<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________
to ________________.
Commission file number 333-05060C
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EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1771946
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
607 West Travelers Trail
Burnsville, Minnesota 55337
-------------------------------------- --------
(Address of principal executive offices) (Zip code)
(612) 894-9229
-----------------------------------------
Issuer's telephone number
Not Applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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 / / No /x/
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: Common Stock, $.01 par value --
8,805,500 issued and outstanding as of October 31, 1996. Series A Convertible
Preferred Stock, $.01 par value -- 4,600,000 issued and outstanding as of
October 31, 1996.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
QUARTERLY REPORT ON FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements:
Balance Sheets as of September 30, 1996
(Unaudited) and December 31, 1995 3
Statements of Operations (Unaudited)
for the three months ended
September 30, 1996 and 1995, the nine
months ended September 30, 1996 and
1995, and cumulative for the period from
inception to September 30, 1996 4
Statements of Cash Flows (Unaudited)
for the nine months ended
September 30, 1996 and 1995, and
cumulative for the period from inception
to September 30, 1996 5
Notes to Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION 9
SIGNATURES 11
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,337,010 $ 788,419
Short-term investments - 912,630
Other current assets 864 3,595
----------- ----------
Total current assets 10,337,874 1,704,644
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $58,979 and $26,755 145,245 85,960
INTELLECTUAL PROPERTY, to be amortized 118,277 88,641
OTHER ASSETS 3,343 3,343
----------- ----------
$10,604,739 $1,882,588
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $190,551 $ 117,334
Accrued liabilities 59,772 12,045
Notes payable 73,077 24,351
----------- ----------
Total current liabilities 323,400 153,730
----------- ----------
SHAREHOLDERS' EQUITY:
Series A Convertible Preferred Stock,
5,014,000 shares authorized, stated
par value of $.01; 4,600,000 shares
issued and outstanding at September 30, 1996 46,000 -
Common stock, 25,000,000 shares authorized,
stated par value of $.01; 8,805,500 and
8,725,500 shares issued and outstanding 83,246 82,446
Additional paid-in capital 13,637,869 3,270,669
Deficit accumulated during the development
stage (3,485,776) (1,624,257)
----------- ----------
Total shareholders' equity 10,281,339 1,728,858
----------- ----------
$10,604,739 $1,882,588
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Cumulative for
the Period From
Inception
Three Months Ended Nine Months Ended (December 22,
September 30 September 30 1993) To
---------------------------- ---------------------------- September 30,
1995 1996 1995 1996 1996
--------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
PREOPERATING EXPENSES:
General and administrative $ 107,318 $ 243,554 $ 303,591 $ 634,020 $ 1,337,618
Research and development 195,719 351,691 584,032 918,377 1,730,804
Marketing 25,972 170,013 70,329 360,282 499,389
--------- --------- --------- ----------- -------------
Total preoperating expenses 329,009 765,258 957,952 1,912,679 3,567,811
INTEREST INCOME 16,197 25,299 20,384 53,469 96,991
INTEREST EXPENSE (655) (1,205) (1,763) (2,309) (14,956)
--------- --------- --------- ----------- -------------
NET LOSS $(313,467) $(741,164) $(939,331) $(1,861,519) $(3,485,776)
--------- --------- --------- ----------- -------------
--------- --------- --------- ----------- -------------
NET LOSS PER COMMON SHARE $(.04) $(.08) $(.12) $(.21) $(.49)
--------- --------- --------- ----------- -------------
--------- --------- --------- ----------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,675,500 8,805,500 7,880,860 8,785,500 7,090,602
--------- --------- --------- ----------- -------------
--------- --------- --------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Cumulative for the
September 30 Period From Inception
--------------------------- (December 22, 1993)
1995 1996 To September 30, 1996
---------- ----------- ---------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (939,331) $(1,861,519) $(3,485,776)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation 11,910 32,224 58,979
Change in current assets and liabilities:
Other current assets (738) 2,731 (864)
Accounts payable 36,807 73,217 190,551
Accrued liabilities (12,390) 47,727 59,772
---------- ----------- -----------
Net cash used in operating activities (903,742) (1,705,620) (3,177,338)
---------- ----------- -----------
INVESTING ACTIVITIES:
Sales of short-term investments, net - 912,630 -
Property and equipment additions (71,998) (91,509) (199,214)
Payments incurred for intellectual property (19,676) (29,636) (118,277)
Change in other assets - - (3,343)
---------- ----------- -----------
Net cash provided by (used in) investing activities (91,674) 791,485 (320,834)
---------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from notes payable 65,070 75,025 205,095
Repayment of notes payable (30,719) (26,299) (57,018)
Proceeds from issuance of common stock, net of offering expenses 2,643,126 100,000 3,373,105
Proceeds from issuance of Series A Convertible Preferred Stock,
net of offering expenses - 10,314,000 10,314,000
---------- ----------- -----------
Net cash provided by financing activities 2,677,477 10,462,726 13,835,182
---------- ----------- -----------
Net increase in cash and cash equivalents 1,682,061 9,548,591 10,337,010
CASH AND CASH EQUIVALENTS:
Beginning of period 303,453 788,419 -
---------- ----------- -----------
End of period $1,985,514 $10,337,010 $10,337,010
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,763 $ 2,309 $ 14,266
Noncash transactions-
Conversion of note payable into common stock - - 75,000
Issuance of common stock for services - 62,500 125,000
Issuance of common stock in settlement of construction payable - - 5,010
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying balance sheet of Excelsior-Henderson Motorcycle Manufacturing
Company (the Company) as of September 30, 1996 and the statements of operations
for the three and nine months ended September 30, 1995 and 1996, and cumulative
for the period from inception (December 22, 1993) to September 30, 1996 and the
statements of cash flows for the nine months ended September 30, 1995 and 1996
and cumulative for the period from inception (December 22, 1993) to September
30, 1996, have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 1996 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Form SB-2 Registration Statement. The results of operations
for the period ended September 30, 1996 are not necessarily indicative of the
operating results for the full fiscal year.
2. SHAREHOLDERS' EQUITY:
During the three months ended September 30, 1996, the Company completed a
registered offering (the Offering) of 4,600,000 shares of Series A Convertible
Preferred Stock. The Company received net proceeds of approximately $10,314,000
from the Offering with the proceeds to be used for further industrial design,
engineering and testing of the Company's Super X motorcycle; manufacturing site
analysis and development; motorcycle production line design, development and
tooling costs; marketing; general operating expenses; and working capital. In
connection with the Offering, the Company issued 394,000 warrants to the
underwriters to purchase shares of Series A Convertible Preferred Stock at $3.00
per share, expiring September 2001.
3. NET LOSS PER COMMON SHARE:
Net loss per common share for all periods presented are computed using the
weighted average number of common shares outstanding. Shares reserved for the
conversion of Series A Convertible Preferred Stock, warrants or stock options
are not considered because the impact of the incremental shares is antidilutive.
6
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company, which is in the development stage, is designing and intends to
mass produce American made, proprietary, premium quality, heavyweight cruiser
and touring motorcycles. The Company has developed several generations of
models and prototypes of its initial motorcycle, a heavyweight cruiser named the
Excelsior-Henderson Super X (the "Super X"). The Company intends to manufacture
and market the Super X and additional heavyweight cruiser and touring
motorcycles.
RESULTS OF OPERATIONS
The Company is in the development stage and its operations are subject to
all of the risks inherent in the establishment of a new business enterprise,
including the absence of any material operating history. The Company does not
anticipate having motorcycle sales revenue until 1998 and then only if
significant additional financing is obtained. The Company's accumulated deficit
was $3,485,776 at September 30, 1996, compared to $1,624,257 at December 31,
1995. Such increase is due to increased spending on product research and
development, marketing and personnel. The Company's accumulated deficit is
expected to continue to grow in the foreseeable future due to continued product
research and development, expanded marketing and dealer network development
expenses, increased staffing and other general operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the sale of $11.5 million of its Series A Convertible
Preferred Stock on September 17, 1996. The Company will require significant
additional financing, currently expected to be in excess of $20 million, to
complete the activities described above and begin mass production. Such
additional financing, if raised, is currently expected to be used for
acquisition of real property for and construction of the Company's manufacturing
and administrative facility; the establishment of an assembly system, tooling
and manufacturing lines for the Super X; finishing the final development details
for the Super X; marketing; public relations; hiring and training additional
personnel; launching the production and delivery to dealers of the Super X; and
general operating expenses and working capital. The Company expects that the
cost of all of these activities will be in excess of $20 million. The use of
the proceeds from such future financings, and the estimated cash required for
acquisition of real property for and construction of the manufacturing facility
and the establishment of an assembly system, tooling and manufacturing lines are
current estimates only, are subject to change at any time.
The Company anticipates raising such additional financing through a
combination of (i) additional equity financing (including private placements
and/or an initial public offering of the Company's Common Stock), (ii) long- or
short-term debt financing (including loans from banks or other financial
entities or debt instruments issued by the Company), (iii) equipment leasing
arrangements and (iv) incentives from local and state government entities
(including grants and debt financing). Debt financing may involve restrictive
covenants that address interests different than those of the Company's
shareholders. There can be no assurance that the Company will be able to obtain
such financing if and when it is needed or that, if available, such financing
will be on terms acceptable to the Company or its shareholders.
The Company currently is finalizing arrangements with certain governmental
entities for debt financing. The Company has signed a non-binding letter of
intent with the City of Belle Plaine, Minnesota to provide incentives for
funding the construction of the Company's manufacturing and administrative
facility. The letter of intent contemplates the following sources of funds,
subject to placement of such bonds and debt: City of Belle Plaine government
obligation tax increment financing bonds with net proceeds of approximately $1.9
million, mortgage-backed debt arranged through the Economic Development
Authority of Belle Plaine in the amount of approximately $4.4 million and $1.0
million provided by the Company. Such amounts are subject to further
negotiation. In addition, the
7
<PAGE>
Minnesota Department of Trade and Economic Development has offered, subject to
further approvals, a loan of approximately $7.0 million for equipment financing
through its Small Business Development Loan Program, with terms subject to
further negotiation.
The Company contemplates that its available cash resources, together with
its planned additional facility, equipment and tooling financing needs
(currently estimated to be in excess of $20 million), will finance the Company's
business plan for the next twelve months.
EMPLOYEES
As of September 30, 1996, the Company had ten full-time employees. The
Company anticipates adding administrative, supervisory, production and marketing
staff as the Company's needs for such personnel increase due to progress on the
Company's business plan. Such needs will depend on the pace of development of
the Super X and the construction of the Company's manufacturing and
administrative facility. The Company expects to hire an increasing number of
motorcycle production workers as the Company proceeds towards production of the
Super X.
FORWARD LOOKING STATEMENTS
Certain statements made above, which are summarized below, are forward-looking
statements that involve risks and uncertainties, and actual results may be
materially different. Factors that could cause actual results to differ include
those identified below:
- - COMPANY EXPECTS TO REQUIRE SIGNIFICANT ADDITIONAL FINANCING, CURRENTLY
EXPECTED TO BE IN EXCESS OF $20 MILLION; AVAILABLE CASH RESOURCES, TOGETHER
WITH PLANNED ADDITIONAL FINANCING, WILL FINANCE THE COMPANY'S BUSINESS PLAN
FOR THE NEXT TWELVE MONTHS -- The Company's anticipated capital needs could
be well in excess of $20 million, due to unexpected increased costs of
construction of the Company's manufacturing and administrative facility,
increased labor costs, increased costs of motorcycle parts and raw
materials or increased marketing and dealer network development expenses,
and increased rate of consumption of available cash resources due to such
factors.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
9
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 1996:
3 Amended Certificate of Designation
27 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the registrant during the quarterly
period ended September 30, 1996.
10
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
DATE: November 11, 1996 By: /s/ Thomas M. Rootness
------------------------------
Thomas M. Rootness,
Vice President of Finance
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
11
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
3 Amended Certificate of Designation FILED
ELECTRONICALLY
27 Financial Data Schedule FILED
ELECTRONICALLY
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(A) DESIGNATION OF SERIES OF PREFERRED STOCK
Of the 10,000,000 shares of Preferred Stock which the Corporation is
authorized to issue under its Articles of Incorporation, 4,360,000 of such
shares shall be designated as shares of Series A Convertible Preferred Stock of
the Corporation (the "Preferred Stock"), par value $.01 per share. Such shares
of Preferred Stock, together with the 25,000,000 shares of authorized Common
Stock of the Corporation (the "Common Stock"), the balance of the undesignated
shares of Preferred Stock of the Corporation and any other common stock or
preferred stock that may hereafter be authorized in or pursuant to the Restated
Articles of Incorporation of the Corporation, are sometimes hereinafter
collectively referred to as the "capital stock."
(B) VOTING PRIVILEGES.
Each holder of Preferred Stock shall have that number of votes on all
matters submitted to the stockholders that is equal to the number of shares of
Common Stock into which such holder's shares of Preferred Stock are then
convertible, as hereinafter provided. Except as otherwise required by agreement
or law, the shares of capital stock of the Corporation shall vote as a single
class on all matters submitted to the stockholders.
(C) DIVIDENDS.
In the event any dividend or distribution is declared or made with respect
to outstanding shares of Common Stock, a comparable dividend or distribution
must be simultaneously declared or made with respect to the outstanding shares
of Preferred Stock. In the event any dividend or distribution is declared or
made with respect to the Common Stock, each holder of shares of Preferred Stock
shall be paid such comparable dividend or receive such comparable distribution
on the basis of the number of shares of Common Stock into which such holder's
shares of Preferred Stock are then convertible, as hereinafter provided.
<PAGE>
(D) LIQUIDATION PREFERENCE.
In the event of an involuntary or voluntary liquidation or dissolution of
the Corporation at any time, the holders of shares of Preferred Stock shall be
entitled to receive out of the assets of the Corporation an amount equal to
$2.50 per share (appropriately adjusted to reflect stock splits, stock
dividends, reorganizations, consolidations and similar changes hereafter
effected), plus dividends unpaid and accumulated or accrued thereon, if any. In
the event of either an involuntary or a voluntary liquidation or dissolution of
the Corporation payment shall be made to the holders of shares of Preferred
Stock in the amounts herein fixed before any payment shall be made or any assets
distributed to the holders of the Common Stock or any other class of shares of
the Corporation ranking junior to the Preferred Stock with respect to payment
upon dissolution or liquidation of the Corporation. If upon any liquidation or
dissolution of the Corporation the assets available for distribution shall be
insufficient to pay the holders of all outstanding shares of Preferred Stock the
full amounts to which they respectively shall be entitled, the holders of such
shares shall share pro rata in any such distribution.
(E) CONVERSION RIGHT.
At the option of the holders thereof, the shares of Preferred Stock shall
be convertible, at the office of the Corporation (or at such other office or
offices, if any, as the Board of Directors may designate), into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100th of
a share) of Common Stock, at the conversion price, determined as hereinafter
provided, in effect at the time of conversion, each share of Preferred Stock
being deemed to have a value of $2.50 for the purpose of such conversion. The
price at which each share of Common Stock shall be delivered upon conversion
(herein called the "conversion price") shall be initially equal to $2.50 per
share of Common Stock (i.e., at an initial conversion rate of one share of
Common Stock for each share of Preferred Stock); PROVIDED, HOWEVER, that such
initial conversion price shall be subject to adjustment from time to time in
certain instances as hereinafter provided. The following provisions shall
govern such right of conversion:
(1) In order to convert shares of Preferred Stock into shares of Common
Stock of the Corporation, the holder thereof shall surrender at any
office hereinabove mentioned the certificate or certificates therefor,
duly endorsed to the Corporation or in blank, and give written notice
to the Corporation at such office that such holder elects to convert
such shares. Shares of Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the
surrender of such shares for conversion as herein provided, and the
person entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder
of such shares of Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall
issue and deliver or cause to be issued and
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<PAGE>
delivered at such office a certificate or certificates for the number
of shares of Common Stock issuable upon such conversion.
(2) The conversion price shall be subject to adjustment from time to time
as hereinafter provided. Upon each adjustment of the conversion price
each holder of shares of Preferred Stock shall thereafter be entitled
to receive the number of shares of Common Stock obtained by
multiplying the conversion price in effect immediately prior to such
adjustment by the number of shares issuable pursuant to conversion
immediately prior to such adjustment and dividing the product thereof
by the conversion price resulting from such adjustment.
(3) In case the Corporation shall (i) declare a dividend upon the Common
Stock payable in Common Stock (other than a dividend declared to
effect a subdivision of the outstanding shares of Common Stock, as
described in subparagraph (4) below) or any obligations or any shares
of stock of the Corporation which are convertible into, or
exchangeable for, Common Stock (any of such obligations or shares of
stock being hereinafter called "Convertible Securities"), or in any
rights or options to purchase Common Stock or Convertible Securities,
or (ii) declare any other dividend or make any other distribution upon
the Common Stock payable otherwise than out of earnings or earned
surplus, then thereafter each holder of shares of Preferred Stock upon
the conversion thereof will be entitled to receive the number of
shares of Common Stock into which such shares of Preferred Stock have
been converted, and, in addition and without payment therefor, each
dividend described in clause (i) above and each dividend or
distribution described in clause (ii) above which such holder would
have received by way of dividends or distributions if continuously
since such holder became the record holder of such shares of Preferred
Stock such holder (i) had been the record holder of the number of
shares of Common Stock then received, and (ii) had retained all
dividends or distributions in stock or securities (including Common
Stock or Convertible Securities, and any rights or options to purchase
any Common Stock or Convertible Securities) payable in respect of such
Common Stock or in respect of any stock or securities paid as
dividends or distributions and originating directly or indirectly from
such Common Stock. For the purposes of the foregoing a dividend or
distribution other than in cash shall be considered payable out of
earnings or earned surplus only to the extent that such earnings or
earned surplus are charged an amount equal to the fair value of such
dividend or distribution as determined by the Board of Directors of
the Corporation.
(4) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the conversion
price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding
shares of Common Stock shall be combined
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<PAGE>
into a smaller number of shares, the conversion price in effect
immediately prior to such combination shall be proportionately
increased.
(5) If any capital reorganization or reclassification of the capital stock
of the Corporation, or consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its
assets to another corporation or other entity shall be effected in
such a way that holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be
made whereby the holders of Preferred Stock shall thereafter have the
right to receive upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of the Common Stock of the
corporation immediately theretofore receivable upon the conversion of
Preferred Stock, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore receivable upon the conversion
of Preferred Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, plus all dividends
unpaid and accumulated or accrued thereon to the date of such
reorganization, reclassification, consolidation, merger or sale, and
in any such case appropriate provision shall be made with respect to
the rights and interests of the holders of Preferred Stock to the end
that the provisions hereof (including without limitation provisions
for adjustments of the conversion price and of the number of shares
receivable upon the conversion of Preferred Stock) shall thereafter be
applicable, as nearly as may be in relation to any shares of stock,
securities or assets thereafter receivable upon the conversion of
Preferred Stock. The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof the successor corporation (if other than the corporation)
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and
mailed to the registered holders of Preferred Stock, at the last
addresses of such holders appearing on the books of the Corporation,
the obligation to deliver to such holders such shares of stock,
securities or assets as, in accordance with the foregoing provisions,
such holders may be entitled to receive.
(6) Upon any adjustment of the conversion price, then and in each case the
Corporation shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holders of Preferred
Stock, at the addresses of such holders as shown on the books of the
Corporation, which notice shall state the conversion price resulting
from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of
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<PAGE>
Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(7) If any event occurs as to which in the opinion of the Board of
Directors of the Corporation the other provisions of this
paragraph (E) are not strictly applicable or if strictly applicable
would not fairly protect the rights of the holders of Preferred Stock
in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make an adjustment in
the application of such provisions, in accordance with such essential
intent and principles, so as to protect such rights as aforesaid.
(8) As used in this paragraph (E) the term "Common Stock" shall mean and
include the Corporation's presently authorized Common Stock and shall
also include any capital stock of any class of the Corporation
hereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares receivable pursuant to
conversion of shares of Preferred Stock shall include shares
designated as Common Stock as of the date of issuance of such shares
of Preferred Stock, or, in case of any reclassification of the
outstanding shares thereof, the stock, securities or assets provided
for in subparagraph (5) above.
(9) No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be
issuable, the Corporation shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the market
price per share of Common Stock as of the close of business on the day
of conversion. "Market price" shall mean if the Common Stock is
traded on a securities exchange or on the Nasdaq National Market, the
closing price of the Common Stock on such exchange or the Nasdaq
National Market, or, if the Common Stock is otherwise traded in the
over-the-counter market, the closing bid price, in each case averaged
over a period of 20 consecutive business days prior to the date as of
which "market price" is being determined. If at any time the Common
Stock is not traded on an exchange or the Nasdaq National Market, or
otherwise traded in the over-the-counter market, the "market price"
shall be deemed to be the fair value thereof determined in good faith
by the Board of Directors of the Corporation as of a date which is
within 15 days of the date as of which the determination is to be
made.
-5-
<PAGE>
(F) MANDATORY CONVERSION.
The Preferred Stock shall automatically be converted into shares of Common
Stock, without any act by the Corporation or the holders of the Preferred Stock,
concurrently with the closing of the Initial Public Offering of the Corporation
(as hereinafter defined). As used herein, the term "closing" shall mean the
delivery by the Corporation to the underwriters of certificates representing the
shares of Common Stock offered to the public against delivery to the Corporation
by such underwriters of payment therefor. Each holder of a share of Preferred
Stock so converted shall be entitled to receive the full number of shares of
Common Stock into which such share of Preferred Stock held by such holder could
be converted if such holder had exercised its conversion right at the time of
closing of such public offering. Upon such conversion, each holder of a share
of Preferred Stock shall immediately surrender such share in exchange for
appropriate stock certificates representing a share or shares of Common Stock.
As used herein, "Initial Public Offering" shall mean the first public offering
by the Corporation of shares of Common Stock registered under the Securities Act
of 1933, as amended, in which (1) the aggregate public offering price of the
Common Stock sold for cash by the Corporation in the offering is at least
$10,000,000 and (2) the offering is underwritten on a firm commitment basis by
an underwriter or a group of underwriters. The term "firm commitment basis"
with respect to the underwriting of such public offering shall mean a commitment
pursuant to a written underwriting agreement under which the nature of the
underwriters' commitment is such that all securities will be purchased by such
underwriters if any securities are purchased by such underwriters.
-6-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 10,337,010 788,419
<SECURITIES> 0 912,630
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,337,864 1,704,644
<PP&E> 204,223 112,715
<DEPRECIATION> 58,978 26,755
<TOTAL-ASSETS> 10,604,739 1,882,588
<CURRENT-LIABILITIES> 323,400 153,730
<BONDS> 0 0
0 0
46,000 0
<COMMON> 83,246 82,446
<OTHER-SE> 10,152,093 1,646,412
<TOTAL-LIABILITY-AND-EQUITY> 10,604,739 1,882,588
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 1,912,679 1,270,112
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,309 7,301
<INCOME-PRETAX> (1,861,519) (1,233,891)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,861,519) (1,233,8981)
<EPS-PRIMARY> (.21) (.17)
<EPS-DILUTED> (.21) (.17)
</TABLE>
