As filed with the Securities and Exchange Commission on August 17, 1999
Registration Statement No. 333-74211
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No.4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN QUANTUM CYCLES, INC.
(Name of Small Business Issuer in Its Charter)
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Florida 3751 59-2651232
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S.Employer
Incorporation or Organization) Classification Number) Identification No.)
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Richard Hagen, President and Chief Executive Officer
American Quantum Cycles Incorporated
731 Washburn Road
Melbourne, Florida 32934
(407) 752-0008
(Name, Address and Telephone Number of Agent For Service)
731 Washburn Road
Melbourne, Florida 32934
(407) 752-0008
(Address and Telephone Number of Principal Executive Offices)
Copies of all communications to:
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James M. Schneider, Esq. Bert L. Gusrae, Esq.
Robert J. Burnett, Esq. David A. Carter, P.A.
Atlas, Pearlman, Trop & Borkson, P.A. 2300 Glades Road
200 East Las Olas Boulevard, Suite 1900 Suite 210, West Tower
Fort Lauderdale, FL 33301 Boca Raton, FL 33431
Telephone: (954) 763-1200 Telephone: (561) 750-6999
Facsimile No. (954) 766-7800 Facsimile No. (561) 367-0960
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number of the earlier effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
-------------------------------
Title of Each Shares Proposed Maximum Proposed Maximum Amount Of
Class of Securities To Be Offering Price Aggregate Offering Registration
To Be Registered Registered Per Share Price Fee
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Common stock,
$.001 par value 2,794,500(1) $3.50(2) $9,780,750(2) $2,719.50
Representative's Warrants
each to purchase one share
of Common Stock, $.001
par value 243,000 $.001 $243 (3)
Common stock,
$.001 par value 243,000(4) $5.78(2) $1,404,540(2) $390.50
Common stock,
$.001 par value (8) 929,449(5) $3.56(6) $3,308,839 $919.86
Common stock,
$.001 par value (8) 62,500(7) $16.00(8) $1,000,000 $278.00
- ------------------- --------- --------- ---------- -------
Amount Due $4,307.86
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(1) Assumes the underwriter's over-allotment option to purchase 364,500
additional shares of common stock is exercised in full.
(2) Estimated solely for purposes of calculating the registration fee.
(3) No registration fee required pursuant to Rule 457(g).
(4) Issuable upon the exercise of the underwriter's warrants together with an
indeterminate number of shares of common stock that may be issuable by reason of
the anti-dilution provisions contained therein.
(5) Includes 929,449 shares of American Quantum Cycles common stock being
offered by selling security holders pursuant to the alternate prospectus.
(6) Calculated pursuant to rule 457(c) (see 8).
(7) Includes 62,500 shares of the American Quantum Cycles common stock issuable
upon the exercise of options exercisable at $16.00 per share being offered by
the selling security holders pursuant to the alternate prospectus.
(8) Adjusted to give effect for a one for four reverse stock split effective on
June 3, 1999
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This registration statement covers the primary offering of shares of our common
stock by American Quantum Cycles, Inc. and the offering of shares of our common
stock by certain selling security holders. American Quantum Cycles is
registering, under the primary prospectus, 2,430,000 shares of common stock not
including shares of our common stock issuable upon exercise of the underwriter's
over-allotment option. American Quantum Cycles is registering, on behalf of the
selling securityholders, under an alternate prospectus, 991,949 shares of common
stock including 62,500 shares of common stock issuable upon exercise of warrants
and options. The alternate prospectus pages, which follow the primary
prospectus, contain certain sections which are to be combined with all of the
sections contained in the primary prospectus, with the following exceptions: the
front and back cover pages, and the sections entitled "The Offering" and
"Selling Securityholders". In addition, the sections entitled "Concurrent
Offering" and "Plan of Distribution" will be added to the alternate prospectus.
Furthermore, all references contained in the alternate prospectus to the
"offering" shall refer to American Quantum Cycles offering under the primary
prospectus.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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SUBJECT TO COMPLETION
Prospectus
American Quantum Cycles, Inc.
2,430,000 shares of common stock
$________ per share
We are offering 2,430,000 shares of our common stock through Barron Chase
Securities, Inc., our underwriter. The chart below shows the basic terms of the
offering. The offering price may be more than the market price of our common
stock after the offering.
Per Share Total
Offering Price $_______ $_______
Underwriting discounts $_______ $_______
Proceeds to American
Quantum Cycles, Inc. $_______ $_______.
We granted the underwriter an option to purchase a maximum of 364,500 additional
shares of common stock to cover over-allotments of shares.
Our common stock currently trades on the OTC Bulletin Board under the Trading
Symbol "AMQC"
On August 16, 1999, the closing bid price for our common stock was $3.56.
We are attempting to register our common stock for trading on the American
Stock Exchange under the symbol AQC.
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss. See "High Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Barron Chase Securities, Inc.
[DATE]
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TABLE OF CONTENTS
Page
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Prospectus Summary................................................................................. 3
High Risk Factors.................................................................................. 5
Use of Proceeds.................................................................................... 11
Dividend Policy.................................................................................... 12
Capitalization..................................................................................... 12
Selected Financial Information..................................................................... 13
Management's Discussion and Analysis
and Plan of Operation.............................................................................. 14
Business........................................................................................... 18
Management......................................................................................... 27
Principal Shareholders............................................................................. 32
Certain Relationships and Related Transactions..................................................... 33
Concurrent Offering................................................................................ 33
Description of Securities.......................................................................... 33
Shares Eligible for Future Sale.................................................................... 35
Underwriting....................................................................................... 35
Legal Matters...................................................................................... 37
Experts............................................................................................ 37
Additional Information............................................................................. 37
Index to Financial Statements...................................................................... F-1
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PROSPECTUS SUMMARY
American Quantum Cycles, Inc.
We are beginning to manufacture and mass market American-made, high performance,
custom made, V-twin engine cruisers and touring style motorcycles. We believe
that ordering the parts we require to make our motorcycles on an as-needed
basis, instead of carrying a large inventory, will allow us to minimize our
production costs and enable us to mass-produce high quality motorcycles. Our
executive offices are located at 731 Washburn Road, Melbourne, Florida 32934.
Our telephone number is (407) 752-0008 our facsimile number is (407) 752-0550
and our website is http://www.quantumcycle.com.
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THE OFFERING
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Common stock outstanding prior to the offering................................. 2,842,798 shares (1)
Common stock offered........................................................... 2,430,000 shares
Common stock outstanding after the offering.................................... 5,272,798 shares (2)
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The information in this prospectus relating to our common
stock gives effect to a one for four reverse stock split of our outstanding
common stock effective on June 3, 1999. We are assuming in calculating the
number of shares of common stock that the underwriter's over-allotment option is
not exercised. The share information does include an aggregate of 929,449 shares
of common stock being offered by the selling security holders under the
alternative prospectus.
The share numbers do not include:
(i) 243,000 shares of common stock issuable upon the exercise
of the representatives warrants; and
(ii) a total of 556,250 shares of common stock issuable upon
the exercise of outstanding options, of which 62,500 are being registered
pursuant to the alternative prospectus.
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SUMMARY FINANCIAL INFORMATION
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For the years ended April 30,
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1999 1998
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OPERATIONS DATA:
Revenues $975,780 $192,856
Total costs and expenses 7,762,571 2,824,567
Net loss $(6,786,791) $(2,631,711)
Weighted average
shares outstanding (2) 1,212,503 501,961
Net loss per common
share outstanding (2) $(5.597) $(5.243)
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As of As of
April 30, 1998 April 30, 1999 Adjusted (1)
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BALANCE SHEET DATA:
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Current assets $886,836 $936,654 $6,214,063
Working capital $(2,162,614) $(4,580,827) $3,225,852
Total assets $1,864,216 $2,642,758 $8,020,167
Total liabilities $3,167,426 $6,985,240 $3,092,470
Shareholders' equity (deficit) $(1,303,210) $(4,342,482) $4,927,697
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(1) Adjusted to show the effect of the sale of 2,430,000 shares of common stock
we are offering to you at a price of $3.50 per share.
(2) Adjusted to give effect to a one for four reverse stock split of the issued
and outstanding shares of our common stock effective on June 3, 1999.
4
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HIGH RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE AND
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AMERICAN QUANTUM CYCLES AND ITS BUSINESS BEFORE PURCHASING THE
SECURITIES OFFERED HEREIN. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
AMERICAN QUANTUM CYCLES ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
We have only limited operating history, we have experienced losses since
inception, we expect future losses and we may not ever become profitable.
Although we were incorporated in 1986, we did not begin manufacturing
motorcycles until May 1997. To date, we have only manufactured 36 motorcycles of
which 22 were sold. Due to our short operating history and limited number of
motorcycle sales, we do not have any significant revenues. Investors in this
offering therefore will have little, if any, meaningful information about us
which may help you evaluate whether we will ever be able to successfully
manufacture and market our motorcycles or whether an investment in us will be
profitable or unprofitable.
Because we have such a short operating history and such limited sales, we will
face all the risks and problems associated with a new developmental stage
business including the existence of operating losses. For example, between the
time of our incorporation through April 30, 1999, we incurred cumulative losses
of $9,421,138 and an accumulated deficit of $4,342,482. We anticipate our losses
will continue in the future unless we are able to produce revenue from sales of
our motorcycles.
Our auditor's have indicated that our ability to continue as a going concern is
questionable.
Our auditors report, included as part of our financial statements for the year
ended April 30, 1999, contains a qualification raising substantial doubt about
our ability to continue as a going concern because of our recurring losses from
operations and our net capital deficiency. Although we believe that the proceeds
from the sale of the shares of our common stock in this offering will enable us
to continue as a going concern, we cannot assure you that we will be able to
continue our operations in the future. If we are unable to continue our
operations, your entire investment in us will be lost.
Our proprietary technology may not provide sufficient protection to us. We may
also be subject to claims from third parties for infringement.
Our success depends upon our motorcycle-related proprietary technology. We rely
on a combination of contractual rights, patents, trade secrets, know-how,
trademarks, non-disclosure agreements and technical measures to establish and
protect our rights, most of which we license from third parties pursuant to an
exclusive licensing agreement. We cannot assure you that we can protect our
rights to prevent third parties from using or copying our technology.
We believe that we independently developed our technology and that it does not
infringe on the proprietary rights or trade secrets of others. However, we
cannot assure you that we have not infringed on the technologies of third
parties or those third parties will not make infringement violation claims
against us. Any infringement claims may have a negative effect on our ability to
manufacture motorcycles.
We are subject to federal, state and local government regulations affecting
motorcycle production that is very costly and can affect our operations.
We are subject to direct regulation by the Department of Transportation,
Environmental Protection Agency and Federal Trade Commission as well as other
local, state and federal agencies. Compliance with the regulations established
by these agencies is very costly and affects our manufacturing process. Any
changes in the laws or regulations imposed on us by these agencies could
significantly increase our motorcycle production costs and could have a very
negative effect on our business.
5
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In particular, our business operations and facilities are subject to a number of
federal, state and local environmental laws and regulations. These laws,
regulations or the nature of our operations may require us to make significant
additional capital expenditures to ensure compliance in the future. Our failure
to comply with environmental laws could result in the termination of our
operations, impositions of fines, or liabilities in excess of our capital
resources. We do not maintain environmental liability insurance, and if we are
required to pay the expenses related to any environmental liabilities, these
expenses could have a material adverse effect on our operations.
We will also be required to obtain approvals and make certifications regarding
compliance with federal, state and local regulations regarding the noise,
emissions and safety characteristics of our motorcycles. The potential delays
and costs that could result from obtaining these regulatory approvals and
complying with, or failing to comply with, such regulations could result in
delays in motorcycle production and adversely affect operating results.
Consumer discretionary spending may affect motorcycle purchases and is affected
by various economic conditions and changes.
Purchases of motorcycles, such as the premium heavyweight motorcycles that we
are attempting to mass-produce, are considered discretionary for consumers. Our
success will therefore be influenced by a number of economic factors affecting
discretionary consumer spending, such as employment levels, business conditions,
interest rates and taxation rates, all of which are not under our control.
Adverse economic changes affecting these factors may restrict consumer spending
and thereby adversely affect our growth and profitability.
Motorcycle defects could cause product recalls that can be expensive and
damaging to our reputation.
Our motorcycles may have unanticipated defects which could require us to recall
them. A product recall could delay or even halt production until we are able to
correct any such defects. Recalls may also have a materially negative effect on
the brand image and public perception of our motorcycles and any other products
we develop and thereby adversely effect our future sales. Such recalls or other
defects would also require substantial expenditures to correct.
Product liability claims could severely damage our business and we may have
insufficient insurance coverage.
Given the nature of our products, we expect that we will be subject to potential
product liability claims that could, in the absence of sufficient insurance
coverage, have a material adverse impact on our business. Although we intend to
obtain adequate insurance coverage prior to commencing mass production, there
can be no assurance that we will be able to secure or maintain adequate
liability insurance to cover all product liability claims. As a new market
entrant, any large product liability suits occurring early in our mass marketing
operations may significantly adversely affect our ability to market our
motorcycles.
We may not have the ability to compete with larger motorcycle companies that
could force us to terminate operations.
The market for the type of motorcycles we manufacture is extremely competitive
and we expect that competition will increase in the future. Our competitors
include many large companies that have substantially greater market presence and
financial resources than we do. For example, we will compete with Harley
Davidson, Honda, Kawasaki, Yamaha, Excelsior Henderson and other national,
regional and local companies.
6
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We believe that our ability to compete successfully depends on a number of
factors including:
o design of high performance and quality motorcycles;
o market presence;
o timely delivery of our motorcycles;
o competitive pricing policies;
o the timing and introduction of our products and services into
the market; and
o our ability to keep up with existing and emerging industry trends.
Current or increased competition may either prevent us from entering or
maintaining a place in the motorcycle manufacturing market. We cannot assure you
that we will be able to successfully identify new opportunities and develop and
bring new products to market in a timely manner, nor can we guarantee you that
products developed by our competitors will not make our products noncompetitive
or obsolete. We cannot guarantee that we will have the financial resources or
marketing and manufacturing capabilities to compete successfully. If we cannot
successfully compete, we probably will be forced to terminate our operations.
A reduction or delay in sales by our dealers will have a material adverse effect
on our business.
We expect to derive substantially all of our revenue from sales through
independent dealers. As of August 1999, we executed agreements with 28 dealers.
Either party may terminate the agreements at any time. We do not yet know how
successful these dealers will be in selling our motorcycles. Furthermore, we do
not have any history or experience in establishing or maintaining such dealer
support, and there can be no assurance that we will be able to successfully
support our dealer network. If we are unable to provide such support, we may
lose dealers and, consequently, distribution of our products would be adversely
affected. In addition, most of our dealers will offer competitive products
manufactured by third parties. There can be no assurance that our dealers will
give priority to our products as compared to competitors' products. Finally, we
will need to attract additional or replacement dealers to sell our products.
There can be no assurance that we will be able to convince a sufficient number
of additional or replacement dealers that our products will be a successful and
profitable line or that such additional or replacement dealers will be
successful in selling our products. Any reduction or delay in sales of our
products by our dealers would have a material adverse effect on our business,
operating results or financial condition.
If we are unable to expand our motorcycle production and distribution capacities
we may have to terminate operations.
We must increase our motorcycle manufacturing capacity and expand our dealer
network, which will sell our motorcycles, before we will have even a chance to
compete in the marketplace. Increasing our manufacturing and marketing capacity
will involve hiring additional personnel, purchasing additional manufacturing
equipment and spending significant funds on advertising. This will require
significant capital expenditures, which will most likely increase our operating
losses for an indefinite period of time. Our expansion plans will also place a
great deal of strain on our management team most of whom have not had experience
managing large complex business operations. We cannot guarantee that we will be
able to expand our motorcycle manufacturing and marketing capabilities as
planned. If any of these obstacles prevent us from expanding our motorcycle
manufacturing and marketing business, we may be forced to terminate our
operations.
Proceeds from this offering may not be sufficient and we may not be able to
generate sufficient revenues or other additional capital to continue operations.
Manufacturing and marketing motorcycles and our plans for expansion, as
mentioned above, will require significant amounts of capital. Since we have no
significant internal revenues to finance our continuing operations and plans for
expansion, we depend on proceeds from sales of our securities to satisfy our
capital requirements. We believe that the proceeds we receive from this offering
will satisfy our capital requirements until February 2000. At that time, we will
have to arrange for additional financing unless we are receiving revenues from
sales of our motorcycles to finance our manufacturing and marketing operations
at a sufficient level. Financing options could include, but not be limited to
additional sales of our securities or an operating line of credit. If we are
unable to obtain additional financing on satisfactory terms when needed, we may
have to suspend our operations or terminate our operations altogether.
A significant portion of proceeds from this offering will be used to pay our
existing debt and may not provide us with sufficient capital to conduct our
operations.
Approximately 24% of the proceeds of this offering will be used to pay our debt.
Because such a large percentage of the proceeds from this offering will be used
to pay down our debt objectives, there is a risk that the remaining proceeds
from the offering will be insufficient to allow us to further our business plan
and conduct our operations.
7
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We depend on motorcycle parts and material suppliers and if we cannot obtain
these supplies as needed, our operation will be severely damaged.
We rely on third party suppliers to produce the parts and materials we use to
manufacture our motorcycles. If our suppliers are unable or unwilling to provide
us with the parts and supplies, we will be unable to produce our motorcycles. We
cannot guarantee that we will be able to purchase the parts we need at
reasonable prices or in a timely fashion. If we are unable to purchase the
supplies and parts we need to manufacture our motorcycles, we will experience
severe production problems, which may possibly result in the termination of our
operations.
Our operations may suffer from computer problems relating to the year 2000.
Our future success will depend, in part, on our computer network infrastructure
that will be used by our dealers to place sales orders and for general and
administrative purposes. We must continue to expand and improve our computer
infrastructure as the number of dealers and motorcycles ordered increase. We
cannot assure you that we will be able to develop our network infrastructure to
meet additional demand or our dealers' changing requirements on a timely basis
and at a reasonable cost. If we cannot develop our computer infrastructure on a
timely basis, we may not be able to efficiently manufacture and market our bikes
and other products which could have a negative effect on our business and
financial condition.
Our computer infrastructure is also vulnerable to computer viruses or similar
disruptive problems. Computer viruses or problems caused by third parties could
lead to interruptions, delays or termination in production and delivery of our
motorcycles to our dealers, which could also negatively affect our business.
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the year 2000. Some older computer systems
store dates with only a two-digit year with an assumed prefix of "19" which
limits those older systems to dates between 1900 and 1999. If not corrected,
many computer systems and applications could fail or create erroneous results by
or at the year 2000.
Because we will rely heavily on computers to conduct our business we are subject
to all the risks associated with the Year 2000. We have assessed the scope of
our risks related to problems these computer systems may have related to the
year 2000, and we believe such risks are not significant. In addition, we are in
the process of questioning our vendors and business partners about their
progress in identifying and addressing problems related to the year 2000.
However, no assurance can be given that all of these third party systems or our
computer systems will be year 2000 compliant. Since we started the business
using a paper based workflow process, we will revert to the paper form process
to run American Quantum Cycles on a contingency basis should we experience Year
2000 problems.
We may not be able to attract and retain key personnel.
Our success depends on the efforts of our management team, including Richard
Hagen, our Chairman and Chief Executive Officer, Gary Irving, our Chief
Operating Officer, Michael Smith, our Vice President of Sales, Frank Aliano, our
Vice President of Production and Jeff Starke, our Vice President of Research and
Development. We cannot guarantee that these persons will continue their
employment with us. The loss of services of one or more of these key people
would have a negative effect on our ability to conduct our operations. Currently
we do not have key man life insurance on any of the members of our management
team. Our success also depends on our ability to hire and retain additional
qualified executive, computer programming, engineering, production, investor
management and marketing personnel. We cannot assure that we will be able to
hire or retain necessary personnel.
8
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Your investment in American Quantum Cycles will be diluted.
Dilution is the difference between the amount you pay for a share of common
stock in this offering and the net tangible book value per share of such common
stock immediately after the offering. If you invest in this offering, you will
incur an immediate and substantial dilution of your investment. In addition, we
may issue a substantial number of shares of common stock or preferred stock
without your approval. Any such issuance of our securities in the future could
reduce your ownership percentage and voting rights in us and further dilute the
value of your investment.
Our intended use of proceeds could be revised by changing circumstances which
investors will not have a right to approve.
Our success will be substantially dependent on our management team with respect
to how the offering proceeds will be used. We believe net proceeds from this
offering will be used for the purposes described under "Use of Proceeds" section
of this prospectus. However, we reserve the right to use the offering proceeds
for purposes other than those described in the "Use of Proceeds" section if we
determine that such use is in our best interests. You will be entrusting your
funds to our management team with only limited information concerning their
specific intentions.
There is only a limited market for American Quantum Cycles common stock and we
can not assure you that a more significant market will ever develop.
There is currently only a limited trading market for our common stock. Our
common stock trades on the OTC Bulletin Board under the symbol "AMQC," which is
a limited market in comparison to the NASDAQ system or the American Stock
Exchange. Simultaneously with this offering, we intend to apply for inclusion of
our common stock on the AMEX, however, we cannot assure you that our common
stock will ever qualify for inclusion on the AMEX or that more than a limited
market will ever develop for our common stock.
Risk associated with penny stock rules will limit the liquidity of American
Quantum Cycles stock.
Our common stock currently trades on the OTC Bulletin Board at a price of less
than $5.00 per share and is subject to the penny stock rules under the
Securities Exchange Act of 1934. These rules regulate broker-dealer practices
for transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00. The penny stock rules require broker-dealers,
to deliver a standardized risk disclosure document prepared by the Security and
Exchange Commission that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction, the
broker and/or dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may reduce
purchases in this offering and trading activity in this offering market for our
common stock. As long as our common stock is subject to the penny stock rules,
investors in this offering may find it more difficult to sell their securities.
9
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Risk that offering price does not accurately reflect the value of our common
stock.
The purchase price for the shares of common stock we are offering to you was
determined by American Quantum Cycles and Barron Chase Securities, Inc., the
underwriter for this offering. We calculated the purchase price for the shares
based on our current financial condition and the general condition of the
securities market; however, we cannot assure you that the purchase price we
established accurately reflects the value of our assets or potential earnings.
Possible volatility of American Quantum Cycles' stock price.
The stock markets are subject to significant price fluctuations, which may be
unrelated to the operating performance of particular companies; and therefore,
the market price of our common stock may frequently change. In addition, if our
competitors or we publicly announce new products or developments, such
announcements may have a significant impact on the market price of our common
stock.
Use of Preferred Stock could be used to resist takeovers and affect voting power
of our common stock.
Our board of directors is authorized to create and issue shares of preferred
stock without the approval of our shareholders. Any preferred stock that our
board of directors creates and issues could negatively affect the voting power
or other rights of the holders of our common stock. Also, our board of directors
may create preferred stock, which could be used to prevent a third party from
taking control of our company. Although we do not plan to issue any shares of
preferred stock, we may choose to in the future.
10
<PAGE>
USE OF PROCEEDS
The net proceeds we receive from the sale of the common stock we are offering to
you based on a public offering price of $3.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses, will be
approximately $7,230,000 (not including an additional $1,275,750 if the
over-allotment option granted to the underwriter is exercised in full). We
intend to use the net proceeds of the offering approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Amount Percentage of
Application of Net Proceeds of Net Proceeds
----------- --------------- ---------------
<S> <C> <C>
Repayment of notes (1) (4) .............................. $1,735,989 24.0%
Equipment Purchase (2)................................... $100,000 1.4%
Working Capital (3) ..................................... $5,394,011 74.6%
---------- -----
Total.............................................. $7,230,000 100%
========== =====
</TABLE>
(1) The proceeds from the notes being repaid were used to fund $958,918
for product development, $394,467 for factory build-out, $223,011 for
information systems, and $159,593 for e-commerce. Includes the
repayment of (i) an aggregate of $661,780 principal and accrued
interest to the holders of American Quantum Cycles 8% notes; and (ii)
an aggregate of $163650 principal and accrued interest to the holders
of American Quantum Cycles 7% notes; (iii) an aggregate of $910,559
to the holders of American Quantum Cycles senior promissory notes
issued between November 1998 and January 1999.
(2) Includes the purchase of ERP Software (which will manage all internal
operating facets of American Quantum Cycles including financial
information), computer hardware and materials handling equipment.
(3) Includes the costs of goods required for motorcycle manufacturing,
research and development, product development, marketing and
administrative expenses.
The foregoing is our best estimate of how we intend to use the net
proceeds of the offering during the next approximately 12 months. We
reserve the right to use the proceeds for different purposes if we
believe such a change is in our best interest.
If we receive additional proceeds because the underwriter exercises their
over-allotment option, we will use such additional proceeds for working
capital purposes. We may invest the net proceeds of the offering in
short-term, interest-bearing investments until we use them for the
purposes stated above.
MARKET PRICE AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
As of August 16, 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.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C>
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
August 1, 1999 - August 16, 1999 4.00 3.19
==== ====
11
<PAGE>
DIVIDEND POLICY
Our Board of Directors has complete control over whether or not we pay dividends
to our shareholders. We have not paid, and do not believe we will pay, any
dividends on our common stock in the near future. We intend to invest future
earnings, if any, in developing and expanding our business.
CAPITALIZATION
The following table describes our actual capitalization as of April 30, 1999,
our capitalization as adjusted to show the sale of our common stock offered at a
public offering price of $3.50 per share and the receipt of the estimated net
proceeds from the offering.
April 30, 1999
Actual(1) As Adjusted
--------- -----------
Short term debt:
Notes payable $2,188,753 $ --
Current maturities of long-term debt 15,558 15,558
Current capital lease obligations 147,560 147,560
Lines of credit 1,093,893 1,093,893
$3,445,764 $ 1,257,011
Long term debt:
Installment note for vehicle purchase at 8.75% $13,001 $ 13,001
Installment notes for intellectual
property rights from 8% to 10% 9,917 9,917
Short-term obligations to be converted 1,363,500 --
-------------- -------------
1,386,418 22,918
Capital lease obligations 81,341 81,341
-------------- -------------
1,467,759 104,259
Shareholders' equity:
Preferred Stock, $.001 par value; 2,500,000
shares authorized; no shares outstanding -- --
Common stock, $.001 par value; 50,000,000
shares authorized; 2,300,586 shares issued
(actual); 5,519,208 shares (as adjusted) (2) 2,031 5,519
Additional paid-in capital (2) 5,076,353 14,343,314
Accumulated deficit (9,421,136) (9,421,136)
-------------- -------------
(4,342,482) 4,927,697
-------------- -------------
Total capitalization $(2,874,723) $4,215,981
============== =============
</TABLE>
(1) As of August 16, 1999, there were 2,842,798 shares of our common stock
outstanding.
(2) Adjusted to give effect to a one for four reverse stock split of the issued
and outstanding shares of common stock effective on June 3, 1999.
12
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
For the years ended April 30,
-----------------------------
1999 1998
---- ----
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C>
Revenues $975,780 $192,856
Total costs and expenses 7,762,571 2,824,567
Net loss $(6,786,791) $(2,631,711)
Weighted average
shares outstanding (2) 1,212,503 501,961
Net loss per common
share outstanding (2) $(5.597) $(5.243)
</TABLE>
<TABLE>
<CAPTION>
As of As of
April 30, 1998 April 30, 1999 Adjusted (1)
-------------- -------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $886,836 $936,654 $6,214,063
Working capital $(2,162,614) $(4,580,827) $3,225,852
Total assets $1,864,216 $2,642,758 $8,020,167
Total liabilities $3,167,426 $6,985,240 $3,092,470
Shareholders' equity (deficit) $(1,303,210) $(4,342,482) $4,927,697
</TABLE>
(1) Adjusted to show the effect of the sale of 2,430,000 shares of common stock
we are offering to you at a price of $3.50 per share.
(2) Adjusted to give effect to a one for four reverse stock split of the issued
and outstanding shares of our common stock effective on June 3, 1999.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, INCLUDED IN OR INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS
DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS INCLUDING
THOSE RISKS DESCRIBED IN OUR 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 AMERICAN QUANTUM CYCLES 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 American Quantum Cycles and the notes thereto appearing
at the end of this prospectus.
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
saddlebags 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.
14
<PAGE>
RESULTS OF OPERATIONS
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 were 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 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 1999 and eight 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:
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.
15
<PAGE>
American Quantum Cycles anticipates that the current fiscal year ending April
30, 2000 will have significant reductions in the loss incurred during the first
two quarters. American Quantum Cycles expects their first profitable quarter to
occur third 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 $3.50; and (ii) warrants to purchase an equal number of
shares of American Quantum Cycles common stock at an exercise price
of $3.50 per share. American Quantum Cycles redeemed two of the 8%
notes with a principal balance of $80,000. The total amount of the
proceeds of this offering that American Quantum Cycles has
designated for repayment of the 8% notes is $570,500 principal plus
$91,280 interest.
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 this
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. American Quantum received notice of default from one 8% note
holder and agreed to settlement terms with such note holder..
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 matured 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 $3.50; and (ii) warrants to purchase an equal number of
shares of American Quantum Cycles common stock at an exercise price
of $3.50 per share. American Quantum Cycles redeemed two of the 7%
notes that 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 this
offering. American Quantum Cycles intends to repay these notes from
the proceeds of this offering. The total amount of the proceeds that
American Quantum Cycles has designated for repayment of the 7% notes
is $150,000 principal plus $13,650 interest.
16
<PAGE>
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 matured 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 $3.50; 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 of $3.50 per
share.
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.
There is a risk that the proceeds from this offering would be insufficient for
American Quantum Cycles to satisfy the payment of these notes. American Quantum
Cycles would attempt to establish a long-term payment plan out of cash flow from
the sale of motorcycles. There are risks that cash flow will be insufficient,
the note holders would not accept a payment plan and that legal action could be
taken against American Quantum Cycles by the holders of the notes in default.
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 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 was 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 this 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 this
offering.
17
<PAGE>
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.
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 that 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.
BUSINESS
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 55
motorcycles since that time, 41 of which have been sold to dealers and/or
consumers. The remaining 14 motorcycles are being used for regulatory compliance
testing, marketing and long term testing. 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.
18
<PAGE>
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.
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.
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.
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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):
<TABLE>
<CAPTION>
Year Median Age Median Income
---- ---------- -------------
<S> <C> <C> <C>
1980 24 years $17,500
1985 27.1 years $25,600
1990 32 years $33,100
</TABLE>
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.
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.
20
<PAGE>
STRATEGY
Our goal is to continue to produce what we believe is a superior U.S.-made
V-twin motorcycle using quality materials and workmanship. We will seek market
share, both domestically and internationally, by offering high performance
custom-built motorcycles and motorcycle products and through the development of
a proprietary Intranet/Extranet system (designed to continually track and
control inventory and production) for use by dealers, customers and American
Quantum Cycles. See "Intranet/Extranet System."
To increase our motorcycle production capacity, we recently completed a
modification to our production facility, which we believe has increased our
production floor space by 200%. This provided space for a second motorcycle
production line which we believe will more than double our motorcycle production
capabilities.
PRODUCTS
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.
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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<PAGE>
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.
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-
22
<PAGE>
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.
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.
RESEARCH AND DEVELOPMENT
American Quantum Cycles' research and development efforts have been and will be
focused on the engine and associated drive train. In fiscal years 1997 and 1998,
the research focused on those refinements required for the 4-Valve engine design
to achieve the desired durability and to pass the 49 state environmental
protection agency emission tests. Different flywheel and connecting rod designs
were analyzed and tested for long life durability. These designs were first
tested in computer-based modeling and simulations. Three-dimensional models were
developed in American Quantum's PRO/E engineering workstation and dynamic stress
analysis was carried out using finite element analysis techniques. This process
supported the determination of the proper neck thickness and flange width for
the connecting rod. Flywheels and connecting rods were then built to these
dimensions and weights and tested in bench and road tests to confirm the
computer modeling results. The resulting design is a heavier flywheel and more
durable connecting rod than is commonly used in the heavyweight cruiser
industry. This allows American Quantum's engine to not only run more smoothly
(providing greater durability), but to take more complete advantage of the
additional torque produced by the 4-Valve design.
In addition to the flywheel/connecting rod research, a variety of combinations
of pushrods, swivel feet and rocker arms were evaluated. Adjustable pushrods and
a variety of fixed-length pushrods were evaluated for smooth running of the
rocker arm assembles and long life durability of the associated parts. A number
of third party swivel feet were tested and compared with an American Quantum
Cycles design. The smoothest running combination was identified after extensive
bench and road testing included fixed pushrod lengths of specific dimensions for
intake and exhaust pushrods and a selected third party swivel foot.
Engine research in fiscal years 1997 and 1998 also focused heavily on those
refinements necessary to pass 49 state Environmental Protection Agency emissions
tests. A variety of third party carburetors and custom designed cams were
evaluated via preliminary testing at an Environmental Protection Agency approved
test facility. Additionally, a number of sizes and shapes of airflow plenums
were tested. The test results specified a third party carburetor (and associated
jet settings), a specific custom grind on a third party cam and the most
efficient plenum size and shape for airflow management which produced the best
mix of low emissions, excellent torque and horsepower performance along with
attractive gas mileage. This combination successfully passed 49 state
Environmental Protection Agency emissions requirements and American Quantum's
4-Valve engine received Environmental Protection Agency certification. These
activities resulted in research and development costs of approximately $489,302
for the fiscal year ended April 30, 1998 and $209,305 for the fiscal year ended
April 30, 1999.
Engine research in fiscal years 1998 and 1999 focused on further refinements to
American Quantum's 88 cubic inch engine and the development of a 96 cubic inch
engine. Refinements to the 88 cubic inch engine design included research on
hardened valve stems, valve spring design and slight modifications to the rocker
arm assembly to minimize upper engine noise. A number of hardened valve stem
designs were put through bench and road testing to determine that design which
would provide the most durable valves and minimize shifting and settling of the
rocker arm assembly due to valve wear and compression. Double and single valve
springs were tested for that combination which minimized valve float and yet
provided ease of starting for a cold engine. Slight variations to the machining
of the rocker arm and pushrod/rocker arm geometry's were tested and evaluated
for minimizing upper engine noise while maintaining torque and horsepower
performance.
A major research and development effort was invested in the development and
testing of a 96 cubic inch 4-Valve engine. All the required changes to the
dimensions of various affected parts were determined and a 96 cubic inch engine
was built. This test engine was put through extensive bench and road testing
including exhaustive dynamometer testing to determine improvement in torque and
horsepower. Torque and horsepower improvements in the 10-15% range were
verified. The durability of the 96 cubic inch engine was also verified. Entering
fiscal year 1999and 2000, the 96 cubic inch engine is ready for Environmental
Protection Agency emission testing and subsequent market release.
23
<PAGE>
An embryonic research and development program was initiated in fiscal year 1998
and 1999 in the use of polymer coatings on selected engine parts to reduce
friction and improve durability. Preliminary tests were carried out with polymer
coatings on flywheels with inconclusive results to date. This program will be
continued in fiscal year 1999 and 2000 as American Quantum maintains an
aggressive research and development program to improve its product line. All of
these efforts resulted in research and development costs of approximately
$608,722 for the fiscal year.
The research and development program planned for fiscal year 1999 and 2000
includes Environmental Protection Agency testing of the 96 cubic inch engine,
evaluation of polymer coatings, evaluation of the use of exotic alloys (e.g.
titanium/aluminum) for rocker arm assemblies and the development of a dual
carburetor engine.
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 intend to install it at our dealer locations beginning in
spring 1999.
MARKETING
Our marketing program will focus on two major objectives
(1) corporate/product name identification; and
(2) lead generation for the sales and distribution channels.
o Corporate product name and product identification will use
advertising, promotions, public relations and participation in
major motorcycle events (such as the Sturgis Race and Rally in
Sturgis, SD and the Daytona Beach Bike Week). We also will sponsor
racing activities and special promotional events and participate
in most major motorcycle consumer shows and rallies. To establish
our brand name among the motorcycling public, we first unveiled
our prototype, the Q2 at the Sturgis Rally in August 1997. We also
intend to eventually license certain of our trademarks on a broad
range of consumer items to increase public exposure of our brand
name.
o Lead generation activities will support each product line
including motorcycles, engines/parts, 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.
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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 24 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 24 dealers represent bookings of 240
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.
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.
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.
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EMPLOYEES
We currently have 38 full-time employees. Of these, 6 are in management and
administration, 3 are in engineering and design, 18 are in production and
manufacturing, 6 are in procurement and inventory management, 5 are in marketing
and sales. We have a number of part and full-time consultants in the areas of
management, engineering drawing maintenance, advertising artwork and website
maintenance.
REAL PROPERTY
We currently lease approximately 17,030 square feet of warehouse and production
space and an additional 6,016 square feet of office space, for a total of
approximately 23,046 square feet 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.
LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings in the
ordinary course of our business. We are not a party to any pending or to our
knowledge, threatened material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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.
27
<PAGE>
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.
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 that he helped build as a co-founder. From
January 1992 to October 1993, he was the owner/operator of A&A Performance, in
Wichita, Kansas, which fabricated custom Harley Davidson Motorcycles. From
October 1980 to December 1991, he was the owner/ operator of Double Services,
Phoenix, Arizona which custom builds and services Harley Davidson and rebuilds
and repairs of trucks and heavy equipment. From 1975 to 1980, he was employed by
Cummins Southwest as a journeyman mechanic. From 1972 to 1975 he was employed by
R.B. Duncan trucking company as a mechanic. From 1971 to 1972, he was employed
by Hartford Harley Davidson as a mechanic, which included servicing and
rebuilding Harley Davidson Motorcycles. A native of Connecticut, he attended the
University of Hartford.
Linda Condon has served as our Director of Finance since October 1997 and
Treasurer since February 1999. Between April 1994 and July 1997, Ms. Condon
worked as an accountant for K.L. Smith and Associates, a Salt Lake City, Utah
based accounting firm. Between January 1993 and April 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 allow us to indemnify our Directors and Officers to the fullest
extent permitted by law. 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.
At present, there is no pending litigation or proceeding involving our
Directors, Officers, employees, or other agents. 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.
<PAGE>
EXECUTIVE COMPENSATION
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>
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 $-0- -0- $-0- $-0-
---- ------- ---- ------- ---- --- ----
1999 $200,000(2) $-0- $-0- $423,000(3) -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(2) $-0- $142,014(4) $282,000(3) -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) 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.
(3) Includes compensation accrued but not paid in the amount of
$75,961 for Mr. Hagen and $53,846 for Mr. Irving.
(4) Represents the value of 225,000 shares of stock issued to Mr.
Hagen and 150,000 shares of stock issued to Mr. Irving. The value was
based on the average bid and ask price of the stock at the date of
award and was recorded as compensation expense.
(5) Represents payments made to Mr. Irving under the terms of a
consulting agreement.
29
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value At
Assumed Annual Rates Of Stock
Price Appreciation For Option Grant Date
Individual Grants Term Value
----------------- ---- -----
Percent of
Number Of Total
Securities Options/
Underlying SARs Granted Expiration
Options/SARs To Employees Exercise Of Date
Name Granted (#) In Fiscal Year Base Price (S/Sh)
---- ----------- -------------- ---------- ------
<S> <C>
Richard Hagen N/A
President, Chief Executive
Officer and Chairman
- --------------------
Gary Irving N/A
Executive Vice President,
Director and Chief
Operating Officer
- -----------------
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
At Fiscal Year-End At Fiscal Year-
Shares Value (#) End ($)
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.
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.
30
<PAGE>
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.
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
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. 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.
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 16, 1999, we granted an aggregate of 50,000 incentive options all
of which have vested and an aggregate of 645,000 non-qualified options of which
268,750 are unexercised. We also granted 287,500 outside of the plan which are
unexercised .
31
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table describes certain information regarding certain individuals
who beneficially owned our common stock on August 16, 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 16, 1999, we had 2,842,798 shares of common stock
outstanding
<TABLE>
<CAPTION>
Percent of Beneficial Ownership
No. of Shares
Name and Address or of Common Stock Before After
Identity of Group(1) Beneficially Owned (10) Offering Offering
-------------------- ----------------------- -------- --------
<S> <C> <C> <C>
Richard Hagen, Director, Chairman, President,
CFO and CEO(2) 237,500 8.4% 4.5%
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 5.7% 3.1%
Frank Aliano, Vice President 6,250 *
*
Doreen Cheal(6) 151,299 5.3% 2.9%
Linda Condon, Director of Finance
and Treasurer(7) 1,073 * *
Susquehanna Holdings Corp(7) 158,500 5.6% 3.0%
Mathers Associates (8) 130,000 4.6% 2.5%
Denise O'Brien(9) 163,799 5.8% 3.1%
All Executive Officers and Directors 441,073 15.5% 8.4%
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.
(6) Jim Cheal is Doreen Cheal's husband.
32
<PAGE>
(7) Address is 230 Mathers Road, Ambler, PA 19002. Mr. Norbert Zeelander is the
sole shareholder of Susquehanna Holdings Corp. As such, Mr. Zeelander is deemed
to beneficially own the 158,500 shares held in the name of Susquehanna 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 Susquehanna
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.
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 shares of common stock issued to Ms. Cheal and Ms. O'Brien were
valued at $116,608. The prototype motorcycle and related equipment was valued at
$92,270. On April 9, 1998, Ms. Cheal and Ms. O'Brien returned an aggregate of
125,974 shares of common stock to us after assets transferred by Ms. Cheal and
Ms. O'Brien received a valuation lower than originally anticipated.
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 American Quantum during our development
stage. As partial compensation for their services and for the progress of
American Quantum over the prior 12 months, the Board of Directors authorized the
issuance of these shares to Mr. Hagen and Mr. Irving
CONCURRENT OFFERING
Concurrent with this offering, we are registering pursuant to an alternate
prospectus, for the account of the selling security holders, an additional
991,949 shares of common stock including 62,500 shares of common stock issuable
upon the exercise of options. These securities are not being underwritten in
this offering and we will not receive any proceeds from the sale of such shares.
We will pay the expenses of the concurrent offering, other than fees and
expenses of counsel to the selling security holders and the selling commissions.
The resale of the securities of the selling security holders is subject to
prospectus delivery and other sales at any time may have an adverse effect on
the market prices of the securities or the potential of such sales at any time
may have an adverse effect on the market prices of the securities offered
hereby.
DESCRIPTION OF SECURITIES
We are authorized to issue 12,500,000 shares of common stock, par value $.001
per Share, and 2,500,000 shares of preferred stock, $.001 per share. As of
August 16, 1999 there were 2,842,798 shares of common stock outstanding and no
shares of preferred stock issued or outstanding. Adjusted to give effect for a
one for four reverse stock split effective on June 3, 1999.
COMMON STOCK
The holders of our common stock are entitled to dividends, if any are declared,
and are entitled to a pro rata portion of our assets if we liquidate or dissolve
our business, if our assets are not first distributed to our creditors or
preferred stock holders.
Each share of common stock entitles the holders thereof, to one vote. Holders of
common stock do not have cumulative voting rights which means that the holders
of more than 50% of shares voting for the election of Directors can elect all of
the Directors if they choose to do so, and in such event, the holders of the
remaining shares will not be able to elect any Directors. Our bylaws require
that only a majority of the issued and outstanding shares of our common stock is
required to transact business at a shareholders' meeting. The common stock has
no preemptive, subscription or conversion rights nor may we redeem it.
33
<PAGE>
PREFERRED STOCK
The preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by our Board of Directors, without further
action by shareholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion rights, redemption rights, and sinking fund provisions.
The issuance of any such preferred stock could adversely affect the rights of
the holders of our common stock and, therefore, reduce the value of the common
stock. The ability of the Board of Directors to issue preferred stock could
discourage, delay, or prevent a takeover of American Quantum Cycles, Inc.
CERTAIN FLORIDA LEGISLATION
Florida law and American Quantum Cycles Articles and Bylaws also authorize us to
indemnify our Directors, Officers, employees and agents. In addition, Florida
law presently limits the personal liability of corporate Directors for monetary
damages, except where the directors (i) breach their fiduciary duties and (ii)
such breach constitutes or includes certain violations of criminal law, a
transaction from which the Directors derived an improper personal benefit,
certain unlawful distributions or certain other reckless, wanton or willful acts
or misconduct.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND
BYLAWS
Certain provisions of the articles and bylaws of American Quantum Cycles, and
our ability to issue preferred stock", may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt,
including attempts that might result in a premium being paid over the market
price for the shares held by shareholders. The provisions in our Articles or
Bylaws may not be amended without the affirmative vote of the holders of a
majority of the outstanding shares of our common stock. The Articles and Bylaws
provide that special meetings of shareholders of American Quantum Cycles may be
called only by our Board of Directors, or holders of not less than 10% of our
outstanding voting stock entitled to vote at the Special Meeting.
Despite the belief of American Quantum Cycles as to the benefits to shareholders
of these provisions of our Articles of Incorporation, these provisions may also
have the effect of discouraging a future takeover attempt which would not be
approved by our Board, but pursuant to which the shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of American Quantum Cycles Board of Directors and management more difficult and
may tend to stabilize our stock price, thus limiting gains which might otherwise
be reflected in price increases due to a potential merger or acquisition. The
Board of Directors, however, has concluded that the potential benefits of these
provisions outweigh the possible disadvantages. Pursuant to applicable
regulations, at any annual or special meeting of its shareholders, American
Quantum Cycles may adopt additional Articles of Incorporation provisions
regarding the acquisition of its equity securities that would be permitted to a
Florida corporation.
TRANSFER AGENT
Our transfer agent for our common stock is Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004.
34
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the completion of this offering, American Quantum Cycles will
have 5,272,798 shares of common stock outstanding, not including up to 556,250
shares of common stock that may be issued upon the exercise of options. Of the
outstanding shares (i) 699,794 are freely tradable without restriction under the
Securities Act of 1933 as amended (ii) 929,449 shares of common stock being
registered in the alternate prospectus will be freely tradable without
restriction the Act ; (iii) 772,482 shares are "Restricted Securities" but will
be eligible for resale pursuant to Rule 144 between October 1999 and January
2000; and (iv) 441,073 shares held by Officers and Directors of American Quantum
Cycles, all of which will be eligible for sale under Rule 144 beginning November
1999.
Under Rule 144, a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be generally
entitled to sell within any three month period a number of shares that does not
exceed the greater of (i) 1% of the number of then outstanding shares of the
common stock or (ii) the average weekly trading volume of the common stock in
the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about American
Quantum Cycles. Any person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of American Quantum Cycles at any time during
the three months preceding a sale, and who has beneficially owned shares for at
least two years (including any period of ownership of preceding nonaffiliated
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner-of-sale provisions, public information
requirements or notice requirements.
The availability for sale of substantial amounts of common stock subsequent to
this offering could adversely affect the prevailing market price of the common
stock and could impair our ability to raise additional capital through the sale
of its equity securities. Prospective investors should be aware that the
possibility of such sales may, in the future, have a depressive effect on the
price of our common stock in any market which may develop and, therefore, the
ability of any investor to market his shares may be dependent directly upon the
number of shares that are offered and sold. Affiliates of American Quantum
Cycles may sell their shares during a favorable movement in the market price of
our common stock ,which may have a depressive effect on its price per share.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriter agreed to purchase from American Quantum Cycles an aggregate of
2,430,000 shares of common stock. The securities are offered by the underwriter
subject to prior sale, when, as and if delivered to and accepted by the
underwriter and subject to approval of certain legal matters by counsel and
certain other conditions. The underwriter is committed to purchase all
securities offered by this prospectus, if any are purchased (other than those
covered by the over-allotment option described below).
American Quantum Cycles has been advised by the underwriter that the underwriter
proposes to offer the securities to the public at the offering price set forth
on the cover page of this prospectus. The underwriter has advised us that the
underwriter proposes to offer the securities through members of the National
Association of Securities Dealers, Inc., and may allow concessions, in its
discretion, to certain selected dealers who are members of the NASD and who
agree to sell the securities in conformity with the NASD's conduct rules. Such
concessions will not exceed the amount of the underwriting discount that the
underwriter is to receive.
American Quantum Cycles has granted to the underwriter an over-allotment option,
exercisable for 45 days from the effective date, to purchase up to an additional
364,500 shares at the public offering price less the underwriting discount set
forth on the cover page of this prospectus. The underwriter may exercise this
option solely to cover over-allotments in the sale of the securities being
offered by this prospectus.
Officers and Directors of American Quantum Cycles may introduce the underwriter
to persons to consider this offering and to purchase securities either through
the underwriter or through participating dealers. In this connection, no
securities have been reserved for those purchases and officers and Directors
will not receive any commissions or any other compensation.
35
<PAGE>
American Quantum Cycles has agreed to pay to the underwriter a commission of ten
percent (10%) of the gross proceeds of this offering, including the gross
proceeds from the sale of the over-allotment option, if exercised. In addition,
American Quantum Cycles has agreed to pay to the underwriter a non-accountable
expense allowance of three percent (3%) of the gross proceeds of this offering,
including proceeds from any securities purchased pursuant to the over-allotment
option. The underwriter's expenses in excess of the non-accountable expense
allowance will be paid by the underwriter. To the extent that the expenses of
the underwriter are less than the amount of the non-accountable expense
allowance received, such excess shall be deemed to be additional compensation to
the underwriter. The underwriter has informed us that it does not expect sales
to discretionary accounts to exceed five percent (5%) of the total number of
securities offered by American Quantum Cycles hereby.
American Quantum Cycles has agreed to engage the underwriter as a financial
advisor at a fee of $108,000, which is payable to the underwriter on the closing
date. Pursuant to the terms of a financial advisory agreement, the underwriter
has agreed to provide, at our request, advice to American Quantum Cycles
concerning potential merger and acquisition and financing proposals, whether by
public financing or otherwise. American Quantum Cycles has also agreed that if
American Quantum Cycles participates in any transaction which the underwriter
has introduced to American Quantum Cycles during a period of five years after
the closing (including mergers, acquisitions, joint ventures and any other
business transaction for American Quantum Cycles introduced by the underwriter),
and which is consummated after the closing (including an acquisition of assets
or stock for which it pays, in whole or in part, with shares or other securities
of American Quantum Cycles), or if we retain the services of the underwriter in
connection with any such transaction, then we will pay for the underwriter's
services an amount equal to 5% of up to one million dollars of value paid or
received in the transaction, 4% of the next million of such value, 3% of the
next million of such value, 2% of the next million of such value, and 1% of the
next million dollars of such value and of all such value above $4,000,000.
At the closing, American Quantum Cycles will issue to the underwriter and/or
persons related to the underwriter, for nominal consideration, common stock
underwriter warrants to purchase up to 243,000 shares of common stock. The
underwriter warrants will be exercisable for a five-year period commencing on
the effective date. The initial exercise price of each underwriter warrant shall
be $______ per underlying share (165% of the public offering price) although
the underwriter warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the effective date by the
holder, except (i) to officers of the underwriter and members of the selling
group and Officers and partners thereof; (ii) by will; or (iii) by operation of
law.
The underwriter warrants contain provisions providing for appropriate adjustment
in the event of any merger, consolidation, recapitalization, reclassification,
stock dividend, stock split or similar transaction. The underwriter warrants
contain net issuance provisions permitting the holders thereof to elect to
exercise the underwriter warrants in whole or in part and instruct American
Quantum Cycles to withhold from the securities issuable upon exercise, a number
of securities, valued at the current fair market value on the date of exercise,
to pay the exercise price. Such net exercise provision has the effect of
requiring American Quantum Cycles to issue shares of common stock without a
corresponding increase in capital. A net exercise of the underwriter warrants
will have the same dilutive effect on the interests of American Quantum Cycles
shareholders as will a cash exercise. The underwriter warrants do not entitle
the holders thereof to any rights as a shareholder of American Quantum Cycles
until such underwriter warrants are exercised and shares of common stock are
purchased thereunder.
The underwriter warrants and the securities issuable thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act of 1933, as amended. American Quantum Cycles has agreed that if
it shall cause a post-effective amendment, a new registration statement, or
similar offering document to be filed with the Securities and Exchange
Commission, the holders shall have the right, for seven (7) years from the
effective date, to include in such registration statement or offering statement
the underwriter warrants and/or the securities issuable upon their exercise at
no expense to the holders. Additionally, American Quantum Cycles has agreed
that, upon request by the holders of 50% or more of the underwriter warrants
during the period commencing one year from the effective date and expiring four
years thereafter, American Quantum Cycles will, under certain circumstances,
register the underwriter warrants and/or any of the securities issuable upon
their exercise.
In order to facilitate the offering of the common stock, the underwriter may
engage in transactions that stabilize, maintain or otherwise affect the price of
the shares. Specifically, the underwriter may sell or allot, more shares than
the ______ shares American Quantum Cycles has agreed to sell to the underwriter.
This over-allotment would create a short position in the shares for the account
of the underwriter. To cover any over-allotments or to stabilize the price of
the shares, the underwriter may bid for, and purchase, shares in the open
market. Finally, the underwriter may reclaim selling concessions allowed to
dealers for distributing the shares in the offering, if the underwriter
repurchases previously distributed shares in transactions to cover short
positions, in stabilization transactions or
36
<PAGE>
otherwise. The underwriter has reserved the right to reclaim selling concessions
in order to encourage dealers to distribute the shares for investment, rather
than for short-term profit taking. Increasing the proportion of the offering
held for investment may reduce the supply of shares available for short-term
trading. Any of these activities may stabilize or maintain the market price of
the shares above independent market levels. The underwriter is not required to
engage in these activities, and may end any of these activities at any time.
American Quantum Cycles has agreed to indemnify the underwriter against any
costs or liabilities incurred by the underwriter by reason of misstatements or
omissions to state material facts in connection with the statements made in the
registration statement filed by American Quantum Cycles and this prospectus. The
underwriter has in turn agreed to indemnify American Quantum Cycles against any
costs or liabilities by reason of misstatements or omissions to state material
facts in connection with the statements made in the registration statement and
this prospectus, based on information relating to the underwriter and furnished
in writing by the underwriter. To the extent that these provisions may purport
to provide exculpation from possible liabilities arising under the federal
securities laws, in the opinion of the commission, such indemnification is
contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements described
above and does not purport to be complete. Reference is made to copies of each
such agreement, which are filed as exhibits to the registration statement.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be passed
upon for American Quantum Cycles by Atlas, Pearlman, Trop & Borkson, P.A., Fort
Lauderdale, Florida. Certain members of the firm of Atlas, Pearlman, Trop &
Borkson own 3,750 shares of common stock. Certain matters will be passed upon
for the underwriter by David A. Carter, P.A., Boca Raton, Florida.
EXPERTS
The financial statements of American Quantum Cycles appearing in this prospectus
have been audited by Pricher and Company, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
American Quantum Cycles intends to furnish to its shareholders annual reports,
which will include financial statements audited by independent accountants, and
such other periodic reports as it may determine to furnish or as may be required
by law, including sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended.
American Quantum Cycles has filed with the Securities and Exchange Commission
(the "Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a
registration statement on Form SB-2 under the Securities Act with respect to the
securities offered hereby. This prospectus does not contain all the information
set forth in the registration statement and the exhibits thereto, as permitted
by the rules and regulations of the Commission. For further information,
reference is made to the registration statement and to the exhibits filed
therewith. Statements contained in this prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
registration statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
registration statement and the exhibits thereto may be inspected without charge
at the offices of the Commission and copies of all or any part thereof may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the
fees prescribed by the Commission. Electronic reports and other information
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's website (http://www.sec.gov.).
37
<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 substantial 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.
Pricher and 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
<PAGE>
No dealer, sales representative, or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by American Quantum Cycles or the
underwriter. This prospectus does not constitute an offer or any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
AMERICAN QUANTUM
CYCLES, INC.
[LOGO]
2,430,000 Shares of Common Stock
PROSPECTUS
BARRON CHASE SECURITIES, INC.
7700 West Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boston, Massachusetts
Brooklyn, New York
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Duluth, Georgia
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrook Heights, New Jersey
La Jolla, California
Naples, Florida
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
West Boca Raton, Florida
_____, 1999
<PAGE>
PROSPECTUS (ALTERNATE)
AMERICAN QUANTUM CYCLES, INC.
991,949 Shares of Common Stock
This is an offering of 991,949 shares of common stock (1)of American Quantum
Cycles, Inc., a Florida corporation, held by certain of our shareholders the
"Selling Security Holders". Of the 991,949 shares being offered by the selling
security holders, 62,500 shares are issuable upon the exercise of options owned
by certain of the selling security holders. We will not receive any proceeds
from the sale of the shares but we will receive proceeds from the selling
security holders if they exercise their options.
Our common stock is quoted on the OTC Bulletin Board under the symbol "AMQC". On
August 16, 1999, the closing bid price per share of the common stock as reported
by the OTC Bulletin Board was $3.56.
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss of your investment. See "High Risk Factors"
beginning on page __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ____________, 1999
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Shares of our common stock offered by the selling
security holders(1)........................................................ 991,949 shares of common stock
Use of proceeds............................................................ We will not receive any proceeds from
the - re-sale of the shares offered
by the selling security holders.
Common stock outstanding:
Prior to the offering (2)........................................... 2,842,798
After the offering (3).............................................. 5,335,298
Risk Factors............................................................... The offering involves a high degree
of risk and immediate substantial
dilution. See "High Risk Factors"
beginning on page ____.
</TABLE>
(1) The number of shares being offered by the selling security holders
includes 62,500 shares of our common stock issuable upon the exercise
of options held by the selling security holders. The options are
exercisable at $16.00 per share.
(2) Does not include 2,430,000 Shares of common stock which are being
offered in a concurrent underwritten offering.
(3) Includes the 991,949 shares being offered by the selling security
holders and the 2,430,000 shares of common stock being offered in the
concurrent offering. Does not include (i) 243,000 shares of common
stock issuable to the underwriters in the concurrent offering; and (ii)
up to 493,750 shares of common stock issuable upon the exercise of
outstanding options to purchase shares of our common stock.
2
<PAGE>
CONCURRENT OFFERING
On the date of this prospectus, a registration statement with respect to an
underwritten public offering of 2,430,000 shares of our common stock was
declared effective by the Securities and Exchange Commission. Sales of
securities under this prospectus by the selling security holders, and in the
underwritten public offering, or even the potential of such sales may have an
adverse effect on the market price of our common stock.
SELLING SECURITY HOLDERS
Unless otherwise indicated, none of the selling security holders holds any
office or position with us or has a material relationship with us or our
affiliates.
<TABLE>
<CAPTION>
SHARES SHARES OF
SHARES OF THAT MAY COMMON
COMMON BE OFFERED STOCK
STOCK BENEFICIALLY PURSUANT OWNED
SELLING OWNED PRIOR TO TO THIS AFTER
SECURITY HOLDER THIS OFFERING(1) PROSPECTUS(4) OFFERING
--------------- ---------------- ------------- --------
<S> <C> <C> <C>
Violetta Dwyer 41,250(2) 25,000 16,250
Terri Grundstedt 63,525(2) 25,000 38,525
Laine Moskowitz 38,137(3) 12,500 25,637
Jefferson Hen 3,000 3,000 0
Colson Construction 1,500 1,500 0
Todd Hemm 4,500 4,500 0
Allen Solomon 1,250 1,250 0
Wayne Laglia 1,250 1,250 0
Chase Construction 2,500 2,500 0
Dante Greco 108,821 105,071 3,750
Bridget McMahon 18,750 18,750 0
Carl Domino 18,750 18,750 0
Abe Goldberger 6,250 6,250 0
Catherine Hass 17,468 17,468 0
Michael Howell 16,782 16,782 0
Harvey Stober 9,375 9,375 0
Jerry Lowry 5,000 5,000 0
Arthur Gronbach 12,500 12,500 0
Sheldon Miller 21,875 21,875 0
Andrew Friss 21,875 21,875 0
J.W. Hammond 28,125 21,875 6,250
Parkplace Consulting 25,000 25,000 0
Whitehall Trust 6,250 6,250 0
RWH and Co., Ltd. 156,250 156,250 0
Gerald Frisen 77,167 77,167 0
Harry Newton 33,584 33,584 0
Anchor Capital 187,500 187,500 0
John Pollock 36,946 36,946 0
David Friedman 3,695 3,695 0
Norman Cannella 1,478 1,478 0
Lori Smith Bajorek 1,478 1,478 0
Edward Oxley 3,695 3,695 0
Rahmat Simani 7,389 7,389 0
Richard Dwelle 14,778 14,778 0
Robert Smith 3,695 3,695 0
Terrell Kirksey 14,778 14,778 0
Richard Heidt 3,695 3,695 0
Kimberly DeCamp 40,000 40,000 0
Amil Fleysher 3,750 3,750 0
Clifford Fruithandler 444 375 69
Newburry Realty Co. 1,500 1,500 0
Alphonso Petti 2,500 2,500 0
Karen Pisani 13,394 9,644 3,750
Atlas Partners 3,750 3,750 0
Douglas Paik 6,500 981 5,519
</TABLE>
Gives effect to the 1 for 4 reverse stock split of our issued and
outstanding common stock effective June 3, 1999.
Includes 25,000 shares of common stock issuable upon the exercise of
options exercisable at $16.00 per share.
Includes 12,500 shares of common stock issuable upon the exercise of
options exercisable at $16.00 per share.
Subject to a six month restriction on transfer beginning on the date our
underwritten public offering closes.
3
<PAGE>
PLAN OF DISTRIBUTION
The selling security holders may offer their Shares at various times in one or
more of the following transactions: in the over-the-counter market where our
common stock is listed; transactions other than in the over-the-counter market;
in connection with short sales of American Quantum Cycles common stock; by
pledges or donees; or a combination of any of the above transactions.
The selling security holders may sell their shares at market prices prevailing
at the time of sale, at prices related to such prevailing market prices and at
negotiated prices or at fixed prices.
The selling security holders may use broker dealers to sell their shares. If
this happens, broker dealers will either receive discounts or commissions from
the selling security holders, or they will receive commissions from purchasers
of shares for whom they acted as agents.
We have advised the selling security holders that during such time as they may
be engaged in a distribution of the shares they are required to comply with
Regulation M under the Securities Exchange Act of 1934. Regulation M generally
precludes any selling security holders, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchase made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the common stock.
It is anticipated that the selling security holders will offer all of the shares
for sale. Further, because it is possible that a significant number of shares
could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of American Quantum
Cycles common stock.
4
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AMERICAN QUANTUM CYCLES OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
991,949 SHARES OF COMMON STOCK
AMERICAN QUANTUM CYCLES, INC.
PROSPECTUS
________________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Florida Business Corporation Act contains provisions entitling American
Quantum Cycles directors and officers to indemnification from judgments,
settlements, penalties, fines, and reasonable expenses (including attorney's
fees) as the result of an action or proceeding in which they may be involved by
reason of having been a director or officer of American Quantum Cycles. In its
Articles of Incorporation, American Quantum Cycles has included a provision that
limits, to the fullest extent now or hereafter permitted by the Florida Act, the
personal liability of its directors to American Quantum Cycles or its
shareholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the Florida Act as currently in effect, this
provision limits a director's liability except where such director breaches a
duty. American Quantum Cycles Articles of Incorporation and By-Laws provide that
American Quantum Cycles shall indemnify its directors and officers to the
fullest extent permitted by the Florida Act. The Florida Act provides that no
director or officer of American Quantum Cycles shall be personally liable to
American Quantum Cycles or its shareholders for damages for breach of any duty
owed to American Quantum Cycles or its shareholders, except for liability for
(i) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (ii) any unlawful payment of a dividend or
unlawful stock repurchase or redemption in violation of the Florida Act, (iii)
any transaction from which the director received an improper personal benefit or
(iv) a violation of a criminal law. This provision does not prevent American
Quantum Cycles or its shareholders from seeking equitable remedies, such as
injunctive relief or rescission. If equitable remedies are found not to be
available to shareholders in any particular case, shareholders may not have any
effective remedy against actions taken by directors or officers that constitute
negligence or gross negligence.
The Articles of Incorporation also include provisions to the effect that
(subject to certain exceptions) American Quantum Cycles shall, to the maximum
extent permitted from time to time under the law of the State of Florida,
indemnify and upon request shall advance expenses to, any director or officer to
the extent that such indemnification and advancement of expenses is permitted
under such law, as may from time to time be in effect.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 as amended may be permitted to directors, officers and controlling persons
of American Quantum Cycles pursuant to any charter provision, by-law, contract,
arrangement, statute or otherwise, American Quantum Cycles has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by American Quantum Cycles in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the underwriter's non-accountable
expense allowance and advisory fee) are as follows:
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................................................................ $3,000
NASD filing fee................................................................................................. $1,731
Amex listing fee................................................................................................ 22,500
Legal fees and expenses......................................................................................... 50,000
Accounting fees and expenses.................................................................................... 25,000
Blue sky fees and expenses...................................................................................... 25,000
Printing and engraving expense.................................................................................. 75,000
Transfer agent fees and expenses................................................................................ 15,000
Miscellaneous................................................................................................... 10,000
--------
Total...........................................................................................................$222,731
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In April 1997, American Quantum Cycles issued an aggregate of $250,000 in
promissory notes to seven investors (the "April 1997 Notes") three of whom were
accredited and four were non-accredited. The April 1997 notes yielded interest
at 8% annually and matured at the earlier of April 8, 1998 or upon receipt by
American Quantum Cycles of $1,000,000 or more in any public or private
financing. The interest on the April 1997 notes was payable by American Quantum
Cycles, at its option, either (i) in cash; or (ii) in common stock of American
Quantum Cycles based on the lower of (A) $2.00 per share; or (B) the average
closing bid price of the common stock of American Quantum Cycles for the five
trading days preceding one date prior to the date of interest on the note the
"Interest Provision"). Pursuant to the interest provision, American Quantum
Cycles issued 732 shares of common stock to the April 1997 note holders in
December 1997 as interest on the April 1997 Notes. As of the date hereof, all
the April 1997 notes have been repaid and cancelled by American Quantum Cycles.
Each investor was provided with or had access to financial and other information
concerning American Quantum Cycles and had the opportunity to ask questions
concerning American Quantum Cycles and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In May 1997, American Quantum Cycles acquired assets totaling $92,270 in
exchange for an aggregate of 477,598 shares of common stock of American Quantum
Cycles, of which 238,799 shares were issued to Doreen Cheal, a principal
shareholder of American Quantum Cycles, and 238,799 shares were issued to Denise
O'Brien, a Director and principal shareholders of American Quantum Cycles. Each
investor was non-accredited, but was provided with or had access to financial
and other information concerning American Quantum Cycles and had the opportunity
to ask questions concerning American Quantum Cycles and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In June 1997, American Quantum Cycles commenced an offering of common stock at
$4.00 per share pursuant to Rule 504 of Regulation D under the Act. An aggregate
of 61,436 shares of common stock for an aggregate of $949,974 were sold by
management to two accredited and thirteen non-accredited sophisticated
investors. Each of the investors were provided with and had access to financial
and other information concerning American Quantum Cycles and had the opportunity
to ask questions concerning American Quantum Cycles and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 3(b) of the Act.
In January 1998, American Quantum Cycles granted options to purchase an
aggregate of 142,500 shares of common stock to a consultant who was a
sophisticated investor. The options are exercisable until October 2004 and are
exercisable at $1.00 per share. Each investor was provided with or had access to
financial and other information concerning American Quantum Cycles and had the
opportunity to ask questions concerning American Quantum Cycles and its
operations. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
Beginning in October 1997, American Quantum Cycles issued an aggregate of forty
8% subordinated notes to 32 note holders, eleven of which were accredited and
twenty-one of which were non-accredited but sophisticated, in the aggregate
principal amount of $1,407,000 (the "8% Notes"). Each note holder was provided
II-2
<PAGE>
with or had access to financial and other information concerning American
Quantum Cycles and had the opportunity to ask questions concerning American
Quantum Cycles and its operations. Accordingly, the issuance of these securities
was exempt from the registration requirements of the Act pursuant to Section
4(2) of the Act. The notes matured one year from date of issue. Nine of the 8%
note holders, representing an aggregate of $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 this offering. 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 $3.50, (the "8% Note Shares"); and (ii) warrants to purchase
an equal number of shares of American Quantum Cycles common stock equal at an
exercise price of $3.50 per share. American Quantum Cycles redeemed two of the
8% Notes with a principal balance of $80,000. The remaining three 8% note
holders have not agreed to either extend the terms of, or convert, their
respective 8% notes. As a result, if the remaining six 8% note holders,
representing an aggregate of $323,000 of the outstanding principal balance of
the 8% notes, send American Quantum Cycles notice informing American Quantum
Cycles that it is in default of its repayment obligations on the 8% notes,
American Quantum Cycles will be considered in default of the 8% notes.
Between May 1997 and June 1997, American Quantum Cycles granted options to
purchase an aggregated 137,500 shares to a consultant who was an accredited
investor. Of the options 75,000 are exercisable at $.40 per share and 62,500 are
exercisable at $16.00 per share. The options are exercisable until September
2003. The consultant was provided with or had access to financial and other
information concerning American Quantum Cycles and had the opportunity to ask
questions concerning American Quantum Cycles and its operations. Accordingly,
the issuance of these securities was exempt from the registration requirements
of the Act pursuant to Section 4(2) of the Act.
Beginning in April 1998, American Quantum Cycles issued an aggregate of
twenty-seven 7% subordinated notes to 24 investors, 6 of whom were accredited
investors and eighteen of whom were non-accredited but sophisticated investors,
in return for which American Quantum Cycles received proceeds of , for an
aggregate of $549,500 (the "7% Notes"). Each investor was provided with or had
access to financial and other information concerning American Quantum Cycles and
had the opportunity to ask questions concerning American Quantum Cycles and its
operations. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act. The 7%
notes mature one year from the date of issuance and are convertible into shares
of common stock of 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. The notes matured one year from date of
issue. 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 $3.50,
(the "7% Note Shares"); and (ii) warrants to purchase an equal number of shares
of American Quantum Cycles common stock at an exercise price of $3.50 per share.
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, have
agreed to extend the maturity date of their respective 7% notes until the close
of this offering.
In May 1998, American Quantum Cycles completed an offering of an aggregate of
$700,000 of 10% subordinated promissory notes (the "10% Notes") and an aggregate
of 35,500 shares of Common Stock to nine accredited investors. The 10% Notes
mature one year from the date of issuance and are convertible into shares of
common stock of 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.
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<PAGE>
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 $3.50, (the "10% Note Shares"); and
(ii) two warrants to purchase an equal number of shares of American Quantum
Cycles common stock at an exercise price of $3.50 per share. Each of the note
holders was provided with, or had access to financial and other information
concerning American Quantum Cycles and had the opportunity to ask questions
concerning American Quantum Cycles and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
Between September 1998 and November 1998, American Quantum Cycles granted
options to purchase an aggregate of 676,250 shares of common stock to 14
consultants, 3 of whom were accredited and eleven of whom were non-accredited
but sophisticated, in connection with services rendered regarding the promotion
of American Quantum Cycles motorcycles. The options are exercisable until
December 2004. The exercise price for the options ranges between $2.00 and $4.00
with the exception of 37,500 options which are exercisable at $.40. Each
investor was provided with or had access to financial and other information
concerning American Quantum Cycles and had the opportunity to ask questions
concerning American Quantum Cycles and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In November 1998, American Quantum Cycles issued an aggregate of 375,000 shares
of common stock and granted options to purchase an aggregate of 50,000 shares of
common stock exercisable at $4.00 per share until December 31, 2003 to four
Executive Officers of American Quantum Cycles pursuant to the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act.
Between November 1998 and January 1999, American Quantum Cycles completed a
Regulation D Rule 506 private offering of approximately 35 Units of its
securities (the "Units") to 10 accredited investors and 1 sophisticated investor
from which 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. Barron Chase Securities, Inc., ("Barron") acted
as the selling agent for the offering. In consideration for acting as selling
agent, Barron received a placement fee equal to ten percent (10%) of the
proceeds received from this offering and an unaccountable expense allowance
equal to 3% of the proceeds received from this offering.
Between December 1998 and February 1999, American Quantum Cycles obtained lines
of credit in the aggregate amount of $1,405,000 from nine accredited investors.
The line of credit accrues interest at 10% and 8% respectively. In connection
with obtaining the lines of credit, American Quantum Cycles agreed to issue an
aggregate of 318,750 shares of common stock to the providers of the credit
lines. Each line of credit provider was provided with or had access to financial
and other information concerning American Quantum Cycles and had the opportunity
to ask questions concerning American Quantum Cycles and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
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 to five
investors, one of whom was accredited and four of whom were non-accredited but
sophisticated. The notes mature October 1, 1999 with interest and principal
payable in cash. Each noteholder was provided with or had access to financial
and other information concerning American Quantum Cycles and had the opportunity
to ask questions concerning American Quantum Cycles and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
<TABLE>
<CAPTION>
ITEM 27. EXHIBITS
Exhibits Description of Document
- -------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement (2)
1.2 Form of Selected Dealer Agreement (2)
2.1 Amended and Restated Articles of Incorporation of American
Quantum Cycles, Inc., filed November 21, 1997(1)
2.2 Amended Articles of Incorporation of American Quantum Cycles,
Inc. filed April 6, 1998, creating "Series A 7% Convertible
Preferred Stock"(1)
II-4
<PAGE>
2.3 Amended and Restated Bylaws of American Quantum Cycles, Inc.(1)
2.4 Amended Articles of Incorporation of American Quantum Cycles,
Inc. filed June 3, 1999 (2)
3.2 American Quantum Cycles, Inc. Amended 1997 Stock Option Plan(1)
4.1 Form of Common Stock Certificate (2)
4.2 Warrant Agreement between American Quantum Cycles and Barron
Chase Securities, Inc. (2)
4.3 Form of Warrant Certificate (2)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. (3)
10.1 Consulting Agreement between American Quantum Cycles, Inc. and
Greenstone Financial Corporation dated May 9, 1997(1)
10.2 License Agreement between Feuling Advanced Technologies, Inc.
and American Quantum Cycles, Inc. dated as of August 19, 1997(1)
10.3 Agreement between the Company and Ferrex International, Inc.(1)
10.4 Sample Dealer Agreement(1)
10.5 Lease Agreement between American Quantum Cycles and Bruce and
Karen Weiss effective May 1, 1997(1)
10.6 Amendment to Lease Agreement between American Quantum Cycles
and Bruce and Karen Weiss dated January 29, 1998(1)
10.7 Employment Agreement with Richard K. Hagen (2)
10.8 Employment Agreement with Gary W. Irving (2)
10.9 Financial Advisory Agreement between American Quantum Cycles
and Barron Chase Securities, Inc.(2)
10.10 Merger and Acquisition Agreement between American Quantum
Cycles and Barron Chase Securities, Inc.(2)
10.11 Forms of the letter of intent between American Quantum Cycles
and Dealers(2)
10.12 Consulting Agreement with Richard K. Hagen(2)
10.13 10% Secured Promissory Note issued by American Quantum Cycles
to Skippack Capital Corp.(3)
10.14 Security Agreement between American Quantum Cycles and Skippack
Capital Corp.(3)
10.15 8% Subordinated Note issued by American Quantum Cycles to Carl Domion(3)
10.16 8% Subordinated Note issued by American Quantum Cycles to Andrew Friss(3)
10.17 8% Subordinated Note issued by American Quantum Cycles to Dante Greco(3)
10.18 8% Subordinated Note issued by American Quantum Cycles to Bridget McMahon(3)
10.19 8% Subordinated Note issued by American Quantum Cycles to Sheldon Miller(3)
10.20 8% Subordinated Note issued by American Quantum Cycles to Harvey Stober(3)
10.21 8% Subordinated Note issued by American Quantum Cycles to Abe Goldberger(3)
10.22 10% Secured Promissory Note issued by American Quantum Cycles to Anchor
Capital Corporation(3)
10.23 Loan and Security Agreement between American Quantum Cycles and Anchor
Capital Corporation(3)
23.1 Consent of Pricher and Company Certified Public Accountants(3)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (contained in
such firm's opinion filed as Exhibit 5.1) (3)
27 Financial Data Schedule (2)
</TABLE>
(1) Incorporated by reference from American Quantum Cycles Registration
Statement on Form 10-SB filed April 24, 1998 (File No. 000-24083).
(2) Previously filed
(3) Filed herewith
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
<TABLE>
<CAPTION>
<S> <C> <C>
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act.
(ii) Reflect in the prospectus any
facts or events which, individually or together,
represent a fundamental change in the information set
forth in the registration statement.
(iii) Include any additional or changed material
information on the plan of distribution;
</TABLE>
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration of the securities
offered, and the offering of such securities at that time to be
the initial bona fide offering; and
(3) File a post effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
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<PAGE>
(4) American Quantum Cycles will provide to the underwriter at the
closing specified in the underwriter's agreement certificates in
such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of American Quantum Cycles pursuant to the
foregoing provisions, or otherwise, American Quantum Cycles has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by American Quantum Cycles of
expenses incurred or paid by a director, officer or controlling
person of American Quantum Cycles in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, American Quantum Cycles will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final
adjudication of such issue.
For the purpose of determining any liability under the Securities
Act, American Quantum Cycles will treat the information omitted
from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by American Quantum Cycles pursuant to Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of
this registration statement as of the time the Securities and
Exchange Commission declares it effective.
For the purpose of determining any liability under the Securities
Act, American Quantum Cycles will treat such post-effective
amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement
therein, and treat the offering of the securities at that time as
the initial bona fide offering of those securities.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing of this Amendment No. 4 to the Form SB-2 and
authorizes this registration statement to be signed on its behalf by the
undersigned, in the city of Melbourne, State of Florida on August 17, 1999.
AMERICAN QUANTUM CYCLES, INC.
By: /s/ Richard K. Hagen
------------------------------
Richard K. Hagen, President
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Chairman of the
Board of Directors,
/s/Richard Hagen Principal Executive Officer,
- ------------------------- Principal Financial Officer August 17, 1999
Richard Hagen and President
/s/Jim Cheal Vice President
- ------------------------- and Director August 17, 1999
Jim Cheal
/s/Jeffrey W. Starke Vice President
- ------------------------- and Director August 17, 1999
Jeffrey W. Starke
/s/Gary Irving Executive Vice President, Chief
- ------------------------- Operating Officer and Director August 17, 1999
Gary Irving
/s/Linda Condon Principal Accounting Officer
- ------------------------- and Treasurer August 17, 1999
Linda Condon
</TABLE>
II-7
<PAGE>
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A.
10.13 10% Secured Promissory Note issued by American Quantum Cycles to
Skippack Capital Corp.
10.14 Security Agreement between American Quantum Cycles and Skippack
Capital Corp.
10.15 8% Subordinated Note issued by American Quantum Cycles to Carl
Domion
10.16 8% Subordinated Note issued by American Quantum Cycles to Andrew
Friss
10.17 8% Subordinated Note issued by American Quantum Cycles to Dante
Greco
10.18 8% Subordinated Note issued by American Quantum Cycles to Bridget
McMahon
10.19 8% Subordinated Note issued by American Quantum Cycles to Sheldon
Miller
10.20 8% Subordinated Note issued by American Quantum Cycles to Harvey
Stober
10.21 8% Subordinated Note issued by American Quantum Cycles to Abe
Goldberger
10.22 10% Secured Promissory Note issued by American Quantum Cycles to
Anchor Capital Corporation
10.23 Loan and Security Agreement between American Quantum Cycles and
Anchor Capital Corporation
23.1 Consent of Independent Certified Public Accountants Pricher and
Company
23.2 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (contained in
such firm's opinion filed as Exhibit 5.1)
American Quantum Cycles, Inc.
August 17, 1999
Page 1
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
200 East Las Olas Boulevard, Suite 1900
Fort Lauderdale, Florida 33301
August 17, 1999
American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, Florida 32934
Re: Registration Statement on Form SB-2; American Quantum Cycles,
Inc. (the "Company")
Gentlemen:
This opinion is submitted pursuant to the applicable rules of the
Securities and Exchange Commission with respect to the public offering by the
Company of 2,794,500 shares of Common Stock, $.001 par value (including up to
364,500 shares of Common Stock issuable in connection with the Underwriters'
over-allotment option) (the "Underwritten Shares"), warrants issued to the
Underwriter to purchase 243,000 shares of the Company's Common Stock (the
"Underwriter's Warrants"), 243,000 shares of the Company's Common Stock issuable
upon the exercise of the Underwriter's Warrants and 991,949 shares of the
Company's Common Stock (including 62,500 shares of the Company's Common Stock
issuable upon the exercise of options (the "Options") held by certain of the
Company's selling security holders (the "Option Shares")) being registered by
the Company on behalf of the selling security holders listed in the Company's
Form SB-2 Registration Statement (the "Selling Security Holder Shares").
In connection therewith, we have examined and relied upon original,
certified, conformed, photostat or other copies of (i) the Articles of
Incorporation, as amended, and Bylaws of the Company; (ii) resolutions of the
Board of Directors of the Company authorizing the offering and the issuance of
the Common Stock and related matters; (iii) the Registration Statement and the
exhibits thereto; and (iv) such other matters of law as we have deemed necessary
for the expression of the opinion herein contained. In all such examinations, we
have assumed the genuineness of all signatures on original documents, and the
conformity to originals or certified documents of all copies submitted to us as
conformed, photostat or other copies. In passing upon certain corporate records
and documents of the Company, we have necessarily assumed the correctness and
completeness of the statements made or included therein by the Company, and we
express no opinion thereon. As to the various questions of fact material to this
opinion, we have relied, to the extent we deemed reasonably appropriate, upon
representations or certificates of officers or directors of the Company
<PAGE>
American Quantum Cycles, Inc.
August 17, 1999
Page 2
and upon documents, records and instruments furnished to us by the Company,
without independently checking or verifying the accuracy of such documents,
records and instruments.
Based upon the foregoing, we are of the opinion that the Underwritten
Shares, the Underwriter's Warrants (including the Underwriter's Shares when
issued in accordance with the Underwriter's Warrants upon receipt of valid
consideration by the Company) and the Selling Security Holder Shares (including
the Option Shares when issued in accordance with the Options upon receipt of
valid consideration by the Company) upon issuance, will be legally issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to use our name under the caption "Legal Matters" in
the prospectus comprising part of the Registration Statement.
Sincerely,
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
/s/ Atlas, Pearlman, Trop & Borkson, P.A.
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), or under the provisions of any applicable state
securities laws, but has been acquired by the registered holder hereof for
purposes of investment and in reliance on statutory exemptions under the 1933
Act, and under any applicable state securities laws. Note may not be sold,
pledged, transferred or assigned except in a transaction which is exempt under
provisions of the 1933 Act and any applicable state securities laws or pursuant
provisions to an effective registration statement; and in the case of an
exemption, only if the Company (as defined) has received an opinion of counsel
reasonably acceptable to the Company that such transaction does not require
registration of this Note.
AMERICAN QUANTUM CYCLES, INC.
December __, 1998 $755,000
10% SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, AMERICAN QUANTUM CYCLES, INC., a Florida corporation
(the "Company") hereby promises to pay to the order of SKIPPACK CAPITAL CORP.,
or registered assigns (the "Holder"), on a date which shall be 30 days after
DEMAND for payment shall have been given by Holder to the Company, at the
offices of the Holder, the principal sum equal to the lesser of Seven Hundred
Fifty-Five Thousand ($755,000) Dollars, or the then aggregate unpaid principal
amount of advances made hereunder by Holder to the Company. The Company further
promises to pay interest on the outstanding amount of all advances made under
this Note at the rate of ten percent (10%) per annum, commencing from the date
of the initial advance hereunder and until all amounts of principal and interest
accrued thereon are paid in full, subject to increase in the rate of interest as
provided in Section 3(c). The Company acknowledges having received an advance of
$68,200 in respect of this Note on December 18, 1998. Interest hereunder shall
be payable quarterly in arrears, commencing March 31, 1999.
1. Prepayment. Outstanding principal under this Note may be prepaid by the
Company, in whole or in part, without premium or penalty, at any time, together
with all accrued but unpaid interest on the amount of such prepayment.
2. Covenants of Company. The Company covenants and agrees with the Holder
that, so long as any amounts of principal or interest remain unpaid under this
Note, it will:
(i) not incur any indebtedness for borrowed money, except for such
indebtedness as is outstanding on the date of this Note and indebtedness
incurred by the Company after the date hereof in connection with the
financing
1
<PAGE>
of inventory, or permit any lien, security interest or encumbrance to be
created in or with respect to any asset of the Company, whenever acquired,
except for any such as are in effect on the date of this Note and except
for purchase money security interests in assets acquired by the Company
after the date of this Note;
(ii) promptly pay and discharge all amounts as and when due and to
become due on all indebtedness of the Company and all taxes, assessments
and governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall
become a lien upon the Company's assets or property, as well as all
lawful claims for labor, materials and supplies which, if unpaid, would
become a lien or charge upon such properties or any part thereof; provided,
however, that the Company shall not be required to pay and discharge any
such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings and the Company
shall have set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested;
(iii) not issue any shares of its Common Stock, or any securities
convertible into or exercisable with respect to its Common Stock, except
for securities sold in an underwritten public offering or securities
insured to the underwriter with respect to any such offering;
(iv) not merge with or into any other corporation or dispose of its
assets other than in the ordinary course of business;
(v) maintain insurance for its assets and business operations in
amounts of coverage not less than the amounts in effect on the date of this
Note;
(vi) use its best efforts to conform to the Company's Business
Plan/Cash Flow Projections delivered by the Company to the Holder
contemporaneously with the execution and delivery of this Note; and
(vii) comply fully with its obligations under that certain Purchase
Agreement of even date herewith between the Company and the Holder
("Purchase Agreement").
3. Events of Default
(a) This Note shall become due and payable, without notice or demand
by Holder, immediatel upon the occurrence of any of the following events,
herein called "Events of Default":
(i) Company's failure to pay any principal or accrued interest on
this Note, when and as the same shall become due and payable, whether
by acceleration or otherwise;
2
<PAGE>
(ii) Company's failure to observe or perform any covenant or
agreement set forth herein to be observed or performed by the Company;
(iii) the occurrence of an Event of Default by the Company under
the Purchase Agreement;
(iv) the entry of a final judgment, arbitration award or order
not subject to further appeal against the Company in an amount
exceeding $100,000 which shall remain unsatisfied for thirty (30)
days after the date of such entry;
(v) Company's admission in writing of its inability to pay its
debts as they mature, or the Company's making a general assignment for
the benefit of creditors, or the filing by or against the Company of a
petition seeking relief under the Bankruptcy Code or a petition or an
answer seeking reorganization, or an arrangement with creditors.
(b) The Company shall give notice to the Holder by certified mail, of
the occurrence of any Event of Default within five (5) days after such
Event of Default shall have occurred.
(c) Upon the occurrence of an Event of Default, interest shall accrue
under this Note on all unpaid amounts of principal at the rate of 18
percent per annum until all such amounts of principal, and all interest
accrued thereon, shall have been paid in full. After the occurrence of an
Event of Default, all payments made in respect to this Note shall be
applied, first, in respect of the Origination Fee, as defined in the
Purchase Agreement, to the extent that the same shall not have been paid in
full, and second, to reimburse Holder for all of its expenses of
collection; any payment in excess of such amounts shall first be applied to
accrued but unpaid interest to the date of any such payment until all such
interest shall have been paid in full.
4. Subordination. Payment of the principal of and accrued interest on this
Note is hereby made expressly subject and subordinated to the payment in full of
all principal of and accrued interest on all indebtedness of the Company,
whenever created, which shall have been incurred by the Company, on regular
commercial terms to banks and other institutional lenders ("Senior
Indebtedness"). The Company shall not remit any payments of principal to the
Holder of this Note in respect of the obligations hereunder unless and until all
obligations to the holders of Senior Indebtedness have been paid in full or such
holders of Senior Indebtedness shall otherwise have consented in writing. The
provisions of this subordination shall not, however, affect or limit the
Company's obligations to pay, when due, all principal of and accrued interest on
this Note, nor shall such subordination be deemed to limit or otherwise affect
any rights and remedies which the Holder of this Note shall be entitled to
receive or assert
3
<PAGE>
upon the occurrence of any Event of Default hereunder, other than to set forth
the priority of payments as between the indebtedness created hereunder and any
Senior Indebtedness.
5. Miscellaneous
(a) The performance by the Company of its obligations under this Note
shall be secured by, and the Holder of this Note shall have the benefit of,
that certain Security Agreement of even date herewith between the Holder
and the Company.
(b) The Holder of this Note shall have the right to transfer this Note
by assignment, and the transferee thereof shall become vested with all the
powers and rights of the transferor. Registration of any new owners shall
take place upon presentation of this Note to the Company at its principal
offices, together with a duly authenticated instrument of assignment.
(c) Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor
and date.
(d) This Note shall be construed and enforced in accordance with the
laws of the Commonwealth of Pennsylvania.
(e) Upon the occurrence of an Event of Default or a threatened Event
of Default, the Company shall pay all costs and expenses incurred by the
Holder to enforce any of the provisions of this Note, including attorneys'
fees and other expenses of collection.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
By /s/ Illegible
----------------------
4
SECURITY AGREEMENT
This Security Agreement is made and entered into as of the _____ day of
December 1998 by and between AMERICAN QUANTUM CYCLES, INC., a Florida
corporation (the "Debtor"), and SKIPPACK CAPITAL CORP. (the "Secured Party").
Background
The Debtor has executed and delivered to the Secured Party its Promissory
Note (the "Note"), bearing even date herewith, wherein the Debtor promises to
pay to the Secured Party the principal sum of Seven Hundred Fifty-Five Thousand
Dollars ($755,000). Pursuant to the terms of the Note, the parties agreed to
execute and deliver this Security Agreement (the "Security Agreement").
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto, each intending to be legally bound hereby,
agree as follows:
Section 1. Definitions.
As herein used:
1.1 "Account Debtor" means the Person who is obligated on an Account.
1.2 "Account" means any account as that term is defined in the Uniform
Commercial Code as in effect in any jurisdiction in which any of the
Collateral may at the time be located (the "U.C.C.") and includes any right
of the Debtor to payment for goods sold or leased or for services rendered
or money loaned which is not evidenced by an instrument or chattel paper
(as those terms are defined in the U.C.C.) whether or not it has been
earned by performance.
1.3 "Chattel Paper" means any chattel paper as that term is defined in
the U.C.C.
1.4 "Collateral" means (i) all of the Debtor's Accounts, General
Intangibles, Chattel Paper and Instruments now existing or hereafter
arising; (ii) all guarantees of Debtor's existing and future Accounts,
General Intangibles, Chattel Paper and Instruments and all other security
held by the Debtor for the payment and satisfaction thereof; (iii) all of
the Debtor's Inventory now owned or hereafter acquired; (iv) all of the
Debtor's Equipment now owned or hereafter acquired; (v) all of the Debtor's
books and records which relate to the Debtor's
1
<PAGE>
Inventory, Equipment, Accounts, General Intangibles, Chattel Paper and
Instruments or guarantees thereof; (vi) all insurance on all of the
foregoing and the proceeds of that insurance; and (vii) all cash and
noncash proceeds and products of all of the foregoing and the proceeds and
products of other proceeds and products. Notwithstanding anything to the
contrary contained herein, "Collateral" shall not include any of the
following assets or rights of the Debtor:
1.5 "Equipment" means any equipment as that term is defined in the
U.C.C. and shall include, without limitation, all equipment, machinery,
appliances, tools, furniture and tangible personal property, whether or not
the same are or may become fixtures, used or bought for use primarily in
the Debtor's business or leased by the Debtor to others, of every nature,
presently existing or hereafter acquired or created, wherever located,
additions, accessories and improvements thereto and substitutions therefor
and all parts which may be attached to or which are necessary for the
operation and use of such personal property or fixtures, whether or not the
same shall be deemed to be affixed to real property, and all rights under
or arising out of present or future contracts relating to the foregoing.
All equipment is and shall remain personal property irrespective of its use
or manner of attachment to real property.
1.6 "General Intangibles" means all general intangibles as that term
is defined in the U.C.C., including, without limitation, all books,
correspondence, credit files, records and other documents, computer
programs, computer tapes and cards and other paper and documents in the
possession or control of the Debtor or in the possession or control of any
affiliate or computer service bureau, and all contract rights, claims,
chooses in action, judgments, patents, patent applications, trademarks,
license agreements, royalty payments, copyrights, service names, service
marks, logos, goodwill and deposit accounts.
1.7 "Instruments" means all instruments as that term is defined in the
U.C.C.
1.8 "Inventory" means any inventory as that term is defined in the
U.C.C. and shall include tangible personal property held for sale or lease
or to be furnished under contracts of service, tangible personal property
which the Debtor has so leased or furnished, and raw materials, work in
process and materials used, produced or consumed in the Debtor's business,
and shall include tangible personal property returned to the Debtor by a
purchaser or lessor thereof following the sale or lease thereof by the
Debtor. All equipment, accessories and parts related to, attached to or
added to items of Inventory or used in connection therewith and all
accessions thereto shall be deemed to be part of the Inventory.
2
<PAGE>
1.9 "Obligations" means all existing and future liabilities and
obligations of the Debtor to the Secured Party, whether absolute or
contingent of any nature whatsoever, now existing or hereafter incurred
arising out of or provided for in the Note and all obligations of the
Debtor to the Secured Party created or referred to herein.
1.10 "Person" means an individual, a corporation, a govemment or
governmental subdivision or agency or instrumentality, a business trust, an
estate, a trust, a partnership, a cooperative, an association, two or more
Persons having a joint or common interest or any other legal or commercial
entity.
1.11 "Proceeds" means whatever is received when Collateral is sold,
exchanged, collected or otherwise disposed of.
Section 2. Security Interest in Collateral.
2.1 The Debtor hereby assigns to the Secured Party and grants to the
Secured Party a lien upon and a security interest in the Collateral as
security for the payment and performance of the Obligations.
Section 3. Collection of Accounts.
3.1 Upon occurrence of an event of default as set forth in Section 5
hereof, the Secured Party shall have the right at any time, acting if it so
chooses in the Debtor's name, to collect the Debtor's Accounts itself, to
sell, assign, compromise, discharge or extend the time for payment of any
Account, to institute legal action for the collection of any Account, and
to do all acts and things necessary or incidental thereto and the Debtor
hereby ratifies all such acts. The Secured Party may at any time after the
occurrence of such event of default and without notice to the Debtor,
notify any Account Debtor or guarantor thereof that the Account payable by
such Account Debtor has been assigned to the Secured Party and is to be
paid directly to the Secured Party. At the Secured Party's request the
Debtor will so notify Account Debtors and shall indicate on all billings to
Account Debtors that payments thereon are to be made to the Secured Party.
In the event Account Debtors are so notified, the Debtor shall not
compromise, discharge, extend the time for payment or otherwise grant any
indulgence or allowance with respect to any Account without the prior
written consent of the Secured Party.
Section 4. Warranties and Covenants as to Collateral.
4.1 The Debtor warrants that it has and at all times will have good
title to the Collateral free of any prior lien (except for Permitted Liens,
as defined) and that all Accounts included in the Collateral are bona fide
existing
3
<PAGE>
obligations created by the sale and delivery of merchandise or the
rendering of services to customers and arose in the ordinary course of
business; and that such Accounts are not subject to defense, set-off or
counterclaim which in the aggregate would materially impair the value of
such Accounts as collateral for the Obligations. As used in this Agreement,
"Permitted Liens", means
4.2 The Debtor will promptly notify the Secured Party if there is any
adverse change in the status of the Collateral that materially impairs its
value or collectibility, or if any defenses, set-offs or counterclaims are
asserted by Account Debtors which in the aggregate materially impair the
value or collectibility of the Accounts.
4.3 The Debtor will preserve the Collateral and its rights against
Account Debtors free and clear of any liens or encumbrances (except for
Permitted Liens) and will keep the Inventory and Equipment in good
condition, insured by insurers authorized to do business in the
jurisdictions where such Collateral is located from time to time against
fire or other casualty loss (with extended coverage in the broadest form),
liability and such other hazards as are customary with companies in the
same or similar business and in the same area, and will cause Secured
Party's security interest to be endorsed on all policies of insurance
thereon in such manner that all payments for losses will be paid to Secured
Party as its interest may appear and will furnish Secured Party upon
request with evidence of such insurance.
Section 5. Default.
The Debtor shall be in default hereunder upon the occurrence of any of
the following events:
5.1 The occurrence of any Event of Default as defined under the Note.
5.2 The failure of the Debtor to observe or perform any of the
covenants or obligations contained in this Security Agreement and such
failure shall remain uncured twenty (20) days after notice thereof from the
Secured Party.
Section 6. Remedies.
6.1 Whenever the Debtor shall be in default as aforesaid, the Secured
Party may, at its option, exercise from time to time any or all rights and
remedies available to it under the U.C.C. or otherwise available to it,
including the right to collect, receipt for, settle, compromise, adjust,
sue for, foreclose or otherwise realize upon any of the Collateral and to
dispose of any of
4
<PAGE>
the Collateral at public or private sale(s) or other proceedings, and the
Debtor agrees that the Secured Party or its nominee may become the
purchaser at any such sale(s).
6.2 The Proceeds of any Collateral received by the Secured Party at
any time before or after default, whether from the sale of Collateral or
otherwise, shall be applied to the payment of the Obligations in such order
as the Secured Party may elect.
Section 7. Further Assurances.
7.1 The Debtor will execute and deliver financing and continuation
statements for filing and recording under the U.C.C. or other applicable
law, landlord waivers, mortgagee waivers and other papers which the Secured
Party reasonably may request, and which the Debtor is able to obtain using
its best efforts, in order to perfect, preserve or enforce the Secured
Party's security interest in the Collateral or to enable the Secured Party
to exercise any of its rights hereunder, and will pay all reasonable
attorney fees and reasonable expenses in connection therewith.
Section 8. Successors and Assigns.
8.1 All provisions herein shall inure to and become binding upon the
successors, representatives, receivers, trustees and assigns of the
parties.
Section 9. Termination.
9.1 This Agreement and the liens and security interests created hereby
shall terminate upon payment in full of all of the Obligations. Upon
termination of this Agreement, the Secured Party shall promptly furnish to
the Debtor, in form for recordation, such executed UCC termination
statements and other instruments, if any, as may be requested by the Debtor
and in the Secured Party's judgment necessary to evidence of record the
termination of the liens and security interests created hereby.
Section 10. Miscellaneous.
10.1 This Agreement has been executed pursuant to and shall be
governed by and be construed in accordance with, the laws of the
Commonwealth of Pennsylvania, except as required by mandatory provisions of
law and except to the extent that remedies provided by the laws of any
state other than Pennsylvania are governed by the laws of such state.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed under seal on the
day and year first above written.
[CORPORATE SEAL] AMERICAN QUANTUM CYCLES, INC.
Attest: /s/ Illegible By: /s/ Illegible
---------------------- -------------------------
Secretary President
SKIPPACK CAPITAL CORP.
By: /s/ Illegible
-------------------------
President
6
<PAGE>
Attachment
Security Interest in Collateral.
--------------------------------
The Debtor hereby assigns to the Secured Party and grants to the Secured
Party a lien upon and a security interest in the Collateral as security for the
payment and performance of the Obligations.
As herein used:
"Account Debtor" means the Person who is obligated on an Account.
"Account" means any account as that term is defined in the Uniform
Commercial Code as in effect in any jurisdiction in which any of the Collateral
may at the time be located (the "U.C.C.") and includes any right of the Debtor
to payment for goods sold or leased or for services rendered or money loaned
which is not evidenced by an instrument or chattel paper (as those terms are
defined in the U.C.C.) whether or not it has been earned by performance.
"Chattel Paper" means any chattel paper as that term is defined in the
U.C.C.
"Collateral" means (i) all of the Debtor's Accounts, General Intangibles,
Chattel Paper and Instruments now existing or hereafter arising; (ii) all
guarantees of Debtor's existing and future Accounts, General Intangibles,
Chattel Paper and Instruments and all other security held by the Debtor for the
payment and satisfaction thereof; (iii) all of the Debtor's Inventory now owned
or hereafter acquired; (iv) all of the Debtor's Equipment now owned or hereafter
acquired; (v) all of the Debtor's books and records which relate to the Debtor's
Inventory, Equipment, Accounts, General Intangibles, Chattel Paper and
Instruments or guarantees thereof; (vi) all insurance on all of the foregoing
and the proceeds of that insurance; and (vii) all cash and noncash proceeds and
products of all of the foregoing and the proceeds and products of other proceeds
and products.
"Equipment" means any equipment as that term is defined in the U.C.C. and
shall include, without limitation, all equipment, machinery, appliances, tools,
furniture and tangible personal property, whether or not the same are or may
become fixtures, used or bought for use primarily in the Debtor's business or
leased by the Debtor to others, of every nature, presently existing or hereafter
acquired or created, wherever located, additions, accessories and improvements
thereto and substitutions therefor and all parts which may be attached to or
which are necessary for the operation and use of such personal property or
fixtures, whether or not the same shall be deemed to be affixed to real
property, and all rights under or arising out of present or future contracts
A-1
<PAGE>
relating to the foregoing. All equipment is and shall remain personal property
irrespective of its use or manner of attachment to real property.
"General Intangibles" means all general intangibles as that term is defined
in the U.C.C., including, without limitation, all books, correspondence, credit
files, records and other documents, computer programs, computer tapes and cards
and other paper and documents in the possession or control of the Debtor or in
the possession or control of any affiliate or computer service bureau, and all
contract rights, claims, chooses in action, judgments, patents, patent
applications, trademarks, license agreements, royalty payments, copyrights,
service names, service marks, logos, goodwill and deposit accounts.
"Instruments" means all instruments as that term is defined in the U.C.C.
"Inventory" means any inventory as that term is defined in the U.C.C. and
shall include tangible personal property held for sale or lease or to be
furnished under contracts of service, tangible personal property which the
Debtor has so leased or furnished, and raw materials, work in process and
materials used, produced or consumed in the Debtor's business, and shall include
tangible personal property returned to the Debtor by a purchaser or lessor
thereof following the sale or lease thereof by the Debtor. All equipment,
accessories and parts related to, attached to or added to items of Inventory or
used in connection therewith and all accessions thereto shall be deemed to be
part of the Inventory.
"Obligations" means all existing and future liabilities and obligations of
the Debtor to the Secured Party, whether absolute or contingent of any nature
whatsoever, now existing or hereafter incurred arising out of or provided for in
the Note and all obligations of the Debtor to the Secured Party created or
referred to herein.
A-2
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$100,000 February 25, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"),
for value received, hereby promises to pay to Carl Domino registered assigns
(the "Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of one hundred
thousand dollars ($100,000) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
------------------------------------------------------------
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"), or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
--------------------
A. The Company covenants and agrees that, so long as this Note shall be
outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its income and
profits, or upon any of its property, before the same shall become in default,
as well as all lawful claims for labor, materials and supplies which, if unpaid,
might become a lien or charge upon such properties or any part thereof,
provided, however, that the Company shall not be required to pay and discharge
any such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any such tax,
assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and franchises and
comply with all laws applicable to the Company as its counsel may advise,
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar corporations
and carry such other insurance as is usually carried by similar corporations and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
-----------------
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein called
"events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable, whether by
acceleration or otherwise, if such default shall continue uncured for 30 days
after written notice, specifying such default, shall have been given to the
Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be observed or
performed pursuant to the terms hereof, if such default shall continue uncured
for 30 days after written notice, specifying such default, shall have been given
to the Company by the Holder of the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement with
creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which order shall
not have been vacated or set aside or otherwise terminated within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered address by
certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and enforce
his, her or its rights by suit in the specific performance of any covenant or
agreement contained in this Note or in aid of the exercise of any power granted
in this Note or may proceed to enforce the payment of this Note or to enforce
any other legal or equitable fights as such Holder.
4. Miscellaneous
-------------
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate of up
to $100,000 in face amount of identical Notes to be issued (subject to increase
in certain circumstances).
2
<PAGE>
B. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company shall not
be affected by any notice to the contrary. The registered owner of this Note
shall have the right to transfer it by assignment, subject to the provisions
elsewhere contained herein, and the transferee thereof shall, upon his
registration as owner of this Note, become vested with all the powers and rights
of the transferor. Registration of any new owner shall take place upon
presentation of this Note to the Company at its principal offices, together with
a duly authenticated assignment. In case of transfer by operation of law, the
transferee agrees to notify the Company of such transfer and of his address, and
to submit appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee. This Note is transferable only on the
books of the Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time that may
elapse between the maturity of this Note and its presentation for payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights of
a stockholder in the Company, either at law or in equity, and the rights of the
Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Note, if mutilated, the Company shall
execute and deliver a new Note of like tenor and date. Any such new Note
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Note so loss, stolen, destroyed or
mutilated shall be at any time enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or future
stockholder, officer, director or agent of the Company or of any successor
corporation, either directly or through the Company or any successor corporation
under any statute or by the enforcement of any assessment or otherwise, all such
liability of the incorporators, stockholders, officers, directors and agents
being waived, released and surrendered by the Holder hereof by acceptance of
this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporate
By: /s/ Richard Hagen
------------------------------
Richard Hagen Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$100,000 March 18, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"),
for value received, hereby promises to pay to Andrew Friss registered assigns
(the "Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of one hundred
thousand dollars ($100,000) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to the Company with the Securities Act of 1933.
-----------------------------------------------------------------
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"), or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
--------------------
A. The Company covenants and agrees that, so long as this Note shall be
outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its income and
profits, or upon any of its property, before the same shall become in default,
as well as all lawful claims for labor, materials and supplies which, if unpaid,
might become a lien or charge upon such properties or any part thereof,
provided, however, that the Company shall not be required to pay and discharge
any such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any such tax,
assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and franchises
and comply with all laws applicable to the Company as its counsel may advise;
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar corporations
and carry such other insurance as is usually carried by similar corporations;
and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
-----------------
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein called
"events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable, whether by
acceleration or otherwise, if such default shall continue uncured for 30 days
after written notice, specifying such default, shall have been given to the
Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be observed or
performed pursuant to the terms hereof if such default shall continue uncured
for 30 days after written notice, specifying such default, shall have been given
to the Company by the Holder of the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement with
creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which order shall
not have been vacated or set aside or otherwise terminated within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered address by
certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and enforce
his, her or its rights by suit in the specific performance of any covenant or
agreement contained in this Note or in aid of the exercise of any power granted
in this Note or may proceed to enforce the payment of this Note or to enforce
any other legal or equitable rights as such Holder.
4. Miscellaneous
-------------
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate of up
to $100,000 in face amount of identical Notes to be issued (subject to increase
in certain circumstances).
2
<PAGE>
B. The Company may consider and treat the person in whose name
this Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company shall not
be affected by any notice to the contrary. The registered owner of this Note
shall have the right to transfer it by assignment, subject to the provisions
elsewhere contained herein, and the transferee thereof shall, upon his
registration as owner of this Note, become vested with all the powers and rights
of the transferor. Registration of any new owner shall take place upon
presentation of this Note to the Company at its principal offices, together with
a duly authenticated assignment. In case of transfer by operation of law, the
transferee agrees to notify the Company of such transfer and of his address, and
to submit appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee. This Note is transferable only on the
books of the Company by the Holder hereof in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time that may
elapse between the maturity of this Note and its presentation for payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights of
a stockholder in the Company, either at law or in equity, and the rights of the
Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Note, if mutilated, the Company shall
execute and deliver a new Note of like tenor and date. Any such new Note
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Note so lost, stolen, destroyed or
mutilated shall be at any time enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or future
stockholder, officer, director or agent of the Company or of any successor
corporation, either directly or through the Company or any successor
corporation, under any statute or by the enforcement of any assessment or
otherwise, all such liability of the incorporators, stockholders, officers,
directors and agents being waived, released and surrendered by the Holder hereof
by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
------------------------------------
Richard Hagen, Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$100,000 February 25, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"), for
value received, hereby promises to pay to Dr. Dante Greco registered assigns
(the "Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of one hundred
thousand dollars ($100,000) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"); or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall
become in default, as well as all lawful claims for labor, materials
and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof, provided, however, that the Company
shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company as its
counsel may advise;
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by
similar corporations; and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein
called "events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable,
whether by acceleration or otherwise, if such default shall continue
uncured for 30 days after written notice, specifying such default,
shall have been given to the Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof, if such default
shall continue uncured for 30 days after written notice, specifying
such default, shall have been given to the Company by the Holder of
the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement
with creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which
order shall not have been vacated or set aside or otherwise terminated
within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered
address by certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and
enforce his, her or its rights by suit in the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note or may proceed to enforce the payment of
this Note or to enforce any other legal or equitable rights as such Holder.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate
of up to $100,000 in face amount of identical Notes to be issued (subject
to increase in certain circumstances).
2
<PAGE>
B. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company
shall not be affected by any notice to the contrary. The registered owner
of this Note shall have the right to transfer it by assignment subject to
the provisions elsewhere contained herein, and the transferee thereof
shall, upon his registration as owner of this Note, become vested with all
the powers and rights of the transferor. Registration of any new owner
shall take place upon presentation of this Note to the Company at its
principal offices, together with a duly authenticated assignment. In case
of transfer by operation of law, the transferee agrees to notify the
Company of such transfer and of his address, and to submit appropriate
evidence regarding the transfer so that this Note may be registered in the
name of the transferee. This Note is transferable only on the books of the
Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered
owner shall be effective as against all holders or transferees of the Note
not registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time
that may elapse between the maturity of this Note and its presentation for
payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights
of a stockholder in the Company, either at law or in equity, and the rights
of the Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor
and date. Any such new Note executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or
not this Note so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or
future stockholder, officer, director or agent of the Company or of any
successor corporation, either directly or through the Company or any
successor corporation, under any statute or by the enforcement of any
assessment or otherwise, all such liability of the incorporators,
stockholders, officers, directors and agents being waived, released and
surrendered by the Holder hereof by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note to
be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
-----------------------------
Richard Hagen, Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$100,000 February 25, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"), for
value received, hereby promises to pay to Bridget McMahon registered assigns
(the "Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of one hundred
thousand dollars ($100,000) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"); or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall
become in default, as well as all lawful claims for labor, materials
and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof, provided, however, that the Company
shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company as its
counsel may advise,
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by
similar corporations; and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein
called "events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable,
whether by acceleration or otherwise, if such default shall continue
uncured for 30 days after written notice, specifying such default,
shall have been given to the Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof, if such default
shall continue uncured for 30 days after written notice, specifying
such default, shall have been given to the Company by the Holder of
the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement
with creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which
order shall not have been vacated or set aside or otherwise terminated
within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered
address by certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and
enforce his, her or its rights by suit in the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note or may proceed to enforce the payment of
this Note or to enforce any other legal or equitable rights as such Holder.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate
of up to $100,000 in face amount of identical Notes to be issued (subject
to increase in certain circumstances).
2
<PAGE>
B. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company
shall not be affected by any notice to the contrary. The registered owner
of this Note shall have the right to transfer it by assignment, subject to
the provisions elsewhere contained herein, and the transferee thereof
shall, upon his registration as owner of this Note, become vested with all
the powers and rights of the transferor. Registration of any new owner
shall take place upon presentation of this Note to the Company at its
principal offices, together with a duly authenticated assignment. In case
of transfer by operation of law, the transferee agrees to notify the
Company of such transfer and of his address, and to submit appropriate
evidence regarding the transfer so that this Note may be registered in the
name of the transferee. This Note is transferable only on the books of the
Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered
owner shall be effective as against all holders or transferees of the Note
not registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time
that may elapse between the maturity of this Note and its presentation for
payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights
of a stockholder in the Company, either at law or in equity, and the rights
of the Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor
and date. Any such new Note executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or
not this Note so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or
future stockholder, officer, director or agent of the Company or of any
successor corporation, either directly or through the Company or any
successor corporation, under any statute or by the enforcement of any
assessment or otherwise, all such liability of the incorporators,
stockholders, officers, directors and agents being waived, released and
surrendered by the Holder hereof by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
-----------------------------
Richard Hagen, Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRFD FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$150,000 May 19, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"), for
value received, hereby promises to pay to Sheldon Miller registered assigns (the
"Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of one hundred
fifty thousand dollars ($150,000) in such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"); or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall
become in default, as well as all lawful claims for labor, materials
and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof, provided, however, that the Company
shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company as its
counsel may advise;
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by
similar corporations; and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein
called "events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable,
whether by acceleration or otherwise, if such default shall continue
uncured for 30 days after written notice, specifying such default
shall have been given to the Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof, if such default
shall continue uncured for 30 days after written notice, specifying
such default, shall have been given to the Company by the Holder of
the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement
with creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which
order shall not have been vacated or set aside or otherwise terminated
within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered
address by certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and
enforce his, her or its rights by suit in the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note or may proceed to enforce the payment of
this Note or to enforce any other legal or equitable rights as such Holder.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate
of up to $150,000 in face amount of identical Notes to be issued (subject
to increase in certain circumstances).
2
<PAGE>
B. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company
shall not be affected by any notice to the contrary. The registered owner
of this Note shall have the right to transfer it by assignment, subject to
the provisions elsewhere contained herein, and the transferee thereof
shall, upon his registration as owner of this Note, become vested with all
the powers and rights of the transferor. Registration of any new owner
shall take place upon presentation of this Note to the Company at its
principal offices, together with a duly authenticated assignment. In case
of transfer by operation of law, the transferee agrees to notify the
Company of such transfer and of his address, and to submit appropriate
evidence regarding the transfer so that this Note may be registered in the
name of the transferee. This Note is transferable only on the books of the
Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered
owner shall be effective as against all holders or transferees of the Note
not registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time
that may elapse between the maturity of this Note and its presentation for
payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights
of a stockholder in the Company, either at law or in equity, and the rights
of the Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor
and date. Any such new Note executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or
not this Note so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or
future stockholder, officer, director or agent of the Company or of any
successor corporation, either directly or through the Company or any
successor corporation, under any statute or by the enforcement of any
assessment or otherwise, all such liability of the incorporators,
stockholders, officers, directors and agents being waived, released and
surrendered by the Holder hereof by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
-----------------------------
Richard Hagen, Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$50,000 February 25, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"),
for value received, hereby promises to pay to Harvey Stober registered
assigns (the "Holder") on demand or prior thereto as hereinafter provided
(the "Maturity Date") at the principal offices of the Company, the principal
sum of fifty thousand dollars ($50,000) in such coin or currency of the
United States of America as at the time of payment shall be legal tender for
the payment of public and private debts, and to pay interest on the
outstanding principal balance at the rate of eight percent (8%) per annum
from the date hereof until the Company's obligation with respect to the
payment of such principal sum shall be discharged as herein provided.
Interest hereunder shall accrue from the date of this Note and shall be
payable together with principal at the Maturity Date, in like coin or
currency to the Holder hereof at the office of the Company as hereinabove set
forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
The Holder agrees that the Note may not be sold, transferred,
pledged, hypothecated or otherwise disposed of except as follows: (1) to a
person who, in the opinion of counsel to the Company, is a person to whom the
Note may legally be transferred without registration and without the delivery
of a current prospectus under the Securities Act of 1933, as amended (the
"1933 Act"), or (2) to any person upon delivery of a prospectus then meeting
the requirements of the 1933 Act relating to such Note and the offering
thereof for such sale or disposition, and thereafter to all successive
assignees.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its income
and profits, or upon any of its property, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any
part thereof, provided, however, that the Company shall not be required to
pay and discharge any such tax, assessment, charge, levy or claim so long as
the validity thereof shall be contested in good faith by appropriate
proceedings and the Company shall set aside on its books adequate reserves
with respect to any such tax, assessment, charge, levy or claim so contested.
1
<PAGE>
(ii) Do or cause to be done all things necessary to preserve and keep
in full force and effect its corporate existence, rights and franchises and
comply with all laws applicable to the Company as its counsel may advise,
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar corporations
and carry such other insurance as is usually carried by similar corporations;
and
(iv) At all times keep true and correct books, records and accounts.
3. Events of Default
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein
called "events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest on
this Note when and as the same shall become due and payable, whether by
acceleration or otherwise, if such default shall continue uncured for 30 days
after written notice, specifying such default, shall have been given to the
Company by the Holder of the Note;
(ii) Default in the due observance or performance of any covenant,
condition or agreement on the part of the Company to be observed or performed
pursuant to the terms hereof, if such default shall continue uncured for 30
days after written notice, specifying such default, shall have been given to
the Company by the Holder of the Note;
(iii) Application for, or consent to, the appointment of a receiver,
trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its debts
as they mature;
(v) General assignment by the Company for the benefit of creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy or a
petition or an answer seeking reorganization or an arrangement with
creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which order
shall not have been vacated or set aside or otherwise terminated within 30
days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered address
by certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and enforce
his, her or its rights by suit in the specific performance of any covenant or
agreement contained in this Note or in aid of the exercise of any power
granted in this Note or may proceed to enforce the payment of this Note or to
enforce any other legal or equitable rights as such Holder.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate of
up to $50,000 in face amount of identical Notes to be issued (subject to
increase in certain circumstances).
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<PAGE>
B. The Company may consider and treat the person in whose name this Note
shall be registered as the absolute owner thereof for all purposes whatsoever
(whether or not this Note shall be overdue) and the Company shall not be
affected by any notice to the contrary. The registered owner of this Note shall
have the right to transfer it by assignment, subject to the provisions elsewhere
contained herein, and the transferee thereof shall, upon his registration as
owner of this Note, become vested with all the powers and rights of the
transferor. Registration of any new owner shall take place upon presentation of
this Note to the Company at its principal offices, together with a duly
authenticated assignment. In case of transfer by operation of law, the
transferee agrees to notify the Company of such transfer and of his address, and
to submit appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee. This Note is transferable only on the
books of the Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time that
may elapse between the maturity of this Note and its presentation for
payment.
D. The Holder shall not, by virtue hereof, be entitled to any rights
of a stockholder in the Company, either at law or in equity, and the rights
of the Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Note, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Note, if mutilated, the Company shall execute
and deliver a new Note of like tenor and date. Any such new Note executed and
delivered shall constitute an additional contractual obligation on the part of
the Company, whether or not this Note so lost, stolen, destroyed or mutilated
shall be at any time enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past, present or future
stockholder, officer, director or agent of the Company or of any successor
corporation, either directly or through the Company or any successor
corporation, under any statute or by the enforcement of any assessment or
otherwise, all such liability of the incorporators, stockholders, officers,
directors and agents being waived, released and surrendered by the Holder
hereof by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this
Note to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
----------------------------
Richard Hagen, Chairman & CEO
3
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.
AMERICAN QUANTUM CYCLES, INC.
8% SUBORDINATED NOTE
DUE October 1, 1999
$50,000 February 25, 1999
AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the "Company"), for
value received, hereby promises to pay to Abe Goldberger registered assigns (the
"Holder") on demand or prior thereto as hereinafter provided (the "Maturity
Date") at the principal offices of the Company, the principal sum of fifty
thousand dollars ($50,000) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal
balance at the rate of eight percent (8%) per annum from the date hereof until
the Company's obligation with respect to the payment of such principal sum shall
be discharged as herein provided. Interest hereunder shall accrue from the date
of this Note and shall be payable together with principal at the Maturity Date,
in like coin or currency to the Holder hereof at the office of the Company as
hereinabove set forth.
1. Transfers of Note to Comply with the Securities Act of 1933.
The Holder agrees that the Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Company, is a person to whom the Note may legally
be transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "1933 Act"); or
(2) to any person upon delivery of a prospectus then meeting the requirements of
the 1933 Act relating to such Note and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
2. Covenants of Company
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall
become in default, as well as all lawful claims for labor, materials
and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof, provided, however, that the Company
shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Company
shall set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested.
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(ii) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company as its
counsel may advise;
(iii) Keep adequately insured, by financially sound reputable
insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by
similar corporations; and
(iv) At all times keep true and correct books, records and
accounts.
3. Events of Default
A. This Note shall become and be due and payable upon written demand
made by the Holder hereof if one or more of the following events, herein
called "events of default", shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable,
whether by acceleration or otherwise, if such default shall continue
uncured for 30 days after written notice, specifying such default,
shall have been given to the Company by the Holder of the Note;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof, if such default
shall continue uncured for 30 days after written notice, specifying
such default, shall have been given to the Company by the Holder of
the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement
with creditors; or
(vii) Entering against the Company of a court order approving a
petition filed against it under the Federal bankruptcy laws, which
order shall not have been vacated or set aside or otherwise terminated
within 30 days.
B. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at his or her registered
address by certified mail.
C. In case any one or more of the events of default specified above
shall happen and be continuing, the Holder may proceed to protect and
enforce his, her or its rights by suit in the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note or may proceed to enforce the payment of
this Note or to enforce any other legal or equitable rights as such Holder.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to authorization
of the Board of Directors of the Company, which provides for an aggregate
of up to $50,000 in face amount of identical Notes to be issued (subject to
increase in certain circumstances).
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<PAGE>
B. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company
shall not be affected by any notice to the contrary. The registered owner
of this Note shall have the right to transfer it by assignment, subject to
the provisions elsewhere contained herein, and the transferee thereof
shall, upon his registration as owner of this Note, become vested with all
the powers and rights of the transferor. Registration of any new owner
shall take place upon presentation of this Note to the Company at its
principal offices, together with a duly authenticated assignment. In case
of transfer by operation of law, the transferee agrees to notify the
Company of such transfer and of his address, and to submit appropriate
evidence regarding the transfer so that this Note may be registered in the
name of the transferee. This Note is transferable only on the books of the
Company by the Holder hereof, in person or by his attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered
owner shall be effective as against all holders or transferees of the Note
not registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to the
registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note upon or after
maturity. No interest shall be due on this Note for such period of time
that may elapse between the maturity of this Note and its presentation for
payment,
D. The Holder shall not, by virtue hereof, be entitled to any rights
of a stockholder in the Company, either at law or in equity, and the rights
of the Holder are limited to those expressed in this Note.
E. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor
and date. Any such new Note executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or
not this Note so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
F. This Note shall be construed and enforced in accordance with the
laws of the State of Florida.
G. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past present or
future stockholder, officer, director or agent of the Company or of any
successor corporation, either directly or through the Company or any
successor corporation, under any statute or by the enforcement of any
assessment or otherwise, all such liability of the incorporators,
stockholders, officers, directors and agents being waived, released and
surrendered by the Holder hereof by acceptance of this Note.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note
to be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
a Florida corporation
By: /s/ Richard Hagen
-----------------------------
Richard Hagen, Chairman & CEO
3
AMERICAN QUANTUM CYCLES, INC.
March 31, 1999 $750,000.00
10% SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, AMERICAN QUANTUM CYCLES, INC., a Florida corporation
("the "Company"), hereby promises to pay to the order of ANCHOR CAPITAL
CORPORATION, a Maryland corporation (the "Lender"), at the offices of the Lender
at 1607 Spring Ridge Road, Potomac, Maryland 20854 or such other place as the
Lender may specify, the principal sum equal to the lesser of SEVEN HUNDRED FIFTY
THOUSAND AND NO/1OO DOLLARS ($750,000.00) or the then aggregate unpaid principal
amount of all advances made hereunder by Lender to the Company, together with
interest as specified herein.
This Note evidences advances made and to be made by the Lender from time to
time under a revolving line of credit governed by a certain Loan and Security
Agreement of even date herewith made by the Company and the Lender (the "Loan
Agreement"). Capitalized terms used herein but not defined herein shall have the
respective meanings given them in the Loan Agreement. The Company may borrow,
repay, and re-borrow advances from time to time under said revolving line of
credit, subject to the terms and conditions set forth in the Loan Agreement.
The Company further promises to pay interest on the outstanding amount of
all advances made under this Note at the rate of ten percent (10%) per annum,
commencing from the date of the initial advance hereunder and until all amounts
of principal and interest accrued thereon are paid in full, except that during
the existence of any Event of Default, the principal outstanding under this Note
shall bear interest at the rate of eighteen percent (18%) per annum at the
option of the Lender. Interest hereunder shall be payable monthly in arrears,
commencing May 1, 1999.
Outstanding principal under this Note may be prepaid by the Company, in
whole or in part, without premium or penalty at any time. The entire outstanding
principal balance of this Note, together with all accrued but unpaid interest,
shall be due and payable on the "Maturity Date" as defined in the Loan
Agreement.
At the option of Lender, the entire unpaid principal balance of this Note,
together with all unpaid interest accrued thereon and all other sums owing under
this Note or the Loan Agreement, shall become immediately due and payable,
without notice or demand, upon the occurrence of any of Event of Default as
defined in the Loan Agreement. If any such Event of Default shall occur, then
Lender shall be entitled to pursue any and all rights and remedies provided by
applicable law and/or under the terms of this Note or the Loan Agreement,
including without limitation the foreclosure of any security interest and
realization against any collateral for this Note, all of which rights and
remedies shall be cumulative and may be exercised successively or concurrently.
Lender's delay in exercising or failure to exercise any rights or remedies to
which Lender may be entitled in the event of any default shall not constitute a
waiver of any of Lender's rights or remedies with respect to that or any
subsequent default, whether of the same or a
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<PAGE>
different nature, nor shall any single or partial exercise of any right or
remedy by Lender preclude any other or further exercise of that or any other
right or remedy.
The Company does hereby: (a) waive demand, presentment, protest, notice of
dishonor, suit against or joinder of any other person, and all other
requirements necessary to charge or hold the Company liable with respect to this
Note; (b) waive any right to trial by jury in any legal action or proceeding to
enforce their obligations hereunder, waive any right to immunity from any such
action or proceeding and waive any immunity or exemption of any property,
wherever located, from garnishment, levy, execution, seizure or attachment prior
to or in execution of judgment, or sale under execution or other process for the
collection of debts; (c) waive any right to interpose any set-off or
non-compulsory counterclaim or to plead laches or any statute of limitations as
a defense in any such action or proceeding, and waive (to the extent lawfully
waivable) all provisions and requirements of law for the benefit of the Company
now or hereafter in force; (d) submit to the jurisdiction of the state and
federal courts in the State of Maryland for purposes of any such action or
proceeding; (e) agree that the venue of any such action or proceeding may be
laid in Montgomery County, Maryland (in addition to any county in which any
collateral for this Note is located), and waive any claim that the same is an
inconvenient forum; and (f) stipulate that service of process in any such action
or proceeding shall be properly made if mailed by any form of registered or
certified mail (airmail if international), postage prepaid, to the address then
registered in Lender's records for the Company, and that any process so served
shall be effective ten days after mailing. No provision of this Note shall limit
Lender's right to serve legal process in any other manner permitted by law or to
bring any such action or proceeding in any other competent jurisdiction.
The Company agrees to pay all filing fees and similar charges and all costs
incurred by Lender in collecting or securing or attempting to collect or secure
this Note, including attorney's fees, whether or not involving litigation and/or
appellate, administrative or bankruptcy proceedings. The Company agrees to pay
any documentary stamp taxes, intangible taxes, sales taxes or other taxes
(except for federal or Maryland franchise or net income taxes) which may now or
hereafter apply to this Note or the Loan Agreement or any security therefor, and
the Company agrees to indemnify and hold Lender harmless from and against any
liability, costs, attorney's fees, penalties, interest or expenses relating to
any such taxes, as and when the same may be incurred.
This Note is secured by the Collateral described in the Loan Agreement. As
additional security for the payment of this Note and any other indebtedness,
liability or obligation arising in connection therewith, the Company hereby
pledges and assigns to Lender and grants Lender a security interest in, and a
right to set off against, any and all monies, accounts, balances, credits,
deposits, collections, drafts, bills, notes and other property of the Company of
every kind (whether tangible or intangible) from time to time in the actual or
constructive possession of (or in transit to) Lender or its correspondents or
agents in any capacity (excluding, however, any Individual Retirement Accounts
and/or Keogh accounts), in addition to and not in substitution for any other
collateral or security Lender may have for this Note.
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<PAGE>
This Note shall be governed, construed and enforced in accordance with the
laws of the State of Maryland.
The Company represents and warrants to the Lender that the advances to be
made under this Note shall be used by the Company for the commercial purposes
described in the Loan Agreement, and that because of the commercial nature of
the transaction evidenced hereby this Note and the advances hereunder are exempt
from any usury law of the State of Maryland or any other Maryland law imposing a
maximum amount of interest that may be charged by the Lender for extending
credit to the Company. In no event shall any agreed to or actual exaction
charged, reserved or taken as an advance or forbearance by Lender as
consideration for the advances under this Note exceed the limits (if any)
imposed or provided by the law applicable from time to time to this Note for the
use or detention of money or for forbearance in seeking its collection; Lender
hereby waives any right to demand such excess. In the event that the interest
provisions of this Note or any exactions provided for in this Note or the Loan
Agreement or any other document shall result at any time or for any reason in an
effective rate of interest that transcends the maximum interest rate permitted
by applicable law (if any), then without further agreement or notice the
obligation to be fulfilled shall be automatically reduced to such limit and all
sums received by Lender in excess of those lawfully collectible as interest
shall be applied against principal immediately upon Lender's receipt thereof,
with the same force and effect as though the payor had specifically designated
such extra sums to be so applied to principal and Lender had agreed to accept
such extra payment(s) as a premium-free prepayment or prepayments. During any
time that this Note bears interest at the maximum lawful rate, interest shall be
calculated on the basis of the actual number of days in the respective calendar
year rather than an assumed year of 360 days.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Note, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Note, if mutilated, the Company shall execute
and deliver a new Note of like tenor and date.
Any provision of this Note which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction only, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction, and to this end the provisions of this Note
are declared to be severable.
All of the terms of this Note shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of the Lender and its
successors and assigns.
The Company and the Lender hereby severally, voluntarily, knowingly and
intentionally WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY in any legal action or
proceeding arising under this Note or the Loan Agreement or any other document
concerning this Note and/or any collateral therefor or pertaining to any
transaction related to or contemplated in the Loan Agreement, regardless of
whether such action or proceeding concerns any contractual or tortious or other
claim. The Company acknowledges that this waiver of jury trial is a material
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<PAGE>
inducement to Lender in extending the credit described herein, that Lender would
not have extended such credit without this jury trial waiver, and that the
Company has been represented by an attorney or has had an opportunity to consult
with an attorney in connection with this Note and understands the legal effect
of this jury trial waiver.
IN WITNESS WHEREOF, AMERICAN QUANTUM CYCLES, INC. has caused this Note to
be signed in its name by its President.
AMERICAN QUANTUM CYCLES, INC.
By /s/ Illegible
----------------------
STATE OF NEW YORK )
) SS:
COUNTY OF NEW YORK )
I hereby certify that the foregoing promissory note was executed and
acknowledged before me, the undersigned authority, this 31st day of March
1999 in the state and county aforesaid, by Richard K. Hagen, as CEO of the
maker named herein, who personally appeared before me, is personally known to
me or produced a driver's license as identification, and did not take an
oath.
Notary: /s/ Keith E. Reich
----------------------------------------
[NOTARIAL SEAL] Print Name:
Notary Public, State of
-------------------------
My commission expires:
--------------------------
KEITH E. REICH
Notary Public, State of New York
No. 31-4760868
Qualified in Westchester County
Commission Expires May 2, 2000
4
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made as of March 31,
1999 between AMERICAN QUANTUM CYCLES, INC., a Florida corporation (the
"Company"), having its address at 731 Washburn Road, Melbourne, Florida 32934,
and ANCHOR CAPITAL CORPORATION, a Maryland corporation (the "Lender"), having
its address at 11607 Spring Ridge Road, Potomac, Maryland 20854.
WITNESSETH:
WHEREAS, the Company is in the business of manufacturing and assembling
motorcycles at its plant in Melbourne, Florida, and has requested the Lender to
finance the Company's purchase of certain parts inventory from the Company's
vendors for such manufacture and assembly;
WHEREAS, the Lender is prepared to establish a line of credit to finance
such inventory purchases provided that the advances therefor are secured by a
purchase-money security interest in such inventory and the accounts and proceeds
generated thereby and provided that the Company meets certain performance
projections represented by the Company to the Lender;
NOW, THEREFORE, in consideration of the sum of $10.00 and other good and
valuable considerations, the Company and the Lender agree as follows:
1. DEFINITIONS. As used in this Agreement, the following capitalized terms
shall have the meanings set forth below:
(a) "Account Debtor" means the motorcycle dealer or other person who is
obligated on an Account.
(b) "Account" means any account as that term is defined in the Uniform
Commercial Code as in effect in any jurisdiction in which any of the Collateral
may at the time be located (the "U.C.C.") and includes any right of the Company
to payment for goods sold or leased or for services rendered or money loaned
which is not evidenced by an instrument or chattel paper (as those terms are
defined in the U.C.C.) whether or not it has been earned by performance.
(c) "Anchor Account" means a deposit account in the name of the Company
over which the Lender shall have sole signature authority, established at a
depositary institution approved by the Lender and pledged to the Lender as
additional security for the Obligations.
(d) "Cash Flow Projections" means the Company's cash flow projections for
the term of this Agreement, attached hereto as Exhibit "A".
(e) "Chattel Paper" means any chattel paper as that term is defined in the
U.C.C.
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(f) "Collateral" means (i) all of the Company's Purchase Orders, Accounts,
General Intangibles, Chattel Paper and Instruments now existing or hereafter
arising; (ii) all guarantees of Company's existing and future Accounts, General
Intangibles, Chattel Paper and Instruments and all other security held by the
Company for the payment and satisfaction thereof; (iii) all of the Company's
Inventory now owned or hereafter acquired; (iv) all of the Company's books and
records which relate to the Company's Inventory, Accounts, General Intangibles,
Chattel Paper and Instruments or guarantees thereof; (v) all insurance on all of
the foregoing and the proceeds of that insurance; (vi) the Anchor Account and
all funds deposited therein from time to time; and (vii) all cash and noncash
proceeds and products of all of the foregoing and the proceeds and products of
other proceeds and products. The Collateral does not include any of the
Company's equipment as that term is defined in the U.C.C.
(g) "Collateral Base" means, for any week during the term of this
Agreement, the sum of (i) seventy-five percent (75%) of "Net Receivables
Outstanding" (shown as line item 233 in attached Exhibit "A") plus (ii)
one-third (1/3) of "Net Gordon Inventory at End of Week" (shown as line item 213
in attached Exhibit "A") as shown in the respective Weekly Report.
(h) "Commitment" means the obligation of the Lender to make Loans up to but
not exceeding the aggregate principal amount of $750,000 at any one time
outstanding, subject to the terms and conditions of this Agreement.
(i) "Cumulative Cash Collected" means the cumulative amount of funds
received in the Anchor Account from dealers or from any Floor Plan Lender as
payment for motorcycles built and shipped pursuant to Purchase Orders approved
for funding by the Lender, computed on a weekly basis and included in each
Weekly Report by the Company; the amount of "Cumulative Cash Collected" is
projected in the Cash Flow Projections as line item 232.
(j) "Cumulative Sales" means the cumulative amount of the Company's sales
to dealers of motorcycles built and shipped pursuant to Purchase Orders approved
for funding by the Lender, expressed in dollars based on the actual sales price,
computed on a weekly basis and included in each Weekly Report by the Company;
the amount of "Cumulative Sales" is projected in the Cash Flow Projections as
line item 230.
(k) "Default Rate" is defined in Section 3(h).
(1) "Event of Default" is defined in Subsection 8(a).
(m) "Floor Plan Lender" means Bombardier Capital Inc. or Transamerica
Commercial Finance Corporation or another commercial floor plan lender
reasonably acceptable to the Lender who agrees in writing to extend floor plan
financing to dealers of the Company's motorcycles.
(n) "General Intangibles" means all general intangibles as that term is
defined in the U.C.C., including, without limitation, all books, correspondence,
credit files, records and other documents, computer programs, computer tapes and
cards and other paper and documents in the
2
<PAGE>
possession or control of the Company or in the possession or control of any
affiliate or computer service bureau, and all contract rights, claims, chooses
in action, judgments, patents, patent applications, trademarks, license
agreements, royalty payments, copyrights, service names, service marks, logos,
goodwill and deposit accounts.
(o) "Instruments" means all instruments as that term is defined in the
U.C.C.
(p) "Inventory" means any inventory as that term is defined in the U.C.C.
and shall include tangible personal property held for sale or lease or to be
furnished under contracts of service, tangible personal property which the
Company has so leased or furnished, and raw materials, work in process and
materials used, produced or consumed in the Company's business, and shall
include tangible personal property returned to the Company by a purchaser or
lessor thereof following the sale or lease thereof by the Company. All
equipment, accessories and parts related to, attached to or added to items of
Inventory or used in connection therewith and all accessions thereto shall be
deemed to be part of the Inventory.
(q) "Loan" or "Loans" means an advance or advances of funds made by the
Lender from time to time to or for the benefit of the Company as set forth in
this Agreement.
(r) "Maturity Date" means June 30, 1999, or such later date to which the
Lender may in its sole discretion extend the final date for payment of the
Company's Obligations to the Lender.
(s) "Note" means that certain 10% Secured Promissory Note of even date
herewith made by the Company payable to the Lender in the maximum principal
amount of $750,000 to evidence the Loans, and any renewal, replacement or
substitute note made with respect thereto.
(t) "Obligations" means all existing and future liabilities and
obligations of the Company to the Lender, whether absolute or contingent of any
nature whatsoever, now existing or hereafter incurred arising out of or provided
for in this Agreement or the Note and all obligations of the Company to the
Lender created or referred to in the Purchase Agreement.
(u) "Offering" means the proposed public offering by the Company of
1,600,000 shares of its common stock (excluding the underwriter's over-allotment
option) and the proposed public offering by certain selling shareholders of
928,000 shares of common stock.
(v) "Permitted Liens" means all liens and security interests against the
Collateral of record on the date of this Agreement.
(w) "Proceeds" means whatever is received when Collateral is sold,
exchanged, collected or otherwise disposed of.
(x) "Purchase Agreement" means the Purchase Agreement of even date herewith
made by and between the Company and the Lender regarding the Lender's purchase
of common stock in the Company.
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(y) "Purchase Order" means an unconditional valid and binding written
purchase order for one or more motorcycles submitted to the Company by a dealer,
substantially in the form attached hereto as Exhibit "B" (or another form
reasonably acceptable to the Lender), which purchase order either (i) is
approved by a Floor Plan Lender for funding under the Company's dealer financing
program or (ii) is supported by a deposit for at least one-third of the purchase
price of the motorcycle(s) ordered.
(z) "Termination Date" means June 30, 1999 or the termination of the
Commitment pursuant to Section 8(b) hereof, whichever is earlier.
(aa) "Weekly Report" means a report prepared for the Lender by the Company
and certified by its chief operating officer for each week during the term of
this Agreement, showing the actual operating results achieved by the Company for
each line item in the Cash Flow Projections, compared to the amounts projected
for each such line item.
2. LINE OF CREDIT AND LOANS. The Lender agrees, on the terms and subject to
the conditions of this Agreement, to establish a revolving line of credit for
the Company and to advance Loans to the Company until the Termination Date at
the rate of up to $10,000 per motorcycle ordered under Purchase Orders submitted
by the Company and approved by the Lender in its reasonable discretion.
(a) Purchase Orders. Purchase Orders shall be submitted to the Lender once
each week together with the Weekly Report by the Company described hereinbelow.
Each submission of a Purchase Order by the Company to the Lender shall
constitute a representation by the Company that (i) the copy of the Purchase
Order delivered to the Lender is true, correct and complete, (ii) the Purchase
Order represents a valid and binding order from a dealer for the immediate
delivery of the number of motorcycles identified therein, (iii) the Purchase
Order is in full force and effect and has not been modified, amended, rescinded
or revoked, (iv) the dealer named in the Purchase Order is obligated to pay for
the motorcycle(s) identified therein, and (v) either the Purchase Order has been
approved for floor plan financing by a Floor Plan Lender, or the Company has
received a deposit for one-third of the purchase price and has deposited the
same in the Anchor Account. In addition, the Company may submit to the Lender
for funding a Purchase Order for a cash sale of a motorcycle to a dealer that is
neither covered by a Floor Plan Lender nor by a deposit, provided that (A) the
dealer is obligated under a written dealer agreement to pay the initial
one-third deposit when the Company commences assembly of the motorcycle, (B)
the dealer's credit is acceptable to the Lender, and (C) the Lender shall not be
required to advance Loan funds for more than one such motorcycle without a
deposit at any one time. To the extent that the dealer's purchase price for any
such motorcycle covered by a Purchase Order is less than $17,588, the Lender may
reduce the $10,000 Loan amount for that motorcycle proportionately. The Lender
shall not be required to approve any Purchase Order from a dealer that has
refused to accept delivery from the Company under any previous Purchase Order or
(if the Purchase Order is to be covered by floor plan financing) that is in
default under the floor plan financing provided by a Floor Plan Lender. If any
Purchase Order against which
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the Lender has advanced Loans is thereafter canceled by the respective dealer,
then the amount of subsequent Loans otherwise available to the Company shall be
reduced by $10,000.
(b) Weekly Limits. Regardless of the number of motorcycles covered by
approved Purchase Orders submitted to the Lender from time to time, the Lender
shall not be required to advance Loans in excess of the following weekly limits
with respect to the maximum principal balance outstanding from time to time and
the maximum cumulative amount of Loans advanced during the term of this
Agreement:
Maximum Maximum
Week Beginning Outstanding Balance Cumulative Loans
-------------- ------------------- ----------------
March 29, 1999 $250,000 $ 250,000
April 5, 1999 $250,000 $ 250,000
April 12, 1999 $250,000 $ 250,000
April 19, 1999 $250,000 $ 250,000
April 26, 1999 $250,000 $ 250,000
May 3, 1999 $400,000 $ 350,000
May 10, 1999 $400,000 $ 450,000
May 17, 1999 $400,000 $ 550,000
May 24, 1999 $400,000 $ 650,000
May 31, 1999 $750,000 $ 830,000
June 7, 1999 $750,000 $1,010,000
June 14, 1999 $750,000 $1,190,000
June 21, 1999 $750,000 $1,400,000
June 28, 1999 $750,000 $1,400,000
Maturity Date $ 0 N/A
Within such limits, the Company may borrow, repay, and reborrow Loans at any
time or from time to time from the date hereof to and including the Termination
Date. To the extent the aggregate principal amount outstanding hereunder may,
from time to time, exceed the foregoing maximum outstanding amount, such excess
shall not constitute or be deemed a waiver or increase of the amount of the
Commitment and shall, at the option of the Lender, be payable on demand and
shall bear interest at the Default Rate specified herein.
(c) Performance Requirements. The Lender has agreed to advance Loans to the
Company in substantial reliance on the Company's Cash Flow Projections
attached to this Agreement as Exhibit "A". At the beginning of each week during
the term of this Agreement, the Company shall deliver to the Lender a Weekly
Report showing the actual operating results achieved by the Company for the
immediately preceding week in comparison to the amount projected for each line
item in the Cash Flow Projections. Each Weekly Report shall include copies of
all relevant Purchase Orders, Floor Plan Lender approvals, parts orders, sales
invoices, shipping papers, and other back-up documentation as the Lender may
request to substantiate the results shown in the Weekly Report. If in any week
during the term of this Agreement the Company fails to achieve the projected
amount of Cumulative Sales or Cumulative Cash Collected as shown in the Cash
Flow Projections, then in the following week: (i) the Lender shall
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<PAGE>
not be required to advance any Loan funds if the amount achieved for the line
item for Cumulative Sales or Cumulative Cash Collected is less than eighty
percent (80%) of the amount projected in the Cash Flow Projections for that line
item; and (ii) if the lowest percentage of achievement for the line item for
Cumulative Sales or Cumulative Cash Collected is between eighty percent (80%)
and one hundred percent (100%) of the amount so projected, then the Loan
otherwise available for that following week shall be reduced to the percentage
actually achieved for the lowest such line item. Amounts achieved in excess of
100% of the projected amount for Cumulative Sales or Cumulative Cash Collected
shall not operate to increase the Loan that the Lender would otherwise be
required to fund in the following week.
(d) Collateral Base Limitations. Commencing with the Weekly Report for the
week of April 19, 1999 and continuing with each Weekly Report thereafter, the
aggregate principal amount of all Loans then outstanding must not exceed the
Collateral Base in order to require the Lender to fund the full amount of the
Loan otherwise available under this Agreement for the following week. To the
extent that the outstanding Loan amount exceeds the Collateral Base in any such
Weekly Report, then Loan to be funded by the Lender in the following week shall
be reduced by the amount of such excess.
3. MANNER OF BORROWING AND PAYMENT. Each Loan shall be disbursed by the
Lender directly to vendors or suppliers of the Company to pay for the purchase
of parts Inventory from such vendors or suppliers in accordance with the
instructions of the Company contained in a Loan request delivered to the Lender.
No Loan funds shall be disbursed directly to the Company unless the Lender
determines to do so in its sole and absolute discretion, in which event the
funds so disbursed shall be used only for the purpose(s) approved by the Lender
in each instance.
(a) Loan Requests. Loans shall be disbursed by the Lender once each week
during the term of this Agreement. Three (3) business days prior to the date on
which the Company desires Lender to disburse Loan funds to the respective
vendors or suppliers, the Company shall deliver to the Lender a completed Loan
request substantially in the form attached hereto as Exhibit "C", together with
an original or copy of the Company's purchase orders to such vendors or
suppliers for the parts Inventory being purchased with the requested Loan. With
respect to any portions of the weekly Loan that are to be disbursed by checks
drawn on the Anchor Account, the Company shall prepare for the Lender's
signature and include with the Loan request all necessary checks payable to the
vendors or suppliers. If any portion of the weekly Loan is to be disbursed by a
wire transfer or cashier's check or certified check, then all instructions for
such other methods of payment shall be included in the Loan request. Lender
shall not be responsible for any errors, mistakes, omissions or inaccuracies in
any such Loan request, parts order, check or payment instructions prepared by
the Company, and the Company shall be solely responsible for the accuracy and
completeness of the same and shall indemnify and hold the Lender harmless from
and against any losses, liabilities, damages, claims, costs or expenses
(including reasonable attorneys fees) incurred by any person as a result of any
such errors, mistakes, omissions or inaccuracies. Subject to the satisfaction of
the respective conditions to each such Loan set forth in Section 4, the Lender
shall disburse the weekly Loan in accordance with the Company's instructions
included in the Loan Request within three (3) business days after the Lender's
receipt
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<PAGE>
of the completed Loan request. If the Lender determines that the Loan request is
incomplete or inaccurate or ambiguous in any respect, the Lender shall promptly
contact the Company for further instructions and shall be relieved of any
obligation to fund the requested Loan until receipt of such further instructions
resolving the incompleteness, inaccuracy or ambiguity.
(b) Disbursement Fees and Expenses. The Company shall pay the Lender a $400
disbursement fee for handling and disbursing each weekly Loan request submitted
by the Company (regardless of how many separate vendor payments are required),
and the Company shall reimburse the Lender for all out-of-pocket costs incurred
by the Lender in connection with any such Loan disbursement, including without
limitation any wire transfer charges, certified check fees, postage and express
delivery charges, or other expenses incurred by the Lender in order to disburse
the Loan in the manner requested by the Company. Such disbursement fees and
costs may at the Lendees option be charged against funds of the Company in the
Anchor Account.
(c) Deposits in Anchor Account. The Company shall establish a restricted
deposit account in the name of the Company at a depositary institution approved
by the Lender, to be known as the "Anchor Account," which shall be assigned to
the Lender and for which the Lender alone shall have the authority to withdraw
funds. If the Anchor Account is established as an interest-bearing account, then
all interest earned on the funds deposited therein from time to time shall be
reported as interest earned by the Company, and the Company shall be responsible
for providing the depositary institution with its federal employer
identification number and any other information or documents necessary to earn
interest on the deposited funds. The Company shall instruct all dealers
submitting Purchase Orders against which Lender advances Loans to remit directly
to the Anchor Account all payments (including any deposits) for motorcycles
covered by such Purchase Order, and the Company shall instruct the respective
Floor Plan Lender financing any such dealer's Purchase Order (if applicable) to
remit payment for the motorcycles by wire transfer of federal funds directly to
the Anchor Account. If any such payments are nevertheless received by the
Company, the Company shall hold the same in trust for the Lender and shall
deposit such payments in the Anchor Account, in the same form received and
together with any necessary endorsements, on the same business day on which such
payments are received by the Company.
(d) Disbursements from Anchor Account. All disbursements of Loans shall be
made from the Anchor Account, whether by checks drawn directly on the Anchor
Account and signed by the Lender, or by other payment methods specified by the
Company in the respective Loan request and funded from monies drawn by the
Lender from the Anchor Account. The Company shall have no authority to withdraw
or disburse funds from the Anchor Account without the signature of the Lender.
All Loans shall be funded first from the monies then on deposit in the Anchor
Account, and to the extent that the collected balance in the Anchor Account is
insufficient to cover any Loan that the Lender is otherwise required to advance
under this Agreement, then the Lender shall credit or deposit sufficient monies
to the Anchor Account to fund the Loan completely. All monies in the Anchor
Account from time to time shall be applied as follows: (i) first, to reimburse
the Lender for any costs or expenses incurred by the Lender that the Company is
required to pay under this Agreement; (ii) next, to pay the Lender's
disbursement
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<PAGE>
fees for handling and disbursing the Loan request; (iii) next, to pay any unpaid
interest accrued on the Loans that is then due and payable; (iv) next, to pay
down the outstanding principal balance of the Loans; and (v) last, provided the
principal balance of the Loans is then zero and no Event of Default then exists,
the balance (if any) in the Anchor Account shall be remitted to the Company
weekly for its use in its business.
(e) Responsibility by the Lender. The Company acknowledges that the Lender
(unlike the Company) is not engaged in the business of manufacturing or
assembling motorcycles or in ordering parts therefor from the Company's vendors
and suppliers, that the Lender will be acting completely in reliance upon the
Company's preparation of checks or parts orders and the Company's instructions
to the Lender included in the Loan requests, and that the Lender does not have
any responsibility whatsoever to determine the accuracy or completeness of any
such matters submitted by the Company to the Lender. The Company agrees that the
Lender shall not be responsible or liable to the Company or to any third party
for, and the Company shall indemnify and hold the Lender harmless against, any
losses, liabilities, damages, claims, costs or expenses, including reasonable
attorney's fees, arising from the Lender's actions or omissions in connection
with this Agreement, except to the extent that a court of competent jurisdiction
holds that the Lender acted fraudulently or with willful misconduct.
(f) Security Interest. As collateral security for the Obligations, the
Company hereby grants the Lender a lien upon and a security interest in the
Anchor Account and all funds held therein from time to time. If requested by the
Lender, the Company shall execute a blocked account agreement, a lockbox
agreement, an account assignment agreement and/or such other documentation as
the Lender may require to evidence and perfect its lien, security interest and
control over the Anchor Account. During the existence of any Event of Default,
the Lender may at its option apply any funds in the Anchor Account in payment
of the Obligations of the Company, and even if the Obligations are then zero the
Lender may refuse to release funds held in the Anchor Account until either the
Event of Default is cured or the Lender's Commitment to advance Loan funds is
released.
(g) Repayment of Principal. Unless repayment is sooner required because of
an Event of Default hereunder, the Company shall repay to the Lender the
aggregate unpaid principal amount of all Loans outstanding on the Maturity Date.
The Loans may be prepaid at any time without premium or penalty.
(h) Interest. The Company agrees (i) to pay interest on the outstanding
principal balance of Loans hereunder at the rate of TEN PERCENT (10%) per annum;
and (ii) to pay interest on any amount of principal which is not paid when due
(whether at stated maturity, by acceleration or otherwise), on demand, at a rate
equal to EIGHTEEN PERCENT (18%) per annum (the "Default Rate"), provided that in
no event shall the rate of interest on Loans hereunder be in excess of the rate
authorized by applicable law. Interest on the Loans accruing during each month
shall be paid by debit to the Anchor Account, and the Lender will furnish the
Company advices setting forth the amount of interest accrued and debited for
each month in which there is an outstanding principal balance of Loans
hereunder. Interest shall be computed on a 360-day year basis. Whenever any
payment to be made hereunder shall be stated to be due
8
<PAGE>
on a Saturday, Sunday, or a public holiday under the laws of the State of
Maryland, such payment may be made on the next succeeding business day, and such
extension of time shall in such case be included in computing interest and
premiums (if any) in connection with such payment.
(i) Commercial Transaction. The Company represents and warrants to the
Lender that the Loans to be advanced under this Agreement shall be used by the
Company for the commercial purposes described in this Agreement, and that
because of the commercial nature of the transaction evidenced hereby this
Agreement the Purchase Agreement, the Note and the Loans advanced hereunder are
exempt from any usury law of the State of Maryland or any other Maryland law
imposing a maximum amount of interest that may be charged by the Lender for
extending credit to the Company. Notwithstanding any contrary provision of this
Agreement, the Purchase Agreement, the Note or any other document, in no event
shall any agreed to or actual exaction charged, reserved or taken as an advance
or forbearance by the Lender as consideration for the Obligations exceed the
limits (if any) imposed or provided by the law applicable from time to time to
the Obligations for the use or detention of money or for forbearance in seeking
its collection; the Lender hereby waives any right to demand such excess. In the
event that any provisions of the Note, this Agreement, the Purchase Agreement or
any other document, or any exactions required thereunder, shall result at any
time or for any reason in an effective rate of interest that transcends the
maximum interest rate permitted by applicable law (if any), then without
further agreement or notice the obligation to be fulfilled shall be
automatically reduced to such limit and all sums received by the Lender in
excess of those lawfully collectible as interest shall be applied against the
principal of the Obligations immediately upon the Lender's receipt thereof, with
the same force and effect as though the payor had specifically designated such
extra sums to be so applied to principal and the Lender had agreed to accept
such extra payment(s) as a premium-free prepayment or prepayments. During any
time that any of the Obligations bear interest at the maximum lawful rate
(whether by application of this paragraph or otherwise), interest shall be
computed on the basis of the actual number of days elapsed and the actual number
of days in the respective calendar year.
4. CONDITIONS OF LENDING.
(a) Initial Loan. The obligation of the Lender to make the initial Loan
to be made by it hereunder is subject to the following conditions precedent:
(i) The Lender shall have received a certified copy of all corporate
actions taken by the Company to authorize the execution, delivery and
performance of this Agreement and the borrowing by the Company hereunder;
(ii) The Company shall have executed and delivered to the Lender the
Note, the Purchase Agreement, the common stock sold to the Lender pursuant to
the Purchase Agreement, and a U.C.C. financing statement describing the
Collateral for filing with the Florida Secretary of State;
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<PAGE>
(iii) The Lender shall have received a satisfactory subordination and
intercreditor agreement executed by Skippack Capital Corp. subordinating its
security interest in those portions of the Collateral pertaining to Purchase
Orders against which the Lender advances Loans;
(iv) The Lender shall have received a satisfactory landlord's waiver or
subordination agreement from the landlord(s) of the premises where the
Inventory of the Company will be kept, agreeing to waive or subordinate any
statutory or contractual landlord's lien against such Inventory; and
(v) The Lender shall have received and approved a copy of all documents
filed with the Securities and Exchange Commission by the Company, including
any such documents pertaining to the Offering.
(b) Each Loan. The obligation of the Lender to make each Loan hereunder
(including the initial Loan) is subject to the following conditions
precedent:
(i) No Event of Default, and no event which with notice or lapse of time
or both would become such an Event of Default, shall have occurred and be
continuing;
(ii) The representations and warranties of the Company hereunder shall
be true on and as of the date of the making of such Loan with the same force
and effect as if made on and as of such date;
(iii) There shall have been no material adverse change to the financial
condition or operations of the Company;
(iv) All Inventory financed with Loans shall have been segregated from
other Inventory on the Company's premises, or otherwise physically identified
as being subject to the Lender's first-priority security interest in a manner
reasonably satisfactory to the Lender;
(v) The Offering shall not have been withdrawn or canceled by the
Company, and there shall have been no material change in the terms,
feasibility or timing of the Offering adverse to the interests of Lender as a
purchaser of the common stock of the Company under the Purchase Agreement;
and
(vi) The Company shall have delivered to the Lender not less than three
(3) business days prior to the date of disbursement a Loan request in the
form attached hereto as Exhibit "C" setting forth the amount of such Loan
and containing a certification by a senior officer of the Company, in form
and substance satisfactory to the Lender, as to the matters specified in the
preceding clauses (i), (ii), (iii), (iv) and (v).
5. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Lender as follows:
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(a) Existence, Authority, Non-Contravention. The Company is a corporation
duly authorized, validly existing, and in good standing under the laws
of the State of Florida, and has all requisite power and authority to own,
lease and operate its properties, to carry on its business as it is now being
conducted, to enter into this Agreement, to issue the Note and to consummate
the transactions contemplated hereby. All actions of the Company necessary to
authorize it to execute, deliver and consummate this Agreement, and to
perform its obligations hereunder and under the Note have been duly and
validly taken and no other further actions or authorizations are required.
This Agreement and the Note constitute the valid, legally binding obligations
of the Company and are enforceable in accordance with their respective terms.
The execution and delivery of this Agreement and the Note and the
consummation of the transactions contemplated herein and therein will not (i)
result in any breach of, or constitute a default under the Articles of
Incorporation or By-Laws of the Company, or any instrument or obligation to
which the Company is a party or by which it is bound; or (ii) violate any
existing statute, order, writ, injunction or decree of any court,
administrative agency or governmental body.
(b) SEC Matters. The Company has filed all reports and statements
required to be filed by the Company with the Securities and Exchange
Commission and no such report or statement contains a misstatement of a
material fact or omits to state a material fact necessary to make the
statements made therein not misleading. The Offering complies and will comply
with all applicable securities laws, and to the best of the Company's
knowledge the Securities and Exchange Commission staff has required no
changes or corrections in the prospectus or other materials for the Offering
that cannot be accomplished by the Company at a reasonable cost.
(c) Financial Statements. The balance sheets and statements of income
and retained earnings of the Company, and all other documents and information
furnished to the Lender, are complete and correct and fairly represent the
financial condition of the Company as of the dates of said financial
statements and results of operations for the periods ending on said dates.
The Company has no contingent obligations, liabilities for taxes, long-term
leases, or unusual forward or long-term commitments not disclosed by, or
reserved against in, said balance sheets or the notes thereto, and at the
present time there are no material unrealized or anticipated losses from any
unfavorable commitments of the Company. Said financial statements were
prepared in accordance with generally accepted accounting principles and
practices of accounting and consistently maintained throughout the periods.
Since the date of the latest of such statements there have been no material
adverse changes in the financial condition of the Company other than as
disclosed in writing to the Lender.
(d) Litigation. There are no suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company which,
if adversely determined, would have a material adverse effect on the
financial condition or business of the Company, and there are no proceedings
pending or to the knowledge of the Company threatened before any governmental
commission, board, bureau or agency against the Company.
(e) Ownership of Properties. With the exception of any security
interest granted to the Lender, and other than as disclosed and described in
writing to the Lender, the Company owns its respective properties free and
clear of all liens, mortgages, pledges, assignments,
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<PAGE>
security interests or other encumbrances with the exception of liens for taxes
not yet due or being contested in good faith by the Company by appropriate
proceedings.
(f) Fictitious Names, Etc. Except as disclosed to the Lender in writing,
the Company does not now use and has not used in the past any trade or
fictitious name in the conduct of its business, has not changed its name, and
has not been the surviving entity in a merger or consolidation or acquired
any business.
6. COVENANTS. The Company covenants and agrees with the Lender that, so
long as the Commitment and the Lender's obligations thereunder shall remain
outstanding, or there shall be any principal balance of Loans outstanding
hereunder, or any interest accrued or other amounts due or to become due
hereunder remain unpaid, the Company will:
(a) Financial Statements. Deliver to the Lender a satisfactory annual
financial statement and supporting documentation for the Company, prepared by
an independent certified public accountant acceptable to the Lender, within
sixty (60) days after the end of the Company's fiscal year. The Company shall
also promptly deliver any other information requested by the Lender from time
to time regarding the respective financial conditions or business operations
of the Company. All financial statements of the Company previously delivered
to the Lender have been prepared in accordance with generally accepted
accounting principles consistently applied and fairly present the correct
respective financial conditions of the Company as of their respective dates,
and the foregoing shall be true with respect to all financial statements of
the Company delivered to the Lender hereafter.
(b) Books and Records. Keep proper books of record and account.
(c) Indebtedness and Liens. Not incur any indebtedness for borrowed
money, except for such indebtedness as is outstanding on the date of this
Agreement and indebtedness incurred by the Company after the date hereof in
connection with the financing of inventory other than inventory financed by
the Lender, or permit any lien, security interest or encumbrance to be
created in or with respect to any asset of the Company, whenever acquired,
except for any such as are in effect on the date of this Agreement and except
for purchase money security interests in assets acquired by the Company after
the date of this Agreement.
(d) Payments. Promptly pay and discharge all amounts as and when due and
to become due on all indebtedness of the Company and all taxes, assessments
and governmental charges or levies imposed upon the Company or upon its
income and profits, or upon any of its property, before the same shall become
a lien upon the Company's assets or property, as well as all lawful claims
for labor, materials and supplies which, if unpaid, would become a lien or
charge upon such properties or any part thereof, provided, however, that the
Company shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be contested in
good faith by appropriate proceedings and the Company shall have set aside on
its books adequate reserves with respect to any such tax, assessment, charge,
levy or claim so contested.
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(e) Common Stock. Not issue any shares of its Common Stock, or any
securities convertible into or exercisable with respect to its Common Stock,
except to the Lender and except for securities sold in an underwritten public
offering or securities issued to the underwriter with respect to any such
offering.
(f) Existence: Mergers; Dispositions. Preserve and maintain its
corporate existence and its rights, privileges and franchises, and not merge
with or into any other corporation or dispose of its assets other than in the
ordinary course of business. Without first notifying the Lender in writing,
the Company shall not change the Company's chief place of business or the
office(s) where the Company's books, papers and records concerning the
Collateral are kept, nor change the Company's name, identity or corporate
structure, nor do business, under any fictitious or assumed name.
(g) Cash Flow Projections. Use its best efforts to conform to the
Company's Cash Flow Projections.
(h) Purchase Agreement. Comply fully with its obligations under the
Purchase Agreement.
7. SECURITY INTEREST. (a) As collateral security for the payment of the
Obligations, the Company hereby grants to the Lender a lien upon and security
interest in all of the "Collateral" as defined in this Agreement, and the
Company warrants and agrees that said security interest shall be a
first-priority security interest with respect to: (i) all Inventory purchased
by the Company with Loan funds, (ii) all Purchase Orders against which the
Lender advances any Loans, (iii) all Accounts, Chattel Paper, Instruments or
General Intangibles arising from or pertaining to any motorcycles sold by the
Company pursuant to any such Purchase Orders; (iv) the Anchor Account; and
(v) all Proceeds, Products and Accessions pertaining to the foregoing.
(b) The Company warrants that it has and at all times will have good
title to the Collateral free of any prior lien (except for Permitted Liens)
and that all Accounts included in the Collateral are bona fide existing
obligations created by the sale and delivery of merchandise or the rendering
of services to customers and arose in the ordinary course of business; and
that such Accounts are not subject to defense, set-off or counterclaim which
in the aggregate would materially impair the value of such Accounts as
collateral for the Obligations.
(c) The Company will promptly notify the Lender if there is any adverse
change in the status of the Collateral that materially impairs its value or
collectibility, or if any defenses, set-offs or counterclaims are asserted by
Account Debtors which in the aggregate materially impair the value or
collectibility of the Accounts.
(d) The Company will preserve the Collateral and its rights against
Account Debtors free and clear of any liens or encumbrances (except for
Permitted Liens) and will keep the Inventory in good condition, insured by
insurers authorized to do business in the jurisdictions where such Collateral
is located from time to time against fire or other casualty loss (with
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<PAGE>
extended coverage in the broadest form), liability and such other hazards as are
customary with companies in the same or similar business and in the same area,
and will cause the Lender's security interest to be endorsed on all policies of
insurance thereon in such manner that all payments for losses will be paid to
the Lender as its interest may appear and will furnish the Lender upon request
with evidence of such insurance.
(e) The Company will segregate all Inventory financed with Loans and
keep the same separate from other Inventory on the Company's premises, or the
Company will otherwise physically identify such Inventory financed with Loans
as being subject to the Lender's first-priority security interest in a manner
reasonably satisfactory to the Lender.
(f) The Lender shall have the right (but not the obligation) at its
option to discharge or pay any taxes, assessments, liens, security interests
or other encumbrances at any time levied or placed on or against the
Collateral or the Company, to pay for the preservation or protection of the
Collateral, to perform any obligations of the Company or cure any default by
the Company under this Agreement, and/or to advance monies for any other
reason or purpose permitted under this Agreement. Any amount so paid or
advanced by the Lender shall be included in the Obligations, shall be secured
by the Collateral and shall be repayable by the Company on demand.
(g) The Lender may sign and file financing statements, security
agreements, recording instruments or other documents or amendments thereto
with respect to the Collateral or any portion thereof without the signature
of the Company, all at the Company's sole expense, and the Company shall
reimburse the Lender on demand for any costs advanced or incurred by the
Lender in connection therewith. At the Lender's option, a carbon,
photographic or other reproduction of this Agreement (or of any financing
statement executed by the Company) shall be sufficient as a financing
statement. At the Lender's request, the Company shall promptly correct patent
errors or omissions in this Agreement, the Note, any financing statement or
any document pertaining to the Loans and shall promptly execute and deliver
such further instruments or documents as may be required to carry out the
intent and purposes of this Agreement.
(h) The Lender is hereby irrevocably appointed the attorney-in-fact of
the Company, which appointment is coupled with an interest, with full power
of substitution, on behalf of the Company to perforn all acts, and to
execute and deliver all endorsements, notices, instruments of assignment and
transfer, deeds, releases, bills of sale or other writings whatsoever, but
only to the extent that Lender determines that such actions or documents are
appropriate to protect and preserve the Collateral and to perfect and
maintain and realize upon the Lender's security interest and rights in the
Collateral. If so requested by the Lender or by any other person, the Company
shall ratify and confirm the acts of the Lender (and/or any substitute) as
the Company's attorney-in-fact.
(i) The Lender shall have the right (but not the obligation) at any time
to take any action the Lender deems appropriate in its sole discretion for
the protection or preservation of any Collateral in its possession or
control. The Lender shall exercise reasonable care with
14
<PAGE>
respect to Collateral in its custody only to the extent required by applicable
law. The Lender shall be deemed to have used reasonable care if such Collateral
is accorded treatment substantially equal to that which the Lender accords its
own property, or if the Lender takes such action for that purpose as the Company
may reasonably request in writing. No omission to do any act not requested by
the Company shall be deemed a failure to exercise reasonable care, and no
omission to comply with any request of the Company shall of itself be deemed a
failure to exercise reasonable care. The Lender is not responsible for any
injury or loss to the Collateral or any part thereof arising from Act of God,
robbery, fire, flood, fraud or any other cause whatsoever beyond the control of
the Lender, and the Lender shall not be liable for any negligent act or default
of any of its collecting agents or correspondents. The Lender shall not be
required to examine or inquire into the validity of any Collateral subject to
this Agreement, or to exchange or collect on any such Collateral, or to take any
action necessary to hold any Account Debtor or other person liable on the
Collateral; the Company hereby waives any obligation of diligence on the part of
the Lender in looking after, preserving or acting with respect to the Collateral
or collecting any sums payable with respect to the Collateral.
8. DEFAULT AND REMEDIES.
(a) Events of Default. The occurrence of any one or more of the following
events, regardless of the cause thereof and whether within or beyond the
control of the Company, shall constitute an "Event of Default" under this
Agreement:
(i) The Company shall fail to make any payment of principal or interest
due under this Agreement or the Note, or fail to pay any fee, charge or other
amount owing to the Lender hereunder when due; or
(ii) The Company shall otherwise default in the performance of any
term, covenant or condition contained herein and such default shall continue
unremedied for a period of five (5) days after written notice thereof has
been given to the Company by the Lender; or
(iii) The occurrence of an Event of Default by the Company under the
Purchase Agreement, or the withdrawal, termination or cancellation of the
Offering, or any material change in the terms, feasibility or timing of the
Offering that is adverse to Lender in its capacity as a purchaser of the
Company's common stock under the Purchase Agreement; or
(iv) The Company shall otherwise default in the performance of any term,
covenant or condition of any other obligations to the Lender secured hereby
and such default shall continue for more than the period of grace, if any,
provided therefor; or
(v) Any representation or warranty made by the Company (or any of its
officers) in connection with the making of any Loan shall at any time prove
to have been incorrect when made in any material respect; or
(vi) Any obligation of the Company for the payment of borrowed money or
for the deferred purchase price of property is not paid when due, whether at
stated maturity, by
15
<PAGE>
acceleration or otherwise, or is declared to be due and payable prior to the
stated maturity thereof, or
(vii) The entry of a final judgment, arbitration award or order not
subject to further appeal against the Company in an amount exceeding $100,000
which shall remain unsatisfied for thirty (30) days after the date of such
entry; or
(viii) The destruction, seizure, confiscation, theft, sale (except in
the ordinary course of business) or further voluntary or involuntary
encumbering of any of the Collateral, or any substantial loss to or decline
in market value of any of the Collateral; or
(ix) If any levy, attachment, execution, charging order, garnishment or
other process shall be issued, or any involuntary lien or encumbrance shall
be filed, against any material portion of the Collateral; or
(x) The Company's admission in writing of its inability to pay its debts
as they mature, or the Company's making a general assignment for the benefit
of creditors, or the filing by or against the Company of a petition seeking
relief under the Bankruptcy Code or a petition or an answer seeking
reorganization, or an arrangement with creditors; or
(xi) If any event shall occur which, in the exclusive judgment of the
Lender, represents or constitutes a material adverse change in the business
or financial condition of the Company; or if at any time the Lender deems
itself insecure for any reason whatsoever (notwithstanding any grace period
in this Agreement or the Note); or if any change or event shall occur which
in the Lender's exclusive judgment impairs any security for the Obligations,
increases the Lender's risk in connection with the Obligations or indicates
that the Company may be unable to perform its obligations under this
Agreement, the Note or the Purchase Agreement.
(b) Rights and Remedies on Default. If any of the foregoing Events of
Default shall occur, then the Lender, in its sole discretion and without
prior notice to the Company, may at any time and from time to time during the
continuation thereof take any or all of the following actions:
(i) declare any or all of the Obligations immediately due and payable;
and/or
(ii) declare any or all other liabilities of the Company to the Lender
immediately due and payable (notwithstanding any contrary provisions thereof)
without demand or notice of any kind; and/or
(iii) require the Company to issue and sell additional common stock to
the Lender as set forth in the Purchase Agreement; and/or
(iv) terminate any obligation which the Lender may have at that time to
make further Loans or extensions of credit or other financial accommodations
to the Company; and/or
16
<PAGE>
(v) set off any and all sums owed to the Company by the Lender in any
capacity (whether or not then due), against the Obligations and/or against
any other liabilities of the Company to the Lender; and/or
(vi) foreclose the Lender's security interest(s) in any or all of the
Collateral as provided by law; and/or
(vii) sell, re-sell, discount or dispose of all or any portion of the
Collateral, or endorse, assign and transfer the same to any third party;
and/or
(viii) require the Company to assemble the Company's books, records,
files, papers, credit information and other data pertaining to the Collateral
and deliver them to the Lender at the Company's expense to a place designated by
the Lender; and/or
(ix) enter the premises of the Company with or without legal process and
take possession of any or all of the Collateral not then in the Lender's
possession and any books, records, files, papers, credit information and
other data pertaining to the Collateral (the Company hereby waiving and
releasing the Lender from, to the fullest extent permitted by law, any and
all claims which the Company might otherwise have against the Lender in
connection therewith or arising therefrom); and/or
(x) accept any or all of the Collateral in discharge of any or all of
the Obligations; and/or
(xi) exercise any and all other rights and remedies with respect to the
Collateral which the Lender may enjoy as a secured party under this
Agreement, the Purchase Agreement, the U.C.C. or any other applicable law.
All rights, remedies and powers granted to the Lender in this Agreement or in
any other agreement or by applicable law shall be cumulative and may be
exercised singly or concurrently on one or more occasions. No delay in
exercising or failure to exercise any of the Lender's rights or remedies shall
constitute a waiver thereof, nor shall any single or partial exercise of any
right or remedy by the Lender preclude any other or further exercise of that or
any other right or remedy. No waiver of any right or remedy by the Lender shall
be effective unless made in writing and signed by the Lender, nor shall any
waiver on one occasion apply to any future occasion, but shall be effective
only with respect to the specific occasion addressed in that signed writing. The
Company shall not be subrogated to any rights of the Lender against any other
party or any Collateral until all sums due to the Lender under the Obligations
shall have been paid in full, and if any of the Obligations shall remain unpaid
after the exercise of any or all of the Lender's rights and remedies, then the
Company shall remain liable for such deficiency.
(c) Upon occurrence of an Event of Default, the Lender shall have the
right at any time, acting if it so chooses in the Company's name, to collect
the Company's Accounts itself, to sell, assign, compromise, discharge or
extend the time for payment of any Account, to institute legal action for the
collection of any Account, and to do all acts and things necessary or
17
<PAGE>
incidental thereto and the Company hereby ratifies all such acts. The Lender
may at any time after the occurrence of such Event of Default and without notice
to the Company, notify any Account Debtor or guarantor thereof that the Account
payable by such Account Debtor has been assigned to the Lender and is to be paid
directly to the Lender. At the Lender's request the Company will so notify
Account Debtors and shall indicate on all billings to Account Debtors that
payments thereon are to be made to the Lender. In the event Account Debtors are
so notified, the Company shall not compromise, discharge, extend the time for
payment or otherwise grant any indulgence or allowance with respect to any
Account without the prior written consent of the Lender.
9. Sale of the Collateral. With respect to any sale or disposition of
any of the Collateral, whether made under the power of sale in this
Agreement, under any applicable provisions of the U.C.C. or other applicable
law, or under judgment or order or decree in any judicial proceeding for the
foreclosure of the Lender's security interest or involving the enforcement of
this Agreement:
(a) The Collateral may be sold, resold, assigned or delivered in one or
more parcels, at the same or at different times, at public or private sale or
at any broker's board or on any securities exchange, for cash or on credit or
for other property, for immediate or future delivery, and at such price(s)
and on such terms as the Lender may determine in its sole discretion, so long
as such disposition is commercially reasonable. Without precluding any other
methods of sale, the sale of the Collateral shall be deemed made in a
commercially reasonable manner if conducted in conformity with reasonable
commercial practices of banks or other financial institutions when disposing
of similar property.
(b) To the fullest extent permitted by law, the Company hereby waives
any and all demand, advertisement or notice (except as required by law), and
any notification required by law with respect to the time and place of such
sale or disposition shall be deemed reasonable if given at least five (5)
days before the time thereof, but notice given in any other reasonable manner
shall also be sufficient. In the case of any sale at a broker's board or on a
securities exchange, the notice shall identify the board or exchange at which
such sale is to be made and the day on which the Collateral (or a portion
thereof) will first be offered for sale. Any public sale of any of the
Collateral shall be held at such time or times within ordinary business hours
at such place or places as the Lender may state in the notice or publication
(if any) of such sale.
(c) The Lender shall not be obligated to sell any of the Collateral if
it determines not to do so, notwithstanding that notice of a sale of such
Collateral may have been given. The Lender may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
the sale, and such sale may be made, without further notice, at the time and
place identified in such announcement. In case of any sale of all or any part
of the Collateral on credit or for future delivery, the Lender may retain the
Collateral sold until the sales price is paid by the purchaser(s) thereof,
but the Lender shall not incur any liability if any such purchaser shall fail
to take up and pay for the Collateral so sold, in which case such Collateral
may again be sold upon like notice.
18
<PAGE>
(d) The Lender may, to the fullest extent permitted by applicable law,
bid for and purchase all or any part of the Collateral in a commercially
reasonable manner, and upon compliance with the terms of sale may hold,
retain and possess and dispose of the same in its own absolute right without
further accountability. The Lender may credit all or any part of the
Obligations against the purchase price(s) so bid, and may deliver any notes
or instruments evidencing any of the Obligations in payment of such purchase
price(s); if the amounts then owing under any such notes or instruments
exceed such purchase price(s), then the same shall be returned to the Lender
after due notation of the partial discharge thereof.
(e) Upon consummation of any sale, the Lender shall have the right to
assign, transfer, endorse and deliver to the respective purchaser(s) the
Collateral or portion thereof so sold. The Lender is hereby irrevocably
appointed the Company's true and lawful attomey-in-fact (which appointment is
coupled with an interest) in the Company's name and stead, with power of
substitution, to make all necessary bills of sale, endorsements and
instruments of assignment and transfer of the Collateral thus sold, and for
such other purposes as the Lender may deem necessary or desirable to
effectuate the provisions of this Agreement. If so requested by the Lender or
by any other person, the Company shall ratify and confirm the acts of the
Lender (and/or any substitute) as the Company's attorney-in-fact.
(f) Such sale shall divest all right, title, interest, equity,
redemption, claim and demand whatsoever of the Company in and to the
Collateral sold and shall be a perpetual bar both at law and in equity
against the Company and the Company's successors and assigns, and against any
and all persons claiming or who may claim all or any part of the Collateral
from, through or under any of them.
(g) A receipt given by the Lender (or its designated agent) shall be a
sufficient discharge to the purchaser(s) at such sale for his or their
purchase money, and none of them shall, after such payment and receipt, be
obliged to see to the application of such purchase money or be answerable for
any loss, misapplication or non-application thereof.
(h) To the extent that the Company may lawfully do so, the Company
agrees not at any time nor in any manner to insist upon, plead, claim or take
the benefit or advantage of any appraisement, valuation, stay, extension or
redemption laws, or any law permitting the Company to direct the order in
which all or any part of the Collateral shall be sold, which may delay,
prevent or otherwise affect the performance or enforcement of this Agreement;
to the fullest extent permitted by law, the Company hereby expressly waives
all benefit or advantage of any such laws now or at any time hereafter in
force and hereby covenants not to hinder, delay or impede the execution of
any power granted or delegated to the Lender in this Agreement, but will
suffer and permit the execution of every such power as though no such laws
were in force.
(i) The Lender shall have no obligation whatsoever to resort first to
any other security which the Lender may hold for the Obligations. The Lender
shall not incur any liability to the Company as a result of the sale of any
Collateral at any private sale conducted in a commercially reasonable manner,
or as a result of any failure to sell or offer for sale any Collateral for
any reason whatsoever or to exercise any other right, privilege, option or
power
19
<PAGE>
granted to the Lender hereunder. To the fullest extent permitted by law, the
Company hereby waives any claims against the Lender arising with respect to any
decrease in the market value of any Collateral during the period held for sale,
or arising by reason of the possibility that the price at which the Collateral
may have been sold was less than the price that might have been obtained had the
sale been otherwise effected, even if the Lender accepts the first offer
received and/or does not offer the Collateral to more than one offeree and/or
limits those who may bid at any public or private sale as set forth in this
Agreement.
(j) A written agreement to sell any Collateral under the provisions
hereof, which agreement the Lender in good faith deems itself bound to
perform, shall be treated as a sale of such Collateral and the Lender shall
be free to carry out such agreement. If such an agreement is then effective,
the Company shall not be entitled to the return of any Collateral subject
thereto, even if after the date of such agreement all Events of Default shall
have been cured or the Obligations shall have been fully paid and performed.
(k) After deducting all costs and expenses of every kind for taking,
retaking, care, safekeeping, collecting, holding, preparing for sale,
selling, delivering and the like (including legal costs, insurance,
commission for sale, and reasonable attorney's fees) and all other charges
against the Collateral, the Lender shall apply the residue of the proceeds of
any such sale or other disposition against any and all amounts remaining
unpaid under the Obligations, all in such order of priority as the Lender may
determine in its sole discretion. The Company shall remain liable for any
deficiency remaining after such application, and any surplus shall be
returned to the Company.
10. Waiver of Rights. To the fullest extent permitted by law, the
Company hereby waives notice, demand, presentment, protest, notice of
dishonor, suit against or joinder of any other person, and all other
requirements necessary to charge or hold the Company liable with respect to
the Obligations. The Company hereby consents and agrees that, at any time and
from time to time without notice, (i) the Lender and the owner(s) of the
Collateral may agree to release, increase, change, substitute or exchange all
or any part of the Collateral, and (ii) the Lender and any person(s) then
primarily liable for the Obligations may agree to renew, extend or compromise
the Obligations in whole or in part or to modify the terms of the Obligations
in any respect whatsoever; no such release, increase, change, substitution,
exchange, renewal, extension, compromise or modification shall release or
affect in any way the liability of the Company or the Lender's rights against
any remaining Collateral, and the Company hereby waives any and all defenses
and claims whatsoever based thereon. Until the Lender receives all sums due
with respect to the Obligations in immediately available funds, the Company
shall not be released from liability unless the Lender expressly releases the
Company in a writing signed by the Lender, and the Lender's release of any
person liable for the Obligations shall not release any other person liable
therefor.
11. Actions or Proceedings. With respect to any legal action or
proceeding arising under this Agreement, the Note or the Purchase Agreement
or concerning the Obligations and/or the Collateral, the Company, to the
fullest extent permitted by law, does hereby: (a) submit to the jurisdiction
of the state and federal courts in the State of Maryland; (b) agree that the
venue of
20
<PAGE>
any such action or proceeding may be laid in Montgomery County, Maryland (in
addition to any county in which any of the Collateral is located) and waive any
claim that the same is an inconvenient forum; (c) stipulate that service of
process in any such action or proceeding shall be properly made if mailed by any
form of registered or certified mail (airmail if international), postage
prepaid, to the address then registered in the Lender's records for the Company,
and that any process so served shall be effective ten days after mailing;
(d) waive any right to immunity from any such action or proceeding and waive any
immunity or exemption of any property, wherever located, from garnishment, levy,
execution, seizure or attachment prior to or in execution of judgment, or sale
under execution or other process for the collection of debts; and (e) waive any
right to interpose any set-off or non-compulsory counterclaim or to plead laches
or any statute of limitations as a defense in any such action or proceeding, and
waive all provisions' and requirements of law for the benefit of the Company now
or hereafter in force. No provision of this Agreement shall limit the Lender's
right to serve legal process in any other manner permitted by law or to bring
any such action or proceeding in any other competent jurisdiction.
12. NOTICES. All communications and notices to any party provided for
hereunder shall be in writing and mailed or delivered to the respective
address of such party specified on the first page of this Agreement, or to
such other address as shall have been designated by such party for the
purpose in a written notice complying with the terms of this Section 12.
13. FEES AND TAXES; INDEMNITY. The Company shall pay on demand all
filing fees and similar charges and all costs incurred by the Lender in
collecting or securing or attempting to collect or secure any Obligations,
including the expenses and reasonable fees of the Lender's legal counsel,
whether or not involving litigation and/or appellate, administrative or
bankruptcy proceedings. The Company agrees to indemnify and hold the Lender
harmless on demand against all expenses, losses, consequences or damages
incurred or suffered by the Lender arising from or relating to any claim,
demand, action or proceeding brought by any person(s) whomsoever in
connection with or relating to the Collateral, the Obligations, this
Agreement or the Note (including without limitation any court costs and the
expenses and reasonable fees of the Lender's legal counsel), except to the
extent that a court of competent jurisdiction shall hold the same to be the
result of the Lender's own gross negligence or willful misconduct. The
Company shall pay any documentary stamp taxes, intangible taxes or other
taxes (except for federal or Florida franchise or income taxes based on the
net income of the Lender) which may now or hereafter apply to the Collateral,
the Obligations, this Agreement, the Note, or any payments made in respect
thereof, and the Company agrees to indemnify and hold the Lender harmless
from and against any liability, costs, attorney's fees, penalties, interest
or expenses relating to any such taxes, as and when the same may be incurred.
The Company shall pay on demand, and indemnify and hold the Lender harmless
against, any and all present or future taxes, levies, imposts, deductions,
charges and withholdings imposed in connection with the Collateral, the
Obligations, this Agreement, the Note, or any payments made in respect
thereof, by the laws or govenmnental authorities of any jurisdiction other
than the State of Florida or the United States of America. All sums payable
by the Company under this Section are and shall be included in the
Obligations and secured by the Collateral.
21
<PAGE>
14. BINDING AGREEMENT. This Agreement shall be binding upon the Company
and its successors and assigns and the terms hereof shall inure to the benefit
of the Lender and its successors and assigns.
15. INTERPRETATION. Whenever used in this Agreement, the term "person"
means any individual, firm, corporation, trust or other organization or
association or other enterprise or any governmental or political subdivision,
agency, department or instrumentality thereof. Whenever used in this
Agreement, the terms "written" or "in writing" mean any form of written
communication and any communication by means of telex, telecopier device,
telegraph or cable. Any reference in this Agreement to a sum expressed in
dollars or with the symbol "$" or "U.S.$" means the lawful currency of the
United States of America, unless such reference expressly identifies another
dollar-denominated currency. Captions and paragraph headings contained in
this Agreement are for convenience only and shall not affect its
interpretation. Whenever used in this Agreement and unless the context
otherwise requires, words in the plural include the singular, words in the
singular include the plural and pronouns of any gender include the other
genders.
16. MISCELLANEOUS. Time is of the essence with respect to the provisions
of this Agreement. This Agreement may be amended but only by an instrument in
writing executed by the party to be burdened thereby. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction only, be ineffective only to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such provision in any
other jurisdiction. To the extent that the Company may lawfully waive any law
that would otherwise invalidate any provision of this Agreement, the Company
hereby waives the same, to the end that this Agreement shall be valid and
binding and enforceable against the Company in accordance with all its terms.
This Agreement shall be governed by, and construed and enforced in accordance
with, the laws of the State of Maryland.
17. WAIVER OF JURY TRIAL. The Company and the Lender hereby severally,
voluntarily, knowingly and intentionally WAIVE ANY AND ALL RIGHTS TO TRIAL BY
JURY in any legal action or proceeding arising under or in connection with
this Agreement, the Note or the Purchase Agreement, regardless of whether
such action or proceeding concerns any contractual or tortious or other
claim. The Company acknowledges that this waiver of jury trial is a material
inducement to the Lender in extending credit to the Company, that the Lender
would not have extended credit to the Company without this jury trial waiver,
and that the Company has been represented by an attorney or has had an
opportunity to consult with an attorney regarding this Agreement and
understands the legal effect of this jury trial waiver.
18. COUNTERPARTS; EXHIBITS. This Agreement may be executed in separate
counterparts by the parties hereto, with the respective signature pages from
separate counterparts assembled into one or more completely executed
documents; this Agreement shall become effective when each party hereto has
executed and delivered to the other party at least one such counterpart. This
Agreement consists of twenty-two (23) pages, plus the following attached
Exhibits, which are incorporated herein by this reference:
22
<PAGE>
EXHIBIT "A" -- Cash Flow Projections
EXHIBIT "B" -- Purchase Order Form
EXHIBIT "C" -- Loan Request Form
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ATTEST: AMERICAN QUANTUM CYCLES, INC., a
Florida corporation
BY: /s/ Illegible
- ----------------------- ---------------------------------
[CORPORATE SEAL] Name:
Title: CEO
ANCHOR CAPITAL CORPORATION, a
Maryland corporation
BY: /s/ Illegible
---------------------------------
Name:
Title: President
23
<PAGE>
Cash Flow Projections (March 1999 - July 1999)
<TABLE>
<CAPTION>
V W X Y Z AA AB AC
---- --- -------- --------- --------- --------- --------- --------
Item March Actual 3/26 29-Mar-99 6-Apr-99 12-Apr-99 19-Apr-99 26-Apr-99
---- ----------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Rent $ 5,800.00 $ 2,971.00 $ 5,800.00 $ -- $ -- $ --
Telephone $ 1,300.00 $ -- $ 12,325.00 $ 325.00 $ 325.00 $ 325.00
Utilities $ 1,020.00 $ 3,300.00 $ 255.00 $ 255.00 $ 255.00 $ 255.00
Cleaning/Ground Maintenance $ 60.00 $ 710.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00
Vehicle Leasing $ 1,695.87 $ -- $ 423.97 $ 423.97 $ 423.97 $ 423.97
Equipment Leasing $ 8,245.94 $ 7,469.00 $ 2,061.49 $ 2,061.49 $ 2,061.48 $ 2,061.49
Payroll Benefits (Health, Life) $ 4,180.00 $ -- $ 1,045.00 $ 1,045.00 $ 1,045.00 $ 1,045.00
Insurance (Product/Corporate Liability) $ 7,083.00 $ 6,000.00 $ 6,270.75 $ 6,270.75 $ 6,270.75 $ 6,270.75
Workman's Compensation $ -- $ 28,138.00 $ -- -- -- --
Legal/Accounting $ -- $ 7,766.00 $ -- -- -- --
Commissions/Fees /Floorplanning Escrow $ 520.00 $ 2,880.00 $ 102,430.00 $ 130.00 $ 130.00 $ 130.00
Payroll Taxes - Current $ 35,208.75 $ 11,736.25 $ 8,802.19 $ 8,802.19 $ 8,802.19 $ 8,802.19
Payroll Taxes - Back $ -- $ -- $ -- $ -- $ -- $ --
Property Tax (Annual) $ -- $ 8,300.00 $ -- $ -- $ -- $ --
Sales Tax $ -- $ 10,000.00 $ -- $ -- $ -- $ --
Office/Safety Suppliers $ 2,488.87 $ -- $ 622.22 $ 622.22 $ 622.22 $ 622.22
Printing $ 1,438.00 $ -- $ 359.50 $ 359.50 $ 359.50 $ 359.50
Internet Access $ 400.00 $ 8,400.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Product Advertising Promotion $ -- $ 5,000.00 $ 5,000.00 $ 6,000.00 $ 5,000.00 $ 5,000.00
Secondary Promotion/Roadshow $ -- $ 10,000.00 $ -- $ -- $ -- $ --
Repayment to N. Zeelander $ -- $ -- $ -- $ -- $ -- $ --
Travel/Meetings/Shows $ 14,086.82 $ 1,000.00 $ 3,521.71 $ 3,521.71 $ 3,521.71 $ 3,521.71
Temporary Employees $ -- $ 3,000.00 $ 8,000.00 $ -- $ 3,000.00 $ 3,000.00
Payroll $ 85,875.00 $ 28,625.00 $ 28,625.00 $ 28,625.00 $ 28,625.00 $ 28,625.00
Operating Expenses Subtotal $ 189,402.25 $ 145,296.25 $ 185,656.81 $ 57,656.81 $ 60,656.81 $ 60,556.81
$ 364,327
Cost of Goods
Parts (includes shipping) - Current $ -- $ 88,200.00 $ 81,900.00 $ -- $ -- $ --
Machining Services - Current $ -- $ 18,900.00 $ 17,550.00 $ -- $ -- $ --
Paint and Powder Coating - Current $ -- $ 12,600.00 $ 11,700.00 $ -- $ -- $ --
Miscellaneous/Warranty - Current $ -- $ 6,300.00 $ 5,850.00 $ -- $ -- --
Parts (includes shipping) - Back Bills $ -- $ 48,659.75 $ 36,663.75 $ 10,663.75 $ 6,163.75 $ 6,663.75
Machining Services - Back Bills $ -- $ 14,239.09 $ 3,626.88 $ 3,626.88 $ 3,626.88 $ 3,626.88
Paint and Powder Coating - Back Bills $ -- $ -- $ -- $ -- $ -- $ --
Miscellaneous/Warranty - Back Bills $ -- $ 500.00 $ -- $ -- $ 500.00 $ --
Subtotal $ -- $ 189,398.84 $ 157,290.83 $ 14,290.63 $ 10,290.63 $ 10,290.63
$ 381,561
Capital Expenses
Factory Equipment - Current $ -- $ -- $ -- $ 5,000.00 $ -- $ --
Computer Hardware/Software - Current $ -- $ -- $ -- $ -- $ -- $ --
Miscellaneous Construction - Current $ -- $ -- $ -- $ -- $ -- $ --
Factory Equipment - Back Bills $ -- $ 3,000.00 $ 8,000.00 $ -- $ -- $ --
Computer Hardware/Software -Back Bills $ -- $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00
Miscellaneous/Construction - Back Bills $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00
Subtotal $ 3,000.00 $ 11,000.00 $ 16,000.00 $ 13,000.00 $ 8,000.00 $ 8,000.00
$ 45,000
Grand Totals
Operating Expenses $ 169,402.25 $ 145,295.25 $ 185,656.81 $ 57,556.81 $ 60,556.81 $ 60,556.81
Cost of Goods $ -- 189,398.84 $ 157,290.63 $ 14,290.63 $ 10,290.63 $ 10,290.63
Capital Expenses $ 3,000.00 11,000.00 16,000.00 13,000.00 $ 8,000.00 $ 8,000.00
Miscellaneous/One Time Charges $ -- $ -- $ -- $ -- $ -- $ --
Grand Total - Cash Out $ 174,402.25 $ 345,694.09 $ 358,947.44 $ 84,847.44 $ 78,847.44 $ 78,847.44
$ 601,490
Gross Cost of Goods Per Bike $ 13,000 $ 13,000 $ 13,000 $ 13,000 $ 12,500 $ 12,500
Net Cost of Goods Per Bike (less Quantum
Inventory) $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 9,000
Gordon Monies Available $ -- $ 250,000 $ -- $ -- $ -- $ --
Purchase Orders Presented and Approved $ -- $ 14 $ 13 $ 8 $ 6 $ 6
</TABLE>
24
<PAGE>
Cash Flow Projections (March 1999 - July 1999)
<TABLE>
<CAPTION>
V W X Y Z AA AB AC
--- - --- --- --- ---- ----- ----
Item March Actual 3/26 29-Mar-99 5-Apr-99 12-Apr-99 19-Apr-99 26-Apr-99
---- ----------------- --------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Bikes Worth of Parts, Ordered -- 14 13 -- -- --
Net Purchase Orders Available -- -- -- 6 12 18
Gordon Monies Used -- 126,000 117,000 -- -- --
Net Gordon Monies Available -- 124,000 7,000 7,000 7,000 7,000
Bikes Built and Sold -- -- 5 5 3 6
Net Parts Inventory for the Week (Bikes) -- -- 9 8 (5) (6)
Cumulative Parts Inventory (Bikes) -- -- 9 17 11 5
Quantum Inventory Drawdown for Week -- -- 20,000 20,000 21,000 21,000
Net Quantum Inventory at End of Week 461,000 461,000 441,000 421,000 400,000 379,000
Gordon Inventory Drawdown for Week -- -- 45,000 45,000 54,000 54,000
Net Gordon Inventory at End of Week -- 126,000 198,000 153,000 99,000 45,000
Revenue From Bikes $ -- $ -- $87,940,000 $ 87,940.00 $ 105,528.00 $ 105,528.00
% Bikes from Bombadier Floorplan 40% 40% 40% 30% 30% 30%
Total Dollars from Bombadier $ -- $ -- $ 35,176 $ 26,382 $ 31,658 $ 31,658
Cumulative Dollars from Bombadier $ -- $ -- $ 35,176 $ 61,558 $ 93,216 $ 124,875
% Bike from Cash 5% 5% 5% 5% 5% 5%
% Bikes from Non-Bombadler Floorplan 55% 55% 55% 65% 65% 65%
Total Dollars fron Non-Bombadier Floorplans -- -- 43,367 57,161 68,593 68,593
Cumulative Dollars fronm Non-Bombadier
Floorplans $ -- $ -- $ 48,367.00 $105,528.00 $ 174,121.20 $ 242,714.40
Cash Flow Sunmary
Cash Out
Total Operating Cash Outlay During Week $172,402 $345,694 $ 358,947 $ 84,847 $ 78,847 $ 78,847
Cash In
Total Sales During Week $ -- $ -- $ 87,940 $ 87,940 $ 105,528 $ 105,528
Cumulative Sales $ -- $ -- $ 87,940 $ 175,880 $ 281,408 $ 388,936
Cash Collections During Week from Prior Sales $ -- $ -- $ -- $ 43,970 $ 87,940 $ 96,734
Cumulative Cash Collected $ -- $ -- $ -- $ 43,970 $ 131,910 $ 228.644
Net Receivables Outstanding $ -- $ -- $ 87,940 $ 131,910 $ 149,498 $ 158,292
Net Cash Resolution and Subsequent Needs
Total Cash Needs During Week $172,402 $345,684 $ 358,947 $ 84,847 $ 78,847 $ 78,847
Cash From Sales $ -- $ -- $ -- $ 43,970 $ 87,940 $ 96,734
Total Net Need for Cash $172,402 $345,894 $ 358,947 $ 40,877 $ (9,093) $ (17,887)
Net Cash from NZ Secured LOC $ -- $383,000 $ -- $ -- $ -- $ --
Cash From Notes $200,000 $ 50,000 $ 100,000 $ 50,000 $ -- $ --
Cash From Collections on Sales $ -- $ -- $ -- $ 43,970 $ 87,940 $ 96,734
Cash From Gordon Secured LOC $ -- $126,000 $ 117,000 $ -- $ -- $ --
Cumulative Cash From Gordon Secured LOC $ -- $126,000 $ 243,000 $ 199,030 $ 111,090 $ 14,356
Interest Charges on Cumulative Gordon Cash $ -- $ 1,050 $ 2,025 $ 1,659 $ 926
Total Cash Out by Week $345,894 $ 359,997 $ 86,872 $ 80,506 $ 79,773
Total Cash In By Week $550,000 $ 217,000 $ 93,970 $ 87,940 $ 96,734
Weekly Cash Balance $213,306 $ (142,997) $ 7,098 $ 7,434 $ 16,961
Cumulative Balance $213,306 $ 70,308 $ 77,406 $ 84,840 $ 101,801
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
V AD AE AF AG AM AL
---- -------- --------- --------- --------- --------- --------
Item 3-May-99 10-May-99 17-May-99 24-May-99 31-May-99 7-Jun-99
---- -------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Rent $ 7,000.00 $ -- $ -- $ -- $ -- $ 7,000.00
Telephone $ 1,460.00 $ 1,460.00 $ 1,460.00 $ 1,460.00 $ 1,460.00 $ 825.00
Utilities $ 844.00 $ 844.00 $ 844.00 $ 844.00 $ 844.00 $ 1,055.00
Cleaning/Ground Maintenance $ 142.00 $ 142.00 $ 142.00 $ 142.00 $ 142.00 $ 177.50
Vehicle Leasing $ 339.17 $ 339.17 $ 339.17 $ 339.17 $ 339.17 $ 423.97
Equipment Leasing $ 1,649.19 $ 1,649.19 $ 1,649.19 $ 1,649.19 $ 1,649.19 $ 16,999.49
Payroll Benefits (Health, Life) $ 1,004.40 $ 1,044.40 $ 1,044.40 $ 1,044.40 $ 1,044.40 $ 1,255.50
Insurance (Product/Corporate Liability) $ 6,216.60 $ 6,216.60 $ 6,216.60 $ 6,216.60 $ 6,216.60 $ 6,270.75
Workman's Compensation $ 1,202.60 $ 1,202.60 $ 1,202.60 $ 1,202.60 $ 1,202.60 $ 1,503.25
Legal/Accounting $ 5,000.00 $ -- $ -- $ -- $ -- $ 9,676.00
Commissions/Fees /Floorplanning Escrow $ 10,116.00 $ 116.00 $ 116.00 $ 116.00 $ 118.00 $ (89,855.00)
Payroll Taxes - Current $ 9,061.00 $ 9,061.00 $ 9,061.00 $ 9,061.00 $ 9,061.00 $ 11,326.25
Payroll Taxes - Back $ -- $ -- $ -- $ -- $ 287,000.00 $ --
Property Tax (Annual) $ -- $ -- $ -- $ -- $ -- $ --
Sales Tax $ -- $ -- $ -- $ -- $ -- $ --
Office/Safety Suppliers $ 497.77 $ 497.77 $ 497.77 $ 497.77 $ 497.77 $ 622.22
Printing $ 400.00 $ 400.00 $ 400.00 $ 400.00 $ 400.00 $ 250.00
Internet Access $ 8,080.00 $ 80.00 $ 80.00 $ 80.00 $ 80.00 $ 4,100.00
Product Advertising Promotion $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00
Secondary Promotion/Roadshow $ -- $ -- $ -- $ -- $ -- $ 35,000.00
Repayment to N. Zeelander $ -- $ -- $ -- $ -- $ -- $ --
Travel/Meetings/Shows $ 2,800.00 $ 1,800.00 $ 1,800.00 $ 1,800.00 $ 1,800.00 $ 3,250.00
Temporary Employees $ 14,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00
Payroll $ 41,250.00 $ 31,250.00 $ 31,250.00 $ 31,250.00 $ 31,250.00 $ 43,750.00
Operating Expenses Subtotal $ 116,062.74 $ 64,062.74 $ 64,082.74 $ 64,082.74 $ 351,082.74 $ 61,529.92
$ 659,314
Cost of Goods
Parts (includes shipping) - Current $ 69,300.00 $ 69,300.00 $ 70,000.00 $ 70,000.00 $ 126,000.00 $ 126,000.00
Machining Services - Current $ 14,850.00 $ 14,850.00 $ 15,000.00 $ 15,000.00 $ 27,000.00 $ 27,000.00
Paint and Powder Coating - Current $ 9,900.00 $ 9,900.00 $ 10,000.00 $ 10,000.00 $ 18,000.00 $ 18,000.00
Miscellaneous/Warranty - Current $ 4,950.00 $ 4,950.00 $ 5,000.00 $ 5,000.00 $ 9,000.00 $ 9,000.00
Parts (includes shipping) - Back Bills $ 13,173.75 $ 6,163.75 $ 6,663.75 $ -- $ -- $ (3,903.00)
Machining Services - Back Bills $ 14,643.88 $ 3,628.88 $ 3,626.88 $ -- $ -- $ 4,403.00
Paint and Powder Coating - Back Bills $ -- $ -- $ -- $ -- $ -- $ --
Miscellaneous/Warranty - Back Bills $ -- $ 500.00 $ -- $ -- $ -- $ 600.00
Subtotal $ 126,817.83 $ 109,290.63 $ 110,290.63 $ 100,000.00 $ 180,000.00 $ 181,000.00
$ -- $ $ 626,399 $ --
$ -- $ --
Capital Expenses $ -- $ --
Factory Equipment - Current $ 10,000.00 $ -- $ -- $ -- $ -- $ --
Computer Hardware/Software - Current $ -- $ -- $ -- $ -- $ -- $ --
Miscellaneous Construction - Current $ -- $ -- $ -- $ -- $ -- $ --
Factory Equipment - Back Bills $ 21,000.00 $ -- $ -- $ -- $ -- $ 10,000.00
Computer Hardware/Software -Back Bills $ 8,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 11,000.00
Miscellaneous/Construction - Back Bills $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00
Subtotal $ 42,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 24,000.00
$ 74,000
Grand Totals
Operating Expenses $ 116,062.74 $ 64,062.74 $ 84,062.74 $ 64,062.74 $ 351,062.00 $ 61,529.00
Cost of Goods $ 126,817.63 $ 109,290.63 $ 110,290.63 $ 100,000.00 $ 180,000.00 $ 181,000.00
Capital Expenses $ 42,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 24,000.00
Miscellaneous/One Time Charges $ -- $ -- $ -- $ -- $ -- $ --
Grand Total - Cash Out $ 284,880.36 $ 181,353.36 $ 182,353.36 $ 172,082.74 $ 539,062.74 $ 266,529.92
$ 1,359,713 --
Gross Cost of Goods Per Bike $ 12,500 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000
Net Cost of Goods Per Bike (less Quantum
Inventory) $ 9,000 $ 9,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Gordon Monies Available $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 180,000 $ 180,000
</TABLE>
26
<PAGE>
Cash Flow Projections (March 1999 - July 1999)
<TABLE>
<CAPTION>
V AD AE AF AG AM AL
---- -------- --------- --------- --------- --------- --------
Item 3-May-89 10-May-89 17-May-89 24-May-89 31-May-89 7-Jun-89
---- -------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Bikes Worth of Parts Ordered 11 11 10 10 18 18
Net Purchase Orders Available 15 12 10 10 6 2
Gordon Monies Used 99,000 99,000 100,000 100,000 180,000 180,000
Net Gordon Monies Available 8,000 9,000 9,000 9,000 9,000 9,000
Bikes Built and Sold 5 10 10 10 10 20
Net Parts Inventory for the Week (Bikes) (5) 1 1 -- -- (2)
Cumulative Parts Inventory (Bikes) -- 1 2 2 2 --
Quantum Inventory Drawdown for Week 17,500 30,000 20,000 20,000 20,000 40,000
Net Quantum Inventory at End of Week 361,500 331,500 311,500 291,500 271,500 231,500
Gordon Inventory Drawdown for Week 45,000 90,000 100,000 100,000 100,000 200,000
Net Gordon Inventory at End of Week 99,000 108,000 108,000 108,000 188,000 168,000
Revenue From Bikes $ 87,940.00 $ 175,880.00 $ 175,880.00 $ 175,880.00 $ 175,880.00 $ 351,760.00
% Bikes from Bombadier Floorplan 30% 20% 20% 20% 20% 20%
Total Dollars from Bombadier $ 26,382 $ 35,176 $ 35,176 $ 35,176 $ 35,176 $ 70,352
Cumulative Dollars from Bombadier $ 151,257 $ 166,433 $ 221,809 $ 256,785 $ 291,961 $ 362,313
% Bike from Cash 5% 5% 5% 5% 5% 5%
% Bike from Non-Bombadier Floorplan 65% 75% 75% 75% 75% 75%
Total Dollars from Non-Bombadier
Floorplan 57,161 131,910 131,910 131,910 131,910 263,820
Cumulative Dollars from Non-Bombadier
Floorplan $ 299,875.40 $ 431,785.40 $ 563,895.40 $ 695,605.40 $ 827,515.40 $1,091,335.40
Cash From Summary
Cash Out
Total Operating Cash Outlay During Week $ 284,880 $ 181,353 $ 182,353 $ 172,063 $ 539,063 $ 266,530
Cash in
Total Sales During Week $ 87,940 $ 175,880 $ 175,880 $ 175,880 $ 175,880 $ 351,760
Cumulative Sales $ 474,876 $ 650,756 $ 826,636 $ 1,002,518 $ 1,178,396 $ 1,530,156
Cash Collections During Week from Prior
Sales $ 105,528 $ 96,734 $ 131,910 $ 175,880 $ 175,880 $ 175,880
Cumulative Cash Collected $ 334,172 $ 430,906 $ 562,816 $ 738,696 $ 914,576 $ 1,090,456
Net Receivables Outstanding $ 140,704 $ 219,850 $ 263,820 $ 263,820 $ 263,820 $ 439,700
Net Cash Resolution and Subsequent Needs
Total Cash Needs During Week $ 284,880 $ 181,353 $ 182,353 $ 172,063 $ 539,063 $ 266,530
Cash From Sales $ 105,528 $ 96,734 $ 131,910 $ 175,880 $ 175,880 $ 175,880
Total Net Need for Cash $ 179,352 $ 84,619 $ 50,443 $ (3,817) $ 363,183 $ 90,650
Need Cash from HZ Secured LOC $ -- $ -- $ -- $ -- $ -- $ --
Cash From Notes $ -- $ -- $ -- $ -- $ -- $ --
Cash From Collection on Sales $ 105,528 $ 96,734 $ 131,910 $ 175,880 $ 175,880 $ 175,880
Cash From Gordon Secured LOC $ 99,000 $ 99,000 $ 100,000 $ 100,000 $ 180,000 $ 180,000
Cumulative Cash From Gordon Secured LOC $ 7,828 $ 10,094 $ -- $ -- $ 4,120 $ 8,240
Internet Charges on Cumulative Gordon
Cash $ 120 $ 65 $ 84 $ -- $ -- $ 34
Total Cash Out by Week $ 285,000 $ 181,419 $ 142,437 $ 172,063 $ 539,063 $ 266,564
Total Cash Out by Week $ 204,528 $ 195,734 $ 231,910 $ 275,880 $ 355,880 $ 355,880
Weekly Cash Balance $ (80,472) $ 14,315 $ 49,473 $ 103,817 $ (183,183) $ 89,316
Cumulative Balance $ 21,329 $ 36,644 $ 85,117 $ 188,934 $ 5,571 $ 95,067
</TABLE>
27
<PAGE>
Cash Flow Projections (March 1999 - July 1999)
<TABLE>
<CAPTION>
V AJ AK AL AM AN AO
---- --------- --------- --------- -------- ------ -------------
Item 14-Jun-99 21-Jun-99 28-Jun-99 6-Jul-99 Total (3/25-7/2)
---- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Rent $ -- $ -- $ -- $ -- $ 19,800
Telephone $ 825.00 $ 825.00 $ 825.00 $ 825.00 $ 23,900
Utilities $ 1,055.00 $ 1,055.00 $ 1,055.00 $ 1,055.00 $ 9,460
Cleaning/Ground Maintenance $ 177.50 $ 177.50 $ 177.50 $ 177.50 $ 1,480
Vehicle Leasing $ 423.97 $ 423.97 $ 423.97 $ 423.97 $ 5,088
Equipment Leasing $ 2,061.49 $ 2,061.49 $ 2,061.49 $ 2,061.49 $ 39,676
Payroll Benefits (Health, Life) $ 1,255.50 $ 1,255.50 $ 1,255.50 $ 1,255.50 $ 14,224
Insurance (Product/Corporate Liability) $ 6,270.75 $ 6,270.75 $ 6,270.75 $ 6,270.75 $ 81,249
Workman's Compensation $ 1,503.25 $ 1,503.25 $ 1,503.25 $ 1,503.25 $ 12,026
Legal/Accounting $ -- $ -- $ -- $ -- $ 14,576
Commissions/Fees/Floorplanning Escrow $ 145.00 $ 145.00 $ 145.00 $ 145.00 $ 23,980
Payroll Taxes - Current $ 11,326.25 $ 11,326.25 $ 11,326.25 $ 11,326.25
Payroll Taxes - Back $ -- $ -- $ -- $ -- $ 287,000
Property Tax (Annual) $ -- $ -- $ -- $ -- $ --
Sales Tax $ -- $ -- $ -- $ -- $ --
Office/Safety Suppliers $ 622.22 $ 622.22 $ 622.22 $ 622.22 $ 7,467
Printing $ 250.00 $ 250.00 $ 250.00 $ 250.00 $ 4,438
Internet Access $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 13,200
Product Advertising Promotion $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 65,000
Secondary Promotion/Roadshow $ -- $ -- $ -- $ -- $ 35,000
Repayment to N. Zeelander $ -- $ -- $ -- $ -- $ --
Travel/Meetings/Shows $ 2,250.00 $ 2,250.00 $ 2,250.00 $ 2,250.00 $ 34,087
Temporary Employees $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 52,000
Payroll $ 33,750.00 $ 33,750.00 $ 33,750.00 $ 33,750.00 $ 425,750
Operating Expenses Subtotal $ 70,015.92 $ 70,015.92 $ 70,015.92 $ 70,015.92 $ 1,295,219
$ 271,578
Cost of Goods
Parts (includes shipping) - Current $ 126,000.00 $ 147,000.00 $ -- $ -- $ 885,500
Machining Services - Current $ 27,000.00 $ 31,500.00 $ -- $ -- $ 189,750
Paint and Powder Coating - Current $ 18,000.00 $ 21,000.00 $ -- $ -- $ 126,500
Miscellaneous/Warranty - Current $ 9,000.00 $ 10,500.00 $ -- $ -- $ 63,250
Parts (includes shipping) - Back Bills $ -- $ -- $ -- $ -- $ 82,253
Machining Services - Back Bills $ -- $ -- $ -- $ -- $ 40,808
Paint and Powder Coating - Back Bills $ -- $ -- $ -- $ -- $ --
Miscellaneous/Warranty - Back Bills $ -- $ -- $ -- $ -- $ 1,500
Subtotal $ 180,00.00 $ 210,000.00 $ -- $ -- $ 1,389,561
$ 671,000 $ 1,578,960
$ --
Capital Expenses $ --
Factory Equipment - Current $ -- $ -- $ -- $ -- $ 15,000
Computer Hardware/Software - Current $ -- $ -- $ -- $ -- $ --
Miscellaneous Construction - Current $ -- $ -- $ -- $ -- $ --
Factory Equipment - Back Bills $ -- $ -- $ -- $ -- $ 39,000
Computer Hardware/Software -Back Bills $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 74,000
Miscellaneous/Construction - Back Bills $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 3,000.00 $ 39,000
Subtotal $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 167,000
$ 48,000
Grand Totals
Operating Expenses $ 70,015.92 $ 70,015.92 $ 70,015.92 $ 70,015.92 $ 1,295,219
Cost of Goods $ 180,000.00 $ 210,000.00 $ -- $ -- $ 1,389,581
Capital Expenses $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 167,000
Miscellaneous/One Time Charges $ -- $ -- $ -- $ -- $ --
Grand Total - Cash Out $ 258,015.92 $ 288,015.92 $ 78,015.92 $ 78,015.92 $ 2,851,780
890,578 $ 2,851,780
--
Gross Cost of Goods Per Bike $ 12,000 $ 12,000 $ 12,000 $ 12,000
Net Cost of Goods Per Bike (less Quantum
Inventory) $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 124,000
Gordon Monies Available $ 180,000 $ 210,000 $ -- $ -- $ --
Purchase Orders Presented and Approved $ 18 $ 18 $ 18 $ 18
</TABLE>
28
<PAGE>
Cash Flow Projections (March 1999 - July 1999)
<TABLE>
<CAPTION>
V AJ AK AL AM AN AO
---- --------- --------- --------- -------- --------- ----------------
Item 14-Jun-99 21-Jun-99 28-Jun-99 5-Jul-99 Total (3/25-7/2)
---- --------- --------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Bikes Worth of Parts Ordered 18 21 -- -- 130
Net Purchase Orders Available 2 (1) 17 35
Gordon Monies Used 180,000 210,000 -- --
Net Gordon Monies Available 9,000 9,000 9,000 9,000
Bikes Build and Sold 18 18 18 2 141
Net Parts Inventory for the Week (Bikes) -- -- 3 (2) 3
Cumulative Parts Inventory (Bikes) -- -- 3 1 52
Quantum Inventory Drawdown for Week 36,000 36,000 36,000 4,000
Net Quantum Inventory at End of Week 195,500 159,500 123,600 119,500
Gordon Inventory Drawdown for Week 180,000 180,000 180,000 20,000
Net Gordon Inventory at End of Week 168,000 198,000 18,000 (2,000) April - June
Revenue From Bikes $ 316,584.00 $ 316,584.00 $ 316,584.00 $ 35,176.00 $ 2,479,908
% Bikes from Bombadier Floorplan 15% 15% 15% 15%
Total Dollars from Bombadier $ 47,488 $ 47,488 $ 47,488 $ 5,276
Cumulative Dollars from Bombadier $ 409,800 $ 457,288 $ 504,776 $ 510,052
% Bikes from Cash 5% 5% 5% 5%
% Bikes from Non-Bombadier Floorplan 80% 80% 80% 80%
Total Dollars from Non-Bombadier
Floorplan 253,267 $ 253,267 $ 253,267 $ 26,141
Cumulative Dollars from Non-Bombadier
Floorplan $1,344,602.60 $1,597,869.80 $1,851,137.00 $1,879,277.80
Cash Flow Summary
Cash Out
Total Operating Cash Outlay During
Week $ 258,016 $ 288,016 $ 78,016 $ 78,016 $ 2,851,780
Cash in
Total Sales During Week $ 316,584 $ 316,584 $ 316,584 $ 35,176 $ 2,479,908
Cumulative Sales $ 1,848,740 $ 2,163,324 $ 2,479,908 $ 2,515,084 na
Cash Collections During Week from Prior
Sales $ 263,820 $ 334,172 $ 316,584 $ 316,584 $ 2,005,032
Cumulative Cash Collected $ 1,354,276 $ 1,688,448 $ 2,005,032 $ 2,321,616 na
Net Receivables Outstanding $ 492,464 $ 474,376 $ 474,876 $ 193,468 $ 3,561,570
Net Cash Resolution and Subsequent Needs
Total Cash Needs During Week $ 258,018 $ 288,016 $ 78,016 $ 78,016 $ 2,851,780
Cash From Sales $ 263,820 $ 334,172 $ 316,584 $ 316,584 $ 2,005,032
Total Net Need for Cash $ (5,804) $ (46,156) $ (238,568) $ (238,568) $ 846,748
Net Cash from NZ Secured LOC $ -- $ -- $ -- $ -- $ --
Cash From Notes $ -- $ -- $ -- $ -- $ 150,000
Cash From Collections on Sales $ 263,820 $ 334,172 $ 316,584 $ 316,584 $ 2,005,032
Cash From Gordon Secured LOC $ 180,000 $ 210,000 $ -- $ -- $ 1,265,000
Cumulative Cash From Gordon Secured LOC $ -- $ -- $ -- $ -- $ 597,758
Interest Charges on Cumulative Gordon
Cash $ 69 $ -- $ -- $ --
Total Cash Out by Week $ 258,085 $ 288,016 $ 78,016 $ 78,016 $ 3,203,505
Total Cash In by Week $ 443,820 $ 544,172 $ 316,584 $ 316,584 $ 3,979,032
Weekly Cash Balance $ 185,735 $ 256,156 $ 238,568 $ 238,568 $ 775,527
Cumulative Balance $ 280,802 $ 536,950 $ 776,627 $ 1,014,095 $ 2,572,791
</TABLE>
29
<PAGE>
EXHIBIT "B"
BIKE ORDER CONFORMATION
COMPANY NAME: _________________________ CUSTOMER NUMBER:________________________
QUANTITY OF BIKES ORDERING: ____________________________________________________
PRICE OF BIKES BEING ORDERED: _______________ (BASE PRICE-$17,550)
(FINAL T.B.D. INDIVIDUALLY) _________________
EXPECTED DATE OF DELIVERY:_______ (NOT BEFORE) ________________________________
PAYMENT METHOD:
FLOOR PLAN COMPANY: ____________________________________________________________
CASH PAYMENT SCHEDULE:
DOWN PAYMENT DATE: 1/3 _________________________________________________________
MID-BUILD DATE: 1/3 _________________________________________________________
COMPLETE DATE: 1/3 _________________________________________________________
NAMES AND TITLES OF PERSONS AUTHORIZED TO PLACE ORDERS:
________________________________________________________________________________
________________________________________________________________________________
NAME AND TITLE OF PERSON PLACING ORDER:
________________________________________________________________________________
SIGNATURE/PLACING ORDER ________________________________ DATE: _________________
SIGNATURE/AQC RECEIVING ________________________________ DATE: _________________
30
<PAGE>
PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 31st day of March,
1999, between AMERICAN QUANTUM CYCLES, INC. a Florida corporation (the
"Company"), and ANCHOR CAPITAL CORPORATION, a Maryland corporation
("Purchaser").
NOW, THEREFORE, in consideration of the mutual premises and.
covenants contained herein and for other good and valuable consideration, the
parties hereto, intending to be legally bound, agree as follows:
1. Sale of the Shares. The Company hereby issues, sells and transfers
to Purchaser 750,000 fully paid and non-assessable shares ("Shares") of
Common Stock, par value $.001 per share ("Common Stock") of the Company for
an aggregate purchase price of $750 paid by the Purchaser simultaneously with
the execution and delivery of this Agreement.
2. Line of Credit. Purchaser agrees to extend to the Company a line of
credit in the maximum aggregate principal amount of Seven Hundred Fifty Thousand
($750,000) Dollars (the "Line of Credit"), and the Company has executed and is
delivering to Purchaser herewith the Company's Secured Promissory Note in the
maximum principal amount of $750,000 ("Promissory Note") and a Loan and Security
Agreement pertaining to the Line of Credit (the "Loan Agreement"). The Company
may take advances under such Line of Credit by written request to Purchaser from
time to time up to June 25, 1999; provided, however, that no advances under the
Line of Credit may be taken if an Event of Default under this Agreement, the
Loan Agreement or the Promissory Note shall have occurred or if the Company
materially shall have failed to comply with the Cash Flow Projections delivered
by the Company to Purchaser contemporaneously with this Agreement.
3. [Reserved].
4. Representations and Warranties.
(a) The Company represents and warrants to the Purchaser, upon which
representations and warranties the Purchaser is relying, as follows:
(1) The Company is a corporation duly authorized, validly existing,
and in good standing under the laws of the State of Florida, and has all
requisite power and authority to own, lease and operate its properties, to
carry on its business as it is now being conducted, to enter into this
Agreement, to issue the Promissory Note and to consummate the transactions
contemplated hereby and under the Loan Agreement and the Promissory Note.
(2) All actions of the Company necessary to authorize it to execute,
deliver and consummate this Agreement, and to perform its obligations
hereunder and under the Loan Agreement and the Promissory Note have been
duly and validly taken and no other further actions or authorizations are
required. This Agreement, the Loan Agreement and the Promissory
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<PAGE>
Note constitute the valid, legally binding obligations of the Company and are
enforceable in accordance with their respective terms.
(3) The execution and delivery of this Agreement, the Loan Agreement
and the Promissory Note and the consummation of the transactions contemplated
herein and therein will not:
(i) result in any breach of, or constitute a default under the
Articles of Incorporation or By-Laws of the Company, or any instrument or
obligation to which the Company is a party or by which it is bound; or
(ii) violate any existing statute, order, writ, injunction or decree
of any court, administrative agency or governmental body.
(4) The Company has filed all reports and statements required to be
filed by the Company with the Securities and Exchange Commission and no such
report or statement contains a misstatement of a material fact or omits to
state a material fact necessary to make the statements made therein not
misleading.
5. Rgpresentations and Warranties of Purchaser. Purchaser represents
and warrants to the Company, upon which representations and warranties the
Company relies, as follows:
(a) Purchaser is acquiring the Shares for investment for its account
and for the account of certain participants as disclosed to the Company, with
no present intention of reselling or otherwise participating, directly or
indirectly, in a distribution of such Shares, and shall not make any sale,
transfer, or pledge thereof (except to such participants) without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and any applicable securities laws of any state, or unless an
exemption from such registration is available under those laws in the opinion
of counsel reasonably acceptable to the Company.
(b) Purchaser acknowledges that the certificates for the Shares will
contain a legend substantially as follows:
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE,
AND MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A SECURITY INTEREST,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL
REGISTERED UNDER THE ACT, OR APPLICABLE STATE SECURITIES LAWS, OR AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY IS RECEIVED THAT
REGISTRATION IS NOT REQUIRED THEREUNDER.
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<PAGE>
6. Covenants of the Company. The Company hereby covenants and agrees
with Purchaser that:
(a) In the event that the Company shall fail to pay in full, as and
when due, by acceleration or otherwise, all amounts of principal and interest
under the Loan Agreement and the Promissory Note within 30 days after demand
in writing for such payment shall have been made by Purchaser and delivered
to the Company, the Company agrees to issue and sell to Purchaser, at the par
value thereof, that number of shares of Common Stock which, after issuance,
shall constitute 25% of the then outstanding Common Stock of the Company.
(b) (1) As used in this Section (b), the following terms have the
following respective meanings:
(i) "Commission" shall mean the Securities and Exchange Commission.
(ii) "Purchaser" shall mean Anchor Capital Corporation and each of
its affiliates to whom Anchor Capital Corporation shall have transferred any
of the Shares and any person controlling any of the foregoing within the
meaning of the Securities Act.
(iii) "Registration Expenses" and "Selling Expenses" shall mean the
expenses so described in Paragraph (4).
(iv) "Registrable Shares" shall mean 750,000 shares of Common Stock
owned by Purchaser, and the additional shares of Common Stock that may be
purchased by Purchaser under Section 6(a) of this Agreement.
(v) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the Commission thereunder, all as
the same shall be in effect at the time.
(2) The Company shall:
(i) Upon the written request of Purchaser, prepare and file with the
Commission not later than the earlier of 90 days after the date of such
request or the filing of a registration statement by the company under the
Securities Act, a registration statement with respect to the Registrable
Shares (the "Registration Statement") and use its best efforts to cause the
Registration Statement to become and remain effective as soon thereafter as
possible. In the event that the Company shall have filed a registration
statement before the expiration of 90 days, the Registrable Shares shall be
included in such Registration Statement on the following terms.
(ii) Prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to keep the Registration Statement
effective for not more than eighteen (18) months from the date of its
effectiveness (plus such additional time during which Purchaser must
33
<PAGE>
cease making offers and sales, as provided in paragraph (v) below) or (unless
otherwise required by the Securities Act) until the Registrable Shares covered
thereunder have been sold, whichever is earlier.
(iii) Furnish to Purchaser such number of copies of each prospectus
contained in the Registration Statement (other than a preliminary
prospectus), in conformity with the requirements of the Securities Act, and
such other documents as Purchaser may reasonably request in order to
facilitate the disposition of the Registrable Shares owned by Purchaser.
(iv) Use its best efforts to register or qualify the Registrable
Shares covered by the Registration Statement under the securities or blue sky
laws of such jurisdictions as Purchaser shall reasonably request, and use its
best efforts to do any and all other acts and things which may be necessary
or advisable so to register or qualify the Registrable Shares to enable
Purchaser to consummate the disposition of the Registrable Shares owned by
Purchaser in such jurisdictions during the period covered in paragraph (ii)
above; provided that the Company shall not be obligated to qualify to do
business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to the service of process in suits other than
those arising out of the offer or sale of the securities covered by the
Registration Statement in any jurisdiction where it is not then so subject.
(v) Notify Purchaser at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus contained in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing. Purchaser agrees, upon receipt of such notice,
forthwith to cease making offers and sales of the Registrable Shares pursuant
to the Registration Statement or deliveries of the prospectus contained
therein for any purpose and to return to the Company, for modification and
exchange, the copies of such prospectus not theretofore delivered by
Purchaser; provided, that the Company shall forthwith prepare and fumish,
after securing such approvals as may be necessary, to Purchase a reasonable
number of copies of any supplement to or amendment of such prospectus that
may be necessary so that, as thereafter delivered to the purchasers of such
Registrable Shares, such prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
(vi) Promptly notify Purchaser of any stop order or similar
proceeding initiated by state or federal regulatory bodies and use its best
efforts to take all necessary steps expeditiously to remove such stop order
or similar proceeding.
(vii) Otherwise use reasonable efforts in good faith to comply with
all applicable rules and regulations of the Commission, and, if required,
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of at least twelve months, but not more
than eighteen months, beginning with the first day of the
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<PAGE>
Company's first fiscal quarter after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11 (a) of the Securities Act and Rule 158 thereunder; provided, however, that
the Company shall not be required to conduct a special audit in order to satisfy
its obligation under this paragraph (vii).
(viii) Upon receipt of such confidentiality agreements as the Company
may reasonably request, make available for inspection, upon the written
request of Purchaser, by Purchaser and by any attorney, accountant or other
agent retained by Purchaser, all pertinent financial and other records,
pertinent corporation documents and properties of the Company and its
subsidiaries as shall be reasonably necessary to enable Purchaser to exercise
and fulfill his due diligence responsibility, and cause all of the Company's,
and its subsidiaries, officers, directors and employees to supply all
information reasonably requested by Purchaser, attorney, accountant or agent
in connection with the Registration Statement.
(3) As a condition to the Company's obligation hereunder to file and
use its best efforts to cause to become effective the Registration Statement,
Purchaser shall provide such information and execute such documents,
including questionnaires and indemnities not inconsistent herewith, as may
reasonably be required in connection with such registration.
(4) All expenses incurred by the Company in complying with any of the
foregoing provisions of this Section (b), including without limitation all
federal (including the Commission and the National Association of Securities
Dealers, Inc.) and state registration, qualification and filing fees,
printing expenses, any premium involved in securing a policy or policies of
registration insurance (but only if the Company in its sole discretion shall
choose to secure such a policy or policies, such policy or policies to be
herein referred to as "registration insurance"), fees and disbursements of
counsel for the Company, and accountants' fees and expenses (but excluding
the compensation of regular employees of the Company which shall be paid in
any event by the Company), incident to or required by any such registration
are herein called "Registration Expenses". All underwriting discounts,
selling commissions and transfer taxes applicable to the sale of Registrable
Shares hereunder are herein called "Selling Expenses". The Registration
Expenses and Selling Expenses in connection with the registration of the
Registrable Shares shall be borne as follows:
(i) All Registration Expenses and the costs of securing registration
insurance shall be borne by the Company.
(ii) All Selling Expenses incurred in connection with the
Registration Statement shall be borne by Purchaser; provided, however, that if
other shares of capital stock of the Company are included in the Registration
Statement, such Registration Expenses shall be borne by Purchaser pro rata
with all other persons (including the Company) for whose account the
securities covered by the Registration Statement are offered in accordance
with the amount of securities being so offered for the account of each such
person.
(5) (i) The Company agrees to indemnify and hold harmless Purchaser
against any and all losses, claims, damages, liabilities or expenses, joint
or several
35
<PAGE>
(including any investigation, legal and other expenses incurred in connection
with any action, suit or proceeding or any claim asserted), arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any prospectus included therein, or
any omission or alleged omission of any material fact required to be stated
therein or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon a statement in writing furnished
by or on behalf of Purchaser for inclusion therein or an omission or failure by
Purchaser to furnish any statement with respect to Purchaser required to be
included therein. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of Purchaser and shall
survive the transfer of the Shares. Promptly after receipt by Purchaser of
written notice of the commencement of any action in respect of which indemnity
may be sought against the Company, Purchaser shall notify the Company in writing
of the commencement thereof, and, subject to the provisions hereinafter stated
and Purchaser's reasonable cooperation, the Company shall assume the defense of
such action (including the employment of counsel, who shall be counsel
reasonably satisfactory to Purchaser and the payment of expenses and such
counsel's fees) insofar as such action shall relate to any alleged liability in
respect of which indemnity may be sought against the Company; provided, however,
that the failure of Purchaser to give written notice to the Company of the
commencement of any action shall not relieve the Company of its obligations
hereunder except to the extent that the Company is actually prejudiced by such
failure to give notice. Purchaser shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the Company
unless in the reasonable judgment of Purchaser, a conflict of interest between
the Company and Purchaser exists in respect of such claim, in which event the
fees and expenses of such counsel shall be at the expense of the Company. In
connection with any offering under this Section (b).which is to be underwritten,
the Company further agrees to enter into an underwriting agreement in usual and
standard form respecting such offering; provided that the terms of such
underwriting agreement shall not be inconsistent or conflict with the provisions
of this Agreement.
(ii) The obligations of the Company under this Section (b) are
subject to the following conditions, which Purchaser hereby agrees to
fulfill: (i) that Purchaser whose Registrable Shares are to be included in
any registration referred to in this Section agrees, in writing, prior to
the filing of such registration or qualification, and hereby does agree to
indemnify and hold harrnless the Company, each Person, if any, who controls
the Company within the meaning of the Securities Act and the officers and
directors of the Company, against any and all losses, claims, damages,
liabilities or expenses arising out of or based upon any untrue statement or
alleged untrue statement of a material fact in any related registration
statement, prospectus, offering circular, notification or other document or
any omission or alleged omission of any material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with reference to statements or omissions made in reliance upon a statement
in writing furnished by or on behalf of Purchaser (but only to the extent
such statement was made in Purchaser's capacity as a holder of Registrable
Shares and not in Purchaser's capacity as an officer or director of the
Company, if applicable) for inclusion therein and with reference to
statements or omissions made in reliance upon an omission or failure by
Purchaser to fumish any statement with respect to Purchaser required to be
included
36
<PAGE>
therein (which indemnification shall remain in full force and effect regardless
of any investigation made by the Company or any person controlling the Company
and shall survive the transfer of the Shares), and (ii) if such registration or
qualification relates to an offering which is to be underwritten, that Purchaser
agrees to enter into an underwriting agreement in usual and standard form
respecting such offering; provided that the terms of such underwriting agreement
shall not be inconsistent or conflict with the provisions of this Agreement.
Promptly after receipt of written notice of the commencement of any action in
respect of which indemnity may be sought against Purchaser, the Company will
notify Purchaser in writing of the commencement thereof, and Purchaser shall,
subject to the provisions hereinafter stated and the Company's reasonable
cooperation, assume the defense of such action (including the employment of
counsel, who shall be counsel reasonably satisfactory to the Company, and the
payment of expenses and such counsel's fees) insofar as such action shall relate
to the alleged liability in respect of which indemnity may be sought against
Purchaser, provided, however, that the failure of the Company to give written
notice to Purchaser of the commencement of any action shall not relieve
Purchaser of its obligations hereunder except to the extent that Purchaser is
actually prejudiced by such failure to give notice. The Company and each such
director, officer, or controlling Person shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expense of such counsel shall not be the expense of Purchaser unless in
the reasonable judgment of the Company or controlling Person, a conflict of
interest between Purchaser and the Company or controlling Person exists in
respect of such claim, in which event the fees and expenses of such counsel
shall be at the expense of Purchaser.
(6) A party required to indemnify another party pursuant to this
Section ("indemnifying party") shall not be liable for any settlement of any
action or claim relating to any such liability or expense affected without
its consent, but if any settlement is effected with its consent or if a final
judgment for the plaintiff is entered in any such action, such indemnifying
party agrees to indemnify and hold harmless the indemnified party from and
against any loss or liability by reason of any such settlement or judgment.
7. Miscellaneous.
(a) An "Event of Default" under this Agreement shall mean and refer
to (i) any material inaccuracy or omission in any representation or warranty
made by the Company in this Agreement, (ii) any failure by the Company to
perform its agreements and covenants herein, or (iii) any Event of Default
under the Loan Agreement or the Promissory Note.
(b) All notices hereunder shall be in writing and shall be mailed by
first class registered or certified mail, postage prepaid, return receipt
requested, or by telecopy with confirmation back, or by nationally recognized
overnight courier or hand delivery, and all communications shall be addressed
to the addresses of the Company and Purchaser as shown on the signature page
or such other address (or telecopy number) as the parties shall designate by
notice to the other party hereunder.
(c) This Agreement, the Loan Agreement and the Promissory Note
contain the final, complete and exclusive understanding of the parties with
respect to its subject matter, and
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<PAGE>
all prior negotiations, discussions, commitments and understandings heretofore
between them are merged herein. This Agreement may not be modified or amended
except by an instrument in writing signed by the party to be charged therewith.
(d) This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the parties, including transferees of the
Shares permitted pursuant to Section 5 and holders of Registrable Shares.
(e) The titles and headings of the sections of this Agreement are
included for the convenience of the parties only and are not part of this
Agreement.
(f) Whenever possible, each provision of this Agreement will be
interpreted in such manner so as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable under any applicable law or rule in any jurisdiction, provided,
that such provision will be ineffective only to the extent of such
invalidity, illegality or unenforceability in such jurisdiction, without
invalidating the remainder of this Agreement in such jurisdiction or any
provision hereof in any other jurisdiction.
(g) This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, and all of which shall
constitute but one and the same document.
(h) At any time, and from time to time, each party agrees, at its own
expense, to take such actions and to execute and deliver such documents as
may be reasonably necessary to effectuate the purposes of this Agreement.
(i) This Agreement shall be governed in all respects, whether as to
validity, construction, interpretation, capacity, performance or otherwise,
by the laws of the State of Maryland.
(j) The Company agrees to pay the reasonable fees of counsel to the
Purchaser in connection with this Agreement, the Line of Credit, and other
contemporaneous transactions contemplated by the parties.
IN WITNESS VIHEREOF, the parties have duly executed this Agreement
the date first written above.
AMERICAN QUANTUM CYCLES, INC.
By: /s/ Richard K. Hagen
--------------------------------
Richard K. Hagen, Chairman & CEO
ANCHOR CAPITAL CORPORATION
By: /s/ Illegible
----------------------------
President
38
<PAGE>
EXHIBIT "C"
LOAN REQUEST
For Week Beginning ______________, 1999
THE UNDERSIGNED AFFIANT, being duly sworn, deposes and says that:
1. Affiant is an officer of AMERICAN QUANTUM CYCLES, INC., a Florida
corporation (the "Company"), being duly elected or appointed to the office of
the Company set forth below the Affiant's signature, and the Affiant has been
duly authorized to make this Loan Request on behalf of the Company, and has
made due investigation as to the following matters.
2. Affiant certifies the following matters on behalf of the Company to
induce and request ANCHOR CAPITAL CORPORATION (the "Lender") to disburse a
Loan as described herein pursuant to the terms of the Loan and Security
Agreement dated as of March 30, 1999 between the Lender and the Company (the
"Agreement"). The capitalized terms used in this certificate have the
respective meanings given them in the Agreement.
3. No Event of Default exists under the Agreement, and no event has
occurred and is continuing which with notice or lapse of time or both would
become an Event of Default.
4. All representations and warranties of the Company made in the
Agreement are true on and as of the date of the making of the Loan requested
herein, with the same force and effect as if the representations and
warranties were made on and as of such date.
5. There has been no material adverse change to the financial condition
or operations of the Company.
6. All Inventory previously financed with Loans has been segregated from
other Inventory on the Company's premises, or has otherwise been physically
identified as being subject to the Lender's first-priority security interest.
7. The Offering has not been withdrawn or canceled by the Company, and
there has been no material change in the terms, feasibility or timing of the
Offering adverse to the interests of Lender as a purchaser of the common
stock of the Company under the Purchase Agreement.
8. With respect to each Purchase Order for motorcycles submitted to the
Lender as of this date: (i) the copy of the Purchase Order delivered to the
Lender is true, correct and complete; (ii) the Purchase Order represents a
valid and binding order from a dealer for the immediate delivery of the
number of motorcycles identified therein; (iii) the Purchase Order is in full
force and effect and has not been modified, amended, rescinded or revoked;
(iv) the dealer named in the Purchase Order is obligated to pay for the
motorcycle(s) identified therein; and (v) either the Purchase Order has been
approved for floor plan financing by a Floor Plan Lender, or the Company has
received a deposit for one-third of the purchase price and has deposited the
39
<PAGE>
same in the Anchor Account (except for up to one permitted cash sale without
deposit as provided in Section 2(a) of the Agreement).
9. As of this date, the Company has submitted and the Lender has
approved Purchase Orders covering dealer orders for a total of ___________
motorcycles, and at the rate of $10,000 per motorcycle, the total fundable
amount of approved Purchase Orders to date is: $ ___________
The cumulative amount of Loans funded against
Purchase Orders to date is: (__________),
and the remaining Loan funds now available for
approved Purchase Orders is: $ ___________
10. The maximum permitted cumulative Loan amount
for this week is: $ ___________
As of this date, the cumulative amount of all Loans
advanced by the Lender is: (__________),
and the excess of this maximum amount over the
cumulative amount to date is: $ ___________
11. The maximum permitted outstanding Loan balance $ ___________
for this week is:
As of this date, the outstanding principal balance of (__________),
all unpaid Loans is:
and the excess of this maximum amount over the present $ ___________
principal balance is:
12. The least of the three dollar amounts determined under foregoing
paragraphs 9, 10 and 11 is $____________.
13. As shown in the Weekly Report for the immediately preceding week,
the amount of actual Cumulative Sales achieved by the Company was ________%
of the amount of Cumulative Sales projected in the Company's Cash Flow
Projections for that week, and the amount of actual Cumulative Cash Collected
achieved by the Company was ________% of the amount of Cumulative Cash
Collected so projected for that week. The "Performance Factor" is: (i) zero,
if either percentage is less than 80%; (ii) 100%, if both percentages are
100% or more; and (iii) in any other case, the lower of the two percentages.
The product of the dollar amount determined in foregoing paragraph 12
multiplied by the Performance Factor is: $ ___________
14. As shown in the Weekly Report for the immediately preceding week,
the amount of "Net Receivables Outstanding" was $ ____________, and 75% of
that amount is: $ __________
As shown in that Weekly Report, the amount of "Net Gordon
Inventory at End of Week" was $ _________, and one third
of that amount is: $ ___________
A. The Collateral Base for the previous week is the sum
of these two amounts: $ ___________
B. The outstanding principal balance of the Loans at end
of previous week was: $ ___________
If line B exceeds line A, then the amount from
paragraph 12 minus this excess is: $ ___________
15. The amount of available Loan funds this week is the lesser of the
two amounts respectively determined under paragraph 13 and paragraph 14,
which is: $ ___________
16. The Company requests the Lender to disburse a Loan in the total
amount of $ __________ to the respective vendors and suppliers listed below,
to each of them in the respective amount listed below, by the respective
payment method listed below. For each vendor or supplier to be paid by check
drawn on the Anchor Account, the Company has prepared and submitted with this
Loan request a check drawn in the correct amount payable to the correct
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<PAGE>
vendor or supplier, and the Company hereby requests the Lender to sign the check
prepared by the Company and to deliver the check (or other specified payment) to
the respective payee by the delivery method specified below (if no delivery
method is specified below, then the Lender is instructed to send the check by
regular U.S. mail). For each such vendor or supplier, an original or a true copy
of the respective parts order is attached hereto, and if so indicated below the
Lender is instructed to enclose the parts order with the payment sent to the
respective vendor or supplier.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Vendors Name & Brief Payment Delivery Enclose Amount of
Mailing Address Description of Method Method Parts Payment to,
Parts Ordered (Anchor Account (US Mail if Order Vendor
Check if not not [Yes/No]
specified) specified)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL LOAN AMOUNT THIS WEEK:
- ----------------------------------------------------------------------------------------------------------
</TABLE>
IN WITNESS WHEREOF, the undersigned Affiant has executed this Loan
Request on behalf of the Company as its duly elected or appointed __________
on __________, 1999.
____________________________
___________________, Affiant
STATE OF ______________ )
) SS:
COUNTY OF _____________ )
SWORN TO AND SUBSCRIBED before me this __ day of ___________, 1999 by
_____________, who personally appeared before me and who is personally known
to me or produced a driver's license as identification.
41
<PAGE>
My Commission Expires: ________________________________
NOTARY PUBLIC, STATE OF ________
[NOTARIAL SEAL]
_______________________________
42
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated June 24, 1999, relating to the financial statements of American
Quantum Cycles, Inc. We also consent to the reference to our firm under the
caption "Experts" in the Prospectus.
/s/ Pricher & Company
Orlando, Florida
August 17, 1999
