U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
0-20436
Commission file number
U.S. AUTOMOTIVE MANUFACTURING, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 65-0309477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Route 627, Airport Drive, Tappahannock, VA 22560
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (804) 444-5356
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) 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____
As of August 14, 1998, the Issuer had 15,724,893 shares outstanding of its
common stock, $.001 par value.
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION................................................. 3
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998
(unaudited) and December 31, 1997........................ 3
Consolidated Statements of Operations (unaudited) for the
three months ended June 30, 1998 and June 30, 1997....... 4
Consolidated Statements of Operations (unaudited) for the
six months ended June 30, 1998 and June 30, 1997......... 5
Consolidated Statements of Cash Flows (unaudited) for
the six months ended June 30, 1998 and June 30, 1997..... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................10
PART II. OTHER INFORMATION...................................................15
Item 2. Changes in Securities and Use of Proceeds........................15
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 6. Exhibits and Reports on Form 8-K.................................17
SIGNATURES....................................................................17
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,211,170 $ 1,001,843
Accounts Receivable (net of allowance for doubtful
accounts of $105,400 and $136,100, respectively) 4,152,014 2,800,755
Inventories 9,120,347 8,739,028
Prepaid Expense and other 178,832 425,781
------------ ------------
Total Current Assets 15,662,363 12,967,407
Property, plant and equipment (net of accumulated
depreciation of $1,086,700 and $812,900,
respectively) 10,542,991 10,256,556
Deferred financing costs 270,000 --
Goodwill, net 6,114,167 6,273,665
------------ ------------
TOTAL ASSETS $ 32,589,521 $ 29,497,628
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 7,088,000 $ 4,815,211
Current Portion of long-term debt 1,628,227 1,688,942
Accounts payable 3,004,988 2,735,688
Accrued liabilities 569,191 830,282
------------ ------------
Total Current Liabilities 12,290,406 10,070,123
Long-term debt, less current portion 177,103 242,414
Redeemable convertible debentures 2,250,000 --
Notes payable to shareholders 4,800,000 4,500,000
------------ ------------
Total Liabilities 19,517,509 14,812,537
------------ ------------
Stockholders' Equity:
Issued & outstanding capital stock $.001 par value 15,725 15,725
Additional paid-in capital 38,885,545 38,885,545
Accumulated deficit (25,829,258) (24,216,179)
------------ ------------
Total stockholders' equity 13,072,012 14,685,091
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 32,589,521 $ 29,497,628
============ ============
</TABLE>
Theaccompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
------------------------------
1998 1997
------------ ------------
Net Sales $ 5,937,296 $ 834,457
Cost of Goods Sold 4,528,545 685,873
------------ ------------
Gross Profit 1,408,751 148,584
------------ ------------
Operating Expenses:
Selling and delivery 799,378 115,204
General and administrative 945,066 1,717,082
------------ ------------
Total Operating Expenses 1,744,444 1,832,286
------------ ------------
Operating loss (335,693) (1,683,702)
Interest expense (303,146) (1,110,463)
------------ ------------
Net Loss $ (638,839) $ (2,794,165)
============ ============
Net Loss per share, basic and diluted $ (0.04) $ (0.31)
============ ============
Weighted average shares outstanding 15,724,893 9,042,020
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
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<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30,
------------------------------
1998 1997
------------ ------------
Net Sales $ 9,357,169 $ 1,495,303
Cost of Goods Sold 7,181,872 1,388,634
------------ ------------
Gross Profit 2,175,297 106,669
------------ ------------
Operating Expenses:
Selling and delivery 1,331,382 231,609
General and administrative 1,905,891 2,291,078
------------ ------------
Total Operating Expenses 3,237,273 2,522,687
------------ ------------
Operating loss (1,061,976) (2,416,018)
Interest expense (551,103) (2,013,220)
------------ ------------
Net Loss $ (1,613,079) $ (4,429,238)
============ ============
Net Loss per share, basic and diluted $ (0.10) $ (0.49)
============ ============
Weighted average shares outstanding 15,724,893 8,970,079
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
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<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $(1,613,079) $(4,429,238)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation 273,845 320,836
Amortization 159,498 --
Provision for doubtful accounts (30,712) --
(Increase) Decrease In:
Accounts Receivable (1,320,547) (97,038)
Inventory (381,319) 55,796
Prepaid Expenses 246,949 308,637
Increase (Decrease) In:
Accounts Payable and Accrued Liabilities 8,209 252,364
----------- -----------
Total Adjustments (1,044,077) 840,595
----------- -----------
Net Cash used in Operating Activities (2,657,156) (3,588,643)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (560,280) (148,047)
----------- -----------
Net cash flows (used in) operating activities (560,280) (148,047)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance
of common stock -- 5,800,000
Deferred Financing Costs (270,000) --
Net borrowings on notes payable and debentures 4,696,763 281,143
----------- -----------
Net Cash provided by Financing Activities 4,426,763 6,081,143
----------- -----------
NET INCREASE IN CASH 1,209,327 2,344,453
CASH-beginning of period 1,001,843 956,548
----------- -----------
CASH-end of period $ 2,211,170 $ 3,301,001
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
U.S AUTOMOTIVE MANUFACTURING, INC.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
NOTE 1: BUSINESS OPERATIONS AND ORGANIZATION
U.S. Automotive Manufacturing, Inc. (formerly RT Industries, Inc.), a Delaware
corporation incorporated on January 16, 1992, together with its wholly-owned
subsidiaries Quality Automotive Company and U.S. Automotive Friction, Inc.
(collectively, the "Company") is engaged in the manufacture, assembly and
distribution of new and rebuilt automotive friction products. The Company
maintains manufacturing and warehouse/distribution facilities in Tappahannock,
Virginia and Sanford, Florida (the "Facilities"), which Facilities are either
owned or leased by the Company.
The Company manufactures a full line of friction automotive products, including
brake lining, integrally molded and riveted brake pads and remanufactured brake
shoes. The Company markets various grades of friction lining, asbestos, non
asbestos organic and semi-metallic formulas, suitable for use by the automotive
and light truck after-markets. The Company's products are marketed under the
Brakes Worth Stopping For,(R) Silent Solution,(R) Max Life,(R) Dual
Friction,(TM) Ultra Brake,(TM) Gold Max,(TM) and Quality Automotive(TM)
tradenames and various private label packaging. In 1997, the Company's products
were also sold under the Roinco,(TM) Ultra Brake(TM) and Max Life(TM)
tradenames.
Brake pads, brake shoes or a combination of both are incorporated in all makes
and models of American and imported automobiles. All imported and the majority
of late model domestic automobiles are equipped with integrally molded brake
pads. The Company generally produces the replacement brake under the same
process used to manufacture the vehicle's original equipment.
The Company sells its friction products to other automotive manufacturers and
the automotive after-market. The automotive after-market encompasses the parts
and service sold to the vehicle owners for repair or replacement of original
equipment parts. The Company believes that the market for replacement parts
generally consists of vehicles which are three to twelve years old. Sales of the
Company's products are made to mass merchandisers, automotive distributors,
chain stores and other brake manufacturers. The Company does not market its
products directly to retail customers.
NOTE 2: UNAUDITED INTERIM STATEMENTS
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions to Form 10 - QSB and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated. Operating results
for the six months ended June 30, 1998, are not necessarily indicative of the
results to be expected for the year ending December 31, 1998. These financial
statements and notes should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1997.
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<PAGE>
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
130, "Reporting Comprehensive Income," on January 1, 1998. For the second
quarter of 1998 and 1997, total comprehensive loss equalled the net loss.
NOTE 4: MERGER WITH QUALITY AUTOMOTIVE COMPANY
On August 29, 1997, Quality Automotive Company was merged (the "Merger") into a
wholly owned subsidiary of the Company, which subsidiary, as the surviving
entity, changed its name to "Quality Automotive Company" ("Quality") following
the Merger and currently conducts business under such name.
The unaudited pro forma information for the three and six months ended June 30,
1997, set forth below gives effect to the Merger as if it had occurred on
January 1, 1997. The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the Merger been consummated on
January 1, 1997, nor are they indicative of future results of operations.
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------------ ----------------
Net Sales $4,462,179 $8,119,984
Net Loss (3,126,168) (5,121,865)
Net loss per share (basic and diluted) (0.29) (0.47)
NOTE 5: INVENTORY
Major inventory components as of June 30, 1998 were as follows:
Raw materials $ 4,287,615
Work in Progress 101,598
Finished goods 4,731,134
-----------
$ 9,120,347
===========
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<PAGE>
NOTE 6: DEBT
1. The Company entered into a revolving credit facility (the "USAM
Revolving Loan") on March 31, 1998, pursuant to which up to $2.0 million was
made available to the Company. At June 30, 1998, an aggregate of $1.05 million
had been advanced to the Company under the USAM Revolving Loan. Advances made
pursuant to the USAM Revolving Loan bear interest at the rate of 11% per annum
and are to be repaid by the Company, together with accrued interest thereon, at
the expiration of 2 years, unless earlier prepaid, at the option of the Company.
The USAM Revolving Loan is secured by a general security interest in the assets
of the Company as well as a first security interest in and to the Company's
Florida production facility. Under the terms of the USAM Revolving Loan, the
Company (i) granted five year warrants to purchase up to 105,000 shares of the
Company's Common Stock, exercisable after March 31, 1999 and (ii) agreed to
grant additional warrants to purchase up to an aggregate of 315,000 additional
shares of the Company's Common Stock, as follows: (x) in the event that funds
advanced under the USAM Revolving Loan are outstanding at September 30, 1998, to
grant to the lender additional five year warrants on such date to purchase up to
an additional 105,000 shares of the Company's Common Stock, exercisable after
March 31, 1999 and (y) in the event that funds advanced under the USAM Revolving
Loan remain outstanding, commencing March 31, 1999 and continuing at each three
(3) month anniversary thereafter until December 31, 1999, to grant to the lender
at each such three month anniversary an additional five year warrant for the
purchase of 52,500 shares of the Company's Common Stock, exercisable at the time
of such granting. Prepayment by the Company will result in a reduction of the
total aggregate warrants to be granted by the Company. Such warrants shall be
exercisable at an exercise price equal to eighty percent (80%) of the average
closing sales price for the Common Stock for the twenty (20) trading days
preceding March 31, 1999 or the granting date, whichever is later. The Company
has also agreed to grant to the lender or its assigns "piggyback" registration
rights with respect to the shares underlying such warrants.
2. The Company obtained additional financing during the second quarter of
1998 through the sale, on June 30, 1998, of 8% Redeemable Convertible Debentures
(each a "Debenture"), in the aggregate principal amount of $2,250,000, in
accordance with, and in reliance upon the exemption from registration afforded
by, Regulation S ("Regulation S") promulgated under the Securities Act of 1933,
as amended (the "Act"). By the terms of the offering of the Debentures, the
Company incurred a placement agent fee of $270,000 and a conversion discount of
$450,000, which amounts will be expensed over the two and one-half year term of
the Debentures or upon conversion of the debt to equity, whichever occurs
earlier. The Debentures represent unsecured obligations of the Company and must
be converted into shares (the "Conversion Shares") of the Company's Common Stock
at the maturity date (December 31, 2000) unless they have been converted
earlier, at the option of the holder. The conversion price of the Debentures
will be equal to 80% of the average closing bid price of the shares of Common
Stock as quoted on the Nasdaq SmallCap Market for the five (5) trading days
immediately preceding the date of conversion. Notwithstanding the foregoing, the
Company is not obligated to issue more than 3,144,900 Conversion Shares (the
"Maximum Conversion Share Allotment"). The Company has also agreed, at its
expense, to (x) file with the Securities and Exchange Commission ("SEC") on or
before August 29, 1998, a registration statement covering the issuance by the
Company of the Conversion Shares and (y) use its reasonable best efforts to
cause such registration statement to be declared effective under the Act as soon
as possible thereafter.
The Debentures bear interest at 8% per annum (subject to increase under
certain circumstances), payable upon conversion or redemption of the Debentures,
in cash or shares of Common Stock, at the option of the Company. The interest
rate will increase to 20% per annum for the period commencing January 1, 1999 in
the event that the underlying Conversion Shares are not covered by a
registration statement filed with the SEC. At such time as the underlying shares
are tradable, without regard to conversion, the rate shall revert to the 8% per
annum. Further, if upon conversion of the Debentures the Company would otherwise
issue shares of Common Stock in excess of the Maximum Conversion Share
Allotment, the interest rate on the Debentures will, effective as of the
issuance of the Maximum Conversion Share Allotment, increase to 25% per annum
with respect to the unconverted Debentures. The Company has agreed that if it
has not either retired the remaining Debentures with accrued but unpaid interest
within ten (10) days of the issuance of the Maximum Conversion Share Allotment
or issued a proxy statement soliciting stockholder authorization to issue
additional shares in lieu of such cash redemption of the remaining Debentures,
the Company would pay a penalty equal to the difference between the interest
rate paid since inception and 25% on those Debentures which remain outstanding
after the issuance of the Maximum Share Allotment. Such penalty shall not be
applicable if the Company issues such proxy as contemplated.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the Company's recent losses; the Company's need to obtain additional
financing and the ability to obtain such financing; outstanding indebtedness;
the ability to hire and retain key personnel; successful completion and
integration of prior and any future acquisitions; relationships with and
dependence on third-party equipment manufacturers and suppliers; uncertainties
relating to business and economic conditions in markets in which the Company
operates; uncertainties relating to government and regulatory policies and other
political risks; uncertainties relating to customer plans and commitments; cost
of and availability of component materials and inventories; effect of
governmental export and import policies; the highly competitive environment in
which the Company operates; potential entry of new, well-capitalized competitors
into the Company's markets; and the uncertainty regarding the Company's
continued ability, through sales growth, to absorb the increasing costs incurred
and expected to be incurred in connection with its business activities. The
words "believe", "expect", "anticipate", "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
General
The Company believes it made significant progress in the quarter ended June
30, 1998 toward its goal of achieving profitability. As discussed in greater
detail below, Revenues increased 600% over the comparable quarter ended June 30,
1997 and over 70% when compared to the 1998 first quarter. To keep up with the
increased demand for its products, the Company has purchased additional
machinery and equipment and hired additional personnel in the quarter ended June
30, 1998. At March 31, 1998, the Company had 249 full time and temporary
employees. At June 30, 1998, the total was 287 people employed. In the Company's
report for the first quarter of 1998, it was noted that significant overtime
would be needed during the quarter to match production with sales. During the
second quarter 1998, the Company spent in excess of $365,000 in overtime pay.
The Company continues to spend overtime pay while it hires and trains new
employees in an effort to reduce such overtime costs. As at August 1, 1998, the
Company employed 345 full time and temporary employees. It is estimated that an
additional 50 full-time employees will be needed to meet production demands. The
Company believes that the cost of hiring and training additional employees
should be significantly less then the overtime pay currently being spent.
Notwithstanding, during the second quarter of 1998, gross profit increased close
to ten-fold from the comparable quarter of 1997 and was almost double the gross
profit of the first quarter of 1998. During the second quarter of 1998, the
Company in consultation with its accountants adjusted overhead allocations
across currently anticipated production. The loss for such period includes a
$179,807 write down of inventory to adjust to the new standard. Net loss for the
second quarter of 1998 was 23% of the comparable second quarter loss in 1997,
and about 65% of the loss in the first quarter of 1998. To insure sufficient
cash resources, the Company also raised over $2 million in a convertible debt
offering during the second quarter 1998.
While the progress made in Revenues, Gross Profit and Net Loss from the
first quarter to the second quarter of 1998 is indicative of the progress made
during such periods, the comparisons do little to approach the progress made
over the three months included within the second quarter of 1998. Sales for the
month ended June 30, 1998, multiplied by twelve (12) monthly periods, would give
rise to annual sales of approximately $26.5 million. While any given month
within a quarterly period gives rise to the use of estimates which may or may
not be true taken in isolation to the quarter, management believes that the
second quarter of 1998 ended with financial results approaching break-even.
Results of Operations
Comparison of Three Months Ended June 30, 1998 to Three Months Ended June 30,
1997
Net Sales. Net sales for the three months ended June 30, 1998 were
$5,937,296 as compared to net sales of $834,457 for the three months ended June
30, 1997. The increase of $5,102,839 or 612% was from additional sales
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<PAGE>
due to the Merger with Quality during the third quarter of 1997 ($3.6 million)
plus a significant gain (33%) in the Company's base business.
Gross Profit. For the three months ended June 30, 1998, the Company had a
gross profit of $1,408,751 as compared to the gross profit of $148,584 for the
three months ended June 30, 1997. The increase in gross profit (850%) is the
result of the increase in sales offset by a smaller increase in the overall cost
of sales, attributable to the economies of scale resulting from the increase in
Company sales.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the three months ended June 30, 1998 were $1,744,444
as compared to $1,832,286 for the three months ended June 30, 1997, representing
a decrease of 4.8%. As a percentage of net sales, selling, general and
administrative expenses decreased from 219% to 29%.
Interest Expense. Interest expense decreased by $807,317 from $1,110,463 in
the second quarter of 1997 to $303,146 in the second quarter of 1998. This
decrease was attributable to a decrease in the principal amount of convertible
debentures outstanding in 1998 offset by the increase in borrowings under the
Company's borrowing facilities which was attributable to increased sales.
Net Loss. The net loss in the second quarter of 1998 was ($638,839) or
($.04) per share based on 15,724,893 weighted average common and common
equivalent shares outstanding compared to a net loss of ($2,794,165) or ($.31)
per share in the second quarter of 1997 based on 9,042,020 common and common
equivalent shares outstanding. The decrease in net loss of $2,155,326 was
primarily the result of economies of scale and the decrease of interest expense.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
Net Sales. Net sales for the six months ended June 30, 1998 were $9,357,169
as compared to net sales of $1,495,303 for the six months ended June 30, 1997.
The increase of $7,861,866 or 525% was from additional sales due to the Merger
with Quality during the third quarter of 1997 ($8,119,984) plus an overall gain
of 15.2% in the Company's base business.
Gross Profit. For the six months ended June 30, 1998, the Company had a
gross profit of $2,175,297 as compared to a gross profit of $106,669 for the six
months ended June 30, 1997. The increase in gross profit (1939%) resulted from
economies of scale realized as a result of the Merger and the increase in sales.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the six months ended June 30, 1998 were $3,237,273
as compared to $2,522,687 for the six months ended June 30, 1997, representing
an increase of $714,586 (28%) due to increased sales. As a percentage of net
sales, selling, general and administrative expenses decreased from 168% to
34.6%.
Interest Expense. Interest expense decreased by $1,462,117 from $2,013,220
in the six months ended June 30, 1997 to $551,103 in the six months ended June
30, 1998. The decrease is attributable to a decrease in the principal amount of
convertible debentures outstanding in 1998 offset by increased borrowings under
the Company's credit facilities resulting from the increase in sales.
Net Income (Loss). The net loss in the first six months of 1998 was
($1,613,079) or ($0.10) per share based on 15,724,893 weighted average common
and common equivalent shares outstanding compared to a net loss of ($4,429,238)
or ($0.49) per share in the six months ended June 30, 1997 based on 8,970,079
common and common equivalent shares outstanding. The decrease in net loss of
$2,816,159 was primarily the result of the economies of scale of the increased
business and the decrease in interest expense.
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<PAGE>
Liquidity and Capital Resources
During the six months ended June 30, 1998, the Company financed its
operations primarily through net proceeds from the Company's private sales of
equity and debt securities, borrowings under its lending facilities and cash
generated by operations.
At June 30, 1998, the Company had consolidated cash and short-term
investments totalling $2,211,170 and working capital of $3,371,957. At June 30,
1997, the Company had consolidated cash and short-term investments totalling
$3,301,003 and working capital of $3,068,444. This decrease in working capital
was due primarily to the Merger.
Net cash provided by financing activities for six months ended June 30,
1998 was $4,426,753, consisting primarily of advances to the Company under the
USAM Revolving Loan (as defined below) and the proceeds of a private placement
of convertible debt securities in the gross amount of $2,250,000. Proceeds from
such offerings were used to fund on-going operations and to replace cash
depleted through losses by the Company.
Prior to April 1997, the Company had a $7.5 million secured line of credit
with Congress Financial Corporation. Such line of credit matured in April 1997,
at which time the Company did not renew the credit line.
After the Merger, a principal source of capital for the Company's
operations has been the line of credit (the "Credit Facility") between Quality
and LaSalle Business Credit, Inc. ("LaSalle"), which Credit Facility was renewed
for a one year period commencing April 1, 1998. The term of such Credit Facility
will, unless terminated by either party upon written notice sixty (60) days
prior to the expiration of such one (1) year renewal period (or successive one
(1) year periods thereafter, if applicable), automatically be renewed for
successive one (1) year periods thereafter. The Company was and continues to be
in noncompliance with certain financial covenants under the Credit Facility as
at the date of renewal, at June 30, 1998 and at August 14, 1998.
The Credit Facility consists of the following components:
(i) a secured revolving credit facility of up to $7.5 million. Advances
are made by formula on the Company's accounts receivable and
inventory. At June 30, 1998, the revolving credit had approximately
$6.038 million of a possible $6.817 million outstanding. Interest is
calculated at the prime rate plus 1% (9.5% at June 30, 1998)
(ii) a secured loan covering machinery equipment, property and plant having
an original loan amount of approximately $3.5 million of which
$600,000 was outstanding at June 30, 1998. Monthly installments of
$50,000 are due until maturity, at which time any balance owing is
due. Interest is calculated at the prime are plus 1% (9.5% at June 30,
1998)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility of 1995. The original amount
outstanding was approximately $1 million. At June 30, 1998, the
balance outstanding was approximately $455,000. The loan calls for
monthly payments of $31,000 with any balance being due at the maturity
date. Interest is calculated at the prime rate plus 1% (9.5% at June
30, 1998).
Quality's obligation to pay the principal of, interest on, premium, if any,
and all other amounts payable on account of the Credit Facility is secured by
substantially all of the assets of Quality as well as the pledge of all of the
Company's ownership interest in Quality.
Quality has requested that LaSalle amend the existing documentation to
remove any technical defaults and grant a new $2.0 million capital expenditure
finance facility (carrying an 85% advance rate against new
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<PAGE>
equipment purchased (acquired after June 1997), with interest and maturity date
consistent with other fixed asset financing, except that there will be no
amortization of principal during the first 12 months of the facility). LaSalle
has advised the Company of its willingness to grant such request subject to
satisfactory documentation. Lasalle has requested certain up-dated financial
information; which the Company will provide in the near future. Although there
can be no assurance, the Company believes that such arrangement will be
finalized during the third quarter of 1998. Until such technical defaults are
amended, the maturity date of the existing credit agreements may be able to be
accelerated by LaSalle. Management believes that should it become necessary or
advisable to change its borrowing arrangements there are a number of financial
institutions willing to provide necessary financing to the Company. No such
change is contemplated or expected.
The Company also entered into a revolving credit facility on March 31,
1998, pursuant to which up to $2.0 million was made available to the Company
(the "USAM Revolving Loan"). At June 30, 1998, an aggregate of up to $1.05
million had been advanced to the Company under the USAM Revolving Loan. Advances
pursuant to the USAM Revolving Loan bear interest at the rate of 11% per annum
and are to be repaid by the Company, together with accrued interest thereon, at
the expiration of 2 years, unless earlier prepaid, at the option of the Company.
The USAM Revolving Loan is secured by a general security interest in the assets
of the Company as well as a first security interest in and to the Company's
Florida production facility. Under the terms of the USAM Revolving Loan, the
Company (i) granted five year warrants to purchase up to 105,000 shares of the
Company's Common Stock, exercisable after March 31, 1999 and (ii) agreed to
grant additional warrants to purchase up to an aggregate of 315,000 additional
shares of the Company's Common Stock, as follows: (x) in the event that funds
advanced under the USAM Revolving Loan are outstanding at September 30, 1998, to
grant to the lender additional five year warrants on such date to purchase up to
an additional 105,000 shares of the Company's Common Stock, exercisable after
March 31, 1999 and (y) in the event that funds advanced under the USAM Revolving
Loan remain outstanding, commencing March 31, 1999 and continuing at each three
(3) month anniversary thereafter until December 31, 1999, to grant to the lender
at each such three month anniversary an additional five year warrants for the
purchase of 52,500 shares of the Company's Common Stock, exercisable at the time
of such granting. Prepayment by the Company will result in a reduction of the
total aggregate warrants to be granted by the Company. Such warrants shall be
exercisable at an exercise price equal to eighty percent (80%) of the average
closing sales price for the Common Stock for the twenty (20) trading days
preceding March 31, 1999 or the granting date, whichever is later. The Company
has also agreed to grant to the lender or its assigns "piggyback" registration
rights with respect to the shares underlying such warrants.
In addition to the Credit Facility and the USAM Revolving Loan, the Company
obtained additional financing during the second quarter of 1998 through the
sale, on June 30, 1998, of 8% Redeemable Convertible Debentures (each a
"Debenture"), in the aggregate principal amount of $2,250,000, in accordance
with, and in reliance upon the exemption from registration afforded by,
Regulation S ("Regulation S") promulgated under the Securities Act of 1933, as
amended (the "Act"). The Debentures represent unsecured obligations of the
Company and must be converted into shares (the "Conversion Shares") of the
Company's Common Stock at maturity date (December 31, 2000) unless they have
been converted earlier, at the option of the holder. The conversion price of the
Debentures will be equal to 80% of the average closing bid price of the shares
of Common Stock as quoted on the Nasdaq SmallCap Market for the five (5) trading
days immediately preceding the date of conversion. Notwithstanding the
foregoing, the Company is not obligated to issue more than 3,144,900 Conversion
Shares (the "Maximum Conversion Share Allotment"). The Company has also agreed,
at its expense, to (x) file with the Securities and Exchange Commission ("SEC")
on or before August 29, 1998, a registration statement covering the issuance by
the Company of the Conversion Shares and (y) use its reasonable best efforts to
cause such registration statement to be declared effective under the Act as soon
as possible thereafter.
The Debentures bear interest at 8% per annum (subject to increase under
certain circumstances), payable upon conversion or redemption of the Debentures,
in cash or shares of Common Stock, at the option of the Company. The interest
rate will increase to 20% per annum for the period commencing January 1, 1999 in
the event that the underlying Conversion Shares are not covered by a
registration statement filed with the SEC. At such time as the underlying shares
are tradable, without regard to conversion, the rate shall revert to the 8% per
annum. Further, if upon conversion of the Debentures the
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<PAGE>
Company would otherwise issue shares of Common Stock in excess of the Maximum
Conversion Share Allotment, the interest rate on the Debentures will, effective
as of the issuance of the Maximum Conversion Share Allotment, increase to 25%
per annum with respect to the unconverted Debentures. The Company has agreed
that if it has not either retired the remaining Debentures with accrued but
unpaid interest within ten (10) days of the issuance of the Maximum Conversion
Share Allotment or issued a proxy statement soliciting stockholder authorization
to issue additional shares in lieu of such cash redemption of the remaining
Debentures, the Company would pay a penalty equal to the difference between the
interest rate paid since inception and 25% on those Debentures which remain
outstanding after the issuance of the Maximum Share Allotment. Such penalty
shall not be applicable if the Company issues such proxy as contemplated.
Impact of the Year 2000
In 1997, as part of a general improvement to Company reporting, a new
manufacturing and financial software package was purchased form a recognized
leader in its field. As part of that general upgrade, the Company moved from a
IBM 36 advanced to an IBM AS400. The new system, which fully contemplates the
computer related problems with the new millennium, is in the final stages of
testing in the Tappahannock, Virginia facility. The Company's new system
accommodates remote locations and the Sanford, Florida facility is expected to
be placed on-line later this year.
The Company, in assessing the readiness of third party suppliers and customers,
has concentrated on alternative back-up procedures to minimize or eliminate any
adverse effect on the Company's business in the event customers or suppliers
systems have a Year 2000 problem. As at June 30, 1998, the Company believes it
has set sufficient back-up systems in place to insulate its business from a Year
2000 problem. While the Company has a substantial investment in the new computer
and software, such costs were incurred as part of a general system upgrade and
not in response to a potential Year 2000 problem. The Company estimates that
costs incurred in investigating and correcting any potential Year 2000 problem
have been and will be immaterial.
-14-
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1998, the Company sold Debentures to Non-U.S. Persons (as
defined in Regulation S) pursuant to the exemption from the registration
requirements under the Act afforded by Regulation S. Net proceeds to the Company
from the Offering were approximately $1,980,000. By the terms of the offering of
the Debentures, the Company incurred a placement agent fee of $270,000 and a
conversion discount of $450,000, which amounts will be expensed over the two and
one-half year term of the Debentures or upon conversion of the debt to equity,
whichever occurs earlier.
The Debentures represent unsecured obligations of the Company and are
convertible into shares (the "Conversion Shares") of the Company's Common Stock
at the date of maturity (December 31, 2000) unless they have been converted
earlier, at the option of the holder. The conversion price of the Debentures
will be equal to 80% of the average closing bid price of the shares of Common
Stock as quoted on the Nasdaq SmallCap Market for the five (5) trading days
immediately preceding the date of conversion. Notwithstanding the foregoing, the
Company is not obligated to issue more than 3,144,900 Conversion Shares (the
"Maximum Conversion Share Allotment") upon the conversion of the Debentures.
The Company may redeem the Debentures at any time, upon 30 days prior
written notice as to redemptions made, or upon three days notice for redemption
pursuant to (iii) hereof (a "Redemption Notice"), at a redemption price equal to
(i) 110% of the principal amount of, plus accrued interest on, the Debentures,
prior to August 29, 1998; (ii) 125% of the principal amount of, plus accrued
interest on, the Debentures, commencing on August 30, 1998; or (iii) 100% of the
principal amount of, plus accrued interest on, the Debentures in the event that
the Company shall have issued the Maximum Conversion Share Allotment.
In addition, if the Company redeems the Debentures any time after the
Company has issued the Maximum Conversion Share Allotment, the Company has also
agreed to issue to the holders of the Debentures to be redeemed a number of
warrants (the "Redemption Warrants") equal to one-half of the principal amount
of Debentures to be redeemed. If issued, the Redemption Warrants will be
exercisable for a period of five years from the date of issuance at an exercise
price equal to either (i) the greater of (A) $1.00 per share; (B) 115% of the
average of the closing bid price of the Common Stock for the five trading days
immediately preceding the Redemption Date or (ii) in the event that an exercise
price under alternative (i) is determined by Nasdaq to be an issuance below the
then current market price within the meaning of NASD Rule 4310(c)(25)(H) (or any
successor rule), the exercise price will be equal to the closing bid price of
the Common Stock on June 30, 1998 and the number of Warrant Shares issuable will
be subject to adjustment as provided in the Redemption Warrant.
If issued, the Redemption Warrants will be redeemable by the Company upon
notice of not less than 30 days, at a price of $.05 per Redemption Warrant but
only to the extent that the shares of Common Stock underlying the Redemption
Warrants are transferable either pursuant to an effective registration statement
or pursuant to Rule 144 of the Act and the closing bid price of the Common Stock
on all 15 trading days ending on the day on which the Company gives notice has
been at least 150% of the then effective exercise price of the Redemption
Warrants. The Redemption Warrants will be exercisable either on a cash or
"cashless" basis and the holders will have certain registration rights with
respect to the shares of Common Stock issuable upon exercise of the Redemption
Warrants.
The Company has also agreed, at its expense, to (x) file with the SEC on or
before August 29, 1998, a registration statement covering the issuance by the
Company of the Conversion Shares and (y) use its reasonable best efforts to
cause such registration statement to be declared effective under the Act as soon
as possible thereafter. The Company has also granted certain registration rights
with respect to the Redemption Warrants.
On July 8, 1998, the Company issued non-qualified stock options with the
directors and certain key employees of the Company under its 1998 Stock Option
Plan (the "1998 Plan"), pursuant to which such directors and
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<PAGE>
employees received options to purchase up to an aggregate of 625,000 shares of
the Company's Common Stock, at an option price of $.96875. Such options shall
vest and be exercisable in equal annual installments over a five year period
with respect to the directors' options and over a four year period with respect
to options held by the key employees and then, only to the extent that such
holder is still employed by the Company as of the date of such vesting and
otherwise still eligible under the terms of the 1998 Plan. Such options become
exercisable at various dates and expire at the end of not more than 5 years from
the date of the grant or within sixty days of termination of employment with the
Company, which ever is earlier. For purposes of such options, the Company shall
at all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, the full number of shares of Common Stock
issuable upon the exercise of the options. The Company is authorized to issue up
to 1,000,000 options under the 1998 Plan.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 30, 1998, the Company held an Annual Meeting of stockholders at
which the following items were voted on by the common stockholders of the
Company: (i) the election of directors, (ii) the authorization of the Company's
1998 Stock Option Plan and (iii) the authorization of an amendment to the
Company's Certificate of Incorporation providing for the issuance of a class of
preferred stock (for which a final vote was adjourned to July 20, 1998).
1. Messrs. Martin Chevalier, John W. Kohut, David Love and Mandel Sherman
were elected to serve as members of the Company's Board of Directors for the
ensuing year and until the election and qualification of their successors. The
votes cast by stockholders were as follows:
Votes Cast Votes
Director "For" Withheld
-------- ----- --------
Martin Chevalier 13,280,371
John W. Kohut 13,277,371 3,000
David Love 13,280,371
Mandel Sherman 13,256,871 23,500
2. The approval of the 1998 Stock Option Plan was approved by the following
vote of the stockholders:
Votes Cast Votes Cast
"For" "Against" Abstentions Broker Non-Votes
----- --------- ----------- ----------------
2,492,210 797,250 76,740 8,336,938
3. The proposal to amend the Certificate of Incorporation of the Company to
authorize the issuance of a class of Preferred Stock was not approved for
failure to obtain the requisite vote of the voting stockholders. The votes cast
by stockholders were as follows:
Votes Cast Votes Cast
"For" "Against" Abstentions Broker Non-Votes
----- --------- ----------- ----------------
4,278,173 871,610 68,920 8,336,938
-16-
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
No Form 8-K's were filed during the quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 1998
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ JOHN W. KOHUT
-------------------
John W. Kohut,
Chairman of the Board
and Principal Financial Officer
(duly authorize officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-QSB AT JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,211,170
<SECURITIES> 0
<RECEIVABLES> 4,257,414
<ALLOWANCES> 105,400
<INVENTORY> 9,120,347
<CURRENT-ASSETS> 15,662,363
<PP&E> 11,629,691
<DEPRECIATION> 1,086,700
<TOTAL-ASSETS> 32,589,521
<CURRENT-LIABILITIES> 12,290,406
<BONDS> 0
<COMMON> 15,725
0
0
<OTHER-SE> 13,056,287
<TOTAL-LIABILITY-AND-EQUITY> 32,589,521
<SALES> 9,357,169
<TOTAL-REVENUES> 9,357,169
<CGS> 7,181,872
<TOTAL-COSTS> 7,181,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 551,103
<INCOME-PRETAX> (1,613,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,613,079)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
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