U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-20436
U.S. AUTOMOTIVE MANUFACTURING, INC.
(Name of small business issuer in its charter)
Delaware 65-0309477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Route 627, Airport Drive, Tappahannock, VA 22560
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (804) 443-5356
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
None Not Applicable
Securities registered under Section 12 (g) of the Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ].
The Issuer's revenues for its most recent fiscal year ended December 31, 1998
were $20,744,412.
The aggregate market value of the voting stock held by non-affiliates was
approximately $1,179,307 as at the close of business on March 30, 1999.
The number of shares of Common Stock outstanding as at March 30, 1999 was
1,048,273.
Documents incorporated by reference: None
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Part I.
ITEM 1. Description of the Business
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; 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; and the
uncertainties regarding the effect of the Year 2000 on the company's business.
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
U.S. Automotive Manufacturing, Inc., a Delaware corporation incorporated on
January 16, 1992 ("U.S. Automotive"), 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").
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 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 brakes under the same
process used to manufacture the vehicle's original equipment.
The Company sells its automotive 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
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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.
Merger with Quality Automotive Company/Products
On August 29, 1997, a wholly-owned subsidiary of the Company (the
"Subsidiary") acquired, by merger, Quality Automotive Company and its two
subsidiaries from the stockholders of Quality Automotive Company (the "Merger")
in exchange for (i) $3,000,000; (ii) two promissory notes, in the aggregate
amount of $4,500,000 (which notes are guaranteed by the Company and secured by
the Company's pledge of all of its shares in the Subsidiary); and (iii) after
giving effect to the reverse split effected in February 1999, 122,582 shares of
common stock, par value of $.001 per share (the "Common Stock"), of the Company.
(See "Item 5 - 1:15 Reverse Split"). After the Merger, the Subsidiary changed
its name to Quality Automotive Company (hereinafter, "Quality").
The Merger gave the Company the ability to manufacture and market a full
line of automotive friction brake products, including friction material for sale
to third parties. The Company believes its ability to produce its own friction
material and to manufacture a complete line of friction products gives the
Company a competitive advantage over competitors that are unable to manufacture
a complete product line.
Suppliers/Manufacturing
The Company has developed multiple sources for all raw material used in
production which are purchased pursuant to open purchase orders. Raw material
required for production include: stamped steel backing plates, used brake shoe
core, resins, various fibers and fillers. All of such materials are converted,
packaged and shipped by the Company from its Facilities.
Customers
The Company sells its products to wholesale and retail automotive
distributors, mass merchandisers, chain stores and to other brake manufacturers
in the United States and in eleven foreign countries. Foreign sales (principally
Latin America and the Caribbean) represented approximately 6.3% and 17% of total
sales in fiscal 1998 and fiscal 1997, respectively. For the year ended December
31, 1998 the Company had two customers which individually accounted for more
than 10% of revenues -- Discount Auto Parts (27.4%) and Advance Auto Parts
(15%). Investment reports have ranked both customers among the top ten auto
parts retailers in the country. Management believes that each of these customers
will account for approximately 25% of the revenues which the Company anticipates
generating during the 1999 fiscal year. The loss of these or any other
significant customers of the Company could have a material effect on the
Company.
Based on the Company's internal run rate as at December 31, 1998, the
Company estimates that it has a continuing order base of approximately
$30,000,000. Since that time the Company has entered into non-binding business
relationships with new customers which could result in the Company receiving as
much as $7,500,000 in additional revenues over a 12 month period. The Company's
business has not traditionally been subject to firm contract orders and as such,
while the Company anticipates that fiscal 1999 sales should exceed $35,000,000,
there can be no assurance that such level of revenues will be attained or that
even if attained that the Company will be profitable. Should such sales level be
attained the Company believes that more than 10% of revenues for the fiscal year
ending December 31, 1999 could be derived from each of three different
customers.
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Sales and Marketing
The Company markets its products mainly through the efforts of a core group
of Company employed sales personnel, complemented by a nationwide network of
independent sales representatives. Company sales support includes providing
recognized industry standard test results of its friction products, parts
catalogs, promotional material, brake clinics and a strong presence at a variety
of industry trade shows. The Company markets its products under the following
trademarks: Brakes Worth Stopping For,(R) Silent Solution,(R) Max Life(R) and
such other trade names as Dual Friction,(TM) Ultra Brake,(TM) Gold Max,(TM)
Quality Automotive(TM) and private labels.
Seasonality
Sales of the Company's products, like those of the replacement brake
industry, are generally lower in the late fall and winter months in those areas
of the country experiencing colder weather. Therefore, demand of the Company's
products are usually strongest in the second and third fiscal quarters.
Inventory and Distribution
At December 31, 1998, the Company had approximately $9.4 million in
inventory, of which approximately $7.3 million was attributable to the
acquisition of Quality. The Company generally maintains an inventory of raw
materials and packaging materials based upon its production schedule and the
general availability of such materials. Finished goods inventory is based on
annual sales as estimated by management, taking into account minimum production
runs necessary to achieve efficient returns on production. The Company believes
that its current level of inventory is adequate for its business operations.
The Company distributes its products from existing warehouse space located
at its Facilities in Virginia and Florida. Product is transported as
appropriate, by common carrier or through a dedicated fleet of tractor trailers
currently leased by the Company.
Competition
The automotive replacement parts industry is a highly competitive business,
with market share being determined by such factors as the quality of the service
provided to customers, the price of products, the speed in which orders are
satisfied, and customer convenience. The Company competes in its market area
with other auto parts manufacturers. Some of its competitors have greater
financial resources and/or marketing personnel than the Company. To the extent a
competitor could develop better name recognition or a stronger distribution
network, it might enable such competitors to compete more effectively for the
sale of automotive brake and replacement brake parts. Specifically, competitors
with greater resources than the Company may be able to offer customers larger
discounts or offer better terms on volume purchases than those offered by the
Company. Although the Company believes that it has enhanced its competitive
position as a result of the Merger, there can be no assurance that the Company
will be able to compete successfully against any of its competitors.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
The Company's manufacturing operations utilize asbestos and other materials
that are considered "hazardous substances" under applicable federal, state and
local laws and are subject to various current and evolving federal, state and
local laws and regulations relating to the protection of the
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environment. These laws govern, among other things, emitting pollutants to air,
discharging pollutants to water, and generating, handling, storing,
transporting, treating, and disposing of a variety of hazardous and
non-hazardous substances and wastes. Federal and state environmental laws and
regulations often require manufacturers to obtain permits for these activities.
Failure to comply with environmental laws or to obtain, or comply with, the
necessary state and federal permits can subject the manufacturer to substantial
civil and criminal penalties. The Company operates two manufacturing facilities,
one in Tappahannock, Virginia and one in Sanford, Florida. The Company believes
that these facilities are in substantial compliance with all necessary permits
and applicable material environmental laws relating to its material business
operations. It is nevertheless possible that the Company faces material
environmental liabilities of which the Company is unaware. Moreover, the costs
of compliance with the various existing or future environmental laws and
regulations, including any penalties which may be assessed for failure to obtain
necessary permits, could be prohibitive. If any such costs exceeded the
Company's budgets for such items, the Company's business could be adversely
affected.
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and similar state statutes, impose joint
and several liability for environmental damages and cleanup costs on past or
current owners and operators of facilities at which hazardous substances have
been released, as well as on persons who generate, transport or arrange for
disposal of hazardous substances at a particular release site. In addition, the
operator of a facility may be subject to claims by third parties for personal
injury, property damage or other costs resulting from contamination present at
or emanating from property on which its facility is located.
In addition to the Facilities, the Company or its predecessors have owned
and/or operated other facilities in the past where hazardous substances were
handled and may have liability for remediation of such facilities in the future.
There can be no assurance that the Company will not be subject to liability
relating to facilities owned and/or operated by them currently or in the past.
The Company could be held liable for a release of hazardous substances to the
environment from the Company's current or former properties or from any of its
offsite waste sites owned by others and used by the Company. The Company
currently has no knowledge of the existence of any such liabilities at this
time.
The Company has made, and will continue to make, capital and other
expenditures necessary to monitor and to comply with the foregoing environmental
regulations. For the year ended December 31, 1998, no material expenditures by
the Company were necessary with respect to such matters.
Trademarks, Proprietary Information and Patents
The Company utilizes various trademarks in connection with the sale of its
product, including the following registered trademarks: Brakes Worth Stopping
For,(R) Silent Solution(R) and MaxLife.(R) The Company holds no patents. The
Company has nonetheless developed processes and formulas with respect to the
composition of its friction material and the production and manufacture of its
brake products that it believes are proprietary to it. The Company relies on a
combination of contractual rights, non-disclosure agreements with its employees,
distributors and customers, and technical measures to establish and protect the
ideas, concepts, and documentation of its proprietary technology and know-how.
Such methods, however, may not afford complete protection, and there can be no
assurance that third parties will not independently develop such know-how or
obtain access to the Company's know-how, ideas, concepts, and documentation.
Although the Company believes that its technology has been developed
independently and does not infringe on the proprietary rights of others, there
can be no assurance that the technology does not and will not so infringe or
that third parties will not assert infringement claims against the Company in
the future. In the case of infringement, the Company would, under certain
circumstances, be required to modify its products or obtain a license. There can
be no
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assurance that the Company will have the financial or other resources necessary
to defend successfully a patent infringement or other proprietary rights
infringement action or that it could modify its products or obtain a license if
it were required to do so. Failure to do any of the foregoing could have a
material adverse effect on the Company. Furthermore, if the Company's products
or technologies are deemed to infringe upon the rights of others, the Company
could become liable for damages, which could have a material adverse effect on
the Company.
Employees
At March 30, 1999, the Company has an aggregate of 366 employees engaged
full-time by the Company. Of these employees, 26 are salaried and 340 are hourly
employees. Twenty-eight (28) of such employees are in general and administrative
positions, 3 are in sales and marketing and 335 are in manufacturing, assembly
and warehousing positions. The Company's employees are not members of any union
and the Company has not experienced any work stoppages and considers its
employee relations to be good.
ITEM 2. Description of Property
The Facilities are located on three parcels of land in Tappahannock,
Virginia (one parcel) and Sanford, Florida (two parcels).
The Virginia Facility is owned by the Company and is comprised of twelve
buildings on 24 acres of land. There is a total of approximately 246,000 sq. ft.
of production and storage capacity located within the buildings.
The Florida Facilities are comprised of (i) a manufacturing facility
(37,000 sq. ft. on approximately 2.5 acres). and (ii) a warehouse/distribution
facility (49,000 sq. ft.). At December 31, 1998 the Company owned the
manufacturing facility and leased the warehouse/distribution facility for
approximately $7,900 per month. The lease expires on October 31, 1999. The
Company is currently reviewing its options relative to the need for replacement
space and the means to satisfy such need.
ITEM 3. 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 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. The Company intends to
vigorously defend this action.
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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 any such 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 for these additional proceedings is
remote.
ITEM 4. Submissions of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1998.
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Part II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The common stock, $.001 par value, of the Company (the "Common Stock") is
traded in the over-the counter market on the NASDAQ SmallCap Market under the
symbol USAM. Prior to the fourth quarter of 1997, the Common Stock traded under
the symbol RTIC. The following table sets forth, for the periods indicated, high
and low bid prices of the Common Stock. The quotations, which have been adjusted
to reflect for the 1 for 15 reverse split referred to below, constitute
quotations among dealers and do not reflect retail mark-ups, markdowns, or
commissions, and may not represent actual retail transactions:
Year Ended Dec. 31, 1997 High Low
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First Quarter: $86.25 $76.875
Second Quarter: 86.25 56.25
Third Quarter: 75.00 56.25
Fourth Quarter: 78.75 33.75
Year Ended Dec. 31, 1998
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First Quarter: $46.05 $26.25
Second Quarter: 31.95 9.45
Third Quarter: 17.85 3.30
Fourth Quarter: 8.40 1.95
As of March 30, 1999 there were 1,048,273 shares of Common Stock
outstanding. The Company believes that there are over 500 beneficial owners of
Common Stock, whose shares are held of record or in street name.
1:15 Reverse Split
At a special meeting of the stockholders held February 5, 1999, the
Company's stockholders authorized a 1 for 15 reverse split of the Company's
issued and outstanding common stock, which was effected on February 11, 1999.
ALL SHARE AND PER SHARE CALCULATIONS PRESENTED IN THIS ANNUAL REPORT HAVE
BEEN ADJUSTED TO GIVE EFFECT TO THE POST-REVERSE SPLIT.
Dividend Policy
The payment of dividends on the Company's common stock is within the
discretion of the Company's Board of Directors. To date, the Company has not
paid any dividends on its common stock,
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and does not expect to pay any dividends in the foreseeable future. The Company
intends to retain all earnings for use in the Company's operations. [The Credit
Facility limits the Company's ability to declare and pay out dividends.]
Recent Sales of Unregistered Shares
In connection with the revolving credit facility entered into by the
Company on March 31, 1998 (the "USAM Revolving Loan"), the Company granted five
year warrants to purchase up to 14,000 shares of the Common Stock, exercisable
after March 31, 1999, and agreed, in the event that and so long as 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
additional five year warrants for the purchase of 3,500 shares of the Common
Stock, exercisable at the time of such granting, for an aggregate of 14,000
additional shares. Any 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 granting
of warrants by the Company was made in reliance upon Section 4(2) of the
Securites Act of 1933, as amended (the "Act").
On June 30, 1998, the Company sold to persons qualifying as "Non-U.S.
Persons" (as such term is defined in Regulation S, as defined below) its 8%
Redeemable Convertible Debentures (each a "Reg S Debenture"), in the aggregate
principal amount of $2,250,000, 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 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 maturity date (December 31, 2000)
unless they have been converted earlier, at the option of the holder. The
conversion price of the Reg S 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 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 March 31,
1999, the Company has yet to file a registration statement.
The Reg S Debentures bear interest at 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 since 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 before June 30, 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 Reg S Debentures
the Company would otherwise issue shares of Common Stock in excess of the
Maximum Conversion Share Allotment, the interest rate on the Reg S Debentures
will, effective as of the issuance of the Maximum Conversion Share Allotment,
increase to 25% per annum with respect to the unconverted Reg S Debentures. The
Company has agreed that if it has not either retired the remaining Reg S
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 Reg S Debentures, the Company would pay a penalty
equal to the difference between the interest rate paid since inception and 25%
on those Reg S Debentures which remain outstanding after the issuance of the
Maximum Share Allotment. Such penalty shall not be applicable if the Company
issues such proxy as contemplated.
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The Company may redeem the Reg S Debentures at any time, upon 30 days prior
written notice as to redemptions made, or upon three days notice for redemption
pursuant to (ii) hereof (a "Redemption Notice"), at a redemption price equal to
(i) 125% of the principal amount of, plus accrued interest on, the Reg S
Debentures, commencing on August 30, 1998 or (ii) 100% of the principal amount
of, plus accrued interest on, the Reg S Debentures in the event that the Company
shall have issued the Maximum Conversion Share Allotment. In addition, if the
Company redeems the Reg S Debentures any time after the Company has issued the
Maximum Conversion Share Allotment, the Company has also agreed to issue to the
holders of the Reg S Debentures to be redeemed a number of warrants (the
"Redemption Warrants") equal to one-half of the principal amount of Reg S
Debentures to be redeemed. If issued, the Redemption Warrants will be
exercisable for a period of five years from the date of issuance at an exercise
price equal to either (i) the greater of (A) $15.00 per share; (B) 115% of the
average of the closing bid price of the Common Stock for the five trading days
immediately preceding the Redemption Date or (ii) in the event that an exercise
price under alternative (i) is determined by Nasdaq to be an issuance below the
then current market price within the meaning of NASD Rule 4310(c)(25)(H) (or any
successor rule), the exercise price will be equal to the closing bid price of
the Common Stock on June 30, 1998 and the number of Warrant Shares issuable will
be subject to adjustment as provided in the Redemption Warrant. The Redemption
Warrants, if any, will be redeemable by the Company upon notice of not less than
30 days, at a price of $.05 per Redemption Warrant but only to the extent that
the shares of Common Stock underlying the Redemption Warrants are transferable
either pursuant to an effective registration statement or pursuant to Rule 144
of the Act and the closing bid price of the Common Stock on all 15 trading days
ending on the day on which the Company gives notice has been at least 150% of
the then effective exercise price of the Redemption Warrants. If issued, the
Redemption Warrants will be exercisable either on a cash or "cashless" basis and
the holders will have certain registration rights with respect to the shares of
Common Stock issuable upon exercise of the Redemption Warrants.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
General
During each of fiscal 1995, 1996 and 1997, the Company posted ever more
significant losses from its continuing operations. In an effort to reverse
declining sales and continuing loss of its customers, the Company has embarked
upon a plan to (1) restructure its operations and (2) expand its business
through acquisitions.
During fiscal 1997, the Company purchased new machinery and equipment to
update obsolete and out-dated existing machinery and equipment at the Florida
Facility as well as pursued the acquisition of additional manufacturing and
distribution capabilities through the Merger on August 29, 1997.
As a result of the Merger, the Company acquired the capacity to manufacture
friction materials for its own use in the manufacture and remanufacture of brake
products as well as with respect to sales to third parties and other
manufacturers. Following the Merger, the senior management of Quality Automotive
Company became the senior management of the Company. The Merger was accounted
for using the purchase accounting method and the results of Quality have
therefore been included in the Company's results since the date of the Merger.
The Company recorded goodwill, in the approximate amount of $6,380,000,
representing the excess of the purchase price over the value of the acquired
assets and liabilities (in accordance with estimates of fair market value on the
date of the Merger). Goodwill is being amortized over 20 years. Amortization
expense for the year ended December 31, 1998 and accumulated amortization at
December 31, 1998 was $318,996 and $425,328, respectively.
In 1997 the Company reported sales of approximately $7,000,000. As of
December 1997 the Company had an internal annualized run rate of approximately
$15,000,000. For the year ended
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December 31, 1998, the Company reported sales of approximately $20,700,000 with
an internal annualized run rate as at December 1998 of approximately
$30,000,000. In fiscal 1997 (pro-forma) and fiscal 1998 the Company produced
approximately 1,300,000 and 2,500,000 brake units, respectively. As production
volume increases, overhead costs are spread over a greater number of brake units
and hence, the overhead component as a percentage of total inventory cost and
cost of sales is reduced. As a result of the significantly increasing volumes
discussed above, the overhead component of cost of sales for 1998 is
approximately $1.3 million (28% of the loss for fiscal 1998) greater than it
would have been if computed on the same basis as the overhead component of
inventory costs at December 31, 1998.
Material growth has not been attained without short-term disruptions. As
previously noted, the significant increase in sales has necessitated the
purchase of new machinery and equipment and the hiring and training of
significant numbers of new employees, resulting in substantial increases in
operating expense. The only way to insure maintaining both old and new customers
is to give each customer top quality order fill and customer service. The
"ramp-up" of production has been necessarily costly . The 1998 expenditure for
employment agency fees, overtime and temporary employees was approximately
$1,728,000 or about 38% of the years loss.
Overall operations at the Company's facility located in Florida (formerly
the RT Industries plant) contributed, in management's view, to approximately 27%
of the Company's loss in fiscal year 1998. Significant quality control rejects
and discards in conjunction with low production per employee, made the cost to
produce greater than the return which could be realized for such products.
Management believes that the savings to cost of goods sold, based on annualized
current production (versus 1998) is approximately $1,200,000 annualized. This
assumes constant total employee expense.
An additional contributing factor to the overall loss during fiscal year
1998 was the Company's difficulty in bringing its new computer system to full
operation. This condition necessitated extraordinary efforts and expense to
maintain control of the Company's financial integrity. The most formidable
effect was the lack of timely management information reports. Cost containment,
even in an environment which favors order fill and customer service cannot be
attained without a first rate management information system.
The Company believes that the last major hurdle in the Company's turnaround
and profitability is the procurement of new and expanded senior debt financing.
The Company's existing senior credit facility (the "Credit Facility") with
LaSalle Business Credit, Inc. ("LaSalle") expires on July 31, 1999. Management
has approached LaSalle as well as three additional potential senior lenders to
obtain sufficient financing to fund the Company's anticipated future growth.
Such lenders have expressed interest in providing a new and expanded lending
facility to the Company. Moreover, in February 1999 LaSalle agreed to increase
the Company's revolving credit to $10,000,000 (from $7,500,000), to raise the
sub-limit on inventory advances by $500,000 and to make available an additional
advance of $1,000,000. The maturity date of the line of credit was also extended
to July 31, 1999 at such time. Although there can be no assurance that an
expanded lending facility will be made available or, if obtained, will be
adequate to fund anticipated future revenue growth, management believes that any
such expanded refinancing of the Company's business will be obtained prior to
the July 31, 1999 expiration of the LaSalle credit facility and will be
sufficient to meet the Company's ongoing financing needs. In addition to seeking
bank financing, the Company may seek to obtain additional funding through the
sale of debt and equity securities. If the Company is successful in raising such
additional funds, it is anticipated that a majority of any proceeds would be
used to retire existing, non-senior debt facilities used during in 1998 to
finance a material portion of the Company's reported loss. An inability to
refinance the Company's Credit Facility prior to the July 31, 1999 maturity date
would have a material adverse impact on the Company's ability to continue its
business operations.
-11-
<PAGE>
Despite such impediments to profitability, management currently believes
that the Company will achieve a profitable second quarter and should be
profitable in fiscal 1999. However, the ability to achieve profitability is
dependent upon many factors including, but not limited to, the realization of
anticipated sales, the absence of any material increases in costs of good sold
from current levels and the ability to obtain additional financing. 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 Year Ended December 31, 1998 to Year Ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 were $20,744,412 as
compared to net sales of $6,999,636 for the year ended December 31, 1997. The
increase of $13,744,776 or 196% resulted from the inclusion of Quality
Automotive for the full calendar year ($8.0 million) in fiscal 1998 versus its
inclusion for only four months in fiscal 1997, plus a significant gain (35.8%)
in the combined Company's base business.
Gross Profit (Loss). For the year ended December 31, 1998, the Company had a
gross profit of $3,880,327, representing an increase of $2,858,962 when compared
to the gross profit of $1,021,365 for the year ended December 31, 1997. The
increase in gross profit was attributed to the increase in sales plus an
improvement in the relative cost of sales per dollar of sales revenue. Cost of
sales for the year ended December 31, 1998 was $16,864,085 as compared to
$5,978,271 for the year ended December 31, 1997.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the year ended December 31, 1998 were $7,064,519 as
compared to $10,107,801 for the year ended December 31, 1997, representing an
decrease of 30%. The $3,043,282 decrease in total operating expense was
comprised of an approximate $2,277,457 increase in selling, general and
administrative expense resulting from the increase in revenues offset by a lack
in fiscal 1998 of (i) valuation reserves; (ii) write-down expense; (iii)
settlement payments; (iv) fees and expenses related to the Merger; and (v) a
reduction of expenses associated with the sale of interest bearing convertible
debentures pursuant to Regulation S ("Regulation S") promulgated under the
Securities Act of 1933, as amended (the "Act").
Interest Expense. Interest expense decreased by $2,559,992 to $1,388,369 in
fiscal 1998 from $3,948,363 in fiscal 1997. This decrease was predominately
attributable to the decrease in interest expense associated with the Merger and
the sale of convertible debentures, in the aggregate principal amount of
$12,000,000, raised during fiscal 1997, which debentures were all converted in
fiscal 1997.
Net Income (Loss). The net loss in fiscal 1998 was ($4,572,561) or ($4.36) per
share based on 1,048,273 common and common equivalent shares outstanding
compared to a net loss of ($13,034,799) or ($18.23) per share in fiscal 1997
based on the weighted average of 714,985 common and common equivalent shares
outstanding. The decrease in net loss of $8,462,238 was primarily the result of
the increase in gross profit and the decrease of interest expense and the
absence in fiscal 1998 of certain non-recurring selling, general and
administrative expenses discussed above.
-12-
<PAGE>
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 were $6,999,636 as
compared to net sales of $3,912,237 for the year ended December 31, 1996. The
increase of $3,087,399 or 44% resulted from the addition of 4 months of Quality
sales ($4.3 million), offset by a $1,200,000 reduction in sales generated by the
Florida Facility.
Gross Profit (Loss). For the year ended December 31, 1997, the Company had a
gross profit of $1,021,365, representing an increase of $2,500,000 when compared
to the gross loss of ($1,422,790) for the year ended December 31,1996. The
increase in gross profit was attributed to a 79% increase in sales offset in
part by a 12 % increase in the overall cost of sales, each attributable to the
acquisition of Quality. Cost of sales for the year ended December 31, 1997 was
$5,978,271 as compared to $5,335,027 for the year ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administration expenses for the year ended December 31, 1997 were $10,107,801 as
compared to $2,694,496 for the year ended December 31, 1996, representing an
increase of 275% The $7,413,305 increase in total operating expense was
comprised of (i) a $600,000 increase in selling and delivery expense (from
$574,939 in fiscal 1996 to $1,179,218 in fiscal 1997) resulting from the Merger
and (ii) a $6,809,026 increase in the general and administrative expenses caused
by the inclusion of the Quality selling, general and administrative expense of
approximately $1,300,000, charges of approximately $3,340,000 relating to
increases in valuation reserves and the write-down of certain assets located at
the Florida Facility, a $350,000 settlement payment to a former officer and
director of the Company, approximately $1,200,000 in aggregate fees and expenses
relating to the sale during fiscal 1997 of interest bearing convertible
debentures pursuant to Regulation S, and $850,000 relating to fees and expenses
incurred in connection with the Merger.
Interest Expense. Other income and expense increased by $1,947,479 from
$2,000,884 in fiscal 1996 to $3,948,363 in fiscal 1997. This increase was
predominately attributable to the increase in interest expense associated with
the $12,000,000 raised through the sale of convertible debentures. In addition,
approximately $215,000 related to the Merger.
Net Income (Loss). The net loss in fiscal 1997 was ($13,034,799) or $(18.23) per
share based on 714,985 weighted average common and common equivalent shares
outstanding compared to a net loss of ($6,118,170) or ($13.55) per share in
fiscal 1996 based on 451,453 common and common equivalent shares outstanding.
The increase in net loss of $6,916,629 was primarily the result of the increase
in interest expense and certain non-recurring general and administrative
expenses discussed above.
Liquidity and Capital Resources
During the year ended December 31, 1998, the Company financed its
operations primarily through net proceeds from the Company's private sales of
equity and debt securities, borrowings from its lending institution and cash
generated by operations.
At December 31, 1998, the Company had consolidated cash and short-term
investments totaling $338,641 and working capital of $1,712,185. At December 31,
1997, the Company had consolidated cash and short-term investments totaling
$1,001,843 and working capital of $2,897,284. This decrease in working capital
was due primarily to the net loss. During fiscal 1998 the Company experienced a
material increase in expenses commensurate with a significant increase in
revenues without a commensurate increase in the commercial financing available
to the Company.
Net cash provided by financing activities for fiscal 1998 was $5,220,374
consisting primarily of the proceeds of the private offering of Convertible
Debentures aggregating $2.25 million (the "Reg S Debenture") issued by the
Company in a transaction exempt from registration pursuant to
-13-
<PAGE>
Regulation S promulgated by the Securities Exchange Commission under the
Securities Act ( the "Reg S Offering"), a $400,000 private placement and an
interim revolving credit of $1,050,000. Proceeds were used to fund growth and to
replace cash depleted through losses by the Company.
At the year ended December 31, 1998, interest of approximately $500,000 was
due and payable under outstanding obligations of such Company, in the form of
three (3) promissory notes aggregating approximately $5.9 million in principal.
Approximately ninety-five percent (95%) of such unpaid interest amount consists
of interest accrued under the two promissory notes issued by the Company in
connection with the Merger and are held by two current directors of the Company
(as described in Item 13 hereof). The remaining unpaid interest obligation is
pursuant to the USAM Revolving Loan.
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 was the Credit Facility between Quality and LaSalle which matures on
July 31, 1999. The Credit Facility consists of:
(i) a secured revolving credit facility of up to $8.0 million.
Advances are made by formula on the Company's accounts receivable and
inventory. At December 31, 1998, the revolving credit had approximately
$7.691 million of a possible $7.818 million outstanding. Interest is
calculated at the prime rate plus 2% (9.75% at December 31, 1998)
(ii) a secured loan covering machinery equipment, property and plant
having an original loan amount of approximately $3,500,000 of which
$300,000 was outstanding at December 31, 1998. Monthly installments of
$50,000 are due until maturity, at which time any balance owing is due.
Interest is calculated at the prime are plus 2% (9.75% at December 31,
1998)
(iii) a secured loan covering machinery and equipment put into service
under a capital expenditure facility of 1995. The original amount
outstanding was approximately $1,000,000. At December 31, 1998, the balance
outstanding was approximately $300,000. 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 2% (9.75% at December 31, 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, which 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. Upon the occurrence of an
event of default specified in the Credit Facility (including failure to satisfy
certain financial covenants), the maturity of the outstanding principal amounts
of the revolving credit loans and the equipment loans may be accelerated by
LaSalle who may also foreclose on the secured assets of Quality. The Company was
and continues to be in noncompliance with certain financial covenants under the
Credit Facility as at the most recent renewal (February 1999). Such
noncompliance has been continuing since the Merger. Until such time, however,
that Quality is no longer in technical default, or the Credit Facility is
amended in a manner to cure such defaults, LaSalle may be able to accelerate the
maturity date of the Credit Facility. Management believes that should it become
necessary or advisable to change its borrowing relationship, there are a number
of financial institutions willing to provide necessary financing to the Company.
The Credit Facility had a maturity date of March 31, 1999. In the fourth
quarter of 1998, Quality and LaSalle agreed that the automatic extension of
maturity of the Credit Facility would not continue. The Company's business has
approximately doubled over the past twelve months and a continuation of the
existing financing arrangements were not deemed prudent. By that Fifth Amendment
to the Credit Facility dated February 26, 1999, LaSalle (i) increased the amount
of the revolving credit under the Credit Facility from $7,500,000 to
$10,000,000, (ii) increased the sub-limit of advances on inventory from $4
million to $4.5 million, (iii) re-advanced up to $1,000,000 based on its
existing security interests in the fixed assets of Quality, and (iv) granted an
interim extension of the maturity date to July 31, 1999 to allow time for the
Company to obtain new facilities to be put in place.
The Company has discussed with LaSalle (and a number of other financial
institutions) its forecasted need for new financing arrangements. Although there
can be no assurance that new financing arrangements will be procured or that any
such arrangements will be adequate to finance the Company's forecasted needs,
management believes that such new financing will be sufficient to meet the
Company's on-going financing needs and will be obtained prior to the expiration
of its current financing facilities. An inability to refinance the Company
beyond the scheduled maturity date of July 31, 1999, however, would have a
material adverse impact on the Company's ability to continue its business
operations.
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<PAGE>
In addition to the Credit Facility, the Company obtained additional
financing during the year ended December 31, 1997 through the private sale of
interest bearing convertible debentures pursuant to Regulation S. For the year
ended December 31, 1997, the Company issued a total of $10,500,000 of
convertible debentures. Such convertible debentures enabled their respective
holder to convert such convertible debentures into the Company's common stock.
All of the convertible debentures (principal plus accrued interest) were
converted during fiscal 1997, resulting in an issuance of an aggregate of
350,892 shares of the Company's Common Stock. For the year ended December 31,
1997, $3,500,000 of interest expense has been recorded for the difference
between the conversion prices of the convertible debentures sold by the Company
pursuant to Regulation S and the fair market value of the Company's common stock
at the time of conversion.
Moreover, in 1997, the Company obtained additional short-term financing
from one of its principal stockholders in June 1997 for use in connection with a
settlement entered into with a former officer and director of the Company and
certain affiliated entities. The loan, in the amount of $350,000, was evidenced
by a promissory note, bearing interest at the annualized rate of 8.5%, which
note was repaid in full in August 1997. In connection with the loan, the Company
issued to such principal stockholder five year warrants to purchase up to 666
shares of the Company's common stock, with an exercise price of $56.25 per
share.
The Company obtained additional financing in February 1998 through the
private placement of debt and equity securities to an affiliate and a director
of the Company, respectively. The sale was made pursuant to a private placement
consisting of 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 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 of the Common Stock as quoted on the Nasdaq SmallCap Market for
the 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 holders of the Warrants shall have the right
to exercise them until the close of business on the date fixed for redemption.
The exercise price and the number of shares of Common Stock or other securities
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. On July 23, 1998, the
Company prepaid in full one of the promissory notes, in the principal amount of
$50,000 (together with accrued interest thereon). The other promissory note, in
the principal amount of $350,000, was satisfied in full on its February 28, 1999
maturity date.
On March 31, 1998, the Company also entered into the USAM Revolving Loan
with Galt Financial Ltd., pursuant to which up to $2.0 million was made
available to the Company. At December 31, 1998 an aggregate of up to $1.05
million had been advanced to the Company under the USAM Revolving Loan. The
additional amount of $350,000 was advanced to the Company under the USAM
Revolving Loan on February 28, 1999 and used by the Company to satisfy the
$350,000 promissory note issued in the February 1998 private placement. 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
-15-
<PAGE>
production facility. Under the terms of the USAM Revolving Loan, the Company (i)
granted five year warrants to purchase up to 14,000 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 14,000 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 five year warrants for the
purchase of 3,500 additional shares of the Company's Common Stock, exercisable
at the time of such granting. Prepayment by the Company of the USAM Revolving
Loan 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 also granted 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 through the sale on June 30, 1998, of 8%
redeemable convertible debentures (each a "Reg S Debenture"), in the aggregate
principal amount of $2,250,000, pursuant to Regulation S (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
maturity date (December 31, 2000) unless they have been converted earlier, at
the option of the holder. The conversion price of the Reg S 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 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 March 31, 1999, the Company has yet to file a
registration statement.
The Reg S Debentures provided for interest at 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 since 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 before June 30,
1999. At such time as the underlying shares are tradable, without regard to
registration, the interest rate shall revert to the 8% per annum. Further, if
upon conversion of the Reg S Debentures the Company would otherwise issue shares
of Common Stock in excess of the Maximum Conversion Share Allotment, the
interest rate on the Reg S Debentures will, effective as of the issuance of the
Maximum Conversion Share Allotment, increase to 25% per annum with respect to
the unconverted Reg S Debentures. The Company has agreed that if it has not
either retired the remaining Reg S 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 Reg S
Debentures, the Company would pay a penalty equal to the difference between the
interest rate paid since inception and 25% on those Reg S Debentures which
remain outstanding after the issuance of the Maximum Share Allotment. Such
penalty shall not be applicable if the Company issues the proxy statement
referred to above.
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
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<PAGE>
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 fair value.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
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 IBM36 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 in the second
quarter.
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 December 31, 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 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 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
ITEM 7. Financial Statements
The Consolidated Financial Statements of the Company appear herein
following Item 13 below.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The information required by this item has previously been reported in the
Company's Current Report on Form 8-K for the event dated August 29, 1997 (Item
2) and Amendment No. 1 thereto.
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<PAGE>
Part III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The table below sets forth the name, age and certain information as to the
Directors and executive officers of the Company.
Name Age Position
- ---- --- --------
John W. Kohut 52 Chairman of the Board, Director (1)
Martin Chevalier 53 Chief Executive Officer, President
and Director
Karen L. Connery 34 Treasurer and Assistant Secretary
David Love 64 Director (1)
Mandel Sherman 60 Director (1)
- ----------
(1) Member, Audit Committee
John W. Kohut has been a director of the Company since August 1997 and has
served as the Chairman of the Board of the Company since Quality was acquired,
by merger, on August 29, 1997. Mr. Kohut also has served since August, 1997 as
the principal financial officer of the Company. Prior to the Merger, he was a
substantial equity owner in Quality. Since January 1991 Mr. Kohut has served as
President of RamKo Venture Management, Inc. ("RamKo"), an investment banking and
consulting firm. He currently continues to serve in such capacity. The Company
has engaged RamKo as a consultant to the Company since December 1996.
Martin Chevalier has been a director of the Company since August 1997 and has
served as President and Chief Executive Officer of the Company following the
Merger. He also has served as President of Quality since December 1988. Prior to
the Merger, he was also a principal equity owner of Quality.
Karen L. Connery has served as Treasurer, principal accounting officer and
Secretary of the Company since May 1998. Over the past five years, Ms. Connery
has practiced in the areas of tax accounting, auditing and litigation support
for both public accounting firms and as a sole proprietor. Immediately prior to
serving the Company in her present capacity, Ms. Connery provided services to
the Company as a financial consultant.
David Love has been a director of the Company since July 1996. He has served as
Chairman of the Audit Committee since August 1997. For more than the past five
plus years, Mr. Love has been a practicing independent Certified Public
Accountant and attorney in the greater Boston area. In addition, Mr. Love is a
practicing arbitrator and mediator. Mr. Love is currently the Chief Financial
Officer of Quality
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<PAGE>
Microwave, Inc., a private corporation located in Wilmington, MA, which office
he has held since April 1995.
Mandel Sherman has been a director of the Company since July, 1996. Mr. Sherman
has also provided consulting services to the Company through Baroque
Investments, Inc., a consulting firm engaged in December 1995 by the Company,
terminating December 31, 2000. Since 1983, Mr. Sherman has served as an investor
and manager in a variety of privately-held real estate ventures and more
recently, investment firms and companies, including without limitation First
Providence Financial Association Inc., a member of NASD. Since 1996, he has
served as President and principal stockholder of Miss Sloan Capital Ltd., an
investment company and general partner of Elmgrove, which partnership is a
principal stockholder of the Company. In the past, Mr. Sherman served as an
executive officer in both public and private companies engaged in the precious
metals industry. He has also served as President of Westbury Alloys, LLC. and
Manager of Wingate Financial Associates, LLC since 1996.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on the Company's review of the copies of such forms
received by the Company, the Company believes that, during the year ended
December 31, 1998, all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were complied with,
except that Form 4's covering July 1998 were not timely filed by the four (4)
directors in connection with options granted to each of them in that month.
ITEM 10. Executive Compensation
The following table sets forth for the fiscal years ended December 31,
1998, 1997 and 1996 the compensation of the Company's Chief Executive Officer
and any executive officer of the Company, other than the Chief Executive
Officer, whose aggregate salary and bonus exceeded $100,000 for the fiscal year
ended December 31, 1998 (the "Named Executives"):
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Principal Fiscal Long-Term and Other
Name Position Year Salary ($) Bonus ($) Compensation
---- -------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Martin Chevalier President and Chief 1998 $225,000 0 21,900.50
Executive Officer 1997 $ 75,000(1) 0 N/A
John W. Kohut Chairman of the Board 1998 0 0 $180,000(2)
1997 0 0 $ 60,000(2)
John K. Kenney Treasurer, Secretary (3) 1998 $ 27,500(4) 0 N/A
1997 $110,000 $ 36,000 N/A
1996 $110,000 $ 18,000 N/A
</TABLE>
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<PAGE>
- ----------
(1) Based on four months employment at an annual rate of $225,000. Mr.
Chevalier was employed by the Company effective August 29, 1997,
following the Merger.
(2) Based on distributions to RamKo, pro-rated over 4 months. The Company
engaged RamKo as a consultant on August 29, 1997, at a rate of $45,000
per quarter. Mr. Kohut is the President of RamKo. He also became
Chairman of the Board of the Company on August 29, 1997. RamKo was
initially engaged by the Company in December, 1996.
(3) Mr. Kenney served as President and Chief Executive Officer of the
Company from mid-October, 1995, until September 2, 1997, at which time
he was employed by the Company as Treasurer and Secretary. Mr. Kenney
resigned from his position as Treasurer and Secretary, effective March
27, 1998.
(4) Based on three months employment at an annual rate of $110,000.
Employment and Consulting Agreements
The Company has entered into a three-year employment agreement dated August
29, 1997, with Martin Chevalier, whereby Mr. Chevalier serves as President and
Chief Executive Officer of each of the Company and Quality. The employment
agreement provides for an annual base compensation of $225,000 plus annual
bonuses of (i) five percent (5%) of the first $1,000,000 in audited pre-tax
consolidated profits of the Company and Quality and (ii) ten percent (10%) of
audited pre-tax consolidated profits of the Company and Quality in excess of
$1,000,000 but not to exceed $500,000 in any given year. The employment
agreement provides for Mr. Chevalier's employment on a full-time basis and
contains a provision that the employee will not compete or engage in a business
competitive with the current or anticipated business of the Company during the
term of the employment agreement and for a period of two years thereafter. Mr.
Chevalier's employment under the employment agreement may be terminated for
"cause" by the Company or Quality.
The Company has entered into a three-year consulting agreement, commencing
August 29, 1997, with RamKo, of which Mr. Kohut is the President, pursuant to
which RamKo has agreed to provide general business and financial advice to the
Company. The agreement provides for quarterly payments of $45,000 plus
reasonable and necessary expenses. The agreement also provides that services
rendered by RamKo shall not exceed twenty-five (25) days in any given calendar
quarter (otherwise, the Company is liable to RamKo for an additional charge). In
addition, RamKo and its directors, shareholders, agents, officers and employees
have agreed not to perform services or engage in any business deemed to be in
competition with the Company. The agreement may be terminated for "cause" by the
Company.
The Company has entered into a consulting agreement, terminating January
31, 1999, with Baroque Investments Inc. ("Baroque"), of which Mr. Sherman is the
President, pursuant to which Baroque has agreed to provide overall strategic
advice and planning in connection with the acquisition and/or development of
complementary products and businesses and the finances of the Company. The
agreement provides for an annual rate of $60,000, payable in monthly
installments of $5,000, plus reasonable and necessary expenses.
Committees of the Board of Directors
In August 1997, the Company established an Audit Committee comprised of
Messrs. Love, Kohut and Sherman. The Audit Committee, among other things, makes
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement.
-20-
<PAGE>
Director Fees and Other Remuneration
All directors receive a director's fee of $25,000 per annum in connection
with their participation on the Board of Directors; provided, however, that each
director is deemed to have waived such fee, or portion thereof during that year,
to the extent that during such year such director otherwise receives
compensation from the Company for services rendered in excess of such aggregate
fee. Mr. Love receives the $25,000 annual director's fee and Mr. Sherman,
effective with the expiry of the Baroque consulting contract on January 31,
1999, will likewise receive the annual director's fee.
In addition to his director fees, Mr. Love received during fiscal 1998 an
additional sum of approximately $7,333 for serving as Chairman of the Audit
Committee. Such fee was discontinued, effective September 1, 1998.
Stock Plans
1992 Stock Option Plan
On March 13, 1992, the Company's Board of Directors and stockholders
approved the Company's 1992 Employee Stock Option Plan (the "1992 Plan"). Under
the 1992 Plan, in the discretion of the Compensation Committee of the Board of
Directors, options may be granted to key employees (including officers) of the
Company and its subsidiaries for the purchase of shares of the Company's common
stock. The Company is authorized to issue up to 4,000 options under the 1992
Plan. The 1992 Plan terminates in March 2002.
At December 31, 1998, only options to purchase up to 93 shares of Common
Stock were outstanding under the 1992 Plan. On January 13, 1999, the Company
agreed to reprice options to purchase shares at a price per share equal to the
closing price of the Common Stock as quoted on the Nasdaq SmallCap Market on
March 31, 1999. In addition, to the extent the holder of such options is still
employed, the Company agreed to issue additional options pursuant to the 1992
Plan to such holder so that such individual has options to purchase up to an
aggregate of 333 shares of the Common Stock under the 1992 Plan.
1998 Stock Option Plan
On June 30, 1998, the Company's Board of Directors and stockholders
approved the 1998 Employee Stock Option Plan (the "1998 Plan"), pursuant to
which 66,666 shares of Common Stock were reserved for issuance upon exercise of
options eligible for grant under the 1998 Plan.
-21-
<PAGE>
Unless sooner terminated, the 1998 plan will expire at the close of business on
January 13, 2008.
Any person, including, but not limited to, employees, directors,
independent agents, consultants and attorneys believed by the Board of
Directors, or if applicable, a Stock Option Committee, to have contributed to
the success of the Company, are eligible to be granted non-qualified stock
options under the 1998 Plan. Incentive stock options as defined in Section 422
of the Code may be granted only to employees of the Company or any subsidiary of
the Company. Under the 1998 Plan the maximum number of shares that may be
covered by stock options granted hereby to any person for the duration of the
Plan is 13,333 shares.
Incentive stock options granted pursuant to the 1998 Plan are
nontransferable by the optionee during his or her lifetime. All options granted
under the 1998 Plan, will, unless a shorter term is established by the Board of
Directors or the Committee, if applicable, expire if not exercised within ten
years of the grant (five years in the case of Incentive Stock Options granted to
an eligible employee owning stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or a parent or subsidiary of
the Company immediately before the grant ("10% Stockholder")), and under certain
circumstances set forth in the 1998 Plan, may be exercised within 3 months
following termination of employment (one year in the event of death of the
optionee). Options may be granted to optionees in such amounts and at such
prices as may be determined, from time to time, by the Board of Directors or the
Committee. The exercise price of an Incentive Stock Option will not be less than
the fair market value of the shares underlying the Incentive Stock Option on the
date the Incentive Stock Option is granted, provided, however, that the exercise
price of an Incentive Stock Option granted to a 10% Stockholder may not be less
than 110% of such fair market value. The Company may not, in the aggregate,
grant Incentive Stock Options that are first exercisable by any optionee during
any calendar year (under all such plans of the optionee's employer corporation
and its "parent" and "subsidiary" corporations, as those terms are defined in
Section 424 of the Code) to the extent that the aggregate fair market value of
the underlying stock (determined at the time the option is granted) exceeds
$100,000.
At December 31, options to purchase up to an aggregate of 20,333 shares of
Common Stock were outstanding under the 1998 Plan, which options had been
granted July 8, 1998 to the four members of the Board of Directors of the
Company, having an exercise price of $14.53125 per share and cashless exercise
provisions. In addition, the Company authorized on January 13, 1999 the granting
of non-qualified stock options to certain key employees of the Company under its
1998 Plan, pursuant to which such employees received options to purchase up to
an aggregate of 26,000 shares of the Common Stock, at an option price per share
equal to the
-22-
<PAGE>
closing price of the Common Stock as quoted on the Nasdaq SmallCap Market on
March 31, 1999. Such options shall vest and be exercisable in equal annual
installments over a four(4) year period and then, only to the extent that such
holder is still employed by the Company as of the date of such vesting and
otherwise still eligible under the terms of the 1998 Plan. Such options become
exercisable at various dates and expire at the end of not more than ten (10)
years from the date of the grant or within sixty days of termination of
employment with the Company, which ever is earlier. For purposes of such
options, the Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, the full
number of shares of Common Stock issuable upon the exercise of the options.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 30, 1999, the number of shares
of the Company's outstanding Common Stock beneficially owned by (i) each
director of the Company; (ii) each person who is known by the Company to
beneficially own 5% or more of the outstanding Common Stock; (iii) each of the
Named Executives; and (iv) all of the Company's directors and executive officers
as a group (based on information furnished by such persons). Unless otherwise
indicated, the beneficial owners exercise sole voting and/or investment power
over their shares.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature of Beneficial Beneficial
Owner(1) Ownership(2) Percent
- ------------------------------ ------------------------------- ----------
<S> <C> <C>
Elmgrove Associates II., L.P(3) 135,166(4) 11.9%
Mandel Sherman (5) 136,332(4)(6) 12.99%
John W. Kohut 50,744(7) 4.83%
Martin Chevalier 75,158(8) 7.16%
David Love (9) 1,416(10) *
John Kenney (11) 0 *
All executive officers and directors as a 263,650(4)(6)(7)(8) (9) (10) 23.14%
group (5 persons)
</TABLE>
- ----------
* less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner of more
than 5% of the Common Stock is c/o the Company.
(2) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days from March 30, 1999 upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that convertible
securities, options or warrants that are held by such person (but not those
held by any other person) and which are exercisable within 60 days of March
30, 1999 have been exercised. Unless otherwise noted, the Company believes
that all persons named in the table have sole voting and investment power
with respect to all shares of Common Stock beneficially owned by them.
(3) Elmgrove's address is 210 Dartmouth, Pawtucket, RI 02860. Mandel Sherman, a
director of the Company, is President of the General Partner of Elmgrove.
-23-
<PAGE>
(4) Includes 85,166 shares issuable upon exercise of currently exercisable
warrants. 50,000 shares of Common Stock held by Elmgrove are also subject
to a lock-up agreement, dated August 29, 1997, whereby Elmgrove has agreed
to certain volume restrictions and limitations on the sale of these shares
over a 5 year period.
(5) Mr. Sherman's address is c/o Elmgrove Associates II, L.P. at 210 Dartmouth,
Pawtucket, RI 02860.
(6) Includes options to purchase up to 1,166 shares of common stock. Also
represents 135,166 shares beneficially owned by Elmgrove. Mr. Sherman may
also be deemed to be the beneficial owner of the share by virtue of his
position as President of the General Partner of Elmgrove.
(7) Includes options to purchase up to 1,666 shares of Common Stock. Except for
the aforementioned option shares, all of the shares are subject to a
lock-up agreement, dated August 29, 1997, restricting the sale of shares
over a 5 year period.
(8) Includes options to purchase up to 1,666 shares of Common Stock. Except for
the aforementioned option shares, all of the shares are subject to a
lock-up agreement, dated August 29, 1997, restricting the sale of shares
over a 5 year period.
(9) Mr. Love's address is 68 Hammond Pond Parkway, Chestnut Hill, Massachusetts
02167.
(10) Includes options to purchase up to 583 shares of Common Stock and up to 833
shares of Common Stock issuable upon exercise of currently exercisable
warrants.
(11) Mr. Kenney resigned from his position as Treasurer and Secretary, effective
March 27, 1998.
ITEM 12 Certain Relationships and Related Transactions
In 1995, the Company entered into a consulting agreement, terminating
January 31, 1999, with Baroque Investments Inc. ("Baroque"), of which Mr.
Sherman (a director of the Company) is the President. Such consulting agreement
provides for Baroque to render overall strategic advice and planning in
connection with the acquisition and/or development of complementary products and
businesses and the finances of the Company. The agreement provides for an annual
rate of $60,000, payable in monthly installments of $5,000, plus reasonable and
necessary expenses.
On May 31, 1997, the Company borrowed from Elmgrove $350,000, evidenced by
a non-negotiable promissory note, bearing interest at a rate of 8% per annum,
which was repaid in August 1997. In connection with the loan, the Company
granted to Elmgrove 10 year warrants to purchase 666 shares of the Common Stock
at an exercise price of $56.25 per share.
In connection with the consummation of the Merger with Quality on August
29, 1997, each of Messrs. Chevalier and Kohut, as shareholders of Quality
Automotive Company, received promissory notes from the Company, in the amounts
of $2,697,841.73 and $ 1,802,158.27, respectively, as well as 73,492 and 49,078
shares of Common Stock, respectively. Such notes bear interest at a rate of 8%
per annum, payable quarterly commencing August 1, 1998, and are payable in full
on May 15, 2000. Such notes are the direct obligation of Quality and are
guaranteed by U.S. Automotive, which also pledged all of its stock in Quality as
additional collateral. The stock pledge is subordinated to the LaSalle Credit
Facility. Mr. Kohut currently serves as a director and principal financial
officer of the Company and Mr. Chevalier serves as a director and President of
the Company.
-24-
<PAGE>
On August 29, 1997, the Company entered into a three-year consulting
agreement with RamKo, of which Mr. Kohut (a director and Chairman of the Board
of the Company) is the President. Such consulting agreement provides for
quarterly payments to RamKo of $45,000 plus reasonable and necessary expenses.
The consulting agreement also provides that RamKo and its directors,
shareholders, agents, officers and employees shall not perform services or
engage in any business deemed to be in competition with the Company. The
agreement may be terminated for "cause" by the Company.
On February 27, 1998, the Company sold debt and equity securities to
Elmgrove and David Love, an affiliate and a director of the Company,
respectively. The sale was made pursuant to a private placement consisting of
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
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 the greater of $30.00
per share or the last sales price of the Common Stock as reported on NASDAQ
SmallCap Market for the trading date immediately preceding the exercise date,
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
holders of the Warrants shall have the right to exercise them until the close of
business on the date fixed for redemption. The exercise price and number of
shares of Common Stock or other securities 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. On each of July 23, 1998 and February 28, 1999, the Company paid in
full the outstanding balances and accrued interest thereon, with respect to the
promissory notes to David Love and Elmgrove, respectively.
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Financial Statements
See list of Financial Statements on F-1.
(b) Reports on Forms 8-K and 8-K/A
The Company did not file any reports with the Securities and Exchange
Commission on Form 8-K during the quarter ended December 31, 1998.
(c) Exhibits
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws of the Company (1)
4.1 Form of certificate evidencing Common Stock, $.001 par value,
of the Company, (1)
10.1 Form of Employment Agreement, dated August 29, 1997, of Martin
Chevalier
10.2 Agreement and Plan of Merger dated as of June 6, 1997, by and
among the Company, its subsidiary, Quality Automotive Company
and its stockholders. (2)
10.3 Amended and Restated Promissory Note, dated August 29, 1997, to
each of John W. Kohut and Linda S. Ram ("Kohut and Ram Note") (4)
-25-
<PAGE>
10.4 Second Amendment to Kohut and Ram Note (*)
10.5 Amended and Restated Promissory Note, dated August 29, 1997, to
each of Martin and Malvina B. Chevalier ("Chevalier Note")(4)
10.6 Second Amendment to Chevalier Note (*)
10.7 Guaranty, dated August 29, 1997, from the Company to each of
John Kohut and Linda S. Ram. (2)
10.8 Guaranty, dated August 29, 1997, from the Company to each of
Martin and Malvina B. Chevalier (2)
10.9 Stock Pledge and Security Agreement, dated August 29, 1997,
among the Company, its subsidiary, Quality Automotive Company
and its stockholders (2)
10.10 Registration Rights Agreement, dated August 29, 1997, between
the Company and certain stockholders (2)
10.11 Lock-Up of John W. Kohut, Linda S. Ram. Martin Chevalier and
Malvina B. Chevalier (2)
10.12 Lock-Up of Elmgrove Associates II, L.P. (2)
10.13 Consulting Agreement, dated August 29, 1997, with RamKo
Venture Management, Inc. (4)
10.14 Amended and Restated Revolving Credit, Term Loan and Security
Agreement (the "Credit Agreement") among Quality, the Company,
and LaSalle Business Credit, Inc. f/k/a StanChart Business
Credit, Inc., dated as of December 30, 1992 (4)
10.15 Second Amendment, dated May 26, 1994 to the Credit Agreement (4)
10.16 Third Amendment, dated December 26, 1995 to the Credit
Agreement (4)
10.17 Waiver, Fourth Amendment and Assumption Agreement, dated
August 29, 1997 to the Credit Agreement (4)
10.18 Fifth Amendment dated February 24, 1999 to the Credit
Agreement.(*)
10.19 Consulting Agreement, dated December 15, 1995, as amended,
with Baroque Investment, Inc.
10.20 Settlement Agreement, dated January 30, 1997, with former
officer and director of the Company and his affiliates (3)
10.21 Form of Promissory Note issued in favor of each of Elmgrove
and David Love (4)
10.22 Form of Warrant issued in favor of each of Elmgrove and David
Love (4)
10.23 Form of Registration Rights Agreement issued in favor of each
of Elmgrove and David Love
10.24 Form of $2,000,000 Revolving Credit Agreement, dated March 31,
1998 (*)
10.25 Form of Revolver Note in Revolving Credit Agreement (*)
-26-
<PAGE>
10.26 Form of Warrant Certificate in Revolving Credit Agreement (4)
10.27 Form of 8% Convertible Debenture dated June 29, 1998 (5)
27 Financial Data Schedule (for SEC use only).
- ----------
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form S-18, File No. 33-47037-A.
(2) Incorporated by reference to the comparable exhibit contained in the
Current Report on Form 8-K filed by the Company for the event dated August
29, 1997.
(3) Incorporated by reference to the comparable exhibits contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996.
(4) Incorporated by reference to the comparable exhibits contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
(5) Incorporated by reference to the comparable exhibit contained in the
Current Report on Form 8-K filed by the Company for the event dated July
[29], 1998.
(*) Filed herewith
-27-
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
U.S. Automotive Manufacturing, Inc.:
We have audited the accompanying consolidated balance sheets of U.S. Automotive
Manufacturing, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Automotive Manufacturing,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 8 to the
financial statements, the Company has suffered recurring losses from operations
and its principal credit facility matures on July 31, 1999, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Richmond, Virginia
March 23, 1999
F-1
<PAGE>
U.S. Automotive Manufacturing, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 338,641 $ 1,001,843
Accounts receivable, net of allowance of $195,000 and $136,000, respectively 5,043,316 2,800,755
Inventories 9,420,570 8,739,028
Prepaid expenses and other 16,078 425,781
------------ ------------
Total current assets 14,818,605 12,967,407
Property, plant, and equipment, net 11,062,084 10,256,556
Other assets:
Goodwill, net 5,954,669 6,273,665
Deferred loan costs, net 216,000 --
------------ ------------
Total assets $ 32,051,358 $ 29,497,628
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 7,691,370 $ 4,815,211
Current portion of long-term debt 693,163 1,688,942
Accounts payable 3,965,184 2,735,688
Accrued liabilities 756,703 830,282
------------ ------------
Total current liabilities 13,106,420 10,070,123
Long-term liabilities:
Long-term debt, less current portion 3,852,408 242,414
Notes payable to stockholders 4,980,000 4,500,000
------------ ------------
Total liabilities 21,938,828 14,812,537
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, ($.001 par value, 30,000,000 shares authorized, 1,048,273*
shares issued and outstanding) 1,048 1,048
Additional paid-in capital 38,900,222 38,900,222
Accumulated deficit (28,788,740) (24,216,179)
------------ ------------
Total stockholders' equity 10,112,530 14,685,091
------------ ------------
Total liabilities and stockholders' equity $ 32,051,358 $ 29,497,628
============ ============
</TABLE>
* Restated for 1:15 reverse split effective February 5, 1999.
The accompanying notes are an integral part of
these consolidated statements.
F-2
<PAGE>
U.S. Automotive Manufacturing, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997
1998 1997
------------ ------------
Net sales $ 20,744,412 $ 6,999,636
Cost of sales 16,864,085 5,978,271
------------ ------------
Gross profit 3,880,327 1,021,365
------------ ------------
Operating expenses:
Selling and delivery 2,852,396 1,179,218
General and administrative 4,212,123 8,928,583
------------ ------------
Total operating expenses 7,064,519 10,107,801
------------ ------------
Operating loss (3,184,192) (9,086,436)
Interest expense (1,388,369) (3,948,363)
------------ ------------
Net loss $ (4,572,561) $(13,034,799)
============ ============
Loss per common share (basic and diluted)* $ (4.36) $ (18.23)
============ ============
Weighted average common shares outstanding* 1,048,273 714,985
============ ============
* Restated for 1:15 reverse split effective February 5, 1999.
The accompanying notes are an integral part of
these consolidated statements
F-3
<PAGE>
U.S. Automotive Manufacturing, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
------------------- Additional
Par Paid-in Accumulated
Shares* Value* Capital* Deficit Total
--------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 554,823 $ 555 $ 15,600,706 $(11,181,380) $ 4,419,881
Conversion of convertible notes payable into
common stock 19,999 20 299,980 -- 300,000
Conversion of convertible debentures into common
stock 350,875 350 11,999,650 -- 12,000,000
Discount on conversion price of convertible
debentures -- -- 3,500,009 -- 3,500,009
Issuance of common stock in connection with the
merger with Quality Automotive Company 122,576 123 7,499,877 -- 7,500,000
Net loss -- -- -- (13,034,799) (13,034,799)
--------- ------- ------------ ------------ ------------
Balance, December 31, 1997 1,048,273 1,048 38,900,222 (24,216,179) 14,685,091
Net loss -- -- -- (4,572,561) (4,572,561)
--------- ------- ------------ ------------ ------------
Balance, December 31, 1998 1,048,273 $ 1,048 $ 38,900,222 $(28,788,740) $ 10,112,530
========= ======= ============ ============ ============
</TABLE>
* Restated for 1:15 reverse split effective February 5, 1999.
The accompanying notes are an integral part of
these consolidated statements.
F-4
<PAGE>
U.S. Automotive Manufacturing, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,572,561) $(13,034,799)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,367,373 820,612
Provision for inventory valuation -- 1,345,776
Provision for property, plant, and equipment valuation -- 1,583,630
Discount on conversion price of convertible debentures -- 3,500,009
Rollover of accrued interest into shareholder note 480,000 --
Net loss on disposal of fixed assets 130,829 --
(Increase) decrease in:
Trade receivables (2,242,561) 473,850
Inventories (681,542) (612,928)
Prepaid expenses and other 409,703 722,868
Increase (decrease) in:
Accounts payable and accrued liabilities 1,155,917 606,907
Account payable to stockholder -- (387,850)
------------ ------------
Net cash used in operating activities (3,952,842) (4,981,925)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 95,000 --
Purchase of property and equipment (2,025,734) (980,570)
Acquisition of Quality Automotive Company, net of cash acquired -- (2,893,543)
------------ ------------
Net cash used in investing activities (1,930,734) (3,874,113)
------------ ------------
Cash flows from financing activities:
Borrowings/(repayments) of line of credit and long-term debt, net 3,240,374 (1,598,667)
Proceeds from issuance of convertible debentures 2,250,000 10,500,000
Deferred loan costs (270,000) --
------------ ------------
Net cash provided by financing activities 5,220,374 8,901,333
------------ ------------
Net increase (decrease) in cash (663,202) 45,295
Cash, beginning of year 1,001,843 956,548
------------ ------------
Cash, end of year $ 338,641 $ 1,001,843
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated statements
F-5
<PAGE>
U.S. Automotive Manufacturing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Business Operations and Organization:
U.S. Automotive Manufacturing, Inc. is a Delaware corporation formed on January
16, 1992. U.S. Automotive Manufacturing, Inc. and its subsidiaries (collectively
the "Company"), manufacture, assemble and distribute new and rebuilt automotive
friction products (brake pads and remanufactured brake shoes). The Company sells
the friction products to the automotive aftermarket (replacement parts sold for
use on motor vehicles after initial vehicle purchase). Sales of the Company's
products are made to automotive distributors, mass merchandisers and chain
stores located primarily in North America and, as a result, maintains
significant receivable balances with its major customers. The Company's two
largest customers accounted for approximately 42 and 14 percent of net sales for
the years ended 1998 and 1997, respectively, and approximately 67 and 31 percent
of net accounts receivable at December 31, 1998 and 1997, respectively. The
Company does not market its products directly to retail customers.
The Company's core business is the manufacture, assembly, and distribution of
new and rebuilt automotive friction products. Brake pads, brake shoes or a
combination of both are incorporated in all makes and models of American and
imported automobiles. The Company manufactures both integrally molded and
riveted brake pads, utilizing both organic and semi-metallic friction material.
Integrally molded brake pads involve a manufacturing process that uses heat and
pressure to affix the friction material to the metal backing plate. All imported
and the majority of late model domestic automobiles are equipped with integrally
molded brake pads. Most older domestic automobiles are equipped with riveted
brake pads, whereby the friction material is affixed to the metal backing plate
with metal rivets.
As a result of the merger with Quality Automotive Company ("Quality") (see Note
4), the Company acquired technology and capacity to additionally manufacture
friction material linings for brake shoes and to remanufacture both riveted and
bonded brake shoes.
The Company operated its business, prior to the merger, through seven
wholly-owned subsidiaries (Ultra Brake Corporation ("Ultra Brake"), Ultratech of
South Florida, Inc. ("Ultratech"), Roinco Manufacturing, Inc. ("Roinco"), and RT
Friction, Inc. ("RT Friction"). Following the merger with Quality, the Company
operates its business through Quality Automotive Company, U.S. Automotive
Friction, Inc. and Vireco, Inc. As part of the Company's ongoing restructuring
efforts, except for Quality and U.S. Automotive Friction, Inc., such
subsidiaries no longer conduct any business operations other than their existing
obligations under various equipment and property leases. The Company intends to
dissolve such subsidiaries under the applicable laws of each such subsidiary's
state of incorporation.
2. Management's Plans:
The Company's financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company suffered continuing erosion of its
customer base and recurring losses from operations through the date of its
merger with Quality. Since that date revenues have materially increased while
the cost of gearing production up to the new level of sales has continued the
Company's current losses. While management believes the Company has made
significant progress in successfully integrating product offering and production
capabilities, at December 31, 1998, the Company had insufficient working
capital. As of February 24,1999, LaSalle Business Credit, Inc. ("LaSalle")
approved amendment Five to the Revolving Credit and Term Loan Agreement which,
among other things, increased the credit facility to $10,000,000 linked to
additional collateral created through the Company's increased sales. Amendment
Five also advanced additional funds of $1,000,000 under existing collateral and
increased the limitation on inventory advances by $500,000. Amendment Five
extends the maturity date of the facility to July 31, 1999. LaSalle, as well as
three additional senior lenders, have expressed conditional interest in
providing a new and expanded lending facility. Although there can be no
assurance, management believes the expanded refinancing of the Company's
business will be sufficient to meet the Company's on-going financing needs and
will be accomplished prior to the expiration of its current financing
facilities. Additionally, the Company is in the process of attempting to raise
additional capital through the sale of equity.
Through the merger with Quality, the Company has become a manufacturer of
friction materials for its own use in the manufacture and remanufacture of brake
products as well as for third party sales to other manufacturers. Utilizing its
own friction material, the Company now produces materially all part numbers it
offers for sale. The advantage of offering a full product line, (integrally
molded and riveted brake pads and both bonded and riveted brake shoes), all
produced internally, is that it allows the Company to be more responsive to its
customer's needs while gaining better control of its inventory. Management
anticipates revenues will increase by over 50 percent in 1999.
An inability to refinance the Company beyond the scheduled maturity date of July
31, 1999, would have a material impact on the Company's ability to continue
operations. While management does not believe this to be a likely outcome, the
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets and classification of liabilities
that would result from the inability of the Company to continue as a going
concern.
3. Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of U.S.
Automotive Manufacturing, Inc. and all of its subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost (average cost method) or market.
F-6
<PAGE>
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Expenditures for maintenance
and repairs which do not improve or extend the life of an asset are charged to
expense as incurred, major renewals or betterments are capitalized. Upon
retirement or sale of an asset, its cost and related accumulated depreciation
are removed from property, plant, and equipment, and any gain or loss is
recognized. Property, plant, and equipment are depreciated over the estimated
useful lives of the assets by the straight-line method for financial reporting
and by accelerated methods for income tax purposes. Useful lives are as follows:
Years
-----
Buildings and improvements 3 - 40
Machinery and equipment 2 - 20
Furniture and fixtures 3 - 10
Automobiles under capital leases 2 - 5
Long-Lived Assets
The carrying value of long-lived assets and certain identifiable intangibles is
reviewed by the Company for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset.
Other Assets
Cost in excess of net assets acquired (goodwill) is amortized on a straight-line
basis over 20 years. Deferred loan costs are amortized on a straight-line basis
over the contractual terms of the related loans.
Revenue Recognition
Sales are recognized upon shipment of products to customers. Sales and cost of
sales include the value of steel ("core") used and returned to be recycled in
the manufacturing process. Customers may return purchased core within 90 days of
their qualifying purchase date and receive credit that can be applied against
future purchases. Core returned in excess of that purchased from the Company is
temporarily placed in a "core bank;" credit for these returns is given if
additional brake shoe products are purchased within defined time limits.
F-7
<PAGE>
Net Loss Per Share
Basic and diluted net loss per share is calculated based on the actual weighted
average shares outstanding. Outstanding stock options and warrants (464,409 and
423,411 at December 31, 1998 and 1997, respectively) are not considered as their
effect is antidilutive.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of estimated income taxes payable or refundable on income
tax returns for the current year and for the estimated future tax effect
attributable to temporary differences and carryforwards. Measurement of deferred
income tax is based on enacted tax laws including tax rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the year. Actual results
could differ from those estimates.
Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments. Fair value
estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 1998 and 1997.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values as of December 31, 1998 and 1997. These financial
instruments include cash, trade receivables, accounts payable, accrued expenses,
and debt. Fair values were assumed to approximate carrying values for these
financial instruments since they are short term in nature and their carrying
amounts approximate fair values or they are receivable or payable on demand.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current year presentation.
4. Merger with Quality Automotive Company:
On August 29, 1997, Quality was merged (the "Merger") into a wholly owned
subsidiary of the Company (the "Subsidiary"). Under the Merger, Quality's
stockholders received (i) $3,000,000 in cash, (ii) two promissory notes, in the
aggregate amount of $4,500,000, from the Subsidiary, that are guaranteed by the
Company and secured by the Company's pledge of all of its shares in the
Subsidiary, and (iii) an aggregate of 122,582 shares of the Company's common
stock. Following the Merger, the Subsidiary changed its name to "Quality
Automotive Company" and conducts business under such name.
The Merger was accounted for by the purchase method of accounting and,
accordingly, the results of operations of Quality from August 29, 1997, are
included in the accompanying consolidated financial statements. Quality's net
sales for the four months ended December 31,
F-8
<PAGE>
1997, were approximately $4.3 million. Under the purchase method, the purchase
price was allocated among the acquired assets and liabilities in accordance with
estimates of fair market value on the date of the Merger. The Company recorded
goodwill representing the excess of the purchase price over the allocation among
the acquired assets and liabilities in accordance with estimates of fair market
value on the date of the Merger. Goodwill is being amortized over 20 years.
Amortization expense for the years ended December 31, 1998 and 1997 was $319,000
and $106,000, respectively. Accumulated amortization at December 31, 1998 and
1997 was approximately $425,000 and $106,000, respectively.
The unaudited pro forma results of operations which follow assume that the
merger occurred as of the beginning of the period presented. The pro forma
results are for illustrative purposes only and do not purport to be indicative
of the actual results which occurred, nor are they indicative of future results
of operations.
Year Ended December 31, 1997
----------------------------------------------------------
Net sales $ 15,566,707
Net loss (14,198,512)
Net loss per share (basic and diluted) (17.85)
5. Inventories:
Inventories are summarized as follows:
1998 1997
---------- ----------
Raw materials $4,131,240 $4,053,517
Work-in-process 107,133 176,519
Finished goods 5,182,197 4,508,992
---------- ----------
$9,420,570 $8,739,028
========== ==========
Certain of the company's inventory is pledged as collateral (see Note 8).
F-9
<PAGE>
6. Property, Plant, and Equipment:
Property, plant, and equipment are summarized as follows:
1998 1997
------------ ------------
Land $ 571,000 $ 571,000
Buildings and improvements 4,816,552 4,477,514
Machinery and equipment 6,359,025 5,540,781
Furniture and fixtures 877,075 455,057
Automobiles under capital lease 38,250 25,076
------------ ------------
12,661,902 11,069,428
Less- Accumulated depreciation (1,599,818) (812,872)
------------ ------------
Property, plant, and equipment, net $ 11,062,084 $ 10,256,556
============ ============
Depreciation and amortization expense related to property, plant, and equipment
was approximately $994,000 and $714,000 for the years ended December 31, 1998
and 1997, respectively. All property, plant, and equipment is pledged as
collateral (see Note 8).
During 1997, equipment with a cost of approximately $4,713,000 and accumulated
depreciation of $3,129,000 was determined not to be realizable and was written
off.
7. Composition Agreement:
On March 7, 1995, in connection with a restructuring of the Company's debt, a
committee of the Company's unsecured trade creditors (the "Trade Creditors")
entered into an agreement (the "Composition Agreement"), providing for repayment
by the Company of the unsecured trade debt (the "Trade Debt") of the Trade
Creditors electing to participate in the Composition Agreement. Trade Creditors,
representing approximately $2,500,000 of the Trade Debt, elected a lump sum
payment of $0.35 for every $1.00 of the Trade Debt and have been paid. Trade
Creditors, representing $336,000 of the Trade Debt, elected periodic payments
and have received 40 percent of the periodic payments. Total remaining payments
were $136,000 and $203,000 as of December 31, 1998 and 1997, respectively, and
are recorded as accounts payable on the accompanying consolidated balance
sheets.
F-10
<PAGE>
The Company successfully negotiated settlements with respect to almost all of
the Trade Debt held by the remaining unsecured trade creditors not electing to
participate in the Composition Agreement, representing approximately $300,000 of
the Trade Debt. The Company has satisfied its obligation to such non-electing
trade creditors in accordance with such settlement arrangements.
8. Debt:
Line of Credit
Quality maintains a line of credit with LaSalle Business Credit, Inc. (the
"LaSalle Line of Credit"). The total facility availability is $8,000,000,
subject to certain limitations based on Quality's and its subsidiaries' levels
of inventory and accounts receivable. At December 31, 1998 and 1997, a total of
approximately $7,691,000 and $4,815,000, respectively, was outstanding under the
LaSalle Line of Credit. The amount available at December 31, 1998 and 1997, was
approximately $127,000 and $500,000, respectively. The interest rate for
borrowings under the LaSalle Line of Credit is the lender's reference rate plus
2.0 percent (9.75 percent and 9.50 percent at December 31, 1998 and 1997,
respectively). The LaSalle Line of Credit is collateralized by the accounts
receivable and inventory of Quality. The Company had requested an extension of
the maturity date, as well as, an increase from $8 million to $10 million in the
revolving credit agreement and a new $1 million advance on the fixed asset loan,
and effective February 24, 1999, these requests were granted. The LaSalle Line
of Credit is scheduled to mature on July 31, 1999.
Under the terms of the LaSalle Line of Credit, Quality and its subsidiaries must
maintain certain financial ratios, such as a current ratio, interest coverage,
debt service coverage, tangible leverage, and annual limits on the amounts of
capital expenditures, dividends, and executive compensation, among other
restrictions. At December 31, 1998 and 1997, Quality and its subsidiaries were
not in compliance with certain terms of the LaSalle Line of Credit. Subject to
the preceding paragraph, as of December 31, 1998, the LaSalle Line of Credit may
be able to be accelerated from the stated maturity date.
Long-term Debt and Notes Payable to Shareholders
During 1998, the Company entered into an additional revolving credit agreement,
pursuant to which up to $2.0 million was made available to the Company (the
"USAM Revolving Loan"). At December 31, 1998, an aggregate of up to $1.05
million had been advanced to the Company under the USAM Revolving Loan. Advances
pursuant to the USAM Revolving Loan bear interest at the rate of 11 percent per
annum and are to be repaid by the Company, together with accrued interest
thereon, at the expiration of two 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
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 14,000 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 14,000 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 month
F-11
<PAGE>
anniversary thereafter until December 31, 1999, to grant to the lender at each
such three month anniversary additional five year warrants for the purchase of
3,500 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 80 percent of the average closing
sales price for the common stock for the 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.
On June 30, 1998, the Company obtained additional financing through the sale of
8 percent Redeemable Convertible Debentures (the "June 1998 Debentures"), in the
aggregate amount of $2,250,000. The June 1998 Debentures represent unsecured
obligations of the Company and must be converted into shares (the "Conversion
Shares") of the Company's common stock at maturity date (December 31, 2000),
unless they have been converted earlier at the option of the holder. The
conversion price of the June 1998 Debentures will be equal to 80 percent of the
average closing bid price of the shares of common stock as quoted on the Nasdaq
SmallCap Market for the five 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 June 1998 Debentures bear interest at 8 percent per annum (subject to
increase under certain circumstances), payable upon conversion or redemption of
the June 1998 Debentures. The interest rate increased to 20 percent per annum
for the period commencing January 1, 1999 because the underlying Conversion
Shares were not registered with the SEC before January 1, 1999. At such time as
the underlying shares are tradable, without regard to conversion, the rate will
revert to the 8 percent per annum. Further, if the June 1998 Debentures cannot
be fully converted using the Maximum Conversion Share Allotment, the interest
rate on the June 1998 Debentures will, effective as of the issuance of the
Maximum Conversion Share Allotment, increase to 25 percent per annum with
respect to the unconverted June 1998 Debentures. The Company has agreed that if
it has not either retired the remaining June 1998 Debentures with accrued but
unpaid interest within ten 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 June
1998 Debentures, the Company would pay a penalty equal to the difference between
the interest rate paid since inception and 25 percent on those June 1998
Debentures which remain outstanding after the issuance of the Maximum Share
Allotment. Such penalty will not be applicable if the Company issues such proxy
as contemplated.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Notes payable, bearing interest at 8%, mandatorily convertible into common
shares on December 31, 2000, unsecured $2,250,000 $ --
USAM revolving loan, bearing interest at 11%, principal and interest due
December 2000, secured by a general security interest in Company assets 1,050,000 --
Notes payable to related parties, bearing interest at 10.5%, principal and interest
due in February 1999, uncollateralized 350,000 --
Notes payable to LaSalle Business Credit, Inc., bearing interest at 2% over
lender's interest rate (9.75% and 9.5% at December 31, 1998 and 1997,
respectively), principal and interest of $81,068 due monthly through, and
final payment due on July 31, 1999, collateralized by certain equipment 603,334 1,506,666
Note payable, bearing interest at prime minus 5% (2.75% and 3.50% at December
31, 1998 and 1997, respectively), floored at 2.5% and capped at 6%, principal
and interest of $2,616 due monthly through March 2003, collateralized by
certain Company equipment 125,779 152,011
Note payable, bearing interest at 7.25%, principal and interest of $2,840 due
monthly through, and final payment is due in July 2001,
collateralized by certain Company equipment 81,068 104,321
Note payable to bank, bearing interest at 9%, principal and interest of $11,107
due monthly through June 1998, collateralized by certain Company equipment -- 65,012
Capital lease obligations for equipment and automobiles bearing interest from
8% to 8.75% due through December 2001 85,390 103,346
---------- ----------
4,545,571 1,931,356
Less- Current maturities 693,163 1,688,942
---------- ----------
Total long-term debt $3,852,408 $ 242,414
========== ==========
Notes payable to former stockholders of Quality Automotive Company, bearing
interest at 8% payable quarterly, principal due May 15, 2000, secured by the
Company's pledge of all its shares in the Subsidiary (including $480,000 of
unpaid interest in 1998) $4,980,000 $4,500,000
========== ==========
</TABLE>
F-12
<PAGE>
The aggregate amount of long-term debt and notes payable to shareholders
maturing in future years is as follows as of December 31, 1998:
1999 $ 693,163
2000 8,722,669
2001 72,528
2002 37,211
2003 --
Thereafter --
----------
$9,525,571
==========
Other
In June 1997, the Company executed a note in the amount of $350,000 to Elmgrove
Associates II, L.P., the proceeds of which were used in connection with a
negotiated settlement agreement (see Note 9) with the former President, CEO, and
Chairman of the Board of Directors of the Company (the "former President"), and
related parties. In connection with the execution of the note, the Company
issued 666 common stock warrants with an exercise price of $56.25 per share to
Elmgrove Associates, II, L.P. The Company paid this note in full on August 31,
1997.
9. Commitments, Contingencies and Related Party Transactions:
Leases
The Company previously leased its facility in Florida from a company controlled
by the Company's former President (the "stockholder lease"). The Company had an
option to purchase the Florida facility as of March 31, 1998 and exercised the
option. The Company also leases certain equipment. These equipment leases are
classified as operating leases and expire on various dates from 1998 through
2001.
As of December 31, 1998, future minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
1999 $ 389,533
2000 305,076
2001 283,051
2002 273,744
2003 11,196
Thereafter 1,008
----------
Total future minimum lease payments $1,263,608
==========
Rental expense under all operating leases amounted to approximately $759,000 and
$682,000 for the years ended December 31, 1998 and 1997, respectively. The
rental expense includes amounts for the stockholder lease of approximately
$30,000 and $122,000 for the years ended December 31, 1998 and 1997,
respectively.
F-13
<PAGE>
In May 1992 the Company entered into a lease agreement with the City of
Caruthersville, Missouri (the "Missouri Facility"), for a lease of a 25,000
square foot building for use by the Company for manufacturing and distribution.
In 1994, the Company ceased operations at the Missouri Facility. Although the
City of Caruthersville has attempted to find a tenant for the Missouri Facility,
it has been unsuccessful in finding a long-term tenant for the facility, and, in
the first quarter of 1997, informed the Company that it had only succeeded in
subletting the building for 14 of the past 37 months. The Company remains
obligated for lease payments, at a monthly rate of $2,270 per month, with
respect to the 23-month vacancy period. The Company recorded a charge of
approximately $229,000 in 1997 to reduce the net carrying amount of the capital
lease asset to zero. The original lease expires in August 2013. The Company
intends to negotiate with the City of Caruthersville to resolve settlement of
future rental payments under the building lease. The Company has recorded a
liability of approximately $311,000 at December 31, 1998 and 1997, for potential
future payments due under this lease.
Settlement Agreement
In June 1997, the Company reached an agreement (the "Amended Settlement
Agreement") with the former President and related parties (collectively referred
to as the "Settlement Parties") to amend a previously executed settlement
agreement, which settled compensation amounts due under a consulting contract
originally entered into in 1995. Under the Amended Settlement Agreement, the
Company made a payment to the Settlement Parties of the aggregate sum of
$350,000 in full satisfaction of the obligations of the parties under the
original settlement agreement.
Contingencies
Various legal proceedings and claims have been or may be asserted against the
Company relating to the conduct of its business. These proceedings and claims
are incidental to the Company's ordinary course of business. Management believes
that it has meritorious defenses and will vigorously defend itself in these
actions. Any costs that management estimates may be paid as a result of these
proceedings or claims are accrued when the liability is considered probable and
the amount can be reasonably estimated. Although the ultimate disposition of
these proceedings and claims is not presently determinable, management believes
that, after consultation with counsel, the likelihood that material costs will
be incurred is remote.
F-14
<PAGE>
10. Income Taxes:
The components of the deferred income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Current assets-
Inventory $ 202,000 $ 473,000
UNICAP 123,000 174,000
Accrued rent 117,000 117,000
Allowance for doubtful accounts 50,000 52,000
Compensation 4,000 21,000
Other -- 1,000
----------- -----------
Total current deferred tax assets 496,000 838,000
----------- -----------
Noncurrent assets-
Net operating loss carryforwards 8,033,000 6,790,000
Amortization 132,000 56,000
Interest 192,000 45,000
Other 20,000 20,000
----------- -----------
Total noncurrent deferred tax assets 8,377,000 6,911,000
----------- -----------
Gross deferred income tax assets 8,873,000 7,749,000
----------- -----------
Less- Valuation allowance (7,742,000) (6,549,000)
----------- -----------
Total deferred income tax assets 1,131,000 1,200,000
----------- -----------
Deferred income tax liabilities:
Noncurrent liabilities-
Depreciation (1,090,000) (1,147,000)
Other (41,000) (53,000)
----------- -----------
Total deferred income tax liabilities (1,131,000) (1,200,000)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
</TABLE>
The change in the valuation allowance for deferred tax assets was an increase of
approximately $1,193,000 and $1,265,000 during 1998 and 1997, respectively. The
tax benefit of the Company's deferred taxes has been offset by a valuation
allowance due to the uncertainty that the deferred tax assets will be realized.
The following summary reconciles differences from taxes at the federal statutory
rate with the effective rate:
Year Ended December 31,
-----------------------
1998 1997
------- -------
Federal income taxes at statutory rate (34.0%) (34.0%)
Losses without tax benefits 34.0 34.0
------ ------
Income taxes at effective rate -- % -- %
====== ======
F-15
<PAGE>
Unused net operating losses for income tax purposes, expiring in various amounts
from 2009 through 2013, of approximately $21,200,000 are available at December
31, 1998, for carryforward against future years' taxable income. Under Section
382 of the Internal Revenue Code, the annual utilization of these losses may be
limited due to changes in ownership.
11. Stockholders' Equity:
Reverse Stock Split
On February 5, 1999, the Company's Board of Directors approved a 1-for-15
reverse stock split with respect to the Company's common stock. The loss per
share calculation and all share information contained in these financial
statements have been retroactively adjusted to give effect to the reverse stock
split.
Private Placements
In February 1998, the Company obtained financing through the private placement
of debt and equity instruments to an affiliate and a director of the Company.
The sale was made pursuant to a private placement consisting of two unsecured
non-negotiable promissory notes in the aggregate principal of $400,000, bearing
interest at the rate of 10.5 percent per annum and warrants to purchase up to an
aggregate of 6,666 shares of the Company's common stock. The warrants expire in
February 2003 and have an exercise price of $30.00 per share, subject to
adjustment in certain conditions. 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 days ending on the
third day prior to the day of which the Company gives notice of redemption has
been at least 150 percent of the then effective exercise price of the warrants.
The holders of the warrants shall have the right to exercise them until the
close of business on the date fixed for redemption. The exercise price and
number of shares of common stock or other securities 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. One of the two promissory notes was repaid during
1998, leaving a remaining principal balance of $350,000 at December 31, 1998.
This amount became due in February 1999, and was retired through an additional
advance on the USAM Revolving Loan. As the maturity date on the USAM Revolving
Loan is December 2000, the amount has been properly classified as long-term debt
in the accompanying balance sheet.
Convertible Debentures
During 1996, the Company issued, pursuant to Offshore Securities Subscription
Agreements, dated each of December 5, 1996, and December 17, 1996 (the "December
1996 Debentures"), $3,775,000 of cumulative convertible debentures payable
bearing interest at 10 percent. The December 1996 Debentures and related accrued
interest were converted into and aggregate of 69,700 shares of the Company's
common stock during 1996 and 1997.
In March 1997, the Company entered into an Offshore Securities Subscription
Agreement pursuant to which the Company sold four 10 percent Cumulative
Convertible Debentures (the "March 1997 Debentures"), in the aggregate amount of
$5,500,000. All of the March 1997
F-16
<PAGE>
Debentures, including principal and accrued interest, were converted into an
aggregate of 134,150 shares of the Company's common stock during 1997.
On August 20, 1997, the Company entered into an Offshore Securities Subscription
Agreement pursuant to which the Company sold five additional 10 percent
Cumulative Convertible Debentures (the "August 1997 Debentures") in the
aggregate amount of $5,000,000. All of the August 1997 Debentures, including
principal and accrued interest, were converted into an aggregate of 191,085
shares of the Company's common stock in December 1997.
The December 1996, March 1997, and August 1997, as well as the June 1998
Debentures were issued in reliance upon exemption from the registration
provisions of the Securities Act of 1933, as amended, as provided by Regulation
S ("Reg. S") promulgated thereunder by the Securities and Exchange Commission.
F-17
<PAGE>
Convertible Notes Payable
Two unsecured convertible notes payable, totaling $300,000 at December 31, 1996,
with interest at 8 percent due monthly and principal due at the demand of the
holder were converted into 20,000 shares of Company common stock in February
1997.
Stock Warrants
At December 31, 1998 and 1997, the Company had 419,145 and 398,480 common stock
warrants outstanding. Information relating to these warrants is summarized as
follows:
Number of Exercise
Expiration Warrants Price
---------- -------- -----
March through August 2001 319,147 $63.00
February 2001 65,333 34.20
March 2001 13,333 34.20
May 2002 666 56.25
February 2003 6,666 30.00
March through September 2003 14,000 Variable
Stock Options
The Company accounts for stock options in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," and, as provided in the statement,
has elected to account for its stock options under Accounting Principles Board
Opinion No. 25 ("APB 25"), under which no compensation expense has been
recognized. If options are granted or extended at exercise prices less than fair
market value, compensation expense is recorded for the difference between the
grant price and the fair market value.
Under the Company's 1992 Stock Option Plan, the Company may grant options to
purchase up to 4,000 shares of the Company's common stock to key employees.
Options granted may be incentive stock options within the meaning of the US
Internal Revenue Code ("IRC") Section 422(b), or non-qualified options. The 1992
Stock Option Plan does not limit the number of options which may be granted to
an employee or the number of shares which may be subject to any option. If any
option expires, terminates or is canceled for any reason without having been
exercised in full, the shares which were reserved for issuance upon its exercise
again become available for the purposes of the 1992 Stock Option Plan. The 1992
Stock Option Plan terminates in March 2002. The Company is authorized to issue
up to 4,000 options under the 1992 Plan. Options granted under the 1992 Stock
Option Plan become exercisable at various dates and expire at the end of not
more than 10 years from the date of the grant or within sixty days of
termination of employment with the Company, which ever is earlier. At December
31, 1998, options to purchase up to only 93 shares of common stock were
outstanding under the 1992 Plan.
In 1995, the Company's Board of Directors, in an action the validity of which is
disputed by the current Board of Directors based upon communication of a member
of the 1995 Board of Directors, reserved 50,000 shares to be granted at the
Board of Directors' discretion.
On June 30, 1998, the Company's Board of Directors and stockholders approved the
1998 Stock Option Plan (the "1998 Stock Option Plan"), pursuant to which 66,666
shares of common stock are reserved for issuance. Options granted may be
incentive stock options within the meaning of the US IRC Section 422(b), or
non-qualified options. All options granted under the 1998 Stock Option Plan,
will, unless a shorter term is established by the Board of Directors, expire if
not exercised within ten years of the grant and under certain circumstances, may
be exercised within 3 months following termination of employment. Shares of
common stock subject to options which expire without being exercised or which
are cancelled as a result of the cessation of employment are available for
further grants. Stock options granted under the 1998 Stock Option Plan are
exercisable until the earlier of (i) a date set by the Board of Directors at the
time of grant or (ii) the close of business on the day before the tenth
anniversary of the stock option's date of grant. The 1998 Plan shall remain in
effect until all stock options are exercised or terminated. Notwithstanding the
foregoing, no options may be granted after January 13, 2008. At December 31,
1998, options to purchase up to an aggregate of 20,333 shares of common stock
were outstanding under the 1998 Stock Option Plan, having an exercise price of
$14.53125 per share.
SFAS No. 123 requires the Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for the Company's stock
options had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimated the fair value of each stock
option granted in 1998 by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: no dividend yield,
volatility of 182 percent, risk-free interest rate of 5.46 percent and expected
life of 10 years. There were no options granted in 1997.
F-18
<PAGE>
Under the accounting provisions of SFAS No. 123, the pro-forma net loss and net
loss per share for the year ended December 31, 1998 were not materially
different from reported results.
Changes in options outstanding (including options granted in 1995, the validity
of which is disputed by the Company's current Board of Directors) are summarized
as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Exercise Fair Value
Price of Options
Shares Per Share Granted
------ --------- -------
<S> <C> <C> <C>
Balance, December 31, 1996 32,931 $52.92 $ --
Forfeited (8,000) 75.00 --
------
Balance, December 31, 1997 24,931 45.75 --
Granted 20,333 14.53 14.49
------
Balance, December 31, 1998 45,264 41.50 --
------
</TABLE>
The following table summarizes information about stock options (including the
options granted in 1995, the validity of which is disputed by the Company's
current Board of Directors) at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ------------------------------------
Weighted- Number
Number Average Weighted- Exercisable Weighted-
Outstanding at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
------ --------------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 14.53 20,333 9.5 years $ 14.53 -- $ 14.53
45.00 24,838 6.5 years 45.00 24,838 45.00
257.25 93 3.5 years 257.25 46 257.25
------ ------
45,264 24,884
====== ======
</TABLE>
F-19
<PAGE>
Shares Reserved
At December 31, 1998 and 1997, the Company has reserved common stock for the
following purposes:
1998 1997
------- -------
Stock option plans 120,666 54,000
Stock warrants 415,146 398,400
Convertible debentures 209,660 --
------- -------
745,472 452,400
======= =======
F-20
<PAGE>
12. Supplemental Cash Flow Information:
For purposes of the statement of cash flows, all highly liquid investments with
a maturity date of three months or less are considered to be cash equivalents.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash paid for interest $ 829,551 $ 3,922,842
Noncash financing and investing activities:
Conversion of convertible debentures payable into common stock -- 12,000,000
Notes payable converted into common stock -- 300,000
Merger with Quality Automotive Company, net of cash acquired:
Working capital, other than cash acquired $(5,948,624)
Property, plant, and equipment (8,412,603)
Purchase price in excess of the net assets acquired (6,379,997)
Other assets (93,539)
Non-current liabilities 5,941,220
Notes payable to former owners of Quality Automotive Company 4,500,000
Issuance of common stock 7,500,000
-----------
Net cash used for business acquisition $(2,893,543)
===========
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
U.S. Automotive Manufacturing, Inc.
March 31, 1999 By: /s/ JOHN W. KOHUT
--------------------------------------
John W. Kohut, Chairman of
the Board and principal financial officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE DATED
- --------- -----
/s/ John W. Kohut
- -------------------------------------------- March 31, 1999
JOHN W. KOHUT
director, Chairman of the Board, (principal
financial officer)
/s/ Martin Chevalier
- -------------------------------------------- March 31, 1999
MARTIN CHEVALIER
Chief Executive Officer, President, Director
(principal executive officer)
/s/ Mandel Sherman
- -------------------------------------------- March 31, 1999
MANDEL SHERMAN
Director
/s/ David Love
- -------------------------------------------- March 31, 1999
DAVID LOVE
Director
/s/ Karen Connery
- -------------------------------------------- March 31, 1999
KAREN CONNERY
(principal accounting officer)
Quality Automotive Company
Route 627, Airport Drive
Tappahannock, VA 22560
March 31, 1999
John W. Kohut and Linda S. Ram
45 East 89th Street, Apt. 21B
New York, New York 10128
Re: Second Amendment to Promissory Note
Dear Martin and Malvina:
Reference is made to the Amended and Restated Promissory Note, dated August
29, 1997, in the principal amount of $1,802,158.27 (the "Note") from the
undersigned to John W. Kohut and LInda S. Ram, as tenants by the entirety.
This letter confirms that the Note is hereby amended to extend the date of
Maturity (as such term is defined in the Note) to May 15, 2000.
The undersigned hereby further acknowledges, ratifies and reaffirms its
obligations under the Note, which Note remains in full force and effect except
as otherwise amended herein.
Very truly yours,
U.S. Automotive Manufacturing, Inc.
By: _______________________________
Name:
Title:
AGREED AND ACCEPTED:
________________________
John W. Kohut
________________________
Linda S. Rm
Quality Automotive Company
Route 627, Airport Drive
Tappahannock, VA 22560
March 31, 1999
Martin Chevalier and Malvina B. Chevalier
26 Piscataway Drive
Cold Cheer Farm Estates
Tappahannock, VA 22560
Re: Second Amendment to Promissory Note
Dear Martin and Malvina:
Reference is made to the Amended and Restated Promissory Note, dated August
29, 1997, in the principal amount of $2,697,841.73 (the "Note") from the
undersigned to Martin Chevalier and Malvina B. Chevalier, as tenants by the
entirety.
This letter confirms that the Note is hereby amended to extend the date of
Maturity (as such term is defined in the Note) to May 15, 2000.
The undersigned hereby further acknowledges, ratifies and reaffirms its
obligations under the Note, which Note remains in full force and effect except
as otherwise amended herein.
Very truly yours,
U.S. Automotive Manufacturing, Inc.
By: _______________________________
Name:
Title:
AGREED AND ACCEPTED:
__________________________
Martin Chevalier
__________________________
Malvina B. Chevalier
FIFTH AMENDMENT
THIS FIFTH AMENDMENT to Amended and Restated Revolving Credit, Term Loan
and Security Agreement ("Amendment") is entered into as of February __, 1999, by
and among QUALITY AUTOMOTIVE COMPANY, a Delaware corporation ("Quality"), US
AUTOMOTIVE FRICTION INC., a Delaware corporation ("US Auto") and together with
Quality, each a "Borrower" and jointly and severally, the "Borrowers") and
LASALLE BUSINESS CREDIT, INC. ("Lender").
BACKGROUND
On December 30, 1992, Lender and Borrowers entered into that certain
Amended and Restated Revolving Credit, Term Loan and Security Agreement, as
amended by a First Amendment dated as of March 9, 1993, a Second Amendment dated
as of May 26, 1994, a Third Amendment dated as of December 26, 1995 and a
Waiver, Fourth Amendment and Assumption Agreement dated as of August 29, 1997
(as so amended and further amended, modified, restated or supplemented from time
to time, the "Loan Agreement") whereby Lender agreed to make certain financial
accommodations to Borrowers.
Borrowers have requested that Lender (a) extend the term of the credit
facility, (b) make additional Term Loans under the existing term loan facility,
(c) increase the amount of the revolving credit facility and (d) increase the
inventory sublimit, and Lender is willing to do so on the terms and conditions
hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrowers by Lender, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Reservation of Rights. Various Events of Default have occurred and are
continuing under the Loan Agreement, including, without limitation, (a)
Borrowers' failure to deliver to Lender the monthly and annual financial
statements required by Section 6.10 of the Loan Agreement, and (b) Borrowers'
violation of the financial covenants and reporting requirements set forth in
Sections 6.11 through 6.17 of the Loan Agreement. Lender continues to reserve
all of its rights and remedies under the Loan Agreement and the Other
Agreements, including its right to charge the full Default Rate although Lender
is presently charging the Lender's Reference Rate plus two percent on the Daily
Balances owing on all Obligations, which is one percent (1.0%) below the Default
Rate.
3. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1.25 of the Loan Agreement is hereby amended in its
entirety to provide as follows:
<PAGE>
1.25 The term "Expenses" means and includes all: costs or expenses
required to be paid by Borrower under this Agreement which are paid or
advanced by Lender; taxes and insurance premiums of every nature and
kind paid by Lender under this Agreement or arising out of Lender's
relationship with Borrower; filing, recording, publication and search
fees paid or incurred by Lender in connection with Lender's
transactions with Borrower; costs and expenses incurred by Lender in
collecting the Accounts (with or without suit), to correct any default
or enforce any provision of this Agreement, or in gaining possession
of, maintaining, handling, preserving and protecting, storing,
shipping, appraising, selling, preparing for sale and/or advertising
to sell the Collateral, whether or not a sale is consummated, a
collateral management and evaluation fee in an amount equal to $25,000
per annum (including all costs and expenses) which shall be deemed
earned in full as of the Fifth Amendment Effective Date and at each
annual anniversary date thereafter and which shall be payable by
Borrower to Lender on the Fifth Amendment Effective Date and
thereafter in equal quarterly installments of $6,250 on the first day
of each January, April, July and October commencing April 1, 2000;
costs and expenses incurred by Lender in enforcing or defending this
Agreement or any portion hereof and in compromising, pursuing or
defending any controversy, action or proceeding which results,
directly or indirectly, from Lender's relationship with Borrower or in
connection with any exercise by Lender of any of its rights under this
Agreement or any of the Collateral Documents, either before or after
the Obligations are paid in full and whether or not under the Federal
Bankruptcy Code; and reasonable attorneys' fees and expenses incurred
by Lender in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is
brought.
(b) Section 1.53 of the Loan Agreement is hereby amended in its
entirety to provide as follows:
1.53 "Restated Note" shall mean that certain Fourth Consolidated,
Amended and Restated Secured Promissory Term Note in the principal
amount of $1,250,000 from Borrowers to Lender together with all
replacements and substitutions thereof.
(c) Section 1.61 of the Loan Agreement is hereby amended in its
entirety to provide as follows:
1.61. The Term "Term Loan" shall have the meaning set forth in Section
2.1(b) hereof.
(d) The following new defined terms are hereby added to Section 1 of
the Loan Agreement in their appropriate alphabetical order:
The term "Fifth Amendment Effective Date" shall mean February 24,
1999.
2
<PAGE>
The term "Year 2000 Problem" shall mean any significant risk that
computer hardware or software used in any Borrower's business or
operations will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.
(e) Section 2.1(b) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"On the Third Amendment Closing Date, Lender consolidated all
outstanding term loans previously made by Lender to make an aggregate
term loan to Borrowers in the original principal amount of
$1,795,343.32 (as so consolidated, the "First Term Loan"). On May 26,
1994, Lender made an additional term loan to Borrowers and
consolidated it with the First Term Loan, constituting an aggregate
consolidated term loan in the original principal amount of $3,000,000
(as so consolidated, the "Second Term Loan"). On December 26, 1995,
Lender made an additional term loan to Borrowers and consolidated it
with the Second Term Loan, constituting an aggregate consolidated term
loan in the original principal amount of $2,150,000 (as so
consolidated, the "Third Term Loan"), of which $250,000 is outstanding
as of the Fifth Amendment Effective Date. Subject to the terms and
conditions set forth herein, on the Fifth Amendment Effective Date,
Lender shall make an additional loan to Borrowers in the amount of
$1,000,000 (the "Additional Term Loan"). On the Fifth Amendment
Effective Date, the Additional Term Loan shall be consolidated into
the Third Term Loan, constituting an aggregate consolidated term loan
in the principal amount of $1,250,000 (as so consolidated, the "Term
Loan"). Borrowers shall repay the principal of and accrued interest on
the Term Loan as stated in the Term Note."
(f) Section 2.1(a) of the Loan Agreement is hereby amended by deleting
"$7,500,000" and inserting "$10,000,000" in its place and stead.
(g) Section 2.1(a)(B)(i) is hereby amended by deleting "Four Million
Dollars ($4,000,000)" and inserting "Four Million Five Hundred Thousand
Dollars ($4,500,000)" in its place and stead.
(h) Section 3.1 of the Loan Agreement is hereby amended by deleting
"March 31, 1999" and inserting "July 31, 1999" in its place and stead.
(i) A new subsection is hereby added to Section 6.4 of the Loan
Agreement at the end thereof:
"(h) Each Borrower shall take all action necessary to assure that its
computer based systems are able to effectively process data, including
dates, on or after January 1, 2000. Each Borrower shall promptly
notify Lender in writing of any Year 2000 Problem, provided, however,
that in no event shall any such Year 2000 Problem have a material
adverse effect upon any of the business, property assets, operations,
condition (financial or otherwise) or prospects of such Borrower. On
3
<PAGE>
or before June 30, 1999, each Borrower shall provide Lender with
assurance reasonably acceptable to Lender of such Borrower's year 2000
capability."
(j) Exhibit A-1 to the Loan Agreement is hereby replaced with Exhibit
A-1 to this Agreement.
4. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Lender shall have received
(i) four (4) copies of this Amendment executed by Borrowers and consented and
agreed to by Guarantors, (ii) the Fourth Consolidated, Amended and Restated
Secured Promissory Term Note duly executed by Borrowers, (iii) a Fifth Deed of
Trust Modification Agreement duly executed by Borrowers, (iv) an updated title
policy with respect to the Real Estate Collateral which shall indicate that
there are no Liens on the Real Estate Collateral other than Permitted Liens, (v)
an amendment fee in the amount of $10,000, which amount shall be charged by
Lender to Borrowers' loan account as a Revolving Loan, (vi) updated UCC tax,
lien and judgment searches with respect to all locations where the Collateral is
located which shall indicate that there are (a) no Liens on the Collateral other
than Permitted Liens and (b) no suits or judgments against any Borrower, (vii)
UCC-1 Financing Statements duly executed by Borrowers with respect to all
Collateral located in Florida, (vii) resolutions of the Board of Directors of
each Borrower duly authorizing the execution, delivery and performance of this
Agreement, the Fourth Consolidated, Amended and Restated Promissory Term Note,
the Fifth Deed of Trust Modification Agreement and the transactions contemplated
therein, which resolutions shall be certified by the Secretary or Assistant
Secretary of such Borrower as being in full force and effect and (viii) such
other certificates, instruments, documents, agreements and opinions of counsel
as may be required by Lender or its counsel, each of which shall be in form and
substance satisfactory to Lender and its counsel.
5. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of such Borrower and are
enforceable against such Borrower in accordance with their respective
terms.
(b) Upon the effectiveness of this Amendment, such Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
(c) Other than as set forth in Section 2 hereof, No Event of Default
or Default has occurred and is continuing or would exist after giving
effect to this Amendment.
(d) Such Borrower has no defense, counterclaim or offset with respect
to the Loan Agreement.
4
<PAGE>
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 3 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of Lender, nor constitute a
waiver of any provision of the Loan Agreement, or any other documents,
instruments or agreements executed and/or delivered under or in connection
therewith.
7. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first written above.
QUALITY AUTOMOTIVE COMPANY
By: /s/ Martin Chevalier
-----------------------------
Name: Martin Chevalier
Title: President
US AUTOMOTIVE FRICTION, INC.
By: /s/ Martin Chevalier
-----------------------------
Name: Martin Chevalier
Title: President
SIGNATURES CONTINUED ON FOLLOWING PAGE
5
<PAGE>
LASALLE BUSINESS CREDIT, INC.
By: /s/ Daniel Maresca
-----------------------------
Name: Daniel Maresca
Title: Vice President
CONSENT OF GUARANTORS:
US AUTOMOTIVE FRICTION, INC.
By: /s/ Martin Chevalier
-----------------------------
Name: Martin Chevalier
Title: President
QUALITY AUTOMOTIVE COMPANY
By: /s/ Martin Chevalier
-----------------------------
Name: Martin Chevalier
Title: President
/s/ Martin Chevalier
- --------------------------------
Martin Chevalier
CONSENT OF PLEDGOR:
US AUTOMOTIVE MANUFACTURING, INC.
By: /s/ Martin Chevalier
-----------------------------
Name: Martin Chevalier
Title: President
6
REVOLVING CREDIT FACILITY
THIS AGREEMENT, dated as of March 31, 1998 by and between U.S. Automotive
Manufacturing, Inc., with offices located at Route 627, Airport Drive,
Tappahannock, Virginia 22560 (the "Borrower" or the "Company"), and Galt
Financial, Ltd., 125 West Shore Road, Huntington, New York 11743 (the "Lender").
WHEREAS, the Borrower has requested that the Lender make available from
time to time to the Borrower up to an aggregate amount of Two Million
($2,000,000) Dollars; and
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Lender is willing to make such funds available to the Borrower;
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
Section 1. THE CREDIT FACILITY
1.1 Advances.
(a) The Lender agrees, subject to the terms and conditions hereinafter
set forth, to advance (an "Advance") to Borrower from time to time in an
aggregate principal amount outstanding at any one time not to exceed
$2,000,000 (the "Credit Facility"), which is being drawn down by Borrower
to the extent of $300,000 on the date hereof (the "Initial Borrowing Date")
and may be further drawn down by Borrower, and shall be provided by Lender,
from time to time as the proceeds of prior draw downs are expended as
contemplated hereby on five (5) business days' notice to Lender from the
Borrower.
(b) Notwithstanding anything to the contrary contained in subparagraph
1.1(a) above, Borrower acknowledges that Lender may not be able to Advance
up to the full amount of the Credit Facility to Borrower and waives any
obligation for Lender to do so; provided, however, that Lender covenants
and agrees to make available to Borrower Advances of not less than
$1,000,000 in the aggregate at any time during the term of this Credit
Facility.
1.2 Security Interest/Collateral.
(a) The Credit Facility creates in favor of the Lender a general
security interest in the assets of the Company as well as a first security
interest (prior to all other liens) in and to the Company's property
located at 1875 Lake Mary Boulevard, Sanford, FL 32773 (collectively, the
"Collateral").
<PAGE>
(b) The Company authorizes the Lender to sign and file on its behalf
one or more financing statements with respect to the Collateral pursuant to
the Uniform Commercial Code. At any time and from time to time, upon
request of the Lender, the Company shall give, execute, file and/or record
any notice, financing statement, statement, instrument, document or
agreement that the Lender considers necessary to create, preserve,
continue, perfect or validate any security interest granted hereunder or
which the Lender considers necessary or desirable to exercise or enforce
the Lender's rights hereunder with respect to such security interest,
naming the Company as debtor and the Lender as secured party.
1.3 Promissory Note. Borrower's obligation to repay each Advance, together
with accrued interest thereon, will be evidenced by a Revolving Credit Note in
the form attached hereto (the "Note") to be executed by Borrower and delivered
to Lender concurrently with Borrower's acceptance of this Agreement.
1.4 Interest. Interest shall accrue at the rate of eleven percent (11%)
per annum from the date hereof on all outstanding balances and shall be payable
in arrears monthly, commencing August 1, 1998 (for interest accrued and unpaid
to the date thereof) and monthly thereafter.
1.5 Payment. All Advances made pursuant to this Credit Facility shall be
due three (3) business days after the earlier of: (i) the second anniversary
from the Initial Borrowing Date (the "Maturity Date") or (ii) a reduction of the
aggregate value of the Collateral (excluding that value of any Collateral
subject to a prior lien) to less than 150% of the Credit Facility.
1.6 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made as of the date delivered, if delivered personally, or one (1) business day
after having been deposited with a courier, if sent by overnight courier or
having been sent by telecopy, if sent by telecopy (receipt confirmed), or three
(3) business days after having been mailed, if mailed by registered or certified
mail, postage prepaid, return receipt requested, to the addresses of the parties
first set forth above or to such other address as any party shall have
designated by like notice to the other parties hereto (except that a notice of
change of address shall only be effective upon receipt). Copies of any notice to
hereunder shall also be sent to the parties' respective counsel as follows:
2
<PAGE>
If to Borrower:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attn: Russell Bulkeley, Esq.
Fax: (212) 885-5001
If to Lender:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, IL 60606
Attn: Joshua S. Kanter, Esq.
Fax: (312) 984-3150
1.7 Use of Proceeds. The Borrower agrees that the proceeds of the Loan
shall be used to finance the working capital requirements of Borrower.
Section 2. ADDITIONAL CONSIDERATION
2.1 Grant of Initial Warrants.
(a) Subject to Section 2.3 hereof, Borrower shall simultaneously
herewith issue to Lender five year warrants ("Initial Warrants") to
purchase up to 200,000 shares ("Initial Warrant Shares") of the common
stock, $.001 par value, of the Company (the "Common Stock"). exercisable
any time after the one year anniversary of the Initial Borrowing Date at an
exercise price equal to eighty percent (80%) of the average Current Market
Price (as defined in paragraph (b) below) of the Common Stock for the
twenty (20) trading days preceding such one year anniversary date.
(b) For purposes of this Agreement, "Current Market Price," when used
with references to shares of Common Stock or other securities for any
period shall mean the average of the daily closing prices per share of
Common Stock or such other securities for such period. The closing price
for each day shall be the last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers,
Inc., Automated Quotation System or such other system then in use, or, on
any such date the Common Stock or such other
3
<PAGE>
securities are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Common Stock or such other securities selected by
the Board of Directors of the Corporation. If the Common Stock is listed or
admitted to trading on a national securities exchange, the closing price
shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Common Stock on such other
securities are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national
securities exchange on which the Common Stock or such other securities are
listed or admitted to trading. If the Common Stock or such other securities
are not publicly held or so listed or publicly traded, "Current Market
Price" shall mean the Fair Market Value per share of Common Stock or of
such other securities as determined in good faith by the Board of Directors
of the Corporation based on an opinion of an independent investment banking
firm with an established national reputation as a valuer of securities,
which opinion may be based on such assumptions as such firm shall deem to
be necessary and appropriate.
2.2 Additional Grant of Warrants.
(a) Subject to Section 2.3 and paragraphs (b) and (c) below, Borrower
shall grant to Lender five year warrants (the "Warrants") to purchase up to
600,000 shares of Common Stock (the "Warrant Shares"), or a portion thereof
which Warrants shall be granted on each of the dates below (each, a "Grant
Date"), as follows:
(1) at September 30, 1998, Warrants to purchase up to 200,000 Warrant
Shares, exercisable any time after the one year anniversary of
the Initial Borrowing Date at an exercise price equal to eighty
percent (80%) of the average Current Market Price of the Common
Stock for the twenty (20) trading days preceding such one year
anniversary date.
(2) at March 31, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after such Grant Date at an exercise
price equal to eighty percent (80%) of the average Current Market
Price of the Common Stock for the twenty (20) trading days
preceding such Grant Date.
4
<PAGE>
(3) at June 30, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after the date such Grant Date at an
exercise price equal to eighty percent (80%) of the average
Current Market Price of the Common Stock for the twenty (20)
trading days preceding such Grant Date.
(4) at September 30, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after the date such Grant Date at an
exercise price equal to eighty percent (80%) of the average
Current Market Price of the Common Stock for the twenty (20)
trading days preceding such Grant Date.
(5) at December 31, 1999, Warrants to purchase up to 100,000 Warrant
Shares, exercisable any time after the date such Grant Date at an
exercise price equal to eighty percent (80%) of the average
Current Market Price of the Common Stock for the twenty (20)
trading days preceding such Grant Date.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event that, on or before the six month anniversary of the
Initial Borrowing Date, Borrower indefeasibly pays in full all Advances
outstanding under this Credit Facility (together with interest thereon),
the Borrower shall be under no further obligation to grant to Lender, and
the Lender shall not be entitled to any Warrants pursuant to this Section
2.2, in which case this credit facility shall terminate and the Borrower
shall not be entitled to, and the Lender shall not be obligated to make,
further Advances pursuant to this Agreement.
(c) Notwithstanding anything to the contrary contained in this
Agreement, in the event that, any time prior to the Maturity Date but
subsequent to the six month anniversary of the Initial Borrowing Date (the
"Early Payment Date"), the Borrower indefeasibly pays in full all Advances
outstanding under this Credit Facility (together with interest thereon),
the Borrower shall be under no obligation to grant to Lender, and the
Lender shall not be entitled to, any Warrants which would otherwise be
granted to Lender subsequent to the Early Payment Date pursuant to this
Section 2.2, in which case this credit facility shall terminate and the
Borrower shall not be entitled to, and the Lender shall not be obligated to
make, further Advances pursuant to this Agreement.
2.3 Limitations. Notwithstanding anything to the contrary contained in this
Agreement, if the aggregate amount of Advances on or before the forty-fifth day
after the Initial Borrowing Date (the "Forty-Five Day Anniversary") is less than
$2,000,000, then
5
<PAGE>
(a) the total number of Initial Warrant Shares to be granted under
Section 2.1 hereof shall be reduced to the amount of Initial Warrant Shares
equal to the product obtained by multiplying: (i) ten percent (10%) by (ii)
the aggregate dollar amount of any Advances having been made by Lender to
Borrower within such forty-five day period. Anything to the contrary
contained herein notwithstanding, in no event shall the aggregate number of
Initial Warrant Shares issued pursuant to Section 2.1 hereof exceed 200,000
shares of Common Stock; and
(b) the total number of Warrant Shares to be granted under Section 2.2
hereof shall be reduced to the amount of Warrant Shares (the "Adjusted
Warrant Total") equal to the product obtained by multiplying: (i) 600,000
by (ii) that percentage, the numerator of which is the aggregate dollar
amount of the Advances made by the Lender at the Forty-Five Day Anniversary
and the denominator of which is $2,000,000. In the event of any adjustment
pursuant to this paragraph (b), the number of Warrants to be granted
pursuant to Section 2.2 hereof shall be adjusted pro ratably and the
Borrower shall be under no obligation to grant to Lender, and the Lender
shall not be entitled to, any Warrant Shares in excess of such Adjusted
Warrant Total.
2.4 Registration Rights. The Company shall grant the Lender or its assigns
"piggyback" registration rights with respect to the Initial Warrant Shares and
the Warrant Shares, as adjusted pursuant to Section 2.1 hereof. The Initial
Warrants and the Warrants received under the terms of this agreement may be
sold, transferred, hypothecated or assigned at the option of the Lender.
2.5 Company Information. The Company has heretofore made available to the
Lender and the Lender has received, or had access to, the Borrower's reports on
Form 10-K for the year ended December 31, 1996 and Form 10-Q for the quarter
ended September 30, 1997 and such supplemental information pertaining to the
Company and its management as at the date hereof (including the Audited
Financial Statements for the year ended December 31, 1997).
2.6 Investment Representatives.
The Lender hereby represents, warrants and covenants as follows:
(a) The Lender understands that (A) neither the Warrants, Initial
Warrant Shares nor Warrant Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), or the securities laws of
any state, based upon applicable exemptions from such registration
requirements; (B) the Warrants, the Initial Warrant Shares and Warrant
Shares are "restricted securities," as said term is defined in Rule 144 of
6
<PAGE>
the Rules and Regulations promulgated under the Act; (C) the Warrants,
Initial Warrant Shares and Warrant Shares may not be sold or otherwise
transferred unless they have been first registered under the Act and all
applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to said resale or
transfer; (D) a legend (in the form of Schedule A hereto) to the foregoing
effect will be placed on the certificate or certificates representing the
Warrants, Initial Warrant Shares and Warrant Shares; and (E) stop transfer
instructions with respect to the foregoing will be placed with the transfer
agent for the Warrants, Initial Warrant Shares and Warrant Shares;
(b) The Lender is acquiring the Warrants, Initial Warrant Shares and
Warrant Shares solely for the account of the Lender for investment purposes
only, and not with a current view towards the distribution thereof;
(c) The Lender shall not sell, transfer, hypothecate or otherwise
dispose of the Warrants, Initial Warrant Shares or Warrant Shares other
than pursuant to an effective registration statement under the Act unless
prior thereto the Company receives either an opinion, in form and substance
reasonably acceptable to the Company, of the Company's counsel or counsel
for the Lender reasonably acceptable to the Company, that the proposed
transaction may be effected without compliance with the registration
provisions of the Act;
(d) The Lender has had a reasonable opportunity to ask questions of
and receive answers from the Company, or a person or persons acting on
behalf of the Company, concerning the Company and its financial condition,
and all such questions, if any, have been answered to the full satisfaction
of the Lender;
(e) The Lender is not an "affiliate" of the Company, as such terms are
defined under the Act; and
(f) The Lender shall indemnify the Company and hold it harmless from
and against any and all losses, damages, liabilities, costs and expenses
which it may sustain or incur in connection with the breach by the Lender
of any representation, warranty or covenant made by the Lender herein;
2.7 Transfer Instructions. To enable the Company to enforce the Lender's
covenants contained in Section 2.4 above, the Lender consents to the Company
imposing transfer instructions consistent hereto with the transfer agent of the
Company's securities with respect to any Warrants, Initial Warrant Shares and
Warrant Shares until the end of such period.
7
<PAGE>
Section 3. REPRESENTATIONS AND WARRANTIES OF BORROWER
The Borrower represents and warrants to Lender, as follows:
3.1 Corporation Existence, Power and Authority of the Borrower. The
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is duly licensed or
qualified in each jurisdiction where the property owned by it or the nature of
the business transacted by it requires such licensing and qualification, except
where such failure to qualify would not have a material adverse effect on the
Company. The Borrower has all requisite corporate power and authority to conduct
business as it is now being conducted and to enter into, consummate and perform
all the provisions of this Agreement, and any instrument, agreement or document
referred to herein to which the Borrower is or shall be a party, having been
duly authorized by all corporate and other required actions.
3.2 No Conflicts. The execution, delivery and performance of the Borrower
of this Agreement, the Promissory Note or any other instrument, agreement or
document referred to herein does not and will not result in any violation of, or
be in conflict with, any terms or provisions of the Certificate of Incorporation
or the by-laws of the Borrower, or any material statute, governmental regulation
or order, judgment, decree, agreement, indenture, or instrument applicable to
the Company.
3.3 Authorizations. All governmental approvals, licenses, authorizations,
consents, filings and registrations, if any are required for the delivery and
execution of this Agreement, and any applicable instrument, agreement or
document referred to herein as having been obtained or made, are final and are
not subject to review or appeal or, to the knowledge and belief of the Borrower,
the subject of any pending or threatened attack or appeal to direct proceedings
or otherwise.
3.4 Florida Property. Borrower has good and valid title to the property
located at 1875 Lake Mary Boulevard, Sanford, FL 32773 as at the date hereof
and, except for the security interest granted hereunder, such property is free
and clear of any and all mortgages, liens, pledges, claims, charges and
encumbrances.
3.5 Warrants and Underlying Shares. The Warrants and the shares underlying
such Warrants, when issued pursuant to the terms and conditions of this
Agreement, will be duly authorized and validly issued, fully paid and
non-assessable, and delivered free and clear of any security interests, pledges,
mortgages, claims, liens and encumbrances, except that the underlying shares of
common stock will be "restricted securities" as such term is defined in the
rules and regulations of the Securities Exchange
8
<PAGE>
Commission and will be subject to restrictions on transfers pursuant to such
rules and regulations and state laws.
Section 4. GOVERNING LAW/JURISDICTION
This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of New York
without reference to the principles of conflicts of laws. The Borrower hereby
irrevocably submits to the jurisdiction of the Supreme Court of the State of New
York, County of New York in any action, suit, or proceeding brought against the
Borrower and related to or in connection with this Agreement or any other
instrument, agreement or document referred to herein or any transaction
contemplated hereby.
Section 5. MISCELLANEOUS
5.1 Amendments. This Agreement may only be amended by a written instrument
executed by the Lender and Borrower.
5.2 Notices. All notices, requests and communications to any person
provided for hereunder shall be in writing and shall be given to such person at
the address first set forth above or such other address as either party shall
specify to the other party (and in the case of the Borrower, with a copy to:
Tenzer Greenblatt LLP, 405 Lexington Avenue, New York, New York 10174,
Attention: J. Russell Bulkeley, Esq.) Each such notice, request or communication
shall be effective (i) if given by mail, 48 hours after such notice is deposited
in the mails by first class postage prepaid, addressed as aforesaid or (ii) if
given by any other means (including, without limitation, by fax or courier),
when delivered at the address specified above, provided that any such notice
shall not be effective until received.
5.3 Assignment. Neither this Agreement nor any rights, interests or
obligations hereunder may be assigned by any party hereto without the prior
written consent of all of the parties hereto. Any assignment not made in
compliance with this provision shall be null and void.
5.4 Severability. If any provision of this Agreement, or the application of
such provisions to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
5.5 Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Company and each other party hereto relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
9
<PAGE>
5.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: _______________________________
Name:
Title:
GALT FINANCIAL, LTD.
By: _____________________________
Name:
Title:
10
<PAGE>
SCHEDULE A
Form of Legend
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION STATEMENT
FOR SUCH SECURITIES UNDER THE ACT OR (ii) AN OPINION OF COUNSEL TO THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE."
11
REVOLVING PROMISSORY NOTE
$2,000,000.00 Huntington, New York
March 31, 1998
FOR VALUE RECEIVED, U.S. Automotive Manufacturing, Inc., a Delaware
corporation, having an address at Route 627, Airport Drive, Tappahanock,
Virginia 22560 ("Borrower"), promises to pay to the order of Galt Financial,
Ltd. ("Lender"), the lesser of the aggregate unpaid principal sum of all
Advances (as shown in the attached schedule) made to Borrower by Lender pursuant
to the Revolving Credit Agreement, dated as of March 31, 1998 (the "Credit
Agreement"), on March 31, 2000 (the "Maturity Date") and Two Million
($2,000,000) on demand after the Maturity Date, together with interest, in
arrears, from the date hereof on the unpaid balance from time to time
outstanding, before maturity of or default under this Note at the rate of eleven
percent (11%) per annum and, after the maturity of or default under this Note at
the rate of fifteen percent (15%) per annum. Accrued and unpaid interest only
shall be payable monthly beginning August 1, 1998. All accrued and unpaid
interest shall be payable in full with the payment of the principal.
All sums payable hereunder are payable at Lender's mailing address of 125
West Shore Road, Huntington, New York 11743, or such other place or places as
Lender, its successors or assigns ("Holder") may designate.
This Note may be prepaid, in whole at any time, or in part from time to
time without penalty or premiums.
All sums paid under this Note shall be applied first to any interest and
then any unpaid principal, with the remaining balance, if any, to be applied to
fees, expenses and other charges then due and unpaid.
All capitalized terms not otherwise defined herein shall have the meaning
ascribed to such term in the Credit Agreement.
The occurrence of any or more of the following events will constitute an
"Event of Default" hereunder:
1. Nonpayment of any interest due under this note when it shall become due
and payable, which nonpayment shall have continued for more than ten (10) days
after written notice to Borrower of such nonpayment.
2. Nonpayment of any principal due under this note when it shall become due
and payable, which nonpayment shall have continued for more than ten (10) days
after written notice to Borrower of such nonpayment.
<PAGE>
3. The dissolution, liquidation, or termination of existence of Borrower or
a sale of assets of Borrower out of the ordinary course of business.
4. The merger or consolidation with any corporation or other entity by
Borrower, where Borrower is not the surviving entity (other than a merger or
consolidation of the Borrower with and into a wholly-owned subsidiary), in which
event Borrower shall take such steps as are reasonably necessary to assure that
Lender retains its security interest in the Collateral.
5. Entry of an order of relief of Borrower in any federal bankruptcy
proceeding or any order or proceeding of similar effect under any state
insolvency or receivership law.
6. Failure to maintain Collateral in the Company having an aggregate value
of at least 150% of the Credit Facility, which failure is not cured within ten
(10) days after written notice to Borrower of its failure hereunder.
Upon the occurrence of any Event of Default, this Note, at the option of
the Holder, shall become immediately due and payable without presentment,
demand, protest or notice of any kind, all of which are hereby waived by
Borrower. Holder's failure to exercise such option shall not constitute a waiver
of the right to exercise it at any time.
Borrower will pay all legal and other fees and expenses reasonably incurred
by Holder in connection with or incidental to the enforcement of any of the
obligations of Borrower or rights of Holder under this Note, and all such fees
and expenses shall be indebtedness under this Note.
Notwithstanding anything to the contrary contained in this note, the Holder
shall not be permitted to charge, take or receive, and the Borrower shall not be
obligated to pay, any interest in excess of the maximum rate from time to time
permitted by applicable law.
This Note may not be modified or terminated orally.
For all purposes, this Note shall be enforced and construed in accordance
with the substantive law of New York, without resort to the conflict of laws and
rules of each state.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: _______________________________
Name:
Title:
2
<PAGE>
Schedule Attached to Revolving Promissory Note
in the amount of $2,000,000
<TABLE>
<CAPTION>
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DATE OF INTEREST AMOUNT UNPAID PRINCIPAL DATE OF NOTATION
ADVANCE RATE OF AMOUNT OF BALANCE MATURITY MADE BY
(% p.a.) ADVANCE REPAYMENT OF LOAN
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<S> <C> <C> <C> <C> <C> <C>
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</TABLE>
3
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, MARCH 31, 2003
No. WR- _______ Warrants
U.S. AUTOMOTIVE MANUFACTURING, INC.
WARRANT
This warrant certificate (the "Warrant Certificate") certifies that GALT
FINANCIAL. LTD. or registered assigns, is the registered holder of warrants to
purchase, at any time commencing April 1, 1999 (the "Initial Exercise Date")
until 5:00 P.M. New York City time on March 31, 2003 (the "Expiration Date"), up
to _______ fully-paid and non-assessable shares, subject to adjustment in
accordance with Article 5 hereof (the "Warrant Shares"), of the common stock
(the "Common Stock"), par value $.001 par value of U.S. Automotive
Manufacturing, Inc., a Delaware corporation (the "Company"), subject to the
terms and conditions set forth herein. The warrants represented by this Warrant
Certificate and any warrants resulting from a transfer or subdivision of the
warrants represented by this Warrant Certificate shall sometimes hereinafter
<PAGE>
be referred to, individually, as a "Warrant" and, collectively, as the
"Warrants."
1. Exercise of Warrants. Each Warrant is initially exercisable to purchase
one Warrant Share at an initial exercise price per Warrant Share, equal to
eighty percent (80%) of the Current Market Price of the Common Stock for the
twenty (20) trading days preceding the Initial Exercise Date, subject to
adjustment as set forth in Article 5 hereof, payable in cash or by check to the
order of the Company, or any combination of cash or check. For purposes of this
Agreement, "Current Market Price" shall mean the average of the daily closing
prices per share of Common Stock. The closing price for each day shall be the
last quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc., Automated Quotation System or such
other system then in use, or, on any such date the Common Stock is not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common Stock. If
the Common Stock is listed or admitted to trading on a national securities
exchange, the closing price shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
-2-
<PAGE>
admitted to trading on the New York Stock Exchange or, if the Common Stock is
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common Stock is listed or admitted to trading. If the Common Stock is not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock as determined in good faith by
the Board of Directors of the Company based on an opinion of an independent
investment banking firm with an established national reputation as a valuer of
securities, which opinion may be based on such assumptions as such firm shall
deem to be necessary and appropriate.
Upon surrender of this Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (presently located at 627 Airport Road, Tappahannock, Virginia
22560, the registered holder of the Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by this Warrant Certificate
are exercisable at the option of the Holder hereof, in whole or in part (but not
as to fractional shares). In the case of the purchase of less than all the
Warrant Shares purchasable under this Warrant Certificate, the
-3-
<PAGE>
Company shall cancel this Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 3
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
-4-
<PAGE>
This Warrant Certificate and, upon exercise of the Warrants, in part or in
whole, certificates representing the Warrant Shares shall bear a legend
substantially similar to the following:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be sold,
transferred, pledged, hypothectated or otherwise disposed of in the absence
of (i) an effective registration statement for such securities under the
Act (ii) an opinion of counsel, reasonably satisfactory to counsel to the
Company, stating that an exemption from registration under such Act is
available."
3. Restriction on Transfer of Warrants. The Holder of this Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
and the Warrant Shares issuable upon exercise of the Warrants are being acquired
as an investment and not with a view to the distribution thereof and that the
Warrants and the Warrant Shares may not be transferred unless such securities
are either registered under the Act and any applicable state securities law or
an exemption from such registration is available. The Holder of this Warrant
Certificate acknowledges that the Holder is an "accredited investor" within the
meaning of Regulation D promulgated under the Act who has been provided with an
opportunity to ask questions of representatives of the Company concerning the
Company and that all such questions were answered to the satisfaction of the
Holder. In connection with any purchase of Warrant Shares the Holder agrees to
execute any documents which may
-5-
<PAGE>
be reasonably required by counsel to the Company to comply with the provisions
of the Act and applicable state securities laws.
4. Price.
4.1 Initial and Adjusted Exercise Price. The initial exercise price of
each Warrant Share shall be equal to eighty percent (80%) of the Current
Market Price of the Common Stock the twenty (20) trading days preceding the
Initial Exercise Date. The adjusted exercise price shall be the price which
shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Article 5 hereof.
4.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
5. Adjustments of Exercise Price and Number of Warrant Shares.
5.1 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding Common Shares, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
5.2 Adjustment in Number of Warrant Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Article 5, the number
of Warrant Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full
-6-
<PAGE>
Common Share by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of the Warrants immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
5.3 Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding Common Shares (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in
the case of any consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger in which
the Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding Common Shares, except a
change as a result of a subdivision or combination of such shares or a
change in nominal value, as aforesaid), or in the case of a sale or
conveyance to another corporation of the property of the Company as an
entirety, the Holder shall thereafter have the right to purchase the kind
and number of shares of stock and other securities and property receivable
upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the Warrant Shares issuable
upon exercise of the Warrants immediately prior to any such events at a
price equal to the product of (x) the number of Warrant Shares issuable
upon exercise of the Warrants and (y) the Exercise Price in effect
-7-
<PAGE>
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holder had exercised
the Warrants.
5.4 Determination of Outstanding Shares. The number of Common Shares
at any one time outstanding shall include the aggregate number of shares
issued or issuable upon the exercise of outstanding options, rights,
warrants and upon the conversion or exchange of outstanding convertible or
exchangeable securities.
6. Exchange and Replacement of Warrant Certificates. This Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu thereof.
-8-
<PAGE>
7. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares and shall not be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Common Shares.
8. Reservation of Shares. The Company covenants and agrees that it will at
all times reserve and keep available out of its authorized share capital, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
Common Shares as shall be equal to the number of Warrant Shares issuable upon
the exercise of the Warrants, for issuance upon such exercise, and that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all Warrant
Shares issuable upon such exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any shareholder.
9. Redemption of Warrants. The Warrants are redeemable by the Company, in
whole or in part, on not less than thirty (30) days' prior written notice at a
redemption price of $.05 per Warrant at any time, provided that the closing
sales price of the Common Shares on all twenty (20) trading days ending on the
third day prior to the day on which the Company gives notice of redemption has
been at least 164% of the then effective Exercise Price of the Warrants (the
"Target Redemption Price"). The
-9-
<PAGE>
redemption notice shall be mailed to the Holders of the Warrants at the address
of such Holders as shown on the books of the Company. Holders of the Warrants
will have exercise rights until the close of business on the date fixed for
redemption
10. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 1 of this
Agreement or to such other address as the Company may designate by notice
to the Holders.
11. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
12. Governing Law.
12.1 Choice of Law. This Warrant Certificate is being delivered
in New York. This Agreement shall be deemed to have been made and
delivered in the State of New York and shall be governed as to
validity, interpretation, construction, effect and in all other
respects by the internal laws of the State of New York.
-10-
<PAGE>
12.2 Jurisdiction and Service of Process. The Company and the Holder each
(a) agrees that any legal suit, action or proceeding arising out of or relating
to this Warrant Certificate, or any other agreement entered into between the
Company and the Holder pursuant to the Offering shall be instituted exclusively
in New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (b) waives any objection
which the Company or such Holder may have now or hereafter to the venue of any
such suit, action or proceeding, and (c) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company and the Holder each further agrees to
accept and acknowledge service of any and all process which may be served in any
such suit, action or proceeding in the New York State Supreme Court, County of
New York or in the United States District Court for the Southern District of New
York and agrees that service of process upon the Company or the Holder mailed by
certified mail to their respective addresses shall be deemed in every respect
effective service of process upon the Company or the Holder, as the case may be,
in any suit, action or proceeding.
-11-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the 31st day of March 1998.
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: _______________________________
Name:
Title:
-12-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of U.S. Automotive Manufacturing, Inc. in the amount of $_________,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such Warrant Shares be registered in the name of
______________________, whose address is
_________________________________________________________________
______________________________________, and that such certificate be delivered
to __________________, whose address is ____________
_________________________________________________________________
Dated: Signature:
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
---------------------------------
---------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto
________________________________________________________________________________
(Please print name and address of transferee) this Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _____________________, Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of
substitution.
Dated: Signature:
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate)
________________________________________
________________________________________
(Insert Social Security or Other
Identifying Number of Assigne)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 338,641
<SECURITIES> 0
<RECEIVABLES> 5,238,316
<ALLOWANCES> 195,000
<INVENTORY> 9,420,570
<CURRENT-ASSETS> 14,818,605
<PP&E> 12,661,902
<DEPRECIATION> 1,599,818
<TOTAL-ASSETS> 32,051,358
<CURRENT-LIABILITIES> 13,106,420
<BONDS> 0
<COMMON> 1,048
0
0
<OTHER-SE> 10,111,482
<TOTAL-LIABILITY-AND-EQUITY> 32,051,358
<SALES> 20,744,412
<TOTAL-REVENUES> 20,744,412
<CGS> 16,864,085
<TOTAL-COSTS> 16,864,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,388,369
<INCOME-PRETAX> (4,572,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,572,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,572,561)
<EPS-PRIMARY> (4.36)
<EPS-DILUTED> (4.36)
</TABLE>
