As filed with the Securities and Exchange Commission on ________, 1999
Registration Statement No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN QUANTUM CYCLES, INC.
(Name of Small Business Issuer in Its Charter)
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Florida 3751 59-2651232
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
-------------------------
Richard Hagen, President and Chief Executive Officer
American Quantum Cycles Incorporated
731 Washburn Road
Melbourne, Florida 32934
(407) 752-0008
(Name, Address and Telephone Number of Agent For Service)
------------------------------
731 Washburn Road
Melbourne, Florida 32934
(407) 752-0008
(Address and Telephone Number of Principal Executive Offices)
------------------------------
Copies of all communications to:
James M. Schneider, Esq. Bert L. Gusrae, Esq.
Robert J. Burnett, Esq. David A. Carter, P.A.
Atlas, Pearlman, Trop & Borkson, P.A. 2300 Glades Road
200 East Las Olas Boulevard, Suite 1900 Suite 210, West Tower
Fort Lauderdale, FL 33301 Boca Raton, FL 33431
Telephone: (954) 763-1200 Telephone: (561) 750-6999
Facsimile No. (954) 766-7800 Facsimile No. (561) 367-0960
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration
Statement.
----------
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement number of the earlier effective registration statement for the same
offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
Title of Each Shares Proposed Maximum Proposed Maximum Amount Of
Class of Securities To Be Offering Price Aggregate Offering Registration
To Be Registered Registered Per Share Price Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value 1,840,000(1) $ 5.00(2) $ 9,200,000(2) $2,556.60
=========== ========== ============= ==========
Representative's Warrants
each to purchase one share
of Common Stock, $.001
par value 160,000 $ .001 $ 150 (3)
Common Stock,
$.001 par value 160,000(4) $ 8.25(2) $ 1,320,000(2) $ 366.96
Common Stock,
$.001 par value 678,000(5) $ 1.14(6) $ 779,920 $ 214.87
Common Stock,
$.001 par value 250,000(7) $ 4.00 $ 1,000,000 $ 278.00
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Due........................................................................................... $3,416.43
==========
- ---------------------------------------------------------------------------------------------------------------------------------
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(1) Assumes the Underwriter's over-allotment option to purchase 240,000
additional shares of Common Stock is exercised in full.
(2) Estimated solely for purposes of calculating the registration fee.
(3) No Registration Fee required pursuant to Rule 457(g).
(4) Issuable upon the exercise of the Underwriter's Warrants together with
an indeterminate number of shares of Common Stock that may be issuable
by reason of the anti-dilution provisions contained therein.
(5) Includes 678,000 shares of the Company's Common Stock being offered by
Selling Security Holders pursuant to the Alternate Prospectus.
See "Concurrent Offering."
(6) Calculated pursuant to rule 457(c).
(7) Includes 250,000 shares of the Company's Common Stock issuable upon the
exercise of options exercisable at $4.00 per share being offered by the
Selling Securityholders pursuant to the Alternate Prospectus. See
"Concurrent Offering."
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement covers the primary offering of Shares of
Common Stock by American Quantum Cycles, Inc. (the "Company") and the offering
of securities by certain selling securityholders (the "Selling
Securityholders"). The Company is registering, under the primary prospectus
("Primary Prospectus"), 1,600,000 shares of Common Stock (excluding shares of
Common Stock issuable upon exercise of the Underwriter's Over-Allotment Option).
The Company is registering, on behalf of the Selling Securityholders, under an
alternate prospectus ("Alternate Prospectus"), 928,000 shares of Common Stock of
the Company including 250,000 shares of common stock issuable upon exercise of
warrants and options. The Alternate Prospectus pages, which follow the Primary
Prospectus, contain certain sections which are to be combined with all of the
sections contained in the Primary Prospectus, with the following exceptions: the
front and back cover pages, and the sections entitled "The Offering" and
"Selling Securityholders". In addition, the sections entitled "Concurrent
Offering" and "Plan of Distribution" will be added to the Alternate Prospectus.
Furthermore, all references contained in the Alternate Prospectus to the
"offering" shall refer to the Company's Offering under the Primary Prospectus.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus
AMERICAN QUANTUM CYCLES, INC.
1,600,000 SHARES OF COMMON STOCK
$________ PER SHARE
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<S> <C> <C> <C>
American Quantum Cycles, Inc. We are a development stage company attempting
731 Washburn Road to manufacture and mass market custom made motorcycles
Melbourne, FL 71934 and motorcycle accessories. We plan to sell our
motorcycles and accessories primarily through a
network of authorized dealers.
Per Share Total
--------- ----- We are offering 1,600,000 shares of our Common
Stock through Barron Chase Securities, Inc., our
Offering Price $_______ $_______ underwriter. The chart to the immediate left shows
Underwriting discounts $_______ $_______ the basic terms of the Offering. The Offering price
Proceeds to American may be more than the market price of our Common Stock
Quantum Cycles, Inc. $_______ $_______ after the Offering.
</TABLE>
Our Common Stock currently trades
on the OTC Bulletin Board under the
Trading Symbol "AMQC"
On March 8, 1999, the Closing Bid Price for our Common Stock was $1.14.
We are attempting to register our Common Stock
for trading on the American Stock Exchange under
the symbol ________.
-------------------
This Investment Involves A High Degree of Risk. You Should Purchase Shares Only
If You Can Afford A Complete Loss. See "High Risk Factors" Beginning On Page 6.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
BARRON CHASE SECURITIES, INC.
[DATE]
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
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TABLE OF CONTENTS
Page
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<S> <C>
Prospectus Summary........................................................................................ 3
High Risk Factors......................................................................................... 6
Use of Proceeds........................................................................................... 12
Dividend Policy .......................................................................................... 13
Capitalization............................................................................................ 14
Selected Financial Information............................................................................ 15
Management's Discussion and Analysis
and Plan of Operation ................................................................................... 16
Business.................................................................................................. 19
Management................................................................................................ 27
Principal Shareholders.................................................................................... 33
Certain Relationships and Related Transactions............................................................ 34
Concurrent Offering....................................................................................... 35
Description of Securities................................................................................. 35
Shares Eligible for Future Sale........................................................................... 36
Underwriting.............................................................................................. 37
Legal Matters............................................................................................. 39
Experts................................................................................................... 39
Additional Information ................................................................................... 39
Index to Financial Statements............................................................................. F-1
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<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS SUMMARY ONLY HIGHLIGHTS CERTAIN INFORMATION CONTAINED
IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU IN MAKING A DECISION OF WHETHER OR NOT TO
INVEST. TO FULLY UNDERSTAND OUR COMPANY AND THIS OFFERING, YOU SHOULD READ THE
ENTIRE PROSPECTUS. MOST IMPORTANTLY, YOU SHOULD READ THE "HIGH RISK FACTORS"
BEGINNING ON PAGE 6.
THE COMPANY
We are a development stage company attempting to manufacture and mass
market American-made, high performance, custom made, V-twin engine cruisers and
touring style motorcycles. We believe that ordering the parts we require to make
our motorcycles on an as-needed basis, instead of carrying a large inventory,
will allow us to minimize our production costs and enable us to mass produce
high quality motorcycles. Our executive offices are located at 731 Washburn
Road, Melbourne, Florida 32934. Our telephone number is (407) 752-0008 and our
facsimile number is (407) 752-0550.
MANUFACTURING. Since May 1997, when we began our motorcycle
manufacturing operations, we have manufactured 36 motorcycles 22, of which were
sold, 11 of which are being used for marketing and promotion and 3 of which are
being used for testing purposes. During the next 12 months, we anticipate our
motorcycle production capacity will increase and we will be capable of producing
an additional 1,000 motorcycles.
GOVERNMENT REGULATIONS. The motorcycle manufacturing industry is
subject to a great deal of government regulation. Our motorcycles have been
tested by state and federal authorities to determine if they meet environmental
standards and have received EPA certification for 49 states (not including
California).
MARKETING AND SALES. We intend to sell our motorcycles primarily
through independently-owned full-service dealerships whom we authorize. We also
intend to sell directly to consumers through various media including the
Internet in those areas in which we have no authorized Company dealerships.
COMPETITION. We will compete directly with Harley-Davidson, Honda,
Suzuki, Kawasaki, Yamaha and Excelsior Henderson. Harley-Davidson, with a market
share of approximately 48% of new U.S. cruiser type motorcycle registrations,
will most likely be our primary competitor. The U.S. and worldwide motorcycle
markets are highly competitive and all of our existing competitors have
resources and sales histories that are substantially greater than ours.
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THE OFFERING
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<S> <C>
Common Stock outstanding prior to the Offering................ 9,166,235
Common Stock offered ......................................... 1,600,000 shares
Common Stock outstanding after the Offering................... 10,766,235 shares *
Use of Proceeds............................................... We intend to use the net proceeds from
the Offering for (i) the repayment of
an aggregate of $2,260,313
indebtedness; (ii) the purchase of
various hardware and software which
will manage all internal operating
facets of the Company including
financial information, computer
hardware and materials handling
equipment; and (iii) costs of goods and
operating expenses. See "Use of
Proceeds" beginning on page 12.
High Risk Factors............................................. The Offering involves a high degree of
risk and immediate substantial dilution.
See "High Risk Factors" beginning on
page 6.
- ---------------------
* Assumes that the Underwriters over-allotment option is not exercised. See the section entitled
"Underwriting" on page 37 of this Prospectus. Includes an aggregate of 678,000 shares of
Common Stock being offered by the Selling Securityholders pursuant to the Alternative
Prospectus. See "Concurrent Offering." Does not include (i) 150,000 shares of Common Stock
issuable upon the exercise of the Representatives Warrants; and (ii) an aggregate of 4,025,000
shares of Common Stock issuable upon the exercise of outstanding options of which 250,000 are
being registered pursuant to the Alternative Prospectus. See the sections of this Prospectus
entitled "Management - Stock Options" "Description of Securities" and "Underwriting."
</TABLE>
4
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SUMMARY FINANCIAL INFORMATION
For the year ended For the six months ended
April 30 October 31
1998 1997 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues $ 192,856 $ 0 $ 475,714 $ 23,676
Total costs and expenses 2,824,567 2,634 3,190,835 595,206
-------------- -------------- ------------- ------------
Net loss $ (2,631,711) $ (2,634) $ (2,715,121) $ (571,530)
============== ============== ============= ============
Weighted average
shares outstanding 2,007,844 591,716 3,706,908 3,502,009
============== ============== ============= ============
Net loss per common
share outstanding $ (1.311) $ ( 0.004) $ (0.732) $ ( 0.163)
============== ============== ============= ============
As of As of
April 30, 1998 October 31, 1998 Adjusted (1)
-------------- ---------------- ------------
(unaudited)
Balance Sheet Data:
Current assets $ 886,836 $ 6,071,411 $ 10,442,598
Working capital $ (2,162,614) $ (4,109,524) $ 3,932,916
Total assets $ 1,864,216 $ 7,517,866 $ 11,989,053
Total liabilities $ 3,167,426 $ 10,312,698 $ 6,641,445
Shareholders' equity (deficit) $ (1,303,210) $ (2,794,832) $ 5,347,608
</TABLE>
- --------------------------
(1) Adjusted to show the effect of the sale of 1,600,000 shares of common
stock we are offering to you at a price of $5.00 per share. See "Use
of Proceeds."
5
<PAGE>
HIGH RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE AND
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED
HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; CONTINUED OPERATING LOSSES
Although we were incorporated in 1986, we did not begin manufacturing
motorcycles until May 1997. To date, we have only manufactured 36 motorcycles of
which 22 were sold. Due to our short operating history and limited number of
motorcycle sales, we do not have any significant revenues. Investors in this
Offering therefore will have little, if any, meaningful information about us
which may help you evaluate whether we will ever be able to successfully
manufacture and market our motorcycles or whether an investment in us will be
profitable or unprofitable.
Because we have such a short operating history and such limited sales,
we will face all the risks and problems associated with a new developmental
stage business including the existence of operating losses. For example, between
the time of our incorporation through October 31, 1998, we incurred cumulative
losses of $5,349,466 and an accumulated deficit of $2,794,832. We anticipate our
losses will continue in the future unless we are able to produce revenue from
sales of our motorcycles.
PRODUCT PROTECTION, EXPIRATION OF PATENTS AND PATENTS PENDING AND INFRINGEMENT
RISKS
Our success depends upon our motorcycle-related proprietary technology.
We rely on a combination of contractual rights, patents, trade secrets,
know-how, trademarks, non-disclosure agreements and technical measures to
establish and protect our rights, most of which we license from third parties
pursuant to an exclusive licensing agreement. We cannot assure you that we can
protect our rights to prevent third parties from using or copying our
technology.
We believe that we independently developed our technology and that it
does not infringe on the proprietary rights or trade secrets of others. However,
we cannot assure you that we have not infringed on the technologies of third
parties or that third parties will not make infringement violation claims
against us. Any infringement claims may have a negative effect on our ability to
manufacture motorcycles.
GOVERNMENT REGULATION
We are subject to direct regulation by the Department of
Transportation, Environmental Protection Agency and Federal Trade Commission as
well as other local, state and federal agencies. Compliance with the regulations
established by these agencies is very costly and affects our manufacturing
process. Any changes in the laws or regulations imposed on us by these agencies
could significantly increase our motorcycle production costs and could have a
very negative effect on our business.
DISCRETIONARY PRODUCT
Purchases of motorcycles, such as the premium heavyweight motorcycles
that we are attempting to mass produce, are considered discretionary for
consumers. Our success will therefore be influenced by a
6
<PAGE>
number of economic factors affecting discretionary consumer spending, such as
employment levels, business conditions, interest rates and taxation rates, all
of which are not under our control. Adverse economic changes affecting these
factors may restrict consumer spending and thereby adversely affect our growth
and profitability.
RISK OF DEFECTS; PRODUCT LIABILITY RISK
Our motorcycles may have unanticipated defects which could require us
to recall them. A product recall could delay or even halt production until we
are able to correct any such defects. Recalls may also have a materially
negative effect on the brand image and public perception of our motorcycles and
any other products we develop and thereby adversely effect our future sales.
Such recalls or other defects would also require substantial expenditures to
correct.
Given the nature of our products, we expect that we will be subject to
potential product liability claims that could, in the absence of sufficient
insurance coverage, have a material adverse impact on our business. Although we
intend to obtain adequate insurance coverage prior to commencing mass
production, there can be no assurance that we will be able to secure or maintain
adequate liability insurance to cover all product liability claims. As a new
market entrant, any large product liability suits occurring early in our mass
marketing operations may significantly adversely affect our ability to market
our motorcycles.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
Our business operations and facilities are subject to a number of
federal, state and local environmental laws and regulations. Although our
management believes that our operations and facilities are in material
compliance with such laws and regulations, the risk of environmental liabilities
cannot be completely eliminated. There can be no assurance that future changes
in such laws, regulations or the nature of our operations will not require us to
make significant additional capital expenditures to ensure compliance in the
future. Our failure to comply with environmental laws could result in the
termination of our operations, impositions of fines, or liabilities in excess of
our capital resources. We do not maintain environmental liability insurance, and
if we are required to pay the expenses related to any environmental liabilities,
such expenses could have a material adverse effect on our operations.
REGULATORY APPROVAL RISKS
We 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 our motorcycles. In addition, our
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 delays in motorcycle production and adversely affect
operating results.
COMPETITION
The market for the type of motorcycles we manufacture is extremely
competitive and we expect that competition will increase in the future. Our
competitors include many large companies that have substantially greater market
presence and financial resources than we do. For example, we will compete with
Harley- Davidson, Honda, Kawasaki, Yamaha, Excelsior Henderson and other
national, regional and local companies.
We believe that our ability to compete successfully depends on a number
of factors including:
o design of high performance and quality motorcycles;
o market presence;
7
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o timely delivery of our motorcycles;
o competitive pricing policies;
o the timing and introduction of our products and services into
the market; and
o our ability to keep up with existing and emerging industry
trends.
Current or increased competition may either prevent us from entering
or maintaining a place in the motorcycle manufacturing market. We cannot
guarantee that we will have the financial resources or marketing and
manufacturing capabilities to compete successfully. If we cannot successfully
compete, we probably will be forced to terminate our operations. See "Business
Competition"
DISTRIBUTION NETWORK; ABILITY TO SUPPORT DEALERS
We expect to derive substantially all of our revenue from sales through
independent dealers. As of February 1999, we executed agreements with 23
dealers. The agreements may be terminated by either party at any time. We do not
yet know how successful these dealers will be in selling our motorcycles.
Furthermore, we do not have any history or experience in establishing or
maintaining such dealer support, and there can be no assurance that we will be
able to successfully support our dealer network. If we are unable to provide
such support, we may lose dealers and, consequently, distribution of our
products would be adversely affected. In addition, most of our dealers will
offer competitive products manufactured by third parties. There can be no
assurance that our dealers will give priority to our products as compared to
competitors' products. Finally, we will need to attract additional or
replacement dealers to sell our products. There can be no assurance that we will
be able to convince a sufficient number of additional or replacement dealers
that our products will be a successful and profitable line, or that such
additional or replacement dealers will be successful in selling our products.
Any reduction or delay in sales of our products by our dealers would have a
material adverse effect on our business, operating results or financial
condition.
RISKS OF DEVELOPMENT IN GENERAL
We cannot assure you that we will ever be able to successfully
manufacture and sell our motorcycles on a large enough scale to produce revenues
that will enable us to continue our operations or provide you with a return on
your investment. Results of our operations in the future will be influenced by
many factors including:
o technological developments
o competition
o regulation
o increases in expenses associated with sales growth
o market acceptance of our products
o the capacity to expand and maintain the quality of our
motorcycles and related services
o development of a dealer organization
o favorable sourcing of supplies
o recruitment of highly skilled employees and integration of
such persons into a cohesive organization
o our ability to control costs; and
o recruitment and retention of experienced dealers
You should be aware that newly developing and/or expanding businesses such as
ours often encounter unforeseen expenses and problems, including competition
from substantially larger and more experienced companies which may prevent us
from continuing our operations.
8
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RISKS AND CONTINUED LOSSES ASSOCIATED WITH EXPANSION
We must increase our motorcycle manufacturing capacity and expand our
dealer network, which will sell our motorcycles, before we will have even a
chance to compete in the marketplace. Increasing our manufacturing and marketing
capacity will involve hiring additional personnel, purchasing additional
manufacturing equipment and spending significant funds on advertising. The
foregoing will require significant capital expenditures which will most likely
increase our operating losses for an indefinite period of time. Our expansion
plans will also place a great deal of strain on our management team most of whom
have not had experience managing large complex business operations. We cannot
guarantee that we will be able to expand our motorcycle manufacturing and
marketing capabilities as planned. If any of these obstacles prevent us from
expanding our motorcycle manufacturing and marketing business, we may be forced
to terminate our operations.
SIGNIFICANT CAPITAL REQUIREMENTS; DEPENDENCE ON THE PROCEEDS OF THIS OFFERING;
NEED FOR ADDITIONAL FINANCING
Manufacturing and marketing motorcycles and our plans for expansion, as
mentioned above, will require significant amounts of capital. Since we have no
significant internal revenues to finance our continuing operations and plans for
expansion, we depend on proceeds from sales of our securities to satisfy our
capital requirements. We believe that the proceeds we receive from this Offering
will satisfy our capital requirements until February 2000. At that time, we will
have to arrange for additional financing unless we are receiving revenues from
sales of our motorcycles to finance our manufacturing and marketing operations
at a sufficient level. If we are unable to obtain additional financing on
satisfactory terms when needed, we may have to suspend our operations or
terminate our operations altogether.
DEPENDENCE ON SUPPLIERS
We rely on third party suppliers to produce the parts and materials we
use to manufacture our motorcycles. If our suppliers are unable or unwilling to
provide us with the parts and supplies, we will be unable to produce our
motorcycles. We cannot guarantee that we will be able to purchase the parts we
need at reasonable prices or in a timely fashion. If we are unable to purchase
the supplies and parts we need to manufacture our motorcycles, we will
experience severe production problems which may possibly result in the
termination of our operations.
RISKS INVOLVED WITH SERVICE DEVELOPMENT AND TECHNOLOGICAL CHANGE
Our success depends on our ability to develop new motorcycle models and
motorcycle related products that meet changing customer demands. The motorcycle
manufacturing industry is subject to rapidly changing technology and emerging
competition. We cannot assure you that we will be able to successfully identify
new opportunities and develop and bring new products to market in a timely
manner, nor can we guarantee you that products developed by our competitors will
not make our products noncompetitive or obsolete. Also, we cannot assure you
that we will have the capital resources or the ability to implement any new
technology.
DEPENDENCE ON COMPUTER INFRASTRUCTURE; IMPACT OF THE YEAR 2000 ON COMPUTER
SYSTEMS
Our future success will depend, in part, on our computer network
infrastructure which will be used by our Dealers to place sales orders and for
general and administrative purposes. We must continue to expand and improve our
computer infrastructure as the number of dealers and motorcycles ordered
increase. We cannot assure you that we will be able to develop our network
infrastructure to meet additional demand or our dealers' changing requirements
on a timely basis and at a reasonable cost. If we cannot develop our computer
infrastructure on a timely basis, we may not be able to efficiently manufacture
and market our bikes and other products which could have a negative effect on
our business and financial condition.
9
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Our computer infrastructure is also vulnerable to computer viruses or
similar disruptive problems. Computer viruses or problems caused by third
parties could lead to interruptions, delays or termination in production and
delivery of our motorcycles to our dealers which could also negatively affect
our business.
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the year 2000. Some older
computer systems store dates with only a two-digit year with an assumed prefix
of "19" which limits those older systems to dates between 1900 and 1999. If not
corrected, many computer systems and applications could fail or create erroneous
results by or at the year 2000.
Because we will rely heavily on computers to conduct our business we
are subject to all the risks associated with the Year 2000. We have assessed the
scope of our risks related to problems these computer systems may have related
to the year 2000, and we believe such risks are not significant. In addition, we
are in the process of questioning our vendors and business partners about their
progress in identifying and addressing problems related to the year 2000.
However, no assurance can be given that all of these third party systems or our
computer systems will be year 2000 compliant. Since we started the business
using a paper based workflow process, we will revert to the paper form process
to run the Company on a contingency basis should we experience Year 2000
problems.
DEPENDENCE ON KEY PERSONNEL
Our success depends on the efforts of our management team, including
Richard Hagen, our Chairman and Chief Executive Officer, Gary Irving, our Chief
Operating Officer, Michael Smith, our Vice President of Sales, Frank Aliano, our
Vice President of Production and Jeff Starke, our Vice President of Research and
Development. We cannot guarantee that these persons will continue their
employment with us. The loss of services of one or more of these key people
would have a negative effect on our ability to conduct our operations. Our
success also depends on our ability to hire and retain additional qualified
executive, computer programming, engineering, production, investor management
and marketing personnel. We cannot assure that we will be able to hire or retain
necessary personnel.
IMMEDIATE DILUTION TO PURCHASERS IN OFFERING; ISSUANCE OF ADDITIONAL SHARES
Dilution is the difference between the amount you pay for a share of
Common Stock in this Offering and the net tangible book value per share of such
Common Stock immediately after the Offering. If you invest in this offering, you
will incur an immediate and substantial dilution of your investment. In
addition, we may issue a substantial number of shares of common stock or
preferred stock without your approval. Any such issuance of our securities in
the future could reduce your ownership percentage and voting rights in us and
further dilute the value of your investment.
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
Our success will be substantially dependent on our management team with
respect to how the Offering proceeds will be used. We believe net proceeds from
this Offering will be used for the purposes described under "Use of Proceeds"
section of this Prospectus. However, we reserve the right to use the Offering
proceeds for purposes other than those described in the "Use of Proceeds"
section if we determine that such use is in our best interests. You will be
entrusting your funds to our management team with only limited information
concerning their specific intentions.
10
<PAGE>
LIMITED MARKET FOR THE COMPANY'S SECURITIES
There is currently only a limited trading market for our Common Stock.
Our Common Stock trades on the OTC Bulletin Board under the symbol "AMQC," which
is a limited market in comparison to the NASDAQ System or the American Stock
Exchange ("AmEx"). Simultaneously with this Offering, we intend to apply for
inclusion of our Common Stock on the AmEx, however, we cannot assure you that
our Common Stock will ever qualify for inclusion on the AmEx or that more than a
limited market will ever develop for our Common Stock.
PENNY STOCK RULES
Our Common Stock currently trades on the OTC Bulletin Board at a price
of less than $5.00 per share and is subject to the Penny Stock Rules under the
Securities Exchange Act of 1934. These rules regulate broker-dealer practices
for transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00. The Penny Stock Rules require broker-dealers,
to deliver a standardized risk disclosure document prepared by the Commission
that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
completing the transaction and must be given to the customer in writing before
or with the customer's confirmation.
In addition, the Penny Stock Rules require that prior to a transaction,
the broker and/or dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may reduce purchases in this Offering and trading activity in the secondary
market for our Common Stock. As long as our Common Stock is subject to the Penny
Stock Rules, investors in this Offering may find it more difficult to sell their
securities.
MARKET ACCEPTANCE; LIMITED MARKETING EXPERIENCE
Our success depends on whether or not our products are accepted in the
market. You should be aware that development stage companies introducing new
products into the market are subject to a high level of uncertainty and risk.
Because the market for our motorcycles is new and evolving we cannot predict the
size and future growth rate, if any, of the market. We cannot assure you that
the market for our motorcycles will develop or that demand for our motorcycles
will emerge or become economically sustainable. Market acceptance of our
products depends on our ability to establish a brand image and a reputation for
high quality which will differentiate our brand of products from our
competitors. There can be no assurance that our products will be perceived as
being of high quality and differentiated from such other products, or that we
will be successful in establishing our intended brand image. In addition, our
management team has no experience manufacturing or marketing motorcycles on a
large scale. Our management's lack of experience could result in the failure of
our ability to sell our motorcycles.
ARBITRARY OFFERING PRICE
The purchase price for the shares of Common Stock we are offering to
you was determined by the Company and Barron Chase Securities, Inc., the
underwriter for this offering. We calculated the purchase price for the shares
based on our current financial condition and the general condition of the
securities market; however, we cannot assure you that the purchase price we
established accurately reflects the value of our assets or potential earnings.
See the section of this Prospectus entitled "Underwriting."
11
<PAGE>
POSSIBLE STOCK PRICE VOLATILITY
The stock markets are subject to significant price fluctuations which
may be unrelated to the operating performance of particular companies; and
therefore, the market price of our Common Stock may frequently change. In
addition, if we, or our competitors, publicly announce new products or
developments, such announcements may have a significant impact on the market
price of our Common Stock.
REPRESENTATIVE'S POTENTIAL CONTINUING INFLUENCE ON THE COMPANY
Barron Chase Securities, Inc., our underwriter, will receive warrants
to purchase a number of shares of our Common Stock equal to 10% of the shares
sold in this offering. At Barron Chase's request, we must register the shares
Barron Chase will receive if it exercises the warrants. If Barron Chase requires
us to register their shares, our ability to arrange future financings and the
market price of our Common Stock may be negatively affected. See the section of
this Prospectus entitled "Underwriting."
NO DIVIDENDS
We do not anticipate generating cash flows from operations in the near
future. If we do generate cash flows from operations we presently intend to use
those cash flows to finance further growth of our business and not to pay
dividends to our shareholders. Accordingly, investors should not purchase the
shares with a view towards receipt of dividends.
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS
Our Board of Directors is authorized to create and issue shares of
preferred stock without the approval of our shareholders. Any preferred stock
that our Board of Directors creates and issues could negatively affect the
voting power or other rights of the holders of our Common Stock. Also, our Board
of Directors may create preferred stock which could be used to prevent a third
party from taking control of our Company. Although we do not plan to issue any
shares of preferred stock, we may choose to in the future. See the section of
this Prospectus entitled "Description of Securities - Preferred Stock."
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Our Articles of Incorporation allow us to reimburse our officers and
directors for damages they may be subject to resulting from a breach of their
fiduciary duties to our shareholders. Our Articles of Incorporation also require
us to advance money to any officer or director if the law does not prevent us
from doing so. We may experience significant cash flow problems if we are
required to either reimburse, or advance money to, our officers or directors for
such purposes. See "Management - Indemnification of Directors and Officers."
USE OF PROCEEDS
The net proceeds we receive from the sale of the common stock we are
offering to you based on a public offering price of $5.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses, will be approximately $6,731,500 (not including an additional
$1,200,000 if the over-
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<PAGE>
allotment option granted to the Underwriters is exercised in full). We intend to
use the net proceeds of the Offering approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Amount Percentage of
Application of Net Proceeds of Net Proceeds
----------- ---------------- ---------------
<S> <C> <C>
Repayment of notes(1).............................. $ 2,260,313 33.6%
Equipment Purchase(2).............................. $ 100,000 1.5%
Working Capital(3)................................. $ 4,371,187 64.9%
------------- -----
Total........................................... $ 6,731,500 100%
============= =====
</TABLE>
- ----------------------
(1) Includes the repayment of (i) an aggregate of $390,313 (including
interest) to the holders of the Company's 10% Notes, 8% Notes and
7% Notes; and (ii) an aggregate of $870,000 (plus interest) to the
holders of the Company's Senior Promissory Notes issued between
November 1998 and January 1999. "See "Management's Discussion and
Analysis" and "Plan of Operations".
(2) Includes the purchase of ERP Software (which will manage all
internal operating facets of the Company including financial
information), computer hardware and materials handling equipment.
(3) Includes costs of goods required for motorcycle manufacturing and
operating expenses.
The foregoing is our best estimate of how we intend to use the net
proceeds of the Offering during the next approximately 12 months. We reserve the
right to use the proceeds for different purposes if we believe such a change is
in our best interest.
If we receive additional proceeds because the Underwriters' exercise
their over-allotment option, we will use such additional proceeds for working
capital purposes. We may invest the net proceeds of the Offering in short-term,
interest-bearing investments until we use them for the purposes stated above.
MARKET PRICE AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
As of February 5, 1999, there were approximately 208 shareholders of
record of our Common Stock. Our Common Stock is currently listed for trading on
the over-the-counter bulletin board under the symbol "AMQC". The following table
sets forth, the high and low bid prices for our Common Stock as reported by the
OTC Bulletin Board since August 12, 1997.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C>
August 12, 1997 - October 31, 1997 $ 10.00 $ 5.50
November 1, 1997 - January 31, 1998 10.625 6.00
February 1, 1998 - April 30, 1998 8.00 3.375
May 1, 1998 - July 30, 1998 6.50 3.50
August 1, 1998 - October 31, 1998 2.59 1.58
November 1, 1998 - January 31, 1999 2.25 0.58
</TABLE>
DIVIDEND POLICY
Our Board of Directors has complete control over whether or not we pay
dividends to our shareholders. We have not paid, and do not believe we will pay,
any dividends on our Common Stock in the near future. We intend to invest future
earnings, if any, in developing and expanding our business.
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<PAGE>
CAPITALIZATION
The following table describes our actual capitalization as of October
31, 1998; our capitalization as adjusted to show the sale of our Common Stock
offered at a public offering price of $5.00 per share; and the receipt of the
estimated net proceeds from the Offering.
<TABLE>
<CAPTION>
October 31, 1998
Actual(1) As Adjusted
--------- -----------
<S> <C> <C>
Short term debt:
Notes payable - shareholders $2,479,000 $ -
Note payable - related party 500,000 500,000
Current maturities of long-term debt 20,182 20,182
Current capital lease obligations 24,006 24,006
----------- ------------
$3,023,188 $544,188
=========== ============
Long term debt:
Installment note for vehicle purchase
at 8.75% $ 23,775 $ 23,775
Installment notes for intellectual
property rights from 8% to 10% 31,163 31,163
----------- ------------
54,938 54,938
Capital lease obligations 76,825 76,825
----------- ------------
131,763 131,763
=========== ============
Shareholders' equity:
Preferred Stock, $.001 par value; 2,500,000
shares authorized; no shares outstanding - -
Common Stock, $.001 par value; 50,000,000
shares authorized; 4,361,345 shares issued
(actual); 5,961,345 shares (as adjusted) 4,361 5,961
Additional paid-in capital 2,550,273 10,691,113
Accumulated deficit (5,349,466) (5,349,466)
----------- ------------
(2,794,832) 5,347,608
----------- ------------
Total capitalization $(2,663,069) $5,479,371
=========== ============
</TABLE>
- --------------------------------
(1) As of March 1, 1999, there were 9,166,235 shares of Our Common Stock
outstanding.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year ended For the six months ended
April 30 October 31
1998 1997 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues $ 192,856 $ 0 $ 475,714 $ 23,676
Total costs and expenses 2,824,567 2,634 3,190,835 595,206
-------------- -------------- ------------- ------------
Net loss $ (2,631,711) $ (2,634) $ (2,715,121) $ (571,530)
=============== ============== ============= ============
Weighted average
shares outstanding 2,007,844 591,716 3,706,908 3,502,009
============== ============== ============= ============
Net loss per common
share outstanding $ (1.311) $ ( 0.004) $ (0.732) $ ( 0.163)
============== ============== ============= ============
As of As of
April 30, 1998 October 31, 1998 Adjusted (1)
-------------- ---------------- ------------
(unaudited)
BALANCE SHEET DATA:
Current assets $ 886,836 $ 6,071,411 $ 10,442,598
Working capital $ (2,162,614) $ (4,109,524) $ 3,932,916
Total assets $ 1,864,216 $ 7,517,866 $ 11,989,053
Total liabilities $ 3,167,426 $ 10,312,698 $ 6,641,445
Shareholders' equity (deficit) $ (1,303,210) $ (2,794,832) $ 5,347,608
</TABLE>
- --------------------------
(1) Adjusted to show the effect of the sale of 1,600,000 shares of common
stock we are offering to you at a price of $5.00 per share. See "Use
of Proceeds."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER
THAN STATEMENTS OF HISTORICAL FACT, INCLUDED IN OR INCORPORATED BY REFERENCE
INTO THIS PROSPECTUS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN
THIS DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS INCLUDING THOSE RISKS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB, AS WELL AS IN THIS REPORT ON PROSPECTUS. SHOULD UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
ANTICIPATED, ESTIMATED OR PROJECTED. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS WE INCLUDE IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT.
AMONG THE KEY RISKS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM EXPECTATIONS ARE ESTIMATES OF COSTS, PROJECTED RESULTS OR
ANTICIPATED RESULTS.
The following discussion and analysis should be read in conjunction
with the financial statements of the Company and the notes thereto appearing
elsewhere.
PLAN OF OPERATION
The Company has made, and projects significant investments in its
manufacturing plant and people which will support an aggressive ramp-up in
monthly production of motorcycles and engines during the next six months.
Investment in the plant includes manufacturing equipment, material handling
equipment along with computer hardware and software (enterprise resource
planning software including integration with the Company's Dealer oriented
Intranet). During this same period, the Company's headcount (number of full time
employees) is projected to increase from 38 to over 70. Most of the increase in
headcount will be in production and key support functions such as quality
control, procurement and inventory management.
Production ramp-up will be implemented through refinement of the
assembly process and investment in jigs, fixtures and material handling
equipment such as pneumatic hoists, lifts and conveyor belts. The total monthly
production is projected to increase from 40 motorcycles in March to 80
motorcycles per month by June 1999 with the addition of a second assembly line
and starting two shift operations during the late spring of 1999.
The Company also plans to invest in the research and development of two
new product lines during the next six months: a touring motorcycle and a 96
cubic inch engine. The touring motorcycle will be a second product line to the
cruiser model currently manufactured by the Company and will include saddle bags
and windshields/fairings. The touring motorcycle is targeted at one of the
fastest growing market segments. A prototype of the touring product was featured
at the Sturgis Motorcycle Rally in August of 1998. Management of the Company
("Management") believes that the dealer and consumer response was very favorable
due to the number of orders ^for the touring motorcycle that were placed at the
rally. The 96 cubic inch engine will use the same 4-Valve technology as the
Company's present 88 cubic inch engine. The Company put the 96 cubic inch engine
through extensive testing, including over 4,000 miles of road testing and
numerous dynamometer tests. The dynamometer tests established a 10% improvement
in peak foot-pounds of torque ^than ^the 88 cubic inch engine. Management
believes that 4-Valve engine design is one of the industry leaders in high
16
<PAGE>
torque at low and mid-range speeds. This torgue gives riders excellent
acceleration for increasing speed to merge into highway traffic from on-ramps
and passing trucks safely. The touring motorcycle and the 96 cubic inch engine
are planned to be introduced in the next twelve months.
RESULTS OF OPERATION
The Company has transitioned from a development stage Company into an
early production Company. The Company was originally incorporated on March 20,
1986 as "Norbern, Inc." and was inactive until March 1977 when it began
developing and implementing its business and financing plans. On May 8, 1997 the
Company changed its name to American Quantum Cycles, Inc. and its fiscal year
end to April 30.
As the Company was inactive prior to March 1997, there was no income
and only incidental supply costs and the accrued interest expense from seven
promissory notes totalling $250,000. The fiscal year ended April 30, 1997 had a
deficit carry forward of $2,634. During the fiscal year ended April 30, 1998,
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital, which resulted in
cumulative losses of $2,634,345. These losses have resulted primarily from
expenditures for general and administrative activities, including salaries and
professional fees for outside services in the amount of $1,164,291, travel and
marketing expenses of $457,590, and accrued interest expense of $187,232 from
the bridge loan and convertible debentures issued.
The Company sustained continuing losses in the six months ended October
31, 1998 in the amount of $2,715,121 as compared to sustained losses of $571,530
incurred during the six months ended October 31, 1997. These losses include
$1,977,436 in general and administrative activities, representing significant
increases in personnel and the outside professional services necessary for
production ramp-up, and $569,083 in accrued interest expense. These losses
include $523,972 in general and administrative activities, representing training
and development of personnel and process necessary in a development stage
operation, and $26,246 in accrued interest expense.
Revenues in the fiscal year ended April 30, 1998 of $192,856 resulted
from the sale of the initial ten motorcycles produced plus some after-market
4-Valve engine parts. An additional eight motorcycles were produced, of which
two were used for engineering and regulatory testing, and the remaining six are
used for marketing purposes. An additional 18 motorcycles have been produced
during this fiscal year to date, and an additional 230 motorcycles have been
booked into production slots based on orders from 23 dealers. Eighty-six of
these bikes have been scheduled for delivery during the January-March time frame
of 1999. The Company expects after-market 4-Valve engine and part sales to
increase significantly during the fiscal year 1999/2000.
While the Company anticipates that the current fiscal year ending April
30, 1999 will have deficit earnings, including the aggregate for the 4th
Quarter, the last two months of the FY (March and April of 1999) are expected to
be cash flow positive. Results of operations in the future will be influenced by
numerous factors including technological developments, competition, regulation,
increases in expenses associated with sales growth, market acceptance of the
products of the Company, the capacity of the Company to expand and maintain the
quality of its motorcycles and related services, continued development of the
dealer organization, favorable sourcing of supplies, recruitment of highly
skilled employees and integration of such persons into a cohesive organization,
and the ability of the Company to raise funds and control costs.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company only recently emerged from its development stage, it
has not received any material income from operations. As such, the Company
relies on private sources of financing to support its operations. As part of its
funding and financing, the Company issued two separate series of convertible
notes to investors:
17
<PAGE>
Beginning in October 1997, the Company issued an aggregate of forty
(40) 8% Subordinated Notes to 32 investors, in ^the ^aggregate principal amount
of $1,407,000 (the "8% Notes"). The notes matured one year from date of issue.
Nine of the 8% Note holders, representing an aggregate of $240,000 of the
outstanding principal balance of the 8% Notes, agreed to extend the maturity
date of their 8% Notes until the close of this Offering. Sixteen of the 8% Note
holders, representing an aggregate of $624,000 of the aggregate outstanding
principal amount of the 8% Notes agreed to convert the principle balance plus
accrued interest of their respective notes into (i) common stock of the Company
at the a price per share equal to $5.00, (the "8% Note Shares"); and (ii)
warrants to purchase a number of shares of the Company's common stock equal to
the 8% Note Shares at an exercise price of $5.00 per share. The Company redeemed
one of the 8% Notes with a principal balance of $70,000. The remaining six 8%
Note holders have not agreed to either extend the terms of, or convert, their 8%
Notes. As a result, if the remaining six 8% Note holders, representing an
aggregate of $473,000 of the outstanding principal balance of the 8% Notes, send
the Company notice informing the Company that it is in default of its repayment
obligations on the 8% Notes, the Company will be considered in default of such
8% Notes.
Beginning in April 1998, the Company issued an aggregate of
twenty-seven (27) 7% Subordinated Notes to 25 investors, in return for which the
Company received proceeds of $549,500 (the "7% Notes"). The 7% Notes mature one
year from the date of issuance and are convertible into shares of common stock
of the Company at $8.00 per share. Interest is payable in cash or shares of
common stock of the Company, at the discretion of the Company. Six of the 7%
Note holders, representing an aggregate of $70,000 of the outstanding principal
balance of the 7% Notes, agreed to extend the maturity date of their 7% Notes
until the close of this Offering. Thirteen of the 7% Note holders, representing
an aggregate of $292,000 of the aggregate outstanding principal amount of the 7%
Notes agreed to convert the principle balance plus accrued interest of their
respective notes into (i) common stock of the Company at the a price per share
equal to $5.00, (the "7% Note Shares"); and (ii) warrants to purchase a number
of shares of the Company's common stock equal to the 7% Note Shares at an
exercise price of $5.00 per share. The Company redeemed two of the 7% Notes
which had an aggregate principal balance of $32,500. The remaining four 7% Note
holders, representing an aggregate of $155,000 of the outstanding principal
balance of the 7% Notes, have not agreed to either extend the terms of, or
convert, their respective 7% Notes. As a result, if any of the remaining four 7%
Note holders are not repaid, or do not convert or extend the terms of their 7%
Notes by April 1999, and such 7% Note holders send the Company notice informing
the Company that it is in default of its repayment obligations on the 7% Notes,
the Company will be considered in default of the 7% Notes.
In March 1998, the Company received aggregate of $700,000 in connection
with the issuance of nine (9) promissory notes to nine investors which bear
interest annually at a rate of 10% (the "10% Notes"). The 10% Notes mature one
year from the date of issuance and are convertible into shares of common stock
of the Company at $8.00 per share. Interest is payable in cash or shares of
common stock of the Company, at the discretion of the Company. Two of the 10%
Note holders, representing an aggregate of $380,000 of the outstanding principal
balance of the 10% Notes, agreed to extend the maturity date of their 10% Notes
until the close of this Offering. Seven of the 10% Note holders, representing an
aggregate of $320,000 of the aggregate outstanding principal amount of the 10%
Notes agreed to convert the principle balance plus accrued interest of their
respective notes into (i) common stock of the Company at the a price per share
equal to $5.00, (the "10% Note Shares"); and (ii) two warrants to purchase a
number of shares of the Company's common stock equal to the 10% Note Shares at
an exercise price of $5.00 per share. ^
Between November 1998 and January 1999, the Company completed a private
offering of approximately 35 Units of its securities (the "Units") to 11
investors from which the Company received gross proceeds of $870,000. Each Unit
consisted of (i) a Senior Promissory Note in the principal amount of $25,000 and
(ii) the right to receive a number of shares of Common Stock of the Company
determined by dividing $12,500 by the subsequent public offering price per share
of the Company's Common Stock in an underwritten public offering from which the
Company receives at least $5,000,000 gross proceeds.
18
<PAGE>
In December 1998, the Company contracted for a secured line of credit
in the amount of $755,000 to use for operating expenses. The line of credit
accrues interest at a rate of 10% per annum. Principal and interest on the line
of credit must be repaid to the line of credit provider upon demand. In February
1999, the Company contracted with six individuals for an unsecured line of
credit in the aggregate amount of $650,000 use for operating expenses. The
Company is currently arranging for a $3,000,000 secured line of credit to use
for inventory and production expenses. However, there is no guarantee this line
of credit will be obtained. In addition to the bridge funding, these lines of
credit will cover expenses of the Company through to the completion of the
secondary offering.
Between ^March and May 1999, American Quantum expects to deliver and
collect monies on 75-125 motorcycles. Money from the sale and delivery of
motorcycles is expected to allow American Quantum to become cash flow positive
before the completion of the secondary offering. However, no assurances can be
given that the secondary offering will be completed. In the event the secondary
offering is not completed, American Quantum will need to arrange alternative
financing sources.
The proceeds from the Company's fund raising efforts have been used for
investment in inventory, equipment, licenses and intellectual rights for an
aggregate out-lay during the fiscal year ended April 30, 1998 of $978,182 and to
supply working capital for the Company's operations to date.
Year 2000 Disclosure
Computers, software and other equipment using microprocessors have been
utilized that will accurately process date-based information, and are "Year
2000" compliant. Specifically, our operating systems are Windows NT 4.0 based
and our manufacturing software (MfgPro) and engineering software (ProE) are all
"Year 2000" compliant. Our usage of "Year 2000" compliant applications enables
us to perform necessary business operations without possible adverse impact that
non-compliant software could cause.
BUSINESS
INTRODUCTION
American Quantum Cycles, Inc. (the "Company" or "AQC") designs,
manufactures and distributes American-made, high performance V-twin engine
cruiser and touring style motorcycles. These motorcycle products include stock
models and motorcycles built to customer specifications. We make use of a "just
in time" approach (i.e. ordering parts on an as-needed basis) in manufacturing,
and we believe we can manufacture a high quality product using mass production
methods. AQC further believes that this made-to-order approach helps produce
greater customer satisfaction and reduces the need for added cash flow. AQC
expects that its motorcycles will be lower in price compared to the other major
sources of high performance, customer-specified motorcycles, which are primarily
small customization shops and small manufacturers.
We are initially focusing on manufacturing and selling heavyweight
motorcycles and have begun small- scale production of our initial heavyweight
cruiser, the Liberty. We unveiled this model at the Sturgis Motorcycle Rally in
Sturgis, South Dakota, in August 1997. AQC has produced 36 motorcycles since
that time, 22 of which have been sold to dealers and/or consumers. The remaining
14 motorcycles are being used for regulatory compliance testing, marketing and
long term testing. AQC will also take bikes to rallies and conferences including
the Indianapolis Dealers Conference, Daytona Beach Bike Week, Laconia Bike Week
and many others. We have signed letters of intent with 23 prospective dealers
and have received orders for 230 motorcycles including 86 for immediate
delivery.
We intend to make investments in plant and people to support a ramp-up
in monthly production of motorcycles and engines during the next twelve months.
Investment in plant will include manufacturing
19
<PAGE>
equipment, materials handling equipment and computer hardware and software.
During this same period, our headcount (number of full time employees) will need
to increase. Most of the increase in headcount will be in production and key
support functions such as quality control, procurement and inventory management.
AQC was originally incorporated as a Florida corporation on March 20,
1986 as "Norbern, Inc." On May 8, 1997, the Company changed its name to
"American Quantum Cycles, Inc." The Company had no operations prior to May 9,
1997, when it issued shares of its common stock in exchange for management,
equipment and other assets. This enabled us to manufacture, distribute and sell
American-made motorcycles, motorcycle parts and related products. The Company's
fiscal year end is April 30. Our executive offices are at 731 Washburn Road,
Melbourne, Florida 32934; Telephone (407) 752-0008.
THE INDUSTRY AND MARKET
Our management believes that the motorcycle market has been extremely
robust, the healthiest segment being the cruiser market. Data from the
Motorcycle Industry Council shows the cruiser market segment has enjoyed eight
years of unbroken market growth averaging roughly 12% per year over this period.
Industry experts are highly confident in the continuation of this growth pattern
well into 2005 due to favorable demographics. The prime buyer for the
heavyweight cruiser is middle-aged and middle class which means that the baby
boomer segment of the population which is now reaching their peak earning years
with growing discretionary income will be motorcycle prospects for the next 7-10
years.
Five different companies currently have about 95% of the market share
and therefore dominate the motorcycle industry in the United States. Those
companies are Harley-Davidson (HD), Honda Motorcycle, Yamaha, Suzuki and
Kawasaki. In spite of this array of able competitors, the market for cruiser
motorcycles is unfulfilled due to a strong demand for American made product and
a shortage of production capacity on the part of HD which has existed for the
last five years. Our management believes that this product shortage has caused
unusual market distortions to exist for a number of years which include:
o HD buyers having to wait from 3-12 months for product delivery
o HD Dealers adding a large number of accessories on their product to
raise prices and margins
o Many HD buyers being required to add $5-10k of aftermarket parts to
new motorcycles to get a high performance product
o High demand and high prices for used HD motorcycles
o HD Dealers taking on second product line in order to fulfill demand
Currently, there are over 100 Harley-Davidson dealerships which have
already picked up the Kawasaki, Honda or Suzuki lines in order to fulfill the
unsatisfied demand of bikers who do not want to wait for their motorcycles. We
believe the demographic audience that most dealerships are attempting to reach
would prefer buying an American-made bike. However, the individual buyer has
been limited to the above choices, or an expensive custom motorcycle selling in
excess of $30,000. Now, however, the customer will have an alternative choice -
American Quantum Cycles.
An estimated 346,966 new motorcycles were sold in 1997 with 67% of
these being in the on-highway classification. New motorcycle sales equaled a
retail value of $2.7 billion in 1997. The overall motorcycle industry in the
U.S. generated an estimated $8.7 billion consumer sales and services, state
taxes and licenses. Included in this overall industry value are retail sales of
motorcycles (new and used), parts and accessories, dealer servicing, product
advertising, vehicle financing charges, insurance premium, dealer personnel
salaries, state tax and licensing fees. There were 12,113 retail outlets which
sold motorcycles and related products in the U.S. in 1997. Roughly one-third
(34%) of these were authorized to sell new motorcycles while the remainder
specialized in related parts, accessories, riding apparel, used vehicles or
service.
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<PAGE>
In 1996, there were $5.6 billion in retails sales generated by all
franchised (authorized by a major brand manufacturer to sell new motorcycles,
parts, accessories or clothing) and non-franchised motorcycle retail outlets
according to the 1996 Retail Outlet Profit Survey from the Motorcycle Industry
Council. Sales by franchised outlets accounted for $4.4 billion of the total
retail sales volume, compared to $1.2 billion for non- franchised outlets. The
estimated average motorcycle related sales and service for a franchised
motorcycle outlet was $1.606 million compared to $159,000 for a non-franchised
outlet. These sales for the franchised outlets were broken down, on average, at
57% for new motorcycles, 14.7% for used motorcycles, 22% for parts, accessories
and riding apparel, 5.7% for service labor and 0.6% for miscellaneous.
The 3.16 million motorcycles in use in 1996 were owned by 2.77 million
owners according to the 1997 Motorcycle Statistical Annual from the Motorcycle
Industry Council. Motorcycle owners have grown steadily in age and income over
the past two decades (see Table below):
Year Median Age Median Income
---- ---------- -------------
1980 24 years $17,500
1985 27.1 years $25,600
1990 32 years $33,100
The most rapidly growing income segment for motorcycle owners was the
"over $50,000 per year" bracket growing from 2.4% in 1980 to 6.1% in 1985 to
19.9% in 1990. The fastest growing education segment for motorcycle owners was
"some college education" which grew from 17% in 1980 to 25.2% in 1990. The
percentage of motorcycle owners who are married has grown steadily from 44.3% in
1980 to 56.6% in 1990.
In 1996, U.S. registrations of new heavyweight motorcycles increased by
approximately 9.6% over 1995 registrations, and U.S. registrations of new
heavyweight motorcycles have increased 59% from 1992 through 1996. AMQC has
carried out detailed demographic surveys through motorcycle registration data
bases, telephone surveys and face-to-face surveys to determine those demographic
groups which are owners of heavyweight cruisers. As a result of this market
research, AMQC has determined the characteristics of their target market groups
and correspondingly, where they live by ZIP code, Census block and trade zone.
The international market for heavyweight motorcycles has seen strong
growth in the last few years. The European market grew at a 7.2% rate during
1997 according to AQC's international export manager, Ferrex International, Inc.
("Ferrex") with Germany being the largest purchaser of American manufactured
heavyweight motorcycles with $76.6 million in sales for 1996, followed by Canada
($67.9 million), Japan ($46.8 million), Australia ($31.1 million), and the
Netherlands ($21.8 million).
Motorcycle buyers today have three choices in buying a high performance
cruiser or touring motorcycle:
(1) to buy new American made products from small manufacturers
(e.g.: Titan, Big Dog, CMC, etc.);
(2) to buy a foreign made product; or
(3) to buy a new Harley-Davidson product and pay a large premium
in order to upgrade the performance characteristics of
Harley-Davidson motorcycles.
AQC intends to fill this market gap by providing an American-made and
styled motorcycle with advanced engineering and high performance technology.
Since its initial promotional event at the Sturgis Motorcycle Rally in Sturgis,
South Dakota, we have received more than 443 dealer inquiries to sell our
motorcycles and motorcycle parts.
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<PAGE>
STRATEGY
Our goal is to continue to produce what we believe is a superior
U.S.-made V-twin motorcycle using quality materials and workmanship. We will
seek market share, both domestically and internationally, by offering high
performance custom-built motorcycles and motorcycle products and through the
development of a proprietary Intranet/Extranet system (designed to continually
track and control inventory and production) for use by dealers, customers and
the Company . See "The Company-Intranet/Extranet System."
To increase our motorcycle production capacity, we recently completed a
modification to our production facility which we believe has increased our
production floor space by 200%. This provided space for a second motorcycle
production line which we believe will more than double our motorcycle production
capabilities.
PRODUCTS
The Company's first model, a heavyweight cruiser motorcycle (the
Liberty), has been designed to achieve major product goals including:
(1) American styling;
(2) handling;
(3) durability; and
(4) performance.
o American Styling -- The Company believes the dimensions,
angles, components and selection of materials (including the
use of polished aluminum as opposed to chrome) used in the
Liberty embodies the heritage of American styled motorcycles
from the 1950's and, at the same time, integrates technologies
of the late 1990's. For example, the painting process used by
AQC on its motorcycle frames prevents paint from chipping,
since the paint is electrically charged and baked at extremely
high temperatures for a glossy, durable finish. AQC also
believes this makes the motorcycle frame more durable.
Additionally, there is a variety of customized colors and
designs available through this powder coating process.
o Handling -- A number of factors contribute to the ease of
handling of the Liberty. The Liberty is designed to be
completely balanced so that the center of gravity is in line
with its rider. The inverted front forks of the Liberty model,
typical on racing motorcycles, absorb shock and provide steady
contact with the road. This delivers ease of handling under
high performance conditions. The engine and transmission are
rubber mounted to minimize vibration for smooth and easy
handling. Many of the materials in the Liberty are selected
for high strength-to- weight ratios.
o Durability -- AQC believes that while competitive products in
the Liberty's price class require annual repairs and continual
upgrades, these repairs and upgrades are not necessary with
the Liberty model. We believe that the Liberty's frame wears
well through all environmental and use conditions. We polish
the aluminum parts to a soft gleam and we believe that they
will resist corroding or peeling. The balanced components and
engine/transmission triple isolation mounts greatly reduce
vibration, which adds to durability and longevity.
Additionally, we make a number of components (including the
oil tanks), from stainless steel which also adds to corrosion
resistance and durability. Aluminum parts dissipate heat
better than the low-grade steel used by competitors, further
increasing long-term durability.
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<PAGE>
o Performance -- The single most outstanding feature of the
American Quantum product line is its engine. The four stroke,
four valve V-twin promises to deliver the greatest
acceleration at low and mid-range speeds in its model class
(heavyweight cruisers) on the road today. The engine, designed
by American Quantum Cycles, includes designs for heads under
exclusive license from Fueling Advanced Technologies. The two
pistons are arranged vertically at a 45 degree angle to each
other. The bore of 3 and 5/8 inches combined with a stroke of
4 and 1/4 inches provides 88 cubic inches or 1462 cc of
capacity - near the top of the range for this class of
motorcycle and larger than most of its competitors. Capacity,
however, is only one factor in delivering power. The 4-valve
technology produces greater airflow through the engine than
the more common 2-valve. Quantum has designed a unique
manifold which manages the flow of air more efficiently
resulting in a more complete burn cycle with less wasted fuel.
The 4- value heads are equipped with two 1.575" intake valves
and two 1.275" exhaust valves for 3.150" and 2.550" intake and
exhaust capacity respectively. The spark plug is located in
the middle of the head between the four valves in the
combustion chamber which has a semi- hemispherical pent roof
design. The cam is ground to Quantum's specifications. The
resulting engine design delivers greater power, less
pollutants, cooler operating temperatures and greater mileage
all at the same time.
The Quantum 4-valve also gets increased power from operating
at higher compression ratios than its competitors. The engine
is expected to be the industry leader in ft-lbs. of torque per
cubic inch of capacity. The Quantum 4-Valve 88 cubic inch
passed 49 state EPA tests and certification has been received.
The power achieved by Quantum's 4-Value engine accomplishes
what the motorcycle industry heretofore has failed to deliver
an engine with excellent low-to-mid range (rpm) torque without
sacrificing upper range power. In conclusion, the design of
the Liberty Cruiser motorcycle has accomplished all four
product goals and has created a product which will be
extremely competitive in the motorcycle industry.
We believe we have close and efficient relationships with all of our
suppliers. Approximately 50% of our motorcycle components are manufactured to
our specifications by manufacturers located throughout the United States but
predominantly in Florida. We purchase the remaining 50% of the components needed
to complete our motorcycle from parts manufacturers and catalog distributors
(e.g. tires, wheels, seats, lights, batteries, and other off-the-shelf parts).
The Company will invest in the research and development of two new
product lines during the next twelve months: a touring motorcycle and a 96 cubic
inch engine.
The touring motorcycle will be a second product line to the existing
Cruiser model and will include saddlebags and windshields/fairing. The 96 cubic
inch engine will use the same 4-valve technology as the Company's present 88
cubic inch engine. With the larger displacement, the Company projects an
increase in peak torque in the 10-20% range.
MANUFACTURING
AQC has designed and produced 36 motorcycles since May 1997. Of these,
22 have been sold, 11 are used for marketing purposes, and 3 for engineering and
regulatory testing. During the remainder of the calendar year 1999, we
anticipate producing 700 additional motorcycles. This projection is based on a
plan to ramp production through refinement of the assembly process. This
involves investing in jigs, fixtures and material handling equipment such as
pneumatic hoists, lifts, and conveyor belts.
We project total monthly production to increase from 20 motorcycles to
80 motorcycles in June 1999 with the addition of a second assembly line and
starting two shift operations. We project that we will increase
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production to 160 motorcycles per month from July 1999 through April 2000.
Currently, AQC's existing manufacturing process consists of outsourcing all
manufacturing of parts to subcontractors. We carry out only research and
development, final assembly, testing and quality control at our facilities. AQC
has long-term contracts with major subcontractors, vendors and backup suppliers
to insure the flow of parts to our plant in Melbourne, Florida.
INTRANET/EXTRANET SYSTEM
One of our goals is to provide our customers with an efficient way of
selecting an exact product design as well as to provide a method to continually
track the progress of production of any specific product. We have developed a
PC-based kiosk Intranet/Extranet System (the "Dealernet") for this purpose. The
Dealernet uses an interactive CD-ROM (or DVD) storing two and three-dimensional
images of our products. A prototype was reviewed by dealers and consumers for
ease-of-use and effectiveness at the Sturgis and Daytona Beach Motorcycle shows.
Management of the company believes that both dealers and customers have
responded favorably to the Internet software. We sent a mailer of the completed
Dealernet library of bike selections (on CD) to 2,000 prospective dealers during
the week of July 24, 1998 as a promotional tool and as an invitation to visit
AQC's booth at the Sturgis, South Dakota Rally.
The Dealernet system displays alternate motorcycle choices on a
computer screen allowing, a customer to select a precise motorcycle design with
options tailored to the customer's requirements. The customer will also know the
cost of each option, and have a graphic image of the bike which he can easily
modify. Once a customer agrees to purchase our motorcycle, we will assign a
unique bar code to each order. This serves as an order and tracking number for
the dealer, the customer and AQC's production plant. This also allows everyone
to monitor the progress of the production of product. We have completed the
Dealernet system and intend to install it at our Dealer locations beginning in
Spring 1999.
MARKETING
Our marketing program will focus on two major objectives:
(1) corporate/product name identification; and
(2) lead generation for the sales and distribution channels.
o Corporate product name and product identification will use
advertising, promotions, public relations and participation in major motorcycle
events (such as the Sturgis Race and Rally in Sturgis, SD and the Daytona Beach
Bike Week). We also will sponsor racing activities and special promotional
events and participate in most major motorcycle consumer shows and rallies. To
establish our brand name among the motorcycling public, we first unveiled our
prototype, the Q2 at the Sturgis Rally in August 1997. We also intend to
eventually license certain of our trademarks on a broad range of consumer items
to increase public exposure of our brand name.
o Lead generation activities will support each product line including
motorcycles, engines/parts, accessories. They also will be matched to each sales
channel, including dealers, the Internet, third party distribution partners and
others. Our primary effort will be generating leads so dealers can sell
motorcycles and engines. We will enter and track all leads at a local level by a
corporate lead tracking and management system. This will provide sales
management support to dealers. The lead management and tracking system also
allows us to monitor sales progress of our dealers. We will identify geographic
regions of unusually low sales productivity (with high densities) and target
them for special promotional efforts.
AQC will use print media advertising and direct marketing to generate
leads to support our dealer sales programs. Print media advertising will focus
on national motorcycle magazines (typically with full page, full
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color ads) and local newspaper ads together with dealers' local promotional
activities. We will evaluate local radio and cable TV ads on a location by
location basis depending on reach, frequency, and cost.
Our management will evaluate the type and amount of marketing to
support each of our local dealers based on our market research program. All
direct marketing campaigns will feature a local focus and will be timed to
support the launch of new dealers. We believe direct mail programs, including
inexpensive give-aways (such as promotional CD's, high quality posters and
merchandise) can be cost-justified if focused on a local basis. Our ad and
promotional campaigns will be available on our Website.
DISTRIBUTION AND SALES
AQC's distribution channels will typically consist of independently
owned full-service dealerships that we will sell to directly. AQC will also sell
directly to consumers through various media, including the Internet, but only in
those geographic regions where we have no authorized Company dealerships. All
other Internet leads will be electronically referred to the nearest AQC dealer.
All of our dealers will carry AQC replacement parts and aftermarket accessories
and perform servicing of our motorcycle products.
We have letters of intent signed by 23 dealers located in 13 states in
the US. Each dealer makes a minimum commitment to buy ten (10) motorcycles upon
signing the dealer agreement. As a result, the 23 dealers represent bookings of
230 motorcycles. Other dealers have expressed a strong interest and their
applications are being evaluated.
Dealership requirements include favorable building locations, display
area size, traffic surveys, local geo-demographics and financial condition. Each
dealer will be expected to provide adequate storefront and service areas. We
anticipate that a minimum of 2,000 square feet will be required and traffic
exposure will need to be at not less than 3,500 cars per day. Dealers will
purchase product and stock parts and engines via our dealer Intranet.
We also have a distribution agreement with Ferrex. Ferrex is presently
doing business in Europe, the Pacific Rim and various countries in Latin
America. Our agreement with Ferrex provides that Ferrex has the opportunity to
sell AQC products in selected countries outside North America. However, Ferrex
must first establish a dealership in a country in order to have the exclusive
rights to that country.
We also intend to enter into distribution agreements for the sale and
delivery of 4-VALVE(R) engine kits. These may include national catalog
distributors or major parts and subassembly suppliers. We will also have a
direct sales staff to promote and sell the 4-VALVE(R) engine to the
Harley-Davidson customization aftermarket.
INTELLECTUAL PROPERTY RIGHTS
AQC believes that it has the exclusive right to use the trademarks
AMERICAN QUANTUM CYCLES, Q, Liberty, and QX, along with certain related word and
design trademarks in the United States and certain foreign countries in
connection with the manufacture and sale of motorcycles and related parts. In
addition, we believe that we have the right to use certain of these marks on
other merchandise and apparel. We believe that we have common law trademark
rights through use of these marks on our prototype motorcycles and ancillary
merchandise independent of U.S. Patent and Trademark Office ("PTO") registration
process. In addition, we have filed for trademark protection for the marks
"American Quantum Cycles", the "Q", "Liberty" and "QX". In some instances, these
rights may depend upon pending applications to register the marks in a foreign
country. If we fail to get this, such registrations could impair our rights to
use a mark in a particular country.
We own no patents and we have not filed or been assigned any patent
applications. We believe, however, that a number of elements of the Liberty
series of motorcycle design have the potential to receive
25
<PAGE>
patents. At a future date, we intend to file patent applications for certain of
the patentable elements. AQC will also actively license and/or purchase
additional intellectual property rights to improve the market competitiveness of
our product line.
We are not aware of any claims of infringement against AQC and we have
not been involved in any court proceedings regarding our intellectual property
rights.
In August 1997, we entered into a license agreement (the "Agreement")
with Feuling Advanced Technology, Inc. As a licensee, we have a license to use
certain proprietary technologies, including patents, trade secrets, techniques,
tooling designs, product designs, and trademarks. As part of this Agreement, and
in exchange for a royalty payment of approximately $235,000, if we comply with
certain other provisions, including non-disclosure of the proprietary
technology, we enjoy an exclusive license (for motorcycle applications) in
perpetuity for the 4-Valve technology. This technology is being used in the
manufacture of AQC's motorcycles.
COMPETITION
As of December 31, 1996, Harley-Davidson, Honda, Suzuki, Kawasaki, and
Yamaha had the largest market share of the U.S. heavyweight motorcycle market.
Our primary competitor in the U.S. heavyweight market is expected to be
Harley-Davidson (which, in 1996, had a market share of 48% of new U.S. and 7% of
European heavyweight motorcycle registrations) according to Harley-Davidson's
Annual Report. Harley- Davidson is the only significant American heavyweight
cruiser and touring motorcycle manufacturer since 1953. Several of the major
foreign manufacturers compete against Harley-Davidson in the domestic market by
selling motorcycles with a "nostalgic" American design.
Two new American made motorcycle competitors are scheduled to enter the
marketplace in 1998-1999. Polaris, a one billion-dollar manufacturer of
snowmobiles, jet skis and other recreational vehicles, has announced its
heavyweight cruiser, the Victory, for sale through some of its dealers.
Excelsior-Henderson, a publicly funded start-up, is expected to offer a
heavyweight cruiser in early 1999.
The market for new and customized motorcycles is extremely competitive.
While there are substantial barriers to entry, we believe that competition will
intensify in the future. We believe that our ability to compete successfully
depends on a number of factors:
(1) design and development of high performance and quality
motorcycles
(2) market presence;
(3) timely delivery of made-to-order motorcycles;
(4) the pricing policies of our competitors and suppliers;
(5) the timing and introduction of new products and services by
AQC and others;
(6) our ability to support existing and emerging industry
standards; and
(7) industry and general economic trends.
We cannot guarantee that AQC will be able to successfully compete with
others in the business of manufacturing and marketing customized motorcycles or
motorcycles in general.
26
<PAGE>
GOVERNMENT REGULATIONS
Commercial sales of our motorcycles depend upon compliance with certain
government regulations and AQC is designing motorcycles to comply with all such
regulations. Both federal and state authorities have various environmental
control requirements relating to air, water and noise pollution which affect our
business and operations. In particular, our motorcycles are subject to the
emissions and noise standards of the U.S. Environmental Protection Agency and
the more stringent emissions standards of the State of California Air Resources
Board ("CARB"). The 4-VALVE engine has received EPA certification in all 49
states (except California). The proprietary exhaust system on the Quantum
Motorcycle was designed to provide an attractive sound while complying with DOT
noise standards. In Spring 1999, we intend to begin testing of our motorcycles
to meet the emission standards of the CARB for compliance with California
Emissions Standards. We cannot guarantee that our motorcycles will meet these
emission standards. Preliminary results show that the Liberty and its associated
4-VALVE(R) engine will pass all CARB requirements. AQC's motorcycles are also
subject to the National Traffic and Motor Vehicle Safety Act of the National
Highway Traffic Safety Administration.
The State of Florida requires that we be licensed as a manufacturer of
motor vehicles. Each of our dealers must be licensed as a motor vehicle dealer
in the jurisdictions where the businesses are located.
EMPLOYEES
We currently have 38 employees. Of these, 6 are in management and
administration, 3 are in engineering and design, 18 are in production and
manufacturing, 6 are in procurement and inventory management, 5 are in marketing
and sales. We have a number of part and full-time consultants in the areas of
management, engineering drawing maintenance, advertising artwork and Website
maintenance.
REAL PROPERTY
We currently lease approximately 17,030 square feet of warehouse and
production space and an additional 6,016 square feet of office space, for a
total of approximately 23,046 square feet, at 711-731 Washburn Road, Melbourne,
Florida 32934. The current monthly rental amount is $6,189 including Florida
sales tax.
The lease on the property began on May 1, 1997 and continues through
April 1999, with two additional three-year options for renewal at our option. If
we elect to renew our lease after the first two years, the annual rental will be
adjusted by an additional 5% per year, with a four-year lease and an option to
vacate after two years with six months notice.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions with the Company and
ages of the executive officers and directors of the Company. Directors are
elected at our annual meeting of shareholders and serve for one year or until
their successors are elected. Officers are elected by the Board and their terms
of office are, unless governed by employment contract, at the discretion of the
Board.
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EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard K. Hagen....................... 41 Chief Executive Officer, Chief Financial
Officer, President, and Chairman of the Board and Director
Jim Cheal.............................. 53 Vice President and Director
Robert L. Guess........................ 36 Vice President and Secretary
Michael Smith.......................... 47 Vice President
Jeffrey W. Starke..................... 42 Vice President and Director
Denise O'Brien......................... 45 Director
Gary Irving............................ 55 Executive Vice President, Chief Operating Officer and Director
Linda Condon........................... 50 Director of Finance and Treasurer
Frank Aliano........................... 38 Vice President
</TABLE>
Richard K. Hagen has served as our Chief Executive Officer, President
and Chairman of the Board and a Director since November 1, 1997 and our Chief
Financial Officer since September 22, 1998. From March 1994 to November 1997,
Mr. Hagen was the founder and principal of MARKTECH Group, Inc., an
Internet/Extranet consulting company. Between November 1990 and March 1994, Mr.
Hagen was the operating officer and general manager of Syscon Services, an
engineering services and systems integration subsidiary of Harnischfeger
Industries. Mr. Hagen is a 1981 graduate of the U.S. Naval Academy.
Jim Cheal has been employed by us since May 1997 and has served as Vice
President and Director since February 1998. From January 1995 to January 1996,
Mr. Cheal was a director and Vice President of American Motor Works, Inc., a
company which designed and manufactured motorcycles. Mr. Cheal was a
professional photojournalist with Time-Life Publications from 1975 to 1987.
Between 1987 and 1995, Mr.
Cheal operated a photography business which he founded in 1978.
Robert L. Guess has served as our Vice President since November 1,
1997, as our President from May 1997 to November 1, 1997, a member of the Board
of Directors since July 1997 and Secretary since February, 1999. From December
1996 to May 1997, Mr. Guess served as consultant to Messrs. Cheal and Starke
each of whom are Vice Presidents and Directors of the Company, in connection
with the development and implementation of the business plan of the Company from
whom AQC purchased substantially all of its assets. From March 1996 to December
1996, Mr. Guess was the owner of Team Enterprise Miami, Inc., a direct product
marketing company. From July 1995 to March 1996, Mr. Guess was the Southeast
District Manager of marketing of Toast of the Town, Inc. a direct product
marketing company. From March 1980 through September 1994, Mr. Guess served as
an Officer in the United States Navy.
Michael Smith has served as our Vice President since February 22, 1998.
From March 1997 to February 1998, Mr. Smith was a consultant for Carl's Speed
Shop in Daytona Beach, Florida. Between March 1996 and March 1997, Mr. Smith was
a retail sales consultant with Arlen Ness Enterprises, Inc., a producer and
marketer of motorcycle accessories and apparel located in California. From
February 1995 to March 1996, Mr. Smith served as the Customer Relations Manager
for Stone Ridge Motors, an automobile dealership in San Francisco, CA. From
January 1993 to February 1995, Mr. Smith was a sales and leasing consultant with
the Ford Motor Company dealership in Dublin, California.
Jeff Starke has been a Director and Vice President of AQC since
February 1998. Between May 1997 and February 1998, Mr. Starke served as Director
of Engineering, Manufacturing and Design at AQC. From January 1995 to January
1996, Mr. Starke was a Director and Vice President of American Motor Works,
Inc.,
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which designed and manufactured motorcycles. From March 1992 to January 1995,
Mr. Starke was Vice President of Harley Motor Works, Inc., which designed, built
and sold Harley Davidson motorcycles and motorcycle parts.
Denise O'Brien has served as a Director since July 1997. She has been
the trading manager for Wanger Asset Management since 1992, where she is an
investment advisor. Ms. O'Brien is the sister of Mr. Starke.
Gary W. Irving has served as our acting Chief Operating Officer since
January 5, 1998 and became Chief Operating Officer and was appointed to the
board of directors on October 1, 1998. Between March 1997 and December 1997, Mr.
Irving was Vice President and General Manager for Strategic Product Management
at Litton-PRC, a $1 billion subsidiary of Litton Industries an aerospace design
and commercial electronics company where he was responsible for launching and
managing their electronic commerce group. Between May 1994 to February 1997, Mr.
Irving was Executive Vice President and Chief Operating Officer of the MARTECH
Group, Inc., an Internet/Extranet consulting company. From June 1993 to January
1994, Mr. Irving was Vice President and General Manager at Instant Video
Technologies, Inc. From December 1993 to June 1993, Mr. Irving was director for
imaging system sales at I-Net. From October 1989 to October 1992, Mr. Irving was
a Vice President at PRC. Mr. Irving has an M.S. Degree in systems engineering
and has been awarded a patent in computer systems using CD-ROM storage devices.
Mr.Irving has developed computer systems for dealer and factory floor
applications and his former clients include Chrysler, Mack Trucks, John Deere
and Boeing.
Frank L. Aliano has served as our Vice President of Production since
May 1998. From October 1993 until May 1998, he was Vice President of Engineering
and Product Development for Big Dog Motorcycles which he helped build as a
co-founder. From January 1992 to October 1993, he was the owner/operator of A&A
Performance, in Wichita, Kansas, which fabricated custom Harley Davidson
Motorcycles. From October 1980 to December 1991, he was the owner/ operator of
Double Services, Phoenix, Arizona which custom builds and services Harley
Davidson and rebuilds and repairs of trucks and heavy equipment. From 1975 to
1980, he was employed by Cummins Southwest as a journeyman mechanic. From 1972
to 1975 he was employed by R.B. Duncan trucking company as a mechanic. From 1971
to 1972, he was employed by Hartford Harley Davidson as a mechanic, which
included servicing and rebuilding Harley Davidson Motorcycles. A native of
Connecticut, he attended the University of Hartford.
Linda Condon has served as our Director of Finance since October 1997
and Treasurer since February 1999. Between April 1994 and July 1997, Ms. Condon
worked as an accountant for K.L. Smith and Associates, a Salt Lake City, Utah
based accounting firm. Between January 1993 and April 1998, Ms. Condon worked as
an accountant for Armstrong and Company, a Salt Lake City, Utah based accounting
firm.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Act permits the indemnification of directors, employees,
officers and agents of Florida corporations. Our Articles of Incorporation
indemnify our directors and officers to the fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of our Company. Insofar as
indemnification for liability arising under the Securities Act may be permitted
to directors, officers, and controlling persons, we are aware that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is unenforceable.
EXECUTIVE COMPENSATION
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SUMMARY COMPENSATION TABLE
The following table sets forth information relating to the compensation
we paid during the past two fiscal years to: (1) President and Chief Executive
Officer; and (2) each of our executive officers who earned more than $100,000
during the fiscal year ended April 30, 1998 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Grant Date
SUMMARY COMPENSATION TABLE 5% ($) 10%($) Present Value $
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
---------------------------------------------------------------------------------
Awards Payouts
-----------------------------------------
Securities
Other Under-
Annual Restricted Lying All Other
Name and Principal Compen- Stock Options/ LTIP Compen
Position Year Salary Bonus sation Award(s) SARs Payouts -sation
($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Hagen 1996 $-0- $-0- $-0- $-0- -0- $-0- $-0-
Chief Executive Officer
and Chairman of the
Board(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1997 $-0- $-0- $-0- $-0 -0- $-0- $-0-
- ------------------------------------------------------------------------------------------------------------------------------------
1998 $13,462 $-0- $78,577(2) $-0- -0- $-0- $-0-
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Hagen was appointed Chief Financial Officer on September 22, 1998.
(2) Includes (i) $10,500 we provided to Mr. Hagen as a relocation
allowance; and (ii) $68,077 we paid to Mr. Hagen under the terms of a
consulting agreement. Does not include (i) 900,000 shares of common
stock issued to Mr. Hagen in November 1998, and (ii) options to
purchase 50,000 shares of common stock granted to Mr. Hagen in November
1998. See "Principal Shareholders."
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value At
Individual Grants Pssumed Annual Rates Of Stock
Price Appreciation For Option Grant Date
Term Value
- --------------------------------------------------------------------------------------------------------------------------
Percent of
Total
Number Of Options/
Securities SARs Granted
Underlying To Employees Exercise Of Expiration
Name Options/SARs In Fiscal Year Base Price Date
Granted (#) (S/Sh)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard Hagen N/A
President, Chief Executive
Officer and Chairman (1)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- --------------------------------------------------------------------------------------------------------------------------
Number of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
At Fiscal Year-End At Fiscal Year-
Shares Value (#) End ($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard Hagen
President, Chief Executive
Officer and Chairman(1) N/A
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
==========================================================================================================================
</TABLE>
(1) Mr. Hagen was appointed Chief Financial Officer on September 22, 1998.
We do not currently have any Long Term Inventive Plans.
EMPLOYMENT AGREEMENTS
RICHARD K. HAGEN, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL
OFFICER AND CHAIRMAN OF THE BOARD AND DIRECTOR. Pursuant to an employment
agreement between AQC and Mr. Hagen, Mr. Hagen receives an annual base salary of
$200,000. As additional compensation, we have also (i) issued Mr. Hagen 900,000
shares of restricted Common Stock; and (ii) granted Mr. Hagen options to
purchase up to 50,000 shares of Common Stock of the Company, at $1.00 per share
exercisable through February 21, 2003.
JIM CHEAL, VICE PRESIDENT AND DIRECTOR. Pursuant to a verbal employment
agreement between the Company and Mr. Cheal, Mr. Cheal receives an annual base
salary of $75,000. As additional compensation, Mr. Cheal also received options
to purchase 50,000 shares of Common Stock at $1.00 per share exercisable through
December 31, 2003.
ROBERT L. GUESS, VICE PRESIDENT AND SECRETARY.Pursuant to a verbal
agreement between Mr. Guess and AQC, Mr. Guess receives an annual base salary of
$50,000. As additional compensation, Mr. Guess also received 25,000 shares of
Common Stock.
MICHAEL SMITH, VICE PRESIDENT OF SALES AND DIRECTOR. Pursuant to a
verbal employment agreement between AQC and Mr. Smith, Mr. Smith receives an
annual base salary of $80,000 and 10,000 shares of Common Stock.
JEFFREY W. STARKE, VICE PRESIDENT AND DIRECTOR. Pursuant to a verbal
employment agreement between Mr. Starke and AQC, Mr. Starke receives an annual
base salary of $85,000. As additional compensation, Mr. Starke received options
to purchase up to 50,000 shares of Common Stock at $1.00 per exercisable through
December 30, 2003.
GARY W. IRVING, CHIEF OPERATING OFFICER. Pursuant to an employment
agreement between Mr. Irving and AQC, in his capacity as Chief Operating
Officer, Mr. Irving receives an annual base salary of $175,000. Mr. Irving also
received (i) 600,000 shares of common stock; and (ii) options to purchase 50,000
shares of Common Stock exercisable at $1.00 per share through December 30, 2003.
FRANK ALIANO, VICE PRESIDENT OF ENGINEERING AND PRODUCTION. Pursuant to
a verbal agreement between Mr. Aliano and AQC, Mr. Aliano receives an annual
base salary of $90,000. As additional
31
<PAGE>
compensation, Mr. Aliano also received 25,000 shares of Common Stock, with
performance options of 25,000 options each year for the subsequent three years.
LINDA CONDON, DIRECTOR OF FINANCE AND TREASURER. Pursuant to verbal
employment agreement between Ms. Condon and the Company, Ms. Condon receives an
annual base salary of $45,000 and 3,490 shares of Common Stock.
STOCK OPTIONS
1997 AMENDED STOCK OPTION PLAN
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
On June 15, 1997, our Board of Directors and a majority of our
shareholders ("Majority Shareholders") adopted AQC's 1997 Stock Option Plan (the
"Plan"). On February 21, 1998, our Board of Directors and majority shareholders
amended the Plan to increase the number of Plan Options from 500,000 to
3,000,000 shares.
The Plan works to increase the stock interest of employees, consultants
and employee directors in the Company and to align more closely their goals with
our shareholders' interests. The Plan will also help us attract and retain the
services of experienced and highly qualified employees. The Plan allows us to
issue up to 3,000,000 shares of Common Stock to the people who we grant options.
Our Board of Directors or a Committee of our Board of Directors (the
"Committee") administers the Plan. Their responsibility includes the selection
of the persons who will be granted Plan Options, the type of Plan Options to be
granted, the number of shares subject to each Plan Option and the Plan Option
price.
Plan Options may either be options qualifying as incentive stock
options ("Incentive Options") under Section 422 of the Internal Revenue Code of
1986, or options that do not so qualify ("Non-Qualified Options"). In addition,
the Plan also allows for a reload option provision ("Reload Option"). Reload
options permit an eligible person to pay the exercise price of the Plan Option
with shares of Common Stock owned by the eligible person and receive a new Plan
Option to purchase shares equal to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of at least 100% of
the fair market value of the underlying shares on the date of such grant. The
exercise price of any Incentive Option granted to an eligible employee owning
more than 10% of our Common Stock must be at least 110% of such fair market
value on the date of the grant. Our Board of Directors or the Committee
determines the term of each Plan Option and the way in which it may be
exercised. No Plan Option may be exercisable more than 10 years after the date
of its grant. In the case of an Incentive Option granted to an eligible employee
owning more than 10% of our Common Stock, no Plan Option may be exercised more
than five years after the date of the grant. The exercise price of Non-Qualified
Options will be determined by our Board of Directors or the Committee.
All of our officers, directors, key employees and consultants will be
eligible to receive Non-Qualified Options under the Plan. Only officers,
directors and employees who are employed by AQC are eligible to receive
Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution. If we terminate an employee's
employment for any reason (other than his death or disability or termination for
cause), or if an optionee is not an employee of AQC but is a member of our Board
of Directors and his service as a Director is terminated for any reason (other
than death or disability), the Plan Option will lapse on the earlier of the
expiration date or 30 days following the date of termination. If the optionee
dies during the term of his employment, the Plan Option will lapse on the
earlier of the expiration date of the Plan Option or the date one year following
the date of the optionee's death. If the optionee is permanently and
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<PAGE>
totally disabled within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, the Plan Option will lapse on the earlier of the expiration date
of the option or one year following the date of such disability.
The Plan will terminate 10 years from the date of the Plan's adoption.
Any such termination of the Plan will not affect the validity of any Plan
Options previously granted.
As of February 4, 1999, we granted an aggregate of 200,000 Incentive
Options (all of which have vested) and an aggregate of 2,580,000 Non-Qualified
Options. We also granted 1,245,000 outside of the Plan.
PRINCIPAL SHAREHOLDERS
The following table describes certain information regarding certain
individuals who beneficially owned our Common Stock on March 1, 1999. In
general, a person is considered a "beneficial owner" of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose of such security. A person is also considered to be a
beneficial owner of any securities of which the person has the right to acquire
beneficial ownership within (60) days.
The individuals included in the following table are:
(1) people who we know beneficially own or exercise voting or
control over 5% or more of our Common Stock,
(2) by each of our directors, and
(3) by all executive officers and directors as a group.
At March 1, 1999, we had 9,166,235 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
Percent of Beneficial Ownership
No. of Shares --------------------------------
Name and Address or of Common Stock Before After
Identity of Group(1) Beneficially Owned Offering Offering
-------------------- ------------------ -------- --------
<S> <C> <C> <C>
Richard Hagen, Director, Chairman, President,
CFO and CEO(2) 950,000 10.4% 8.8%
Jim Cheal, Vice President and Director(3) 50,000 * *
Robert Guess, Vice President and Secretary 25,000 * *
Michael Smith, Vice President 10,000 * *
Jeffrey W. Starke, Vice President and Director(4) 50,000 * *
Denise O'Brien, Director 655,195 7.2% 6.1%
Gary Irving, Executive Vice President, COO and Director(5) 650,000 7.1% 6.0%
Frank Aliano, Vice President 25,000 * *
Doreen Cheal(6) 605,195 6.6% 5.6%
Linda Condon, Director of Finance
and Treasurer(7) 4,290 * *
Susquehana Holdings Corp(7) 634,000 6.9% 5.9%
Mathers Associates (8) 520,000 5.7% 4.8%
All Executive Officers and Directors 3,021,680 33.0% 28.1%
as a group (9 persons)
* Denotes less than 1% beneficial ownership.
- --------------
</TABLE>
33
<PAGE>
(1) Unless otherwise indicated, the address of each of the persons is
711-731 Washburn Road, Melbourne, FL 32934.
(2) Includes 50,000 shares of Common Stock issuable upon the exercise of
options exercisable at $1.00 until December 20, 2003.
(3) Includes (i) 605,195 shares of Common Stock owned by Doreen Cheal, Mr.
Cheal's wife and (ii) 50,000 shares of Common Stock issuable upon the
exercise of options exercisable at $1.00 per share until December 30,
2003.
(4) Includes 50,000 shares of Common Stock issuable upon the exercise of
options exercisable at $1.00 per share until December 20, 2003. Jeff
Starke is the brother of Denise O'Brien.
(5) Includes 50,000 shares issuable upon the exercise of options
exercisable at $1.00 per share until December 20, 2003.
(6) Jim Cheal is Doreen Cheal's husband.
(7) Address is 213 Mathers Road, Ambler, PA 19002. Mr. Norbert Zeelander is
the sole shareholder of Susquehana Holdings Corp. As such, Mr.
Zeelander is deemed to beneficially own the 634,000 shares held in the
name of Susquehana Holdings Corp. Does not include (i) 38,000 shares of
Common Stock owned by Mr. Zeelander individually; or (ii) 520,000
shares of Common Stock owned by Mathers Associates, a limited
partnership in which Mr. Zeelander is a general partner.
(8) Address is 213 Mathers Road, Ambler, PA 19002. Mr. Norbert Zeelander is
the general partner of Mathers Associates. As such, Mr. Zeelander is
deemed to beneficially own the 520,000 shares held in the name of
Mathers Associates. Does not include (i) 38,000 shares of Common Stock
owned by Mr. Zeelander individually; or (ii) 634,000 shares of Common
Stock owned by Susquehana Holdings Corp., a corporation in which Mr.
Zeelander is sole shareholder.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 9, 1997, pursuant to the terms of a purchase agreement (the
"Initial Agreement") AQC issued 1,207,142 shares of Common Stock to Doreen Cheal
and 1,207,142 shares of Common Stock to Denise O'Brien in exchange for a
prototype motorcycle and certain equipment required to manufacture and market
the prototype motorcycle. The prototype motorcycle and related equipment was
valued at $116,608. On April 9, 1998, Ms. Cheal and Ms. O'Brien returned an
aggregate of 503,894 shares of Common Stock to us because they were overvalued.
On June 5, 1998, certain members of management returned an aggregate of
700,000 shares of Common Stock to us for the purpose of improving the
capitalization of the Company.
In November 1998, Mr. Richard Hagen, Chairman, CEO, President, CFO and
Director of the Company, and Mr. Gary Irving, Executive Vice President, COO and
Director of the Company, were issued 900,000 and 600,000 shares of the Company's
common stock, respectively.
34
<PAGE>
CONCURRENT OFFERING
Concurrent with this offering, we are registering pursuant to an
Alternate Prospectus, for the account of the Selling Security Holders, an
additional 928,000 shares of Common Stock including 250,000 shares of Common
Stock issuable upon the exercise of Options. These securities are not being
underwritten in this Offering and we will not receive any proceeds from the sale
of such shares.
We will pay the expenses of the Concurrent Offering, other than fees
and expenses of counsel to the Selling Security Holders and the selling
commissions. The resale of the securities of the Selling Security Holders is
subject to prospectus delivery and other sales at any time may have an adverse
effect on the market prices of the securities or the potential of such sales at
any time may have an adverse effect on the market prices of the securities
offered hereby.
DESCRIPTION OF SECURITIES
We are authorized to issue 50,000,000 shares of Common Stock, par value
$.001 per Share, and 2,500,000 shares of Preferred Stock, $.001 per Share. As of
March 1, 1998 there were 9,166,235 shares of Common Stock issued and outstanding
and no shares of Preferred Stock issued or outstanding.
COMMON STOCK
The holders of our Common Stock are entitled to dividends, if any are
declared, and are entitled to a pro rata portion of our assets if we liquidate
or dissolve our business, if our assets are not first distributed to our
creditors or preferred stock holders.
Each share of Common Stock entitles the holders thereof, to one vote.
Holders of Common Stock do not have cumulative voting rights which means that
the holders of more than 50% of shares voting for the election of Directors can
elect all of the Directors if they choose to do so, and in such event, the
holders of the remaining shares will not be able to elect any Directors. Our
ByLaws require that only a majority of the issued and outstanding shares of our
Common Stock is required to transact business at a shareholders' meeting. The
Common Stock has no preemptive, subscription or conversion rights nor may we
redeem it.
PREFERRED STOCK
The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by our Board of Directors,
without further action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights, and sinking
fund provisions. The issuance of any such Preferred Stock could adversely affect
the rights of the holders of our Common Stock and, therefore, reduce the value
of the Common Stock. The ability of the Board of Directors to issue Preferred
Stock could discourage, delay, or prevent a takeover of the Company.
CERTAIN FLORIDA LEGISLATION
Florida law includes certain provisions which prevent third parties
from taking over Florida corporations. The Florida Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will not
possess any voting rights unless such voting rights are approved by a majority
of a corporation's disinterested shareholders. The Florida Affiliated
Transactions Act generally requires super majority approval by disinterested
shareholders of certain specified transactions between a public corporation and
holders of more than 10% of the outstanding voting shares of the corporation (or
their affiliates). Florida law and the Company's Articles and Bylaws also
authorize us to indemnify our directors, officers, employees
35
<PAGE>
and agents. In addition, our Articles and Florida law presently limit the
personal liability of corporate directors for monetary damages, except where the
directors (i) breach their fiduciary duties and (ii) such breach constitutes or
includes certain violations of criminal law, a transaction from which the
directors derived an improper personal benefit, certain unlawful distributions
or certain other reckless, wanton or willful acts or misconduct.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND
BYLAWS
Certain provisions of the articles and bylaws of the Company summarized
in the following paragraphs, and above under the Section entitled "Preferred
Stock", may be deemed to have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt, including attempts that might result
in a premium being paid over the market price for the shares held by
shareholders. The following provisions may not be amended in our Articles or
Bylaws without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of our Common Stock.
The Articles and Bylaws provide that special meetings of shareholders
of the Company may be called only by our Board of Directors, or holders of not
less than 10% of our outstanding voting stock entitled to vote at the Special
Meeting.
Despite the belief of the Company as to the benefits to shareholders of
these provisions of the Company's Articles of Incorporation, these provisions
may also have the effect of discouraging a future takeover attempt which would
not be approved by the Company's Board, but pursuant to which the shareholders
may receive a substantial premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and management more
difficult and may tend to stabilize the Company's stock price, thus limiting
gains which might otherwise be reflected in price increases due to a potential
merger or acquisition. The Board of Directors, however, has concluded that the
potential benefits of these provisions outweigh the possible disadvantages.
Pursuant to applicable regulations, at any annual or special meeting of its
shareholders, the Company may adopt additional Articles of Incorporation
provisions regarding the acquisition of its equity securities that would be
permitted to a Florida corporation.
TRANSFER AGENT
Our transfer agent for our Common Stock is Florida Atlantic Stock
Transfer, Inc., 5701 N. Pine Island Road, Tamarac, Florida 33321.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the completion of this Offering, the Company will
have 10,766,235 shares of Common Stock outstanding (the "Outstanding Shares")
not including up to 4,025,000 shares of Common Stock that may be issued upon the
exercise of options. Of the Outstanding Shares (i) 3,709,121 (including 678,000
shares of Common Stock being registered in the Alternate Prospectus) will be
freely tradable without restriction under the Securities Act of 1933, as amended
(the "Act"); (ii) 270,900 are "restricted securities" but were eligible for
resale pursuant to Rule 144 promulgated under the Act beginning in May 1998;
(iii) 2,798,500 are "restricted securities" but will be eligible for resale
pursuant to Rule 144 between October 1999 and January 2000; and (iv) 3,024,680
held by officers and directors of the Company are subject to lock-up agreements
with the Underwriter restricting the transfer of such shares for a period of two
years from the closing date of this Offering (the "Lock-Up Shares"). After the
expiration of the lock-up agreements all Lock-Up Shares will be eligible for
sale under Rule 144.
36
<PAGE>
Under Rule 144, a person (or persons whose shares are aggregated) who
has beneficially owned restricted securities for at least one year, including
the holding period of any prior owner except an affiliate, would be generally
entitled to sell within any three month period a number of shares that does not
exceed the greater of (i) 1% of the number of then outstanding shares of the
Common Stock or (ii) the average weekly trading volume of the Common Stock in
the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned shares for at least two years
(including any period of ownership of preceding nonaffiliated holders), would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner-of-sale provisions, public information requirements or
notice requirements.
The availability for sale of substantial amounts of Common Stock
subsequent to this offering could adversely affect the prevailing market price
of the Common Stock and could impair the Company's ability to raise additional
capital through the sale of its equity securities. Prospective investors should
be aware that the possibility of such sales may, in the future, have a
depressive effect on the price of the Company's Common Stock in any market which
may develop and, therefore, the ability of any investor to market his shares may
be dependent directly upon the number of shares that are offered and sold.
Affiliates of the Company may sell their shares during a favorable movement in
the market price of the Company's Common Stock which may have a depressive
effect on its price per share. See "Description of Securities", "Principal
Shareholders," "Concurrent Offering," and "Risk Factors."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
Barron Chase Securities, Inc. (the "Underwriter") has agreed to purchase from
the Company an aggregate of 1,600,000 Shares (the "Securities"). The Securities
are offered by the Underwriter subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to approval of certain legal
matters by counsel and certain other conditions. The Underwriter is committed to
purchase all Securities offered by this Prospectus, if any are purchased (other
than those covered by the Over-Allotment Option described below).
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Securities to the public at the offering price set forth
on the cover page of this Prospectus. The Underwriter has advised the Company
that the Underwriter proposes to offer the Securities through members of the
National Association of Securities Dealers, Inc. ("NASD"), and may allow
concessions, in its discretion, to certain selected dealers who are members of
the NASD and who agree to sell the Securities in conformity with the NASD's
Conduct Rules. Such concessions will not exceed the amount of the underwriting
discount that the Underwriter is to receive.
The Company has granted to the Underwriter an Over-Allotment Option,
exercisable for 45 days from the Effective Date, to purchase up to an additional
_________ Shares at the public offering price less the Underwriting Discount set
forth on the cover page of this Prospectus. The Underwriter may exercise this
option solely to cover overallotments in the sale of the Securities being
offered by this Prospectus.
Officers and directors of the Company may introduce the Underwriter to
persons to consider this Offering and to purchase Securities either through the
Underwriter or through participating dealers. In this connection, no Securities
have been reserved for those purchases and officers and directors will not
receive any commissions or any other compensation.
37
<PAGE>
The Company has agreed to pay to the Underwriter a commission of ten
percent (10%) of the gross proceeds of this Offering (the "Underwriting
Discount"), including the gross proceeds from the sale of the Over-Allotment
Option, if exercised. In addition, the Company has agreed to pay to the
Underwriter a non-accountable expense allowance of three percent (3%) of the
gross proceeds of this Offering, including proceeds from any Securities
purchased pursuant to the Over-Allotment Option. The Underwriter's expenses in
excess of the non-accountable expense allowance will be paid by the Underwriter.
To the extent that the expenses of the Underwriter are less than the amount of
the non-accountable expense allowance received, such excess shall be deemed to
be additional compensation to the Underwriter. The Underwriter has informed the
Company that it does not expect sales to discretionary accounts to exceed five
percent (5%) of the total number of Securities offered by the Company hereby.
The Company has agreed to engage the Underwriter as a financial advisor
at a fee of $108,000, which is payable to the Underwriter on the Closing Date.
Pursuant to the terms of a financial advisory agreement, the Underwriter has
agreed to provide, at the Company's request, advice to the Company concerning
potential merger and acquisition and financing proposals, whether by public
financing or otherwise. The Company has also agreed that if the Company
participates in any transaction which the Underwriter has introduced to the
Company during a period of five years after the Closing (including mergers,
acquisitions, joint ventures and any other business transaction for the Company
introduced by the Underwriter), and which is consummated after the Closing
(including an acquisition of assets or stock for which it pays, in whole or in
part, with shares or other securities of the Company), or if the Company retains
the services of the Underwriter in connection with any such transaction (an
"Introduced Consummated Transaction"), then the Company will pay for the
Underwriter's services an amount equal to 5% of up to one million dollars of
value paid or received in the transaction, 4% of the next million of such value,
3% of the next million of such value, 2% of the next million of such value, and
1% of the next million dollars of such value and of all such value above
$4,000,000.
At the Closing, the Company will issue to the Underwriter and/or
persons related to the Underwriter, for nominal consideration, Common Stock
Underwriter Warrants to purchase up to 160,000 shares of Common Stock (the
"Underlying Shares"). The Common Stock Underwriter Warrants are sometimes
referred to in the Warrants." The Common Stock Underwriter Warrants will be
exercisable for a five-year period commencing on the Effective Date. The initial
exercise price of each Common Stock Underwriter Warrant shall be $______ per
Underlying Share (____% of the public offering price). The Underwriter Warrants
will be restricted from sale, transfer, assignment or hypothecation for a period
of twelve months from the Effective Date by the holder, except (i) to officers
of the Underwriter and members of the selling group and officers and partners
thereof; (ii) by will; or (iii) by operation of law.
The Common Stock Underwriter Warrants contain provisions providing for
appropriate adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Underwriter Warrants contain net issuance provisions permitting
the holders thereof to elect to exercise the Underwriter Warrants in whole or in
part and instruct the Company to withhold from the securities issuable upon
exercise, a number of securities, valued at the current fair market value on the
date of exercise, to pay the exercise price. Such net exercise provision has the
effect of requiring the Company to issue shares of Common Stock without a
corresponding increase in capital. A net exercise of the Underwriter Warrants
will have the same dilutive effect on the interests of the Company's
shareholders as will a cash exercise. The Underwriter Warrants do not entitle
the holders thereof to any rights as a shareholder of the Company until such
Underwriter Warrants are exercised and shares of Common Stock are purchased
thereunder.
The Underwriter Warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that if it shall cause a post-effective
amendment, a new registration statement, or similar offering document to be
filed with the Commission, the holders shall have the right, for seven (7) years
from the Effective Date, to include in such registration statement or offering
statement the Underwriter Warrants and/or the securities issuable upon their
38
<PAGE>
exercise at no expense to the holders. Additionally, the Company has agreed
that, upon request by the holders of 50% or more of the Underwriter Warrants
during the period commencing one year from the Effective Date and expiring four
years thereafter, the Company will, under certain circumstances, register the
Underwriter Warrants and/or any of the securities issuable upon their exercise.
In order to facilitate the offering of the Common Stock, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Shares. Specifically, the Underwriter may sell or allot,
more Shares than the ______ Shares the Company has agreed to sell to the
Underwriter. This over-allotment would create a short position in the Shares for
the account of the Underwriter. To cover any over-allotments or to stabilize the
price of the Shares, the Underwriter may bid for, and purchase, Shares in the
open market. Finally, the Underwriter may reclaim selling concessions allowed to
dealers for distributing the Shares in the Offering, if the Underwriter
repurchases previously distributed Shares in transactions to cover short
positions, in stabilization transactions or otherwise. The Underwriter has
reserved the right to reclaim selling concessions in order to encourage dealers
to distribute the Shares for investment, rather than for short-term profit
taking. Increasing the proportion of the Offering held for investment may reduce
the supply of Shares available for short-term trading. Any of these activities
may stabilize or maintain the market price of the Shares above independent
market levels. The Underwriter is not required to engage in these activities,
and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriter against any costs
or liabilities incurred by the Underwriter by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement filed by the Company (together with all amendments and
exhibits thereto, the "Registration Statement") and this Prospectus. The
Underwriter has in turn agreed to indemnify the Company against any costs or
liabilities by reason of misstatements or omissions to state material facts in
connection with the statements made in the Registration Statement and this
Prospectus, based on information relating to the Underwriter and furnished in
writing by the Underwriter. To the extent that these provisions may purport to
provide exculpation from possible liabilities arising under the federal
securities laws, in the opinion of the Commission, such indemnification is
contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., Fort
Lauderdale, Florida. Certain members of the firm of Atlas, Pearlman, Trop &
Borkson own 21,000 shares of Common Stock. Certain matters will be passed upon
for the Underwriter by David A. Carter, P.A., 2300 Glades Road, Suite 210, West
Tower, Boca Raton, Florida.
EXPERTS
The financial statements of the Company appearing in this Prospectus
have been audited by Pricher and Company, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders annual reports,
which will include financial statements audited by independent accountants, and
such other periodic reports as it may determine to furnish or
39
<PAGE>
as may be required by law, including Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and to the
exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document which has been filed as an exhibit to
the Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits thereto may be inspected without charge
at the offices of the Commission and copies of all or any part thereof may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the
fees prescribed by the Commission. Electronic reports and other information
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's website (http://www.sec.gov.).
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
Report of Certified Public Accountant...................................... F-2
Balance Sheets as of April 30, 1998 and 1997............................... F-3
Statements of Operations for the Years Ended April 30 1998,
1997 and 1996 and for the Period from March 20, 1986 (Inception)
to April 30, 1998......................................................... F-4
Statements of Stockholders' Equity (Deficit) for the Period
from March 20, 1986 (Inception) to April 30, 1998......................... F-5
Statements of Cash Flows for the Years Ended April 30, 1998
1997 and 1996 and from the Period from March 20, 1986 (Inception)
to April 30, 1998..........................................................F-6
Notes to Financial Statements...............................................F-7
Unaudited Balance Sheet as of October 31, 1998............................. F-15
Unaudited Statements of Operations for the Six Months
Ended October 31, 1998 and 1997........................................... F-17
Unaudited Statements of Cash Flows for the Six Months Ended
October 31, 1998 and 1997................................................. F-18
Notes to the Financial Statements.......................................... F-19
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
American Quantum Cycles, Inc.
We have audited the accompanying balance sheet of American Quantum
Cycles, Inc. as of April 30, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the years ended April 30,
1998, 1997 and 1996, and for the period from March 20, 1986 (inception) to April
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Quantum
Cycles, Inc. as of April 30, 1998 and 1997 and the results of its operations and
its cash flows for the years ended April 30, 1998, 1997 and 1996, and for the
period from March 20, 1986 (inception) to April 30, 1998 in conformity with
generally accepted accounting principles.
Pricher and Company
Orlando, Florida
September 21, 1998
F-2
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
BALANCE SHEET
April 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,768 $ 244,985
Accounts receivable 35,602
Prepaid expenses 39,308 4,165
Inventories 763,158
--------------------- ---------------------
Total current assets 886,836 249,150
--------------------- ---------------------
Property and equipment 649,499
Less accumulated depreciation 62,486
--------------------- ---------------------
587,013
--------------------- ---------------------
Other assets:
Deposits 40,700
Licenses and intellectual rights, less accumulated
amortization of $12,565 349,667
--------------------- ---------------------
390,367
--------------------- ---------------------
$ 1,864,216 $ 249,150
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
Current liabilities:
Accounts payable $ 370,658 $
Accrued liabilities 317,103 767
Current maturities of long-term debt 20,183
Current capital lease obligations 24,006
Notes payable 2,317,500 221,770
--------------------- ---------------------
Total current liabilities 3,049,450 222,537
--------------------- ---------------------
Capital lease obligations, less current maturities 75,598
Long-term debt, less current maturities 42,378
--------------------- ---------------------
117,976
--------------------- ---------------------
Stockholders' equity (deficit):
Common stock, par value $.001 per share; authorized
50,000,000 shares, issued and outstanding
2,471,045 and 900,000 shares 2,471 900
Preferred stock, par value $.001 per share; authorized
2,500,000 shares, no shares issued and outstanding
Additional paid-in capital 1,328,664 28,347
Deficit accumulated during the development stage (2,634,345) (2,634)
--------------------- ---------------------
Total stockholders' equity (deficit) (1,303,210) 26,613
--------------------- ---------------------
$ 1,864,216 $ 249,150
===================== =====================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
Years Ended April 30, 1998, 1997 and 1996
and the Period from March 20, 1986 (inception) to April 30, 1998
<TABLE>
<CAPTION>
March 20, 1986
(inception)
1998 1997 1996 to April 30, 1998
---------------- ---------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Sales $ 192,856 $ $ $ 192,856
---------------- ---------------- ------------------ --------------------
Cost and expenses:
Cost of goods sold 173,424 173,424
General and administrative 2,453,062 1,542 2,454,604
---------------- ---------------- ------------------ --------------------
2,626,486 1,542 2,628,028
---------------- ---------------- ------------------ --------------------
Loss from operations (2,433,630) (1,542) (2,435,172)
---------------- ---------------- ------------------ --------------------
Other income (expense):
Loss on disposition of property and
equipment (13,956) (13,956)
Interest and other income 3,107 3,107
Interest expense (187,232) (1,092) (188,324)
---------------- ---------------- ------------------ --------------------
(198,081) (1,092) (199,173)
---------------- ---------------- ------------------ --------------------
Net loss $ 2,631,711 $ (2,634) $ $ (2,634,345)
================ ================ ================== ====================
Loss per common share:
Weighted average shares
outstanding 2,007,844 591,716 500,000
================ ================ ==================
Net loss $ (1.311) $ (0.004) $ 0.00 $ (1.315)
================ ================ ================== ====================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from March 20, 1986 (inception) to April 30, 1998
<TABLE>
<CAPTION>
Common Stock Deficit
--------------------------- Accumulated
Additional During the Total
Number of Par Paid-In Development Stockholders'
Shares Value Capital Stage Equity (Deficit)
----------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock,
March 20, 1986 500 $ 500 $ $ $ 500
Net income (loss) from inception to
April 30, 1996
----------- ------------ ------------ ------------- -------------
Balance, April 30, 1996 500 500 500
1,000 for 1 stock split 499,500
Stock issued for consulting services 275,000 275 275
Stock issued to bridge loan participants 125,000 125 28,347 28,472
Net loss for the year ended
April 30, 1997 (2,634) (2,634)
----------- ------------ ------------ ------------- -------------
Balance, April 30, 1997 900,000 900 28,347 (2,634) 26,613
Common stock issued in exchange
for equipment and services 1,261,075 1,261 93,748 95,009
Private placement of common stock
for cash, net of issuance costs 245,744 246 949,728 949,974
Employee stock bonuses recorded
as compensation expense 51,300 51 205,150 205,201
Common stock issued to a dealership
for promotional expense 10,000 10 39,990 40,000
Stock issued to lenders for interest
on bridge loans 2,926 3 11,701 11,704
Net loss for the year ended
April 30, 1998 (2,631,711) (2,631,711)
----------- ------------ ------------ ------------- -------------
Balance, April 30, 1998 2,471,045 $ 2,471 $ 1,328,664 $(2,634,345) $ (1,303,210)
=========== ============ ============ ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
Years Ended April 30, 1998, 1997 and 1996
and the Period from March 20, 1986 (inception) to April 30, 1998
<TABLE>
<CAPTION>
March 20, 1986
(inception)
1998 1997 1996 to April 30, 1998
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Reconciliation of net loss to net cash used in
operating activities:
Net loss $ (2,631,711) $ (2,634) $ $ (2,634,345)
Items not requiring (providing) cash:
Loss on disposition of equipment 13,956 13,956
Depreciation and amortization 75,051 1,092 76,143
Issuance of common stock for services
and interest 304,409 275 304,684
Changes in assets and liabilities:
Receivables (35,602) 500 (35,102)
Inventories (763,158) (763,158)
Prepaid expenses (35,143) (35,143)
Other assets (40,700) (40,700)
Accounts payable 370,658 370,658
Accrued liabilities 316,336 767 317,103
--------------- ---------------- --------------- ----------------
Net cash used in operating activities (2,425,904) (2,425,904)
--------------- ---------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (615,950) (615,950)
Investment in licenses and intellectual rights (362,232) (362,232)
--------------- ---------------- --------------- ----------------
Net cash used in investing activities (978,182) (978,182)
--------------- ---------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 2,317,500 244,985 2,562,485
Repayment of notes payable (221,770) (221,770)
Long-term borrowing 175,159 175,159
Repayment of long-term debt (12,994) (12,994)
Proceeds from issuance of common stock 949,974 949,974
--------------- ---------------- --------------- ----------------
Net cash provided by financing activities 3,207,869 244,985 3,452,854
--------------- ---------------- --------------- ----------------
Net increase (decrease) in cash (196,217) 244,985 48,768
Cash, beginning of year 244,985
--------------- ---------------- --------------- ----------------
Cash, end of year $ 48,768 $ 244,985 $ $ 48,768
=============== ================ =============== ================
Supplemental cash flow information:
Amounts paid for:
Interest $ 5,332 $ $ $ 5,332
=============== ================ =============== ================
Income taxes $ $ $ $
=============== ================ =============== ================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business and organization - American Quantum Cycles, Inc., a
Florida corporation, ("The Company") designs, produces, markets, distributes and
sells American-made, high performance V-twin engine cruiser and touring style
motorcycles. These motorcycle products include stock models and motorcycles
built to customer specified configurations. The Company was originally
incorporated on March 20, 1986 as "Norbern, Inc." and was inactive until March
1997 when it began developing and implementing its business and financing plans.
On May 8, 1997 the Company changed its name to American Quantum Cycles, Inc. and
its fiscal year end to April 30.
Basis of presentation - As of April 30, 1998, the Company is still
considered to be in the development stage as substantially all of its efforts to
date have been devoted to raising capital, developing technological resources,
entering into employment agreements with key executives, leasing facilities and
securing licensing and dealership agreements. Sales during 1998 were minimal
compared to planned operations. The accompanying financial statements for years
prior to 1998 are presented on an April 30 fiscal year end which does not
require restatement since the Company had no operations prior to March 1997.
Cash and cash equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories - Inventories are carried at the lower of cost or market,
with cost principally determined under the average cost method.
Property and equipment - Property and equipment are carried at cost.
Depreciation is recorded principally on the straight-line method at rates based
on the estimated useful lives of the assets which range from three to seven
years. The book value of obsolete assets is charged to depreciation expense when
they are scrapped. Profits or losses from the sale of assets are included in
other income. Repairs and maintenance are charged to expense as incurred.
Intangible Assets - Intangible assets consist of licenses and
intellectual rights and are amortized on the straight-line method over fifteen
years.
Income taxes - Deferred taxes are recognized for temporary differences
between the basis of assets and liabilities for financial statements and income
tax purposes. The differences relate primarily to depreciable assets (using
accelerated depreciation methods for income tax purposes), the allowance for
doubtful accounts (deductible for financial statement purposes but not for
income tax purposes), stock-based compensation, and net operating loss
carryforwards.
Concentration of credit risk - The Company occasionally maintains
deposits in excess of federally insured limits. Statement of Financial
Accounting Standards No. 105 identifies these items as a concentration of credit
risk requiring disclosure, regardless of the degree of risk. The risk is managed
by maintaining all deposits in high quality financial institutions.
F-7
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
2 INVENTORIES
Inventories at April 30, 1998 are comprised as follows:
Finished goods $ 13,787
Work in process 66,796
Purchased raw materials 682,575
-----------
$ 763,158
===========
There were no inventories as of April 30, 1997.
3 PROPERTY AND EQUIPMENT
Property and equipment includes the following:
Leasehold improvements $ 52,750
Manufacturing tools and equipment 142,805
Office furniture, equipment and software 308,025
Vehicles 145,919
----------
$ 649,499
==========
Depreciation expense for the year ended April 30, 1998 amounted to $
62,486. As of April 30, 1997, the Company had not yet acquired any property and
equipment, accordingly, there was no depreciation expense for years prior to
1998.
F-8
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
4 LICENSES AND INTELLECTUAL PROPERTY
Licenses and intellectual property are comprised of the following:
Proprietary technology license $ 235,000
Intellectual property rights 127,232
-----------
362,232
Less accumulated amortization (12,565)
-----------
$ 349,667
===========
In August 1997, the Company entered into a license agreement (the
"Agreement") with Feuling Advanced Technologies, Inc. whereby the Company
obtained a license to use certain proprietary technologies including, among
other things, patents, trade secrets, techniques, tooling designs, product
designs, and trademarks. Pursuant to the terms of the Agreement, as long as the
Company complies with certain other provisions including non-disclosure of the
proprietary technology, the Company has an exclusive license, for motorcycle
applications, in perpetuity for the 4-Valve technology. This technology will be
used in connection with the Company motorcycles and bolt-on kits for the Harley
Davidson motorcycles which feature the evolution engine, evolution big twin,
other Harley Davidson clones and aftermarket parts.
5 NOTES PAYABLE
Notes payable at April 30, 1998 consist of:
10% Subordinated Bridge Loans - The Company issued eight unsecured promissory
notes dated March 30, 1998 to individuals providing bridge loan financing. The
aggregate principal balance of the notes at April 30, 1998 is $650,000 with
interest payable at 10% at maturity on September 30, 1998. The terms of the loan
agreements provide for the Company to issue a total of 130,000 shares of common
stock to the note holders at maturity in order to obtain a favorable interest
rate and repayment terms. Additional interest expense (equal to the fair value
of the common stock to be issued minus the conversion price) will be recognized
over the term of the loans.
Convertible Debentures - The Company has issued two separate series of
convertible notes to investors:
Beginning in October 1997, the Company issued thirty-four 8%
Subordinated Notes, for an aggregate of $1,524,500. The notes mature one year
from date of issue, convertible at $2.00 per share. Interest is convertible at
the same rate as the principal, at the discretion of the note holder. Additional
interest expense of $381,125 (equal to the fair value of the common stock
assumed to be issued minus the conversion price) will be recognized over the
term of the loans. During the year ended April 30, 1998, $125,168 of such
additional interest expense was accrued.
F-9
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
Beginning in April 1998, the Company issued three 7% Subordinated
Notes, for an aggregate of $143,000. The notes mature one year from the date of
issue, convertible at $8.00 per share. Interest is payable in cash or
convertible at the same rate as the principal, at the discretion of the Company.
A warrant is attached at 10% above the final price of a proposed secondary
offering.
Notes payable at April 30, 1997 consisted of seven unsecured promissory
notes dated April 16, 1997 with principal aggregating $250,000. Interest at 8%
and principal were paid at maturity in September, 1997.
6 LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C>
Long-term debt at April 30, 1998 is as follows:
Installment loan, monthly payments of $618 including interest
at 8.75%, matures September, 2002, secured by a vehicle $ 27,074
Three installment notes payable to individuals for the purchase of intellectual
property rights, monthly payments aggregating $1,389 including interest at 8% to
10%, matures January, 2001
and 2002, secured by property rights 35,487
---------
62,561
Less current maturities 20,183
---------
Total long-term debt $ 42,378
=========
</TABLE>
The aggregate maturities of total long-term debt during the next five years are
$20,182 in 1999, $19,461 in 2000, $13,073 in 2001, $6,822 in 2002 and $3,023 in
2003.
7 LEASES
Capital leases - The Company leases various manufacturing, production,
telephone and computer equipment under capital lease agreements with terms of
three to five years through February, 2002. The economic substance of the leases
is that the Company is financing the acquisition of the assets, and accordingly,
they are capitalized as property and equipment. The leases contain bargain
purchase options at the end of the lease terms.
F-10
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
The following is an analysis of the leased assets included in property and
equipment as of April 30, 1998:
Telephone equipment $ 16,452
Computer equipment 49,142
Machinery and production equipment 41,479
-------------
107,073
Less accumulated amortization (7,489)
-------------
$ 99,584
=============
The following is a schedule by years of future minimum payments
required under the leases together with their present value as of April 30,
1998:
<TABLE>
<CAPTION>
Year ending
April 30, Amount
------------------ ------------------
<S> <C> <C>
1999 $ 35,308
2000 35,308
2001 32,378
2002 21,276
2003 4,030
------------------
Total minimum lease payments 128,300
Less amount representing interest (28,697)
------------------
Present value of minimum lease payments $ 99,604
==================
</TABLE>
Operating leases - The Company leases its facilities and other real
property under noncancelable operating leases with terms of one to four years
expiring in February, 2002. The Company is also responsible for real estate
taxes on the leased facilities. Rent expense under these leases was $ 83,155 for
the year ended April 30, 1998. The following is a schedule of future minimum
lease payments required under operating leases:
Year ending
April 30, Amount
------------------ ---------------
1999 $ 133,956
2000 $ 69,756
2001 $ 69,756
2002 $ 58,130
F-11
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
8 CONTINGENCIES
Results of operations in the future will be influenced by numerous
factors including technological developments, competition, regulation, increases
in expenses associated with sales growth, market acceptance of the products of
the Company, the capacity of the company to expand and maintain the quality of
its motorcycles and related services, continued development of the dealer
organization, favorable sourcing of supplies, recruitment of highly skilled
employees and integration of such persons into a cohesive organization, and the
ability of the Company to raise funds and control costs
9 SECURITY TRANSACTIONS
Following is a summary of security transactions during the year ended
April 30, 1998:
On May 21, 1997 the Company issued 1,261,075 shares of common stock
valued at $95,009 for management services, equipment and other assets (See
Subsequent Events - Note 14).
In September, 1997 the Company issued 245,744 shares of common stock in
a private placement. The net proceeds of the offering of $949,974 were used to
repay debt of $250,000 (see note 5) and to provide working capital.
On October 24, 1997 and December 31, 1997, 50,000 and 1,300 shares,
respectively, of common stock valued at $205,201 were issued to key employees as
performance bonuses (See Subsequent Events - Note 14).
On December 15, 1997, 10,000 shares of common stock valued at $40,000
were issued to a dealership and recorded as promotional expense and 2,926 shares
valued at $11,794 were issued to bridge lenders and recorded as interest
expense.
10 PREFERRED STOCK
As of April 30, 1998, the Company was authorized to issue up to
2,500,000 shares of $.001 par value Preferred Stock. Preferred Stock is
designated as the "Series A 7% Convertible Preferred Stock" and has a stated
value of $6.00 per share. Dividends of 7% of the stated value accrue and are
payable semi-annually. Each share of Preferred Stock is convertible into one
share of common stock at the option of the shareholder. No preferred shares have
been issued.
F-12
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
11 INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting For Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires that
the Company use the liability method which attempts to recognize the future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities.
At April 30, 1998, the Company has net operating loss carryforwards
totaling approximately $2,600,000 that may be offset against future taxable
income through 2012. No tax benefit has been reported in the 1998 financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused. Accordingly, a $1,040,000 tax benefit
of the loss carryforward has been offset by a valuation allowance of the same
amount. The expected tax benefit that would result from applying federal
statutory tax rates to the pretax loss differs from amounts reported in the
financial statements primarily because of the increase in the valuation
allowance.
The company paid no income taxes since its inception.
12 LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period. All
share and per share data, except shares authorized, have been retroactively
adjusted to reflect a 1,000 for 1 stock split effective March 25, 1997.
13 STOCK OPTIONS
On May 9, 1997 (and as amended June 3, 1997) the Company entered into a
consulting agreement with Greenstone Financial Corp. ("GFC") to assist the
Company with corporate development and strategic business planning. Under terms
of the agreement, the Company granted GFC an option to purchase up to 250,000
shares of Company common stock based upon the successful completion of a private
placement of Company common stock (see note 9), with each option exercisable at
$4.00 per share. Also under the terms of the agreement, as amended, the Company
granted GFC a five year option to purchase 300,000 shares of Company common
stock, exercisable when and if there is a successful completion of a secondary
offering of the Company's common stock, at an exercise price of $0.10 per share.
F-13
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
Notes to Financial Statements
On June 15, 1998, the Company adopted the "1997 Stock Option Plan" (the
"Plan"). Under the Plan, 3,000,000 shares of common stock are reserved for
issuance upon exercise of options granted to management, key employees and
consultants. The plan provides for the granting of either "incentive stock
options" or "non-qualified stock options", as defined under the Internal Revenue
Code. Options may be granted at prices not less than 100 percent of the fair
market value at the date of grant and may be exercisable with a term not
exceeding ten years. As of April 30, 1998, the Company has granted common stock
options to plan participants as follows:
Exercise Price Number of Options
-------------- -----------------
$ 5.00 405,000
$ 6.00 315,000
$ 7.00 500,000
$ 8.00 685,000
----------
Total options granted 1,905,000
==========
No options have been exercised as of April 30, 1998 (See Subsequent Events -
Note 14)
14 SUBSEQUENT EVENTS
On August 11, 1998 the Company retroactively reduced an employee stock
bonus awarded to two individuals on October 24, 1997, from 100,000 shares to
50,000 shares. The reduced number of shares have been recorded as compensation
expense of $200,000 for the year ended April 30, 1998 based on a value of $4.00
per share (See Note 9).
Also, on August 11, 1998 the Company retroactively reduced the number
of common shares issued in an exchange for certain property and equipment on May
21, 1997, from 1,911,075 shares to 1,261,075 shares. The exchange has been
recorded as a capital expenditure during the year ended April 30, 1998 based on
the fair market value of the equipment (See Note 9).
As of September 21, 1998, the board of directors is considering
rescinding all of the common stock options previously granted under the 1997
Stock Option Plan, however, no formal action has been approved (See Note 13).
F-14
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
October 31, 1998 April 30, 1998
(Unaudited)
---------------- --------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 20,408 $ 8,768
Accounts receivable - trade (Note 8) 5,090,919 35,602
Inventory - raw materials (at FIFO) 138,646 682,575
Inventory - work in process 779,563 66,796
Inventory - finished goods 0 13,787
Prepaid expenses and other current assets 41,875 39,308
------------------ ---------------
Total current assets 6,071,411 886,836
Property and equipment, net 1,062,855 587,013
Patents and licenses, net (Note 4) 341,833 349,667
Other assets 41,767 40,700
------------------ ----------------
Total Assets $ 7,517,866 $ 1,864,216
================== ================
(See accompanying notes to condensed financial statements)
F-15
<PAGE>
October 31, 1998 April 30, 1998
(Unaudited)
---------------- --------------
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Liabilities
Current liabilities
Accounts payable - trade $ 1,459,724 $ 370,658
Accrued compensation 32,141 21,921
Notes payable - bridge loan (Note 6) 700,000 650,000
Convertible debentures - 8% (Note 7) 1,579,500 1,524,500
Convertible debentures - 7% (Note 7) 699,500 143,000
Deferred income (Note 8) 4,728,308 0
Other accrued expenses and current liabilities 981,762 295,182
------------------ ----------------
Total current liabilities 10,180,935 3,005,261
Long term liabilities
Capitalized leases (Note 5) 76,825 99,604
Notes payable - bank 24,956 27,074
Notes payable - other 29,982 35,487
------------------ ----------------
Total long term liabilities 131,763 162,165
------------------ ----------------
Total Liabilities 10,312,698 3,167,426
------------------ ----------------
Shareholders' Equity
Preferred stock - $.001 par value; 2,500,000
shares authorized; no shares issued 0 0
Common stock - $.001 par value; 50,000,000
shares authorized; 4,361,345 shares and
2,471,045 shares issued and outstanding 4,361 2,471
Capital in excess of par value 2,550,273 1,328,664
Retained earnings (deficit) (5,349,466) (2,634,345)
------------------ ----------------
Total shareholders' equity (deficit) (2,794,832) (1,303,210)
------------------ ----------------
Total Liabilities & Shareholders' Equity $ 7,517,866 $ 1,864,216
================== ================
</TABLE>
(See accompanying notes to condensed financial statements)
F-16
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended Six months ended Six months ended
October 31, 1998 October 31, 1997 October 31, 1998 October 31, 1997
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales of tangible goods $ 305,999 $ 23,355 $ 474,023 $ 23,355
Cost of goods sold 369,123 37,422 644,316 37,422
--------------- -------------- ------------ ------------
Gross profit (deficit) (63,124) (14,067) (170,293) (14,067)
Selling, general and administrative expenses 745,691 311,810 1,977,436 523,972
--------------- -------------- ------------ ------------
Operating profit (deficit) (808,815) (325,877) (2,147,729 (538,039)
Other income (expense):
Interest expense (61,374) (26,246) (569,083) (26,246)
Loss on disposition of asset 0 (7,566) 0 (7,566)
Other income (Note 9) 197 317 1,691 321
--------------- -------------- ------------ ------------
Net Operating Loss $ (869,992) $ (359,372) $ (2,715,121) (571,530)
=============== ============== ============ ============
Weighted average shares outstanding 3,669,445 3,518,741 3,706,908 3,502,009
=============== ============== ============ ============
Loss per common share $ (0.237) $ (0.102) $ (0.732) $ (0.163)
=============== ============== ============ ============
Loss per Common Share-diluted $ (0.149) $ (0.102) $ (0.465) $ (0.163)
=============== ============== ============ ============
</TABLE>
(See accompanying notes to condensed financial statements)
F-17
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Six months ended
October 31, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,715,121) $ (571,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 118,153 12,105
Changes in assets and liabilities:
Receivables (463,311) 52,691
Inventories (155,051) (475,807)
Prepaid expenses and other 10,244 (36,398)
Accounts payable 1,089,066 66,725
Other accrued expenses and current liabilities 696,800 43,800
-------------- ---------------
Net cash used by operating activities (1,419,220) (908,414)
Cash flows from financing activities:
Loan proceeds 50,000 200,000
Convertible debenture proceeds 611,500 280,000
Retirement of prior debt 0 (325,000)
Payment of loan principal (30,401) (846)
Net capital and stock changes 1,341,088 1,092,378
-------------- ---------------
Net cash provided by financing activities 1,972,187 1,246,532
Cash flows from investing activities:
Additions to property and equipment (581,327) (234,759)
Additions to intangible assets (Note 4) 0 (235,000)
-------------- ---------------
Net cash used by investing activities (581,327) (469,759)
-------------- ---------------
Net (decrease) increase in cash (28,360) (131,641)
Cash at beginning of period 48,768 244,985
-------------- ---------------
Cash at end of period $ 20,408 $ 113,344
============== ===============
</TABLE>
(See accompanying notes to condensed financial statements)
F-18
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation, General and Business
-------------------------------------------
American Quantum Cycles, Inc. ("The Company") is an early production stage
company that designs, produces, markets, distributes and sells American-made,
high performance V-twin engine cruiser and touring style motorcycles. These
motorcycle products include stock models and motorcycles built to customer
specified configurations. The Company was originally incorporated on March 20,
1986 as "Norbern, Inc." and was inactive until March 1997 when it began
developing and implementing its business and financing plans. On May 8, 1997 the
Company changed its name to American Quantum Cycles, Inc. and its fiscal year
end to April 30.
The accompanying interim financial statements are prepared in accordance with
the instructions to Form-10QSB, are unaudited and do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.
(2) Concentration of Credit Risk
----------------------------
The Company occasionally maintains deposits in excess of federally insured
limits. Statement of Financial Accounting Standards No, 105 identifies these
items as a concentration of credit risk requiring disclosure, regardless of the
degree of risk. The risk is managed by maintaining all deposits in high quality
financial institutions.
(3) Transition from Development Stage Company to Production
-------------------------------------------------------
The Company has transitioned from a development stage company into an early
production ramp-up stage company. The Company has completed various activities
necessary for this transition including entering into dealership agreements, a
technology license agreement (see Note 4), leasing and upgrading facilities,
purchasing supplies and equipment, and hiring and training employees. The
Company anticipates that the current fiscal year ending April 30, 1999 will
sustain additional losses. Except for the historical information contained
herein, the matters set forth in this Form 10-QSB are forward looking and
involve a number of risks and uncertainties.
F-19
<PAGE>
Results of operations in the future will be influenced by numerous factors
including technological developments, competition, regulation, increases in
expenses associated with sales growth, market acceptance of the products of the
Company, the capacity of the company to expand and maintain the quality of its
motorcycles and related services, continued development of the dealer
organization, favorable sourcing of supplies, recruitment of highly skilled
employees and integration of such persons into a cohesive organization, and the
ability of the Company to raise funds and control costs.
(4) Patents, Licenses and Certificates
----------------------------------
In August 1997, the Company entered into a license agreement (the "Agreement")
with Feuling whereby the Company, as licensee, obtained a license to use certain
proprietary technologies including among other things, patents trade secrets,
techniques, tooling designs, product designs, and trademarks. Pursuant to the
terms of the Agreement, so long as the Company complies with certain other
provisions including non-disclosure of the proprietary technology, the Company
has an exclusive license, for motorcycle applications, in perpetuity for the
4-Valve technology. This technology will be used in connection with the Company
motorcycles and bolt-on kits for the Harley Davidson motorcycles which feature
the evolution engine, evolution big twin, other Harley Davidson clones and
aftermarket parts. An American Quantum Motorcycle with its 4-Valve engine
successfully passed EPA testing and was awarded an EPA certificate for 49 states
(less California). American Quantum will submit a second motorcycle for further
testing aimed at a 50 state certificate in the early spring of 1999.
(5) Capitalized Leases
------------------
The Company has executed capital leases with Nations Commercial Credit
Corporation for purchasing manufacturing and production equipment, and for
computer equipment to expand and improve the Company's network infrastructure.
All leases provide a $1 purchase buy-out provision at the end of the term of the
lease.
(6) Bridge Loan Financing
---------------------
Notes payable consist of nine (9) unsecured promissory notes dated March 30,
1998 to individuals providing bridge loan financing. The principal aggregate is
$700,000 with interest payable at 10% at maturity on September 30, 1998. The
Company also contracted to issue a total of 142,000 shares of common stock to
these individuals at maturity in order to obtain a favorable interest rate and
repayment terms. Loan costs are expensed as incurred.
The Company has received extensions until a secondary offering on all notes and
these note holders have been offered an updated agreement tied to the contracted
secondary offering expected to be completed during March 1999, however no
assurance can be given that the secondary offering will be completed. The note
holders will be repaid by converting principle plus interest (accrued through
the date of secondary completion) into American Quantum stock at the opening
stock price of the secondary offering plus two warrants (at the same share price
as the original conversion) for each share resulting from the note conversion.
As of the date of this filing 6 note
F-20
<PAGE>
holders representing $249,999 of original note loans have executed agreements to
convert to American Quantum stock at time of completion of the secondary.
(7) Convertible Debentures
----------------------
As part of its equity funding and financing, the Company has issued two separate
series of convertible notes to investors: Beginning in October 1997, the Company
issued thirty-four (34) 8% Subordinated Notes, for an aggregate of $1,579,500.
The notes mature one year from date of issue, convertible at $2.00 per share,
with no warrants attached. Interest is convertible at the same rate as the
principal, at the discretion of the note holder.
The Company has received extensions until a secondary offering on all notes and
these note holders have been issued an updated agreement tied to the contracted
secondary offering expected to be completed during March 1999. These note
holders have been offered the choice of being repaid via principle, interest
(accrued through to the time of completion of the secondary offering) and
American Quantum incentive shares or to be repaid by converting principle plus
interest (accrued through the date of secondary completion) into American
Quantum stock at the opening stock price of the secondary offering plus one
warrant (at the same share price as the original conversion) for each share
resulting from the note conversion. As of the date of this filing 11 note
holders representing $579,000 of original note loans have executed agreements to
convert to American Quantum stock at time of completion of the secondary.
Beginning in April 1998, the Company issued twenty-nine (29) 7%
Subordinated Notes, for an aggregate of $699,500. The notes mature one year from
the date of issue, convertible at $8.00 per share. Interest is payable in cash
or convertible at the same rate as the principal, at the discretion of the
Company. A warrant is attached at 10% above the final price of a secondary
offering.
The Company has received extensions until a secondary offering on all notes and
these note holders have been issued an updated agreement tied to the contracted
secondary offering expected to be completed during March 1999. These note
holders have been offered the choice of being repaid via principle, interest
(accrued through to the time of completion of the secondary offering) and
American Quantum incentive shares or to be repaid by converting principle plus
interest (accrued through the date of secondary completion) into American
Quantum stock at the opening stock price of the secondary offering plus one
warrant (at the same share price as the original conversion) for each share
resulting from the note conversion. As of the date of this filing 11 note
holders representing $245,000 of original note loans have executed agreements to
convert to American Quantum stock at time of completion of the secondary.
(8) Recognition of Income
---------------------
Orders received from the Company's dealers are booked as received in Account
Receivable, with an offset in Deferred Income. As the motorcycle proceeds
through the production process, revenue is recognized based on "percentage of
completion."
F-21
<PAGE>
No dealer, sales representative, or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus does not constitute an offer or any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
AMERICAN QUANTUM
CYCLES INCORPORATED
[LOGO]
1,600,000 Shares of Common Stock
PROSPECTUS
_________________, 1999
BARRON CHASE SECURITIES
7700 West Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boston, Massachusetts
Brooklyn, New York
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Duluth, Georgia
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrook Heights, New Jersey
La Jolla, California
Naples, Florida
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
West Boca Raton, Florida
----------------------------
March _____, 1999
<PAGE>
Subject to Completion ____________, 1999
PROSPECTUS (ALTERNATE)
AMERICAN QUANTUM CYCLES, INC.
928,000 Shares of Common Stock
This is an offering of 928,000 Shares of Common Stock of American
Quantum Cycles, Inc., a Florida corporation, held by certain of our Shareholders
(the "Selling Security Holders"). Of the 928,000 Shares being offered by the
Selling Security Holders, 250,000 are issuable upon the exercise of options
owned by certain of the Selling Security Holders. We will not receive any
proceeds from the sale of the Shares but we will receive proceeds from the
Selling Security Holders if they exercise their options.
Our Common Stock is quoted on the OTC Bulletin Board under the symbol
"AMQC". On _________, 1999, the closing bid price per share of the Common Stock
as reported by the OTC Bulletin Board was $_____.
------------------------------------------
This Investment Involves a High Degree of Risk. You Should Purchase
Shares Only If You Can Afford a Complete Loss of Your Investment. See "High Risk
Factors" Beginning on Page __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------------------------
The date of this Prospectus is ____________, 1999
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Shares Offered by the Selling
Security Holders(1)............................................ 928,000 Shares of Common Stock
Use of Net Proceeds............................................ We will not receive any proceeds from the -
re-sale of the Shares offered by the Selling
Security Holders.
Common Stock Outstanding:
Prior to the Offering (2) ................................ 9,166,235
After the Offering (3) ................................... 11,016,235
Risk Factors .................................................. The Offering involves a high degree of risk
and immediate substantial dilution. See
"High Risk Factors" beginning on page ____.
</TABLE>
- ---------------------------
(1) The number of Shares being offered by the Selling Security Holders
includes 250,000 shares of our Common Stock issuable upon the exercise
of options held by the Selling Security Holders. The Options are
exercisable at $4.00 per share.
(2) Does not include 1,600,00 Shares of Common Stock which are being
offered in a concurrent underwritten offering. See "Concurrent Public
Offering".
(3) Includes the 928,000 Shares being offered by the Selling Security
Holders and the 1,600,000 Shares of Common Stock being offered in the
Concurrent Offering. Does not include (i) 150,000 Shares of Common
Stock issuable to the Underwriters in the Concurrent Offering; and (ii)
up to 3,775,000 Shares of Common Stock issuable upon the exercise of
outstanding options to purchase shares of our Common Stock.
2
<PAGE>
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement with respect
to an underwritten public offering of 1,600,000 Shares of our Common Stock (the
"Underwritten Public Offering") was declared effective by the Securities and
Exchange Commission ("Commission"). Sales of securities under this Prospectus by
the Selling Security Holders, and in the Underwritten Public Offering, or even
the potential of such sales may have an adverse effect on the market price of
our Common Stock.
SELLING SECURITY HOLDERS
<TABLE>
<CAPTION>
SHARES SHARES OF
SHARES OF THAT MAY COMMON
COMMON BE OFFERED STOCK
STOCK OWNED PURSUANT OWNED
SELLING PRIOR TO TO THIS AFTER
SECURITY HOLDER THIS OFFERING PROSPECTUS OFFERING
- --------------- ------------- ---------- --------
<S> <C> <C> <C>
Violetta Dwyer 100,000(1) 100,000 0
Terri Grundstedt 100,000(1) 100,000 0
Laine Moskowitz 50,000(2) 50,000 0
Jefferson Hen 12,000 12,000 0
Colson Construction 8,000 8,000 0
Todd Hemm 18,000 18,000 0
Allen Solomon 5,000 5,000 0
Wayne Laglia 5,000 5,000 0
Chase Construction 10,000 10,000 0
Dante Greco 272,500 272,500 0
Bridget McMahon 75,000 75,000 0
Carl Domino 75,000 75,000 0
Abe Goldberger 25,000 25,000 0
Catherine Hass 69,870 69,870 0
Michael Howell 67,130 67,130 0
Harvey Stober 37,500 37,500 0
</TABLE>
(1) Includes 100,000 shares of common stock issuable upon the exercise of
options exercisable at $4.00 per share.
(2) Includes 50,000 shares of common stock issuable upon the execise of options
exercisable at $4.00 per share.
PLAN OF DISTRIBUTION
The Selling Security Holders may offer their Shares at various times in
one or more of the following transactions: in the over-the-counter market where
our Common Stock is listed; transactions other than in the over-the-counter
market; in connection with short sales of the Company's Common Stock; by
pledgees or donees; or a combination of any of the above transactions.
The Selling Security Holders may sell their shares at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices and at negotiated prices or at fixed prices.
The Selling Security Holders may use broker dealers to sell their
shares. If this happens, broker dealers will either receive discounts or
commissions from the Selling Security Holders, or they will receive commissions
from purchasers of shares for whom they acted as agents.
3
<PAGE>
We have advised the Selling Security Holders that during such time as
they may be engaged in a distribution of the Shares they are required to comply
with Regulation M under the Exchange Act. Regulation M generally precludes any
Selling Security Holders, any affiliated purchasers and any broker-dealer or
other person who participates in such distribution from bidding for or
purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchase made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the Common Stock.
It is anticipated that the Selling Security Holders will offer all of
the Shares for sale. Further, because it is possible that a significant number
of Shares could be sold at the same time hereunder, such sales, or the
possibility thereof, may have a depressive effect on the market price of the
Company's Common Stock.
4
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
928,000 SHARES OF COMMON STOCK
AMERICAN QUANTUM CYCLES, INC.
PROSPECTUS
________________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Florida Business Corporation Act (the "Florida Act") contains
provisions entitling the Company's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Company. In its Articles of Incorporation, the Company has included a provision
that limits, to the fullest extent now or hereafter permitted by the Florida
Act, the personal liability of its directors to the Company or its shareholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the Florida Act as currently in effect, this provision limits a
director's liability except where such director breaches a duty. The Company's
Articles of Incorporation and By-Laws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Florida Act.
The Florida Act provides that no director or officer of the Company shall be
personally liable to the Company or its shareholders for damages for breach of
any duty owed to the Company or its shareholders, except for liability for (i)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) any unlawful payment of a dividend or unlawful
stock repurchase or redemption in violation of the Florida Act, (iii) any
transaction from which the director received an improper personal benefit or
(iv) a violation of a criminal law. This provision does not prevent the Company
or its shareholders from seeking equitable remedies, such as injunctive relief
or rescission. If equitable remedies are found not to be available to
shareholders in any particular case, shareholders may not have any effective
remedy against actions taken by directors or officers that constitute negligence
or gross negligence.
The Articles of Incorporation also include provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Florida, indemnify and
upon request shall advance expenses to, any director or officer to the extent
that such indemnification and advancement of expenses is permitted under such
law, as may from time to time be in effect.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Representative's non-accountable
expense allowance and advisory fee) are as follows:
II-1
<TABLE>
<CAPTION>
<PAGE>
<S> <C>
SEC registration fee............................................................ $3,000
NASD filing fee ................................................................ $1,731
Amex listing fee ............................................................... 22,500
Legal fees and expenses......................................................... 50,000
Accounting fees and expenses.................................................... 25,000
Blue sky fees and expenses...................................................... 25,000
Printing and engraving expense.................................................. 75,000
Transfer agent fees and expenses................................................ 15,000
Miscellaneous................................................................... 10,000
---------
Total $222,731
=========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In April 1997, the Company issued an aggregate of $250,000 in
promissory notes to seven investors (the "April 1997 Notes") three of whom were
accredited and four were non-accredited. The April 1997 Notes yielded interest
at 8% annually and matured at the earlier of April 8, 1998 or upon receipt by
the Company of $1,000,000 or more in any public or private financing. The
interest on the April 1997 Notes was payable by the Company, at its option,
either (i) in cash; or (ii) in Common Stock of the Company based on the lower of
(A) $2.00 per share; or (B) the average closing bid price of the Common Stock of
the Company for the five trading days preceding one date prior to the date of
interest on the Note the "Interest Provision"). Pursuant to the Interest
Provision, the Company issued 2,926 shares of Common Stock to the April 1997
Note holders in December 1997 as interest on the April 1997 Notes. As of the
date hereof, all the April 1997 Notes have been repaid and cancelled by the
Company. Each investor was provided with or had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of these
securities was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In May 1997, the Company acquired assets totalling $92,270 in exchange
for an aggregate of 1,910,390 shares of Common Stock of the Company, of which
955,195 shares were issued to Doreen Cheal, a principal shareholder of the
Company, and 955,195 shares were issued to Denise O'Brien, a Director and
principal shareholders of the Company. Each investor was nonaccredited, but was
provided with or had access to financial and other information concerning the
Company and had the opportunity to ask questions concerning the Company and its
operations. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
In June 1997, the Company commenced an offering of Common Stock at
$4.00 per share pursuant to Rule 504 of Regulation D under the Act. An aggregate
of 245,744 shares of Common Stock for an aggregate of $949,974 were sold by
management. Each of the investors were provided with and had access to financial
and other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 3(b) of the Act.
In January 1998, the Company granted options to purchase an aggregate
of 570,000 shares of Common Stock to a consultant. The options are exercisable
until October 2004_ and are exercisable at $.25 per share. Each investor was
provided with or had access to financial and other information concerning the
Company and had the opportunity to ask questions concerning the Company and its
operations. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
Beginning in October 1997, the Company issued an aggregate of forty 8%
Subordinated Notes to 32 investors, in the aggregate principal amount of
$1,407,000 (the "8% Notes"). Each investor was provided
II-2
<PAGE>
with or had access to financial and other information concerning the Company and
had the opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act. The notes matured
one year from date of issue. Nine of the 8% Note holders, representing an
aggregate of $240,000 of the outstanding principal balance of the 8% Notes,
agreed to extend the maturity date of their 8% Notes until the close of this
Offering. Sixteen of the 8% Note holders, representing an aggregate of $624,000
of the aggregate outstanding principal amount of the 8% Notes agreed to convert
the principle balance plus accrued interest of their respective notes into (i)
common stock of the Company at the a price per share equal to $5.00, (the "8%
Note Shares"); and (ii) warrants to purchase a number of shares of the Company's
common stock equal to the 8% Note Shares at an exercise price of $5.00 per
share. The Company redeemed one of the 8% Notes with a principal balance of
$70,000. The remaining six 8% Note holders have not agreed to either extend the
terms of, or convert, their respective 8% Notes. As a result, if the remaining
six 8% Note holders, representing an aggregate of $473,000 of the outstanding
principal balance of the 8% Notes, send the Company notice informing the Company
that it is in default of its repayment obligations on the 8% Notes, the Company
will be considered in default of the 8% Notes.
Between May 1997 and June 1997, the Company granted options to purchase
an aggregated 550,000 shares to a consultant. Of the options 300,000 are
exercisable at $.10 per share and 250,000 are exercisable at $4.00 per share.
The options are exercisable until September 2003. Each investor was provided
with or had access to financial and other information concerning the Company and
had the opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
Beginning in April 1998, the Company issued an aggregate of
twenty-seven 7% Subordinated Notes to 24 investors, in return for which the
Company received proceeds of , for an aggregate of $549,500 (the "7% Notes").
Each investor was provided with or had access to financial and other information
concerning the Company and had the opportunity to ask questions concerning the
Company and its operations. Accordingly, the issuance of these securities was
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act. The 7% Notes mature one year from the date of issuance and are
convertible into shares of common stock of the Company at $8.00 per share.
Interest is payable in cash or shares of common stock of the Company, at the
discretion of the Company. The notes matured one year from date of issue. Six of
the 7% Note holders, representing an aggregate of $70,000 of the outstanding
principal balance of the 7% Notes, agreed to extend the maturity date of their
7% Notes until the close of this Offering. Thirteen of the 7% Note holders,
representing an aggregate of $292,000 of the aggregate outstanding principal
amount of the 7% Notes agreed to convert the principle balance plus accrued
interest of their respective notes into (i) common stock of the Company at the a
price per share equal to $5.00, (the "7% Note Shares"); and (ii) warrants to
purchase a number of shares of the Company's common stock equal to the 7% Note
Shares at an exercise price of $5.00 per share. The Company redeemed two of the
7% Notes which had an aggregate principal balance of $32,500. The remaining four
7% Note holders, representing an aggregate of $255,000 of the outstanding
principal balance of the 7% Notes, have not agreed to either extend the terms
of, or convert, their respective 7% Notes. As a result, if any of the remaining
four 7% Note holders are not repaid, or do not convert or extend the terms of
their 7% Notes by April 1999, and such 7% Note holders send the Company notice
informing the Company that it is in default of its repayment obligations on the
7% Notes, the Company will be considered in default of the 7% Notes.
In May 1998, the Company completed an offering of an aggregate of
$700,000 of 10% Subordinated Promissory Notes (the "10% Notes") and an aggregate
of 140,000 shares of Common Stock to nine accredited investors. The 10% Notes
mature one year from the date of issuance and are convertible into shares of
common stock of the Company at $8.00 per share. Interest is payable in cash or
shares of common stock of the Company, at the discretion of the Company. Two of
the 10% Note holders, representing an aggregate of $380,000 of the outstanding
principal balance of the 10% Notes, agreed to extend the maturity date of their
II-3
<PAGE>
10% Notes until the close of this Offering. Seven of the 10% Note holders,
representing an aggregate of $320,000 of the aggregate outstanding principal
amount of the 10% Notes agreed to convert the principle balance plus accrued
interest of their respective notes into (i) common stock of the Company at the a
price per share equal to $5.00, (the "10% Note Shares"); and (ii) two warrants
to purchase a number of shares of the Company's common stock equal to the 10%
Note Shares at an exercise price of $5.00 per share. ^Each of the investors was
provided with, or had access to financial and other information concerning the
Company and had the opportunity to ask questions concerning the Company and its
operations. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
Between September 1998 and November 1998, the Company granted options
to purchase an aggregate of 2,705,000 shares of Common Stock to 14 consultants
in connection with services rendered regarding the promotion of the Company's
motorcycles. The options are exercisable until December 2004. The exercise price
for the options ranges between $.50 and $1.00 with the exception of 150,000
options which are exercisable at $.10. Each investor was provided with or had
access to financial and other information concerning the Company and had the
opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In November 1998, the Company issued an aggregate of 1,500,000 shares
of Common Stock and granted options to purchase an aggregate of 200,000 shares
of Common Stock exercisable at $1.00 per share until December 31, 2003 to four
executive officers of the Company pursuant to the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act.
Between November 1998 and January 1999, the Company completed a
Regulation D Rule 506 private offering of approximately 35 Units of its
securities (the "Units") to 10 accredited investors and 1 sophisticated investor
from which the Company received gross proceeds of $870,000. Each Unit consisted
of (i) a Senior Promissory Note in the principal amount of $25,000 and (ii) the
right to receive a number of shares of Common Stock of the Company determined by
dividing $12,500 by the subsequent public offering price per share of the
Company's Common Stock in an underwritten public offering from which the Company
receives at least $5,000,000 gross proceeds. Barron Chase Securities, Inc.,
("Barron") acted as the selling agent for the offering. In consideration for
acting as selling agent, Barron received a placement fee equal to ten percent
(10%) of the proceeds received from this offering and an unaccountable expense
allowance equal to 3% of the proceeds received from this offering.
Between December 1998 and February 1999, the Company obtained lines of
credit in the aggregate amount of $1,405,000 from accredited investors. The line
of credit accrues interest at 10% and 8% respectively. In connection with
obtaining the lines of credit, the Company agreed to issue an aggregate of
1,275,000 shares of common stock to the ^providers of the credit lines. Each
line of credit provider was provided with or had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of these
securities was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibits Description of Document
- -------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement (3)
1.2 Form of Selected Dealer Agreement (3)
2.1 Amended and Restated Articles of Incorporation of American Quantum Cycles, Inc., filed
November 21, 1997(1)
2.2 Amended Articles of Incorporation of American Quantum Cycles, Inc. filed April 6, 1998,
creating "Series A 7% Convertible Preferred Stock"(1)
II-4
<PAGE>
2.3 Amended and Restated Bylaws of American Quantum Cycles, Inc.(1)
3.2 American Quantum Cycles, Inc. Amended 1997 Stock Option Plan(1)
4.1 Form of Common Stock Certificate (2)
4.2 Warrant Agreement between the Company and Barron Chase Securities, Inc. (3)
4.3 Form of Warrant Certificate (3)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. (2)
10.1 Consulting Agreement between American Quantum Cycles, Inc. and Greenstone Financial
Corporation dated May 9, 1997(1)
10.2 License Agreement between Feuling Advanced Technologies, Inc. and American Quantum
Cycles, Inc. dated as of August 19, 1997(1)
10.3 Agreement between the Company and Ferrex International, Inc.(1)
10.4 Sample Dealer Agreement(1)
10.5 Lease Agreement between the Company and Bruce and Karen Weiss effective May 1, 1997(1)
10.6 Amendment to Lease Agreement between the Company and Bruce and
Karen Weiss dated January 29, 1998(1)
10.7 Employment Agreement with Richard K. Hagen (2)
10.8 Employment Agreement with Gary W. Irving (2)
10.9 Financial Advisory Agreement between the Company and Barron Chase Securities, Inc.(3)
10.10 Merger and Acquisition Agreement between the Company and Barron Chase Securities, Inc.(3)
23.1 Consent of Pricher and Company Certified Public Accountants(3)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (contained in such firm's opinion filed as
Exhibit 5.1) (2)
27 Financial Data Schedule
</TABLE>
- ----------------
(1) Incorporated by reference from the Company's Registration Statement on
Form 10-SB filed April 24, 1998 (File No. 000-24083).
(2) To be filed by Amendment
(3) Filed herewith
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
Registration Statement.
(iii) Include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be the initial bona fide
offering; and
(3) File a post effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-5
<PAGE>
(4) The Company will provide to the Underwriters at the closing
specified in the Underwriter's Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For the purpose of determining any liability under the Securities Act,
the Company will treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Company pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Securities Act as part of this Registration Statement as of
the time the Securities and Exchange Commission declares it effective.
For the purpose of determining any liability under the Securities Act,
the Company will treat such post-effective amendment that contains a form of
Prospectus as a new Registration Statement for the securities offered in the
Registration Statement therein, and treat the Offering of the securities at that
time as the initial bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in the city of
Melbourne, State of Florida on March 10, 1999.
AMERICAN QUANTUM CYCLES, INC.
By: /s/ Richard K. Hagen
--------------------
Richard K. Hagen, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Chairman of the
Board of Directors,
/s/Richard Hagen Principal Executive Officer,
- -------------------------- Principal Financial Officer March 10, 1999
Richard Hagen and President
/s/Jim Cheal Vice President
- -------------------------- and Director March 10, 1999
Jim Cheal
/s/Jeffrey W. Starke Vice President
- -------------------------- and Director March 10, 1999
Jeffrey W. Starke
/s/Denise O'Brien
- --------------------------
Denise O'Brien Director March 10, 1999
/s/Gary Irving Executive Vice President, Chief
- -------------------------- Operating Officer and Director March 10_, 1999
Gary Irving
/s/Linda Condon Principal Accounting Officer
- -------------------------- and Treasurer March 10, 1999
Linda Condon
</TABLE>
II-7
<PAGE>
EXHIBIT LIST
------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement (3)
1.2 Form of Selected Dealer Agreement (3)
4.2 Warrant Agreement between the Company and Barron Chase
Securities, Inc. (3)
4.3 Form of Warrant Certificate (3)
10.9 Financial Advisory Agreement between the Company and Barron
Chase Securities, Inc.(3)
10.10 Merger and Acquisition Agreement between the Company and
Barron Chase Securities, Inc.(3)
23.1 Consent of Pricher and Company Certified Public Accountants(3)
AMERICAN QUANTUM CYCLES, INC.
1,600,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
Boca Raton, Florida
____, 1999
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Gentlemen:
American Quantum Cycles, Inc. (the "Company"), on the basis of the
representations, warranties, covenants and conditions contained herein, hereby
proposes to issue and sell to Barron Chase Securities, Inc. (the "Underwriter")
for sale in a proposed public offering pursuant to the terms of this
Underwriting Agreement (the "Agreement"), on a "firm commitment" basis,
1,600,000 shares of Common Stock (the "Shares") at $______ per Share. The Shares
are also referred to as the "Securities". The date upon which the Securities and
Exchange Commission ("Commission") shall declare the Registration Statement of
the Company effective shall be the "Effective Date". In addition, the Company
proposes to grant to the Underwriter the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 240,000 additional Shares (the
"Option Securities").
You have advised the Company that you desire to purchase the
Securities, and that you are authorized to execute this Agreement. The Company
confirms the agreements made by it with respect to the purchase of the
Securities by the Underwriter, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with the Underwriter
as of the Effective Date (as defined above), the Closing Date (as hereinafter
defined) and the Option Closing Date (as hereinafter defined) that:
(a) A registration statement (File No. ________) on Form SB-2 relating
to the public offering of the Securities, including a preliminary form of the
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in
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<PAGE>
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Commission thereunder, and has been filed with the Commission under the Act. The
Company has prepared in the same manner and proposes to file, prior to the
Effective Date of such registration statement, an additional amendment or
amendments to such registration statement, including a final form of Prospectus,
copies of which shall be delivered to you. "Preliminary Prospectus" shall mean
each prospectus filed pursuant to the Rules and Regulations under the Act prior
to the Effective Date. The registration statement (including all financial
schedules and exhibits) as amended at the time it becomes effective and the
final prospectus included therein are respectively referred to as the
"Registration Statement" and the "Prospectus", except that (i) if the prospectus
first filed by the Company pursuant to Rule 424(b) of the Rules and Regulations
shall differ from said prospectus as then amended, the term "Prospectus" shall
mean the prospectus first filed pursuant to Rule 424(b), and (ii) if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriter or
Sation Statement and Prospectus will in all respects conform to the requirements
of the Act and the Rules and Regulations; and (ii) neither the Registration
Statement nor the Prospectus will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make statements therein, in light of the circumstances under which
they are made, not misleading; provided, however, that the Company makes no
representations, warranties or agreement as to information contained in or
omitted from the Registration Statement or Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, under the
heading "Underwriting" and regarding the identity of counsel to the Underwriter
under the heading "Legal Matters" constitute the only information furnished in
writing by the Underwriter for inclusion in the Prospectus.
(c) Each of the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus
2
<PAGE>
and is duly qualified to do business as a foreign corporation and is in good
standing in all other jurisdictions in which the nature of its business or the
character or location of its properties requires such qualification, except
where failure to so qualify will not materially affect the Company's business,
properties or financial condition.
(d) The authorized, issued and outstanding securities of the Company as
of the date of the Prospectus is as set forth in the Prospectus under
"Capitalization"; all of the issued and outstanding securities of the Company
have been, or will be when issued as set y issued and fully paid and
non-assessable; the issuances and sales of all such securities complied in all
material respect with, or were exempt from, applicable Federal and state
securities laws; the holders thereof have no rights of rescission against the
Company with respect thereto, and are not subject to personal liability by
reason of being such holders; none of such securities were issued in violation
of the preemptive rights of any holders of any security of the Company or
similar contractual rights granted by the Company; except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or agreements or other rights to convert any
obligation into, any securities of the Company have been granted or entered into
by the Company; and all of the securities of the Company, issued and to be
issued as set forth in the Registration Statement, conform to all statements
relating thereto contained in the Registration Statement and Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and paid
for pursuant to this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights of any security holder of
the Company. Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated in this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any securities of the Company, except as described in the
Registration Statement.
The Common Stock Underwriter Warrants and the shares of Common Stock
issuable upon exercise of the Common Stock Underwriter Warrants (as defined in
the Underwriter's Warrant Agreement described in Section 11 herein), have been
duly authorized and, when issued, delivered and paid for, will be validly
issued, fully paid, non-assessable, free of pre-emptive rights and no personal
liability will attach to the ownership thereof, and will constitute valid and
legally binding obligations of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Underwriter's Warrant
Agreement.
(f) This Agreement, the Financial Advisory Agreement, the Merger and
Acquisition Agreement (the "M/A Agreement") and the Underwriter's Warrant
Agreement have been duly and validly
3
<PAGE>
authorized, executed and delivered by the Company, and assuming due execution of
this Agreement by the other party hereto, constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as enforceability may be limited by bankruptcy, insolvency
or other laws affecting the rights of creditors generally. The Company has full
power and authority to authorize, issue and sell the Securities to be sold by it
hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Securities or the securities to be issued
pursuant to the Underwriter's Warrant Agreement, except such as may be required
under the Act or state securities laws, or as otherwise have been obtained.
(g) Except as described in the Prospectus, neither the Company nor any
subsidiary is in material violation, breach of or default under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach of, or
constitute a material default under, or result in the creation or imposition of
any material lien, charge or encumbrance upon any property or assets of the
Company or any subsidiary or any of the terms or provisions of any material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrumparty or by which the Company or any subsidiary may be bound or to which
any of the property or assets of the Company or any subsidiary is subject, nor
will such action result in any material violation of the provisions of the
Articles of Incorporation or By-Laws of the Company or any subsidiary, as
amended, or any statute or any order, rule or regulation applicable to the
Company or subsidiary of any court or of any regulatory authority or other
governmental body having jurisdiction over the Company or each subsidiary.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each subsidiary have good and marketable title to all properties and assets
described in the Prospectus as owned by each of them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not material to
its business, financial condition or results of operation; all of the material
leases and subleases under which the Company or each subsidiary is the lessor or
sublessor of properties or assets or under which the Company or each subsidiary
holds properties or assets as lessee or sublessee as described in the Prospectus
are in full force and effect, and, except as described in the Prospectus,
neither the Company nor each subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or any subsidiary as lessor, sublessor, lessee, or sublessee under any
of the leases or subleases mentioned above, or affecting or questioning the
right of the Company or any subsidiary to continued possession of the leased
4
<PAGE>
or subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and the Company and each subsidiary
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) _________________________________, who has given its report on
certain financial statements filed and to be filed with the Commission as part
of the Registration Statement, and whict to the Company, independent public
accountants as required by the Act and the Rules and Regulations.
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus and the Registration Statement present fairly
the financial condition, results of operations and cash flows of the Company on
the basis stated in the Registration Statement, at the respective dates and for
the respective periods to which they apply. Said financial statements and
related notes and schedules have been prepared in accordance with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved. The Company's internal accounting controls and procedures are
sufficient to cause the Company and each subsidiary to prepare financial
statements which comply in all material respects with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved. During the preceding five (5) year period, nothing has been brought to
the attention of the Company's management that would result in any material
reportable condition relating to the Company's internal accounting procedures,
weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) neither the Company nor any subsidiary has
incurred and will not have incurred any material liabilities or obligations,
direct or contingent, and has not entered into and will not have entered into
any material transactions other than in the ordinary course of business and/or
as contemplated in the Registration Statement and the Prospectus; (ii) neither
the Company nor any subsidiary has and will not have paid or declared any
dividends or have made any other distribution on its capital stock; (iii) there
has not beenrrence of long-term debt by, the Company or any subsidiary; (iv)
neither the Company nor any subsidiary has issued any options, warrants or other
rights to purchase the capital stock of the Company or any subsidiary; and (v)
there has not been and will not have been any material adverse change in the
business, financial condition or results of operations of the Company or any
subsidiary, or in the book value of the assets of the Company or any subsidiary,
arising for any reason whatsoever.
5
<PAGE>
(l) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business prospects, net worth, or properties of
the Company or any subsidiary.
(m) Except as disclosed in the Prospectus, each of the Company and each
subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any subsidiary that has not been provided for in
the financial statements.
(n) Except as set forth in the Prospectus, each of the Company and each
subsidiary has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property as described in the Prospectus and is in all material
respects in compliance therewith and owns or possesses adequate right to use all
material patents, patent applications, trademarks, service marks, trade-names,
trademark registrations, service mark registrations, copyrights, and licenses
necessary for the conduct of such business and has not received any notice of
conflict with the asserted rights of others in respect thereof. To the best of
the Company's knowledge, none of the activities or business of the Company or
any subsidiary are in violation of, or cause the Company or any subsidiary to
violate, any law, rule, regulation or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company and any
subsidiary.
(o) Neither the Company nor any subsidiary has, directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution, in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public of quasi-public duties, other than
payments or contributions required or allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in connection
with the sale and transfer of the
6
<PAGE>
Securities to the Underwriter hereunder will have been fully paid or provided
for by the Company and all laws imposing such taxes will have been fully
complied with.
(q) All contracts and other documents which are required to be
described in or filed as exhibits to the Registration Statement have been so
described and/or filed.
(r) Except as described in the Registration Statement and Prospectus,
no holders of Common Stock or of any other securities of the Company have the
right to include such Common Stock or other securities in the Registration
Statement and Prospectus.
(s) Except as set forth in or contemplated by the Registration
Statement and the Prospectus, neither the Company nor any subsidiary has any
material contingent liabilities.
(t) The Company has no subsidiary corporations except as disclosed in
the Registration Statement and Prospectus, nor has it any equity interest in any
partnership, joint venture, association or other entity except as disclosed in
the Registration Statement or Prospectus. Except as described in the
Registration Statement and Prospectus, the Company owns all of the outstanding
securities of each of its subsidiaries.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) Neitheke, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any of the
securities of the Company.
(w) Item 26 of Part II of the Registration Statement accurately
discloses all unregistered securities sold by the Company within the three year
period prior to the date as of which information is presented in the
Registration Statement. All of such securities were sold in transactions which
were exempt from the registration provisions of the Act and not in violation of
Section 5 thereof.
(x) Other than as set forth in the Prospectus, the Company has not
entered into any agreement pursuant to which any person is entitled, either
directly or indirectly, to compensation from the Company for services as a
finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Underwriter against any losses, claims, damages
or liabilities,
7
<PAGE>
which shall include, but not be limited to, all costs to defend against any such
claim, so long as such claim arises out of agreements made or allegedly made by
the Company.
(y) Based upon written representations received by the Company, no
officer, director or beneficial owner of five percent (5%) or more of the
securities of the Company or any subsidiary has any direct or indirect
affiliation or association with any member of the National Association of
Securities Dealers, Inc. ("NASD"), except as disclosed to the Underwriter in
writing, and no beneficial owner of the Company's unregistered securities has
any direct or indirect affiliation or association with any NASD member except as
disclosed to the Underwriter in writing. The Company will advise the Underwriter
and the NASD if any five percent (5%) or greater shareholder of the Company or
any subsidiary is or becomes an affiliate or associated person of an NASD member
participating in the distribution.
(z) The Company and each subsidiary is in compliance in all material
respects with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any subsidiary by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any subsidiary pending before the N
dispute, slowdown or stoppage pending or to the knowledge of the Company,
threatened against or involving the Company or any subsidiary or any predecessor
entity. No question concerning representation exists respecting the employees of
the Company or any subsidiary and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company or any
subsidiary. No grievance or arbitration proceeding is pending under any expired
or existing collective bargaining agreements of the Company or any subsidiary,
if any.
(aa) Except as disclosed in the Prospectus, neither the Company nor any
subsidiary maintains, sponsors nor contributes to, nor is it required to
contribute to, any program or arrangement that is an "employee pension benefit
plan", an "employee welfare benefit plan", or a "multi-employer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). Except as disclosed in the Prospectus, neither the Company nor any
subsidiary maintained or contributed to a defined benefit plan, as defined in
Section 3(35) of ERISA.
(ab) Based upon written representations received from the officers and
directors of the Company and each subsidiary, except as disclosed in the
Prospectus, during the past five years, none of the officers or directors of the
Company or any subsidiary have been:
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(1) The subject of a petition under the federal
bankruptcy laws or any state insolvency law filed by or
against them, or by a receiver, fiscal agent or similar
officer appointed by a court for their business or property,
or any partnership in which any of them was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which any of them was
an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
any of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or
employee of any investment company, bank, savings and
loan association or insurance company, or engaging in
or continuing any conduct or practice in connection
with any such activity;
(ii) engaging in any type of business
practice; or
(iii) engaging in any activity in connection
with the purchase or sale of any security or
commodity or in connection with any violation of
federal or state securities law or federal commodity
laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or
state authority barring, suspending or otherwise limiting for
more than sixty (60) days their right to engage in any
activity described in paragraph (3)(i) above, or be associated
with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in
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a civil action or by the Securities and Exchange Commission to
have violated any federal or state securities law, and the
judgment in such civil action or finding by the Commission has
not been subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(ac) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. PURCHASE, DELIVERY AND SALE OF THE SECURITIES.
(a) Subject to the terms and conditions of this Agreement and based
upon the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriter an aggregate of
1,600,000 Shares at $______ per Share (the public offering price less ten
percent (10%)) at the place and time hereinafter specified. The price at which
the Underwriter shall sell the Securities to the public shall be $_____ per
Share.
Delivery of the Securities against payment therefor shall take place at
the offices of Barron Chase Securities, Inc., 7700 West Camino Real, Boca Raton,
Florida 33433 (or at such other place as may be designated by the Underwriter)
at 10:00 a.m., Eastern Time, on such date after the Registration Statement has
become effective as the Underwriter shall designate, but not later than ten (10)
business days (holidays excepted) following the first date that any of the
Securities are released to you, such time and date of payment and delivery for
the Securities being herein called the "Closing Date".
(b) In addition, subject to the terms and conditions of this Agreement,
and based upon the representations, warranties and agreements herein contained,
the Company hereby grants an option to th the same price per Share as the
Underwriter shall pay for the Securities being sold pursuant to the provisions
of subsection (a) of this Section 2 (such additional Securities being referred
to herein as the "Option Securities"). This option may be exercised within
forty-five (45) days after the Effective Date of the Registration Statement upon
notice by the Underwriter to the Company advising as to the amount of Option
Securities as to which the option is being exercised, the names and
denominations in which the certificates for such Option Securities are to be
registered
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<PAGE>
and the time and date when such certificates are to be delivered. Such time and
date shall be determined by the Underwriter but shall not be later than ten (10)
full business days after the exercise of said option, nor in any event prior to
the Closing Date, and such time and date is referred to herein as the "Option
Closing Date". Delivery of the Option Securities against payment therefor shall
take place at the offices of the Underwriter. The Option granted hereunder may
be exercised only to cover overallotments in the sale by the Underwriter of the
Securities referred to in subsection (a) above. In the event the Company
declares or pays a dividend or distribution on its Common Stock, whether in the
form of cash, shares of Common Stock or any other consideration, prior to the
Option Closing Date, such dividend or distribution shall also be paid on the
Option Closing Date.
(c) The Company will make the certificates for the Securities to be
sold hereunder available to you for inspection at least two (2) full business
days prior to the Closing Date at the offices of the Underwriter, and such
certificates shall be registered in such names and denominations as you may
request. Time shall be of the essence and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriter hereunder will be delivered by the Company to you
for the account of the Underwriter against payment of the purchase prices by the
Underwriter by certified or bank cashier's checks in New York Clearing House
funds payable to the orn New York Clearing House funds to the account of the
Company.
In addition, in the event the Underwriter exercises the option to
purchase from the Company all or any portion of the Option Securities pursuant
to the provisions of subsection (b) above, payment for such Securities shall be
made payable in New York Clearing House funds at the offices of the Underwriter,
or by wire transfer, at the time and date of delivery of such Securities as
required by the provisions of subsection (b) above, against receipt of the
certificates for such Securities by the Underwriter for the account of the
Underwriter registered in such names and in such denominations as the
Underwriter may request.
It is understood that the Underwriter proposes to offer the Securities
to be purchased hereunder to the public upon the terms and conditions set forth
in the Registration Statement, after the Registration Statement is declared
effective by the Commission.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriter that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you
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<PAGE>
and will not at any time, whether before or after the Effective Date, file any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously been advised and furnished with a copy or to which you
or your counsel shall have objected in writing, acting reasonably, or which is
not in compliance with the Act and the Rules and Regulations. At any time prior
to the later of (i) the completion by the Underwriter of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the Company
will prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessas and as mutually agreed by the Company and the Underwriter.
After the Effective Date and as soon as the Company is advised thereof,
the Company will advise you, and confirm the advice in writing, of the receipt
of any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus and Definitive Prospectus, and the Company has consented
and hereby consents to the use of such copies for the purposes permitted by the
Act. The Company authorizes the Underwriter and Selected Dealers to use the
Prospectus in connection with the sale of the Securities for such period as in
the opinion of counsel to the Underwriter the use thereof is required to comply
with the applicable provisions of the Act and the Rules and Regulations. In case
of the happening, at any time within such period as a Prospectus is required
under the Act to be delivered in connection with sales by the Underwriter or
Selected Dealers, of any event of which the Company has knowledge and which in
the opinion of counsel for the Company or counsel for the Underwriter, should be
set forth in an amendment to the Registration Statement or a supplement to the
Prospectus, in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Securities, or in case it shall be necessary to
amend or supplemmply with law or with the Act and the Rules and Regulations, the
Company will notify you promptly and
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<PAGE>
forthwith prepare and furnish to you copies of such amended Prospectus or of
such supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Underwriter.
The Company will comply with the Act, the Rules and Regulations
thereunder, the Securities Exchange Act of 1934 (the "1934 Act"), and the rules
and regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will act in good faith and use its best efforts and
cooperate with you and your counsel to qualify to register the Securities for
sale under the securities or "blue sky" laws of such jurisdictions as the
Underwriter may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent to service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the Securities. The Company will, from time to time, prepare and file
such statements and reports as are or may be required to continue such
qualification in effect for so long a period as the Underwriter may reasonably
request.
(c) If the sale of the Securities provided for herein is not
consummated, the Company shall pay all costs and expensess hereunder, including,
but not limited to, all such expenses itemized in Section 8(a) and 8(c) hereof,
and either (i) the out-of-pocket expenses of the Underwriter, not to exceed the
$35,000 previously paid if the Underwriter elects to terminate the offering for
any reason; or (ii) the out-of-pocket expenses of the Underwriter if the Company
elects to terminate the offering for any reason. For the purposes of this
sub-section, the Underwriter shall be deemed to have assumed such expenses when
they are billed or incurred, regardless of whether such expenses have been paid.
The Underwriter shall not be responsible for any expenses of the Company or
others, or for any charges or claims relative to the proposed public offering if
it is not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the Underwriter, from time to time
until the Effective Date of the Registration Statement, as many copies of any
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<PAGE>
Preliminary Prospectus filed with the Commission prior to the Effective Date of
the Registration Statement as the Underwriter may reasonably request. The
Company will deliver to the Underwriter on the Effective Date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Definitive
Prospectus, or as thereafter amended or supplemented, as the Underwriter may
from time to time reasonably request.
(e) For so long as the Company is a reporting company under either
Section 12 or 15 of the 1934 Act, the Company, at its expense, will furnish to
the Underwriter during the period ending five (5) years from the Effective Date,
(i) as soon as practicable after the end of each fiscal year, a balance sheet of
the Company and any of its subsidiaries as at the end of such fiscal year,
together with statements of income, surplus and cash flow of the Company and any
subsidiaries for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of independent accountants; (ii) as
soon as they are available, a copy of all reports (financial or other) mailed to
security holders; (iii) as soon as they are available, a copy of a- confidential
documents, including annual reports, periodic reports and financial statements,
furnished to or filed with the Commission under the Act and the 1934 Act; (iv)
copies of each press release, news item and article with respect to the
Company's affairs released by the Company; and (v) such other information as you
may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will make generally available to its stockholders and
deliver to the Underwriter as soon as it is practicable, but in no event later
than the first day of the sixteenth full calendar month following the Effective
Date, an earnings statement (which need not be audited) covering a period of at
least twelve consecutive months beginning with the Effective Date of the
Registration Statement, which shall satisfy the requirements of Section 11(a) of
the Act.
(h) On the Closing Date, the Company shall have taken the necessary
action to become a reporting company under Section 12 of the 1934 Act, and the
Company will make all filings required to and will have obtained approval for
the listing of the Shares on The Nasdaq Small Cap Market System, and will use
its best efforts to maintain such listing for at least seven (7) years from the
date of this Agreement.
(i) For a period of seven (7) years following the Effective Date, the
Company will hold an annual meeting of stockholders for
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<PAGE>
the election of Directors within 180 days after the end of each of the Company's
fiscal years and, within nine (9) months after the end of each of the Company's
fiscal years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the proceeds
therefrom as may be required by Sections 12, 13 and/or 15 of the 1934 Act and
pursuant to Rule 463 under the Act.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of counsel to the Underwriter and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date, the Company shall execute and deliver to you
the Underwriter's Warrant Agreement. The Underwriter's Warrant Agreement and
Warrant Certificates will be substantially in the form of the Underwriter's
Warrant Agreement filed as an exhibit to the Registration Statement.
(m) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued securities which are issuable upon
exercise of the Underwriter's Warrants outstanding from time to time.
(n) All officers, directors and holders of five percent (5%) or more of
the Company's securities (including warrants, options and Preferred Stock of the
Company) as of the Effective Date shall agree in writing, in a form satisfactory
to the Underwriter, not to sell, transfer or otherwise dispose of any of such
securities (or underlying securities) of the Company for a period of twenty-four
(24) months from the Effective Date or any longer period required by the NASD,
Nasdaq or any State, without the written consent of the Underwriter. For a
period of two (2) years following the Effective Date, all sales of the Company's
securities by officers and/or directors of the Company shall be through the
Underwriter.
(o) The Company will obtain, on or before the Closing Date, key person
life insurance on the life of Richard K. Hagen in an amount of not less than
$2,000,000, and will use its best efforts
15
<PAGE>
to maintain such insurance for a period of at least five (5) years from the
Effective Date.
(p) Prior to the Closing Date, the Company shall, at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and such
other manuals as the Underwriter may designate, such listings to contain the
information required by such manuals and the Uniform Securities Act. The Company
hereby agrees to use its best efforts to maintain such listing for a period of
not less than five (5) years. The Company shall take such action as may be
reasonably requested by the Underwriter to obtain a secondary market trading
exemption in such states as may be reasonably requested by the Underwriter.
(q) During the one (1) year period commencing on the Closing Date, the
Company will not, without the prior written consent of the Underwriter, grant
options or warrants to purchase the Company's Common Stock at a price less than
the initial per share public offering price.
(r) Prior to the Closing Date, neither the Company nor any subsidiary
will issue, directly or indirectly, without your prior consent, any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering of the Securities other than routine
customary advertising of the Company's products and services, and except as ry
in any relevant jurisdiction.
(s) At the Closing Date, the Company will engage the Underwriter as a
non-exclusive financial advisor to the Company for a period of twelve (12)
months commencing on the first day of the month following the Company's receipt
of the proceeds of this offering, at an aggregate fee of $108,000, all of which
shall be payable to the Underwriter on the Closing Date. The financial advisory
agreement will provide that the Underwriter shall, at the Company's request,
provide advice and consulting services to the Company concerning potential
merger and acquisition proposals and the obtaining of short or long-term
financing for the Company, whether by public financing or otherwise.
(t) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. For a period of five (5) years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's quarterly report
and the mailing of quarterly financial information to stockholders.
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<PAGE>
(u) The Company shall retain Florida Atlantic Stock Transfer, Inc. as
the transfer agent for the securities of the Company, or such other transfer
agent as you may agree to in writing. In addition, the Company shall direct such
transfer agent to furnish the Underwriter with daily transfer sheets as to each
of the Company's securities as prepared by the Company's transfer agent and
copies of lists of stockholders as reasonably requested by the Underwriter, for
a five (5) year period commencing from the Closing Date.
(v) The Company shall cause the Depository Trust Company, or such other
depository of the Company's securities, to furnish special security position
reports ("DTC Tracking Reports") to the Underwriter on a daily and weekly basis
at the expense of the Company, for a five (5) year period from the Effective
Date. It is anticipated that the DTC Tracking Reports may cost up to $10,000 for
the initial two (2) month period from the Effective Date, after which time the
Company's obligation to furnish such tracking reports will be reviewed by the
Company and the Underwriter.
(w) Following the Effecy applications with such jurisdictions as the
Underwriter shall designate and the Company may reasonably agree.
(x) On the Effective Date and for a period of three (3) years
thereafter, the Company's Board of Directors shall consist of a minimum of five
(5) persons, two (2) of whom shall be independent and not otherwise affiliated
with the Company or associated with any of the Company's affiliates. The
Underwriter shall have the opportunity to invite an observer to attend Board of
Directors meetings of the Company at the expense of the Company.
(y) On the Closing Date, the Company shall execute and deliver to you a
non-exclusive M/A Agreement with the Underwriter in a form satisfactory to the
Underwriter, providing:
(1) that the Underwriter will be paid a finder's fee, of from
five percent (5%) of the first $1,000,000 ranging in $1,000,000
increments down to one percent (1%) of the excess, if any, over
$4,000,000 of the consideration involved in any transaction introduced
by the Underwriter (including mergers, acquisitions, joint ventures,
and any other business for the Company introduced by the Underwriter)
consummated by the Company, as an "Introduced, Consummated
Transaction", by which the Underwriter introduced the other party to
the Company during a period ending five (5) years from the date of the
M/A Agreement; and
(2) that any such finder's fee due to the Underwriter will be
paid in cash or stock as mutually agreed at the closing of the
particular Introduced, Consummated Transaction for which the finder's
fee is due.
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(z) After the Closing Date, the Company shall prepare and publish
"tombstone" advertisements of at least 5 x 5 inches in publications to be
designated by the Underwriter at a total cost not to exceed $15,000.
(aa) Until such time as the securities of the Company are listed or
quoted on either the New York Stock Exchange or the American Stock Exchange, the
Company shall engage the Company's legal counsel to deliver to the Underwriter a
written opinion detailing those states in which the Shares of the Company may be
traded in non-issuer transactions under the Blue Sky laws of the fifty states
("Secondary Market Trading Opinion"). The initial Secondary Market Trading
Opinion shall be delivered to the Underwriter on the Effective Date, and the
Company shall continue to update such opinion and deliver same to the
Underwriter on a timely basis, but in any event at the beginning of each fiscal
quarter, for a five (5) year period, if required.
(ab) As promptly as practicable after the Closing Date, the Company
will prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute such volumes to the individuals designated by the
Underwriter or counsel to the Underwriter.
4. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase and pay for the Securities which the Underwriter has
agreed to purchase hereunder from the Company is subject, as of the date hereof
and as of the Closing Date and the Option Closing Date, to the execution of this
Agreement by the Underwriter, to the continuing accuracy of, and compliance
with, the representations and warranties of the Company herein, to the accuracy
of statements of officers of the Company made pursuant to the provisions hereof,
to the performance by the Company of its obligations hereunder, and to the
following additional conditions:
(a) (i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such
later time or on such later date as you may agree to in writing; (ii) at or
prior to the Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceeding for that purpose shall have been initiated or pending, or shall be
threatened, or to the knowledge of the Company, contemplated by the Commission;
(iii) no stop order suspending the effectiveness of the qualification or
registration of the Securities under thenot a jurisdiction which you shall have
specified) shall be threatened or to the knowledge of the Company contemplated
by the authorities of any such jurisdiction or shall have been issued and in
effect; (iv) any request for additional information on the part of the
Commission or any such authorities shall have been complied with to the
satisfaction of the Commission and any such authorities, and to the satisfaction
of counsel to the Underwriter; and (v) after the date hereof no amendment or
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supplement to the Registration Statement or the Prospectus shall have been filed
unless a copy thereof was first submitted to the Underwriter and the Underwriter
did not object thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any subsidiary or any material adverse change in
the long-term debt of the Company or any material subsidiary except as set forth
in or contemplated by the Registration Statement, (ii) there shall not have been
any material adverse change in the general affairs, business, properties,
condition (financial or otherwise), management, or results of operations of the
Company or any subsidiary, whether or not arising from transactions in the
ordinary course of business, in each case other than as set forth in or
contemplated by the Registration Statement or Prospectus; (iii) neither the
Company nor any subsidiary shall have sustained any material interference with
its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not set
forth in the Registration Statement and Prospectus; and (iv) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstance under which they are made, not misleading.
(c) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), busineerties of the Company or any subsidiary.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date
shall have been duly performed, fulfilled or complied with.
(e) At the Closing Date and each Option Closing Date,, the
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Underwriter shall have received the opinion, dated as of the Closing Date and
each Option Closing Date, from Atlas, Pearlman, Trop & Borkson, P.A., counsel
for the Company, in form and substance satisfactory to counsel for the
Underwriter, which in the aggregate shall state:
(i) the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, with full corporate power
and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation and is in
good standing in each other jurisdiction in which the ownership or
leasing of its properties or conduct of its business requires such
qualification except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company and
each subsidiary as a whole;
(ii) the authorized capitalization of the Company is as set
forth under "Capitalization" in the Prospectus; all shares of the
Company's outstanding stock and other securities requiring
authorization for issuance by the Company's Board of Directors have
been duly authorized, validly issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock of the Company and other securities
have not been issued in violation of the preemptive rights of any
shareholder and the shareholders of the Company do not have any
preemptive rights or, to such counsel's knowledge, other rights to
subscribe for or to purchase securities of the Company, nor, to such
counsel's knowledge, are there any restrictions upon the voting or
transfer of any of the securities of the Company, except as disclosed
in the Prospectus; the Common Stock, the Shares and the securities
contained in the Underwriter's Warrant Agreement conform to the
respective descriptions thereof contained in the Prospectus; the Common
Stock, the Shares and the securities contained in the Underwriter's
Warrant Agreement, have been duly authorized and, when issued,
delivered and paid for, will be duly authorized, validly issued, fully
paid, non-assessable, free of pre-emptive rights and no personal
liability will attach to the ownership thereof; all prior sales by the
Company of the Company's securities have been made in compliance with
or under an exemption from registration under the Act and applicable
state securities laws and no shareholders of the Company have any
rescission rights against the Company with respect to the Company's
securities; a sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Underwriter Warrants, and to
the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration
20
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rights or other rights, other than those which have been waived or
satisfied or described in the Registration Statement;
(iii) this Agreement, the Underwriter's Warrant Agreement, the
Financial Advisory Agreement, and the M/A Agreement have been duly and
validly authorized, executed and delivered by the Company and, assuming
the due authorization, execution and delivery of this Agreement by the
Underwriter, are the valid and legally binding obligations of the
Company, enforceable in accordance with their terms, except (a) as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect
which effect creditors' rights generally; and (b) no opinion is
expressed as to the enforceability of the indemnity provisions or the
contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities of
the Company and the Shares are in valid and proper legal form;
(v) to the best of such counsel's knowledge, except as set
forth in the Prospectus, there is not pending or threatened any
material action, suit, proceeding, inquiry, arbitration or
investigation against the Company or any subsidiary or any of the
officers of directors of the Company or any subsidiary, nor any
material action, suit, proceeding, inquiry, arbitration, or
investigation, which might materially and adversely affect the
condition (financial or otherwise), business prospects, net worth, or
properties of the Company or any subsidiary;
(vi) the execution and delivery of this Agreement, the
Underwriter's Warrant Agreement, the Financial Advisory Agreement, and
the M/A Agreement, and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or
therein contemplated, will not result in a violation of, or constitute
a default under (a) the Articles of Incorporation or By-Laws of the
Company and each subsidiary; (b) to the best of such counsel's
knowledge, any material obligations, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the
Company or any subsidiary is a party or by which it or any of its
material properties is bound; or (c) to the best of such counsel's
knowledge, any material order, rule, regulation, writ, injunction, or
decree of any government, governmental instrumentality or court,
domestic or foreign;
(vii) the Registration Statement has become effective
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under the Act, and to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations; and
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or delivery
of the Securities by the Company in connection with the execution,
delivery and performance of this Agreement by the Company or in
connection with the taking of any action contemplated herein, or the
issuance of the Underwriter's Warrants or the Securities underlying the
Underwriter's Warrants, other than registrations or qualifications of
the Securities under applicable state or foreign securities or Blue Sky
laws and registration under the Act.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriter or counsel for the Underwriter shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriter. The opinion of such counsel
to the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Underwriter and they are justified in
relying thereon.
Such counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus and nothing has come to the attention of such counsel to lead
such counsel to believe that the Registration Statement or any amendment thereto
at the time it became effective contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading or that the Prospectus or any supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact required to be stae statements therein, in light of the
circumstances under which they are made, not misleading (except, in the case of
both the Registration Statement and any amendment thereto and the Prospectus and
any supplement thereto, for the financial statements, notes thereto and other
financial information and statistical data contained therein, as to which such
counsel need express no opinion).
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<PAGE>
(f) You shall have received on the Closing Date and each Option Closing
Date, a certificate dated as of the Closing Date and each Option Closing Date,
signed by the Chief Executive Officer and the Chief Financial Officer of the
Company and such other officers of the Company as the Underwriter may request,
certifying that:
(i) No Order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities is in
effect and no proceedings for such purpose are pending or are, to their
knowledge, threatened by the Commission;
(ii) They do not know of any litigation instituted or, to
their knowledge, threatened against the Company or any subsidiary or
any officer or director of the Company or any subsidiary of a character
required to be disclosed in the Registration Statement which is not
disclosed therein; they do not know of any contracts which are required
to be summarized in the Prospectus which are not so summarized; and
they do not know of any material contracts required to be filed as
exhibits to the Registration Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge,
neither the Registration Statement nor the Prospectus nor any amendment
or supplement to either of the foregoing contains an untrue statement
of any material fact or omits to state any material fact required to be
stated therein or necessary to make the statement therein, in light of
the circumstances under which they are made, not misleading; and since
the Effective Date, to the best of their knowledge, there has occurred
no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth;
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in the condition of the Company or any
subsidiary, financial or otherwise, or in the results of its
operations, except as reflected in or contemplated by the Registration
Statement and the Prospectus, and except as so reflected or
contemplated since such date, there has not been any material
transaction entered into by the Company or any subsidiary;
(v) The representations and warranties set forth in this
Agreement are true and correct in all material respects, and the
Company has complied with all of its agreements herein contained;
(vi) Neither the Company nor any subsidiary is
23
<PAGE>
delinquent in the filing of any federal, state and other tax return or
the payment of any federal, state or other taxes; they know of no
proposed redetermination or re-assessment of taxes, adverse to the
Company or any subsidiary, and the Company and each subsidiary has paid
or provided by adequate reserves for all known tax liabilities;
(vii) They know of no material obligation or liability of the
Company, contingent or otherwise, not disclosed in the Registration
Statement and Prospectus;
(viii) This Agreement, the Underwriter's Warrant Agreement,
the Financial Advisory Agreement, and the M/A Agreement, the
consummation of the transactions therein contemplated, and the
fulfillment of the terms thereof, will not result in a breach by the
Company of any terms of, or constitute a default under, the Company's
Articles of Incorporation or By-Laws, any indenture, mortgage, lease,
deed of trust, bank loan or credit agreement or any other material
agreement or undertaking of the Company or any subsidiary including, by
way of specification but not by way of limitation, any agreement or
instrument to which the Company or any subsidiary is now a party or
pursuant to which the Company or any subsidiary has acquired any
material right and/or obligations by succession or otherwise;
(ix) The financial statements and schedules filed with and as
part of the Registration Statement present fairly the financial
position of the Company as of the dates thereof all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. Since the respective dates of such
financial statements, there have been no material adverse change in the
condition or general affairs of the Company, financial or otherwise,
other than as referred to in the Prospectus;
(x) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as may
otherwise be indicated therein or contemplated thereby, neither the
Company nor any subsidiary has, prior to the Closing Date, either (i)
issued any securities or incurred any material liability or obligation,
direct or contingent, for borrowed money, or (ii) entered into any
material transaction other than in the ordinary course of business. The
Company has not declared, paid or made any dividend or distribution of
any kind on its capital stock;
(xi) They have reviewed the sections in the Prospectus
relating to their biographical data and equity ownership position in
the Company, and all information contained therein is true and
accurate; and
(xii) Except as disclosed in the Prospectus, during the
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past five years, they have not been:
(1) The subject of a petition under the federal
bankruptcy laws or any state insolvency law filed by or
against them, or by a receiver, fiscal agent or similar
officer appointed by a court for their business or property,
or any partnership in which any of them was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which any of them was
an executive officer at or within two years before the time of
such filing;
(2) Convicted in a criminal proceeding or a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
any of them from, or otherwise limiting, any of the following
activities:
(i) acting as a futures commission merchant,
introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or
employee of any investment company, bank, savings and
loan association or insurance company, or engaging in
or continuing any conduct or practice in connection
with any such activity;
(ii) engaging in any type of business
practice; or
(iii) engaging in any activity in connection
with the purchase or sale of any security or
commodity or in connection with any violation of
federal or state securities law or federal commodity
laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or
state authority barring, suspending or otherwise limiting for
more than sixty (60) days their right to engage in any
activity described in paragraph (3)(i) above, or be associated
with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in
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<PAGE>
a civil action or by the Securities and Exchange Commission to
have violated any federal or state securities law, and the
judgment in such civil action or finding by the Commission has
not been subsequently reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to
have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
(g) The Underwriter shall have received from _________________________,
independent auditors to the Company, certificates or letters, one dated and
delivered on the Effective Date and one dated and delivered on the Closing Date,
in form and substance satisfactory to the Underwriter, stating that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) the financial statements and the schedules included in
the Registration Statement and the Prospectus were examined by them
and, in their opinion, comply as to form in all material respects with
the applicable accounting requirements of the Act, the Rules and
Regulations and instructions of the Commission with respect to
Registration Statements on Form SB-2;
(iii) on the basis of inquiries and procedures conducted by
them (not constituting an examination in accordance with generally
accepted auditing standards), including a reading of the latest
available unaudited interim financial statements or other financial
information of the Company (with an indication of the date of the
latest available unaudited interim financial statements), inquiries of
officers of the Company who have responsibility for financial and
accounting matters, review of minutes of all meetings of the
shareholders and the Board of Directors of the Company and other
specified inquiries and procedures, nothing has come to their attention
as a result of the foregoing inquiries and procedures that causes them
to believe that:
(a) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to a specified date not more than five days
prior to the date of such letters, there has been any change
in the Common Stock, long-term debt or other securities of the
Company (except as specifically contemplated in the
Registration Statement and Prospectus) or any material
decreases in net current
26
<PAGE>
assets, net assets, shareholder's equity, working capital or
in any other item appearing in the Company's financial
statements as to which the Underwriter may request advice, in
each case as compared with amounts shown in the balance sheet
as of the date of the most recent financial statements in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or will
occur;
(b) during the period from (and including) the date
of the financial statements in the Registration Statement and
the Prospectus to such specified date there was any material
decrease in revenues or in the total or per share amounts of
income or loss before extraordinary items or net income or
loss, or any other material change in such other items
appearing in the Company's financial statements as to which
the Underwriter may request advice, in each case as compared
with the fiscal period ended as of the date of the most recent
financial statements in the Prospectus, except in each case
for increases, changes or decreases which the Prospectus
discloses have occurred or will occur;
(c) the unaudited interim financial statements of the
Company appearing in the Registration Statement and the
Prospectus (if any) do not comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting principles
and practices on a basis substantially consistent with the
audited financial statements included in the Registration
Statements or the Prospectus.
(iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letters and found them to be in agreement; and
(v) they have not during the immediately preceding five (5)
year period brought to the attention of the Company's management any
reportable condition related to the Company's internal accounting
procedures, weaknesses and/or controls.
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<PAGE>
Such letters shall also set forth such other information as may be
requested by counsel for the Underwriter. Any changes, increases or decreases in
the items set forth in such letters which, in the judgment of the Underwriter,
are materially adverse with respect to the financial position or results of
operations of the Company shall be deemed to constitute a failure of the Company
to comply with the conditions of the obligations to the Underwriter hereunder.
(h) Upon exercise of the option provided for in Section 2(b) hereof,
the obligation of the Underwriter to purchase and pay for the Option Securities
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of counsel to the Underwriter.
(ii) At the Option Closing Date, there shall have been
delivered to you the signed opinions from Atlas, Pearlman, Trop &
Borkson, P.A., counsel for the Company, dated as of the Option Closing
Date, in form and substance satisfactory to counsel to the Underwriter,
which opinions shall be substantially the same in scope and substance
as the opinions furnished to you at the Closing Date pursuant to
Section 4(e) hereof, except that such opinions, where appropriate,
shall cover the Option Securities.
(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Option Closing Date, in
form and substance satisfactory to counsel to the Underwriter,
substantially the same in scope and substance as the certificate
furnished to you at the Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you
from __________________________________, independent auditors to the
Company, dated the Option Closing Date and addressed to the Underwriter
confirming the information in their letter referred to in Section 4(g)
hereof and stating that nothing has come to their attention during the
period from the ending date of their review referred to in said letter
to a date not more than five business days prior to the Option Closing
Date, which would require any change in said
28
<PAGE>
letter if it were required to be dated the Option Closing
Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Securities
shall be satisfactory in form and substance to the Underwriter, and the
Underwriter and counsel to the Underwriter shall have been furnished
with all such documents, certificates, and opinions as you may request
in connection with this transaction in order to evidence the accuracy
and completeness of any of the representations, warranties or
statements of the Company or its compliance with any of the covenants
or conditions contained herein.
(i) No action shall have been taken by the Commission or the NASD, the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Shares and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the Underwriter or the
Company, shall be contemplated by the Commission or the NASD. The Company
represents that at the date hereof it has no knowledge that any such action is
in fact contemplated by the Commission or the NASD. The Company shall advise the
Underwriter of any NASD affiliations of any of its officers, directors, or
stockholders of the Company's securities or their affiliates in accordance with
Section 1(y) of this Agreement.
(j) At the Effective Date, you shall have received from counsel to the
Company, dated as of the Effective Date, in form and substance satisfactory to
counsel for the Underwriter, a written Secondary Market Trading Opinion
detailing those states in which the Shares may be traded in non-issuer
transactions under the Blue Sky laws of the fifty (50) states after the
Effective Date, in accordance with Section 3(ab) of this Agreement.
(k) The authorization and issuance of the Securities and delivery
thereof, the Registration Statement, the Prospectus, and all corporate
proceedings incident thereto shall be satisfactory in all respects to counsel
for the Underwriter, and such counsel shall be furnished with such documents,
certificates and opinions as they may reasonably request to enable them to pass
upon the matters referred to in this sub-section.
(l) Prior to the Effective Date, the Underwriter shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter, as described in the Registration Statement.
(m) If any of the conditions provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the Underwriter under this
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<PAGE>
Agreement may be canceled at, or at any time prior to, the Closing Date and/or
the Option Closing Date by the Underwriter notifying the Company of such
cancellation in writing or by facsimile at or prior to the applicable Closing
Date or Option Closing Date. Any such cancellation shall be without liability of
the Underwriter to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the
Company to sell and deliver the Securities is subject to the execution of this
Agreement by the Company, and to the following conditions:
(i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement, or
on such later time or date as the Company and the Underwriter may agree
in writing; and
(ii) At the Closing Date and the Option Closing Date, no stop
orders suspending the effectiveness of the Registration Statement shall
have been issued under the Act or any proceedings therefore initiated
or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this Section have been fulfilled on the Closing Date but are not fulfilled after
the Closing Date and prior to the Option Closing Date, then only the obligation
of the Company to sell and deliver the Securities on exercise of the option
provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION. (a) The Company indemnifies and holds harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
(i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, (ii) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or i
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such cases to
30
<PAGE>
the extent, but only to the extent, that any such losses, claim, damages or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the Registration Statement or any amendment or
supplement thereof or any Blue Sky Application or any Preliminary Prospectus or
the Prospectus or any such amendment or supplement thereto. Notwithstanding the
foregoing, the Company shall have no liability under this Section if such untrue
statement or omission made in a Preliminary Prospectus is cured in the
Prospectus and the Prospectus is not delivered to the person or persons alleging
the liability upon which indemnification is being sought. This indemnity will be
in addition to any liability which the Company may otherwise have.
(b) The Underwriter indemnifies and holds harmless the Company, each of
its directors, each nominee (if any) for director named in the Prospectus, each
of the persons who have signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, signer of the
Registration Statement, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or sise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statements or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use in such Registration Statement
or Prospectus. Notwithstanding the foregoing, the Underwriter shall have no
liability under this section if such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus and the Prospectus is not
delivered to the person or persons alleging the liability upon which
indemnification is being sought through no fault of the Underwriter. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the
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omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, subject to the provisions herein stated, with counsel
reasonably satisfactory to such indemnified party, and after notice from
themnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is an Underwriter or a person who controls such
Underwriter within the meaning of the Act, the fees and expenses of such counsel
shall be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action (including any impleaded parties)
include both the Underwriter or such controlling person and the indemnifying
party and in the reasonable judgment of the Underwriter, it is advisable for the
Underwriter or such Underwriter or controlling persons to be represented by
separate counsel (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of the Underwriter or such
controlling person). No settlement of any action against an indemnified party
shall be made without the consent of the indemnifying party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnifying
and indemnified parties.
7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (i) the Underwriter makes claim
for indemnification pursuant to Section 6 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and the Underwriter shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees) in either such
case (after contribution
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from others) in such proportions that the Underwriter is responsible in the
aggregate for that portion of such losses, claims, damages or liabilities
represented by the percentage that the underwriting discount per Share appearing
on the cover page of the Prospectus bears to the public offering price appearing
thereon, and the Company shall be responsible for the remaining portion,
provided, however, that if such allocation is not permitted by applicable law
then the relative fault of the Company and the Underwriter and controlling
persons, in the aggregate, in connection with the statements or omissions which
resulted in such damages and other relevant equitable considerations shall also
be considered. The relative fault shall be determined by reference to, among
other things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact, such statement or omission relates to
information supplied by the Crelative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriter agree that it would not be just and equitable if the
respective obligations of the Company and the Underwriter to contribute pursuant
to this Section 7 were to be determined by pro rata or per capita allocation of
the aggregate damages (even if the Underwriter and its controlling persons in
the aggregate were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in the first sentence of this Section. No person ultimately
determined to be guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not ultimately determined to be guilty of such fraudulent misrepresentation.
As used in this Section, the term "Underwriter" includes any officer, director,
or other person who controls the Underwriter within the meaning of Section 15 of
the Act, and the word "Company" includes any officer, director, or person who
controls the Company within the meaning of Section 15 of the Act. If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Underwriter and each person who controls the Underwriter shall be
entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law. This foregoing
agreement shall in no way affect the contribution liabilities of any persons
having liability under Section 11 of the Act other than the Company and the
Underwriter. No contribution shall be requested with regard to the settlement of
any matter from any party which did not consent to the settlement; provided,
however, that such consent shall not be unreasonably withheld in light of all
factors of importance to such party.
8. COSTS AND EXPENSES. (a) Whether he sale of the Securities to the
Underwriter is consummated, the Company will pay all costs and expenses incident
to the performance of this Agreement by the Company including but not limited to
the fees and expenses of counsel to the Company and of the Company's
accountants; the costs and expenses incident to the preparation, printing,
filing and distribution under the Act of the Registration
33
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Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented; the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Securities contemplated hereby; all state filing fees, expenses
and disbursements and legal fees of counsel to the Company who shall serve as
Blue Sky counsel to the Company in connection with the filing of applications to
register the Securities under the state securities or blue sky laws; the cost of
printing and furnishing to the Underwriter copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, this Agreement, the Selected
Dealers Agreement, and the Blue Sky Memorandum; the cost of printing the
certificates evidencing the securities comprising the Securities; the cost of
preparing and delivering to the Underwriter and its counsel bound volumes
containing copies of all documents and appropriate correspondence filed with or
received from the Commission and the NASD and all closing documents; and the
fees and disbursements of the transfer agent for the Company's securities. The
Company shall pay any and all taxes (including any original issue, transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriter hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus. The Company shall also engage the Company's counse
Underwriter with a written Secondary Market Trading Opinion in accordance with
Sections 3(ab) and 4(j) of this Agreement.
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds received from the sale of the
Securities, of which an advance of $35,000 has been paid to date. In the event
the overallotment option is exercised, the Company shall pay to the Underwriter
at the Option Closing Date an additional amount equal to three percent (3%) of
the gross proceeds received upon exercise of the overallotment option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Underwriter or from any other person for services as a finder in connection
with the proposed offering, and the Company agrees to indemnify and hold
harmless the Underwriter against any losses, claims, damages or liabilities,
which shall, for all purposes of this Agreement, include, but not be limited to,
all costs of defense and investigation and all attorneys' fees, to which the
Underwriter may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
34
<PAGE>
9. EFFECTIVE DATE. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the execution
of this Agreement; or at such earlier time after the Effective Date of the
Registration Statement as you in your discretion shall first commence the public
offering of any of the Securities. The time of the public offering shall mean
the time after the effectiveness of the Registration Statement when the
Securities are first generally offered by you to the Selected Dealers. This
Agreement it becomes effective as provided above, except that Sections 3(c), 6,
7, 8, 12, 13, 14, 15, 16 and 17 shall remain in effect notwithstanding such
termination.
10. TERMINATION. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
12, 13, 14, 15, 16, and 17 hereof, may be terminated at any time prior to the
Closing Date, and the option referred to in Section 2(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Securities agreed to be purchased
hereunder by reason of: (i) the Company having sustained a material adverse
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree; (ii) trading in securities on the New York Stock Exchange or the
American Stock Exchange having been suspended or limited; (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof); (iv) a banking moratorium having
been declared by Federal or New York or Florida state authorities; (v) an
outbreak of major international hostilities or other national or international
calamity having occurred; (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed likely by the Underwriter to have a material
adverse impact on the business, financial condition or financial statements of
the Company or the market for the Securities offered hereby; (vii) any material
adverse change in the financial or securities markets beyond normal market
fluctuations having occurred since the date of this Agreemeg occurred, since the
respective dates as of which information is given in the Registration Statement
and Prospectus, in the earnings, business prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business; (ix) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could, in the reasonable judgment of the Underwriter, materially adversely
affect the Company; (x) except as contemplated by the Prospectus, the Company is
merged or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing
35
<PAGE>
or any other material change of ownership or control occurs; or (xi) the Company
shall not have complied in all material respects with any term, condition or
provisions on its part to be performed, complied with or fulfilled (including
but not limited to those set forth in this Agreement) within the respective
times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
11. UNDERWRITER'S WARRANT AGREEMENT. At the Closing Date, the Company
will issue to the Underwriter and/or persons related to the Underwriter, for an
aggregate purchase price of $10, and upon the terms and conditions set forth in
the form of Underwriter's Warrant Agreement annexed as an exhibit to the
Registration Statement, Underwriter Warrants to purchase up to an aggregate of
150,000 Shares, in such denominations as the Underwriter shall designate. In the
event of conflict in the terms of this Agreement and the Underwriter's Warrant
Agreement, the language of the form of Underwriter's Warrant Agreement shall
control.
12.RVE DELIVERY. The respective indemnities, agreements,
representations, warranties and other statements of the Company and its
principal officers, where appropriate, and the Underwriter set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Underwriter, the Company or any of
its officers or directors or any controlling person and will survive delivery of
and payment for the Securities and the termination of this Agreement.
13. NOTICE. All communications hereunder will be in writing
and, except as otherwise expressly provided herein, will be mailed,
delivered or telefaxed, and confirmed:
If to the Underwriter: Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
2300 Glades Road, Suite 210W
Boca Raton, Florida 33431
If to the Company: Richard K. Hagen
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
Copy to: James J. Schneider, Esq.
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<PAGE>
Atlas, Pearlman, Trop &
Borkson, P.A.
New River
Center, Suite 1900
200 East Olas Boulevard
Fort Lauderdale, Florida 33301
14. PARTIES IN INTEREST. This Agreement herein set forth is made solely
for the benefit of the Underwriter, the Company and, to the extent expressed,
any person controlling the Company or the Underwriter, and directors of the
Company, nominees for director (if any) named in the Prospectus, each person who
has signed the Registration Statement, and their respective executors,
administrators, successors, assigns and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of the Securities, as such purchaser,
from the Underwriter.
15. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida applicable to contracts made
and to be performed entirely within the State of Florida. The parties agree that
any action brought by any party against another party in connection with any
rights or obligations arising out of this Agreement shall be instituted properly
in a federal or state court of competent jurisdiction with venue only in the
Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida or the
United States District Court for the Southern District of Florida, West Palm
Beach Division. A party to this Agreement named as a Defendant in any action
brought in connection with this Agreement in any court outside of the above
37
<PAGE>
named designated county or district shall have the right to have the venue of
said action changed to the above designated county or district or, if necessary,
have the case dismissed, requiring the other party to refile such action in an
appropriate court in the above designated county or federal district.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
17. ENTIRE AGREEMENT. This Agreement and the agreements referred to
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreements, understandings, negotiations and discussions,
whether written or oral, of the parties hereto.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
AMERICAN QUANTUM CYCLES, INC.
BY:_________________________________
Richard K. Hagen
Chairman and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
BARRON CHASE SECURITIES, INC.
BY:_________________________________
Robert T. Kirk, President
38
AMERICAN QUANTUM CYCLES, INC.
1,600,000 Shares of Common Stock
SELECTED DEALER AGREEMENT
-------------------------
Boca Raton, Florida
_____________, 1999
Gentlemen:
1. Barron Chase Securities, Inc. (the "Underwriter") is offering for
sale an aggregate of 1,600,000 Shares of Common Stock (the "Shares" or the "Firm
Securities") of American Quantum Cycles, Inc. (the "Company"), which the
Underwriter has agreed to purchase from the Company, and which are more
particularly described in the Registration Statement, Underwriting Agreement and
Prospectus. In addition, the Underwriter has been granted an option to purchase
from the Company up to an additional 240,000 Shares (the "Option Securities") to
cover overallotments in connection with the sale of the Firm Securities. The
Firm Securities and any Option Securities purchased are herein called the
"Securities". The Securities and the terms under which they are to be offered
for sale by the Underwriter is more particularly described in the Prospectus.
2. The Securities are to be offered to the public by the Underwriter at
the price per Share set forth on the cover page of the Prospectus (the "Public
Offering Price"), in accordance with the terms of offering set forth in the
Prospectus.
3. The Underwriter, subject to the terms and conditions hereof, is
offering a portion of the Securities for sale to certain dealers who are
actually engaged in the investment banking or securities business and who are
either (a) members in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"), or (b) dealers with their principal places of
business located outside the United States, its territories and its possessions
and not registered as brokers or dealers under the Securities Exchange Act of
1934, as amended (the "1934 Act"), who have agreed not to make any sales within
the United States, its territories or its possessions or to persons who are
nationals thereof or residents therein (such dealers who shall agree to sell
Securities hereunder being herein called "Selected Dealers") at the public
offering price, less a selling concayable as hereinafter provided, out of which
concession an amount not exceeding $______________ per Share may be reallowed by
Selected Dealers to members of the NASD or foreign dealers qualified as
aforesaid. The Selected Dealers who are members of the NASD agree to comply with
all of the provisions of the NASD Conduct Rules. Foreign Selected Dealers agree
to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and, if
any such dealer is a foreign dealer and not
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<PAGE>
a member of the NASD, such Selected Dealer also agrees to comply with the NASD's
Interpretation with Respect to Free-Riding and Withholding, and to comply, as
though it were a member of the NASD, with the provisions of Rules 2730 and 2750
of the NASD Conduct Rules, and to comply with Rule 2420 thereof as that Rule
applies to non-member foreign dealers. The Underwriter has agreed that, during
the term of this Agreement, it will be governed by the terms and conditions
hereof.
4. Barron Chase Securities, Inc. shall act as Underwriter and shall
have full authority to take such action as we may deem advisable in respect to
all matters pertaining to the public offering of the Securities.
5. If you desire to act as a Selected Dealer, and purchase any of the
Securities, your application should reach us promptly by facsimile, letter or
telegraph at the offices of Barron Chase Securities, Inc., 7700 West Camino
Real, Boca Raton, Florida 33433, Attention: Robert T. Kirk. We reserve the right
to reject subscriptions in whole or in part, to make allotments, and to close
the subscription books at any time without notice. The Securities allotted to
you will be confirmed, subject to the terms and conditions of this Selected
Dealers Agreement (the "Agreement").
6. The privilege of subscribing for the Securities is extended to you
only on the condition that the Underwriter may lawfully sell the Securities to
Selected Dealers in your state or other applicable jurisdiction.
7. Any Securities to be purchased by you under the terms of this
Agreement may be immediately reoffered to the public in accordance with the
terms of offering as set forth herein and in the Prospectus, subject to the
securities or Blue Sky laws of the various states or other jurisdictions.
You agree to pay us on demand for the account of the Underwriter an
amount equal to the Selected Dealer concession as to any Securities purchased by
you hereunder which, prior to the completion of the public offering as defined
in paragraph 8 below, we may purchase or contract to purchase for our account
and, in addition, we may charge you with any broker's commission and transfer
tax paid in connection with such purchase or contract to purchase. Certificates
for Securities delivered on such repurchas from time to time, upon request, of
the number of Securities purchased by you hereunder and remaining unsold at the
time of such request, and, if in our opinion any such Securities shall be needed
to make delivery of the Securities sold or overallotted for the account of the
Underwriter, you will, forthwith upon our request, grant to us for the account
of the Underwriter the right, exercisable promptly after receipt of notice from
you that such right has been granted, to purchase, at the Public Offering Price
less the selling concession or such part thereof as we shall
2
<PAGE>
determine, such number of Securities owned by you as shall have been specified
in our request.
No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Securities by the Underwriter to you will
be paid when such Securities are delivered to you. However, you shall pay any
transfer tax on sales of Securities by you and you shall pay your proportionate
share of any transfer tax (other than the single transfer tax described above)
in the event that any such tax shall from time to time be assessed against you
and other Selected Dealers as a group or otherwise.
Neither you nor any other person is or has been authorized to give any
information or to make any representation in connection with the sale of the
Securities other than as contained in the Prospectus.
8. The first three paragraphs of Section 7 hereof will terminate when
we shall have determined that the public offering of the Securities has been
completed and upon telefax notice to you of such termination, but, if not
theretofore terminated, they will terminate at the close of business on the 30th
full business day after the date hereof; provided, however, that we shall have
the right to extend such provisions for a further period or periods, not
exceeding an additional 30 days in the aggregate upon telefax notice to you.
9. For the purpose of stabilizing the market in the Sf the Securities
of the Company, in the open market or otherwise, for long or short account, and,
in arranging for sales, to overallot.
10. On becoming a Selected Dealer, and in offering and selling the
Securities, you agree to comply with all the applicable requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the 1934 Act. You
confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to
the distribution of preliminary and final prospectuses for securities of an
issuer (whether or not the issuer is subject to the reporting requirements of
Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will
comply therewith.
We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as you may reasonably
request for the purposes contemplated by the 1933 Act or the 1934 Act, or the
rules and regulations thereunder.
11. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Securities are qualified
for sale under the respective securities or Blue Sky laws of such states and
other jurisdictions, but we shall not assume any obligation or responsibility as
to the right of any Selected Dealer to sell the Securities in any state or other
3
<PAGE>
jurisdiction or as to the eligibility of the Securities for sale therein. We
will, if requested, file a Further State Notice in respect of the Securities
pursuant to Article 23-A of the General Business Law of the State of New York.
12. No Selected Dealer is authorized to act as agent for the
Underwriter, or otherwise to act on our behalf, in offering or selling the
Securities to the public or otherwise or to furnish any information or make any
representation except as contained in the Prospectus.
13. Nothing will constitute the Selected Dealers an association or
other separate entity or partners with the Underwriter, or with each other, but
you will be responsible for your share of any liability or expense based on any
claim to the contrary. We shall not be under any liability for or in respect of
value, validity or form of the Securities, or the delivery of the certificates
for the Securities, or the performance by anyone of any agreement on its part,
or the qualification of the Securities for sale under the laws of any
jurisdiction, or for or in respect of any other matter relating to this
Agreement, except for lack of good faith and for obligations expressly assumed
by us or by the Underwriter in this Agreement and no obligation on our part
shall be implied herefrom. The foregoing provisions shall not be deemed a waiver
of any liability imposed under the 1933 Act.
14. Payment for the Securities sold to you hereunder is to be made at
the Public Offering Price less the above-mentioned selling concession on such
time and date as we may advise, at the office of Barron Chase Securities, Inc.,
7700 West Camino Real, Boca Raton, Florida 33433, Attention: Robert T. Kirk, by
wire transfer to the account of the Underwriter or by a certified or official
bank check in current New York Clearing House funds, payable to the order of
Barron Chase Securities, Inc., as Underwriter, against delivery of certificates
for the Securities so purchased. If such payment is not made at such time, you
agree to pay us interest on such funds at the prevailing broker's loan rate.
15. Notices to us should be addressed to us at the offices of Barron
Chase Securities, Inc., 7700 West Camino Real, Boca Raton, Florida 33433,
Attention: Robert T. Kirk. Notices to you shall be deemed to have been duly
given if telephoned, telefaxed, telegraphed or mailed to you at the address to
which this Agreement or accompanying Selected Dealer Letter is addressed.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to the choice of law
or conflicts of law principles thereof.
17. If you desire to purchase any Securities and act as a Selected
Dealer, please confirm your application by signing and returning to us your
confirmation on the duplicate copy of the
4
<PAGE>
Selected Dealer Letter enclosed herewith, even though you may have previously
advised us thereof by telephone, letter or telegraph.
Our signature hereon may be by facsimile.
Very truly yours,
BARRON CHASE SECURITIES, INC.
BY:__________________________
Authorized Officer
5
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SELECTED DEALER LETTER
----------------------
Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
We hereby subscribe for ______________ Shares of American Quantum
Cycles, Inc. in accordance with the terms and conditions stated in the foregoing
Selected Dealers Agreement and this Selected Dealer letter. We hereby
acknowledge receipt of the Prospectus referred to in the Selected Dealers
Agreement and Selected Dealer letter. We further state that in purchasing said
Shares we have relied upon said Prospectus and upon no other statement
whatsoever, whether written or oral. We confirm that we are a dealer actually
engaged in the investment banking or securities business and that we are either
(i) a member in good standing of the National Association of Securities Dealers,
Inc. ("NASD"); or (ii) a dealer with its principal place of business located
outside the United States, its territories and its possessions and not
registered as a broker or dealer under the Securities Exchange Act of 1934, as
amended, who hereby agrees not to make any sales within the United States, its
territories or its possessions or to persons who are nationals thereof or
residents therein. As a member of the NASD, we hereby agree to comply with all
of the provisions of NASD Conduct Rules. If we are a foreign Selected Dealer, we
agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and
if we are a foreign dealer and not a member of the NASD, we agree to comply with
the NASD's interpretation with respect to free-riding and withholding, and agree
to comply, as though we were a member of the NASD, with provisions of Rules 2730
and 2750 of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD
Conduct Rules as that Rule applies to non-member foreign dealers.
Firm:________________________________
By:________________________________
(Name and Position)
Address:________________________________
________________________________
Telephone No.:________________________________
Dated:___________________, 1998
6
UNDERWRITER'S WARRANT AGREEMENT (the "Underwriter's Warrant
Agreement" or "Agreement"), dated as of ____________, 1998, between
AMERICAN QUANTUM CYCLES, INC. (the "Company"), and BARRON CHASE
SECURITIES, INC. (the "Underwriter").
W I T N E S S E T H:
--------------------
WHEREAS, the Underwriter has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the Underwriter, to act as the Underwriter in connection with the
Company's proposed public offering of 1,600,000 shares of the Company's Common
Stock at $____ per share (the "Public Offering"); and
WHEREAS, the Company proposes to issue to the Underwriter and/or
persons related to the Underwriter as those persons are defined in Rule 2710 of
the NASD Conduct Rules (the "Holder"), 160,000 warrants ("Common Stock
Underwriter Warrants") to purchase 160,000 shares of the Company's Common Stock
(the "Shares"). The "Common Stock Underwriter Warrants" are also referred to as
the "Warrants". The "Shares" are also referred to as the "Warrant Securities";
and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Holders in consideration for, and as part of
the compensation in connection with, the Underwriter acting as Underwriter
pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment to the
Company of TEN DOLLARS AND NO CENTS ($10.00), the agreements herein set forth
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. GRANT AND PERIOD.
The above recitals are true and correct. The Public Offering has been
registered under a Registration Statement on Form SB-2 (File No. _________) and
declared effective by the Securities and Exchange Commission (the "SEC" or
"Commission") on __________, 1999 (the "Effective Date"). This Agreement,
relating to the purchase of the Warrants, is entered into pursuant to the
Underwriting Agreement between the Company and the Underwriter in connection
with the Public Offering.
Pursuant to the Warrants, the Holders are hereby granted the right to
purchase from the Company, at any time during the period commencing on the
Effective Date and expiring five (5) years thereafter (the "Expiration Time"),
up to 160,000 Shares at an initial exercise price (subject to adjustment as
provided in
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Article 8 hereof) of $____ per share (___% of the public offering price) (the
"Exercise Price" or "Purchase Price"), subject to the terms and conditions of
this Agreement.
Except as specifically otherwise provided herein, the Shares
constituting the Warrant Securities shall bear the same terms and conditions as
such securities described under the caption "Description of Securities" in the
Registration Statement, and as designated in the Company's Articles of
Incorporation and any amendments thereto, and the Holders shall have
registration rights under the Securities Act of 1933, as amended (the "Act"),
for the Warrants and the Shares, as more fully described in paragraph seven (7)
of this Underwriter's Warrant Agreement.
2. WARRANT CERTIFICATES.
The warrant certificates (the "Warrant Certificate") delivered and to
be delivered pursuant to this Agreement shall be in the form set forth in the
form of Warrant Certificate, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1 FULL EXERCISE.
(i) The Holder hereof may effect a cash exercise of the Common
Stock Underwriter Warrants by surrendering the Warrant Certificate,
together with a Subscription in the form of Exhibit "A" attached
thereto, duly executed by such Holder to the Company, at any time prior
to the Expiration Time, at the Company's principal office, accompanied
by payment in cash or by certified or official bank check payable to
the order of the Company in the amount of the aggregate purchase price
(the "Aggregate Price"), subject to any adjustments provided for in
this Agreement. The aggregate price hereunder for each Holder shall be
equal to the exercise price as set forth in Section six (6) hereof
multiplied by the number of Shares that are the subject of each
Holder's Warrant (as adjusted as hereinafter provided).
(ii) The Holder hereof may effect a cashless exercise of the
Common Stock Underwriter Warrants by delivering the Warrant Certificate
to the Company together with a Subscription in the form of Exhibit "B"
attached thereto, duly executed by such Holder, in which case no
payment of cash will be required. Upon such cashless exercise, the
number of Shares to be purchased by each Holder hereof shall be
determined by dividing: (i) the number obtained by multiplying the
number of Shares that are the subject of each Holder's Warrant
Certificate by the amount, if any, by which the then
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Market Value (as hereinafter defined) exceeds the Purchase Price; by
(ii) the then per share Market Value or Purchase Price, whichever is
greater. In no event shall the Company be obligated to issue any
fractional securities and, at the time it causes a certificate or
certificates to be issued, it shall pay the Holder in lieu of any
fractional securities or shares to which such Holder would otherwise be
entitled, by the Company check, in an amount equal to such fraction
multiplied by the Market Value. The Market Value shall be determined on
a per Share basis as of the close of the business day preceding the
exercise, which determination shall be made as follows: (a) if the
Common Stock is listed for trading on a national or regional stock
exchange or is included on the NASDAQ National Market or Small-Cap
Market, the average closing sale price quoted on such exchange or the
NASDAQ National Market or Small-Cap Market which is published in THE
WALL STREET JOURNAL for the ten (10) trading days immediately preceding
the date of exercise, or if no trade of the Common Stock shall have
been reported during such period, the last sale price so quoted for the
next day prior thereto on which a trade in the Common Stock was so
reported; or (b) if the Common Stock is not so listed, admitted to
trading or included, the average of the closing highest reported bid
and lowest reported ask price as quoted on the National Association of
Securities Dealer's OTC Bulletin Board or in the "pink sheets"
published by the National Daily Quotation Bureau for the first day
immediately preceding the date of exercise on which the Common Stock is
traded.
3.2 PARTIAL EXERCISE. The securities referred to in paragraph 3.1 above
also may be exercised from time to time in part by surrendering the Warrant
Certificate in the manner specified in Section 3.1 hereof, except that with
respect to a cash exercise, the Purchase Price payable shall be equal to the
number of securities being purchased hereunder multiplied by the per security
Purchase Price, subject to any adjustments provided for in this Agreement. Upon
any such partial exercise, the Company, at its expense, will forthwith issue to
the Holder hereof a new Warrant Certificate or Warrants of like tenor calling in
the aggregate for the number of securities (as constituted as of the date
hereof) for which the Warrant Certificate shall not have been exercised, issued
in the name of the Holder hereof or as such Holder (upon payment by such Holder
of any applicable transfer taxes) may direct.
4. ISSUANCE OF CERTIFICATES.
Upon the exercise of the Warrants, the issuance of certificates for the
shares of Common Stock and/or other securities shall be made forthwith (and in
any event within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable inct
to the provisions of Sections 5 and 7 hereof) be issued in the name of, or
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in such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Common Stock and/or other securities shall be executed on behalf of the
Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or Assistant Secretary of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS.
The Holder of a Warrant Certificate, by acceptance thereof, covenants
and agrees that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the Effective Date of the Public Offering, except (a) to officers
of the Underwriter or to officers and partners of the Selected Dealers
participating in the Public Offering; (b) by will; or (c) by operation of law.
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICES.
The initial exercise price of each Common Stock Underwriter Warrant
shall be $____ per share (___% of the public offeom any and all adjustments of
the initial exercise price in accordance with the provisions of Section 8
hereof.
6.2 EXERCISE PRICE.
The term "Exercise Price" herein shall mean the initial exercise price
or the adjusted exercise price, depending upon the context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933.
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The Warrants and the Warrant Securities (collectively the "Registrable
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act"). Upon exercise, in part or in whole, of the Warrants, certificates
representing the Shares shall bear the following legend in the event there is no
current registration statement effective with the Commission at such time as to
such securities:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under
the Act, (ii) to the extent applicable, Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of securities),
or (iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act and applicable state securities laws is
available.
7.2 PIGGYBACK REGISTRATION.
If, at any time commencing after the Effective Date of the offering and
expiring seven (7) years thereafter, the Company prepares and files a
post-effective amendment to the Registration Statement, or a new Registration
Statement under the Act, or files a Notification on Form 1-A or otherwise
registers securities under the Act, or files a similar disclosure document with
the Commission (collectively the "Registration Documents") as to any of its
securities under the Act (other than under a Registration Statement pursuant to
Form S-8), it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such Registration Document, to the Underwriter
and to all other Holders of the Registrable Securities of its intention to do
so. If the Underwriter and/or other Holders of the Registrable Securities notify
the Company within twenty (20) days after receipt of any such notice of its or
their desire to include any such Registrable Securities in such proposed
Registration Documents, the Company shall afford the Underwriter and such
Holders of such Registrable Securities the opportunity to have any Registrable
Securities registered under such Registration Documents or any other available
Registration Document.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
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(a) At any time commencing one (1) year after the Effective Date of the
Public Offering, and expiring four (4) years thereafter, the Holders of
Registrable Securities representing more than 50% of such securities at that
time outstanding shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Commission, on one
occasion, a registration statement and/or such other documents, including a
prospectus, and/or any other appropriate disclosure document as may be
reasonably necessary in the opinion of both counsel for the Company and counsel
for the Underwriter and Holders, in order to comply with the provisions of the
Act, so as to permit a public offering and sale of their respec(or such longer
period of time as permitted by the Act) by such Holders and any other Holders of
any of the Registrable Securities who notify the Company within ten (10) days
after being given notice from the Company of such request. A Demand Registration
shall not be counted as a Demand Registration hereunder until such Demand
Registration has been declared effective by the SEC and maintained continuously
effective for a period of at least nine months or such shorter period when all
Registrable Securities included therein have been sold in accordance with such
Demand Registration, provided that a Demand Registration shall be counted as a
Demand Registration hereunder if the Company ceases its efforts in respect of
such Demand Registration at the request of the majority Holders making the
demand for a reason other than a material and adverse change in the business,
assets, prospects or condition (financial or otherwise) of the Company and its
subsidiaries taken as a whole.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by the majority of the Holders to
all other registered Holders of any of the Registrable Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing one (1) year after
the Effective Date of the offering, and expiring four (4) years thereafter, the
Holders of a majority of the Registrable Securities shall have the right,
exercisable by written request to the Company, to have the Company prepare and
file, on one occasion, with the Commission a registration statement or any other
appropriate disclosure document so as to permit a public offering and sale for
nine (9) consecutive months (or such longer period of time as permitted by the
Act) by any such Holder of Registrable Securities; provided, however, that the
provisions of Secegistration request and registration and all costs incident
thereto shall be at the expense of the Holder or Holders participating in the
offering pro-rata.
(d) Any written request by the Holders made pursuant to this Section
7.3 shall:
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(i) specify the number of Registrable Securities which the
Holders intend to offer and sell and the minimum price at which the
Holders intend to offer and sell such securities;
(ii) state the intention of the Holders to offer such
securities for sale;
(iii) describe the intended method of distribution of such
securities; and
(iv) contain an undertaking on the part of the Holders to
provide all such information and materials concerning the Holders and
take all such action as may be reasonably required to permit the
Company to comply with all applicable requirements of the Commission
and to obtain acceleration of the effective date of the registration
statement.
(e) In the event the Company receives from the Holders of any
Registrable Securities representing more than 50% of such securities at that
time outstanding, a request that the Company effect a registration on Form S-3
with respect to the Registrable Securities and if Form S-3 is available for such
offering, the Company shall, as soon as practicable, effect such registration as
would permit or facilitate the sale and distribution of the Registrable
Securities as are specified in the request. All expenses incurred in connection
with a registration requested pursuant to this Section shall be borne by the
Company. Registrations effected pursuant to this Section 7.3(e) shall not be
counted as registrations pursuant to Section 7.3(a) and 7.3(c) hereof.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION.
In connection with the filing of any Registration Document by the
Company, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand pursuant to
Section 7.3, and shall use its best efforts to have any such registration
statement declared effective at the earliest practicable time. The Company will
promptly notify each seller of such Registrable Securities and confirm such
advice in writing, (i) when such registration statement becomes effective, (ii)
when any post-effective amendment to such registration statement becomes
effective and (iii) of any request by the SEC for any amendment or supplement to
such registration statement or any prospectus relating thereto or for additional
information.
The Company shall furnish to each seller of such Registrable Securities
such number of copies of such registration statement and of each such amendment
and supplement thereto (in each case including each preliminary prospectus and
summary prospectus) in
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conformity with the requirements of the Act, and such other documents as such
seller may reasonably request in order to facilitate the disposition of the
Registrable Securities by such seller.
(b) The Company shall pay all costs (excluding transfer taxes, if any,
and fees and expenses of Holder(s)' counsel and the Holder's pro-rata portion of
the selling discount or commissions), fees and expenses in connection with all
registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and
expenses in connection with any registration statement filed pursuant to Section
7.3(c). If the Company shall fail to comply with the provisions of Section
7.3(a), the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any or all special and consequential
damages sustained by the Holder(s) requesting registration of their Registrable
Securities.
(c) The Company shall prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be reasonably necessary to keep such registration statement
effective for at least nine months (or such longer period as permitted by the
Act), and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the seller or
sellers of Registrable Securities set forth in such registration statement. If
at any time the SEC should institute or threaten to institute any proceedings
for the purpose of issuing a stop order suspending the effectiveness of any such
registration statement, the Company will promptly notify each seller of such
Registrable Securities and will use all reasonable efforts to prevent the
issuance of any such stop order or to obtain the withdrawal thereof as soon as
possible. The Company will use its good faith reasonable efforts and take all
reasonably necessary action which may be required in qualifying or registering
the Registrable Securities included in a registration statement for offering and
sale under the securities or reasonably are required by the Holder(s), provided
that the Company shall not be obligated to execute or file any general consent
to service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction. The Company shall use its good faith
reasonable efforts to cause such Registrable Securities covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities of the United States or any State thereof
as may be reasonably necessary to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities.
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(d) The Company shall indemnify the Holder(s) of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter as contained in the Underwriting
Agreement.
(e) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each of the Holder(s) of the
Registrable Securities to be sold pursuant to a registration statement, and
their successors and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurinst any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from written
information furnished by such Holder, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in the Underwriting Agreement
pursuant to which the Underwriter has agreed to indemnify the Company, except
that the maximum amount which may be recovered from each Holder pursuant to this
paragraph or otherwise shall be limited to the amount of net proceeds received
by the Holder from the sale of the Registrable Securities.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the filing of any registration
statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof without the prior written consent of the
Holders of the Registrable Securities representing a majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration
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statement (and, if such registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting agreement) signed by
the independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and the
managing underwriter copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and prop of the Company with its officers and independent auditors, all
to such reasonable extent and at such reasonable times and as often as any such
Holder shall reasonably request.
(j) With respect to a registration statement filed pursuant to Section
7.3, the Company, if requested, shall enter into an underwriting agreement with
the managing underwriter, reasonably satisfactory to the Company, selected for
such underwriting by Holders holding a majority of the Registrable Securities
requested to be included in such underwriting. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders, if required by the
Underwriter to be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities, may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) Notwithstanding the provisions of paragraph 7.2 or
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paragraph 7.3 of this Agreement, the Company shall not be required to effect or
cause the registration of Registrable Securities pursuant to paragraph 7.2 or
paragraph 7.3 hereof if, within thirty (30) days after its receipt of a request
to register such Registrable Securities (i) counsel for the Company delivers an
opinion to the Holders requesting registration of such Registrable Securities,
in form and substance satisfactory to counsel to such Holder(s), to the effect
that the entire number of Registrable Seay otherwise be sold, in the manner
proposed by such Holder(s), without registration under the Securities Act, or
(ii) the SEC shall have issued a no-action position, in form and substance
satisfactory to counsel for the Holder(s) requesting registration of such
Registrable Securities, to the effect that the entire number of Registrable
Securities proposed to be sold by such Holder(s) may be sold by it, in the
manner proposed by such Holder(s), without registration under the Securities
Act.
(l) After completion of the Public Offering, the Company shall not,
directly or indirectly, enter into any merger, business combination or
consolidation in which (a) the Company shall not be the surviving corporation
and (b) the stockholders of the Company are to receive, in whole or in part,
capital stock or other securities of the surviving corporation, unless the
surviving corporation shall, prior to such merger, business combination or
consolidation, agree in writing to assume the obligations of the Company under
this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to include the securities which the Holders would be
entitled to receive in exchange for Registrable Securities under any such
merger, business combination or consolidation, provided that to the extent such
securities to be received are convertible into shares of Common Stock of the
issuer thereof, then any such shares of Common Stock as are issued or issuable
upon conversion of said convertible securities shall also be included within the
definition of "Registrable Securities".
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 ADJUSTMENT FOR DIVIDENDS, SUBDIVISIONS, COMBINATIONS OR
RECLASSIFICATIONS.
In case the Company shall (a) pay a dividend or make a distribution in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock any shares of capital stock of the Company; then, and in each
such case, the per share Exercise Price and the number of Warrant Securities in
effect immediately prior to such action shall be adjusted so that the Holder of
this Warrant thereafter upon the exercise hereof shall be entitled to receive
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the number and kind of shares of the Company which such Holder would have owned
immediately following such action had this Warrant been exercised immediately
prior thereto. An adjustment made pursuant to this Section shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this Section, the Holder of this Warrant shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such class of capital stock.
Immediately upon any adjustment of the Exercise Price pursuant to this
Section, the Company shall send written notice thereof to the Holder of Warrant
Certificates (by first class mail, postage prepaid), which notice shall state
the Exercise Price resulting from such adjustment, and any increase or decrease
in the number of Warrant Securities to be acquired upon exercise of the
Warrants, settithod of calculation and the facts upon which such calculation is
based.
8.2 ADJUSTMENT FOR REORGANIZATION, MERGER OR CONSOLIDATION.
In case of any reorganization of the Company or consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental Warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such reorganization, consolidation, merger,
conveyance, sale or transfer. Such supplemental Warrant agreement shall provide
for adjustments which shall be identical to the adjustments provided in Section
8 and such registration rights and other rights as provided in this Agreement.
The Company shall not effect any such consolidation, merger, or similar
transaction as contemplated by this paragraph, unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing, receiving, or leasing such assets or other appropriate corporation
or entity shall assume, by written instrument executed and delivered to the
Holders, the obligation to deliver to the Holders, such shares of stock,
securities, or assets as, in accordance with the foregoing
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provisions, such holders may be entitled to purchase, and to perform the other
obligations of the Company under this Agreen shall similarly apply to successive
consolidations or successively whenever any event listed above shall occur.
8.3 DIVIDENDS AND OTHER DISTRIBUTIONS.
In the event that the Company shall at any time prior to the exercise
of all of the Warrants distribute to its stockholders any assets, property,
rights, evidences of indebtedness, securities (other than a distribution made as
a cash dividend payable out of earnings or out of any earned surplus legally
available for dividends under the laws of the jurisdictions of incorporation of
the Company), whether issued by the Company or by another, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such
distribution as if the Warrants had been exercised immediately prior to such
distribution. At the time of any such distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
subsection or an adjustment to the Exercise Price, which shall be effective as
of the day following the record date for such distribution.
8.4 ADJUSTMENT IN NUMBER OF SECURITIES.
Upon each adjustment of the Exercise Price pursuant to the provisions
of this Section 8, the number of securities issuable upon the exercise of each
Warrant shall be adjusted to the nearest full amount by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of securities issuable upon exercise of the Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.5 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES.
No adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than 5 cents ($.05) per Share, provided, however, that
in such case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with the
next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least 5 cents ($.05) per Share.
8.6 ACCOUNTANT'S CERTIFICATE OF ADJUSTMENT.
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In each case of an adjustment or readjustment of the Exercise Price or
the number of any securities issuable upon exercise of the Warrants, the
Company, at its expense, shall cause independent certified public accountants of
recognized standing selected by the Company (who may be the independent
certified public accountants then auditing the books of the Company) to compute
such adjustment or readjustment in accordance herewith and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to any Holder of the Warrants at the Holder's
address as shown on the Company's books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based including, but not limited to, a statement
of (i) the Exercise Price at the time in effect, and (ii) the number of
additional securities and the type and amount, if any, of other property which
at the time would be received upon exercise of the Warrants.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder theasonably satisfactory to
it of the loss, theft, destruction or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTEREST.
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of the Warrants, nor shall
it be required to issue script or pay cash in lieu of fractional interests, it
being the intent of the parties that all fractional interests may be eliminated,
at the Company's option, by rounding any fraction up to the nearest whole number
of shares of Common Stock or other securities, properties or rights, or in lieu
thereof paying cash equal to such fractional interest multiplied by the current
value of a share of Common Stock.
11. RESERVATION, VALIDITY AND LISTING.
The Company covenants and agrees that during the exercise period, the
Company shall at all times reserve and keep available out of its authorized
shares of Common Stock, solely for the
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purpose of issuance upon the exercise of the Warrants, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise under this Warrant Certificate. The Company covenants and agrees
that, upon exercise of the Warrants, and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly authorized, validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Warrants to be listed and
quoted (subject to official notice of issuance) on all securities Exchanges and
Systems on which the Common Stock may then be listed and/or quoted, including
Nasdaq.
12. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Agreement shall be construed as conferring
upon the Holders of the Warrants the right to vote or to consent or to receive
notice as a stockholder in respect of any meetings of stockholders for the
election of directors or any other matter, or as having any rights whatsoever as
a stockholder of the Company. If, however, at any time prior to the expiration
of the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date of the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notices shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in
15
<PAGE>
connection with the declaration or payment of any such dividend, or the issuance
of any convertible or exchangeable securities, or subscription rights, options
or warrants, or any proposed dissolution, liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly given when sent by
facsimile and personally delivered, or mailed by registered or certified mail,
return receipt requested:
(a) If to the registered Holder of any of the
Registrable Securities, to the address of such Holder as shown
on the books of the Company; or
(b) If to the Company, to the address set forth below or to
such other address as the Company may designate by notice to the
Holders.
Richard K. Hagen
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
With copies to: James J. Schneider, Esq.
Atlas, Pearlman, Trop &
Borkson, P.A.
New River
Center, Suite 1900
200 East Olas Boulevard
Fort Lauderdale, Florida 33301
16
<PAGE>
and
David A. Carter, P.A.
2300 Glades Road, Suite 210W
Boca Raton, Florida 33431
15. ENTIRE AGREEMENT: MODIFICATION.
This Agreement (and the Underwriting Agreement to the extent
applicable) contain the entire understanding between the parties hereto with
respect to the subject matter hereof, and the terms and provisions of this
Agreement may not be modified, waived or amended except in a writing executed by
the Company and the Holders of at least a majority of Registrable Securities
(based on underlying numbers of shares of Common Stock). Notice of any
modification, waiver or amendment shall be promptly provided to any Holder not
consenting to such modification, waiver or amendment.
16. SUCCESSORS.
All the covenants and provisions of this Agreement shall be binding
upon and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
17. TERMINATION.
This Agreement shall terminate at the close of business on
____________, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination.
18. GOVERNING LAW; SUBMISSION TO JURISDICTION.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Florida and for all
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws. The
Company, the Underwriter and the Holders hereby agree that any action,
proceeding or claim arising out of, or relating in any way to, this Agreement
shall be brought and enforced in a federal or state court of competent
jurisdiction with venue only in the Fifteenolders hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. A party to this
Agreement named as a Defendant in any action brought in connection with this
Agreement in any court outside of the above named designated county or district
shall have the right to have the venue of said action changed to the above
designated county or district or, if necessary, have the case dismissed,
requiring the other party to refile such action in an appropriate court in the
above designated
17
<PAGE>
county or federal district.
19. SEVERABILITY.
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
20. CAPTIONS.
The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be construed
as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Underwriter and any other registered
Holder(s) of the Warrant Certificates or Registrable Securities any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and the Underwriter and any
other Holder(s) of the Warrant Certificates or Registrable Securities.
22. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
AMERICAN QUANTUM CYCLES, INC.
BY:_________________________________
Richard K. Hagen
Chairman and Chief Executive Officer
Attest:
______________________
Jim Cheal, Secretary
18
BARRON CHASE SECURITIES, INC.
By:_______________________________
Robert Kirk, President
AMERICAN QUANTUM CYCLES, INC.
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M, EASTERN TIME ON ___________, 2004
NO. W- ______ Common Stock
Underwriter
Warrants
This Warrant Certificate certifies that ____________________________,
or registered assigns, is the registered holder of __________________ Common
Stock Underwriter Warrants of AMERICAN QUANTUM CYCLES, INC. (the "Company").
Each Common Stock Underwriter Warrant permits the Holder hereof to purchase
initially, at any time from __________, 1999 ("Purchase Date") until 5:30 p.m.
Eastern Time on __________, 2004 ("Expiration Date"), one (1) share of the
Company's Common Stock at the initial exercise price, subject to adjustment in
certain events (the "Exercise Price"), of $____ per share (___% of the public
offering price).
Any exercise of Common Stock Underwriter Warrants shall be effected by
surrender of this Warrant Certificate and payment of
1
<PAGE>
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Underwriter's Warrant Agreement dated as
of __________, 1999, between the Company and Barron Chase Securities, Inc. (the
"Underwriter's Warrant Agreement"). Payment of the Exercise Price shall be made
by certified check or official bank check in New York Clearing House funds
payable to the order of the Company in the event there is no cashless exercise
pursuant to Section 3.1(ii) of the Underwriter's Warrant Agreement. The Common
Stock Underwriter Warrants are also referred to as "Warrants".
No Warrant may be exercised after 5:30 p.m., Eastern Time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Underwriter's Warrant
Agreement, which Underwriter's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation or rights, obligations, duties and
immunities thereunder of the Company and the holdersders or registered holder)
of the Warrants.
The Underwriter's Warrant Agreement provides that upon the occurrence
of certain events, the Exercise Price and the type and/or number of the
Company's securities issuable thereupon may, subject to certain conditions, be
adjusted. In such event, the Company will, at the request of the holder, issue a
new Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Underwriter's Warrant Agreement.
Upon due presentment for registration or transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Underwriter's
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any
2
<PAGE>
distribution to the holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the
Underwriter's Warrant Agreement shall have the meanings assigned to them
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of __________, 1999
AMERICAN QUANTUM CYCLES, INC.
BY:_________________________________
Richard K. Hagen
Chairman and Chief Executive Officer
Attest:
_____________________________
Jim Cheal, Secretary
3
<PAGE>
EXHIBIT "A"
FORM OF SUBSCRIPTION (CASH EXERCISE)
------------------------------------
(To be signed only upon exercise of Warrant)
TO: Richard K. Hagen
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
The undersigned, the Holder of Warrant Certificate number __ (the
"Warrant"), representing _________ Common Stock Underwriter Warrants of AMERICAN
QUANTUM CYCLES, INC. (the "Company"), which Warrant Certificate is being
delivered herewith, hereby irrevocably elects to exercise the purchase right
provided by the Warrant Certificate for, and to purchase thereunder, _________
Shares of the Company, and herewith makes payment of $_________ therefor, and
requests that the certificates for such securities be issued in the name of, and
delivered to, _______________________ , whose address___________________________
is______________________________________________________________________________
_______________ , all in accordance with the Underwriter's Warrant Agreement and
the Warrant Certificate.
Dated:___________________
________________________________
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
________________________________
________________________________
(Address)
4
<PAGE>
EXHIBIT "B"
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
----------------------------------------
TO: Richard K. Hagen
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
The undersigned, the Holder of Warrant Certificate number __ (the
"Warrant"), representing __________ Common Stock Underwriter Warrants of
AMERICAN QUANTUM CYCLES, INC. (the "Company"), which Warrant is being delivered
herewith, hereby irrevocably elects the cashless exercise of the purchase right
provided by the Underwriter's Warrant Agreement and the Warrant Certificate for,
and to purchase thereunder, Shares of the Company in accordance with the formula
provided at Section three (3) of the Underwriter's Warrant Agreement. The
undersigned requests that the certificates for such Shares be issued in the name
of, and delivered to,___________________________________________________________
______________________, whose address is,_______________________________________
_______________________________________________________________________________,
all in accordance with the Warrant Certificate.
Dated:_______________________
______________________________
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
______________________________
______________________________
(Address)
5
<PAGE>
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if
such holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED______________________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint_____________________
______________________________________________________________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, and full power of substitution.
Dated: Signature:
_________________________ ________________________________
(Signature must conform in all
respects to name of holder as
specified on the fact of the
Warrant Certificate)
________________________________
(Insert Social Security or
Other Identifying Number of
Assignee)
6
FINANCIAL ADVISORY AGREEMENT
----------------------------
This Agreement is made and entered into as of the ____ day of
_______________, 1999, between American Quantum Cycles, Inc. (the
"Company") and Barron Chase Securities, Inc. (the "Financial
Advisor").
W I T N E S S E T H :
---------------------
WHEREAS, The Company has engaged the Financial Advisor to act as the
Underwriter in connection with the public offering of the Company's securities;
and
WHEREAS, the Financial Advisor has experience in providing
financial and business advice to public and private companies; and
WHEREAS, the Company is seeking and the Financial Advisor is willing to
furnish business and financial related advice and services to the Company on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of, and for the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
1. PURPOSE. The Company hereby engages the Financial Advisor on a
non-exclusive basis for the term specified in this Agreement to render financial
advisory and consulting advice to the Company as an investment banker relating
to financial and similar matters upon the terms and conditions set forth herein.
However, the advisory will only be rendered if specifically requested in writing
by the CEO of the Company.
2. REPRESENTATIONS OF THE FINANCIAL ADVISOR AND THE COMPANY. The
Financial Advisor represents and warrants to the Company that (i) it is a member
in good standing of the National Association of Securities Dealers, Inc.
("NASD") and that it is engaged in the securities brokerage business; (ii) in
addition to its securities brokerage business, the Financial Advisor provides
consulting advisory services; and (iii) it is free to enter into this Agreement
and the services to be provided pursuant to this Agreement are not in conflict
with any other contractual or other obligation to which the Financial Advisor is
bound. The Company acknowledges that the Financial Advisor is in the business of
providing financial services and consulting advice (of the type contemplated by
this Agreement) to others and that nothing herein contained shall be construed
to limit or restrict the Financial Advisor in conducting such business with
respect to others, or rendering such advice to others.
1
<PAGE>
3. DUTIES OF THE FINANCIAL ADVISOR. During the term of this Agreement,
the Financial Advisor will provide the Company with consulting advice as
specified below at the request of the Company, provided that the Financial
Advisor shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service in which the Financial Advisor is
engaged generally. In performance of these duties, the Financial Advisor shall
provide the Company with the benefits of its best judgment and efforts. It is
understood and acknowledged by the parties that the value of the Financial
Advisor's advice is not measurable in any quantitative manner, and that the
amount of time spent rendering such consulting advice shall be determined
according to the Financial Advisor's discretion.
The Financial Advisor's duties may include, but will not necessarily be
limited to:
1) Advice relating to corporate financing activities;
2) Recommendations relating to specific business
operations and investments;
3) Advice relating to financial planning; and
4) Advice regarding future financings involving
securities of the Company or any subsidiary.
4. TERM. The term of this Agreement shall be for twelve (12) months
commencing on the first day of the month following the Company's receipt of the
proceeds from the contemplated public offering (the "Commencement Date");
provided, however, that this Agreement may be renewed or extended upon such
terms and conditions as may be mutually agreed upon by the parties hereto.
5. FEE. The Company shall pay the Financial Advisor a fee of $108,000
for the financial services to be rendered pursuant to this Agreement, all of
which shall be payable at the Closing Date of the Company's proposed public
offering.
6. EXPENSES. In addition to the fees payable hereunder, the Company
shall reimburse the Financial Advisor, within five (5) business days of its
request, for any and all reasonable out-of-pocket expenses incurred in
connection with the services performed by the Financial Advisor and its counsel
pursuant to this Agreement, including (i) reasonable hotel, food and associated
expenses; (ii) reasonable charges for travel; (iii) reasonable long-distance
telephone calls; and (iv) other reasonable expenses spent or incurred on the
Company's behalf. All such expenses in excess of $500 shall be pre-approved by
the Company.
7. INTRODUCTION OF CUSTOMERS, ORIGINATION OF LINE OF CREDIT AND SIMILAR
TRANSACTIONS. In the event the Financial Advisor
2
<PAGE>
originates a line of credit with a lender or a corporate partner, the Company
and the Financial Advisor will mutually agree on a satisfactory fee and the
terms of payment of such fee. In the event the Financial Advisor introduces the
Company to a joint venture partner or customer and sales develop as a result of
the introduction, the Company agrees to pay a fee of five percent (5%) of total
sales generated directly from this introduction during the first two years
following the date of the first sale. Total sales shall mean cost receipts less
any applicable refunds, returns, allowances, credits and shipping charges and
monies paid by the Company by way of settlement or judgment arising out of
claims made by or threatened against the Company. Commission payments shall be
paid on the 15th day of each month following the receipt of customers' payments.
In the event any adjustments are made to the total sales after the commission
has been paid, the Company shall be entitled to an appropriate refund or credit
against future payments under this Agreement.
All fees to be paid pursuant to this paragraph, except as otherwise
specified, are due and payable to the Financial Advisor in cash at the closing
or closings of any transaction specified in this paragraph. In the event that
this Agreement shall not be renewed or if terminated for any reason,
notwithstanding any such non-renewal or termination, the Financial Advisor shall
be entitled to a full fee as provided under this paragraph for any transaction
for which the discussions were initiated during the term of this Agreement and
which is consummated within a period of twelve months after non-renewal or
termination of this Agreement. Nothing herein shall impose any obligation on the
part of the Company to enter into any transaction or to use any services of the
Financial Advisor offered pursuant to this paragraph or this Agreement.
8. USE OF ADVICE BY THE COMPANY; PUBLIC MARKET FOR THE COMPANY'S
SECURITIES. The Company acknowledges that all opinions and advice (written or
oral) given by the Financial Advisor to the Company in connection with the
engagement of the Financial Advisor are intended solely for the benefit and use
of the Company in considering the transaction to which they relate, and the
Company agrees that no person or entity other than the Company shall be entitled
to make use of or rely upon the advice of the Financial Advisor to be given
hereunder, and no such opinion or advice shall be used for any other purpose or
reproduced, disseminated, quoted or referred to at any time, in any manner or
for any purpose, nor may the Company make any public references to the Financial
Advisor, or use of the Financial Advisor's name in any annual reports or any
other reports or releases of the Company without the prior written consent of
the Financial Advisor.
The Company acknowledges that the Financial Advisor makes no commitment
whatsoever as to making a public trading market in the Company's securities or
to recommending or advising its clients to purchase the Company's securities.
Research reports or corporate
3
<PAGE>
finance reports that may be prepared by the Financial Advisor will, when and if
prepared, be done solely on the merits or judgment and analysis of the Financial
Advisor or any senior corporate finance personnel of the Financial Advisor.
9. COMPANY INFORMATION; CONFIDENTIALLY. The Company recognizes and
confirms that, in advising the Company and in fulfilling its engagement
hereunder, the Financial Advisor will use and rely on data, material and other
information furnished to the Financial Advisor by the Company. The Company
acknowledges and agrees that in performing its services under this engagement,
the Financial Advisor may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same. In addition, in the performance of its
services, the Financial Advisor may look to such others for such factual
information, economic advice and/or research upon which to base its advice to
the Company hereunder as the Financial Advisor shall in good faith deem
appropriate.
Except as contemplated by the terms hereof or as required by applicable
law, the Financial Advisor shall keep confidential all non-public information
provided to it by the Company, and shall not disclose such information to any
third party without the Company's prior written consent, other than such of its
employees and advisors as the Financial Advisor determines to have a need to
know.
10. INDEMNIFICATION. The Company shall indemnify and hold harmless the
Financial Advisor against any and all liabilities, claims, lawsuits, including
any and all awards and/or judgments to which it may become subject under the
Securities Act of 1933, (the "Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act") or any other federal or state statute, at common law or
otherwise, insofar as said liabilities, claims and lawsuits (including costs,
expenses, awards and/or judgments) arise out of or are in connection with the
services rendered by the Financial Advisor or any transactions in connection
with this Agreement, except for any liabilities, claims and lawsuits (including
awards and/or judgments), arising out of willful misconduct or willful omissions
of the Financial Advisor. In addition, the Company shall also indemnify and hold
harmless the Financial Advisor against any and all reasonable costs and
expenses, including reasonable counsel fees, incurred relating to the foregoing.
The Financial Advisor shall give the Company prompt notice of any such
liability, claim or lawsuit which the Financial Advisor contends is the subject
matter of the Company's indemnification and the Company thereupon shall be
granted the right to take any and all necessary and proper action, at its sole
cost and expense, with respect to such liability, claim and lawsuit, including
the right to settle, compromise and dispose of such liability, claim or lawsuit,
excepting therefrom any and all proceedings or hearings
4
<PAGE>
before any regulatory bodies and/or authorities.
The Financial Advisor shall indemnify and hold the Company harmless
against any and all liabilities, claims and lawsuits, including any and all
awards and/or judgments to which it may become subject under the Act, the 1934
Act or any other federal or state statute, at common law or otherwise, insofar
as said liabilities, claims and lawsuits (including costs, expenses, awards
and/or judgments) arise out of or are based upon willful misconduct or willful
omissions of the Financial Advisor. In addition, the Financial Advisor shall
also indemnify and hold the Company harmless against any and all reasonable
costs and expenses, including reasonable counsel fees, incurred relating to the
foregoing.
The Company shall give the Financial Advisor prompt notice of any such
liability, claim or lawsuit which the Company contends is the subject matter of
the Financial Advisor's indemnification and the Financial Advisor thereupon
shall be granted the right to take any and all necessary and proper action, at
its sole cost and expense, with respect to such liability, claim and lawsuit,
including the right to settle, compromise or dispose of such liability, claim or
lawsuit, excepting therefrom any and all proceedings or hearings before any
regulatory bodies and/or authorities.
11. THE FINANCIAL ADVISOR AS AN INDEPENDENT CONTRACTOR. The Financial
Advisor shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that the Financial Advisor shall
have no authority to act for, represent or bind the Company or any affiliate
thereof in any manner, except as may be agreed to expressly by the Company in
writing from time to time.
12. MISCELLANEOUS.
(a) This Agreement between the Company and the Financial Advisor
constitutes the entire agreement and understanding of the parties hereto, and
supersedes any and all previous agreements and understandings, whether oral or
written, between the parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder shall
be in writing and shall be deemed sufficiently given if hand-delivered or sent
by facsimile and postage prepaid by certified or registered mail, return receipt
requested, to the respective parties as set forth below, or to such other
address as either party may notify the other in writing:
If to the Company: Richard K. Hagen
5
<PAGE>
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
Copy to: James J. Schneider, Esq.
Atlas, Pearlman, Trop &
Borkson, P.A.
New River
Center, Suite 1900
200 East Olas Boulevard
Fort Lauderdale, Florida 33301
If to the
Financial Advisor: Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
2300 Glades Road, Suite 210W
Boca Raton, Florida 33431
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida applicable to contracts made and to be
performed entirely within the State of Florida. The parties agree that any
action brought by any party against another party in connection with any rights
or obligations arising out of this Agreement shall be instituted properly in a
federal or state court of competent jurisdiction with venue only in the
Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida or the
United States District Court for the Southern District of Florida, West Palm
Beach Division. A party to this Agreement named as a Defendant in any action
brought in connection with this Agreement in any court outside of the above
named designated county or district shall have the right to have the venue of
said action changed to the above designated county or
6
<PAGE>
district or, if necessary, have the case dismissed, requiring the other party to
refile such action in an appropriate court in the above designated county or
federal district.
(g) This Agreement has been duly authorized, executed and delivered by
and on behalf of the Company and the Financial Advisor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
AMERICAN QUANTUM CYCLES, INC.
BY:_________________________________
Richard K. Hagen
Chairman and Chief Executive Officer
BARRON CHASE SECURITIES, INC.
BY:_________________________________
Robert T. Kirk, President
7
____________, 1999
Richard K. Hagen
Chairman and Chief Executive Officer
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
RE: MERGER AND ACQUISITION AGREEMENT
--------------------------------
Dear Mr. Hagen:
You have agreed that Barron Chase Securities, Inc., (the "Finder") may
act as a non-exclusive finder or financial consultant for you in various
transactions in which American Quantum Cycles, Inc. (the "Company") may be
involved, including but not limited to, mergers, acquisitions, business
combinations, joint ventures, debt or equity placements or other on-balance or
off-balance sheet corporate transactions. The Company hereby agrees that in the
event that the Finder shall first introduce to the Company another party or
entity, and that as a result of such introduction, a transaction between such
entity and the Company is consummated ("Consummated Transaction"), then the
Company shall pay to the Finder a finder's fee as follows:
a. Five percent (5%) of the first $1,000,000 of the
consideration paid in such transaction;
b. Four percent (4%) of the consideration in excess of
$1,000,000 and up to $2,000,000;
c. Three percent (3%) of the consideration in excess of
$2,000,000 and up to $3,000,000;
d. Two percent (2%) of any consideration in excess of
$3,000,000 and up to $4,000,000; and
e. One percent (1%) of any consideration in excess of
$4,000,000.
The fee due the Finder shall be paid by the Company in cash and/or in
stock at the closing of the Consummated Transaction as mutually agreed between
the Company and the Finder, without regard to whether the Consummated
Transaction involves payments in cash, in stock, or a combination of stock and
cash, or is made on an installment sale basis. By way of example, if the
Consummated Transaction involves securities of the acquiring entity (whether
securities of the Company, if the Company is the acquiring party, or securities
of another entity, if the Company is the selling party) having a value of
$5,000,000, the consideration to be paid by the Company to the Finder at closing
shall be $150,000.
1
<PAGE>
However, both parties agree that it is the purpose of the Company to
use the proceeds of the offering in the acquisition, merger, purchase of shares
or any other kind of association with foreign companies as described in the
prospectus. To the extent that the Company has any prior relationships with such
foreign companies these foreign companies are specifically excluded from this
Agreement.
In the event that for any reason the Company shall fail to pay to the
Finder all or any portion of the finder's fee payable hereunder when due,
interest shall accrue and be payable on the unpaid balance due hereunder from
the date when first due through and including that date when actually collected
by the Finder, at a rate equal to two (2) points over the prime rate of
Citibank, N.A. in New York, New York, computed on a daily basis and adjusted as
announced from time to time.
This agreement shall be effective on the date hereof and shall expire
on the fifth anniversary of the date hereof.
Notwithstanding anything herein to the contrary, if the Company shall,
within 180 days immediately following the termination of the five year period
provided above, conclude a Consummated Transaction with any party introduced by
the Finder to the Company prior to the termination of said five year period, the
Company shall also pay the Finder the fee determined above.
The Company represents and warrants to the Finder that the engagement
of the Finder hereunder has been duly authorized and approved by the Board of
Directors of the Company and this letter agreement has been duly executed and
delivered by the Company and constitutes a legal, valid and binding obligation
of the Company.
This agreement has been executed and delivered in the State of Florida
and shall be governed by the laws of such state, without giving effect to the
conflicts of laws rules thereunder.
This agreement shall be binding upon, and enforceable against, the
successors and assigns of each of the undersigned.
Please sign this letter at the place indicated below, whereupon it will
constitute our mutually Very truly yours,
BARRON CHASE SECURITIES, INC.
BY:_______________________________
Robert T. Kirk, President
Agreed to and Accepted:
AMERICAN QUANTUM CYCLES, INC.
BY:___________________________
Richard K. Hagen
Chairman and Chief Executive Officer
2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dtaed September 21, 1998, relating to the financial statements of
American Quantum Cycles, Inc. We also consent to the reference to our firm under
the caption "Experts" in the Prospectus.
Pricher and Company
Orlando, Florida
March 9, 1999
