-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9V0Id4AdQzlwOPZshq1xeAzmt55aP/AW9CwO9H2pXr1g9P31LbLzba/gB0BmtBt JbdAT7ot2P8jpowehPXnTw== /in/edgar/work/0000950124-00-006321/0000950124-00-006321.txt : 20001031 0000950124-00-006321.hdr.sgml : 20001031 ACCESSION NUMBER: 0000950124-00-006321 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EAGLE MOTORCYCLE CO INC CENTRAL INDEX KEY: 0001125984 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 770420004 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-48916 FILM NUMBER: 749064 BUSINESS ADDRESS: STREET 1: 2350 TECHNOLOGY PARKWAY CITY: HOLLISTER STATE: CA ZIP: 95023 BUSINESS PHONE: 8316344740 SB-2 1 c57376sb-2.txt FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER , 2000 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERICAN EAGLE MOTORCYCLE COMPANY, INC. (Name of Small Business Issuer in its Charter) ------------------------ CALIFORNIA 3751 77-042000 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification of Incorporation) Classification Code Number) Number)
------------------------ Gregory Spak 2350 Technology Parkway President and Chief Executive Officer Hollister, California 95023 American Eagle Motorcycle Company, Inc. (831) 634-4740 2350 Technology Parkway (Address and Telephone Number of Principal (831) 634-4740 Executive (Name, Address and Telephone Number of Agent for Officer and Principal Place of Business) Service)
------------------------ COPIES TO: Robert O. Knutson, Esq. William M. Prifti, Esq. Attorney at Law Prifti Law Offices 9372 Creekwood Drive Five Market Square, Suite 109 Eden Prairie, MN 55347 Amesbury, MA 01913 (612) 941-0908 (978) 388-4942 Fax (612) 941-2744 Fax (978) 388-4945
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------------ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] If any 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, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) UNIT PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, no par value, and one redeemable Class A Warrant to purchase one share of Common Stock 920,000(2) $ 7.00 $ 6,440,000 $1,701 - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value 920,000(2) $ 9.80 $ 9,016,000 $2,381 - --------------------------------------------------------------------------------------------------------------------------------- Underwriters' warrants and common shares issuable upon exercise of warrants 80,000 $ 9.80 $ 784,000 $ 207 - --------------------------------------------------------------------------------------------------------------------------------- Total registration fee -- -- $16,240,000 $4,289 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this registration statement also covers such additional securities as may become issuable upon exercise of the Class A Warrants or underwriters' warrants through operation of the antidilution provisions thereof. (2) Includes 120,000 units subject to an option granted to the underwriter to cover over-allotments, if any. ------------------------ THE REGISTRANT HEREBY 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION, DATED , 2000. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD 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. 800,000 UNITS [AMERICAN EAGLE LOGO] AMERICAN EAGLE MOTORCYCLE COMPANY EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE CLASS A WARRANT We are offering 800,000 units to the public at an initial offering price expected to be between $6.00 and $7.00 per unit. Each unit consists of one share of common stock and one redeemable Class A Warrant which is exercisable and separable from the common stock immediately upon the effectiveness of this offering. Each Class A Warrant entitles its holder to purchase, at any time during its three-year term, one share of our common stock at an exercise price of $9.80 per share, subject to adjustment. We may redeem these warrants for $.01 per warrant at any time on 20 days written notice, provided the closing bid price of our common stock exceeds $12.00 per share, subject to adjustment, for 20 consecutive trading days. Prior to this offering, there has been no public market for any of our securities. INVESTING IN OUR UNITS INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 8 AND "DILUTION" ON PAGE 12.
PER UNIT TOTAL -------- ----- Public offering price....................................... $ $ Underwriting discounts...................................... $ $ Proceeds to us.............................................. $ $
We have granted the underwriter a 45-day option to purchase a maximum of 120,000 additional units from us at the same price to cover over-allotments, if any. Delivery of the securities will be made on or about , 2000. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------- MERCER PARTNERS, INC. The date of this prospectus is , 2000. 3 [INSIDE FRONT COVER -- PHOTOS OF AMERICAN EAGLE MOTORCYCLES] 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 4 Risk Factors........................ 8 Forward-Looking Statements.......... 9 Asset Purchase Agreement............ 9 Use of Proceeds..................... 10 Dividend Policy..................... 10 Capitalization...................... 11 Dilution............................ 12 Unaudited Pro Forma Consolidated Financial Data.................... 13 Management Discussion and Analysis of Financial Condition and Results of Operations..................... 18
PAGE ---- Business............................ 23 Management.......................... 32 Certain Transactions................ 35 Principal Shareholders.............. 36 Description of Securities........... 37 Shares Eligible for Future Sale..... 39 Underwriting........................ 40 Legal Matters....................... 42 Experts............................. 42 Additional Information.............. 43 Index to Financial Statements....... F-1
------------------------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. DEALER PROSPECTUS DELIVERY OBLIGATION Until , 2000 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. 3 5 PROSPECTUS SUMMARY Unless otherwise indicated, all information contained in this prospectus assumes the underwriters will not exercise their over-allotment option to purchase additional units, and also reflects the 1-for-7 reverse common stock split of our outstanding common shares effected by us in October 2000. AMERICAN EAGLE MOTORCYCLE COMPANY, INC. We design, develop, manufacture and sell American-styled heavyweight motorcycles popularly known as "cruisers." Heavyweight motorcycles in our industry are those having an engine displacement of at least 651 cubic centimeters (cc). Our motorcycles are marketed and distributed under our American Eagle brand primarily through our current dealer network of 32 domestic dealers. Since inception of our commercial production in 1996, we have produced and sold approximately 800 American Eagle motorcycles. Suggested retail prices of our cruisers range from $20,900 to $27,900, and they are offered with a variety of customized options and styling. We believe that our premium motorcycles represent the finest available American-made, custom-designed cruisers. STRATEGIC PROPRIETARY ENGINE ACQUISITION We are in the process of acquiring complete proprietary engine development technology and running prototypes for two distinct air-cooled V-Twin engines for use in our cruisers. These assets are being purchased by us from an unaffiliated company, and the acquisition is contingent upon the completion of the public offering of our units. See "Asset Purchase Agreement." One engine has a 92 cubic inch displacement and is similar in mechanical design and exterior styling to the traditional V-Twins manufactured by Harley-Davidson and certain independent engine manufacturers such as S&S Cycle Inc. This 92 cubic inch V-Twin is fully adaptable to power our premium cruiser models, and the commercial introduction of this engine is planned to occur in the first half of 2001. The second proprietary engine we are acquiring is an innovative completely new-designed powerful V-Twin of 152 cubic inches, which we intend to incorporate into a top-of-the-line performance cruiser now being developed by us, the TRX 152. We expect to introduce our TRX 152 model commercially in the second half of 2001. We believe that our engine technology acquisition will accomplish a very important strategic milestone for our business. Having proprietary engines to power our cruisers will enable us to reduce our cost of production dramatically and result in significantly higher gross margins from our production operations, since an engine is by far the most expensive component we purchase from our suppliers. We also believe we will generate sales of these V-Twins in the custom cruiser aftermarket. OUR STRATEGY Our goal is to become a leading manufacturer of premium heavyweight custom cruisers, and certain key elements of our business strategy are as follows: - continuing an active development and engineering program to enhance the performance and styling of our current models; - developing new models of motorcycles; - integrating our new V-Twin engines in all our cruiser models; - increasing our domestic market penetration for a greater nationwide distribution; 4 6 - developing and offering a line of proprietary brand parts, apparel and other general merchandise, and accessories for the large custom cruiser aftermarket; and - continuing preparations to enter foreign motorcycle markets by 2002. OTHER INFORMATION We are incorporated in California, our headquarters and production facilities are located at 2350 Technology Parkway, Hollister, CA 95023, our telephone number is (831) 634-4740, and our Internet Web site address is www.americaneagles.com. Information contained on our Web site is not part of this prospectus. "American Eagle", "Maverick", "STM-C", "Stinger", "Stalker", "XRT Talon", "STX 2000", and our logo are some of the trademarks and trade names that we use. This prospectus also contains trade names and trademarks of other entities. 5 7 THIS OFFERING Securities offered by us...... 800,000 units, with each unit consisting of one share of common stock and one redeemable Class A Warrant. Each Class A Warrant becomes exercisable and transferable separate from the common stock immediately upon the effectiveness of the offering. Each warrant entitles its holder to purchase, during its three-year term, one share of common stock at $9.80 per share. We may redeem these warrants on 20 days written notice for $.01 per warrant provided the closing public bid price of our common stock exceeds $12.00 per share for 20 consecutive trading days. Offering price................ $7.00 per unit. Common stock outstanding after offering...................... 3,983,161 shares. Use of proceeds............... Payment of outstanding and assumed debt, capital expenditures, development and engineering expenses, sales and marketing expansion, purchasing materials and components for production inventory, enhancing Internet Web sites, working capital and other general corporate purposes.
COMMON STOCK CLASS A WARRANTS ------------ ---------------- Proposed symbols: Nasdaq SmallCap Market.................. Pacific Stock Exchange (PSE)............
Unless otherwise indicated, all information in this prospectus: - assumes an initial offering price of $7.00 per unit, and does not allocate any separate value to the Class A Warrant; - assumes no exercise of the underwriter's over-allotment option; and - gives effect to a one-for-seven reverse common stock split which was effective October 2000. The number of our shares of common stock to be outstanding after this offering includes: - 1,416,161 shares outstanding as of June 30, 2000; - 285,714 shares issued incident to the recent conversion of all our preferred to common shares; - 162,500 shares issued incident to the September 2000 acquisitions by us of Yankee Engineuity and certain motorcycle Web sites; - 31,428 shares issued in September 2000 to satisfy trade accounts payable; and - 1,287,358 shares to be issued to Angel Motorcycles Inc. to acquire its engine technology assets. The number of our shares of common stock to be outstanding after this offering excludes: - 143,714 shares issuable upon exercise of outstanding options and warrants at a weighted average exercise price of $6.73 per share; - 235,286 shares issuable upon exercise at $7.00 per share of warrants to be assumed by us incident to the pending engine technology acquisition; - 800,000 shares issuable upon the exercise at $9.80 per share of Class A Warrants included in the units being offered by us; and - 80,000 shares issuable by us upon the exercise of a warrant to be issued to the underwriter at an exercise price of $9.80 per share. 6 8 SUMMARY FINANCIAL DATA
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------- ------------------------- 1998 1999 1999 2000 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales.............................. $ 3,315,100 $ 4,980,200 $3,502,400 $ 970,600 Cost of sales.......................... 3,205,800 4,558,000 3,201,800 871,700 ----------- ----------- ---------- ----------- Gross profit........................... 109,300 422,200 300,600 98,900 Operating expenses: Research and development............. 164,700 545,400 224,300 174,200 Sales and marketing.................. 354,600 421,400 224,700 57,500 General and administrative........... 904,900 913,000 471,400 1,034,700 ----------- ----------- ---------- ----------- Total operating expenses............... 1,424,200 1,879,800 920,400 1,266,400 ----------- ----------- ---------- ----------- Loss from operations................... (1,314,900) (1,457,600) (619,800) (1,167,500) Other income (expenses)................ (58,100) (80,900) (35,400) 265,100 ----------- ----------- ---------- ----------- Net loss............................... (1,373,000) (1,538,500) (655,200) (902,400) Preferred stock dividend............... (12,600) (24,000) (12,000) (12,000) ----------- ----------- ---------- ----------- Net loss attributed to common shareholders......................... $(1,385,600) $(1,562,500) $ (667,200) $ (914,400) =========== =========== ========== =========== Basic and diluted loss per common share................................ $ (1.15) $ (1.27) $ (0.55) $ (0.73) Weighted average common shares outstanding.......................... 1,205,444 1,225,816 1,218,730 1,249,823
The following balance sheet data is presented: - on an actual basis as of June 30, 2000; - on a pro forma basis to reflect (i) our issuance in September 2000 of common stock to satisfy accounts payable of $200,000, (ii) our September 2000 acquisitions of motorcycle Web sites and Yankee Engineuity Products Division, (iii) our pending acquisition of assets from Angel Motorcycles Inc. as if this acquisition had occurred on June 30, 2000, and (iv) the October 2000 conversion of our outstanding preferred stock into common stock on a 2-for-1 basis; and - on a pro forma as adjusted basis to reflect our receipt of the net proceeds from our sale of 800,000 units in this offering at an estimated public offering price of $7.00 per unit, after deducting underwriting discounts and offering expenses, payment of liabilities being assumed in our pending acquisition, and satisfaction of approximately $1,200,000 in bank indebtedness and trade accounts payable.
JUNE 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 5,200 $ 5,200 $ 2,621,700 Working capital (deficiency)....................... (943,700) (1,549,800) 3,150,200 Total assets....................................... 1,341,200 12,762,200 15,378,700 Total liabilities.................................. 2,108,600 2,785,200 701,700 Accumulated deficit................................ (5,595,000) (5,595,000) (5,595,000) Shareholders' (deficiency) equity.................. (767,400) 9,977,000 14,677,000
7 9 RISK FACTORS An investment in our Units involves a high degree of risk. You should carefully consider the following risks as well as other information in this prospectus before you decide to buy our securities in this offering. WE HAVE A HISTORY OF OPERATING LOSSES WHICH WILL ADVERSELY AFFECT US IF LOSSES CONTINUE. We have incurred losses every year since our 1995 inception, and as of June 30, 2000 we had an accumulated deficit of $5,595,000. Our business and operations will be harmed if we continue to incur losses. BECAUSE OF OUR SERIOUS LIQUIDITY DEFICIENCY, WE MAY BE UNABLE TO CONTINUE OUR BUSINESS AS A GOING CONCERN. Our operations require significant levels of cash to fund the production and distribution of our motorcycles. We have funded our operations with equity infusions, cash from operations and a bank line of credit. Our bank lender currently is demanding payment in full of our outstanding credit facility, and we also are undergoing pressure for additional payments from certain trade creditors. We must raise substantial new capital to continue our operations. The report of our Independent Certified Public Accountant contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. WE DEPEND UPON OUR DEALERS FOR OUR REVENUES, AND THEY ARE NOT OBLIGATED TO PURCHASE ANY MINIMUM REQUIREMENT FROM US. We depend upon our dealers to promote our products and brand image, and our operations will be adversely affected if they fail. Our dealer agreements may be terminated anytime upon 60 days notice by either party. In addition, all dealer orders may be cancelled without penalty. WE DEPEND ON A LIMITED SOURCE OF SUPPLIERS FOR OUR KEY MOTORCYCLE COMPONENTS. We currently purchase key components used in the manufacture of our motorcycles from single or limited source suppliers. We typically purchase components and materials through purchase orders without having any guaranteed supply arrangements with our vendors. Any interruption or substantial delay in the supply of our outsourced components or materials without our being able to obtain them from alternate sources timely and at acceptable prices, could seriously impair our product delivery to dealers and even cause our dealers to cancel orders. UNTIL OUR NEW ENGINES REACH COMMERCIAL PRODUCTION, OUR CONTINUED RELIANCE ON EXISTING ENGINE SUPPLIERS COULD ADVERSELY AFFECT US IF DELIVERY IS INTERRUPTED. For example, our single engine supplier in 1999 interrupted delivery for some time that year, which harmed our business significantly. OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN GREG SPAK AND OTHER KEY PERSONNEL. We believe the experience and ability of Greg Spak, our chief executive officer, is important to our growth and success, and the loss of his services would harm our business. Our success will also depend on our ability to hire and retain other qualified management, including competent marketing, development and engineering personnel. We may be unable to locate and hire these personnel. WE MAY ENCOUNTER DIFFICULTIES AND COMPLICATIONS IN ESTABLISHING AND INTEGRATING OUR NEW ENGINES. We intend to incorporate the two proprietary engines we are acquiring into our motorcycles promptly. We may encounter complications and delays in assimilating and integrating these engines and securing necessary government certifications for them. Any failure by us to effectively incorporate these engines into our products would adversely affect our planned future business and operations. OUR EXPOSURE TO PRODUCT LIABILITY CLAIMS COULD HARM US SERIOUSLY IF OUR INSURANCE COVERAGE IS INADEQUATE. Given the nature of motorcycle products, we are subject to potential product liability claims that could, in the absence of sufficient insurance coverage, have a material adverse impact on our business and financial condition. Although we believe the insurance we maintain is adequate, we 8 10 cannot assure you that it will cover all claims made against us or that it will fully indemnify us for product liabilities that may be imposed against us. WE MUST COMPLY WITH MANY GOVERNMENT REGULATIONS WITH RESPECT TO OUR PRODUCTION OPERATIONS AND OUR MOTORCYCLES, AND ANY FAILURE TO COMPLY MATERIALLY WITH THESE REGULATIONS WOULD HARM OUR BUSINESS. Our manufacturing operations and motorcycles must comply with many federal and state requirements governing environmental, safety and other factors, which generally relate to air, water and noise pollution and product safety characteristics. Any failure by us to comply with these regulations or to obtain or maintain necessary certifications from governmental agencies would harm our business and operations. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance and business expansion. These statements involve known and unknown risks and uncertainties that may cause our actual results and performance to be materially different from those anticipated or implied by the forward-looking statements for many reasons, including the risks described under "Risks Factors" and elsewhere in this prospectus. We use words such as "anticipate", "believe", "intend", "expect", "estimate" and similar expressions to identify such forward-looking statements. These forward-looking statements include anticipated development and release of new products, anticipated business expansion, and anticipated increased expenditures for manufacturing, sales and marketing, and general and administrative expenses. These statements are only predictions of ours which apply only as of the date of this prospectus, and you should not place undue reliance on them. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee our future results or performance, nor can we assure you that our future business expansion will unfold as projected by us. ASSET PURCHASE AGREEMENT In July 2000, we entered into an asset purchase agreement (the "Agreement") with Angel Motorcycles Inc., a Minnesota corporation ("Angel") to acquire all of Angel's motorcycle development and technology assets, consisting primarily of the design and development of two distinct V-Twin engines, one of 92 cubic inches and the other of 152 cubic inches. Development of these engines has been completed and running prototypes of both engines have been subjected satisfactorily to substantial operational testing. We are currently adapting the frameworks, drivetrains and other components of our motorcycles to fit these engines being acquired from Angel. As soon as practicable, we intend to offer these proprietary V-Twin engines to power all models of American Eagle cruisers. See "Business -- Products Under Development." Both of these proprietary engines were developed for Angel in England by Melling Consultancy Design ("MCD"), a leading engine design firm owned by Al Melling. MCD designed both engines specifically to power premium high performance V-Twin heavyweight motorcycles. Doing business as MCD, Mr. Melling has been active continuously in engine design and development for over 30 years. He has designed, enhanced or improved numerous automobile, motorcycle, and other motorsport engines of many types while working for various internationally well-known firms including General Motors, Ferrari, Porsche, Lamborghini, Alfa Romeo, Ducati, and various leading Japanese motorcycle manufacturers. In recent years, he has achieved considerable prominence in the engine design industry for his development of modern innovative engines including a Formula 1 racing V-10 engine 9 11 for Lola, a British developer of high performance motorsport vehicles, and both a V-8 engine and an inline-6 engine for TVR, a British high performance engine and specialty vehicle manufacturer. Closing of the Agreement is conditional upon the completion of this offering, and upon its closing we will issue to Angel 1,287,358 shares of our common stock plus stock purchase warrants for an additional 235,286 shares of our common stock. We also will assume liabilities of Angel specified in the Agreement and consisting of accounts and notes payable of $300,000 and convertible debentures of $583,500. In addition, we will be obligated to make royalty payments to MCD of 2.5% in respect to any sales of these engines or of motorcycles using these engines. USE OF PROCEEDS We expect to receive net proceeds of approximately $4,700,000 from this offering, or approximately $5,400,000 if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and estimated offering expenses payable by us, and assuming an initial public offering price of $7.00 per share. Of these net proceeds, we intend to use approximately $1,200,000 to satisfy certain trade accounts payable and bank indebtedness now in default and bearing interest at the bank's prime rate plus 3% (10% as of June 30, 2000), approximately $883,500 for payment of liabilities we will assume incident to our acquisition of V-Twin engine technology from Angel Motorcycles Inc., approximately $200,000 for capital expenditures to purchase production and computer equipment and software, and approximately $600,000 for production inventories of raw materials, engines and other components. The balance of estimated proceeds will be used for general corporate purposes including expansion of sales and marketing efforts, new product and engine development and certification, integration and expansion of our recently acquired Yankee Engineuity aftermarket sales business, enhancement of our e-commerce motorcycle Web sites, and general working capital needs. Until we apply the proceeds for these uses, we intend to invest them in short-term, interest-bearing securities. The foregoing description represents our present intentions based upon current plans and business conditions, which may change or vary significantly due to many factors including the amount of our future revenues, prevailing general economic or industry conditions, changes in the competitive environment of our industry, and strategic acquisition or other opportunities that may arise. Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this offering. Depending upon future events, we may determine to apply these proceeds for different purposes and in different amounts than described above. Although we cannot assure you that the net proceeds of this offering will satisfy our requirements for any particular period of time, we currently expect that the proceeds from this offering along with cash generated from our operations will be adequate to satisfy our operational and capital requirements for at least one year from the date of this prospectus. After that, to the extent our capital resources are insufficient to meet out future requirements, we will need to raise additional funds in order to continue our operations and planned expansion effectively. We cannot assure you that any such funds will be available to us on favorable terms, or at all. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock and we do not anticipate declaring or paying any cash dividends for the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business. 10 12 CAPITALIZATION The following table shows: - our actual capitalization on June 30, 2000; - our pro forma capitalization on June 30, 2000 reflecting (i) our September 2000 issuance of a total of 162,500 shares of common stock for our recent acquisition of Yankee Engineuity Products Division and the purchase of motorcycle Web sites from Net Media Technologies, Inc., (ii) the October 2000 conversion of our outstanding preferred stock into common stock on a 2-for-1 basis; (iii) our September 2000 issuance of 31,428 shares of common stock to satisfy accounts payable of $200,000, and (iv) the issuance of 1,287,358 shares of our common stock to Angel Motorcycles Inc. for its intangible engine technology assets, assuming this pending acquisition occurred on June 30, 2000; and - our pro forma as adjusted capitalization on June 30, 2000, assuming the completion of this offering at an assumed public offering price of $7.00, payment of all outstanding convertible debentures we will assume incident to our acquisition of assets from Angel Motorcycles Inc., and payment of our outstanding bank debt.
AS OF JUNE 30, 2000 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- Bank line of credit................................ $ 500,000 $ 500,000 $ -- Long-term debt, including current portion of $339,900......................................... 351,200 351,200 -- Capital lease obligations, including current portion.......................................... 55,100 55,100 55,100 Notes payable...................................... -- 128,700 28,700 10% convertible debentures......................... -- 583,500 -- Shareholders' (deficiency) equity: Preferred stock, no par value, 5,000,000 shares authorized; 142,857 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted...................................... 1,525,000 -- -- Common stock, no par value, 10,000,000 shares authorized; 1,416,161 shares issued and outstanding actual; 3,183,161 shares issued and outstanding pro forma; 3,983,161 shares issued and outstanding pro forma as adjusted...................................... 3,302,600 15,572,000 20,272,000 ----------- ----------- ----------- Accumulated deficit.............................. (5,595,000) (5,595,000) (5,595,000) ----------- ----------- ----------- Total shareholders (deficiency) equity... (767,400) 9,977,000 14,677,000 ----------- ----------- ----------- Total capitalization..................... $ 138,900 $11,595,500 $14,760,800 =========== =========== ===========
11 13 DILUTION If you invest in our securities, your investment will be diluted to the extent of the difference between the initial public offering price per unit and the pro forma net tangible book value per share of common stock after this offering, assuming no value is allocated to the Class A Warrant portion of a unit. Our pro forma net tangible book value deficit as of June 30, 2000 was $(1,370,200) or $(.43) per share. Pro forma net tangible book value per share was determined by dividing our tangible net worth, which consists of tangible assets less liabilities, by the total number of common shares outstanding after adjusting for all common stock transactions which transpired after June 30, 2000 (including our purchase of engine technology assets which will be closed simultaneous with this offering). After giving effect to the sale of the 800,000 units offered hereby at an assumed initial public offering price of $7.00 per unit, our pro forma net tangible book value as of June 30, 2000 would have been $3,329,800 or $.84 per share. This represents an immediate increase in net tangible book value of $1.27 per share to existing shareholders and an immediate dilution in net tangible book value of $6.16 per share to new investors, or approximately 88% of the assumed offering price of $7.00 per share. The following table illustrates this dilution: Assumed initial public offering price....................... $7.00 Pro forma net tangible book value per share before offering............................................... $(.43) Increase in net tangible book value from this offering.... 1.27 ----- Pro forma net tangible book value per share after offering.................................................. .84 ----- Dilution in net tangible book value per share to new investors................................................. $6.16 =====
The following table shows on a pro forma basis as of the date of this prospectus and after giving effect to this offering at an assumed offering price of $7.00 per unit, the differences between our existing holders of common stock and the new investors in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share, before deducting underwriting discounts and estimated offering expenses. For purposes of this table, no value has been allocated to the Class A Warrant portion of the units being offered. The information on existing shareholders includes Angel Motorcycles Inc. and the common shares to be issued to that company for its engine technology assets, and also the common shares issued to acquire motorcycle web sites and Yankee Engineuity. This information also reflects the conversion of all our preferred shares into common shares.
SHARES PURCHASED TOTAL CONSIDERATION ------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- ------------- Existing shareholders........ 3,183,161 79.9% $15,572,000 73.5% $4.89 New investors................ 800,000 20.1 5,600,000 26.5 7.00 --------- ---- ----------- ---- 3,983,161 100% $21,172,000 100% ========= ==== =========== ====
The foregoing information is based on the number of shares of our common stock to be outstanding after this offering and excludes the following: - 379,000 shares issuable upon exercise of outstanding warrants and stock options with a weighted average exercise price of $6.90 per share (including warrants being issued incident to our purchase of engine technology assets); - 80,000 shares issuable upon exercise of underwriters' warrants being granted by us incident to this offering and exercisable at $9.80 per share; and - 120,000 additional shares that may be purchased from us by the underwriters pursuant to an option to cover over-allotments in connection with this offering. 12 14 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Set forth below are our unaudited pro forma condensed consolidated financial statements. The pro forma condensed consolidated financial statements have been prepared giving effect to (1) the acquisition of Yankee Engineuity Products Division, a California sole proprietorship; (2) the acquisition of certain motorcycle Web sites from Net Media Technologies, Inc.; and (3) the acquisition of engine technology from Angel Motorcycles, Inc. net of liabilities assumed. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2000 is based on the historical balance sheets of American Eagle Motorcycle Company, Inc., Yankee Engineuity Products Division, and Angel Motorcycles, Inc., as of June 30, 2000, respectively. The unaudited pro forma condensed consolidated balance sheet assumes the transactions occurred on June 30, 2000. The unaudited pro forma condensed consolidated statements of operations for the twelve months ended December 31, 1999 and the six months ended June 30, 2000 are based on the historical statements of operations of American Eagle Motorcycle Company, Inc., Yankee Engineuity Products Division, and Angel Motorcycles, Inc. for the periods then ended, respectively. The unaudited pro forma condensed consolidated statement of operations assumes the transactions occurred on January 1, 1999. The unaudited pro forma condensed consolidated statements of operations may not be indicative of the actual results which would have been obtained if the transactions had occurred on the dates indicated nor are they indicative of future operating results. In particular, the unaudited pro forma condensed consolidated financial statements are based on estimates of purchase price allocation, which may differ from the actual allocation. The accompanying unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of American Eagle Motorcycle Company, Inc. and Angel Motorcycles, Inc. and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. 13 15 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 --------------------------------------------------------------------------------------------------- PREVIOUS ACQUISITIONS AMERICAN ----------------------------------------- EAGLE YANKEE PRO FORMA ANGEL PRO FORMA MOTORCYCLE ENGINEUITY ADJUSTMENTS PRO FORMA MOTORCYCLES ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ASSETS CURRENT: Cash and cash equivalents............. $5,200...... $19,700 $ -- $ 24,900 $ -- $ -- $ 24,900 Accounts receivable, net of allowance for doubtful accounts....... 86,700..... 29,300 -- 116,000 -- -- 116,000 Advances to related parties................. 96,900..... -- -- 96,900 -- -- 96,900 Inventories............... 822,600.... 21,500 -- 844,100 -- -- 844,100 Prepaid expenses and other assets.................. 106,100.... -- -- 106,100 59,900 (59,900)(c) 106,100 ----------- ------- ---------- ----------- ----------- ---------- ----------- Total Current Assets............. 1,117,500.. 70,500 -- 1,188,000 59,900 (59,900) 1,188,000 Intangible Assets........... --......... -- 1,105,400(a,b) 1,105,400 -- 10,241,800(d) 11,347,200 Notes Receivable............ --......... -- -- -- 273,000 (273,000)(c) -- Property and Equipment, net....................... 223,700.... 3,300 -- 227,000 -- -- 227,000 ----------- ------- ---------- ----------- ----------- ---------- ----------- $1,341,200.. $73,800 $1,105,400 $ 2,520,400 $ 332,900 $9,908,900 $12,762,200 =========== ======= ========== =========== =========== ========== =========== LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY CURRENT LIABILITIES: Bank overdraft............ $8,300...... $ -- $ -- $ 8,300 $ 5,900 $ (5,900)(c) $ 8,300 Line of credit............ 500,000.... -- -- 500,000 -- -- 500,000 Accounts payable.......... 784,200.... 9,600 -- 793,800 95,000 105,000(c) 993,800 Accrued expenses.......... 409,800.... 3,400 -- 413,200 1,200 (1,200)(c) 413,200 Current portion, long-term............... 339,900.... -- -- 339,900 -- -- 339,900 Current portion, obligations............. 19,000..... -- -- 19,000 -- -- 19,000 Notes payable............. --......... 28,700 -- 28,700 106,900 (6,900)(c) 128,700 Convertible debentures.... --......... -- -- -- 240,500 343,000(c) 583,500 ----------- ------- ---------- ----------- ----------- ---------- ----------- Total Current Liabilities........ 2,061,200.. 41,700 -- 2,102,904 449,500 434,000 2,986,400 ----------- ------- ---------- ----------- ----------- ---------- ----------- LONG-TERM LIABILITIES: Long-term debt, less current portion......... 11,300..... -- -- 11,300 -- -- 11,300 Obligations under capital lease, less current portion................. 36,100..... -- -- 36,100 -- -- 36,100 ----------- ------- ---------- ----------- ----------- ---------- ----------- Total Liabilities..... 2,108,600.. 41,700 -- 2,150,300 449,500 434,000 3,033,800 SHAREHOLDERS' (DEFICIENCY) EQUITY: Series A preferred stock................... 1,525,000.. -- -- 1,525,000 -- -- 1,525,000 Common stock.............. 3,302,600.. -- 1,137,500(a,b) 4,440,109 998,500 8,359,800(c,d) 13,798,400 (Accumulated deficit) Retained Earnings....... (5,595,000) 32,100 (32,100)(b) (5,595,000) (1,115,100) 1,115,100(c,d) (5,595,000) ----------- ------- ---------- ----------- ----------- ---------- ----------- Total Shareholders' (Deficiency) Equity............. (767,400) 32,100 1,105,400 370,100 (116,600) 9,474,900 9,728,400 ----------- ------- ---------- ----------- ----------- ---------- ----------- $1,341,200.. $73,800 $1,105,400 $ 2,520,400 $ 332,900 $9,908,900 $12,762,200 =========== ======= ========== =========== =========== ========== ===========
14 16 - ------------------------- (a) Reflects the value of the 130,000 shares of our common stock issued to acquire several motorcycle Web sites from Net Media Technologies, Inc. based on the initial public offering price of our common stock of $7.00. (b) Reflects the acquisition of Yankee Engineuity, accounted for using the purchase method of accounting, for 32,500 shares of our common stock at the initial public offering price of $7.00. (c) To reflect assets acquired and liabilities assumed from Angel Motorcycles, Inc. (d) Reflects the value of the 1,287,358 shares of our common stock, based on the initial public offering price of our common stock of $7.00, and warrants to purchase 235,286 shares of our common stock at $7.00 per share, to be issued to Angel Motorcycles, Inc. to acquire its technology of two V-Twin engines, net of liabilities assumed. 15 17 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------------------------------------------- PREVIOUS ACQUISITIONS AMERICAN ----------------------------------------- EAGLE YANKEE PRO FORMA ANGEL PRO FORMA MOTORCYCLE ENGINEUITY ADJUSTMENTS PRO FORMA MOTORCYCLES ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net Sales................. $ 4,980,200 $352,600 $ -- $ 5,332,800 $ -- $ -- $ 5,332,800 Cost of Sales............. 4,558,000 272,600 -- 4,830,600 -- -- 4,830,600 ----------- -------- --------- ----------- --------- --------- ----------- Gross Profit.............. 422,200 80,000 -- 502,200 -- -- 502,200 Operating Expenses: Research and development........... 545,400 -- -- 545,400 238,900 -- 784,300 Sales and marketing..... 421,400 4,700 182,000(a) 608,100 -- -- 608,100 General and administrative........ 913,000 50,000 9,800(b) 972,800 26,400 512,100(c) 1,511,300 ----------- -------- --------- ----------- --------- --------- ----------- Total Operating Expenses........ 1,879,800 54,700 191,800 2,126,300 265,300 512,100 2,903,700 ----------- -------- --------- ----------- --------- --------- ----------- Loss From Operations...... (1,457,600) 25,300 (191,800) (1,624,100) (265,300) (512,100) (2,401,500) Other Income (Expense): Interest income......... 26,400 -- -- 26,400 -- -- 26,400 Interest and other expense............... (106,500) (5,600) -- (112,100) -- (70,400)(d) (182,500) ----------- -------- --------- ----------- --------- --------- ----------- Loss Before Income Taxes................... (1,537,700) 19,700 (191,800) (1,709,800) (265,300) (582,500) (2,557,600) Income Taxes.............. (800) -- -- (800) -- -- (800) ----------- -------- --------- ----------- --------- --------- ----------- Net Loss.................. (1,538,500) 19,700 (191,800) (1,710,600) (265,300) (582,500) (2,558,400) Preferred Stock Dividends............... (24,000) -- -- (24,000) -- -- (24,000) ----------- -------- --------- ----------- --------- --------- ----------- Net Loss Attributed to Common Shareholders..... $(1,562,500) $ 19,700 $(191,800) $(1,734,600) $(265,300) $(582,500) $(2,582,400) =========== ======== ========= =========== ========= ========= =========== Basic and Diluted Loss Per Common Share............ $ (1.27) $ (1.25) $ (0.97) =========== =========== =========== Weighted-Average Common Shares Outstanding...... 1,225,816 1,388,316(e) 2,675,674(f) =========== =========== ===========
- ------------------------- (a) Reflects the amortization of intangible assets recorded in the acquisition of motorcycle Web sites from Net Media Technologies, Inc. using a five year life. (b) Reflects the amortization of goodwill recorded in the acquisition of Yankee Engineuity using a twenty year life. (c) Reflects the amortization of intangible assets recorded in the acquisition of technology from Angel Motorcycles, Inc. using a twenty year life. (d) To reflect interest expense on notes payable at 12% and convertible debentures at 10% assumed from Angel Motorcycles, Inc. (e) Includes 130,000 shares to acquire motorcycle Web sites from Net Media Technologies, Inc. and 32,500 shares to acquire Yankee Engineuity. (f) Includes 1,287,358 shares to be issued to Angel Motorcycles, Inc. for its V-Twin engine technology. 16 18 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 ----------------------------------------------------------------------------------------------- PREVIOUS ACQUISITIONS AMERICAN ------------------------- EAGLE YANKEE PRO FORMA ANGEL PRO FORMA MOTORCYCLE ENGINEUITY ADJUSTMENTS PRO FORMA MOTORCYCLES ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net Sales.............. $ 970,600 $165,400 $ -- $1,136,000 $ -- $ -- $ 1,136,000 Cost of Sales.......... 871,700 74,600 -- 946,300 -- -- 946,300 ----------- -------- -------- ----------- --------- --------- ----------- Gross Profit........... 98,900 90,800 -- 189,700 -- -- 189,700 Operating Expenses: Research and development........ 174,200 -- -- 174,200 624,800 (330,000)(c) 469,000 Sales and marketing.......... 57,500 300 91,000(a) 148,800 -- -- 148,800 General and administrative..... 1,034,700 19,000 4,900(b) 1,058,600 160,600 256,000(d) 1,475,200 ----------- -------- -------- ----------- --------- --------- ----------- TOTAL OPERATING EXPENSES............. 1,266,400 19,300 95,900 1,381,600 785,400 (74,000) 2,093,000 ----------- -------- -------- ----------- --------- --------- ----------- LOSS FROM OPERATIONS... (1,167,500) 71,500 (95,900) (1,191,900) (785,400) 74,000 (1,903,300) OTHER INCOME (EXPENSE): Interest income...... 18,300 -- -- 18,300 -- -- 18,300 Other income......... 330,000 -- -- 330,000 -- (330,000)(c) -- Interest and other expense............ (83,200) -- -- (83,200) (8,800) (26,400)(e) (118,400) ----------- -------- -------- ----------- --------- --------- ----------- LOSS BEFORE INCOME TAXES................ (902,400) 71,500 (95,900) (926,800) (794,200) (282,400) (2,003,400) Income Taxes........... -- -- -- -- -- -- ----------- -------- -------- ----------- --------- --------- ----------- Net Loss............... (902,400) 71,500 (95,900) (926,800) (794,200) (282,400) (2,003,400) Preferred Stock Dividends............ (12,000) -- -- (12,000) -- -- (12,000) ----------- -------- -------- ----------- --------- --------- ----------- NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS.. $ (914,400) $ 71,500 $(95,900) $ (938,800) $(794,200) $(282,400) $(2,015,400) =========== ======== ======== =========== ========= ========= =========== BASIC AND DILUTED LOSS PER COMMON SHARE..... $ (0.73) $ (0.66) $ (0.75) =========== =========== =========== WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING... 1,249,823 1,412,323(f) 2,699,681(g) =========== =========== ===========
- ------------------------- (a) Reflects the amortization of intangible assets recorded in the acquisition of motorcycle Web sites from Net Media Technologies, Inc. using a five year life. (b) Reflects the amortization of goodwill recorded in the acquisition of Yankee Engineuity using a twenty year life. (c) Reflects the elimination of other income paid to American Eagle Motorcycle by Angel Motorcycles. (d) Reflects the amortization of intellectual property recorded in the acquisition of technology from Angel Motorcycle, Inc. using a twenty year life. (e) To reflect interest expense on notes payable at 12% and convertible debentures at 10% assumed from Angel Motorcycles, Inc. (f) Includes 130,000 shares to acquire motorcycle Web sites from Net Media Technologies, Inc. and 32,500 shares to acquire Yankee Engineuity. (g) Includes 1,287,358 shares to be issued to Angel Motorcycles, Inc. for its V-Twin engine technology. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included later in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this prospectus. OVERVIEW We develop, manufacture and market heavyweight V-Twin motorcycles popularly known as cruisers, which are sold to consumers through our distribution network of American Eagle authorized dealers. Development of our first cruiser commenced at the time of our incorporation in California in late 1995, and we now offer three different types of cruiser models including our new STX 2000 sport cruiser. Commercial sales of our motorcycles began in the second half of 1996, and since then we have sold approximately 800 American Eagle motorcycles. We offer only premium-priced motorcycle products, and accordingly all our development and marketing efforts and activities are positioned in and directed toward the upscale segment of the heavyweight motorcycle market. To date, our revenues have consisted primarily of wholesale distribution of our motorcycles to our independent dealers, all of which are located in the United States. Our cost of sales consists primarily of raw materials and off-the-shelf parts and components, salaries and related personnel expenses for employees engaged in assembly and quality control operations, and manufacturing overhead. In addition, we rely on contract manufacturers for some of our components, which are included in our cost of sales. Research and development expenses consist primarily of employee compensation related to engineering and development, outsourced contract engineering expenses, equipment and material costs associated with design and development activities, and costs for obtaining regulatory certification for commercial sale and use of our motorcycles. All research and development costs are expensed as incurred. Sales and marketing expenses consist primarily of salaries and personnel expenses for our marketing and sales support employees, general advertising and promotional activities including participation in trade shows and motorcycle rallies, publication of sales brochures and other marketing materials, Web site expenses, and costs of public relations efforts. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, accounting and administrative employees, administrative overhead expenses, and professional fees. PENDING STRATEGIC ACQUISITION We recently entered into a strategic asset purchase agreement with Angel Motorcycles Inc. to acquire engine technology and prototypes for two distinct V-Twin engines developed and owned by Angel Motorcycles Inc. This acquisition will be consummated simultaneous with the closing of this offering of our units, and will enable us to incorporate and include proprietary American Eagle engines in our motorcycles. See "Asset Purchase Agreement." In consideration for these engine technology assets, we will issue 1,287,358 shares of our common stock to Angel Motorcycles Inc. and stock purchase warrants to purchase up to 235,286 18 20 additional shares of our common stock at $7.00 per share until expiration in 2004. We also will assume liabilities of Angel Motorcycles Inc. in the aggregate amount of $883,500 including $383,500 of convertible debentures, notes payable of $100,000 and accounts payable of $200,000 as well as future royalties payable to the engine developer in respect to future sales of these engines. RECENT ACQUISITIONS In September 2000, we acquired Yankee Engineuity Products Division, an established sole proprietor business engaged in selling custom engine parts and other motorcycle aftermarket components, which currently has annual sales of approximately $300,000. We acquired Yankee Engineuity Products Division in consideration for 32,500 shares of our common stock and this acquisition will be accounted for using the purchase method of accounting. In September 2000, we also acquired several motorcycle Web sites from Net Media Technologies, Inc., a company affiliated with our Chief Executive Officer. These Web sites were acquired in consideration for 130,000 shares of our common stock. We intend to enhance and use these Web sites for several important functions including conducting e-commerce business with our dealer network, promoting our products to the general motorcycle community, providing a periodic motorcycle e-magazine having a wide range of current motorcycle topics, and developing an online direct sales outlet offering an American Eagle line of custom motorcycle parts and components, accessories, apparel and other general merchandise. RESULTS OF OPERATIONS The following table sets forth our Statements of Operations data expressed as a percentage of total sales:
FISCAL YEAR SIX-MONTH PERIOD ENDED ENDED DECEMBER 31, JUNE 30, ----------------- ------------------ 1998 1999 1999 2000 ----- ----- ----- ------ Sales........................................... 100.0% 100.0% 100.0% 100.0% Cost of sales................................... 96.7 91.5 91.4 89.8 ----- ----- ----- ------ Gross profit.................................... 3.3 8.5 8.6 10.2 ----- ----- ----- ------ Operating expenses: Research and development...................... 5.0 11.0 6.4 18.0 Sales and marketing........................... 10.7 8.4 6.4 5.9 General and administrative.................... 27.3 18.3 13.5 106.6 ----- ----- ----- ------ Total operating expenses................. 43.0 37.7 26.3 130.5 ----- ----- ----- ------ Loss from operations............................ (39.7) (29.2) (17.7) (120.3) Interest income................................. 0.8 0.5 0.6 1.9 Other income.................................... -- -- -- 34.0 Interest and other expense...................... (2.5) (2.1) (1.6) (8.6) ----- ----- ----- ------ Loss before income taxes........................ (41.4) (30.8) (18.7) (93.0) Income taxes.................................... -- -- -- -- ----- ----- ----- ------ Net loss........................................ (41.4)% (30.8)% (18.7)% (93.0)% ===== ===== ===== ======
19 21 COMPARISON OF SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 2000 Sales. Sales for the first six months of 2000 decreased $2,531,800 or 72% to $970,600 in comparison to sales of $3,502,400 for the same six-month period of 1999. This significant sales decrease was due to capital and personnel restraints resulting from an ongoing lack of liquidity and working capital to support our operations effectively, and also because much of our marketing efforts and resources in early 2000 were directed toward the commercial launch of our new sport cruiser class of motorcycles. In addition, we encountered shipping delays in 1999 from our supplier of engines which significantly impacted production scheduling and the filling of orders. Cost of Sales. Cost of sales decreased 72.8% to $871,700 for the first six months of 2000 from $3,201,800 for the same six months of 1999, primarily due to the corresponding decrease in sales for these periods. Gross margin increased to 10.2% for the first six months of 2000 compared to 8.6% for the same period of 1999, due primarily to sales in 2000 having a larger percentage of higher margin products. Research and Development. Research and development expenses decreased from $224,300 for the first six months of 1999 to $174,200 for the same period of 2000, primarily due to our having limited working capital available during 2000. Sales and Marketing. Sales and marketing expenses decreased from $224,700 for the first six months of 1999 to $57,500 during the same period of 2000, primarily due to liquidity and working capital constraints which required us to reduce or delay our marketing and promotional activities. General and Administrative. General and administrative expenses were $471,400 for the first six months of 1999 compared to $1,034,700 for the same six-month period of 2000. This increase was due primarily to a non-cash compensation expense of $580,400 related to the beneficial conversion of related party notes payable into capital stock. Other Income. Other income of $330,000 during the first six months of 2000 consisted of development, engineering and other activities performed for Angel Motorcycles Inc. to incorporate their engine technology into a finished motorcycle product. Income Taxes. There was no provision for income taxes for the six months ended June 30, 1999 and 2000, due to our loss position in both periods. Net Loss. Our net loss was $655,200 for the first six months of 1999 compared to $902,400 for the same period of 2000. This increase in our loss was primarily due to non-cash compensation expense offset by the receipt of non-recurring other income in 2000. COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1999 Sales. Sales increased 50% to $4,980,200 for the year ended December 31, 1999 from $3,315,100 for the year ended December 31, 1998. This increase was primarily due to increased motorcycle orders from our expanded dealer network and increasing market acceptance of our motorcycles. Cost of Sales. Cost of sales increased 42.2% to $4,558,000 during 1999 from $3,205,800 in 1998, primarily reflecting our growth in sales. Our gross profit margin increased to 8.5% in 1999 from 3.3% in 1998, primarily due to economies of scale in our manufacturing operations. Research and Development. Research and development expenses increased from $164,700 in 1998 to $545,400 in 1999, primarily due to increased design and development activities related to our new sport cruiser class of motorcycle introduced in late 1999. Sales and Marketing. Sales and marketing expenses increased from $354,600 in 1998 to $421,400 in 1999, primarily due to increased marketing efforts to support our growth in sales and in 20 22 our dealer network. These expenses, however, decreased as a percentage of total sales from 10.7% in 1998 to 8.4% in 1999 due to economies of scale resulting from our significant growth in sales in 1999. General and Administrative. General and administrative expenses increased slightly from $904,900 in 1998 to $913,000 in 1999. Although there was no material change in the actual amount of these expenses from 1998 to 1999, they decreased as a percentage of total sales from 27.3% in 1998 to 18.3% in 1999. Income Taxes. Other than the payment of minimum state income taxes of $800 annually, there was no provision for income taxes in 1998 or 1999 due to our loss position. Net Loss. Net loss was essentially the same in 1998 and 1999, being $1,373,000 in 1998 and $1,538,500 in 1999, with the increase in loss in 1999 due primarily to increased expenses for research and development. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have funded our operations primarily through equity private placements of capital stock, bank credit facilities, trade credit from our suppliers, and bridge loans and other advances from our Chief Executive Officer. As of June 30, 2000, we had only $5,200 in cash and a negative working capital position of $(943,700). Accordingly, we will not be able to continue our operations effectively unless we obtain additional capital. We have experienced recurring operating losses, negative working capital and shareholders' deficiency. In addition, our bank has demanded full payment of the credit facility. The report of our independent certified public accountant contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. We believe that the net proceeds from this offering will be sufficient to satisfy our anticipated needs for working capital, planned product development, and capital expenditures for at least the next twelve months. If we fail to meet our operational cash flow needs, we would be required to raise additional capital through either debt or equity financing. There is no assurance that we will be able to obtain any material future debt or equity financing when needed, or that any future financing terms will be acceptable to us. Moreover, the future sale of equity or convertible debt securities could result in additional substantial dilution to our shareholders. Net cash used in operating activities for the years ended December 31, 1998 and 1999 and in the six months ended June 30, 2000 was $846,200, $380,600, and $224,100, respectively. Cash used for our operations was principally for product development, expansion of our sales and marketing support and activities, and expansion of our administrative staff to support our growth. Net cash used in investing activities for the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000 was $56,100, $76,700, and $76,100, respectively, and was primarily related to purchase of production and development equipment. Net cash provided by financing activities for the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000 was $893,900, $485,200, and $276,600, respectively. Principal activities providing this cash were (i) increased borrowings from our bank, loan advances from our Chief Executive Officer and sales of both preferred and common stock in 1998, (ii) increased bank borrowings, loan advances from our Chief Executive Officer, and sales of common stock in 1999, and (iii) loan advances from our Chief Executive Officer in the six months ended June 30, 2000. 21 23 NET OPERATING LOSS CARRYFORWARDS As of December 31, 1999, we had net operating loss carryforwards for federal income tax purposes of approximately $3,462,200, which expire beginning in 2010. Due to the uncertainty of future profitability, a valuation allowance equal to the deferred tax asset has been recorded. In addition, changes in our equity ownership may limit the net operating loss carryforward available to us in any given year under applicable provisions of the Internal Revenue Code. SEASONALITY Due to our current dealer network being primarily from states having warm or mild winter climate conditions, to date we have not experienced any material seasonality of dealer orders or revenues. Assuming we accomplish our planned nationwide expansion of our dealer network, however, we anticipate that future dealer orders and revenues will be somewhat lower during the colder seasons in northern and central states. BACKLOG As of June 30, 2000, we had a backlog of dealer orders for our motorcycles of approximately $1,180,000. Over the past year or so, we have not attempted to increase our backlog of orders because our cash flow difficulties have seriously constrained our ability to fill new dealer orders on a timely basis. INFLATION Since our inception in 1995, inflation has not had a material impact on our operating results. Any future significant increases in labor, materials, or development costs, however, could harm our future operating results and business. 22 24 BUSINESS We design, develop, manufacture and sell traditional American-styled heavyweight V-Twin custom motorcycles popularly known as "cruisers." All our motorcycles are positioned and offered in the premium or upscale market niche of our industry. They are sold and distributed under our American Eagle brand through our dealer network of 32 domestic dealers. From inception of our commercial production in 1996 until the date of this prospectus, we have produced and sold approximately 800 of our premium motorcycles. Suggested retail prices of our cruisers currently range from $20,900 to $27,900, and they are offered with a variety of customized options and styling. Our primary mission is to establish our American Eagle brand based on the classic American motorcycling heritage while offering products with performance and styling that represent a distinct alternative to those of Harley-Davidson and other manufacturers of traditional heavyweight cruisers. Our company was founded in 1995 by our President, Greg Spak, who primarily has been responsible for the development and styling of our motorcycle products. Since 1998, we have conducted our development, production, marketing and administrative operations from our facility in Hollister, California, which was designed specifically for our overall motorcycle business. This modern one-story facility includes efficient assembly lines designed, equipped and dedicated solely for motorcycle production, substantial distinct Engineering/Research & Development spaces, metal-polishing spaces, ample warehousing spaces for materials and finished products, storage areas for parts/accessories and general merchandise, and other features designed to suit our particular needs. Hollister also is the permanent host of a leading annual motorcycle rally. HEAVYWEIGHT MOTORCYCLE INDUSTRY AND MARKET In our industry, motorcycles often are characterized as heavyweight, middleweight or lightweight models, with the heavyweight category having engine displacements of at least 651cc (cubic centimeters). Within the heavyweight segment, there are generally four types: (i) standard, which emphasize simplicity and low cost, (ii) performance, which emphasize handling and speed, (iii) touring, which emphasize rider comfort amenities for long-distance traveling, and (iv) cruiser, which are designed to facilitate customization by owners and feature classic American styling like the popular Harley-Davidson streetbikes. From the outset, our motorcycles were designed and developed for the cruiser segment of the market. Although we have not conducted any formal market research, we believe that most potential customers in our targeted upscale market are seeking premium motorcycles with a brand and "biker" lifestyle appeal associated with the classic American motorcycling tradition. Based on industry information, for many years the heavyweight segment has represented, and now represents, a majority of U.S. market sales including all on- and off-highway motorcycles. Moreover, we believe that V-Twin cruisers have constituted the largest part of the heavyweight market. Throughout the 1990s, the U.S. market for heavyweight motorcycles has experienced healthy and growing conditions, and we believe favorable market conditions will continue well into the present decade. U.S. registrations of new heavyweight motorcycles increased from 104,200 to 165,700 units over the 1992-96 period, an average annual growth rate of approximately 15%. Such registrations continued to increase to 275,600 units over the 1997-99 period, an even better average annual growth rate of 22%. Moreover, in the first five months of 2000, the growth rate of new U.S. heavyweight registrations has accelerated to approximately 25% in comparison to the same five-month period of 1999. The Motorcycle Industry Council is the source of data included in this paragraph. Based on general industry information and our past sales experience, we believe that our primary customer base comes from experienced male motorcyclists of 35 years or older, with relatively high 23 25 incomes, who purchase motorcycles for recreational and lifestyle image purposes. This customer base has expanded considerably over recent years, and we expect it to continue expanding over the coming years due to the increasing popularity of motorcycling as well as the continuing maturity of the population bulge caused by the post-World War II baby boom. The baby boom generation now constitutes 45-50% of our national population, and many males of this generation are entering their peak income earning years and thus are prime prospects for purchasing luxury recreational motorsport products such as our premium cruisers. We believe that the 35-55 year old age group leads all age groups in annual spending per consumer on premium recreational products and also generally has greater disposable income than other age groups. OUR MOTORCYCLES All American Eagle motorcycles are equipped with standard high performance features and components, including a powerful hand-polished V-Twin engine, a durable drivetrain with a 5-speed close ratio transmission, a rugged and smooth-riding chassis and suspension system, a state-of-the-art brake system, solid state electrical components, modern electronics including a dual fire ignition, a premium chromed exhaust system, a comfortable custom seat, polished wire spoke wheels, a wide 180mm rear tire, a stretched custom teardrop gas tank, considerable chrome and billet parts and controls, and a custom high-gloss paint pattern. We also offer various optional custom packages depending upon the chosen cruiser model, such as a higher-powered engine, a 6-speed transmission, higher-performance engine parts, a custom two-rider seat with billet passenger pegs, one-piece billet aluminum or mag wheels, and certain individualized high-gloss paint schemes. Our full line of American Eagle cruisers includes three basic models: - our top-seller "Maverick" brand with its classic American custom styling along with its high performance riding features; - our premium "chopper" cruisers which merge traditional cruiser styling with the distinct stretched and front-end raked look favored by chopper enthusiasts; and - our new innovative STX 2000 "sport cruiser" currently being introduced into our market. Maverick Cruisers -- Our leading premium cruisers feature classic styling similar to traditional custom cruisers offered by Harley-Davidson and others, and we sell them primarily under our Maverick trade name. Our standard Maverick model, the STM Maverick-S, is powered by a 100 cubic inch (1675cc) V-Twin engine and has a prominent chrome inverted frontend fork and a full suspension Softail rearend. We also offer a more upscale version, the STM Maverick-RS, which has a more powerful V-Twin engine of 113 cubic inches (1825cc) and custom mag wheels. We also offer certain variations of our basic Maverick bike including our "Stinger" and "Mirage" models. The Stinger, a more affordable bike than the Maverick, has a smaller 88 cubic inch (1462cc) V-Twin engine and certain other differences such as dual exhaust pipes and our chopper-style rear fender. The Mirage is quite similar to the Maverick with its differences being mainly custom skirted fenders and a smaller front tire, and it is offered with either a 100 or a 113 cubic inch V-Twin engine. Chopper Cruisers -- For thirty years or more, the distinctive low-slung, stretched look of a custom chopper motorcycle, with its characteristic raked frontend, has maintained a strong appeal to a substantial segment of motorcyclists who prefer the styling and rebel lifestyle image projected by chopper streetbikes. Accordingly, a key element of our original business strategy was to address this market aggressively by designing and offering American Eagle premium chopper motorcycles. We developed and commenced commercial production of our first chopper in 1996 almost as early as the 24 26 commercial launch of our original Maverick cruiser model. During much of our four-year commercial production history, our chopper cruisers have sold in almost equal numbers to our leading Maverick line, and we estimate that our choppers have represented approximately 40% of our total motorcycle unit sales. Our choppers have been designed to be reminiscent of the early traditional chopper craze popularized by the classic "Easy Rider" movie and other biker movies and events. For some time, we offered two types of chopper motorcycles, rigid and full suspension. Our initial rigid model without rear suspension was sold under our BMC (Big Mike Chopper) trade name until its recent discontinuance. In order to provide more comfort for chopper riders, in 1997 we completed developing and commercially introduced the first full suspension Softail choppers in our industry. Our Softail choppers retain the classic chopper look and high quality frontend suspension of our original rigid BMC model while also featuring the softride rear suspension of our Maverick line of cruisers. From the outset, our pioneering Softail choppers were well received in our industry, and we soon sold considerably more of our full suspension version than our rigid version. Because of the favorable reception of our full suspension chopper, we recently discontinued offering a rigid model. We offer two models of Softail choppers, our STM-C model which is powered by a 100 cubic inch V-Twin engine, and our less expensive model powered by an 88 cubic inch V-Twin engine and sold under our "Stalker" trade name. We believe we are the industry leader in the chopper segment of the heavyweight cruiser market, and we anticipate that a healthy demand for chopper motorcycles will prevail and even increase over the coming years. STX 2000 Sport Cruisers -- In 1998, we made a strategic decision to develop and offer a "sport cruiser," a new distinct class of American Eagle cruisers to join our established Maverick and chopper product lines. Our sport cruiser has been designed to emphasize and maintain traditional American cruiser styling while also incorporating certain high quality handling and performance features characteristic of leading sportbikes. During the past year, we produced and sold an initial limited edition of our sport cruiser under our "XRT Talon" trade name, and the XRT Talon experienced a very favorable reception from our dealers and others in the motorcycle community. This encouraged us to focus on enhancing and improving our sport cruiser concept beyond the XRT Talon version. Recently we completed final development of our sport cruiser class, and we have renamed it the STX 2000 to celebrate its commercial introduction with the new millennium. During the remainder of 2000 and ongoing into 2001, we intend to direct a significant percentage of our marketing efforts and resources toward promoting, selling and securing a strong demand for our new STX 2000. The STX 2000 retains the key standard features of our traditional Maverick cruisers. In order to offer superior handling and performance than traditional cruisers, however, the STX 2000 also incorporates additional high quality technology advances such as a mono-shock rear suspension, a specialized rubber engine-mounting system to diminish vibration, and increased front-end fork suspension travel. Weighing slightly under 500 pounds, the STX 2000 is lighter and handles better than more traditional heavyweight streetbikes. We also offer our STX 2000 with dual shock rather than mono-shock rearend suspension. Styling of the STX 2000 features a streamlined look and a specially re-engineered frame intended to provide a smooth, sleek and sporty look and attitude. When compared to other cruisers in our market, we believe our new sport cruiser offers the motorcycle public a new and exciting dimension in cruiser styling, handling and performance. The STX 2000 also provides ample power with its 100 cubic inch engine. And for those desiring even more power, we are offering a top-of-the-line sport cruiser, the STX-SE, which is powered by a Patrick High Performance Engine. 25 27 SALES AND MARKETING We sell our motorcycles directly to our authorized American Eagle dealers which are well-established independently owned full-service motorcycle retail outlets carrying one or more motorcycle brands other than our products. All our dealers are experienced in selling and servicing premium heavyweight motorcycles. As of September 30, 2000, we had 32 active dealerships, all with domestic dealers. The following table shows the number and location of dealers in each state where we currently have dealer representation:
NUMBER OF STATE DEALERS LOCATION OF DEALERS ----- --------- ------------------- Arizona....................... 2 Tucson and Scottsdale California.................... 8 Santa Ana, Woodland, Citrus Heights, Concord, Pomona, Santa Cruz, Redding and Cloverdale Colorado...................... 1 Denver Florida....................... 2 Fort Lauderdale and Sarasota Idaho......................... 1 Couer d'Alene Indiana....................... 1 Merrillville New York...................... 3 Centereach, Binghampton, and West Babalon Michigan...................... 2 Mount Clemens and Burton New Jersey.................... 1 Egg Harbor Township North Carolina................ 2 Charlotte and Washington Oklahoma...................... 1 Tulsa Oregon........................ 2 Hillsboro and Bend Tennessee..................... 1 Nashville Texas......................... 1 Houston Utah.......................... 1 Salt Lake City Virginia...................... 2 Danville and Richmond Washington.................... 1 Wenatchee
Our current effective dealers are located primarily in East and West Coast states, Texas and Arizona. We have minimal presence in Midwestern and South Central states. Upon completion of this offering, we intend to aggressively seek additional dealers in regions of the country without effective representation. A large base of motorcycle dealers is available from which we can solicit additional American Eagle dealers, since a substantial percentage of motorcycle dealers carry more than one line of motorcycles. We believe we can add dealers in the future to attain our planned nationwide commercial presence. Dealers purchase our motorcycles through floor planning from major financial institutions, and we receive payment for floored bikes within 2 weeks of shipment to dealers. We generally provide free flooring for our dealers for 30 days, although during winter months we provide it for up to 3 months for qualifying dealers. We typically ship our motorcycles to dealers within 2-3 weeks of receipt of dealer orders. 26 28 Our dealerships are offered primarily to established motorcycle dealers having substantial experience in selling and servicing premium heavyweight cruisers and established full service departments skilled in V-Twin engine and drivetrain maintenance and repair as well as custom performance upgrades. Dealers must enter into a written dealer agreement with us which grants them a designated territory in which we cannot otherwise sell our products without compensating our dealer. Dealers have the exclusive right to use and display the American Eagle trademark in their respective territories in connection with sale of our products. They also are required to provide warranty and general repair and maintenance services, and maintain substantial general liability insurance covering us as an additional insured party. All our dealers retain the right to carry and sell motorcycles of any brand, including premium cruisers competing directly with our products. Although our dealers agree to use their best efforts to market and sell our products, they are not required to purchase any minimum amount of our motorcycles to obtain a dealership. Our dealer agreements have a term of one year with an automatic renewal provision, although they can be terminated by either party for any reason upon 60 days written notice. We conduct substantial ongoing marketing activities to support our dealers and promote our products to our targeted upscale customer base and the general public, including advertising in trade publications and motorcycle magazines, production of sales brochures and technical product documentation and manuals, direct mail promotions to potential customers, public relations efforts directed toward our industry media, and participation in and display of our products at leading national and regional trade shows, biker rallies and other motorcycle events such as the well-known Sturgis Rally and Daytona Beach Bike Week. Due to the explosive growth of the Internet over the past few years for commercial functions such as promoting product sales and brand awareness and disseminating general corporate information, we established a proprietary Web site with the Internet address of www.americaneagles.com. This Web site is an important feature of our overall marketing strategy, and was designed for us by professionals to suit our specific needs. We use our Website for multiple functions including displaying current textual and graphic material on our motorcycles, general promotion of the American Eagle brand, communication with current owners and potential buyers of our products, generating leads for our dealers, and informing both the motorcycle community and the general public about our business and products. We also intend to add new features to our Web site in several stages throughout the coming year, including allowing our customers to purchase American Eagle clothing and accessories directly from us, referring our Internet customer leads electronically to our dealers, providing information on our available motorcycle stock to our dealers, and posting current business and financial information for investors in our common stock, as well as other features. PRODUCTS UNDER DEVELOPMENT We are committed to an ongoing development strategy in order to continually introduce new American Eagle products and enhancements of, and accessories for, existing products. We believe our design and development systems and capabilities allow us to timely design and develop new products as needed to address any changing needs and tastes of the heavyweight motorcycle community. Our current development activities consist primarily of completing the development and regulatory certification of the proprietary V-Twin engine technology being acquired by us, and of completing development of our top-of-the-line TRX 152 sport cruiser model. 27 29 Proprietary Engine Technology Our most important current development project is to complete final development, operational testing, and regulatory certification of the two distinct proprietary V-Twin engines being acquired by us from Angel Motorcycles Inc. Complete running prototypes of both the 92 cubic inch and 152 cubic inch V-Twins were shipped to us from their developer in England in August 2000, and since then we have been subjecting them to extensive engineering and operational evaluation and testing at our Hollister facility, as well as commencing certain desired re-engineering modifications to the larger 152 cubic inch engine. Since the 92 cubic inch V-Twin will be used to power our new STX 2000 sport cruiser as well as other American Eagle cruiser models, our current development and engineering efforts are being focused primarily on commencing commercial production of this 92 cubic inch engine as soon as possible. The 92 cubic inch engine was designed to look and perform similar to traditional V-Twins manufactured by Harley-Davidson and certain independent V-Twin engine manufacturers such as S&S Cycle, Inc. Full development of this engine has been accomplished to our satisfaction, and we now are in the process of undergoing its extensive operational testing under running conditions and submitting it to various governmental agencies to obtain regulatory certification for commercial use and sale. Although we cannot assure you these proprietary V-Twins will satisfy the numerous government regulations and standards relating to noise and emissions, we believe that, based on our operational testing, they will pass all such requirements. We have identified and secured the necessary subcontract manufacturers in England to produce the various engine components and parts needed for this 92 cubic inch engine, and we believe such subcontractors are willing and capable of supplying us with such parts and components in a timely manner upon their receipt of our purchase orders. We also believe alternative quality subcontractors are available to us for manufacturing such engine parts and components. Upon completion of all testing and certifying of the 92 cubic inch engine for commercial production, which we anticipate being done during 2001, we will then concentrate our development and engineering toward completing certain re-engineering modifications and obtaining regulatory certification for the 152 cubic inch V-Twin, as well as incorporating it into our most expensive and innovative cruiser, the TRX 152. We believe that this 152 cubic inch V-Twin is revolutionary both in design and performance, and has engine design technology which provides optimum horsepower, torque, and acceleration to be especially suitable for high performance premium cruisers. Design of this 152 cubic inch engine is based on the look and reliability of air-cooled radial aircraft engines of the 1940s, and we believe its style will be appealing to upscale motorcycle enthusiasts. This engine also features considerable use of billet parts, which are superior to conventional castings in performance, look, and durability. We believe that this 152 cubic inch V-Twin, with its anticipated 145 horsepower rating, will provide us with the most powerful V-Twin engine in our industry. Powering our American Eagle cruisers with proprietary V-Twin engine technology will represent a landmark event in our commercial history, since we believe that this capability will separate and distinguish us clearly and favorably from those of our competitors assemblying heavyweight custom cruisers without proprietary engines. Moreover, we also believe such proprietary technology will enhance and improve our name-brand identity within the overall motorcycle community. By 2002, we also intend to offer both the 92 cubic inch and 152 cubic inch V-Twins as upgrade products in the large and steadily growing custom cruiser motorcycle aftermarket. In particular, the 92 cubic inch engine was designed to be readily adaptable as a replacement engine upgrade for Harley-Davidson type motorcycles powered by their "evolution" engine. According to industry data, over 1,000,000 motorcycles now in use are powered by this well-known popular Harley-Davidson engine. 28 30 TRX 152 Cruiser We intend to complete the development of our TRX model by the time we have completed full development and certification of the 152 cubic inch V-Twin engine, which we anticipate happening by the second half of 2001. The TRX 152 cruiser is basically an upscale version of our innovative STX 2000 sport cruiser, modified to accept the 152 cubic inch V-Twin. Accordingly, it will contain the performance and handling features of the STX 2000 such as state-of-the-art durable rearend suspension, anti-vibration engine mounts, increased front suspension travel, and lightweight construction compared to traditional custom cruisers. WARRANTY POLICY We provide a 4-year limited warranty to all purchasers of American Eagle motorcycles, which covers parts and labor to repair or replace any defective engine, transmission and certain other key parts, as well as defects in materials and painting. We self-insure the initial 6 months of the warranty, and the remaining 3 1/2 years are covered by a standard extended warranty provided through an independent product warranty company. RESEARCH AND DEVELOPMENT We conduct our research and development primarily through our in-house development and engineering departments. We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve material market acceptance, maintain technological competitiveness, and satisfy a changing or expanding range of motorcyclist tastes and requirements. We spent $164,700 in 1998 and $545,400 in 1999 on research and development activities. MANUFACTURING AND SUPPLIERS Our manufacturing operations mainly consist of assembly of components, polishing engines and parts, painting fully assembled motorcycles, and conducting quality control and performance testing procedures. Our frames, fenders, gas tanks and certain other parts are outsourced to various local subcontractors for manufacture to our specifications. We purchase engines, transmissions, brake and suspension systems, starters, tires and wheels, seats, lights, electronic parts and other off-the-shelf components from various independent manufacturers or distributors, most of which are located in the United States. Components and parts used to build our bikes are normally available with short order lead times. Multiple suppliers are available for all components and parts used in our motorcycle production. We have been able to obtain adequate supplies in a timely manner from our primary sources or, when necessary, from alternative secondary sources, except for a considerable period in 1999 when we were unable to obtain engines. We employ just-in-time (JIT) inventory principles as much as possible in order to minimize our inventories of raw materials and components and to provide quick reaction to engineering design changes and varying market demands. Our production operations also rely heavily upon stringent quality control procedures and standards, including inspection of incoming materials and components, adhering strictly to work-in-process quality standards, and substantial finished product testing. Periodic quality control testing is employed at different production stages along each assembly line. In particular, finished motorcycles are subjected to rigorous operational performance and quality inspection before being released to our dealer network, including fueling, starting and operating each motorcycle for a final thorough running inspection by a dedicated test foreman. 29 31 With our current employees and production equipment, we have the capacity during one shift to produce up to 50 motorcycles per month. If needed, by adding additional direct labor, we can increase our production up to 150 units per month. COMPETITION The heavyweight motorcycle market is highly competitive, and all of our major competitors have substantially greater financial, personnel, development, production, marketing and other resources than those we possess, as well as having substantially larger sales volumes and being more diversified than our business. Our main competitor is Harley-Davidson, which dominates the custom cruiser segment of the heavyweight motorcycle market, and since 1953 has been the only major domestic manufacturer of heavyweight motorcycles. Recent new domestic entrants into our market include Polaris, Indian (formerly California Motorcycle Company), and Excelsior-Henderson. In addition, major foreign competitors include Kawasaki, Honda, Suzuki, Yamaha, Ducati, BMW, Moto Guzzi and Aprilia. In recent years, a growing segment of direct competition to our cruisers also has emerged from several new domestic entrants in our market which offer heavyweight custom V-Twin cruisers with American styling and built mostly from non-proprietary components, including Titan, Big Dog, Pure Steel, American Ironhorse, Ultra and others. Moreover, due to the steady growth of demand for heavyweight motorcycles in recent years, we expect to encounter additional competition from other manufacturers entering the market from time to time. We believe that the principal competitive factors in our industry include styling and performance, product pricing, reliability and durability, quality, customer preferences, marketing and distribution, brand awareness, and the availability of support services. With the exception of brand recognition, we believe that we compete effectively regarding such competitive factors. We cannot assure you, however, that we will be able to compete successfully against current and future competitors, or that the competitive pressures faced by us will not adversely affect our operations and business. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We believe that we hold the exclusive right to use our American Eagle registered trademark and related designs in the United States in connection with the manufacture and sale of motorcycles and related parts and accessories. We also regard our development technology and know-how as being valuable and proprietary, but we do not currently have any patent protection, nor have we applied for any patents. We rely primarily upon a combination of trade secrets and confidentiality agreements to protect our proprietary rights and property, and on established trademark law to protect our trademarks. We cannot assure you, however, that any measures taken by us to protect our intellectual property will be sufficient or that such property will provide us with any competitive advantage. Moreover, it may be possible for competitors to copy valuable features of our products or technology, or to obtain information we regard as a trade secret. Although we may apply for certain patents and seek registration of new trademarks from time to time, we cannot assure you that we will ever obtain any significant protection from such efforts. We believe, however, that our current trademarks and proprietary trade secrets and intellectual know-how rights will be substantially more important to our business and operations than any future patent or new trademark protection we may acquire. We are not aware of any claims of infringement against us regarding our products or proprietary rights, nor have we made any claims against anyone asserting a violation of our intellectual property rights. Any future claims against us relating to infringement of third-party proprietary rights, even if not meritorious, could result in our expenditure of significant financial and managerial resources or even in injunctions preventing us from distributing our products unless we can obtain license 30 32 agreements, which we may not be able to secure if necessary. In any event, such claims could adversely affect our financial condition and operations. GOVERNMENT REGULATION We must comply with numerous federal, state and local government regulations regarding the noise, emissions and safety characteristics of our motorcycles, and incident thereto we must obtain certain approvals and certifications from various government agencies. In addition, our manufacturing facility must comply with environmental and safety standards. We believe that our facilities, operations and products currently satisfy applicable government regulations. The many regulations governing our motorcycles generally relate to air, water, and noise pollution as well as various safety matters. Any failure by us to obtain necessary approvals or certifications, or to maintain them, would materially harm our business and operations. Our motorcycles are subject to rigorous regulation under the emissions and noise standards of the Environmental Protection Agency (EPA) on the federal level, and the even more stringent emissions standards of the State of California Air Resources Board (CARB). Concerning safety matters, our motorcycles are subject to the provisions of the National Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by the National Highway Traffic Safety Administration (NHTSA). If we fail to comply with such EPA or CARB or NHTSA rules and standards, we could be subject to administrative or judicially imposed sanctions including civil penalties, injunctions, product seizure or detention, product recalls, or even total or partial suspension of our production. Our production and marketing operations and our facility conditions are subject to regulation under various federal, state and local regulations related to, among other things, occupational safety, environmental protection, hazardous substance control, noise conditions, and product advertising and promotion. EMPLOYEES We currently employ 26 persons including 14 in production and quality control operations, 2 in development and engineering, 5 in marketing and sales support, and 5 in management and administration. None of our employees belongs to a labor union, and we consider our employee relations to be satisfactory. FACILITIES Our production, engineering and development, warehousing, and marketing and administrative offices and facilities are located in Hollister, California in a modern one-story building of approximately 40,000 square feet, which was specifically designed and built for our requirements in 1997. We lease these facilities from an affiliated party under a lease expiring in June 2003 and requiring monthly lease payments of $20,000. We believe that our current facilities provide sufficient production and office spaces for our anticipated business and growth for the foreseeable future. For our motorcycle painting operations, we lease a building of approximately 3,000 square feet in Santa Clara, California on a month-to-month basis for $2,650 monthly. LEGAL PROCEEDINGS We are not a party to any material legal proceedings or litigation, nor are we aware of any material litigation or proceedings threatened against us by anyone. 31 33 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Our Board of Directors is responsible for the management of our business, and our directors are elected by our shareholders to serve until the next annual meeting of shareholders or until their successors are elected and shall qualify. Our executive officers are elected by, and serve at the discretion of, the Board of Directors.
NAME AGE POSITION ---- --- -------- DIRECTORS AND EXECUTIVE OFFICERS: Gregory Spak.................................... 56 Chief Executive Officer and Director Maurice Taylor.................................. 54 Chairman of the Board of Directors David Maginnis.................................. 51 Chief Financial Officer Kenneth MacLennan............................... 61 Director Clifford E. Fenske.............................. 52 Director KEY EMPLOYEES: Duncan Keller................................... 50 Director of Research and Development Donald Logan.................................... 38 Director of Internet Systems
GREGORY SPAK is our principal founder and has been a director since our inception in August 1995. Prior to our founding, he founded, managed and owned several electronic products sales and distribution companies including QCI Associates, Summit Components, and Carrera Sales with aggregate annual revenues of approximately $200 million and doing significant international business in Europe and Asia. Mr. Spak has over thirty years experience in engineering, manufacturing and sales management, and holds a business administration degree from Arizona State University and an engineering technologies degree from Moraine Valley College. MAURICE TAYLOR has been since July 2000 the Chairman of the Board and Chief Executive Officer of MEDgenesis Inc., a developer and distributor of medical diagnostic products with current annual revenues in excess of $30 million. MEDgenesis is a wholly owned subsidiary of Chronimed Inc., a pharmaceutical products and chronic disease services company with revenues in its latest fiscal year of approximately $250 million. He has been one of our directors since October 2000. Mr. Taylor was a founder of Chronimed and its Chief Executive Officer and a director from July 1985 until his recent fulltime employment with MEDgenesis. Prior to Chronimed, he held various management positions in companies whose principal activities were manufacturing, distribution and international trade. Mr. Taylor also is Chairman of the Scripps Institute for Diabetes. DAVID MAGINNIS, a Certified Public Accountant(CPA), has been our Chief Financial Officer since July 2000, and he devotes approximately 20% of his time to our business. He also currently is, and since February 1995 has been, Chief Financial Officer of August Supply, Inc., an electronic components distributor in Burlingame, California. Mr. Maginnis has been an independent financial management and litigation consultant since January 1986, during which he has gained extensive experience while serving in key financial and management positions with established and startup companies of all sizes, including hands-on implementation of a number of Chapter 11 reorganizations and other turnaround situations, as well as substantial experience with public company SEC reporting. Prior to becoming an independent consultant, Mr. Maginnis had been Controller of Memorex-DIC of Santa Clara, California, and of Printex, Inc. of Mountain View, California, while being in charge of accounting departments of 15-20 personnel. He also holds a MBA degree from Santa Clara University. 32 34 KENNETH MACLENNAN is one of our founders and has been one of our directors since our inception in August 1995. Since September 1980, he has owned and been Chief Executive Officer of CTM Magnetics, an electronic products manufacturer with current annual revenues exceeding $8 million. Prior thereto, Mr. MacLennan served for many years in various significant supervisory and management positions with Rogers Corporation, a large developer and manufacturer of electronic components, where he established a Mexican maquilladora subsidiary having over 1,000 employees. He is a member of the executive committee and past chairman of the Arizona Association of Industries, and he holds a degree in chemical engineering from Rensselaer Polytechnic Institute. CLIFFORD E. FENSKE, a Certified Public Accountant with professional offices in San Martin, California, has been one of our directors since October 2000. His current CPA business primarily provides tax and financial planning services for certain small businesses and individuals. Mr. Fenske was a founder of California Motorcycle Company, Inc. (CMC) of Gilroy, California, and he served as the Chief Executive and Chief Financial Officer of CMC from its inception in November 1996 until its recent sale to Indian Motorcycle Company, Inc. in January 1999. Under his management, CMC grew in three years to 300 employees generating annual heavyweight cruiser motorcycle sales of approximately $20 million, while maintaining profitable operations during this growth. Prior to establishing his independent accounting practice, Mr. Fenske held key financial management positions with certain leading industry corporations including being the District Administration Manager of the San Jose branch of Control Data Corporation, which branch had sales of approximately $100 million annually. DUNCAN KELLER has been our Director of Research and Development since September 2000 when we acquired his Yankee Engineuity motorcycle aftermarket business, and he has worked exclusively in motorcycle development for 30 years. He founded Yankee Engineuity in March 1985 to provide high performance motorcycle service and maintenance throughout Northern California, and he soon began selling considerable aftermarket engine parts and other motorcycle components. By May 1989, Mr. Keller had developed a line of proprietary custom motorcycle parts which are marketed under the Yankee Engineuity brand name. He has served as a key development consultant for leading aftermarket firms including S&S Cycle, Custom Chrome, Corbin Motors, Rivera Products, Allen Engineering and others. He also has extensive experience in racing engine development while working on racing programs ranging from Bonneville to drag racing. Racing engines built by him include various Bonneville Racers such as the Vance and Hines Unlimited Streamliner, AHRA and NHRA drag bikes, and engines for other road-racing classes. Mr. Keller holds an Associate Degree in Automotive Technology from De Anza College and a Bachelor's Degree in Industrial Arts from East Carolina University. DONALD LOGAN became our Director of Internet Systems in September 2000 when we acquired several motorcycle Web sites from Net Media Technologies, Inc. Mr. Logan developed these Web sites while employed since November 1998 as a principal executive officer of Net Media Technologies, Inc., of which he also is a principal shareholder. His extensive experience in computer programming and Internet streaming and video capture development includes over 10 years as a program developer of numerous CD-ROM and video streaming or capture programs for Creative Labs, ATI, Sega Soft, AutoDesk, Atari, SGI and others. From January 1995 through October 1997, Mr. Logan developed the first fully digital and interactive NFL video CD-ROM (for the San Francisco 49ers), the first fulltime 24/7 streaming video application for commercial use, and the first controllable streaming Web site. Prior thereto, he created over 200 video CD-ROM titles for various Hollywood entertainment companies. He also holds a Microsoft MCSE certification and has developed excellent working relationships with certain key development employees of Microsoft, and he is a member of most Microsoft Windows beta teams. 33 35 COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has established an audit and a compensation committee. Messrs. Taylor and Fenske are members of the audit committee, which is responsible for recommending the appointment of our auditors, analyzing reports and recommendations from our auditors, and reviewing internal controls and audit procedures. Messrs. Taylor and MacLennan are members of the compensation committee, which is responsible for reviewing and evaluating our general compensation policies, and recommending the compensation and benefits of all our officers including any grants of stock options. MANAGEMENT COMPENSATION Our directors have not received any compensation for services performed in their capacity as a director. We will reimburse our non-employee directors for any reasonable expenses incurred in performing their activities as a director. In the future, we may compensate outside directors with reasonable fixed fee payments for attending official board of director or committee meetings, and from time to time we most likely will grant them certain reasonable stock options. No cash compensation has been paid to any of our executive officers from our inception to the date of this prospectus. Other than consulting fees to be paid to our Chief Financial Officer, we also will not pay any executive compensation through the remainder of 2000. Regarding future compensation to our Chief Executive Officer, who devotes full time to our business, we have entered into an employment agreement to compensate him commencing January 1, 2001. This agreement has a two-year term and provides for him to receive an annual salary of $96,000 plus family health insurance benefits and a monthly car allowance of $350. The agreement also contains certain confidentiality and restrictive terms which prohibit his disclosure of any of our confidential or proprietary information, restricts his ability to compete with us during and after his employment, and prohibits his solicitation of any of our customers or employees for a period of three years following his employment with us. MANAGEMENT STOCK OPTIONS In October 2000, we granted management stock options for the purchase of a total of 80,000 shares of our common stock, of which Mr. Taylor received an option for 50,000 shares and Messrs. MacLennan, Fenske and Maginnis each received an option for 10,000 shares. These stock options are exercisable anytime during their five-year terms at $7.00 per share. LIMITATION OF LIABILITY AND INDEMNIFICATION Our bylaws limit personal liability for breach of the fiduciary duty of our directors to the fullest extent allowed by California law, and also provide that we will indemnify our directors, officers and employees in the manner and to the fullest extent permitted by law. Insofar as indemnification for any liabilities arising under the federal Securities Act is concerned, however, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 34 36 CERTAIN TRANSACTIONS In October 2000, we offered our preferred shareholders the opportunity to convert their preferred shares into our common stock on the basis of two common shares for each preferred share, in consideration for their agreement to waive and deem satisfied all accrued preferred stock dividends, to surrender any preferred stock warrants, and to enter into a "lock-up" agreement in respect to their common stock as described in "Shares Eligible for Future Sale." All of our preferred shareholders accepted this conversion offer which resulted in our issuance of a total of 285,714 shares of common stock after adjusting for our recent reverse common stock split. Gregory Spak received 150,000 of these common shares incident to conversion of his preferred shares. Our principal founder and Chief Executive Officer, Gregory Spak, has advanced significant working capital loans to us from time to time since our inception. By December 1997, these loan advances had accumulated to $493,900, which we then satisfied in full by the issuance to Mr. Spak of 211,675 shares of our common stock as adjusted for our recent reverse common stock split. After January 1998, Mr. Spak advanced additional substantial loans to us which accumulated to an outstanding balance of $1,080,400 by June 30, 2000, which we also satisfied in full by the issuance to Mr. Spak of 525,000 shares of our preferred stock and 1,110,800 shares of our common stock before our recent reverse stock split. After adjusting for our recent reverse stock split and Mr. Spak's conversion of his preferred shares to common shares, this conversion of his loan balance of $1,080,400 represents a total of 308,686 shares of our common stock. Gregory Spak also has personally guaranteed all bank credit facilities we have obtained since our inception. As of June 30, 2000, our outstanding bank debt covered by his guarantees was $851,200. Mr. Spak is under no obligation to personally guarantee any future debt financing available to us. From time to time, we have made non-interest loan advances to certain entities affiliated with Gregory Spak, and the outstanding balances of these related party loan receivables were $101,400 as of June 30, 2000, $87,900 as of December 31, 1999 and $60,900 as of December 31, 1998. We will not make any further loan advances to any entity affiliated with an officer, director or principal shareholder of our company. In September 2000, we issued 130,000 shares of our common stock, adjusted for our recent reverse stock split, to acquire several motorcycle Web sites from Net Media Technologies, Inc., which conducts its business from our Hollister facility. Net Media Technologies, Inc. is a Web site developer and e-commerce services provider, and Gregory Spak owns approximately 30% of Net Media Technologies, Inc. One of the Web sites we purchased from Net Media Technologies, Inc. conducted business as a virtual motorcycle dealership and made sales of motorcycles through online e-commerce transactions, including American Eagle motorcycles. In 1999 and 1998, our sales to this online dealership were $81,100 and $37,900, respectively, and we hold accounts receivable from Net Media Technologies, Inc. of $23,448 as of June 30, 2000 in respect to these online motorcycle sales. We lease our production and administrative facilities from a private corporation which is 30% owned by Gregory Spak. The terms of this lease currently require us to make monthly lease payments of $20,000 until expiration of the lease in June 2003. We believe that this lease is on terms no less favorable to us than if it had been made with an unrelated third party. All future transactions with our officers, directors or stockholders owning 5% or more of our outstanding common stock, and any of their respective affiliates, will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors. 35 37 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership as of the date of this prospectus of (a) our common stock, and (b) the common stock of Angel Motorcycles Inc., which will become a principal shareholder of our common stock upon the effectiveness of this offering. In each case, the following table describes ownership by (i) each person known to be the beneficial owner of more than 5% of the outstanding common stock of the respective issuer, (ii) each director and executive officer of the respective issuer, and (iii) all executive officers and directors of the respective issuer as a group. Unless otherwise indicated, all persons listed below have sole voting power and sole investment power, subject to any applicable community property laws, with respect to all shares beneficially owned. Beneficial ownership of each person is determined in accordance with the rules of the federal Securities and Exchange Commission (SEC), and includes warrants and options currently exercisable or exercisable within 60 days. (A) OWNERSHIP OF COMMON STOCK OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. (AMERICAN EAGLE)
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT PERCENT BENEFICIAL OWNER(1) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING ------------------- ------------------ --------------- -------------- Gregory Spak................................. 1,152,447 60.7% 28.9% Maurice Taylor(2)............................ 50,000 2.6% 1.2% Kenneth MacLennan(3)......................... 60,000 3.1% 1.5% Clifford E. Fenske(4)........................ 10,000 * * David Maginnis(5)............................ 10,000 * * Angel Motorcycles Inc.(6).................... 1,522,644 -- 36.1% All directors and officers as a group (5 persons)................................... 1,282,447 64.7% 31.5%
- ------------------------- * Less than 1% of the outstanding shares. (1) The address for each beneficial owner is c/o American Eagle Motorcycle Company, Inc., 2350 Technology Parkway, Hollister, California 95023. (2) Represents 50,000 shares subject to options currently exercisable. (3) Includes 17,143 shares subject to warrants and options currently exercisable. (4) Represents 10,000 shares subject to options currently exercisable. (5) Represents 10,000 shares subject to options currently exercisable. (6) Includes 1,287,358 shares to be issued simultaneous with the closing of this offering and 235,286 shares subject to warrants to be exercisable upon the closing of this offering. (B) OWNERSHIP OF COMMON STOCK OF ANGEL MOTORCYCLES INC. (ANGEL)
NUMBER OF SHARES PERCENT OF PERCENT OF NAME AND ADDRESS OF OF ANGEL COMMON STOCK AMERICAN EAGLE BENEFICIAL OWNER BENEFICIALLY OWNED OF ANGEL AFTER OFFERING ------------------- ------------------ ------------ -------------- John Lai(1)................................. 1,960,000 23.4% 7.0% 2924 Major Avenue North Golden Valley, MN 55422 John R. Silseth, Sr.(2)..................... 2,521,356 30.2% 9.0% 5507 Malibu Drive Edina, MN 55436 John Tastad(3).............................. 761,000 9.1% 2.7% 3430 Winnetka Ave. North Minneapolis, MN 55427 Donald Shiff................................ 537,000 6.4% 1.9% 20 NE. Second St. - #2001 Minneapolis, MN 55413 All directors and officers as a group (1 person)................................... 1,960,000 23.4% 7.0%
- ------------------------- (1) Represents 1,960,000 shares held of record by Genesis Capital Group, Inc., which is owned by Mr. Lai. Mr. Lai is the Chief Executive Officer and sole director of Angel Motorcycles Inc. (2) Represents 2,521,356 shares held of record by Minneapple Capital Ltd., which is owned by Mr. Silseth. (3) Represents 740,000 shares held of record by NMI Investments, Inc., of which Mr. Tastad is the principal beneficial owner, and 21,000 shares held of record by Mr. Tastad. 36 38 DESCRIPTION OF SECURITIES Our authorized capital stock of 15,000,000 shares consists of 10,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, no par value. As of the date of this prospectus, we had issued and outstanding 1,895,803 shares of common stock. UNITS Each unit being offered by us consists of one share of common stock and one redeemable Class A Warrant. Each Class A Warrant becomes exercisable, and may be transferred separately from the common stock, immediately upon the effectiveness of this offering. We intend to apply for a listing of both our common stock and Class A Warrants for public trading on the Pacific Stock Exchange (PSE) and the Nasdaq SmallCap Market. COMMON STOCK Upon completion of this offering, there will be 3,983,161 shares of common stock outstanding, after giving effect to the closing of our pending acquisition of assets from Angel Motorcycles Inc. and assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants. Holders of shares of our common stock are entitled to one vote for each share on all matters to be submitted to a vote of our shareholders. Our shareholders do not have any cumulative voting rights, and accordingly the owners of a majority of outstanding common stock may elect all of our directors. Subject to the rights of any future preferred shareholders, our common shareholders are entitled to share ratably in dividends as and when declared by our board of directors. In the event of any liquidation, dissolution or winding up of our company, common shareholders are entitled to share ratably in all assets remaining after payment of all liabilities and liquidation preferences, if any. There are no redemption, conversion, subscription or preemptive rights with respect to our common stock. The outstanding shares of our common stock are, and the shares of common stock to be issued as part of the units of this offering will be, validly issued, fully paid and nonassessable. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of any future preferred shareholders. CLASS A WARRANTS The Class A Warrants included as part of the units of this offering will be issued under and governed by the provisions of a warrant agreement between us and Interwest Transfer Company, Inc., as warrant agent. Each Class A Warrant entitles its holder to purchase one share of common stock at any time until three years after the effectiveness of this offering, subject to earlier redemption. Each Class A Warrant is exercisable at a price of $9.80 per share, subject to customary antidilution adjustments in certain events such as stock splits and dividends, mergers and other business combinations, and reorganizations. We may redeem the Class A Warrants on not less than 20 days written notice, at a price of $.01 per warrant, at any time after a period of 20 consecutive trading days during which the closing bid price of our common stock exceeds $12.00 per share, subject to antidilution adjustments. Unless warrantholders exercise their Class A Warrants before any redemption is completed, they will forfeit all rights of the warrants except the right to receive the $.01 redemption right per warrant. Warrantholders are not entitled to vote, receive dividends or exercise any of the rights of holders of shares of common stock for any purpose. These warrants are in registered form and may be presented for transfer or exercise at the office of our warrant agent. Any exercise must be completed 37 39 prior to the expiration date, or earlier redemption date, by surrendering the warrant certificate accompanied by payment of the full exercise price. Unless a current prospectus relating to the common shares underlying the Class A Warrants is in effect and applicable state law qualifications or exemptions are satisfied, you may not be able to exercise your Class A Warrants. We intend to use our best efforts to maintain the effectiveness of such a current prospectus and to satisfy qualifications or exemptions in states in which we initially qualify our units for sale in this offering, but we cannot assure you that we will be able to do so. PREFERRED STOCK We have 5,000,000 shares of authorized preferred stock, none of which are presently outstanding. Our board of directors has the authority, without further stockholder action or approval, to issue such shares of preferred stock in one or more series and to fix the designations, preferences, rights, limitations, restrictions or qualifications of each series, including dividend rights and rates, voting rights, conversion and redemption rights and prices, liquidation preferences, and the number of shares in each series. The issuance of any of our preferred stock may have the effect of delaying, deferring or preventing a change of control of our company. The anti-takeover effects of our preferred stock may deny our shareholders the receipt of a premium on our common stock and may also have a depressive effect on the market price of our common stock. We have no present plans to issue any shares of preferred stock. STOCK OPTIONS AND WARRANTS As of the date of this prospectus, we had outstanding warrants and stock options to purchase an aggregate of 143,714 shares of our common stock at a weighted average exercise price of $6.73 per share, and expiring between 2001 and 2005. Upon the effectiveness of this offering, incident to our pending acquisition of engine technology assets from Angel Motorcycles Inc., we also will assume additional warrants to purchase a total of 235,286 shares of our common stock at $7.00 per share until their expiration in 2004. TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT We have appointed Interwest Transfer Company, Inc. as the transfer agent and registrar for our common stock and also as the warrant agent for our Class A Warrants. 38 40 SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our securities in the public market following this offering, the prevailing market price of our securities could decline. Furthermore, because we do not expect any material amount of our currently outstanding common stock to be available for sale until twelve months after this offering as a result of the contractual and legal restrictions on resale described as follows, sales of substantial amounts of our common stock after these restrictions lapse or expire could adversely affect the prevailing market price of our common stock as well as our ability to raise equity capital in the future. Upon the closing of this offering and our pending acquisition of engine technology assets, we will have outstanding an aggregate of 3,983,161 shares of common stock (including the shares in the units being offered), assuming no exercise of the underwriters' over-allotment option or any of our outstanding options or warrants. All common shares and Class A Warrants sold as units in this offering will be freely tradeable without restriction, and other shares of our common stock will be eligible for sale in the public market as follows:
NUMBER OF SHARES NATURE OF SHARES WHEN AVAILABLE FOR SALE - ---------------- ---------------- ----------------------- 3,571........... Shares saleable under Rule 144(k) Upon completion of this offering not subject to lock-up agreements 647,164......... Shares to be issued to Angel One year after completion of Motorcycles Inc. not subject to offering, these shares are saleable lock-up agreement under Rule 144 696,928......... Shares subject to 12-month lock-up One year after completion of this agreement offering, the lock-up will expire and these shares will be saleable under Rule 144 1,835,498....... Shares subject to 1-4 year lock-up From 1-4 years after completion of agreement, including shares to be this offering, these shares will be issued to Angel Motorcycles Inc. saleable under Rule 144 if the subject to lock-up agreement public market price has exceeded 175% of the IPO price of this offering
Lock-up Agreements. All of our shareholders and all shareholders of Angel Motorcycles Inc. who will become principal shareholders of us after this offering are subject to lock-up agreements under which they have agreed not to sell, transfer or dispose of, directly or indirectly, any shares of our common stock until one year after the date of this prospectus. In addition, our officers and directors and principal shareholders (including persons becoming principal shareholders of us due to their beneficial ownership through Angel Motorcycles Inc.) have further agreed that for a period of four years after the date of this prospectus, their lock-up period will not expire until the offering price of our common stock has traded above 175% of the IPO price of this offering for 20 consecutive trading days. Rule 144. In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of prior owners who are not affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of common shares then outstanding, which will equal approximately 39,831 shares immediately after this offering; or 39 41 - the average weekly trading volume of our common stock on the Nasdaq SmallCap Market during the four calendar weeks before a Form 144 notice of the sale is filed. Any sales of our common stock under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. Rule 144(k). Under Rule 144(k), a person who has not been one of our affiliates during the three months before a sale and who has beneficially owned our common shares for at least two years, including the holding period of prior non-affiliates, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. UNDERWRITING We have entered into an underwriting agreement with the underwriters named below regarding the units being offered. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase from us on a firm commitment basis the number of units indicated in the following table, at the public offering price less the underwriting discount and 3% non-accountable expense allowance. Mercer Partners, Inc. is the representative of the underwriters. Delivery of the units will be made on , 2000 in New York, New York against payment in immediately available funds.
NAME OF UNDERWRITER NUMBER OF UNITS ------------------- --------------- Mercer Partners, Inc........................................ ------- Total............................................. 800,000 =======
The underwriting agreement provides that the obligations of the several underwriters to purchase the units in this offering are subject to approval of certain legal matters and certain other conditions. The underwriters are severally committed to purchase all of the units being offered by us if any units are purchased, other than those covered by the over-allotment option described below. The underwriters propose to offer units directly to the public at the public offering price on the cover page of this prospectus. The underwriters may offer the units to securities dealers at that price less a concession not in excess of $ per unit, and securities dealers may reallow a concession not in excess of $ per unit to other dealers. After the units are released for sale to the public, the underwriters may change the offering price and other selling terms from time to time. The underwriters have advised us that they do not expect sales to be made to discretionary accounts. We have agreed to pay the underwriters a non-accountable expense allowance equal to three percent of the total proceeds of the offering, of which we have already paid $50,000. We have granted the underwriters a 45-day option to purchase up to 120,000 additional units, at the public offering price less discounts and the non-accountable expense allowance, to cover over-allotments, if any. We also will enter into an agreement retaining Mercer Partners, Inc. as our investment banking consultant for a two-year period at $3,000 per month, with the total fee of $72,000 payable in advance in full at the closing of this offering. In addition, following the completion of this offering, Mercer Partners, Inc. has the right to nominate one member of our Board of Directors for a period of two years. 40 42 We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments that the underwriters may be required to make in respect of those liabilities. Substantially all our shareholders, including our officers and directors, have entered into lock-up agreements under which they have agreed that they will not sell, transfer, or dispose of any of our common stock now held by them for a period of one year. In addition, the lock-up terms relating to our officers, directors and principal shareholders, including shareholders of Angel Motorcycles Inc. who become principal shareholders of us, further provide that their common shares are locked up for a period of up to four years unless our common stock has traded publicly above 175% of the IPO price of this offering for 20 consecutive trading days. See "Shares Eligible for Future Sale." The following table summarizes the compensation and non-accountable expenses we will pay in this offering:
PER UNIT TOTAL --------------------- --------------------- WITHOUT WITH WITHOUT WITH OVER- OVER- OVER- OVER- ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT --------- --------- --------- --------- Underwriting discounts payable by us..... $.70 $.70 $560,000 $644,000 Non-accountable expenses payable by us... $.21 $.21 $168,000 $193,200
We have also agreed to sell to the representative of the underwriter, for nominal consideration, warrants to purchase that number of shares of our common stock equal to 10% of the total number of units sold in this offering, exercisable at a price per share equal to 140% of the unit IPO price of this offering for a four-year period commencing one year from the date of this prospectus. The exercise price and number of shares are subject to adjustment to prevent dilution under certain circumstances. These warrants also permit a cashless exercise, and we must keep a registration current with respect to them and their underlying shares. For a period of one year from the date of this prospectus, the underwriters' warrants will be restricted from transfer except to officers of the underwriter and members of the syndicate and officers and partners thereof. For the period during which the underwriter's warrants are exercisable, the holder(s) will have the opportunity to profit from a rise in the market value of our common stock, with a resulting dilution in the interests of other shareholders of our company. The holder(s) of the underwriters' warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital from an offering of unissued common stock on terms more favorable to us than those provided for in the underwriters' warrants. Such facts may adversely affect the terms on which we can obtain additional financing. To the extent that the underwriters realize any gain from the resale of the underwriters' warrants or the securities issuable thereunder, such gain may be deemed additional underwriting compensation under the Securities Act of 1933. Our underwriters may engage in over-allotment, passive market making, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities and Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - In passive market making, market makers in the security who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the security until the time, if any, at which a stabilizing bid is made. 41 43 - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the security in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the security originally sold by the syndicate member is purchased in a stabilizing transaction or a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions, and penalty bids may cause the price of the security to be higher than it would be in their absence. These transactions may be effected on the Nasdaq SmallCap Market or otherwise and, if commenced, may be discontinued at any time. DETERMINATION OF OFFERING PRICE Before this offering, there has been no public market for any of our securities. The initial public offering price of these units has been determined by negotiations between us and the representative of the underwriters and is not necessarily related to our revenues, assets, net worth or any other established criteria of value. Among the factors considered in these negotiations were prevailing market conditions, estimates of our business potential, our revenues, the conditions of our industry, the present state of our development and other factors deemed relevant. LEGAL MATTERS The validity of the securities being offered by this prospectus and certain other legal matters related to the offering will be passed upon for us by Robert O. Knutson, Attorney at Law, Eden Prairie, Minnesota. Mr. Knutson will become the owner of approximately 20,000 shares of our common stock after this offering incident to his current ownership of common stock of Angel Motorcycles Inc. William M. Prifti, Esq., Amesbury, Massachusetts, is acting as counsel for the underwriters in connection with certain legal matters related to the offering. EXPERTS The audited financial statements of American Eagle Motorcycle Company, Inc. as of December 31 , 1998 and 1999, and for each of the two years in the period ended December 31, 1999 included in this prospectus have been so included in reliance on the report of BDO Seidman, LLP, independent certified public accountants (which contains an explanatory paragraph regarding the Company's ability to continue as a going concern), given on their authority as experts in accounting and auditing. The audited financial statements of Angel Motorcycles Inc. as of December 31, 1998 and 1999, and for the one-year period ended December 31, 1999 and the period from August 17, 1998 (inception) to December 31, 1998 included in this prospectus have been so included in reliance on the report of Stirtz Bernards Boyden Surdel & Larter, P.A., independent certified public accountants, given on their authority as experts in accounting and auditing. 42 44 ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form SB-2 under the Securities Act of 1933 relating to this offering. This prospectus does not contain all of the information contained in the registration statement and its exhibits. For further information with respect to us and our securities, reference is made to the registration statement and its exhibits. You should read the documents filed as exhibits to the registration statement for a more complete description of the matter involved. With respect to references made in this prospectus to any document of our company, such references are not necessarily complete and you should refer to the exhibits filed with our registration statement for the complete document. After this offering, we will be filing annual and quarterly reports, proxy statements and other information with the SEC. You may read and copy any documents we file at the public reference facilities of the SEC at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. 43 45 INDEX TO FINANCIAL STATEMENTS AMERICAN EAGLE MOTORCYCLE COMPANY, INC.: Report of Independent Certified Public Accountants.......... F-2 Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000 (unaudited)................................. F-3 Statements of Operations for the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000 (unaudited)............................................... F-4 Statements of Shareholders' Deficiency for the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000 (unaudited)............................................... F-5 Statements of Cash Flows for the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000 (unaudited)............................................... F-6 Notes to Financial Statements............................... F-7 ANGEL MOTORCYCLES INC.: Report of Independent Certified Public Accountants.......... F-21 Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000 (unaudited)............................. F-22 Statements of Operations for the period from August 17, 1998 (inception) to December 31, 1998, and the year ended December 31, 1999, and the six months ended June 30, 2000 (unaudited)................ F-23 Statements of Stockholders' Equity (Deficit) for the period from August 17, 1998 (inception) to December 31, 1998, and the year ended December 31, 1999, and the six months ended June 30, 2000 (unaudited)............................................... F-24 Statements of Cash Flows for the period from August 17, 1998 (inception) to December 31, 1998, the year ended December 31, 1999, and the six months ended June 30, 2000 (unaudited)................ F-25 Notes to Financial Statements............................... F-26
F-1 46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of American Eagle Motorcycle Company, Inc. We have audited the accompanying balance sheets of American Eagle Motorcycle Company, Inc. as of December 31, 1998 and 1999, and the related statements of operations, shareholders' deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 American Eagle Motorcycle Company, Inc. as of December 31, 1998 and 1999, and the results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has recurring operating losses, negative working capital and shareholders' deficiency. In addition, the Company's bank has demanded full payment of the credit facility. These factors raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regards to this matter are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP San Jose, California August 10, 2000, except for matters discussed in Note 16 for which the date is September 29, 2000 F-2 47 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. BALANCE SHEETS
PRO FORMA SHAREHOLDERS' DECEMBER 31, DEFICIENCY ------------------------- JUNE 30, JUNE 30, 1998 1999 2000 2000 ----------- ----------- ----------- ------------- (UNAUDITED) (UNAUDITED) ASSETS (Note 5) Current: Cash and cash equivalents (Note 12).............. $900........ $ 28,800 $ 5,200 Accounts receivable, less allowance for doubtful accounts of $95,000, $235,800, and $373,000, respectively (Notes 2, 11, and 12)............. 218,100 71,900 86,700 Advances to related parties (Note 2)............. 60,500 87,600 96,900 Inventories (Note 3)............................. 1,442,100 1,145,500 822,600 Prepaid expenses and other assets................ 48,500 72,200 106,100 ----------- ----------- ----------- TOTAL CURRENT ASSETS............................... 1,770,100 1,406,000 1,117,500 PROPERTY AND EQUIPMENT, NET (Notes 4, 8, and 13)... 224,700 183,500 223,700 ----------- ----------- ----------- $ 1,994,800 $ 1,589,500 $ 1,341,200 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES: Bank overdraft................................... $ 209,700 $ -- $ 8,300 Line of credit (Note 5).......................... 500,000 500,000 500,000 Accounts payable................................. 693,200 1,182,200 784,200 Accrued expenses (Note 6)........................ 259,100 300,000 409,800 Current portion, long-term debt (Note 7)......... 82,400 307,500 339,900 Current portion, obligations under capital lease (Note 8)....................................... 19,900 21,100 19,000 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES.......................... 1,764,300 2,310,800 2,061,200 ----------- ----------- ----------- LONG-TERM LIABILITIES: Long-term debt, less current portion (Note 7).... 318,100 11,300 11,300 Obligations under capital lease, less current portion (Notes 8 and 13)....................... 63,200 42,800 36,100 Note payable, related party (Note 2)............. 216,500 788,400 -- ----------- ----------- ----------- TOTAL LIABILITIES.................................. 2,362,100 3,153,300 2,108,600 COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 8, 15 and 16) SHAREHOLDERS' DEFICIENCY (Notes 10, 13, and 16): Redeemable 5% cumulative, Series A preferred stock, no par value; 1,000,000 shares authorized; 67,857, 67,857, and 142,857 shares issued and outstanding, respectively, liquidation preference of $487,600 $511,600, and $1,048,600, respectively (no shares outstanding pro forma).............. 475,000 475,000 1,525,000 -- Common stock subscribed.......................... 40,000 40,000 -- Common stock, no par value; 10,000,000 shares authorized; 1,211,618, 1,248,904, and 1,416,161 shares issued and outstanding, respectively 1,701,875 shares outstanding pro forma......... 2,271,800 2,613,800 3,302,600 4,876,200 Accumulated deficit.............................. (3,154,100) (4,692,600) (5,595,000) (5,595,000) ----------- ----------- ----------- ----------- TOTAL SHAREHOLDERS' DEFICIENCY..................... (367,300) (1,563,800) (767,400) $ (718,800) ----------- ----------- ----------- ----------- $ 1,994,800 $ 1,589,500 $ 1,341,200 =========== =========== ===========
See accompanying notes to financial statements. F-3 48 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------- -------------------------- 1998 1999 1999 2000 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) NET SALES (Notes 2 and 11)............. $ 3,315,100 $ 4,980,200 $3,502,400 $ 970,600 COST OF SALES.......................... 3,205,800 4,558,000 3,201,800 871,700 ----------- ----------- ---------- ----------- GROSS PROFIT........................... 109,300 422,200 300,600 98,900 OPERATING EXPENSES: Research and development............. 164,700 545,400 224,300 174,200 Sales and marketing.................. 354,600 421,400 224,700 57,500 General and administrative........... 904,900 913,000 471,400 1,034,700 ----------- ----------- ---------- ----------- TOTAL OPERATING EXPENSES............... 1,424,200 1,879,800 920,400 1,266,400 ----------- ----------- ---------- ----------- LOSS FROM OPERATIONS................... (1,314,900) (1,457,600) (619,800) (1,167,500) OTHER INCOME (EXPENSE): Interest income...................... 25,400 26,400 20,600 18,300 Other income (Note 14)............... -- -- -- 330,000 Interest and other expense........... (82,700) (106,500) (56,000) (83,200) ----------- ----------- ---------- ----------- LOSS BEFORE INCOME TAXES............... (1,372,200) (1,537,700) (655,200) (902,400) INCOME TAXES (Note 9).................. (800) (800) -- -- ----------- ----------- ---------- ----------- NET LOSS............................... (1,373,000) (1,538,500) (655,200) (902,400) PREFERRED STOCK DIVIDENDS.............. (12,600) (24,000) (12,000) (12,000) ----------- ----------- ---------- ----------- NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS......................... $(1,385,600) $(1,562,500) $ (667,200) $ (914,400) =========== =========== ========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE................................ $ (1.15) $ (1.27) $ (0.55) $ (0.73) =========== =========== ========== =========== WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.......................... 1,205,444 1,225,816 1,218,730 1,249,823 =========== =========== ========== =========== PRO FORMA BASIC AND DILUTED LOSS PER COMMON SHARE (UNAUDITED)............. $ (1.13) $ (0.65) =========== =========== PRO FORMA WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING (UNAUDITED)....... 1,361,530 1,386,370 =========== ===========
See accompanying notes to financial statements. F-4 49 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. STATEMENTS OF SHAREHOLDERS' DEFICIENCY
REDEEMABLE PREFERRED STOCK -------------------- SERIES A COMMON STOCK -------------------- ---------------------- COMMON STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT SUBSCRIBED DEFICIT TOTAL ------- ---------- --------- ---------- ------------ ----------- ----------- Balance, January 1, 1998............ 28,571 $ 200,000 1,193,761 $2,059,400 $ -- $(1,781,100) $ 478,300 Exercise of warrants to acquire Preferred Stock Series A.......... 14,286 100,000 -- -- -- -- 100,000 Proceeds from issuance of Preferred Stock Series A.................... 25,000 175,000 -- -- -- -- 175,000 Proceeds from issuance of common stock............................. -- -- 17,857 125,000 -- -- 125,000 Common stock subscribed............. -- -- -- -- 40,000 -- 40,000 Contributed services................ -- -- -- 100,000 -- -- 100,000 Preferred stock dividends........... -- -- -- (12,600) -- -- (12,600) Net loss............................ -- -- -- -- -- (1,373,000) (1,373,000) ------- ---------- --------- ---------- -------- ----------- ----------- Balance, December 31, 1998.......... 67,857 475,000 1,211,618 2,271,800 40,000 (3,154,100) (367,300) Proceeds from issuance of common stock............................. -- -- 35,857 251,000 -- -- 251,000 Issuance of common stock for trade payable........................... -- -- 1,429 15,000 -- -- 15,000 Contributed services................ -- -- -- 100,000 -- -- 100,000 Preferred stock dividends........... -- -- -- (24,000) -- -- (24,000) Net loss............................ -- -- -- -- -- (1,538,500) (1,538,500) ------- ---------- --------- ---------- -------- ----------- ----------- Balance, December 31, 1999.......... 67,857 475,000 1,248,904 2,613,800 40,000 (4,692,600) (1,563,800) Balance of information through June 30, 2000 is unaudited............. Issuance of common stock subscribed........................ -- -- 8,571 40,000 (40,000) -- -- Conversion of note payable related party (Note 2).................... 75,000 525,000 158,686 555,400 -- -- 1,080,400 Contributed services................ -- 525,000 -- 105,400 -- -- 630,400 Preferred stock dividends........... -- -- -- (12,000) -- -- (12,000) Net loss............................ -- -- -- -- -- (902,400) (902,400) ------- ---------- --------- ---------- -------- ----------- ----------- Balance, June 30, 2000.............. 142,857 $1,525,000 1,416,161 $3,302,600 $ -- $(5,595,000) $ (767,400) ======= ========== ========= ========== ======== =========== ===========
See accompanying notes to financial statements. F-5 50 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. STATEMENTS OF CASH FLOWS (NOTE 13)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------- ------------------------- 1998 1999 1999 2000 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows From Operating Activities: Net Loss............................... $(1,373,000) $(1,538,500) $(655,200) $(902,400) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization....... 60,800 117,900 22,600 33,500 Loss on sale of equipment........... -- -- -- 2,400 Contributed services................ 100,000 100,000 50,000 630,400 Allowance for doubtful accounts..... 138,900 140,800 42,000 137,200 Changes in operating assets and liabilities: Accounts receivable............... 598,700 5,400 (164,300) (152,000) Inventories....................... (947,100) 296,600 479,600 322,900 Prepaid expenses and other assets......................... 3,100 (23,700) (800) (33,900) Accounts payable.................. 424,200 504,000 324,000 (360,000) Accrued expenses.................. 148,200 16,900 (87,100) 97,800 ----------- ----------- --------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES............................. (846,200) (380,600) 10,800 (224,100) ----------- ----------- --------- --------- Cash Flows From Investing Activities: Proceeds from sale of capital equipment........................... -- -- -- 12,000 Capital expenditures................... (63,900) (76,700) (37,700) (88,100) Deposits............................... 7,800 -- -- -- ----------- ----------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES.... (56,100) (76,700) (37,700) (76,100) ----------- ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft......................... (38,200) (209,700) (172,400) 8,300 Line of credit......................... 500,000 -- -- -- Proceeds from note payable, related party............................... 210,500 571,900 240,800 292,000 Advances to related parties............ (45,200) (27,100) 15,700 (9,300) Proceeds from long-term debt........... 388,100 -- -- -- Payments on long-term debts............ (507,700) (81,700) (46,200) (5,600) Payments on obligations under capital lease............................... (13,600) (19,200) (11,500) (8,800) Proceeds from issuance of preferred stock............................... 275,000 -- -- -- Proceeds from issuance of common stock............................... 125,000 251,000 -- -- ----------- ----------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................. 893,900 485,200 26,400 276,600 ----------- ----------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (8,400) 27,900 (500) (23,600) CASH AND CASH EQUIVALENTS, beginning of period................................. 9,300 900 900 28,800 ----------- ----------- --------- --------- CASH AND CASH EQUIVALENTS, ending of period................................. $ 900 $ 28,800 $ 400 $ 5,200 =========== =========== ========= =========
See accompanying notes to financial statements. F-6 51 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES THE COMPANY American Eagle Motorcycle Company, Inc. (the Company) was incorporated in the State of California on August 15, 1995 and has headquarters in Hollister, California. The Company designs and manufactures custom design V-twin motorcycles and parts and accessories and sells them to authorized dealers or to the general public throughout the U.S.A. BASIS OF PRESENTATION/GOING CONCERN UNCERTAINTY The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has recurring operating losses, negative working capital and a shareholders' deficiency. In addition, the Company's bank has demanded full payment of the credit facility. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or refinancing as may be required and ultimately to attain profitability. The Company is actively seeking additional equity and debt financing, and marketing its existing and new products. Management believes that these factors will sustain the Company's operations for the next year. No assurance can be given that the Company will be successful in its efforts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. INTERIM FINANCIAL INFORMATION The interim financial information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of its financial position at that date and its results of operations and cash flows for those periods. Operating results for the six months ended June 30, 2000 are not necessarily indicative of results that may be expected for any future periods. F-7 52 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE AND ALLOWANCES FOR DOUBTFUL ACCOUNTS The Company grants credit to its customers after undertaking an investigation of credit risk for all significant amounts. An allowance for doubtful accounts is provided for estimated credit losses at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. The allowance is based on reviews of losses, adjustment history, current economic conditions and other factors that deserve recognition in estimating potential losses. While management uses the best information available in making its determination, the ultimate recovery of recorded accounts receivable is also dependent upon future economic and other conditions that may be beyond management's control. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is provided on an accelerated method over the estimated useful lives of the assets, generally ranging from five to seven years. Leasehold improvements and assets held under capital leases are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the related assets. LONG-LIVED ASSETS Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, or whenever management has committed to a plan to dispose of the assets. Such assets are carried at the lower of book value or fair value as estimated by management based on appraisals, current market value, comparable sales value, and undiscounted future cash flows as appropriate. Assets to be held and used affected by such impairment loss are depreciated or amortized at their new carrying amount over the remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. REVENUE RECOGNITION The Company's revenue is derived primarily from the sale of custom design motorcycles. Revenue is recognized at the time of shipment provided no significant obligations remain and collectibility is probable. F-8 53 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) WARRANTY The Company provides a limited warranty on its motorcycles. The warranty period is 36 months (3 years) on parts and accessories. Product warranty costs are charged to operations based upon the estimated product liability using historical rates. ADVERTISING COSTS The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 1998 and 1999 were approximately $125,200 and $100,000, respectively, and for the six months period ended June 30, 2000, $2,100. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences of temporary differences by applying the tax rate expected to be in effect in future years to differences between the financial statements carrying amounts and the tax basis of existing assets and liabilities. Valuation allowances are established when necessary, to reduce deferred tax assets to the amount expected to be realized. Realization is dependent upon future pretax earnings, the reversal of temporary differences between book and tax income, and the expected tax rates in effect in future periods. NET LOSS PER SHARE Basic and diluted net loss per share information for all periods is presented under the requirement of FASB Statement No. 128 Earnings Per Share. Basic earnings per share has been computed using the weighted-average number of shares of common stock outstanding during the period and excludes any dilutive effects of options, warrants, and convertible securities. Pro forma net loss per share has been computed as described above and also gives effect to the conversion of preferred shares not included above that will automatically convert to common shares upon completion of the Company's initial public offering, using the if-converted method. Diluted net loss per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, warrants, and convertible preferred stock, to the weighted-average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. F-9 54 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Short term debt: The fair value of short-term debt approximates cost because of the short period of time to maturity. Long-term debt: The fair value of long-term debt is estimated based on current interest rates available to the Company for debt instruments with similar terms and remaining maturities. As of December 31, 1998 and 1999 and June 30, 2000, the fair values of the Company's financial instruments approximate their historical carrying amounts. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 138, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged assets or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferred of the Effective date of FASB Statement No. 133, which amended SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to have a material impact on the Company's results from operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB 101 must be applied to the financial statements no later than the quarter ending September 30, F-10 55 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 2000. The Company does not believe that the adoption of SAB 101 will have a material affect on the Company's financial results. 2. RELATED PARTY TRANSACTIONS AND BALANCES As of December 31, 1998 and 1999 and June 30, 2000, the Company held certain interest-free loans receivable with balances aggregating $60,500, $87,600, and $96,900, respectively, from certain related partnership and corporations in which the Company's President serves as a general partner and/or officer. The Company advances to and from these related parties from time to time based on their need of cash. In 1998 and 1999, the Company advanced approximately $45,200 and $27,100 to these parties, respectively. The President of the Company periodically contributes additional capital to the Company. The Company accounts for these contributions as related party notes payable until the Board of Directors authorizes the issuance of additional shares. As of December 31, 1998 and 1999, the Company had related party notes payable aggregating $216,500 and $788,400, respectively. In June 2000, $1,080,400 was converted into 75,000 shares of Series A preferred stock and 158,686 shares of common stock, representing non-cash compensation of $1,080,400 ($555,400 relating to common shares and $525,000 relating to preferred shares). The President of the Company has not been paid compensation since inception of the Company. The Company has imputed a compensation expense for contributed services at the rate of approximately $100,000 per year. In conjunction with the beneficial conversion of the related party notes payable in June 2000, the Company recognized additional compensation expense of approximately $580,400, net of previously imputed compensation of $500,000. The Company has transactions in the normal course of business with an affiliated dealership that is partially owned by the President of the Company. In 1998 and 1999, sales to the affiliated dealership were approximately $37,900 and $81,100, respectively. As of December 31, 1998 and 1999, accounts receivable from the affiliated dealership were approximately $18,900 and $42,600, respectively. In November 1998, the Company entered into a facility lease agreement with an affiliated partnership that is partially owned by the President of the Company. In 1998 and 1999, lease payments made to the affiliated partnership were approximately $28,800 and $224,300, respectively. F-11 56 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. INVENTORIES Inventories, including V-Twin motorcycles and parts, consisted of the following:
DECEMBER 31, ----------------------- JUNE 30, 1998 1999 2000 ---------- ---------- ----------- (UNAUDITED) Parts........................................... $ 533,300 $ 644,600 $666,400 Work in process................................. 380,100 177,500 83,400 Finished goods.................................. 528,700 323,400 72,800 ---------- ---------- -------- $1,442,100 $1,145,500 $822,600 ========== ========== ========
4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Machinery and equipment............................ $147,700 $187,500 $247,200 Vehicles........................................... 152,900 160,800 160,800 Leasehold improvements............................. 2,300 28,600 28,100 Furniture and fixtures............................. 15,300 18,000 21,500 -------- -------- -------- 318,200 394,900 457,600 Less accumulated depreciation and amortization..... 93,500 211,400 233,900 -------- -------- -------- $224,700 $183,500 $223,700 ======== ======== ========
Depreciation and amortization expense for the years ended December 31, 1998 and 1999 was approximately $60,800 and $117,900, respectively, and for the six months ended June 30, 2000, $33,500. Equipment under capital lease obligations aggregated $105,400 as of December 31, 1998 and 1999, and June 30, 2000, with related accumulated amortization of $30,000, $58,500, and $72,800, respectively. 5. LINE OF CREDIT The Company has a $500,000 revolving line of credit with a bank, which is due upon demand by the bank, bears interest at bank's prime rate plus 3% (9.5% as of December 31, 1999), and is secured by all assets of the Company and guaranteed by the President of the Company. The Company's bank has demanded full payment of the credit facility. F-12 57 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 31, -------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Accrued payroll and related expenses............. $115,200 $ 72,800 $121,800 Professional expenses............................ 26,700 58,400 76,000 Warranty......................................... 32,600 56,200 66,800 Payroll taxes, penalties and interest............ 31,500 37,100 58,200 Accrued dividends................................ 12,600 36,600 48,600 Property taxes................................... 16,000 31,000 31,000 Other............................................ 24,500 7,900 7,400 -------- -------- -------- $259,100 $300,000 $409,800 ======== ======== ========
7. LONG-TERM DEBT A summary of long-term debt consisted of the following:
DECEMBER 31, -------------------- JUNE 30, 1998 1999 2000 -------- --------- ----------- (UNAUDITED) Debt financing, with interest at 9.0% maturing November 24, 2003, secured by vehicle acquired........................................ $ 17,800 $ 15,300 $ 15,300 Term loan, with interest at 9.5% and 8.76% (bank's prime rate plus 3%) as of December 31, 1999 and 1998, respectively), due upon demand by the bank, secured by all assets of the Company and guaranteed by the President of the Company...... 382,700 303,500 296,900 Note payable, with interest at 10% maturing November 1, 2000................................ -- -- 39,000 -------- --------- --------- 400,500 318,800 351,200 Less current portion.............................. (82,400) (307,500) (339,900) -------- --------- --------- $318,100 $ 11,300 $ 11,300 ======== ========= =========
The Company's bank has demanded full payment of the credit facility. 8. LEASE COMMITMENTS The Company leases its facilities and certain equipment under operating leases expiring on various dates through 2003. The facility leases require the Company to pay certain maintenance and operating expenses such as utilities, property taxes and insurance costs. Rent expense related to these leases was $82,700, for the six months ended June 30, 2000, $233,000 and $122,100 for the years ended December 31, 1999 and 1998, respectively. F-13 58 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. LEASE COMMITMENTS (CONTINUED) A summary of the future minimum lease payments under capitalized leases together with the present value of such minimum lease payments and future minimum lease payments required under noncancelable operating leases with terms in excess of one year follows:
YEARS ENDED DECEMBER 31, ------------------------ CAPITALIZED OPERATING LEASES LEASES ----------- --------- 2000........................................................ $ 28,800 $143,600 2001........................................................ 18,400 182,800 2002........................................................ 28,200 240,000 2003........................................................ 1,600 120,000 -------- -------- Future minimum lease payments............................... 77,000 $686,400 ======== Less amounts representing interest (8.2% to 20.7%).......... (13,100) -------- Present value of future minimum lease payments.............. 63,900 Less current portion........................................ (21,100) -------- $ 42,800 ========
9. INCOME TAXES The provision for income taxes for the years ended December 31, 1999 and 1998 consisted of minimum state taxes. The Company's effective tax rate differs from the statutory Federal income tax principally as a result of Federal and state net operating losses for which no deferred benefit is recognized due to a full valuation allowance provided on the resulting deferred tax asset. Temporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities as of December 1999 and 1998 are as follows:
DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- Net operating loss carryforward............................ $ 841,800 $ 1,273,900 Depreciation and amortization.............................. (33,000) (43,300) Other, net................................................. 245,000 362,200 ----------- ----------- Net deferred tax asset..................................... 1,053,800 1,592,800 Valuation allowance........................................ (1,053,800) (1,592,800) ----------- ----------- Reported deferred tax asset................................ $ -- $ -- =========== ===========
As of December 31, 1999, the Company had a Federal net operating loss carryforward in the amount of $3,462,200 which may be applied to future taxable income until these benefits begin to expire in 2010 through 2019. The Company also had a California net operating loss (NOL) carryforward in the amount of approximately $1,660,000 which may be applied to future taxable income until these benefits begin to expire in 2003 through 2004. F-14 59 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES (CONTINUED) The Company's ability to utilize the NOL carryforwards are dependent upon the Company's ability to generate taxable income in future periods and may be limited due to restrictions imposed under Federal and state laws upon a change in ownership. 10. SHAREHOLDER'S EQUITY STOCK SPLIT On July 25, 2000, the Board of Directors approved a one-for-seven reverse stock split of its common and preferred stock. All share and per share data, except for shares authorized, have been restated for all periods presented to reflect the reverse stock split on a retroactive basis. COMMON STOCK In February 1999, the Company issued 1,429 shares of common stock in a noncash exchange to offset certain accounts payable in the amount of $15,000. In connection with this transaction, the Company granted warrants to purchase 2,857 shares of common stock at $5.25 per share. These warrants vested immediately and expire in January 2002. In 1999, the Company also issued 35,857 shares of common stock, and granted warrants to purchase 35,857 shares of common stock at $7.00 per share, in a private placement for cash proceeds of approximately $251,000. These warrants vested immediately and expire in January 2002. In 1998, the Company issued 17,857 shares of common stock, and granted warrants to purchase 17,857 shares of common stock at $7.00 per share, in a private placement for cash proceeds of approximately $125,000. These warrants vested immediately and expire in January 2001. REDEEMABLE CUMULATIVE SERIES A PREFERRED STOCK On June 2, 1997, the Company authorized 5,000,000 shares of preferred stock, 1,000,000 of these shares were designated as redeemable 5% cumulative, Series A preferred stock (Series A preferred). As of December 31, 1998 and 1999, the Company had 67,857 shares of Series A preferred stock issued and outstanding, respectively. In 1998 and 1999, the Company accrued for dividend on these shares in the amount of $12,600 and $24,000, respectively. In the six months ended June 30, 2000, the Company issued 75,000 shares of Series A preferred stock in connection with the conversion of a related party notes payable. In the six months ended June 30, 2000, the Company also accrued for dividends on the Series A preferred stock in the amount of $12,000 (unaudited). The rights and preferences of the Series A preferred stock are as follows: Dividend Rights: The holders of the Series A preferred stock are entitled to receive 5% annual dividends. The dividend rights are cumulative and accrue from the date of issuance of the shares, whether or F-15 60 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDER'S EQUITY (CONTINUED) not earned or declared. As of December 31, 1999 accrued but unpaid dividends aggregated $36,600. Voting Rights: The holders of the Series A preferred stock have voting rights and powers. Liquidation Preferences: In the event of a liquidation or dissolution of the Company, the holders of the Series A preferred stock are entitled to receive a distribution amount in preference to the common stockholders equal to the amount of $7.00 per share plus all accrued and unpaid dividends at the date of liquidation/dissolution. Thereafter, the remaining assets of the Company shall be distributed pro ratably to the holders of the common and preferred stock on an as-converted basis. Conversion Rights: Each share of Series A preferred is convertible to one share of common stock (see Note 16), and is convertible at the option of the holder or automatically upon a merger, consolidation, or other corporate reorganization, or the closing of a firm commitment underwritten public offering. Redemption: The Company has the right to redeem all or any portion of the outstanding Series A preferred stock at a price equivalent to $7.00 plus any unpaid dividends outstanding. In 1998, the Company issued 14,286 shares of Series A preferred stock and granted warrants to purchase 14,286 shares of the Company's common stock at a purchase price of $7.00 per share, in conjunction with the exercise of warrants to purchase 14,286 Series A preferred stock for $7.00 per share. The value of the warrants issued was determined to be de minimus. In 1998, the Company also sold 25,000 shares of Series A preferred stock for $175,000 in a private placement. In connection with this transaction, the Company granted warrants to purchase 25,000 shares of the Company's common stock at a purchase price of $7.00 per share. These warrants vested immediately and expire in July 2002 and December 2002. F-16 61 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDER'S EQUITY (CONTINUED) STOCK PURCHASE WARRANTS A summary of the status of the Company's stock purchase warrants as of December 31, 1999 and 1998 and changes during the years then ended is presented in the following table:
WEIGHTED- RANGE OF AVERAGE EXERCISE EXERCISE WARRANTS PRICES PRICE -------- ---------- --------- Outstanding as of December 31, 1997...................... 35,714 $2.31-7.00 $6.06 Granted.................................................. 57,143 7.00 7.00 Exercised................................................ (14,286) 7.00 7.00 ------- ---------- ----- Outstanding as of December 31, 1998...................... 78,571 2.31-7.00 6.57 Granted.................................................. 38,714 5.25-7.00 6.87 ------- ---------- ----- Outstanding as of December 31, 1999 and June 30, 2000 (unaudited)............................................ 117,285 2.31-7.00 6.67 ======= ========== =====
All of the outstanding warrants as of December 31, 1999 and June 30, 2000 (unaudited) were exercisable. 11. MAJOR CUSTOMERS AND SUPPLIER CONCENTRATION MAJOR CUSTOMERS In 1999, two customers accounted for approximately 13% and 11% of total net sales, respectively, with related accounts receivable as of December 31, 1999 of $28,500 and $200, respectively. In 1998, three customers accounted for approximately 29%, 11%, and 10% of total net sales, respectively, with related accounts receivable as of December 31, 1998 of $19,100, $0, and $135,900, respectively. SUPPLIER CONCENTRATION Certain parts are critical in order to keep the Company production lines running without business interruption. Although management has alternative suppliers for parts identified as critical, there can be no assurance that the parts will be available at the time and price required. Any prolonged delay in receipt of critical parts could have a material adverse impact on the Company's financial positions and results of operations. During 1999 the Company encountered shipping delays from its supplier of engines which significantly impacted production scheduling and the filling of orders. 12. OFF BALANCE SHEET RISK FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash F-17 62 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. OFF BALANCE SHEET RISK (CONTINUED) and cash equivalents with high quality financial institutions and, by policy, limits the amounts of credit exposure to any one financial institution. A significant portion of the Company's accounts receivable are derived from network dealerships. The Company believes any risk of accounting loss is significantly reduced due to provision being made at the date of sale for returns and allowances, diversity of its products, and geographic sales areas. The Company performs credit evaluation of its customers' financial condition whenever necessary. The Company generally does not require cash collateral or other security to support customer receivables. ENVIRONMENTAL CONTROLS The operations of the Company, like those of the other companies engaged in similar businesses, are subject to various federal, state, and local laws and regulations intended to protect the public health and the environment, including regulations related to air and water quality. 13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following is supplemental disclosure for the statements of cash flows.
PERIODS ENDED ------------------------------------------------- DECEMBER 31, JUNE 30, ----------------- ------------------------- 1998 1999 1999 2000 ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH PAID: Income taxes......................... $ 800 $ 800 $ -- $ -- Interest............................. $50,900 $94,000 $47,600 $ 56,200 NONCASH INVESTING AND FINANCING ACTIVITIES: Capital expenditures under capital lease............................. $82,800 $ -- $ -- $ -- Issuance of common stock for related party note payable................ $ -- $ -- $ -- $555,400 Issuance of Series A Preferred Stock for related party note payable.... $ -- $ -- $ -- $525,000 Issuance of common stock for trade payable........................... $ -- $15,000 $15,000 $ -- Debt finance for acquisition of vehicle........................... $17,900 $ -- $ -- $ -- Equipment received for common stock subscription...................... $40,000 $ -- $ -- $ -- Accrued dividend for Series A Preferred Stock................... $12,600 $24,000 $12,000 $ 12,000 Conversion of trade payable into note payable........................... $ -- $ -- $ -- $ 38,000
F-18 63 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 14. OTHER INCOME During the six months ended June 30, 2000, the Company received $330,000 from an affiliated company for the performance of certain development activities. As of June 30, 2000, the Company's obligations for future development performance have been satisfied and all related monies have been collected. 15. CONTINGENCIES PRODUCT LIABILITY INSURANCE The Company maintains insurance coverage for product liability losses up to $9 million per occurrence. LITIGATION The Company is involved in legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceeding, claims and litigation will not materially affect the Company's result from operations. REPURCHASE The majority of the Company's customers finance their purchases from the Company using a third party wholesale financing company. The Company and wholesale financing company repossesses the motorcycle, and if the motorcycle is in "like-new" condition, then the Company is obligated to repurchase the motorcycle. To date, the Company has experienced only insignificant repurchases under this agreement. 16. SUBSEQUENT EVENTS MERGER AND ACQUISITIONS On July 31, 2000, the Company signed an Asset Purchase Agreement under which it will issue 1,287,358 shares of common stock and grant warrants to purchase 235,286 shares of common stock, at $7.00 per share, in exchange for substantially all assets of Angel Motorcycle, Inc., a Minnesota corporation. The acquisition is contingent on the successful completion of the pending initial public offering. On September 15, 2000, the Company issued 130,000 shares of common stock in exchange for certain motorcycle Web sites developed by Net Media Technologies, Inc., which is 30% owned by the President of the Company. On September 15, 2000, the Company completed a business combination in a single transaction with Yankee Engineuity Products Division, a California sole proprietorship, by exchanging 32,500 shares of its common stock for all of the outstanding ownership of Yankee Engineuity Products Division. F-19 64 AMERICAN EAGLE MOTORCYCLE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 16. SUBSEQUENT EVENTS (CONTINUED) COMMON STOCK During September 2000, 31,428 shares of common stock was issued to satisfy accounts payable of approximately $200,000. CONVERSION OF PREFERRED STOCK On September 29, 2000, the Board of Directors authorized the Company to offer all holders of the outstanding preferred shares to convert each share of preferred stock to two shares of common stock, under the condition that the holders waive and surrender warrants held to purchase preferred stock and all accrued or cumulative rights to preferred stock dividends and agree to enter into lock-up agreement for one year from the Company's initial public offering regarding the common stock received in this conversion. The Company will recognize deemed preferred stock dividends of approximately $475,000, net of the $525,000 recorded as compensation for the six months ended June 30, 2000 (Note 2). PROPOSED PUBLIC OFFERING The Company has entered into an agreement to sell shares of its common stock in an initial public offering. If the offering is consummated, as presently anticipated, all of the outstanding preferred stock will automatically convert to common stock. The unaudited pro forma shareholders' deficiency as of June 30, 2000 gives effect to the two-for-one conversion of all outstanding shares of preferred stock at that date into 285,714 shares of common stock upon the completion of the offering. EMPLOYMENT AGREEMENT The Company has entered into an employment agreement with the Chief Executive Officer for a two year term to provide an annual salary of $96,000 plus certain benefits. F-20 65 To the Board of Directors ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) Minneapolis, Minnesota INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheets of Angel Motorcycles, Inc. (a development stage enterprise) as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 1999, and for the periods from August 17, 1998 (inception) to December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 Angel Motorcycles, Inc. (a development stage enterprise) as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended December 31, 1999, and for the periods from August 17, 1998 (inception) to December 31, 1999 and 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a loss of $265,343 in 1999 and at December 31, 1999, had an accumulated deficit of $320,809. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have compiled the accompanying balance sheet of Angel Motorcycles, Inc. (a development stage enterprise) as of June 30, 2000, and the related statements of operations, stockholders' equity (deficit), and cash flows for the six months then ended, and for the period from August 17, 1998 (inception) to June 30, 2000, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. /s/ STIRTZ BERNARDS BOYDEN SURDEL & LARTER, P.A. Edina, Minnesota August 16, 2000 F-21 66 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
DECEMBER 31, ----------------------- JUNE 30, 1999 1998 2000 --------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash.............................................. $ 2,750 $ -- $ -- Due from affiliate................................ -- -- 243 Prepaid expense................................... 2,524 -- -- Debt offering costs, net of accumulated amortization of $7,653......................... -- -- 59,687 --------- -------- ----------- 5,274 -- 59,930 Other assets: Investment in notes receivable -- Norton Motorcycles, Inc. ............................. 273,000 -- 273,000 Surety bond deposit............................... 250,000 -- -- --------- -------- ----------- $ 528,274 $ -- $ 332,930 ========= ======== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Checks issued in excess of cash in bank........... $ -- $ -- $ 5,945 Accounts payable: Related party.................................. 4,367 8,719 88,330 Other.......................................... 7,476 -- 6,714 Accrued interest.................................. -- -- 1,154 Advances -- related party......................... 350,000 -- 106,867 Advances -- others................................ 173,000 -- -- Convertible debentures -- stockholders............ -- -- 240,500 --------- -------- ----------- Total current liabilities................. 534,843 8,719 449,510 --------- -------- ----------- Stockholders' equity (deficit): Common stock, no par value, 25,000,000 shares authorized; 5,607,105 and 4,674,661 shares issued and outstanding at December 31, 1999 and 1998. At June 30, 2000, 7,974,405 shares are issued and outstanding......................... 314,240 46,747 998,470 Deficit accumulated during the development stage.......................................... (320,809) (55,466) (1,115,050) --------- -------- ----------- Total stockholders' equity (deficit)...... (6,569) (8,719) (116,580) --------- -------- ----------- $ 528,274 $ -- $ 332,930 ========= ======== ===========
See Notes to Financial Statements. F-22 67 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS
AUGUST 17, AUGUST 17, AUGUST 17, 1998 1998 SIX MONTHS 1998 YEAR ENDED (INCEPTION) TO (INCEPTION) TO ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1999 1998 1999 2000 2000 ------------ -------------- --------------- ----------- -------------- (UNAUDITED) (UNAUDITED) Expenditures: General and administrative..... $ 26,381 $ 46,547 $ 72,928 $ 160,656 $ 233,584 Research and development........ 238,962 8,919 247,881 624,778 872,659 Interest expense...... -- -- -- 8,807 8,807 --------- --------- --------- --------- ---------- 265,343 55,466 320,809 794,241 1,115,050 Income taxes............ -- -- -- -- -- --------- --------- --------- --------- ---------- NET LOSS........... $ 265,343 $ 55,466 $ 320,809 $ 794,241 $1,115,050 ========= ========= ========= ========= ========== BASIC LOSS PER SHARE.... $ .052 $ .012 $ .065 $ .113 $ .203 ========= ========= ========= ========= ========== WEIGHTED AVERAGE SHARES OUTSTANDING........... 5,063,179 4,674,661 4,948,909 6,999,105 5,483,743 ========= ========= ========= ========= ==========
See Notes to Financial Statements. F-23 68 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM AUGUST 17, 1998 (INCEPTION) TO DECEMBER 31, 1999
COMMON STOCK -------------------- NUMBER OF ACCUMULATED SHARES AMOUNT DEFICIT TOTAL --------- -------- ----------- --------- BALANCE, August 17, 1998.................... -- $ -- $ -- $ -- Issuance of common stock on August 25, 1998, for services; $.01 per share..... 3,924,661 39,247 -- 39,247 Issuance of common stock on August 25, 1998, for cash; $.01 per share......... 750,000 7,500 -- 7,500 Net loss.................................. -- -- (55,466) (55,466) --------- -------- ----------- --------- BALANCE, December 31, 1998.................. 4,674,661 46,747 (55,466) (8,719) Issuance of common stock on August 2, 1999, for services; $.29 per share..... 214,556 61,600 -- 61,600 Issuance of common stock on August 2, 1999, for cash; $.29 per share......... 717,888 205,893 -- 205,893 Net loss.................................. -- -- (265,343) (265,343) --------- -------- ----------- --------- BALANCE, December 31, 1999.................. 5,607,105 314,240 (320,809) (6,569) Issuance of common stock on March 2, 2000, for cash; $.205 per share (unaudited)............................ 1,220,600 250,000 -- 250,000 Issuance of common stock on March 2, 2000, for advances related to investment in notes receivable -- Norton Motorcycles, Inc.; $.20 per share (unaudited)....... 740,000 148,000 -- 148,000 Issuance of common stock on March 2, 2000, for services; $.20 per share (unaudited)............................ 70,000 14,000 -- 14,000 Issuance of warrants on March 2, 2000, for advances related to investment in notes receivable -- Norton Motorcycles, Inc.; $.10 per warrant (unaudited)........... -- 25,000 -- 25,000 Issuance of warrants on March 2, 2000, for cash; $.10 per warrant (unaudited)..... -- 179,890 -- 179,890 Issuance of common stock on April 28, 2000, related to debentures; $.20 per share (unaudited)...................... 114,800 22,960 -- 22,960 Issuance of common stock on June 30, 2000, related to debentures; $.20 per share (unaudited)............................ 221,900 44,380 -- 44,380 Net loss (unaudited)...................... -- -- (794,241) (794,241) --------- -------- ----------- --------- BALANCE, JUNE 30, 2000 (UNAUDITED).......... 7,974,405 $998,470 $(1,115,050) $(116,580) ========= ======== =========== =========
See Notes to Financial Statements. F-24 69 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH
AUGUST 17, 1998 AUGUST 17, 1998 SIX MONTHS AUGUST 17, 1998 YEAR ENDED (INCEPTION) TO (INCEPTION) TO ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1999 1998 1999 2000 2000 ------------ --------------- --------------- ----------- --------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss......................... $(265,343) $(55,466) $(320,809) $(794,241) $(1,115,050) Adjustments to reconcile net loss to net cash flows from operating activities: Amortization of debt offering costs..................... -- -- -- 7,653 7,653 Common stock and warrants issued for services....... 61,600 39,247 100,847 14,000 114,847 Increase due from affiliate................. -- -- -- (243) (243) (Increase) decrease in prepaid expense........... (2,524) -- (2,524) 2,524 -- Increase (decrease) in accounts payable: Related party............. (4,352) 8,719 4,367 83,963 88,330 Other..................... 7,476 -- 7,476 (762) 6,714 Increase in accrued interest.................. -- -- -- 1,154 1,154 --------- -------- --------- --------- ----------- Net cash flows from operating activities.......... (203,143) (7,500) (210,643) (685,952) (896,595) --------- -------- --------- --------- ----------- Cash flows from financing activities: Checks issued in excess of cash in bank........................ -- -- -- 5,945 5,945 Advances -- related party........ -- -- -- 6,867 6,867 Issuance of debentures........... -- -- -- 240,500 240,500 Issuance of common stock and warrants....................... 205,893 7,500 213,393 429,890 643,283 --------- -------- --------- --------- ----------- Net cash flows from financing activities.......... 205,893 7,500 213,393 683,202 896,595 --------- -------- --------- --------- ----------- Net increase (decrease) in cash................ 2,750 -- 2,750 (2,750) -- Cash, beginning of period.......... -- -- (2,750) -- -- --------- -------- --------- --------- ----------- Cash, end of period................ $ 2,750 $ -- $ -- $ (2,750) $ -- ========= ======== ========= ========= =========== NON-CASH INVESTING AND FINANCING ACTIVITY: Advance issued for surety bond deposit........................ $ 250,000 $ -- $ 250,000 $(250,000) $ -- ========= ======== ========= ========= =========== Advance -- related party for investment in notes receivable -- Norton Motorcycle, Inc................ $ 100,000 $ -- $ -- $ -- $ 100,000 ========= ======== ========= ========= =========== Advances -- others for investment in notes receivable -- Norton Motorcycles, Inc............... $ 173,000 $ -- $ -- $ -- $ -- ========= ======== ========= ========= ===========
See Notes to Financial Statements. F-25 70 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1999 AND THE PERIODS FROM AUGUST 17, 1998 (INCEPTION) TO DECEMBER 31, 1999 AND 1998 (UNAUDITED FOR THE SIX MONTHS ENDED JUNE 30, 2000) 1. GOING CONCERN As shown in the accompanying financial statements, the Company incurred a net loss of $265,343 during the year ended December 31, 1999, and as of that date, the Company has an accumulated deficit of $320,809. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include raising additional equity capital. However, there can be no assurance that the Company will raise additional funds to meet its future financing requirements or that future operations will be successful. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company incurred a net loss of $794,241 during the six months ended June 30, 2000, and as of that date, the Company's liabilities exceeded its assets by $116,580, and the Company has an accumulated deficit of $1,115,050. 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company was incorporated as a Minnesota corporation on August 17, 1998. The Company is in the process of developing motorcycle technology for the American-style cruiser market. The Company is in the development stage and its efforts through December 31, 1999, have been principally devoted to organizational activities, raising capital, and research and development efforts. Management anticipates incurring substantial additional losses as it pursues its research and development efforts. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Surety Bond Deposit As part of the litigation to pursue collection on the notes receivable -- Norton Motorcycles, Inc., the Company was required by the court to post a $250,000 surety bond. A stockholder of the Company placed $250,000 into an escrow account with the insurance company on behalf of the Company. This amount was treated as a non-interest bearing advance to the Company by the F-26 71 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) stockholder. During 2000, the $250,000 was repaid to the stockholder directly from the escrow account. Income Taxes The Company follows FASB Statement No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the deferred tax assets and liabilities. Basic Loss Per Common Share Basic loss per common share was computed by dividing income available to common stockholders by the weighted averaged number of common shares outstanding during the year. Diluted earnings per share are not presented because the effects of the Company's warrants are anti-dilutive. 3. INVESTMENT IN NOTES RECEIVABLE -- NORTON MOTORCYCLES, INC. During 1999, the Company authorized the purchase of three Norton Motorcycles, Inc. (Norton) notes receivable. Two of the notes were collateralized by certain trademarks and technology of Norton. The third note did not have any collateral attached to it. Following are the details related to the purchase of the notes:
FACE AMOUNT OF NON-INTEREST PURCHASED FROM NOTES RECEIVABLE BEARING ADVANCE - -------------- ---------------- --------------- Stockholder....................................... $100,000 $100,000 Third Party....................................... 25,000 25,000 Third Party....................................... 740,000* 148,000 -------- $273,000 ========
- ------------------------- * Consisting of $720,000 of principal and approximately $20,000 of accrued interest. Norton is currently insolvent and has no operations. The Company has initiated litigation against Norton to obtain rights to certain trademarks. The litigation is still in its early stages and the Company cannot determine the outcome of the litigation at this time. The investment in the notes receivable will be carried as an asset until such time as the litigation is successful, at which time the amounts will begin being amortized over the estimated useful lives of the intangible assets acquired, or until the litigation proves unsuccessful, at which time the amounts will be expensed. F-27 72 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT IN NOTES RECEIVABLE -- NORTON MOTORCYCLES, INC. (CONTINUED) Subsequent to year end, the Company issued 250,000 warrants with a fair value of $.10 per warrant for the $25,000 advance and 740,000 shares of common stock with a fair value of $.20 per share for the $148,000 advance. A convertible debenture was issued for the $100,000 advance. This $100,000 debenture incurs interest at the rate of 12%, matures January 1, 2001, and is convertible into shares of common stock at a conversion price of $1.00 per share. 4. ACCOUNTS PAYABLE -- RELATED PARTY Accounts payable -- related party and advances -- related party represent non-interest bearing advances to the Company by stockholders. The Company uses Melling Consultancy Design (MCD) to perform all of its research and development activities related to the process of developing motorcycle technology. During 1999, the Company issued MCD 214,556 shares of common stock as consideration for $61,600 of services. No amounts were owed to MCD as of December 31, 1999 and 1998. As of June 30, 2000, the Company owed MCD $60,000. 5. CONVERTIBLE DEBENTURES (UNAUDITED) On April 28, 2000, the Company authorized the issuance of up to $600,000 of Series A Debenture Units. Each unit is to consist of a $10,000 Series A Debenture and 14,000 shares of restricted common stock. The debentures incur interest at the rate of 10% simple interest per annum and mature at the earlier of six months from the date of the debenture or 30 days after the effective date of the pending initial public offering of American Eagle Motorcycle Company, Inc. The debentures are convertible into common stock of the Company at the rate of one share of common stock for each $.36 of debenture principal. As of June 30, 2000, the Company has issued $240,500 of Series A Debentures. The value allocated to the shares of stock issued as part of the debenture units is being amortized to interest expense over the terms of the notes. 6. COMMON STOCK WARRANTS (UNAUDITED) During the first six months of 2000, the Company issued 2,048,900 warrants to purchase shares of common stock at $1.00 per share (subsequently discounted to $.33 per share) that may be exercised at any time prior to May 31, 2004. These warrants were issued at an offering price of $.10 per warrant with 1,798,900 warrants being issued for cash and 250,000 warrants issued for a Norton note receivable (see Note 3). 7. INCOME TAXES The Company has operating loss carryforwards for federal and state tax purposes of approximately $300,000 at December 31, 1999, which expire through 2014. The Internal Revenue Code contains provisions which may limit the loss carryforwards available if significant changes in stockholder ownership of the Company occur. A deferred tax asset of approximately $120,000 has F-28 73 ANGEL MOTORCYCLES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) been fully offset by a valuation allowance since realization of the asset can not be reasonably assumed. 8. SUBSEQUENT EVENTS Subsequent to December 31, 1999, the Company has issued $240,500 of convertible debentures (see Note 5), 2,367,300 shares of common stock (see statement of stockholders' equity (deficit)) and 2,048,900 warrants to purchase shares of common stock (see Note 6). On April 7, 2000, the Company entered into an agreement with Melling Consultancy Design (MCD), which formalized their existing relationship on developing and designing motorcycle engines and a motorcycle prototype. Under the agreement, the Company is committed to pay MCD $240,000 upon completion of development of the engines and prototype. The Company has also agreed to pay MCD an additional $40,000 for all prototype tooling, molds and jigs, and to issue an additional $40,000 of purchase orders for engines. As part of this agreement, the Company is obligated to pay a 2.5% royalty to MCD on all sales of motorcycles, engines and spare parts developed under this agreement. On April 28, 2000, the Company's sole director authorized the Company to pursue the sale of the Company's engine technology and other assets to American Eagle Motorcycle Company, Inc. F-29 74 [INSIDE BACK COVER -- PHOTOS OF V-TWIN ENGINES AND PRODUCTION FACILITIES] 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article VI of the corporate articles of registrant and Article 6 of the bylaws of registrant provide that the registrant shall have the power to indemnify its officers and directors, as well as other agents, to the fullest extent permitted by California law. Section 317 of the California Corporations Code permits indemnification of directors, officers and agents of the registrant who are made or threatened to be made a party to any civil, criminal or administrative proceeding by reason of their respective capacities with registrant, against judgments, settlements, penalties, fines and expenses (including attorney's fees) incurred by any such person in connection with the proceeding, provided the person acted in good faith and in a manner the person reasonably believed to be in the best interests of the registrant, and in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. In addition, Section 204 of the California Corporations Code prohibits any such indemnification. In the following circumstances: (i) acts or omissions that involve intentional misconduct or a knowing or culpable violation of law, (ii) acts or omissions that the person believes to be contrary to the best interests of the registrant or its shareholders, (iii) any transaction from which the person derived an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the person's duty to the registrant or its shareholders in circumstances in which the person was aware, or should have been aware, in the ordinary course of performing duties of the person, of a risk of serious injury to the registrant or its shareholders, and (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to abdication of the person's duty to the registrant or its shareholders. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of registrant pursuant to the foregoing discussion, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The underwriting agreement for this offering contains provisions under which the registrant, on the one hand, and the underwriters, on the other hand, have agreed to indemnify each other (including officers and directors or controlling persons of the registrant or the underwriters) against certain liabilities, including liabilities under the Securities Act. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses in connection with the issuance and distribution of the securities registered hereby, other than underwriting discounts and fees, are set forth in the following table. Other than the SEC registration fee and NASD filing fee, all amounts are estimates.
ITEM AMOUNT - ---- ------ SEC registration fee........................................ $ 4,289 NASD filing fee............................................. 2,124 Nasdaq and PSE listing fees................................. 20,000 Legal fees and expenses..................................... * Blue Sky fees and expenses.................................. 25,000 Printing expenses (including Edgar filings)................. * Accounting fees and expenses................................ * Transfer Agent fees and expenses............................ 5,000 Miscellaneous expenses...................................... 5,000 ------- Total............................................. * =======
- ------------------------- * to be filed by amendment II-1 76 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following includes all sales of unregistered securities by the registrant during the past three years, and gives effect to a 1-for-7 reverse common stock split effected in October 2000. (a) In December 1997, the registrant issued 211,675 shares of common stock to Gregory Spak, its Chief Executive Officer, to satisfy outstanding loans payable to him in the aggregate amount of $493,900. (b) From December 1997 through December 1998, the registrant issued 475,000 shares of its preferred stock at $1.00 per share, a total of $475,000, to eleven accredited investors in private transactions with minimum investments of $25,000. These eleven investors also received three-year warrants to purchase an equivalent number of additional preferred shares at $1.00 per share. In October 2000, all of these 475,000 preferred shares and related warrants were exchanged for a total of 135,714 common shares of the registrant. (c) From May 1998 through November 1999, the registrant issued a total of 53,714 shares of common stock for $7.00 per share, a total of $376,000, to twelve private investors (most of whom are accredited investors) already known by officers of the registrant prior to their purchases of this common stock. They also received three-year warrants to purchase additional common shares at $7.00 per share in an amount equivalent to the shares purchased by them. (d) In February 1999, the registrant issued 1,429 shares of common stock to a consultant as compensation for consulting services of $15,000, accompanied by a warrant to purchase an additional 2,857 common shares at $5.25 per share. (e) In June 2000, the registrant issued 8,571 shares of its common stock in exchange for transportation equipment valued at $40,000 to Oscar Coco. (f) In June 2000 the registrant issued 158,686 shares of common stock and 525,000 shares of preferred stock to its Chief Executive Officer to satisfy outstanding loans and advances owed to him in the aggregate amount of $1,080,400. All of these preferred shares were exchanged by him in October 2000 into 150,000 common shares. (g) In September 2000, the registrant issued 130,000 shares of common stock to Net Media Technologies, Inc. to acquire several motorcycle Web sites from them. (h) In September 2000 the registrant issued 32,500 shares of common stock to Duncan Keller to acquire his sole proprietorship motorcycle parts business known as Yankee Engineuity. (i) In October 2000 the registrant issued 31,428 shares of its common stock to a trade creditor to satisfy outstanding trade accounts payable of $200,000. The sales and issuances of common stock, preferred stock, and warrants in each of the above transactions were deemed to be exempt from registration in reliance upon Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering. All purchasers in these transactions represented their intention to acquire the securities for investment only and not with a view toward their distribution. In addition, all purchasers in these transactions had adequate access to sufficient information about the registrant to make an informed investment decision. No general solicitation or advertising was employed by the registrant in any of these transactions. None of these securities were sold through an underwriter or selling agent, and accordingly there were no underwriting or selling discounts or commissions involved in these transactions. II-2 77 ITEM 27. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 -- Form of Agreement Among Underwriters 1.2 -- Form of Underwriting Agreement 1.3 -- Form of Selected Dealers Agreement 1.4 -- Form of Underwriters Agreement 1.5 -- Form of Consulting Agreement Between Registrant and Representative of Underwriter 3.1 -- Articles of Incorporation of registrant, as amended 3.2 -- Bylaws of registrant *4.1 -- Specimen common stock certificate *4.2 -- Form of redeemable Class A Warrant and related Warrant Agreement *5 -- Opinion of Robert O. Knutson, Attorney at Law 10.1 -- Asset Purchase Agreement between registrant and Angel Motorcycles Inc. 10.2 -- Acquisition agreement for purchase of motorcycle Web sites by registrant from Net Media Technologies, Inc. 10.3 -- Acquisition agreement for purchase of Yankee Engineuity motorcycle parts business by registrant from Duncan Keller 10.4 -- Authorized dealer agreement for American Eagle dealers *10.5 -- Employment agreement with Gregory Spak to become effective January 1, 2000 10.6 -- Lease for American Eagle headquarters/production facilities *23.1 -- Consent of Robert O. Knutson, Attorney at Law (included in Exhibit 5) 23.2 -- Consent of BDO Seidman, LLP 23.3 -- Consent of independent public accountant for Angel Motorcycles Inc. *27 -- Financial Data Schedule
- ------------------------ * To be filed by amendment. ITEM 28. UNDERTAKINGS The registrant will provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities 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 small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or II-3 78 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 Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to: (1) file, during any period in which it offers or sells securities, a post effective amendment to this Registration Statement to: - include any prospectus required by Section 10(a)(3) of the Securities Act; - reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and - include any additional or changed material information on the plan of distribution; (2) for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. For determining any liability under the Securities Act, the registrant will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the SEC declared it effective. For determining any liability under the Securities Act, the registrant will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-4 79 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 for filing on Form SB-2 and has authorized the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hollister, State of California on October 30, 2000. AMERICAN EAGLE MOTORCYCLE COMPANY, INC. By /s/ GREGORY SPAK ------------------------------------ Gregory Spak President, Chief Executive Officer and Director In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GREGORY SPAK President, Chief Executive Officer October 30, 2000 - --------------------------------------------------- and Director (Principal Executive Gregory Spak Officer) /s/ DAVID MAGINNIS Chief Financial Officer (Principal October 30, 2000 - --------------------------------------------------- Financial and Accounting Officer) David Maginnis /s/ MAURICE TAYLOR Director and Chairman of Board October 30, 2000 - --------------------------------------------------- Maurice Taylor /s/ KENNETH MACLENNAN Director October 30, 2000 - --------------------------------------------------- Kenneth MacLennan
II-5 80 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 -- Form of Agreement Among Underwriters 1.2 -- Form of Underwriting Agreement 1.3 -- Form of Selected Dealers Agreement 1.4 -- Form of Underwriters Agreement 1.5 -- Form of Consulting Agreement Between Registrant and Representative of Underwriter 3.1 -- Articles of Incorporation of registrant, as amended 3.2 -- Bylaws of registrant *4.1 -- Specimen common stock certificate *4.2 -- Form of redeemable Class A Warrant and related Warrant Agreement *5 -- Opinion of Robert O. Knutson, Attorney at Law 10.1 -- Asset Purchase Agreement between registrant and Angel Motorcycles Inc. 10.2 -- Acquisition agreement for purchase of motorcycle Web sites by registrant from Net Media Technologies, Inc. 10.3 -- Acquisition agreement for purchase of Yankee Engineuity motorcycle parts business by registrant from Duncan Keller 10.4 -- Authorized dealer agreement for American Eagle dealers *10.5 -- Employment agreement with Gregory Spak to become effective January 1, 2000 10.6 -- Lease for American Eagle headquarters/production facilities *23.1 -- Consent of Robert O. Knutson, Attorney at Law (included in Exhibit 5) 23.2 -- Consent of BDO Seidman, LLP 23.3 -- Consent of independent public accountant for Angel Motorcycles Inc. *27 -- Financial Data Schedule
- ------------------------ * To be filed by amendment. EX-1.1 2 c57376ex1-1.txt AGREEMENT AMONG UNDERWRITERS 1 EXHIBIT 1.1 AMERICAN EAGLE MOTORCYCLE COMPANY 800,000 Units each unit consisting of one share of common stock and one class A redeemable purchase warrant AGREEMENT AMONG UNDERWRITERS , 2000 Mercer Partners, Inc. 2425 Post Road, Suite 205 Southport, CT 06490 as Representative GENTLEMEN: We wish to confirm as follows the agreement among you, the undersigned and the other members of the Underwriting Group named in Schedule I to the Underwriting Agreement, as it is to be executed (all such parties being herein called the "Underwriters"), with respect to the purchase by the Underwriters severally from American Eagle Motorcycle Company ("Company") of 800,000 units each consisting of one share of common stock and one class A redeemable common stock purchase warrant ("Securities") offered as described above and as set forth in Schedule I to the Underwriting Agreement. The number of Securities to be purchased by each Underwriter from the Company shall be determined in accordance with Section 2 of the Underwriting Agreement. It is understood that changes may be made in those who are to be Underwriters and in the respective numbers of Securities to be purchased by them, but that the Underwriting Agreement will not be changed without our consent, except as provided herein, and in the Underwriting Agreement. The obligations of the Underwriters to purchase the number of Securities set opposite their respective names in Schedule I to the Underwriting Agreement, are herein called their "underwriting obligations." The number of Securities set opposite our names in said Schedule I, are herein called "our Securities." For purposes of this Agreement the following definitions shall be applicable: (a) "Manager's Concession" shall be the compensation to you for acting as Manager as provided in Paragraph 1 of not less than percent ( %) of the underwriting discount. The Manager's Concession shall include the right to a portion of the warrants to be issued pursuant to the Underwriting Agreement and, the right to the nonaccountable expenses to be paid pursuant to the Underwriting Agreement. (b) "Underwriting Group Concession" shall mean compensation to members of the Underwriting Group for assuming the underwriting risk and shall be not less than percent ( %) of the underwriting discount. (c) "Dealer's Concession" shall mean compensation to Dealers, who are members of the Selling Group and shall, as to Dealers who have executed an agreement with you, be not less than percent ( %) of the underwriting discount. (d) "Dealer's Reallowance Concession" shall mean the compensation allowed Dealers by Underwriters other than you and shall be one-half (1/2) of the Dealer's Concession. (e) It is contemplated that the underwriting discount will be percent ( %) of the offering price. You, in your absolute discretion, shall determine, within the foregoing limitations, the precise allocation of the underwriting discount and shall notify us of same at least twenty-four (24) hours prior to the execution of the Underwriting Agreement. 2 1. Authority and Compensation of Representative. We hereby authorize you, as our Representative and on our behalf, (a) to enter into an agreement with the Company substantially in the form attached hereto as Exhibit A ("Underwriting Agreement"), but with such changes therein as in your judgment are not materially adverse to the Underwriters, (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement, and (c) to take all such action as you, in your discretion, may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and this Agreement and the sale and distribution of the Securities, provided, however, that the time within which the Registration Statement is required to become effective pursuant to the Underwriting Agreement will not be extended more than forty-eight (48) hours without the approval of a majority in interest of the Underwriters (including you). We authorize you, in executing the Underwriting Agreement on our behalf, to set forth in Schedule I of the Underwriting Agreement as our commitment to purchase the number of Securities (which shall not be substantially in excess of the number of Securities included in your invitation to participate unless we have agreed otherwise) included in a wire, telex, or similar means of communication transmitted by you to us at least twenty-four (24) hours prior to the commencement of the offering as our finalized underwriting participation. As our share of the compensation for your services hereunder, we will pay you, and we authorize you to charge to our account, a sum equal to the Manager's Concession. 2. Public Offering. A public offering of the Securities is to be made, as herein provided, as soon after the Registration Statement relating thereto shall become effective as in your judgment is advisable. The Securities shall be initially offered to the public at the public offering price of $00.00 per share. You will advise us by telegraph or telephone when the Securities shall be released for offering. We authorize you as Representative of the Underwriters, after the initial public offering, to vary the public offering price, in your sole discretion, by reason of changes in general market conditions or otherwise. The public offering price of the Securities at any time in effect is herein called the "Offering Price." Unless otherwise permitted, we will not sell any of the Securities to any account over which we have discretionary authority. We hereby agree to deliver all preliminary and final Prospectuses as required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934 and Section 5(b) of the Securities Act of 1933. You have heretofore delivered to us such preliminary Prospectuses as have been requested by us, receipt of which is hereby acknowledged, and will deliver such final Prospectuses as will be requested by us. 3. Offering to Dealers and Group Sales. We authorize you to reserve for offering and sale, and on our behalf to sell, to institutions or other retail purchasers (such sales being herein called "Group Sales") and to dealers selected by you (such dealers being herein called the "Dealers") all or any part of our Securities as you may determine. Such sales of Securities, if any, shall be made (i) in the case of Group Sales, at the Offering Price, and (ii) in the case of sales to Dealers, at -the Offering Price less the Dealer's Concession. Any Group Sales shall be as nearly as practicable in proportion to the underwriting obligations of the respective Underwriters. Any sales to Dealers made for our account shall be as nearly as practicable in the ratio that the Securities reserved for our account for offering to Dealers bears to the aggregate of all Securities of all Underwriters, including you, so reserved. On any Group Sales or sales to Dealers made by you on our behalf, we shall be entitled to receive only the Underwriter's Concession. You agree to notify us not less than twenty-four (24) hours prior to the commencement of the public offering as to the number of Securities, if any, which we may retain for direct sale. Prior to the termination of this Agreement, you may reserve for offering and sale, as herein before provided, any Securities remaining unsold theretofore retained by us and we may, with your consent, retain any Securities remaining unsold theretofore reserved by you. Sales to Dealers shall be made under a Selected Dealers Agreement, attached hereto as Exhibit B and by this reference incorporated herein. We authorize you to determine the form and manner of any communications with Dealers, and to make such changes in the Selected Dealers Agreement, as you may deem appropriate. In the event that there shall be any such agreements with Dealers, you are authorized to act as managers thereunder, and we agree, in such event, to be governed by the terms and conditions of such agreements. Each Underwriter agrees that it will not offer any of the Securities for sale at a price below the Offering Price or allow any concession therefrom, except as herein 2 3 otherwise provided. We, as to our Securities, may enter into agreements with Dealers, but any Dealer's Reallowance Concession shall not exceed half of the Dealer's Concession. It is understood that any person to whom an offer may be made, as herein before provided, shall be a member of the National Association of Securities Dealers, Inc. ("NASD") or dealers or institutions with their principal place of business located outside of the United States, its territories or possessions, and who are not eligible for membership under Section 1 of the Bylaws of the NASD who agree to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof, or residents therein, and, in making sales, to comply with the NASD's Rules of Fair Practice. We authorize you to determine the form and manner of any public advertisement of the Securities. Nothing in this Agreement contained therein shall be deemed to restrict our right, subject to the provisions of this Section 3, to offer our Securities prior to the effective date of the Registration Statement, provided, however, that any such offer shall be made in compliance with any applicable requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder and of any applicable state securities laws. 4. Repurchases in the Open Market. Any Securities sold by us (otherwise than through you) which, prior to the termination of this Agreement, or such earlier date as you may determine, shall be contracted for or purchased in the open market by you on behalf of any Underwriter or Underwriters, shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes, if any, on redelivery. Any Securities delivered on such repurchase need not be the identical Securities originally sold by us. In lieu of delivery of such Securities to us, you may (i) sell such Securities in any manner for our account and charge us with the amount of any loss or expense, or credit us with the amount of any profit, less any expense, resulting from such sale, or (ii) charge our account with an amount not in excess of the concession to Dealers on such Securities. 5. Delivery and Payment. We agree to deliver to you, at or before 9:00 A.M., New York, New York Time, on the Closing Date referred to in the Underwriting Agreement, at your office, a certified or bank cashier's check payable to your order for the offering price of the Securities less Dealer's Concession of the Securities which we retained for direct sale by us, the proceeds of which check shall be delivered to you, in the manner provided in the Underwriting Agreement, to or for the account of the Company against delivery of certificates for such Securities to you for our account. You are authorized to accept such delivery and to give receipts therefor. You may advance funds for Securities which have been sold or reserved for sale to retail purchasers or Dealers for our account. If we fail (whether or not such failure shall constitute a default hereunder) to deliver to you, or you fail to receive, our check and/or payment for sales made by you for our account for the Securities which we have agreed to purchase, you, individually and not as Representative of the Underwriters, are authorized (but shall not be obligated) to make payment, in the manner provided in the Underwriting Agreement, to or for the account of the Company for such Securities for our account, but any such payment by you shall not relieve us of any of our obligations under the Underwriting Agreement or under this Agreement and we agree to repay you on demand the amount so advanced for our account. We also agree on demand to take up and pay for or to deliver to you funds sufficient to pay for at cost any Securities of the Company purchased by you for our account pursuant to the provisions of Section 9 hereof, and to deliver to you on demand any Securities sold by you for our account, pursuant to any provision of this Agreement. We authorize you to deliver our Securities, and any other Securities purchased by you for our account pursuant to the provisions of Section 9 hereof, against sales made by you for our account pursuant to any provision of this Agreement. Upon receipt by you of payment for the Securities sold by us and/or through you for our account, you will remit to us promptly an amount equal to the Underwriter's Concession on such Securities. You agree to cause to be delivered to us, as soon as practicable after the Closing Date referred to in the Underwriting Agreement, such part of our Securities purchased on such Closing Date as shall not have been sold or reserved for sale by your for our account. 3 4 In case any Securities reserved for sale in Group Sales or to Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree to accept delivery when tendered by you of any Securities so reserved for our account and not so purchased and pay you the offering price less the Dealer's and Underwriter's Concessions. 6. Authority to Borrow. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments, and to hold, or pledge as security therefor, all or any part of our Securities of the Company purchased hereunder for our account. Any lending bank is hereby authorized to accept your instructions as Representative in all matters relating to such loans. Any part of our Securities held by you, may be delivered to us for carrying purposes, and if so delivered, will be redelivered to you upon demand. 7. Allocation of Expense and Liability. We authorize you to charge our account with, and we agree to pay (a) all transfer taxes on sales made by you for our account, except as herein otherwise provided, and (b) our proportionate share (based on our underwriting obligations) of all expenses in excess of those reimbursed by the Company incurred by you in connection with the purchase, carrying and distribution, or proposed purchase and distribution, of the Securities and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. Funds for our account at any time in your hands as our Representative may be held in your general funds without accountability for interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account, after proper charge and credit for all interim payments and receipts, shall be paid to or paid by us, provided, however, that you, in your discretion, may reserve from distribution an amount to cover possible additional expenses chargeable to the several Underwriters. 8. Liability for Future Claims. Neither any statement by you, as Representative of the Underwriters, of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Securities shall constitute any representation by you as to the existence or nonexistence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement, or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our underwriting obligations) of all expenses and liabilities which may be incurred by, or for the accounts of the Underwriters, including any liability which may be incurred by the Underwriters or any of them, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 9. Stabilization. We authorize you, until the termination of this Agreement, (a) to make purchases and sales of the Securities, in the open market or otherwise, for long or short account, and on such terms, and at such prices as you in your discretion may deem desirable, (b) in arranging for sales of Securities, to overallot, and (c) either before or after the termination of this Agreement, to cover any short position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934. All such purchases, sales and overallotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations; provided, however, that our net position resulting from such purchases and sales and overallotments shall not at any time exceed, either for long or short account, fifteen percent (15%) of the number of Securities agreed to be purchased by us. If you engage in any stabilizing transactions as representative of the underwriters, you shall promptly notify us of that fact and in like manner you agree to promptly notify and file with us any stabilizing transaction in accordance with the requirements of Rule 17a-2(d) under the Securities Exchange Act of 1934. We agree to advise you from time to time, upon request, until the settlement of accounts hereunder, of the number of Securities at the time retained by us unsold, and we will upon request sell to you, for the accounts of one or more of the several Underwriters, such number of our unsold Securities as you may designate, at the Offering Price less such amount, not in excess of the concession to Dealers, as you may determine. 4 5 10. Open Market Transactions. We agree that, except with your consent and except as herein provided upon advice from you, we will not make purchases or sales on the open market or otherwise, or attempt to induce others to make purchases or sales, either before or after the purchase of the Securities, and prior to the completion (as defined in Regulation M of the Securities Exchange Act of 1934) of our participation in the distribution, we will otherwise comply with Regulation M. Nothing in this Section 10 contained shall prohibit us from acting as broker or agent in the execution of unsolicited orders of customers for the purchase or sale of any securities of the Company. 11. Blue Sky. Prior to the initial offering by the Underwriters, you will inform us as to the states under the respective securities or Blue Sky laws of which it is believed that the Securities have been qualified or are exempt for sale, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or Dealer to sell the Securities in any jurisdiction. We will not sell any Securities in any other state or jurisdiction and we will not sell Securities in any state or jurisdiction unless we are qualified or licensed to sell securities in such state or jurisdiction. We authorize you, if you deem it inadvisable in arranging sales of Securities for our account hereunder, to sell any of our Securities to any particular Dealer, or other buyer, because of the securities or Blue Sky laws of any jurisdiction, to sell our Securities to one or more other Underwriters at the Offering Price less, in the case of a sale to any Dealer, such amount, not in excess of the concession to Dealers thereon, as you may determine. The transfer tax on any such sales among Underwriters shall be treated as an expense and charged to the respective accounts of the several Underwriters, in proportion to their respective underwriting obligations. 12. Default by Underwriters. Default by one or more Underwriters, in respect to their obligations under the Underwriting Agreement shall not release us from any of our obligations. In case of such default by one or more Underwriters, you are authorized to increase, pro rata, with the other nondefaulting Underwriters, the number of defaulted Securities which we shall be obligated to purchase from the Company, provided, however, that the aggregate amount of all such increases for all Underwriters shall not exceed ten percent (10%) of such Securities, and, if the aggregate number of the Securities not taken up by such defaulting Underwriters exceeds such ten percent (10%), you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include yourselves, of all or a portion of the Securities not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective numbers of Securities to be purchased by the nondefaulting Underwriters and by any such other person or persons shall be taken as the basis for the underwriting obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriters to the other Underwriters for damages resulting from such default. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any Securities purchased by you for their respective accounts, pursuant to Section 9 hereof, or to deliver any such Securities sold or overallotted by you for their respective accounts pursuant to any provisions of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each nondefaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such Underwriter of its liability therefor. 13. Termination of Agreement. Unless earlier terminated by you, the provisions of Sections 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise provided therein, terminate thirty (30) full business days after the effective date of the Registration Statement herein referred to, but may be extended by you for an additional period or periods not exceeding thirty (30) full business days in the aggregate. You may, however, terminate this Agreement, or any provisions hereof, at any time by written or telegraphic notice to us. 14. General Position of the Representative. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority as Representative of the several Underwriters shall include the taking of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Securities, including the right to make any modifications which you consider necessary or desirable in the arrangements with Dealers or others. You shall be under no liability for or in respect of the value of the Securities or the validity or the form thereof, the Registration Statement, the Prospectus, the Underwriting Agreement, or other instruments executed by the Company or others of any agreement on its or their part; nor shall you, as such Representative or otherwise, be liable under any of the provisions hereof, or for any matters connected herewith, 5 6 except for want of good faith, and except for any liability arising under the Securities Act of 1933; and no obligation not expressly assumed by you as such Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as the representative of each of them respectively. Nothing herein contained shall constitute the several Underwriters partners with you or with each other, or render any Underwriter liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective underwriting obligations and are not joint. 15. Acknowledgment of Registration Statement, etc. We hereby confirm that we have examined the Registration Statement (including all amendments thereto) relating to the Securities as heretofore filed with the Securities and Exchange Commission, that we are familiar with the amendment(s) to the Registration Statement and the final form of Prospectus proposed to be filed, that we are willing to accept the responsibilities of an underwriter thereunder, and that we are willing to proceed as therein contemplated. We further confirm that the statements made under the heading "Underwriting" in such proposed final form of Prospectus are correct and we authorize you so to advise the Company on our behalf. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any amendment or amendments to the Registration Statement and of any amended Prospectus promptly, if and when received by you, but the making of such changes and amendments shall not release us or affect our obligations hereunder or under the Underwriting Agreement. 16. Indemnification. Each Underwriter, including you, agrees to indemnify and hold harmless each other Underwriter and each person who controls any other Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, to the extent of their several commitments under the Underwriting Agreement and upon the terms that such Underwriter agrees to indemnify and hold harmless the Company as set forth in Section 7 of the Underwriting Agreement. The Agreement contained in this Section 16 shall survive any termination of this Agreement Among Underwriters. 17. Capital Requirements. We confirm that our ratio of aggregate indebtedness to net capital is such that we may, in accordance with and pursuant to Rule 15c3-1, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, agree to purchase the number of Securities we may be obligated to purchase under any provision of the Underwriting Agreement or this Agreement. 18. Miscellaneous. We have transmitted herewith a completed Underwriters' Questionnaire on the form thereof supplied by you. Any notice hereunder from you to us or from us to you shall be deemed to have been duly give if sent by registered mail, telegram, teletype, telex, telecopier, graphic scan, or other written form of telecommunication to us at our address as set forth in the Underwriting Agreement, or to you at the address set forth on the first page of this Agreement. You hereby confirm that you are registered as a broker-dealer with the United States Securities and Exchange Commission and that you are a member of the NASD and we confirm that we are either a member of the NASD or a foreign broker-dealer not eligible for membership under Section I of the Bylaws of the NASD, who agrees to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof or residents therein, and, in making sales, to comply with the requirements of the NASD's Interpretation with Respect to Free Riding and Withholding, and with Sections 2730, 2740, and 2420 to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. We will comply with all applicable federal laws, the laws of the states or other jurisdictions concerned and the Rules and Regulations of the NASD, including, but not limited to, Section 2740 of the Rules of Fair Practice. 6 7 This instrument may be signed by the Underwriters in various counterparts which together shall constitute one and the same agreement among all the Underwriters and shall become effective as between us at such time as you shall have confirmed same by returning an executed copy to us, and thereafter, as to us and the other Underwriters, upon execution by them of counterparts which are confirmed by you. In no event, however, shall we have any liability under this Agreement if the Underwriting Agreement is not executed. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, ----------------------------------- Attorney-in-Fact for the several Underwriters named in Schedule I to the Underwriting Agreement Confirmed as of the date first above written. Mercer Partners, Inc. As Representative By -------------------------- Senior Vice President 7 EX-1.2 3 c57376ex1-2.txt UNDERWRITING AGREEMENT 1 EXHIBIT 1.2 AMERICAN EAGLE MOTORCYCLE COMPANY 800,000 Units each unit consisting of OneShare of Common Stock and One Redeemable Class A Warrant UNDERWRITING AGREEMENT ,2000 Mercer Partners, Inc. 2425 Post Road, Suite 205 Southport, CT 06490 Dear Sirs: American Eagle Motorcycle Company, a California corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto, who are acting severally and not jointly, (the "Underwriters"), eight hundred thousand units each unit consisting of one share of Common Stock of the Company and one redeemable class A warrant (the "Securities"). The Company hereby confirms the agreement made by it with respect to the purchase of the Securities by the Underwriter, which Securities are more fully described in the Registration Statement referred to below. Mercer Partners, Inc. is referred to herein as the "Underwriter" or the "Representative." You have advised the Company that the Underwriters desire to act on a firm commitment basis to publicly offer and sell the Securities for the Company and that you are authorized to execute this Agreement. The Company confirms the agreement made by it with respect to the relationship with the Underwriters as follows: 1. Filing of Registration Statement with S.E.C. and Definitions. A Registration Statement and Prospectus on Form SB-2 (File No.333- ) with respect to the Securities has been carefully and accurately prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the published rules and regulations (the "Rules and Regulations") thereunder or under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has been filed with the Securities and Exchange Commission (the "Commission") and such other states that the Underwriter deems necessary in its discretion to so file to permit a public offering and trading thereunder. Such registration statement, including the prospectus, Part II, and all financial schedules and exhibits thereto, as amended at the time when it shall become effective, is herein referred to as the "Registration Statement," and the prospectus included as part of the Registration Statement on file with the Commission that discloses all the information that was omitted from the prospectus on the effective date pursuant to Rule 430 A of the Rules and Regulations with any changes contained in any prospectus filed with the Commission by the Company with the Underwriters consent after the effective date of the Registration Statement, is herein referred to as the "Final Prospectus." The prospectus included as part of the Registration Statement of the Company and in any amendments thereto prior to the effective date of the Registration Statement is referred to herein as a "Preliminary Prospectus." 2. Discount, Delivery, and Sale of the Securities (a) Subject to the terms and conditions of this Agreement, and on the basis of the representations, warranties, and agreements herein contained, the Company agrees to sell to, and the Underwriters agree to buy from the Company at a purchase price of $00.00 per share before any underwriter expense allowances, an aggregate of 800,000 units on a firm commitment basis the "Initial Securities".. 1 2 It is understood that the Underwriters propose to offer the Securities to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. The Underwriters may enter into one or more agreements as the Underwriters in their sole discretion deem advisable with one or more broker-dealers who shall act as dealers in connection with the offering. (b) Delivery of the Securities against payment of the purchase price therefor by certified or official bank check or checks or wire transfer in next-day funds, payable to the order of the Company shall take place at the offices of the clearing broker for the Underwriter at New York City, within three (3) business days after the Securities are first traded (or such other place as may be designated by agreement between you and the Company) at 11:00 A.M., New York time or such time and date as you and the Company may agree upon in writing, such time and date of payment and delivery for the Securities being herein called the "Initial Closing Date." The Company will make the certificates for the shares of Common Stock to be purchased by the Underwriters hereunder available to the Underwriter for inspection and packaging at least two (2) full business days prior to the Initial Closing Date. The certificates shall be in such names and denominations as the Underwriter may request to the Company in writing at least two (2) full business days prior to any Closing Date. (c) In addition, subject to the terms and conditions of this Agreement and on the basis of the representations, warranties and agreements herein contained, the Company grants an option to the Underwriters to purchase up to an additional 120,000 units ("Option Securities") at the same terms as the Underwriters shall pay for the Initial Securities being sold by the Company pursuant to the provisions of Section 2(a) hereof. This option may be exercised from time to time, for the purpose of covering overallotments, within forty-five (45) days after (i) the effective date of the Registration Statement if the Company has elected not to rely on Rule 430A under the Rules and Regulations or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, upon written notice by the Underwriter setting forth the number of Option Securities as to which the Underwriter is exercising the option and the time and date at which such certificates are to be delivered. Such time and date shall be determined by the Underwriter but shall not be earlier than four (4) nor later than ten (10) full business days after the date of the exercise of said option. Nothing herein shall obligate the Underwriter to make any overallotment. (d) Definitive certificates in negotiable form for the Securities to be purchased by the Underwriter hereunder will be delivered at the closing by the Company to the Underwriters against payment of the purchase price by the Underwriters by certified or bank cashier's checks or wire transfer in next day funds payable to the order of the Company. (e) The information set forth under "Underwriting" in any preliminary prospectus and Prospectus relating to the Securities and the information set forth in the last paragraph on the front cover page, under the last paragraph on page 2 concerning stabilization and over-allotment by the Underwriters, and (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriter to the Company for inclusion therein, and you represent and warrant to the Company that the statements made therein are correct. (f) On the Initial Closing Date, the Company shall issue and sell to the Representative, warrants (the "Representative's Warrants") at a purchase price of $.001 per Representative's Warrant, which shall entitle the holders thereof to purchase an aggregate of 80,000 units as described above. The shares of common stock and the redeemable warrants issuable upon the exercise of the Representative's Warrants are hereafter referred to as the "Representative's Securities" or "Representative's Warrants." The Representative's Warrants shall be exercisable for a period of four (4) years commencing one (1) year from the effective date of the Registration Statement at a price equaling one hundred forty percent (140%) of the initial public offering price of the Securities. The form of Representative's Warrant Certificate shall be substantially in the form filed as an Exhibit to the Registration Statement. Payment for the Representative's Warrant shall be made on the Initial Closing Date. 2 3 3. Representations and Warranties of the Company. (a) The Company represents and warrants to you as follows: (i) The Company has prepared and filed with the Commission a registration statement, and an amendment or amendments thereto, on Form SB-2 (No.333- ), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities, the Representative's Warrant (sometimes referred to herein collectively as the "Registered Securities"), under the Act, which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the Rules and Regulations. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Underwriter and will not file any other amendment thereto to which the Underwriter shall have objected verbally or in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, any schedules, exhibits and all other documents filed as a part thereof or that may be incorporated therein (including, but not limited to those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Rules and Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, is hereinafter called the "Prospectus." (ii) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Prospectus or the Registration Statement and no proceeding for an order suspending the effectiveness of the Registration Statement or any of the Company's securities has been instituted or is pending or threatened. Each such Prospectus and/or any supplement thereto has conformed in all material respects with the requirements of the Act and the Rules and Regulations and on its date did not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which they were made and (i) the Prospectus and/or any supplement thereto will contain all statements which are required to be stated therein by the Act and Rules and Regulations, and (ii) the Prospectus and/or any supplement thereto will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances under which they were made; provided, however, that no representations, warranties or agreements are made hereunder as to information contained in or omitted from the Prospectus in reliance upon, and in conformity with, the written information furnished to the Company by you as set forth in Section 2(e) above. (iii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of its incorporation, with full power and authority (corporate and other) to own its properties and conduct its businesses as described in the Prospectus and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties or operations of the Company and the subsidiaries as a whole. (iv) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, the Option Securities and the Representative's Securities and to enter into this Agreement, the Representative's Warrant dated as of the initial closing date to be exercised and delivered by the Company to the Representative (the "Representative's Warrant Agreement"), and to consummate the transactions provided for in such agreements, and each of such agreements has been duly and properly authorized, and on the Initial Closing Date will be duly and properly executed and delivered by the Company. This Agreement constitutes and on the Initial Closing Date the Representative's Warrant Agreement will then constitute valid and binding agreements, enforceable in accordance 3 4 with their respective terms (except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by general equitable principles and except as the enforcement of indemnification provisions may be limited by federal or state securities laws). (v) Except as disclosed in the Prospectus, the Company is not in violation of its respective certificate or articles of incorporation or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party or by which it may be bound or is not in material violation of any law, order, rule, regulation, writ, injunction or decree of any governmental instrumentality or court, domestic or foreign; and the execution and delivery of this Agreement, the Representative's Warrant Agreement ;and the consummation of the transactions contemplated therein and in the Prospectus and compliance with the terms of each such agreement will not conflict with, or result in a material breach of any of the terms, conditions or provisions of, or constitute a material default under, or result in the imposition of any material lien, charge or encumbrance upon any of the property or assets of the Company pursuant to, any material bond, debenture, note or other evidence of indebtedness or any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party nor will such action result in the material violation by the Company of any of the provisions of its respective certificate or articles of incorporation or bylaws or any law, order, rule, regulation, writ, injunction, decree of any government, governmental instrumentality or court, domestic or foreign, except where such violation will not have a material adverse effect on the financial condition of the Company. (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus and the Company will have the adjusted capitalization set forth therein on the Initial Closing Date; all of the shares of issued and outstanding capital stock of the Company set forth therein have been duly authorized, validly issued and are fully paid and nonassessable; the holders thereof do not have any rights of rescission with respect therefor and are not subject to personal liability for any obligations of the Company by reason of being stockholders under the laws of the State in which the Company is incorporated; none of such outstanding capital stock is subject to or was issued in violation of any preemptive or similar rights of any stockholder of the Company; and such capital stock (including the Securities, the Option Securities and the Representative's Securities) conforms in all material respects to all statements relating thereto contained in the Prospectus. (vii) The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement or as described in the Prospectus. The Securities, the Option Securities and the Representative's Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform to the respective descriptions thereof contained in the Prospectus; except for payment of the applicable purchase price paid upon exercise of the options or warrants, as the case may be the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities, the Option Securities and the Representative's Securities has been duly and validly taken; and the certificates representing the Securities, the Option Securities and the Representative's Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities, the Option Securities and the Representative's Securities to be sold by the Company hereunder, the Underwriter will acquire good and marketable title to such Securities, Option Securities and Representative's Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever other than restrictions as may be imposed under the securities laws. (viii) The Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described or referred to in the Prospectus or which are not materially significant or important in relation to its business or which have been incurred in the ordinary course of business; except as described in the Prospectus all of the leases and subleases under which the Company holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and the Company is not in material default in respect of any of the terms or provisions of any of such leases or subleases, and no claim has been asserted by anyone adverse to the Company's rights as lessor, sublessor, 4 5 lessee or sublessee under any of the leases or subleases mentioned above or affecting or questioning the Company's right to the continued possession of the leased or subleased premises or assets under any such lease or sublease; and the Company owns or leases all such properties as are necessary to its operations as now conducted and as contemplated to be conducted, except as otherwise stated in the Prospectus. (ix) The financial statements, together with related notes, set forth in the Prospectus fairly present the financial position and results of operations of the Company at the respective dates and for the respective periods to which they apply. Said statements and related notes have been prepared in accordance with generally accepted accounting principles applied on a basis which is consistent in all material respects during the periods involved but any stub period has not been audited by an independent accounting firm. There has been no material adverse change or material development involving a prospective change in the condition, financial or otherwise, or in the prospects, value, operation, properties, business or results of operations of the Company whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus. (x) Subsequent to the respective dates as of which information is given in the Prospectus as it may be amended or supplemented, and except as described in the Prospectus, the Company has not, directly or indirectly, incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business or entered into any transactions not in the ordinary course of business, which are material to the business of the Company as a whole and there has not been any change in the capital stock of, or any incurrence of long term debts by, the Company or any issuance of options, warrants or rights to purchase the capital stock of the Company or declaration or payment of any dividend on the capital stock of the Company or any material adverse change in the condition (financial or other), net worth or results of operations of the Company as a whole and the Company has not become a party to, any material litigation whether or not in the ordinary course of business. (xi) To the knowledge of the Company, there is no pending or threatened, action, suit or proceeding to which the Company is a party before or by any court or governmental agency or body, which might result in any material adverse change in the condition (financial or other), business or prospects of the Company as a whole or might materially and adversely affect the properties or assets of the Company as a whole nor are there any actions, suits or proceedings against the Company related to environmental matters or related to discrimination on the basis of age, sex, religion or race which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole; and no labor disturbance by the employees of the Company individually exists or is, to the knowledge of the Company, imminent which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole. (xii) Except as may be disclosed in the Prospectus, the Company has properly prepared and filed all necessary federal, state, local and foreign income and franchise tax returns, has paid all taxes shown as due thereon, has established adequate reserves for such taxes which are not yet due and payable, and does not have any tax deficiency or claims outstanding, proposed or assessed against it. (xiii) The Company has sufficient licenses, permits, right to use trade or service marks and other governmental authorizations currently required for the conduct of its business as now being conducted and as contemplated to be conducted and the Company is in all material respects complying therewith. Except as set forth in the Prospectus, the expiration of any such licenses, permits, or other governmental authorizations would not materially affect the Company's operations. To its knowledge, none of the activities or businesses of the Company are in material violation of, or cause the Company to materially violate any law, rule, regulations, or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality. (xiv) The Company has not at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any such contribution, or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi public duties, other than payments required or allowed by applicable law. 5 6 (xv) Except as set forth in the Prospectus the Company knows of no outstanding claims for services either in the nature of a finder's fee, brokerage fee or otherwise with respect to this financing for which the Company or the Underwriters may be responsible, or which may affect the Underwriter's compensation as determined by the National Association of Securities Dealers, Inc. ("NASD") except as otherwise disclosed in the Prospectus or known by the Underwriters. (xvi) The Company has its property adequately insured against loss or damage by fire and maintains such other insurance as is customarily maintained by companies in the same or similar business. (xvii) The Representative's Warrants herein described are duly and validly authorized and upon delivery to the Representative in accordance herewith will be duly issued and legal, valid and binding obligations of the Company, except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by equitable principles, and except as the enforcement of indemnification provisions may be limited by federal or state securities laws. The Representative's Securities issuable upon exercise of any of the Representative's Warrants have been duly authorized, and when issued upon payment of the exercise price therefor, will be validly issued, fully paid and nonassessable. (xviii) Except as set forth in the Prospectus, no default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (xix) To the best of the Company's knowledge it has generally enjoyed a satisfactory employer-employee relationship with its employees and, to the best of its knowledge, is in substantial compliance in all material respects with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. To the best of the Company's knowledge, there are no pending investigations involving the Company, by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. To the best of the Company's knowledge, there is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or to its knowledge involving the Company, or any predecessor entity, and none has ever occurred. To the best of the Company's knowledge, no representation question is pending respecting the employees of the Company, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. To the best of the Company's knowledge, no grievance or arbitration proceeding is pending or to its knowledge threatened under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company is pending, or, to its knowledge is imminent; and the Company is not aware of any pending or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which may result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, position, prospects, value, operation, properties, business or results of operations of the Company. (xx) Except as may be set forth in the Registration Statement, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code (the "Code"), which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each 6 7 ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401 (a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." (xxi) None of the Company, or any of its employees, directors, stockholders, or affiliates (within the meaning of the Rules and Regulations) has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, Option Securities, Representative's Securities or otherwise. (xxii) None of the patents, patent applications, trademarks, service marks, trade names, copyrights, and licenses and rights to the foregoing presently owned or held by the Company, are in dispute or, to the best knowledge of the Company's management are in any conflict with the right of any other person or entity. The Company (i) except as disclosed in the Prospectus owns or has the right to use, all patents, trademarks, service marks, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing, and except as set forth in the Prospectus or otherwise disclosed to the Underwriter in writing, to the best knowledge of the Company's management is not obligated or under any liability whatsoever to make any material payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. There is no suit, proceeding, inquiry, arbitration, investigation, litigation or governmental or other proceeding, domestic or foreign, pending or, to the best of the Company's knowledge, threatened ( or circumstances that may give rise to the same) against the Company which challenges the rights of the Company with respect to any trademarks, trade names, service marks, service names, copyrights, patents, patent applications or licenses or rights to the foregoing used in the conduct of its business. (xxiii) Except as disclosed in the Prospectus the Company owns and has adequate right to use to the best knowledge of the Company's management all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") required for or incident to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company, free and clear of and without violating any right, lien or claim of others, including without limitation, former employers of its employees. The Company is not aware of any such development of similar or identical trade secrets or technical information by others. The Company has valid and binding confidentiality agreements with all of its officers, covering its intellectual property (subject to the equitable powers of any court), which agreements have remaining terms of at least two years from the effective date of the Registration Statement except where the failure to have such agreements would not materially and adversely effect the Company's business taken as a whole. The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. (xxiv) KPMG whose reports are filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. (xxv) The Company has agreed to cause to be duly executed, agreements pursuant to which each of the Company's officers, directors, consultants, and holders of more than 5% of the outstanding Common Stock calculated as of the date immediately preceding the commencement of the public offering, and any person or entity deemed to be an affiliate of the Company pursuant to SEC Rules and Regulations, has agreed not to, directly or 7 8 indirectly, sell, assign, transfer, or otherwise dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) for a period commencing on the effective date until after 12 months from the effective date of the offering, unless the price of the Common Stock, adjusted for any splits, trades at 175% of the public offering price for 20 consecutive days; (iii) or after the first day of the fourth year from the effective date of the prospectus (the Lock-up). Any shares of common stock released from the foregoing restrictions will remain restricted securities subject however to the resale provisions of Rule 144. Shares issued upon the exercise of any options held by the Company's officers, directors or holders of 5% or more of the Company's Common Stock, it is agreed shall be locked up in accordance with the terms of the preceding paragraph. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. The company president or CEO, company counsel and the Representative will have their signatures on the lock-up agreements. The Company also agrees that it will not release any securities subject to this Agreement without the signatures of all parties referred to. (xxvi) The Registered Securities have been approved for listing on NASDAQ or an Exchange. (xxvii) Except as set forth in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no officer or director of the Company, holder of 5% or more of securities of the Company or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions" or disclosed in writing to the Underwriter (which writing specifically refers to this Section) there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, principal stockholder of the Company, or any partner, affiliate or associate of any of the foregoing persons or entities. (xxviii) Any certificate signed by any officer of the Company, and delivered to the Underwriter or to the Underwriter's counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (xxix) Each of the minute books of the Company has been made available to the Underwriter and contains a complete summary of all meetings and actions of the directors and stockholders of the Company, since the time of its incorporation and reflect all transactions referred to in such minutes accurately in all respects. (xxx) As of the Initial Closing Date, the Company will enter into the Consulting Agreement substantially in the form filed as an exhibit to the registration statement with respect to the rendering of consulting services by the Representative to the Company. (xxxi) Except and only to the extent described in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. Except as disclosed in the Prospectus, all rights so described or disclosed have been waived or have not been triggered with respect to the transactions contemplated by this Agreement and the Representative's Warrant Agreement (including the warrants issuable thereunder). 8 9 (xxxii) The Company has not entered into any employment agreements with its executive officers, except as disclosed in the Prospectus. (xxxiii) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Registered Securities pursuant to the Prospectus and the Registration Statement, the issuance of the Underwriter's Warrants, the performance of this Agreement, the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Securities, the Option Securities and the Underwriter's Securities, except such as have been or may be obtained under the Act, otherwise or may be required under state securities or blue sky laws in connection with the Underwriter's purchase and distribution of the Securities, the Option Securities, the Representative's Securities and the Underwriter's Warrants to be sold by the Company hereunder or may be required by the Rules of the National Association of Securities Dealer, Inc. ("NASD"). Since a portion of the Securities are to be offered and sold through foreign broker-dealers not registered with the NASD, any sales by such broker-dealers are to be made in compliance with the securities laws of the country thereof and any required orders from a regulatory body obtained therefrom. (xxxiv) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company, enforceable against the Company, in accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate and fairly present the information required to be shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (xxxv) Within the past five (5) years, none of the Company's independent public accountants has brought to the attention of the Company's management any "material weakness" as defined in the Statement of Auditing Standard No. 60 in any of the Company's internal controls. 4. Covenants of the Company. The Company covenants and agrees with you that: (a) It will cooperate in all respects in making the Prospectus effective and will not at any time, whether before or after the effective date, file any amendment to or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you or your counsel shall have reasonably objected or which is not in material compliance with the Act and the Rules and Regulations or applicable state law. As soon as the Company is advised thereof, the Company will advise you, and confirm the advice in writing, of the receipt of any comments of the Commission or any state securities department, when the Registration Statement becomes effective if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A, of the effectiveness of any posteffective amendment to the Registration Statement or Prospectus, or the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission or any state securities department for amendment of the Prospectus or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance of any stop order suspending the effectiveness of the Prospectus or any order preventing or suspending the use of any Prospectus or any order suspending trading in the Common Stock of the Company, or of the suspension of the qualification of the Securities, the Option Securities or the Representatives Securities for offering in any jurisdiction, or of the institution 9 10 of any proceedings for any such purposes, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain as soon as possible the lifting or dismissal thereof. The Company has caused to be delivered to you copies of such Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by law. The Company authorizes you and the dealers to use the Prospectus and such copies of the Prospectus in connection with the sale of the Securities, the Option Securities and the Representative's Securities for such period as in the opinion of your counsel and our counsel the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. The Company will prepare and file with the states, promptly upon your request, any such amendments or supplements to the Prospectus, and take any other action, as, in the opinion of your counsel, may be necessary or advisable in connection with the initial sale of the Securities, the Option Securities and the Underwriter's Securities and will use its best efforts to cause the same to become effective as promptly as possible. The Company shall file the Prospectus (in form and substance satisfactory to the Underwriter) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to Rule 424(b)(3) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement, and (ii) the fifth business day after the effective date of the Registration Statement. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with the initial sale of the Securities, the Option Securities and the Representative's Securities of any event of which the Company has knowledge and which materially affects the Company, or the securities thereof, and which should be set forth in an amendment of or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required under the Act to be delivered, or in case it shall be necessary to amend or supplement the Prospectus to comply with the Act, the Rules and Regulations or any other law, the Company will forthwith prepare and furnish to you copies of such amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they are made. The preparation and furnishing of any such amendment or supplement to the Prospectus or supplement to be attached to the Prospectus shall be without expense to you. The Company will to the best of its ability comply with the Act, the Exchange Act and applicable state securities laws so as to permit the initial offer and sales of the Securities, the Option Securities and the Representatives Securities under the Act, the Rules and Regulations, and applicable state securities laws. (b) It will cooperate to qualify the Securities and the Option Securities and the Representative's Securities for initial sale under the securities laws of such jurisdictions as you may designate and will make such applications and furnish such information as may be required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long as the Underwriter may reasonably request. (c) So long as any of the Securities, the Option Securities or the Representative's Securities remain outstanding in the hands of the public, the Company, at its expense, will annually furnish to its shareholders a report of its operations to include financial statements audited by independent public accountants, and will furnish to the Underwriter as soon as practicable after the end of each fiscal year, a balance sheet of the Company as at the end of such fiscal year, together with statements of operations, shareholders' equity, and changes in cash flow of the Company for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent public accountants. 10 11 (d) It will deliver to you at or before the Initial Closing Date three signed copies of the signature pages to the Registration Statement and three copies of the registration statement including all financial statements and exhibits filed therewith, whether or not incorporated by reference. The Company will deliver to you, from time to time until the effective date of the Prospectus, as many copies of the Prospectus as you may reasonably request. The Company will deliver to you on the effective date of the Prospectus and thereafter for so long as a Prospectus is required to be delivered under the Act and the Rules and Regulations as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as you may from time to time reasonably request. (e) The Company will apply the net proceeds from the sale of the Securities and the Option Securities substantially in the manner set forth under "Use of Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly or indirectly, to acquire any securities issued by the Company, without the prior written consent of the Underwriter. (f) As soon as it is practicable, but in any event not later than the first (lst) day of the fifteenth (15th) full calendar month following the effective date of the Registration Statement, the Company will make available to its security holders and the Underwriter an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the effective date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations. (g) Non-Accountable Expense Allowance and other Costs and Expenses The Company shall pay to the Underwriter at each closing date, and to be deducted from the purchase price for the Securities and the Option Securities, an amount equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Securities and the Option Securities at such closing date less in the case of the Initial Closing Date, the sum of $50,000 previously paid by the Company. If the sale of the Securities by the Underwriter is not consummated for any reason not attributable to the Underwriter, or if (i) the Company unilaterally withdraws the Registration Statement or does not proceed with the public offering for reasons other than the affirmative wrongdoing of the Underwriter, or (ii) the representations in Section 3 hereof are not correct or the covenants cannot be complied with, or (iii) there has been a materially adverse change in the condition, prospects or obligations of the Company or a materially adverse change in stock market conditions from current conditions, or (iv) the road show presentation produced a negative affect on the intended syndicate members, or (v) the Company unilaterally terminates the financing, the Company will reimburse us for our out-of-pocket expenses up to a maximum of $75,000 but any funds remaining unused from the $50,000 advance, will be returned to the Company. In the event of unilateral termination by the Company we will re-evaluate the Company and the Company agrees to pay us a consulting and restructuring fee of $250,000 and deliver 200,000 shares of common stock to be registered on any future offering and non-dilutive until that financing. Costs and Expenses. Subject to the provisions above the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including, but not limited to, the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement and Prospectus (including the fee of the Commission, any securities exchange and the NASD in connection with the filing required by the NASD relating to the offering of the Securities contemplated hereby); all expenses, including fees of counsel, which shall be due and payable on the Closing Date in connection with the qualification of the Securities under the state securities or blue sky laws; the cost of furnishing to you copies of the Prospectus, this Agreement, the cost of printing the certificates representing the Securities and of preparing and photocopying the Underwriting Agreement and related Underwriting documents, the cost of three underwriter's bound volumes, any advertising costs and expenses, including but not limited to the Company's expenses on "road show" information meetings and presentations, prospectus memorabilia, issue and transfer taxes, if any. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus of or any supplement to be attached to the Prospectus. 11 12 (h) As a condition of the closing, the Company shall obtain from its officers and directors, employee option holders and holders of 5% of the outstanding Common Stock of the Company, written commitments restricting the sale of 100% of their common stock for (12) months after the closing pursuant to lock-up agreements satisfactory to the Underwriter and as described in section 3(a)(xxv) of this Agreement.. (i) During a date five years after the date hereof, the Company will make available to its shareholders, as soon as practicable, and deliver to the Underwriter: (1) as soon as they are available, copies of all reports (financial or other) mailed to shareholders; (2) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (3) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was prepared and released by or on behalf of the Company; and (4) any additional information of a public nature concerning the Company (and any future subsidiaries) or its businesses which the Underwriter may request. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (j) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (k) The Company will furnish to the Underwriter or on the Underwriter's order, without charge, at such place as the Underwriter may designate, copies of each Preliminary Prospectus, the Final Prospectus the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriter may request. (1) Neither the Company nor any of its officers, directors, stockholders or any of its affiliates will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any of the Company's securities. (m) The Company shall timely file all such reports, forms or other documents as may be required from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. (n) The Company shall cause the Securities to be listed on the NASDAQ Small Cap Market or on an exchange for a period of five (5) years from the date hereof, and use its best efforts to maintain the listing of the Securities to the extent they are outstanding. (o) As soon as practicable, (i) before the effective date of the Registration Statement, file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and/or Moody's OTC Manual and to continue such inclusion for a period of not less than five years if the securities are not listed on an exchange. The Company also agrees to take such steps as may be necessary to comply with the requirements of any state to be in compliance with the aftermarket 12 13 provisions of Section 18 of the Securities Act of 1933, as amended, and as further amended by the National Securities Markets Improvement Act of 1996. (p) Until the completion of the distribution of the Securities, the Company shall not without the prior written consent of the Underwriter and its counsel which consent shall not be unreasonably withheld or delayed, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in 'the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (q) During the five (5) year period from the date hereof, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form SB-2 (or other appropriate form) for the registration under the Act of the Representative's Securities. (r) For a period of three (3) years from the Initial Closing Date, the Company shall, at the Company's sole expense, (i ) promptly provide the Representative, upon any and all requests of the Representative, with a "blue sky trading survey" for secondary sales of the Company's securities, prepared by counsel to the Company, and (ii) take all necessary and appropriate actions to further qualify the Company's securities in all jurisdictions of the United States in order to permit secondary sales of such securities pursuant to the "blue sky" laws of those jurisdictions, provided that such jurisdictions do not require the Company to qualify as a foreign corporation. 5. Conditions of the Underwriter's Obligations. The obligation of the Underwriters to offer and sell the Securities and the Option Securities is subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company to the performance by it of its agreement and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective as and when cleared by the Commission, and you shall have received notice thereof, on or prior to any closing date no stop order suspending the effectiveness of the Prospectus shall have been issued and no proceedings for that or similar purpose shall have been instituted or shall be pending, or, to your knowledge or to the knowledge of the Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriter; and qualification, under the securities laws of such states as you may designate, of the issue and sale of the Securities upon the terms and conditions herein set forth or contemplated and containing no provision unacceptable to you shall have been secured, and no stop order shall be in effect denying or suspending effectiveness of such qualification nor shall any stop order proceedings with respect thereto be instituted or pending or threatened under such law. (b) On any closing date and, with respect to the letter referred to in subparagraph (iii), as of the date hereof, you shall have received: (i) the opinion, together with such number of signed or facsimile copies of such opinion as you may reasonably request, addressed to you by Robert O. Knutson., counsel for the Company, (who may rely on the opinion of other counsel for certain legal matters), in form and substance reasonably satisfactory to the Underwriter and William M. Prifti, Esq., counsel to the Underwriter, dated each such closing date, to the effect that: (A) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the jurisdiction in which it is incorporated and has all necessary corporate power and authority to carry on its business as described in the Prospectus. (B) The Company is qualified to do business in each jurisdiction in which conducting its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company's business or assets. 13 14 (C) The Company has the full corporate power and authority to enter into this Agreement, the Representative's Warrant Agreement and to consummate the transactions provided for therein and each such Agreement has been duly and validly authorized, executed and delivered by the Company. Each of this Agreement and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency or similar laws governing the rights of creditors and to general equitable principles, and provided that no opinion need be given as to the enforceability of any indemnification or contribution provisions, and none of the Company's execution or delivery of this Agreement, or the Representative's Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any material breach or violation of any of the terms or provisions of, or constitutes or will constitute a material default under, or result in the creation or imposition of any material lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the articles of incorporation or by-laws of the Company, (B) to the knowledge of such counsel, any material license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound, or (C) to the knowledge of such counsel, any statute, judgment, decree, order, rule or regulation applicable to the Company, whether domestic or foreign. (D) The Company had authorized and outstanding capital stock as set forth in the Prospectus under the heading "Capitalization" as of the date set forth therein, and all of such issued and outstanding shares of capital stock have been duly and validly authorized and issued, and to the knowledge of such counsel are fully paid and nonassessable, and to the knowledge of such counsel no stockholder of the Company is entitled to any preemptive rights to subscribe for, or purchase shares of the capital stock and to the knowledge of such counsel none of such securities were issued in violation of the preemptive rights of any holders of any securities of the Company. (E) To the knowledge of such counsel, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement, and except as described in the Prospectus. The Common Stock, the Class A Redeemable Warrants and the Representative's Warrants each conforms in all material respects to the respective descriptions thereof contained in the Prospectus. The outstanding shares of Common Stock and the Representative's Warrant Stock, upon issuance and delivery and payment therefore in the manner described herein, the Warrant Agreement and the Representative Agreement, as the case may be, will be, duly authorized, validly issued, fully paid and nonassessable. There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's articles of incorporation, by-laws, other governing documents or any agreement or other instrument known to such counsel to which the Company is a party or by which it is bound. (F) The certificates representing the Securities comprising the Common Stock and the Class A Redeemable Warrants are in due and proper form and the Representative's Warrant has been duly authorized and reserved for issuance and when issued and delivered in accordance with the respective terms of the Warrant Agreement and Representative's Warrant Agreement, respectively, will duly and validly issued, fully paid and nonassessable. (G) To the knowledge of such counsel, there are no claims, suits or other legal proceedings pending or threatened against the Company in any court or before or by any governmental body which might materially affect the business of the Company or the financial condition of the Company as a whole, except as set forth in or contemplated by the Prospectus. (H) Based on oral and/or written advice from the staff of the Commission, the Registration Statement has become effective and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Prospectus 14 15 is in effect and no proceedings for that purpose are pending before, or threatened by, federal or by a state securities administrator (I) To the knowledge of such counsel, there are no legal or governmental proceedings, actions, arbitrations, investigations, inquiries or the like pending or threatened against the Company of a character required to be disclosed in the Prospectus which have not been so disclosed, questions the validity of the capital stock of the Company or this Agreement or the Representative's Warrant Agreement or might adversely affect the condition, financial or otherwise, or the prospects of the Company or which could adversely affect the Company's ability to perform any of its obligations under this Agreement, or the Representative's Warrant Agreement. (J) To such counsel's knowledge, there are no material agreements, contracts or other documents known to such counsel required by the Act to be described in the Registration Statement and the Prospectus not filed as exhibits to the Registration Statement and the Prospectus, and to such counsel's knowledge (A) the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound, including any document to which the Company is a party or by which it is bound incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form SB-2. (K) No consent, approval, order or authorization from any regulatory board, agency or instrumentality having jurisdiction over the Company, or its properties (other than registration under the Act or qualification under state or foreign securities law or approval by the NASD) is required for the valid authorization, issuance, sale and delivery of the Securities, the Option Securities or the Representative's Warrant. (L) The statements in the Prospectus under "Risk Factors-Our success depends on our ability to retain Greg Spak and other key personnel", "Our exposure to product liability claims could harm us seriously if our insurance coverage is inadequate", "We must comply with many government regulations with respect to our production operations and our motorcycles and any failure to comply materially with these regulations would harm our business" "Description of the Securities," and "Shares Eligible For Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Underwriter, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not certified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement, when such documents became effective or were filed with the Commission (other than the financial statements including the notes thereto and supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus and any amendment or supplement thereto (other than the financial statements including the notes thereto and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall also cover such other matters incident to the transactions contemplated hereby and the offering Prospectus as you or counsel to the Underwriter shall reasonably request. In rendering such opinion, to the extent 15 16 deemed reasonable by them, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact of which the maker of such certificate has knowledge. (ii) a certificate, signed by the Chief Executive Officer and the Principal Financial or Accounting Officer of the Company dated the Closing Date, to the effect that with regard to the Company, each of the conditions set forth in Section 5(d) have been satisfied. (iii) a letter, addressed to the Underwriter and in form and substance satisfactory to the Underwriter in all respects (including the nonmaterial nature of the changes or decreases, if any, referred to in clause (D) below), from BDO Seidman, LLP dated, respectively, as of the effective date of the Registration Statement and as of the Closing Date, as the case may be along with a letter from Stirtz Bernards Boyden Surdel & Larter, P.A. for Angel Motorcycles, Inc.: (A) Confirming that they are independent public accountants with respect to the Company and its consolidated subsidiaries, if any, within the meaning of the Act and the applicable published Rules and Regulations. (B) Stating that, in their opinion, the financial statements, related notes and schedules of the Company and its consolidated subsidiaries, if any, included in the Registration Statement examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the published Rules and Regulations thereunder. (C) Stating that, with respect to the period from December 31, 1999, to a specified date (the specified date") not earlier than five (5) business days prior to the date of such letter, they have read the minutes of meetings of the stockholders and board of directors (and various committees thereof) of the Company and its consolidated subsidiaries, if any, for the period from December 31, 1999 through the specified date, and made inquiries of officers of the Company and its consolidated subsidiaries, if any, responsible for financial and accounting matters and, especially as to whether there was any decrease in sales, income before extraordinary items or net income as compared with the corresponding period in the preceding year; or any change in the capital stock of the Company or any change in the long term debt or any increase in the short-term bank borrowings or any decrease in net current assets or net assets of the Company or of any of its consolidated subsidiaries, if any, and further stating that while such procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards, nothing came to their attention which caused them to believe that during the period from December 31, 1999, through the specified date there were any decreases as compared with the corresponding period in the preceding year in sales, income before extraordinary items or net income; or any change in the capital stock of the Company or consolidated subsidiary, if any, or any change in the long term debt or any increase in the short-term bank borrowings (other than any increase in short-term bank borrowings in the ordinary course of business) of the Company or any consolidated subsidiary, if any, or any decrease in the net current assets or net assets of the Company or any consolidated subsidiary, if any; and (D) Stating that they have carried out certain specified procedures (specifically set forth in such letter or letters) as specified by the Underwriter (after consultations with BDO Seidman, LLP, CPA's relating to such procedures), not constituting an audit, with respect to certain tables, statistics and other financial data in the Prospectus specified by the Underwriter and such financial data not included in the Prospectus but from which information in the Prospectus is derived, and which have been obtained from the general accounting records of the Company or consolidated subsidiaries, if any, or from such accounting records by analysis or computation, and having compared such financial data with the accounting records of the Company or the consolidated subsidiaries, if any, stating that they have found such financial data to agree with the accounting records of the Company. (c) All corporate proceedings and other legal matters relating to this Agreement, the Prospectus and other related matters shall be satisfactory to or approved by counsel to the Underwriter and you shall have received from Robert O. Knutson, Esq. a signed opinion dated as of each closing date, with respect to the incorporation of the Company, the validity of the Securities, the form of the Prospectus, (other than the financial statements together with related notes and other financial and statistical data contained in the Prospectus or omitted therefrom, as to which such counsel need express no opinion), the execution of this Agreement and other related matters as you may reasonably require. 16 17 (d) At each closing date, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects with the same effect as if made on and as of such closing date; (ii) the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations and in all material respects conform to the requirements thereof, and neither the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary, in light of the circumstances under which they were made, in order to make the statements therein not misleading; (iii) there shall have been since the respective dates as of which information is given no material adverse change in the business, properties or condition (financial or otherwise), results of operations, capital stock, long term debt or general affairs of the Company from that set forth in the Prospectus, except changes which the Prospectus indicates might occur after the effective date of the Prospectus, and the Company shall not have incurred any material liabilities or material obligations, direct or contingent, or entered into any material transaction, contract or agreement not in the ordinary course of business other than as referred to in the Prospectus and which would be required to be set forth in the Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or proceeding at law or in equity shall be pending or threatened against the Company which would be required to be set forth in the Prospectus, and no proceedings shall be pending or threatened against the Company or any subsidiary before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company. (e) On the Initial Closing Date, the Company shall have executed and delivered to the Underwriter, (i) the Representatives' Warrant Agreement substantially in the form filed as an Exhibit to the Registration Statement in final form and substance satisfactory to the Underwriter, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. (f) On or before the Initial Closing Date, the Securities shall have been duly approved for listing on an exchange or on NASDAQ, Small Cap Market. (g) On or before the Initial Closing Date, there shall have been delivered to the Underwriter all of the Lock-up Agreements required to be delivered pursuant to Section 3(a)(xxv) and 4(h), in form and substance satisfactory to the Underwriter and Underwriter's counsel. If any condition to the Underwriter's obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if the Underwriter so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 6. Conditions of the Company's Obligations. The obligation of the Company to sell and deliver the Securities is subject to the following: (a) The provisions regarding the effective date, as described in Section 10. (b) At the Initial Closing Date, no stop order suspending the effectiveness of the Prospectus shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission or by any state securities department. (c) Tender of payment by the Underwriter in accord with Section 2 hereof. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and its employees and each person, if any, who controls you within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several (which shall, for any purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which each Underwriter or such controlling person may become subject, 17 18 under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission made in the Prospectus, or such amendment or supplement to state a material fact required to be stated therein or necessary to make the statements therein not misleading, which is in reliance upon and in conformity with written information furnished by the Company to you specifically for use in the preparation thereof, and provided further that the indemnity agreement contained in this subsection (a) shall not inure to the benefit of you with respect to any person asserting any such loss, claim, damage or liability who has purchased the Securities which are the subject thereof if you or any participants failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Securities to such person and except that, with respect to any untrue statement or omission or any alleged untrue statement or omission, made in any Pre-Effective Prospectus, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Underwriter ( or to any person controlling any such underwriter) from whom the person asserting any such loss, claim, damage or liability purchased the securities concerned to the extent that such untrue statement or omission, or alleged untrue statement or omission, has been corrected in a later Pre-Effective Prospectus or in the Final Prospectus unless the Underwriter circulated a later Pre-Effective Prospectus or the Final Prospectus to such person (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission was made in the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you specifically for use in the preparation thereof. This indemnity will be in addition to any liability which any Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that, if the indemnified party is you or a person who controls you, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both you or such controlling person and the indemnifying party and you or such controlling person shall have been advised by such counsel that there is a conflict of interest which would prevent counsel for the indemnifying party from representing the indemnifying party and you or such controlling person (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of you or such controlling person, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction or which are consolidated into the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and 18 19 expenses of more than one separate firm of attorneys for you and all such controlling persons, which firm shall be designated in writing by you). No settlement of any action against an indemnified party shall be made without the consent of the indemnified party, which shall not be unreasonably withheld in light of all factors of importance to such indemnified party. 8. Contribution. In order to provide for just and equitable contribution tinder the Act in any case in which (i) the indemnifying party makes a claim for indemnification pursuant to Section 7 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of the Underwriters, then the Company and the Underwriters in the aggregate shall contribute to the aggregate losses, claims, damages, or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) in either such case (after contribution from others) in such proportions that the Underwriters are responsible in the aggregate for that portion of such losses, claims, damages or liabilities determined by multiplying the total amount of such losses, claims, damages or liabilities times the difference between the public offering price and the commission to the Underwriter and dividing the product thereof by the public offering price, and the Company, if applicable, shall be responsible for that portion of such losses, claims, damages or liabilities times the commission to the Underwriters and dividing the product thereof by the public offering price; provided, however, that the Underwriters shall not be required to so contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder if such allocation is not permitted by applicable law, then the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. No person guilty of a fraudulent misrepresentation (within the meaning of Section 12(2) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any person having liability under Section 12 of the Act other than the Company and the Underwriter. As used in this paragraph, the term "Underwriters" includes any person who controls the Underwriters within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then any Underwriter and each person who controls any Underwriter shall be entitled to contribution from the Company, to the full extent permitted by law. 9. Effective Date. This Agreement shall become effective at 10:00 a.m. New York time on the next full business day following the effective date of the Registration Statement, or at such other time after the effective date of the Prospectus as you in your discretion shall first commence the public offering of any of the Securities covered thereby, provided, however, that at all times the provisions of Sections 7, 8, 9 and 11 shall be effective. 10. Termination. (a) This Agreement, may be terminated at any time prior to the Closing Date by you if in your judgment it is impracticable to offer for sale or to enforce contracts made by you for the sale of the Securities agreed to be sold hereunder by reason of (i) the Company as a whole having sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree, (ii) trading in securities of the Company having been suspended by a state securities administrator or by the Commission, (iii) material governmental restrictions having been imposed on trading in securities generally (not in force and effect on the date hereof) or trading on the New York Stock Exchange, American Stock Exchange, or in the over-the-counter market shall have been suspended, (iv) a banking moratorium having been declared by federal or New York State authorities, (v) an outbreak or escalation of hostilities or other national or international calamity having occurred, (vi) the passage by the Congress of the United States or by any state legislative body, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is believed likely by you to have a material impact on the business, financial condition or financial statements of the Company; or (vii) any material adverse change having occurred, since the respective dates as of which information is given in the 19 20 Prospectus, in the condition, financial or otherwise, of the Company as a whole, whether or not arising in the ordinary course of business, (viii) or the Securities are not listed on NASDAQ. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10 or in Section 9, the Company shall be promptly notified by you, by telephone or telegram, confirmed by letter. 11. Representations, Warranties and Agreements to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company (or its officers) and the Underwriter set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriter, the Company, or any of their officers or directors and will survive delivery of and payment for the Securities. 12. Notices. All communications hereunder will be in writing and, except as otherwise expressly provided herein, if sent to you, will be mailed, delivered or telephoned and confirmed to you at, Mercer Partners, Inc. 2425 Post Road, Suite 205, Southport, CT 06490 Attn: John Lane, Senior Vice President; and to the Company to Gregory Spak, 2350 Technology Parkway, Hollister, CA 95023. 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter(s), and the Company, and their respective controlling persons, directors and officers, and their respective successors, assigns, executors and administrators. No other person shall acquire or have any right under or by virtue of this Agreement. 14. Headings. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 15. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflict of law principles. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same instrument. 20 21 If the foregoing correctly sets forth the understanding between the Company and you, as Representative of the several underwriters, please so indicate in the space provided below for such purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, American Eagle Motorcycle Company Inc. ---------------------------------------- By: (Authorized Officer) Gregory Spak President Accepted as of the date first above written: Mercer Partners, Inc. - --------------------- As Representative of the several Underwriters By: ----------------------------------------- (Authorized Officer) John D. Lane, Senior Vice President 21 22 EXHIBIT A SCHEDULE I UNDERWRITERS Underwriter Units - ----------- ----- Mercer Partners, Inc. TOTAL 800,000 ------- 22 EX-1.3 4 c57376ex1-3.txt SELECTED DEALERS AGREEMENT 1 EXHIBIT 1.3 A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. YOUR EXECUTION HEREOF WILL INVOLVE NO OBLIGATION OR COMMITMENT OF ANY KIND UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. AMERICAN EAGLE MOTORCYCLE COMPANY SELECTED DEALERS AGREEMENT , Dear Sirs: 1. Mercer Partners, Inc. named as the Underwriter ("Underwriter") in the enclosed preliminary Prospectus, proposes to offer, along with several underwriters, on a firm commitment basis, subject to the terms and conditions and execution of the Underwriting Agreement, 800,000 shares of common stock at $00.00 ("Securities") of the above Company. The Securities are more particularly described in the enclosed preliminary Prospectus, additional copies of which will be supplied in reasonable quantities upon request. Copies of the definitive Prospectus will be supplied after the effective date of the Registration Statement. 2. The Underwriter is soliciting offers to buy, upon the terms and conditions hereof, a part of the Securities from Selected Dealers, including you who are to act as principal and who are (i) registered with the Securities and Exchange Commission ("Commission") as broker-dealers under the Securities Exchange Act of 1934, as amended ("1934 Act"), and members in good standing with the National Association of Securities Dealers, Inc. ("NASD"), or (ii) dealers or institutions with their principal place of business located outside the United States, its territories and possessions who are not eligible for membership in the NASD and who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's Interpretation with Respect to Free Riding and Withholding and with Sections 2730, 2740,2420, to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. The Securities are to be offered at a public price of $00.00 per share. Selected Dealers will be allowed a concession of $____ per share, except as provided below. You will be notified of the precise amount of such concession prior to the effective date of the Registration Statement. You may reallow not in excess of $___ per share to dealers who meet the requirements set forth in this Section 2. This offer is solicited subject to the issuance and delivery of the Securities and their acceptance by the Underwriter, to the approval of legal matters by counsel and to the terms and conditions as herein set forth. 3. Your offer to purchase may be revoked in whole or in part without obligation or commitment of any kind by you and any time prior to acceptance and no offer may be accepted by us and no sale can be made until after the registration statement covering the Securities has become effective with the Commission. Subject to the foregoing, upon execution by you of the Offer to Purchase below and the return of same to us, you shall be deemed to have offered to purchase the number of Securities set forth in your offer on the basis set forth in paragraph 2 above. Any oral notice by us of acceptance of your offer shall be immediately followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealers Agreement shall be applicable. We may also make available to you an allotment to purchase Securities, but such allotment shall be subject to modification or termination upon notice from us any time prior to an 2 exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Securities assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. If prior to termination of this Agreement, we purchase or contract to purchase any Securities ( or any Securities which we believe have been substituted therefor) purchase by you from us, you hereby agree that we (i)reserve the right not to pay such concession on any of such securities; (ii) may sell for your account any such securities so purchased and debit or credit your account with the loss or profit resulting from such sale; or (iii) may require you to purchase any such Securities at a price equal to the total cost of such purchase including commissions and transfer taxes (if any) on redelivery. 4. You agree that in reoffering said Securities, if your offer is accepted after the effective date, you will make a bona fide public distribution of same. You will advise us upon request of Securities purchased by you remaining unsold and we shall have the right to repurchase such Securities upon demand at the public offering price without paying the concession with respect to any Securities so repurchased. Any of the Securities purchased by you pursuant to this Agreement are to be subject to the terms hereof. Securities shall not be offered or sold by you below the public offering price before the termination of this Agreement. 5. Payment for Securities which you purchase is to be made, against delivery, at the full authorized public offering price stated above, or if we shall so advise you, at the public offering price less the dealers' selling concession stated above, by a certified or official bank check payable to the order of Westport resources Investment Services, Inc. in New York Clearing House Funds. Certificate for the Securities shall be delivered as soon as practicable after delivery instructions are received by the Underwriter. You, by becoming a member of the Selected Dealers, agree (a) to take up and pay for the number of Units allotted and confirmed to you, (b) not to use any of the Securities to reduce or cover any short position you may have, (c) upon our request, to advise us of the number of Securities purchased from us as manager of the Selected Dealers remaining unsold by you and to resell to us any or all of such unsold Securities at the public offering price stated above, and (d) to make available a copy of the Prospectus to all persons who on your behalf will solicit orders for the Securities prior to the making of such solicitations by such persons. 6. A registration statement covering the offering has been filed with the Securities and Exchange Commission in respect to the Securities. You will be promptly advised when the registration statement becomes effective. Each Selected Dealer in selling Securities pursuant hereto agrees (which agreement shall also be for the benefit of the Company) that it will comply with the applicable requirements of the Securities Act of 1933 and of the Securities Exchange Act of 1934 and any applicable rules and regulations issued under said Acts. No person is authorized by the Company or by the Underwriter to give any information or to make any representations other than those contained in the Prospectus in connection with the sale of the Securities. Nothing contained herein shall render the Selected Dealers a member of the Underwriting Group or partners with the Underwriter or with one another. 7. You will be informed by us as to the states in which we have been advised by counsel the Securities have been qualified for sale or are exempt under the respective securities or blue sky laws of such states, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell Securities in any state. You agree not to sell Securities in any other state or jurisdiction and to not sell Securities in any state or jurisdiction unless you are qualified or licensed to sell securities in such state or jurisdiction. 8. The Underwriter shall have full authority to take such action as it may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Underwriter shall not be under any liability to you, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by us in this Agreement, and no obligation on our part shall be implied or inferred herefrom. 2 3 9. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate when the offering is completed. Nothing herein contained shall be deemed a commitment on our part to sell you any Securities; such contractual commitment can only be made in accordance with the provisions of paragraph 3 hereof. 10. You represent that you are a member in good standing of the NASD and registered as a broker-dealer with the Commission, or that you are a foreign broker-dealer not eligible for membership under Section 1 of the Bylaws of the NASD who agrees to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretation with Respect to FreeRiding and Withholding and with Sections 2730, 2740, 2420 to the extent applicable to foreign nonmember brokers and dealers, and Section 2750 of the NASD's Rules of Fair Practice. Your attention is called to and you agree to comply with the following: (a) Article III, Section 1 of the Rules of Fair Practice of the NASD and the interpretations of said Section promulgated by the Board of Governors of the NASD including Section 2740 and the interpretation with respect to "Free-Riding and Withholding;" (b) Section 10(b) of the 1934 Act and Regulation M, 10b-10 of the general rules and regulations promulgated under the 1934 Act; and (c) Rule 15c2-8 of the general rules and regulations promulgated under the 1934 Act requiring the distribution of a preliminary Prospectus to all persons reasonably expected to be purchasers of the Securities from you at least 48 hours prior to the time you expect to mail confirmations. You, as a member of the NASD, by signing this Agreement, acknowledge that you are familiar with the cited laws and rules and agree that you will not directly and/or indirectly violate any provisions of applicable law in connection with your participation in the distribution of the Securities. You, by becoming a member of the Selected Dealers represent that (a) neither you nor any of your directors, officers, partners or "persons associated with" you (as defined in the By-Laws of the NASD), nor to your knowledge, any "related person" (defined by the NASD to include counsel, financial consultants and advisors, finders, members of the selling group or distribution group, and any other persons associated with or related to any of the foregoing) or any other broker-dealer, (i) within the last 18 months have purchased in private transactions, or intends before, at or within 6 months after the commencement of the public offering of the Securities, to purchase in private transactions, any securities of the Company or any parent, predecessor, or subsidiary thereof, (ii) within the last 12 months had any dealings with any of the Company or the parent, predecessor, subsidiary or controlling shareholder thereof, or (iii) have, except as contemplated by this Agreement, any agreement, arrangement or understanding to receive compensation in connection with (as defined by the NASD) the distribution of the Securities. 11. In addition to compliance with the provisions of paragraph 10 hereof, you will not, until advised by us in writing or by wire that the entire offering has been distributed and closed, bid for or purchase Securities in the open market or otherwise make a market in the Securities or otherwise attempt to induce others to purchase the Securities in the open market. Nothing contained in this paragraph 11 shall, however, preclude you from acting as agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 12. You understand that the Underwriter may in connection with the offering engage in stabilizing transactions. If the Underwriter contracts for or purchases in the open market in connection with such stabilization any Securities sold to you hereunder and not effectively placed by you, the Underwriter may charge you the Selected Dealer's concession originally allowed you on the Securities so purchased and you agree to pay such amount to us on demand. 13. We agree that without your consent we will not sell to any account over which we exercise discretionary authority any of the Securities that we purchase and which are subject to the terms of this Agreement. 14. By submitting an Offer to Purchase you confirm that you may, in accordance with Rule 15c3-1 adopted under the 1934 Act, agree to purchase the number of Securities you may become obligated to purchase under the provisions of this Agreement. 3 4 15. All communications from you should be directed to us at 2425 Post Road, Southport, Ct. 06490 Attn: John D. Lane, Senior Vice President, (203-254-3216) and fax (203-254-9310) (All communications from us to you shall be directed to the address to which this letter is mailed. Any notice from us to you shall be deemed to have been fully authorized by the Underwriter and to have been duly given if mailed, telegraphed or telexed to you at the address to which this letter is mailed). Very truly yours, Mercer Partners, Inc. By --------------------------------- (Authorized Officer) 4 5 OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke as set forth in paragraph 3) * Securities in accordance with the terms and conditions set forth above. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to such Securities. We further state that in purchasing such Securities we have relied upon such Prospectus and upon no other statement whatsoever, written or oral. - -------------------------------- By ----------------------------- (Authorized Officer) *If a number appears here which does not correspond with what you wish to offer to purchase, you may change the number by crossing out the number, inserting a different number and initializing the change. 5 EX-1.4 5 c57376ex1-4.txt UNDERWRITER'S WARRENT AGREEMENT 1 EXHIBIT 1.4 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED FOR RESALE UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH. VOID AFTER 3:30 P.M., EASTERN TIME, ON , 2005 Underwriters Warrant to Purchase Units Each Unit Consisting of One share of Common Stock And One Class A Redeemable Warrant of AMERICAN EAGLE MOTORCYCLE COMPANY INC. This is to Certify That, FOR VALUE RECEIVED, Mercer Partners, Inc.(the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from American Eagle Motorcycle Company, Inc., ("Company"), a California corporation, at any time on or after , 2001, and not later than 3:30 p.m., Eastern Time, on , 2005, a total of 80,000 units each unit consisting of one share of Common Stock of the Company and one Class A redeemable warrant ("Securities") exercisable at a purchase price of $00.00 for the Securities which is 140% of the public offering price. The number of Securities to be received upon the exercise of this Warrant and the price to be paid for the Securities may be adjusted from time to time as hereinafter set forth. The purchase price of a Security in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Warrant is or may be one of a series of Warrants identical in form issued by the Company to purchase an aggregate of 160,000 Shares of Common Stock. The Securities, as adjusted from time to time, underlying the Warrants are hereinafter sometimes referred to as "Warrant Securities". The Securities issuable upon the exercise hereof are in all respects identical to the securities being purchased by the Underwriter for resale to the public pursuant to the terms and conditions of the Underwriting Agreement entered into on this date between the Company and Holder. (1.) Exercise of Warrant. Subject to the provisions of Section (7) hereof, this Warrant may be exercised in whole or in part at anytime or from time to time on or after , 2001, but not later than 3:30 p.m., Eastern Time on , 2005, or if , 2005 is a day on which banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of shares of Common Stock or Redeemable Warrants, as the case may be as specified in such Form, together with all federal and state taxes applicable upon such exercise. The Company agrees to provide notice to the Holder that any tender offer is being made for the Securities no later than the first business day after the day the Company becomes aware that any tender offer is being made for the Securities. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and 1 2 deliver a new Warrant evidencing the right of the Holder to purchase the balance of the shares purchasable hereunder along with any additional Redeemable Warrants not exercised. Upon receipt by the Company of this Warrant at the office of the Company or at the office of the Company's stock transfer agent, in proper form for exercise and accompanied by the total Exercise Price, the Holder shall be deemed to be the holder of record of the Securities issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Securities shall not then be actually delivered to the Holder. (2.) Reservation of Securities. The Company hereby agrees that at all times there shall be reserved for issuance and/or delivery upon exercise of this Warrant such number of shares of Securities as shall be required for issuance or delivery upon exercise of this Warrant. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Securities and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all Securities issuable upon the exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on NASDAQ. (3.) Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (a) If the Securities are listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (b) If the Securities are not so listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Automated Quotation System (or, if not so quoted on NASDAQ or quoted by the National Quotation Bureau, Inc.) on the last business day prior to the date of the exercise of this Warrant; or (c) If the Securities are not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount, not less than book value, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company, such determination to be final and binding on the Holder. (4.) Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder thereof to purchase (under the same terms and conditions as provided by this Warrant) in the aggregate the same number of Securities purchasable hereunder. This Warrant may not be sold, transferred, assigned, or hypothecated until after one year from the effective date of the registration statement except that it may be (i) assigned in whole or in part to the officers of the "Underwriter(s)", and (ii) transferred to any successor to the business of the "Underwriter(s)." Any such assignment shall be made by surrender of this Warrant to the Company, or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and with funds sufficient to pay any transfer tax; whereupon the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in-such instrument of assignment, and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants issued in substitution for or replacement of this Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, 2 3 and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not the Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (5.) Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. (6.) Notices to Warrant Holders. So long as this Warrant shall be outstanding and unexercised (i) if the Company shall pay any dividend EXCLUSIVE OF A CASH DIVIDEND, or make any distribution upon the Common Stock, or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any class or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then, in any such case, the Company shall cause to be delivered to the Holder, at least ten (10) days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any, is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for equivalent securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (7.) Adjustment of Exercise Price and Number of Shares of Common Stock Deliverable. (A)(i) Except as hereinafter provided, in the event the Company shall, at any time or from time to time after the date hereof, issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision or combination being herein call a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Exercise Price of the Common Stock issuable upon the exercise of the Warrant and the Redeemable Warrant in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent to the nearest cent) determined by dividing (i) the sum of (a) the total number of shares of Common Stock outstanding immediately prior to such Change of Shares, multiplied by the Exercise Price in effect immediately prior to such Change of Shares, and (b) the consideration, if any, received by the Company upon such issuance, subdivision or combination by (ii) the total number of shares of Common Stock outstanding immediately after such Change of Shares; provided, however, that in no event shall the Exercise Price be adjusted pursuant to this computation to an amount in excess of the Exercise Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock. For the purposes of any adjustment to be made in accordance with this Section (7) the following provisions shall be applicable: (I) Shares of Common Stock issuable by way of dividend or other distribution on any capital stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (II) The number of shares of Common Stock at any one time outstanding shall not be deemed to include the number of shares issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights or warrants and upon the conversion or exchange of convertible or exchangeable securities. 3 4 (A)(ii) Upon each adjustment of the Exercise Price pursuant to this Section (7), the number of shares of Common Stock and Redeemable Warrants purchasable upon the exercise of each Warrant shall be the number derived by multiplying the number of shares of Common Stock and Redeemable Warrants purchasable immediately prior to such adjustment by the Exercise Price in effect prior to such adjustment and dividing the product so obtained by the applicable adjusted Exercise Price. (B) In case of any reclassification or change of outstanding Securities issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation other than a merger with a "Subsidiary" (which shall mean any corporation or corporations, as the case may be, of which capital stock having ordinary power to elect a majority of the Board of Directors of such corporation (regardless of whether or not at the time capital stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries) or by the Company and one or more Subsidiaries in which merger the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of subdivision or combination) or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company, or such successor or purchasing corporation, as the case may be, shall make lawful and adequate provision whereby the Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and shall forthwith file at the principal office of the Company a statement signed on its behalf by its President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing such provision. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section (7)(A). The above provisions of this Section (7)(B) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (C) Irrespective of any adjustments or changes in the Exercise Price or the number of Securities purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant hereto, continue to express the Exercise Price per share and the number of shares purchasable thereunder as the Exercise Price per share and the number of shares purchasable thereunder as expressed in the Warrant Certificates when the same were originally issued. (D) After each adjustment of the Exercise Price pursuant to this Section (7), the Company will promptly prepare a certificate signed on its behalf by the President or Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so adjusted, (ii) the number of Securities purchasable upon exercise of each Warrant, after such adjustment, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate in the Company's minute books and cause a brief summary thereof to be sent by ordinary first class mail to each Holder at his last address as it shall appear on the registry books of the Company. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (E) No adjustment of the Exercise Price shall be made as a result of or in connection with the issuance or sale of Securities if the amount of said adjustment shall be less than $.10, provided, however, that in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment that shall amount, together with any adjustment so carried forward, 4 5 to at least $.10. In addition, Holders shall not be entitled to cash dividends paid by the Company prior to the exercise of any Warrant or Warrants held by them. (F) In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend consisting solely of shares of Common Stock or otherwise distribute to its stockholders any assets, property, rights, or evidences of indebtedness, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the Securities or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same property, assets, rights, or evidences of indebtedness, that they would have been entitled to receive at the time of such dividend or distribution as if the Warrants had been exercised immediately prior to such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section (7). (G.1) Right to Exercise on a Net Issuance Basis. In lieu of exercising this Warrant for cash, the Holder shall have the right to exercise this Warrant or any portion thereof (the "Net Issuance Right") into Common Stock as provided in this Section G.1 at any time or from time to time during the period specified on page one of this Warrant Agreement, hereof by the surrender of this Warrant to the Company with a duly executed and completed Exercise Form marked to reflect net issuance exercise. Upon exercise of the Net Issuance Right with respect to a particular number of shares subject to this Warrant and noted on the Exercise Form (the "Net Issuance Warrant Shares"), the Company shall deliver to the Holder (without payment by the Holder of any Exercise Price or any cash or other consideration) (X) that number of shares of fully paid and nonassessable shares of Common Stock equal to the quotient obtained by dividing the value of this Warrant (or the specified portion hereof) on the Net Issuance Exercise Date, which value shall be determined by subtracting (A) the aggregate Exercise price of the Net Issuance Warrant Shares immediately prior to the exercise of the Net Issuance Right from (B) the aggregate fair market value of the Net Issuance Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Net Issuance Exercise Date (as herein defined) by (Y) the fair market value one share of Common Stock on the Net Issuance Exercise Date (as herein defined). Expressed as a formula as shown below, such net issuance exercise shall be computed as follows: X = B-A ----- Y Where: X = the number of shares of Common Stock that may be issued to the Holder Y = the fair market value ("FMV") of one share of Common Stock as of the Net Issuance Exercise Date A = the aggregate Exercise Price (i.e. the product determined by multiplying the Net Issuance Warrant Shares by the Exercise Price) B = the aggregate FMV (i.e. the product determined by multiplying the FMV by the Net Issuance Warrant Shares. (G.1.2) Determination of Fair Market Value. For purposes of this Section G.1.2, "fair market value" of a share of Common Stock as of the Net Issuance Exercise Date shall mean: (i) if the Net Issuance Right is exercised in connection with and contingent upon a Public Offering, and if the Company's registration Statement relating to such Public Offering has been declared effective by the SEC, then the initial "Price to Public" specified in the final Prospectus with respect to such offering. (ii) if the Net Issuance Right is not exercised in connection with and contingent upon a Public Offering, then as follows: 5 6 (a) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the last reported sale price or if no reported sale takes place, the average of the last reported sale prices for the last three (3) trading days prior to the Net Issuance Date; (b) If traded on the Nasdaq National Market or the Nasdaq Small Cap Market, the fair market value of the Common Stock shall be deemed to be the average of the last reported sale price of the common Stock on such Market over the last three (3) trading days prior to the Net Issuance Exercise Date; (c) If traded over-the-counter other than on the Nasdaq National market or the Nasdaq SmallCap Market, the fair market value of the Common Stock shall be deemed to be the average of the midpoint between the closing bid and ask prices of the Common Stock over the 3-day trading period prior to the Net Issuance Exercise Date; and (d) If there is no public market for the Common Stock, then the fair market value shall be determined by mutual agreement of the Warrantholder and the Company, and if the Warrantholder and the company are unable to so agree, at the Company's sole expense, by an investment banker of national reputation selected by the Company and reasonably acceptable to the Warrantholder. (8.) Piggyback Registration. If, at any time commencing one year from the effective date of the registration statement and expiring four (4) years thereafter, the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Act") (other than in connection with a merger or pursuant to Form S-8, S-4 or other comparable registration statement) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Holders and to all other Holders of the Warrants and/or the Warrant Securities of its intention to do so. If the Holder or other Holders of the Warrants and/or Warrant Securities notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford each of the Underwriter and such Holders of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement. In the event any underwriter underwriting the sale of securities registered by such registration statement shall limit the number of securities includable in such registration by shareholders of the Company, the number of such securities shall be allocated pro rata among the holders of Warrants and the holders of other securities entitled to piggyback registration rights. Notwithstanding the provisions of this Section, the Company shall have the right at any time after it shall have given written notice pursuant to this Section (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. (9.) Demand Registration. (a) At any time commencing one year from the effective date of the registration statement and expiring four (4) years thereafter, the Holders of the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Warrants) shall have the right (which right is in addition to the registration rights under Section (i) hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Underwriter and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant Securities for nine (9) consecutive months by such Holders and any other holders of the Warrants and/or Warrant Securities who notify the Company within ten (10) days after receiving notice from the Company of such request. (b) The Company covenants and agrees to give written notice of any registration request under this Section (i) by any Holder or Holders to all other registered Holders of the Warrants and the Warrant Securities within ten (10) days from the date of the receipt of any such registration request. (c) In addition to the registration rights under this Section (9) at any time commencing one year after the effective date of the registration statement and expiring four (4) years thereafter, the Holders of Representative's 6 7 Warrants and/or Warrant Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for nine (9) consecutive months by such Holders of its Warrant Securities; provided, however, that the provisions of Section (9)(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. (10.) Covenants of the Company With Respect to Registration. In connection with any registration under Section (8) or (9) hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within thirty (30) days of receipt of any demand therefor, shall use its best efforts to have any registration statement declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections (h), (i) and (j) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. If the Company shall fail to comply with the provisions of Section (10)(a), the Company shall, in addition to any other equitable or other relief available to the Holder(s), extend the Exercise Period by such number of days as shall equal the delay caused by the Company's failure. (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from and against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 7 of the Underwriting Agreement relating to the offering. (e) The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company. (f) The Holder(s) may exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in any registration statement filed pursuant to Section (9) hereof, or permit any other registration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section (9) hereof, other than a 7 8 secondary offering of equity securities of the Company, without the prior written consent of the Holders of the Warrants and Warrant Securities representing a Majority of such securities (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (x) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (y) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (j) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriters, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD") or an Exchange. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (k) The Company shall enter into an underwriting agreement with the managing underwriters, which may be the Underwriter. Such agreement shall be satisfactory in form and substance to the Company, and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter; provided however, that no Holder shall be required to make any representations, warranties or covenants or grant any indemnity to which it shall object in any such underwriting agreement. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (l) For purposes of this Agreement, the term "Majority" in reference to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty (50%) of the then outstanding Warrants and Warrant Securities that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith or (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 8 9 (11.) Buy-Out of Registration Demand. In lieu of carrying out its obligations to effect a Piggyback Registration or Demand Registration of any registrable securities pursuant to the Section, the Company may carry out such obligation by offering to purchase and purchasing such Registrable Securities requested to be registered in an amount in cash equal to the difference between (a) 95% of the last sale price of the Common Stock on the day the request for registration is made and (b) the Exercise Price in effect on such day; the purchase transaction closing within three (3) business days; provided however, that the Holder or Holders may decline such request rather than accept such offer by the Company. (12.) Conditions of Company's Obligations. The Company's obligation under Section 10 hereof shall be conditioned as to each such public offering, upon a timely receipt by the Company in writing of: (a) Information as to the terms of such public offering furnished by or on behalf of the Holders making a public distribution of their Warrant Securities; (13.) Continuing Effect of Agreement. The Company's agreements with respect to the Warrant Securities in this Warrant will continue in effect regardless of the exercise or surrender of this Warrant. (14.) Notices. Any notices or certificates by the Company to the Holder and by the Holder to the Company shall be deemed delivered if in writing and delivered personally or sent by certified mail, to the Holder, addressed to him or sent to Mercer Partners, Inc. 2425 Post Road, Suite 205, Southport, CT 06490, or, if the Holder has designated, by notice in writing to the Company, any other address, to such other address, and, if to the Company, addressed to Gregory Spak, President, American Eagle Motorcycle Company Inc., 2350 technology Parkway, Hollister, CA 95023. The Company may change its address by written notice to Mercer Partners, Inc. (15.) Limited Transferability. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the effective date of the Registration Statement except to underwriters of the Offering referred to in the Underwriting Agreement or to individuals who are either partners or officers of such an underwriter or by will or by operation of law and if transfer occurs after one year, the warrant must be exercised immediately upon transfer or it shall lapse. The Warrant may be divided or combined, upon request to the Company by the Warrant holder, into a certificate or certificates evidencing the same aggregate number of Warrants. The Warrant may not be offered, sold, transferred, pledged or hypothecated in the absence of any effective registration statement as to such Warrant filed under the Act, or an exemption from the requirement of such registration, and compliance with the applicable federal and state securities laws. The Company may require an opinion of counsel satisfactory to the Company that such registration is not required and that such laws are complied with. The Company may treat the registered holder of this Warrant as he or it appears on the Company's book at any time as the Holder for all purposes. The Company shall permit the Holder or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (16.) Transfer to Comply With the Securities Act of 1933. The Company may cause the following legend, or one similar thereto, to be set forth on the Warrants and on each certificate representing Warrant Securities, or any other security issued or issuable upon exercise of this Warrant not theretofore distributed to the public or sold to underwriters for distribution to the public pursuant to Sections (8) or (9) hereof; unless counsel satisfactory to the Company is of the opinion as to any such certificate that such legend, or one similar thereto, is unnecessary: "The warrants represented by this certificate are restricted securities and may not be offered for sale, sold or otherwise transferred unless an opinion of counsel satisfactory to the Company is obtained stating that such offer, sale or transfer is in compliance wrath state and federal securities law. (17.) Applicable Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to conflict of law principles. 9 10 (18.) Assignability. This Warrant may not be amended except in a writing signed by each Holder and the Company. (19.) Severability. If any provisions of this Warrant shall be held to be invalid or unenforceable, such invalidity or enforceability shall not affect any other provision of this Warrant. (20.) Survival of Indemnification Provisions. The indemnification provisions of this Warrant shall survive until , 2008 American Eagle Motorcycle Company Inc. By ---------------------------------- Gregory Spak, President Date: --------------------- Attest: - ---------------------------- , Secretary 10 11 PURCHASE FORM Dated 20 --------- ----- The undersigned hereby irrevocably elects to exercise the Warrant to the extent of purchasing shares of ------- Common Stock hereby makes payment of $ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name ---------------------------------------------------------------------------- (please typewrite or print in block letters) Address ------------------------------------------------------------------------- Signature ----------------------------------------------------------------------- 11 12 ASSIGNMENT FORM FOR VALUE RECEIVED, ------------------------------------------------------------- hereby sells, assigns and transfers unto Name ---------------------------------------------------------------------------- (please typewrite or print in block letters) Address ------------------------------------------------------------------------- the right to purchase shares of Common Stock as represented by this Warrant to the extent of shares of Common Stock as to which such right is exercisable and does hereby irrevocably constitute and appoint, ---------------------------- attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Signature ---------------------------------------------------------------------- Dated: 20 ------- ------ 12 EX-1.5 6 c57376ex1-5.txt CONSULTING AGREEMENT 1 EXHIBIT 1.5 AMERICAN EAGLE MOTORCYCLE COMPANY CONSULTING AGREEMENT ,2000 Dear Mr. Spak: This will confirm the arrangements, terms and conditions, whereby Mercer Partners, Inc. (hereinafter referred to as "Consultant") has been retained by you to serve as financial consultant and advisor to American Eagle Motorcycle Company, (hereinafter referred to as the "Company"), on a nonexclusive basis for a period of 24 months commencing on the closing date of the public offering (the "Closing"). The undersigned hereby agree to the following terms and conditions: 1. Consulting Services. Consultant will render financial consulting and advice pertaining to the Company's business affairs as you may from time to time request. 2. Financing. Consultant will assist and represent you in obtaining both short and long-term financing whether from banks or the sale of the Company's debt or equity. 3. Wall Street Liaison. Consultant will when appropriate arrange meetings with individuals and financial institutions in the investment community such as security analysts, portfolio managers, and market makers and representatives of the Company. 4. Compensation. The Company agrees to pay the Consultant in the aggregate, the sum of seventy-two thousand ($72,000) Dollars at the rate of Three Thousand ($3,000) Dollars per month payable at the closing of the Offering. 5. Relationship. Nothing herein shall constitute Consultant as employee or agent of the Company except to such extent as might hereafter be agreed upon for a particular purpose. Except as expressly agreed, Consultants shall not have the authority to obligate or commit the Company in any manner whatsoever. 6. Assignment and Termination. This Agreement shall not be assignable by any party except to successors to all or substantially all of the business of either the Consultant or the Company nor may this Agreement be terminated by either party for any reason whatsoever without the prior written consent of the other party, which consent may not be arbitrarily withheld by the party whose consent is required. Very truly yours Mercer Partners, Inc. By: Title: Agreed and Accepted By: American Eagle Motorcycle Company By: (Vice)President EX-3.1 7 c57376ex3-1.txt ARTICLES OF INCORPORATION 1 Exhibit 3.1 ENDORSED - FILED In the office of the Secretary of State of the State of California AUG 11 1997 BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. Greg Spak and David Carson certify that: 1. They are the president and the secretary, respectively, of AMERICAN EAGLE MOTORCYCLE COMPANY, INC., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as follows: "ARTICLE I The name of this corporation is American Eagle Motorcycle Company, Inc. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE IV This corporation is authorized to issue two classes of shares, designated respectively "Common Stock" and "Preferred Stock". Ten million (10,000,000) shares of Common Stock may be issued. Five million (5,000,000) shares of Preferred Stock may be issued. The board of directors may divide the Preferred Stock into any number of series. The board shall fix the designation and number of shares of each such series. The board may determine and alter the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of the Preferred Stock. The board of directors (within the limits and restrictions of any resolution adopted by it, originally fixing the number of shares of any series) may increase or decrease the number of shares of any such series after the issue of shares of that series, but not below the number of then outstanding shares of such series. 2 ARTICLE V The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE VI The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the Corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code." 3. The foregoing amendment and the restatement of articles of incorporation has been duly approved by the board of directors. 4. The foregoing amendment and restatement of articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 4,054,600. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: April 21, 1997 /s/ GREG SPAK -------------------------------- Greg Spak, President /s/ DAVID CARSON -------------------------------- David Carson, Secretary 2 3 ENDORSED-FILED In the office of the Secretary of State of the State of California JUL 25 1997 BILL JONES, Secretary of State AMENDED AND RESTATED ARTICLES OF INCORPORATION OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. Greg Spak and David Carson certify that: 1. They are the president and the secretary, respectively, of AMERICAN EAGLE MOTORCYCLE COMPANY INC., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as follows: "ARTICLE I The name of this corporation is American Eagle Motorcycle Company, Inc. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE IV This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 10,000,000. ARTICLE V The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE VI The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw. 4 provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code." 3. The foregoing amendment and the restatement of articles of incorporation has been duly approved by the board of directors. 4. The foregoing amendment and restatement of articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 4,000,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: April 21, 1997 /s/ GREG SPAK -------------------------------- Greg Spak, President /s/ DAVID CARSON -------------------------------- David Carson, Secretary 2 5 ENDORSED FILED In the office of the Secretary of State of the State of California JAN - 8 1996 BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. ARTHUR B. JACOBS certifies that: 1. He is the sole incorporator of American Eagle Motorcycle Company, Inc. a California corporation. 2. He hereby adopts the following amendment of the articles of incorporation of said corporation; Article IV is amended to read as follows: "This corporation is authorized to issue only one class of stock; and the total numbers of shares which this corporation is authorized to issue is 5,000,000. All of the corporation's issued shares of all classes shall be held of record by not more than 35 persons. This corporation is a close corporation." 3. No directors were named in the original articles of incorporation of the above-named corporation and none have been elected. 4. The corporation has issued no shares. /s/ ARTHUR B. JACOBS ---------------------------------- Arthur B. Jacobs, Incorporator The undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of his own knowledge and that this declaration was executed on January 3, 1996 at, Monterey, California 93940. /s/ ARTHUR B. JACOBS ---------------------------------- Arthur B. Jacobs 6 ENDORSED FILED In the office of the Secretary of State of the State of California AUG 17 1995 BILL JONES BILL JONES, Secretary of State ARTICLES OF INCORPORATION OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. I The name of this corporation is AMERICAN EAGLE MOTORCYCLE COMPANY, INC. II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The name and address in the State of California of this corporation's initial agent for service of process is: Arthur B. Jacobs, 555 Abrego Street, Suite 200 Monterey, CA 93940 IV This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized is 50,000. All of the corporation's issued shares of all classes shall be held of record by not more than 35 persons. This corporation is a close corporation. Date: August 15, 1995 /s/ ARTHUR B. JACOBS ----------------------------- Arthur B. Jacobs EX-3.2 8 c57376ex3-2.txt BYLAWS OF REGISTRANT 1 Exhibit 3.2 BYLAWS OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. ARTICLE 1: OFFICES 1. PRINCIPAL OFFICE. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside California and the corporation has one or more business offices in California, the Board shall fix and designate a principal business office in California. 2. OTHER OFFICES. Branch or subordinate offices may be established at any time and at any place by the Board of Directors. ARTICLE 2: SHAREHOLDERS 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside of California designated by the board of directors and stated in the notice of the meeting. If no place is so specified, shareholders' meetings shall be held at the corporation's principal executive office. 2. ANNUAL MEETING. The annual meeting of shareholders shall be held on the date and at the time designated each year by the Board of Directors. At this meeting, directors shall be elected and any other business within the power of the shareholders may be transacted. 3. SPECIAL MEETINGS; HOW CALLED. A special meeting of the shareholders may be called at any time by any of the following: The board of directors, the chairman of the board, the president, any vice president, or one or more shareholders holding shares that in the aggregate are entitled to cast no less than 10 percent of the votes at that meeting. For special meetings called by anyone other than the board of directors, the person or persons calling the meeting shall make a request in writing to the chairman of the board, the president, vice president, or secretary, specifying a time and date for the proposed meeting (which is not less than 35 nor more than 60 days after receipt of the request) and the general nature of the business to be transacted. Within 20 days after receipt, the officer receiving the request shall cause notice to be given to the shareholders entitled to vote at the meeting. The notice shall state that a meeting will be held at the time requested by the person(s) calling the meeting, and shall state the general nature of the business proposed to be transacted. If notice if not given within 20 days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing in this paragraph shall limit, 2 fix, or affect the time or notice requirements for shareholder meetings called by the board of directors. 4. NOTICE OF MEETINGS; TIME AND CONTENTS. Notice of meetings of shareholders shall be sent or otherwise given not less than 10 nor more than 60 days before the meeting date. The notice shall specify the place, date, and hour of the meeting. It shall also state (a) for special meetings, the general nature of the proposed business, or (b) for annual meetings, those matters which the board of directors at the time of giving the notice intends to present for action by the shareholders. If directors are to be elected, the notice shall include the names of all nominees and persons whom the board intends to present for election, as of the date of the notice. The notice shall also state the general nature of any proposed action at the meeting to approve: (a) A transaction in which a director has a financial interest, within the meaning of Section 310 of the California Corporations Code; (b) An amendment of the Articles of Incorporation under Section 902 of that Code: (c) A reorganization under Section 1201 of that Code: (d) A voluntary dissolution of the corporation under Section 1900 of that Code; or (e) A distribution in dissolution that requires approval of the outstanding shares under Section 2007 of that Code. The manner of giving notice and the determination of shareholders entitled to receive notice shall be in accordance with these bylaws. 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any shareholders' meeting shall be given either (a) personally, or (b) by first-class mail or by telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address appearing on the corporation's books or supplied by the shareholder for purposes of notice. If the corporation has no such address for a shareholder, notice shall be either (a) sent by first-class mail addressed to the shareholder at the corporation's principal executive office, or (b) published at least once in a newspaper of general circulation in the county where the corporation's principal executive office is located. Notice is deemed to have been given at the time it was delivered personally, deposited in the mail, or sent by other means of written communication. If any notice or report mailed to a shareholder at the shareholder's address (as specified in the preceding paragraph) is returned marked "unable to deliver" at that address, subsequent notices or reports shall be deemed to have been duly given with further 2 3 mailing if the corporation holds the document available for the shareholder on written demand at its principal executive office for one year from the date on which the notice or report was sent to the other shareholders. An affidavit, certificate, or declaration of mailing (or other authorized means of delivery) of any notice of share holders' meeting, report, or other document sent to shareholders shall be executed by the corporate secretary, assistant secretary, or transfer agent, and filed in the corporation's minute book. 6. ADJOURNED MEETINGS; NOTICE. Shareholders' meetings (either annual or special) may be adjourned from time to time by a vote of the majority of the shareholders represented at that meeting in person or by proxy, whether or not a quorum is present; however, in the absence of a quorum, no other business may be transacted, except as specifically authorized in these bylaws. If a meeting is adjourned to another time or place, new notice is not required if the new time and place were announced at the original meeting, unless (a) the board sets a new record date for this purpose, or (b) the adjournment is for more than 45 days from the original meeting date, in which case the board must set a new record date. If a new record date is set, new notice shall be given to the shareholders of record as of that date, in the same manner as other notices of meetings. At an adjourned meeting, the corporation may transact any business that would be proper at the original meeting. 7. WAIVER OF NOTICE OR CONSENT BY ABSENTEES. The transactions of any shareholders' meeting, either annual or special, however called and noticed and wherever held, shall be as valid as though they were had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if each person entitled to vote but not present at the meeting signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes. Shareholders' signatures may be obtained either before or after the meeting. The waiver of notice or consent need not specify either the intended business or the purpose of the meeting, except that if action is taken or proposed to be taken regarding any of the matters specified in Section 601(f) of the California Corporations Code (and listed above in the paragraph on contents of notices of shareholder meetings), the general nature of the action or proposed action must be stated in the waiver of notice or consent. All written waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice is also waived by a shareholder's attendance at the meeting, unless the shareholder at the beginning of the meeting objects to the transaction of any business on the ground that the meeting was not lawfully called or convened. Attendance and failure to object to the validity of the meeting, however, does not constitute a waiver of any right to object expressly, at a meeting, to consideration of matters required by law to be included in the notice of the meeting which were not so included. 3 4 8. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action that could be taken at an annual or special meeting of shareholders, except for the election of directors (see following paragraph), may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having at least the minimum number of votes necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voting. Directors may be elected without a meeting only by the unanimous written consent of all shares entitled to vote for the election of directors, except that vacancies the board is entitled to fill (vacancies other than those caused by removal of a director) may be filled by the written consent of a majority of the outstanding shares entitled to vote. All written consents shall be filed with the secretary of the corporation and maintained in the corporate records. Anyone who has given a written consent may revoke it by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. Unless the consents of all shareholders entitled to vote have been solicited in writing, the secretary shall give prompt notice of any corporate action approved by the share holders without a meeting by less than unanimous consent, to those shareholders entitled to vote who have not consented in writing. As to approvals required by California Corporations Code Section 310 (transactions in which a director has a financial interest), Section 317 (indemnification of corporate agents), Section 1201 (corporation reorganization), or Section 2007 (certain distributions on dissolution), notice of the approval shall be given at least ten days before the consummation of any action authorized by the approval. Notice shall be given in the manner specified in these bylaws for notice of shareholders' meetings. 9. RECORD DATE FOR SHAREHOLDER NOTICE AND VOTING. (a) For purposes of determining the shareholders entitled to receive notice of and vote at a shareholders' meeting or give written consent to corporate action without a meeting, the board may fix in advance a record date that is not more than 60 days nor less than 10 days before the date of any such meeting, or not more than 60 days before any such action without a meeting. (b) If no record date has been fixed: (i) The record date for determining share holders entitled to receive notice of and vote at a shareholders' meeting shall be the business day next preceding the day on which notice is given, or if notice is waived as provided in these bylaws, the business day next preceding the day on which the meeting is held; (ii) The record date for determining share holders entitled to give written consent to corporate action without a meeting shall be the day on which the 4 5 action to be approved was taken by the board, or, if the board has not yet acted, the day on which the first written consent is given; and (iii) The record date for any other purpose shall be as set forth in the section of these bylaws regarding record date for purposes other than notice and voting. (c) A determination of shareholders of record entitled to receive notice of and vote at a shareholders' meeting shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned meeting. However, the board shall fix a new record date if the adjournment is to a date more than 45 days after the date set for the original meeting. (d) Except as otherwise required by law, only shareholders of record on the corporation's books at the close of business on the record date shall be entitled to any of the notice and voting rights listed in subsection (a) of this section, notwithstanding any transfer of shares on the corporation's books after the record date. 10. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum was initially present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum; however, any action taken (other than adjournment) must be approved by at least a majority of the shares required to constitute a quorum. 11. VOTING. The corporation shall determine the shareholders entitled to vote at any shareholders' meeting in accordance with bylaw provisions for record date, subject to Sections 702 and 704 of the California Corporations Code (concerning the voting of shares held by a fiduciary, a corporation, or joint owners). Except as otherwise provided by law or as otherwise provided in the Articles of Incorporation, each outstanding share shall be entitled to one vote on each matter submitted to a vote of the shareholders. The shareholders may vote by voice vote or by ballot, except that if any shareholder so demands before the voting begins, any election for directors must be by ballot. On any matter other than the election of directors, a shareholder may vote part of his or her shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal. If a shareholder does not specify the number of shares being voted, it will be conclusively presumed that the shareholder's vote covers all shares which that shareholder is entitled to vote. If a quorum is present (or if a quorum had been present earlier at the meeting but some shareholders have withdrawn), the affirmative vote of a majority of the shares represented and voting, provided such affirmative vote also constitutes a majority of the number of shares 5 6 required for a quorum, shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by statute or by the Articles of Incorporation. 12. CUMULATIVE VOTING. Cumulative voting for the election of directors is permitted if one or more shareholders present at the meeting give notice, before the voting begins, of their intention to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which that shareholder would normally be entitled to cast). If any shareholder has given such notice, and if the candidates' names have been placed in nomination, then all shareholders entitled to vote may cumulate their votes, giving any nominated candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled, or distributing the cumulative number of votes among any or all of the candidates. The elected directors shall be those candidates (up to the number of directorships open for election) receiving the most votes. 13. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy that does not state that it is irrevocable shall continue in full force and effect unless (a) it is revoked by the person who executed the proxy, either by a writing delivered to the corporation before the proxy has been voted, or by attendance at the meeting; or (b) the corporation receives written notice of the shareholder's death or incapacity before the vote pursuant to that proxy has been counted; provided, however, that no proxy shall be valid after the expiration of 11 months from the date of the proxy unless the proxy itself provides otherwise. Proxies stating on their face that they are irrevocable shall be governed by Sections 705(e) and 705(f) of the California Corporations Code. 14. VOTING TRUSTS. If any shareholders file a voting trust agreement with the corporation, the corporation shall take notice of its terms and trustee limitations. 15. ELECTION INSPECTORS. Before any shareholders' meeting, the board of directors may appoint any persons other than nominees for the office to act as election inspectors. If no election inspectors have been so appointed, the chairman of the meeting may, and on the request of any shareholder or share holder's proxy shall, appoint election inspectors at the meeting. The number of inspectors shall be either 1 or 3. If inspectors are appointed at the meeting on the request of one or more shareholders or their proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether 1 or 3 inspectors are to be appointed. If any inspector fails to appear or fails or 6 7 refuses to act, the chairman of the meeting may, and on the request of any shareholder or shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots, or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE 3: DIRECTORS 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these bylaws relating to actions requiring approval by shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the board of directors shall have the power to: (a) Select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the Articles of Incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service; (b) Change the principal executive office or the principal business office in the State of California from one location to another; qualify the corporation to do business in any other state, territory, dependency, or country; conduct business within or outside the State of California; and designate any place within or outside the State of California for the holding of any shareholders' meeting; (c) Adopt, make and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates; (d) Authorize the issuance of shares of corporate stock on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received; and (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities. 7 8 2. NUMBER OF DIRECTORS. The authorized number of directors shall be as set forth below. This number can be changed by an amendment to the Articles of Incorporation or an amendment to this bylaw adopted by the vote or written consent of a majority of the outstanding shares entitled to vote. However, if the number of directors is five or more, an amendment that would reduce the number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting to an action by written consent are equal to more than one sixth (16 2/3 percent) of the outstanding shares entitled to vote. Number of Directors: Five(5) 3. ELECTION AND TERM OF DIRECTORS. Directors shall be elected at each annual shareholders' meeting, to hold office until the next annual meeting. Election of directors by written consent without a meeting requires the unanimous written consent of the outstanding shares entitled to vote. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. No reduction of the authorized number of directors shall have the effect of removing any director before his or her term of office expires 4. VACANCIES. A vacancy in the board of directors shall be deemed to exist (a) if a director dies, resigns, or is removed by the shareholders or an appropriate court, as provided in Section 303 or Section 304 of the California Corporations Code; (b) if the board of directors declares vacant the office of a director who has been convicted of a felony or declared of unsound mind by an order of court; (c) if the authorized number of directors is increased; or (d) if at a shareholders' meeting the shareholders fail to elect the full authorized number of directors. Vacancies (except for those caused by a director's removal) may be filled by a majority of the remaining directors, whether or not they constitute a quorum, or by a sole remaining director. Vacancies on the board caused by the removal of a director (except for vacancies created when the board declares the office of a director vacant as provided in clause (b) of the first paragraph of this section) may be filled only by the shareholders, either by majority vote of the shares represented and voting at a meeting at which a quorum is present, or by the unanimous written consent of all shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later effective date. If the resignation is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. The shareholders may elect a director at any time to fill a vacancy not filled by the board of directors. 8 9 The term of office of a director elected to fill a vacancy shall run until the next annual shareholders' meeting, and the director shall hold office until a successor is elected and qualified. 5. PLACE OF MEETINGS. Regular meetings of the board of directors may be held at any place within or outside the State of California as designated from time to time by the board. In the absence of a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California designated in the notice of the meeting, or if the notice does not state a place, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, provided that all directors participating can hear one another. 6. ANNUAL DIRECTORS' MEETING. Immediately after each annual shareholders' meeting, the board of directors shall hold a regular meeting at the same place or at any other place designated by the board, to elect officers and transact other necessary business as desired. Notice of this meeting shall not be required unless some place other than the place of the annual shareholders' meeting has been designated. 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at times to be fixed by the board of directors from time to time. Such regular meetings may be held without notice. 8. SPECIAL MEETINGS. Special meetings of the board of directors may be called for any purpose or purposes at any time by the chairman of the board, the president, any vice president, the secretary, or any two directors. Special meetings shall be held on 4 days' notice by mail or 48 hours' notice delivered personally or by telephone or telegraph. Oral notice given personally or by telephone may be transmitted either to the director or to a person at the director's office who can reasonably be expected to communicate it promptly to the director. Written notice, if used, shall be addressed to each director at his or her address shown on the corporate records. The notice need not specify the purpose of the meeting, nor need it specify the place if the meeting is to be held at the principal executive office of the corporation. 9. WAIVER OF NOTICE. Notice of a meeting, if other wise required, need not be given to any director who (a) either before or after the meeting signs a waiver of notice or a consent to holding the meeting without being given notice, (b) signs an approval of the minutes of the meeting, or (c) attends the meeting without protesting the lack of notice before or at the beginning of the meeting. Waivers of notice or consents need not specify the purpose of the meeting. All such waivers, consents, and approvals of the minutes, if written, shall be filed with the corporate records or made a part of the minutes of the meeting. 9 10 10. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except for adjournment. Except as otherwise required by California Corporations Code Section 310 (approval of contracts or transactions in which a director has a material financial interest), Section 311 (appointment of committees), and Section 317(e) (indemnification of directors), every act done or decision made by a majority of the directors present at a meeting duly held at which a quorum is present shall be deemed the act of the board of directors, unless a different requirement is imposed by the Articles of Incorporation. A meeting at which a quorum was initially present may continue to transact business despite the withdrawal of directors, if the action taken is approved by at least a majority of the quorum required for that meeting. 11. ADJOURNMENT TO ANOTHER TIME OR PLACE. Whether or not a quorum is present, a majority of the directors present may adjourn any meeting to another time and place. 12. NOTICE OF ADJOURNED MEETING. Notice of the time and place of resuming an adjourned meeting need not be given if the adjournment is for 24 hours or less. If the adjournment is for more than 24 hours, notice of the new time and place shall be given, before the time set for resuming the meeting, to any directors who were not present at the time of adjournment, but need not be given to directors who were present at the time of adjournment. 13. ACTION WITHOUT A MEETING BY WRITTEN CONSENT. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board individually or collectively consent in writing to that action. Any action by written consent shall have the same effect as a unanimous vote of the board of directors. All such written consents shall be filed with the minutes of the proceedings of the board of directors. 14. COMPENSATION OF DIRECTORS. Directors and members of committees of the board may be compensated for their services, and shall be reimbursed for expenses, as fixed or determined by resolution of the board of directors. This section shall not preclude any director from serving the corporation as an officer, agent, employee, or in any other capacity, and receiving compensation for those services. 15. REIMBURSEMENT OF NONDEDUCTIBLE COMPENSATION. If all or part of the compensation, including expenses, paid by the corporation to a director, officer, employee, or agent is finally determined not to be allowable to the corporation as a federal or state income tax deduction, the director, officer, employee, or agent to whom the payment was made shall repay to the corporation the amount disallowed. The board of directors shall enforce repayment of each such amount disallowed by the taxing authorities. 10 11 ARTICLE 4: COMMITTEES 1. EXECUTIVE AND OTHER COMMITTEES OF THE BOARD. The board of directors, by resolution adopted by a majority of the authorized number of directors, may create one or more committees with the authority of the board ("board committees" or "committees of the board"), including an executive committee. Each board committee shall consist of two or more directors, and may have one or more alternate members, also directors. Appointment of members and alternate members requires the affirmative vote of a majority of the authorized number of directors. Committees of the board, to the extent provided in the board resolution establishing the committee, may be granted any or all of the powers and authority of the board except for the following: (a) Approving any action for which the California Corporations Code also requires the approval of the shareholders or of the outstanding shares; (b) Filling vacancies on the board of directors or any committee of the board; (c) Fixing directors' compensation for serving on the board or a committee of the board; (d) Adopting, amending, or repealing bylaws; (e) Amending or repealing any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) Making distributions to shareholders, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) Appointing other committees of the board or their members. 2. MEETINGS AND ACTIONS OF BOARD COMMITTEES. Meetings and actions of committees of the board shall be governed by the bylaw provisions applicable to meetings and actions of the board of directors as to place of meetings, regular meetings, special meetings, waiver of notice, quorum, adjournment, notice of adjournment, and action by written consent without a meeting, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that (a) the time of regular committee meetings may be determined either by resolution of the board of directors or by resolution by the committee; (b) special committee meetings may also be called by resolution of the board of directors; (c) notice of special committee meetings shall also be given to all alternate members; and (d) alternate members shall have the right to attend all meetings of the committee. The board may adopt rules, not inconsistent with the bylaws, for the governance of committees of the board. 11 12 3. NON-BOARD COMMITTEES. One or more committees without the power and authority of the board ("non-board" committees) may be created by board resolution, for investigative and other appropriate purposes. Membership on non-board committees is not limited to directors. To bind the corporation, actions of non-board committees must be ratified by the board of directors. ARTICLE 5: OFFICERS 1. OFFICERS; ELECTION. The corporation shall have a chief executive officer, a secretary, and a chief financial officer. There may also be other officers as specified in the bylaws or designated by the board. Any number of offices may be held by the same person. The officers of the corporation (except for subordinate officers appointed in accordance with the provisions below) shall be elected annually by the board of directors. All officers shall serve at the pleasure of the board. 2. CHIEF EXECUTIVE OFFICER. Except to the extent that the bylaws or the board of directors assign specific powers and duties to the chairman of the board, the president shall serve as general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the corporation's business and its officers, with all the general powers and duties of management usually vested in a corporation's chief executive officer. The president shall preside at all shareholders' meetings, and shall exercise and perform such other powers and duties as prescribed by the bylaws or by the board of directors. The president shall also preside at board meetings if there is no chairman of the board or if the chairman is absent. 3. SECRETARY. The secretary shall have the following duties: (a) MINUTES. The secretary shall be present at and take the minutes of all meetings of the shareholders, the board of directors, and committees of the board. If the secretary is unable to be present, the secretary or the presiding officer of the meeting shall designate another person to take the minutes of the meeting. The secretary shall keep, or cause to be kept, at the principal executive office or such other place as designated by the board of directors, a book of minutes of all meetings and actions of the shareholders, the board of directors, and committees of the board. The minutes of each meeting shall state the following: The time and place of the meeting; whether it was regular or special; if special, how it was called or authorized; the notice given or waivers or consents obtained; the names of directors present at board or committee meetings; the number of shares present or represented at shareholders' meetings, and an accurate account of the proceedings. (b) RECORD OF SHAREHOLDERS. The secretary shall keep or cause to be kept, at the principal executive office or at the office of the transfer agent or registrar, a record or duplicate record of shareholders. This record shall show the name of all 12 13 shareholders and their addresses, the number and classes of shares held by each, the number and date of share certificates issued to each shareholder, and the number and date of cancellation of any certificates surrendered for cancellation. (c) NOTICE OF MEETINGS. The secretary shall give notice, or cause notice to be given, of all shareholders' meetings, board meetings, and committee meetings for which notice is required by statute or by the bylaws. If the secretary or other person authorized by the secretary to give notice fails to act, notice of any meeting may be given by any other officer of the corporation. The secretary shall maintain records of the mailing or other delivery of notices and documents to shareholders or directors, as prescribed by the bylaws or by the board of directors. (d) OTHER DUTIES. The secretary shall keep the seal of the corporation, if any, in safe custody. The secretary shall have such other powers and perform such other duties as prescribed by the Board of Directors or by the Bylaws. 4. CHIEF FINANCIAL OFFICER. The chief financial officer, who may also be referred to as the treasurer, shall keep or cause to be kept adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall (1) deposit corporate funds and other valuables in the corporation's name and to its credit with depositories designated by the board; (2) disburse corporate funds as authorized by the board; (3) whenever requested by the board or the chief executive officer, render a statement of the corporation's financial condition and an account of all transactions he or she has conducted as chief financial officer; and (4) exercise such other powers and perform such other duties as prescribed by the bylaws or by the board of directors. The chief financial officer shall be deemed the treasurer for any purpose requiring action by the corporation's treasurer. 5. VICE PRESIDENTS. There may be one or more vice presidents, as determined by the board. In the absence or disability of the president, the president's duties and responsibilities shall be carried out by the highest-ranking available vice president, or if there are two or more unranked vice presidents, by a vice president designated by the board of directors. When so acting, a vice president shall have all the powers of and be subject to all the restrictions on the president. Vice presidents shall have such other powers and perform such other duties as prescribed by the bylaws or assigned from time to time by the board of directors or the chief executive officer. 6. SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the chief executive officer to appoint, subordinate officers as required by the 13 14 corporation's business, whose duties shall be as provided in the bylaws or as determined from time to time by the board of directors or the chief executive officer. 7. REMOVAL AND RESIGNATION OF OFFICERS. Any officer chosen by the board of directors may be removed by the board at any time, with or without cause or notice. Subordinate officers appointed by persons other than the board may be removed at any time, with or without cause or notice, by the board or by the person by whom appointed. A removed officer shall have no claim against the corporation or individual officers or board members arising from such removal (other than any rights he or she may have to monetary compensation or damages under an employment contract). Any officer may resign at any time by giving the corporation written notice. Unless otherwise specified in the notice, resignations shall take effect on the date the notice is received, and acceptance of the resignation is not necessary to make it effective. An officer's resignation or its acceptance by the corporation shall not prejudice any rights the corporation may have to monetary damages under an employment contract. 8. VACANCIES IN OFFICES. Vacancies in offices resulting from an officer's death, resignation, removal, disqualification, or any other cause shall be filled by the board or by the person, if any, authorized by the bylaws or the board to make an appointment to that office. 9. COMPENSATION. Salaries of officers and other shareholders employed by the corporation shall be fixed from time to time by the board of directors or established under employment agreements approved by the board of directors. No officer shall be prevented from receiving this salary because he or she is also a director of the corporation. 10. REIMBURSEMENT OF NONDEDUCTIBLE COMPENSATION. If all or part of the compensation, including expenses, paid by the corporation to a director, officer, employee, or agent is finally determined not to be allowable to the corporation as a federal or state income tax deduction, the director, officer, employee, or agent to whom the payment was made shall repay to the corporation the amount disallowed. The board of directors shall enforce repayment of each such amount disallowed by the taxing authorities. ARTICLE 6: INDEMNIFICATION 1. INDEMNIFICATION OF AGENTS. The corporation, to the maximum extent permitted by the California General Corporation Law, shall have power to indemnify any of its agents against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding or potential proceeding arising out of the relationship, and to the maximum extent permitted by law, the corporation shall have power to advance the agent's reasonable defense expenses in any such proceeding. For the purposes of this section, "agent" means any person who is or was a director, officer, employee, or other agent of this corporation or its predecessor, and any person who is or was 14 15 serving as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, at the request of this corporation or its predecessor; "proceeding" means any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" include but are not limited to attorneys' fees and any expenses of establishing a right to indemnification under this section. ARTICLE 7: RECORDS AND REPORTS 1. SHAREHOLDER LISTS; INSPECTION BY SHAREHOLDERS. The corporation shall keep at its principal executive office or at the office of its transfer agent or registrar, as the board shall determine, a record of the names and addresses of all shareholders and the number and class of shares held by each. A shareholder or group of shareholders holding 5 percent or more of the outstanding voting shares of the corporation may (a) inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours, on 5 days' prior written demand on the corporation; and/or (b) obtain from the corporation's transfer agent, on written demand and tender of the transfer agent's usual charges for this service, a list of the names and addresses of shareholders entitled to vote for the election of directors and their shareholdings, as of the most recent date for which a record has been compiled or as of a specified date which is later than the date of demand. This list shall be made available within 5 days after demand or within 5 days after the specified later date as of which the list is to be compiled. The record of shareholders shall also be open to inspection during usual business hours, on the written demand of any shareholder or holder of a voting trust certificate, for a purpose reasonably related to the holder's interest in the corporation. Any inspection or copying under this section may be made in person or by the holder's agent or attorney. 2. MAINTENANCE OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside of California and the corporation has no principal business office in this state, the secretary shall, upon a shareholder's written request, furnish to that shareholder a copy of the bylaws as amended to date. 3. MINUTES AND ACCOUNTING RECORDS. The minutes of proceedings of shareholders, board of directors, and committees of the board, and the accounting books and records shall be kept at the principal executive office of the corporation, or at such other place or places as designated by the board of directors. The minutes shall be kept in 15 16 written form, and the accounting books and records shall be kept either in written form or in a form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection during usual business hours on the written demand of any shareholder or holder of a voting trust certificate, for a purpose reasonably related to the holder's interests in the corporation. The inspection may be made in person or by an agent or attorney, and includes the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary of the corporation. 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection may be made by the director in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents. 5. ANNUAL REPORT TO SHAREHOLDERS. Inasmuch as, and for as long as, there are less than 100 shareholders, the requirement of an annual report to shareholders referred to in Section 1501 of the California Corporations Code is expressly waived. However, nothing in this provision shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the shareholders, as the board considers appropriate. 6. FINANCIAL STATEMENTS. The corporation shall keep a copy of any annual financial statement, quarterly or other periodic income statement, and accompanying balance sheets on file in its principal executive office for 12 months; these documents shall be exhibited (or copies provided) to share holders at all reasonable times. If no annual report for the last fiscal year has been sent to shareholders, on written request of any shareholder made more than 120 days after the close of the fiscal year, the corporation shall deliver or mail to the shareholder, within 30 days after receipt of the request, a balance sheet as of the end of that fiscal year and an income statement and statement of changes in financial position for that fiscal year. A shareholder or shareholders holding 5 percent or more of the outstanding shares of any class of stock of the corporation may request in writing an income statement for the most recent three-month, six-month, or nine-month period (ending more than 30 days before the date of the request) of the current fiscal year, and a balance sheet as of the end of that period. If such documents are not already prepared, the chief financial officer shall cause them to be prepared and shall deliver them personally or by mail to the requesting shareholders within 30 days after the receipt of the request. A balance sheet, income statement, and statement of changes in financial position for the last fiscal year shall also be included, unless the corporation has sent the shareholders an annual report for the last fiscal year. Quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of independent accountants engaged by the corporation, 16 17 or a certificate by the authorized corporate officer stating that the financial statements were prepared without audit from the corporation's books and records. 7. ANNUAL INFORMATION STATEMENT. (a) Every year, during the calendar month in which the original Articles of Incorporation were filed with the California Secretary of State or during the preceding five calendar months, the corporation shall file a statement with the Secretary of State on the prescribed form, setting forth the authorized number of directors; the names and complete business or residence addresses of the chief executive officer, the secretary, and the chief financial officer; the street address of the corporation's principal executive office or principal business office in this state; a statement of the general type of business constituting the principal business activity of the corporation, and a designation of the corporation's agent for service of process, all in compliance with Section 1502 of the Corporations Code of California. (b) Notwithstanding the provisions of paragraph (a) of this section, if there has been no change in the information contained in the corporation's last annual statement on file in the Secretary of State's office, the corporation may, in lieu of filing the annual statement, advise the Secretary of State, on the appropriate form, that no changes in the required information have occurred during the applicable period. ARTICLE 8: GENERAL CORPORATE MATTERS 1. RECORD DATE FOR DIVIDENDS AND DISTRIBUTIONS. For purposes of determining the shareholders entitled to receive payment of dividends or other distributions or allotment of rights, or entitled to exercise any rights in respect of any other lawful action (other than voting at and receiving notice of shareholders' meetings and giving written consent of the shareholders without a meeting), the board of directors may fix in advance a record date not more than 60 nor less than 10 days before the date of the dividend payment, distribution, allotment, or other action. If a record date is so fixed, only shareholders of record at the close of business on that date shall be entitled to receive the dividend, distribution, or allotment of rights, or to exercise the other rights, as the case may be, notwithstanding any transfer of any shares on the corporate books after the record date, except as otherwise provided by statute. If the board of directors does not so fix a record date in advance, the record date for these purposes shall be at the close of business on the later of (a) the day on which the board of directors adopts the applicable resolution or (b) the 60th day before the date of the dividend payment, distribution, allotment of rights, or other action. 2. AUTHORIZED SIGNATORIES FOR CHECKS. All checks, drafts, or other orders for payment of money, notes, and other evidences of indebtedness issued in the name 17 18 of or payable to the corporation shall be signed or endorsed in the manner and by the persons authorized by the board of directors. 3. EXECUTING CONTRACTS AND INSTRUMENTS. The board of directors may authorize any of its officers or agents to enter into any contract or execute any instrument in the name of and on behalf of the corporation. This authority may be general or it may be confined to one or more specific matters. No officer, agent, employee, or other person purporting to act on behalf of the corporation shall have any power or authority to bind the corporation in any way, pledge its credit, or render it liable for any purpose in any amount, unless that person was acting with authority duly granted by the board of directors as provided in these bylaws, or unless an unauthorized act was later ratified by the corporation. 4. SHARE CERTIFICATES. One or more certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of the shareholder's shares are fully paid. All certificates shall certify the number of shares and the class or series of shares represented by the certificate. All certificates shall be signed in the name of the corporation by (a) one of the following: the chairman or vice chairman of the board of directors, the president, or any vice president; and (b) one of the following: the chief financial officer, any assistant treasurer, the secretary, or any assistant secretary. Any of the signatures on the certificate may be facsimile. If a party who has signed share certificates ceases to be an officer or other agent before the certificate is issued, the corporation may issue the certificate with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. The share certificates shall state, by way of appropriate legend, any restrictions on share ownership or transfer, and any other statements required by applicable federal or state securities regulations. 5. LOST CERTIFICATES. Except as provided in this section, no new certificates for shares shall be issued to replace old certificates unless the old certificates are surrendered to the corporation for cancellation at the same time. If share certificates or certificates for any other security have been lost, stolen, or destroyed, the board of directors may authorize the issuance of replacement certificates on terms and conditions as the board may require, which may include a requirement that the owner give the corporation a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it (including any expenses or liability) on account of the alleged loss, theft, or destruction of the old certificate or the issuance of the replacement certificate. 6. SHARES OF OTHER CORPORATIONS: HOW VOTED. Shares of other corporations standing in the name of this corporation shall be voted by the chief executive officer or a person designated by the chief executive officer. If neither of them is able to act, 18 19 the shares may be voted by a person designated by the board of directors. The authority to vote shares includes the authority to execute a proxy in the corporation's name for purposes of voting the shares. 7. REIMBURSEMENT OF NONDEDUCTIBLE COMPENSATION. If all or part of the compensation, including expenses, paid by the corporation to a director, officer, employee, or agent is finally determined not to be allowable to the corporation as a federal or state income tax deduction, the director, officer, employee, or agent to whom the payment was made shall repay to the corporation the amount disallowed. The board of directors shall enforce repayment of each such amount disallowed by the taxing authorities. 8. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in Sections 100 through 195 of the California Corporations Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes a corporation and a natural person. ARTICLE 9: AMENDMENTS 1. AMENDMENT OF ARTICLES OF INCORPORATION. Unless otherwise provided under California Corporations Code Sections 900 through 911, amendments to the Articles of Incorporation may be adopted if approved by the board and approved by a majority of the outstanding shares entitled to vote, either before or after approval by the board. An amendment to the Articles of Incorporation shall be effective as of the date that the appropriate certificate of amendment is filed with the Secretary of State 2. AMENDMENT OF BYLAWS. Except as otherwise required by law or by the Articles of Incorporation, these bylaws may be amended or repealed, and new bylaws may be adopted, by the board of directors or by a majority of the outstanding shares entitled to vote. 19 20 CERTIFICATE OF SECRETARY OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. a California corporation I, do hereby certify: 1. That I am the duly elected and acting secretary of the above named California corporation. 2. That the foregoing Bylaws, comprising nineteen (19) pages, constitute the bylaws of said corporation as duly adopted at a meeting of the Board of Directors thereof duly held on April 21 1997. IN WITNESS WHEREOF, I have hereunto subscribed by name and affixed the seal of said corporation, this 21st day of April, 1997. /s/ David Carson ----------------------------- David Carson, Secretary EX-10.1 9 c57376ex10-1.txt ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.1 ASSET PURCHASE AGREEMENT THIS AGREEMENT, made and entered into this effective date of July 31, 2000, by and between Angel Motorcycles, Inc., a Minnesota corporation (hereinafter "Seller") and American Eagle Motorcycle Company, Inc., a California corporation (hereinafter "Buyer"). WHEREAS, Seller has been engaged in the development of certain motorcycle technology and prototypes, including two distinct engine types, drivetrains, framework, and other significant motorcycle components in order to produce and sell a new cruiser class motorcycle; and Buyer is engaged in the business of commercially manufacturing and selling a line of "American Eagle" brand cruiser motorcycles from its Hollister CA facility; and FURTHER WHEREAS, Buyer desires to acquire and purchase substantially all of Seller's assets, and Seller desires to sell and transfer all of such assets to Buyer in a transaction which qualifies as a tax-free acquisition under Section 368(a)(1)(C) of the Internal Revenue Code, after which Seller intends to liquidate and distribute all its assets to its shareholders. NOW, THEREFORE, for and in consideration of the promises, representations, and warranties contained herein, the parties hereto agree as follows: 1. Assets To Be Acquired - Subject to the terms and provisions of this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Buyer on the Closing Date as defined herein, all of the assets of Seller related to its motorcycle development and technology since its inception, which constitutes substantially all of Seller's assets, including but not limited to the following: i. All intellectual property developed or owned by Seller including engine and drivetrain design and development, framework design and development, and design and development for any other motorcycle components such as brakes, shock systems, steering and wheels, exhaust systems, and use of materials, with all designs, drawings, illustrations, schematics or other documents evidencing such intellectual properties; ii. all physical components or prototypes of engines, drivetrains, frameworks and other motorcycle components or materials used incident to such development work of Seller since inception; iii. all bills of material or parts lists for engines or other motorcycle components of Seller, including lists of vendors supplying such components or manufacturing services to produce such components along with any prices submitted by such vendors to produce such components; iv. any and all molds, tooling or other equipment owned or produced by Seller incident to its motorcycle development since its inception; v. any and all assignable contract rights held by Seller relating to the various English vendors and contractors which have supplied goods and services to Seller incident to its motorcycle development; and vi. any and all inventories of motorcycle engines or components owned by Seller, and Buyer hereby agrees to purchase, acquire and accept from Seller, on the Closing Date and for the consideration stated herein, all of the foregoing assets. 2. Liabilities To Be Assumed By Buyer - Buyer also agrees to assume, as of the Closing Date hereof, the following specific liabilities: a. Any future royalty payments due to Melling Consultancy Design(MCD) the developer of Seller's engines, related to sales of motorcycles of Buyer using such engines or OEM sales of engines by Buyer; and b. The Notes, Debentures and other obligations of Seller in the aggregate amount of $683,500 and specifically set forth on Exhibit A hereto. 2 3. All negotiations and terms of this Agreement have been transacted by the parties hereto to constitute a tax-free reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code, and both parties hereto agree that there shall be no changes, modifications, or amendments of this Agreement which would conflict with this transaction qualifying as such a tax-free transaction. 4. Final Agreement - The parties hereto have conducted substantial negotiations and entered into considerable understandings, both written and oral, relating to the form and structure of this acquisition by Buyer. It is the express intent, purpose and understanding of both parties hereto that this Agreement is the final and complete agreement or contract between the parties hereto to consummate a business combination, and that this Agreement supersedes any and all prior understandings and agreements between the parties hereto, whether oral or written. None of the prior agreements or understandings of the parties hereto in regard to this transaction have been submitted to the Board of Directors of either party hereto, and accordingly were never consummated. Accordingly, both parties hereto specifically represent hereby that this Agreement will be submitted to their respective Boards of Directors and shareholders promptly for necessary approval as required by the respective laws of California and Minnesota. 5. Essential Condition Precedent - The consummation of the asset purchase pursuant to this Agreement is absolutely contingent upon the pending Initial Public Offering (IPO) of Buyer becoming effective with the Securities and Exchange Commission as a firm commitment underwriting. In the event such pending IPO for the sale of common stock of Buyer is not consummated, this Agreement shall be voidable by either party hereto. This condition precedent can only be waived by mutual written consent of both parties hereto. 6. Purchase Price and Payment Terms - In addition to the assumption by Buyer of liabilities specified in Paragraph 2 hereof, Buyer shall issue to Seller on the Closing Date hereof the following: i. A total of 1,167,900 shares of common stock of Buyer, and upon delivery of such common shares to Seller, all of them shall be fully paid and nonassessable. The parties hereto specifically agree that these common shares of Buyer issued under this Agreement shall constitute at least 33% of the outstanding capital stock of Buyer as of the Closing Date and excluding any common shares to be issued by Buyer incident to its pending IPO and any common shares to be issued incident to the exercise of outstanding stock options of Buyer or Warrants to be issued under the following subparagraph 6(ii) of this Agreement. ii. Warrants for the purchase of 223,600 shares of common stock of Buyer in the form of Exhibit B hereto. 7. Closing Date - The Closing Date of this Agreement shall be that date when such pending IPO of Buyer becomes effective with the Securities and Exchange Commission, it being the intention of both parties hereto that the closing of this Agreement shall be simultaneous with the effectiveness of such IPO. 8. Unless expressly provided in this Agreement, Buyer does not assume any responsibility whatsoever for payment or assumption of any liabilities or obligations of Seller which exist upon the closing of this Agreement, whether such liabilities are matured or contingent. 9. Due Diligence Investigations - Between the date of this Agreement and the Closing Date hereof, the parties hereto and their respective managements and professional representatives may make such investigations and reviews of each other and their respective businesses and records, affairs, financial positions and operations, and assets and liabilities, as each of the parties hereto deems necessary or desirable in furtherance of the terms of this Agreement, including having access to the premises and complete books and records of each other at all reasonable times; and the executive officers of each party hereto shall furnish to each other whatever financial and operational data and information with respect to each other as is reasonably requested by each party hereto. -2- 3 Neither party hereto nor their management, legal or other respective representatives shall disclose any private or confidential information on the other party which was obtained incident to the negotiations preceding this Agreement or their performing due diligence investigations hereunder, or that was obtained or discovered in any manner incident hereto and incident to any earlier agreements or understandings between the parties hereto. In the event this asset purchase fails to be consummated for any reason whatsoever, each party hereto shall return to the other party all documents, papers and any other written or graphic materials obtained by each of them incident to the negotiations leading to this Agreement or any due diligence investigations carried on by any party incident hereto. 10. Conduct of Business - Between the date of this Agreement and the Closing Date hereof, both parties hereto shall conduct their respective businesses and operations in a normal and customary manner in accordance with their existing policies and practices and shall to the best of their ability (i) preserve their respective business organizations and operations intact, (ii) not sell any assets other than in the ordinary course of business, (iii) not incur any material liabilities or obligations other than in the ordinary course or business or otherwise only with the consent of the other party hereto, (iv) not enter into any discussions or negotiations with third parties relating to a business combination or sale of assets outside the ordinary course of business without the consent of the other party, and (v) preserve all existing banking or other financial facilities for obtaining working capital for development or commercial operations. 11. Consummation of Transaction - Each of the corporate parties hereto, and their respective managements and executive officers, shall use their best efforts to cause all conditions to their respective obligations hereunder to close this Agreement, or any matters contemplated hereby to be satisfied prior to such closing, to be completed or satisfied or waived as promptly as possible, including but not limited to obtaining all consents, waivers, amendments, modifications, approvals, authorizations and meetings. 12. Submission of Agreement to Directors and Shareholders - Approval of this Agreement shall be obtained by the respective Boards of Directors of each party hereto as required by their respective Bylaws and the laws of their respective States of incorporation, either by Written Action or duly held meetings of directors, which respective Board of Director's approvals and resolutions shall provide for this Agreement to be submitted to their respective shareholders at duly held shareholders' meetings pursuant to the respective Bylaws and state law requirements pertaining to each party hereto, for the approval of such shareholders. 13. Delivery and Nature of Securities - On the Closing Date of this Agreement, Buyer shall deliver to Seller duly endorsed certificates representing common stock of Buyer required to be issued to Seller incident to this Agreement as necessary to effect the full issuance of common stock of Seller pursuant hereto, after which all of such common shares shall be fully paid and nonassessable. Common shares of Buyer to be issued to Seller incident hereto shall be "restricted securities" as defined under the Securities Act of 1933, meaning generally that such common shares have not been registered under any federal or state securities laws, and accordingly Seller will take such securities knowing and understanding such restricted status. Any future transfer or disposition of such common shares of Buyer must either be registered under such securities laws or exempt from such registration under all applicable laws. Any common shares of Buyer issued to the shareholders of Seller after the Closing Date hereof shall also have such restricted securities status after being issued to shareholders of Seller following the closing hereof. Share certificates issued by Buyer to Seller or Seller's shareholders also shall bear a standard restrictive legend as appropriate to clearly evidence their restricted nature. -3- 4 14. Dual Representations and Warranties of Parties - The parties hereto represent and warrant to each other the following: a) That the respective outstanding capital stock of each corporation hereto has been legally and validly issued and is fully paid and nonassessable, and none of such outstanding capital stock of either of the parties hereto has been issued in violation of any preemptive or similar corporate shareholder rights, or in violation of any relevant federal or state securities laws; b) That none of the outstanding capital stock of each respective party hereto is subject to any voting trust or other such restrictive covenant or agreement which would impair or prevent the consummation of this Agreement; c) That there are no warrants, stock options or other such rights including convertible debt obligations outstanding relating to both parties hereto which have not been disclosed in writing to the other party hereto, nor are there any such warrants, options or rights promised or contemplated by either party hereto unless already disclosed to the other party prior to the execution of this Agreement; d) Unless already disclosed to the other party hereto, as of the execution of this Agreement, no party hereto owns, directly or indirectly, any shares of capital stock or equity interest of any other corporation or unincorporated business entity or partnership or joint venture, nor has any obligations, direct or indirect, to purchase of subscribe for any such equity interest in a third party; nor any obligation to advance or loan money to any third party corporation, partnership, associate, affiliate, joint venturer, or other unincorporated entity; e) Each corporate party hereto is duly organized, validly existing and in good standing in its respective state of incorporation, and each has full power and authority to own and operate their property, assets and business and carry an all operations presently and formerly carried on by each of them; f) Each party hereto represents hereby that this Agreement is a valid and binding agreement on such party, and further that compliance with the terms and conditions of this Agreement by each respective party hereto will not result in (i) a breach or default under the Articles of Incorporation or Bylaws of each respective party hereto, (ii) a breach or violation under any lien, pledge, security interest or other encumbrance in respect to the assets or business to which each party hereto is subject, (iii) a breach or default of any term or provision of any lease, contract, note, mortgage or other obligation of each respective party hereto, or of any law, rule, regulation or ordinance, or governmental judgment or decree or license to which any party is subject, unless such breach is of a technical or minimal nature so as to not affect this transaction materially; g) Each respective party hereto is not subject to any pending litigation or administrative or governmental proceeding which has not been disclosed to the other party hereto incident to negotiating or entering into this Agreement; and no litigation, claims, assessments or proceedings have been threatened against each respective party hereto unless already disclosed to the other party hereto prior to the execution of this Agreement; h) The officer or officers executing this Agreement for each respective party hereto hold the corporate authority and power to execute this Agreement on behalf of their respective corporations hereto; i) All financial statements and schedules provided by each party hereto to the other party hereto incident to this Agreement or any prior negotiations or understandings or agreements between the parties hereto and regarding a business combination transaction, and any further financial statements to be provided by either party hereto in respect to future due diligence by either party hereto, have been, or will be, complete and accurate for the dates and periods indicated thereon and fairly present the financial condition and operations for the dates and periods covered thereon; and there are no material liabilities, either fixed or contingent, direct or indirect, of either party hereto which is not reflected in such financial statements or schedules or otherwise disclosed in writing to the other party hereto; -4- 5 j) that there have been no material financial changes in the position or operations of either party hereto since the time of the most current financial information provided by each party hereto to the other party, except for changes in the ordinary course of business or chances which have been otherwise disclosed to the other party incident hereto; k) that neither party hereto has any material governmental taxes or assessments due incident to its properties or business operations other than those already disclosed to the other party incident hereto in writing or on submitted financial statements prior to entering into this Agreement, provided that this representation is applicable to the date of execution of this Agreement. Each party hereto has paid any and all income, real estate or personal property or other taxes if any in respect to its business or properties, and neither party hereto is in material default in filing any tax returns, forms or reports which are required to have been filed with any governmental agency or body prior to the date of this Agreement; l) Each party hereto has good and marketable title to their respective assets, free and clear of all mortgages, liens or encumbrances except for those reflected on financial statements of the party submitted to the other party incident hereto; m) All corporation record books, minute books, financial records, contracts or other documents or material financial records of each party hereto shall be made available to the other party hereto prior to the closing of this Agreement; n) Each party hereto has complied with its respective state and federal laws, regulations and requirements concerning their respective incorporations and reporting obligations and past issuances and/or sales of capital stock or rights therein, and no contingent liability exists against either party hereto regarding such incorporations, reporting or issuances of sales of securities or rights therein; o) Neither corporate party hereto has any outstanding material debt other than what has been disclosed to the other party in financial statements or other written documents prior to entering into this Agreement; p) As of the date hereof, and as of the Closing Date of this Agreement, each corporate party hereto will have, to the best of their respective knowledge and belief, disclosed to each other all material events, conditions and facts affecting the respective businesses, properties and affairs or each party hereto; and neither party hereto has now, and will not as of Closing Date hereof, withheld knowledge of any such material events, conditions and facts which such party knows, or has reason to know, may materially adversely affect the business, worth or prospects of such party; and q) The record of capital stock issuances or any warrants or options or other rights therein, of each party hereto shall be provided to the other party hereto as part of the due diligence hereunder promptly after the execution of this Agreement, and as of the closing of this Agreement, and each such record shall reflect the record ownership of common stock and interests therein of each respective party hereto as of the Closing Date of this Agreement. Upon request of either party hereto, the other party shall also disclose any beneficial interests of such record shareholders of either party hereto; r) that if the shareholders of either corporate party hereto shall fail to approve this Agreement, each party hereto shall bear its own costs or damages resulting from such failure of this Agreement to be approved by shareholders; s) No representation or warranty in this Agreement by either party hereto to the other party hereto, or certificate or document furnished by each party to the other party representing material facts, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading as of the date thereof; t) that neither party hereto is in material default under any contracts to which each is a party with a third party, and that any obligations of either party hereto under such third party contracts shall be altered or breached by such party entering into this Agreement or consummating the closing hereof; -5- 6 u) that each party hereto holds all permits, licenses, registrations and authorizations needed to own and operate its respective assets and carry on its respective business, and is not in breach of any court order, statute, regulation or bylaw; v) that no broker or finder or similar agent has been involved in this transaction and no commissions or finders fees or similar compensation to a third party are payable to any third party relating to this transaction; w) that no shareholder or warrantholder of either party hereto holds any registration rights with regard to their capital stock or interests therein, nor do any of the shareholders or warrantholders or any others hold securities of either party hereto that are subject to voting rights with regard to such securities; and x) that no consent, approval or authorization of any governmental agency, person or authority is required by either party hereto in connection with the execution, delivery or performance of this Agreement by either party hereto. At the Closing of this Agreement, each party hereto shall deliver to the other party hereto a Certificate of its President confirming and stating that the foregoing representations and warranties are true and correct as of the Closing Date. 15. Mutual Covenants - Each party hereto respectively covenants and agrees that from the date hereof until the Closing Date of this Agreement, unless express written permission is obtained from the other party hereto, it shall: i) conduct its business and operations pursuant to current business plans and policies, and not outside the normal and ordinary course of business; ii) not make any material termination, breach or change of any contract, lease, license or other material commitment which would result in a material adverse effect on the business or assets of the party; iii) not declare any cash dividend or stock dividend, nor make any other distribution to shareholders of any kind by way of liquidation, partial distribution redemption or otherwise; iv) not make any issuance or grant of stock options, warrants, capital stock or convertible debt without the express consent of the other party; v) not pay any bonuses or salary increases or extraordinary compensation, through cash or otherwise, to any officers, directors, shareholders, or enter into any written binding employment contracts with any of them, unless with the express written consent of the other party; vi) not make any loan, advance or other material benefit with or to any officer, director, shareholder, affiliate or associate without the express written consent of the other party; vii) not make any purchase of real or material personal property outside the ordinary course of business without the written consent of the other party hereto; viii) not amend any bylaws, corporate articles, or make any changes in accounting or financial practices, other than as is contemplated by the terms of this Agreement; ix) not incur any debt of a material amount unless within the ordinary course of business or with the consent of the other party hereto; x) Each party hereto warrants and covenants hereby that any information or data supplied to the other party hereto from the date hereof until the Closing Date shall not contain any statement which, at the time and in the light of the circumstances under which it is offered or made, is false or misleading with respect to any material fact; and xi) the representations and warranties of each party hereto contained in this Agreement shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. -6- 7 16. Survival and Effect of Representations and Warranties - Prior to the Closing Date of this Agreement, neither party hereto shall take any action or enter into any transaction, and each party hereto shall exert its best efforts to prevent the occurrence of any event, which would result in any of the representations, warranties or covenants herein, or in any agreement, instrument or document delivered pursuant hereto, not to be true and correct, or not to be performed as contemplated, at and as of the time immediately after the occurrence of such transaction or event. The representations and warranties and covenants of each party hereto contained in this Agreement in the foregoing Sections 14 and 15 hereof only relate to the respective business, assets, operations, liabilities and financial condition and other affairs of each such party, and neither party hereto is making any representations, warranties or covenants in respect to the status, assets, liabilities, operations, business, financial condition or other affairs of the other party hereto. All representations and warranties by each party hereto in this Agreement shall survive the Closing Date hereof and the consummation of the transactions hereby for a period of one year after such Closing Date; provided, however, that no officer, director or shareholder of either party hereto shall be personally liable for any damages or expenses resulting from the inaccuracy or incompleteness of any such representation or warranty which is made by one party hereto in good faith to the other party hereto. 17. Closing Conditions and Duties of Parties - The obligations of each party hereto are subject to and conditioned upon satisfaction of the following prior to or at the Closing Date hereof, unless waived in writing by the other party: i) there shall exist no outstanding material breach of any of the representations, warranties or covenants herein by either party hereto, unless waived in writing by the other party hereto; ii) The pending IPO of Buyer shall be effective with the SEC; iii) Buyer shall have completed whatever amendments to its Articles of Incorporation or bylaws are necessary to have the status of a public company rather than a close corporation, including any increase in authorized capital stock needed to consummate this transaction; iv) All parties hereto shall have complied with and performed all actions and duties required by the terms of this Agreement to consummate this purchase of assets from Seller by Buyer; v) this Agreement shall have been approved by the directors and shareholders of each respective party hereto as required by their respective state's laws of incorporation and by their respective bylaws; and each party hereto shall deliver to the other party Certified Copies of Resolutions of meetings of directors and shareholders approving this transaction for each party hereto; vi) As of Closing Date, neither party hereto shall have any outstanding capital stock other than common shares; vii) there shall be no pending or impending action or proceeding seeking to enjoin or impair the consummation of this Agreement; viii) The common shares and warrants to be delivered by Buyer to Seller incident to this Agreement shall be issued and delivered to Seller on the Closing Date via that amount and number of Stock Certificates and Warrant Certificates necessary to effect fully the payment due by Buyer for the assets of Seller being purchased hereunder, and after such delivery to Seller, all of such common shares shall have been fully paid and nonassessable; ix) Seller shall deliver to Buyer such general warranty deed, bills of sale, endorsements, assignments, or other good and sufficient instruments of transfer and ownership, in form satisfactory to Buyer, as shall be effective to vest in the Buyer good and marketable title to all assets being sold hereunder; and -7- 8 simultaneous with the delivery of such documents of title, Seller shall also take all steps and actions necessary to place the Buyer into actual possession and control of all assets of Seller being sold hereunder; x) If required by either party hereto at Closing, the other party shall deliver to the requesting party a Certificate of President and Certificate of Incumbency (which may be on the same document) certifying that all representations and warranties herein made by such certifying party are true and correct in all material respects as of the Closing unless waived by the requesting party prior thereto, and further certifying and containing the current names and signatures of all officers and directors of the certifying party; xi) Each party hereto shall have also furnished the other party with whatever other instruments and documents are required or necessary to be delivered to complete the terms of this Agreement, or which were reasonably requested by the other party in furtherance of the intent and provisions of this Agreement. 18. Further Assurances - Each party hereto shall, without charge to the other party hereto, after the Closing Date, execute and deliver, or cause to be executed and delivered to each other, such further instruments, documents and conveyances, and shall take such other action as may reasonably be required, to more effectively carry out the terms, provisions and intent of this Agreement. 19. Indemnity - Each party hereto agrees to indemnify and hold the other party harmless from and against and in respect of any liabilities, losses, damages or expenses suffered, incurred or paid by such other party which arise out of any material breach of this Agreement including a breach of warranty or covenant contained herein and a breach through the making of any untrue material representation made hereunder. 20. Termination - This Agreement and the transactions contemplated hereby may be terminated anytime prior to Closing hereof by (a) written mutual consent of both parties hereto, (b) by either party hereto if there has been a material breach by the other party of any term of this Agreement and such material breach is not cured by the breaching party within 30 days of notification in writing of such breach by the non-breaching party or has not been waived or cured by the effective date of the pending IPO of Buyer, (c) by either party hereto if a material condition of the Closing hereof has not been satisfied or cannot occur unless waived by the other party, or (d) at the option of either party hereto if the Closing has not taken place by December 31, 2000. 21. General - I. Notices - Any and all notices required hereunder shall be in writing and hand-delivered or sent by certified mail, directed as follows: If to Seller: John Lai, President If to Buyer: Greg Spak 8800 49th Ave. North 2250 Technology Pkwy. Minneapolis, MN 55428 Hollister, CA 95023 II. Waiver and Severability - Any failure on the part of either party hereto to comply with any of the terms or obligations of this Agreement may be waived in writing by the other party hereto. If any part of this Agreement is deemed to be unenforceable, the balance hereof shall remain in full force and effect. III. Modification - This Agreement cannot be modified or amended unless by mutual written consent of both parties hereto. IV. Parties In Interest and Non-Assignability - This Agreement shall inure to the benefit of, and bind both parties hereto, and their respective successors and legal representatives, if any. None of the rights or obligations contained in this Agreement can be assigned by either party hereto. -8- 9 V. Governing Law - This Agreement shall be governed by the laws of the State of California, except as Minnesota corporate law relates to the approval by shareholders of Seller of its sale of assets contemplated hereunder IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ANGEL MOTORCYCLES, Inc., as Seller By: /s/ JOHN LAI ---------------------------------------- John Lai, President AMERICAN EAGLE MOTORCYCLE COMPANY, INC., as Buyer By: /s/ GREG SPAK ---------------------------------------- Greg Spak, President -9- 10 EXHIBIT A-OBLIGATIONS BEING ASSUMED 1) NOTES ($100,000 FACE AMOUNT) a) $100,000 Donald Shiff 2) CONVERTIBLE DEBENTURES ($383,500 FACE AMOUNT) a) $15,000 John Tastad b) $47,000 William McMahon c) $8,500 Jeff Mills d) $205,000 Donald Shiff e) $70,000 Genesis Capital Group, Inc. f) $18,000 Lester Geotzke g) $20,000 Valhalla Investments 3) OTHER OBLIGATIONS ($200,000) a) $200,000 UK trade venders (MCD/The Angel Motorcycle Company Limited) 11 EXHIBIT B AMERICAN EAGLE MOTORCYCLE COMPANY, INC. Warrant Certificate No. W- Certificate for _______ Warrants THIS CERTIFIES THAT or his, her or its registered assigns, as the case may be, is the owner of that number of Warrants specified above, of which each Warrant entitles the holder thereof to purchase one fully paid and nonassessable common share, subject to adjustment as provided herein, of American Eagle Motorcycle Company, Inc. (the "Company") anytime during the term hereof at an exercise price of $1.00. Each Warrant may be exercised on any business day before the Expiration Date of May 31, 2004, and the holder hereof or any authorized assigns hereby acknowledges that the common stock to be issued underlying these Warrants shall constitute "restricted securities" unless such shares have been registered under relevant securities laws prior to exercise of the Warrants. The Company is under no obligation to so register such underlying common shares, and accordingly the holder hereof or any assigns acknowledges that any common stock of the Company being purchased incident to exercise of these Warrants will be purchased as a long-term investment to be restricted from further resale, transfer or other disposition thereof unless either registered or satisfying an appropriate exemption from registration such as Rule 144 of the Securities Act of 1933, as amended. The Warrants exercisable hereby are exercisable upon presentation and surrender of this Warrant Certificate at the corporate office of the Company along with payment in full of the exercise price for whatever number of Warrants are being exercised by the holder hereof in U.S. currency. At the election of the holder or any assigns, these Warrants are exercisable either in whole or in part anytime, and from time to time, for the number of shares specified above. In the event this Warrant Certificate is exercised in respect to less than all of such shares, a new Warrant Certificate will be issued for the number of Warrants which were not exercised. The Company shall not be obligated to issue any fractional shares incident to exercise of these Warrants. Prior to the exercise of these Warrants, the holder hereof shall not be entitled to any rights of a shareholder of the Company, including without limitation the rights to vote or receive dividends or other distributions, and further shall not be entitled to notice of any proceedings of the Company which is required to be sent to shareholders of the Company. The Purchase Price, the number of shares purchasable upon exercise of each Warrant, and the number of warrants outstanding are subject to adjustment from time to time upon the occurrence of any event such as a declaration of stock dividends, reorganizations or mergers or other business combinations, reclassification of shares, consolidations, stock splits (forward or reverse), so that the Holder of these Warrants after such event or time shall be entitled to receive the number and kind of shares which, if such Warrant had been exercised immediately prior to such event, such Holder would have received or owned. Such adjustment or adjustments shall be made successively whenever any such event shall occur. This Warrant Certificate and these Warrants have not been registered and cannot be transferred or sold in public market transactions unless they are so registered under relevant federal and state securities laws, or are sold or transferred in private transactions satisfying an exemption from such registration. This restriction on further sale or transfer of these Warrants shall also be 12 applicable to and binding upon any private transferee of these Warrants during the term hereof. Prior to presentment for transfer of any of these Warrants to the Company or its transfer agent, as the case may be, the Company may deem and treat the registered holder hereof as the absolute owner hereof and of each Warrant hereunder for all purposes, and the Company shall not be affected by any notice to the contrary. Reduction of Exercise Price - The Board of Directors of the Company shall hold and reserve the right and authority to reduce the exercise price of these Warrants anytime during their term, and any such reduction shall be effective for whatever time period is specified by the Board of Directors of the Company. This Warrant Certificate and each Warrant represented hereby shall be construed and governed by the laws of the State of Minnesota. DULY EXECUTED by the Company effective this 31st day of May, 2000. BY ORDER OF THE BOARD OF DIRECTORS OF AMERICAN EAGLE MOTORCYCLE COMPANY, INC. By -------------------------------------- - -------------------------------------------------------------------------------- ASSIGNMENT FORM (To Be Executed By the Registered Holder hereof Incident to Transfer) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers ___________________________ of the Warrants represented by this Certificate to ___________________________ and does hereby irrevocably constitute and appoint ___________________________ Attorney to transfer this Warrant Certificate on the records of the Company with full power of substitution in the premises. ------------------------------------- Signature of Holder ------------------------------------------ EXERCISE OF WARRANT CERTIFICATE The undersigned holder hereof hereby exercises this Warrant Certificate for the amount of _______________ common shares of the Company, and after payment of such exercise price in full to the Company, the Company shall promptly issue a certificate for such common shares to the undersigned, after which all such shares shall be fully paid and nonassessable. ------------------------------------- Signature 13 AMENDMENT TO AGREEMENT THIS AMENDMENT, made and entered into this effective date of September 29, 2000, by and between Angel motorcycles Inc., a Minnesota corporation ("Seller") and American Eagle Motorcycle Company, Inc., a California corporation ("Buyer"). WHEREAS, ON July 31, 2000 Seller and Buyer entered into an Asset Purchase Agreement whereby Buyer is acquiring certain engine technology assets from Seller; and FURTHER WHEREAS, the parties hereto desire to amend said Asset Purchase Agreement as follows. NOW THEREFORE, for valuable consideration the parties hereto agree as follows: 1. Subparagraph 2b of such agreement shall be amended to be an amount of $883,500 vice $583,500, which represents an increase of $200,000 in the convertible debentures set forth on Exhibit A to the Agreement. 2. Paragraph 6 shall be amended of follows: Subparagraph 1 of such paragraph 6 shall be changed to 1,167,258 vice 1,167,900 shares; and Subparagraph 11 of such paragraph 6 shall be changed to 233,206 warrants vice 223,600 warrants. 3. All other terms of such Asset Purchase Agreement shall remain in full force and effect. EXECUTED the day and year first above shown by the following parties. ANGEL MOTORCYCLES INC., as Seller By: /s/ JOHN LAI ---------------------------------- John Lai, President AMERICAN EAGLE MOTORCYCLE COMPANY, INC. As Buyer By: /s/ GREG SPAK ---------------------------------- Greg Spak, President EX-10.2 10 c57376ex10-2.txt AQUISITION AGREEMENT 1 EXHIBIT 10.2 NMI ASSET PURCHASE AGREEMENT This Agreement, made and entered into this effective date of September 15, 2000, by and between Net Media Technologies, Inc., A California Corporation (hereinafter "Seller") and American Eagle Motorcycle Company, Inc., a California corporation hereinafter "Buyer"). WHEREAS, Seller has been engaged in the development of certain website technology and websites for the motorcycle and motorsport industry; and Buyer is engaged in the business of commercially manufacturing and selling a line of "American Eagle" brand cruiser motorcycles; and FURTHER WHEREAS, Buyer desires to acquire and purchase certain websites developed by the Seller, and Seller desires to sell and transfer said website assets to Buyer. NOW, THEREFORE, for and in consideration of the promises, representations, and warranties contained herein, the parties hereto agree as follows: 1. Assets To Be Acquired - Subject to the terms and provisions of this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Buyer on the Closing Date as defined herein, the following Websites: (a). www.bigbikes.com (b). www.bigbikes.net (c). www.thebikecam.com (d). www.cyclespoint.com (e). www.cyclesfinance.com (f). www.vtwin.org (g). www.americanriders.com (h). www.hollistercam.com (i). www.sturgiscam.com And Buyer agrees to purchase, acquire and accept from Seller, on the Closing Date and for the consideration stated herein, all of the foregoing assets. 2. Final Agreement - It is the express intent, purpose and understanding of both parties hereto that this Agreement supercedes any and all prior understandings and agreements between the parties. 2 3. Purchase Price and Payment Terms - Buyer shall issue to Seller in the Closing Date a total of 130,000 shares of common stock of Buyer, and upon delivery of such common shares to Seller, all of them fully paid and nonassessable. Common shares of Buyer to be issued to Seller incident hereto shall be "restricted securities" as defined under the Securities Act of 1933, meaning generally that such common shares have not been registered under any federal or state securities laws. 4. General - I. Notices - Any and all notices required hereunder shall be in writing and hand-delivered or sent by certified mail, directed as follows: If to Seller: If to Buyer: II. Waiver and Severability - Any failure on the part of either party hereto to comply with any of the terms or obligations of this Agreement may be waived in writing by the other party hereto. If any part of this Agreement is deemed to be unenforceable, the balance hereof shall remain in full force and effect. Ill. Modification - This Agreement cannot be modified or amended unless by written consent of both parties hereto. IV. Governing Law - the laws of the State of California shall govern This Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Net Media Technologies, Inc., as Seller [ILLEGIBLE] ---------------------------------------- By Its President, September 14, 2000 American Eagle Motorcycle Company, Inc. /s/ GREG SPAK ---------------------------------------- By Its President EX-10.3 11 c57376ex10-3.txt AQUISITION AGREEMENT 1 EXHIBIT 10.3 AGREEMENT AND PLAN OF BUSINESS COMBINATION THIS AGREEMENT entered into this 15th day of Sept. 2000, by and between American Eagle Motorcycle Company Inc., a California corporation (AEM), and Yankee Engineuity Products Division, a California sole proprietorship (YEPD); WITNESSETH, WHEREAS AEM is a motorcycle manufacturing corporation which for some time has been in the process of evaluating various businesses for acquisition; and YE is a distributor of its own line of Billet motorcycle parts; and FURTHER WHEREAS, AEM and YEPD mutually desire to enter into a business combination whereby AEM will purchase the Motorcycle Products Division of YEPD. NOW THEREFORE, for valuable consideration and upon the mutual representations, warranties, covenants, conditions and agreements contained herein, the parties agree as follows: 1. Plan of Business Combination - It is the agreement and intention of all parties hereto that all of the outstanding ownership of YEPD shall be exchanged hereunder solely for voting common stock of AEM, and it is also the intention and understanding of all parties hereto that this transaction shall qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1954, as amended, and any related sections there under. 2. Restricted Securities - All common shares of AEM issued incident to this business combination shall be "restricted securities" as defined in relevant federal and state securities laws and regulations, basically meaning that such shares will not be registered under either state or federal securities laws and will be taken by the owners of YEPD for long-term investment are not with a present view toward further sale, disposition or transfer thereof; and accordingly any future transfer or disposition of such shares must either be (i) registered under relevant federal and state securities laws, or (ii) satisfy an appropriate exemption from such registration such as rule 144 of the Securities Act of 1933, as amended. 3. Exchange of Securities - All parties hereto agree that all of the outstanding ownership of YEPD shall be exchanged for 32,500 common shares of AEM. Upon completion of this exchange of shares, YEPD shall become a wholly owned subsidiary of AEM. 4. Delivery of Certificate - On the Closing date of this business combination, YEPD shall deliver all ownership documentation duly endorsed for transfer pursuant hereto, and simultaneously thereto AEM shall deliver certificates of AEM common shares to complete this transaction. 5. This agreement shall be approved by each company as required by law. 2 6. Conduct of Business - Between the date of this Agreement and the Closing Date hereof, YEPD shall conduct its business operations in a normal and customary manner in accordance with existing business operations in a normal and customary manner in accordance with existing business practices and policies. 7. Due Diligence Investigation - Between the date of this Agreement and the Closing date hereof, AEM and YEPD may directly make such investigation of each other and their respective business and operations, affairs and financial positions; and the officers of each corporation hereto shall furnish to each other whatever financial and operational data and other information with respect to each other as reasonably requested by the other party. Neither AEM nor YEPD shall disclose any private or confidential information on the other party, which was obtained or discovered in connection with their respective due diligence review and investigation of each other incident hereto. 8. Representations and Warranties of Parties - The parties jointly and severally represent and warrant to the other the following: a. AEM has outstanding capital stock of Approx. 1,582,500 common shares, and all common shares of AEM have been validly issued and are fully paid and nonassessable, and no such shares has been issued in violation of any preemptive or similar rights. b. AEM is a duly organized corporation validly existing and in good standing under the respective laws of the State of California, with full corporate power and authority to own and operate it's properties and assets and carry on any business presently and formerly conducted by it. c. YEPD is a properly organized sole proprietorship, validly existing and in good sanding under the laws of California, with full corporate power and authority to own and operate it's properties and assets and carry on any business presently and formerly conducted by it. d. This Agreement is a valid and binding agreement of each party hereto, and compliance with the terms of this Agreement by each party hereto will not result in (i) a breach or default under the Articles or Bylaws of either party or (ii) a breach or violation under any lien, pledge, security interest or other encumbrance on assets to which either party is subject. e. Neither company is subject to any pending litigation or governmental proceedings not reflected in their financial statements or otherwise disclosed to the other party incident to negotiating this Agreement. f. The Management of each company executing this Agreement is duly authorized to execute this Agreement on behalf of their respective corporation. g. All company record books, minute books and financial statements of each party in existence prior to the closing date shall be made available to the other party prior to closing of this business combination. h. As of the date hereof, and at Closing Date both companies hereto will have to the best of their knowledge and abilities, disclosed to each other all events, conditions and facts materially affecting the business and prospects of each company hereto. 9. Convenants of both parties - AEM and YEPD, both convenant, warrant and agree that from the date hereof to closing date, each party hereto shall: (i) Conduct its business and operations in the usual, normal and ordinary course of business; (ii) Neither party shall declare any cash or stock dividends: nor shall they make any distribution by way of dividend, redemption, or otherwise; (iii) Each party hereto agrees to approve this agreement as soon as reasonably practicable after the date hereof. 10. Survival of Representations - All representations, covenants and warranties contained herein shall survive the Closing Date of this Agreement and the consummation of the transactions hereby for two years from the date hereof. 11. Closing - Upon the Closing of this Agreement, the following transactions shall occur or have occurred, all of which shall be deemed to be simultaneous: a. YEPD shall have delivered to AEM all ownership documentation of YEPD, duly endorsed thereon for exchange pursuant to this agreement; b. AEM shall deliver the required certificates of its common stock to YEPD or its assigns. c. Each party hereto shall deliver at the Closing Date certified copies of resolutions of each party which adopted and approved this business combination; d. The Effective Date of this business combination shall be the Closing Date hereof. 3 12. General (a). Notices - Any and all notices provided for in this Agreement shall be in writing and hand-delivered or sent by certified mail, directed as follows: To AEM: Greg Spak 2350 Technology Pkwy. Hollister, CA 95023 To YEPD: Duncan Keller 1520 A. West San Carlos San Jose, CA 95126 (b). Parties in Interest and Assignment - This Agreement shall inure to the benefit of and bind the parties hereto, and their respective successors, legal representatives and authorized assigns; provided, however, that no party hereto shall assign any interest herein without the express written consent of all other parties hereto. (c). Expenses - In the event this business combination is not consummated for any reason or purpose whatsoever, each party hereto shall pay its or his own expenses incident to negotiation of, preparation for or any other matters related hereto. (d). Waiver - Any failure on the part of a party hereto to comply with any term, obligation or condition of this Agreement may be waived in writing by the other parties hereto. (e). Governing Law - the laws of the State of California shall govern this Agreement. (f). Severability - If any part of this Agreement is deemed to be unenforceable, the balance of the Agreement shall remain in full force and effect. (g). Entire Agreement - This Agreement constitutes the entire agreement for this business combination, and supercedes and cancels any prior agreement or understanding, written or oral; and this Agreement cannot be modified or amended unless by mutual written consent of all parties hereto. Except as listed in Addendum A. Addendum A 1. In lieu of additional stock, AEM will pay YEPD approximately $22,000 for past services. 2. AEM will purchase YEPD's product inventory for approximately $20,000. YEPD insures all inventory purchased is of Current designs and saleable. 3. Duncan Keller shall receive the following yearly royalties: a. 3% - up to $500,000 in product sales b. 2% - $500,001 to $1,500,000 c. 1% - over $1,500,001 These royalties will be in effect for 5 years and pay ability agreement will be automatically renewed unless terminated in writing by either party. 13. Use of Yankee Engineuity Name - AEM will have exclusive right to use the Yankee Engineuity name in Sales and Marketing of motorcycle parts and accessories. 4 14. Termination - This agreement and the transactions contemplated hereby may be terminated anytime prior to Closing hereof by a. Written mutual consent of both parties hereto b. By either party hereto if there has been a material breach by the other party of any term of this Agreement and such material breach is not cured by the breaching party within 30 days of notification in writing of such breach by the non-breaching party or has not been waived or cured by the effective date of the pending IPO of buyer c. By either party hereto if a material condition of the Closing hereof has not been satisfied or cannot occur unless waived by the other party, or d. At the option of either party hereto if the Closing has not taken place by December 31, 2000 IN WITNESS WHEREOF, the above parties hereto have executed this agreement as of the day and year first written above written. Yankee Engineuity American Eagle Motorcycle By /s/ DUNCAN KELLER /s/ GREG SPAK ------------------------- ------------------------------ Its Owner Its President ------------------------ --------------------------- EX-10.4 12 c57376ex10-4.txt AUTHORIZED DEALER AGREEMENT 1 EXHIBIT 10.4 DEALER AGREEMENT This agreement is entered into this day by and between American Eagle Motorcycle Co., Inc. ("Manufacturer") and American Cycles Legend ("Dealer"). Whereas, Manufacturer is the manufacturer of MOTORCYCLES AND MOTORCYCLE ACCESSORIES AND PRODUCTS distributed and sold bearing certain proprietary trade marks American Eagle ("Product"). Whereas, Dealer is in the business of marketing and selling MOTORCYCLE AND MOTORCYCLE ACCESSORIES AND PRODUCTS and desires to enter into the business of selling the Manufacturer's Product; and NOW, THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. Dealership. During the term of this Agreement, Manufacturer hereby appoints Dealer and Dealer hereby accepts appointment as, the distributor of the Product. During the term of this Agreement, Dealer agrees to maintain Prices set by Manufacturer, and offer proper warranty and service support as required by manufacturer. The parties contemplate that the dealer will accept trade-ins of other brand motorcycles and that dealer has the right to sell motorcycles consisting of other brands. During said term, Dealer shall use reasonable efforts to market and sell the Product. During said term, Manufacture shall not itself market the product in the territory. Section 2. Term. This Agreement shall begin January 5, 1999 and shall terminate on December 31, 2001. It is the intention of the parties to hereto that this Agreement will automatically renew unless either party terminates per Section 11. Section 3. Prices. The suggested factory dealer price and the retail consumer price for the items to be sold is set forth in Exhibit A attached hereto. Section 4. Materials. The parties agree that, subject to reasonable availability, Manufacturer will continue constructing the Product with same or better quality as those motorcycles previously produced and exhibited to dealer. The parties may, from time to time, agree to the substitution of alternative materials. Section 5. Trademark. Manufacturer is the owner of the trademark "American Eagle" ("Mark"). Manufacturer hereby grants Dealer the exclusive right to identify itself as an Authorized [MARK] Dealer in the Territory and to display the Mark at Dealer's place(s) of business, including dealers of Dealer, located within the Territory, in connection with the sale of the Product. Dealer shall not make any use of the Mark, which is inconsistent with Manufacturer's policies concerning its trademark use. Except as authorized herein, Dealer shall not make use of the Mark, and Dealer shall neither have nor claim any right in respect to the Mark. DEALER AGREEMENT 1 2 [TEXT TO COME] DEALER AGREEMENT 2 3 Section 16. Past Due Account Balance. Dealers will be charged a 1.5% month interest fee on all outstanding invoices not paid to American Eagle Motorcycle Co. Inc. by their respected due date set forth in Exhibit B. Section 17. Agreement Changes. This is the total agreement defining the relationship between the Manufacturer and Dealer. Any request for change by either party must be submitted in writing to the other. A response must be returned in writing within 30 days. Dealer /s/ [ILLEGIBLE] January 14, 1999 - -------------------------------------- ------------------------- Dealer Date President American Legend Cycles AMERICAN EAGLE MOTORCYCLE CO., INC. /s/ GREG SPAK President January 9, 1999 - -------------------------------------- ------------------------- Representative Title Date DEALER AGREEMENT 3 EX-10.6 13 c57376ex10-6.txt LEASE FOR HEADQUARTERS 1 EXHIBIT 10.6 Highland Enterprises, LLC. Lease Agreement 1. Parties: This lease is entered into this first day of July 1998 between Highland Enterprises, LLC (Landlord) and American Eagle Motorcycle Company, Inc. (Tenant) 2. Premises: 40,000 Square Feet of building located at 2350 Technology Parkway, Hollister, CA 95023 3. Term: The term of this lease shall be for 60 months, commencing on July 1, 1998, and extending on June 30, 2003. Extensions are automatically in place for an additional two years at the end of the current lease period. Any changes to this period, lease cancellations, or alterations to this agreement must be approved by both parties. All changes must be submitted to other party in writing with at least 90 days notice. 4a. Security Deposit: Tenant shall deposit with Landlord upon execution of this lease the sum of zero dollars as a security deposit for the Tenant's performance of the provisions of this lease. If Tenant performs all obligations of this lease, the security deposit will be returned to Tenant within ten business days after the expiration of the lease's term. 4b. Rent: Tenant shall pay to Landlord the following rent: A. Mortgage payment of $10,459.00 to Comerica Bank. B. All real property taxes and assessments as required. Rent is due on the first of each month without notice or deduction. Payments not received by the tenth of each month shall be deemed late and a 10% late charge will be assessed and due. 4c. Future Rent: Beginning July 1, 2000, Tenant shall pay to landlord the rent of $.50 a square foot or $20,000/month. Tenant will no longer be responsible for property taxes. At each subsequent lease period of three years, rent will be adjusted by an increase of 10%. 5. Utilities: 2 6. Alterations: Tenant shall not, without Landlord's prior written consent, make any alterations or additions to premises. 7. Assignment: Tenant shall not assign, transfer or sublet any or all of Tenant's interest in this lease. 8. Hold Harmless: Tenant shall indemnify and hold Landlord harmless from and against any and all claims arising from Tenant's use or occupancy of the premises. 9. Insurance: Tenant shall be responsible for maintaining his own insurance on property, employees, contents, liability, and negligence. Landlord will be listed as co-insured as necessary. 10. Condition of Building: Tenant shall be responsible for maintaining the premises and will be financially responsible for any damages caused during term of this lease. 11. Default: If Tenant defaults or breeches any provision of this lease, then Landlord, after giving proper notice required by law, may re-enter the premises and remove any property on premises in a manner allowed by law. In addition, the landlord may recover all rentals or damages from the tenant by reason of such default or breach of agreement. 12. Surrender: On the last day of the term of this lease, Tenant snail surrender the premises to the Landlord in good condition, broom clean, and damage free. 13. Attorney's Fees: In the event of litigation, arbitration, or other legal action in connection with this lease, the prevailing party shall be entitled to recover reasonable fees and other associated costs. 14. Right to Inspection: Landlord or Landlord's agent shall have the right to inspect the premises at reasonable times with notice. 15. Binding On Successors: The terms, conditions, covenants shall be binding now and shall inure to the benefit of each of the parties, representations, and successors. 3 16. Notices: All notices regarding provisions of the lease shall be in writing and sent as follows: To Landlord: Greg Spak Highland Enterprises 7205 Gold Crook Court San Jose, CA 95120 To Tenant: American Eagle Motorcycle, Inc. ATTN: Dave Carson 2350 Technology Parkway Hollister, CA 95023 Execution of this lease on the date above by: Landlord: By Highland Enterprises, LLC By: /s/ GREG SPAK -------------------------------- Managing Member Tenant: By American Eagle Motorcycles, Inc. By: /s/ [ILLEGIBLE] -------------------------------- Secretary Approved: By: /s/ GREG SPAK -------------------------------- President American Eagle Motorcycle EX-23.2 14 c57376ex23-2.txt COSENT OF PUBLIC ACCOUNTANT 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS American Eagle Motorcycle Company, Inc. Hollister, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated August 10, 2000, except for matter discussed in Note 16 for which the date is September 29, 2000, relating to the financial statements of American Eagle Motorcycle Company, Inc., which is contained in that Prospectus. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/BDO SEIDMAN, LLP San Jose, California October 30, 2000 EX-23.3 15 c57376ex23-3.txt CONSENT OF PUBLIC ACCOUNTANT 1 EXHIBIT 23.3 The Board of Directors Angel Motorcycles, Inc. (A Development Stage Enterprise) Minneapolis, Minnesota CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated August 16, 2000 included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ Stirtz Bernards Boyden Surdel & Larter, P.A. -------------------------------------------- Stirtz Bernards Boyden Surdel & Larter, P.A. Edina, Minnesota October 30, 2000 -----END PRIVACY-ENHANCED MESSAGE-----