<PAGE>
UNIVERSAL MFG. CO.
ANNUAL REPORT
1997
1964-1997
131 CONSECUTIVE
QUARTERLY DIVIDENDS
<PAGE>
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
The fiscal year ended July 31, 1997, was another record year for Universal
Mfg. Co. Both earnings and sales were the highest in the history of the Company.
This was the fifth consecutive year of record sales. Total sales were
$19,089,166, an 8% increase from the year before. This sales increase was led by
sales to other Ford Authorized Remanufacturers. Sales of these products
increased 43%, and accounted for 15% of the Company's business.
Sales of products which are part of Ford distribution programs continued to
grow, with sales to this market increasing to over $6 million from $5.4 million
last year. This represents an 11% increase, and accounted for 32% of the
Company's business.
The sale of remanufactured electric fuel pumps again led the growth in
sales to other Ford Authorized Remanufacturers. Sales increased to $1.8 million
in 1997 from $1.19 million in 1996.
Earnings per share of outstanding common stock for fiscal year ended July
31, 1997, was $1.41, which is a new Company record. This compares with $1.39
earned in 1996, which was also a record year.
Cash dividends for fiscal 1997 were $1.00 per share, compared to $.85 per
share in fiscal 1996, and to $.80 per share in 1995. The market value of the
Company's stock also increased significantly during fiscal 1997, from
approximately $11 per share to $16.50 per share.
Several improvements in processes and equipment were made during fiscal
1997. These include computerized testing capability of power steering pumps, and
the addition of alternator rotor winding equipment. Improvements planned for
next year include construction of a 10,000 square foot warehouse addition next
to our Algona plant and the completion of bar coding capability.
Quality system improvements continue at the Company. In 1989, the Company
was granted Ford's Q-101 Quality System Standard Certification. In 1993, the
Company received the Ford Q-1 Preferred Quality Award. We are now on track to
meet requirements for QS-9000, the international quality standards for
automotive related companies, by the end of 1997.
The Company said "good-bye" to two faithful and hard working directors who
resigned during the year. John McHugh had served as a director since 1963, and
his counsel and experience will definitely be missed. Dr. Anthony Kelly brought
a knowledge of business and common sense which were most valuable to the
Company.
We continue to be very optimistic about the Company's future. Our
increasing involvement in Ford distribution programs should continue to increase
sales volumes. Service to Ford and Lincoln-Mercury dealerships continues to be
our most important business. However, we are seeking additional markets for our
products, including sales of additional product lines to other Ford Authorized
Remanufacturers.
Management is grateful to employees, customers, suppliers and shareholders
who have contributed to the continued success of our Company. On a separate
sheet you will find an invitation to our Annual Meeting which we encourage you
to attend.
/s/ Donald D. Heupel
Donald D. Heupel
President
<PAGE>
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ADDITIONAL INFORMATION PROVIDED BY THE COMPANY
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THE COMPANY'S BUSINESS
The Company is engaged in the remanufacture and distribution of automotive
engines and automotive parts. The amounts of net sales, net income, and total
assets attribut-able to this business for each of the last five fiscal years are
shown under the heading "Selected Financial Data".
The following table shows the percentage of total sales over the last
three fiscal years for engines and parts:
1997 1996 1995
- -----------------------------------------------------------
Automobile and Truck Engines 28% 22% 26%
Automobile and Truck Parts 72% 78% 74%
The principal markets for the Company's products are automotive dealers,
automotive remanufacturers and distributors and automotive parts distributors in
the Midwest. The Company has no export sales business.
The following table shows the percentage of total sales by type of product
and by customer:
1997 1996 1995
- ---------------------------------------------------------------------
Ford Authorized Remanufactured to Dealers 51% 56% 64%
Distribution Program to Dealers 32% 31% 24%
Parts to Other Ford Remanufacturers 15% 11% 9%
Miscellaneous Sales 2% 2% 3%
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA FOR FISCAL YEARS ENDED JULY 31
(NOT COVERED BY AUDITORS' REPORT) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . $19,089,166 $17,678,542 $14,762,085 $13,118,372 $11,020,437
Income Before Income Taxes . . . . . . . . . 1,971,377 1,888,950 1,319,902 809,648 911,106
Estimated Income Taxes . . . . . . . . . . . 818,450 754,491 501,086 329,016 338,913
Income Before Accounting Changes . . . . . . 1,152,927 1,134,459 818,816 480,632 572,193
Cumulative Effect of Accounting Changes. . . --------- --------- ---------- 284,061 ----------
Net Income . . . . . . . . . . . . . . . . . 1,152,927 1,134,459 818,816 764,693 572,193
Net Income Per Share of
Outstanding Common Stock. . . . . . . . . 1.41 1.39 1.00 .94 .70
Cash Dividends
Per Share Declared. . . . . . . . . . . . 1.00 .85 .80 .60 .60
Total Assets . . . . . . . . . . . . . . . . $6,443,524 $6,231,331 $5,453,419 $5,543,974 $4,689,878
</TABLE>
THE COMPANY'S STOCK
The Company's stock is traded in the over-the-counter market and is listed
on the NASDAQ Small-Cap Market under the trading symbol UFMG. As of September
10, 1997, there were 256 holders of record of the Company's common stock. The
following table lists the dividend declarations on the Company's stock during
the last two fiscal years:
AMOUNT AMOUNT
DATE PER SHARE DATE PER SHARE
- ----------------------------------------------------------------
October 29, 1996 $.25 October 31, 1995 $.20
January 21, 1997 .25 January 16, 1996 .20
April 30, 1997 .25 April 23, 1996 .20
July 15, 1997 .25 July 16, 1996 .25
- ----------------------------------------------------------------
1997 TOTAL $1.00 1996 TOTAL $.85
The high and low bid and asked prices for the Company's common stock during
the last two fiscal years are shown in the adjacent table:
HIGH LOW
- ------------------------------------------------------------------
CALENDAR QUARTERS BID ASKED BID ASKED
3rd Quarter 1995 8 1/2 10 7 3/4 9
4th Quarter 1995 8 1/2 10 8 1/2 10
1st Quarter 1996 8 1/2 10 8 1/2 10
2nd Quarter 1996 10 11 1/4 8 1/2 10
3rd Quarter 1996 13 1/2 14 3/4 10 11 1/4
4th Quarter 1996 13 1/2 15 12 1/4 13 1/2
1st Quarter 1997 12 1/2 13 7/8 12 3/8 13 3/4
2nd Quarter 1997 16 3/4 18 12 3/8 13 3/4
Information concerning stock prices for fiscal year 1996 was obtained from The
NASDAQ Stock Market, Inc. Information concerning stock prices for fiscal years
1995 and 1997 was obtained from Kirkpatrick, Pettis, Smith, Polian Inc., which
acts as a market maker in the Company's stock. The above quotations may reflect
inter-dealer prices and may not reflect retail mark-up, mark-down or commission
or necessarily represent actual transactions.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In fiscal 1997, the Company experienced an increase in sales of 8% due to
continued increases in sales of Ford Remanufactured distribution products
and sales to other Ford Authorized Remanufacturers. In fiscal 1996, the Company
experienced an increase in sales of 20% also due to continued increased sales to
other Ford Authorized Remanufacturers and increased sales of Ford Remanufactured
distribution products.
Sales to other Ford Authorized Remanufacturers increased to $2,946,457 in
fiscal 1997 from $2,052,650 in fiscal 1996. Sales of Ford Remanufactured
distribution products in fiscal 1997 were $6,022,370 compared to $5,439,309 in
fiscal 1996.
Unit sales increases in fiscal year 1997 were led by electric fuel pumps,
with sales of 26,003 units. This represents an increase of 9,530 units over
fiscal 1996 sales of 16,473 units.
Remanufactured engine unit sales in fiscal year 1997 were 3,164, which
represents an increase of 367 units. Engine sales in fiscal 1996 were 2,797.
Transmission unit sales increased by 118 in fiscal year 1997 to 3,873
units. Transmission sales in fiscal 1996 were 3,755 an increase of 1,187 over
the previous year.
In February 1997, prices were reviewed and selectively increased about
2.5%. In September 1996, water pump prices were reduced as part of a nation-
wide price reduction program to increase market penetration. Prices were
reviewed in February 1996 and were selectively increased by approximately 5%.
In July 1996, brake shoe prices were reduced to adjust to market trends. In
March 1995, prices were increased by approximately 2%. In July 1995, prices were
adjusted on several part numbers to pass on cost increases of specific component
parts.
In May 1996, the Company and the United Auto Workers Union, which
represents the production employees, reached a new three year agreement.
This agreement provides for approximate wage increases of 2.6% each year of the
agreement.
Interest income for fiscal 1997 was $49,109; in fiscal 1996 it was $31,153;
and in fiscal 1995 it was $15,206. Investment amounts were higher during fiscal
1997 than during fiscal 1996, and available rates were approximately equal.
Investment amounts during 1996 were higher than in 1995, and available
investment rates again were approximately the same.
The following table shows the comparison for the last five fiscal years of
gross profit and selling, general and administrative expenses as a percentage of
net sales. Increased sales volume from Ford distribution products and sales to
other Ford Authorized Remanufacturers allowed for continued reduction in
selling, general and administrative expenses as a percentage of sales.
GROSS PROFIT SELLING, GENERAL AND
FISCAL AS PERCENTAGE ADMINISTRATIVE EXPENSES AS
YEAR OF NET SALES PERCENTAGE OF NET SALES
- ----------------------------------------------------------------
1993 24.9 17.6
1994 21.6 14.6
1995 21.4 12.8
1996 21.7 11.4
1997 20.8 10.8
The following table shows the changes in selected expense categories,
included within selling, general and administrative expenses, for the past three
fiscal years:
AMOUNT OF INCREASE (DECREASE)
OVER PRIOR FISCAL YEAR
FISCAL YEARS ENDED JULY 31
1997 1996 1995
- --------------------------------------------------------------------------------
Salaries and Wages (Other than
for Officers and Directors) ($10,631) $2,700 ($10,187)
Cost of Group Insurance
for Employees 16,799 19,778 (16,155)
Officers' and Directors'
Compensation 12,032 28,173 (4,918)
Repairs and Maintenance
for Vehicles 8,341 (1,697) 1,964
Depreciation on Vehicles (13) 9,453 (25,424)
Gas and Oil (3,973) (3,808) 2,800
Warehouse Supplies & Expenses (992) 2,656 13,037
Payroll Taxes (910) 3,986 149
Advertising and Price Lists (23,693) 19,502 (7,264)
Bad Debt Expenses 550 (253) (2,228)
Professional Services 5,342 (20,346) 4,472
Payroll Insurance (5,624) (13,426) (168)
Insurance--
Vehicles, Building, Contents (365) (1,717) (6,666)
Telephone (6,572) 7,133 (5,526)
Utilities 2,138 2,773 (2,676)
Freight 36,113 46,491 45,566
The increase in group insurance is due to higher claim costs than during
the preceding two years. The increase in officers' and directors' compensation
was due to higher salaries and commissions paid to officers.
The decrease in advertising and price lists is due to a reduction in the
Ford Authorized Remanufacturers national advertising budget, in which the
Company participates. The increase in freight costs is due to policy changes
which result in more products being shipped on a prepaid basis.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Earnings per share of common stock increased $.02 in fiscal 1997 due to
increased sales volume. Earnings per share of common stock increased $.39 in
fiscal 1996 due to increased sales volume and to a slight improvement in gross
margin. Earnings per share increased $.06 in fiscal 1995 also due to increased
sales volume.
The Company's ratio of current assets to current liabilities of 3 to 1
indicates that the Company is maintaining a reasonable level of liquidity. Our
inventories in fiscal 1997 were lower than in fiscal 1996, although sales
volumes were higher. Our total cash and short-term investments at fiscal year-
end for the past three years were:
TOTAL OF CASH AND
FISCAL YEAR SHORT TERM INVESTMENTS
- ---------------------------------------------------------------------------
1997 . . . . . . . . . . . . . . . . . $881,389
1996 . . . . . . . . . . . . . . . . . $934,072
1995 . . . . . . . . . . . . . . . . . $278,064
It is anticipated that certain capital expenditures will be required to
maintain or increase the current level of business and service. Among these
expenditures is a 10,000 square foot warehouse addition next to the Algona
plant, computer system improvements and unit replacements in the truck fleet.
Continued growth in Ford distribution programs may require investment in
additional inventories. Management believes the internal resources of the
Company will permit a relatively easy transition to higher levels of inventory
if demand requires such levels and should also provide for planned and future
capital needs.
In connection with the complaint filed by the Environmental Protection
Agency (EPA) described in Note 6 of the Notes to Consolidated Financial
Statements, the Company accrued an expense of $149,725 in fiscal 1994 to account
for clean-up costs or additional penalty as provided in the settlement agreement
with the Environmental Protection Agency (EPA). Portions of this amount were
expended in each of fiscal years 1994 and 1995. It is unknown when additional
expenditures will be required.
The Company had no bank borrowings during the fiscal year ended July 31,
1997.
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INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Stockholders and Board of Directors
Universal Mfg. Co.:
We have audited the accompanying balance sheets of Universal Mfg. Co. as of
July 31, 1997 and 1996 and the related statements of income and retained
earnings and of cash flows for each of the three years in the period ended July
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Universal Mfg. Co. as of July 31, 1997 and
1996 and the results of its operations and its cash flows for each of the three
years in the period ended July 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
August 19, 1997
<PAGE>
UNIVERSAL MFG. CO.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
JULY 31,
-------------------------
CURRENT ASSETS: 1997 1996
---------- ----------
Cash and cash equivalents $ 881,389 $ 934,072
Accounts receivable 1,884,917 1,654,992
Inventories (Notes 3) 2,412,712 2,479,713
Income taxes recoverable 23,180 -
Prepaid expenses 70,929 50,282
---------- ----------
Total current assets 5,273,127 5,119,059
---------- ----------
DEFERRED INCOME TAXES (NOTES 5) 44,208 42,329
LEASE RECEIVABLE (NOTE 4) 14,041 26,073
PROPERTY - AT COST:
Land 120,499 120,499
Buildings 1,157,116 1,099,594
Machinery and equipment 938,466 899,997
Furniture and fixtures 208,086 209,947
Trucks and automobiles 743,530 699,240
---------- ----------
Total property 3,167,697 3,029,277
Less accumulated depreciation (2,055,549) (1,985,407)
---------- ----------
Property - net 1,112,148 1,043,870
---------- ----------
$6,443,524 $6,231,331
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,419,725 $1,507,944
Dividends payable 204,000 204,000
Payroll taxes 24,944 10,539
Income taxes payable - -56,790
Accrued compensation 87,631 90,046
Accrued local taxes 22,269 13,984
---------- ----------
Total current liabilities 1,758,569 1,883,303
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value -
authorized 2,000,000 shares; issued
and outstanding, 816,000 shares 816,000 816,000
Additional paid-in capital 17,862 17,862
Retained earnings 3,851,093 3,514,166
---------- ----------
Total stockholders' equity 4,684,955 4,348,028
---------- ----------
$6,443,524 $6,231,331
---------- ----------
---------- ----------
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNIVERSAL MFG. CO.
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $19,089,166 $17,678,542 $14,762,085
COST OF GOODS SOLD 15,111,618 13,836,818 11,600,552
----------- ----------- -----------
GROSS PROFIT 3,977,548 3,841,724 3,161,533
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,068,321 2,019,079 1,885,622
----------- ----------- -----------
INCOME FROM OPERATIONS 1,909,227 1,822,645 1,275,911
OTHER INCOME:
Interest (net) 49,109 31,153 15,206
Other 13,041 35,152 28,785
----------- ----------- -----------
Total other income 62,150 66,305 43,991
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,971,377 1,888,950 1,319,902
INCOME TAXES (Note 5) 818,450 754,491 501,086
----------- ----------- -----------
NET INCOME 1,152,927 1,134,459 818,816
RETAINED EARNINGS, BEGINNING OF YEAR 3,514,166 3,073,307 2,907,291
----------- ----------- -----------
4,667,093 4,207,766 3,726,107
LESS CASH DIVIDENDS
($1.00, $.85 and $.80 per share
in 1997, 1996 and 1995,
respectively) 816,000 693,600 652,800
----------- ----------- -----------
RETAINED EARNINGS, END OF YEAR $ 3,851,093 $ 3,514,166 $ 3,073,307
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER COMMON SHARE: $ 1.41 $ 1.39 $ 1.00
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNIVERSAL MFG. CO.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,152,927 $1,134,459 $ 818,816
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 190,749 184,406 149,786
Deferred income taxes (1,879) - (22,586)
Gain on sale of property (2,459) (14,634) (4,920)
Effect of changes in operating assets and liabilities:
Accounts receivable (229,925) (235,815) 131,288
Inventories 67,001 44,270 (203,350)
Income taxes recoverable (23,180) 109,646 (109,646)
Prepaid expenses (20,647) (12,306) 46,411
Accounts payable (88,219) 242,231 (117,845)
Dividends payable - 40,800 40,800
Payroll taxes 14,405 1,227 (2,676)
Income taxes payable (56,790) 56,790 (143,848)
Accrued compensation (2,415) 1,711 (32,292)
Accrued local taxes 8,285 (5,706) (710)
----------- ----------- -----------
Net cash flows from operating activities 1,007,853 1,547,079 549,228
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 88,400 81,063 38,724
Purchases of property (332,936) (278,534) (365,610)
Purchases of investments - - (3,197)
Proceeds from maturities of investments - 67,597 -
----------- ----------- -----------
Net cash flows from investing activities (244,536) (129,874) (330,083)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (816,000) (693,600) (652,800)
----------- ----------- -----------
Net cash flows from financing activities (816,000) (693,600) (652,800)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (52,683) 723,605 (433,655)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 934,072 210,467 644,122
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 881,389 $ 934,072 $ 210,467
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 898,426 $ 595,805 $ 729,514
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNIVERSAL MFG. CO.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The Company is engaged in the business of
remanufacturing and selling on a wholesale basis remanufactured engines and
other remanufactured automotive parts for Ford, Lincoln and Mercury
automobiles and trucks. The Company is a franchised remanufacturer for Ford
Motor Company with a defined sales territory. The Company purchases the
majority of its new raw materials from Ford Motor Company. Remanufactured
engines for non-Ford vehicles are also marketed on a limited basis. The
principal markets for the Company's products are automotive dealers and
jobber supply houses. The Company has no separate segments, major
customers, foreign operations or export sales.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
INVENTORIES - Inventories are stated at the lower of cost, determined on a
last-in, first-out (LIFO) method or market.
INVESTMENTS - From time-to-time the Company may make short-term investments
which are considered as either trading securities or available for sale
securities and, accordingly, are carried at fair value in the Company's
financial statements.
DEPRECIATION, MAINTENANCE, AND REPAIRS - Property is depreciated generally
as follows
ASSETS DEPRECIATION METHOD LIVES
------ ------------------- -----
Buildings Straight-line and
declining-balance 10 - 20 years
Machinery and
equipment declining-balance 7 - 10 years
Furniture and
fixtures declining-balance 5 - 7 years
Trucks and
automobiles declining-balance 3 - 5 years
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments are capitalized and depreciated over their estimated useful
service lives. The applicable property accounts are relieved of the cost
and related accumulated depreciation upon disposition. Gains or losses are
recognized at the time of disposal.
REVENUE RECOGNITION - Sales and related cost of sales are recognized
primarily upon shipment of products.
CASH EQUIVALENTS - For purposes of the Statements of Cash Flows, the
Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS - Cash and cash equivalents, accounts receivable and
accounts payable are short-term in nature and the values at which they are
recorded are considered to be reasonable estimates of their fair values.
EARNINGS PER SHARE - Earnings per share have been computed on the weighted
average number of shares outstanding during the years (816,000 shares).
2. CHANGES IN ACCOUNTING PRINCIPLES
INVESTMENTS - During the year ended July 31, 1995 the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
adoption of SFAS No. 115 had no effect on the 1995 financial statements.
PENDING ACCOUNTING CHANGES - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share", effective for fiscal years beginning after
December 15, 1997. In addition, in February 1997, the FASB issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure." In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", all of which are
effective for fiscal years beginning after December 15, 1997. The adoption
of these statements is not expected to have a material impact on the
operations of the Company.
<PAGE>
UNIVERSAL MFG. CO.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1997
3. INVENTORIES
The major classes of inventory are as follows:
1997 1996
---------- ----------
Product core $1,048,754 $ 889,164
Raw materials 382,557 496,439
Finished engines 278,756 208,295
Finished small parts 702,645 885,815
---------- ----------
$2,412,712 $2,479,713
---------- ----------
---------- ----------
If inventories were valued at the lower of cost (first-in, first-out
method) or market, inventories would have been $5,342,795 and $5,483,024
at July 31, 1997 and 1996, respectively.
4. LEASE RECEIVABLE
On May 26, 1993, the Company, as lessor, entered into a lease agreement
with another manufacturer to lease equipment at 8% interest, for a
sixty-month period. The total minimum lease payments are $27,373 and the
unearned income is $13,332 at July 31, 1997. These amounts are shown on a
net basis for financial statement purposes.
5. INCOME TAXES
The provision for income taxes for the years ended July 31, 1997, 1996 and
1995 is as follows:
1997 1996 1995
Current income taxes $820,329 $754,491 $523,672
Deferred income taxes (1,879) - (22,586)
-------- -------- --------
Income tax provision $818,450 $754,491 $501,086
-------- -------- --------
-------- -------- --------
The tax effect of differences in the timing of revenues and expenses for
tax and financial statement purposes is as follows:
1997 1996 1995
Depreciation $ (2,619) $40,590 $ -
Uniform inventory
capitalization (1,862) 1,752 (13,128)
Vacation pay accruals 2,076 5,788 1,834
Other 526 (48,130) (11,292)
--------- -------- ---------
Deferred Income taxes $ (1,879) $ - $(22,586)
--------- -------- ---------
--------- -------- ---------
A reconciliation between statutory and effective tax rates is as follows:
1997 1996 1995
Income before
income taxes $1,971,377 $1,888,950 $1,319,902
Statutory rate 34% 34% 34%
--------- --------- ---------
Income taxes
at statutory rate 670,268 642,243 448,767
Tax effect of:
State taxes 159,387 85,320 62,552
Other - net (11,205) 26,928 (10,233)
--------- --------- ---------
Total income taxes $818,450 $754,491 $501,086
--------- --------- ---------
--------- --------- ---------
6. EPA PROJECT COSTS
In February, 1991, the Company was served with a complaint from the United
States Environmental Protection Agency (EPA) which contained eight counts
of alleged violations of the Resource Conservation and Recovery Act of 1976
and the Hazardous Solid Waste Amendments of 1984. The complaint alleged,
among other things, that the Company failed to adequately test and properly
transport certain residue of hazardous wastes which it was treating at its
facility. The Company entered into a Consent Agreement and Consent Order
with the EPA dated May 6, 1994, which provided for settlement of this
complaint.
This settlement called for payment of a civil penalty of $32,955, and for
the completion of certain remedial projects, estimated to cost $149,725.
Total costs paid as of July 31, 1997 are $90,113. The remaining amount of
$59,612 is recorded as a liability in the accompanying financial
statements.
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EXECUTIVE OFFICERS
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DONALD D. HEUPEL GARY L. CHRISTIANSEN T. WARREN THOMPSON
President Vice President & Treasurer Secretary
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DIRECTORS
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RICHARD W. AGEE, President
The Huntington Corporation
Real Estate Developer, Builder & Subdivider
Lincoln, Nebraska
DONALD D. HEUPEL, President of the Company
Algona, Iowa
RICHARD E. MCFAYDEN, Partner
Perrigrine Partners, a Real Estate &
Investment Partnership
Professor of Business and Associate Director
of Student Services, Buena Vista University
Omaha, Nebraska
HELEN ANN MCHUGH, Account Manager
Caltar, Inc.
Sante Fe Springs, California
HARRY W. MEGINNIS, Retired
Palm City, Florida
THOMAS W. RASMUSSEN, Dealer Development Manager
Arcadia Financial, Ltd.,
Minneapolis, Minnesota
T. WARREN THOMPSON, Commercial Real Estate Broker
Omaha, Nebraska
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[LOGO]
UNIVERSAL MFG. CO.
405 DIAGONAL STREET
ALGONA, IOWA 50511-0190
515-295-3557
