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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 September 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 November 22, 1999, the Issuer had 1,245,367 shares outstanding of its
common stock, $.001 par value.
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION........................................................................3
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998.........3
Consolidated Statements of Operations (unaudited) for the three months ended
September 30, 1999 and September 30, 1998...................................................4
Consolidated Statements of Operations (unaudited) for the nine months ended
September 30, 1999 and September 30, 1998...................................................5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1999 and September 30, 1998...................................................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 1. Legal Proceedings............................................................................15
Item 2. Changes in Securities and Use of Proceeds....................................................16
Item 4. Submission of Matters to a Vote of Security Holders.........................................16
Item 6. Exhibits and Reports on Form 8-K.............................................................16
SIGNATURES ...................................................................................17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ............................................... $ 244,714 $ 338,641
Accounts Receivable (net of allowance for doubtful
accounts of $115,295 and $195,431, respectively) 5,024,798 5,043,316
Inventories ........................................ 9,734,908 9,420,570
Prepaid Expense and other .......................... 268,309 16,078
------------ ------------
Total Current Assets ............................... 15,272,729 14,818,605
Property, plant and equipment (net of accumulated
depreciation of $2,426,028 and $1,599,818,
respectively) ...................................... 11,128,796 11,062,084
Deferred financing costs ........................................... 326,047 216,000
Goodwill, net ...................................................... 5,715,422 5,954,669
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TOTAL ASSETS ....................................................... $ 32,442,994 $ 32,051,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ..................................... $ -- $ 7,691,370
Current portion of long-term debt .................. 445,666 693,163
Accounts payable ................................... 3,440,986 3,965,184
Accrued liabilities ................................ 1,335,080 756,703
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Total Current Liabilities ...... 5,221,732 13,106,420
Long-term debt, less current portion ............................... 10,561,053 552,408
Redeemable convertible debentures .................................. 2,070,000 2,250,000
Line of Credit ..................................................... -- 1,050,000
Notes payable to shareholders ...................................... 5,250,000 4,980,000
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Total Liabilities .............. 23,102,785 21,938,828
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Stockholders' Equity:
Issued & outstanding capital stock $.001 par value ................. 1,245 1,048
Additional paid-in capital ......................................... 39,172,198 38,900,222
Accumulated deficit ................................................ (29,833,234) (28,788,740)
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Total Stockholders' Equity ..... 9,340,209 10,112,530
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ........................... $ 32,442,994 $ 32,051,358
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months
Ended September 30,
--------------------------
1999 1998
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Net Sales ........................................ $ 5,661,471 $ 5,590,661
Cost of Goods Sold ............................... 4,422,023 4,031,877
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Gross Profit ..................................... 1,239,448 1,558,784
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Operating Expenses:
Selling and delivery ..................... 769,050 771,627
General and administrative ............... 933,498 1,077,953
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Total Operating Expenses ................. 1,702,548 1,849,580
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Operating income (loss) .......................... (463,100) (290,796)
Interest expense ................................. (499,219) (419,810)
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Net Income/(Loss) ................................ $ (962,319) $ (710,606)
=========== ===========
Net Income/(Loss) per share, basic and diluted ... $ (0.86) $ (0.68)
=========== ===========
Weighted average shares outstanding .............. 1,124,168 1,048,326
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30,
------------------------------
1999 1998
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Net Sales .................................. $ 21,025,787 $ 14,947,830
Cost of Goods Sold ......................... 15,642,114 11,213,749
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Gross Profit ............................... 5,383,673 3,734,081
------------ ------------
Operating Expenses:
Selling and delivery ............... 2,303,709 2,103,009
General and administrative ......... 2,611,238 2,983,844
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Total Operating Expenses ................... 4,914,947 5,086,853
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Operating income (loss) .................... 468,726 (1,352,772)
Interest expense ........................... (1,513,220) (970,913)
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Net Loss ................................... $ (1,044,494) $ (2,323,685)
============ ============
Net Loss per share, basic and diluted ...... $ (0.96) $ (2.21)
============ ============
Weighted average shares outstanding ........ 1,086,069 1,048,326
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
1999 1998
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ......................................................................... $ (1,044,494) $ (2,323,685)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation ..................................................... 826,210 718,141
Amortization ..................................................... 320,247 266,247
Change in provision for doubtful accounts ........................ (80,136) (44,938)
Rollover of accrued interest into n/p to shareholders............. 270,000 --
Issuance of common stock in satisfaction of related party payables 49,166 --
(Increase) Decrease In:
Accounts receivable .......................... 98,654 (2,446,387)
Inventory .................................... (314,338) (2,185,428)
Prepaid expenses and other ................... (252,231) 278,680
Increase (Decrease) In:
Accounts payable and accrued liabilities ......................... 97,186 1,604,732
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Total Adjustments ................................................................ 1,014,758 (1,808,953)
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Net Cash provided by (used in) Operating Activities .............................. (29,736) (4,132,638)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................................. (892,922) (1,367,110)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Deferred financing costs ......................................................... (191,047) (270,000)
Proceeds from convertible debentures ............................................. -- 2,250,000
Net (repayments) borrowings on notes payable and line of credit .................. (8,741,370) 3,260,981
Net borrowings on revolving line of credit ...................................... 9,761,148 --
------------ ------------
Net cash provided by financing activities` ....................................... 828,731 5,240,981
NET DECREASE IN CASH ............................................................. (93,927) (258,767)
CASH-beginning of period ......................................................... 338,641 1,001,843
------------ ------------
CASH-end of period ............................................................... $ 244,714 $ 743,076
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
U.S AUTOMOTIVE MANUFACTURING, INC.
Notes to Consolidated Financial Statements
September 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) Ustop,(TM) and Quality Automotive(TM) tradenames and
various private label packaging. In 1998, the Company's products were also sold
under the Roinco,(TM) and Max Life (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 nine months ended September 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.
<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:
September 30, 1999 December 31, 1998
(unaudited)
------------------ -----------------
Raw materials ..................... $4,033,445 $4,131,240
Work in Progress .................. 200,800 107,133
Finished goods .................... 5,500,663 5,182,197
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$9,734,908 $9,420,570
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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, but may in its sole determination,
issue more than 209,660 Conversion Shares (the "Maximum Conversion Share
Allotment"). The Company also agreed, at its expense, to (x) file with the
Securities and Exchange
<PAGE>
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 Company has not yet
filed a registration statement.
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 December 31, 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 25% interest rate shall continue
until the Debentures are redeemed by the Company or the Company has obtained
authorization to issue additional shares of USAM Stock for use in lieu of a cash
redemption of debentures at which time the interest rate on any Debentures then
outstanding shall revert to 8% per annum. 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.
The principal source of capital for the Company's operations during the
period ended August 9, 1999 was the line of credit (the "Credit Facility")
between Quality Automotive Company, the Company's subsidiary and LaSalle
Business Credit, Inc. On August 9, 1999 the Credit Facility was fully retired
with the proceeds of the Company's new $15,000,000 Senior Credit and Term Loan
Agreement ("Senior Credit Agreement") with IBJ Whitehall, as Agent. The Senior
Credit Agreement, at September 30, 1999 consisted of the following:
(i) a secured revolving credit facility of up to $12 million. Advances are
made by formula on the Company's accounts receivable and inventory. At
September 30, 1999, the revolving credit had approximately $8.517
million of a possible $8.617 million outstanding. Interest is
calculated at the prime rate plus 3/4% (9% at September 30, 1999)
(ii) a secured loan covering machinery, equipment, property and plant
having an original loan amount of approximately $2.108 million of
which $2.079 million was outstanding at September 30, 1999. Monthly
installments of $29,294 are due until maturity, at which time any
balance outstanding is due. Interest is calculated at the prime rate
plus 1% (9.25% at September 30, 1999)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility of 1999. The facility allows for
the financing of up to $1,000,000 of capital expenditures since May 1,
1999 at an advance rate of 80% of the cost of the equipment. The
original amount outstanding at closing was $238,990. At September 30,
1999, the balance outstanding was approximately $236,000. The loan
calls for monthly payments of 1/72 of each advance, with any balance
being due at the maturity date. Interest is calculated at the prime
rate plus 1% (9.25% at September 30, 1999).
The Company's obligation to pay the principal of, interest on, premium, if
any, and all other amounts payable on account of the Senior Credit Agreement is
secured by substantially all of the assets of the Company as well as the pledge
of all of the Company's ownership interest in Quality. Pursuant to the terms of
the Senior Credit Agreement, under certain restrictive criteria, the Company may
choose to borrow under a formula equal to 300 basis points over LIBOR. The
Senior Credit 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. During the quarter $180,000 principal amount of
debentures plus accured interest were converted into common stock.
<PAGE>
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
(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.
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.
<PAGE>
General
During the three months ended September 30, 1999, the Company's revenues
increased by 1% (compared to the quarter ended September 30, 1998), while
decreasing over 29% from the prior quarter ended June 30, 1999 and over 22% from
the Company's first quarter ended March 31, 1999, its traditionally weakest
quarter. While the trend toward operating improvements continued at the
Company's Florida facility, the unexpected reduction in quarterly volume left
the Company with excess manufacturing capacity. For the past seven quarters the
Company has focused its resources in adding to production capacity so that it
would be in a position to accept materially greater volumes of business each
quarter, if such business developed. The Company positioned itself to produce
significantly more product in its third quarter ended September 30, 1999 in
anticipation of increased sales but an unanticipated general slowness in the
demand for after-market brakes coupled with programs instituted by our largest
customers (to reduce over-all levels of inventory at their warehouses), has
resulted in a worse than anticipated third quarter performance. The Company has
recently had its single largest customer reduce its projection for 1999 and year
2000 purchases by approximately a third and the Company is in the process of
adjusting its staff and inventory levels to its reasonably anticipated business.
The Company now anticipates that it will generate sales for the full fiscal year
in the $26-$30 million range. Although management cannot guarantee any future
performance, it believes that the Company will incur a loss for the year ended
December 31, 1999. The Company's ability to achieve future profitability is
dependent upon many factors including, but not limited to, the realization of a
certain level of sales sufficient to cover its costs of goods sold and provide
for the absorption of its overhead expenses.
Results of Operations
Comparison of Three Months Ended September 30, 1999 to Three Months Ended
September 30, 1998
Net Sales. Net sales for the three months ended September 30, 1999 were
$5,661,471 as compared to net sales of $5,590,661 for the three months ended
September 30, 1998. The increase of $70,810 or 1% was marginal annual growth
attributable to the Company's existing customers.
Gross Profit. For the three months ended September 30, 1999, the Company
had a gross profit of $1,239,448 as compared to the gross profit of $1,558,784
for the three months ended September 30, 1998. The decrease in gross profit
(20%) is the result of higher overhead expense being incurred in production
arising from the Company's preparation for a material increase in sales, which
did not materialize.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the three months ended September 30, 1999 were
$1,702,548 as compared to $1,849,580 for the three months ended September 30,
1998, representing a decrease of 8%. Selling, general and administrative
expenses were essentially flat although the level of current expenses
contemplated significantly greater sales than were actually realized
Interest Expense. Interest expense increased by $79,409 from $419,810 in
the third quarter of 1998 to $499,219 in the third quarter of 1999. This
increase was attributable to an increase in borrowings under the Company's
credit facilities as a result of increased sales and to the increase in the
borrowing rate under the Reg S Debentures.
Net Income (Loss). The net loss in the third quarter of 1999 was ($962,319)
or ($0.86) per share based on 1,124,168 weighted average common and common
equivalent shares outstanding compared to a net loss of ($710,606) or ($0.68)
per share in the third quarter of 1998 based on 1,048,326 common and common
equivalent shares outstanding. The increase in net loss of ($251,713) was
attributable to the lower level of gross profit and the increase in interest
expense.
<PAGE>
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Net Sales. Net sales for the nine months ended September 30, 1999 were
$21,025,787 as compared to net sales of $14,947,830 for the nine months ended
September 30, 1998. The increase of $6,077,957 or 41% was from the recognition
of annualized sales to customers acquired during 1998.
Gross Profit. For the nine months ended September 30, 1999, the Company had
a gross profit of $5,383,673 as compared to a gross profit of $3,734,081 for the
nine months ended September 30, 1998. The increase in gross profit (44%)
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 nine months ended September 30, 1999 were
$4,914,947 as compared to $5,086,853 for the nine months ended September 30,
1998, representing a decrease of $171,906 (3%). As a percentage of net sales,
selling, general and administrative expenses decreased from 34% to 23% as a
result of economies of scale.
Interest Expense. Interest expense increased by $542,307 from $970,913 in
the nine months ended September 30, 1998 to $1,513,220 in the nine months ended
September 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 nine months of 1999 was ($1,044,494) or
($0.96) per share based on 1,086,069 weighted average common and common
equivalent shares outstanding compared to a net loss of ($2,323,685) or ($2.21)
per share in the nine months ended September 30, 1998 based on 1,048,326 common
and common equivalent shares outstanding. The decrease in net loss of $1,279,191
was primarily attributable to the increase in net sales combined with a
reduction in total operating expenses due to certain economies of scale.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, the Company financed its
operations primarily through borrowings under its credit facilities and cash
generated by operations.
At September 30, 1999, the Company had consolidated cash and short-term
investments totaling $244,714 and working capital of $10,050,997. At September
30, 1998, the Company had consolidated cash and short-term investments totaling
$743,076 and working capital of $3,549,849. The increase in working capital was
due primarily to the refinancing of senior debt whereby the maturity dates of
the facilities are greater than one year.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $828,731 consisting primarily of non-cash expenses under
the Company's affiliated credit and Reg "S" Debentures 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.
<PAGE>
The principal source of capital for the Company's operations during the
period ended August 9, 1999 was the line of credit (the "Credit Facility")
between Quality Automotive Company, the Company's subsidiary ("Quality") and
LaSalle Business Credit, Inc. On August 9, 1999 the Credit Facility was fully
retired with the proceeds of the Company's new $15,000,000 Senior Credit and
Term Loan Agreement ("Senior Credit Agreement") with IBJ Whitehall, as Agent.
The Senior Credit Agreement, at September 30, 1999 consisted of the following:
(i) a secured revolving credit facility of up to $12 million. Advances are
made by formula on the Company's accounts receivable and inventory. At
September 30, 1999, the revolving credit had approximately $8.517
million of a possible $8.617 million outstanding. Interest is
calculated at the prime rate plus 3/4% (9% at September 30, 1999)
(ii) a secured loan covering machinery, equipment, property and plant
having an original loan amount of approximately $2.108 million of
which $2.079 million was outstanding at September 30, 1999. Monthly
installments of $29,294 are due until maturity, at which time any
balance outstanding is due. Interest is calculated at the prime rate
plus 1% (9.25% at September 30, 1999)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility of 1999. The facility allows for
the financing of up to $1,000,000 of capital expenditures since May 1,
1999 at an advance rate of 80% of the cost of the equipment. The
original amount outstanding at closing was $238,990. At September 30,
1999, the balance outstanding was approximately $236,000. The loan
calls for monthly payments of 1/72 of each advance, with any balance
being due at the maturity date. Interest is calculated at the prime
rate plus 1% (9.25% at September 30, 1999).
The Company's obligation to pay the principal of, interest on, premium, if
any, and all other amounts payable on account of the Senior Credit Agreement is
secured by substantially all of the assets of the Company as well as the pledge
of all of the Company's ownership interest in Quality. Pursuant to the terms of
the Senior Credit Agreement, under certain restrictive criteria, the Company may
choose to borrow under a formula equal to 300 basis points over LIBOR. The
Senior Credit 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.
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. Advances pursuant to the USAM Revolving Loan
carried interest at the rate of 11% per annum. The USAM Revolving Loan was
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 the lenders (i)
five year warrants to purchase up to 21,000 shares of the Company's Common Stock
at an exercise price of $1.43 per share for 17,500 shares and $1.97 for an
additional 3,500 shares. On August 9, 1999 the USAM Revolving Loan was fully
retired with proceeds made available from the Senior Credit Agreement.
<PAGE>
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 year end.
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, 1999, 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
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 are expected to 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.
<PAGE>
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) An aggregate of $180,000 principal amount of the Company's 8%
Redeemable Convertible Debentures and accrued interest thereon was converted
into a total 157,047 shares of the Company's common stock pursuant to the
exemption provided by Section 3(a)(9) of the Securities Act of 1933.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 18,1999, the Company held an Annual Meeting of Stockholders at
which (a) the election of directors and (b) an amendment to the Company's
Certificate of Incorporation to decrease the Company's authorized class of
common stock from 30,000,000 to 5,000,000 shares were voted on by common
stockholders of the Company . The results of the vote were as follows:
a. Election of Directors
John W. Kohut, Martin Chevalier, 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 with respect to the election of Directors
were as follows:
Number of
Name of Nominees Number of Votes Votes Against Abstentions
---------------- --------------- -------------- -----------
John W. Kohut 825,381 3,480 46,660
Martin Chevalier 826,529 2,332 46,660
David Love 827,046 1,815 46,660
Mandel Sherman 821,849 7,012 46,660
b. Amendment to Certificate of Incorporation to Reduce Authorized Common Stock
Number of Number of
Votes For Votes Against Abstentions
--------- ------------- -----------
856,873 14,888 3,760
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 September 30, 1999.
<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 22, 1999
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ JOHN W. KOHUT
-------------------------------
John W. Kohut,
Chairman of the Board
and Principal Financial Officer
(duly authorized officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 244,714
<SECURITIES> 0
<RECEIVABLES> 5,140,093
<ALLOWANCES> 115,295
<INVENTORY> 9,734,908
<CURRENT-ASSETS> 15,272,729
<PP&E> 13,554,824
<DEPRECIATION> 2,426,028
<TOTAL-ASSETS> 32,442,994
<CURRENT-LIABILITIES> 5,221,732
<BONDS> 0
0
0
<COMMON> 1,245
<OTHER-SE> 9,338,964
<TOTAL-LIABILITY-AND-EQUITY> 32,442,944
<SALES> 21,025,787
<TOTAL-REVENUES> 21,025,787
<CGS> 15,642,114
<TOTAL-COSTS> 15,642,114
<OTHER-EXPENSES> 4,914,947
<LOSS-PROVISION> 468,726
<INTEREST-EXPENSE> 1,513,220
<INCOME-PRETAX> (1,044,494)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,044,494)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,044,494)
<EPS-BASIC> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
