<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________.
Commission File No. 0-15501
BIKERS DREAM, INC.
Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0140149
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11631 STERLING AVENUE RIVERSIDE, CALIFORNIA 92503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909)-343-1883
Indicate by check mark whether Registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 1998, there were 4,878,437 shares of the Registrant's common
stock outstanding, 3 shares of the Registrant's Series A Preferred Stock
outstanding, 722,600 shares of the Registrant's Series B Preferred Stock
outstanding, and 4 shares of the Registrant's Series C Preferred Stock
outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 208,353 $ 667,258
Marketable securities 197,621 200,332
Accounts receivable, net 3,746,260 961,270
Notes receivable, current portion 18,595 16,999
Inventories 9,072,170 4,454,091
Prepaid expenses and other current assets 391,175 99,760
------------ ------------
Total current assets 13,634,174 6,399,710
Notes receivable, net of current portion 10,754 13,039
Property, equipment and capitalized leases, net 1,074,563 1,052,195
Goodwill - net of amortization 2,678,544 3,520,228
Deposits and other assets 345,135 303,869
------------ ------------
Total assets $ 17,743,170 $ 11,289,041
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,805,784 $ 670,796
Other accrued expenses 1,099,016 1,397,627
Current portion of long-term debt 112,962 89,670
Current portion of notes payable 9,044 8,709
Notes payable to shareholders -- 36,000
------------ ------------
Total current liabilities 3,026,806 2,202,802
Deferred rent 59,046 64,910
Long-term debt and capital leases, less current portion 4,736,850 276,766
Notes payable, less current portion 72,086 2,581,280
------------ ------------
Total liabilities 7,894,788 5,125,758
Shareholders' equity:
Preferred stock, Series A, no par value
30 shares authorized, 3 shares issued and
outstanding at September 30, 1998, and
December 31, 1997 402,500 402,500
Convertible preferred stock, Series B, no
par value 8,000,000 shares authorized,
722,600 shares outstanding at September 30,
1998, and 6,481,385 shares issued and
outstanding at December 31, 1997 722,600 6,481,385
Convertible preferred stock, Series C, no
par value 280 shares authorized, 4 shares
issued and outstanding at September 30, 1998 100,000 --
Common stock, no par value 25,000,000 shares
authorized at September 30, 1998;
4,878,437 issued and outstanding at
September 30, 1998, and 2,544,926 shares
issued and outstanding at December 31, 1997 20,451,280 11,269,995
Accumulated deficit (11,827,998) (11,990,597)
------------ ------------
Total shareholders equity 9,848,382 6,163,283
------------ ------------
Total liabilities and shareholders' equity $ 17,743,170 $ 11,289,041
============ ============
</TABLE>
See the accompanying notes to these financial statements
2
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BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For The
Quarters and Nine Months Ended September 30, 1998, and 1997
(In $000s except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 9,697 $ 4,518 $ 22,696 $ 12,167
COST OF GOODS SOLD 7,511 3,701 18,205 10,280
-------- -------- -------- --------
GROSS PROFIT 2,186 817 4,491 1,887
OPERATING EXPENSES
Selling, general and administrative
expenses 1,226 1,179 3,474 4,070
Depreciation and amortization 146 91 418 251
-------- -------- -------- --------
Total expenses 1,372 1,270 3,892 4,321
-------- -------- -------- --------
OPERATING INCOME (LOSS) 814 (453) 599 (2,434)
OTHER EXPENSE
Interest Expense 208 245 414 517
Other expense, net 4 160 23 184
-------- -------- -------- --------
Total other expense 212 1,675 437 5,022
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 602 (858) 162 (3,135)
PROVISION FOR INCOME TAX -- -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE
PREFERRED STOCK DIVIDENDS 602 (858) 162 (3,135)
PREFERRED STOCK DIVIDENDS -- -- (1,292) --
-------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ 602 $ (858) $ (1,130) $ (3,135)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.14 $ (0.40) $ (0.36) $ (1.56)
Diluted $ 0.12 $ (0.40) $ 0.04 $ (1.56)
WEIGHTED-AVERAGE COMMON SHARES
Basic 4,205 2,141 3,159 2,011
Diluted 5,035 2,141 3,999 2,011
</TABLE>
- -----------------
* Adjusted for the Company's 1 for 5 reverse stock split of February 1998
See the accompanying notes to these financial statements
3
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BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1998, and 1997
(In $000s)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 162 $(3,135)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 418 251
(Increase) decrease in:
Accounts receivable (2,785) (535)
Inventories (4,618) (3,185)
Prepaid expenses and other current
assets (293) (16)
Increase (decrease) in:
Accounts payable 1,135 273
Other accrued expenses (299) 493
------- -------
Net cash used in operating
activities (6,280) (5,623)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in deposits 39 (16)
(Increase) in property, plant and equipment (243) (511)
Purchase of (loss on) marketable securities (3) (200)
Purchase of Ultra Kustom Cycles and Ultra
Kustom Parts -- (1,100)
(Decrease) in deferred rent (6) (1)
Other 139 16
------- -------
Net cash used in investing
activities (152) (1,812)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 4,500 --
Principal payments made on long-term debt and
capitalized leases (35) (61)
Proceeds from issuance of preferred stock 3,075 --
Costs associated with issuance of preferred stock (35) --
Proceeds from exercise of options 213 --
Proceeds from issuance of convertible notes
payable 800 4,920
Proceeds from issuance of notes payable -- 2,500
Principal payments made on notes payable (2,509) (37)
Payments made on notes payable to shareholders (36) (36)
------- -------
Net cash provided by financing
activities 5,973 7,286
------- -------
Net increase in cash and cash
equivalents (459) (149)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 667 248
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 208 $ 99
======= =======
</TABLE>
See the accompanying notes to these financial statements
4
<PAGE> 5
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, and 1997
1. The consolidated financial statements include the accounts of Bikers Dream,
Inc. and all of its wholly-owned subsidiaries. All significant inter-company
accounts and transactions are eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the audited financial statements of the Company for the year ended
December 31, 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION:
PRODUCT SALES - Motorcycle manufacturing revenue from the sale of product is
recognized at the time of shipment. Retail revenue from the sale of products
is recognized at the time of sale to a retail customer. Motorcycle
manufacturing sales made to the Company-owned stores are eliminated in
consolidation.
INCOME TAXES:
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes will be 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 will be established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
NET EARNINGS OR LOSS PER COMMON SHARE:
The computation of diluted net earnings or loss per share was anti-dilutive
in the 1997 periods presented; therefore, the amounts reported for basic and
diluted are the same. Net income or loss per common share was determined by
dividing net income or loss by the weighted average shares outstanding in
each period. Effective February 5, 1998, the Company effected a 1-for-5
reverse stock split of its common stock. All shares and per share data are
presented to reflect the 5-for-1 stock split for all periods presented.
The basic and diluted net earnings per share for the nine months ended
September 30, 1998 reflect the impact of EITF D-60. This pronouncement of
the Financial Accounting Standards Board sets forth the SEC staff's position
on accounting for the issuance of certain types of convertible preferred
stock. EITF D-60 recommends that a beneficial conversion feature be treated
(for the purposes of the presentation of earnings per share) as a return to
the preferred shareholders over the minimum period that it is realized.
The Company's Series C preferred stock, issued in the second quarter of
1998, qualifies for the presentation recommended in EITF D-60 and the
presentation of the net earnings per share for the nine months ended
September 30, 1998, is presented accordingly.
CASH AND CASH EQUIVALENTS:
For purposes of the balance sheet and the statement of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost or market using a cost method
which approximates average cost. Inventory consists primarily of purchased
items, together with labor and overhead that has been applied thereto.
5
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PROPERTY, EQUIPMENT AND CAPITALIZED LEASES:
Property, equipment and capitalized leases are recorded at cost with
depreciation and amortization provided using the straight-line method over
the estimated useful lives of the assets, which range from three to ten
years or the term of the lease, whichever is the lesser.
Repairs and maintenance are expensed as incurred. When property and
equipment are retired or disposed of, the related costs and accumulated
depreciation and amortization are eliminated from the accounts and any gain
or loss on such disposition is reflected in operations.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
3. SERIES C PREFERRED STOCK
On April 16, 1998, the Company sold through a private offering 155 Units at
$25,000 per Unit, of Series C Preferred Stock. Each Unit consisted of one
share of the Company's Series C Preferred Stock (the "Preferred C") and
1,250 Series F Common Stock Purchase Warrants (the " F Warrants") to
purchase one share of the Company's common stock at $5.00 per share, for
total consideration of $3.875 million. Each share of the Company's Preferred
C is convertible, at the option of the holder, at any time after the date of
issuance (the "Conversion Date"), into shares of the Company's common stock.
The price at which the Preferred C converts into the Company's common stock
(the "Conversion Price"), is determined by dividing $25,000 by the greater
of; (1) seventy-five percent (75%) of the average closing price of the
Company's common stock for the ten trading days immediately preceding the
Conversion Date, or (2) $2.50, provided, however, that under no circumstance
shall the Conversion Price exceed $4.00. Under certain circumstances, the
Conversion Price is subject to adjustment. The Preferred C shall be
automatically converted into the Company's common stock in the event the
closing price equals or exceeds $8.00 per share for any period of twenty
(20) consecutive trading days. During the third quarter ended September 30,
1998, 151 shares of Series C Preferred stock were converted into 1,222,595
shares of common stock. As of November 3, 1998, all the Series C Preferred
had been converted into common shares.
4. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases all of its operating facilities located in Santa Ana,
Sacramento, San Diego, and Riverside, California, as well as in Deep Ellum
and Farmers Branch in Dallas, Texas.
5. RELATED PARTY TRANSACTIONS:
In February 1998, Meyer Duffy & Associates (an affiliate of the Company),
through affiliated partnerships, provided the Company an $800,000 loan,
(herein referred to as "Bridge Loan") bearing interest at 12% per annum.
Meyer Duffy & Associates through affiliated partnerships also received
150,000 warrants at $5.00 per share, pending completion of the Series C
Preferred Stock offering (Refer to Footnote 3). Donald Duffy, a principal of
Meyer, Duffy & Associates, is currently a director of the Company and was
Chairman of the Board of the Company at the time of the Bridge Loan. The
Company also maintains a consulting arrangement with Meyer Duffy. Upon
completion of the Series C Preferred Offering, this Bridge Loan was
converted into 32 units of Series C Preferred Stock. Meyer Duffy &
Associates through affiliated partnerships also purchased 28 units of the
Series C Preferred stock. During the third quarter ended September 30, 1998
Meyer Duffy & Associates through affiliated partnerships converted all 60
units into 495,050 shares of common stock.
In October 1998, Meyer Duffy & Associates (an affiliate of the Company),
through affiliated partnerships, provided the Company $300,000 pursuant to a
motorcycle flooring arrangement evidenced initially by an unsecured note,
bearing interest at eighteen percent (18%) per annum, pending completion of
documentation for a formal flooring agreement. This loan was needed in order
to finance the Company's continued growth until the closing of a revolving
credit agreement, now being negotiated by the Company, and corresponding
refinancing of the existing long-term debt.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report 10-Q are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects," "estimates," or words of similar meaning. Similarly, references to
the Company's future plans, objectives or goals are forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
which are described in close proximity to such statements and which could cause
actual results to differ materially from those anticipated as of the date of
this report. Shareholders, potential investors, and other readers are urged to
consider these factors in evaluating the forward-looking statements, and are
cautioned not to rely on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
The Company conducts its operations through two operating divisions: Motorcycle
Manufacturing and Retail Stores. The Motorcycle Manufacturing division includes
the manufacture of heavyweight cruiser motorcycles by the Company at its
Riverside, California facility and the sale of these motorcycles to dealers in
its independent dealer network and through its five Company-owned Superstores.
The Retail Stores division includes sales of motorcycles, parts and accessories
by the Company's Superstores.
In accordance with the Company's business plan, the Company's efforts are
currently focused primarily on the growth of the Motorcycle Manufacturing
division through increasing its manufacturing capability and the expansion of
the Company's independent dealer network. The Company expects that in future
periods, an increasing proportion of the Company's revenues will be derived from
the Motorcycle Manufacturing division.
The Company's operations are expected to be impacted by general seasonal trends
that it believes are characteristic of the motorcycle industry. The Company has
historically not been affected by seasonal trends because it began manufacturing
operations in February 1997, and by the fall and winter months of 1997 and early
1998, had sufficient dealer demand to absorb all of the production the Company
was able to achieve at that time. In 1998, however, production has been
substantially increased to a point that the Company expects some effect due to
seasonal trends. The Company therefore expects higher revenues to occur in the
second and third quarters in future years. Due to this seasonality in the
Company's operations, the Company's three- and nine-month results may not be
indicative of the results of operations for the full fiscal year.
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997:
Total revenues for the three months ended September 30, 1998, were $9,697,000 as
compared to $4,518,000 for the same quarter in 1997, representing an increase of
$5,179,000, or 115%.
After giving effect to the elimination of interdivisional charges of $1,256,000,
revenues attributable to the Company's Motorcycle Manufacturing and Retail
Stores divisions for the three months ended September 30, 1998, were $6,388,000
and $3,309,000, respectively, as compared to $1,830,000 and $2,688,000 for the
comparable period a year earlier.
The increase in net sales in the Motorcycle Manufacturing division was primarily
attributable to an increase in units sold to 469 from 183 for the comparable
period a year earlier. The increase in units sold was attributable to a larger
dealer network, which increased to approximately 100 dealers at September 30,
1998, as compared to approximately 27 dealers as of September 30, 1997. All of
the active dealers within the Company's dealer network are located in the United
States.
Currently, the Company has the capacity to manufacture approximately 200 units
per month. The Company is pursuing a long-term strategy to significantly
increase motorcycle production capacity with a goal of having the capacity to
manufacture approximately 300 units a month by the end of 1999. The Company does
not expect that such an increased capacity can be supported by sales through the
Company's existing dealer network, and the Company's ability to increase sales
in accordance with its strategy is therefore dependent on the continued
expansion of the Company's dealer network. The Company also seeks to stimulate
demand for its motorcycles by additional marketing efforts, advertising through
different media and national advertising of its products, which the Company
believes will aid in attracting new dealers and will promote increased sales
from existing dealers.
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<PAGE> 8
The increase in net sales in the Retail Stores division was attributable to a
20% increase in same store sales for the four Superstores which were operating
during both periods, and the addition in August 1998, of a new Superstore in the
Deep Ellum, Dallas, Texas market, bringing the total number of Company owned
Superstores to five. The Company's Superstores range in size from 5,000 to
12,000 square feet and sell a product line which primarily includes new Ultra
Cycles manufactured by the Company, and used Harley-Davidsons. The Company does
not currently plan to open additional Company-owned Superstores, although plans
may change if an exceptional opportunity arises.
Cost of goods sold for the three months ended September 30, 1998, was $7,511,000
(i.e. 77% of revenues) compared to $3,701,000 (i.e. 82% of revenues) for the
comparable period a year earlier, representing an increase of $3,810,000, or
103%. With revenues rising at a faster rate than cost of goods sold, the
Company's gross margin improved to 23% from 18%, and gross profit increased by
$1,369,000, to $2,186,000 for the three months ended September 30, 1998, from
$817,000 for the comparable period a year earlier.
The increase in gross margins is principally due to the increased production in
the Company's Motorcycle Manufacturing division, which permitted improved cost
efficiencies. Gross margins in the Motorcycle Manufacturing division were
approximately 25% during the three months ended September 30, 1998, as compared
to approximately 17% for the Retail Stores division. Management believes that
gross margins in the Motorcycle Manufacturing division should continue to
improve with increases in production, as the Company expects to benefit from
growing economies of scale.
Selling, general and administrative expenses were $1,226,000 (i.e. 13% of total
revenues), for the quarter ended September 30, 1998, compared to $1,179,000
(i.e. 26% of total revenues), for the three months ended September 30, 1997,
representing an increase of $47,000, or 4%. Selling, general, and administrative
expenses consist primarily of corporate operating expenses, professional fees,
and salaries. The percentage increase in selling, general and administrative
expenses was substantially less than the percentage increase in total revenues,
reflecting improved utilization of corporate and administrative personnel and
some reduction in the labor force, offset by the increased costs associated with
increased Company operations.
Depreciation and amortization expense for the quarter ended September 30, 1998,
totaled $146,000 compared to $91,000 for the same period in 1997. The increase
is attributable to a changing of the amortization period of goodwill from a
forty-year amortization period to a fifteen-year amortization period.
As a consequence of the foregoing, the Company's operating income was $814,000
for the three months ended September 30, 1998, as compared to an operating loss
of $458,000 for the comparable period a year earlier.
Interest expense declined by $37,000, from $245,000 for the three months ended
September 30, 1997, to $208,000 for the three months ended September 30, 1998.
The decrease is primarily attributable to less debt outstanding compared to the
same period in 1997.
There is no provision for income taxes in 1998. The Company has fully reserved
for the deferred tax asset related to its net operating loss carry-forwards
beginning in the second quarter of 1995. The Company's management has concluded
that, based upon its assessment of all available evidence, the future benefit of
this asset cannot be projected accurately at this time.
For the three month period ended September 30, 1998, the Company reported a net
income of $602,000, compared to a net loss of $858,000, for the comparable
period a year earlier. The improved profitability of $1,460,000 is the result of
the aforementioned increases in manufacturing and sales as well as improved
operating efficiencies.
The Company's ability to continue to improve its profitability in future periods
will depend upon a number of factors including, without limitation, continued
demand for heavyweight motorcycles, generally, and the Company's products,
specifically, the ability of the Company to continue the expansion of its dealer
network, and the ability of the Company to increase its manufacturing capability
on a cost-effective basis.
While the Company does not expect inflation to have a material impact upon its
operating results, there can be no assurance that inflation will not affect the
Company's business in the future. The Company expects to mitigate inflationary
increases through securing additional purchase volume discounts as production
continues to increase, as well as selected price increases for its products.
8
<PAGE> 9
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997:
Total revenues for the nine months ended September 30, 1998, were $22,679,000,
as compared to $12,167,000 for the comparable period a year earlier,
representing an increase of $10,512,000, or 86%.
After giving effect to the elimination of interdivisional charges of $3,326,000,
revenues attributable to the Company's Motorcycle Manufacturing and Retail
Stores divisions for the nine months ended September 30, 1998, were $13,294,000
and $9,402,000 respectively, as compared to $4,327,000 and $7,840,000 for the
comparable period a year earlier.
The increase in net sales in the Motorcycle Manufacturing division was primarily
attributable to an increase in units sold to 1068 from 439. The increase in
units sold was attributable to a larger dealer network, which increased to about
100 dealers at September 30, 1998, as compared to approximately 27 dealers as of
September 30, 1997.
The increase in net sales in the Retail Stores division was attributable to a
20% increase in same store sales for the four Superstores which were operating
during both periods, and the addition in August 1998, of a new Superstore in the
Deep Ellum, Dallas, Texas market.
Cost of goods sold for the nine months ended September 30, 1998, was $18,205,000
(i.e. 80% of revenues) compared to $10,280,000 (i.e. 84% of revenues) for the
comparable period a year earlier, representing an increase of $7,925,000, or
77%. With revenues rising at a faster rate than cost of goods sold, the
Company's gross margin improved to 20% from 16%, and gross profit increased by
$2,604,000, to $4,491,000 for the nine months ended September 30, 1998, from
$1,887,000 for the comparable period a year earlier.
The increase in gross margins is principally due to the increased production in
the Company's Motorcycle Manufacturing division, which permitted improved cost
efficiencies. Gross margins in the Motorcycle Manufacturing division were
approximately 23% during the nine months ended September 30, 1998, as compared
to approximately 15% for the Retail Stores division.
Selling, general and administrative expenses were $3,474,000 (i.e. 15% of total
revenues), for the nine months ended September 30, 1998, compared to $4,070,000
(i.e. 33% of total revenues), for the nine months ended September 30,1997,
representing a reduction of $596,000, or 15%. Selling, general, and
administrative expenses consist primarily of corporate operating expenses,
professional fees, and salaries. The decrease in selling, general and
administrative expenses, despite a substantial increase in total revenues,
reflected significant cost-cutting measures implemented during the year
including a general reduction in the labor force.
Depreciation and amortization for the nine months ended September 30, 1998,
totaled $418,000 compared to $251,000 for the same period in 1997. The increase
is primarily attributable to a changing of the amortization period of goodwill
from a forty-year amortization period to a fifteen-year amortization period.
As a consequence of the foregoing, the Company's operating income was $599,000
for the nine months ended September 30, 1998, as compared to an operating loss
of $2,434,000 for the comparable period a year earlier.
Interest expense declined by $103,000, from $517,000 for the nine months ended
September 30, 1997, to $414,000 for the nine months ended September 30, 1998.
The decrease is primarily attributable to a debt restructuring which took place
in November 1997.
For the nine month period ended September 30, 1998, the Company had a net income
of $162,000, compared to a net loss of $3,135,000 for the comparable period a
year earlier. The improved profitability is the result of the aforementioned
increases in manufacturing and retail sales, as well as improved operating
efficiencies and cost reduction measures.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Some of the
Company's computer programs that have data sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar business activity.
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<PAGE> 10
Based on a recent assessment, the Company has determined that it may be required
to modify or replace certain portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company's
computer systems are entirely "PC" based utilizing "off-the-shelf" software
produced by a limited number of major software suppliers.
The Company has initiated formal communications with all of the significant
suppliers of its information technology ("IT") and non-IT systems in order to
receive assurances that both its IT and non-IT systems are Year 2000 compliant.
Based upon the responses received, the Company intends, during the first half of
1999, to run test transactions on all of its systems to confirm the Year 2000
operability of such systems. In the event that such testing reveals Year 2000
vulnerability, the Company believes that with modifications to existing systems
and conversions to new systems, the Year 2000 issue can be mitigated. The
Company believes that such communication, testing, and modifications and/or
replacements can be accomplished at an estimated cost of less than $20,000.
The Company has also initiated formal communications with all of its significant
vendors and large customers to determine to what extent the Company might be
vulnerable to those third parties' failure to remedy their own Year 2000 issue.
There can be no assurance that the systems of third parties will be timely
converted. The Company, however, has a relatively small number of significant
suppliers, and it believes that alternative suppliers will be available for all
required parts. The Company will continue to monitor the compliance activities
of its key suppliers up to the Year 2000, and if satisfactory assurances of
compliance cannot be received in a timely fashion, the Company expects to enter
into replacement arrangements with other vendors.
As the number of units held by a dealer at any one time range from one to
fifteen, the Company believes that the ordering and invoicing process with such
dealers could, if need be, be handled on a manual basis for a limited time until
compliance is obtained.
The most reasonably likely worst case scenario for the Company is the failure of
banking institutions, through which the Company clears its financial
transactions, to become Year 2000 compliant. In the event any such banking
institutions do not become Year 2000 compliant in a timely manner, the Company
may be unable to gain access to funds when needed or to pay its obligations when
due. The Company would be required to delay or defer financial transactions,
which could severely and adversely affect the Company's financial condition. To
the extent that operations could continue on a manual basis, there would be an
impact relating to the additional cost and delay associated with manual
processing.
Pending completion of its review and testing process, the Company does not yet
have a contingency plan as such. It is expected that such a plan will be
prepared by mid-1999. The Company has determined, however, that to the extent
any key supplier, vendor or customer of the Company cannot demonstrate such
person's Year 2000 compliance to the Company's satisfaction, and if short-term
manual back-up systems cannot be implemented without adversely effecting the
Company's operations, then the Company will seek to establish relationships with
other suppliers, vendors, or customers who can provide assurance of Year 2000
compliance.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes its working capital primarily to finance the motorcycles
which it manufactures. Typically, manufacturing costs are incurred one to two
months prior to receipt of payment for the finished product. As the operations
of the Company expand, internally generated cash is not sufficient to meet the
Company's working capital needs. Accordingly, the Company has needed to look to
outside funding sources to address its liquidity and working capital needs.
Historically, the Company has addressed these needs primarily through private
equity placements and secured debt-financing arrangements with lenders.
During the nine months ended September 30, 1998, the Company completed a private
placement of Series C Convertible Preferred Stock, which generated approximately
$3.875 million in cash. In addition, in June 1998, the Company completed a
three-year senior secured loan with Tandem Capital of Nashville, Tennessee. The
amount of the loan is $4.5 million. The loan bears interest at 12% per annum and
stipulates quarterly payments. The Tandem loan is secured by a first lien on
substantially all of the Company's assets. In connection with this loan, Tandem
also received 370,000 warrants to purchase the Company's common stock at an
exercise price equal to $4-1/16 payable in cash or in-kind by debt cancellation.
The proceeds of the loan were used to repay $2.5 million of then-existing
long-term debt, with the remaining $2 million used to expand the Company's
motorcycle manufacturing operations.
10
<PAGE> 11
In October 1998, Meyer Duffy & Associates (an affiliate of the Company),
through affiliated partnerships, provided the Company $300,000 pursuant to a
motorcycle flooring arrangement evidenced initially by an unsecured note,
bearing interest at eighteen percent (18%), pending completion of documentation
for a formal flooring agreement. This loan was needed in order to finance the
Company's continued growth until the closing of a revolving credit agreement,
now being negotiated by the Company, and corresponding refinancing of existing
long-term debt.
Cash used for operating activities totaled $6.280 million for the nine months
ended September 30, 1998, as compared to cash used for operating activities of
$5.623 million for the same period in 1997. The increase in cash used for
operating activities primarily resulted from increased manufacturing operations.
Significant working capital changes included an increase of $2.25 million in
accounts receivable and an increase in inventories of $1.433 million
attributable to an increase in production in the Motorcycle Manufacturing
division, offset, in part, by an increase in accounts payable of $862,000.
Cash used for investing activities totaled $152,000 during the nine months ended
September 30, 1998, as compared to cash used for investing activities of $1.812
million during the prior year's period. The decrease results from the following:
(1) slightly lower investment in property, plant, and equipment in 1998, (2) the
acquisition, in 1997, of the assets of the Ultra Kustom Cycles and Ultra Kustom
Parts divisions of Mull Acres Investments ("MAI"), offset by the elimination, in
conjunction with such acquisition, of the Company's investment in a
joint-venture with MAI.
Cash provided by for financing activities totaled $5.973 million for the nine
months ended September 30, 1998, as compared to cash provided by financing
activities of $7.286 million during the prior year's period. Principal payments
on long-term debt and short-term debt totaled $2.580 million and $98,000,
respectively, for the nine months ended September 30, 1998. Net proceeds from
the issuance of preferred stock totaled $3.875 million and the exercise of
previously outstanding stock warrants/options totaled $213,000 during the
period.
OUTLOOK
As the Company continues to pursue its growth strategy, additional financing
will be required principally for its motorcycle manufacturing operations. The
Company currently has the capacity to manufacture approximately 200 units per
month, with a goal of increasing capacity to over 300 units a month by the end
of 1999. The Company also intends to move to a new manufacturing facility with
approximately twice the manufacturing space it currently possesses, with such a
move expected to cost between $250,000 and $350,000.
Assuming that revenues generated by its Superstores do not materially decline,
the Company does not believe that working capital from external sources will be
needed for its Retail Store division. The Company does not currently plan to
open additional Company-owned Superstores, although such plans may change if an
exceptional opportunity arises.
Although the Company believes it can, at its current level of operations,
adequately service its existing indebtedness and meet its working capital needs
utilizing available internal cash, however, additional cash and/or credit
availability will be required to meet its manufacturing expansion goals. It is
currently expected that the Company's additional financing will be in the form
of both additional placement of equity and receivable- and inventory-based debt
financing; however, the Company will continue to evaluate financing alternatives
based upon changing market conditions. The Company believes that its available
cash and cash resources, combined with additional financing which it can
reasonably expect to obtain, will be sufficient to fund current activities.
There can be no assurances, however, that the Company will be able to meet its
expansion goals. Such expansion goals may not be met if, for example, the
Company is unable to raise additional equity capital or debt financing, the
Company experiences delays establishing a new manufacturing facility, or if the
Company is unable (due to a lack of dealers or demand) to sell all of the
motorcycles which it may have the capacity to produce.
11
<PAGE> 12
PART II
OTHER EVENTS
ITEM 1 - LEGAL PROCEEDINGS
As described in the Company's latest Form 10-KSB, Donald Bogert, Brenda
Bogert and Bikers Dream of North Carolina, Inc. ("Bogert") 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 Bogert in June 1994, as well as breach of contract.
Bogert sought 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 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 continued in May
1998. A decision in the arbitration was reached in June 1998, which
requires the Company to rescind the franchise agreement. A total of
$125,000 has been deposited by the Company into an escrow account to
cover the potential costs of such rescission. The Company currently
expects that less than the full amount of the deposit will be required
in order to comply with the arbitration decision.
As referenced in the Company's Form 10-QSB for the quarter ended June
30, 1997, on June 18, 1997, the Company was served as a co-defendant in
a claim filed in the Superior Court of the State of California for the
County of Orange by Frank Pierce Jones. The complaint named several
co-defendants, including Mull Acres Investments, Inc. ("MAI"), and sough
to recover from these several entities a $300,000 judgement previously
obtained by the plaintiff from Tiffany Coachworks, Inc. ("TCI").
Plaintiff sued the Company on the theory that the Company was a
successor to TCI, insofar as the Company purchased the assets of the
Ultra Kustom Cycles and Ultra Kustom Parts businesses from MAI, which
allegedly is an affiliate of TCI. Pursuant to a settlement agreement in
February 1998, the plaintiff amended the complaint to remove the Company
as a defendant.
ITEM 2 - CHANGE IN SECURITIES
During the quarter ended September 30, 1998, the Company sold the
following securities which were not registered under the Securities Act
of 1933, as amended (the "Securities Act"). The Company believes that
the transaction described below were all exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offerings. In each transaction,
the number of investors was limited, the investors confirmed to the
Company their investment intent, the investors were provided with
information about the Company and/or access to such information, and
restrictions were placed on resale of the securities. In each
transaction involving the issuance of stock options or warrants, the
exercise price was equal to the fair market value of the Company's
common stock as of the date of grant of such options or warrants. No
underwriters were used or commissions paid in connection with any such
sales.
In September 1998, the Company received notice of exercise from a single
investor with respect to 20,000 previously issued Series D Warrants, and
received $80,000 in payment of the exercise price of $4.00 per share
with respect to such Warrants.
ITEM 3 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on July 31, 1998.
The stockholders took the following actions at the meeting:
1. Elected Herm Rosenman, Donald J. Duffy, Humbert Powell, III, John
Russell, and Bruce Scott to the Company's Board of Directors. Each of
Messrs. Rosenman, Duffy, Powell, Russell and Scott was elected by the
vote of 3,665,867 in favor and 37,121 against, with no one abstaining
and no broker non-votes.
2. Approved the Company's 1998 Stock Option Plan by the vote of
2,411,667 in favor and 60,252 against, with 973 abstaining and
1,230,096 broker non-votes.
3. Ratified the selection by the Company's Board of Directors of Singer,
Lewak, Greenbaum, and Goldstein as the Company's Independent auditors
for the fiscal year 1998 by the vote of 3,648,219 in favor and 50,004
against, with 509 abstaining and 4,256 broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-K
Not applicable.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: November 23, 1998 BIKERS DREAM, INC.
By: /s/ HERM ROSENMAN
--------------------------------------
Herm Rosenman, Chief Executive Officer
By: /s/ ANNE TODD
--------------------------------------
Anne Todd, Chief Accounting Officer
13
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 208,353
<SECURITIES> 197,621
<RECEIVABLES> 4,024,162
<ALLOWANCES> (277,902)
<INVENTORY> 9,072,170
<CURRENT-ASSETS> 13,634,174
<PP&E> 1,723,934
<DEPRECIATION> (649,371)
<TOTAL-ASSETS> 17,743,170
<CURRENT-LIABILITIES> 3,026,806
<BONDS> 0
0
1,225,100
<COMMON> 20,451,280
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,743,170
<SALES> 22,610,666
<TOTAL-REVENUES> 22,695,874
<CGS> 18,204,756
<TOTAL-COSTS> 3,891,383
<OTHER-EXPENSES> 23,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413,637
<INCOME-PRETAX> 0
<INCOME-TAX> 162,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,600
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.12
</TABLE>
