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 September 30, 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 December 1, 2000, the Registrant had 1,329,492 shares outstanding of its
common stock, $.001 par value.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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U.S. AUTOMOTIVE MANUFACTURING, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION................................................ 3
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999............................................ 3
Consolidated Statements of Operations (unaudited) for the
three months ended September 30, 2000 and September 30, 1999..... 4
Consolidated Statements of Operations (unaudited) for the
nine months ended September 30, 2000 and September 30, 1999...... 5
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended September 30, 2000 and September 30, 1999.. 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis or Plan
of Operation.................................................. 11
PART II. OTHER INFORMATION ................................................. 15
Item 5. Other Information ................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................... 16
SIGNATURES................................................................... 17
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AUTOMOTIVE MANUFACTURING, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash ......................................... $ 25,128 $ 151,685
Accounts receivable (net of allowance of
$162,000 and $73,000 respectively) ....... 3,598,640 3,531,487
Inventories .................................. 8,470,714 8,745,814
Prepaid expenses and other ................... 19,124. 27,978
----------- -----------
Total Current Assets ..................... 12,113,606 12,456,964
Property, plant and equipment
(net of accumulated depreciation of
$803,693 and $2,708,450 respectively) .......... 3,371,131 10,965,687
Fixed Assets Held For Sale ....................... 873,149 .
Deferred financing costs ......................... . 397,989
Goodwill, net .................................... . 5,635,673
----------- -----------
TOTAL ASSETS ..................................... $16,357,886 $29,456,313
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Line of credit ............................... 7,960,284 7,220,713
Current portion of long-term debt ............ 3,900,103 4,299,657
Secured promissory loan ...................... 1,420,000 .
Accounts payable ............................. 4,128,502 3,518,527
Accrued liabilities .......................... 2,010,747 1,549,969
----------- -----------
Total Current Liabilities ................ 19,419,636 16,588,866
Long-term debt, less current portion ............. 103,370 124,079
Notes payable to shareholders .................... 5,610,000 5,340,000
----------- -----------
Total Liabilities ........................ 25,133,006 22,052,945
----------- -----------
Stockholders' Equity:
Issued & outstanding capital stock
$.001 par value ................................ 1,329 1,268
Additional paid-in capital ....................... 39,314,596 39,252,927
Accumulated deficit .............................. (48,091,045) (31,850,827)
----------- -----------
Total stockholders' equity (deficit) ..... (8,775,120) 7,403,368
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY (DEFICIT) ............................... $16,357,886 $29,456,313
=========== ===========
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
SEPTEMBER 30,
---------------------------
2000 1999
------------ -----------
Net sales ....................................... $ 4,114,011 $ 5,661,471
Cost of goods sold .............................. 3,381,458 4,422,023
------------ -----------
Gross profit .................................... 732,553 1,239,448
------------ -----------
Operating expenses:
Selling and delivery ........................ 658,699 769,050
General and administrative .................. 798,967 933,498
Asset Impairment ............................ 11,621,053
------------ -----------
Total operating expenses .................... 13,078,719 1,702,548
------------ -----------
Operating loss .................................. (12,346,166) (463,100)
Interest expense ................................ (612,957) (499,219)
------------ -----------
Net loss ........................................ $(12,959,123) $ (962,319)
============ ===========
Net loss per share, basic and diluted ........... $ (9.75) $ (0.86)
============ ===========
Weighted average shares outstanding ............. 1,329,492 1,124,168
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
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U.S. AUTOMOTIVE MANUFACTURING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
------------ -----------
Net sales ....................................... $ 14,414,917 $21,025,787
Cost of goods sold .............................. 12,456,026 15,642,114
------------ -----------
Gross profit .................................... 1,958,891 5,383,673
------------ -----------
Operating expenses:
Selling and delivery ........................ 2,135,033 2,303,709
General and administrative .................. 2,780,254 2,611,238
Asset Impairment ............................ 11,621,053 .
------------ -----------
Total operating expenses .................... 16,536,340 4,914,947
------------ -----------
Operating (loss) income ......................... (14,577,449) 468,726
Interest expense ................................ (1,662,769) (1,513,220)
------------ -----------
Net loss ........................................ $(16,240,218) $(1,044,494)
============ ===========
Net loss per share, basic and diluted ........... $ (12.34) $ (0.96)
============ ===========
Weighted average shares outstanding ............. 1,315,702 1,086,069
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
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U.S. AUTOMOTIVE MANUFACTURING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
------------ -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss ........................................ $(16,240,218) $(1,044,494)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and Amortization ............... 1,375,273 1,146,457
Asset Impairment ............................ 11,621,053 --
Rollover of accrued interest into
shareholder note .......................... 270,000 270,000
Issuance of common stock in satisfaction
of related party
Payables .................................... -- 49,166
(Increase) decrease in:
Accounts receivable .................... (67,152) 18,518
Inventory .............................. 275,101 (314,338)
Prepaid expenses and other ............. 8,854 (252,231)
Increase in:
Accounts payable and accrued liabilities 1,095,338 97,186
------------ -----------
Total adjustments ............................... 14,578,467 1,014,758
------------ -----------
Net cash used in operating activities ........... (1,661,751) (29,736)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................ (241,257) (892,922)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings on lines of credit,
notes payable, and secured
Promissory loans ............................ 1,776,451 828,731
------------ -----------
NET DECREASE IN CASH ............................ (126,557) (93,927)
CASH-beginning of period ........................ 151,685 338,641
------------ -----------
CASH-end of period .............................. $ 25,128 $ 244,714
============ ===========
Supplemental Cash Flow Information:
Non-cash financing and investing activities:
Conversion of convertible debentures
and accrued interest payable into
common stock .............................. $ 49,230 $ --
Directors fees converted into common stock .. $ 12,500 $ 36,666
The accompanying notes are an integral part of these
consolidated financial statements.
6
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U.S AUTOMOTIVE MANUFACTURING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 a manufacturing and
warehouse/distribution facility in Tappahannock, Virginia.
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 that 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 AND ASSET IMPAIRMENT
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10 - QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated. Operating results
for the nine months ended September 30, 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 has experienced lower than expected sales resulting from
reduced customer orders and other industry wide factors. The lower than expected
sales are anticipated to continue through the end of the year. In response to
the lower sales, the Company has reduced staff and closed its manufacturing and
warehouse facilities in Sanford, Florida.
The Company is currently not generating sufficient revenues from operations
to fund its operating activities and is dependent upon additional financing from
external sources.
7
<PAGE>
Previously the Company reported that on May 9, 2000, it had entered into a
non-binding letter of understanding with an investor with respect to a proposed
strategic investment in the Company. In connection with that proposed
investment, the investor has provided a secured promissory loan to the Company
in the aggregate principal amount of $1,420,000. The investor has advised the
Company that the strategic investment will not be made as a result of the
Company's being delisted on October 19, 2000. However, the Company is still in
negotiations with the strategic investor and another investor to structure a new
deal in the form of an asset purchase. The Company, therefore, has no available
sources of additional financing. If the Company is unable to secure financing,
on an immediate basis, through a strategic investment or otherwise, the Company
may be required to cease operations.
The Company has been advised by its independent public accountants that
unless the Company raises adequate capital through additional financing or a
strategic investment prior to the completion of the audit of the Company's
financial statements for the year ending December 31, 2000, the auditors' report
on those financial statements will be modified to reflect this contingency. The
accompanying 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.
Asset Impairment
In the third quarter of 2000, after considering the Company's history of
operating losses and the expectation of future operating losses, changes in the
Company's strategic direction, and certain industry factors, the Company
evaluated the ongoing value of its business. Based on this evaluation and the
proposed strategic investor's decision not to make a strategic investment in the
Company in accordance with the original proposal, the Company determined that
assets with a carrying value of $15,517,000 were impaired according to the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Asset to be Disposed Of", and wrote down the carrying value
of such assets by $11,621,000 to their fair value. Fair value was based on the
recent appraisals, if available, and expected future cash flows. The Company has
also classified the fixed assets at its Sanford Florida facility as fixed assets
held for sale on the accompanying balance sheet. Fair value of the fixed assets
held for sale is based on anticipated sales prices.
The Company's estimates of the fair value of the assets could be reduced
significantly in the future due to the results of its discussions to raise
capital and changes in market conditions. As a result, the carrying amount of
long-lived assets could be further reduced materially in the future.
NOTE 3: INVENTORY
Major inventory components were as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------- ----------
(UNAUDITED)
Raw materials .................................. $3,617,724 $4,027,616
Work in Process ................................ 142,240 80,904
Finished goods ................................. 4,710,750 4,637,294
---------- ----------
$8,470,714 $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
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capital expenditures loan. The IBJ Credit Facility 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 September
30, 2000, a total of approximately $7,960,284, of a possible $8,350,783, was
outstanding under the IBJ Revolving Loan and was included in line of credit in
the accompanying balance sheets. Interest is calculated at the prime rate plus
.75% (10.25% at September 30, 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 the Company's financial statements. The short-term classification
does not effect the Company's ability to draw additional advances under the
credit 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 September 30, 2000, the balance outstanding
was approximately $1,634,042. Interest is calculated at the prime rate plus 1%
(10.5% at September 30, 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. As of September 30, 2000, the balance outstanding was approximately
$195,839. 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% (10.5% at September 30, 2000).
The IBJ Credit Facility contains covenants that 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 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
would have a material adverse effect on the Company.
CONVERTIBLE DEBENTURES
In 1998, 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")
without stockholder approval.
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
9
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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.
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.
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. In accordance with the
terms of the Reg S Debentures, the Company filed a preliminary proxy statement
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.
As of September 30, 2000 an aggregate of $230,760 principal amount of Reg S
Debentures plus accrued but unpaid interest thereon of $41,514 had been
converted into 209,660 shares of the Company's Common Stock at an average
conversion price of $1.255 per share.
Subsequent to the Company's filing of the preliminary proxy statement, the
Company proceeded with negotiations with a prospective strategic investor in
connection with an equity investment by the strategic investor in the Company.
The transaction contemplated the simultaneous conversion of the outstanding Reg
S Debentures into a certain percentage of the Company's common stock. As a
result of the continuing negotiations, the Company was unable to file a
definitive proxy statement until such time as a formal agreement regarding the
strategic investment was entered into. The strategic investment as negotiated,
however, was conditioned, among other things, upon the continued listing of
Company's common stock on the Nasdaq Small Cap market. Effective October 19,
2000, by a
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decision of a Nasdaq listing Qualifications Panel, the Company's common stock
was delisted from the Nasdaq Small Cap market. Subsequent to such delisting all
discussions relating to the originally proposed strategic investment have ceased
entirely. As of December 1, 2000 the Company has not filed a definitive proxy
statement. By letter dated December 5, 2000, the holders of Reg S Debentures
notified the Company that they declared the Company to be in default under the
terms of the Reg S Debentures and demanded an accelerated payment of principal
and interest on the outstanding Reg S Debentures. The Company has initiated
discussions in an effort to resolve this matter.
SECURED LOAN
Prior to the termination of discussions with the prospective strategic
investor with respect to the originally proposed strategic investment, the
Company had entered into a secured loan with the prospective strategic investor
for an aggregate principal amount of $1,420,000 (the "Secured Promissory Loan").
The Secured Promissory Loan was primarily for $1,000,000 of cash received and
approximately $347,000 related to the conversion of certain payables for
inventory. The Company recorded interest expense in the third quarter of 2000
for the difference between the face value of the Secured Promissory Loan and the
value of the cash received and payables converted. The cash proceeds have been
applied towards the reduction of amounts outstanding under the IBJ Credit
Facility. The Secured Promissory Loan accrues interest at an annual rate of 10%.
The interest rate may be increased to 13% in the event of a default. The Secured
Promissory Loan is due on October 30, 2002. The Secured Promissory Loan has been
classified as current as it contains a covenant that requires repayment in the
event that the Company fails to pay certain indebtness, which would likely occur
if any of the Company's debt that is currently in non compliance with debt
covenants was accelerated. The Secured Promissory Loan is secured by the
Company's real estate and operating office and warehouse facilities.
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 and its ability to continue as a going
concern, 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 statements were made.
GENERAL
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
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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 269 at December 31, 1999.
The downturn of the third and fourth quarters of 1999 reversed itself in
late December 1999 primarily as a result of accelerated orders from existing
customers. 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. As a result of the increase in
orders the Company was forced to hire and train a substantial amount of new
employees, which 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. As a result, the Company was again required to reduce the
number of its full-time employees.
Previously the Company reported that on May 9, 2000, it had entered into a
non-binding letter of understanding with a strategic investor. In connection
with that proposed investment, the prospective investor had loaned the Company
an aggregate principal amount of $1,420,000. A pre-condition to such strategic
investor's investment in the Company had been the continued listing of the
Company's Common Stock or the Nasdaq Small Cap market. As described below,
effective October 19, 2000 the Company's Common Stock has been delisted from the
Nasdaq Small Cap market and has commenced trading on the OTC Bulletin Board.
Subsequent to such delisting, all discussions relating to the originally
propossed strategic investment have ceased entirely. Consequently, the Company
has no sources of available financing. If the Company is unable to secure
financing on an immediate basis, through a strategic investment, or otherwise,
the Company may be required to cease operations.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the three months ended September 30, 2000 were
$4,114,011 as compared to net sales of $5,661,471 for the three months ended
September 30, 1999. The decrease of $1,547,460 or 27.3% was primarily
attributable to a reduction of orders from customers.
GROSS PROFIT. For the three months ended September 30, 2000, the Company
had a gross profit of $732,553 compared to a gross profit of $1,239,448 for the
three months ended September 30, 1999. The decrease in gross profit was
primarily attributable to the decrease in sales. Cost of goods sold as a
percentage of net sales for the three months ended September 30, 2000 was 82.2%
as compared to 78.1% for the three months ended September 30, 1999 because of
increase in utility expenses and manufacturing overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 30, 2000 were
$1,457,666 as compared to $1,702,548 for the three months ended September 30,
1999, representing a decrease of 14.4%. The decrease was primarily attributable
to the closing of the Company's Sanford, Florida facility.
ASSET IMPAIRMENT. During the third quarter of 2000 the Company recorded an
asset impairment charge of $11,621,053. See Note: 2 under Notes to Consolidated
Financial Statements.
INTEREST EXPENSE. Interest expense increased by $113,738 or 22.8% from
$499,219 for the three months ended September 30, 1999 to $612,957 for the three
months ended September 30, 2000. The increase in interest expense reflected an
increase in borrowing by the Company.
NET LOSS. Net loss in the third quarter of 2000 was ($12,959,123) or
($9.75) per share based on 1,329,492 weighted average common shares outstanding
compared to a net loss of ($962,319) or ($.86) per share in the third quarter of
1999 based on 1,124,168 weighted average common and common equivalent shares
outstanding. The increase in net loss of $375,751 was primarily the result of
reduced sales and write down of assets.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
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NET SALES. Net sales for the nine months ended September 30, 2000 were
$14,414,917 as compared to net sales of $21,025,787 for the nine months ended
September 30, 1999. The decrease of $6,610,870 or 31.4% was primarily
attributable to a reduction of orders from customers.
GROSS PROFIT. For the nine months ended September 30, 2000, the Company had
a gross profit of $1,958,891 compared to a gross profit of $5,383,673 for the
nine months ended September 30, 1999. The decrease in gross profit was primarily
attributable to the decrease in sales. Cost of goods sold as a percentage of net
sales for the nine months ended September 30, 2000 was 86.4% as compared to
74.4% for the nine months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 2000 were
relatively unchanged at $4,915,287 as compared to $4,914,947 for the nine months
ended September 30, 1999.
ASSET IMPAIRMENT. During the third quarter of 2000 the Company recorded an
asset impairment charge of $11,621,053. See Note: 2 under Notes to Consolidated
Financial Statements.
INTEREST EXPENSE. Interest expense increased by $149,549 or 9.9% from
$1,513,220 for the nine months ended September 30, 1999 to $1,662,769 for the
nine months ended September 30, 2000. The increase in interest expense reflected
the increase in borrowing.
NET LOSS. Net loss in the first nine months of 2000 was ($16,240,218) or
($12.34) per share based on 1,315,702 weighted average common shares outstanding
compared to a net loss of ($1,044,494) or ($.96) per share in the first nine
months of 1999 based on 1,086,069 weighted average common and common equivalent
shares outstanding. The increase in net loss of $3,574,671 was primarily the
result of reduced sales and write down of assets.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company financed its
operations primarily through borrowings under its lending facilities and cash
generated by operations. In addition, during the third quarter of 2000, the
Company obtained the secured promissory loan in the amount of $1,420,000.
At September 30, 2000, the Company had consolidated cash totaling $25,128
and a working capital deficit of $7,310,440. 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
reduction in cash, which was used to fund the Company's recent net losses and
the increase in accounts payable and accrued liabilities.
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 September 30, 2000, the revolving credit
facility had approximately $7,960,284 of a possible $8,350,783
outstanding. Interest is calculated at the prime rate plus .75%
(10.25% at September 30, 2000)
(ii) the IBJ Term Loan, secured by machinery equipment, having an original
loan amount of approximately $2,108,000 of which approximately
$1,634,042 was outstanding at September 30, 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% (10.5% at September 30, 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
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was $238,990. At September 30, 2000, the balance outstanding was
approximately $195,839. 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% (10.5% at September 30, 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 would 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 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.
In May 2000, the Company filed a preliminary proxy statement for the
purpose of, among other things, obtaining stockholder authorization to the
issuance of additional shares in excess of the Maximum Conversion Share
Allotment in connection with a further request for the conversion of outstanding
Reg S Debentures by the holders thereof. Subsequent thereto, the Company
proceeded with negotiations with a prospective strategic investor for an equity
investment in the Company, which transaction contemplated the simultaneous
conversion of the outstanding Reg S Debentures into a certain percentage at the
Company's common stock. As a result, the Company was unable to file a definitive
proxy statement until such time as a formal agreement would be entered into with
respect to the strategic investment. The strategic investment as negotiated,
however, was conditioned, among other things, upon the continued listing of the
Company's common stock on the Nasdaq Small Cap market. Effective, October 19,
2000, the Company's common stock was delisted from the Nasdaq Small Cap market.
Subsequent to such delisting, all discussions relating to the strategic
investment have ceased entirely. The Company has not yet filed a definitive
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proxy statement. By letter dated December 5, 2000, the holders of Reg S
Debentures notified the Company that they declared the Company to be in default
under the terms of the Reg S Debentures and demanded an accelerated payment of
principal and interest on the outstanding Reg S Debentures. The Company has
initiated discussions in an effort to resolve this matter.
During the second quarter of 2000, the Company obtained the Secured
Promissory Loan in the aggregate amount of $1,420,000. The Secured Promissory
Loan consisted of $1,000,000 of cash received and approximately $347,000 related
to the conversion of certain payables for inventory. The Company recorded
interest expense in the third quarter of 2000 for the difference between the
face value of the Secured Promissory Loan and the value of the cash received and
payables converted. The cash proceeds have been applied towards the reduction of
amounts outstanding under the IBJ Credit Facility. The Secured Promissory Loan
accrues interest at an annual rate of 10%. The interest rate is subject to be
increased to 13% in the event of a default. The Secured Promissory Loan is due
on October 30, 2002. The Secured Promissory Loan has been classified as current
as it contains a covenant that requires repayment in the event that the Company
fails to pay certain indebtness, which would likely occur if any of the
Company's debt that is currently in non compliance with debt covenants was
accelerated. The Secured Promissory Loan is secured by the Company's real estate
and operating office, and warehouse facilities.
PART II
OTHER INFORMATION
ITEM 5: OTHER INFORMATION
In May 2000, Nasdaq informed the Company that it was not in compliance with
the net tangible asset/market capitalization/net income requirements for
continued listing on the Nasdaq SmallCap Market. The Company responded to the
notice and was given until September 10, 2000, to comply. The Company
subsequently requested that a Nasdaq Listing Qualifications Panel agree to the
continued listing of its common stock on the Nasdaq Small Cap market. On October
18, 2000, the Panel determined to delist the Company's common stock from the
Nasdaq Stock Market effective with the open business on October 19, 2000. The
Company's common stock has commenced trading on the OTC Bulletin Board.
On October 13, 2000 the holders of the outstanding Reg S Debentures
provided written notice to the Company claiming that the Company was in default
of the terms of the Reg S Debentures for failure to timely file a definitive
proxy statement with respect to stockholder authorization for issuance of common
stock in excess of the Maximum Conversion Share Allotment. Subsequent to such
notification and in response to a letter from the Company explaining the causes
for the delay in filing such definitive proxy, the holders of Reg S Debentures
provided further written notice on November 9, 2000, directing the Company to
expedite the filing of such definitive proxy and requesting that the Company
agree to extend the maturity date of the Reg S Debentures for one year to
December 31, 2001. The Company has not taken any action with respect to filing a
definitive proxy statement or extending the maturity date of the Reg S
Debentures. By letter dated December 5, 2000, the holders of Reg S Debentures
notified the Company that they declared the Company to be in default under the
terms of the Reg S Debentures and demanded an accelerated payment of principal
and interest on the outstanding Reg S Debentures. The Company has initiated
discussions in an effort to resolve this matter.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Secured Promissory Note dated September 27,
2000 from the Company, Quality Automotive Company and U.S.
Automotive Friction, Inc to FDP Brakes, Inc.
10.2 Amendment to Deed of Trust, Fixture Filing and Security Agreement
dated September 27, 2000 among Quality Automotive Company and
Ellen and David G. Lane as trustees for the benefit of FDP
Brakes, Inc.
27 Financial Data Schedule
(b) Form 8-K
None.
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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: December 8, 2000
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ MARTIN D. CHEVALIER
--------------------------------
Martin D. Chevalier,
President
(principal and sole officer)
17
