FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 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 000-24477
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TITAN MOTORCYCLE COMPANY OF AMERICA
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 86-0776876
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2222 West Peoria Avenue, Phoenix, Arizona 85029
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 861-6977
- --------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, par value $.001,
outstanding as of August 14, 1999: 17,147,333
<PAGE>
TITAN MOTORCYCLE CO. OF AMERICA
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
- -----------------------------------------
Consolidated Balance Sheets as of July 3, 1999............................1
Consolidated Statements of Operations for the thirteen-weeks ended July 3,
1999 and July 4, 1998, respectively and for the twenty-six-weeks ended July
3, 1999 and July 4, 1998, respectively....................................2
Consolidated Statements of Cash Flow for the twenty-six-weeks ended July 3,
1999 and July 4, 1998, respectively.......................................4
Notes to Consolidated Financial Statements................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..........................................................6
PART II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
TITAN MOTORCYCLE CO. OF AMERICA
Consolidated Balance Sheets
<CAPTION>
July 3, 1999
-----------
Assets (Unaudited)
Current assets:
<S> <C>
Cash 7,290
Accounts receivable, net 5,302,180
Accounts receivable - related party 1,367,519
Inventories 13,577,177
Prepaid expenses 799,598
-----------
Total current assets 21,053,764
Property and equipment, net 1,640,157
Other assets 62,311
Trademarks 60,032
-----------
Total assets 22,816,264
===========
Liabilities and stockholders' equity
Current liabilities:
Bank Overdraft 171,159
Accounts payable 4,101,192
Accrued expenses 1,126,096
Current portion of notes payable 599,993
-----------
Total current liabilities 5,998,440
Notes payable 11,181,435
-----------
Total liabilities 17,179,875
Stockholders' equity
Common stock, par value $.001; 100,000,000 shares authorized 16,727
Additional paid in capital 8,394,607
Unearned compensation (33,898)
Accumulated deficit (2,741,047)
-----------
Total stockholders' equity 5,636,389
-----------
Total liabilities and stockholders' equity 22,816,264
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
<TABLE>
TITAN MOTORCYCLE CO. OF AMERICA
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Thirteen Weeks Ended Thirteen Weeks Ended
July 3, 1999 July 4, 1998
---------- ----------
<S> <C> <C>
Sales, net 8,451,345 7,528,946
Cost of goods sold 7,574,065 6,173,736
---------- ----------
Gross profit 877,280 1,355,210
---------- ----------
Operating expenses:
Selling, general and administrative 1,359,576 988,839
Research and development 73,869 55,465
---------- ----------
Total operating expenses 1,433,445 1,044,304
Income (loss) from operations (556,165) 310,906
Other income (expense):
Other income (expense) 9,060 (33,419)
Interest expense (224,164) (74,113)
---------- ----------
Total other income (expense) (215,104) (107,532)
========== ==========
Income (loss) before income taxes (771,269) 203,374
Income taxes -- --
---------- ----------
Net income (loss) (771,269) 203,374
========== ==========
Income (loss) per common share - basic and diluted $ (0.05) $ 0.02
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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<TABLE>
TITAN MOTORCYCLE CO. OF AMERICA
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 3, 1999 July 4, 1998
----------- -----------
<S> <C> <C>
Sales, net 16,096,910 12,891,297
Cost of goods sold 14,059,411 10,820,713
----------- -----------
Gross profit 2,037,499 2,070,584
----------- -----------
Operating expenses:
Selling, general and administrative 2,449,088 1,539,918
Research and development 113,402 112,953
----------- -----------
Total operating expenses 2,562,490 1,652,871
Income (loss) from operations (524,991) 417,713
Other income (expense):
Other income (expense) (2,683) (34,991)
Interest expense (423,888) (120,409)
----------- -----------
Total other income (expense) (426,571) (155,400)
=========== ===========
Income (loss) before income taxes (951,562) 262,313
Income taxes -- --
----------- -----------
Net income (loss) (951,562) 262,313
=========== ===========
Income (loss) per common share - basic and diluted $ (0.06) $ 0.02
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
TITAN MOTORCYCLE CO. OF AMERICA
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 3, 1999 July 4, 1998
---------- ----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income (loss) (951,562) 262,313
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 127,853 86,478
Stock compensation expense 4,843 --
Net change in balance sheet accounts
Accounts receivable (2,019,337) (1,836,345)
Inventories (1,793,901) (3,518,420)
Other assets (82,039) (303,466)
Accounts payable 1,073,926 984,029
Accrued expenses 175,534 (14,343)
---------- ----------
Net cash used in operating expenses (3,464,683) (4,339,754)
---------- ----------
Cash Flows from Investing Activities:
Purchase of property and equipment (684,451) (64,394)
Purchase of trademarks -- (8,083)
---------- ----------
Net cash used in investing activities (684,451) (72,477)
---------- ----------
Cash Flows from Financing Activities
Bank overdraft 93,422 213,288
Issuance of stock 1,122,480 500,000
Borrowing from related parties -- --
Net increase in line of credit 2,932,124 3,613,475
---------- ----------
Net cash provided by financing activities 4,148,026 4,326,763
---------- ----------
Net increase in cash (1,108) (85,468)
Cash and cash equivilants at beginning of year 8,398 85,468
---------- ----------
Cash and cash equivilants at end of period 7,290 --
========== ==========
Supplemental Cash Flow Information:
Non-cash investing and financing activities
Stock issued in exchange for advertising 250,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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TITAN MOTORCYCLE CO. OF AMERICA
Notes to the Consolidated Financial Statements
July 3, 1999 and July 4, 1998
NOTE 1 - Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at July 3, 1999 and for
all periods presented have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's January 2, 1999 audited
consolidated financial statements. The results of operations for the period
ended July 3, 1999 are not necessarily indicative of the operating results for
the full year.
NOTE 2 - Earnings Per Share
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 128, Earnings Per Share, a reconciliation of the
numerator and denominator of basic and diluted EPS is provided as follows:
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 3, 1999 July 4, 1998
---------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income (Loss) available
to common shareholders ($ 951,562) 16,652,744 ($ 0.06) $ 262,313 16,397,551 $ 0.02
Effects of Dilutive Securities
Common stock Options -- -- -- -- 353,348 --
Diluted EPS
Net Income (Loss) available
to common shareholders ($ 951,562) 16,652,744 ($ 0.06) $ 262,313 16,750,899 $ 0.02
</TABLE>
Note 3 - Note Payable
At January 2, 1999, the Company has an set based line of credit, bearing
interest at prime plus .5% (8.25% at January 2, 1999) which is due monthly. The
line of credit has a $10 million maximum capacity with an outstanding balance of
$7,049,324 at January 2, 1999. The principal is due April 1, 2000 if the line is
not renewed. Borrowings under the asset based line of credit are collateralized
by a first priority security interest in substantially all of the Company's
assets and are senior to all other borrowings. The unused line of credit bears
interest at a rate of .25% per year due monthly. This financing agreement
contains certain financial covenants and precludes capital expenditures in
excess of $500,000 per year. During the year, the Company's capital expenditures
exceed this amount. The Company has received a waiver for this violation.
Note 4 - Changes in Securities and use of proceeds
On February 8, 1999, the Company agreed to sell 700,000 shares of its common
stock to a non-US investor for net proceeds to the Company of $1,575,000. As of
the date of this report all of the proceeds of this transaction have been
received. These 700,000 shares are subscribed for and certificates issued, and
as such are included in the 17,147,333 shares reflected as outstanding in the
financial statements filed with this report.
The transaction is deemed exempt from registration pursuant to the provisions of
Regulation S adopted by the Securities and Exchange Commission. The Company
reasonably believes, and the purchaser specifically warranted and represented to
5
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TITAN MOTORCYCLE COMPANY OF AMERICA
the Company, that (a) the purchaser was not a U.S. person as that term is
defined under Regulation S; (b) at the time the buy order for the securities was
originated, the purchaser was outside of the United States; (c) the purchaser
was purchasing the securities for its own account and not on behalf of and U.S.
person; (d) the sale had not been pre-arranged with a purchaser in the United
States: (e) all offers and resales of the securities would only be made in
compliance with Regulation S; and (f) the sales transaction was made in
compliance with all laws of the country of domicile of the purchaser, and of any
political subdivision thereof, and the customary practices and documentation of
such jurisdiction. The certificates representing the shares to be issued in such
transaction will bear the appropriate restrictive legend, and the transfer agent
of the Company has been given stop transfer instructions with regard to shares
issued under any Regulation S exemption.
No commission or finders fee was paid on the referenced transaction.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
13 Week Period Ended July 3, 1999, Compared with 13 Week Period Ended July 4,
1998
OVERALL
Net Sales for the thirteen-week period ended July 3, 1999 of $8.4 million were
$0.9 million, or 12%, higher than net sales for the comparable period in 1998.
The Company recorded a net loss of $771,269, or $(0.05) per share, in 1999
compared with net income of $203,374 or $0.02 per share, for 1998.
RESULTS OF OPERATIONS
MOTORCYCLE UNIT SHIPMENTS AND NET SALES
1999 1998 INCREASE % CHANGE
------ ------ ------ ------
Motorcycle Units 291 270 21 8%
Net Sales (in $ 000's):
Motorcycles $7,744 $7,272 $ 472 6%
Motorcycle Parts and Accessories $ 707 $ 257 $ 450 175%
Total Motorcycles and Parts $8,451 $7,529 $ 922 12%
As indicated in the above chart, the Company's business continues to consist
primarily of motorcycles sales. A small, but rapidly growing, amount of business
has been done in parts and accessories. The Company's Clothing and Accessories
product line, introduced in late 1997 continues to be well accepted. Parts and
Accessories sales grew to approximately 8% of revenues and the Company
anticipates these could grow to 10 - 20% of total sales at some future date.
The increase in motorcycle shipments is due to several reasons. Chief among them
is the continuing growth in reputation of the Company's motorcycles and the
resulting demand this has created. This, combined with the growth in the
dealership network and the Company's investment in new facilities and staff to
meet the growing demand, continues to drive the growth in shipments. The growth
was constrained in second quarter due to part supply issues affecting both the
existing Legacy line of motorcycles as well as the introduction of the new
Phoenix line of products. These issues have been addressed and should have a
minor impact on third quarter.
6
<PAGE>
GROSS PROFIT
1999 1998 DECREASE % CHANGE
-------- -------- -------- --------
Gross Profit (In 000's) $ 877 $ 1,355 $ 478 35%
Gross Margin % 10.4% 18.0% 7.6%
In the thirteen-weeks ended July 3, 1999, gross profit decreased $477,999 or
35%, as compared to the comparable period in 1998. The gross profit margin was
10.4% as compared with 18.0% in 1998.
In 1999, the Company saw its cost of goods sold (COGS) negatively impacted as a
result of the first year in new additional facilities and costs associated with
ramping-up both the new facility and new employees in anticipation of increased
production rates. These "ramping up" activities consist principally of amassing
the various elements necessary to rapidly increase unit production output,
including:
o adding expanded floor space for manufacturing, storage and personnel offices,
o adding staff, both hourly and salaried, throughout the organization,
o adding inventories of raw materials and work in process to support higher
volume production, and
o adding production equipment to facilitate higher unit volume output.
These costs were partially offset by an aggressive cost reduction program
focused primarily on component purchase costs. The Company anticipates
improvement in its gross profit in 1999 as a result of significant engineering
and cost reduction efforts, as well as the continued increase in customization
of its products. This improvement has been slowed in 1999 by the introduction of
the new "Phoenix by Titan" line of motorcycles and the start-up costs associated
with its introduction. Gross margins should benefit from volume purchases of
components, vertical integration, manufacturing more parts in-house, and by
redesigning components of its motorcycles.
The Company's budgeted sales for the new Phoenix line of motorcycles was
negatively impacted during second quarter 1999 due to parts availability from
two outside suppliers. Failure to achieve anticipated Phoenix line production
was a significant factor in the disparity between sales revenues and increased
support costs. The lower than planned volumes in second quarter primarily
impacted labor and overhead utilization resulting in a decline in gross profit
margin.
7
<PAGE>
OPERATING EXPENSES
1999 1998 INCREASE % CHANGE
-------- -------- -------- --------
Operating Expenses (In 000's) $1,433 $1,044 $389 37%
Operating Expense as % of Sales 17.0% 13.9% 3.1%
Total operating expense for the thirteen-week period ended July 3, 1999
increased $389,141, or 37%, over the comparable period in 1998. This increase
was due to a number of causes, including, but not limited to the following
principal factors listed in descending order of importance:
o an increase in salaries and wages attributed to building both the management
and support staff necessary to support a rapidly growing and significantly
larger Company;
o an increase in legal and accounting expense;
o a substantial increase in advertising, trade show and promotional activities
to build the Company's brand name and recognition, and drive higher sales
levels; and
o an increase in depreciation and amortization expense.
Each of these factors are the result of direct management action and are part of
a continuing trend to expand production, marketing, facilities and product
improvements. While the increases were substantial, both as a percentage of the
prior year period and in actual dollars, it was in keeping with the Company's
plan to continue to invest heavily in infrastructure, to position the Company
for profitable growth in the second half of 1999 and the coming years.
CONSOLIDATED INCOME TAXES
The Company's effective tax rate was 0.0% in both the thirteen-week period ended
July 3, 1999 and the comparable period ended July 4, 1998 as a result of losses
in 1999 and use of tax loss carryforwards in 1998. The Company currently has a
tax loss carry forward of approximately $2.2 million.
26 Week Period Ended July 3, 1999, Compared with 26 Week Period Ended July 4,
1998
OVERALL
Net Sales for the twenty-six week period ended July 3, 1999 of $16.1 million
were $3.2 million, or 25%, higher than net sales for the comparable period in
1998. The Company recorded a net loss of $951,562, or $(0.06) per share, in 1999
compared with net income of $262,313 or $0.02 per share, for 1998.
8
<PAGE>
RESULTS OF OPERATIONS
MOTORCYCLE UNIT SHIPMENTS AND NET SALES
1999 1998 INCREASE % CHANGE
-------- -------- -------- --------
Motorcycle Units 542 465 77 17%
Net Sales (in $ 000's):
Motorcycles $15,176 $12,475 $ 2,701 22%
Motorcycle Parts and Accessories $ 921 $ 416 $ 505 121%
Total Motorcycles and Parts $16,097 $12,891 $ 3,206 25%
As indicated in the above chart, the Company's business continues to consist
primarily of motorcycles sales. A small, but rapidly growing, amount of business
has been done in parts and accessories. Parts and Accessories sales approached
6% of revenue, the Company anticipates these could grow to 10 - 20% of total
sales at some future date.
The increase in motorcycle shipments is due to several reasons. Chief among them
is the continuing growth in reputation of the Company's motorcycles and the
resulting demand this has created. This, combined with the growth in the
dealership network and the Company's investment in new facilities and staff to
meet the growing demand, continues to drive the growth in shipments. The growth
was constrained in second quarter due to part supply issues affecting both the
existing Legacy line of motorcycles as well as the introduction of the new
Phoenix line of products. These issues have been addressed and should have a
minor impact on third quarter.
GROSS PROFIT
1999 1998 DECREASE % CHANGE
-------- -------- -------- --------
Gross Profit (In 000's) $ 2,037 $ 2,071 $ 33 (2)%
Gross Margin % 12.7% 16.1% 3.4%
In the twenty-six weeks ended July 3, 1999, gross profit decreased $33,085 or
2%, as compared to the comparable period in 1998. The gross profit margin was
12.7% as compared with 16.1% in 1998.
In 1999, the Company saw its cost of goods sold (COGS) negatively impacted as a
result of the first year in new additional facilities and costs associated with
ramping-up both the new facility and new employees as the production rates grew.
These "ramping up" activities consist principally of amassing the various
elements necessary to rapidly increase unit production output, including:
o adding expanded floor space for manufacturing, storage and personnel offices,
o adding staff, both hourly and salaried, throughout the organization,
9
<PAGE>
o adding production equipment to facilitate higher unit volume output.
These costs were partially offset by an aggressive cost reduction program
focused primarily on component purchase costs. The Company anticipates
improvement in its gross profit in 1999 as a result of significant engineering
and cost reduction efforts, as well as the continued increase in customization
of its products. This improvement has been slowed in 1999 by the introduction of
the new "Phoenix by Titan" line of motorcycles and the start-up costs associated
with its introduction. Gross margins should benefit from volume purchases of
components, vertical integration, manufacturing more parts in-house, and by
redesigning components of its motorcycles.
The Company's budgeted sales for the new Phoenix line of motorcycles was
negatively impacted during second quarter 1999 due to parts availability from
two outside suppliers. Failure to achieve anticipated Phoenix line production
was a significant factor in the disparity between sales revenues and increased
support costs.
OPERATING EXPENSES
1999 1998 INCREASE % CHANGE
-------- -------- -------- --------
Operating Expenses (In 000's) $2,562 $ 1,653 $ 909 55%
Operating Expense as % of Sales 15.9% 12.8% 3.1%
Total operating expense for the twenty-six week period ended July 3, 1999
increased $909,619, or 55%, over the comparable period in 1998. This increase
was due to a number of causes, including, but not limited to the following
principal factors listed in descending order of importance:
o an increase in salaries and wages attributed to building both the management
and support staff necessary to support a rapidly growing and significantly
larger Company;
o an increase in legal and accounting expense;
o a substantial increase in advertising, trade show and promotional activities
to build the Company's brand name and recognition, and drive higher sales
levels; and
o an increase in depreciation and amortization expense.
Each of these factors are the result of direct management action and are part of
a continuing trend to expand production, marketing, facilities and product
improvements. While the increases were substantial, both as a percentage of the
prior year period and in actual dollars, it was in keeping with the Company's
plan to invest heavily in infrastructure, to set the stage for profitable growth
in the second half of 1999 and the coming years.
10
<PAGE>
CONSOLIDATED INCOME TAXES
The Company's effective tax rate was 0.0% in both the twenty-six week period
ended July 3, 1999 and the comparable period ended July 4, 1998 as a result of
losses in 1999 and use of tax loss carryforwards in 1998. The Company currently
has a tax loss carry forward of approximately $2.2 million.
WORKING CAPITAL MANAGEMENT
- --------------------------
The Company supplies motorcycles to its dealers in one of two ways. First, the
dealer can specify the motorcycle completely with customized paint and selected
options with a lead time of 6-8 weeks, sometimes slightly longer during peak
season. Alternatively, the dealer can select a completed bike from the Company's
available Finished Goods inventory list for immediate shipment or one from the
current production schedule that will be available inside the normal lead time
window. The Company builds some inventory (up to one month's production) of
finished motorcycles during the winter months that is consumed during the
spring/summer peak season. During the rest of the year the Company normally
maintains a low level of finished goods inventory.
Motorcycles are typically either floored with major financial institutions by
the dealer or are paid for in full prior to shipment by the Company. The Company
receives payment for floored bikes within 2 weeks of shipment. During winter
months the Company may provide free flooring for qualifying dealers depending on
model and stock situation to help smooth shipments and keep higher levels of
product available for customers.
Parts used to build the bikes are usually available with short lead times, but
some parts do require up to ten weeks lead time. Due to high quality standards
and reliability of delivery, the Company sets slightly higher stocking levels to
assure the availability of parts to production. The Company has an ongoing
program to continue to upgrade its supplier base and to selectively bring
additional parts in house for production, reducing required inventory levels as
well as part costs.
The Company has built a strong network of dealers both domestically and
internationally. Collectively, there are approximately 88 dealers currently in
place with more being added every month. There are 5 types of dealers in the
Company's network; independent dealers, Easyrider stores and franchises, Bikers'
Dream franchises, existing Harley DavidsonTM dealers, and Titan dealerships. To
date in 1999, 4 dealers with common ownership (Titan of Los Angeles, Titan of
Las Vegas, Titan of Houston and Paragon Custom dba Titan of Phoenix) represented
20% of the Company's sales. Majority ownership of these dealerships are held by
principals in the Company. No other dealer represents more than 5% of sales.
11
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As of July 3, 1999, backlog orders stood at approximately $1.4 million, compared
with approximately $1.2 million at the same time in 1998. The Company is
presently completing an average of more than 25 motorcycles each week. At this
production volume the entire backlog can be shipped within 1 month, assuming the
availability of customized options.
OTHER MATTERS
IMPACT OF YEAR 2000
- -------------------
The "Year 2000 Problem" exists because many existing computer programs use only
two digits to refer to a year. Therefore, these programs do not properly
recognize a year that begins with "20" instead of "19". If not corrected, many
computer applications could fail or create erroneous results.
The Company has completed an analysis of its internal systems and the potential
for issues associated with the Year 2000 problem. The Company began in 1997 to
bring on-line new systems to support both operations and financial reporting
requirements as part of building the infrastructure to support the Company's
growth. As part of the conversion, the Company received assurances from its
software suppliers that all systems are Year 2000 compliant. The Company has
installed software modules that address inventory management, purchasing
components, shop floor control and production scheduling, receiving, order
entry, shipping and invoicing, and accounting.
Relative to areas other than information systems, the Company has investigated
this area for potential problems. As the Company does not have a high degree of
sophisticated equipment in its production process, the risk in this area is low
and the Company has not identified any areas of non-compliance in its analysis.
With regard to third party Year 2000 issues, the Company has had, and continues
to have, discussions with its supplier base (and is currently completing a
survey of all suppliers), to ascertain the potential for a negative impact on
the Company's operations and what steps are being taken to ensure continuity of
supply of parts and service. While the Company believes its plans and actions
are adequate to deal with the Year 2000 issues internally, and that it will be
compliant, there is no guarantee that all suppliers and other parties that are
essential to the Company's operations will similarly do so. The failure of any
supplier to adequately address this issue in a timely manner will result in the
Company looking to other suppliers to fill the need. While the Company is single
sourced for many of its components, there are alternative suppliers for all
required parts. The potential exists for a material negative effect on Company
12
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operations if a key supplier does not adequately address the issue in a timely
manner. The Company will be working with all key suppliers throughout this time
period to ensure continuity of supply. The Company has completed reviews of
approximately half of its suppliers to date, with most reporting full compliance
already in place or to be completed by the end of the third quarter 1999. The
Company will continue to solicit information from suppliers that have not
responded and follow up on those that have not completed their compliance
activities.
The Company has also evaluated the risks associated with this problem and its
customers through discussions with key dealers. As the ordering process from
dealers is a manual one, and stocks of motorcycles on dealer's floors is a
relatively low number (typically between 5 and 25 units), the Company and the
dealers involved in these discussions believe that the Year 2000 problem will
have no material impact to either the dealers or the Company.
The Company's cost to become Year 2000 compliant has been minimal and not
material to this point, nor expected to be in the future. As the Company had
already planned its systems conversions to facilitate its growth, there were no
incremental costs associated with insuring those systems were Year 2000
compliant. As a result, costs of the effort are mainly focused on following up
with suppliers to determine their level of compliance. These costs are imbedded
in other activities and are not expected to be material (less than
$50,000.00/year in both 1998 and 1999).
The most reasonable likely worst case Year 2000 scenario would be for a key
supplier to not become compliant. If no steps were taken to address this issue,
it could result in the Company's operations being shut down until the problem
was resolved. As discussed above, the Company is in the process of analyzing the
readiness of all its suppliers to assure continuity of supply, so the
probability of such a scenario is not yet known.
As the specifics of potential problems are not yet known, a detailed contingency
plan has not yet been developed. Once more information is known from the survey
of vendors, a specific contingency plan for likely scenarios will be developed.
The Company would anticipate this being completed by the end of the third
quarter of 1999.
After identifying the likelihood of such an event, the Company would take some
or all of the following steps:
o Work with the vendor to put in place a manual back-up system to assure
continued supply until the vendor becomes compliant,
o Bring on-line alternate vendors with the capacity to meet 100% of the
Company's supply requirements, or
o Put in place additional raw material inventory at either the vendor's
location or in the Company's warehouse, or both, until continuity of supply
is assured.
13
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LIQUIDITY AND CAPITAL RESOURCES
The Company used $3.4 million of cash in operating activities in the twenty-six
week period ended July 3, 1999 compared with $4.3 million in the comparable
period in 1998. In first half 1999 net loss adjusted for depreciation and
amortization consumed $818,816. In first half 1998 net income adjusted for
depreciation and amortization provided $348,791. Inventories increased $1.8
million in the twenty-six week period in 1999 over the $3.5 million increase in
the comparable period of 1998. Accounts receivable increased by $2.0 million on
increased sales of $3.1 million as many of the second quarter 1999 sales were at
the end of the period, and funding had not yet been received from the flooring
company as of quarter end. The Company operates under a manufacturer's flooring
agreement with Transamerica Financial Corp., whereby most dealers finance their
motorcycle inventory directly with Transamerica Financial Corp. and the Company
receives funds in a more timely manner. The contractual agreement with
Transamerica Financial Corp. is at no cost to the Company, but provides for a
repurchase obligation on the part of the Company should a Titan dealership fail
to meet its financial obligation and Transamerica Financial Corp. seizes
motorcycles in new condition upon a dealer's default. When Titan invoices a
dealer using the Transamerica Financial Corp. program, a copy of the invoice is
sent to Transamerica Financial Corp. by Titan, and Transamerica Financial Corp.
pays the Company in full within 7 to 10 calendar days. Approximately 60-65% of
all sales are currently paid for through this arrangement with Transamerica
Financial Corp. The majority of the remainder are cash sales.
Capital expenditures totaled $684,451 in the twenty-six week period ended July
3, 1999 compared with $64,394 in the comparable period in 1998. These
expenditures were predominantly associated with bringing on line the new
manufacturing facility.
Cash was provided through the issuance and sale of stock for $1.1 million in
first half of 1999 as compared with $500,000 in first half 1998. Additionally,
the Company had net borrowings of $2.9 million in 1999 as compared with $3.6
million in 1998. A more detailed description of cash flows can be found in the
attached financial statements.
14
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information
- -------------------------
Union
- -----
On July 27, 1999 the Company received an order from the National Labor Relations
Board (NLRB) calling for an election of all Titan production employees to
determine whether Teamster's Union Local 104 will represent said employees in
collective bargaining. The election is slated for mid-September 1999.
Titan of Houston
- ----------------
During the second quarter of 1999, BPF-LLC, a holding company beneficially owned
by Patrick Keery, Barbara Keery, and Frank Keery along with an third-party
investor, purchased American Biker Houston, Texas after outside Directors of the
Company voted to forego such purchase on behalf of the Company. The third-party
investor in the holding company is the principal of an investment banking firm
that has assisted the Company in Capital raising functions. American Biker was a
Titan retail dealer and continues as a dealer for the Company under the new name
of Titan of Houston. Titan of Houston is continuing to sell the products of the
Company under the standard dealorship contract of the Company without any
special concessions of contract provisions.
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended July 3, 1999, and the period from July 4 through August
14, 1999, the Company filed no reports on Form 8-K.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TITAN MOTORCYCLE COMPANY OF AMERICA
(Registrant)
/s/ Francis Kerry August 16,1999
- ----------------------------------------
Francis Keery Date
Chairman and CEO
/s/ Robert Lobban August 16, 1999
- ----------------------------------------
Robert Lobban Date
Chief Financial Officer
16
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