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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 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.
(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)
3810 Wacker Drive Mira Loma, California 91752
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 360-2500
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 registrant'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. [ ]
State issuer's revenues for its most recent fiscal year. The issuer had revenues
of $27,734,620 for the fiscal year ended December 31, 1998.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act). The aggregate market value of the voting and
non-voting common equity held by non-affiliates on April 1, 1999 was
approximately $12,809,038 based on the closing price of the Company's Common
Stock on the Nasdaq SmallCap Market on that date.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of April 1, 1999, 5,157,590 shares
of the issuer's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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Bikers Dream, Inc. hereby amends and restates in its entirety the Form
10-KSB for the fiscal year ended December 31, 1998. This amendment and
restatement is the result of a review by the Securities and Exchange
Commission. The purpose of the amendment is to make corrections as described in
footnote 19 (entitled "Restatement of Certain Transactions as of December 31,
1998 and 1997") to the financial statements appearing in this report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL BUSINESS DEVELOPMENT
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 Biker's Dream, Inc., a California corporation
engaged in the sales and service of used Harley-Davidson motorcycles. Prior to
its acquisition of Biker's Dream, Inc., the Company effected a 1 for
1,363.341473 reverse split of its outstanding Common Stock. After the
acquisition, Biker's Dream, Inc. was merged into HDL Communications and HDL
Communications changed its name to Bikers Dream, Inc. For accounting purposes,
Biker's 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 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
The Company's Motorcycle Manufacturing and Distribution ("Motorcycle") division
consists of the Company's wholly-owned subsidiary, UAC. The Motorcycle division
designs, manufactures and sells "V" twin powered 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. In February 1999, the Company entered
into a lease for a new 56,000 square foot assembly facility and administrative
offices in Mira Loma, California. The Company anticipates that it will vacate
the Riverside premises and move to the new Mira Loma headquarters by May 1999.
See Item 2 -- "Description of Property."
The Motorcycle division currently offers ten models under the Ultra Cycles name:
the "Groundpounder", the "Jackhammer", the "Patriot", the "Legacy", the
"Cruiser", the "Wide Series" I & II, the "Groundpounder ST", the "Jackhammer ST"
and the "Avenger." All Ultra Cycles models emphasize customized features,
including polished or painted 96 and 113 cubic inch high performance S&S motors,
custom gas tanks, fenders and paint schemes, and chrome and billet aluminum
accessories, as standard equipment. 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 accessories. Parts in these product categories are
continually being developed and enhanced.
Distribution of Products; Dealer Network. The Motorcycle division distributes
its products through a distribution network of six owned Bikers Dream
Superstores, approximately 40 independently owned Bikers Dream Superstores and
approximately 65 independent Ultra Cycles dealers. In addition, the Company has
recently entered into a distribution agreement with Costco Companies Inc.
("Costco"), operator of 200 U.S. and 70 international warehouse-style consumer
buying outlets, pursuant to which Costco will conduct test marketing of Ultra
Cycles at selected Costco stores. 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 assistance. In
addition, the Company provides its Bikers Dream Superstores with marketing
assistance.
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Market for Company's Products. Heavyweight cruiser motorcycles are in high
demand in the United States. The market leader is Harley-Davidson Inc. which,
according to its 1998 annual report Form 10-k, controls approximately 49.5% 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).
According to such reports, the heavyweight cruiser motorcycle segment, including
related parts, accessories and service, accounts for 60% of the U.S. motorcycle
market. The market leader is Harley-Davidson, Inc. which, according to its 1998
annual report on Form 10-K, controls approximately 49.5% of the heavyweight
motorcycle market.
Competition. The U.S. heavyweight cruiser motorcycle market in which the Company
competes 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, have a larger number of distribution outlets and dealers, and
are more diversified than the Company.
The Company seeks to avoid direct competition with Harley-Davidson, the largest
seller of heavyweight cruiser motorcycles, by operating within a specialized
niche of the heavyweight market. Within this niche, the Company competes on the
basis of product performance and style, pricing, service and warranties. This
competitive strategy includes offering certain customized features (such as
polished or painted high-performance engines) at no additional charge over base
prices, as well as a four-year, unlimited mileage warranty for all models. The
main competitors within the Company's market niche are Titan Motorcycles, Big
Dog Motorcycles and CMC (California Motorcycle Corp.). There can be no assurance
that the Company's competitors will not expand their product lines or
manufacturing operations, or that other motorcycle manufacturers will not enter
this market.
RETAIL STORES
The Retail Stores division operates six Company-owned Bikers Dream Superstores
and licenses the Company's name, and use of its business model and operating
manuals, to its independently owned Bikers Dream Superstores and Ultra Cycles
dealers. The Company and licensed Superstores sell Ultra 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.
The Company-owned Superstores are located in San Diego, Santa Ana and
Sacramento, California, Conover, North Carolina, and Dallas and Farmers Branch,
Texas. Approximately 40 independently owned, licensed Bikers Dream Superstores
and approximately 65 licensed, independent Ultra Cycles dealers located
throughout the United States serve markets not currently served by the
Company-owned Superstores.
The Retail Stores division also operates "Dream Wheels", which functions as a
mobile showroom. "Dream Wheels" is a 53-foot tractor/trailer which travels the
United States to promote and market the Company's dealers and Ultra Cycles brand
of 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 motorcycles and
merchandise, a warehouse for inventory and a repair and service department. 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 Cycles 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
the Bikers Dream Superstores compare favorably with many of the independent
retailers of heavyweight cruiser motorcycles. The independent Ultra Cycles
dealers 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.
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The Company recently has launched testing of a fully interactive e-commerce web
site which the Company anticipates will be fully operational by May 1999. The
web site will enable consumers to purchase motorcycle parts, including the
Company's Ultra Kustom Parts, accessories and apparel. The site will also enable
consumers to view all models of Ultra Cycles, locate dealers and obtain credit
approvals for motorcycle purchases. Consumers located outside territories
covered by Bikers Dream Superstores and Ultra Cycle dealers will be able to
purchase motorcycles over the Internet.
The service department of each Superstore performs service work on most cruiser
motorcycles, including Ultra 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 Harley-Davidson and the licensed Harley-Davidson
motorcycle dealer network, which primarily sell new Harley-Davidson motorcycles,
accessories and parts. Other competitors include the 7,000+ motorcycle retail
outlets located throughout the United States which provide new and used
motorcycles, aftermarket parts, services and accessories. Competition could
increase if current competitors of the Company expand their retail facilities
and operations or new competitors with substantial capital and other resources
enter the retail market.
MATERIALS AND SUPPLIERS
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 and S&S, from which the Company purchases its
engines, accounting for more than 10% of sales. Management believes that the
loss of any supplier, other than S&S, would not have a material adverse effect
on the Company at present because other suppliers could be relied upon to meet
the Company's requirements at a comparable cost.
RESEARCH AND DEVELOPMENT
The Company has not expended a material amount during each of the past two
fiscal years on research and development efforts.
PATENTS, LICENSES AND TRADEMARKS
The Company has no patents issued and has several patents pending that relate to
performance oriented motorcycle components. 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 is
also actively promoting national brand recognition for the Ultra Cycles name by
entering into strategic marketing and promotional agreements. These include a
recently signed deal with Speedvision, a 24-hour cable network, pursuant to
which Speedvision will provide extensive marketing support for the Ultra Cycles
brand.
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.
EMPLOYEES
As of December 31, 1998, the Company had 122 employees, all of which are full
time.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's operations are conducted in leased facilities located in
California, Texas and North Carolina. The following table describes the general
character of the existing facilities as of April 1, 1999:
<TABLE>
<CAPTION>
SQUARE LEASE APPROXIMATE
LOCATION PRIMARY FUNCTION FEET EXPIRES MONTHLY RENT
-------- ---------------- ---- ------- ------------
<S> <C> <C> <C> <C>
Mira Loma, CA(1) Motorcycle Assembly and 56,200 2004 $19,670
Executive Offices
Riverside, CA(1) Motorcycle Assembly and 20,487 1999 $ 9,115
Executive Offices
Riverside, CA(1) Administration 3,200 1998 $ 2,280
Sacramento, CA Retail Superstore 10,480 2000 $ 3,800
San Diego, CA Retail Superstore 6,935 2001 $ 5,710
Santa Ana, CA Retail Superstore 12,107 2003 $12,900
Conover, NC Retail Superstore 7,000 2001 $ 2,000
Dallas, TX Retail Superstore 5,000 2001 $ 2,500
Farmers Branch, TX Retail Superstore 10,000 1999 $ 8,100
</TABLE>
- ----------
(1) In order to accommodate the expansion of motorcycle production and
distribution in its Motorcycle division, the Company has entered into a
lease for a new 56,200 square foot assembly facility and administrative
offices in Mira Loma, California. The Company anticipates that it will
vacate the Riverside premises and move to the new Mira Loma headquarters
by May 1999. 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, in
the opinion of the Company's management, liability, if any, under these actions
is adequately covered by insurance or will not have a material effect on the
Company's financial position or results of operations.
As described in the Company's latest Form 10-QSB for the period ended the
September 30, 1998, 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 Rules 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. At the
Company's request, the action was removed to the United States District Court,
Western District of North Carolina in 1996. In
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December 1996, the court dismissed the case pursuant to a provision in the
franchise agreement regarding arbitration of disputes. The arbitration hearing
commenced in December 1997 and was continued in May 1998. A decision in the
arbitration was reached in June 1998, which required the Company to rescind the
franchise agreement. A total of $125,000 that was deposited by the Company into
an escrow account to cover the partial restitution in connection with the
rescission was paid to Bogert in January 1999. The Company also made additional
payments aggregating approximately $63,000 to Bogert in the first quarter of
1999. As of the date of this report, the Company remains obligated to make one
final payment in an amount to be determined, but in any event such payment will
not exceed $12,500. In connection with the resolution of the Bogert matter, in
January 1999 the Company assumed the operation of the Bogerts' former dealership
in Conover, North Carolina.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded since July 30, 1998 on The Nasdaq
SmallCap Market under the symbol "BIKR". Prior to such date, the Company's
Common Stock was traded in the over-the-counter market and quoted on the
National Association of Securities Dealers Electronic Bulletin Board ("OTC
Bulletin Board") under the same symbol. The following table reflects the high
and low bid prices of the Company's Common Stock, as reported by the OTC
Bulletin Board, from January 1, 1997 to July 30, 1998, and the high and low
closing sales prices of the Company's Common Stock, as reported by The Nasdaq
Stock Market, from July 30, 1998 through December 31, 1998, in each case as
adjusted for the reverse split of the Company's Common Stock effected on
February 5, 1998. The bid prices shown in the following table are inter-dealer
quotations without retail mark-ups, mark-downs or commissions, and may not
represent actual transactions. The high and low prices for the third quarter of
1998 occurred after July 30, 1998, and therefore the prices shown are the high
and low closing sales prices.
<TABLE>
<CAPTION>
1997 LOW HIGH
- ---- ----- -----
<S> <C> <C>
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>
<TABLE>
<CAPTION>
1998 LOW HIGH
- ---- ----- -----
<S> <C> <C>
First Quarter $4.00 $4.20
Second Quarter $4.00 $4.44
Third Quarter $2.63 $5.34
Fourth Quarter $2.53 $6.84
</TABLE>
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to pay any dividends in the foreseeable future.
As of April 1, 1999, there were 1,315 shareholders of record of the Company's
Common Stock.
The Company believes that the transactions described below in which securities
were sold were exempt from registration under the Securities Act of 1933 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 were provided with information about the Company and/or access to such
information, and restrictions were placed on resales of the securities.
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<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION PURCHASER
- ---- ----- ------ ------------- ---------
<S> <C> <C> <C> <C>
1/98 Options to purchase 92,000 Services Employees
Common Stock
3/98 Option to purchase 50,000 Consulting Consultant
Common Stock
3/98 Option to purchase 25,000 Waiver of rights Private investor
Common Stock
4/98 Options to purchase 25,000 Consulting Consultant
Common Stock
4/98 Options to purchase 16,000 Services Employees
Common Stock
4/98 Common Stock issued 35,000 $105,000 Private investor
upon exercise of
options
5/98 Options to purchase 15,000 Services Employee
Common Stock
5/98 Common Stock issued 33,000 $ 99,000 Private investor
upon exercise of
options
6/98 Warrants to purchase 370,000(1) Term loan Institutional lender
Common Stock
7/98 Options to purchase 25,000 Services Directors
Common Stock
9/98 Common Stock issued 20,000 $ 80,000 Private investor
upon exercise of
warrants
11/98 Option to purchase 30,000 Services Employee
Common Stock
1/99 Common Stock issued 15,000 $ 75,000 Private investor
upon exercise of
warrants
1/99 Common Stock issued 12,000 $ 36,000 Private investors
upon exercise of
options
1/99 Common Stock issued 73,500 $367,500 Private investors
upon exercise of
warrants
1/99 Common Stock issued 20,000 $ 60,000 Private investor
upon exercise of
options
</TABLE>
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<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION PURCHASER
- ---- ----- ------ ------------- ---------
<S> <C> <C> <C> <C>
2/99 Preferred Stock 1,545(2) $1,500,000(2) Private investor
2/99 Warrants to Purchase 60,000(2) (2) Private investor
Common Stock
2/99 Common Stock 16,000(3) Termination of license Director agreement
</TABLE>
(1) In June 1998, the Company received a $4.5 million, 12% term loan from
Tandem Capital (the "Tandem loan"). In connection with the Tandem loan,
the Company issued Tandem Capital warrants expiring June 2003 to
purchase 370,000 shares of the Company's Common Stock at an initial
exercise price of $4-1/16 per share. The exercise price of the warrants
is reset annually on the anniversary of the closing of the Tandem loan
at the lesser of (i) $4-1/16 or (ii) the average closing bid price of
the Company's Common Stock for the 20 trading days immediately preceding
such anniversary. In addition, under the terms of the agreement
governing the Tandem loan, the Company is obligated to issue to Tandem
Capital on each anniversary of the closing date of the Tandem loan,
until the Tandem loan is paid in full, a warrant to purchase 200,000
additional shares of Common Stock at an exercise price equal to the
greater of (i) $4.00, or (ii) 80% of the average closing bid price of
the Company's Common Stock for the 20 days preceding such anniversary
date.
(2) In February 1999, the Company completed an offering of $1.5 million in
newly issued Series D Preferred Stock. The outstanding shares of Series
D Preferred Stock are convertible into Common Stock pursuant to a
formula. Each share of Series D Preferred Stock has a Stated Value of
$1,000. The number of shares of Common Stock issuable upon the
conversion of one share of Series D Preferred Stock is calculated by
adding $1,000 to the amount of accrued and unpaid dividends on such
share and dividing the resulting sum by the conversion price. The
conversion price is equal to the lesser of (i) 110% of the closing bid
price of the Common Stock on the last trading day before the date of
issuance of the share of Series D Preferred Stock being converted, or
(ii) 90% of the average of the four lowest closing bid prices of the
Common Stock during the last 22 trading days before the date of
conversion.
The 1,545 shares of Series D Preferred Stock currently outstanding could
be converted until April 7, 1999. The exact number of shares of Common
Stock into which currently outstanding Series D Preferred Stock may
ultimately be convertible will vary over time as the result of ongoing
changes in the trading price of the Company's Common Stock. Decreases in
the trading price of the Company's Common Stock are likely to result in
increases in the number of shares of Common Stock issuable upon
conversion. However, prior to the receipt of shareholder approval, the
maximum number of shares issuable upon conversion will not exceed
1,027,996. This number represents 19.9% of the Company's outstanding
Common Stock as of the date the Series D Preferred Stock was issued.
The Company issued warrants to the holders of the Series D Preferred
Stock enabling them to purchase a total of 60,000 shares of the
Company's Common Stock. The warrants may be exercised at any time until
February 5, 2004 at an exercise price of $4.125 per share.
The investors in the Series D Preferred Stock offering have committed to
purchase an additional $500,000 of Series D Preferred Stock and a total
of 15,000 additional warrants upon approval by the Company's
shareholders of the issuance of such additional Series D Preferred
Stock. The same investors have also committed to purchase an additional
$1 million in Series D Preferred Stock and another 25,000 warrants
following the later to occur of shareholder approval or the
effectiveness of a registration statement with respect to such shares.
(3) In February 1998, the Company entered into a license agreement with Big
Bike Boutique, Inc. ("BBB"), a company owned by Bruce Scott, a director
of the Company, pursuant to which the Company licensed its name to BBB
for the purpose of selling apparel and accessories. The agreement was
terminated in October 1998 pursuant to a termination of license
agreement and mutual release. In connection with the termination
agreement, the Company issued to Mr. Scott, in February 1999, 16,000
shares of Common Stock. See Item 12 -- "Certain Relationships and
Related Transactions."
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Annual Report on Form 10-KSB/A 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 under "Certain Trends and Uncertainties," below, 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.
GENERAL
From 1990 until 1996, the Company operated primarily as a motorcycle superstore
retailer. Prior to 1997 the Company was attempting to establish a network of
franchised Bikers Dream stores, but suspended such efforts at the end of 1996.
In 1997 the Company established its Motorcycle Manufacturing and Distribution
("Motorcycle") division by completing the acquisition of the motorcycle and
parts manufacturing assets of Ultra Kustom Cycles (see Item 1 - "Description of
Business - General Business Developments"). During 1997 and 1998 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 network of Bikers Dream Superstores and Ultra Cycles dealers. Bikers
Dream Superstore dealers are modeled after the Company-owned Superstores and are
located throughout the United States to service the markets not directly
serviced by large Company-owned Superstores.
RESULTS OF OPERATIONS
The Company conducts its operations through two operating divisions: Motorcycle
and Retail Stores. The Motorcycle division includes the manufacture of large
displacement "V" twin powered custom 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 six 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 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 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
historically has 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 was 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.
COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997:
REVENUES. Total revenues for the fiscal year ended December 31, 1998, were
$27,735,000 as compared to $14,925,000 for the same period in 1997, representing
an increase of $12,810,000, or 86%.
After giving effect to the elimination of interdivisional charges of
$6,046,000, revenues attributable to the Company's Motorcycle and Retail
Stores divisions for the fiscal year ended December 31, 1998, were $15,853,000
and $11,881,000, respectively, as compared to $5,750,000 and $9,175,000 for the
fiscal year ended December 31, 1997.
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Sales to customers from the manufacturing division include 1,452 motorcycles
manufactured during the year, of which 356 were initially sold to our
Company-owned retail Superstores. Of those, 256 were then, in turn, sold to
retail consumers. Therefore, 1,352 units were ultimately sold to unaffiliated
customers during 1998. The increase in units sold was attributable to a larger
dealer network, which increased to approximately 100 dealers at April 15, 1999,
as compared to approximately 25 dealers as of December 31, 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. The Company expects that the number of units sold will
continue to rise in the foreseeable future, although no assurances can be given.
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 the entire year, and the addition in August 1998, of a new Superstore in
the Deep Ellum, Dallas, Texas market. In January 1999 the Company assumed the
operation of a store in Conover, North Carolina formerly operated by one of the
Company's ex-franchises (see Item 3 --"Legal Proceedings"), bringing the total
number of Company owned Superstores to six. The Company's Superstores range in
size from 4,000 to 10,000 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/GROSS PROFIT. Cost of goods sold for the fiscal year ended
December 31, 1998, was $25,784,000 (i.e., 93% of revenues) compared to
$14,296,000 (i.e., 96% of revenues) for the comparable period a year earlier,
representing an increase of $11,488,000, or 80%. With revenues rising at a
faster rate than cost of goods sold, the Company's gross margin improved to 7%
from 4%, and gross profit increased by $1,322,000, to $1,951,000 for the fiscal
year ended December 31, 1998, from $629,000 for the comparable period a year
earlier.
The increase in gross margins is principally due to the increased production in
the Company's Motorcycle division, which permitted improved cost efficiencies.
Gross margins in the Motorcycle division were approximately 3.7% during the
fiscal year ended December 31, 1998, as compared to approximately 11.6% for the
Retail Stores division. Management believes that gross margins in the Motorcycle
division should continue to improve with increases in production, as the Company
expects to benefit from growing economies of scale.
Cost of goods sold for the fiscal year ended December 31, 1998 included
approximately $2,000,000 due to the recording of a charge during the fourth
quarter of the Company's 1998 fiscal year, resulting from the difference between
the Company's inventory total as of December 31, 1998 as shown in its internal
accounting records and a lesser amount observed in the physical inventory review
conducted in connection with the Company's annual audit. In order to determine
the reason or reasons for this difference, the Company is currently conducting a
review under the supervision of the Audit Committee of the Board of Directors of
its accounting systems, which underwent a complete systems conversion during the
second half of 1998. However, the specific causes of this difference have not
yet been determined. The Company will notify its insurance carriers of the
situation, and the Company believes that, should the Company verify that a
physical loss of inventory has actually occurred, then its insurance coverage
may provide for recovery of a substantial portion of the amount of this charge,
although no assurances can be given.
In light of the foregoing, the Company is implementing new inventory control
procedures on a going forward basis. The Company has engaged the services of an
independent, bonded warehouse company to take full control over all of the
Company's physical inventory functions. The services will commence effective
with the Company's move to its new production and corporate headquarters
facility, which will be completed in May 1999. At the time of the Company's
move, the bonded warehousemen will take possession of the Company's inventory
and a full physical inventory count will be taken. The bonded warehousemen will
record all receipts and issuances of inventory directly into the Company's
accounting system. In addition, beginning with the first fiscal quarter of 1999,
the Company will engage its independent auditors to perform a limited review of
its quarterly financial statements. Once the Company has identified the specific
causes of the inventory difference, further procedures will be implemented as
necessary to prevent a reoccurrence.
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Cost of goods sold for the fiscal year ended December 31, 1998 also includes, in
addition to the charge specifically referenced above, certain adjustments made
during the fourth quarter of the year which may pertain, in part, to operations
of the Company during prior quarters of the year. These adjustments include
approximately $679,000 of intercompany profit elimination and approximately
$350,000 of warranty expense.
As a consequence of the foregoing charges and adjustments, the gross margins of
the Company for the first three quarters of the fiscal year ended December 31,
1998 are lower than were shown in the Company's unaudited interim financial
statements for such periods.
EXPENSES. Selling, general and administrative expenses were $5,361,000 (i.e.,
19.3% of total revenues), for the fiscal year ended December 31, 1998, compared
to $4,584,000 (i.e., 30.7% of total revenues), for the fiscal year ended
December 31, 1997, representing an increase of $777,000, or 16.9%. 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.
Selling, general, and administrative expenses for the fiscal year ended December
31, 1998 reflect adjustments made during the fourth quarter of the year which
pertain, in part, to operations of the Company during prior quarters of the
year. These adjustments include approximately $85,000 for the accrual of legal
expenses and $65,000 representing a loan origination fee deemed to have been
incurred in connection with the restructuring and increase of a credit facility
with one of the Company's lenders.
Depreciation and amortization expense for the fiscal year ended December 31,
1998, totaled $503,000 compared to $452,000 for the 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 loss was $3,913,000
for the fiscal year ended December 31, 1998, as compared to an operating loss of
$4,407,000 for the comparable period a year earlier.
OTHER EXPENSE (INCOME). Interest expense declined by $16,000, from $592,000 for
the fiscal year ended December 31, 1997, to $576,000 for the fiscal year ended
December 31, 1998. The decrease is primarily attributable to less debt
outstanding compared to the same period in 1997.
There is no material 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.
NET LOSS. For the fiscal year ended December 31, 1998, the Company reported a
net loss of $4,487,000, compared to a net loss of $5,108,000, for the comparable
period a year earlier. The improved profitability of $621,000 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.
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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.
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. Although management
believes that the Company can, at its current level of operations, adequately
service its existing indebtedness and meet its working capital needs by using
available internal cash, as the manufacturing 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.
In April 1998, the Company completed a private placement of Series C Convertible
Preferred Stock, which generated approximately $3.075 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 initial exercise price
equal to $4-1/16 payable in cash or in-kind by debt cancellation. The exercise
price of the warrants is reset annually on the anniversary of the closing of the
loan at the lesser of (i) $4-1/16 or (ii) the average closing bid price of the
Company's Common Stock for the 20 trading days immediately preceding such
anniversary. In addition, under the terms of the Tandem loan agreement, the
Company is obligated to issue to Tandem Capital on each anniversary of the
closing date of the loan, until the loan is paid in full, a warrant to purchase
200,000 additional shares of Common Stock at an exercise price equal to the
greater of (i) $4.00, or (ii) 80% of the average closing bid price of the
Company's Common Stock for the 20 days preceding such anniversary date. The
proceeds of the Tandem 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.
In order to finance its current working capital needs, the Company is relying on
a $1.5 million inventory flooring line of credit which it obtained in May 1998
from Cana Capital Corporation ("Cana Capital"), a company owned by Bruce Scott,
a director of the Company, and a $300,000 bridge loan which it obtained in
October 1998 from MD Strategic L.P. ("MD Strategic"), a partnership in which Don
Duffy, a director of the Company, is a principal. Advances under the Cana
Capital line of credit bear interest at a rate of 2% or 5% over the prime rate,
depending on the type of advance. The MD Strategic loan is evidenced by an
unsecured note bearing interest at eighteen percent (18%) per annum and is due,
together with accrued interest, on the earlier of May 31, 1999 or upon receipt
by the Company of funds from a third-party lender.
In February 1999, the Company completed an offering of $1,500,000 in newly
issued Series D Preferred Stock. The investors in the Series D Preferred Stock
offering have committed to purchase an additional $500,000 of Series D Preferred
Stock upon approval by the Company's shareholders of the issuance of such
additional Series D Preferred Stock. The same investors have also committed to
purchase an additional $1 million in Series D Preferred Stock following the
later to occur of shareholder approval or the effectiveness of a registration
statement with respect to such shares.
The Company will require additional outside sources of capital to continue to
expand its manufacturing operations. The Company is currently negotiating an
inventory and receivables based line of credit of up to $10 million which will
be used to pay off all or part of its existing indebtedness to Tandem Capital,
Cana Capital and MD Strategic, and to finance its general business operations
and working capital needs. Management believes that such a credit facility,
combined with the proceeds of Series D Preferred Stock offerings, would provide
the Company with sufficient working capital for the current year. If the Company
does not obtain such a credit facility, the Company will be unable to meet its
expansion goals unless it obtains other debt or equity financing on acceptable
terms. The Company is continually in discussions with lenders and potential
equity partners regarding funding options to fuel the Company's growth strategy.
Any additional equity financing that the Company obtains may be dilutive to
shareholders, and any additional debt financing may impose substantial
restrictions on the ability of the Company to operate and raise additional
funds. The Board of Directors will determine the terms of any financing at the
appropriate time based upon management's good faith evaluation of the best
interests of
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<PAGE> 14
the Company and its shareholders. There can be no assurance that additional
capital will be available or that, if available, such capital will be made
available on satisfactory terms.
Cash used for operating activities totaled $7,687,000 for the fiscal year ended
December 31, 1998, as compared to cash used for operating activities of
$6,509,000 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 $1,672,000 in
accounts receivable and an increase in inventories of $3,191,000 attributable to
an increase in production in the Motorcycle Manufacturing division, offset, in
part, by an increase in accounts payable of $1,463,000.
Cash used for investing activities totaled $175,000 during the fiscal year ended
December 31, 1998, as compared to cash used for investing activities of
$1,549,000 during the prior year's period. The decrease results from the
following: (1) slightly lower investment in property, plant, and equipment in
1998, and (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 financing activities totaled $7,884,000 for the fiscal year
ended December 31, 1998, as compared to cash provided by financing activities of
$8,478,000 during the prior year's period. Proceeds from issuance of notes
payable totaled $5,675,000 while payments on notes payable totaled $2,617,000
for the fiscal year ended December 31, 1998. Net proceeds from the issuance of
preferred stock totaled $2,945,000 and the exercise of previously outstanding
stock warrants/options totaled $494,000 during the period. Net proceeds from
advances on related party financing agreements totaled $1,486,000 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 by May 1999 to a new manufacturing
facility with approximately three times 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, 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 placements 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 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.
SEASONALITY
Generally, the Company's Motorcycle division exhibits a moderate level of
seasonality as dealer demand for motorcycles tends 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 in 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.
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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.
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 may range from one to
fifteen, the Company believes that the ordering and invoicing process with such
dealers could, if necessary, 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 affecting 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.
CERTAIN TRENDS AND UNCERTAINTIES
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others, could
cause the Company's actual results to differ materially from those expressed in
any projected, estimated or forward-looking statements relating to the Company.
The following factors should be considered in conjunction with any discussion of
operations or results by the Company or its representatives, including any
forward-looking discussion, as well as comments contained in press releases,
presentations to securities analysts or investors, or other communications by
the Company.
In making these statements, the Company is not undertaking to address or update
each factor in future filings or communications regarding the Company's business
or results, and is not undertaking to address how any of these factors may have
caused changes to
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<PAGE> 16
discussions or information contained in previous filings or communications. In
addition, certain of these matters may have affected the Company's past results
and may affect future results.
History of Operating Losses and Accumulated Deficits May Affect Profitability;
Improvements in Profitability Dependent upon Ability to Expand Dealer Network
and Increase Manufacturing Capability. The Company has a history of operating
losses and accumulated deficits. The Company had net operating losses of
approximately $4.5 million, $5.1 million and $4 million for the fiscal years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998,
the Company's accumulated deficit was approximately $17,595,000. The Company may
not be able to achieve or maintain profitability in the future. The ability of
the Company to improve its profitability in future periods will depend upon its
ability to continue to expand its dealer network and to increase its
manufacturing capability on a cost-effective basis.
Limited Experience with Manufacturing Operations. The Company entered the
motorcycle manufacturing business in 1997 through the acquisition of the assets
which now comprise its Ultra Cycles Division. Previously, the Company's
operations had involved only the operation of retail stores selling used
motorcycles and motorcycle parts and accessories. The Company's direct
experience with motorcycle manufacturing is therefore limited.
Demand for the Company's Products May Not be Sufficient to Enable the Company to
Protect or Increase Market Share. The Company manufactures heavyweight cruiser
motorcycles. According to industry research reports, the overall market for
heavyweight cruisers has grown by approximately 12% per year since 1996. The
base retail price of one of the Company's heavyweight cruisers ranges from
approximately $16,000 to $26,000. Motorcycles within this price range are luxury
goods and are therefore more susceptible to changes in popular fashion and
changes in economic conditions than lower priced motorcycles. Any reduction in
overall demand for heavyweight cruiser motorcycles may require the Company to
increase its share of the market in order to sustain or increase sales. However,
the Company cannot ensure that demand for its products will be sufficient to
enable the Company to protect or increase its market share. Without sufficient
sales volume, the Company's stores will also lose the benefit of economies of
scale associated with the superstore concept.
Expansion of Dealer Network Necessary to Maintain or Increase Sales. Motorcycles
manufactured by the Company are sold through its six owned Bikers Dream
Superstores, approximately 40 independently owned Bikers Dream Superstores and
approximately 65 independent Ultra Cycles dealers. Approximately 75% of the
motorcycles sold by the Company during the year ended December 31, 1998 were
sold through the independent dealer network. Dealers may not be able to maintain
or increase this level of sales of the Company's products. Management believes
that the Company will need to continue to expand its independent dealer network
in order to increase sales, but may not be able to do so successfully.
Loss of Services of Herm Rosenman May Have Material Adverse Effect. The Company
depends highly on the services of Herm Rosenman, its president and chief
executive officer. The Company entered into an employment agreement with Mr.
Rosenman which expires in 2002, but has not obtained key man insurance for Mr.
Rosenman. The loss of Mr. Rosenman could have a material adverse effect on the
Company and its results of operations.
Stock Price is Subject to Volatility. The stock market from time to time
experiences significant price and volume fluctuations, some of which are
unrelated to the operating performance of particular companies. The Company
believes that a number of factors can cause the price of its Common Stock to
fluctuate, perhaps substantially. These factors include, among others:
o Announcements of financial results and other developments
relating to the Company's business;
o Changes in the general state of the economy; and
o Changes in market analyst estimates and recommendations for the
Company Common Stock.
As an example, in late December 1998, the Company's stock price and trading
volume fluctuated significantly following announcement of the Company's plans to
engage in Internet related commerce.
Significant Decrease in Price of Common Stock Would Correspondingly Increase
Number of Shares Issuable Upon Conversion of Series D Preferred Stock and Cause
Greater Dilution. Significant downward fluctuations of the Company's stock price
may substantially increase the number of shares of Common Stock issuable upon
conversion of outstanding Series D Preferred Stock as a result of the conversion
formula which is tied to the market price of the Common Stock, thereby also
increasing the dilution to existing security holders of the Company. See
discussion in note (2) under Item 5 -- "Market for Common Stock and Related
Matters."
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The Ability of the Company to Continue Operations May be Materially Impaired if
the Company Does Not Have Sufficient Cash to Redeem Series D Preferred Stock
Upon a Mandatory Redemption. The Company is required to redeem Series D
Preferred Stock after an event triggering mandatory redemption pursuant to the
terms of the documents governing the terms of the Series D Preferred Stock.
Such triggering events include, among other things:
o Failure of the Company to pay dividends when required;
o Material breaches of the Company's agreements with purchasers of
Series D Preferred Stock, including failure to register the
Common Stock issuable upon conversion of Series D Preferred
Stock and failure to maintain the effectiveness of any such
registration;
o Failure to maintain a Nasdaq listing for the Company's Common
Stock;
o Failure to deliver Common Stock certificates in a timely fashion
after the conversion of Series D Preferred Stock; and
o Failure to obtain shareholder approval for the issuance of
Series D Preferred Stock and underlying shares of Common Stock
by September 30, 1999.
With respect to the last item listed above, the rules of the Nasdaq Stock Market
limit the number of shares of Common Stock which the Company can issue without
shareholder approval. Under these rules, without shareholder approval common
shares cannot be issued upon the conversion of Series D Preferred Stock in an
amount exceeding 19.9% of the number of common shares outstanding at the time
the Series D Preferred Stock was issued. At the time the Series D Preferred
Stock was issued, the Company had 5,165,810 shares of Common Stock outstanding,
thereby enabling the Company to issue up to 1,027,996 shares of Common Stock
without prior shareholder approval.
Given the formula used for the conversion of Series D Preferred Stock, the
number of shares issuable upon the conversion of all currently outstanding
Series D Preferred Stock will not exceed 1,027,996 as long as the trading price
of the Company's Common Stock is $1.68 or greater. If the trading price of the
Common Stock falls below $1.68, then the holders of Series D Preferred Stock
will have the right to redeem any shares of Series D Preferred Stock which
cannot be converted without violating the 19.9% limitation. Consequently,
significant downward fluctuations of the Company's stock price could also create
an obligation on the part of the Company to redeem shares of outstanding Series
D Preferred Stock, which could have a material adverse effect on our business
and financial condition.
It is unlikely that the Company will have sufficient cash to be able to redeem
Series D Preferred Stock if required to do so. As a result, the occurrence of an
event triggering mandatory redemption of the Series D Preferred Stock could
materially impair our ability to continue to operate our business.
Exercise of Outstanding Warrants and Options Would Result in Significant
Dilution; Obligations to Issue Additional Warrants. As of April 1, 1999,
1,199,250 previously issued warrants were outstanding at exercise prices ranging
from $4.00 to $5.00. As of April 1, 1999, 952,374 options were outstanding at
prices ranging from $3.00 to $7.50, and 575,334 of the options were fully
vested. The exercise of such warrants and options could result in significant
dilution to existing security holders of the Company. In addition, under the
terms of the agreement governing the Company's $4.5 million term loan from
Tandem Capital, the Company is obligated to issue to Tandem Capital on each
anniversary of the closing date of the term loan, until such loan is paid in
full, a warrant to purchase 200,000 additional shares of Common Stock at an
exercise price equal to the greater of (i) $4.00, or (ii) 80% of the average
closing bid price of the Company's Common Stock for the 20 days preceding such
anniversary date. (See discussion in note (1) under Item 5 -- "Market for Common
Stock and Related Matters.")
Possible Issuance of Additional Preferred Stock May Adversely Affect Rights of
Holders of Common Stock and May Render More Difficult Certain Anti-Takeover
Strategies in the Best Interest of Shareholders. As of April 1, 1999, the
Company had 703,740 shares of Preferred Stock outstanding. The Articles of
Incorporation of Bikers Dream permit the Board of Directors to designate the
terms of, and issue, up to 9,296,260 additional shares of Preferred Stock
without further shareholder approval. The issuance of additional shares of
Preferred Stock could adversely affect the rights of holders of Common Stock by,
among other things, establishing preferential dividends, liquidation rights and
voting power. In addition, the issuance of Preferred Stock might render more
difficult, and therefore discourage, an unsolicited takeover proposal such as a
tender offer, proxy contest or removal of incumbent management, even if such
actions would be in the best interest of the Company's shareholders.
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Other important risk factors that could cause the Company's actual results to
differ materially from those expressed or implied by the Company or on behalf of
the Company are discussed elsewhere within this Form 10-KSB in Item 1 --
"Description of Business", under the subheadings: "Motorcycle Manufacturing and
Distribution" and "Retail Stores", and Item 6 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the
subheadings "General Discussion of Liquidity and Capital Resources", "Outlook",
"Seasonality", "Inflation" and "Impact of the Year 2000 Issue."
ITEM 7. FINANCIAL STATEMENTS
See financial statements appended to the back of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers consist of the following persons:
<TABLE>
<CAPTION>
NAME OFFICE
- ---- ------
<S> <C>
Herm Rosenman CEO, President; Director
Donald J. Duffy Director
Humbert Powell Director
John K. Russell Director
Bruce Scott Director
Anne Todd Controller
</TABLE>
HERM ROSENMAN, age 51, has been the Company's president and chief executive
officer and a director since September 1997. At the annual meeting of the
shareholders of the Company in July 1998, he was appointed chairman of the board
of directors. From 1996 through 1997, Mr. Rosenman was a principal with Pacific
Consulting Group. From 1994 to 1997, Mr. Rosenman was the chief executive
officer of RadNet, a healthcare provider. From 1991 to 1995, he was the
President and chief executive officer of Ireland Coffee, an upscale coffee chain
he founded in a joint venture. From 1988 to 1991, Mr. Rosenman was the chief
financial officer of Rexene, a plastics and petrochemicals manufacturer. Prior
to 1988, Mr. Rosenman worked for Coopers & Lybrand for 20 years, 10 of which he
was a partner, where he served clients in many industries including
manufacturing, telecommunications, pharmaceuticals and construction. Mr.
Rosenman also serves on the board of directors of Integrated Intelligence Corp.,
a privately owned company, Mr. Rosenman received a
17
<PAGE> 19
B.B.A. from Pace University and an M.B.A. from the Wharton School of Business.
Mr. Rosenman is married to Diana Rosenman, Director of Marketing and Public
Relations of the Company. See Item 12 -- "Certain Relationships and Related
Transactions."
DONALD J. DUFFY, age 31, has been a director since December 1995 and is the
former chief executive officer of the Company. Until the last Annual Meeting
held in 1998, Mr. Duffy served as the chairman of the board of directors. Mr.
Duffy is a principal of Meyer, Duffy & Associates, Inc. ("Meyer, Duffy"), an
investment management and strategic consulting group based in New York which he
founded in September 1994. Meyer, Duffy is involved in the financing of
development stage private and public companies. From June 1992 to September
1994, Mr. Duffy was a senior analyst at Oak Hall Capital Advisors, specializing
in research and investments in retail, gaming and technology companies.
HUMBERT POWELL, III, age 60, has been a director since December 1995. Mr. Powell
has been an associate with Sanders, Morris and Mundy, an investment banker and
broker/dealer, since December 1996. Prior to joining Sanders, Morris and Mundy,
Mr. Powell held a variety of positions in corporate finance and investment
banking, including Chairman of Marleau, Lemire USA from 1995 to November 1996
and Senior Managing Director of Bear Stearns & Co. from 1984 to 1994. Mr. Powell
also serves on the Board of Directors of Osicom Technologies.
JOHN K. RUSSELL, age 48, has been a director since May 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.
BRUCE A. SCOTT, age 52, has been a director since July 1998. Since January 1998,
Mr. Scott has been the President of Cana Capital Corporation, the Secretary and
Treasurer of Big Bike Boutique, a retail apparel distributor, the President of
Bikers Dream stores in Tampa Bay, Jacksonville, Panama City and Daytona, and the
President of Bay Honda, a motorcycle retailer. From December 1995 through
December 1997 Mr. Scott was the Senior Vice President of Republic Security
Services, a security system company which was, at the time, a division of
Republic Industries. From 1985 to 1995 Mr. Scott was the President of Scott
Alarm, a privately held security system company that was sold to Republic
Industries in 1995.
ANNE TODD, age 31, 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 1993 to 1995.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered in all capacities during
the fiscal years ended December 31, 1998 and 1997, respectively, to the
Company's chief executive officer during the fiscal year ended December 31,
1998. Where applicable, the figures set forth below have been adjusted to
reflect the Company's reverse stock split effected as of February 5, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION SECURITIES
---------------------- RESTRICTED UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS/SARS
--------------------------- ---- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Herm Rosenman, CEO/President(1) 1998 $180,000(2) 0(3) $ 76,875(5) 478,334(6)
1997 $ 45,000(2) 0 $158,646(4) 473,334(7)
</TABLE>
- -------------
(1) Herm Rosenman was appointed CEO and President in September 1997. No
other executive officer earned salary and bonus in excess of $100,000
during the fiscal year ended December 31, 1998.
(2) Under Mr. Rosenman's employment agreement with the Company, as amended,
commencing September 1, 1997, the Company has an obligation to pay him a
salary in monthly installments of $17,361 for the first, second and
third years of the agreement and not less than $20,000 for the fourth
and fifth years of the agreement. In accordance with the terms of the
employment agreement and as agreed to by the parties, the Company
deferred payment of $7,361 each month for the months of September and
October 1997, $4,861 each month for the months of November and December
1997 and $2,361 each month during the year of 1998. Further, pursuant to
the employment agreement, the Company is obligated to pay all amounts so
deferred in equal monthly installments throughout the remainder of the
term commencing January 1999, 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. As of January 1, 1999, the total
amount deferred was $52,778.
18
<PAGE> 20
(3) On December 28, 1998, in lieu of a cash bonus (i) the vesting schedule
of 30,000 shares of restricted stock previously granted to Mr. Rosenman
in 1997 was changed; and (ii) the exercise price of certain options to
purchase Common Stock previously granted to Mr. Rosenman was reduced and
the vesting schedule for such options was changed. See also notes (4),
(5) and (6).
(4) Includes 667 shares of Common Stock granted in consideration of Mr.
Rosenman's services as a consultant to the Company that vested on August
1, 1997, and 30,000 shares granted as of September 1, 1997, pursuant to
Mr. Rosenman's stock grant and stock option agreement, of which 10,000
shares were originally scheduled to vest on each of September 1, 1998,
September 1, 1999 and September 1, 2000. As discussed in notes (3) and
(5), on December 28, 1998 the vesting dates for the first two allotments
of 10,000 shares (a total of 20,000 shares) were changed to January 1,
1999 and the vesting date for the last allotment of 10,000 shares was
changed to January 1, 2000. Dividends will be paid on such shares (when
issued and outstanding) only to the same extent, if any, that dividends
are paid on all other outstanding shares of Common Stock.
(5) As described in note (4), the vesting dates of the 30,000 shares
originally awarded to Mr. Rosenman in 1997 were changed on December 28,
1998, with 20,000 shares vesting on January 1, 1999 and 10,000 shares
vesting on January 1, 2000. In the table, this change in vesting dates
has been treated as the grant of a new restricted stock award of 30,000
shares in 1998; however, the 1998 award in effect simply replaces, and
is not cumulative with respect to, the prior award of 30,000 shares in
1997. The shares that vest on January 1, 2000 will vest only if Mr.
Rosenman is still employed by the Company on September 1, 1999. All of
the 30,000 shares, once vested, will not become issuable until September
1, 2000 or upon termination of Mr. Rosenman's employment, whichever
occurs first. Dividends on the 30,000 shares (when issued and
outstanding) will be paid only to the same extent, if any, that
dividends are paid on all other outstanding shares of Common Stock.
As of December 31, 1998, Mr. Rosenman held a total of 667 shares of
restricted stock awarded to him as compensation, and the total value of
such shares, based on the Nasdaq closing sales price for the Company's
Common Stock on that date, was $2,793.
(6) Includes non-qualified options to purchase 473,334 shares of Common
Stock that are reflected in this table as securities underlying options
originally granted in the fiscal year ended December 31, 1997. These
options are included in the table for 1998 because they were all
repriced on October 22, 1998 at an exercise price of $4.00 and
subsequently repriced on December 28, 1998 at an exercise price of
$3.00. The vesting schedule for 380,000 of these options was also
changed on December 28, 1998 as reflected in the table below entitled
Option Grants in the Fiscal Year Ended December 31, 1998. Also includes
options to purchase 5,000 shares of Common Stock granted in 1998 in
consideration of Mr. Rosenman's services as a director of the Company.
(7) Includes non-qualified options to purchase 3,334 shares of Common Stock
granted on August 1, 1997 in consideration of Mr. Rosenman's services as
a consultant to the Company and non-qualified options to purchase
470,000 shares of Common Stock granted on September 1, 1997, of which
460,000 options were granted pursuant to Mr. Rosenman's stock grant and
stock option agreement, as amended, and 10,000 options were granted in
consideration of Mr. Rosenman's services as a director of the Company.
STOCK OPTIONS
The following table sets forth certain information with respect to stock options
granted to the Company's Chief Executive Officer during the fiscal year ended
December 31, 1998.
19
<PAGE> 21
OPTION GRANTS IN THE FISCAL YEAR
ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED 1998(10) ($/SHARE) EXPIRATION DATE
---- -------------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
Herm Rosenman 13,334(1)(2) 2.11 $3.00 9/1/2002
Herm Rosenman 80,000(1)(3) 12.69 $3.00 9/1/2003
Herm Rosenman 80,000(1)(4) 12.69 $3.00 12/31/2003
Herm Rosenman 50,000(1)(5) 7.93 $3.00 12/31/2004
Herm Rosenman 50,000(1)(5)(6) 7.93 $3.00 12/31/2004
Herm Rosenman 50,000(1)(7) 7.93 $3.00 12/31/2005
Herm Rosenman 50,000(1)(6)(7) 7.93 $3.00 12/31/2005
Herm Rosenman 50,000(1)(8) 7.93 $3.00 12/31/2006
Herm Rosenman 50,000(1)(6)(8) 7.93 $3.00 12/31/2006
Herm Rosenman 5,000(9) 0.79 $3.75 7/31/2003
</TABLE>
- ------------------------------
(1) Includes non-qualified options to purchase the number of shares of
Common Stock stated in the table that were originally granted in August
and September 1997 but were repriced on October 22, 1998 at an exercise
price of $4.00 and, in lieu (partially) of a cash bonus, were
subsequently repriced on December 28, 1998 at an exercise price of
$3.00. The vesting schedule for 380,000 of these options was also
changed on December 28, 1998, as reflected in subsequent footnotes to
the table.
(2) These options are exercisable commencing September 1, 1997. Of these
options, 3,334 options were granted in consideration of Mr. Rosenman's
services as a consultant to the Company and 10,000 options were granted
in consideration of Mr. Rosenman's services as a director of the
Company.
(3) These options are exercisable commencing September 1, 1998.
(4) These options are exercisable commencing December 31, 1998.
(5) These options are exercisable commencing December 31, 1999.
(6) None of these options vest until 75% of the budget is achieved. These
options vest ratably with the percentage of budget achieved in excess of
75%. As 75% to 100% of the budget is achieved, 75% to 100% of these
options vest. The budget described in this footnote is the budget that
is submitted annually by Mr. Rosenman and the Company's management team,
and approved by the Board of Directors, subject to revision as approved
by the Board of Directors or an authorized committee thereof.
(7) These options are exercisable commencing December 31, 2000.
(8) These options are exercisable commencing December 31, 2001.
20
<PAGE> 22
(9) These options are exercisable commencing July 31, 1998. These options
were granted in consideration of Mr. Rosenman's services as a director
of the Company.
(10) Includes, for purposes of this table, the total number of options
granted to Herm Rosenman as a consultant and as a director.
The following table sets forth certain information as to the fiscal year-end
value of unexercised options of the Company's Chief Executive Officer. Mr.
Rosenman did not exercise any options during the fiscal year ended December 31,
1998.
AGGREGATE OPTION EXERCISES IN
FISCAL YEAR ENDED DECEMBER 31, 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY OPTIONS
SHARES OPTIONS AT 12/31/98 AT 12/31/98(1)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herm Rosenman 0 -- 178,334 300,000 $208,022 $356,250
</TABLE>
- ------------------------
(1) The value of the Company's Common Stock for the purposes of the
calculation was based upon the closing sales price for the Company's
Common Stock on December 31, 1998, as reported by The Nasdaq Stock
Market, minus the exercise price.
EMPLOYMENT AGREEMENTS AND REPRICING OF OPTIONS
The Company entered into a three 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 term of this agreement was extended
to five years by amendment in December 1997. Under the terms of this agreement,
as amended, Mr. Rosenman is to receive base compensation of $17,361 for each
month of the first, second and third years, and at least $20,000 for each month
of the fourth and fifth years, of the term. In accordance with the terms of the
employment agreement and as agreed to by the parties, the Company deferred
payment of $7,361 each month for the months of September and October 1997,
$4,861 each month for the months of November and December 1997 and $2,361 each
month during the year of 1998. Further, pursuant to the employment agreement,
the Company is obligated to pay all amounts so deferred in equal monthly
installments throughout the remainder of the term commencing January 1999,
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. As of
January 1, 1999, the total amount deferred was $52,778. The Board may annually
review Mr. Rosenman's salary and, in its sole discretion, based upon such
factors as the Board may choose to consider, may increase such salary. Mr.
Rosenman is also eligible to participate in any bonus plans applicable to
executive officers of the Company as may be established by the Board. In
addition, the Company reimburses Mr. Rosenman for certain automobile expenses
and provides him with a motorcycle manufactured by the Company for his personal
use, and if Mr. Rosenman serves the full five year term of his employment
agreement, title to this motorcycle will be transferred to him at the end of the
term. In the event that Mr. Rosenman becomes physically or mentally disabled or
incapacitated during any period of the term, the Company will pay him his base
compensation less the aggregate amount of all income disability benefits that he
may, or may be entitled to, receive for such period. Mr. Rosenman's employment
agreement further provides that on the date of any termination without cause of
Mr. Rosenman's employment under his employment agreement arising from a change
in control, the Company is obligated to pay to Mr. Rosenman an amount equal to
18 months' salary, as determined according to the amount paid to Mr. Rosenman at
the time of termination, payable on a monthly basis.
In connection with Mr. Rosenman's employment agreement, the Company and Mr.
Rosenman entered into a stock grant and stock option agreement in December 1997.
Pursuant to the stock grant and stock option agreement, the Company agreed to
grant 30,000 shares of Common Stock (after giving effect to the reverse stock
split of the Company's Common Stock that was effected as of February 5, 1998) to
Mr. Rosenman, which shares would vest in equal allotments of 10,000 shares on
each of September 1, 1998, September 1, 1999 and September 1, 2000, provided
that Mr. Rosenman was still employed by the Company under his employment
agreement at each such vesting date. Under an amendment to the stock grant and
stock option agreement entered into in December 1998, the vesting dates for the
first two allotments of 10,000 shares (a total of 20,000 shares) were changed to
January 1, 1999, and the vesting date for the last allotment of 10,000 shares
was changed to January 1, 2000 in lieu, partially, of a cash bonus to Mr.
Rosenman. Once vested, none of the 30,000 shares are issuable until September 1,
2000 or upon termination of Mr. Rosenman's employment, whichever occurs first.
Under the original stock grant and stock option agreement, the Company agreed to
grant 460,000 options to Mr. Rosenman at an exercise price of $5.00 per share
(as adjusted for the reverse stock split of the Common Stock of the Company
effected as of February 5, 1998), which shares would vest in specified
allotments over a period of five years. In October 1998, these options, together
with 13,334 previously granted options, were canceled and new options were
issued at an exercise price of $4.00 per share, which price included a premium
of approximately 10% above the fair market value of the Common Stock as of the
date of approval by the Compensation Committee. The Compensation Committee
approved the reduction in the exercise price from $5.00 to $4.00 to more closely
reflect the market price of the Common Stock and thereby maintain the value of
the options as an incentive. As a result of this stock option repricing,
21
<PAGE> 23
the Company canceled a total of 473,334 stock options and granted the same
number of new stock options at the aforementioned exercise price of $4.00 per
share.
In December 1998, all 473,334 options were canceled and new options were issued
at an exercise price of $3.00 per share, which price includes a premium of
approximately 20% above the fair market value of the Common Stock as of the date
of approval by the Compensation Committee. In lieu, partially, of a cash bonus,
the Compensation Committee approved the reduction in the exercise price from
$4.00 to $3.00 per share to provide greater economic incentive to Mr. Rosenman
to remain with the Company and to avoid the expense to the Company of a cash or
stock bonus. As a result of this stock option repricing, the Company canceled a
total of 473,334 stock options and granted the same number of new stock options
at the aforementioned exercise price of $3.00 per share. Under the original
stock grant and stock option agreement, the vesting schedule for the 460,000
options granted thereunder provided (after giving effect to the reverse stock
split of the Company's Common Stock that was effected as of February 5, 1998)
for vesting of 80,000 options on September 1, 1998, 80,000 options on September
1, 1999 (of which 40,000 were performance-based options), and 100,000 options
(of which 50,000 were performance-based options) on each of September 1, 2000,
September 1, 2001 and September 1, 2002. Pursuant to the amendment to stock
grant and stock option agreement, this schedule was amended in December 1998 to
provide, in partial substitution for a cash bonus, for vesting of the remaining
then - unvested 380,000 options as follows: 80,000 options (of which 40,000
options were performance-based options) on December 31, 1998 and 100,000 options
(of which 50,000 options are performance-based options) on each of December 31,
1999, December 31, 2000 and December 31, 2001. All of the 80,000 options
scheduled to vest on December 31, 1998 (including the 40,000 performance-based
options) vested on such date.
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1998, no cash compensation was paid to
directors of the Company for their services as directors.
As partial consideration for Mr. Rosenman's services as a director of the
Company, the Company granted to Mr. Rosenman options to purchase 10,000 shares
of Common Stock at an exercise price of $5.00 per share, on September 1, 1997,
which were repriced at $4.00 per share on October 22, 1998 and repriced again at
$3.00 per share on December 28, 1998.
In October 1998, options to purchase 10,000 shares at a price of $7.90 that were
previously granted to Humbert Powell and options to purchase 10,000 shares at a
price of $7.05 that were previously granted to John Russell were canceled and
new options were issued to each of them at an exercise price of $4.00 per share,
which price includes a premium of approximately 10% above the fair market value
of the Common Stock as of the date of approval by the Compensation Committee.
The Compensation Committee approved the reductions in the exercise price from
$7.90 and $7.05 to $4.00 to more closely reflect the market price of the Common
Stock and thereby maintain the value of the options as an incentive. As a result
of this stock option repricing, the Company canceled a total of 20,000 stock
options and granted the same number of new stock options (10,000 options to each
of Humbert Powell and John Russell) at the aforementioned exercise price of
$4.00 per share.
In July 1998, the Company's stockholders approved a stock option plan (the
"Plan") that authorizes incentive stock options for employees (including
officers) and non-qualified stock options for non-employee directors and
consultants. A total of 50,000 shares of Common Stock were reserved for issuance
to directors upon exercise of options granted under the Plan.
Under the Plan, as of the date of their first election or appointment as
directors, each director of the Company is automatically granted non-qualified
stock options to purchase 5,000 shares of the Company's Common Stock, and
thereafter on each anniversary of their first election or appointment as
director, each director of the Company will automatically be granted
non-qualified stock options to purchase 2,000 shares of the Company's Common
Stock. Except as expressly authorized by the Plan, directors of the Company who
are members of the committee that administers the Plan are not otherwise
eligible to participate in the Plan. The exercise price for each non-qualified
stock option granted under the Plan is the fair market value of the Company's
Common Stock on the date of grant. Each such non-qualified stock option has a
term of five years, subject to earlier termination. If a holder of any
non-qualified stock option granted under the Plan no longer serves on the Board,
then the outstanding non-qualified stock options of such holder will expire one
year after such termination, or their stated expiration date, whichever occurs
first.
During the year ended December 31, 1998, the Company's five directors were each
awarded options under the Plan for the purchase of 5,000 shares of Common Stock,
all with an exercise price of $3.75 per share, none of which were exercised
during that year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of the
Company's voting securities, which include its Common Stock, Series A Preferred
Stock and Series B Preferred Stock, as of April 14, 1999, by each director of
the Company, the chief executive officer of the Company, each person known by
the Company to be the beneficial owner of more than five percent of any class of
the Company's voting securities, and all of the directors and the chief
executive officer of the Company as a group, excluding in each case rights under
options or warrants not exercisable within 60 days. All persons named have sole
voting power and investment power over
22
<PAGE> 24
their shares except as otherwise noted. The figures set forth below have been
adjusted to reflect the Company's reverse stock split as of February 5, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED CLASS
- -------------- ------------------- ------------ -----------
<S> <C> <C> <C>
Common Stock Herm Rosenman(1) 205,001(2) 3.82%(3)
11631 Sterling Avenue
Riverside, CA 92503
Common Stock Donald Duffy(4) 1,403,643(5) 25.04%(3)
c/o Meyer, Duffy & Associates, Inc.
237 Park Avenue
New York, NY 10017
Common Stock MD Strategic L.P. 933,448(6) 17.38%(3)
c/o Meyer, Duffy & Associates, Inc.
237 Park Avenue
New York, NY 10017
Common Stock Humbert Powell, III(7) 15,000(8) *(3)
712 Fifth Avenue, 11th Floor
New York, NY 10019
Common Stock John K. Russell(9) 15,000(10) *(3)
11631 Sterling Avenue
Riverside, CA 92503
Common Stock Bruce Scott(11) 22,000(12) *(3)
11631 Sterling Avenue
Riverside, CA 92503
Common Stock Bulldog Capital Management 524,555(13) 10.17%(3)
Limited Partnership, Inc.
33 North Glendon Avenue
Suite 750
Clearwater, FL 33755
Common Stock Directors and Officers as a Group(5) 1,660,644 28.41%(3)
Series A Pfd. Stock Elizabeth M. Custer TTEE FBO 1 100%(14)(15)
William M. Custer
14 S. High Street
P.O. Box 673
New Albany, OH 43504
Series A Pfd. Stock Directors and Officers as a Group(5) 0 0%(15)
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED CLASS
- -------------- ------------------- ------------ -----------
<S> <C> <C> <C>
Series B Pfd. Stock Mull Acres Investments, Inc. 600,000 85.4%(16)(17)
c/o Furman Selz
230 Park Avenue
New York, NY 10169
Series B Pfd. Stock Len Lichter 102,194 14.6%(18)(17)
405 Park Avenue
New York, NY 10022
Series B Pfd. Stock Directors and Officers as a Group(5) 0 0%(17)
</TABLE>
- ----------
(1) Mr. Rosenman is a Director, President and CEO of the Company.
(2) Includes 667 shares of Common Stock received in consideration of
Mr. Rosenman's services as a consultant to the Company, and 20,000
shares granted pursuant to Mr. Rosenman's stock grant and stock option
agreement with the Company (20,000 of said shares are issuable on the
earlier of termination of employment or September 1, 2000). Mr. Rosenman
disclaims beneficial ownership of 20,000 of the shares described in the
immediately preceding sentence as they are not issuable until the
earlier of September 1, 2000 or the termination of his employment. Also
includes 178,334 shares underlying presently exercisable options. Does
not include: 10,000 shares granted to Mr. Rosenman pursuant to his stock
grant and stock option agreement with the Company which do not vest
until January 1, 2000. Also does not include 300,000 shares of Common
Stock underlying options issued to Mr. Rosenman which will not vest
within 60 days. Includes 6,000 shares underlying presently exercisable
options that were granted to Diana Rosenman, Mr. Rosenman's wife. Does
not include 10,000 shares of Common Stock issuable to Diana Rosenman
upon the exercise of options which will not vest within 60 days.
(3) Percent of class calculation based on 5,157,590 shares of Common Stock
outstanding as of April 14, 1999, plus number of shares of Common Stock,
if any, issuable to the named securityholders upon conversion of
preferred stock and/or exercise of options and warrants exercisable
within 60 days.
(4) Mr. Duffy is a Director of the Company.
(5) Includes (i) 11,193 shares of Common Stock owned by Mr. Duffy
individually, and (ii) 55,000 shares of Common Stock which Mr. Duffy has
the right to acquire upon the exercise of currently exercisable stock
options. Also includes an additional (x) 944,450 shares of Common Stock
which are held by various investment partnerships of which Mr. Duffy is
either a general partner or a member of the limited liability company
which serves as the general partner, including MD Strategic L.P., and a
corporation of which Mr. Duffy is an executive officer (collectively,
the "Investment Entities"), and as to which he shares voting and
investment power, and (y) 393,000 shares of Common Stock which the
Investment Entities have the right to acquire upon the exercise of
currently exercisable stock options and/or warrants. Mr. Duffy disclaims
beneficial ownership of all securities described in clauses (x) and (y).
(6) Includes (i) 720,448 shares of Common Stock owned by MD Strategic L.P.,
and (ii) 213,000 shares of Common Stock which MD Strategic L.P. has the
right to acquire upon the exercise of currently exercisable warrants.
Mr. Donald Duffy is a general partner of MD Strategic L.P. (see footnote
5 to this table).
(7) Mr. Powell is a director of the Company.
24
<PAGE> 26
(8) Issuable upon exercise of presently exercisable options.
(9) Mr. Russell is a director of the Company.
(10) Issuable upon exercise of presently exercisable options.
(11) Mr. Scott is a director of the Company.
(12) Includes: (i) 17,000 shares of Common Stock and (ii) 5,000 shares
issuable upon the exercise of currently exercisable options.
(13) Bulldog Capital Management Limited Partnership ("BCM"), Bulldog Capital
Partners Limited Partnership ("BCP"), Bulldog Capital Management,
Inc.("BCMI"), the general partner of BCM, and Ronald J. Pollack
("Pollack"), the controlling shareholder of BCMI, filed a Schedule 13G
on February 16, 1999 indicating that BCM, BCMI, and Pollack share voting
power and dispositive power with respect to 524,555 shares, and that
BCM, BCMI, Pollack and BCP share voting power and dispositive power with
respect to 470,168 shares. The Schedule 13G also states that, with
respect to those shares owned by BCM in its capacity as an investment
adviser, no individual client's holdings are more than 5% of the class.
The principal offices of BCM are located at 33 North Glendon Avenue,
Suite 750, Clearwater, Florida 33755.
(14) Represents less than 5% of the outstanding Common Stock of the Company
as of April 14, 1999, assuming conversion of said share of Series A
Preferred Stock to Common Stock on such date.
(15) Percent of class calculation based on one share of Series A Preferred
Stock outstanding as of April 14, 1999.
(16) Represents less than 5% of the outstanding Common Stock of the Company
as of April 14, 1999, assuming conversion of said 600,000 shares of
Series B Preferred Stock to Common Stock on such date.
(17) Percent of class calculation based on 702,194 shares of Series B
Preferred Stock outstanding as of April 14, 1999.
(18) Represents less than 5% of the outstanding Common Stock of the Company
as of April 14, 1999, assuming conversion of said 102,194 shares of
Series B Preferred Stock to Common Stock on such date.
* Represents less than 1% of the outstanding shares of Common Stock of the
Company as of April 14, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities ("reporting
persons"), to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Except as described below, to the Company's knowledge, based solely on a review
of the copies of reports and amendments thereto on Forms 3, 4 and 5 furnished to
the Company by reporting persons during, and with respect to, its fiscal year
ended December 31, 1998, and on a review of written representations from
reporting persons to the Company that no other reports were required to be filed
for such fiscal year, all Section 16(a) filing requirements applicable to the
Company's directors, executive officers and greater than ten percent beneficial
owners during such period were satisfied in a timely manner, except that (i)
Anne Todd, who was appointed Principal Accounting Officer in 1998, failed to
timely file one report and (ii) Christopher Ebert who served as Chief Financial
Officer from June 22, 1998 to October 7, 1998, failed to timely file one report.
In addition, based on information available to the Company, it appears that (i)
Humbert Powell III, who was appointed as a director in 1995, failed to timely
file two reports, one of which related to one transaction and (ii) Donald Duffy
who was then the Co-Chief Executive Officer and a director of the Company,
failed to timely file three reports with regard to five transactions in 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996 and 1997, the Company incurred a total of $115,603 fees to Meyer,
Duffy & Associates, Inc. ("Meyer, Duffy"), for consulting services with respect
to capital raising. Mr. Don Duffy, a director of the Company, is a principal of
Meyer, Duffy. The fees were paid by the Company in May and June of 1998.
In private offerings in January and June of 1997, the Company sold $2,210,000
principal amount of 12% promissory notes and $2,710,000 principal amount of
9.75% promissory notes, respectively. MD Strategic L.P. ("MD Strategic"), PV II
L.P. ("PV II") and MD Ventures III ("MDV III"), partnerships in which Mr. Duffy
is a general partner, purchased an aggregate of $1,480,000 of such notes. In
August 1998, the notes held by the partnerships plus accrued interest thereon
were converted into a total of 1,559,742 shares of
25
<PAGE> 27
Series B Preferred Stock. These shares were subsequently converted into a total
of 311,950 shares of Common Stock (on a post reverse split basis).
In connection with the January 1997 issuance of the 12% promissory notes, the
Company issued 1,105,000 warrants ("C Warrants") to purchase an equivalent
number of shares of Common Stock (221,000 shares of Common Stock on a
post-reverse split basis). Of this number, a total of 375,000 C Warrants were
issued to MD Strategic and PV II. In September 1997, MD Strategic and PV II
received 275,000 shares of Common Stock (55,000 shares on a post reverse split
basis) upon the exercise of an equivalent number of warrants. PV II continues to
hold Series C Warrants entitling it to purchase 20,000 shares of Common Stock on
a post reverse split basis.
In connection with the June 1997 issuance of the 9.75% promissory notes, the
Company issued 1,367,501 warrants ("E Warrants") to purchase an equivalent
number of shares of Common Stock of the Company (273,500 shares of Common Stock
on a post reverse-split basis). Of this number, a total of 365,000 E Warrants
were issued to MD Strategic and MDV III. These warrants entitle MD Strategic and
MDV III to purchase a total of 73,000 shares of Common Stock on a post reverse
split basis.
In February 1998, pending the completion of the Company's Series C Preferred
Stock offering, the Company obtained unsecured bridge loans in the amounts of
$500,000 and $300,000, respectively, from MD Strategic and MDV IV, L.P. ("MDV
IV"), partnerships in which Mr. Duffy is a principal. Both loans bore interest
at 12%. MD Strategic and MDV IV also received a total of 150,000 warrants at an
exercise price $5.00 per share, pending completion of the Series C Preferred
Stock offering. In April 1998, MD Strategic was issued 48 units of Series C
Preferred Stock and 60,000 additional warrants for total consideration of $1.2
million consisting of $700,000 in cash and conversion of its $500,000 promissory
note. In August 1998, these 48 units were converted into 396,040 shares of
Common Stock. In April 1998, MDV IV was issued 12 units of Series C Preferred
Stock and 15,000 additional warrants in exchange for conversion of its $300,000
promissory note. In August 1998, these 12 units were converted into 99,010
shares of Common Stock.
On April 1, 1998, Meyer, Duffy entered into a Consulting Agreement with the
Company pursuant to the terms of which Meyer, Duffy agreed to provide the
Company consulting services with respect to capital raising and providing
industry research in exchange for a fee of $117,600 (payable in monthly
installments of $4,900 over a period of two years) and warrants to purchase
25,000 shares of Common Stock of the Company with an exercise price of $4.00 per
share.
In order to finance its current working capital needs, the Company is relying on
a $1.5 million inventory flooring line of credit which it obtained in May 1998
from Cana Capital Corporation ("Cana Capital"), a company owned by Bruce Scott,
a director of the Company, and a $300,000 loan which it obtained in October 1998
from MD Strategic. Advances under the Cana Capital line of credit bear interest
at a rate of 2% or 5% over the prime rate, depending on the type of advance. The
MD Strategic loan is evidenced by an unsecured note bearing interest at eighteen
percent (18%) per annum and is due, together with accrued interest, on the
earlier of May 31, 1999 or upon receipt by the Company of funds from a
third-party lender. The Company is in the process of negotiating a revolving
line of credit with an institutional lender and anticipates that it will
terminate the line of credit with Cana Capital Corporation and repay the MD
Strategic loan upon obtaining such financing.
In February 1998, the Company entered into a license agreement with Big Bike
Boutique, Inc. ("BBB"), a company owned by Bruce Scott, a director of the
Company and owner of four independently operated Bikers Dream dealerships,
pursuant to which the Company licensed its name to BBB for the purpose of
selling apparel and accessories. The agreement was terminated in October 1998
pursuant to a termination of license agreement and mutual release. In connection
with the termination agreement, the Company issued to Mr. Scott in February 1999
16,000 shares of Common Stock.
In September 1998, the Company entered into a sublease agreement and a repayment
agreement with Big Bike of Daytona, Inc. ("Big Bike"), a Florida corporation
owned by Mr. Scott. Pursuant to the terms of the sublease agreement, the Company
agreed to sublease to Big Bike, for an original term of three years (which term
is in the process of being extended to six years), premises to be used by Big
Bike for the operation of an independent motorcycle retail business. Under the
repayment agreement, the Company has agreed to reimburse Big Bike for a portion
of the cost of certain tenant improvements advanced by Big Bike; such
reimbursement is to be made by an offset by Big Bike against the rent otherwise
due under the sublease. All profits made by Big Bike on sales of motorcycles,
parts and other inventory consigned by the Company shall be applied to rent due
under the sublease until the amount paid under the sublease in any given year
equals the rent the Company is obligated to pay on the master lease for the
premises; thereafter, Big Bike is obligated to pay the Company half of net
profits on sales of consigned inventory from the Company. Total rent due under
the sublease is capped at the lesser of actual net profits from the sale of
consigned inventory from the Company or the amount owed by the Company under the
master lease.
The Company has entered into an employment agreement and a stock grant and stock
option agreement with Herm Rosenman, president and chief executive officer of
the Company. See Item 10 --"Executive Compensation."
In May 1998, the Company entered into a three year employment agreement with
Diana Rosenman pursuant to which Ms. Rosenman is employed as Director of
Marketing and Public Relations. Ms. Rosenman earns an annual minimum salary of
$110,000, subject to annual review by the Board's compensation committee. In
addition, the Company agreed to grant Ms. Rosenman an option to purchase 16,000
shares of the Company's Common Stock at $4.00 per share, vesting over a period
of three years. Upon termination other than
26
<PAGE> 28
for cause, Ms. Rosenman is entitled to payment equal to six months salary, based
on her then current rate of compensation. Ms. Rosenman is the wife of Herm
Rosenman, the Company's president and chief executive officer.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
a. List of Exhibits:
<TABLE>
<S> <C>
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.(1)
3.1 Articles of Incorporation, as amended, of the
Company (formerly known as HDL Communications).(1)
3.1.1 Certificate of Amendment of Articles of Incorporation dated
June 21, 1996.(4)
3.1.2 Certificate of Correction of Certificate of Amendment of
Articles of Incorporation dated July 25, 1997.(5)
3.1.3 Certificate of Ownership of HDL Communications (now known as
Bikers Dream, Inc.).(1)
3.1.4 Certificate of Determination of Series B Convertible
Preferred Stock.(5)
3.1.5 Certificate of Determination of Series C Convertible
Preferred Stock.(7)
3.1.6 Certificate of Determination of Series D Convertible
Preferred Stock.(10)
3.2 Bylaws, as amended, of the Company.(1)
4.1 Form of Certificate of Common Stock of the Company.(11)
4.2 Articles of Incorporation of Company, as amended (included
as Exhibits 3.1, 3.1.1, 3.1.2, 3.1.4, 3.1.5 and 3.1.6).
4.3 Bylaws, as amended, of the Company (included as Exhibit
3.2).
10.1 Lease dated August 5, 1993 between the Company and McFadden
Plaza.(1)
10.2 Lease dated November 1, 1994 between the Company and Valley
View Partnership.(1)
10.3 Lease dated February 8, 1995 between the Lily Company and
Jim Kinnicutt and Susan Rasmussen d/b/a Bikers Dream of
Sacramento.(4)
10.4 Lease dated October 30, 1996 between the Company and Inland
Industries.(4)
10.5 Form of Series D Preferred Stock Subscription Agreement.(10)
10.6 Consulting Agreement dated April 6, 1995 between the Company
and Meyer, Duffy & Associates.(1)
10.7 Consulting Agreement effective as of October 1, 1995 between
the Company and Meyer, Duffy & Associates.(1)
10.8 Amendment to Consulting Agreement and Stock Option Agreement
dated November 1, 1995, between the Company and Meyer Duffy
& Associates.(4)
10.9 The 1995 Incentive Stock Option Plan of the Company, as
amended.(2)+
10.10 The 1995 Non-Qualified Stock Option Plan of the Company, as
amended.(2)+
10.11 The 1995 Non-Qualified Directors' Stock Option Plan of the
Company, as amended.(2)+
10.12 1998 Stock Compensation Plan.(9)+
10.13 Bikers Dream, Inc. 1998 Stock Option Plan.(8)+
10.14 Promissory Note and Security Agreement dated February 14,
1996 between the Company and Green Tree Financial Servicing
Corporation.(4)
10.15 Promissory Note and Security Agreement dated December 28,
1995 between the Company and Green Tree Financial Servicing
Corporation.(4)
10.16 Stock Option Agreement dated September 13, 1996 between the
Company and Mull Acres Investments, Inc.(4)
10.17 Asset Purchase Agreement dated January 30, 1997 among the
Company, Ultra Acquisition Corp. and Mull Acres Investments,
Inc.(3)
10.18 Senior Subordinated Promissory Note of the Company dated
January 30, 1997 payable to Mull Acres Investments, Inc. in
the amount of $2,700,000.(4)
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
10.19 Security Agreement dated January 30, 1997 between the
Company and Mull Acres Investments, Inc.(4)
10.20 Lease dated February 12, 1996 between Mull Acres
Investments, Inc. and Lincoln Riverside Business Center.(4)
10.21 Lease dated October 11, 1996 between Mull Acres Investments,
Inc. and Lincoln Riverside Business Center.(4)
10.22 Note Conversion Agreement dated June 30, 1997 between the
Company and Mull Acres Investments, Inc.(6)
10.23 Employment Agreement dated August 31, 1997 between the
Company and Herm Rosenman.(6)+
10.24 Amendment to Employment Agreement dated August 31, 1997
between the Company and Herm Rosenman.(6)+
10.25 Stock Grant and Stock Option Agreement dated December 24,
1997 between the Company and Herm Rosenman.(6)+
10.26 Loan Agreement dated November 17, 1997 between the Company
and Sirrom Capital Corporation dba Tandem Capital.(6)
10.27 Form of 12% Convertible Promissory Note dated February 18,
1998 payable to the order of Meyer Duffy Ventures III in the
amount of $300,000.(11)
10.28 Form of 12% Convertible Promissory Note dated February 18,
1998 payable to the order of MD Strategic L.P. in the amount
of $500,000.(11)
10.29 Non-Negotiable Promissory Note dated October 13, 1998
payable to the order of MD Strategic L.P. in the amount of
$300,000.(11)
10.30 Consulting Agreement dated April 1, 1998 between the Company
and Meyer Duffy & Associates.(11)
10.31 Loan Agreement dated June 22, 1998 between Sirrom Capital
Corporation d/b/a Tandem Capital and the Company and Ultra
Acquisition Corporation as Borrowers.(11)
10.31.1 12% Secured Promissory Note Due June 22, 2001 by the Company
and Ultra Acquisition Corporation payable to the order of
Sirrom Capital Corporation d/b/a Tandem Capital.(11)
10.31.2 Stock Purchase Warrant by the Company dated June 22, 1998
issued by the Company to Sirrom Capital Corporation d/b/a
Tandem Capital.(11)
10.31.3 Registration Rights Agreement dated as of June 22, 1998
between the Company and Sirrom Capital Corporation d/b/a
Tandem Capital.(11)
10.31.4 Stock Purchase Warrant by Bikers Dream, Inc. dated November
17, 1997 issued by the Company to Sirrom Capital Corporation
d/b/a Tandem Capital.(11)
10.31.5 Registration Rights Agreement dated as of November 17, 1997
between the Company and Sirrom Capital Corporation d/b/a
Tandem Capital.(11)
10.32 Form of Loan and Security Agreement dated May 28, 1999 in
series of loan agreements between the Company and Cana
Capital Corporation in connection with loans to the Company
in an aggregate maximum principal amount of $1,500,000.(11)
10.33 Form of Promissory Note dated May 28, 1999 in series of
promissory notes between the Company and Cana Capital
Corporation evidencing loans to the Company in an aggregate
maximum principal amount of $1,500,000.(11)
10.34 Form of Manufacturer's Recourse Agreement dated May 28, 1999
in series of agreements between the Company and Cana Capital
Corporation in connection with loans to the Company in an
aggregate maximum principal amount of $1,500,000.(11)
10.35 Form of Program Letter dated May 28, 1999 in series of
agreements between the Company and Cana Capital Corporation
in connection with loans to the Company in an aggregate
maximum principal amount of $1,500,000.(11)
10.36 Lease dated as of January 15, 1999 between LDT Company,
Carol M. Carson, David Carson and Tim Carson as Partners and
Bikers Dream International, together with addendum (relating
to Mira Loma facilities).(11)
10.37 Sublease dated as of January 15, 1999 between PrimeLine
Products Company and Bikers Dream International and LDT
Company, Carol M. Carson, David Carson and Tim Carson,
together with addendum (relating to Mira Loma
facilities).(11)
10.38 Termination of License Agreement and Mutual Release dated as
of October 29, 1998 between the Company and Big Bike
Boutique, Inc.(11)
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C>
10.39 Sublease Agreement dated September, 1998 between the Company
and Big Bike of Daytona, Inc.(11)
10.40 Agreement dated September 10, 1998 between Bikers Dream,
Inc. and Big Bike of Daytona, Inc.(11)
10.41 Amendment to Stock Grant and Stock Option Agreement dated as
of December 28, 1998 between the Company and Herm Rosenman.
(11)
10.42 Mutual Release and Settlement Agreement dated as of October
7, 1997, between the Company, Ultra Acquisition Corporation,
Mall Acres Investments, Inc., Jeffrey H. Silvers, William
Alden and Carl Vincent Bergeman.
21.1 List of subsidiaries.(2)
23.1 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule.
</TABLE>
- ----------
(1) 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.
(2) Incorporated by reference to the Company's Form 10-KSB dated April 12,
1996 for the fiscal year ended December 31, 1995 filed with the
Commission on April 15, 1996.
(3) Incorporated by reference to the Company's Form 8-K dated January 30,
1997 filed with the Commission on February 14, 1997.
(4) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996 filed with the Commission on April 15,
1997.
(5) Incorporated by reference to the Company's Form 10-QSB for the fiscal
quarter ended September 30, 1997 filed with the Commission on November
14, 1997.
(6) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1997 filed with the Commission on April 15,
1998.
(7) Incorporated by reference to the Company's Form 10-QSB for the fiscal
quarter ended March 31, 1998 filed with the Commission on May 15, 1998.
(8) Incorporated by reference to the Company's proxy statement filed with
the Commission on July 8, 1998.
(9) Incorporated by reference to the Company's registration statement on
Form S-8 filed with the Commission on December 15, 1998.
(10) Incorporated by reference to the Company's registration statement on
Form S-3 filed with the Commission on February 11, 1999.
(11) Incorporated by reference to the Company's Form 10-KSB dated April 15,
1999 for the fiscal year ended December 31, 1998, filed with the
Commission on April 15, 1999.
+ A compensatory plan or arrangement.
b. Reports on Form 8-K.
Not applicable.
29
<PAGE> 31
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: August 17, 1999 By: /s/ Herm Rosenman
-------------------------------------
Herm Rosenman, President/CEO
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.
<TABLE>
<CAPTION>
<S> <C>
/s/ Herm Rosenman August 17, 1999
- ---------------------------------------------------------
Herm Rosenman
President, CEO and Director (Principal Executive Officer)
/s/ Anne Todd August 17, 1999
- ---------------------------------------------------------
Anne Todd
Controller (Principal Financial and Accounting Officer)
/s/ Donald J. Duffy August 17, 1999
- ---------------------------------------------------------
Donald J. Duffy
Director
/s/ John Russell August 17, 1999
- ---------------------------------------------------------
John Russell
Director
- ---------------------------------------------------------
Humbert Powell
Director
- ---------------------------------------------------------
Bruce Scott
Director
</TABLE>
30
<PAGE> 32
BIKERS DREAM, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE> 33
BIKERS DREAM, INC. AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5 - 6
Consolidated Statements of Cash Flows 7 - 9
Notes to Consolidated Financial Statements 10 - 39
<PAGE> 34
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, 1998 (as restated), and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998 (as restated). 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, 1998 (as restated), and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended December 31, 1998 (as restated) in conformity with
generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 2, 1999
(Except for Note 19, as to which the
date is August 4, 1999)
1
<PAGE> 35
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
As Restated
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 689,679
Marketable securities 200,634
Accounts receivable, net of allowance for doubtful accounts of $343,361 2,633,649
Other receivables 43,098
Notes receivable 6,143
Inventories 7,644,793
Prepaid expenses and other current assets 221,096
-----------
Total current assets 11,439,092
FURNITURE AND EQUIPMENT, net of accumulated depreciation and
amortization of $720,108 1,011,371
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated
amortization of $429,954 2,589,401
DEBT ISSUANCE COSTS, net of accumulated amortization of $29,913 169,533
DEPOSITS AND OTHER ASSETS 488,516
-----------
TOTAL ASSETS $15,697,913
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 36
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
As Restated
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,083,338
Accrued expenses 971,313
Advances on financing agreements - related party 1,486,174
Current portion of notes payable 160,991
Current portion of capital lease obligations 36,833
Notes payable - related parties 300,000
------------
Total current liabilities 5,038,649
DEFERRED RENT 55,586
NOTES PAYABLE, less current portion 4,731,749
CAPITAL LEASE OBLIGATIONS, less current portion 54,735
------------
Total liabilities 9,880,719
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A, convertible preferred stock, no par value
aggregate liquidation preference of $175,000
30 shares authorized
1 share issued and outstanding 157,500
Series B, convertible preferred stock, no par value
cumulative dividends, aggregate liquidation preference of
$702,194 per share 8,000,000 shares authorized
702,194 shares issued and outstanding 702,194
Series C, convertible preferred stock, no par value
cumulative dividends, aggregate liquidation preference of $25,000
300 shares authorized
0 shares issued and outstanding --
Common stock, no par value
25,000,000 shares authorized
5,112,926 issued and outstanding 22,642,205
Subscriptions receivable (90,000)
Accumulated deficit (17,594,705)
------------
Total shareholders' equity 5,817,194
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,697,913
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 37
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(As Restated) (As Restated)
<S> <C> <C>
REVENUES
Product sales $ 27,606,964 $ 14,838,057
Financing contracts 127,656 86,930
------------ ------------
Total revenues 27,734,620 14,924,987
COST OF GOODS SOLD 25,783,689 14,296,108
------------ ------------
GROSS PROFIT 1,950,931 628,879
------------ ------------
EXPENSES
Selling, general, and administrative expenses 5,361,152 4,584,294
Depreciation and amortization 503,157 451,960
------------ ------------
Total expenses 5,864,309 5,036,254
------------ ------------
OPERATING LOSS (3,913,378) (4,407,375)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (576,156) (592,076)
Other expense, net 3,707 (107,707)
------------ ------------
Total other income (expense) (572,449) (699,783)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES
PREFERRED STOCK DIVIDENDS AND BENEFICIAL
CONVERSION FEATURE (4,485,827) (5,107,158)
PROVISION FOR INCOME TAXES 800 800
------------ ------------
NET LOSS BEFORE STOCK DIVIDENDS AND
BENEFICIAL CONVERSION FEATURE $ (4,486,627) $ (5,107,958)
PREFERRED STOCK DIVIDENDS, NET OF
FORFEITED DIVIDENDS 128,445 (199,627)
BENEFICIAL CONVERSION FEATURE GRANTED TO
SERIES C PREFERRED SHAREHOLDERS (1,335,534) 0
------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (5,693,716) $ (5,307,585)
============ ============
BASIC LOSS PER SHARE $ (1.38) $ (2.63)
============ ============
DILUTED LOSS PER SHARE $ (1.38) $ (2.63)
============ ============
WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC 4,125,309 2,018,075
============ ============
DILUTED 4,125,309 2,018,075
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 38
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
As Restated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A, Convertible Series B, Convertible Series C, Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7 $ 1,102,500 -- $ -- -- $ --
DEBT INTEREST THEREON CONVERTED
TO EQUITY 6,481,385 6,481,385
SERIES B PREFERRED STOCK
REACQUIRED BY THE COMPANY FROM
MULL ACRES INVESTMENTS, INC. (730,000) (730,000)
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES CONVERTED TO EQUITY
ISSUANCE OF COMMON STOCK TO
EMPLOYEES IN EXCHANGE FOR
SERVICES
EXERCISE OF OPTIONS FOR CASH
EXERCISE OF SERIES C WARRANTS
FOR CASH
CONVERSION OF SERIES A
CONVERTIBLE PREFERRED STOCK
TO COMMON STOCK (4) (630,000)
DIVIDENDS ON SERIES A
CONVERTIBLE PREFERRED STOCK
CONVERTED TO COMMON STOCK
DIVIDENDS ACCRUED ON PREFERRED
SHARES
NET LOSS
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 3 472,500 5,751,385 5,751,385 -- --
PRIVATE PLACEMENTS, net of cost 123 2,944,985
RELATED PARTY DEBT CONVERTED
TO EQUITY 32 800,000
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
CONVERSION OF SERIES A
PREFERRED STOCK (2) (315,000)
CONVERSION OF SERIES B
PREFERRED STOCK (5,049,191) (5,049,191)
CONVERSION OF SERIES C
PREFERRED STOCK (155) (3,744,985)
CONVERSION OF SERIES A
PREFERRED STOCK DIVIDEND
</TABLE>
<TABLE>
<CAPTION>
Common Stock
---------------------------- Subscriptions Accumulated
Shares Amount Receivable Deficit Total
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,749,736 $ 7,477,913 $ -- $ (6,573,983) $ 2,006,430
DEBT INTEREST THEREON CONVERTED
TO EQUITY 274,000 1,370,000 7,851,385
REACQUISITION OF SERIES B
PREFERRED STOCK (730,000)
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
EXERCISE OF SERIES C WARRANTS
FOR CASH 125,000 484,375 484,375
CONVERSION OF SERIES A
CONVERTIBLE PREFERRED STOCK
TO COMMON STOCK 93,333 630,000 --
DIVIDENDS ON SERIES A
CONVERTIBLE PREFERRED STOCK
CONVERTED TO COMMON STOCK 9,333 70,000 70,000
DIVIDENDS ACCRUED ON PREFERRED
SHARES (70,250) (70,250)
NET LOSS (5,107,958) (5,107,958)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 2,544,926 11,199,995 -- (11,752,191) 5,671,689
PRIVATE PLACEMENTS, net of cost 2,944,985
RELATED PARTY DEBT CONVERTED
TO EQUITY 800,000
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES 57,062 250,000 250,000
CONVERSION OF SERIES A
PREFERRED STOCK 46,667 315,000 --
CONVERSION OF SERIES B
PREFERRED STOCK 1,009,838 5,049,191 --
CONVERSION OF SERIES C
PREFERRED STOCK 1,255,599 3,744,985 --
CONVERSION OF SERIES A
PREFERRED STOCK DIVIDEND 4,667 35,000 35,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 39
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
As Restated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A, Convertible Series B, Convertible Series C, Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
EXERCISE OF SERIES D WARRANTS
FOR CASH $ $ $ $
EXERCISE OF SERIES F WARRANTS
FOR CASH
EXERCISE OF OPTIONS FOR CASH
EXERCISE OF OPTIONS FOR
SERVICES
NET LOSS
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 1 $ 157,500 702,194 $ 702,194 -- $ --
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Stock
---------------------------- Subscriptions Accumulated
Shares Amount Receivable Deficit Total
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
EXERCISE OF SERIES D WARRANTS
FOR CASH $ 20,000 $ 80,000 $ $ $ 80,000
EXERCISE OF SERIES F WARRANTS
FOR CASH 55,000 275,000 275,000
EXERCISE OF OPTIONS FOR CASH 76,167 228,500 (90,000) 138,500
EXERCISE OF OPTIONS FOR
SERVICES 43,000 129,000 129,000
AMOUNT RECORDED UPON ISSUANCE
OF PREFERRED STOCK AS A
BENEFICIAL CONVERSION
FEATURE 1,335,534 (1,335,534) --
DIVIDENDS ACCRUED ON PREFERRED
SHARES (20,353) (20,353)
NET LOSS (4,486,627) (4,486,627)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 5,112,926 $ 22,642,205 $ (90,000) $(17,594,705) $ 5,817,194
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 40
BIKERS DREAM, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
As Restated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
(As Restated) (As Restated)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,486,627) $(5,107,958)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 503,157 451,960
Issuance of common stock for services 129,000 32,750
Issuance of preferred stock for interest expense - 231,385
(Increase) decrease in
Accounts receivable (1,672,379) (712,639)
Other receivables (43,098) -
Inventories (3,190,702) (1,542,965)
Prepaid expenses and other current assets (121,336) (18,222)
Deposits and other assets (284,624) (134,229)
Increase (decrease) in
Accounts payable 1,462,542 509,321
Accrued expenses 16,913 (218,451)
----------- -----------
Net cash used in operating activities (7,687,154) (6,509,048)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchases of furniture and equipment (189,092) (216,435)
Purchase of marketable securities (302) (200,000)
Purchase of Ultra Kustom Cycles - (1,100,000)
Increase in deferred rent (9,324) (2,627)
Other 23,895 (30,370)
----------- -----------
Net cash used in investing activities (174,823) (1,549,432)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 4,575,000 7,420,000
Payments on notes payable (2,580,922) (108,773)
Payments on capital lease obligations (28,783) (25,278)
Proceeds from notes payable - related parties 1,100,000 -
Payments on notes payable - related parties (36,000) (48,000)
Advances on financing agreements - related party, net 1,486,174 -
Debt issuance costs (69,556) (99,977)
Exercise of Series C warrants - 484,375
Exercise of Series D warrants 80,000 -
Exercise of Series F warrants 275,000 -
Exercise of stock options 138,500 855,500
Private placements, net of offering costs 2,944,985 -
----------- -----------
Net cash provided by financing activities 7,884,398 8,477,847
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 41
BIKERS DREAM, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net increase in cash and cash equivalents $ 22,421 $419,367
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 667,258 247,891
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $689,679 $667,258
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the years ended December 31, 1998 and 1997, approximately $544,000 and
$550,000, 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.
During the year ended December 31, 1997, the Company converted four shares of
Series A convertible preferred stock into 93,333 shares of common stock.
During the years ended December 31, 1998 and 1997, the Company accrued but did
not declare dividends on Series A, B, and C preferred stock of $20,353 and
$70,250, respectively.
During the years ended December 31, 1998 and 1997, the Company converted
accounts payable of $50,000 and $279,457, respectively, into 14,286 and 48,391
shares, respectively, of common stock.
During the year ended December 31, 1998, the Company converted notes payable to
a related party of $800,000 into 32 shares of Series C preferred stock.
During the year ended December 31, 1998, the Company converted accrued expenses
of $200,000 into 42,776 shares of common stock.
During the year ended December 31, 1998, the Company converted two shares of
Series A convertible preferred stock into 46,667 shares of common stock.
During the year ended December 31, 1998, the Company converted 5,049,191 shares
of Series B convertible preferred stock into 1,009,838 shares of common stock.
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 42
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, 1998, the Company converted 155 shares of
Series C convertible preferred stock into 1,255,599 shares of common stock.
During the year ended December 31, 1998, the Company paid dividends of $35,000
by issuing 4,667 shares of common stock.
During the year ended December 31, 1998, the Company acquired automobiles of
$62,588 for a note payable and a capitalized lease obligation of $20,208 and
$42,380, respectively.
During the year ended December 31, 1998, the Company recorded an exercise of
stock options of 30,000 in exchange for a subscription receivable of $90,000.
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 43
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Line of Business
Bikers Dream, Inc. (the "Company") is in the business of manufacturing
and selling new Ultra motorcycles and other new and used motorcycles,
parts, accessories, apparel, and service. The Company operates in two
business segments: 1) the Retail Division, which sells motorcycles,
parts and accessories, and services through the five Company-owned
retail stores located in California and Texas to individuals; and 2)
the Manufacturing Division, which manufactures Ultra motorcycles and
sells them to the Ultra motorcycle dealers located throughout the
United States and to the five Company-owned stores.
Organization
The Company was originally incorporated in 1985. 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 an
arm's length negotiation that the market value of the combined entities
was approximately $4,000,000 (or approximately $5.00 per share) which
was evidenced by the number of shares issued (820,000) in connection
with the acquisition as follows:
o 660,000 shares to former Company shareholders
o 60,000 shares to former HDL shareholders
o 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 Cycles and other new and used motorcycles, parts,
accessories, apparel, and service as described above under "Line of
Business."
10
<PAGE> 44
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION (CONTINUED)
Organization (Continued)
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.
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 of UKC 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 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>
On June 30, 1997, the Company and Mull Acres entered into an agreement
(the "Note Conversion Agreement"). Under the terms of the Note
Conversion Agreement, 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.
11
<PAGE> 45
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION (CONTINUED)
Organization (Continued)
In addition, on October 7, 1997, the Company, Mull Acres, and several
individuals affiliated with Mull Acres entered into another agreement
(the "Mutual Release and Settlement Agreement"). Under the terms of the
Mutual Release and Settlement Agreement, certain terms of the Asset
Purchase Agreement and Note Conversion Agreement were clarified and
modified. Some of the terms that were clarified and modified related to
non-competition, non-solicitation of customers, and non-interference
with the Company's employees by Mull Acres and certain specified
individuals affiliated with Mull Acres. To secure Mull Acres and the
individuals affiliated with Mull Acres performance under the Mutual
Release and Settlement Agreement, 730,000 shares of Series B
convertible preferred stock were retained by the Company in escrow.
Upon the settlement agreement, the Company reduced the excess cost
over fair market value for $730,000 and effectively retired the
preferred shares.
During 1998, the management of the Company and its legal counsel
concluded that the individuals affiliated with Mull Acres violated the
terms of the Mutual Release and Settlement Agreement sufficiently
enough to allow the Company to reacquire the 730,000 shares of Series B
convertible preferred stock that were retained in escrow.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Bikers
Dream, Inc. and all of its wholly-owned subsidiaries (hereafter known
as the "Company"), 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, dba Ultra Cycles. All significant
intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
Product Sales
Revenue from the sale of motorcycles is recognized upon completion of
the sale agreement. Revenue from the sale of motorcycle parts is
recognized upon shipment 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.
12
<PAGE> 46
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - 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. Advertising costs for the
years ended December 31, 1998 and 1997 were $463,420 and $285,390,
respectively.
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
to 24 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, 1998, the Company adopted SFAS No. 128,
Earnings per Share." Basic loss per share is computed by dividing the
net loss by the weighted-average number of common shares available.
Diluted loss 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. Since the Company had a net loss for 1998 and
1997, basic loss per share and diluted loss 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. All shares and per share data have
been retroactively restated to reflect the stock split.
13
<PAGE> 47
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - 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, 1998, the market value of
these investments approximates cost under the specific-identification
method.
Inventories
Inventories are stated at the lower of cost 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 capitalized and amortized over the term of the
corresponding indebtedness.
14
<PAGE> 48
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - 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.
Concentrations
For the years ended December 31, 1998 and 1997, the Company purchased
certain motorcycle parts primarily from a single vendor. There could be
a negative economic impact to the Company if conditions arise so that
the Company could no longer purchase the certain parts from the vendor.
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, 1998,
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.
For the years ended December 31, 1998 and 1997, the provision for
warranty costs has not been materially different than actual warranty
costs.
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 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.
15
<PAGE> 49
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain amounts included in the 1997 financial statements have been
reclassified to conform with the 1998 presentation.
Excess of Cost over Fair Value of Net Assets Acquired
The excess of the purchase price over the estimated fair value of the
assets acquired has been recorded as excess cost over fair value of net
assets acquired, which is being amortized on a straight-line basis over
fifteen years. For the years ended December 31, 1998 and 1997,
amortization expense was $210,653 and $219,301, respectively. When
events and circumstances so indicate, all long-term assets, including
the excess cost over fair value of net assets acquired, are assessed
for recoverability based upon cash flow forecasts. As of December 31,
1998, the Company has not recognized any impairment losses.
Comprehensive Income
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from
net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financials
statements since the Company did not have any of the items of
comprehensive income in any period presented.
Segment Reporting
The Company accounts for segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
which requires that companies disclose "operating segments" based on
the way management desegregates the Company for internal operating
decisions. See Note 13 for further information about the Company's
segments.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results of
operations.
16
<PAGE> 50
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," is effective for financial statements with the
first fiscal quarter beginning after December 15, 1998. The Company
does not expect adoption of SFAS No. 134 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the
Company.
NOTE 3 - 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, 1998, the uninsured portion amounted to
$627,581. 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 4 - INVENTORIES
For the year ended December 31, 1998 and 1997, the Company provided
a reserve for obsolescence of $290,000 and $465,000, respectively.
Inventories at December 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Parts $3,414,448
Finished motorcycles 4,230,345
----------
TOTAL $7,644,793
==========
</TABLE>
17
<PAGE> 51
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1998 consisted of the
following:
<TABLE>
<S> <C>
Furniture and fixtures $ 179,749
Equipment 303,675
Computers 287,020
Autos and trucks 667,792
Leasehold improvements 293,243
----------
1,731,479
Less accumulated depreciation and amortization 720,108
----------
TOTAL $1,011,371
==========
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities for its motorcycle assembly
plant, executive offices, administration, and retail superstores under
long-term, non-cancelable operating lease agreements that expire
through October 2003. The facilities are located in California and
Texas. Future minimum aggregate lease payments under non-cancelable
operating leases with initial or remaining terms of one year or more at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 441,332
2000 323,999
2001 258,406
2002 153,996
2003 128,330
----------
TOTAL $1,306,063
==========
</TABLE>
Total rent expense incurred by the Company for the years ended December
31, 1998 and 1997 was $509,267 and $515,320, respectively.
See Note 17 for a significant lease entered into by the Company
subsequent to December 31, 1998.
18
<PAGE> 52
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
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 in cash, and the remaining
balance of $200,000 was paid in 42,776 shares of the Company's common
stock during 1998.
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 $100,000 was paid by the
Company.
During 1998, the Company settled a lawsuit through arbitration, in
which the plaintiffs alleged that the Company violated 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. The settlement
agreement required the Company to pay a total of approximately
$220,000, and in turn, the Company would receive the inventory,
equipment, and fixed assets of the dealership with an approximate fair
value of $200,000. In addition, as part of the arbitration agreement,
the Company would assume operation of the dealership. As of December
31, 1998, the Company had paid a total of approximately $156,000 and
had not yet assumed operation of the dealership.
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.
As discussed in Note 1, the Company reacquired 730,000 shares of Series
B convertible preferred stock related to violations of the Mutual
Release and Settlement Agreement. To date, the parties involved have
not filed legal action with respect to the reacquisition, and
management of the Company and its legal counsel believe the likelihood
that the parties will prevail if they do pursue legal action to be
remote.
19
<PAGE> 53
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements
The Company has entered into three employment agreements, expiring
through October 31, 2001 with certain key employees of the Company.
These officers will receive aggregate annual salaries over the years as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 468,333
2000 398,889
2001 161,667
----------
TOTAL $1,028,889
==========
</TABLE>
Other Commitments and Contingencies
As of December 31, 1998, the Company was in the progress of being
audited for compliance with the sales and use tax laws and regulations
in the State of California by the State Board of Equalization ("SBOE")
related to sales tax exemptions for re-sales and interstate sales.
Although the audit was in progress at December 31, 1998, preliminary
correspondence from the SBOE indicated that the Company could owe as
much as $155,000 as a result of the audit. The Company is vigorously
working with the SBOE to resolve the issues concerning the audit and
believes that it is more likely than not that the audit will not result
in an assessment. Accordingly, as of December 31, 1998, the Company has
not accrued any loss related to the sales tax audit.
During August 1998, the Company signed a letter of intent with two
individuals to purchase from the individuals technology that would be
used by the Company for the enhancement and development of proprietary
parts. Under the terms of the letter of intent, the Company would
purchase the technology for a total of $1,100,000 with $1,000,000 to be
paid over three years after the definitive agreement takes effect. As
of April 2, 1999, the terms of the definitive agreement were still in
process of being finalized. Under the terms of the letter of intent, in
the event the Company discontinues use of the technology either because
it fails to continue to perform as represented or does not achieve
reasonable acceptance in the market, the Company has the right to
discontinue payments and share ownership of the technology on a pro
rata basis with the individuals.
20
<PAGE> 54
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 7 - ADVANCES ON FINANCING AGREEMENTS - RELATED PARTY
In May 1998, the Company entered into five separate motorcycle
floor-plan financing agreements with Cana Capital Corporation ("CCC"),
a related party (see Note 14), for an aggregate total of $1,500,000.
Under the terms of the agreement, the Retail Division of the Company
can borrow on the facilities to finance the purchase of specific bikes
for its inventory. Repayments on the advances are the earlier of one
year after the advance is made or immediately after the specific bike
for which an advance was made is sold. The advances carry an interest
rate of 2% per annum over the prime rate, or 9.75% at December 31,
1998, for new motorcycles, and 5% per annum over the prime rate, or
12.75% at December 31, 1998, for used motorcycles. In addition, an
administrative fee of 0.25% is charged on outstanding advances. The
advances are secured by the Company's inventory, accounts receivable,
chattel paper, furniture and equipment, and general intangibles. At
December 31, 1998, advances on the credit facilities aggregated to
$1,486,174.
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
During February 1998, the Company received $500,000 and $300,000
convertible bridge loans, bearing an interest rate of 12% each, payable
to two partnerships affiliated with Meyer Duffy & Associates, a related
party. During April 1998, these notes were converted into a total of 32
shares of the Company's Series C convertible preferred stock.
During October 1998, the Company issued a $300,000 note payable to MD
Strategic, LP, a partnership of which a director of the Company is a
principal. The note bears an interest rate of 18% per annum and is due
with all accrued interest on the earlier of May 31, 1999, or in full or
part upon earlier receipt of funds by the Company from any third-party
lender or investor. The note may be extended upon the option of the
payee. As of December 31, 1998, the outstanding principal balance on
the note was $300,000.
NOTE 9 - CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31,1998 consisted of the
following:
<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 $34,765
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 17,705
</TABLE>
21
<PAGE> 55
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL LEASE OBLIGATIONS (CONTINUED)
<TABLE>
<S> <C>
Capitalized lease obligation payable to a finance company,
collateralized by a Ford truck, requiring principal and
interest payments of $643 per month, with interest at 8.2%
per annum through April 2002. $39,098
-------
91,568
Less current portion 36,833
-------
LONG-TERM PORTION $54,735
=======
</TABLE>
Minimum future payments for the capital lease obligations at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 46,226
2000 30,114
2001 7,716
2002 24,218
---------
108,274
Less amounts representing interest 16,706
---------
TOTAL $ 91,568
=========
</TABLE>
NOTE 10 - NOTES PAYABLE
Notes payable at December 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Notepayable to Tandem Capital, dated June 1998, with interest
at 12% per annum, due and payable quarterly,
collateralized by a first lien on all assets of the
Company, and payable in June 2001. As more fully described
in Note 12, certain stock purchase warrants were issued in
connection with the $4,500,000 note payable to Tandem Capital. $4,500,000
Notepayable 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, or 10.25% at
December 31, 1998, payable in monthly principal and interest
payments of $1,455 through April 2005. 80,341
</TABLE>
22
<PAGE> 56
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 10 - NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
Notepayable to a bank collateralized by the Company's
securities with the bank, with interest at prime plus
0.625% per annum, or 8.375% at December 31, 1998, payable
monthly through June 1999. $ 75,000
Notepayable to a finance company collateralized by a diesel
tractor, requiring principal and interest payments of
$1,870 per month, with interest at 10% per annum through
January 2001. 40,421
Notepayable 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 2001. 180,058
Notepayable to a finance company, collateralized by a Ford
truck, requiring principal and interest payments of $612
per month, with interest at 11% per annum through August 2001. 16,920
----------
4,892,740
Less current portion 160,991
----------
LONG-TERM PORTION $4,731,749
==========
</TABLE>
The following is a schedule by years of future maturities of notes
payable:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 160,991
2000 95,553
2001 4,580,719
2002 20,289
2003 14,446
Thereafter 20,742
-----------
TOTAL $ 4,892,740
===========
</TABLE>
23
<PAGE> 57
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
The following table presents the current and deferred income tax
provision for federal and state income taxes for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current
Federal $ $ -
State 800 800
---------- ----------
800 800
---------- ----------
Deferred
Federal - -
State - -
---------- ----------
- -
---------- ----------
PROVISION FOR INCOME TAXES $ 800 $ 800
========== ==========
</TABLE>
The tax effects of temporary differences which give rise to the
deferred tax provision (benefit) at December 31, 1998 and 1997
consisted of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Furniture and equipment $ 34,339 $ (2,936)
Accrued liabilities 49,358 2,569
Accounts receivable allowance 241 82,943
Inventory reserve (40,855) 266,000
Net operating losses 1,257,981 1,566,566
Other (6,517) (1,047)
Valuation allowance (1,294,547) (1,914,095)
------------ ------------
TOTAL $ - $ -
============ ============
</TABLE>
The provision for income taxes differs from the amount that would
result from applying the federal statutory rate for the years ended
December 31, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Statutory regular federal income tax rate (34.0)% (34.0)%
Change in valuation allowance 33.8 33.8
Other 0.2 0.2
------------ ------------
TOTAL -% -%
============ ============
</TABLE>
24
<PAGE> 58
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (CONTINUED)
The components of the deferred income tax assets (liabilities) as of
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
State taxes $ (185,620) $ -
Furniture and equipment 854 (38,689)
Accrued expenses 299,858 34,527
Accounts receivable allowance 155,664 102,943
Inventory reserve 141,303 306,000
Net operating loss carryforwards 5,715,903 3,842,415
Other 26,777 25,964
----------- -----------
6,154,739 4,273,160
Valuation allowance 6,154,739 4,273,160
----------- -----------
TOTAL $ - $ -
=========== ===========
</TABLE>
As of December 31, 1998, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $15,500,000 and $4,800,000, respectively. The net
operating loss carryforwards begin expiring in 2007 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 12 - SHAREHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue preferred stock in series and to
determine the rights, preferences, privileges, and restrictions granted
to or imposed upon any wholly unissued series of preferred stock and to
fix the number of shares and designation of any such series.
Series A Convertible Preferred Stock
Each share of preferred stock pays annual dividends of 10% (based upon
a purchase price of $175,000 per unit) and 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 10 consecutive trading days or any time after the
third anniversary of the private placement. In addition, the aggregate
liquidation preference is $175,000.
25
<PAGE> 59
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Series A Convertible Preferred Stock (Continued)
In 1996, the Company sold seven units consisting of one unit of Series
A convertible preferred stock and 10,000 units of Series D warrants for
a price of $175,000 per unit. (Note: Series D warrants are described
below under "Stock Purchase Warrants.")
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, 1998, cumulative per share dividends in arrears on
December 31, 1998 were 43,500 in the aggregate.
Series B Convertible Preferred Stock
Each share of Series B preferred stock is convertible at the option of
the holder. 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 $0.0975 per preferred share. At
December 31, 1998, accrued dividends on Series B preferred shares were
$211,330 in the aggregate. In addition, the aggregate liquidation
preference is $702,194.
As described in Note 1, on June 30, 1997, the Company entered into a
note conversion agreement with Mull Acres, and as part of the
agreement, the Company issued 1,330,000 shares of its Series B
convertible preferred stock in satisfaction of a portion of the
$2,700,000 note payable that the Company had with Mull Acres at the
time.
During September 1997, the Company converted a series of 12% notes
payable and 9.75% notes, with an aggregate principal balance of
$4,920,000 and accrued interest thereon of $232,000, into 4,920,000
shares of the Company's Series B convertible preferred stock.
Series C Convertible Preferred Stock
The Company is authorized to issue 300 shares of Series C convertible
preferred stock. Each share of the Company's Series C convertible
preferred stock 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 stock
converts into the Company's common stock (the "Conversion Price") is
determined by dividing $25,000 by the greater of: 1) 75% of the average
closing price of the Company's common stock for the 10 trading days
immediately preceding the Conversion Date, or 2) $2.50, provided,
however, that under no circumstances shall the Conversion Price exceed
$4.00. Under certain circumstances, the Conversion Price is subject to
adjustment. Each share 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 20 consecutive days. Dividends are
cumulative and accrue whether or not declared on each share of Series C
of convertible preferred stock at an annual rate of $2.25 per preferred
share. Upon issuance of the Series C Preferred stock, the Company
calculated the conversion of the preferred stock as if the conversion
occurred upon issuance. Since the preferred stock is convertible
immediately, the Company recorded a beneficial conversion feature of
$1,335,534.
26
<PAGE> 60
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Series C Convertible Preferred Stock (Continued)
In April 1998, the Company sold for cash, and through the conversion of
notes payable aggregating to $800,000 to a related party, 155 units,
each consisting of one unit of Series C convertible preferred stock and
1,250 units of Series F warrants for an aggregate price of $3,875,000
($25,000 per unit). (Note: Series F warrants are described below under
"Stock Purchase Warrants.") As of December 31, 1998, all 155 shares of
the Series C convertible preferred stock that were issued were
converted into the Company's common stock.
Common Stock
During the year ended December 31, 1997, the Company converted four
shares of Series A preferred stock into 93,333 shares of common stock.
During the year ended December 31, 1997, the Company converted
$4,920,000 of notes payable into 4,920,000 shares of Series B
convertible preferred stock. In addition, accrued interest of $231,385
relating to the above notes payable were converted into 231,385 shares
of Series B convertible preferred stock.
During the year ended December 31, 1997, the Company converted
$1,330,000 of notes payable due to Mull Acres into 1,330,000 shares of
Series B preferred stock.
During the year ended December 31, 1997, the Company converted
$1,370,000 of notes payable due to Mull Acres into 274,000 shares of
common stock.
During the year ended December 31, 1997, the Company converted accounts
payable and accrued expenses of $279,457 into 48,391 shares of common
stock.
During the year ended December 31, 1997, the Company issued 4,333
shares of common stock in exchange for services rendered valued at
$32,750 or $7.56 per share, which represents the fair market value
of the services rendered.
During the year ended December 31, 1997, 240,800 stock options were
exercised for cash of $855,500.
During the year ended December 31, 1997, Series C warrants were
exercised, whereby 125,000 shares of common stock were issued in
exchange for cash of $484,375.
During the year ended December 31, 1997, the Company issued 9,333
shares of common stock in exchange for accrued preferred stock
dividends of $70,000.
During the year ended December 31, 1998, the Company converted notes
payable to a related party of $800,000 into 32 shares of Series C
convertible preferred stock.
During the year ended December 31, 1998, the Company converted accounts
payable of $50,000 into 14,286 shares of common stock.
27
<PAGE> 61
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock (Continued)
During the year ended December 31, 1998, the Company converted accrued
expenses of $200,000 into 42,776 shares of common stock.
During the year ended December 31, 1998, the Company converted two
shares of Series A convertible preferred stock into 46,667 shares of
common stock.
During the year ended December 31, 1998, the Company converted
5,049,191 shares of Series B convertible preferred stock into 1,009,838
shares of common stock.
During the year ended December 31, 1998, the Company converted 155
shares of Series C convertible preferred stock into 1,255,599 shares of
common stock.
During the year ended December 31, 1998, the Company completed a
private placement of Series C convertible preferred stock, selling 123
units at $25,000 per unit, for gross proceeds of $3,075,000.
The Company netted $2,944,985 after offering costs.
During the year ended December 31, 1998, Series D and Series F warrants
were exercised, whereby 20,000 and 55,000 shares, respectively, of
common stock were issued in exchange for cash of $80,000 and $275,000,
respectively.
During the year ended December 31, 1998, 46,167, stock options were
exercised for cash of $138,500. In addition, 30,000 shares of common
stock were issued in exchange for a subscription receivable of $90,000.
During the year ended December 31, 1998, the Company issued 43,000
shares of common stock in exchange for services rendered valued at
$129,000 or $3.00 per share, which represents the fair market value
of the services rendered.
During the year ended December 31, 1998, the Company issued 4,667
shares of common stock in exchange for accrued preferred stock
dividends of $35,000.
At December 31, 1998, common shares were reserved for issuance as
follows:
<TABLE>
<S> <C>
Assuming exercise or conversion of:
1995 Incentive Stock Option Plan 46,200
1995 Nonqualified Stock Option Plan 203,000
1995 Nonqualified Director's Stock Option Plan 128,000
Other stock options 709,187
Stock purchase warrants 1,497,750
Convertible preferred stock 163,772
---------
TOTAL 2,747,909
=========
</TABLE>
28
<PAGE> 62
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Purchase Warrants
At December 31, 1998, the Company had the following stock purchase
warrants outstanding:
1) Series C Warrants
In connection with the issuance of $2,210,000 of notes payable
during 1997, the holder of the notes received 221,000 Series C
warrants. Each warrant gives the holder the right to purchase
the Company's common stock. The exercise price of the warrants
was lowered to $3.875 during 1997, and subsequently in 1997,
125,000 of these warrants were exercised for $484,375. At
December 31, 1998, there were 96,000 Series C warrants
outstanding.
2) Series D Warrants
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, the warrants
are callable if the Company's common stock closes at $7.50 per
share for 10 consecutive trading days after registration of
the preferred stock. During 1998, the Company lowered the
exercise price on Series D warrants from $5.00 per common
share to $4.00 per common share, and 20,000 Series D warrants
were exercised for a total of $80,000. At December 31, 1998,
there were 57,000 Series D warrants outstanding.
3) Series E Warrants
Under the terms of a series of 9.75% notes payable that were
issued in June 1997 with an aggregate principal of $2,710,000,
investors of the notes received an aggregate of 273,500 Series
E warrants to purchase common stock at a purchase price of
$5.00 per share. At December 31, 1998, there were 273,500
Series E warrants outstanding.
4) Series F Warrants
As part of the sale of the 155 shares convertible Series C
preferred stock sold in April 1998, the Company also issued an
aggregate of 193,750 Series F warrants (1,250 warrants per
preferred share). Each warrant entitles the holder to purchase
one share of the Company's stock at a purchase price of $5.00
per share. During 1998, 55,000 Series F warrants were
exercised for $275,000 in cash, leaving 138,750 Series F
warrants outstanding at December 31, 1998.
5) Other Warrants
Under the terms of a $2,500,000 loan agreement during 1997,
Tandem Capital received an initial Stock Purchase Warrant to
purchase up to 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. The warrant was outstanding at
December 31, 1998.
29
<PAGE> 63
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Purchase Warrants (Continued)
Other Warrants (Continued)
Additionally, as part of the above loan agreement, Tandem
Capital received a Stock Purchase Warrant to purchase 75,000
shares of the Company's common stock at an exercise price of
$5.25 per share, which is exercisable on or before June 1,
2003. At December 31, 1998, the warrant was outstanding.
Other Warrants
In connection with a $4,500,000 loan agreement during June 1998, Tandem
Capital received a stock purchase warrant to purchase up to 370,000
shares of the Company's common stock at $3.25 per share, at any time
during a five-year period beginning June 15, 1998. The exercise price
of the warrants is automatically reset on the first anniversary date of
closing date at the lesser of 1) $3.25 per share, or 2) the average
closing bid price of the Company's common stock for the 20 trading days
immediately preceding the anniversary date.
In addition, if the loan obligation is outstanding on the first
anniversary of the closing date or any anniversary date thereafter, the
Company shall grant Tandem Capital additional stock warrants to
purchase up to 200,000 shares of common stock at an exercise price
equal to the greater of 1) $4.00 per share, or 2) 80% of the average
closing bid price of the Company's common stock for the 20 trading days
preceding the anniversary date of the loan. The warrants are
exercisable for a five-year period beginning in June 1999.
Stock Option Plans
The Company has adopted five stock option plans, the 1995 Incentive
Stock Option Plan, the 1995 Non-Qualified Stock Option Plan, the 1995
Non-Qualified Directors' Stock Option Plan, the 1998 Stock Option Plan,
and the 1998 Stock Compensation 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 five plans.
Under the 1995 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.
30
<PAGE> 64
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
The 1995 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 1995 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
10 years of the date of grant.
Under the 1998 Stock Option Plan (the "1998 Plan"), options may be
granted by the Compensation Committee to officers, employees,
directors, and consultants. Options granted under the 1998 Plan may
either be incentive stock options or non-qualified stock options. The
aggregate number of shares that may be issued pursuant to the plan is
1,000,000 over the life of the plan, of which 50,000 shares shall be
issued to directors, 750,000 to employees as incentive stock options,
and 200,000 to non-employees as non-qualified stock options. No
incentive stock option may be granted to any person who owns more than
10% ("10% Shareholders") of the total combined voting power of all
classes of the Company's stock or of its parent, unless the exercise
price is at least equal to 110% of the fair market value on the date of
grant. Options may be granted under the 1998 Plan for terms of up to 10
years, except for incentive stock options granted to 10% shareholders,
which are limited to the five-year terms. No incentive stock options
may be granted to an optionee if the aggregate fair market value of the
stock with respect to which incentive stock options are exercisable by
the optionee in any calendar year under all such plans of the Company
and its affiliates exceeds $100,000.
The 1998 Stock Compensation Plan was adopted to provide the Company
with a means of compensating key employees, including directors and
consultants to the Company, for their services with shares of common
stock. The plan became effective April 1, 1998 and shall terminate on
March 31, 2008. It is administered by the Board of Directors, who is
authorized to award up to 150,000 shares of common stock for a value of
no less than par as consideration for services rendered. As of December
31, 1998, no options have been granted under the 1998 Stock
Compensation Plan.
31
<PAGE> 65
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
In addition to the stock options issued under the above plans, the
Company issued other stock options.
The following summarizes the stock option transactions under the stock
option plans:
<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, 1996 4,000 $ 8.75 717,000 $ 8.24
Granted - $ - 639,547 $ 3,72
Exercised - $ - (500,000) $ 8.25
Canceled (3,800) $ 8.75 (165,360) $ 8.96
------------ -------------
Outstanding, December
31, 1997 200 $ 8.75 691,187 $ 3.87
Granted 50,000 $ 4.00 - $ -
Exercised - $ - (112,000) $ 5.00
Canceled (4,000) $ 4.00 (40,480) $ 4.30
------------ -------------
OUTSTANDING,
DECEMBER 31, 1998 46,200 $ 4.02 538,707 $ 3.61
============ =============
EXERCISABLE AT
DECEMBER 31, 1998 6,500 191,557
============ =============
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL LIFE OF
OPTIONS OUTSTANDING
AT DECEMBER 31,
1998 4.2 YEARS 3.6 YEARS
============ =============
RANGE OF EXERCISE
PRICES OF OPTIONS
OUTSTANDING AT
DECEMBER 31,
1998 $4.00 - 8.75 $4.40 - 15.00
============ =============
</TABLE>
32
<PAGE> 66
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Non- Average Average Average
qualified Granted Non- Granted 1998 Granted
Directors Price qualified Price Stock Price
Option Per Option Per Option Per
Plan Share Plan Share Plan Share
--------- --------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding December
31, 1996 128,000 $ 8.05 53,000 $ 8.85 - $ -
Canceled - $ - (23,000) $ 8.85 - $ -
----------- ----------- -----------
Outstanding, December
31, 1997 128,000 $ 8.05 30,000 $ 8.85 - $ -
Granted - $ - 175,000 $ 4.01 55,000 $ 3.68
Canceled - $ - (2,000) $ 5.00 - $ -
----------- ----------- -----------
OUTSTANDING, DECEMBER
31, 1998 128,000 $ 8.05 203,000 $ 4.72 55,000 $ 3.68
=========== =========== ===========
EXERCISABLE AT
DECEMBER 31, 1998 128,000 149,000 25,938
=========== =========== ===========
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL LIFE OF
OPTIONS OUTSTANDING
AT DECEMBER 31,
1998 6.4 YEARS 3.7 YEARS 4.7 YEARS
=========== =========== =========
RANGE OF EXERCISE
PRICES OF OPTIONS
OUTSTANDING AT
DECEMBER 31,
1998 $ 8.05 $ 4.00-8.85 $ 3.65-3.75
=========== ============= ============
</TABLE>
Stock Option Pricing
During the year ended December 31, 1998, all stock options were
repriced at an exercise price of $4.00.
On October 22, 1998, certain non-qualified options to purchase 473,334
shares of common stock, originally granted during the year ended
December 31, 1997, were repriced at an exercise price of $4.00.
Subsequently, these options were repriced on December 31, 1998 at an
exercise price of $3.00.
33
<PAGE> 67
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 1998 is 4.1 years. The exercise prices of
the options outstanding at December 31, 1998 ranged from $3.65 to
$5.00, and information relating to these options is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Weighted- Price
Average of Options
Range of Remaining Outstanding
Exercise Stock Options Stock Options Contractual and
Prices Outstanding Exercisable Life Exercisable
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
$ 3.65-4.50 284,000 155,438 3.6 years $ 4.00
$ 4.51-6.00 496,667 172,445 3.8 years $ 3.20
$ 6.01-10.00 185,240 168,312 6.0 years $ 8.20
$ 10.01-15.00 5,000 5,000 3.0 years $ 15.00
------- -------
970,907 501,195
======= =======
</TABLE>
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 for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss available to common shareholders
As reported $ (5,693,716) $ (5,307,585)
Pro forma $ (6,278,493) $ (9,000,037)
Basic and diluted loss per common share
As reported $ (1.38) $ (2.63)
Pro forma $ (1.52) $ (4.46)
</TABLE>
34
<PAGE> 68
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued)
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, 1998 and
1997: dividend yields of 0% and 0%, respectively; expected volatility
of 99% and 99%, respectively; risk-free interest rates of 47% and 5.7%,
respectively; and expected lives of 2.95 and five years, respectively.
The weighted-average fair value of options granted during the years
ended December 31, 1998 and 1997 was $2.93 and $4.00, respectively, and
the weighted-average exercise price was $4.42 and $7.70, respectively.
For options granted during the year ended December 31, 1998 where the
exercise price equaled the stock price at the date of the grant, the
weighted-average fair value of such options was $2.85, and the
weighted-average exercise price of such options was $4.53. For options
granted during the year ended December 31, 1998 where the exercise
price was less than the stock price at the date of the grant, the
weighted-average fair value of such options was $3.45, and the
weighted-average exercise price of such options was $3.75. No options
were issued during the year ended December 31, 1998 where the exercise
price exceeded the stock price at the date of the grant.
NOTE 13 - SEGMENT INFORMATION
For internal reporting purposes, management desegregates the Company
into two divisions: 1) the Manufacturing Division and 2) the Retail
Division. Most corporate expenses, such as internal administrative
costs, legal expenses, and debt issuance costs, are included in the
Retail Division.
The following table summarizes of results two segments:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------------
Retail Manufacturing
Division Division Eliminations Consolidated
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 11,881,139 $ 15,853,481 $ - $ 27,734,620
Operating loss $ (2,402,909) $ (1,510,469) $ - $ (3,913,378)
Operating loss,
excluding amortization
of costs in excess of
assets $ (2,402,909) $ (1,299,816) $ - $ (3,702,725)
Identifiable assets $ 6,318,045 $ 10,438,087 $ (1,058,219) $ 15,697,913
Capital expenditures $ 154,597 $ 121,460 $ - $ 276,057
</TABLE>
35
<PAGE> 69
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 13 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
Retail Manufacturing
Division Division Eliminations Consolidated
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 9,174,641 $ 5,750,346 $ - $ 14,924,987
Operating loss $ (1,963,562) $ (2,443,639) $ - $ (4,407,201)
Operating loss,
excluding amortization
of costs in excess of
assets $ (1,963,562) $ (2,224,512) $ - $ (4,188,074)
Identifiable assets $ 4,708,520 $ 5,993,897 $ (133,550) $ 10,568,867
Capital expenditures $ 155,672 $ 106,455 $ - $ 262,127
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
During 1998 and 1997, the Company incurred $220,248 and $193,800,
respectively, in legal fees and/or consulting fees from a law firm of
which Rowland W. Day, ll, a shareholder, a 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.
During the years ended December 31, 1998 and 1997 the Company engaged
the services of Meyer Duffy & Associates ("Meyer Duffy"), a management
consulting firm whose principal partner is a shareholder, a director,
and former Co-Chairman of the Company. Meyer Duffy was retained by the
Company to provide consulting, financial advisory, and investment
banking services. The latest written consulting agreement was
consummated and became effective January 1, 1998. Under the terms of
the agreement, Meyer Duffy would continue its consulting services and
services related raising capital for the Company for a two-year period
for $5,000 per month, and in addition, would receive a total of 75,000
options, exercisable at $4.00 per share.
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.
36
<PAGE> 70
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 14 - RELATED PARTY TRANSACTIONS (CONTINUED)
In February 1998, the Company entered into a license agreement with
Bike Bike Boutique, Inc., ("BBB") a company owned by Bruce Scott, a
director of the Company, owner of four independently operated Bikers
Dream dealerships, and owner of CCC, pursuant to which the Company
licensed it name to BBB for the purpose of selling apparel and
accessories. The agreement was terminated in October 1998 pursuant to a
termination of license agreement and mutual release.
In September 1998, the Company entered into a sublease agreement and
repayment agreement with Big Bike of Daytona, Inc. ("Big Bike"), a
Florida Corporation owned by Bruce Scott. Pursuant to the terms of the
sublease agreement, the Company agreed to sublease to Big Bike the
rights to operate an independent motorcycle dealership at the facility
for an original term of three years. Under the repayment agreement, the
Company has agreed to reimburse Big Bike for a portion of the cost of
certain tenant improvements advanced by Bike Bike. The reimbursement is
to be made by an offset against the rent otherwise due under the
sublease. All profits made by Big Bike on sales of motorcycles, parts,
and other consigned inventory by the Company shall be applied to rent
due under the sublease until the amount paid under the sublease in any
given year equals the rent the Company is obligated to pay on the
master lease for the premises. Thereafter, Big Bike is obligated to pay
the Company half of its net profits on sales of consigned inventory
from the Company. Total rent due under the sublease is capped at the
lesser of actual net profits from the sale of consigned inventory from
the Company or the amount owed by the Company under the master lease.
Bruce Scott also owns three other motorcycle dealerships in the state
of Florida. Sales to these stores owned by him during 1998 were
$1,684,015. At December 31, 1998, the stores owned by Bruce Scott owed
the Company an aggregate of approximately $30,000 on trade accounts
receivable.
NOTE 15 - OTHER UNUSUAL ADJUSTMENTS
During the fourth quarter of 1998 the Company had the following
significant accounting adjustments:
1) A charge of approximately $2,000,000 to cost of goods sold,
resulting from the difference between the inventory quantities
per the Company's perpetual inventory records at December 31,
1998 to a lesser amount counted during the physical year-end
inventory. In order to determine the reason or reasons for the
difference, the Company is currently conducting a review of
its computerized accounting and inventory systems, which
underwent a complete systems conversion during the second half
of 1998. However, the specific causes for the difference have
not yet been determined. The Company will notify its insurance
carriers of the situation.
37
<PAGE> 71
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 15 - OTHER UNUSUAL ADJUSTMENTS (CONTINUED)
2) A charge of $679,000 to cost of goods sold for the elimination
of intercompany gross profit included in inventory that
resulted from the Retail Division purchasing motorcycles from
the Manufacturing Division at a price above the Manufacturing
Division's actual cost.
3) A charge of approximately $356,000 to cost of goods sold
related to the Company reconciling its intercompany warranty
receivable and payable balances and accruing warranty costs.
Management of the Company has not yet determined which quarters in 1998
that the above adjustments relate to.
NOTE 16 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not
believe the cost of implementation will be material to the Company's
financial position and results of operations.
NOTE 17 - SUBSEQUENT EVENTS
In February 1999, the Company entered into a five-year lease to
relocate its corporate headquarters, manufacturing, warehouse, and
distribution facilities. The Company intends to move into the new
facility during the end of May 1999, and at that time, the lease will
commence. The lease payments will be $19,670 per month, subject to
increase to $21,356 after two years. The Company has an option to
extend the lease for five years.
38
<PAGE> 72
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS (CONTINUED)
In February 1999, the Company sold 1,545 shares of its newly issued
Series D convertible preferred stock in a private placement offering
for $1,500,000. The outstanding shares of Series D convertible
preferred stock are convertible into common stock pursuant to a
formula. Each share of Series D convertible preferred stock has a
stated value of $1,000. The number of shares of common stock issuable
upon the conversion of one share of Series D preferred stock is
calculated by adding $1,000 to the amount of accrued and unpaid
dividends on such shares and dividing the resulting sum by the
conversion price. The conversion price is equal to the lesser of 1)
110% of the closing bid price of the common stock on the last trading
day before the date of issuance of the share of Series D preferred
stock being converted, or 2) 90% of the average of the four lowest
closing bid prices of the common stock during the last 22 trading days
before the date of conversion. In addition, as part of the offering,
the Company issued warrants to holders of the Series D convertible
preferred stock enabling them to purchase a total of 60,000 shares of
the Company's common stock that are exercisable at any time until
February 5, 2004 at $4.125 per share. Upon the issuance of the Series D
Preferred Stock, the Company calculated the conversion of the preferred
stock as if the conversion occurred upon issuance. The total
beneficial conversion feature amounted to $318,428. Since the
preferred stock is not convertible until 61 days after issuance, the
Company expensed $292,328 in the quarter ended March 31, 1999, and the
remaining balance of $26,100 will be expensed in the quarter ended
June 30, 1999.
The investors of the Series D convertible preferred stock have also
committed to purchase an additional $500,000 of Series D convertible
preferred stock and a total of 15,000 additional warrants upon approval
by the Company's shareholders of the issuance of such additional Series
D convertible preferred stock. In addition, the same investors have
also committed to purchase an additional $1,000,000 of Series D
convertible preferred stock and another 25,000 warrants following the
later to occur of shareholder approval or the effectiveness of a
registration statement with respect to such shares.
As discussed in Note 6, during 1998, the Company settled a lawsuit
through arbitration related to the 1994 sale of a franchise to two
individuals, and among other terms included in the arbitration
agreement, the Company would assume operations of the motorcycle
dealership in Conover, North Carolina, which the Company did in January
1999. In addition to assuming the operations of the dealership, the
Company entered into a lease agreement for the facility that expires in
August 2001 and requires monthly rent payments of $2,000 per month.
During February 1999, the Company issued 16,000 shares to BBB as part
of the consideration for the termination agreement of a license
agreement (see Note 14). The fair market value of the shares at the
time of issuance was approximately $60,000.
NOTE 18 - EARNINGS PER SHARE
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Net loss $(4,486,627) (5,107,958)
Dividends on preferred shares, net of
forfeited dividends 128,445 (199,627)
Beneficial conversion feature granted
on Series C preferred shares (1,335,534) 0
----------- -----------
Loss available to common shareholders (5,693,716) (5,307,585)
=========== ===========
Basic loss per common shareholder $ (1.38) $ (2.63)
=========== ===========
Diluted loss per common shareholder $ (1.38) $ (2.63)
=========== ===========
Weighted-average shares outstanding:
Basic 4,125,309 2,018,075
=========== ===========
Diluted 4,125,309 2,018,075
=========== ===========
</TABLE>
NOTE 19 - RESTATEMENT OF CERTAIN TRANSACTIONS AS OF DECEMBER 31, 1998 AND 1997
Goodwill (Excess of Cost Over Fair Market Value)
During the year ended December 31, 1997 the Company entered into a Mutual
Settlement and Release Agreement with Mull Acres and several individuals
affiliated with Mull Acres. Under the terms of the agreement, certain terms of
the Purchase Agreement and Notes Conversion Agreement were clarified and
modified. Some of the terms clarified and modified related to non-competition,
non-solicitation of customers and non-interference with the Company's employees
by Mull Acres and certain specified individuals affiliated with Mull Acres. To
secure the performance of Mull Acres and the individuals affiliated with Mull
Acres, 730,000 shares of Series B convertible preferred stock were retained by
the Company in escrow.
During the year ended December 31, 1998, the management of the Company and its
legal counsel concluded that the individuals affiliated with Mull Acres
violated the terms of the Mutual Release and Settlement Agreement sufficiently
enough to allow the Company to reacquire the 730,000 shares of Series B
convertible preferred stock that were retained in escrow.
Originally the Company reduced the excess of cost over fair value during the
year ended December 31, 1998. It was later determined once the shares are
placed in escrow, they are no longer outstanding. Accordingly, the Company
restated the financial statements upon the Mutual and Settlement and Release
Agreement to reflect the reduction of goodwill (excess of cost over fair value)
and Series B preferred stock by $730,000. Since goodwill (excess of cost over
fair value) was reduced, the Company also recalculated amortization expense.
The above restatement in 1998 reduces goodwill (excess of cost over fair value)
and total assets by $680,870, decreases depreciation and amortization expense by
$39,304, decreases other income by $730,000 and decreases net loss before
preferred stock dividends and beneficial conversion feature by $690,696.
The above restatement in 1997 decreases depreciation and amortization expense,
operating loss and net loss before preferred stock dividends and beneficial
conversion feature by $9,826.
Accrued Preferred Dividends
The Series A, B and C preferred stock accrues dividends at certain stated
rates. Since the series B and C preferred shareholders were not entitled to
accrued dividends unless the shares were outstanding for a specific time, the
Company did not declare the dividends therefore certain amounts were not
accrued. Although the dividends were not accrued the Company should have
deducted cumulative dividends when calculating net income or loss available to
common shareholders. As of December 31, 1998 and 1997 cumulative undeclared
dividends on Series A, B and C totaled $132,181 and $260,627, respectively.
The above restatement decreased net loss available to common shareholders for
the year ended December 31, 1998 by $128,445 for the decrease in cumulative
dividends (since the preferred shareholders forfeited more dividends than were
accrued) from December 31, 1997 to December 31, 1998.
The above restatement increased net loss available to common shareholders for
the year ended December 31, 1997 by $199,627 for the increase in cumulative
dividends from December 31, 1996 to December 31, 1997.
Series C Preferred Share Beneficial Conversion Feature
Upon the issuance of the Series C preferred stock, the Company was required to
calculate the beneficial conversion feature granted to the Series C preferred
shareholders. Accordingly, the Company calculated a total beneficial conversion
feature of $1,335,534. Since the shares were immediately convertible the
Company recorded the total amount.
The above restatement increases the 1998 net loss available to common
shareholders by $1,335,534.
39
<PAGE> 1
EXHIBIT 10.42
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This MUTUAL RELEASE AND SETTLEMENT AGREEMENT (hereinafter "Settlement
Agreement") is entered into by and between the following parties: Bikers Dream,
Inc., and its wholly owned subsidiary Ultra Acquisition Corporation,
(hereinafter sometimes referred to collectively as "Bikers") Mull Acres
Investments, Inc., (hereinafter "Mull"); Jeffrey H. Silvers, (hereinafter
"Silvers"); William Alden (hereinafter "Alden") and Carl Vincent "Vini" Bergeman
(hereinafter "Bergeman". This Settlement Agreement is made with reference to the
following recitals of fact:
RECITALS
A. On September 13, 1996, Bikers and Mull entered into a limited
liability company operating agreement, under which they each became members of a
limited liability company known as "Ultra Bikers LLC". Under the terms of this
agreement, Mull was to manufacture motorcycles and Ultra Bikers LLC was to
distribute them, including the distribution of motorcycles to retail stores
owned by Bikers. Pursuant to the terms of this agreement, Mull granted Bikers an
option to purchase the motorcycle assets of Mull, and Bikers granted Mull an
option to purchase 2,500,000 shares of Bikers' common stock.
B. At the time of the limited liability company operating agreement,
Silvers was the officer, director, and shareholder of Mull, and Bergeman was an
employee of Mull.
C. On January 30, 1997, Bikers and Mull entered into an Asset Purchase
Agreement, by which Bikers exercised its option to purchase the motorcycle
assets of Mull. Under the terms of this agreement, Mull received Bikers'
Promissory Note in the original principal amount of $2,700,000 in partial
payment for its motorcycle assets. Silvers also executed a Non-Competition and
Confidentiality Agreement dated January 30, 1997.
D. On January 30, 1997, Bergeman and Ultra Acquisition Corporation
("UAC") entered into an Employment Agreement, by which UAC employed Bergeman as
its production manager. Said employment agreement was subsequently modified in
June, 1997.
E. On June 27, 1997, Bikers and Mull entered into a Note Conversion
Agreement, by which Mull agreed to exercise 1,370,000 of its options to purchase
Bikers' common stock, in satisfaction of Bikers' obligation to pay Mull
$1,370,000 of principal under Bikers' Promissory Note. Mull also agreed to
accept 1,330,000 of Bikers' series B convertible preferred stock, in
satisfaction of the remaining principal balance due under the Bikers' Promissory
Note. As further consideration for Mull's agreement to the Note Conversion
Agreement, Bikers issued 1,130,000 options to purchase Bikers' common stock at
an exercise price of $1.00 per share.
<PAGE> 2
F. Mull subsequently sold 250,000 shares of its Bikers' common stock,
with Bikers' consent, leaving Mull with 1,120,000 shares of Bikers' common
stock.
G. Differences have arisen between Bikers and Mull, and between Bikers
and Bergeman, regarding the terms of the agreements described above.
H. All parties to this Settlement Agreement now desire to terminate all
differences and disputes between them arising from the agreements described
above, and the various transactions to which those agreements pertain, and any
other differences and disputes; and to settle all past, present, and future
claims between them arising out of, relating to, or in any manner connected with
the agreements and the transactions, except to the extent addressed herein.
NOW, THEREFORE, in consideration of the waivers, releases, conditions,
warranties and covenants herein set forth, the parties to this Settlement
Agreement agree as follows:
AGREEMENT
1. Recitals Incorporated: The foregoing Recitals, Paragraphs A through
H hereinabove, are incorporated herein by this reference and made a part hereof.
2. No Admission of Liability: Notwithstanding the foregoing, nothing in
this Settlement Agreement shall be construed as an admission by any party hereto
of any liability to any other party with respect to any of the matters set forth
herein, except as specifically set forth herein.
3. Purchase and Sale of Common Stock: Bikers covenants that it has
arranged to have certain investors purchase, and Mull hereby agrees to sell, the
1,120,000 shares of Bikers' common stock presently owned by Mull, in exchange
for $1,000,000 cash, not later than 5:00 p.m October 8, 1997. Mull agrees to
execute any documents reasonably requested by Bikers and or its attorneys in
connection with this transaction.
4. Options for Common Stock: Mull agrees to transfer to Bikers or its
nominee 1,080,000 of the options to purchase Bikers' common stock, in further
consideration for this agreement. Bikers agrees that either it or its assigns
shall consent to Mull's transfer of 40,000 of its remaining 50,000 stock options
to Anderson Ball ("Ball"), and the 10,000 balance of stock options to Jesse
Llama ("Llama"), upon the condition that Ball and Llama execute and deliver to
Bikers any documents reasonably requested by Bikers or its attorneys in
connection with this transfer. Said stock options shall continue to have the
registration rights, and be subject to the "lock-up" agreement, that they had
and were subject to as held by Mull.
2
<PAGE> 3
5. Preferred Stock: Bikers shall issue to Mull as soon as practicable
the 1,330,000 shares of its series B convertible preferred stock, as described
on the "Description of Series B Convertible Preferred Stock of Bikers Dream,
Inc." delivered to Mull in connection with the Note Conversion Agreement. Bikers
represents to Mull that it has received the authorization from the California
Secretary of State to issue said preferred stock to Mull. Said preferred stock
shall have the registration rights, and be subject to the "lock-up" agreement
and pledge agreement, as set forth below.
6. Registration Rights: Bikers' preferred stock held by Mull shall have
the following registration rights: The Registration Rights Certificate attached
as Exhibit B to the Note Conversion Agreement is hereby amended as follows: Add
to subparagraph (a) the following: "In addition to this "best efforts"
registration, the holder of the shares shall have piggyback registration rights
on any other registration (except S-8 and S-4 registrations), and demand
registration rights to be exercised in concert with the holders of at least 50%
of the issued and outstanding common stock."
7. Lock-Up: Bikers and Mull acknowledge that Biker's preferred stock
held by Mull is subject to the "lock-up" agreement set forth in paragraph (b) of
the Registration Rights Certificate described above.
8. Pledge Agreement to Secure Obligations: Bikers and Mull hereby agree
to delete Paragraph 1(d) of the Note Conversion Agreement, and to agree to the
following: Mull hereby agrees that Bikers may hold 730,000 shares of the Bikers'
series B convertible preferred stock owned by Mull pursuant to the terms of the
Pledge Agreement of even date herewith, the form of which is attached as Exhibit
A to this Agreement, to secure Mull's performance under its indemnification
obligations to Bikers, as more fully set forth below; and to secure Bergeman's
performance under his Employment Agreement, as more fully set forth below.
9. Mull's Indemnification Obligations: Mull's obligations to indemnify
Bikers, as set forth in the Asset Purchase Agreement, are modified as follows:
(a) Section 6.l(a) does not include any representation or warranty made
by Mull regarding the design of its products, as set forth in Section 3.24 of
the Asset Purchase Agreement, entitled "Product Liability and Warranty;
provided, however, that this shall not limit Mull's obligation to indemnify
Bikers in any trademark or similar litigation brought by Harley Davidson, as
described below.
3
<PAGE> 4
(b) Delete the word "designed" from Section 6.0l(g); provided, however
that this shall not limit Mull's obligation to indemnify Bikers in any trademark
or similar litigation brought by Harley Davidson, as described below.
(c) Add the following to Section 6.01(j): Provided, however, that
Mull's obligation to indemnify Bikers is limited to any liability arising out of
any act or omission by Mull or its affiliates, including for illustration only
any use of any Harley Davidson "logos", and the design of any motorcycles.
(d) Delete the clause "including any such actions relating to the
operations of Ultra Bikers", from Section 6.01(k), and add the following: "Mull
further agrees to indemnify Bikers in any lawsuit in which the allegations
against Bikers are based upon its dealings with Mull or its Affiliates, and Mull
is a defendant in the lawsuit. By way of illustration only, Mull is obligated to
indemnify Bikers in the Frank Jones lawsuit now pending in the Orange County
Superior Court, from the effective date of this Settlement Agreement, because
Mull is a defendant in that lawsuit, and the allegations against Bikers are
based upon its alleged dealings with Mull."
(e) Section 6.6(a) of the Asset Purchase Agreement is hereby modified,
to delete the phrase "and at Buyer's option, in the form of an offset against
the note", and to insert the phrase "and in the event of a default by Mull under
its indemnification obligations for Mull or its Affiliates, by proceeding
against Mull's stock held by Bikers pursuant to the Pledge Agreement of even
date herewith, a copy of which is attached as Exhibit A hereto."
(f) Section 6.6(b) is hereby deleted.
(g) Anything to the contrary notwithstanding, the maximum liability
owed to Bikers by Mull and all of its affiliates under any of the
indemnification obligations shall not exceed the actual consideration actually
received by Mull from its sale of its motorcycle assets to Bikers, which for the
purposes of this Settlement Agreement is fixed at $2,370,000 in cash and
1,330,000 shares of Bikers Series B Convertible Preferred Stock; provided,
however, that this limitation upon the liability of Mull and its affiliates
shall not apply to any claims for indemnification based upon actual fraud.
10. Bikers' Indemnification Obligations: Bikers and Mull agree that
Section 6.2 of the Asset Purchase Agreement, Indemnification by Buyer, shall be
modified by the addition of a new subsection (d): "The pending lawsuit filed by
H-D Michigan, Inc., et al., in the United States District Court, Central
District of California, Case No. CV-SACV97-29LHM(ANX), or any related or similar
action, including any action based on similar facts and circumstances (the
"Harley-Davidson Lawsuit"), and arising out of any act or omission by Bikers,
including for illustration only any use of any Harley Davidson "logos", and its
design of any motorcycles. Mull acknowledges that Bikers is presently subject to
a consent decree entered in a related "Harley Davidson" lawsuit, and that
Biker's obligation to indemnify Mull in connection with that lawsuit will arise
only out of an alleged violation of that consent decree."
4
<PAGE> 5
11. Modification of Bergeman's Employment Agreement: Bergeman and
Bikers agree that Bergeman's Employment Agreement is modified as follows:
(a) Bergeman shall resign, effective upon the effective date of this
Settlement Agreement.
(b) Bikers Dream, Inc., and Ultra Acquisition Corporation shall be
relieved of any further obligations under said Employment Agreement, including
without limitation the payment of any compensation and additional benefits.
(c) Section 7 of Bergeman's Employment Agreement, entitled
Non-Competition; Confidentiality, is modified as follows:
(i) The term is reduced, so that the Covenant expires six
months after the effective date of this Settlement Agreement;
(ii) Subsection (a) is hereby modified, to insert the
following: "Anything to the contrary contained herein notwithstanding,
it shall not be a breach of this Non-Competition Covenant for Bergeman
to manufacture, distribute or sell up to six custom motorcycles during
the term of this Covenant.
(iii) Subsection (e) is hereby modified, to insert the
following: "Provided, however, that Bergeman shall be in breach of this
Covenant not to Disparage only if Bergeman's remarks cause a present or
prospective business relationship, such as a vendor or employee, to
either refuse to do business with Bikers, or to grant Bikers less
desirable credit or other terms than would have been granted but for
Bergeman's remarks. Provided, further, that Bikers may establish a
breach of this Covenant not to Disparage only with a written statement
signed under penalty of perjury, or oral testimony in a deposition or
other proceeding under penalty of perjury, by the present or
prospective business relationship or other witness(es) with personal
knowledge, setting forth facts which constitute a breach of this
Covenant as set forth herein."
(d) Section 8 of Bergeman's Employment Agreement, entitled
Non-Solicitation of Customers, is modified as follows:
(i) The term is reduced, so that the Covenant expires six
months after the effective date of this Settlement Agreement;
5
<PAGE> 6
(ii) Section 8 is further modified, to insert the following:
"Provided, however, that Bikers may establish a breach of this
Non-Solicitation of Customers Covenant only with a written statement
signed under penalty of perjury, or oral testimony in a deposition or
other proceeding under penalty of perjury, by the customer or other
witness(es) with personal knowledge, setting forth facts which
constitute a breach of this Covenant as set forth herein."
(e) Section 9 of Bergeman's Employment Agreement, entitled
Non-Interference with Employees, is modified as follows:
(i) The term is reduced, so that the Covenant expires six
months after the effective date of this Settlement Agreement;
(ii) The following is added to Section 9: "Employee further
agrees that he will not interfere with Bikers' employees, or disrupt
their work for Bikers at Bikers' places of business, by coming onto
Bikers' places of business and making remarks to them which disparage
Bikers, or cause the employees to stop their work, or otherwise
interrupting the work performed by Bikers employees."
(iii) Section 9 is further modified, to insert the following:
"Provided, however, that Bikers may establish a breach of this
Non-Interference with Employees Covenant only with a written statement
signed under penalty of perjury, or oral testimony in a deposition or
other proceeding under penalty of perjury, by the Bikers' employee or
other witness(es) with personal knowledge, setting forth facts which
constitute a breach of this Covenant as set forth herein."
12. Modification of Agreement not to Compete: Bikers and Mull agree to
delete the word "fifth" Section 5.1 Agreement not to Compete, of the Asset
Purchase Agreement, and to insert the word "second". Bikers and Mull further
agree that Section 1.1 of the separate "Non-Competition and Confidentiality
Agreement" signed by Jeffrey Silvers pursuant to this Section 5.1, and dated
January 30, 1997, is similarly modified, to provide that it expires on the
second anniversary of the Closing Date of the Asset Purchase Agreement.
13. Deletion of Stock Options Assigned to Kraig Kavanagh: Bikers and
Mull agree to modify Section 5.4 of the Asset Purchase Agreement, to delete any
reference to the transfer to Kraig Kavanagh of any of Mull's options to purchase
Bikers' common stock. Bikers agrees to use its best efforts to obtain Mr.
Kavanagh's consent to this modification and his release of Mull from any claim
to said stock options.
6
<PAGE> 7
14. Dissolution of Ultra Bikers, LLC: Bikers shall diligently pursue
the dissolution of Ultra Bikers, LLC, as provided in Section 5.4 of the Asset
Purchase Agreement. Bikers shall assume any remaining liabilities of Ultra
Bikers, LLC, and shall indemnify Mull against any claims or losses arising out
of Ultra Bikers, LLC, except for any claim or loss due to any act or omission by
Mull or its Affiliates; provided, however, that this shall not affect the
obligations of the parties regarding the Harley-Davidson lawsuit, which are set
forth separately herein. Section 13.4 of the Limited Liability Company Operating
Agreement is hereby modified to delete subsection (d), which requires Mull to
return the stock options to Bikers upon dissolution of the Limited Liability
Company, and subsection (e), regarding the retention of rights by Mull upon
dissolution.
15. Limited Liability Company Operating Agreement: Bikers and Mull
agree there are no provisions of this agreement which presently pertain to the
dealings between the parties, except insofar as Section 11.1 defines the stock
options originally granted to Mull, and except insofar as the Asset Purchase
Agreement requires Bikers to dissolve the Limited Liability Company.
16. Stock Option Agreement dated September 13, 1996: Mull and Bikers
agree that there are no provisions of this agreement which presently pertain to
the dealings between the parties, except insofar as Section 3 defines the
registration rights and lock-up agreement pertaining to the stock options
originally granted to Mull.
17. Monstercycle Truck: Bikers agrees to pay Alden $16,000 for the
Monster truck and trailer. Alden agrees to transfer the truck and trailer to
Bikers, upon payment of the $16,000, free and clear from the present lien on the
truck.
18. Starters: Mull agrees to release Bikers from any claim arising out
of the $15,000 advanced by Mull for the starters delivered to Bikers, in further
consideration for this Settlement Agreement.
19. Flooring Account: Bikers and Mull agree that this Settlement
Agreement does not pertain to any of the dealings between Bikers, Ultra Custom
Cycles, Inc., a Nevada corporation, ("UKC Nevada") and any partnership or
individual who has loaned money to UKC Nevada, in connection with the financing
of motorcycles.
20. Indemnification and Release of Silvers: Bikers agrees to indemnify
Silvers against any claim arising out of his service as an officer of Ultra
Acquisition Corporation, and to release Silvers from any claim arising out of
his service as an officer of Ultra Acquisition Corporation, to the fullest
extent permitted by law.
7
<PAGE> 8
21. Premises Leases: Bikers and Mull agree to use their best efforts to
obtain the consent of the landlords to the assignment of the premises leases, as
described in Section 1.1(g) of the Asset Purchase Agreement, from Mull to
Bikers. In the event that the landlords refuse to consent to the release of Mull
and Silvers under said premises leases, then said assignments shall provide that
Bikers shall indemnify Mull and Silvers against all liability arising under said
premises leases. Said assignments shall also provide that, in the event of any
default by Bikers under the leases, which remains uncured for the maximum period
permitted under said premises leases, then Mull shall have the right to retake
possession of the premises and to cure said defaults.
22. Materials: Mull agrees to release Bikers from any claims for
reimbursement or payment for the materials it has contributed to Bikers, in
further consideration of this Settlement Agreement.
23. Schatzlein Litigation: Bikers and Mull agree to equally split the
costs of defending Bikers against this claim. By way of illustration only, in
the event that Schatzlein agrees to accept a new motorcycle in settlement of his
claims against Bikers, and any claim he might assert against Mull, Bikers will
provide a new motorcycle; Schatzlein's present motorcycle will be repaired by
Bikers, and resold. The difference between the net cost of the settlement (cost
of new motorcycle + costs of flooring current motorcycle + costs of repairing
current motorcycle - sales proceeds from current motorcycle) will be paid
equally by Mull and Bikers.
24. Release of Bikers: In consideration for this Settlement Agreement,
and subject to the performances required of the parties under this Settlement
Agreement, Mull, Silvers, Alden, and Bergeman release and forever discharge
Bikers, and its employees, agents, officers, directors, shareholders, attorneys,
beneficiaries and assigns, from any and all claims, attorney's fees, expenses,
and causes of action in existence as of the execution of this Settlement
Agreement, whether or not well founded, arising out of any of the claims
referred to herein, including without limitation any claims arising out of the
sale of Mull's motorcycle assets to Bikers. This release is binding upon Mull,
Silvers, Alden and Bergeman, for themselves and their past and present agents,
attorneys, employees, partners, successors, spouses, beneficiaries and assigns,
and for the benefit of Bikers and its past and present agents, attorneys,
employees, partners, successors, spouses, beneficiaries and assigns. This
release shall not include any claims arising out of any breach of this
Settlement Agreement.
25. Release of Mull: In consideration for this Settlement Agreement,
and subject to the performances required of the parties under this Settlement
Agreement, Bikers releases and forever discharges Mull, Silvers, Alden and
Bergeman, and their employees, agents, officers, directors, shareholders,
attorneys, beneficiaries and assigns, from any and all claims, attorney's fees,
expenses, and causes of action in existence as of the execution of this
Settlement Agreement, whether or not well founded, arising out of any of the
claims referred to herein, including without limitation any claims arising out
of its purchase of Mull's motorcycle assets described above. This release is
binding upon Bikers, for itself and its past and present agents, attorneys,
employees, partners, successors, spouses, beneficiaries and assigns, and for the
benefit of Mull, Silvers, Alden and Bergeman, and their past and present agents,
attorneys, employees, partners, successors, spouses, beneficiaries and assigns.
This release does not include any claims arising out of a breach of this
Settlement Agreement.
8
<PAGE> 9
26. Section 1542 Waiver: The parties agree that there is a risk that,
subsequent to the execution of this Settlement Agreement, they will incur or
suffer loss, damages or injuries which are in some way caused by or related to
the matters referred to above, but which are unknown and unanticipated at the
time this Settlement Agreement is signed. The parties assume such risk, and
agree that this Settlement Agreement shall apply to all such unknown or
unanticipated results, as well as those known and anticipated. The parties
expressly waive and relinquish any and all rights and benefits afforded by
Section 1542 of the California Civil Code which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the Release, which if known by him must have
materially affected his, settlement with the debtor."
27. Attorneys Fees: In the event that it becomes necessary for any
party to this Settlement Agreement to bring an action to interpret or enforce
any provision of this Settlement Agreement, or arising out of a
misrepresentation contained in this Settlement Agreement, then the prevailing
party shall be entitled to recover its actual attorney's fees incurred in
connection with such action.
28. No Oral Modifications: This Settlement Agreement shall not be
modified by any party hereto by oral representation before or after the
execution of this Settlement Agreement, and any and all modifications must be in
writing and signed by all of the parties hereto.
29. Entire Agreement: This Settlement Agreement contains the entire
understanding and agreement between the parties with respect to the matters
referred to herein. No other representations, covenants, undertakings, or prior
or contemporaneous agreements, oral or written, regarding such matters which are
not specifically contained and/or incorporated herein by reference, shall be
deemed, in any way, to exist or bind any of the parties hereto, except as
specifically set forth herein. The parties hereto acknowledge that each said
party has not been induced to enter into this Settlement Agreement and has not
executed this Settlement Agreement in reliance upon any promises,
representations, warranties or statements not provided within or incorporated by
reference into this Settlement Agreement.
9
<PAGE> 10
30. Miscellaneous. No delay or failure by any party in the exercise of
any right or remedy shall constitute a waiver thereof. This Settlement Agreement
shall be construed and governed by the laws of the State of California. The
parties agree that they will execute any other documents as may become necessary
to implement this Settlement Agreement. The headings used in this Settlement
Agreement are used for convenience only and should not be considered in
construing this Settlement Agreement. The parties agree that this Settlement
Agreement was drafted jointly by each of them, and therefore the rule of
interpretation which requires documents to be strictly construed against their
drafters does not apply to this Settlement Agreement. In the event that any of
the provisions contained in this Settlement Agreement is held to be invalid,
illegal or unenforceable, that shall not affect the validity, legality or
enforceability of the other provisions. This Settlement Agreement may be
executed in counterparts, each of which is deemed to be an original, but such
counterparts together shall constitute one and the same instrument. All parties
hereto acknowledge receipt of a copy of this Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Settlement
Agreement, and when fully executed, it shall be effective as of the last date
set forth below.
Dated: October 7, 1997 /s/ H. Rosenman
--------------------------------
Bikers Dream, Inc.
by: H. Rosenman
--------------------------------
its: Pres. and CEO
--------------------------------
Dated: October 7, 1997 /s/ H. Rosenman
--------------------------------
Ultra Acquisition Corporation
by: H. Rosenman
--------------------------------
its: Pres. and CEO
--------------------------------
Dated: October 7, 1997 /s/ Jeffrey H. Silvers
--------------------------------
Mull Acres Investments, Inc.
by Jeffrey H. Silvers, President
Dated: October 7, 1997 /s/ Jeffrey H. Silvers
--------------------------------
Jeffrey H. Silvers
Dated: October 7, 1997 /s/ William Alden
--------------------------------
William Alden
Dated: October 7, 1997 /s/ Carl Vincent Vini Bergeman
--------------------------------
Carl Vincent "Vini" Bergeman
10
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 2, 1999 (except for Note 19, as to which
the date is August 4, 1999) accompanying the consolidated financial statements
included in the Annual Report of Bikers Dreams, Inc. on Form 10-KSB/A for the
year ended December 31, 1998 (as restated). We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Bikers Dream, Inc. on Forms S-3 (#333-72167, dated February 11, 1999), S-8
(#333-68971, dated December 15, 1998), S-8 (#333-32639, dated August 1, 1997),
S-3/A (#333-17829, dated May 23, 1997) and S-8 (#333-26719, dated May 8, 1997).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 17, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 689,679
<SECURITIES> 200,634
<RECEIVABLES> 3,026,251
<ALLOWANCES> 343,361
<INVENTORY> 7,644,793
<CURRENT-ASSETS> 11,439,092
<PP&E> 1,731,479
<DEPRECIATION> 720,108
<TOTAL-ASSETS> 15,697,913
<CURRENT-LIABILITIES> 5,038,649
<BONDS> 0
0
859,694
<COMMON> 22,642,205
<OTHER-SE> (17,684,705)
<TOTAL-LIABILITY-AND-EQUITY> 15,697,913
<SALES> 27,606,964
<TOTAL-REVENUES> 27,734,620
<CGS> 25,783,689
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<INCOME-PRETAX> (4,485,827)
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