SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
0-20436
Commission file number
U.S. AUTOMOTIVE MANUFACTURING, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 65-0309477
(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Route 627, Airport Drive, Tappahannock, VA 22560
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (804) 443-5356
-----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 [ ]
As of May 15, 2000, the Registrant had 1,297,980 shares outstanding of its
common stock, $.001 par value.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
U.S. AUTOMOTIVE MANUFACTURING, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION ............................................. 3
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2000
(unaudited) and December 31, 1999 .............................. 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2000 and March 31, 1999 .......... 4
Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 2000 and March 31, 1999 ...... 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis or Plan
of Operation ................................................ 10
PART II. OTHER INFORMATION ................................................ 14
Item 1. Legal Proceedings ................................................ 14
Item 2. Changes in Securities and Use of Proceeds ........................ 14
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
Item 5. Other Information ................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................. 15
SIGNATURES ................................................................ 16
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Balance Sheets
March 31, 2000
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ....................................................... $ 57,798 $ 151,685
Accounts receivable (net of allowance of $108,570 and
$73,000 respectively) .................................. 5,113,923 3,531,487
Inventories ................................................ 9,042,638 8,745,814
Prepaid expenses, and other ................................ 14,436 27,978
------------ ------------
Total Current Assets ................... 14,228,795 12,456,964
Property, plant and equipment (net of accumulated
depreciation of $1,863,638 and $1,599,818,
respectively) ................................................... 10,851,123 10,965,687
Deferred financing costs ............................................ 360,221 397,989
Goodwill, net ....................................................... 5,555,924 5,635,673
------------ ------------
TOTAL ASSETS ........................................................ $ 30,996,063 $ 29,456,313
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ............................................. 8,563,665 7,220,713
Current portion of long-term debt .......................... 4,140,324 4,299,657
Accounts payable ........................................... 4,672,800 3,518,527
Accrued liabilities ........................................ 1,714,336 1,549,969
------------ ------------
Total Current Liabilities .............. 19,091,125 16,588,866
Long-term debt, less current portion ................................ 117,194 124,079
Notes payable to shareholders ....................................... 5,430,000 5,340,000
------------ ------------
Total Liabilities ...................... 24,638,319 22,052,945
------------ ------------
Stockholders' Equity:
Issued & outstanding capital stock $.001 par value .................. 1,317 1,268
Additional paid-in capital .......................................... 39,300,073 39,252,927
Accumulated deficit ................................................. (32,943,646) (31,850,827)
------------ ------------
Total stockholders' equity ............. 6,357,744 7,403,368
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ............................ $ 30,996,063 $ 29,456,313
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
----- -----
Net sales ...................................... $ 5,821,715 $ 7,320,955
Cost of goods sold ............................. 4,777,490 5,305,134
----------- -----------
Gross profit ................................... 1,044,225 2,015,821
----------- -----------
Operating expenses:
Selling and delivery ................... 725,666 782,815
General and administrative ............. 940,785 969,351
----------- -----------
Total operating expenses ............... 1,666,451 1,752,166
----------- -----------
Operating (loss) income ........................ (622,226) 263,655
Interest expense ............................... (483,093) (498,121)
----------- -----------
Net loss ....................................... $(1,105,319) $ (234,466)
=========== ===========
Net loss per share, basic and diluted .......... $ (0.86) $ (0.22)
=========== ===========
Weighted average shares outstanding ............ 1,289,124 1,048,656
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
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U.S. AUTOMOTIVE MANUFACTURING, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- -----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss ...................................................................... $(1,105,319) $ (234,466)
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Depreciation and Amortization ....................................... 443,772 370,569
Rollover of accrued interest into shareholder note .................. 90,000 90,000
(Increase) decrease in:
Accounts receivable ....................................... (1,582,436) (200,057)
Inventory ................................................. (296,824) 508,442
Prepaid expenses and other ................................ 13,542 (137,592)
Increase in:
Accounts payable and accrued liabilities .................. 1,338,334 681,952
----------- -----------
Total adjustments ............................................................. 6,388 1,313,314
----------- -----------
Net cash (used in) provided by operating activities ........................... (1,098,931) 1,078,848
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................ (211,691) (65,311)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) on lines of credit and
notes payable ....................................................... 1,216,735 (907,930)
----------- -----------
NET (DECREASE) INCREASE IN CASH ............................................... (93,887) 105,607
CASH-beginning of period ...................................................... 151,685 338,641
----------- -----------
CASH-end of period ............................................................ $ 57,798 $ 444,248
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 252,557 $ 239,371
Accrued Interest Expense $ 230,534 $ 258,750
Non-cash financing and investing activities:
Conversion of convertible debentures and
accrued interest payable into common stock $ 47,195 --
Directors fees converted into common stock $ 12,500 $ 36,666
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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U.S AUTOMOTIVE MANUFACTURING, INC.
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
NOTE 1: BUSINESS OPERATIONS AND ORGANIZATION
U.S. Automotive Manufacturing, Inc., a Delaware corporation incorporated on
January 16, 1992, together with its wholly-owned subsidiaries Quality Automotive
Company and U.S. Automotive Friction, Inc. (collectively, the "Company") is
engaged in the manufacture, assembly and distribution of new and rebuilt
automotive friction products. The Company maintains manufacturing and
warehouse/distribution facilities in Tappahannock, Virginia and Sanford, Florida
(the "Facilities").
The Company manufactures a full line of automotive friction products,
including brake lining, integrally molded and riveted brake pads and
remanufactured brake shoes. The Company markets various grades of friction brake
lining, using asbestos, non asbestos organic and semi-metallic formulas,
suitable for use by the automotive and light truck after-markets. The Company's
products are marketed under the Brakes Worth Stopping For,(R) Silent
Solution,(R) Gold Max,(R) Dual Friction,(TM) Ultra Brake,(TM) Ustop,(TM) and
Quality Automotive(TM) tradenames and various private label packaging. In 1999,
the Company's products were also sold under the Roinco,(TM) and Max Life, (TM)
tradenames.
Brake pads, brake shoes or a combination of both are incorporated in all
makes and models of American and imported automobiles. All imported and the
majority of late model domestic automobiles are equipped with integrally molded
brake pads. The Company generally produces the replacement brake under the same
process used to manufacture the vehicle's original equipment.
The Company sells its friction products to other automotive manufacturers
and the automotive after-market. The automotive after-market encompasses the
parts and service sold to the vehicle owners for repair or replacement of
original equipment parts. The Company believes that the market for replacement
parts generally consists of vehicles which are three to twelve years old. Sales
of the Company's products are made to mass merchandisers, automotive
distributors, chain stores and other brake manufacturers. The Company does not
market its products directly to retail customers.
NOTE 2: UNAUDITED INTERIM STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10 - QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated. Operating results
for the three months ended March 31, 2000, are not necessarily indicative of the
results to be expected for the year ending December 31, 2000. These financial
statements and notes should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999.
The Company's financial statements are presented on a 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 (August 1997). Since that date revenues have materially
increased while the cost of gearing production up to the new level of sales has
caused production inefficiencies and losses, which have reduced with time.
Through June 30, 1999, year-to-date sales were over $15 million (double that
recorded in fiscal 1997) with positive cash flow. The Company
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<PAGE>
continued to gear production upward anticipating record third quarter sales.
Instead, the Company experienced a 30% reduction from its internal sales plan,
leading into its traditionally weakest fourth quarter and substantial losses.
Since the middle of 1997, management has been building the Company's production
capacity in anticipation of the development of materially greater volumes of
business. The unexpected reduction in quarterly volume during the third quarter
of 1999 required management to focus on preserving cash.
Management believes that ultimately the Company will need to stabilize its
workforce and monthly production to capture the true production economies
available to the Company from its higher level of sales. Management further
believes that, without a significant infusion of additional working capital, the
Company's currently available cash reserves will prevent the Company from
availing itself of these efficiencies and from protecting itself from future
unforeseen downturns, such as those experienced in the last six months of fiscal
1999. Accordingly, since mid-November 1999, management has been attempting (i)
to negotiate a non-conversion solution to the Reg "S" Debentures and (ii) to
raise additional capital financing, through financial institutions and/or
strategic investors to solidify and stabilize the Company's balance sheet and
thereby its ability to normalize production. There is no assurance that such
financing will be available to the Company when needed, on commercially
reasonable terms or at all.
Previously the Company reported that it had entered into a strategic
investment by a third party through a direct equity purchase. On May 5, 2000,
the Company was notified that the investor was unwilling to move forward with
the strategic investment on the basis originally contemplated. The Company has
entered into a non-binding letter of understanding with another investor and is
working with such investor and its lenders to put together a plan to stabilize
production and maximize corporate value. There can be no assurance that a
strategic investment will be made. In the event the Company is unable to secure
financing through a strategic investment, or otherwise, the Company may be
materially adversely affected.
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.
NOTE 3: INVENTORY
Major inventory components were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials ........................ $4,669,741 $4,027,616
Work in Progress ..................... 202,663 80,904
Finished goods ....................... 4,170,234 4,637,294
---------- ----------
$9,042,638 $8,745,814
========== ==========
NOTE 4: DEBT
Credit Agreement
The Company entered into a $15,000,000 credit agreement with IBJ Whitehall
Business Credit Corporation (the "IBJ Credit Facility") as of July 30, 1999. The
IBJ Credit Facility consists of a revolving loan, a term loan, and a capital
expenditures loan. The agreement terminates on July 30, 2002, unless earlier
terminated, as provided for in the credit agreement.
The revolving loan (the "IBJ Revolving Loan") commitment amount is
$12,000,000, subject to certain limitations. Advances are made by formula based
upon the Company's accounts receivable and inventory balances. As of March 31,
2000, a total of approximately $8,564,000 of a possible $9,641,000 was
outstanding under the IBJ Revolving Loan and was included in line of credit in
the accompanying balance sheets. Interest is calculated at the
7
<PAGE>
prime rate plus .75% (9.75% at March 31, 2000). The IBJ Revolving Loan is
collateralized by the accounts receivable and inventory of the Company. Under
the IBJ Revolving Loan, the Company is required to maintain a lockbox. Proceeds
from the collection of accounts receivable are required to be remitted directly
to this lockbox which is controlled by IBJ Whitehall Business Credit
Corporation. As such, the balance of the IBJ Revolving Loan is reflected as a
short-term liability in these financial statements. The short-term
classification does not effect the Company's ability to draw additional advances
under the agreement according to the established formula.
The term loan (the "IBJ Term Loan") has an original loan amount of
approximately $2,108,000 and is secured by machinery and equipment. Monthly
installments of $36,459 are due until maturity, at which time the remaining
outstanding balance is due. As of March 31, 2000, the balance outstanding was
approximately $1,852,792. Interest is calculated at the prime rate plus 1% (10%
at March 31, 2000).
The capital expenditures loan (the "CapEx Loan") is a secured loan covering
machinery and equipment put into service under a capital expenditure facility of
1999. The CapEx Loan allows for the financing of up to $1,000,000 of capital
expenditures from May 1, 1999 at an advance rate of 80% of the cost of the
equipment. The original amount outstanding at closing was approximately
$239,000. As of March 31, 2000, the balance outstanding was approximately
$215,755. The CapEx Loan requires monthly payments of 1/72 of each advance, with
any remaining balance due at maturity. Interest is calculated at the prime rate
plus 1% (10% at March 31, 2000).
The IBJ Credit Facility contains covenants which restrict the Company's
ability to declare cash dividends and require the Company to maintain certain
financial ratios such as fixed charge coverage and a minimum net worth. The
Company was and continues to be in non-compliance with certain financial
covenants under the IBJ Credit Facility. Until such time as the Company is no
longer in non-compliance with the financial covenants contained in the IBJ
Credit Facility or the IBJ Credit Facility is amended in a manner to cure such
non-compliance, IBJ could accelerate the maturity date of the IBJ Credit
Facility. Such acceleration of the maturity date of the IBJ Credit Facility
could have a material adverse effect on the Company.
Convertible Debentures
The Company obtained additional financing through the sale of 8% Redeemable
Convertible Debentures (the "Reg S Debentures"), in the aggregate principal
amount of $2,250,000. 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 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 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. Commencing January 1, 1999, the interest rate increased to 20% per
annum 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 registration, the interest rate will revert to the 8% per
annum. Further, if upon conversion of the Reg S Debentures the Company would
otherwise be required to 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 days of the issuance of the Maximum
Conversion Share Allotment or filed a proxy statement soliciting stockholder
authorization to issue additional shares upon notice of conversion of
outstanding Reg S Debentures in excess of the Maximum Conversion Share Allotment
and/or 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 will not be
applicable if the Company files 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) below (a "Redemption Notice"), at a redemption price equal to
(i) 125% of the principal amount of, plus accrued interest on, the Reg S
Debentures, 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 the 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 Securities Act
of 1933, as amended (the "Securities 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.
As of March 31, 2000 an aggregate of 229,204 principal amount of Reg S
Debentures plus accrued but unpaid interest thereon of $41,035 had been
converted into 206,324 shares of the Company's Common Stock at an average
conversion price of $1.265 per share.
On May 3, 2000 the holders of Reg S Debentures each delivered a conversion
notice to the Company requesting the conversion of an aggregate principal amount
of $90,000, and accrued but unpaid interest thereon into approximately 192,948
shares of the Company's Common Stock at an average conversion price, pursuant to
the conversion rate set forth in the Reg S Debentures, of $.61 per share. The
Company issued an aggregate of 3,336 shares to the converting holders on a
pro-rata basis of 1,112 to each such holder. Such shares in the aggregate,
represented the remaining shares available for issuance by the Company under the
Maximum Conversion Allotment. The Company has likewise notified the holders of
the Reg S Debentures that the Company has contemporaneously with the issuance of
the 3,336 shares reached the Maximum Share Allotment. The Company intends to
file a proxy statement, pursuant to the terms of the Reg S Debenture, to solicit
shareholder authorization for the issuance of shares in excess of the Maximum
Conversion Allotment pursuant to further conversion requests by the holders of
the balance of the Reg S Debentures.
NOTE 5: STOCKHOLDERS' EQUITY
In February 2000, the Company issued an aggregate of 49,277 shares of
common stock to certain of the holders of Reg S Debentures in connection with
the conversion by such holders of an aggregate of $40,000 principal amount of
Reg S Debentures, together with accrued and unpaid interest thereon of $7,195,
at a conversion rate of $.96 per share. The issuance of shares of Common Stock
by the Company pursuant to the conversion of Reg S Debentures was made in
reliance upon an exemption from registration under Section 3(a)(9) of the
Securities Act.
On March 8, 2000, the Company authorized the issuance of an aggregate of
8,332 shares of Common Stock to two of its directors in lieu of unpaid
director's fees of an aggregate of $12,500. The issuances of such shares is
based on a price per share of $1.50 ( the closing sales price of the Company's
Common Stock on March 31, 2000) The issuances of Common Stock will be made in
reliance upon Section 4(2) of the Securities Act.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the Company's recent losses, the Company's need to obtain additional
financing and the ability to obtain such financing; outstanding indebtedness;
the ability to hire and retain key personnel; successful completion and
integration of prior and any future acquisitions; relationships with and
dependence on third-party equipment manufacturers and suppliers; uncertainties
relating to business and economic conditions in markets in which the Company
operates; uncertainties relating to government and regulatory policies and other
political risks; uncertainties relating to customer plans and commitments; cost
of and availability of component materials and inventories; effect of
governmental export and import policies; the highly competitive environment in
which the Company operates; potential entry of new, well-capitalized competitors
into the Company's markets; and the uncertainty regarding the Company's ability
to continue as a going concern as well as it ability, through sales growth, to
absorb the increasing costs incurred and expected to be incurred in connection
with its business activities. The words "believe", "expect", "anticipate",
"intend" and "plan" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made.
General
Since 1997 the Company's revenues have increased by approximately 100% and
in the quarter ended June 30, 1999 the Company achieved its first quarterly
profit in more than five years. Based on these and other factors, at the end of
the June 30, 1999 quarter management anticipated continued revenue growth and,
consequently, the Company was hiring and training additional employees and
incurring overtime expenses in order to keep production in line with such
anticipated growth. However, during the third and fourth quarters of 1999, the
Company experienced an unforeseen substantial decrease in orders from two of its
largest customers. Moreover, business from a potential new customer that was
expected to occur in the third quarter of 1999 never materialized. As a result,
the Company was required to reduce overhead expenses which was partially
accomplished through reductions in personnel from 475 at June 30, 1999 to 394 at
September 30, 1999. Management determined it was in the Company's best interest
to stabilize the existing trained workforce and continue production in order to
build inventory of its best selling products in anticipation of the year 2000
season. In order to finance continued production, the Company secured agreements
from certain third parties to allow any monies raised in the financing of the
Company's real property to support the fourth quarter plan of production and not
to reduce the prior existing commitments of the Company to such third parties.
Assurances to such third parties were required that if such monies as funded,
remained in the Company , they would be used to support the fourth quarter plan
of production and not as an offset to other existing debt. The Company, however,
could not secure agreement from its lenders to fund the real property and allow
the Company to produce in anticipation of its Year 2000 season. Accordingly the
Company had no alternative but to reduce full time employees to 269 by year-end
1999.
As a result, management determined that a strategic investor was required
to stabilize cash flow and allow the Company to enjoy the economies of scale a
well financed company should achieve from the Company's current level of sales
and production. In November 1999, the Company commenced negotiations with
Satisfied Brake Products ("Satisfied") with respect to a prospective strategic
investment by Satisfied in the Company, although a formal non-binding letter of
intent was not signed until March, 2000. During the intervening time the Company
was forced into a "lame duck" status within its industry. There were views
expressed by customers and prospective customers ranging from it was a "done
deal" to they could not depend on the strategic investor ever completing
satisfactory due diligence. Both industry perspectives were equally damaging. On
more than one occasion, sales efforts by the Company were set back as
prospective customers eliminated the Company from consideration on account of
the fact that they were already considering the Company's strategic investor or
because of concerns for the Company's on-going viability. Certain customers
became concerned with the Company's ability to make it through the year 2000
season; resulting in accelerated orders from such customers.
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The downturn of the third and fourth quarters of last year reversed itself
in late December 1999. The Company ended the year with a substantial backlog of
orders. This trend continued during the first quarter of year 2000 primarily as
a result of the Company's two largest customers more than doubling the normal
amount of orders they typically place during this period. Since the Company was
not able to prepare for its season by "pre-producing" its best selling products
during the fourth quarter, the Company was forced to once again concentrate on
production at the expense of the bottom line. Based on established criteria of
"timeliness of delivery" and a required high percentage of order fill, the
Company was forced to hire and train a substantial amount of new employees. At
March 31, 2000, the Company employed 324 full-time employees. The costs of such
inefficiencies have had a material adverse effect on the Company's operating
results. Moreover, in the last half of April 2000, the Company was advised that
both of its largest customers had an oversupply of inventory and would be
cutting back orders.
On May 5, 2000, Satisfied informed the Company that it was unwilling to
move forward with the strategic investment on the basis originally contemplated.
On May 9, 2000 the Company entered into a non-binding letter of understanding
with another strategic investor and is working with that investor and its
lenders to put together a plan to stabilize production and maximize Corporate
value. There is no assurance that such strategic investment will take place. In
the event that the Company is unable to secure financing through a strategic
investment, or otherwise, the Company may be materially adversely affected.
Results of Operations
Comparison of Three Months Ended March 31, 2000 to Three Months Ended March 31,
1999
Net Sales. Net sales for the three months ended March 31, 2000 were
$5,821,715 as compared to net sales of $7,320,955 for the three months ended
March 31, 1999. The decrease of $1,499,240 or 20.5% was primarily attributable
to decreased production resulting from delayed raw material purchases and
production inefficiencies inherent in the hiring and training of a significant
number of new employees.
Gross Profit. For the three months ended March 31, 2000, the Company had a
gross profit of $1,044,225 compared to a gross profit of $2,015,821 for the
three months ended March 31, 1999. The decrease in gross profit was attributed
to a 20.5% decrease in sales plus an increase in cost of sales as a percentage
of net sales resulting from the inefficiencies inherent in hiring and training
substantial numbers of employees. Cost of sales as a percentage of net sales for
the three months ended March 31, 2000 was 82.1% as compared to 72.5% for the
three months ended March 31, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2000 were
$1,666,451 as compared to $1,752,166 for the three months ended March 31, 1999,
representing a decrease of 4.9%. The decrease was primarily attributable to the
reduction of sales.
Interest Expense. Interest expense decreased by $15,028 or 3% from $498,121
for the three months ended March 31, 1999 to $483,093 for the three months ended
March 31, 2000. The nominal decrease in interest expense reflected the fact that
borrowings and interest rates were essentially unchanged from period to period.
Net Loss. Net loss in the first quarter of 2000 was ($1,105,319) or ($.86)
per share based on 1,289,124 weighted average common and common equivalent
shares outstanding compared to a net loss of ($234,466) or ($.22) per share in
the first quarter of 1999 based on 1,048,656 weighted average common and common
equivalent shares outstanding. The increase in net loss of $858,352 was
primarily the result of decreased production resulting from inadequate cash
resources combined with the operating inefficiencies created by the hiring of
additional staff to meet orders received by our largest customers.
Liquidity and Capital Resources
During the three months ended March 31, 2000, the Company financed its
operations primarily through borrowings under its lending facilities and cash
generated by operations.
11
<PAGE>
At March 31, 2000, the Company had consolidated cash totaling $57,798 and a
working capital deficit of $4,862,330. At December 31, 1999, the Company had
consolidated cash totaling $151,685 and a working capital deficit of $4,131,902.
The increase in working capital deficit was due primarily to the (i) the
reduction in cash to fund the Company's net losses, (ii) the increase in short
term debt obligations resulting from the reclassification of the Reg S
Debentures to short term debt, (iii) the increase in accrued liabilities, and
(iv) the reclassification of certain long term debt pending an amendment to the
IBJ Credit Facility (defined below).
The principal source of capital for the Company's operations is the line of
credit facility between the Company and IBJ Whitehall, as Agent (the "IBJ Credit
Facility"), which consists of the following:
(i) the IBJ Revolving Loan facility of up to $12 million. Advances are
made by formula based on the Company's accounts receivable and
inventory balances. At March 31, 2000, the revolving credit facility
had approximately $8.564 million of a possible $9.641 million
outstanding. Interest is calculated at the prime rate plus .75% (9.75%
at March 31, 2000)
(ii) the IBJ Term Loan, secured by machinery equipment, having an original
loan amount of approximately $2.108 million of which $1,852,792 was
outstanding at March 31, 2000. Monthly installments of $36,459 are due
until maturity, at which time any balance owing is due. Interest is
calculated at the prime rate plus 1% (10.0% at March 31, 2000)
(iii) the CapEx Loan, secured by machinery and equipment put into service
under a capital expenditure facility of 1999. The CapEx Loan allows
for the financing of up to $1,000,000 of capital expenditures from May
1, 1999 at an advance rate of 80% of the cost of the equipment. The
original amount outstanding at the closing was $238,990. At March 31,
2000, the balance outstanding was approximately $215,755. The loan
calls for monthly payments of 1/72 of each advance with any balance
being due at the maturity date. Interest is calculated at the prime
rate plus 1% (10.0% at March 31, 2000).
The Company's obligation to pay the principal of, interest on, premium, if
any, and all other amounts payable on account of the IBJ Credit Facility is
secured by the inventory, accounts receivables and machinery and equipment of
the Company, as well as the pledge of all of the Company's ownership interest in
it's principal subsidiary, Quality Automotive Company. Pursuant to the terms of
the IBJ Credit Facility, under certain restrictive criteria, the Company may
choose to borrow under a formula equal to 300 basis points over LIBOR. The IBJ
Credit Facility contains covenants which restrict the Company's ability to
declare cash dividends and require the Company to maintain certain financial
ratios such as fixed charge coverage and a minimum net worth. The Company was
and continues to be in noncompliance with certain financial covenants under the
IBJ Credit Facility. Until such time as the Company is no longer in
non-compliance with the financial covenants contained in the IBJ Credit Facility
or the IBJ Credit Facility is amended in a manner to cure such non-compliance,
IBJ could accelerate the maturity date of the IBJ Credit Facility. Such
acceleration of the maturity date of the IBJ Credit Facility could have a
material adverse effect on the Company.
In addition to the IBJ Credit Facility, the Company obtained additional
financing through the sale on June 30, 1998, of Reg S Debentures, in the
aggregate principal amount of $2,250,000. The Reg S Debentures represent
unsecured obligations of the Company and outstanding Reg S Debentures 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") without obtaining approval of its stockholders.
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
12
<PAGE>
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. At such time as the
underlying shares are tradable, without regard to registration, the interest
rate will 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 will not be applicable if
the Company issues the proxy statement referred to above.
Impact of the Year 2000
As of May 12, 2000, the Company has not experienced any Year 2000 effect,
from either its own, or its customer's computing systems.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On August 21, 1998, an eight count complaint, entitled Al Dulisse, Bernard
Bard, Michael Scicchitano and Barry Schwartz vs. U.S. Automotive Manufacturing,
Inc., f/k/a R.T. Industries, Inc., a Delaware corporation (Case No. 98-007490
AN), was filed in the Circuit Court of the Fifteenth Judicial Circuit of
Florida, in and for Palm Beach County (the "Complaint") alleging 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 claims. A jury trial on the breach of contract claims was held in
January 2000 and a verdict was rendered in favor of the Company. The plaintiffs'
motions for partial judgement notwithstanding the verdict and for a new trial
were denied at a subsequent hearing. A final judgement in this matter has not
been entered. The Company has filed motions with respect to collecting certain
costs and fees associated with this proceeding, which were scheduled for hearing
on April 24, 2000. Prior to such hearing the parties agreed orally to end the
subject litigation with prejudice, without payment from either party. The
Company expects to have a formal settlement agreement incorporating the intent
of the parties in the near future.
Various other legal proceedings and claims have been or may be from time to
time asserted against the Company in the ordinary course of its business.
Management believes that it has meritorious defenses and will vigorously defend
itself with respect to all existing proceedings or claims. Any costs or damages
that management estimates may be paid as a result of these proceedings or claims
are accrued when the liability, if any, is considered probable and the amount
can be reasonably estimated. Although the ultimate disposition of proceedings
and claims currently pending is not presently determinable, management believes
that, after consultation with counsel, the likelihood that material costs or
damages will be incurred by the Company as a result of any pending proceedings
is remote.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, the Company issued an aggregate of 49,277 shares of
common stock to certain of the holders of Reg S Debentures in connection with
the conversion by such holders of an aggregate of $40,000 principal amount of
Reg S Debentures, together with accrued and unpaid interest thereon of $7,195,
at a conversion rate of $.96 per share. The issuance of shares of Common Stock
by the Company pursuant to the conversion of Reg S Debentures was made in
reliance upon an exemption from registration under Section 3(a)(9) of the
Securities Act of 1933, as amended (the "Securities Act").
On March 8, 2000, the Company authorized the issuance of an aggregate of
8,332 shares of Common Stock to two of its directors in lieu of unpaid
director's fees of an aggregate of $12,500. The issuances of such shares is
based on a price per share of $1.50 (the closing sales price of the Company's
Common Stock on March 31, 2000). The issuances of Common Stock will be made in
reliance upon Section 4(2) of the Securities Act.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of securities holders during the
first quarter of 2000.
ITEM 5: OTHER INFORMATION
In May 2000, Nasdaq informed the Company that, among other things, it was
not in compliance with the new net tangible asset/market capitalization/net
income requirements for continued listing on the Nasdaq SmallCap Market. The
Company is in the process of responding to such notice. If such response is not
accepted by Nasdaq, it may commence proceedings to delist the Company from
Nasdaq. If the Company is delisted, the Company's
14
<PAGE>
common stock may commence trading on the OTC Bulletin Board. In such event, it
may become more difficult to buy or sell the Company's Common Stock or obtain
timely and accurate quotations to buy or sell. In addition, the delisting could
result in a decline in the trading market for the Company's common stock which
could potentially further depress the Company's stock price.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 2000
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ John W. Kohut
-------------------------------------
John W. Kohut,
Chairman of the Board and
principal financial officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT MARCH 31,2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 57,798
<SECURITIES> 0
<RECEIVABLES> 5,222,493
<ALLOWANCES> 108,570
<INVENTORY> 9,042,638
<CURRENT-ASSETS> 14,228,795
<PP&E> 12,714,761
<DEPRECIATION> 1,863,638
<TOTAL-ASSETS> 30,996,063
<CURRENT-LIABILITIES> 19,091,125
<BONDS> 0
0
0
<COMMON> 1,317
<OTHER-SE> 6,357,744
<TOTAL-LIABILITY-AND-EQUITY> 30,996,063
<SALES> 5,821,715
<TOTAL-REVENUES> 5,821,715
<CGS> 4,777,490
<TOTAL-COSTS> 4,777,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483,093
<INCOME-PRETAX> (1,105,319)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,105,319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,105,319)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
