U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended April 30, 1999
Commission File No. 000-24083
AMERICAN QUANTUM CYCLES, INC.
(Name of Small Business Issuer in Its Charter)
Florida 59-2651232
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
731 Washburn Road, Melbourne, Florida 33434
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(Address of Principal Executive Offices) (Zip Code)
(407) 752-0008
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Name of Each Exchange
Title of Each Class on Which Registered
================================ ===============================
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.001
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No
---X-- -----
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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State issuer's revenues for its most recent fiscal year: $ 975,780
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
2,620,752 shares of Common Stock, $.001 par value, as of August 13, 1999.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Introduction
American Quantum Cycles, Inc. 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. American
Quantum Cycles further believes that this made-to-order approach helps produce
greater customer satisfaction and reduces the need for added cash flow. We
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. American Quantum Cycles has produced 54
motorcycles since that time, 41 of which have been sold to dealers and/or
consumers. The remaining 13 motorcycles are being used for regulatory compliance
testing, marketing and long term testing. We 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
28 prospective dealers and have received orders for 280 motorcycles including 86
for immediate delivery.
We intend to make investments in plant and people to support a increase in
monthly production of motorcycles and engines during the next twelve months.
Investment in plant will include manufacturing 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.
American Quantum Cycles was originally incorporated as a Florida corporation on
March 20, 1986 as "Norbern, Inc." On May 8, 1997, Norbern, Inc. changed its name
to "American Quantum Cycles, Inc." American Quantum Cycles 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. American Quantum Cycles fiscal year end is April 30. Our executive
offices are at 731 Washburn Road, Melbourne, Florida 32934; Telephone (407)
752-0008, our fax is (407) 752-0550 and our website is
http://www.quantumcycle.com.
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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, 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 Harley Davidson, 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 Harley Davidson buyers having to wait from 3-12 months for product delivery
o Harley Davidson Dealers adding a large number of accessories on their product
to raise prices and margins
o Many Harley Davidson 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 Harley Davidson motorcycles
o Harley Davidson dealers taking on second product line in order to fulfill
demand
Because there is little or no competition between Harley Davidson dealers, the
dealers have been taking advantage of the excess demand market condition by
adding a large number of accessories on their product to arbitrarily raise the
price and margin of their motorcycles. The consumer has been tolerating this
because they have no competition between Harley Davidson dealers to use to drive
prices back down.
Harley Davidson has taken advantage of the excess market demand situation and
extreme customer loyalty by being slow to make improvements to their product
line, particular slow to improve engine performance. This has created large
after-market industry consisting of providers of kits with which to upgrade the
performance of Harley Davidson engines. Consequently, many Harley Davidson
buyers end up adding $5-$10 thousand dollars of aftermarket parts to new
motorcycles in order to get a high performance product with the Harley Davidson
name on it. When the market leader does not satisfy neither the quantity nor the
option preferences (e.g. high performance) of the market place, this creates a
market vacuum which can be filled by newer, smaller competitors with less
capital resources. This is the market condition today in the heavy cruiser
motorcycle segment in North America.
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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 Cycle.
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.
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. American
Quantum Cycles has carried out detailed demographic surveys through motorcycle
registration databases, 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, American Quantum Cycles has determined the
characteristics of their target market groups and correspondingly, where they
live by ZIP code, census block and trade zone.
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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, 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.
American Quantum Cycles 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.
Products
American Quantum Cycles first model the Liberty, a heavyweight cruiser
motorcycle, has been designed to achieve major product goals including:
(1) American styling;
(2) handling;
(3) durability; and
(4) performance.
o American Styling -- American Quantum Cycles 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
us 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. We also believe this makes the
motorcycle frame more durable. Additionally, there is a
variety of customized colors and designs available
through this powder coating process.
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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-weights ratios.
o Durability -- American Quantum Cycles 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.
o Performance -- The single most outstanding feature of
the American Quantum Cycles 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.
American Quantum Cycles 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 torque, less pollutants, cooler
operating temperatures and greater mileage all at the
same time.
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The 4-valve engine is expected to be the industry leader
in ft-lbs. of torque per cubic inch of capacity. The
American Quantum Cycles 4-Valve 88 cubic inch passed 49
state Environment Protection Agency 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).
American Quantum Cycles has and 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 American
Quantum Cycles present 88 cubic inch engine. With the larger displacement,
American Quantum Cycles projects an increase in peak torque in the 10-20% range.
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Manufacturing
American Quantum Cycles focuses on final assembly of the engine and motorcycle
in its home plant in Melbourne, Florida. American Quantum Cycles outsources all
casting, machining, forging, powder coating, chrome plating and fiberglass
molded processes to subcontractors, minimizing the capital investment required
in heavy machinery and additional plant floor space and expenses associated with
recruiting, training and retaining highly skilled personnel.
American Quantum Cycles can implement this outsource focused production
philosophy cost-effectively because of its location on the "Space Coast" of
central Florida taking advantage of the large number of small machine shops
which have evolved to support NASA and Cape Canaveral.
American Quantum Cycles has designed and produced 55 motorcycles since May 1997.
Of these, 41 motorcycles have been sold, 11 are used for marketing purposes, and
3 for engineering and regulatory testing. During the remainder of fiscal 2000 we
expect to build and ship roughly 1000 Motorcycles this projection is based on a
plan to increase 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 August 1999 with the addition of a second assembly line and
starting two shift operations. We project that we will increase production to
160 motorcycles per month from July 1999 through April 2000. Currently, American
Quantum Cycles 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.
American Quantum Cycles has long-term contracts with major subcontractors,
vendors and backup suppliers to insure the flow of parts to our plant in
Melbourne, Florida.
American Quantum Cycles presently can produce five motorcycles per week or 20
motorcycles per month with a team of seven persons working one line of final
assembly stations. American Quantum Cycles has plant space and much of the
equipment in place for a second parallel line prior to receiving the proceeds of
this offering. American Quantum Cycles has been recruiting and training
additional production personnel and can increase production from 20 motorcycles
per month to 40 motorcycles per month by opening up the second production line.
No new additional plant space or equipment is needed to further increase monthly
production via adding a full or partial second shift 4PM to Midnight. By adding
a second shift on one line only, monthly production increases to 60 motorcycles
per month. Two shifts, two production lines will provide 80 motorcycles per
month. All of these increases are possible with no "learning curve" or increase
in productivity per line, per shift, per week. Over a six to twelve month
period, We will improve productivity by streamlining assembly processes,
improving jigs and fixtures, weeding out low performance personnel, etc. At the
end of twelve months of production refinement, We estimate that a 10-12 man team
working on one line, one shift can produce five motorcycles per day or 100
motorcycles per month.
American Quantum Cycles must also insure a corresponding increase in supply of
parts to support a month-by-month increase in production. American Quantum
Cycles works closely with all of its vendors, providing them with six month
production forecasts and anticipating any needs on the part of the vendors to
support our increasing parts supply needs. American Quantum Cycles gets its
non-proprietary products primarily from large vendors with $50 million or larger
in annual revenues who can scale up to provide American Quantum Cycles its
increasing parts needs. Where American Quantum Cycles uses a smaller vendor for
any part, we have cultivated secondary and tertiary suppliers. This is
particularly critical in machining services where American Quantum Cycles has
provided proprietary drawings and multiple machining houses have developed their
numerical machine control code to support us. American Quantum Cycles has
invested considerable in time and money to insure that its vendors can provide
the increasing supply of parts required to support substantial increases in
monthly production of motorcycles. Since, we can not guarantee the performance
of its vendors and subcontractors, adequate and uninterrupted supply of parts
must be consider a risk factor for our success.
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Having grown up from its garage shop origins, much of the motorcycle industry's
after market parts vendors practice an informal business philosophy. Most
contracts are verbal in nature. Consequently, American Quantum Cycles has no
written contracts at present with any of its parts suppliers save purchase
orders with written notes concerning reorder cycles and increasing volumes over
a forward looking 3-6 month period.
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 American Quantum Cycles 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
American Quantum Cycles 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 American Quantum Cycles production plant. This also allows everyone
to monitor the progress of the production of product. We have completed the
Dealernet system and began to install it at our dealer locations 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.
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o Lead generation activities will support each product line
including motorcycles, engines/parts, and 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.
American Quantum Cycles 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 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 team 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-always (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
American Quantum Cycles distribution channels will typically consist of
independently owned full-service dealerships that we will sell to directly. We
will also sell directly to consumers through various media, including the
Internet, but only in those geographic regions where we have no authorized
dealerships. All other Internet leads will be electronically referred to the
nearest American Quantum Cycles dealer. All of our dealers will carry American
Quantum Cycles replacement parts and aftermarket accessories and perform
servicing of our motorcycle products.
We have letters of intent signed by 28 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 28 dealers represent bookings of 280
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 intend to enter into distribution agreements for the sale and delivery
of 4-VALVE(Registered) 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(Registered) engine to the
Harley Davidson customization aftermarket.
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Intellectual Property Rights
American Quantum Cycles 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 patents. At a future
date, we intend to file patent applications for certain of the patentable
elements. We 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 American Quantum Cycles
and we have not been involved in any court proceedings regarding our
intellectual property rights.
In August 1997, we entered into a license agreement with Feuling Advanced
Technology, Inc. As a licensee, we have a license to use certain proprietary
technologies, including patents, trade secrets, and 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 American Quantum
Cycles motorcycles.
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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
American Quantum Cycles and others;
(6) our ability to support existing and emerging industry
standards; and
(7) industry and general economic trends.
We cannot guarantee that American Quantum Cycles will be able to
successfully compete with others in the business of manufacturing
and marketing customized motorcycles or motorcycles in general.
GOVERNMENT REGULATIONS
Commercial sales of our motorcycles depend upon compliance with certain
government regulations and American Quantum Cycles 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 Environmental Protection Agency certification in all 49 states (except
California). The proprietary exhaust system on the American Quantum Cycle 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(Registered) engine will pass all CARB requirements. American Quantum
Cycles motorcycles are also subject to the National Traffic and Motor Vehicle
Safety Act of the National Highway Traffic Safety Administration.
13
<PAGE>
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 41 full-time employees. Of these, 6 are in management and
administration, 3 are in engineering and design, 21 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.
ITEM 2. DESCRIPTION OF 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 which is adequately suited for the purpose of
assembling our motorcycles, at 711-731 Washburn Road, Melbourne, Florida 32934.
The current monthly rental amount is $6,189 including Florida sales tax. All
required insurance coverages are also maintained and periodically audited by our
insurance company, Davis Baldwin 4600 West Cypress Street, Suite 200 Tampa,
Florida 33607.
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.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
MATTERS
-------------------------------------------------
As of August 13, 1999, there were approximately 221 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. The following table also gives effect
to our 1 to 4 reverse stock split effective June 3, 1999.
Common Stock
------------
High Low
---- ---
August 12, 1997 - October 31, 1997 $40.00 $22.00
November 1, 1997 - January 31, 1998 42.50 24.00
February 1, 1998 - April 30, 1998 32.00 13.50
May 1, 1998 - July 30, 1998 26.00 14.00
August 1, 1998 - October 31, 1998 10.36 6.32
November 1, 1998 - January 31, 1999 9.00 2.32
February 1, 1999 - April 30, 1999 4.88 3.40
May 1, 1999 - July 30, 1999 5.52 2.48
14
<PAGE>
Our transfer agent for our common stock is Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
-----------------------------------------------
Plan of Operation
American Quantum Cycles has made, and projects significant investments in its
manufacturing plant and people which will support an aggressive increase 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 our dealer oriented intranet).
During this same period, our 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 increase 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 20 motorcycles in March to 80 motorcycles per month
by September 1999 with the addition of a second assembly line.
American Quantum Cycles 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 American Quantum Cycles and will include
saddle bags and windshields/fairing. 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
American Quantum Cycles 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 our present 88 cubic inch engine. We 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 torque at low and mid-range speeds. This torque 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.
15
<PAGE>
Results of Operation
American Quantum Cycles has transitioned from a development stage company into
an early production company. American Quantum Cycles 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 Norbern, Inc. changed its name to American Quantum Cycles, Inc. and its
fiscal year end to April 30.
As American Quantum Cycles was inactive prior to March 1997, there was no income
and only incidental supply costs and the accrued interest expense from seven
promissory notes totaling $250,000. For the fiscal year ended April 30, 1997, we
had a deficit carry forward of $2,634. During the fiscal year ended April 30,
1998, our 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.
American Quantum Cycles sustained continuing losses during the fiscal year ended
April 30, 1999 in the amount of $6,786,791. These losses include $5,706,840 in
general and administrative activities, representing training and development of
personnel and process necessary in a development stage operation, and $1,079,951
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. Fifty-four (54) motorcycles have been produced during the
fiscal year ended April 30, 1999 for revenues of $959,210 plus $16,570 in
aftermarket parts.
Two hundred eighty (280) motorcycles have been booked into production slots
based on orders from 28 dealers. Eighty-six of these bikes were scheduled for
delivery during the January-March time frame of 1999. Of the 86 motorcycles that
were ordered for delivery between January and March 1999, 4 were delivered
between January and March, 4 were delivered in April. These eight motorcycles
are included in the 54 motorcycles produced this past fiscal year. Seven
additional motorcycles were delivered in May and 8 in June, 1999 as part of the
new fiscal year production.
American Quantum Cycles expects after-market 4-Valve engine and part sales to
increase significantly during the fiscal year 1999/2000. In order to
successfully deliver the 280 motorcycles, which have been ordered by the
dealers, American Quantum Cycles will have to increase monthly production from 5
per month to 85 per month. To accomplish this production increase, we will need
to improve the facilities, refine production processes, add to production staff,
and insure continued and smooth flow of proper parts and implement effective
quality. There is no guarantee that the management team will be able to
implement this required production increase in the 3-6 month time frame
necessary for timely delivery of motorcycles against outstanding orders. Risks
which could prevent successful delivery of 280 motorcycles include:
16
<PAGE>
o Not recruiting adequate production staff,
o Insufficient training of production staff,
o Not ordering part on time,
o Not ordering correct parts,
o Suppliers delivering parts of unacceptable quality,
o Suppliers not delivering parts on a timely basis,
o Not being able to devise efficient assembly procedures, jigs, fixtures and
tools and
o To manage production staff to operate at an acceptable level of energy,
efficiency and productivity
Consequently, there is no guarantee that we will be successful in producing the
motorcycles that have been ordered.
While American Quantum Cycles anticipates that the current fiscal year ending
April 30, 1999 will have deficit earnings, including the aggregate for the 4th
Quarter. American Quantum Cycles expects their first profitable quarter to occur
second quarter of fiscal year 2000. 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 American Quantum Cycles, the capacity of
American Quantum Cycles to expand and maintain the quality of its motorcycles
and related services, continued development of the dealer organization,
favorable source of supplies, recruitment of highly skilled employees and
integration of such persons into a cohesive organization, and the ability to
raise funds and control costs.
Liquidity and Capital Resources
Since American Quantum Cycles only recently emerged from its development stage,
it has not received any material income from operations. As such, American
Quantum Cycles relies on private sources of financing to support its operations.
As part of its funding and financing, American Quantum Cycles issued three
separate series of convertible notes to investors:
o Beginning in October 1997, American Quantum Cycles issued an
aggregate of forty (40) 8% subordinated notes to 32 investors, in the aggregate
principal amount of $1,407,000. The notes matured one year from date of issue.
Eighteen of the 8% note holders, representing an aggregate of $756,500 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 American Quantum Cycles at the a price per share equal to the
price of a subsequent public offering; and (ii) warrants to purchase a number of
shares of American Quantum Cycles common stock equal to the 8% note shares at an
exercise price per share equal to the price per share of the subsequent public
offering. American Quantum Cycles redeemed two of the 8% notes with a principal
balance of $80,000.
17
<PAGE>
Nine of the 8% note holders, representing an aggregate of $247,500 of the
outstanding principal balance of the 8% Notes, agreed to extend the maturity
date of their 8% notes until the close of a subsequent public offering offering.
American Quantum Cycles intends to repay these notes from the proceeds of this
offering.
The remaining three 8% note holders, representing an aggregate of $323,000 of
the outstanding principal balance of the 8% notes, have not agreed to either
extend the terms of, or convert, their 8% notes. One of the 8% note holders has
sent American Quantum Cycles notice informing American Quantum Cycles that it is
in default of its repayment obligations on the 8% notes. American Quantum Cycles
is in the process of negotiating with this note holder.
Under the terms of the notes, American Quantum Cycles has 30 days after receipt
of written notice of default from a note holder to cure the default. If American
Quantum is unable to cure the default or reach satisfactory arrangements with
the note holder who sent such written default, the note holder is entitled to
proceed to protect and enforce his or her rights under this note.
o Beginning in April 1998, American Quantum Cycles issued an aggregate
of twenty-seven (27) 7% subordinated notes to 25 investors, in return for which
American Quantum Cycles received proceeds of $549,500. The 7% notes mature one
year from the date of issuance and are convertible into shares of common stock
of American Quantum Cycles at $8.00 per share. Interest is payable in cash or
shares of common stock of American Quantum Cycles, at the discretion of American
Quantum Cycles. Seventeen of the 7% note holders, representing an aggregate of
$367,000 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 American Quantum Cycles at the a price per share equal
to to the price of a subsequent public offering; and (ii) warrants to purchase a
number of shares of American Quantum Cycles common stock equal to the 7% note
shares at an exercise price per share equal to the price per share of the
subsequent public offering. American Quantum Cycles redeemed two of the 7% notes
which had an aggregate principal balance of $32,500.
Six of the 7% note holders, representing an aggregate of $150,000 of the
outstanding principal balance of the 7% notes, agreed to extend the maturity
date of their 7% notes until the close of a subsequent public offering. American
Quantum Cycles intends to repay these notes from the proceeds of this offering.
o In March 1998, American Quantum Cycles 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 mature one year
from the date of issuance and are convertible into shares of common stock of
American Quantum Cycles at $8.00 per share. Interest is payable in cash or
shares of common stock of American Quantum Cycles, at the discretion of American
Quantum Cycles. All of the 10% note holders agreed to convert the principle
balance plus accrued interest of their respective notes into (i) common stock of
American Quantum Cycles at the a price per share equal to to the price of a
subsequent public offering; and (ii) two warrants to purchase a number of shares
of American Quantum Cycles common stock equal to the 10% note shares at an
exercise price per share equal to the price per share of the subsequent public
offering.
18
<PAGE>
Between November 1998 and January 1999, American Quantum Cycles completed a
private offering of approximately 35 units of its securities to 11 investors
from which American Quantum Cycles 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
American Quantum Cycles determined by dividing $12,500 by the subsequent public
offering price per share of American Quantum Cycles common stock in an
underwritten public offering from which American Quantum Cycles receives at
least $5,000,000 gross proceeds. . American Quantum will use these funds for
costs of goods required for motorcycle manufacturing, research and development,
product development, marketing and administrative expenses through to the time
of the completion of this offering.
As of June 14, 1999, American Quantum Cycles issued an aggregate of five (5) 8%
subordinated notes in the aggregate principal amount of $284,181. The notes
mature October 1, 1999 with interest and principal payable in cash.
In December 1998, American Quantum Cycles contracted for a secured line of
credit with Skippack Capital Corp. in the amount of $755,000 to use for research
and development, product development, marketing and administrative expenses. The
line of credit accrues interest at a rate of 10% per annum. The secured line of
credit is evidenced by a secured promissory note. Principal and interest on the
line of credit must be repaid to the line of credit provider upon demand. The
entire amount of the line of credit has been drawn down as of April 30, 1999.
This is not a revolving line of credit and is secured by all of American Quantum
Cycles' assets. If Skippack calls the line of credit, American Quantum Cycles
will attempt to establish a long-term payment plan out of revenue from the sale
of motorcycles.
In February 1999, American Quantum Cycles contracted with seven individuals for
an unsecured line of credit in the aggregate amount of $650,000 use for research
and development, product development, marketing and administrative expenses. The
entire amount of the line of credit has been drawn down as of April 30, 1999.
The line of credit accrues interest at a rate of 8% per annum plus an aggregate
of 112,500 incentive shares of stock. Principal and interest are to be paid back
after completion of a subsequent public offering. This is not a revolving line
of credit.
In March 1999, American Quantum Cycles contracted with Anchor Capital
Corporation for a $750,000 revolving line of credit to use for inventory and
production expenses. Draw on the line of credit is based per purchase order for
motorcycles from our dealers. Interest accrues at a rate of 10% per annum.
Principal and interest are paid from funds received from the purchase of the
motorcycles.
In addition to the bridge funding and short-term notes, these lines of credit
will cover expenses of American Quantum Cycles through to the completion of the
susequent public offering.
The proceeds from American Quantum Cycles notes and lines of credit have been
used for research and development in the amount of $489,302 and investment in
inventory, equipment, licenses and intellectual rights in the amount of $978,182
during the fiscal year ended April 30, 1998. American Quantum Cycles expended
$608,722 for research and development and $807,885 in equipment, facility
improvements and fixtures during the fiscal year ended April 30, 1999. The
remaining funds raised were used to supply working capital for American Quantum
Cycles operations to date.
19
<PAGE>
Year 2000 Disclosure
American Quantum Cycles has investigated what, if any, impact the year 2000
could have on its internal software and operating systems. It is believed by the
management team that American Quantum's operating system (Win NT 4.0) is year
2000 compliant. DealerNet, a proprietary software for designing and ordering
motorcycles at the dealership level, was developed for American Quantum Cycles
in 1998, and is to our knowledge year 2000 compliant. Additionally, integral
software which is currently being purchased and/or developed for American
Quantum Cycles (MRP/ERP, TechNet, & e-commerce), is believed to also be year
2000 compliant. American Quantum Cycles has made efforts to ascertain its
vulnerability should any of its vendors experience year 2000 difficulties.
Should certain vendors become unable to meet American Quantum's material needs,
production could be interrupted, which would in turn adversely affect
operations. In 1999, American Quantum Cycles will attempt to identify, if
possible, multiple vendor sources for product to limit our exposure to vendor's
year 2000 problems. The anticipated costs of American Quantum's year 2000
initiative is not considered material. The internal year 2000 team's mission is
to attempt to ensure that there is no adverse effect on us. While we believe
that every effort is being taken to address all year 2000 concerns, we can not
guarantee that the systems of other companies will be compliant and will not
have a material adverse affect on American Quantum Cycles.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The financial statements are included under Item 13(a) of this
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
Not Applicable.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE UNDER SECTION 16 (A) OF THE EXCHANGE
ACT
--------------------------------------------------------
The following table includes the names, positions with American Quantum Cycles
and ages of the Executive Officers and Directors of American Quantum Cycles.
Directors are elected at our annual meeting of shareholders and serve for one
year or until their successors are elected. The board elects Officers and their
terms of office are, unless governed by employment contract, at the discretion
of the Board.
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <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 Starke.............................. 42 Vice President and Director
Gary W. 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 American Quantum Cycles, in connection with
the development and implementation of the business plan of American Quantum
Cycles from whom American Quantum Cycles 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.
21
<PAGE>
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 American Quantum Cycles
since February 1998. Between May 1997 and February 1998, Mr. Starke served as
Director of Engineering, Manufacturing and Design at American Quantum Cycles.
From January 1995 to January 1996, Mr. Starke was a Director and Vice President
of American Motor Works, Inc., 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.
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 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.
22
<PAGE>
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 1994, 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 Business Corporation 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 our
Directors, Officers, employees, or other agents of our. Insofar as
indemnification for liability arising under the Securities Act of 1933, as
amended 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 of
1933 as amended and is unenforceable.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
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 American Quantum Cycles, Inc. and Mr. Hagen, Mr. Hagen receives an
annual base salary of $200,000. As additional compensation, we have also (i)
issued Mr. Hagen 225,000 shares of restricted common stock; and (ii) granted Mr.
Hagen options to purchase up to 12,500 shares of common stock of American
Quantum Cycles, at $4.00 per share exercisable through February 21, 2003.
Jim Cheal, Vice President and Director. Pursuant to a verbal employment
agreement between American Quantum Cycles, Inc. and Mr. Cheal, Mr. Cheal
receives an annual base salary of $75,000. As additional compensation, Mr. Cheal
also received options to purchase 12,500 shares of common stock at $4.00 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 $60,000.
As additional compensation, Mr. Guess also received 6,250 shares of common
stock.
Michael Smith, Vice President of sales. Pursuant to a verbal employment
agreement between American Quantum Cycles, Inc. and Mr. Smith, Mr. Smith
receives an annual base salary of $80,000 and 2,500 shares of common stock.
Jeffrey Starke, Vice President and Director. Pursuant to a verbal employment
agreement between Mr. Starke and American Quantum Cycles, Inc. Mr. Starke
receives an annual base salary of $85,000. As additional compensation, Mr.
Starke received options to purchase up to 12,500 shares of common stock at $4.00
per exercisable through December 30, 2003.
23
<PAGE>
Gary W. Irving, Chief Operating Officer and Director. Pursuant to an employment
agreement between Mr. Irving and American Quantum Cycles, Inc., in his capacity
as Chief Operating Officer, Mr. Irving receives an annual base salary of
$175,000. Mr. Irving also received (i) 150,000 shares of common stock; and (ii)
options to purchase 12,500 shares of common stock exercisable at $4.00 per share
through December 30, 2003.
Frank Aliano, Vice President of Engineering and Production. Pursuant to a verbal
agreement between Mr. Aliano and American Quantum Cycles, Inc. Mr. Aliano
receives an annual base salary of $90,000. As additional compensation, Mr.
Aliano also received 6,250 shares of common stock, with performance options of
6,250 options each year for the subsequent three years.
Linda Condon, Director of Finance and Treasurer. Pursuant to verbal employment
agreement between Ms. Condon and American Quantum Cycles, Inc. Ms. Condon
receives an annual base salary of $50,000 and 873 shares of common stock.
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
adopted the American Quantum Cycles 1997 Stock Option Plan. On February 21,
1998, our Board of Directors and majority shareholders amended the plan to
increase the number of plan options from 125,000 to 750,000 shares.
The plan works to increase the stock interest of employees, consultants and
employee directors in American Quantum Cycles 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 750,000 shares of common stock to the people who we
grant options. Our Board of Directors or a Committee of our Board of Directors
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 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 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
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.
24
<PAGE>
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 of American Quantum Cycles 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 American Quantum Cycles 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
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 August 13, 1999, we granted an aggregate of 50,000 incentive options all
of which have vested and an aggregate of 645,000 non-qualified options. We also
granted 311,250 outside of the plan.
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 $100,000 during the
fiscal year ended April 30, 1999 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Securities
Other Under-
Annual Restricted Lying All Other
Compen- Stock Options/ LTIP Compen-
Name and Principal Year Salary Bonus sation Award(s) SARs Payouts sation
Position ($) ($) (#) ($) ($)
-------- ---- ------ ----- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Hagen 1997 $ -0- $-0- $ -0- $ -0- -0- $-0- $-0-
Chief Executive Officer
and Chairman of the Board(1)
1998 $ 13,462 $-0- $ 78,577(2) $ -0- -0- $-0- $-0-
---- ------- ---- -------- ------- --- ---- ----
1999 $200,000(3) $-0- $ -0- $423,000(4) -0- $-0- $-0-
---- -------- ---- ---- ----------- --- ---- ----
Gary Irving 1998 $ -0- $-0- $134,539(5) $ -0- -0- $-0- $-0-
Executive Vice President,
Director and Chief Operating
Officer (1)
1999 $102,308(3) $-0- $142,014(5) $282,000(4) -0- $-0- $-0-
---- --------- ---- -------- -------- ---- ---- ----
</TABLE>
(1) Mr. Hagen was appointed Chief Financial Officer on September 22,
1998. Mr. Irving was appointed Chief Operating Officer and to the
Board of Directors on October 1, 1998.
(2) 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.
(3) 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) 225,000 shares of common
stock issued to Mr. Hagen in November 1998, and (ii) options to
purchase 12,500 shares of common stock granted to Mr. Hagen in
November 1998. See "Principal Shareholders."
(4) Includes compensation accrued but not paid in the amount of
$75,961 for Mr. Hagen and $53,846 for Mr. Irving.
(5) Represents the value of 900,00 shares of stock issued to Mr.
Hagen and 600,00 shares of stock issued to Mr. Irving. The value was
based on the average bid and ask price of the stock at the date of
award and was recorded as compensation expense.
(6) Represents payments made to Mr. Irving under the terms of a
consulting agreement.
25
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value At
Assumed Annual Rates Of Stock
Price Appreciation For Option Grant Date
Individual Grants Term Value
----------------- ---- -----
Percent of
Number Of Total
Securities Options/
Underlying SARs Granted Expiration
Options/SARs To Employees Exercise Of Date
Name Granted (#) In Fiscal Year Base Price (S/Sh)
---- ----------- -------------- ---------- ------
<S> <C>
Richard Hagen N/A
President, Chief Executive
Officer and Chairman
Gary Irving N/A
Executive Vice President,
Director and Chief
Operating Officer
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
At Fiscal Year-End At Fiscal Year-
Shares Value (#) End ($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
---- ------------ --- ------------- -------------
<S> <C>
Richard Hagen
President, Chief Executive
Officer and Chairman N/A
Gary Irving N/A
Executive Vice President,
Director and Chief
Operating Officer
</TABLE>
Mr. Hagen was appointed Chief Financial Officer on September 22, 1998.
Mr. Irving was appointed Chief Operating Officer and to the Board of
Directors on October 1, 1998.
We do not currently have any long term inventive plans.
26
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table describes certain information regarding certain individuals
who beneficially owned our common stock on August 13, 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 August 13, 1999, we had 2,620,752 shares of common stock
outstanding
<TABLE>
<CAPTION>
No. of Shares Percent of
Name and Address or of Common Stock Beneficial
Identity of Group(1) Beneficially Owned (10) Ownership
-------------------- ----------------------- ---------
<S> <C> <C>
Richard Hagen, Director, Chairman, President,
CFO and CEO(2) 237,500 9.5%
Jim Cheal, Vice President and Director(3) 12,500 *
Robert Guess, Vice President and Secretary 6,250 *
Michael Smith, Vice President 2,500 *
Jeffrey Starke, Vice President and Director(4) 12,500 *
Gary Irving, Executive Vice President, COO and Director(5) 162,500 6.5%
Frank Aliano, Vice President 6,250 *
Doreen Cheal(6) 151,299 6.1%
Linda Condon, Director of Finance
and Treasurer(7) 1,073 *
Susquehana Holdings Corp(7) 158,500 6.3%
Mathers Associates (8) 130,000 5.2%
Denise O'Brien(9) 163,799 6.6%
All Executive Officers and Directors 756,170 30.3%
as a group (8 persons)
</TABLE>
* Denotes less than 1% beneficial ownership.
- - --------------------------------------------
(1) Unless otherwise indicated, the address of each of the persons is 711-731
Washburn Road, Melbourne, FL 32934.
(2) Includes 12,500 shares of common stock issuable upon the exercise of options
exercisable at $4.00 until December 20, 2003.
(3) Includes (i) 151,299 shares of common stock owned by Doreen Cheal, Mr.
Cheal's wife and (ii) 12,500 shares of common stock issuable upon the exercise
of options exercisable at $4.00 per share until December 30, 2003.
(4) Includes 12,500 shares of common stock issuable upon the exercise of options
exercisable at $4.00 per share until December 20, 2003. Jeff Starke is the
brother of Denise O'Brien.
(5) Includes 12,500 shares issuable upon the exercise of options exercisable at
$4.00 per share until December 20, 2003.
27
<PAGE>
(6) Jim Cheal is Doreen Cheal's husband.
(7) Address is 230 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 158,500 shares held in the name of Susquehana Holdings
Corp. Does not include (i) 9,500 shares of common stock owned by Mr. Zeelander
individually; or (ii) 130,000 shares of common stock owned by Mathers
Associates, a limited partnership in which Mr. Zeelander is a general partner.
(8) Address is 230 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 130,000 shares held in the name of Mathers Associates. Does
not include (i) 9,500 shares of common stock owned by Mr. Zeelander
individually; or (ii) 158,500 shares of common stock owned by Susquehana
Holdings Corp., a corporation in which Mr. Zeelander is sole shareholder.
(9) Denise O'Brien is the sister of Jeffrey Starke. Mrs. O'Brien resigned as a
director on April 30, 1999.
(10) Adjusted to give effect for a one for four reverse stock split effective on
June 3, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On May 9, 1997, pursuant to the terms of a purchase agreement the American
Quantum Cycles issued 301,786 shares of common stock to Doreen Cheal and 301,786
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
125,974 shares of common stock to us because they were overvalued.
On June 5, 1998, Robert Guess, Doug Paik, Jeff Starke and Jim Cheal returned an
aggregate of 175,000 shares of common stock to us for the purpose of improving
the capitalization of American Quantum Cycles.
In November 1998, Mr. Richard Hagen, Chairman, CEO, President, CFO and Director
of American Quantum Cycles, and Mr. Gary Irving, Executive Vice President, COO
and Director of American Quantum Cycles, were issued 225,000 and 150,000 shares
of American Quantum Cycles common stock, respectively. Mr. Hagen and Mr. Irving
voluntarily deferred salary to assist company during development stage as
partial compensation for their services and for the progress of company over the
prior 12 months, the Board of Directors determined that in the best interest of
the company to grant these shares which were recorded as compensation in the
company's records.
28
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
(a)The financial statements listed on the index to financial statements on
page F-1 are filed as part of this Form 10-KSB.
(b)Reports on Form 8-K
None.
(c)Exhibits
<TABLE>
<CAPTION>
Exhibits Description of Document
-------- -----------------------
<S> <C>
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)
2.3 Amended and Restated Bylaws of American Quantum Cycles, Inc.(1)
3.2 American Quantum Cycles, Inc. Amended 1997 Stock Option Plan(1)
6.1 Consulting Agreement between American Quantum Cycles, Inc. and
Greenstone Financial Corporation dated May 9, 1997.(1)
6.2 License Agreement between Feuling Advanced Technologies, Inc. and American
Quantum Cycles, Inc. dated as of August 19, 1997.(1)
6.3 Agreement between the Company and Ferrex International, Inc.(1)
6.4 Dealer Agreement between the Company and Paul Jackson(1)
6.5 Lease Agreement between the Company and Bruce and Karen Weiss effective
May 1, 1997(1)
6.6 Amendment to Lease Agreement between the Company and Bruce and
Karen Weiss dated January 29, 1998.(1)
27 Financial Data Schedule
</TABLE>
- - -----------------
(1) Incorporated by reference to the exhibit of the same number filed with the
Company's registration statement on Form 10-SB filed April 24, 1998 (File No.
000-24083).
29
<PAGE>
SIGNATURE
---------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on this day of August 13, 1999.
AMERICAN QUANTUM CYCLES, INC.
By:/s/ Richard Hagen
-----------------------
Richard Hagen
Chairman of the Board of Directors,
Chief Executive Officer,
Chief Financial Officer
and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ----------- ----- ----
<S> <C> <C>
Chairman of the
Board of Directors,
/s/Richard Hagen Principal Executive Officer,
- - ------------------ Principal Financial Officer August 13, 1999
Richard Hagen and President
/s/Jim Cheal Vice President August 13, 1999
- - ----------------- and Director
Jim Cheal
/s/ Jeffrey W. Starke Vice President August 13, 1999
- - ----------------------- and Director
Jeffrey W. Starke
/s/ Gary Irving Chief Operating Officer August 13, 1999
- - ------------------ and Director
Gary Irving
/s/ Linda Condon Principal Accounting Officer August 13, 1999
- - ------------------ and Treasurer
Linda Condon
</TABLE>
30
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
FINANCIAL STATEMENTS
APRIL 30, 1999
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Certified Public Accountant............................................................................... F-2
Balance Sheets as of April 30, 1999 and 1998........................................................................ F-3
Statements of Operations for the Years Ended April 30 1999, 1998 and 1997 .......................................... F-4
Statements of Cash Flows for the Years Ended April 30, 1999 1998 and 1997 .......................................... F-5
Statements of Shareholders' Deficit for the Years Ended April 30, 1999 1998 and 1997................................ F-6
Notes to Financial Statements........................................................................................ F-7-F-17
</TABLE>
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, 1999 and 1998, and the related statements of
operations, stockholders' deficit, and cash flows for each of the years in the
three year period ended April 30, 1999. 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, 1999 and 1998 and the results of its operations and
its cash flows for each of the years in the three year period ended April 30,
1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises doubt about the entity's ability to
continue as a going concern. Management's plans regarding those matters are also
described in Note 8. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Pricher & Company
Orlando, Florida
June 24, 1999
F-2
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
BALANCE SHEET
April 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,397 $ 48,768
Accounts receivable 94,439 35,602
Other current assets 35,734 39,308
Inventories 791,084 763,158
----------- -----------
Total current assets 936,654 886,836
----------- -----------
Property and equipment 1,666,661 649,499
Less accumulated depreciation 331,630 62,486
----------- -----------
1,335,031 587,013
----------- -----------
Other assets:
Deposits 45,555 40,700
Licenses and intellectual rights, less accumulated
amortization of $36,714 and $12,565 325,518 349,667
----------- -----------
371,073 390,367
----------- -----------
$ 2,642,758 $ 1,864,216
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,149,882 $ 370,658
Accrued liabilities 921,835 317,103
Current maturities of long-term debt 15,558 20,183
Current capital lease obligations 147,560 24,006
Lines of credit 1,093,893
Notes payable 2,188,753 2,317,500
----------- -----------
Total current liabilities 5,517,481 3,049,450
----------- -----------
Capital lease obligations, less current maturities 81,341 75,598
Long-term debt, less current maturities 1,386,418 42,378
----------- -----------
1,467,759 117,976
----------- -----------
Stockholders' deficit:
Common stock, par value $.001 per share; authorized
50,000,000 shares, issued and outstanding
2,300,586 and 617,761 shares 2,301 618
Preferred stock, par value $.001 per share; authorized
2,500,000 shares, no shares issued
Additional paid-in capital 5,076,353 1,330,517
Deficit (9,421,136) (2,634,345)
----------- -----------
Total stockholders' deficit (4,342,482) (1,303,210)
----------- -----------
$ 2,642,758 $ 1,864,216
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF OPERATIONS
Years Ended April 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 975,780 $ 192,856 $
----------- ----------- -----------
Cost and expenses:
Cost of goods sold 1,539,728 173,424
General and administrative 5,144,615 2,453,062 1,542
----------- ----------- -----------
6,684,343 2,626,486 1,542
----------- ----------- -----------
Loss from operations (5,708,563) (2,433,630) (1,542)
----------- ----------- -----------
Other income (expense):
Loss on disposition of property and
equipment (13,956)
Interest and other income 1,724 3,107
Interest expense (1,079,952) (187,232) (1,092)
----------- ----------- -----------
(1,078,228) (198,081) (1,092)
----------- ----------- -----------
Net loss $(6,786,791) $(2,631,711) $ (2,634)
=========== =========== ===========
Loss per common share:
Weighted average shares outstanding 1,212,503 501,961 147,929
=========== =========== ===========
Net loss $ (5.597) $ (5.243) $ (0.018)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF CASH FLOWS
Years Ended April 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Reconciliation of net loss to net cash used in
operating activities:
Net loss $(6,786,791) $(2,631,711) $ (2,634)
Items not requiring (providing) cash:
Loss on disposition of equipment 13,956
Depreciation and amortization 293,293 75,051 1,092
Issuance of common stock for compensation,
services and interest 3,069,270 304,409 275
Changes in assets and liabilities:
Receivables (62,471) (35,602) 500
Inventories (27,926) (763,158)
Prepaid expenses 7,208 (35,143)
Other assets (4,855) (40,700)
Accounts payable 779,224 370,658
Accrued liabilities 604,731 316,336 767
----------- ----------- -----------
Net cash used in operating activities (2,128,317) (2,425,904)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (1,017,162) (615,950)
Investment in licenses and intellectual rights (362,232)
----------- ----------- -----------
Net cash used in investing activities (1,017,162) (978,182)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 2,488,519 2,317,500 244,985
Repayment of notes payable (54,661) (221,770)
Long-term borrowing 175,159
Repayment of long-term debt (12,994)
Proceeds from issuance of common stock 678,250 949,974
----------- ----------- -----------
Net cash provided by financing activities 3,112,108 3,207,869 244,985
----------- ----------- -----------
Net increase (decrease) in cash (33,371) (196,217) 244,985
Cash, beginning of year 48,768 244,985
----------- ----------- -----------
Cash, end of year $ 15,397 $ 48,768 $ 244,985
=========== =========== ===========
Supplemental cash flow information:
Amounts paid for:
Interest $ 257,551 $ 5,332 $
=========== =========== ===========
Income taxes $ $ $
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
Years Ended April 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Total
Number of Par Paid-In Stockholders'
Shares Value Capital Deficit Deficit
---------- ----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1996 125 $ 125 $ 375 $ $ 500
1,000 for 1 stock split 124,875
Stock issued for consulting services 68,750 69 206 275
Stock issued to bridge loan participants 31,250 31 28,441 28,472
Net loss for the year ended April 30, 1997 (2,634) (2,634)
---------- -------- ----------- ------------ ------------
Balance, April 30, 1997 225,000 225 29,022 (2,634) 26,613
Stock issued in exchange for equipment
and services 315,269 315 94,694 95,009
Private placement of common stock for cash 61,436 61 949,913 949,974
Employee stock bonuses recorded as
compensation expense 12,825 13 205,188 205,201
Stock issued to a dealership for
promotional expense 2,500 3 39,997 40,000
Stock issued to lenders for interest on bridge
loans 731 1 11,703 11,704
Net loss for the year ended April 30, 1998 (2,631,711) (2,631,711)
- - ----------------------------------------------------------- -------- ----------- ------------ ------------
Balance, April 30, 1998 617,761 618 1,330,517 (2,634,345) (1,303,210)
Private placement of common stock for cash 62,500 63 254,937 255,000
Stock issued upon exercise of stock options 399,375 400 422,850 423,250
Employee stock bonuses recorded as
compensation expense 375,350 375 706,285 706,660
Stock issued in exchange for consulting
and other services 237,350 237 913,523 913,760
Stock issued to lenders for interest on bridge
loans and lines of credit 608,250 608 1,448,241 1,448,849
Net loss for the year ended April 30, 1999 (6,786,791) (6,786,791)
- - ----------------------------------------------------------- -------- ----------- ------------ ------------
Balance, April 30, 1999 2,300,586 $ 2,301 $ 5,076,353 $ (9,421,136) $ (4,342,482)
========== ======== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
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. 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.
Basis of presentation - For years prior to the fiscal year ended April
30, 1999 the Company was considered to be in the development stage. During the
current year the Company commenced planned operations, however, substantial
efforts are still being made to raise capital, enter into dealership agreements
and implement its business plan.
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 that 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.
Notes to Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Sales returns and warranty allowances - The Company establishes an
allowance for product warranties and sales returns based on experience with
customers' claims arising from the sale of defective merchandise and a study of
the experiences of other companies engaged in the sale of similar products.
Changes in the allowance are charged to selling expense.
2 INVENTORIES
Inventories at April 30, 1999 and 1998 are comprised as follows:
<TABLE>
<CAPTION>
Description 1999 1998
--------------------------------------------------------------- -------------- --------------------
<S> <C> <C>
Finished goods $ 27.573 $ 13,787
Work in process 24,032 66,796
Purchased raw materials 739,479 682,575
============== =================
Total inventory $ 791,084 $ 763,158
============== =================
</TABLE>
3 PROPERTY AND EQUIPMENT
Property and equipment includes the following:
<TABLE>
<CAPTION>
Description 1999 1998
--------------------------------------------------------------- -------------- -----------------
<S> <C> <C>
Leasehold improvements $ 559,742 $ 52,750
Manufacturing tools and equipment 251,159 142,805
Office furniture, equipment and software 696,055 308,025
Vehicles 159,705 145,919
=============== ===============
Total $ 1,666,661 $ 649,499
=============== ===============
</TABLE>
Depreciation expense for the years ended April 30, 1999 and 1998
amounted to $269,144 and $62,486, respectively. 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.
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 (36,714)
$ 325,518
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 is 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 AND LINES OF CREDIT
Notes payable at April 30, 1999 consist of:
10% Subordinated Notes - The Company issued nine unsecured promissory
notes dated March 30, 1998 to individuals providing bridge loan financing. The
aggregate principal balance of the notes at April 30, 1999 is $700,000 with
interest payable at 10% at maturity (originally September 30, 1998). The terms
of the loan agreements provide for the Company to issue a total of 35,500 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) is being
recognized over the term of the loans. The note holders of $320,000 of the
outstanding notes subsequently agreed to convert the notes and accrued interest
thereon into common stock at a conversion price equal to the offering price of
shares of the Company's common stock in a proposed public offering as discussed
in Note 8 ("the proposed stock offering"). The note holders will also receive
two common stock warrants for each share of common stock to be received upon
conversion. Note holders representing the remaining $380,000 of the outstanding
notes have agreed to extend the maturity date of their notes until the
completion of the proposed stock offering.
F-9
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Convertible Debentures - The Company has issued two separate series of
unsecured convertible notes to investors:
Beginning in October 1997, the Company issued forty 8% Subordinated
Notes, for an aggregate of $1,524,500. The notes were scheduled to mature one
year from date of issue and were convertible at $8.00 per share. Interest was
also convertible at the same rate as the principal, at the discretion of the
note holder. As of April 30, 1999 the outstanding principal balance of these
notes is $1,327,000. The note holders of $706,500 of the outstanding notes
subsequently agreed to convert the notes and accrued interest thereon into
common stock at a conversion price equal to the offering price of shares of the
Company's common stock in the proposed stock offering and will also receive one
common stock warrant for each share of common stock to be received upon
conversion. Note holders representing $297,500 of the outstanding notes have
agreed to extend the maturity date of their notes until the completion of the
proposed stock offering. The remaining note holders representing $323,000 of the
outstanding notes have not agreed to convert or extend the maturity date of
their notes and the notes are, therefore, in default.
Beginning in April 1998, the Company issued twenty-seven 7%
Subordinated Notes, for an aggregate of $549,500. The notes were scheduled to
mature one year from the date of issue and were 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 stock offering. As of April 30, 1999 the outstanding
principal balance of these notes is $517,000. The note holders of $337,000 of
the outstanding notes subsequently agreed to convert the notes and accrued
interest thereon into common stock at a conversion price equal to the offering
price of shares of the Company's common stock in the proposed stock offering and
will also receive one common stock warrant for each share of common stock to be
received upon conversion. Note holders representing the remaining $180,000 of
the outstanding notes have agreed to extend the maturity date of their notes
until the completion of the proposed stock offering.
Senior Promissory Notes - Between November 1998 and January 1999 the
Company issued thirty-five units at a price of $25,000 per unit. Each unit
consisted of a non-interest bearing, unsecured $25,000 senior promissory note
and common stock warrants for a number of shares of stock determined by dividing
$12,500 by the public offering price of shares of common stock of the Company to
be issued in the proposed stock offering. The warrants are exercisable at the
offering price of the proposed stock offering. The outstanding principal balance
of the senior promissory notes at April 30, 1999 is $870,000.
8% Subordinated Demand Notes - Between January and April 1999 the
Company issued seven unsecured 8% subordinated demand notes for an aggregate
principal amount of $587,000. These notes remain outstanding at April 30, 1999.
F-10
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Bank Note - In January 1999, the Company assumed a $61,005 bank note in
default from one of its dealers and regained title to five motorcycles. The
Company has agreed to repay the note at $5,000 per month commencing in February
1999. As of April 30, 1999, the remaining principal balance on the note is
$46,005.
Lines of Credit at April 30, 1999 consist of:
Investor Group Line of Credit - In February 1999 the Company contracted
with a group of six individuals for an unsecured line of credit in the aggregate
amount of $500,000. The loans bear interest at 8% per annum plus the note
holders received 28,125 shares of common stock valued at $125,000. Principal and
interest are payable upon the completion of the proposed stock offering.
Revolving Line of Credit - In March 1999, the Company contracted for a
$750,000 secured line of credit. Interest is payable monthly at 10% plus the
lender received 187,500 shares of common stock valued at $187,500. The loan is
secured by inventory, accounts receivable and general intangibles and matures on
June 30, 1999. Borrowing under the agreement is based on firm purchase orders
for motorcycles received by the Company. As of April 30, 1999, the Company had
drawn $220,000 on this line of credit.
Line of Credit - In December 1998, the Company contracted for a
$755,000 secured line of credit. Interest is payable quarterly at 10% per annum
plus the lender received 188,750 shares of common stock valued at $188,750. The
loan is secured by inventory, accounts receivable, general intangibles and
equipment and is due on demand. As of April 30, 1999, the Company had drawn
$755,000 on this line of credit.
Outstanding notes payable and lines of credit as of April 30, 1999 are
summarized as follows:
10% Subordinated Notes $ 700,000
8% Subordinated Notes 1,327,000
7% Subordinated Notes 517,000
Senior Promissory Notes 870,000
8% Subordinated Demand Notes 587,000
Bank Note 46,005
Lines of Credit 1,475,000
-----------
5,522,005
Less unamortized discount (875,859)
-----------
Total notes payable and lines of credit $ 4,646,146
===========
F-11
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Notes payable and lines of credit are included in the accompanying
balance sheet under the following captions:
Lines of credit $ 1,093,893
Notes payable 2,188,753
Long term debt 1,363,500
-----------
Total $ 4,646,146
===========
The shares of common stock issued to note holders and line of credit
lenders, as discussed above, were valued at the market value at the date of
issue. The value of the shares, which aggregated $1,448,850, has been recorded
as a discount from the face value of the related debt and is being amortized
over the term of the debt using the interest method. During the year ended April
30, 1999, $572,991 of such discount has been amortized and charged to interest
expense. These transactions result in an effective interest rate on the notes
payable and lines of credit of 31.2% and 61%, respectively.
6 LONG-TERM DEBT
Long-term debt at April 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Installment loan, monthly payments of $618 including interest
at 8.75%, matures September, 2002, secured by a vehicle $ 21,822
Installment note payable for the purchase of intellectual property
rights, monthly payments of $783 including interest at 8%, matures
January, 2001, secured by property rights 16,654
Short-term obligations expected to be refinanced (see note 5) 1,363,500
----------
1,401,976
Less current maturities 15,558
----------
Total long-term debt $1,386,418
==========
</TABLE>
The aggregate maturities of long-term debt as of April 30, 1999 are
$15,558 in 2000, $13,073 in 2001, $6,822 in 2002 and
$3,023 in 2003.
F-12
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
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 May, 2003. 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.
The following is an analysis of the leased assets included in property
and equipment as of April 30, 1999:
Telephone equipment $ 16,452
Computer equipment 255,611
Machinery and production equipment 41,479
-----------
313,542
Less accumulated amortization (35,531)
-----------
$ 278,011
===========
The following is a schedule of future minimum payments required under
the leases together with their present value as of April 30, 1999:
Year ending
April 30, Amount
-------------------- ------------------
2000 $ 95,710
2001 92,945
2002 52,667
2003 32,866
2004 4,908
---------------
Total minimum lease payments 279,096
Less amount representing interest ( 50,195)
---------------
Present value of minimum lease payments $ 228,901
===============
Operating leases - The Company leases its administration and production
facilities under noncancelable operating leases with terms of four years
expiring in February, 2002. The Company is also responsible for real estate
taxes on the leased facilities. Rent expense under operating leases was $69,756
and $83,155 for the years ended April 30, 1999 and 1998, respectively. The
following is a schedule of future minimum lease payments required under
operating leases:
Year ending
April 30, Amount
-------------------- -------------------
2000 $ 69,756
2001 $ 69,756
2002 $ 58,130
F-13
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
8 CONTINGENCIES
The Company has suffered recurring losses since its inception and at
April 30, 1999 has a capital deficiency of $9,421,136 and a working capital
deficiency of $4,580,827. As described in note 5, the Company has negotiated
with its lenders to convert certain loans to common stock and stock warrants and
to defer payment on certain loans until completion of a proposed stock offering
planned for July 1999. The proposed stock offering of up to 1,840,000 shares of
the Company's common stock is expected to provide sufficient net proceeds to
repay all delinquent obligations and provide working capital to sustain
operations until such time as positive cash flow and profits can be generated.
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.
Management believes that it will be successful in completing the stock
offering and achieving profitable operations, however, there is no assurance
that such efforts will be successful.
9 SECURITY TRANSACTIONS
Following is a summary of security transactions during the years ended
April 30, 1999 and 1998:
On May 21, 1997 the Company issued 315,269 shares of common stock
valued at $95,009 for management services, equipment
and other assets.
In September, 1997 the Company issued 61,436 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 and provide working capital.
On October 24, 1997 and December 31, 1997, 12,825 shares of common
stock valued at $205,201 were issued to key employees
as performance bonuses.
On December 15, 1997, 2,500 shares of common stock valued at $40,000
were issued to a dealership and recorded as promotional expense and 732 shares
valued at $11,704 were issued to bridge lenders and recorded as interest
expense.
At various dates during the year ended April 30, 1999 the Company
issued 62,500 shares of common stock for cash at prices ranging from $4.00 to
$4.20 per share and an additional 399,375 shares were issued upon exercise of
stock options at prices ranging from $.40 to $4.00 per share.
F-14
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
9 SECURITY TRANSACTIONS (Continued)
In October and November, 1998 the Company issued 375,350 shares of
common stock valued at $706,660 to management and other employees as performance
bonuses.
At various dates between October, 1998 and January, 1999 the Company
issued 237,350 shares valued at $913,760 for consulting and other services.
As discussed in note 5, the Company issued 35,500 shares of common
stock valued at $177,500 during December, 1998 to certain 10% note holders to
obtain a favorable interest rate and repayment terms. Additionally, in January
and April, 1999, in connection with agreements to provide $2,005,000 in secured
and unsecured lines of credit, the lenders were issued 572,750 shares of common
stock valued at $1,271,350. The value of the shares issued to the 10% note
holders and the line of credit lenders is being amortized as additional interest
expense over the original terms of the debt.
10 PREFERRED STOCK
The Company is 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.
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, 1999, the Company has net operating loss carryforwards
totaling approximately $9,400,000 that may be offset against future taxable
income through 2012. No tax benefit has been reported in the accompanying
financial statements, however, because the Company believes there is at least a
50% chance that the carryforwards will expire unused. Accordingly, a $3,760,000
tax benefit of the loss carryforward has been offset by a valuation allowance of
the same amount. During the years ended April 30, 1999 and 1998, the valuation
allowance increased by $2,720,000 and $1,040,000, respectively.
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.
F-15
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
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 and a 4
for 1 reverse stock split effective June 3, 1999.
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 62,500
shares of Company common stock based upon the successful completion of a private
placement of Company common stock, with each option exercisable at $16.00 per
share. Also under the terms of the agreement, as amended, the Company granted
GFC an option to purchase 75,000 shares of Company common stock at an exercise
price of $0.40 per share. GFC exercised this option in October, 1998.
On June 15, 1998, the Company adopted the "1997 Stock Option Plan" (the
"Plan"). Under the Plan, 750,000 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, 1999, the Company has granted common stock
options to plan participants as follows:
Exercise Price Number of Options
-------------- -----------------
$ .40 37,500
$ 1.00 142.500
$ 2.00 146,250
$ 2.32 75,000
$ 2.80 105,000
$ 3.20 225,000
$ 4.00 212,500
-------
Total options granted 943,750
=======
F-16
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
13 STOCK OPTIONS (Continued)
In addition to the 75,000 options exercised by GFC, an additional
324,375 options were exercised during the year ended April 30, 1999. As of April
30, 1999 the following options are exercisable:
Exercise Price Number of Options
$ 2.00 103,125
$ 2.80 101,250
$ 3.20 225,000
$ 4.00 190,000
$ 16.00 62,500
-------
Total options exercisable 681,875
=======
14 COMPREHENSIVE INCOME
As of May 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Company's net loss or shareholders' deficit for any of the periods presented in
the accompanying financial statements. SFAS No. 130 requires other comprehensive
income to include foreign currency translation adjustments and minimum pension
liability adjustments, which prior to adoption were reported separately in
shareholders' equity.
15 SUBSEQUENT EVENTS
On June 3, 1999, the Company declared a one for four reverse stock
split. All share and per share data have been retroactively restated in the
accompanying financial statements.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 15,397
<SECURITIES> 0
<RECEIVABLES> 94,439
<ALLOWANCES> 0
<INVENTORY> 791,084
<CURRENT-ASSETS> 936,654
<PP&E> 1,666,661
<DEPRECIATION> 331,630
<TOTAL-ASSETS> 2,642,758
<CURRENT-LIABILITIES> 5,517,481
<BONDS> 0
0
0
<COMMON> 2,301
<OTHER-SE> 5,076,353
<TOTAL-LIABILITY-AND-EQUITY> 2,642,758
<SALES> 975,780
<TOTAL-REVENUES> 975,780
<CGS> 1,539,728
<TOTAL-COSTS> 6,684,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,079,952
<INCOME-PRETAX> (6,786,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,786,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,786,791)
<EPS-BASIC> (5.597)
<EPS-DILUTED> 0
</TABLE>
