<PAGE>
PROSPECTUS
4,000,000 SHARES
[EXCELSIOR-HENDERSON LOGO SUPERIMPOSED OVER A PICTURE OF THE EXCELSIOR-
HENDERSON SUPER X MOTORCYCLE AT THE BEACH.]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
Excelsior-Henderson Motorcycle Manufacturing Company (the "Company"). The
Company is not related to Excelsior Supply Company, which ceased business in
1931, see "Prospectus Summary--The Company." Prior to this offering, there has
been no public market for the Common Stock of the Company. See "Underwriting"
for the factors considered in determining the initial public offering price. The
Common Stock of the Company has been approved for quotation on the Nasdaq
National Market under the symbol "BIGX."
------------------------
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Share.................... $7.50 $.525 $6.975
Total(3)..................... $30,000,000 $2,100,000 $27,900,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$321,500.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. If this option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$34,500,000, $2,415,000 and $32,085,000, respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, and are subject to the
right of the Underwriters to withdraw, cancel, or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the shares
of Common Stock will be made on or about July 29, 1997.
------------------------
<TABLE>
<S> <C>
JOHN G. KINNARD AND COMPANY, MILLER, JOHNSON & KUEHN,
INCORPORATED INCORPORATED
</TABLE>
THE DATE OF THIS PROSPECTUS IS JULY 23, 1997
<PAGE>
**[First Page Gatefold-Front]**
1. Picture of tatoo of Super X logo on arm.
Top Caption: Reborn To Be Wild
Bottom Caption: Your next tattoo.
<PAGE>
**[Second Page Gatefold-Front]**
Top Caption: Excelsior-Henderson Comes Roaring Back.
1. Photograph of crowd at 1996 Sturgis Motorcycle Rally and Races viewing Super
X prototypes. Close-up photograph of motorcyclist at Sturgis looking at the
Super X.
Caption: Motorcyclists at the 1996 Sturgis Rally and Races crowd in to
experience the unveiling of the new Super X Prototype.
2. Photograph of groundbreaking ceremony for the Company's manufacturing and
administrative facility.
Caption: In April of 1997, Excelsior-Henderson broke ground on their factory
and headquarters site in Belle Plaine, Minnesota.
3. Super X motorcycle (covers both second and third page gatefold).
Caption: The new Excelsior-Henderson Super X will be powered by a large
displacement 1386cc X-twin engine designed for classic American cruising.
<PAGE>
**[Third Page Gatefold-Front]**
1. Photograph of Excelsior-Henderson motorcycle parade at 1997 Daytona Bike
Week.
Caption: The Company demonstrated running prototypes in the First Annual
Excelsior-Henderson Parade at the 1997 Daytona Bike Week.
2. Photograph of David Hanlon riding Super X prototype.
Caption: The Super X prototype continues to undergo testing on the open
road.
3. Drawing of Company's manufacturing and administrative facility.
Caption: The company intends to manufacture its motorcycles in a 160,000 sq.
ft. manufacturing and administrative facility. The company anticipates
relocating its operations to the facility during late 1997.
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any of the Underwriters. This
Prospectus does not constitute an offer of any securities other than those to
which it relates or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
Until August 17, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................................................................... 3
Forward-Looking Statements............................................................. 4
Risk Factors........................................................................... 6
Use of Proceeds........................................................................ 12
Dividend Policy........................................................................ 12
Dilution............................................................................... 13
Capitalization......................................................................... 14
Selected Financial Data................................................................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 16
Business............................................................................... 19
Management............................................................................. 27
Principal Shareholders................................................................. 32
Certain Transactions................................................................... 32
Description of Capital Stock........................................................... 33
Shares Eligible for Future Sale........................................................ 35
Underwriting........................................................................... 36
Legal Matters.......................................................................... 37
Experts................................................................................ 38
Available Information.................................................................. 38
Index to Financial Statements.......................................................... F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE IMPOSITION OF
PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND
OVERALLOTMENTS IN CONNECTION WITH THE OFFERING. FOR A DISCUSSION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------------
THE FOLLOWING TRADEMARKS OF THE COMPANY ARE USED IN THIS PROSPECTUS:
EXCELSIOR-HENDERSON-TM-, SUPER X-TM- AND X-TWIN-TM-.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
2-FOR-3 REVERSE STOCK SPLIT EFFECTED ON MAY 22, 1997 AND (III) ASSUMES PRO FORMA
ISSUANCE OF 3,066,527 SHARES OF COMMON STOCK UPON THE CONVERSION OF THE
OUTSTANDING SHARES OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE
"PREFERRED STOCK"), WHICH UNDER THE TERMS OF THE PREFERRED STOCK, WILL OCCUR
AUTOMATICALLY UPON THE CLOSING OF THIS OFFERING. SEE "DESCRIPTION OF CAPITAL
STOCK."
FORWARD-LOOKING STATEMENTS ARE MARKED BY AN ASTERISK (*) AND ARE INTENDED TO
BE COVERED BY CERTAIN SAFE HARBOR PROVISIONS OF THE FEDERAL SECURITIES LAWS, SEE
"FORWARD-LOOKING STATEMENTS."
THE COMPANY
Excelsior-Henderson Motorcycle Manufacturing Company (the "Company"), a
development stage company, plans to manufacture, market and sell premium
heavyweight cruiser and touring motorcycles with a brand that evokes an
authentic American motorcycling heritage and lifestyle.* The Company's
motorcycles will feature current technology but will reflect distinctive
designs, styling and names reminiscent of the motorcycles produced in the early
part of this century by Excelsior Supply Company ("Excelsior Supply") under the
brand names Excelsior and Henderson. Excelsior Supply ceased business in 1931.
The Company is a new company incorporated in 1993 and is not related to the
former Excelsior Supply, except that the Company believes it has secured certain
trademarks previously used by the former Excelsior Supply. During the early
1900s, Excelsior Supply was one of the "Big Three" motorcycle manufacturers,
along with Harley-Davidson and Indian. The motorcycles manufactured by Excelsior
Supply were considered to be among the best motorcycles of their time, set many
performance records and were among the originators of the classic American
heavyweight cruiser motorcycle design. The Company intends to commence mass
production of its initial motorcycle, a heavyweight cruiser named the Excelsior-
Henderson Super X (the "Super X"), in late 1998.*
The Company's strategy is to market a brand that is based on the authentic
American motorcycling heritage of Excelsior Supply and to manufacture products
that represent a distinct alternative to the products of Harley-Davidson. To
create a strong brand identity for its motorcycles and related products and to
establish the authenticity of the Company's brand, the Company intends to foster
among consumers and dealers a culture and lifestyle that are reminiscent of the
classic American motorcycling heritage.* Such heritage refers to the "soul" of
the traditional American motorcycling experience, fostered by motorcycle events,
motorcyclists and media, which associates riding motorcycles with individuality
and freedom. Owner customization of motorcycles is also an important part of
this heritage, and the Company intends to design its motorcycles and to make
custom parts and accessories available to facilitate customization.* In
addition, the Company intends to sponsor and promote a motorcycle owners' group,
rallies and a magazine for owners and enthusiasts.*
The Company plans to manufacture and market only heavyweight cruiser and
touring motorcycles. Heavyweight motorcycles are defined as motorcycles with an
engine displacement of 651cc or greater and represent approximately half of
retail motorcycle unit sales in the overall U.S. market. The market segment of
cruiser and touring models comprise approximately 80% of retail unit sales in
the U.S. heavyweight motorcycle market. Based on information in
Harley-Davidson's public reports, in 1996 U.S. registrations of new heavyweight
motorcycles increased by approximately 9.6% (to 165,700 units) over 1995
registrations, and U.S. registrations of new heavyweight motorcycles have
increased by 59% from 1992 through 1996. In 1996, Harley-Davidson reported a 48%
market share of new U.S. heavyweight motorcycle registrations. Trade
publications and dealers have reported that there are substantial waiting lists
at the dealers for certain models of Harley-Davidson's motorcycles.
The Super X is a new motorcycle featuring modern engineering and performance
whose design is inspired by the classic American heavyweight styling features of
the motorcycles produced by Excelsior
3
<PAGE>
Supply and Henderson, including a large displacement "X-twin" engine, a sleekly
styled, teardrop shaped fuel tank, full valanced fenders, a curved front frame
that follows the contour of the front fender, a low slung seat in which a rider
will sit into the bike, a leading link front suspension with fork tubes that
pass through the front fender, a tank-mounted instrument panel, wide profile
tires and modern, high gloss, single and two-tone paint finishes. The Super X
design incorporates a proprietary long-stroke engine designed to produce a
distinctive sound, as well as a proprietary transmission and electronic fuel
injection system and computer controlled-engine management system. The Company
has developed several generations of prototypes of the Super X and first
unveiled a running prototype at the Sturgis Motorcycle Rally in Sturgis, South
Dakota in August 1996.
The Company is building its nationwide dealer network and plans to have
dealers in the major population centers and in the major motorcycling markets.*
The Company will also have dealers along the major motorcycle traveling routes,
providing a nationwide network of dealers to serve the Company's customers.* The
Company has identified a dealer profile for the dealers it believes will be
successful in selling its products and is currently soliciting dealers in the
key areas who meet this profile. The Company began signing agreements with its
initial dealers in the second quarter of 1997. Prior to production, the Company
expects to select 80 to 100 dealers from the over 3,000 authorized dealers of
new motorcycles in the United States, and will then add dealers as its
production increases.*
The Company intends to manufacture its motorcycles in a 160,000 square foot
manufacturing and administrative facility under construction in Belle Plaine,
Minnesota.* The Company has signed a Construction Agreement and a Lease
Agreement with a real estate development company, which has
commenced construction of the facility. The facility has been designed to have a
production capacity of up to 20,000 motorcycles per year, prior to any facility
expansion. The Company anticipates relocating its operations to the facility
during late 1997.*
The Company, which was incorporated in Minnesota in December 1993 under the
name "Hanlon Manufacturing Company," changed its name to Excelsior-Henderson
Motorcycle Manufacturing Company in March 1996. The Company currently is located
at 607 West Travelers Trail, Burnsville, Minnesota 55337. Its telephone number
is (612) 894-9229.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE SAFE HARBOR PROVISIONS OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"), RELATING TO FUTURE EVENTS OR THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY. CERTAIN OF THESE FORWARD-LOOKING
STATEMENTS ARE INDICATED BY AN ASTERISK WITHIN THIS PROSPECTUS. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS OR
STATEMENTS OF INTENTION SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL
EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED. BECAUSE ACTUAL
RESULTS MAY DIFFER, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE RISKS, UNCERTAINTIES AND OTHER
MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND THE MATTERS SET FORTH
UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 4,000,000 shares
Common Stock to be outstanding
after the offering.......... 12,944,758 shares(1)
Use of Proceeds............... Proceeds will be used primarily for funding research and development costs (including pre-production
manufacturing and completion of the design, engineering and testing of the Super X); sales and
marketing costs (including increased marketing activity prior to the commercial introduction of the
Super X and dealer network development); capital expenditures (including completing and equipping
the manufacturing and administrative facility, acquiring tooling and motorcycle components and
supplies); and general and administrative costs. See "Use of Proceeds."
Nasdaq National Market
Symbol...................... BIGX
</TABLE>
- - ------------------------
(1) Does not include 1,003,481 shares of Common Stock that are issuable upon the
exercise of outstanding options and warrants exercisable at $.90 to $4.50
per share as of the date of this Prospectus. See "Management--Executive
Compensation" and "Description of Capital Stock-- Options and Warrants."
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
CUMULATIVE FOR CUMULATIVE FOR
THE PERIOD THE PERIOD
FROM INCEPTION FROM INCEPTION
(DECEMBER 22, THREE MONTHS ENDED (DECEMBER 22,
YEAR ENDED DECEMBER 31, 1993) TO MARCH 31, 1993) TO
-------------------------------------- DECEMBER 31, ----------------------- MARCH 31,
1994 1995 1996 1996(1) 1996 1997 1997(1)
---------- ------------ ------------ -------------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total preoperating
expenses.......... $ 383,845 $ 1,270,112 $ 2,681,669 $ 4,336,801 $ 502,905 $ 1,078,554 $ 5,415,355
Interest income
(expense), net.... (5,346) 36,221 170,138 201,013 17,774 88,794 289,807
---------- ------------ ------------ -------------- ---------- ----------- --------------
Net loss............ $ (389,191) $ (1,233,891) $ (2,511,531) $ (4,135,788) $ (485,131) $ (989,760) $ (5,125,548)
---------- ------------ ------------ -------------- ---------- ----------- --------------
---------- ------------ ------------ -------------- ---------- ----------- --------------
Net loss per common
and common
equivalent share
(pro forma)(2).... $ (.07) $ (.18) $ (.31) $ (.65) $ (.06) $ (.11) $ (.77)
Weighted average
common and common
equivalent shares
outstanding (pro
forma)(2)......... 5,329,678 6,774,031 8,174,856 6,409,967 7,643,006 9,203,700 6,698,055
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 7,932,590 $ 35,511,090
Total assets....................................................................................... 9,024,919 36,603,419
Total stockholders' equity......................................................................... 8,656,567 36,235,067
</TABLE>
- - ------------------------------
(1) The Company was incorporated and began operations on December 22, 1993.
(2) See Note 2 to Financial Statements for an explanation of the determination
of weighted average common and common equivalent shares outstanding.
(3) Adjusted to reflect the sale of the shares offered hereby and application of
the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED BY THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS CONCERNING THE COMPANY AND ITS BUSINESS, BEFORE PURCHASING THE SHARES
OFFERED HEREBY. FORWARD-LOOKING STATEMENTS ARE MARKED BY AN ASTERISK (*), SEE
"FORWARD-LOOKING STATEMENTS."
LACK OF SALES; EXPECTATION OF LOSSES
The Company has not had sales to date and does not anticipate motorcycle
sales until late 1998.* As of March 31, 1997, the Company had an accumulated
deficit of $5.1 million. The Company expects operating losses to increase as its
product development, marketing and sales, manufacturing and administrative
functions expand prior to and during the initial stage of motorcycle sales.*
There can be no assurance that the Company will generate motorcycle sales or
become profitable.
INDEPENDENT PUBLIC ACCOUNTANT'S UNCERTAINTY REGARDING GOING CONCERN OF THE
COMPANY
The report of the independent public accountants on the Company's Financial
Statements for the years ended December 31, 1994, 1995 and 1996 and cumulative
for the period from inception (December 22, 1993) to December 31, 1996 includes
an explanatory paragraph relating to the uncertainty of the Company's ability to
continue as a going concern. The Company is 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 has sustained operating losses since
inception and currently requires substantial financing for motorcycle
development, acquisition and equipping of manufacturing facilities, and
development of a dealer network and raising consumer awareness. Even if the
Company is successful in completing the above activities, significant revenues
might not be realized. The aforementioned factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company's ability to
continue motorcycle development and to operate as a going concern is contingent
upon obtaining additional financing that might not be available to it. See
"Financing Risk; Possible Need for Additional Financing" and Financial
Statements and the Notes thereto.
MARKET ACCEPTANCE
The Company's success depends upon market acceptance of its brand of
products. Market acceptance depends upon the ability of the Company to establish
its intended brand image and a reputation for high quality and to differentiate
its brand of products from its competitors. There can be no assurance that the
Company's products will be perceived as being of high quality and differentiated
from such other products, or that the Company will be successful in establishing
its intended brand image. See "Business--Products" and "Business--Industry and
Market."
COMPETITION
The Company will operate in a highly competitive environment and compete
against established motorcycle manufacturers such as Harley-Davidson, BMW,
Ducati, Honda, Kawasaki, Moto-Guzzi, Suzuki, Triumph and Yamaha.
Harley-Davidson, which is expected to be the Company's primary competitor in the
U.S. market, has stated in its public reports that it had a 48% share of the
U.S. market for new heavyweight motorcycle registrations in 1996 and that it
will double its 1995 production capacity by the year 2003. The Company also
expects that other manufacturers will attempt to enter the industry, including
Polaris Industries Inc., a manufacturer of snowmobiles, personal watercraft and
all-terrain vehicles, which announced that it would begin manufacturing a
cruiser motorcycle to be available in
6
<PAGE>
limited quantities in spring 1998. Also, the Company is aware of several
attempts to revive the "Indian" motorcycle. The Company's established
competitors have greater resources than the Company. Finally, a number of small
companies build motorcycles from non-proprietary parts. No assurance can be
given that the Company will be able to compete effectively. See
"Business--Industry and Market" and "Business-- Competition."
MANUFACTURING RISK; NO MANUFACTURING HISTORY
Production of the Super X and any additional motorcycles the Company may
produce is dependent upon completing the construction of the Company's
manufacturing facility, establishing a motorcycle production line, engaging
reliable suppliers to manufacture components for the Company's products, hiring
additional engineering and manufacturing personnel and completing the design of
the Super X for mass production. Factors that may affect the successful
completion of such items include delays in the construction of the Company's
manufacturing and administrative facility, problems in establishing the
motorcycle production line, the inability of the Company to locate competent
suppliers or obtain adequate quantities of components and supplies at reasonable
costs, the inability of the Company to hire additional qualified personnel and
the inability of the Company's engineering and manufacturing staff to design,
engineer and produce the Super X. In addition, for the Company to be successful,
its products must be manufactured to meet high quality standards in production
volumes. Although the Company has produced prototypes of the Super X, it has
never attempted to manufacture motorcycles in large quantities. The transition
to mass production will involve various risks and uncertainties that may not be
apparent at this time and there can be no assurance that the Company will be
able to successfully react to unanticipated difficulties. See
"Business--Manufacturing".
FINANCING RISK; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company is dependent upon obtaining substantial amounts of financing
from a number of sources, including those discussed below, to fund its
operations and capital expenditures. There can be no assurance that the Company
will be able to obtain such financing or that such financing, if obtained, will
be on terms acceptable to its shareholders. Significant additional dilution may
be incurred by investors in this offering as a result of additional equity
financing. New investors may seek and obtain significantly better terms than
those granted to present investors. Any need for such additional financing could
delay production of the Super X.
Based upon its current estimates, the Company believes that the proceeds of
this offering, together with equipment financing from the State of Minnesota of
approximately $7.0 million and available cash resources, will be sufficient to
fund the pre-production operations of the Company and the capital expenditures
necessary to start production of the Super X.* The Company may require
additional fixed asset and working capital financing prior to commencement of
production.* If the Company's estimates of the amount of financing needed to
commence production of the Super X are incorrect due to unanticipated additional
costs of constructing and equipping the Company's manufacturing facility,
unanticipated problems in the development of the Super X for production,
increased labor costs, increased costs of motorcycle parts and raw materials,
increased marketing and dealer network development expenses, increased rates of
consumption of available cash resources, the unavailability of commercial fixed
asset and working capital financing, or other unanticipated events, then the
Company may need additional equity or debt financing in excess of the proceeds
of this offering prior to or shortly after commencement of production of the
Super X.
Although the relevant approvals by the State of Minnesota to loan the
Company $7.0 million for equipment financing have been obtained, such loan
depends on the successful marketing and sale of bonds to fund the loan. The
State of Minnesota has not yet offered the bonds for sale and there can be no
assurance that such bonds will ever be sold or that the Company will receive any
equipment financing from the State of Minnesota.
7
<PAGE>
Upon commencement of production, the Company will need to obtain substantial
amounts of fixed asset and working capital financing to fund its operations.*
The Company has not sought, and does not expect to seek, any commitments for
fixed asset or working capital financing until the Company approaches the
commencement of production. The availability and terms of any such fixed asset
or working capital financing will depend on a number of credit market factors,
including interest rates, liquidity and lending regulations, as well as the
business prospects and financial condition of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE ON SUPPLIERS
The Company will rely on outside vendors to supply most of the proprietary
and non-proprietary components that will be used to manufacture its motorcycle
products. For certain of the components the Company intends to rely on single
sources of supply. Such reliance involves a number of significant risks,
including the unavailability of or interruptions in delivery of such components,
manufacturing delays caused by such unavailability or interruptions and
fluctuations in the quality and price of such components. Any significant
adverse variation in the quantity, quality or cost of such components
manufactured by outside vendors, especially single-source vendors, could
materially and adversely affect the Company's results of operations. See
"Business--Manufacturing."
The Company anticipates that it will purchase certain of its components from
foreign vendors. In addition to the risks of dependence on suppliers described
above, the risks of dependence on foreign suppliers include currency
fluctuations affecting the value of goods purchased, trade restrictions, changes
in tariffs and difficulty of enforcing supply arrangements.
DISTRIBUTION NETWORK; ABILITY TO SUPPORT DEALERS
The Company has not had a dealer network to date. Prior to production, the
Company will need to attract successful dealers to sell its brand of products.
There can be no assurance that the Company will be able to attract the number of
dealers the Company may need or that such dealers will be successful in selling
its brand of products. See "Business--Distribution."
In addition, the Company will be required to support its dealers through,
among other things, making floor plan financing available through third parties,
continuing education about the Company's brand of products, supplying parts and
accessories, and training repair personnel. The Company does not have any
history in such dealer support and there can be no assurance that the Company
will be able to successfully support its dealer network. If the Company is
unable to provide such support, the Company may lose dealers and, consequently,
distribution of its products would be adversely affected.
DISCRETIONARY PRODUCT
Purchases of motorcycles, such as the premium heavyweight motorcycles that
the Company plans to produce, are discretionary for consumers. The success of
the Company will be influenced by a number of economic factors affecting
discretionary consumer income, such as employment levels, business conditions,
interest rates and taxation rates, which are beyond the Company's control.
Adverse economic changes affecting these factors may restrict consumer spending
and thereby adversely affect the Company's growth and profitability.
SINGLE PRODUCT
Until the Company commences the manufacturing of other motorcycles, the
Company's success will depend entirely on the success of a single product, the
Super X. If the Super X is not accepted by its intended market, the future
operations of the Company would be materially adversely affected.
8
<PAGE>
RISK OF DEFECTS
The Company's products may encounter unanticipated defects. Such defects
could give rise to recalls of the Company's products and adversely affect their
market appeal. Such recalls or other defects would be costly to the Company and
could have a material adverse effect on the Company's brand, future financial
condition, and subsequent results of operations.
PRODUCT LIABILITY RISK
Given the nature of the Company's products, the Company expects that it will
be subject to potential product liability claims that could, in the absence of
sufficient insurance coverage, have a material adverse impact on the Company.
Although the Company intends to obtain adequate insurance coverage prior to
commencing mass production, there can be no assurance that the Company will be
able to secure or maintain adequate liability insurance to cover all product
liability claims. Particularly as a new market entrant, any large product
liability suits occurring early in the Company's operations may significantly
adversely affect the Company's ability to market its motorcycle products.
DEPENDENCE UPON KEY PERSONNEL; MANAGEMENT OF GROWTH
The success of the Company is materially dependent upon the services and
efforts of its Co-Founders, Daniel and David Hanlon, and other members of its
executive management team. In addition, as a development stage company, the
Company has had in the past and expects in the future to have management
turnover as the Company develops its management team. The unavailability or loss
of the services of any of these individuals could adversely affect the Company's
success. The Company is still in the process of filling key management roles.
The Company does not have any employment or non-competition agreements with any
members of its executive management team but has entered into confidentiality
and non-solicitation agreements with such persons. While the Company maintains
life insurance on its Co-Founders, it does not maintain life insurance on any
other member of its executive management team. See "Management--Confidentiality
Agreements; Life Insurance."
As the Company moves closer to mass production of the Super X, there will be
increasing demands on the Company's management, operational and financial
resources. Successful management of growth will require the Company to
constantly improve its management abilities and production processes and there
can be no assurance that the Company will be able to manage the expected level
of growth effectively. In addition, mass production of the Super X will depend
on the ability of the Company to hire additional qualified personnel and the
ability of the Company's management to integrate such persons into the Company.
Competition is intense for highly skilled workers, and there can be no assurance
that the Company will be successful in attracting, training and retaining such
personnel.
TRADEMARK STATUS
The Company believes that it has the exclusive right to use the trademarks
"Excelsior-Henderson," "Super X" and "X-twin," among others, and certain related
word and design trademarks in the United States and in certain foreign countries
in connection with the manufacture or sale of motorcycles. Given the Company's
actual and intended use of these trademarks to enhance the Company's brand name
and marketing appeal of its motorcycles, a successful challenge to its use of
certain of these trademarks in connection with motorcycles and ancillary
products would adversely affect the Company's business. Although the Company
intends to vigorously defend its intellectual property rights, if necessary,
such litigation could be costly and consume resources of the Company, which
could adversely affect operating results. See "Business--Intellectual Property
Rights."
REGULATORY APPROVAL RISKS
The Company will be required to obtain approvals and make certifications
regarding compliance with federal, state and local regulations regarding the
noise, emissions and safety characteristics of its
9
<PAGE>
motorcycles. In addition, the Company's manufacturing facility will be required
to comply with environmental and safety standards. The potential delays and
costs that could result from obtaining such regulatory approvals and complying
with, or failing to comply with, such regulations could result in a delay in
motorcycle production and adversely affect operating results. See
"Business--Government Regulation."
CONTROL BY CO-FOUNDERS AND EXISTING MANAGEMENT
Co-Founders Daniel Hanlon and David Hanlon together beneficially own
3,260,000 shares of Common Stock of the Company. In addition, the directors and
other executive officers of the Company own an additional 520,575 shares of
Common Stock (including options which vest within 60 days of the date of this
Prospectus). Following this offering, the Co-Founders, and other directors and
executive officers will in the aggregate control 29.1% of the voting power of
the Company (assuming the exercise of options). As a result, such persons will
be able to greatly influence the outcome of shareholder votes, including votes
concerning the election of directors and changes in control. See "Principal
Shareholders."
CO-CHIEF EXECUTIVE OFFICERS
The Company's Co-Founders also serve as the Co-Chief Executive Officers and
Co-Chairmen of the Board of the Company. In the event of a deadlock in decision
making between the Co-Founders that could materially impact the Company's
operations, the Company's Board of Directors would resolve the issue by a
majority vote.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 8,944,758
shares of Common Stock (including the 3,066,527 shares of Common Stock issuable
upon the conversion of the Company's Preferred Stock), which does not include:
(i) the shares offered hereby or (ii) 1,003,481 shares of Common Stock that are
issuable upon the exercise of outstanding options and warrants. See "Dilution"
and "Description of Capital Stock."
Sales of substantial amounts of the Company's Common Stock could adversely
affect prevailing market prices of the Company's Common Stock and could impair
the Company's ability to raise additional capital. Substantially all of the
shares of Common Stock currently outstanding are freely tradeable under Rule 144
of the Securities Act ("Rule 144"), or under other exemptions. Of the shares of
Common Stock currently outstanding, approximately 576,700 shares are not subject
to the lock-up agreements described below. Of these shares, approximately
448,500 shares are currently eligible for sale without restriction pursuant to
Rule 144(k) and approximately 128,200 shares are currently eligible for sale
subject to the volume, manner of sale and notice restrictions of Rule 144.
Approximately 8,368,000 shares of the Common Stock currently outstanding and to
be issued upon conversion of the Preferred Stock are subject to lock-up
agreements of varying periods; accordingly, none of these shares will be
eligible for sale until the expiration of the lock-up agreements. Approximately
1,664,000 of these shares will be eligible for sale 90 days after the closing of
this offering (approximately 56,400 of which will be subject to the requirements
of Rule 144 described above); approximately 3,544,400 of these shares will be
eligible for sale 180 days after the closing of this offering (approximately
473,900 of which will be subject to the requirements of Rule 144 described above
and 3,066,527 of which represents the shares of Common Stock issuable upon
conversion of the Company's Preferred Stock); and approximately 3,160,000 of
these shares will become eligible for sale 365 days after the closing of this
offering (all of which will be subject to the requirements of Rule 144 described
above). See "Shares Eligible for Future Sale."
NO PRIOR MARKET FOR COMMON STOCK; NEGOTIATED OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to this offering there has been no public market for shares of the
Company's Common Stock and there can be no assurance that an active trading
market will develop or be sustained. The initial public offering price for the
Common Stock will be determined by negotiations between the Company and the
representatives of the Underwriters and may be greater than the market price for
the Common Stock
10
<PAGE>
following this offering. The initial public offering price should not be
considered an accurate indication of the actual value of the Company, as it
bears no relationship to the Company's assets, book value, earnings, net worth
or other financial criteria. The market price of the Company's Common Stock
could be subject to significant fluctuations in response to variations in
quarterly operating results and other factors, such as announcements of progress
towards the Company's production and marketing goals, new products introduced by
the Company or its competitors, changes in financial estimates by securities
analysts and other events. Moreover, the stock market has experienced extreme
volatility that has often been unrelated and disproportionate to the operating
performance of affected companies. Broad market fluctuations, as well as
economic conditions generally and in the Company's industry specifically, may
adversely affect the market price of the Company's Common Stock. There can be no
assurance that the market price of the Common Stock will not decline below the
initial public offering price. The Company makes no representations, express or
implied, as to the value of the shares. There can be no assurance that the
purchasers will be able to resell the shares at the initial public offering
price or at any price. See "Underwriting."
DILUTION
Purchasers of the shares will experience an immediate and substantial
dilution of $4.71 in pro forma net tangible book value per share of Common Stock
from the initial public offering price of $7.50 per share. See "Dilution."
NO DIVIDENDS
The Company does not anticipate generating cash flows from operations in the
near future. If such cash flows from operations do occur, the Company presently
intends to use those cash flows to finance further growth of the Company's
business. Accordingly, investors should not purchase the shares with a view
towards receipt of dividends.
ANTI-TAKEOVER CONSIDERATIONS
As a Minnesota corporation, the Company is subject to certain anti-takeover
provisions of the Minnesota Business Corporation Act (the "MBCA"). Certain
provisions of the MBCA could have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the then prevailing market price of the
Common Stock, and may adversely affect the market price of, and the voting and
other rights of the holders of, the Common Stock. See "Description of Capital
Stock--Anti-Takeover Provisions of the Minnesota Business Corporation Act;
Restated Articles of Incorporation."
LIMITATION OF LIABILITY OF DIRECTORS TO SHAREHOLDERS
The Company has included in its Bylaws a provision to indemnify its
directors and officers and advance litigation expenses to the fullest extent
permitted or required by Minnesota law, including circumstances in which
indemnification is otherwise discretionary. Such indemnification may be
available for liabilities arising in connection with this offering. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to such indemnification provisions, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company has adopted in its Articles of Incorporation a provision that
limits the personal liability of a director for breach of the director's
fiduciary duty, except under certain circumstances involving any breach of the
director's duty of loyalty to the Company or its shareholders, acts or omissions
not made in good faith or that involve intentional misconduct or a knowing
violation of law, any unlawful acts under Sections 302A.559 or 80A.23 of the
Minnesota Statutes, or any transaction from which a director derives an improper
personal benefit.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be approximately $27.6 million ($31.8 million,
assuming the Underwriters' over-allotment option is exercised in full) after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The net proceeds of this offering are estimated to be used by the Company to
fund the following development stage operating costs and expenses and investment
in property and equipment: $9.8 million for research and development (including
pre-production manufacturing and completion of the design, engineering and
testing of the Super X); $2.0 million for sales and marketing (including
increased marketing activity prior to the commercial introduction of the Super X
and dealer network development); $13.4 million for capital expenditures
(including completing and equipping the manufacturing and administrative
facility and acquiring manufacturing tooling); and $2.4 million for general and
administrative costs. Pending such uses, the Company intends to invest such net
proceeds from this offering in short-term investment-grade, interest-bearing
securities. In addition, the Company may also require additional fixed asset and
working capital financing prior to commencement of production of the Super X.*
Upon commencement of production, the Company will need to obtain substantial
amounts of fixed asset and working capital financing.* See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future.
12
<PAGE>
DILUTION
As of March 31, 1997, the pro forma net tangible book value of the Company
was $8.5 million, or $.95 per share of Common Stock. "Pro forma net tangible
book value" per share of Common Stock represents the total amount of tangible
assets of the Company, less the total amount of liabilities of the Company,
divided by the number of shares of Common Stock outstanding, including the
issuance of 3,066,527 shares of Common Stock issuable upon conversion of the
Preferred Stock. Assuming the offering was completed at March 31, 1997 at the
initial public offering price of $7.50 per share, and after deducting the
underwriting discount and selling commissions and estimated offering expenses,
the pro forma net tangible book value of the Common Stock of the Company as of
March 31, 1997, would have been $36.1 million, or $2.79 per share. The increase
in pro forma net tangible book value of approximately $1.84 per share of Common
Stock would be due solely to the purchase of shares in this offering by
investors and immediate dilution of $4.71 per share would be incurred by
investors in this offering. "Dilution" is determined by subtracting net tangible
book value per share after the offering from the offering price, as illustrated
by the following table:
<TABLE>
<S> <C> <C>
Price per share(1)............................................ $ 7.50
Pro forma net tangible book value per share at March 31,
1997...................................................... $ .95
Increase per share attributable to new investors............ 1.84
---------
Pro forma net tangible book value per share after this
offering.................................................... 2.79
---------
Pro forma net tangible book value dilution per share to new
investors(2)................................................ $ 4.71
---------
---------
</TABLE>
- - ------------------------
(1) Offering price before deduction of underwriting discounts and selling
commissions and estimated offering expenses. If the Underwriters'
over-allotment option is exercised in full, the pro forma net tangible book
value per share after this offering would be $2.97, the increase per share
attributable to new investors would be $2.02, and the dilution per share to
new investors would be $4.53.
(2) Does not include 1,003,481 shares of Common Stock that are issuable upon the
exercise of outstanding options and warrants exercisable at $.90 to $4.50
per share. See "Management-- Executive Compensation" and "Description of
Capital Stock--Options and Warrants."
The following table summarizes, on a pro forma basis, the difference between
the number of shares of Common Stock purchased from the Company by the existing
shareholders and by new investors in this offering, the total consideration paid
to the Company and the average price paid per share. The table assumes that no
shares are purchased in this offering by existing shareholders. To the extent
existing shareholders purchase in this offering, their percentage ownership,
total consideration and average consideration per share will be greater than is
shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Common Shareholders(1).................... 5,878,231 45.4% $ 3,872,550 8.5% $ .66
Existing Preferred Shareholders.................... 3,066,527 23.7 11,500,000 25.4 3.75
New Investors...................................... 4,000,000 30.9 30,000,000 66.1 7.50
------------ ----- ------------- -----
Total............................................ 12,944,758 100.0% $ 45,372,550 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- - ------------------------
(1) Does not include 1,003,481 shares of Common Stock that are issuable upon the
exercise of outstanding options and warrants exercisable at $.90 to $4.50
per share. See "Management-- Executive Compensation" and "Description of
Capital Stock--Options and Warrants."
13
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the capitalization
of the Company, (ii) the pro forma capitalization of the Company giving effect
to the conversion of all outstanding shares of Preferred Stock into Common
Stock, and (iii) such pro forma capitalization as adjusted to reflect the
application of the net proceeds from the sale by the Company of 4,000,000 shares
of Common Stock pursuant to this offering at the initial public offering price
of $7.50 per share. See "Use of Proceeds." The information set forth below
should be read in conjunction with the Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
MARCH 31, 1997(1)
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Stockholders' equity:
Series A Convertible Preferred Stock, par value of $.01; 3,342,666
shares authorized; 3,066,527 issued and outstanding (actual);
(none pro forma and pro forma as adjusted)...................... $ 30,665 $ -- $ --
Common Stock, par value of $.01; 16,666,666 shares authorized;
5,878,231 issued and outstanding (actual); 8,944,758 issued and
outstanding (pro forma); 12,944,758 issued and outstanding (pro
forma as adjusted).............................................. 58,782 89,447 129,448
Additional paid-in capital........................................ 13,692,668 13,692,668 41,231,167
Deficit accumulated during the development stage.................. (5,125,548) (5,125,548) (5,125,548)
------------- ------------- -------------
Total stockholders' equity and capitalization................... $ 8,656,567 $ 8,656,567 $ 36,235,067
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- - ------------------------
(1) Does not include 1,003,481 shares of Common Stock that are issuable upon the
exercise of outstanding options and warrants exercisable at $.90 to $4.50
per share. See "Management-- Executive Compensation" and "Description of
Capital Stock--Options and Warrants."
14
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994, 1995
and 1996 and cumulative for the period from inception (December 22, 1993) to
December 31, 1996, and the balance sheet data as of December 31, 1995 and 1996
are derived from and are qualified by reference to, and should be read in
conjunction with the more detailed Financial Statements of the Company and the
Notes thereto, which have been audited by Arthur Andersen LLP, independent
public accountants, whose report is included elsewhere in this Prospectus, and
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which follows this section. The balance
sheet data at December 31, 1994 are derived from audited financial statements
not included in this Prospectus. The statement of operations data for the three
months ended March 31, 1996 and 1997 and cumulative for the period from
inception (December 22, 1993) to March 31, 1997, and the balance sheet data at
March 31, 1997 are derived from the unaudited financial statements of the
Company included elsewhere in this Prospectus, which statements reflect, in the
opinion of management of the Company, all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
data for such periods. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997, or for any other interim
period.
<TABLE>
<CAPTION>
CUMULATIVE FOR
THE PERIOD CUMULATIVE FOR
FROM INCEPTION THE PERIOD
(DECEMBER 22, FROM INCEPTION
1993) THREE MONTHS ENDED (DECEMBER 22,
YEAR ENDED DECEMBER 31, TO MARCH 31, 1993)
--------------------------------------- DECEMBER 31, ------------------------- TO
1994 1995 1996 1996 1996 1997 MARCH 31, 1997
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
PREOPERATING
EXPENSES:
Research and
development..... $ 110,082 $ 702,345 $ 1,271,276 $ 2,083,703 $ 252,157 $ 477,108 $ 2,560,811
Marketing......... 32,133 106,974 694,239 833,346 95,426 283,376 1,116,722
General and
administrative... 241,630 460,793 716,154 1,419,752 155,322 318,070 1,737,822
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
Total
preoperating
expenses...... 383,845 1,270,112 2,681,669 4,336,801 502,905 1,078,554 5,415,355
INTEREST INCOME..... -- 43,522 174,226 217,748 18,335 90,482 308,230
INTEREST EXPENSE.... (5,346) (7,301) (4,088) (16,735) (561) (1,688) (18,423)
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
Net loss............ $ (389,191) $ (1,233,891) $ (2,511,531) $(4,135,788) $ (485,131) $ (989,760) $(5,125,548)
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
Net loss per common
and common
equivalent share
(pro forma) (1)... $ (.07) $ (.18) $ (.31) $ (.65) $ (.06) $ (.11) $ (.77)
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
Weighted average
common and common
equivalent shares
outstanding
(pro forma) (1)... 5,329,678 6,774,031 8,174,856 6,409,967 7,643,006 9,203,700 6,698,055
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
---------- ------------ ------------ ---------------- ----------- ----------- ----------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- MARCH 31,
1994 1995 1996 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $188,025 $1,550,914 $9,038,639 $7,932,590
Total assets............................ 373,926 1,882,588 10,023,400 9,024,919
Note payable............................ 25,015 24,351 70,086 67,002
Total stockholders' equity.............. 254,123 1,728,858 9,631,327 8,656,567
</TABLE>
- - ------------------------------
(1) See Note 2 to Financial Statements for determination of weighted average
common and common equivalent shares outstanding.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company plans to manufacture, market and sell premium heavyweight
cruiser and touring motorcycles with a brand that evokes an authentic American
motorcycling heritage and lifestyle.* 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 risk that full-scale operations may
not occur. The Company does not anticipate having motorcycle sales until late
1998.* As a result primarily of the operating expenses described below in
"Results of Operations," the Company's deficit accumulated during the
development stage was $5.1 million at March 31, 1997. Historic spending levels
are not indicative of anticipated future spending levels because the Company is
entering a period in which it will increase spending on product research and
development, marketing and dealer network development, and increase staffing and
other general operating expenses. For these reasons, the Company believes its
expenses, losses, and deficit accumulated during the development stage will
increase significantly before any material product sales are generated.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $477,000 for the three months ended March 31, 1997 from $252,000
for the three months ended March 31, 1996. The increases were primarily due to
increased product design and development costs, as well as the costs of building
prototypes.
MARKETING EXPENSES. Marketing expenses increased to $283,000 for the three
months ended March 31, 1997 from $95,000 for the three months ended March 31,
1996. The increases were primarily due to staffing increases, increased
advertising and promotion costs and expenses associated with the Company's
promotional event at the 1997 Daytona Bike Week.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $318,000 for the three months ended March 31, 1997 from $155,000
for the three months ended March 31, 1996. The increases were primarily due to
staffing increases and other general operating expenses.
INTEREST INCOME. Interest income increased to $90,000 for the three months
ended March 31, 1997 from $18,000 for the three months ended March 31, 1996. The
increase generally reflects interest earned on increased average levels of cash,
cash equivalents and short-term investments held by the Company resulting from
the proceeds of the sale of the Company's Preferred Stock during 1996.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $1.3 million in 1996 from $702,000 in 1995 and $110,000 in 1994.
The increases were primarily due to increases in expenses for product design and
development, as well as expenses for developing prototypes.
MARKETING EXPENSES. Marketing expenses increased to $694,000 in 1996 from
$107,000 in 1995 and $32,000 in 1994. The increases were primarily due to
staffing increases, increased advertising and promotion costs and, during 1996,
expenses associated with the unveiling of the prototype Super X at the Sturgis
Motorcycle Rally in Sturgis, South Dakota.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $716,000 in 1996 from $461,000 in 1995 and $242,000 in 1994. The
increases were primarily due to staffing increases and other general operating
expenses.
16
<PAGE>
INTEREST INCOME. Interest income increased to $174,000 in 1996 from $44,000
during 1995. The Company did not earn any interest income during 1994. The
increase generally reflects interest earned on increased average levels of cash,
cash equivalents and short-term investments held by the Company resulting from
the proceeds of the sale of the Company's Preferred Stock during 1996 (See Note
4 of Notes to Financial Statements) and from the proceeds of the sales of Common
Stock during 1994, 1995 and 1996 (See Statements of Stockholders' Equity in the
Financial Statements).
NET OPERATING LOSS CARRYFORWARDS
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, a change in equity ownership of greater than 50% of the Company within
a three-year period results in an annual limitation on the Company's ability to
utilize its net operating loss ("NOL") carryforwards that accrued during the tax
periods prior to the change in ownership. As of December 31, 1996, the Company
had an NOL carryforward of approximately $3,228,000, which begins to expire in
2011. The sale of the shares in this offering will not directly result in such
limitation; however, the NOL carryforwards may become subject to such a
limitation due to subsequent changes in the equity ownership of the Company.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company raised approximately $10.3 million in net proceeds from
the sale of the Preferred Stock. Of such proceeds, as of March 31, 1997, $1.8
million had been used to fund development stage operating costs, $500,000 had
been used for investment in property and equipment and the balance remained
available in cash, cash equivalents and short-term investments. As of March 31,
1997, the Company had cash, cash equivalents and short-term investments of $8.2
million and working capital of $7.9 million. Subsequent to March 31, 1997, the
Company has used an additional $3.2 million as its equity contribution to its
manufacturing and administrative facility. Prior to production of the Super X,
the Company has planned capital expenditures of an aggregate of $10.5 million
(including the $3.2 million equity contribution referred to above) to construct
its new manufacturing and administrative facility and $18.0 million to equip its
facility.
On April 21, 1997, the Company signed a Construction Agreement and a Lease
Agreement (the "Lease Agreement") with a real estate development company to
commence construction of its approximately 160,000 square foot manufacturing and
administrative facility, with an estimated cost of $10.5 million, exclusive of
equipment costs. The project is being financed by the real estate development
company with $2.3 million of tax increment financing bonds to be issued by the
City of Belle Plaine, Minnesota, $5.75 million (including a $750,000 deposit) of
mortgage-backed debt arranged by the developer and the balance of approximately
$3.2 million was provided by the Company during April 1997. To finance repayment
of the tax increment financing, the Company has guaranteed the underlying real
estate tax payments on the property. The Company anticipates recording the
transaction as a capital lease upon completion and acceptance of the facility.
The lease for the facility has an initial term of 20 years with two
additional 10-year renewal options. Rent for the first 20 years will be equal to
the debt service on the $5.75 million mortgage-backed debt, using a 20 year
amortization, plus a 10 percent premium (escalating during the lease term to
roughly offset inflation). Rent for the 10 year renewal options is based on the
greater of fair market value at the date of renewal or formula rent, as defined
in the Lease Agreement. The Lease Agreement contains an option to purchase the
facility at the five year anniversary for $6.25 million less any principal
reduction in the $5.0 million debt (and application of the $750,000 deposit).
In addition, the Minnesota Department of Trade and Economic Development,
through the Minnesota Agriculture and Economic Development Board, has offered to
loan approximately $7.0 million for equipment financing through its Small
Business Development Loan Program. Although the relevant approvals for such
financing have been obtained, the bonds for the financing have not yet been sold
and
17
<PAGE>
there can be no assurance that such bonds will ever be sold. If the bonds are
not sold, then the Company may need to obtain the funds anticipated from such
financing from other sources.
The Company will use the net proceeds of $27.6 million from this offering
for funding research and development costs (including pre-production
manufacturing and completion of the design, engineering and testing of the Super
X); sales and marketing costs (including increased marketing activity prior to
the commercial introduction of the Super X and dealer network development);
capital expenditures (including completing and equipping the manufacturing and
administrative facility, acquiring tooling and motorcycle components and
supplies); and general and administrative costs. Based upon its current
estimates, the Company believes that its available cash resources, together with
the proceeds to be received from this offering and the proceeds anticipated to
be received from the Minnesota Department of Trade and Economic Development,
will be sufficient to fund the pre-production operations of the Company and the
capital expenditures necessary to start production of the Super X.* The Company
may require additional fixed asset and working capital financing prior to
commencement of production.* Upon commencement of production, the Company will
need to obtain substantial amounts of fixed asset and working capital
financing.* However, if any of the anticipated sources of funds are not
available, the Company will have to look to other means of financing. In
addition, if the Company's estimates of the amount of financing needed to
commence production of the Super X are incorrect due to unanticipated additional
costs of constructing and equipping the Company's manufacturing facility,
unanticipated problems in the development of the Super X for production,
increased labor costs, increased costs of motorcycle parts and raw materials,
increased marketing and dealer network development expenses, increased rates of
consumption of available cash resources, or other unanticipated events, then the
Company may need additional equity or debt financing in excess of the proceeds
of this offering prior to or shortly after commencement of production of the
Super X.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
changes the way companies calculate their earnings per share ("EPS"). SFAS 128
replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed. The Company is required to adopt SFAS 128 for its year-end 1997
financial statements, at which time all prior year EPS data is to be restated in
accordance with SFAS 128. See Note 7 to Financial Statements for the pro forma
analysis of EPS data.
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<PAGE>
BUSINESS
The Company, which was organized as a Minnesota corporation in 1993, is in
the development stage and plans to manufacture, market and sell premium
heavyweight cruiser and touring motorcycles with a brand that evokes an
authentic American motorcycling heritage and lifestyle.* The Company's
motorcycle products will feature current technology but will reflect distinctive
designs, styling and names reminiscent of the motorcycles produced in the early
part of this century by Excelsior Supply under the brand names Excelsior and
Henderson. The Company intends to commence mass production of its initial
motorcycle, a heavyweight cruiser named the Excelsior-Henderson Super X, in late
1998.* The Company has developed several generations of prototypes of the Super
X and first unveiled a running prototype at the Sturgis Motorcycle Rally in
Sturgis, South Dakota in August 1996. The Company's 160,000 square foot
manufacturing and administrative facility is under construction in Belle Plaine,
Minnesota, and the Company anticipates relocating its operations to the facility
during late 1997.*
In 1993, Co-Founders Dan and Dave Hanlon developed a business plan to pursue
a market opportunity they believed existed in the heavyweight motorcycle market.
They believed that many purchasers of heavyweight motorcycles wanted an
authentic American alternative to the motorcycles produced by Harley-Davidson.
After researching the market, they believed that the combination of Excelsior
Supply's status as one of the original Big Three motorcycle manufacturers,
available brand name and rich heritage would serve as an excellent marketing
brand and design inspiration for the heavyweight motorcycles they planned to
introduce. The Company was founded on the strategy to establish itself within
the motorcycle industry by marketing a brand that is based on an authentic
American heritage and to manufacture products and accessories that represent a
distinct alternative to the products of Harley-Davidson.* To achieve such
strategy, the Company has been developing its products, securing its trademarks,
engaging in marketing activities, hiring its management team and its initial
engineering, manufacturing and other personnel and raising capital.
THE EXCELSIOR-HENDERSON HERITAGE
It has been estimated that in the early part of this century, there were
over 200 American motorcycle manufacturing companies. Until 1931, the "Big
Three" motorcycle manufacturers were Excelsior Supply, Harley-Davidson and
Indian. Excelsior Supply ceased operations in 1931 during the Great Depression
and Indian ceased operations in 1953. Harley-Davidson has been the only
significant manufacturer of American heavyweight cruiser and touring motorcycles
since 1953. See "Competition."
Founded as a bicycle supply company in Chicago in 1876, Excelsior Supply was
owned by bicycle producer Ignatz Schwinn from 1911 until it ceased production.
Although the Company is not a successor to Excelsior Supply, it secured
Excelsior Supply's available brand names through usage beginning in 1993. These
brand names had become available after they were abandoned by Excelsior Supply
in 1931. Excelsior Supply produced, among others, a Big X motorcycle and a Super
X motorcycle, featuring large "X-twin" engines. In 1917, Excelsior Supply
purchased Henderson and continued to manufacture a Henderson DeLuxe Four, which
featured an inline four cylinder engine. The Company intends to produce
motorcycles whose styling is inspired by those manufactured by Excelsior Supply.
The motorcycles manufactured by Excelsior Supply and Henderson were a
significant force on the racetrack and on the road. These motorcycles set many
performance records, including the first motorcycle to circle the world and the
first to break the 100 m.p.h. speed barrier. Also, many police departments used
motorcycles manufactured by Excelsior Supply, as did the U.S. government during
World War I. Several famous personalities of the time owned motorcycles produced
by Excelsior Supply, including aviator Charles Lindbergh and automobile
manufacturer Henry Ford.
In 1929, Excelsior Supply restyled its Super X and Henderson DeLuxe Four
motorcycles into its "Streamline" product line. Several motorcycle historians
have cited these "Streamline" models as among the originators of the classic
American heavyweight motorcycle style. For the Excelsior Supply Super X,
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<PAGE>
this classic style included a large displacement "X-twin" engine, a teardrop
shaped split fuel tank, full valanced fenders, a curved front frame that
followed the contour of the front fender, a low slung seat in which the rider
sat into the bike, a leading link front suspension with fork tubes that passed
through the front fender, a tank-mounted instrument panel, balloon tires and
premium single and two-tone paint finishes.
INDUSTRY AND MARKET
The heavyweight motorcycle category consists of motorcycles with an engine
displacement of 651cc or greater. Within the heavyweight category, there are
four types of motorcycles: (i) STANDARD, which emphasize simplicity and cost;
(ii) PERFORMANCE, which emphasize handling and speed; (iii) TOURING, which
emphasize comfort and amenities for long-distance travel; and (iv) CRUISER,
which feature the distinctive styling of classic American motorcycles built
during the early years of the motorcycling industry and are designed to
facilitate customization by individual owners. Touring and cruiser motorcycles
are the only types of heavyweight motorcycles that the Company plans to design
and market. According to statistics in Harley-Davidson's public reports, in
1996, touring and cruiser models represented approximately 80% of retail unit
sales in the U.S. heavyweight market. Heavyweight motorcycles, in turn,
represented approximately half of retail motorcycle unit sales in the overall
United States market in 1996. U.S. registrations of new heavyweight motorcycles
increased in 1996 by approximately 9.6% (to 165,700 units) over 1995
registrations, and U.S. registrations of new heavyweight motorcycles have
increased by 59% from 1992 through 1996. In 1996, Harley-Davidson reported an
approximate 48% market share of U.S. and a 25% market share of worldwide
(including U.S.) new heavyweight motorcycle registrations representing
approximately $874 million in domestic motorcycle revenue and approximately $1.2
billion in worldwide (including U.S.) motorcycle revenue. Trade publications and
dealers have reported that there are substantial waiting lists at the dealers
for certain models of Harley-Davidson motorcycles.
As recreational products, the Company's motorcycles and related products are
in a growing consumer market. According to U.S. Government reports, from 1992
through 1995 spending on recreational products grew at over five percent per
year and in the last three years has grown at three times the rate of overall
consumer spending. Based on industry information, the Company believes that the
typical customer for heavyweight American touring and cruiser motorcycles is a
male between the ages of 35 and 65, with a household income of approximately
$65,000. These customers are generally experienced motorcycle riders who
purchase motorcycles for recreational purposes rather than for transportation.
According to U.S. Department of Commerce demographic surveys, the number of
Americans that will fall into the targeted age bracket is projected to increase
by approximately 11% over the next five years and by 19% over the next ten
years. The 35 to 65 year old age group also leads all age groups in annual
spending per consumer on recreational products and generally has greater
disposable income than other age groups.
The Company believes that customers in its target market purchase
motorcycles based on a number of factors including styling, quality, reliability
and product features. The Company also believes that such purchasers are seeking
motorcycles and related products with a brand appeal associated with an
authentic classic American motorcycling heritage and lifestyle.
STRATEGY AND DEVELOPMENT PLAN
The Company's strategy is to establish its brand based on the authentic
American motorcycling heritage of Excelsior Supply and Henderson and to offer
products and accessories that represent a distinct alternative to the products
of Harley-Davidson.* In conjunction with this strategy, the Company has
undertaken marketing efforts to re-establish the legacy of Excelsior Supply and
Henderson in the motorcycling community and build demand for the Company's brand
and motorcycle products. In addition, the Company has secured its trademarks and
begun using them on its products, raised approximately $13.7 million in private
equity, constructed working prototypes of the Super X, displayed the Super X at
rallies, commenced construction of its manufacturing and administrative facility
and has
20
<PAGE>
commenced establishment of its dealer network. The Company also has hired, and
continues to add to, its engineering and manufacturing staff, which has been
working with design and engineering firms to develop the Super X for mass
production.
Prior to the commencement of production, the Super X will be subject to
continuing track and road testing to ensure reliability, durability, rider
ergonomics and to ensure product and manufacturing process optimization.* In
addition, the Company will have to complete certain certifications with
government entities prior to retail sales.* In addition to completing
construction of the manufacturing and administrative facility, the Company must
acquire equipment and fixtures for its production line, finalize agreements with
vendors to supply motorcycle components and continue training and manufacturing
system development.* The Company will need to sign up additional dealers and
begin targeted local market promotional and advertising programs with its
dealers.* The Company plans to conduct a nationwide marketing campaign, which
will include participating in additional rallies, consumer events and trade
shows, and promoting the Company's brand of motorcycle products at
Excelsior-Henderson dealer events.* Finally, the Company will be required to
hire additional management, engineering and manufacturing, and marketing staff
as needed to complete the above tasks.*
PRODUCTS
The Company plans to produce premium heavyweight cruiser and touring
motorcycles.* The Company currently is developing its first motorcycle, the
Super X, for mass production in late 1998. After commencement of mass production
of the Super X, the Company intends to expand its product line by developing
additional models of motorcycles, including a heavyweight touring motorcycle and
an entry-level cruiser, each with classic American heavyweight styling.* The
Company also sells, and will continue to sell, a wide variety of apparel
products such as hats, T-shirts and jackets to build brand image and support the
lifestyle of American motorcycling. The Company also intends to sell additional
motorcycle parts and accessories to its customers to customize the Company's
motorcycles.*
The Super X is a new motorcycle featuring modern engineering and performance
and a design inspired by the classic American heavyweight styling features of
the original Excelsior Supply Super X, including a large displacement "X-twin"
engine, a sleekly styled, teardrop shaped fuel tank, full valanced fenders, a
curved front frame that follows the contour of the front fender, a low slung
seat in which a rider will sit into the bike, a leading link front suspension
with fork tubes that pass through the front fender, a tank-mounted instrument
panel, wide profile tires and modern, high gloss, single and two-tone paint
finishes. The Super X will also incorporate a proprietary long-stroke engine
designed to produce a distinctive sound, as well as a proprietary transmission
and electronic fuel injection system and computer controlled-engine management
system.
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The following projected specifications of the Super X are subject to further
testing and are therefore subject to change:
<TABLE>
<S> <C>
Wheelbase 65 Inches
Length 95 Inches
Weight 675 lbs.
Seat Height 26.5 Inches
Engine Size 85 Cubic Inches (1386cc)
Engine Design 50 DEG. "X-twin"
Engine Cooling Air and Oil
Fuel
Distribution Electronic Fuel Injection
Valves 4 Valves Per Cylinder, Dual Overhead Cam
Frame Double Wishbone, Full Travel Suspension with Leading
Link Front End
Transmission 5 Speed, Constant Mesh
Fuel Capacity 5 Gallons
Load Capacity 675 lbs.
</TABLE>
[SPECIFICATIONS ABOVE SUPERIMPOSED OVER A PHOTO OF THE SUPER X]
MARKETING
Since inception, the Company's marketing goal has been to re-establish the
legacy of Excelsior Supply and Henderson in the motorcycling community and build
demand for the Company's brand of motorcycle products. The Company's marketing
strategy is to establish its brand through association with the heritage of
Excelsior Supply and Henderson and to create opportunities for the public to
experience such heritage.*
The Company has been developing its marketing team, led by its Co-Founders,
since inception and will continue to add additional personnel as needed. The
Company's marketing team, together with the services of a marketing agency, has
developed a marketing campaign that has generated many news articles and other
forms of publicity, including articles in most of the national and international
motorcycle publications, as well as many articles and news telecasts in the
non-motorcycle media. To establish the Company's brand among the motorcycling
public, the Company implemented a marketing campaign for the August 1996 Sturgis
Motorcycle Rally in Sturgis, South Dakota and first unveiled four prototype
Super X motorcycles publicly. The Company was also an official sponsor of the
1996 Sturgis Rally. The
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Company also held marketing events at the Daytona Beach 1997 Bike Week by
displaying prototypes of the Super X and opening the week with the first Annual
Excelsior-Henderson Motorcycle Parade. In addition, the Company was the
exclusive sponsor of a two-year exhibition, "Excelsior-Henderson, the Lost
Legend," featuring the largest collection of vintage Excelsior Supply and
Henderson Motorcycles ever assembled, at the American Motorcyclist Association
Motorcycle Heritage Museum. In the period leading up to the first sale of the
Super X, the Company will continue its marketing efforts including, among other
things, attending additional rallies, consumer events and trade shows, promoting
the Excelsior-Henderson brand of motorcycle products at dealer events, informing
the media about the Super X and the Company, and advertising in trade and
consumer publications.*
To create a strong brand identity for its motorcycles and related products
and to establish the authenticity of the Company's brand, the Company intends to
foster among consumers and dealers a culture and lifestyle that are reminiscent
of the classic American motorcycling heritage.* Such heritage refers to the
"soul" of the traditional American motorcycling experience, fostered by
motorcycle events, motorcyclists and media, which associates riding motorcycles
with individuality and freedom. Owner customization of motorcycles is also an
important part of this heritage, and the Company intends to design its
motorcycles to facilitate individual customization by owners and to make custom
parts and accessories available to owners.* In addition, the Company intends to
sponsor and promote a motorcycle owners' group, rallies and a magazine for
owners and enthusiasts.* The Company also sells a wide variety of apparel
products such as hats, T-shirts and jackets with the Company's logos and intends
to license certain of its trademarks on a broad range of consumer items to
increase public exposure and familiarization with its brand and products.
DISTRIBUTION
The Company is building its nationwide dealer network. Through researching
the U.S. motorcycle market, the Company has identified the key areas in which it
believes it must have dealer presence. In addition, the Company has identified a
dealer profile for the dealers it believes will be successful in selling its
products and is currently soliciting dealers in the key areas who meet this
profile. The Company held a ceremony to commemorate signing agreements with its
first ten dealers in the second quarter of 1997. Prior to production, the
Company expects to select 80 to 100 dealers from the over 3,000 authorized
dealers of new motorcycles in the United States, and will then add dealers as
its production increases.* The Company's sales team is led by the Company's
Co-Founders and a national sales manager who previously has introduced new
product lines for a recreational products manufacturer through an independent
dealer network.
The Company's network will have dealers in the major population centers and
in the major motorcycling markets.* The Company will also have dealers along the
major motorcycle traveling routes, providing a nationwide network of dealers to
serve the Company's customers. Within the industry, a significant percentage of
dealers handle more than one line of motorcycle, and the Company expects that
its dealers will also sell other motorcycle product lines.* The Company intends
to select dealers who will have a strong commitment to the Company's brand of
products and its success. The Company will allocate its brand of products
through a process of determining how many of its motorcycles a particular dealer
can sell in its market, rather than allocating to dealers on a pro-rata basis.
The Company believes that this will allow it to have the right number of dealers
nationwide who are comfortable with selling the number of motorcycles allocated.
The Company intends to select dealers who have an established reputation for
excellence, professional appearance, profitable operations, a sales floor
sufficient to display the Company's motorcycles and related products, the
ability to maintain adequate inventories of motorcycles, parts, supplies and
other merchandise, a knowledgeable sales staff, the ability to provide
full-service maintenance and who can add value by promoting lifestyle motorcycle
products and events (E.G., customized after-market parts, motorcycle apparel and
accessories, customer appreciation and promotional events, rallies,
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<PAGE>
etc.).* The Company will provide support for its dealers and customers by
maintaining adequate quantities of repair parts and accessories, training for
service technicians and warranty coverage.*
MANUFACTURING
The Company will assemble its motorcycles using proprietary and
non-proprietary components in the Company's new manufacturing facility. The
manufacturing operations will consist of three main manufacturing processes:
welding, painting and assembly.
WELDING. The welding area will consist of several robotic welding cells and
ancillary equipment, which will be used to manufacture the frame, swing cage,
and rigid front fork assembly. The resulting accuracy and consistency from using
robotics are intended to ease the task of assembling motorcycles in volume.*
Components completed in the welding area will be fed directly into the paint
area.
PAINTING. The paint area will be equipped and built to the highest industry
standards.* The Company believes that a high quality finish is extremely
important in marketing its motorcycles, and intends to perform all facets of the
finish work in-house. The paint area will have a comprehensive range of
processes to ensure the corrosion resistance and surface durability required for
the major cosmetic components of the Company's motorcycles.* From the paint
area, components will be fed directly into the assembly area.
ASSEMBLY. The assembly area will be equipped with a moving assembly track.
In this area, the engine and transmission unit will be assembled and tested.
After the powertrain has been successfully tested, it will be transferred to the
chassis section. The whole motorcycle will then be assembled as the powertrain
is built into the chassis. Once assembled, the motorcycle will be subjected to a
final test and will then be packed and shipped.
The Company will obtain its proprietary and non-proprietary components from
established original equipment manufacturers. The Company will strive to engage
original equipment manufacturers who have established records of producing
reliable products for the motorcycle industry in a timely manner and will
constantly review such vendors to ensure strict quality control.* For the
critical components, the Company has identified vendors and is in the process of
establishing relationships with such vendors.
Allan Hurd, the Company's Senior Vice President of Engineering and
Manufacturing, previously worked for Triumph Motorcycles, where he was part of
the management team that designed, developed and produced new motorcycles under
the Triumph name after the original Triumph ceased production. Mr. Hurd was
directly responsible for establishing and operating all aspects of motorcycle
production, including motorcycle design and development, factory development and
layout, manufacturing equipment specification and acquisition and motorcycle
production.
After relocating to its new facility, currently anticipated to occur in late
1997, the Company believes it will take at least nine months of preparation
before production of the Super X commences.* The facility has been designed to
have a production capacity of up to 20,000 motorcycles per year before on-site
expansion is necessary. The facility has been designed to provide an optimum
production environment for the Company's employees through the use of natural
lighting and climate-controlled heating and air conditioning. The Company
believes that such an environment will help optimize employee productivity.*
INTELLECTUAL PROPERTY RIGHTS
The Company believes that it has the exclusive right to use the trademarks
"Excelsior-Henderson," "Super X" and "X-twin", among others, and certain related
word and design trademarks in the United States in connection with the
manufacture and sale of motorcycles and related structural parts. In addition,
the Company believes that it has the right to use certain of these marks on
ancillary merchandise and apparel. The Company has secured its rights to these
trademarks, which were abandoned by Excelsior Supply when it ceased production
in 1931.
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<PAGE>
The Company believes that it has obtained common law rights through the use
of these marks on its prototype motorcycles and ancillary merchandise and
apparel that are independent of the United States Patent and Trademark Office
("USPTO") registration process. In addition, the Company has obtained
registrations or notices of allowance for a number of these marks ("Excelsior",
"Henderson" and "Super X") for use on motorcycles and has applications pending
approval in the USPTO on other marks.
The Company also believes that it has the exclusive right to use certain of
its trademarks in certain foreign countries in connection with the manufacture
and sale of motorcycles and related structural parts. In some instances, these
rights may be dependent on pending applications to register the marks in a
foreign country. A failure to obtain such registrations could impair the
Company's rights to use a mark in a particular country.
The Company owns copyrights for its designs used as trademarks and generates
documents in the course of its operations that are protected by copyright. The
Company intends to register its copyrights in its designs and its promotional
materials and other works with the U.S. Copyright Office as such registrations
become appropriate.
The Company owns no patents, nor has it filed or been assigned any patent
applications. At an appropriate point in the design process of its motorcycles,
the Company may file patent applications with the U.S. Patent and Trademark
Office to cover certain features or aspects of its motorcycles.
There are no claims of infringement against the Company and the Company is
not and has not been involved in any court proceedings regarding its
intellectual property rights. From time to time, the Company has been involved
in INTER PARTES opposition proceedings in the USPTO to protect its trademark
rights. All such proceedings have been resolved to the Company's satisfaction,
and there are no material proceedings pending. There are no outstanding claims
by the Company against anyone for violation of the Company's intellectual
property rights.
COMPETITION
In the U.S. heavyweight motorcycle market, Harley-Davidson, Honda, Suzuki,
Kawasaki and Yamaha have the largest market share. Other manufacturers of
heavyweight motorcycles include BMW, Buell, Ducati, Moto-Guzzi, and Triumph. The
Company's primary competitor in the U.S. heavyweight market is expected to be
Harley-Davidson, which has been the only significant American heavyweight
cruiser and touring motorcycle manufacturer since 1953. According to its public
reports, in 1996 Harley-Davidson had a market share of 48% of new U.S.
heavyweight motorcycle registrations. In response to demand for its products,
Harley-Davidson has tripled its production capabilities over the past decade and
forecasts doubling its 1995 production capacity by the year 2003. Several of the
major foreign manufacturers compete against Harley-Davidson in the domestic
market by selling motorcycles with a "nostalgic" American design.
Due to recent growth in the market for heavyweight motorcycles, the Company
expects that other manufacturers will attempt to enter the market. In 1997,
Polaris Industries Inc., a manufacturer of snowmobiles, personal watercraft and
all-terrain vehicles, announced that it would begin manufacturing a cruiser
motorcycle to be available in limited quantities in Spring 1998. Over the years,
the Company has also been aware of several efforts to revive the "Indian" name
on new motorcycles. Finally, a number of small companies build and sell
motorcycles from non-proprietary parts.
The U.S. and worldwide heavyweight motorcycle markets are highly competitive
and all of the Company's existing major competitors have resources that are
substantially greater than those of the Company, have larger overall sales
volumes and are more diversified than the Company.
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<PAGE>
GOVERNMENT REGULATION
Commercial sales of the Company's motorcycles depends upon compliance with
certain government regulations and the Company is designing its motorcycles to
comply with all such regulations.* The Company's motorcycles will be subject to
the emissions and noise standards of the U.S. Environmental Protection Agency
and the more stringent emissions standards of the State of California Air
Resources Board. The Company's motorcycles also will be subject to the National
Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by the
National Highway Traffic Safety Administration. Furthermore, the European Union
and other foreign governmental entities have regulations to which the Company's
motorcycles will be subject. Finally, federal, state and local authorities have
adopted various standards relating to air, water and noise pollution that will
affect the Company's manufacturing operations. The Company expects that its
facilities will comply with all such regulations and standards.* The potential
delays and costs that could result from obtaining such regulatory approvals and
complying with, or failing to comply with, such regulations could result in a
delay in motorcycle production.
FACILITIES
To build its 160,000 square foot manufacturing and administrative facility
in Belle Plaine, Minnesota, the Company has engaged the services of a project
construction company. The facility will be owned by an affiliate of the project
construction company and the Company has signed a lease with such affiliate that
will become effective upon completion and acceptance of the facility. The lease
has an initial term of twenty years with two additional ten year renewal options
and contains an option to purchase the facility at the five year anniversary for
$6.25 million.
The Company presently leases 12,895 square feet of space that it uses for
offices, a shop area, a museum and retail display showroom and a warehouse. The
lease for this facility expires on December 31, 1997, or, at the Company's
option, on October 31 or November 30, 1997 with 90 days' written notice. The
monthly rent is $8,400 through June 30, 1997 and $9,100 through December 31,
1997.
EMPLOYEES
As of June 26, 1997, the Company had 26 full-time employees, of whom 10 work
in engineering and manufacturing. The Company is not subject to any collective
bargaining agreement. The Company anticipates adding supervisory, engineering
and manufacturing, marketing and administrative staff as the Company moves from
the development stage to the production stage.* The timing and extent of the
Company's hiring will depend on the pace of development of the Super X and the
construction of the Company's manufacturing and administrative facility.
LITIGATION
The Company is not involved in any material legal proceedings and management
is not aware of any material threatened litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Daniel L. Hanlon.................. 40 Co-Founder, Co-Chairman of the Board and Co-Chief
Executive Officer
David P. Hanlon................... 44 Co-Founder, Co-Chairman of the Board and Co-Chief
Executive Officer
Allan C. Hurd..................... 49 Senior Vice President of Engineering and
Manufacturing
Thomas M. Rootness................ 49 Senior Vice President of Finance and Administration
and Chief Financial Officer
John B. Donahue................... 53 Director
Wayne M. Fortun................... 47 Director
David R. Pomije................... 40 Director
</TABLE>
DANIEL L. HANLON, a Co-Founder of the Company, is Co-Chief Executive Officer
and Co-Chairman of the Board of the Company. Immediately prior to founding the
Company in 1993, Mr. Hanlon worked as founder, President and Chief Executive
Officer of EverGreen Solutions Inc., a manufacturer of degradable packaging
materials, from 1990 to December 1993. Prior to 1990, Mr. Hanlon served as
Controller of Midwest Importers, in sales branch management positions with
Knutson Mortgage and Marquette banks, and in various accounting and strategic
planning positions with EcoLab Inc. and Honeywell Inc. Mr. Hanlon received his
B.A. and M.B.A. degrees from the University of St. Thomas, St. Paul, Minnesota.
Mr. Hanlon has been an avid automotive and motorcycle enthusiast for over 20
years and currently owns one heavyweight American motorcycle. Mr. Hanlon is a
brother of David P. Hanlon.
DAVID P. HANLON, a Co-Founder of the Company, is Co-Chief Executive Officer
and Co-Chairman of the Board of the Company. From 1984 to November 1993, Mr.
Hanlon was the General Manager of the Michigan District for Rollins Leasing
Corporation, a truck leasing company. Prior to 1984, Mr. Hanlon worked for three
years as the District Manager of Gelco Truck Leasing in the Memphis, Tennessee
district. Mr. Hanlon attended the University of St. Thomas, St. Paul, Minnesota
and studied Business Administration. Mr. Hanlon has been an avid motorcycle
builder and rider for over 23 years and owns four heavyweight American
motorcycles. Mr. Hanlon is a brother of Daniel L. Hanlon.
ALLAN C. HURD has been Senior Vice President of Engineering and
Manufacturing since May 1997 and was Vice President of Manufacturing and
Operations from May 1996 to May 1997. From 1987 through May 1996, Mr. Hurd was
employed by Triumph Motorcycles, LTD ("Triumph"), a motorcycle manufacturer
located in England. At Triumph, Mr. Hurd was part of the management team
responsible for establishing and operating all aspects of motorcycle production,
including motorcycle design and development, factory development and layout,
manufacturing equipment specification and acquisition and motorcycle production.
From March 1991 to May 1996, Mr. Hurd was Production Engineering Manager, from
July 1989 to February 1991, he was Design and Production Coordinating Manager
and from May 1987 to July 1989, he was Chief Production Engineer. Mr. Hurd has a
degree in Engineering from Kingston-upon-Hull College of Technology and is a
member of the Institute of Electrical Engineers (Manufacturing Section) and the
Institute of Management. Mr. Hurd owns several European motorcycles.
THOMAS M. ROOTNESS has been Senior Vice President of Finance and
Administration since May 1997, has been Chief Financial Officer since March 1996
and was Vice President of Finance from March 1996 to
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<PAGE>
May 1997. From September 1993 to March 1996, Mr. Rootness was Chief Financial
Officer, Treasurer and Executive Vice President of Luigino's Inc., a large,
multi-national manufacturer of frozen food entrees. From January 1992 to August
1993, Mr. Rootness was General/Plant Manager of the LaBounty Manufacturing
division of The Stanley Works after The Stanley Works purchased LaBounty
Manufacturing, Inc., a heavy construction equipment manufacturer and was the
Chief Financial Officer of LaBounty Manufacturing from August 1990 until such
purchase. Prior to 1990, Mr. Rootness served as President and Chief Financial
Officer of National Screenprint, Inc., President, Chief Executive Officer and a
director of The Barbers Hairstyling for Men and Women, Inc., a publicly traded
company, and as President, Chief Operating Officer and a director of Dahlberg,
Inc., at the time a publicly traded company. Mr. Rootness is a Certified Public
Accountant and received a Bachelor of Arts in Accounting from the University of
Minnesota-Duluth in 1969. Mr. Rootness owns four heavyweight American
motorcycles.
JOHN B. DONAHUE was elected as a director of the Company in April 1997. Mr.
Donahue is an owner and President of Donahue Harley-Davidson and Delano Sports
Center, a motorcycle and recreational product dealership in suburban
Minneapolis, Minnesota. In 1995, Mr. Donahue was President of the Harley-
Davidson Dealers Council, and has been on the Harley-Davidson Dealer Advisory
Council since 1992. In addition, Mr. Donahue was on the Arctic Cat Advisory
Board from 1984 to 1993 and the Kawasaki National Dealer Advisory Board from
1975 to 1980. Mr. Donahue has been involved with motorcycles since 1956.
WAYNE M. FORTUN was elected as a director of the Company in April 1997. Mr.
Fortun has been the Chief Executive Officer of Hutchinson Technology
Incorporated since May 1996, President, Chief Operating Officer and a director
since 1983. Hutchinson Technology, a publicly traded company, is the world's
leading supplier of suspension assemblies for rigid magnetic disk drives. Mr.
Fortun is also a director of G&K Services, Inc., a publicly held company, which
provides and maintains commercial, institutional and industrial garments and
other textile products for a variety of businesses and institutions. Mr. Fortun
owns two heavyweight American motorcycles.
DAVID R. POMIJE was elected as a director of the Company in April 1997.
Since April 1995, Mr. Pomije has been the Chairman of the Board and Chief
Executive Officer of Funco, Inc., which he founded in 1988. From 1988 to April
1995, Mr. Pomije also served as President, Chief Financial Officer and
Secretary. Funco, a publicly traded company, is a specialty retailer of
interactive entertainment products.
COMMITTEES
The Audit Committee of the Board of Directors consists of Messrs. Fortun and
Donahue. The Compensation Committee of the Board of Directors consists of
Messrs. Pomije and Donahue.
CONFIDENTIALITY AGREEMENTS; LIFE INSURANCE
The Company does not have any employment or non-competition agreements with
any members of its executive management team but has entered into
confidentiality and non-solicitation agreements with such persons. Such
agreements provide that the executive will not solicit any other employee of the
Company to leave the Company during the executive's employment with the Company
and for one year following such employment, will not compete with the Company
during the executive's employment and will protect the proprietary information
of the Company during and following such executive's employment.
The Company is the owner and beneficiary of $2,000,000 of term life
insurance policies covering the lives of each of the Co-Founders, Daniel L.
Hanlon and David P. Hanlon. The Company does not maintain any life insurance
policies on any other executive officer.
28
<PAGE>
DIRECTOR COMPENSATION
The Company's 1995 Option Plan provides that a new outside director of the
Company will be issued an option to purchase 10,000 shares of Common Stock upon
joining the Board of Directors, with an exercise price equal to the fair market
value of a share on the date of grant. Such options will vest one year from the
date of grant and expire ten years from the date of grant. In addition, outside
directors who have been in office more than six months receive an option to
purchase 6,667 shares of Common Stock at each annual meeting of the Company's
shareholders with an exercise price equal to the fair market value of a share on
the date of grant. Such options vest at the next annual meeting of shareholders
and expire ten years from the date of grant. Messrs. Donahue, Fortun and Pomije
were each granted an option to purchase 10,000 shares of Common Stock of the
Company upon joining the Board of Directors. Such options have an exercise price
of $4.50, vest one year from the date of grant and expire ten years from the
date of grant.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by the executive officers of the Company for the fiscal years ended
December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SHARES
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) OPTIONS(2) COMPENSATION(3)
- - ---------------------------------------------------------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Daniel L. Hanlon, 1996 $ 75,865 -- $ --
Co-Founder, Co-Chairman and Co-Chief Executive Officer 1995 65,000 -- --
1994 55,000 -- --
David P. Hanlon, 1996 75,865 -- --
Co-Founder, Co-Chairman and Co-Chief Executive Officer 1995 65,000 -- --
1994 55,000 -- --
Allan C. Hurd, 1996 50,080 66,667 10,000
Senior Vice President of Engineering and Manufacturing
Thomas M. Rootness, 1996 69,420 66,667 24,800
Senior Vice President of Finance and Administration and
Chief Financial Officer
</TABLE>
- - ------------------------
(1) Messrs. Hurd and Rootness were not employed for all of 1996, if they would
have been employed for a full year, the respective salaries would have been
$93,000 and $95,000.
(2) Includes options issued to purchase Common Stock of the Company granted
under the 1995 Stock Plan. See "1995 Stock Plan."
(3) Represents payments made to reimburse moving and temporary living expenses.
29
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes option grants made during 1996 to the
executive officers of the Company.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED(2) FISCAL YEAR SHARE DATE 5% 10%
- - ------------------------------------------ ----------- ----------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allan C. Hurd............................. 66,667 25% $ 1.88 5/15/06 $ 203,610 $ 324,215
Thomas M. Rootness........................ 66,667 25 1.88 3/31/06 203,610 324,215
</TABLE>
- - ------------------------
(1) The potential realizable value is based on a 10-year term of each option at
the time of grant. Assumed stock price appreciation of 5% and 10% is
mandated by rules of the Securities and Exchange Commission and is not
intended to forecast actual future financial performance or possible future
appreciation. The potential realizable value is calculated by assuming that
the deemed fair value of the Company's Common Stock for financial statement
presentation purposes on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
(2) Options granted pursuant to the Company's 1995 Stock Plan are exercisable at
an exercise price equal to the fair market value as determined by the Board
of Directors on the date of grant. Each option becomes exercisable as to
16,667 shares on each of the first and second anniversaries of the date of
grant, 13,333 shares on the third anniversary of the date of grant and
10,000 shares on each of the fourth and fifth anniversaries (except with
respect to Mr. Rootness, for whom the option became exercisable with respect
to 20,000 shares in June 1996) of the date of grant. Each option has a
maximum term of 10 years, subject to earlier termination in the event of the
optionee's cessation of service with the Company.
AGGREGATED OPTION
EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
The purpose of the following table is to report exercise of stock options by
the executive officers during 1996 and the value of their unexercised stock
options as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ------------------------------ ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - -------------------------------------- ----------- ----------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allan C. Hurd......................... -- $ -- -- 66,667 $ -- $ 125,000
Thomas M. Rootness(2)................. 20,000 -- -- 46,667 -- 87,500
</TABLE>
- - ------------------------
(1) Value is based on the fair market value of a share of Common Stock on
December 31, 1996, which was $3.75, as previously determined by the Board of
Directors.
(2) Mr. Rootness exercised an option to purchase 20,000 shares of Common Stock
on June 13, 1996. The exercise price of such option was $1.88 per share, the
fair market value of a share of Common Stock on the date of grant, as
determined by the Board of Directors. Value Realized is based on the
attributed fair market value of a share of Common Stock on the date of
exercise, which was $1.88 on June 13, 1996, as previously determined by the
Board of Directors.
30
<PAGE>
1995 STOCK PLAN
In December 1995, the Board of Directors of the Company adopted the
Company's 1995 Stock Plan (the "1995 Stock Plan"), which was approved by the
shareholders of the Company on March 18, 1996. The Board of Directors approved
an amendment and restatement of the 1995 Stock Plan in January 1997. The purpose
of the 1995 Stock Plan is to attract, motivate and retain employees, directors,
advisors and officers to produce a superior return to the shareholders of the
Company by offering such persons an opportunity to realize stock appreciation,
by facilitating stock ownership, and by rewarding them for achieving a high
level of corporate financial performance. The 1995 Stock Plan is also intended
to facilitate recruiting and retaining experienced and knowledgeable advisors
and independent contractors by permitting such persons to acquire a proprietary
interest in the Company.
The 1995 Stock Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"), which is appointed by the Board of
Directors and consists of Messrs. Pomije and Donahue. Subject to the provisions
of the 1995 Stock Plan, the Committee has the exclusive power to make awards
under the 1995 Stock Plan, to determine when and to whom awards will be granted,
and the form, amount and other terms and conditions of each award.
The types of awards that may be granted under the 1995 Stock Plan include
incentive and non-qualified stock options and restricted and unrestricted stock.
Subject to certain restrictions applicable to incentive stock options, awards
will be exercisable by the recipients at such times as are determined by the
Committee.
Options may be granted to recipients at such exercise prices as the
Committee may determine but not less than 85% of their fair market value as of
the date the option is granted. Stock options may be granted and exercised at
such times as the Committee may determine, except that, unless applicable
federal tax laws are modified, (1) no incentive stock option may be granted at
less than fair market value, (2) no incentive stock options may be granted more
than ten years after the effective date of the 1995 Stock Plan, (3) an incentive
stock option shall not be exercisable more than ten years after the date of
grant and (4) the aggregate fair market value of the shares of Common Stock with
respect to which incentive stock options may first become exercisable in any
calendar year for any employee may not exceed $100,000 under the 1995 Stock Plan
or any other plan of the Company. Additional restrictions apply to an incentive
stock option granted to an individual who beneficially owns more than ten
percent of the combined voting power of all classes of stock of the Company.
At December 15, 1995, the effective date of the 1995 Stock Plan, the total
number of shares of Company Common Stock available for distribution under the
1995 Stock Plan was 666,667 (subject to adjustment for future stock splits,
stock dividends and similar changes in the capitalization of the Company). As of
the date of this Prospectus, options to purchase an aggregate of 521,607 shares
of Common Stock were outstanding and held by the directors, executive officers,
employees, consultants to, and independent contractors of, the Company, 20,000
shares were issued and outstanding pursuant to the exercise of an option and an
aggregate of 125,060 shares of Common Stock were available for future grants of
awards under the 1995 Stock Plan. Options outstanding have per share exercise
prices of $1.88 to $4.50, and expire from five to ten years from the date of
grant of the option (unless exercised prior to that time).
The 1995 Stock Plan will remain in effect until all stock subject to it is
distributed or all awards have expired or lapsed, whichever occurs later. The
1995 Stock Plan also gives the Board the right to terminate, suspend or modify
the 1995 Stock Plan, except that amendments to the 1995 Stock Plan are subject
to shareholder approval if needed to comply with certain provisions of the
federal securities laws or the Internal Revenue Code of 1986, as amended, their
successor provisions, or any other applicable law or regulation.
In addition to the options granted under the 1995 Stock Plan, the Company
has issued options to purchase 17,667 shares of Common Stock of the Company at
exercise prices ranging from $0.90 to $1.88 per share to three independent
contractors of the Company for consulting services. There are currently
31
<PAGE>
8,000 shares of Common Stock issued and outstanding pursuant to the exercise of
one of these options. Such options expire on dates ranging from August 1, 2000
to June 19, 2005 and are fully exercisable. The foregoing options were not
granted under the 1995 Stock Plan.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock beneficially owned by each person who is a
beneficial owner of more than 5% of the Common Stock issued and outstanding, by
each officer, by each director, and by all officers and directors as a group,
and as adjusted to reflect the sale of the shares offered hereby. All persons
have sole voting and dispositive power over such shares unless otherwise
indicated.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS NUMBER PRIOR TO PERCENT AFTER
OF BENEFICIAL OWNER: OF SHARES OFFERING OFFERING
- - ----------------------------------------------------------------------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Directors and executive officers
Daniel L. Hanlon(1)(2)..................................................... 1,791,998 19.9% 13.8%
David P. Hanlon(1)(3)...................................................... 1,468,000 16.3 11.3
Allan C. Hurd(4)........................................................... 16,667 * *
Thomas M. Rootness(4)...................................................... 36,667 * *
John B. Donahue(5)......................................................... 17,801 * *
Wayne M. Fortun(5)......................................................... 6,667 * *
David R. Pomije............................................................ 442,777 4.9 3.4
Directors and Officers, as a group (7 persons)(6).......................... 3,780,579 42.0 29.1
Other beneficial owners:
Heartland Small Cap Contrarian Fund, a series of Heartland Group,
Inc.(7).................................................................. 460,000 5.1 3.5
</TABLE>
- - ------------------------
* Less than one percent.
(1) The address of Daniel and David Hanlon is 607 West Travelers Trail,
Burnsville, MN 55337.
(2) Includes 30,665 shares of Common Stock held in trusts for which Mr. Hanlon's
spouse acts as custodian.
(3) Includes 1,333 shares of Common Stock owned by Mr. Hanlon's son.
(4) Includes options to purchase 16,667 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.
(5) Includes options to purchase 6,667 shares of Common Stock exercisable within
60 days of the date of this Prospectus.
(6) Includes options to purchase up to 46,668 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.
(7) The address of Heartland Small Cap Contrarian Fund is 790 N. Milwaukee
Street, Milwaukee, WI 53202.
CERTAIN TRANSACTIONS
John B. Donahue, a director of the Company, is the owner of Donahue
Harley-Davidson and Delano Sports Center (the "Dealer"), which executed the
Company's standard form Authorized Dealership Agreement (the "Dealership
Agreement") on May 16, 1997. Pursuant to the Dealership Agreement, the Dealer is
an authorized dealer of the Company for the sale and service of the Company's
products.
In April 1997, Daniel L. Hanlon and David P. Hanlon, the Co-Founders and
Co-Chief Executive Officers of the Company, concluded discussions commenced in
February 1997, by selling 40,000 shares of Common Stock and 33,333 shares of
Common Stock, respectively, to David R. Pomije, a director of the Company. Mr.
Pomije paid a purchase price of $6.00 per share.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Articles of Incorporation, as amended, authorize the issuance
of up to 23,333,332 shares of capital stock. The shares are classified into two
classes, consisting of 16,666,666 shares of Common Stock, $.01 par value, and
6,666,666 shares of Preferred Stock, $.01 par value.
The Board of Directors is authorized to establish one or more series of
Preferred Stock by resolution, set forth the designation of each such series and
fix the relative rights and preferences of each such series, including but not
limited to fixing the relative voting rights, if any, of each such series of
Preferred Stock to the full extent permitted by law.
COMMON STOCK
As of the date of this Prospectus, there were 5,878,231 shares of Common
Stock issued and outstanding and held by approximately 400 shareholders. Holders
of Common Stock are entitled to one vote per share for the election of directors
and on all matters submitted to a vote of shareholders, and there are no
cumulative voting rights for the election of directors. Holders of Common Stock
are entitled to receive dividends as and when declared by the Board of Directors
out of funds legally available therefor. Holders of Common Stock are not
entitled to preemptive rights. In the event of the liquidation, dissolution or
winding up of the Company, the holder of each share of Common Stock is entitled
to share equally in any balance of the Company's assets available for
distribution to shareholders after the holders of Series A Preferred (described
below) have received the full distribution to which such holders are entitled.
Outstanding shares of Common Stock are not subject to any further call or
assessment.
The shares of Common Stock currently outstanding were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Act and are, therefore, restricted securities which may not be sold
publicly unless the shares are registered under the Act or are sold under Rules
144 or 144A or under similar exemptions. See "Shares Eligible for Future Sale."
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors
has the authority, without further action by the shareholders, to issue up to
6,666,666 shares of preferred stock in one or more classes or series and to fix
the designations and the voting, powers, preferences, and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, redemption and
liquidation preferences, purchase, retirement or sinking fund for the purchase,
retirement or redemption of such shares, conversion rights, voting rights, any
or all of which may be greater than the rights of the Common Stock. Of such
6,666,666 shares, the Company has designated 3,342,666 as Series A Convertible
Preferred Stock (of which 3,066,527 are currently outstanding) and the remaining
3,324,000 shares are undesignated as to class. The Board of Directors, without
shareholder approval, can issue preferred stock with voting, conversion or other
rights that could adversely affect the voting power and other rights of the
holders of Common Stock. Preferred stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of preferred
stock may have the effect of decreasing the market price of the Common Stock,
and may adversely affect the voting and other rights of the holders of Common
Stock. The Company has no present plans to issue any additional shares of
preferred stock.
Pursuant to the Company's Amended Certificate of Designation of Series of
Preferred Stock, all of the 3,066,527 shares of outstanding Series A Convertible
Preferred Stock will automatically be converted into 3,066,527 shares of Common
Stock upon the closing of this offering.
33
<PAGE>
OPTIONS AND WARRANTS
As of the date of this Prospectus, the Company had outstanding options to
purchase up to an aggregate of 531,274 shares of Common Stock to directors,
officers, non-employee consultants and contractors of the Company at exercise
prices ranging from $0.90 to $4.50 per share and options for 28,000 shares of
Common Stock have been exercised.
As of the date of this Prospectus, the Company had outstanding warrants to
purchase up to an aggregate of 472,207 shares of Common Stock, which were issued
as compensation to placement agents and substantial investors in previous rounds
of financing at exercise prices ranging from $1.88 to $4.50 per share.
REGISTRATION RIGHTS
Under the terms of agreements between the Company and the holders of
warrants to purchase up to 472,207 shares of Common Stock issued in connection
with previous financings, if the Company proposes to register any of its
securities under the Act, either for its own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of Common Stock
of the Company held by such holders therein. Furthermore, such holders may,
under certain circumstances, require the Company to file additional registration
statements at the Company's expense. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of a public
offering to limit the number of shares included in such registration in certain
circumstances.
ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT; RESTATED
ARTICLES OF INCORPORATION
Certain provisions of Minnesota law and the Company's Restated Articles of
Incorporation described below could have an anti-takeover effect. These
provisions are intended to provide management flexibility to enhance the
likelihood of continuity and stability in the composition of the Company's Board
of Directors and in the policies formulated by the Board and to discourage an
unsolicited takeover of the Company, if the Board determines that such a
takeover is not in the best interests of the Company and its shareholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire the Company which could deprive the Company's shareholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisitions of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20% or
more of the voting stock then outstanding. Section 302A.671 requires approval of
the granting of voting rights for the shares received pursuant to any such
acquisition by a majority vote of the shareholders of the Company. In general,
shares acquired without such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to deliver a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date.
34
<PAGE>
In addition, the existence of undesignated Preferred Stock in the Restated
Articles of Incorporation allows the Board of Directors of the Company, without
further shareholder action, to issue Preferred Stock with, among others, rights
to vote for the election of directors of the Company and in amounts that could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, National Association, will serve as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 8,944,758
shares of Common Stock (including the 3,066,527 shares of Common Stock issuable
upon conversion of the Company's Preferred Stock), which does not include: (i)
the shares offered hereby, or (ii) 1,003,481 shares of Common Stock that are
issuable upon the exercise of outstanding options and warrants. The securities
currently outstanding were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Act and
are, therefore, restricted securities which may not be sold publicly unless the
shares are registered under the Act or are sold under Rules 144 or other
exemptions. Provided the Company meets the reporting requirements of Rule 144
and there is an active trading market in the Common Stock (which there presently
is not) a person (or persons whose sales are aggregated) who beneficially owns
unregistered securities last acquired privately from the Company, or an
affiliate of the Company at least one year previously and affiliates of the
Company who beneficially own shares last acquired (whether or not such shares
were acquired privately) from the Company or an affiliate of the Company at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of the Company's Common Stock or the average weekly trading
volume in the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner of sale and
notice requirements and the availability of current public information about the
Company. A person who has not been an affiliate of the Company at any time
during the three months preceding a sale, and who beneficially owns shares last
acquired from the Company or an affiliate of the Company at least two years
previously, is entitled to sell all such shares under Rule 144(k) without regard
to any of the limitations of Rule 144.
Substantially all of the shares of Common Stock currently outstanding are
freely tradeable under Rule 144 of the Securities Act ("Rule 144"), or under
other exemptions. Of the shares of Common Stock currently outstanding,
approximately 576,700 shares are not subject to the lock-up agreements described
below. Of these shares, approximately 448,500 shares are currently eligible for
sale without restriction pursuant to Rule 144(k) and approximately 128,200
shares are currently eligible for sale subject to the volume, manner of sale and
notice restrictions of Rule 144. Approximately 8,368,000 shares of the Common
Stock currently outstanding and to be issued upon conversion of the Preferred
Stock are subject to lock-up agreements of varying periods; accordingly, none of
these shares will be eligible for sale until the expiration of the lock-up
agreements. Approximately 1,664,000 of these shares will be eligible for sale 90
days after the closing of this offering (approximately 56,400 of which will be
subject to the requirements of Rule 144 described above); approximately
3,544,400 of these shares will be eligible for sale 180 days after the closing
of this offering (approximately 473,900 of which will be subject to the
requirements of Rule 144 described above and 3,066,527 of which represents the
shares of Common Stock issuable upon conversion of the Company's Preferred
Stock); and approximately 3,160,000 of these shares will become eligible for
sale 365 days after the closing of this offering (all of which will be subject
to the requirements of Rule 144 described above).
35
<PAGE>
The officers and directors of the Company have agreed to a lock-up
prohibiting the offer, sale or other disposition of their shares until 180 days
after closing of this offering without the prior written consent of John G.
Kinnard and Company, Incorporated. Additionally, the Co-Founders, Dan and Dave
Hanlon, have agreed to a lock-up prohibiting the offer, sale or other
disposition of their shares (1,791,998 and 1,468,000 shares, respectively) until
365 days after closing of this offering without the prior written consent of
John G. Kinnard and Company, Incorporated (except for 50,000 shares of each
Co-Founder which will become freely tradable upon the expiration of a 180 day
lock-up, subject to the requirements of Rule 144 described above). These lock-up
agreements have been reflected in the preceding paragraph.
The Company cannot predict the effect, if any, that sales of restricted
securities or the availability of such securities for sale could have on the
market price if any were to develop. Nevertheless, sales of substantial amounts
of the Company's Common Stock could adversely affect prevailing market prices of
the Company's Common Stock and the Company's ability to raise additional capital
by occurring at a time when it would be beneficial for the Company to sell
securities. There has been no previous public market, active or otherwise, for
any of the Company's securities and there can be no assurance that a liquid
market will ever develop.
UNDERWRITING
The Company has entered into an Underwriting Agreement (the "Underwriting
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom John G. Kinnard and Company, Incorporated and Miller,
Johnson & Kuehn, Incorporated are acting as representatives (the
"Representatives"). Subject to the terms and conditions set forth in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters, and
each of the Underwriters has severally agreed to purchase, the number of shares
of Common Stock set forth opposite each Underwriter's name in the table below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- - --------------------------------------------------------------------------------- ----------
<S> <C>
John G. Kinnard and Company, Incorporated........................................ 2,289,000
Miller, Johnson & Kuehn, Incorporated............................................ 981,000
Advest, Inc...................................................................... 65,000
Cleary Gull Reiland & McDevitt Inc............................................... 65,000
Cruttenden Roth Incorporated..................................................... 65,000
Hanifen, Imhoff Inc.............................................................. 65,000
Kirkpatrick, Pettis, Smith, Polian Inc........................................... 65,000
The Seidler Companies Incorporated............................................... 65,000
Van Kasper & Company............................................................. 65,000
Frederick & Company, Inc......................................................... 55,000
M.H. Meyerson & Co., Inc......................................................... 55,000
R.J. Steichen & Company.......................................................... 55,000
Summit Investment Corporation.................................................... 55,000
Traub and Company, Inc........................................................... 55,000
----------
Total.......................................................................... 4,000,000
----------
----------
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Underwriting Agreement, if any is purchased (excluding shares covered by
the over-allotment option granted therein). In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
36
<PAGE>
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock directly to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $0.32 per share.
Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
public offering, the public offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of the Underwriting Agreement, to
purchase up to an additional 600,000 shares of Common Stock at the same price
per share to be paid by the Underwriters for the other shares offered hereby. If
the Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
These transactions may include stabilizing bids, the imposition of penalty bids,
the purchase of securities to cover syndicate short positions and overallotments
in connection with the offering. The Underwriters may overallot the offering
creating a syndicate short position. A "stabilizing bid" is a bid for or the
purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. These activities may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
The Company, certain shareholders and its officers and directors have agreed
that they will not sell, offer to sell, issue distribute or otherwise dispose of
any shares of Common Stock for periods of 90, 180 or 365 days after the date of
this Prospectus without the prior written consent of John G. Kinnard and
Company, Incorporated, except that the Company may issue shares pursuant to the
over-allotment option. See "Shares Eligible for Future Sale."
Prior to the offering of the shares, there has been no public market for the
Common Stock. The initial public offering price for the Common Stock has been
determined by negotiation between the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management and the consideration of
the above factors in relation to the market valuations of companies in related
businesses.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the shares offered by this Prospectus will be passed upon
for the Company by Faegre & Benson LLP, Minneapolis, Minnesota. Gale Mellum, a
partner in Faegre & Benson LLP, was a member of the Company's Advisory Board and
as such has been granted an option to purchase up to 6,667 shares of Common
Stock of the Company at $1.88 per share. Mr. Mellum and other partners of Faegre
& Benson LLP are the general partners of F&B Investors, which owns 37,333 shares
of Common Stock of the
37
<PAGE>
Company. Mr. Mellum is also the Corporate Secretary of the Company. Dorsey &
Whitney LLP, Minneapolis, Minnesota, has acted as counsel to the Underwriters in
connection with certain legal matters relating to the offering of the shares.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996 and
cumulative for the period from inception (December 22, 1993) to December 31,
1996, included in this Prospectus and elsewhere in the registration statement,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance on the authority of said firm as experts in giving said report.
Reference is made to said report which includes an explanatory paragraph that
describes the going concern assumption discussed in Note 1 to the financial
statements.
AVAILABLE INFORMATION
The Company is subject to the information requirements of Section 15(d) of
the Securities Exchange Act of 1934, as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as the following regional offices: 75 Park Place, 14th Floor, New York, New
York 10007, and Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such materials may be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports and other information regarding the
Company at: http://www.sec.gov.
The Company has also filed with the Commission a Registration Statement on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, copies of which may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of which may be obtained from the Commission upon payment
of the prescribed fees.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996, March 31, 1997 (unaudited) and Pro
Forma March 31, 1997 (unaudited).................................................... F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996,
Cumulative for the Period From Inception (December 22, 1993) To December 31, 1996,
Three Months Ended March 31, 1996 and 1997 (unaudited), and Cumulative for the
Period From Inception (December 22, 1993) To March 31, 1997 (unaudited)............. F-4
Statements of Stockholders' Equity for the Periods Ended December 31, 1993, 1994, 1995
and 1996, the Three Months Ended March 31, 1997 (unaudited), and Pro Forma Three
Months Ended March 31, 1997 (unaudited)............................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
Cumulative for the Period From Inception (December 22, 1993) To December 31, 1996,
Three Months Ended March 31, 1996 and 1997 (unaudited), and Cumulative for the
Period From Inception (December 22, 1993) To March 31, 1997 (unaudited)............. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excelsior-Henderson Motorcycle Manufacturing Company:
We have audited the accompanying balance sheets of Excelsior-Henderson
Motorcycle Manufacturing Company (a Minnesota corporation in the development
stage) as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996 and cumulative for the period from inception
(December 22, 1993) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Excelsior-Henderson
Motorcycle Manufacturing Company as of December 31, 1995 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996 and cumulative for the
period from inception (December 22, 1993) to December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise with no significant operating results to date. The factors discussed
in Note 1 to the financial statements raise a substantial doubt about the
ability of the Company to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 17, 1997 (except with
respect to Notes 4 and 6, as
to which the date is May 22, 1997)
F-2
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 PRO FORMA
---------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED;
SEE NOTE 8)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 788,419 $ 5,376,601 $ 4,168,785 $ 4,168,785
Short-term investments............................. 912,630 4,044,992 4,044,992 4,044,992
Other current assets............................... 3,595 9,119 87,165 87,165
------------- ------------- ------------- -------------
Total current assets........................... 1,704,644 9,430,712 8,300,942 8,300,942
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $26,755 and $76,250 at December 31,
1995 and 1996, and $93,296 at March 31, 1997....... 85,960 229,082 253,612 253,612
INTELLECTUAL PROPERTY, to be amortized............... 88,641 135,384 156,609 156,609
OTHER ASSETS......................................... 3,343 228,222 313,756 313,756
------------- ------------- ------------- -------------
$ 1,882,588 $ 10,023,400 $ 9,024,919 $ 9,024,919
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 117,334 $ 123,236 $ 140,474 $ 140,474
Accrued liabilities................................ 12,045 198,751 160,876 160,876
Note payable....................................... 24,351 70,086 67,002 67,002
------------- ------------- ------------- -------------
Total current liabilities...................... 153,730 392,073 368,352 368,352
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, par value of
$.01; 3,342,666 shares authorized; 3,066,527
issued and outstanding at December 31, 1996 and
March 31, 1997 (none pro forma).................. -- 30,665 30,665 --
Common stock, par value of $.01; 16,666,666 shares
authorized; 5,816,898, 5,870,231 and 5,878,231
issued and outstanding (8,944,758 pro forma)..... 58,169 58,702 58,782 89,447
Additional paid-in capital......................... 3,294,946 13,677,748 13,692,668 13,692,668
Deficit accumulated during the development stage... (1,624,257) (4,135,788) (5,125,548) (5,125,548)
------------- ------------- ------------- -------------
Total stockholders' equity..................... 1,728,858 9,631,327 8,656,567 8,656,567
------------- ------------- ------------- -------------
$ 1,882,588 $ 10,023,400 $ 9,024,919 $ 9,024,919
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION THREE MONTHS ENDED INCEPTION
(DECEMBER 22, (DECEMBER 22,
YEAR ENDED DECEMBER 31 1993) TO MARCH 31 1993) TO
---------------------------------------- DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
---------- ------------ ------------ ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
PREOPERATING EXPENSES:
Research and development.... $ 110,082 $ 702,345 $ 1,271,276 $ 2,083,703 $ 252,157 $ 477,108 $ 2,560,811
Marketing................... 32,133 106,974 694,239 833,346 95,426 283,376 1,116,722
General and
administrative............ 241,630 460,793 716,154 1,419,752 155,322 318,070 1,737,822
---------- ------------ ------------ ------------- ---------- ----------- -------------
Total preoperating
expenses.............. 383,845 1,270,112 2,681,669 4,336,801 502,905 1,078,554 5,415,355
INTEREST INCOME............... -- 43,522 174,226 217,748 18,335 90,482 308,230
INTEREST EXPENSE.............. (5,346) (7,301) (4,088) (16,735) (561) (1,688) (18,423)
---------- ------------ ------------ ------------- ---------- ----------- -------------
Net loss................ $ (389,191) $ (1,233,891) $ (2,511,531) $(4,135,788) $ (485,131) $ (989,760) $(5,125,548)
---------- ------------ ------------ ------------- ---------- ----------- -------------
---------- ------------ ------------ ------------- ---------- ----------- -------------
Net loss per common and common
equivalent share (pro forma)
(Note 2).................... $ (.07) $ (.18) $ (.31) $ (.65) $ (.06) $ (.11) $ (.77)
---------- ------------ ------------ ------------- ---------- ----------- -------------
---------- ------------ ------------ ------------- ---------- ----------- -------------
Weighted average common and
common equivalent shares
outstanding (pro forma)
(Note 2).................... 5,329,678 6,774,031 8,174,856 6,409,967 7,643,006 9,203,700 6,698,055
---------- ------------ ------------ ------------- ---------- ----------- -------------
---------- ------------ ------------ ------------- ---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
-------------------- -------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
---------- -------- --------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION, December 22,
1993............................. -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock, $0.01
per share...................... -- -- 3,366,667 33,667 16,833 -- 50,500
Excess of par value over issuance
price.......................... -- -- -- (28,617) (16,833) -- (45,450)
Net loss......................... -- -- -- -- -- (1,175) (1,175)
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, December 31, 1993......... -- -- 3,366,667 5,050 -- (1,175) 3,875
Proceeds from sales of common
stock, $0.75 per share, net of
offering costs of $23,059...... -- -- 86,667 29,483 12,458 -- 41,941
Proceeds from sales of common
stock, $0.90 per share, net of
offering costs of $14,919...... -- -- 594,433 5,944 514,127 -- 520,071
Issuance of common stock in
settlement of construction
payable, $0.90 per share....... -- -- 5,567 56 4,954 -- 5,010
Issuance of common stock from
conversion of promissory note
to investor, $0.60 per share,
net of conversion costs of
$2,583......................... -- -- 125,000 1,250 71,167 -- 72,417
Net loss......................... -- -- -- -- -- (389,191) (389,191)
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, December 31, 1994......... -- -- 4,178,334 41,783 602,706 (390,366) 254,123
Proceeds from sales of common
stock, $1.88 per share, net of
offering costs of $363,874..... -- -- 1,605,231 16,053 2,630,073 -- 2,646,126
Issuance of common stock for
research and development
services, $1.88 per share...... -- -- 33,333 333 62,167 -- 62,500
Net loss......................... -- -- -- -- -- (1,233,891) (1,233,891)
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, December 31, 1995......... -- -- 5,816,898 58,169 3,294,946 (1,624,257) 1,728,858
Proceeds from sales of Series A
Convertible Preferred Stock,
$3.75 per share, net of
offering costs of $1,186,000... 3,066,527 30,665 -- -- 10,283,335 -- 10,314,000
Issuance of common stock for
marketing services, $1.88 per
share.......................... -- -- 33,333 333 62,167 -- 62,500
Proceeds from exercise of stock
options, $1.88 per share....... -- -- 20,000 200 37,300 -- 37,500
Net loss......................... -- -- -- -- -- (2,511,531) (2,511,531)
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, December 31, 1996......... 3,066,527 30,665 5,870,231 58,702 13,677,748 (4,135,788) 9,631,327
Proceeds from exercise of stock
options, $1.88 per share
(unaudited).................... -- -- 8,000 80 14,920 -- 15,000
Net loss (unaudited)............. -- -- -- -- -- (989,760) (989,760)
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, March 31, 1997
(unaudited)...................... 3,066,527 30,665 5,878,231 58,782 13,692,668 (5,125,548) 8,656,567
Effects of conversion of Series A
Convertible Preferred Stock to
common stock
(Note 8) (unaudited)........... (3,066,527) (30,665) 3,066,527 30,665 -- -- --
---------- -------- --------- --------- ------------ ------------ ------------
BALANCE, pro forma, March 31, 1997
(unaudited)...................... -- $ -- 8,944,758 $ 89,447 $ 13,692,668 $(5,125,548) $ 8,656,567
---------- -------- --------- --------- ------------ ------------ ------------
---------- -------- --------- --------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(DECEMBER 22, THREE MONTHS ENDED (DECEMBER 22,
YEAR ENDED DECEMBER 31 1993) TO MARCH 31 1993) TO
----------------------------------- DECEMBER 31, ---------------------- MARCH 31,
1994 1995 1996 1996 1996 1997 1997
--------- ----------- ----------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net loss......................... $(389,191) $(1,233,891) $(2,511,531) $(4,135,788) $(485,131) $ (989,760) $(5,125,548)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Depreciation................. 5,194 21,561 49,495 76,250 6,750 17,046 93,296
Change in current assets and
liabilities:
Other current assets....... (4,375) 780 (5,524) (9,119) (5,853) (78,046) (87,165)
Accounts payable........... 72,548 39,611 5,902 123,236 (10,516) 17,238 140,474
Accrued liabilities........ 17,065 (5,020) 186,706 198,751 (2,045) (37,875) 160,876
--------- ----------- ----------- ------------- --------- ----------- -------------
Net cash used in
operating activities... (298,759) (1,176,959) (2,274,952) (3,746,670) (496,795) (1,071,397) (4,818,067)
--------- ----------- ----------- ------------- --------- ----------- -------------
INVESTING ACTIVITIES:
Purchases of short-term
investments, net............... -- (912,630) (3,132,362) (4,044,992) (12,000) -- (4,044,992)
Property and equipment
additions...................... (29,788) (77,917) (192,617) (300,322) (39,691) (41,576) (341,898)
Payments made for intellectual
property....................... (29,151) (55,490) (46,743) (135,384) (8,035) (21,225) (156,609)
Change in other assets........... (3,343) -- (224,879) (228,222) -- (85,534) (313,756)
--------- ----------- ----------- ------------- --------- ----------- -------------
Net cash used in investing
activities............... (62,282) (1,046,037) (3,596,601) (4,708,920) (59,726) (148,335) (4,857,255)
--------- ----------- ----------- ------------- --------- ----------- -------------
FINANCING ACTIVITIES:
Proceeds from notes payable...... 100,015 30,055 75,025 205,095 -- -- 205,095
Repayment of notes payable....... -- (30,719) (29,290) (60,009) (2,331) (3,084) (63,093)
Proceeds from issuance of Series
A Convertible Preferred Stock,
net of offering expenses....... -- -- 10,314,000 10,314,000 -- -- 10,314,000
Proceeds from issuance of common
stock, net of offering
expenses....................... 564,479 2,708,626 100,000 3,373,105 62,500 15,000 3,388,105
--------- ----------- ----------- ------------- --------- ----------- -------------
Net cash provided by
financing activities..... 664,494 2,707,962 10,459,735 13,832,191 60,169 11,916 13,844,107
--------- ----------- ----------- ------------- --------- ----------- -------------
Net increase (decrease) in
cash and cash
equivalents.............. 303,453 484,966 4,588,182 5,376,601 (496,352) (1,207,816) 4,168,785
CASH AND CASH EQUIVALENTS:
Beginning of period.............. -- 303,453 788,419 -- 788,419 5,376,601 --
--------- ----------- ----------- ------------- --------- ----------- -------------
End of period.................... $ 303,453 $ 788,419 $ 5,376,601 $ 5,376,601 $ 292,067 $ 4,168,785 $ 4,168,785
--------- ----------- ----------- ------------- --------- ----------- -------------
--------- ----------- ----------- ------------- --------- ----------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................... $ 4,656 $ 7,301 $ 4,088 $ 16,045 $ 561 $ 1,687 $ 17,732
Noncash transactions:
Conversion of note payable into
common stock................. 75,000 -- -- 75,000 -- -- 75,000
Issuance of common stock for
services..................... -- 62,500 62,500 125,000 62,500 -- 125,000
Issuance of common stock in
settlement of construction
payable...................... 5,010 -- -- 5,010 -- -- 5,010
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
1. NATURE OF BUSINESS:
Excelsior-Henderson Motorcycle Manufacturing Company (the Company) is a
development stage company incorporated on December 22, 1993 in the state of
Minnesota, formerly known as Hanlon Manufacturing Company, for the purpose of
developing, manufacturing, selling and distributing motorcycles.
The Company is 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 has sustained operating losses since inception and
currently requires substantial working capital for motorcycle development,
acquisition of manufacturing facilities, development of a dealer network and
consumer awareness. Even if the Company is successful in completing the above
activities, significant revenues might not be realized. The aforementioned
factors raise substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to continue motorcycle development and
operate as a going concern is contingent upon obtaining additional financing
that might not be available to it. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of money market instruments and certificates of
deposit with original maturities of three months or less. Cash equivalents are
recorded at cost, which approximates fair value.
SHORT-TERM INVESTMENTS
The Company's short-term investments, U.S. government securities, are
considered to be available-for-sale and are carried at cost, which approximates
fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of three to five years.
Additions and improvements are capitalized, while maintenance and repairs which
do not improve or extend the useful lives of the respective assets are charged
to operations as incurred.
INTELLECTUAL PROPERTY
Intellectual property represents amounts incurred to prepare and file for
United States and international trademark applications. These amounts are
presented at cost in the accompanying balance sheets and will be amortized over
5 to 17 years, beginning at the earlier of commencement of operations or receipt
of trademark protection.
F-7
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
OTHER ASSETS
Other assets consist primarily of deferred costs associated with the
construction of the Company's manufacturing and administrative facility (see
Note 6). These amounts are presented at cost in the accompanying balance sheets,
will be capitalized as part of property and equipment, and will be depreciated
over the life of the facility.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Deferred taxes are based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities, given
the provisions of the enacted tax laws.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (PRO FORMA)
Net loss per common and common equivalent share (pro forma) was computed by
dividing net loss by the weighted average number of shares outstanding of common
and common stock equivalents (pro forma). As discussed in Note 8, the Series A
Convertible Preferred Stock is reflected pro forma from the date of issuance.
Common and common equivalent shares issued during the 12-month period prior to
the initial filing date of the proposed initial public offering have been
included in the calculation as if they were outstanding for all periods
presented using the treasury stock method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Ultimate results could differ from those estimates.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying balance sheet as of March 31, 1997; the statements of
operations and cash flows for the three months ended March 31, 1996 and 1997,
and cumulative for the period from inception (December 22, 1993) to March 31,
1997; and the statement of stockholders' equity for the three months ended March
31, 1997 are unaudited. However, in the opinion of management, these statements
include all adjustments, consisting solely of normal recurring adjustments,
necessary for the fair presentation of results for these interim periods. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of results to be expected for the entire year, or for any
other interim period.
F-8
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
3. NOTE PAYABLE:
Note payable as of March 31, 1997 consists of a promissory note due to a
bank with interest at 9.9%. The note requires combined monthly payments of
principal and interest of $1,590, is collateralized by certain assets of the
Company and is due on demand no later than July 2, 2001.
4. STOCKHOLDERS' EQUITY:
AUTHORIZED SHARES
The Company's Articles of Incorporation, as amended, authorize the aggregate
issuance of 23,333,332 shares of stock. The shares are classified into two
classes consisting of 6,666,666 shares of Preferred Stock, $.01 par value, of
which 3,342,666 shares have been designated as Series A Convertible Preferred
Stock and 3,324,000 shares undesignated as to class, and 16,666,666 shares of
$.01 par value common stock.
REVERSE STOCK SPLIT
Effective May 22, 1997, the Company's board of directors approved a 2-for-3
reverse stock split of the Company's outstanding stock. All share and per share
data have been restated for all periods presented to reflect the reverse stock
split.
SERIES A CONVERTIBLE PREFERRED STOCK
During 1996, the Company completed a restricted offering to the public of
3,066,527 shares of Series A Convertible Preferred Stock, par value $.01 per
share, at an offering price of $3.75 per share. The Company received net
proceeds of approximately $10,314,000 from the restricted 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, product development and tooling costs;
marketing; general operating expenses; and working capital.
The Series A Convertible Preferred Stock has certain preferential
liquidation, conversion and dividend rights as follows:
a. In the event of liquidation of the Company, the holders of the Series A
Convertible Preferred Stock are entitled to receive $3.75 per share
unless a greater amount would be distributed or paid with respect to each
common share assuming the conversion of all outstanding Series A
Convertible Preferred Stock.
b. Each Series A Convertible Preferred Stock is convertible, at the option
of the holder, at any time into one share of common stock, subject to
adjustment, with automatic conversion upon the closing of a registered
public offering meeting certain minimum parameters.
c. Holders of Series A Convertible Preferred Stock are entitled to receive
dividends if, as and when declared by the board of directors.
STOCK-BASED COMPENSATION
In 1995, the Company implemented a stock option plan (the Plan). Under the
terms of the Plan, the Company is authorized to issue incentive stock options to
employees, directors, advisors and officers. The
F-9
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
4. STOCKHOLDERS' EQUITY: (CONTINUED)
incentive options allow the holder to purchase shares of the Company's common
stock at fair market value (as determined by the board of directors) on the date
of the grant. For options granted to holders of more than 10% of the outstanding
common stock, the option price at the date of the grant must be at least equal
to 110% of the fair market value of the stock. 666,667 shares have been reserved
for issuance under the Plan. The stock options expire between a range of four
and ten years from the date of grant and vest at various rates over five years.
Nonqualified stock options have also been granted to outside service
providers under the Plan and as stand-alone agreements. The stock options have
been granted at fair market value as determined by the board of directors at the
date of the grant. The stock options expire between a range of four and ten
years from the date of grant and vest at various rates over two years.
Information regarding stock options is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1995 1996 MARCH 31, 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- - ----------------------------------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period... -- $ -- 17,667 $ 1.49 410,934 $ 1.86
Granted.......................... 17,667 1.49 413,267 1.88 142,000 3.75
Exercised........................ -- -- (20,000) 1.88 (8,000) 1.88
Canceled......................... -- -- -- -- (66,667) 1.88
--------- ----- --------- ----- --------- -----
Outstanding, end of period......... 17,667 $ 1.49 410,934 $ 1.86 478,267 $ 2.42
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable, end of period......... -- $ -- 148,267 $ 1.83 156,933 $ 1.83
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted.................. $ .66 $ 1.08 $ 2.37
--------- --------- ---------
--------- --------- ---------
</TABLE>
Options outstanding at March 31, 1997 have an exercise price per share
ranging between $0.90 and $3.75, have a weighted average exercise price of $2.42
and a weighted average remaining contractual life of 8.25 years.
The Company accounts for the options under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the options
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based
F-10
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
4. STOCKHOLDERS' EQUITY: (CONTINUED)
Compensation," the Company's net loss and net loss per common share would have
been the following pro forma amounts:
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FOR THE FOR THE
PERIOD PERIOD
FROM FROM
INCEPTION THREE INCEPTION
(DECEMBER 22, MONTHS (DECEMBER 22,
YEAR ENDED 1993) TO ENDED 1993) TO
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1996 1996 1997
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net loss:
As reported.......................................... $2,511,531 $ 4,135,788 $ 485,131 $ 5,125,548
Pro forma............................................ 2,696,083 4,326,441 558,212 5,350,077
Net loss per common share:
As reported.......................................... $.31 $.65 $.06 $.77
Pro forma............................................ $.33 $.67 $.07 $.80
</TABLE>
Pro forma net loss and pro forma net loss per common share for the year
ended December 31, 1995 and for the three months ended March 31, 1997 would have
been substantially unchanged from reported amounts.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995, 1996 and 1997, respectively: risk-free
interest rates of 5.78%, 5.95% and 6.15%; expected lives of 5, 7 and 9 years;
and expected volatility of 40% for all three years.
WARRANTS
In connection with its 1995 sale of common stock, the Company issued
warrants to purchase 209,540 shares of common stock at a price of $1.88 per
share exercisable through August 2, 2000.
In connection with its 1996 sale of Series A Convertible Preferred Stock,
the Company issued warrants to purchase 262,667 shares of Series A Convertible
Preferred Stock at $4.50 per share, exercisable through September 2001.
5. INCOME TAXES:
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $3,228,000 for federal income tax purposes that are available to
offset future taxable income through the year 2011. A valuation allowance equal
to the full amount of the related deferred tax asset has been established due to
the uncertainty of realization of the deferred tax asset. Certain restrictions,
caused by the change in ownership resulting from sales of the Company's stock,
may limit annual utilization of these net operating loss carryforwards.
F-11
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
6. COMMITMENTS AND CONTINGENCIES:
MANUFACTURING AND ADMINISTRATIVE FACILITY
On April 21, 1997, the Company signed a construction agreement and a lease
agreement with a real estate development company to commence construction of a
manufacturing and administrative facility with an estimated cost of $10,500,000,
exclusive of equipment costs. The project is being financed with $2,300,000 of
tax increment financing bonds to be issued by the City of Belle Plaine,
Minnesota and $5,750,000 (including a $750,000 deposit) of mortgage-backed debt
arranged by the developer, with the balance of approximately $3,200,000 provided
by the Company. To finance repayment of the tax increment financing bonds, the
Company has guaranteed the underlying real estate tax payments on the property.
The Company anticipates recording the transaction as a capital lease upon
completion and acceptance of the facility.
The lease for the facility has an initial term of 20 years with two
additional 10-year renewal options. Rent for the first 20 years will be equal to
the debt service on the $5,750,000 mortgaged-backed debt, using a 20-year
amortization, plus a 10% premium (escalating during the lease term to roughly
offset inflation). Rent for the 10-year renewal options is based on the greater
of fair market value at the date of renewal or formula rent, as defined in the
lease agreement. The lease contains an option to purchase the facility at the
five-year anniversary for $6,250,000, less any principal reduction in the
$5,000,000 debt and application of the $750,000 deposit.
OPERATING LEASES
The Company leases office space and certain office equipment under
noncancelable operating leases. Future minimum payments under these leases as of
March 31, 1997 for 1997 are $80,000. Under the terms of these leases, the
Company is also responsible for certain operating expenses. Total lease expense
was $12,000, $19,000, $33,000, $64,000, $5,000, $25,000 and $89,000 for the
years ended December 31, 1994, 1995 and 1996, cumulative for the period from
inception to December 31, 1996, for the three months ended March 31, 1996 and
1997, and cumulative for the period from inception to March 31, 1997,
respectively.
LIFE INSURANCE
The Company is the owner and beneficiary of four $1,000,000 term life
insurance policies, covering the lives of its founders.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which changes the way companies calculate their earnings
per share (EPS). SFAS No. 128 replaces primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed by dividing reported loss by
the weighted average shares outstanding, excluding potentially dilutive
securities while diluted EPS includes the dilutive securities. The Company is
required to adopt SFAS No. 128 in fiscal 1998,
F-12
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT: (CONTINUED)
at which time, all prior period EPS data is to be restated. If the Company had
adopted SFAS No. 128, the effect on reported loss per share data would have been
as follows:
<TABLE>
<CAPTION>
CUMULATIVE FOR THREE MONTHS ENDED CUMULATIVE FOR
THE PERIOD FROM THE PERIOD FROM
YEAR ENDED INCEPTION INCEPTION
DECEMBER 31 (DECEMBER 22, MARCH 31 (DECEMBER 22,
------------------------------- 1993) TO -------------------- 1993) TO
1994 1995 1996 DECEMBER 31, 1996 1996 1997 MARCH 31, 1997
--------- --------- --------- ----------------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Primary EPS, as reported........... $ .07 $ .18 $ .31 $ .65 $ .06 $ .11 $ .77
Effect of SFAS No. 128............. .04 .07 .12 .22 .02 .06 .28
--- --- --- --- --- --- ---
Basic EPS, as restated............. $ .11 $ .25 $ .43 $ .87 $ .08 $ .17 $ 1.05
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
</TABLE>
Diluted EPS under SFAS No. 128 would have been equal to primary EPS as
reported.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS:
PRO FORMA BALANCE SHEET AND STATEMENT OF STOCKHOLDERS' EQUITY AS OF MARCH
31, 1997 (UNAUDITED)
As discussed in Note 4, the Series A Convertible Preferred Stock will be
automatically converted into shares of common stock concurrent with the closing
of the Company's initial public offering. The Company's unaudited pro forma
balance sheet and statement of stockholders' equity as of and for the three
months ended March 31, 1997 give effect to the conversion.
INITIAL PUBLIC OFFERING
The Company intends to offer 4,000,000 shares of its common stock (excluding
the underwriters' overallotment option to purchase an additional 600,000 shares
of common stock) to the public. The net proceeds from the offering will be used
primarily to complete and equip the facility; design and develop a motorcycle
production line; acquire tooling, components and supplies; finalize engineering
and design of the Super X; and fund marketing costs, general operating expenses
and working capital.
F-13
<PAGE>
**[First Page Gatefold-Back]**
Top Caption: REMAKING AN AMERICAN LEGEND.
1. Photograph of motorcycle racer on Excelsior Supply Motorcycle
Caption: The Excelsior-Henderson name is revered in motorcycle history. In
1912, the Excelsior X-twin was the first motorcycle to break the 100 mph
barrier. The following year, the Henderson Four became the first to circle
the globe.
2. Top inset photograph of lineup of motorcycle racers on Excelsior Supply
motorcycles.
3. Bottom inset photograph of board track racers.
These pictures show motorcycles made earlier in this century by Excelsior
Supply Company, which ceased business in 1931. Excelsior-Henderson
Motorcycle Manufacturing Company is a new company incorporated in 1993 and
is not related to the former Excelsior Supply, except that
Excelsior-Henderson believes it has secured certain trademarks previously
used by the former Excelsior Supply.
<PAGE>
**[Second Page Gatefold-Back]**
Top Caption: WITH A RICH HERITAGE IN THE REAR-VIEW MIRROR.
1. Photograph of hill climber on an Excelsior Supply Motorcycle
Caption: The original Excelsior-Henderson motorcycles were renowned for
their styling, quality and performance. The classic styling of the new Super
X is based on the 1931 model shown at right.
2. Inset photograph of 1931 Excelsior Supply Super X.
These pictures show motorcycles made earlier in this century by Excelsior
Supply Company, which ceased business in 1931. Excelsior-Henderson
Motorcycle Manufacturing Company is a new company incorporated in 1993 and
is not related to the former Excelsior Supply, except that
Excelsior-Henderson believes it has secured certain trademarks previously
used by the former Excelsior Supply.
<PAGE>
**[Third Page Gatefold-Outside Back Cover]**
Top Caption: The Road Is Wide Open
1. Photograph of David and Jennie Hanlon and Daniel Hanlon riding prototype
Super X motorcycles along the beach, with the Company's logo inset.
CAPTION: EXCELSIOR-HENDERSON, RELATED LOGO DESIGNS, SUPER-X AND "X" ARE
TRADEMARKS OF EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY.
