EXCELSIOR HENDERSON MOTORCYCLE MANUFACTURING CO, 10-Q, 1998-11-16

EXCELSIOR HENDERSON MOTORCYCLE MANUFACTURING CO
10-Q, 1998-11-16
MOTORCYCLES, BICYCLES & PARTS

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<PAGE>

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended October 3, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to ________________.

Commission file number 000-22765
---------

EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Minnesota 41-1771946
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

805 Hanlon Drive
Belle Plaine, Minnesota 56011
------------------------------- ----------
(Address of principal executive (Zip code)
offices)

(612) 873-7000
-----------------------------
Registrant's telephone number

Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date: Common Stock, $.01 par value -
13,069,253 issued and outstanding as of October 30, 1998.

<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY

QUARTERLY REPORT ON FORM 10-Q

PART I. FINANCIAL INFORMATION PAGE NO.
--------

Item 1. Financial Statements:

Balance Sheets (Unaudited) as of January 3, 1998
and October 3, 1998 3

Statements of Operations (Unaudited)
for the Three Months Ended
September 30, 1997 and October 3, 1998 4

Statements of Operations (Unaudited)
for the Nine Months Ended
September 30, 1997 and October 3, 1998 and
Cumulative for the Period from Inception
(December 22, 1993) to October 3, 1998 5

Statements of Cash Flows (Unaudited)
for the Nine Months Ended
September 30, 1997 and October 3, 1998 and Cumulative
for the Period from Inception (December 22, 1993)
to October 3, 1998 6

Notes to Financial Statements 7

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8

Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12

PART II. OTHER INFORMATION 13

SIGNATURES 17

2
<PAGE>

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,484,502 $ 10,001,762
Short-term investments 11,764,689 --
Other current assets 113,497 248,001
------------ ------------
Total current assets 24,362,688 10,249,763

PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $255,529 and $834,003 13,353,897 25,376,676

RESTRICTED CASH 7,275,569 11,347,250

DEPOSITS 2,670,675 --

INTELLECTUAL PROPERTY, to be amortized 200,545 256,446

OTHER ASSETS, net 322,093 495,810
------------ ------------
$ 48,185,467 $ 47,725,945
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,997,783 $ 899,271
Accrued liabilities 585,481 1,766,060
Current maturities of long-term debt 675,372 639,453
------------ ------------
Total current liabilities 3,258,636 3,304,784
------------ ------------
LONG-TERM DEBT, less current maturities 13,738,615 19,626,589
------------ ------------

COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)

STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, 10,000
shares authorized, par value of $.01;
10,000 shares issued and outstanding -- 9,325,000
Common stock, 32,000,000 shares authorized,
par value of $.01; 13,026,191 and 13,068,920
shares issued and outstanding 130,262 130,689
Additional paid-in capital 41,066,473 41,123,520
Deficit accumulated during the development stage (10,008,519) (25,784,637)
------------ ------------
Total stockholders' equity 31,188,216 24,794,572
------------ ------------
$ 48,185,467 $ 47,725,945
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these balance sheets.

3
<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)

Statements of Operations

(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 30, October 3,
1997 1998
------------- -------------
<S> <C> <C>
PREOPERATING EXPENSES:
Research and development $ 620,633 $ 4,303,645
Marketing 628,624 1,697,788
General and administrative 505,633 1,249,357
------------- -------------
Total preoperating expenses 1,754,890 7,250,790

INTEREST INCOME 298,186 240,197

INTEREST EXPENSE (6,016) (470,668)
------------- -------------
NET LOSS $ (1,462,720) $ (7,481,261)
------------- -------------
------------- -------------
NET LOSS PER SHARE:
Basic and diluted $ (0.13) $ (0.57)
------------- -------------
------------- -------------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 11,341,095 13,062,586
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

4
<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)

Statements of Operations

(Unaudited)

INTEREST INCOME 461,571 908,261 1,936,067

INTEREST EXPENSE (9,349) (1,198,741) (1,394,773)
------------ ------------ ------------

NET LOSS $ (3,543,902) $(15,776,118) $(25,784,637)
------------ ------------ ------------
------------ ------------ ------------

NET LOSS PER SHARE:
Basic and diluted $ (0.45) $ (1.21) $ (3.69)
------------ ------------ ------------
------------ ------------ ------------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 7,812,986 13,041,653 6,979,260
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

5
<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended Cumulative for the
------------------------------ Period from Inception
September 30, October 3, (December 22, 1993)
1997 1998 to October 3, 1998
------------ ------------ ---------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,543,902) $(15,776,118) $(25,784,637)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 72,393 606,102 911,675
Change in current assets and liabilities:
Other current assets (18,472) (134,504) (248,001)
Accounts payable (62,563) (1,098,512) 899,271
Accrued liabilities 275,520 1,180,579 1,766,060
------------ ------------ ------------
Net cash used in operating activities (3,277,024) (15,222,453) (22,455,632)
------------ ------------ ------------

INVESTING ACTIVITIES:
Proceeds from sale of short-term investments, net 4,044,992 11,764,689 --
Property and equipment additions (4,207,663) (9,745,128) (20,853,328)
Increase in restricted cash -- (266,048) (396,617)
Payments made for intellectual property (49,601) (55,901) (256,446)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (212,272) 1,697,612 (21,506,391)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds received from restricted cash -- 2,294,367 2,294,367
Payments incurred for other assets -- (201,345) (526,094)
Proceeds from long-term debt 293,362 -- 2,505,095
Payments under capital lease and long-term
debt obligations (6,209) (433,395) (808,782)
Proceeds from issuance of Series A Convertible
Preferred Stock, net of offering expenses -- -- 10,314,000
Proceeds from issuance of Series B Convertible
Preferred Stock, net of offering expenses -- 9,325,000 9,325,000
Proceeds from issuance of common stock, net of
offering expenses 27,429,669 57,474 30,860,199
------------ ------------ ------------
Net cash provided by
financing activities 27,716,822 11,042,101 53,963,785
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 24,227,526 (2,482,740) 10,001,762

CASH AND CASH EQUIVALENTS:
Beginning of period 5,376,601 12,484,502 --
------------ ------------ ------------
End of period $ 29,604,127 10,001,762 $ 10,001,762
------------ ------------ ------------
------------ ------------ ------------

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,390 $ 1,064,485 $ 1,229,161
Noncash transactions-
Property and equipment acquired under
capital lease obligations -- 185,450 5,399,729
Restricted cash received from long-term debt -- 6,100,000 13,245,000
Conversion of note payable into common stock -- -- 75,000
Issuance of common stock for services -- -- 125,000
Issuance of common stock in settlement of
construction payable -- -- 5,010
</TABLE>

The accompanying notes are an integral part of these financial statements.

6
<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
(A DEVELOPMENT STAGE COMPANY)

Notes to Financial Statements

(Unaudited)
1. BASIS OF PRESENTATION:

The accompanying balance sheet of Excelsior-Henderson Motorcycle Manufacturing
Company (the "Company") as of October 3, 1998, the statements of operations for
the three months and nine months ended September 30, 1997 and October 3, 1998,
and cumulative for the period from inception (December 22, 1993) to October 3,
1998, and the statements of cash flows for the nine months ended September 30,
1997 and October 3, 1998, and cumulative for the period from inception (December
22, 1993) to October 3, 1998, have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows as of October 3, 1998 and for all periods
presented have been made.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended January 3,
1998. The results of operations for the three months and nine months ended
October 3, 1998 are not necessarily indicative of the operating results for the
full fiscal year.

2. BASIC AND DILUTED NET LOSS PER SHARE:

Basic and diluted net loss per share for all periods presented is computed using
the weighted average number of common shares outstanding. Shares reserved for
warrants, stock options or convertible preferred stock are not considered
because the impact of the incremental shares is antidilutive.

3. COMMITMENTS AND CONTINGENCIES:

In October 1997, the Company signed a construction agreement with a third-party
vendor for the construction of the Company's paint and finishing facility. The
cost of the facility will be approximately $7.5 million. The Company paid 20%
of the cost upon execution of the agreement and is making progress payments
during construction and a final payment upon completion of the facility.
Through October 3, 1998, the Company had made construction payments totaling
$6.0 million under the construction agreement. Long-term financing of the paint
and finishing facility and other equipment has been arranged with the State of
Minnesota, through the Minnesota Agriculture and Economic Development Board,
which provides for a $7.1 million loan for a portion of the cost of the paint
and finishing facility and certain reserves. The loan proceeds are being held
in escrow and will be available to the Company upon installation and acceptance
of the paint and finishing facility and the purchase of certain manufacturing
equipment and product tooling. The loan has a 10-year term with interest at an
annual rate of 9.5% and is secured by the paint and finishing facility and
certain of the Company's equipment.

In July 1998, the Company entered into a $6.1 million Industrial Development
Revenue Bond (the "Bond"), which was facilitated by the Economic Development
Authority of the City of Belle Plaine, Minnesota. The entire Bond was purchased
by FINOVA Public Finance, Inc., a subsidiary of FINOVA Capital Corporation
("FINOVA"). The proceeds of the sale of the Bond, net of a $1.1 million debt
service reserve, have been placed into an escrow account, and may be drawn for
certain past and future equipment and product tooling purchases. During the
three months ended October 3, 1998, the Company drew $2.3 million from the
escrow account. The Bond is repayable over a seven and one-half year term,
carries an interest rate of 10.4%, and is secured by certain factory equipment
and product tooling. FINOVA also received a warrant to purchase 196,500 shares
of common stock of the Company. The warrant may be exercised up to ten years
from the date of issuance at an exercise price of $9.00 per share.

<PAGE>

4. ISSUANCE OF PREFERRED STOCK:

In September 1998, an institutional investor (the "Investor") purchased 10,000
shares of the Company's Series B Convertible Preferred Stock (the "Preferred
Stock") for a gross purchase price of $10.0 million of which the Company
received $9.3 million in net proceeds. The conversion price of the Preferred
Stock is $7.47 and is fixed for the first twelve months. Thereafter, the
conversion price may vary based upon the market price of the Company's common
stock during the period immediately preceding conversion. The Investor also is
committed to make an additional $3.0 million investment in the Company upon the
achievement of certain market price goals and certain other conditions. In
addition, warrants to purchase 340,000 of the Company's common stock were issued
in connection with the Preferred Stock offering. The warrants have an exercise
price of $8.4896 and expire five years from the date of the Preferred Stock
offering.

EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY

THE INFORMATION PRESENTED BELOW IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER "FORWARD-LOOKING
STATEMENTS" BELOW, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED. BECAUSE ACTUAL RESULTS MAY DIFFER, READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.

ITEM 2. 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 of the operating expenses described below in "Results of
Operations," the Company's deficit accumulated during the development stage was
$25.8 million at October 3, 1998. Historic spending levels are not indicative
of anticipated future spending levels because the Company is in a period in
which it will increase spending on product research and development, marketing
and dealer network development, and 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 OCTOBER 3, 1998 AND SEPTEMBER 30, 1997

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4,304,000 for the three months ended October 3, 1998 from $621,000
for the three months ended September 30, 1997. The increases were primarily due
to staffing increases and increased product design and development costs, as
well as expenses for developing prototypes and production intent motorcycles.

MARKETING EXPENSES. Marketing expenses increased to $1,698,000 for the
three months ended October 3, 1998 from $629,000 for the three months ended
September 30, 1997. The increases were primarily due to staffing increases,
increased advertising and promotion costs, attendance at various marketing
events, and dealer network development expenses.

8
<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1,249,000 for the three months ended October 3, 1998 from $506,000
for the three months ended September 30, 1997. The increases were primarily due
to staffing increases and other general operating expenses.

INTEREST INCOME. Interest income decreased to $240,000 for the three
months ended October 3, 1998 from $298,000 for the three months ended September
30, 1997, due to decreased average levels of cash, cash equivalents and
short-term investments held by the Company between periods.

INTEREST EXPENSE. Interest expense increased to $471,000 for the three
months ended October 3, 1998 from $6,000 for the three months ended September
30, 1997 due to increased borrowings under long-term debt and capital lease
agreements.

NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $8,466,000 for the nine months ended October 3, 1998 from
$1,533,000 for the nine months ended September 30, 1997. The increases were
primarily due to staffing increases and increased product design and development
costs, as well as expenses for developing prototypes and production intent
motorcycles.

MARKETING EXPENSES. Marketing expenses increased to $3,287,000 for the
nine months ended October 3, 1998 from $1,292,000 for the nine months ended
September 30, 1997. The increases were primarily due to staffing increases,
increased advertising and promotion costs, attendance at various marketing
events, and dealer network development expenses.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3,733,000 for the nine months ended October 3, 1998 from
$1,171,000 for the nine months ended September 30, 1997. The increases were
primarily due to staffing increases and other general operating expenses.

INTEREST INCOME. Interest income increased to $908,000 for the nine months
ended October 3, 1998 from $462,000 for the nine months ended September 30,
1997. The increase results from increased average levels of cash, cash
equivalents and short-term investments held by the Company resulting from the
net proceeds of the Company's initial public offering of its common stock, net
proceeds of the Series B Convertible Preferred Stock offering, and the cash
received from the FINOVA and Minnesota Agricultural and Economic Development
Board loans. See "Liquidity and Capital Resources."

INTEREST EXPENSE. Interest expense increased to $1,199,000 for the nine
months ended October 3, 1998 from $9,000 for the nine months ended September 30,
1997 due to increased borrowings under long-term debt and capital lease
agreements.

NET OPERATING LOSS CARRYFORWARDS

As of January 3, 1998, the Company had net operating loss carryforwards of
approximately $8.8 million for federal income tax purposes that are available to
offset future taxable income through the year 2012. 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 a 1996 change in ownership resulting from sales of the Company's
stock, will limit annual utilization of these net operating loss carryforwards.
The portion of the net operating loss carryforwards subject to this limitation
is approximately $2.6 million. The calculated annual limitation is
approximately $600,000.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash, cash equivalents and short-term investments of
$10.0 million at October 3, 1998, as compared to $24.2 million at January 3,
1998. The decrease is due primarily to cash paid for research and
development costs (including pre-production manufacturing and completion of
the design, engineering and testing of the Super X);

9
<PAGE>

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. Such decrease was offset by
the net proceeds received from the Series B Convertible Preferred Stock
offering and the funds drawn from the FINOVA escrow account. Based upon its
current estimates, the Company believes that its available cash resources,
including the net proceeds from the Series B Convertible Preferred Stock
offering, as well as the proceeds to be drawn from the escrow account from
the Minnesota Agricultural and Economic Development Board and from the
Taxable Industrial Development Revenue Bond purchased by FINOVA Public
Finance, Inc., a subsidiary of FINOVA Capital Corporation ("FINOVA") (see
below), will be sufficient to fund the pre-production operations of the
Company. However, the Company may require additional working capital
financing prior to commencement of production. Upon commencement of
production, the Company will need to obtain substantial additional amounts of
fixed asset, inventory, and working capital financing. However, if
sufficient fixed asset and/or working capital financing is 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
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, unanticipated delays in drawing funds held in escrow from the
Minnesota Department of Trade and Economic Development or FINOVA financings,
the unavailability of fixed asset, inventory, and working capital financing,
or other unanticipated events, then the Company may need additional equity or
debt financing prior to or shortly after commencement of production of the
Super X.

In July 1998, the Company issued a $6.1 million Taxable Industrial
Development Revenue Bond (the "Bond"), through the Economic Development
Authority of the City of Belle Plaine, Minnesota. The entire Bond was purchased
by FINOVA. The proceeds of the sale of the Bond, net of a $1.1 million debt
service reserve, have been placed into an escrow account, and may be drawn for
certain past and future equipment and product tooling purchases. During the
three months ended October 3, 1998, the Company completed a $2.3 million draw
from the escrow account. The Bond is repayable over a seven and one-half year
term, carries an interest rate of 10.4%, and is secured by certain factory
equipment and product tooling. FINOVA also received a warrant to purchase
196,500 shares of common stock of the Company. The warrant may be exercised up
to ten years from the date of issuance at an exercise price of $9.00 per share.

In September 1998, an institutional investor (the "Investor") purchased
10,000 shares of the Company's Series B Convertible Preferred Stock (the
"Preferred Stock") for a gross purchase price of $10.0 million of which the
Company received $9.3 million in net proceeds. The conversion price of the
Preferred Stock is $7.47 and is fixed for the first twelve months. Thereafter,
the conversion price may vary based upon the market price of the Company's
common stock during the period immediately preceding conversion. The Investor
also is committed to make an additional $3.0 million investment in the Company
upon the achievement of certain market price goals and certain other conditions.
In addition, warrants to purchase 340,000 of the Company's common stock were
issued in connection with the Preferred Stock offering. The warrants have an
exercise price of $8.4896 and expire five years from the date of the Preferred
Stock offering.

YEAR 2000 ISSUE

The Company has assessed the impact of year 2000 on the Company's
significant internal systems and software, which include information technology
(IT) and non-IT, or embedded technology, systems. The Company believes that its
internal systems and software are year 2000 compliant. The Company's internal
year 2000 assessment is based in large part on the acquisition of substantially
all of the Company's internal systems and software which began in 1997 and is
expected to be completed in 1999. The Company also has initiated discussions
with its significant vendors to ensure that those parties have appropriate plans
to remediate year 2000 issues. The Company is assessing the extent to which its
operations are vulnerable should those vendors fail to properly

10
<PAGE>

remediate their computer systems. If certain vendors are unable to deliver
product on a timely basis, due to their own year 2000 issues, the Company
anticipates there will be others who will be able to deliver similar goods
within a reasonable period of time.

The Company's year 2000 initiative is being completed by a team of internal
staff with the assistance of outside advisors. The team's mission is to ensure
that there is no material adverse effect on the Company's business operations.
The Company is well under way with its efforts, which are scheduled to be
completed in 1999. While the Company believes its efforts are adequate to
address its year 2000 concerns, there can be no guarantee that the systems of
other companies will be converted on a timely basis and will not have a material
adverse effect on the Company. The cost of the year 2000 initiatives are not
considered material by the Company.

FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.

- - - 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 has not had
sales to date and does not anticipate motorcycle sales until late 1998. As
of October 3, 1998, the Company had an accumulated deficit of
$25.8 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.

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. 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 49% share of the U.S. market for
new heavyweight motorcycle registrations in 1997 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 began manufacturing a cruiser motorcycle in
July 1998. The Company's established competitors have greater resources
than the Company. No assurance can be given that the Company's products
will be accepted or that the Company will be able to compete effectively.

- - - THE COMPANY DOES NOT ANTICIPATE HAVING MOTORCYCLE SALES UNTIL LATE 1998 --
Factors that may affect the timing of production of the Super X include
problems in acquisition, installation and successful operation of the
motorcycle production equipment, the ability of the Company to locate
competent suppliers or obtain adequate quantities of components and
supplies at reasonable costs, the ability of the Company to hire additional
qualified personnel and the ability 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. The
transition from prototype 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 and commence mass production in late 1998.

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 to manage growth. Mass production of the Super X will
require the Company to hire additional qualified personnel. Competition is
intense for highly skilled workers,

11
<PAGE>

and there can be no assurance that the Company will be successful in
attracting, training and retaining such personnel.

Sales of the Super X and any additional motorcycles the Company may produce
are dependent on the Company establishing a dealer network. The Company
has executed agreements with 82 dealers as of October 3, 1998. The Company
may need to attract additional dealers to sell its brand of products by
convincing such dealers that the Company's products will be a successful
and profitable line. In addition, the Company will be required to support
its dealers through, among other things, making floor plan financing
available through third parties, providing 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. If the Company is unable to establish and support an adequate
dealer network, sales and distribution of the Company's products will be
adversely affected.

Prior to sales of the Super X, 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 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.

- - - BASED UPON ITS CURRENT ESTIMATES, THE COMPANY BELIEVES THAT ITS AVAILABLE
CASH RESOURCES, INCLUDING THE NET PROCEEDS RECEIVED FROM THE SERIES B
CONVERTIBLE PREFERRED STOCK OFFERING, AS WELL AS THE PROCEEDS RECEIVED FROM
THE MINNESOTA DEPARTMENT OF TRADE AND ECONOMIC DEVELOPMENT AND FROM THE
TAXABLE INDUSTRIAL DEVELOPMENT REVENUE BOND PURCHASED BY FINOVA, WILL BE
SUFFICIENT TO FUND THE PRE-PRODUCTION OPERATIONS OF THE COMPANY--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 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, unanticipated delays in drawing
funds held in escrow from the Minnesota Agricultural and Economic
Development Board or FINOVA financings, the unavailability of inventory and
working capital financing, or other unanticipated events, then the Company
may need additional equity or debt financing prior to or shortly after
commencement of production of the Super X. There can be no assurance that
the Company will be able to obtain such financing or that such financing
will be available on terms favorable to the Company.

- - - THE COMPANY MAY REQUIRE ADDITIONAL WORKING CAPITAL FINANCING PRIOR TO
COMMENCEMENT OF PRODUCTION; UPON COMMENCEMENT OF PRODUCTION, THE COMPANY
WILL NEED TO OBTAIN SUBSTANTIAL ADDITIONAL AMOUNTS OF FIXED ASSET AND
WORKING CAPITAL FINANCING--The availability and terms of any 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.
There can be no assurance that the Company will be able to obtain such
financing or that such financing will be available on terms favorable to
the Company.

- - - IF CERTAIN VENDORS ARE UNABLE TO DELIVER PRODUCT ON A TIMELY BASIS, DUE
TO THEIR OWN YEAR 2000 ISSUES, THE COMPANY ANTICIPATES THERE WILL BE
OTHERS WHO WILL BE ABLE TO DELIVER SIMILAR GOODS WITHIN A REASONABLE
PERIOD OF TIME--The Company's belief that it will be able to obtain
goods from other vendors is based upon the number of vendors currently
sypplying various products that the Company requires for production,
which number could change prior to the year 2000. If certain vendors for
a particular product are unable to supply such product because of year
2000 problems, other vendors who supply such product may not be able to
meet the increased demand for such product from all customers, which
could cause an interuption in the Company's production. Due to the
complex nature of the year 2000 problem, it is even possible that all
vendors for a particular item could have year 2000 compliance problems
and be unable to supply goods to the Company, which would materially
affect the Company's ability to continue production until such product
could be obtained.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

12
<PAGE>

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 2. CHANGES IN SECURITIES

In September 1998, the Company issued 10,000 shares of Series B
Convertible Preferred Stock (the "Preferred Stock") in a private
placement under Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated under Section 4(2) to a single
institutional investor. The aggregate purchase price for the
Preferred Stock was $10.0 million, with net proceeds to the Company of
$9.3 million. Shoreline Pacific Advisors acted as placement agent for
the Company in the transaction and received $500,000 in cash
compensation and a warrant to purchase 90,000 shares of the Company's
common stock. The transaction, and the conversion feature of the
Preferred Stock, is described in Part I of the Quarterly Report on
Form 10-Q under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." For additional terms of the Preferred Stock, see the
Company's Amended Statement of Designation of Rights, Preferences and
Limitations of Series B Convertible Preferred Stock, incorporated by
reference in Exhibit 4.3 to this Quarterly Report on Form 10-Q.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of the Shareholders of the Company was held on
July 25, 1998. At such meeting, the following matters were voted on:

1. The five individuals listed below were elected to the Company's
Board of Directors, with each receiving the number of shares set
forth opposite his name.

a. Daniel L. Hanlon 12,013,423 for nominee and 33,619 withheld
b. David P. Hanlon 12,011,423 for nominee and 35,619 withheld
c. John B. Donahue 12,008,470 for nominee and 38,572 withheld
d. Wayne M. Fortun 12,010,315 for nominee and 36,727 withheld
e. David R. Pomije 11,993,018 for nominee and 54,024 withheld

2. An Amendment to the Company's Articles of Incorporation
increasing the authorized capital stock to 32,000,000 shares was
approved with 7,823,822 votes cast for the motion, 996,518 votes
cast against the motion, 58,273 votes abstaining and 3,168,429
broker non-votes.

3. The Company's Amended and Restated 1995 Stock Plan was approved
with 8,418,724 votes cast for the motion, 259,958 votes cast
against the motion, 125,113 votes abstaining and 3,243,547 broker
non-votes.

4. The Company's Team Stock Purchase Plan was approved with
8,496,928 votes cast for the motion, 193,297 votes cast against
the motion, 114,200 votes abstaining and 3,242,617 broker
non-votes.

13
<PAGE>

5. The appointment of Arthur Andersen LLP as independent public
accountants of the Company for the 1998 fiscal year was ratified
with 11,971,541 votes cast for the motion, 30,944 votes cast
against the motion, 44,557 votes abstaining and no broker
non-votes.

For further information respecting all such matters reference is made
to the Company's definitive proxy statement dated June 27, 1998 (File
No. 000-22765).

ITEM 5. OTHER INFORMATION

Not applicable

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are filed as part of this Quarterly Report on
Form 10-Q for the quarterly period ended October 3, 1998:

Exhibit Description
- - ------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of Company, as Amended.(1)
3.3 By-Laws of the Company.(2)
4.1 Securities Purchase Agreement dated as of September 3, 1998, by and
among Excelsior-Henderson Motorcycle Manufacturing Company and the
Buyers listed therein.(7)
4.2 Registration Rights Agreement dated as of September 3, 1998, by and
between Excelsior-Henderson Motorcycle Manufacturing Company and the
Buyers listed therein.(7)
4.3 Amended Statement of Designation of Rights, Preferences and
Limitations of Series B Convertible Preferred Stock as filed with the
Secretary of State of the State of Minnesota on September 3, 1998.(7)
4.4 Form of Common Stock Purchase Warrant Certificate dated September 3,
1998.(7)
10.4 Contract for Private Development by and among City of Belle Plaine,
Minnesota and Belle Plaine Economic Development Authority Belle
Plaine, Minnesota and the Company dated as of December 31, 1996.(3)
10.5 Assignment, Assumption and Amendment of Development Contract by and
among the City of Belle Plaine, Minnesota, Belle Plaine Economic
Authority, Belle Plaine, Minnesota, the Company, and Ryan Belle
Plaine, LLC dated April 21, 1997.(4)
10.6 Lease Agreement between Ryan Belle Plaine, LLC and the Company dated
April 21, 1997.(4)
10.7 Construction Agreement by and between Ryan Belle Plaine, LLC and the
Company dated April 21, 1997.(4)
10.8 Guaranty by Ryan Companies US, Inc. in favor of the Company dated
April 21, 1997.(4)
10.9 Amended and Restated 1995 Stock Option Plan.(5)
10.11 Form of Employee Agreement.(5)
27.1 Financial Data Schedule
</TABLE>

Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.

- - ----------------
(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form S-1 filed with the Commission on May 23,
1997 (Registration No. 333-27789).
(2) Incorporated by reference to the like numbered Exhibit to Amendment No. 1
to the Company's Registration Statement on Form SB-2 filed with the
Commission on July 23, 1996 (Registration No. 333-05060C).
(3) Incorporated by reference to the like numbered Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996 (File No.
000-22765).
(4) Incorporated by reference to the like numbered Exhibit to the Company's
Quarterly Report on Form 10-QSB for the period ended March 31, 1997 (File
No. 000-22765).
(5) Incorporated by reference to the like numbered Exhibit to Amendment No. 1
to the Company's Registration Statement on Form S-1 filed with the
Commission on June 27, 1997 (the Registration No. 333-27789).
(7) Incorporated by reference to the like numbered Exhibit to the Company's
Current Report on Form 8-K filed with the Commission on September 18, 1998
(File No. 000-22765).

15
<PAGE>

(b) REPORTS ON FORM 8-K

During the three months ended October 3, 1998, the Company filed the
following Current Reports on Form 8-K for events occurring on the indicated
dates: (i) on July 31, 1998, for the purpose of announcing that the registrant
had closed on a $6.1 million Industrial Development Revenue Bond; and (ii) on
September 3, 1998, for the purpose of announcing that the registrant had sold
and issued 10,000 shares of Series B Convertible Preferred Stock at a purchase
price of $1,000 per share.

16
<PAGE>

EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY

DATE: November 16, 1998 By: /s/ Thomas M. Rootness
-----------------------------------------
Thomas M. Rootness,
Senior Vice President of Finance
and Administration and Chief
Financial Officer
(Duly authorized officer and Principal
Financial Officer)

17
<PAGE>

INDEX TO EXHIBITS

Exhibit Description Page
- - ------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of Company. . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
3.3 By-Laws of the Company.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
4.1 Securities Purchase Agreement dated as of September 3, 1998, by and among
Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein.. . . Incorporated by Reference
4.2 Registration Rights Agreement dated as of September 3, 1998, by and among
Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein . . . Incorporated by Reference
4.3 Amended Statement of Designation of Rights, Preferences and Limitations of
Series B Convertible Preferred Stock as filed with the Secretary of State of the
State of Minnesota filed on September 3, 1998. . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
4.4 Form of Common Stock Purchase Warrant Certificate dated September 3, 1998. . . . . . . . Incorporated by Reference
10.4 Contract for Private Development by and among City of Belle Plaine,
Minnesota and Belle Plaine Economic Development Authority, Belle
Plaine, Minnesota and the Company dated as of December 31, 1996. . . . . . . . . . . . . Incorporated by Reference
10.5 Assignment, Assumption and Amendment of Development Contract by and
among the City of Belle Plaine, Minnesota, Belle Plaine Economic Authority,
Belle Plaine, Minnesota, the Company, and Ryan Belle Plaine, LLC
dated April 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
10.6 Lease Agreement between Ryan Belle Plaine, LLC and the Company
dated April 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
10.7 Construction Agreement by and between Ryan Belle Plaine, LLC
and the Company dated April 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
10.8 Guaranty by Ryan Companies US, Inc. in favor of the Company
dated April 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
10.9 Amended and Restated 1995 Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
10.11 Form of Employee Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incorporated by Reference
27.1 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Filed Electronically
</TABLE>

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 10,001,762
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,249,763
<PP&E> 26,210,679
<DEPRECIATION> 834,003
<TOTAL-ASSETS> 47,725,945
<CURRENT-LIABILITIES> 3,304,784
<BONDS> 0
0
9,325,000
<COMMON> 130,689
<OTHER-SE> 15,338,883
<TOTAL-LIABILITY-AND-EQUITY> 47,725,945
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 15,485,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,198,741
<INCOME-PRETAX> (15,776,118)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,776,118)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)

</TABLE>