriders' Annual Report on Form 10-KSB for the year ended
December 31, 1997).
10.5 Stock Purchase Agreement for Restricted Shares and Warrants
between Newriders and William R. Nordstrom dated April 21,
1997 (incorporated by reference to Exhibit 10.4.4 of
Newriders' Annual Report on Form 10-KSB for the year ended
December 31, 1997).
10.6 Letter of Intent dated October 7, 1997 between Newriders and
M & B Restaurants, L.C. (Incorporated by reference to
Exhibit 10.5.1 of Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997).
10.7 Letter Agreement dated January 13, 1998 between Newriders
and the Paisano Companies (incorporated by reference to
Exhibit 10.5.2 of Newriders' Annual Report on Form 10-KSB
for the year ended December 31, 1997).
10.8 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) (incorporated by reference to Exhibit 10.6.1 of
Newriders Annual Report on Form 10-KSB for the year ended
December 31, 1997).
10.9 Security Agreement between Newriders and Franchise Mortgage
Acceptance Company, LLC dated October 21, 1997 for $475,000
(Loan # 11441-102) (incorporated by reference to Exhibit
10.6.2 of Newriders Annual Report on Form 10-KSB for the
year ended December 31, 1997).
10.10 Guaranty dated October 21, 1997 signed by Leon Hatcher and
Sandra Hatcher (incorporated by reference to Exhibit 10.6.3
of Newriders Annual Report on Form 10-KSB for the year ended
December 31, 1997).
10.11 Form of Agreement to Exchange Options and Waive Change in
Control Rights (incorporated by reference to Exhibit 10.1.12
of the Registrant's Registration Statement on Form S-4,
filed July 6, 1998).
33
<PAGE>
10.12 Newriders, Inc. 8% Convertible Debenture Due June 30, 2000
in the amount of $1,000,000 payable to Wayne L. Knyal
(incorporated by reference to Exhibit 10.1.13 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.13 Newriders, Inc. Warrant dated June 10, 1998 in favor of
Wayne L. Knyal for 225,000 shares (incorporated by reference
to Exhibit 10.1.14 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.14 Newriders, Inc. 8% Convertible Debenture Due May 11, 2000,
in the amount of $500,000 payable Silenus, Ltd (incorporated
by reference to Exhibit 10.1.15 of the Registrant's
Registration Statement on Form S-4, filed July 6, 1998).
10.15 Newriders, Inc. Warrant dated May 11, 1998 in favor of
Silenus, Ltd. for 25,000 shares (incorporated by reference
to Exhibit 10.1.16 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.16 Security Agreement between Leon Hatcher as pledgor and
Silenus, Ltd. as secured party dated May 11, 1998 pledging
400,000 shares of Newriders Common Stock as security
(incorporated by reference to Exhibit 10.1.17 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.17 Letter Agreement dated January 13, 1998 between Imperial
Capital, LLC and Newriders, Inc. (incorporated by reference
to Exhibit 10.1.12 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.18 Newriders, Inc. Convertible Note due December 12, 2000 in
the amount of $400,000 payable to Offshore Investment Fund
(incorporated by reference to Exhibit 10.1.19 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.19 Newriders, Inc. Convertible Note due December 12, 2000 in
the amount of $400,000 payable to Offshore Investment Fund
(incorporated by reference to Exhibit 10.1.20 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.20 Proxy dated April 19, 1998, for 800,000 shares of Newriders
Common Stock given by Michael T. Purcell in favor of Mr.
Joseph Teresi (incorporated by reference to Exhibit 10.1.21
of the Registrant's Registration Statement on Form S-4,
filed July 6, 1998).
10.21 Proxy dated April 20, 1998, for 640,000 shares of Newriders
Common Stock given by Mr. C. W. Doyle in favor of Mr. Joseph
Teresi (incorporated by reference to Exhibit 10.1.22 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
34
<PAGE>
10.22 Proxy dated April 20, 1998, for 1,300,000 shares of
Newriders Common Stock given by Mr. Leon Hatcher in favor of
Mr. Joseph Teresi (incorporated by reference to Exhibit
10.1.23 of the Registrant's Registration Statement on Form
S-4, filed July 6, 1998).
10.23 Letter Agreement for Return of Common Stock dated February
9, 1998 executed by Cyril Doyle, Leon Hatcher and Michael T.
Purcell (incorporated by reference to Exhibit 10.1.24 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.24 Letter Agreement for Return of Common Stock dated February
10, 1998 executed by Rick Pierce (incorporated by reference
to Exhibit 10.1.25 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.25 Agreement to Relinquish Stock Options dated June 25, 1998,
by and among Newriders, Inc., John Martin, William
Nordstrom, William Prather, Wayne Knyal and Daniel Gallery
(incorporated by reference to Exhibit 10.1.26 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.26 Form of Agreement for Change in Conversion Rights
(incorporated by reference to Exhibit 10.1.27 of the
Registrant's Registration Statement on Form S-4/A, filed
August 28, 1998).
10.27 Easyriders 1998 Executive Incentive Plan (incorporated by
reference to Exhibit 10.2.1 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.28 Distribution Agreement dated April 1, 1987 between Curtis
Circulation Company and Paisano Publications, Inc.
(confidential treatment requested) (incorporated by
reference to Exhibit 10.3.1 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.29 Letter Agreement dated April 20, 1998 between Curtis
Circulation Company and Paisano Publications, Inc., amending
Distribution Agreement dated April 1, 1987 (confidential
treatment requested) (incorporated by reference to Exhibit
10.3.2 of the Registrant's Registration Statement on Form S-
4, filed July 6, 1998).
10.30 Letter Agreement between RR Donnelley & Sons Company and
Paisano Publications, Inc. dated September 11, 1996
(incorporated by reference to Exhibit 10.3.3 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.31 Limited Recourse Subordinated Promissory Note compromising
Exhibit B-1 to the Stock Contribution and Sale Agreement, by
the Registrant in favor of Joseph Teresi in the amount of
$5,000,000 (incorporated by
35
<PAGE>
reference to Exhibit 10.4.1 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.32 Pledge Agreement compromising Exhibit B-2 to Stock
Contribution and Sale Agreement by Easyriders as pledgor and
Joseph Teresi as pledgee (incorporated by reference to
Exhibit 10.4.2 of the Registrant's Registration Statement on
Form S-4, filed July 6, 1998).
10.33 Subordinated Promissory Note compromising Exhibit B-3 to the
Stock Contribution and Sale Agreement, by the Registrant in
favor of Joseph Teresi in the amount of $5,000,000
(incorporated by reference to Exhibit 10.4.3 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.34 Subordinated Promissory Note compromising Exhibit B-4 to the
Stock Contribution and Sale Agreement, by the Registrant in
favor of Joseph Teresi in the amount of $3,000,000
(incorporated by reference to Exhibit 10.4.4 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.35 Employment Agreement between Paisano Publications, Inc. and
Robert Davis comprising Exhibit D-2 to the Stock
Contribution and Sale Agreement (incorporated by reference
to Exhibit 10.4.5 of the Registrant's Registration Statement
on Form S-4, filed July 6, 1998).
10.36 Employment Agreement between Paisano Publications, Inc. and
Joseph Teresi comprising Exhibit F-1 to the Stock
Contribution and Sale Agreement (incorporated by reference
to Exhibit 10.4.6 of the Registrant's Registration Statement
on Form S-4, filed July 6, 1998).
10.37 Consulting Agreement between Paisano Publications, Inc. and
Joseph Teresi comprising Exhibit F-2 to the Stock
Contribution and Sale Agreement (incorporated by reference
to Exhibit 10.4.7 of the Registrant's Registration Statement
on Form S-4, filed July 6, 1998).
10.38 Stockholders Voting Agreement comprising Exhibit I to Stock
Contribution and Sale Agreement between John E. Martin and
Joseph Teresi (incorporated by reference to Exhibit 10.4.8
of the Registrant's Registration Statement on Form S-4,
filed July 6, 1998).
10.39 Promissory Note compromising Exhibit 2.2(a) to the Stock
Contribution and Sale Agreement, by Easyriders Sub II, Inc.
in favor of Joseph Teresi in the amount of $15,000,000
(incorporated by reference to Exhibit 10.4.9 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.40 Stock Purchase Agreement dated June 30, 1998, between
Easyriders and John E. Martin ("Stock Purchase Agreement")
(incorporated by reference
36
<PAGE>
to Exhibit 10.4.10 of the Registrant's Registration
Statement on Form S-4, filed July 6, 1998).
10.41 Promissory Note comprising Exhibit A to the Stock Purchase
Agreement, by John E. Martin in favor of Easyriders in the
amount of $5,000,000 (incorporated by reference to Exhibit
10.4.11 of the Registrant's Registration Statement on Form
S-4, filed July 6, 1998).
10.42 Promissory Note comprising Exhibit B to the Stock Purchase
Agreement, by John E. Martin in favor of Easyriders in the
amount of $2,300,000 (incorporated by reference to Exhibit
10.4.12 of the Registrant's Registration Statement on Form
S-4, filed July 6, 1998).
10.43 Commercial Lease -- Daytona, Florida, comprising Exhibit C
to the Stock Contribution and Sale Agreement, by Joseph
Teresi and Easyriders (incorporated by reference to Exhibit
10.4.13 of the Registrant's Registration Statement on Form
S-4, filed July 6, 1998).
10.44 Commercial Lease -- Columbus, Ohio, comprising Exhibit C to
the Stock Contribution and Sale Agreement, by Joseph Teresi
and Easyriders (incorporated by reference to Exhibit 10.4.14
of the Registrant's Registration Statement on Form S-4,
filed July 6, 1998).
10.45 Commercial Lease -- 28216 Dorothy Drive, Agoura Hills,
California, comprising Exhibit C to the Stock Contribution
and Sale Agreement, by Joseph Teresi and Easyriders
(incorporated by reference to Exhibit 10.4.15 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.46 Commercial Lease -- 28216 Dorothy Drive, Agoura Hills,
California, comprising Exhibit C to the Stock Contribution
and Sale Agreement, between Joseph Teresi and Easyriders
(incorporated by reference to Exhibit 10.4.16 of the
Registrant's Registration Statement on Form S-4, filed July
6, 1998).
10.47 Employment Agreement between Newriders and William E.
Prather comprising Exhibit F to the LLC Interest
Contribution Agreement (incorporated by reference to Exhibit
10.4.17 of the Registrant's Registration Statement on Form
S-4, filed July 6, 1998).
10.48 Employment Agreement, dated January 4, 1999, by and between
Easyriders and J. Robert Fabregas.
10.49 Form of Subordinated Promissory Note, dated February 23,
1999, by Easyriders in favor of John Martin in the amount of
$352,306.
37
<PAGE>
10.50 Form of Subordinated Promissory Note, dated February 23,
1999, by Easyriders in favor of Joseph Teresi in the amount
of $352,306.
10.51 Stock Purchase Agreement, dated April 8, 1999, between John
Martin and Easyriders.
10.52 Stock Purchase Agreement, dated April 8, 1999, between
Jospeh Teresi and Easyriders.
10.53 Letter Agreement, dated as of April 14 1999, by and between
Easyriders, Inc. and Joseph Teresi.
10.54 First Amendment, Consent and Waiver Under Note and Warrant
Purchase Agreement, dated as of March 31, 1999, by and among
Easyriders, Paisano Publications and Nomura Holding America,
Inc.
21 Subsidiaries of the Registrant
27 Financial Statement Schedules
38
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EASYRIDERS, INC.
----------------
(Registrant)
Date: March 24, 1999 By: /s/ William Prather
----------------------
William Prather
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and on the dates indicated.
Date: March 24, 1999 By: /s/ J. Robert Fabregas
------------------------
J. Robert Fabregas
Chief Financial Officer and
Executive Vice President
Date: March 24, 1999 By: /s/ John E. Martin
------------------------
John E. Martin
Chairman of the Board
39
<PAGE>
Date: March 24, 1999 By: /s/ Joseph Teresi
-------------------
Joseph Teresi
Director
Date: March 24, 1999 By: /s/ Joseph Jacobs
-------------------
Joseph Jacobs
Director
Date: March 24, 1999 By: /s/ Robert Davis
------------------
Robert Davis
Director
Date: March 24, 1999 By: /s/ Ellen Meagher
-------------------
Ellen Meagher
Director
Date: March 24, 1999 By: /s/ Daniel Gallery
--------------------
Daniel Gallery
Director
Date: March 24, 1999 By: /s/ Wayne Knyal
-----------------
Wayne Knyal
Director
40
<PAGE>
Easyriders, Inc. and
subsidiaries
Consolidated Financial Statements for the
Years ended December 31, 1998 and 1997,
and Independent Auditors' Report
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Easyriders, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Easyriders, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1998. 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 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 audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Easyriders, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the two years ended December 31, 1998, in conformity with
generally accepted accounting principles.
April 14, 1999
F-2
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 278,035 $1,262,633
Restricted cash 313,640
Accounts receivable, less allowance for doubtful accounts
of $395,681 in 1998 2,874,779
Inventories 3,975,443 285,622
Prepaid publication costs 629,375
Prepaid expenses and other 875,846 15,738
Receivable from shareholder 398,085
----------- ----------
Total current assets 9,345,203 1,563,993
PROPERTY AND EQUIPMENT, net 3,718,067 1,487,598
GOODWILL, net of accumulated amortization of $612,739 in 1998 62,704,698
TRADEMARK, net of accumulated amortization of $36,538 in 1998 809,409
OTHER ASSETS 560,245 410,764
----------- ----------
$77,137,622 $3,462,355
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,086,773 $ 517,904
Accrued payroll and payroll related expenses 589,861 395,507
Other current liabilities 1,659,631 50,000
Income taxes payable 7,034
Advances from stockholders 201,350
Current portion of deferred subscription and advertising income 3,348,420
Current portion of long-term debt 558,748 178,878
------------ -----------
Total current liabilities 10,250,467 1,343,639
------------ -----------
CONVERTIBLE DEBENTURES, net, including related party
debentures of $1,000,000 in 1998 1,316,667 785,183
NOTE PAYABLE TO STOCKHOLDER 13,000,000
LONG-TERM DEBT, net of current portion and debt discount, including
related party indebtedness of $895,304 in 1998 and $1,050,000 in 1997. 22,713,670 902,688
OTHER LONG TERM LIABILITIES, including $549,838 of
deferred subscription revenues in 1998 799,838 128,003
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 10,000,000 shares
authorized, none outstanding
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 19,295,375 (1998) and 8,590,713 (1997) outstanding 19,295 8,591
Additional paid in capital 54,318,590 6,893,267
Common stock subscription receivable (750,000)
Receivable from the sale of stock (7,300,000)
Accumulated deficit (17,980,905) (5,849,016)
------------ -----------
Total stockholders' equity 29,056,980 302,842
------------ -----------
$ 77,137,622 $ 3,462,355
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SALES $ 13,760,318 $ 2,932,708
COST OF SALES 10,457,224 1,670,146
------------ -----------
GROSS MARGIN 3,303,094 1,262,562
EXPENSES:
Selling, general, and administrative 7,664,959 3,729,500
Depreciation and amortization 1,056,538 99,388
Stock issuance expense 2,504,867 1,244,000
Loss on sale of restaurant to related party 1,099,760
Write-off of stock subscription receivable 750,000
Write-off of leasehold improvements 628,129
------------ -----------
Total expenses 13,076,124 5,701,017
------------ -----------
LOSS FROM OPERATIONS (9,773,030) (4,438,455)
OTHER INCOME 182,078
INTEREST EXPENSE (2,532,637) (338,419)
------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (12,123,589) (4,776,874)
PROVISION FOR INCOME TAXES 8,300
------------ -----------
NET LOSS $(12,131,889) $(4,776,874)
============ ===========
COMPREHENSIVE LOSS $(12,131,889) $(4,776,874)
============ ===========
NET LOSS PER SHARE - BASIC AND DILUTED $(1.04) $(0.57)
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 11,686,551 8,317,533
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Common stock Additional stock Receivable
----------------- paid-in subscription from the sale
Shares Amount capital receivable of stock
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 8,084,000 $8,084 $3,579,076 $(1,000,000) $ -
Common stock issued in conjunction with
convertible debentures 146,913 147 610,670
Discount on convertible debenture issuance 481,667
Warrants issued in connection with issuance
of debt 105,130
Issuance of common stock in exchange for
cash 192,300 192 499,808
Issuance of common stock in exchange for
services performed 167,500 168 572,332
Services rendered in satisfaction of stock 250,000
Issuance of stock as compensation to
employee 671,500
Capital contributed 373,084
Net loss
---------- ------ ---------- ---------
BALANCE, December 31, 1997 8,590,713 8,591 6,893,267 (750,000)
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Accumulated stockholder's
stock deficit equity
<S> <C> <C> <C>
BALANCE, January 1, 1997 $ - $(1,072,142) $2,587,160
Common stock issued in conjunction with
convertible debentures 610,817
Discount on convertible debenture issuance 481,667
Warrants issued in connection with issuance
of debt 105,130
Issuance of common stock in exchange for
cash 500,000
Issuance of common stock in exchange for
services performed 572,500
Services rendered in satisfaction of stock 250,000
Issuance of stock as compensation to
employee 671,500
Capital contributed 373,084
Net loss (4,776,874) (4,776,874)
---------- ---------- ----------
BALANCE, December 31, 1997 (5,849,016) 302,842
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Common stock Additional stock
-------------------------- paid-in subscription
Shares Amount capital receivable
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 8,590,713 $ 8,591 $ 6,893,267 $(750,000)
Common stock issued in
conjunction with
convertible debentures 432,575 432 1,205,711
Warrants issued in connection
with issuance of convertible
debentures 542,858
Common stock issued for services
and in satisfaction of accounts
payable 500,000 500 2,099,500
Discount on convertible debenture
issuance 500,002
Contribution of stock from certain
founders of the Company (9,480,979)
Reissuance of treasury stock in
connection with the acquisition
of the Paisano Companies 9,480,979
Issuance of stock related to the
purchase of Paisano Companies 3,415,267 3,415 19,996,585
Issuance of stock options and
common stock purchase warrants
in connection with the
acquisition of the Paisano
Companies 3,711,024
Issuance of stock related to the
purchase of M&B Restaurants LC 2,000,000 2,000 6,158,000
Issuance of common stock in
exchange for cash and notes
receivable 4,036,797 4,037 12,295,963
Issuance of common stock as
compensation to employees 320,000 320 915,680
Write-off of common stock
subscription receivable 750,000
Shares issued in lieu of payment
on rounding caused by stock
split 23
Net loss
---------- ------- ----------- ---------
BALANCE, December 31, 1998 19,295,375 $19,295 $54,318,590 $ -
========== ======= =========== =========
<CAPTION>
Receivable Total
from the sale Treasury Accumulated stockholders'
of stock stock deficit equity
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ - $ - $ (5,849,016) $ 302,842
Common stock issued in
conjunction with
convertible debentures 1,206,143
Warrants issued in connection
with issuance of convertible
debentures 542,858
Common stock issued for services
and in satisfaction of accounts
payable 2,100,000
Discount on convertible debenture
issuance 500,002
Contribution of stock from certain
founders of the Company 9,480,979
Reissuance of treasury stock in
connection with the acquisition
of the Paisano Companies (9,480,949)
Issuance of stock related to the
purchase of Paisano Companies 20,000,000
Issuance of stock options and
common stock purchase warrants
in connection with the
acquisition of the Paisano
Companies 3,711,024
Issuance of stock related to the
purchase of M&B Restaurants LC 6,160,000
Issuance of common stock in
exchange for cash and notes
receivable (7,300,000) 5,000,000
Issuance of common stock as
compensation to employees 916,000
Write-off of common stock
subscription receivable 750,000
Shares issued in lieu of payment
on rounding caused by stock
split
Net loss (12,131,889) (12,131,889)
----------- ----------- ------------ ------------
BALANCE, December 31, 1998 $(7,300,000) $ - $(17,980,905) $ 29,056,980
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(12,131,889) $(4,776,874)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Common stock issued for services 2,504,867 572,500
Compensatory options issued to nonemployees 671,500
Services rendered in satisfaction of common stock 250,000
Depreciation and amortization 1,056,538 223,169
Write-off of leasehold improvements 628,129
Loss on sale of restaurant to third party 1,099,760
Loss on sale of fixed assets 182,717
Write-off of stock subscription receivable 750,000
Amortization of debt issuance costs 1,369,536 310,877
Increase (decrease) in cash resulting from changes in operating
accounts, net of acquisitions:
Current assets 2,162,248 183,066
Other assets 44,219
Current liabilities 1,180,124
Other long-term liabilities (139,696) 872,246
------------ -----------
Net cash used in operating activities (1,921,576) (1,065,387)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, less cash acquired (18,951,876)
Proceeds from the sale of fixed assets 215,325
Purchase of fixed assets (243,319) (1,338,738)
------------ -----------
Net cash used in investing activities (18,979,870) (1,338,738)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures 1,500,000 1,600,000
Issuance of long-term debt 21,350,000 1,050,000
Payment of long-term debt and capital leases (7,731,802) (127,723)
Payments of stockholders advances (201,350)
Issuance of note payable to stockholder 339,350
Payment of note payable to stockholder (88,000)
Capital contributed 373,084
Common stock issued for cash 5,000,000 500,000
------------ -----------
Net cash provided by financing activities 19,916,848 3,646,711
------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (984,598) $1,242,586
CASH AND CASH EQUIVALENTS, beginning of year 1,262,633 20,047
------------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 278,035 $1,262,633
============= ==========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 1,083,101 $ 21,482
============= ==========
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of accounts payable $ 211,134 $ -
============= ==========
Common stock issued in settlement of debt $ 1,506,142 $ 610,817
============= ==========
Convertible debentures issued with conversion discount $ 500,002 $ 481,667
============= ==========
Issuance of warrants in connection with debt issuance $ 1,487,190 $ 105,130
============= ==========
Issuance of stock in settlement of accrued liability $ 300,000 $
============= ==========
Common stock issued in exchange for a note receivable $ 7,300,000 $ -
============= ==========
DETAIL OF BUSINESSES ACQUIRED IN PURCHASE
BUSINESS COMBINATIONS (Note 2):
On September 23, 1998, the Company acquired the net assets of the
Paisano Companies. A summary of the transaction is as follows:
Cash paid $ 15,000,000
Receivable related to purchase adjustments (398,085)
Promissory notes issued 13,000,000
Fair market value of stock issued (6,493,507 shares at $3.08 per share) 20,000,000
Fair market value of options issued to employees of Paisano Companies 697,434
Fair value of liabilities assumed 14,499,307
Other acquisition costs 5,251,474
Fair value of tangible and identifiable assets acquired (11,681,378)
------------
Excess of cost over identifiable assets acquired (goodwill) $ 56,368,752
============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
On September 23, 1998, the Company acquired the net assets of the
M&B Restaurants, L.C. A summary of the transaction is as follows:
<TABLE>
<S> <C>
Fair market value of stock issued (2,000,000 shares at $3.08 per share) $ 6,160,000
Fair value of liabilities assumed 4,140,729
Other acquisition costs 639,817
Fair value of tangible and identifiable assets acquired (4,141,861)
-----------
Excess of cost over identifiable assets acquired (goodwill) $ 6,798,685
===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. GENERAL BASIS OF PRESENTATION
Easyriders, Inc. (Easyriders or the Company) was incorporated in the State
of Delaware on May 13, 1998, and for financial reporting purposes is the
successor to Newriders, Inc. On September 23, 1998, Easyriders, Inc.
consummated a series of transactions (collectively, the Reorganization),
including the following: (i) the merger of a subsidiary of Easyriders with
and into Newriders, Inc. (Newriders) (the Merger) upon which the
shareholders of Newriders exchanged their stock on a 2-for-1 basis for
Easyriders, Inc. common stock; (ii) the acquisition by Easyriders of all of
the outstanding common stock of Paisano Publications, Inc. (Paisano
Publications), a California corporation, and certain affiliated corporations
(collectively, the Paisano Companies); and (iii) the acquisition by
Easyriders of all of the outstanding membership interests of M&B
Restaurants, L.C. (El Paso), a Texas limited liability company (See Note 3).
As a result of the merger, the Newriders common stock was exchanged for
Easyriders common stock on the basis of one share of Easyriders common stock
for each two shares of Newriders common stock, and the stockholders of
Newriders immediately prior to the merger became stockholders of Easyriders.
The merger was accounted for as a combination of entities under common
control, similar to a pooling of interest. Therefore, the historical
financial statements represent the combined financial statements of
Easyriders and Newriders. The acquisitions of the Paisano Companies and El
Paso were accounted for as a purchase. The accompanying financial
statements include the results of the Paisano Companies and El Paso's
operations from the date of acquisition, September 23, 1998.
The Paisano Companies consist of Paisano Publications; Easyriders of
Columbus, Inc., an Ohio corporation; Easyriders Franchising, Inc., a
California corporation; Easyriders Events, Inc., a California corporation;
Bros Club, Inc., a California corporation; and Associated Rodeo Riders on
Wheels, a California corporation. Paisano Publications publishes 11
special-interest magazines directed to motorcycle, hot-rod, and tattoo
enthusiasts. Other Paisano Companies market a line of apparel and other
products designed to appeal to motorcycle, hot-rod, and tattoo enthusiasts,
and own three Easyriders stores and have franchised 22 additional stores
that sell Easyriders apparel, customized new and used American-made
motorcycles, and motorcycle accessories.
El Paso is a Texas limited liability company, which owns and operates four
barbecue and smoked meat restaurants, three of which are located in Arizona
and one of which is located in Oklahoma. The restaurants are operated under
the name "El Paso Bar-B-Que."
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications and El Paso.
F-11
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
2. MANAGEMENT'S PLANS
During the year ended December 31, 1998, the Company incurred a net loss of
$12,131,889 and cash used in operations was $1,921,576. Contributing to
this net loss, but not adversely impacting the Company's operating cash
flow, were the following significant expenses recorded during during the
year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Stock issuance expense (Note 13) $2,504,867
Loss on sale of restaurant to related party (Note 15) 1,099,760
Write-off of stock subscription receivable (Note 13) 750,000
Depreciation and amortization 1,056,538
Noncash interest expense 1,369,536
----------
$6,780,701
==========
</TABLE>
Management is currently evaluating and implementing several steps to improve
the liquidity and operations of the Company. These steps include:
. Increasing the subscriber base and advertising revenues associated with
its magazines
. Expanding its franchising base
. Expanding the revenue base of its wholly owned subsidiary, M&B
Restaurants L.C., by opening additional restaurant sites (Note 21)
Management has implemented certain steps to improve the liquidity and
operations of the Company. These steps include:
. Renegotiating the terms associated with certain of its loan agreements
(Note 8)
. Seeking additional financing either in the form of equity or additional
debt (Note 21)
3. ACQUISITIONS
Paisano Acquisition - On September 23, 1998, the Company acquired all of the
issued and outstanding stock of each of the corporations that comprise the
Paisano Companies (The Paisano Acquisition). In exchange for the
outstanding stock of each Paisano Company, the sole shareholder of the
Paisano Companies (the Seller) received total consideration of $48,000,000.
This consideration was comprised of the following:
A. An aggregate 6,493,507 shares of Easyriders common stock valued at $3.08
per share
B. Promissory notes aggregating $28,000,000, of which $15,000,000 was
repaid subsequent to the Paisano Acquisition using proceeds from a
credit facility (see Note 8) and proceeds from the sale of stock to a
related party.
F-12
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Additionally, under the terms of the Stock Contribution and Sale Agreement,
Easyriders was obligated to issue stock options to purchase an aggregate
300,000 shares of Easyriders common stock at an exercise price of $5.00 per
share to certain employees and consultants of the Paisano Companies. These
options were valued at $697,434 using Black-Scholes option-pricing model and
has been included in the determination of the aggregate purchase price of
the Paisano Companies.
Based upon the terms of the Stock Contribution and Sale Agreement, the
purchase price was subject to adjustment based upon the working capital
level of the Paisano Companies at September 23, 1998. In March 1999, the
Seller and the Company reached agreement to reduce the consideration paid to
the Seller by $398,085. This amount has been recorded as a receivable from
shareholders in the Company's financial statements.
The acquisition of Paisano Companies was accounted for as a purchase and the
resulting goodwill of $56,368,752 is being amortized on a straight-line
basis over 30 years.
El Paso Acquisition - On September 23, 1998, the Company acquired all of the
issued and outstanding membership interests of El Paso from the members, who
included the Chairman and the President of the Company, for 2,000,000 shares
of Easyriders' common stock valued at $3.08 per share.
The acquisition of El Paso was accounted for as a purchase and the resulting
goodwill of $6,798,685 is being amortized on a straight-line basis over 20
years.
Other - Warrants to purchase 592,184 shares of Easyriders' common stock were
issued to a financial advisor of the Company on the closing date of the
Reorganization, at nominal cost. The exercise price of the warrants is
$4.3125 per share. The warrants have been valued, in aggregate, at
$2,069,258 using the Black-Scholes option-pricing model and have been
included in the determination of the purchase price of the Paisano Companies
and El Paso. The warrants will be exercisable at any time for a period of
seven years from their date of issuance. As compensation for certain
services provided by the financial advisor in April 1999, the Company
repriced the warrants. The increase in fair value of the warrants, if any,
related to the reduction in the exercise price to $1.75 per share was
recorded as expense in April 1999.
F-13
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, the Paisano Companies and
El Paso as if the acquisition had occurred at the beginning of 1998, with
pro forma adjustments to give effect to amortization of goodwill and
interest expense on acquisition debt.
<TABLE>
<S> <C>
SALES $ 47,232,108
============
PRO FORMA LOSS FROM OPERATIONS $(12,021,536)
============
PRO FORMA NET LOSS $(16,004,759)
============
PRO FORMA NET LOSS PER SHARE $ (0.83)
============
</TABLE>
The pro forma results of operations are not necessarily indicative of actual
results that may have occurred had the operations of Easyriders, Newriders,
the Paisano Company, and El Paso been combined in prior years nor are they
necessarily indicative of future operating results.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. Material intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition - The Company's revenue stems primarily from the sale of
magazines, magazine advertising space, products, franchise rights and
related royalties, and restaurant sales. The Company records 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 - Easyriders Franchising, Inc. grants franchise
rights to third parties. The Company provides 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.
F-14
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
. Other Revenues - Event production revenues are recognized upon completion
of events. Retail and mail order revenues are recognized upon product
shipment.
. Food Service Revenue - Revenue is recognized at the point of sale to the
customer.
Income Taxes - Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax basis assets and
liabilities and are measured by applying enacted tax rates and laws to
taxable years in which differences are expected to be recovered or settled.
A valuation allowance was recorded to reduce deferred tax assets to an
amount that represents the Company's best estimate of the amount of such
deferred tax assets that more likely than not will be realized.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Restricted Cash - As part of certain advertising, promotion, and inventory
purchase activities, the Company is required to maintain certain minimum
deposits with a financial institution. The deposit amount has been included
as restricted cash in the accompanying consolidated balance sheets.
Inventories - Inventories, consisting primarily of paper for magazine
production and retail merchandise, food, beverages, and other restaurant
supplies and are stated at the lower of cost (first-in, first-out method) or
market.
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 Company accounts 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. As of December 31, 1998, $264,941 of these
expenses were included in prepaids and other current assets.
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. Useful lives generally range from 3 to 15 years.
Intangible Assets - Intangible assets consist of goodwill associated with
the acquisition of the Paisano Companies and El Paso in 1998 (Note 3).
Goodwill is amortized on a straight-line basis over periods
F-15
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
ranging from 20 to 30 years. At each balance sheet date, management assesses
whether there has been a permanent impairment in the value of goodwill. If
the carrying value of the asset 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 asset is written
down to fair value.
Pre-Opening Costs - Costs incurred prior to commencement of a restaurant's
operations are expensed as incurred.
Deferred Financing Costs - Costs incurred in obtaining financing are
deferred and amortized over the term of the related debt.
Deferred Rent - The Company recognizes rent expense on a straight-line basis
over the term of the leases (Note 12).
Collective Advertising Program - Easyriders Franchising, Inc. purchases
advertising on behalf of its franchisees in exchange for advertising fees of
2% of the franchised venue's gross reportable sales. The fees collected are
recorded as an accrued liability of the Company and the related advertising
costs are recorded as a reduction of the liability. As of December 31,
1998, the Company incurred greater advertising expenses than had been
collected under the collective advertising program and therefore no
liability exists at December 31, 1998.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable, accrued liabilities, and notes payable,
convertible debentures, and long-term debt. The carrying value of all
financial instruments, other than notes payable, convertible debentures, and
long-term debt are representative of their fair values because of their
short-term maturities. The carrying value of the Company's notes payable,
convertible debentures, and long-term debt are representative of their fair
value because of the short period of time elapsed since origination.
Use of Estimates in Preparation of Financial Statements - 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 as the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
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 are reviewed for events or changes in
circumstances that indicate that their carrying value may not be
recoverable.
Comprehensive Income/Loss - As of December 31, 1998, the Company has
implemented SFAS No. 130, Reporting Comprehensive Income. As shown on the
Company's consolidated statements of operations, comprehensive loss equaled
net loss at December 31, 1998.
F-16
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
New Accouting Pronouncements - In June of 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal periods beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company is currently evaluating the effect this standard may have on the
Company's financial condition, results of operations, and cash flows.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Office equipment $ 406,218 $ 135,649
Computer equipment 535,298 35,621
Production and restaurant equipment 1,296,051 374,380
Leasehold improvements 1,753,430 1,085,240
---------- ----------
3,990,997 1,630,890
Less accumulated depreciation (272,930) (143,292)
---------- ----------
Property and equipment, net $3,718,067 $1,487,598
========== ==========
</TABLE>
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Food and restaurant supplies $ 187,718 $ 48,586
Paper 1,295,918
Motorcycles and parts 754,399 137,055
Other retail products 1,737,408 99,981
---------- --------
$3,975,443 $285,622
========== ========
</TABLE>
7. CONVERTIBLE DEBENTURES
F-17
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
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 are convertible at
the option of the holder into shares of the Company's common stock 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 were converted into common stock in increments
throughout September 1998. The Company issued a total of 274,130 shares of
its common stock in connection with the conversion of the Debentures. The
conversion discount, which was $166,667 at the date of issuance, was
recognized by the Company as 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. In conjunction
with the issuance of the convertible debentures, the Company issued warrants
for the purchase of 12,500 shares of the Company's common stock to a
financial advisor as compensation for arranging the Convertible Debenture
issuances. The warrants have an exercise price of $2.82 per share and can be
exercised at any time 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
with a director of the Company. 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
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 conversion discount, which was $333,335 at the
date of issuance, was recognized by the Company as 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.
In conjunction with the issuance of the convertible debentures, the Company
issued warrants for the purchase of 12,500 shares of the Company's common
stock, with an exercise price of $2.98 per share at any time 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. At December 31, 1998, $1,000,000 in principal balance remains
outstanding.
During the year ended December 31, 1997, the Company issued two tranches of
convertible debentures (the Debentures) with face values of $600,000
(Tranche A) and $1,000,000 (Tranche B) 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
146,913 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-18
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
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. As of
December 31, 1998, the Company had issued 158,445 shares of its common
stock in connection with the conversion of $683,333 in principal amount of
the Debentures. At December 31, 1998, $316,667 in principal balance remains
outstanding.
The conversion of the Debentures at a discount of the Company's common stock
results in the Debentures being issued at a discount. The conversion
discount, which aggregated $481,667 at the dates of issuance, is being
recognized by the Company as 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.
In conjunction with the issuance of the Debentures, the Company issued an
aggregate 25,000 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 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.
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Upon its acquisition by Easyriders, Inc., Paisano Publications obtained an
aggregate of $22,000,000 in financing (the Senior Loans) from a financial
institution. This financing was comprised of $17,000,000 in senior term
loans (the Term Loans) and $5,000,000 in revolving loans (the Revolving
Loans). The proceeds from the Term Loans plus $3,500,000 of the Revolving
Loans were used to repay certain promissory notes issued to the shareholder
of the Paisano Companies in conjunction with the Paisano Acquisition (Note
3) and to pay certain acquisition expenses. To the extent that Paisano
Publications is in compliance with the terms of the Senior Loans, any unused
portion of the Revolving Loans may be used by Paisano Publications for
working capital purposes. At December 31, 1998, no amounts were available
under the Revolving Loans.
The Senior Loans are guaranteed (the Guarantees) by Easyriders and the
Paisano Companies, other than Paisano Publications (the Guarantors). The
Senior Loans will mature on September 23, 2001, and bear interest at an
annual rate equal to the prime rate (7.75% at December 31, 1998) plus 1.85%,
payable monthly. The Senior Loans and the Guarantees are secured by a first
priority security interest in substantially all of the tangible and
intangible assets (owned or hereafter acquired) of Easyriders and
F-19
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
the Paisano Company, including all of the capital stock or equity interests
of the Paisano Company, Newriders, and El Paso. The Senior Loans and the
Guarantees constitute the sole senior secured indebtedness of Paisano
Publications and the Guarantors and rank senior to all other indebtedness of
Paisano Publications and the Guarantors.
Paisano Publications is obligated to pay the Senior Lender a fee equal to
0.25% per annum of the average daily undrawn amount of the Revolving Loans.
At the end of each one-month period in which the Term Loans are outstanding,
Paisano Publications is required to prepay the Term Loans in an aggregate
principal amount equal to 35% of Excess Cash Flow, as defined, for such
period, to the extent such Excess Cash Flow is achieved. Because this
prepayment is dependent upon Excess Cash Flow, no amounts have been
classified as current at December 31, 1998.
Because the Senior Loans included restrictions on the ability of the Paisano
Companies to transfer funds to Easyriders in the form of cash dividends,
loans, or advances, the net assets of the Paisano Companies are considered
to be restricted. The restricted net assets of the Paisano Companies at
December 31, 1998, total $39,394,334. See Parent Company financial
information at Note 19.
Subject to certain limitations on dividends and provided that no event of
default has occurred, Paisano Publications may loan funds to Easyriders
monthly, limited to the lessor of $100,000 or 35% of the Excess Cash Flow
for the preceding monthly period. As of December 31, 1998, Paisano
Publications did not achieve such excess cash flow and therefore, Paisano
Publications was unable to provide funds to Easyriders, Inc. The inability
of Paisano Publications to provide funds to Easyriders, Inc. can adversely
impact the ability of Easyriders, Inc. to repay certain expenses of the
Company (Note 12).
The Senior Loans contain numerous operating and financial covenants,
including but not limited to, payment of dividends, limitations on
indebtedness and the maintenance of minimum net worth, minimum working
capital, interest coverage ratios and the achievement of cash flow measures.
At December 31, 1998, the Company was in compliance with the terms of the
Senior Loans or had received waivers related to events of noncompliance.
Under the terms of the Senior Loans the Company issued warrants to purchase
355,920 shares of common stock at an exercise price of $3.00 per share,
exercisable at any time up to seven years from their date of issuance. The
fair value of the warrants, $944,332, has been recorded as a debt discount
and is being amortized over the term of the Senior Loans. As compensation
for the waivers related to events of noncompliance, the Company repriced the
warrants. The increase in fair value of the warrants, if any, related to
the reduction in the exercise price to $1.625 per share was recorded as a
debt discount and is being amortized over the remaining term of the Senior
Loans.
Long-term debt and capital lease obligations is summarized as follows:
F-20
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
<S> <C> <C>
Senior term loan, net of unamortized debt discount of $858,954 $16,141,046 $ -
Revolving term loan 3,750,000
Secured installment promissory note agreements with a
commercial lender bearing interest at 13.5%, interest and
principle payments of $24,160 due through December 2002.
A director and the president of the lender are directors of
the Company $ 895,304 $1,050,000
Note payable to a financial institution, 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 certain
property and equipment 1,364,702
Note payable to a financial institution, dated May 1, 1996 in
the amount of $1,017,000. The note bears interest at the
prime rate plus 1% with monthly principal and interest
payments of $15,364 through January 2001 and is
collateralized by certain property and equipment 742,736
Note payable to a current landlord, dated May 15, 1995 in the
amount of $1,500,000. The note bears interest at 10.5% with
monthly principal and interest payments of $3,373 through
February 2006 201,815
Unsecured promissory note to a financial institution, dated
March 2, 1998. The note bears interest at 8% and is due
on demand 100,000
Obligations under capital leases with various financial
institutions. The obligations bear interest at rates ranging
from 9.0% to 18.3% due in monthly payments of $4,511
ending on various dates through February 2006 76,815 31,566
---------- ----------
23,272,418 1,081,566
Less current maturities (558,748) (178,878)
----------- ----------
$22,713,670 $ 902,688
=========== ==========
</TABLE>
F-21
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1999 $ 558,748
2000 489,230
2001 21,648,330
2002 447,196
2003 188,436
Thereafter 799,432
-----------
24,131,372
Less debt discount (858,954)
-----------
$23,272,418
===========
</TABLE>
On March 17, 1998, the Company borrowed $500,000 under a securities purchase
agreement, which was repaid in June 1998. Additionally, the agreement
required the issuance of between 10,000 and 20,000 warrants to purchase
common stock of the Company at $1.50 for each week the debt was outstanding.
For the year ended December 31, 1998, 54,000 warrants were issued. The
fair value of the warrants was recorded as debt issuance costs and was
amortized over the period the debt was outstanding.
9. NOTE PAYABLE TO SHAREHOLDER
In connection with the Paisano Acquisition, the sole stockholder of the
Paisano Companies received promissory notes aggregating $13,000,000 (the
Contributor Notes). The Contributor Notes consist of a subordinated
promissory note (the Contributor Subordinated Note) in the amount of
$5,000,000, a limited recourse subordinated promissory note (the Contributor
Mirror Note) in the amount of $5,000,000 secured by the Martin Mirror Note
(defined below) and a subordinated promissory note (the Contributor Short-
Term Subordinated Note) in the amount of $3,000,000. The Contributor
Subordinated Note has a term of five years and can be extended for an
additional term of five years by Registrant and bears interest at an annual
rate between 6% and 10%. The Contributor Mirror Note has a term of five
years and will be extended if, and to the extent that, the Martin Mirror
Note (Note 13) is extended, and bears interest at an annual rate between 6%
and 10%. The Contributor Short-Term Subordinated Note bears interest at an
annual rate of 10% and had a term of 90 days (stated maturity date of
December 23, 1998). On March 31, 1999, the sole stockholder of the Paisano
Companies agreed to defer collection of all interest and principle due under
the Contributor Notes until March 31, 2000. Therefore, the $3,000,000
Contributor Short-Term Subordinated Note was classified as long-term. On
April 9, 1999, the Company issued shares of stock in exchange for the
forgiveness of interest on the Contributor Subordinated Note of $75,000 and
a reduction in principal of the Contributor Subordinated Note from
$5,000,000 to $3,575,000 (Note 21).
F-22
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
10. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ - $ -
State 8,300
----------- -----------
8,300 -
Deferred:
Federal 3,263,935 1,444,800
State 473,317 213,387
Change in valuation allowance (3,737,252) (1,658,187)
----------- -----------
- -
----------- -----------
$ 8,300 $ -
=========== ===========
</TABLE>
A reconciliation of the provision (benefit) for income taxes to the amount
of income tax expense that would result from applying the federal statutory
rate to income before provision for income taxes is as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Federal statutory rate (35)% (35)%
State income taxes, net of federal benefit (3) (3)
Nondeductible expenses related to acquired intangibles 3
Change in valuation allowance 32 35
Other 3 3
---- ----
0% 0%
==== ====
</TABLE>
F-23
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
State taxes $ (28,980) $ (9,482)
Accrued compensation 329,840 329,840
Other 277,605 (43,043)
Valuation allowance (578,465) (277,315)
----------- -----------
- -
----------- -----------
Noncurrent:
State taxes (233,613) (95,006)
Fixed assets 40,313 40,313
Net operating loss carryforward 5,437,116 1,862,407
Valuation allowance (5,243,816) (1,807,714)
----------- -----------
- -
----------- -----------
$ - $ -
=========== ===========
</TABLE>
The Company has provided a full valuation allowance on the net deferred
asset at December 31, 1998 and December 31, 1997, due to the uncertainty
regarding its realization.
At December 31, 1998, the Company has available net operating loss
carryforwards of approximately $13,995,000 and $7,755,000 for federal and
state income tax purposes, respectively. Approximately $11,995,000 of the
federal loss carryforward related to pre-reorganization periods which can be
used to offset future taxable income. Sections 382, 383, and 1502 of the
Internal Revenue Code of 1986 place certain limitations on the use of these
acquired losses. A maximum of approximately $1,100,000 of the net operating
loss carryforwards can be utilized annually in 1999 and subsequent years.
Any net operating losses not utilized will begin expiring in 2010 and 2003
for federal and state purposes, respectively.
F-24
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
11. PENSION PLAN
The Paisano Companies have a noncontributory defined benefit pension plan
(the Plan) covering a majority of their employees. The Company assumed this
plan through the purchase of the Paisano Companies. The funded status of
the Plan is as follows at December 31, 1998:
<TABLE>
<S> <C>
Change in benefit obligations
Benefit obligation at December 31, 1997: $
Acquisition 1,236,736
Interest cost 70,026
----------
Benefit obligation at December 31, 1998 1,306,762
Change in Plan assets
Fair value of Plan assets at December 31, 1997:
Acquisition 970,628
Actual return on Plan assets 140,298
----------
Fair value of Plan assets at December 31, 1998 1,110,926
----------
Funded status 195,836
----------
Accrued benefit cost $ 195,836
==========
Weighted average assumptions as of December 31, 1998
Discount rate 5.8%
==========
Expected return on Plan assets 5.0%
==========
Rate of compensation increase 0.0%
==========
Components of net periodic benefit cost:
Service cost $
Interest cost 70,026
Expected return on Plan assets (48,531)
Amortization of prior service cost 236,710
Recognized net actuarial loss (62,369)
----------
$ 195,836
==========
</TABLE>
The Company intends to terminate the Plan during the year ended December 31,
1999. Actuarial assumptions used to determine pension costs and net
periodic pension cost reflect this intent to terminate. The Plan was
amended to freeze benefits in anticipation of plan termination.
Plan assets consist principally of United States government securities.
F-25
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases its facilities and certain equipment under both
capital leases (Note 8) 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 years ended December 31, 1998 and 1997 was $470,978 and
$433,188, of which $140,808 and $42,000 was paid to directors and
shareholders of the Company.
Minimum annual payments under these agreements as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Operating Operating
leases leases
(related)
Year ending December 31:
<S> <C> <C>
1999 $ 1,507,126 $ 564,983
2000 1,542,994 573,458
2001 1,620,579 582,059
2002 1,629,064 590,790
2003 1,483,779 448,059
Thereafter 3,515,847
----------- ----------
Total minimum lease payments $11,299,389 $2,759,349
=========== ==========
</TABLE>
Employment Agreements - The Company has entered into employment and
consulting agreements with certain Company officers requiring minimum
aggregate compensation as follows: $863,000 (1999), $850,000 (2000),
$850,000 (2001), $850,000 (2002), and $850,000 thereafter.
Restrictions Under Financing Facilities - Paisano Publications, a primary
source of the Company's revenue is subject to certain restrictions in the
Senior Credit Agreement underlying the Notes that limit its ability to
transfer funds to Easyriders, Inc., its parent, or to its other affiliates
(Note 8).
Concentration - Primarily all of the Company's magazine distribution is
performed by one distributor and primarily all of the Company's printing and
production is performed by one printing company. Any failure to renew the
distribution and printing contracts with these companies could have a
material adverse effect on the Company's operations.
Paper Price Volatility - A primary component of the Company' cost of
revenues in the magazine publishing segment is the cost of paper.
Consequently, increases in paper prices can adversely impact the Company'
results of operations.
F-26
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Litigation - The Company is currently involved in litigation incidental to
its business both as a plaintiff and defendent. In the opinion of
management, the ultimate resolution of such litigation will not have a
material impact on the Company's financial statements.
13. STOCKHOLDERS' EQUITY
Exchange Ratio - As more fully described in Note 1, at the time of the
Merger, the Company effected a 2-for-1 exchange of its common stock.
Historical share and per share information has been retroactively restated
in the accompanying consolidated financial statements.
Treasury Stock Transactions - In connection with the reorganization, four of
the largest shareholders of Newriders agreed to return to Newriders an
aggregate of 6,156,480 shares of Newriders' common stock. A total of
4,848,480 of these shares were delivered to Newriders for cancelation at or
prior to closing. One of the four shareholders failed to deliver 1,308,000
of the Newriders shares to be canceled, of which 464,000 Newriders shares
are beneficially owned by another individual, who had consented to their
cancelation. The Paisano shareholder waived the condition for cancelation
of the 1,308,000 Newriders' shares at closing, on the condition that
Newriders continue to pursue the cancelation of the 1,308,000 Newriders
shares.
Easyriders has issued stop transfer instructions concerning the 1,308,000
Newriders' shares, which is equivalent to 654,000 shares of Easyriders, Inc.
common stock. Following the closing on September 23, 1998, a petition for
an involuntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy
Code involving the holder of these shares was filed. Easyriders, through
its subsidiary, Newriders, intends to pursue its claim for cancelation of
the 1,308,000 Newriders' shares in the bankruptcy proceeding involving the
shareholder. Share and per share amounts in the accompanying consolidated
financial statements assume that the 1,308,000 shares have been canceled.
Sale of Stock to Related Parties - In connection with the Reorganization,
the chairman of the Company purchased 4,036,797 shares of Easyriders' common
stock at $3.05 per share. Aggregate consideration of $12,300,000 was paid,
$5,000,000 in cash and the balance by delivery of two promissory notes (the
Martin Mirror Note and the Other Martin Note). The Martin Mirror Note is in
the amount of $5,000,000 and has been pledged by Easyriders to secure a note
payable to the former shareholder of the Paisano Companies. The Other
Martin Note has a face amount of $2,300,000. The Martin Mirror Note has a
term of five years, may be extended by Mr. Martin for an additional period
of five years, and bears interest at an annual rate beginning at 6% and
increasing to 10% over its life. The Other Martin Note has a term of five
years, and may be extended for an additional five years and bears interest
at an annual rate between 6% and 10%. These promissory notes have been
recorded as an offset to stockholders' equity.
F-27
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Common Stock Issued for Services - During 1997, the Company issued 167,500
shares (including 25,000 issued to a financial advisor [Note 7]) for
consulting and other services. Shares were issued at their fair value at
the date of issuance which ranged from $3.00 to $4.20 per share and was
recorded as stock issuance expense in the accompanying consolidated
financial statements.
During June 1998, the Company issued 500,000 shares of the Company's common
stock to the sole shareholder of Paisano Publications, Inc. for services to
the Company and the satisfaction 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 consolidated financial statements.
As more fully described in Note 3, in conjunction with the Reorganization,
the Company issued warrants to purchase 592,184 shares of common stock of
the Company to a financial advisor of the Company. The warrants have been
valued at $2,069,258 using the Black-Scholes option-pricing model and have
been included in the determination of the purchase price of the Paisano
Companies and El Paso. The warrants will be exercisable at any time for a
period of seven years from their date of issuance.
During November 1998, the Company issued 120,000 shares of Easyriders, Inc.
stock with a fair value of $300,000 to a former employee of El Paso as part
of a settlement of a severance agreement existing prior to the El Paso
Acquisition.
During September 1998, the Company issued 200,000 shares of Easyriders, Inc.
stock to an employee of Easyriders as compensation for services performed
related to the Paisano and the El Paso Acquisitions. The fair value of the
stock, $616,000, is recorded as stock issuance expenses in consolidated
statement of operations.
Common Stock Subscription - In November 1996, the Company entered into an
agreement with a barter service to issue 200,000 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 was written off during the year ended
December 31, 1998, as it was determined that no probable future economic
benefit would be realized from the receivable.
Stock Option Plans - In September 1998, the Company adopted its 1998
Executive Incentive Compensation plan (the Easyriders 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
Easyriders Plan is 2,800,000. Following the adoption of such plan, the
Company granted options to purchase an aggregate of 300,000 shares of the
Company's common stock at $5.00 as part of the acquisition of the Paisano
Companies. The Company recorded an increase to the purchase consideration
for the Paisano Companies equivalent to the fair value of the options
granted to nonemployees, totaling approximately $697,434. These options
vested upon grant.
F-28
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
In November 1997, the Company adopted its 1997 Executive Incentive
Compensation plan (the Newriders Plan), which provides for the grant of
stock options to purchase Newriders stock and other awards to certain
officers, key employees, consultants, or other persons affiliated with the
Company. The maximum number of Newriders shares of common stock that may be
issued pursuant to the Plan is 5,000,000 (pre-split). Following the
adoption of such plan, the Company granted options to purchase an aggregate
of 2,721,000 (pre-split) shares of the Newriders common stock at (pre-split)
prices ranging from $2.50 to $3.00 per share (pre-split), 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, in 1997, options were granted for the purchase of up
to 395,000 (pre-split) Newriders common shares at $2.50 per share (pre-
split) 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. As part of the Reorganization, all the outstanding options to
purchase Newriders shares were exchanged for options under the Easyriders
Plan to purchase the Company's stock on the basis of one share of the
Company's Common Stock for each two shares of Newriders Common Stock at an
exercise price equal to two times the exercise price provided in the stock
option. Activity under the Newriders Plan has been restated to give effect
to this exchange ratio.
The following table summarizes the activity under the Plan for the period
indicated:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
Weighted Weighted
Number of average Number of average
shares exercise price shares exercise price
<S> <C> <C> <C> <C>
Beginning of period 1,558,000 $5.00 - $ -
Grants 715,000 5.00 1,558,000 5.00
Cancelations (1,645,000) 5.00
---------- ------------
End of period 628,000 5.00 1,558,000 $ 5.00
========= ============
</TABLE>
Summary information related to stock options outstanding as of December 31,
1998, is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- ---------------------------------
Number Number
outstanding at Remaining exercisable at Weighted
Exercise December 31, contractual December 31, average
price 1998 life (in years) 1998 exercise price
<S> <C> <C> <C> <C>
$5.00 to $6.00 628,000 6.7 628,000 5.00
</TABLE>
F-29
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
Stock Warrants - The Company has issued warrants related to the issuance of
subordinated debt and as compensation to employees during 1998 and 1997. The
following outlines the activity related to the Warrants for the period
indicated:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- --------------------------------
Weighted Weighted
average average
Number of exercise price Number of exercise price
shares price shares price
<S> <C> <C> <C> <C>
Beginning of period 270,646 $7.98 -
Grants 1,063,104 $8.00 270,646 $7.98
Cancelations
--------- -------
End of period 1,333,750 $7.58 270,646 $7.98
========= =======
</TABLE>
As of December 31, 1998, all outstanding warrants are exercisable. The
warrants have a range of exercise price from $3.00 to $8.62 and have a
weighted average remaining life of 6.0 years.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does
not require Company to record compensation cost for employee stock option
grants. The Company has chosen to continue to account for employee option
grants using Accounting Principles Board Opinion No. 25. No compensation
expense has been recognized for employee stock option grants. 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 years ended December 31,
1998 and 1997, would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss applicable to common stock:
As reported $(12,131,889) $(4,776,874)
Pro forma $(12,828,148) $(6,107,953)
Net loss per common share:
As reported $(1.04) $(0.57)
Pro forma $(1.10) $(0.73)
</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 and 1998: zero dividend yield, expected
volatility of 109%, risk-free interest rate of 5.9%, and expected lives of
three years in 1997, and zero dividend yield, expected volatility of 101% to
150%, risk-free interest rate of 5.4% to 6.2%, and expected lives of 3 to 10
years in 1998.
F-30
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
14. 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.
15. SALE OF RESTAURANT TO RELATED PARTY
On July 22, 1998, the Company sold its Myrtle Beach Restaurant to a
stockholder of the Company. As a result of this sale, the Company recorded
a loss during the year ended December 31, 1998 of $1,099,760, primarily
related to the write-down to net realizable value of leasehold improvements
and store fixtures.
16. NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss $(12,131,889) $(4,776,874)
============ ===========
Weighted average number of common shares:
Basic 11,686,551 8,317,533
Effect of dilutive securities - stock options
------------ -----------
Diluted 11,686,551 8,317,533
============ ===========
Net income per share:
Basic $ (1.04) $ (0.57)
Effect of dilutive securities - stock options
------------ -----------
Diluted $ (1.04) $ (0.57)
============ ===========
</TABLE>
All stock options, stock warrants, and convertible debentures outstanding as
of December 31, 1998, were considered anti-dilutive and therefore basic
weighted average number of common shares equals diluted weighted average
number of common shares at December 31, 1998 and 1997.
F-31
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
17. BUSINESS SEGMENTS
Information by Operating Segment - Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources and in
assessing performance. Easyriders, Inc. chief operating decision-making
group is comprised of the chief executive officer and the officers who
report to him directly.
Easyriders Inc. has five reportable segments: publishing, goods and
services, food service, franchising, and other events and operations. The
publishing segment includes magazine and catalog publishing and other
operations. The trade goods and services segment distributes motorcycle
apparel and other related goods to both intermediate and end-users and
offers motorcycle repair and services through a Company owned store. The
food service segment includes the operations of El Paso and Newriders. The
franchising segment includes the franchising of Easyriders motorcycle stores
for distribution of equipment and apparel. The other events and operations
segment includes the coordination and sponsorship of motorcycle related
events and operations.
Easyriders, Inc. evaluates performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses. (The Company utilizes the other
events and operations segment as a venue for increased exposure for
publication sales.) The accounting policies of the operating segments are
the same as those described in the summary of significant accounting
policies. The financial results for Easyriders, Inc. four operating
segments have been prepared on a basis which is consistent with the manner
in which Easyriders, Inc. management internally disaggregates financial
information for the purposes of assisting in making internal operating
decisions. In this regard, certain common expenses have been allocated
among segments less precisely than would be required for stand alone
financial information prepared in accordance with generally accepted
accounting principles. Revenue attributed to geographic areas is based on
the location of the customer.
<TABLE>
<CAPTION>
Goods and Food Other
Publishing services service Franchising operations Totals
<S> <C> <C> <C> <C> <C> <C>
Sales external customers $6,954,082 $2,565,314 $3,527,311 $ 151,200 $ 562,411 $13,760,318
Income (loss) from
operations 1,185,153 240,832 (47,071) (583,533) (363,453) 431,928
Segment assets 4,748,986 3,474,002 5,137,288 196,568 199,960 13,756,804
Capital expenditures 76,642 70,266 96,411 243,319
Depreciation and
amortization 53,204 62,323 315,730 12,542 443,799
</TABLE>
This historical results of the Company represent the results of Newriders,
Inc. only and therefore no segment information is provided for prior years.
The operations of Newriders, Inc. are considered to be one component of the
food service segment.
F-32
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows:
<TABLE>
<S> <C>
Loss from operations included in segment disclosure $ 431,928
Unallocated, selling, general, and administrative (5,850,331)
Stock issuance expense (2,504,867)
Loss on sale of restaurant to related party (1,099,760)
Write-off of stock subscription receivable (750,000)
------------
Loss from operations $(9,773,030)
============
Segment assets $13,756,804
Cash and cash equivalents 278,035
Receivable from shareholder 398,085
Goodwill 62,704,698
-----------
Loss from operations $77,137,622
===========
Depreciation and amortization included in segment disclosure $ 443,799
Amortization of goodwill 612,739
-----------
Depreciation and amortization $ 1,056,538
===========
</TABLE>
Revenues concerning principal geographic areas is as follows based on
customer location:
<TABLE>
<CAPTION>
USA Canada Germany UK Australia Other Total
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $12,783,632 $298,061 $189,727 $154,680 $124,044 $210,174 $13,760,318
</TABLE>
The Company's foreign operations consist primarily of international
newsstand sales and mail-order product sales. No one country makes up more
than 10% of international sales. The Company does not have any identifiable
assets attributable to these foreign activities and does not separately
identify any expenses related specifically to foreign activities.
Therefore, income before taxes and net income associated with foreign
activities is not presented.
F-33
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
18. TRANSACTIONS WITH RELATED PARTIES
For the two years ended December 31, 1998, the Company entered into
transactions with the following related parties: significant shareholders of
the Company and entities in which significant shareholders of the Company
are directors or own a controlling interest. The following amounts
represent related party transactions for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Rent paid to shareholders/directors (Note 12) $ 140,808 $ 42,000
Product sales to shareholder $ 75,182
Loss on sale of restaurant to shareholder (Note 15) $1,099,760
Sale of 96,150 shares of stock to directors of the Company $500,000
Issuance of 20,000 shares in exchange for legal services from
a stockholder and director $ 60,000
Expense related to issuance of 500,000 shares in
exchange for services and satisfaction of $210,333 of
trade payables to a director of the Company (Note 13) $1,888,867
Expense related to issuance of 200,000 shares to an employee of
the Company as compensation for services performed (Note 13) $ 616,000
Expense related to legal services from a stockholder $ 150,378 $ 44,315
Cash paid for advertising from a stockholder and director $ 41,133
Advances from shareholders $305,000
Repayments of advances from shareholders $ 270,650
</TABLE>
The following amounts represent related party balances as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Subordinated debt issued to a director (Note 7) $ 1,000,000 $ 0
Note payable issued to a shareholder (Note 8) $13,000,000
Receivable from a shareholder from the sale of stock (Note 13) $ 7,300,000
Receivable from a shareholder related to the
Paisano Companies acquisition (Note 3) $ 398,085
Other receivable from shareholder $ 32,000
Accrued compensation to a shareholder $ 222,465
Advances from shareholder $ 201,350
Promissory note with affiliated lender (Note 8) $ 895,304 $1,050,000
Payable to shareholder for legal services performed $ 47,684
</TABLE>
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.
F-34
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
19. PARENT COMPANY FINANCIAL INFORMATION
The following presents the unconsolidated financial statements of the parent
company only, Easyriders, Inc. (Note 1) as of December 31, 1998.
EASYRIDERS, INC. (Parent Company Only)
<TABLE>
<CAPTION>
BALANCE SHEETS
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,341 $1,262,633
Inventory 74,999 285,622
Other current assets 118,016 15,738
----------- ----------
Total current assets 226,356 1,563,993
PROPERTY AND EQUIPMENT, net 8,398 1,487,598
DEPOSITS AND OTHER ASSETS 205,726 410,764
INVESTMENTS IN SUBSIDIARIES 45,491,676
----------- ----------
$45,932,156 $3,462,355
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 516,325 $ 517,904
Accrued expenses and other current liabilities 690,740 668,041
Payables to subsidiaries 277,057
Current portion of long-term debt 353,485 157,694
----------- ----------
Total current liabilities 1,837,607 1,343,639
CONVERTIBLE DEBENTURES, net 1,316,667 785,183
NOTE PAYABLE - SHAREHOLDER 13,000,000
LONG-TERM DEBT 720,902 892,306
OTHER LONG TERM LIABILITIES 138,385
STOCKHOLDERS' EQUITY 29,056,980 302,842
----------- ----------
$45,932,156 $3,462,355
=========== ==========
</TABLE>
F-35
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
EASYRIDERS, INC. (Parent Company Only)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES $ 969,424 $ 2,932,708
COST OF SALES 578,877 1,670,146
------------ -----------
GROSS MARGIN 390,547 1,262,562
EXPENSES 8,453,570 5,701,017
------------ -----------
LOSS FROM OPERATIONS (8,063,023) (4,438,455)
EQUITY IN NET LOSSES OF SUBSIDIARIES 2,378,946
OTHER EXPENSE, net 1,689,920 338,419
------------ -----------
NET LOSS $(12,131,889) $(4,776,874)
============ ===========
COMPREHENSIVE LOSS $(12,131,889) $(4,776,874)
============ ===========
</TABLE>
F-36
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
EASYRIDERS, INC. (Parent Company Only)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
1998 1997
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(12,131,889) $(4,776,874)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock issued for services 2,504,867 572,500
Compensatory options issued to nonemployees 671,500
Services rendered in satisfaction of common stock 250,000
Depreciation and amortization 261,241 223,169
Write-off of leasehold improvements 628,129
Loss on sale of restaurant to third party 1,099,760
Loss on sale of property, plant, and equipment 182,717
Write-off of stock subscription receivable 750,000
Amortization of debt issuance costs 1,369,536 310,877
Equity in net losses from subsidiaries 2,378,946
Increase (decrease) in cash resulting from changes in operating
accounts, net of acquitions
Current assets 124,988 183,066
Current liabilities 1,031,845
Other liabilities (128,003) 872,246
------------ -----------
Net cash used in operating activities (2,555,992) (1,065,387)
CASH FLOWS FROM INVESTING ACTIVITIES -
Cash paid for acquisitions, less cash acquired (5,000,000)
Proceeds from sale of fixed assets 200,000
Purchases of fixed assets (164,771) (1,338,738)
------------ -----------
Net cash used in investing activities (4,964,771) (1,338,738)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures and long-term debt 2,100,000 2,650,000
Payment of long-term debt and capital leases (607,179) (127,723)
Payments of stockholders advances (201,350)
Issuance and payment of note payable to stockholder 251,350
Cash contributions to capital 373,084
Common stock issued for cash 5,000,000 500,000
------------ -----------
Net cash provided by financing activities 6,291,471 3,646,711
------------ -----------
</TABLE>
F-37
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $(1,229,292) $1,242,586
CASH AND CASH EQUIVALENTS, beginning of year 1,262,633 20,047
----------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 33,341 $1,262,633
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 364,733 $ 21,482
=========== ==========
NONCASH FINANCING ACTIVITIES:
Common stock issued in settlement of accounts payable $ 211,134 $ -
=========== ==========
Common stock issued in settlement of debt $ 1,506,142 $ 610,817
=========== ==========
Convertible debentures issued with conversion discount $ 500,002 $ 481,667
=========== ==========
Issuance of warrants in connection with debt issuance $ 1,487,190 $ 105,130
=========== ==========
Common stock issued in exchange for a note receivable $ 7,300,000 $ -
=========== ==========
</TABLE>
F-38
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
20. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1st qtr. 2nd qtr. 3rd qtr. 4th qtr. Year ended
March 31, June 30, September 30, December 31, December 31,
1997
<S> <C> <C> <C> <C> <C>
Revenues $ 455,225 $ 693,883 $1,277,473 $ 506,127 $ 2,932,708
Cost of sales 239,476 479,481 376,270 574,919 1,670,146
Loss from operations 304,714 450,180 402,252 3,281,309 4,438,455
Net loss 307,530 452,772 639,232 3,377,340 4,776,874
Comprehensive loss 307,530 452,772 639,232 3,377,340 4,776,874
Basic net loss per share $ 0.04 $ 0.06 $ 0.08 $ 0.39 $ 0.57
Diluted net loss per share $ 0.04 $ 0.06 $ 0.08 $ 0.39 $ 0.57
1998
Revenues 214,163 609,992 1,416,563 11,519,600 13,760,318
Cost of sales 64,792 322,172 831,990 9,238,270 10,457,224
Loss from operations 867,614 3,386,059 1,563,346 3,956,011 9,773,030
Net loss 1,230,993 3,966,181 1,937,889 4,996,826 12,131,889
Comprehensive loss 1,230,993 3,966,181 1,937,889 4,996,826 12,131,889
Basic net loss per share $ 0.14 $ 0.46 $ 0.19 $ 0.26 $ 1.04
Diluted net loss per share $ 0.14 $ 0.46 $ 0.19 $ 0.26 $ 1.04
</TABLE>
During the quarter ended December 31, 1998, the Company wrote-off a stock
subscription receivable in the amount of $750,000 (Note 13)
F-39
<PAGE>
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued)
- -------------------------------------------------------------------------------
21. SUBSEQUENT EVENTS
El Paso Debt - In March 1999, El Paso received commitments from three
financing companies to provide financing to enable El Paso to complete the
build-out of its El Paso Bar-B-Que in Tulsa, Oklahoma and subject to certain
other contingencies to re-open the Easyriders restaurant in Fresno,
California, as an El Paso Bar-B-Que.
Related Party Debt - On February 23, 1999, the Company borrowed $704,612
from two directors of the Company. The balance borrowed was evidenced by
two notes of equal amount from each shareholder. The notes bear interest at
13% per annum and both interest and principal are due on September 23, 2002.
The Notes were fully repaid through proceeds from the issuance of common
stock on April 8, 1999.
Related-Party Stock Purchases - On April 8, 1999, the Company received a
commitment to purchase $1,500,000 of common stock of the Company from a
director of the Company. The number of shares to be issued under the
commitment is to be calculated as 75% of the average closing price of the
common stock, with average closing price being defined as the average of the
last recorded sale price of the common stock on the ten consecutive trading
days ending on and including April 8, 1999.
On April 8, 1999, the Company received a commitment to purchase $1,500,000
of common stock of the Company from the former sole shareholder of the
Paisano Companies and a director of the Company. The number of shares to be
issued under the commitment is to be calculated as 75% of the average
closing price of the common stock, with average closing price being defined
as the average of the last recorded sale price of the common stock on the
ten consecutive trading days ending on and including April 8, 1999. As
consideration for the $1,500,000 in common stock, the director will forgive
interest on the $5,000,000 Contributor Subordinated Note (Note 9) of $75,000
and will reduce the principal on the Contributor Subordinated Note from
$5,000,000 to $3,575,000.
* * * * * *
F-40
<PAGE>
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 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.
F-41
<PAGE>
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-42
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<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>
See independent auditors' report and
notes to consolidated financial statements.
F-43
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Common
--------------------------- Additional stock
Accumulated paid-in 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) $(1,072,412)
========== ======= ========== =========== ===========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements.
F-44
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<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 in
operating activities:
Common stock issued for services 250,000
Depreciation and amortization 129,277
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,009
Increase in inventory (258,222)
Increase in deferred charges (139,810)
Increase in prepaid expenses (2,035)
Decrease in deposits 3,214
Increase in accounts payable and accrued expenses 177,428
-----------
Net cash used in operating activities (875,979)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of fixed assets (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 DECREASE IN CASH AND CASH EQUIVALENTS (35,371)
CASH AND CASH EQUIVALENTS, beginning of year 55,418
-----------
CASH AND CASH EQUIVALENTS, end of year $ 20,047
===========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements.
F-45
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
year ended
December 31,
1996
(as restated,
see Note 7)
<S> <C>
SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid for:
Interest $ 18,365
========
Income taxes $ -
========
NONCASH FINANCING ACTIVITIES:
Capital contributions through debt relief $214,907
========
Common stock issued for services $250,000
========
Capital contributions of fixed assets $ 21,568
========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements.
F-46
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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 in
the restaurant and retail motorcycle business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Provision for Income Taxes - The Company accounts for income taxes under
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under SFAS No. 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.
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.
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-47
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (Continued)
- --------------------------------------------------------------------------------
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.
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.
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.
F-48
<PAGE>
NEWRIDERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (Continued)
- --------------------------------------------------------------------------------
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.
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.
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.
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-49
<PAGE>
EXHIBIT 10.48
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
January 4, 1999, by and between Easyriders, Inc., a California corporation (the
"Company") and J. Robert Fabregas (the "Executive").
WITNESSETH:
WHEREAS, the Company is engaged in the publishing of special interest magazines
directed to motorcycle and tattoo enthusiasts;
WHEREAS, the Executive, by education and experience, possesses extraordinary
qualifications to serve as an executive officer of the Company; 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.
2. TERM. Subject to the provisions hereof, the term of the Executive's
employment by the Company under this Agreement shall be for three (3) years
commencing on the date hereof; provided that such term of employment shall
continue thereafter unlesss 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 shall serve
as Chief Financial Officer of the Company, with such assignments, powers and
duties as are assigned or delegated to him by the Board of Directors or
President of the Company. Such assignments, powers and duties may, from time
to time, be modified by the Company, as the Company's needs may require. The
Executive shall also, at the request of the Company, perform similar
services for any Affiliate (as hereinafter defined) of the Company without
additional compensation. The Executive agrees to devote all of his business
time, skill, attention and best efforts to the business of the Company and
its Affiliates in the advancement of the best interests of the Company and
its Affiliates. As used in this Agreement, the term "Affiliate" of the
Company means any person,
<PAGE>
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. Notwithstanding anything to the contrary contained herein, the
Executive shall be subject to and be bound by all employment-related
agreements and policies adopted by the Company and applicable to the
Company's employees generally.
4. COMPENSATION.
4.1 Base Salary: Withholding. For all services rendered by the Executive to
the Company during the Employment Period, the Company shall pay to the
Executive a salary at the annual rate of One Hundred Eighty-Five
Thousand Dollars ($185,000). The compensation is to be payable, subject
to such withholdings as are required by law, in installment in
accordance with Company's customary payroll practices.
4.2 Incentive Compensation. The parties acknowledge and agree that Executive
shall be paid additional incentive compensation on the following terms.
4.2.1 Company Bonus Program. The Company shall award bonus at its own
discretion on a yearly basis in accordance with the terms of the
corporate bonus plan.
4.3 Stock Option. The parties acknowledge and agree that, additional
incentive to Executive shall be 75,000 shares of stock and shall be
vested 25,000 each year for three years pricing shall be determined by
the sole discretion of the compensation committee.
4.4 Vacation Leave. Executive shall be entitled to two (2) weeks annual
vacation time with full pay which shall accrue at a rate of 6.67
vacation hours per month of employment.
4.5 Car Allowance. Executive shall be paid a car allowance of Five Hundred
Dollars ($500.00) a month due and payable on the first day of each
month. Executive acknowledges that the car allowance will be treated as
income and subject to federal and state withholding.
4.6 Other Benefits. Executive shall participate in and have the benefits of
all present and future holiday leave, paid leave, unpaid leave, life,
accident, disability, dental, vision and health insurance plans,
pension, and all other plans and benefits which the Company now or in
the future from time to time makes available to any of its management
executives in accordance with Company policies and procedures.
5. EXPENSES. The Company shall reimburse the Executive for such travel,
entertainment and other business expenses reasonably incurred by him in
<PAGE>
connection with the business of the Company and the performance of his
duties hereunder upon presentation by the Executive to the Company of
substantiating evidence thereof in such form as the Company reasonably may
require from time to time .
6. OFFICE FACILITIES. During the Employment Period, the Company will furnish
the Executive, without charge, with suitable office facilities for the
purpose of performing his duties hereunder, which facilities shall include
secretarial, telephone, clerical and support personnel and services.
7. TERMINATION.
A. TERMINATION DUE TO DEATH OR DISABILITY. If the Executive dies or becomes
disabled during the Employment Period, the Executive's salary and other
rights under this Agreement or as an employee of the Company shall
terminate at the end of the month during which death or disability
occurs. For purposes of this Agreement, the Executive shall be deemed to
be "disabled" if, at any time during the Employment Period, the
Executive shall have been unable to perform the duties of his employment
hereunder for ninety (90) days in a period of two hundred seventy (270)
days.
B. TERMINATION FOR CAUSE. If the Executive fails to perform his duties
hereunder or to comply with any of the material provisions hereof or
commits any act of misconduct, malfeasance, gross negligence or
disloyalty or disregards or seriously neglects his duties as an
executive and employee of the Company, the Employment Period and the
Executive's salary and other rights under this Agreement as an employee
of the Company shall terminate effective upon notice from the Company to
the Executive, but such termination shall not affect the liability of
the Executive by reason of his misconduct, malfeasance, gross negligence
or disloyalty.
C. TERMINATION FOR REASONS OTHER THAN CAUSE, DEATH OR DISABILITY. If the
Executive's employment shall be terminated by the Company for reasons
other than as stated in Sections 7(A) or (B), the Company shall continue
to pay the Executive as damages the salary specified in Section 4 for
the period of one year, subject to the Executive's obligation under law
to mitigate such damages or to offset such damages by amounts earned by
the Executive subsequent to the termination of this Agreement.
8. 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
<PAGE>
person, corporation or other 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 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.
9. COVENANT NOT TO COMPETE. The Executive covenants and agrees that, during the
Employment Period and for a period of one (1) year after the termination of
the Employment Period, the Executive will not, directly or indirectly, own,
render services or advice to , or be engaged in a business which is similar
to or in competition with the business of the Company or any of its
Affiliates, except upon the written consent of the Company. The foregoing
prohibition shall specifically extend to (a) soliciting any employees of the
Company for any reason and (b) soliciting any customers, suppliers, sponsors
or promoters of the Company with respect to any activities similar to those
engaged in by the Company.
10. ESSENTIAL NATURE OF COVENANTS. The covenants contained in Sections 8 and 9
of this Agreement 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 said covenants. The Executive understands that
the covenants contained in Sections 8 and 9 are essential elements of the
transactions contemplated by this agreement and, but for the agreement of
the Executive to Sections 8 and 9 the Company would not have agreed to enter
into such transaction. The Executive has been advised to consult with his
counsel in order to be informed in all respects concerning the
reasonableness and propriety of Sections 8 and 9 with specific regard to the
nature of the business conducted by the Company, and the Executive
acknowledges that Sections 8 and 9 are reasonable in all respects.
11. REMEDIES. In the event of a breach or threatened breach by the Executive of
Section 8 or 9, 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.
12. WAIVER OR BREACH. The waiver by the Company of a breach of any provision of
this Agreement by the Executive shall not operate or be construed as a
waiver of any subsequent breach by the Executive.
13. BINDING EFFECT. This agreement shall insure to the benefit of and shall be
binding upon the parties hereto and their respective permitted successors,
assigns,
<PAGE>
heirs and legal representatives. The Company may assign this Agreement to
an Affiliate without the consent of the Executive. The Executive may not
assign this Agreement.
14. 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.
15. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall, when executed, be deemed to be original, but all of
which together shall constitute one and the same instrument.
16. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with the laws of the state of California.
17. 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.
EASYRIDERS, INC.
By:/s/ William Prather By: /s/ J. Robert Fabregas
------------------- ----------------------
WILLIAM PRATHER J. ROBERT FABREGAS
PRESIDENT / CEO
<PAGE>
EXHIBIT 10.49
ALL INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATED TO OTHER INDEBTEDNESS
PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE SUBJECT TO THE
TERMS OF, THE SUBORDINATION AND INTERCREDITOR AGREEMENT, DATED AS OF FEBRUARY
23, 1999, AS THE SAME MAY BE AMENDED, MODIFIED OR OTHERWISE SUPPLEMENTED FROM
TIME TO TIME (THE "SUBORDINATION AGREEMENT"), BY AND AMONG MR. JOSEPH TERESI,
MR. JOHN MARTIN, EASYRIDERS, INC., NOMURA HOLDING AMERICA INC., AND CERTAIN OF
THE OTHER HOLDERS FROM TIME TO TIME OF THE OBLIGATIONS ARISING UNDER THE
SUBORDINATED NOTES REFERRED TO IN THE SUBORDINATION AGREEMENT, INCLUDING,
WITHOUT LIMITATION, THIS NOTE. THE TERMS OF THE SUBORDINATION AGREEMENT ARE
HEREBY INCORPORATED BY REFERENCE TO THIS NOTE AS IF SET FORTH IN FULL HEREIN.
BY MAKING AVAILABLE TO EASYRIDERS, INC. THE INDEBTEDNESS EVIDENCED BY THIS NOTE
(AND WHETHER OR NOT THE PROMISEE HAS EXECUTED AND DELIVERED THE SUBORDINATION
AGREEMENT), THE PROMISEE HEREBY AGREES THAT IT SHALL BE DEEMED TO HAVE EXECUTED
AND DELIVERED THE SUBORDINATION AGREEMENT AND TO BE BOUND BY ALL THE TERMS OF
THE SUBORDINATION AGREEMENT APPLICABLE TO THE "SUBORDINATED NOTEHOLDERS" (AS
DEFINED THEREIN). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, ASSIGNED,
MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS AND THE OTHER RESTRICTIONS SET FORTH HEREIN AND IN THE
SUBORDINATION AGREEMENT.
SUBORDINATED PROMISSORY NOTE
$352,306.00 February 23, 1999
FOR VALUE RECEIVED, Easyriders, Inc., a Delaware corporation ("Maker"),
promises to pay to John Martin ("Payee"), at the place and in the manner
specified below, the principal sum of Three Hundred Fifty-Two Thousand Three
Hundred and Six Dollars ($352,306.00), together with interest on the unpaid
principal balance hereof at the rate per annum set forth below.
SECTION 1. Definitions.
-----------
"Business Day" means any day other than a Saturday, Sunday or a day on
which banks are required or authorized to be closed in the State of California.
"Events of Default" is defined in Section 4 of this Note.
<PAGE>
"Indebtedness" means, with respect to the Maker, (i) any indebtedness of
such Maker, without duplication, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
bankers' acceptances or representing capital lease obligations or the balance
deferred and unpaid of the purchase price of any property, as well as all
indebtedness of others secured by a lien on any asset of the Maker (whether or
not such indebtedness is assumed by the Maker) and (ii) to the extent not
included in clause (i), any guarantee by the Maker of any indebtedness of any
other person or entity.
"indefeasible payment in full" or any similar term or phrase when used in
this Note with respect to Senior Debt shall mean the final payment in full of
all Senior Debt in cash or in case of Senior Debt consisting of contingent
obligations under letters of credit, the setting apart of cash sufficient to
discharge such obligations in an account for the exclusive benefit of the
holders of such Senior Debt, in which account such holders shall have been
granted a perfected security interest, which payment and perfected security
interest shall have been retained by such holders for a period in excess of any
applicable preference or other similar period under applicable bankruptcy,
insolvency or creditors' rights law.
"Insolvency Proceeding" shall mean (i) any assignment for the benefit of
creditors by Maker or any other marshaling of the assets and liabilities of
Maker, or (ii) the institution by or against Maker of any proceedings in
insolvency, bankruptcy, receivership, liquidation, arrangement,
reorganization, dissolution, winding up or other similar case or proceeding,
whether voluntary or involuntary.
"Interest Payment Date" is defined in Section 2.2(b) of this Note.
"Note" means this Subordinated Promissory Note, as the same may be amended
from time to time.
"Obligations" means all of Maker's liabilities, obligations and
indebtedness to Payee under this Note (including, without limitation, Maker's
obligation to make payments of principal and interest to Payee hereunder),
whether now existing or hereafter arising.
"Payment Default" is defined in Section 4 of this Note.
"Person" means any person or entity (including, without limitation, a
corporation, limited liability corporation, partnership, trust or joint
venture).
"Rate" is defined in Section 2.2 of this Note.
"Senior Credit Agreement" shall mean the Note and Warrant Purchase
Agreement dated September 23, 1998 among the Maker Paisano Publications, Inc.
(as successor by merger to Easyriders Sub II, Inc.) and Nomura Holding America
Inc., as such agreement may be modified, amended, supplemented, restated,
extended, deferred, renewed, replaced, refunded or refinanced,
2
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in whole or in part, from time to time, and each instrument now or hereafter
evidencing, governing, guarantying or securing any Indebtedness under such Note
and Warrant Purchase Agreement, as such agreement may be modified, amended,
supplemented, restated, extended, deferred, renewed, replaced, refunded or
refinanced, in whole or in part, from time to time.
"Senior Creditors" shall mean the holders from time to time of the Senior
Debt of Maker.
"Senior Debt" shall mean all obligations and liabilities of Maker for the
payment of prin cipal, interest, penalties, fees and other amounts under or in
respect of (i) the Senior Credit Agreement (including without limitation the
contingent obligation of the Maker in respect of let ters of credit issued
pursuant thereto), and (ii) any other Indebtedness of the Maker, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to this Note. Without
limitation of the foregoing, Senior Debt shall include any claim by the Senior
Creditors for interest accruing after any Insol vency Proceeding or any claim
by the Senior Creditors for such interest which would have ac crued in the
absence of such Insolvency Proceeding, whether or not such interest is allowed
as a claim in such Insolvency Proceeding.
"Stock Contribution and Sale Agreement" means the Stock Contribution and
Sale Agreement dated June 30, 1998, by and among Maker, Payee, Newriders, Inc.,
Easyriders Sub II, Inc. and the Paisano Companies (as defined therein), as
amended from time to time.
Unless otherwise defined herein, terms used in the Stock Contribution and
Sale Agreement shall have the same meanings when used in this Note.
SECTION 2. Terms.
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SECTION 2.1 Repayment of Principal. Subject to Section 3 hereof, the
----------------------
principal balance of this Note shall be payable by Maker in lawful money of the
United States of America and in immediately payable funds on September 23, 2002
(the "Maturity Date").
SECTION 2.2 Interest; Payments.
------------------
(a) Maker shall accrue interest on the unpaid principal amount
of this Note at a rate of thirteen percent (13%) per annum.
(b) Accrued interest on the outstanding principal amount of this
Note shall be paid in arrears on the Maturity Date. Interest hereunder shall be
computed on the basis of a year of 365 days for the actual number of days
elapsed. If any payment of principal or interest hereunder shall become due on a
day which is not a Business Day, such payment shall be due on the next
succeeding Business Day and such extension of time shall be included in
computing interest in connection with such payment. Both principal and interest
hereunder are payable to Payee by wire transfer to such account as Payee may,
from time to time, designate to Maker in writing.
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(c) Notwithstanding anything to the contrary contained herein,
Maker (i) may elect to prepay the outstanding principal amount of this Note,
together with accrued interest on the amount prepaid, at any time either in
whole or in part without penalty, together with accrued interest on the amount
prepaid and (ii) shall from time to time prepay as much of the outstanding
principal amount of this Note, together with accrued interest on the amount
prepaid, as is possible with (A) the proceeds of any Indebtedness incurred by
Maker after the date hereof in accordance with Section 10.1(h) of the Senior
Credit Agreement, (B) the proceeds of the issuance by Maker after the date
hereof of equity interests issued by the Maker meeting the requirements of
Section 10.8 of the Senior Credit Agreement or (C) the sale of any of the
assets, or all or part of the Capital Stock, of either of the Restaurant
Subsidiaries (as defined in the Senior Credit Agreement) so long as the net cash
proceeds received by either of the Restaurant Subsidiaries or the Parent from
such sale are not less than $3 million. Maker shall deliver written notice of
such prepayment to Payee at least ten (10) days prior to prepayment. Each notice
of prepayment delivered pursuant to this subsection (c) shall set forth the
amount of such prepayment and the proposed date of such prepayment. Upon payment
in full of this Note, Payee shall surrender this Note to Maker for cancellation.
Upon prepayment in part of principal, Payee shall make a notation of such
prepayment on the Schedule of Payments attached as Exhibit A hereto and deliver
a copy of such schedule to Maker. The aggregate unpaid principal amount set
forth on such schedule shall be rebuttably presumptive evidence of the principal
amount owing and unpaid hereunder, but the failure to record any such amount on
such schedule shall not limit or otherwise affect the obligation of the Maker
hereunder to make payments on this Note when due.
SECTION 3. Subordination
-------------
SECTION 3.1 Nature of Subordination. Until the Senior Debt has been
-----------------------
indefeasibly paid in full, Payee may not (i) except for payments pursuant to
Section 2(c) hereof, receive, directly or indirectly, any payment, advance,
credit, security or new or further evidence of any kind whatso ever on account
of or with respect to any of the obligations evidenced by this Note, (ii)
accelerate any amount owing with respect to this Note, (iii) sue upon, take or
permit to be taken any action to assert, collect or enforce this Note, or (iv)
file or join in the filing of any petition to commence any Insolvency
Proceeding.
SECTION 3.2 Insolvency Proceedings.
----------------------
(a) Upon any distribution of assets of Maker to creditors of
Maker upon or in connection with an Insolvency Proceeding, any payment or
distribution of any kind (whether in cash, property or securities) which
otherwise would be payable or deliverable upon or with respect to the
obligations evidenced by this Note shall be paid or delivered directly to
the Senior Creditors for application (in case of cash) to, or as collateral
(in case of non-cash property or securities) for, the payment or prepayment
of the Senior Debt until the Senior Debt has been indefeasibly paid in
full.
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(b) If any Insolvency Proceeding is commenced by or against
Maker, the Senior Creditors are hereby irrevocably authorized and empowered
(in their own names or otherwise), but shall have no obligation, to (i)
demand, sue for, collect and receive every payment or distribution referred
to in subsection (a) above and give acquittance therefor and (ii) file
claims and proofs of claim and take such other action (including without
limitation voting the obligations evidenced by this Note and enforcing any
security interest or other lien securing payment of this Note) as it may
deem necessary or advisable for the exercise of any of the rights or
interests of the Senior Creditors.
(c) If any Insolvency Proceeding is commenced by or against
Maker, Payee shall duly and promptly take such action as the Senior
Creditors may request to (i) collect the obligations evidenced by this Note
for the account of the Senior Creditors, and file appropriate claims or
proofs of claim in respect of the obligations evidenced by this Note, (ii)
execute and deliver to the Senior Creditors such powers of attorney,
assignments or other instruments as the Senior Creditors may request in
order to enable them to enforce any and all claims with respect to this
Note and any security interests and other liens securing payment of this
Note, and (iii) collect and receive any and all payments and distributions
which may be payable or deliverable upon or with respect to this Note.
SECTION 3.3 Liens. To the extent that Payee now has or hereafter obtains
-----
a lien or security interest in any assets of Maker:
(a) Such lien or security interest shall be at all times subject
and subordinate to any lien or security interest which the Senior Creditors
now have or hereafter obtain in such assets without regard to the time or
manner in which the respective liens and security interests of the parties
hereto may have been created or perfected; and
(b) Payee may not at any time exercise any rights or remedies
with respect to or otherwise enforce any lien or security interest it now
has or hereafter obtains in Maker's assets, or apply any assets covered by
any such lien or security interest to any claim now or hereafter existing
against Maker.
SECTION 3.4 Waivers. Maker and Payee waive notice of acceptance of this
-------
Note by the Senior Creditors, and Payee waives notice of and consents to the
making, amount and terms of (i) any loans or other extensions of credit which
the Senior Creditors may make to Maker from time to time, (ii) any renewal or
extension thereof and (iii) any action which the Senior Creditors may take or
omit in their sole and absolute discretion with respect thereto.
SECTION 3.5 Rights of the Senior Creditors.
------------------------------
(a) This Subordinated Promissory Note shall constitute a
continuing agreement of subordination and the Senior Creditors may, from
time to time and without notice to Payee, lend money to or make other
financial arrangements with Maker in reliance hereon.
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<PAGE>
(b) In the event that any payment or distribution, or any
security, proceeds thereof or property or funds payable as protection for
use, sale or lease of such security, is received by Payee, such property
shall be received and held in trust for the benefit of the Senior
Creditors, shall be segregated from other funds and property held by Payee,
and shall be immediately paid over to the Senior Creditors, as their
interests may appear, in the form received (together with any endorsements
or documents as may be necessary to effectively negotiate or transfer such
property) for application (in case of cash) to, or as collateral (in case
of non-cash property or securities) for, the payment or prepayment of the
Senior Debt.
(c) Payee authorizes the Senior Creditors, without notice or
demand and without affecting or impairing Payee's obligations hereunder,
from time to time to (i) renew, compromise, extend, increase, accelerate or
otherwise change the time for payment of, or otherwise change any of the
other terms of the Senior Debt or any part thereof, including without
limitation to increase or decrease the rate of interest thereon; (ii) take
and hold security for the payment of the Senior Debt and exchange, enforce,
waive, release and fail to perfect any such security; (iii) apply such
security and direct the order or manner of sale thereof as the Senior
Creditors in their sole discretion may determine; and (iv) release and
substitute any one or more endorsers, warrantors, Maker or other obligor.
The Senior Creditors may without notice assign their rights under this Note
in whole or in part to any other Senior Creditor.
(d) Payee acknowledges and agrees that it shall have the sole
responsibility for obtaining from Maker such information concerning Maker's
financial condition or business operations as Payee may require, and that
the Senior Creditors have no duty at any time to disclose to Payee any
information relating to the business operations or financial condition of
Maker.
(e) The Senior Creditors may notify any assignee, trustee or
interim trustee in bankruptcy, receiver, debtor in possession or other
person or persons of their rights under this Note.
(f) Neither Payee nor Maker shall amend, extend or otherwise
change the terms of this Note without the consent of the Senior Creditors.
(g) After the Senior Debt has been indefeasibly paid in full,
the Payee shall be subrogated to the rights of the Senior Creditors to
receive payments or distributions applicable to Senior Debt, to the extent
that distributions otherwise payable to Payee have been applied to the
payment of Senior Debt. Payee agrees that the provisions of this Section 3
shall not be affected by any action, or failure to act, by any Senior
Creditor which results, or may result, in impairing or extinguishing any
right of reimbursement, subrogation or other right or remedy of Payee.
6
<PAGE>
SECTION 3.6 Third Parties. The provisions of Section 3 of this Note are
-------------
intended solely for the purpose of defining the relative rights of the Senior
Creditors and the Payee. Nothing contained in this Section 3 is intended to or
shall effect or impair (i) as between Maker, its creditors (other than the
Senior Creditors) and Payee, the obligation of Maker (which is absolute and
unconditional) to pay the obligations evidenced by this Note in accordance with
the terms hereof, and (ii) the relative rights of Payee and creditors of Maker
other than the Senior Creditors.
SECTION 3.7 Subsequent Holders. Any holder of this Note by such holder's
------------------
acceptance of this Note agrees to be bound by, and take this Note subject to,
the rights of the Senior Creditors and the obligations of Payee set forth in
this Section 3.
SECTION 4. Events of Default; Acceleration. If any of the following
-------------------------------
events ("Events of Default") shall occur:
(a) Maker shall fail to pay the interest on and principal amount
of this Note on the Maturity Date;
(b) Maker makes an assignment for the benefit of creditors, or
admits in writing its inability to pay or generally fails to pay its debts as
they mature or become due, or petitions or applies for the appointment of a
trustee or other custodian, liquidator or receiver of Maker or of any
substantial part of the assets of Maker or commences any case or other
proceeding relating to Maker under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction, now or hereafter in effect, or takes any action to authorize
or in furtherance of any of the foregoing, or if any such petition or
application is filed or any such case or other proceeding is commenced against
Maker and Maker indicates its approval thereof, consent thereto or acquiescence
therein; or
(c) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating Maker bankrupt or insolvent,
or approving a petition in any such case or other proceeding, or a decree or
order for relief is entered in respect of Maker in an involuntary case under
Federal bankruptcy laws as now or hereafter constituted, and such decree or
order remains in effect for more than sixty (60) days, whether or not
consecutive.
then Payee or Assignee may by notice in writing to Maker declare all amounts
owing with respect to this Note to be, and they shall thereupon forthwith mature
and become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by Maker.
Payee's failure at any time or times hereafter to require strict
performance by Maker of any of the terms, conditions and provisions contained in
this Note shall not waive, affect or diminish any right of Payee at any time or
times hereafter to demand strict performance thereof and such right shall not be
deemed to have been waived or modified by any act or knowledge of
7
<PAGE>
Payee, its agents, officers or employees, unless such waiver or modification is
contained in an instrument in writing signed by an officer of Payee and directed
to Maker specifying such waiver or modification. No waiver by Payee of any Event
of Default shall operate as a waiver of any other Event of Default or the same
Event of Default on a future occasion. No delay on the part of Payee in the
exercise of any right or remedy shall operate as a waiver thereof, and no single
or partial exercise by Payee of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other rights or remedy.
If any Event of Default occurs, Maker shall pay on demand all reasonable
out-of-pocket expenses incurred or sustained by Payee in connection with the
enforcement or protection of the rights of Payee under this Note, including
costs of collection and the fees and disbursements of counsel.
SECTION 5. Miscellaneous.
-------------
(a) This Note may not be assigned by Maker or Payee without the
express written consent of the other party.
(b) This Note may not be amended except by a writing signed by
Maker and Payee.
(c) Whenever in this Note there is reference made to either
Payee or Maker, such reference shall be deemed to include a reference to the
successors and permitted assigns of such party and the provisions of this Note
shall be binding upon and inure to the benefit of said successors and permitted
assigns.
(d) Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, two (2) days after the date of deposit in the United States mails as
follows:
To Maker:
Easyriders, Inc.
28210 Dorothy Drive
Agoura Hills, CA 91301
Attention: Robert Fabregas
Fax No.: (818) 889-4726
8
<PAGE>
To Payee:
John Martin
18931 Glenmont Terrace
Irvine, California 92612
Fax No.: (949) 719-4999
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
(e) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICTS OF
LAW PRINCIPLES THEREOF. THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
CALIFORNIA AND OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE OF
CALIFORNIA (THE "CALIFORNIA COURTS") FOR ANY LITIGATION ARISING OUT OF OR
RELATING TO THIS NOTE (AND AGREE NOT TO COMMENCE ANY LITIGATION RELATING THERETO
EXCEPT IN SUCH COURTS), WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION IN THE CALIFORNIA COURTS AND AGREE NOT TO PLEAD OR CLAIM IN ANY
CALIFORNIA COURT THAT SUCH LITIGATION BROUGHT THEREIN HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
(f) The Section and subsection titles contained herein are for
convenience only and shall not control or affect the meaning or construction of
any provision hereof.
(g) The invalidity or unenforceability of any provision of this
Note in any jurisdiction shall not affect the validity or enforceability of the
remainder of this Note in that jurisdiction or the validity or enforceability of
this Note, including that provision, in any other jurisdiction. If any
restriction or provision of this Note is held unreasonable, unlawful or
unenforceable in any respect, such restriction or provision shall be
interpreted, revised or applied in a manner that renders it lawful and
enforceable to the fullest extent possible under law.
(h) Nothing in this Note is intended or shall be construed to
give any Person other than the parties hereto any legal or equitable right,
remedy or claim under or in respect of this Note or any provision contained
herein.
(i) Upon receipt by Maker of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, Maker will make
and deliver a new Note of like tenor in lieu of this Note against receipt of
Payee's undertaking to indemnify Maker against and hold it harmless from all
reasonable costs arising as a result of its making and delivery of the new Note.
9
<PAGE>
This Note has been executed and delivered at Los Angeles, California, on
the date first above written.
EASYRIDERS, INC.
By: /s/ William Nordstrom
---------------------------------
William Nordstrom
Secretary and Executive Vice President
10
<PAGE>
EXHIBIT 10.50
ALL INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATED TO OTHER INDEBTEDNESS
PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE SUBJECT TO THE
TERMS OF, THE SUBORDINATION AND INTERCREDITOR AGREEMENT, DATED AS OF FEBRUARY
23, 1999, AS THE SAME MAY BE AMENDED, MODIFIED OR OTHERWISE SUPPLEMENTED FROM
TIME TO TIME (THE "SUBORDINATION AGREEMENT"), BY AND AMONG MR. JOSEPH TERESI,
MR. JOHN MARTIN, EASYRIDERS, INC., NOMURA HOLDING AMERICA INC., AND CERTAIN OF
THE OTHER HOLDERS FROM TIME TO TIME OF THE OBLIGATIONS ARISING UNDER THE
SUBORDINATED NOTES REFERRED TO IN THE SUBORDINATION AGREEMENT, INCLUDING,
WITHOUT LIMITATION, THIS NOTE. THE TERMS OF THE SUBORDINATION AGREEMENT ARE
HEREBY INCORPORATED BY REFERENCE TO THIS NOTE AS IF SET FORTH IN FULL HEREIN.
BY MAKING AVAILABLE TO EASYRIDERS, INC. THE INDEBTEDNESS EVIDENCED BY THIS NOTE
(AND WHETHER OR NOT THE PROMISEE HAS EXECUTED AND DELIVERED THE SUBORDINATION
AGREEMENT), THE PROMISEE HEREBY AGREES THAT IT SHALL BE DEEMED TO HAVE EXECUTED
AND DELIVERED THE SUBORDINATION AGREEMENT AND TO BE BOUND BY ALL THE TERMS OF
THE SUBORDINATION AGREEMENT APPLICABLE TO THE "SUBORDINATED NOTEHOLDERS" (AS
DEFINED THEREIN). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, ASSIGNED,
MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS AND THE OTHER RESTRICTIONS SET FORTH HEREIN AND IN THE
SUBORDINATION AGREEMENT.
SUBORDINATED PROMISSORY NOTE
$352,306.00 February 23, 1999
FOR VALUE RECEIVED, Easyriders, Inc., a Delaware corporation ("Maker"),
promises to pay to Joseph Teresi ("Payee"), at the place and in the manner
specified below, the principal sum of Three Hundred Fifty-Two Thousand Three
Hundred and Six Dollars ($352,306.00), together with interest on the unpaid
principal balance hereof at the rate per annum set forth below.
SECTION 1. Definitions.
-----------
"Business Day" means any day other than a Saturday, Sunday or a day on
which banks are required or authorized to be closed in the State of California.
"Events of Default" is defined in Section 4 of this Note.
<PAGE>
"Indebtedness" means, with respect to the Maker, (i) any indebtedness of
such Maker, without duplication, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
bankers' acceptances or representing capital lease obligations or the balance
deferred and unpaid of the purchase price of any property, as well as all
indebtedness of others secured by a lien on any asset of the Maker (whether or
not such indebtedness is assumed by the Maker) and (ii) to the extent not
included in clause (i), any guarantee by the Maker of any indebtedness of any
other person or entity.
"indefeasible payment in full" or any similar term or phrase when used in
this Note with respect to Senior Debt shall mean the final payment in full of
all Senior Debt in cash or in case of Senior Debt consisting of contingent
obligations under letters of credit, the setting apart of cash sufficient to
discharge such obligations in an account for the exclusive benefit of the
holders of such Senior Debt, in which account such holders shall have been
granted a perfected security interest, which payment and perfected security
interest shall have been retained by such holders for a period in excess of any
applicable preference or other similar period under applicable bankruptcy,
insolvency or creditors' rights law.
"Insolvency Proceeding" shall mean (i) any assignment for the benefit of
creditors by Maker or any other marshaling of the assets and liabilities of
Maker, or (ii) the institution by or against Maker of any proceedings in
insolvency, bankruptcy, receivership, liquidation, arrangement,
reorganization, dissolution, winding up or other similar case or proceeding,
whether voluntary or involuntary.
"Interest Payment Date" is defined in Section 2.2(b) of this Note.
"Note" means this Subordinated Promissory Note, as the same may be amended
from time to time.
"Obligations" means all of Maker's liabilities, obligations and
indebtedness to Payee under this Note (including, without limitation, Maker's
obligation to make payments of principal and interest to Payee hereunder),
whether now existing or hereafter arising.
"Payment Default" is defined in Section 4 of this Note.
"Person" means any person or entity (including, without limitation, a
corporation, limited liability corporation, partnership, trust or joint
venture).
"Rate" is defined in Section 2.2 of this Note.
"Senior Credit Agreement" shall mean the Note and Warrant Purchase
Agreement dated September 23, 1998 among the Maker Paisano Publications, Inc.
(as successor by merger to Easyriders Sub II, Inc.) and Nomura Holding America
Inc., as such agreement may be modified, amended, supplemented, restated,
extended, deferred, renewed, replaced, refunded or refinanced,
2
<PAGE>
in whole or in part, from time to time, and each instrument now or hereafter
evidencing, governing, guarantying or securing any Indebtedness under such Note
and Warrant Purchase Agreement, as such agreement may be modified, amended,
supplemented, restated, extended, deferred, renewed, replaced, refunded or
refinanced, in whole or in part, from time to time.
"Senior Creditors" shall mean the holders from time to time of the Senior
Debt of Maker.
"Senior Debt" shall mean all obligations and liabilities of Maker for the
payment of prin cipal, interest, penalties, fees and other amounts under or in
respect of (i) the Senior Credit Agreement (including without limitation the
contingent obligation of the Maker in respect of let ters of credit issued
pursuant thereto), and (ii) any other Indebtedness of the Maker, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to this Note. Without
limitation of the foregoing, Senior Debt shall include any claim by the Senior
Creditors for interest accruing after any Insol vency Proceeding or any claim
by the Senior Creditors for such interest which would have ac crued in the
absence of such Insolvency Proceeding, whether or not such interest is allowed
as a claim in such Insolvency Proceeding.
"Stock Contribution and Sale Agreement" means the Stock Contribution and
Sale Agreement dated June 30, 1998, by and among Maker, Payee, Newriders, Inc.,
Easyriders Sub II, Inc. and the Paisano Companies (as defined therein), as
amended from time to time.
Unless otherwise defined herein, terms used in the Stock Contribution and
Sale Agreement shall have the same meanings when used in this Note.
SECTION 2. Terms.
-----
SECTION 2.1 Repayment of Principal. Subject to Section 3 hereof, the
----------------------
principal balance of this Note shall be payable by Maker in lawful money of the
United States of America and in immediately payable funds on September 23, 2002
(the "Maturity Date").
SECTION 2.2 Interest; Payments.
------------------
(a) Maker shall accrue interest on the unpaid principal amount
of this Note at a rate of thirteen percent (13%) per annum.
(b) Accrued interest on the outstanding principal amount of this
Note shall be paid in arrears on the Maturity Date. Interest hereunder shall be
computed on the basis of a year of 365 days for the actual number of days
elapsed. If any payment of principal or interest hereunder shall become due on a
day which is not a Business Day, such payment shall be due on the next
succeeding Business Day and such extension of time shall be included in
computing interest in connection with such payment. Both principal and interest
hereunder are payable to Payee by wire transfer to such account as Payee may,
from time to time, designate to Maker in writing.
3
<PAGE>
(c) Notwithstanding anything to the contrary contained herein,
Maker (i) may elect to prepay the outstanding principal amount of this Note,
together with accrued interest on the amount prepaid, at any time either in
whole or in part without penalty, together with accrued interest on the amount
prepaid and (ii) shall from time to time prepay as much of the outstanding
principal amount of this Note, together with accrued interest on the amount
prepaid, as is possible with (A) the proceeds of any Indebtedness incurred by
Maker after the date hereof in accordance with Section 10.1(h) of the Senior
Credit Agreement, (B) the proceeds of the issuance by Maker after the date
hereof of equity interests issued by the Maker meeting the requirements of
Section 10.8 of the Senior Credit Agreement or (C) the sale of any of the
assets, or all or part of the Capital Stock, of either of the Restaurant
Subsidiaries (as defined in the Senior Credit Agreement) so long as the net cash
proceeds received by either of the Restaurant Subsidiaries or the Parent from
such sale are not less than $3 million. Maker shall deliver written notice of
such prepayment to Payee at least ten (10) days prior to prepayment. Each notice
of prepayment delivered pursuant to this subsection (c) shall set forth the
amount of such prepayment and the proposed date of such prepayment. Upon payment
in full of this Note, Payee shall surrender this Note to Maker for cancellation.
Upon prepayment in part of principal, Payee shall make a notation of such
prepayment on the Schedule of Payments attached as Exhibit A hereto and deliver
a copy of such schedule to Maker. The aggregate unpaid principal amount set
forth on such schedule shall be rebuttably presumptive evidence of the principal
amount owing and unpaid hereunder, but the failure to record any such amount on
such schedule shall not limit or otherwise affect the obligation of the Maker
hereunder to make payments on this Note when due.
SECTION 3. Subordination
-------------
SECTION 3.1 Nature of Subordination. Until the Senior Debt has been
-----------------------
indefeasibly paid in full, Payee may not (i) except for payments pursuant to
Section 2(c) hereof, receive, directly or indirectly, any payment, advance,
credit, security or new or further evidence of any kind whatso ever on account
of or with respect to any of the obligations evidenced by this Note, (ii)
accelerate any amount owing with respect to this Note, (iii) sue upon, take or
permit to be taken any action to assert, collect or enforce this Note, or (iv)
file or join in the filing of any petition to commence any Insolvency
Proceeding.
SECTION 3.2 Insolvency Proceedings.
----------------------
(a) Upon any distribution of assets of Maker to creditors of
Maker upon or in connection with an Insolvency Proceeding, any payment or
distribution of any kind (whether in cash, property or securities) which
otherwise would be payable or deliverable upon or with respect to the
obligations evidenced by this Note shall be paid or delivered directly to
the Senior Creditors for application (in case of cash) to, or as collateral
(in case of non-cash property or securities) for, the payment or prepayment
of the Senior Debt until the Senior Debt has been indefeasibly paid in
full.
4
<PAGE>
(b) If any Insolvency Proceeding is commenced by or against Maker, the
Senior Creditors are hereby irrevocably authorized and empowered (in their
own names or otherwise), but shall have no obligation, to (i) demand, sue
for, collect and receive every payment or distribution referred to in
subsection (a) above and give acquittance therefor and (ii) file claims and
proofs of claim and take such other action (including without limitation
voting the obligations evidenced by this Note and enforcing any security
interest or other lien securing payment of this Note) as it may deem
necessary or advisable for the exercise of any of the rights or interests
of the Senior Creditors.
(c) If any Insolvency Proceeding is commenced by or against Maker,
Payee shall duly and promptly take such action as the Senior Creditors may
request to (i) collect the obligations evidenced by this Note for the
account of the Senior Creditors, and file appropriate claims or proofs of
claim in respect of the obligations evidenced by this Note, (ii) execute
and deliver to the Senior Creditors such powers of attorney, assignments or
other instruments as the Senior Creditors may request in order to enable
them to enforce any and all claims with respect to this Note and any
security interests and other liens securing payment of this Note, and (iii)
collect and receive any and all payments and distributions which may be
payable or deliverable upon or with respect to this Note.
SECTION 3.3 Liens. To the extent that Payee now has or hereafter obtains
-----
a lien or security interest in any assets of Maker:
(a) Such lien or security interest shall be at all times subject
and subordinate to any lien or security interest which the Senior Creditors
now have or hereafter obtain in such assets without regard to the time or
manner in which the respective liens and security interests of the parties
hereto may have been created or perfected; and
(b) Payee may not at any time exercise any rights or remedies with
respect to or otherwise enforce any lien or security interest it now has or
hereafter obtains in Maker's assets, or apply any assets covered by any
such lien or security interest to any claim now or hereafter existing
against Maker.
SECTION 3.4 Waivers. Maker and Payee waive notice of acceptance of this
-------
Note by the Senior Creditors, and Payee waives notice of and consents to the
making, amount and terms of (i) any loans or other extensions of credit which
the Senior Creditors may make to Maker from time to time, (ii) any renewal or
extension thereof and (iii) any action which the Senior Creditors may take or
omit in their sole and absolute discretion with respect thereto.
SECTION 3.5 Rights of the Senior Creditors.
------------------------------
(a) This Subordinated Promissory Note shall constitute a
continuing agreement of subordination and the Senior Creditors may, from
time to time and without notice to Payee, lend money to or make other
financial arrangements with Maker in reliance hereon.
5
<PAGE>
(b) In the event that any payment or distribution, or any
security, proceeds thereof or property or funds payable as protection for
use, sale or lease of such security, is received by Payee, such property
shall be received and held in trust for the benefit of the Senior
Creditors, shall be segregated from other funds and property held by Payee,
and shall be immediately paid over to the Senior Creditors, as their
interests may appear, in the form received (together with any endorsements
or documents as may be necessary to effectively negotiate or transfer such
property) for application (in case of cash) to, or as collateral (in case
of non-cash property or securities) for, the payment or prepayment of the
Senior Debt.
(c) Payee authorizes the Senior Creditors, without notice or
demand and without affecting or impairing Payee's obligations hereunder,
from time to time to (i) renew, compromise, extend, increase, accelerate or
otherwise change the time for payment of, or otherwise change any of the
other terms of the Senior Debt or any part thereof, including without
limitation to increase or decrease the rate of interest thereon; (ii) take
and hold security for the payment of the Senior Debt and exchange, enforce,
waive, release and fail to perfect any such security; (iii) apply such
security and direct the order or manner of sale thereof as the Senior
Creditors in their sole discretion may determine; and (iv) release and
substitute any one or more endorsers, warrantors, Maker or other obligor.
The Senior Creditors may without notice assign their rights under this Note
in whole or in part to any other Senior Creditor.
(d) Payee acknowledges and agrees that it shall have the sole
responsibility for obtaining from Maker such information concerning Maker's
financial condition or business operations as Payee may require, and that
the Senior Creditors have no duty at any time to disclose to Payee any
information relating to the business operations or financial condition of
Maker.
(e) The Senior Creditors may notify any assignee, trustee or
interim trustee in bankruptcy, receiver, debtor in possession or other
person or persons of their rights under this Note.
(f) Neither Payee nor Maker shall amend, extend or otherwise
change the terms of this Note without the consent of the Senior Creditors.
(g) After the Senior Debt has been indefeasibly paid in full, the
Payee shall be subrogated to the rights of the Senior Creditors to receive
payments or distributions applicable to Senior Debt, to the extent that
distributions otherwise payable to Payee have been applied to the payment
of Senior Debt. Payee agrees that the provisions of this Section 3 shall
not be affected by any action, or failure to act, by any Senior Creditor
which results, or may result, in impairing or extinguishing any right of
reimbursement, subrogation or other right or remedy of Payee.
6
<PAGE>
SECTION 3.6 Third Parties. The provisions of Section 3 of this Note are
-------------
intended solely for the purpose of defining the relative rights of the Senior
Creditors and the Payee. Nothing contained in this Section 3 is intended to or
shall effect or impair (i) as between Maker, its creditors (other than the
Senior Creditors) and Payee, the obligation of Maker (which is absolute and
unconditional) to pay the obligations evidenced by this Note in accordance with
the terms hereof, and (ii) the relative rights of Payee and creditors of Maker
other than the Senior Creditors.
SECTION 3.7 Subsequent Holders. Any holder of this Note by such holder's
------------------
acceptance of this Note agrees to be bound by, and take this Note subject to,
the rights of the Senior Creditors and the obligations of Payee set forth in
this Section 3.
SECTION 4. Events of Default; Acceleration. If any of the following
-------------------------------
events ("Events of Default") shall occur:
(a) Maker shall fail to pay the interest on and principal amount
of this Note on the Maturity Date;
(b) Maker makes an assignment for the benefit of creditors, or
admits in writing its inability to pay or generally fails to pay its debts as
they mature or become due, or petitions or applies for the appointment of a
trustee or other custodian, liquidator or receiver of Maker or of any
substantial part of the assets of Maker or commences any case or other
proceeding relating to Maker under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction, now or hereafter in effect, or takes any action to authorize
or in furtherance of any of the foregoing, or if any such petition or
application is filed or any such case or other proceeding is commenced against
Maker and Maker indicates its approval thereof, consent thereto or acquiescence
therein; or
(c) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating Maker bankrupt or insolvent,
or approving a petition in any such case or other proceeding, or a decree or
order for relief is entered in respect of Maker in an involuntary case under
Federal bankruptcy laws as now or hereafter constituted, and such decree or
order remains in effect for more than sixty (60) days, whether or not
consecutive.
then Payee or Assignee may by notice in writing to Maker declare all amounts
owing with respect to this Note to be, and they shall thereupon forthwith mature
and become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by Maker.
Payee's failure at any time or times hereafter to require strict
performance by Maker of any of the terms, conditions and provisions contained in
this Note shall not waive, affect or diminish any right of Payee at any time or
times hereafter to demand strict performance thereof and such right shall not be
deemed to have been waived or modified by any act or knowledge of
7
<PAGE>
Payee, its agents, officers or employees, unless such waiver or modification is
contained in an instrument in writing signed by an officer of Payee and directed
to Maker specifying such waiver or modification. No waiver by Payee of any Event
of Default shall operate as a waiver of any other Event of Default or the same
Event of Default on a future occasion. No delay on the part of Payee in the
exercise of any right or remedy shall operate as a waiver thereof, and no single
or partial exercise by Payee of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other rights or remedy.
If any Event of Default occurs, Maker shall pay on demand all reasonable
out-of-pocket expenses incurred or sustained by Payee in connection with the
enforcement or protection of the rights of Payee under this Note, including
costs of collection and the fees and disbursements of counsel.
SECTION 5. Miscellaneous.
-------------
(a) This Note may not be assigned by Maker or Payee without the
express written consent of the other party.
(b) This Note may not be amended except by a writing signed by
Maker and Payee.
(c) Whenever in this Note there is reference made to either
Payee or Maker, such reference shall be deemed to include a reference to the
successors and permitted assigns of such party and the provisions of this Note
shall be binding upon and inure to the benefit of said successors and permitted
assigns.
(d) Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, two (2) days after the date of deposit in the United States mails as
follows:
To Maker:
Easyriders, Inc.
28210 Dorothy Drive
Agoura Hills, CA 91301
Attention: Robert Fabregas
Fax No.: (818) 889-4726
8
<PAGE>
To Payee:
Joseph Teresi
2400 Laguna Drive
Fort Lauderdale, FL 33316
Fax No.: (954) 462-0223
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
(e) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICTS OF
LAW PRINCIPLES THEREOF. THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
CALIFORNIA AND OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE OF
CALIFORNIA (THE "CALIFORNIA COURTS") FOR ANY LITIGATION ARISING OUT OF OR
RELATING TO THIS NOTE (AND AGREE NOT TO COMMENCE ANY LITIGATION RELATING THERETO
EXCEPT IN SUCH COURTS), WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION IN THE CALIFORNIA COURTS AND AGREE NOT TO PLEAD OR CLAIM IN ANY
CALIFORNIA COURT THAT SUCH LITIGATION BROUGHT THEREIN HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
(f) The Section and subsection titles contained herein are for
convenience only and shall not control or affect the meaning or construction of
any provision hereof.
(g) The invalidity or unenforceability of any provision of this
Note in any jurisdiction shall not affect the validity or enforceability of the
remainder of this Note in that jurisdiction or the validity or enforceability of
this Note, including that provision, in any other jurisdiction. If any
restriction or provision of this Note is held unreasonable, unlawful or
unenforceable in any respect, such restriction or provision shall be
interpreted, revised or applied in a manner that renders it lawful and
enforceable to the fullest extent possible under law.
(h) Nothing in this Note is intended or shall be construed to
give any Person other than the parties hereto any legal or equitable right,
remedy or claim under or in respect of this Note or any provision contained
herein.
(i) Upon receipt by Maker of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, Maker will make
and deliver a new Note of like tenor in lieu of this Note against receipt of
Payee's undertaking to indemnify Maker against and hold it harmless from all
reasonable costs arising as a result of its making and delivery of the new Note.
9
<PAGE>
This Note has been executed and delivered at Los Angeles, California, on
the date first above written.
EASYRIDERS, INC.
By: /s/ William Nordstrom
---------------------
William Nordstrom
Secretary and Executive Vice President
10
<PAGE>
EXHIBIT 10.51
STOCK PURCHASE AGREEMENT
Stock Purchase Agreement, made and entered into as of April 8, 1999 (the
"Agreement"), between Easyriders, Inc., a Delaware corporation (the "Company")
and John E. Martin (the "Investor").
WHEREAS, the Company desires to sell, and the Investor desires to purchase,
subject to the terms and conditions of this Agreement, shares of the Company's
common stock, par value $.001 per share (the "Common Stock");
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Investor agree as
follows:
SECTION I. AUTHORIZATION; SALE AND PURCHASE OF THE COMPANY'S
SECURITIES; CLOSING.
1.1 Sale and Purchase of Common Stock. Subject to the terms and
conditions hereof, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company on the Closing Date, a number of shares of
Common Stock (the "Shares") determined by dividing $1,500,000 by 75% of the
Average Closing Price of the Common Stock (as hereinafter defined) for an
aggregate cash purchase price of $1,500,000. The Average Closing Price of the
Common Stock shall mean the average of the daily Closing Prices (as hereinafter
defined) of the Common Stock on the ten consecutive trading days ending on and
including April 8, 1999. The Closing Price shall mean the last recorded sale
price of the Common Stock or, if no such reported sale takes place on such day,
the average of the reported closing bid and asked price of the Common Stock, as
reported on the American Stock Exchange.
1.2 Closing. The closing of the transaction contemplated by this
Agreement (the "Closing") shall take place at 10:00 a.m., Pacific Standard time,
on April 9, 1999 (the "Closing Date") or at such other time or day as may be
mutually acceptable to the Investor and the Company.
1.3 Delivery; Payment. At the Closing, the Company will deliver
to the Investor a certificate, dated the Closing Date, representing the Shares
purchased by the Investor, registered in his name as stated herein (or in the
name of his nominee) against payment to the Company of the purchase price of the
Shares being purchased by the Investor, which payment shall be made in cash.
1.4 Registration Rights. After the Closing Date, the parties
hereto will negotiate in good faith the terms and conditions upon which the
Company will grant the Investor "shelf" and "piggyback" registration rights.
<PAGE>
SECTION II. INVESTMENT REPRESENTATIONS.
The Investor represents that:
2.1 Investment Intent.
(a) The Shares being acquired by the Investor are being
acquired for investment for the Investor's own account and not with the view to,
or for resale in connection with, any distribution or public offering thereof.
The Investor understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws by reason of their contemplated issuance in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof and applicable state securities laws, and that the reliance of the
Company and others upon these exemptions is predicated in part upon this
representation by the Investor. The Investor further understands that the Shares
may not be transferred or resold without (i) registration under the Securities
Act and any applicable state securities laws, or (ii) an exemption from the
requirements of the Securities Act and applicable state securities laws.
(b) The Shares are only transferable pursuant to (a) a public
offering registered under the Securities Act or (b) pursuant to an exemption
from the registration requirements of the Securities Act and applicable state
securities or blue sky laws.
(c) Each certificate representing Shares shall be endorsed
with the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR WITH THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
THOSE SECURITIES LAWS.
2.2 Qualification, Etc. The Investor acknowledges that the
Company has made available to the Investor at a reasonable time prior to the
execution of this Agreement the opportunity to ask questions and receive answers
concerning the terms and conditions of the sale of securities contemplated by
this Agreement and to obtain any additional information (which the Company
possesses or can acquire without unreasonable effort or expense) as may be
necessary to verify the accuracy of information furnished to such Investor. Such
Investor (a) is able to bear the loss of his entire investment in the Shares,
and (b) has such knowledge and experience in financial and business matters that
he is capable of evaluating the merits and risks of the investment to be made by
it pursuant to this Agreement.
2
<PAGE>
2.3 Accredited Investor. The Investor is an "accredited investor"
within the meaning of Rule 501 promulgated under the Securities Act.
SECTION III. FAIRNESS OPINION
As a condition to the purchase and sale of the Shares, the
Company shall have received an opinion from an investment banking firm that the
transactions contemplated hereby are fair to the Company and the stockholders of
the Company from a financial point of view.
SECTION IV. MISCELLANEOUS.
4.1 Amendments; Waiver and Consents. This Agreement may be
amended or modified, and the obligations of the Company and the Investor may be
waived only by the written consent of the Company and Investor. Any waiver or
consent may be given subject to satisfaction of conditions stated therein and
any waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
4.2 Assignment. This Agreement may not be assigned by either
party hereto.
4.3 Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
4.4 Entire Agreement. This Agreement contains the entire
agreement between the parties and supersedes any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way.
4.5 Governing Law. The internal law, without regard to conflicts
of laws principles, of the State of California shall govern all questions
concerning the construction, validity and interpretation of this Agreement and
the performance of the obligations imposed by this Agreement.
4.6 Counterparts. This Agreement may be executed concurrently in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the Company and the Investor has caused this Agreement
to be executed by its duly authorized representative.
EASYRIDERS, INC.
By: /s/ J. Robert Fabregas
------------------------------
Name: J. Robert Fabregas
Title: Chief Financial Officer
Investor:
/s/ John E. Martin
----------------------------------
John E. Martin
4
<PAGE>
EXHIBIT 10.52
STOCK PURCHASE AGREEMENT
Stock Purchase Agreement, made and entered into as of April 8, 1999 (the
"Agreement"), between Easyriders, Inc., a Delaware corporation (the "Company")
and Joseph Teresi (the "Investor").
WHEREAS, the Company desires to sell, and the Investor desires to purchase,
subject to the terms and conditions of this Agreement, shares of the Company's
common stock, par value $.001 per share (the "Common Stock");
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Investor agree as
follows:
SECTION I. AUTHORIZATION; SALE AND PURCHASE OF THE COMPANY'S
SECURITIES; CLOSING.
1.1 Sale and Purchase of Common Stock. Subject to the terms and
conditions hereof, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company on the Closing Date, a number of shares of
Common Stock (the "Shares") determined by dividing $1,500,000 by 75% of the
Average Closing Price of the Common Stock (as hereinafter defined) in
consideration of the Investor forgiving the interest on the $5,000,000
Subordinated Promissory Note, dated September 23, 1998, made by the Company to
the Investor (the "Note") in the amount of $75,000, and a reduction in the
principal amount of the Note from $5,000,000 to $3,575,000. The Average Closing
Price of the Common Stock shall mean the average of the daily Closing Prices (as
hereinafter defined) of the Common Stock on the ten consecutive trading days
ending on and including April 8, 1999. The Closing Price shall mean the last
recorded sale price of the Common Stock or, if no such reported sale takes place
on such day, the average of the reported closing bid and asked price of the
Common Stock, as reported on the American Stock Exchange.
1.2 Closing. The closing of the transaction contemplated by this
Agreement (the "Closing") shall take place at 10:00 a.m., Pacific Standard time,
on April 9, 1999 (the "Closing Date") or at such other time or day as may be
mutually acceptable to the Investor and the Company.
1.3 Delivery; Payment. At the Closing, (a) the Company will deliver
to the Investor a certificate, dated the Closing Date, representing the Shares
purchased by the Investor, registered in his name as stated herein (or in the
name of his nominee) and a promissory note which is identical to the Note except
that it shall be in the principal amount of $3,575,000 and (b) the Investor will
deliver the Note to the Company for cancellation.
<PAGE>
1.4 Registration Rights. After the Closing Date, the parties hereto
will negotiate in good faith the terms and conditions upon which the Company
will grant the Investor "shelf" and "piggyback" registration rights.
SECTION II. INVESTMENT REPRESENTATIONS.
The Investor represents that:
2.1 Investment Intent.
(a) The Shares being acquired by the Investor are being
acquired for investment for the Investor's own account and not with the view to,
or for resale in connection with, any distribution or public offering thereof.
The Investor understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws by reason of their contemplated issuance in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof and applicable state securities laws, and that the reliance of the
Company and others upon these exemptions is predicated in part upon this
representation by the Investor. The Investor further understands that the Shares
may not be transferred or resold without (i) registration under the Securities
Act and any applicable state securities laws, or (ii) an exemption from the
requirements of the Securities Act and applicable state securities laws.
(b) The Shares are only transferable pursuant to (a) a public
offering registered under the Securities Act or (b) pursuant to an exemption
from the registration requirements of the Securities Act and applicable state
securities or blue sky laws.
(c) Each certificate representing Shares shall be endorsed with
the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR WITH THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
THOSE SECURITIES LAWS.
2.2 Qualification, Etc. The Investor acknowledges that the Company
has made available to the Investor at a reasonable time prior to the execution
of this Agreement the opportunity to ask questions and receive answers
concerning the terms and conditions of the sale of securities contemplated by
this Agreement and to obtain any additional information (which the Company
possesses or can acquire without unreasonable effort or expense) as may be
necessary to verify the accuracy of information furnished to such Investor. Such
Investor (a) is able to bear
2
<PAGE>
the loss of his entire investment in the Shares, and (b) has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the investment to be made by it pursuant to this
Agreement.
2.3 Accredited Investor. The Investor is an "accredited investor"
within the meaning of Rule 501 promulgated under the Securities Act.
SECTION III. FAIRNESS OPINION
As a condition to the purchase and sale of the Shares, the
Company shall have received an opinion from an investment banking firm that the
transactions contemplated hereby are fair to the Company and the stockholders of
the Company from a financial point of view.
SECTION IV. MISCELLANEOUS.
4.1 Amendments; Waiver and Consents. This Agreement may be amended
or modified, and the obligations of the Company and the Investor may be waived
only by the written consent of the Company and Investor. Any waiver or consent
may be given subject to satisfaction of conditions stated therein and any waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
4.2 Assignment. This Agreement may not be assigned by either party
hereto.
4.3 Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
4.4 Entire Agreement. This Agreement contains the entire agreement
between the parties and supersedes any prior understandings, agreements or
representations by or between the parties, written or oral, which may have
related to the subject matter hereof in any way.
4.5 Governing Law. The internal law, without regard to conflicts
of laws principles, of the State of California shall govern all questions
concerning the construction, validity and interpretation of this Agreement and
the performance of the obligations imposed by this Agreement.
4.6 Counterparts. This Agreement may be executed concurrently in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the Company and the Investor has caused this Agreement
to be executed by its duly authorized representative.
EASYRIDERS, INC.
By: /s/ J. Robert Fabregas
-------------------------------
Name: J. Robert Fabregas
Title: Chief Financial Officer
Investor:
/s/ Joseph Teresi
-----------------
Joseph Teresi
4
<PAGE>
EXHIBIT 10.53
Easyriders, Inc.
Joseph Teresi
2400 Laguna Drive
Ft. Lauderdale, Fl 33316
Dear Joe:
Reference is made to Sections 2.3 and 2.4 of the Stock Contribution and
Sale Agreement, dated as of June 30, 1998, by and among Newriders, Inc.,
Easyriders, Inc. (the "Company"), Easyriders Sub II, Inc., Paisano Publications,
Inc., Easyriders of Columbus, Inc., Easyriders Franchising, Inc., Teresi, Inc.,
Bros Club, Inc., Associated Rodeo Riders On Wheels, Inc. and Mr. Joseph Teresi
(the "Stock Purchase Agreement"), which states that the Exchange Amount (as
defined therein) will be adjusted upward or downward based on the amount by
which the Paisano Companies' Working Capital (as defined therein) as of
September 23, 1998 exceeds or is less than $4,537,000 (the "Adjustment"). In
accordance with the Stock Purchase Agreement, Deloitte & Touche LLP has
determined that you owe the Company $964,731 pursuant to the Adjustment (the
"Deloitte Number").
You have taken exception to the Adjustment and in lieu of submitting these
issues to Ernst & Young, LLP for resolution in accordance with Section 2.4 of
the Stock Purchase Agreement, and after discussion and due consideration by the
independent members of the Audit Committee and the full Board of Directors of
the Company, we have agreed as follows:
1. You owe the Company $398,085 in satisfaction of the Adjustment (the
"Payable") This amount was determined by subtracting the following items
from the Deloitte Number: $353,625 (your credits from the items listed
in Exhibit A); $205,647 (September 1998, Post-Reorganization for
"Easyriders" and "Airbrush" magazine revenues); and $7,374 (cash that
you have previously paid the Company).
a. No interest will be owed on the Payable.
b Subject to prior payment in accordance with paragraphs 2, 3, 4
and 5 below, the Payable is due when all of the promissory notes,
presently in effect, from the Company to you are paid in full.
2. The Company will make reasonable efforts to collect all over-due
receivables listed in Exhibit B (the "Receivables") at your direction.
Any amount collected with respect to the Receivables shall be applied to
the oldest Receivables first. A percentage of the amounts collected with
respect to such Receivables equal to the larger percentage indicated
next to the applicable Receivables on Exhibit B ("your percentage") will
be credited against the Payable.
<PAGE>
3. If the Company's accountants determine that the amount of pension
accrual listed in Exhibit A should be decreased, then the amount of
the Payable will be reduced at such time by an amount equal to such
decrease.
4. To the extent to which any portion of the inventory referenced in
Exhibit C (the "Inventory") is sold or used as prizes in connection
with Company promotions, the amount of the Payable will be reduced at
such time by the amount of the receipts or value assigned thereto by
the Company.
5. If the Company receives a refund of any portion of the Japan VAT
listed on Exhibit A (the "Japan VAT"), then the amount of the Payable
will be reduced at such time by an amount equal to such refund.
6. It is the Company's present intention to continue utilizing Leon
Hatcher's services for Easyriders Events, Inc., although no commitment
is made in this respect.
7. From and after such time as the Payable has been reduced to zero, you
will have the right to continue to receive in cash within 10 days of
receipt by the Company (i) your percentage of any amount of the
collections on any of the Receivables, (ii) any amount of the decrease
in the aforementioned pension accrual, (iii) any amount of the
receipts or value assigned to the Inventory and (iv) any amount of
refund received by the Company with respect to the Japan VAT;
provided, however, that until such time as all amounts owing to Nomura
Holding America Inc. ("Nomura") under the Note and Warrant Purchase
Agreement, dated as of September 23, 1998 (the "Nomura Agreement"),
have been paid in full, such amounts shall be represented by a non-
interest bearing receivable owed by the Company to you.
The terms of this agreement are conditioned upon obtaining the approval of
this agreement by Nomura pursuant to the Nomura Agreement.
By signing below, you agree and accept the terms of this agreement.
Very truly yours,
/s/ William Prather
------------------------------
William Prather, President and
Chief Executive Officer
Agreed and Accepted on
this 14 day of April, 1999
/s/ Joseph Teresi
-------------------------
Joseph Teresi
2
<PAGE>
EXHIBIT 10.54
FIRST AMENDMENT, CONSENT AND WAIVER UNDER
-----------------------------------------
NOTE AND WARRANT PURCHASE AGREEMENT
-----------------------------------
FIRST AMENDMENT, CONSENT AND WAIVER, dated as of March 31, 1999 (this
"Amendment"), to the Note and Warrant Purchase Agreement referred to below by
---------
and among EASYRIDERS, INC. (the "Parent"), PAISANO PUBLICATIONS, INC. (as
------
successor by merger with Easyriders Sub II, Inc.) (the "Company") and NOMURA
-------
HOLDING AMERICA INC. (the "Purchaser").
---------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Parent, the Company and the Purchaser are parties to that
certain Note and Warrant Purchase Agreement, dated as of September 23, 1998 (as
amended, supplemented or otherwise modified from time to time, the "Note
----
Purchase Agreement");
- ------------------
WHEREAS, the Purchaser has agreed to amend certain provisions of, to
consent to certain actions otherwise prohibited by, and to waive certain
violations of, the Note Purchase Agreement, in the manner, and on the terms and
conditions, provided for herein;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
-----------
shall have the meanings ascribed to them in the Note Purchase Agreement.
2. Amendments. The Note Purchase Agreement is hereby amended as of
----------
the Amendment Effective Date (as hereinafter defined) as follows:
(a) The definition of "Consolidated EBITDA" set forth in Section 1.1
-------------------
of the Note Purchase Agreement is hereby amended by inserting at the end thereof
the following new text:
", plus (vi) for the period ended December 31, 1998 the one time
----
reserves set forth on Schedule 1 to the First Amendment, Consent and
Waiver dated as of March 31, 1999 to this Agreement";
<PAGE>
(b) The definition of "Excess Cash Flow" set forth in Section 1.1 of
----------------
the Note Purchase Agreement is hereby amended by inserting at the end thereof
the following new proviso:
", provided that the above calculation for Excess Cash Flow will be
--------
determined with respect to the Paisano Group plus Easyriders
Franchising, Inc. and Teresi, Inc. if such calculation produces an
amount of Excess Cash Flow that is greater than the calculation of
Excess Cash Flow without giving effect to this proviso."
(c) The definition of "Paisano Group" set forth in Section 1.1 of the
-------------
Note Purchase Agreement is hereby amended and restated in its entirety to read
as follows:
""Paisano Group" means the Paisano Companies other than
-------------
Easyriders of Columbus, Easyriders Franchising, Inc., and Teresi,
Inc.";
(d) The definition of "Restricted Investment" set forth in Section 1.1
---------------------
of the Note Purchase Agreement is hereby amended by amending and restating
clause (e) thereof in its entirety to read as follows:
"(e) any Investment in or capital contribution by the Parent to
any member of the Paisano Group or Easyriders Franchising, Inc. or
Teresi, Inc., and";
(e) Section 3.1(c) of the Note Purchase Agreement is hereby amended
and restated in its entirety to read as follows:
"(c) Commencing with the six-month period ending on March 31,
1999 and for each calendar month thereafter, commencing with the month
ending April 30, 1999 (such initial six-month period and each calendar
month thereafter being a "period" for purpose of this Section 3.1(c)),
not later than 15 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 5 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 twenty
(20) 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
-2-
<PAGE>
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.";
(f) Section 10.1(c) of the Note Purchase Agreements is hereby amended
and restated in its entirely to read as follows:
"(c) Indebtedness of (i) any Wholly-owned Subsidiary of the
Parent (other than the Restaurant Subsidiaries, Easyriders of
Columbus, Easyriders Franchising, Inc. and Teresi, Inc.) to the Parent
or to another Wholly-owned Subsidiary of the Parent (other than the
Restaurant Subsidiaries), and (ii) notwithstanding the foregoing,
Easyriders Franchising, Inc. and/or Teresi, Inc. to the Parent,
provided that in the case of each of clauses (i) and (ii) 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;";
(g) Section 10.6 of the Note Purchase Agreement is hereby amended by
inserting the text ", Easyriders Franchising, Inc. or Teresi, Inc." immediately
after the term "Paisano Group" where it appears therein;
(h) Section 10.9(ii) of the Note Purchase Agreement is hereby amended
and restated in its entirety to read as follows:
"(ii) Easyriders of Columbus (other than transactions with respect to
magazine sales and which satisfy the conditions of the immediately
preceding sentence), Easyriders Franchising, Inc. or Teresi, Inc. or";
(i) Section 10.18(a) of the Note Purchase Agreement is hereby amended
by deleting the amount "$4,250,000" appearing therein and inserting in lieu
thereof the following new text:
"(w) for the fiscal quarter ended March 31, 1999, $1,100,000, (x) for
the fiscal quarter ended June 30, 1999, $1,200,000, (y) for the fiscal
quarter ended September 30, 1999, $2,000,000, and (z) for the fiscal
quarter ended December 31, 1999 and for each fiscal quarter
thereafter, $4,500,000";
(j) Section 10.18(c) of the Note Purchase Agreement is hereby amended
by deleting the portion of the table appearing therein beginning at March 31,
1999 and continuing through December 31, 1999 and inserting in lieu thereof the
following new portion of the table:
-3-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- -----
<S> <C>
March 31, 1999 16.50:1.00
June 30, 1999 12.50:1.00
September 30, 1999 7.25:1.00
December 31, 1999 3.75:1.00
</TABLE>
(k) Section 10.18(d) of the Note Purchase Agreement is hereby amended
by deleting the portion of the table appearing therein beginning at March 31,
1999 and continuing through December 31, 1999 and inserting in lieu thereof the
following new portion of the table:
<TABLE>
<CAPTION>
Measuring Date Amount
-------------- ------
<S> <C>
March 31, 1999 $1,200,000
June 30, 1999 $1,600,000
September 30, 1999 $2,700,000
December 31, 1999 $5,000,000
</TABLE>
(l) Section 10.18(e) of the Note Purchase Agreement is hereby amended
by deleting the portion of the table appearing therein beginning at March 31,
1999 and continuing through December 31, 1999 and inserting in lieu thereof the
following new portion of the table:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- -----
<S> <C>
March 31, 1999 1.00:1.00
June 30, 1999 1.00:1.00
September 30, 1999 1.10:1.00
December 31, 1999 2.40:1.00
</TABLE>
3. Consent. Notwithstanding anything to the contrary set forth in
-------
the Note Purchase Agreement, the Parent shall be permitted to enter into the
letter agreement, dated April 8, 1999, with Teresi, in the form attached as
Exhibit A, provided that no payment or other distribution (other than non-cash
--------
credits against payables owed by Teresi) shall be made, directly or indirectly,
to Teresi pursuant to such letter agreement until such time as all Obligations
under the Note Purchase Agreement have been paid in full in cash.
-4-
<PAGE>
4. Waiver. The Purchaser hereby waives all Events of Default
------
resulting solely out of the failure of the Company to comply with Sections 10.11
and 10.18(a), (c), (d) and (e) of the Note Purchase Agreement for the period
ended December 31, 1998.
5. Representations and Warranties. To induce the Purchaser to enter
------------------------------
into this Amendment, each of the Parent and the Company, jointly and severally,
hereby represents and warrants to the Purchaser that:
(a) Corporate Power. The execution, delivery and performance of this
---------------
Amendment are within its corporate power and have been duly authorized by all
necessary corporate and shareholder action.
(b) Due Execution and Delivery. This Amendment has been duly
--------------------------
executed and delivered by or on behalf of each of the Parent and the Company.
(c) Binding Effect. This Amendment constitutes a legal, valid and
--------------
binding obligation of each of the Parent and the Company enforceable against
such Person, in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at law).
(d) No Defaults. No Default or Event of Default has occurred and is
-----------
continuing after giving effect to the waivers set forth in Section 4 hereof.
(e) Representations and Warranties True. Except as modified by the
-----------------------------------
Disclosure Schedules attached hereto, the representations and warranties of the
Parent and the Company contained in the Note Purchase Agreement and each other
Note Document (including without limitation the Note Documents delivered
pursuant to this Amendment) shall be true and correct on and as of the Amendment
Effective Date 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.
6. Outstanding Indebtedness; Waiver of Claims. Each of the Parent
------------------------------------------
and the Company hereby acknowledges and agrees that as of the date hereof the
aggregate outstanding principal amounts of the Revolving Notes and the Term
Notes are $3,750,000 and $16,500,000, respectively, and that such principal
amounts are payable pursuant to the Note Purchase Agreement without defense,
offset, withholding, counterclaim or deduction of any kind. Each of the Parent
and the Company hereby waives, releases, remises and forever discharges the
Purchaser and each other Indemnitee from any and all actions, causes of action,
suits, losses, liabilities and damages of any kind or character, known or
unknown, which either the Parent or the Company ever had, now has or might
hereafter have against the Purchaser or any other Indemnitee which
-5-
<PAGE>
relates, directly or indirectly, to any acts or omissions of the Purchaser or
any other Indemnitee on or prior to the date hereof.
7. Effectiveness. This Amendment shall become effective as of March
-------------
31, 1999 (the "Amendment Effective Date") only upon satisfaction in full in the
------------------------
judgment of the Purchaser of each of the following conditions on or prior to
April __, 1999:
(a) Amendment. The Purchaser shall have received four (4) original
---------
copies of this Amendment duly executed and delivered by the Parent and the
Company.
(b) Representations and Warranties True. The representations and
-----------------------------------
warranties of the Parent and the Company contained in this Amendment shall be
true and correct on and as of the Amendment Effective Date.
(c) Proceedings Satisfactory. All corporate and other proceedings
------------------------
taken or to be taken in connection with the transactions contemplated hereby 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:
(i) certified copies of resolutions of the Board of Directors of
the Parent and the Company authorizing the execution, delivery and
performance of this Amendment and the First Amendment to Warrant; and
(ii) certificates as to the incumbency and signatures of each of
the officers of the Parent and the Company who shall execute this Amendment
and the First Amendment to Warrant on behalf of such Person.
(d) Fees. On or before the Amendment Effective Date, the Company
----
shall have paid to the Purchaser all costs and expenses owing in connection with
the preparation of this Amendment (including, without limitation, any legal fees
and expenses).
(e) Amendment to Warrant. The Purchaser shall have received four (4)
--------------------
original copies of the First Amendment to Warrant, in the form attached hereto
as Exhibit B, duly executed by the Parent and the Purchaser.
(f) Amendment to Paisano Stock Contribution Agreement. The purchaser
-------------------------------------------------
shall have received true and correct copies of the amendment to the Paisano
Stock Contribution Agreement described in Section 3 hereof.
8. No Other Amendments/Waivers. Except as expressly modified in
---------------------------
Section 2 and 3 hereof, the Note Purchase Agreement shall be unmodified and
shall continue to be in full force and effect in accordance with its terms. In
addition, except as expressly provided in Section 4 hereof, this Amendment shall
not be deemed a waiver of
-6-
<PAGE>
any term or condition of the Note Purchase Agreement or any Note Document and
shall not be deemed to prejudice any right or rights which the Purchaser may now
have or may have in the future under or in connection with the Note Purchase
Agreement or any Note Document or any of the instruments or agreements referred
to therein, as the same may be amended from time to time.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, CONSTRUED AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
10. Counterparts. This Amendment may be executed by the parties
------------
hereto on any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
[Signature pages follow.]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first above written.
EASYRIDERS, INC.
By:________________________
Name:
Title:
PAISANO PUBLICATIONS, INC. (as
successor by merger with EASYRIDERS
SUB II, INC.)
By:________________________
Name:
Title:
NOMURA HOLDING AMERICA INC.
By:________________________
Name:
Title:
Each of the undersigned hereby acknowledges
and consents to the amendments, consents and
waivers to the Note Purchase Agreement
effected by this Amendment and hereby
confirms and agrees that its obligations under
the Note Documents shall continue without any
diminution thereof and shall remain in full
force and effect without amendment or
modification on and after the effectiveness of
this Amendment.
<PAGE>
ACKNOWLEDGED, CONSENTED and
AGREED to as of the date first
written above.
EASYRIDERS OF COLUMBUS, INC.
By:________________________
Name:
Title:
EASYRIDERS FRANCHISING, INC.
By:________________________
Name:
Title:
TERESI, INC.
By:________________________
Name:
Title:
BROS CLUB, INC.
By:________________________
Name:
Title:
ASSOCIATED RODEO RIDERS ON WHEELS
By:________________________
Name:
Title:
<PAGE>
SCHEDULE 1
----------
EBITDA Add-Backs
----------------
<TABLE>
<CAPTION>
Description Amount
----------- ------
<S> <C>
Reserve 100% for sale of slow moving inventory $321,495
Increased reserve for advertising receivables $221,626
Increased reserve for magazine returns $161,687
Increased reserve for pension plan $ 65,000
--------
Total Add-back $769,808
</TABLE>
Sch. 1 - 1
<PAGE>
EXHIBIT A
---------
See Attached
Exh. A - 1
<PAGE>
EXHIBIT B
FIRST AMENDMENT TO WARRANT
--------------------------
THIS FIRST AMENDMENT, dated as of March 31, 1999 (this "Amendment"),
---------
to the Warrant referred to below by and between EASYRIDERS, INC., a Delaware
corporation (the "Issuer"), and NOMURA HOLDING AMERICA INC., a Delaware
------
corporation (the "Holder").
------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Issuer has executed a Warrant to Purchase Shares of
Common Stock, dated September 23, 1998 (as amended, supplemented or otherwise
modified from time to time prior to the date hereof, the "Warrant"), in favor of
-------
the Holder; and
WHEREAS, the Holder has agreed to amend the Warrant in the manner, and
on the terms and conditions, provided for herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
-----------
shall have the meanings ascribed to them in the Warrant.
2. Amendment. The definition of "Warrant Price" set forth in
--------- -------------
Section 7 of the Warrant is hereby amended and restated in its entirety to read
as follows:
""Warrant Price" means initially $1.625 and such other prices as shall
result from the adjustments specified in Section 4 hereof."
3. No Other Amendments. Except as expressly provided herein, (i)
-------------------
the Warrant shall be unmodified and shall continue to be in full force and
effect in accordance with its terms, and (ii) this Amendment shall not be
deemed a waiver of any term or condition of the Warrant and shall not be deemed
to prejudice any right or rights which the Holder may now have or may have in
the future under or in connection with the Warrant or the Registration Rights
Agreement, as the same may be amended from time to time.
4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
-------------
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Exh. B - 1
<PAGE>
5. Counterparts. This Amendment may be executed by the parties
------------
hereto on any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
(SIGNATURE PAGE FOLLOWS)
Exh. B - 2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first above written.
Issuer:
------
EASYRIDERS, INC.
By:___________________________
Name:
Title:
Holder:
------
NOMURA HOLDING AMERICA INC.
By:___________________________
Name:
Title:
Exh. B - 3
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Name Jurisdiction of Incorporation
- ---- -----------------------------
- -----------------------------------------------------------------------------
<S> <C>
Paisano Publications, Inc. California
- -----------------------------------------------------------------------------
Easyriders Franchising, Inc. California
- -----------------------------------------------------------------------------
Teresi, Inc. California
- -----------------------------------------------------------------------------
Associated Rodeo Riders on Wheels, Inc. California
- -----------------------------------------------------------------------------
Easyriders of Columbus, Inc. Ohio
- -----------------------------------------------------------------------------
Bros. Club, Inc. California
- -----------------------------------------------------------------------------
M&B Restaurants, L.C. Texas
- -----------------------------------------------------------------------------
Newriders, Inc. Nevada
- -----------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 278,035
<SECURITIES> 0
<RECEIVABLES> 2,874,779
<ALLOWANCES> 395,681
<INVENTORY> 3,975,443
<CURRENT-ASSETS> 9,345,203
<PP&E> 3,718,067
<DEPRECIATION> 272,930
<TOTAL-ASSETS> 77,137,622
<CURRENT-LIABILITIES> 10,250,467
<BONDS> 37,030,337
0
0
<COMMON> 19,295
<OTHER-SE> 29,037,685
<TOTAL-LIABILITY-AND-EQUITY> 77,137,622
<SALES> 13,760,318
<TOTAL-REVENUES> 13,760,318
<CGS> 10,457,224
<TOTAL-COSTS> 10,457,224
<OTHER-EXPENSES> 13,076,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,532,637
<INCOME-PRETAX> (12,123,589)
<INCOME-TAX> 8,300
<INCOME-CONTINUING> (12,131,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,131,889)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
