<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, 2000
[ ] 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)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of June 30, 2000, 8,925,782 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., dba Ultra Motorcycle Company
We have reviewed the accompanying condensed consolidated balance sheet of Bikers
Dream, Inc., dba Ultra Motorcycle Company and subsidiaries as of June 30, 2000,
and the related consolidated condensed statements of operations and cash flows
for the each of the six month periods ended June 30, 2000 and 1999. These
condensed 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 condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred recurring
losses from operations, its total current liabilities exceed its total current
assets, and its accumulated deficit was $23,171,849 as June 30, 2000. This
raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Bikers Dream, Inc., dba Ultra
Motorcycle Company and subsidiaries as of December 31, 1999, and the related
statements of operation, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated April 4, 2000, we
expressed an unqualified opinion on those financial statements. However, our
report contained an explanatory paragraph that expressed substantial doubt about
the Company's ability to continue as a going concern. We have not performed any
auditing procedures since that date. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 1999 is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 26, 2000
<PAGE> 3
Part 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BIKERS DREAM, INC., dba ULTRA MOTORCYCLE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
================================================================================
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 499,994 $ 1,434,781
Investments 500,000 --
Accounts receivable, net of allowance for doubtful accounts
of $521,385 at June 30, 2000 and $312,376 at December 31, 1999 1,990,574 2,250,939
Other receivables 335,235 54,175
Inventories, net of reserves 4,286,222 4,354,194
Prepaid expenses and other current assets 284,889 240,279
Net assets of discontinued operations 19,387 1,248,088
------------ ------------
Total current assets 7,916,301 9,582,456
FURNITURE AND EQUIPMENT, net 925,241 988,248
NOTE RECEIVABLE, net of unamortized discount 855,144 --
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net 2,305,397 2,404,907
DEBT ISSUANCE COSTS, net 53,925 80,888
DEPOSITS AND OTHER ASSETS 121,376 346,413
------------ ------------
TOTAL ASSETS $ 12,177,384 $ 13,402,912
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable $ 4,530,742 $ 153,881
Current portion of capital lease obligations 55,028 62,584
Accounts payable 2,089,136 2,685,624
Accrued expenses 1,800,104 1,949,426
Accrued legal and settlement costs 324,326 813,000
Advances on financing agreements-- related party -- 309,087
Notes payable-- related parties 351,638 600,000
------------ ------------
Total current liabilities 9,150,974 6,573,602
NOTES PAYABLE, less current portion 44,304 4,564,562
CAPITAL LEASE OBLIGATIONS, less current portion 115,797 90,324
------------ ------------
Total liabilities 9,311,075 11,228,488
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY
Series A, convertible preferred stock, no par value Aggregate
liquidation preference of $175,000 30 shares authorized,
0 (unaudited) and 0 shares issued and outstanding -- --
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
(unaudited) and 702,194 shares issued and outstanding 702,194 702,194
Series C, convertible preferred stock, no par value
Cumulative dividends, aggregate liquidation preference
of $25,000, 300 shares authorized, 0 (unaudited) and
0 shares issued and outstanding -- --
Series D, convertible preferred stock, $0.01 par value
Cumulative dividends, aggregate liquidation preference
of $1,780,000, 3,500 shares authorized, 0 (unaudited) and
1,780 shares issued and outstanding -- 18
Additional-paid-in-capital, Series D Preferred Stock -- 1,438,526
Common stock, no par value
25,000,000 shares authorized,8,925,782 (unaudited) and
5,725,896 issued and outstanding 25,335,964 23,831,804
Accumulated deficit (23,171,849) (23,798,118)
------------ ------------
Total shareholders' equity 2,866,309 2,174,424
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,177,384 $ 13,402,912
============ ============
</TABLE>
SEE THE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
<PAGE> 4
BIKERS DREAM, INC., dba ULTRA MOTORCYCLE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 9,502,238 $ 6,386,245 $ 16,214,278 $ 12,309,754
COST OF GOODS SOLD 7,637,579 4,407,110 13,357,856 8,474,981
------------ ------------ ------------ ------------
GROSS PROFIT 1,864,659 1,979,135 2,856,422 3,834,773
------------ ------------ ------------ ------------
EXPENSES
Selling, general, and administrative
expenses 1,064,910 1,282,326 2,434,474 2,530,098
Depreciation and amortization 120,328 134,949 246,214 245,999
------------ ------------ ------------ ------------
Total expenses 1,185,238 1,417,275 2,680,688 2,776,097
------------ ------------ ------------ ------------
OPERATING INCOME FROM CONTINUING
OPERATIONS 679,421 561,860 175,734 1,058,676
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (184,340) (195,983) (379,087) (422,329)
Interest income 24,252 19,732 38,226 24,371
Other income from litigation settlement 622,000 -- 622,000 --
Gain on sale of technology 96,000 -- 96,000 --
Extinguishment of debt-related party 366,000 -- 366,000 --
Gain on disposal of furniture and
equipment 4,087 -- 4,087 --
Other expense, net (19,351) -- (4,152) --
------------ ------------ ------------ ------------
Total other income (expense) 908,648 (176,251) 743,074 (397,958)
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS AND PREFERRED
STOCK DIVIDENDS 1,588,067 385,609 918,808 660,718
LOSS ON DISCONTINUED OPERATIONS, net
of provision for income taxes of $0 (114,125) (152,017) (253,397) (299,189)
------------ ------------ ------------ ------------
INCOME BEFORE PREFERRED STOCK
DIVIDENDS $ 1,473,942 $ 233,592 $ 665,411 $ 361,529
PREFERRED STOCK DIVIDENDS, net of
forfeited dividends -- (66,319) -- (389,535)
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ 1,473,942 $ 167,273 $ 665,411 $ (28,006)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE
From continuing operations $ 0.18 $ 0.06 $ 0.11 $ 0.05
From discontinued operations (0.01) (0.03) (0.03) (0.06)
------------ ------------ ------------ ------------
TOTAL BASIC AND DILUTED
EARNINGS (LOSS) PER SHARE $ 0.17 $ 0.03 $ 0.08 $ (0.01)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED-
AVERAGE SHARES OUTSTANDING 8,925,782 5,133,525 7,990,584 5,123,282
============ ============ ============ ============
</TABLE>
SEE THE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
<PAGE> 5
BIKERS DREAM, INC., dba ULTRA MOTORCYCLE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations $ 918,808 $ 660,718
Adjustments to reconcile net income from continuing
operations to net cash used in operating activities
Gain on sale of equipment (14,754) --
Loss on sale of equipment 10,667 --
Depreciation and amortization 246,214 245,999
Amortization of discount on note receivable (34,758) --
Amortization of loan costs 26,963 95,464
Issuance of stock for services -- 60,000
Extinguishment of debt - related party (366,000) --
Sale of technology (96,000) --
Other income from litigation settlement (622,000) --
(Increase) decrease in
Accounts receivable 260,365 (1,661,201)
Other receivables 18,940 (4,633)
Inventories 27,972 (255,607)
Prepaid expenses and other current assets (24,610) (147,068)
Deposits and other assets 21,037 (127,566)
Increase (decrease) in
Accounts payable (596,488) 664,869
Accrued expenses (5,210) 73,295
Accrued legal and settlement costs (101,674) --
----------- -----------
Net cash used in continuing operating activities (330,528) (395,730)
Net cash provided by(used in) discontinued operating activities (305,082) 630,179
----------- -----------
Net cash provided by (used in) operating activities (635,610) 234,449
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (64,199) (314,180)
Cash received upon sales of furniture and equipment 16,000 --
Purchase of marketable securities -- (19,172)
----------- -----------
Net cash used in continuing investing activities (48,199) (333,352)
Net cash used in discontinued investing activities -- (198,170)
----------- -----------
Net cash used in investing activities (48,199) (531,522)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ 66,500 $ --
Payments on notes payable (209,897) (29,884)
Payments on capital lease obligations (33,494) (32,180)
Advances on financing agreements - related party, net (74,087) (870,459)
Debt issuance costs -- (33,780)
Proceeds from issuance of preferred stock, net of costs -- 1,367,000
Exercise of warrants -- 159,503
Additional paid-in capital received from related parties -- 107,656
Payment on subscriptions receivable -- 90,000
----------- -----------
Net cash provided by (used in) continuing financing activities (250,978) 757,856
Net cash provided by discontinued financing activities -- --
----------- -----------
Net cash provided by (used in) financing activities (250,978) 757,856
----------- -----------
Net increase (decrease) in cash and cash equivalents (934,787) 460,783
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,434,781 689,679
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 499,994 $ 1,150,462
=========== ===========
</TABLE>
SEE THE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
<PAGE> 6
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., d.b.a. Ultra Motorcycle Company and all of its wholly owned subsidiaries,
including the accounts of Ultra Motorcycle Company, Bikers Dream International,
Inc., Bikers Dream Distribution, Inc., Bikers Dream Management Services, and
Bikers Dream Eagle Enterprises, Inc. (collectively, the "Company"). All
significant intercompany accounts and transactions are eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION:
Revenue from the sale of motorcycles is recognized upon shipment to the
customer.
ADVERTISING COSTS:
Those costs associated with the placement of advertisements in various
periodicals are expensed when the advertisement is run. Internal development
costs are expensed as incurred.
INCOME TAXES:
The Company utilizes Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," which requires the recognition of deferred
tax assets and liabilities 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 INCOME (LOSS) PER SHARE:
The Company utilizes SFAS No. 128, "Earnings per Share." Basic income (loss) per
share is computed by dividing the net income (loss) by the weighted-average
number of common shares available. Diluted income (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.
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.
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
<PAGE> 7
the straight-line method over the estimated useful lives or the term of the
lease, whichever is less.
CONCENTRATION OF RISK:
The Company is operating in a growing market due to the current nationwide
popularity of custom motorcycles. Its future success is dependent on the
continuation of interest in the recreational motorcycle industry.
CONCENTRATION OF CREDIT RISK:
Other financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable. These
concentrations are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different geographic
regions. The Company performs ongoing credit evaluations of customers and
generally does not require collateral. Allowances are maintained for potential
credit losses, and such losses have been within management's expectations. As of
June 30, 2000, 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 EXPENSES:
Included in accrued expenses are accrued warranty expenses. Estimated future
warranty obligations related to motorcycles and parts are provided by charges to
operations in the period in which the related revenue from the sales of
motorcycles or parts is recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for notes payable also approximate
fair value because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
RECLASSIFICATIONS:
Certain amounts included in the 1999 financial statements have been reclassified
to conform to the 2000 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.
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 June 30, 2000 the Company
has not recognized any impairment losses.
DISCONTINUED OPERATIONS:
On January 31, 2000, the Company completed the sale of the assets of its Retail
Division to V-Twin Holdings, Inc. ("V-Twin"), which is a publicly traded company
that is a consolidator of independent motorcycle dealerships. The assets of the
Retail Division included the five Company-owned stores located in California,
Texas, and North Carolina, substantially all of the fixed assets and inventories
at the retail stores, certain intellectual property assets including the trade
name "Bikers Dream," and the domain name "bikers-dream.com." As a result of the
sale, the results of the operations of the Retail Division have been
reclassified as discontinued operations and prior periods have been restated.
<PAGE> 8
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 are described in close proximity to such
statements and under the heading "Certain Trends and Uncertainties" below. These
risks and uncertainties could cause the 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. Since the acquisition of the
Motorcycle Division, the Company has devoted a significant amount of resources
to restructuring and repositioning the Company from a retailer to a premier
motorcycle manufacturer and distributor.
Between 1997 and 1999, the Company operated two divisions: Motorcycle and Retail
Stores (the "Retail Division"). The Retail Division sold motorcycles,
after-market parts and accessories and performed service work on motorcycles at
five Superstores in Santa Ana, Sacramento and San Diego, California, Farmers
Branch, Texas, and Conover, North Carolina, licensed the Company's intellectual
property and use of its business model and operating manuals to approximately 16
independently owned Bikers Dream Superstores, and operated an e-commerce site
for the sale of motorcycle parts, accessories and apparel. On January 31, 2000,
the Company sold to V-Twin Holdings, Inc. ("V-Twin") the assets related to the
operation of the Retail Division. The assets sold included all fixed assets,
inventory and equipment used in the Retail Division, the right to operate the
Retail Division under the assumed name "Bikers Dream", all intellectual property
assets relating to the Retail Division, the right to use the domain name
"bikers-dream.com", all rights under license agreements with independently owned
Bikers Dream Superstores, and rights under real property leases and equipment
leases.
The sale of the Retail Division has enabled the Company to focus on
strengthening its core motorcycle manufacturing business. Since the sale on
January 31, 2000, the Company has been focused on restructuring the Company to
meet the needs of a manufacturer of motorcycles, including the development of a
profitable and stable dealer base, and the resolution of those issues discussed
in Part II, Item 6 of the Company's Annual Report for the fiscal year ended
December 31, 1999 under the caption, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Outlook and Ability of Company
to Continue as Going Concern." Although no assurances can be given, the Company
expects to expand its market share through the introduction of new highly styled
performance motorcycle models and through addition of dealers in geographic
regions of the country with longer riding seasons. In addition to emphasizing
quality control of its manufactured product, the Company is beginning to develop
its customer service infrastructure and has recently introduced an Ultra
motorcycle owners club and is redesigning its web site "www.ultracycles.com".
The club will provide a forum for Ultra owners to participate in riding events
and to exchange information.
<PAGE> 9
RESULTS OF OPERATIONS
During 1999, the Company conducted its operations through two operating
divisions: Motorcycle and Retail. The Motorcycle division manufactures large
displacement "V" twin powered heavyweight cruiser motorcycles at the Company's
Mira Loma, California facility. Prior to its sale in January 2000, the Retail
Division sold new and used motorcycles, parts and accessories through the
Company's five owned Superstores.
As noted above, in January 2000, the Company sold to V-Twin Holdings, Inc. the
assets related to the operation of the Retail Division. As stated in Note 2 to
the Company's financial statements filed with the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999, and Note 2 to the
financial statements included in this report, the results of operations of the
Retail Division have been reclassified as continued operations and prior
periods have been restated.
COMPARISON OF THE FISCAL QUARTERS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues for the three months ended June 30, 2000 were $9,502,000 as
compared to $6,386,000 for the comparable period in 1999, representing an
increase of $3,116,000 or 49%. The Company attributes a large portion of the
increase in revenues to sales of its new "Fat Pounder" model, which was
introduced as a 2000 model in late 1999.
The number of motorcycles sold during the three months ended June 30, 2000
increased to 500, from 412 for the comparable period in 1999, while the number
of dealerships decreased to approximately 80 at June 30, 2000, from 100 for the
comparable period in 1999. As a result, dealer sales productivity (the number of
motorcycles sold to dealers divided by the number of dealers) increased from an
average of approximately .7 motorcycles per month for the three months ended
June 30, 1999, to an average of approximately 2 motorcycles per dealer per month
for the three months ended June 30, 2000.
COST OF GOODS SOLD/GROSS PROFIT. Cost of goods sold for the three months ended
June 30, 2000 was $7,638,000 (representing 80% of revenues), as compared to
$4,407,000(representing 69% of revenues) for the comparable period a year
earlier, representing an increase of $3,231,000 or 73%. Cost of goods sold
include direct and indirect manufacturing costs, administrative costs to
purchase and sell Ultra Kustom parts, warranty costs, and costs related to the
assembly of motorcycles. The Company attributes the increase of $3,231,000 in
cost of goods sold to higher material and labor costs (including increased
payroll taxes and benefits) related to the increased level of motorcycle sales
during the period, costs of making quality improvements, and sales of models
during the period with higher manufacturing costs than models sold during the
same period in 1999.
As described in the Company's Annual Report on Form 10-KSB for the fiscal year
period ended December 31, 1999, the Company incurred a significant increase in
warranty expense from $842,000 for the fiscal year ended December 31, 1998 to
$1,795,000 for the fiscal year ended December 31, 1999, representing an increase
of $954,000 or approximately 113%. Included in the $1,795,000 figure was an
increase of $247,000 in the fourth quarter of 1999 to increase the contingency
of liabilities on units sold under warranty. During the three month period ended
June 30, 2000, the Company experienced a decrease of $12,000 in warranty costs
from $215,000 for the three month period ended June 30, 1999 to $203,000 for the
three month period ended June 30, 2000. Based upon the decrease in expense and
after reviewing its warranty service call rate, the Company believes that the
rate of warranty claims per motorcycle sold is decreasing. It is the Company's
view that warranty costs will continue to decline in the future but no
assurances can be given.
As the cost of goods sold increased at a greater rate than did revenues, gross
profit for the three months ended June 30, 2000 was $1,865,000 (representing 20%
of revenues), as compared to $1,979,000(representing 31% of revenues) for the
three month period ended June 30, 1999. This represents a decrease in gross
profit of $114,000 or 6%. The decrease in gross profit as a percentage of
revenues (i.e., gross margin) is attributable to the increase in cost of goods
sold as described above and sales of several models of motorcycles in the
current period that had a lower gross margin than models sold in the comparable
period of a year ago.
The decrease in gross profit for the three month period ended June 30, 2000 is
also partially attributable to the pricing of the Company's 2000 model year
motorcycles. When the Company designed and determined the cost of manufacture of
its 2000 model year motorcycles, it implemented a price increase that it
believed would maintain the historical rate of gross profit. In January
<PAGE> 10
2000, the Company reviewed its manufacturing costs and determined that its
earlier cost estimates were lower than the actual costs of manufacture. As a
result, the Company implemented a price increase of approximately 7%, effective
March 1, 2000, on orders received after March 1, 2000. Due to the Company's
sales backlog, the full impact of the price increase on gross profit was not
realized in the quarter ended June 30, 2000. The Company expects that gross
profit at the end of the third quarter of 2000 will fully reflect the impact of
the price increase. The Company will continue to monitor its product cost and
when required, make the appropriate price increases. In addition, the Company
has continued to implement a material cost reduction program to reduce
manufacturing costs. While the Company believes that it will be able to return
to previous levels of gross profit, no assurances can be given that gross profit
will increase in the future.
As described in Note 14 in the Financial Statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999, the Company
recognized an aggregate of $969,000 of charges to cost of goods sold in
connection with three significant adjustments that were all recorded in the
fourth quarter. The periods attributed to these charges could not be identified
by the Company's management. If these charges recorded in the fourth quarter of
1999 were attributed to the first three quarters of 1999, the gross profit for
these quarters would have been lower than as reported in the unaudited interim
financial statements for such periods.
EXPENSES. Selling, general and administrative expenses were $1,065,000 or 11% of
sales for the three months ended June 30, 2000, as compared to $1,282,000 or 20%
of sales, for the three months ended June 30, 1999.
Selling, general, and administrative expenses consist primarily of corporate
operating expenses, professional fees, and salaries. The decrease of $217,000 is
largely attributable to decreased advertising and decreased use of temporary
employees and services of consultants.
Depreciation and amortization expense for the three months ended June 30, 2000
totaled $120,000 as compared to $135,000 for the same period in 1999. The
decrease of $15,000 is the result of disposals of equipment made in fiscal 1999.
OPERATING INCOME FROM CONTINUING OPERATIONS. As a consequence of the foregoing,
the operating income from continuing operations for the three months ended June
30, 2000 increased to $679,000 as compared to an operating income from
continuing operations of $562,000 for the three months ended June 30, 1999, an
increase of $117,000 or 21%.
OTHER INCOME (EXPENSE). For the three months ended June 30, 2000, other income
totaled $909,000 in comparison with total other expenses of $176,000 for the
three months ended June 30, 1999, an increase of $1,085,000. Other income
includes $622,000 under the line item entitled "Other income from litigation
settlement," of which amount $613,000 represents a reduction of liabilities
recorded on December 31, 1999 for the negotiated settlement of the Kinnicutt
lawsuit. (See also discussion of settlement of the Kinnicutt lawsuit under the
caption below entitled "General Discussion of Liquidity and Capital Resources,"
and in Part II, Item 1, under the caption entitled, "Legal Proceedings."). Other
income also includes $366,000 under the line item entitled "Extinguishment of
debt - related party," which amount represents the negotiated reduction of notes
payable held by w3 Holdings in the amount of $366,000 (including interest that
was forgiven). (See also discussion of settlement with w3 Holdings under the
caption below entitled "General Discussion of Liquidity and Capital Resources.")
In addition to the foregoing, other income includes a gain on the sale of
technology in the amount of $96,000.
The judgment against the Company in the Kinnicutt case was entered on March 20,
2000 and originally was in the amount of $683,601. This sum represented over
$283,000 in compensatory damages plus $400,000 in punitive damages. In its
annual report on Form 10-KSB for the year ended December 31, 1999 and its
quarterly report on Form 10-QSB for the quarter ended March 31, 2000, the
Company had recorded in its financial statements total liabilities related to
the Kinnicutt lawsuit of $683,000. These total liabilities consisted of $70,000
related to the SBA loan that the Company had agreed to pay off as part of the
repurchase of the retail store from the Kinnicutts, which was recorded as a debt
on the Company's financial statements when the Company repurchased the retail
store, and $613,000 of estimated litigation costs that were charged as an
expense during the fourth quarter of 1999. After the Company filed its quarterly
report on Form 10-QSB for the quarter ended March 31, 2000, in response to a
subsequent post-trial motion by the plaintiffs, in May 2000 the court awarded
plaintiffs an additional $154,000 for attorneys' fees, thereby bringing the
total award against the Company to $837,601. As discussed in the preceding
paragraph and under the caption below entitled "General Discussion of Liquidity
and Capital Resources," and in Part II, Item 1, under the caption entitled,
"Legal Proceedings."), the Company reached a settlement of the
<PAGE> 11
Kinnicutt lawsuit. Because the case settled prior to June 30, 2000, the Company
did not reserve the additional $154,000 sum for attorneys' fees. As a result of
the foregoing, the Company recorded other income of only $613,000 in connection
with the negotiated settlement of the Kinnicutt lawsuit, which amount is
included within the $622,000 amount under the line item entitled "Other income
from litigation settlement."
INCOME BEFORE PROVISION FOR INCOME TAXES, DISCONTINUED OPERATIONS, PREFERRED
STOCK DIVIDENDS AND BENEFICIAL CONVERSION. Income before provision for income
taxes, discontinued operations, preferred stock dividends and beneficial
conversion for the three months ended June 30, 2000 was $1,588,000 and consists
of the operating income from continuing operations of $679,000 and other income
of $909,000 as previously described above.
INCOME TAXES. The provision for income taxes for the three month period ended
June 30, 2000 is $0. The Company has fully reserved for the deferred tax asset
related to its net operating loss carry-forwards. 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.
LOSS ON DISCONTINUED OPERATIONS. In accordance with APB No. 30, in order to
record the loss on disposal of its Retail Division for the year ended December
31, 1999, the Company estimated the future operating losses of the Retail
Division for the period up until the sale of the division, which was January 31,
2000. As described in the Company's report on Form 10-QSB for the quarter ended
March 31, 2000, during the quarter ended March 31, 2000, the Company recognized
an adjustment on the provision for losses on discontinued operations in the
amount of $139,000. This adjustment was primarily attributable to an increase of
the reserve balance on accounts receivable at the Retail Division. During the
three month period ending June 30, 2000 the Company finalized the collection of
the Retail Division accounts receivable and, in connection with such collection
efforts, recorded an adjustment in the provision for losses on discontinued
operations of $51,000 for the second quarter of 2000. The Company also recorded
an adjustment in the provision for losses on discontinued operations in the
amount of $63,000, relating to the write-off of certain inventory and prepaid
rent for a retail store in Daytona Beach, Florida that became part of the Cana
Capital litigation and settlement. As a result of the foregoing adjustments, the
Company recognized a loss on discontinued operations in the amount of $114,000
for the fiscal quarter ended June 30, 2000. The total provision for the expense
incurred in the discontinued operations is net of a provision for income taxes
of $0.
PREFERRED STOCK DIVIDENDS AND BENEFICIAL CONVERSION FEATURE GRANTED TO SERIES C
PREFERRED STOCKHOLDERS. During the three months ended June 30, 2000, there were
no costs associated with preferred stock dividends or beneficial conversion
features. However, during the three months ended June 30, 1999 costs were
recognized for the beneficial conversion granted to Series C preferred
stockholders of $66,000.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS. For the three months ended June 30,
2000, the net income available to common stockholders was $1,474,000 as compared
to a net income of $168,000 for the same period in fiscal 1999. The increased
profitability of $1,306,000 is the result of an increase in income from
operations and the increase in other income as described above.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues for the six months ended June 30, 2000 were $16,214,000 as
compared to $12,310,000 for the comparable period in 1999, representing an
increase of $3,904,000 or 32%.
The number of motorcycles sold during the six months ended June 30, 2000
increased to 874, from 765 for the comparable period in 1999, while the number
of dealerships decreased to approximately 80 at June 30, 2000, from 100 for the
comparable period in 1999. As a result, dealer sales productivity (the number of
motorcycles sold to dealers divided by the number of dealers) increased from an
average of approximately 1.3 motorcycles per dealer per month for the six months
ended June 30, 1999, to an average of approximately 1.8 motorcycles per dealer
per month for the six months ended June 30, 2000.
COST OF GOODS SOLD/GROSS PROFIT. Cost of goods sold for the six months ended
June 30, 2000 was $13,358,000 (representing 82% of revenues), as compared to
$8,475,000(representing 69% of revenues) for the comparable period a year
earlier, representing an increase of
<PAGE> 12
$4,883,000 or 58%. Cost of goods sold include direct and indirect manufacturing
costs, administrative costs to purchase and sell Ultra Kustom parts, warranty
costs, and costs related to the assembly of motorcycles. The Company attributes
the increase of $4,883,000 in cost of goods sold to higher material and labor
costs related to the increased level of motorcycle sales during the period,
costs of making quality improvements, and sales of models during the period with
higher manufacturing costs than models sold during the same period in 1999.
As the cost of goods sold increased at a greater rate than did revenues, gross
profit for the six months ended June 30, 2000 was $2,856,000 (representing 18%
of revenues), as compared to $3,835,000 (representing 31% of revenues) for the
period ended June 30, 1999. This represents a decrease in gross profit of
$979,000 or 26%. The decrease in gross profit as a percentage of revenues (i.e.,
gross margin) is attributable to the increase in cost of goods sold as described
above and sales of several models of motorcycles in the current period that had
a lower gross margin than models sold in the comparable period of a year ago.
The decrease in gross profit for the six month period ended June 30, 2000 also
can be attributed to the pricing of the Company's 2000 model year motorcycles.
When the Company designed and determined the cost of manufacture of its 2000
model year motorcycles, it implemented a price increase that it believed would
maintain the historical rate of gross profit. In January 2000, the Company
reviewed its manufacturing costs and determined that its earlier cost estimates
were lower than the actual costs of manufacture. As a result, the Company
implemented a price increase of approximately 7 percent, effective March 1,
2000, on orders received after March 1, 2000. Due to the Company's sales
backlog, the full impact of the price increase was not realized in the quarter
ended June 30, 2000. The Company expects that gross profit at the end of the
third quarter of 2000 will fully reflect the impact of the price increase. The
Company will continue to monitor its production cost and when required, make the
appropriate price increases. In addition, the Company has initiated a material
cost reduction program to reduce manufacturing costs. While the Company believes
that it will be able to return to previous levels of gross profit, no assurances
can be given that gross profit will increase in the future.
As described in Note 14 in the Financial Statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999, the Company
recognized an aggregate of $969,000 of charges to cost of goods sold in
connection with three significant adjustments that were all recorded in the
fourth quarter. The periods attributed to these charges could not be identified
by the Company's management. If these charges recorded in the fourth quarter of
1999 were attributed to the first three quarters of 1999, the gross profit for
these quarters would have been lower than as reported in the unaudited interim
financial statements for such periods.
EXPENSES. Selling, general and administrative expenses were $2,434,000 or 15% of
sales for the six months ended June 30, 2000, as compared to $2,530,000 or 21%
of sales, for the six months ended June 30, 1999.
Selling, general, and administrative expenses consist primarily of corporate
operating expenses, professional fees, and salaries. The decrease of $96,000 is
primarily attributable to a decrease in advertising expenses of approximately
$76,000.
Depreciation and amortization expense for the six months ended June 30, 2000
totaled $246,000 as compared to $246,000 for the same period in 1999.
OPERATING INCOME FROM CONTINUING OPERATIONS. As a consequence of the foregoing,
operating income from continuing operations for the six months ended June 30,
2000 was $176,000 as compared to an operating profit from continuing operations
of $1,059,000 for the six months ended June 30, 1999.
OTHER INCOME (EXPENSE). For the six months ended June 30, 2000 other income
totaled $743,000 in comparison with total other expenses of $398,000 for the six
months ended June 30, 1999 or an increase of $1,141,000. Other income includes
$622,000 under the line item entitled "Other income from litigation settlement,"
of which amount $613,000 represents a reduction of liabilities recorded on
December 31, 1999 for the negotiated settlement of the Kinnicutt lawsuit. (See
also discussion of settlement of the Kinnicutt lawsuit under the caption below
entitled "General Discussion of Liquidity and Capital Resources," and in Part
II, Item 1, under the
<PAGE> 13
caption entitled, "Legal Proceedings.") Other income also includes $366,000
under the line item entitled "Extinguishment of debt - related party," which
amount represents the negotiated reduction of notes payable held by w3 Holdings
in the amount of $366,000 (including interest that was forgiven). (See also
discussion of settlement under the caption below entitled "General Discussion of
Liquidity and Capital Resources.") In addition to the foregoing, other income
also includes a gain on the sale of technology in the amount of $96,000.
INCOME BEFORE PROVISION FOR INCOME TAXES, DISCONTINUED OPERATIONS, PREFERRED
STOCK DIVIDENDS AND BENEFICIAL CONVERSION. Income before provision for income
taxes, discontinued operations, preferred stock dividends and beneficial
conversion for the six months ended June 30, 2000 was $919,000 and consists of
the operating income from continuing operations of $176,000 and other income of
$743,000.
INCOME TAXES. The provision for income taxes for the six month period ended June
30, 2000 is $0. The Company has fully reserved for the deferred tax asset
related to its net operating loss carry-forwards. 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.
LOSS ON DISCONTINUED OPERATIONS. In accordance with APB No. 30, in order to
record the loss on disposal of its Retail Division for the year ended December
31, 1999, the Company estimated the future operating losses of the Retail
Division for the period up until the sale of the division, which was January 31,
2000. During the first six months of 2000, it became evident that the provision
as of December 31, 1999 made for the operating loss for the period ended January
31, 2000 was deficient by approximately $253,000. This adjustment to the
operating loss of discontinued operations is primarily attributable to an
increase of the reserve balance for uncollected accounts receivable at the
Retail Division of $190,000 and an adjustment of $63,000 to recognize the write
off of certain assets related to the settlement litigation arising from the
operation of a retail location in Daytona Beach, Florida, The operating loss of
$253,000 for discontinued operations is net of a provision for income taxes of
$0.
PREFERRED STOCK DIVIDENDS AND BENEFICIAL CONVERSION FEATURE GRANTED TO SERIES C
PREFERRED STOCKHOLDERS. During the six months ended June 30, 2000, there were no
costs associated with preferred stock dividends or beneficial conversion
features. However, during the six months ended June 30, 1999 costs were
recognized for the preferred stock dividends and a beneficial conversion feature
which totaled $390,000 and consisted of preferred stock dividends of $31,000 and
the beneficial conversion granted to Series C preferred stockholders of
$359,000.
NET INCOME/(LOSS) AVAILABLE TO COMMON STOCKHOLDERS. For the six months ended
June 30, 2000, the net income available to common stockholders was $665,000 as
compared to a net loss of $28,000 for the same period in fiscal 1999. The
increased profitability of $693,000 is the result of operating income of
$176,000 and other income of $743,000 less the loss on discontinued operations
of $253,000 as explained in the preceding discussion.
GENERAL DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES. The Company finances the
manufacture of its motorcycles from proceeds of sales. Most of the Company's
vendors require payment terms of 30 days or less. Other than for certain
extraordinary liabilities as described below under the caption entitled "Ability
of the Company to Continue as a Going Concern," management believes that the
Company can, at its current level of operations, adequately meet its
liabilities, including liabilities to vendors, by using available internal cash.
In the past, the Company has also looked to outside funding sources to address
its liquidity and working capital needs. These include private equity placements
and secured debt-financing arrangements with lenders.
EXISTING FINANCING ARRANGEMENTS
In April 1998 the Company completed a private placement of Series C Convertible
Preferred Stock, which generated approximately $3.075 million in cash. In June
1998, the Company obtained a three-year senior secured loan in the amount of
$4.5 million from Tandem Capital of Nashville, Tennessee. Tandem subsequently
assigned the loan to FINOVA Mezzanine Capital, Inc. The loan bears interest at
12% per annum and stipulates quarterly interest payments. The FINOVA loan is
secured by a first lien on substantially all of the Company's assets. FINOVA
received warrants to purchase a total of 457,500 shares of the Company's
<PAGE> 14
Common Stock, after giving effect to the Company's 5-for-1 reverse stock split
effective on February 5, 1998. Of these warrants, 87,500 are exercisable at a
price of $5 per share and expire in November 2002. The remaining 370,000
warrants are exercisable at an initial exercise price equal to $4 1/16 payable
in cash or in-kind by debt cancellation and expire in June 2003. The exercise
price of the 370,000 warrants is reset on the first 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 FINOVA loan agreement, the Company is
obligated to issue to FINOVA 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. Each such warrant shall be
exercisable for five years from the date of issue. The proceeds of the FINOVA
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. Since the original closing date, the Company has become obligated to
issue a warrant to purchase 400,000 additional shares of Common Stock in
accordance with the terms of the FINOVA loan agreement as set forth above.
Prior to the quarter ended June 30, 2000, the Company's indebtedness to FINOVA
in the amount of $4,500,000 had been classified as a long-term note payable on
the Company's consolidated balance sheet. As of June 30, 2000 the FINOVA note is
required to be shown as a current liability.
In May 1998 the Company entered into an agreement with Cana Capital Corporation,
a company owned by Bruce Scott, a former director of the Company, pursuant to
which Cana Capital would provide $1.5 million in floor financing for the
Company's motorcycles. In April 1999 Cana Capital elected to terminate the
flooring agreement. Thereafter, Cana Capital allowed the Company several months
to pay off the balance on the floor financing. In approximately August 1999, a
dispute arose between Cana Capital and the Company as to claims the Company had
against Cana Capital, which offset part of the balance remaining on the floor
financing. Cana Capital subsequently filed suit against the Company in the
Circuit Court for the Fourth Judicial Circuit, Duval County, Florida. The
Company defended the action and cross-complained against Cana Capital to offset
the balance owed on the floor financing, which, according to the Company's
records, was approximately $235,000 as of June 30, 2000. Advances under the Cana
Capital line of credit had an interest of rate of 2% over the prime rate if used
to finance the acquisition of new vehicles, and 5% over the prime rate if used
to finance the acquisition of used vehicles. In July, 2000 the Company
successfully reached a settlement agreement with Cana Capital and Mr. Scott
which required payment by the Company to Cana Capital by July 31, 2000. On July
28, 2000, the Company fulfilled its obligations under the settlement agreement.
In exchange for the payment, Cana Capital agreed to provide the Company the
original title to motorcycles financed under the Cana Capital floor line and has
dismissed its suit with prejudice.
In October 1998, the Company obtained a bridge loan in the amount of $300,000
from MD Strategic L.P. ("MD Strategic"), a partnership in which Don Duffy, a
former director of the Company, is a principal. The loan was originally
evidenced by an unsecured note bearing interest at 18% per annum and was due,
together with accrued interest, on the earlier of December 31, 1999 or upon
receipt by the Company of funds from a third-party lender. In January 2000, MD
Strategic assigned the note, on which there was accrued approximately $82,200 in
interest and fees, to W3 Holdings, Inc. ("W3 Holdings"). W3 Holdings extended
the term of the note to March 31, 2000. On July 5, 2000 the Company completed an
agreement on the payment of the debt with W3 Holdings as described below.
In November 1999, the Company obtained a second bridge loan in the amount of
$300,000 from William Whalen, a stockholder of the Company. The loan originally
was evidenced by two promissory notes in the principal amounts of $200,000 and
$100,000 respectively, each bearing interest at a rate of 12% per annum and
maturing on June 30, 2000. In January 2000, the notes were replaced by two
amended and restated promissory notes in the principal amounts of $156,638 and
$150,000, respectively. The amended and restated $156,638 note evidences
$150,000 of the principal amount of the original $200,000 note, $4,338 of
accrued interest on the original $200,000 note and $2,300 of accrued interest on
the original $100,000 note. The amended and restated $150,000 note evidences the
entire principal amount of the original $100,000 note, plus $43,362 of their
original principal amount of the $200,000 note. Both the $156,638 and $150,000
amended and restated notes bear interest at a rate of 12% per annum and mature
on March 31, 2000. Mr. Whalen subsequently assigned the
<PAGE> 15
amended and restated note in the amount of $150,000 to W3 Holdings, while
continuing to hold the amended and restated note in the amount of $156,638.
In July 2000, the Company reached a settlement of its obligations owing on the
two promissory notes held by w3 Holdings. The combined sum of principal and
interest owing on the notes was approximately $560,000 at the time the
settlement was reached. The Company negotiated a compromise payment of $195,000
to extinguish all indebtedness on the notes. Final payment of the $195,000 was
made on July 20, 2000. The Company is continuing to negotiate a settlement on
the $156,638 note held by Mr. Whalen, on which there was accrued $8,362 in
interest as of June 30, 2000.
In February 1999 and October 1999, the Company received an aggregate of
$2,000,000 upon the issuance of 2,060 shares of Series D Convertible Preferred
Stock, each share having a stated value of $1,000. (60 out of the 2,060 shares
were issued in payment of placement agent fees, and therefore the Company did
not receive cash for those shares.) As of March 10, 2000, all issued and
outstanding shares of Series D Convertible Preferred Stock, having an aggregate
stated value of $2,060,000, plus accrued and unpaid dividends on such shares,
had been converted into a total of 3,728,452 shares of Common Stock. The number
of shares of Common Stock issued upon the conversion of each share of Series D
Convertible Preferred Stock was 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.
CONSOLIDATED STATEMENT OF CASH FLOWS.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net cash used in operating activities for the six month period ended June 30,
2000 was $636,000 as compared to net cash provided by operating activities of
$234,000 for the period ended June 30, 1999. Net cash used in operating
activities includes net cash used in continuing operating activities and net
cash used in discontinued operating activities. Discontinued operations consist
of the Retail Division that was sold on January 31, 2000.
Net cash used in continuing operating activities for the six month period ended
June 30, 2000 was $331,000 as compared to $396,000 for the comparable period in
1999, representing a change of approximately $65,000. During the six months
ended June 30, 2000, the primary use of cash was in the reduction of trade
accounts payable of $596,000, which was partially offset by cash provided by
improved collection of motorcycle receivables as accounts receivable decreased
$260,000.
The net cash used in discontinued operating activities was $305,000 for the six
month period ended June 30, 2000. For the same period in 1999, the discontinued
operations provided cash of $630,000.
Net cash used in investing activities is $48,000 for the six month period ended
June 30, 2000, as compared to $532,000 net cash used in investing activities for
the same six month period in 1999. The principle use of cash during the six
months ended June 30, 2000 was the purchase of a trade show exhibit booth. The
principle use of cash for the period ended June 30, 1999 was the purchase of
assets related to the move to the Mira Loma facility and the implementation of
new computer hardware and software. These acquisitions totaled $314,000, while
$198,000 was used by the discontinued operations during the same period of 1999.
Net cash used by financing activities for the six month period ended June 30,
2000 is $251,000 and consists of payments on notes payable and capital lease
obligations of approximately $243,000, after refinancing the SBA loan of $67,000
related to the Kinnicutt settlement, and repayments of advances on floor plan
financing from Cana Capital of approximately $74,000.
Net cash provided by financing activities for the six month period ended June
30, 1999 was approximately $758,000. This sum consisted of primarily the
proceeds from the placement of the Series D Preferred Stock in February 1999 of
approximately $1,367,000. Warrants were exercised in the Series C class and
provided cash of $160,000 during the period. The principle use of cash during
the period was the payment made to retire debt on the Cana
<PAGE> 16
Capital floor plan financing which was reported under the line item titled
"Advances on financing agreements-related party."
For the six months ended June 30, 2000, there was a net decrease in cash and
cash equivalents of $935,000. The primary use of cash during the six month
period consisted of approximately $596,000 used in the reduction of trade
accounts payable and $317,000 was used to make payments on notes payable, lease
obligations and financing agreements.
For the six months ended June 30, 1999 the net increase in cash and cash
equivalents was approximately $461,000. The major source of cash during the
period was the approximately $1,367,000 in net proceeds from the sale of Series
D preferred stock. Cash of $870,000 was used to make payments on the Cana
Capital floor plan financing.
OUTLOOK AND ABILITY OF COMPANY TO CONTINUE AS A GOING CONCERN
As described Note 2 to the Company's financial statements in its Annual Report
for fiscal 1999 on Form 10-KSB, entitled "Summary of Significant Accounting
Policies -- Going Concern and Basis of Presentation", and in their independent
Accountants' report dated April 4, 2000, which appears in this quarterly report
on Form 10-QSB, the Company's independent auditors state that the Company has
incurred recurring losses from operations, and that its total liabilities exceed
its tangible assets as of December 31, 1999.
In Part II, Item 6 of the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 1999, under the caption entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook and Ability of Company to Continue as a Going Concern," the Company
described several extraordinary liabilities that were of primary concern to the
Company. These included the Company's liability under the promissory notes held
by w3 Holdings and Mr. Whalen, the Company's liability to pay the judgment in
the Kinnicutt lawsuit, as described in Part II, Item 1 of this report, and the
Company's obligation to repay its $4,500,000 loan from FINOVA Capital
Corporation when that loan becomes due in June 2001.
As discussed above, the Company has satisfied the indebtedness owing to w3
Holdings in full. The Company has also settled its lawsuit with Cana Capital
Corporation and Bruce Scott, as discussed above. Finally, the Company has
settled the Kinnicutt litigation as described below Part II, Item 1 of this
report.
As a result of the foregoing, as of the date of the filing of this report, the
Company has settled or discharged liabilities of approximately $1,600,000.
Although cash payments made to date of $195,000 together with future payments of
approximately $67,000 to settle these matters have reduced the Company's current
liquidity, management remains confident that it can continue to meet its
obligations to vendors and suppliers through the generation of operating income.
However, no assurances can be given.
The Company plans to negotiate with Mr. Whalen regarding the repayment of his
note. At the time of the filing of this report, Mr. Whalen has not presented a
demand for payment. However, there can be no assurances that these negotiations
will be successful.
The remaining significant liability of the Company is the Company's obligation
to repay its $4,500,000 secured loan from FINOVA Capital Corporation when that
loan matures in June 2001. As noted above, the Company has reclassified this
loan on its consolidated balance sheet as of June 30, 2000 as a current
liability. The Company may not be able to repay the FINOVA loan unless it
obtains an extension, or refinancing on terms acceptable to the Company. The
ability of the Company to extend or refinance the FINOVA loan will be affected
by, among other factors, the ability of the Company to sustain profitability by
the loan's maturity date. While the Company had a net income of approximately
$665,000 for the six months ended June 30, 2000, the Company has a prior history
of operating losses and accumulated deficits. See discussion above under the
caption entitled, "Certain Trends and Uncertainties -- The Company may not be
able to implement the changes necessary to sustain profitability in future
periods." There can be no assurances that the Company will be able to sustain
profitability in future periods. If the Company is unable to extend or refinance
the FINOVA loan at maturity, whether due to the Company's inability to sustain
profitability or for other reasons, such event will have a material adverse
effect on the Company's financial condition.
<PAGE> 17
The ability of the Company to continue generating a profit is paramount to
resolving its working capital issues and to obtain an extension or refinancing
of the FINOVA loan when that loan matures in June 2001. The Company's ability to
sustain profitability in future periods will depend upon a number of factors,
including the ability of the Company to introduce new products, manage the
transition from model year 2000 product to model year 2001 product and maintain
a level of production which is responsive to seasonal demands. Management
believes that several steps can be taken to sustain profitability. These include
implementation of better internal controls, reduction of expenses, and
improvements in purchasing, cash management, and inventory control. However,
there can be no assurances that the Company will be able to successfully
implement any of the changes described above, or that the Company will in fact
achieve profitability in future periods.
Any additional equity financing which the Company may obtain in the future 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.
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.
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.
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 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.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT THE CHANGES NECESSARY FOR
THE COMPANY TO REMAIN A GOING CONCERN. Due to the Company's prior history of
operating losses and working capital deficiency, Singer Lewak Greenbaum &
Goldstein LLP, the Company's auditors, have included an explanatory paragraph in
their report to the Company's consolidated financial statements for the year
ended December 31, 1999 that expresses substantial doubt as to the Company's
ability to continue as a going concern. There can be no assurances that the
Company will be able to successfully implement the changes necessary for the
Company to remain a going concern. See "Report of Independent Certified Public
Accountants", dated April 4, 2000, included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission on April 14, 2000. See also paragraph below
entitled, "The Company may not be able to implement the changes necessary to
sustain profitability in future periods."
THE COMPANY MAY NOT BE ABLE TO IMPLEMENT THE CHANGES NECESSARY TO SUSTAIN
PROFITABILITY IN FUTURE PERIODS. While the Company had a net income of
approximately $665,000 for the six months ended June 30, 2000, the Company has a
prior history of operating losses and accumulated deficits. The Company had a
net operating loss of approximately $809,000 for the fiscal quarter ended March
31, 2000. Prior to that period, the Company had operating
<PAGE> 18
net losses of approximately $6.1 million and $5.7 million for the fiscal years
ended December 31, 1999 and 1998, respectively. As of December 31, 1999, the
Company's accumulated deficit was approximately $23,800,000. The Company may not
be able to implement the changes necessary to sustain profitability in future
periods. These changes include implementation of better internal controls,
reduction of expenses, and improvements in purchasing, cash management, and
inventory control. The Company's ability to sustain profitability will also
depend upon other factors, including the ability of the Company to introduce new
products, manage the transition from model year 2000 product to model year 2001
product and maintain a level of production which is responsive to seasonal
demands. There can be no assurances that the Company will be able to
successfully implement any of these changes, or that the Company will be able to
sustain profitability in future periods.
THE COMPANY MAY NOT BE ABLE TO REPAY OR REFINANCE ITS EXISTING SECURED TERM LOAN
ON TERMS ACCEPTABLE TO THE COMPANY. The Company's $4.5 million secured term loan
with FINOVA Mezzanine Capital expires in June 2001. See discussion in Part I,
Item 2, of this report, entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -General Discussion of Liquidity
and Capital Resources." The Company may not be able to repay the FINOVA loan
unless it obtains an extension or refinancing on terms acceptable to the
Company. The ability of the Company to extend or refinance the FINOVA loan will
be affected by, among other factors, the ability of the Company to sustain
profitability by the loan's maturity date. While the Company had a net income of
approximately $665,000 for the six months ended June 30, 2000, the Company has a
prior history of operating losses and accumulated deficits. See discussion above
under the caption entitled, "The Company may not be able to implement the
changes necessary to sustain profitability in future periods." There can be no
assurances that the Company will be able to sustain profitability in future
periods. If the Company is unable to extend or refinance the FINOVA loan at
maturity, whether due to the Company's inability to sustain profitability or for
other reasons, such event will have a material adverse effect on the Company's
financial condition.
IF THE AMOUNT OF CAPITAL NEEDED TO FUND OPERATIONS EXCEEDS CURRENT ASSETS, THE
COMPANY MAY NOT BE ABLE TO OBTAIN ADDITIONAL EQUITY OR DEBT FINANCING. If the
Company needs to seek additional debt or equity financing in the future, there
is no assurance that sufficient financing will be available or, if available,
that it will be on terms favorable to the Company or its shareholders. Any
additional equity financing may cause substantial dilution to the Company's
existing equity holders. Many factors may cause the amount of capital needed to
fund operations to exceed current estimates, including, among other
unanticipated events, the Company's inability to:
- increase quarterly production volume;
- lower per unit production costs;
- control departmental costs; or
- manage inventory effectively.
Additional financing may not be available on terms favorable to the Company, or
at all. If adequate funds are not available or are not available on acceptable
terms, the Company may not be able to take advantage of business opportunities.
In addition, if the Company elects to raise capital by issuing additional shares
of stock, existing stockholders may incur dilution.
THE COMPANY'S COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET,
WHICH MAY MAKE IT DIFFICULT FOR THE COMPANY'S STOCKHOLDERS TO BUY, SELL AND
OBTAIN PRICING INFORMATION ABOUT THE COMPANY'S COMMON STOCK. The Company's
common stock has been listed on The Nasdaq SmallCap Market since June 1998 under
the symbol "BIKR." On June 12, 2000, Nasdaq notified the Company that its common
stock had failed to maintain a minimum bid price of $1.00 over the 30
consecutive trading days preceding such date. Therefore, as of June 12, 2000,
the Company was not in compliance with the requirements for continued listing on
the The Nasdaq SmallCap Market as set forth in Nasdaq Marketplace Rule
4310(c)(4). Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(B), Nasdaq has
provided the Company 90 days from June 12, 2000, or until September 11, 2000, to
regain compliance with Marketplace Rule 41310(c)(4). If at any time before
September 11, 2000, the bid price of the Company's common stock is at least
$1.00 for a minimum of 10 consecutive trading days, Nasdaq will determine in its
discretion if the Company complies with the Nasdaq listing requirements.
However, if the Company is unable to demonstrate compliance with the Nasdaq
listing requirements on or before September 11,
<PAGE> 19
2000, its common stock could be delisted at the opening of business on September
13, 2000. From June 12, 2000 to August 11, 2000, the minimum bid price of the
Company's common stock has remained below $1.00. Therefore, no assurances can be
given that the Company will be able to comply with the Nasdaq listing
requirements prior to the September 11, 2000 deadline. If the Company is not
able to comply with the Nasdaq listing requirements prior to the September 11
deadline and as a result Nasdaq elects to delist the Company's stock, the
Company intends to appeal the Nasdaq decision. No assurances can be given that
the Company will be successful in its appeal.
The loss of a listing on the Nasdaq SmallCap Market could have a material
adverse effect on the Company's business prospects. The Nasdaq market system
provides brokers and others with immediate access to the best bid and asked
prices, as well as other information, about the Company's common stock. With the
loss of the designation, stockholders may find it more difficult to buy, sell
and obtain pricing information about our common stock. The Company also risks no
longer qualifying as a "margin security" as defined by the Federal Reserve Board
and becoming subject to the SEC's "penny stock" rules thereby reducing the
attractiveness of the Company's stock as an investment vehicle and making it
more difficult for the investor to purchase and sell the Company's stock.
THE COMPANY HAS LIMITED EXPERIENCE WITH MANUFACTURING OPERATIONS. The Company
entered the motorcycle manufacturing business in 1997. Previously, the Company's
operations had involved only the operation of retail stores selling new and used
motorcycles and motorcycle parts and accessories. Although the Company has
acquired considerable manufacturing experience since it entered the business in
1997, that experience is more limited than that of other motorcycle
manufacturers which have been in operation for a longer period of time.
THE COMPANY'S PRODUCTS COULD CONTAIN DEFECTS CREATING PRODUCT RECALLS AND
WARRANTY CLAIMS WHICH COULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S FUTURE
SALES AND PROFITABILITY. The Company's products could contain unforeseen
defects. These defects could give rise to product recalls and warranty claims. A
product recall could delay or even halt production until the Company is able to
address the reason for any defects. Recalls may also have a materially negative
effect on the brand image and public perception of the Company's motorcycles.
This could materially adversely affect the Company's future sales. Recalls or
other defects would be costly and could require substantial expenditures.
Unanticipated defects could also result in litigation against the Company. Given
the nature of its products, the Company expects that it will be subject to
potential product liability claims that could, in the absence of sufficient
insurance coverage, have a material adverse impact on the Company. The Company
cannot assure you that it will be able to secure or maintain adequate liability
insurance to cover all product liability claims. Any large product liability
claim could materially adversely affect the Company's ability to market its
motorcycles and could have a material adverse impact on the Company's business,
operating results and financial condition.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN OR INCREASE ITS CURRENT LEVEL OF SALES
IF CHANGES IN POPULAR TRENDS OR ECONOMIC CONDITIONS CAUSE A DECLINE IN MARKET
DEMAND FOR HEAVYWEIGHT CRUISER MOTORCYCLES. The base retail price of one of the
Company's heavyweight cruiser motorcycles ranges approximately from $20,000 to
$25,000. Motorcycles within this price range are luxury goods. Therefore, market
demand for heavyweight cruisers such as those manufactured by the Company may be
particularly susceptible to changes in popular trends and economic conditions.
These economic factors include, among others:
- employment levels;
- business conditions;
- interest rates;
- general level of inflation; and
- taxation rates.
If such changes cause a decline in market demand for heavyweight cruiser
motorcycles, the Company may not be able to maintain or increase its current
level of sales.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN OR INCREASE ITS CURRENT LEVEL OF SALES
IF IT DOES NOT CONTINUE TO EXPAND ITS DEALER NETWORK. Motorcycles manufactured
by the Company are sold through approximately 86 independent Ultra Cycles
dealers, of which approximately 55 are currently active as of August 8, 2000.
The Company may not be able to maintain or increase
<PAGE> 20
its current level of sales if it does not continue to expand its dealer network,
and there is no assurance that the Company will be able to do so.
THE COMPANY'S COMPETITIVE POSITION WITHIN ITS NICHE OF THE HEAVYWEIGHT CRUISER
MOTORCYCLE MARKET COULD SUFFER IF EXISTING COMPETITORS EXPAND OPERATIONS OR
OTHER MOTORCYCLE MANUFACTURERS INSTITUTE SIMILAR PRODUCT OFFERINGS. The Company
seeks to avoid direct competition with Harley-Davidson, which has the largest
share of the heavyweight cruiser motorcycle market, by competing within a
specialized niche. The Company's competitive strategy focuses on product
performance and style, pricing and service. For example, the Company offers on
all models, at no additional charge over base prices, customized features like
polished or painted high-performance engines and a four-year, unlimited mileage
warranty. These features and benefits all combine to present an image that
differentiate the rider from the Harley-Davidson consumer. The Company's main
competitors within this niche of the heavyweight cruiser motorcycle market are
Titan Motorcycles, Big Dog Motorcycles, Indian and American Iron Horse. In the
event that the Company's existing competitors expand their manufacturing
operations, or other motorcycle manufacturers institute product offerings on
terms similar to those offered by the Company, the Company's competitive
position within its niche of the heavyweight cruiser motorcycle market could
suffer.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UNDERLYING OPTIONS AND
WARRANTS MAY CAUSE SIGNIFICANT DILUTION OF EXISTING SHAREHOLDERS' INTERESTS. As
of December 31, 1999, 1,347,583 warrants and 1,266,387 options were outstanding.
770,527 of the options were fully vested. During the six months ended June 30,
2000 the Company issued 200,000 warrants, no options were issued and there was
no change in the number of options that are fully vested. Under the terms of the
agreement governing its $4.5 million term loan from FINOVA Mezzanine Capital,
the Company is obligated to issue to FINOVA 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 (1) $4.00, or (2) 80% of the average closing bid price of the common
stock for the 20 days preceding such anniversary date. Since June 1998, the date
of the FINOVA loan, the Company became obligated to issue a warrant to purchase
400,000 additional shares of Common Stock pursuant to the foregoing provision.
The issuance in June 2000 of 200,000 shares and the issue of 200,000 shares in
June 1999 brings the total warrants issued to FINOVA to 857,500 as of June 30,
2000. The issuance of additional shares of common stock upon exercise of the
warrants and options described in this paragraph could result in significant
dilution to existing security holders of the Company.
THE POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK MAY ADVERSELY AFFECT RIGHTS
OF HOLDERS OF COMMON STOCK AND MAY RENDER MORE DIFFICULT CERTAIN UNSOLICITED
TAKEOVER PROPOSALS WHICH WOULD BE IN THE BEST INTEREST OF SHAREHOLDERS. As of
the date of this report, the Company has 702,194 shares of preferred stock
outstanding. The Articles of Incorporation of the Company permit the Board of
Directors to designate the terms of, and issue, up to 9,297,806 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, certain
unsolicited takeover proposals which would be in the best interest of
shareholders, such as a tender offer, proxy contest or removal of incumbent
management.
THE COMPANY RELIES HEAVILY ON THIRD PARTY PARTS SUPPLIERS AND ANY SIGNIFICANT
ADVERSE VARIATION IN QUANTITY, QUALITY OR COST WOULD NEGATIVELY AFFECT OUR
OPERATIONS. We operate primarily as an assembler and rely heavily on a number of
major component manufacturers to supply us with almost all of our parts. Any
significant adverse variation in quantity, quality or cost would adversely
affect our volume and cost of production until we could identify alternative
sources of supply.
OUR FAILURE TO COMPLY WITH VARIOUS REGULATORY APPROVALS AND GOVERNMENTAL
REGULATIONS COULD NEGATIVELY IMPACT OUR OPERATIONS. Our motorcycles must comply
with certain governmental approvals and certifications regarding noise,
emissions and safety characteristics. Our failure to comply with these
requirements could prevent us or delay us from selling our products which would
have a significant negative impact on our operations.
<PAGE> 21
OUR QUARTERLY RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY RESULT IN THE
VOLATILITY OF OUR STOCK PRICE. Our quarterly operating results may fluctuate
significantly as a result of a variety of factors, many of which are outside of
our control. These factors include:
~ the amount and timing of orders from dealers;
~ disruptions in the supply of key components and parts;
~ seasonal variations in the sale of our products; and
~ general economic conditions.
WE ARE SUBJECT TO CONTINGENT LIABILITIES UNDER A DEALER FLOOR PLAN FINANCING
PROGRAM WHICH COULD EXPOSE US TO SIGNIFICANT FINANCIAL OBLIGATIONS.
Approximately 80% of our dealers receive floor plan financing for our products
through several lending institutions. The dealers are the obligors under these
floor plan agreements and are responsible for all principal and interest
payments. However, we are subject to a standard repurchase agreement which
requires us to buy back any of our motorcycles at the wholesale price if the
defaults and the motorcycles are repossessed by the lender. While we have only
had to repurchase less than approximately $175,000 or ten motorcycles since
August of 1997, as of June 30, 2000, total estimated outstanding obligations of
all 80 dealers is estimated to range between $4,600,000 and $8,300,000. Our
profitability would be significantly negatively impacted if we were forced to
repurchase a large number of these motorcycles.
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-QSB and Part I, Item 2
of this report, entitled, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
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,
except as set forth below, 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 reports on Form 8-K dated January 31, 2000, Form
10-KSB for the fiscal year ended December 31, 1999, and Form 10-QSB for the
fiscal quarter ended March 31, 2000, James and Susan Kinnicutt (the
"Kinnicutts") filed an action against the Company on August 20, 1998 in
Sacramento Superior Court, Sacramento County, California, for breach of
contract, fraud, slander, wrongful termination and gender discrimination in
connection with the Company's repurchase of a Bikers Dream franchise which the
Kinnicutts had purchased in 1994. At the time the Kinnicutts had purchased the
franchise, the Company had failed to strictly comply with the requirements of
California's Franchise Investment Law. Thereafter, the Kinnicutts elected to
rescind their franchise agreement, and the parties entered into an asset
purchase agreement, pursuant to which the Company agreed to repurchase the
franchise and its assets. The agreement required the Company to pay off a SBA
loan, which the Kinnicutts had obtained to finance the opening of the franchise
and to assume the franchise's lease. In conjunction with the repurchase of the
franchise, the Company retained Mr. and Mrs. Kinnicutt as managers of the store.
In August 1997, the Kinnicutts were terminated as employees of the store and
they subsequently filed the action described in this paragraph.
The case was tried before a jury in December 1999, and the jury found in favor
of the Kinnicutts on the breach of contract and fraud causes of action. The jury
rendered verdicts for compensatory damages against the Company of over $283,000.
In January 2000, following a trial on the bifurcated issue of punitive damages,
the jury awarded $400,000 in punitive damages against the Company and lesser
amounts against two of its former employees. On March 20, 2000, the court
entered a judgment against the Company in the amount of $683,601. In response to
a subsequent post-trial motion by the plaintiffs, the court awarded
<PAGE> 22
plaintiffs an additional $154,000 for attorneys' fees, thereby bringing the
total award against the Company to $837,601.
The Company has recently concluded a settlement with the plaintiffs, which
provides for a compromise (reduced) payment to the plaintiffs and the mutual
release of all claims and dismissal of the action, with prejudice. The terms of
the settlement agreement between the Company and the plaintiffs provide that the
plaintiffs shall be paid the sum of $190,000 and that the balance owing on the
plaintiffs' SBA loan, which was the subject of the litigation, shall be paid in
full. The Company's insurer is paying the entire settlement amount, except that
the Company shall repay to its insurer the loan pay-off amount of approximately
$67,000, payable, without interest, at the rate of $2,000 per month. Settlement
documents have been signed by all parties, which include a motion to vacate the
judgment and a request for dismissal of the action.
The Company and its insurer entered into an ancillary agreement, which provides,
among other things, that the Company will release its insurer from any and all
claims, relative to the handling and defense of the action, in consideration for
the insurer's payment of the settlement amount.
ITEM 2. CHANGES IN SECURITIES
In June 2000 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 warrants are exercisable for five years from the date
of issue.
The issuance of the warrants was 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:
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)
2.2 Asset Purchase Agreement dated January 30, 1997 among the
Company, Ultra Acquisition Corporation and Mull Acres
Investments, Inc.(2)
2.3 Asset Purchase Agreement dated January 18, 2000 between Bikers
Dream, Inc. and V-Twin Holdings, Inc.(3)
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(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(6)
<PAGE> 23
3.1.6 Certificate of Determination of Series D Convertible Preferred
Stock(7)
3.2 Bylaws, as amended, of Bikers Dream, Inc. (1)
4.1 Form of Certificate of Common Stock of Bikers Dream, Inc.(8)
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).
4.4 Loan Agreement dated June 22, 1998 between FINOVA Mezzanine
Capital Inc. (formerly known as Sirrom Capital Corporation
d/b/a/ Tandem Capital) and the Company and Ultra Acquisition
Corporation as Borrowers(8).
4.5 First Amendment to Loan Agreement and Loan Documents dated as of
January 31, 2000 between FINOVA Mezzanine Capital Inc. and the
Company and Ultra Motorcycle Company (f/k/a Ultra Acquisition
Corporation) as Borrowers(9).
10.1 Form of Settlement Agreement and Release effective as of
June 1, 2000, by and between Bikers Dream, Inc. and
w3 Holdings, Inc.
10.2 Form of Memorandum of Settlement Terms regarding the action in
Sacramento County Superior Court captioned James Kinnicutt, et
al. v. Bikers Dream, Inc.
10.3 Form of Settlement Agreement and General Release between James
Kinnicutt, Susan Kinnicutt, Bikers Dream of Sacramento, Bikers
Dream, Inc. and William Gresher.
10.4 Form of Settlement Agreement and General Release between TIG
Insurance Company, Bikers Dream, Inc. and William and
Sandra Gresher.
10.5 Form of Promissory Note dated July 20, 2000 by Bikers Dream,
Inc. in favor of TIG Insurance Company in the principal sum
of $67,062.
10.6 Form of Settlement Agreement as of July 2000 between Cana
Capital Corporation, Bruce A. Scott and affiliated companies,
on the one hand, and Bikers Dream, Inc., and Ultra Acquisition
Corporation on the other hand and General Releases between the
parties.
15 Letter of Singer Lewak Greenbaum & Goldstein LLP regarding
awareness of use of report dated July 26, 2000.
27 Financial Data Schedule
------------------------
(1) Previously filed as an exhibit 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) Previously filed as an exhibit to the Company's Form 8-K dated
January 30, 1997 filed with the Commission on February 14, 1997.
(3) Previously filed as an exhibit to the Company's Form 8-K dated
January 18, 2000 filed with the Commission on January 26, 2000.
(4) Previously filed as an exhibit to the Company's Form 10-KSB
report for the fiscal year ended December 31, 1996 filed with
the Commission on April 15, 1997.
(5) Previously filed as an exhibit to the Company's Form 10-QSB
report for the fiscal quarter ended September 30, 1997 filed
with the Commission on November 14, 1997.
(6) Previously filed as an exhibit to the Company's Form 10-QSB
report for fiscal quarter ended March 31, 1998 filed with the
Commission on May 15, 1998.
(7) Previously filed as an exhibit to the Company's registration
statement on Form S-3 filed with the Commission on February 11,
1999.
(8) Previously filed as an exhibit to the Company's Form 10-KSB
report for the fiscal year ended December 31, 1998 filed with
the Commission on April 15, 1999.
(9) Previously filed as an exhibit to the Company's Annual Report on
From 10-KSB for the period ended December 31, 1999 filed with
the Commission on April 14, 2000.
(b) Reports on Form 8-K
(1) Report on Form 8-K filed with the Commission on April 7, 2000
(reporting the resignation of H. Rosenman as President and Chief
Executive Officer).
<PAGE> 24
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 11, 2000 Bikers Dream, Inc.
By: /s/ Harold L. Collins
------------------------------------
Harold L. Collins,
(Chief Operating Officer
Principal Executive Officer)
By: /s/ Michael J. Fisher
------------------------------------
Michael J. Fisher
(Chief Financial Officer)
