U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - --------------------------------------------------------------------------------
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 September 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 November 13, 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 September 30, 1998
(unaudited) and December 31, 1997..............................3
Consolidated Statements of Operations (unaudited) for the
three months and nine months ended September 30, 1998
and September 30, 1997........................................4
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended September 30, 1998
and September 30, 1997........................................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................8
PART II. OTHER INFORMATION...................................................14
Item 1. Legal Proceedings................................................14
Item 2. Changes in Securities and Use of Proceeds .......................14
Item 4. Submission of Matters to a Vote of Security Holders..............14
Item 6. Exhibits and Reports on Form 8-K.................................14
SIGNATURES....................................................................15
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998
(Unaudited) December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 743,076 $ 1,001,843
Accounts receivable (net of allowance for doubtful accounts
of $91,000 and $136,000, respectively) 5,292,080 2,800,755
Inventories 10,924,456 8,739,028
Prepaid expenses and other 147,101 425,781
------------ ------------
Total Current Assets 17,106,713 12,967,407
Property, plant and equipment (net of accumulated depreciation of
$1,531,000 and $812,900, respectively) 10,905,525 10,256,556
Deferred financing costs 243,000 --
Goodwill, net 6,034,418 6,273,665
------------ ------------
TOTAL ASSETS $ 34,289,656 $ 29,497,628
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 7,030,396 $ 4,815,211
Current portion of long term debt 1,355,755 1,688,942
Accounts payable 4,471,058 2,735,688
Accrued liabilities 699,644 830,282
------------ ------------
Total Current Liabilities 13,556,864 10,070,123
Long-term debt, less current maturities 181,386 242,414
Redeemable convertible debentures 2,250,000 --
Line of credit, long term portion 1,050,000 --
Notes payable to shareholders 4,890,000 4,500,000
------------ ------------
Total Liabilities 21,928,250 14,812,537
Stockholders' equity:
Issued and outstanding capital stock, $.001 par value 15,725 15,725
Additional paid-in capital 38,885,545 38,885,545
Accumulated deficit (26,539,864) (24,216,179)
------------ ------------
Total Stockholders' Equity 12,361,406 14,685,091
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,289,656 $ 29,497,628
============ ============
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 5,590,661 $ 1,850,076 $ 14,947,830 $ 3,345,379
Cost of Goods Sold 4,031,877 1,591,819 11,213,749 2,980,454
------------ ------------ ------------ ------------
Gross Profit 1,558,784 258,257 3,734,081 364,925
------------ ------------ ------------ ------------
Operating Expenses:
Selling and delivery 771,627 287,170 2,103,009 518,751
General and administrative 1,077,953 5,653,841 2,983,844 7,898,347
------------ ------------ ------------ ------------
Total Operating Expenses 1,849,580 5,941,011 5,086,853 8,417,098
------------ ------------ ------------ ------------
Operating Loss (290,796) (5,682,754) (1,352,772) (8,052,173)
Interest Expense (419,810) (1,675,097) (970,913) (3,688,317)
------------ ------------ ------------ ------------
Net Loss $ (710,606) $ (7,357,851) $ (2,323,685) $(11,740,490)
============ ============ ============ ============
Net Loss per share, basic and diluted $ (.05) $ (0.66) $ (0.15) $ (1.06)
============ ============ ============ ============
Weighted average shares outstanding 15,724,893 11,086,610 15,724,893 11,086,610
============ ============ ============ ============
</TABLE>
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>
Nine Months Ended September 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (2,323,685) $(11,740,490)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 718,141 477,448
Amortization 266,247 26,583
Provision for doubtful accounts (44,938) 412,035
Provision for inventory valuation (720,519) 1,345,776
Provision for property, plant and equipment valuation -- 1,483,629
Convertible debentures interest expense -- 3,500,000
(Increase) decrease in:
Accounts Receivable (2,446,387) 581,219
Inventory (1,464,909) 320,544
Prepaid Expenses 278,680 102,369
Increase in:
Accounts Payable and Accrued Liabilities 1,604,732 63,634
----------- -----------
Total Adjustments (1,808,953) 8,313,237
----------- -----------
Net cash used in operating activities (4,132,638) (3,427,253)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of QAC -- (2,893,543)
Capital expenditures (1,367,110) (411,904)
----------- -----------
Net cash used in investing activities (1,367,110) (3,305,447)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Deferred financing costs (270,000) --
Proceeds from convertible debentures 2,250,000 10,500,000
Net (repayments) borrowings on notes payable 3,260,981 (2,058,879)
----------- -----------
Net cash provided by financing activities 5,240,981 8,441,121
----------- -----------
NET INCREASE (DECREASE) IN CASH (258,767) 1,708,421
Cash, beginning of period 1,001,843 956,548
----------- -----------
Cash, end of period $ 743,076 $ 2,664,969
=========== ===========
</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
September 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 nine months ended September 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 third 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 nine months ended
September 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net Sales $ 3,792,826 $ 11,912,810
Net Loss (7,781,978) (12,903,843)
Net Loss per share (basic and diluted) $ (0.61) $ (1.01)
</TABLE>
NOTE 5: INVENTORY
Major inventory components as of September 30, 1998 and December 31, 1997
were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 4,584,343 $ 4,053,517
Work in Progress 188,267 176,519
Finished goods 6,151,846 4,508,992
----------- -----------
$10,924,456 $ 8,739,028
=========== ===========
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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
During the quarter ended September 30, 1998, the Company continued to make
progress toward its goal of achieving profitability. Since its Merger in the
third quarter of 1997, management's immediate goal has been to materially
increase revenues while realigning the Company's customer base toward larger
volume purchasers. During 1997, no single customer accounted for more than 10%
of the Company's business. For 1998, the Company expects to report a sales
increase of approximately 200% on a reported basis (approximately 33% on a
pro-forma basis), with at least two customers providing more than 10% of sales.
Consistent with such expectations, revenues for the quarter ended September 30,
1998 were up over 200% from the comparable quarter ended September 30, 1997.
Over the last ten years, the average seasonal difference between third and
second quarter revenue at Quality Automotive Company ("Quality") was a decrease
of 15%. For the comparable quarters during 1998 the decrease was only 6%, which
was due to continued revenue growth within the third quarter. The Company
continues to secure significant additional business. The Company has recently
been informed that, beginning in 1999, its existing supply relationship with a
major customer will be expanded as a result of acquisitions recently concluded
by such customer. The Company has also recently bid on additional significant
national business. Based on business relationships currently in place, the
Company anticipates annualized 1999 revenues will exceed 1998 revenues by
approximately 50%. Management's goal to increase revenues specifically with
larger volume customers is rooted in its projections of its economies of scale
of production. It is the intention of management to continue to broaden the
Company's business base over time with large volume purchasers to reduce
dependence on any one customer or group of customers while enjoying such
economies of scale.
Material growth has not been attained without short-term disruptions. As
previously noted, the explosive volume increase has necessitated the purchase of
new machinery and equipment and the hiring and training of significant number of
new employees, resulting in significant increases in operating expenses. The
ramp-up of production has come at a high front end cost.
At March 31, 1998 the Company employed 249 full-time and temporary
employees. At June 30th the comparable number was 287. At August 1st the number
increased to 345 and at September 30, 1998 the Company employed 371 full-time
and temporary employees (a 49% increase in staff versus an increase of 63% in
quarterly revenues). During the third quarter the Company's total payroll
increased by approximately $435,000, inclusive of overtime pay of approximately
$400,000. As training is completed and staff becomes more seasoned, it is
expected that overtime will decrease significantly.
-8-
<PAGE>
Another item adversely effecting profitability for the third quarter of
1998 was the roll out of three new specialty programs for one of our new
customers. Specialty programs by their nature preclude the use of
"off-the-shelf" product, in favor of a "produced-to-order product". With over
2000 SKU's produced by the Company, production efficiencies can only be realized
by longer runs produced to inventory. Any start-up specialty program extracts a
heavy up front cost and management only authorizes such programs where it
believes that the long term benefit of the client relationship far exceeds the
short term costs. Moreover, management further believes that the short term
inefficiencies of these programs are substantially behind the Company.
Lastly, overall production at the Company's Florida plant remains behind
scheduled targets. The Company has assigned one of its key personnel to the
Florida plant to assist regional management to obtain satisfactory levels of
production and efficiency. It is expected that such task will be accomplished by
year-end.
The Company's efforts to maintain high customer satisfaction while
controlling costs have been impeded by the on-going transition to a new computer
system at Quality Automotive ("Quality"). In late 1996, Quality signed a
contract to convert its computer system to a new manufacturing and financial
software system available from a recognized leader in its field. At that time a
consulting firm recommended by the software firm was retained to assist in the
transition to the new system. In February 1998, the new system went on-line.
Since that time, however, the Company has been plagued with systems problems.
The Company took full inventory counts on March 31, 1998 and June 30, 1998. As a
result of reporting problems, management has implemented a program whereby a
full physical inventory has been taken every other month - with a partial
inventory being taken on off months. Aside from the internal costs involved with
dealing with these problems, the Company, to date has paid over $500,000 for
consulting services. The lack of timely accurate reporting has inhibited
management's ability to contain the Company's costs.
The computer reporting problems have also resulted in untimely reports to
the Company's lender. The lender has been advised that the Company has embarked
on a program with the software company and the consultants to resolve such
problems by year end. The Lender has been supportive of the Company's continuing
efforts to resolve these problems. Although management is dedicated to the
resolution of these problems, there can be no assurance that the computer
problems will be resolved within such time frame.
During the quarter ended September 30, 1998, the Company's two principal
market makers ceased doing business. This has resulted in the Company's stock
price falling to levels severely below book value. At such levels, management
does not believe that the Company can raise funds on an equity basis upon terms
that are reasonable and not significantly below market prices.
Although the Company believes it is well-positioned from a sales standpoint
to continue to materially increase its business, the Company is short on capital
at this time. In addition, the Company's inability to raise equity based funding
upon reasonable terms, together with its computer related problems, have
severely limited the Company's near-term possibilities for obtaining additional
capital. The Company continues to explore all means of raising additional
capital, including the issuance of additional debt and equity instruments.
Recently, the Company has had discussions with its lender about entering into a
new revolving credit and term loan agreement, drawing upon substantial
unencumbered capital assets held by the Company as an additional lending base.
In the interim, the lender has granted a temporary increase in Quality's
existing revolving credit up to a maximum of $8 million. While management is
confident that the Company can meet these challenges in the short term, there
can however be no assurance that the Company can obtain additional funding.
Lastly, because the Company's stock has remained below the $1.00 per share
listing criteria, The NASDAQ Stock Market has notified the Company that if its
stock does not trade above $1.00 per share for a period of at least 10 trading
days during any 10-day period ending November 26, 1998, the Company's securities
will be subject to delisting. Prior to such date, the Company may request a
hearing which, if granted, could delay any potential decision to delist until at
least the date of such hearing. Because management believes that the Company
cannot, in the time allotted, interest one or more securities firms in making a
professional market
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<PAGE>
in the Company's securities, management is currently considering soliciting
shareholder approval for an anticipated 15:1 reverse split of its common stock
in an effort to satisfy Nasdaq's minimum stock price component. Approval of such
an action would substantially reduce outstanding shares and increase the per
share price to a level which should allow for continued listing. No assurance
can be given, however, that such action will be taken by the board; or if taken,
that the shareholders will approve such action. Further, should the Board
recommend such action and the requisite shareholder approval is received, no
assurance can be given that the shares shall continue to trade above NASDAQ
listing criteria or that the Company would continue to meet Nasdaq's other
criteria for continued listing.
Results of Operations
Comparison of Three Months Ended September 30, 1998 to Three Months Ended
September 30, 1997
Net Sales. Net sales for the three months ended September 30, 1998 were
$5,590,661 as compared to net sales of $1,850,076 for the three months ended
September 30, 1997. The increase of $3,740,585 or 202% was from additional sales
due to the Merger with Quality during the third quarter of 1997 plus a
significant gain (45%) in the Company's base business.
Gross Profit. For the three months ended September 30, 1998, the Company
had a gross profit of $1,558,784 as compared to the gross profit of $258,257 for
the three months ended September 30, 1997. The increase in gross profit (504%)
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 as a result of the
Merger and the increase in Company sales.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the three months ended September 30, 1998 were
$1,849,580 as compared to $5,941,011 for the three months ended September 30,
1997, representing a decrease of 69%. As a percentage of net sales, selling,
general and administrative expenses decreased from 321% to 33%.
Interest Expense. Interest expense decreased by $1,255,287 from $1,675,097
in the third quarter of 1997 to $419,810 in the third 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.
Net Loss. The net loss in the third quarter of 1998 was ($710,606) or
($.05) per share based on 15,724,893 weighted average common and common
equivalent shares outstanding compared to a net loss of ($7,357,851) or ($.66)
per share in the third quarter of 1997 based on 11,086,610 common and common
equivalent shares outstanding. The decrease in net loss of $6,647,245 was
primarily the result of economies of scale, the decrease of interest expense and
the reduction in other non-recurring expenses.
Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Net Sales. Net sales for the nine months ended September 30, 1998 were
$14,947,830 as compared to net sales of $3,345,379 for the nine months ended
September 30, 1997. The increase of $11,602,451 or 347% was from additional
sales due to the Merger with Quality during the third quarter of 1997
($8,567,071) plus an overall gain of 25.5% in the Company's base business.
Gross Profit. For the nine months ended September 30, 1998, the Company had
a gross profit of $3,734,081 as compared to a gross profit of $364,925 for the
nine months ended September 30, 1997. The increase in gross profit (923%)
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 nine months ended September 30, 1998 were
$5,086,853 as compared to $8,417,098 for the nine months ended September 30,
1997, representing an decrease of $3,330,245 (39.6%). As a percentage of net
sales (which increased during such nine month period), selling, general and
administrative expenses decreased from 252% to 34.0%.
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<PAGE>
Interest Expense. Interest expense decreased by $2,717,404 from $3,688,317
in the nine months ended September 30, 1997 to $970,913 in the nine months ended
September 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.
Net Income (Loss). The net loss in the first nine months of 1998 was
($2,323,685) or ($0.15) per share based on 15,724,893 weighted average common
and common equivalent shares outstanding compared to a net loss of ($11,740,490)
or ($1.06) per share in the nine months ended September 30, 1997 based on
11,086,610 common and common equivalent shares outstanding. The decrease in net
loss of $9,416,805 was primarily the result of cost savings due to economies of
scale, a decrease in interest expense and the decrease of other non-recurring
expenses.
Liquidity and Capital Resources
During the nine months ended September 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 September 30, 1998, the Company had consolidated cash and short-term
investments totalling $743,076 and working capital of $3,549,849. At September
30, 1997, the Company had consolidated cash and short-term investments totalling
$2,664,969 and working capital of $9,475,750. This decrease in working capital
was due to the Merger, and the reclassification of certain debt items from long
term (1997) to current (1998).
Net cash provided by financing activities for nine months ended September
30, 1998 was $5,240,981, 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 expire March 30,1999. The Company and LaSalle have agreed not to
automatically renew the current facility at the current maturity date. The
Company is in the process of putting together requested data for submission to
LaSalle as the basis for negotiations of a new credit facility. As a temporary
measure to help the Company meet its immediate cash requirements, LaSalle has
increased the revolving facility to $8,000,000 for 90 days. The Company was and
continues to be in noncompliance with certain financial covenants under the
Credit Facility as at the date of renewal, at September 30, 1998 and at November
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 September 30, 1998, the revolving credit had
approximately $7.035 million of a possible $7.500 million
outstanding. Quality had additional qualifying assets against
which it could not borrow, based on the $7.5 million facility
maximum. Had this maximum not been in place management believes
an additional $1 million would have been available. Interest is
calculated at the prime rate plus 1% (9.25% at September 30,
1998)
(ii) a secured loan covering machinery equipment, property and plant
having an original loan amount of approximately $3.5 million of
which $450,000 was outstanding at September 30, 1998. Monthly
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<PAGE>
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% (9.25% at September 30, 1998)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility in 1995. The original amount
outstanding was approximately $1 million. At September 30, 1998,
the balance outstanding was approximately $379,000. The loan
calls for monthly payments of $25,000 with any balance being due
at the maturity date. Interest is calculated at the prime rate
plus 1% (9.25% at September 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.
As discussed above, Quality has had substantial difficulties with its
transition to a new computer system. Among other consequences, such difficulties
have created substantial delays in submitting required reports to LaSalle (as
well as internal reports to management). While management believes that steps
that were put in place have been sufficient to guarantee the integrity of its
financial statements, the lack of timely data continues to be a problem. LaSalle
is aware of the situation and has worked with the Company. The current schedule
for resolving these computer related issues is year end 1998. LaSalle has
granted a 90 day increase in the revolving facility to $8 million to assist
Quality with its rapid ramp-up of business pending the resolution of the
Company's computer problems. Discussions of a new credit facility with LaSalle
are continuing. Notwithstanding, until continuing technical defaults are
resolved, the maturity date of the existing credit agreements may be accelerated
by LaSalle. There can be no assurance that the LaSalle credit facilities will
remain in place or be renewed as currently contemplated. Management believes,
that should it become necessary or advisable to change its borrowing
arrangements, there are a number of financial institutions available 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. Under
the terms of the USAM Revolving Loan, the Lender is not obligated to advance the
Company more than $1 million at any time during the term of the 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 210,000 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 210,000 additional
shares of the Company's Common Stock 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
-12-
<PAGE>
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. Through November 14,1998 the Company has yet to file a
registration statement but intends so to do shortly after the filing of the
September 30, 1998 10-QSB.
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 31, 1999
in the event that the underlying Conversion Shares are not covered by a
registration statement filed with the SEC. It is not expected that the
Conversion Shares will be able to be registered with the SEC in the remaining
time frame before January 31, 1999. 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.
During the quarter ended September 30, 1998, the Company's two principal
market makers ceased doing business. This has resulted in the Company's stock
price falling to levels severely below book value. At such levels, management
does not believe that the Company can raise funds on an equity basis upon terms
that are reasonable and not significantly below market prices.
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. As part of that
general upgrade, the Company moved from an IBM 36 advanced to an IBM AS400. The
new system, which fully contemplates the computer related problems with the new
millennium, continues to be 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 early next 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 September 30, 1998, the
Company believes it has set sufficient back-up systems in place to insulate its
business from a Year 2000 problem. Nevertheless, although the Company does not
expect significant costs or disruption in operations from its customers' or
suppliers' inability to achieve Year 2000 compliance, the Company can not
guaranty customer or supplier performance. Accordingly, it cannot predict what
effect noncompliance might have. 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 continue to be immaterial.
-13-
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On August 21, 1998, an eight count complaint, entitled Al Dulisse, Bernard
Bard, Michael Scicchitano and Barry Schwartz vs. U.S. Automotive Manufacturing,
Inc., f/k/a R.T. Industries, Inc., a Delaware Corporation (Case No. 98-007490
AN), was filed in the Circuit Court of the Fifteenth Judicial Circuit of
Florida, in and for Palm Bach County (the "Complaint"). The Complaint alleges
that the Company failed to recognize certain stock options purportedly exercised
by each plaintiff under alleged stock option agreements with the Company's
predecessor, R.T. Industries, Inc. The Complaint contains a breach of contract
claim and an unpaid-wages claim for each of the four plaintiffs. On November 12,
1998, the Court heard argument on the Company's Motion to Dismiss With Prejudice
Counts II, IV, VI and VIII of the Complaint and to Strike Certain Allegations
from Counts I, III, V, and VII of the Complaint. The Court announced that it
would enter an Order dismissing with prejudice all of the unpaid-wages claims,
and that the case would proceed solely on the breach of contract claims. The
Company's Answer and Affirmative Defenses as to the remaining counts is due on
December 14, 1998. No discovery has been conducted to date. In light of the
court's November 12th decision, management believes that the allegations are not
of a material nature.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 1998, the Company issued to lender five (5) year warrants
to purchase an aggregate of 105,000 shares of the Company's common stock
pursuant to the USAM Revolving Loan, which warrants are unexercisable after
March 31, 1999 at an exercise price equal to eighty percent (80%) of the average
closing sale price of the Common Stock for the twenty (20) trading days
preceding March 31, 1999. At November 13, 1998, warrants to purchase an
aggregate of 210,000 shares of Common Stock had been issued to the lender in
accordance with the USAM Revolving Loan.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 20, 1998, a final vote was taken with respect to the authorization
of an amendment to the Company's Certificate of Incorporation to provide for the
issuance of a class of preferred stock, which final vote had been adjourned at
the Company's Annual Meeting of stockholders on June 30, 1998. The proposal to
amend the Certificate of Incorporation of the Company was not approved for
failure to obtain the requisite vote of the voting stockholders. The votes cast
by stockholders was as follows:
Votes Cast Votes Cast
"For" "Against" Abstentions Broker Non-Votes
---------- --------- ----------- ----------------
4,278,173 871,610 68,920 8,336,938
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
The Company filed a Report on Form 8-K with the Commission on July 29, 1998
with respect to its offering of convertible debentures pursuant to Regulation
promulgated under the Securities Act of 1933, as amended.
-14-
<PAGE>
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: November 14, 1998
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ John W. Kohut
------------------------------------
John W. Kohut,
Chairman of the Board
and Principal Financial Officer
(duly authorized officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 743,076
<SECURITIES> 0
<RECEIVABLES> 5,383,080
<ALLOWANCES> 91,000
<INVENTORY> 10,924,456
<CURRENT-ASSETS> 17,106,713
<PP&E> 12,436,525
<DEPRECIATION> 1,531,000
<TOTAL-ASSETS> 34,289,656
<CURRENT-LIABILITIES> 13,556,864
<BONDS> 0
0
0
<COMMON> 15,725
<OTHER-SE> 12,345,681
<TOTAL-LIABILITY-AND-EQUITY> 34,289,656
<SALES> 14,947,830
<TOTAL-REVENUES> 14,947,830
<CGS> 11,213,749
<TOTAL-COSTS> 11,213,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 970,913
<INCOME-PRETAX> (2,323,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,323,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,323,685)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>