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 June 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 August 15, 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 June 30, 2000
(unaudited) and December 31, 1999................................ 3
Consolidated Statements of Operations (unaudited) for the
three months ended June 30, 2000 and June 30, 1999............. 4
Consolidated Statements of Operations (unaudited) for the
six months ended June 30, 2000 and June 30, 1999................ 5
Consolidated Statements of Cash Flows (unaudited) for
the six months ended June 30, 2000 and June 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 1. Legal Proceedings ................................................ 15
Item 2. Changes in Securities and Use of Proceeds.......................... 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
JUNE 30, 2000
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash ...................................... $ 73,236 $ 151,685
Accounts receivable (net of
allowance of $144,418 and
$73,000 respectively) .................... 3,932,375 3,531,487
Inventories ............................... 8,522,607 8,745,814
Prepaid expenses and other ................ 9,864 27,978
----------- -----------
Total Current Assets ......... 12,538,082 12,456,964
Property, plant and equipment (net of accumulated
depreciation of $3,310,969 and $2,708,450
respectively) .................................. 10,593,672 10,965,687
Deferred financing costs ........................... 293,919 397,989
Goodwill, net ...................................... 5,476,175 5,635,673
----------- -----------
TOTAL ASSETS ....................................... $28,901,848 $29,456,313
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ............................ 8,083,433 7,220,713
Current portion of long-term debt ......... 4,019,436 4,299,657
Accounts payable .......................... 4,651,261 3,518,527
Accrued liabilities ....................... 1,833,513 1,549,969
Bridge loans .............................. 500,000 --
----------- -----------
Total Current Liabilities .... 19,087,643 16,588,866
Long-term debt, less current portion ............... 110,200 124,079
Notes payable to shareholders ...................... 5,520,000 5,340,000
----------- -----------
Total Liabilities ............ 24,717,843 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 ................................ (35,131,920) (31,850,827)
----------- -----------
Total stockholders' equity ... 4,184,005 7,403,368
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ........... $28,901,848 $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 JUNE 30,
---------------------------
2000 1999
----------- -----------
Net sales ........................................ $ 4,479,191 $ 8,043,361
Cost of goods sold ............................... 4,297,078 5,914,957
----------- -----------
Gross profit ..................................... 182,113 2,128,404
----------- -----------
Operating expenses:
Selling and delivery ..................... 750,668 751,844
General and administrative ............... 1,040,502 708,389
----------- -----------
Total operating expenses ................. 1,791,170 1,460,233
----------- -----------
Operating (loss) income .......................... (1,609,057) 668,171
Interest expense ................................. (566,719) (515,880)
----------- -----------
Net (loss) income ................................ $(2,175,776) $ 152,291
=========== ===========
Net (loss) income per share, basic and diluted ... $ (1.64) $ 0.14
=========== ===========
Weighted average shares outstanding .............. 1,328,246 1,082,827
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
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U.S. AUTOMOTIVE MANUFACTURING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------ ------------
Net sales .................................... $ 10,300,906 $ 15,364,316
Cost of goods sold ........................... 9,074,568 11,220,091
------------ ------------
Gross profit ................................. 1,226,338 4,144,225
------------ ------------
Operating expenses:
Selling and delivery ................. 1,476,334 1,534,659
General and administrative ........... 1,981,287 1,677,740
------------ ------------
Total operating expenses ............. 3,457,621 3,212,399
------------ ------------
Operating (loss) income ...................... (2,231,283) 931,826
Interest expense ............................. (1,049,812) (1,014,001)
------------ ------------
Net loss ..................................... $ (3,281,095) $ (82,175)
============ ============
Net loss per share, basic and diluted ........ $ (2.51) $ (0.08)
============ ============
Weighted average shares outstanding .......... 1,308,731 1,065,836
============ ============
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)
SIX MONTHS ENDED JUNE 30,
------------------------
2000 1999
------------ ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss ............................................. $(3,281,095) $ (82,175)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and Amortization .................... 866,092 757,987
Rollover of accrued interest into
shareholder note ................................. 180,000 180,000
Issuance of common stock in satisfaction
of related party payables ........................ -- 49,166
(Increase) decrease in:
Accounts receivable ........................... (400,888) (810,580)
Inventory ..................................... 223,207 (803,146)
Prepaid expenses and other .................... 18,114 (160,650)
Increase in:
Accounts payable and accrued liabilities ...... 1,436,452 918,787
----------- ---------
Total adjustments .................................... 2,322,977 131,564
----------- ---------
Net cash (used in) provided by operating activities .. (958,118) 49,389
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................. (230,506) (550,250)
----------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings on lines of credit,
notes payable, and bridge loans ................ 1,110,175 489,772
----------- ---------
NET DECREASE IN CASH ................................. (78,449) (11,089)
CASH-beginning of period ............................. 151,685 338,641
----------- ---------
CASH-end of period ................................... $ 73,236 $ 327,552
=========== =========
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
JUNE 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 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 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
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10 - QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated. Operating results
for the six months ended June 30, 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 cut back operations in its
Florida facility.
The Company is currently not generating sufficient revenues from operations
to fund its operating activities and is dependent upon additional financing from
external sources. The Company is currently seeking additional sources
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of financing. There can be no assurance, however, that any additional sources of
financing will be available to the Company when needed, on commercially
reasonable terms or at all.
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. As of the most recent date, the investor has provided a
bridge loan to the company in the aggregate principal amount of $750,000, and
due diligence is in progress. 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 and may be required to further curtail operations.
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:
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
Raw materials......................... $3,883,590 $4,027,616
Work in Process....................... 228,596 80,904
Finished goods........................ 4,410,421 4,637,294
---------- ----------
$8,522,607 $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 June 30,
2000, a total of approximately $8,083,433, of a possible $8,838,095, 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 June 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 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 June 30, 2000, the balance outstanding was
approximately $1,743,417. Interest is calculated at the prime rate plus 1%
(10.5% at June 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
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capital expenditures from May 1, 1999 at an advance rate of 80% of the cost of
the equipment. As of June 30, 2000, the balance outstanding was approximately
$205,797. 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 June 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 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.
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
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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. The Company intends to file a
definitive proxy statement upon execution of the strategic investor agreement.
As of June 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.
BRIDGE LOAN
On May 23 and June 6, 2000, the Company received an aggregate principal
amount of $500,000 pursuant to a bridge loan from a prospective strategic
investor. The loan accrues interest at the annual rate of 10%. Subsequently, in
July 2000, the Company received an additional $250,000 principal amount under
such bridge loan from the prospective strategic investor. The proceeds of such
bridge loan have been applied towards the reduction of amounts outstanding under
the IBJ Credit Facility.
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.
On May 5, 2000, the Company issued an aggregate of 3,336 shares of common
stock to certain holders of Reg S Debentures in connection with the conversion
by such holders of an aggregate of $1,556 principal amount of Reg S Debentures,
together with accrued and unpaid interest thereon of $479, at a conversion rate
of $ 0.61 per share. The issuance of the 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.
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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
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 269 at
December 31, 1999.
The downturn of the third and fourth quarters of last year 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. 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. In response to the slow down in sales, the Company reduced
its full-time employees to 233 as of June 30, 2000.
Previously the Company reported that on May 9, 2000, it had entered into a
non-binding letter of understanding with a strategic investor. As of the most
recent date, the investor has provided a bridge loan to the company in the
aggregate principal amount of $750,000, and due diligence is in progress. 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
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NET SALES. Net sales for the three months ended June 30, 2000 were
$4,479,191 as compared to net sales of $8,043,361 for the three months ended
June 30, 1999. The decrease of $3,564,170 or 44.3% was primarily attributable to
a reduction of orders from customers.
GROSS PROFIT. For the three months ended June 30, 2000, the Company had a
gross profit of $182,113 compared to a gross profit of $2,128,404 for the three
months ended June 30, 1999. The decrease in gross profit was primarily
attributable to a 44.3% decrease in sales. Cost of goods sold as a percentage of
net sales for the three months ended June 30, 2000 was 95.9% as compared to
73.5% for the three months ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $1,791,170
as compared to $1,460,233 for the three months ended June 30, 1999, representing
an increase of 22.7%. The increase was primarily attributable to increased
consulting and professional fees.
INTEREST EXPENSE. Interest expense increased by $50,839 or 9.9% from
$515,880 for the three months ended June 30, 1999 to $566,719 for the three
months ended June 30, 2000. The increase in interest expense reflected increase
in borrowing.
NET INCOME (LOSS). Net loss in the second quarter of 2000 was ($2,175,776)
or ($1.64) per share based on 1,328,246 weighted average common shares
outstanding compared to a net income of $152,291 or $.14 per share in the second
quarter of 1999 based on 1,082,827 weighted average common and common equivalent
shares outstanding. The increase in net loss of $2,328,067 was primarily the
result of reduced sales coupled with increased general and administrative
expenses.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales for the six months ended June 30, 2000 were
$10,300,906 as compared to net sales of $15,364,316 for the six months ended
June 30, 1999. The decrease of $5,063,410 or 33.0% was primarily attributable to
a reduction of orders from customers.
GROSS PROFIT. For the six months ended June 30, 2000, the Company had a
gross profit of $1,226,338 compared to a gross profit of $4,144,225 for the six
months ended June 30, 1999. The decrease in gross profit was primarily
attributable to a 33.0% decrease in sales. Cost of goods sold as a percentage of
net sales for the six months ended June 30, 2000 was 88.1% as compared to 73.0%
for the six months ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $3,457,621
as compared to $3,212,399 for the six months ended June 30, 1999, representing
an increase of 7.6%. The increase was primarily attributable to increased
consulting and professional fees.
INTEREST EXPENSE. Interest expense increased by $35,811 or 3.5% from
$1,014,001 for the six months ended June 30, 1999 to $1,049,812 for the six
months ended June 30, 2000. The increase in interest expense reflected the
increase in borrowing.
NET LOSS. Net loss in the first six months of 2000 was ($3,281,095) or
($2.51) per share based on 1,308,731 weighted average common shares outstanding
compared to a net loss of ($82,175) or ($.08) per share in the first six months
of 1999 based on 1,065,836 weighted average common and common equivalent shares
outstanding. The increase in net loss of $3,198,920 was primarily the result of
reduced sales coupled with increased general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
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During the six months ended June 30, 2000, the Company financed its
operations primarily through borrowings under its lending facilities and cash
generated by operations. In addition, during the second quarter of 2000, the
Company obtained $500,000 under a bridge loan from a potential strategic
investor.
At June 30, 2000, the Company had consolidated cash totaling $73,236 and a
working capital deficit of $6,549,561. 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 to fund the Company's 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 June 30, 2000, the revolving credit facility had
approximately $8.083 million of a possible $8.838 million outstanding.
Interest is calculated at the prime rate plus .75% (10.25% at June 30,
2000)
(ii) the IBJ Term Loan, secured by machinery equipment, having an original
loan amount of approximately $2.108 million of which approximately
$1.743 million was outstanding at June 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 June
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 was $238,990. At June 30,
2000, the balance outstanding was approximately $205,797. 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 June 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 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),
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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.
On May 23 and June 6, 2000, the Company received an aggregate principal
amount of $500,000 pursuant to a bridge loan from a prospective strategic
investor. The loan accrues interest at the annual rate of 10%. Subsequently, in
July 2000, the Company received an additional $250,000 principal amount under
such bridge loan from the prospective strategic investor. The proceeds of such
bridge loan have been applied towards the reduction of amounts outstanding under
the IBJ Credit Facility.
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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. The Company filed motions with respect to
collecting certain costs and fees associated with the proceeding. The foregoing
matter was dismissed with prejudice by an order of the court on July 14, 2000,
in accordance with a settlement by the parties withdrawing all further rights
and claims.
Various other legal proceedings and claims have been or may be from time to
time asserted against the Company in the ordinary course of its business.
Management believes that it has meritorious defenses and will vigorously defend
itself with respect to all existing proceedings or claims. Any costs or damages
that management estimates may be paid as a result of these proceedings or claims
are accrued when the liability, if any, is considered probable and the amount
can be reasonably estimated. Although the ultimate disposition of proceedings
and claims currently pending is not presently determinable, management believes
that, after consultation with counsel, the likelihood that material costs or
damages will be incurred by the Company as a result of any pending proceedings
is remote.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 2000, the Company issued an aggregate of 3,336 shares of common
stock to certain holders of Reg S Debentures in connection with the conversion
by such holders of an aggregate of $1,556 principal amount of Reg S Debentures,
together with accrued and unpaid interest thereon of $479, at a conversion rate
of $ 0.61 per share. The issuance of the 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.
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 responded to the notice and was given until September 11, 2000, to
comply. If the Company is not able to comply by such date, Nasdaq has advised
the Company that it will delist the Company's common stock from the SmallCap
market effective September 13, 2000. The Company intends to request a hearing
prior to September 11, 2000, subject to the progress of the strategic
investment, to appeal the determination to delist. Such hearing will stay the
delisting process pending a final decision by the panel assigned to such
hearing. If the Company is delisted, the Company's 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.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: August 18, 2000
U.S. AUTOMOTIVE MANUFACTURING, INC.
By: /s/ JERRY W. PERRY
--------------------------------------
Jerry W. Perry,
Executive Vice President and Chief Operating
Officer (principal financial officer)
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