SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For the quarter ended January 31, 2000
Commission file number 0-24083
AMERICAN QUANTUM CYCLES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2651232
- -------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
731 Washburn Road
Melbourne, Florida 32934
- --------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 752-0008
---------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Common stock outstanding at January 31, 2000 was 6,876,687 shares.
AMERICAN QUANTUM CYCLES, INC.
BALANCE SHEET
January 31, 2000 April 30, 1999
(unaudited)
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 900,955 $ 15,397
Accounts receivable 116,118 94,439
Other current assets 263,073 35,734
Inventories 930,431 791,084
------------ ------------
Total current assets 2,210,577 936,654
------------ ------------
Property and equipment 2,455,294 1,666,661
Less accumulated depreciation 547,738 331,630
------------ ------------
1,907,556 1,335,031
------------ ------------
Other assets:
Deposits 46,098 45,555
Licenses and intellectual rights, less accumulated
amortization of $54,825 and $36,714 307,407 325,518
------------ ------------
353,505 371,073
------------ ------------
$ 4,471,638 $ 2,642,758
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 195,233 $ 1,149,882
Accrued liabilities 68,530 921,835
Current maturities of long-term debt 11,305 15,558
Current capital lease obligations 130,386 147,560
Lines of credit 0 1,093,893
Notes payable 0 2,188,753
------------ ------------
Total current liabilities 405,454 5,517,481
------------ ------------
Capital lease obligations, less current maturities 38,467 81,341
Long-term debt, less current maturities 12,954 1,386,418
------------ ------------
51,421 1,467,759
------------ ------------
Stockholders' Equity:
Common stock, par value $.001 per share; authorized
12,500,000 shares, issued and outstanding
6,876,687 and 2,300,586 shares 6,877 2,301
Preferred stock, par value $.001 per share; authorized
2,500,000 shares, no shares issued
Additional paid-in capital 15,308,583 5,076,353
Deficit (11,300,697) (9,421,136)
------------ ------------
Total stockholders' equity/deficit 4,014,763 (4,342,482)
------------ ------------
$ 4,471,638 $ 2,642,758
============ ============
See accompanying notes to financial statements.
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF OPERATIONS
Three months ended Three months ended Nine months ended Nine months ended
January 31, 2000 January 31, 1999 January 31, 2000 January 31, 1999
------------------ ------------------ ----------------- -----------------
Sales $ 904,983 $ 391,376 $ 1,850,685 $ 865,399
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 822,200 263,947 1,740,622 908,263
General and administrative 706,711 756,761 1,979,877 2,734,197
----------- ----------- ----------- -----------
1,528,911 1,020,708 3,720,499 3,642,460
----------- ----------- ----------- -----------
Loss from operations (623,928) (629,332) (1,869,814) (2,777,061)
----------- ----------- -----------
Other income (expense):
Interest and other income 67,168 0 67,765 1,691
Interest expense (22,625) (56,335) (77,512) (625,418)
----------- ----------- ----------- -----------
44,543 (56,335) (9,747) (623,727)
----------- ----------- ----------- -----------
Net Loss $ (579,385) $ (685,667) $(1,879,561) $(3,400,788)
=========== =========== =========== ===========
Loss per common share:
Weighted average shares outstanding 6,093,541 4,903,095 6,042,811 4,821,291
=========== =========== =========== ===========
Loss per common share $ (0.095) $ (0.140) $ (0.311) $ (0.705)
=========== =========== =========== ===========
See accompanying notes to financial statements.
AMERICAN QUANTUM CYCLES, INC.
STATEMENT OF CASH FLOWS
Three months ended Three months ended Nine months ended Nine months ended
January 31, 2000 January 31, 1999 January 31, 2000 January 31, 1999
------------------ ------------------ ----------------- -----------------
Cash flows from operating activities:
Reconciliation of net loss to net cash
used in operating activities:
Net loss $ (579,385) $ (685,667) $(1,879,561) $(3,400,788)
Items not requiring (providing) cash:
Depreciation and amortization 74,385 83,329 234,219 201,482
Changes in assets and liabilities:
Receivables 196,211 (417,728) (21,679) (881,039)
Inventories 869,368 77,333 (139,347) (77,718)
Prepaid expenses 76,037 (353) 242,938 9,891
Accounts payable (19,343) (507,375) (954,649) 581,691
Accrued liabilities (128,051) 196,135 (853,305) 892,935
----------- ----------- ----------- -----------
Net cash used in operating activities 489,222 (1,254,326) (3,371,384) (2,673,546)
Cash flows from investing activities:
Capital expenditures (720,810) (143,037) (788,633) (724,364)
Investment in licenses and intellectual rights
----------- ----------- ----------- -----------
Net cash used in investing activities (720,810) (143,037) (788,633) (724,364)
Cash flows from financing activities:
Proceeds from issuance of notes payable 1,295,700 284,181 1,957,200
Repayment of notes payable (262,307) (7,500) (2,451,060) (7,500)
Repayment of long-term debt (28,901) (17,747) (594,331) (48,148)
Proceeds from issuance of common stock 350,000 209,540 7,641,785 1,550,628
Proceeds from exercise of options 165,000
----------- ----------- ----------- -----------
Net cash provided by financing activities 58,792 1,479,993 5,045,575 3,452,180
Net increase (decrease) in cash (172,796) 82,630 885,558 54,270
Cash, beginning of period 1,073,751 20,408 15,397 48,768
----------- ----------- ----------- -----------
Cash, end of period $ 900,955 $ 103,038 $ 900,955 $ 103,038
=========== =========== =========== ===========
See accompanying notes to financial statements.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business and organization - American Quantum Cycles, Inc., a Florida
corporation, ("The Company") designs, produces, markets, distributes and sells
American-made, high performance V-twin engine cruiser and touring style
motorcycles. These motorcycle products include stock models and motorcycles
built to customer specified configurations. The Company was originally
incorporated on March 20, 1986 as "Norbern, Inc." and was inactive until March
1997 when it began developing and implementing its business and financing plans.
On May 8, 1997 the Company changed its name to American Quantum Cycles, Inc. and
its fiscal year end to April 30. The accompanying financial statements for years
prior to 1998 are presented on an April 30 fiscal year end which does not
require restatement since the Company had no operations prior to March 1997.
Basis of presentation - For years prior to the fiscal year ended April 30, 1999
the Company was considered to be in the development stage. During the current
year the Company commenced planned operations, however, substantial efforts are
still being made to raise capital, enter into dealership agreements and
implement its business plan.
Cash and cash equivalents - For purposes of the statement of cash flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Inventories - Inventories are carried at the lower of cost or market, with cost
principally determined under the average cost method.
Property and equipment - Property and equipment are carried at cost.
Depreciation is recorded principally on the straight-line method at rates based
on the estimated useful lives of the assets that range from three to seven
years. The book value of obsolete assets is charged to depreciation expense when
they are scrapped. Profits or losses from the sale of assets are included in
other income. Repairs and maintenance are charged to expense as incurred.
Intangible Assets - Intangible assets consist of licenses and intellectual
rights and are amortized on the straight-line method over fifteen years.
Income taxes - Deferred taxes are recognized for temporary differences between
the basis of assets and liabilities for financial statements and income tax
purposes. The differences relate primarily to depreciable assets (using
accelerated depreciation methods for income tax purposes), the allowance for
doubtful accounts (deductible for financial statement purposes but not for
income tax purposes), stock-based compensation, and net operating loss
carryforwards.
Concentration of credit risk - The Company occasionally maintains deposits in
excess of federally insured limits. Statement of Financial Accounting Standards
No. 105 identifies these items as a concentration of credit risk requiring
disclosure, regardless of the degree of risk. The risk is managed by maintaining
all deposits in high quality financial institutions.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Sales returns and warranty allowances - The Company establishes an allowance for
product warranties and sales returns based on experience with customers' claims
arising from the sale of defective merchandise and a study of the experiences of
other companies engaged in the sale of similar products. Changes in the
allowance are charged to selling expense.
2 INVENTORIES
Inventories at April 30, 1999 and 1998 are comprised as follows:
Description 1999 1998
----------- ---- ----
Finished goods $ 27,573 $ 13,787
Work in process 24,032 66,796
Purchased raw materials 739,479 682,575
======== ========
Total inventory $791,084 $763,158
======== ========
3 PROPERTY AND EQUIPMENT
Property and equipment includes the following:
Description 1999 1998
------------ ---- ----
Leasehold improvements $ 559,742 $ 52,750
Manufacturing tools and equipment 251,159 142,805
Office furniture, equipment and software 696,055 308,025
Vehicles 159,705 145,919
========== ========
Total $1,666,661 $649,499
========== ========
Depreciation expense for the years ended April 30, 1999 and 1998 amounted to
$269,144 and $62,486, respectively. As of April 30, 1997, the Company had not
yet acquired any property and equipment, accordingly, there was no depreciation
expense for years prior to 1998.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
4 LICENSES AND INTELLECTUAL PROPERTY
Licenses and intellectual property are comprised of the following:
Proprietary technology license $235,000
Intellectual property rights 127,232
--------
362,232
Less accumulated amortization (36,714)
$325,518
In August 1997, the Company entered into a license agreement (the
"Agreement") with Feuling Advanced Technologies, Inc. whereby the Company
obtained a license to use certain proprietary technologies including, among
other things, patents, trade secrets, techniques, tooling designs, product
designs, and trademarks. Pursuant to the terms of the Agreement, as long as the
Company complies with certain other provisions including non-disclosure of the
proprietary technology, the Company has an exclusive license, for motorcycle
applications, in perpetuity for the 4-Valve technology. This technology is used
in connection with the Company motorcycles and bolt-on kits for the Harley
Davidson motorcycles which feature the evolution engine, evolution big twin,
other Harley Davidson clones and aftermarket parts.
5 NOTES PAYABLE AND LINES OF CREDIT
Notes payable at April 30, 1999 consist of:
10% Subordinated Notes - The Company issued nine unsecured promissory notes
dated March 30, 1998 to individuals providing bridge loan financing. The
aggregate principal balance of the notes at April 30, 1999 is $700,000 with
interest payable at 10% at maturity (originally September 30, 1998). The terms
of the loan agreements provide for the Company to issue a total of 35,500 shares
of common stock to the note holders at maturity in order to obtain a favorable
interest rate and repayment terms. Additional interest expense (equal to the
fair value of the common stock to be issued minus the conversion price) is being
recognized over the term of the loans. The note holders of $320,000 of the
outstanding notes subsequently agreed to convert the notes and accrued interest
thereon into common stock at a conversion price equal to the offering price of
shares of the Company's common stock in a proposed public offering as discussed
in Note 8 ("the proposed stock offering"). The note holders will also receive
two common stock warrants for each share of common stock to be received upon
conversion. Note holders representing the remaining $380,000 of the outstanding
notes have agreed to extend the maturity date of their notes until the
completion of the proposed stock offering.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Convertible Debentures - The Company has issued two separate series of unsecured
convertible notes to investors:
Beginning in October 1997, the Company issued forty 8% Subordinated Notes, for
an aggregate of $1,524,500. The notes were scheduled to mature one year from
date of issue and were convertible at $8.00 per share. Interest was also
convertible at the same rate as the principal, at the discretion of the note
holder. As of April 30, 1999 the outstanding principal balance of these notes is
$1,327,000. The note holders of $706,500 of the outstanding notes subsequently
agreed to convert the notes and accrued interest thereon into common stock at a
conversion price equal to the offering price of shares of the Company's common
stock in the proposed stock offering and will also receive one common stock
warrant for each share of common stock to be received upon conversion. Note
holders representing $297,500 of the outstanding notes have agreed to extend the
maturity date of their notes until the completion of the proposed stock
offering. The remaining note holders representing $323,000 of the outstanding
notes have not agreed to convert or extend the maturity date of their notes and
the notes are, therefore, in default.
Beginning in April 1998, the Company issued twenty-seven 7% Subordinated Notes,
for an aggregate of $549,500. The notes were scheduled to mature one year from
the date of issue and were convertible at $8.00 per share. Interest is payable
in cash or convertible at the same rate as the principal, at the discretion of
the Company. A warrant is attached at 10% above the final price of a proposed
stock offering. As of April 30, 1999 the outstanding principal balance of these
notes is $517,000. The note holders of $337,000 of the outstanding notes
subsequently agreed to convert the notes and accrued interest thereon into
common stock at a conversion price equal to the offering price of shares of the
Company's common stock in the proposed stock offering and will also receive one
common stock warrant for each share of common stock to be received upon
conversion. Note holders representing the remaining $180,000 of the outstanding
notes have agreed to extend the maturity date of their notes until the
completion of the proposed stock offering.
Senior Promissory Notes - Between November 1998 and January 1999 the Company
issued thirty-five units at a price of $25,000 per unit. Each unit consisted of
a non-interest bearing, unsecured $25,000 senior promissory note and common
stock warrants for a number of shares of stock determined by dividing $12,500 by
the public offering price of shares of common stock of the Company to be issued
in the proposed stock offering. The warrants are exercisable at the offering
price of the proposed stock offering. The outstanding principal balance of the
senior promissory notes at April 30, 1999 is $870,000.
8% Subordinated Demand Notes - Between January and April 1999 the Company issued
seven unsecured 8% subordinated demand notes for an aggregate principal amount
of $587,000. These notes remain outstanding at April 30, 1999.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Bank Note - In January 1999, the Company assumed a $61,005 bank note in default
from one of its dealers and regained title to five motorcycles. The Company has
agreed to repay the note at $5,000 per month commencing in February 1999. As of
April 30, 1999, the remaining principal balance on the note is $46,005.
Lines of Credit at April 30, 1999 consist of:
Investor Group Line of Credit - In February 1999 the Company contracted with a
group of six individuals for an unsecured line of credit in the aggregate amount
of $500,000. The loans bear interest at 8% per annum plus the note holders
received 28,125 shares of common stock valued at $125,000. Principal and
interest are payable upon the completion of the proposed stock offering.
Revolving Line of Credit - In March 1999, the Company contracted for a $750,000
secured line of credit. Interest is payable monthly at 10% plus the lender
received 187,500 shares of common stock valued at $187,500. The loan is secured
by inventory, accounts receivable and general intangibles and matures on June
30, 1999. Borrowing under the agreement is based on firm purchase orders for
motorcycles received by the Company. As of April 30, 1999, the Company had drawn
$220,000 on this line of credit.
Line of Credit - In December 1998, the Company contracted for a $755,000 secured
line of credit. Interest is payable quarterly at 10% per annum plus the lender
received 188,750 shares of common stock valued at $188,750. The loan is secured
by inventory, accounts receivable, general intangibles and equipment and is due
on demand. As of April 30, 1999, the Company had drawn $755,000 on this line of
credit.
Outstanding notes payable and lines of credit as of April 30, 1999 are
summarized as follows:
10% Subordinated Notes $700,000
8% Subordinated Notes 1,327,000
7% Subordinated Notes 517,000
Senior Promissory Notes 870,000
8% Subordinated Demand Notes 587,000
Bank Note 46,005
Lines of Credit 1,475,000
----------
Less unamortized discount 5,522,005
(875,859)
----------
Total notes payable and lines of credit $4,646,146
==========
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
5 NOTES PAYABLE AND LINES OF CREDIT (Continued)
Notes payable and lines of credit are included in the accompanying balance sheet
under the following captions:
Lines of credit $1,093,893
Notes payable 2,188,753
Long term debt 1,363,500
---------
Total $4,646,146
==========
The shares of common stock issued to note holders and line of credit lenders, as
discussed above, were valued at the market value at the date of issue. The value
of the shares, which aggregated $1,448,850, has been recorded as a discount from
the face value of the related debt and is being amortized over the term of the
debt using the interest method. During the year ended April 30, 1999, $572,991
of such discount has been amortized and charged to interest expense. These
transactions result in an effective interest rate on the notes payable and lines
of credit of 31.2% and 61%, respectively.
6 LONG-TERM DEBT
Long-term debt at April 30, 1999 is as follows:
Installment loan, monthly payments of $618 including interest at
8.75%, matures September, 2002, secured by a vehicle $21,822
Installment note payable for the purchase of intellectual property
rights, monthly payments of $783 including interest at 8%, matures
January, 2001, secured by property rights 16,654
Short-term obligations expected to be refinanced (see note 5) 1,363,500
---------
1,401,976
Less current maturities 15,558
------
Total long-term debt $1,386,418
==========
The aggregate maturities of long-term debt as of April 30, 1999 are $15,558 in
2000, $13,073 in 2001, $6,822 in 2002 and $3,023 in 2003.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
7 LEASES
Capital leases - The Company leases various manufacturing, production, telephone
and computer equipment under capital lease agreements with terms of three to
five years through May, 2003. The economic substance of the leases is that the
Company is financing the acquisition of the assets, and accordingly, they are
capitalized as property and equipment. The leases contain bargain purchase
options at the end of the lease terms.
The following is an analysis of the leased assets included in property and
equipment as of April 30, 1999:
Telephone equipment $ 16,452
Computer equipment 255,611
Machinery and production equipment 41,479
--------
313,542
Less accumulated amortization (35,531)
--------
$278,011
========
The following is a schedule of future minimum payments required under the leases
together with their present value as of April 30, 1999:
Year ending
April 30, Amount
--------- ------
2000 $ 95,710
2001 92,945
2002 52,667
2003 32,866
2004 4,908
--------
Total minimum lease payments 279,096
Less amount representing interest (50,195)
--------
Present value of minimum lease payments $228,901
========
Operating leases - The Company leases its administration and production
facilities under noncancelable operating leases with terms of four years
expiring in February, 2002. The Company is also responsible for real estate
taxes on the leased facilities. Rent expense under operating leases was $69,756
and $83,155 for the years ended April 30, 1999 and 1998, respectively. The
following is a schedule of future minimum lease payments required under
operating leases:
Year ending
April 30, Amount
--------- ------
2000 $69,756
2001 $69,756
2002 $58,130
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
8 CONTINGENCIES
The Company has suffered recurring losses since its inception and at April 30,
1999 has a capital deficiency of $9,421,136 and a working capital deficiency of
$4,580,827. As described in note 5, the Company has negotiated with its lenders
to convert certain loans to common stock and stock warrants and to defer payment
on certain loans until completion of a proposed stock offering planned for July
1999. The proposed stock offering of up to 1,840,000 shares of the Company's
common stock is expected to provide sufficient net proceeds to repay all
delinquent obligations and provide working capital to sustain operations until
such time as positive cash flow and profits can be generated.
Results of operations in the future will be influenced by numerous factors
including technological developments, competition, regulation, increases in
expenses associated with sales growth, market acceptance of the products of the
Company, the capacity of the Company to expand and maintain the quality of its
motorcycles and related services, continued development of the dealer
organization, favorable sourcing of supplies, recruitment of highly skilled
employees and integration of such persons into a cohesive organization, and the
ability of the Company to raise funds and control costs.
Management believes that it will be successful in completing the stock offering
and achieving profitable operations, however, there is no assurance that such
efforts will be successful.
9 SECURITY TRANSACTIONS
Following is a summary of security transactions during the years ended April 30,
1999 and 1998:
On May 21, 1997 the Company issued 315,269 shares of common stock valued at
$95,009 for management services, equipment and other assets.
In September, 1997 the Company issued 61,436 shares of common stock in a private
placement. The net proceeds of the offering of $949,974 were used to repay debt
of $250,000 and provide working capital.
On October 24, 1997 and December 31, 1997, 12,825 shares of common stock valued
at $205,201 were issued to key employees as performance bonuses.
On December 15, 1997, 2,500 shares of common stock valued at $40,000 were issued
to a dealership and recorded as promotional expense and 732 shares valued at
$11,704 were issued to bridge lenders and recorded as interest expense.
At various dates during the year ended April 30, 1999 the Company issued 62,500
shares of common stock for cash at prices ranging from $4.00 to $4.20 per share
and an additional 399,375 shares were issued upon exercise of stock options at
prices ranging from $.40 to $4.00 per share.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
9 SECURITY TRANSACTIONS (Continued)
In October and November, 1998 the Company issued 375,350 shares of common stock
valued at $706,660 to management and other employees as performance bonuses.
At various dates between October, 1998 and January, 1999 the Company issued
237,350 shares valued at $913,760 for consulting and other services.
As discussed in note 5, the Company issued 35,500 shares of common stock valued
at $177,500 during December, 1998 to certain 10% note holders to obtain a
favorable interest rate and repayment terms. Additionally, in January and April,
1999, in connection with agreements to provide $2,005,000 in secured and
unsecured lines of credit, the lenders were issued 572,750 shares of common
stock valued at $1,271,350. The value of the shares issued to the 10% note
holders and the line of credit lenders is being amortized as additional interest
expense over the original terms of the debt.
10 PREFERRED STOCK
The Company is authorized to issue up to 2,500,000 shares of $.001 par value
Preferred Stock. Preferred Stock is designated as the "Series A 7% Convertible
Preferred Stock" and has a stated value of $6.00 per share. Dividends of 7% of
the stated value accrue and are payable semi-annually. Each share of Preferred
Stock is convertible into one share of common stock at the option of the
shareholder. No preferred shares have been issued.
11 INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires that the
Company use the liability method which attempts to recognize the future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities.
At April 30, 1999, the Company has net operating loss carryforwards totaling
approximately $9,400,000 that may be offset against future taxable income
through 2012. No tax benefit has been reported in the accompanying financial
statements, however, because the Company believes there is at least a 50% chance
that the carryforwards will expire unused. Accordingly, a $3,760,000 tax benefit
of the loss carryforward has been offset by a valuation allowance of the same
amount. During the years ended April 30, 1999 and 1998, the valuation allowance
increased by $2,720,000 and $1,040,000, respectively.
The expected tax benefit that would result from applying federal statutory tax
rates to the pretax loss differs from amounts reported in the financial
statements primarily because of the increase in the valuation allowance. The
company paid no income taxes since its inception.
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
12 LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period. All
share and per share data, except shares authorized, have been retroactively
adjusted to reflect a 1,000 for 1 stock split effective March 25, 1997 and a 4
for 1 reverse stock split effective June 3, 1999.
13 STOCK OPTIONS
On May 9, 1997 (and as amended June 3, 1997) the Company entered into a
consulting agreement with Greenstone Financial Corp. ("GFC") to assist the
Company with corporate development and strategic business planning. Under terms
of the agreement, the Company granted GFC an option to purchase up to 62,500
shares of Company common stock based upon the successful completion of a private
placement of Company common stock, with each option exercisable at $16.00 per
share. Also under the terms of the agreement, as amended, the Company granted
GFC an option to purchase 75,000 shares of Company common stock at an exercise
price of $0.40 per share. GFC exercised this option in October, 1998.
On June 15, 1998, the Company adopted the "1997 Stock Option Plan" (the "Plan").
Under the Plan, 750,000 shares of common stock are reserved for issuance upon
exercise of options granted to management, key employees and consultants. The
plan provides for the granting of either "incentive stock options" or
"non-qualified stock options", as defined under the Internal Revenue Code.
Options may be granted at prices not less than 100 percent of the fair market
value at the date of grant and may be exercisable with a term not exceeding ten
years. As of April 30, 1999, the Company has granted common stock options to
plan participants as follows:
Exercise Price Number of Options
-------------- -----------------
$.40 37,500
$1.00 142,500
$2.00 146,250
$2.32 75,000
$2.80 105,000
$3.20 225,000
$4.00 212,500
-------
Total options granted 943,750
=======
AMERICAN QUANTUM CYCLES, INC.
Notes to Financial Statements
13 STOCK OPTIONS (Continued)
In addition to the 75,000 options exercised by GFC, an additional 324,375
options were exercised during the year ended April 30, 1999. As of April 30,
1999 the following options are exercisable:
Exercise Price Number of Options
$2.00 103,125
$2.80 101,250
$3.20 225,000
$4.00 190,000
$16.00 62,500
-------
Total options exercisable 681,875
=======
14 COMPREHENSIVE INCOME
As of May 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net loss or shareholders' deficit for any of the periods presented in
the accompanying financial statements. SFAS No. 130 requires other comprehensive
income to include foreign currency translation adjustments and minimum pension
liability adjustments, which prior to adoption were reported separately in
shareholders' equity.
15 SUBSEQUENT EVENTS
On June 3, 1999, the Company declared a one for four reverse stock split. All
share and per share data have been retroactively restated in the accompanying
financial statements.
As of June 14, 1999, American Quantum Cycles issued an aggregate of five (5) 8%
subordinated notes in the aggregate principal amount of $284,181. The notes
mature October 1, 1999 with interest and principal payable in cash.
An additional five noteholders have agreed to convert their notes into American
Quantum common stock after the completion of the subsequent public offering.
American Quantum Cycles closed on its secondary offering on September 13, 1999
selling 2,430,000 shares of its common stock at $3.50 per share raising a gross
of approximately $8.5 million. With this financing, American Quantum qualified
for listing on the American Stock Exchange and now trades on the AMEX under the
symbol "AFV". Net proceeds to American Quantum Cycles were $7,291,785 which have
been used for repayment of notes, paying down lines of credit, reducing accounts
payable, inventory purchase to allow for production increases, and working
capital for American Quantum Cycles.
In February 2000, American Quantum Cycles contracted for a new $1,500,000
revolving line of credit with International Holdngs Inc.. This line of credit is
to be used for inventory and production expenses. Draw on the line of credit is
based per purchase order for motorcycles from our dealers. Principal and
interest are paid from funds received from the sales of the motorcycles.
In February 2000, American Quantum Cycles arranged for a $1,500,000 line of
credit to be used for an E-Commerce internet/extranet initiative and related
expansion and development of corporate ERP.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
THIS DOCUMENT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, INCLUDED IN OR INCORPORATED BY REFERENCE INTO
THIS DOCUMENT, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS
DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS INCLUDING
THOSE RISKS DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-KSB, AS WELL AS IN THIS
REPORT. SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED. ALTHOUGH AMERICAN
QUANTUM CYCLES BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL
PROVE TO BE CORRECT.
AMONG THE KEY RISKS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
EXPECTATIONS ARE ESTIMATES OF COSTS, PROJECTED RESULTS OR ANTICIPATED RESULTS.
The following discussion and analysis should be read in conjunction with the
financial statements of American Quantum Cycles and the notes thereto appearing
earlier in this prospectus.
PLAN OF OPERATION
American Quantum Cycles continues to make significant progress in increasing
plant capacity, product development, Dealer network expansion in Q2 FY00 laying
the infrastructure for increased revenues and profits in Q4 FY'00. Two parallel
production lines have been established and equipped. Personnel have been
increased from 38 to 53 with most the increase coming in production and
inventory management. Training has been completed for the new production
personnel and plant capacity is now rated at 80 - 100 motorcycles per month. In
addition, a Regional Sales Manager, VP for Production and an additional Manager
for Quality Assurance have been hired and integrated into the management team.
Production and Inventory personnel will continue to be added throughout Q4 with
headcount peaking at around 100 people in order to increase plant capacity to
200 units per month in Q4.
Production capacity has been further advanced with the initiation of a program
partnering with the Wackenhut Corporation and the State of Florida for the
establishment of American Quantum production in state correctional institutions.
The State of Florida has constructed two 20,000 square foot buildings and the
Wackenhut Corporation is completing the interior construction to American
Quantum's specifications. These facilities will be used by inmate labor to
provide American Quantum with painting, polishing and fiberglass production
services. This is seen as a model program whereby the inmates receive training
and pay (at minimum wage) and American Quantum benefits from significantly
lowered cost-of-goods. Most of the inmate's pay goes for spousal support, child
support and victim restitution. The first facility will launch production in
March.
Two new product lines are nearing completion and will be introduced to the
market in Q4 FY'00. The Touring model (the Pioneer) has completed design and
engineering and is in the final stages of production rampup on the part of key
vendors to support deliver of the first units in April 2000. American Quantum
has utilized state-of-the 3-dimensional CAD software to design proprietary
saddle bags which provide excellent storage capacity along with styling which
follows the unique curves and lines of American Quantum's frame and fenders.
America Quantum has retained leading engineering experts and has designed
proprietary suspension systems, exhaust pipes and engine electronics for the new
Touring model. Orders are now being taken for January and February deliveries.
The second product line nearing completion is the 96 cubic inch, 4-valve engine.
The 96 cubic inch engine has passed all durability and performance tests. In
tests run at the Orlando Speedworld Dragway, the 96 cubic inch engine (in an
American Quantum standard cruiser motorcycle) reached over 100 mph from a
standing start, on average, in less than a quarter of a mile and around twelve
seconds. The final configuration of the 96 cubic inch engine produced 110 peak
horsepower and 110 peak foot-pounds of torque. This represents a 25% improvement
over American Quantum's 88 cubic inch engine performance and is extremely
competitive in the heavy cruiser and touring motorcycle markets. The 96 cubic
inch engine will enter EPA testing in April and is expected to be available for
delivery in May of 2000. An electronic ignition has been added to the 96 cubic
inch engine that can vary the spark advance curve for hot and cold operating
conditions and environmental conditions such as atmospheric pressure.
Engineering and development of
motorcycle engines will continue in Q4 with a focus on the development a 107
cubic inch, 4-valve engine and a fuel injection, 4-valve engine. These engine
products are not expected to be available for delivery until FY'01.
The number of American Quantum Dealers has been increased to 45 and is on pace
to end FY'00 at around 70. Investment has continued in Internet based sales
support software. American Quantum's proprietary software for allowing a
consumer to design their desired motorcycle configuration and see it portrayed
graphically on a computer screen (CycleDesign) is being ported to the Internet
for consumer use. American Quantum will complete this software development and
will launch an aggressive Internet advertising campaign in Q4 FY'00. The
Internet Advertising campaign will use demographically targeted techniques and
are expected to deliver strong revenues for Q4 FY'00 and Q1 FY'01.
RESULTS OF OPERATIONS
American Quantum Cycles has transitioned from a development stage company into
an early production company. American Quantum Cycles was originally incorporated
on March 20, 1986 as "Norbern, Inc." and was inactive until March 1997 when it
began developing and implementing its business and financing plans. On May 8,
1997, Norbern, Inc. changed its name to American Quantum Cycles, Inc. and its
fiscal year end to April 30.
As American Quantum Cycles was inactive prior to March 1997, there was no income
and only incidental supply costs and the accrued interest expense from seven
promissory notes totaling $250,000. For the fiscal year ended April 30, 1997, we
had a deficit carry forward of $2,634. During the fiscal year ended April 30,
1998, our efforts were principally devoted to research, development and design
of products, marketing activities and raising capital, which resulted in
cumulative losses of $2,634,345. These losses resulted primarily from
expenditures for general and administrative activities, including salaries and
professional fees for outside services in the amount of $1,164,291, travel and
marketing expenses of $457,590, and accrued interest expense of $187,232 from
the bridge loan and convertible debentures issued.
American Quantum Cycles sustained continuing losses during the fiscal year ended
April 30, 1999 in the amount of $6,786,791. These losses include $5,706,840 in
general and administrative activities, representing training and development of
personnel and process necessary in a development stage operation, and $1,079,951
in accrued interest expense.
American Quantum Cycles moved from a product development focus during the fiscal
year ended April 30, 1999 to low volume production. During the first quarter of
this fiscal year (FY'00), revenues increased and there was a significant
reduction of expenses compared to prior quarters. We sustained losses of
$641,569 during the quarter ended July 31, 1999 as compared to losses of
$1,845,129 during the quarter ended July 31, 1998. Revenues continued to
increase significantly during the second and third quarters. We sustained losses
of $655,996 for the second quarter ended October 31, 1999, and losses of
$579,385 for the third quarter ended January 31, 2000.
Revenues in the fiscal year ended April 30, 1998 of $192,856 resulted from the
sale of the initial ten motorcycles produced plus some after-market 4-Valve
engine parts. An additional eight motorcycles were produced, of which two were
used for engineering and regulatory testing, and the remaining six are used for
marketing purposes. Fifty-four (54) motorcycles have been produced during the
fiscal year ended April 30, 1999 for revenues of $959,210 plus $16,570 in
aftermarket parts. Revenues in the quarter ended July 31, 1999 were $343,700,
$605,352 in the quarter ended October 31, 1999, and $904,983 in the quarter
ended January 31, 2000.
American Quantum improved over the same Quarter a year ago in a number of
financial measures: sales increased 231% ($904,983 in FY'00 vs. $391,376 in FY
`99), operating expenses only increased 150% in the same time frame ($1,582,911
in FY'00 vs. $1,020,708 in FY'99), net interest expense decreased 60% ($22,625
in FY'00 vs. $56,335 in FY'99) and net loss decreased by 16% ($579,385 in FY'00
vs. $685,667 in FY'99). A comparison of the cumulative financial results over
the first three Quarters of FY 2000 when compared with the cumulative results
over the same time period for the FY 1999 shows a greater rate of improvement:
sales increased 214% ($1,850,685 in FY'00 vs. $865,399 in FY'99), operating
expenses were roughly the same ($3,720,499 in FY'00 vs. $3,642,460 in FY'99),
net interest expense decreased 88% ($77,512 in FY'00 vs. $625,418 in FY'99) and
net loss decreased 45% ($1,879,561 in FY'00 vs. $3,400,788 in FY'99).
Four hundred and twenty (420) motorcycles have been booked into production slots
based on orders from 45 Dealers. Forty-two motorcycles were produced in Q2 with
eight motorcycles being allocated to marketing purposes and thirty-four being
delivered to Dealers. Production in August and September was constrained due to
tight cash flow as result of a delay of American Quantum's public secondary
offering to late September.
American Quantum Cycles closed on its secondary offering on September 13, 1999
selling 2,430,000 shares of its common stock at $3.50 per share raising a gross
of approximately $8.5 million. With this financing, American Quantum qualified
for listing on the American Stock Exchange and now trades on the AMEX under the
symbol "AFV".
A number of marketing programs were launched in the Quarter. A joint marketing
relationship with Decoma of Troy, MI resulted in the establishment of
co-marketing programs with GMC Truck and Chrysler. An American Quantum, custom
painted motorcycle was co-marketed in a booth at the SEMA (Specialty Equipment
Marketing Association) Show in Las Vegas with GMC's GMT 800 truck. A similar
co-marketing relationship has been established with Chrysler's SUV model. The
legendary racecar driver A.J. Foyt agreed to extend his National Master
Distributor relationship with American Quantum Cycles and also agree to join the
Board of Directors. Mr. Foyt will continue his promotional activities with
American Quantum included appearances at motorcycle shows and rallies and
product endorsements through print, broadcast and Internet media advertisements.
American Quantum Cycles will have to increase monthly production from roughly 20
per month to 125 per month in order to deliver against the 420 outstanding
orders within FY'00. Additional orders are expected to be received in Q4 and
will add to the monthly production requirement. To accomplish this increase in
production, American Quantum will have to add personnel, train personnel, add
tooling, continue to refine production and material handling processes, ensure
the smooth and timely flow of parts from vendors and launch paint, polishing and
fiberglass production at the Wackenhut/State of Florida facilities. There is no
guarantee that the management team will be able to implement this required
increase in the three-month time frame necessary for timely delivery of
motorcycles against outstanding orders. Risks which could prevent successful
delivery of 420 motorcycles include:
. Not recruiting adequate production staff
. Insufficient training of production staff
. Not ordering parts on time
. Too many last minute engineering changes
. Suppliers delivering parts of unacceptable quality
. Suppliers not delivering parts on a timely basis
. Not managing the production staff to produce the quantity and quality
of motorcycles required
. Not establishing an effective Quality Assurance Program
. Inadequate skill and experience in the inmate population available
for the Wackenhut Program
. Unacceptable levels of damage to motorcycles in shipping to Dealers
Consequently, there is no guarantee that we will be successful in producing the
motorcycles that have been ordered.
American Quantum Cycles expects significant improvement in the fourth quarter of
fiscal year 2000. Results of operations in the future will be influenced by
numerous factors including technological advancements, competition, regulation,
increases in expenses associated with sales growth, market acceptance of the
products of American Quantum Cycles, the capacity of American Quantum to expand
and maintain the quality of its motorcycle and related services, continued
development of the dealer organization, favorable sources of supplies,
recruitment of highly skilled employees and integration of such persons into a
cohesive organization along with the ability to control costs and manage cash
flow.
LIQUIDITY AND CAPITAL RESOURCES
Since American Quantum Cycles only recently emerged from its development stage,
and is just beginning to receive any material income from operations. As such,
American Quantum Cycles relies on private sources of financing to support its
operations.
American Quantum Cycles closed on its secondary offering on September 13, 1999
selling 2,430,000 shares of its common stock at $3.50 per share raising a gross
of approximately $8.5 million. With this financing, American Quantum qualified
for listing on the American Stock Exchange and now trades on the AMEX under the
symbol "AFV". Net proceeds to American Quantum Cycles were
$7,291,785 which have been used for repayment of notes, paying down lines of
credit, reducing accounts payable, inventory purchase to allow for production
increases, and working capital for American Quantum Cycles.
In February 2000, American Quantum Cycles contracted for a new $1,500,000
revolving line of credit with International Holdngs Inc.. This line of credit is
to be used for inventory and production expenses. Draw on the line of credit is
based per purchase order for motorcycles from our dealers. Principal and
interest are paid from funds received from the sales of the motorcycles.
In February 2000, American Quantum Cycles arranged for lines of credit totaling
$1,500,000 to be used for an E-Commerce internet/extranet initiative and the
related expansion and development of corporate ERP.
Year 2000 Disclosure
American Quantum Cycles has investigated what, if any, impact the year 2000
could have on its internal software and operating systems. It is believed by the
management team that American Quantum's operating system (Win NT 4.0) is year
2000 compliant. DealerNet, a proprietary software for designing and ordering
motorcycles at the dealership level, was developed for American Quantum Cycles
in 1998, and is to our knowledge year 2000 compliant. Additionally, integral
software that is currently being purchased and/or developed for American Quantum
Cycles (MRP/ERP, TechNet, & e-commerce), is believed to also be year 2000
compliant. American Quantum Cycles has made efforts to ascertain its
vulnerability should any of its vendors experience year 2000 difficulties.
Should certain vendors become unable to meet American Quantum's material needs,
production could be interrupted, which would in turn adversely affect
operations. In 1999, American Quantum Cycles will attempt to identify, if
possible, multiple vendor sources for product to limit our exposure to vendor's
year 2000 problems. The anticipated costs of American Quantum's year 2000
initiative is not considered material. The internal year 2000 team's mission is
to attempt to ensure that there is no adverse effect on us. While we believe
that every effort is being taken to address all year 2000 concerns, we can not
guarantee that the systems of other companies will be compliant and will not
have a material adverse affect on American Quantum Cycles.
AMERICAN QUANTUM CYCLES, INC.
PART II
Other Information
Item 1. Legal Proceedings - None
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Item 2. Changes in Securities - None
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Item 3. Defaults upon Senior Securities - None
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Item 4. Submission of Matters to a Vote of Security Holders - None
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Item 5. Other Information - None
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - 27.1 Data sheet
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended October 31, 1999.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial
officer by the Registrant.
AMERICAN QUANTUM CYCLES, INC.
Date: March 16, 2000 By: /s/ Richard K. Hagen
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Richard K. Hagen
Chairman of the Board of Directors,
Chief Executive Officer,
Chief Financial Officer and President
Officer of Registrant