Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
Commission File Number 33-8817-D
For the quarter ended December 31, 1999
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 Company's common stock, no par value per
share, at February 10, 2000 was approximately 7.1 million shares.
<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 Condensed Balance Sheet
(In Thousands, except share data)
December 31 and March 31, 1999
<TABLE>
<CAPTION>
March 31 December 31
1999 1999
--------- -----------
<S> <C> <C>
Assets
Current assets
Cash $ 0 $ 0
Prepaid insurance 20
Deposits and other 47
-------
Total current assets 67
Property and Equipment
Assembly plant - held for sale 502
Equipment 105
-------
Total property and equipment 607
Trademarks 451
------- -------
Total assets $ 0 $ 1,125
======= =======
Liabilities and stockholders' equity (deficit)
Current liabilities
Accounts payable $ 0 $ 521
Accrued liabilities 338
Short term secured debt 150
Current maturities of debt and advances 200
-------
Total excluding debt subject to acceleration 1,209
Debt subject to acceleration 1,095
-------
Total including debt subject to acceleration 2,304
Advances from Genesis - net of current maturity 723
Stockholders' equity (deficit)
Common stock, no par value, 400,000,000 shares
authorized, 999,611 and 7,067,994 shares
issued and outstanding at March 31, 1999
and December 31, 1999, respectively 296 424
Deficit accumulated during development
stage (296) (2,326)
------- -------
Total stockholders' (deficit) 0 (1,902)
======= =======
Total liabilities and stockholders' deficit $ 0 $ 1,125
======= =======
2
<PAGE>
Norton Motorcycles, Inc
(A Development Stage Company)
Unaudited Condensed Statement of Operations
(In Thousands, except share and per share data)
Nine Months Ended December 31, 1999 and 1998
Nine Month Period
Ended December 31 Cumulative
---------------------------------- amount from
1998 1999 inception
----------- ----------- -----------
Expenses
Research and development $ 0 $ 684 $ 684
Administration, marketing and other 986 1,282
Stock based compensation 264 264
----------- ----------- -----------
Total expenses 0 1,934 2,230
Interest expense 96 96
----------- ----------- -----------
Loss before taxes 0 (2,030) (2,326)
Income taxes
----------- ----------- -----------
Net (loss) 0 (2,030) ($ 2,326)
===========
Accumulated deficit, beginning of period (296) (296)
=========== ===========
Accumulated deficit, end of period ($ 296) ($ 2,326)
=========== ===========
Weighted average number of shares 999,611 6,624,185
=========== ===========
Loss per share $ 0.00 ($ 0.31)
=========== ===========
See accompanying notes
3
<PAGE>
Norton Motorcycles, Inc
(A Development Stage Company)
Unaudited Condensed Statement of Operations
(In Thousands, except share and per share data)
Three Months Ended December 31, 1999 and 1998
Three Month Period
Ended December 31
--------------------------------------
1998 1999
----------- -----------
Expenses
Research and development $ 0 $ 134
Administration, marketing and other 345
Stock based compensation
----------- -----------
Total expenses 0 479
Interest expense 31
----------- -----------
Loss before taxes 0 (510)
Income taxes
=========== ===========
Net (loss) 0 ($ 510)
=========== ===========
Weighted average number of shares 999,611 7,067,994
=========== ===========
Loss per share $ 0.00 ($ 0.07)
=========== ===========
See accompanying notes.
4
<PAGE>
Norton Motorcycles, Inc.
(A Development Stage Company)
Unaudited Condensed Statement of Cash Flows
(In Thousands)
Nine Months Ended December 31, 1999 and 1998
Nine Month Period
Ended December 31 Cumulative
-------------------------- amount from
1998 1999 inception
--------- -------- -----------
Cash (used by) operating activities
Net loss $ 0 ($2,030)
Adjustments to reconcile net loss to cash (used by)
operations
Stock based compensation and interest expense 287
Change in accounts payable and accrued liabilities 704
-------
Cash (used by) operations (1,039) ($1,311)
Cash (used in) investing activities
Addition to trademark (51) (51)
Other (74) (74)
------- -------
Cash (used in) investing activities (125) (125)
Cash from (used by) financing activities
Proceeds from issuing common stock 272
Proceeds from Bridge Loan financing 695 695
Proceeds from Genesis advances 823 823
Proceeds from short term debt 75 75
Repayment of short term debt (75) (75)
Payment of accounts payable liabilities assumed (354) (354)
------- -------
Net cash from financing activities 1,164 1,436
------- -------
Net increase in cash 0 0 0
Cash at beginning of period 0 0
------- ------- -------
Cash at end of period $ 0 $ 0 $ 0
======= ======= =======
See accompanying notes
5
</TABLE>
<PAGE>
Norton Motorcycles, Inc.
(A Development Stage Enterprise)
Notes to Unaudited Financial Statements
December 31, 1999
1. The Company, Liquidity, Going Concern Considerations, Recent Developments and
Risk Factors
Norton Motorcycles, Inc. (NRTN 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 that were being 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.
On October 1, 1999 the Company commenced proceedings in the English High Court
against its former engineering consultants, MCD, for relief including delivery
up of prototype motorcycles and design drawings. MCD is defending that claim and
has indicated that it intends to pursue a claim to ownership of the designs
and/or prototypes and a claim for substantial damages that it has estimated to
be in excess of $1.7 million. Although the outcome of this dispute is uncertain,
the Company's English solicitors have advised the Company that they believe that
it is unlikely that MCD's claims to the designs and prototypes and to damages
sought will be sustained.
Since the commencement of these proceedings the Company has received advice that
places in question previous assessments as to the development and viability of
the designs previously provided to the Company. Based on such advice the Company
now believes that it is unlikely that it will complete the development of its
previously announced motorcycle product line. The Company is seeking an
independent third party evaluation of the designs and prototypes and it will be
in a position to provide further details upon receipt of that evaluation. The
Company may have to make further application to the English Court in order to
secure such an inspection.
In June 1999, NMI Investments, LLP (NMI Investments) agreed to provide a $1
million Bridge Loan facility to the Company and to acquire $4 million of a
previously contemplated preferred stock offering. As of December 31, 1999 NMI
Investments had advanced approximately $695 thousand under such Bridge Loan
facility. In response to the Company's assessment that it may not complete the
development of its previously announced product line, NMI Investments has
informed the Company that a substantial change in the business and the
operations of the Company has occurred, and that therefore, it is withholding
any additional funding under the Bridge Loan and it has withdrawn its previously
contemplated $4 million funding commitment. As is discussed under Part II - Item
1 Legal Proceedings, Company is currently involved in material litigation
including litigation with NMI Investments.
As of the date of this report, NRTN had no significant cash resources and had
suspended substantially all motorcycle product line development activities. The
Company requires additional cash resources in the immediate future in order to
continue as a going concern and to resume its efforts to introduce a line of
motorcycles. There is no assurance that such additional funding can or will be
obtained on terms and conditions acceptable to the Company or at all. As
discussed under Part II - Item 1 Legal Proceedings the Company is involved in
material on-going litigation. As of December 31, 1999 the Company owed
approximately $859 thousand to suppliers and employees and the principal amount
of the Company's debt outstanding aggregated $2.2 million. A substantial portion
of the debt, $1.4 million, is classified as current or is subject to
acceleration. The debt outstanding includes $695 thousand owed under the Bridge
Loan agreement and advances from Genesis Capital which advances the Company
believes are convertible into NRTN common stock. As is discussed under Legal
Proceedings, Angel Motorcycles (Angel) purports to hold $820 thousand of NRTN's
outstanding debt. The debt held by Angel includes $695 thousand advanced under
the Bridge Loan agreement with NMI Investments and there is a dispute as to
whether such debt is in default and whether such debt is secured by any assets
of NRTN.
6
<PAGE>
Given the Company's insufficient cash resources, the substantial doubts about
viability of the motorcycle product line which was being developed by MCD, the
significant amounts owed to suppliers and debt holders and the substantial
on-going litigation faced by the Company, the Company may be unable to continue
as a going concern and may have to file for bankruptcy or other court protection
from suppliers and debt holders. Additionally, the Company may seek to sell all
or a portion of its assets, including the trade name Norton.
The Company has received a non-binding proposal from Norton Motors Acquisition,
LLP (Acquisition) whereby a corporate entity to be formed and funded by
Acquisition would purchase substantially of the Company's assets, including the
Norton trade name, in exchange for cash and common stock issued by the new
entity. The non-binding proposal is under review. The terms of the non-binding
proposal have not been announced. Robert Kilpatrick, Chief Executive Officer of
NRTN, is a partner in Acquisition. There is no assurance that any transaction
will be consummated. Additionally, the Company makes no prediction as to the
value of the consideration to be received if a transaction were consummated.
NRTN is a start-up development stage enterprise with no revenue base, product
line or operating history. The competitors of NRTN are substantially larger and
have substantially more capital resources. NRTN's competitors also have
successful motorcycle models and established distribution channels. NRTN has no
motorcycle product line, production facilities, in-house engineering staff or
marketing or administrative employees. The cash requirements to develop or
acquire an initial motorcycle product line have not been determined. NRTN would
need to acquire substantial additional capital resources in order to introduce a
successful motorcycle product line into the very competitive motorcycle market
place. NRTN's competitors would likely have economies of scale efficiencies not
available to the Company. NRTN faces other significant risk factors and
uncertainties, including, but not limited to: the NRTN's ability to raise
additional capital resources; NRTN's ability to create product and brand name
awareness; the level of consumer acceptance of NRTN's products; the ability of
NRTN to design, develop and market its products on a cost-effective basis;
NRTN's ability to attract and retain key engineering, purchasing, production,
marketing and administrative employees; governmental regulation in several
countries and changes in such regulation; economic trends; industry competition;
NRTN's ability to operate successfully in several different countries; the
financial impacts of changes in currency exchange rates; as well as various risk
factors and uncertainties associated with being a development stage enterprise
with limited assets and no revenue base or product line. There is no assurance
that NRTN will be successful in achieving profitability.
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 December 31, 1999 condensed balance sheet and related condensed statements
of operations and cash flows for each of the periods 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 December 31, 1999 are not necessarily indicative
of results of the results of operations for fiscal year 2000 or of any other
future period. Additionally the outcome of existing litigation and the
resolution of disputes with certain suppliers could result in payments of
amounts different from the amounts recorded for financial accounting purposes.
Certain information normally included in notes to financial statements prepared
in accordance with generally accepted accounting principles has been omitted.
7
<PAGE>
The Company had no operating activities and incurred no expenses or earned no
revenues during fiscal year 1999. The costs incurred prior to fiscal year 1999
pertain to seeking merger candidates and business opportunities.
During the year ended March 31, 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.
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 NRTN 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 7 million NRTN common
shares then outstanding. NAC had recently acquired substantially all of the
assets of Norton Motors International, Inc. (International) in exchange for all
of NAC's outstanding common stock. International was 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 Company has decided to offer the Shenstone assembly plant for
sale. 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 maturity of this debt may be subject to acceleration
because contractual interest payments have not been made.
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
International. Historical cost is not necessarily indicative of fair value of
the assets acquired. Under generally accepted accounting principles in the
United States, research and development costs are expensed as incurred. Through
December 31, 1998, International 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, International had an unaudited accumulated deficit of approximately
$15 million. The Company did not assume a substantial majority of the
International debt and other International liabilities. The International debt
not assumed and other International liabilities not assumed are not included in
the December 31, 1999 balance sheet of the Company.
4. Funding Agreements
On April 9. 1999 Genesis Capital Group (Genesis) of Minneapolis agreed to lend
$1 million to the Company. The $1 million was to have been advanced on or before
May 30, 1999. The Company had indicated its intention to exercise its
contractual right to convert all amounts advanced by Genesis into common stock
at $4 per share. As of December 31, 1999 Genesis had advanced approximately $825
thousand to the Company. In October 1999 the Company advised Genesis that it was
in default on the final extension of its funding commitment and that the Company
would not accept additional amounts from Genesis. In October 1999 an attorney
8
<PAGE>
retained by Genesis advised the Company that that the Company was not authorized
to convert into equity any previous advances from Genesis and that Genesis was
evaluating unspecified remedies related to unspecified "changes in
circumstances, factual discrepancies and absences of material factual
information in connection with" the Genesis financing. The advances from Genesis
have been classified as a liability in the December 31, 1999 unaudited balance
sheet.
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 $4.00 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) that contain commitments for cash investments in the Company by NMI
Investments, an entity primarily owned by Messrs. Tastad and Kilpatrick. The
initial cash advance to NRTN was to have been provided in the form of a $1
million US dollar Bridge Loan facility provided by NMI Investments. 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 twelv month term on the payment of $10
thousand. The entire principal amount will be payable on the last day of the
term. The debt maturity may be subject to acceleration because contractual
interest payments have not been made. NMI Investments is to receive 12,500
warrants to purchase common stock of the Company at $4.00 per share. These
warrants are exercisable for two years. Upon full funding of the $1 million
amount to be advanced, the Bridge Loan was to be secured by motorcycle designs
and prototypes and the Norton trademarks. As of December 31, 1999 approximately
$695 thousand of the Bridge Loan had been funded. Additionally, NMI Investments
committed in the June 30, 1999 Agreements to provide an additional $4 million of
equity financing to NRTN. The June 30, 1999 Agreements also provide that Messrs.
Kilpatrick and Tastad will serve as NRTN's Chief Executive Officer and
President, respectively. As is discussed in Note 1, in response to the Company's
assessment that it may not complete the development of its previously announced
product line, NMI Investments has informed the Company that a substantial change
in the business and the operations of the Company has occurred, and that
therefore, it is withholding any additional funding under the Bridge Loan and it
has withdrawn its previously contemplated $4 million funding commitment. In
November 1999, Mr. Tastad resigned as a director and President of NRTN. In
November 1999, Mr. Kilpatrick, Chief Executive Officer of NRTN, resigned as
President of NMI Investments. In December 1999, Angel Motorcycles Inc. (Angel)
acquired the Bridge Loan from NMI Investments and commenced legal action to
collect the amount owed by the Company. As discussed under Part II - Item 1
Legal Proceedings there is a dispute as to whether the Bridge Loan is in default
and whether the amounts advanced under the Bridge Loan agreement are secured by
any assets of NRTN. Additionally, NRTN has asserted a claim against NMI
Investments.
5. Stock Options
As of March 31, 1999 no stock options were outstanding. During the quarter ended
June 30, 1999 the Company granted 737,500 options to acquire common stock to
officers, directors 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 were estimated at the date of grant to have an aggregate fair value of
$264 thousand which was 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 options 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. No options have
yet been earned under the June 30, 1999 Agreements. The financial accounting for
9
<PAGE>
options provided for in the June 30, 1999 Agreements has not yet been
determined. Also, Messrs. Kilpatrick and Tastad have informed the Company that
as a condition of their employment they were each promised additional grants of
215,000 options to purchase common stock exercisable at $4.00 per share; the
Board of Directors has not yet acted on this matter. In November 1999, Mr.
Tastad resigned as a director and President of NRTN.
6. Trademark Agreement
In July 1999 NRTN 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
NRTN to pay royalties based on sales in certain European countries, provides
NRTN with a five-year exclusive trademark license and purchase options. In
addition, NMD has been appointed the distributor of NRTN products in Germany. In
the event that the Company is unable to make required contractual payments it
will be in default under the trademark license agreement.
7. Litigation
The Company is involved in material on-going litigation with MCD and with debt
holders. The outcome of such litigation, which could have a material adverse
effect on NRTN, cannot be predicted. See Part II - Item 1 Legal Proceedings for
a discussion of legal proceedings.
10
<PAGE>
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. Norton Motorcycles, Inc (NRTN or 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 significant risk factors
including but not limited to the development stage nature of the Company.
Results of Operations and Norton Motorcycle Product Line
The Company reported a net loss of $2.0 million for the nine months ended
December 31, 1999. The Company's expenses pertain to research and development,
administration, marketing and other, and stock based compensation. The Company
incurred administration, marketing and other expenses for personnel, severance
pay, legal fees, management and consulting fees, office rent, supplies,
marketing and sales, development of the Norton web site, financing related
costs, expenses incurred on behalf of Norton Motors International, travel and
other expenses. The reported non-cash stock based compensation expense is
related to stock options awarded to a consulting firm and to a director.
On October 1, 1999 the Company commenced proceedings in the English High Court
against its former engineering consultants, MCD, for relief including delivery
up of prototype motorcycles and design drawings. MCD is defending that claim and
has indicated that it intends to pursue a claim to ownership of the designs
and/or prototypes and a claim for substantial damages that it has estimated to
be in excess of $1.7 million. Although the outcome of this dispute is uncertain,
the Company's English solicitors have advised the Company that they believe that
it is unlikely that MCD's claims to the designs and prototypes and to damages
sought will be sustained.
Since the commencement of these proceedings the Company has received advice that
places in question previous assessments as to the development and viability of
the designs previously provided to the Company. Based on such advice the Company
now believes that it is unlikely that it will complete the development of its
previously announced motorcycle product line. The Company is seeking an
independent third party evaluation of the designs and prototypes and it will be
in a position to provide further details upon receipt of that evaluation. The
Company may have to make further application to the English Court in order to
secure such an inspection.
The development and introduction of a motorcycle line will require that the
Company obtain significant additional capital resources in amounts not yet
quantified and from sources not yet identified. As of the date of this report,
the Company had suspended substantially all product development activities.
Liquidity and Capital Resources
As of the date of this report, NRTN had no significant cash resources and had
suspended substantially all motorcycle product line development activities. The
Company requires additional cash resources in the immediate future in order to
continue as a going concern and to resume its efforts to introduce a line of
motorcycles. There is no assurance that such additional funding can or will be
obtained on terms and conditions acceptable to the Company or at all. As
discussed under Part II - Item 1 Legal Proceedings the Company is involved in
material on-going litigation. As of December 31, 1999 the Company owed
approximately $859 thousand to suppliers and employees and the principal amount
of the Company's debt outstanding aggregated $2.2 million. A substantial portion
11
<PAGE>
of the debt, $1.4 million, is classified as current or is subject to
acceleration. The debt outstanding includes $695 thousand owed under the Bridge
Loan agreement and advances from Genesis Capital which advances the Company
believes are convertible into NRTN common stock. As is discussed under Legal
Proceedings, Angel Motorcycles (Angel) purports to hold $820 thousand of NRTN's
outstanding debt. The debt held by Angel includes $695 thousand advanced under
the Bridge Loan agreement with NMI Investments and there is a dispute as to
whether such debt is in default and whether such debt is secured by any assets
of NRTN.
Given the Company's insufficient cash resources, the substantial doubts about
viability of the motorcycle product line which was being developed by MCD, the
significant amounts owed to suppliers and debt holders and the substantial
on-going litigation faced by the Company, the Company may be unable to continue
as a going concern and may have to file for bankruptcy or other court protection
from suppliers and debt holders. Additionally, the Company may seek to sell all
or a portion of its assets, including the trade name Norton.
The Company has received a non-binding proposal from Norton Motors Acquisition,
LLP (Acquisition) whereby a corporate entity to be formed and funded by
Acquisition would purchase substantially of the Company's assets, including the
Norton trade name, in exchange for cash and common stock issued by the new
entity. The non-binding proposal is under review. The terms of the non-binding
proposal have not been announced. Robert Kilpatrick, Chief Executive Officer of
NRTN, is a partner in Acquisition. There is no assurance that any transaction
will be consummated. Additionally, the Company makes no prediction as to the
value of the consideration to be received if a transaction were consummated.
NRTN is a start-up development stage enterprise with no revenue base, product
line or operating history. The competitors of NRTN are substantially larger and
have substantially more capital resources. NRTN's competitors also have
successful motorcycle models and established distribution channels. NRTN has no
motorcycle product line, production facilities, in-house engineering staff or
marketing or administrative employees. The cash requirements to develop or
acquire an initial motorcycle product line have not been determined. NRTN would
need to acquire substantial additional capital resources in order to introduce a
successful motorcycle product line into the very competitive motorcycle market
place. NRTN's competitors would likely have economies of scale efficiencies not
available to the Company. NRTN faces other significant risk factors and
uncertainties, including, but not limited to: the NRTN's ability to raise
additional capital resources; NRTN's ability to create product and brand name
awareness; the level of consumer acceptance of NRTN's products; the ability of
NRTN to design, develop and market its products on a cost-effective basis;
NRTN's ability to attract and retain key engineering, purchasing, production,
marketing and administrative employees; governmental regulation in several
countries and changes in such regulation; economic trends; industry competition;
NRTN's ability to operate successfully in several different countries; the
financial impacts of changes in currency exchange rates; as well as various risk
factors and uncertainties associated with being a development stage enterprise
with limited assets and no revenue base or product line. There is no assurance
that NRTN will be successful in achieving profitability.
12
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal proceedings
Norton Motorcycles, Inc (NRTN or the Company) and Norton Motors International
(International) are involved in material litigation. International owns all of
the common stock of Norton Acquisition Corp (NAC) which owns 85 percent of the
common stock of NRTN. An unfavorable outcome to the litigation involving
International could impact the ownership of the common stock of NAC and/or NRTN.
In a suit filed in the U.S. District Court, District of Minnesota, 4th Division
in July 1999 Robert Cieslukowski, a former Chief Executive Officer and director
of Norton Motors International (International), seeks to recover from NRTN,
International and others including certain directors and officers of NRTN and
International amounts due under Series A Bridge Notes and Convertible
Subordinated Debentures of International as well as advances to International.
The total claim is for $617 thousand plus legal fees. The plaintiff,
Cieslukowski, also alleges that the transactions in April 1999 by which
substantially all the former assets of International were sold to Norton
Acquisition Corp. (NAC) and then to NRTN constituted a fraudulent conveyance
that should be reversed, that NRTN is a continuation of International and that
therefore NRTN is liable for International's financial obligations to the
plaintiff, Cieslukowski. NRTN and International have responded to the suit.
Although any litigation is subject to uncertainty, NRTN and International
believe that the April 1999 transfer of assets was proper. Additionally,
International has asserted that it has claims against Cieslukowski based on
claimed breaches of his fiduciary duty to International as a director and CEO.
Cieslukowski has filed a motion for summary judgment against International that
was heard on February 4, 2000. If plaintiff Cieslukowski were successful in his
motion, he would obtain a judgment against International and may be able to
execute on that judgment against International's assets. If Cieslukowski were
successful he could become entitled to force the sale of International's assets
(primarily International's stock in NAC or NAC's stock in NRTN) to obtain
payment of his claim.
Alex Daneman and Northern Pacific Lines ("NPL") have filed suit against
International in the Superior Court of the State of California in the County of
Marin, to enforce payment of a contract debt of International. Sometime prior to
1998 Daneman and/or NPL bought shares of International's common stock and was
granted share warrants and broad motorcycle distribution rights. Daneman and NPL
agreed to give up the distribution rights and the shares of common stock if
International would pay $300 thousand. The initial agreed upon cash payment
dates were extended; however, International was unable to pay by the extended
dates. Then, in exchange for a further extension International executed certain
stipulated judgments in favor of Daneman and NPL to secure the amount due, which
by then, inclusive of interest, amounted to $360 thousand. According to these
stipulated judgments, if an initial payment of $100 thousand was not paid by
December 31, 1999, Daneman and NPL could file the stipulated judgments and
execute upon them. Accordingly when International failed to make the December
31, 1999 $100 thousand payment Daneman and NPL became entitled to file their
judgment. They have not yet done so, but could at any time. If the judgment is
filed and if Daneman and NPL seek to execute upon the judgment against
International's assets in Minnesota, the judgment will have to be transferred to
Minnesota. If Daneman were to proceed he would be entitled to force the sale of
International's assets (primarily International's stock in NAC or NAC's stock in
NRTN) to obtain payment of his claim.
Global Coin Corporation (Global Coin), as holder of certain debt of
International consisting of Series A Bridge Notes, Convertible Subordinated
Debentures and other loans, and as assignee of the rights of another party,
Cataract N.V., in and to similar debt instruments, has filed a suit against
International in the State of Minnesota, County of Hennepin, District Court, 4th
Judicial District to enforce payment of the foregoing (which aggregate $2.9
million principal amount). International has filed a defense to the claims of
13
<PAGE>
Global Coin. Global Coin has filed a motion for summary judgment that is to be
heard in early March 2000. If Global Coin is successful on its motion, it could
execute against the assets of International. If Global Coin were successful it
could become entitled to force the sale of International's assets (primarily
International's stock in NAC or NAC's stock in NRTN) to obtain payment of its
claim. . Roberto Aquilini is a director of NRTN and also an executive officer of
Global Coin. Myron Calof is a director and Executive Vice President of NRTN, one
of two directors of International and the only director of NAC. Calof is also
employed by the Aquilini Investment Group that owns Global Coin.
On October 1,1999 the Company commenced proceedings in the English High Court
against its former engineering consulting firm, MCD, for relief including
delivery up of prototype motorcycles and design drawings. MCD is defending that
claim and has indicated that it intends to pursue a claim to ownership of the
designs and/or prototypes and a claim for substantial damages that it has
estimated to be in excess of $1.7 million. Although the outcome of this dispute
is uncertain, the Company's English solicitors have advised the Company that
they believe that it is unlikely that MCD's claims to the designs and prototypes
and to damages sought will be sustained.
Angel Motorcycles, Inc., a Minnesota corporation founded by John Silseth II to
develop and distribute motorcycles, has acquired from Donald Shiff and NMI
Investments, whose president is John Tastad, a former director and President of
NRTN, certain debts due from NRTN. Silseth has been a key consultant to both
NRTN and International. Shiff's debt ($100 thousand principle amount) is secured
by a UCC-1 Financing Statement covering NRTN's intellectual property including
the "Norton" trademarks. A UCC-1 Financing Statement has also been filed to
secure NMI Investments' debt ($695 thousand principle amount) but its right to
this security interest has been challenged by NRTN on several bases including
that NMI Investments was in breach of a Bridge Loan commitment to NRTN when the
UCC-1 was filed. As for the Shiff UCC-1 Financing Statement, NRTN asserts that
the Shiff Financing Statement was given to Shiff concurrent with identical
security (UCC Financing Statements filed the same day and time and bearing same
filing number) given to other creditors as well and that all such securities can
only be enforced together in a single collective action. NRTN therefore believes
that it has good defenses to Angel's claims. However, if the Angel claim (which
came before a Minnesota court in a hearing on February 4, 2000) is successful,
Angel could obtain a judgment against NRTN and become entitled to force a sale
of NRTN's intellectual property, including the Norton trade name, to obtain
payment of its claim. NRTN has filed a response to Angel's claim. Additionally,
NRTN asserted that it has claims against NMI Investments and has commenced a
third party action against NMI Investments for breach of contract based on NMI
Investments wrongful refusal to honor its Bridge Loan commitment and for breach
of a Subscription Agreement whereby NMI Investments was to invest $4 million in
NRTN. Robert Kilpatrick, Chief Executive Officer of NRTN, was the President of
NMI Investments until November 1999.
The eventual outcome of all of the above-described litigation is subject to
substantial uncertainty.
Item 2. Changes in securities: None
See Item 5 for a discussion of unauthorized common stock issued by the Company's
former transfer agent.
Item 3. Defaults on senior securities
The Company did not make the scheduled $18 thousand October 15, 1999 interest
payment pursuant to the mortgage on its assembly facility located in Shenstone
England. Pursuant to its terms, the $500 thousand mortgage becomes due and
payable in the event of a default of interest payment with or without demand by
the holder.
14
<PAGE>
The Company has not made the monthly payments of interest provided for in the
Bridge Loan facility. Angle Motorcycles, the holder of the Bridge Loan, $695
thousand principle amount, has advised the Company that it is in default under
the Bridge Loan agreement. Angle Motorcycles has also advised the Company that
it is in default on certain secured advances aggregating $100 thousand held by
Angle Motorcycles. These matters are currently the subject of litigation. See
Part II Item 1 Legal Proceeding for a discussion of this matter.
Item 4. Submission of matters to a vote of security holders: None
Item 5. Other information
In April 1999 Miles Wynn, the former Chief Executive Officer of the Company,
engaged American Securities Transfer Agency (American Securities) to be the
Company's common stock transfer agent. American Securities is located in
Bainbridge Island, Washington and is owned by John Wachsmith. Shortly after
Wynn's resignation, the Company informed American Securities that the Company
would be changing to another transfer agent and the Company requested that
American Securities provide the Company with a shareholder listing and an
accounting for all stock certificates. American Securities has provided the
Company with a shareholder listing that indicates that American Securities
issued approximately 68 thousand unauthorized common shares. However, American
Securities has been unable to provide the Company with an accounting for all
stock certificates. Additionally, American Securities has been unable to provide
the Company with assurance that the unauthorized common shares issued by
American Securities did not exceed the 68 thousand shares previously discussed.
The Company has informed the Securities and Exchange Commission about this
matter including the inadequate record keeping of American Securities. Also,
because of the inadequate recording keeping of American Securities, the
replacement transfer agent, Norwest Shareowner Services, has resigned and will
not continue to transfer shares. A majority of the NRTN common shares held by
the public are handled electronically by the Depository Trust Company and those
shares currently transfer and trade without handling by a transfer agent.
Item 6. Exhibits
Exhibits: Not applicable.
15
<PAGE>
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 February 14, 2000 By: /s/ ROBERT KILPATRICK
----------------------------
Robert Kilpatrick
Chief Executive Officer
Dated February 14, 2000 By: /s/ MARK OSTERBERG
---------------------------
Mark Osterberg
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,125
<CURRENT-LIABILITIES> 2,304
<BONDS> 0
0
0
<COMMON> 424
<OTHER-SE> (2326)
<TOTAL-LIABILITY-AND-EQUITY> 1125
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2030)
<EPS-BASIC> (0.31)
<EPS-DILUTED> 0
</TABLE>
