<PAGE> 1
U.S SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1997.
[ ] 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.
(Name of small business issuer in its charter)
California 33-0140149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1420 Village Way, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (714) 835-8464
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer had revenues of $14,924,987 for the fiscal year ended December 31,
1997
The aggregate market value of the voting stock held by non-affiliates on March
31, 1998 was approximately $15,295,968 based on the average of the bid and asked
prices of the issuer's Common Stock in the over-the-counter market on such date
as reported by the OTC Bulletin Board. As of March 31, 1998, 2,538,844 shares of
the issuer's Common Stock were outstanding, 3 shares of the issuer's Series A
Preferred Stock and 6,481,385 shares of the issuer's Series B Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's report on Form 8-K dated January 6, 1997: Part II
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL BUSINESS DEVELOPMENTS
The Company, which was formerly known as HDL Communications, was incorporated in
California in October, 1985. The Company was engaged in the publishing business
until June, 1989, when it acquired Bikers Dream, Inc., a California corporation
engaged in the sales and service of used Harley-Davidson motorcycles. Prior to
its acquisition of Bikers Dream, Inc., the Company effected a 1 for
1,363.341473 reverse split of its outstanding Common Stock. After the
acquisition, Bikers Dream, Inc. was merged into HDL Communications and HDL
Communications changed its name to Biker Dream, Inc. For accounting purposes,
Bikers Dream, Inc. is considered to be the acquirer of HDL Communications.
In September 1996, the Company formed a joint venture with Mull Acres
Investments, Inc. ("MAI"), whose Ultra Kustom Cycles division in Riverside,
California, manufactured custom V-twin motorcycles and show-bikes. The joint
venture was formed to act as the exclusive distributor of Ultra Kustom Cycles
with exclusive rights to all direct retail sales of Ultra Kustom Cycles in
Southern California, Sacramento, California, and Dallas, Texas. In connection
with the formation of the joint venture, the Company granted an option to Mull
Acres Investments, Inc. to purchase 500,000 shares of Common Stock at a price of
$8.25 per share (as adjusted for the Company's reverse split, see "Submission of
Matters to a Vote of Security Holders"). In February 1997, the Company, through
its wholly owned subsidiary, Ultra Acquisition Corporation, a Nevada corporation
("UAC") purchased from MAI certain assets, including equipment and inventory, of
MAI's Ultra Kustom Cycles and Ultra Kustom Parts divisions that had been used in
connection with the manufacture, distribution and sale of motorcycles and
motorcycle parts and accessories.
BUSINESS OF BIKERS DREAM
The Company operates in two divisions: Motorcycle Manufacturing and Distribution
and Retail Stores.
MOTORCYCLE MANUFACTURING AND DISTRIBUTION
Motorcycle Manufacturing and Distribution ("Motorcycle") consists of the
Company's wholly-owned subsidiary, UAC. The Motorcycle division designs,
manufactures and sells heavyweight cruiser motorcycles. The Motorcycle division
manufactures motorcycles at an assembly facility in Riverside, California.
Marketing, sales and administrative offices are also located in Riverside,
California.
The Motorcycle division currently offers seven models under the Ultra Kustom
Cycles name ("Ultra"); the "Groundpounder", the "Jackhammer", the "Patriot", the
"Legacy", the "Cruiser", and the "Wide Drive Series" I & II. All Ultra models
emphasize S&S engines, custom paint, enhanced customization and higher
performance to appeal to each customer's desire. Through March 31, 1998, all
Ultra cycles were sold with a twelve-month, twelve thousand-mile warranty. On
April 1, 1998, the Motorcycle division introduced a four-year, unlimited mileage
warranty for all models.
The major product categories for Ultra Kustom Parts are customized parts,
replacement parts and rider accessories. Parts in these product categories are
being developed and enhanced as the Motorcycle division increases production
capabilities.
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The Motorcycle division distributes its products through a distribution network
of twenty-five Bikers Dream Superstores and twenty-three Ultra Kustom Cycle
dealers. The Company has marketed its dealer program primarily by advertising
in motorcycle and specialty magazines, trade shows and industry gatherings. Each
dealer receives an exclusive territory. The Company provides dealers with
product training and other operational and marketing assistance.
The Motorcycle division competes in the heavyweight cruiser motorcycle
marketplace. Heavyweight cruiser motorcycles are in high demand in the U.S.
While annual overall motorcycle unit sales in North America have remained
stagnant at just over 300,000 units since 1990, heavyweight cruiser motorcycle
sales have grown from 78,000 units in 1990 to over 200,000 units in 1997. This
growth has been led by Harley-Davidson, Inc. which, according to their 1996 10K,
controls approximately 48% of the heavyweight motorcycle market. Based on
industry reports, the Company estimates the total retail sales volume for the
U.S. motorcycle market exceeds $5 billion annually (including motorcycles,
parts, accessories and service). The Company believes the heavyweight cruiser
motorcycle segment, including related parts, accessories and service, accounts
for over 60% of the U.S. motorcycle market.
The U.S. heavyweight cruiser motorcycle market is highly competitive. The
Company's major competitors generally have substantially greater financial and
marketing resources than those of the Company. Many of the Company's principal
competitors have greater sales volume than the Company, a larger number of
distribution outlets and dealers, and are more diversified than the Company.
RETAIL STORES
The Retail Stores division operates four Company-owned Bikers Dream Superstores
and licenses its name to twenty-one independent dealers. The Company and
licensed Superstores sell Ultra Kustom Cycles and other new and used heavyweight
cruiser motorcycles complemented by a full range of after-market parts,
accessories and service. The Company is not a licensed Harley-Davidson dealer
and does not sell new Harley-Davidson motorcycles or buy any products or
services directly from Harley-Davidson Motor Company.
The Company-owned Superstores are located in San Diego, California, Santa Ana,
California, Sacramento, California and Dallas, Texas. Licensed Superstores serve
markets not currently served by the Company-owned Superstores and are located
throughout the U.S. and include two international locations.
The Retail Stores division also operates "Dream Wheels", which functions as a
mobile retail store. "Dream Wheels" is a 53-foot tractor/trailer which travels
the U.S. to promote and market the Company's dealers and motorcycles,
accessories and apparel to motorcycle enthusiasts at nationally acclaimed events
such as Daytona Bike Week, Sturgis, Laconia and the Laughlin River Run.
Each Superstore features a large showroom for the display of merchandise,
warehousing for inventory and a repair and service department. The Company-owned
Santa Ana Superstore also contains administrative and dealer training offices.
The showroom is organized to allow variations in location of the displays to
accommodate customer traffic flow within the store and heighten customer
interest. The service area houses a staff of mechanics and service personnel to
accommodate customer service and warranty needs. The forward area of the
showroom is reserved for the display of new Ultra's as well as other motorcycles
carried for sale.
Larger Superstores are approximately 10,000 square feet in size, while smaller
Superstores are approximately 4,000 to 6,000 square feet. Management believes
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the Bikers Dream Superstores compare favorably with many of the independent
retailers of heavyweight cruiser motorcycles. The independent retailers are
usually smaller shops, ranging in size from approximately 1,500 to 4,000 square
feet, which limits space for display of motorcycles and accessories.
The Company's Superstores stock and sell an extensive range of after-market
products for the motorcycle enthusiast. Many of these products are not offered
by independent motorcycle retailers who typically carry a limited range of
products for a variety of motorcycles.
The Company has supply arrangements with most of the major motorcycle
after-market parts and accessory suppliers. Under these arrangements, the
Company's Superstores, including dealers if they qualify, receive quantity
discounts, allowing the Superstores to purchase goods more affordably. Parts and
accessories are purchased from numerous suppliers, with no supplier, excluding
the Company's Motorcycle division, accounting for more than 10% of sales.
Management believes that the loss of any supplier would not have a material
adverse effect on the Company because other suppliers could be relied upon to
meet the Company's requirements at a comparable cost.
The service department of each Superstore performs service work on most cruiser
motorcycles, including Ultra Kustom Cycles, Harley-Davidson and other
heavyweight cruiser motorcycles. The service department also performs safety
checks on all motorcycles sold and warranty work on authorized brands including
Ultra. The service department can also install parts and accessories sold in the
Superstore.
The market in which Bikers Dream Superstores compete is highly competitive. The
main sources of competition are the Harley-Davidson Company and the licensed
Harley-Davidson motorcycle dealer network, which primarily sell new
Harley-Davidson motorcycles, accessories and parts. Other competitors include
the 10,000+ motorcycle retail outlets located throughout the U.S.
which provide aftermarket parts, services and accessories.
PATENTS, LICENSES AND TRADEMARKS
The Company has no patents. The Company currently licenses the "Bikers Dream"
name for dealer use. The Company has obtained a service mark registration in the
United States for the mark "Bikers Dream". The Company has also trademarked the
name of several motorcycle models.
REGULATION
The Company's operations are subject to regulation, supervision and licensing
under various federal, state and local statutes, ordinances and regulations.
Federal and state authorities have various environmental control requirements
relating to air and noise pollution which affect the business and operations of
the Company. The Company's motorcycles are subject to certification by the U.S.
EPA for compliance with applicable emissions and noise standards and by the
state of California Air Resources Board with respect to more stringent emissions
standards. The Company's motorcycle products also must comply with the National
Highway Traffic Safety Administration's standards. Management believes that it
maintains all requisite licenses and permits and is in compliance with all
applicable federal, state and local laws and regulations.
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EMPLOYEES
As of December 31, 1997, the Company had 110 full time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's operations are conducted in leased facilities located in
California and Texas. Its executive offices are located in Santa Ana and
Riverside, California. The following table describes the general character of
the existing facilities as of April 1, 1998:
<TABLE>
<CAPTION>
SQUARE LEASE APPROXIMATE
LOCATION PRIMARY FUNCTION FEET EXPIRES MONTHLY RENT
- -------- ---------------- ------ ------- ------------
<S> <C> <C> <C> <C>
Santa Ana, CA Executive Offices & 12,107 2003 $12,900
Retail Superstore
Dallas, TX Retail Superstore 10,000 1999 $ 8,100
Sacramento, CA Retail Superstore 10,480 2000 $ 3,315
San Diego, CA Retail Superstore 6,935 2001 $ 5,710
Riverside, CA Motorcycle Assembly 20,487 1999 $ 9,115
Riverside, CA Administration 3,200 1998 $ 2,280
</TABLE>
While the Company believes that its current facilities are adequate for its
immediate needs, future expansion of motorcycle production and distribution may
necessitate expansion of the assembly facilities, sales and administrative
support and executive offices. In the opinion of the Company's management, the
facilities are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising out of its
operations in the normal course of business. As of the date of this report the
Company is not a party to any material pending legal proceeding other than the
proceeding described below.
David Bogert, Brenda Bogert and Bikers Dream of North Carolina, Inc. (the
"Plaintiffs") filed an action against the Company on February 28, 1996 in the
General Court of Justice, Superior Court Division, of Catawba County, North
Carolina claiming violation by the Company of the requirements of the Federal
Trade Commission Rule and the requirements of the North Carolina Business
Opportunity Sales Statute in connection with the Company's sale of a franchise
to the Plaintiffs in June 1994, as well as breach of contract. The Plaintiffs
were seeking recovery of all sums paid to the Company, a sum in excess of
$10,000 for breach of contract and a sum in excess of $10,000 for punitive
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damages. In December 1996, the Court dismissed the case pursuant to a provision
in the License Agreement regarding arbitration of disputes. Arbitration
commenced in December 1997 and is currently scheduled to continue in May 1998.
The Harley Davidson Motor Company ("Harley-Davidson") filed an action against
the Company in January 1997, in the U.S. District Court, District of California,
for alleged trademark infringement, trade dress infringement, unfair competition
and related claims. The Company and Harley-Davidson reached a settlement in
April of 1998, which will require the Company to make certain model name
changes, modify certain parts on certain models, and pay damages approximating
Harley-Davidson's legal fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 17, 1997, the Company solicited shareholders' consent to effect a
one-for-five reverse split of the Company's common stock. By January 22, 1998,
the Company had received consents representing 9,743,392 shares of the common
stock, exceeding the 9,587,805 required for approval of the reverse split. The
Company effected the reverse split on February 5, 1998.
PART II
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and quoted
on the National Association of Securities Dealers Electronic Bulletin Board
("OTC Bulletin Board") under the symbol "BIKR" (the current symbol is "BIKRD" to
reflect the Company's recent reverse split). It was previously traded under the
ticker symbol "HOGS" until December 29, 1995 when it was changed to the current
"BIKR" symbol. There was no active trading market for the Company's Common Stock
prior to March 23, 1995. To date, the volume of trading in the Common Stock has
been limited and, therefore, the market prices for the Common Stock may not
accurately reflect the value of the Company. The following table reflects the
high and low bid prices of the Company's Common Stock as adjusted for the
Company's recent reverse split, as reported by the OTC Bulletin Board from
January 1, 1996 to March 31, 1998. Such prices are inter-dealer quotations
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
<TABLE>
<CAPTION>
1996 LOW HIGH
<S> <C> <C>
First Quarter $ 8.13 $17.50
Second Quarter $10.63 $16.25
Third Quarter $ 7.50 $15.31
Fourth Quarter $ 9.38 $16.25
1997 LOW HIGH
First Quarter $ 3.75 $10.78
Second Quarter $ 3.13 $ 9.22
Third Quarter $ 4.22 $ 8.59
Fourth Quarter $ 3.75 $ 5.00
</TABLE>
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<TABLE>
<CAPTION>
1998 LOW HIGH
<S> <C> <C>
First Quarter $ 4.00 $ 4.20
</TABLE>
To date, the Company has not paid any cash dividends on its Common Stock.
As of December 31, 1997, there were approximately 1,269 shareholders of record
of the Company's Common Stock.
During the fiscal year ended December 31, 1997, the Company sold securities that
were not registered under the Securities Act of 1933 as follows (adjusted to
reflect the Company's recent reverse split):
In a private offering in January 1997, the Company sold $2,210,000, 12%
promissory notes. The promissory notes plus accrued interest were subsequently
converted into 2,377,223 shares of Series B preferred stock. In connection with
the issuance of the promissory notes, the Company issued 221,000 Series C
warrants ("C Warrants"). Each C Warrant entitles the holder to the right to
purchase one share of the Company's common stock at $5 per share. In September
1997, certain holders of C Warrants exercised 125,000 C Warrants to purchase
125,000 common shares for $484,375. The issuance of such securities was exempt
under Section 4(2) of the Securities Act of 1933, and Regulation D promulgated
thereunder.
In January of 1997, the Company issued a $2,700,000 senior secured promissory
note to MAI as partial consideration for the purchase of the motorcycle and
parts manufacturing assets of Ultra Kustom Cycles. In June 1997, MAI exercised
274,000 common stock options at $5 per share by reducing the principal amount of
the $2,700,000 senior secured promissory note due from the Company by
$1,370,000. In September 1997, MAI converted the balance of the senior secured
promissory note, $1,330,000, into 1,330,000 shares of Series B preferred stock.
In June 1997, the Company sold $2,710,000, 9.75% convertible promissory notes.
The notes, plus accrued interest were subsequently converted into 2,774,162
shares of Series B preferred stock. In connection with the issuance of the
promissory notes, the Company issued 273,501 Series E Warrants ("E Warrants").
Each E Warrant entitles the holder to the right to purchase one share of the
Company's common stock at $5.00 per share. The issuance of such securities was
exempt under Section 4(2) of the Securities Act of 1933, and Regulation D
promulgated thereunder.
In October 1997, in an exempt transaction under Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder, holders of certain options
exercised options to purchase 216,000 common shares of the Company's common
stock for $756,000.
During 1997, the Company issued; 13,000 common shares for the settlement of
legal matters, 4,333 common shares as bonuses to employees, and 35,391 common
shares in exchange for services rendered to the Company. The issuance of such
securities was exempt under Section 4(2) of the Securities Act of 1933, and
Regulation D promulgated thereunder.
In November 1997, the Company received a $2.5 million, 12% term loan ("Term
Loan") from Tandem Capital. In connection with the Term Loan, the Company issued
Tandem 87,500 warrants to purchase 87,500 shares of the Company's common stock
at $5 per share. The grant of such warrants was exempt under Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in or incorporated by reference into this report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general business conditions, including a worsening
economy which might slow the overall demand for the Company's services, economic
conditions which may adversely affect sales of or demand for the Company's
motorcycles; government action or regulation which may affect the Company's
industry as a whole; competitive factors, including the entry of new competitors
or the failure to obtain new customers; loss of executive management or other
key employees; the effects of changes in costs and availability of parts,
supplies or insurance coverage; the effects of changes in compensation or
benefit plans; adverse result in significant litigation matters; and other
factors referenced herein.
GENERAL
From 1990 until 1996, the Company operated primarily as a motorcycle superstore
retailer. Prior to 1997 the Company was attempting to establishing a network of
franchised Bikers Dream Stores, but suspended such efforts at the end of 1996.
In 1997 the Company established the Motorcycle division, by completing the
acquisition of the motorcycle and parts manufacturing assets of Ultra Kustom
Cycles. During 1997 a significant amount of the Company's resources were devoted
to restructuring and repositioning the Company from a retailer to a premier
custom motorcycle manufacturer and distributor. The franchising program was
replaced by a rapidly growing worldwide network of Bikers Dream Superstores and
Ultra dealers. Bikers Dream Superstore dealers are modeled after the
Company-owned Superstores and are expected to be located throughout the United
States and the world to service the markets not directly serviced by large
Company-owned Superstores.
The Company hired a new President and Chief Executive Officer in 1997, Herm
Rosenman, who brings significant management and business experience to the
Company (see "Directors and Executive Officers"). The Company also restructured
its balance sheet during 1997, converting a substantial portion of its debt to
equity. In October 1997, the Company secured a $2.5 million term loan from
Tandem Capital, which provided necessary capital to continue the further
development and expansion of the Company's Motorcycle division.
RESULTS OF OPERATION
The following table sets forth for the period indicated, the income and expense
items for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net Revenues $ 14,924,987 $ 8,996,659
Cost of Goods Sold 14,296,108 7,889,271
Gross Profit 628,879 1,107,388
Expenses
Selling, general and administrative 4,584,294 4,550,744
Depreciation and amortization 461,786 197,476
Franchise income -- (34,290)
Loss on closure of stores -- 166,634
Equity in loss of Ultra Bikes, LLC -- 16,145
Total Expenses 5,046,080 4,896,709
Operating Loss (4,417,201) (3,789,321)
Other Expense
Interest expense (592,076) (169,731)
Other expense, net (107,707) (70,316)
Total other expense (699,783) (240,047)
Loss before provision for income tax (5,116,984) (4,029,368)
Provision for income taxes 800 800
Net loss (5,117,784) (4,030,168)
Basic loss per share 2.54 2.95
Diluted loss per share 2.54 2.95
Weighted-average shares outstanding 2,018,075 1,364,818
</TABLE>
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COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net revenues for the year ended December 31, 1997 ("1997") were $14,924,987, an
increase of $5,928,328, or 65.9%, from the year ended December 31, 1996
("1996"). The increase in net revenues is primarily attributable to the
Motorcycle division, which was not part of the Company in 1996 and higher Retail
division sales. The Motorcycle division produced revenue of $9,174,641 in 1997.
The Retail Stores division generated revenue of $10,221,541 in 1997,an increase
of $1,224,882, or 13.6%%, compared to $8,996,659 in 1996.
Gross Profit for 1997 was $628,879 a decrease of $478,509, or 43.2%, compared to
1996. The gross margin in 1997 was 4.2% compared to 12.3% in 1996. The decrease
in gross profit and gross margins in 1997 were due to the Motorcycle division,
which experienced negative gross profit of $563,613 in 1997 and lower gross
profit from the Retail Stores division and an inventory reserve of $665,000. The
losses experienced in the Motorcycle division are primarily attributable to 1)
an inventory reserve of $515,000 related to parts exchange inventory and slow
moving inventory, 2) inefficiencies in production labor and overhead relative to
the amount of motorcycles produced. The decrease in gross profit in the Retail
Stores division is primarily related to an inventory reserve of $150,000 related
to slow moving inventory.
Selling, general and administrative expenses were $4,584,294 for 1997, an
increase of $33,550, or 0.7% from 1996. The increase is primarily due to the
selling, general and administrative expenses incurred from the Motorcycle
division, which was not a part of the Company in 1996, offset by the selling,
general and administrative expenses incurred by the Retail division.
Depreciation and amortization expense was $461,787 for 1997, which represents an
increase of $264,311, or 133.8%, from 1996. The increase in depreciation and
amortization was solely due to depreciation and amortization of $282,983 from
the Motorcycle division, which was not part of the Company in 1996, offset by
lower depreciation and amortization of $18,672 in the Retail Stores division.
The Company did not recognize any franchise income in 1997, compared to $34,290
in 1996. The decrease in franchise income is related to the indefinite
suspension of franchising.
Other expenses increased by $459,736, or 191% to $699,783 in 1997 from $240,047
in 1996. The increase was primarily due to short-term financing costs.
Loss before provision for income tax increased by $1,087,616, or 27%,to
$5,116,984 in 1997, from $4,029,368 in 1996.
Net losses for 1997 were $5,117,784, an increase of $1,087,616 or 94%, from
$4,030,168 in 1996. The increase in net losses primarily resulted from losses
incurred from the Motorcycle division, of $2,529,738, offset by lower losses
experienced in the Retail Stores division.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has relied substantially on equity or debt financing to meet its
operating capital needs. The Company is pursuing a strategy to increase its
motorcycle production capacity with a goal of having the capacity to manufacture
in excess of 5,000 units annually by the year 2000. The Company's strategy
includes the establishment of a new manufacturing facility in 1999. The Company
expects to significantly expand its distribution network through additional
Bikers Dream Superstore and Ultra dealers and one new Company-owned superstore.
In a private offering in January 1997, the Company sold $2,210,000, 12%
promissory notes. The promissory notes plus accrued interest were subsequently
converted into 2,377,223 shares of Series B preferred stock. In connection with
the issuance of the promissory notes, the Company issued 221,000 Series C
Warrants ("C Warrants"). Each C Warrant entitles the holder to the right to
purchase one share of the Company's common stock at $5 per share. In September
1997, certain holders of C Warrants exercised 125,000 warrants to purchase
125,000 common shares for $484,375.
In January of 1997, the Company issued a $2,700,000 senior secured promissory
note to MAI as partial consideration for the purchase of the motorcycle and
parts manufacturing assets of Ultra Kustom Cycles. In June 1997, MAI exercised
274,000 common stock options at $5 per share by reducing the principal amount of
the $2,700,000 senior secured promissory note due from the Company by
$1,370,000. In September 1997, MAI converted the balance of the senior secured
promissory note, $1,330,000, into 1,330,000 shares of Series B preferred stock.
In June 1997, the Company sold $2,710,000, 9.75% convertible promissory notes.
The notes, plus accrued interest were subsequently converted into 2,774,162
shares of Series B preferred stock. In connection with the issuance of the
promissory notes, the Company issued 273,501 Series E warrants ("E Warrants").
Each E Warrant entitles the holder to the right to purchase one share of the
Company's common stock at $5.00 per share.
In October 1997, holders of certain options exercised options to purchase
216,000 common shares of the Company's common stock for $756,000. In November
1997, the Company received a $2.5 million, 12% term loan ("Term Loan") from
Tandem Capital. In connection with the Term Loan the Company issued Tandem
warrants to purchase 87,500 shares of the Company's common stock at $5 per
share.
The Company's manufacturing and distribution strategy for the future may require
additional equity and/or debt financing in 1998. If the Company requires such
equity or debt financing it will raise such additional financing through a
combination of additional equity financing, including private placements and/or
a secondary offering of the Company's common stock, and long term or short term
debt financing, including loans from banks or other financial entities or debt
instruments issued by the Company. Debt instruments may involve restrictive
covenants that address interests different than those of the Company's
shareholders. There can be no assurance that the Company will have the ability
to fund its capital requirements through additional equity and/or debt financing
if and when it is needed or that, if available, such financing will be on terms
acceptable to the Company or its shareholders.
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SEASONALITY
Generally, the Company's Motorcycle division exhibits a moderate level of
seasonality as dealer demand for motorcycles tend to increase in the second and
third quarters as motorcycle sales are greatest in the spring and summer months.
The Company's Retail Store division experiences seasonality on the second and
third quarters due to the peak in the riding season in the spring and summer.
INFLATION
The Company believes that the relatively moderate rates of inflation in recent
years have not had a significant impact on its net revenues or profitability.
YEAR 2000
As of the date of this report, the Company estimates the costs of the Year 2000
problem to be immaterial.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR F-1
FOR THE YEAR ENDED DECEMBER 31, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR F-2
FOR THE YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENT OF OPERATIONS F-4
CONSOLIIDATED STATEMENTS OF SHAREHOLDERS EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in accountants was previously reported in a report on Form 8-K dated
January 6, 1997. There were no disagreements with the Company's prior
accountants over accounting or reporting matters.
11
<PAGE> 12
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The Company's officers and directors consist of the following persons:
<TABLE>
<CAPTION>
Name Office
- -------------- -----------------
<S> <C>
Herm Rosenman CEO, President
Anne Todd Controller and Secretary
Donald Duffy Chairman, Director
Humbert Powell Director
John Russell Director
Terrence Quinn Director
</TABLE>
Herm Rosenman, age 50, was elected President , CEO and Director in September
1997. Mr. Rosenman was previously CEO of RadNet from 1994 to 1997, a $125
million in revenue healthcare provider. From 1991 to 1995, he was President and
CEO of Ireland Coffee, an upscale coffee chain he founded in a joint venture.
From 1988 to 1991, Mr. Rosenman was CFO of Rexene, a plastics and petrochemicals
manufacturer. Prior to 1988, Mr. Rosenman was a partner at Coopers & Lybrand for
10 years and worked for 20 years, where he served clients in many industries,
including manufacturing, telecommunications, pharmaceuticals, and construction.
Mr. Rosenman is also on the board of directors of Integrated Intelligence
Corporation, an internet software provider. He received a B.B.A. from Pace
University and a M.B.A. from the Wharton School of Business.
Anne Todd, age 30, was named Controller and appointed Corporate Secretary in
1997. Ms. Todd was previously Assistant Controller for the Company from 1995 to
1997. Prior to joining the Company she was assistant controller for American
Standard from 1990 to 1995.
Donald Duffy, age 30, is a founder and principal of Meyer, Duffy & Associates,
Inc., an investment management and strategic consulting group based in New York.
Meyer, Duffy & Associates has been instrumental in the financing and development
of several companies. Mr. Duffy has served in a variety of investment management
and analytical positions specializing in research and investments in retail,
gaming and technology companies.
Humbert Powell, III, age 57, is an associate with Sanders, Morris and Mundy, an
investment banker and broker/dealer. Since 1966, Mr. Powell has served in
various corporate finance and investment banking capacities including Chairman
of Marleau, Lemire USA, Senior Managing Director of Bear Stearns and Senior Vice
President of E.F. Hutton. Mr. Powell is also a director of Tatham Offshore Corp.
and Salem-Teiko University.
John Russell, age 47, was elected to the board of directors in 1997. Mr. Russell
is President of the Ducati Owners Club Northeast and owns and operates a fine
arts business. Mr. Russell has over twenty years of retail experience and an
extensive background managing, supervising and consulting in motorcycle related
businesses.
Terrence Quinn, age 42, was elected to the board of directors in 1997. Mr. Quinn
is a portfolio manager at Crestwood Capital Partners, L.P., an affiliate of
Furman Selz LLC. Mr. Quinn has an extensive background in asset management and
investment research including being named an Institutional Investor All-Star
Analyst for ten consecutive years.
12
<PAGE> 13
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1997 and 1996, respectively, to the Company's Chief Executive
Officers and Controller during such period. Where applicable, the figures set
forth below have been adjusted to reflect the Company's recent reverse split.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------- ----------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options/SARS
- --------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Herm Rosenman, CEO/President 1997 $38,750 0 0 460,000
(1)
Anne Todd, Controller/Secretary 1997 $40,000 0 0 8,000
(2) 1996 $35,000
Donald Duffy, Chairman 1997 0 0 (5)
(3) 1996 0 0 40,000
Rowland Day II 1996 0 0 0 40,000
(4)
Dennis Campbell 1996 $82,000 0 0 50,000
(6)
</TABLE>
(1) Herm Rosenman was appointed CEO and President in September 1997.
(2) Anne Todd was appointed Controller in June 1997.
(3) Donald Duffy resigned as CEO in September 1997.
(4) Rowland Day resigned as Co-CEO and Director in 1997.
(5) Mr. Duffy is entitled to receive a motorcycle valued at not more than
$20,000.
(6) Dennis Campbell resigned as Chairman, CEO and Director in 1996.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted 1997 ($/Share) Date
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Herm Rosenman 460,000 97% $4.00 2002
Anne Todd 8,000 2% $4.00 2002
</TABLE>
13
<PAGE> 14
AGGREGATE OPTION EXERCISES IN
FISCAL YEAR ENDED DECEMBER 31, 1997 AND OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Shares Underlying Unexercised In The Money Options
Acquired On Value Options at 12/31/97 at 12/31/97 (1)
Name Exercise Realized Exercisable Un-exercisable Exercisable Un-exercisable
- ---- -------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Herm Rosenman 0 -- 0 460,000 0 0
Anne Todd 0 -- 8,000 0 0 0
</TABLE>
(1) The value of the Company's common stock for the purposes of the
calculation was based upon the average of the bid and ask prices for the
Company's common stock on December 31, 1997, as reported by the OTC
Bulletin Board, minus the exercise price.
The Company entered into a five year employment agreement with Herm Rosenman in
September, 1997, pursuant to which Mr. Rosenman is employed as President and
Chief Executive Officer of the Company. The Company agreed to grant 460,000
options to Mr. Rosenman at a price of $5.00 per share which vest over a period
of five years. The Company also agreed to issue Mr. Rosenman 10,000 shares of
common stock per year over the first three years of his employment contract.
The Company has a non-qualified stock option plan for its directors (the "Plan")
and has reserved a total of 60,000 shares of common stock to be issued upon
exercise upon exercise of options granted under the Plan. As of March 31, 1998,
there were options outstanding under the Plan to purchase a total of 60,000
shares of common stock and no options granted under the Plan have been
exercised.
14
<PAGE> 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of Common
stock as of December 31, 1997, by each director of the Company, each person
known by the Company to be the beneficial owner of more than five percent of the
common stock, and all of the directors and executive officers of the Company as
a group, excluding in each case rights to options or warrants not exercisable
within 60 days. All persons named have sole voting power and investment power
over their shares except as otherwise noted. The figures set forth below have
been adjusted to reflect the Company's recent reverse split.
<TABLE>
<CAPTION>
Title Name and Address of Number of Shares
Of Class Beneficial Owner Owned Percent of Class (10
- ------------- -------------------------------- ------------------ --------------------------
<S> <C> <C>
Common Stock Herm Rosenman (2) 508,001(3) 13.0%
1420 Village Way
Santa Ana, CA 92705
Common Stock Anne Todd 9,000(3) *
1420 Village Way
Santa Ana, CA 92705
Common Stock Donald Duffy (4) 54,600 (5) 1.4%
Meyer, Duffy & Associates
237 Park Avenue, NY, NY 10017
Common Stock Humbert Powell(6) 10,000 (7) *
712 Fifth Avenue, 11th Floor
NY, NY 10019
Common Stock Terrence Quinn(6) 10,000 (7) *
1420 Village Way
Santa Ana, CA 92705
Common Stock John Russell (6) 10,000 (7) *
1420 Village Way
Santa Ana, CA 92705
Common Stock M.D. Strategic L.P. 336,007 (8) 8.6%
C/O Meyer, Duffy & Associates
237 Park Avenue, NY, NY 10017
Common Stock ADMN Associates 269,664 (9) 6.9%
13 Crestview Drive
Pleasantville, NY 10570
Common Stock Mull Acres Investments, Inc. 266,000 (9) 6.8%
C/O Furman Selz
230 Park Avenue, NY, NY 10169
Common Stock Directors and Officers as a Group 601,600 (10) (5) 15.4%
Series A Bulldog Capital Partners, L.P. 2 66.7%
Pfd. Stock 301 Turner Street
Clearwater, FL 34616
Series A Elizabeth M. Custer TTEE FBO 1 33.3%
Pfd. Stock William M. Custer
14 S. High Street
P.O. Box 673, New Albany OH 43504
Series B ADMN Associates 1,348,316 20.8%
Pfd. Stock 13 Crestview Drive
Pleasantville, NY 10570
Series B Mull Acres Investments, Inc. 1,330,000 20.5%
Pfd. Stock C/O Furman Selz
230 Park Avenue, NY, NY 10169
Series B M.D. Strategic L.P. 923,787 14.2%
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Pfd. Stock C/O Meyer, Duffy & Associates
237 Park Avenue, NY, NY 10017
Series B Donald Duffy 155,972 (11) 2.4%
Pfd. Stock C/O Meyer, Duffy & Associates
237 Park Avenue, NY, NY 10017
Series B PV II L.P. 430,267 6.6%
Pfd. Stock C/O Meyer, Duffy & Associates
237 Park Avenue, NY, NY 10017
Series B Directors and Officers as a Group 155,972 (11) 2.4%
Pfd. Stock
</TABLE>
(1) Based on 3,894,122 common shares outstanding, including common shares
issuable upon conversion of preferred stock and exercise of warrants and
options; 3 shares of Series A Preferred Stock outstanding; and 6,481,385
shares of Series B Preferred Stock outstanding.
(2) Mr. Rosenman is a Director, President and CEO of the Company.
(3) Includes 476,667 shares issuable upon exercise of options to Mr.
Rosenman and 8,000 shares issuable to Ms. Todd.
(4) Mr. Duffy is a Director of the Company.
(5) Includes 53,100 shares beneficially owned through Mr. Duffy's 10%
interest in M.D. Strategic L.P.; PV II L.P.; and MDV III L.P.
(6) Mr. Powell, Mr. Quinn and Mr. Russell are Directors of the Company.
(7) Issuable upon exercise of options.
(8) Includes 184,758 shares of Common Stock issuable upon the conversion of
Series B Preferred Stock.
(9) Issuable upon conversion of Series B Preferred Stock.
(10) Includes 514,667 shares issuable upon the exercise of options.
(11) Includes 155,972 shares beneficially owned through Mr. Duffy's 10%
interest in M.D. Strategic L.P.; PV II L.P.; and MDV III, L.P.
Section 16(a) Compliance
As required by the Securities and Exchange Commission rules under Section 16(a)
of the Securities Exchange Act of 1934, the Company notes that (i) John Russell
and Terrence Quinn, who were appointed as directors in 1997, failed to timely
file initial statements of beneficial ownership and failed to timely report the
grant of options in connection therewith and (ii) Herm Rosenman, who was
appointed CEO in 1997, failed to timely file an initial statement of beneficial
ownership and failed to timely report the grant of stock and options in
connection therewith. The Company expects that such reports will be filed
shortly. In addition, the Company will institute an enhanced compliance program
to ensure compliance by directors and officers with future Section 16(a)
reporting obligations.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1996, the Company obtained two 90-day, 14% unsecured loans (the
"Loans")for $300,000 and $200,000 from M.D. Strategic L.P., a partnership of
which Donald Duffy, the Chairman of the Company, is a General Partner. The Loans
were extended until September 10, 1996, when $300,000 of the Loan was converted
into 142,800 units and $200,000 of the Loan was purchased by an investor. M.D.
Strategic L.P. and the investor subsequently converted the notes into 238,000
Units (each Unit consisted of two shares of Common Stock, and two warrants to
purchase two shares of common stock).
In September 1996, the Company sold the assets of its Clearwater, Florida Bikers
Dream Superstore and dealership rights to the Company's former President and
CEO, Dennis Campbell, for consideration which included 950,000 shares of the
Company's common stock owned by Mr.
Campbell.
In September 1996, 90% of the outstanding fees owed to Day, Campbell & McGill
and Meyer, Duffy & Associates, firms affiliated with the Company's then
Co-CEO's, were converted into 11,911 and 7,692 shares, respectively, of the
Company's common stock. In addition, in September 1996, the Company issued
10,000 common shares to Day, Campbell & McGill, 10,000 common shares to Meyer,
Duffy & Associates, and 2,000 common shares to Richard King, a former director
of the Company, of the Company's common stock as payment for prior services
rendered.
During 1996 and 1997, the Company incurred legal and/or consulting fees of
$133,689 and $215,287 respectively, to Day, Campbell & McGill, a law firm in
which Mr. Day, a former director and Co-CEO of the Company is a partner. During
1996, the Company incurred $52,201 in legal fees to the law offices of Richard
E. King, Jr., of which Mr. King, a former director and corporate secretary of
16
<PAGE> 17
the Company, is the principle. During 1997 and 1996, the Company incurred
consulting fees from Meyer, Duffy & Associates of $22,100 and 93,503,
respectively, a firm which Mr. Duffy, a Director of the Company, is a principle.
In a private offering in January 1997, the Company sold $2,210,000, 12%
promissory notes. The promissory notes plus accrued interest were subsequently
converted into 2,377,223 shares of Series B preferred stock. M.D. Strategic L.P.
and PV II L.P. (the "Partnerships"), in which Donald Duffy, Director of the
Company is a general partner, purchased $750,000 of such notes and subsequently
converted such notes plus accrued interest into 1,354,054 Series B Preferred
shares. In connection with the issuance of the promissory notes, the Company
issued 221,000 warrants ("C warrants") to the promissory noteholders, of which
the Partnerships received 75,000 such warrants. In September 1997, certain
holders of C warrants exercised 125,000 warrants to purchase 125,000 common
shares, of which the Partnerships exercised 55,000 warrants.
In June 1997, the Company sold $2,710,000, 9.75% convertible promissory notes,
of which M.D. Strategic L.P. and MDV III L.P. (the "Partnerships"), in which
Donald Duffy, Director of the Company is a general partner, purchased $730,000
of such notes. The notes, plus accrued interest were subsequently converted into
2,774,162 shares of Series B preferred stock, of which the Partnerships
converted such notes plus accrued interest into 752,992 shares of Series B
preferred stock. In connection with the issuance of the promissory notes, the
Company issued 273,501 warrants ("E warrants"), of which the Partnerships
received 73,000 warrants.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
a. List of Exhibits:
2.1 Agreement and Plan of Reorganization dated August 4, 1994 among HDL
Communications (now known as Bikers Dream, Inc.), Biker Dream, Inc. and
the stockholders of Bikers Dream, Inc., as amended by agreements dated
November 11, 1994, February 3, 1995 and February 20, 1995.*
3.1 Articles of Incorporation, as amended, of Bikers Dream, Inc. (formerly
know as HDL Communications).*
3.1.1 Certificate of Amendment, Articles of Incorporation, June, 1996.****
3.1.2 Certificate of Correction of Certificate of Amendment of Articles of
Incorporation****
3.2 Certificate of Ownership of HDL Communications (now known as Bikers
Dream, Inc.)*
3.3 Bylaws, as amended, of Bikers Dreams, Inc.*
4.1 Certificate of Determination*****
10.1 Lease dated August 5, 1993 between the Company and McFadden Plaza.*
10.2 Lease dated November 1, 1994 between the Company and Valley View
Partnership.*
10.3 Lease dated February 8, 1995 between the Lily Company and Jim Kinnicutt
and Susan Rasmussen dba Bikers Dream of Sacramento.****
10.4 Lease dated October 30, 1996 between the Company and Inland
Industries.****
10.6 Consulting Agreement dated April 6, 1995 between the Company and Meyer,
Duffy & Associates.*
10.7 Consulting Agreement effective as of October 1, 1995 between the Company
and Meyer, Duffy & Associates.*
10.8 Amendment to Consulting Agreement and Stock Option Agreement dated
November 1, 1995, between the Company and Meyer Duffy & Associates.****
17
<PAGE> 18
10.11 The 1995 Incentive Stock Option Plan of the Company, as amended.**+
10.12 The 1995 Non-Qualified Stock Option Plan of the Company, as amended.**+
10.13 The 1995 Non-Qualified Directors' Stock Option Plan of the Company, as
amended.**+
10.16 Promissory Note and Security Agreement dated February 14, 1996 between
the Company and Green Tree Financial Servicing Corporation****
10.17 Promissory Note and Security Agreement dated December 28, 1995 between
the Company and Green Tree Financial Servicing Corporation.****
10.18 Form of Dealer Agreement between the Company and its dealers, and a
schedule identifying all dealer agreements to which the Company is a
party as of December 31, 1996 which are substantially identical to the
attached Dealer Agreement, except with respect to the parties thereto,
dates of execution and territory.****
10.20 Stock Option Agreement dated September 13, 1996 between the Company and
Mull Acres Investments, Inc.****
10.21 Asset Purchase Agreement dated January 30, 1997 among the Company,
Ultra Acquisition Corp. and Mull Acres Investments, Inc.***
10.22 Senior Subordinated Promissory Note of the Company dated January 30,
1997 payable to Mull Acres Investments, Inc. in the amount of
$2,700,000.****
10.23 Security Agreement dated January 30, 1997 between the Company and Mull
Acres Investments, Inc.****
10.24 Lease dated February 12, 1996 between Mull Acres Investments, Inc. and
18
<PAGE> 19
Lincoln Riverside Business Center.****
10.25 Lease dated October 11, 1996 between Mull Acres Investments, Inc. and
Lincoln Riverside Business Center.****
10.26 Note Conversion Agreement dated June 30, 1997 between the Company and
Mull Acres Investments, Inc.
10.27 Employment Agreement dated August 31, 1997 between the Company and
Herm Rosenman.+
10.28 Addendum to Employment Agreement dated August 31, 1997 between the
Company and Herm Rosenman.+
10.29 Stock Grant and Option Agreement dated December 24, 1997 between the
Company and Herm Rosenman.+
10.30 Loan Agreement dated November 17, 1997 between the Company and Sirrom
Capital Corporation dba Tandem Capital.
21.1 List of subsidiaries.**
23.1 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
- --------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 33-92294) filed with the Commission on May 31, 1995
and Amendment No. 1 thereto filed with the Commission on October 16, 1995.
** Incorporated by reference to the Company's Form 10-KSB dated April 12,
1996 filed with the Commission on April 15, 1996.
*** Incorporated by reference to the Company's Form 8-K dated January 30, 1997
filed with the Commission on February 14, 1997.
**** Incorporated by reference to the Company's Form 10-KSB filed with the
Commission on April 15, 1997.
***** Incorporated by reference to the Company's Form 10-QSB filed with the
Commission on November 14, 1997.
+ A compensatory plan or arrangement.
19
<PAGE> 20
b. Reports on Form 8-K
The Company filed the following reports on Form 8-K during the year
ended December 31, 1997:
1. Form 8-K dated January 6, 1997, reporting a change in
accountants.
2. Form 8-K dated February 14, 1997, reporting that
pursuant to an Asset Purchase Agreement between the
Company, the Company's wholly owned subsidiary, Ultra
Acquisition Corporation, a Nevada Corporation ("UAC")
and Mull Acres Investments, Inc. ("Mull Acres"), the
Company, through UAC, purchased from Mull Acres certain
assets, including equipment and inventory, of Mull
Acres' Ultra Kustom Cycles and Ultra Kustom Parts
Divisions that had been used in connection with the
manufacture, distribution and sales of motorcycles and
motorcycle parts and accessories.
3. Form 8-K/A Amendment No. 1, dated April 15, 1997, to its
Form 8K Reports dated January 30, 1997, reporting (1)
the combined audited financial statements of Ultra
Bikers, LLC and Ultra Kustom cycles for the period of
inception (September 19, 1996) to December 31, 1996, and
(2) the pro forma financial statements of Bikers Dream,
Inc., Ultra Bikers, LLC and Ultra Kustom Cycles for the
year ended December 31, 1996.
4. Form 8-K dated September 29, 1997, announcing the
conversion of various promissory notes and secured notes
into Series B Preferred stock, setting the terms of the
Series B Preferred stock, announcing the appointment of
Herm Rosenman as President and CEO of the Company, and a
balance sheet amended as of 8/31/97 to reflect the
conversion of the notes to Series B Preferred stock.
20
<PAGE> 21
SIGNATURES
In accordance with Section 13 or 15(d)of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bikers Dream, Inc.
Dated: April 15, 1998 By: /s/ HERM ROSENMAN
-----------------------------------------
Herm Rosenman, President/CEO
Dated: April 15, 1998 By: /s/ ANNE TODD
-----------------------------------------
Anne Todd, Corporate Secretary
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ HERM ROSENMAN April 15, 1998
- -----------------------------------
Herm Rosenman
President, CEO and Director
/s/ ANNE TODD April 15, 1998
- -----------------------------------
Anne Todd
Corporate Secretary, Principal
Financial Officer, and Controller
April 15, 1998
- -----------------------------------
Donald J. Duffy
Director
April 15, 1998
- -----------------------------------
John Russell
Director
April 15, 1998
- -----------------------------------
Humbert Powell
Director
April 15, 1998
- -----------------------------------
Terrence Quinn
Director
21
<PAGE> 22
BIKERS DREAM, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
<PAGE> 23
BIKERS DREAM, INC. AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-9
Notes to Consolidated Financial Statements F-10 - F-33
</TABLE>
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Bikers Dream, Inc.
We have audited the accompanying consolidated balance sheet of Bikers Dream,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bikers Dream, Inc.
and subsidiaries as of December 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 14, 1998
F-1
<PAGE> 25
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 667,258
Marketable securities 200,332
Accounts receivable, net of allowance for doubtful accounts of $257,000 961,270
Notes receivable, current portion 16,999
Inventories 4,454,091
Prepaid expenses and other current assets 99,760
-------------
Total current assets 6,399,710
NOTES RECEIVABLE, net of current portion 13,039
FURNITURE AND EQUIPMENT, net 1,052,195
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated
amortization of $229,127 3,520,228
DEPOSITS AND OTHER ASSETS 303,869
TOTAL ASSETS $ 11,289,041
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 26
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 670,796
Accrued expenses 1,397,627
Current portion of long-term debt 89,670
Current portion of notes payable 8,709
Note payable to shareholder 36,000
-------------
Total current liabilities 2,202,802
DEFERRED RENT 64,910
LONG-TERM DEBT, less current portion 276,766
NOTES PAYABLE, less current portion 2,581,280
-------------
Total liabilities 5,125,758
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A, convertible preferred stock, no par value
liquidation preference of $175,000 per share
30 shares authorized
3 shares issued and outstanding 402,500
Series B, convertible preferred stock, no par value
cumulative dividends, liquidation preference of $1 per share
8,000,000 shares authorized
6,481,385 shares issued and outstanding 6,481,385
Common stock, no par value
25,000,000 shares authorized
2,544,926 issued and outstanding 11,269,995
Accumulated deficit (11,990,597)
-------------
Total shareholders' equity 6,163,283
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,289,041
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 27
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Product sales $ 14,838,057 $ 8,903,517
Financing contracts 86,930 93,142
------------ ------------
Total revenues 14,924,987 8,996,659
COST OF GOODS SOLD 14,296,108 7,889,271
------------ ------------
GROSS PROFIT 628,879 1,107,388
------------ ------------
EXPENSES
Selling, general, and administrative expenses 4,584,294 4,550,744
Depreciation and amortization 461,786 197,476
Franchise income -- (34,290)
Loss on closure of store -- 166,634
Equity in loss of Ultra Bikers, LLC -- 16,145
------------ ------------
Total expenses 5,046,080 4,896,709
------------ ------------
OPERATING LOSS (4,417,201) (3,789,321)
------------ ------------
OTHER EXPENSE
Interest expense (592,076) (169,731)
Other expense, net (107,707) (70,316)
------------ ------------
Total other expense (699,783) (240,047)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,116,984) (4,029,368)
PROVISION FOR INCOME TAXES 800 800
------------ ------------
NET LOSS $ (5,117,784) $ (4,030,168)
============ ============
BASIC LOSS PER SHARE $ (2.54) $ (2.95)
============ ============
DILUTED LOSS PER SHARE $ (2.54) $ (2.95)
============ ============
WEIGHTED-AVERAGE SHARES OUTSTANDING 2,018,075 1,364,818
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 28
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Series A, Convertible Series B, Convertible
Preferred Stock Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Shares Amount Deficit Equity
------ ---------- ---------- ---------- --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 - $ - - $ - 1,107,184 3,166,970 (2,482,815) 684,155
PRIVATE PLACEMENTS, NET OF
OFFERING COSTS 7 1,102,500 569,000 2,893,834 3,996,334
DEBT CONVERTED TO EQUITY 222,198 1,579,300 1,579,300
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
CONVERTED TO EQUITY 19,604 135,467 135,467
CANCELLATION OF SHARES (190,000) (569,458) (569,458)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 21,750 151,800 151,800
EXPENSE RELATING TO STOCK
OPTIONS GRANTED BELOW THE
FAIR MARKET VALUE 120,000 120,000
DIVIDENDS ACCRUED ON
PREFERRED STOCK (61,000) (61,000)
NET LOSS (4,030,168) (4,030,168)
----- ------------- ------------ ---------- ------------ ------------- ------------- ------------
BALANCE, DECEMBER 31, 1996 7 1,102,500 - - 1,749,736 7,477,913 (6,573,983) 2,006,430
DEBT INTEREST THEREON
CONVERTED TO EQUITY 6,481,385 6,481,385 274,000 1,370,000 7,851,385
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
CONVERTED TO EQUITY 48,391 279,457 279,457
ISSUANCE OF COMMON STOCK
TO EMPLOYEES IN EXCHANGE
FOR SERVICES 4,333 32,750 32,750
EXERCISE OF OPTIONS FOR CASH 240,800 855,500 855,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 29
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Series A, Convertible Series B, Convertible
Preferred Stock Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Shares Amount Deficit Equity
------ -------- ---------- ---------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXERCISE OF SERIES C
WARRANTS FOR CASH $ $ 125,000 $ 484,375 $ $ 484,375
CONVERSION OF SERIES A
CONVERTIBLE PREFERRED
STOCK TO COMMON STOCK (4) (700,000) 93,333 700,000 -
DIVIDENDS ON SERIES A
CONVERTIBLE PREFERRED
STOCK CONVERTED TO
COMMON STOCK 9,333 70,000 70,000
DIVIDENDS ACCRUED ON
PREFERRED SHARES (298,830) (298,830)
NET LOSS (5,117,784) (5,117,784)
----- -------- --------- ------------- ------------ ---------- ------------- ------------
BALANCE, DECEMBER 31, 1997 3 $402,500 6,481,385 $ 6,481,385 2,544,926 $11,269,995 $ (11,990,597) $ 6,163,283
===== ======== ========= ============= ============ ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 30
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,117,784) $ (4,030,168)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 461,786 197,476
Loss on disposal of fixed assets - 130,949
Issuance of common stock for services 32,750 151,800
Issuance of preferred stock for interest expense 231,385 -
Stock options granted below the fair market value - 120,000
Equity in loss of Ultra Bikers, LLC - 16,145
(Increase) decrease in
Accounts receivable (712,639) 144,265
Inventories (1,542,965) (251,439)
Prepaid expenses and other current assets (18,222) 51,981
Increase (decrease) in
Accounts payable 509,321 88,657
Other accrued expenses (218,451) 380,106
------------- -------------
Net cash used in operating activities (6,374,819) (3,000,228)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in deposits (234,206) 151,643
Payments for purchases of furniture and equipment (216,435) (178,010)
Purchase of marketable securities (200,000) -
Purchase of Ultra Kustom Cycles (1,100,000) -
Investment in Ultra Bikers, LLC - (1,525,000)
Increase in deferred rent (2,627) 12,604
Other (30,370) -
------------- -------------
Net cash used in investing activities (1,783,638) (1,538,763)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt and capitalized
leases (134,051) (64,606)
Proceeds from issuance of preferred stock - 1,225,000
Cost associated with issuance of preferred stock - (122,500)
Proceeds from issuance of common stock 1,339,875 2,987,250
Costs associated with issuance of common stock - (93,416)
Proceeds from issuance of convertible notes payable 4,920,000 450,500
Proceeds from issuance of notes payable 2,500,000 570,000
Principal payments made on notes payable - (188,035)
Payments on notes payable to shareholders (48,000) (113,047)
------------- -------------
Net cash provided by financing activities 8,577,824 4,651,146
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 31
BIKERS DREAM, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net increase in cash and cash equivalents $ 419,367 $ 112,155
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 247,891 135,736
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 667,258 $ 247,891
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the years ended December 31, 1997 and 1996, approximately $550,000 and
$170,000, respectively, of cash was paid for interest expense.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1997, the Company issued a note payable in
connection with the acquisition of Ultra Kustom Cycles in the amount of
$2,700,000.
During the year ended December 31, 1997, the Company converted notes payable of
$6,250,000 and $1,370,000 into 6,250,000 shares of Series B preferred stock and
274,000 shares of common stock, respectively.
During the year ended December 31, 1997, the Company paid dividends of $70,000,
compensation of $32,750, and interest expense of $231,385 by issuing 9,333 and
4,333 shares of common stock and 231,385 shares of Series B preferred stock,
respectively. In addition, the Company also converted accounts payable of
$279,457 into 48,391 shares of common stock.
During the year ended December 31, 1997, the Company converted 4 shares of
Series A convertible preferred stock into 93,333 shares of common stock.
During the year ended December 31, 1997, the Company converted certain notes
payable into Series B convertible preferred stock.
During the year ended December 31, 1996, the Company converted the 8%
convertible note of $1,079,500 into 126,998 shares of common stock.
During the year ended December 31, 1996, the Company converted notes payable in
the amount of $499,800 into 238,000 Units. (Each Unit consists of two shares of
common stock, one Series A warrant to purchase one share of common stock for
$5.25 per share, and one Series B warrant to purchase one share of common stock
at $7.50 per share.)
During the year ended December 31, 1996, the Company converted accounts payable
and accrued expenses of $53,177 and $82,290, respectively, into 19,604 shares of
common stock.
During the year ended December 31, 1996, the Company entered into a note payable
with a lender for equipment in the amount of $303,555.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 32
BIKERS DREAM, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 1996, the Company transferred the
Company-owned superstore in Clearwater, Florida to the former president, chief
executive officer, and director of the Company in exchange for the cancellation
of 190,000 shares of Bikers Dream, Inc. common stock. In connection with the
transfer, the Company transferred $612,899 of assets consisting of inventory of
$466,473 and fixed assets of $146,426. In addition, the Company wrote-off
deferred rent of $43,441.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 33
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
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"). 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
$5.00 per share) which was evidenced by the number of shares issued
(820,000) in connection with the acquisition as follows:
- 660,000 shares to former Company shareholders
- 60,000 shares to former HDL shareholders
- 100,000 shares to holders of $500,000 of convertible notes of HDL
who converted them into shares of the Company at a price of $5.00 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 60,000 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 manufacturing and selling
new Ultra Kustom and other new and used motorcycles, parts, accessories,
apparel, and service through Company-owned retail stores and
dealer-operated stores throughout the United States.
In September 1996, the Company entered into an agreement with Mull Acres
Investments, Inc. ("Mull Acres") to become a member of Ultra Bikers,
LLC, a newly-formed California limited liability company (the "LLC").
The Company contributed $1,525,000 in cash for a 49% interest in the
LLC, and Mull Acres received a 51% interest for its expertise in the
business of manufacturing, distributing, and selling custom motorcycles.
The Company's investment in the LLC was loaned to the Ultra Kustom
Cycles division ("UKC") of Mull Acres to be used to manufacture
motorcycles and related parts and accessories. UKC sold the motorcycles
and related parts and accessories to the LLC at cost, and the LLC then
sold the motorcycles to the Company and unrelated parties. The
operations of UKC began substantially on September 19, 1996 after
receiving the necessary capital from the LLC to fund its production
activities.
F-10
<PAGE> 34
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organization and Line of Business (Continued)
On January 30, 1997, through its newly-created subsidiary, Ultra
Acquisition Corporation, the Company entered into an Asset Purchase
Agreement with Mull Acres to purchase the net assets, which included the
employee base and manufacturing expertise, of UKC for $3,800,000, which
consisted of $1,100,000 in cash and a note payable of $2,700,000. After
the close of the transaction, the LLC was dissolved, and the Company
owned 100% of the assets of UKC. The acquisition was accounted for by
the purchase method of accounting, and accordingly, the purchase price
has been allocated to the assets acquired based on the estimated fair
values at the date of the acquisition. The excess of the purchase price
over the estimated fair values of the assets acquired has been recorded
as excess cost over fair value of net assets acquired, which is being
amortized over fifteen years.
The estimated fair value of the assets purchased and liabilities assumed
at the acquisition date is summarized as follows:
<TABLE>
<S> <C>
Furniture and equipment $ 310,270
Other assets 108,928
Excess cost over fair value of net assets acquired 3,749,355
Other liabilities (368,553)
-------------
PURCHASE PRICE $ 3,800,000
=============
</TABLE>
The operations of the UKC from January 1, 1997 to the date of the
acquisition are immaterial; therefore, a pro forma statement of
operations showing the acquisition as if it occurred on January 1, 1997
is not presented.
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., Bikers Dream Eagle
Enterprises, Inc., and Ultra Acquisition Corporation. All significant
intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
Product Sales
Revenue from the sale of products is recognized at the time of delivery
to the customer.
Financing Income
Financing income is the Company's participation in finance contracts for
motorcycle sales. Revenue from financing income is recognized when
earned.
F-11
<PAGE> 35
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Income Taxes
The Company utilizes Statement of Financial Accounting Standards
("SFAS") 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. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Net Loss Per Share
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings per Share." Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number
of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive. Earnings per share for
1996 have been restated using the methodologies of SFAS No. 128. Since
the Company had a net loss for 1997 and 1996, basic earnings per share
and diluted earnings per share are the same.
Stock Split
Effective February 5, 1998, the Company effected a 1-for-5 reverse stock
split of its common stock and Series B convertible preferred stock. All
shares and per share data have been retroactively restated to reflect
the stock split.
F-12
<PAGE> 36
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Marketable Securities
The Company accounts for its investment in marketable securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The Company's investments include mutual
funds which are classified as available-for-sale securities and are
stated at fair market value. At December 31, 1997, the market value of
these investments approximates cost under the specific-identification
method.
Inventories
Inventories are stated at the lower of cost (average cost method) or
market. Cost is determined by the specific identification method for
finished motorcycles and work-in-process inventories and the average
cost method for parts inventories. Finished goods include capitalized
overhead costs, which include primarily labor.
Furniture and Equipment
Furniture and equipment, including capitalized leases, are stated at
cost less accumulated depreciation and amortization. The Company
provides for depreciation and amortization using the straight-line
method over the estimated useful lives or the term of the lease,
whichever is the lesser, as follows:
<TABLE>
<S> <C>
Furniture and fixtures 7 years
Equipment 5 to 7 years
Computers 5 years
Autos and trucks 7 years
Leasehold improvements 7 years
</TABLE>
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.
Debt Issuance Costs
Investment banking, broker, and other direct costs of obtaining new
long-term financing are amortized over the term of the corresponding
indebtedness.
F-13
<PAGE> 37
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Risk
The Company is operating in a growing market due to the current
nationwide popularity of custom motorcycles. Its future success is
dependent on the continuation of interest in the recreational motorcycle
industry.
Concentration of Credit Risk
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 December 31, 1997, the
Company has no significant concentrations of credit risk.
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 disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and
expenses during the reported period. Actual results could differ from
those estimates.
Warranty Costs
Included in other accrued expenses are accrued warranty costs. Estimated
future warranty obligations related to motorcycles and parts are
provided by charges to operations in the period in which the related
revenue from the sales of motorcycles or parts is recognized.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and other accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for notes payable and long-term debt also approximate
fair value because current interest rates offered to the Company for
debt of similar maturities are substantially the same.
Reclassifications
Certain amounts included in the 1996 financial statements have been
reclassified to conform with the 1997 presentation.
F-14
<PAGE> 38
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," is effective for
financial statements with fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company does not believe the adoption of SFAS
No. 130 will have a material impact on its financial position or results
of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15,
1997. SFAS 131 requires a company to report certain information about
its operating segments including factors used to identify the reportable
segments and types of products and services from which each reportable
segment derives its revenues. The Company has not determined the impact
this new standard will have on its financial statements.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at several banks. Deposits at each
bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of December 31, 1997, the uninsured portion amounted to
$638,873. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
NOTE 3 - INVENTORIES
Inventories at December 31, 1997 consisted of the following
<TABLE>
<S> <C>
Parts $ 2,337,990
Work-in-process 208,636
Finished motorcycles 1,907,465
------------
TOTAL $ 4,454,091
============
</TABLE>
F-15
<PAGE> 39
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 153,069
Equipment 269,286
Computers 221,931
Autos and trucks 581,486
Leasehold improvements 254,825
------------
1,480,597
Less accumulated depreciation and amortization 428,402
TOTAL $ 1,052,195
=============
</TABLE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Accrued dividends $ 289,830
Accrued salaries, wages, and payroll taxes 128,924
Accrued legal and settlement costs 433,098
Customer deposits 147,081
Other accrued expenses 398,694
-------------
TOTAL $ 1,397,627
=============
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases all of its operating facilities. The Santa Ana,
California operating facility, which serves as a retail superstore as
well as the corporate warehouse and executive offices, is leased under a
non-cancelable 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.
F-16
<PAGE> 40
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
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 has the option
to extend the lease for five years.
On October 31, 1996, the Company negotiated a lease for a new
Company-owned superstore in San Diego, California which opened in 1997.
The lease term is 60 months commencing January 1, 1997 with monthly
lease payments of $5,271 per month. The Company has the option to extend
the lease for five years.
Minimum annual non-cancelable commitments under these leases are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998 $ 412,560
1999 373,701
2000 246,246
2001 227,751
2002 160,162
Thereafter 102,666
-------------
TOTAL $ 1,523,086
=============
</TABLE>
Total rent expense incurred by the Company for the years ended December
31, 1997 and 1996 was $451,770 and $368,564, respectively.
Litigation
The Company is a defendant in a lawsuit in which plaintiffs allege
violation of the Federal Trade Commission Rule and the requirements of
the North Carolina Business Opportunity Sales Statute against the
Company in connection with the Company's sale of a franchise to the
plaintiffs in June 1994. The plaintiffs further allege that the Company
breached its franchise contract with plaintiffs by failing to perform
its obligations under the contract and engaged in unfair and deceptive
trade practices. Management has been advised by counsel that the
possible range of exposure on this issue is approximately $25,000 to
$700,000 and that the probable amount of loss is approximately $75,000,
which the Company has accrued as of December 31, 1997.
F-17
<PAGE> 41
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
During July 1997, the Company settled a dispute over an employee
agreement matter in which the Company and its insurance company agreed
to pay $250,000 in cash and stock during 1997 and 1998. During 1997, the
Company's insurance company paid $50,000, the first installment payment
due under the terms of the settlement agreement. The balance of the
settlement is payable in common stock of the Company or cash and has
been reserved for as of December 31, 1997.
On March 18, 1998, the Company and its co-defendants finalized a
settlement ("the Settlement") agreement with Harley-Davidson Motor
Company relating to certain trademark and other infringements and a
breach of a 1991 Consent Judgment. Under the terms of the Settlement,
the Company and its co-defendants are required to pay $400,000, of which
$300,000 was paid by insurance and the Company owes the balance of
$100,000. The Company has accrued this liability as of December 31,
1997, which is included in other accrued expenses on the consolidated
balance sheet.
The Company is also subject to various employee, warranty and other
claims and proceedings which arise in the ordinary course of its
business. Although occasional adverse decisions (or settlements) may
occur, the Company believes that the final disposition of such matters
will not have a material adverse effect on the financial position or
results of operations of the Company.
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of capital lease obligations and notes payable
issued in connection with equipment purchases as follows:
<TABLE>
<S> <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. $ 51,772
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. 25,967
Long-term note payable to a finance company collateralized by a
diesel tractor, requiring principal and interest payments of
per month, with interest at 10% per annum through January
2001. 57,985
</TABLE>
F-18
<PAGE> 42
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 7 - LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
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 10.75% per annum through February
2002. $ 230,480
Capitalized lease obligation payable to a finance company,
collateralized by equipment, requiring principal and interest
payments of $232 per month, with interest at 16% per annum
through January 1998. 232
---------
366,436
Less current portion 89,670
LONG-TERM PORTION $ 276,766
=========
</TABLE>
Minimum future principal debt payments at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ending Capitalized Notes
December 31, Leases Payable Total
<S> <C> <C> <C>
1998 $ 38,734 $ 91,308 $ 130,042
1999 38,505 91,308 129,813
2000 22,601 91,308 113,909
2001 - 70,738 70,738
2002 - 11,478 11,478
Thereafter - - -
------------- ------------- -------------
99,840 356,140 455,980
Less amounts representing
interest 21,869 67,675 89,544
------------- ------------ ------------
TOTAL $ 77,971 $ 288,465 $ 366,436
============= ============= ============
</TABLE>
NOTE 8 - NOTES PAYABLE
During January 1997, the Company issued 12% notes payable to several
investors, including related parties, with aggregate principal amounting
to $2,210,000. The Company also issued to investors Series C warrants to
purchase the Company's common stock as more fully described in Note 11.
During September 1997, these notes and interest thereon of $167,223 were
converted to the Company's newly issued Series B convertible preferred
stock.
F-19
<PAGE> 43
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 8 - NOTES PAYABLE (CONTINUED)
During 1997, the Company issued 9.75% notes payable to several
investors, including related parties, with aggregate principal amounting
to $2,710,000. The Company also issued to investors Series E warrants to
purchase the Company's common stock as more fully described in Note 11.
During September 1997, these notes and interest thereon of $64,162 were
converted to the Company's newly issued Series B convertible preferred
stock.
Under the Asset Purchase Agreement (described in Note 1), the Company
issued a $2,700,000 note payable on January 30, 1997. On June 30, 1997,
the Company and Mull Acres entered into a Note Conversion Agreement by
which Mull Acres agreed to exercise 274,000 of its then outstanding
stock options to purchase the Company's common stock in satisfaction of
$1,370,000 of the note payable, and to accept 1,330,000 of the Company's
Series B convertible preferred stock in satisfaction of the remaining
principal balance due under the note payable. Under the terms of the
Note Conversion Agreement, 730,000 shares of the Series B convertible
preferred stock were retained by the Company in escrow to secure Mull
Acres' performance under its indemnification obligations outlined in the
Asset Purchase Agreement.
The notes payable at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Note payable to Tandem Capital, dated November 17, 1997, with
interest at 12% per annum, due and payable quarterly,
collateralized by a first lien on all assets of the Company,
and payable in May 1999. $ 2,500,000
Note payable to bank assumed in conjunction with the acquisition
of a former franchise operation, guaranteed by the Small
Business Administration ("SBA") and collateralized by all the
assets of the Sacramento store, with interest at prime plus
2.5% per annum (10% at December 31, 1997), payable monthly
through April 2005. 89,989
-------------
2,589,989
Less current portion 8,709
-------------
LONG-TERM PORTION $ 2,581,280
=============
</TABLE>
As more fully described in Note 11, certain stock purchase warrants were
issued in connection with the $2,500,000 note payable to Tandem Capital.
F-20
<PAGE> 44
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 8 - NOTES PAYABLE (CONTINUED)
The following is a schedule by years of future maturities of long-term
debts:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 8,709
1999 2,509,636
2000 10,663
2001 11,799
2002 13,055
Thereafter 36,127
--------------
TOTAL $ 2,589,989
==============
</TABLE>
NOTE 9 - INCOME TAXES
The following table presents the current and deferred income tax
provision for federal and state income taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Current
Federal $ - $ -
State 800 800
------------- -------------
800 800
------------- -------------
Deferred
Federal - -
State - -
------------- -------------
- -
------------- -------------
PROVISION FOR INCOME TAXES $ 800 $ 800
============= =============
</TABLE>
F-21
<PAGE> 45
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES (CONTINUED)
The tax effects of temporary differences which give rise to the deferred
tax provision (benefit) consist of:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Furniture and equipment $ (2,936) $ (8,968)
Accrued liabilities 2,569 12,638
Accounts receivable allowance 82,943 9,932
Inventory reserve 266,000 27,010
Net operating losses 1,566,566 1,415,258
Other (1,047) (16,074)
Valuation allowance (1,914,095) (1,439,796)
------------- -------------
TOTAL $ - $ -
============= =============
</TABLE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1997 1996
--------- --------
<S> <C> <C>
Statutory regular federal income tax rate (34.0%) (34.0%)
State income taxes, net of federal benefit - -
Change in valuation allowance 33.8 33.5
Other 0.2 0.5
--------- --------
TOTAL -% -%
========= ========
</TABLE>
The components of the deferred income tax assets (liabilities) as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Furniture and equipment $ (38,689) $ (35,753)
Accrued expenses 34,527 31,958
Accounts receivable allowance 102,943 20,000
Inventory reserve 306,000 40,000
Net operating loss carryforwards 3,842,415 2,275,849
Other 25,964 27,011
------------- -------------
4,273,160 2,359,065
Valuation allowance 4,273,160 2,359,065
------------- -------------
TOTAL $ - $ -
============= =============
</TABLE>
F-22
<PAGE> 46
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES (CONTINUED)
As of December 31, 1997, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$12,300,000 and $4,200,000, respectively. The net operating loss
carryforwards begin expiring in 2002 and 1998, respectively. The
utilization of net operating loss carryforwards may be limited due to
the ownership change under the provisions of Internal Revenue Code
Section 382 and similar state provisions.
NOTE 10 - SHAREHOLDERS' EQUITY
Preferred Stock
In 1996, the Company sold 7 units of Series A preferred stock for a
price of $175,000 per unit for a total consideration of $1,102,500, net
of offering costs. As more fully described in Note 11, the holder of
each unit received 10,000 Series D warrants. Each unit consists of one
share of convertible preferred stock which pays annual stock dividends
of 10%. Each share of preferred stock is convertible at the option of
the holder, after the effective date of the registration statement with
respect to the common stock, into 10,000 shares of the Company's common
stock at a conversion rate of $17.50 per share. If at the time of
conversion 75% of the current bid price is less than $17.50 per share,
the holder will receive a greater number of shares, but in no case will
the conversion rate be less than $7.50 per share. In addition, the
Company may call for the conversion of the preferred stock if the
average closing price of the Company's common stock is $37.50 per share
for ten consecutive trading days or any time after the third anniversary
of the private placement. Preferred shareholders shall have preferences
on liquidation over common shareholders.
During 1997, accrued dividends of $70,000 on Series A convertible
preferred stock were converted into 9,333 shares of common stock. As of
December 31, 1997, cumulative per share dividends in arrears on December
31, 1997 were approximately $26,167 per preferred share or $78,500 in
aggregate.
As described in Note 8, the Company converted notes payable totaling
$6,250,000 and accrued interest thereon of $231,385 into 6,481,385
shares of Series B convertible preferred stock. Each share of Series B
preferred stock is convertible at the option of the holder. Holders of
the preferred shares shall have preferences on liquidation over common
shareholders. The preferred shares may be redeemed by the corporation at
the option of the Board of Directors on a pro rata basis at any time or
from time to time in whole or in part commencing one year after the date
of issuance at a redemption price of $1.125 per preferred share, plus
all accumulated and unpaid dividends. Dividends on the preferred stock
are cumulative and accrue whether or not declared on each preferred
share at the annual rate of $.0975 per preferred share. At December 31,
1997, accrued dividends on Series B preferred shares were $.03381
preferred share or $211,330.
F-23
<PAGE> 47
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock
In 1996, the Company sold 284,500 units of common stock for a price of
$10.50 per unit in two private placement offerings for a total
consideration of $2,987,250 before offering costs. Each unit consists of
two shares of the Company's common stock. In addition, the holder of
each unit received one Series A Common Stock Purchase Warrant ("Series A
Warrants") to purchase one share of the Company's common stock at a
price of $5.25 per share and one Series B Common Stock Purchase Warrant
("Series B Warrants") to purchase one share of the Company's common
stock at $7.50 per share. All of the Series A warrants and Series B
warrants expired during 1997.
During 1997, the Company repriced certain stock options and warrants
which resulted in a charge on the consolidated statement of operations
of $3,500,000.
At December 31, 1997, common shares were reserved for issuance as
follows:
Assuming exercise of:
<TABLE>
<S> <C>
1995 Inventive Stock Option Plan 200
1995 Nonqualified Stock Option Plan 30,000
1995 Nonqualified Director's Stock Option Plan 128,007
Other stock options 191,795
Stock purchase warrants 534,000
-------
TOTAL 883,995
=======
</TABLE>
Stock Option Plans
The Company has adopted three stock option plans, the 1995 Incentive
Stock Option Plan, the 1995 Non-Qualified Stock Option Plan, and the
1995 Non-Qualified Directors' Stock Option Plan. The shares issued
pursuant to the plans are restricted shares until or unless registered
by the Company. In addition, the Company from time to time will issue
nonqualified stock options outside of these three plans.
F-24
<PAGE> 48
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
Under the Incentive Stock Option Plan, options may be granted by the
Compensation Committee to its officers, key employees, and other
employees according to responsibility and length of service. Options may
not be granted to employees owning more than 10% of the total combined
voting power of the stock of the corporation. Options granted under the
plan shall be granted within 10 years of the date of the adoption of the
plan, and must be exercised within 10 years of the grant. The aggregate
number of shares that may be issued pursuant to the plan is 100,000 over
the life of the plan, and the aggregate fair market value of the stock
for exercise for the first time during any calendar year is $100,000 per
individual. The exercise price of the options is determined by the
Compensation Committee, but in any case the exercise price may not be
less than 100% of the fair market value on the date of grant. Options
vest pro rata over a four-year period.
The Nonqualified Stock Plan provides for incentives to management,
executive personnel of the Company and others. The plan limits the
number of shares to 200,000, and the aggregate value of underlying
shares granted in any year for any single employee may not exceed
$100,000 in value. The option price is fixed by the bid price of the
Company's shares as quoted on NASDAQ or the Bulletin Board at the close
of business on the date of the grant. Options must be exercised within
10 years of the date of grant thereof and shall vest at such time or
times as the Board of Directors shall fix on the date of grant.
The Director's plan is a Nonqualified Plan and provides for 60,000
shares in total, 10,000 shares to be granted to each director on
assuming office. The underlying share price is determined by the bid
price on NASDAQ or the Bulletin Board on the date of the grant. The
options vest over a five-year period. Options must be exercised within
ten years of the date of grant.
In addition to the stock options issued under the above plans, the
Company issued other stock options.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to
outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to
the pro forma amounts indicated below:
F-25
<PAGE> 49
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net loss
As reported $ (5,117,784) $ (4,030,168)
Pro forma $ (8,810,236) $ (4,206,309)
Basic and diluted loss per common share
As reported $ (2.54) $ (2.95)
Pro forma $ (4.37) $ (3.08)
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 1997 and
1996: dividend yields of 0% and 0%; expected volatility of 99% and 65%;
risk-free interest rates of 5.7% and 7.0%; and expected life of 5 years
and 2.95 years, respectively. The weighted-average fair value of options
granted during the years ended December 31, 1997 and 1996 was $4.00 and
$2.35, respectively, and the weighted-average exercise price was $7.70
and $5.15, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
F-26
<PAGE> 50
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Incentive Granted Granted
Stock Price Other Price
Option Plan Per Share Options Per Share
----------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 74,960 $10.72 110,000 $5.00
Granted 13,300 $11.26 607,000 $8.82
Exercised - $ - - $ -
Canceled (84,260) $10.90 - $ -
------------- --------
Outstanding, December 31, 1996 4,000 $ 8.75 717,000 $8.24
Granted - $ - 639,547 $5.16
Exercised - $ - (482,000) $4.33
Canceled (3,800) $ 8.75 (165,000) $8.96
------------- --------
OUTSTANDING,
DECEMBER 31, 1997 200 $ 8.75 709,187 $7.95
============= ========
EXERCISABLE AT
DECEMBER 31, 1997 200 191,795
============= ========
</TABLE>
The weighted-average remaining contractual life of options outstanding
issued under the Incentive Stock Option Plan and for other options is
8.7 and 3.6 years, respectively, at December 31, 1997. There are 99,800
options available for future grants.
F-27
<PAGE> 51
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Nonqualified Granted Granted
Directors Price Nonqualified Price
Option Plan Per Share Option Plan Per Share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding,
December 31, 1995 28,000 $ 11.07 60,000 $ 8.70
Granted 100,000 $ 7.20 - $ -
Exercised - $ - - $ -
Canceled - $ - (7,000) $ 7.50
------------- -------------
Outstanding
December 31, 1996 128,000 $ 8.05 53,000 $ 8.85
Granted - $ - - $ -
Exercised - $ - - $ -
Canceled - $ - (23,000) $ 5.40
------------- -------------
OUTSTANDING,
DECEMBER 31, 1997 128,000 $ 30,000 $ 9.16
============= =============
EXERCISABLE AT
DECEMBER 31, 1997 128,000 21,050
============= =============
</TABLE>
The weighted-average remaining contractual life of options outstanding
issued under the Nonqualified Option Plan and the Director's
Nonqualified Option Plan is 6.45 and 7.49 years, respectively, at
December 31, 1997. There are 72,000 nonqualified stock options and
30,000 director's nonqualified stock options available for future
grants.
F-28
<PAGE> 52
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 11 - STOCK PURCHASE WARRANTS
At December 31, 1997, the Company has the following outstanding stock
purchase warrants:
1) Under the terms of the $2,500,000 loan agreement, Tandem Capital
received an initial Stock Purchase Warrant to purchase 87,500
shares of the Company's common stock at an exercise price of
$5.00 per share, which is exercisable on or before November 17,
2002. These warrants are outstanding at December 31, 1997.
Additionally, Tandem Capital will receive a Stock Purchase
Warrant on June 1, 1998 to purchase 75,000 shares of the
Company's common stock at an exercise price of $1.05 per share,
which is exercisable on or before June 1, 2003.
2) In connection with the issuance of $2,210,000 of notes payable,
the holders of the Notes received 221,000 Series C warrants.
Each warrant gives the holder the right to purchase the
Company's common stock. Certain holders of these notes exercised
125,000 of the options for $484,375. At December 31, 1997,
96,000 of these warrants are outstanding.
3) The holders of certain notes issued in June 1996 received 77,000
Series D warrants to purchase the Company's common stock at an
exercise price of $5.00 per share. The warrants expire three
years after issuance. In addition, warrants are callable if the
Company's common stock closes at $7.50 per share for ten
consecutive trading days after registration of the preferred
stock. At December 31, 1997, there were 77,000 Series D warrants
outstanding.
4) Under the terms of the 9.75% notes payable with aggregate
principal of $2,710,000 issued in June 1997, investors received
an aggregate of 273,500 Series E warrants to purchase common
stock. All of these warrants were outstanding at December 31,
1997.
F-29
<PAGE> 53
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company incurred $193,800 and $133,689,
respectively, in legal fees and/or consulting fees from a law firm of
which Rowland W. Day, ll, a shareholder and former member of the Board
of Directors and former Co-Chairman of the Company, is a partner.
Accrued legal and consulting fees of $59,577 were converted into 11,915
shares of common stock during December 1997.
On August 31, 1995, Dennis Campbell, the Company's former President,
loaned the Company $24,000 on a demand note at an interest rate of 16%
per annum. This note was reduced by a principal payment of $1,500 during
1995, leaving a balance of $22,500 as of December 31, 1995. The
remaining balance was paid as of December 31, 1996.
On December 31, 1995, Dennis Campbell loaned the Company $14,547 on
demand at 10% interest, which note was outstanding at December 31, 1995,
and subsequently paid in full in January 1996.
On December 31, 1995, the Company issued its demand note payable in lieu
of compensation to Dennis Campbell in the sum of $100,000, bearing
interest at 10%, in consideration of a bonus deferral. This note was
reduced by principal payments of $16,000 during 1996 and $48,000 during
1997, leaving a balance of $36,000 as of December 31, 1997.
On October 1, 1995, the Company entered into a consulting agreement with
Meyer Duffy, & Associates ("Meyer Duffy"), a management consulting firm
whose principal partner, Donald Duffy, is also a shareholder, Director,
and former Co-Chairman of the Company, which was amended on November 1,
1995, whereby Meyer Duffy 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.
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 2,000 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 20,000 shares for $20 million in capital received, and that
the option is granted in pro rata increments, exercisable at a price of
$8.50 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
10,000 shares of the Company's common stock at a price of $8.50 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.
F-30
<PAGE> 54
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
On October 17, 1995, William R. Gresher, Senior Vice President, Chief
Financial Officer and a director of the Company at that time, 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. (Mr. Gresher
subsequently resigned his positions with the Company and was given a
$70,000 severance package of which $28,000 is payable at December 31,
1996 (see Note 7). The loan was subsequently repaid including interest
during 1997.
On November 3, 1995, M.D. Strategic L.P., a partnership of which Donald
Duffy is a principal, loaned $100,000 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 $8.50 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 23,529 shares of common stock of the Company.
During 1996, the Company incurred $52,201 in legal fees to the law
offices of Robert E. King, Jr. of which Richard E. King, Jr., Secretary
and a director of the Company, is the principal. (Mr. King subsequently
resigned his positions with the Company.)
In April 1996, the Company obtained a 90-day, unsecured loan in the
amount of $299,880 from M.D. Strategic L.P., a partnership of which
Donald Duffy is a principal. The loan bears interest at 14% per annum
and was extended until September 10, 1996 when it was converted into
28,560 Units. (Each Unit consists of two shares of common stock, one
Series A warrant to purchase one share of common stock for $5.25 per
share, and one Series B warrant to purchase one share of common stock
for $7.50 per share.)
In 1996, the Company obtained a 90-day, unsecured loan in the amount of
$199,920 from M.D. Strategic L.P., a partnership of which Donald Duffy
is a principal. The loan bears interest at 14% per annum and was
extended until September 10, 1996 when an investor bought the principal
balance and then converted the loan into 19,040 Units. (Each Unit
consists of two shares of common stock, one Series A warrant to purchase
one share of common stock for $5.25 per share, and one Series B warrant
to purchase one share of common stock for $7.50 per share.)
In September 1996, the Company converted accrued legal and consulting
expenses of $53,177 due to Meyer Duffy into 7,602 shares of common
stock.
In September 1996, the Company converted accrued legal and consulting
expenses of $82,290 due to Day, Campbell & McGill into 11,911 shares of
common stock.
F-31
<PAGE> 55
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1996, the Company issued 10,000, 10,000, and 2,000 shares
of common stock to Day, Campbell & McGill, Meyer Duffy, and Richard
King, Jr., respectively, for services rendered.
In September 1996, the Company granted 40,000 stock options to both
Rowland W. Day II and Donald J. Duffy at an exercise price of $5.25,
vesting immediately, with piggyback registration rights and exercisable
over two years with a cashless exercise feature.
In January 1997, the Company issued $2,210,000, 12% promissory notes
maturing January 1998. Several investment partnerships, of which Donald
Duffy is a 10% general partner, purchased a total of $750,000 of such
promissory notes. In September 1997, such promissory notes plus accrued
interest were converted into 750,000 shares of Series B convertible
preferred stock.
In July 1997, the Company issued $2,710,000, 9.75% promissory notes.
Several investment partnerships, of which Donald Duffy is a 10% general
partner, purchased a total of $730,000 of such promissory notes. In
September 1997, such promissory notes plus accrued interest were
converted into 730,000 shares of Series B convertible preferred stock.
NOTE 13 - SUBSEQUENT EVENTS
In January 1998, the Company entered into an exclusive manufacturing and
distribution agreement with Castle Motorcycles Manufacturing, Inc.
("Castle"). Under the terms of the agreement, Castle will manufacture
certain of the Company's motorcycles, which will be built to the
Company's specifications. In addition, through its Company-owned retail
stores and its dealerships, the Company will be the exclusive
distributor of Castle Motorcycles. Once Castle achieves full production
quantities, the Company is obligated under certain purchase commitments
with respect to Castle's production of motorcycles under the Castle and
Company brand names.
On February 18, 1998, the Company issued to Meyer Duffy Ventures IV,
Series A a 12% convertible promissory note in the amount of $300,000.
The note is unsecured, and principal and accrued interest are due 360
days from issuance. Upon the completion of the Company's next round of
equity or debt financing with aggregate gross proceeds of not less than
$2,000,000, the holder of the note has the right to convert the entire
principal or portion thereof and unpaid interest into the same
securities offered by the Company at a price per share or unit equal to
that offered to other investors in the next equity or debt offering.
F-32
<PAGE> 56
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
On February 18, 1998, the Company issued to MD Strategic LP a 12%
convertible promissory note in the amount of $500,000. The note is
unsecured and principal and accrued interest are due 360 days from
issuance. Upon the completion of the Company's next round of equity or
debt financing with aggregate gross proceeds of not less than
$2,000,000, the holder of the note has the right to convert the entire
principal or portion thereof and unpaid interest into the same
securities offered by the Company at a price per share or unit equal to
that offered to other investors in the next equity or debt offering.
In April 1998, the Company renegotiated the terms of its $2,500,000 loan
with Tandem Capital. Under the terms of the renegotiation, the loan
maturity date was extended to May 1999.
In 1998, the Company offered up to 280 units of convertible preferred
stock with warrants in private offering. Each unit, which consists of
one share of the Company's Series C preferred stock and 1,250 Series F
Common Stock Purchase Warrants to purchase 1,250 shares of the Company's
common stock at $5.00 per share, is being offered at $25,000 per unit.
The Series C preferred stock is convertible at the option of the holder
at any time after the date of issuance into common stock at the
conversion price which is the greater of 75% of the average closing
price of the common stock for the ten trading days immediately prior to
conversion or $2.50 provided certain events take place. The Series C
preferred stock may be redeemed at the option of the holder at any time
commencing four years after the date of issuance at a redemption price
of $25,000. As of April 14,1998, the Company has issued 140 units for
gross proceeds of $3,500,000.
F-33
<PAGE> 1
EXHIBIT 10.26
NOTE CONVERSION AGREEMENT
THIS NOTE CONVERSION AGREEMENT (the "Agreement") is made and entered
into as of June 30, 1997, by and among Bikers Dream, Inc., a California
corporation (the "Company") and Mull Acres Investments, Inc. ("Mull Acres").
WHEREAS, Mull Acres holds the Company's Senior Secured Subordinated
Promissory Note dated January 30, 1997 (the "Note") in the principal amount of
two million seven hundred thousand dollars ($2,700,000); and
WHEREAS, the Company now desires that Mull Acres shall convert a portion
of its Note into payment of the exercise price of certain options granted to
Mull Acres pursuant to the Option Agreement dated September 13, 1996 to purchase
2,500,000 shares of the Company's common stock (the "Option"); and
WHEREAS, the Company desires that Mull Acres shall convert another
portion of its Note into shares of the Company's Series B Preferred Stock (the
"Preferred Stock") on the terms set forth on Exhibit A hereto.
NOW THEREFORE for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and Mull Acres hereby
agree as follows:
1. CONVERSION OF NOTES.
(a) The exercise price referenced in the Option shall henceforth
be reduced from $1.75 to $1.00 per share, and the Option shall be deemed amended
accordingly.
(b) One million three hundred seventy thousand dollars
($1,370,000) principal amount of the Note shall be canceled in consideration of
payment of the exercise price of options to purchase 1,370,000 shares of the
Company's common stock pursuant to the Option. Interest shall accrue on the
principal amount of the Note converted pursuant to this Section 1(b) up to and
including the date of conversion as provided herein, and all such accrued and
unpaid interest shall be applied to the value of the Note at Closing.
(c) An additional six hundred thousand dollars ($600,000)
principal amount of Note shall be converted at Closing into shares of the
Preferred Stock at a conversion price of $1.00 per share. Interest shall accrue
on the principal amount of the Note converted pursuant to this Section 1(c) up
to and including the date of conversion, and the Company shall pay all such
accrued and unpaid interest in accordance with paragraph 1(d) below.
(d) Upon the conversion of the Note as provided in Sections 1(b)
and (c), above, the holder shall surrender the Note and the Option to the
Company at its principal office, duly endorsed or accompanied by a written
instrument of transfer duly executed by the holder of the Note. As promptly as
practicable after the surrender of the Note aforesaid, the Company shall issue
and
<PAGE> 2
deliver to such holder (i) a revised Option to purchase up to 1,130,000 shares
of the Company's common stock, (ii) a certificate for the number of full shares
of Series B Preferred Stock issuable upon such conversion (600,000 Preferred
Shares), (iii) cash, as provided in paragraph 1(e), in respect of any fraction
of a share of Preferred Stock issuable upon conversion, and (iv) additional
730,000 shares of Preferred Stock to replace the balance of the Note ($730,000)
which will be held in escrow by the Company until the outstanding lawsuits
regarding Harley-Davidson and any lawsuit that results in a judgment against the
Company due to its relationship and contracts with Mull Acres (dba Ultra Kustom
Cycles).
(e) The Company shall not be required to issue fractions of
shares of Preferred Stock upon conversion of the Note. If any fractional
interest in a share of Preferred Stock would otherwise be deliverable upon
conversion, the Company shall purchase such fractional interest for an amount in
cash equal to the conversion price then in effect, calculated to the nearest
dollar.
(f) The shares of common stock issuable upon conversion of the
Preferred Stock shall carry registration rights pursuant to a Registration
Rights Certificate in the form of EXHIBIT B hereto.
2. THE CLOSING.
The closing ("Closing") of the conversion of the Notes under this
Agreement shall take place at the offices of the Company, 1420 Village Way,
Santa Ana, California, 92705, at 2:00 p.m. local time, on the earlier of (i)
ninety (90) days from the date hereof, or (ii) the date that is seven days after
the date of the Company's next shareholder meeting as the Company, in its sole
discretion, may determine, (iii) or an earlier date as determined by the
Company. The date of the Closing is hereinafter referred to as the "Closing
Date."
3. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and
warrants to Purchasers as follows:
(a) ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it, and to enter into and
perform this Agreement, to sell and issue the Notes hereunder and to carry out
the transactions contemplated by this Agreement. The Company is duly qualified
to do business as a foreign corporation and is in good standing in the State of
California and in every other jurisdiction in which the failure to so qualify
would have a material adverse effect on the operations or financial condition of
the Company.
(b) AUTHORIZATION. The execution, delivery and performance by the
Company of this Agreement and the performance of all of the Company's
obligations hereunder have been duly authorized by all necessary corporate
action, and this Agreement has been duly executed and delivered by the Company.
This Agreement constitutes the valid and binding obligation of the
2
<PAGE> 3
Company enforceable in accordance with its terms. The execution of and
performance of the transactions contemplated by this Agreement and compliance
with its provisions by the Company will not conflict with or result in any
breach of any of the terms, conditions or provisions of, or constitute a default
under, its Articles of Incorporation or Bylaws or any agreement to which the
Company is a party or by which it or any of its properties is bound.
(c) ISSUANCE OF PREFERRED STOCK. The issuance, sale and delivery
of the Preferred Stock in accordance with this Agreement have been duly
authorized by all necessary corporate action on the part of the Company, and the
Preferred Stock when so issued, sold and delivered against payment therefor in
accordance with the provisions of this Agreement, will be validly issued, fully
paid and nonassessable.
4. REPRESENTATIONS OF THE PURCHASER. Each Purchaser acknowledges,
represents and warrants to the Company as follows:
(a) INVESTMENT. Purchaser is acquiring the Preferred Stock for
Purchaser's own account for investment and not with a view to, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling the same; and, except as contemplated by this Agreement,
Purchaser has no present or contemplated agreement, undertaking, arrangement,
obligation, indebtedness or commitment providing for the disposition thereof.
(b) RESTRICTIONS ON TRANSFER. Purchaser acknowledges that the
Preferred Stock has not been registered under the Securities Act of 1933 (the
"Securities Act") or any state securities laws; that the offering and sale of
the Preferred Stock is intended to be exempt from registration under the
Securities Act, based, in part, upon Purchaser's representations, warranties and
agreements contained in this Agreement; that the Preferred Stock and any shares
of common stock of the Company issued upon conversion of the Preferred Stock may
not be sold, transferred or otherwise disposed of in the absence of an effective
registration statement registering such securities under the Securities Act or
an opinion of counsel satisfactory to the Company that registration is not
required under the Securities Act; and that the Company may cause the following
legend to be placed upon the certificate(s) representing shares of Preferred
Stock and shares of common stock issuable upon conversion of the Preferred
Stock.
"The securities represented hereby have not been registered under
the Securities Act of 1933 (the "Securities Act") and may not be
sold, transferred or otherwise disposed of in the absence of an
effective registration statement registering the securities under
the Securities Act or an opinion of counsel satisfactory to the
Company that registration is not required under the Securities
Act."
(c) AUTHORITY. Purchaser: (i) if a natural person, represents
that Purchaser has reached the age of 21 and has full power and authority to
execute and deliver this Agreement and to carry out the provisions hereof and
has adequate means for providing for his or her current financial
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<PAGE> 4
needs and anticipated future needs and possible contingencies and emergencies
and has no need for liquidity in the investment in the Preferred Stock; (ii) if
a corporation, partnership, association, joint stock company, trust,
unincorporated organization or other entity, represents that such entity was not
formed for the specific purpose of acquiring the Preferred Stock, such entity is
duly organized, validly existing and in good standing under the laws of the
state of its organization; the consummation of the transactions contemplated
hereby is authorized by, and will not result in a violation of its charter or
other organizational documents; such entity has full power and authority to
execute and deliver this Agreement and to carry out the provisions hereof and to
purchase and hold the Preferred Stock; the execution and delivery of this
Agreement has been duly authorized by all necessary action; and this Agreement
has been duly executed and delivered on behalf of such entity and is a legal,
valid and binding obligation of such entity; and (iii) if executing this
Agreement in a representative or fiduciary capacity, represents that it has full
power and authority to execute and deliver this Agreement in such capacity and
on behalf of the subscribing individual, ward, partnership, trust, estate,
corporation, or other entity for whom the undersigned is executing this
Agreement, and such individual, ward, partnership, trust, estate, corporation,
or other entity has full right and power to perform pursuant to this Agreement,
and that this Agreement constitutes a legal, valid and binding obligation of
such entity. The execution and delivery of this Agreement will not violate or be
in conflict with any order, judgment, injunction, agreement or controlling
document to which the undersigned is a party or by which it is bound.
(d) ACCREDITED INVESTOR. Purchaser is an Accredited Investor
within the definition set forth in Securities Act Rule 501(a).
(e) DOCUMENTS RECEIVED. Purchaser has received from the Company a
copy of (i) the Company's Prospectus dated May 27, 1997 relating to an offering
of shares of the Company's Common Stock by certain selling stockholders, which
Prospectus was included in the Company's Registration Statement on Form S-3
(Registration No. 333-17829) filed with the Securities and Exchange Commission
("SEC") and declared effective by the SEC on May 27, 1997 and (ii) such other
documents and other written information regarding the finances, operations,
business and prospects of the Company as Purchaser shall have requested.
(f) ADDITIONAL INFORMATION. Purchaser has had the opportunity to
meet with representatives of the Company and to have them answer any questions
and provide additional information regarding the terms and conditions of this
particular investment and the finances, operations, business and prospects of
the Company deemed relevant by the Purchaser and all such questions have been
answered and requested information provided to the Purchaser's full
satisfaction. Purchaser is satisfied that it has received information with
respect to all matters which it considers material to the Purchaser's decision
to convert the Note.
(g) EXPERIENCE AND NET WORTH. Purchaser has such knowledge and
experience in financial and business matters so as to enable Purchaser to
utilize the information made available to Purchaser in connection with the
offering of the Note to evaluate the merits and risks of an investment in the
Preferred Stock and to make an informed investment decision with respect
thereto.
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<PAGE> 5
Purchaser has a sufficient net worth to sustain a loss of its entire investment
in the Company in the event such a loss should occur. Purchaser's overall
commitment to investments which are not readily marketable is not excessive in
view of the Purchaser's net worth and financial circumstances and the purchase
of the Note will not cause such commitment to become excessive.
5. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS. Purchaser's
obligation to convert the Note at the Closing is subject to the fulfillment on
or prior to the Closing Date of each of the following conditions:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty contained in Section 3 shall be true and correct on
and as of the Closing Date with the same effect as though such representation
and warranty had been made on and as of the Closing Date.
(b) PERFORMANCE. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company on or prior to the Closing Date.
6. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the
Company under Section I of this Agreement are subject to fulfillment, on or
before the Closing Date, of each of the following conditions (unless waived by
the Company in its sole discretion):
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of the Purchaser contained in Section 4 shall be
true and correct on and as of the Closing Date with the same effect as though
such representation and warranty had been made on and as of that date.
(b) UNANIMOUS CONSENT. All holders of Notes shall execute this
Agreement.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All agreements,
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the closing of the transactions contemplated
hereby.
8. NOTICES. Any notice, demand or communication required or permitted to
be given by any provision of this Agreement will be in writing and will be
deemed to have been given when delivered personally or by telefacsimile, receipt
confirmed, to the party designated to receive such notice or on the business
date following the day sent by overnight courier or on the third (3rd) business
day after the same is sent by certified mail, postage and charges prepaid,
directed to the Following addresses or to such other or additional addresses as
any party might designate by written notice to the other party:
To Company: 1420 Village Way
Santa Ana, California 92705
Attention: Don Duffy
5
<PAGE> 6
To Purchasers: At the address set forth opposite such
Purchasers' names on Schedule A
9. ATTORNEY FEES. If any legal action or any arbitration upon mutual
agreement is brought for the enforcement of this Agreement or because of an
alleged dispute, breach or default in connection with this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs and expenses incurred in that action or proceeding, in addition to
any other relief to which it may be entitled.
10. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
11. AMENDMENTS AND WAIVERS. Except as otherwise expressly set forth in
this Agreement, any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and the holders of all of the Notes. No waivers of or exceptions to
any term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
12. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13. HEADINGS. The headings of the sections, subsections, and paragraphs
of this Agreement have been added for convenience only and shall not be deemed
to be a part of this Agreement.
14. SEVERABILITY. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, excluding that body of laws
pertaining to conflicts of laws.
16. LEGENDS
(a) NASAA UNIFORM LEGEND: IN MAKING AN INVESTMENT
DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON
OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE
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<PAGE> 7
NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands
as of the day and year first above written.
BIKERS DREAM, INC.
/s/ Don Duffy
----------------------------------------
By: Don Duffy
------------------------------------
Its: CEO
------------------------------------
MULL ACRES INVESTMENTS, INC.
/s/ Jeffrey Silvers
----------------------------------------
By:
------------------------------------
Its:
------------------------------------
7
<PAGE> 1
EXHIBIT 10.28
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment"), made and
entered into as of December 24, 1997, is by and between Ultra Acquisition, Inc.,
a Nevada corporation, and its affiliated companies, including Bikers Dream,
Inc., a California corporation (collectively, the "Company") and Herm Rosenman,
the Company's President and Chief Executive Officer (the "Executive").
RECITALS
WHEREAS, the Company and Executive have entered into an Employment
Agreement dated August 31, 1997 (the "Agreement"), pursuant to which the Company
agreed to retain the Executive's services as President and Chief Executive
Officer pursuant to the terms thereof; and
WHEREAS, the parties desire to amend the Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. All terms defined in the Agreement and used herein shall have the
meaning given them in the Agreement.
2. Paragraph 1 of the Agreement shall be amended by increasing the
three (3) year Term to a five (5) year Term.
3. Paragraph 3(a) shall be amended to read in full as follows:
(a) Salary. During the Term, the Company shall pay to
Executive a total salary of not less than $1,105,000, payable in
monthly installments of $17,361.11 for the first, second and
third years of this Agreement, and payable in monthly
installments of not less than $20,000 for years four and five of
this Agreement. Notwithstanding the foregoing, the Company may in
its sole discretion elect to defer payment of a portion of the
monthly installments in amounts not to exceed $2,361,11 each
month during the year of 1998, provided, however, that the total
amount of payments deferred shall be payable to Executive in
equal monthly installments during the remainder of the term
commencing January 1, 1999, in an amount determined by dividing
the total amount of payments deferred by the total number of
monthly payments remaining during the term as of January 1, 1999.
4. Except as expressly set forth herein, the Agreement shall remain
in full force and effect.
<PAGE> 2
5. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written.
COMPANY
/s/ ANNE TODD
----------------------------------
Anne Todd, Secretary
EXECUTIVE
/s/ HERM ROSENMAN
----------------------------------
Herm Rosenman
<PAGE> 1
EXHIBIT 10.29
STOCK GRANT AND STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as of
the 24th day of December, 1997, by and between Bikers Dream, Inc., a California
corporation ("Company") and Herm Rosenman ("Optionee").
RECITALS
WHEREAS, Rosenman is presently employed as the Company's President and
Chief Executive Officer pursuant to an employment agreement dated August 31,
1997, as amended, (the "Employment Agreement");
WHEREAS, in connection therewith, the Company has agreed to grant
Rosenman certain shares of the Company's common stock upon the terms and
conditions contained herein; and
WHEREAS, in connection therewith, the Company has agreed to grant to
Optionee, effective September 1, 1997, an option to purchase shares of the
Company's common stock upon the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements set forth herein, the parties hereto agree as follows:
1. Stock Grant. Company shall grant Rosenman up to 150,000 shares of the
Company's restricted common stock, to be issued in 50,000 share allotments on
each of the first, second and third anniversaries of the execution of the
Employment Agreement, provided as to each such allotment Rosenman is still
employed thereunder at each such vesting date.
2.. Grant of Option. Company hereby grants to Optionee, effective
September 1, 1997, the right and option to purchase 2,300,000 shares of the
Company's restricted common stock (the "Option Shares") at an exercise price of
$1.00 per share, subject to the terms of this agreement (the "Option"). The
Option shall vest as set forth on Schedule A attached hereto and incorporated
herein by reference.
3. Option Exercise, Stockholder Rights and Legal Requirements
(i) Exercise of Option. The Option may be exercised, to the
extent it has vested, at any time during the five year period beginning at the
vesting date.
(ii) Method of Exercise. The Option may be exercised by giving
written notice of exercise of the Option to the Company at the address set forth
below. The notice shall state Optionee's election to exercise the Option and the
number of Option Shares with respect to which the Option is being exercised and
shall be accompanied by full payment of the purchase price of the shares. A
certificate or certificates for the shares shall be delivered to Optionee as
soon as practicable after receipt of the notice and payment. If the Company
shall determine, in its discretion, that the satisfaction of withholding tax or
other withholding liabilities under any federal, state or local law is necessary
in connection with the exercise of the option, then in such event, the exercise
of the Option shall not be effective unless and until the Company has received
payment of all amounts it is required to withhold.
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<PAGE> 2
(iii) Stockholder Rights. No rights or privileges of a
stockholder in the Company are conferred by reason of the granting of this
Option. Optionee will not become a stockholder in the Company with respect to
the Option Shares unless and until the Option has been properly exercised and
the option price fully paid as to the number of option shares as to which the
option has been exercised.
(iv) Legal Requirements. The Company may require Optionee, or any
transferee, as a condition of exercising the Option, (1) to give written
assurances satisfactory to the Company as to the Optionee's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Option; and (2) to give written assurances satisfactory
to the Company stating that such person is acquiring the Option Shares for such
person's own account and not with any present intention of selling or otherwise
distributing the shares. These requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (i) the issuance of the shares
upon the exercise of the Option has been registered under a then currently
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws.
4. Change in Control. On the date of any termination of Optionee's
employment arising pursuant to a Change in Control (as hereinafter defined),
whether voluntary or involuntary, if there exists no basis for termination
pursuant to Section 6 of the Employment Agreement, the vesting schedule
referenced in paragraph 2 shall be accelerated and the entirety of the Option
shall be immediately vested.
(a) A "Change in Control" shall occur when:
(i) any person (as such term is used in Sections 3(a)(9)
and 13(d)(3) of the Securities Exchange Act of 1934 as in effect on the date
hereof, herein called the "Act"), other than a person beneficially owning (as
such term is used in Section 13(d)(1) of the Act) 15% or more of the voting
securities of the Company on August 31, 1997, or any person substantially all of
the equity of which is owned by the persons who beneficially owned the voting
securities of the Company on August 31, 1997, becomes the beneficial owner,
directly or indirectly, of securities representing at least 25% of the combined
voting power of the then outstanding securities of the Company; or
(ii) during any period of twenty-four consecutive months
(whether commencing before or after the date of this Agreement), individuals who
at the beginning of such period constituted the Company's Board of Directors
cease for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election, of each new director (A) was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period or (B) was pursuant to an arrangement
the same as or substantially similar to any arrangement pursuant to which such
new director's predecessor was nominated; or
(iii) unless theretofore approved by a vote of at least
two-thirds of the Continuing Directors (as hereinafter defined), there is the
approval by the stockholders of the Company of any merger or consolidation, or
any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in
one transaction or a series of transactions) of any assets of the Company or any
subsidiary with or to
2
<PAGE> 3
(A) any Interested Stockholder (as hereinafter defined) or (B) any other person
which is, or after such transaction would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
(iv) there is the approval by the stockholders of the
Company of any plan or proposal for the Company to be Acquired (as hereinafter
defined) or for the liquidation or dissolution of the Company.
(b) The Company shall be considered to be "Acquired" only if the
owners of the Company's voting securities immediately prior to the effective
date of any sale, reorganization, merger, consolidation, liquidation or similar
transaction will not own immediately thereafter, as a result of having owned
such voting securities, securities representing a majority of the combined
voting power of the then outstanding securities of the Company or the entity
that then owns, directly or indirectly, the Company or all or substantially all
its assets.
(c) "Interested Stockholder" shall mean any person (other than
the Company, any subsidiary thereof, any person owning any voting securities of
the Company on August 31, 1997 or any person substantially all of the equity of
which is owned by the persons who beneficially owned the voting securities of
the Company on August 31, 1997) who or which:
(i) is the beneficial owner, directly or indirectly, of
securities representing 10% or more of the combined voting power of the then
outstanding securities of the Company;
(ii) is an Affiliate of the Company, and at any time
within the two year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of securities representing 10% or more
of the combined voting power of the then outstanding securities of the Company;
(iii) is an assignee of or has otherwise succeeded to any
voting securities of the Company which were at any time within the two year
period immediately prior to the date in question beneficially owned by an
Interested Stockholder, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
(e) "Affiliate" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Act.
(f) "Continuing Director" means any member of the Company's Board
of Directors who is unaffiliated with the Interested Stockholder and was a
member of the Board prior to the time that the Interested Stockholder became an
Interested Stockholder and any successor or a Continuing Director who is
unaffiliated with the Interested Stockholder and is recommended to succeed a
Continuing Director by a vote of at least two-thirds of the Continuing Directors
then on the Board.
4. Restrictions on Transfer. Neither the Option granted hereby nor the
Option Shares shall be sold or transferred until either (i) they first have been
registered under the Securities Act, or (ii) the Company first has been
furnished with an opinion of legal counsel, reasonably satisfactory to the
Company, to the effect that such sale or transfer is exempt from the
registration requirements of the Securities Act.
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<PAGE> 4
The certificates evidencing the shares issued upon exercise of
the Option will bear the following restrictive legend unless a registration
statement is in effect with respect to the sale of Option Shares issued upon
exercise of the Option:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") AS
AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE
REGISTERED UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS
NOT REQUIRED."
5. Termination. This Agreement is subject to the continuing
effectiveness of the Employment Agreement. The termination of the Employment
Agreement will result in the concurrent termination of this Agreement, provided,
however, that any portion of the Option that has previously vested shall remain
vested notwithstanding such termination, but any remaining portion of the Option
shall be canceled except as provided in paragraph 3 above.
6. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or by facsimile transmission (with subsequent letter confirmation by mail) to
the parties, their successors in interest or their assignees at the following
addresses, or at such other addresses as the parties may designate by written
notice in the manner aforesaid:
If to the Company: Bikers Dream, Inc.
1420 Village Way
Santa Ana, California 92705
Attn: Donald Duffy, Director
Fax: (714) 835-2414
If to Optionee: Herm Rosenman
111 Marquez Place #309
Pacific Palisades, California 90272
Fax: (310) 454-4315
7. Assignability and Parties in Interest. This Agreement shall not be
assignable by any of the parties without consent of the other. This Agreement
shall inure to the benefit of and be binding upon the parties and their
respective permitted successors and assigns.
8. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal law, and not the law pertaining to
conflicts or choice of law, of the State of California.
9. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
4
<PAGE> 5
10. Complete Agreement. This Agreement contains the entire agreement
among the parties with respect to the specific subject matter hereof and shall
supersede all previous oral and written and all contemporaneous oral
negotiations, commitments and understandings.
11. Modifications, Amendments and Waivers. This Agreement may be
modified, amended or otherwise supplemented only by a writing signed by all of
the parties. No waiver of any right or power hereunder shall be deemed effective
unless and until a writing waiving such right or power is executed by the party
waiving such right or power.
12. Attorneys' Fees and Costs. Should any party institute any action or
proceeding in any court to enforce any provision of this Agreement, the
prevailing party shall be entitled to receive from the losing party reasonable
attorneys' fees and costs incurred in such action or proceeding, whether or not
such action or proceeding is prosecuted to judgment.
13. Contract Interpretation; Construction of Agreement.
(a) The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.
(b) No party, nor its respective counsel, shall be deemed the
drafter of this Agreement for purposes of construing the provisions of this
Agreement, and all language in all parts of this Agreement shall be construed in
accordance with its fair meaning, and not strictly for or against any party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
COMPANY
/s/ Anne Todd
----------------------------------------
Anne Todd, Secretary
OPTIONEE
/s/ Herm Rosenman
----------------------------------------
Herm Rosenman
5
<PAGE> 6
SCHEDULE A
VESTING SCHEDULE
1. The Option will vest as to the number of shares listed in the "Automatic
Vesting" column on the indicated date. The Option will vest as to the number of
shares indicated under the Performance Options column as indicated in paragraph
2.
<TABLE>
<CAPTION>
Date Automatic Vesting Performance Options
---- ----------------- -------------------
<S> <C> <C>
September 1, 1998 400,000 --
September 1, 1999 200,000 200,000
September 1, 2000 250,000 250,000
September 1, 2001 250,000 250,000
September 1, 2002 250,000 250,000
</TABLE>
2. The Performance Options will vest as follows:
<TABLE>
<CAPTION>
Percent of Budget Achieved Percent of Performance Options Vesting
-------------------------- --------------------------------------
<S> <C>
up to 75% 0%
75% to 100% 75% to 100%
</TABLE>
The Performance Options will vest ratably with the percentage of budget
achieved in excess of 75%.
The budget referenced herein is the budget which shall be submitted
annually by Mr. Rosenman and the management team, and approved by the board of
directors.
6
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 14, 1998 accompanying the consolidated
financial statements included in the Annual Report of Bikers Dream, Inc. on
Form 10-KSB for the year ended December 31, 1997. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Bikers Dream, Inc. on Forms S-8 (File Nos. 333-32639 and 333-26719).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 667,258
<SECURITIES> 200,332
<RECEIVABLES> 1,218,270
<ALLOWANCES> 257,000
<INVENTORY> 4,454,091
<CURRENT-ASSETS> 6,399,710
<PP&E> 1,480,597
<DEPRECIATION> 428,402
<TOTAL-ASSETS> 11,289,041
<CURRENT-LIABILITIES> 2,202,802
<BONDS> 2,581,280
0
6,883,885
<COMMON> 11,269,995
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,289,041
<SALES> 14,838,057
<TOTAL-REVENUES> 14,924,987
<CGS> 14,296,108
<TOTAL-COSTS> 5,046,080
<OTHER-EXPENSES> 107,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592,076
<INCOME-PRETAX> (5,116,984)
<INCOME-TAX> 800
<INCOME-CONTINUING> (5,117,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,117,784)
<EPS-PRIMARY> (2.54)
<EPS-DILUTED> (2.54)
</TABLE>
