As filed with the Securities and Exchange
Commission on December 19, 2001
Commission File Number 333-58086
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment 1 to FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
Pure Steel Custom Cycles, Inc.
<s> <c> <c>
ARIZONA 86-0788909
(State or other (Primary Standard Industrial (I.R.S. Employer)
jurisdictions Classification Code Number) Identification number)
of incorporation
or organization)
4010 Grand Avenue, Suite 16
Phoenix, Arizona 85019
Telephone: 602-841-2000
(Address and telephone number of registrant's
principal executive offices and principal place
of business)
Glenford F. Griffin
4010 Grand Avenue, Suite 16
Phoenix, Arizona 85019
Telephone: 602-841-2000
(Name, address and telephone number of
agent for service)
with copies to:
Jody M. Walker
Attorney At Law
South Garfield Way
Littleton, Colorado 80122
Telephone: 303-850-7637
Facsimile: 303-220-9902
If any of the securities being registered on this
Form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: |x|
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed Amount of
class of Amount to be offering aggregate registration
securities registered price offering price fee
<s> <c> <c> <c> <c>
Common stock 2,000,000 $1.00 $2,000,000 $478.00
Common stock(1) 488,500 $1.00 488,500 116.75
Common stock
Underlying warrants 300,000 $2.50 750,000 179.25
2
Common stock
Underlying warrants 100,000 $1.50 150,000 35.85
---------- ---------- -------
2,888,500 $3,388,500 $809.85
(1)To be registered on behalf of selling
shareholders.
The registrant amends this registration statement
on such date or dates as may be necessary to delay
its effective date until the registrant shall file
a further amendment, which specifically states that
this registration statement shall thereafter become
effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration
statement shall become effective on such date as
the Commission, acting pursuant to said Section
8(a), may determine.
3
PRELIMINARY PROSPECTUS Dated December 18, 2001
SUBJECT TO COMPLETION
Up to a maximum of 2,000,000 common shares
at $1.00 per common share
488,500 on behalf of selling security holders
400,000 common shares underlying warrants
on behalf of selling security holders
PURE STEEL CUSTOM CYCLES, INC.
We shall receive $1,739,037 of the proceeds from
the sale of the common shares after paying the
selected broker dealer discounts, if any and
commissions of $200,000 and before offering
expenses estimated at $60,963.
The offering is on a self-underwritten basis with
no minimum offering amount. We have made no escrow
arrangements for any funds received.
We will pay the $200,000 commission fee only if we
engage a broker-dealer.
This is our initial public offering, and no public
market currently exists for our shares.
The offering terminates on December 31, 2002.
Consider carefully the risk factors beginning on
page 7 in the prospectus.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any
representation to the contrary is a criminal
offense.
The information in this prospectus is not complete
and we may change it. We may not sell these
securities until the registration statement filed
with the Securities and Exchange Commission is
effective.
This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy
these securities in any state where the
offer or sale is not permitted.
4
TABLE OF CONTENTS
PROSPECTUS SUMMARY 5
RISK FACTORS 7
- Sales may not meet our expectations
- We rely on a single line of products
- The cost of our motorcycles may deter sales
- We may have to raise additional financing
- We rely on a few large customers
- We have a limited manufacturing history
- We may experience potential recalls and
product liability
- There will be less due diligence done by
third parties
- We will be less likely to sell the common
shares
- There is no minimum offering amount and no
escrow account in this offering
- There is no market for our common stock
- We may never meet the requirements to be
quoted on NASDAQ
- The selling shareholders may have liability
because of their status as underwriters
DETERMINATION OF OFFERING PRICE 11
SELLING SECURITY HOLDERS 11
TERMS OF THE OFFERING 12
SOURCE AND USE OF PROCEEDS 14
DILUTION 15
PURE STEEL 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 24
MANAGEMENT 34
CERTAIN TRANSACTIONS 37
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES 38
PRINCIPAL SHAREHOLDERS 38
SHARES ELIGIBLE FOR FUTURE SALE 40
MARKET FOR COMMON SHARES
AND RELATED SHAREHOLDER MATTERS 40
DESCRIPTION OF SECURITIES 42
LEGAL MATTERS 44
LEGAL PROCEEDINGS 44
EXPERTS 44
INTERESTS OF NAMED EXPERTS AND COUNSEL 44
ADDITIONAL INFORMATION 44
AVAILABLE INFORMATION 45
FINANCIAL STATEMENTS 47
5
PROSPECTUS SUMMARY
The following summary contains basic information
about this offering. It likely does not contain
all the information that is important to you. For
a more complete understanding of this offering, we
encourage you to read this entire document and the
documents we have referred you to.
Pure Steel. Pure Steel designs, develops and
manufactures hand crafted custom motorcycles for
the high-end premium motorcycle market.
For the year ended March 31, 2001 and 2000, we had
revenues of $1,575,887 and a net loss of $432,475.
For the six months ended September 30, 2001, we had
revenues of $339,242 and a net loss of $211,149.
Principal Executive Offices 4010 Grand Avenue, Suite 16
Phoenix, Arizona 85019
Telephone: 602-841-2000
The Offering Pure Steel is offering
up to 2,000,000 common
shares at $1.00 per
common share. There is
no minimum investment and
no minimum offering amount
You will not get your money
back, even if we raise
insufficient capital to
accomplish the expansion of
our operations.
We are not engaging
underwriters to sell the
offering.
Common shares outstanding
prior to this offering
assuming exercise of all of the
warrants 8,188,500
Percent of common shares owned by
current shareholders after maximum
offering and assuming exercise
of warrants 75.58%
Gross proceeds after maximum offering $2,000,000
6
Use of proceeds from sale of
common shares Pure Steel intends to use
the funds from the sale of
our common shares primarily
for:
- payment of debt,
- clothing manufacturing,
- tooling,
- labor,
- parts inventory and
- working capital.
Market For the Common Stock
Prior to the date of this
prospectus, we have had no
trading market for our common
stock. We will apply for
the quotation of our common
stock on the OTC Bulletin
Board.
We cannot offer assurance that
the NASD will quote our common
stock, that an active trading
and/or a liquid market will
develop or, if developed, that
we can maintain it.
Sales by Selling
Security Holders We are registering common shares
on behalf of selling security
holders in this prospectus. We
will not receive any cash or other
proceeds in connection with the
subsequent sale. We are not
selling any common shares on
behalf of selling security holders
and have no control or affect on
these selling security holders.
These securities will be held in
escrow until an acquisition is
consummated.
Absence of Dividends; Dividend Policy We do not currently
intend to pay regular cash
dividends on our common stock.
Our board of directors will
review this policy from time
to time in light of,
among other things, our
earnings and financial
position. We do not
anticipate paying dividends on
our common stock in the
foreseeable future.
7
Transfer Agent We currently act as our own
transfer agent.
- -------------------------------------------
Risk Factors
- -------------------------------------------
In analyzing this offering, you should read this
entire prospectus and carefully consider, among
other things, the following risk factors:
Risks relating to Pure Steel
1. Sales may not meet our expectations and if
other sources of revenue are not available, our
growth and profitability could be delayed or
diminished. You may lose your entire investment.
We expect that the net proceeds from this offering
and the cash flow from operations will be
sufficient to allow us to meet the expected growth
in demand for our products and services. However,
we cannot be assured that our sales will meet our
growth expectations. Should either of these fail to
occur, we may elect to
- reduce the planned expansion of operations
or
- pursue other financing alternatives such as
a rights offering, warrant exercise or borrowings.
Our planned growth and profitability could be
delayed or diminished if we cannot implement the
two options listed above. You may lose your
entire investment.
2. We currently rely on a single line of
products. If these products are not successfully
commercialized, we may not reach profitability and
you may lose your entire investment.
We have concentrated our efforts primarily on the
development of our custom motorcycles and
accessories. We will be dependent to a significant
extent upon acceptance of these products to
generate additional revenues. We cannot assure
you that our custom cycles and accessories will be
successfully commercialized. We cannot assure
you that our competitors will not succeed in
developing or marketing technologies and products
that are more commercially attractive than our
custom cycles.
8
3. The cost of our motorcycles may deter sales,
we may not reach profitability and you may lose
your entire investment.
Our motorcycles retail for prices substantially in
excess of retail prices for conventional
motorcycles. This significant difference in
pricing may deter potential purchasers from making
a monetary commitment in order to purchase our
custom motorcycles. The higher cost of the
product may deter sales, we may not reach
profitability and you may lose your entire
investment.
4. We may have to raise additional financing.
We may not be able to obtain the financing at
reasonable terms to continue operations and you may
lose your entire investment.
We cannot assure you that we will not be required
to seek additional equity or debt capital to
finance our operations in the future. In
addition, we cannot assure you that any financings,
if needed, will be available to Pure Steel or that
adequate funds for Pure Steel's operations, whether
from Pure Steel's revenues, financial markets,
collaborative or other arrangements with corporate
partners or from other sources, will be available
when needed or on terms attractive to Pure Steel.
Our inability to obtain sufficient funds may
require us to delay, scale back or eliminate some
or all of sales and marketing efforts and
manufacturing.
5. We rely on a few large customers. The loss
of any of these large customers will have a
negative affect on our profitability.
In the past, Pure Steel has made a significant
amount of sales to a few large customers.
Historically, the identity of Pure Steel's largest
customers and the volumes purchased by them has
varied. The loss of Pure Steel's largest customers
or a reduction of the volume purchased by these
customers would have had an adverse effect upon
Pure Steel's sales until a time, if ever, as
significant sales to other customers could have
been made.
Pure Steel had sales to two customers that
represented 47.8% and 52.0% of total sales for
the years ended March 31, 2001 and 2000,
9
respectively. At March 31, 2001, one of these
customers owed Pure Steel $68,017, representing
96% of accounts receivable at that date.
6. We have a limited manufacturing history with
our custom motorcycles. Our operations could be
negatively affected if we cannot scale up our
production or hire and train sufficient personnel.
Pure Steel has limited experience with the
manufacture and assembly of our custom cycles in
the volumes that will be necessary for Pure Steel
to generate significant revenues from the sale of
our motorcycles. Pure Steel may encounter
difficulties in scaling up our production or in
hiring and training additional personnel to
manufacture our motorcycles. Future interruptions
in supply or other production problems could have a
material adverse effect on Pure Steel's business,
financial condition and results of operations.
7. We may experience potential recalls and
product liability. Our operations could be
negatively affected by increased costs relating to
recalls or product liability.
Any of Pure Steel's products may be subject to
recall for unforeseen reasons. As a result, Pure
Steel faces a risk of exposure to product
liability, errors and omissions or other claims in
the event that the use of our custom motorcycles,
accessories or other future potential products is
alleged to have resulted in injury and there can be
no assurance that Pure Steel will avoid significant
liability.
We cannot assure you that Pure Steel will be able
to retain our current insurance coverage or that
such coverage will continue to be available at an
acceptable cost, if at all. Consequently, these
claims could have a material adverse effect on the
business or financial condition of Pure Steel.
Risks related to this Offering
8. There will be less due diligence done by third
parties since we are not engaging underwriters.
You will have to rely on your own due diligence in
making the investment.
We are not going to engage an underwriter to assist
us in selling the offering. Less due diligence
will be conducted than in an underwritten offering.
In making your investment decision, you will have
10
to rely on your own due diligence without any
assurance that a third party has thoroughly
investigated the transaction.
9. We will be less likely to sell the common
shares we are offering than we would be if we
engaged an underwriter. We may not sell
sufficient common shares to expand our operations.
You could lose your entire investment.
Since we will be selling the offering without the
assistance of an underwriter, we will likely sell
less of the common shares than we would with an
underwriter's assistance. If we do not sell
enough common shares to ensure the necessary funds
to expand our operations, you could lose your
entire investment.
10. There is no minimum offering amount and no
escrow account in this offering. You will not
receive any of your investment back even if we
raise only a minimal amount.
We have not established an escrow account since
there is no minimum offering amount. We will have
immediate access to the proceeds of the offering.
We will not return any of your investment even if
we only raise a minimal amount from the sale of our
common shares.
11. There is no market for our common stock. If
our common stock has no active trading market, you
may not be able to sell your common shares at all.
We cannot assure you that a public market will ever
develop. We will have to obtain market makers in
our stock. This will be more difficult since we
are not engaging underwriters to sell the offering
and support the common stock. Consequently, you
may not be able to liquidate your investment in the
event of an emergency or for any other reason
except as required by law.
12. We may never meet the requirements to be
quoted on NASDAQ. You may not be able to sell your
common shares easily.
If the trading price of our common stock is less
than $5.00 per share, trading in the common stock
would also be subject to the requirements of Rule
15g-9 under the Exchange Act. Under this rule,
broker/dealers who recommend low-priced securities
to persons other than established customers and
11
accredited investors must satisfy special sales
practice requirements. The broker/dealer must make
an individualized written suitability determination
for the purchaser and receive the purchaser's
written consent prior to the transaction.
SEC regulations also require additional disclosure
in connection with any trades involving a "penny
stock", including the delivery, prior to any penny
stock transaction, of a disclosure schedule
explaining the penny stock market and its
associated risks. Such requirements severely limit
the liquidity of the common stock in the secondary
market because few brokers or dealers are likely to
undertake such compliance activities. Generally,
the term penny stock refers to a stock with a
market price of less than $5.00 per share. A
market in our stock may never develop due to these
restrictions.
13. The selling shareholders may have liability
because of their status as underwriters.
Under the Securities Act of 1933, the selling
security holders will be considered to be
underwriters of the offering. The selling security
holders may have civil liability under Section 11
and 12 of the Securities Act for any omissions or
misstatements in the registration statement because
of their status as underwriters.
- -------------------------------------------------
Determination of Offering Price
- -------------------------------------------------
Our directors arbitrarily determined the offering
price and the total offering amount without
considering any book or market value. The
directors determined the amount of proceeds and
pricing based on the amount of funds necessary to
continue and expand our operations and the possible
dilution to existing and new shareholders.
- -----------------------------------------------
Selling Security Holders
- -----------------------------------------------
Pure Steel shall register pursuant to this
prospectus 488,500 common shares currently
outstanding for the account of the following
individuals or entities and 400,000 common shares
which may be issued upon exercise of currently
outstanding warrants. The percentage owned prior
12
to and after the offering reflects all of the then
outstanding common shares. The amount and
percentage owned after the offering assumes the
sale of all of the common shares being registered
on behalf of the selling security holders.
Amount Total Number % Owned Number of % Owned
Being Owned Prior to Shares Owned After
Name Registered Currently offering After offering offering
- ------- ---------- ----------- ---------- ---------------- -----------
<s> <c> <c> <c> <c> <c>
Don Allio 20,250 20,250 .35% 0 0%
Jim Cornett 2,400 2,400 .04% 0 0%
Correct Alliance, Inc. 117,000 117,000 2.02% 0 0%
Freel Performance, Inc. 30,000 30,000 .52% 0 0%
Bruce Garfunkel 20,000 20,000 .35% 0 0%
Glenford F. Griffen 8,100 8,100 .14% 0 0%
Mary Hidalgo 50,000 50,000 .86% 0 0%
Brian Mazzacua 10,000 10,000 .17% 0 0%
Peter Mignion 80,750 60,750 1.05% 0 0%
Post Co., Inc. 75,000 75,000 1.40% 0 0%
David Schoelles 50,000 50,000 .86% 0 0%
Douglas Twineham 25,000 25,000 .43% 0 0%
Pure Steel shall register pursuant to this
prospectus 400,000 common shares which may be
issued upon exercise of currently outstanding
warrants. The percentage owned prior to and after
the offering reflects all of the then outstanding
warrants. The amount and percentage owned after
the offering assumes the sale of all of the common
shares issued upon exercise of the warrants.
Amount of Total Number of % Owned Number of % Owned
Common Shares Warrants Owned Prior to Warrants Owned After
Name Being Registered Currently offering After offering offering
- ------- ---------- ----------- ---------- --------------- ---------
<s> <c> <c> <c> <c> <c>
David Schoelles 100,000 100,000 21.05% 0 0%
Bruce Garfunkel 100,000 100,000 21.05% 0 0%
Gerald Dente 100,000 100,000 21.05% 0 0%
Tsasnhos Image
Productions, LLC 100,000 100,000 21.05% 0 0%
- ----------------------------------------------
Terms of the Offering
- ----------------------------------------------
Plan of Distribution. Pure Steel is offering up to
2,000,000 common shares at the purchase price of
$1.00 per common share. We are offering the common
13
shares on a direct participation basis by our
officers and directors, and possibly selected
broker-dealers. Glenford Griffin, Oscar Coca and
Daniel Elzy, our officers and directors, will sell
the offering on our behalf. They will be relying
on the safe harbor in Rule 3a4-1 of the Securities
Exchange Act of 1934 to sell Pure Steel's
securities. None of these individuals are subject
to a statutory disqualification, are not an
associated person of a broker or dealer and meet
all of the following conditions of Rule 3a4-
1(a)(4)(ii).
- they each primarily perform or intended
primarily to perform at the end of the offering,
substantial duties for or on behalf of Pure Steel
otherwise than in connection with transactions in
securities; and
- they were not a broker or dealer, or an
associated person of a broker or dealer, within the
preceding twelve months; and
- They have not participated in selling an
offering of securities for any issuer more than
once in the last 12 months.
No sales commission will be paid for common shares
sold by Pure Steel. Selected broker-dealers shall
receive a sales commission of up to 10% for any
common shares sold by them.
Pure Steel reserves the right to withdraw, cancel
or reject an offer in whole or in part. The
common shares offered hereby will not be sold to
insiders, control persons, or affiliates of our
company.
We have made no plans, proposals, arrangements or
understandings with any potential sales agent with
respect to participating in the distribution of our
securities. When, in the future, assuming such
participation develops, the registration statement
will be amended to identify such persons.
Offering Period. Our offering will terminate on
December 31, 2002.
Subscription Procedure. The full amount of each
subscription will be required to be paid with a
check payable to Pure Steel in the amount of the
subscription. Purchasers or soliciting
broker/dealers should remit payment directly to
Pure Steel before 12:00 noon, on the following
14
business day, together with a list showing the
names and addresses of the person subscribing for
the offered common shares or copies of subscriber's
confirmations.
No Escrow Account. There is no minimum offering
amount and no escrow account. As a result, we will
deposit any and all offering proceeds directly into
our operating account.
We do not intend to use any means of distributing
or delivering the prospectus other than by hand or
the mails. We do not intend to use any forms of
prospectus other than the printed prospectus.
- -------------------------------------------------
Source and Use of Proceeds
- -------------------------------------------------
Assuming successful completion of the offering, we
shall receive net proceeds of $1,739,037 after
payment of commissions of $200,000 and offering
expenses of $60,963. The commission amount would
only be payable if a broker-dealer is engaged.
There is no minimum amount we will receive and we
may receive none or a small amount of proceeds.
If we raise significantly less than the maximum
amount, we will be able to pay operational expenses
but will have less working capital to expand
operations. We shall utilize the net proceeds
from the sale of our common shares as described
below. We intend to use the proceeds over a six-
month period.
$2,000,000 $1,000,000 $500,000
Raised Raised Raised
---------- ---------- ---------
<s> <c> <c> <c>
Gross Proceeds $2,000,000 $1,000,000 $500,000
less commissions 200,000 100,000 50,000
offering expenses 60,963 60,963 60,963
---------- ---------- ---------
Net Proceeds $1,739,037 839,037 389,037
---------- ---------- ---------
15
Payment of
Outstanding debt 270,000 140,000 67,500
Clothing manufacturing 90,000 45,000 22,500
Tooling 100,000 50,000 25,000
Labor 100,000 50,000 25,000
Parts 1,002,620 501,301 200,000
Working capital 176,417 52,736 49,037
---------- --------- ---------
Net Proceeds used $1,739,037 $ 839,037 $389,037
========== ========= =========
In the event that the minimal amount is not
received, we will have to scale back operations and
may pursue other equity or debt offerings, not yet
determined.
- ----------------------------------------------
Dilution
- ----------------------------------------------
Dilution. Common shares outstanding will be a
total of 7,788,500, 6,788,500 or 6,288,500 if
$2,000,000, $1,000,000 or $500,000 is raised. The
net tangible book value as of September 30, 2001 is
$(298,823) and the net tangible book value per
share as of September 30, 2001 is $(0.05) based on
5,788,500 common shares outstanding.
The net tangible book value is the aggregate amount
of our tangible assets, less our total liabilities.
The net tangible book value per share represents
the total net tangible book value divided by the
number of common shares outstanding.
The following table illustrates the per share
dilution as of the date of this prospectus, which
investors may experience if we reach the various
levels listed below.
$2,000,000 $1,000,000 $500,000
Raised Raised Raised
---------- ---------- --------
<s> <c> <c> <c>
Offering price $1.00 $1.00 $1.00
Net tangible book value per
share before offering (0.05) (0.05) (0.05)
Increase per share
attributable to investors 0.23 0.13 0.07
16
Pro Forma net tangible
book value per common
share after offering 0.18 0.08 0.01
----- ----- -----
Dilution to investors
per common share $0.82 $0.92 $0.99
----- ----- -----
Dilution as a percent of
the offering price
Per common share 82% 92% 99%
Further Dilution. We may issue additional
restricted common shares pursuant to private
business transactions. We do not currently have
any plans, arrangements or commitments regarding
any private business transactions. Any sales
under Rule 144 after the applicable holding period
may have a depressive effect upon the market price
of our common shares in this offering.
- --------------------------------------------
Pure Steel
- --------------------------------------------
Pure Steel was originally formed on March 10, 1995
as an Arizona corporation. Pure Steel filed
amended articles of incorporation on December 27,
1999 which increased the authorized common shares
to 25,000,000 and created 300,000 authorized Class
A preferred shares.
Properties. Our executive offices consist of
7,000 square feet and are located 4010 Grand
Avenue, Suite 16, Phoenix, Arizona 85019 -
telephone - 602-841-2000. The lease is from
January 1, 2001 to January 1, 2002 for the monthly
lease amount of $3,498.
Employees. Pure Steel currently has ten full time
employees and no part time employees. Pure Steel
does not foresee a change in the number of
employees in the next 12 months.
Business Activities. We develop and market custom
motorcycles. Pure Steel has designed new models
for specific market segments. Many of these
designs are limited edition and with limited
production runs.
Product License Agreement. On May 31, 2000, Pure
Steel entered into a product license agreement with
General Media Communications, Inc. for an exclusive
license of the Penthouse marks in the production
manufacture and distribution of 90 limited edition
17
"Penthouse Magazine 30th Anniversary Motorcycles"
manufactured by Pure Steel and accessory items that
include leather jackets, gloves, goggles, helmets
and bandanas.
Pure Steel paid a $150,000 license fee in 2000.
General Media Communications will earn a royalty of
5 percent of the gross wholesale and/or retail
selling price, based on an average projected sales
price of at least $30,000 per motorcycle.
The term of the agreement commenced on May 31, 2000
and expires 26 months after commencement.
Advertising and Promotion Agreement. On June 13,
2000, Pure Steel entered into an advertising and
promotion agreement with AZPB Limited Partnership,
a Delaware limited partnership, dba
Arizona Diamondbacks and AZPB REM Limited
Partnership, a Delaware limited partnership to
promote and advertise our motorcycle manufacturing
business at the ballpark and in connection with the
Arizona Diamondbacks professional baseball team.
Pure Steel may use the Diamondbacks name and logo
for marketing and promotional uses, subject to
prior review of all materials and written approval
by the Arizona Diamondbacks. Pure Steel will
receive one full page, four-color advertisement in
all issues of the Arizona Diamondbacks
Magazine/Program. Pure Steel will receive
exposure in conjunction with the mascot of the
Arizona Diamondbacks riding a Pure Steel motorcycle
during the games.
During the 2001, 2002 and 2003 seasons, the
motorcycle will be showcased at a minimum of 30
games during the regular season of play, as
determined by the Arizona Diamondbacks.
Additionally, the motorcycle will be displayed on
the main plaza of the ballpark at a minimum of 25
regular season games.
The term of the agreement commenced July 1, 2000
and terminates December 31, 2003. Pure Steel paid
$7,5000 in the 2000 season and shall pay an annual
fee of:
2001 season $15,000
2002 season $20,000
2003 season $25,000
18
Pure Steel will provide one customized Arizona
Diamondbacks Pure Steel motorcycle for each
baseball season covered by the agreement or a total
of four motorcycles.
Product and Service Description. Pure Steel
entered the fiscal year 2001 with five models to
market. Each model is produced to meet exact
specifications, despite low volume. These models
are described as follows:
Scimitar
This bike offers what management believes is sleek
styling and comfortable, performance handling. The
rear turn signals are hidden in the taillight
assembly, leaving the fender struts clean. A 107"
S&S brand engine with Pure Steel's heads provide
the horsepower. Dealer Cost: $30,350. Retail
Cost: $34,350.
Dagger
The Dagger is styled with a contoured rear fender,
side mounted license plate and taillight. All
fenders, tanks and dashes are made of high quality
steel. Dealer Cost: $30,100. Retail Cost: $ 34,100.
Saber
The Saber is Pure Steel's cruiser. A low powerful
stance and our power train are cornerstones for
this bike. We use 18" diamond cut 40 or 80 spoke
wheels, matched with Avon brand tires. Dealer
Cost: $30,350. Retail Cost: $34,350.
Classic Motorcycle
The Pure Steel Classic is the most popular model.
The Classic Motorcycle features tightly contoured
fenders, trenched in taillights and floating brake
rotors highlight a few of this motorcycle's design
features. Additionally, this nostalgic machine
features a 7" tri-bar headlight, fat handlebars and
lace wheels. Dealer Cost: $32,950. Retail Cost:
$35,950.
Stiletto
The Stiletto uses a rigid frame. The struts are
hidden in the fender and the frame made by Daytec
is Pure Steel exclusive. Dealer Cost: $27,100.
Retail Cost: $30,100.
19
In conjunction with our marketing agreements with
the Arizona Diamondbacks baseball team and General
Media, we introduced two more special edition
models.
Penthouse Magazine Signature 30-Year Anniversary
Special
In conjunction with the General Media / Pure Steel
advertising campaign, we designed the Series 2
representing the Eighties era model. This bike
utilizes a stretched frame and 35-degree front
forks. Only 30 of these will be made. Pure Steel
has two more models developed for this campaign.
The Series 1 Representing the Seventies era is a
nostalgic chopper and the Series 3 representing the
Nineties era utilizes a one-piece tank, an inverted
front end and a twin cam rubber mounted engine.
Penthouse magazine featured the Series 2 on its
30th anniversary cover dated September 2000.
Dealer Cost: $39,850. Retail Cost: $46,300
The Arizona Diamondbacks model
A special edition designed especially for the
Arizona Diamondbacks baseball team. We have
established an aggressive goal to sell 100 of these
limited edition bikes.
General Product Specifications. Pure Steel offers
a 48-month unlimited mileage warranty on all
models. Prior to delivery, each bike is run
through a break-in process, then road tested and
followed up with a comprehensive inspection for
durability and reliability for our customers.
The part content for our line of motorcycles is
99.5% American made. All of the Pure Steel
motorcycles use frames that are powder coated to
match custom paint manufactured by Daytec
Manufacturing, Inc. All transmissions feature
close ratio gears with cases made by Delkron, Inc.
Pure Steel maintains insurance for product
liability.
Manufacturing and Assembly. Pure Steel
motorcycles are assembled by hand by technicians
who take pride in the work and are experienced in
the assembly process craft these machines. The
production of Pure Steel motorcycles is primarily
an assembly process made more efficient with the
use of sub assemblers. The Phoenix area is home to
20
a number of motorcycle assemblers. Pure Steel hires
and trains mechanics who come from the industry and
are experienced in such assembly.
Each model possesses a complete component list that
is used as a checklist to acquire all the parts and
components necessary to build a Pure Steel bike.
The process requires coordination with our sales
and order book in order to purchase and acquire the
proper parts and accessories. After the parts are
received and inventoried, they are picked by parts
personnel and placed in order in the pre-assembly
area. Simultaneously, the engine and all of its
components are assembled in the engine machine
shop. Fenders, gas tanks and frames are sent out
to be painted. The entire build process takes
approximately one week. An additional two days are
required for break in and quality control. If any
problems arise, they are addressed with the
technician.
Our manufacturing expenses consist of amounts paid
to third parties for services such as engine
polishing and component painting. A significant
cost of our manufacturing expense consists of
materials and components. The cost of manufacturing
each of the bikes under our current capital
structure is approximately $22,200. We intend to
reduce this cost through volume discounts from our
suppliers.
One of the primary components of our motorcycles is
the 107" S&S brand engines. S&S Cycle, Inc. is an
American OEM manufacturer of V-twin engines that
has been in business for decades. We prepare the
unassembled engines and then we send them to a
third party where they are completely polished. In
our engine and machine shop, the cylinders are
finished by trained technicians to our rigid
specifications.
During the second quarter of fiscal year 2002, a
verbal agreement was entered into with Las Vegas
Harley-Davidson whereby LVHD would buy the parts
necessary for Pure Steel to build ten custom
motorcycles. Total cost of parts necessary to
build these motorcycles are estimated to be
approximately $20,000 to $22,000 per motorcycle.
Pure Steel is to repay LVHD at a rate of $22,000
per motorcycle as each motorcycle is built and
sold. Repayments to LVHD began in June 2001.
21
Distribution. We distribute our motorcycles
through a nationwide network of established
unaffiliated dealers who offer other brands of
motocycles that do not directly compete with the
high end customized motorcycle market. All of
the dealers maintain a wait list and we have had an
increase in backorders for our motorcycles.
Sourcing. We currently purchase several key
components including frames and engines from single
or limited sources. We purchase each of these
components on a purchase order basis and have no
long-term contracts for these components. Although
we believe there are alternate sources for each of
these components, we have elected not to sacrifice
on what we believe to be quality. We buy only
what we have found to be the highest quality parts.
Pure Steel has relationships with nearly 30
vendors, supplying a diverse and extensive list of
the necessary components used in building a Pure
Steel motorcycle.
S&S Cycles is our primary supplier for our engines.
Revenue recognition. We recognize revenue when
the product is shipped, provided a purchase order
or payment has been received.
Competition. Competition in the custom motorcycle
market is intense. We have five significant
competitors, Titan Motorcycles, Big Dog Cycles,
Borgett Custom Cycles, Ultra Motorcycles and
American Eagle Custom Cycles. Competition is based
by the design, paint schemes, workmanship, price of
the motorcycles, quality and availability.
Our motorcycles are one of the most expensive
manufactured motorcycles on the market, however, in
our six years of business, we have yet to supply
the demand.
Market Segmentation. We compete in the
heavyweight segment of the motorcycle market with
units that have an engine displacement of 751cc and
larger. This heavyweight market segment can be
segregated into four basic categories:
- standard,
- performance,
- touring and
- custom bikes.
The marketing for our motorcycles is directed at
buyers in the market for custom bikes who are
looking for the high-end components not associated
22
with mass production bikes, individuality and
style. Based on our past sales, the most ardent
Harley-Davidson riders are the most likely Pure
Steel buyers.
Industry Analysis. Motorcycles are recreation
vehicles and are categorized in the leisure and toy
industry. This industry segment is comprised of a
diverse amalgam of general industry participants.
- Motorcycle manufacturers,
- toy manufacturers,
- cruise lines,
- resorts and
- amusement parks
are all examples of participants in this diverse
industry competing for consumer leisure and
recreation dollars. Disposable income is a major
driver of economic activity in this sector. As the
economy weakens, spending in this industry may
slow.
The industry is further broken down by recreation
vehicle companies including Fleetwood Enterprises,
a mobile home manufacturer and Artic Cat, a
manufacturer of snowmobiles and personal
watercraft. Specifically, Motorcycle Industry
Magazine indicates that the motorcycle industry
segment structure is made up of a number of low
cost foreign manufacturers primarily sourced from
Japan and European manufacturers from Italy and
Germany. The Japanese bikes are priced much lower
than our motorcyles and maintain a large model
lineup ranging from small 50cc bikes all the way up
to the 1500cc Honda Goldwing.
Participants in the motorcycle manufacturing
industry include entrants from Japan. Honda,
Suzuki, Kawasaki and Yamaha are the largest and
offer lower cost machines. These companies also
sell a variety of other recreation vehicles ranging
from watercraft, mini-motorcycles, dirt bikes, 4-
wheelers and a host of street bikes and combination
on/off road bikes. Ducati, BMW and a number of
smaller low volume European manufacturers also
provide bikes to the US market.
Strategy and Implementation Summary. Pure Steel
plans to use the proceeds of this offering to
- pay outstanding debt,
- manufacture clothing,
- tooling,
23
- parts and labor and
- working capital.
We are building our brand by targeting distribution
through high-end Harley Davidson dealers. This is
strategic for a number of reasons:
First, we believe these dealers already possess
a customer base of buyers with the financial
ability to purchase our product due to the high
cost nature of Harley Davidson motorcycles.
Second, we are positioned as a move up product
from a Harley Davidson motorcycle. Pure Steel is
able to complete the bike line up on a dealer's
showroom floor.
Third, based on in-house surveys, we targeted
dealers that are the most financially successful.
Therefore, we believe they are a lower credit risk.
Distribution is rather simple. Based on our in-
house surveys, we have more dealers interested in
putting Pure Steel motorcycles on their showroom
floor than we have bikes to fill them.
- Increase production to meet demand.
Increased production is directly related to our
capital position. Our challenge is to satisfy the
demand for Pure Steel motorcycles.
- Leverage our brand through an apparel line.
In conjunction with our contract to build the co-
branded Penthouse magazine limited series
motorcycles, General Media's Penthouse Magazine, in
cooperation with Bob Guccione, have verbally agreed
to co-brand Pure Steel apparel through apparel
market makers and design representatives in the
business.
We have entered into preliminary negotiations with
Friedman Corporate Consultants, LLC. No formal
agreement has been entered into. Under the
preliminary terms discussed, Pure Steel will make a
$90,000 investment paid over six months and pay
royalties to Penthouse and Friedman totaling 7% of
retail sales. The clothing manufacturer will split
the profits 50/50 with Pure Steel. Friedman and
General Media have preliminarily elected to develop
a co-branded signature line of Pure Steel clothing.
24
The clothes would be placed in major department
stores around the country. Additionally, sales
and distribution would be made available on the
Penthouse website at Penthouse.com.
Seasonality. Pure Steel, in general, has not
experienced significant seasonal fluctuations in
motorcycle production. This has been primarily
the result of a strong demand for our motorcycles
and related products, as well as the availability
of floor plan financing arrangements for its North
American independent dealers which allows them to
build their inventory levels.
- -------------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -------------------------------------------------
Organization. Pure Steel was incorporated under
the laws of the State of Arizona in 1995. Our
principal business consists of the manufacture and
sale of custom motorcycles and motorcycle repair.
We are located in Phoenix, Arizona and sales are
made to various retailers located throughout the
United States. Sales and related cost of sales are
reported upon product shipment. Pure Steel
designs, develops and manufactures hand crafted
custom motorcycles for the high-end premium
motorcycle market.
Trends and Uncertainties
Demand for Pure Steel's products and services will
be dependent on, among other things, general
economic conditions that are cyclical in nature
and subject to volatility not in Pure Steel's
control. Inasmuch as a major portion of Pure
Steel's activities is the sale and marketing of
custom motorcycles and related products. Pure
Steel's business operations may be adversely
affected by its competitors and prolonged
recessionary periods.
Our marketing strategy is tailored to attract a
sophisticated high-end customer seeking a one of
kind custom motorcycle. Over the past 18 months,
the condition of the domestic economy has shown
signs of a recession that may lower discretionary
income and may result in lower future demand of
high-end custom motorcycles and related products
and services. The retail prices for our
motorcycles are in excess of the retail prices of
conventional motorcycles and other competitor
brands of heavy weight motorcycles. When coupled
25
with a recessionary economic trend this may deter
sales and shift demand for our products and
services to our competitors who may offer products
that are more economically attractive.
Results of Operations
Six Months Ended September 30, 2001 and 2000
For the six month period ended September 30, 2001,
Pure Steel had sales of $339,242 as compared to
$771,857 for the six-month period ended September
30, 2000. The decrease in sales is due to an
overall lower volume of units sold of which 11
units were sold during the six months ended
September 30, 2001 compared to 28 units sold
during the same period a year ago. The decrease
in units sold is due to a shortage of working
capital needed to fund the purchase of parts and
to fund manufacturing overhead.
Cost of goods sold was $323,759 for the six months
ended September 30, 2001, or a gross margin of
4.6%, as compared to cost of goods sold of
$587,546 for the same period a year ago, or a
gross margin of 24.9%. The significant decrease
in gross margin was due to a higher allocation of
overhead to cost of manufacturing caused by a
lower number of units manufactured. During the
six months ended September 30, 2001 there were 11
units manufactured compared to 28 units during the
same period of the previous year. Certain cost of
manufacturing are fixed thus as more units are
manufactured these fixed costs on a per unit basis
are reduced.
Selling, general and administrative expenses were
$208,696 for the six months ended September 30,
2001 compared to $474,896 for the same period of
the previous year. The decrease in SG&A was due
to a reduction in advertising expenses of
approximately $149,000, lower travel expenses of
approximately $23,000 and lower consulting
expenses of approximately $20,000. The remaining
decrease in SG&A during the six months ended
September 30, 2001 compared to the same period of
the previous year is attributable to a Company-
wide focus on cost reduction.
Other Income (Expense) for the six months ended
September 30, 2001 was a net expense of $17,936
compared to a net expense of $6,198 for the same
period of the previous year. The significant
increase in other expense was due to an increase
26
in interest expense of $15,162 attributable to
higher overall weighted average debt for the six
months ended September 30, 2001 compared to the
same period of the previous year. Interest expense
for the six months ended September 30, 2001 was
offset by $6,179 resulting from a gain on the
disposal of equipment. There was no such gain
recorded during the same period of the previous
year.
The Year Ended March 31, 2001 and 2000
During the year ended March 31, 2001, Pure Steel
had sales of $1,575,887 as compared to $1,658,002
for the same period of the previous year. The
decrease in sales is due to an overall lower
volume of units sold of which 48 units were sold
during the year ended March 31, 2001 compared to
57 units sold in during the same period of the
previous year. The decease in units sold is due
to a shortage of working capital needed to fund
the purchase of parts and fund manufacturing
overhead.
Cost of Goods Sold was $1,220,035 for the year
ended March 31, 2001, or a gross margin of 22.6%
as compared to cost of goods sold of $1,196,091
for the same period of the previous year, or a
gross margin of 27.9%. The decrease in gross
margin was due to a slightly higher allocation of
overhead to cost of manufacturing due to a lower
number of units manufactured. During the year
ended March 31, 2001 there were 48 units
manufactured compared to 57 units during the same
period of the previous year. Certain cost of
manufacturing are fixed thus as more units are
manufactured these fixed costs on a per unit basis
are reduced.
SG&A was $765,337 for the year ended March 31,
2001 compared to $572,963 for the same period of
the previous year. The increase in SG&A for the
year ended March 31, 2001 was due to a significant
increase in advertising expense of approximately
$121,000, an increase in consulting expense of
$60,000, an increase in amortization of licensing
fees of approximately $66,000 and higher costs
associated with insurance, printing and travel
which combined increased SG&A by approximately
$103,000. During the year ended March 31, 2000
Pure Steel issued 125,000 shares of common stock
for compensation valued at $125,000 of which there
was no such amount recorded during the year ended
March 31, 2001. During the year ended March 31,
27
2000 Pure Steel had bad debt expense of
approximately $30,000 relating to one unit sold to
a single customer which is no longer in business
with no corresponding bad debt amount recorded
during the year ended March 31, 2001.
Other Income (Expense) for the year ended March
31, 2001 was a net expense of $22,990 compared to
a net expense of $8,669 for the same period of the
previous year. The significant increase in other
expense was due to an increase in interest expense
of $19,837 attributable to higher overall weighted
average debt for the year ended March 31, 2001
compared to the same period of the previous year.
Interest expense for the year ended March 31, 2001
was offset by $5,516 of interest income earned on
overnight invested funds. There was no such
interest income earned during the year ended March
31, 2000.
Liquidity and Capital Resources
As of September 30, 2001 Pure Steel had negative
working capital of $(171,432) compared to negative
working capital of $(172,565) at March 31, 2001.
Cash flows from operations before changes in
working capital for the six months ended September
30, 2001 was a negative $(161,427) compared to a
negative Cash flows from operations before changes
in working capital of $(216,523) for the same
period of the same period of the previous year.
This increase in Cash flows from operations before
changes in working capital was attributable to a
lower overall net loss for the six month period
ended September 30, 2001 compared to the same
period a year ago.
Cash flow provided by investing activities for the
six month period ended September 30, 2001 was
$31,120 resulting from proceeds generated from the
disposal of equipment compared to cash flow used
by investing activities of $24,536 for the six
month period ended September 30, 2000 resulting
from the purchase of certain operating equipment.
Cash flow provided by financing activities for the
six month period ended September 30, 2001 was
$39,160 compared to cash flow used by financing
activities of $(7,549) for the six month period
ended September 30, 2000. The increase in cash
flow provided by financing activities is
attributable to borrowings from a related party of
$185,000 and advances from a stockholder of
28
$36,095 offset by net payments of long-term debt
of $167,730. As of September 30, 2001, the
Company has available a $50,000 line of credit
from a bank. As of September 30, 2001 there are
no amounts borrowed under this line of credit.
Cash flows from operations before changes in
working capital for the year ended March 31, 2001
was a negative $(214,305) compared to cash flows
from operations before changes in working capital
of $61,846 for the same period of the previous
year. This decrease in cash flows from operations
before changes in working capital was primarily
attributable to the net loss incurred during the
year ended March 31, 2001 offset by higher overall
depreciation and amortization.
Cash flow used by investing activities for the
year ended March 31, 2001 was $57,248 compared to
cash flow used by investing activities of $95,798
for the same period of the previous year. The
significant decrease is due to the purchase of a
$75,000 certificate of deposit during the year
ended March 31, 2000 as security for a $75,000
letter of credit required by the floor plan
financing agreement entered into with a financial
institution. Purchases of property and equipment
for the year ended March 31, 2001 was $57,248
compared to $20,798 for the same period of the
previous year. The increase in the purchase of
property and equipment was due to the purchase of
a customized trailer and awning during the year
ended March 31, 2001 valued at approximately
$56,000 compared to the purchase of truck
accessories and certain special purpose equipment
valued at approximately $21,000 during the year
ended March 31, 2000.
Cash flow provided by financing activities for the
year ended March 31, 2001 was $23,567 compared to
cash flow provided by financing activities of
$132,107 for the same period of the previous year.
The majority of the decrease in cash flow provided
by financing activities is attributable to cash
proceeds generated from the sale of Preferred
Stock of $100,000 and a capital contribution by a
stockholder of $52,101 during the year ended March
31, 2000 compared to cash proceeds generated from
the sale of Preferred Stock of $25,000 during the
year ended March 31, 2001. Net debt repayments
were $1,433 during the year ended March 31, 2001
compared to net debt repayments of $19,994 during
the year ended March 31, 2000.
29
Available Capital Resources
Historically working capital requirements have
been funded by cash flows from operations, private
placements of preferred stock, issuance of common
stock for goods and services, borrowings from its
major shareholders and borrowings and advances
from related parties and customers. There is no
assurance that working capital will continue to be
made available from these sources or under similar
terms in amounts sufficient enough to ensure that
Pure Steel will be able to continue its
operations.
In the event Pure Steel is unable to secure such
additional funding and/or under reasonable terms,
management would attempt to downsize the business
so as to enable Pure Steel to survive and grow at
a slower pace or discontinue.
Until such time as Pure Steel has successfully
completed additional funding arrangements, and is
cash flow positive from operations, it remains at
significant risk from its lack of capitalization.
It is highly likely that our stockholders will
incur additional dilution as a result of future
fundings involving issuance of common stock,
common stock warrants and class A preferred stock.
Note Payable - Line of Credit
Pure Steel has a $50,000 line of credit
established at Bank of America, N.A. with interest
payable monthly at the prime rate plus 2% (10.5%
and 10.75% as of March 31, 2001 and 2000,
respectively) with no maturity date. The maximum
amount borrowed on the line of credit in both
years was $50,000 and the minimum amount borrowed
was $42,125 and $44,564 for the years ended
March 31, 2001 and 2000, respectively. The line of
credit is secured by the personal guarantees of
the founding stockholders of Pure Steel. As of
September 30, 2001 there are no amounts borrowed
under this line of credit and the line of credit
remains available for future borrowings.
Floor Plan Financing
Pure Steel guarantees the collection of
receivables owed to a financial institution by
their customers for sales made under a floor plan
financing agreement. As of September 30, 2001,
Pure Steel has guaranteed $228,497 of receivables
which have been previously recorded as sales.
This floor plan financing arrangement has been
30
made available to certain qualified dealers.
Proceeds generated from the sales of Pure Steel
motorcycles by the participating dealers are paid
directly to the financial institution equal to the
cost of the motorcycles purchased from Pure Steel.
There is no limit to the amount of financial
availability provided for under the floor plan
financing agreement. As of March 31, 2001 and
2000, the amount of receivables guaranteed by Pure
Steel was $292,370 and $290,330, respectively.
Additionally Pure Steel has secured a $75,000
certificate of deposit as required by the
financial institution.
In June 2001, Pure Steel received notice from the
finance company that a dealer had defaulted on its
floor plan financing agreement. The finance
company requested immediate reimbursements of
approximately $130,000 from Pure Steel for the
four motorcycles, which had been covered by the
floor plan. Pure Steel took possession of the four
motorcycles, and as of September 30, 2001, two
motorcycles have been sold and the finance company
had been reimbursed $62,400 of the amount owed. At
September 30, 2001, included within the $228,497
of guaranteed receivables, referred to above, is
$67,600 related to these receivables that remain
in default. Subsequent to September 30, 2001, Pure
Steel has repaid an additional $14,200 from cash
flows from operations and borrowings from
available debt sources. Pure Steel is presently
in default of the remaining balance of $53,400,
which is due and payable. Pure Steel anticipates
repaying this amount due as excess funds become
available.
Stockholder Advances
From time to time, the founding stockholders, who
are also officers and management of Pure Steel,
have made periodic advances to Pure Steel. No
physical note agreements exist and repayment terms
are unspecified. As of March 31, 2001 and 2000
the total amounts owed to these stockholders were
$217,195 and $274,106, respectively. At September
30, 2001 the amount owed to these stockholders was
$212,117. Although these founding shareholders
have elected to make advances to Pure Steel in
order to fund the working capital requirements of
Pure Steel, the shareholders are not legally
obligated to fund the working capital needs of
Pure Steel.
31
Related Party Advances
During the six months ended September 30, 2001,
Pure Steel received an advance totaling $185,000
from a related party with unspecified repayment
terms. These advances are unsecured and are being
repaid by Pure Steel in monthly installments of
$1,735. As of September 30, 2001, there is
$179,796 outstanding.
Customer Advances
Subsequent to September 30, 2001, Pure Steel
entered into an agreement with a customer to
provide advances, not to exceed $200,000, to fund
the production of ten motorcycles. These funds
are restricted to the purchase of parts only.
Advances are to be repaid at a rate of $22,000 per
motorcycle as the units are sold. These
motorcycles are not intended to be purchased by
this customer but are to be made available to the
general public through Pure Steel's several
distributors.
Exercise of Warrants
As of September 30, 2001 Pure Steel has
outstanding 475,000 warrants to acquire an equal
number of shares of common stock of Pure Steel
having an exercise price of $1.50 to $2.50 per
warrant. These warrants expire three years from
any registration of Pure Steel's common stock with
the Securities and Exchange Commission. The
exercise of all warrants would result in total
additional proceeds to Pure Steel, before
expenses, of $1,087,500. There is no assurance
that these warrants will be exercised in the
future or that they will be exercised at the
prices currently established.
Plan of Operation
Management possesses the experience to expand
marketing and distribution of its products and it
is anticipated that marketing and sales
expenditures in the future will increase as Pure
Steel grows and expands its domestic market
demographics.
Capital expenditures in the near term are not
expected to be significant as Pure Steel appears
to have sufficient production and delivery
capacity to accommodate projected production
volumes.
32
Pure Steel is focused on maintaining a low cost
operating environment while increasing operating
revenues. It is expected that as production
increases, SG&A will also increase in absolute
dollars while decreasing as a percentage of
revenue as Pure Steel takes advantage of economies
of scale.
Dependence on a Few Large Customers
A majority of Pure Steel's sales are concentrated
on a few large customers. Pure Steel had sales to
two customers that represented 47.8% and 52.0% of
total sales for the years ended March 31, 2001 and
2000, respectively. At March 31, 2001 one customer
owed Pure Steel $68,017 representing 96% of
accounts receivable at that date. A loss of one
or both of these large customers or a reduction of
the volumes purchased by these customers could
have a materially adverse effect on the future
operations of Pure Steel. There is no assurance
that sales to other customers could be made in
volumes comparable to those volumes sustained by
one or both of these customers in a time period
sufficient to prevent a curtailment of operations.
Going Concern
The accompanying financial statements have been
prepared in conformity with accounting principles
generally accepted in the United States of
America, which contemplate continuation of Pure
Steel as a going concern. However, for the year
ended March 31, 2001, Pure Steel had a net loss of
$432,475, negative working capital of $172,565,
stockholders' deficit of $87,734, and has
experienced a severe shortage of working capital
which has greatly affected operations.
In view of this, realization of a major portion of
the assets in the accompanying balance sheet is
dependent upon continued operations of Pure Steel,
which in turn is dependent upon the success of
Pure Steel's future operations. Management is
attempting to obtain new capital funding which
will strengthen its balance sheet and is revising
its operating requirements which will result in
increased operating cash flows. Management
believes that these actions presently being taken
will provide the opportunity for Pure Steel to
continue as a going concern.
33
Forward Looking Statements
Except for historical information contained
herein, certain other matters discussed herein are
forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. All statements,
other than statements of historical facts, that
address future activities, events or developments,
including such things as future revenues, product
development, market acceptance, responses from
competitors, capital expenditures (including the
amount and nature thereof), business strategy and
measures to implement strategy, competitive
strengths, goals, expansion and growth of Pure
Steel's business and operations, plans, references
to future success and other such matters, are
forward-looking statements. The words
"anticipates," "believes," "estimates," "expects,"
"plans," "intends," "should," "seek," "will," and
similar expressions are intended to identify these
forward-looking statements, but are not the
exclusive means of identifying them. These
statements are based on certain historical trends,
current conditions and expected future
developments as well as other factors we believe
are appropriate in the circumstances. However,
whether actual results will conform to our
expectations and predictions is subject to a
number of risks and uncertainties that may cause
actual results to differ materially, our success
or failure to implement our business strategy, our
ability to successfully market our products,
changes in consumer demand, changes in general
economic conditions, the opportunities (or lack
thereof) that may be presented to and pursued by
us, changes in laws or regulations, changes in
technology, many of which are beyond our control.
Consequently, all of the forward-looking
statements made in this Report are qualified by
these cautionary statements and there can be no
assurance that the actual results we anticipate
will be realized or, even if substantially
realized, that they will have the expected
consequences to or effects on us or our business
or operations. We assume no obligation to update
publicly any forward-looking statements, whether
as a result of new information, future events or
otherwise.
34
- -----------------------------------------------
Management
- -----------------------------------------------
Officers and Directors. Pursuant to our articles
of incorporation, each director shall serve until
the annual meeting of the stockholders, or until
his successor is elected and qualified. Pure
Steel's basic philosophy requires the inclusion of
directors who will be representative of management,
employees and the minority shareholders of Pure
Steel. Directors may only be removed for cause.
The term of office of each officer of Pure Steel is
at the pleasure of Pure Steel's board.
The principal executive officers and directors of
Pure Steel are as follows:
Name Position
------- --------
<s> <c>
Glenford F. Griffin, age 63 Chief Executive Officer
Director
Secretary/Treasurer
Oscar Coca, age 41 President
/Director
Daniel Elzy, age 41 Vice President
/Director
Mary A. Hidalgo, age 31 Corporate Secretary
All of the above officers and directors began their
term at inception.
EXECUTIVE COMPENSATION
Annual Compensation
Name and -------------------------- Long-term
Principal Position Year Salary(1) Bonus Awards Compensation Other
- ------------------ ---- ------ ----- ------ ------------ -----
<s> <c> <c> <c> <c> <c> <c>
Glenford Griffin 2000 $ -- -- -- -- --
Secretary and CEO 1999 $ -- -- -- -- --
1998 $ -- -- -- -- --
Oscar Coca 2000 $ 4,972 -- -- --
President 1999 $ -- -- --
1998 $ -- -- -- -- --
35
Mary Hidalgo
Corporate Secretary 2000 $14,400 -- -- -- --
1999 $ -- -- -- -- --
1998 $ -- -- -- -- --
Daniel Elzy
Vice President 2000 $ -- -- -- -- --
1999 $ -- -- -- -- --
1998 $ -- -- -- -- --
Glenford F. Griffin. Mr. Griffin has been a
partner of Interim Management Services since 1976,
a 1099 contract management firm that provide longer
1099 contract executive management for startup
ventures, project management, reorganizations,
strategic planning, transitions and turnarounds.
We do not pay a fee to Interim Management Service
in return for Mr. Griffin's services as CEO of Pure
Steel. As a partner of Interim Management
Service, Mr. Griffin has served as president and
CEO of corporations with start-up, turnaround or
growth opportunities including, Inland Northwest
Biotechnology Alliance; Inland Northwest Technology
Council; Darius Technology, Inc., an international
manufacturer of high performance computers; AirTN,
Inc., an international electronic financial
transaction and document delivery network; Retail
Automation, Inc., a developer of integrated data
capture systems; Consolidated Electronics, Inc., an
engineering research and development firm of
microprocessor monitoring devices for the
semiconductor, electric utility and marine
industries and 3iInc., an international Internet
middleware developer for fax, voice, data and video
over IP and worldwide wireless banking financial
transaction processing.
Mr. Griffin obtained a bachelor of arts degree in
business administration with minors in human
behavior and graphic arts from the United States
Armed Forces Institute in 1960 by extension while
service on active duty in the U.S. Navy from the
University of Oregon. In 1970, Mr. Griffin
completed a twelve month program for management
development conducted by the Harvard Graduate
School of business administration.
Oscar Coca. Mr. Coca has been president of Pure
Steel since 1995. Mr. Coca attend Pima College
from 1980-1981 and Triton College from 1979-1980
attending classes in engineering at each college.
From 1990 to 1993, Mr. Coca was president of
general construction for Z Restoration, a
36
corporation that refurbished houses. From 1993 to
present, Mr. Coca has been president of Z
Restoration.
Daniel Elzy. Mr. Elzy has been vice president of
Pure Steel since 1995. From 1990-1993, Mr. Elzy
ran the Acid Department at Phillips Dodge in
Tucson, Arizona. From 1989 to 1993, Mr. Elzy was
a professional musician. Mr. Elzy graduated from
Mechanics Motorcycle Institute in 1995.
Mary A. Hidalgo. Ms. Hidalgo has been corporate
secretary since 1995. From 1993 to 1998, Ms.
Hidalgo worked at Standard Printing Company where
she shot customer artwork, cut and positioned print
and logos. In 1999, Ms. Hidalgo attended Mesa
Community College and took accounting and
bookkeeping classes.
Board of Directors Compensation. Members of the
board of directors will receive a yet to be
determined compensation amount per meeting if these
directors are not separately compensated by Pure
Steel. Each board member will be required to
attend a minimum of four board meetings per fiscal
year. All expenses for meeting attendance or out
of pocket expenses connected directly with their
board representation will be reimbursed by Pure
Steel.
Director and officer liability insurance may be
provided to all members of the board of directors.
Pure Steel has not yet obtained such insurance.
Pure Steel does not have a specific time frame to
obtain this insurance. No differentiation is made
in the compensation of "outside directors" and
those officers of Pure Steel serving in that
capacity.
Conflicts of Interest Policy. Pure Steel has
adopted a policy that any transactions with
directors, officers or entities of which they are
also officers or directors or in which they have a
financial interest, will only be on terms
consistent with industry standards and approved by
a majority of the disinterested directors of Pure
Steel's board of directors.
The bylaws of Pure Steel provide that no such
transactions by Pure Steel shall be either void or
voidable solely because of such relationship or
interest of directors or officers or solely because
such directors are present at the meeting of the
board of directors of Pure Steel or a committee
37
thereof that approves such transactions, or solely
because their votes are counted for such purpose
if:
- - the fact of such common directorship or
financial interest is disclosed or known by the
board of directors or committee and noted in the
minutes, and the board or committee authorizes,
approves or ratifies the contract or transaction in
good faith by a vote for that purpose without
counting the vote or votes of these interested
directors; or
- - the fact of the common directorship or
financial interest is disclosed to or known by the
shareholders entitled to vote and they approve or
ratify the contract or transaction in good faith by
a majority vote or written consent of shareholders
holding a majority of the common shares entitled to
vote (the votes of the common or interested
directors or officers shall be counted in any such
vote of shareholders), or
- - the contract or transaction is fair and
reasonable to Pure Steel at the time it is
authorized or approved. In addition, interested
directors may be counted in determining the
presence of a quorum at a meeting of the board of
directors of Pure Steel or a committee thereof that
approves such transactions.
- ------------------------------------------------
Certain Transactions
- ------------------------------------------------
Advances from stockholders. From time to time,
Oscar Coca and Daniel Elzy have made periodic
advances to the Company. No physical note
agreements exist and repayment terms are
unspecified. As of March 31, 2001 and 2000,
$217,195 and $274,106, respectively, was owed to
stockholders. At September 30, 2001, $212,117
was owed to the two founding stockholders of
which $26,000 was owed to Daniel Elzy and
$186,117 was owed to Oscar Coca.
During the six months ended September 30, 2001,
the Company received an advance totaling
$185,000 from the mother of Oscar Coca with
unspecified repayment terms. The advance is
unsecured and is being repaid by Pure Steel in
monthly installments of $1,735.
38
- ------------------------------------------------
Changes In and Disagreements with Accountants
on Accounting and Financial Disclosures
- ------------------------------------------------
During May 2001, the Company dismissed its
independent accountants, Sapp & Sapp, P.C.
Management of the Company agreed that they would be
better served by a different firm of independent
auditors. On July 3, 2001, the Company engaged
Pannell Kerr Forster of Texas, P.C. to replace Sapp
& Sapp, P.C. as its independent accountants to
audit the financial statements of the Company as of
and for the years ended March 31, 2001 and 2000.
During the Company's last two fiscal years to the
date hereof, there were no disagreements between
the Company and Sapp & Sapp, P.C. on any matters of
accounting principles or practices, financial
statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to
the satisfaction of Sapp & Sapp, P.C. would have
caused them to make reference to the subject matter
of the disagreements in connection with their
report on the financial statements for such years.
During the last two fiscal years the Company did
not consult PKF regarding any of the matters or
events set forth in Item 304 (a) (2) (i) or (ii) of
Regulation S-K.
- ------------------------------------------------
Principal Shareholders
- ------------------------------------------------
There are currently 5,788,500 common shares
outstanding. After the offering, a total of
8,188,500 common shares will be outstanding
assuming the exercise of the warrants. The
following tabulates holdings of shares of Pure
Steel by each person who, at the date of this
prospectus, holds of record or is known by
management to own beneficially more than 5.0% of
the common shares and, in addition, by all
directors and officers of Pure Steel individually
and as a group.
39
Shareholdings at Date of
This Prospectus
Percentage of
Outstanding
Shares as
Adjusted
to Reflect
Percentage Shares Conclusion
Number Prior to Owned After of the
Name and Address of Shares(1) Offering Offering(2) Offering
- ----------------- ------------ --------- ------------- ---------
<s> <c> <c> <c> <c>
Glenford F. Griffin
1022 W. 30th Avenue
Spokane, WA 99203 8,100 .14% 0 0%
Daniel Elzy
4010 Grand Avenue
Suite 16
Phoenix, AZ 85019 2,650,000 45.78% 2,650,000 32.36%
Oscar Coca
4010 Grand Avenue
Suite 16
Phoenix, AZ 85019 2,650,000 45.78% 2,650,000 32.36%
Mary Hidalgo
4656 S. Parkside Dr.
Tempe, Arizona 85282 50,000 .86% 0 0%
Officers and
Directors 5,358,100 92.56% 5,300,000 64.72%
As a Group (4 persons)
Pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, beneficial ownership of a
security consists of sole or shared voting power,
including the power to vote or direct the voting,
and/or sole or shared investment power, including
the power to dispose or direct the disposition,
with respect to a security whether through a
contract, arrangement, understanding, relationship
or otherwise.
Unless otherwise indicated, each person indicated
above has sole power to vote, or dispose or direct
the disposition of all shares beneficially owned
except if applicable community property laws apply.
40
- ------------------------------------------------
Shares Eligible for Future Sale
- ------------------------------------------------
Pure Steel currently has 5,788,500 shares of common
stock outstanding. Of these, 5,300,000 common
shares will be restricted securities after the
offering and may be sold in compliance with Rule
144 adopted under the Securities Act of 1933. Other
securities may be issued, in the future, in private
transactions pursuant to an exemption from the
Securities Act. Rule 144 provides, in essence,
that a person who has held restricted securities
for a period of one year may sell every three
months in a brokerage transaction or with a market
maker an amount equal to the greater of 1% of Pure
Steel's outstanding shares or the average weekly
trading volume, if any, of the shares during the
four calendar weeks preceding the sale.
The amount of restricted securities that a person
who is not an affiliate of Pure Steel may sell is
not so limited. Non-affiliates may each sell
without limitation shares held for two years. Pure
Steel will make application for the listing of our
shares in the over-the-counter market. Sales under
Rule 144 may, in the future, depress the price of
Pure Steel's shares in the over-the-counter market,
should a market develop. Prior to this offering
we have not had a market for our common shares. The
effect, if any, of a public trading market or the
availability of shares for sale at prevailing
market prices cannot be predicted. Nevertheless,
sales of substantial amounts of shares in the
public market could adversely effect prevailing
market prices.
- -----------------------------------------------
Market for Common Shares and
Related Stockholder Matters
- ----------------------------------------------
Prior to this offering, we have had no market for
our common stock. Subsequent to successful
completion of this offering, we will apply to have
our common stock quoted on the OTC Bulletin Board.
If Pure Steel is not accepted on the OTC Bulletin
Board, Pure Steel will apply to have our common
shares traded on the pink sheets.
Dividends. Holders of Pure Steel's common stock
are entitled to receive such dividends as may be
declared by our board of directors.
41
Broker-Dealer Sales of Pure Steel Securities. If
the trading price of our common stock is less than
$5.00 per share, trading in the common stock would
also be subject to the requirements of the penny
stock rules pursuant to Rule 15g-9 under the
Exchange Act. Rule 15g-2 imposes additional sales
practice requirements on broker-dealers who sell
such securities to persons other than established
customers and accredited investors. Accredited
investors are generally institutions with assets in
excess of $5,000,000 or individuals:
- with net worth in excess of $2,000,000
or
- annual income exceeding $200,000 or
- $300,000 jointly with their spouse
For transactions covered by Rule 15g-2, the broker-
dealer must make a special suitability
determination of the purchaser and have received
the purchaser's written agreement to the
transaction prior to the sale.
In order to approve a person's account for
transactions in designated securities, the broker
or dealer must
- obtain information concerning the person's
financial situation, investment experience and
investment objectives;
- reasonably determine, based on the
information required by the first paragraph that
transactions in designated securities are suitable
for the person and that the person has sufficient
knowledge and experience in financial matters that
the person reasonably may be expected to be capable
of evaluating the rights of transactions in
designated securities; and
- deliver to the person a written statement
setting forth the basis on which the broker or
dealer made the determination required by the
second paragraph in this section, stating in a
highlighted format that it is unlawful for the
broker or dealer to effect a transaction in a
designated security the provisions of the second
paragraph of this section unless the broker or
dealer has received, prior to the transaction, a
written agreement to the transaction from the
person; and stating in a highlighted format
immediately preceding the customer signature line
that the broker or dealer is required to provide
the person with the written statement and the
42
person should not sign and return the written
statement to the broker or dealer if it does not
accurately reflect the person's financial
situation, investment experience and investment
objectives and obtain from the person a manually
signed and dated copy of the written statement.
A designated security means any equity security
other than a security
- registered, or approved for registration
upon notice of issuance on a national securities
exchange that makes transaction reports available
pursuant to 17 CFR 11Aa3-1
- authorized or approved for authorization
upon notice of issuance, for quotation in the
NASDAQ system;
- that has a price of five dollars or more
or
- whose issuer has net tangible assets in
excess of $2,000,000 demonstrated by financial
statements dated less than fifteen months
previously that the broker or dealer has reviewed
and has a reasonable basis to believe are true and
complete in relation to the date of the transaction
with the person.
Consequently, the rule may affect the ability of
broker-dealers to sell Pure Steel's securities and
also may affect the ability of purchasers in this
offering to sell their shares in the secondary
market.
Pure Steel's securities will likely trade below
$5.00 and the penny stock rules of Rule 15g-2
discussed above will apply.
As of the date of the prospectus, there are 15
shareholders.
- ----------------------------------------------
Description of Securities
- ----------------------------------------------
Our articles of incorporation authorize the
issuance of up to 25,000,000 common shares, no par
value and 300,000 Class A preferred shares, no par
value. Currently, Pure Steel has 5,788,000 common
shares outstanding and no preferred shares
outstanding. During the year ended March 31,
2001, holders of 33,500 Class A preferred shares
43
executed their right to convert their shares, 1 for
8, to common shares of Pure Steel. Accordingly,
300,000 common shares were issued in exchange for
all outstanding Class A preferred shares.
Common Stock. Each record holder of common stock
is entitled to one vote for each share held on all
matters properly submitted to the stockholders for
their vote. Cumulative voting for the election of
directors is not permitted by the articles of
incorporation. The holders of outstanding shares
of common stock are entitled to such dividends as
may be declared from time to time by the board of
directors out of legally available funds; and, in
the event of liquidation, dissolution or winding up
of the affairs of Pure Steel, holders are entitled
to receive, ratably, the net assets of Pure Steel
available to stockholders after distribution is
made to the preferred stockholders, if any, who are
given preferred rights upon liquidation.
To the extent that additional common shares are
issued, the relative interest of then existing
stockholders may be diluted.
Preferred Stock. The board of directors of Pure
Steel is authorized to issue the preferred stock
from time to time in series and is further
authorized to establish such series, to fix and
determine the variations in the relative rights and
preferences as between series, to fix voting
rights, if any, for each series, and to allow for
the conversion of preferred stock into common
stock.
There are currently no preferred shares
outstanding.
Warrants. Pure Steel has issued 475,000 warrants
to purchase an equal number of common shares. The
warrants can be exercised at prices ranging from
$1.50 to $2.50 per common share and expire three
years from any registration of Pure Steel's common
stock with the Securities and Exchange Commission.
The exercise of all the warrants would result in
total additional proceeds of $1,087,500 to Pure
Steel.
Transfer Agent. Pure Steel, Inc. currently acts as
its own transfer agent.
44
- -----------------------------------------------
Legal Matters
- -----------------------------------------------
Certain legal matters with respect to the issuance
of the securities offered in this prospectus will
be passed upon by Jody M. Walker, Attorney-At-Law,
Littleton, Colorado.
- -----------------------------------------------
Legal Proceedings
- -----------------------------------------------
We are not involved in any legal proceedings as of
the date of this prospectus.
- -----------------------------------------------
Experts
- -----------------------------------------------
The financial statements as of March 31, 2001 and
2000 included in this prospectus, have been audited
by Pannell Kerr Forster of Texas, P.C., independent
auditors, as stated in their report appearing
herein and have been so included in reliance upon
the report of such firm given upon their authority
as experts in accounting and auditing.
- ----------------------------------------------
Interests of Named
Experts and Counsel
- ----------------------------------------------
None of the experts or counsel named in the
prospectus is affiliated with Pure Steel.
- ----------------------------------------------
Additional Information
- ----------------------------------------------
Until , 2002 (90 days after the date of the
prospectus), all persons making transactions in the
registered securities, whether or not participating
in the offering, may be required to deliver a
prospectus. This is in addition to the obligation
of these persons to deliver a prospectus when
acting as underwriters and when utilizing their
unsold allotments or subscriptions.
45
No dealer, salesman, agent or any other person has
been authorized to give any information or to make
any representation other than those contained in
this prospectus. If given or made, this
information or representation must not be relied
upon as having been authorized by Pure Steel, or
the underwriter, if an underwriter assists in the
sale of the securities.
This prospectus is not an offer or a solicitation
by anyone to any person in any state, territory or
possession of the United States in which an offer
or solicitation is not authorized by the laws of a
state, territory or possession of the United
States, or to any person to whom it is unlawful to
make an offer or solicitation.
Neither the delivery of this prospectus or any sale
made hereunder shall, under any circumstances,
create an implication that there has not been any
change in the facts set forth in this prospectus or
in the affairs of Pure Steel since the date of this
prospectus.
- -----------------------------------------
Available Information
- -----------------------------------------
Pure Steel has filed with the Securities and
Exchange Commission a registration statement
including all amendments and required exhibits
under the Act with respect to the securities
offered by Pure Steel. This prospectus does not
contain all of the information set forth in the
registration statement. Some parts of the
registration statement are omitted pursuant to the
rules and regulations of the Commission.
For further information with respect to Pure Steel
and the securities offered by Pure Steel,
shareholders should examine the registration
statement. Copies of such materials may be
examined without charge at, or obtained upon
payment of prescribed fees from, the Public
Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, telephone number
1-800-SEC-0330, at the Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and the
New York Regional Office, New York, New York
10048.
46
Pure Steel will voluntarily file periodic reports
in the event our obligation to file such reports is
suspended under Section 15(d) of the Exchange Act.
Pure Steel will provide without charge to each
person who receives a prospectus, upon written or
oral request of such person, a copy of any
of the information that was incorporated by
reference in the prospectus not including exhibits
to the information that is incorporated by
reference unless the exhibits are themselves
specifically incorporated by reference. Requests
for copies of said documents should be directed to
Glenford Griffin at Pure Steel.
The Commission maintains a Web site --
//www.sec.gov -- that contains reports, proxy and
information statements and other information
regarding issuers that file electronically with the
Commission.
47
- ----------------------------------------------
Financial Statements
- ----------------------------------------------
Index to Financial Statements Page
<s> <c>
Independent Auditors Report F-1
Balance Sheets as of March 31, 2001 and 2000
and September 30, 2001 (Unaudited) F-2
Statements of Operations for the Years ended
March 31, 2001 and 2000 and for the six month periods
ended September 30, 2001 and 2000 (Unaudited) F-3
Statements of Changes in Stockholders'Equity (Deficit)
for the years ended March 31, 2001, and 2000 and the
six month period ended September 30, 2001 (Unaudited) F-4
Statements of Cash Flows for the Years Ended
March 31, 2001 and 2000 and for the six month periods
ended September 30, 2001 and 2000 (Unaudited) F-5
Notes to Financial Statements F-6
48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Pure Steel Custom Cycles, Inc.
We have audited the accompanying balance sheets
of Pure Steel Custom Cycles, Inc. (an Arizona
corporation), as of March 31, 2001 and 2000, and
the related statements of operations, changes in
stockholders' equity (deficit), and cash flows
for the years then ended. The financial
statements are the responsibility of management.
Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the
United States of America. Those standards
require that we plan and perform the audits to
obtain reasonable assurance about whether the
financial statements are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An
audit also includes assessing the accounting
principles used and significant estimates made
by management, as well as evaluating the overall
financial statement presentation. We believe
that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements
referred to above present fairly, in all
material respects, the financial position of
Pure Steel Custom Cycles, Inc. as of March 31,
2001 and 2000, and the results of its operations
and its cash flows for the years then ended, in
conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been
prepared assuming that the Company will continue
as a going concern. As discussed in Note 13 to
the financial statements, the Company had a net
loss for the year ended March 31, 2001 of
$432,475, negative working capital of $172,565,
stockholders' deficit of $87,734, and has
experienced severe shortages of working capital
which have greatly affected operations, all of
which raise substantial doubt about its ability
to continue as a going concern. Management's
49
plans regarding those matters also are described
in Note 13. The financial statements do not
include any adjustments that might result from
the outcome of this uncertainty.
/s/ PANNELL KERR FORSTER OF TEXAS, P.C.
- ---------------------------------------
PANNELL KERR FORSTER OF TEXAS, P.C.
Houston, Texas
October 23, 2001
F-1
50
PURE STEEL CUSTOM CYCLES, INC.
BALANCE SHEETS
March 31, September 30,
----------------- ------------
2001 2000 2001
------ ------ ------
(Unaudited)
<s> <c> <c> <c>
ASSETS
CURRENT ASSETS:
Cash $ - $ 21,805 $ 46
Accounts receivable, less allowance
for doubtful accounts of $0 and
$34,100 at March 31, 2001 and 2000,
respectively 70,813 143,413 13,645
Inventories 183,556 360,722 389,618
Other current assets 16,834 - 16,822
-------- -------- --------
Total current assets 271,203 525,940 420,131
-------- -------- --------
PROPERTY AND EQUIPMENT, net 150,052 134,070 103,824
-------- -------- --------
OTHER ASSETS:
Certificate of deposit 75,000 75,000 75,000
Inventories 43,700 43,700 43,700
Licensing fees, net of accumulated
amortization of $69,228 and $0 at
March 31, 2001 and 2000, respectively 80,772 50,000 46,158
-------- -------- --------
Total other assets 199,472 168,700 164,858
-------- -------- --------
TOTAL ASSETS $620,727 $828,710 $688,813
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 14,205 $ - $ -
Accounts payable and accrued
liabilities 246,702 140,142 414,912
Customer deposits 36,000 9,000 107,865
Income taxes payable - 2,300 -
Note payable - line of credit 45,125 44,564 -
Current portion of long-term debt 101,736 37,240 47,970
Current portion of long-term debt
- related party - - 20,816
-------- -------- --------
Total current liabilities 443,768 233,246 591,563
51
DEFERRED TAX LIABILITY 3,300 3,300 3,300
LONG-TERM DEBT, net of current
portion 44,198 58,317 21,736
LONG-TERM DEBT - RELATED PARTY,
net of current portion - - 158,980
LOANS FROM STOCKHOLDERS 217,195 274,106 212,117
-------- -------- --------
Total liabilities 708,461 568,969 987,696
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - no par value;
300,000 shares authorized; none
and 35,000 shares issued and
outstanding at March 31, 2001
and 2000, respectively - 100,000 -
Common stock - no par value;
25,000,000 shares authorized;
5,788,500 and 5,425,000 shares
issued and outstanding at March
31, 2001 and 2000, respectively 393,500 205,000 393,500
Additional paid in capital 48,601 52,101 48,601
Accumulated deficit (529,835) (97,360) (740,984)
-------- -------- --------
Total stockholders' equity
(deficit) (87,734) 259,741 (298,883)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $620,727 $ 828,710 $ 688,813
======== ========= =========
See Accompanying Notes to the Financial Statements.
F-2
52
PURE STEEL CUSTOM CYCLES, INC.
STATEMENTS OF OPERATIONS
Six Months Ended
Year Ended March 31, September 30,
-------------------- ---------------------
2001 2000 2001 2000
------ ------ ------ ------
(Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
SALES $1,575,887 $1,658,002 $ 339,242 $ 771,857
COST OF GOODS SOLD 1,220,035 1,196,091 323,759 587,546
--------- --------- ------- -------
GROSS PROFIT 355,852 461,911 15,483 184,311
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 765,337 572,963 208,696 474,896
--------- ------- ------- ---------
LOSS FROM OPERATIONS (409,485) (111,052) (193,213) (290,585)
--------- ------- -------- ---------
OTHER INCOME (EXPENSE):
Interest income 5,516 - - 2,758
Interest expense (28,506) (8,669) (24,118) (8,956)
Gain on disposal of equipment - - 6,179 -
--------- ------- -------- ---------
Other income
(expense), net (22,990) (8,669) (17,936) (6,198)
--------- ------- -------- ---------
LOSS BEFORE PROVISION
FOR INCOME TAXES (432,475) (119,721) (211,149) (296,783)
PROVISION FOR INCOME TAXES - - - -
--------- -------- -------- ---------
NET LOSS $(432,475) $(119,721) $(211,149) $(296,783)
========= ========= ========= =========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.08) $ (0.02) $ (0.04) $ (0.05)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
BASIC AND DILUTED COMMON
SHARES OUTSTANDING 5,534,529 5,338,699 5,788,500 5,439,754
========== ========= ========= =========
See Accompanying Notes to the Financial Statements.
F-3
53
PURE STEEL CUSTOM CYCLES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
Class A Accumulated Total
Preferred Common Additional Retained Stockholders'
------------ ----------- Paid In Earnings Equity
Shares Amount Shares Amount Capital (Deficit) (Deficit)
------- ------- -------- ------- ------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at
March 31, 1999 - $ - 5,300,000 $ 80,000 $ - $ 22,361 $ 102,361
Issuance of 35,000
shares of Class A
Preferred for cash
and offering costs 35,000 100,000 - - - - 100,000
Issuance of 125,000
shares of common
stock for compensation
and services - - 125,000 125,000 - - 125,000
Capital contribution - - - - 52,101 - 52,101
Net loss - - - - - (119,721) (119,721)
------- ------- --------- ------- ------ -------- --------
Balance at
March 31, 2000 35,000 100,000 5,425,000 205,000 52,101 (97,360) 259,741
Issuance of 2,500
shares of Class A
Preferred for cash 2,500 25,000 - - - - 25,000
Conversion of 37,500
shares of Class A
Preferred to 300,000
shares of common
stock (37,500) (125,000) 300,000 125,000 - - -
Issuance of 60,000
shares of common stock
for services - - 60,000 60,000 - - 60,000
Issuance of 3,500 shares
of common stock as a stock
dividend to Class A
Preferred Stockholders - - 3,500 3,500 (3,500) - -
Net loss - - - - - (432,475) (432,475)
------- ------- ------- ------- ------ ------- --------
54
Balance at
March 31, 2001 - - 5,788,500 393,500 48,601 (529,835) (87,734)
Net loss (unaudited) - - - - - (211,149) (211,149)
------- ------- --------- ------- ------ -------- --------
Balance at September 30,
2001 (unaudited) - $ - 5,788,500 $393,500 $48,601 $(740,984) $(298,883)
======= ======= ========= ======== ======= ======== =========
See Accompanying Notes to the Financial Statements.
F-4
55
STATEMENTS OF CASH FLOWS
Six Months Ended
Year Ended March 31, September 30,
-------------------- -------------------
2001 2000 2001 2000
------ ------ ----- -----
(Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(432,475) $(119,721) $(211,149) $(296,783)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 120,159 26,967 55,901 60,260
Gain on disposal of equipment - - (6,179) -
Allowance for doubtful accounts (34,100) 29,600 - -
Common stock issued for compensation
and services 60,000 125,000 - 20,000
Changes in operating assets
and liabilities
Accounts receivable 106,700 (86,975) 57,168 104,118
Inventories 177,166 1,911 (206,062) (61,810)
Other current assets (16,834) 17,865 12 84,462
Licensing fees (100,000) (50,000) - (110,000)
Accounts payable and accrued
liabilities 106,560 79,238 168,210 100,883
Income taxes payable (2,300) 1,000 - (2,300)
Customer deposits 27,000 (40,000) 71,865 111,450
--------- -------- -------- --------
Net cash provided by (used in)
operating activities 11,876 (15,115) (70,234) 10,280
--------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (57,248) (20,798) - (24,536)
Purchase of certificate of deposit - (75,000) - -
Proceeds from the disposal of
equipment - - 31,120 -
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities (57,248) (95,798) 31,120 (24,536)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 14,205 - (14,205) 164
Issuance of class A preferred
stock 25,000 100,000 - 23,000
Capital contribution - 52,101 - -
Proceeds from stockholder loans 67,067 - 36,095 50,951
Proceeds from note payable
- line of credit 7,875 50,000 - 3,476
Proceeds from long-term debt 133,767 - - 1,167
56
Proceeds from long-term debt,
related party - - 185,000 -
Repayment of stockholder loans (123,978) (41,206) (41,173) (86,307)
Repayment on note payable
- line of credit (7,314) (5,436) (45,125) -
Repayment of long-term debt (93,055) (23,352) (76,230) -
Repayment of long-term debt,
related party - - (5,202) -
--------- -------- -------- -------
Net cash provided by (used in)
financing activities 23,567 132,107 39,160 (7,549)
--------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH (21,805) 21,194 46 (21,805)
CASH, beginning of period (21,805) 611 - 21,805
--------- --------- -------- --------
CASH, end of period $ - $ 21,805 $ 46 $ -
========= ========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 21,433 $ 9,982 $ 29,878 $ 7,643
NON CASH INVESTING AND
FINANCING ACTIVITIES
Conversion of Class A
Preferred Stock $ 125,000 $ - $ - $ -
Equipment purchased under
capital lease 9,665 - - 9,665
Common stock issued for
compensation and services 60,000 125,000 - 20,000
Notes payable assumed to
acquire equipment - 28,350 - -
See Accompanying Notes to the Financial Statements.
F-5
57
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Pure Steel Custom Cycles, Inc. (the "Company")
was incorporated under the laws of the State of
Arizona in 1995. The Company's principal
business consists of the manufacture and sale of
custom motorcycles and motorcycle repair. The
Company is located in Phoenix, Arizona and sales
are made to various retailers located throughout
the United States. Sales and related cost of
sales are reported upon product shipment.
Interim Financial Information
The financial statements as of September 30, 2001
and for the six months ended September 30, 2001
and 2000 are unaudited. In the opinion of the
Company's management, such unaudited financial
statements include all adjustments necessary,
which include only normal recurring items, to
present fairly the information set forth therein.
Results for interim periods are not necessarily
indicative of the results that may be expected
for any other interim period of a full year.
Statement of Cash Flows
For purposes of the statement of cash flows, the
Company considers all highly liquid debt
instruments purchased with an original maturity
of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash with a major U.S.
domestic bank. The amounts held in this bank
exceed the insured limit of $100,000 from time to
time. The terms of these deposits are on demand
to minimize risk. The Company has not incurred
losses related to these deposits.
The Company is subject to risks common to
companies in early stages of development
including, but not limited to, development of new
products, development of markets and distribution
channels, dependence on key personnel, and the
F-6
58
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
ability to obtain additional capital as needed to
fund its operating plan. To date, the Company has
been funded by the issuance of debt to both
financial institutions and private individuals
and private equity financings for cash and for
services. The Company's ultimate success is
dependent upon its ability to raise additional
capital and to successfully develop and market
its products.
The Company is currently dependent on a few large
customers who have provided a majority of the
revenue recognized in the last two years (see
Note 11). A loss of the Company's largest
customer or a reduction of the volume purchased
by these customers would have an adverse near-
term effect upon the Company's future revenues.
The Company currently purchases several key
components including frames and engines from
single or limited sources. The Company purchases
these components on a purchase order basis and
has no long term contracts for these components.
The Company believes that there are alternative
sources for each of these components and design
specifications can be replicated if needed.
Inventories
Inventories, consisting of motorcycle parts, are
stated at the lower of average cost or market as
determined on a specific identification basis.
At March 31, 2001 and 2000, inventories of
approximately $43,700, determined by management
to be slow-moving, have been presented as
noncurrent assets in other assets in the
accompanying financial statements.
Property and equipment
Property and equipment is stated at cost.
Depreciation is provided using the straight-line
and accelerated methods over the following
useful lives:
F-7
59
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Machinery and equipment 7 years
Vehicles 5 years
Furniture and fixtures 7 years
Licensing Fees
The Company has incurred licensing fees of
$150,000 to produce 90 special edition custom
motorcycles. The fees are being amortized at
$5,769 per month over the 26-month life of the
agreement starting April 2000 (see Note 10).
Income Taxes
Income taxes are provided for the tax effects of
transactions reported in the financial
statements and consist of taxes currently due
plus deferred taxes related primarily to
differences between the tax basis of assets for
financial and income tax reporting. The deferred
tax assets and liabilities represent the future
tax return consequences of those differences,
which will either be taxable or deductible when
the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for
operating losses that are available to offset
future taxable income and tax credits that are
available to offset future federal income taxes.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally
accepted in the United States of America
requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could differ
from those estimates.
F-8
60
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Advertising Costs
Advertising costs are charged to operations when
the advertising first takes place. Advertising
expense was $243,841 and $122,840 for the years
ended March 31, 2001 and 2000, respectively, and
is included in selling, general and
administrative expenses in the accompanying
financial statements. Included within
advertising expense for the year ended March 31,
2001 is $72,111 representing the cost of three
motorcycles exchanged for advertising and
promotions required under certain advertising
and promotion agreements (see Note 10).
Revenue Recognition
The Company recognizes revenue when the product
is shipped provided that a purchase order or
payment has been received.
Product Warranty
Each motorcycle sold is backed by a 48 month
unlimited mileage warranty. Estimated future
warranty obligations are charged to operations
in the period in which the related revenue is
recognized. To minimize exposure from future
warranty claims the Company purchases extended
warranty insurance on each motorcycle sold from
a reputable insurance carrier which is expensed
as incurred and covers the last 42 months of the
48 month warranty period.
Customer Deposits
From time to time, the Company requests that its
customers provide a deposit on new motorcycle
orders. When a customer deposit is received it
is recorded as a liability until such time that
the motorcycle is shipped or the customer takes
possession of which the amount is then applied
to the final purchase price.
F-9
61
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 2 - FLOORING PLAN
During November 1999, the Company executed a
floor plan financing agreement (floor Plan) with
a reputable financial institution.
Accordingly, the Company guarantees the
collection of receivables owed to this financial
institution by certain customers for sales made
under the floor plan. The balance of receivables
guaranteed by the Company for custom motorcycles
previously recorded as sales is $292,370 and
$290,330 at March 31, 2001 and 2000,
respectively (see Note 12).
As a condition required by the floor plan the
Company was required to secure a $75,000
irrevocable letter of credit ("LOC"). The bank
providing the LOC required that it be secured by
a $75,000 certificate of deposit.
NOTE 3 - INVENTORIES
Components of current inventories consist of the
following at March 31, 2001 and 2000:
2001 2000
---------- ---------
Raw materials $ 183,556 $ 309,803
Finished goods - 50,919
--------- --------
Total inventories $ 183,556 $ 360,722
========== =========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following
at March 31, 2001 and 2000:
2001 2000
-------- -------
Machinery and equipment $164,082 $98,743
Vehicles 89,637 89,637
Furniture and fixtures 9,516 7,943
-------- -------
263,235 196,323
F-10
62
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 4 - PROPERTY AND EQUIPMENT (CONTINUED)
Less: accumulated depreciation (113,183) (62,253)
-------- --------
Property and equipment, net $150,052 $134,070
======== ========
Equipment under capital lease has been included
in property and equipment at a total cost of
$9,665 as of March 31, 2001. Accumulated
depreciation related to this equipment was
$2,416. The Company had no equipment under
capitalized leases as of March 31, 2000.
Depreciation expense was $50,931 and $26,967 for
the years ended March 31, 2001 and 2000,
respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following
at March 31, 2001 and 2000:
2001 2000
----- ------
<s> <c> <c>
Capital Lease
Capital lease obligation payable to Wells Fargo Financial
Leasing; original amount of $9,665; payable in monthly
installments of $236, including interest at 16.89%,
through April 2005; secured by equipment. $ 8,288 $ -
Less: current portion (1,539) -
------- --------
Capital lease - long-term 6,749 -
-------- --------
Notes Payable
Note payable to Navistar Financial Corporation; original
amount of $50,726; payable in monthly installments of
$1,078, including interest at 10%, through December 2003;
secured by vehicle. 28,196 40,306
Note payable to Bank One; original amount of
$11,075; payable in monthly installments of $358,
including interest at 10.21%, through February 2002;
secured by equipment. 3,869 7,459
F-11
63
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 5 - LONG-TERM DEBT (CONTINUED)
Note payable to Ford Motor Credit; original amount of
$28,971; payable in monthly installments of $618,
including interest at 9.95%, through February 2005;
secured by vehicle. 24,814 28,350
Note payable to Hacienda Harley-Davidson, Inc.;
original amount of $33,767; principal and interest
at 18%; originally due March 2001 and has been
extended for an unspecified period of time; unsecured. 33,767 -
Note payable to dealer; original amount of $7,000;
non-interest bearing; repayment terms unspecified;
unsecured. 7,000 7,000
Note payable to investor; original amount of $100,000;
interest payable at 10%; repayment terms unspecified;
unsecured. 40,000 -
Note payable to Sunnen Products Company; original amount
of $49,267; payable in monthly installments of $1,108,
including interest at 12.5%; paid in full March 2001;
secured by equipment. - 12,442
------- --------
Total notes payable 137,646 95,557
Less: current portion (100,197) (37,240)
-------- --------
Notes payable - long-term 37,449 58,317
Total long-term debt $ 44,198 $ 58,317
======== ========
F-12
64
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 5 - LONG-TERM DEBT (CONTINUED)
The following is a schedule of the future
minimum lease payments required under the
capital lease. The capital lease obligation
reflects the present value of future rental
payments, discounted at the interest rate
implicit in the lease.
Year Ending
March 31,
- -----------
2002 $ 2,832
2003 2,832
2004 2,832
2005 2,832
2006 236
------
Total minimum lease payments 11,564
Less: amount representing interest (3,276)
------
Present value of minimum lease payments $ 8,288
=======
The aggregate principal payments due on the
notes payable are as follows:
Year Ending
March 31,
- -----------
2002 $ 100,197
2003 17,187
2004 12,935
2005 7,327
---------
$ 137,646
=========
NOTE 6 - NOTE PAYABLE - LINE OF CREDIT
The Company has a $50,000 line of credit
established at Bank of America, N.A. with
interest payable monthly at the prime rate plus
2% (10.5% and 10.75% as of March 31, 2001 and
2000, respectively) with no maturity date. The
maximum amount borrowed on the line of credit in
both years was $50,000 and the minimum amount
borrowed was $42,125 and $44,564 for the years
ended March 31, 2001 and 2000, respectively. The
line of credit is secured by the personal
guarantees of the founding stockholders of the
Company.
F-13
65
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 7 - LOANS FROM STOCKHOLDERS
From time to time, the founding stockholders
have made periodic advances to the Company. No
physical note agreements exist and repayment
terms are unspecified. As of March 31, 2001 and
2000, $217,195 and $274,106, respectively, was
owed to stockholders.
NOTE 8 - INCOME TAXES
Deferred taxes in the accompanying balance
sheet includes the following amounts as of
March 31, 2001 and 2000:
2001 2000
------------------------- -------------------------
Federal State Total Federal State Total
------- ------ ------- ------- ------ -------
<s> <c> <c> <c> <c> <c> <c>
Deferred long-term tax asset $127,005 $44,176 $171,181 $ 27,536 $ 9,578 $ 37,114
Deferred long-term tax
Liability (2,500) (800) (3,300) (2,500) (800) (3,300)
------- ------- ------- ------- ------- -------
Net long-term deferred tax
asset 124,505 43,376 167,881 25,036 8,778 33,814
Deferred tax asset valuation
allowance (127,005)(44,176) (171,181) (27,536) (9,578) (37,114)
-------- ------- -------- ------- ------ -------
Net deferred tax liability $ (2,500)$ (800) $ (3,300) $ (2,500) $ (800) $ (3,300)
======== ======= ======== ======== ====== ========
At March 31, 2001, the Company has recorded a
deferred tax asset of $171,181 reflecting the
benefit of $552,196 in net operating loss
carryforwards, which expire beginning 2020.
Realization is dependent on generating
sufficient taxable income prior to expiration of
the loss carryforwards. Management believes it
is more likely than not that the deferred tax
relating to the Company asset will not be
realized. The amount of the deferred tax asset
considered realizable, however, could be
increased in the near term if estimates of
future taxable income during the carryforward
period are increased.
The deferred tax liability results primarily
from the use of accelerated methods of
depreciation for tax purposes.
F-14
66
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 9 - STOCKHOLDERS' EQUITY
In order to fund ongoing operations of the
Company, during the year ended March 31, 2000, a
majority stockholder contributed $52,101 of
capital to the Company. No shares of stock,
common or preferred, were issued in conjunction
with this transaction.
Common Stock
From time to time the Company may issue common
stock in exchange for goods and services or as
compensation to key employees. During the year
ended March 31, 2001, the Company issued 60,000
shares of common stock in exchange for goods and
services valued at $60,000. During the year
ended March 31, 2000, the Company issued 125,000
shares of common stock to key employees and
other individuals as compensation and consulting
services having a combined total value of
$125,000.
Class A Preferred Stock
In order to provide working capital, during the
year ended March 31, 2001 and 2000, the Company
issued 2,500 and 10,000 shares of Class A
Preferred Stock ("Preferred Stock"),
respectively, to non-employees at $10 per share
generating cash proceeds of $25,000 and
$100,000, respectively.
Additionally, during the year ended March 31,
2000, 25,000 shares of Preferred Stock were
issued to non-employees in exchange for
consulting services relating to the offering of
Preferred Stock having a value of $250,000 based
on a value of $10 per share.
At December 1, 2000, all 37,500 outstanding
shares of Preferred Stock were converted into
300,000 shares of common stock, plus 75,000
warrants expiring three years from any
registration of the Company's common stock with
the Securities and Exchange Commission. Each
share of Preferred Stock was entitled to one
vote and was redeemable into eight shares of
F-14
67
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
common stock plus two warrants to purchase two
additional shares of common stock at $2.50 per
share. The Preferred Stock had a 10% cumulative
preferred dividend payable by issuance of one
share of common stock for each ten shares of
Preferred Stock. Upon conversion, the Company
also paid dividends to the holders of the
Preferred Stock by issuance of 3,500 shares of
common stock. After the conversion, the shares
of Preferred Stock were retired.
Warrants
As of and during the year ended March 31, 2001,
the Company issued and has outstanding 475,000
warrants to purchase an equal number of shares
of common stock. No warrants were issued during
the year ended March 31, 2000. Of the warrants
issued, 100,000 warrants were for compensation
to a key employee, 300,000 warrants were for
consulting services and 75,000 warrants were
issued relating to the conversion of Preferred
Stock referred to above. These warrants are
immediately exercisable at prices ranging from
$1.50 to $2.50 per share and expire three years
from any registration of the Company's common
stock with the Securities and Exchange
Commission. The weighted average exercise price
of these warrants is approximately $2.29 per
warrant. The exercise of all warrants would
result in total additional proceeds to the
Company, before expenses, of approximately
$1,087,500.
The fair value of warrants at the dates of grant
were estimated using the Black Scholes option
price calculation model using the following
assumptions: expected life of three years, a
risk free interest rate of 5%, a volatility of
.0001 and a dividend yield of 0%. The weighted
average fair value of warrants granted during
the year ended March 31, 2001 was approximately
$0.01 per warrant.
F-15
68
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
During the year ended March 31, 2001, the fair
market value of these warrants when granted were
determined to be approximately $4,750 which has
not been recorded due to the immaterial nature
of the amount.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Advertising and Promotion Agreements
On May 31, 2000, the Company entered into a
product license agreement with General Media
Communications, Inc. ("General Media") for an
exclusive license of the Penthouse marks in the
production manufacture and distribution of 90
limited edition "Penthouse Magazine 30th
Anniversary Motorcycles" manufactured by the
Company and accessory items that include leather
jackets, gloves, goggles, helmets and bandanas.
Upon execution of the agreement, the Company
agreed to pay a $150,000 license fee, which was
fully paid during the year ended March 31, 2001,
and provide one limited edition Penthouse custom
motorcycle which was delivered to General Media
at a cost of $24,487. General Media will earn a
royalty of 5% of the gross wholesale and/or
retail selling price, based on an average
projected sales price of at least $30,000 per
motorcycle. The term of the agreement commenced
on May 31, 2000 and expires 26 months after
commencement. Additionally, a consultant
assisting with the execution of this product
license agreement was provided a Pure Steel
custom motorcycle in exchange for services
valued at $26,432.
On June 13, 2000, the Company entered into an
advertising and promotion agreement with AZPB
Limited Partnership, a Delaware partnership to
promote and advertise the Company's motorcycle
manufacturing business at the ballpark and in
connection with Arizona Diamondbacks (the
"Diamondbacks") professional baseball team. The
Company may use the Diamondback's name and logo
to promote the sale of its products. The
agreement expires December 31, 2003 and the
F-16
69
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(CONTINUED)
Company shall pay an annual per season fee of
$15,000 for 2001, $20,000 for 2002 and $25,000
for 2003. Additionally, the Company will
provide one new customized Arizona Diamondback's
Pure Steel motorcycle for each baseball season
covered by the agreement or a total of four
motorcycles. Total cost to the Company is
expected to be approximately $100,000 over the
life of the agreement. As of March 31, 2001,
the Company has expensed $21,192 representing
the cost of the motorcycle contributed for the
2000 baseball season.
Leases
The Company leases office space under a
noncancelable operating lease expiring in
January 2002. The lease requires monthly
payments of $3,498, plus applicable tax. The
Company has an option to renew the lease for an
additional one-year period under the same terms.
The Company leases equipment under noncancelable
operating leases expiring in various years
through 2003. The aggregate monthly lease
payments are $569.
Future minimum payments under these commitments
are as follows:
Year Ending
March 31,
-----------
2002 $44,921
2003 2,623
-------
$47,544
=======
Lease expense was $65,222 and $69,797 for the
years ended March 31, 2001 and 2000,
respectively, and is included in selling,
general and administrative expenses in the
accompanying financial statements.
F-17
70
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 11 - ECONOMIC DEPENDENCY
The Company had sales to two customers that
represented 47.8% and 52.0% of total sales for
the years ended March 31, 2001 and 2000,
respectively. At March 31, 2001, one of these
customers owed the Company $68,017, representing
96% of accounts receivable at that date.
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to March 31, 2001, a verbal agreement
was entered into with Las Vegas Harley-Davidson
("LVHD") whereby LVHD would buy the parts
necessary for the Company to build ten custom
motorcycles. Total cost of parts necessary to
build these motorcycles are estimated to be
approximately $200,000. The Company is to repay
LVHD at a rate of $22,000 per motorcycle as each
motorcycle is built and sold. Repayments to LVHD
began in June 2001.
In June 2001, the Company received notice from
the finance company that a dealer had defaulted
on its floor plan financing agreement (see Note
2). The finance company requested immediate
reimbursements of $130,000 from the Company for
the four motorcycles, which had been covered by
the floor plan. The Company took possession of
the four motorcycles, and as of September 30,
2001, two motorcycles have been sold and the
finance company had been reimbursed $62,400 of
the amount owed. The Company is presently in
default of the remaining balance of $67,600,
which is due and payable.
During the six months ended September 30, 2001,
the Company received an advance totaling
$185,000 from a related party with unspecified
repayment terms. The advance is unsecured and
is being repaid by the Company in monthly
installments of $1,735.
NOTE 13 - GOING CONCERN
The accompanying financial statements have been
prepared in conformity with accounting
principles generally accepted in the United
States of America, which contemplate
F-18
71
PURE STEEL CUSTOM CYCLES, INC.
Notes to Financial Statements
NOTE 13 - GOING CONCERN (CONTINUED)
continuation of the Company as a going concern.
However, for the year ended March 31, 2001, the
Company had a net loss of $432,475, negative
working capital of $172,565, stockholders'
deficit of $87,734, and has experienced a severe
shortage of working capital which has greatly
affected operations.
In view of this, realization of a major portion
of the assets in the accompanying balance sheet
is dependent upon continued operations of the
Company, which in turn is dependent upon the
success of the Company's future operations.
Management is attempting to obtain new capital
funding which will strengthen its balance sheet
and is revising its operating requirements which
will result in increased operating cash flows.
Management believes that these actions presently
being taken will provide the opportunity for the
Company to continue as a going concern.
Historically, working capital requirements have
been funded by cash flows from operations,
private placements of preferred stock, issuance
of common stock for goods and services and
borrowings from major shareholders of the
Company and, from time to time, by borrowings
and advances from related parties and customers.
There is no assurance that working capital will
continue to be made available from these sources
or under similar terms in amounts sufficient
enough to ensure that the Company will be able
to continue its operations. Should the Company
not be able to find new capital funding and/or
under reasonable terms, management would attempt
to downsize the business so as to enable the
Company to survive and grow at a slower pace or
discontinue.
F-19
72
PART II
INFORMATION NOT REQUIRED BY PROSPECTUS
Item 24. Indemnification of Officers and
Directors.
The bylaws of Pure Steel provides that a director
of the registrant shall have no personal liability
to the Registrant or its stockholders for monetary
damages for breach of a fiduciary duty as a
director, except for liability (a) for any breach
of the director's duty of loyalty to the Registrant
or its stockholders, (b) for acts and omissions not
in good faith or which involve intentional
misconduct or a knowing violation of law, and (c)
pursuant to Arizona law for any transaction from
which the director derived an improper personal
benefit. Registrant's bylaws exculpates and
indemnifies the directors, officers, employees, and
agents of the registrant from and against certain
liabilities. Further the bylaws also provides that
the Registrant shall indemnify to the full extent
permitted under Delaware law any director, officer
employee or agent of Registrant who has served as a
director, officer, employee or agent or the
Registrant or, at the Registrant's request, has
served as a director, officer, employee or agent of
another corporation, partnership, joint venture,
trust or other enterprise.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING
PURE STEEL FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933, IS HELD TO BE
AGAINST PUBLIC POLICY BY THE SECURITIES AND
EXCHANGE COMMISSION AND IS THEREFORE UNENFORCEABLE.
Item 25. Other Expenses of Issuance and
Distribution.
Other expenses in connection with this offering
that will be paid by Pure Steel are estimated to be
substantially as follows:
Amount Payable
Item By Pure Steel
<s> <c>
SEC Registration Fees $ 809.85
Printing and Engraving Fees $2,500.00
Legal Fees and Expenses $18,000.00
Accounting Fees and Expenses $35,700.00
Transfer Agent's Fees $1,500.00
Miscellaneous $2,452.65
----------
Total $60,962.50
==========
73
Item 26. Recent Sales of Unregistered Securities.
In the second quarter of fiscal year 2000, Pure
Steel issued 10,000 shares of Class A preferred
stock to Peter Minion, a non-affiliate for
consideration of $10 per Class A preferred share.
The above issuance of Class A preferred stock was
made to a sophisticated individual pursuant to an
exemption from registration under Sec. 4(2) of the
Securities Act of 1933.
Additionally, in the third quarter of fiscal year
2000, 24,000 Class A preferred shares were issued
to Correct Alliance, an unaffiliated consultant for
services rendered related to the private placement
of Pure Steel securities, and 1,000 Class A
preferred shares to Glenford Griffin. These Class
A Preferred Shares were issued under section 4(2)
to a sophisticated investor that had an ongoing
relationship with Pure Steel.
The above issuance of Class A preferred stock was
made to sophisticated individuals pursuant to an
exemption from registration under Sec. 4(2) of the
Securities Act of 1933.
In the third quarter of fiscal year 2000 and the
first quarter of 2001, 145,000 common shares were
issued to the following key employees and other
individuals for services rendered to Pure Steel.
David Schoelles 50,000
Mary Hidalgo 50,000
Douglas Twineham 25,000
Bruce Garfunkel 20,000
The above issuances of common shares were made to
sophisticated individuals pursuant to an exemption
from registration under Sec. 4(2) of the Securities
Act of 1933.
In the first quarter of fiscal year 2001, Pure
Steel issued 2,500 Class A Preferred shares at $10
per Class A preferred share to Donald Allio.
The above issuance of Class A preferred stock was
made to a sophisticated individual pursuant to an
exemption from registration under Sec. 4(2) of the
Securities Act of 1933.
In December 2000, Pure Steel issued 300,000 common
shares upon conversion of all of the outstanding
Class A preferred stock.
74
During the second quarter of the year ended March
31, 2001, the Company issued 475,000 warrants to
purchase an equal number of shares of common stock.
Of the warrants issued, 100,000 warrants were for
compensation to David Schoelles, a key employee,
300,000 warrants were for consulting services by
Gerard Dente, Tsanhos Image Productions, LLC and
Bruce Garfunkel, and 75,000 warrants were issued
relating to the conversion of preferred stock
referred to above. These warrants are immediately
exercisable at prices ranging from $1.50 to $2.50
per share and expire three years from any
registration of Pure Steel's common stock with the
Securities and Exchange Commission.
Item 27. Exhibit Index.
(1) Not Applicable
(2) Not Applicable
(3.1) Articles of Incorporation
(3.2) Bylaws
(4) Specimen certificate for common stock
(5) Consent and Opinion of Jody M. Walker regarding
legality of securities registered under this
Registration Statement and to the
references to such attorney in the prospectus filed
as part of this Registration Statement
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10) Product License Agreement between Pure Steel and
General Media Communications, Inc. dated May 31,
2000
(10.1) Advertising and Promotion Agreement between Pure
Steel, AZPB Limited Partnership and AZPB REM
Limited Partnership dated June 13, 2000
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Consent of Pannell Kerr Forster
of Texas, P.C., Certified
Public Accountants
75
(24) Not Applicable
(25) Not Applicable
(26) Not Applicable
(27) Not Applicable
(28) Not Applicable
Item 28. Undertaking.
The undersigned registrant undertakes:
(a)(1) To file, during any period in which offers
or sales are being made, a post-effective amendment
to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
Registration Statement (or the most recent post-
effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in
the formation set forth in the registration
statement.
(iii) To include any additional or changed material
information on the plan of distribution.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be
a new registration statement relating to the
securities offered therein, and the offering of
such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities
being registered that remain unsold at the
termination of the offering.
(b) Delivery of Certificates. The undersigned
registrant undertakes to provide to the Transfer
Agent at the closing, certificates in such
denominations and registered in such names as are
required by the Transfer Agent to permit prompt
delivery to each purchaser.
(c) Indemnification. Insofar as indemnification
for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to
the provisions set forth in Pure Steel's articles
76
of incorporation or otherwise, the registrant has
been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is
against public policy as expressed in the Act and
is, therefore, unenforceable.
In the event that a claim for indemnification
against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a
director, officer or controlling person of the
registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
officer or controlling person in connection with
the securities being registered, the registrant
will, unless in the opinion of its counsel the
matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is
against public policy as expressed in the Act and
will be governed by the final adjudication of such
issue.
77
SIGNATURES
In accordance with the requirements of the
Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-
2 and authorized this registration statement to be
signed on its behalf by the undersigned, in the
City of Phoenix, State of Arizona on the 19th day
of December, 2001.
Pure Steel Custom Cycles, Inc.
/s/ Glenford Griffin
- -----------------------------
By Glenford Griffin
President
In accordance with the requirements of the
Securities Act of 1933, this registration statement
was signed by the following persons in the
capacities and on the dates stated.
Signature Capacity Date
/s/Glenford Griffin Chief Executive Officer December 19, 2001
- ----------------------- Chief Financial Officer,
Glenford Griffin Controller, Director
/s/Oscar Coca Vice President/Director December 19, 2001
- -----------------------
Oscar Coca
/s/Daniel Elzy Director December 19, 2001
- -----------------------
Daniel Elzy