<PAGE> 1
Universal Automotive Industries, Inc.
Annual Report
Dated December 31, 1996
<PAGE> 2
TO OUR STOCKHOLDERS:
Substantial progress was made in 1996 in achieving the Company's strategy
to evolve from an aftermarket distributor of auto parts to the leading Value
Line manufacturer of brake parts in the U.S. and Canada. The Value Line concept
is one of selling at prices significantly below those of certain leading
national brand name brake parts. The evolution process was initiated in 1992
and completed in 1996.
Universal experienced strong results in 1996 in its core brake parts
business, liquidated its aftermarket distribution business and had
disappointing results at our Csepel Iron Foundry, Budapest, Hungary. The
Company brake parts business benefited from the acquisitions in the prior year
of MHD and North American Rotor, as well as internally generated growth.
Sales in 1996 were up by 35% in spite of a 49% decline in sales from the
Company's liquidated automotive aftermarket warehouse distributor business. Net
sales of brake parts increased in 1996 by $15.8 million or 60%, to $42.1
million, from $26.3 million in 1995. The sales run rate of brake parts for 1997
to date is approximately 50% better than the same period in 1996.
Brake parts continue to be the core focus of the Company. The Company is
rapidly becoming the leading Value Line supplier of aftermarket brake parts in
North America. The Company's market share in the brake rotor and drum business
has exceeded 10% of that segment of the U.S. aftermarket. The Company completed
two brake related acquisitions in 1996, MCI Automotive and North American
Friction. The acquisition of MCI Automotive substantially expanded the range of
patterns available to manufacture disc brake rotors and drums and was
instrumental in developing a business relationship with the premier supplier of
rotor and drum castings in North America. The acquisition of North American
Friction, which formulates and manufactures conventional as well as integrally
molded disc brake pads, will enable the Company to be a dynamic force in the
Value Line friction business, and enhance our product offering to our customer
base. Currently, the Company is the only Value Line brake parts company to
manufacture disc brake rotors and friction product, and sell at substantial
discount from the traditional branded suppliers. The Company believes that the
aftermarket customer base seeks to consolidate suppliers based upon quality,
performance and price. The Company's strong sales gains in the brake business
validates the Company's strategic concept. Revenue growth far exceeds the
aftermarket industry in this segment. This afermarket industry segment has a
growth rate of 3%.
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Industry consolidation continues to support the Company's brake parts
growth strategy in several ways:
1). The Company's primary customers are growing through acquisition
and new store openings.
2). Pressure on margins created by aggressive retailers selling
generic parts forces the traditional market to purchase from value
line suppliers that offer price savings from major brands.
3). Industry preference to consolidate number of suppliers.
Currently, the Value Line brake parts business is fragmented in three
principal categories: drum and rotor, friction, and hydraulics. The
Company's strategy is to provide "one stop" shopping at economics
competitive with the leading supplier in each category.
Challenges facing us in 1997 are containing costs during double digit
sales growth, reassessing the strategic value of the Company's Hungarian assets
and increasing stockholder value. Now that the foundation is in place, the
Company is confident that 1997 will be a rewarding year for shareholders and
employees of Universal.
/s/Arvin Scott
--------------------
Arvin Scott
President and CEO
April 14, 1997
2
<PAGE> 4
THE COMPANY
The Company is a manufacturer and distributor of brake rotors, drums, disc
brake pads, relined brake shoes, wheel cylinders and brake hoses for the
automotive market. The Company markets approximately 50% of its product under
its UBP trademark (Universal Brake Parts) and the balance under its customers'
private labels. The Company commenced operations in 1981 as a warehouse
distributor of a wide variety of automotive aftermarket replacement parts
servicing the Chicagoland area. In the early 1990's, the Company started
shifting its focus to the brake parts segment of the business, and in the
second half of 1996 commenced liquidation of the non-brake parts warehouse
distributor business due to the lower margin and declining growth prospects of
this segment of the business. The Company manufactures disc brake rotors in
its Laredo, Texas facility, and formulates and manufactures conventional as
well as integrally molded disc brake pads at its North American Friction plant,
located in Toronto, Canada. In October 1995, it acquired a foundry in
Budapest, Hungary which presently makes iron castings for numerous industries,
but which could be capable of supplying brake rotors for the Company's internal
requirements should certain significant additional equipment investment be
made.
The Company believes it is the leading supplier of "value line" brake
parts (brake parts sold at prices significantly below those of certain leading
national brand name brake parts) to mass-market retailers, traditional
warehouse distributors and specialty undercar distributors in North America.
Many of the Company's "value line" competitors specialize in only one category
of brake parts. By offering a full line of "value line" products in each of
such categories, the Company believes it has an advantage over those
competitors offering "value line" products in fewer brake part categories in
light of the industry trend to consolidate the number of suppliers of products.
The Company also conducts a wholesale "commodities" operation from its
headquarters in Chicago, Illinois, purchasing certain automotive replacement
parts and maintenance items in large volume, at favorable prices, and reselling
such products at slightly higher prices.
In each of the past four years, the Company has experienced a greater than
30% increase in net sales of brake rotors and other brake parts. Due to
several acquisitions and overall improvement of its brake parts business, sales
in this category increased by 60% during 1996 compared to 1995. No assurance
can be given that this percentage increase in sales will continue at such level
in the future.
The Company currently markets its UBP Universal Brake Parts line to
warehouse distributors, mass market retailers (e.g. Hi-Lo Auto Supply, Discount
Autoparts, AutoWorks, APS, ISW), specialty, "under-the-car" distributors, and
national franchise and chain installers (e.g. Meineke, Midas, Monroe Muffler,
Speedy Muffler and Car-X) located throughout the United States and Canada,
principally through the Company's salespeople, independent sales
representatives and telemarketing. The Company has recently been named a
private label brake rotor and drum supplier to the national buying groups
Pronto, AAAD, and the Independent Auto Parts Association.
Net sales of brake rotors and other brake parts account for an
increasingly significant portion of the Company's total net sales and gross
profits. The following table sets forth, for the three years ended December
31, 1994, 1995 and 1996, net sales attributable to brake parts and all other
Company operations as a percentage of total net sales, and gross profits
attributable to sales of brake parts and sales from all other Company
operations as a percentage of total gross profits.
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<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996
-------------- -------------- -------------
% OF % OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
NET GROSS NET GROSS NET GROSS
PRODUCTS SALES PROFITS SALES PROFITS SALES PROFIT
-------- ----- ------- ----- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Brake Parts(1)........... 58% 70% 64% 79% 66% 81%
All other operations(2).. 42% 30% 36% 21% 34% 19%
----- ----- ----- ------ ----- ------
Total................ 100% 100% 100% 100% 100% 100%
===== ===== ===== ====== ===== ======
</TABLE>
- ----------------------
(1) Includes sales of brake rotors and drums, wheel cylinders and brake
friction products.
(2) Includes sales of automotive hard parts, maintenance products and
accessories on a warehouse distribution and wholesale basis, and for the
period from October 2, 1995 through December 31, 1996, revenues from the
Company's Hungarian foundry operations.
In October 1995, the Company acquired the assets of Csepel Iron Foundry
Works, a producer of high quality gray iron and ductile iron casting products,
located in Budapest, Hungary. The Company manufactures iron casting products
at its Hungarian foundry primarily for the European automotive and machine tool
industries. The foundry is not presently equipped to manufacture high volume,
smaller-sized items such as brake rotors. The Company may at some time in the
future upgrade the foundry (including additional equipment purchases) to
produce iron castings for brake rotors, although the Company has no present
plans to make any such upgrades. All of the foundry's sales are in Europe.
The Company's strategy is to capitalize on the increasing demand for brake
rotors and other brake parts and the higher gross margins on sales of such
brake parts by expanding its brake parts manufacturing operations and its
specialty brake parts distribution business. The Company intends to seek a
combination of additional senior and subordinated debt and possible equity
financing to finance this expansion. The Company believes that it can
implement its expansion strategy by: (i) gaining additional market share if
friction brake products; (ii) purchasing additional machinery and brake rotor
patterns to increase the number of brake rotor SKUs the Company manufactures;
(iii) possibly acquiring other specialty brake parts distributors; (iv)
increasing its marketing activities relative to new brake parts product lines;
and (v) increasing its inventories of brake parts.
(i) April 1995 - the Company purchased the brake rotor and drum
inventory and customer list of the passenger car division of MHD
Automotive, an Illinois-based distributor of brake parts;
(ii) June 1995 - the Company acquired the inventory and customer list
of North American Rotor, Inc., a distributor of brake drums anD
rotors;
(iii) October 1995 - the Company acquired the assets of Csepel
Iron Foundry Works, with a view toward potential future upgrading in
order to eventually produce brake rotors for internal requirements
(See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Hungarian Foundry");
(iv) January 1996 - the Company, which owned 50% of the
outstanding stock of UBP Friction, Inc., a Canadian-based specialty
manufacturer of brake friction parts, acquired the remaining 50% of
the outstanding capital stock;
(v) March 1996 - the Company acquired the brake parts inventory
and customer list of MPW Brake Supply of Cambridge, Massachusetts,
an aftermarket brake parts distributor on the east coast;
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(vi) June 1996 - the Company acquired the assets and goodwill of
North American Friction Inc., a Canadian manufacturer of a brake
friction component used in the Company's brake friction
manufacturing process;
(vii) September 1996 - the Company substantially liquidated its
non-brake parts warehouse/distribution division which enabled the
Company to utilize the financial, warehouse and personnel resources
previously used by such division in the Company's higher margin
brake parts business. Liquidation was substantially completed by
December 31, 1996; and
(viii) November 1996 - the Company acquired all of the assets of MCI
Automotive Division of Excel Industries which was in bankruptcy.
Inventory was acquired at values substantially less than current
market values which the Company believes will enable it to obtain
higher margins as the product is sold. The Company also acquired a
substantial number of additional brake rotor patterns and additional
equipment to increase its manufacturing capacity.
Marketing
The Company organizes its marketing operations around three principal
customer groups: (i) volume purchasers of private label brake parts; (ii)
national franchise and chain installers; and (iii) Chicago area jobbers
purchasing brake parts. The Company currently markets its UBP Universal Brake
Parts label line to other warehouse distributors, mass market retailers (e.g.,
Hi-Lo Auto Supply, Discount Autoparts, Autoworks, APS, ISW), specialty
"under-the-car" distributors, and jobbers located throughout the United States
and Canada, principally through independent sales representatives retained by
the Company on a commission basis. The Company markets predominantly private
label brake parts to national franchise and chain installers, including
Meineke, Midas, Monroe Muffler, Speedy Muffler and Car-X, through telemarketing
operations conducted from the Company's headquarters facility located in
Chicago, Illinois. The Company has reduced the scope of its traditional
warehouse-distribution business to approximately 2500 SKUs, comprised of brake
parts.
Distribution
The Company provides rapid delivery of a broad variety of brake parts to
its customers. The Company operates one central warehouse at its 126,000
square foot headquarters facility located in Chicago, Illinois, and three
regional warehouses ranging in size from 4,000 to 40,000 square feet located
across North America with one warehouse located in the western United States in
Compton, California, one warehouse located in western Canada in Vancouver,
British Columbia, and one warehouse located in eastern Canada, in North York,
Ontario.
Manufacturing
The Company relocated its brake rotor manufacturing operations from Canada
to Laredo, Texas during the first two quarters of 1996. The Laredo, Texas
manufacturing facility has the capacity to machine from raw castings to
finished product approximately 720,000 rotors which represents 20% of the brake
rotor SKUs marketed under the Company's private label. Such facility became
fully operational in July 1996. The manufacture of brake rotors involves: (i)
the engineering and design of a pattern for each brake rotor SKU produced by
the Company; (ii) the formation of a raw iron casting by a foundry from the
brake rotor pattern; and (iii) the machining of the raw iron casting to the
specifications for the particular brake rotor SKU in production. The Company
owns approximately 216 patterns for the brake rotors it manufactures which are
used to pour the raw iron castings. The Company provides its brake rotor
patterns to several unaffiliated foundries which pour the raw iron castings
into molds made from such patterns and deliver them to the Company for
machining at its Laredo facility.
The Hungarian foundry acquired by the Company in October 1995 manufactures
iron casting products primarily for the European automotive and machine tool
industries. The foundry is not presently equipped to produce raw iron castings
for use in the manufacture of brake rotors.
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The brake friction parts manufactured by the Company consist of brake pads
and shoes. These manufacturing operations are conducted at the Company's UBP
Canholdings headquarters in North York, Ontario. In June 1996 the Company
acquired the assets and goodwill of North American Friction Inc., a Canadian
manufacturer of a brake friction component (conventional pucks and integrally
molded pads) used in the Company's brake friction manufacturing process.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"UVSL" and on The Chicago Stock Exchange under the symbol "UVS." The
Redeemable Common Stock Purchase Warrants are listed on the Nasdaq SmallCap
Market under the symbol "UVSLW" and on The Chicago Stock Market under the
symbol "UVSWS." The following table sets forth, for the periods indicated,
the high and low sale prices per share for the Common Stock and for the
Redeemable Common Stock Purchase Warrants as reported by the Nasdaq SmallCap
Market, on a quarterly basis, for the years 1995 and 1996. The Common Stock
and the Redeemable Common Stock Purchase Warrants were initially listed on the
Nasdaq SmallCap Market and on The Chicago Stock Exchange on December 15, 1994.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter ........................... $10.62 $ 9.50
Second Quarter .......................... $11.37 $ 9.62
Third Quarter ........................... $11.75 $10.50
Fourth Quarter .......................... $12.87 $11.12
1996
First Quarter ........................... $12.00 $ 6.75
Second Quarter .......................... $10.75 $ 9.50
Third Quarter ........................... $10.25 $ 7.62
Fourth Quarter .......................... $ 8.00 $ 1.25
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW
---- ---
1995
First Quarter ........................... $ 4.87 $ 4.12
Second Quarter .......................... 6.37 4.37
Third Quarter ........................... 6.87 5.68
Fourth Quarter .......................... 7.00 6.00
1996
First Quarter ........................... $ 6.63 $ 4.25
Second Quarter .......................... $ 6.50 $ 4.50
Third Quarter ........................... $ 5.25 $ 3.88
Fourth Quarter .......................... $ 4.00 $ 0.50
</TABLE>
As of May 27, 1997, there were approximately 850 beneficial holders of the
Common Stock.
The Company has not paid any cash dividends on its Common Stock. The
Company does not intend to declare or pay any cash dividends on the Common
Stock in the foreseeable future and anticipates that earnings, if any, will be
used to finance the development of and expansion of its business. Moreover,
the Company's bank lines of credit prohibit the declaration and payment of cash
dividends. Any payment of future dividends and the amounts thereof will be
dependent upon the Company's earnings, financial requirements, and other
factors deemed relevant
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<PAGE> 8
by the Company's Board of Directors, including the Company's contractual
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Report. The statement of operations data for the years ended December
31, 1996, 1995 and 1994 and the balance sheet data at December 31, 1996 and
1995 are derived from the audited financial statements of the Company included
elsewhere in this Report. The statement of operations data for the years ended
December 31, 1993 and 1992 and the balance sheet data at December 31, 1994,
1993 and 1992 are derived from audited financial statements not included
herein. The pro forma data are based on the circumstances described in the
accompanying footnotes and the information discussed in Note 1 of the Notes to
the Company's Consolidated Financial Statements.
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<TABLE>
<CAPTION>
(in thousands except for per share data)
Years Ended December 31, (1)
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................... $ 63,060 $ 46,815 $ 39,712 $ 33,170 $ 33,510
Cost of sales............................... 51,785 38,299 33,053 28,248 29,335
----------- ----------- ----------- ----------- ----------
Gross profit............................... 11,275 8,516 6,659 4,922 4,175
Selling, general and administrative expenses 10,599 7,688 5,350 4,353 2,653
----------- ----------- ----------- ----------- ----------
Income from operations...................... 676 848 1,309 569 1,522
----------- ----------- ----------- ----------- ----------
Other expense (income):
Equity in income of affiliate.............. (1) 6 (60) (181) 0
Interest expense........................... 1,184 843 689 366 296
Loss (Gain) on disposition of assets....... (44) (4) 70 0 43
Other...................................... (69) (29) 7 (54) (25)
----------- ----------- ----------- ----------- ----------
1,070 816 706 131 314
----------- ----------- ----------- ----------- ----------
Income (loss) before provision for income
taxes and cumulative effect of
accounting change.......................... (394) 32 603 438 1,208
Income tax provision (benefit) (2).......... 99 (32) 129 17 22
----------- ----------- ----------- ----------
Income (loss) before cumulative effect of
accounting change.......................... (493) 64 474 421 1,186
Cumulative effect of accounting change (4).. 0 0 47 0 0
----------- ----------- ----------- ----------- ----------
Net Income for period....................... $ (493) $ 64 $ 521 $ 421 $ 1,186
=========== =========== =========== =========== ==========
Pro forma income per share (2):
Income before provision for income taxes
and cumulative effect of accounting change $ 603 $ 438
Income tax provision....................... 128 170
----------- -----------
Income before cumulative effect of
accounting change......................... 475 268
Cumulative effect of accounting change...... 46 0
----------- -----------
Net income.................................. $ 521 $ 268
=========== ===========
Net income per common share:
Before cumulative effect adjustment........ $ (.07) $ .01 $ .10 $ .07
Cumulative effect adjustment............... 0 0 .01 0
----------- =========== =========== ===========
Net income per share........................ $ (.07) $ .01 $ .11 $ .07
=========== =========== =========== ===========
Common shares outstanding (3)............... 6,647,796 7,129,966 4,918,630 4,078,000
=========== =========== =========== ===========
December 31, (1)
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
Balance Sheet Data:
Working capital............................ $ 14,268 $ 14,327 $ 11,630 $ 1,973 $ 1,909
Total assets............................... 38,027 26,416 23,464 11,726 8,403
Long-term debt, less current portion....... 15,394 12,085 7,711 852 365
Total stockholders' equity................. 8,856 8,559 8,012 2,156 1,656
</TABLE>
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(1) The financial data as of and for the years ended December 31, 1992
include only the operations of Universal Automotive, Inc., the predecessor
of the Company. The financial data as of and for the year ended December
31, 1993 include the operations of the Company and IDC. For the period
from January 1, 1993 through September 30, 1993, certain
Stockholders/Executive Officers owned all of the issued and outstanding
capital stock of IDC Holdings Corporation, which owned 50% of
International Discus Corporation, and the investment in and the results of
operations of International Discus Corporation are recorded on the equity
method for such period. For the period from October 1, 1993 through
December 31, 1993, IDC Holdings Corporation owned 100% of International
Discus Corporation and the Company's Consolidated Financial Statements for
such period include, on a consolidated basis, the operations of Universal
and IDC. The financial data as of and for the year ended December 31,
1994 include, on a consolidated basis, the operations of Universal and IDC
and for the period from May 1, 1994 through December 31, 1994, also
include the operations of UBP Canholdings, which was acquired by the
Company effective April 30, 1994. The financial data as of and for the
year ended December 31, 1995 include, on a consolidated basis, the
operations of Universal, IDC and UBP Canholdings and, for the period from
October 2, 1995 through December 31, 1995, also included the operations of
UBP Hungary which was acquired by the Company effective October 2, 1995.
Pro forma information for UBP Hungary is not included because no financial
statements for periods prior to acquisition of the predecessor entity are
available. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 1 of the Notes to the
Company's Consolidated Financial Statements.
(2) For the period beginning on and after January 1, 1992 and terminating on
April 30, 1994, Universal elected to be treated as an "S Corporation"
under the Internal Revenue Code of 1986, as amended, whereby income or
loss of the Company is allocated to its stockholders by inclusion in their
respective individual income tax returns. Accordingly, no liability or
provision for federal income taxes is reflected for Universal for the
years ended December 31, 1993 and 1992, and for the period from January 1,
1994 through April 30, 1994. The pro forma income per share adjustment
for the years ended December 31, 1994 and 1993 reflect a provision for
federal income taxes as if the Company were a "C Corporation" rather than
an S Corporation for such periods. See "Market for Registrant's Common
Equity and Related Stockholder Matters," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 and
Note 7 of the Notes to the Company's Consolidated Financial Statements.
(3) For the year ended December 31, 1993 common shares outstanding have been
computed using the modified treasury stock method. Shares of common stock
sold within 12 months prior to the date of the public offering for a per
share price less than the initial public offering price are included in
the calculation of net income per share as if they had been outstanding
for the entire period. For the year ended December 31, 1994, common
shares outstanding are based on the weighted average number of shares
outstanding during the year. For the year ended December 31, 1995,
primary net income per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period using the treasury stock method
based on the average price of the stock during the period. Common stock
equivalents include shares issuable upon conversion of the Company's
warrants and options. Fully diluted net income per share is computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period using the
treasury stock method based on the end of the period stock price. Because
of the net loss incurred during 1996, common stock equivalents are not
included for such year in the weighted average number of shares
outstanding in determining loss per share. See Note 2 of the Notes to the
Company's Consolidated Financial Statements.
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<PAGE> 11
(4) As discussed in Note 2 to the Notes to the Company's Consolidated
Financial Statements, in 1994 the Company changed its method of
determining inventory costs for financial reporting purposes to include
capitalization of inbound customs and transportation costs. The
cumulative effect on prior years of this change was $47 (net of income
taxes of $29).
(5) Certain 1995 and 1994 selling, general and administrative expenses have
been reclassified to cost of sales to conform to 1996 classifications,
without affecting income from operations. Other reclassifications of
certain 1995 items have been made to conform to 1996 classifications.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS1
GENERAL
The Company is a manufacturer and distributor of brake rotors, drums, disc
brake pads, relined brake shoes, and wheel cylinders. The Company believes it
is the leading supplier of "value line" brake parts (brake parts sold at prices
significantly below those of certain leading national brand name brake parts)
to mass-market retailers, traditional warehouse distributors and specialty
undercar distributors in North America.
Change in Tax Status. For the period beginning on and after January 1,
1992 and terminating on April 30, 1994, the Company elected to be treated as an
"S Corporation" for federal income tax purposes under Subchapter S of the Code.
As a result, the Company's earnings for such period were taxed, for federal
and certain state income tax purposes, directly to the Company's stockholders
rather than to the Company. Since the termination of its S Corporation status
in April 1994, the Company has been subject to corporate income taxation as a
"C Corporation."
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 increased by $16,244,688 or
35% to $63,059,515 from $46,814,827 in 1995. Such increase was due to a 60%
increase in sales in the Company's brake parts business and a full year's
revenue of the Company's Hungarian foundry which was acquired in October 1995.
This increase was achieved despite a 49% sales decrease in the Company's
non-brake parts warehouse distribution business which was liquidated in 1996.
Gross profit for the year ended December 31, 1996 increased by $3,208,112
or 40% to $11,274,779 from $8,066,667 in 1995. Gross profit margin increased
from 17.2% in 1995 to 17.9% in 1996. The increase in gross profit was
attained as sales of higher margin brake related product continued to replace
sales of discontinued non-brake warehouse distribution business and inclusion
of a full year of operations of the Company's Hungarian foundry. The
increase in gross profit margin was attained due to the fact that sales of
brake related product is at a higher margin than the sales of non brake parts
which it replaced and despite significantly lower margins reported by the
Hungarian foundry.
Selling, general and administrative expense for the year ended December 31,
1996 were $10,599,238 or a 47% increase over the 1995 year of $7,219,126. Such
increase was due primarily to:
- ---------------------
(1) Some of the statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations may be considered to
be "forward looking statements" since such statements relate to matters which
have not yet occurred. For example, phrases such as "the Company anticipates,"
"believes" or "expects" indicate that it is possible that the event
anticipated, believed or expected may not occur. Should such event not occur,
then the result which the Company expected also may not occur or occur in a
different manner, which may be more or less favorable to the Company. The
Company does not undertake any obligation to publicly release the result of
any revisions to these forward looking statements that may be made to reflect
any future event or circumstances. Actual results could differ materially
from those projected in the forward looking statement.
9
<PAGE> 13
(i) an approximately $2,100,000 increase in selling and distribution expenses
of a mostly variable nature related to the sales increase in the UBP Brake
Parts business; (ii) an approximately $955,000 increase due to the inclusion
of a full year's results for the Company's Hungarian foundry; (iii) an
approximately $221,000 increase due to the acquisition in June 1996 of the North
American Friction brake pad manufacturing business; and (iv) a charge of
$195,000 to increase the reserve for bad debts to reflect collection risks
associated with a certain customer.
Income from operations for the year ended December 31, 1996 decreased by
$172,000 or 20% to $675,541 from $847,541 in 1995. This decrease resulted from
an increased loss from operations for the Hungarian foundry of approximately
$572,000, which was not offset by increased income from operations in the
Company's UBP Brake Parts business.
Interest expense for the year ended December 31, 1996 increased by
$340,785 or 40% to $1,184,018 from $843,233 in 1995. Such an increase resulted
in an overall increase in the Company's borrowing under its bank line of credit
and other subordinated borrowings which were used to finance (i) the overall
increase in sales and related increases in working capital requirements and
(ii) purchase of equipment and improvements for the manufacturing facilities
and the Hungarian foundry. Also, subordinated borrowings bear interest at
higher rates than bank borrowings.
Income (loss) before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1996 decreased by $426,299 to
a loss of $394,712 in 1996 from income of $31,587 in 1995. Net income (loss)
for the year ended December 31, 1996 decreased by $557,670 to a net loss of
$493,420 from net income of $64,250 in 1995. These decreases resulted from the
factors discussed above.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 increased by $7,102,698 or
18% to $46,814,827 from $39,712,129 in 1994. Such increase was due primarily
to increased sales in the Company's UBP Brake Parts distribution business. The
18% overall increase was achieved despite a 20% sales decrease in the Company's
Chicago warehouse distribution business.
Gross profit for the year ended December 31, 1995 increased by $1,759,496
or 28% to $8,066,667 from $6,307,171 in 1994. The gross profit margin
increased from 15.9% in 1994 to 17.2% in 1995. This increase is attributable
primarily to an increase in 1995 of brake part sales which generate higher
gross margins than sales of other automotive replacement parts.
Selling, general and administrative expenses for the year ended December
31, 1995 increased by $2,220,875 or 44% to $7,219,126 from $4,998,251 in 1994.
Such increase was due primarily to: (i) an approximately $1,100,000 increase
in selling and distribution expenses of a mostly variable nature related to the
sales increase in the UBP Brake Parts business; (ii) an approximately $500,000
increase due to the inclusion of UBP Canholdings' results for all of 1995,
compared to the inclusion of only eight months in 1994; (iii) an approximately
$250,000 increase in professional fees related primarily to the Company's stock
being publicly traded; (vi) an approximately $165,000 increase related to
expenses incurred by UBP Hungary, which was acquired in October 1995; and (v)
approximately $169,000 in stock option compensation cost.
10
<PAGE> 14
Income from operations for the year ended December 31, 1995 decreased by
$461,379 or 35% to $847,541 from $1,308,920 in 1994. This decrease resulted
from the increase in selling, general and administrative expenses.
Interest expense for the year ended December 31, 1995 increased by
$153,807 or 22% to $843,233 from $689,426 in 1994. Such increase resulted from
an increase in the Company's borrowing under its bank line of credit which was
used to finance (i) the overall increase in sales and the related increases in
working capital requirements and (ii) the acquisition of and improvements at
the Hungarian foundry.
Income before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1995 decreased by $571,398 or
95% to $31,587 from $602,985 in 1994. This decrease is attributable to the
overall increase in selling, general and administrative expenses discussed
above.
Net income for the year ended December 31, 1995 decreased by $457,125 or
88% to $64,250 from $521,375 in 1994. This decrease resulted from the factors
discussed above.
Year Ended December 31, 1994 Compared To Year Ended December 31, 1993
Net sales for the year ended December 31, 1994 increased by approximately
$6,542,000 or 20%, to $39,712,129 from $33,170,049 in 1993. Such increase was
due primarily to the Company's acquisition of UBP Canholdings in April 1994,
and the inclusion of approximately $6,000,000 for UBP Canholdings' net sales
from May 1994 through December 31, 1994.
Gross profit for the year ended December 31, 1994 increased by
approximately $1,368,785 or 28%, to $6,307,171 from $4,938,386 in 1993. Such
increase in gross profit was attributable, in part, to the inclusion of IDC's
operating results on a consolidated basis for the period. For the first nine
months of 1993 the Company's investment in IDC was accounted for by the equity
method. The increase in gross profit was also attributable to the inclusion of
UBP Canholdings' operating results for the period from May 1 to December 31,
1994, which led to a higher mix of brake parts sales on a consolidated basis
and an increase in brake part sales which generated higher gross margins.
Selling, general and administrative expenses for the year ended December
31, 1994 increased by approximately $644,872 or 15% to $4,998,251 from
$4,353,379 in 1993. Selling, general and administrative expenses for 1993
included an $866,000 bonus to an executive officer of the Company. Excluding
this 1993 bonus, the increase in selling, general and administrative expenses
for 1994 would have been $1,510,872. Such increase was due primarily to (i) the
addition of approximately $1,300,000 of expenses as a result of the acquisition
of UBP Canholdings and the treatment of IDC's and UBP Canholdings' (for the
period from May 1, 1994 to December 31, 1994) operating results on a
consolidated basis and (ii) approximately $200,000 in expenses incurred in
connection with the Company's relocation to its new headquarters and central
warehouse facility in June 1994.
Income from operations for the year ended December 31, 1994 increased by
approximately $723,000 or 123%, to $1,308,920, from $585,007 in 1993. This
increase resulted from the increase in gross profit of $689,426 exceeding the
increase in selling, general and administrative expenses.
Interest expense for the year ended December 31, 1994 increased by
approximately $323,000 or 88% to $689,426, from $365,651 in 1993. Such
increase resulted from: (i) an increase in the Company's borrowing under its
bank lines of credit; (ii) the purchase by the Company in January 1994 of its
new
11
<PAGE> 15
headquarters and central warehousing facility for a purchase price of
$1,750,000, all of which was financed by bank debt; (iii) the inclusion of
IDC's interest expense on a consolidated basis; (iv) increased borrowing to
finance the Company's recent acquisition of new manufacturing machinery; and
(v) an increase in the Company's lenders' reference rates of interest on which
the interest rates on a substantial portion of the Company's indebtedness
were based.
Income before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1994 increased by
approximately $165,000 or 38%, to $602,985, from $438,132 in 1993.
Net income for the year ended December 31, 1994 increased by approximately
$100,000 or 24%, to $521,375, from $420,783 in 1993. This increase resulted
from the factors discussed above.
CAPITAL EXPENDITURES
For the year ended December 31, 1994, capital expenditures totaled
approximately $3,180,000 consisting primarily of: (i) the purchase and
improvement of the Company's headquarters facility in Chicago, Illinois for
approximately $1,825,000; (ii) the purchase of new manufacturing machinery and
brake rotor patterns for approximately $885,000; and (iii) the purchase of new
warehousing and computer equipment and fixtures for approximately $340,000.
For the year ended December 31, 1995, capital expenditures totaled
approximately $1,983,000 consisting primarily of: (i) the acquisition of the
Hungarian foundry for approximately $960,000; (ii) the expenditure of
approximately $200,000 for improvements and renovations to the Hungarian
foundry; and (iii) approximately $700,000 for the acquisition of machinery and
new brake rotor SKU patterns for the raw iron castings used in the Company's
brake rotor manufacturing operations.
For the years ended December 31, 1996, capital expenditures totaled
approximately $3,973,000, consisting primarily of: (i) the acquisition of
brake friction manufacturing machinery and equipment for approximately
$2,300,000; (ii) the acquisition of machinery, equipment and additional brake
rotor patterns to expand the brake rotor manufacturing capacity for
approximately $600,000; and (iii) upgrade and renovation of the Hungarian
foundry for approximately $1,000,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary liquidity needs have been associated
with carrying accounts receivable and maintaining inventories. Prior to the
Company's initial public offering, which was completed in December 1994, the
Company relied on internally generated funds, credit made available from
suppliers and bank lines of credit. The Company's working capital needs are
generally not seasonal in nature, although business slows down slightly during
the winter months. Certain capital expenditures have been funded through bank
loans and capital lease arrangements.
In May 1995 the Company entered into a credit agreement (the "Credit
Agreement") with NBD Bank ("NBD"), pursuant to which NBD (i) replaced all
previously existing American National Bank facilities and loans and (ii)
consolidated existing credit facilities and loans for both the United States
and Canadian entities. The Credit Agreement, as amended from time to time,
permits revolving line of credit borrowings in amounts up to $12,000,000 due
May 18, 2000 and additional borrowings of up to $500,000 to finance equipment
purchases, to be paid off over a five-year term. Under the Agreement, the Bank
also (i) refinanced the first mortgage on the Company's headquarters for a
total of $1,300,000 due in April,
12
<PAGE> 16
2000 and (ii) extended to the Company an authorization to finance the
acquisition of machinery and equipment. It should be noted that NBD
subsequently merged with First National Bank of Chicago, and as a result of such
merger, the Credit Agreement, as amended, has been transferred back to its
American National Bank subsidiary (collectively, the "Bank"). In addition, as
noted below, the Company also obtained an additional $2,000,000 line of credit
for equipment acquisitions and a $2,250,000 credit facility from NBD (Frankfurt)
to fund its Hungarian foundry operations.
The Agreement, as amended, contains certain limitations on dividends and
capital expenditures and requires the Company to satisfy certain financial
covenants, including, without limitation, ratios of current assets to current
liabilities, cash flow to fixed charges ratios and minimum tangible net worth.
As of December 31, 1996, the Company was in violation of three of these
financial covenants. The Bank entered into a waiver agreement whereby the Bank
waived the event of default with respect to such covenants as of and for the
quarter ended December 31, 1996. The Company anticipates, although it cannot
guarantee, that improved operations and additional financing will bring the
Company back into compliance with the loan covenants in question.
All borrowings under the Credit Agreement are at the bank's prime rate
(8.25% at December 31, 1996) and/or various LIBOR options, except for the term
loans described below, for which the Company has chosen a fixed rate. The
facilities are secured by a first lien on substantially all of the Company's
North American assets and by a pledge of all of the outstanding capital stock
of the Company's subsidiaries. At December 31, 1996, approximately $496,000
was available for borrowing under the revolving line of credit.
The first mortgage note on the Company's headquarters facility is payable
to the Bank in quarterly installments of $16,250 plus interest. The Company
has entered into a fixed interest rate swap agreement with the Bank which
fixes the rate of interest the Company pays at a rate of 8.58%. The swap
contract is settled on a quarterly basis with the Company either paying or
receiving the difference between the fixed rate specified in the contract and
the current floating rate. For the years ended December 31, 1996 and 1995,
the Company paid a net amount of $6,495 and $657 under this agreement. The
Company is exposed to off-balance sheet risk in the event of nonperformance by
the Bank; however, the Company believes the Bank will be able to satisfy its
obligation under the contract.
The Company has outstanding notes payable to the Bank (pursuant to its
authorization to borrow up to $2,500,000 for the acquisition of machinery and
equipment) in the aggregate amount at December 31, 1996 of approximately
$1,970,000. These notes are payable in monthly installments of approximately
$62,700 including interest at rates ranging from 9.1% to 11% per annum. All of
the notes mature between 1999 and 2001 and are collateralized by first liens
on all of the Company's assets, pursuant to the Credit Agreement.
On January 2, 1996, the Bank's European branch located in Frankfurt,
Germany extended: (a) a line of credit facility of $750,000 (maturing December
31, 1997); and (b) a $1,500,000 term loan (maturing 5 years from the dates of
specific borrowings) to the Hungarian subsidiary to be used in connection with
its foundry operations in Hungary, both of which loans are secured by all the
assets of that entity. Such borrowings (denominated in Deutsche Marks) bear
interest at the bank's prime rate or various LIBOR options. As of December 31,
1996, total borrowings on the line of credit and term loan were approximately
$1,371,000.
As of December 31, 1996, the Company was obligated under notes payable to
one of its directors and a general partnership managed by another of its
directors in the aggregate principal amount of
13
<PAGE> 17
$350,000. Both notes bear interest at the rate of 11% per annum and contain
options to purchase 14,000 shares of the Company's Common Stock at $5.00
per share. Such notes mature during 1997 and are subordinated to the Company's
bank indebtedness. As of such dates, the Company also was obligated under notes
payable to four unaffiliated persons in the aggregate principal amount of
$700,000. Such notes bear interest at rates ranging from 9% to 11% per annum
and contain options to purchase 28,000 shares of the Company's Common Stock at
$5.00 per share. Such notes mature during 1997 and are subordinated to the
Company's bank indebtedness.
As of December 31, 1996, the Company's Canadian subsidiary was indebted to
an employee in the amount of approximately $204,000 due on demand at an annual
interest rate of 11%. The Company also has due a swingline note to one Bank in
the amount of $500,000 due May 31, 1997 plus interest at rates in effect for
the Credit Agreement.
The Company believes that cash generated from operations, borrowings under
the Company's Bank lines of credit, credit from its suppliers and the net
proceeds additional financing in the form of senior or subordinated debt or
additional equity financing will be sufficient to fund its working capital
requirements and capital expenditures through 1997.
SEASONALITY
The Company's business is slightly seasonal in nature, primarily as a
result of the impact of weather conditions on the demand for automotive
replacement parts. Historically, the Company's sales and profits have been
slightly higher in the second and third calendar quarters of each year than in
the first or fourth quarters.
EFFECTS OF INFLATION
The Company historically has been able to diminish the effects of
inflationary cost expenses through increased prices to customers and
productivity improvements. Non-inventory cost increases, such as payroll,
supplies and services, have generally been offset through price increases.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The new standard, which was adopted in 1996,
did not have a significant effect on the Company's results of operations, cash
flows or financial position.
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation" allows companies to measure compensation cost in
connection with employee stock compensation plans using a fair market value
method or to continue to use an intrinsic value based method. The Company has
adopted only the disclosure provision of SFAS No. 123 and continues to account
for stock options in accordance with APB Opinion No. 25. The Company currently
plans to continue using the intrinsic value based method.
14
<PAGE> 18
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, related notes, and the
report of the independent certified public accountants follow on subsequent
pages of this report.
15
<PAGE> 19
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
FINANCIAL STATEMENTS:
<S> <C>
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-5
Consolidated Statements of Operations, for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-5
</TABLE>
F-1
<PAGE> 20
[ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Universal Automotive Industries, Inc.
We have audited the accompanying consolidated balance sheets of UNIVERSAL
AUTOMOTIVE INDUSTRIES, INC. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 did not audit the financial statements of wholly owned foreign
subsidiaries (Note 1) which statements reflect aggregate total assets of
$14,090,590 and $8,960,023 as of December 31, 1996 and 1995 and aggregate total
revenue of $16,250,090, $11,547,447 and $6,774,331 for the respective three
years then ended. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for such subsidiaries is based solely on the reports of
the other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Universal Automotive
Industries, Inc. as of December 31, 1996 and 1995, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, in 1994 the Company changed
its method of accounting for inbound customs and transportation costs.
/s/Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
March 19, 1997
F-2
<PAGE> 21
[BDO DUNWOODY LETTERHEAD]
================================================================================
AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE DIRECTORS OF
UBP CANHOLDINGS INC.
We have audited the consolidated balance sheets of UBP Canholdings Inc. as at
December 31, 1996 and 1995 and the consolidated statements of operations and
retained earnings and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards applicable in Canada, which do not differ significantly from those in
the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31,
1996 and 1995 and the results of its operations and its cash flows for the
years then ended in accordance with generally accepted accounting principles.
/s/ BDO Dunwoody
Chartered Accountants
Hamilton, Ontario, Canada
February 28, 1997
F-3
<PAGE> 22
ARTHUR
ANDERSEN
-------------------------------------
UBP-Csepel Iron Foundry Kft. Arthur Andersen Audit Kft
Budapest
Cyepsor u.1.
1211 -------------------------------------
East-West Business Center
H-1088 Budapest
Rakoezi ut 1-3
Postacim: 1443 Budapest 70 Pf 300/31
Telefon: (36-1) 327-7100
Telefax: (36-1) 327-7199
This is the English translation of the Hungarian original (Note 0)
Independent Auditors' Report
The English translation of the Annual Report is incomplete since the
Business Report is only available in Hungarian. Although this report is
signed, in the event of any discrepancy between the Hungarian language
original and this English language translation, the Hungarian language
version shall prevail. The following is a translation to English of the
Hungarian language original audit opinion on the complete Annual Report:
"To the quotaholder of UBP-Csepel Iron Foundry Kft:
We have audited the accompanying balance sheet of UBP-Csepel Iron
Foundry Kft. ("the Company") as at 31 December 1996, which shows total
assets of HUF'000 580,198 and a retained loss for the year of HUF'000
128,943, the related profit and loss account for the year then ended,
and the supplement (collectively "the financial statements") included in
the Company's 1996 Annual Report. The Annual Report, comprising the
financial statements and a Business Report, is the responsibility of the
Company's management. Our responsibility is to express an opinion on
the financial statements based on our audit. In addition, it is our
responsibility to assess whether the accounting information in the
Business Report is consistent with that contained in the financial
statements.
We had also audited the Company's Annual Report for the year ended
December 31, 1995 and issued an unqualified opinion. Reference is made
to our Auditors' Report dated 16 February 1996.
F-4
<PAGE> 23
ARTHUR
ANDERSEN
-2-
We conducted our audit in accordance with the International Standards on
Auditing and applicable laws and regulations in Hungary. 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. Our work with respect to
the Business Report was limited to checking it within the aforementioned
scope, and did not include a review of any information other than that
drawn from the audited accounting records of the Company. We believe
that our audit provides a reasonable basis for our opinion.
This Annual Report has been prepared for the consideration of the owner
at the forthcoming General Meeting and does not reflect the effects, if
any, of resolutions that might be adopted at that meeting. In our opinion,
except for the effects, if any, of resolutions that might be adopted at the
forthcoming General Meeting, the Annual Report has been prepared in accordance
with the provisions of the Act on Accounting and accounting principles
generally accepted in Hungary and gives a true and fair view of the financial
position of the UBP-Csepel Iron Foundry Kft. as at 31 December 1996 and of the
results of its operations for the year then ended.
Budapest, 19 February 1997
/s/Emery Jakab /s/ Laszlo Bary
Emery Jakab Laszlo Bary
Arthur Andersen Audit Kft. Registered Auditor
[KF-0660/96./V.] [K1-0363/92./XII.]
F-4(a)
<PAGE> 24
Exhibit A
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash $ 63,706 $ 401,117
Accounts receivable, trade (net of allowance
for doubtful accounts of $463,968 and
$92,461 in 1996 and 1995) 11,919,002 8,446,630
Inventories (Notes 2 and 3) 14,441,523 10,362,510
Income taxes refundable (Note 7) 183,049 302,313
Deferred income taxes (Note 7) 488,700 220,400
Prepaid expenses and other current assets 949,114 365,416
------------- -------------
28,045,094 20,098,386
------------- -------------
Property and Equipment (net of accumulated
depreciation--Notes 2 and 3) 8,836,272 5,254,644
------------- -------------
Other Assets:
Investments 0 60,316
Goodwill, net of accumulated amortization of
$77,378 and $64,112 in 1996 and 1995 (Note 2) 260,581 239,305
Other assets 884,824 763,184
------------- -------------
1,145,405 1,062,805
------------- -------------
$ 38,026,771 $ 26,415,835
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 8,583,217 $ 4,850,584
Long-term indebtedness, current portion (Note 6) 2,710,583 407,079
Subordinated notes (Note 4) 1,050,000 0
Accrued expenses and other current liabilities 1,432,963 513,930
------------- -------------
13,776,763 5,771,593
------------- -------------
Long-term Liabilities:
Revolving loan indebtedness (Note 5) 11,432,525 9,332,583
Long-term indebtedness, noncurrent portion (Note 6) 2,710,145 2,036,866
Deferred income taxes (Note 7) 323,213 181,818
Due to affiliates 0 201,617
Due to stockholders (Note 9) 927,724 332,371
------------- -------------
15,393,607 12,085,255
------------- -------------
Commitments and Contingencies (Notes 5, 8 and 11)
Stockholders' Equity (Note 1):
Preferred stock (authorized 1,000,000 shares,
$.01 par value, none issued or outstanding) 0 0
Common stock (authorized 15,000,000 shares,
$.01 par value, 6,729,425 and 6,500,000 shares
issued and outstanding) 67,294 65,000
Additional paid-in-capital 7,777,788 6,976,204
Retained earnings 1,038,465 1,531,885
Foreign currency translation adjustments ( 27,146) ( 14,102)
------------- -------------
8,856,401 8,558,987
------------- -------------
$ 38,026,771 $ 26,415,835
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 25
Exhibit B
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statement of Operations
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales $ 63,059,515 $ 46,814,827 $ 39,712,129
Cost of Sales 51,784,736 38,748,160 33,404,958
------------- ------------- -------------
Gross Profit 11,274,779 8,066,667 6,307,171
Selling, General and Administrative Expenses 10,599,238 7,219,126 4,998,251
------------- ------------- -------------
Income from Operations 675,541 847,541 1,308,920
------------- ------------- -------------
Other Expense (Income):
Equity in income (loss) of affiliate ( 827) 6,254 ( 60,151)
Interest expense 1,184,018 843,233 689,426
(Gain) Loss on disposition of assets ( 44,182) ( 4,093) 69,860
Other ( 68,756) ( 29,440) 6,800
------------- ------------- -------------
1,070,253 815,954 705,935
------------- ------------- -------------
Income (Loss) before Provision for Income
Taxes and Cumulative Effect of Accounting
Change ( 394,712) 31,587 602,985
------------- ------------- -------------
Income Tax Provision (Benefit) (Note 7):
Current 225,613 ( 111,081) 245,387
Deferred ( 126,905) 78,418 ( 117,000)
------------- ------------- -------------
98,708 ( 32,663) 128,387
------------- ------------- -------------
Income (Loss) before Cumulative Effect of
Accounting Change ( 493,420) 64,250 474,598
Cumulative Effect of Accounting Change -
Net of Income Taxes of $28,600 (Note 2) 0 0 46,777
------------- ------------- -------------
Net Income (Loss) ($ 493,420) $ 64,250 $ 521,375
============= ============= =============
Earnings (Loss) per Share (Note 2):
Primary:
Net income (loss) per common share ($ .07) $ .01
============= =============
Weighted average number of
common shares outstanding 6,647,796 7,129,966
============= =============
Fully diluted:
Net income per common share $ .01
=============
Weighted average number of
common shares outstanding 7,293,056
=============
Pro Forma:
Net income before cumulative effect adjustment $ .10
Cumulative effect adjustment .01
-------------
Net income per common share $ .11
=============
Weighted average number of common shares
outstanding 4,918,630
=============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 26
Exhibit C
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Currency
Shares Paid-in Retained Translation
Outstanding Amount Capital Earnings Adjustments Total
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 4,160,000 $ 1,780 $ 409,003 $ 1,745,268 $ 2,156,051
Net Income for 1994 521,375 521,375
Distributions to S-Corporation
Stockholders for 1994 ( 237,371) ( 237,371)
Acquisition of 547647 Ontario Limited 1,040,000 10,400 412,763 423,163
Transfer to Conform to Exchange
of Shares--(Note 1) 39,820 ( 39,820) 0
Undistributed S-Corporation Earnings
Reclassified to Paid-in Capital 561,637 ( 561,637) 0
Proceeds (net) from Common stock
Offering (Note 1) 1,300,000 13,000 5,153,729 5,166,729
Foreign Currency Translation
Adjustment ($ 17,568) ( 17,568)
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1994 6,500,000 65,000 6,497,312 1,467,635 ( 17,568) 8,012,379
Net Income for 1995 64,250 64,250
Elimination of Minority Interest 309,517 309,517
Stock Options Recorded as Compensation (Note 12) 169,375 169,375
Foreign Currency Translation Adjustment 3,466 3,466
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1995 6,500,000 65,000 6,976,204 1,531,885 ( 14,102) 8,558,987
Net Loss for 1996 ( 493,420) ( 493,420)
Exercise of Warrants and Exchange of
Shares by Underwriters (Note 12) 51,325 513 ( 383) 130
Shares Issued as Partial Consideration
for Acquisitions of Assets 137,200 1,372 305,229 306,601
Shares Issued in Lieu of Cash for
Consulting/Noncompete Agreement (Note 8) 39,500 395 341,805 342,200
Exercise of Stock Options 1,400 14 6,986 7,000
Stock Options Recorded as Compensation (Note 12) 147,947 147,947
Foreign Currency Translation Adjustment ( 13,044) ( 13,044)
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1996 6,729,425 $ 67,294 $ 7,777,788 $ 1,038,465 ($ 27,146) $ 8,856,401
=========== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 27
Exhibit D
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statement of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ($ 493,420) $ 64,250 $ 521,375
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 1,006,808 515,870 353,139
Provision for bad debts 472,732 188,015 206,556
Write down of investment 0 0 59,485
(Gain)/loss on disposition of
assets ( 44,182) ( 4,093) 69,860
Equity in income of subsidiary ( 827) 6,254 ( 60,151)
Effect of exchange rate changes ( 13,044) 3,466 ( 17,568)
Deferred income taxes ( 126,905) 78,418 ( 117,000)
Compensation expense for stock
options 147,947 169,375 0
Increase (Decrease) in cash from
changes in:
Accounts receivable, trade ( 3,945,104) ( 1,687,887) ( 1,206,298)
Inventories ( 4,079,013) ( 1,486,530) ( 1,696,966)
Prepaid expenses and other
current assets ( 464,432) ( 337,623) ( 180,047)
Increase in other assets ( 56,332) ( 507,609) ( 190,375)
Accounts payable, trade 3,732,633 ( 706,596) 1,935,286
Accrued expenses and other
liabilities 919,860 ( 195,367) ( 194,310)
------------ ------------ ------------
Net cash used in operating activities,
forward ( 2,943,279) ( 3,900,057) ( 517,014)
------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of subsidiary 0 ( 1,163,290) 0
(Increase) Decrease in advances to
partially owned entity ( 141,301) 330,091 ( 29,250)
Purchase of property and equipment ( 3,973,180) ( 1,028,349) ( 3,180,137)
Proceeds from disposition of assets 56,988 4,248 75,225
(Increase) Decrease in cash value
of life insurance policies ( 65,846) ( 41,135) 3,293
------------ ------------ ------------
Net cash used in investing activities,
forward ($4,123,339) ($1,898,435) ($3,130,869)
============= ============ ============
</TABLE>
F-8
<PAGE> 28
Exhibit D, Continued
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statement of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net cash used in operating activities,
forwarded ($ 2,943,279) ($ 3,900,057) ($ 517,014)
------------ ------------ ------------
Net cash used in investing activities,
forwarded ( 4,123,339) ( 1,898,435) ( 3,130,869)
------------ ------------ ------------
Cash Flows from Financing Activities:
Issuance of common stock 7,130 0 5,166,729
Net increase (decrease) in revolving
loan indebtedness 2,099,941 4,146,961 ( 260,049)
Proceeds on notes payable 3,535,280 1,590,780 3,744,576
Principal payments on notes payable ( 558,497) ( 2,386,899) ( 1,852,960)
Proceeds from (Payments on)
stockholder loans, net 595,353 ( 117,629) 0
Distributions to stockholders 0 0 ( 237,371)
Net proceeds from subordinated notes 1,050,000 0 0
------------ ------------ ------------
Net cash provided by financing
activities 6,729,207 3,233,213 6,560,925
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents ( 337,411) ( 2,565,279) 2,913,042
Cash and Cash Equivalents, Beginning
of Period 401,117 2,966,396 53,354
------------ ------------ ------------
Cash and Cash Equivalents, End of
Period $ 63,706 $ 401,117 $ 2,966,396
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 1,151,986 $ 875,864 $ 617,057
=========== =========== ============
Income taxes $ 383,140 $ 132,903 $ 292,782
=========== =========== ============
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Assets acquired by issuance of stock $ 648,801 $ 0 $ 732,441
=========== =========== ============
Equipment acquired by capital lease $ 0 $ 0 $ 240,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 29
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 1--Structure and Common Stock Offering:
Universal Automotive Industries, Inc. (the Company) was incorporated in
January 1994 to act as a holding company for its direct and indirect
subsidiaries which as of December 31, 1996 are as follows:
Universal Automotive, Inc. (Universal), a United States Corporation.
Canadian Corporations:
UBP Canholdings, Inc. (Canholdings) and its wholly owned subsidiaries:
Universal Brake Parts, Inc.
International Discus Corporation (Inactive) (IDC)
UBP Hungary, Inc. (Hungary), a United States Corporation and its
wholly-owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian
limited liability company, (both formed in September, 1995).
In January 1996, the Company acquired the remaining 50% interest in UBP
Friction, Inc., which was thereupon merged into Canholdings.
On April 30, 1994, the shareholders of Universal and IDC (entities under
common control) exchanged their shares in Universal and IDC for 80%
(4,160,000 shares) of the outstanding shares of the Company. In addition,
the shareholder of Canholdings exchanged the outstanding shares of
Canholdings for 20% (1,040,000 shares) of the outstanding shares of the
Company. Immediately preceding the transaction, Universal purchased the net
assets of Aaron Automotive Industries, Inc., a United States subsidiary of
Canholdings, for book value of $27,410. The subsidiary was liquidated in
1995.
On December 15, 1994, the Company issued 1,300,000 shares of its common
stock, at $5.00 per share, in a public common stock offering. Proceeds from
the offering, net of commissions and other related expenses totalling
$1,333,271 were $5,166,729. In connection with the public offering, the
Company effected a 5,200 to 1 stock split to increase the 1,000 previously
outstanding shares of common stock to 5,200,000 shares of common stock,
therefore requiring a transfer of $39,820 from additional paid-in capital to
common stock. All references to number of shares and to per share
information in the consolidated financial statements reflect the stock split
and share authorization amount for all periods presented.
F-10
<PAGE> 30
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 1--Structure and Common Stock Offering, Continued:
The April 30, 1994 transfer of shares of Canholdings for 20% of the
outstanding shares of the Company has been recorded at the transferor's
historical cost rather than fair value as required by generally accepted
accounting principles. Management indicates there was no material
difference between the transferor's historical cost and the fair value of
the assets acquired and liabilities assumed at April 30, 1994. Assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Current assets $ 2,463,610
Property and equipment 254,820
Other assets 210,303
Liabilities assumed ( 2,196,292)
------------
Purchase price 732,441
Less--minority interest (Note 3) 309,278
------------
Amount credited to stockholders' equity
on issuance of shares $ 423,163
============
</TABLE>
On September 29, 1995, Hungary acquired assets of the Csepel Iron Foundry of
Budapest, Hungary. The acquisition was accounted for as a purchase and the
cost of the acquisition was allocated to reflect the fair value of the
assets purchased:
<TABLE>
<S> <C>
Inventory $ 174,226
Property and equipment 989,064
----------
Purchase price $1,163,290
==========
</TABLE>
Supplemental unaudited pro forma information for Hungary is not included
because no financial statements for periods prior to acquisition for the
predecessor entity are available.
Note 2--Nature of Activities and Summary of Significant Accounting Policies:
Universal Automotive Industries, Inc. is engaged principally in the
manufacture and distribution of automotive brake parts and supplies
operating from facilities in Chicago, Illinois, Compton, California, Dallas
and Laredo, Texas, Vancouver, Canada and Ontario, Canada. Sales are made
throughout the United States and Canada. The Company's Hungarian subsidiary
is engaged in the manufacture of iron casting products, primarily for the
automotive and machine tool industries. All of its sales are in Europe.
F-11
<PAGE> 31
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 2--Nature of Activities and Summary of Significant Accounting Policies,
Continued:
A summary of significant accounting policies is as follows:
Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
Foreign Currency Translation--For Canholdings, the local currency is the
functional currency and translation adjustments are accumulated in a
separate component of stockholders' equity. In 1995, the local currency
was also the functional currency for Hungary. In 1996, the Company
determined that the country of Hungary's economy qualifies as a "highly
inflationary economy" and thus Hungary's financial statements have been
remeasured as if the functional currency is the U.S. dollar. Such
remeasurement creates adjustments which are included in the
determination of net income (loss).
Inventories--Inventories are stated at the lower of cost or market
value with cost generally determined using the weighted average method,
which approximates the first-in, first-out (FIFO) method.
Depreciation--Depreciation of property and equipment has been computed
under accelerated and straight line methods for financial reporting
purposes, and accelerated methods for income tax reporting purposes,
over the estimated useful lives of the assets.
Cost of Sales--The Company considers warehousing (including certain
salaries, occupancy costs, supplies) and buying expenses as an integral
component of cost of sales.
Goodwill--Goodwill represents the excess of the cost of various
companies acquired, over the fair value of the net assets at their
respective dates of acquisition. Such goodwill is being amortized over
20 to 40 years using the straight-line method.
F-12
<PAGE> 32
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 2--Nature of Activities and Summary of Significant Accounting Policies,
Continued:
Derivatives--The Company has only limited derivative financial
instruments and does not use them for trading purposes. Amounts
receivable or payable under the interest rate swap agreement are
recognized as additions to or deductions from interest expense.
Income Taxes--Until April 30, 1994, Universal had elected to be treated
as an S corporation under the Internal Revenue Code, whereby income or
loss of Universal was allocated to its stockholders, by inclusion in
their respective individual income tax returns. Accordingly, no
liability or provision for federal income taxes was reflected in the
accompanying financial statements, nor were any deferred taxes provided
for temporary differences between tax and financial reporting. However,
Universal continued to be subject to various state and local income
taxes.
Effective April 30, 1994, the S corporation election for Universal was
terminated as a result of the business combination referred to in Note
1. As a result of such termination, deferred income taxes were provided
subsequently for temporary differences between financial statement and
tax bases of certain assets and liabilities. Deferred income tax assets
and liabilities are recognized for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. Under this method, deferred income tax assets and liabilities
are determined based on the financial statement and tax bases of assets
and liabilities (Note 7).
Accounting Change--During the fourth quarter of 1994, the Company
refined the method of determining inventory costs for financial
reporting purposes to include capitalization of inbound customs and
transportation costs. Previously, all inbound customs and
transportation costs had been charged to expense when incurred because
the amount of such costs that would have been capitalized as an
inventory cost were not considered material. The Company believes that
this refinement provides a better measurement of operations by more
closely matching revenue with expenses particularly since such costs
have been increasing as related to purchases of inventory. The
cumulative effect on prior years of this change was $46,777 (net of
income taxes of $28,600) or $.01 per share. The effect of this change
was to increase 1994 net income by $40,919 (net of income taxes of
$25,100) or $.01 per share.
Pro Forma Net Income per Share--Common shares outstanding for 1994 are
based on the weighted average number of common shares outstanding. For
the year ended December 31, 1994, the warrants issued in connection with
the initial public offering (Note 1) were not considered common stock
equivalents because they were not outstanding for a sufficient period of
time to qualify as a common stock equivalent.
F-13
<PAGE> 33
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 2--Nature of Activities and Summary of Significant Accounting Policies,
Continued:
Net Income Per Share--Primary net income per share is computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period using
the treasury stock method based on the average price of the stock during
the period. Common stock equivalents include shares issuable upon
conversion of the Company's warrants and options. Fully diluted net
income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period using the treasury stock method based on
the end of the period stock price.
Because of the net loss incurred during 1996, common stock equivalents
are not included for such year in the weighted average number of shares
outstanding in determining loss per share. Also, there is no
presentation of fully diluted loss per share required for 1996.
Reclassification--Certain 1995 and 1994 selling, general and
administrative expenses have been reclassified to cost of sales to
conform to 1996 classifications, without affecting income from
operations. Other reclassifications of certain 1995 items have been
made to conform to 1996 classifications.
Note 3--Selected Financial Statement Data:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Inventories:
Finished goods $13,027,987 $ 9,602,755
Work-in-process 229,588 306,625
Raw materials 1,183,948 453,130
----------- -----------
$14,441,523 $10,362,510
=========== ===========
Estimated
Lives
---------
Property, plant and equipment:
Machinery and equipment 5 to 11 years $ 4,929,024 $ 2,671,836
Building and improvements 25 to 39 years 2,734,526 1,999,040
Land 498,835 419,569
Tools and dies 5 to 11 years 539,623 53,462
Patterns 5 to 10 years 761,717 409,504
Computer equipment 3 to 5 years 457,792 315,726
Autos and trucks 3 to 5 years 351,643 366,766
Furniture and fixtures 5 to 11 years 278,346 248,771
Leasehold improvements 5 years 219,511 98,356
------------ ------------
10,771,017 6,583,030
Less accumulated depreciation ( 1,934,745) ( 1,328,386)
------------ ------------
$ 8,836,272 $ 5,254,644
============ ============
</TABLE>
F-14
<PAGE> 34
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 3--Selected Financial Statement Data, Continued:
Depreciation expense amounted to $663,746, $452,885 and $308,969, for 1996,
1995 and 1994, respectively.
Total bad debt expense included in selling, general and administrative
expenses was $472,732, $188,015 and $206,556 for the years ending 1996,
1995, and 1994, respectively.
Note 4--Subordinated Notes:
At December 31, 1996, the following notes were owing, maturing in 1997.
Such notes are subordinated to bank indebtedness (Note 5).
To a company director and a general partnership
managed by another company director (both bearing
interest at 11% per annum and containing options
to purchase 14,000 shares of company stock at
$5.00 per share) $350,000
To four nonaffiliated individuals (bearing interest at
9% to 11% and containing options to purchase 28,000
shares of company stock at $5.00 per share) 700,000
----------
$1,050,000
==========
Note 5--Revolving Loan Indebtedness:
Revolving loans payable to NBD Bank (see below) or its affiliate American
National Bank amounted to $11,432,525 and $9,332,583 at December 31, 1996
and 1995.
The Company entered into a credit agreement (the "Agreement") with NBD Bank
in May 1995. Subsequently, NBD merged with First National Bank of Chicago
which in 1996 transferred the Agreement as amended from time-to-time to
American National Bank, (collectively, the Bank). The amended Agreement
permits revolving line of credit borrowings in amounts up to $12,000,000 due
in May 2000, and additional borrowings of up to $500,000 to finance
equipment acquisitions to be paid off over a five-year term (included in
Item D in Note 6). Under the Agreement, the Bank also (i) refinanced the
first mortgage on the Company's headquarters for a total of $1,300,000 due
in April 2000 (Note 6) and (ii) extended to the Company an authorization to
finance the acquisition of machinery and equipment (Note 6(B)). The
Agreement contains certain limitations on dividends and capital expenditures
and requires the Company to satisfy certain financial tests, including,
without limitation, ratios of liabilities to tangible net worth, cash flow
to fixed charges ratios and minimum tangible net worth. At December 31,
1996, the Company had violated certain of such covenants and has received a
bank waiver therefor. All borrowings are at the bank's prime rate and/or
various LIBOR options, except for the term loans for which the Company can
choose a fixed rate. The facilities are secured by a first lien on
substantially all of the Company's North American assets. At December 31,
1996, approximately $496,000 was available for borrowing under this
Agreement.
F-15
<PAGE> 35
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 5--Revolving Loan Indebtedness, Continued:
At December 31, 1996 the Company was contingently liable under the revolving
credit agreement on outstanding letters of credit totaling approximately
$71,400.
The weighted average interest rates on the aforementioned borrowings were
7.54%, 8.26% and 7.96% for the years ended December 31, 1996, 1995, and
1994, respectively.
Because the revolving loan interest rate adjusts with changes in the market
rate of interest, management believes the fair value of the revolving loan
is equal to its carrying value.
Note 6--Long-term Indebtedness:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Long-term indebtedness consisted of the
following:
First mortgage loan on
Chicago headquarters (see A below) $1,186,250 $1,251,250
Notes payable to NBD, Canada
(see B below) 1,635,723 920,277
Note payable by Canholdings in
connection with loans made by
individuals (see C below) 203,749 91,682
Other installment notes, partially
collateralized by certain equipment
(see D below) 893,780 0
Notes payable to NBD, Frankfurt
(see E below) 1,371,207 0
Capital lease obligation (see Note 8) 130,019 180,736
---------- ----------
Total long-term indebtedness 5,420,728 2,443,945
Less current portion 2,710,583 407,079
---------- ----------
Noncurrent portion $2,710,145 $2,036,866
========== ==========
</TABLE>
(A) The first mortgage note is payable to the Bank under a $1,300,000
loan, in quarterly installments of $16,250 plus (a) interest at the
bank's prime rate (8.25% at December 31, 1996). The note matures in
April 2000 and is collateralized by a first mortgage on the Company's
headquarters in Chicago, Illinois. This note is pursuant to the May
1995 Agreement (Note 5). The Company has entered into a fixed interest
rate swap agreement with the bank, which fixes the rate of interest the
Company pays at 8.58%.
F-16
<PAGE> 36
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 6--Long-term Indebtedness, Continued:
The term of the agreement and the notional dollar amount coincides with
the terms of the first mortgage loan. The swap contract is settled on
a quarterly basis with the Company either paying or receiving the
difference between the fixed rate specified in the contract or the
current floating rate. For the years ended December 31, 1996 and 1995,
the Company paid net amounts of $6,495 and $657 under this Agreement.
The Company is exposed to off balance sheet risk in the event of
nonperformance by the bank, however, management anticipates the bank
will be able to satisfy its obligation under the contract.
(B) The notes payable to NBD, Canada are pursuant to a $2,000,000
authorization to finance equipment purchases. These notes are payable
in monthly installments of $45,086 including interest at rates ranging
from 9.1% to 11%. The notes mature from 1999 to 2001 and are
collateralized by a first lien on all of the company's assets, pursuant
to the Agreement (Note 5). At December 31, 1996, a total of $364,277
remains to be drawn on the $2,000,000 authorization.
(C) The loan payable to an individual at December 31, 1995 was paid in
full in 1996. At December 31, 1996, a loan of $203,749 was owing to an
employee. The related note is payable on demand, with interest at 11%
per annum.
(D) Other installment notes include (a) $500,000 note to the Bank, due
May 31, 1997 plus interest payable at rates in effect for the revolving
credit indebtedness (Note 5), (b) $334,400 equipment term note under
the Agreement (Note 5) due in quarterly installments of $17,600, and
(c) certain other notes aggregating $59,380.
(E) On January 2, 1996, NBD Bank (Frankfurt) extended (a) a line of
credit facility of $750,000 and (b) a $1,500,000 term loan (maturing in
5 years from the dates of specific borrowings) to the Hungarian
subsidiary both secured by all the assets of that entity. Such
borrowings (denominated in Deutsche Marks) bear interest at the bank's
prime rate or various LIBOR options. Draws under this facility mature
December 31, 1997 unless converted to term loans, which has not been
done by the Company.
Management believes that the fair value of its long-term indebtedness is
not materially different from its carrying value. Management has
estimated the fair value by discounting expected cash flows using interest
rates that management believes are approximately equal to the interest
rates currently available for similar debt issues.
F-17
<PAGE> 37
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 6--Long-term Indebtedness, Continued:
The approximate aggregate maturities of long-term indebtedness (excluding
capital leases) are:
<TABLE>
<CAPTION>
Year Ending
December 31 Amount
----------- ----------
<S> <C>
1997 $2,660,893
1998 574,697
1999 576,690
2000 1,303,828
2001 174,601
----------
$5,290,709
==========
</TABLE>
Note 7--Income Taxes:
For the four months ended April 30, 1994, Universal elected to be treated as
an S corporation under the Internal Revenue Code and therefore no provisions
for federal income taxes were reflected for Universal in the financial
statements for that period (Note 2).
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 263,000 ($105,000) $ 139,200
Foreign ( 75,387) 20,919 67,987
State 38,000 ( 27,000) 38,200
Deferred ( 126,905) 78,418 ( 117,000)
----------- ---------- ----------
$ 98,708 ($32,663) $ 128,387
=========== ========== ==========
</TABLE>
The components of the domestic net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $152,000 $28,200
Variation of inventories between
tax and financial reporting
purposes 185,300 69,800
Compensation expense for stock options 120,600 64,400
Other accruals 30,800 58,000
-------- -------
Net deferred tax assets $488,700 $220,400
======== ========
</TABLE>
F-18
<PAGE> 38
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 7--Income Taxes, Continued:
The components of the Canadian net deferred tax liabilities at
December 31, 1996 and 1995 are:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation differences resulting
from different bases of certain
assets for tax and financial
reporting purposes $373,213 $237,100
-------- --------
Deferred tax assets:
Tax carryforwards 40,500 48,500
Other 9,500 6,782
-------- --------
50,000 55,282
-------- --------
Net deferred tax liabilities $323,213 $181,818
======== ========
</TABLE>
A reconciliation of the provision for income taxes and the amount computed
by applying the federal statutory rate to income (loss) before income tax
expense is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before income
tax expenses and cumulative
effect of accounting change:
Domestic $ 76,168 ($598,062) $324,247
Foreign ( 470,880) 629,649 278,738
------------ ---------- --------
($394,712) $31,587 $602,985
============ ========== ========
Computed income tax expense
(benefit) at federal
statutory rate ($134,200) $10,700 $205,000
Increase (reduction)
resulting from:
Hungary loss (tax benefit
not recorded) 215,000 0 0
Deferred tax assets
recorded under SFAS 109 0 0 ( 82,800)
Other (including effect of
different foreign and
U.S. State rates) 17,908 ( 43,363) 6,187
------------ ------------ ---------
Total $98,708 ( $32,663) $128,387
============ ============ =========
</TABLE>
F-19
<PAGE> 39
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 7--Income Taxes, Continued:
At December 31, 1996 and 1995, income taxes refundable consist of:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Tax deposits in excess of taxes due $107,137 $170,313
Carryback of 1996 Canadian operating
losses 75,912 0
------------ ------------
Carryback of 1995 United States
operating losses 0 132,000
------------ ------------
$183,049 $302,313
============ ============
</TABLE>
Note 8--Leases and Other Commitments:
The Company leases from unaffiliated parties all its facilities except for
the Chicago headquarters and Hungarian foundry both of which are owned. The
lease terms range from month-to-month to long-term leases the latest of
which expires in 2000. Annual rents for the facilities range from $60,000
to $137,000.
Until June 1995, the Company leased its former Chicago headquarters from a
land trust operating as a partnership comprised of three of the Company's
stockholders. Rent paid for such facility amounted to $58,000 and $115,233
for 1995 and 1994, respectively.
Aggregate rent expense for all facilities was $526,697, $335,058 and
$543,801 for 1996, 1995 and 1994, respectively.
The Company leases certain equipment under capital leases payable in
aggregate monthly installments of $5,300 with the latest expiring in 1999.
The net book value of such equipment under capital lease is $71,000.
Certain vehicles and equipment are also leased under operating leases.
Minimum lease payments due over the remaining terms of the leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31 Leases Leases
----------------------- -------- ---------
<S> <C> <C>
1997 $ 63,641 $369,652
1998 63,641 289,261
1999 30,623 148,075
2000 105,872
2001 46,618
-------- ---------
157,905 959,478
Less interest portion 27,886
-------- ---------
$130,019 $959,478
======== =========
</TABLE>
F-20
<PAGE> 40
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 8--Leases and Other Commitments, Continued:
In 1995, the Company had entered into a consulting agreement and covenant
not to compete (both expiring in 1998) with the principals of a company
located in Dallas, Texas from which the Company acquired inventory and a
customer list. Monthly payments required under the agreements were $11,800.
In 1996, the Company satisfied the remaining unpaid balance of $342,200 by
issuing 39,500 shares of its common stock to the aforementioned individuals.
Note 9--Due to Stockholders:
Due to stockholders consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Unsecured notes payable without
interest to five original
stockholders (who are also officers
and directors) due in varying
monthly installments $157,724 $332,371
Loans made in 1996 by two of the
above parties, due in 1998, with
interest varying up to 11% per annum 770,000 0
-------- --------
$927,724 $332,371
======== ========
</TABLE>
Note 10--Geographical Segment/Major Customer Data:
The Company's operations primarily involve a single industry segment which
is the design, manufacture, sale and support of automotive brake parts.
Beginning in September 1995, the new Hungarian operation involves the
manufacture of iron casting products, primarily for the automotive and
machine tool industries. Financial information, summarized by geographical
area follows:
<TABLE>
<CAPTION>
Consolidated
Domestic Canada Europe Eliminations Total
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Period ended December 31,
1996:
Total revenue:
Unaffiliated
customers $51,035,259 $5,973,613 $6,050,643 $63,059,515
Interarea
transfers 1,771,569 4,225,834 ($5,997,403) 0
----------- ----------- ---------- ----------- -----------
Total $52,806,828 $10,199,447 $6,050,643 ($5,997,403) $63,059,515
=========== =========== ========== =========== ===========
Income (Loss)
from operations $1,197,426 $129,130 ($651,015) $675,541
=========== =========== ========== ===========
Total assets $31,946,883 $8,331,846 $4,230,008 ($6,481,966) $38,026,771
=========== =========== ========== =========== ===========
Total export
sales $ 504,692
===========
</TABLE>
F-21
<PAGE> 41
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
Note 10--Geographical Segment/Major Customer Data, Continued:
<TABLE>
<CAPTION>
Consolidated
Domestic Canada Europe Eliminations Total
----------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Period ended December 31,
1995:
Total revenue:
Unaffiliated
customers $39,864,658 $5,600,300 $1,349,869 $46,814,827
Interarea
transfers 1,694,629 7,477,203 0 ($9,171,832) 0
----------- ----------- ------------- ------------ -----------
Total $41,559,287 $13,077,503 $1,349,869 ($9,171,832) $46,814,827
=========== =========== ============= ============ ===========
Income (loss)
from operations ($54,144) $910,753 ($78,792) $69,724 $847,541
=========== =========== ============= ============ ===========
Total assets $32,757,868 $6,524,311 $2,683,367 ($15,549,711) $26,415,835
=========== =========== ============= ============ ===========
Total export
sales $ 1,098,489
===========
</TABLE>
<TABLE>
<CAPTION>
Consolidated
Domestic Canada Eliminations Total
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Period ended December 31, 1994:
Total revenue:
Unaffiliated customers $35,952,824 $3,759,305 $39,712,129
Interarea transfers 1,492,509 3,015,026 ($4,507,535) 0
----------- ------------ ------------ -----------
Total $37,445,333 $6,774,331 ($4,507,535) $39,712,129
=========== ============ ============ ===========
Income from operations $ 610,685 $ 547,815 $ 150,420 $ 1,308,920
=========== ============ ============ ===========
Total assets $23,976,162 $6,588,635 ($7,100,738) $23,464,059
=========== ============ ============ ===========
Total export sales $ 1,706,209
===========
</TABLE>
In 1996, one customer accounted for 11% of total consolidated sales and one
vendor accounted for approximately 24% of consolidated cost of sales.
F-22
<PAGE> 42
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 11--Contingencies:
During 1995, a lawsuit was filed against the Company in the United States
Bankruptcy Court by the Trustee of a bankrupt entity ("the Debtor") with
which the Company had transacted both purchases and sales of certain
automotive parts in 1992 and 1993. The Trustee is seeking a total of
$5,100,000 in damages under two claims. The largest claim, for
approximately $4,600,000 is the result of alleged "voidable transactions"
concerning transfers of product by the Debtor to the Company without
receiving "reasonably equivalent values" (as defined). The Company believes
that all transactions with the Debtor were conducted in the ordinary course
of business and at "reasonably equivalent values", and thus disclaims any
liability under these claims. The Company, which is in the midst of
defending such action, (currently in the pretrial stage) believes that no
significant liability will result and has made no provision therefor.
Further, the Company has filed a claim of some $322,000 against the Debtor
for amounts owed to it for auto parts sold to the Debtor. Because of the
Debtor's bankruptcy, no receivable is reflected for such amount.
Note 12--Stock Warrants and Options:
In connection with the public offering of common stock consummated on
December 15, 1994 (see Note 1), the Company issued 1,495,000 redeemable
common stock purchase warrants. Of this amount, 1,300,000 warrants were
part of units containing shares of common stock that were offered to the
public and 195,000 warrants were contributed by the Company in connection
with 195,000 shares of common stock that were purchased by the underwriters
from certain stockholders of the Company in exercise of an underwriter's
overallotment option. Each warrant entitles the holder to purchase one
share of the Company's common stock at an exercise price of $7.00 per share,
subject to certain adjustments, at any time until December 15, 1999. The
warrants may be redeemed, in whole or in part, at the Company's option, if
the closing bid price of the Company's common stock exceeds 175% of the
exercise price (or $12.25 per share) for 20 consecutive trading days, as
defined. Such warrants have not been exercised or redeemed.
The Company also agreed to sell to the underwriter, warrants to purchase
130,000 units (one share of common stock and one warrant, as noted above) at
a price of $.001 per unit, exercisable until December 15, 1999, at an
initial per unit exercise price equal to 145% of the public offering price
of $5.00 per unit (or an exercise price of $7.25). On January 24, 1996,
such underwriter warrants for the purchase of 130,000 units were exercised.
Based on the Underwriting Agreement, the holders of such underwriter
warrants elected to exchange shares of Company stock (78,675 shares) whose
then current market value was equal to the total required exercise price of
$942,500 (130,000 units at $7.25). Thus, an additional 51,325 shares of
Company stock were issued to the underwriter, (or certain employees thereof,
who had been assigned certain of such underwriter warrants) without any cash
consideration to the Company. The exercise price of the warrants included
in such units is 160% of the exercise price ($7.00) of the aforementioned
warrants issued to the public (or $11.20). Such warrants have not yet been
exercised.
F-23
<PAGE> 43
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statement
Note 12--Stock Warrants and Options, Continued:
In connection with the acquisition of Ontario on April 30, 1994 (see Note
1), the previous stockholder of Canholdings granted to each of the other
Company stockholders a nontransferable option to acquire from him for $1
that number of shares of Company common stock that have a market value of
$62,500 (Canadian), determined as of July 1, 1998, and exercisable from and
after July 1, 1998, provided that the Company consummated an initial public
offering under defined terms. Such options expire on January 1, 1999.
In October 1994, the Company adopted a Stock Option Plan for defined key
employees and others. Options granted may be either incentive stock options
as specified by the Internal Revenue Code or nonstatutory options. The
Company has reserved 300,000 shares of common stock for issuance under the
Stock Option Plan. Following is a table indicating the activity during 1995
and 1996 for such Stock Option Plan (no options were issued during 1994):
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- ---------
<S> <C> <C> <C>
1996:
-----
Shares under option:
Outstanding at beginning of year 57,000 $ 1.07
Granted during year 84,526 5.00
Exercised during year ( 1,400) ( 5.00)
Forfeited ( 2,100) ( 5.00)
--------- -------
Outstanding at end of year 138,026 $ 3.38
========= =======
Options exercisable at end of year 43,805 $ 2.90
========= =======
Weighted average fair value per share
of options granted during the year $ 7.69
=======
1995:
-----
Options granted and outstanding at
end of year 57,000 $ 1.07
========= =======
Options exercisable at end of year 13,000 $ 1.31
========= =======
Weighted average fair value per share
of options granted during the year $10.75
=======
</TABLE>
F-24
<PAGE> 44
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidate Financial Statements
Note 12--Stock Warrants and Options, Continued:
The following table summarizes information about outstanding and exercisable
stock options as of December 31, 1996:
Options Outstanding
-------------------
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
-------- ----------- ----------- ---------
<S> <C> <C> <C>
$1.00 55,000 115 mo. $1.00
3.00 2,000 115 mo. 3.00
5.00 81,026 128 mo. 5.00
-------
138,026
=======
</TABLE>
Options Exercisable
-------------------
<TABLE>
<CAPTION>
Weighted-
Range of Average
Exercise Number Exercise
Prices Exercisable Price
------- ----------- --------
<S> <C> <C>
$1.00 22,000 $1.00
3.00 2,000 3.00
5.00 19,805 5.00
------
43,805
======
</TABLE>
Compensation expense is being recorded over the respective service periods
required of the optionees, based on the difference between the grant price
and the market price of the stock on the dates of such grants, as required
by APB Opinion 25, Accounting for Stock Issued to Employees. In 1996 and
1995, amounts of $147,947 and $169,375, respectively, have been provided for
such compensation expense (with offsetting credits to additional paid-in
capital).
The Company has adopted only the disclosure provisions of SFAS 123,
Accounting for Stock-Based Compensation and continues to account for stock
options in accordance with APB Opinion 25. The foregoing amount of
compensation expense for 1996 of $147,947 does not materially differ from
that which would have been recorded using the Black-Scholes option valuation
method. Accordingly, the pro forma disclosures required by SFAS 123 have
been omitted.
F-25
<PAGE> 45
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidate Financial Statements
Note 13--Quarterly Results (Unaudited):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1996:
Net sales $13,010,368 $19,451,798 $17,625,102 $12,972,247 $63,059,515
Net income
(loss) ( 305,167) 700,984 208,278 ( 1,097,515) ( 493,420)
Net income
(loss) per
share (.05) .10 .03 (.16) (.07)
1995:
Net sales $8,490,973 $13,028,477 $12,748,483 $12,546,894 $46,814,827
Net income
(loss) ( 149,787) 276,108 326,040 ( 388,111) 64,250
Net income
(loss) per
share (.02) .04 .05 (.06) .01
1994:
Net sales $6,925,820 $11,205,965 $10,509,272 $11,071,072 $39,712,129
Net income 134,362 255,973 96,595 34,445 521,375
Net income
per share .02 .05 .02 .01 .11
</TABLE>
1996 fourth quarter results were adversely affected by lower sales volumes
due to the phase out of the Company's traditional warehouse distribution
business, to make room for growth in the Company's higher margined brake
business. The Company also experienced higher expenses in the fourth
quarter primarily due to the charges related to the acquisitions of assets
of two entities in the latter part of 1996. A one-time pre-tax bad debt
reserve charge of $195,000 was also taken in the fourth quarter to reflect
collection risks associated with a certain customer.
The fourth quarter 1995 net loss was primarily due to the significant
unusual expenses recorded in the fourth quarter. Such expenses included (a)
a reduction in operating income of approximately $200,000 resulting from the
discovery in the fourth quarter of a computer accounting problem relating to
the recording of returned merchandise involved in sales returns (this
problem has been subsequently corrected) and (b) unusually high expenses
related to nonrecurring maintenance costs, which had been postponed by the
previous owners, required at the newly acquired Hungarian foundry (Note 1)
and other costs and interest expenses related to the acquisition of this
facility.
F-26
<PAGE> 46
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidate Financial Statements
Note 13--Quarterly Results (Unaudited), Continued:
Significant adjustments recorded in the fourth quarter of 1994 include (a) a
reduction in operating income of approximately $120,000 resulting from a
year-end book to physical inventory adjustment partially offset by a $31,000
increase in operating income resulting from the accounting change described
in Note 2, and (b) the writedown of an investment in the amount of $59,485,
both net of a reduction in the provision for certain Canadian income taxes
of approximately $25,000.
F-27
