<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ___________ to ____________.
Commission File No. 0-15501
BIKERS DREAM, INC.
(Exact name of small business issuer as specified 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)
(909) 360-2500
(Issuer's telephone number)
11631 Sterling Avenue, Riverside, California 92503
(Former address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities and 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 20, 1999, 5,137,590
shares of the issuer's common stock were outstanding.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE> 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Bikers Dream, Inc.
We have reviewed the accompanying balance sheet and the statements of operations
and cash flows of Bikers Dream, Inc. and consolidated subsidiaries as of June
30, 1999, and for the six-month period then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
The accompanying statements of operations and cash flows for the six-month
period ended June 30, 1998 for Bikers Dream, Inc. and consolidated subsidiaries
were not audited or reviewed by us, and accordingly, we do not express an
opinion on them.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, (as restated)
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein), and in our report
dated April 2, 1999, (except for Note 19, as to which the date is August 4,
1999) we expressed an unqualified opinion on those consolidated financial
statements.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 2, 1999
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
(As Restated)
--------------- ---------------
<S> <C> <C>
A S S E T S
Current Assets:
Cash and cash equivalents $ 1,150,462 $ 689,679
Marketable securities 219,806 200,634
Accounts receivable, net 4,299,193 2,633,649
Other receivables 47,731 43,098
Notes receivable 1,800 6,143
Inventories 7,287,535 7,644,793
Prepaid expenses and other current assets 368,164 221,096
--------------- ---------------
Total current assets 13,374,691 11,439,092
Furniture and equipment, net 1,422,359 1,011,371
Excess cost over fair value of net assets acquired, net 2,484,075 2,589,401
Debt issuance costs, net 107,849 169,533
Deposits and other assets 391,839 488,516
Total assets $ 17,780,813 $ 15,697,913
=============== ===============
L I A B I L I T I E S A N D S H A R E H O L D E R S' EQ U I T Y
Current liabilities:
Accounts payable $ 2,748,207 $ 2,083,338
Accrued expenses 1,115,715 971,313
Advances on financing agreements - related party 615,715 1,486,174
Current portion of notes payable 180,977 160,991
Current portion of capital lease obligations 57,824 36,833
Notes payable to related parties 300,000 300,000
--------------- ---------------
Total current liabilities 5,018,438 5,038,649
Deferred rent 61,309 55,586
Notes payable, less current portion 4,681,879 4,731,749
Capital lease obligations, less current portion 127,412 54,735
--------------- ---------------
Total liabilities 9,889,038 9,880,719
Shareholders' equity:
Convertible preferred stock, Series A no par value, aggregate
liquidation preference of $175,000, 30 shares
authorized, 1 share issued and outstanding at June 30, 1999 and 157,500 157,500
December 31, 1998
Convertible preferred stock, Series B, no par value, cumulative
dividends, aggregate liquidation preference of $702,194,
8,000,000 shares authorized, 702,194 shares issued and
outstanding at June 30, 1999 and December 31, 1998 702,194 702,194
Convertible preferred stock, Series C, no par value, -- --
cumulative dividends, liquidation preference of $25,000 per
share, 300 shares authorized, 0 shares issued and
outstanding at June 30, 1999 and December 31, 1998
Convertible preferred stock, Series D, $1,000 stated 1,367,000 --
value, aggregate liquidation preference of $1,545,000,
3,500 shares authorized, 1,545 and 0 shares issued and
outstanding at June 30, 1999 and December 31, 1998
Common stock, no par value, 25,000,000 shares 23,287,792 22,642,205
authorized, 5,137,590 and 5,112,926 issued and outstanding at
June 30, 1999 and December 31, 1998
Subscriptions receivable -- (90,000)
Accumulated deficit (17,622,711) (17,594,705)
--------------- ---------------
Total shareholders equity 7,891,775 5,817,194
--------------- ---------------
Total liabilities and shareholders' equity $ 17,780,813 $ 15,697,913
=============== ===============
</TABLE>
See the accompanying notes to these financial statements
<PAGE> 4
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Quarters Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1999 1998
(As Restated)
----------- -----------
<S> <C> <C>
REVENUES $ 9,867,429 $ 8,121,021
COST OF GOODS SOLD 7,663,158 6,593,827
----------- -----------
GROSS PROFIT 2,204,271 1,527,194
OPERATING EXPENSES
Selling, general and administrative expenses 1,626,194 1,090,832
Depreciation and amortization 168,232 124,416
----------- -----------
Total expenses 1,794,426 1,215,248
----------- -----------
OPERATING INCOME 409,845 311,946
----------- -----------
OTHER EXPENSE
Interest expense, net 179,637 104,506
Other expense (income), net (3,384) --
----------- -----------
Total other expense 176,253 104,506
----------- -----------
INCOME BEFORE PROVISION FOR 233,592 207,440
INCOME TAXES
PROVISION FOR INCOME TAX -- --
----------- -----------
NET INCOME before Preferred Stock Dividends
and Beneficial Conversion Feature 233,592 207,440
Preferred stock dividends and beneficial (66,341) (1,352,683)
conversion feature
----------- -----------
NET INCOME (LOSS) available to Common $ 167,251 $(1,145,243)
Shareholders
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic
$ 0.03 $ (0.42)
=========== ===========
Diluted
$ 0.03 $ (0.42)
=========== ===========
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING:
Basic 5,137,590 2,734,169*
=========== ===========
Diluted 5,137,590 2,734,169*
=========== ===========
</TABLE>
See the accompanying notes to these financial statements
*Adjusted for the Company's 1 for 5 reverse stock split of February 1998
1
<PAGE> 5
BIKERS DREAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1999 1998
(As Restated)
------------ ------------
<S> <C> <C>
REVENUES $ 18,630,157 $ 13,113,809
COST OF GOODS SOLD 14,230,219 10,866,251
------------ ------------
GROSS PROFIT 4,399,938 2,247,558
OPERATING EXPENSES
Selling, general and administrative expenses 3,313,960 2,273,932
Depreciation and amortization 326,488 244,850
------------ ------------
Total expenses 3,640,448 2,518,782
------------ ------------
OPERATING INCOME (LOSS) 759,490 (271,224)
------------ ------------
OTHER EXPENSE
Interest expense 401,345 206,432
Other expense (income), net (3,384) --
------------ ------------
Total other expense 397,961 206,432
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 361,529 (477,656)
PROVISION FOR INCOME TAX -- --
------------ ------------
NET INCOME (LOSS) before Preferred Stock $ 361,529 $ (477,656)
Dividends and Beneficial Conversion Feature
Preferred stock dividends and beneficial (389,535) (1,497,248)
conversion feature
------------ ------------
NET (LOSS) available to Common Shareholders $ (28,006) $ (1,974,904)
============ ============
(LOSS) PER COMMON SHARE:
Basic $ (0.01) $ (0.75)
============ ============
Diluted
$ (0.01) $ (0.75)
============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING:
Basic 5,130,636 2,636,656*
============ ============
Diluted 5,130,636 2,636,656*
============ ============
</TABLE>
See the accompanying notes to these financial statements
*Adjusted for the Company's 1 for 5 reverse stock split of February 1998
2
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 1999, and 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1999 1998
(As Restated)
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 361,529 $ (477,656)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 326,488 244,850
Issuance for common stock for services rendered 60,000 --
(Increase) decrease in:
Accounts receivable (1,665,544) (1,115,873)
Inventories (1,593,339) 357,258
Prepaid expenses and other current assets (147,068) 190,638
Deposits and other assets 92,044 --
Increase (decrease) in:
Accounts payable 664,869 (497,343)
Accrued expenses 73,295 (438,815)
----------- -----------
Net cash provided by (used in)
operating activities 122,871 (3,687,538)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (506,302) (133,734)
(Increase) in marketable securities (19,172) (3,018)
Other 10,069 30,038
----------- -----------
Net cash used in investing activities (515,405) (106,714)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 4,500,000
Principal payment made on long-term debt and capital (32,180) (2,559,910)
leases
Proceeds from issuance of preferred stock 1,500,000 3,875,000
Deferred offering costs (141,000) --
Redemption of outstanding warrants 167,500 97,500
Proceeds from issuance of convertible notes payable -- 800,000
Principal payments made on notes payable (29,884) (800,000)
Payments made on financing agreements with related parties (870,459) --
Payments made on notes payable to shareholders -- (24,000)
Additional paid in capital received from related parties 107,656 --
Payments on subscriptions receivables 90,000 --
Debt issuance costs 61,684 --
----------- -----------
Net cash provided by financing
activities 853,317 5,888,590
----------- -----------
Net increase in cash and cash
equivalents 460,783 2,094,338
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 689,679 667,258
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,150,462 $ 2,761,596
=========== ===========
</TABLE>
See the accompanying notes to these financial statements
3
<PAGE> 7
BIKERS DREAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Bikers Dream,
Inc. and all of its wholly-owned subsidiaries. All significant
inter-company accounts and transactions are eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the Company's annual report on Form 10-KSB/A for the year ended
December 31, 1998. The results of operations for the six months ended June
30, 1999, are not necessarily indicative of the results to be expected for
the year ending December 31, 1999.
2. Summary Of Significant Accounting Policies:
Revenue Recognition:
Product Sales - Motorcycle manufacturing revenue from the sale of product
is recognized upon completion of the sale agreement. Retail revenue from
the sale of products is recognized at the time of sale to a retail
customer. Motorcycle manufacturing sales made to one of the Company owned
stores are eliminated in consolidation
Income Taxes:
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes will be recognized for the tax
consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end
based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances will be established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Net Earnings or Loss Per Common Share:
The 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.
4
<PAGE> 8
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 stated
to reflect the stock split.
Cash and Cash Equivalents:
For purposes of the balance sheet and the statement of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost or market using a cost method
which is determined by the specific identification method for finished
motorcycles and work-in-process inventories and the average cost method for
parts inventories. The finished goods inventory consists of purchased items
together with labor that has been applied thereto.
Furniture and Equipment:
Furniture, equipment and capitalized leases are recorded at cost with
depreciation and amortization provided using the straight-line method over
the estimated useful lives of the assets, which range from three to ten
years or the term of the lease, whichever is the lesser. Repairs and
maintenance are expensed as incurred. When property and equipment are
retired or disposed of, the related costs and accumulated depreciation and
amortization are eliminated from the accounts and any gain or loss on such
disposition is reflected in operations.
Estimates:
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reported period.
Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effected 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 SFAS No. 133 to have a
material effect, if any on its financial position or results of operations.
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 financial
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 operation.
SFAS No. 135 "Rescission of FASB Statement No. 75 and Technical
Correction," is effective for financial years beginning February 1999. This
statement is not applicable to the Company.
5
<PAGE> 9
3. Series C Preferred Stock
On April 16, 1998, the Company sold through a private offering 155 Units at
$25,000 per Unit, of Series C Preferred Stock. Each Unit consisted of one
share of the Company's Series C Preferred Stock (the "Preferred C") and
1,250 Series F Common Stock Purchase Warrants (the "F Warrants") to
purchase one share of the Company's common stock at $5.00 per share, for
total consideration of $3,875,000. Each share of the Company's Preferred C
is convertible, at the option of the holder, at any time after the date of
issuance (the "Conversion Date"), into shares of the Company's common
stock. The price at which the Preferred C converts into the Company's
common stock (the "Conversion Price"), is determined by dividing $25,000 by
the greater of; (1) seventy-five percent (75%) of the average closing price
of the Company's common stock for the ten trading days immediately
preceding the Conversion Date, or (2) $2.50, provided, however, that under
no circumstance shall the Conversion Price exceed $4.00. Under certain
circumstances, the Conversion Price is subject to adjustment. The Preferred
C shall be automatically converted into the Company's common stock in the
event the closing price equals or exceeds $8 per share for any period of
twenty (20) consecutive trading days. Each F Warrant entitles the holder to
purchase one (1) share of the Company's common stock at a purchase price of
$5.00 per share. All shares of series C Preferred Stock have been converted
into common stock. Upon the issuance of the Series C Preferred Stock, the
Company calculated the conversion of the Preferred Stock as if the
conversion occurred upon issuance. Accordingly, the Company recorded the
beneficial conversion feature of $1,335,534.
Series D Preferred Stock
In February 1999, the Company completed an offering of 1,545 shares of
newly issued Series D Preferred Stock for a total consideration of
$1,500,000. 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 not 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 the shares of
common stock underlying all of the previously issued shared of D Preferred
6
<PAGE> 10
Stock. Upon issuance of the Series D Preferred Stock, the Company
calculated the beneficial conversion feature of Preferred Stock as if the
conversion occurred upon issuance. The total beneficial conversion feature
amounted to $318,428, of which $292,328 was recorded in the three months
ended March 31,1999 and $26,100 in the three months ended June 30, 1999.
4. Commitments and Contingencies:
Leases
The Company leases all of its operating facilities located in Santa Ana,
California, Sacramento, California, San Diego, California, Mira Loma,
California, Farmers Branch, Texas, Dallas, Texas, and Conover, North
Carolina.
5. Related Party Transactions:
In February 1998, Meyer Duffy & Associates, through various partnerships,
provided the Company an $800,000 "bridge loan", bearing interest at 12% per
annum, pending completion of the Series C Preferred Stock offering
described in Note 3. Donald Duffy, a principal of Meyer, Duffy &
Associates, was Chairman of the Board of the Company at June 30, 1998. The
Company currently maintains a consulting arrangement with Meyer Duffy. Upon
completion of the Series C Preferred offering (as described in note 3), the
bridge loan was converted into Series C Preferred Stock. 25,000 stock
options and 150,000 warrants to purchase the Company's Common Stock were
also issued to Meyer Duffy and other investors who were parties to the
bridge loan.
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.
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 efforts 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 L.P. an investment
partnership of which Donald Duffy is a general partner. 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 Company is currently
liquidating the inventory that was floored by Cana Capital through the
ordinary course of business. 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 September 12, 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 repay the remaining line
of credit with Cana Capital Corporation and the MD Strategic loan upon
obtaining such financing.
7
<PAGE> 11
6. Earnings (Loss) Per Share
<TABLE>
<CAPTION>
Quarters Ended June 30, Six Months Ended June 30,
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $233,592 $207,440 $361,529 ($477,656)
Dividends on preferred shares, net of forfeited dividends (40,241) (17,149) (71,107) (161,714)
Beneficial conversion feature granted on Series C & D
preferred shares (26,100) (1,335,534) (318,428) (1,335,534)
----------------------------------------------------------------
Loss available to common shareholders $167,251 ($1,145,243) ($28,006) ($1,974,904)
----------------------------------------------------------------
Basic loss per common shareholder $0.03 ($0.42) ($0.01) ($0.75)
----------------------------------------------------------------
Diluted loss per common shareholder $0.03 ($0.42) ($0.01) ($0.75)
----------------------------------------------------------------
Weighted-average shares outstanding:
Basic 5,137,590 2,734,169 5,130,636 2,636,656
Diluted 5,137,590 2,734,169 5,130,636 2,636,656
</TABLE>
7. Restatement of Certain Transactions as of December 31, 1998 (Balance Sheet)
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 were
placed in escrow, they were no longer outstanding. Accordingly, the Company
restated the financial statements reflecting the Mutual 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.
8. Restatement of Certain Transactions for the quarter ended and six months
ended June 30, 1998 (Consolidated Statements of Operations)
Accrued Preferred Dividends
The Series A, B and C preferred stock accrues dividends at certain stated rates.
The Series B and C preferred shareholders were not entitled to accrued dividends
unless the shares were outstanding for a specific time. The Series B and C
preferred shareholders did not qualify for the dividends because the shares were
not outstanding for the specific time, therefor the Company did not declare the
dividends or accrue these amounts. 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 June 30, 1998 cumulative undeclared
dividends on Series A, B and C totaled $422,341.
The above restatement increased net loss available to common shareholders for
the quarter ended June 30, 1998 by $17,149 for the increase in cumulative
dividends from December 31, 1997 to June 30, 1998.
The above restatement increased net loss available to common shareholders for
the six months ended June 30, 1998 by $161,714 for the increase in cumulative
dividends from December 31, 1997 to June 30, 1998.
The above restatement increased net loss available to common shareholders for
the six months ended June 30, 1998 by $161,714 for the increase in cumulative
dividends from December 31, 1997 to June 30, 1998.
Series C Preferred Share Beneficial Conversion Features
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 beneficial conversion
feature of $1,335,534. Since the shares were immediately convertible the Company
recorded the total amount.
The above restatement increases the net loss available to common shareholders by
$1,335,534.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-QSB 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 could cause actual results to differ
materially from those anticipated as of the date of this report. Specific
factors that may cause such a difference include, but are not limited to, the
Company's history of operating losses and accumulated deficit, the Company's
limited experience with manufacturing operations, and competition from other
motorcycle manufacturers and retailers. See additional discussion under the
heading "Certain Trends and Uncertainties" in Item 6 of the Company's annual
report for 1998 on Form 10-KSB/A. 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 retailer of
motorcycles, parts and accessories. 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 division by completing the acquisition of the
motorcycle manufacturing and other assets of Ultra Kustom Cycles. 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
heavyweight cruiser motorcycle manufacturer and distributor. The franchising
program was replaced by a rapidly growing network of licensed 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.
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RESULTS OF OPERATIONS
The Company conducts its operations through two operating divisions: Motorcycle
Manufacturing and Distribution ("Motorcycle") and Retail Stores ("Retail"). The
Motorcycle division includes the manufacture of large displacement "V"
twin-powered heavyweight cruiser motorcycles at the Company's Mira Loma,
California facility, and the sale of these motorcycles to dealers in its
independent dealer network and through its six Company-owned Superstores. The
Retail 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 experienced
reduced sales activity due to seasonal trends. The Company therefore expects
higher revenues to occur in the second and third quarters of 1999 and future
years.
COMPARISON OF THE QUARTERS ENDED June 30, 1999 AND 1998:
Total revenues for the three months ended June 30, 1999, were $9,867,000 as
compared to $8,121,000 for the same quarter in 1998, representing an increase of
$1,746,000, or 22%.
After giving effect to the elimination of interdivisional charges of $712,000,
revenues attributable to the Company's Motorcycle and Retail divisions for the
three months ended June 30, 1999, were $6,365,000 and $3,502,000, respectively,
as compared to $4,782,000 and $3,339,000 for the comparable period a year
earlier.
The increase in revenues in the Motorcycle division was primarily attributable
to an increase in units sold to 421 from 379 for the comparable period a year
earlier, as well as selected price increases of the Company's products. The
increase in units sold was attributable to a larger dealer network, which
increased to approximately 100 dealers at June 30, 1999, as compared to
approximately 58 dealers as of June 30, 1998. 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 over 300 units per month.
The Company is pursuing a long-term strategy to significantly increase its
motorcycle production capacity with a goal of having the capacity to manufacture
more than 400 units a month by the end of 2000. 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 such as television and other 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.
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<PAGE> 13
The increase in revenues in the Retail division was attributable to the opening
of two Superstores in Dallas, Texas and Conover, North Carolina, which were not
in operation during the comparable period in 1998. In August 1998, the Company
opened its second Superstore in the 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-franchisees, bringing the total number of
Company owned Superstores to six. The Company's Superstores range in size from
5,000 to 12,000 square feet and sell a product line which consists primarily of
new Ultra Cycles manufactured by the Company, and used Harley-Davidsons. The
Company does not currently plan to open additional Company-owned Superstores,
although plans may change if an exceptional opportunity arises.
Cost of goods sold for the three months ended June 30, 1999, was $7,663,000
(i.e. 78% of revenues) compared to $6,594,000 (i.e. 81% of revenues) for the
comparable period a year earlier, representing an increase of $1,069,000, or
16%. With revenues rising at a faster rate than cost of goods sold, the
Company's gross margin improved to 22% from 19%, and gross profit increased by
$677,000, to $2,204,000 for the three months ended June 30, 1999, from
$1,527,000 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 31% during the three
months ended June 30, 1999, as compared to approximately 9% for the Retail
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, although no assurances can be given.
As described in more detail in the Company's annual report for the yearended
December 31, 1998, on Form 10-KSB/A, cost of goods sold for the year ended
December 31, 1998 included approximately $2,000,000 due to the recording of a
charge during the fourth quarter of 1998 resulting from the difference between
the Company's inventory total as of the year end 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 independent audit. In order to
determine the cause of this difference, the Company has conducted a review under
the supervision of the Audit Committee of the Board of Directors and engaged an
independent accounting firm to conduct its own review. Such reviews concluded
that the Company suffered in 1998 from significant material handling and
inventory control weaknesses.
It is possible, although not yet certain as of the date of this report, that a
portion of the charges and adjustments described above may relate back to the
second quarter of 1998. If any of such charges or adjustments did in fact relate
back to the second quarter of 1998, then the Company's gross margins for such
quarter may have been different than previously reported by the Company.
Consequently, the comparability of gross margins for the second quarters of 1998
and 1999, respectively, may be affected.
In order to prevent a reoccurrence of this situation, the Company has
implemented new inventory control procedures, including those described in the
Company's 1998 Form 10-KSB/A, has employed additional management personnel with
experience in inventory control matters, has upgraded its inventory control
system and has implemented improved training procedures for existing Company
personnel. The Company believes that such procedures will satisfactorily remedy
the previous weaknesses in the Company's inventory control system noted in both
the Company's internal investigation and the independent investigation
commissioned by the Audit Committee.
Selling, general and administrative expenses were $1,626,000 (i.e. 16% of total
revenues), for the three months ended June 30, 1999, compared to $1,091,000
(i.e. 13% of total revenues), for the three months ended June 30, 1998,
representing an increase of $535,000, or 49%. Selling, general, and
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<PAGE> 14
administrative expenses consist primarily of corporate operating expenses,
professional fees, and salaries. The percentage increase in selling, general and
administrative expenses was substantially higher due to the Company's move of
its corporate headquarters and manufacturing facility, which occurred during the
quarter, an increase in advertising costs, and the cost associated with the
operation of two new Company-owned Superstores.
Depreciation and amortization expense for the three months ended June 30, 1999,
totaled $168,000 compared to $124,000 for the same period in 1998. The increase
is primarily attributable to the additional depreciation recorded on the assets
of two new Company-owned Superstores, and the additional equipment and tenant
improvements acquired by the motorcycle division and corporate headquarters upon
the recent relocation to a new facility.
As a result of the foregoing, the Company's operating income was $410,000 for
the three months ended June 30, 1999, compared to $312,000 for the comparable
period a year earlier.
Interest expense increased by $75,000, from $105,000 for the three months ended
June 30, 1998, to $180,000 for the three months ended June 30, 1999. The
increase is attributable to additional outstanding debt during the quarter ended
June 30, 1999 as compared to the same period in 1998, primarily an increase in
$2,000,000 notes payable received in June 1998.
There is no provision for income taxes in 1999. The Company has fully reserved
for the deferred tax asset related to its net operating loss carry-forwards
beginning in the second quarter of 1995. The Company's management has concluded
that, based upon its assessment of all available evidence, the future benefit of
this asset cannot be projected accurately at this time.
For the three-month period ended June 30, 1999, the Company reported net income
of $234,000, before Preferred Stock Dividends and Beneficial Conversion Feature,
compared to $207,000, before Preferred Stock Dividends and Beneficial Conversion
Feature, for the comparable period a year earlier. Net Income available to
Common Shareholders after the Preferred Stock Dividends and Beneficial
Conversion Feature was $167,000 compared to a net loss of ($1,146,000), for the
comparable period a year earlier. The improved profitability is the result of
the aforementioned increases in production 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 cruiser 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.
COMPARISON OF THE SIX MONTHS ENDED June 30, 1999 AND 1998:
Total revenues for the six months ended June 30, 1999, were $18,630,000 as
compared to $13,114,000 for the same quarter in 1998, representing an increase
of $5,516,000, or 42%.
After giving effect to the elimination of interdivisional charges of $1,869,000,
revenues attributable to the Company's Motorcycle and Retail divisions for the
six months ended June 30, 1999, were $12,262,000 and $6,368,000, respectively,
as compared to $6,963,000 and $6,151,000 for the comparable period a year
earlier.
The increase in revenues in the Motorcycle division was primarily attributable
to an increase in units sold to 827 from 599 for the comparable period a year
earlier, as well as selected price increases of the Company's products. The
increase in units sold was attributable to a larger dealer network, which
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<PAGE> 15
increased to approximately 100 dealers at June 30, 1999, as compared to
approximately 58 dealers as of June 30, 1998. All of the active dealers within
the Company's dealer network are located in the United States.
The increase in revenues in the Retail division was attributable to the opening
of two Superstores in Dallas, Texas and Conover, North Carolina, which were not
in operation during the comparable period in 1998. In August 1998, the Company
opened its second Superstore in the 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-franchisees, bringing the total number of
Company owned Superstores to six. The Company's Superstores range in size from
5,000 to 12,000 square feet and sell a product line which consists primarily of
new Ultra Cycles manufactured by the Company, and used Harley-Davidsons. The
Company does not currently plan to open additional Company-owned Superstores,
although plans may change if an exceptional opportunity arises.
Cost of goods sold for the six months ended June 30, 1999, was $14,230,000 (i.e.
76% of revenues) compared to $10,866,000 (i.e. 83% of revenues) for the
comparable period a year earlier, representing an increase of $3,364,000, or
31%. With revenues rising at a faster rate than cost of goods sold, the
Company's gross margin improved to 24% from 17%, and gross profit increased by
$2,152,000, to $4,400,000 for the six months ended June 30, 1999, from
$2,248,000 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 30% during the six
months ended June 30, 1999, as compared to approximately 10% for the Retail
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, although no assurance's can be
given.
As described in more detail in the Company's annual report for the year ended
December 31, 1998, on Form 10-KSB/A, cost of goods sold for the year ended
December 31, 1998 included approximately $2,000,000 due to the recording of a
charge during the fourth quarter of 1998 resulting from the difference between
the Company's inventory total as of the year end 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 independent audit. In order to
determine the cause of this difference, the Company has conducted a review under
the supervision of the Audit Committee of the Board of Directors and engaged an
independent accounting firm to conduct its own review. Such reviews concluded
that the Company suffered in 1998 from significant material handling and
inventory control weaknesses.
It is possible, although not yet certain as of the date of this report, that a
portion of the charges and adjustments described above may relate back to the
first half of 1998. If any of such charges or adjustments did in fact relate
back to the first half of 1998, then the Company's gross margins for such period
may have been different than previously reported by the Company. Consequently,
the comparability of gross margins for the first half of 1998 and 1999,
respectively, may be affected.
In order to prevent a reoccurrence of this situation, the Company has
implemented new inventory control procedures, including those described in the
Company's 1998 Form 10-KSB/A, has employed additional management personnel with
experience in inventory control matters, has upgraded its inventory control
system and has implemented improved training procedures for existing Company
personnel. The Company believes that such procedures will satisfactorily remedy
the previous weaknesses in the Company's inventory control system noted in both
the Company's internal investigation and the independent investigation
commissioned by the Audit Committee.
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<PAGE> 16
Selling, general and administrative expenses were $3,314,000 (i.e. 18% of total
revenues), for the six months ended June 30, 1999, compared to $2,274,000 (i.e.
17% of total revenues), for the six months ended June 30, 1998, representing an
increase of $1,040,000, or 46%. 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 due to the Company's move of its corporate headquarters and
manufacturing facility, an increase in advertising costs and the costs
associated with the operation of two new Company-owned Superstors.
Depreciation and amortization expense for the six months ended June 30, 1999,
totaled $326,000 compared to $245,000 for the same period in 1998. The increase
is primarily attributable to the additional depreciation recorded on the assets
of two new Company-owned Superstores, and the additional assets acquired by the
motorcycle division and corporate headquarters upon the relocation of these
operations to a new facility.
As a result of the foregoing, the Company's operating income was $759,000 for
the six months ended June 30, 1999, as compared to an operating loss of $271,000
for the comparable period a year earlier.
Interest expense increased by $195,000, from $206,000 for the six months ended
June 30, 1998, to $401,000 for the six months ended June 30, 1999. The increase
is attributable to additional outstanding debt during the period, as compared to
the same period in 1998, primarily a $2,000,000 increase in Notes Payable during
June 1998.
There is no provision for income taxes in 1999. The Company has fully reserved
for the deferred tax asset related to its net operating loss carry-forwards
beginning in the second quarter of 1995. The Company's management has concluded
that, based upon its assessment of all available evidence, the future benefit of
this asset cannot be projected accurately at this time.
For the six-month period ended June 30, 1999, the Company reported net income of
$361,000, before Preferred Stock Dividends and Beneficial Conversion Feature,
compared to a net loss of ($478,000), before Preferred Stock Dividends and
Beneficial Conversion Feature, for the comparable period a year earlier. Net
Income available to Common Shareholders after the Preferred Stock Dividends and
Beneficial Conversion Feature was a net loss of ($28,000), compared to a net
loss of ($1,975,000), for the comparable period a year earlier. The improved
profitability is the result of the aforementioned increases in production and
sales as well as improved operating efficiencies.
For the six-month period ended June 30, 1999, the Company reported net income of
$362,000, compared to a net loss of $478,000, for the comparable period a year
earlier. The improved profitability of $840,000 is the result of the
aforementioned increases in production and sales as well as improved operating
efficiencies.
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. 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. However, 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 its liquidity and working capital needs
primarily through private equity placements and secured debt-financing
arrangements with lenders. The Company has relied on term loans from several
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<PAGE> 17
lenders. These include a three-year term loan in the amount of $4.5 million
which the Company obtained from Tandem Capital of Nashville, Tennessee in June
1998, 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. The Company is also relying on a $1.5 million
financing agreement secured by certain inventory which it obtained in May 1998
from Cana Capital Corporation ("Cana Capital"), a company owned by Bruce Scott,
then a director of the Company. The Company is currently liquidating the secured
inventory through the ordinary course of business.
In February 1999, the Company completed a private placement of 1,545 shares of
Series D Convertible Preferred Stock, which generated approximately $1,367,000
in cash, net of associated costs. 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 group of 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 the shares of common stock underlying all
of the previously issued shares of Series D Preferred Stock.
The Company will require additional outside sources of capital to continue to
expand its manufacturing operations. The Company is currently negotiating an
inventory-based and receivables-based line of credit of up to $10 million which
will be used to pay off part, or all, of its existing indebtedness, to expand
the manufacturing capabilities of its motorcycle division 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 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 provided by operating activities totaled $123,000 for the six months ended
June 30, 1999, as compared to cash used in operating activities of $3,688,000
for the same period in 1998. The decrease in cash used in operating activities
was primarily a result of increased profitability for the period ended June 30,
1999 as compared to the comparable period in 1998. Significant working capital
changes also included an increase in accounts receivable of $1,666,000, a
decrease in inventories of $357,000 and an increase in accounts payable of
$665,000.
Cash used in investing activities totaled $515,000 for the six months ended June
30, 1999, as compared to cash used in investing activities of $107,000 during
the prior year's period. The increase is primarily the result of the initial
phase of furniture, equipment and tenant improvement purchases for the new
manufacturing facility, corporate headquarters and two new Company-owned
Superstores.
Cash provided by financing activities totaled $853,000 for the six months ended
June 30, 1999, as compared to cash provided by financing activities of
$5,889,000 during the prior year's period. Net proceeds from the issuance of
preferred stock totaled $1,359,000 for the period ended June 30, 1999, as
compared to $3,875,000 for the same period in 1998.
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OUTLOOK
As the Company continues to pursue its growth strategy, additional financing
will be required principally for the expansion of its motorcycle manufacturing
operations. The Company currently has the capacity to manufacture approximately
300 units per month, with a goal of increasing capacity to over 400 units a
month by the end of 2000. In May 1999, the Company completed its move to a new
manufacturing facility with approximately three times the manufacturing space it
formerly possessed.
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 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, 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
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Some of the
Company's computer programs that have data sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar business activity.
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Based on a recent assessment, the Company believes that the software and
hardware used in its Motorcycle division and corporate headquarters are Year
2000 compliant. However, the Company has not yet completed its review of the
software and hardware of its Retail division. The Company has determined that it
may be required to modify or replace certain portions of its software and
hardware 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 third
quarter 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 received written verification from all of its significant and
large customers to the effect that their systems are Year 2000 compliant. In any
event, however, the Company has a relatively small number of suppliers, and it
believes that to the extent any such suppliers are not year 2000 compliant,
alternative venders are available to the Company.
As the number of units held by a dealer at any one time range from one to
fifteen, the Company believes that the ordering and invoicing process with such
dealers could, if need be, be handled on a manual basis for a limited time until
compliance is obtained.
The 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 during the upcoming months. The Company has determined, however, that
to the extent any key supplier, vendor or customer of the Company cannot
demonstrate such person's Year 2000 compliance to the Company's satisfaction,
and if short-term manual back-up systems cannot be implemented without adversely
effecting the Company's operations, then the Company will seek to establish
relationships with other suppliers, vendors, or customers who can provide
assurance of Year 2000 compliance.
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PART II - Other Information
Item 1 - 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.
See "Item 3. -- Legal Proceedings" included in the Company's latest Form
10-KSB/A for a complete discussion.
Item 2 - Changes in Securities and Use of Proceeds
In May 1999, the Company issued options to five employees of the Company to
purchase 167,000 shares of the Company's common stock at an exercise price of
$3.06 per share. Four employees received 67,000 options, of which 13,400 vested
immediately, with the remaining vesting in four equal annual installments. The
remaining 100,000 options vest upon the earlier of: (i) the market price of the
Company's Common Stock reaching an average of $6.00 per share for a period of 90
consecutive trading days during any twelve month period preceding the filing of
the Company's annual report with the Commission and for the additional ten
trading days following the filing of such annual report; (ii) the termination of
option holder without cause (including upon a change of control of the Company);
or (iii) August 31, 2003. The remaining 50,000 shares vest upon the earlier of:
(i) the market price of the Company's Common Stock reaching an average of $9.00
per share for a period of 90 consecutive trading days during any twelve month
period preceding the filing of the Company's annual report with the Commission
and for the additional ten trading days following the filing of such annual
report; (ii) the termination for option holder without cause (including upon a
change of control of the Company); or (iii) August 31, 2003.
In June 1999 the Company issued 200,000 warrants at an exercise price of $4.00
as required under the terms of the Company's existing term loan with an
institutional lender.
The issuance of the options and warrants were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). The Company believes
that such transactions were exempt from registration under the Securities Act by
virtue of Section 4(2) thereof as transactions not involving a public offering.
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed or incorporated by reference as
part of this report:
3.1 Articles of Incorporation, as amended, of Bikers Dream, Inc.
(formerly known as HDL Communications)(1)
17
<PAGE> 21
3.1.1 Certificate of Amendment of Articles of Incorporation dated
June 21, 1996(2)
3.1.2 Certificate of Correction of Certificate of Amendment of
Articles of Incorporation dated July 25, 1997(3)
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(3)
3.1.5 Certificate of Determination of Series C Convertible Preferred
Stock(4)
3.1.6 Certificate of Determination of Series D Convertible Preferred
Stock(5)
3.2 Bylaws, as amended, of Bikers Dream, Inc.(1)
4.1 Form of Certificate of Common Stock of Bikers Dream, Inc.(6)
4.2 Articles of Incorporation of the 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 By-laws, as amended, of the Company (included as Exhibit 3.2)
10.1 Amended and Restated $300,000 18% unsecured Promissory Note
with MD Strategic L.P..
15 Letter of Singer Lewak Greenbaum & Goldstein LLP regarding
awareness of use of report dated August 20, 1999.
27 Financial Data Schedule
(1) Previously filed as an exhibit to Bikers Dream's registration statement
on Form SB-2 (No. 33-92294) filed with the Commission on May 31, 1995.
(2) Previously filed as an exhibit to Bikers Dream's Form 10-KSB report for
the fiscal year ended December 31, 1996 filed with the Commission on
April 15, 1997.
(3) Previously filed as an exhibit to Bikers Dream's Form 10-QSB report
for the fiscal quarter ended September 30, 1997 filed with the
Commission on November 14, 1997.
(4) Previously filed as an exhibit to Bikers Dream's Form 10-QSB report for
fiscal quarter ended March 30, 1998 filed with the Commission on
May 15, 1998.
(5) Previously filed as an exhibit to this registration statement on Form
S-3 (No. 333-72167) as originally filed with the Commission on February
11, 1999.
(6) Previously filed as an exhibit to Bikers Dream's Form 10-KSB report for
the fiscal year ended December 31, 1998 filed with the Commission on
April 15, 1999.
(b) Reports on Form 8-K
No reports were filed by the Company during the quarter ended June 30,
1999.
18
<PAGE> 22
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: August 23, 1999 Bikers Dream, Inc.
By: /s/ Herm Rosenman
----------------------------
Herm Rosenman,
(Chief Executive Officer
Principal Executive Officer)
By: /s/ Michael Fisher
----------------------------
Michael Fisher
(Chief Financial Officer)
19
<PAGE> 23
Exhibits Index
The following exhibits are filed or incorporated by reference as part of this
report:
3.1 Articles of Incorporation, as amended, of Bikers Dream, Inc.
(formerly known as HDL Communications)(1)
3.1.1 Certificate of Amendment of Articles of Incorporation dated
June 21, 1996(2)
3.1.2 Certificate of Correction of Certificate of Amendment of
Articles of Incorporation dated July 25, 1997(3)
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(3)
3.1.5 Certificate of Determination of Series C Convertible Preferred
Stock(4)
3.1.6 Certificate of Determination of Series D Convertible Preferred
Stock(5)
3.2 Bylaws, as amended, of Bikers Dream, Inc.(1)
4.1 Form of Certificate of Common Stock of Bikers Dream, Inc.(6)
4.2 Articles of Incorporation of the 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 By-laws , as amended, of the Company (included as Exhibit
3.2).
10.1 Amended and Restated $300,000 18% unsecured Promissory Note
with MD Strategic L.P..
15 Letter of Singer Lewak Greenbaum & Goldstein LLP regarding
awareness of use of report dated May 13, 1999.
27 Financial Data Schedule
(1) Previously filed as an exhibit to Bikers Dream's registration statement
on Form SB-2 (No. 33-92294) filed with the Commission on May 31, 1995.
(2) Previously filed as an exhibit to Bikers Dream's Form 10-KSB report for
the fiscal year ended December 31, 1996 filed with the Commission on
April 15, 1997.
(3) Previously filed as an exhibit to Bikers Dream's Form 10-QSB report for
the fiscal quarter ended September 30, 1997 filed with the Commission
on November 14, 1997.
(4) Previously filed as an exhibit to Bikers Dream's Form 10-QSB report for
fiscal quarter ended March 30, 1998 filed with the Commission on May
15, 1998.
(5) Previously filed as an exhibit to this registration statement on Form
S-3 (No. 333-72167) as originally filed with the Commission on February
11, 1999.
(6) Previously filed as an exhibit to Bikers Dream's Form 10-KSB/A report
for the fiscal year ended December 31, 1998 filed with the Commission
on August 17, 1999.
20
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED PROMISSORY NOTE
$ 300,000 October 13, 1998
FOR VALUE RECEIVED, Bikers Dream, Inc. (the "Company") hereby
promises to pay MD Strategic, LP(the "Payee") at 237 Park Avenue, New York, New
York 10017 (or at such other address as the Payee may notify the Company from
time to time), the principal sum of Three Hundred Thousand DOLLARS ($300,000) or
the outstanding principal amount hereof, whichever is less, in lawful money of
the United States of America and in immediately available funds, without
set-off, counterclaim or deduction of any kind, on September 12, 1999 subject to
pre payment, or the earlier date described below, and to pay interest on the
unpaid principal amount of this Note for the period commencing on the date
hereof until this Note shall be paid in full at a rate equal to 18.0% per annum.
Principal and accrued interest on this Note shall be payable in full on or
before September 12, 1999 or in full or in part upon the earlier receipt of
funds by the Company from any third-party lender or investor (each, a
"Prepayment Date"), in an amount equal to the net proceeds of each financing up
to the outstanding principal and accrued interest herein.
This Note shall have the following terms and conditions:
1. This Note amends and restates that certain promissory note of the Company,
dated October 13, 1998, in the principal amount of $300,000, payable on or
before May 31, 1999 (the "Original Maturity Date"). In consideration for
extension of the Original Maturity Date to the Maturity Date, as provided
herein, the Company shall have paid to Payee a fee in the amount of $12,000
(the "Extension Fee") on or before execution of this note.
2. This Note may be prepaid, in whole or in part, prior to September 12, 1999
(the "Maturity Date"), and shall be prepaid to the extent set forth above
on each Prepayment Date. The indebtedness evidenced by this Note shall be
pari passu with all other senior unsecured indebtedness of the Company.
3. The Maturity Date of this Note may be further extended at the option of the
Payee.
4. An "Event of Default" shall occur if one or more of the following events
shall occur and be continuing: (A) the Company shall fail to pay the
principal and accrued interest on, the Note when due; (B) the Company shall
default in any material respect on any of its obligations under this Note,
including default by failure to pay the extension fee as provided herein,
or any representation or warranty by the Company in connection herewith
shall prove to have been untrue or in any respect on or as of the date
made, which default remains uncured 15 days after written notice thereof
from the holder hereof to the Company, (C) the Company shall (I) apply for
or consent to the appointment of, or taking possession by, a receiver,
custodian, trustee or liquidation of itself or of all or a substantial part
of its property, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under any relevant bankruptcy
code or similar law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or readjustment of debts, (iv) fail to convert
in a timely and appropriate manner, or acquiesce in writing to, any
petition filed against it in an involuntary case under any relevant
bankruptcy code or similar law (as now or hereafter in effect), or (v)
admit in writing its inability to pay its debt generally as they become
due, or (vi) take any action for the purpose of effecting any of the
foregoing: or (D) a proceeding or case shall be commenced, without the
application or consent of the Company, in any court of competent
jurisdiction, seeking (1) its liquidation, reorganization,
21
<PAGE> 2
dissolution or winding-up, or the composition or readjustment of its debts,
(ii) the appointment of a trustee, receiver, custodian, liquidator or the
like of the Company or all or any substantial parts of its assets, or (iii)
similar relief in respect of the Company under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of 30 days: or an order for relief against the Company shall be
entered in an involuntary case under any relevant bankruptcy code or
similar law (as now or hereafter in effect);
5. THEREUPON: (1) in the case of an Event of Default other than one referred
to in clause (C) or (D) of the immediately preceding paragraph, the Payee,
by written notice to the Company, may declare the principal amount of this
note then outstanding and the accrued interest thereon and all other
amounts payable by the Company hereunder to be forthwith due and payable,
whereupon such amounts together with interest thereafter accruing at 25%
shall be immediately due and payable without presentment, demand, protest
or other formalities of any kind (other than the notice expressly provided
for above in the subclause (1), all of which are hereby expressly waived by
the Company); and (2) in the case of an Event of Default referred to in
clause (C) or (D) of the immediately preceding paragraph, the principal
amount then outstanding of, and the accrued interest on, this Note and all
other amounts payable by the Company hereunder shall become automatically
immediately due and payable without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Company.
6. The Company agrees to pay, upon demand, all costs of collection and
enforcement of this Note, together with the costs incurred by the Company
in connection with any extension, amendment or restatement of this Note(
including, without limitation, in connection with the preparation, review,
or other revision of this amended and restated promissory note and any
other document in connection herewith).
7. This Note may be negotiated, assigned or transferred without the consent of
the Company.
8. THIS AMENDED AND RESTATED PROMISSORY NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO INSTRUMENTS MADE AND DELIVERED THEREIN BY RESIDENTS THREREOF.
BIKERS DREAM, Inc.
By: /s/ Herm Rosenman
-----------------------------
Name: Herm Rosenman
---------------------------
Title: Chief Executive Officer
--------------------------
22
<PAGE> 1
EXHIBIT 15
Bikers Dream, Inc.
3810 Wacker Drive
Mira Loma, California 91752
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of Bikers Dream, Inc. and consolidated subsidiaries for the period
ended June 30, 1999, as indicated in our report dated August 2, 1999; because we
did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999 is
incorporated by reference in the Registration Statements of Bikers Dream, Inc.
on Forms S-3/A (#333-72167, dated May 13, 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).
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant within the meaning of Sections
7 and 11 of that Act.
/s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 23, 1999
23
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<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,150,462
<SECURITIES> 219,806
<RECEIVABLES> 4,677,825
<ALLOWANCES> (378,632)
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0
2,226,694
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