-----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, Wmz158rmMpY2YQ5kpO62steNdzSFvspaFJEjWs+MrPuFqFpL3I+0WY5mCdvQT8lq fkn0bNerWdLjX0dlv20Kcg== 0001047469-99-013487.txt : 19990405 0001047469-99-013487.hdr.sgml : 19990405 ACCESSION NUMBER: 0001047469-99-013487 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCELSIOR HENDERSON MOTORCYCLE MANUFACTURING CO CENTRAL INDEX KEY: 0001017904 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 411771946 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22765 FILM NUMBER: 99586891 BUSINESS ADDRESS: STREET 1: 805 HANLON DR CITY: BELLE PLAINE STATE: MN ZIP: 56011 BUSINESS PHONE: 6128735700 MAIL ADDRESS: STREET 1: 805 HANLON DR CITY: BELLE PLAINE STATE: MN ZIP: 56011 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended January 2, 1999 or /_/ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From _______________ to ________________. Commission file number 000-22765 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota 41-1771946 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 805 Hanlon Drive Belle Plaine, Minnesota 56011 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (612) 873-7000 -------------- Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of each class) ---------------------------------------- Check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No /_/ Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /_/ The aggregate market value of the common equity held by non-affiliates of the registrant as of March 2, 1999 was $91,157,852, based on a closing price of $9.03125 per share as reported on the Nasdaq National Market on such date. State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common Stock, $.01 par value - 13,505,752 shares issued and outstanding as of March 2, 1999. THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS OR STATEMENTS OF INTENTION SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER INCLUDE THE RISKS, UNCERTAINTIES AND OTHER MATTERS SET FORTH BELOW UNDER THE CAPTION "FORWARD-LOOKING STATEMENTS" AND THE MATTERS SET FORTH UNDER THE CAPTIONS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. PART I DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 1999 Annual Meeting of Shareholders are incorporated by reference in Part III. ITEM 1. BUSINESS The Company, which was incorporated in Minnesota in 1993, manufactures, markets and sells premium heavyweight cruiser motorcycles with a brand that evokes an authentic American motorcycling heritage and lifestyle. The Company's motorcycle products feature current technology but also reflect the distinctive designs, styling and names reminiscent of the motorcycles produced in the early part of this century by Excelsior Supply Company under the brand names Excelsior and Henderson. The Company's initial motorcycle is a heavyweight cruiser named the Excelsior-Henderson Super X. On December 30, 1998, the Company's "Road Crew" produced Super X motorcycle number 000001. This first Super X was then placed next to the 1931 Super X in the Company's heritage museum at its corporate headquarters. On January 30, 1999, the Company produced and shipped its first revenue Super X. In 1993, Co-Founders Dan, Dave and Jennie Hanlon developed a business plan to pursue a market opportunity they believed existed in the heavyweight motorcycle market. They believed that purchasers of heavyweight motorcycles wanted an authentic American alternative to the existing motorcycles in the market. After researching the market, they believed that the combination of Excelsior Supply's status as one of the original Big Three motorcycle manufacturers, available brand name and rich heritage would serve as an excellent marketing brand and as a design inspiration for the heavyweight motorcycles they planned to introduce. The Company was founded on the strategy to establish itself within the motorcycle industry by marketing a brand that is based on the authentic American motorcycling heritage of Excelsior Supply and Henderson and to offer products and accessories that represent distinct proprietary alternatives to the existing products and accessories existing in the market. To achieve such strategy, the Company has been developing its products, engaging in marketing activities, developing its dealer network, equipping its manufacturing facility, securing its trademarks, hiring its management team and its engineering, manufacturing and other personnel, and raising capital. The Company is currently transitioning from the development stage to an operating company. THE EXCELSIOR-HENDERSON HERITAGE It has been estimated that in the early part of this century there were over 200 American motorcycle manufacturing companies. Until 1931, the "Big Three" motorcycle manufacturers were Excelsior Supply, Harley-Davidson and Indian. Excelsior Supply ceased operations in 1931 during the Great Depression and Indian ceased operations in 1953. Harley-Davidson has been the only significant manufacturer of American heavyweight cruiser and touring motorcycles since 1953. Founded as a bicycle supply company in Chicago in 1876, Excelsior Supply was owned by bicycle producer Ignatz Schwinn from 1911 until it ceased production. The Company secured Excelsior Supply's available brand names beginning in 1993. Excelsior Supply produced, among others, a Big X motorcycle and a Super X motorcycle, featuring large "X-twin" engines. In 1917, Excelsior Supply purchased the Henderson Motorcycle Company and continued to manufacture a Henderson DeLuxe Four, which featured an inline four cylinder engine. 2 The motorcycles manufactured by Excelsior Supply and Henderson were a significant force on the racetrack and on the road. These motorcycles set many performance records, including the first motorcycle to circle the world and the first to break the 100 m.p.h. speed barrier. Also, many police departments used motorcycles manufactured by Excelsior Supply, as did the U.S. government during World War I. Several famous personalities of the time owned motorcycles produced by Excelsior Supply, including aviator Charles Lindbergh and automobile manufacturer Henry Ford. In 1929, Excelsior Supply restyled its Super X and Henderson DeLuxe Four motorcycles into its "Streamline" product line. Several motorcycle historians have cited these "Streamline" models as among the originators of the classic American heavyweight motorcycle style. For the 1929 to 1931 Super X Streamline models, this classic style included a large displacement "X-twin" engine, a teardrop shaped split fuel tank, full valanced fenders, a curved front frame that followed the contour of the front fender, a low slung seat in which the rider sat into the bike, a leading link front suspension with fork tubes that passed through the front fender, a tank-mounted instrument panel, balloon tires and premium single and two-tone paint finishes. PRODUCTS The Company currently produces one premium heavyweight cruiser motorcycle, the Super X. The Company completed the development and testing of the Super X for initial production and produced the first Commemorative Super X from its production line in December 1998. The first Super X was placed in the Company's heritage museum. The Company shipped its first revenue Super X in January 1999 and will continue to ramp up production of the Super X. The Company intends to expand its product line in the future by developing additional models of motorcycles with classic American heavyweight styling. In addition, the Company will sell a variety of accessory parts through its dealers for customization of its motorcycles. The Company will also sell individual replacement parts for its motorcycles. Finally, the Company sells a wide variety of apparel such as hats, shirts and jackets to build brand image and support the lifestyle of American motorcycling. The Super X is a new proprietary motorcycle featuring modern engineering and performance and a design inspired by the classic American heavyweight styling features of the original Excelsior Supply Super X. The Super X includes a proprietary large displacement "X-Twin" engine that produces a distinctive sound; a sleekly styled, teardrop shaped fuel tank; full valanced fenders; a curved front frame that follows the contour of the front fender; a low slung seat; a leading link front suspension with fork tubes that pass through the front fender; a tank-mounted instrument panel; wide profile tires; and modern, high gloss, single and two-tone paint finishes. The Super X also incorporates a proprietary transmission, an electronic fuel injection system and computer controlled-engine management system. For the 1999 model year, the Super X has a limited twelve-month/unlimited mileage warranty. The 1999 model year Super X has the following specifications: Wheelbase 62.9 Inches Length 92.5 Inches Dry Weight 647 lbs. Seat Height 26.5 Inches Bore X Stroke 3.66 X 4.02 Inches Engine Size 85 Cubic Inches (1386cc) Engine Design 50DEG."X-Twin" Engine Cooling Air and Oil Fuel System Port Sequential, Closed Loop Fuel Injection Valves 4 Valves Per Cylinder, Dual Overhead Cams Per Cylinder Frame Double Wishbone Frame, Full Travel Suspension and Leading Link Front End Transmission 5 Speed, Constant Mesh
INDUSTRY AND MARKET 3 The heavyweight motorcycle category consists of motorcycles with an engine displacement of 651cc or greater. Within the heavyweight category, there are four types of motorcycles: (i) STANDARD, which emphasize simplicity and cost; (ii) PERFORMANCE, which emphasize handling and speed; (iii) TOURING, which emphasize comfort and amenities for long-distance travel; and (iv) CRUISER, which feature the distinctive styling of classic American motorcycles built during the early years of the motorcycling industry and are designed to facilitate customization by individual owners. Touring and cruiser motorcycles are the only types of heavyweight motorcycles that the Company plans to design and market. According to statistics in Harley-Davidson's public reports, in 1998, touring and cruiser models represented approximately 79% of retail unit sales in the U.S. heavyweight market. Heavyweight motorcycles, in turn, represented approximately half of retail motorcycle unit sales in the overall United States market in 1998. U.S. registrations of new heavyweight motorcycles increased in 1998 by approximately 19% (to 227,000 units) over 1997 registrations. As recreational products, the Company's motorcycles and related products are in a growing consumer market. According to U.S. Government reports, from 1992 through 1995 spending on recreational products grew at over five percent per year and from 1994 through 1997 grew at three times the rate of overall consumer spending. Based on industry information, the Company believes that the typical customer for heavyweight American touring and cruiser motorcycles is a male between the ages of 35 and 65, with a household income of approximately $65,000. These customers are generally experienced motorcycle riders who purchase motorcycles for recreational purposes rather than for transportation. According to estimates of the U.S. Census Bureau, the number of Americans that will fall into the targeted age bracket is projected to increase by approximately 9.2% from 1999 to 2005 and by approximately 13.1% from 1999 to 2010. The 35 to 65 year old age group also leads all age groups in annual spending per consumer on recreational products and generally has greater disposable income than other age groups. The Company believes that customers in its target market are seeking motorcycles and related products with a brand image associated with an authentic classic American motorcycling heritage and lifestyle. The Company also believes that such customers purchase motorcycles based on a number of other factors including styling, quality, reliability and product features. MARKETING Since inception, the Company's marketing goal has been to re-establish the legacy of the Excelsior and Henderson brands in the motorcycling community and build demand for the Company's brand of motorcycle products. The Company's marketing strategy is to establish its brand through reintroduction of the heritage of the Excelsior and Henderson brands and to create opportunities for the public to experience such heritage. To introduce the production intent Super X to the motorcycling public and further establish the Company's brand, the Company implemented a marketing campaign for the August 1998 Sturgis Rally and Races in Sturgis, South Dakota, which included a parade of the production intent Super X motorcycles down Main Street. The Company also implemented a marketing campaign at the 1998 Daytona Beach Bike Week. In 1999, the Company opened Daytona Bike Week with its third Annual Excelsior-Henderson Motorcycle Parade. In addition, for the first time bikers were able to take a demonstration ride on a 1999 Super X at Daytona Bike Week, with approximately 1,000 bikers participating in such demonstration rides. The Company also plans to conduct demonstration rides of the Super X during 1999 at the Sturgis Rally and Races, the Laughlin River Run in Laughlin, Nevada, the Laconia Motorcycle Rally and Race Week in Laconia, New Hampshire, Biktoberfest in Daytona Beach, Florida, the Company's 1999 Annual Shareholders Meeting and Biker Barbecue at the Company's headquarters in Belle Plaine, Minnesota, and at other events. The Company intends to increase its other marketing efforts during 1999, including holding dealer promotional events (including demonstration rides), attending additional rallies, consumer events and trade shows and advertising in trade and consumer publications. To create a strong brand identity for its motorcycles and related products and to establish the authenticity of the Company's brand, the Company is fostering among consumers and dealers a culture and lifestyle that are reminiscent of the classic American motorcycling heritage. Such heritage refers to the "soul" of the traditional American motorcycling experience, fostered by motorcycle events, motorcyclists and media, which associates riding motorcycles with individuality and freedom. Owner customization of motorcycles is also an important part of this 4 heritage, and the Company has designed the Super X, and intends to design future motorcycles, to facilitate individual customization by owners and to make custom parts and accessories available to owners. In addition, the Company intends to sponsor and promote a motorcycle owners' group, rallies and a magazine for owners and enthusiasts. The Company also sells a wide variety of apparel products with its logos such as hats, shirts and jackets and intends to license certain of its trademarks on a broad range of consumer items to increase public exposure and familiarization with its brand and products. DISTRIBUTION The Company distributes its products through a nationwide network of independent dealers. In 1998, the Company completed selecting its initial dealer network and as of March 19, 1999, the Company had 86 dealers. The Company expects to add dealers as its production increases during 1999 and beyond. The Company's initial dealer network formation culminated with the Company's first Excelsior-Henderson Authorized Dealer Brand Meetings held during January and February 1999. Over 80 of the Company's dealers attended the meetings at the Company's headquarters. The Company has selected dealers who the Company believes have an established reputation for excellence, professional appearance, profitable operations, a sales floor sufficient to display the Company's motorcycles and related products, the ability to maintain adequate inventories of motorcycles, parts, supplies and other merchandise, a knowledgeable sales staff, the ability to provide full-service maintenance and who can add value by promoting lifestyle motorcycle products and events (E.G., customized after-market parts, motorcycle apparel and accessories, customer appreciation and promotional events, rallies, etc.). The Company will provide support for its dealers and customers by maintaining adequate quantities of repair parts and accessories, training service technicians and providing warranty coverage. MANUFACTURING In 1998, the Company completed the equipping of its manufacturing facility for initial production, obtained the tooling necessary for initial production, commenced hiring its first production assembly employees, and began establishing its production components and parts supply flow. The Company also tested its manufacturing facility, commenced the operation of its integrated manufacturing and accounting software system, and produced the first production Super X. The Company began the ramp up of production of the Super X in January 1999. The manufacturing operations consist of three main manufacturing processes: welding, painting and assembly. WELDING. The welding area consists of robotic welding cells and ancillary equipment, which manufactures the frame, swing cage, and rigid front fork assembly. The resulting accuracy and consistency from using robotics ease the task of assembling motorcycles in volume. Components completed in the welding area are fed directly into the paint area. PAINTING. The paint area has been built to the highest industry standards. The Company believes that a high quality finish is extremely important in marketing its motorcycles, and, therefore, performs all facets of the paint finish work in-house. The paint area has a comprehensive range of processes to ensure the corrosion resistance and surface durability required for the major cosmetic components of the Company's motorcycles. From the paint area, components are fed directly into the assembly area. ASSEMBLY. The assembly area is equipped with a moving assembly track. In this area, the engine and transmission unit are assembled and tested. After the powertrain has been successfully tested, it is transferred to the chassis section. The whole motorcycle is then assembled as the powertrain is built into the chassis. Once assembled, the motorcycle is subjected to a final test and is then packed and shipped. The Company assembles its motorcycles using proprietary and non-proprietary components. The Company is obtaining the components primarily from original equipment suppliers. The Company strives to engage original equipment suppliers who have established records of producing reliable products for the motorcycle industry in a timely manner and will constantly review such vendors to ensure strict quality control. The Company's facility has been designed to have a production capacity of up to 20,000 motorcycles per year before on-site expansion is necessary. The facility has been designed to provide an optimum production environment for the Company's team members (the "Road Crew") through the use of natural lighting and climate-controlled heating and air conditioning. The Company believes that such an environment will help optimize employee productivity. 5 COMPETITION In the U.S. heavyweight motorcycle market, Harley-Davidson, Honda, Suzuki, Kawasaki and Yamaha have the largest market share. Other manufacturers of heavyweight motorcycles include BMW, Ducati, Moto Guzzi, and Triumph. The Company's primary competitor in the U.S. heavyweight market is expected to be Harley-Davidson, which has been the only significant American heavyweight cruiser and touring motorcycle manufacturer since 1953. According to its public reports, in 1998, Harley-Davidson reported an approximate 49% market share of U.S. and a 25% market share of worldwide (including U.S.) new heavyweight motorcycle registrations, representing approximately $1.6 billion in worldwide (including U.S.) motorcycle revenue. Trade publications and dealers have reported that there are substantial waiting lists at the dealers for certain models of Harley-Davidson motorcycles. In response to demand for its products, Harley-Davidson has tripled its production capabilities over the past decade and forecasts doubling its 1995 production capacity by the year 2003. Several of the major foreign manufacturers compete against Harley-Davidson in the domestic market by selling motorcycles with a "nostalgic" American design. Due to recent growth in the market for heavyweight motorcycles, the Company expects that other manufacturers will attempt to enter the market. In addition, a number of other companies build and sell motorcycles from non-proprietary parts, commonly referred to as "kit bikes" or "clones". The U.S. and worldwide heavyweight motorcycle markets are highly competitive and all of the Company's existing major competitors have resources that are substantially greater than those of the Company, have larger overall sales volumes and are more diversified than the Company. INTELLECTUAL PROPERTY RIGHTS The Company believes that it has the exclusive right to use the trademarks "Excelsior-Henderson," "Super X" and "X-Twin", among others, and certain related word and design trademarks in the United States in connection with the manufacture and sale of motorcycles and related structural parts. In addition, the Company believes that it has the right to use certain of these marks on ancillary merchandise and apparel. The Company believes that it has obtained common law rights through the use of these marks on its motorcycles and ancillary merchandise and apparel that are independent of the United States Patent and Trademark Office ("USPTO") registration process. In addition, the Company has obtained registrations or notices of allowance for a number of these marks ("Excelsior", "Henderson", "Super X" and "X-Twin") for use on motorcycles and has applications pending approval in the USPTO on other marks. The Company also believes that it has the exclusive right to use certain of its trademarks in certain foreign countries in connection with the manufacture and sale of motorcycles and related structural parts. In some instances, these rights may be dependent on pending applications to register the marks in a foreign country. A failure to obtain such registrations could impair the Company's rights to use a mark in a particular country. The Company currently owns one design patent and has filed additional utility and design patents in connection with the Super X motorcycle. At appropriate points in the design and development process, the Company may file additional patent applications with the USPTO to cover certain features or aspects of its products. The Company intends to diligently police its trademark, copyright and patent rights throughout the world. There are no claims of infringement against the Company and the Company is not and has not been involved in any court proceedings regarding its intellectual property rights. From time to time, the Company has been involved in INTER PARTES opposition proceedings in the USPTO to protect its trademark rights. All such proceedings have been resolved to the Company's satisfaction, and there are no material proceedings pending. GOVERNMENT REGULATION Commercial sales of the Company's motorcycles depend upon compliance with certain government regulations and the Company is designing its motorcycles to comply with such regulations. The Company's motorcycles are subject to the emissions and noise standards of the U.S. Environmental Protection Agency ("EPA") and the more stringent emissions standards of the State of California Air Resources Board ("CARB"). In early 1999, the Company received approval from the EPA and CARB to sell the Super X motorcycle. The Company's motorcycles 6 also are subject to the National Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by the National Highway Traffic Safety Administration. Furthermore, the European Union and other foreign governmental entities have regulations to which the Company's motorcycles will be subject. Finally, federal, state and local authorities have adopted various standards relating to air, water and noise pollution that will affect the Company's manufacturing operations. The Company believes that its facilities comply with all such regulations and standards. The potential delays and costs that could result from obtaining such additional regulatory approvals and complying with, or failing to comply with, such regulations could adversely affect operating results. EMPLOYEES As of March 19, 1999, the Company had 180 full-time employees, of whom 124 work in engineering and manufacturing. The Company is not subject to any collective bargaining agreement. The Company anticipates adding supervisory, engineering and manufacturing, marketing and administrative staff as the Company continues to transition from the development stage to an operating company. ITEM 2. PROPERTIES The Company leases a 160,000 square foot manufacturing and administrative facility in Belle Plaine, Minnesota. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders by the Company during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock trades on the Nasdaq National Market under the symbol BIGX. The following table sets forth, for the fiscal quarters indicated, a summary of the high and low closing prices of the Common Stock as reported by the Nasdaq National Market.
High Low ------ ------ Year Ended January 2, 1999 - -------------------------- First Quarter............................... $6.00 $5.188 Second Quarter.............................. $8.375 $5.50 Third Quarter............................... $9.75 $6.375 Fourth Quarter.............................. $9.25 $6.25 Year Ended January 3, 1998 - -------------------------- Third Quarter (from 7/24/97)................ $9.00 $5.625 Fourth Quarter.............................. $7.75 $4.50
As of March 1, 1999, the Company had 1,305 shareholders of record and approximately 16,000 beneficial holders of its Common Stock. The Company has never declared or paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the foreseeable future. 7 ITEM 6. SELECTED FINANCIAL DATA The statement of operations data for the years ended December 31, 1996 (Fiscal 1996), January 3, 1998 (Fiscal 1997) and January 2, 1999 (Fiscal 1998) and cumulative for the period from inception (December 22, 1993) to January 2, 1999, and the balance sheet data as of January 3, 1998 and January 2, 1999 are derived from and are qualified by reference to, and should be read in conjunction with the more detailed Financial Statements of the Company and the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants, whose report is included elsewhere in this Annual Report on Form 10-K, and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which follows this section. The statement of operations data for the years ended December 31, 1994 and 1995 and the balance sheet data as of December 31, 1994, 1995 and 1996 are derived from audited financial statements not included in this Annual Report on Form 10-K.
CUMULATIVE FOR THE PERIOD FROM INCEPTION YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED (DECEMBER 22, ------------------------------------------- JANUARY 3, JANUARY 2, 1993) TO 1994 1995 1996 1998 1999 JANUARY 2, 1999 ----------- ----------- ----------- ----------- ------------- ---------------- STATEMENT OF OPERATIONS DATA: Preoperating Expenses: Research and development ...... $ 110,082 $ 702,345 $ 1,271,276 $ 2,648,964 $ 14,907,976 $ 19,640,643 Marketing ..................... 32,133 106,974 694,239 1,673,680 3,797,185 6,304,211 General and administrative .... 241,630 460,793 716,154 2,180,848 4,559,639 8,160,239 ----------- ----------- ----------- ----------- ------------- ------------- Total preoperating expenses.. 383,845 1,270,112 2,681,669 6,503,492 23,264,800 34,105,093 Interest Income .................. - 43,522 174,226 810,058 1,108,997 2,136,803 Interest Expense ................. (5,346) (7,301) (4,088) (179,297) (1,753,502) (1,949,534) ----------- ----------- ----------- ----------- ------------- ------------- Net Loss ......................... $ (389,191) $(1,233,891) $(2,511,531) $(5,872,731) $(23,909,305) $(33,917,824) ----------- ----------- ----------- ----------- ------------- ------------- ----------- ----------- ----------- ----------- ------------- ------------- Basic and diluted net loss per share(1) ............. $ (.11) $ (.25) $ (.43) $ (.65) $ (1.83) $ (4.66) ----------- ----------- ----------- ----------- ------------- ------------- ----------- ----------- ----------- ----------- ------------- ------------- Basic and diluted weighted average shares outstanding(1).. 3,529,417 4,989,058 5,859,977 9,073,839 13,048,708 7,281,142 ----------- ----------- ----------- ----------- ------------- ------------- ----------- ----------- ----------- ----------- ------------- -------------
DECEMBER 31, ------------------------------------------- JANUARY 3, JANUARY 2, 1994 1995 1996 1998 1999 -------- ---------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital (deficit).............. $188,025 $1,550,914 $ 9,038,639 $21,104,052 $(3,117,625) Total assets........................... 373,926 1,882,588 10,023,400 48,185,467 47,988,132 Current maturities of long-term debt... 25,015 24,351 70,086 675,372 919,533 Long-term debt......................... - - - 13,738,615 20,569,409 Total stockholders' equity............. 254,123 1,728,858 9,631,327 31,188,216 17,196,934
- ------------------------------------------------------------------------------- (1) See Note 2 to Financial Statements for determination of weighted average shares outstanding. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company manufactures, markets and sells premium heavyweight cruiser motorcycles. The Company is currently transitioning from the development stage to an operating company and its operations are subject to all of the risks inherent in the establishment of a new business enterprise. Primarily as a result of the operating expenses described below in "Results of Operations," the Company's deficit accumulated during the development stage was $33.9 million at January 2, 1999. Historic spending levels are not indicative of anticipated future spending levels, as the Company enters the period of transition from development stage to an operating company. During such transition, the Company believes that its expenses will increase and that it will incur significant additional losses before cash generated from sales will fund the Company's operations. RESULTS OF OPERATIONS FISCAL 1998 COMPARED TO FISCAL 1997 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $14.9 million in Fiscal 1998 from $2.6 million in Fiscal 1997. The increase was primarily due to staffing increases, increased product design and development costs, developing and testing of prototype and production intent motorcycles, and the costs incurred to establish the Company's manufacturing capabilities. Included within research and development expenses is a provision of $2.0 million to write down inventory on hand and to reserve for inventory purchase commitments in excess of the estimated net realizable value as of January 2, 1999. MARKETING EXPENSES. Marketing expenses increased to $3.8 million in Fiscal 1998 from $1.7 million in Fiscal 1997. The increase was primarily due to staffing increases, increased advertising and promotion costs, increased participation at various marketing events and dealer network development. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $4.6 million in Fiscal 1998 from $2.2 million in Fiscal 1997. The increase was primarily due to staffing increases and increases in general operating expenses due to Company growth. INTEREST INCOME. Interest income increased to $1.1 million in Fiscal 1998 from $810,000 in Fiscal 1997. The increase results from increased average levels of cash, cash equivalents and short-term investments held by the Company resulting from the net proceeds of the Company's initial public offering of its common stock, net proceeds of the Series B Convertible Preferred Stock offering, and the cash received from the FINOVA Capital Corporation ("FINOVA") and Minnesota Agricultural and Economic Development Board loans. See "Liquidity and Capital Resources." INTEREST EXPENSE. Interest expense increased to $1.8 million in Fiscal 1998 from $180,000 in Fiscal 1997 due to increased average levels of debt outstanding. See "Liquidity and Capital Resources." FISCAL 1997 COMPARED TO FISCAL 1996 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $2.6 million in Fiscal 1997 from $1.3 million in Fiscal 1996. The increase was primarily due to staffing increases and increased product design and development costs, as well as expenses for developing prototypes. MARKETING EXPENSES. Marketing expenses increased to $1.7 million in Fiscal 1997 from $690,000 in Fiscal 1996. The increase was primarily due to staffing increases, increased advertising and promotion costs, and increased dealer network development. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $2.2 million in Fiscal 1997 from $720,000 in Fiscal 1996. The increase was primarily due to staffing increases and increases in other general operating expenses. 9 INTEREST INCOME. Interest income increased to $810,000 in Fiscal 1997 from $170,000 in Fiscal 1996. The increase generally reflects interest earned on increased average levels of cash, cash equivalents and short-term investments held by the Company resulting from the proceeds of the Company's initial public offering of its common stock in Fiscal 1997 and the proceeds of the sale of Series A Convertible Preferred Stock (which has converted into common stock in Fiscal 1997) during Fiscal 1996. NET OPERATING LOSS CARRYFORWARDS As of January 2, 1999, the Company had net operating loss carryforwards of approximately $18.8 million for federal income tax purposes that are available to offset future taxable income through the year 2013. A valuation allowance equal to the full amount of the related deferred tax asset has been established due to the uncertainty of realization of the deferred tax asset. Certain restrictions, caused by a 1996 change in ownership resulting from sales of the Company's stock, will limit annual utilization of these net operating loss carryforwards. The portion of the net operating loss carryforwards subject to this limitation is approximately $2.6 million. The calculated annual limitation is approximately $600,000. LIQUIDITY AND CAPITAL RESOURCES The Company had cash, cash equivalents and short-term investments of $4.7 million at January 2, 1999, as compared to $24.2 million at January 3, 1998. The decrease is due primarily to cash paid for research and development costs (including pre-production manufacturing and completion of the design, engineering and testing of the Super X); sales and marketing costs (including increased marketing activity prior to the commercial introduction of the Super X and dealer network development); capital expenditures (including completing and equipping the manufacturing and administrative facility for initial production, acquiring tooling and motorcycle components and supplies); and general and administrative costs. Such decrease was offset by the net proceeds received from the funds drawn from the Minnesota Agriculture and Economic Development Board escrow account, the Series B Convertible Preferred Stock offering, the funds drawn from the FINOVA escrow account and the funds drawn from the Dakota Bank loan (see below). The Company anticipates that it will incur significant losses from operations during Fiscal 1999 due to the transition from the development stage to an operating company. As of March 19, 1999, the Company's currently available resources included cash and cash equivalents, available restricted cash (which includes the proceeds to be drawn from the Minnesota Agriculture and Economic Development Board and the proceeds to be drawn from the FINOVA Bond) and remaining proceeds to be drawn from the Dakota Bank loan. The Company believes that its existing resources and estimated cash from operations will not be sufficient to fund its cash requirements in Fiscal 1999. Accordingly, the Company will require significant additional debt and equity financing during Fiscal 1999. There can be no assurance that sufficient additional debt or equity financing will be available or, if available, will be on terms favorable to the Company or its shareholders. In addition, the Company's debt agreements contain certain restrictive covenants, among other requirements, relating to the Company's current ratio, tangible net worth, debt to net worth ratio and debt service coverage ratio. Except for the current ratio covenant, the Company was in compliance with all covenants as of January 2, 1999. The lenders have agreed to waive the current ratio covenant through January 1, 2000. If significant losses are incurred or additional funding is not obtained, the Company will not comply with other covenant ratios at various times in Fiscal 1999. Non-compliance could lead to an event of default in the agreements, in which case the lender(s) could demand repayment of the obligation(s). MINNESOTA AGRICULTURE AND ECONOMIC DEVELOPMENT BOARD In Fiscal 1997, the Company received a $7.1 million loan from the Minnesota Agriculture and Economic Development Board for financing of certain of the Company's equipment and tooling. The loan proceeds were placed in escrow and may be drawn for certain equipment and tooling purchases. The loan has a ten-year term with annual interest of 9.5% and is secured by the equipment and tooling purchased. Subsequent to January 2, 1998, the Company received $2.6 million out of the escrow account. At March 19, 1999, approximately $350,000 remained available in the escrow account, leaving $1.1 million for a debt service reserve. 10 FINOVA BOND In Fiscal 1998, the Company issued a $6.1 million Taxable Industrial Development Revenue Bond through the Economic Development Authority of the City of Belle Plaine, Minnesota. The Bond was purchased by FINOVA. The proceeds of the sale of the Bond, net of a $1.1 million debt service reserve, were placed into an escrow account and may be drawn for certain past and future equipment and tooling purchases. The Bond is repayable over a seven and one-half year term, carries a stated interest rate of 10.4% and is secured by equipment and tooling. FINOVA also received a warrant to purchase 196,500 shares of common stock of the Company. The warrant may be exercised up to ten years from the date of issuance at an exercise price of $9.00 per share. Subsequent to January 2, 1998, the Company received $2.0 million out of the escrow account. At March 19, 1999, approximately $800,000 remained available in the escrow account, leaving $1.1 million for a debt service reserve. ISSUANCE OF SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK In Fiscal 1998, an institutional investor (the "Investor") purchased 10,000 shares of the Company's Series B Convertible Preferred Stock ("Series B") for a gross purchase price of $10.0 million, from which the Company received $9.3 million in net proceeds. Subject to certain limited restrictions, the holder of the Series B may convert the Series B to common stock at any time. Until September 1999, the conversion price of the Series B is fixed. After September 1999, the conversion price will adjust based on a defined average market price of the Company's common stock (the "Market Price"). If the Market Price of the Company's common stock is less than $5.00 per share on the date of conversion, then the Series B conversion price will be 105% of such Market Price. Subsequent to January 2, 1999, the Investor purchased 3,000 shares of the Company's Series C Convertible Preferred Stock ("Series C") for a gross purchase price of $3.0 million, from which the Company received $2.8 million in net proceeds. Until September 1999, the conversion price of the Series C is fixed. After September 1999, the conversion price will be at the Market Price. If the Market Price of the Company's common stock is less than $5.00 per share on the date of conversion, then the Series C conversion price will be 105% of such Market Price. Notwithstanding the foregoing, the holder is not permitted to hold at any point in time an amount of common stock issued upon conversion of Series B or Series C that is greater than 4.99% of the then outstanding shares of the Company's common stock. In addition, if the aggregate amount of shares of common stock of the Company issued upon conversion of the Series B and/or C Preferred Stock exceeds 20% of the outstanding shares of common stock of the Company, the Company would likely be required to take one of the following actions: (A) submit such issuances of common stock in excess of 20% for the approval of the Company's shareholders and honor the conversion of the amounts in excess of 20%; or (B) redeem all of the outstanding shares of Series B and/or C Preferred Stock from the holders at the face amount of the Preferred Stock ($1,000 per share). The provision in the preceding clause (A) is required by the Marketplace Rules of the Nasdaq Stock Market. In addition, warrants to purchase 442,000 shares of the Company's common stock were issued in connection with the Series B and C offerings. The warrants have exercise prices of $8.49 and $11.28, respectively and expire five years from the date of the respective Series B or C offering. Subsequent to January 2, 1999, the Company has received conversion notices from the Investor to convert 2,750 shares of the Series B into 368,097 shares of common stock of the Company. As of March 19, 1999, there were outstanding 7,250 shares of Series B and 3,000 shares of Series C. DAKOTA BANK LOAN In Fiscal 1998, the Company entered into a $5.0 million multi-advance working capital loan with Dakota Bank, with a variable interest rate based on the prime rate plus one-half percent. The Company is required to repay interest only until the earlier of July 1, 2000 or the time at which the loan is fully drawn. Once fully drawn, the loan is repayable over sixty months. The loan is collateralized by certain assets of the Company. Subsequent to January 2, 1998, the Company received $2.6 million out of the loan proceeds. At March 19, 1999, approximately $1.0 million of the loan proceeds remained available. 11 YEAR 2000 ISSUE The Company has assessed the impact of year 2000 on the Company's significant internal systems and software, which include information technology (IT) and non-IT, or embedded technology, systems. The Company believes that its internal systems and software are year 2000 compliant. The Company's internal year 2000 assessment is based in large part on the recent acquisition and installation of substantially all of the Company's internal systems and software, which began in 1997. The Company also has initiated discussions with its significant vendors to ensure that those parties have appropriate plans to remediate year 2000 issues. The Company is assessing the extent to which its operations are vulnerable should those vendors fail to properly remediate their computer systems. If certain vendors are unable to deliver product on a timely basis, due to their own year 2000 issues, the Company's production would be interrupted, which would materially adversely affect its results of operations. During 1999, the Company will attempt to identify, if possible, multiple vendor sources to address such contingency. The Company's year 2000 initiative is being completed by a team of internal staff with consultation from outside advisors. The team's mission is to ensure that there is no material adverse effect on the Company's business operations. The anticipated costs of the year 2000 initiatives are not considered material by the Company. While the Company believes its efforts are adequate to address its year 2000 concerns, there can be no guarantee that the systems of other companies will be converted on a timely basis and will not have a material adverse effect on the Company. FORWARD-LOOKING STATEMENTS Certain statements made in this Annual Report on Form 10-K, including those summarized below, are forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, and actual results may differ. Factors that could cause actual results to differ include those identified below. - - THE COMPANY IS TRANSITIONING FROM THE DEVELOPMENT STAGE TO AN OPERATING COMPANY--The Company has not had material sales to date. As of January 2, 1999, the Company had an accumulated deficit of $33.9 million. The Company expects operating losses to increase as its product development, marketing and sales, manufacturing and administrative functions expand during the initial stage of motorcycle sales. There can be no assurance that the Company will generate significant motorcycle sales or become profitable. During the transition to an operating company, the Company must successfully increase the production volume of the Super X, produce a high-quality motorcycle and control production costs. Factors that may affect the volume of production include the ability of the Company to maintain adequate quantities of high-quality components and supplies, to refine its manufacturing processes, to solve unanticipated manufacturing problems, and to hire additional qualified personnel. Factors that may affect production costs include the ability of the Company to purchase motorcycle components and supplies at reasonable costs and to effectively manage its inventory. The Company has tried to produce high-quality products through the design, construction and equipping of its manufacturing line, the design of the Super X, its choice of vendors, testing of components and supplies received, and testing of motorcycles in the production process; however, the Company has not yet manufactured a significant number of motorcycles and the transition to production could affect product quality in a manner that may not be apparent at this time. As the Company transitions to an operating company, there will be increasing demands on the Company's management, operational and financial resources to manage growth. The Company relies on original equipment suppliers to supply most of the proprietary and non-proprietary components that are used to manufacture its motorcycles. For most of the components, the Company relies on a sole source of supply. Such reliance involves a number of significant risks, including the unavailability of or interruptions in delivery of such components, manufacturing delays caused by such unavailability or interruptions, and fluctuations in the quality and price of such components. Any significant adverse variation in the quantity, quality or cost of such components manufactured by suppliers, especially single-source suppliers, could materially 12 and adversely affect the volume of production and the cost of the Company's product, until an additional source of supply is identified. The Company purchases certain components from foreign suppliers. In addition to the risks of dependence on suppliers described above, the risks of dependence on foreign suppliers include currency fluctuations affecting the value of goods purchased, trade restrictions, changes in tariffs and difficulty of enforcing supply arrangements. The Company's success also depends upon market acceptance of its brand of products. Market acceptance depends upon the ability of the Company to establish its intended brand image, a reputation for high quality and to differentiate its brand of products from its competitors. The Company will operate in a highly competitive environment and compete against established motorcycle manufacturers such as Harley-Davidson, BMW, Ducati, Honda, Kawasaki, Moto Guzzi, Suzuki, Triumph and Yamaha. Harley-Davidson, which is expected to be the Company's primary competitor in the U.S. market, has stated in its public reports that it had a 49% share of the U.S. market for new heavyweight motorcycle registrations in 1997 and that it will double its 1995 production capacity by the year 2003. The Company also expects that other manufacturers will attempt to enter the industry. The Company's established competitors have greater resources than the Company. No assurance can be given that the Company's products will be accepted or that the Company will be able to compete effectively. Sales of the Super X and any additional motorcycles the Company may produce are dependent on the effectiveness of the Company's dealer network and internal sales team. The Company may need to attract additional dealers to sell its brand of products. In addition, the Company will be required to support its dealers through, among other things, providing continuing education about the Company's brand of products, supplying parts and accessories, and training repair personnel. The Company does not have any history in such dealer support. If the Company is unable to maintain its dealer network, sales and distribution of the Company's products will be adversely affected. - - THE COMPANY ANTICIPATES SEEKING ADDITIONAL DEBT AND EQUITY FINANCING IN 1999--There can be no assurance that additional debt or equity financing will be available or, if available, will be on terms favorable to the Company or its shareholders. Any additional equity financing may cause substantial dilution to existing equity holders. In addition, if the Company's estimates of the amount of debt and equity financing needed to fund operations are incorrect due to unanticipated additional production costs, increased costs of components and supplies, increased sales and marketing costs, or other unanticipated events, then the Company would be required to obtain additional debt or equity financing beyond its current estimates. In addition, if the Company is not able to obtain such financing or if the Company incurs significant losses, the Company would not be in compliance with covenants contained in its debt agreements. Such non-compliance could lead to an event of default in the agreements, in which case the lender(s) could demand repayment of the obligation(s). - - THE COMPANY BELIEVES THAT ITS INTERNAL SYSTEMS AND SOFTWARE ARE YEAR 2000 COMPLIANT; DURING 1999, THE COMPANY WILL ATTEMPT TO IDENTIFY, IF POSSIBLE, MULTIPLE VENDOR SOURCES TO ADDRESS YEAR 2000 CONTINGENCIES--The Company's assessment of its internal year 2000 status may be incorrect or incomplete. If such assessment is incorrect or incomplete, the Company's production of its motorcycles may be interrupted. In addition, the Company has not yet completed its assessment of the effect the year 2000 problem may have on the Company's vendors. If certain vendors for a particular product are unable to supply such product because of year 2000 problems, other vendors who supply such product may not be able to meet the increased demand for such product, which could cause an interruption in the Company's production. Due to the complex nature of the year 2000 problem, it is even possible that all vendors for a particular item could have year 2000 compliance problems and be unable to supply goods to the Company, which would materially affect the Company's ability to continue production until such product could be obtained. Any interruption in production caused by year 2000 problems could materially adversely affect the Company's operating results. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company anticipates that it will be exposed to market risk from changes in foreign exchange and interest rates with respect to its components obtained from foreign sources. The Company is currently analyzing such risk and will attempt to reduce such risk through the use of certain financial instruments. In addition, the Company has entered into an import letter of credit in the amount of $995,000 for the benefit of a foreign vendor. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page Number ----------- Report of Independent Public Accountants...................................... 16 Balance Sheets as of January 3, 1998 and January 2, 1999....................................................... 17 Statements of Operations for the Years Ended December 31, 1996, January 3, 1998, and January 2, 1999 and Cumulative for the Period from Inception (December 22, 1993) to January 2, 1999........................................................ 18 Statements of Stockholders' Equity for the Period from Inception (December 22, 1993) to January 2, 1999..................... 19 Statements of Cash Flows for the Years Ended December 31, 1996, January 3, 1998, and January 2, 1999 and Cumulative for the Period from Inception (December 22, 1993) to January 2, 1999........................................................ 21 Notes to Financial Statements................................................. 22
15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Excelsior-Henderson Motorcycle Manufacturing Company: We have audited the accompanying balance sheets of Excelsior-Henderson Motorcycle Manufacturing Company (a Minnesota corporation in the development stage) as of January 3, 1998 and January 2, 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 2, 1999 and cumulative for the period from inception (December 22, 1993) to January 2, 1999. 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 Excelsior-Henderson Motorcycle Manufacturing Company as of January 3, 1998 and January 2, 1999, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 1999 and cumulative for the period from inception (December 22, 1993) to January 2, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise with no significant operating results to date. The factors discussed in Note 1 to the financial statements raise a substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these factors are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 19, 1999 16 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Balance Sheets
January 3, January 2, 1998 1999 ---------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $12,484,502 $ 4,697,542 Short-term investments 11,764,689 - Inventories - 1,865,251 Other current assets 113,497 541,371 ---------------- ----------------- Total current assets 24,362,688 7,104,164 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $255,529 and $999,869 12,908,770 30,317,118 INTELLECTUAL PROPERTY, to be amortized 200,545 275,532 RESTRICTED CASH 7,275,569 8,065,727 DEPOSITS 2,670,675 - OTHER ASSETS, net of accumulated amortization of $2,656 and $402,487 767,220 2,225,591 ---------------- ----------------- $48,185,467 $47,988,132 ---------------- ----------------- ---------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,997,783 $ 5,540,599 Accrued liabilities 585,481 3,761,657 Current maturities of long-term debt 675,372 919,533 ---------------- ----------------- Total current liabilities 3,258,636 10,221,789 LONG-TERM DEBT, less current maturities 13,738,615 20,569,409 ---------------- ----------------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Series B Convertible Preferred Stock, par value $0.01; 10,000 shares authorized, issued and outstanding at January 2, 1999 - 9,325,000 Common stock, par value $0.01; 25,000,000 shares authorized; 13,026,191 and 13,083,461 shares issued and outstanding 130,262 130,835 Additional paid-in capital 41,066,473 41,658,923 Deficit accumulated during the development stage (10,008,519) (33,917,824) ---------------- ----------------- Total stockholders' equity 31,188,216 17,196,934 ---------------- ----------------- $48,185,467 $47,988,132 ---------------- ----------------- ---------------- -----------------
The accompanying notes are an integral part of these balance sheets. 17 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Statements of Operations For the Years Ended December 31, 1996, January 3, 1998 and January 2, 1999, and Cumulative for the Period From Inception (December 22, 1993) to January 2, 1999
Fiscal 1996 Fiscal 1997 Fiscal 1998 Cumulative ------------ ----------- ------------ ------------ PREOPERATING EXPENSES: Research and development $ 1,271,276 $ 2,648,964 $ 14,907,976 $ 19,640,643 Marketing 694,239 1,673,680 3,797,185 6,304,211 General and administrative 716,154 2,180,848 4,559,639 8,160,239 ------------ ----------- ------------ ------------ Total preoperating expenses 2,681,669 6,503,492 23,264,800 34,105,093 INTEREST INCOME 174,226 810,058 1,108,997 2,136,803 INTEREST EXPENSE AND OTHER (4,088) (179,297) (1,753,502) (1,949,534) ------------ ----------- ------------ ------------ Net loss $(2,511,531) $(5,872,731) $(23,909,305) $(33,917,824) ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------ BASIC AND DILUTED NET LOSS PER SHARE $ (.43) $ (.65) $ (1.83) $ (4.66) ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------ BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,859,977 9,073,839 13,048,708 7,281,142 ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements. 18 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Statements of Stockholders' Equity
Series A Convertible Series B Convertible Preferred Stock Preferred Stock ---------------------- ---------------------- Shares Amount Shares Amount ---------- ---------- ---------- ---------- BALANCE AT INCEPTION, December 22, 1993 - $ - - $ - Issuance of common stock, $0.01 per share - - - - Excess of par value over issuance price - - - - Net loss - - - - ---------- ---------- ---------- ---------- BALANCE, December 31, 1993 - - - - Sale of common stock, $0.75 per share, net of offering costs of $23,059 - - - - Sale of common stock, $0.90 per share, net of offering costs of $14,919 - - - - Issuance of common stock in settlement of construction payable, $0.90 per share - - - - Issuance of common stock from conversion of promissory note to investor, $0.60 per share, net of conversion costs of $2,583 - - - - Net loss - - - - ---------- ---------- ---------- ---------- BALANCE, December 31, 1994 - - - - Sale of common stock, $1.88 per share, net of offering costs of $363,874 - - - - Issuance of common stock for research and development services, $1.88 per share - - - - Net loss - - - - ---------- ---------- ---------- ---------- BALANCE, December 31, 1995 - - - - Sale of Series A Convertible Preferred Stock, $3.75 per share, net of offering costs of $1,186,000 3,066,527 30,665 - - Issuance of common stock for marketing services, $1.88 per share - - - - Exercise of stock options, $1.88 per share - - - - Net loss - - - - ---------- ---------- ---------- ----------
Deficit Accumulated Common Stock Additional During the Total ---------------------- Paid-In Development Stockholders' Shares Amount Capital Stage Equity ---------- ---------- ----------- ------------ ------------- BALANCE AT INCEPTION, December 22, 1993 - $ - $ - $ - $ - Issuance of common stock, $0.01 per share 3,366,667 33,667 16,833 - 50,500 Excess of par value over issuance price - (28,617) (16,833) - (45,450) Net loss - - - (1,175) (1,175) ---------- ---------- ----------- ------------ ------------ BALANCE, December 31, 1993 3,366,667 5,050 - (1,175) 3,875 Sale of common stock, $0.75 per share, net of offering costs of $23,059 86,667 29,483 12,458 - 41,941 Sale of common stock, $0.90 per share, net of offering costs of $14,919 594,433 5,944 514,127 - 520,071 Issuance of common stock in settlement of construction payable, $0.90 per share 5,567 56 4,954 - 5,010 Issuance of common stock from conversion of promissory note to investor, $0.60 per share, net of conversion costs of $2,583 125,000 1,250 71,167 - 72,417 Net loss - - - (389,191) (389,191) ---------- ---------- ----------- ------------ ------------ BALANCE, December 31, 1994 4,178,334 41,783 602,706 (390,366) 254,123 Sale of common stock, $1.88 per share, net of offering costs of $363,874 1,605,231 16,053 2,630,073 - 2,646,126 Issuance of common stock for research and development services, $1.88 per share 33,333 333 62,167 - 62,500 Net loss - - - (1,233,891) (1,233,891) ---------- ---------- ----------- ------------ ------------ BALANCE, December 31, 1995 5,816,898 58,169 3,294,946 (1,624,257) 1,728,858 Sale of Series A Convertible Preferred Stock, $3.75 per share, net of offering costs of $1,186,000 - - 10,283,335 - 10,314,000 Issuance of common stock for marketing services, $1.88 per share 33,333 333 62,167 - 62,500 Exercise of stock options, $1.88 per share 20,000 200 37,300 - 37,500 Net loss - - - (2,511,531) (2,511,531) ---------- ---------- ----------- ------------ ------------
19 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Statements of Stockholders' Equity (Continued)
Series A Convertible Series B Convertible Preferred Stock Preferred Stock ---------------------- ---------------------- Shares Amount Shares Amount ---------- ---------- ---------- ---------- BALANCE, December 31, 1996 3,066,527 $ 30,665 - $ - Conversion of Series A Convertible Preferred Stock to common stock (3,066,527) (30,665) - - Cash paid for fractional shares in reverse stock split - - - - Sale of common stock, $7.50 per share, net of offering costs of $2,600,000 - - - - Exercise of stock options and warrants, $1.88 per share - - - - Cashless exercise of stock options and warrants - - - - Net loss - - - - ---------- ---------- ---------- ---------- BALANCE, January 3, 1998 - - - - Sale of Series B Convertible Preferred Stock, $1,000 face value per share, net of offering costs of $675,000 - - 10,000 9,325,000 Value assigned to common stock warrants (see Note 3) - - - - Exercise of stock options, $1.88 to $3.75 per share - - - - Cashless exercise of stock options and warrants - - - - Shares issued under employee stock purchase plan - - - - Net loss - - - - ---------- ---------- ---------- ---------- BALANCE, January 2, 1999 - $ - 10,000 $9,325,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Deficit Accumulated Common Stock Additional During the Total ---------------------- Paid-In Development Stockholders' Shares Amount Capital Stage Equity ---------- ---------- ----------- ------------ ------------- BALANCE, December 31, 1996 5,870,231 $ 58,702 $13,677,748 $ (4,135,788) $ 9,631,327 Conversion of Series A Convertible Preferred Stock to common stock 3,066,527 30,665 - - - Cash paid for fractional shares in reverse stock split - - (1,880) - (1,880) Sale of common stock, $7.50 per share, net of offering costs of $2,600,000 4,000,000 40,000 27,360,000 - 27,400,000 Exercise of stock options and warrants, $1.88 per share 16,800 168 31,332 - 31,500 Cashless exercise of stock options and warrants 72,633 727 (727) - - Net loss - - - (5,872,731) (5,872,731) ---------- ---------- ----------- ------------ ------------ BALANCE, January 3, 1998 13,026,191 130,262 41,066,473 (10,008,519) 31,188,216 Sale of Series B Convertible Preferred Stock, $1,000 face value per share, net of offering costs of $675,000 - - - - 9,325,000 Value assigned to common stock warrants (see Note 3) - - 430,000 - 430,000 Exercise of stock options, $1.88 to $3.75 per share 15,066 160 59,811 - 59,971 Cashless exercise of stock options and warrants 29,093 282 (282) - - Shares issued under employee stock purchase plan 13,111 131 102,921 - 103,052 Net loss - - - (23,909,305) (23,909,305) ---------- ---------- ----------- ------------ ------------ BALANCE, January 2, 1999 13,083,461 $130,835 $41,658,923 $(33,917,824) $ 17,196,934 ---------- ---------- ----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
20 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Statements of Cash Flows For the Years Ended December 31, 1996, January 3, 1998 and January 2, 1999, and Cumulative For the Period From Inception (December 22, 1993) to January 2, 1999
Fiscal 1996 Fiscal 1997 Fiscal 1998 Cumulative -------------- -------------- -------------- -------------- OPERATING ACTIVITIES: Net loss $(2,511,531) $(5,872,731) $(23,909,305) $(33,917,824) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 49,495 229,323 1,146,827 1,452,400 Change in current assets and liabilities: Inventories - - (1,865,251) (1,865,251) Other current assets (5,524) (104,378) (427,874) (541,371) Accounts payable 5,902 1,874,547 3,542,816 5,540,599 Accrued liabilities 186,706 386,730 3,176,176 3,761,657 ------------ ------------ ------------ ------------ Net cash used in operating activities (2,274,952) (3,486,509) (18,336,611) (25,569,790) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Sales (purchases) of short-term investments, net (3,132,362) (7,719,697) 11,764,689 - Property and equipment additions, net (417,496) (10,134,529) (15,296,563) (25,959,636) Purchases of intellectual property (46,743) (65,161) (74,987) (275,532) Payments made for other assets - (445,127) (1,306,972) (1,752,099) ------------ ------------ ------------ ------------ Net cash used in investing activities (3,596,601) (18,364,514) (4,913,833) (27,987,267) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from restricted cash, net - (130,569) 5,309,842 5,179,273 Payments made for other assets - (324,749) (553,886) (878,635) Proceeds from long-term debt 75,025 2,300,000 1,884,181 4,389,276 Repayment of long-term debt (29,290) (315,378) (664,676) (1,040,063) Proceeds from issuance of common stock, net of offering expenses 100,000 27,429,620 163,023 30,965,748 Proceeds from issuance of convertible preferred stock, net of offering expenses 10,314,000 - 9,325,000 19,639,000 ------------ ------------ ------------ ------------ Net cash provided by financing activities 10,459,735 28,958,924 15,463,484 58,254,599 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 4,588,182 7,107,901 (7,786,960) 4,697,542 CASH AND CASH EQUIVALENTS: Beginning of period 788,419 5,376,601 12,484,502 - ------------ ------------ ------------ ------------ End of period $ 5,376,601 $12,484,502 $ 4,697,542 $ 4,697,542 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 4,088 $ 148,631 $ 1,724,285 $ 1,888,961 Noncash transactions- Property and equipment acquired under capital lease obligations - 5,214,279 185,450 5,399,729 Restricted cash received from long-term debt and value assigned to common stock warrants - 7,145,000 6,100,000 13,245,000 Conversion of note payable into common stock - - - 75,000 Issuance of common stock for services 62,500 - - 125,000 Issuance of common stock in settlement of construction payable - - - 5,010
The accompanying notes are an integral part of these financial statements. 21 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (A DEVELOPMENT STAGE COMPANY) Notes to Financial Statements January 3, 1998 and January 2, 1999 1. NATURE OF BUSINESS: Excelsior-Henderson Motorcycle Manufacturing Company (the Company) is a development stage company incorporated on December 22, 1993 in the state of Minnesota for the purpose of developing, manufacturing, selling and distributing motorcycles. Effective January 3, 1998, the Company adopted a 52/53-week fiscal year ending on the Saturday closest to December 31. Fiscal 1997 ended January 3, 1998 and Fiscal 1998 ended January 2, 1999. The Company is subject to all of the risks inherent in the establishment of a new business enterprise, including the absence of any material operating history. The Company has sustained losses since inception and will require substantial additional equity and debt financing during the ramp up of production and to comply with existing debt covenants. In addition, if the Company's estimates of the amount of financing needed to ramp up production of the Super X are incorrect due to unanticipated additional costs of equipping the Company's manufacturing facility, unanticipated problems in the development of the Super X for production, increased labor costs, increased costs of motorcycle parts and raw materials, increased marketing and dealer network development expenses, increased rates of consumption of available cash resources or other unanticipated events, then the Company may need additional equity or debt financing. Even if the Company is successful in completing the above activities, significant revenues might not be realized. The aforementioned factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to operate as a going concern is contingent upon obtaining additional financing that might not be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 2. SIGNIFICANT ACCOUNTING POLICIES: CASH EQUIVALENTS Cash equivalents consist of money market instruments and commercial paper with original maturities of three months or less and are recorded at cost, which approximates fair value. SHORT-TERM INVESTMENTS Short-term investments consisted of U.S. government and corporate debt securities which were available for sale and were carried at fair value, which approximated cost. 22 INVENTORIES Inventories consist of raw material components recorded at the lower of cost or market, with cost determined on a first-in, first-out basis and market based on estimated realizable value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
January 3, January 2, 1998 1999 ----------- ----------- Land and improvements $ 2,172,586 $ 2,185,567 Building and improvements 8,795,212 9,217,027 Machinery and equipment 1,352,021 11,199,243 Tools and dies 165,178 1,824,608 Office equipment and fixtures 679,302 986,918 Construction in progress - 5,903,624 ----------- ----------- 13,164,299 31,316,987 Less- Accumulated depreciation (255,529) (999,869) ----------- ----------- $12,908,770 $30,317,118 ----------- ----------- ----------- -----------
Property, plant and equipment are stated at cost. Additions and improvements are capitalized, while maintenance and repairs are charged to operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives as follows:
Useful Life ------------ Land improvements 20 years Building and improvements 12-35 years Machinery and equipment 5-10 years Tools and dies 5 years Office equipment and fixtures 5-10 years
INTELLECTUAL PROPERTY Intellectual property represents amounts incurred to prepare and file for U.S. and international patent and trademark registrations. These amounts are stated at cost and will be amortized over 5 to 17 years beginning January 1999 or upon future patent or trademark registrations. RESTRICTED CASH Restricted cash consists of cash held in trusts pending the completion of the Company's paint and finishing facility and the acquisition of production tooling and manufacturing equipment. Subsequent to year-end and through March 19, 1999, the Company has drawn $4.6 million of the restricted cash. Approximately $1.3 million remains available for future draws, with the remaining amount of $2.2 million being unavailable due to debt service requirements. 23 DEPOSITS Deposits consisted of payments made for manufacturing and finishing equipment not yet installed in the Company's facility. OTHER ASSETS Other assets primarily consist of deferred financing costs associated with debt financings and the capitalization of software and related external development costs. Deferred financing costs are amortized over the lives of the related debt (ranging from six to eight years). Software and the related external development costs are amortized over the estimated useful lives of the software (ranging from three to five years). ACCRUED LIABILITIES Accrued liabilities consisted of the following:
January 3, January 2, 1998 1999 ---------- ------------ Inventory commitment reserve $ - $1,452,000 Salaries and benefits 139,131 527,860 Research and development contracts 50,000 1,204,077 Other accrued liabilities 396,350 577,720 -------- ---------- $585,481 $3,761,657 -------- ---------- -------- ----------
The inventory commitment reserve results from firm purchase commitments for inventory to be received subsequent to January 2, 1999 in excess of the estimated realizable value. The Company recorded the reserve in Fiscal 1998 within research and development expenses in the accompanying statement of operations. INCOME TAXES The Company follows the liability method of accounting for income taxes. Deferred taxes are based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Shares reserved for outstanding warrants, stock options or convertible preferred stock are not considered because the impact of the incremental shares is antidilutive. 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 24 liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Estimates are used when accounting for inventory obsolescence and valuation; determining the useful lives for property, plant and equipment and other assets; capitalizing software and related external development costs; and recording the inventory commitment reserve. Ultimate results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the Fiscal 1997 financial statements have been reclassified to conform to the Fiscal 1998 presentation. These reclassifications had no effect on the previously reported net loss or stockholders' equity. 3. LONG-TERM DEBT: Long-term debt consisted of the following:
January 3, January 2, 1998 1999 ----------- ------------ Series 1997 B Revenue Bonds, interest rate at 9.5%, escalating annual principal payments through August 1, 2007 $ 6,915,000 $ 6,435,000 Building capital lease, imputed interest rate of 11.6%, escalating monthly principal payments through September 1, 2017 4,927,763 4,842,775 Industrial Development Revenue Bond, stated interest rate at 10.4%, interest-only payments through July 1, 1999, equal principal and interest payments of $107,920 from August 1, 1999 through January 1, 2006 - 5,670,000 Tax Increment Financing Obligation, imputed interest rate of 7.9%, payments made through future property taxes, remaining balance due no later than February 1, 2012 2,300,000 2,750,000 Multiadvance $5.0 million working capital loan with a bank, variable interest rate (8.25% at January 2, 1999), interest-only payments until the earlier of July 1, 2000 or when the loan is fully drawn, principal and interest payments over 60 months thereafter, collateralized by certain assets of the Company - 1,434,181 Other 271,224 356,986 ----------- ------------ 14,413,987 21,488,942 Less- Current maturities (675,372) (919,533) ----------- ------------ $13,738,615 $20,569,409 ----------- ------------ ----------- ------------
The Series 1997 B Revenue Bonds (the Bonds) are collateralized by a security interest in the property, plant and equipment acquired with the proceeds of the Bonds. The Company is required to make monthly sinking fund installments in amounts sufficient to redeem on August 1 of each year the specified principal amount, which increases from $460,000 in Fiscal 1998 to $1,040,000 in Fiscal 2007. In Fiscal 1997, the Company entered into a 20-year capital lease for its manufacturing facility. Rent for the life of the lease is equal to the debt service on the lessor's debt ($5,750,000) using a 20-year amortization plus a 10% premium (escalating during the lease term to offset inflation). The $5,750,000 includes a $750,000 deposit held in a reserve fund. Earnings on the reserve fund will be paid to the 25 Company. The reserve fund may be released to the Company at the first to occur: lessor permission, loan maturity or the purchase of the building by the Company. The lease includes a purchase option at the end of the fifth year for $6,250,000 less principal payments made and application of the $750,000 deposit. In Fiscal 1998, the Company issued a $6.1 million Industrial Development Revenue Bond (the Bond). The proceeds of the Bond were placed into an escrow account and are being drawn for certain past and future equipment and tooling purchases. The Bond is secured by such equipment and tooling. The Bond is reported net of a $430,000 discount for the valuation of detachable stock purchase warrants issued in connection with the transaction. The Company is amortizing the debt discount over the life of the debt using the effective interest rate method. Proceeds from the City of Belle Plaine's Tax Increment Financing Obligation (TIF) were used to acquire land and construct the Company's manufacturing facility. The Company's future property taxes will be used to repay both the TIF principal and interest. In the event that future property taxes are not sufficient to make the scheduled principal and interest payments, the Company is liable for any payment deficiency. The Company's debt agreements contain certain restrictive covenants, among other requirements, relating to the Company's current ratio, tangible net worth, debt to net worth ratio and debt service coverage ratio (as defined in the agreements). Except for the current ratio covenant, the Company was in compliance with all agreement covenants as of January 2, 1999. The lenders have agreed to waive the current ratio covenant through January 1, 2000. If significant losses are incurred or additional funding is not obtained, the Company will not comply with other covenant ratios at various times in Fiscal 1999. Noncompliance could lead to an event of default, in which case the lender(s) could demand repayment of the obligation(s). Future maturities of long-term debt are as follows: 1999 $ 919,533 2000 2,274,125 2001 2,679,016 2002 1,991,153 2003 2,102,796 Thereafter 11,522,319 ----------- $21,488,942 ----------- -----------
4. STOCKHOLDERS' EQUITY: AUTHORIZED SHARES The Company's Articles of Incorporation, as amended, authorize the aggregate issuance of 32,000,000 shares of stock. The shares are classified into two classes consisting of 7,000,000 shares of preferred stock, $.01 par value, and 25,000,000 shares of $.01 par value common stock. REVERSE STOCK SPLIT Effective May 22, 1997, the Company's board of directors approved a 2-for-3 reverse stock split of the Company's outstanding stock. All periods presented reflect the reverse stock split. SERIES B AND C CONVERTIBLE PREFERRED STOCK OFFERINGS 26 In Fiscal 1998, an institutional investor (the Investor) purchased 10,000 shares of the Company's Series B Convertible Preferred Stock (Series B) for a gross purchase price of $10.0 million, from which the Company received $9.3 million in net proceeds. The conversion price of the Series B is $7.47 and is fixed for the first twelve months. Thereafter, the conversion price may vary based upon the market price of the Company's common stock during the period immediately preceding conversion. Under certain circumstances within the Company's control, the Company may be required to redeem the Series B for cash. Subsequent to year-end and through March 19, 1999, the Company received conversion notices from the Investor and converted 2,750 shares of Series B into 368,047 shares of common stock. On January 20, 1999, the Investor purchased 3,000 shares of the Company's Series C Convertible Preferred Stock (Series C) for a gross purchase price of $3.0 million from which the Company received $2.8 million in net proceeds. The conversion price of the Series C is $9.92 and is fixed until September 1999. Other terms are similar to those of the Series B. COMPANY STOCK OFFERING During Fiscal 1997, the Company completed an initial public offering of 4,000,000 shares of common stock with net proceeds of approximately $27.4 million. SERIES A CONVERTIBLE PREFERRED STOCK OFFERING During Fiscal 1996, the Company completed a restricted offering to the public of 3,066,527 shares of Series A Convertible Preferred Stock (Series A) with net proceeds to the Company of approximately $10.3 million. The Series A was converted into shares of common stock concurrent with the closing of the Company's initial public offering in July 1997. TEAM STOCK PURCHASE PLAN In Fiscal 1998, the Company implemented an employee stock purchase plan (the TSPP) that enables employees to contribute a percentage of their wages toward the purchase of the Company's common stock at 85% of the lower of market value at the beginning or the end of the semiannual purchase period. In July 1998, the shareholders authorized 300,000 shares for issuance under the TSPP. On January 2, 1999, 13,111 shares were issued at $7.86 per share, leaving 286,889 shares for future employee purchases of stock under the TSPP. STOCK-BASED COMPENSATION The Company has a stock option plan (the Plan), under the terms of which it is authorized to issue incentive stock options to employees, directors, advisors and officers. The incentive options allow the holder to purchase shares of the Company's common stock at fair market value on the date of the grant. For incentive options granted to holders of more than 10% of the outstanding common stock, the option price at the date of the grant must be at least equal to 110% of the fair market value of the stock. Currently, 1,200,000 shares have been reserved for issuance under the Plan. Stock options granted expire between four to ten years from the date of grant and vest at various rates over one to ten years. Nonqualified stock options have also been granted to outside service providers and certain employees under the Plan. The stock options were granted at fair market value as determined by the board of directors at the date of the grant. Stock options granted expire between four and ten years from the date of grant and vest over two to five years. 27 Information regarding stock-based compensation is as follows:
Fiscal 1996 Fiscal 1997 Fiscal 1998 ---------------------- ----------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ---------- ---------- ----------- ------------ ---------- Outstanding, beginning of year 17,667 $1.49 410,934 $1.86 518,773 $3.40 Granted 413,267 1.88 311,338 4.72 744,500 7.76 Exercised (20,000) 1.88 (43,666) 1.72 (20,666) 3.33 Canceled - - (159,833) 2.41 (65,002) 6.08 --------- ---------- ----------- Outstanding, end of year 410,934 1.86 518,773 3.40 1,177,605 6.02 --------- ---------- ------------ --------- ---------- ------------ Exercisable, end of year 148,267 1.83 248,936 2.44 297,425 2.71 --------- ---------- ------------ Weighted average fair value of options granted $ 1.08 $ 3.43 $ 5.52
In Fiscal 1997 and 1998, respectively, 12,000 and 4,667 options were exercised through the exchange of 3,000 and 933 shares held by the shareholder in excess of six months. Options outstanding at January 2, 1999 have an exercise price per share ranging between $1.88 and $8.50, a weighted exercise price of $6.02 and a weighted average remaining contractual life of 8.5 years. The Company accounts for the options under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the options been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and net loss per share would have been the following pro forma amounts:
Cumulative for the Period From Inception (December 22, 1993) to Fiscal 1996 Fiscal 1997 Fiscal 1998 January 2, 1999 ----------- ----------- ----------- -------------------------- Net loss: As reported $2,511,531 $5,872,731 $23,909,305 $33,917,824 Pro forma 2,696,083 6,060,375 24,418,004 34,798,719 Basic and diluted net loss per share: As reported $ .43 $ .65 $ 1.83 $ 4.66 Pro forma .46 .67 1.87 4.78
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in Fiscal 1996, 1997 and 1998, respectively: risk-free interest rates of 5.95%, 6.47% and 6.26%; expected lives of 7, 10 and 9 years; and expected volatility of 40%, 57% and 59%. 28 WARRANTS In Fiscal 1995, the Company issued warrants to purchase 209,540 shares of common stock at a price of $1.88 per share exercisable through August 2, 2000. During the year ended January 3, 1998, warrants to purchase 70,706 common shares were exercised with cash and through the exchange of common shares, with net proceeds to the Company of $16,500. During the year ended January 2, 1999, warrants to purchase 22,263 common shares were exercised through the exchange of common shares. In Fiscal 1996, the Company issued warrants to purchase 262,667 shares of Series A Convertible Preferred Stock at $4.50 per share. During Fiscal 1997, these warrants were converted to common stock warrants exercisable at $4.50 per share through September 2001. During the year ended Janury 2, 1999, warrants to purchase 16,280 common shares were exercised through the exchange of common shares. In Fiscal 1998, the Company issued to the holder of the Bond warrants to purchase 196,500 shares of common stock at a price of $9.00 per share exercisable through July 2008. In Fiscal 1998 and 1999, respectively, the Company issued to the Investor and a placement agent warrants to purchase 340,000 and 102,000 shares of common stock at a price of $8.49 and $11.28 per share exercisable through September 2003 and January 2004. 5. INCOME TAXES: As of January 2, 1999, the Company had net operating loss carryforwards of approximately $18.8 million for federal income tax purposes that are available to offset future taxable income through the year 2013. A valuation allowance equal to the full amount of the related deferred tax asset has been established due to the uncertainty of realization of the deferred tax asset. Restrictions, caused by a 1996 change in ownership resulting from sales of the Company's stock, will limit annual utilization of these net operating loss carryforwards. The portion of the net operating loss carryforwards subject to this limitation is approximately $2.6 million and the annual limitation is approximately $600,000. 6. COMMITMENTS AND CONTINGENCIES: PROPERTY, PLANT AND EQUIPMENT The Company has committed to capital expenditures of $3.7 million as of January 2, 1999, primarily for production equipment and tooling. OPERATING LEASES The Company leases certain office equipment and furniture, vehicles and trailers, and maintenance equipment under noncancelable operating leases. Future minimum payments under these leases as of January 2, 1999 are as follows: 1999 $ 315,000 2000 276,000 2001 204,000 2002 176,000 2003 143,000 Thereafter 135,000 ---------- $1,249,000 ---------- ----------
29 Under the terms of these operating leases, the Company is also responsible for certain operating expenses. Total lease expense was $33,000, $99,000, $252,000 and $415,000 for Fiscal 1996, 1997 and 1998, and cumulative for the period from inception (December 22, 1993) to January 2, 1999, respectively. LIFE INSURANCE The Company is the owner and beneficiary of four term life insurance policies covering the lives of its founders, majority shareholders and certain other executive officers. 7. LETTER OF CREDIT: As of January 2, 1999, the Company had outstanding an irrevocable import letter of credit of $995,000, which expires on March 31, 1999. This letter of credit collateralizes the Company's obligation to a third party for the purchase of inventory. The contract amount of this letter of credit approximates fair value. 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders under the captions "Election of Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information included in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders under the captions "Election of Directors--Director Compensation", "Summary Compensation Table", "Option Grants in Last Fiscal Year", "Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values" and "Employment Contracts; Termination of Employment and Change-In-Control Arrangements" is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders under the caption "Security Ownership of Principal Shareholders and Management" is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions" is incorporated by reference. 31 ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS See Index to Financial Statements on page 15. (2) FINANCIAL STATEMENT SCHEDULE Report of Independent Public Accountants on Schedule Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted. (3) The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended January 3, 1998:
Exhibit Description - ------- ----------- 3.1 Restated Articles of Incorporation of Company, as Amended.(1) 3.3 By-Laws of the Company.(2) 4.1 Securities Purchase Agreement dated as of September 3, 1998, by and among Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein.(6) 4.2 Registration Rights Agreement dated as of September 3, 1998, by and between Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein.(6) 4.3 Amended Statement of Designation of Rights, Preferences and Limitations of Series B Convertible Preferred Stock as filed with the Secretary of State of the State of Minnesota on September 3, 1998.(6) 4.4 Form of Common Stock Purchase Warrant Certificate dated September 3, 1998.(6) 4.5 Statement of Designation of Rights, Preferences and Limitations of Series C Convertible Preferred Stock as filed with the Secretary of State of the State of Minnesota on January 20, 1999. 4.6 Promissory Note, dated December 1, 1997, from the Company to Minnesota Agricultural and Economic Development Board 4.7 Specimen Taxable Industrial Development Revenue Bond (Excelsior-Henderson Project) Series 1998 10.1 Loan Agreement, dated as of November 1, 1997, by and between Minnesota Agricultural and Economic Development Board and the Company 10.2 Loan Agreement, dated as of July 1, 1998, by and between Economic Development Authority of the City of Belle Plaine, Minnesota and the Company 10.3 Assignment of Loan Agreement, dated as of July 1, 1998, by and between Economic Development Authority of the City of Belle Plaine, Minnesota, Finova Public Finance, Inc. and the Company 10.4 Contract for Private Development by and among City of Belle Plaine, Minnesota and Belle Plaine Economic Development Authority Belle Plaine, Minnesota and the Company dated as of December 31, 1996.(3) 10.5 Assignment, Assumption and Amendment of Development Contract by and among the City of Belle Plaine, Minnesota, Belle Plaine Economic Authority, Belle Plaine, Minnesota, the Company, and Ryan Belle Plaine, LLC dated April 21, 1997.(4) 10.6 Lease Agreement between Ryan Belle Plaine, LLC and the Company dated April 21, 1997.(4) 10.7 Construction Agreement by and between Ryan Belle Plaine, LLC and the Company dated April 21, 1997.(4) 10.8 Guaranty by Ryan Companies US, Inc. in favor of the Company dated April 21, 1997.(4) 10.9 Amended and Restated 1995 Stock Option Plan.(4) 10.10 Loan Agreement, dated as of December 22, 1998, by and between the Company and Dakota Bank 10.11 Form of Employee Agreement.(5) 23 Consent of Arthur Andersen LLP. 24 Powers of Attorney.
32 27 Financial Data Schedule for the year ended January 2, 1999.
- ---------- (1) Incorporated by reference to the like numbered Exhibit to the Company's Registration Statement on Form S-1 filed with the Commission on May 23, 1997 (Registration No. 333-27789). (2) Incorporated by reference to the like numbered Exhibit to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed with the Commission on July 23, 1996 (Registration No. 333-05060C). (3) Incorporated by reference to the like numbered Exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996 (File No. 000-22765). (4) Incorporated by reference to the like numbered Exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1997 (File No. 000-22765). (5) Incorporated by reference to the like numbered Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 filed with the Commission on June 27, 1997 (Registration No. 333-27789). (6) Incorporated by reference to the like numbered Exhibit to the Company's Current Report on Form 8-K filed with the Commission on September 18, 1998 (File No. 000-22765). (b) REPORTS ON FORM 8-K The registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended January 2, 1999. 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Excelsior-Henderson Motorcycle Manufacturing Company: We have audited in accordance with generally accepted auditing standards, the financial statements of Excelsior-Henderson Motorcycle Manufacturing Company included in this Form 10-K, and have issued our report thereon dated March 19, 1999. Our report on the financial statements includes an explanatory paragraph with respect to a going concern as discussed in Note 1 to the financial statements. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 19, 1999 34 SCHEDULE II EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JANUARY 2, 1999
Balance at Additions Balance at Beginning Charged to Costs End of of Period and Expenses Deductions(1) Period ------------- ---------------------- ---------------- ------------- Accrued Liabilities: Inventory Commitment Reserve...................... $ -- $ 1,452,000 $ -- $ 1,452,000
(1) Charges to the reserve are for the purpose for which the reserve was created. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 2, 1999. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By Daniel L. Hanlon -------------------------------------- Daniel L. Hanlon, Co-Founder By David P. Hanlon -------------------------------------- David P. Hanlon, Co-Founder By Jennie L. Hanlon -------------------------------------- Jennie L. Hanlon, Co-Founder Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 2, 1999. Daniel L. Hanlon - ---------------------------------------------- Daniel L. Hanlon, Director, Co-Founder, Co-Chairman of the Board of Directors and Co-Chief Executive Officer (Principal Executive Officer) David P. Hanlon - ---------------------------------------------- David P. Hanlon, Director, Co-Founder, Co-Chairman of the Board of Directors and Co-Chief Executive Officer (Principal Executive Officer) Thomas M. Rootness - ---------------------------------------------- Thomas M. Rootness, Senior Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) John B. Donahue* Director Wayne M. Fortun* Director David R. Pomije* Director - ---------- * Daniel L. Hanlon, by signing his name hereto, does hereby sign this document on behalf of each of the above named Directors of the registrant pursuant to powers of attorney duly executed by such persons. Daniel L. Hanlon ------------------------------------------ Daniel L. Hanlon, Attorney-in-Fact 36 INDEX TO EXHIBITS
Exhibit Description Page - ------- ----------- ---- 3.1 Restated Articles of Incorporation of Company............................. Incorporated by Reference 3.3 By-Laws of the Company.................................................... Incorporated by Reference 4.1 Securities Purchase Agreement dated as of September 3, 1998, by and among Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein................................................. Incorporated by Reference 4.2 Registration Rights Agreement dated as of September 3, 1998, by and between Excelsior-Henderson Motorcycle Manufacturing Company and the Buyers listed therein..................................... Incorporated by Reference 4.3 Amended Statement of Designation of Rights, Preferences and Limitations of Series B Convertible Preferred Stock as filed with the Secretary of State of the State of Minnesota on September 3, 1998..... Incorporated by Reference 4.4 Form of Common Stock Purchase Warrant Certificate dated September 3, 1998......................................................... Incorporated by Reference 4.5 Statement of Designation of Rights, Preferences and Limitations of Series C Convertible Preferred Stock as filed with the Secretary of State of the State of Minnesota on January 20, 1999....................... Filed Electronically 4.6 Promissory Note, dated December 1, 1997, from the Company to Minnesota Agricultural and Economic Development Board.................. Filed Electronically 4.7 Specimen Taxable Industrial Development Revenue Bond (Excelsior-Henderson Project) Series 1998................................. Filed Electronically 10.1 Loan Agreement, dated as of November 1, 1997, by and between Minnesota Agricultural and Economic Development Board and the Company........................................................... Filed Electronically 10.2 Loan Agreement, dated as of July 1, 1998, by and between Economic Development Authority of the City of Belle Plaine, Minnesota and the Company........................................................... Filed Electronically 10.3 Assignment of Loan Agreement, dated as of July 1, 1998, by and between Economic Development Authority of the City of Belle Plaine, Minnesota, Finova Public Finance, Inc. and the Company...... Filed Electronically 10.4 Contract for Private Development by and among City of Belle Plaine, Minnesota and Belle Plaine Economic Development Authority, Belle Plaine, Minnesota and the Company dated as of December 31, 1996...................................................................... Incorporated by Reference 10.5 Assignment, Assumption and Amendment of Development Contract by and among the City of Belle Plaine, Minnesota, Belle Plaine Economic Authority, Belle Plaine, Minnesota, the Company, and Ryan Belle Plaine, LLC dated April 21, 1997.......................................... Incorporated by Reference 10.6 Lease Agreement between Ryan Belle Plaine, LLC and the Company dated April 21, 1997...................................................... Incorporated by Reference 10.7 Construction Agreement by and between Ryan Belle Plaine, LLC and the Company dated April 21, 1997...................................... Incorporated by Reference 10.8 Guaranty by Ryan Companies US, Inc. in favor of the Company dated April 21, 1997...................................................... Incorporated by Reference 10.9 Amended and Restated 1995 Stock Option Plan............................... Incorporated by Reference 10.10 Loan Agreement, dated as of December 22, 1998, by and between the Company and Dakota Bank....................................... Filed Electronically 10.11 Form of Employee Agreement................................................ Incorporated by Reference 23 Consent of Arthur Andersen LLP............................................ Filed Electronically 24 Powers of Attorney........................................................ Filed Electronically 27 Financial Data Schedule for the year ended January 2, 1999................ Filed Electronically
EX-4.5 2 EXHIBIT 4.5 EXHIBIT 4.5 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES C CONVERTIBLE PREFERRED STOCK The rights, preferences and limitations of the Series C Convertible Preferred Stock are as follows. All references to Articles and Sections herein are solely to Articles and Sections within this Amended Statement of Rights, Preferences and Limitations (this "Certificate of Designation"). I. DESIGNATION AND AMOUNT Of the 7,000,000 shares of preferred stock that EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY (the "Company") is authorized to issue under its Articles of Incorporation, 3,000 shares shall be designated as shares of Series C Convertible Preferred Stock of the Company (the "Series C Preferred Stock" or "Series C Preferred Shares"), par value $0.01 per share, with a face amount per share of $1,000 (the "Face Amount"). The relative rights and preferences of the Series C Preferred Shares are as set forth in this Certificate of Designation. II. CERTAIN DEFINITIONS For purposes of this Certificate of Designation, the following terms shall have the following meanings: "Anniversary Date" means September 3, 1999. "Business Day" means any day that the principal exchange on which the Common Stock is traded is open for business. "Closing Bid Price" means, for any security as of any date, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg Financial Markets or a comparable reporting service of national reputation selected by the Company and reasonably acceptable to the Holders then holding a majority of the outstanding shares of Preferred Stock ("Majority Holders"), if Bloomberg Financial Markets is not then reporting closing bid prices of such security (collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sale price of such security in the over-the-counter market on the electronic bulletin board of such security as reported by Bloomberg, or, if no sale price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the Majority Holders, or, if they are unable to agree on such value, it shall be determined by an investment banking firm selected by the Company and reasonably acceptable to the Majority Holders. "Closing Date" means the date on which the Series C Preferred Shares are initially issued. "Closing Price" means $9.0208 (the average Closing Bid Price for the three (3) consecutive Business Days ending one Business Day prior to the filing of the Certificate of Designation). "Common Stock" means the common stock, $0.01 par value, of the Company. "Conversion Price", subject to the adjustments provided for in Article X hereof, means (1) on and prior to the Anniversary Date, $9.9229 [110% of the Closing Price], and (2) beginning on the day following the Anniversary Date, the lesser of (i) $9.9229 [110% of the Closing Price] and (ii) the Market Price at the time of conversion. Notwithstanding the foregoing, after the Anniversary Date, if the Market Price is less than $5.00 per Share of Common Stock, the Conversion Price shall equal 105% of the Market Price. "Effective Date" means October 9, 1998. "Holders" means the initial Holders of the Series C Preferred Stock and their permitted transferees. "majority of the outstanding shares of Series C Preferred Stock" means greater than 66.6% of the outstanding shares of Preferred Stock. "Market Price" means the lowest volume weighted average price of the Common Stock during any period of five (5) consecutive Business Days during the twenty (20) consecutive Business Day period ending on the day prior to the Conversion Date. "Maximum Share Amount" shall be calculated on the Anniversary Date, and shall mean the lesser of (a) 2,600,000 shares of Common Stock, or (b) the quotient resulting from (i) $13,000,000 less the aggregate Face Amount of all shares of the Series B Preferred Stock and Series C Preferred Stock, which have converted into shares of Common Stock on or prior to the Anniversary Date, divided by (ii) $5.00, subject to adjustments for stock dividends, stock splits, combinations or similar events. "Preferred Stock" means shares of the Series B Preferred Stock and the Series C Preferred 2 Stock. "Registration Statement" means a registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. "Series B Preferred Stock" means the shares of Series B Convertible Preferred Stock issued pursuant to the terms of the Securities Purchase Agreement. "Second Closing Warrants" means certain stock purchase warrants to acquire shares of Common Stock issued by the Company to the initial Holders at the Second Closing (as defined in the Securities Purchase Agreement). "Securities Purchase Agreement" means the Securities Purchase Agreement referencing this Certificate of Designation, among the Company and the purchasers named therein, as amended from time to time in accordance with the terms thereof. "Warrants" means the First Closing Warrants (as defined in Article V.B.(ii) hereof), and the Second Closing Warrants. III. DIVIDENDS The Series C Preferred Stock will be entitled to dividends paid on the Common Stock, with such dividends calculated as if the Series C Preferred Stock had been converted to Common Stock at the then-applicable Conversion Price on the date of declaration of such dividend. IV. CONVERSION A. CONVERSION AT THE OPTION OF HOLDER. Subject to Article V(B), on and following the Closing Date, each Holder may, at any time and from time to time, convert all or any portion of the Face Amount (plus any other amounts payable thereon, including, without limitation, payments due under Section 2 of the Registration Rights Agreement and Conversion Default Payments, in each case, to the extent not paid by the Company in cash (the "Additional Amounts")) of its shares of Series C Preferred Stock into a number of fully paid and nonassessable shares of Common Stock determined by dividing the aggregate Face Amount of the Series C Preferred Shares being converted (including any Additional Amounts) by the then applicable Conversion Price, subject to adjustment as provided in Article X; provided, however, that, in no event shall a Holder of shares of Series C Preferred Stock be entitled to convert any such shares to the extent, but only to the extent, that (x) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the shares of Series C Preferred Stock or unexercised portion of the Second Closing Warrants or any other securities containing analogous limitations) plus (y) the 3 number of shares of Common Stock issuable upon the conversion of the shares of Series C Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by a Holder and such Holder's affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rules 13(d) through (g) thereunder, except as otherwise provided in clause (x) of such proviso. B. MANDATORY CONVERSION. So long as, for a period of thirty (30) Business Days prior to delivery of a Mandatory Conversion Notice (as defined below), and continuing through the Mandatory Conversion Date (as defined below) (i) all of the shares of Common Stock issuable upon conversion of all outstanding shares of Series C Preferred Stock and all outstanding shares of Series B Preferred Stock are then (x) authorized and reserved for issuance, (y) registered for resale under the 1933 Act by the holders of the Series C Preferred Stock and the Series B Preferred Stock (or may otherwise be resold publicly without restriction) and (z) eligible to be traded on the Nasdaq National Market ("Nasdaq"), the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") or Nasdaq SmallCap Market, or any successor national securities exchange or market (collectively, a "National Exchange") and (ii) there is not then a continuing Redemption Event and the Maximum Share Limit has not been reached (unless the Share Limit Waiver (as defined below) has been obtained), the Company shall be entitled, on any date that the average of the Closing Bid Prices of the Common Stock during the ten (10) consecutive Business Day period ending on the Business Day immediately preceding such date of determination is equal to or greater than 200% of the Closing Price (subject to adjustment in accordance with Article X hereof), to deliver a written notice to the Holders requiring the Holders to convert all, but not less than all, of the Series C Preferred Shares. Such conversion shall be on a Business Day designated in such notice, which date (the "Mandatory Conversion Date") shall be no earlier than twenty (20) Business Days and no later than twenty-five (25) Business Days following the date of such notice (such notice, a "Mandatory Conversion Notice"). Notwithstanding anything herein to the contrary, no mandatory conversion will be required, and the applicable Mandatory Conversion Notice shall be of no further force and effect, if on the Business Day immediately preceding the Mandatory Conversion Date, the Closing Bid Price of the Common Stock is not equal to at least 175% of the Closing Price. The mechanics of such conversion shall be in accordance with Section IV(C), except that each Holder shall be deemed to have delivered a Notice of Conversion, with the Conversion Date being the Mandatory Conversion Date specified in the Mandatory Conversion Notice. C. MECHANICS OF CONVERSION. To convert the Series C Preferred Shares, a Holder shall: (i) fax (or deliver by other means resulting in notice) to the Company a copy of the fully executed Notice of Conversion in the form of Exhibit H to the Securities Purchase Agreement, and (ii) surrender or cause to be surrendered to the Company or its transfer agent (the "Transfer Agent") (or satisfy the provisions of Article XIII(A), if applicable) the certificates representing the Series C Preferred Stock being converted (the "Series C Preferred Stock Certificates") and the original 4 executed version of the Notice of Conversion as soon as practicable thereafter. The date the Holder delivers to the Company the Notice of Conversion described in clause (i) or such later date specified in the Notice of Conversion shall be the "Conversion Date". In the case of fax or messenger delivery, delivery shall be deemed made on the date of such fax or messenger delivery. D. TIMING OF CONVERSION. No later than the third Business Day following the Conversion Date (the "Delivery Date"), provided that the Company's Transfer Agent has received prior to such date the Series C Preferred Stock Certificates (or the Holder has satisfied the provisions of Article XIII(A), if applicable), the Company shall cause the Transfer Agent to issue and deliver to the Holder (or otherwise at such Holder's direction) that number of shares of Common Stock issuable upon conversion of the number of Series C Preferred Shares being converted, if applicable, and a new certificate representing the Series C Preferred Stock not converted by such Holder. The person or persons entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares at the close of business on the Conversion Date, unless the Notice of Conversion is revoked as provided in Article V(E). If Series C Preferred Stock Certificates are not received (or the provisions of Article XIII(A) are not satisfied) prior to 2:00 p.m. Eastern Time on the Business Day prior to the Delivery Date, the Delivery Date shall be extended until the Business Day (or, if received after 2:00 p.m. Eastern Time, the second Business Day) following the date of surrender to the Company of Series C Preferred Stock Certificates to be converted or satisfaction of the provisions of Article XIII(A), if applicable. E. CONTINUING RIGHTS. In addition to any other remedies which may be available to the Holder, in the event the Company fails for any reason to effect or to cause the Transfer Agent to effect delivery to the Holder of certificates representing the shares of Common Stock receivable upon conversion of the Series C Preferred Shares by the Business Day following the Delivery Date (which certificates shall be unlegended as and when required pursuant to the Securities Purchase Agreement, the Registration Rights Agreement entered into in connection with the Securities Purchase Agreement by and among the Company and the other signatories thereto (the "Registration Rights Agreement") and this Certificate of Designation), the Holder shall, unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Company and the Transfer Agent, regain the rights of a Holder with respect to such unconverted shares of Series C Preferred Stock and the Company shall immediately cause the Transfer Agent to return the subject Series C Preferred Stock Certificates and other conversion documents, if any, delivered by Holder, to the Holder, or, if shares of Series C Preferred Stock have not been surrendered, adjust its records to reflect that such shares of Series C Preferred Stock have not been converted; provided, however, that the Company shall remain liable for payment of the amounts determined pursuant to Article VI(A) hereof for each day falling between the Business Day following the Delivery Date and the date the revocation notice is received by the Company, and shall also remain liable for any damages suffered by Holder. F. STAMP, DOCUMENTARY AND OTHER SIMILAR TAXES. The Company shall pay all stamp, 5 documentary, issuance and other similar taxes which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Series C Preferred Stock; provided that the Company will not be obligated to pay stamp, transfer or other taxes resulting from the issuance of Common Stock to any person other than the registered holder of the Series C Preferred Stock. G. NO FRACTIONAL SHARES. No fractional shares of Common Stock are to be issued upon the conversion of Series C Preferred Stock, but the Company shall make a cash payment equal to such fraction multiplied by the Closing Bid Price on the Conversion Date in respect of any fractional share which would otherwise be issuable; provided that in the event that sufficient funds are not legally available for the payment of such cash adjustment any fractional shares of Common Stock shall be rounded up to the next whole number. H. ELECTRONIC TRANSMISSION. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of a Holder, the Company shall use its commercially reasonable efforts to cause the Transfer Agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of a prime broker designated by the Holder with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. In the case of electronic transmission of such Common Stock, the Company or the Transfer Agent shall, if applicable, within three (3) Business Days issue a new certificate representing the Series C Preferred Stock not converted pursuant to any Notice of Conversion. I. CASH CONVERSION. Following the Anniversary Date, so long as (i) for at least thirty (30) Business Days prior to the date of any Cash Conversion (as defined below) all of the shares of Common Stock issuable upon conversion of all outstanding shares of Series C Preferred Stock and all outstanding shares of Series B Preferred Stock are then (x) authorized and reserved for issuance, (y) registered for resale under the 1933 Act by the holders of the Series C Preferred Stock and the Series B Preferred Stock (or may otherwise be resold publicly without restriction) and (z) eligible to be traded on a National Exchange and (ii) there is not then a continuing Redemption Event, in lieu of honoring Notices of Conversion by delivery of shares of Common Stock on the Delivery Date in accordance with Section IV(D), the Company shall, subject to the notice requirement set forth in the last sentence of this Section IV(I), be entitled to make a cash payment ("Cash Conversion") in an amount equal to (a) the number of shares of Common Stock deliverable to a Holder pursuant to the Notice of Conversion multiplied by (b) the average Closing Bid Price of the Common Stock for the five consecutive Business Days preceding the Conversion Date. The number of shares of Common Stock that would have been issued absent any such Cash Conversion will be deemed to have been issued for purposes of calculating the Maximum Share Amount. If the Company desires to effect Cash Conversions, it shall notify the Holder subject thereto at least five Business Days prior to the first date during which Cash Conversions will be effected, and, unless waived by the Company, 6 during the period specified in such notice, not to exceed (with respect to any one notice) thirty (30) days, only Cash Conversions will be permitted. V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK; LIMITATION ON NUMBER OF CONVERSION SHARES A. RESERVATION OF COMMON STOCK. Subject to the provisions of this Article V, and subject to the Maximum Share Amount (unless the Stockholder Approval (as defined herein) has been obtained) the Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the conversion of all outstanding Series C Preferred Shares and the exercise of all Second Closing Warrants (at the then-current Conversion Price and Exercise Price, respectively) in accordance with Section 4.11 of the Securities Purchase Agreement (the "Reserved Amount"). The Reserved Amount shall be increased from time to time in accordance with the Company's obligations pursuant to 4.11 of the Securities Purchase Agreement. In addition, if the Company shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Series C Preferred Stock shall be convertible at the then current Conversion Price, the Company shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series C Preferred Stock. B. LIMITATION ON NUMBER OF COMMON SHARES TO BE ISSUED. (i) Notwithstanding anything in this Certificate of Designation to the contrary, the Series C Preferred Stock shall not be convertible into an aggregate number of shares in excess of the Maximum Share Amount, subject to adjustments for stock dividends, stock splits, combinations or similar events, and upon issuance of Common Shares in conversion of the Series C Preferred Stock equal to the Maximum Share Amount, the Series C Preferred Stock shall, from that time forward, cease to be convertible into Common Stock in accordance with the terms of Article IV, unless (a) the Company, at its sole option, shall have notified the Holders that the Company will continue to honor conversions of Series C Preferred Stock into Common Stock, and (b) either (1) any necessary stockholder approval required by the Nasdaq (or such other principal exchange upon which the Common Stock is then trading) for the issuance of shares in excess of the Maximum Share Amount has been obtained or duly waived by such exchange, and evidence of such approval satisfactory to the Holders has been delivered to the Holders or (2) the Company can issue additional shares without violating National Association of Securities Dealers, Inc. ("NASD") rules and regulations (but only to the extent such rules or regulations would not be violated) (satisfaction of clauses (a) or (b) of this Section V(B)(i) being referred to herein as a "Share Limit Waiver"). (ii) Following any Stockholder Approval Trigger Date, the Company shall solicit 7 by proxy the authorization (the "Stockholder Approval") by the stockholders of the Company of the issuance of shares of Common Stock upon (x) the conversion of shares of Series C Preferred Stock pursuant to the terms hereof, (y) the exercise of the Second Closing Warrants pursuant to the terms thereof, and (z) the conversion and/or exercise of any other securities (including, but not limited to, the shares of Series B Preferred Stock and the Warrants (the "First Closing Warrants") issued by the Company at the First Closing (as defined in the Securities Purchase Agreement)) which would be integrated with the Series C Preferred Stock and Second Closing Warrants for purposes of the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities (the "Other Securities") representing in the aggregate in excess of twenty (20%) percent of the outstanding shares of Common Stock on September 3, 1998 (the "20% Limit") for the purpose of eliminating any prohibitions under the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities on the Company's ability to issue shares of Common Stock in excess of such 20% Limit. The Company shall thereafter use its commercially reasonable efforts to obtain the Stockholder Approval no later than ninety (90) days following the Stockholder Approval Trigger Date. The failure to obtain Stockholder Approval shall not constitute a breach of the Company's obligations hereunder. "Stockholder Approval Trigger Date" shall mean any date following the Anniversary Date and following the date (i) on which the Holders have, in the aggregate, converted more than 50% of the sum of the original Face Amount of all of the Series C Preferred Stock issued on the Closing Date plus the original face value of all of the Series B Preferred Stock issued at the First Closing under the Securities Purchase Agreement, and (ii) on which the sum of (a) the number of shares of Common Stock issued upon conversion of the Series C Preferred Stock and exercise of the Second Closing Warrants on the date of calculation, plus (b) the number of shares of Common Stock issuable upon conversion of the then outstanding Series C Preferred Stock at the Market Price and upon exercise of the Second Closing Warrants at the Exercise Price on the date of calculation, plus (c) the number of shares of Common Stock, if any, issued upon conversion and/or exercise of the Other Securities on the date of calculation, plus (d) the number of shares of Common Stock, if any, issuable upon conversion and/or exercise of the Other Securities at the conversion or exercise price that would be in effect on the date of calculation, is, in the aggregate, in excess of the 20% Limit. C. REDEMPTION OBLIGATION FOLLOWING ISSUANCE OF MAXIMUM SHARE AMOUNT. Within 90 days of the date that the Maximum Share Amount of Common Stock has been issued (or has been deemed to have been issued as a result of Cash Conversions), the Company must (a) to the extent the conditions set forth in clause (b) of Article V(B)(i), have been satisfied, provide the Share Limit Waiver to each Holder, and thereafter permit conversions of the Series C Preferred Stock into shares of Common Stock in excess of the Maximum Share Amount, or (b) redeem all of the outstanding shares of Series C Preferred Stock, with the redemption amount for each share of Series C Preferred Stock being equal to the Face Amount thereof. The Share Limit Waiver must be provided within two (2) Business Days following the issuance of the Maximum Share Amount of Common Stock unless the Company delivers to each Holder a certificate signed by its Chief Financial Officer or a Chief Executive Officer certifying that the Company will exercise commercially reasonable best 8 efforts to obtain sufficient financing to permit the redemption of all of the outstanding shares of Series C Preferred Stock during the 90 day period referenced in the preceding sentence. Unless the Share Limit Waiver is delivered on the Business Day following the date that the Maximum Share Amount of Common Stock has been issued, any conversions of Series C Preferred Shares into shares of Common Stock in excess of the Maximum Share Amount (after the Share Limit Waiver has been delivered to each Holders) shall be at the lowest applicable Conversion Price, as chosen in the sole discretion of each Holder, in effect from the date that the Maximum Share Amount was reached until the date of delivery of the Share Limit Waiver to such Holder. D. ALLOCATION OF RESERVED AMOUNT, MAXIMUM SHARE AMOUNT. The Maximum Share Amount (including any increases thereto) shall be allocated by the Company pro rata among the holders of Series C Preferred Stock and Series B Preferred Stock based on the number of shares of Series C Preferred Stock and Series B Preferred Stock issued to each holder. Each increase to the Maximum Share Amount shall be allocated pro rata among the holders of Series C Preferred Stock and Series B Preferred Stock based on the number of shares of Series C Preferred Stock and Series B Preferred Stock held by each holder at the time of the increase in the Maximum Share Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series B Preferred Stock or Series C Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount. Any portion of the Maximum Share Amount which remains allocated to any person or entity which does not hold any Series B Preferred Stock or Series C Preferred Stock shall be allocated to the remaining holders of shares of Series C Preferred Stock and Series B Preferred Stock, pro rata based on the number of shares of Series C Preferred Stock and Series B Preferred Stock then held by such holders. The Reserved Amount (including any increases thereto) shall be allocated by the Company pro rata among the holders of Series C Preferred Shares based on the number of shares of Series C Preferred Shares issued to each holder. Each increase to the Reserved Amount shall be allocated pro rata among the holders of Series C Preferred Shares based on the number of shares of Series C Preferred Shares held by each holder at the time of the increase in the Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series C Preferred Shares, each transferee shall be allocated a pro rata portion of such transferor's Reserved Amount. Any portion of the Reserved Amount which remains allocated to any person or entity which does not hold any Series C Preferred Shares shall be allocated to the remaining holders of shares of Series C Preferred Shares, pro rata based on the number of shares of Series C Preferred Shares then held by such holders. VI. FAILURE TO CONVERT A. If, at any time, (x) a Notice of Conversion has been sent to the Company and the 9 Company fails for any reason to deliver, on or prior to the third Business Day following the expiration of the Delivery Date for such conversion (said period of time being the "Extended Delivery Period"), such number of shares of Common Stock to which such Holder is entitled (taking into account the limitations on conversions imposed by such Holder's allocated portion of the Maximum Share Amount) upon such conversion, or (y) the Company provides notice (including by way of public announcement) (the "Refusal Notice") to any Holder at any time of its intention not to issue shares of Common Stock upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (each of (x) and (y) being a "Conversion Default"), then the Company shall pay to the affected Holder, in the case of a Conversion Default described in clause (x) above, and to all Holders of Series C Preferred Stock, in the case of a Conversion Default described in clause (y) above, an amount equal to 1% of the Face Amount of the Series C Preferred Stock held by such Holder with respect to which the Conversion Default exists (which amount shall be deemed to be the aggregate Face Amount of all outstanding Series C Preferred Stock in the case of a Conversion Default described in clause (y) above) for each day thereafter until the Cure Date. "Cure Date" means (i) with respect to a Conversion Default described in clause (x) of its definition or if a Conversion Notice has been submitted and the Company has issued a Refusal Notice, the date the Company effects the conversion of the portion of the Series C Preferred Stock submitted for conversion and (ii) if no Conversion Notices have been submitted, with respect to a Conversion Default described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all conversions of Series C Preferred Stock in accordance with the terms of this Certificate of Designation. The Company shall promptly provide each Holder with notice of the occurrence of a Conversion Default with respect to any of the other Holders. B. The payments to which a Holder shall be entitled pursuant to this Section VI(A) are referred to herein as "Conversion Default Payments." Conversion Default Payments shall be paid in cash. Such payment shall be made in accordance with and be subject to the provisions of Article XIII(B). VII. REDEMPTION DUE TO CERTAIN EVENTS A. Redemption Events. A "Redemption Event" means any one of the following (after expiration of any applicable cure period): (i) The Company fails, and any such failure continues uncured for seven (7) Business Days after the Company has been notified thereof in writing by the Holder, to (x) remove any restrictive legend on any certificate for any shares of Common Stock issued after the Effective Date to the Holders upon conversion of the Series C Preferred Stock or the Series B Preferred Stock or upon exercise of the Warrants, or (y) to transfer or cause the Transfer Agent to transfer any certificate for shares of Common Stock issued to a Holder upon conversion of the Series C Preferred Stock or the Series B Preferred Stock, in each case as and when required by this Certificate of Designation, the Warrants, the Securities Purchase Agreement or the Registration Rights Agreement; 10 or (ii) The Company fails to fulfill its obligations pursuant to Section 4.11 or 4.13 of the Securities Purchase Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten (10) days after the Corporation shall have been notified thereof in writing by any holder of Series C Preferred Stock; or (iii) The Company fails to make any redemption payment due pursuant to Article V(C) hereof or Article V(C) of the Amended Certificate of Designation with respect to the Series B Preferred Stock when due; or (iv) The Registration Statement filed by the Company pursuant to the Registration Rights Agreement and declared effective by the SEC on the Effective Date lapses in effect (or sales of all of the Registrable Securities cannot be made by the Holders thereunder, whether by reason of the Company's failure to amend or supplement the prospectus included therein in accordance with the Registration Rights Agreement or otherwise) for more than forty-five (45) consecutive days or an aggregate of seventy-five (75) days in any twelve (12) month period after the Effective Date, or the Common Stock is not listed or included for quotation on a National Exchange or that trading is halted after the Effective Date for more than an aggregate of twenty (20) Business Days in any twelve (12) month period. B. REDEMPTION OF HOLDER'S SHARES. Upon the occurrence and during the continuation of any Redemption Event, the Company shall, as to each Holder of the then outstanding shares of Series C Preferred Stock who have given written notice (the "Optional Redemption Notice") to the Company of such Redemption Event, purchase each such Holder's shares of Series C Preferred Stock for an amount per share equal to the greater of (1) 130% multiplied by the sum of (a) the Face Amount of the shares to be redeemed, plus (b) any other amounts payable thereon (including without limitation payments due under Section 2 of the Registration Rights Agreement and Conversion Default Payments) through the date of payment of the Optional Redemption Amount (as defined herein) (the "Optional Redemption Date") and (2) the "Parity Value" of the shares to be redeemed (the greater of such amounts being the "Optional Redemption Amount"); provided that if such Redemption Event is pursuant to Article VII(A)(iv), the Company may, at its sole option, in lieu of the foregoing purchase, pay the Holder an amount equal to the Default Amount (as defined below) multiplied by the number of shares of Series C Preferred Stock held by such holder on the date of the Optional Redemption Notice. "Parity Value" means the product of (a) the number of shares of Common Stock issuable upon conversion of such shares at such time (treating the Trading Day immediately preceding the Optional Redemption Date as the "Conversion Date" (as hereinafter defined), unless the Redemption Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by 11 (b) the highest Closing Bid Price for the Common Stock on the principal trading market for such shares from the period beginning on the date of the first occurrence of the Redemption Event and ending on such Conversion Date. "Default Amount" shall mean Two Hundred U.S. Dollars ($200), or such lesser amount as would be determined in accordance with Section 2(c) of the Registration Rights Agreement. In the case of a Redemption Event, if the Company fails to pay the Default Amount or the Optional Redemption Amount, as applicable, for each share within five (5) business days of written notice that such amount is due and payable, then (assuming there are sufficient authorized shares) in addition to all other available remedies, each holder of Series C Preferred Stock shall have the right at any time, so long as the Redemption Event continues, to require the Company, upon written notice, to immediately issue (in accordance with and subject to the terms of Article V above), in lieu of the Default Amount or the Optional Redemption Amount, as applicable, with respect to each outstanding share of Series C Preferred Stock held by such holder, the number of shares of Common Stock of the Company equal to the Default Amount or the Optional Redemption Amount, as applicable, divided by any Conversion Price, as chosen in the sole discretion of the Holder, in effect from the date of the Redemption Event until the date of exercise of such rights by Holder. Payment of the Default Amount shall not affect the Holder's ongoing rights with respect to the then outstanding shares of Series C Preferred Stock or the rights of such holders to pursue alternate damages in respect of the events giving rise to such payments. C. OPTIONAL REDEMPTION BY THE COMPANY. So long as (i) for at least thirty (30) Business Days prior to the date of any date of redemption under this Article VII(C) all of the shares of Common Stock issuable upon conversion of all outstanding shares of Series C Preferred Stock and all outstanding shares of Series B Preferred Stock are then (x) authorized and reserved for issuance, (y) registered for resale under the 1933 Act by the holders of the Series C Preferred Stock and Series B Preferred Stock (or may otherwise be resold publicly without restriction) and (z) eligible to be traded on a National Exchange and (ii) there is not then a continuing Redemption Event or Shareholder Approval Trigger Date (unless the Share Limit Waiver has occurred), the Company may, at its option, upon twenty (20) Business Days' notice, redeem the Series C Preferred Stock, as follows: (x) beginning upon the date that the Company completes a public offering of its Common Stock of at least $20,000,000 underwritten by an investment banking firm that holds a seat on the NYSE, and (y) on any date following the Anniversary Date that the average Closing Bid Price of the Common Stock over the immediately preceding ten trading day period is less than $5.00 per share (as adjusted for any stock dividends, stock splits, combinations, or similar events), the Company may, at its option, redeem for cash out of funds legally available therefor, all (but not less than all) of the outstanding Series C Preferred Shares at 120% of the Face Amount of such shares of Series C Preferred Stock plus any other amounts payable thereon. Nothing in this Article VII(C) shall prohibit conversions of Series C Preferred Stock otherwise permitted pursuant to the terms of this Certificate of Designation during the pendency of any notice of optional redemption by the Company hereunder. 12 D. MATURITY; REQUIRED REDEMPTION. Subject to the limitations contained in Article VII(F) hereof and so long as there is not then a continuing Redemption Event, each share of Series C Preferred Stock outstanding on September 3, 2001 (the "Maturity Date") will be redeemed at the Company's sole option, (a) in cash equal to the aggregate face value thereof and any other amounts payable thereon or, (b) by delivery of a number of shares of Common Stock issuable upon conversion of all of the Series C Preferred Stock at the then-applicable Conversion Price, including any adjustment under Article X; provided that (i) any necessary approval for the issuance of additional shares has been obtained if the Maximum Share Amount has been reached (or will be exceeded as a result of any conversion at maturity) or the Company is able to issue shares of Common Stock without violating applicable rules of the principal National Exchange on which the Common Stock is then traded (but only to the extent such rules would not be violated), and (ii) all shares of Common Stock issuable upon conversion of all outstanding shares of Series C Preferred Stock are then (x) authorized and reserved for issuance, (y) registered under the Securities Act for resale by all Holders of such Series C Preferred Shares and (z) eligible to be traded on a National Exchange. The Maturity Date shall be delayed by one (1) Business Day each for each Business Day occurring prior thereto and prior to the full conversion of the Series C Preferred Stock that any Redemption Event (as defined in Article V(A)) exists, without regard to whether any cure periods shall have run, and for each Business Day that the Registration Statement is not effective or that the Common Stock is not then listed for trading beyond days during which such events are permitted without penalty pursuant to the Registration Rights Agreement. The Company will notify each Holder at least ten Business Days prior to the Maturity Date if the Company intends to redeem all or any portion of the Series C Preferred Stock held such Holder in cash. E. REDEMPTION DEFAULTS. If the Company fails to pay any Holder the redemption consideration with respect to any share of Series C Preferred Stock, as provided in this Article VII, within five (5) Business Days of its receipt or delivery, as applicable, of a notice requiring such redemption (the "Redemption Notice"), then each Holder (i) shall be entitled to interest on the redemption consideration not paid at a per annum rate equal to the lower of (x) the sum of prime rate published from time to time by the Wall Street Journal plus three percent (3%) and (y) the highest interest rate permitted by applicable law from the date of the Redemption Notice until the date of redemption hereunder. In the event the Company is not able to redeem all of the shares of Series C Preferred Stock subject to Redemption Notices, the Company shall redeem shares of Series C Preferred Stock from each Holder, pro rata, based on the total number of shares of Series C Preferred Stock included in the Redemption Notice relative to the total number of shares of Series C Preferred Stock in all of the Redemption Notices. In the case of a Redemption Event, if the Company fails to pay the Optional Redemption Amount for each share for any reason (including, without limitation, the circumstances specified in paragraph VII(F)), within five (5) Business Days of the applicable Redemption Notice then (assuming there are sufficient authorized shares) in addition to all other available remedies, each Holder of Series C Preferred Stock shall have the right at any time, so long as the Redemption Event continues, to convert, upon written notice, in lieu of the Optional 13 Redemption Amount, each outstanding share of Series C Preferred Stock held by such Holder, into the number of shares of Common Stock of the Company equal to the Optional Redemption Amount, divided by the Conversion Price then in effect, subject in all cases to each such Holder's Maximum Share Amount. F. CAPITAL IMPAIRMENT. In the event that any Section 302A.551 of the Minnesota Business Corporation Act ("BCA"), would be violated by the redemption of any shares of Series C Preferred Stock that are otherwise subject to redemption pursuant to this Article VII, the Company: (i) will redeem the greatest number of shares of Series C Preferred Stock possible without violation of said Article; (ii) the Company thereafter shall use its best efforts to take all necessary steps permitted pursuant to this Certificate of Designation and the agreements entered into in connection with the issuance of Series C Preferred Stock pursuant hereto in order to remedy its capital structure in order to allow further redemptions without violation of said Article; and (iii) from time to time thereafter as promptly as possible the Company shall redeem shares of Series C Preferred Stock at the request of the Holders to the greatest extent possible without causing a violation of the BCA. VIII. RANK; PARTICIPATION A. RANK. All shares of the Series C Preferred Stock shall rank (i) prior to the Common Stock; (ii) prior to any class or series of capital stock of the Company hereafter created (unless, with the consent of the Holders of a majority of the outstanding shares of Series C Preferred Stock obtained in accordance with Article XII hereof, such class or series of capital stock specifically, by its terms, ranks senior to or pari passu with the Series C Preferred Stock) (collectively, with the Common Stock, "Junior Securities"); (iii) pari passu with the Series B Preferred Stock and pari passu with any class or series of capital stock of the Company hereafter created (with the consent of the Holders of a majority of the outstanding shares of Series C Preferred Stock obtained in accordance with Article XII hereof), specifically ranking, by its terms, on parity with the Series C Preferred Stock (the "Pari Passu Securities"); and (iv) junior to any class or series of capital stock of the Company hereafter created (with the consent of the Holders of a majority of the outstanding shares of Series C Preferred Stock obtained in accordance with Article XII hereof) specifically ranking, by its terms, senior to the Series C Preferred Stock (the "Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. B. PARTICIPATION. Subject to the rights of the holders (if any) of Pari Passu Securities and Senior Securities, the Holders shall, as such Holders, be entitled to such dividends paid and distributions made to the holders of Common Stock to the same extent as if such Holders had converted their shares of Series C Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere contained) and had been issued such Common Stock on the day before the record date for said dividend or distribution. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common 14 Stock. IX. LIQUIDATION PREFERENCE A. LIQUIDATION OF THE COMPANY. If the Company shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of sixty (60) consecutive days and, on account of any such event, the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up (a "Liquidation Event"), no distribution shall be made to the holders of any shares of capital stock of the Company (other than Senior Securities and, together with the Holders of Series C Preferred Stock and the Pari Passu Securities) upon liquidation, dissolution or winding up unless prior thereto the Holders shall have received the Liquidation Preference (as herein defined) with respect to each Series C Preferred Share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the Holders and holders of Pari Passu Securities shall be insufficient to permit the payment to such Holders of the preferential amounts payable thereon, then the entire assets and funds of the Company legally available for distribution to the Series C Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. B. CERTAIN ACTS NOT A LIQUIDATION. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Subject to the provisions of Section X(B), neither the consolidation or merger of the Company with or into any other entity nor the sale or transfer by the Company of less than substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. C. DEFINITION OF LIQUIDATION PREFERENCE. The "Liquidation Preference" with respect to a share of Series C Preferred Stock means an amount equal to the Face Amount thereof plus any other amounts that may be due from the Company with respect thereto pursuant to this Certificate of Designation, the Securities Purchase Agreement or the Registration Rights Agreement. The Liquidation Preference with respect to any Pari Passu Securities shall be as set forth in the Certificate 15 of Designation filed in respect thereof. X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS The Conversion Price shall be subject to adjustment from time to time as follows: A. STOCK SPLITS, STOCK DIVIDENDS, ETC. If at any time on or after the Closing Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, reclassification or other similar event, the number of shares of Common Stock issuable upon conversion of the Series C Preferred Shares shall be proportionately increased, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the number of shares of Common Stock issuable upon conversion of the Series C Preferred Shares shall be proportionately reduced. In such event, the Company shall notify the Company's Transfer Agent of such change on or before the effective date thereof. B. MAJOR TRANSACTIONS. If the Company shall consolidate with or merge into any corporation, sell all or substantially all of its assets, effectuate a transaction or series of transactions in which 50% or more of the voting power of the Company is disposed of or reclassify its outstanding shares of Common Stock (other than by way of subdivision or reduction of such shares) (each a "Major Transaction"), then each Holder shall thereafter be entitled to receive consideration, in exchange for each share of Series C Preferred Stock held by it, equal to the greater of, as determined in the sole discretion of the Holders of at least 50.1% of the outstanding shares of Series C Preferred Stock: (i) the number of shares of stock or securities or property of the Company, or of the entity resulting from such consolidation or merger (the "Major Transaction Consideration"), to which a Holder of the number of shares of Common Stock delivered upon conversion of such shares of Series C Preferred Stock would have been entitled upon such Major Transaction (without regard to any limitations on conversion herein contained) and had such Common Stock been issued and outstanding and had such Holder been the holder of record of such Common Stock at the time of such Major Transaction, and the Company shall make lawful provision therefore as a part of such consolidation, merger or reclassification; and (ii) the Optional Redemption Amount, in cash. Subject to the provisions of this Article X, but in any event not later than five (5) Business Days prior to the consummation of the Major Transaction, but not prior to the public announcement of such Major Transaction, the Company shall deliver written notice ("Notice of Major Transaction") to each Holder, which Notice of Major Transaction shall be deemed to have been delivered one (1) Business Day after the Company's sending such notice by telecopy (provided that the Company sends a confirming copy of such notice on the same day by overnight courier). Such Notice of Major Transaction shall indicate the amount and type of the Major Transaction Consideration which such Holder would receive under clause (i) of this Article X(B). If the Major Transaction Consideration does not consist entirely of United States dollars, the value of such other property shall be determined by a reputable accounting firm selected by the Company that is reasonably acceptable the Holders of a majority of the outstanding. The Holder shall, within two (2) Business Days following 16 receipt of the Notice of Major Transactions, notify the Company of the type of consideration it elects to receive under this Article X(B). C. ADJUSTMENT DUE TO DISTRIBUTION. If at any time after the Closing Date, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the minimum Conversion Price per share shall be reduced by the value of such Distribution per share. If the Distribution does not consist entirely of U.S. Dollars, the value of such other property shall be determined by a reputable accounting firm selected by the Company that is reasonably acceptable to the Holders of a majority of the outstanding shares of Series C Preferred Stock. D. PURCHASE RIGHTS. If at any time after the Closing Date, the Company issues any Convertible Securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holders of Series C Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series C Preferred Stock (without regard to any limitations on conversion or exercise herein or elsewhere contained) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. E. ADJUSTMENT TO CONVERSION PRICE. If at any time when Series C Preferred Stock is issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification, below-market price rights offering to all holders of Common Stock or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for the Series C Preferred Stock, then the Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event during the calculation period preceding the Conversion Date. In such event, the Company shall notify the Transfer Agent of such change on or before the effective date thereof. F. ADJUSTMENT FOR RESTRICTED PERIODS. If the Registration Statement filed by the Company pursuant to the Registration Rights Agreement and declared effective by the SEC on the Effective Date lapses in effect or sales cannot otherwise be made thereunder, whether by reason of the Company's failure or inability to amend or supplement the prospectus included therein ("Prospectus") in accordance with the Registration Rights Agreement or otherwise, then the 20 Business Days period ("Lookback Period") used for determining the "Market Price" shall be extended to include the number of Business Days preceding the date on which the Holder is first 17 notified that sales may not be made under the Prospectus, which would otherwise then be included in the Lookback Period plus all Business Days through and including the date on which the Holder is notified that sales may again be made under the Prospectus. If a Holder of the Series C Preferred Stock reasonably determines that sales may not be made pursuant to the Prospectus, it shall notify the Company in writing and, unless the Company provides Holder with an opinion of Company's counsel to the contrary, such determination shall be binding for purposes of this paragraph. G. ADJUSTMENT TO CONVERSION PRICE FOR MAJOR ANNOUNCEMENTS. In the event the Company (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or (ii) any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's Common Stock or otherwise publicly announces an intention to replace a majority of the Corporation's Board of Directors by waging a proxy battle or otherwise (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for an Optional Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in Article II. For purposes hereof, "Adjusted Conversion Price Termination Date" shall mean, with respect to any proposed transaction, tender offer or removal of the majority of the Board of Directors which a public announcement as contemplated by this Article X.H. has been made, the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer which caused this Article X.H. to become operative. H. NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section X, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Preferred Stock. XI. VOTING RIGHTS The holders of the Series C Preferred Stock have no voting power whatsoever, except as 18 otherwise provided by the ("BCA"), in this Article XI, and in Article XII below. Notwithstanding the above, the Company shall provide each holder of Series C Preferred Stock with prior notification of any meeting of the shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail a notice to each holder, at least ten (10) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. No Holder of the Series C Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Company for their vote, waiver, release or other action, except as may be otherwise expressly required by law. XII. PROTECTION PROVISIONS So long as any Series C Preferred Shares are outstanding, the Company shall not, without first obtaining the approval of the Holders of majority of the outstanding shares of Series C Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series C Preferred Stock; (b) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Series C Preferred Stock; (c) create or issue any Senior Securities; (d) create or issue any Pari Passu Securities; (e) increase the authorized number of shares of Series C Preferred Stock; (f) increase the par value of the Common Stock; or (g) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in any taxation with respect to the Series C Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended, or any comparable provision of the Internal Revenue Code as hereafter from time to time amended, (or otherwise suffer to exist any such taxation as a result thereof). XIII. MISCELLANEOUS A. LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of (i) evidence of the loss, theft, destruction or mutilation of any Series C Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or (z) in the case 19 of mutilation, upon surrender and cancellation of the Series C Preferred Stock Certificate(s), the Company shall execute and deliver new Series C Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to reissue such lost, stolen, destroyed or mutilated Series C Preferred Stock Certificate(s) if the Holder contemporaneously requests the Company to convert such Series C Preferred Stock. B. PAYMENT OF CASH; DEFAULTS. Whenever the Company is required to make any cash payment to a Holder under this Certificate of Designation (as a Conversion Default Payment, Optional Redemption Amount or otherwise), such cash payment shall be made to the Holder by the method (by certified or cashier's check or wire transfer of immediately available funds) elected by such Holder. If such payment is not delivered when due such Holder shall thereafter be entitled to interest on the unpaid amount until such amount is paid in full to the Holder at a per annum rate equal to the lower of (x) the sum of prime rate published from time to time by the Wall Street Journal plus three percent (3%) and (y) the highest interest rate permitted by applicable law. C. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Company covenants to each Holder that there shall be no characterization concerning this instrument other than as expressly provided herein; provided, however, that the Company shall be entitled to prepare summaries of this Certificate of Designation for purposes of complying with its disclosure obligations and in connection with bona fide disputes as to the operations of the provisions of this Certificate of Designation. D. FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. E. NOTICES. Any notice from a Holder to the Company hereunder shall be given to the Company in accordance with Section 8(f) of the Securities Purchase Agreement. Any notices from the Company to a Holder shall be given to such Holder at such Holder's address as shown in the stock register of the Company and otherwise in accordance with Section 8(f) of the Securities Purchase Agreement. 20 EX-4.6 3 EXHIBIT 4.6 EXHIBIT 4.6 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY PROMISSORY NOTE No. 1 $7,145,000 Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, acknowledges itself indebted and for value received hereby promises to pay to the order of the Minnesota Agricultural and Economic Development Board as the statutory successor to the Minnesota Energy and Economic Development Authority (the "Board") and its successors and assigns, the principal sum of SEVEN MILLION ONE HUNDRED FORTY FIVE THOUSAND DOLLARS ($7,145,000) together with interest on the unpaid principal balance of this Note until the Borrower's obligation with respect to the payment of such sum shall be discharged at a rate of interest identical to the stated rates of interest on the Series 1997B Bonds referred to below (taking into account the different rates for the different maturities and principal amounts of the Series 1997B Bonds) but payable not as provided in the Series 1997B Bonds but as provided below and in the Loan Agreement referred to below. This Note is issued to evidence the obligation of Excelsior-Henderson Motorcycle Manufacturing Company under and pursuant to, and shall be governed by and construed in accordance with the terms and conditions of, the Loan Agreement dated as of November 1, 1997 (the "Loan Agreement") between the Board and Excelsior-Henderson Motorcycle Manufacturing Company, for the repayment of the loan made by the Board to Excelsior-Henderson Motorcycle Manufacturing Company, thereunder from the proceeds of the Board's $7,145,000 principal amount of Minnesota Small Business Development Loan Program Taxable Revenue Bonds, Series 1997B, Lot 1 (the "Bonds") and the payment of interest thereon, including provision for prepayment of said loan in certain cases, and for the satisfaction of a certain right of reimbursement of the General Guaranty Fund as provided in the Loan Agreement under certain circumstances and for the satisfaction of a certain right of reimbursement of the Board as provided in the Loan Agreement under certain circumstances. This Note is secured by the Security Agreement, dated as of November 1, 1997 (the "Security Agreement") made by Excelsior-Henderson Motorcycle Manufacturing Company to the payee on the Land and certain other property, as provided in the Loan Agreement and granted by the maker to the payee as provided in the Loan Agreement. The Loan Agreement (together with this Note) and the Security Agreement have been pledged to the Holders of the Bonds from time to time issued under the Minnesota Small Business Development Loan Program Revenue Bond General Bond Resolution (the "General Bond Resolution") adopted by the Board on September 26, 1984 and thereafter amended and restated from time to time pursuant to its terms. As provided in the Loan Agreement and subject to the provisions thereof, payments hereon are to be made in lawful money of the United States of America at the place and in the manner provided in the Loan Agreement, in monthly installments of principal and interest, commencing November 1, 1997, and payable thereafter on the first day of each month, such installments to be applied first to the payment of interest then due on this Note, and the remaining balance thereof to reduce the unpaid principal amount of this Note, with each installment payable as interest to include interest payable in advance due to and including the first day of the next succeeding month from the month in which the installment is payable and with each installment payable as principal to be similarly paid in advance. The monthly installments to be paid on this Note shall be an amount equal to (A) on January 1, 1998 (i) an installment of interest (after receiving a credit for any accrued interest on the Bonds received from the Original Purchasers (as defined in the Loan Agreement) of the Bonds) equal to the interest due on the Bonds on February 1, 1998; and (ii) an installment of principal equal to one-half of the principal due on the Bonds on August 1, 1998; and (B) for the period commencing on February 1, 1998 and on the first day of each month thereafter (1) one-sixth of the interest installment due on the Bonds on the next succeeding bond payment date thereof (taking into account such in-advance payments) and (2) one-twelfth of the principal installment due on the Bonds on the next succeeding bond payment date on which a principal installment thereon is due (taking into account such in-advance payments), such installments to be reduced by that sum or sums such that on or before the bond payment date on which a principal installment is due thereon any amounts then on deposit in the Holding Account created with respect to the Bonds pursuant to the provisions of the General Bond Resolution plus the monthly installment then to be paid on this Note shall equal the debt service payment on the Bonds due on such bond payment date. This Note may be prepaid in whole or in part in accordance with the provisions of the Loan Agreement. In addition, upon the occurrence of a "Determination of Taxability" (as defined in the Loan Agreement), this Note shall be mandatorily prepaid at the price and time specified in the Loan Agreement and the Loan Agreement shall be terminated in accordance with the provisions of Article XI of the Loan Agreement (and in particular, Section 11.1(a) and Section 11.2(a)(i)(A) thereof). Excelsior-Henderson Motorcycle Manufacturing Company agrees to make the payments on this Note on the dates and in the amounts specified herein and in the Loan Agreement and in addition agrees to make such other payments at such times and upon such conditions as are required pursuant to the Loan Agreement. In the "Event of Default", as defined in the Loan Agreement, the principal of and interest on this Note may be declared immediately due and payable as provided in the Loan Agreement. This Note may be cancelled, amended or supplemented as provided in the Loan Agreement. Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived by the makers hereof. IN WITNESS WHEREOF, Excelsior-Henderson Motorcycle Manufacturing Company has caused this Note to be executed in its respective name and on its behalf by the manual signature of its _______________, all as of December 1, 1997. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By Its ------------------------------ EX-4.7 4 EXHIBIT 4.7 EXHIBIT 4.7 THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER ANY STATE SECURITIES OR "BLUE SKY" LAWS ("BLUE SKY LAWS"). NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, OR OTHER DISPOSITION OF THIS BOND OR ANY INTEREST THEREIN MAY BE MADE EXCEPT (a) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE BLUE SKY LAWS OR (b) IF THE BORROWER HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE BORROWER, TO THE EFFECT THAT NO REGISTRATION IS REQUIRED BECAUSE OF THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS. UNITED STATES OF AMERICA STATE OF MINNESOTA ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA TAXABLE INDUSTRIAL DEVELOPMENT REVENUE BOND (EXCELSIOR-HENDERSON PROJECT) SERIES 1998 R-1 $6,100,000 The Economic Development Authority of the City of Belle Plaine, Minnesota, a public body corporate and politic and political subdivision of the State of Minnesota (the "Issuer"), for value received, hereby promises to pay to FINOVA Public Finance, Inc., a Minnesota corporation (the "Lender"), or its assigns (the Lender and any assigns are hereinafter referred to as the "Holder"), at its designated principal office or such other place as the Holder may designate in writing, but solely from the revenues derived from a Loan Agreement, dated as of July 1, 1998 (the "Loan Agreement"), between the Issuer and Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation (the "Borrower"), providing for a loan of the proceeds from the Bond to the Borrower, the principal sum of Six Million One Hundred Thousand Dollars ($6,100,000), with interest at the rate of 10.40 % per annum (the "Interest Rate"), interest commencing to accrue on the date of issue of the Bond, in any coin or currency, which at the time or times of payment is legal tender for the payment of public or private debts in the United States of America. The principal and interest on this Bond is payable in installments due as follows: (a) On August 20, 1998, and thereafter on the first day of each month thereafter to and including July 1, 1999, accrued and unpaid interest only on the outstanding principal balance of the Bond shall be due and payable. (b) Commencing on August 1, 1999, and on the first day of each month thereafter, through and including January 1, 2006, equal payments of principal of and accrued and unpaid interest on the Bond shall be due and payable in amounts sufficient to fully amortize the principal of the Bond by January 1, 2006, at the Interest Rate. (c) Payment of the entire unpaid principal balance of the Bond, together with accrued but unpaid interest thereon, and all other indebtedness due hereunder shall be payable on January 1, 2006 (the "Final Maturity Date"). 1 EXHIBIT 4.7 (d) If the Borrower makes any partial prepayment permitted under this Bond, the monthly payments due pursuant to this Bond shall be adjusted to be equal to payments of principal of and interest on the Bond in amounts sufficient to fully amortize the remaining principal of the Bond by January 1, 2006, at the Interest Rate. All interest hereon shall be computed on the basis of a year of three hundred sixty (360) days and charged for actual days principal is unpaid. If any payment of principal or interest is not paid when due, each and every such delinquent payment, including the entire principal balance and accrued interest in the event of an acceleration of the Bond, shall bear interest to the extent permitted by law at the rate of 18% per annum from its due date until payment. The Bond is subject to optional redemption prior to maturity, at the election of the Borrower, in whole, at any time on or after September 1, 2000, at a redemption price equal to the principal amount of the Bond to be redeemed, plus accrued interest to the date of redemption, plus a premium (expressed as a percentage of the principal amount of the Bond outstanding as of the date of redemption) determined in accordance with the following schedule:
- ---------------------------------------------- -- -------------------------------------- Redemption Date Redemption Premium - ---------------------------------------------- -- -------------------------------------- - ---------------------------------------------- -- -------------------------------------- September 1, 2000 - August 31, 2001 4.00 % - ---------------------------------------------- -- -------------------------------------- September 1, 2001 - August 31, 2002 3.00 % - ---------------------------------------------- -- -------------------------------------- September 1, 2002 - August 31, 2003 2.00 % - ---------------------------------------------- -- -------------------------------------- September 1, 2003 - August 31, 2004 1.00 % - ---------------------------------------------- -- -------------------------------------- September 1, 2004 and thereafter 0.00 % - ---------------------------------------------- -- --------------------------------------
The Bond is subject to special optional redemption prior to maturity, in part, on or before December 31, 1999, at the election of the Borrower from "Excess Bond Proceeds." The term "Excess Bond Proceeds" means up to $800,000 of the proceeds derived from the sale of the Bond, but in no case an amount greater than the amount not disbursed under Section 7(b) of the Escrow Deposit Agreement because of the Borrower's inability to provide acceptable collateral pursuant to the terms of such Section 7(b). The Bond is subject to mandatory redemption, in whole but not in part, at its principal amount plus accrued interest to the date of redemption upon occurrence of any of the following events: (a) all or substantially all the Building (as defined in the Loan Agreement) shall have been damaged or destroyed to such extent that in the reasonable opinion of the Holder, the repair and restoration of the Building or use of a replacement building is economically not practicable or cannot be accomplished within twelve months, or (b) there occurs the condemnation of all or substantially all the Facility (as defined in the Loan Agreement) or the taking by eminent domain of such use or control of the Facility as to render it unsatisfactory to the Borrower for its intended use for a period of time longer than twelve months and the Borrower does not commence operations in a replacement Facility satisfactory to the Borrower within twelve months. Notice of redemption with respect to the Bond shall be mailed first-class, postage prepaid, not less than thirty days prior to the redemption date, to each holder of the Bond to be redeemed. If less than all the Bond is subject to redemption, the Borrower shall determine and designate the principal of the Bond to be redeemed. 2 EXHIBIT 4.7 This Bond is issued under and pursuant to authority granted by the Minnesota Municipal Industrial Development Act, being Minnesota Statutes, Section 469.152 to 469.1651, as amended (the "Act"), for the purpose of providing funds for a project, as defined in Section 469.153, subd. 2, of the Act, consisting of the acquisition and installation of certain equipment with respect to the manufacturing business of the Borrower located in the City of Belle Plaine, Minnesota (the "City"), and paying necessary expenses incidental thereto, such funds to be loaned by the Issuer to the Borrower pursuant to a resolution adopted by the Issuer (the "Resolution") and the Loan Agreement, thereby assisting activities in the public interest and for the public welfare of the City and the Issuer. This Bond is secured by, among other instruments, an Assignment of Loan Agreement, dated as of July 1, 1998 (the "Assignment of Loan Agreement"), from the Issuer to the Lender and a Security Agreement, dated as of July 1, 1998 (the "Security Agreement"), from the Borrower to Lender. This Bond and interest thereon and any penalty, premium, or other indebtedness due hereunder are payable solely from the revenues and proceeds derived from the Loan Agreement and the Security Agreement, and do not constitute a debt of the City or the Issuer within the meaning of any constitutional or statutory limitation, are not payable from or a charge upon any funds other than the revenues and proceeds pledged to the payment thereof, and do not give rise to a pecuniary liability of the City or the Issuer (other than from proceeds derived from the Loan Agreement), or, to the extent permitted by law, of any of its officers, agents, or employees, and no Holder of this Bond shall ever have the right to compel any exercise of the taxing power of the City or the Issuer to pay this Bond or the interest thereon, or to enforce payment thereof against any property of the City or the Issuer (other than proceeds derived from the Loan Agreement), and this Bond does not constitute a charge, lien, or encumbrance, legal or equitable, upon any property of the City or the Issuer (other than proceeds derived from the Loan Agreement), and the agreement of the Issuer to perform or cause the performance of the covenants and other provisions herein referred to shall be subject at all times to the availability of revenues or other funds furnished for such purpose in accordance with the Loan Agreement, sufficient to pay all costs of such performance or the enforcement thereof. On the date of issuance, the Issuer will register this Bond upon its books. Upon such registration, this Bond shall be transferable upon the books of the Issuer, by the Holder hereof in person or by its attorney duly authorized in writing, upon surrender hereof together with a written instrument of transfer satisfactory to the Issuer, duly executed by the Holder or its duly authorized attorney; provided, however, that any assignment, transfer, sale, or conveyance of this Bond shall be subject to the limitations set forth in Section 7.8 of the Loan Agreement. Upon such transfer the Issuer will note the date of registration and the name and address of the new Holder upon the books of the Issuer and in the registration blank appearing below. The Issuer may deem and treat the person in whose name this Bond is last registered upon the books of the Issuer with such registration also noted on the Bond, as the absolute owner hereof, whether or not overdue, for the purpose of receiving payment of or on account of the principal balance, redemption price, or interest, and for all other purposes, and all such payments so made to the Holder or upon its order shall be valid and effectual to satisfy and discharge the liability upon this Bond to the extent of the sum or sums so paid, and the Issuer shall not be affected by any notice to the contrary. All of the agreements, conditions, covenants, provisions, and stipulations contained in the Resolution, the Loan Agreement, the Security Agreement, and the Assignment of Loan Agreement, or any instrument securing, or executed in connection with the issuance of, this Bond are hereby made a part of this Bond to the same extent and with the same force and effect as if they were fully set forth herein. If an Event of Default occurs under the Security Agreement, the Loan Agreement, or any such other instrument, then the Holder of this Bond may at its right and option declare immediately due and payable 3 EXHIBIT 4.7 the principal balance of this Bond and interest accrued thereon, and, to the extent permitted by law, a prepayment premium of 4% of the outstanding principal amount of the Bond but only if the Event of Default has occurred and if the Holder has declared immediately due and payable the principal balance of this Bond and interest accrued thereon on or before August 31, 2001, and thereafter a prepayment premium equal to the applicable redemption premium for an optional redemption, together with any costs of collection including attorneys' fees incurred by the Holder of this Bond in collecting or enforcing payment hereof, whether suit be brought or not, and all other sums due hereunder or under the Loan Agreement, or any instrument securing this Bond. The remedies of the Holder of this Bond as provided herein, and in the Security Agreement, the Loan Agreement, or any other instrument securing, or executed in connection with the issuance of, this Bond, shall be cumulative and concurrent and may be pursued singly, successively, or together, and, at the sole discretion of the Holder of this Bond, may be exercised as often as occasion therefor shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof. The Holder of this Bond shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by the Holder of this Bond, and then only to the extent specifically set forth in the writing and if the Borrower pays, upon the Holder's demand, $1,500 to the Holder as reimbursement for the Holder's cost of providing such a waiver. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. This Bond may not be amended, modified, or changed except only by an instrument in writing signed by the party against whom enforcement of any such amendment, modification, or change is sought. If any term of this Bond, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Bond, or the application of such term to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Bond shall be valid and enforceable to the fullest extent permitted by law. This Bond is made with reference to, and shall be construed as, a Minnesota contract and governed by the laws thereof. IT IS HEREBY CERTIFIED AND RECITED that all conditions, acts, and things required to exist, happen, and be performed precedent to or in the issuance of this Bond do exist, have happened, and have been performed in regular and due form as required by law. 4 EXHIBIT 4.7 IN WITNESS WHEREOF, the Issuer has caused this Bond to be duly executed by its duly authorized officers as of _______________, 1998. ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA By ------------------------------------- Its ------------------------------------ By ------------------------------------- Its ------------------------------------ 5 EXHIBIT 4.7 CERTIFICATE OF REGISTRATION It is hereby certified that the undersigned has registered this Bond in the name of the Holder, as indicated in the registration blank below, on the books of the Issuer kept for that purpose.
- -------------------------------------------------------------------------------------------------------- Name of Registered Signature of Issuer Holder Date of Registration Official - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
6 EX-10.1 5 EXHIBIT 10.1 EXHIBIT 10.1 EXECUTION COPY - ------------------------------------------------------------------------------- MINNESOTA AGRICULTURAL AND ECONOMIC DEVELOPMENT BOARD AND EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY ----------------------------- LOAN AGREEMENT ----------------------------- DATED AS OF NOVEMBER 1, 1997 - ------------------------------------------------------------------------------- Relating to: Minnesota Energy and Economic Development Authority's* Minnesota Small Business Development Loan Program. - ------------------- *The Minnesota Agricultural and Economic Development Board is the statutory successor to the Minnesota Energy and Economic Development Authority. TABLE OF CONTENTS ARTICLE I - DEFINITIONS Section 1.1. Definitions 3 ARTICLE II - REPRESENTATIONS AND COVENANTS Section 2.1. Representations and Covenants of the Board 13 Section 2.2. Representations and Covenants of the Borrower 13 Section 2.3. Additional Representations and Covenants of the Borrower 14 Section 2.4. Covenant with Bondholders 16 Section 2.5. General Guaranty Fund Right of Reimbursement 16 Section 2.6. Board Right of Reimbursement 16 ARTICLE III - AGREEMENT TO ISSUE SINGLE LOT BONDS AND TO LOAN PROCEEDS THEREOF; BORROWER'S CONTRIBUTION TO COSTS OF PROJECT Section 3.1. Issuance of Single Lot Bonds; Deposit of Bond Proceeds 17 Section 3.2. Agreement to Make Loan 17 Section 3.3. Need For Borrower's Contribution to Costs of Project 17 ARTICLE IV - DEVELOPMENT OF THE PROJECT; APPLICATION OF MONEYS IN CONSTRUCTION ACCOUNT, COST OF ISSUANCE ACCOUNT AND CAPITALIZED INTEREST ACCOUNT Section 4.1. Prior Acquisition of Land 19 Section 4.2. Acquisition and Installation of the Project 19 Section 4.3. Application of Moneys in Construction Account 20 Section 4.4. Certificate of Completion 22 Section 4.5. Completion by Borrower 22 Section 4.6. Remedies to be Pursued Against Contractors and Subcontractors And their Sureties 22 Section 4.7. Application of Moneys in Cost of Issuance Account 23 ARTICLE V - REPAYMENT PROVISIONS; SECURITY CLAUSES Section 5.1. Repayment of Loan 24 Section 5.2. Other Amounts Payable 25 Section 5.3. Obligations of Borrower Hereunder Unconditional 26 Section 5.4. Security Clauses 27 Section 5.5. Investment of Funds and Accounts; Consent to Elections 27
ARTICLE VI - MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE Section 6.1. Maintenance of Property by Borrower 28 Section 6.2. Installation of Additional Equipment 28 Section 6.3. Taxes, Assessments and Utility Charges 28 Section 6.4. Insurance Required 29 Section 6.5. Additional Provisions Respecting Insurance 30 Section 6.6. Application of Net Proceeds of Insurance 30 Section 6.7. Right of Board to Pay Taxes, Insurance Premiums and Other Charges 30 ARTICLE VII - DAMAGE, DESTRUCTION AND CONDEMNATION Section 7.1. Damage or Destruction 31 Section 7.2. Condemnation 33 Section 7.3. Condemnation of Borrower-Owned Property Other Than Security Property 35 ARTICLE VIII - SPECIAL COVENANTS Section 8.1. Qualification in the State 36 Section 8.2. Hold Harmless Provisions 36 Section 8.3. Maintenance of Existence; Conditions Under Which Exceptions Permitted 36 Section 8.4. Agreement to Provide Information 37 Section 8.5. Books of Record and Account; Financial Statements 37 Section 8.6. Release of Equipment 38 Section 8.7. Certificate of No Default 39 Section 8.8. Notice of Default 40 Section 8.9. Assignment and Leasing 40 Section 8.10. Right to Inspect the Project and Security Property 41 Section 8.11. Compliance With Orders, Ordinances, etc. 41 Section 8.12. Liens and Encumbrances 41 Section 8.13. Identification of Equipment 42 Section 8.14. Relocation of the Equipment 42 Section 8.15. Security Instruments Covenants 42 Section 8.16. Covenant Against Discrimination 42 Section 8.17. Employment Records 42 Section 8.18. Certain Financial Covenants 43 Section 8.19 Covenant Against Loans, Transfers, etc. 43 Section 8.20 Covenant Against Sale, Gift, Purchase or Redemption of Stock 44 Section 8.21 Vacant Positions 44 Section 8.22 Prevailing Wages 44 Section 8.23 Covenant Against Loans, Dividends, etc. 44 Section 8.24 Covenant Against Unreasonable Compensation 44 Section 8.25 Job Creation 44
ARTICLE IX - PLEDGE OF CERTAIN INTERESTS Section 9.1. Pledge of Certain Interests to Bondholders 45 ARTICLE X - EVENTS OF DEFAULT AND REMEDIES Section 10.1. Events of Default Defined 46 Section 10.2. Remedies on Default 47 Section 10.3. Remedies Cumulative 48 Section 10.4. Agreement to Pay Attorneys' Fees and Expenses 49 Section 10.5. No Additional Waiver Implied by One Waiver 49 ARTICLE XI - EARLY TERMINATION OF AGREEMENT; PREPAYMENT OF LOAN Section 11.1. Early Termination of Agreement 50 Section 11.2. Conditions to Early Termination of Agreement 50 Section 11.3. Discharge of Lien 51 Section 11.4. Prepayment of Loan in Part 51 Section 11.5. Refunding Consent 51 ARTICLE XII - MISCELLANEOUS Section 12.1. Notices 53 Section 12.2. Binding Effect 53 Section 12.3. Severability 53 Section 12.4. Amendments, Changes and Modifications 54 Section 12.5. Data Privacy Disclosure 54 Section 12.6. Execution of Counterparts 54 Section 12.7. Applicable Law 54 Section 12.8. Recording and Filing 55 Section 12.9. Survival of Obligations 55 Section 12.10. Table of Contents and Section Headings Not Controlling 55 Section 12.11. Limited Liability 55 Schedule I - Promissory Note I-1 Exhibit A - Legal Description of Land A-1 Exhibit B - Description of Equipment B-1 Exhibit C - Draw Request C-1 Exhibit D - Opinion of Counsel D-1 Exhibit E - Consent to Assignment E-1
THIS LOAN AGREEMENT, dated as of November 1, 1997 (the "Agreement"), is by and between the Minnesota Agricultural and Economic Development Board (as statutory successor to the Minnesota Energy and Economic Development Authority), constituted as an authority to act on behalf of the State of Minnesota and created and existing by virtue of the laws of the State (together with any legal successor thereto, herein referred to as the "Board"), and Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, which is engaged in the business of owning and operating a motorcycle manufacturing facility in the State of Minnesota (as defined herein in more detail, the "Borrower"). W I T N E S S E T H : WHEREAS, the Board (as the legal successor of the Minnesota Small Business Finance Agency) was created by the Laws of 1980, Chapter 547, as amended and supplemented and MINNESOTA STATUTES, 1986 Chapter 116M and presently set forth in MINNESOTA STATUTES, Chapter 41A (the "Act"), to act on behalf of the State of Minnesota (the "State") within the scope of powers granted to it in the Act to implement loan programs and to provide financial assistance under the economic development fund created under MINNESOTA STATUTES 1986, Section 116M.06 of the Act (the "Economic Development Fund") by which the Board, alone or in cooperation with cities, towns, counties and private or public lenders, may provide adequate funds or incentives to financing such as guarantees or insurance with respect thereto on sufficiently favorable terms to assist and encourage the establishment, maintenance and growth of businesses and eligible small businesses and employment opportunities in the State and to reduce to a manageable level the cost of the control of pollution and disposal of waste resulting from the operation of businesses and eligible small businesses; and WHEREAS, to provide financial assistance to businesses and eligible small businesses to encourage their establishment, maintenance and growth and to reduce the cost of the control of pollution and disposal of waste resulting from the operation of businesses and eligible small businesses, the Board has established its Minnesota Small Business Development Loan Program (the "Program"); and WHEREAS, in accordance with the Program, the Board on September 26, 1984 adopted its Minnesota Small Business Development Loan Program Revenue Bonds General Bond Resolution, as supplemented and amended (the "General Bond Resolution"), pursuant to which General Bond Resolution (and lot resolutions to be adopted from time to time by the Board as supplemented resolutions thereto), the Board intends to issue revenue bonds (the "Bonds"), and to loan the proceeds thereof to "businesses" or "eligible small businesses" within the meaning of the Act to finance capital facilities, as described within MINNESOTA STATUTES 1986, Section 116M.03, Subd. 11 or Subd. 19 of the Act and "pollution control facilities" as described within MINNESOTA STATUTES 1986, Section 116M.03, Subd. 14 of the Act, for use by them in connection with their business operations (such "businesses" and "eligible small businesses" collectively referred to herein as "Businesses"); and WHEREAS, such Bonds, as provided in the General Bond Resolution, shall be special obligations of the Board, the principal or redemption price, if any, of and interest on which are payable solely from and secured solely by the revenues, funds and other property or assets of the Board described in the General Bond Resolution (and the lot resolutions) and pledged therefor; and WHEREAS, it is the further purpose of the Board with respect to its Program to provide additional financial assistance to the Businesses participating therein by creating an account within the Economic Development Fund to be known as the "General Guaranty Fund", transferring certain moneys from the Economic Development Fund and from other sources to the General Guaranty Fund and pledging and allocating the moneys on deposit in the General Guaranty Fund to guarantee the payment of debt service payments and certain mandatory prepayments payable on or with respect to the Bonds; and WHEREAS, pursuant to a resolution adopted by the Board on September 26, 1984 (the "General Guaranty Fund Resolution"), the Board created and established the General Guaranty Fund as an account within and of the Economic Development Fund and pursuant to a General Guaranty Fund Pledge and Escrow Agreement, dated as of September 26, 1984 (the "General Guaranty Fund Pledge and Escrow Agreement") by and between the Board and First National Bank of Minneapolis, as escrow holder (together with U.S. Bank National Association and its successors, the "Escrow Holder") the Board provided for the holding, investment, application, disposition of and use of moneys in the General Guaranty Fund and various other matters related thereto with respect to the governance of the General Guaranty Fund; and WHEREAS, the Borrower (referred to herein, together with its permitted successors and assigns, as the "Borrower") has applied to the Board for assistance under the Program in connection with the financing of a project to consist of the acquisition of equipment for a new motorcycle manufacturing facility (the "Project") to be used primarily for the production of motorcycles in the City of Belle Plaine, Scott County, Minnesota; and WHEREAS, by resolution adopted by the Board on October 23, 1996 the Board has found that the Borrower is an "eligible small business" under the Act and that the Project qualifies for financial assistance under the Act and has determined to provide such financial assistance by the inclusion of the Project in the Program; and WHEREAS, to implement this determination the Board proposes (i) to issue a lot of bonds within a series issued under the General Bond Resolution and its Single Lot Resolution and (ii) to loan the proceeds of the sale of the said Bonds to the Borrower to finance a portion of the cost of the Project, upon the terms and conditions hereinafter set forth in this Agreement; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto hereby formally covenant, agree and bind themselves as follows, and, as to the Borrower, Excelsior-Henderson Motorcycle Manufacturing Company, agrees and binds itself, to-wit: ARTICLE I DEFINITIONS Section 1.1. DEFINITIONS. Capitalized terms used herein but not defined herein shall have the meaning given thereto in the General Bond Resolution unless the context or use indicates another or different meaning or intent. The following words and terms as used in this Agreement shall have the following meanings unless the context or use indicates another or different meaning or intent: "ACCOUNTANT" means a firm of independent public accountants of recognized standing, selected by the Borrower. "ACT" means the act of the legislature of the State enacted as Chapter 547 of the Laws of Minnesota for 1980, as amended and supplemented from time to time, known as the "Minnesota Energy and Economic Development Authority Act" and set forth MINNESOTA STATUTES 1986, Chapter 116M (notwithstanding the repeal thereof and MINNESOTA STATUTES, Chapter 41A). "AGREEMENT" means this Loan Agreement, dated as of November 1, 1997, by and between the Board and the Borrower, as the same may be amended from time to time. "APPRAISED VALUE" means the value established by an independent appraiser acceptable to the Board. "AUTHORIZED REPRESENTATIVE" means, in the case of the Board, the Chair, the Administrator or the Executive Director of the Board; in the case of the Borrower, an officer; and, in the case of both, such additional persons as, at the time, are designated to act in behalf of the Board or Borrower, as the case may be, by written certificate furnished to the Trustee and the Board or Borrower, as the case may be, containing the specimen signature of each such person and signed on behalf of (i) the Board by the Chair, the Administrator or the Executive Director of the Board, and (ii) an officer of the Borrower. "BOARD" means the Minnesota Agricultural and Economic Development Board, constituted as an authority to act on behalf of the State within the scope of the powers granted to it in the Act and created by the Act, or any successor thereto, and constituting the legal successor of the Minnesota Energy and Economic Development Authority and the Minnesota Small Business Finance Agency. "BOARD RESOLUTION" means the General Bond Resolution and the Single Lot Resolution. "BONDS" means any of the Board's Minnesota Small Business Development Loan Program Bonds issued from time to time under the General Bond Resolution and then outstanding. "BOND COUNSEL" means Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, or any attorney or firm of attorneys of recognized standing in the field of municipal law, duly admitted to the practice of law before the highest court of any state of the United States of America, appointed from time to time by the Attorney General of the State with respect to the Program. "BOND PAYMENT DATE" means each date on which interest or both a Principal Installment and interest shall be payable on the Single Lot Bonds in accordance with its terms. "BOND PROCEEDS" means the amount, including accrued interest, if any, received by the Board as the purchase price of the Single Lot Bonds, and deposited by the Trustee in accordance with the provisions of the Board Resolution into certain funds and accounts created thereunder. "BOND RATE" means, as of any date of calculation and with respect to any period, the highest rate of interest payable on any of the Single Lot Bonds determined as of such date with respect to such period (including any fluctuations of rate, if any). "BOND YEAR" means, for the Single Lot Bonds, the 12-month period beginning on August 1 of any year and ending on July 31 of the succeeding year; provided, however, that the initial Bond Year shall begin on the date in which such Bonds are delivered and end on the next succeeding July 31. "BONDHOLDER" or "HOLDER" or "HOLDERS OF BONDS" or similar term, when used with respect to a Bond or Bonds, means any person who shall be the registered owner of any outstanding Bond registered as to both principal and interest in accordance with the provisions of the General Bond Resolution. "BORROWER" means (i) Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation which is engaged in the business of owning and operating a motorcycle manufacturing company in the State of Minnesota, and its successors and assigns and (ii) any surviving, resulting or transferee as provided in Section 8.3 hereof. "BUILDINGS" means all those buildings, improvements, structures or renovations to existing buildings, improvements or structures and other related facilities (i) affixed or attached, or to be affixed or attached, to the Land, (ii) financed with the proceeds of the Single Lot Bonds or of any payment by any of the Borrower pursuant to Section 3.3 or Section 4.5 hereof, and (iii) not part of the Equipment, all as they may exist from time to time. "BUSINESS LOAN RESERVE ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution pursuant to the General Bond Resolution. "BUSINESS LOAN RESERVE ACCOUNT REQUIREMENT" means, as of any date of calculation, with respect to the Single Lot Bonds that sum which is equal to the maximum aggregate payments of principal and interest for any Bond Year over the period from the date of calculation to (and including) the final maturity date of such Single Lot Bonds. "CAPITALIZED INTEREST ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "CAPITALIZED LEASE OBLIGATIONS" means all lease obligations which have been or should be, in accordance with generally accepted accounting principles, capitalized on the books of the Borrower. "CLOSING DATE" means the date of sale and delivery of the Single Lot Bonds. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations, proposed, temporary or final, of the Department of the Treasury promulgated under the Code from time to time. "COMPLETION DATE" means the date of completion of the acquisition and installation of the Project, as certified to pursuant to Section 4.4 of this Agreement. "CONDEMNATION" means the taking of title to, or the use of, Property under the exercise of the power of eminent domain by any governmental entity or other Person acting under governmental authority. "CONTINUING DISCLOSURE AGREEMENT" means the Continuing Disclosure Agreement between the Board and the Trustee relating to the Single Lot Bonds. "Contractor" means any firm with whom the Borrower enters into an Equipment supply contract with respect to the Project. "CONSTRUCTION ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "CONSTRUCTION PERIOD" means, with respect to the Project, the period (a) beginning on the earlier of (i) the date of commencement of acquisition or construction of such Project, or (ii) the Closing Date with respect to the Single Lot Bonds, and (b) ending on the Completion Date with respect to such Project. "COST OF ISSUANCE" means all items of expense payable or reimbursable directly or indirectly by the Board and related to the authorization, sale and issuance of Bonds, which items of expense shall include but not be limited to printing costs, costs of reproducing documents, filing and recording fees, initial fees and charges of any fiduciary appointed under the General Bond Resolution, initial letter of credit fees, surety obligation fees or other similar fees, municipal bond insurance premiums or the cost of providing any other credit enhancement, legal fees and charges, professional consultants' fees, costs of credit ratings, fees and charges for execution, transportation and safekeeping of Bonds, underwriter discount or placement fees, costs and expenses of refunding and other costs, charges and fees in connection with the original issuance of Bonds. "COST OF THE PROJECT" means all those items of cost and expenses as set forth below: (i) Costs of Equipment; (ii) Reimbursement to the Borrower for any of the above enumerated costs and expenses paid by it, whether paid from funds of the Borrower or from the proceeds of interim construction borrowings. "CURRENT RATIO" means, as of any date, the ratio of current assets to current liabilities, all determined in accordance with generally accepted accounting principles. "DEBT SERVICE PAYMENT" means, with respect to any Bond Payment Date, (i) the interest payable on the Single Lot Bonds on such Bond Payment Date, plus (ii) the principal, if any, payable on the Single Lot Bonds on such Bond Payment Date, plus (iii) the premium, if any, payable on the Single Lot Bonds on such Bond Payment Date. "DISBURSING AGENT" means Procurement Consulting Services, Inc. "DISBURSING AGREEMENT" means the Disbursing Agreement dated as of November 1, 1997 between the Borrower, the Trustee and the Disbursing Agent. "EQUIPMENT" means all machinery, equipment and other personal property described in Exhibits B-1 through B-3 attached to this Agreement, which (a) is used in connection with the Project on the Land, (b) is (or will be) acquired with the proceeds of the Single Lot Bonds or of any payment by the Borrower pursuant to Section 3.3 or Section 4.3 hereof, together with such replacements and substitutions therefor, pursuant to Section 8.6 hereof, as may exist from time to time in accordance with the provisions of this Agreement but excluding additions pursuant to Section 6.2 hereof, and (c) is functionally complete and operationally independent; provided, however, Equipment shall not include fixtures affixed or attached to the Buildings unless approved in writing by the Executive Director, except for items on Exhibit B-1. "ESCROW HOLDER" means U.S. Bank National Association (formerly First Bank National Association and First National Bank of Minneapolis) appointed as the escrow holder under the General Guaranty Fund Pledge and Escrow Agreement, and its successor and successors, and any other corporation or association which may at any time be substituted in its place as Escrow Agent pursuant to the General Guaranty Fund Pledge and Escrow Agreement. "FUNDED INDEBTEDNESS" means, for any Person, all Indebtedness which matures by its terms more than one year from the Closing Date or matures within one year from such date but is unconditionally renewable or extendible, at the option of the debtor, by its terms or by the terms of any instrument or agreement relating thereto, to a date more than one year from such date or arises under a revolving credit or similar agreement which obligates the lender or lenders to extend credit over a period of more than one year from such date or, if created after the Closing Date, matures by its terms more than one year from the date of creation. "GENERAL BOND RESOLUTION" means the Minnesota Small Business Development Loan Program Revenue Bonds, General Bond Resolution adopted by the Board on September 26, 1984, as the same may be amended or supplemented from time to time by any supplemental resolution thereunder. "GENERAL GUARANTY FUND" means that account of the Economic Development Fund that has been created by the Board in accordance with the Act pursuant to the General Guaranty Fund Resolution of the Board and is governed by the provisions of the General Guaranty Fund Pledge and Escrow Agreement. "GENERAL GUARANTY FUND PAYMENTS" means any payments made by the Escrow Holder to the Trustee for deposit in accordance with the provisions of the General Bond Resolution to discharge the guaranty obligation of the General Guaranty Fund with respect to the debt service payments on or the prepayment of the Bonds that correspond to unpaid payments of principal and interest then due on the loans to businesses or exempt small businesses financed by such Bonds, whether due upon scheduled payment dates or upon acceleration prior to the occurrence of such scheduled payment dates. "GENERAL GUARANTY FUND PLEDGE AND ESCROW AGREEMENT" means that escrow agreement dated as of September 26, 1984, by and between the Board and the Escrow Holder, pursuant to which the Board has provided for the holding, investment and application, disposition and use of the moneys transferred by the Board into the General Guaranty Fund from the Economic Development Fund and from other sources, and pursuant to which the Board has provided for such other matters as may be provided for with respect to the General Guaranty Fund and the moneys transferred thereto, all in accordance with the Act. "GENERAL GUARANTY FUND REIMBURSEMENT AMOUNT" means, as of any date of calculation, with respect to any Lot of Bonds, an amount equal to the aggregate of all of the General Guaranty Fund Payments paid from the General Guaranty Fund to discharge the guarantee obligation of the General Guaranty Fund with respect to said Bonds less those sums that have been applied, or are then available under the provisions of the General Bond Resolution to be applied, to reimburse the General Guaranty Fund for the aggregate of all such General Guaranty Fund Payments, plus, with respect to such unpaid General Guaranty Fund Payments, such additional amounts equal to the sum of interest accruing on the amount of such unpaid General Guaranty Fund Payments at the interest rate borne by said Bonds for any period during which such General Guaranty Fund Payments are unpaid. "GENERAL GUARANTY FUND RESOLUTION" means that certain Resolution No. 84-205 of the Board adopted by the Board on September 26, 1984, pursuant to which the Board created the General Guaranty Fund as an account of the Economic Development Fund. "HOLDING ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "INDEBTEDNESS" means, for any Person, (i) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services (but not including current accounts payable) (ii) all indebtedness or other obligations of any other person for borrowed money or for the deferred purchase price of property or services the payment or collection of which such Person has guaranteed (except by reason of endorsement for collection in the ordinary course of business) or in respect of which such Person is liable, contingently or otherwise, including, without limitation, liable by way of agreement to purchase, to provide funds for payment, to supply funds to or otherwise to invest in such other persons, or otherwise to assure a creditor against loss, (iii) all indebtedness or other obligations of any other person for borrowed money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance upon or in property (including, without limitation, accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness or obligations and (iv) Capitalized Lease Obligations of such Person. "INDEMNIFIED PARTIES" means the Board and its members, officers, employees and agents, the Department of Trade and Economic Development and its Commissioner, employees and agents, the Trustee and the Disbursing Agent and their respective employers and agents. "INDEPENDENT COUNSEL" means an attorney or attorneys or firm or firms of attorneys duly admitted to practice law before the highest court of any state of the United States of America or in the District of Columbia and not an employee of the Board, the Borrower or the Trustee. "LAND" means the land described on Exhibit A to the Security Agreement. "LIEN" means any interest in Property securing an obligation owed to a Person, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a Uniform Commercial Code security interest, lease, consignment or bailment for security purposes. The term "Lien" includes reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other similar title exceptions and encumbrances, including but not limited to mechanics', materialmen's, warehousemen's, carriers' and other similar encumbrances, affecting real property. For the purposes of this Agreement, a Person shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "LOAN" means the loan made by the Board to the Borrower pursuant to Section 3.2 of this Agreement and as evidenced by the Note. "LOAN TERM" means the period commencing with the Closing Date and continuing until all the Single Lot Bonds and interest thereon have been paid in full or provision for such payment has been made pursuant to Article XI of the General Bond Resolution. "LOT LOAN FIDUCIARY PAYMENTS" means, for any Bond Year (or any ratable portion thereof), the reasonable fees and expenses of the Trustee (and Depositaries and Paying Agents, as defined in the General Bond Resolution) for the Bond Year in connection with duties performed by them with respect to the Single Lot Resolution, this Agreement, the Security Agreement, the Project and the Borrower and under the General Bond Resolution and the General Guaranty Fund Pledge and Escrow Agreement with respect to the foregoing. "NET PROCEEDS" means so much of the gross proceeds with respect to which such term is used as remain after payment of all expenses, costs and taxes (including attorneys' fees) incurred in obtaining such gross proceeds. "NET WORTH" means, at any date, the Tangible Assets of a Person which would be shown, in accordance with generally accepted accounting principles, on its balance sheet, minus liabilities (other than capital stock and surplus or its equivalent but including all reserves for contingencies and other potential liabilities) which would be shown, in accordance with generally accepted accounting principles, on such balance sheet. "NOTE" means the promissory note of the Borrower dated as of the date of the Single Lot Bonds, evidencing the Borrower's obligations pursuant to this Agreement, substantially in the form of Appendix I hereto. "OFFICIAL ACTION RESOLUTION" means that resolution adopted by the Board on October 23, 1996, with respect to the Borrower and entitled "RESOLUTION GIVING PRELIMINARY APPROVAL TO A PROJECT WITH EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY, A MINNESOTA CORPORATION AND GIVING PRELIMINARY APPROVAL, WITH CONDITIONS, FOR THE ISSUANCE OF SMALL BUSINESS DEVELOPMENT LOAN PROGRAM REVENUE BONDS TO FINANCE THE PROJECT AND PROVIDING FOR OTHER MATTERS RELATED THERETO." "OPTIONAL REDEMPTION ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "PAINT FINISHING SYSTEM" means that portion of the Equipment described in Exhibit B-1 attached hereto. "PERMITTED ENCUMBRANCES" means (i) this Agreement, the Board Resolution and any security interest created thereunder and (ii) the Primary Lease. "PERSON" means an individual, partnership, corporation, trust or unincorporated organization or a government or any agency, instrumentality, program, account, fund, political subdivision or corporation thereof. "PLACEMENT AGENTS" means Dougherty Summit Securities LLC and Piper Jaffray Inc. "PLEDGE" means the pledge by the Board of the rights and interests of the Board in and to this Agreement, the Note, including all rights to receive payment thereunder, such pledge by the Board being made pursuant to Section 1.04 of the General Bond Resolution and Section 6.1 of the Single Lot Resolution to the Trustee on behalf of Bondholders for the payment of the principal or redemption price of and interest on the Bonds in accordance with their terms. "PRINCIPAL INSTALLMENT" means an installment of principal payable on the Single Lot Bonds, whether as the maturity date of serial or term bond or as sinking fund installments payable with respect to such Bonds. "PROGRAM" means the Board's program of acquiring business loans under the General Bond Resolution with the proceeds of Bonds, the repayment of debt service payments and certain mandatory redemptions which are guaranteed by the General Guaranty Fund in accordance with the provisions of the General Guaranty Fund Pledge and Escrow Agreement, which program has been designated by the Board as the "Minnesota Small Business Development Loan Program". "PROGRAM EXPENSE FUND" means the Fund so designated, which is created and established by Section 5.01 of the General Bond Resolution. "PROJECT" means the Equipment to be used in connection with the Borrower's manufacturing facility, and to be acquired, constructed and installed by the Borrower with the Bond Proceeds or any payment by the Borrower pursuant to either Sections 3.3 or 4.3 hereof, with such additions thereto and substitutions therefor as may exist from time to time in accordance with the provisions of this Agreement. "PROJECT MUNICIPALITY" means the City of Belle Plaine, Scott County, Minnesota within the corporate borders of which the Project is, or is to be, located. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "RECONSTRUCTION ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "REDEMPTION PRICE" means, when used with respect to the Single Lot Bonds, the principal amount thereof plus the applicable premium, if any, payable upon the prior redemption thereof pursuant to the Single Lot Resolution. "REIMBURSEMENT ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "RESTORATION" means the repair, replacement, restoration or rebuilding of the Property or any part thereof following any taking, damage to ro destruction of the same, as nearly as possible to its respective size, floor area, type and character immediately prior to such taking, damage or destruction, within, in the case of any restoration by the Borrower, such alterations as may be made at the Borrower's election, together with any temporary repairs and property protection pending completion of the work. "REVENUE ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "SECURITY AGREEMENT" means the Security Agreement dated as of November 1, 1997 between the Borrower and the Board. "SECURITY INSTRUMENTS" means (i) the Security Agreement and (ii) the Disbursing Agreement. "SECURITY PROPERTY" means all Property subject to the Security Instruments and as described in Section 5.4 of this Agreement. "SERIES 1997B BONDS" means the Bonds of the series designated by the Board as the "SERIES 1997B BONDS" in the Single Lot Resolution of the Board and consisting of the Single Lot Bonds plus the additional lots being issued pursuant to separate lot resolutions. "SINGLE LOT BONDS" means the Board's Minnesota Small Business Development Loan Program Revenue Bonds, Series 1997B Taxable, Lot 1 in the aggregate principal amount of $7,145,000 authorized to be issued by the Board Resolution. "SINGLE LOT RESOLUTION" means the Single Lot Bonds resolution of the Board authorizing the issuance of the Single Lot Bonds adopted by the Board on November 18, 1997 pursuant to the General Bond Resolution. "SPECIAL REDEMPTION ACCOUNT" means the Account so designated which is created and established by Section 4.1 of the Single Lot Resolution, pursuant to the General Bond Resolution. "STATE" means the State of Minnesota. "SUBORDINATED INDEBTEDNESS" means, with respect to any Person, all Indebtedness which by its terms states that payment of principal and interest thereof is subordinate to the payment of principal and interest of the Loan. A payment of principal or interest on Subordinated Indebtedness is subordinate to payment of principal and interest on the Loan if by its terms such payment shall not be made or received by or on behalf of the holder of the Subordinated Indebtedness if and for so long as (a) the Borrower is delinquent in the payment of principal, premium, if any, or interest on the Loan as and when any such payment on the Loan is due, whether by reason of regularly scheduled payments, maturity, mandatory, special or extraordinary redemption or acceleration, (b) an event of default has occurred and is continuing under this Agreement. "TANGIBLE ASSETS" means total assets except: (i) that portion of deferred assets and prepaid expenses (other than prepaid insurance, prepaid rent and prepaid taxes) which do not mature or, in accordance with generally accepted accounting principles, are not amortizable within one year from the date of calculation, and (ii) trademarks, trade names, good will, and other similar intangibles. "TRUSTEE" means U. S. Bank National Association (formerly known as First Bank National Association and First National Bank of Minneapolis), appointed by the Board as Trustee under the Board Resolution, and its successor or successors and any other corporation or association at any time substituted in its place as trustee pursuant to the General Bond Resolution. ARTICLE II REPRESENTATIONS AND COVENANTS Section 2.1. REPRESENTATIONS AND COVENANTS OF THE BOARD. The Board makes the following representations and covenants as the basis for the undertakings on its part herein contained: (a) The Board is duly established and existing and is constituted as an authority to act on behalf of the State and created and existing by virtue of the laws of the State and has the power to enter into the transactions contemplated by this Agreement and the Security Instruments, and to adopt the Board Resolution, and to carry out its obligations hereunder and thereunder. The Project is of a nature that qualifies under the Act for the financial assistance provided by the Program. By proper official action the Board has been duly authorized to execute and deliver or accept this Agreement and the Security Instruments, and has duly adopted the Board Resolution. (b) Neither the execution and delivery or acceptance of this Agreement and the Security Instruments, or the adoption of the Board Resolution, the consummation of the transactions contemplated hereby or thereby nor the fulfillment of or compliance with the provisions of this Agreement, the Security Instruments and the Board Resolution will conflict with or result in a breach of any of the terms, conditions or provisions of the Act, or any restriction, agreement or instrument to which the Board is a party or by which it is bound, or will constitute a default under any of the foregoing, or will result in the creation or imposition of any Lien upon any of the Property of the Board under the terms of any such instrument or agreement (other than as contemplated by this Agreement, the Security Instruments and the Board Resolution). (c) The Board will lend to the Borrower the sum of $7,145,000 pursuant to this Agreement to finance (i) a portion of the cost of the acquisition and installation of the Project, (ii) a deposit into the Business Loan Reserve Account required under the provisions of the General Bond Resolution and (iii) certain Costs of Issuance with respect to the issuance of the Single Lot Bonds. (d) To finance a portion of the Cost of the Project and the other costs described in Section 2.1(c), the Board will issue its Single Lot Bonds which will mature, bear interest, be redeemable and have the other terms and conditions as set forth in the Board Resolution. Section 2.2. REPRESENTATIONS AND COVENANTS OF THE BORROWER. The Borrower makes the following representations and covenants as the basis for the undertakings of the Borrower as herein contained: (a) The Borrower, which is a Minnesota corporation duly created and validly existing under the laws of the State, is not in violation of any provision of its articles of incorporation, as amended, has the power to enter into this Agreement, the Note and the Security Instruments and to borrow money pursuant hereto and who has duly executed and delivered this Agreement and the Note. The Borrower constitutes an "eligible small business" and a "business" as defined in the Act and is eligible for "special assistance" as defined in the Act. (b) Neither the execution and delivery of this Agreement, the Note and the Security Instruments, the consummation of the transactions contemplated hereby nor the fulfillment of or compliance with the provisions of this Agreement, the Note and the Security Instruments will conflict with or result in a material breach of any of the terms, conditions or provisions of any restriction or any agreement or instrument to which the Borrower is a party or by which it is bound, or will constitute an event of default under any of the foregoing, or result in the creation or imposition of any Lien of any nature upon any of the Property of the Borrower under the terms of any such instrument or agreement, which conflict, breach, default or Lien would have a material adverse effect on the Loan, Note, any Properties of the Borrower or its financial condition. No event has occurred and no condition exists which, upon the passage of time or the giving of notice, would constitute such an event of default under any such agreement or instrument. (c) There has been no material adverse change in the financial condition of the Borrower since the last annual and interim financial statements and reports furnished by the Borrower to the Board in the Borrower's application dated September 26, 1996 and the information contained in said statements fairly presents the financial condition of the Borrower as of the dates of such financial statements and reports. (d) The Borrower has all requisite power and authority and all necessary authorizations, licenses and permits, without unusual restrictions or limitations, to own and operate its Properties and to carry on its business as now conducted, and are duly authorized to do business in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary or in which the failure to qualify will not have a material adverse affect on the Properties, business, prospects, profits or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform their obligations under this Agreement. (e) The Borrower has no contingent liabilities other than those disclosed in the financial statements described in Section 2.2(c) hereof. (f) No material event of default has occurred and is continuing in any agreement as to any outstanding indebtedness of the Borrower for money borrowed and no condition, event or act exists which, with notice or lapse of time, or both, would constitute such an event of default under any such agreement. (g) The Borrower is a publicly held corporation. Section 2.3. ADDITIONAL REPRESENTATIONS AND COVENANTS OF THE BORROWER. The Borrower makes the following representations and covenants as the basis for the undertakings of the Borrower herein contained: (a) So long as any of the Single Lot Bonds shall be outstanding, the Borrower will not take any action, or fail to take any action, or cause, suffer or permit others (other than the Board or Trustee) to take or fail to take action, which would cause the Project not to qualify under the Act for the financial assistance provided by the Program (as such Act is in effect on the Closing Date). (b) To the extent financed with Bond Proceeds, the Project consists, and will at all times consist, entirely of property owned for federal income tax purposes by the Borrower and which is of a character subject to the allowance for depreciation by the Borrower as provided in Section 167 of the Code. (c) The findings and determinations made by the Board in the Official Action Resolution concerning the Borrower and the Project are true and correct. In particular, the financing of the acquisition of the Project will not have the effect of a transfer of jobs from one area of the State to another. (d) The availability of the financial assistance by the Board as provided in this Agreement, in the Board Resolution and the General Guaranty Fund Pledge and Escrow Agreement and by the Program has been a substantial inducement to the Borrower to undertake the Project and to locate the Project in the State. (e) No officer or official of the Board or the State Departments of Finance or Trade and Economic Development has any interest (financial, employment or other) in the Borrower or, to the knowledge of the Borrower, the transactions contemplated by this Agreement except, if any, holdings of publicly traded stock of the Borrower. (f) No expense for supervision by the Borrower or any director, officer or employee of the Borrower and no expense for work done by any such director, officer or employee in connection with the Project is or will be included in the Cost of the Project. (g) The Borrower has not entered into any lease or assignment with respect to any portion of the Project and no Person other than the Borrower has any right to the use or possession thereof. (h) The Project as designed will comply with all presently applicable environmental, building, zoning and subdivision laws, ordinances, rules and regulations. (i) The Borrower reasonably estimates that the aggregate Cost of the Project will be at least $10,963,750 which sum includes (i) interest on the Single Lot Bonds to be paid out of Bond Proceeds during the Construction Period of the Project in the approximate amount of $ -0-, (ii) amounts derived from Bonds and required to be deposited into the Business Loan Reserve Account ($1,140,325) and (iii) amounts required to pay Costs of Issuance with respect to the issuance of the Single Lot Bonds (presently estimated as $320,425). (j) There is no action or proceeding pending or, to the knowledge of the Borrower threatened, against the Borrower, before any court, administrative agency or arbitration board that may materially and adversely affect the Properties, business, prospects, profits or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform their respective joint and several obligations under this Agreement or which, if determined adversely to the Borrower, would result in a determination that the Borrower violated environmental laws, rules or administrative orders. Section 2.4. COVENANT WITH BONDHOLDERS. The Board and the Borrower agree that this Agreement is executed in part to induce the purchase by others of the Single Lot Bonds. Accordingly, subject to the provisions of Section 2.5 and Section 2.6 of this Agreement, all covenants and agreements on the part of the Board and the Borrower set forth in this Agreement are hereby declared to be for the benefit of the holders from time to time of such Single Lot Bonds. Section 2.5. GENERAL GUARANTY FUND RIGHT OF REIMBURSEMENT. In the event of the acceleration of the Loan hereunder, if any General Guaranty Fund Payments are made from the General Guaranty Fund with respect to the Single Lot Bonds, there shall arise hereunder a right of reimbursement against the Borrower and accruing to the General Guaranty Fund equal to the sum of the unsatisfied General Guaranty Fund Reimbursement Amount with respect to the Single Lot Bonds. Such right of reimbursement in favor of the General Guaranty Fund shall require payment of such sum by the Borrower to the Board immediately upon the creation of such right and shall be secured as provided in Section 5.4 of this Agreement and enforced and reduced as provided in Section 10.2 of this Agreement and, in each case, as may be provided in the General Bond Resolution; provided, however, that such right of reimbursement shall be subordinate to the rights of the Bondholders described in Section 2.4 of this Agreement and as further provided in the General Bond Resolution. Section 2.6. BOARD RIGHT OF REIMBURSEMENT. In the event of the acceleration of the Loan hereunder, if the Board elects to redeem the Single Lot Bonds in whole or in part from any moneys available to the Board for such purpose from any source other than the General Guaranty Fund (and other than those sources pledged to pay Bonds pursuant to Section 1.04 of the General Bond Resolution), there shall arise hereunder a right of reimbursement against the Borrower and accruing to the Board equal to the amount so paid by the Board with respect to the Single Lot Bonds. Such right of reimbursement in favor of the Board requires payment of such sum by the Borrower to the Board immediately upon the creation of such right and shall be secured as provided in Section 5.4 of this Agreement and enforced and reduced as provided in Section 10.2 of this Agreement and, in each case, as provided in the General Bond Resolution; provided, however, that such right of reimbursement shall be subordinate to the rights of Bondholders described in Section 2.4 of this Agreement and as further provided in the General Bond Resolution. ARTICLE III AGREEMENT TO ISSUE SINGLE LOT BONDS AND TO LOAN PROCEEDS THEREOF; BORROWER'S CONTRIBUTION TO COSTS OF PROJECT Section 3.1. ISSUANCE OF SINGLE LOT BONDS; DEPOSIT OF BOND PROCEEDS. In order to provide funds for (i) payment of the Cost of the Project, together with other payments and incidental expenses in connection therewith, (ii) a deposit into the Business Loan Reserve Account required under the provisions of the General Bond Resolution, (iii) certain Costs of Issuance with respect to the issuance of the Single Lot Bonds and (iv) capitalized interest with respect to the Single Lot Bonds, the Board agrees that it will issue and sell the Single Lot Bonds and cause the Bond Proceeds to be delivered to the Trustee. Section 3.2. AGREEMENT TO MAKE LOAN. The Board agrees that, upon (i) the sale and delivery of the Single Lot Bonds and (ii) satisfaction of the terms and conditions set forth in this Section, it will and does hereby lend the Borrower the sum of $7,145,000 in accordance with the provisions of this Agreement, such loan to be evidenced by the Note. The obligation of the Board to make said loan shall be discharged and the obligation of the Borrower hereunder and in the Note shall arise and become effective, when the following sums, totaling $7,145,000 ($7,145,000 less $-0- discount) are deposited in the following funds and accounts established under the Board Resolution in accordance with the provisions of the Board Resolution, or are otherwise directly applied for certain purposes, in any case, in the following amounts: (a) To the Business Loan Reserve Account, $1,140,325; (b) To the Cost of Issuance Account, $1,675; and (c) To the Construction Account, $6,003,000 being the cash balance of the Bond Proceeds (other than amounts representing accrued interest on the Single Lot Bonds), to pay the Cost of the Project. Section 3.3. NEED FOR BORROWER'S CONTRIBUTION TO COSTS OF PROJECT. (a) The Borrower hereby represents that the amount of the Loan deposited into the Construction Account ($6,003,000) to pay for the Cost of the Project is less than the total Cost of the Project (other than interest payable on the Single Lot Bonds during the Construction Period of the Project) by an amount equal to approximately $3,500,000 $ 1,675of Bond Proceeds will be applied to pay Cost of Issuance, $-0- of Bond Proceeds will be applied to pay capitalized interest from the Capitalized Interest Account , and $1,140,325 of Bond Proceeds will be deposited in the Business Loan Reserve Account as provided in Section 3.2(a), 3.2(b) above. Pursuant to the loan criteria for its Program, the Board hereby requires the Borrower to make an equity contribution of not less than $3,500,000 to pay for the remaining deficiency in the Cost of the Project, which does not include Costs of Issuance, such equity contribution to take the form of evidence satisfactory to the Board of payment of not less than $3,500,000 of costs of the Project from Borrower's funds derived from a source other than the Single Lot Bonds. Prior to any disbursement from the Construction Account, the Borrower shall provide the Trustee with evidence of payment of not less than $3,500,000 of Costs of the Project. (b) If the Cost of Issuance Account is insufficient to pay any claim or cost incurred in connection with the Single Lot Bonds for any reason, the Borrower shall deposit on demand by the Board's Executive Director an amount sufficient to pay any remaining Costs of Issuance. ARTICLE IV DEVELOPMENT OF THE PROJECT; APPLICATION OF MONEYS IN CONSTRUCTION ACCOUNT; COSTS OF ISSUANCE ACCOUNT AND CAPITALIZED INTEREST ACCOUNT Section 4.1. PRIOR ACQUISITION OF LAND. The Borrower heretofore has leased the Building on the Land in order to permit the acquisition and installation of the Project thereon. Section 4.2. ACQUISITION AND INSTALLATION OF THE PROJECT. The Borrower agrees to acquire and install the Project or cause the Project to be acquired and installed on the Land. (a) The Cost of the Project shall be paid from the Construction Account in the manner and to the extent provided in Section 4.3 hereof and the General Bond Resolution. The Borrower shall not be entitled to any moneys in the Construction Account, nor shall the Borrower submit a requisition, for any item of property which constitutes collateral under another security agreement, or is otherwise subject to any other Lien or encumbrance whatsoever. (b) The Borrower hereby covenants and agrees to proceed with due diligence to make, execute, acknowledge and deliver any contracts, orders, receipts, writings and instructions with any other persons, firms or corporations and in general do all things which may be requisite or proper, all for acquiring and installing the Project. The Borrower agrees to acquire and to install the Project with all reasonable dispatch, and to use reasonable efforts to cause such acquisition and installation to be completed by November 1, 1998, or as soon thereafter as may be practicable and, in all events by no later than November 1, 2000; but if for any reason such acquisition and completion are not completed by either said date, there shall be no resulting liability on the part of the Board and no diminution in or postponement of the payments required in Section 5.1 hereof to be paid by the Borrower. (c) The Borrower shall assign to the Board, contingent upon Borrower's default as set forth in Article X hereof, all of Borrower's agreements with Contractors and shall obtain from each Contractor consent to such assignment in the form attached hereto as Exhibit "E." (d) The Borrower shall obtain all necessary approvals from any and all governmental agencies requisite to the acquiring and installation of the Project, and the Project shall be acquired and installed in compliance with all federal, State and local laws, ordinances and regulations applicable thereto. Upon completion of the Project, the Borrower shall obtain all required permits and authorizations from appropriate authorities, if any be required, authorizing the uses of the Project for the purpose contemplated hereby. (e) THE BOARD MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION, TITLE, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS OF THE PROJECT OR THAT IT IS OR WILL BE SUITABLE FOR ANY OF THE BORROWER'S PURPOSES OR NEEDS. Section 4.3. APPLICATION OF MONEYS IN CONSTRUCTION ACCOUNT. (a) Moneys in the Construction Account may be disbursed in order to pay, or to reimburse the Borrower for the payment of, any item of Cost of the Project permitted by the Act which, under generally accepted accounting principles, constitutes necessary capital expenditures in connection with the Project and subject to the limitations in Section 2.3 hereof and Section 5.02(b) of the General Bond Resolution. Provided, however, no moneys in the Construction Account shall be used directly or indirectly to pay Costs of Issuance. Notwithstanding anything contained herein to the contrary, (i) Except as permitted in Section 4.3(a)(ii) or Section 8.12, the Trustee shall make no advances from the Construction Account (for other than Costs of Issuance or debt service on the Single Lot Bonds) while there is any Lien or encumbrance upon the Project, nor will the Trustee make any advances from the Construction Account while there is any charge, question or claim of any kind whatsoever, whether of record or not, which, in the opinion of counsel for Trustee, may have priority over the Board's or Trustee's interest in the Project or in any way render the Board's or Trustee's position insecure; (ii) The Trustee shall make no advances from the Construction Account with respect to particular items to be acquired as Equipment hereunder until the Trustee (A) is satisfied that the specific requisitions for disbursements from the Construction Account to pay for specific items of property to be acquired as Equipment hereunder correspond in fact to specific items of Equipment enumerated in Exhibit B; provided, however, if the specific item of Equipment is not listed on Exhibit B hereto, (1) such item of Equipment must be approved by the Executive Director of the Board, which approval shall be solely at the discretion of the Executive Director based on his determination of its value, and (2) an amendment to the Loan Agreement and an amendment to the Security Agreement shall be executed to include such item of Equipment, (B) has received evidence that a valid UCC-1 covering the Equipment has been properly filed so as to perfect the Board's security interest in the Equipment and that such security interest has been assigned of record to the Trustee, (C) is presented with reasonable proof satisfactory to the Trustee that all of the items to be acquired as Equipment hereunder have been acquired, installed and accepted and are all free and clear of all security interests, liens and encumbrances of any kind whatsoever, the Trustee may rely on the Board's determination that the Board is satisfied with the above provisions, (D) has received an opinion of counsel to the Borrower acceptable to the Board that the Equipment is free and clear of all liens except the lien of the Security Instruments and the security interest by the Board in the Equipment has been perfected and is valid, which opinion shall be substantially in the form attached hereto as Exhibit D, which shall be approved by Bond Counsel for each advance (E) has received a UCC search showing no existing interest in such items of Equipment on such request for advance, (F) has received proof satisfactory to the Trustee and the Board that the Borrower has satisfied the requirements in this Section relating to their equity contribution of $3,500,000 including meeting the requirements of (B), (C), (D) and (E) relating to their equity contribution and (G) has received evidence satisfactory to the Board that the Board and its successors and assigns shall own the exclusive rights to use the Equipment and the use of the Equipment and the products produced by the Equipment will not violate any tradename, trademark, patents or use rights of any other Person. Nothing contained herein shall be deemed to convey or require conveyance to the Board of any rights in the tradename, trademark, patents or use rights of the Borrower. No advances will be made with respect to any Equipment in the Paint Finishing System prior to the time the Paint Finishing System has passed its acceptance test and evidence thereof has been submitted to the Disbursing Agent as provided in Section 4.1(f) of the Disbursing Agreement; (iii) The Trustee shall make no advances out of Bond Proceeds from the Construction Account to reimburse the Borrower for any Costs of the Project paid from the cash deposits paid or equity contribution made pursuant to Section 3.3(a) or Section 4.3(a)(ii). In connection with Section 4.3(a)(i), 4.3(a)(ii) and 4.3(a)(iii), above and the preconditions established therein, the Trustee may request that counsel to the Borrower certify to the Trustee the existence of such preconditions in connection with making any advances from the Construction Account and the Trustee shall be entitled to conclusively rely upon such certification. The Trustee may rely on an opinion of counsel to the Borrower to the extent such certification covers matters of law, including the validity and perfection of any security interest contemplated by the Security Instruments. In addition, in making any such payment from the Construction Account the Trustee may rely on such requisitions and proof delivered to it and the Trustee shall be relieved of all liability with respect to making such payments if such payments are made in accordance with the foregoing. The Borrower hereby agrees to pay all reasonable costs of filing or submitting such requisitions and proof delivered to the Trustee and to its counsel. The Trustee shall keep and maintain adequate records pertaining to the Construction Account and all disbursements therefrom, and after the Project has been completed and the Borrower has filed with the Board a certificate of completion of the Project as otherwise provided, the Trustee thereafter shall file an accounting with respect to the Construction Account and all disbursements therefrom with the Board and with the Borrower. (b) Upon the earlier of (i) completion of the Project as certified to pursuant to Section 4.4 hereof; (ii) the acceleration of the Loan pursuant to Section 10.2(a)(i) of this Agreement; or (iii) failure to satisfy the requirements for disbursement of moneys from the Construction Account by November 1, 2000 (or such later date as the Board, in its unilateral discretion, may designate); any moneys remaining in the Construction Account, except for amounts to be paid pursuant to the draw made upon completion or those retained therein for the payment of incurred and unpaid items of the Cost of the Project, shall be applied in accordance with Section 5.02(b) of the General Bond Resolution. Section 4.4. CERTIFICATE OF COMPLETION. Completion of the Project shall be evidenced by a certificate signed by an Authorized Representative of the Borrower stating that (i) the acquisition and installation of the Project has been completed and (ii) except for amounts to be retained in the Construction Account as provided in Section 4.3(b) hereof, all costs and expenses of acquiring and installing the Project have been paid or provided for and that having attached thereto a certificate of the Borrower or such other evidence satisfactory to the Board to the effect there exist no Liens or encumbrances with respect to the Project. Section 4.5. COMPLETION BY BORROWER. To the extent that the Bond Proceeds that are deposited into the Construction Account are not sufficient to pay in full all costs of acquiring and installing the Project, the Borrower agrees to pay all such sums as may be necessary to so complete the Project. At the Trustee's request, the Borrower will provide the Trustee with evidence satisfactory to the Trustee as to whether or not the remaining moneys in the Construction Account available to pay the Costs of the Project shall be sufficient to pay the remaining Costs of the Project. In the event that the Trustee shall determine at any time that the remaining moneys in the Construction Account available for payment of the remaining Costs of the Project shall not be sufficient to pay the costs thereof in full, the Trustee shall give written notice thereof to the Borrower and the Borrower shall promptly pay to the Trustee for deposit into the Construction Account moneys sufficient to pay the Costs of the Project as may be in excess of the moneys available therefor in the Construction Account. The Trustee may rely on the Board's determination. No payment by the Borrower pursuant to this Section 4.5 shall entitle the Borrower to any diminution or abatement of the other amounts payable by the Borrower under this Agreement or the Note. Section 4.6. REMEDIES TO BE PURSUED AGAINST CONTRACTORS AND SUBCONTRACTORS AND THEIR SURETIES. In the event of default of any contractor or subcontractor under any contract made by it in connection with the Project or in the event of a breach of warranty with respect to any materials, workmanship, or performance guaranty, the Borrower shall promptly proceed, either separately or in conjunction with others, to exhaust the remedies of the Borrower against the contractor or subcontractor so in default and against each surety for the performance of such contract. The Borrower agrees to advise the Board of the steps they intend to take in connection with any such default. The Borrower may prosecute or defend any action or proceeding or take any other action involving any such contractor, subcontractor or surety which the Borrower deems reasonably necessary. The Net Proceeds of any amounts recovered pursuant to this Section 4.6, if received prior to the Completion Date, shall be delivered to the Trustee and deposited in the Construction Account and, if received thereafter, shall be (i) delivered to the Trustee and deposited to the extent attributable to Bond Proceeds, to the credit of the Special Redemption Account and (ii) to the extent attributable to the Borrower's equity required by Section 3.3 or Section 4.5 hereof, paid over to the Borrower free and clear of any provision of this Agreement. Section 4.7. APPLICATION OF MONEYS IN COST OF ISSUANCE ACCOUNT. $318,750 will be deposited by the Borrower in the Cost of Issuance Account on the Closing Date. Moneys in the Cost of Issuance Account shall be used to pay Costs of Issuance on the Single Lot Bonds. If the Cost of Issuance Account is insufficient to pay any claim or cost incurred in connection with the Single Lot Bonds for any reason, the Borrower shall deposit on demand by the Trustee or the Board's Executive Director an amount sufficient to pay any remaining Costs of Issuance. ARTICLE V REPAYMENT PROVISIONS; SECURITY CLAUSES Section 5.1. REPAYMENT OF LOAN. (a) Principal on the Loan shall be paid by the Borrower on the dates and in the amounts provided in the Note. Interest on the unpaid balance of the Loan shall be payable at the times stated in the Note at the rates provided in the Note. All such amounts to be so paid shall be paid by the Borrower to the Trustee on behalf of the Board. It is the intention of the parties hereto that the Borrower shall be liable hereunder and under the Note. (b) The Note shall provide that interest thereon shall accrue from the date thereof and shall be payable thereon on the first day of the following month and thereafter on the first day of each month until the principal sum of the Loan is discharged, each such payment to include interest payable in advance due to and including the first day of the next succeeding month. The principal amount of the Loan shall be payable thereon at the same times and manner as interest. Principal and interest payments on the Loan shall be made in monthly installments through the date of final maturity of the Note, applied first to the payment of interest then due on the unpaid principal amount of the Loan, and the remaining balance of each such installment applied to the payment and reduction of the unpaid principal amount of the Loan. The monthly installments to be paid on the Loan shall be an amount equal to (i) one-sixth of the interest installment due on the Single Lot Bonds on the next succeeding Bond Payment Date (taking into account such in-advance payments) and (ii) one-twelfth of the Principal Installment due on the Single Lot Bonds on the next succeeding Bond Payment Date on which a Principal Installment is due (taking into account such in-advance payments), such installments to be reduced such that on or before the Bond Payment Date on which a Principal Installment is due any amounts then on deposit in the Holding Account plus the monthly installment then to be paid on the Loan shall equal the Debt Service Payment on the Single Lot Bonds due on such Bond Payment Date. Notwithstanding the foregoing, amounts in the Capitalized Interest Account shall reduce the monthly installments set forth above. Notwithstanding the foregoing, the number and amount of proportional payments of the monthly installments to be paid on the Loan shall be adjusted in accordance with the date of the Note and the dates of the initial interest payment and initial payment of the Principal Installment due on the Single Lot Bonds. All payments on the Note by the Borrower shall be made to the Trustee at the address set forth in Section 12.1 of this Agreement. At the request of the Borrower, pending disbursement or application of amounts in the Construction Account, such amounts shall be invested so as to make interest earnings available monthly to be applied as credits against the required loan repayments. (c) If on any Bond Payment Date of the Single Lot Bonds the amount then on deposit in the Holding Account shall not be sufficient to pay the interest and Principal Installment due on the Single Lot Bonds as of such Bond Payment Date, the Borrower shall forthwith pay any such deficiency into the Revenue Account for transfer into the Holding Account. (d) The Borrower shall have the option to make payments designated as and representing advance loan payments on the Note under and pursuant to this Agreement (or Section 5.2 of this Agreement) to the Trustee for deposit in the Revenue Account. Such payments shall not in any way alter or suspend any obligations of the Borrower under the terms of this Agreement (i) except to the extent that such payment shall be transferred by the Trustee under the provisions of the Board Resolution to the Holding Account and shall result in a credit against payments on the Note as provided in Section 5.1(b) of this Agreement or the retirement of principal amounts of the Single Lot Bonds, pursuant to these provisions, or (ii) except to the extent that such payments shall otherwise be transferred by the Trustee in accordance with the provisions of Section 5.06(a) of the General Bond Resolution and shall result in a credit against payments as provided in Section 5.2 of this Agreement; and the Borrower shall, in either case, continue to perform and be responsible for the performance of all the terms and provisions of this Agreement. (e) If at any time the amount held by the Trustee in the Holding Account and the Business Loan Reserve Account shall be sufficient to pay, together with any interest earning to be realized, at the times required the principal of, premium, if any, and interest on the Single Lot Bonds then unpaid, the Borrower shall not be obligated to make any further payments under the foregoing provisions. (f) If the Borrower should fail to make the payments of an amount required under this Section 5.1, the amount so in default shall continue as an obligation of the Borrower until it shall have been fully paid, and the Borrower shall pay the same with interest thereon at the Bond Rate until paid. (g) The Borrower agrees to make the above-mentioned payments without any further notice, in lawful money of the United States of America which, at the time of payment, shall be legal tender for the payment of public and private debts. Section 5.2. OTHER AMOUNTS PAYABLE. (a) The Borrower shall pay to the Trustee for deposit by the Trustee in the Revenue Account, the following amounts (in addition to those amounts described in Section 5.1(b) of this Agreement) at the times set forth below: (i) On August 1 and February 1 of each year during the Loan Term, the Lot Loan Fiduciary Payments due with respect to the Bond Year then ended; provided, however, that, to the extent that on any August 1 there are amounts in the Revenue Account in excess of the amounts required to be deposited therein pursuant to Section 5.1, Section 5.2(a)(i), Section 5.2(a)(ii) and Section 5.2(a)(iii) of this Agreement, the amount required to be paid by the Borrower pursuant to this Section 5.2(a)(i) shall be reduced by the amount of such excess; (ii) On each Bond Payment Date, a sum sufficient to satisfy any outstanding General Guaranty Fund Reimbursement Amount with respect to the Single Lot Bonds as provided in Section 2.5; (iii) On each Bond Payment Date, a sum sufficient so that amounts then on deposit in the Business Loan Reserve Account shall not be less than the Business Loan Reserve Account Requirement with respect to the Single Lot Bonds. (b) Notwithstanding anything contained in this Agreement to the contrary, any amount payable as and for an outstanding General Guaranty Fund Reimbursement Amount under Section 5.2(a)(ii) of this Agreement shall not be payable as and for unpaid amounts due under Section 5.1(b) and Section 5.1(f) of this Agreement. (c) Notwithstanding anything contained in this Agreement to the contrary, any amount payable pursuant to Section 5.2(a)(iii) of this Agreement shall not be payable as and for unpaid amounts due under Section 5.1(b) and Section 5.1(f) of this Agreement. (d) In addition to the foregoing payments, the Borrower shall make such reports and shall pay during the Loan Term the annual fees required to maintain the secondary market trading of the Single Lot Bonds in the State. Such fees shall be paid directly by the Borrower to Minnesota State Treasurer by the time required by law each year, with the Borrower to provide evidence satisfactory to the Board that each such payment has been made. (e) In addition to the foregoing payments, the Borrower shall pay any fees of the Board under the Continuing Disclosure Agreement. Section 5.3. OBLIGATIONS OF BORROWER HEREUNDER UNCONDITIONAL. The obligations of the Borrower to make the payments required by this Agreement and the Note and to perform and observe any and all of the other covenants and agreements on its part contained herein shall be general obligations of the Borrower, shall be absolute and unconditional irrespective of any defense or any rights of setoff, recoupment or counterclaim it may otherwise have against the Board or the Trustee or any Holders of the Bonds. The Borrower agrees that it will not (i) suspend, discontinue or abate any payment required by this Agreement and the Note or (ii) fail to observe any of its other covenants or agreements in this Agreement, the Note or any Security Instrument, (iii) seek judicial or other relief from the obligation to make any payment required by, or to perform any covenant in, this Agreement and the Note or (iv) except as provided in Section 11.1 hereof, terminate this Agreement for any cause whatsoever including, without limiting the generality of the foregoing, failure to complete the Project, failure of the Borrower to use the Project as contemplated in this Agreement or otherwise, any defect in the title, design, operation, merchantability, fitness or condition of the Project or in the suitability of the Project for the Borrower's purposes or needs, failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, or the taking by Condemnation of title to or the use of all or any part of the Project, any change in the tax or other laws of the United States of America or of the State or any political subdivision of either, or any failure of the Board to perform and observe any agreement, whether expressed or implied, or any duty, liability or obligation arising out of or in connection with this Agreement. Nothing contained in this Section 5.3 shall be construed to release the Board from the performance of any of the agreements on its part contained in this Agreement. Section 5.4. SECURITY CLAUSES. In order to secure the payment of this Agreement, the Note and the Bonds according to their tenor and effect, and to secure the right of reimbursement of the General Guaranty Fund provided for in Section 2.5 of this Agreement and the right of reimbursement of the Board provided for in Section 2.6 of this Agreement and to secure the performance by the Borrower of all covenants expressed or implied in this Agreement, as of the Closing Date, the Borrower shall grant and deliver a validly perfected first security interest to the Board in the (i) Equipment pursuant to the Security Instruments, (ii) Equipment purchased with proceeds of the Bonds and (iii) Equipment purchased by the Borrower as the Borrower's equity contribution, all of which Equipment is to be pledged by the Board to the Trustee for the benefit of Bondholders pursuant to the Board Resolution as security for the Bonds and the Single Lot Bonds. The Borrower shall cause to be delivered a legal opinion on behalf of the Borrower as to the due authorization and execution of this Agreement, the Security Instruments, the Note and any other Security Instrument and as to the legality, validity and enforceability of such instruments in such form and substance satisfactory to the Board and Bond Counsel. Section 5.5. INVESTMENT OF FUNDS AND ACCOUNTS; CONSENT TO ELECTIONS. (a) Notwithstanding anything contained in this Agreement to the contrary, any moneys at any time in the Business Loan Reserve Account, the Construction Account, Holding Account, Optional Redemption Account, Reconstruction Account, the Reimbursement Account, the Revenue Account, the Special Redemption Account or any other fund or account created under, or authorized by, the General Bond Resolution or the Single Lot Resolution may be invested and reinvested by the Board as provided in Section 5.16 of the General Bond Resolution and any letter of instruction issued by the Board to the Trustee thereunder, to which such investment and reinvestment, the Borrower hereby consents. Neither the Board nor its members, officers or employees shall be liable for any rate of interest achieved or not achieved on such investment or for any depreciation in the value of, or for any loss arising from, any such investment. Investment income earned from money deposited in any such funds and accounts shall be applied by the Trustee in the manner provided for in the Board Resolution. (b) The Borrower hereby consents to the elections made by the Board in Section 5.5 of the Single Lot Resolution with respect to the Series 1997B Taxable, Lot 1 Bonds. ARTICLE VI MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE Section 6.1. MAINTENANCE OF PROPERTY BY BORROWER. (a) The Borrower agrees that during the Loan Term Borrower will, at Borrower's own expense, (i) keep the Security Property in as reasonably safe condition as its operations shall permit; (ii) make all necessary repairs and replacements to the Security Property (whether ordinary or extraordinary, structural or nonstructural, foreseen or unforeseen); and (iii) operate the Security Property in a sound and economic manner. (b) The Borrower from time to time may, at Borrower's own expense, make any structural additions, modifications or improvements to the Security Property or any part thereof which it may deem desirable. All such structural additions, modifications or improvements made by the Borrower shall become a part of the Security Property. The Borrower agrees to deliver to the Board all documents which may be necessary or appropriate to convey to the Board a satisfactory security interest in such Security Property. Section 6.2. INSTALLATION OF ADDITIONAL EQUIPMENT. Subject to the provisions of Section 5.4 of this Agreement, the Borrower from time to time may, at Borrower's own expense, install additional machinery, equipment or other personal property in the Project (which may be attached or affixed to the Security Property), and such machinery, equipment or other personal property shall not become, or be deemed to become, a part of the Security Property. The Borrower shall keep appropriate records of all of such machinery, equipment or other personal property installed as Security Property sufficient to identify the same. The Borrower from time to time may remove or permit the removal of such machinery, equipment and other personal property from the Security Property and may create or permit to be created any Lien on such machinery, equipment or other personal property; provided that any such removal of such machinery, equipment or other personal property shall not adversely affect the structural integrity of the Security Property or impair the overall operating efficiency of the Security Property for the purposes for which it is intended and provided further that if any damage is occasioned to the Security Property by such removal, the Borrower agrees to promptly repair such damage at its own expense. Section 6.3. TAXES, ASSESSMENTS AND UTILITY CHARGES. (a) The Borrower agrees to pay, as the same respectively become due, and subject to Section 6.3(b)(i) all taxes and governmental charges of any kind whatsoever which may at any time be lawfully assessed or levied against or with respect to (1) the Security Property, (2) any replacement machinery, equipment or other property installed or brought by the Borrower therein or thereon (including without limitation any sale or use taxes), (3) worker's compensation taxes with respect to the employees of the Borrower located at or assigned to the Project, and (4) the income or revenues of the Borrower from the Project, (ii) all utility and other charges, including "service charges", incurred or imposed for the operation, maintenance, use, occupancy, upkeep and improvement of the Security Property, and (iii) all assessments and charges of any kind whatsoever lawfully made by any governmental body for public improvements; provided that, with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Borrower shall be obligated under this Agreement to pay only such installments as are required to be paid during the Loan Term. (b) The Borrower may in good faith contest any such taxes, assessments and other charges. In the event of any such contest, the Borrower may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom, provided that a reserve in an amount satisfactory to the Board has been established with respect thereto with the Trustee. If the Board or the Trustee shall notify the Borrower that by nonpayment of any such items the security interest as to any part of the Security Property will be materially endangered or the Security Property or any part thereof will be subject to loss or forfeiture, however, such taxes, assessments or charges shall be paid promptly or secured by posting a bond in form and substance satisfactory to the Board and the Trustee. Section 6.4. INSURANCE REQUIRED. At all times throughout the Loan Term, including without limitation during any period of acquisition and construction of the Project, the Borrower shall, at its own expense, maintain or cause to be maintained insurance against such risks and for such amounts as are customarily insured against by businesses of like size and type paying, as the same become due and payable, all premiums in respect thereto, including, but not necessarily limited to: (a) Comprehensive general public liability insurance, fire and all risk coverage insurance insuring the Equipment, boiler and machinery insurance, if appropriate, including business interruption (including rental interruption), or use and occupancy coverage for a period of not less than one year and such other insurance, flood insurance, if the Land is located in a HUD-designated special flood hazard area, as the Board may reasonably require from time to time. All such insurance shall be obtained from such companies, in such amounts (which shall be the amounts as required by this Agreement) and with such provisions as the Board may deem necessary or desirable to protect its interests and shall contain a waiver of subrogation clause, non-contributory standard mortgage clauses and 30-day notice to the Board and the Trustee of cancellation or material change clause. During any period of construction, repair or restoration, such insurance shall be in builder's risk form, written on a non-reporting completed value basis. In the event of loss in excess of $50,000, the Borrower will give immediate notice by mail to the Board, and each insurance company concerned is hereby authorized and directed to make payment for such loss with respect to Security Property in excess of $50,000 directly to the Board and the Trustee as their interests appear instead of to the Borrower and the Board jointly, and except as may be hereinafter provided, the application of the proceeds of any insurance award shall be governed by Article VII hereunder. (b) Worker's compensation insurance, disability benefits insurance, and each other form of insurance which the Borrower is required by law to provide, covering loss resulting from injury, sickness, disability or death of employees of the Borrower who are located at or assigned to the Project. Section 6.5. ADDITIONAL PROVISIONS RESPECTING INSURANCE. (a) All insurance required by Section 6.4 hereof shall be procured and maintained in financially sound and generally recognized responsible insurance companies selected by the Borrower and authorized to write such insurance in the State. Such insurance may be written with deductible amounts acceptable to the Board. All policies evidencing such insurance shall provide for (i) payment of the losses to the Borrower, the Board and the Trustee as their respective interests may appear, and (ii) at least thirty (30) days written notice of the proposed cancellation thereof to the Borrower and the Trustee. The policies required by Section 6.4(a) hereof shall contain standard mortgagee clauses requiring that all Net Proceeds of insurance resulting from any claim in excess of $50,000 for loss or damage covered thereby be paid to the Trustee. (b) All such policies of insurance, or a certificate or certificates of the insurers that such insurance is in force and effect, shall be deposited with the Trustee on or before the Closing Date. Prior to expiration of any such policy, the Borrower shall within thirty (30) days of such expiration furnish the Trustee evidence that the policy has been renewed or replaced or is no longer required by this Agreement. Section 6.6. APPLICATION OF NET PROCEEDS OF INSURANCE. The Net Proceeds of the insurance carried pursuant to (i) Section 6.4(a) hereof shall be applied as provided in Section 7.1 hereof and (ii) Section 6.4(b) hereof shall be applied toward extinguishment or satisfaction of the liability with respect to which such insurance proceeds may be paid. Section 6.7. RIGHT OF BOARD TO PAY TAXES, INSURANCE PREMIUMS AND OTHER CHARGES. If the Borrower fails (i) to pay any tax prior to delinquency, assessment or other governmental charge required to be paid by Section 6.3 hereof or (ii) to maintain any insurance required to be maintained by Section 6.4 hereof, the Board or the Trustee may pay such tax, assessment or other governmental charge or the premium for such insurance. No such payment by the Board or the Trustee shall affect or impair any rights of the Board under this Agreement, the Security Instruments and the Note or of the Board or the Trustee under the Board Resolution arising as a consequence of such failure by the Borrower. The Borrower shall reimburse the Board or the Trustee, as the case may be, for any amount so paid by the Board or the Trustee, as the case may be, pursuant to this Section 6.7, together with interest thereon from the date of payment by the Board at the Bond Rate. ARTICLE VII DAMAGE, DESTRUCTION AND CONDEMNATION Section 7.1. DAMAGE OR DESTRUCTION. (a) If the Security Property shall be damaged or destroyed (in whole or in part) at any time during the Loan Term: (i) The Board shall have no obligation to replace, repair, rebuild or restore the Security Property; (ii) There shall be no abatement or reduction in the amounts payable by the Borrower under this Agreement (whether or not the Security Property is replaced, repaired, rebuilt or restored); and (iii) Except as otherwise provided in Section 7.1(b), the Borrower shall promptly replace, repair, rebuild or restore the Security Property to substantially the same condition and value as an operating entity as existed prior to such damage or destruction, with such changes, alterations and modifications as may be desired by the Borrower, provided that such changes, alterations or modifications do not so change the nature of the Project that it does not qualify under the Act for the financial assistance provided by the Program. Except as otherwise provided in Section 7.1(b), the Borrower shall apply to the replacement, repair, rebuilding or restoration of the Project so much as may be necessary of any Net Proceeds of insurance resulting from claims for such losses. If the claim for loss resulting from such damage or destruction exceeds $50,000, all Net Proceeds of insurance shall be paid to and held by the Trustee in the Reconstruction Account. All Net Proceeds so deposited shall be applied as provided below. If the Borrower determines that the Security Property shall be repaired, replaced or restored in whole, the Board hereby authorizes and directs the Trustee, subject to the conditions set forth herein, to make payments from the Reconstruction Account for such purposes or to reimburse the Borrower for costs paid by it in connection therewith to the extent subject to issuance of insurance of the absence of mechanics or materialman Liens affecting the Security Property (all at no cost to the Board or the Trustee). The Trustee may not make any payments from the Reconstruction Account to repair, restore, replace, modify or improve the Security Property pursuant to this Section 7.1 unless the Borrower has (i) first, obtained a fixed price contract for the repair, restoration, replacement, modification or improvement of the Security Property, specifying a Completion Date therefore, and (ii) caused the deposit to the Reconstruction Account an amount which, together with the Net Proceeds and all interest to be earned thereon through the Completion Date established in clause (i) above, will be sufficient to pay all costs of repair, restoration, modification and improvement of the Security Property. Thereafter the Trustee, upon receipt of a certificate of an Authorized Representative of the Borrower that payments are required for such purpose, shall apply so much as may be necessary of the Net Proceeds of such insurance to the payment of the costs of such replacement, repair, rebuilding or restoration, such moneys to be applied either on completion thereof or as the work progresses, at the option of the Board. In the event the Borrower has elected to rebuild or restore, and amounts in the Reconstruction Account are not sufficient to pay in full the costs of such replacement, repair, rebuilding or restoration, the Trustee shall request the Borrower to pay into the Reconstruction Account an amount which, together with Net Proceeds available for such purposes, shall be sufficient to pay all such costs, and, upon receipt of such request, the Borrower shall forthwith pay such amount to the Trustee. In the event that the Borrower fails to pay any such amounts into the Reconstruction Account, then the Single Lot Bonds shall be prepaid in accordance with Section 7.1(b) of this Agreement. All such replacements, repairs, rebuilding or restoration made pursuant to this Section 7.1, whether or not requiring the expenditure of the Borrower's contribution, shall automatically become a part of the Security Property as if the same were specifically described herein. Any balance of such Net Proceeds remaining after payment of all the costs of such replacement, repair, rebuilding or restoration shall be deposited in the Special Redemption Account held by the Trustee and used only to prepay the Single Lot Bonds as provided in Section 5.11(a) of the General Bond Resolution. (b) In the event that the Borrower shall fail or elect not to replace, repair or restore the Security Property, or if an Event of Default under Section 10.1 hereof shall have occurred and be continuing and the Single Lot Bonds have been accelerated, then at the direction of the Board the Net Proceeds of the insurance shall be transferred from the Reconstruction Account to the Special Redemption Account or otherwise paid to the Trustee for deposit into the Special Redemption Account. To the extent that such Net Proceeds so transferred into the Special Redemption Account are not sufficient to pay the Single Lot Bonds in whole pursuant to Section 2.8 of the Single Lot Resolution, the Borrower shall forthwith pay the sum of such deficiency to the Trustee for deposit into the Special Redemption Account. (c) The Borrower shall not be obligated to replace, repair, rebuild or restore the Project, and all such Net Proceeds shall be paid to the Borrower for its purposes, if the Single Lot Bonds and interest thereon have been paid in full and all other amounts due and owing hereunder, under the Note and the Security Instruments have been paid in full. (d) The Borrower may adjust all claims under any policies of insurance required by Section 6.4(a) hereof; provided, however, that no such claim with respect to an insured event as to which the Board or the Trustee may be or is alleged to be liable may be adjusted without the prior written consent of the Board or the Trustee, as the case may be. Section 7.2. CONDEMNATION. (a) If at any time during the Loan Term the whole or any part of title to, or the use of, the Security Property shall be taken by Condemnation, the Board shall have no obligation to restore or replace the Security Property and there shall be no abatement or reduction in the amounts payable by the Borrower under this Agreement (whether or not the Security Property is restored or replaced). Except as otherwise provided in this Section 7.2(b), the Borrower shall promptly: (i) Restore the Security Property to substantially the same condition and value as an operating entity as existed prior to such Condemnation; or (ii) Upon receipt by the Borrower of written approval of the Trustee and the Board as to the location thereof (which approval shall not be unreasonably withheld), acquire, by construction or otherwise, facilities of substantially the same nature and value as an operating entity as the Security Property (hereinafter referred to in this Section 7.2 as "Substitute Facilities"). Such Substitute Facilities shall (A) be of such nature so as to qualify under the Act for the financial assistance provided by the Program and (B) be subject to no Liens prior to the Security Instruments or the security interest created by Sections 5.4(b) and 5.4(c) of this Agreement. The Borrower shall cause all Net Proceeds of any award in any Condemnation proceeding to be paid to the Trustee which shall hold such moneys in the Reconstruction Account. All Net Proceeds so deposited shall be applied as provided below: If the Borrower determines that the Security Property shall be repaired, replaced or restored in whole or substitute Equipment is to be acquired, the Board hereby authorizes and directs the Trustee, subject to the conditions set forth herein, to make payments from the Reconstruction Account for such purposes or to reimburse the Borrower for costs paid by it in connection therewith by disbursements through a title insurance company with commercially reasonable procedures for payment of costs upon incurrence thereof subject to issuance of insurance of the absence of mechanics or materialman liens affecting the Security Property (all at no cost to the Board or the Trustee). The Trustee may not make any payments from the Reconstruction Account to repair, restore, replace, modify or improve the Security Property pursuant to this Section 7.2 unless the Borrower has caused the deposit to the Reconstruction Account an amount which, together with the Net Proceeds and all interest to be earned thereon will be sufficient to pay all costs of repair, restoration, modification and improvement of the Security Property. Thereafter, the Trustee, upon receipt of a certificate of an Authorized Representative of the Borrower that payments are required for such purpose, shall apply so much as may be necessary of such Net Proceeds to the payment of the costs of the restoration of the Security Property at the option of the Borrower, such moneys to be applied either on completion thereof or as the restoration or acquisition progresses, at the option of the Board. In the event amounts in the Reconstruction Account are not sufficient to pay in full the costs of such restoration of the Security Property, the Trustee shall request the Borrower to pay into the Reconstruction Account an amount sufficient to pay all such costs, and, upon receipt of such request, the Borrower shall forthwith pay such amount to the Trustee. In the event that the Borrower fails to pay any such amounts into the Reconstruction Account, then the Single Lot Bonds shall be prepaid in accordance with Section 7.2(b) of this Agreement. The Security Property, as so restored, whether or not requiring the expenditure of the Borrower's contribution, shall automatically become part of the Security Property as if the same were specifically described herein. Any balance of such Net Proceeds of any Condemnation award remaining after payment of all costs of such restoration or acquisition shall be deposited in the Special Redemption Account held by the Trustee and used only to prepay the Single Lot Bonds as provided in Section 5.11(a) of the General Bond Resolution. (b) In the event that the Borrower shall fail or elect not to replace, repair or restore the Security Property, or if an Event of Default under Section 10.1 hereof shall have occurred and be continuing and the Single Lot Bonds have been accelerated, then at the direction of the Board the Net Proceeds of the Condemnation Award shall be transferred from the Reconstruction Account to the Special Redemption Account or otherwise paid to the Trustee for deposit into the Special Redemption Account. To the extent that such Net Proceeds so transferred into the Special Redemption Account are not sufficient to pay the Single Lot Bonds in whole pursuant to Section 2.8 of the Single Lot Resolution, the Borrower shall forthwith pay the sum of such deficiency to the Trustee for deposit into the Special Redemption Account. (c) The Borrower shall not be obligated to restore the Project, and all such Net Proceeds shall be paid to the Borrower, if the Single Lot Bonds and interest thereon have been paid in full and all other amounts due and owing hereunder, under the Note and Security Instruments have been paid in full. (d) The Board shall cooperate fully with the Borrower in the handling and conduct of any Condemnation proceeding with respect to the Security Property. Section 7.3. CONDEMNATION OF BORROWER-OWNED PROPERTY OTHER THAN SECURITY PROPERTY. The Borrower shall be entitled to the proceeds of any Condemnation award or portion thereof made for damage to or taking of any Property which, at the time of such damage or taking, is not part of the Security Property and which is owned by the Borrower. ARTICLE VIII SPECIAL COVENANTS Section 8.1. QUALIFICATION IN THE STATE. Throughout the Loan Term, the Borrower shall continue to be duly authorized to do business in the State. Section 8.2. HOLD HARMLESS PROVISIONS. (a) The Borrower during the Loan Term hereby releases the Indemnified Parties from, agrees that the Indemnified Parties shall not be liable for and agrees to indemnify and hold the Indemnified Parties harmless from and against any and all liability arising from or expense incurred by the Board's making the loan to the Borrower pursuant to this Agreement, including without limiting the generality of the foregoing, all causes of action and reasonable attorneys' fees and any other expenses incurred in defending any suits or actions which may arise as a result thereof, provided that any such liabilities or expenses of the Indemnified Parties are not incurred or do not result from the gross negligence, the intentional or willful wrongdoing of the Indemnified Parties or any of their members, agents or employees. (b) Notwithstanding any provision of this Agreement or the Board Resolution to the contrary, the Borrower specifically agrees that Indemnified Parties shall not be held liable, or in any way responsible, for any investment of any Fund or Account or the General Guaranty Fund or other "gross proceeds" (as defined in Section 148 of the Code) under the control or custody of the Board, the Trustee or the Escrow Holder. Section 8.3. MAINTENANCE OF EXISTENCE; CONDITIONS UNDER WHICH EXCEPTIONS PERMITTED. The Borrower covenants and agrees to maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets, and will not consolidate with or merge into another corporation or permit one or more corporations to consolidate with or merge into it; provided, however, that any mortgages and security interests in personal property entered into by the Borrower in the ordinary course of business with respect to any of its Property shall not be deemed to constitute a disposition of assets for purposes of this Section 8.3 and provided further that, if no Event of Default under this Agreement shall have occurred and is continuing, the Borrower may consolidate with or merge into another domestic corporation organized and existing under the laws of one of the states of the United States of America, or permit one or more such domestic corporations to consolidate with or merge into it, or sell or otherwise transfer to another such domestic corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided that: (a) the surviving, resulting, or transferee corporation, as the case may be, is incorporated under the laws of the State or qualifies to do business in the State; (b) the surviving, resulting or transferee corporation, as the case may be, assumes in writing all of the obligations of and restrictions on the Borrower hereunder and any other agreement securing the Borrower's performance of its obligations hereunder; (c) immediately after the consummation of the transaction, and after giving effect thereto, the surviving, resulting or transferee corporation, as the case may be, has a Net Worth at least equal to the Net Worth of the Borrower immediately prior to the transaction; (d) as of the date of such consolidation, merger, sale or transfer, the Board and Trustee shall be furnished with (i) an opinion of Independent Counsel opining as to the compliance with Sections 8.3(a) and 8.3(b),(ii) an opinion of an Accountant opining as to the compliance with Section 8.3(c) and (iii) a certificate, dated the effective date of such consolidation, merger, sale of transfer, signed by the chief executive officer and the chief financial officer of the Borrower and of the surviving, resulting of transferee corporation, as the case may be, to the effect that immediately after the consummation of the transaction, and after giving effect thereto, no event of default exists under this Agreement (as set forth in Section 10.1 hereof) and no event exists which, with notice or lapse of time or both, would become such an Event of Default and that the provisions of Section 8.3(c) hereof are and will be satisfied; and (e) In addition to the foregoing, such financial statements shall be accompanied by a report containing all of the calculations required by Section 8.18(a) and (b) of this Agreement to determine whether or not the Borrower is in compliance with the requirements of Section 8.18(a) and (b) of this Agreement, such calculations to be prepared by an Accountant from the then-current audited financial statements of the Borrower or the financial statements of the Borrower prepared by the Accountant, as the case may be. Section 8.4. AGREEMENT TO PROVIDE INFORMATION. The Borrower agrees, whenever requested by the Trustee or the Board, to provide and certify or cause to be provided and certified such information concerning the Borrower, its finances, and such other topics as the Trustee or the Board from time to time reasonably considers necessary or appropriate, including, but not limited to such information as may be necessary to enable the Board to make any reports required by the Act, any other law or governmental regulation or to enable the Board to issue additional lots of Bonds under the General Bond Resolution and publicly or privately market the same. Section 8.5. BOOKS OF RECORD AND ACCOUNT; FINANCIAL STATEMENTS. (a) The Borrower agrees to maintain proper accounts, records and books in which full and correct entries shall be made, in accordance with generally accepted accounting principles, of business and affairs of the Borrower. The Board, the Legislative Auditor and the Trustee or their designated agents or representatives shall have the right to inspect such accounts, records and books upon reasonable advance notice during normal business hours. (b) Within 120 days after the close of each fiscal year of the Borrower, during the Loan Term, the Borrower shall furnish to the Board and the Trustee, a consolidated balance sheet, a consolidated statement of income and retained earnings and partnership capital account, and a consolidated statement of changes in financial position of the Borrower, for the immediately preceding fiscal year, all in reasonable detail including footnotes to such financial statements, such financial statements to be audited and accompanied by the opinion of an Accountant. Section 8.6. RELEASE OF EQUIPMENT. (a) The Borrower shall have the right at any time or from time to time to sell or otherwise dispose of all or any part of the Equipment subject, however, to all of the following terms and conditions: (i) The Borrower shall, prior to or simultaneously, with any such sale or other disposition of any Equipment, cause to be substituted therefor equipment which is determined by the Board to have a value substantially equal to the value of the item of Equipment so sold or otherwise disposed of at the time said item of Equipment was sold or disposed by the Borrower pursuant to the terms hereof, but which equipment may, however, be of a different kind or type or have a different function or purpose; (ii) The security interest granted pursuant to the Security Instruments shall attach to the equipment so substituted upon its acquisition by the Borrower and its installation on and building on the Land and prior to the sale or other disposition of the Equipment originally subject to such security interest. (iii) The Borrower shall execute any and all documents, instruments, agreements or other writings (including, but not limited to, one or more Uniform Commercial Code financing statements) and otherwise do all acts and things which the Board shall reasonably deem necessary or advisable to perfect or continue perfection of a security interest in the equipment so substituted; (iv) The Borrower shall pay any and all reasonable expenses (including, but not limited to, any applicable filing fees) incurred by the Board or the Trustee in connection with the perfection or continuation of such security interest; and (v) The Borrower shall, not less than fifteen days prior to the consummation of any such sale or disposition, furnish the Board with a certificate signed by the Authorized Representative of the Borrower setting forth (1) a description of the item of Equipment which the Borrower proposes to sell or otherwise dispose of, which description has been previously set forth in the copy of Exhibit B hereto maintained by the Trustee in accordance with the Single Lot Resolution, (2) a description of the equipment to be proposed to be substituted for the item of Equipment sold or otherwise disposed of, which description shall be sufficient for the creation and perfection of a security interest in said equipment under the Uniform Commercial Code of the State, (3) a statement to the effect that the equipment proposed to be so substituted is now owned by the Borrower and in the possession of the Borrower and is free and clear of all security interests, liens, and encumbrances of any kind whatsoever and (4) a submission of reasonable proof satisfactory to the Board that such equipment proposed to be substituted is now owned by the Borrower and in possession of the Borrower and is free and clear of all security interest, liens and encumbrances of any kind whatsoever. The description of substituted equipment provided for in Section 8.6(a) above shall, when furnished to the Board, constitute an amendment or supplement to Exhibit B hereof. Items of Equipment replaced and substituted pursuant to the terms of this Section 8.6(a) shall be deleted from Exhibit B by the Board. The Borrower shall not substitute or replace any item of Equipment pursuant to this Section 8.6(a) for any property which is not free and clear of all security interests, liens and encumbrances of any kind whatsoever. (b) The Borrower will from time to time, upon the written request of the Board or the Trustee, file with the Board and the Trustee a list of Equipment currently on the Land, which list shall further identify said items of equipment substituted pursuant to Section 8.6(a) hereof and the date and reason for substitution. The Borrower shall have sixty days in which to respond to each such request, but shall be obligated to respond to such request no more than twice each calendar year. (c) Notwithstanding the provisions set forth in Section 8.6(a) of this Agreement, the Borrower shall have the right at any time or from time to time to sell or otherwise dispose of all or any part of the Equipment free and clear of the security interest created by the Security Instruments, without being obligated to substitute new equipment therefor, if: (i) The items of Equipment so disposed from time to time have an aggregate Appraised Value at the time of disposition of $10,000 (the Borrower is to furnish to the Board written evidence of such Appraised Value for each item of Equipment so disposed); or (ii) The ratio of the outstanding principal amount of the Appraised Value of the Security Property (excluding the items of Equipment to be so disposed) at the time of proposed disposition shall exceed one hundred fifty nine percent (159%) to the Loan (the Borrower is to furnish to the Board written evidence of such Appraised Value of the Security Property); or (iii) The amount of the Appraised Value of the items of Equipment to be disposed of, to the extent such Appraised Value exceeds the amount described in clause (i), is deposited in the Special Redemption Account and is invested and applied in the manner prescribed in Section 8.12 of this Agreement. Section 8.7. CERTIFICATE OF NO DEFAULT. The Borrower agrees to deliver to the Trustee and to the Board within 120 days after the close of each fiscal year of the Borrower, a certificate of an Authorized Representative of the Borrower (a) to the effect that the Borrower is not aware of any condition, event or act which constitutes an Event of Default hereunder or under the Security Instruments, and no condition, event or act which, with notice of lapse of time, or both, would constitute such an Event of Default, or if any such condition, event or acts exists, specifying the same, and (b) to the effect that it is not aware of any failure in the payment of any part of the principal of or interest on any outstanding indebtedness of the Borrower for money borrowed and as the same shall become due and payable, whether at the stated maturity of such indebtedness or at a date fixed for redemption or otherwise, or the acceleration of the maturity of any such indebtedness following a default under the terms of any agreement or instrument relating to any such indebtedness. Section 8.8. NOTICE OF DEFAULT. The Borrower shall forthwith, upon the occurrence of an Event of Default hereunder or under the Security Instruments or upon the occurrence of a condition, event or act which, with notice or lapse of time, or both, would constitute such an Event of Default, notify in writing the Trustee and the Board of the occurrence of such Event of Default. Section 8.9. ASSIGNMENT AND LEASING. (a) This Agreement may be assigned in whole or in part and the Project may be sold or leased as a whole or in part by the Borrower only with the prior written consent of the Board and provided further that: (i) No assignment (other than pursuant to Section 8.3 hereof) or sale or lease shall relieve the Borrower from primary liability for any of its obligations hereunder; (ii) The assignee, transferee or lessee shall assume the obligations of the Borrower hereunder to the extent of the interest assigned, transferred or leased, except no such assumption shall be required if the subject lease is a true lease for federal tax purposes; (iii) The Borrower shall, within ten (10) days after the delivery thereof, furnish or cause to be furnished to the Board and to the Trustee a true and complete copy of each such assignment, instrument of transfer or lease, as the case may be, and the instrument of assumption (where required); (iv) The assignment, transfer or lease shall be subject and subordinate to the Lien of this Agreement, the Security Instruments and the Pledge; and (v) Neither the validity nor the enforceability of this Agreement, the Security Instruments or any security interest created thereunder shall be adversely affected thereby. (b) As of the purported effective date of any assignment, transfer or lease pursuant to Section 8.9(a), the Borrower shall furnish the Trustee with an opinion, in form and substance satisfactory to the Board, (i) of Independent Counsel that the assignment, transfer or lease is subject and subordinate to the Lien of the Security Instruments, (ii) of Independent Counsel that neither the validity nor the enforceability of this Agreement and the Note will be adversely affected thereby and (iii) of Independent Counsel opining that the assumption of obligations of the Borrower by any Person pursuant to Section 8.9(a)(ii) hereof will constitute a valid and legally enforceable assumption by such Person. (c) Any reassignment, transfer or sublease in turn of any assignment, transfer or lease entered into pursuant to Section 8.9(a) shall comply with and be subject to all the provisions of Sections 8.9(a) and 8.9(b). Any sublease in turn of a lease entered into pursuant to Section 8.9(a) shall be subject and subordinate to such original lease or sublease. Section 8.10. RIGHT TO INSPECT THE PROJECT AND SECURITY PROPERTY. The Board, the Trustee and the duly authorized agents of either of them shall have the right at all reasonable times and upon reasonable advance notice, to inspect the Project and the Security Property. Section 8.11. COMPLIANCE WITH ORDERS, ORDINANCES, ETC. (a) The Borrower agrees throughout the Loan Term to promptly comply with all statutes, codes, laws, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, companies or associations insuring the premises, courts, authorities, officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Security Property or any part thereof, or to any use, manner of use or condition of the Security Property or any part thereof. (b) Notwithstanding the provisions of Section 8.11(a), the Borrower may in good faith contest the validity or the applicability of any requirement of the nature referred to in such subsection (a). In such event, the Borrower may fail to comply with the requirement or requirements so contested during the period of such contest and any appeal therefrom, unless the Board or the Trustee shall notify the Borrower that by failure to comply with such requirement or requirements the Lien of the Security Instruments or the security interest created by Section 5.4(a) and 5.4(b) of this Agreement as to any part of the Security Property may be materially endangered or the Security Property or any part thereof may be subject to loss or forfeiture, in which event the Borrower shall promptly take such action with respect thereto as shall be satisfactory to the Trustee. Section 8.12. LIENS AND ENCUMBRANCES. (a) During the Loan Term and subject to the provisions of Section 5.4 of this Agreement, the Borrower shall not permit or create or suffer to be permitted or created any Lien upon the Security Property or any part thereof, nor may the Borrower assign, sell or otherwise dispose of the Security Property or any part thereof, without the prior written consent of the Board, which shall not be unreasonably withheld. Any such Lien, if nonetheless created or permitted, shall be discharged by the Borrower forthwith. (b) Notwithstanding the provisions of Section 8.12(a), the Borrower may in good faith contest any Lien upon the Security Property or any part thereof by reason of any labor, services or materials rendered or supplied or claimed to be rendered or supplied with respect to the Project or any part thereof. In such event, the Borrower may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom, unless the Board shall notify the Borrower that by nonpayment of any such item or items the security interest created by Section 5.4(a) and 5.4(b) of this Agreement may be materially endangered or the Security Property or any part thereof may be subject to loss or forfeiture, in which event the Borrower shall promptly secure payment of all such unpaid items by filing a bond, in form and substance and in such amount satisfactory to the Trustee, thereby causing a Lien to be removed. (c) Upon the request of the Board or the Trustee, the Borrower shall provide the Board and the Trustee, within sixty (60) days of such request, with proof satisfactory to the Trustee that all items of Security Property continue to be free and clear of all Liens. Section 8.13. IDENTIFICATION OF EQUIPMENT. All Equipment shall be properly identified by the Borrower by appropriate records, including computerized records. Section 8.14. RELOCATION OF THE EQUIPMENT. The Borrower covenants and agrees that during the Loan Term it will not remove the Equipment (except in accordance with the terms of Section 8.6 hereof) from the Land to a new location either within or outside of the State, without first obtaining the express written consent of the Board with respect to such removal and relocation. Section 8.15. SECURITY INSTRUMENTS COVENANTS. The Borrower covenants and agrees to perform all of the obligations and covenants imposed upon it pursuant to the Security Instruments and the Borrower agrees that any failure to perform such covenants shall, after the lapse of any applicable cure periods therein expressly provided, constitute a default for purposes of this Agreement. Section 8.16. COVENANT AGAINST DISCRIMINATION. The Borrower covenants and agrees that in the performance of this Agreement the Borrower will not discriminate or permit discrimination against any person or group of persons on the grounds of race, color, religion, national origin or sex in any manner prohibited by the laws of the United States of America or of the State. Section 8.17. EMPLOYMENT RECORDS. Within sixty (60) days after the close of each calendar year, the Borrower shall furnish a written report to the Board of the total number of employees at the Project, and shall separately indicate: (a) the number of permanent new jobs which was estimated to be created by the Project on the Borrower's application to the Board, with job descriptions and annual salaries; (b) which of these permanent new jobs are currently filled; and (c) the average number of full-time, part-time or seasonal employees at the Project within the three (3) categories of (i) professional, managerial, technical, (ii) skilled, and (iii) semi-skilled or unskilled for the current reporting period. In addition, such report shall contain information with respect to employment at the Project that is specified by the Board as being required to be contained in the employment reports described in MINNESOTA STATUTES, Section 469.154, Subd. 7. Section 8.18. CERTAIN FINANCIAL COVENANTS. (a) For the fiscal year of the Borrower beginning January 1, 2000 and thereafter, during the Loan Term and as of the date of any calculation, the Borrower shall maintain a ratio of (i) earnings before paying interest on all Indebtedness, taxes and making allowances for depreciation and amortization (all in accordance with generally accepted accounting principles) plus capitalized interest on the Bonds to (ii) regularly scheduled payments of principal and interest on all Funded Indebtedness of the Borrower averaged for the last three (3) full fiscal years for the Borrower of at least 1.5 to 1.0, provided, however, no years prior to January 1, 2000 will be included in the calculation. The outstanding principal amount of all Series 1997B Taxable, Lot 1 Bonds shall constitute Funded Indebtedness of the Borrower for purposes of this Section. (b) The Borrower shall have a Current Ratio of 2 to 1 for the fiscal years prior to January 1, 2000 and thereafter 1.5 to 1. (c) Notwithstanding anything contained herein to the contrary, the failure by the Borrower to comply with the provisions of either Section 8.18(a) or Section 8.18(b) of this Agreement shall not constitute an Event of Default under this Loan Agreement, but shall result in the following requirements of the Borrower during the continuance of such failure: (i) The Borrower shall not, without the prior written consent of the Board, incur any Funded Indebtedness other than Subordinated Indebtedness and other than purchase money indebtedness for real or personal property usable in the business of the Borrower. (ii) The Borrower shall not, without the prior written consent of the Board, pay any annual increases in total cash compensation (excluding insurance, health, dental and pension benefits) to the shareholders, directors and officers of the Borrower, or any person who is related by blood or marriage, any of such shareholders who own 5% or more of the stock of the Borrower, directors and officers in excess of 7% per annum. (d) Failure to comply with the provisions of Sections 8.18(c) shall constitute an Event of Default hereunder. (e) The calculations required by Section 8.18 of this Loan Agreement shall be prepared and certified by an Accountant and submitted to the Board and the Trustee annually pursuant to Section 8.5 of this Loan Agreement. Section 8.19 COVENANT AGAINST LOANS, TRANSFERS, ETC. The Borrower covenants and agrees that it will not, without the prior written consent of the Board, make any loans or transfer title to any of its assets to any officer, member or stockholder of the Borrower unless the loan or transfer is determined to be the same as if it were at arm's length, between unrelated parties, in an amount or at fair market value in the aggregate in excess of $100,000 in any single transaction with the Borrower and $250,000 in the aggregate. Section 8.20. COVENANT AGAINST SALE, GIFT, PURCHASE OR REDEMPTION OF STOCK. The Borrower covenants and agrees that it will not, without the prior written consent of the Board, gift, purchase, sell or redeem any capital stock of the Borrower or purchase any treasury stock of the Borrower, if, after giving effect to such transaction, (a) the Borrower would not be in compliance with Section 8.18(a) or (b) of this Loan Agreement. Section 8.21. VACANT POSITIONS. The Borrower agrees to list any vacant new positions with the job services of the Commissioner of Jobs and Training or a local service units as required by MINNESOTA STATUTES Section 268.66. Section 8.22. PREVAILING WAGES. The Board hereby notifies the Borrower that the Loan made pursuant to the Loan Agreement constitutes "financial assistance" from a "state agency" within the meaning of Article 10, Section 7 of Chapter 604, MINNESOTA LAWS (1990) and, therefore, the requirements of subdivision (2) and the penalties of subdivision (3) of such statute apply to Borrower and the Project except as and to the extent that it is determined that the exception set forth in subdivision (5) of such statute is applicable. The Board makes no representation as to the applicability or meaning of such exception and the Borrower hereby agrees to comply with such statute to the extent and in the manner provided by law. Section 8.23. COVENANT AGAINST DIVIDENDS, ETC. The Borrower covenants and agrees that it will not, without the prior written consent of the Authority, pay or declare any dividends on any class of its capital stock to any officer or stockholder of the Borrower, in an amount or at fair market value in the aggregate in excess of $-0- in any single fiscal year of the Borrower. Section 8.24. COVENANT AGAINST UNREASONABLE COMPENSATION. The Borrower covenants and agrees that it will not pay directors' and officers' salaries or provide any form of compensation to its directors and officers in excess of that reasonable for services rendered. Section 8.25. JOB CREATION. The Borrower will create 125 new jobs which pay more than $10 per hour, exclusive of all benefits and taxes, from November 1, 1996 to the date 12 months after production commences at the Borrower's motorcycle manufacturing facility in Belle Plaine and shall create 175 new jobs which pay more than $10 per hour, exclusive of all benefits and taxes, from November 1, 1996 to the date 24 months after production commences at the Borrower's motorcycle manufacturing facility in Belle Plaine. ARTICLE IX PLEDGE OF CERTAIN INTERESTS Section 9.1. PLEDGE OF CERTAIN INTERESTS TO BONDHOLDERS. (a) The Board under Section 1.04 of the General Bond Resolution and under Section 6.1 of the Single Lot Resolution has Pledged all of its rights and interest and all provisions of this Agreement, the Security Instruments and the Note (except pursuant to Section 8.2 hereof) as security for the payment of the principal of, premium, if any, and interest on the Bonds and the Single Lot Bonds. Such Pledge shall in no way impair or diminish any obligation of the Borrower under this Agreement, the Security Instruments or the Note. The Borrower hereby consent to such Pledge by the Board. (b) Except as provided in this Section 9.1 and in Article X of this Agreement and except as otherwise expressly provided in this Agreement, the Security Instruments and the Note, the Board shall not sell, assign, transfer, convey or otherwise dispose of its interest in or its rights under this Agreement, the Security Instruments and the Note, without the prior written consent of the Borrower. ARTICLE X EVENTS OF DEFAULT AND REMEDIES Section 10.1. EVENTS OF DEFAULT DEFINED. (a) The following shall be "Events of Default" under this Agreement and the terms "Event of Default" or "Default" shall mean, whenever they are used in this Agreement, any one or more of the following events: (i) The failure by the Borrower to pay or cause to be paid, when due, the amounts specified to be paid pursuant to Section 5.1, Section 5.2(a) or Section 11.1 hereof and the Note; or (ii) The failure by the Borrower to observe and perform any covenant contained in Section 8.3 hereof; or (iii) The failure by the Borrower to observe and perform any covenant, condition or agreement hereunder on its part to be observed or performed (except obligations referred to in Sections 10.1(a)(i), 10.1(a)(ii), 10.1(a)(iv), 10.1(a)(v) and 10.1(a)(vi) hereof) on the earlier of (A) written notice thereof specifying such failure in the event that the failure is not of the type or nature which the Board reasonably believes can be remedied within thirty (30) days or (B) the thirty-first (31st) day after written notice, specifying such failure and requesting that it be remedied, given to the Borrower by the Board or the Trustee; or (iv) The dissolution or liquidation of the Borrower or the filing by the Borrower of a voluntary petition in bankruptcy, or the failure by the Borrower within sixty (60) days to lift any execution, garnishment or attachment of such consequence as will impair such Person's ability to carry on its operations at the Project, or the commission by the Borrower of any act of bankruptcy, or the adjudication of the Borrower as a bankrupt, or the assignment of assets by the Borrower for the benefit of its creditors, or the entry by the Borrower into an agreement of composition with such Person's creditors, or the approval by a court of competent jurisdiction of a petition applicable to the Borrower in any proceeding for its reorganization instituted under the provisions of any state or Federal bankruptcy or similar law, or appointment by final order, judgment or decree of a court of competent jurisdiction of a receiver of the whole or a substantial portion of the Properties of the Borrower (unless such receiver is removed or discharged within sixty (60) days of the date of his qualification); or (v) The failure in the payment of any part of the principal of or interest on any Indebtedness of the Borrower for money borrowed having an outstanding principal amount of $100,000, when and as the same shall become due and payable, whether at the stated maturity of such Indebtedness or at a date fixed for redemption or otherwise, which failure results in the acceleration of the maturity of any such indebtedness following a default under the terms of any agreement or instrument relating to any such indebtedness; or (vi) The occurrence and continuance of an "event of default" under the Security Instruments; or (vii) The failure of Borrower to comply with the requirements of Section 4.2 or Section 5.4 hereof as and when applicable; or (b) Notwithstanding the provisions of Section 10.1(a), if by reason of FORCE MAJEURE either party hereto shall be unable in whole or in part to carry out its obligations under this Agreement and if such party shall give notice and full particulars of such FORCE MAJEURE in writing to the other party and to the Trustee within a reasonable time after the occurrence of the event or cause relied upon, the obligations under this Agreement of the party giving such notice, so far as they are affected by such FORCE MAJEURE, shall be suspended during the continuance of the inability, which shall include a reasonable time for the removal of the effect thereof. The suspension of such obligations for such period pursuant to this subsection (b) shall not be deemed an Event of Default under this Section 10.1. Notwithstanding anything to the contrary in this subsection (b), an event of FORCE MAJEURE shall not excuse, delay or in any way diminish the obligations of the Borrower to make the payments required by Section 5.1, Section 5.2 and Section 11.1(a) hereof, to obtain and continue in full force and effect the insurance required by Section 6.4 hereof, to provide the indemnity required by Section 8.2 hereof and to comply with the provisions of Sections 2.3, 4.3, 5.2(e), 5.3, 6.3, 6.5, 6.6, 6.7, 8.1, 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.14, 8.15, 8.16, 8.17, 8.18, 8.19, 8.20, 8.21, 8.22, 8.23, 8.24 and 8.25 hereof. The term "FORCE MAJEURE" as used herein shall include, without limitation, acts of God, strikes, lockouts or other industrial disturbances, acts of public enemies, orders of any kind of the government of the United States of America or of the State or any of their departments, agencies, governmental subdivisions, or officials, or any civil or military authority, insurrections, riots, epidemics, landslides, lightning, earthquakes, fire, hurricanes, storms, floods, washouts, droughts, arrests, restraint of government and people, civil disturbances, explosions, breakage or accident to machinery, transmission pipes or canals, partial or entire failure of utilities, or any other cause or event not reasonably within the control of the party claiming such inability. Section 10.2. REMEDIES ON DEFAULT. (a) Whenever any Event of Default shall have occurred, the Board or the Trustee may take any one or more of the following remedial steps: (i) Declare, by written notice to the Borrower, to be immediately due and payable, whereupon the same shall become immediately due and payable and so accelerated: (A) all unpaid amounts payable pursuant to Section 5.1 hereof, and pursuant to the Note (constituting principal on the Loan and accrued but unpaid interest thereon) and (B) all other payments due under this Agreement and pursuant to the Note (whether or not constituting principal on the Loan and accrued but unpaid interest thereon); (ii) Terminate the disbursement of any moneys in the Construction Account in accordance with Section 4.3 hereof and, upon acceleration of the Loan pursuant to Section 10.2(a)(i) of this Agreement, transfer such moneys to the Special Redemption Account; (iii) Enforce the Security Instruments on, and any security interest in, the Equipment; (iv) As provided in the Security Instruments, take possession of the Equipment and for that purpose the Borrower agrees that (a) the Borrower will, when so requested by the Board or the Trustee assemble the Equipment and make it available to the Board or the Trustee on the premises on which it is located and (b) the Board and the Trustee, their employees, agents and representatives shall have the right to peacefully enter upon any premises in the possession of the Borrower wherein the Equipment or any part thereof may be located and take possession of and remove such Equipment without interference or hindrance from the Borrower, the officers, agents or employees or any person associated therewith; (v) Upon fifteen (15) calendar days' notice to the Borrower (which the Borrower hereby agree is commercially reasonable) the Board or Trustee may proceed to sell or otherwise dispose of the Equipment or any part thereof by public or private sale in any commercially reasonable manner (and without intending to limit the generality of the foregoing, the Borrower hereby agrees that the sale of such property at a public auction conducted by a reputable auctioneer in the manner in which such auctions are usually conducted is commercially reasonable); and (vi) Take any other action at law or in equity which may appear necessary or desirable to collect the payments then due or thereafter to become due and to enforce the obligations, agreements or covenants of the Borrower under this Agreement, the Security Instruments and the Note. (b) Any sums realized as a consequence of any action taken pursuant to Section 10.2(a) shall be paid to the Trustee and shall be applied by the Trustee, subject to the provisions of Section 7.04 of the General Bond Resolution, in accordance with the provisions of Section 6.06(d) of the General Bond Resolution, to which such application the Borrower hereby consents. Section 10.3. REMEDIES CUMULATIVE. No remedy herein conferred upon or reserved to the Board is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Board to exercise any remedy reserved to it in this Article X, it shall not be necessary to give any notice, other than such notice as may be herein expressly required in this Agreement and the Note or required by law. Section 10.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In the event the Board or the Trustee should employ attorneys or incur other expenses in response to any request of the Borrower or for the collection of amounts payable hereunder or the implementation or enforcement of performance or observance of any obligations or agreements on the part of the Borrower herein contained, including without limitation obligations and agreements under this Section, the Borrower shall, on demand therefor, pay to the Board or the Trustee the reasonable fees of such attorneys (determined at their usual and customary rates) and such other expenses so incurred. Commencement of a lawsuit to recover any amount payable under this Agreement or the Note shall be deemed a demand for payment of all expenses incurred in the course of such lawsuit, including without limitation attorneys' fees incurred in connection with such lawsuit. Section 10.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any agreement contained herein should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder including without limitation a subsequent breach or subsequent breaches of the same provision of this Agreement. ARTICLE XI EARLY TERMINATION OF AGREEMENT; PREPAYMENT OF LOAN Section 11.1. EARLY TERMINATION OF AGREEMENT. The Borrower shall have an option to terminate this Agreement upon filing with the Board and the Trustee a certificate signed by an Authorized Representative of the Borrower stating the Borrower's intention to do so on the next succeeding Bond Payment Date pursuant to this Section and complying with the requirements of Section 3.02(b) of the General Bond Resolution and upon further compliance with the requirements set forth in Section 11.2 hereof. Section 11.2. CONDITIONS TO EARLY TERMINATION OF AGREEMENT. In the event the Borrower exercises its right or is required to terminate this Agreement in accordance with any provision of Section 11.1 hereof, the Borrower shall comply with the requirements set forth in the following three subsections: (a) The following payments shall be made: (i) TO THE TRUSTEE FOR THE ACCOUNT OF THE BOARD: at least thirty days prior to the Bond Payment Date, an amount certified by the Trustee which, when added to the total amount on deposit with the Trustee for the account of the Board and the Borrower and available for such purpose, will be sufficient (A) to pay, for deposit into the Special Redemption Account, the amount required by Section 2.8(a) of the Single Lot Resolution as the Redemption Price for the Single Lot Bonds in connection with the redemption in whole of such Bonds, if such termination is pursuant to Section 11.1 hereof, or (B) to pay, for deposit into the Optional Redemption Account, the Redemption Price of the Single Lot Bonds in connection with the redemption in whole of such Bonds, in accordance with the terms of Section 2.7(a) of the Single Lot Resolution, together with all interest on such Single Lot Bonds which will accrue to the date of prepayment (which shall be the next succeeding Bond Payment Date for which the Trustee may give notice pursuant to Section 3.03 and Section 3.04 of the General Bond Resolution), if such termination is pursuant to Section 11.1 hereof; (ii) TO THE BOARD: an amount certified by the Board sufficient to pay all unpaid fees and expenses of the Board incurred under this Agreement and the Board Resolution; and (iii) TO THE APPROPRIATE PERSON: an amount sufficient to pay all other fees, expenses or charges, if any, due and payable or to become due and payable under this Agreement and the Board Resolution and not otherwise paid or provided for. (b) The certificate required to be filed pursuant to Section 11.1, shall specify the date upon which the payments pursuant to Section 11.2(a) shall be made, which date shall not be less than ninety (90) nor more than one hundred twenty (120) days from the date such certificate is filed with the Board and the Trustee. Section 11.3. DISCHARGE OF LIEN. If the Borrower shall pay or cause to be paid, or there shall otherwise be paid, to the Holders of all outstanding Single Lot Bonds or to the Trustee with respect thereto, the principal or Redemption Price, if applicable, and interest due or to become due at the times and in the manner stipulated therein, then the rights in the Security Property hereby granted and all covenants, agreements and other obligations of the Borrower hereunder to the Board and the Trustee shall thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Board and the Trustee shall cancel and discharge the Lien of the Security Instruments and the security interest in the Equipment created by the Security Instruments and execute and deliver to the Borrower all such instruments as may be appropriate to evidence such discharge and satisfaction of such liens. After payment in full of the Single Lot Bonds and the interest thereon and the payment of all fees, charges, expenses and other amounts required to be paid under this Agreement, the Note and the Single Lot Resolution, all amounts on deposit with the Trustee for the account of the Board and the Borrower under this Agreement, the Note and the Single Lot Resolution, if any, shall be applied by the Trustee in accordance with the provisions of Section 5.21 of the General Bond Resolution. Section 11.4. PREPAYMENT OF LOAN IN PART. (a) The Borrower shall have the Option to prepay the Loan in part upon filing with the Board and Trustee a certificate signed by an Authorized Representative stating the Borrower's intention to do so pursuant to this Section and complying with the requirements of Section 2.7(a) of the Single Lot Resolution and Section 3.02(b) of the General Bond Resolution. Such certificate shall specify the date (which shall be a Bond Payment Date) and amount of the partial prepayment of the Loan, which date shall not be more than one hundred twenty (120) days nor less than ninety (90) days after such notice. (b) Upon the filing of such certificate, the Borrower shall pay to the Trustee for the account of the Board a sum sufficient to pay, for deposit into the Optional Redemption Account, the Redemption Price of the amount of the Single Lot Bonds to be redeemed (from the amounts to be prepaid on the Loan as certified in Section 11.4(b) of this Agreement) in accordance with the terms of Section 2.7(a) of the Single Lot Resolution, together with all interest on such Single Lot Bonds which will accrue to the date of prepayment. Section 11.5. REFUNDING CONSENT. If after August 1, 1997 the Board certifies to the Borrower that it wishes to refund the Single Lot Bonds in order to permit the Board to amend the provisions of the General Bond Resolution or the General Guaranty Fund Pledge and Escrow Agreement without the necessity of obtaining Bondholder consent, the Borrower hereby consents to the issuance of a Lot of refunding Bonds to refund the Single Lot Bonds at the then prevailing rates of interest, provided, however, that Borrower will continue to make the same payments due on the Note as established in the Single Lot Resolution as of the Date of Issuance and under this Agreement and that any increase or decrease in payments shall be paid to or received by the Board. In connection with any such refunding, the Borrower hereby covenants to amend or supplement this Agreement and the Security Instruments, to such extent, or to provide substitute documents therefor, as in the opinion of the Board shall be necessary to effect such refunding, including the payment of debt service on such refunding Bonds when and as due and at the rate of interest set forth therein. The Borrower hereby consents, in connection with such refunding, to any deposit by the Board of all or part of the proceeds of such refunding Bonds (i) into the Special Redemption Account to prepay in whole the Single Lot Bonds or (ii) to be held by the Trustee to defease the Single Lot Bonds in accordance with the provisions of Section 11.02 and Section 11.03 of the General Bond Resolution. ARTICLE XII MISCELLANEOUS Section 12.1. NOTICES. All notices, other than interest billing notices, certificates or other communications hereunder shall be in writing and shall be sufficiently given and shall be deemed given when delivered and, if delivered by mail, shall be sent by certified or registered mail, postage prepaid, return receipt requested, addressed as follows: TO THE BOARD: Minnesota Agricultural and Economic Development Board 500 Metro Square 121 7th Place East Saint Paul, Minnesota 55101 ATTENTION: Financial Management Division (Department of Trade and Economic Development) TO THE BORROWER: Excelsior-Henderson Motorcycle Manufacturing Company 805 Hanlon Drive Belle Plaine, MN 56011 ATTENTION: Chief Executive Officer TO THE TRUSTEE: U. S. Bank National Association c/o First Trust National Association 180 East Fifth Street St. Paul, Minnesota 55101 ATTENTION: Corporate Trust Administration A duplicate copy of each notice, certificate and other communication given hereunder by either the Board or the Borrower to the other shall also be given to the Trustee. The Board, the Borrower and the Trustee may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates and other communications shall be sent. Section 12.2. BINDING EFFECT. This Agreement shall inure to the benefit of and shall be binding upon the Board, the Borrower and their respective personal representatives, heirs, devisees, successors and assigns (as applicable) and shall create no rights in any other parties except as may be specifically set forth elsewhere in this Agreement. Section 12.3. SEVERABILITY. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 12.4. AMENDMENTS, CHANGES AND MODIFICATIONS. This Agreement, the Security Instruments and the Note may not be amended, changed, modified, altered or terminated without the concurring written consent of the Bondholders, except as provided in Section 6.08 of the General Bond Resolution. Wherever the consent or approval of the Board or the Trustee is required or permitted under this Agreement, the Security Instruments or the Note, such consent or approval shall not be unreasonably withheld (based upon the standards set forth in the General Bond Resolution) and shall be promptly given (but this provision shall not be deemed to require any special meetings by the Board). Section 12.5. DATA PRIVACY DISCLOSURE. The Borrower understands that the data which the Borrower provides pursuant to the Agreement, including, but not limited to, information required under Section 8.3, Section 8.4, Section 8.5, Section 8.7 and Section 8.18 will be used by the Board to: (a) Assess Borrower's financial status; (b) Make any reports required by the Act, any other law or government regulation in accordance with MINNESOTA STATUTES Section 13.71; (c) Provide such information to the public, including, but not limited to, potential purchasers of its Bonds, Bondholders, Bond Counsel and the Board's underwriters and placement agents, as is needed in connection with the sale, issuance and payments of Bonds; (d) Enforce this agreement and any mortgage or other security instrument between the Borrower and the Board; and (e) Operate and evaluate its Program. The Borrower further understands that there is a possibility that the data might constitute a public record and may be examined by anyone. The Borrower hereby consents to the use of such data as described above and to its public disclosure. Failure to provide the required data may constitute an Event of Default under Section 10.1. In the event a Person other than the Trustee, investment bankers representing the Board or any agent thereof requests the information described in Sections 8.4, 8.5 or 8.18, the Board shall exercise its best efforts to provide the Borrower advance notice of its intention to provide such information to such Person. Section 12.6. EXECUTION OF COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 12.7. APPLICABLE LAW. This Agreement shall be governed exclusively by the applicable laws of the State. Section 12.8. RECORDING AND FILING. (a) The financing statements perfecting the security interests created by the Security Instruments or by this Agreement in all amounts payable hereunder shall be recorded or filed, as the case may be, in such office or offices as may at the time be provided by law as the proper place for the recordation or filing thereof. The Borrower shall be responsible for such recording and filing and shall bear the expense associated therewith and in connection with the continued validity and perfection thereof. (b) The Board and the Borrower shall execute and deliver all instruments and shall furnish all information necessary or appropriate to perfect or protect any security interest created or contemplated by this Agreement, the Security Instruments or the Board Resolution. Section 12.9. SURVIVAL OF OBLIGATIONS. This Agreement, the Security Instruments and the Note shall remain in full force and effect until the Series 1997B Bonds, together with all interest thereon, and all amounts payable under this Agreement, the Security Instruments and the Note and the Board Resolution shall have been paid in full. However, the obligations of the Borrower to make the payments required by Section 5.1 and Section 5.2 hereof and Article XI hereof, and to provide the indemnity required by Section 8.2 hereof and payment of attorney fees required by Section 10.4 hereof, shall survive the termination of this Agreement and the full payment of the Single Lot Bonds. Section 12.10. TABLE OF CONTENTS AND SECTION HEADINGS NOT CONTROLLING. The Table of Contents and the headings of the several Sections in this Agreement have been prepared for convenience of reference only and shall not control, affect the meaning of or be taken as an interpretation of any provision of this Agreement. Section 12.11. LIMITED LIABILITY. The Act prescribes and the parties intend that by reason of making this Agreement, by reason of the issuance of the Single Lot Bonds, by reason of the performance of any act required of the Board by this Agreement, or by reason of the performance of any act requested of the Board by the Borrower, no indebtedness or charge against the general credit or taxing powers, if any, of the Board within the meaning of any constitutional or statutory limitation shall occur. IN WITNESS WHEREOF, the Board and the Borrower have caused this Loan Agreement to be executed in their respective names as of November 1, 1997. MINNESOTA AGRICULTURAL AND ECONOMIC DEVELOPMENT BOARD By Its Chair ATTEST: By -------------------- Its Executive Director EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By Its ---------------------------------- Signature page of the Loan Agreement dated as of November 1, 1997 between the Minnesota Agricultural and Economic Development Board and Excelsior-Henderson Motorcycle Manufacturing Company SCHEDULE I EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY PROMISSORY NOTE No. 1 $7,145,000 Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, acknowledges itself indebted and for value received hereby promises to pay to the order of the Minnesota Agricultural and Economic Development Board as the statutory successor to the Minnesota Energy and Economic Development Authority (the "Board") and its successors and assigns, the principal sum of SEVEN MILLION ONE HUNDRED FORTY FIVE THOUSAND DOLLARS ($7,145,000) together with interest on the unpaid principal balance of this Note until the Borrower's obligation with respect to the payment of such sum shall be discharged at a rate of interest identical to the stated rates of interest on the Series 1997B Bonds referred to below (taking into account the different rates for the different maturities and principal amounts of the Series 1997B Bonds) but payable not as provided in the Series 1997B Bonds but as provided below and in the Loan Agreement referred to below. This Note is issued to evidence the obligation of Excelsior-Henderson Motorcycle Manufacturing Company under and pursuant to, and shall be governed by and construed in accordance with the terms and conditions of, the Loan Agreement dated as of November 1, 1997 (the "Loan Agreement") between the Board and Excelsior-Henderson Motorcycle Manufacturing Company, for the repayment of the loan made by the Board to Excelsior-Henderson Motorcycle Manufacturing Company, thereunder from the proceeds of the Board's $7,145,000 principal amount of Minnesota Small Business Development Loan Program Taxable Revenue Bonds, Series 1997B, Lot 1 (the "Bonds") and the payment of interest thereon, including provision for prepayment of said loan in certain cases, and for the satisfaction of a certain right of reimbursement of the General Guaranty Fund as provided in the Loan Agreement under certain circumstances and for the satisfaction of a certain right of reimbursement of the Board as provided in the Loan Agreement under certain circumstances. This Note is secured by the Security Instruments (as defined in the Loan Agreement) made by Excelsior-Henderson Motorcycle Manufacturing Company to the Board and certain other property, as provided in the Loan Agreement and granted by the maker to the payee as provided in the Loan Agreement. The Loan Agreement (together with this Note) and the Security Instruments have been pledged to the Holders of the Bonds from time to time issued under the Minnesota Small Business Development Loan Program Revenue Bond General Bond Resolution (the "General Bond Resolution") adopted by the Board on September 26, 1984 and thereafter amended and restated from time to time pursuant to its terms. As provided in the Loan Agreement and subject to the provisions thereof, payments hereon are to be made in lawful money of the United States of America at the place and in the manner provided in the Loan Agreement, in monthly installments of principal and interest, commencing December 1, 1997, and payable thereafter on the first day of each month, such installments to be applied first to the payment of interest then due on this Note, and the remaining balance thereof to reduce the unpaid principal amount of this Note, with each installment payable as interest to include interest payable in advance due to and including the first day of the next succeeding month from the month in which the installment is payable and with each installment payable as principal to be similarly paid in advance. The monthly installments to be paid on this Note shall be an amount equal to (A) on January 1, 1998and (i) an installment of interest (after receiving a credit for any accrued interest on the Bonds received from the Placement Agents (as defined in the Loan Agreement) of the Bonds) equal to the interest due on the Bonds on February 1, 1998; and (ii) an installment of principal equal to one-half of the principal due on the Bonds on August 1, 1998; and (B) for the period commencing on February 1, 1998 and on the first day of each month thereafter (1) one-sixth of the interest installment due on the Bonds on the next succeeding bond payment date thereof (taking into account such in-advance payments) and (2) one-twelfth of the principal installment due on the Bonds on the next succeeding bond payment date on which a principal installment thereon is due (taking into account such in-advance payments), such installments to be reduced by that sum or sums such that on or before the bond payment date on which a principal installment is due thereon any amounts then on deposit in the Holding Account created with respect to the Bonds pursuant to the provisions of the General Bond Resolution plus the monthly installment then to be paid on this Note shall equal the debt service payment on the Bonds due on such bond payment date. This Note may be prepaid in whole or in part in accordance with the provisions of the Loan Agreement. Excelsior-Henderson Motorcycle Manufacturing Company agrees to make the payments on this Note on the dates and in the amounts specified herein and in the Loan Agreement and in addition agrees to make such other payments at such times and upon such conditions as are required pursuant to the Loan Agreement. In the "Event of Default", as defined in the Loan Agreement, the principal of and interest on this Note may be declared immediately due and payable as provided in the Loan Agreement. This Note may be cancelled, amended or supplemented as provided in the Loan Agreement. Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived by the makers hereof. IN WITNESS WHEREOF, Excelsior-Henderson Motorcycle Manufacturing Company has caused this Note to be executed in its respective name and on its behalf by the manual signature of its _______________, all as of December 1, 1997. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By Its__________________________________ EXHIBIT A TO LOAN AGREEMENT LEGAL DESCRIPTION OF LAND Lot 1, Block 1, and Lot 3, Block 2, Excelsior-Henderson Industrial Park Subdivision, according to the recorded plat thereof, Scott County, Minnesota. A-67 EXHIBIT B-1 TO LOAN AGREEMENT
TOTAL PAINT FINISHING SYSTEM COST 10 Stage Surface Preparation Machine $ 603,280 R.O. Water System 117,706 Electrocoat System 524,351 5 Stage Postrinse Machine 174,761 Electrocoat Bake Oven and Cooling Tunnel 222,360 Dry-Off Oven 85,123 Powder Cure Oven & Cooldown Tunnel 274,655 Tack Booths (2) 54,028 Base Coat Booths (2) 96,893 Demask Booths (2) 62,079 Clear Coat Environmental Room 139,786 Flash Enclosures 57,171 Base Coat/Clear Coat Ovens and Cooldown 432,425 Programmable Logic Control System 73,396 Wastewater Treatment System 273,589 Power & Free Conveyor System 1,966,153 HVAC System 1,350,348 Nordson booths 548,670 Total $7,056,774
B-1 EXHIBIT B-2 TO LOAN AGREEMENT B-2 EXHIBIT B-3 TO LOAN AGREEMENT B-3 EXHIBIT C $7,145,000 Minnesota Agricultural and Economic Development Board Minnesota Small Business Development Loan Program Revenue Bonds Series 1997B Taxable, Lot 1 DISBURSEMENT REQUEST NO. ____ FOR DISBURSEMENT OF FUNDS FROM THE CONSTRUCTION ACCOUNT TO: U.S. Bank National Association Corporate Trust Administration 180 East Fifth Street St. Paul, Minnesota 55101 I, a duly authorized representative of Excelsior-Henderson Motorcycle Manufacturing Company (the "Borrower") and the obligor under a Loan Agreement, dated as of November 1, 1997 (the "Loan Agreement), between the Minnesota Agricultural and Economic Development Board (the "Board") and the Borrower, hereby certify on behalf of the Borrower pursuant to Section 4.3 thereof as follows: (a) I have reviewed appropriate records and documents of the Borrower relating to the matters covered by this Request. All capitalized terms used in this Request shall have the meaning given them in the Loan Agreement. (b) The Borrower has provided the Trustee and the Board with proof of satisfaction of the requirements in Section 4.3(a)(ii)(F) of the Loan Agreement for $3,500,000 in Equipment. (c) This certificate accompanies the Borrower's request number ______ for advances under the Loan Agreement dated as of November 1, 1997 between Borrower and the Minnesota Agricultural and Economic Development Board (the "Board"). Previous to this request for advance the Borrower has received advances of $____________ of Bond Proceeds. (d) The presently pending request for advance seeks $__________ in Bond Proceeds. (e) The Trustee may rely upon the foregoing certifications in approving any advance requested by Borrower. (f) No item hereby requested to be paid or reimbursed has been included in any Request previously filed by the Borrower with the Trustee under Section 4.3 of the Loan C-1 Agreement. (g) No default by the Borrower under the Loan Agreement or the Security Instruments has occurred which has not been cured. (h) The amount remaining in the Construction Account (together with any anticipated investment income to be credited thereto) will, after payment of the amount requested by this Request, be sufficient to pay the remaining costs of the Project. (i) All costs of issuance have been paid by the Borrower or sufficient funds have been deposited for such costs of issuance in the Cost of Issuance Account. (j) Payment of the amounts requested herein will not result in a violation by the Borrower of its representations as set forth in the Loan Agreement or the Security Instruments. (k) All of the items to be acquired as Equipment on Schedule A hereto have been acquired, installed and accepted and are free and clear of all security liens and encumbrances and a filed UCC-1 is attached hereto reflecting the Board's security interest which has been assigned to U.S. Bank National Association in the Equipment on Schedule A hereto and a UCC search has been done which is attached hereto to indicate all security interests in the Borrower. (l) Attached hereto is an opinion of counsel to the Borrower that the Equipment on Schedule A hereto is free and clear of all liens except the lien of the Security Instruments and the security interest of the Board in the Equipment has been perfected and is valid. (m) Each item for which payment or reimbursement is hereby requested (a) has been paid or incurred or is now due and payable and (b) is or was necessary in connection with the acquisition and installation of the Project. (n) The Board and any successor has the right to use Equipment and the use of the Equipment and the products produced by the Equipment will not violate any trademark, tradename or patent of any Person. (o) All conditions in Sections 2 and 4 of the Disbursing Agreement have been met. You are hereby requested to advance and disburse from the Construction Account in the Construction Account the amounts shown on Schedules A and B and make payment to the persons entitled to receipt thereof as shown on said Schedules. C-2 WITNESS my hand this ___ day of ___________, 199_. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By ------------------------------------ Its --------------------------------- Approved: MINNESOTA AGRICULTURAL AND ECONOMIC DEVELOPMENT BOARD By ---------------------------------- Its Executive Director C-3 SCHEDULE A The Borrower has incurred the following costs for Equipment:
ITEM AMOUNT INCURRED CONTRACTOR OR SUPPLIER - ---- --------------- ----------------------
C-4 SCHEDULE B
NAME AND ADDRESS OF AMOUNT TO ITEM SUPPLIER OF ITEM BE PAID - ---- ------------------- ---------
C-5 EXHIBIT D [Opinion of Counsel] D-1 EXHIBIT E [Consent Form] E-1 EX-10.2 6 EXHIBIT 10.2 EXHIBIT 10.2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LOAN AGREEMENT BY ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA AND EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY DATED AS OF JULY 1, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- This instrument was drafted by: KENNEDY & GRAVEN, Chartered 470 Pillsbury Center 200 South Sixth Street Minneapolis, Minnesota 55402 EXHIBIT 10.2 TABLE OF CONTENTS
Page ---- PARTIES...................................................................1 RECITALS..................................................................1 ARTICLE ONE Definitions Section 1.01. Defined Terms...........................................3 Section 1.02. Rules of Interpretation.................................5 ARTICLE TWO Representations Section 2.01. Representations by the Issuer...........................6 Section 2.02. Representations by the Borrower.........................7 Section 2.03. Lender May Rely on Representations......................8 Section 2.04. Other Agreements and Instruments........................9 ARTICLE THREE The Loan Section 3.01. Amount and Source of Loan; Repayment...................10 Section 3.02. Borrower's Obligations Unconditional...................10 Section 3.03. Borrower's Remedies....................................10 Section 3.04. Additional Payments....................................11 Section 3.05. Escrow Agreement; Loan Disbursement....................11 Section 3.06. Interest Upon Default..................................11 ARTICLE FOUR Borrower's Covenants Section 4.01. Covenants..............................................12 Section 4.02. Indemnity..............................................14 Section 4.03. Reports to Governmental Agencies.......................15 Section 4.04. Security Agreement.....................................15 Section 4.05. Concerning the Facility................................15 Section 4.06. Alterations and Disposal of Equipment..................15 Section 4.07. INTENTIONALLY OMITTED..................................15 Section 4.08. Use of Facility........................................15 Section 4.09. Maintenance and Possession of Equipment by Borrower....16 Section 4.10. Observance of Covenants and Terms of Resolution and the Bond...........................................16 Section 4.11. Notice of Defaults.....................................16 Section 4.12. Borrower to Execute Further Documents..................16 i EXHIBIT 10.2 Section 4.13. Borrower to Maintain Certain Standards.................16 Section 4.14. Mergers and Consolidations.............................16 Section 4.15. Insurance..............................................16 Section 4.16. Taxes..................................................18 ARTICLE FIVE Borrower's Options Section 5.01. Prepayments............................................19 Section 5.02. Assignment.............................................19 ARTICLE SIX Events of Default and Remedies Section 6.01. Events of Default......................................20 Section 6.02. Remedies in the Event of Default.......................21 Section 6.03. Disposition of Funds...................................21 Section 6.04. Manner of Exercise.....................................21 Section 6.05. Effect of Waiver.......................................22 Section 6.06. Notice to Borrower of Event of Default.................22 ARTICLE SEVEN General Section 7.01. Notices................................................23 Section 7.02. Binding Effect.........................................23 Section 7.03. Severability...........................................23 Section 7.04. Amendments, Changes and Modifications..................23 Section 7.05. Execution; Counterparts................................24 Section 7.06. Concerning the Bond....................................24 Section 7.07. Limitation of Issuer's Liability.......................24 Section 7.08. Assignment by the Issuer...............................24 Section 7.09. Survival of Certain Provisions.........................25 Section 7.10 Publicity..............................................25 SIGNATURES .......................................................26
ii EXHIBIT 10.2 LOAN AGREEMENT THIS LOAN AGREEMENT, dated as of July 1, 1998, is made and entered into by EXCELSIOR-HENDERSON MORTORCYCLE MANUFACTURING COMPANY (the "Borrower") and ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA (the "Issuer"). WHEREAS, the Municipal Industrial Development Act, Minnesota Statutes, Sections 469.152 to 469.165 (the "Act"), declares and provides that the welfare of the State of Minnesota requires active promotion, attraction, encouragement and development of economically sound industry and commerce through governmental action to prevent, so far as possible, emergence of blighted lands and areas of chronic unemployment, and it is the policy of the State of Minnesota to facilitate and encourage action by local government units to prevent the economic deterioration of such areas to the point where the process can be reversed only by total redevelopment through the use of local, state and federal funds derived from taxation with the attendant necessity of relocating displaced persons and of duplicating public services in other areas; and WHEREAS, the Act further finds and declares that such governmental action is required by technological change that has caused a shift to a significant degree in the area of opportunity for educated youth to processing, transporting, marketing, service and other industries, and unless existing and related industries are retained and new industries are developed to use the available resources in each community, a large part of the existing investment of the community and of the State of Minnesota as a whole in educational and public service facilities will be lost, and the movement of talented, educated personnel of mature age to areas where their services may be effectively used and compensated and the lessening attraction of persons and businesses from other areas for purposes of industry, commerce and tourism will deprive the community and the State of Minnesota of the economic and human resources needed as a base for providing governmental services and facilities for the remaining population; and WHEREAS, the Act further finds and declares that such governmental action is required by the increase in the amount and cost of governmental services and the need for more intensive development and use of land to provide an adequate tax base to finance these costs; and WHEREAS, the Issuer is a "redevelopment agency," as such term is defined in the Act, authorized by the Act to enter into a revenue agreement with any person, firm, or public or private corporation or federal or state governmental subdivision or agency in such manner that payments required thereby to be made by the contracting party shall be fixed, and revised from time to time as necessary, so as to produce income and revenue sufficient to provide for the prompt payment of principal of and interest on all revenue bonds issued under the Act when due, and the revenue agreement shall also provide that the contracting party shall be required to pay all expenses of the operation and maintenance of the "project" (as defined in the Act) including adequate insurance thereon and insurance against all liability for injury to persons or property arising from the operation thereof, and all taxes and special assessments levied upon or with respect to the project and payable during the term of the revenue agreement; and WHEREAS, the Issuer is further authorized under the Act to issue revenue bonds, in anticipation of the collection of revenues of a project, to finance, in whole or in part, the cost of acquisition, construction, reconstruction, improvement, betterment, or extension of such project; and 1 EXHIBIT 10.2 WHEREAS, the Issuer proposes to finance the acquisition and installation of certain manufacturing equipment and tooling (the "Equipment"), installed or to be installed in the manufacturing and distribution facility of the Borrower (the "Facility"), under the Act through the issuance of a revenue bond of the Issuer (the "Bond") under the Resolution, as hereinafter defined; and WHEREAS, the Bond issued under the Resolution will be secured by a reserve fund pursuant to an escrow deposit agreement and a security agreement with respect to the Equipment, and by an assignment of the revenues derived by the Issuer from the Loan Agreement, as hereinafter defined, and the Bond and the interest on the Bond shall be payable solely from the revenue pledged therefor and the Bond shall not constitute a debt of the Issuer within the meaning of any constitutional or statutory limitation nor shall the Bond constitute nor give rise to a pecuniary liability of the Issuer or a charge against its general credit or taxing powers and shall not constitute a charge, lien, or encumbrance, legal or equitable, upon any property of the Issuer other than the Issuer's interest in the Loan Agreement; and WHEREAS, the Borrower has acquired and installed portions of the Equipment and proposes to acquire and install the remainder of the Equipment, and the Issuer desires to finance the acquisition and installation of the Equipment upon the terms and conditions as required by the Act and as hereinafter in this Loan Agreement set forth; and WHEREAS, the execution, delivery and performance of this Loan Agreement have been duly authorized by the Issuer, and all conditions, acts and things necessary and required by the Constitution or statutes of the State of Minnesota or otherwise, to exist, to have happened, or to have been performed precedent to and in the execution and delivery of this Loan Agreement and in the issuance of the Bond, do exist, have happened and have been performed in regular form, time and manner; NOW THEREFORE, in consideration of the mutual promises herein contained, the parties to this Agreement agree as follows: 2 EXHIBIT 10.2 ARTICLE ONE DEFINITIONS Section 1.01. DEFINED TERMS. As used in this Loan Agreement, the following terms shall have the following respective meanings: ACT: the Municipal Industrial Development Act, Minnesota Statutes, Sections 469.152 to 469.165, as amended. ASSIGNMENT OF LOAN AGREEMENT: the Assignment of Loan Agreement, dated as of July 1, 1998, executed by the Issuer, assigning certain interests of the Issuer in this Loan Agreement to the Lender. BOND: the revenue Bond issued in the original principal amount of $6,100,000 pursuant to the Act by the Issuer and designated as the Economic Development Authority of the City of Belle Plaine, Minnesota, Taxable Industrial Development Revenue Bond (Excelsior-Henderson Project), Series 1998. BORROWER: Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, and its successors and assigns. BUILDING: the buildings and all other structures and facilities owned by the Borrower, located on the Land, and forming a part of the Facility. CITY: the City of Belle Plaine, Minnesota, and its successors. CLOSING DATE: the date on which the Lender purchases the Bond from the Issuer. COSTS: with respect to the application of the proceeds of the Bond, shall be deemed to include reimbursement of or payment for the costs of acquisition and installation of the Equipment approved for disbursement by the Lender pursuant to the Escrow Deposit Agreement, and shall also include amounts paid or incurred for other items authorized by the Act, including but not limited to: (a) obligations of the Borrower incurred for labor and materials (including obligations payable to the Borrower) in connection with the acquisition and installation of the Equipment; (b) the cost of contract bonds and of issuance thereof of all kinds that may be required or necessary during the course of installation of the Equipment; (c) all costs of architectural and engineering services, including the costs of the Borrower for test borings, surveys, estimates, plans and specifications and preliminary investigations therefor, and for supervising installation, as well as for the performance of all other duties required by or consequent upon the proper installation of the Equipment; (d) all expenses incurred in connection with the issuance of the Bond for the purpose of providing funds for the acquisition and installation of the Equipment, including without limitation, legal expenses and fees, and recording and filing fees, including any mortgage registration tax; 3 EXHIBIT 10.2 (e) any sums required to reimburse the Issuer or the Borrower for advances made by or on behalf of either of them for any of the above items or for any other costs incurred and for work done by either of them which are properly chargeable to the Equipment; and (f) interest incurred by the Borrower on loans made with respect to the acquisition and installation of the Equipment. ENVIRONMENTAL INDEMNITY AGREEMENT: the Environmental Indemnity Agreement, dated as of July 1, 1998, executed by the Borrower and providing for the environmental indemnification of the Lender and the Issuer. EQUIPMENT: those items of manufacturing machinery, equipment, tooling, and related property, referred to in the Security Agreement, and replacements and substitutions thereof as permitted by this Loan Agreement and the Security Agreement, acquired and to be acquired and installed in the Building or elsewhere on or in connection with the Land with the proceeds from the sale of the Bond for use in the motorcycle manufacturing business of the Borrower. ESCROW AGENT: National City Bank, N.A., and its successor and assigns. ESCROW DEPOSIT AGREEMENT: the Escrow Deposit Agreement, dated as of July 1, 1998, executed by the Borrower, the Lender, and the Escrow Agent, and providing for the escrow and disbursement of the proceeds of the Bond. EVENT OF DEFAULT: any event defined as such in Section 6.01 of this Loan Agreement. FACILITY: the Land and the Building. HOLDER: the Lender or any subsequent holder of the Bond. ISSUER: the Economic Development Authority of the City of Belle Plaine, Minnesota. LAND: the real estate described in Exhibit A. LEASE: the lease for the Land between the Borrower and Ryan Belle Plaine, LLC dated as of April 21, 1997, as supplemented as of the date of this Loan Agreement. LENDER: FINOVA Public Finance, Inc., its successors and assigns. LOAN: the loan of the proceeds of the Bond from the Issuer to the Borrower pursuant to this Loan Agreement. LOAN AGREEMENT: this Loan Agreement, as the same may be amended, modified, or supplemented from time to time. RESERVE FUND: the fund by such name established with the Escrow Agent pursuant to the Escrow Deposit Agreement required by Section 3.05 of this Loan Agreement. RESOLUTION: Resolution No. 98-07 of the Issuer adopted on June 15, 1998, authorizing the issuance of the Bond, prescribing the form of the Loan Agreement and the Security Agreement, and 4 EXHIBIT 10.2 determining other matters in connection with the issuance of the Bond and the execution and delivery of and performance under the other aforesaid documents. SECURITY AGREEMENT: the Security Agreement, dated as of July 1, 1998, executed by the Borrower, granting a security interest in the Equipment to the Lender. STATE: the State of Minnesota WARRANT AND FEE AGREEMENT: the Warrant and Fee Agreement, dated as of July 1, 1998, executed by the Borrower, granting the Holder rights to certain payments and stock warrants as described therein. Section 1.02. RULES OF INTERPRETATION. (a) This Loan Agreement shall be interpreted in accordance with and governed by the laws of the State. (b) Unless the context clearly requires otherwise, the singular shall include the plural and vice versa, and the masculine shall include the feminine and vice versa. (c) The words "herein" and "hereof" and words of similar import, without reference to any particular section or subdivision, refer to this Loan Agreement as a whole rather than to any particular section or subdivision hereof. (d) References herein to any particular section or subdivision hereof are to the section or subdivision of this instrument as originally executed. (e) The headings of articles and sections herein are for convenience of reference only and are not a part of this Loan Agreement. 5 EXHIBIT 10.2 ARTICLE TWO REPRESENTATIONS Section 2.01. REPRESENTATIONS BY THE ISSUER. The Issuer makes the following representations as the basis for its covenants herein: (a) the Issuer is an economic development authority, organized and existing under the Constitution and laws of the State (including Minnesota Statutes, Sections 469.090-469.1081) and has power to issue the Bond under the Act; (b) the Equipment comprises personal properties useful in connection with the operation of a revenue-producing enterprise as contemplated by the Act; (c) on the basis of information provided to the Issuer by the Borrower, it appears, and the Issuer hereby finds, that the effect of the acquisition and installation of the Equipment will be to encourage the development of economically sound commerce in the City, to increase the taxable value of property within the City, and to increase current employment opportunities for residents of the City, all to the benefit of the residents and taxpayers of the City, the school district, Scott County, and the State; (d) the financing of the Equipment, the issuance and sale of the Bond, the execution and delivery of this Loan Agreement, the Assignment of Loan Agreement, and the performance of all covenants and agreements of the Issuer contained in the Bond, this Loan Agreement, the Assignment of Loan Agreement, and all other documents that have been executed by the Issuer in connection with this Loan Agreement and the transactions contemplated hereby (collectively, all such documents are referred to herein as the "Issuer Documents"), and of all other acts and things required under the Constitution and laws of the State to make the Issuer Documents valid and binding obligations of the Issuer in accordance with their terms are authorized by the Act and, where necessary to be valid and binding, have been duly authorized by a resolution of the Board of Commissioners of the Issuer adopted at a meeting duly called and held by the affirmative vote of not less than a majority of its members; (e) the Issuer Documents are the legal, valid, and binding obligations of the Issuer, enforceable against it in accordance with their respective terms; (f) the Facility will add to the tax base of the City, and will accordingly be of direct benefit to the taxpayers of the Issuer; (g) to provide funds to be loaned to finance Costs related to acquisition and installation of the Equipment, in anticipation of the repayment thereof, the Issuer has duly authorized the Bond in the principal amount of not to exceed $8,500,000 to be issued upon the terms set forth in the Resolution, under the provisions of which the Issuer has agreed to assign its interest in this Loan Agreement and grant a security interest therein to the Lender as security for the payment of the principal of and interest on the Bond; (h) pursuant to the Resolution, the Issuer has authorized and directed the Lender to disburse the proceeds of the Bond directly to the Borrower and such other parties as may be entitled to 6 EXHIBIT 10.2 payment, upon receipt of such supporting documentation as the Lender may deem reasonably necessary, including compliance with all conditions set forth herein; (i) the execution and delivery of the Issuer Documents will not conflict with or constitute on the part of the Issuer a breach of, or a default under, any existing law, or any existing agreement, indenture, mortgage, lease, or other instrument to which the Issuer is subject or is a party or by which it is bound and do not and will not constitute a default under any of the foregoing, or result in the creation or imposition of any lien, charge, or encumbrance of any nature upon any of the property or assets of the Issuer contrary to the terms of any instrument or agreement; and (j) there are no proceedings, pending or threatened, contemplating the liquidation or dissolution of the Issuer or threatening its existence or powers or threatening the validity of the Issuer Documents. Section 2.02. REPRESENTATIONS BY THE BORROWER. The Borrower makes the following representations as the basis for its agreements and covenants herein: (a) the execution and delivery of this Loan Agreement, the Security Agreement, the Escrow Deposit Agreement, the Environmental Indemnity Agreement, and all other documents that have been executed by the Borrower in connection with this Loan Agreement and the transactions contemplated hereby (collectively, all such documents are referred to herein as the "Borrower Documents"), the consummation of the transactions contemplated hereby, and the fulfillment of the terms and conditions hereof do not and will not conflict with or result in a breach of any of the terms or conditions of any mortgage, indenture, loan agreement, or instrument to which the Borrower is now a party or to which any property of the Borrower is subject, and do not and will not constitute a default under any of the foregoing, or result in the creation or imposition of any lien, charge, or encumbrance of any nature upon any of the property or assets of the Borrower contrary to the terms of any instrument or agreement; (b) the Loan to be made by the Issuer will induce the Borrower to undertake the acquisition and installation of the Equipment in the Facility; (c) the proceeds of the Bond, together with any other funds to be contributed to the payment of Costs by the Borrower, will be sufficient to pay the costs of acquiring and installing the Equipment in the Facility for use in the motorcycle manufacturing business of the Borrower, and the proceeds of the Bond and the Loan will be used only for purposes authorized by the Act; (d) the Borrower does not rely on any warranty of the Issuer or Lender, either express or implied, that the Equipment will be suitable to the Borrower's needs, and recognizes that under the Act the Issuer is not authorized to own and operate the Equipment or to expend any funds thereon other than the revenues received by it therefrom or the proceeds of the Bond or other funds granted to it for purposes contemplated in the Act; (e) there is not pending, or to the best knowledge of the Borrower threatened, any suit, action, or proceeding against or affecting the Borrower before or by any court, arbitrator, administrative agency, or other governmental authority which materially and adversely affects the validity, as to the Borrower, of any of the transactions contemplated hereby, or the ability of the Borrower to perform its obligations hereunder or contemplated hereby, or the financial condition or status of the Borrower, or any material contracts to which the Borrower is a party; 7 EXHIBIT 10.2 (f) to the best of the Borrower's knowledge, the Facility and the Equipment will meet, on the date hereof, all material requirements of law, including requirements of any federal, State, Scott County, Issuer, or other governmental authority having jurisdiction over the Borrower or the Facility or Equipment, including, but not limited to any applicable zoning, safety, or health regulations; (g) neither the Borrower Documents nor any other document provided to the Lender for its use in considering whether to and agreeing to purchase the Bond, contains any untrue statement of a material fact, and there is no fact presently known to the Borrower which materially adversely affects or in the future may (so far as the Borrower can now foresee) materially adversely affect the business, operations, affairs, or condition of the Borrower or any of its material properties which have not been set forth in the Borrower Documents or otherwise provided to the Lender by the Borrower; to the best knowledge of the Borrower, no member of the Board of Commissioners of the Issuer or any officer or employee of the Issuer has an unlawful direct or indirect financial interest in or will personally gain an unlawful financial benefit from the Facility or the Equipment or from the issuance of the Bond; (i) the Borrower is a corporation, duly organized and in good standing under the laws of the State, is not in violation of any provisions of its articles of incorporation or bylaws, or the laws of the State, is duly authorized to transact business within the State, has power to enter into the Borrower Documents, and has duly authorized the execution, delivery, and performance of the Borrower Documents by proper action of its board; (j) the Facilities are serviced by all utilities necessary to operate the Equipment, including, but not limited to, electricity, sewer and water, and heating and cooling; (k) the Borrower shall take all action necessary to assure that there will be no material adverse change to the Borrower's business by reason of the advent of the year 2000, including without limitation, that all computer-based systems, imbedded microchips, and other processing capabilities effectively recognize and process dates after April 1, 1999. At the Lender's request, the Borrower shall provide to the Lender assurance reasonably acceptable to the Lender that the Borrower's computer-based systems, imbedded microchips, and other processing capabilities are year 2000 compatible; (l) the Borrower possesses all necessary patents, licenses, trademarks, trademark rights, trade names, trade name rights and copyrights to conduct its business as now conducted, without known conflict with any patent, license, trademark, trade name or copyrights of any other person; (m) the audited financial statements provided to the Lender in connection with the transactions contemplated hereby have been prepared in accordance with generally accepted accounting principles consistently applied (or, with regard to unaudited financial statements, have been in accordance with standard reporting and auditing practices) and substantially comply with usual and customary fiscal reporting practices for similar publicly held companies; Section 2.03. LENDER MAY RELY ON REPRESENTATIONS. The Issuer and the Borrower agree that the representations contained in this Article Two are for the use and benefit of the Holder, and the Holder shall be entitled to rely thereon. The Borrower agrees that the representations contained in Section 2.02 hereof are for the benefit of and may be relied upon by the Issuer. 8 EXHIBIT 10.2 Section 2.04. OTHER AGREEMENTS AND INSTRUMENTS. The Borrower acknowledges and represents that the Borrower Documents and all other agreements and instruments securing the Bond and executed and delivered in contemplation of the issuance and delivery of the Bond shall be valid and legally binding on the Borrower and shall inure to the benefit of the Lender or any subsequent Holder of the Bond. 9 EXHIBIT 10.2 ARTICLE THREE THE LOAN Section 3.01. AMOUNT AND SOURCE OF LOAN; REPAYMENT. The Issuer agrees to issue the Bond and sell the Bond to the Lender. The Issuer agrees to loan to the Borrower and the Borrower agrees to borrow from the Issuer, the proceeds of the Bond upon the terms and conditions set forth herein. The source of such Loan shall be the Bond proceeds, which proceeds shall be advanced by the Lender, for the account of the Issuer, to or on behalf of the Borrower in payment of Costs, all subject to and in accordance with the provisions of this Loan Agreement. The Borrower agrees that it will repay the Loan of the proceeds of the Bond by making repayments to the Holder thereof for the account of the Issuer at the times and in the amounts necessary to pay in full the principal of, prepayment premium, if any, and interest on the Bond when due, at maturity or upon a mandatory redemption or acceleration of maturity under the Bond, the Assignment, or this Loan Agreement. The Borrower may prepay the Bond, for the account of the Issuer, in accordance with the terms of the Bond. The Borrower agrees to be bound by all of the terms and conditions of the Bond, including without limiting the generality of the foregoing, terms specifying the interest rate, maturity date, the installment payment amount, and provisions for redemption and prepayment. The provisions of the Bond are incorporated by reference herein and made a part hereof. All payments received from the Borrower are to be applied first to interest then due and then to the principal balance. In any event, the payments hereunder shall be sufficient to enable the Issuer to pay all principal and interest due on the Bond as such principal and interest become due, at maturity, upon redemption or otherwise. Interest shall be computed on the basis of the actual number of days elapsed in a 360-day year. All payments hereunder shall be made directly to the Lender at its principal office for the account of the Issuer. All payments received by the Lender shall be applied to the indebtedness secured by the Bond. Section 3.02. BORROWER'S OBLIGATIONS UNCONDITIONAL. All payments required of the Borrower hereunder shall be paid without notice or demand and without setoff, counterclaim, abatement, deduction or defense. The Borrower will not suspend or discontinue any payments, and will perform and observe all of its other agreements in this Loan Agreement and, except as expressly permitted herein, will not terminate this Loan Agreement for any cause, including, but not limited to, any acts or circumstances that may constitute failure of consideration, destruction or damage to the Facility, eviction by paramount title, commercial frustration of purpose, bankruptcy or insolvency of the Issuer or the Lender, change in the tax or other laws or administrative rulings or actions of the United States of America or of the State or any political subdivision thereof, or failure of the Issuer to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with this Loan Agreement. Section 3.03. BORROWER'S REMEDIES. Nothing contained in this Article and no Payments made by the Borrower pursuant to Section 3.02, shall be construed to release the Issuer from the performance of any of its agreements in this Loan Agreement or to be a waiver of any of Borrower's rights, claims or causes of action as would otherwise exist, and if the Issuer should fail to perform any such agreement, the Borrower may institute such action against the Issuer as the Borrower may deem necessary so long as 10 EXHIBIT 10.2 such action shall not violate the Borrower's agreements in Section 3.02; provided that no action taken by the Borrower hereunder shall affect the Borrower's obligations under this Loan Agreement. Section 3.04. ADDITIONAL PAYMENTS. The Borrower agrees to pay the following amounts to the following persons as additional payments under this Loan Agreement: (a) to the Holder when due, all reasonable expenses, including without limitation legal fees, of the Holder incurred in enforcing the Borrower Documents, and all fees and expenses payable or which may become payable by the Borrower pursuant to said instruments; and (b) to the Issuer and the Holder as additional payments under this Loan Agreement, all reasonable expenses incurred by the Issuer and the Holder in relation to the Facility and the issuance and sale of the Bond which are not otherwise required to be paid by the Borrower under the terms of this Loan Agreement, including the fees and expenses of bond counsel fees and attorneys representing the Issuer and the Holder and all permit and license fees required under regulations or codes of the Issuer; All fees payable under this Section 3.04 of this Loan Agreement are due without regard to the payment or defeasance of the Bond, the exercise of any remedy under the Security Agreement, termination of this Loan Agreement, or any other event. Section 3.05. ESCROW DEPOSIT AGREEMENT. (a) In order to establish the Reserve Fund and the Project Fund under the Escrow Deposit Agreement, the proceeds of the Bond will be paid to the Escrow Agent on the Closing Date. (b) The proceeds of the Bond will be disbursed by the Escrow Agent to the Borrower in accordance with the terms and conditions of the Escrow Deposit Agreement. (c) The Issuer consents to the transfer of the Bond proceeds to the Escrow Agent pursuant to the terms of the Escrow Deposit Agreement and further consents to the disbursement of the Bond proceeds pursuant to the terms of the Escrow Deposit Agreement. Section 3.06. INTEREST UPON DEFAULT. In the event the Borrower should fail to make any of the payments required by Sections 3.01 or 3.04 of this Loan Agreement, or any payment required by the Environmental Indemnity Agreement, the item in default shall continue as an obligation of the Borrower until the amount in default shall have been fully paid, and the Borrower agrees to pay the same with interest thereon until paid at the lesser of 18% or the highest rate permitted by applicable law. 11 EXHIBIT 10.2 ARTICLE FOUR BORROWER'S COVENANTS Section 4.01. COVENANTS. The Borrower covenants, warrants, represents and agrees: (a) that the Loan will be used solely to pay Costs; (b) that the Facility shall comply with all applicable ordinances, regulations and laws of all governments having jurisdiction over the Facility and the Facility does not and shall not violate any enforceable private restrictions or covenants or encroach upon or interfere with easements affecting the Land; (c) that the Borrower has completed or will complete the acquisition and installation of the Equipment free from all mechanics', laborers' and materialmen's liens and in a good and workmanlike manner; (d) that the Borrower will keep, perform, enforce and maintain in full force and effect all of the terms, covenants, conditions and requirements of all agreements between the Lender, or any other Holder, and the Borrower with respect to the Equipment; (e) that, subject to the Borrower's right under the Security Agreement, the Borrower will not create, permit to be created or allow to exist any liens, charges, or encumbrances on the Equipment, other than such encumbrances as may be approved in writing by the Lender or any other Holder; (f) that the Borrower will not assign this Loan Agreement or any interest herein except as herein expressly set forth or as may be approved in writing by the Holder; (g) that there have not been any adverse material changes in the Borrower's financial or operating condition since March 31, 1998, and that no such changes will occur prior to the Closing Date; (h) that the Borrower will deliver to the Holder: (i) annual audited financial statements of the Borrower within 120 days of the end of the fiscal year end of the Borrower; (ii) unaudited quarterly financial statements prepared by management of the Borrower within forty-five days after the end of each fiscal quarter of the Borrower; (iii) unaudited monthly financial statements and compliance certificates (such compliance certificates to be in a form mutually acceptable to Holder and Borrower) within thirty days after the end of each fiscal month; and (iv) such other related information as is reasonably requested by the Holder; (i) that the Borrower will have on hand at least $1,500,000 in cash and cash equivalents at the end of each fiscal month during fiscal year 1998; (j) that the Borrower will maintain a current ratio (defined as the ratio of the Borrower's current assets to its current liabilities) of no less than 1.0:1.0 at all times, measured as of the end of each fiscal month, as long as the Loan is outstanding and unpaid; (k) that the Borrower's tangible net worth (defined as the Borrower's total assets, minus its intangible assets and total liabilities, plus debt subordinated to the Loan Agreement and the Bond) shall 12 EXHIBIT 10.2 be: (i) as of the end of each fiscal month through its fiscal June, 1999, at least $12,000,000; (ii) at the end of each fiscal month from the beginning of its fiscal July, 1999 through the end of its fiscal December, 1999, at least the greater of $12,000,000 or eighty percent of the Borrower's tangible net worth as of the end of its fiscal June, 1999; (iii) at the end of each fiscal month thereafter, at least the greater of the minimum tangible net worth required under this Section 4.01(k) on the last day of its immediately preceding fiscal December or eighty percent of the Borrower's actual tangible net worth as of the immediately preceding fiscal year end. (l) that the ratio of the Borrower's total liabilities to total stockholders equity less any intangible assets will not exceed 3.0:1.0 at the end of any fiscal month; (m) that in its fiscal 1999, Borrower will maintain an annual debt service coverage ratio of at least 1.25 (calculated by dividing the sum of net income after tax, plus depreciation, amortization, and interest by the sum of interest and total current maturities of long-term debt/capital leases); (n) that for all fiscal years subsequent to the end of its 1999 fiscal year, Borrower will maintain an annual debt service coverage ratio of at least 1.25 (calculated by dividing the sum of net income after tax, depreciation, amortization, and interest (less nonfinanced capital expenditures) by interest and total current maturities of long-term debt/capital leases); (o) that the Borrower shall, prior to any disbursement to the Borrower being made pursuant to the Escrow Deposit Agreement, provide the Holder with a production plan showing its projected monthly production of motorcycles through 1999 (and projected annual production of motorcycles through 2002) and certified to be its true and correct production plan, and that the Borrower will provide the Holder, prior to the first day of the last month of fiscal 1999 and the first day of the last month of each fiscal year thereafter through fiscal 2004, a monthly plan, certified to be the Borrower's true and correct projected production plan, and covering at least the immediately next fiscal year (each such plan referred to herein as a "Plan"); (p) that the Borrower will report to the Holder if the Borrower's actual production of motorcycles in any fiscal month is less than eighty percent of the production projected by the Plan for that fiscal month, with such report made in a form reasonably satisfactory to the Holder and within thirty days of the end of the month in which the shortfall occurs; (q) the Borrower's actual production of motorcycles in any fiscal quarter will not be less than eighty percent of the production projected by the Plan for that fiscal quarter; (r) that the Borrower will obtain regulatory approval from all state and federal governmental bodies with regulatory authority over the commercial production of motorcycles by no later than December 31, 1998, except that regulatory approval from the State of California will be obtained by December 31, 1999; (s) that the Borrower will maintain, through June 30, 2000, key man life insurance coverage of at least $1,000,000 each on Allan Hurd and Tom Rootness; (t) that the Borrower will raise at least $5,000,000, gross, in combined equity and debt subordinate to the Bond (as shown on a balance sheet audited in accordance with generally accepted accounting principles) between the Closing Date and December 31, 1998; 13 EXHIBIT 10.2 (u) that the Borrower has maintained and will, for purposes of this Loan Agreement, maintain fiscal months, fiscal quarters, fiscal years, financial statements, and practices that comply with generally accepted accounting principles consistently applied (or, with regard to unaudited financial statements, that comply with standard reporting and auditing practices) and substantially comply with usual and customary fiscal reporting practices for similar publicly held companies; (v) that the Borrower's obligations to deliver financial information to the Holder pursuant to this Section 4.01 are contingent upon the Holder executing and delivering to the Borrower a confidentiality agreement in substantially the form shown at Exhibit B to this Loan Agreement; (w) that the Borrower will not incur any long-term debt subsequent to the date of this Loan Agreement unless no Event of Default exists under this Loan Agreement and unless a 1.25 debt service coverage ratio will exist on the proposed additional debt plus existing debt (calculated by dividing the sum of net income after tax, plus depreciation, amortization, and interest less nonfinanced capital expenditures by the sum of interest and total current maturities of long-term debt/capital leases); (x) that any debt owed by the Borrower to any one or more of its shareholders is and will be subordinate to the interest and obligations created by this Loan Agreement and the Security Agreement; and (y) that the Borrower will notify the Holder, in writing, within two (2) business days upon receipt of a written late payment notice from Ryan Belle Plaine, LLC or its successors for payments due by the Borrower under the Lease. Section 4.02. INDEMNITY. To the fullest extent permitted by law, the Borrower will pay, and will protect, indemnify, and save the Issuer and the members of its Board of Commissioners, the City and the members of its City Council, the respective officers, employees, agents, and attorneys of the Issuer and City, and any past and present Holder, and its officers, employees, agents, attorneys, and any "Controlling Person" of any past or present Holder (as defined in 15 U.S.C. Section 77o) (each an "Indemnified Party") harmless from and against all liabilities, losses, damages, costs, expenses (including attorneys' fees), causes of action, suits, claims, demands, and judgments of any nature arising from the Facility or this Loan Agreement, including but not limited to: (i) any injury, death, or property damage arising from any actions or failures to act by the Borrower or arising out of or connected with the Facility; (ii) violation of any contract, agreement, or restriction to which the Borrower is a party relating to the Facility; (iii) violation of any law, ordinance, or regulation affecting the Facility, or the ownership, occupancy, or use of the Facility, including any licensing of the Facility; and (iv) the use of the proceeds of the Bond, the use of the Facility, or the use of the proceeds derived from the disposition of the Facility or any part thereof. Without limiting the generality of the foregoing, the Borrower agrees to pay all costs of the Indemnified Parties, including the fees of attorneys, financial advisors, and accountants, and all other costs of the Indemnified Parties (including staff time and out-of-pocket expenses) with respect to any audit conducted by the Internal Revenue Service (or the Minnesota Department of Revenue) related to the Bond, the Borrower, or the Facility, or with respect to any enforcement action conducted by the Securities and Exchange Commission (or the Minnesota Department of Commerce) with respect to the offer or sale of the Bond or the offer or sale of any related separate security, or with respect to the investment of the gross proceeds of the Bond. Promptly after receipt by the Issuer, the City, or any other Indemnified Party, of notice of the commencement of any action in respect of which indemnity may be sought against the Borrower under this Section 7, such Indemnified Party will notify the Borrower in writing of the commencement thereof, 14 EXHIBIT 10.2 and, subject to the provisions hereinafter stated, the Borrower shall assume the defense of such action (including the employment of counsel who shall be counsel satisfactory to the Indemnified Party claiming indemnification) and the payment of expenses. Insofar as such action shall relate to any alleged liability in respect of which indemnity may be sought against the Borrower, the Indemnified Party claiming indemnity shall have the right to employ separate counsel in any such action and to participate in the defense thereof, and the fees and expenses of such counsel shall be at the expense of the Borrower. The Borrower shall not be liable to indemnify any Indemnified Party for any settlement of any such action effected without its consent. The Borrower shall be entitled to negotiate a settlement of any action, suit, claim or demand giving rise to indemnity hereunder, and the consent of an Indemnified Party shall not be required thereto if: (a) no liability will be imposed upon or will result to the Indemnified Party; or (b) the Borrower fully reimburses the Indemnified Party for any liability arising from such settlement. The provisions of this Section 4.02 shall survive the payment and discharge of the Bond. Section 4.03. REPORTS TO GOVERNMENTAL AGENCIES. The Borrower will furnish to agencies of the State, including, but not limited to, the Commissioner of the Minnesota Department of Trade and Economic Development and to the Lender, the City, and the Issuer, such periodic reports or statements as they may reasonably require throughout the term of this Loan Agreement. The Borrower shall notify the Issuer of any request by the Borrower for the Holder's consent to alterations to the Equipment, or to the sale, assignment or other disposition of the Equipment, and of the Holder's action in response to such requests. Section 4.04. SECURITY AGREEMENT. As additional security for the Lender, and to induce the Issuer to issue and deliver the Bond, the Borrower agrees to execute and deliver, or cause to be executed and delivered, to the Lender: (i) the Security Agreement; and (ii) such other agreements or documents as may be required by the Lender. Section 4.05. CONCERNING THE FACILITY. The Borrower agrees to pay all expenses of the operation and maintenance of the Facility including, but without limitation, adequate insurance thereon and insurance against all liability for injury to persons or property arising from the operation thereof, and all taxes and special assessments levied upon or with respect to the Facility and payable during the term of this Loan Agreement. Section 4.06. ALTERATIONS TO AND DISPOSAL OF EQUIPMENT. The Borrower shall not dispose of any Equipment without the prior written consent of the Lender and in no event shall the Borrower do any act or thing which would unduly impair or depreciate the value of the Equipment. All work done by the Borrower in connection with any alterations or repairs to the Equipment shall be done promptly and in good workmanlike manner and in compliance with the building and zoning laws of the Issuer, the City, and other governmental subdivisions wherein the Facility and the Equipment are situated, and with all laws, ordinances, orders, rules, regulations and requirements of all federal, State and municipal governments and the appropriate departments, commissions, boards and officers thereof, and shall keep any policy of insurance covering the Building and the Equipment in full force and effect, and the work shall be prosecuted with reasonable dispatch, unavoidable delays excepted. Section 4.07. OMITTED. This Section intentionally omitted. Section 4.08. USE OF FACILITY. The Borrower will use the Facility only in furtherance of lawful purposes and will use and operate the Equipment only as a revenue producing enterprise, eligible to be and defined as a "project" under the Act. The Borrower will not use or permit any person to use the 15 EXHIBIT 10.2 Equipment or the Building for any use or purpose in violation of the laws of the United States, the State, or any identifiable redevelopment plan of the Issuer or the City, and agrees to comply with all the orders, rules, regulations and requirements of the Board of Fire Underwriters and of the City, the Issuer, Scott County, or the State, or other governmental authority having jurisdiction over the Facility. The Borrower shall have the right to contest by appropriate legal proceedings, without cost or expense to the Issuer, the validity of any law, ordinance, order, rule, regulation or requirement of the nature herein referred to. Section 4.09. MAINTENANCE AND POSSESSION OF EQUIPMENT BY BORROWER. The Borrower agrees that so long as the Bond is outstanding, the Borrower will keep the Equipment in good repair and good operating condition at its own cost, including without limitation making such repairs and replacements as are necessary in the judgment of the Borrower so that the Equipment will remain a "project" under the Act. Section 4.10. OBSERVANCE OF COVENANTS AND TERMS OF THE RESOLUTION AND THE BOND. The Borrower will not do, in any manner, anything which will cause or permit to occur any default under the Resolution or the Bond, but will faithfully observe and perform, and will do all things necessary so that the Issuer may observe and perform, all the conditions, covenants and requirements of the Resolution and the Bond. The Issuer agrees that it will observe and perform all obligations imposed upon it by this Loan Agreement and the Resolution and the Bond, and will not suffer or permit any default to occur thereunder; provided that the Issuer has no obligation to use its own funds or funds of the State to perform or cause performance of any such obligations. Section 4.11. NOTICE OF DEFAULTS. The Borrower will furnish to the Holder and the Issuer, immediately after the Borrower has obtained knowledge of the occurrence, notice of each Event of Default or each event which with the giving of notice or lapse of time or both would constitute an Event of Default, which is continuing on the date of such notice, the notice of the Borrower setting forth details of such Event of Default or event and the action which the Borrower take with respect thereto. Section 4.12. BORROWER TO EXECUTE FURTHER DOCUMENTS. The Borrower agrees that it shall execute and deliver to the Issuer and the Holder such further financing statements, acknowledgments, certificates and agreements as shall be reasonably requested from time to time by the Issuer or the Holder to protect the security provided for the payment of the Bond and to further the transactions contemplated by this Loan Agreement. Section 4.13. BORROWER TO MAINTAIN CERTAIN STANDARDS. The Borrower agrees that it will at all times maintain its corporate existence and good standing, and will at all times remain qualified to do business in all places within the United States, where failure to be so qualified would have a material adverse effect on the Borrower's business or financial condition. Section 4.14. MERGERS AND CONSOLIDATION. The Borrower agrees that it shall not enter into any merger, consolidation, combination, sale of all or substantially all of its assets, or any other change in its corporate form if doing so would result in an Event of Default under this Loan Agreement, including without limitation the provisions of Section 5.02(d), (and the provisions of Sections 4.01(i), 4.01(j), 4.01(l), and 4.01(m), if the standards set forth in those Sections were applied on the day of the merger or consolidation). Section 4.15. INSURANCE. (a) The Borrower, at its sole cost and expense, will maintain continuously in effect with respect to the Equipment policies of insurance against such risks and in such 16 EXHIBIT 10.2 amounts as are acceptable to the Lender. Without limiting the generality of the foregoing provision, the Borrower shall maintain insurance of the following character: (i) Insurance on the Equipment now existing and on the fixtures and personal property included in the definition of Equipment against loss by fire, and other hazards covered by the so-called "all-risk" form of policy with no co-insurance clause, in an amount equal to the actual replacement cost thereof, without deduction for physical depreciation; (ii) If the Land that the Equipment resides on is located in a designated official flood-hazardous area, flood insurance insuring the buildings and improvements now existing or hereafter erected on the Land in an amount equal to the actual replacement of the cost thereof without deduction for physical depreciation; (iii) Comprehensive general liability insurance including product liability and contractual liability protecting against claims arising from any accident or occurrence in an amount of not less than $2,000,000 in the aggregate and per occurrence in connection with the operations of the Borrower; (iv) Worker's compensation insurance with statutory coverages and Employer's Liability at a limit of $1,000,000 per occurrence covering all persons engaged in the construction or installation of the Project or the operations of the Borrower; (v) Business interruption insurance with a limit sufficient to insure not less than a 6 month loss of income, or extra expense insurance; (vi) Comprehensive Automobile Liability insurance in an amount not less than $1,000,000 per occurrence covering all titled motor vehicles used in the operations of the Borrower's business, such insurance to include coverage for non-owned and hired vehicles; and (vii) such other insurance with respect to the Collateral (as defined in the Security Agreement) as may be required by the Lender. (b) The insurance described in Sections 4.15(a)(i), 4.15(a)(ii), and 4.15(a)(v) shall: (i) include a clause naming the Lender as Loss Payee; (ii) identify the Equipment insured; and (iii) state the applicable amount of insurance. (c) The insurance described in Sections 4.15(a)(v) and 4.15(a)(vi) shall include clauses which: (i) name the Lender as an Additional Insured; and 17 EXHIBIT 10.2 (ii) provide that all insurance, except the limits of liability, operate as if there were a separate policy covering each insured. (d) All insurance required by this Section 4.15 shall: (i) be provided with insurers rated "A IX" by A.M. Best Company, Inc. (or the future equivalent thereof) or as otherwise approved by the Lender; (ii) provide the Lender with thirty (30) days advance written notice of cancellation and/or material change in coverage directly from insurers; (iii) be primary and without the right of contribution from any other insurance not specifically purchased by the Borrower to be excess of, or in contribution with the insurances required herein; (iv) include a waiver of any subrogation rights the Borrower's insurers may have against the Lender; (v) provide that all insurance shall insure the interest of the Lender regardless of any breach or violation by the Borrower or any other party or entity of any warranties, declarations, or conditions contained in such policies; and (vi) be satisfactory in form, substance, limits, deductibles and retentions to Lender. Section 4.16. TAXES. The Borrower shall pay all taxes on the Equipment and the Facility before such taxes become delinquent. 18 EXHIBIT 10.2 ARTICLE FIVE BORROWER'S OPTIONS Section 5.01. PREPAYMENTS. (a) In the event of mandatory prepayment or acceleration of the Bond in accordance with the terms of the Bond, the Borrower agrees to prepay the Loan in such amount and on such dates as will permit the Issuer to pay the principal, premium, if any, and accrued interest on the Bond when due. The prepayment premium on the Loan in the event of mandatory prepayment or acceleration shall be equal to the prepayment premium payable on the Bond determined in accordance with the terms of the Bond. (b) The Borrower may prepay the principal of the Loan at such times, in such amounts, and subject to all other terms applicable to optional prepayments of the Bond by the Issuer. The Issuer agrees to immediately apply all optional prepayments of the Loan by the Borrower to prepayments of the Bond. The Issuer hereby authorizes the Borrower to pay all optional prepayments on the Loan directly to the Holder. Section 5.02. ASSIGNMENT. (a) The Borrower will not, during the term of the Bond, sell the Equipment or assign its rights or interests in any part thereof, or otherwise convey, dispose of or mortgage in any manner the Equipment or any part thereof, without: (i) providing satisfactory replacement collateral to secure the Holder's interest in the Equipment to be sold or assigned; (ii) obtaining the Holder's written consent (such consent not to be unreasonably withheld); and (iii) providing notice to the Issuer. (b) Notwithstanding the foregoing, Equipment with a combined fair market value of no more than $25,000 may be sold in any fiscal year without Borrower's compliance with the terms of Section 5.02(a). (c) In the event the Borrower sells, conveys, transfers, further mortgages or encumbers or disposes of the Equipment or any part thereof, or any interest therein, or agrees so to do, in violation of the terms and conditions of this Section 5.02 and if the Holder declares the amount owing on the Bond to be due and payable in full and calls for payment of the same in full at once, the Borrower shall immediately pay on the Loan an amount equal to same, plus any prepayment premium due. (d) The Borrower will not, during the term of the Bond, sell or assign its right or interest in this Loan Agreement, or any part thereof without the written consent of the Holder and notice to the Issuer. If such sale or assignment of the Borrower's interest in this Loan Agreement does not purport to and does not release the Borrower from any of its obligations under this Loan Agreement, the Holder's consent will not be unreasonably withheld. If such sale or assignment of the Borrower's interest in this Loan Agreement purports to or does release the Borrower from any of its obligations under this Loan Agreement, the Holder will have sole discretion with regard to giving its consent. 19 EXHIBIT 10.2 ARTICLE SIX EVENTS OF DEFAULT AND REMEDIES Section 6.01. EVENTS OF DEFAULT. Subject to the notice and cure provisions of Section 6.06, any one or more of the following events is, upon expiration of the applicable cure period, an Event of Default under this Loan Agreement: (a) if the Borrower shall fail to make any payments required under this Loan Agreement on the date that the payment is due, provided: (i) If the Borrower fails to make any payment required under this Loan Agreement within five (5) days of the date that the payment is due, then, pursuant to the terms and conditions of the Escrow Deposit Agreement, the Escrow Agent shall: (i) make such payment on the Borrower's behalf, such payment to be made from the "Reserve Fund" (as defined in the Escrow Deposit Agreement); and (ii) give written notice of such payment to the Borrower. (ii) If the Escrow Agent makes any payment on the Borrower's behalf from the Reserve Fund, the Borrower will pay, within 7 days of such payment to the Escrow Agent an amount equal to such payment for the purpose of restoring the amount of the Reserve Fund to the balance in it prior to such payment. (iii) If the Borrower complies with the terms of Sections 6.01(a)(i) and 6.01(a)(ii), then no Event of Default shall exist; provided, however, that if the balance of the Reserve Fund is inadequate to make the payment on Borrower's behalf, or if the Escrow Agent makes three (3) or more payments from the Reserve Fund on the Borrower's behalf in any three (3) month period, such condition or conditions shall be an Event of Default under this Loan Agreement. (b) if the Borrower shall fail to observe and perform (prior to any applicable cure period) the covenants described in sections 4.01(i), (j), (k) or (l) of this Loan Agreement for two consecutive months; (c) period, any other covenant, condition or agreement on its part under this Loan Agreement, the Lease, the Escrow Deposit Agreement, the Warrant and Fee Agreement, the Environmental Indemnity Agreement, any future working capital financing agreements, or any material contract or agreement; (d) if any representation or warranty made by the Borrower hereunder or by a representative of the Borrower in any document or certificate furnished the Lender or the Issuer in connection herewith or therewith or pursuant hereto or thereto, shall prove at any time to be incorrect or misleading in any material respect as of the date made; (e) if the Borrower shall file a petition in bankruptcy or for an arrangement pursuant to any present or future federal bankruptcy act or under any similar federal or state law, or shall be adjudicated a bankrupt or insolvent, or shall make an assignment for the benefit of its creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Borrower as a bankrupt under any present or future federal bankruptcy act or any similar federal or state law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof, or a receiver, trustee or liquidator of all or 20 EXHIBIT 10.2 substantially all of the assets of the Borrower or of the Equipment shall be appointed in any proceeding brought against the Borrower and shall not be discharged within sixty (60) days after such appointment or if the Borrower shall consent to or acquiesce in such appointment, or if the estate or interest of the Borrower in the Equipment or a part thereof shall be levied upon or attached in any proceeding and such process shall not be vacated or discharged within sixty (60) days after such levy or attachment; or (f) if an Event of Default shall occur under the Security Agreement or any other instrument securing the Bond or if any representation or warranty made by the Borrower thereunder shall prove at any time to be incorrect or misleading in any material respect as of the date made. Section 6.02. REMEDIES IN THE EVENT OF DEFAULT. Whenever any Event of Default referred to in Section 6.01 shall have happened and be subsisting (subject to the cure provisions of Section 6.06), any one or more of the following remedial steps may be taken by the Holder directly or, upon written consent of the Holder, by the Issuer: (a) all sums payable under this Loan Agreement (being an amount equal to that necessary to pay in full the Bond assuming acceleration of the Bond under the terms thereof and to pay all other indebtedness secured by the Security Agreement) may be declared to be immediately due and payable, whereupon the same shall become immediately due and payable by the Borrower; and (b) whatever action at law or in equity or as provided in the Security Agreement or any other instrument securing the Bond that may appear necessary or appropriate to collect the amounts then due and thereafter to become due, or to enforce performance and observance of any obligation, agreement or covenant of the Borrower under this Loan Agreement may be taken. Section 6.03. DISPOSITION OF FUNDS. Any amounts collected pursuant to action taken under Section 6.02 shall be applied in such order as the Holder may determine; provided that in the event that the Holder advances sums in protecting the lien of the Security Agreement, in payment of taxes on the Facility, in payment of premiums with respect to insurance covering the Facility, in payment of principal and interest on prior liens against the Facility, in order to cure any Event of Default under this Loan Agreement or the Security Agreement or any default under the Lease (the Borrower hereby authorizing the Holder to make any such advance on its behalf), and in payment of expenses and attorneys' fees herein provided for and other sums advanced by the Holder for any other purpose authorized in the Security Agreement, the Borrower upon demand shall pay all such costs and expenses so incurred and advances so made to the Holder together with interest at the rate then payable on the Bond per annum (unless payment of such rate would be contrary to law in which event such sums shall bear interest at the lesser of 18% or the highest rate permitted by applicable law). Section 6.04. MANNER OF EXERCISE. No remedy herein conferred upon or reserved to the Issuer is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Loan Agreement or now or hereafter existing at law or in equity by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be herein expressly required, but no remedy shall be exercised by the Issuer without the prior written consent of the Holder. 21 EXHIBIT 10.2 Section 6.05. EFFECT OF WAIVER. In the event any agreement contained in this Loan Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. If the Holder, at the Borrower's request, waives any breach of this Loan Agreement on the part of the Borrower, the Borrower will pay, upon the Holder's demand, $1,500 to the Holder as reimbursement for the Holder's cost of providing such a waiver. Section 6.06. NOTICE TO BORROWER OF EVENT OF DEFAULT. (a) The Borrower, except as otherwise specifically provided in this Article Six, shall have the right to written notice from the Issuer or the Lender of any alleged Event of Default (except an Event of Default under Section 6.01(a) of this Loan Agreement, for which no notice shall be necessary), and shall, except as provided in Section 6.06(b), have a period of thirty (30) days from receipt of said notice, unless a longer period of time is provided by the specific terms of this Loan Agreement, the Security Agreement, or the laws of the State of Minnesota, to cure or correct such alleged Event of Default or otherwise respond to said notice, and no Event of Default shall occur hereunder until the expiration of such cure period. (b) Notwithstanding anything to the contrary in this Article VI, an Event of Default shall occur immediately upon the occurrence of any of the following: (i) an event under Section 6.01(a)(ii) or section 6.01(a)(iii) of this Loan Agreement; (ii) failure to carry or maintain insurance on the Equipment as required by section 4.15 of this Loan Agreement and by the Security Agreement; or (iii) any event described in Section 6.01(e) of this Loan Agreement. The cure and notice provisions of Section 6.06(a) of this Loan Agreement do not apply to the Events of Default referred to in this paragraph (b) or the Events of Default referred to in Section 6.01(a)(i). (c) Notice under this Section 6.06 shall be deemed received: (i) if sent by facsimile before 4:00 p.m. Central Time on a business day, on that business day; (ii) if sent by facsimile after 4:00 p.m. Central Time on a business day, or on a nonbusiness day, on the next business day; and (iii) if sent by mail, 3 days after mailing 22 EXHIBIT 10.2 ARTICLE SEVEN GENERAL Section 7.01. NOTICES. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given when mailed by certified or registered mail, postage prepaid, with proper address as indicated below. The Issuer, the Borrower and the Holder may, by written notice given by each to the others, designate any address or addresses to which notices, certificates or other communications to them shall be sent when required as contemplated by this Loan Agreement. Until otherwise provided by the respective parties, all notices, certificates and communications to each of them shall be addressed as follows: To the Issuer: Economic Development Authority of the City of Belle Plaine, Minnesota 420 East Main Street Belle Plaine, Minnesota 56011 Attn: City Administrator To the Borrower: Excelsior-Henderson Motorcycle Manufacturing Company 805 Hanlon Drive Belle Plaine, Minnesota 56011 Attn: Chief Financial Officer with a copy to: Gale Mellum Faegre & Benson 2200 Norwest Center 90 South Seventh Street Minneapolis, Minnesota 55402 To the Lender: FINOVA Public Finance, Inc. 605 North Highway 169 Suite 250 Plymouth, Minnesota 55441 Attn: President Section 7.02. BINDING EFFECT. This Loan Agreement shall inure to the benefit of and shall be binding upon the Issuer and the Borrower and their respective successors and assigns. Section 7.03. SEVERABILITY. In the event any provision of this Loan Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 7.04. AMENDMENTS, CHANGES AND MODIFICATIONS. Except as otherwise provided in this Loan Agreement or in the Resolution, subsequent to the initial issuance of the Bond and before the Bond are satisfied and discharged in accordance with its terms, this Loan Agreement may not be effectively amended, changed, modified, altered, or terminated without the written consent of the Holder. 23 EXHIBIT 10.2 Section 7.05. EXECUTION; COUNTERPARTS. This Loan Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 7.06. CONCERNING THE BOND. The Borrower agrees to be bound by all of the terms and conditions set forth in the Bond. Section 7.07. LIMITATION OF ISSUER'S LIABILITY. It is understood and agreed by Borrower and the Lender that no covenant of the Issuer herein shall give rise to any liability of the Issuer, other than from revenues derived from this Loan Agreement, or constitute a charge against the general credit or taxing powers of the Issuer. It is further understood and agreed by the Borrower and the Lender that the Issuer shall incur no liability other than from proceeds derived from this Loan Agreement hereunder, and shall not be liable for any expenses related hereto, all of which the Borrower agrees to pay. Section 7.08. ASSIGNMENT BY THE ISSUER; ASSIGNMENT BY THE LENDER. (a) The Borrower recognizes that the Issuer, pursuant to the Assignment of Loan Agreement, has granted a security interest in all of its interest in, to, and under this Loan Agreement (including all Loan repayments hereunder but excluding any of its rights to indemnification and payment of costs or expenses provided in Sections 3.04, 4.02 and 7.07 hereof) to the Lender as security for the prompt payment of the principal, premium, if any, and interest on the Bond, and hereby consents to such grant. The Borrower has reviewed and hereby approves and consents to the terms of the Assignment of Loan Agreement. The Issuer and the Borrower consent to any future assignments by the Lender of the Issuer's interest in, to, and under this Loan Agreement to any future Holder of the Bond. (b) The Holder may not assign, transfer, sell, or otherwise convey this Loan Agreement, the Bond, and the Security Agreement in whole, unless any such assignment, transfer, sale, or conveyance complies with all state and federal laws, rules, and regulations. (c) Notwithstanding anything to the contrary in this Loan Agreement, the Lender will not assign, transfer, sell, or otherwise convey a partial interest or partial right in this Loan Agreement, the Bond, the Security Agreement, or any related partial interest or partial right unless such assignment, transfer, sale, or conveyance: (i) complies with all state and federal laws, rules, and regulations; (ii) is to only one other party and no third party shall have any partial interest or partial right in the Loan Agreement, the Bond, the Security Agreement, unless the Borrower approves in writing and at its sole discretion, an additional assignment, transfer, sale or conveyance; and (iii) contains a condition in a form reasonably satisfactory to the Borrower, that either the Lender or its assignee, but not both, has and will exercise authority to act on the other's behalf with regard to the Borrower's obligations under the Borrower Documents; provided that this Section 7.08(c)(ii) shall not apply to assignment by the Lender or Holder to the Issuer when such assignment is expressly permitted by this Loan Agreement. 24 EXHIBIT 10.2 Section 7.09. SURVIVAL OF CERTAIN PROVISIONS. The provisions of Section 4.02, Section 4.01(v), and the Environmental Indemnity Agreement shall survive the payment and discharge of the Bond and any termination of this Loan Agreement. Section 7.10. PUBLICITY. The Lender may, upon the consent of the Borrower (such consent to be given or withheld at the Borrower's sole discretion) and in compliance with all state and federal laws, rules, and regulations, publicize the Lender's purchase of the Bond and the purposes for which it was purchased. 25 EXHIBIT 10.2 IN WITNESS WHEREOF, the Issuer and the Borrower have caused this Loan Agreement to be executed in their respective names as of the date first above written. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By ------------------------------------- Its ------------------------------------- 26 EXHIBIT 10.2 Loan Agreement signature page of the Issuer. ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA By ------------------------------------- Its ------------------------------------- By ------------------------------------- Its ------------------------------------- EXHIBIT 10.2 EXHIBIT A LEGAL DESCRIPTION OF LAND Lot 1, Block 1 and Lot 3, Block Two, Excelsior-Henderson Industrial Park Subdivision, according to the recorded plat thereof, Scott County, Minnesota. EXHIBIT 10.2 EXHIBIT B CONFIDENTIALITY AGREEMENT GOES HERE EX-10.3 7 EXHIBIT 10.3 EXHIBIT 10.3 - ------------------------------------------------------------------------------ ASSIGNMENT OF LOAN AGREEMENT BY AND AMONG ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA, FINOVA PUBLIC FINANCE, INC. AND EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY DATED AS OF JULY 1, 1998 - ------------------------------------------------------------------------------ This instrument was drafted by: KENNEDY & GRAVEN, CHARTERED 470 Pillsbury Center 200 South Sixth Street Minneapolis, Minnesota 55402 EXHIBIT 10.3 ASSIGNMENT OF LOAN AGREEMENT THIS ASSIGNMENT OF LOAN AGREEMENT, dated as of July 1, 1998, is made and entered into by and among Economic Development Authority of the City of Belle Plaine, Minnesota, a public body corporate and politic and political subdivision of the State of Minnesota (the "Issuer"), FINOVA Public Finance, Inc. (the "Lender"), and Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation (the "Borrower"). WHEREAS, the Issuer has authorized the issuance of, and sale to the Lender of a Taxable Industrial Development Revenue Bond (Excelsior-Henderson Project), Series 1998 (the "Bond"), in the principal face amount of Six Million One Hundred Thousand Dollars ($6,100,000); and WHEREAS, the Issuer has entered into a Loan Agreement, dated as of July 1, 1998 (the "Loan Agreement"), with the Borrower whereby the Issuer will loan the proceeds from the sale of the Bond to the Borrower upon the terms and conditions set forth in the Loan Agreement; and WHEREAS, the Issuer is willing to provide further security for the prompt payment of the principal, premium, if any, and interest due on the Bond in order to induce the Lender to purchase the Bond and to advance funds under the Bond. NOW, THEREFORE, in order to induce the Lender to purchase the Bond and to secure the due and punctual payment of the Bond and all other sums due the Lender under any document securing or executed in connection with the Bond, the Issuer hereby agrees with the Lender and the Borrower as follows: 1. The Issuer does hereby grant to Lender a security interest in all of the Issuer's right, title, and interest in and to the Loan Agreement (except its rights to indemnification and the payment of costs and expenses provided in Sections 3.04, 4.02 and 7.07 of the Loan Agreement). 2. The Issuer hereby represents and warrants to the Lender that the Issuer is the owner of the Loan Agreement and all rights incident thereto, free and clear of any lien, security interest, or other encumbrance other than the security interest arising under this Assignment of Loan Agreement. 3. The Issuer hereby authorizes the Lender to exercise, whether or not an "Event of Default" has occurred under the Loan Agreement, either in the Issuer's name or the Lender's name, any and all rights or remedies available to the Issuer under the Loan Agreement, including without limitation the right to modify the terms of the Loan Agreement and the Bond without the prior consent of the Issuer; provided that the maturity date of the Bond shall in no event be modified to a date that is more than thirty years after the date of issue of the Bond, and further provided that so long as the Bond is outstanding the Lender agrees that it will not make or approve a modification of the Loan Agreement or the Bond if as a result thereof the property financed with the proceeds of the Bond no longer constitutes a "project" under the Act (as defined in the Loan Agreement). The Issuer agrees, on request of the Lender, to execute and deliver to the Lender such other documents or instruments as shall be deemed necessary or appropriate by the Lender at any time to confirm or perfect the security interest hereby granted. The Issuer hereby irrevocably appoints the Lender its attorney-in-fact to execute on behalf of the Issuer, and in its name, any and all such assignments, financing statements, or other documents or instruments which the Lender may deem necessary or appropriate to perfect, protect, or enforce the security interest hereby granted. EXHIBIT 10.3 4. The Issuer will not: (a) exercise or attempt to exercise any remedies under the Loan Agreement (except those reserved to the Issuer under Section 1 hereof), or terminate, modify, or accept a surrender of, or offer or agree to any termination, modification, or surrender of the same, or by affirmative act, consent to the creation or existence of any security interest or other lien in the Loan Agreement to secure payment of any other indebtedness; or (b) receive or collect or permit the receipt or collection of any payments, receipts, rentals, profits, or other money under the Loan Agreement, or assign, transfer, or hypothecate (other than to the Lender hereunder) any of the same then due or to accrue in the future except for payments received by the Issuer pursuant to Sections 3.04, 4.02, or 7.07 of the Loan Agreement. 5. Whenever any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all the covenants, promises, and agreements in this Assignment of Loan Agreement contained by or on behalf of the Issuer or the Lender shall bind and inure to the benefit of the respective successors and assigns of such parties whether so expressed or not. 6. The unenforceability or invalidity of any provision or provisions of this Assignment of Loan Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 7. This Assignment of Loan Agreement shall in all respects be construed in accordance with and governed by the laws of the State of Minnesota. This Assignment of Loan Agreement may not be amended or modified except in writing signed by the Issuer and the Lender. 8. This Assignment of Loan Agreement may be executed, acknowledged, and delivered in any number of counterparts and each of such counterparts shall constitute an original but all of which together shall constitute one agreement. 9. The terms used in this Assignment of Loan Agreement which are defined in the Loan Agreement shall have the meanings specified therein, unless the context of this Assignment of Loan Agreement otherwise requires, or unless such terms are otherwise defined herein. 10. No obligation of the Issuer hereunder shall constitute or give rise to a pecuniary liability of the Issuer or a charge against its general credit or taxing powers, but shall be payable solely out of the proceeds and the revenues derived under the Loan Agreement. If, notwithstanding the provisions of the immediately preceding sentence, the Issuer incurs any expense or suffers any losses, claims, or damages or incurs any liabilities directly related to the Facility or the Loan Agreement, the Borrower will indemnify and hold harmless the Issuer from the same and will reimburse the Issuer for any legal or other expenses incurred by the Issuer in relation thereto, and this covenant to indemnify, hold harmless, and reimburse the Issuer shall survive payment of the Bond. EXHIBIT 10.3 IN WITNESS WHEREOF, the Issuer, the Lender, and the Borrower have hereunto executed this instrument as of the date first above written. ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF BELLE PLAINE, MINNESOTA By ------------------------------------- Its ------------------------------------- By ------------------------------------- Its ------------------------------------- EXHIBIT 10.3 Assignment of Loan Agreement signature page. FINOVA PUBLIC FINANCE, INC. By ------------------------------------- Its ------------------------------------- EXHIBIT 10.3 The undersigned agrees to the provisions of paragraph 10 of this Assignment of Loan Agreement and agrees that its obligations to indemnify and hold harmless and reimburse the Issuer shall survive payment of the Bond. EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By ------------------------------------- Its ------------------------------------- EX-10.10 8 EXHIBIT 10.10 EXHIBIT 10.10 LOAN AGREEMENT THIS AGREEMENT, made as of the _____ day of _____________, 1998, by and between EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY, a Minnesota corporation ("Borrower") whose address is 805 Hanlon Drive, Belle Plaine, Minnesota 56011, and DAKOTA BANK, a state banking association, with its main banking office located at 1060 Dakota Drive, Mendota Heights, Minnesota 55120 ("Bank"). W I T N E S S E T H: WHEREAS, the Borrower has requested the Bank to extend a Five Million Dollar ($5,000,000.00) multi-advance working capital loan to Borrower ("Loan") to provide: operating capital for the build up of Borrower's inventory and accounts receivable; capital for the purchase of manufacturing equipment; and cash for the payment of loan origination costs; WHEREAS, the initial term of the Loan will require interest only payments for a period not to exceed eighteen months. During such initial period, advances will be drawn by Borrower up to a multi-advance limit of $5,000,000.00. Once the Loan proceeds have been fully drawn or at eighteen months, whichever is sooner, the Loan will be fully amortized over sixty months. WHEREAS, the Bank is willing and prepared to extend the Loan to the Borrower, upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. GENERAL. Subject to and upon the terms, covenants and conditions hereinafter set forth, the Bank hereby agrees to make Loan advances to the Borrower two times monthly up to and including July 1, 2000 ("Draw Expiration Date"), or until the occurrence of any Event of Default (as hereinafter defined), whichever first occurs. The sum total of requests shall not exceed the sum of Five Million Dollars ($5,000,000.00). The obligation of the Bank to make Loan advances under this Section 1 to the Borrower up to an aggregate principal amount at any one time outstanding equal to the Loan is hereinafter referred to as the "Multi-Advance Commitment". Commencing on the Draw Expiration Date the sum total of all Loan advances made to Borrower shall be fully repaid by Borrower in equal monthly installments over sixty months. Monthly payments may be recalculated from time to time by Bank to prevent negative amortization of the remaining Loan balance. 2. PROMISSORY NOTE. The obligation of the Borrower to repay the Loan shall be evidenced by that certain Promissory Note ("Note") of even date herewith executed by the Borrower. Reference is hereby made to the Note for the terms thereof relating to maturity, repayment schedule, interest rate and other matters governing the repayment of the Loan. Notwithstanding any provision of the Note, however, interest shall be payable at the variable rate 1 EXHIBIT 10.10 provided for therein (Prime Rate of interest published by the Wall Street Journal - Midwest Edition plus one-half percent) only on such portion of the Loan proceeds as actually have been disbursed hereunder pursuant to Section 1 hereof and remain unpaid. 3. MANNER OF BORROWING UNDER LOAN. Each time the Borrower desires to obtain a loan pursuant to the Multi-Advance Commitment, the Borrower shall request such loan in writing (i) by the Chief Financial Officer of the Borrower; or (ii) by any person designated as the Borrower's agent by resolution of the Borrower's Board of Directors delivered to the Bank. Each such request must specify the date of the requested advance and the amount thereof and shall include evidence (in the form of a certificate with supporting documentation reasonably acceptable to Bank) of discounted collateral values as more specifically described herein. The sum of all outstanding Loan advances shall be limited to the aggregate of: A. Eighty percent (80%) of Eligible Receivables (defined as accounts receivable of Borrower less than ninety days old, exclusive of foreign receivables and inter-company receivables and receivables pledged to or financed by another lender); B. Eighty percent (80%) of Eligible Equipment (defined as the book value on any new or used equipment including tooling equipment of Borrower which is unencumbered by any lien creditor and which is pledged to the Bank); and C. Seventy percent (70%) of Eligible Inventory (defined as raw materials, work-in-process, parts and finished goods valued at Borrower's cost as reported in Borrower's financial statements). 4. LOAN DOCUMENTS/COLLATERAL. As a condition precedent to the establishment of the Multi-Advance Commitment of the Bank and the agreement of the Bank to make and disburse the Loan, Borrower and Bank acknowledge that the following agreements and documents have been executed and/or delivered to the Bank: A. SECURITY AGREEMENT. A duly executed Security Agreement ("Security Agreement") pursuant to which the Bank has been granted a valid and perfected security interest in and to the following assets of Borrower: accounts receivable; inventories and unencumbered fixed assets of Borrower as described on Exhibit "A" (hereinafter the "Collateral"). B. UCC-1 FINANCING STATEMENTS. UCC-1 Financing Statements to be filed at the Minnesota Secretary of State and, under certain circumstances, the Scott County, Minnesota Recorder's Office. C. GUARANTY. The Guaranty of the U. S. Department of Agriculture under the Rural Development Business and Industry Loan Guaranty Program, in form and content reasonably acceptable to Bank, guarantying payment of eighty percent (80%) of the Loan when due, of the Borrower's obligations ("Guaranty"). 2 EXHIBIT 10.10 D. CERTIFICATE OF GOOD STANDING. Certificate of Good Standing issued by the Minnesota Secretary of State dated within seven days of the date of this Agreement. E. CORPORATE RESOLUTION. A Resolution of Borrower authorizing certain officers of Borrower to execute the Borrower Documents. F. OPINION OF BORROWER'S COUNSEL. A legal opinion executed by Borrower's Attorney, in form and content acceptable to Bank relating to Borrower's corporate existence, authority to execute the Borrower Documents, the enforceability of the Borrower Documents, and whether the Borrower Documents violate any obligation of Borrower. G. TAX LIEN AND UCC SEARCHES. Updated tax lien and UCC searches covering Borrower. This Agreement, the Note and the documents referenced in this Section are sometimes hereinafter collectively referred to as the "Borrower Documents". 5. REPRESENTATIONS. In order to induce the Bank to make Loan advances hereunder, the Borrower hereby warrants and represents to the Bank as follows: A. CORPORATE EXISTENCE AND POWER. The Borrower is a corporation duly organized and validly existing in the State of Minnesota, and is fully qualified to do business and is in good standing in the State of Minnesota, and has all requisite power and authority to carry on its business as now conducted and as presently proposed to be conducted. B. CORPORATE AUTHORITY. The Borrower has full power and authority to execute and deliver the Borrower Documents and to incur and perform obligations set forth in this Agreement and in the Borrower Documents; the execution, delivery and performance by the Borrower of the Borrower Documents and any and all other documents and transactions contemplated hereby or thereby, has been duly authorized by all necessary corporate action, will not violate any provision of law, the Articles of Incorporation or Bylaws of the Borrower, or any obligation of Borrower to any third party. C. ENFORCEABILITY. The Borrower Documents each constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms. D. FINANCIAL CONDITION. The audited financial statements of the Borrower dated as of January 3, 1998, and heretofore furnished to the Bank are complete and correct in all respects and fairly represent the financial condition of the Borrower at the dates of such statements and the results of its operations for the period ended on 3 EXHIBIT 10.10 said date, and have been prepared in accordance with generally accepted accounting principles, consistently applied. E. LITIGATION. There is no action, suit or proceeding pending or threatened against or affecting the Borrower which, if adversely determined, would have a material adverse effect on the condition (financial or otherwise), business, properties or assets of the Borrower, except as otherwise reported. F. TAXES. The Borrower has filed all tax returns required to be filed and either paid all taxes shown thereon to be due, including interest and penalties, which are not being contested in good faith and by appropriate proceedings, or provided adequate reserves for payment thereof, and none of them have any information or knowledge of any objections to or claims for additional taxes in respect of federal income or excess profits tax returns for prior years. G. TITLES, ETC. The Borrower has good title to the Collateral free and clear of all mortgages, liens and encumbrances, and except such liens and encumbrances as may from time to time be consented to in writing by the Bank (hereinafter collectively referred to as "Permitted Interests"). 6. COVENANTS OF THE BORROWER: On and after the date hereof and until the payment in full of the Loan evidenced by the Note and the performance of all other obligations of the Borrower hereunder, and so long as any portion of the Multi-Advance Commitment of the Bank remains in full force and effect, the Borrower agrees that, unless the Bank shall otherwise consent in writing: A. FINANCIAL STATEMENTS; OTHER INFORMATION. The Borrower shall deliver to the Bank (1) as soon as available and in any event within forty-five days after the end of each fiscal quarter of the Borrower, unaudited consolidated balance sheets of the Borrower as of the end of such period and related statements of operations of the Borrower for such period and for the year to date, all in reasonable detail and stating in comparative form the figures for the corresponding period in the previous year; (2) as soon as available and in any event within ninety days of Borrower's fiscal year, Annual Audited Fiscal Year End Financial Statements of the Borrower prepared in accordance with generally accepted accounting principles, consistently applied; (3) All SEC filings/press releases relating Borrower's business operations within seven days of filing or release as the case may be; 4 EXHIBIT 10.10 (4) Annual budget/projections of Borrower, as internally generated, for Borrower's next fiscal year by the end of Borrower's current fiscal year; and (5) such other information respecting the financial condition and results of operations of the Borrower as the Bank may from time to time reasonably request. B. TAXES AND CLAIMS. The Borrower shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any of its assets or properties, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon the property or assets of the Borrower. C. INSURANCE. The Borrower shall maintain insurance coverage with responsible insurance companies licensed to do business in the State of Minnesota in such amounts against such risks as is requested by the Bank or as required by law, including, without limitation, property, comprehensive general public liability, product liability and business interruption insurance, and worker's compensation or similar insurance. The Borrower shall furnish, to the Bank, upon written request, full information and written evidence as to the insurance maintained by the Borrower. D. LITIGATION. The Borrower shall promptly give to the Bank notice in writing of all litigation and of all proceedings by or before any court or governmental or regulatory agency affecting the Borrower, except litigation or proceedings which, if adversely determined, would not materially affect the financial condition or business of the Borrower. E. LIENS. The Borrower will not create, incur, assume or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance on any of its assets covered by the Bank's security interest without the prior written consent of the Bank, other then liens in existence prior to the date of this Agreement and purchase money security interest liens arising pursuant to Section 6K hereof. F. SALE OF ASSETS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets to any other person or entity other than in the ordinary course of business; PROVIDED, HOWEVER, that Borrower may sell accounts receivable to an accounts receivable financier, in accordance with the term of an agreement with such financier, which such terms and conditions have been disclosed to and approved by the Bank. 5 EXHIBIT 10.10 G. ACCESS. The Borrower shall grant to the Bank and the USDA access to the Borrower's premises at any reasonable time in order to inspect the Collateral and the Borrower's property and business. H. TRANSFER OF COLLATERAL. The Borrower shall not sell, dispose of, lease, mortgage, assign, sublet or transfer any of its right, title or interest in or the Collateral without the prior written consent of the Bank, except that the Borrower may dispose of worn out or obsolete equipment, may sell and replace any item of Collateral with equipment of a like kind and grade, may sell accounts receivables to an accounts receivable financier and the Borrower may sell Collateral consisting of inventory in the ordinary course of Borrower's business. I. USE OF PROCEEDS. Sums advanced to the Borrower under the Loan shall only be used to provide operating capital for the build up of inventory, accounts receivable, for the purchase of manufacturing equipment, and for costs related to obtaining this loan. J. MAINTENANCE OF TANGIBLE NET WORTH. Borrower shall maintain a Tangible Net Worth equal to at least twenty percent (20%) of Total Assets for the term of this Agreement. "Total Assets" shall mean the sum of all assets of Borrower as reported on Borrower's financial statements. "Tangible Net Worth" shall mean the difference between total tangible assets and total liabilities as reported on a financial statement prepared in accordance with this Agreement. K. ADDITIONAL DEBT LIMITATIONS. During the term of this Agreement, Borrower and Borrower's subsidiaries shall not incur any additional debt and shall not assume liabilities or obligations of any entity or person without the written consent of the Bank. Notwithstanding the foregoing, the Borrower may incur the following debt: (1) this loan; (2) debt existing as of the date of this Loan Agreement; (3) debt incurred by Borrower to refinance or exchange existing debt of Borrower; (4) debt incurred by Borrower or any subsidiary of Borrower in connection with providing customer or dealer financing for the purchase of Borrower's product; (5) other debt of Borrower provided that in its fiscal year 1999 and fiscal years subsequent thereto, Borrower maintains a debt service coverage ratio at least 1.25. Debt service coverage ratio shall be calculated by dividing the sum of net income after tax, plus depreciation, amortization and 6 EXHIBIT 10.10 interest expense by the sum of interest and total current maturities of long-term debt and capital leases; and (6) purchase money security interest debt in an amount not to exceed $250,000.00 per fiscal year. L. DIVIDEND PAYMENTS TO SHAREHOLDERS. This Agreement contains no restriction on dividend payments to shareholders of Borrower. M. LIMITATION ON COMPENSATION OF OFFICERS. This Agreement does not limit the compensation of officers of Borrower. N. CURRENT RATIO. The minimum current ratio maintained at all times shall be 1.0 to 1. Minimum current ratio shall be determined by dividing current assets by current liabilities. O. MAXIMUM DEBT TO NET WORTH RATIO. The maximum debt to net worth ratio shall not exceed 4 to 1. The debt to net worth ratio is determined by dividing total liabilities by tangible net worth. P. SUBSEQUENT AMENDMENT RELATING TO ENVIRONMENTAL IMPACTS. This Agreement shall be subject to subsequent amendment as required by the USDA to establish obligations upon Borrower to avoid or reduce adverse environmental impact resulting from the construction of Borrower's facility or from the business operations of Borrower. 7. EVENTS OF DEFAULT; REMEDIES. Any one or more of the following events shall constitute an Event of Default: A. the Borrower shall fail to pay, when due, any amounts required to be paid by the Borrower under any of the Borrower Documents, or any other indebtedness of the Borrower to the Bank for a period of ten (10) days after written notice to Borrower specifying such default and requesting that it be remedied within such time period; B. the Borrower shall be in default in the performance of any covenant, condition, obligation or agreement under any other document or instrument heretofore or hereafter executed and delivered to the Bank and such default is not cured within the period, if any, allowed by such documents for the cure thereof; C. the Borrower shall fail to observe or perform any of the covenants, conditions, obligations or agreements to be observed or performed by it under this Agreement, the Borrower Documents or any of the documents related hereto for a period of thirty (30) days after written notice to Borrower, specifying such default and requesting that it be remedied within such time period (other than defaults 7 EXHIBIT 10.10 which can be cured by a money payment) provided that such party is proceeding with reasonable diligence to remedy the same; D. the Borrower shall file a petition in bankruptcy or for reorganization or for an arrangement pursuant to any present or future state or federal bankruptcy act or under any similar federal or state law, or shall be adjudicated as bankrupt or insolvent, or shall make a general assignment for the benefit of its creditors, or shall be unable to pay its debts generally as they become due; or if a petition or answer proposing the adjudication of the Borrower as bankrupt or its/their reorganization under any present or future state or federal bankruptcy act or any similar federal or state law shall be filed in any court and such petition or answer shall not be discharged or denied within thirty (30) days after the filing thereof; or if a receiver, trustee or liquidator of the Borrower or of all or substantially all of the assets of the Borrower, Borrower be appointed in any proceeding brought against the Borrower and shall not be discharged within thirty (30) days of each appointment; or if the Borrower shall consent to or acquiesce in such appointment; E. the Borrower shall be or become insolvent (whether in the equity or bankruptcy sense); F. any representation or warranty made by the Borrower or the Guarantor in this Agreement, the Borrower Documents or the Guaranty or the documents related hereto shall prove to be untrue or misleading in any material respect, or any statement, certificate or report furnished hereunder or under any of the foregoing documents by or on behalf of any such party shall prove to be untrue or misleading in any material respect on the date when the facts set forth and recited therein are stated or certified; G. the Borrower shall liquidate, wind up, dissolve, merge, terminate or suspend its business operations, or sell all or substantially all of its assets, without the prior written consent of the Bank; H. the Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due or notice of any state or federal tax lien shall be filed or issued; I. any property of the Borrower shall be garnished, levied upon, or attached in any proceeding and such garnishment or attachment shall remain undischarged for a period of thirty days during which execution has not effectively stayed; J. except as permitted herein, the Borrower shall sell, transfer, assign or otherwise dispose of all or any part of or any interest in any property subject to any security agreement securing the Note, or agree to any of the foregoing, without the prior written consent of the Bank; or 8 EXHIBIT 10.10 K. any change in the condition of the Borrower which, in the reasonable opinion of the Bank, materially increases its risk with respect to the Borrower Documents or the Guaranty, or any documents or agreements related hereto or thereto, or the Bank otherwise in good faith deems itself insecure for any reason with respect to the payment of the Note. Upon the occurrence and continuation of an Event of Default, any one or more of the following remedial steps may be taken by the Bank: (1) Bank may, after the expiration of applicable cure periods following written notice by Bank, declare all or part of the principal balance of the Note plus accrued interest thereon to be immediately due and payable, whereupon the same shall become immediately due and payable by the Borrower; (2) the Bank may take whatever action at law or in equity as may appear necessary or appropriate to collect the amounts then due and thereafter to become due under the Note, this Agreement and the documents related hereto; (3) the Bank may take whatever action in law or in equity as may appear necessary or appropriate to collect any other amounts then due and thereafter to become due under this Agreement and the documents related hereto and to enforce performance and observance of any obligation, agreement, or covenant of the Borrower thereunder; and (4) the Bank may take whatever action in law or in equity as may appear necessary or appropriate to enforce its rights with respect to the collateral securing the Note. 8. NOTICES. All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by mail, postage prepaid, first class, certified or registered mail, return receipt requested, to the following address or such other address of which a party subsequently may give notice to all the other parties (provided, however, that notices to the Bank shall not be effective until received by the Bank): IF TO BANK: Dakota Bank ATTENTION: JOHN P. SEIDEL 1060 Dakota Drive Mendota Heights, MN 55120 IF TO THE BORROWER: Excelsior-Henderson Motorcycle Manufacturing Company 9 EXHIBIT 10.10 ATTENTION: THOMAS M. ROOTNESS, SENIOR VICE PRESIDENT OF FINANCE AND ADMINISTRATION 805 Hanlon Drive Belle Plaine, MN 56011 9. MISCELLANEOUS. A. WAIVERS, ETC. No failure on the part of the Bank to exercise, and no delay in exercising, any right or remedy hereunder or under applicable law or any document or agreement related hereto shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. B. EXPENSES. The Borrower shall reimburse the Bank for any and all costs and expenses, including, without limitation, attorneys' fees, paid or incurred by either the Bank in connection with the preparation of the enforcement by the Bank during the term hereof of thereafter or any of the rights or remedies of the Bank under any of the foregoing documents, instruments or agreements of under applicable law, whether or not suit is filed with respect thereto. C. AMENDMENTS, ETC. The Borrower Documents may not be amended or modified except by written instruments signed by the Bank and the Borrower. D. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns; provided, however, that the Borrower may not transfer or assign its rights to borrow hereunder without the prior written consent of the Bank. E. ACCOUNTING. Unless otherwise expressly provided herein, or unless the Bank otherwise consents in writing, all accounting terms used herein which are not expressly defined in this Agreement shall have the meanings respectively given to them in accordance with generally accepted accounting principles and audited financial statements and reports furnished to the Bank hereunder shall be prepared, and all computations and determinations pursuant hereto shall be made, in accordance with generally accepted accounting principles and practices, applied on a basis not materially inconsistent with that applied in preparing the respective financial statements referred to in Sections 5D hereof. F. GOVERNING LAW. Except as otherwise expressly provided therein, the Borrower Documents, and all other agreements related hereto, shall be construed in accordance with and governed by the laws of the State of Minnesota. 10 EXHIBIT 10.10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. DAKOTA BANK EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY By: By: ---------------------------------- ----------------------------------- David M. Carlson Thomas M. Rootness Its Executive Vice President Its Senior Vice President of Finance and Administration and Chief Financial Officer 11 EXHIBIT 10.10 EXHIBIT "A" TO LOAN AGREEMENT COLLATERAL (a) All accounts receivable, contract rights and rights to payment in money or in kind for goods sold or leased or for services rendered; all returned or repossessed goods arising from or relating to any account, contract rights, or rights to payment; and any rights of Borrower as an unpaid seller of goods or services, which may now exist or which are hereafter acquired, together with all proceeds and products of the foregoing; (b) All inventory (goods, merchandise, and other personal property) which are held for sale, lease or otherwise in connection with Borrower's operations, or furnished or to be furnished under any contract of service or are raw materials, work-in-process, supplies, or materials used or consumed in Borrower's operations, and any right of Borrower as an unpaid seller of goods or services; and (c) All equipment, machinery and other fixed assets of Borrower pledged by Borrower to Bank pursuant to the terms of the Security Agreement. 12 EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 333-38505, 333-60083, 333-60085, and 333-64011. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, April 1, 1999 EX-24 10 EXHIBIT 24 EXHIBIT 24 EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY Power of Attorney of Director and/or Officer The undersigned director and/or officer of Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, does hereby make, constitute and appoint Daniel L. Hanlon and David P. Hanlon, and either of them, the undersigned's true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of said Corporation to an Annual Report on Form 10-K or other applicable form, and all amendments thereto, to be filed by said Corporation with the Securities and Exchange Commission, Washington, D.C., under the Securities Act of 1934, as amended, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand this 1st day of April, 1999. John B. Donahue EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY Power of Attorney of Director and/or Officer The undersigned director and/or officer of Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, does hereby make, constitute and appoint Daniel L. Hanlon and David P. Hanlon, and either of them, the undersigned's true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of said Corporation to an Annual Report on Form 10-K or other applicable form, and all amendments thereto, to be filed by said Corporation with the Securities and Exchange Commission, Washington, D.C., under the Securities Act of 1934, as amended, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand this 1st day of April, 1999. Wayne M. Fortun EXCELSIOR-HENDERSON MOTORCYCLE MANUFACTURING COMPANY Power of Attorney of Director and/or Officer The undersigned director and/or officer of Excelsior-Henderson Motorcycle Manufacturing Company, a Minnesota corporation, does hereby make, constitute and appoint Daniel L. Hanlon and David P. Hanlon, and either of them, the undersigned's true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of said Corporation to an Annual Report on Form 10-K or other applicable form, and all amendments thereto, to be filed by said Corporation with the Securities and Exchange Commission, Washington, D.C., under the Securities Act of 1934, as amended, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand this 1st day of April, 1999. David R. Pomije EX-27 11 EXHIBIT 27
5 YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 4,697,542 0 0 0 1,865,251 7,104,164 30,317,118 999,869 47,988,132 10,221,789 0 0 9,325,000 130,835 7,741,099 47,988,132 0 0 0 23,264,800 0 0 1,753,502 (23,909,305) 0 (23,909,305) 0 0 0 (23,909,305) (1.83) (1.83)
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