10-Q 1 e10-q.txt 10-Q 1 FORM 10Q Securities and Exchange Commission Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-24477 TITAN MOTORCYCLE COMPANY OF AMERICA (Exact name of registrant as specified in its charter) Nevada 86-0776876 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2222 West Peoria Avenue, Phoenix, Arizona 85029 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 861-6977 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of common stock, par value $.001, outstanding as of July 1, 2000: 18,044,665 2 TITAN MOTORCYCLE CO. OF AMERICA TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of July 1, 2000 and January 1, 2000...................................... Condensed Consolidated Statements of Operations for the thirteen-weeks ended July 1, 2000 and July 3, 1999 and for the twenty-six-weeks ended July 1, 2000 and July 3, 1999.......................................................................................... Condensed Consolidated Statements of Cash Flows for the twenty-six-weeks ended July 1, 2000 and July 3, 1999............................................................................... Notes to Condensed Consolidated Financial Statements............................................................ ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................................. PART II. OTHER INFORMATION ITEM 2. Other Information ITEM 6. Exhibits and Reports on Form 8-K
3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TITAN MOTORCYCLE CO. OF AMERICA Consolidated Balance Sheets (Unaudited)
JULY 1, 2000 JANUARY 1, 2000 ------------ --------------- ASSETS (UNAUDITED) Current assets: Cash $ 163,822 $ 33,700 Accounts receivable, net 1,977,203 1,228,311 Accounts receivable - related party 425,000 999,252 Inventories, net 14,606,893 17,451,996 Prepaid expenses 256,653 351,483 ----------- ----------- TOTAL CURRENT ASSETS 17,429,571 20,064,742 Property and equipment, net 1,823,035 2,013,905 Other assets 17,317 17,317 Trademarks 84,516 85,481 ----------- ----------- TOTAL ASSETS $19,354,439 $22,181,445 =========== =========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Bank Overdraft $ -- $ 305,538 Accounts payable 3,930,753 3,891,287 Accrued expenses 1,368,426 2,158,985 Note Payable - Line of Credit 6,028,228 9,779,731 Repurchase obligation 1,262,092 -- Current portion of notes payable 941,782 627,825 ----------- ----------- TOTAL CURRENT LIABILITIES 13,531,281 16,763,366 Notes payable 2,583,212 2,647,169 ----------- ----------- Total liabilities 16,114,493 19,410,535 Redeemable Preferred Stock Cumulative preferred stock, 7,273 share outstanding 5,608,836 3,536,739 Stockholders' deficit Common stock, par value $.001; 100,000,000 shares authorized 18,005 17,162 Additional paid in capital 10,735,424 9,098,252 Unearned compensation (27,843) (31,475) Accumulated deficit (13,094,476) (9,849,768) ----------- ----------- TOTAL STOCKHOLDERS' DEFICIT (2,368,890) (765,829) ----------- ----------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT $19,354,439 $22,181,445 =========== ===========
The accompanying notes are an integral part of these financial statements 4 Titan Motorcycle Co. of America Consolidated Statements of Operations (Unaudited)
Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 1, 2000 July 3, 1999 Sales, net $19,146,421 16,096,910 Cost of goods sold 17,958,060 14,059,411 ----------- ----------- Gross profit 1,188,361 2,037,499 ----------- ----------- Operating expenses: Selling, general and administrative 3,662,554 2,449,088 Research and development 68,886 113,402 ----------- ----------- Total operating expenses 3,731,440 2,562,490 Income (loss) from operations (2,543,079) (524,991) Other income (expense): Other income (expense) 3,522 (2,683) Finance costs (185,000) -- Interest expense (520,153) (423,888) ----------- ----------- Total other income (expense) (701,629) (426,571) Income (loss) before income taxes (3,244,708) (951,562) Income taxes -- -- ----------- ----------- Net loss (3,244,708) (951,562) Amortization of beneficial conversion (1,047,368) -- feature Net loss available to common stockholders (4,292,076) (951,562) =========== =========== Loss per common share - basic and diluted $ (0.25) $ (0.06) =========== =========== Weighted average shares used in computation: 17,402,050 16,652,744 =========== ===========
The accompanying notes are an integral part of these financial statements. 5 TITAN MOTORCYCLE CO. OF AMERICA Consolidated Statements of Operations (Unaudited)
Thirteen Weeks Ended Thirteen Weeks Ended July 1, 2000 July 3, 1999 Sales, net $11,124,601 $ 8,451,345 Cost of goods sold 10,298,793 7,574,065 ----------- ----------- Gross profit 825,808 877,280 ----------- ----------- Operating expenses: Selling, general and administrative 1,960,426 1,359,576 Research and development 46,539 73,869 ----------- ----------- Total operating expenses 2,006,965 1,433,445 Income (loss) from operations (1,181,157) (556,165) Other income (expense): Other income (expense) 2,324 9,060 Finance charges (185,000) -- Interest expense (243,660) (224,164) ----------- ----------- Total other income (expense) (426,336) (215,104) Loss before income taxes (1,607,493) (771,269) Income taxes -- -- ----------- ----------- Net income (loss) (1,607,493) (771,269) Amortization of beneficial conversion (547,368) -- feature Net loss available to common stockholders $(2,154,861) $ (771,269) =========== =========== Loss per common share - basic and diluted $ (0.12) $ (0.05) =========== =========== Weighted average shares used in computation: 17,402,050 16,652,744 =========== ===========
The accompanying notes are an integral part of these financial statements. 6 TITAN MOTORCYCLE CO. OF AMERICA Consolidated Statements of Cash Flows
July 1, 2000 July 3, 1999 ------------ ------------ Cash Flows from Operating Activities: Net loss $(3,224,708) $ (951,562) Adjustments to reconcile net loss to net cash Provided (used) in operating activities: Depreciation and amortization 191,835 127,853 Stock compensation expense 3,632 4,843 Net change in balance sheet accounts Accounts receivable (174,640) (2,019,337) Inventories 4,024,028 (1,766,538) Other assets 94,830 (82,039) Accounts payable 122,633 1,046,563 Accrued expenses (790,559) 175,534 ---------- ---------- Net cash Provided (used) in operating activities 227,051 (3,464,683) ---------- ---------- Cash Flows from Investing Activities: Purchase of property and equipment -- (684,451) Purchase of trademarks -- -- ---------- ---------- Net cash used in investing activities -- (684,451) ---------- ---------- Cash Flows from Financing Activities Bank overdraft (305,538) 93,422 Issuance of stock 3,710,112 1,122,480 Note payable 250,000 -- Net change in line of credit (3,751,503) 2,932,124 ---------- ---------- Net cash provided by financing activities 103,071 4,148,026 ---------- ---------- Net increase in cash 130,122 (1,108) Cash and cash equivalants at beginning of year 33,700 8,398 ---------- ---------- Cash and cash equivalants at end of period $ 163,822 $ 7,290 ========== ========== Supplemental Cash Flow Information: Cash paid for: Interest $ 705,000 $ Non-cash investing and financing activities Inventory in exchange for payables $ 83,167 $ $ -- $ -- Repurchase obligation $ 1,262,092 --
The accompanying notes are an integral part of these financial statements 7 TITAN MOTORCYCLE CO. OF AMERICA Notes to the Consolidated Financial Statements July 1, 2000 and July 3, 1999 NOTE 1 - Condensed Consolidated Financial Statements The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at July 1, 2000 and for all periods presented have been made. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles for interim financial information. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's year ended January 1, 2000 audited consolidated financial statements. The results of operations for the period ended July 1, 2000 are not necessarily indicative of the operating results for the full year. NOTE 2-INVENTORY The composition of inventory as of July 1, 2000 and January 1, 2000 was as follows:
2000 1999 Raw materials and $ 11,175,795 $ 10,607,330 supplies Work-in-process 1,023,458 2,461,800 Finished Goods 3,292,639 4,382,866 ------------ ------------ Total inventories 15,491,893 17,451,996 Inventory reserves (885,000) -- ------------ ------------ $ 14,606,893 $ 17,451,996 ============ ============
The Company intends to sell raw material inventory as a method of obtaining capital. A reserve of approximately $ 400,000 has been established to provide for estimated losses on disposal. 8 NOTE 3 - EARNINGS PER SHARE In accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 128, Earnings Per Share, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows: Since the company incurred a net loss for all periods presented, potential common shares are antidilutive and excluded from the calculation of diluted earnings per share.
Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 1, 2000 July 3, 1999 --------------------------------------------- ------------------------------------------------ Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------- ------------------------------------------------ BASIC EPS Net loss $(3,244,708) 17,402,050 $(0.18) $(951,562) 16,652,744 $(0.06) Amortization of beneficial conversion feature $(1,047,368) 17,402,050 $(0.06) $ - - $ - Net Income (Loss) available to common shareholders $(4,292,076) 17,402,050 $(0.25) $(951,562) 16,652,744 $(0.06) EFFECTS OF DILUTIVE SECURITIES Common stock options $ - - $ - $ - - $ - -------------------------------------------------------------------------------------------------- DILUTED EPS Net Income (Loss) available to common shareholders $(4,292,076) 17,402,050 $(0.25) $(951,562) 16,652,744 $(0.06) -----------------------------------------------------------------------------------------------------------------------------------
Thirteen-Weeks Ended Thirteen-Weeks Ended July 1, 2000 July 3, 1999 ---------------------------------------------- -------------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------------------------------------------- -------------------------------------------------- BASIC EPS Net loss $(1,607,493) 17,402,050 $(0.09) $(771,269) 16,652,744 $(0.05) Amortization of beneficial conversion feature $ (547,368) 17,402,050 $(0.03) $ - - $ - Net Income (Loss) available to common shareholders $(2,154,861) 17,402,050 $(0.12) $(771,269) 16,652,744 $(0.05) EFFECTS OF DILUTIVE SECURITIES Common stock options $ - - $ - $ - - $ - --------------------------------------------------------------------------------------------------- DILUTED EPS Net Income (Loss) available to common shareholders $(2,154,861) 17,402,050 $(0.12) $(771,269) 16,652,744 $(0.05) ---------------------------------------------------------------------------------------------------
9 NOTE 4 - GOING CONCERN The accompanying financial statements have been prepared on a going concern basis of accounting which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses of $3,244,708 for the twenty-six weeks ended July 1, 2000. For the year ended January 1, 2000, the Company has incurred a net loss and net income of $8,060,282. As of July 1, 2000 and January 1, 2000, the Company had cash balances of approximately $163,822 and $34,000, respectively, and an accumulated deficit of $13,094,476 as of July 1, 2000. Additionally, as of July 1, 2000, the Company has an outstanding balance on its credit line of $6,028,000 that matures on September 10, 2000 (see Note 6). These factors, among other things, raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. Management is pursuing various options in order to provide necessary financing. Management's plans to resolve near term cash flow issues include the following: - Negotiating a new line of credit with additional cash availability; - Effecting a private placement equity financing to provide approximately $3 to $5 million in cash flow, less offering costs; and - Reducing its operating costs. Management believes if it can finalize the financing alternatives that it is pursuing and improve its operating results for the remainder of fiscal 2000, the Company will generate sufficient resources to ensure uninterrupted performance of its operating obligations as currently structured and anticipated. The Company's continuance as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations in a timely manner, to obtain additional financing as required, and ultimately to attain profitability. There can be no assurance, however, that financing sources will be available to the Company on acceptable terms or when necessary or that the Company will be successful in its efforts to improve its operating results. 10 NOTE 5 - EQUITY On June 20, 2000, the Company sold 650 shares of Series C Convertible Preferred Stock ("Series C Stock") and a warrant to purchase 1,642,106 shares of the Company's common stock. in a private placement for $1,300,000 in gross proceeds. The Company allocated approximately $401,000 related to the value of the warrants. The warrants have an exercise price of $2.26 for 1/6 of the warrants and $1.69 for the remaining warrants. The warrants expire on June 30, 2005. The Series C Stock and warrants are convertible at any time into a maximum of 3,500,000 shares of the Company's common stock. For the first six months after issuance, the Series C Stock is convertible at a fixed conversion price of $0.95 per share, which was less than the common stock price at the date of close, resulting in a beneficial conversion feature at issue date. Thereafter, the conversion price is adjusted every three months to be the lower, of (a) 80% of the average market price for the lowest three trading days during the last ten trading days prior to the adjustment date and (b)either (i) the current conversion price if 80% of the average market price is less than or equal to 200% of the current conversion price, or (ii) $.95 if 80%of the average market price is more than 200% of the current conversion price. The number of shares of Common stock underlying the Series C Stock is subject to adjustment for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Company's common stock. An additional beneficial conversion feature occurred as a result of the 80% of market adjustment. As of the issue date the Company allocated approximately 612,000 to the beneficial conversion feature, of which $547,368 was amortized as of July 1, 2008. During the second quarter, the Company received $750,000 in gross proceeds related to the exercise of warrants to purchase 750,000 shares of the Company's common stock. Subject to certain restrictions in a subordination agreement with the Company's bank, the Series C Stock holders have the right to force the Company to redeem the Series C Stock at a premium upon the occurrence of certain events as defined in the agreement. NOTE 6 - SUBSEQUENT EVENTS CONVERTIBLE DEBENTURES On August 14, 2000, in a private placement, the Company sold $750,000 of its 12% Convertible Debentures. The private placement also included warrants to purchase 1,025,160 shares of the Company's common stock. The Debentures are collateralized against substantially all of the Company's assets, subject to a senior security interest in favor of the holder of the Company's credit line. Unless shareholder approval is obtained, the Debentures are convertible into a maximum of 3,500,235 shares of the Company's common stock at the lower of a fixed or variable conversion price as defined in the agreement. The warrants are exercisable at a price equal to 105% of the market price for the Company's common stock as of the closing date or $0.64 per share and expire on August 31, 2005, subject to the terms and conditions as described in the agreement. In connection with the sale of the Convertible Debentures, the Company was required to obtain the consent of the Series C Stock. In exchange for this concession, the Company agreed to amend the terms of the Series C Stock. Pursuant to the terms of the amendment, the conversion price of the Series C Stock is equal to 70% of the average of the market price of the 5 lowest trading days over the 22 trading days preceding the relevant conversion date. 11 As a condition to the sale of the Debentures, the Company was required to obtain consent from its existing holders of Series A and Series B and Series C Convertible Preferred Stock. In exchange for this consent, the Company amended certain provisions of the related agreements. The effect of these amendments is to accelerate the preferred holders' ability to convert at a variable conversion price which in each case is based upon then current market price as defined in the amendment. Since the price of the Company's common stock has declined significantly since the closing of the Series A and Series B and Series C Convertible Preferred Stock, the acceleration of reset dates may result in a substantially increased number of shares of common stock to be issued upon conversion. Management is currently evaluating the impact of the amendments. CREDIT LINE EXTENSION AND AMENDMENT In July 2000, the Company signed an agreement which extended the line of credit due on July 10, 2000 for an additional two months. The extension agreement contains restrictive covenants and fees as defined in the agreement. As of the filing of this report Form 10QSB, the Company's in technical default of the covenants contained in the Loan and Security Agreement with Wells Fargo. However, as of this date of the filing of this report on Form 10QSB the Company has reached a verbal agreement with Wells Fargo to amend the Loan and Security Agreement, which will bring this into compliance with the applicable covenants and cure any prior default. The Company expects to execute the amendment within one business day of this filing. Although management anticipates it will be able to either extend the line of credit or obtain a new line of credit with another financial institution, there can be no assurance that it will be able to obtain financing on acceptable terms and conditions or when necessary. RELATED PARTY REPURCHASE OF INVENTORY In July 2000, the Company was notified of default under and cancellation of flooring arrangements for certain affiliated dealerships. Under the terms of the wholesale financing agreement with the flooring company, the Company was required to repurchase approximately $1.3 million in motorcycles sold to these affiliated dealerships and held in inventory. The estimated loss of $100,000 that the Company expects to incur related to this transaction has been included in the accompanying financial statements. Additionally, a reduction of $1.3 million dollars in sales and cost of sales, and a payable to the flooring company for $1.3 million, have also been established. In connection with the repurchase of the $1.3 million in motorcycles, the Company has entered into a Forbearance Agreement with the commercial finance company that requires the Company to repurchase the related motorcycles over a maximum three month period with a required minimum payment of three equal installments. The final 12 installment is due on October 17, 2000. The Company has delivered approximately 1/3 of the related motorcycles and met the required first installment in August 2000. There can be no assurance that the Company will be able to sell the remaining motorcycles or meet the installment payment requirements. In the event the Company is unable to comply with the terms of the Forbearance Agreement, its ability to sell motorcycles funded with commercial flooring could be eliminated, which would have a material adverse impact on the Company's financial position. Due to the loss of flooring and the closure of two of the affiliated dealership locations, the Company has determined that the collectability of accounts receivable balances as of July 1, 2000 from the affiliated dealerships is in question. Accordingly, an allowance for doubtful accounts has been established totaling approximately $600,000 is included in the accompanying financial statements. 13 TITAN MOTORCYCLE COMPANY OF AMERICA Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 13 WEEK PERIOD ENDED JULY 1, 2000, COMPARED WITH 13 WEEK PERIOD ENDED JULY 3, 1999 OVERALL Net sales for the thirteen-week period ended July 1, 2000 of $11.1 million were $2.7 million, or 32%, higher than net sales for the comparable period in 1999. The Company recorded a net loss of $1,607,493, or $(0.08) per share in 2000 compared with a net loss of $771,269 or $(0.05) per share for 1999. RESULTS OF OPERATIONS MOTORCYCLE UNIT SHIPMENTS AND NET SALES
2000 1999 INCREASE % CHANGE ---- ---- -------- -------- Motorcycle Units 568 291 277 95% Net Sales (in $ 000's): Motorcycles $ 10,746 $ 7,744 $ (100) 39% Motorcycle Parts and Accessories $ 378 $ 707 $ (329) (47)% Total Motorcycles and Parts $ 11,124 $ 8,451 $ (429) 32%
As indicated in the above chart, the Company's business continues to consist primarily of motorcycles sales. A small amount of business has been done in parts and accessories. Parts and accessories sales were approximately 5% of revenues. The increase in motorcycle shipments is due to several reasons, including the continuing growth in reputation of the Company's motorcycles resulting in increased demand, growth in the Company's dealership network, and the Company's investment in new facilities and staff to meet this growing demand. Growth was constrained in the second quarter due to cash flow problem causing part supply issues affecting both the existing Legacy line of motorcycles as well as the new Phoenix line of products. Cash flow issues continue to restrict the Company's ability to obtain parts and meet production requirements. 14 GROSS PROFIT
2000 1999 DECREASE % CHANGE ---- ---- -------- -------- Gross Profit (In 000's) $876 $877 $1 0% Gross Margin % 7.8% 10.4% 25%
In the thirteen-weeks ended July 1,2000, gross profit was consistent in dollars with the comparable period in 1999, although the gross margin decreased to 7.8% from 10.4% in 1999. The Company's gross margins were negatively impacted during the second quarter of 2000 due to parts acquisition issues encountered as a result of cash flow constraints. Failure to generate cash flow sufficient to pay vendors in a more timely manner resulted in lower than expected materials cost savings and anticipated margin improvement. The lower than planned volumes in the last month of the second quarter impacted labor and overhead utilization resulting in a decline in gross margin. OPERATING EXPENSES
2000 1999 INCREASE % CHANGE ---- ---- -------- -------- Operating Expenses (In 000's) $2,007 $1,433 $574 40% Operating Expense as % of Sales 18.0% 17% 1%
Total operating expense for the thirteen-week period ended July 1, 2000 increased $573,250, or 40%, over the comparable period in 1999 while sales increased approximately 32% for the same period. This increase was due to a number of factors, including increased rental expense in the new facility, larger support staff in anticipation of growth, and increased legal and accounting expenses. CONSOLIDATED INCOME TAXES The Company's effective tax rate was 0.0% in both the thirteen-week period ended July 1, 2000 and the comparable period ended July 3, 1999 as a result of losses in 2000 and use of tax loss carryforwards in 1999. The Company's ability to use its tax loss carry forwards in the future may be limited due to IRS Section 382 limitations. 15 26 WEEK PERIOD ENDED JULY 1, 2000, COMPARED WITH 26 WEEK PERIOD ENDED JULY 3, 1999 OVERALL Net sales for the twenty-six week period ended July 1, 2000 of $19.2 million were $3.1 million, or 19%, higher than net sales for the comparable period in 1999. The Company recorded a net loss of $3,244,708, or $(0.25) per share, in 2000 compared with a net loss of $951,562 or $(0.06) per share, for 1999. RESULTS OF OPERATIONS MOTORCYCLE UNIT SHIPMENTS AND NET SALES
2000 1999 INCREASE % CHANGE ---- ---- -------- -------- Motorcycle Units 927 542 385 71% Net Sales (in $ 000's): Motorcycles $18,645 $15,176 $ 3,469 23% Motorcycle Parts and Accessories $ 501 $ 921 $ (420) (46)% Total Motorcycles and Parts $19,146 $16,097 $ 3,047 19%
As indicated in the above chart, the Company's business continues to consist primarily of motorcycle sales. Parts and accessories sales approached 6% of revenue during this period. The increase in motorcycle shipments is due to several reasons, including continuing growth in reputation of the Company's motorcycles, resulting in increased demand. Sales were constrained in the second quarter due primarily to cash flow issues that led to part supply issues affecting both the existing Legacy line of motorcycles as well as the Phoenix line of products. GROSS PROFIT
2000 1999 DECREASE % CHANGE ---- ---- -------- -------- Gross Profit (In 000's) $1,188 $2,037 $849 41.7% Gross Margin % 6.2% 12.7% 5.4%
In the twenty-six weeks ended July 1, 2000, gross profit decreased $849,000 or 34.3%, as compared to the comparable period in 1999. Gross margin in 2000 was 7.3% as compared with 12.7% in 1999. 16 The Company's gross margins were negatively impacted during the second quarter of 2000 due to parts acquisition issues encountered as a result of cash flow constraints. Failure to generate cash flow sufficient to pay vendors in a more timely manner resulted in lower than expected materials cost savings and anticipated margin improvement. The lower than planned volumes in the last month of the second quarter impacted labor and overhead utilization resulting in a decline in gross margin. The Company's budgeted sales for the new Phoenix line of motorcycles was negatively impacted during the second quarter 2000 due to parts supply problems derived from cash flow constraints. Failure to achieve anticipated Phoenix line production was a significant factor in the disparity between sales revenues and increased support costs. OPERATING EXPENSES
2000 1999 INCREASE % CHANGE ---- ---- -------- -------- Operating Expenses (In 000's) $3,731 $2,562 $1,169 46% Operating Expense as % of Sales 19.5% 15.9% 22.6%
Total operating expense for the twenty-six week period ended July 1, 2000 increased $1,168,947, or 46%, over the comparable period in 1999. This increase was due to a number of factors, including, but not limited to the following principal factors listed in descending order of importance: - an increase in salaries and wages attributed to both management and support staff necessary to support anticipated increases in sales volumes that did not materialize as anticipated. - an increase in legal and accounting expense; - increased rental expense Management has initiated significant cost cutting plans in an attempt to lower operating costs in the third quarter of fiscal 2000. CONSOLIDATED INCOME TAXES The Company's effective tax rate was 0.0% in both the twenty-six week period ended July 1, 2000 and the comparable period ended July 3, 1999 as a result of losses in 1999 and use of tax loss carryforwards in 1999. The Company's ability to use its tax loss carry forwards in the future may be limited due to IRS Section 382 limitations. 17 LIQUIDITY AND CAPITAL RESOURCES The Company generated a small amount of cash in operating activities in the twenty-six week period ended July 1, 2000 compared with uses of $3.5 million in the comparable period in 1999. The decrease in cash used for operating expenses is due primarily to a reduction in inventory of approximately $2.8 million for the period. Capital expenditures totaled $ 0 in the twenty-six week period ending July 1, 2000 compared with $684,000 for the comparable period in 1999. Cash provided through the issuance and sale of common and preferred stock totaled $3.8 million for the first two quarters in fiscal 2000 as compared to $1.1 million for the same period in 1999. Additionally, the Company had a net reduction in borrowings under its line of credit of $3.8 million in 2000 as compared with a net increase of $2.9 million in 1999. A more detailed description of cash flows can be found in the attached financial statements. For the first two quarters of fiscal 2000 and fiscal 1999, the Company has incurred net losses of $3.09 million and $1.0 million, respectively. For the two years ending January 1, 2000, the Company has incurred a net loss and net income of approximately $8.1 million and $240,000, respectively. As of July 1, 2000 and January 1, 2000, the Company had cash balances of approximately $164,000 and $34,000, respectively, and an accumulated deficit of approximately $12.9 million as of July 1, 2000. These factors, among other things, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. Management is pursuing various options in order to provide necessary financing. As discussed in Note 4 to the consolidated financial statements, management's plans to resolve near term cash flow issues include the following: - Negotiating a new line of credit with additional cash availability; - Effecting a private placement equity financing to provide approximately $3 to $5 million in cash, less offering costs; and - Improving its operating results primarily through a reduction in operating costs. Management believes if it can finalize the financing alternatives that it is pursuing to improve its operating results for the remainder of fiscal 2000, the Company will generate sufficient resources to ensure uninterrupted performance of its operating obligations as currently structured and anticipated. The Company's continuance as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations in a timely manner, to obtain additional financing as required, and ultimately to attain profitability. There can be no assurance, 18 however, that financing sources will be available to the Company on acceptable terms or when necessary or that the Company will be successful in its efforts to improve its operating results. PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Designations for Series A Preferred Stock filed August 16, 2000 with the Nevada Secretary of State (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 3.2 Amended and Restated Certificate of Designations for Series B Preferred Stock filed August 16, 2000 with the Nevada Secretary of State (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 3.3 Amended and Restated Certificate of Designations for Series C Preferred Stock filed August 16, 2000 with the Nevada Secretary of State (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 4.1 Form of Debenture issued to Esquire Trade & Finance, Inc. and Celeste Trust Reg. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 4.2 Form of Warrant issued to Esquire Trade & Finance, Inc. and Celeste Trust Reg. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 4.3 Registration Rights Agreement with Esquire Trade & Finance Inc. and Celeste Trust Reg., dated as of August 14, 2000. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 4.4 Security Interest and Pledge Provisions, dated as of August 14, 2000 by and among the Company, Esquire Trade & Finance Inc. and Celeste Trust Reg. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 10.1 Securities Purchase Agreement with Esquire Trade & Finance Inc. and Celeste Trust Reg., dated as of August 14, 2000. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 10.2 Intecreditor Agreement dated as of August 14, 2000 by and among the Company, Esquire Trade & Finance, Inc., Celeste Trust Reg. and Wells Fargo Credit, Inc. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 10.3 Second Amendment to Amended and Restated Loan and Security Agreement dated as of August 14, 2000 by and between the Company and Wells Fargo Credit, Inc. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 10.4 Consent and Waiver Agreement, dated as of August 14, 2000 by and among the Company, Advantage Fund II Ltd. and Koch Investment Group Limited. (incorporated by reference from the Company's Form 8-K filed August 21, 2000) 27 Financial Data Schedule (b) Reports on Form 8-K During the quarter ended July 1, 2000 the Company filed two reports on Form 8-K on May 24, 2000 and June 22, 2000. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TITAN MOTORCYCLE COMPANY OF AMERICA (Registrant) /S/ FRANCIS KEERY /S/ AUGUST 21, 2000 -------------------------------------------------- FRANCIS KEERY DATE CHAIRMAN AND CEO /S/ ROBERT P. LOBBAN /S/ AUGUST 21, 2000 -------------------------------------------------- ROBERT LOBBAN DATE CHIEF FINANCIAL OFFICER