SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For the quarter ended July 31, 1999
Commission file number 0-24083
AMERICAN QUANTUM CYCLES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2651232
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
731 Washburn Road
Melbourne, Florida 32934
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 752-0008
---------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Common stock outstanding at July 31, 1999 was 2,842,798 shares.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
July 31, 1999 April 30, 1999
------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,683 $ 15,397
Accounts receivable 274,056 94,439
Other current assets 117,506 35,734
Inventories 794,066 791,084
------------ ------------
Total current assets 1,237,311 936,654
------------ ------------
Property and equipment 1,710,279 1,666,661
Less accumulated depreciation 411,042 331,630
------------ ------------
1,299,237 1,335,031
------------ ------------
Other assets:
Deposits 45,555 45,555
Licenses and intellectual rights, less accumulated
amortization of $42,751 and $36,714 319,481 325,518
------------ ------------
365,036 371,073
------------ ------------
$ 2,901,584 $ 2,642,758
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,085,992 $ 1,149,882
Accrued liabilities 951,075 921,835
Current maturities of long-term debt 11,305 15,558
Current capital lease obligations 130,386 147,560
Lines of credit 1,638,684 1,093,893
Notes payable 2,012,934 2,188,753
------------ ------------
Total current liabilities 5,830,376 5,517,481
------------ ------------
Capital lease obligations, less current maturities 81,341 81,341
Long-term debt, less current maturities 1,846,418 1,386,418
------------ ------------
1,927,759 1,467,759
------------ ------------
Stockholders' deficit:
Common stock, par value $.001 per share; authorized
50,000,000 shares, issued and outstanding
2,842,798 and 2,300,586 shares 2,843 2,301
Preferred stock, par value $.001 per share; authorized
2,500,000 shares, no shares issued
Additional paid-in capital 5,203,312 5,076,353
Deficit (10,062,706) (9,421,136)
------------ ------------
Total stockholders' deficit (4,856,551) (4,342,482)
------------ ------------
$ 2,901,584 $ 2,642,758
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF OPERATIONS
Three months ended Three months ended
July 31, 1999 July 31, 1998
------------------ ------------------
Sales $ 343,700 $ 168,024
----------- -----------
Cost and expenses:
Cost of goods sold 370,151 275,193
General and administrative 580,504 1,231,745
----------- -----------
950,655 1,506,938
----------- -----------
Loss from operations (606,955) (1,338,914)
----------- -----------
Other income (expense):
Interest and other income 154 1,494
Interest expense (34,768) (507,709)
----------- -----------
(34,614) (506,215)
----------- -----------
Net loss $ (641,569) $(1,845,129)
=========== ===========
Loss per common share:
Weighted average shares outstanding 2,027,650 662,324
=========== ===========
Net loss $ (0.316) $ (2.786
=========== ===========
See accompanying notes to financial statements.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Three months ended
July 31, 1999 July 31, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Reconciliation of net loss to net cash used in
operating activities:
Net loss $ (641,569) $(1,845,129)
Items not requiring (providing) cash:
Depreciation and amortization 85,449 46,950
Changes in assets and liabilities:
Receivables (179,617) 166,616
Inventories (2,982) (305,143)
Prepaid expenses -- 121,638
Accounts payable 63,890 1,115,056
Accrued liabilities 343,115 239,485
----------- -----------
Net cash used in operating activities (331,714) (460,527)
----------- -----------
Cash flows from investing activities:
Capital expenditures (43,618) (537,871)
Investment in licenses and intellectual rights -- --
----------- -----------
Net cash used in investing activities (43,618) (537,871)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 284,181 661,500
Repayment of notes payable -- --
Repayment of long-term debt -- (18,423)
Proceeds from issuance of common stock -- 422,588
Proceeds from exercise of options 127,500 --
----------- -----------
Net cash provided by financing activities 411,681 1,065,665
----------- -----------
Net increase (decrease) in cash 36,286 67,267
Cash, beginning of period 15,397 48,768
----------- -----------
Cash, end of year $ 51,683 $ 116,035
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<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.
<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.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
4 LICENSES AND INTELLECTUAL PROPERTY
<TABLE>
Licenses and intellectual property are comprised of the following:
<S> <C>
Proprietary technology license $235,000
Intellectual property rights 127,232
--------
362,232
Less accumulated amortization (36,714)
--------
$325,518
</TABLE>
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.
<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.
<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
==========
<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
<TABLE>
Long-term debt at April 30, 1999 is as follows:
<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.
<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:
<TABLE>
<S> <C>
Telephone equipment $ 16,452
Computer equipment 255,611
Machinery and production equipment 41,479
--------
313,542
Less accumulated amortization (35,531)
--------
$278,011
========
</TABLE>
The following is a schedule of future minimum payments required under the leases
together with their present value as of April 30, 1999:
<TABLE>
Year ending
April 30, Amount
----------- --------
<S> <C>
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
========
</TABLE>
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:
<TABLE>
Year ending
April 30, Amount
----------- -------
<S> <C>
2000 $69,756
2001 $69,756
2002 $58,130
</TABLE>
<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.
<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.
<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
=======
<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.
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.
An additional five noteholders have agreed to convert their notes into American
Quantum common stock after the completion of the subsequent public offering.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS DOCUMENT 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 DOCUMENT, 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
earlier in 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.
<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.
American Quantum Cycles moved from a product development focus during the fiscal
year ended April 30, 1999 to low volume production. During the first quarter of
this fiscal year (FY'00), revenues increased and there was a significant
reduction of expenses compared to prior quarters. We sustained losses of
$641,569 during the quarter ended July 31, 1999 as compared to losses of
$1,845,129 during the quarter ended July 31, 1998.
As we increase production and revenues, we anticipate operating expenses
remaining at the current level. The management team is in place and heavy
expenditures in design, engineering and other development costs do not have to
be repeated. This will allow funds to be channeled into advertising and
marketing without increasing the overall operating budget and a profit generated
in the third and fourth quarters of this fiscal year.
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. Revenues in the quarter ended July 31, 1999 were $343,700.
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, eight in June 1999, and four
in July 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:
<PAGE>
o Not recruiting adequate production staff,
o Insufficient training of production staff,
o Not ordering part on time,
o Not ordering correct parts,
o Suppliers delivering parts of unacceptable quality,
o Suppliers not delivering parts on a timely basis,
o Not being able to devise efficient assembly procedures, jigs, fixtures
and tools and
o To manage production staff to operate at an acceptable level of energy,
efficiency and productivity
Consequently, there is no guarantee that we will be successful in producing the
motorcycles that have been ordered.
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 the price per share of the subsequent public
offering; and (ii) warrants to purchase an equal number of shares of
American Quantum Cycles common stock at an exercise price per share equal
to the price per share of the subsequent public offering. American Quantum
Cycles redeemed two of the 8% notes with a principal balance of $80,000.
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 the subsequent public
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 the price per
share of the subsequent public offering; and (ii) warrants to purchase an
equal number of shares of American Quantum Cycles common stock at an
exercise price per share equal to the price per
<PAGE>
share of the subsequent public offering. 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 the subsequent public
offering. American Quantum Cycles intends to repay these notes from the
proceeds of this offering.
o In March 1998, American Quantum Cycles received aggregate of $700,000 in
connection with the issuance of nine (9) promissory notes to nine
investors, which bear interest annually at a rate of 10%. The 10% notes
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 a
price per share equal to the price per share of the subsequent public
offering; and (ii) two warrants to purchase an equal number of shares of
American Quantum Cycles common stock at an exercise price per share equal
to the price per share of the subsequent public offering.
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 the public 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 a subsequent public offering. This is not a revolving line
of credit.
<PAGE>
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 sales of the
motorcycles.
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.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
PART II
Other Information
Item 1. Legal Proceedings - None
-----------------
Item 2. Changes in Securities - None
---------------------
Item 3. Defaults upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - 27.1 Data sheet
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended July 31, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial
officer by the Registrant.
AMERICAN QUANTUM CYCLES, INC.
Date: August 31, 1999 By: /s/ Richard K. Hagen
--------------- -------------------------------------
Richard K. Hagen
Chairman of the Board of Directors,
Chief Executive Officer,
Chief Financial Officer and President
Officer of Registrant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 51,683
<SECURITIES> 0
<RECEIVABLES> 274,056
<ALLOWANCES> 0
<INVENTORY> 794,066
<CURRENT-ASSETS> 1,237,311
<PP&E> 1,710,279
<DEPRECIATION> 411,042
<TOTAL-ASSETS> 2,901,584
<CURRENT-LIABILITIES> 5,830,376
<BONDS> 0
0
0
<COMMON> 2,843
<OTHER-SE> 5,203,312
<TOTAL-LIABILITY-AND-EQUITY> (4,856,551)
<SALES> 343,700
<TOTAL-REVENUES> 343,700
<CGS> 370,151
<TOTAL-COSTS> 950,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,614
<INCOME-PRETAX> (641,569)
<INCOME-TAX> 0
<INCOME-CONTINUING> (641,569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (641,569)
<EPS-BASIC> (0.316)
<EPS-DILUTED> 0
</TABLE>
