Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number 33-8817-D
NORTON MOTORCYCLES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1036901
--------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6462 City West Parkway - Suite 150
Eden Prairie, MN 55344
(Address of Principal Executive Offices) (Zip Code)
(612) 837-0260
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of Registrant's common stock, no par value
per share, at July 20, 1999 was 7,125,658 shares.
1
<PAGE>
Norton Motorcycles, Inc.
Quarterly Report on Form 10-QSB
Part 1 - Financial Information
Item 1 - Financial Statements
Norton Motorcycles, Inc.
(A Development Stage Company)
Unaudited Balance Sheets
(In Thousands, Except Share Data)
March 31 and June 30, 1999
March 31 June 30
1999 1999
----------- ------------
Assets
Current assets
Cash $0 $3
Other 13
------------
Total current assets 16
Property and Equipment
Factory 502
Equipment 101
-----------
Total property and equipment 603
Trademarks 425
----------- -----------
Total assets $0 $1,044
=========== ===========
Liabilities and stockholders'
equity (deficit)
Current liabilities
Accounts payable $0 $281
Accrued liabilities 103
Short term secured debt 225
Current maturity of long term debt 100
-----------
Total current liabilities 709
Long term secured debt 400
Stockholders' equity (deficit)
Common stock, no par value, 400,000,000
shares authorized, 999,611
and 7,125,658 shares issued and
outstanding at March 31, 1999 and
June 30, 1999, respectively 296 838
Deficit accumulated during development
stage (296) (903)
----------- -----------
Total stockholders' (deficit) 0 (65)
----------- -----------
Total liabilities and stockholders' equity $0 $1,044
=========== ===========
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Norton Motorcycles, Inc
(A Development Stage Company)
Unaudited Statement of Operations
(In Thousands, except share and per share data)
Three Months Ended June 30, 1998 and 1999
Three Month Period Cumulative
Ended June 30 amount from
--------------------- inception
1998 1999 -----------
---------- ----------
Expenses
Research and development $0 $246 $246
Administration and marketing 168 464
Stock based compensation 178 178
---------- ---------- -----------
Total expenses 0 592 888
Interest expense 15 15
---------- ---------- -----------
Loss before taxes 0 (607) (903)
Income taxes
---------- ---------- -----------
Net (loss) 0 (607) ($903)
===========
Accumulated deficit, beginning of period (296) (296)
---------- ----------
Accumulated deficit, end of period ($296) ($903)
========== ==========
========== ==========
Weighted average number of shares 999,611 5,829,080
========== ==========
Loss per share $0.00 ($0.10)
========== ==========
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Norton Motorcycles, Inc.
(A Development Stage Company)
Unaudited Statement of Cash Flows
(In Thousands)
Three Months Ended June 30, 1998 and 1999
Three Month Period Cumulative
Ended June 30 amount from
--------------------- inception
1998 1999 -----------
---------- ----------
Cash (used by) operating activities
Net loss $0 ($607)
Adjustments to reconcile net loss to cash
(used by) operations
Stock based expense 178
Change in accounts payable and accrued
liabilities 204
----------
Cash (used by) operations (225) ($497)
Cash (used in) investing activities
Addition to trademark (25) (25)
Other (15) (15)
---------- ---------
Cash (used in) investing activities (40) (40)
Cash from (used by) financing activities
Proceeds from issuing common stock 500 772
Proceeds from short term debt 75 75
Payment of accounts payable
liability assumed (329) (329)
Other 22 22
---------- ---------
Net cash from financing activities 268 540
---------- ---------- ---------
Net increase in cash 0 3 3
Cash at beginning of period 0 0
---------- ---------- ---------
Cash at end of period $0 $3 $3
========== ========== =========
4
<PAGE>
Norton Motorcycles, Inc.
(A Development Stage Enterprise)
Notes to Unaudited Financial Statements
June 30, 1999
1. The Company
Norton Motorcycles, Inc. (Norton or the Company), a development stage
enterprise, was organized in 1986 for the purpose of evaluating and seeking
merger candidates. Through March 1999, the Company had no operations other
than management had been seeking merger or other business opportunities. As
discussed in Note 3, in April 1999 the Company acquired the trade name Norton
and certain assets used to develop a line of high performance motorcycles (the
Asset Purchase). Also in April 1999 the Company's name was changed to Norton
Motorcycles, Inc. from Hallmark Properties, Inc.
As a development stage enterprise, Norton currently has no significant revenue
base and is actively seeking additional investment funding to support its
motorcycle development program. Norton is actively seeking and will need to
obtain capital resources in addition to those described in Note 4 to complete
its product development, fund expected losses, fund plant and equipment
additions, provide working capital and commence profitable operations.
2. Significant Accounting Policies
The Company's fiscal year-end is March 31. The financial statements are
presented in accordance with United States generally accepted accounting
principles and are stated in United States dollars.
The June 30, 1999 balance sheet and related statements of operations and cash
flows presented are unaudited. In the opinion of management all adjustments
(consisting of normal recurring adjustments) necessary to the fair
presentation of financial position and results of operations for the periods
presented have been made. The results of operations for the period ended June
30, 1999 are not necessarily indicative of results of operations of the
results of operations for fiscal year 2000 or of any other future period.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been omitted.
The Company had no operating activities and incurred no expenses or earned no
revenues during either fiscal year 1998 or fiscal year 1999. The costs
incurred prior to fiscal year 1998 pertain to seeking merger candidates and
business opportunities.
During fiscal years 1998 and 1999 there were no changes in stockholders'
equity. On April 30, 1999 the Company's common stock was reverse split on a 1
share for 42 shares basis which immediately became effective. Unless otherwise
indicated, all of the share and per share disclosure amounts are presented as
if the reverse stock split had occurred prior to the beginning of the periods
presented.
Research and development costs are expensed as incurred.
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3. Asset Purchase
The Company entered into an asset purchase agreement dated April 16, 1999 to
acquire substantially all of the assets of Norton Acquisition Corporation
(NAC) in exchange for newly issued common stock, the assumption by the Company
of approximately $500 thousand of trade accounts payable, the assumption of
$650 thousand of debt and the payment of $25 thousand in cash (the Asset
Purchase). On April 20, 1999 the board of directors of Norton authorized the
issuance of the restricted common shares to NAC. After the impact of the 1
share for 42 shares reverse stock spilt, NAC owned 6 million shares out of
6,999,612 Norton common shares then outstanding. NAC had recently acquired
substantially all of the assets of Norton Motors International, Inc. (NMI) in
exchange for all of NAC's outstanding common stock. NMI is a development stage
enterprise that was engaged in the development of a line of high performance
motorcycles. The assets acquired by the Company include all trademarks, a
largely idle assembly plant in Shenstone, England and all motorcycle designs
and prototypes. The long term debt assumed by the Company carries an 8%
interest rate, is collateralized by the assembly plant and intellectual
property and is payable as follows: $100 thousand in April 2000, $150 thousand
in April 2001 and $250 thousand in April 2002.
The Asset Purchase has been accounted for as an acquisition of assets. The
acquired assets were recorded on the basis of the historical cost to NMI.
Under generally accepted accounting principles in the United States, research
and development costs are expensed as incurred. Through December 31,1998, NMI
had invested approximately $4 million in design, development and testing of
high performance motorcycles and had raised approximately $5 million cash
through debt and equity offerings. As of December 31, 1998, NMI had an
unaudited accumulated deficit of approximately $15 million. A substantial
majority of the debt and other liabilities of NMI was not assumed by the
Company. The NMI debt not assumed and other NMI liabilities not assumed are
not included in the June 30, 1999 balance sheet of the Company.
4. Funding Commitments
Genesis Capital Group (Genesis) of Minneapolis has agreed to lend $1 million
to the Company. The Company has indicated its intention to exercise its
contractual right to convert all amounts advanced by Genesis into common stock
at $4 per share. As of June 30, 1999 Genesis had advanced $525 thousand (out
of the $1 million committed) to the Company.
In June 1999 Mr. John Tastad loaned the Company $75 thousand at 10% interest
and received warrants to purchase 18,750 shares of common stock at $4 per
share. The warrants are exercisable for two years. In August 1999 the $75
thousand loan was repaid out of the proceeds of the Bridge Loan financing
discussed below.
On June 30, 1999 the Company entered into agreements (the June 30, 1999
Agreements) which contain commitments for cash investments in the Company by
NMI Investments, LLC, an entity owned by Messrs. Tastad and Kilpatrick. The
initial cash advance to Norton is being provided in the form of a $1 million
US dollar Bridge Loan Facility provided by NMI Investments, LLC. The Bridge
Loan carries a 12 percent interest rate and has a twelve-month term renewable
at the option of the Company for a further twelve-month term on the payment of
$10 thousand. The entire principal amount will be payable on the last day of
the term. NMI Investments received 12,500 warrants to purchase common stock of
the Company at $4.00 per share. These warrants are exercisable for two years.
The Bridge Loan is secured by motorcycle designs and prototypes and the Norton
trademarks. The Bridge Loan is being funded by NMI Investments as the Company
requires the cash resources. As of August 9, 1999 $375 thousand of the Bridge
Loan commitment had been funded. Additionally, NMI Investments, LLC,
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committed in the June 30, 1999 Agreements to provide an additional $4 million
of equity financing to Norton. NMI Investments, LLC has the option to reduce
its commitment to the extent that the Company's equity offering is fully
subscribed by other parties. NMI Investments, LLC has reaffirmed its
intention to fulfill its $4 million funding commitment by participating in the
next equity offering of the Company. The terms and timing of the next equity
offering have not yet been determined. The Company is dependent on the
funding of these commitments to continue its operations and motorcycle
development program through the end of the current fiscal year. The June 30,
1999 Agreements also provide that Messrs. Kilpatrick and Tastad will serve as
Norton's Chief Executive Officer and President, respectively.
5. Stock Options
As of March 31, 1999 no options were outstanding. During the quarter ended
June 30, 1999 the Company granted 737,500 options to acquire common stock to
officers, directors, management and a consulting firm. The options are
exercisable at $4.00 per share. The options granted to the consulting firm
and to a non-employee director are estimated to have an aggregate fair value
of $264 thousand which is being charged to operating expense as follows: $178
thousand during the quarter ended June 30, 1999 and $86 thousand during the
quarter ended September 30, 1999. Also, the June 30, 1999 Agreements
discussed above provide that Messrs. Kilpatrick and Tastad will be
collectively awarded stock options to purchase up to 925,000 additional common
shares at option prices ranging from $4.00 to $12.00 per share over two years;
the number of options awarded is conditional on the achievement of
contractually specified goals. The financial accounting for the options
provided for in the June 30, 1999 Agreements has not been determined.
6. Trademark Agreement
In July 1999 Norton entered into a license and distribution agreement with
Norton Motors Deutschland (NMD), a Munich based distributor of classic Norton
parts and holder of certain Norton trademarks in Europe. The agreement, which
requires Norton to pay royalties based on sales in certain European countries,
provides Norton with a five-year exclusive trademark license and options for
Norton to purchase the trademarks. Should Norton elect to exercise its option
to purchase the trademarks, the royalties previously paid would apply to the
trademark purchase price. In addition, NMD has been appointed the distributor
of Norton products in Germany.
7. Litigation
In July 1999, Robert E. Cieslukowski commenced a lawsuit against Norton and
NMI alleging among other things that the transfer of assets from NMI to Norton
was without reasonable consideration and with the intent to defraud the
creditors of NMI. The complaint also alleges that the aforementioned transfer
amounted to a consolidation or merger of NMI and Norton and therefore Norton
is merely a continuation of NMI. The lawsuit seeks recovery from Norton and
NMI of approximately $545 thousand indebtedness of NMI plus interest. Norton
and NMI deny these allegations and filed their response with the District
Court in August 1999. Although any litigation is subject to uncertainty, NMI
and Norton believe that the transfer of assets was in consideration for fair
value received and hence the transfer was proper. Additionally, the transfer
of assets was in the best interest of the NMI creditors. The aforementioned
indebtedness of NMI is not reflected in the June 30, 1999 balance sheet of the
Company.
7
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Item 2. Management's discussion and analysis of financial condition and
results of operations
Information provided throughout this quarterly report may contain "forward-
looking" information. These cautionary statements are made with the objective
of obtaining the benefits of safe harbor provisions of applicable legislation.
The Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance and actual results may differ
materially from those in the forward-looking statements as a result of various
factors including but not limited to the development stage nature of the
Company.
Results of operations
The Company reported a net loss of $607 thousand for the quarter ended June
30, 1999. The largest expense pertains to research and development that is
being performed in England. Norton's motorcycle development program is
progressing and is currently focused on the Nemesis, a V-8 engine performance
motorcycle, and the Nirvana, a V-twin engine cruiser. The Nemesis is being
road tested. Working prototypes of the Nirvana's V-twin engine are being
produced. The Company incurred administration and marketing expenses
primarily for personnel, outside consulting, legal fees, travel and
promotional activities. The reported non-cash stock based expense is related
to stock options awarded to a consulting firm and to an outside director. As
the Company does not anticipate commencing commercial production of motorcycle
models this fiscal year, the Company expects to continue to incur and report
losses during the remainder of the current fiscal year.
Liquidity and capital resources
As of March 31, 1999 the Company had no assets, liabilities or financial
commitments. In April 1999 the Company acquired assets that were being used in
the development of a line of high performance motorcycles to be marketed under
the trade name Norton. The assets acquired included trademarks, a largely
idle assembly plant in Shenstone, England and motorcycle designs and
prototypes. See notes to the unaudited June 30, 1999 financial statements
for additional information regarding the Asset Purchase.
In April 1999, Genesis Capital Group (Genesis) of Minneapolis agreed to lend
$1 million to the Company. The Company has indicated its intention to
exercise its contractual right to convert all amounts advanced by Genesis into
common stock at $4 per share. As of June 30, 1999 Genesis had advanced
approximately $525 thousand out of its $1 million commitment. Genesis has not
indicated when it will fund the balance of its commitment.
As of June 30, 1999 the Company had no significant cash assets. As discussed
in Note 4 to the unaudited financial statements, on June 30, 1999 the Company
entered into agreements which contain commitments for significant cash
investments in Norton. The initial cash advance to Norton is being provided
in the form of a $1 million US dollar Bridge Loan Facility provided by NMI
Investments, LLC, an entity owned by Messrs. Tastad and Kilpatrick. The Bridge
Loan is being funded by NMI Investments as the Company requires the cash
resources. As of August 8, 1999 $375 thousand of the Bridge Facility had been
funded. Additionally, NMI Investments, LLC, committed in the June 30, 1999
Agreements to provide an additional $4 million of equity financing to Norton.
NMI Investments, LLC has the option to reduce its commitment to the extent
8
<PAGE>
that the Company's equity offering is fully subscribed by other parties. NMI
Investments, LLC has reaffirmed its intention to fulfill its $4 million
funding commitment by participating in the next equity offering of the
Company. The terms and timing of the next equity offering have not yet been
determined. Based on discussions with potential investors the Company will
likely revise the private placement of preferred stock that had been
contemplated.
As a development stage enterprise, Norton currently has no significant revenue
base. The Company is actively seeking approximately $20 million of additional
capital resources (including the $4 million commitment of NMI Investments, LLC
to provide equity financing). The additional capital resources are required
by Norton to complete its product development, fund expected fiscal year 2000
and fiscal year 2001 losses, fund plant and equipment additions, provide
working capital and commence profitable operations. The development of
certain models in the initial product line is expected to continue through
fiscal year 2001.
Additionally the Company faces certain other significant risks and
uncertainties including: the Company's competitors are larger with
substantially more financial resources; the Company has no motorcycle
manufacturing experience; none of the models in the initial product line has
been completed and regulatory approvals will be needed for each model; and a
majority of the Company's costs will be denominated in British pounds while a
majority of the sales will be denominated in other currencies.
While development is not complete and there are significant uncertainties
associated with developing new high performance motorcycles, management
believes that the motorcycle product line being developed, coupled with the
powerful Norton brand name and trademarks, will have substantial market
potential.
Part II - OTHER INFORMATION
Item 1. Legal proceedings
On July 13, 1999, Robert E. Cieslukowski commenced a lawsuit against Norton.
The case is venued in United States District Court, District of Minnesota.
Also, named as defendants in this action are Norton Motors International, Inc.
(NMI), Norton Acquisition Corporation, Myron Calof and Mark Osterberg. In his
complaint, Mr. Cieslukowski, claims that NMI breached the Repayment Agreement
between himself and NMI dated February 27, 1999. Mr. Cieslukowski claims that
debt obligations of NMI aggregating approximately $ 545 thousand are
delinquent.
Mr. Cieslukowski has named Norton as a defendant in this matter arguing that
it is also liable for the above indebtedness under alternative theories of
fraudulent transfer and successor liability. Specifically, the complaint
alleges that the transfer of assets from NMI to Norton was made without
reasonable consideration and with the intent to defraud NMI's creditors. The
complaint also alleges that the aforementioned transfer amounted to a
consolidation or merger of NMI and Norton and therefore Norton is merely a
continuation of NMI.
Norton and NMI deny these allegations and have filed their response with the
District Court in August 1999. Although any litigation is subject to
uncertainty, NMI and Norton believe that the transfer of assets was in
consideration for fair value received and hence the transfer was proper.
Additionally, the transfer of assets was in the best interest of the NMI
creditors.
Item 2. Changes in securities
As more fully described in Note 3 to the unaudited financial statements, on
April 20, 1999 the board of directors of Norton authorized the issuance of
6,000,000 restricted common shares. The issuance of these shares did not
9
<PAGE>
involve a public offering and otherwise was exempt from registration under the
requirements of Section 4(2) of the Securities and Exchange Act of 1933.
In April 1999, Genesis Capital Group agreed to lend $1 million to the Company.
The Company has indicated its intention to exercise its contractual right to
convert all amounts advanced by Genesis into restricted common stock at $4 per
share.
The issuance of these shares did not involve a public offering and otherwise
was exempt from registration under the requirements of Section 4(2) of the
Securities and Exchange Act of 1933.
Item 3. Defaults on senior securities: None
Item 4. Submission of matters to a vote of security holders
As previously reported in the Company's report on Form 10-K, the following
shareholder resolutions were adopted by Norton at its annual shareholders
meeting on April 30, 1999 by an affirmative vote of 252,000,000 pre reverse
stock split common shares out of a total of 293,983,696 pre reverse stock
split common shares then outstanding:
1. The number of directors was increased to four and the following
individuals were elected to the Board of Directors of Norton effective
immediately, until the next annual meeting or until their successors are
elected or shall qualify:
Roberto Aquilini
Myron Calof
Mark Osterberg
John Tastad
2. The Company changed its name from Hallmark Properties, Inc. to Norton
Motorcycles, Inc.
3. The number of shares of Common Stock issued as of the date of the
shareholder meeting was reverse split on the basis of one (1) share for each
forty-two (42) shares outstanding and new certificates will be issued to
shareholders, for the number of shares resulting from such reverse split
rounded to the nearest full share, upon said shareholder's surrender of their
old share certificate.
Item 5. Other information
In July 1999 board of directors elected two new senior executives. Mr. Robert
Kilpatrick is the Company's new chief executive officer and Mr. John M. Tastad
is the Company's new president. Messrs. Kilpatrick and Tastad also serve on
the board of directors. Mr. Kilpatrick is an executive experienced with start-
up and early growth stage companies. He has worked for companies such as
Harley Davidson, Star Craft Manufacturing, Citicorp, Calico Commerce, eLoan,
Quicken, Bankers Trust and Lawyer's Title. Mr. Tastad was the founder and
chief executive officer of Energy Solutions International (ESI). From 1992
until 1997 Mr. Tastad developed ESI from a Minneapolis start-up to a
nationally recognized energy services company. In July of 1997 ESI was sold
to Northern States Power. Messrs. Kilpatrick and Tastad are motorcycle riders
and enthusiasts.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits: Not applicable.
(b) A Current Report on Form 8-K was filed in July 1999 reporting on new
senior officers, additional financing, an increase in the board of directors,
a trademark license agreement and recent litigation.
10
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SIGNATURES
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, thereunto duly authorized.
Norton Motorcycles, Inc.
Dated August 19, 1999 By /s/ Robert Kilpatrick
--------------- ---------------------------
Robert Kilpatrick
Chief Executive Officer
Dated August 19, 1999 By /s/ Mark Osterberg
--------------- ---------------------------
Mark Osterberg
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
NORTON MOTORCYCLES, INC. FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> NORTON MOTORCYCLES, INC.
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