<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 April 3, 1999
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 offices) (Zip code)
(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 -
13,583,742 issued and outstanding as of May 1, 1999.
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements:
Balance Sheets (Unaudited) as of April 3, 1999
and January 2, 1999 3
Statements of Operations (Unaudited)
for the Three Months Ended
April 3, 1999 and April 4, 1998 4
Statements of Cash Flows (Unaudited)
for the Three Months Ended
April 3, 1999 and April 4, 1998 5
Notes to Financial Statements 6
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 16
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,359,498 $ 4,697,542
Trade accounts receivable, net of allowance for doubtful accounts
of $10,000 476,618 -
Inventories 5,609,406 1,865,251
Other current assets 480,709 541,371
----------- -----------
Total current assets 8,926,231 7,104,164
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$1,669,885 and $999,869 31,234,412 30,317,118
INTELLECTUAL PROPERTY, net of accumulated amortization of $3,303 and $0 291,038 275,532
RESTRICTED CASH 3,529,268 8,065,727
OTHER ASSETS, net of accumulated amortization of $532,503 and $402,487 2,215,169 2,225,591
----------- -----------
$46,196,118 $47,988,132
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $6,309,883 $ 5,540,599
Accrued liabilities 3,549,846 3,761,657
Current maturities of long-term debt 1,498,207 919,533
----------- -----------
Total current liabilities 11,357,936 10,221,789
LONG-TERM DEBT, less current maturities 22,491,101 20,569,409
----------- -----------
STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, par value $0.01; 6,750 and
10,000 shares authorized, issued and outstanding 6,294,375 9,325,000
Series C Convertible Preferred Stock, par value $0.01; 3,000 shares
authorized, issued and outstanding 2,849,000 -
Common stock, par value $0.01; 25,000,000 shares authorized;
13,583,076 and 13,083,461 shares issued and outstanding 135,831 130,835
Additional paid-in capital 44,754,871 41,658,923
Accumulated deficit (41,686,996) (33,917,824)
----------- -----------
Total stockholders' equity 12,347,081 17,196,934
----------- -----------
$46,196,118 $47,988,132
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 3, April 4,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 1,857,232 $ -
COST OF SALES 4,633,225 -
----------- -----------
Gross margin (2,775,993) -
----------- -----------
DEPARTMENTAL EXPENSES:
Research and development 1,415,994 1,539,128
Sales and marketing 1,425,642 835,875
General and administrative 1,555,877 1,280,529
----------- -----------
Total departmental expenses 4,397,513 3,655,532
----------- -----------
Operating loss (7,173,506) (3,655,532)
INTEREST INCOME 160,660 414,107
INTEREST EXPENSE AND OTHER (756,326) (363,320)
----------- -----------
NET LOSS $(7,769,172) $(3,604,745)
----------- -----------
----------- -----------
NET LOSS PER SHARE:
Basic and diluted $ (0.58) $ (0.28)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 13,329,888 13,027,821
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
April 3, April 4,
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,769,172) $(3,604,745)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 803,335 212,703
Amortization of debt discount 74,928 -
Change in current assets and liabilities:
Accounts receivable (476,618) -
Inventories (3,744,155) -
Other current assets 60,662 (275,907)
Accounts payable 769,284 1,106,901
Accrued liabilities (211,811) 400,807
------------ -----------
Net cash used in operating activities (10,493,547) (2,160,241)
------------ -----------
INVESTING ACTIVITIES:
Property and equipment additions (1,587,310) (4,457,247)
Purchases of intellectual property (18,809) (8,165)
------------ -----------
Net cash used in investing activities (1,606,119) (4,465,412)
------------ -----------
FINANCING ACTIVITIES:
Proceeds from restricted cash, net 4,536,459 (79,867)
Payments made for other assets (119,594) -
Proceeds from long-term debt 2,549,895 -
Repayment of long-term debt (124,457) (102,606)
Proceeds from issuance of Series C Convertible Preferred stock, net
of offering expenses 2,849,000 -
Proceeds from issuance of common stock, net of offering expenses 70,319 6,251
------------ -----------
Net cash provided by (used in) financing activities 9,761,622 (176,222)
------------ -----------
Net decrease in cash and cash equivalents (2,338,044) (6,801,875)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,697,542 12,484,502
------------ -----------
End of period $ 2,359,498 $ 5,682,627
------------ -----------
------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 657,240 $ 201,835
Noncash transactions-
Conversion of Series B Convertible Preferred Stock into common
stock 3,030,625 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying balance sheet of Excelsior-Hendersen Motorcycle Manufacturing
Company (the Company) as of April 3, 1999, the statements of operations for the
three months ended April 3, 1999 and April 4, 1998 and the statements of cash
flows for the three months ended April 3, 1999 and April 4, 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 April 3, 1999 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 2, 1999. The results of operations for the three
months ended April 3, 1999 are not necessarily indicative of the operating
results for the full fiscal year or for future periods.
2. NATURE OF BUSINESS:
During the three months ended April 3, 1999, the Company began actively selling
its products and no longer considers itself to be in the development stage.
Although the Company is no longer in the development stage, the Company has not
operated profitably to date and there can be no assurance that the Company will
operate profitably in the future.
3. SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 2,
April 3, 1999 1999
------------- ----------
<S> <C> <C>
Raw materials and work in process $4,745,751 $1,865,251
Finished goods 354,653 -
Parts and accessories 509,002 -
---------- ----------
$5,609,406 $1,865,251
---------- ----------
---------- ----------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment. Dealers typically
finance purchases of the Company's motorcycles through an independent
third-party finance company. In certain circumstances, the Company is
required to repurchase motorcycles from the finance company. No reserve was
required for this contingency at April 3, 1999. The agreement may be
terminated by either party at any time with thirty days written notice.
6
<PAGE>
PRODUCT WARRANTY
Product warranty costs are charged to operations based upon the estimated
warranty cost per unit sold at the time of sale.
4. ISSUANCE OF PREFERRED STOCK SUBSEQUENT TO APRIL 3, 1999
In May 1999, an institutional investor and the institutional investor who
purchased the Series B and Series C Convertible Preferred Stock (the
Investor) purchased an aggregate of 10,000 shares of the Company's Series D
Convertible Preferred Stock (the Preferred Stock) for $10.0 million, of which
the Company received $9.5 million in net proceeds. The conversion price of
the Preferred Stock is $7.65 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 Preferred Stock has a six percent annual rate dividend payable quarterly
in either cash or common stock of the Company. The Company is required to
redeem any unconverted Preferred Stock in May 2002 in either cash or common
stock at the option of the Company. In connection with the Preferred Stock
offering warrants to purchase 440,000 shares of the Company's common stock
were issued. One half of the warrants have an exercise price of $8.44 and the
remaining warrants will have an exercise price based on a defined average
market price of the Company's common stock on November 30, 1999. All the
warrants expire five years from the date of the Preferred Stock offering. The
Company also agreed, as a condition of the Preferred Stock offering, to
reprice the warrant issued to the Investor pursuant to the Company's Series C
Convertible Preferred Stock offering to $8.44 per share.
7
<PAGE>
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, RELATING TO FUTURE EVENTS OR
THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE
ONLY PREDICTIONS OR STATEMENTS OF INTENTION THAT 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 manufactures, markets and sells premium heavyweight cruiser
motorcycles. On January 30, 1999, the Company produced and shipped its first
revenue motorcycle, a heavyweight cruiser named the Excelsior-Henderson Super X
(the "Super X"). During 1999, the Company will continue to ramp up production of
the Super X. The Company is in the process of transitioning from the development
stage to an operating company and its operations are subject to all of the risks
inherent in such transition. Primarily as a result of the operating expenses
described below in "Results of Operations," the Company's accumulated deficit as
of April 3, 1999 was $41.7 million. The Company expects to incur continued
operating losses during Fiscal 1999; however, the amount of operating losses is
expected to decline over the remaining quarters of Fiscal 1999 as the Company
increases production volume and reduces per unit product cost, while maintaining
control over departmental expenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1999 COMPARED TO THE THREE MONTHS ENDED APRIL 4,
1998
NET SALES. During the three months ended April 3, 1999, the Company started
selling motorcycles to its domestic dealer network. Primarily all of the
Company's net sales for the three months ended April 3, 1999 were due to
sales of the Company's motorcycles. Net sales also included sales of
accessories, parts, and merchandise and apparel. The Company anticipates
increasing motorcycle production and sales through the remainder of Fiscal
1999.
GROSS MARGIN. The negative gross margin for the three months ended April 3,
1999 was due to initial production start-up costs, delays in motorcycle
production and the inability to fully cover through production volume the
labor and overhead costs incurred to produce the Company's motorcycles. The
Company anticipates that the gross margin will improve over the remainder of
Fiscal 1999 as the Company increases production volume of its motorcycles.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
to $1.4 million during the three months ended April 3, 1999 from $1.5 million in
the comparable prior period. In the first quarter of 1998, research and
development expenses reflected increases in staffing and increased product
design and development costs, as well as expenses for developing prototypes. In
the first quarter of 1999, research and development expenses reflected continued
testing and modification of the Super X motorcycle and the development of
additional models.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to $1.4
million during the three months ended April 3, 1999 from $840,000 in the
comparable prior period. The increase was primarily due to staffing increases,
increased advertising and promotion costs, increased participation at various
marketing events and dealer network development.
8
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.6 million during the three months ended April 3, 1999 from $1.3
million in the comparable prior period. The increase was primarily due to
staffing increases and increases in general operating expenses due to Company
growth.
INTEREST INCOME. Interest income decreased to $160,000 during the three months
ended April 3, 1999 from $410,000 in the comparable prior period due to
decreased average levels of cash, cash equivalents and short-term investments
held by the Company. See "Liquidity and Capital Resources."
INTEREST EXPENSE AND OTHER. Interest expense and other increased to $760,000
during the three months ended April 3, 1999 from $360,000 in the comparable
prior period due to increased average levels of debt outstanding. See
"Liquidity and Capital Resources."
NET OPERATING LOSS CARRYFORWARDS
As of January 2, 1999, the Company had net operating loss carryforwards
of approximately $18.8 million for federal income tax purposes that are
available to offset future taxable income through the year 2013. 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 and cash equivalents of $2.4 million at April 3,
1999, as compared to $4.7 million at January 2, 1999. The decrease is due
primarily to cash paid for operating expenses, inventory purchases, and property
and equipment additions. Such decrease was offset by proceeds from restricted
cash draws, proceeds from a multi-advance working capital loan, and net proceeds
from the Series C Convertible Preferred Stock offering (see below).
The Company anticipates that it will incur significant losses from
operations during Fiscal 1999 due to the transition from the development stage
to an operating company. As of May 10, 1999, the Company's currently available
resources included cash and cash equivalents (which included the proceeds
received from the sale of the Series D Convertible Preferred Stock offering (see
below) and amounts drawn under the working capital loan), and available
restricted cash. The Company's existing resources and estimated cash from
operations may not be sufficient to fund its cash requirements during Fiscal
1999. Accordingly, the Company intends to seek a combination of debt and/or
equity financing during Fiscal 1999. There can be no assurance that sufficient
additional debt or equity financing will be available or, if available, will be
on terms favorable to the Company or its shareholders.
In addition, the Company's debt agreements contain certain
restrictive covenants, among other requirements, relating to the Company's
current ratio, tangible net worth, debt to net worth ratio and debt service
coverage ratio. Except for the current ratio covenant, the Company was in
compliance with all covenants as of April 3, 1999. The lenders have agreed to
waive the current ratio covenant, as necessary, through January 1, 2000.
Because of its anticipated losses during Fiscal 1999, the Company will likely
not comply with other covenant ratios at various times in Fiscal 1999. Absent
a waiver of such covenants by the lenders or amendment of the applicable
agreements, such non-compliance would lead to an event of default in the
agreements, in which case the lender(s) could demand repayment of the
obligation(s).
ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK
In January 1999, an institutional investor (the "Investor") purchased
3,000 shares of the Company's Series C Convertible Preferred Stock ("Series C")
for a gross purchase price of $3.0 million, from which the Company received $2.8
million in net proceeds. Until September 1999, the conversion price of the
Series C is fixed (the "fixed conversion price"). After September 1999, the
conversion price will adjust based on a defined average market price of the
Company's common stock (the "Market Price"), but will never exceed the fixed
conversion price. If the Market Price
9
<PAGE>
is less than $5.00 per share on the date of conversion, then the Series C
conversion price will be 105% of such Market Price. The Company is required to
redeem any unconverted Series C (and any unconverted shares of its Series B
Convertible Preferred Stock ("Series B") issued to the Investor in September
1999) in September 2001 in either cash or common stock at the option of the
Company.
Notwithstanding the foregoing, the holder is not permitted to hold at
any point in time an amount of common stock issued upon conversion of Series B
or Series C that is greater than 4.99% of the then outstanding shares of the
Company's common stock. In addition, if the aggregate amount of shares of common
stock of the Company issued upon conversion of the Series B and/or C exceeds 20%
of the outstanding shares of common stock of the Company, the Company would be
required, at its option, to either (A) submit such issuances of common stock in
excess of 20% for the approval of the Company's shareholders and honor the
conversion of the amounts in excess of 20%; or (B) redeem all of the outstanding
shares of Series B and/or C from the holders at the face amount of the Preferred
Stock ($1,000 per share). The provision in the preceding clause (A) is required
by the Marketplace Rules of the Nasdaq Stock Market.
In addition, warrants to purchase 102,000 shares of the Company's
common stock were issued in connection with the Series C offering. The warrants
have an exercise price of either $11.28 or $8.44 (after repricing, see "Issuance
of Series D Convertible Preferred Stock" below) and expire five years from the
date of the Series C offering.
As of May 1, 1999, the Company has received conversion notices from the
Investor to convert 3,250 shares of the Series B into 435,023 shares of common
stock of the Company. As of May 1, 1999, there were outstanding 6,750 shares of
Series B and 3,000 shares of Series C.
ISSUANCE OF SERIES D CONVERTIBLE PREFERRED STOCK
In May 1999, an institutional investor and the Investor purchased an
aggregate of 10,000 shares of the Company's Series D Convertible Preferred Stock
("Series D") for a gross purchase price of $10.0 million, from which the Company
received $9.5 million in net proceeds. Subject to certain limited restrictions,
the holder of the Series D may convert the Series D to common stock at any time.
Until May 2000, the conversion price of the Series D is fixed. After May 2000,
the conversion price will adjust based on the Market Price, but will never
exceed the fixed conversion price. In addition, the Series D includes a dividend
payable at the rate of 6% per annum. The dividend is payable quarterly in cash
or common stock at the option of the Company. The Company is required to redeem
any unconverted Series D in May 2002 in either cash or common stock at the
option of the Company.
Notwithstanding the foregoing, each holder is not permitted to hold
at any point in time an amount of common stock issued upon conversion of
Series D that is greater than 4.99% of the then outstanding shares of the
Company's common stock. In addition, if the aggregate amount of shares of
common stock of the Company issued upon conversion of the Series D exceeds
20% of the outstanding shares of common stock of the Company, the Company
would be required, at its option, to either (A) submit such issuances of
common stock in excess of 20% for the approval of the Company's shareholders
and honor the conversion of the amounts in excess of 20%; or (B) redeem all
of the outstanding shares of Series D from the holders at the face amount of
the Preferred Stock ($1,000 per share). The provision in the preceding clause
(A) is required by the Marketplace Rules of the Nasdaq Stock Market.
In addition, warrants to purchase 440,000 shares of the Company's
common stock were issued in connection with the Series D offering. One-half
of the warrants have an exercise price of $8.44 and the remaining warrants
will have an exercise price based on a defined average market price of the
Company's common stock on November 30, 1999, and will expire five years from
the date of the Series D offering. The Company also agreed, as a condition to
the purchase of the Series D by the Investor, to reprice the warrant issued
to the Investor pursuant to the Series C offering.
As of May 10, 1999, there were outstanding 10,000 shares of Series D.
10
<PAGE>
YEAR 2000 ISSUE
The Company has assessed the impact of the 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 recent acquisition and
installation of substantially all of the Company's internal systems and
software, which began in 1997. 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 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's production would be
interrupted, which would materially adversely affect its results of operations.
During 1999, the Company will attempt to identify, if possible, multiple vendor
sources to address such contingency.
The Company's year 2000 initiative is being completed by a team of
internal staff with consultation from outside advisors. The team's mission is to
ensure that there is no material adverse effect on the Company's business
operations. The anticipated costs of the year 2000 initiatives are not
considered material by the Company. 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.
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 IS TRANSITIONING FROM THE DEVELOPMENT STAGE TO AN OPERATING
COMPANY; THE AMOUNT OF OPERATINg LOSSES IS EXPECTED TO DECLINE OVER THE
REMAINING QUARTERS OF FISCAL 1999 AS THE COMPANY INCREASES PRODUCTION
VOLUME AND REDUCES THE PER UNIT PRODUCT COST, WHILE MAINTAINING CONTROL
OVER DEPARTMENTAL EXPENSES; THE COMPANY ANTICIPATES THAT THE GROSS
MARGIN WILL IMPROVE OVER THE REMAINDER OF FISCAL 1999--The Company
commenced revenue-producing operations in the first quarter of Fiscal 1999.
There can be no assurance that the Company will generate significant
motorcycle sales or become profitable. As of April 3, 1999, the Company had
an accumulated deficit of $41.7 million.
During the transition to an operating company, the Company must
successfully increase the production volume of the Super X, produce a
high-quality motorcycle and control production costs. Factors that may
affect the volume of production include the ability of the Company to
maintain adequate quantities of high-quality components and supplies, to
refine its manufacturing processes, to solve unanticipated manufacturing
problems, and to hire additional qualified personnel. Factors that may
affect production costs and the resulting gross margin include the
ability of the Company to purchase motorcycle components and supplies at
reasonable costs and to increase production volume. The Company has tried
to produce high-quality products through the design, construction and
equipping of its manufacturing line, the design of the Super X, its choice
of vendors, testing of components and supplies received, and testing of
motorcycles in the production process; however, the Company has not yet
manufactured a sufficient number of motorcycles to properly assess the
effect of increasing production volume on product quality.
The Company relies on original equipment suppliers to supply most of the
proprietary and non-proprietary components that are used to manufacture its
motorcycles. For most of the components, the Company relies on a sole
source 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 suppliers, especially single-source
suppliers, could materially and adversely affect the volume of production
and the cost of the Company's product, until an additional source of supply
is identified.
11
<PAGE>
The Company purchases certain components from foreign suppliers. 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.
The Company's success also depends upon market acceptance of its brand of
products. Market acceptance depends upon the ability of the Company to
continue to establish its intended brand image, a reputation for high
quality and to differentiate its brand of products from its competitors.
The Company operates in a highly competitive environment and competes
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
1998 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. The Company's established competitors have greater resources than
the Company.
Sales of the Super X and any additional motorcycles the Company may produce
are dependent on the effectiveness of the Company's dealer network and
internal sales team. The Company may need to attract additional dealers to
sell its brand of products. In addition, the Company will be required to
support its dealers through, among other things, 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 maintain its
dealer network, sales and distribution of the Company's products will be
adversely affected.
- - THE COMPANY'S EXISTING RESOURCES AND ESTIMATED CASH FROM OPERATIONS MAY NOT
BE SUFFICIENT TO FUND ITS CASH REQUIREMENTS DURING FISCAL 1999.
ACCORDINGLY, THE COMPANY INTENDS TO SEEK A COMBINATION OF DEBT AND/OR
EQUITY FINANCING DURING FISCAL 1999.--If the Company's estimates of the
amount of cash to be received from operations during Fiscal 1999 are
incorrect due to the inability of the Company to produce quality
motorcycles at an increasing quarterly volume, reduce per unit production
costs, control departmental costs, or manage inventory effectively, or
other unanticipated events, then the Company will be required to obtain
additional financing. There can be no assurance that additional debt or
equity financing will be available or, if available, will be on terms
favorable to the Company or its shareholders. Any additional equity
financing may cause substantial dilution to existing equity holders.
- - THE COMPANY BELIEVES THAT ITS INTERNAL SYSTEMS AND SOFTWARE ARE YEAR 2000
COMPLIANT; DURING 1999, THE COMPANY WILL ATTEMPT TO IDENTIFY, IF POSSIBLE,
MULTIPLE VENDOR SOURCES TO ADDRESS YEAR 2000 contingencies--The Company's
assessment of its internal year 2000 status may be incorrect or incomplete.
If such assessment is incorrect or incomplete, the Company's production of
its motorcycles may be interrupted. In addition, the Company has not yet
completed its assessment of the effect the year 2000 problem may have on
the Company's vendors. 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, which could cause an interruption 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. Any interruption in production caused by
year 2000 problems could materially adversely affect the Company's
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company anticipates that it will be exposed to market risk from
changes in foreign exchange and interest rates with respect to its components
obtained from foreign sources. The Company is currently analyzing such risk and
will attempt to reduce such risk through the use of certain financial
instruments. In addition, the Company has entered into an import letter of
credit in the amount of $995,000 for the benefit of a foreign vendor.
In addition, the Company's earnings would be affected by changes in
short-term interest rates as a result of its borrowings under its
multi-advance working capital loan. Based on Fiscal 1998 year-end balances,
it is estimated that a one-percent increase in short-term interest rates
would not have a material impact on interest expense or net loss.
12
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
In January 1999, the Company issued 3,000 shares of Series C
to a single institutional investor in a private placement
under Section 4(2) of the Securities Act of 1933, as amended,
and Rule 506 promulgated under Section 4(2). The aggregate
purchase price for the Series C was $3.0 million, with net
proceeds to the Company of $2.8 million. Shoreline Pacific
Advisors acted as placement agent for the Company in the
transaction and received $150,000 in cash compensation and a
warrant to purchase 27,000 shares of the Company's common
stock. The transaction and the conversion feature of the
Series C are described in Part I of this 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 Series C, see the Company's Amended Statement of
Designation of Rights, Preferences and Limitations of Series C
Convertible Preferred Stock, incorporated by reference as
Exhibit 4.5 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
13
<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:
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of Company, as Amended.(1)
3.3 By-Laws of the Company.
4.1 Securities Purchase Agreement dated as of September 3, 1998, by and
among Excelsior-Henderson Motorcycle Manufacturing Company and the
Buyers listed therein.(5)
4.2 Registration Rights Agreement dated as of September 3, 1998, by and
between Excelsior-Henderson Motorcycle Manufacturing Company and the
Buyers listed therein.(5)
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.(5)
4.4 Form of Common Stock Purchase Warrant Certificate dated September 3, 1998.(5)
4.5 Statement of Designation of Rights, Preferences and Limitations of
Series C Convertible Preferred Stock as filed with the Secretary of
State of the State of Minnesota on January 20, 1999.(6)
4.6 Promissory Note, dated December 1, 1997, from the Company to Minnesota
Agricultural and Economic Development Board.(6)
4.7 Specimen Taxable Industrial Development Revenue Bond (Excelsior-Henderson
Project) Series 1998.
10.1 Loan Agreement, dated as of November 1, 1997, by and between Minnesota
Agricultural and Economic Development Board and the Company.(6)
10.2 Loan Agreement, dated as of July 1, 1998, by and between Economic
Development Authority of the City of Belle Plaine, Minnesota and the
Company.(6)
10.3 Assignment of Loan Agreement, dated as of July 1, 1998, by and
between Economic Development Authority of the City of Belle Plaine,
Minnesota, Finova Public Finance, Inc. and the Company.(6)
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.(2)
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.(3)
10.6 Lease Agreement between Ryan Belle Plaine, LLC and the Company dated
April 21, 1997.(3)
10.7 Construction Agreement by and between Ryan Belle Plaine, LLC and the
Company dated April 21, 1997.(3)
10.8 Guaranty by Ryan Companies US, Inc. in favor of the Company dated April 21, 1997.(3)
10.9 Amended and Restated 1995 Stock Option Plan.(3)
10.10 Loan Agreement, dated as of December 22, 1998, by and between the
Company and Dakota Bank.(6)
10.11 Form of Employee Agreement.(4)
27 Financial Data Schedule for the quarterly period ended April 3, 1999.
</TABLE>
- ----------
(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 the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996 (File No.
000-22765).
(3) 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).
(4) 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 (Registration No. 333-27789).
(5) 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).
(6) Incorporated by reference to the like numbered Exhibit to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended January 2, 1999 (File
No. 000-22765).
14
<PAGE>
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the first quarter of
the 1999 Fiscal Year.
15
<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: May 18, 1999 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)
16
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<C> <S> <C>
3.1 Restated Articles of Incorporation of Company............................. Incorporated by Reference
3.3 By-Laws of the Company.................................................... Filed Electronically
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 between 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 on September 3, 1998..... Incorporated by Reference
4.4 Form of Common Stock Purchase Warrant Certificate dated
September 3, 1998......................................................... Incorporated by Reference
4.5 Statement of Designation of Rights, Preferences and Limitations of
Series C Convertible Preferred Stock as filed with the Secretary of
State of the State of Minnesota on January 20, 1999....................... Incorporated by Reference
4.6 Promissory Note, dated December 1, 1997, from the Company
to Minnesota Agricultural and Economic Development Board.................. Incorporated by Reference
4.7 Specimen Taxable Industrial Development Revenue Bond
(Excelsior-Henderson Project) Series 1998................................. Incorporated by Reference
10.1 Loan Agreement, dated as of November 1, 1997, by and
between Minnesota Agricultural and Economic Development Board
and the Company........................................................... Incorporated by Reference
10.2 Loan Agreement, dated as of July 1, 1998, by and between Economic
Development Authority of the City of Belle Plaine, Minnesota
and the Company........................................................... Incorporated by Reference
10.3 Assignment of Loan Agreement, dated as of July 1, 1998, by
and between Economic Development Authority of the City of
Belle Plaine, Minnesota, Finova Public Finance, Inc. and the Company...... 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
10.10 Loan Agreement, dated as of December 22, 1998, by and
between the Company and Dakota Bank....................................... Incorporated by Reference
10.11 Form of Employee Agreement................................................ Incorporated by Reference
27 Financial Data Schedule for the quarterly period ended April 3, 1999...... Filed Electronically
</TABLE>
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED
BY-LAWS
OF
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
SHAREHOLDERS 1
- ------------
1.01 Place of Meetings 1
1.02 Regular Meetings 1
1.03 Special Meetings 1
1.04 Meetings Held Upon Shareholder Demand 1
1.05 Adjournments 2
1.06 Notice of Meetings 2
1.07 Waiver of Notice 2
1.08 Voting Rights 2
1.09 Proxies 2
1.10 Quorum 3
1.11 Acts of Shareholders 3
1.12 Action Without a Meeting 3
DIRECTORS 3
- ---------
2.01 Number; Qualifications 3
2.02 Term 3
2.03 Vacancies 3
2.04 Place of Meetings 4
2.05 Regular Meetings 4
2.06 Special Meetings 4
2.07 Waiver of Notice; Previously Scheduled Meetings 4
2.08 Quorum 4
2.09 Acts of Board 5
2.10 Participation by Electronic Communications 5
2.11 Absent Directors 5
2.12 Action Without a Meeting 5
2.13 Committees 5
2.14 Special Litigation Committee 6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
2.15 Compensation 6
OFFICERS 6
- --------
3.01 Number and Designation 6
3.02 Office of the Chief Executive 6
3.03 Chief Financial Officer 6
3.04 President 7
3.05 Vice Presidents 7
3.06 Secretary 7
3.07 Treasurer 7
3.08 Authority and Duties 7
3.09 Term 7
3.10 Salaries 8
3.11 Office of Co-Founders 8
3.12 Spiritual Road Crew Leader 8
INDEMNIFICATION 8
- ---------------
4.01 Indemnification 8
4.02 Insurance 8
SHARES 8
5.01 Certificated and Uncertificated Shares 8
5.02 Declaration of Dividends and Other Distributions 9
5.03 Transfer of Shares 9
5.04 Record Date 9
MISCELLANEOUS 9
- -------------
6.01 Execution of Instruments 9
6.02 Advances 10
6.03 Corporate Seal 10
6.04 Fiscal Year 10
6.05 Amendments 10
</TABLE>
This Table of Contents is not part of the By-Laws of the
Corporation. It is intended merely to aid in the utilization of the By-Laws.
-2-
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
EXCELSIOR-HENDERSON MOTORCYCLE
MANUFACTURING COMPANY
SHAREHOLDERS
SECTION 1.01 PLACE OF MEETINGS. Each meeting of the
shareholders shall be held at the principal executive office of the Corporation
or at such other place as may be designated by the Board of Directors or the
Office of the Chief Executive; provided, however, that any meeting called by or
at the demand of a shareholder or shareholders shall be held in the county where
the principal executive office of the Corporation is located.
SECTION 1.02 REGULAR MEETINGS. Regular meetings of the
shareholders may be held on an annual or other less frequent basis as determined
by the Board of Directors; provided, however, that if a regular meeting has not
been held during the immediately preceding 15 months, a shareholder or
shareholders holding three percent or more of the voting power of all shares
entitled to vote may demand a regular meeting of shareholders by written demand
given to the Office of the Chief Executive or Chief Financial Officer of the
Corporation. At each regular meeting the shareholders shall elect qualified
successors for directors who serve for an indefinite term or whose terms have
expired or are due to expire within six months after the date of the meeting and
may transact any other business, provided, however, that no business with
respect to which special notice is required by law shall be transacted unless
such notice shall have been given.
SECTION 1.03 SPECIAL MEETINGS. A special meeting of the
shareholders may be called for any purpose or purposes at any time by the Chief
Executive Officer; by the Chief Financial Officer; by the Board of Directors or
any two or more members thereof; or by one or more shareholders holding not less
than ten percent of the voting power of all shares of the Corporation entitled
to vote (except that a special meeting for the purpose of considering any action
to directly or indirectly facilitate or effect a business combination, including
any action to change or otherwise affect the composition of the Board for that
purpose, must be called by shareholders holding not less than 25 percent of the
voting power of all shares of the Corporation entitled to vote), who shall
demand such special meeting by written notice given to the Chief Executive
Officer or the Chief Financial Officer of the Corporation specifying the
purposes of such meeting.
-3-
<PAGE>
SECTION 1.04 MEETINGS HELD UPON SHAREHOLDER DEMAND. Within 30
days after receipt of a demand by the Office of the Chief Executive or the Chief
Financial Officer from any shareholder or shareholders entitled to call a
meeting of the shareholders, it shall be the duty of the Board of Directors of
the Corporation to cause a special or regular meeting of shareholders, as the
case may be, to be duly called and held on notice no later than 90 days after
receipt of such demand. If the Board fails to cause such a meeting to be called
and held as required by this Section, the shareholder or shareholders making the
demand may call the meeting by giving notice as provided in Section 1.06 hereof
at the expense of the Corporation.
SECTION 1.05 ADJOURNMENTS. Any meeting of the shareholders may
be adjourned from time to time to another date, time and place. If any meeting
of the shareholders is so adjourned, no notice as to such adjourned meeting need
be given if the date, time and place at which the meeting will be reconvened are
announced at the time of adjournment.
SECTION 1.06 NOTICE OF MEETINGS. Unless otherwise required by
law, written notice of each meeting of the shareholders, stating the date, time
and place and, in the case of a special meeting, the purpose or purposes, shall
be given at least ten days and not more than 60 days prior to the meeting to
every holder of shares entitled to vote at such meeting except as specified in
Section 1.05 or as otherwise permitted by law. The business transacted at a
special meeting of shareholders is limited to the purposes stated in the notice
of the meeting.
SECTION 1.07 WAIVER OF NOTICE. A shareholder may waive notice
of the date, time, place and purpose or purposes of a meeting of shareholders. A
waiver of notice by a shareholder entitled to notice is effective whether given
before, at or after the meeting, and whether given in writing, orally or by
attendance. Attendance by a shareholder at a meeting is a waiver of notice of
that meeting, unless the shareholder objects at the beginning of the meeting to
the transaction of business because the meeting is not lawfully called or
convened, or objects before a vote on an item of business because the item may
not lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
SECTION 1.08 VOTING RIGHTS. Subdivision 1. A shareholder shall
have one vote for each share held which is entitled to vote. Except as otherwise
required by law, a holder of shares entitled to vote may vote any portion of the
shares in any way the shareholder chooses. If a shareholder votes without
designating the proportion or number of shares voted in a particular way, the
shareholder is deemed to have voted all of the shares in that way.
Subdivision 2. The Board of Directors may fix a date not more
than 60 days before the date of a meeting of shareholders as the date for the
determination of the holders of shares entitled to notice of and entitled to
vote at the meeting. When a date is so fixed, only shareholders on that date are
entitled to notice of and permitted to vote at that meeting of
-4-
<PAGE>
shareholders.
SECTION 1.09 PROXIES. A shareholder may cast or authorize the
casting of a vote by filing a written appointment of a proxy with an officer of
the Corporation at or before the meeting at which the appointment is to be
effective. The shareholder may sign or authorize the written appointment by
telegram, cablegram or other means of electronic transmission setting forth or
submitted with information sufficient to determine that the shareholder
authorized such transmission. Any copy, facsimile, telecommunication or other
reproduction of the original of either the writing or transmission may be used
in lieu of the original, provided that it is a complete and legible reproduction
of the entire original.
SECTION 1.10 QUORUM. The holders of a majority of the voting
power of the shares entitled to vote at a shareholders meeting are a quorum for
the transaction of business. If a quorum is present when a duly called or held
meeting is convened, the shareholders present may continue to transact business
until adjournment, even though the withdrawal of a number of the shareholders
originally present leaves less than the proportion or number otherwise required
for a quorum.
SECTION 1.11 ACTS OF SHAREHOLDERS. Subdivision 1. Except as
otherwise required by law or specified in the Articles of Incorporation of the
Corporation, the shareholders shall take action by the affirmative vote of the
holders of the greater of (a) a majority of the voting power of the shares
present and entitled to vote on that item of business or (b) a majority of the
voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at a duly held meeting of
shareholders.
Subdivision 2. A shareholder voting by proxy authorized to
vote on less than all items of business considered at the meeting shall be
considered to be present and entitled to vote only with respect to those items
of business for which the proxy has authority to vote. A proxy who is given
authority by a shareholder who abstains with respect to an item of business
shall be considered to have authority to vote on that item of business.
SECTION 1.12 ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at a meeting of the shareholders of the Corporation may be
taken without a meeting by written action signed by all of the shareholders
entitled to vote on that action. The written action is effective when it has
been signed by all of those shareholders, unless a different effective time is
provided in the written action.
-5-
<PAGE>
DIRECTORS
SECTION 2.01 NUMBER; QUALIFICATIONS. Except as authorized by
the shareholders pursuant to a shareholder control agreement or unanimous
affirmative vote, the business and affairs of the Corporation shall be managed
by or under the direction of a Board of one or more directors. Directors shall
be natural persons. The shareholders at each regular meeting shall determine the
number of directors to constitute the Board, provided that thereafter the
authorized number of directors may be increased by the shareholders or the Board
and decreased by the shareholders. Directors need not be shareholders.
SECTION 2.02 TERM. Each director shall serve for an indefinite
term that expires at the next regular meeting of the shareholders. A director
shall hold office until a successor is elected and has qualified or until the
earlier death, resignation, removal or disqualification of the director.
SECTION 2.03 VACANCIES. Vacancies on the Board of Directors
resulting from the death, resignation, removal or disqualification of a director
may be filled by the affirmative vote of a majority of the remaining members of
the Board, though less than a quorum. Vacancies on the Board resulting from
newly created directorships may be filled by the affirmative vote of a majority
of the directors serving at the time such directorships are created. Each person
elected to fill a vacancy shall hold office until a qualified successor is
elected by the shareholders at the next regular meeting or at any special
meeting duly called for that purpose.
SECTION 2.04 PLACE OF MEETINGS. Each meeting of the Board of
Directors shall be held at the principal executive office of the Corporation or
at such other place as may be designated from time to time by a majority of the
members of the Board or by the Office of the Chief Executive. A meeting may be
held by conference among the directors using any means of communication through
which the directors may simultaneously hear each other during the conference.
SECTION 2.05 REGULAR MEETINGS. Regular meetings of the Board
of Directors for the election of officers and the transaction of any other
business shall be held without notice at the place of and immediately after each
regular meeting of the shareholders.
SECTION 2.06 SPECIAL MEETINGS. A special meeting of the Board
of Directors may be called for any purpose or purposes at any time by any member
of the Board by giving not less than two days' notice to all directors of the
date, time and place of the meeting, provided that when notice is mailed, at
least four days' notice shall be given. The notice need not state the purpose of
the meeting.
SECTION 2.07 WAIVER OF NOTICE; PREVIOUSLY SCHEDULED MEETINGS.
Subdivision 1. A director of the Corporation may waive notice of the date, time
and place of a meeting of the
-6-
<PAGE>
Board. A waiver of notice by a director entitled to notice is effective whether
given before, at or after the meeting, and whether given in writing, orally or
by attendance. Attendance by a director at a meeting is a waiver of notice of
that meeting, unless the director objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened
and thereafter does not participate in the meeting.
Subdivision 2. If the day or date, time and place of a Board
meeting have been provided herein or announced at a previous meeting of the
Board, no notice is required. Notice of an adjourned meeting need not be given
other than by announcement at the meeting at which adjournment is taken of the
date, time and place at which the meeting will be reconvened.
SECTION 2.08 QUORUM. The presence in person of a majority of
the directors currently holding office shall be necessary to constitute a quorum
for the transaction of business. In the absence of a quorum, a majority of the
directors present may adjourn a meeting from time to time without further notice
until a quorum is present. If a quorum is present when a duly called or held
meeting is convened, the directors present may continue to transact business
until adjournment, even though the withdrawal of a number of the directors
originally present leaves less than the proportion or number otherwise required
for a quorum.
SECTION 2.09 ACTS OF BOARD. Except as otherwise required by
law or specified in the Articles of Incorporation of the Corporation, the Board
shall take action by the affirmative vote of a majority of the directors present
at a duly held meeting.
SECTION 2.10 PARTICIPATION BY ELECTRONIC COMMUNICATIONS. A
director may participate in a Board meeting by any means of communication
through which the director, other directors so participating and all directors
physically present at the meeting may simultaneously hear each other during the
meeting. A director so participating shall be deemed present in person at the
meeting.
SECTION 2.11 ABSENT DIRECTORS. A director of the Corporation
may give advance written consent or opposition to a proposal to be acted on at a
Board meeting. If the director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
SECTION 2.12 ACTION WITHOUT A MEETING. An action required or
permitted to be taken at a Board meeting may be taken without a meeting by
written action signed by all of the directors. Any action, other than an action
requiring shareholder approval, if the Articles of
-7-
<PAGE>
Incorporation so provide, may be taken by written action signed by the number of
directors that would be required to take the same action at a meeting of the
Board at which all directors were present. The written action is effective when
signed by the required number of directors, unless a different effective time is
provided in the written action. When written action is permitted to be taken by
less than all directors, all directors shall be notified immediately of its text
and effective date.
SECTION 2.13 COMMITTEES. Subdivision 1. A resolution approved
by the affirmative vote of a majority of the Board may establish committees
having the authority of the Board in the management of the business of the
Corporation only to the extent provided in the resolution. Committees shall be
subject at all times to the direction and control of the Board, except as
provided in Section 2.14.
Subdivision 2. A committee shall consist of one or more
natural persons, who need not be directors, appointed by affirmative vote of a
majority of the directors present at a duly held Board meeting.
Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof
shall apply to committees and members of committees to the same extent as those
sections apply to the Board and directors.
Subdivision 4. Minutes, if any, of committee meetings shall be
made available upon request to members of the committee and to any director.
SECTION 2.14 SPECIAL LITIGATION COMMITTEE. Pursuant to the
procedure set forth in Section 2.13, the Board may establish a committee
composed of one or more independent directors or other independent persons to
determine whether it is in the best interests of the Corporation to pursue a
particular legal right or remedy of the Corporation and whether to cause, to the
extent permitted by law, the dismissal or discontinuance of a particular
proceeding that seeks to assert a right or remedy on behalf of the Corporation.
The committee, once established, is not subject to the direction or control of,
or termination by, the Board. A vacancy on the committee may be filled by a
majority vote of the remaining committee members. The good faith determinations
of the committee are binding upon the Corporation and its directors, officers
and shareholders to the extent permitted by law. The committee terminates when
it issues a written report of its determinations to the Board.
SECTION 2.15 COMPENSATION. The Board may fix the compensation,
if any, of directors.
-8-
<PAGE>
OFFICERS
SECTION 3.01 NUMBER AND DESIGNATION. The Corporation shall
have one or more natural persons exercising the functions of the offices of the
Office of the Chief Executive and Chief Financial Officer. The Board of
Directors may elect or appoint such other officers or agents as it deems
necessary for the operation and management of the Corporation, with such powers,
rights, duties and responsibilities as may be determined by the Board,
including, without limitation, a President, one or more Vice Presidents, a
Secretary and a Treasurer, each of whom shall have the powers, rights, duties
and responsibilities set forth in these By-Laws unless otherwise determined by
the Board. Any of the offices or functions of those offices may be held by the
same person.
SECTION 3.02 OFFICE OF THE CHIEF EXECUTIVE. The Office of the
Chief Executive shall consist of two persons, each of whom will serve as
Co-Chairman of the Board of Directors and each of whom may be appointed by the
Board of Directors to serve as Chief Executive Officer and/or Chief Operating
Officer of the Corporation. Unless otherwise provided by a resolution adopted by
the Board of Directors, the persons who occupy the Office of the Chief Executive
(a) shall have general active management of the business of the Corporation; (b)
shall see that all orders and resolutions of the Board are carried into effect;
and (c) shall perform such other duties as may from time to time be assigned by
the Board.
SECTION 3.03 CHIEF FINANCIAL OFFICER. Unless provided
otherwise by a resolution adopted by the Board of Directors, the Chief Financial
Officer (a) shall keep accurate financial records for the Corporation; (b) shall
deposit all moneys, drafts and checks in the name of and to the credit of the
Corporation in such banks and depositories as the Board shall designate from
time to time; (c) shall endorse for deposit all notes, checks and drafts
received by the Corporation as ordered by the Board, making proper vouchers
therefor; (d) shall disburse corporate funds and issue checks and drafts in the
name of the Corporation, as ordered by the Board; (e) shall render to the Office
of the Chief Executive and the Board, whenever requested, an account of all of
such officer's transactions as Chief Financial Officer and of the financial
condition of the Corporation; and (f) shall perform such other duties as may be
prescribed by the Board or the Office of the Chief Executive from time to time.
SECTION 3.04 PRESIDENT. The President shall perform such
duties as may from time to time be assigned by the Board.
SECTION 3.05 VICE PRESIDENTS. Any one or more Vice Presidents,
if any, may be designated by the Board of Directors as Executive Vice Presidents
or Senior Vice Presidents. In addition, the Board may designate a President of a
division of the Corporation, who shall have the authority and responsibilities
of an Executive Vice President, in charge of that division.
-9-
<PAGE>
During the absence or disability of all members of the Office of the Chief
Executive and the President, it shall be the duty of the highest ranking
Executive Vice President, and, in the absence of any such Vice President, it
shall be the duty of the highest ranking Senior Vice President or other Vice
President, who shall be present at the time and able to act, to perform the
duties of the Office of the Chief Executive and the President. The determination
of who is the highest ranking of two or more persons holding the same office
shall, in the absence of specific designation of order of rank by the Board, be
made on the basis of the earliest date of appointment or election, or, in the
event of simultaneous appointment or election, on the basis of the longest
continuous employment by the Corporation. Vice Presidents shall perform such
other duties as may be prescribed by the Board or the Office of the Chief
Executive.
SECTION 3.06 SECRETARY. The Secretary, unless otherwise
determined by the Board of Directors, shall attend all meetings of the
shareholders and all meetings of the Board, shall record or cause to be recorded
all proceedings thereof in a book to be kept for that purpose, and may certify
such proceedings. Except as otherwise required or permitted by law or by these
By-Laws, the Secretary shall give or cause to be given notice of all meetings of
the shareholders and all meetings of the Board.
SECTION 3.07 TREASURER. Unless otherwise determined by the
Board of Directors, the Treasurer shall be the Chief Financial Officer of the
Corporation. If an officer other than the Treasurer is designated Chief
Financial Officer, the Treasurer shall perform such duties as may from time to
time be assigned by the Board.
SECTION 3.08 AUTHORITY AND DUTIES. In addition to the
foregoing authority and duties, all officers of the Corporation shall
respectively have such authority and perform such duties in the management of
the business of the Corporation as may be designated from time to time by the
Board of Directors. Unless prohibited by a resolution approved by the
affirmative vote of a majority of the directors present, an officer elected or
appointed by the Board may, without the approval of the Board, delegate some or
all of the duties and powers of an office to other persons.
SECTION 3.09 TERM. Subdivision 1. All officers of the
Corporation shall hold office until their respective successors are chosen and
have qualified or until their earlier death, resignation or removal.
Subdivision 2. An officer may resign at any time by giving
written notice to the Corporation. The resignation is effective without
acceptance when the notice is given to the Corporation, unless a later effective
date is specified in the notice.
Subdivision 3. An officer may be removed at any time, with or
without cause, by
-10-
<PAGE>
a resolution approved by the affirmative vote of a majority of the directors
present at a duly held Board meeting.
Subdivision 4. A vacancy in an office because of death,
resignation, removal, disqualification or other cause may, or in the case of a
vacancy in the Office of the Chief Executive or Chief Financial Officer shall,
be filled for the unexpired portion of the term by the Board.
SECTION 3.10 SALARIES. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors or by the Office of the
Chief Executive if authorized by the Board.
SECTION 3.11 OFFICE OF CO-FOUNDERS. The Office of Co-Founders
shall consist of the three original founders of the Corporation, each of whom
shall participate in the general active management of the business of the
Corporation and perform such duties as may from time to time be approved by the
Board.
SECTION 3.12 SPIRITUAL ROAD CREW LEADER. The Spiritual Road
Crew Leader shall be responsible to maintain the unique corporate culture of the
Corporation by promoting harmony, openness, fun and spontaneity among the
employees of the Corporation and to perform such other duties as may from time
to time be approved by the Board.
INDEMNIFICATION
SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify
its officers and directors for such expenses and liabilities, in such manner,
under such circumstances, and to such extent, as required or permitted by
Minnesota Statutes, Section 302A.521, as amended from time to time, or as
required or permitted by other provisions of law.
SECTION 4.02 INSURANCE. The Corporation may purchase and
maintain insurance on behalf of any person in such person's official capacity
against any liability asserted against and incurred by such person in or arising
from that capacity, whether or not the Corporation would otherwise be required
to indemnify the person against the liability.
SHARES
SECTION 5.01 CERTIFICATED AND UNCERTIFICATED SHARES.
Subdivision 1. The shares of the Corporation shall be either certificated shares
or uncertificated shares. Each holder of duly issued certificated shares is
entitled to a certificate of shares.
-11-
<PAGE>
Subdivision 2. Each certificate of shares of the Corporation
shall bear the corporate seal, if any, and shall be signed by the Office of the
Chief Executive, or the President or any Vice President, and the Chief Financial
Officer, or the Secretary or any Assistant Secretary, but when a certificate is
signed by a transfer agent or a registrar, the signature of any such officer and
the corporate seal upon such certificate may be facsimiles, engraved or printed.
If a person signs or has a facsimile signature placed upon a certificate while
an officer, transfer agent or registrar of the Corporation, the certificate may
be issued by the Corporation, even if the person has ceased to serve in that
capacity before the certificate is issued, with the same effect as if the person
had that capacity at the date of its issue.
Subdivision 3. A certificate representing shares issued by the
Corporation shall, if the Corporation is authorized to issue shares of more than
one class or series, set forth upon the face or back of the certificate, or
shall state that the Corporation will furnish to any shareholder upon request
and without charge, a full statement of the designations, preferences,
limitations and relative rights of the shares of each class or series authorized
to be issued, so far as they have been determined, and the authority of the
Board to determine the relative rights and preferences of subsequent classes or
series.
Subdivision 4. A resolution approved by the affirmative vote
of a majority of the directors present at a duly held meeting of the Board may
provide that some or all of any or all classes and series of the shares of the
Corporation will be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until the certificate is surrendered to
the Corporation.
SECTION 5.02 DECLARATION OF DIVIDENDS AND OTHER DISTRIBUTIONS.
The Board of Directors shall have the authority to declare dividends and other
distributions upon the shares of the Corporation to the extent permitted by law.
SECTION 5.03 TRANSFER OF SHARES. Shares of the Corporation may
be transferred only on the books of the Corporation by the holder thereof, in
person or by such person's attorney. In the case of certificated shares, shares
shall be transferred only upon surrender and cancellation of certificates for a
like number of shares. The Board of Directors, however, may appoint one or more
transfer agents and registrars to maintain the share records of the Corporation
and to effect transfers of shares.
SECTION 5.04 RECORD DATE. The Board of Directors may fix a
time, not exceeding 60 days preceding the date fixed for the payment of any
dividend or other distribution, as a record date for the determination of the
shareholders entitled to receive payment of such dividend or other distribution,
and in such case only shareholders of record on the date so fixed shall be
-12-
<PAGE>
entitled to receive payment of such dividend or other distribution,
notwithstanding any transfer of any shares on the books of the Corporation after
any record date so fixed.
MISCELLANEOUS
SECTION 6.01 EXECUTION OF INSTRUMENTS. Subdivision 1. All
deeds, mortgages, bonds, checks, contracts and other instruments pertaining to
the business and affairs of the Corporation shall be signed on behalf of the
Corporation by the Office of the Chief Executive, or the President, or any Vice
President, or by such other person or persons as may be designated from time to
time by the Board of Directors.
Subdivision 2. If a document must be executed by persons
holding different offices or functions and one person holds such offices or
exercises such functions, that person may execute the document in more than one
capacity if the document indicates each such capacity.
SECTION 6.02 ADVANCES. The Corporation may, without a vote of
the directors, advance money to its directors, officers or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
SECTION 6.03 CORPORATE SEAL. The seal of the Corporation, if
any, shall be a circular embossed seal having inscribed thereon the name of the
Corporation and the following words:
"Corporate Seal Minnesota".
SECTION 6.04 FISCAL YEAR. The fiscal year of the Corporation
shall be determined by the Board of Directors.
SECTION 6.05 AMENDMENTS. The Board of Directors shall have the
power to adopt, amend or repeal the By-Laws of the Corporation, subject to the
power of the shareholders to change or repeal the same, provided, however, that
the Board shall not adopt, amend or repeal any By-Law fixing a quorum for
meetings of shareholders, prescribing procedures for removing directors or
filling vacancies in the Board, or fixing the number of directors or their
classifications, qualifications or terms of office, but may adopt or amend a
By-Law that increases the number of directors.
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 2,359,498
<SECURITIES> 0
<RECEIVABLES> 486,618
<ALLOWANCES> 10,000
<INVENTORY> 5,609,406
<CURRENT-ASSETS> 8,926,231
<PP&E> 32,904,297
<DEPRECIATION> 1,669,885
<TOTAL-ASSETS> 46,196,118
<CURRENT-LIABILITIES> 11,357,936
<BONDS> 0
0
9,143,375
<COMMON> 135,831
<OTHER-SE> 3,067,875
<TOTAL-LIABILITY-AND-EQUITY> 46,196,118
<SALES> 1,857,232
<TOTAL-REVENUES> 1,857,232
<CGS> 4,633,225
<TOTAL-COSTS> 4,633,225
<OTHER-EXPENSES> 4,397,513
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 756,326
<INCOME-PRETAX> (7,769,172)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,769,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,769,172)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
