SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For the quarter ended January 31, 1999
Commission file number 0-24083
AMERICAN QUANTUM CYCLES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2651232
- ------------------------------- --------------------------
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification number)
731 Washburn Road
Melbourne, Florida 32934
- - -------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 752-0008
---------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Common stock outstanding at January 31, 1999 was 8,134,845 shares.
1
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AMERICAN QUANTUM CYCLES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
January 31, 1999 April 30, 1998
(Unaudited)
---------------- --------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 103,038 $ 8,768
Accounts receivable - trade (Note 8) 5,313,648 35,602
Inventory - raw materials (at FIFO) 157,819 682,575
Inventory - work in process 683,056 66,796
Inventory - finished goods 0 13,787
Prepaid expenses and other current assets 41,523 39,308
---------- ----------
Total current assets 6,299,084 886,836
Property and equipment, net 1,126,480 587,013
Patents and licenses, net (Note 4) 337,916 349,667
Other assets 41,767 40,700
---------- ----------
Total Assets $7,805,247 $1,864,216
========== ==========
(See accompanying notes to condensed financial statements)
2
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January 31, 1999 April 30, 1998
(Unaudited)
---------------- --------------
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Liabilities
Current liabilities
Accounts payable - trade $ 952,349 $ 370,658
Accrued compensation 74,064 21,921
Notes payable - bridge loans (Note 6) 1,570,000 650,000
Convertible debentures - 8% (Note 7) 1,579,500 1,524,500
Convertible debentures - 7% (Note 7) 692,000 143,000
Lines of credit - secured & unsecured (Note 9) 293,200 0
Deferred income (Note 8) 4,533,308 0
Other accrued expenses and current liabilities 1,267,768 295,182
------------ ------------
Total current liabilities 10,962,189 3,005,261
Long term liabilities
Capitalized leases (Note 5) 65,377 99,604
Notes payable - bank 23,573 27,074
Notes payable - other 25,067 35,487
------------ ------------
Total long term liabilities 114,017 162,165
------------ ------------
Total Liabilities 11,076,206 3,167,426
------------ ------------
Shareholders' Equity
Preferred stock - $.001 par value; 2,500,000
shares authorized; no shares issued 0 0
Common stock - $.001 par value; 50,000,000
shares authorized; 8,134,845 shares and
2,471,045 shares issued and outstanding 8,135 2,471
Capital in excess of par value 2,756,040 1,328,664
Retained earnings (deficit) (6,035,134) (2,634,345)
------------ ------------
Total shareholders' equity (deficit) (3,270,959) (1,303,210)
------------ ------------
Total Liabilities & Shareholders' Equity $ 7,805,247 $ 1,864,216
============ ============
</TABLE>
(See accompanying notes to condensed financial statements)
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AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended Nine months ended Nine months ended
January 31, 1999 January 31, 1998 January 31, 1999 January 31, 1998
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales of tangible goods $ 391,376 $ 103,061 $ 865,399 $ 126,416
Cost of goods sold 263,947 94,766 908,263 132,188
----------- ----------- ----------- -----------
Gross profit (deficit) 127,429 8,295 (42,864) (5,772)
Selling, general and administrative expenses 756,761 590,282 2,734,197 1,114,254
----------- ----------- ----------- -----------
Operating profit (deficit) (629,332) (581,987) (2,777,061) (1,120,026)
Other income (expense):
Interest expense (56,335) (4,634) (625,418) (30,880)
Loss on disposition of asset 0 0 0 (7,566)
Other income (Note 9) 0 834 1,691 1,155
----------- ----------- ----------- -----------
Net Operating Loss $ (685,667) $ (585,787) $(3,400,788) $(1,157,317)
=========== =========== =========== ===========
Weighted average shares outstanding 4,903,095 3,568,987 4,821,291 3,562,370
=========== =========== =========== ===========
Loss per common share $ (0.140) $ (0.164) $ (0.705) $ (0.325)
=========== =========== =========== ===========
Loss per Common Share-diluted $ (0.075) $ (0.164) $ (0.371) $ (0.325)
=========== =========== =========== ===========
</TABLE>
(See accompanying notes to condensed financial statements)
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AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
January 31, 1999 January 31, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,400,788) $(1,157,317)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 201,482 33,603
Changes in assets and liabilities:
Receivables (881,039) (48,343)
Inventories (77,718) (559,828)
Prepaid expenses and other 9,891 (62,015)
Accounts payable 581,691 110,776
Other accrued expenses and current liabilities 892,935 205,068
----------- -----------
Net cash used by operating activities (2,673,546) (1,478,056)
Cash flows from financing activities:
Loan proceeds 1,345,700 200,000
Convertible debenture proceeds 611,500 1,054,000
Retirement of prior debt (7,500) (450,000)
Payment of loan principal (48,148) (2,057)
Net capital and stock changes 1,550,628 1,137,808
----------- -----------
Net cash provided by financing activities 3,452,180 1,939,751
Cash flows from investing activities:
Additions to property and equipment (724,364) (310,874)
Additions to intangible assets (Note 4) 0 (349,039)
----------- -----------
Net cash used by investing activities (724,364) (659,913)
----------- -----------
Net (decrease) increase in cash 54,270 (198,218)
Cash at beginning of period 48,768 244,985
----------- -----------
Cash at end of period $ 103,038 $ 46,767
=========== ===========
</TABLE>
(See accompanying notes to condensed financial statements)
5
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AMERICAN QUANTUM CYCLES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation, General and Business
-------------------------------------------
American Quantum Cycles, Inc. ("The Company") is an early production stage
company that designs, produces, markets, distributes and sells American-made,
high performance V-twin engine cruiser and touring style motorcycles. These
motorcycle products include stock models and motorcycles built to customer
specified configurations. The Company was originally incorporated on March 20,
1986 as "Norbern, Inc." and was inactive until March 1997 when it began
developing and implementing its business and financing plans. On May 8, 1997 the
Company changed its name to American Quantum Cycles, Inc.
and its fiscal year end to April 30.
The accompanying interim financial statements are prepared in accordance with
the instructions to Form-10QSB, are unaudited and do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.
(2) Concentration of Credit Risk
----------------------------
The Company occasionally maintains deposits in excess of federally insured
limits. Statement of Financial Accounting Standards No, 105 identifies these
items as a concentration of credit risk requiring disclosure, regardless of the
degree of risk. The risk is managed by maintaining all deposits in high quality
financial institutions.
(3) Transition from Development Stage Company to Production
-------------------------------------------------------
The Company has transitioned from a development stage company into an early
production ramp-up stage company. The Company has completed various activities
necessary for this transition including entering into dealership agreements, a
technology license agreement (see Note 4), leasing and upgrading facilities,
purchasing supplies and equipment, and hiring and training employees. The
Company anticipates that the current fiscal year ending April 30, 1999 will have
deficit earnings. Except for the historical information contained herein, the
matters set forth herein are forward looking and involve a number of risks and
uncertainties.
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.
6
<PAGE>
(4) Patents, Licenses and Certificates
----------------------------------
In August 1997, the Company entered into a license agreement (the "Agreement")
with Feuling whereby the Company, as licensee, obtained a license to use certain
proprietary technologies including among other things, patents trade secrets,
techniques, tooling designs, product designs, and trademarks. Pursuant to the
terms of the Agreement, so long as the Company complies with certain other
provisions including non-disclosure of the proprietary technology, the Company
has an exclusive license, for motorcycle applications, in perpetuity for the
4-Valve technology. This technology will be used in connection with the Company
motorcycles and bolt-on kits for the Harley Davidson motorcycles which feature
the evolution engine, evolution big twin, other Harley Davidson clones and
aftermarket parts. An American Quantum Motorcycle with its 4-Valve engine
successfully passed EPA testing and was awarded an EPA certificate for 49 states
(less California). American Quantum will submit a second motorcycle for further
testing aimed at a 50 state certificate in the spring of 1999.
(5) Capitalized Leases
------------------
The Company has executed capital leases with Nations Commercial Credit
Corporation for purchasing manufacturing and production equipment, and for
computer equipment to expand and improve the Company's network infrastructure.
All leases provide a $1 purchase buy-out provision at the end of the term of the
lease.
(6) Bridge Loan Financing
---------------------
Notes payable consist of nine unsecured promissory notes dated March 30, 1998 to
nine individuals providing bridge loan financing. The principal aggregate is
$700,000 with interest payable at an annual rate of 10% (the "10% Notes"). The
10% Notes matured on September 30, 1998. The Company also contracted to issue a
total of 142,000 shares of common stock to these individuals at maturity in
order to obtain a favorable interest rate and repayment terms. Loan costs are
expensed as incurred.
Two of the 10% Note holders, representing an aggregate of $380,000 of the
outstanding principal balance of the 10% Notes, agreed to extend the maturity
date of their 10% Notes until the close of a public secondary offering. Seven of
the 10% Note holders, representing an aggregate of $320,000 of the aggregate
outstanding principal amount of the 10% Notes agreed to convert the balance plus
accrued interest of their respective notes into (i) common stock of the Company
at a price per share equal to the price of the public secondary offering (the
"10% Note Shares"); and (ii) two warrants to purchase a number of shares of the
Company's common stock equal to the 10% Note Shares at an exercise price per
share equal to the price of the pubic secondary offering
The Company has completed a private bridge program against this secondary
offering in the amount of $870,000. The terms of the bridge program are to repay
the principle plus incentive shares at the time of the completion of the
secondary offering. American Quantum will use these funds for operating expenses
and production ramp-up through to the time of the completion of the secondary.
(7) Convertible Notes
-----------------
7
<PAGE>
As part of its equity funding and financing, the Company has issued two separate
series of convertible notes to investors. Beginning in October 1997, the Company
issued forty (40) 8% Subordinated Notes to 32 investors, for an aggregate
principal amount of $1,407,000 (the "8% Notes"). The notes matured one year from
date of issue, convertible at $2.00 per share, with no warrants attached.
Interest is convertible at the same rate as the principal, at the discretion of
the note holder.
Nine of the 8% Note holders, representing an aggregate of $240,000 of the
outstanding principal balance of the 8% Notes, agreed to extend the maturity
date of their 8% Notes until the close of this Offering. Sixteen of the 8% Note
holders, representing an aggregate of $624,000 of the aggregate outstanding
principal amount of the 8% Notes agreed to convert the balance plus accrued
interest of their respective notes into (i) common stock of the Company at a
price per share equal to the price of the public secondary offering (the "8%
Note Shares"); and (ii) one warrant to purchase a number of shares of the
Company's common stock equal to the 8% Note Shares at an exercise price per
share equal to the price of the public secondary offering. The Company redeemed
one of the 8% Notes which had a principal balance of $70,000. The Company has
not received agreements to either extend the maturity date or convert their 8%
Notes from six investors, representing an aggregate $473,000 of the aggregate
outstanding principal amount of the 8% Notes. As a result, if the remaining 8%
Note holders do not convert or extend the terms of their Notes, and such 8% Note
holders send the Company notice informing the Company that it is in default of
its repayment obligations on the 8% Notes, the Company will be considered in
default of such Note.
Beginning in April 1998, the Company issued twenty-seven (27) 7% Subordinated
Notes to 25 investors, for an aggregate principal amount of $549,500 (the "7%
Notes"). The notes mature one year from the date of issue, convertible at $8.00
per share. Interest is payable in cash or convertible at the same rate as the
principal, at the discretion of the Company.
Six of the 7% Note holders, representing an aggregate of $70,000 of the
outstanding principal balance of the 7% Notes, agreed to extend the maturity
date of their 7% Notes until the close of this Offering. Thirteen of the 7% Note
holders, representing an aggregate of $292,000 of the aggregate outstanding
principal amount of the 7% Notes agreed to convert the balance plus accrued
interest of their respective notes into (i) common stock of the Company at a
price per share equal to the price of this Offering (the "7% Note Shares"); and
(ii) one warrant to purchase a number of shares of the Company's common stock
equal to the 7% Note Shares at an exercise price per share equal to the price of
this Offering. The Company redeemed two of the 7% Notes which had an aggregate
principal balance of $32,500. The Company has has not received agreements to
either extend the maturity date or convert their 7% Notes from four investors,
representing an aggregate $155,000 of the aggregate outstanding principal amount
of the 7% Notes.
8
<PAGE>
(8) Recognition of Income
---------------------
Orders received from the Company's dealers are booked as received in Account
Receivable, with an offset in Deferred Income. As the motorcycle proceeds
through the production process, revenue is recognized based on "percentage of
completion."
(9) Subsequent Events
-----------------
In December 1998, the Company contracted for a secured line of credit to use for
operating expenses in the amount of $755,000 with a 10% interest rate and a
total of 755,000 incentive shares issued. Interest and principle on the line of
credit must be repaid to the line of credit provider on demand.
In February 1999, the Company contracted with six individuals for an additional
unsecured line of credit in the aggregate amount of $650,000 to use for
operating expenses. Interest of 8% plus principle is to be paid after the
completion of the secondary, and a total of 520,000 incentive shares issued.
The Company is currently arranging for a $3,000,000 secured line of credit to
use for inventory and production expenses. In addition to the bridge funding,
these lines of credit will cover expenses of the company through to the
completion of the secondary offering.
9
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Management's Discussion, Analysis and Plan of Operation
RISK FACTORS
- ------------
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, INCLUDED IN OR INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS
DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS INCLUDING
THOSE RISKS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB, AS WELL AS
IN THIS REPORT ON PROSPECTUS. SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR
PROJECTED. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE
EXPECTATIONS WILL PROVE TO BE CORRECT.
AMONG THE KEY RISKS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM EXPECTATIONS ARE ESTIMATES OF COSTS, PROJECTED RESULTS OR
ANTICIPATED RESULTS.
The following discussion and analysis should be read in conjunction
with the financial statements of the Company and the notes thereto appearing
elsewhere.
Plan of Operation
- -----------------
The Company has made and projects significant investments in plant and people
which will support an aggressive ramp-up in monthly production of motorcycles
and engines during the next six months. Investment in plant includes
manufacturing equipment, materials handling equipment along with computer
hardware and software (enterprise resource planning software including
integration with the Company's Dealer oriented Intranet). During this same
period, the Company's headcount (number of full time employees) is projected to
increase from 38 to over 70. Most of the increase in headcount will be in
production and key support functions such as quality control, procurement and
inventory management.
Production ramp-up will be implemented through refinement of the assembly
process and investment in jigs, fixtures and material handling equipment such as
pneumatic hoists, lifts and conveyor belts. The total monthly production is
projected to increase from 40 in March with the addition of a second assembly
line and starting two shift operations during the late spring of 1999.
Production is projected to be increased to 100 motorcycles per month by April
1999.
The Company has plans to invest in the research and development of two new
product lines during the next six months: a touring motorcycle and a 96 cubic
inch engine. The touring motorcycle will be a second product line to the Cruiser
model currently manufactured by the Company and will include saddle bags and
windshields/fairings. The touring motorcycle is targeted at one of the fastest
10
<PAGE>
growing market segments. A prototype of the Touring product has been built and
was featured at the Sturgis Motorcycle Rally in August of 1998. Management of
the Company ("Management") believes that the dealer and consumer response was
very favorable due to the number of orders for the touring motorcycle that were
placed at the rally. The 96 cubic inch engine will use the same 4-Valve
technology as the Company's present 88 cubic inch engine. The Company put the 96
cubic inch engine through extensive testing, including over 4,000 miles of road
testing and numerous dynamometer tests. The dynamometer tests established a 10%
improvement in peak foot-pounds of torque more than available from 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
Results of Operation
- --------------------
The Company has transitioned from a development stage company into an early
production company. The Company was originally incorporated on March 20, 1986 as
"Norbern, Inc." and was inactive until March 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.
As the Company was inactive prior to March 1997, there was no income and only
incidental supply costs and the accrued interest expense from seven promissory
notes totaling $250,000 in principal. The fiscal year ended April 30, 1997 had a
deficit carried forward of ($2,634). During the fiscal year ended April 30, 1998
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital, and has sustained
cumulative losses of ($2,634,345). These losses have resulted primarily from
expenditures for general and administrative activities, including salaries and
professional fees for outside services in the amount of $1,164,291, travel and
marketing expenses of $457,590, and accrued interest expense of $187,232 from
the bridge loan and convertible debentures issued.
The Company sustained continuing losses in the first nine months of this fiscal
year in the amount of ($3,400,788). These losses include $2,734,197 in general
and administrative activities, representing significant increases in personnel
and the outside professional services necessary for production ramp-up, and
$625,418 in accrued interest expense. The Company sustained losses in the first
nine months of the last fiscal year in the amount of ($1,157,317). These losses
include $1,114,254 in general and administrative activities, representing
training and development of personnel and process necessary in a development
stage operation, and $30,880 in accrued interest expense.
Revenues in the fiscal year ended April 30, 1998 of $192,856 resulted from the
sale of the initial ten motorcycles produced plus some after-market 4-Valve
engine parts. An additional eight motorcycles were produced, of which two were
used for engineering and regulatory testing, and the remaining six are used for
marketing purposes. An additional 18 motorcycles have been produced during this
fiscal year to-date, and an additional 230 motorcycles have been booked into
production slots from 23 dealers. Eighty-six of these bikes have been scheduled
for delivery during the April-June timeframe of 1999. The Company expects
after-market 4-Valve engine and part sales to increase significantly during the
fiscal year 1999/2000.
While the Company anticipates that the current fiscal year ending April 30, 1999
will have deficit earnings, including the aggregate for the 4th Quarter, the
first two months of the new FY (May and June of 1999) are expected to be cash
flow positive. Results of operations in the future will be influenced by
numerous factors including technological developments, competition, regulation,
increases in expenses associated with sales growth, market acceptance of the
11
<PAGE>
products of the Company, the capacity of the company to expand and maintain the
quality of its motorcycles and related services, continued development of the
dealer organization, favorable sourcing of supplies, recruitment of highly
skilled employees and integration of such persons into a cohesive organization,
and the ability of the Company to raise funds and control costs.
Liquidity and Capital Resources
- -------------------------------
Since the Company only recently emerged from its development stage, it
has not received any material income from operations. As such, the Company
relies on private sources of financing to support its operations. As part of its
funding and financing, the Company issued two separate series of convertible
notes to investors:
Beginning in October 1997, the Company issued an aggregate of forty
(40) 8% Subordinated Notes to 32 investors, in ^the ^aggregate principal amount
of $1,407,000 (the "8% Notes"). The notes matured one year from date of issue.
Nine of the 8% Note holders, representing an aggregate of $240,000 of the
outstanding principal balance of the 8% Notes, agreed to extend the maturity
date of their 8% Notes until the close of this Offering. Sixteen of the 8% Note
holders, representing an aggregate of $624,000 of the aggregate outstanding
principal amount of the 8% Notes agreed to convert the principle balance plus
accrued interest of their respective notes into (i) common stock of the Company
at the a price per share equal to $5.00, (the "8% Note Shares"); and (ii)
warrants to purchase a number of shares of the Company's common stock equal to
the 8% Note Shares at an exercise price of $5.00 per share. The Company redeemed
one of the 8% Notes with a principal balance of $70,000. The remaining six 8%
Note holders have not agreed to either extend the terms of, or convert, their 8%
Notes. As a result, if the remaining six 8% Note holders, representing an
aggregate of $473,000 of the outstanding principal balance of the 8% Notes, send
the Company notice informing the Company that it is in default of its repayment
obligations on the 8% Notes, the Company will be considered in default of such
8% Notes.
Beginning in April 1998, the Company issued an aggregate of
twenty-seven (27) 7% Subordinated Notes to 25 investors, in return for which the
Company received proceeds of $549,500 (the "7% Notes"). The 7% Notes mature one
year from the date of issuance and are convertible into shares of common stock
of the Company at $8.00 per share. Interest is payable in cash or shares of
common stock of the Company, at the discretion of the Company. Six of the 7%
Note holders, representing an aggregate of $70,000 of the outstanding principal
balance of the 7% Notes, agreed to extend the maturity date of their 7% Notes
until the close of this Offering. Thirteen of the 7% Note holders, representing
an aggregate of $292,000 of the aggregate outstanding principal amount of the 7%
Notes agreed to convert the principle balance plus accrued interest of their
respective notes into (i) common stock of the Company at the a price per share
equal to $5.00, (the "7% Note Shares"); and (ii) warrants to purchase a number
of shares of the Company's common stock equal to the 7% Note Shares at an
exercise price of $5.00 per share. The Company redeemed two of the 7% Notes
which had an aggregate principal balance of $32,500. The remaining four 7% Note
holders, representing an aggregate of $155,000 of the outstanding principal
balance of the 7% Notes, have not agreed to either extend the terms of, or
convert, their respective 7% Notes. As a result, if any of the remaining four 7%
Note holders are not repaid, or do not convert or extend the terms of their 7%
Notes by April 1999, and such 7% Note holders send the Company notice informing
the Company that it is in default of its repayment obligations on the 7% Notes,
the Company will be considered in default of the 7% Notes.
12
<PAGE>
In March 1998, the Company received aggregate of $700,000 in connection
with the issuance of nine (9) promissory notes to nine investors which bear
interest annually at a rate of 10% (the "10% Notes"). The 10% Notes mature one
year from the date of issuance and are convertible into shares of common stock
of the Company at $8.00 per share. Interest is payable in cash or shares of
common stock of the Company, at the discretion of the Company. Two of the 10%
Note holders, representing an aggregate of $380,000 of the outstanding principal
balance of the 10% Notes, agreed to extend the maturity date of their 10% Notes
until the close of this Offering. Seven of the 10% Note holders, representing an
aggregate of $320,000 of the aggregate outstanding principal amount of the 10%
Notes agreed to convert the principle balance plus accrued interest of their
respective notes into (i) common stock of the Company at the a price per share
equal to $5.00, (the "10% Note Shares"); and (ii) two warrants to purchase a
number of shares of the Company's common stock equal to the 10% Note Shares at
an exercise price of $5.00 per share. ^
Between November 1998 and January 1999, the Company completed a private
offering of approximately 35 Units of its securities (the "Units") to 11
investors from which the Company received gross proceeds of $870,000. Each Unit
consisted of (i) a Senior Promissory Note in the principal amount of $25,000 and
(ii) the right to receive a number of shares of Common Stock of the Company
determined by dividing $12,500 by the subsequent public offering price per share
of the Company's Common Stock in an underwritten public offering from which the
Company receives at least $5,000,000 gross proceeds.
In December 1998, the Company contracted for a secured line of credit
in the amount of $755,000 to use for operating expenses. The line of credit
accrues interest at a rate of 10% per annum. Principal and interest on the line
of credit must be repaid to the line of credit provider upon demand. In February
1999, the Company contracted with six individuals for an unsecured line of
credit in the aggregate amount of $650,000 use for operating expenses. The
Company is currently arranging for a $3,000,000 secured line of credit to use
for inventory and production expenses. However, there is no guarantee this line
of credit will be obtained. In addition to the bridge funding, these lines of
credit will cover expenses of the Company through to the completion of the
secondary offering.
Between March and May 1999, American Quantum expects to deliver and
collect monies on 75-125 motorcycles. Money from the sale and delivery of
motorcycles is expected to allow American Quantum to become cash flow positive
before the completion of the secondary offering. However, no assurances can be
given that the secondary offering will be completed. In the event the secondary
offering is not completed, American Quantum will need to arrange alternative
financing sources.
The proceeds from the Company's fund raising efforts have been used for
investment in inventory, equipment, licenses and intellectual rights for an
aggregate out-lay during the fiscal year ended April 30, 1998 of $978,182 and to
supply working capital for the Company's operations to date.
13
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
PART II
Other Information
Item 1. Legal Proceedings - None
-----------------
Item 2. Changes in Securities - None
---------------------
Item 3. Defaults upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - 27.1 Data sheet
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended January 31, 1999.
14
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial
officer by the Registrant.
AMERICAN QUANTUM CYCLES, INC.
Date: March 22, 1999 By: /s/ Richard K. Hagen
-------------- ---------------------
Richard K. Hagen
Chairman of the Board of Directors,
Chief Executive Officer,
Chief Financial Officer and President
Officer of Registrant
15
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 103,038
<SECURITIES> 0
<RECEIVABLES> 5,313,648
<ALLOWANCES> 0
<INVENTORY> 840,875
<CURRENT-ASSETS> 6,299,084
<PP&E> 1,378,697
<DEPRECIATION> 252,218
<TOTAL-ASSETS> 7,805,247
<CURRENT-LIABILITIES> 10,962,189
<BONDS> 0
0
0
<COMMON> 8,135
<OTHER-SE> 2,756,040
<TOTAL-LIABILITY-AND-EQUITY> 7,805,247
<SALES> 391,376
<TOTAL-REVENUES> 391,376
<CGS> 263,947
<TOTAL-COSTS> 1,020,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,335
<INCOME-PRETAX> (869,992)
<INCOME-TAX> 0
<INCOME-CONTINUING> (685,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (685,667)
<EPS-PRIMARY> (0.140)
<EPS-DILUTED> (0.075)
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