10-Q 1 d10q.txt FORM 10-Q FOR THE PERIOD ENDED 09/30/2001 ================================================================================ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 Commission File No. 001-14509 EASYRIDERS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0811505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 28210 Dorothy Drive, Agoura Hills, California 91301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 889-8740 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.001 per share Securities registered pursuant to Section 12(g) of the Act: Not Applicable Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- There were 25,481,112 shares of outstanding Common Stock of the Registrant as of November 6, 2001. ================================================================================ ================================================================================ PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements EASYRIDERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements. 1 EASYRIDERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)

See accompanying notes to consolidated financial statements. 2 EASYRIDERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME/(OPERATIONS)

See accompanying notes to consolidated financial statements. 3 EASYRIDERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements 4 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- 1. GENERAL BASIS OF PRESENTATION Easyriders, Inc. (Easyriders or the Company) was incorporated in the State of Delaware on May 13, 1998, and for financial reporting purposes is the successor to Newriders, Inc. (Newriders), a Nevada corporation. On September 23, 1998, Easyriders, Inc. consummated a series of transactions (collectively, the Reorganization), including the following: (i) the merger of a subsidiary of Easyriders with and into Newriders (the Merger) upon which the shareholders of Newriders exchanged their stock on a 2-for-1 basis for Easyriders, Inc. common stock; (ii) the acquisition by Easyriders of all of the outstanding common stock of Paisano Publications, Inc. (Paisano Publications), a California corporation, and certain affiliated corporations (collectively, the Paisano Companies); and (iii) the acquisition by Easyriders of all of the outstanding membership interests of M&B Restaurants, L.C. dba El Paso Bar-B-Que Company (El Paso), a Texas limited liability company. As a result of the merger, the Newriders common stock was exchanged for Easyriders common stock on the basis of one share of Easyriders common stock for each two shares of Newriders common stock, and the stockholders of Newriders immediately prior to the merger became stockholders of Easyriders. The merger was accounted for as a combination of entities under common control, similar to a pooling of interest. Therefore, the historical financial statements represent the combined financial statements of Easyriders and Newriders. The acquisitions of the Paisano Companies and El Paso were accounted for as a purchase. The Paisano Companies consist of Paisano Publications; Easyriders of Columbus, Inc., an Ohio corporation; Easyriders Franchising, Inc., a California corporation; Teresi, Inc. (DBA Easyriders Events, Inc.), a California corporation; Bros Club, Inc., a California corporation and Associated Rodeo Riders on Wheels, a California corporation; Paisano Publications publishes 11 special-interest magazines directed to motorcycle, hot-rod, and tattoo enthusiasts, and 2 industry related magazines, Eagles Eye and Tatoo Industry. Other Paisano Companies market a line of apparel and other products designed to appeal to motorcycle, hot-rod, and tattoo enthusiasts. Through the end of 1999 Easyriders Franchising had established franchise stores that sold Easyriders apparel, customized new and used American-made motorcycles, and motorcycle accessories. Subsequently, the operations of Easyriders Franchising were assumed by Easyriders Licensing, Inc., a California corporation, and a wholly-owned subsidiary of Newriders, under a new program pursuant to which franchisees signed agreements converting their franchise arrangement to licensing arrangements. Currently, there are 39 licensed stores and 1 retail store still operating under an expired franchise agreement. El Paso owns and operates barbecue and smoked meat restaurants located in Arizona and Oklahoma. The restaurants are operated under the name "El Paso Bar-B-Que." On October 5, 2000, the Company sold its interest in El Paso to a related party. Easyriders currently derives substantially all of its revenues from the operations of Paisano Publications. Basis of presentation - The accompanying unaudited interim consolidated financial statements of Easyriders, Inc. for the three and nine month periods ended September 30, 2001 and 2000, respectively, reflect all adjustments (consisting of normal recurring accruals) which, in the opinion 5 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain reclassifications have been made to the 2000 financial statements in order to conform them to the 2001 presentation. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended December 31, 2000. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. In this regard, readers are cautioned to consider the fact that on July 17, 2001, Easyriders and Paisano Publications filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California, San Fernando Valley Division. The immediate consequences of these filings are discussed herein, but the longer-term consequences are substantially uncertain at this time, and could include, among other things: . An outright sale of assets for a price which is less than the Company's total indebtedness, in which case no value would remain for shareholders. . Restructuring of the Nomura Indebtedness through modified terms, or replacing the Nomura Indebtedness with alternative financing. . Restructuring or elimination, in whole or in part, of the Company's unsecured debt. . Cancellation or dilution of all, or a portion of, the Company's currently outstanding equity securities. . Events which disqualify the Company from remaining a publicly traded enterprise. . Changes in ownership control and/or management of the Company. This list in not intended to be exhaustive, nor to reflect management's expectations as to the most likely outcome of the Chapter 11 cases, but merely to serve as a notice to readers that the future of the Company is substantially uncertain at this point in light of the issues still to be resolved in the Bankruptcy Court. The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The above referenced bankruptcy filings were prompted primarily by various repayment demands and other disputes that Easyriders was having with its primary secured lender, Nomura Holding America Inc. ("Nomura"), including Nomura's unwillingness to extend the September 23, 2001 maturity date of its secured loan in the principal amount of approximately $21 million. The unpredictability of the outcome of these 6 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- bankruptcy filings raises substantial doubt about the Company's ability to continue as a going concern. Prior to its filing for Chapter 11 relief on July 17, 2001, the Company made regular monthly interest payments to Nomura in respect of the Nomura Indebtedness. After its bankruptcy filing, in accordance with orders of the Bankruptcy Court, the Company continued to make such payments to Nomura through October 31, 2001 (the "Post-Petition Payments"). No agreement was made between the parties and no order of the Bankruptcy Court was issued as to the application of any of the Post-Petition Payments made by the Debtors to Nomura. Under the Bankruptcy Code, if the value of Nomura's collateral is less than the amount of Nomura's "allowed claim," Nomura is not entitled to any post-bankruptcy interest and Nomura's allowed claim is bifurcated into an allowed secured claim equal to the value of Nomura's collateral and an allowed unsecured claim equal to the balance of Nomura's allowed claim. The Company believes that the funds used to make the Post-Petition Payments to Nomura was not part of Nomura's collateral and therefore should reduce the amount of Nomura's allowed secured claim on a dollar-for-dollar basis. No determination has been made by the Bankruptcy Court and no agreement has been reached between the parties in this regard. The Company has filed a motion with the Bankruptcy Court to determine the value of Nomura's allowed secured claim. A status conference on that motion is scheduled to be held on November 21, 2001. The Company anticipates that the Bankruptcy Court will provide the parties with a trial date to litigate this issue at the November 21, 2001 status conference. The Company is also in the process of preparing a complaint to file in the Bankruptcy Court to determine to what extent, if any, the Company's cash constitutes part of Nomura's collateral. Until the value of Nomura's allowed secured claim and the extent to which, if any, the Company's cash constitutes part of Nomura's collateral is determined by the Bankruptcy Court, the Company will continue to report all Post-Petition Payments made to Nomura as interest, and if a determination is made at some later date that such Post-Petition Payments to Nomura do not constitute interest to Nomura, the Company will show such adjustment in its financial reports. Pre-petition liabilities, including the Nomura indebtedness of $20,968,002, the notes payable to a stockholder of $8,000,000, and the trade accounts payable as of July 17, 2001 of $4,705,661, have been reclassified to a separate line item on the balance sheet. The following statement of cash flows for the nine months ended September 30, 2001 was prepared under the direct method: Easyriders, Inc. Statement of Cash Flows For the Nine Months Ended September 30, 2001

Effective July 17, 2001, the American Stock Exchange ("AMEX") temporarily suspended trading in the Company's common stock, pending further developments in the Chapter 11 cases. This suspension was implemented on an informal basis. AMEX has taken no formal action with respect to the de-listing of the Company's securities. 2. LONG-TERM DEBT The Nomura Indebtedness - In November of 2000, Nomura asserted that the Company was in default with respect to numerous non-financial matters based on various negative covenants in the Nomura Credit Agreement. Management took issue with each of these charges, and in good faith believed that no events of default had occurred. The Nomura Indebtedness, approximately $21.0 million, became due and payable on September 23, 2001. In view of the Company's anticipated inability to repay the entire principal on such date, and Nomura's unwillingness to accept a lesser amount, or to extend the maturity date, in or about May 2001, management began discussing with Nomura the possibility of filing for Chapter 11 relief, which led to protracted negotiations concerning a Cash Collateral Stipulation (the "First CCS"). The First CCS was based upon a detailed budget which Nomura reviewed and ultimately 7 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- approved, subject to reserving all of its rights under the Nomura Credit Agreement (the "First CCS Budget"). Easyriders, Inc. and Paisano Publications filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on July 17, 2001, and the First CCS was formally approved by the Bankruptcy Court on an interim basis at an interim hearing held on July 20, 2001, pending a final hearing to be held on August 21, 2001. Between the time of the interim hearing and the final hearing, an Official Committee of Unsecured Creditors (the "OCC") was formed to represent the interests of the unsecured creditors. Prior to the final hearing, Easyriders, Inc., Paisano Publications, the OCC and Nomura entered into a cash collateral stipulation (the "Second CCS") which modified the terms of the First CCS and which provided for the Company to continue to pay expenses in accordance with an agreed upon budget (the "Second CCS Budget") through October 31, 2001. In accordance with the First CCS, the First CCS Budget, the Second CCS and the Second CCS Budget, the Company thereafter made payments to Nomura (with no agreement as to the application of such payments) computed in an amount equal to Nomura's pre-Chapter 11 interest (the "Computed Payments"), in the full amount thereof, for the months of May, June, July, August and September, 2001, as follows: Month Amount of Computed Payment ----- --------------------------

The First CCS remained in effect until August 31, 2001. Pursuant to the terms of the First CCS, in addition to the payments set forth immediately above, the Company made an "excess cash flow payment" in the amount of $23,699 to Nomura for the month of July, 2001. Pursuant to the terms of the Second CCS, the Company is required to deposit all of their "Net Income" (as defined in the Second CCS) after payment of the amounts to Nomura set forth above into a segregated bank account (the "Blocked Account"). At a hearing held on October 24, 2001, the Bankruptcy Court granted the Company's motion for authority to continue using cash collateral (the "CCM") through February 28, 2002 to pay expenses in accordance with the budget attached to the CCM (the "CCM Budget"). At the hearing held on October 24, 2001, the Bankruptcy Court also ordered the Company to stop making any further payments to Nomura and to deposit the payments that the Company would otherwise have made to Nomura into the Blocked Account. The Siena Loan - On April 13, 2000, Mr. Martin and Mr. Teresi each paid to Siena the sum of $137,500 and assumed the position of Siena with respect to the Siena Loan, with some modifications to the terms. For the quarter ended March 31, 2001, the Company did not possess the resources to pay off this $275,000 loan from Messrs. Teresi and Martin. As a result, as provided under the modified terms, through March 13, 2001 an additional 225,000 warrants vested to each of Mr. Martin and Mr. Teresi and the fair value of the warrants, aggregating $100,500, was recorded as interest expense. Effective March 30, 2001, in connection with the Martin Unwind transaction (see Note 4 - Stockholders' Deficit), Mr. Teresi purchased Mr. Martin's one- half interest in the Siena Loan, and all warrants vested thereunder, for cash in the amount of $137,500. 8 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- Concurrently, in an amendment to the terms of the loan effective April 1, 2001, Mr. Teresi agreed to relinquish his right to receive additional warrants. 3. REDEEMABLE COMMON STOCK On February 1, 2001, to resolve a dispute over legal fees and expenses, the Company entered into a settlement agreement with a law firm (the "Firm") which had provided litigation defense services for total consideration of approximately $750,000. The settlement included (a) the delivery of a promissory note for $250,000, which bears interest at the rate of 10% per annum and was due and payable in full on April 30, 2001; and (b) the issuance of 500,000 shares of Easyriders, Inc, common stock (the "Issued Shares"). As of September 30, 2001, a balance of $50,000 plus accrued interest remained outstanding under the promissory note. Under the terms of the settlement agreement, on or after December 1, 2002, the Firm has the right (a "put option") to cause Easyriders to purchase any or all of the Issued Shares then held by the Firm at a price of $1.00 per share. As a result of the put option held by the Firm, the mandatory redemption value of $500,000 has been classified as redeemable common stock. The fair market value of the 500,000 shares issued under this agreement approximated $155,000 on the settlement date, or $0.31 per share. 4. STOCKHOLDERS' DEFICIT Related-Party Receivable from the sale of Stock - Shortly after the El Paso Transaction, and as a consequence thereof, the Board of Directors and the Company's Chairman, John Martin, began negotiating the terms and conditions of a transaction which has become known as the "Martin Unwind," pursuant to which Mr. Martin would resign as Chairman. Such negotiations concluded on March 1, 2001, when the Company and Mr. Martin entered into a Settlement Agreement (the "Martin Settlement"). Concurrently, Mr. Martin and the Company's principal shareholder and a director, Joseph Teresi, entered into a separate agreement concerning the purchase by Mr. Teresi of certain assets of Mr. Martin (the "Martin Asset Purchase"). These two transactions affected (a) Mr. Martin's employment agreement with the Company (the "Martin Employment Agreement"), (b) the Company's 1998 Executive Incentive Compensation Plan (the "Compensation Plan"), (c) a limited-recourse promissory note in the principal amount of $5,000,000 owed by the Company to Mr. Teresi (the "Teresi Note"), which is secured by a full-recourse promissory note in the principal amount of $5,000,000 owed by Mr. Martin to the Company (the "Martin Mirror Note"), (d) a promissory note in the principal sum of $2,300,000 owed by Mr. Martin to the Company (the "Martin Note"), (e) 6,000,000 shares of the Company's common stock, of which 2,395,823 were acquired by Martin through the issuance of the Martin Mirror Note and the Martin Note, and (f) a promissory note in the principal sum of $275,000 originally owed by the Company to Siena Capital Partners, LLC, (the "Siena Note"), which note was subsequently sold to Mr. Martin and Mr. Teresi, each as to a one-half interest. Pursuant to the Martin Settlement and the Martin Asset Purchase: . Mr. Martin resigned as a director and Chairman of the Board, effective March 1, 2001. Concurrently, the other designated directors, William Prather, Wayne Knyal and Daniel Gallery, also resigned. 9 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- . Mr. Martin agreed to offset all amounts due to him from the Company, to waive future entitlements to receive salary payments under the Martin Employment Agreement, and to waive the right to receive accrued and future bonus payments under the Compensation Plan. . The Company canceled the Martin Mirror Note and reduced the balance due under the Martin Note to $1,200,000 (the "Adjusted Balance"). During the year ended December 31, 2000, the Company wrote-off $5.1 million of the Martin Mirror Note. . Effective March 30, 2001, Mr. Martin paid the Adjusted Balance to the Company, through (a) the surrender to the Company, for cancellation and retirement, of 4.5 million shares of the Company's common stock held by him (valued at $0.20 per share, or $900,000), and payment of $300,000 in cash. . Effective March 30, 2001, Mr. Teresi agreed to the cancellation of the Martin Mirror Note and as to the Teresi Note, Mr. Martin provided Mr. Teresi with a limited personal guarantee up to $3,000,000. . Effective March 30, 2001, Mr. Teresi purchased from Mr. Martin, (a) 1,500,000 shares of the Company's common stock held by Mr. Martin for cash in the amount of $300,000, and (b) Mr. Martin's one-half interest in the Siena Note, and all warrants vested thereunder, for cash in the amount of $137,500. Common Stock Issued for Services - On April 17, 2001, the Company issued 30,000 shares of Easyriders, Inc. common stock to two members of the Board of Directors of the Company as compensation for serving as chairmen of board committees. The fair value of the stock, $6,000, was recorded as compensation expense. Stock Issued to Settle Litigation - On July 3, 2001, the Company issued 125,000 shares of Easyriders, Inc. common stock in settlement of a dispute with a former employee. Settlement expense was recognized in an amount equal to $58,750, the fair market value of such shares on the date of issuance. Stock Option Grants - During the nine months ended September 30, 2001, pursuant to the formula grant provision under the Company's 1998 Executive Incentive Compensation Plan, the Company granted 45,000 options to non- employee directors of the Company. SFAS No. 123, Accounting for Stock- Based Compensation, encourages but does not require the Company to record compensation cost for employee stock option grants. The Company has chosen to continue to account for employee option grants using Accounting Principles Board Opinion No. 25. No compensation expense has been recognized for employee stock option grants. 5. LONG-TERM LICENSE AGREEMENT Wholesale Product Sales and License Agreement - Effective March 28, 2001, the Company, through its subsidiaries Paisano Publications, Inc. and Easyriders Licensing, Inc. entered into a long-term license agreement (the "Products Agreement") with Southern Steel Sportswear, Inc. 10 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- ("SSS"), an affiliate of Action Promotions, Inc., of Ormond Beach, Florida ("API"), in connection with the Company's wholesale products division. The Company has previously reported that in March 2000, it entered into a long- term license agreement with API, in connection with the activities of its subsidiary, Easyriders Events (the "Events Transaction"). Pursuant to the Events Transaction, API acquired a merchandise purchase credit which as of March 28, 2001 amounted to $1,360,195 (the "API Credit"). Under the Products Agreement, the Company has outsourced to SSS all activities pertaining to the design, manufacture, warehousing, shipping and fulfillment of orders in connection with the sale of Easyriders-branded apparel and related merchandise to its network of retail stores, each of which (an "Easyriders Store") conducts business as "Easyriders of _____" pursuant to a written license agreement, and through other retail motorcycle- oriented stores. (See "Information about Easyriders Licensing," herein.) The Products Agreement is for a term of 10 years, with options to renew for two additional 10-year terms. Pursuant to the Products Agreement, the Company retains control over all other channels of distribution, including direct sales via its Roadware catalog and Internet Web site, and licensing of product opportunities to independent third parties (the "Retail Channel"). The Products Agreement provides for an initial product inventory purchase of $760,195, and the purchase of delivery and transition services, licensing rights, customer lists, promotional support and related goods and services, all valued at $600,000. The total of these figures, $1,360,195 was paid by SSS via cancellation of the API Credit. During the quarter ended March 31, 2001, the Company recognized approximately $585,000 of revenues from products sold and $500,000 from services rendered in relation to the delivery of products, transition support services, customer lists, and promotional support. During the quarter ended June 30, 2001, the Company recognized an additional $175,000 of revenues from products shipped. The remaining balance of $100,000, less accumulated amortization calculated using the straight-line method over the license period of 10 years, is included in deferred revenues on the accompanying consolidated balance sheet. 6. BUSINESS SEGMENTS Information by Operating Segment - Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Easyriders, Inc. chief operating decision-making group is comprised of the chief executive officer and the officers who report to him directly. Easyriders Inc. has four reportable segments: publishing, goods and services, franchising/licensing, and other events and operations. The publishing segment includes magazine and catalog publishing and other operations. The trade goods and services segment distributes motorcycle apparel and other related goods to both intermediate and end-users and offers motorcycle repair and services through a formerly owned Company store. The franchising/licensing segment includes the franchising/licensing of Easyriders motorcycle stores for distribution of equipment and apparel. The other events and operations segment includes the coordination and sponsorship of motorcycle related events and operations. 11 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) -------------------------------------------------------------------------------- Easyriders, Inc. evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. (The Company utilizes the other events and operations segment as a venue for increased exposure for publication sales.) The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The financial results from continuing operations for Easyriders, Inc.'s four operating segments have been prepared on a basis which is consistent with the manner in which Easyriders, Inc.'s management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. In this regard, certain common expenses have been allocated among segments less precisely than would be required for stand alone financial information prepared in accordance with generally accepted accounting principles. Revenue attributed to geographic areas is based on customer location.

A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows: 12 EASYRIDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (unaudited) --------------------------------------------------------------------------------

Revenues concerning principal geographic areas are as follows based on customer location:

The Company's foreign operations consist primarily of international newsstand sales and mail-order product sales. The Company does not have any identifiable assets attributable to these foreign activities and does not separately identify any expenses relating specifically to foreign activities. Therefore, income before taxes and net income associated with foreign activities is not presented. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and related Notes thereto. Overview Easyriders is a corporation established under the laws of the state of Delaware on May 13, 1998. Easyriders currently derives substantially all of its revenues from Paisano Publications, having sold all of its interests in El Paso in October 2000. On September 23, 1998, Easyriders consummated a series of transactions (the "Reorganization") comprised of the following: (a) the acquisition by Easyriders from Joseph Teresi of all of the outstanding common stock of Paisano Publications and certain affiliated corporations (the "Paisano Companies"), engaged at the time in (i) publishing special-interest magazines relating primarily to American-made "V-Twin" motorcycles and tattoo art, (ii) selling branded motorcycle apparel and accessories through a mail-order catalogue, events and franchise stores, (iii) producing motorcycle and tattoo-related events, and franchising retail stores to market its branded motorcycle apparel and accessories; (b) the acquisition by Easyriders of all of the outstanding membership interests of El Paso, which at the time was engaged in the operation of four restaurants under the name "El Paso Bar-B-Que"; and (c) the merger (the "Merger") of a subsidiary of Easyriders with and into Newriders, Inc., a Nevada corporation ("Newriders"). As a result of the Merger (i) each two shares of Newriders common stock, par value $.01 per share (the "Newriders Common Stock") were exchanged for one share of Easyriders common stock, par value $.001 per share ("Easyriders Common Stock"), and the shareholders of Newriders immediately prior to the Merger became stockholders of Easyriders, (ii) all of the outstanding options, warrants and other convertible securities exercisable for or convertible into Newriders Common Stock were exchanged for the right to purchase or convert into one-half the number of shares of Easyriders Common Stock at an exercise price or conversion ratio per share equal to two times the exercise price or conversion ratio provided for in the stock option, warrant or other agreements evidencing such options, warrants or other convertible securities, and (iii) Newriders, the Paisano Companies and El Paso became wholly-owned subsidiaries of Easyriders. The Merger was accounted for as a combination of entities under common control, similar to a pooling of interest. Therefore, the historical financial statements represent the combined financial statements of the Company and Newriders. The acquisitions of the Paisano Companies and El Paso were accounted for as a purchase. The acquisition of the Paisano Companies had, and will continue to have, a material impact on the Company's financial statements; accordingly, current and future financial statements may not be directly comparable to the Company's historical financial statements. In future periods, the amortization of goodwill will significantly effect the Company's financial statements. 14 Use of EBITDA The following comparative discussion of the results of operations and financial condition of the Company includes, among other factors, an analysis of changes in the operating income of the business segments before interest expense, taxes, depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the Paisano Companies of significant amounts of amortization of intangible assets and interest expense recognized through the Reorganization. Further, the Company has added back non-cash charges consisting of stock issuance expenses to derive an adjusted EBITDA ("Adjusted EBITDA"). Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of the Company and its subsidiaries, and when used in comparison to debt levels or the coverage of interest expense as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States of America. Also, EBITDA, as calculated by the Company, may not be comparable to similarly titled measures used by other companies. 15 Results of Operations The following table sets forth certain operating data for Easyriders for the three months ended September 30, 2001 and 2000:

16 The following table sets forth certain operating data for Easyriders for the nine months ended September 30, 2001 and 2000:

17 The following tables set forth the EBITDA calculations for Easyriders for the three and nine month periods ended September 30, 2001 and 2000, respectively:

18 Results of Operations of Easyriders Inc. and subsidiaries During the three months ended September 30, 2001, the Company generated a net loss of $624,511, reflecting an improvement in results of $1,197,917, or 66%, when compared with the net loss of $1,822,428 for the three months ended September 30, 2000. The net income for the nine months ended September 30, 2001 was $391,717, reflecting an improvement of $9,079,095 when compared with the net loss of $8,687,378 for the same period in the prior year. The improvement for the three month period can be attributed to an improvement in gross margin of $679,418, a $396,249 reduction in operating expenses, and a $289,647 reduction in interest and other expenses and income taxes, offset by a $167,397 decrease in income from discontinued operations. The improvement for the nine month period can be attributed to an improvement in gross margin of $2,614,857, a $3,613,847 reduction in operating expenses, a $1,038,854 decrease in interest and other expenses and income taxes, and a $1,811,537 decrease in loss from discontinued operations. Net income from continuing operations improved $1,365,314, or 69%, for the three month periods from a net loss of $1,989,825 in 2000 to a net loss of $624,511 in 2001, and $7,267,558 for the nine month periods from a net loss of $6,875,841 in 2000 to net income of $391,717 in 2001. The operating results for both the three and nine month periods ended September 30, 2001 are burdened by the substantial costs of the Chapter 11 filings. Net of these expenses, which total $496,266 for both the three and nine month periods, the net loss generated for the quarter is reduced to $128,245, resulting in an improvement of $1,694,183, or 93%, when compared to the same quarter in the previous year. For the nine month period, net income before bankruptcy expenses increased to $887,983, reflecting an improvement of $9,575,361 when compared to the same period in the previous year. On October 5, 2000, the Company sold all of its interests in El Paso. The subsidiary is reflected as discontinued operations for both the three and nine month periods ended September 30, 2000 in the accompanying financial statements so that the periods presented are comparable. Net loss per share, both basic and diluted, improved $0.038 per share, or 59%, to $0.026 per share for the three months ended September 30, 2001, as compared to the net loss per share of $0.064 for the three months ended September 30, 2000. Basic net income per share for the nine month periods improved $0.342 per share from a net loss of $0.327 per share in 2000 to net income of $0.015 per share in 2001. Diluted net income per share for the nine month periods improved $0.341 per share from a net loss of $0.327 per share in 2000 to net income of $0.014 per share in 2001. Basic and diluted net loss per share from continuing operations improved $0.044 per share, or 63%, for the three month periods. Basic net income per share from continuing operations improved $0.274 per share for the nine month periods, while diluted net income per share from continuing operations improved $0.273 per share. Based on the results of operations net of bankruptcy expenses, basic net loss per share for the three month period ended September 30, 2001 improved to $0.005 per share, and basic net income per share for the nine month period then ended improved to $0.035 per share. The Company experienced positive EBITDA in the amount of $447,074 and $3,921,304 for the three and nine month periods ended September 30, 2001, respectively, compared with EBITDA of $351,658 and negative EBITDA of $1,646,506 for the three and nine month periods ended September 30, 2000, reflecting an improvement in EBITDA of $95,416, or 27%, for the three month periods, and an improvement in EBITDA of $5,567,810 for the nine month periods. Adjusted EBITDA reflects the add-back of non-cash charges related to stock issuance expenses of $6,721 and $202,305 for the three and nine month periods ended September 30, 2000, respectively. Stock issuance expense arise when shares are issued at a discount from the market price. There have been no stock issuance expenses in 2001. As a result, for the three and nine month periods ended September 30, 2000, the Company had adjusted EBITDA of $358,379 and adjusted negative EBITDA of $1,444,201, respectively, resulting in 19 improvements in adjusted EBITDA of $88,695, or 25%, for the three month periods, and $5,365,505 for the nine month periods. EBITDA from continuing operations was $447,074 and $3,921,304 for the three and nine month periods ended September 30, 2001, respectively, compared with negative EBITDA from continuing operations of $267,432 and $1,021,587 for the three and nine month periods ended September 30, 2000, reflecting an improvement in EBITDA from continuing operations of $714,506 for the three month periods, and an improvement in EBITDA from continuing operations of $4,942,891 for the nine month periods. Results of Operations: Paisano Companies The operating results of the Company for both the three and nine month periods ended September 30, 2001 and September 30, 2000 include the results for the Paisano Companies. The Paisano Companies' publishing segment includes sales generated from subscription sales, newsstand sales and advertising sales related to the Companies' special interest magazines. The related cost of sales includes direct costs related to the sales, consisting primarily of printing, paper, publication and distribution costs. The goods and services segment includes sales generated from the sale of apparel and other products through its mail- order catalogs, one retail store, and franchise/license programs. The related cost of sales includes the costs of the apparel and other products. The franchising/licensing segment includes sales generated through fees charged to the operating franchisees/licensees of the retail stores, which segment has no material related cost of sales. Through March 2000, the Paisano Companies' other segment primarily included Easyriders Events, Inc. (Events), which generated substantially all of its revenues from the sale of tickets to motorcycle rodeos, motorcycle shows, and tattoo shows. In March 2000, the Company licensed its rights to produce and manage these events. Since then, such revenues have been generated through royalties and license fees paid pursuant to this Events outsourcing transaction. Cost of sales for the other segment consists primarily of direct costs of promoting the events. The Paisano Companies' total sales decreased $35,050, or 1%, from $6,347,464 for the three months ended September 30, 2000 to $6,312,414 for the same three months in 2001. Total sales for the nine month periods decreased $482,670, or 2%, from $22,032,056 for the nine months ended September 30, 2000 to $21,549,386 for the same nine months in 2001. The decrease for the nine month periods can be substantially attributed to a combination of 1) reduced revenues from Easyriders of Columbus of $874,025 as a result of this store being sold in April 2000, 2) reduced revenues from Easyriders Events of $1,035,854 as a result of a restructuring in March 2000 under which a third party licensed the rights to produce and manage events and to sell event- specific merchandise, and 3) increased revenues from Paisano Publications of $1,427,259 resulting primarily from the recognition of a $500,000 in revenues from the products sold and services rendered under the terms of the licensing arrangement with SSS and the sale of $584,966 of merchandise to SSS. The Paisano Companies' gross margin increased $679,418, or 68%, from $997,357 for the three months ended September 30, 2000, to $1,676,775 for the three months ended September 30, 2001. For the nine month periods, gross margin increased $2,614,858, or 68%, from $3,858,250 in 2000 to $6,473,107 in 2001. As a percentage of sales, gross margin for the Paisano Companies increased from 16% to 27% for the three month periods, and from 18% to 30% for the nine month periods. The increase in gross margin for both the three and nine month periods can be attributed to 1) an increase in gross margin in the publishing segment of $473,142 and $1,649,884, respectively, primarily due to a combination of a) higher cover prices, and b) cost savings from reduced personnel, space rental, and travel, 2) an increase in gross margin of $160,507 and $1,194,468, respectively, in the goods and services segment, of which $500,000 of the increase for the nine month period is attributable to the SSS licensing agreement, and the remainder is the result of increased sales and decreased costs of personnel, space rent, 20 and travel, and 3) an increase in gross margin from the other operations segment of $45,769 for the three month periods substantially attributable to the reduction in licensing expenses incurred in the quarter ended September 2000 under a product licensing contract with an outside firm, and a decrease in gross margin in this segment of $229,494 for the nine month periods, primarily resulting from the outsourcing of our events division in March 2000. The Paisano Companies' income from operations improved $923,665, or 419%, from a loss of $220,699 for the three months ended September 30, 2000, to income of $702,966 for the three months ended September 30, 2001. The Paisano Companies' income from operations improved $4,676,908, or 587%, from a loss of $796,612 for the nine months ended September 30, 2000, to income of $3,880,297 for the nine months ended September 30, 2001. The improvement for the three month periods can be attributed to an improvement in gross margin of $679,418 combined with a decrease in operating expenses of $244,247. The improvement for the nine month periods can be attributed to an increase in gross margin of $2,614,858 combined with a decrease in operating expenses of $2,062,050. The decrease in operating expenses for both the three and nine month periods can be substantially attributed to the combination of 1) reduced goodwill amortization expense of $223,842 and $1,553,576, respectively, resulting from the combination of a) an $866,470 accelerated amortization of goodwill arising from the sale of Columbus in April 2000, and b) the impact of the $25M write-off of goodwill effected December 2000, 2) reduced expenses of $80,232 and $420,122, respectively, resulting from the closure of Franchising, 3) reduced expenses of $273,722 for the nine month period resulting from the closure of Columbus, 4) reduction in stock issuance expenses of $6,721 and $202,305, respectively, and 5) increased professional fees of $105,819 incurred during the three month period as a result of the Chapter 11 filings in July 2001. Expenses of the Paisano Companies not allocated to any segment amount to $105,819 and $174,142 for the three and nine months ended September 30, 2001, and $5,449 and $925,057 for the three and nine months ended September 30, 2000. The allocated expenses include payroll, promotion, and other general and administrative expenses specifically attributable to the business segments. The unallocated expenses represent legal and professional fees, expenses arising from the bankruptcy filings and other expenses which are not specifically attributable to a particular business segment. Payroll and related benefits for the Paisano Companies increased $31,269, or 11%, from $278,156 for the quarter ended September 30, 2000 to $309,425 for the same quarter in 2001, and decreased $31,339, or 4%, from $905,716 for the nine months ended September 30, 2000 to $874,377 for the same nine months in 2001. The increase for the three month periods can be primarily attributed to the hiring of inside counsel in December 2000. The decrease for the nine month periods is substantially attributable to efforts to reduce costs by decreasing staff size. Depreciation and amortization for the Paisano Companies for the quarters ended September 30, 2001 and 2000 totaled $316,066 and $545,255, respectively, and for the nine month periods ended September 30, 2001 and 2000 totaled $948,375 and $2,545,163, respectively, of which $236,550 and $709,650 for the three and nine months ended September 30, 2001, respectively, and $460,392 and $2,263,226 for the three and nine months ended in the prior year, respectively, relates to the amortization of the goodwill created out of the Paisano Companies' acquisition by the Company. The decrease in the amortization of goodwill, and in turn in the depreciation and amortization in total, can be substantially attributed to the recording of a $25 million reduction of the balance in goodwill as a result of impairment as of December 31, 2000. In addition, the amortization for the nine month period ended September 30, 2000 includes $866,470 of accelerated amortization of the goodwill attributed to Easyriders of Columbus, as such store was sold effective April 30, 2000. Interest expense for the Paisano Companies decreased $235,535, or 30%, from $785,705 for the quarter ended September 30, 2000 to $550,170 for the quarter ended September 30, 2001. For the nine 21 month periods ended September 30, 2000 and 2001, interest expense decreased $345,613, or 16%, from $2,195,552 to $1,849,939, respectively. These decreases are primarily attributable to decreases in the prime rate, which declined from an average of 9.1% for the nine month period ended September 30, 2000, to an average of 7.7% for the nine month period ended September 30, 2001. The net income for the Paisano Companies improved $1,153,672, or 115%, from a loss of $1,000,143 for the three months ended September 30, 2000 to income of $153,529 for the three months ended September 30, 2001. The net income for the nine month periods improved $5,895,769, or 155%, from a loss of $3,806,520 to income of $2,089,249. The improvement in net income for both the three and nine month periods can be primarily attributed to the results of operations for Paisano Publications, Inc. which improved by $1,077,629, or 117%, from a net loss of $923,987 to net income of $153,642 for the quarters ended September 30, 2000 and 2001, respectively, and improved results by $6,392,518, or 148%, from a net loss of $4,323,248 to net income of $2,069,270 for the nine month periods then ended. EBITDA for the three month periods improved by $688,472, from $331,293 for the three months ended September 30, 2000 to $1,019,765 for the three months ended September 30, 2001. EBITDA for the nine month periods improved by $3,955,470 from $940,471 for the nine months ended September 30, 2000 to $4,895,941 for the nine months ended September 30, 2001. The principal raw material used in the publishing operations of the Paisano Companies is paper. Paper costs represented approximately 17% and 18% of Paisano Publications' production, selling and other direct costs for the three months ended September 30, 2001 and 2000, respectively, and approximately 18% for both nine month periods then ended. Certain commodity grades of paper have shown considerable price volatility over the last decade. There can be no assurance that future fluctuations in paper prices will not have a material adverse effect on the Paisano Companies' results of operations or financial condition. The profitability of the Paisano Companies' publishing segment is also affected by the cost of postage and could be materially adversely affected if there is an increase in postal rates. No assurance can be given that the publishing segment can recoup paper or postal cost increases by passing them through to its advertisers and readers. In addition, future fluctuations in paper prices and/or postal rates could have a material effect on the results of operations and financial condition of the publishing segments. Liquidity and Capital Resources The Company's primary cash requirements are to fund the Company's operating costs (primarily paper, payroll and related expenses) and working capital needs (primarily accounts receivable, inventory, prepaid expenses and debt service). On September 30, 2001, the Company had positive working capital of $1.5 million. Cash provided by operating activities from continuing operations during the nine month period ended September 30, 2001 totaled approximately $0.6 million. The operating net income of $0.4 million was increased by several non-cash charges including $1.0 million for depreciation and amortization, $0.1 million for expenses settled with common stock, $0.1 million for non-cash interest expenses, and $0.2 million of amortization of debt issuance costs, and offset by $0.1 million of gains from the Martin Unwind transaction and the sale of fixed assets. Cash of $1.1 million was used for changes in operating accounts. Upon its acquisition by the Company, Paisano Publications obtained an aggregate of $22,000,000 in Nomura Indebtedness. This financing was comprised of a $17,000,000 senior term loan (the "Term 22 Loan") and a $5,000,000 revolving loan (the "Revolving Loan"). The proceeds from the Term Loan plus $3,500,000 of the Revolving Loan were used to repay certain promissory notes issued to the shareholder of the Paisano Companies in conjunction with the Paisano Acquisition and to pay certain acquisition expenses. At September 30, 2001, there were no available borrowings under the Revolving Loan. The Nomura Indebtedness is guaranteed (the "Guarantees") by the Company and the Paisano Companies, other than Paisano Publications (the "Guarantors"). The Nomura Indebtedness bears interest at an annual rate equal to the prime rate of the Lender from time to time plus 1.85%, payable monthly. The Nomura Indebtedness and the Guarantees are secured by a first priority security interest in substantially all of the tangible and intangible assets (owned or hereafter acquired) of the Company and the Paisano Companies, including all of the capital stock or equity interests of the Paisano Companies and Newriders. The Nomura Indebtedness and the Guarantees constitute the primary secured indebtedness of Paisano Publications and Guarantors. The Nomura Indebtedness, approximately $21.0 million, became due and payable on September 23, 2001. In view of the Company's anticipated inability to repay the entire principal on such date, and Nomura's unwillingness to accept a lesser amount, or to extend the maturity date, in or about May, 2001, management began discussing with Nomura the possibility of filing for Chapter 11 relief, which led to protracted negotiations concerning a Cash Collateral Stipulation (the "First CCS"). The First CCS was based upon a detailed budget which Nomura reviewed and ultimately approved, subject to reserving all of its rights under the Nomura Credit Agreement (the "First CCS Budget"). Easyriders, Inc. and Paisano Publications filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on July 17, 2001, and the First CCS was formally approved by the Bankruptcy Court on an interim basis at an interim hearing held on July 20, 2001, pending a final hearing to be held on August 21, 2001. Between the time of the interim hearing and the final hearing, an Official Committee of Unsecured Creditors (the "OCC") was formed to represent the interests of the unsecured creditors. Prior to the final hearing, Easyriders, Inc., Paisano Publications, the OCC and Nomura entered into a cash collateral stipulation (the "Second CCS") which modified the terms of the First CCS and which provided for the Company to continue to pay expenses in accordance with an agreed upon budget (the "Second CCS Budget") through October 31, 2001. In accordance with the First CCS, the First CCS Budget, the Second CCS and the Second CCS Budget, the Company thereafter made payments to Nomura (with no agreement as to the application of such payments) computed in an amount equal to Nomura's pre-Chapter 11 interest (the "Computed Payments"), in the full amount thereof, for the months of May, June, July, August and September, 2001. The First CCS remained in effect until August 31, 2001. Pursuant to the terms of the First CCS, in addition to the payments set forth immediately above, the Company made an "excess cash flow payment" in the amount of $23,699 to Nomura for the month of July, 2001. Pursuant to the terms of the Second CCS, the Company is required to deposit all of their "Net Income" (as defined in the Second CCS) after payment of the amounts to Nomura set forth above into a segregated bank account (the "Blocked Account"). At a hearing held on October 24, 2001, the Bankruptcy Court granted the Company's motion for authority to continue using cash collateral (the "CCM") through February 28, 2002 to pay expenses in accordance with the budget attached to the CCM. At the hearing held on October 24, 2001, the Bankruptcy Court also ordered the Company to stop making any further payments to Nomura and to deposit the payments that the Company would otherwise have made to Nomura into the Blocked Account. Prior to its filing for Chapter 11 relief on July 17, 2001, the Company made regular monthly interest payments to Nomura in respect of the Nomura Indebtedness. After its bankruptcy filing, in accordance with orders of the Bankruptcy Court, the Company continued to make such payments to 23 Nomura through October 31, 2001 (the "Post-Petition Payments"). No agreement was made between the parties and no order of the Bankruptcy Court was issued as to the application of any of the Post-Petition Payments made by the Debtors to Nomura. Under the Bankruptcy Code, if the value of Nomura's collateral is less than the amount of Nomura's "allowed claim," Nomura is not entitled to any post- bankruptcy interest and Nomura's allowed claim is bifurcated into an allowed secured claim equal to the value of Nomura's collateral and an allowed unsecured claim equal to the balance of Nomura's allowed claim. The Company believes that the funds used to make the Post-Petition Payments to Nomura was not part of Nomura's collateral and therefore should reduce the amount of Nomura's allowed secured claim on a dollar-for-dollar basis. No determination has been made by the Bankruptcy Court and no agreement has been reached between the parties in this regard. The Company has filed a motion with the Bankruptcy Court to determine the value of Nomura's allowed secured claim. A status conference on that motion is scheduled to be held on November 21, 2001. The Company anticipates that the Bankruptcy Court will provide the parties with a trial date to litigate this issue at the November 21, 2001 status conference. The Company is also in the process of preparing a complaint to file in the Bankruptcy Court to determine to what extent, if any, the Company's cash constitutes part of Nomura's collateral. Until the value of Nomura's allowed secured claim and the extent to which, if any, the Company's cash constitutes part of Nomura's collateral is determined by the Bankruptcy Court, the Company will continue to report all Post-Petition Payments made to Nomura as interest, and if a determination is made at some later date that such Post-Petition Payments to Nomura do not constitute interest to Nomura, the Company will show such adjustment in its financial reports. Pursuant to the terms of the First CCS, the Company engaged the Westlake Village, CA-based investment banking firm of Murphy Noell Capital ("MNC") to provide financial advisory and investment banking services to the Company. At a hearing held on September 25, 2001, the Bankruptcy Court approved the Company's employment of MNC for such purposes effective as of the date of the Company' bankruptcy filings and continuing through October 30, 2001, without prejudice to the Company's right to seek a further order of the Bankruptcy Court to extend the term of the Company's employment of MNC beyond October 30, 2001. Pursuant to the terms of its engagement, MNC prepared a presentation book on the Company, solicited prospective replacement lenders, prospective buyers of the Company's assets, and financial backers of a plan of reorganization, and MNC provided financial advisory services to the Company in connection with the pending Chapter 11 bankruptcy cases. At a hearing held on October 30, 2001, the Company requested the Bankruptcy Court to approve the Company's continued employment of MNC beyond October 30, 2001. However, both Nomura and the OCC opposed any further employment by the Company of MNC, and the Bankruptcy Court denied the Company's motion to continue the Company's employment of MNC beyond October 30, 2001. During the pendency of the Chapter 11 cases, Nomura is prevented from foreclosing on its collateral pursuant to the automatic stay provisions of the Bankruptcy Code absent a Bankruptcy Court order to the contrary. November 14, 2001 was both the last day of the Company's exclusive period to file a Plan of Reorganization and the Bankruptcy Court imposed deadline for the Company to file a Plan of Reorganization. The Company recently filed a motion with the Bankruptcy Court seeking to extend both of these deadlines. A hearing on that motion was held on November 7, 2001 at which time the Bankruptcy Court denied the Company's motion to extend its exclusive period to file a Plan of Reorganization, terminated the Company's exclusivity periods, and extended the Bankruptcy Court imposed deadline for the Company to file a Plan of Reorganization from November 14, 2001 to January 18, 2002. By reason of the Court's ruling on November 7, 2001, other parties in interest are permitted to file a competing Plan of Reorganization. 24 The Nomura Credit Agreement sets forth (a) requirements for payments to Nomura out of Excess Cash Flow, and (b) conditions under which dividends can be paid and advances made by Paisano Publications to the Company out of Excess Cash Flow. These provisions have been superseded by the CCS and subsequent Bankruptcy Court orders, pursuant to which all expenses of the Company and Paisano Publications, on a consolidated basis, are being paid pursant to the a court-approved Budget. The Nomura Credit Agreement contains numerous operating and financial covenants, including, but not limited to, payment of dividends, limitations on indebtedness and the maintenance of minimum net worth, minimum working capital, interest coverage ratios and the achievement of cash flow measures. As of September 30, 2001, the Company was not in compliance with any of such financial covenants. In addition, as of March 1, 2001, the Company was not in compliance with certain technical compliance provisions of the Nomura Credit Agreement. In connection with the Company's bankruptcy filing, the Bankruptcy Court order of October 24, 2001 presently governs the Company's payment and performance obligations to Nomura. In connection with the Paisano Acquisition, the Company issued Subordinated Seller Notes in the aggregate amount of $13,000,000 to Joseph Teresi, the sole shareholder of the Paisano Companies prior to the Paisano Acquisition. The Subordinated Seller Notes consisted of a subordinated promissory note in the amount of $5,000,000, a limited recourse subordinated promissory note in the amount of $5,000,000 secured by the Martin Mirror Note (as defined in the applicable instruments) and a short-term subordinated promissory note in the amount of $3,000,000. The first two notes (the "Subordinated Notes") bear interest at an annual rate that escalates from 6% to 10% and may be extended for an additional five years. The remaining $3,000,000 (the "Short Term Note") was initially issued as a 90 day note that bears interest at an annual rate of 10%. On April 3, 2000, the then remaining principal and interest balance on the $5,000,000 subordinated promissory note was exchanged for 3,356,710 shares of Easyriders, Inc. Common Stock issued to Mr. Teresi. Mr. Teresi has agreed to defer collection of current interest on the remaining $8,000,000 of the Subordinated Seller Notes until after March 2002. In October 1999, Paisano Publications issued a $275,000 increasing rate secured promissory note to an investment partnership, Siena Capital Partners, L.P. This loan (the "Siena Loan") is subordinate to the Nomura Indebtedness. The loan bears interest at a rate of 20% per annum (increasing by 1% monthly beginning April 14, 2000), and is due and payable with accrued interest on October 14, 2000. Warrants to purchase 100,000 shares of the Common Stock of the Company were issued with an exercise price of $0.01 per share. If the Siena Loan has been paid off in its entirety by April 13, 2000, the warrants become null and void. In addition, if the balance is not paid in full by July 13, 2000, the Company must issue warrants to purchase an additional 300,000 shares of the Common Stock of the Company, and if the balance is not paid in full by October 13, 2000, the Company must issue warrants to purchase an additional 100,000 shares of the Common Stock of the Company. Thereafter, until the loan is paid off in full, the Company must issue warrants to purchase 150,000 shares of the Common Stock of the Company on the 13th day of each month. As of April 13, 2000, the Company did not possess the resources to pay off the Siena Loan. However, John Martin and Joseph Teresi were granted a right of first refusal in connection with any assignment of the Siena Loan. Based on this right, the Company pursued negotiations with Mr. Teresi and Mr. Martin concerning their assumption of the Siena Loan upon terms more favorable to the Company. These negotiations were successful and on April 13, 2000, Mr. Martin and Mr. Teresi each paid to Siena the sum of $137,500 and assumed the position of Siena with respect to the Siena Loan. Concurrently, the first 100,000 warrants vested, and Mr. Martin and Mr. Teresi agreed to make the following modifications to the Siena Loan terms: 25 . The interest rate was reduced from 20% per annum to 13% per annum. . Provided the Siena Loan is paid off by December 31, 2000, twenty percent (20%) of all warrants vested by and through such date will be surrendered. As of December 31, 2000, the Company did not possess the resources to pay off the Siena Loan. As a result, as provided under the modified terms, an additional 350,000 warrants vested to each of Mr. Martin and Mr. Teresi. In addition, as of March 13, 2001, the Company still did not possess the resources to pay off the Siena Loan and, as a result, an additional 225,000 warrants vested to each of Mr. Martin and Mr. Teresi. As of March 30, 2001, Mr. Teresi aquired all of Mr. Martin's interest in the Siena Loan, and all warrants vested up to such date. Concurrently, in an amendment to the terms of the loan, Mr. Teresi relinquished the right to receive additional warrants. On October 5, 2000, the Company sold all interests in El Paso Bar-B-Que Company to a newly formed subsidiary of Culinary Holdings, Inc. for a combination of cash in the amount of $4,000,000 and the assumption of liabilities in the amount of approximately $6,700,000. In accordance with the terms of the sale transaction, the Company forgave a net intercompany receivable of $782,753. In addition, Culinary Holdings assumed $1,000,000 of convertible debentures held by a director of the Company, who thereupon released the Company from any obligation in connection therewith. The Company, as it is currently configured, is presently able to meet its liquidity obligations, by reason of the protections afforded by Chapter 11 and the Bankruptcy Court order of October 24, 2001 concerning continued use of cash collateral. If management is successful in formulating a Plan of Reorganization which is confirmed by the Bankruptcy Court, it is anticipated that upon emerging from Chapter 11 the Company will continue to be able to meet its liquidity obligations, based on a restructured balance sheet. A sale of the Company's assets is also a possible outcome of the Company's Chapter 11 case. In any event, the Company cannot now predict the outcome of the Chapter 11 cases. Forward-Looking Information and Certain Factors Certain statements in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and in oral statements made by or with the approval of an authorized executive officer constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, risks associated with future capital needs, management of growth, availability of adequate financing, integration of business operations, concentration of stock ownership, restrictions imposed on the Company by the Lender, the magazine publishing and restaurant business, paper, and other raw material prices and other factors discussed herein, in the Company's Prospectus/Proxy Statement on Form S-4 dated September 8, 1998 and other filings submitted to the Securities and Exchange Commission. Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 was initially effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of 26 FASB Statement No. 133, was issued which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company does not believe that the adoption of this new standard will have a material impact on its financial position or results of operations. In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which became effective December 2000. SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The application of this SAB did not have a material effect on the Company's revenue recognition policies. In March 2000, the Financial Accounting Standards Board (FASB) issued Interpretation No. 44 of Accounting Principles Board Opinion No. 25 Accounting for Certain Transactions Involving Stock Compensation, which, among other things, addressed accounting consequences of a modification that reduces the exercise price of a fixed stock option award (otherwise known as repricing). If the exercise price of a fixed stock option award is reduced, the award must be accounted for as variable stock option plan from the date of the modification to the date the award is exercised, is forfeited, or expires unexercised. The exercise price of an option award has been reduced if the fair value of the consideration required to be paid by the grantee upon exercise is less than or potentially less than the fair value of the consideration that was required to be paid pursuant to the award's original terms. The requirements about modifications to fixed stock option awards that directly or indirectly reduce the exercise price of an award apply to modifications made after December 15, 1998, and will be applied prospectively as of July 1, 2000. The adoption of this interpretation did not impact the Company's financial statements. In January 2001, the Financial Accounting Standards Board Emerging Issues Task Force issued EITF 00-27 effective for convertible debt instruments issued after November 16, 2000. This pronouncement requires the use of the intrinsic value method for recognition of the detachable and imbedded equity features included with indebtedness, and requires amortization of the amount associated with the convertibility feature over the life of the debt instrument rather than the period for which the instrument first becomes convertible. Inasmuch as all debt instruments that were entered into prior to November 16, 2000 and all of the debt discount relating to the beneficial conversion feature was previously recognized as expense in accordance with EITF 98-5, there is no impact on these financial statements. This EITF 00-27, could impact future financial statements, should the Company enter into such agreements. In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that any business combinations initiated after June 30, 2001 be accounted for as a purchase; therefore, eliminating the pooling-of-interest method defined in APB 16. The statement is effective for any business combination initiated after June 30, 2001 and shall apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations since the Company has not participated in such activities covered under this pronouncement. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. The Company is evaluating any accounting effect, if any, arising from the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial position or results of operations. 27 In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held- for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company is exposed to a variety of risks, including paper price volatility, postal rate increases and changes in interest rates affecting the cost of its debt. Paper Price Volatility A primary component of the Company's cost of sales in the magazine publishing segment is the cost of paper. Consequently, increases in paper prices can adversely impact the Company results of operations. Interest Rates The Company is subject to certain interest rate risk related to the Senior Loans. The Senior Loans matured on September 23, 2001 and bear interest at an annual rate equal to the prime rate of the Lender plus 1.85% payable monthly. Excluding any effect from the Default Rate of interest asserted by Nomura, the interest rate on the balance of $20,968,002 outstanding on September 30, 2001 was 7.85 %. An increase in interest rates of 1% would result in an increase in interest expense of approximately $210,000. The Company's remaining long-term debt has fixed interest rates and therefore the Company does not believe an increase in interest rates would have a material impact on the Company's consolidated financial statements. Notwithstanding the foregoing, as noted above under Part I, Item 1, Footnote 1 under "Basis of Presentation," post-petition payments to Nomura may not ultimately be deemed to be "interest." 28 PART II -- OTHER INFORMATION ---------------------------- Item 1. Legal Proceedings. The Hatcher Litigation On April 28, 2000, an action was filed in the U.S District court for the Central District of California (Los Angeles) by Leon Hatcher, Richard Stafford and entities controlled by them, naming as defendants the Company, Newriders, Paisano Publications, El Paso, Easyriders Franchising, Easyriders Licensing, Easyriders of Ohio, and the following current or former officers and/or directors of the Company (the "Non-Debtor Defendants"): John Martin, William Prather, Joseph Teresi, J. Robert Fabregas, William Nordstrom, Robert Davis, Ellen Meagher, Joseph Jacobs, Daniel Gallery, Wayne Knyal, and Grady Pfeiffer (the "Hatcher Action"). The complaint also named as a defendant James E. Salven, Trustee in Bankruptcy in connection with the Pierce Action, previously disclosed by the Company. The Hatcher Action alleged wrongful conduct on the part of the named defendants in connection with Mr. Hatcher's past and current relationship with Easyriders and Newriders, including: (a) his role and ownership position in Newriders prior to the Reorganization, (b) his role and participation in the Reorganization, (c) his acquisition of shares of Easyriders as a consequence of the Reorganization, (d) transactions involving the shares held by Mr. Hatcher in Newriders and Easyriders, (e) the Company's Events business and his role therein, (f) the Company's event merchandise business and Mr. Hatcher's role therein, (g) the use and possession by Mr. Hatcher of property and vehicles used in connection with the Events and event merchandise business of the Company, (h) the acquisition by Mr. Hatcher and Mr. Stafford of franchises to operate retail stores under the "Easyriders" name pursuant to various written agreements, and (i) the termination of such franchise agreements by the Company in April, 2000. The complaint asserted wrongful conduct by defendants in connection with the foregoing under a wide range of legal theories, including violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the California Corporations Code, Federal Trade Commission Disclosure Rules, the California Franchise Investment Law Laws and the Federal RICO statute (18 U.S.C. sections 1961-1968); breach of fiduciary responsibilities; fraud, negligent misrepresentation, breach of contract, infliction of emotional distress, interference with contracts and business relations, unfair competition and defamation. Certain of the causes of action were presented as derivative claims, brought on behalf of Easyriders and/or Newriders against one or more individual defendants. The action sought general and compensatory damages in amounts to be proven at the time of trial, contract damages of $450,000, punitive damages, injunctive and declaratory relief, and the appointment of a receiver. On July 31, 2000, the U.S. District Court in Los Angeles issued an order dismissing the Hatcher Action in its entirety, based on a motion brought by defendants challenging the complaint as being in violation of applicable rules requiring that complaints in Federal court set forth a "short and plain" statement of the basis for relief, and that allegations of fraud be specific as to all details. The order granted plaintiffs 30 days to file a new complaint, stating that any amended complaint "must be a short, plain statement which is concise, simple and direct in compliance with Rule 8 (a). Furthermore, allegations of fraud, misrepresentation and securities fraud must be alleged with particularity in compliance with Rule 9." Subsequently, Plaintiff has filed two amended complaints which the Company has challenged for similar reasons. On January 29, 2001, the court heard the Company's motion to dismiss the plaintiffs' Second Amended Complaint (the "SAC"). On July 23, 2001, the court issued a lengthy, detailed ruling in which it specified substantially all of the pleading defects affecting the SAC, and granted defendants' motion in the entirety. Except for certain securities law claims dismissed with 29 prejudice, the ruling granted plaintiffs 30 days, until August 24, 2001 to make "one final attempt" to file a Third Amended Complaint ("TAC"), indicating that the court will dismiss the plaintiffs' claims with prejudice if their TAC ---- -------------- suffers from any of same deficiencies cited herein." On August 13 and August 15, Hatcher's counsel filed ex parte applications seeking additional time to file the TAC, both of which failed to meet court guidelines and were rejected. As to the latter, Hatcher's counsel also failed to give notice of the application to the Company's counsel. On August 31, 2001, Hatcher's counsel filed yet another ex parte application seeking 90 additional days to file the TAC. Hatcher's counsel failed to give notice of this application, and failed even to serve a copy on counsel for the Company. On September 25, 2001, the court granted this application and ordered that Hatcher could have an additional 90 days from the date of such ruling within which to file the TAC, or December 24, 2001. Lacking knowledge of the last two ex parte applications by Hatcher, the Company served notice of its intent to dismiss the action with prejudice on August 25, 2001 (as required by court rules), and on September 25, 2001 filed such motion to dismiss. The hearing date on this motion was later vacated in light of the court's order granting Hatcher additional time. The Company still believes it is entitled to a dismissal of the Hatcher Action with prejudice. Accordingly, and because of Hatcher's failure to give notice of the application which the court granted, the Company intends to pursue its motion to dismiss with prejudice via appropriate action to be taken shortly. If the Hatcher Action is not dismissed, the Company believes it has substantial defenses to any amended complaint plaintiff's may pursue or file in this action. In any event, in light of the Company's Chapter 11 filing, prosecution of the case against the Company is presently stayed pursuant to the automatic stay provisions of section 362 of the Bankruptcy Code. Technically, this stay does not apply to the individual defendants, although prosecution of the case against them may require plaintiffs to obtain certain procedural relief such as bifurcation of the cases against the Company and the Non-Debtor Defendants. Based on the current pleadings, the Company and its officers and directors are insured under a policy providing indemnification for damages arising from securities claims and the misconduct of its management, and have received confirmation from their insurance carrier ("D&O Carrier") that the Hatcher Action claims are covered by such policy. It is possible, however, that claims could still be asserted which are not covered by insurance. As to the Company, the outcome of this action will depend significantly on how the Company's Chapter 11 case proceeds. If plaintiffs pursue the case through a TAC which is not subsequently dismissed, the surviving claims against the Company would become part of the pool of general pre-petition unsecured debt. Unless the surviving claims are resolved through a negotiated settlement, they would be adjudicated through an adversary proceeding in the Bankruptcy Court or litigation in the existing forum. Regardless, in light of all of the foregoing considerations, the outcome of the Hatcher Action is not expected to be materially adverse to the Company. The Pierce Litigation The Company has previously reported on the legal action involving Rick Pierce, a former shareholder of Newriders, including (a) Mr. Pierce's Chapter 7 bankruptcy proceeding pending in the United States Bankruptcy Court, Eastern District of California, Fresno Division, Case No. 98-19101-A-11, which was commenced as an involuntary proceeding and then converted to a Chapter 11 case with the debtor, Rick Pierce, in possession, and (b) the Company's adversary proceeding against the Pierce Bankruptcy Estate and other parties who claim an interest in shares of the Company acquired through various transactions with Mr. Pierce. This action involves claims and counterclaims arising out of the 30 1998 Reorganization in which Mr. Pierce sought damages of at least $20 million. As a consequence of the previously-reported (a) settlement conference in September, 1999 before Judge Montali, (b) the arrest and indictment of Mr. Pierce on 29 counts of conspiracy, mail fraud and money laundering (c) conversion of the bankruptcy proceeding from Chapter 11 to Chapter 7, (d) dissolution of the creditor's committee and (e) appointment of a trustee to administer the bankruptcy estate (the "Trustee"), as well as the subsequent criminal conviction of Mr. Pierce on multiple felony counts, the Pierce Action has been relatively dormant for the past 14 months. During this period, the company pursued settlement discussions with the Trustee, James Salven, through his counsel, Bill Lee. In December 2000, the Trustee approved a settlement providing for dismissal of the Pierce Action in exchange for payment to the Pierce bankruptcy estate of 350,000 shares of the Company's common stock, representing the exact amount of shares due Mr. Pierce in accordance with his obligations in the Reorganization, plus an additional 20,000 shares. In this regard, a definitive settlement agreement was prepared and circulated, but just as negotiations to finalize the Settlement Agreement were coming to a close, Bill Lee was appointed to the bench, forcing James Salven to retain new counsel. For this purpose he selected Bruce Leichty, a Fresno attorney who previously had represented the Creditors Committee during the period that Pierce was a Chapter 11 Debtor-in-Possession. Mr. Leichty subsequently took the position that he would not sign it without substantial, substantive revision, including the payment of several hundred thousand dollars to the Piece bankruptcy estate. The District Court which has jurisdiction over this case has established a schedule for discovery and progress towards trial. However, in light of the Company's Chapter 11 filing, prosecution of the case against the Company was initially stayed pursuant to the automatic stay provisions of section 362 of the Bankruptcy Code. Technically, this stay does not apply to the individual defendants, although prosecution of the case against them may require plaintiffs to obtain certain procedural relief such as bifurcation the cases against the Company and the individual defendants in this action. On October 11, 2001, upon motion of Mr. Salven, the Bankruptcy Court granted Pierce relief from the automatic stay. Once such ruling becomes final, the litigation of the Pierce Action against all of the defendants, including the Company, is expected to resume in District Court. While the Company believes the Pierce Action is without merit, the exact outcome will depend significantly on how the Company's Chapter 11 case proceeds. The claims against the Company are part of the pool of general pre-petition unsecured debt. Unless these claims are resolved through a negotiated settlement, they would be adjudicated through an adversary proceeding in the Bankruptcy Court or litigation in the existing forum. Regardless, in light of all of the foregoing considerations, the outcome of the Pierce Action is not expected to be materially adverse to the Company. The Kaye, Scholer Litigation On April 19, 2000, the Company filed an action in Los Angeles County Superior Court against the law firm of Kaye, Scholer, Fierman, Hays & Handler, LLP, now known as Kaye Scholer LLP ("Kaye Scholer"), which represented Newriders, Inc. in the Reorganization of 1998 (the "Kaye Scholer Action"). The Kaye Scholer Action alleges that defendant, and the responsible attorneys individually, committed legal malpractice, rendered negligent advice and breached attorney-client fiduciary duties by failing to protect the Company's interests in connection with the indemnification agreement entered into by and between Newriders, as Buyer, and Paisano Publications, Inc., as Seller, in the Reorganization. The complaint alleges that as a consequence of such malpractice, the Company incurred costs in excess of $2.5 million in connection with the previously reported Steel Horses Arbitration, and seeks recovery of such sums, and other damages. In the action, Kaye Scholer has filed a cross- complaint seeking recovery of unpaid legal fees in the amount of approximately $100,000. Discovery in this action is now substantially complete, and the parties remain too far apart in their positions for meaningful settlement 31 discussions to take place at this time. Kaye Scholer's claim for unpaid legal fees has been stayed pursuant to the Company's filing for Chapter 11 relief, and this claim is now part of the Company's pool of pre-petition unsecured debt. The Company's claims against Kaye Scholer are an asset of the Chapter 11 estate, and have been pursued by the Company. On October 29, 2001 the Superior Court conducted a hearing on motions for summary judgment filed by Kaye Scholer. As a consequence of the Court's comments at the hearing, the parties stipulated to continue the hearing on such motions to and until January 3, 2002, and in the interim to pursue mediation of the action. The outcome of this action is presently uncertain. The Richard Dillon Litigation On May 9, 2000, a complaint was filed by Richard Dillon ("Dillon") against Easyriders in the Superior Court of Maricopa County, Arizona (the "Dillon Action"). Dillon is a former employee of El Paso. The Action alleges that Dillon is entitled to damages for breach of contract and as a Wage Claim under Arizona law, arising out of an alleged promise on the part of Easyriders to deliver shares of stock of Easyriders to Dillon. The Dillon Action seeks contract damages of approximately $162,000, treble damages under Arizona law of not less than $500,000 and the recovery of attorney's fees. The contract in question arises out of the former employment of Dillon with M&B. Easyriders is the sole named defendant in the Dillon Action, and disputes the claims of Dillon therein. In light of the Company's Chapter 11 filing, prosecution of the case against the Company is presently stayed pursuant to the automatic stay provisions of section 362 of the Bankruptcy Code.While the Company believes it has substantial defenses to the Dillon Action, the exact outcome will depend significantly on how the Company's Chapter 11 case proceeds. The claims against the Company are part of the pool of general pre-petition unsecured debt. Unless these claims are resolved through a negotiated settlement, they would be adjudicated through an adversary proceeding in the Bankruptcy Court or litigation in the existing forum. Regardless, in light of all of the foregoing considerations, the outcome of the Dillon Action is not expected to be materially adverse to the Company. The Greg King Litigation On August 2, 1999, Greg King ("King") filed an action against the Company and its subsidiary, Newriders, in of certain officers of Newriders. On December 23, 1999, an amended complaint was filed naming as additional defendants, Leon Hatcher, Michael Purcell and Bill Doyle, each a former officer and/or director of Newriders Los Angeles County Superior Court (the "King Action"), seeking damages of (a) not less than $500,000 for the alleged breach of an oral agreement to deliver certain shares of Newriders, Inc. in 1998, and (b) approximately $100,000 for breach of an alleged oral agreement to reimburse King for certain advances made by Mr. King on behalf of Newriders in 1998. The King Action also seeks these damages on the basis of alleged fraud on the part. The allegations of Mr. King arise out of his employment with Newriders in Fresno, California, and his associations with Leon Hatcher and Rick Pierce, identified above. After extensive pre-trial investigation, the Company determined it had substantial defenses to the King Action, but could not be assured of a favorable outcome. The Company tendered the King Action to its D&O Carrier, which indicated a willingness to contribute towards settlement of this action. This matter was scheduled for trial on April 30, 2001, but as the result of negotiations between King, the Company, and the D&O Carrier, this action was settled as of April 25, 2001. Under the terms thereof, which were reduced to a written settlement agreement (the "Settlement Agreement"), the D&O Carrier agreed to pay King $75,000, the 32 Company agreed to issue to King and his attorneys a total of 125,000 shares of common stock of the Company, and the Company agreed to issue to King a promissory note for $15,000. Prior to the Company's filing its petition for Chapter 11 relief on July 17, 2001 the cash proceeds were delivered to King and the note and share certificates were delivered to the Company's counsel. Subsequently the Company received the signed settlement agreement, and released the share certificates. Accordingly, the King Action has been settled with finality. Estate of Henry Wise v. Easyriders, Inc. et al On April 12, 2001 a complaint was filed in the Horry County (South Carolina) Court of Common Pleas by Genevieve Beach, as Personal Representative of the Estate of Henry F. Wise, II, deceased, naming as defendants the Company and the Myrtle Beach Speedway (the "Wise Action"). The Wise Action arises out of the death of Mr. Wise while participating in a motorcycle stunt event at the Myrtle Beach Speedway in May of 1999 and seeks unspecified damages as the result of alleged negligence on the part of defendants with respect to safety precautions in connection with the event. The event was part of a series of motorcycle stunt events produced by Kevin Ruic, whose company, FASCAR North, had previously sold the rights thereto to the Company. The Company believes it has meritorious defenses to the Wise Action, and potential cross-actions, but at this point has not completed its investigation into the facts concerning this matter. Preliminarily, the Company does not believe there is insurance coverage for this action. If there is no insurance coverage, it is possible that the Company could be forced to incur substantial litigation costs, and that if Plaintiff were to prevail, the amount of any adverse judgment could be significant. However, the exact outcome will depend significantly on how the Company's Chapter 11 case proceeds. The claims against the Company are part of the pool of general pre-petition unsecured debt. Unless these claims are resolved through a negotiated settlement, they would be adjudicated through an adversary proceeding in the Bankruptcy Court or litigation in the existing forum. Regardless, in light of all of the foregoing considerations, the outcome of the Wise Action is not expected to be materially adverse to the Company. Other Litigation and Claims The Company is named as a defendant in other legal actions arising from its normal operations, and from time-to-time is presented with claims for damages arising out of its actions. The Company anticipates that any damages or expenses it may incur in connection with these actions, individually and collectively, will not have a material adverse effect on the Company. Any claims existing prior to July 17, 2001 are subject to the automatic stay provisions of section 362 of the Bankruptcy Code, and are subject to resolution as part of the Company's pool of unsecured, pre-petition obligations. Item 2. Changes in Securities and Use of Proceeds. During July 2001, the Company issued 125,000 shares of Easyriders, Inc. stock to a former employee of Newriders in settlement of litigation. The shares were valued at their market price, market price being determined as the closing price of the Common Stock on the American Stock Exchange on the date of issuance. This transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. Item 3. Defaults Upon Senior Securities The Nomura Credit Agreement sets forth two types of obligations on the part of the Company: 33 . Payment-Related Obligations: Payments in respect of interest, principal --------------------------- reduction and pay-off at maturity. . Covenant-Related Obligations: Obligations to maintain certain ---------------------------- financial ratios, and to do or not do certain things, which obligations are designed to avoid impairment of Nomura's credit position and the value of its collateral. In November of 2000, Nomura asserted that the Company was in default with respect to numerous Covenant-Related Obligations. Management took issue with each of these charges, and in good faith believed that no events of default had occurred. As of March 31, 2001, the Company reported that it was in default as to certain Covenant-Related Obligations. The Nomura Indebtedness, approximately $21.0 million, became due and payable on September 23, 2001. In view of the Company's anticipated inability to repay the entire principal on such date, and Nomura's unwillingness to accept a lesser amount, or to extend the maturity date, in or about May, 2001, management began discussing with Nomura the possibility of filing for Chapter 11 relief, which led to protracted negotiations concerning a Cash Collateral Stipulation (the "First CCS"). The First CCS was based upon a detailed budget (the "First CCS Budget") which Nomura reviewed and ultimately approved, subject to reserving all of its rights under the Nomura Credit Agreement. Easyriders, Inc. and Paisano Publications filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on July 17, 2001, and the First CCS was formally approved by the Bankruptcy Court on an interim basis at an interim hearing held on July 20, 2001, pending a final hearing to be held on August 21, 2001. Between the time of the interim hearing and the final hearing, an Official Committee of Unsecured Creditors (the "OCC") was formed to represent the interests of the unsecured creditors. Prior to the final hearing, Easyriders, Inc., Paisano Publications, the OCC and Nomura entered into a cash collateral stipulation (the "Second CCS") which modified the terms of the First CCS and which provided for the Company to continue to pay expenses in accordance with an agreed upon budget (the "Second CCS Budget") through October 31, 2001. In accordance with the First CCS, the First CCS Budget, the Second CCS and the Second CCS Budget, the Company thereafter made payments to Nomura (with no agreement as to the application of such payments) computed in an amount equal to Nomura's pre-Chapter 11 interest, in the full amount thereof, for the months of May, June, July, August and September, 2001. The First CCS remained in effect until August 31, 2001. Pursuant to the terms of the First CCS, in addition to the payments set forth immediately above, the Company made an "excess cash flow payment" in the amount of $23,699 to Nomura for the month of July, 2001. Pursuant to the terms of the Second CCS, the Company is required to deposit all of their "Net Income" (as defined in the Second CCS) after payment of the amounts to Nomura set forth above into a segregated bank account (the "Blocked Account"). At a hearing held on October 24, 2001, the Bankruptcy Court granted the Company's motion for authority to continue using cash collateral (the "CCM") through February 28, 2002 to pay expenses in accordance with the budget attached to the CCM. At the hearing held on October 24, 2001, the Bankruptcy Court also ordered the Company to stop making any further payments to Nomura and to deposit the payments that the Company would otherwise have made to Nomura into the Blocked Account. During the pendency of the Chapter 11 case, Nomura is prevented from foreclosing on its collateral under the automatic stay provisions of the Bankruptcy Code. Under such circumstances, Nomura would have to seek and obtain relief from the automatic stay imposed by section 362 of the Bankruptcy Code in order to effect such foreclosure. 34 Item 4. Submission of matters to a vote of security holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: Current Report of the Company on Form 8K, as filed on July 26, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EASYRIDERS, INC. ---------------- (Registrant) Dated: November 19, 2001 /s/ J. Robert Fabregas ----------------------------------- J. Robert Fabregas Chief Executive Officer and Chief Financial Officer 35

EASYRIDERS INC 10-Q