<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from___________to______________.
Commission File No. 0-15501
BIKERS DREAM, INC.
(Exact name of Registration as specified in its charter)
California 33-0140149
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1420 VILLAGE WAY, SANTA ANA, California 92705
(Address of principal executive offices)
(Zip Code)
(714) 835-8464
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of June 30, 1996, there were 6,170,911 shares of common stock outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 And 1995
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995
---- ----
<S> <C> <C>
A S S E T S:
Current assets:
Cash and cash equivalents $ 490,322 $ 234,228
Accounts receivable, net 582,957 133,487
Inventories 1,663,567 1,211,125
Prepaid expenses and other current assets 69,301 78,077
---------- ----------
Total current assets 2,806,147 1,656,917
Property, equipment and capitalized leases, net 1,025,158 429,837
Deposits and other assets 75,794 29,170
---------- ----------
Total assets $3,907,099 $2,115,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $450,226 $197,178
Other accrued expenses 989,266 314,741
Current portion of long-term debt 76,151
Current portion of notes payable 373,102 679,499
Notes payable to shareholders 171,500
---------- ----------
Total current liabilities 2,060,245 1,191,418
Deferred rent 119,098 82,624
Notes payable, less current portion 96,928
Deferred tax liability 3,425
Long-term debt, less current portion 413,738 80,804
---------- ----------
Total liabilities 2,690,009 1,358,271
---------- ----------
Commitments and contingencies (Note 4)
Shareholders' equity:
10% convertible preferred stock, no par value, 10,000,000 shares
authorized at June 30, 1996: 7 shares
issued and outstanding at June 30, 1996 1,102,500
Common stock, no par value; 25,000,000 shares
authorized at June 30, 1996; 6,170,911 and 4,700,920
issued and outstanding at June 30, 1996 and June 30,1995 4,212,718 1,789,555
Accumulated deficit (4,098,128) (1,031,901)
---------- ----------
Total shareholders' equity (1,217,090) 757,654
---------- ----------
Total liabilities and shareholders' equity $3,907,099 $2,115,924
========== ==========
</TABLE>
See the accompanying notes to these consolidated financial statements.
<PAGE> 3
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Three Months For The Six Months
-------------------- ------------------
Ended June 30, Ended June 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenues:
Product sales $2,783,711 $1,820,650 $5,552,689 $3,246,266
Financing contracts 81,789 (3,668) 159,709 3,590
---------- ---------- ----------- ----------
Total revenues 2,865,500 1,816,982 5,712,398 3,249,856
Cost of goods sold 2,275,328 1,145,716 4,464,076 2,504,872
---------- ---------- ----------- ----------
Gross profit 590,172 331,266 1,248,322 744,984
---------- ---------- ----------- ----------
Expenses:
Selling, general and administrative expenses 1,355,272 999,273 2,562,188 1,544,878
Depreciation and amortization 58,220 25,823 96,320 33,639
Interest expense 38,405 (384) 81,399 8,598
Franchise income (28,205) (6,500) (32,302) (8,500)
Other expense 156,034 96 156,034
---------- ---------- ----------- ----------
Total expenses 1,579,726 1,018,308 2,863,638 1,578,615
---------- ---------- ----------- ----------
Loss before (provision) for
income taxes (989,554) (687,042) (1,615,316) (833,631)
(Provision) for income taxes 0 (63,151) 0 (63,151)
---------- ---------- ----------- -----------
Net loss $ (989,554) $ (750,193) $(1,615,316) $ (896,782)
========== ========== =========== ==========
Net loss per share $ (0.17) $ (0.16) $ (0.28) $ (0.22)
========== ========== =========== ==========
Weighted average shares outstanding 6,118,494 4,700,920 5,863,799 4,151,388
========== ========== =========== ==========
</TABLE>
See the accompanying notes to these consolidated financial statements.
2
<PAGE> 4
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 1996, And 1995
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,615,316) $(896,779)
----------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Deferred income taxes 62,351
Loss from disposal of fixed assets 26,046 --
Store closure costs 125,000
Depreciation and amortization 102,966 33,639
Changes in assets and liabilities:
(Increase) in accounts receivable (296,565) (19,629)
(Increase) in inventories (6,107) (509,824)
Decrease (increase) in prepaid expenses and other
current assets 61,794 (13,874)
Increase in accounts payable 15,801 192,052
Increase in other accrued expenses 233,600 188,191
----------- ---------
Total adjustments 262,495 (67,094)
----------- ---------
Net cash used in operating activities (1,352,821) (963,873)
----------- ---------
Cash flows from investing activities:
Decrease in deposits 105,357 8,049
Payments for purchases of fixed assets (407,531) (349,184)
Increase in deferred rent 20,724 9,120
----------- ---------
Net cash used in investing activities (281,450) (332,015)
----------- ---------
</TABLE>
See the accompanying notes to these consolidated financial statements.
3
<PAGE> 5
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For Six Months Ended June 30, 1996, And 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from short-term notes $ 300,000 $ 705,803
Proceeds from long-term debt 308,350 --
Principal payments made on long-term debt and (40,055)
capitalized leases (27,750)
Proceeds from issuance of common stock 840,565
Costs associated with issuance of common stock (33,733)
Proceeds from issuance of preferred stock 1,225,000
Costs associated with issuance of preferred stock (122,500)
Proceeds from issuance of convertible notes payable 450,500
Principal payments made on notes payable (85,463)
Payments on notes payable to shareholders (25,547)
Advances received on employee note receivable (18,949)
Payments received on note receivable from stockholder 24,616
---------- ----------
Net cash provided by financing activities 1,988,857 1,511,980
---------- ----------
Net increase in cash and cash equivalents 354,586 216,092
Cash and cash equivalents, beginning of period 135,736 18,136
---------- ----------
Cash and cash equivalents, end of period $ 490,322 $ 234,228
========== ==========
</TABLE>
In March 1995, the Company converted a $500,000 promissory note into
500,000 shares of the Company in connection with the acquisition of HDL
Communications by Bikers Dream, Inc.
In March 1996, the Company converted promissory notes in the amount
of $629,000 into 369,992 shares of common stock of the Company.
In April 1996, the Company converted promissory notes in the amount of
$450,500 into 264,999 shares of common stock of the Company.
See the accompanying notes to these consolidated financial statements.
4
<PAGE> 6
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June, 1996, And 1995
1. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of
normal recurring accruals) to present fairly the financial
information contained therein. These statements do not include all
disclosures required by generally accepted accounting principles and
should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 1995. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the year ending December
31, 1996. Earnings per share were computed by dividing net loss by the
weighed average number of common shares outstanding during the
respective quarters.
2. Company Operations And Liquidity:
Bikers Dream, Inc. (the "Company") was originally incorporated in
1991. As of March 13, 1995, the Company acquired a publicly-traded
dormant entity formerly known as HDL Communications ("HDL") which was
originally incorporated in 1985. After the acquisition, the Company
was merged into HDL and HDL changed its name to Bikers Dream, Inc. At
the time of acquisition, there was no active trading market for the
Company's stock and management of the Company and HDL determined in
arm's length negotiation that the market value of the combined
entities was approximately $4.0 million (or approximately $1.00 per
share) which was evidenced by the number of shares issued (4,100,000)
in connection with the acquisition as follows:
3.3 million shares to former Company shareholders
.3 million shares to former HDL shareholders
.5 million shares to holders of $500,000 of convertible notes of
HDL who converted them into shares of the Company at a price
of $1.00 per share immediately prior to the closing of the
acquisition
At the time of the merger, HDL's assets and liabilities consisted of a
note receivable of $500,000 from the Company and notes payable in the
amount of $500,000. As the notes were converted into shares
concurrent with the acquisition, the .3 million shares issued to
former HDL shareholders were issued in consideration for the public
entity HDL.
The substance of the transaction was a recapitalization of the
Company's shares for those of HDL's shares. Shareholders' equity has
been restated to give retroactive recognition to the recapitalization
and has been treated as a stock split for all periods presented. In
addition, all references in the financial statements to number of
shares and per share amounts of the Company's common stock have been
restated.
The surviving company is in the business of selling previously owned
Harley Davidson motorcycles, parts, accessories, apparel and service
through Company-owned retail stores throughout the United States and
selling franchises based upon the Company concept.
Continued
5
<PAGE> 7
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June, 1996, And 1995
2. Company Operations And Liquidity, Continued:
The Company's consolidated financial statements for the six months
ended June 30, 1996 have been prepared on a going-concern basis which
contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The
Company incurred a net loss of $2,347,693 for the year ended December
31, 1995 and a net loss of $1,615,316 for the six months ended June
30, 1996. As of June 30, 1996 the Company had an accumulated deficit
of $4,098,128. The Company's working capital at June 30, 1996 is
$749,902. The Company experienced an increase in its selling and
administrative expenses of $1,017,310 over the same six month period
last year. This increase was primarily the result of hiring
additional corporate employees to continue the Company's growth, an
increase in audit and legal fees related to the Company becoming an
SEC reporting company, expenses associated with having three
additional company owned stores not yet at their break-even point, and
the launch of a new catalogue.
Management has previously relied upon equity sources to fund
operations as the Company is in its initial growth and expansion stage
and the Company's access to third party financing has been limited.
Access to debt financing has been limited to capital leases entered
into for fixed asset purchases.
The Company has retained an investment banking firm to advise and
assist in the sale of equity securities and or placement of private
debt. Management expects these efforts to result in obtaining
additional financing with which to expand its operations and increase
the number of Company-owned Bikers Dream superstores.
The Company has incurred recurring losses from operations and the
ability of the Company to raise additional funds and ultimately
achieve positive operating cash flows is uncertain and, therefore,
this raises substantial doubt about the Company's ability to continue
as a going concern.
Principles Of Consolidation:
The consolidated financial statements include the accounts of Bikers
Dream, Inc. and all of its wholly-owned subsidiaries, including the
accounts of Bikers Dream International, Inc., Bikers Dream
Distribution, Inc., Bikers Dream Management Services, Inc. and Bikers
Dream Eagle Enterprises, Inc. All significant intercompany accounts
and transactions are eliminated in consolidation.
Continued
6
<PAGE> 8
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
3. Summary Of Significant Accounting Policies:
Revenue Recognition:
Product Sales - Revenue from the sale of products is
recognized at the time of sale to a retail customer.
Financing Income - Financing income is the Company's
commission revenue resulting from certain motorcycle sales.
Such revenue is recognized at the time financing arrangements
are contractually completed between a retail customer and a
third-party lender. The Company recognizes as financing
income 80% of the total commission revenue expected to be
received over the life of the finance contract. This estimate
is based on experience with similar contracts owned by the
third party finance company.
Franchise Income - Income from the sale of franchises is
recognized at the time the franchise commences retail
operations and the Company has performed substantially all of
the services which it is required to perform under the
Company's franchise agreement. These services provided to
franchises include, but are not limited to, assistance in site
selection and in-house and on-site training with instruction
using the Company's franchise operations manual.
Superstore Pre-Opening Costs:
All costs associated with opening a company-owned and operated
Superstore, with the exception of capitalized furniture, fixtures and
equipment, are expensed when incurred.
Advertising Costs:
Those costs associated with placement of advertisements in various
periodicals are expensed when the advertisement is run. Internal
development costs are expensed as incurred.
Catalog Costs:
Internal costs associated with the development of mail order catalogs
are expensed as incurred. External costs, excluding printing,
relating to the development of the catalog are capitalized and
amortized over 12 months from the first publication. Costs associated
with printing catalogs are inventoried when purchased and expensed as
catalogs are sold or distributed.
Continued
7
<PAGE> 9
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
3. Summary Of Significant Accounting Policies, Continued:
Income Taxes:
The Company utilizes Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Net Loss Per Common Share:
The computation of fully diluted net loss per share was antidilutive
in each of the periods presented; therefore, the amounts reported for
primary and fully diluted are the same. Net loss per common share was
determined by dividing net loss by the weighted average shares
outstanding in each period.
Cash And Cash Equivalents:
For purposes of the balance sheet and the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity at date of purchase of three months or less to be
cash equivalents.
Accounts Receivable:
At June 30, 1996, the allowance for doubtful accounts was $33,251.
The balance was $14,911 as of June 30, 1995.
Inventories:
Inventories are valued using a cost method which approximates the
first-in, first-out (FIFO) method at the lower of cost or market. The
entire inventory consists of purchased items which are categorized as
finished goods. At June 30, 1996, the reserve for obsolescence was
$75,000. The reserve at June 30, 1995 was $58,000.
Continued
8
<PAGE> 10
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
3. Summary Of Significant Accounting Policies, Continued:
Property, Equipment And Capitalized Leases:
Property, equipment and capitalized leases are recorded at cost with
depreciation and amortization provided using the straight-line method
over the estimated useful lives of the assets which range from three
to ten years or the term of the lease, whichever is the lesser.
Repairs and maintenance are expensed as incurred. When property and
equipment are retired or disposed of, the related costs and
accumulated depreciation and amortization are eliminated from the
accounts and any gain or loss on such disposition is reflected in
operations.
Deferred Rent:
Deferred rent arises from rent abatements which are negotiated at the
beginning of certain property leases. The total amount of the base
rent payments is being charged to expense on the straight-line method
over the term of the lease. The Company has recorded deferred rent to
reflect the excess of rent expense over the cash payments since the
inception of the lease.
Concentration Of Risk:
The Company is operating in a growing market due to the current
nationwide popularity of Harley Davidson motorcycles. Its future
success is dependent on the continuation of interest in the
recreational motorcycle industry.
Concentration Of Credit Risk:
The Company's cash and cash equivalents are placed with high credit
quality financial institutions. The Company had demand deposits in
excess of Federal Deposit Insurance Corporation ("FDIC") insurance
limits at June 30, 1996.
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. These concentrations are limited due to the large number
of customers comprising the Company's customer base and their
dispersion across different geographic regions. The Company performs
ongoing credit evaluations of customers and generally does not require
collateral. Allowances are maintained for potential credit losses,
and such losses have been within management's expectations. As of
June 30, 1996 and 1995, the Company has no significant concentrations
of credit risk.
Continued
9
<PAGE> 11
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
3. Summary Of Significant Accounting Policies, Continued:
Use Of Estimates In The 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 at
the date of the financial statements, and the reported amounts of
revenue and expenses during the reported period. Actual results could
differ from those estimates.
4. Property, Equipment And Capitalized Leases:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated June 30,
-----------------------
Useful Lives 1996 1995
------------ ---- ----
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 195,841 $ 55,150
Leasehold improvements 7 years 208,579 191,584
Equipment 5-7 years 101,696 43,212
Computers 5 years 270,046 170,546
Autos and trucks 3-10 years 441,053 331,066
---------- --------
1,217,215 491,558
Less, Accumulated depreciation and amortization (192,057) (61,721)
---------- --------
$1,025,158 $429,837
========== ========
</TABLE>
Assessments of whether there has been a permanent impairment in the
value of long-lived assets are periodically performed by considering
factors such as expected future operating results, trends and
prospects, as well as the effects of demand, competition and other
economic factors. The method used is to determine if an impairment has
occurred based upon a change in circumstances regarding the long lived
assets, followed by an analysis of cash flows regarding the assets in
question. If an impairment is determined to have occurred as a result
of the analysis, then the Company recognizes and measures that
impairment using discounted cash flow as provided by FAS 121. Since
the Company has just started many of its retail operations in the last
12 months, historical information is limited in evaluating future
effects. The Company has, however, closed one of its former franchises
which was acquired in late 1995, and as a result, has recorded a write
off of leasehold improvements in the amount of $32,000 and $125,000 of
other costs during the Second Quarter of 1996. Management believes no
further permanent impairment has occurred based upon the information
currently available.
Continued
10
<PAGE> 12
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
4. Property, Equipment And Capitalized Leases, Continued:
The Company leases certain computer equipment under agreements which
are classified as capital leases. These leases have original terms of
two to five years. These leases have bargain purchase options at the
end of the original term. Leased capitalized assets included in
property, equipment and capitalized leases at June 30, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Computers $132,723 $80,803
Less, Accumulated amortization (22,127)
-------- -------
$110,596 $80,803
======== =======
</TABLE>
5. Commitments And Contingencies:
The Company leases all of its operating facilities. The Santa Ana,
California operating facility, which serves as a retail Superstore and
executive offices, is leased under a noncancelable tenant operating
lease for the monthly rent of $11,865 subject to annual CPI increases
starting the third year of the lease. The lease term is 120 months
commencing November 1, 1993 with two successive five-year options.
The Company negotiated a lease at a second Company-owned Superstore in
Dallas, Texas. The terms of the lease call for a monthly rent of
$8,000 subject to CPI increases. The lease term is sixty months
commencing January 1, 1995 with two successive five-year options.
On March 1, 1995, the Company negotiated a lease to open its third
Company-owned Superstore in Clearwater, Florida. The lease term is 60
months commencing June 1, 1995 with the monthly lease payments
starting at $4,000 and increasing up to $9,261 per month through the
term of the lease. The Company has an option to extend the lease for
five years.
Continued
11
<PAGE> 13
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
5. Commitments And Contingencies, Continued:
On September 22, 1995, the Company purchased one of its franchise
stores. The Company assumed the store's lease as part of the
transaction. The lease term is 60 months commencing January 1, 1994
with monthly lease payments starting at $3,500 and increasing up to
$4,410 per month through the term of the lease. As of April 29,1996
this store was closed by the Company with the intention of opening a
larger Superstore in the greater Los Angeles area later in 1996. The
Company is in negotiations with the landlord regarding the termination
of this lease.
On November 21, 1995, the Company purchased another of its franchise
stores. The Company did not assume this lease, but instead issued a
guarantee to the former franchisee to continue its lease payment. The
lease term is 63 months commencing on April 1, 1995 with monthly lease
payments of $3,039 per month. The monthly lease payments increase to
$3,555 per month over the term of the lease.
The Company is involved in litigation arising from the sale of one
franchise and in the ordinary course of business. Although the final
outcome of these legal matters cannot be determined, management has
estimated the Company's loss and accrued for such amount in the
December 31, 1995 financial statements. The final resolution of these
matters could have a material adverse effect on the financial position
and results of operations of the Company.
Continued
12
<PAGE> 14
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
6. Long-Term Debt:
Long-term debt at June 30, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Capitalized lease obligation payable to a finance company,
collateralized by certain computer equipment, requiring
principal and interest payments of $2,272 per month, with
interest at 20% per annum through May 2000 $73,351 $80,804
Capitalized lease obligation payable to a finance company,
collateralized by certain computer equipment, requiring
principal and interest payments of $232 per month with
interest at 16% per annum through January 1998 3,907
Long Term Note Payable to a finance company,
collateralized by a trailer requiring principal and interest
payments of $5,739 per month, with interest at 11% per
annum through February 2002 291,314
Capitalized lease obligation payable to a finance company,
collateralized by certain computer equipment, requiring
principal and interest payments of $937 per month, with interest
at 16% per annum through December 2000 plus a $4,258 payment in 39,529
January, 2001
Long-term note payable to a finance company, collateralized by a
diesel tractor, requiring principal and interest payments of
$1,870 per month, with interest at 10% per annum through January 81,788
2001 -------- -------
489,889 80,804
Less, Current portion (76,151) (0)
-------- -------
Long-term debt, net of current portion $413,738 $80,804
======== =======
</TABLE>
Continued
13
<PAGE> 15
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
7. Notes Payable:
The notes payable at June 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Note payable to lender in monthly installments varying from $457
to 492, including principal and interest at rates varying from 5%
to 7.5%. The note was paid in full in December 1995
$ 54,499
Note payable to former franchisee in conjunction with acquisition
of former franchise operation. The note accrues interest at 9%
and is payable in equal installments of $13,118 through October
1996, collateralized by all the assets of the Company. $ 51,502
Note payable to bank which was assumed in conjunction with the
acquisition of a former franchise operation. The note is
guaranteed by the SBA and is collateralized by all the assets of
the Sacramento store. The note accrues interest at the rate of
prime plus 2-1/2% per annum on the unpaid balance and is payable
in monthly installments through April, 2005. 97,779
Note payable to former franchisee in conjunction with acquisition
of former franchise operation. Note is uncollateralized, non-
interest-bearing and is payable in 24 equal installments of
$1,221 through November 1997. 20,749
M.D. Strategic L.P. due and payable August 31, 1996, with total
interest of $14,000 of which $10,500 is in prepaid assets. 300,000
Convertible notes payable to various lenders under a Note
Agreement dated June 19, 1995, accruing interest at a rate of 8%
per annum, principal and accrued interest due and payable one
year after the date of each note through June 1996. The notes
were converted into shares of common stock of the Company in
August, 1995 at $2.00 per share. 0 625,000
--------- -------
Sub Total 470,030 679,499
Less, Current portion (373,102) (679,499)
--------- ---------
Notes payable, long-term portion $ 96,928 $ 0
========= =========
</TABLE>
Continued
14
<PAGE> 16
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
8. Preferred Stock
In June, 1996, the Company's articles of incorporation were amended to
authorize a new class of Preferred Stock. At that time, the Board of
Directors were given authority, from time to time, to issue such
shares and determine the terms and conditions thereof via a Board
Resolution when the need arose for them to be issued.
The Board of Directors subsequently resolved to issue up to 30 shares
of 10% Convertible Preferred Stock at the price of $175,000 per unit.
Each share of Preferred Stock may be converted into 50,000 shares of
common stock at the rate of $3.50 per common share, at the option of
the holder, at any time following the effective approval date of the
registration of the shares. The Company may call for conversion at any
time after the registration statement becomes effective if (a) the
average closing price of the common shares is $7.50 per share or more
for ten (10) consecutive trading days, or (b) after the third
anniversary of the closing of the private placement of Preferred Stock,
whichever occurs first.
If the holder of the Preferred Stock exercises their conversion
privilege, the adjusted conversion price will be 75% of the greater of
(a) the average of the closing bid price for the common stock for the
ten (10) trading days immediately prior to receipt of notice by the
Company to convert, or (b) the closing bid price on the day
immediately preceding receipt of notification by the Company. If the
adjusted conversion price is lower than $3.50 per share, then the
holders would convert into a greater number of shares based upon the
adjusted conversion price, but in no event shall the conversion price
be less than $1.50 per share.
Each share of Preferred Stock is entitled to an annual common stock
dividend equal to ten (10) percent of the face value of the Preferred
Stock ($17,500) at the closing bid price of the common shares on the
date of declaration. The dividend will be paid each year on the
anniversary date of issuance of the Preferred Stock.
Holders of Preferred Stock will be entitled to receive 50,000 warrants
for each share of Preferred Stock held. The warrants will be issued
six (6) months following the issuance of the Preferred Stock, or at
such earlier date as the Board may approve. Investors who have
converted their Preferred Stock prior to issuance of the warrants
shall not be entitled to such warrants.
Continued
15
<PAGE> 17
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
The warrants have an exercise price of $5.00 per share or such lower
price as the Board of Directors may approve. The warrants will expire
three (3) years following the date of their issuance. The warrants
are callable by the Company after the common stock closes for at least
$7.50 per common share for ten (10) consecutive trading days, after
which the Company must notify the holders of warrants of such
redemption within ten (10) business days. The call price for each
warrant will be $5.00.
9. Related Party Transactions:
In August 1994, Rowland W. Day, II loaned $300,000 to HDL. HDL used
the proceeds from the loan from Mr. Day, along with the proceeds of
other loans from nonaffiliates in the aggregate additional amount of
$200,000, to make a $500,000 collateralized loan to the Company upon
the signing of the Acquisition Agreement. The loan was evidenced by
the Company's noninterest-bearing convertible promissory note which
was converted into shares of the Company's common stock upon
consummation of the acquisition on March 13, 1995 at the conversion
price of $1.00 per share. The Company also agreed to issue warrants
to such nonaffiliates to purchase 200,000 shares of the Company's
common stock at a price of $1.50 per share. The warrants were
converted to 200,000 shares of common stock on September 8, 1995.
In February 1995, Rowland W. Day, II loaned $50,000 to the Company,
the proceeds of which were used to purchase four used Harley-Davidson
motorcycles. The Company repaid the loan and interest thereon in the
amount of $2,000 to Mr. Day in March 1995.
The Company agreed to grant to Rowland W. Day, II and/or his assigns,
upon consummation of the Bikers Dream Acquisition, an irrevocable
three-year option to purchase, at a price of $1.00 per share, 550,000
shares of common stock . Mr. Day has assigned his right to receive
options to purchase 170,000 of such shares to other persons.
The Company has granted options to a Company officer, in connection
with an employment agreement, to purchase 350,000 shares of common
stock at a per share exercise price of $2.50. The options vest over
a five-year period commencing in September 1995. The options expire
10 years following the date of the option grant.
Continued
16
<PAGE> 18
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
9. Related Party Transactions, Continued:
In April 1995, the Company granted options to each of its then current
directors to purchase, at an exercise price of $1.50 per share, 50,000
shares of common stock, which options vest in increments over a
five-year period.
In April 1995, Dennis Campbell, President, Chief Executive Officer and
a director of the Company, loaned $75,000 to the Company, the proceeds
of which were used for working capital. The Company agreed to repay
the loan and interest thereon of $5,000 within 60 days after the date
of the loan. This loan was subsequently paid in full with interest.
On April 6, 1995, the Company entered into a consulting agreement with
Meyer Duffy & Associates, Inc. ("Meyer Duffy") for management
consulting, financial advisory and investment banking services to be
rendered to the Company for six months in consideration of a monthly
fee of 2,500 shares of the Company's common stock, plus travel
expenses, if incurred. This agreement was effective through September
1995, and the 15,000 shares were issued in December 1995 at $2 per
share. Donald Duffy, a member of the Board of Directors of the
Company, is a principal of Meyer Duffy.
The Company has granted nonqualified options to Meyer Duffy to
purchase 30,000 shares of common stock at $2.50 per share. The
options vested at the time of grant for services rendered, and are
exercisable within two years following the date of grant in April
1995.
On August 31, 1995, Dennis Campbell loaned the Company $24,000 on a
demand note at an interest rate of 16% per annum. This note was
reduced by principal payments totaling $3,687 during 1995, and 1996
leaving a balance of $20,313 as of June 30, 1996.
On December 31, 1995, Dennis Campbell loaned the Company $14,547 on
demand at 10% interest. This note was paid in full during January
1996.
On October 1, 1995, the Company entered into a consulting agreement
with Meyer Duffy, which was amended on November 1, 1995, whereby Meyer
Duffy & Associates was retained to provide consulting, financial
advisory and investment banking services for a ten-month term
commencing October 1, 1995. The agreement provides for the payment of
$5,000 per month to Meyer Duffy.
Continued
17
<PAGE> 19
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
9. Related Party Transactions, Continued:
Under the terms of the agreement, Meyer Duffy is to use its best
efforts to obtain a commitment from an investment banking firm to
raise up to $20 million in capital for the Company. The agreement
provides that upon the successful closing of an offering through an
investment banker introduced by Meyer Duffy, the Company will issue an
option to Meyer Duffy to purchase 10,000 shares of the Company's
common stock for each $1 million of capital received by the Company in
such an offering, up to a maximum of 100,000 shares for $20 million in
capital received, and that the option is granted in pro rata
increments, exercisable at a price of $1.70 per share at any time
within two years after the date of completion of a successful
financing pursuant thereto.
In addition, Meyer Duffy is to be compensated by means of an option to
purchase 50,000 shares of the Company's common stock at a price of
$1.70 per share within two years of a grant in consideration of
arranging for bridge financing to the Company in the amount of $1.1
million in convertible debt, and a fee of 5% of all proceeds received
from the bridge financing in excess of $100,000.
On October 17, 1995, William R. Gresher, Senior Vice President, Chief
Financial Officer and a director of the Company, loaned $50,000 to the
Company, pursuant to a note bearing interest at 11% per annum, on
demand, and on October 24, 1995, Mr. Gresher loaned an additional
$10,000 to the Company on the same terms. These notes have not been
paid as of June 30, 1996.
On November 3, 1995, M.D. Strategic L.P., a partnership of which
Donald Duffy, a director of the Company, is a principal, loaned
$100,003 to the Company for 90 days at 8% interest per annum,
receiving notes which are convertible into shares of common stock of
the Company at $1.70 per share on certain conditions related to
proposed asset-based financing of the Company. On December 3, 1995,
M.D. Strategic made an additional loan of $49,997 to the Company, and
on December 5, 1995, a similar loan was consummated in the sum of
$50,000, for convertible notes bearing the same terms and due 90 days
from the funding thereof. These notes were converted on March 14,
1996 into common stock of the Company.
On April 10, 1996 the Company signed a ninety day unsecured loan in
the amount of $300,000 with M.D. Strategic L.P. The loan bears
interest at an annual rate of 14.0%, which was prepaid at the
beginning of the note. This note was extended for 30 days until
August 10, 1996 for additional interest of $3,500 for that period.
Continued
18
<PAGE> 20
BIKERS DREAM, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
June 30, 1996 And 1995
10. Fair Value Of Financial Instruments:
The fair value of the Company's long-term debt and notes payable
approximates the carrying value at June 30, 1996. This estimate is
based on the fact that the majority of the long-term debt and notes
payable were negotiated transactions, and the negotiated interest
rates approximate a market rate at that time.
11. Recently Issued Accounting Standard:
The Financial Accounting Standards Board has issued a Statement of
Financial Accounting Standards No. 123 (FAS 123) entitled "Accounting
for Stock-Based Compensation." Upon adoption of FAS 123 in fiscal
1996, the Company will continue to account for stock- based
compensation in accordance with Accounting Principles Board Opinion
No. 25 and provide disclosure with respect to the fair value of the
Company's options. The Company has not yet determined the impact of
this disclosure on its financial statements.
Continued
19
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in the filing.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated the unaudited income and
expense items.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenue $2,865,500 $1,816,982 $ 5,712,398 $3,249,856
Cost of Goods Sold 2,275,328 1,485,716 4,464,076 2,504,872
Gross Profit 590,172 331,266 1,248,322 744,984
Other (Income) and Expenses
Selling, general and
administrative expenses 1,355,272 999,273 2,562,188 1,544,878
Depreciation and Amortization 58,220 25,823 96,320 33,639
Interest (income) expense 38,405 (384) 81,399 8,598
Franchise income (28,205) (6,500) (32,302) (8,500)
Other expense (income) 156,034 96 156,034 0
---------- ---------- ----------- ----------
Total 1,579,726 1,018,308 2,863,638 1,578,615
Income (loss) Before
provision For Income Taxes (989,554) (687,042) (1,615,316) (833,631)
(Provision) For Taxes (63,151) (63,151)
---------- ---------- ----------- ---------
Net Income (loss) $ (989,554) $ (750,193) $(1,615,316) $ (896,782)
========== ========== =========== ==========
</TABLE>
Continued
20
<PAGE> 22
COMPARISON OF SECOND QUARTERS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
Net revenues for the second quarter ended June 30, 1996 were $2,865,500, an
increase of $1,048,518 or 57.7% from the same period in 1995. The increase in
net revenue is due to the opening of new Company owned Superstores in Dallas,
Texas and Tampa, Florida during 1995 and the acquisition of a former franchise
in Sacramento, California, plus an increase in same store sales of 16.4% between
years. The second quarter 1995 revenues have been restated to reclassify income
from the sale of financing contracts from Cost of Goods Sold to Revenue, a
policy established in the fourth quarter of 1995.
Net sales for the six months ended June 30, 1996 were $5,712,396 which was an
increase of $2,462,542 or 75.8% over the same period ended June 30, 1995. The
increase in net sales is due entirely to the addition of new corporate stores
and the acquisition of two previous franchises.
Total gross profit for the quarter ended June 30, 1996 was $590,172 which was
an increase of $258,906 or 78.1% over the same period in 1995. The increase in
gross profit was due to higher level of sales volumes from the newly opened or
acquired stores in Dallas, Tampa and Sacramento. The gross profit rate for the
quarter ended June 30 was 20.6% compared to 18.2% for the same period in 1995.
The change in gross profit rate was due to a higher sales mix of Company owned
motorcycles versus consignment motorcycles and the increase in revenue related
to the sale of finance contracts which bear no cost of sales. Consignment
motorcycles typically carry a lower gross margin rate that motorcycles owned by
the Company.
Gross profit for the first half of 1996 was $1,248,322, an increase of
$503,338 or 67.6% over the same period in 1995. The gross profit rate for the
first six months of 1996 was 21.8% as compared to 22.9% for the same period
last year. The change in gross profit rate was due to slightly higher sales
mix of consignment versus Company owned motorcycles offset by an increase in
revenue related to the sale of finance contracts which bear no cost of sales.
Selling, general and administrative expenses were $1,355,272 for the quarter
ended June 30, 1996, which represents an increase of $355,499 or 35.6% over
the same period last year. This increase is due to several factors, including
1) the opening of new Company owned Superstores, 2) the launch of the new Dream
Wheels mobile Superstore in March 1996, 3) legal and accounting fees related to
becoming a SEC reporting company, and 4) the increase in executive staff
necessary to continue the Company's growth.
Selling, general and administrative expenses were $2,562,188 for the first six
months of 1996, an increase of $1,017,310 or 65.8% over the same period in
1995. The increase was due to the same reasons outlined above for the second
quarter 1996.
Continued
21
<PAGE> 23
Depreciation and amortization expense was $58,220 for the quarter, which was
$32,397 or 125.5% higher than the same period in the prior year. The increase
was due to the addition of three more Company owned Superstores which were
opened in the last three quarters of 1995, the addition of computers necessary
to bring the advertising and financial functions in house, and the launch of
the Dream Wheels mobile store in March of 1996.
Depreciation and amortization expense was $96,320 for the first six months
ended June 30, 1996. This increase of $62,681 or 186.3% from the same period
last year was due to the same reasons outlined above for the second quarter
ended June 30, 1996.
Franchise income for the quarter ended June 30, 1996 was $28,205 which
represents an increase of $21,705 or 333.9% over that of the preceding year.
This increase is attributed to the opening of new franchises during 1995 and
improved royalty income from franchise sales activities.
Franchise income for the first half of 1996 was $32,302 an increase of $23,802
or 280% over the preceding year. This increase was attributed to the same
reasons outlined above for the second quarter 1996.
Other expense includes a provision of $125,000 for store closing costs.
There was no provision for income taxes in 1996. The Company decided to fully
reserve for the Deferred Tax Asset primarily related to its net operating loss
carry forwards beginning in the second quarter of 1995. The Company's
management has concluded that, based upon its assessment of all available
evidence, the future benefit of this asset cannot be projected accurately at
this time. The major underlying reason which led to this conclusion is the
uncertainty of the Company's ability to raise sufficient debt and equity
capital necessary to expand the number of Company-owned Superstores. The
Company planned to use this additional capital to expand its retail operations
into new locations which would generate more operating income. This additional
operating income from expanded retail trade-related activities would defray
existing centralized corporate overhead costs and generate additional operating
profits to begin utilizing the tax loss carry forwards. As a result of the
current time delays in the Company's ability to raise the amount of additional
capital required, the Company's management believes that the timing of the
income turnaround cannot be predicted with accuracy.
The net loss for the quarter ended June 30, 1996 was $989,554 as compared to a
loss of $750,193 in the same period in 1995. This increase of $239,361 was due
to continued investment by the Company to expand the business through 1) the
opening of new Superstores in various parts of the U.S. in 1995 and 1996, which
have not yet turned profitable 2) the costs associated with becoming an SEC
reporting company, 3) the increase in executive staff to continue growth of
the Company and 4) the provision for store closing costs.
The net loss for the first six months ended June 30, 1996 was $1,615,316 as
compared to a loss of $896,782 for the same period in 1995. This increase of
$718,534 was due to the same reasons outlined above for the second quarter
ended June 30, 1996.
While the Company does not expect inflation to have a material impact upon its
operating results, there can be no assurance that inflation will not affect the
Company's business in the future. The Company expects to
Continued
22
<PAGE> 24
mitigate inflationary increases through securing additional purchase volume
discounts as net sales increase through the opening of future Superstores and
franchises.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied substantially on equity capital to meet its operating
and growth needs until late 1995 when debt in the amount of $281,883 was used
to acquire two former franchises. In early 1996, third party debt was again
used to acquire the Dream Wheels tractor/trailer in the amount of $391,053.
In December 1995 and January 1996 the Company raised $629,000 and $450,500
respectively through the issuance of Convertible Notes. These notes were
converted into shares of the Company's Common Stock in March and April of
1996 at a conversion rate of $1.70 per common share. These funds were used
principally to fund current operating losses and debt service.
In April 1996, the Company received a 90 day loan from MD Strategic, of which
one of the Company's directors is a principal, in the amount of $300,000 to
meet its additional cash needs for operating losses and debt service. This note
was extended until August 31, 1996.
In addition, the Company retained an investment banking firm in April 1996 to
advise and assist in the sale of additional equity securities. The securities
offered, principally to Institutional Investors, are convertible preferred
stock with warrants to purchase additional common shares at the purchase price
of $175,000 per unit aggregating $5,250,000. Through August 8, the Company has
sold 7 units and received $1,102,500 net of commissions.
The Company at the present time needs approximately $6,000 to $7,000 per day to
meet its operating and debt service needs. The Company is in active discussions
with several sources of additional capital, both debt and equity capital, but
there can be no assurance that funds will be procured from these sources at
this time. If the Company is not able to continue to generate additional debt
or equity capital to expand its retail operations and open profitable stores,
it will be necessary to evaluate various alternative actions to improve the
cash flow of the Company, including but not limited to:
- Addition of more company owned motorcycles for sale in retail
stores by becoming an authorized dealership for newly
manufactured motorcycles to improve product mix and gross
profit ratio,
- Increase frequency of promotional events to generate more
product sales,
- Hiring an experienced COO with extensive retail background to
enhance retail store performance,
- Evaluate non-retail related revenue streams available to the
Company including royalties from licensing fees relating to the
Company name,
- Promotional efforts to increase the number of franchises and
the corresponding royalty payments, as well as their purchases
of product from the Company,
- Reduction in executive compensation and the number of Company
executives,
- Reductions in operating store and corporate personnel,
- Reductions in insurance premiums through the increase in
deductibles and decrease in excessive coverage,
- The shutdown or sale of unprofitable retail stores if revenue
enhancement and/or cost reduction actions cannot make them
profitable.
Management believes that no single action will result in a turnaround to
positive cash flow, and as a result multiple opportunities are actively being
pursued by management as well as the Company's Board of Directors.
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 490,322
<SECURITIES> 0
<RECEIVABLES> 616,208
<ALLOWANCES> (33,251)
<INVENTORY> 1,663,567
<CURRENT-ASSETS> 2,806,147
<PP&E> 1,217,215
<DEPRECIATION> (192,057)
<TOTAL-ASSETS> 3,907,099
<CURRENT-LIABILITIES> 2,060,245
<BONDS> 0
0
1,102,500
<COMMON> 4,212,718
<OTHER-SE> (4,098,128)
<TOTAL-LIABILITY-AND-EQUITY> 3,907,099
<SALES> 5,552,689
<TOTAL-REVENUES> 5,712,398
<CGS> 4,464,076
<TOTAL-COSTS> 2,863,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33,251
<INTEREST-EXPENSE> 81,399
<INCOME-PRETAX> (1,615,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,615,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,615,316)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
