<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from_______________________to_______________________
Commission file number 0-2865
UNIVERSAL MFG. CO.
(Name of small business issuer in its charter)
Nebraska 42-0733240
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
405 Diagonal Street, Algona, Iowa 50511
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 515/295-3557
Securities registered under Section 12(g) of the Exchange Act:
Common Stock ($1.00 par value)
(Title of class)
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $19,372,976
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
Common Stock ($1.00 par value) - $7,516,888.75 for October 21, 1998.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock ($1.00 par value) - 816,000 shares as of October 23, 1998.
This document consists of 18 pages. Page 1 of 18 pages.
See Page 18 for Exhibit Index
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders to
be held November 17, 1998, are incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes ; No X
--- ---
Page 2 of 18 Pages
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) The Company is a Nebraska corporation which became incorporated on
December 12, 1945. During the fiscal year ended July 31, 1993, the Company
phased out remanufacturing of engines and increased its remanufacturing and sale
of component automotive parts to other Ford Authorized Remanufactures. The
Company continues to market and distribute remanufactured engines. The
Company's source for such remanufactured engines is other Ford Authorized
Remanufacturers. During the fiscal year ended July 31, 1993, the Company also
instituted distribution programs distributing Ford branded parts and products to
Ford dealers and began distributing new products, including remanufactured
diesel parts, transmissions and Ford branded car care products.
During the fiscal year ended July 31, 1993, the Company's production
employees became unionized. A description of the agreement between the Company
and the union is set forth below.
(b) The Company is engaged in the business of selling on a wholesale basis
remanufactured automotive parts for Ford, Lincoln and Mercury automobiles and
trucks. It is a franchised remanufacturer for Ford Motor Company. Used
automotive parts are the basic raw materials. The principal markets for the
Company's products are automotive dealers, parts jobber supply houses and other
Ford Authorized Remanufactures. The Company has refocused its distribution
efforts from parts jobber supply houses to independent warehouse distributors
and warehouses. In addition to its remanufacturing activities, the Company also
sells, under a warehouse distributorship agreement with Ford Motor Company,
clutches, pressure plates, torque converters, transmissions, engine assemblies,
remanufactured diesel parts and Ford branded car care products.
The Company purchases approximately 75% of its new (i.e., non-used) raw
materials and all of its car care products from Ford Motor Company. Used parts
to be remanufactured are obtained in exchange with dealers, parts jobber supply
houses and other Ford Authorized Remanufactures, or are purchased from salvage
dealers and other used parts suppliers. Approximately 75% of such used raw
materials are obtained by such exchange with the remaining 25% being purchased.
The Company purchases approximately 80% of its completed engine assemblies from
Dealers Manufacturing Co., of Minneapolis, Minnesota.
As an authorized distributor of remanufactured products, the Company's
competitive position is strongly related to that of Ford Motor Company. As of
April 1, 1995, the Company entered into an Authorized Remanufactured Product
Distributor Agreement with Ford Motor Company. A copy of such agreement is
attached as Exhibit 10(ii) to the Form 10-KSB for the fiscal year ended July 31,
1995. Among other things, the agreement provides that a Ford dealer may
purchase products from any Ford authorized remanufacturer and the agreement
changed the designation of the Company's status with respect to Ford Motor
Company from remanufacturer to distributor, with remanufacturing activities to
be governed by a specific annexed agreement (a copy of which is attached as part
of Exhibit 10(ii) to the Form 10-KSB for the fiscal year ended July 31, 1995).
The Company's agreement with Ford Motor Company requires it to observe
specifications for remanufacturing which are provided by the engineering
department of Ford Motor Company. Under the arrangement Ford Motor Company is
permitted to inspect for quality control purposes the plant and products of the
Company. The Company attempts to maintain a rigid program of quality control to
assure conformance with the specifications of Ford Motor Company. The Company's
agreement with Ford Motor Company to operate as an authorized distributor of
remanufactured products may be cancelled by either party upon thirty days'
notice by the Company or upon five days' notice by Ford Motor Company upon the
occurrence of certain events described in the agreement.
Effective October 1, 1998, the Company signed a new sales agreement with
the Ford Customer Service Division of the Ford Motor Company. This sales
agreement establishes the Company as a Ford Authorized Distributor and
requires the Company to distribute remanufactured products, Motorcraft
branded products and certain other Ford branded products to Ford Motor
Company and Lincoln-Mercury dealerships in territories near the Company's
distribution centers according to prescribed distribution standards.
Page 3 of 18 Pages
<PAGE>
Ford Motor Company also published a price list for certain distribution
items distributed by the Company in early October which provided for reduced
gross margins (for example, from 21% to 15% on steering products). Shortly
thereafter, Ford Motor Company announced advance information on the addition
of two more product lines to be distributed by the Company (starters and
alternators), indicating similar gross margins. At the present time,
distribution activity represents approximately 35% of the Company's total
sales. Because of Ford Motor Company's deauthorization actions, present and
anticipated, the Company's distribution activities are expected to constitute
a higher percentage of overall sales.
While it is currently anticipated that total sales volume will increase as
a result of Ford Motor Company's recent actions, increased competition and the
reduced margins established by Ford Motor Company could adversely affect future
earnings. The Company is in the process of formulating and implementing a
strategic plan for alternative manufacturing and remanufacturing activities in
order to utilize its existing plant and attain other opportunities for
profitable operation.
The Company carries a substantial inventory of both raw materials and
finished parts. Relatively large stocks of raw material parts are required
because the Company remanufactures parts which may be as much as 30 years old.
The Company's business also requires that a range of finished engines and other
parts be maintained at each of its three warehouse facilities in order to serve
customers promptly. Each customer is entitled to return purchased items so long
as the dollar amount on return items does not exceed 5% of the customer's total
annual purchases. All sales are on an account receivable basis with payment due
by the 10th day of the following month.
The Company faces a wide range of competitors selling both new and used
engines and parts, including franchises of the other large automotive companies
and numerous independent suppliers. Competition is based upon price, service,
warranty terms and product performance.
Under the 1979 amendments to the Clean Air Act, standards have been and are
being formulated which apply to automotive engines as newly manufactured. Such
regulatory standards have affected and will continue to affect the Company's
business by changing the design of the products which the Company
remanufactures. Refer to Item 3--Legal Proceedings for information with respect
to the implementation of certain remedial projects which include the separation,
removal and transportation of hazardous wastes related primarily to residues
from cleaning operations in response to a complaint against the Company filed by
the EPA.
As of July 31, 1998, the Company had 79 employees, all which were full-time
employees. In May of 1993 the Company entered into a three year agreement with
the United Auto Workers Union ("UAW"), which represents the Company's production
employees. Effective May 5, 1996, the Company entered into a new three year
agreement with the UAW. The agreement calls for 2.6% hourly wage increases of
$.25, $.27 and $.29 on May 5 of each year of the agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The location and general description of the principal plants of the Company
are as follows:
<TABLE>
<CAPTION>
Location General Description Owned or Leased
-------- ------------------- ---------------
<S> <C> <C>
Algona, Iowa Manufacturing Plant Owned
Des Moines, Iowa Warehouse Owned
Peoria, Illinois Warehouse Owned
Omaha, Nebraska Warehouse Owned
</TABLE>
Page 4 of 18 Pages
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On February 25, 1991, the Company was served with a complaint, compliance
order and notice of opportunity for hearing from the United States Environmental
Protection Agency ("EPA") Region VII, Kansas City, Kansas. The complaint
contained eight counts of alleged violations of the Resource Conservation and
Recovery Act of 1976 and the Hazardous Waste Amendments of 1984 and sought to
impose civil penalties against the Company totalling $511,535.
On May 6, 1994, the Company entered into a Consent Agreement and Consent
Order (the "Agreement") with the EPA. The Agreement settled all issues arising
under the 1991 complaint. The Company approved the Agreement without admitting
the allegations of the complaint and solely to avoid further costs of
litigation.
The Agreement imposed an immediate civil penalty of $32,955 which has been
paid by the Company. It also imposed an additional penalty of $176,374, which
has been deferred by the EPA pending the Company's performance and EPA's
approval of a Supplemental Environmental Project (the "Project") relating to the
removal of sludge from, and cleaning of, four wastewater collection pits at the
Company's manufacturing facility in Algona, Iowa. The terms of the Agreement
called for the entire deferred penalty to be offset and permanently waived upon
certain conditions, including completion of the Project to the satisfaction of
the EPA and that actual costs of the Project exceed or equal the $149,725
estimate of the Company's engineering firm. In the event that the Company's
actual costs for the Project are less than $149,725, the Company will be
required to pay an additional penalty equal to 62% of the difference between
$149,725, and the amount expended on the Project.
During July and August of 1994 the Company undertook the Project and
incurred costs of $91,076, or $58,649 less than the engineer's estimate,
potentially subjecting the Company to a deferred penalty of $36,362. After
the sludge was removed, however, additional contamination was found in the
largest of the wastewater collection pits. On June 10, 1998, the Company
received notice from the EPA authorizing submission of a detailed technical
proposal for an additional Project to ascertain information concerning
environmental conditions at the Company's Plant. The EPA notice stated that
if approved, the cost of the additional Project work could be used to offset
the remaining approximately $37,000 in deferred penalties owed by the Company
to EPA under the Agreement. On August 6, 1998, the Company's consultant
submitted a proposed Project plan to the EPA detailing soil sampling work and
groundwater studies to be conducted over a 48-week period at an estimated
cost of $62,000, yielding an anticipated $38,840 in after tax costs to the
Company for offset against the remaining deferred penalty. The EPA has not
yet responded to the Company's proposal for an additional Project.
The Agreement also required the Company to proceed with preparation and
implementation of a closure plan for certain solid waste treatment and storage
facilities at its manufacturing facility in Algona, Iowa. This closure was
completed by the Company under EPA supervision in February of 1995 at a cost of
approximately $20,000. On July 25, 1995, the EPA determined that the closure
met all regulatory requirements and released $64,796 in deposits which the
Company previously was required to maintain for the costs of closure and for
liability assurance purposes under the EPA regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No response required.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 5 of 18 Pages
<PAGE>
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 9, 1998, there were 234 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:
<TABLE>
<CAPTION>
AMOUNT AMOUNT
DATE PER SHARE DATE PER SHARE
- --------------------------------------------------------------------------
<S> <C> <C> <C>
October 29, 1997 $.25 October 29, 1996 $.25
January 20, 1998 .25 January 21, 1997 .25
April 20, 1998 .20 April 30, 1997 .25
July 21, 1998 .20 July 15, 1997 .25
- --------------------------------------------------------------------------
1998 TOTAL $ .90 1997 TOTAL $1.00
</TABLE>
The high and low bid and asked prices for the Company's common stock
during the last two fiscal years are shown in the table below:
<TABLE>
<CAPTION>
HIGH LOW
- ----------------------------------------------------------------------------
CALENDAR QUARTERS BID ASKED BID ASKED
<S> <C> <C> <C> <C>
3rd Quarter 1996 13 1/2 14 3/4 10 11 3/4
4th Quarter 1996 13 1/2 15 12 1/4 10 1/2
1st Quarter 1997 12 1/2 13 7/8 12 3/8 12 3/4
2nd Quarter 1997 16 3/4 18 12 3/8 12 3/4
3rd Quarter 1997 16 17 1/2 16 17 1/2
4th Quarter 1997 17 17 1/2 15 16
1st Quarter 1998 15 3/8 16 1/4 13 3/4 15 1/2
2nd Quarter 1998 15 1/4 15 3/4 10 11
</TABLE>
Information concerning stock prices has been obtained from The NASDAQ Stock
Market, Inc. Information concerning stock prices for fiscal years 1997 and
1998 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 6 of 18 Pages
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In fiscal 1998, the Company experienced an increase in sales of 1.5% due
to continued increases in sales of Ford Remanufactured distribution
products. In fiscal 1997, the Company experienced an increase in sales of 8%
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 $3,057,983
in fiscal 1998 from $2,946,457 in fiscal 1997. Sales of Ford Remanufactured
distribution products in fiscal 1998 were $6,770,540 compared to $6,022,370
in fiscal 1997.
Unit sales increases in fiscal year 1998 were led by water pumps, with
sales of 12,854 units. This represents an increase of 4,052 units over fiscal
1997 sales of 8,802 units.
Remanufactured engine unit sales in fiscal year 1998 were 2,977, which
represents a decrease of 187 units. Engine sales in fiscal 1997 were 3,164.
Transmission unit sales increased by 326 in fiscal year 1998 to 4,109
units. Transmission sales in fiscal 1997 were 3,783 an increase of 118 over
the previous year.
Electric fuel pump unit sales decreased from 26,003 units in fiscal year
1997 to 24,274 in fiscal 1998, a decrease of 1,729.
In March, 1998, prices were reviewed but net price changes were not
significant. In February 1997, prices were reviewed and selectively increased
about 2.5%. In September 1996, water pump prices were reduced as part of a
nationwide 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 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 1998 was $43,213; in fiscal 1997 it was
$49,109; and in fiscal 1996 it was $31,153. Investment amounts were slightly
lower during fiscal 1998 than during fiscal 1997, and available rates were
approximately equal. Investment amounts during 1997 were higher than in 1996,
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. The reduced gross margin is the result of the sales
mix changing to more Ford Remanufacturing distribution products.
<TABLE>
<CAPTION>
GROSS PROFIT SELLING, GENERAL AND
FISCAL AS PERCENTAGE ADMINISTRATIVE EXPENSES AS
YEAR OF NET SALES PERCENTAGE OF NET SALES
- ------------------------------------------------------------------------
<S> <C> <C>
1994 21.6 14.6
1995 21.4 12.8
1996 21.7 11.4
1997 20.8 10.8
1998 19.8 11.0
</TABLE>
The following table shows the changes in selected expense categories,
included within selling, general and administrative expenses, for the past
three fiscal years:
<TABLE>
<CAPTION>
AMOUNT OF INCREASE (DECREASE)
OVER PRIOR FISCAL YEAR
FISCAL YEARS ENDED JULY 31
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and Wages (Other than
for Officers and Directors) $41,535 ($10,631) $2,700
Cost of Group Insurance
for Employees 6,663 16,799 19,778
Officers' and Directors'
Compensation (22,606) 12,032 28,173
Repairs and Maintenance
for Vehicles 20,723 8,341 (1,697)
Depreciation on Vehicles 7,316 (13) 9,453
Gas and Oil (14,135) (3,973) (3,808)
Warehouse Supplies & Expenses (10,337) (992) 2,656
Payroll Taxes 583 (910) 3,986
Advertising and Price Lists (24,028) (23,693) 19,502
Bad Debt Expenses (550) 550 (253)
Professional Services 30,238 5,342 (20,346)
Payroll Insurance (6,338) (5,624) (13,426)
Insurance-
Vehicles, Building, Contents (8,463) (365) (1,717)
Telephone (4,894) (6,572) 7,133
Utilities (2,214) 2,138 2,773
Freight 8,413 36,113 46,491
</TABLE>
The increase in compensation other than officers and directors is due to
a key person who was an officer resigning, and being replaced by a key person
who was not an officer. The decrease in directors and officers compensation
is due to an officer's resignation. The increase in professional services is
due to the retention of a consultant to assist with strategic planning, and to
legal fees associated with personnel issues. 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.
Page 7 of 18 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Earnings per share of common stock decreased $.07 in fiscal 1998 due to
a lower gross margin and increased selling, general and administrative
expenses. Earnings per share of common stock increased $.02 in fiscal 1997
due to increased sales volume. Earnings per share increased $.39 in fiscal
1996 due to increased sales volume and to a slight improvement in gross
margin.
The Company's ratio of current assets to current liabilities of 2.5 to 1
indicates that the Company is maintaining a reasonable level of liquidity.
Our inventories in fiscal 1998 were slightly higher than in fiscal 1997. Our
total cash and short-term investments at fiscal year-end for the past three
years were:
<TABLE>
<CAPTION>
TOTAL OF CASH AND
FISCAL YEAR SHORT TERM INVESTMENTS
- --------------------------------------------------------------
<S> <C>
1998 . . . . . . . . $1,234,007
1997 . . . . . . . . . $881,389
1996 . . . . . . . . . $934,072
</TABLE>
It is anticipated that certain capital expenditures will be required to
maintain or increase the current level of business and service. Expansion or
replacement of our warehouse facilities in Des Moines, IA, Omaha, NE, and
Peoria, IL, is likely. Continued growth in Ford distribution programs and the
additions of Motorcraft parts to our product offering will require investment
in additional inventories. Management believes that some debt may be required
to make the transition to higher levels of inventory and to finance future
capital needs.
As indicated in the President's Message to Shareholders, the Ford
program for remanufacturing is being restructured. The Company is uncertain
concerning what products will be included in future remanufacturing
activities, and is in the process of implementing its strategic plan for the
future use of its remanufacturing plant.
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 cleanup 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.
The Company had no bank borrowings during the fiscal year ended July 31,
1998.
Page 8 of 18 Pages
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Universal Mfg. Co.:
We have audited the accompanying balance sheets of Universal Mfg. Co. as
of July 31, 1998 and 1997 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, 1998. 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. at July 31,
1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended July 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
August 31, 1998
Page 9 of 18 Pages
<PAGE>
UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JULY 31,
----------------------------
CURRENT ASSETS: 1998 1997
---------- ---------
<S> <C> <C>
Cash and cash equivalents $1,234,007 $ 881,389
Accounts receivable 2,141,099 1,884,917
Inventories (Note 2) 2,611,961 2,412,712
Income taxes recoverable 23,545 23,180
Prepaid expenses 19,798 70,929
---------- ---------
Total current assets 6,030,410 5,273,127
---------- ---------
DEFERRED INCOME TAXES (NOTE 4) 24,188 44,208
LEASE RECEIVABLE (NOTE 3) - 14,041
PROPERTY - AT COST:
Land 120,499 120,499
Buildings 1,406,747 1,157,116
Machinery and equipment 1,013,923 938,466
Furniture and fixtures 264,924 208,086
Trucks and automobiles 870,579 743,530
---------- ---------
Total property 3,676,672 3,167,697
Less accumulated depreciation (2,201,225) (2,055,549)
---------- ---------
Property - net 1,475,447 1,112,148
---------- ---------
$7,530,045 $6,443,524
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,199,744 $1,419,725
Dividends payable 163,200 204,000
Payroll taxes 27,828 24,944
Accrued compensation 81,495 87,631
Accrued local taxes 17,570 22,269
---------- ---------
Total current liabilities 2,489,837 1,758,569
---------- ---------
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 4,206,346 3,851,093
---------- ---------
Total stockholders' equity 5,040,208 4,684,955
---------- ---------
$7,530,045 $6,443,524
---------- ---------
---------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
Page 10 of 18 Pages
<PAGE>
UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $19,372,976 $19,089,166 $17,678,542
COST OF GOODS SOLD 15,532,466 15,111,618 13,836,818
----------- ----------- -----------
GROSS PROFIT 3,840,510 3,977,548 3,841,724
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,132,669 2,068,321 2,019,079
----------- ----------- -----------
INCOME FROM OPERATIONS 1,707,841 1,909,227 1,822,645
OTHER INCOME:
Interest (net) 43,213 49,109 31,153
Other 18,820 13,041 35,152
----------- ----------- -----------
Total other income 62,033 62,150 66,305
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,769,874 1,971,377 1,888,950
INCOME TAXES (Note 4) 680,221 818,450 754,491
----------- ----------- -----------
NET INCOME 1,089,653 1,152,927 1,134,459
RETAINED EARNINGS, BEGINNING OF YEAR 3,851,093 3,514,166 3,073,307
LESS CASH DIVIDENDS
($.90, $1.00, and $.85 per share in 1998, 1997 and 1996, respectively) 734,400 816,000 693,600
----------- ----------- -----------
RETAINED EARNINGS, END OF YEAR $ 4,206,346 $ 3,851,093 $ 3,514,166
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER COMMON SHARE: $ 1.34 $ 1.41 $ 1.39
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
Page 11 of 18 Pages
<PAGE>
UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,089,653 $1,152,927 $1,134,459
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 196,186 190,749 184,406
Deferred income taxes 20,020 (1,879) -
Gain on sale of property (4,589) (2,459) (14,634)
Effect of changes in operating assets and liabilities:
Accounts receivable (256,182) (229,925) (235,815)
Inventories (199,249) 67,001 44,270
Income taxes recoverable (365) (23,180) 109,646
Prepaid expenses 51,131 (20,647) (12,306)
Accounts payable 780,019 (88,219) 242,231
Payroll taxes 2,884 14,405 1,227
Income taxes payable - (56,790) 56,790
Accrued compensation (6,136) (2,415) 1,711
Accrued local taxes (4,699) 8,285 (5,706)
--------- ---------- ----------
Net cash flows from operating activities 1,668,673 1,007,853 1,506,279
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 19,050 88,400 81,063
Purchases of property (559,905) (332,936) (278,534)
Proceeds from maturities of investments - - 67,597
--------- ---------- ----------
Net cash flows from investing activities (540,855) (244,536) (129,874)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (775,200) (816,000) (652,800)
--------- ---------- ----------
Net cash flows from financing activities (775,200) (816,000) (652,800)
--------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 352,618 (52,683) 723,605
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 881,389 934,072 210,467
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,234,007 $ 881,389 $ 934,072
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 662,445 $ 898,426 $ 595,805
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
Page 12 of 18 Pages
<PAGE>
UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998
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:
<TABLE>
<CAPTION>
ASSETS DEPRECIATION METHOD LIVES
------ ------------------- ---------
<S> <C> <C>
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
</TABLE>
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.
WARRANTY - Warranty expense is based upon receipt of warranty claims and
prior historical experience.
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).
PENDING ACCOUNTING CHANGES - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, effective for fiscal years beginning after June 15, 1999.
The adoption of this statement is not expected to have a material impact
on the operations of the Company.
2. INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Product core $1,169,485 $1,048,754
Raw materials 470,768 382,557
Finished engines 336,941 278,756
Finished small parts 634,767 702,645
---------- ----------
$2,611,961 $2,412,712
---------- ----------
---------- ----------
</TABLE>
If inventories were valued at the lower of cost (first-in, first-out
method) or market, inventories would have been $5,655,407 and $5,342,795
at July 31, 1998 and 1997, respectively.
3. 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. This agreement was completed as of July 31, 1998.
4. INCOME TAXES
The provision for income taxes for the years ended July 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current income taxes $660,201 $820,329 $754,491
Deferred income taxes 20,020 (1,879) -
-------- -------- --------
Income tax provision $680,221 $818,450 $754,491
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred tax assets are comprised of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Depreciation $(30,480) $(13,617)
Uniform inventory capitalization 12,867 15,820
Vacation pay accruals 11,770 10,380
EPA liability 23,885 23,885
Other 6,146 7,740
-------- --------
Deferred Income taxes $24,188 $ 44,208
-------- --------
-------- --------
</TABLE>
A reconciliation between statutory and effective tax rates is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes $1,769,874 $1,971,377 $1,888,950
Statutory rate 34% 34% 34%
---------- ---------- ----------
Income taxes at statutory rate 601,757 670,268 642,243
Tax effect of:
State taxes 130,074 159,387 85,320
Other - net (51,610) (11,205) 26,928
---------- ---------- ----------
Total income taxes $ 680,221 $ 818,450 $ 754,491
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
5. 401(K) PLAN
The Company has a 401(k) plan which covers all non-union employees which
was adopted January 1, 1997. Under this plan, the Company matches 100%
of employee contributions up to 3% of gross salary. The Company
matching contributions vest immediately. Total expenses under the plan
were $42,790, $20,667 and $0 for the years ended July 31, 1998, 1997 and
1996 respectively.
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, 1998 are $90,113. The
remaining amount of $59,612 is recorded as a liability in the
accompanying financial statements.
On June 10, 1998, the Company received notice from the EPA authorizing
submission of a proposal for treatment on additional contamination found
after the initial hazardous waste was removed. The EPA approved that
costs related to studies for the removal of the additional contamination
could be offset against the remaining liability, if approved. On August
6, 1998, the Company received a proposal to study the additional
contamination with an estimated cost approximating the liability at July
31, 1998.
7. CREDIT ARRANGEMENTS
The Company has revolving lines of credit with two banks totaling
$1,000,000. Advances under these revolving lines of credit bear
interest ranging from 7.75% to prime rate (8.5% at July 31, 1998). The
revolving lines of credit expire on May 22, 1999 and April 17, 1999,
respectively. As of July 31, 1998, there were no outstanding borrowings
under these revolving credit facilities.
Page 13 of 18 Pages
<PAGE>
Refer to Item 13 for Supplemental Report of Independent Public Accountants and
the following financial statement schedule:
Schedule VIII - Valuation Accounts for the three years ended July 31,
1998
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No response required.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following information set forth in the Company's proxy statement for
its annual meeting of shareholders to be held November 17, 1998, is incorporated
by reference:
"Election of Directors" - Pages 3, 4, and 5.
"Management" - Page 5.
"Section 16(a) Beneficial Ownership Reporting Compliance" - Page 9.
ITEM 10. EXECUTIVE COMPENSATION
The following information set forth in the Company's proxy statement for
its annual meeting of shareholders to be held November 17, 1998, is incorporated
by reference:
"Compensation of President and Directors" - Page 6.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information set forth in the Company's proxy statement for
its annual meeting of shareholders to be held November 17, 1998, is incorporated
by reference:
"Ownership of Voting Securities by Directors and Nominees" - Pages 7
and 8.
"Principal Holders of Voting Securities" - Page 10.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No response required.
Page 14 of 18 Pages
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(2) Plan or acquisition, reorganization, arrangement,
liquidation or succession. None required.
(3)(i) Articles of Incorporation. The Articles of
Incorporation of the Company are incorporated by
reference to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1980, Page
26, to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1986, Pages 15
to 16 and to the Company's Annual Report for the
fiscal year ended July 31, 1987, Pages 15 to 16.
(ii) Bylaws. The Bylaws of the Company are
incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
July 31, 1993, Pages 12-24.
(4) Instruments defining the rights of security holders,
including indentures. None required.
(9) Voting trust agreement. None required.
(10) Material contracts.
(i) The Company's Rent Agreement with Dealers
Manufacturing Co., dated May 26, 1993, is
incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
July 31, 1993, Pages 25-29.
(11) Statement re: computation of per share earnings. None
required.
(13) Annual or quarterly reports, Form 10-Q. None required.
(16) Letter on change in certifying accountant. None
required.
(18) Letter on change in accounting principles. None
required.
(21) Subsidiaries of the registrant. None required.
(22) Published report regarding matters submitted to vote.
None required.
(23) Consent of experts and counsel. None required.
(24) Power of attorney. None required.
(27) Financial Data Schedule. See page 10.
Page 15 of 18 Pages
<PAGE>
(99) Additional Exhibits.
(i) Supplemental Report of Independent Public
Accountants and attached financial statement
schedule: Schedule VIII - Valuation Accounts for
the three years ended July 31, 1996. See pages
11-12.
(ii) Universal Mfg. Co. Form 8-K filed October 21,
1998 and incorporated by reference.
(b) The Company did not file any reports on Form 8-K during the
fiscal year ended July 31, 1998. The Company filed a
current report on Form 8-K on October 21, 1998 reporting
recent actions of Ford Motor Company which incorporated a
press release issued October 20, 1998.
Page 16 of 18 Pages
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL MFG. CO.
By: By:
------------------------------------ ----------------------------------
Donald D. Heupel, President, Chief T. Warren Thompson, Secretary
and Executive Officer, Chief Director
Financial Officer and Director
Date: October 27, 1998 Date: October 27, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
By: Date: October 27, 1998
----------------------------------
Richard R. Agee/Director
By: Date: October 27, 1998
----------------------------------
Richard E. McFayden/Director
By: Date: October 27, 1998
----------------------------------
Helen Ann McHugh/Director
By: Date: October 27, 1998
----------------------------------
Harry W. Meginnis/Director
By: Date: October 27, 1998
----------------------------------
Thomas W. Rasmussen/Director
Page 17 of 18 Pages
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Page
No. Description Method of Filing Location
------- ----------- ---------------- -----------
<S> <C> <C> <C>
3(i) Articles of Incorporated by reference to the --
Incorporation Company's Annual Report on Form
10-K for the fiscal year ended
July 31, 1980, Page 26, to the
Company's Annual Report on Form
10-K for the fiscal year ended
July 31, 1986, Pages 15-16 and to
the Company's Annual Report for
the fiscal year ended July 31,
1987, Pages 15-16.
3(ii) Bylaws Incorporated by reference to the --
Company's Annual Report on Form
10-KSB for the fiscal year ended
July 31, 1993, Pages 12-24.
10(i) The Company's Rent Incorporated by reference to the --
Agreement with Company's Annual Report on Form
Dealers 10-KSB for the fiscal year ended
Manufacturing Co., July 31, 1993, Pages 25-29.
dated May 26, 1993
27 Financial Data Filed herewith. 19
Schedule
99(i) Supplemental Filed herewith. 20-21
Report of
Independent Public
Accountants and
attached financial
statement
schedule:
Schedule VIII -
Valuation Accounts
for the three
years ended July
31, 1998
99(ii) Form 8-K filed Incorporated by reference. --
October 21, 1998
</TABLE>
Page 18 of 18 Pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 1,234,007
<SECURITIES> 0
<RECEIVABLES> 2,141,099
<ALLOWANCES> 0
<INVENTORY> 2,611,961
<CURRENT-ASSETS> 6,030,410
<PP&E> 3,676,672
<DEPRECIATION> (2,201,225)
<TOTAL-ASSETS> 7,530,045
<CURRENT-LIABILITIES> 2,489,837
<BONDS> 0
0
0
<COMMON> 816,000
<OTHER-SE> 4,224,208
<TOTAL-LIABILITY-AND-EQUITY> 7,530,045
<SALES> 19,372,976
<TOTAL-REVENUES> 19,372,976
<CGS> 15,532,466
<TOTAL-COSTS> 17,665,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,769,874
<INCOME-TAX> 680,221
<INCOME-CONTINUING> 1,089,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,089,653
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Universal Mfg. Co.:
We have audited the financial statements of Universal Mfg. Co. as of July 31,
1998 and 1997, and for each of the three years in the period ended July 31,
1998, and have issued our report thereon dated August 31, 1998; such financial
statements and report are included in your 1998 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
financial statement schedule of Universal Mfg. Co., listed in Item 7. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Des Moines, Iowa
August 31, 1998
<PAGE>
Schedule VIII
UNIVERSAL MFG. CO.
VALUATION ACCOUNTS
THREE YEARS ENDED JULY 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions-
Balance, Charged to Deductions- Balance,
Beginning Cost and Accounts End of
Description of Year Expenses Charged-Off Year
<S> <C> <C> <C> <C>
July 31, 1998 - Allowance
for doubtful accounts $ - $ - $ - $ -
------ ------ ------ ------
------ ------ ------ ------
July 31, 1997 - Allowance
for doubtful accounts $ - $ 550 $ 550 $ -
------ ------ ------ ------
------ ------ ------ ------
July 31, 1996 - Allowance
for doubtful accounts $ - $ - $ - $ -
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
