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 June 30, 1999
[ ] 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, 1999, the Issuer had 1,088,320 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, 1999
(unaudited) and December 31, 1998........................ 3
Consolidated Statements of Operations (unaudited) for the
three months ended June 30, 1999 and June 30, 1998....... 4
Consolidated Statements of Operations (unaudited) for the
six months ended June 30, 1999 and June 30, 1998......... 5
Consolidated Statements of Cash Flows (unaudited) for
the six months ended June 30, 1999 and June 30, 1998..... 6
Notes to Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
PART II. OTHER INFORMATION.................................................. 15
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities and Use of Proceeds.......................... 15
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES.................................................................. 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ............................................. $ 327,552 $ 338,641
Accounts Receivable (net of allowance for doubtful
accounts of $87,272 and $195,431, respectively) 5,853,896 5,043,316
Inventories ...................................... 10,223,716 9,420,570
Prepaid Expense and other ........................ 176,728 16,078
------------ ------------
Total Current Assets ............................. 16,581,892 14,818,605
Property, plant and equipment (net of accumulated
depreciation of $2,144,307 and $1,599,818,
respectively) .................................... 11,067,845 11,062,084
Deferred financing costs ................................. 162,000 216,000
Goodwill, net ............................................ 5,795,171 5,954,669
------------ ------------
TOTAL ASSETS ............................................. $ 33,606,908 $ 32,051,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ................................... $ 293,000 $ 7,691,370
Current portion of long-term debt ................ 50,982 693,163
Accounts payable ................................. 4,414,444 3,965,184
Accrued liabilities .............................. 1,226,230 756,703
------------ ------------
Total Current Liabilities .............. 5,984,656 13,106,420
Long-term debt, less current portion ..................... 137,737 552,408
Redeemable convertible debentures ........................ 2,250,000 2,250,000
Line of Credit 9,994,994 1,050,000
Notes payable to shareholders ............................ 5,160,000 4,980,000
------------ ------------
Total Liabilities ...................... 23,527,387 21,938,828
------------ ------------
Stockholders' Equity:
Issued & outstanding capital stock $.001 par value ....... 1,088 1,048
Additional paid-in capital ............................... 38,949,348 38,900,222
Accumulated deficit ...................................... (28,870,915) (28,788,740)
------------ ------------
Total Stockholders' Equity ............. 10,079,521 10,112,530
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ................. $ 33,606,908 $ 32,051,358
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
-----------------------------
1999 1998
----------- -----------
Net Sales .................................... $ 8,043,361 $ 5,937,296
Cost of Goods Sold ........................... 5,914,957 4,528,545
----------- -----------
Gross Profit ................................. 2,128,404 1,408,751
----------- -----------
Operating Expenses:
Selling and delivery ..................... 751,844 799,378
General and administrative ............... 708,389 945,066
----------- -----------
Total Operating Expenses ................. 1,460,233 1,744,444
----------- -----------
Operating income (loss) ...................... 668,171 (335,693)
Interest expense ............................. (515,880) (303,146)
----------- -----------
Net Income/(Loss) ............................ $ 152,291 $ (638,839)
=========== ===========
Net Income/(Loss) per share, basic and diluted $ 0.14 $ (0.61)
=========== ===========
Weighted average shares outstanding .......... 1,082,827 1,048,273
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
4
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U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30,
------------------------------
1999 1998
------------ ------------
Net Sales .................................. $ 15,364,316 $ 9,357,169
Cost of Goods Sold ......................... 11,220,091 7,181,872
------------ ------------
Gross Profit ............................... 4,144,225 2,175,297
------------ ------------
Operating Expenses:
Selling and delivery ................... 1,534,659 1,331,382
General and administrative ............. 1,677,740 1,905,891
------------ ------------
Total Operating Expenses ................... 3,212,399 3,237,273
------------ ------------
Operating income (loss) .................... 931,826 (1,061,976)
Interest expense ........................... (1,014,001) (551,103)
------------ ------------
Net Loss ................................... $ (82,175) $ (1,613,079)
============ ============
Net Loss per share, basic and diluted ...... $ (0.08) $ (1.54)
============ ============
Weighted average shares outstanding ........ 1,065,836 1,048,273
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
5
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U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss ................................................................ $ (82,175) $(1,613,079)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation .................................................... 544,489 273,845
Amortization .................................................... 213,498 159,498
Change in provision for doubtful accounts ....................... (108,159) (30,712)
Rollover of accrued interest .................................... 180,000 --
Issuance of common stock in satisfaction of related party payables 49,166 --
(Increase) Decrease In:
Accounts receivable ................................... (702,421) (1,320,547)
Inventory ............................................. (803,146) (381,319)
Prepaid expenses and other ............................ (160,650) 246,949
Increase (Decrease) In:
Accounts payable and accrued liabilities ........................ 918,787 8,209
----------- -----------
Total Adjustments ....................................................... 131,564 (1,044,077)
----------- -----------
Net Cash provided by (used in) Operating Activities ..................... 49,389 (2,657,156)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................................................... (550,250) (560,280)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings on notes payable and debentures .......................... 489,772 4,426,763
----------- -----------
NET INCREASE (DECREASE) IN CASH ......................................... (11,089) 1,209,327
CASH-beginning of period ................................................ 338,641 1,001,843
----------- -----------
CASH-end of period ...................................................... $ 327,552 $ 2,211,170
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
U.S AUTOMOTIVE MANUFACTURING, INC.
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
NOTE 1: BUSINESS OPERATIONS AND ORGANIZATION
U.S. Automotive Manufacturing, 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) Gold Max,(R) Dual
Friction,(TM) Ultra Brake,(TM) Max Life,(TM) and Quality Automotive(TM)
tradenames and various private label packaging. In 1998, the Company's products
were also sold under the Roinco,(TM) tradename.
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, 1999, are not necessarily indicative of the
results to be expected for the year ending December 31, 1999. 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, 1998.
7
<PAGE>
NOTE 3: REVERSE SPLIT
On February 5,1999, the Company's Board of Directors approved a 1-for-15 reverse
split with respect to the Company's common stock. All share and per share
information contained in these financial statements have been retroactively
adjusted to give effect to the reverse stock split.
NOTE 4: INVENTORY
Major inventory components were as follows:
June 30, 1999 December 31, 1998
Raw materials ...................... $ 4,280,230 $ 4,131,240
Work in Progress ................... 55,166 107,133
Finished goods ..................... 5,888,320 5,182,197
----------- -----------
$10,223,716 $ 9,420,570
----------- -----------
NOTE 5: DEBT
Private Placement
The Company obtained financing during the first quarter of 1998 through the
private placement of debt and equity instruments on February 27,1998 to a
director and an affiliate of another director of the Company, respectively (the
February 1998 Offering). The sale was made pursuant to a private placement
consisting of (i) two (2) unsecured non-negotiable promissory notes in the
aggregate principal amount of $400,000, bearing interest at the rate of 10.5%
per annum and a maturity date of February 28, 1999 (the "Notes" ) and (ii)
warrants to purchase up to an aggregate of 6,666 shares of the Common Stock,
maturing in February 2003, at a conversion price equal to $30.00 per share
subject to adjustment in certain conditions. The net proceeds to the Company
were approximately $370,000. The warrants are redeemable by the Company upon
notice of not less than 30 days at a price of $0.75 per warrant, provided that
the closing bid quotation of the Common Stock on all 20 trading days ending on
the third day prior to the day of which the Company gives notice of redemption
has been at least 150% of the then effective exercise price of the warrants. The
exercise price and number of shares of Common Stock issuable on exercise of the
warrants are subject to adjustment in certain circumstances, including in the
event of a stock dividend, recapitalization, reorganization, merger or
consolidation of the Company. The outstanding principal balance, together with
accrued interest, under the Notes was fully repaid by the Company on or prior to
the February 28, 1999 maturity date.
Convertible Debentures
In June 1998, the Company obtained additional financing through the sale of
8% redeemable convertible debentures (each a "Reg S Debenture"), in the
aggregate principal amount of $2,250,000, pursuant to Regulation S ("Regulation
S") under the Securities Act of 1933, as amended (the "Act") (the "Reg S
Offering"). The Reg S 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 209,660 Conversion
Shares (the "Maximum Conversion Share Allotment"). The Company also agreed, at
8
<PAGE>
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. As at June 30, 1999, the Company has yet to file a
registration statement; it is anticipated that the Company will file such
registration statement during the third quarter of 1999.
The Reg S Debentures provided for initial interest of 8% per annum (subject
to increase under certain circumstances), payable upon conversion or redemption
of the Reg S Debentures, in cash or shares of Common Stock, at the option of the
Company. The interest rate increased to 20% per annum for the period commencing
January 1, 1999 as a result of the underlying Conversion Shares having not been
covered by such date by an effective registration statement filed with the SEC.
It is not expected that the Conversion Shares will be able to be registered with
the SEC before September 30, 1999. At such time as the underlying shares are
registered or tradable, without regard to registration, 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.
NOTE 6: STOCKHOLDERS' EQUITY
On March 31, 1999, the Company issued to two directors of the Company
11,759 and 22,734 shares of the Company's Common Stock, in exchange for accrued
but unpaid obligations owing by the Company to such individuals and/or their
affiliates.
On March 31, 1999, the Company granted to executive officers and key
employees of the Company options pursuant to the Company's 1992 and 1998 Stock
Option Plans, as follows:
(i) The Company granted to an executive officer of the Company ten-year
options pursuant to the 1992 Stock Option Plan to purchase up to 1,800
shares of the Company's Common Stock, at an exercise price of $1.063
(the closing sales price for the Common Stock on March 31,1999). Such
options vest immediately;
(ii) The Company granted to an executive officer of the Company ten-year
options pursuant to the 1998 Stock Option Plan to purchase up to 1,800
shares of the Company's Common Stock, at an exercise price of $1.063
(the closing sales price for the Common Stock on March 31, 1999). Such
options vest immediately;
(iii) The Company granted to a key employee of the Company ten-year options
pursuant to the 1992 Stock Option Plan to purchase up to 307 shares of
the Company's Common Stock, at a price of $1.063 (the closing sales
price for the Common Stock on March 31,1999). Such options shall vest
in equal quarterly installments over the course of four (4) years from
the date of the option grant; and
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<PAGE>
(iv) The Company granted to certain key employees of the Company options
pursuant to the Company's 1998 Stock Option Plan to purchase up to an
aggregate of 29,000 shares of the Company's Common Stock, at an
exercise price of $1.063. (the closing sales price for the Common
Stock at March 31, 1999). Such options shall vest in equal quarterly
installments over the course of four (4) years from the date of
the option grant.
Options to purchase up to 2,000 shares of the Company's Common Stock ,
granted to a key employee pursuant to the 1998 Stock Option Plan, were cancelled
prior to issuance during the quarter ended June 30, 1999.
In addition, on March 31, 1999, the Company re-priced all outstanding
options under the 1992 Stock Option Plan, exercisable to purchase up to an
aggregate of 93 shares of the Company's Common Stock, to $1.063 per share (the
closing sales price of the Company's Common Stock reported by the Nasdaq Small
Cap Market as of the close of business on March 31, 1999).
On June 9, 1999, the Company granted ten-year options to: (i) an executive
officer of the Company, pursuant to the Company's 1992 Stock Option Plan, to
purchase up to 1,800 shares of the Company's Common Stock; (ii) an executive
officer of the Company, pursuant to the Company's 1998 Stock Option Plan, to
purchase up to 1,800 shares of the Company's Common Stock and (iii) a key
employee of the Company, pursuant to the Company's 1998 Stock Option Plan, to
purchase up to 3,000 shares of the Company's Common Stock. All of such options
are exercisable at an exercise price of $2.25 per share (the closing sales price
for the Common Stock on June 30, 1999) and vest immediately.
On June 9, 1999, the Company granted to two of its directors 2,777 shares
of Common Stock each in lieu of owed and unpaid director's fees in the amount of
$6,250 each, based on a conversion price (the closing sales price for the Common
Stock on June 30, 1999) of $2.25 per share.
NOTE 7: SUBSEQUENT EVENT
On August 9, 1999 the Company entered into a new $15 Million Senior Credit
and Term Loan Agreement ("Senior Credit") with IBJ Whitehall, as Agent. Interest
on amounts borrowed under the Senior Credit facility will be calculated, at the
Company's option at 3/4 % above the base rate or 300 basis points over LIBOR .
Substantially all of the Company's assets including the stock of the Company's
principal subsidiaries are pledged as security for the Senior Credit facility.
The loan agreement contains provisions which restrict the Company's ability to
declare cash dividends and covenants include a fixed charge coverage ratio and a
minimum net worth test. Proceeds from the initial funding of the Senior Credit
facility were used to retire principal and accrued but unpaid interest on the
LaSalle Credit Facility, the USAM Revolving Loan and the SBA's term loan. The
Senior Credit Facility matures on June 30, 2002. Accordingly, certain amounts
retired with the initial funding are classified as long-term indebtedness as of
June 30, 1999.
10
<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 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, the
ability of critical third parties to be Year 2000 compliant; 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 three months ended June 30, 1999, the Company increased revenues
by 35% (compared to the quarter ended June 30, 1998), and posted its first
quarterly profit since the acquisition of Quality Automotive Company. While the
trend toward operating improvements is expected to continue, problems in
bringing the Company's Florida facility to acceptable levels of cost and
production continue to negatively impact results. Management is committed to
bringing the economics of production at the Florida facility up to the standard
enjoyed by the main facilities in Virginia. The second quarter ended with a
softness in revenues beyond the normal seasonal downturn. An analysis of the
slowdown appears to indicate that the Company did not lose customers but that
its customers are maintaining leaner inventories in managing their respective
businesses. The Company continues to anticipate the normal fall upturn and
expects that it will record sales for the full year in the $30-$35 million
range. Although management cannot guarantee future performance, it believes that
the Company will be profitable for the year ended December 31, 1999. The
Company's ability to achieve profitability, however, is dependent upon many
factors including, but not limited to, the realization of anticipated sales and
the absence of any material increases in costs of goods sold from current
levels. There can be no assurance that the foregoing or other factors will not
prevent the Company from achieving these expectations.
Results of Operations
Comparison of Three Months Ended June 30, 1999 to Three Months Ended June
30, 1998
Net Sales. Net sales for the three months ended June 30, 1999 were
$8,043,361 as compared to net sales of $5,937,296 for the three months ended
June 30, 1998. The increase of $2,106,065 or 35% was from a significant gain in
the Company's base business.
11
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Gross Profit. For the three months ended June 30, 1999, the Company had a
gross profit of $2,128,404 as compared to the gross profit of $1,408,751 for the
three months ended June 30, 1998. The increase in gross profit (51%) 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, 1999 were $1,460,233
as compared to $1,744,444 for the three months ended June 30, 1998, representing
a decrease of 16%. As a percentage of net sales, selling, general and
administrative expenses decreased from 29% to 18% as a result of economies of
scale realized through increased sales.
Interest Expense. Interest expense increased by $212,734 from $303,146 in
the second quarter of 1998 to $515,880 in the second quarter of 1999. This
increase was attributable to an increase in borrowings under the Company's
borrowing facilities which was attributable to increased sales and the increase
in borrowing rate under the Reg S Debentures.
Net Income (Loss). The net income in the second quarter of 1999 was
$152,291 or $.14 per share based on 1,082,827 weighted average common and common
equivalent shares outstanding compared to a net loss of ($638,839) or ($.61) per
share in the second quarter of 1998 based on 1,048,273 common and common
equivalent shares outstanding. The increase in net income of $791,130 was
attributable to the increase in net sales combined with a reduction in total
operating expenses due to certain economies of scale.
Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30,
1998
Net Sales. Net sales for the six months ended June 30, 1999 were
$15,364,316 as compared to net sales of $9,357,169 for the six months ended June
30, 1998. The increase of $6,007,147 or 64% was from an overall gain in the
Company's base business.
Gross Profit. For the six months ended June 30, 1999, the Company had a
gross profit of $4,144,225 as compared to a gross profit of $2,175,297 for the
six months ended June 30, 1998. The increase in gross profit (91%) resulted from
economies of scale realized as a result of increase in sales.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the six months ended June 30, 1999 were $3,212,398
as compared to $3,237,273 for the six months ended June 30, 1998, representing a
decrease of $24,874 (1%) due to increased sales. As a percentage of net sales,
selling, general and administrative expenses decreased from 35% to 21% as a
result of economies of scale realized through increased sales.
Interest Expense. Interest expense increased by $462,898 from $551,103 in
the six months ended June 30, 1998 to $1,014,001 in the six months ended June
30, 1999. The increase is attributable to increased borrowings under the
Company's credit facilities resulting from the increase in sales and the
increase in borrowing rate of the Company's Reg S Debentures.
Net Loss. The net loss in the first six months of 1999 was ($82,175) or
($0.08) per share based on 1,065,836 weighted average common and common
equivalent shares outstanding compared to a net loss of ($1,613,079) or ($1.54)
per share in the six months ended June 30, 1998 based on 1,048,273 common and
common equivalent shares outstanding. The decrease in net loss of $1,530,904 was
primarily attributable to the increase in net sales combined with a reduction in
total operating expenses due to certain economies of scale.
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Liquidity and Capital Resources
During the six months ended June 30, 1999, the Company financed its
operations primarily through borrowings under its lending facilities and cash
generated by operations.
At June 30, 1999, the Company had consolidated cash and short-term
investments totaling $327,552 and working capital of $10,597,236. At June 30,
1998, the Company had consolidated cash and short-term investments totaling
$338,641 and working capital of $1,712,185. This increase in working capital was
due primarily to the refinancing of senior debt whereby the maturity dates of
the facilities were greater than one year.
Net cash provided by financing activities for six months ended June 30,
1999 was $489,772 consisting primarily of advances under the Company's senior
credit agreements.
In February 1999, the Company paid in full the outstanding principal
balance on the promissory notes previously issued by the Company in February
1998.
The principal source of capital for the Company's operations during 1999
had been the line of credit (the "Credit Facility") between Quality Automotive
Company, the Company's subsidiary ("Quality") and LaSalle Business Credit, Inc.
("LaSalle"), which Credit Facility was extended and replaced on August 9, 1999.
The Credit Facility, at June 30, 1999 consisted of the following:
(i) a secured revolving credit facility of up to $10 million. Advances are
made by formula on the Company's accounts receivable and inventory. At
June 30, 1999, the revolving credit had approximately $7,489,617
million of a possible $8,743,617 million outstanding. Interest is
calculated at the prime rate plus 2% (9.75% at June 30, 1999)
(ii) a secured loan covering machinery equipment, property and plant having
an original loan amount of approximately $3.5 million of which
$1,166,800 was outstanding at June 30, 1999. Monthly installments of
$20,800 are due until maturity, at which time any balance owing is
due. Interest is calculated at the prime are plus 2% (9.75% at June
30, 1999)
(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, 1999, the
balance outstanding was approximately $151,667. 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 2% (9.75% at June
30, 1999).
13
<PAGE>
Quality's obligation to pay the principal of, interest on, premium, if any,
and all other amounts payable on account of the Credit Facility was secured by
substantially all of the assets of Quality as well as the pledge of all of the
Company's ownership interest in Quality.
In addition to the Credit Facility, up to $2.0 million was made available
to the Company under a revolving credit agreement (the "USAM Revolving Loan")
entered into on March 31,1998. At June 30, 1999, an aggregate of up to $1.4
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 granted (i) five year warrants to purchase up to 14,000 shares of the
Company's Common Stock at an exercise price of $1.43 per share, exercisable
after March 31, 1999, (ii) five year warrants to purchase up to an aggregate of
3,500 additional shares of the Company's Common Stock at an exercise price of
$1.43 per share, exercisable after March 31, 1999, and (iii) five year warrants
to purchase up to an aggregate of 3,500 additional shares of the Company's
Common Stock at an exercise price of $1.97 per share, exercisable after June 30,
1999. The USAM Revolving Loan was prepaid on August 9, 1999. The Company has
agreed to grant to the lender or its assigns "piggyback" registration rights
with respect to the shares underlying such warrants.
On August 9, 1999 the Company entered into a new $15 Million Senior Credit
and Term Loan Agreement ("Senior Credit") with IBJ Whitehall, as Agent. Interest
on amounts borrowed under the Senior Credit facility will be calculated, at the
Company's option at 3/4 % above the base rate or 300 basis points over LIBOR .
Substantially all of the Company's assets including the stock of the Company's
principal subsidiaries are pledged as security for the Senior Credit facility.
The loan agreement contains provisions which restrict the Company's ability to
declare cash dividends and covenants include a fixed charge coverage ratio and a
minimum net worth test. Proceeds from the initial funding of the Senior Credit
facility were used to retire principal and accrued but unpaid interest on the
LaSalle Credit Facility, the USAM Revolving Loan and the SBA's term loan.
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 from 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 operational at the
Tappahannock, Virginia facility. The Company's new system accommodates remote
locations and the Sanford, Florida facility is expected to be placed on-line
prior to October 31,1999.
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, 1999, the Company believes it
has set sufficient back-up systems in place to insulate its business from a Year
2000 problem.
14
<PAGE>
Nevertheless, although the Company does not expect significant costs or
disruptions in operations from its customers' and suppliers' inability to
achieve Year 2000 compliance, the Company can not guaranty customer or supplier
performance. Accordingly, it can not 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 be immaterial.
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.
98-007490AN), was filed in the Circuit Court of the Fifteenth Judicial Circuit
of Florida, in and for Palm Beach County (the "Complaint"). The Complaint
alleges that the Company failed to recognize stock options purportedly exercised
by each plaintiff under alleged stock option agreements with the Company's
predecessor, R.T. Industries, Inc. The Complaint contained a breach of contract
claim and unpaid-wages claim for each of the four plaintiffs; however on
November 23, 1998, the Court entered an Order dismissing with prejudice all of
the unpaid-wages claim. Accordingly, the action is proceeding solely on the
breach of contract claims.
Various other legal proceedings and claims have been or may be from time to
time asserted against the Company in the ordinary course of its business.
Management believes that it has meritorious defenses and will vigorously defend
itself with respect to all existing proceedings or claims. Any costs or damages
that management estimates may be paid as a result of these proceedings or claims
are accrued when the liability, if any, is considered probable and the amount
can be reasonably estimated. Although the ultimate disposition of proceedings
and claims currently pending is not presently determinable, management believes
that, after consultation with counsel, the likelihood that material costs or
damages will be incurred by the Company as a result of any pending proceedings
is remote.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31,1999 and June 30,1999 respectively, the Company granted five
year warrants exercisable to purchase up to 3500 shares (at each date) of its
Common Stock to its lenders pursuant to the terms of the USAM Revolving Loan.
Such warrants are exercisable immediately at an exercise price of $1.43 for
those warrants issued on March31, 1999 and at an exercise price of $1.97 for
those warrants issued on June 30,1999(eighty percent (80%) of the average
closing price for the Common Stock for the twenty (20) trading days preceding
March 31,1999 and June 30,1999,respectively). The USAM Revolving Loan was
prepaid on August 9,1999 and no further warrants will be issued. At August
12,1999 warrants exercisable to purchase up to an aggregate of 21,000 shares of
the Company's Common Stock had been granted pursuant to the USAM Revolving Loan.
On March 31,1999, the Company granted to executive officers and key
employees of the Company options pursuant to the Company's 1992 and 1998 Stock
Option Plan as follows:
15
<PAGE>
(i) The Company granted to an executive officer of the Company ten-year
options pursuant to the 1992 Stock Option Plan to purchase up to 1,800
shares of the Company's Common Stock, at an exercise price of $1.063
(the closing price for the Common Stock on March 31,1999). Such
options vest immediately;
(ii) The Company granted to an executive officer of the Company ten-year
options pursuant to the 1998 Stock Option Plan to purchase up to 1,800
shares of the Company's Common Stock, at an exercise price of $1.063
(the closing price for the Common Stock on March 31, 1999. Such
options vest immediately;
(iii) The Company granted to a key employee of the Company ten year options
pursuant to the 1992 Stock Option Plan to purchase up to 307 shares of
the Company's Common Stock at an exercise price of $1.063 (the closing
sales price for the Company's Common Stock on March 31,1999). Such
options shall vest in equal quarterly installments over the course of
four (4) years from the date of the option grant; and
(iv) The Company granted to certain key employees of the Company options
pursuant to the Company's 1998 Stock Option Plan to purchase up to an
aggregate of 29,000 shares of the Company's Common Stock at an
exercise price of $1.063 ( the closing sales price for the Common
Stock at March 31,1999) Such options shall vest in equal quarterly
installments over the course of four (4) years from the date of
the option grant.
Options to purchase up to 2,000 shares of the Company's Common Stock,
granted pursuant to the Company's 1998 Stock Option Plan were cancelled prior to
issuance during the quarter ended June 30, 1999.
In addition, on March 31,1999, the Company re-priced all outstanding
options under the 1992 Stock Option Plan, exercisable to purchase up to an
aggregate of 93 shares of the Company's Common Stock, to $1.063 per share (the
price of the Company's common Stock reported by the Nasdaq SmallCap Market, as
of the close of trading on March 31,1999).
On June 9, 1999, the Company granted ten-year options to: (i) an executive
officer of the Company, pursuant to the Company's 1992 Stock Option Plan, to
purchase up to 1,800 shares of the Company's Common Stock; (ii) an executive
officer of the Company, pursuant to the Company's 1998 Stock Option Plan, to
purchase up to 1,800 shares of the Company's Common Stock and (iii) a key
employee of the Company, pursuant to the Company's 1998 Stock Option Plan, to
purchase up to 3,000 shares of the Company's Common Stock. All of such options
are exercisable at an exercise price of $2.25 per share (the closing price for
the Common Stock on June 30, 1999) and vest immediately.
On March 31, 1999, the Company issued to two directors of the Company
11,759 and 22,734 shares of the Company's Common Stock, in exchange for accrued
but unpaid obligations owing by the Company to such individuals and/or their
affiliates.
On June 9, 1999, the Company granted to two of its directors 2,777 shares
of Common Stock each in lieu of owed and unpaid director's fees in the amount of
$6,250 each, based on a conversion price (the closing sales price for the Common
Stock on June 30, 1999) of $2.25 per share.
At January 1, 1999, the interest rate of the Reg S Debentures was increased
to 20% per annum (from 8% per annum) until such time as the underlying
Conversion Shares are covered by an effective registration statement filed with
the SEC or the Company redeems same. It is not expected that the Conversion
Shares will be able to be registered with the SEC before September 30, 1999. At
such time as the underlying Conversion Shares are tradable, without regard to
registration, the interest rate will revert to 8% per annum.
In connection with the above referenced issuances, the Company relied on
Section 4(2) under the Securities Act of 1933 as transactions by an issuer not
involving any public offering .
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, 1999.
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 12, 1999
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ JOHN W. KOHUT
---------------------------
John W. Kohut,
Chairman of the Board
and Principal Financial Officer
(duly authorize officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-QSB AT JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 327,552
<SECURITIES> 0
<RECEIVABLES> 5,941,168
<ALLOWANCES> 87,272
<INVENTORY> 10,223,716
<CURRENT-ASSETS> 16,581,892
<PP&E> 13,212,152
<DEPRECIATION> 2,144,307
<TOTAL-ASSETS> 33,606,908
<CURRENT-LIABILITIES> 5,691,656
<BONDS> 0
0
0
<COMMON> 1,088
<OTHER-SE> 10,078,433
<TOTAL-LIABILITY-AND-EQUITY> 33,606,908
<SALES> 15,364,316
<TOTAL-REVENUES> 15,364,316
<CGS> 11,220,091
<TOTAL-COSTS> 11,220,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,014,001
<INCOME-PRETAX> (82,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (82,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,175)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
<FN>
On February 11, 1999, the Company effected a 1-for-15 reverse stock split
of its issued and outstanding common stock. Financial Data Schedules prior to
the Quarterly Report for the period ended March 31, 1999 have not been restated
for the reverse stock split.
</FN>
</TABLE>
