<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission file number 1-13516
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3973627
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 North Kedzie
Chicago, Illinois 60618-5722
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(312) 478-2323
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of issuer's Common Stock, par value $.01 per share,
outstanding as of November 11, 1998 was 6,769,425 shares.
<PAGE> 2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page (s)
--------
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statements of Operations
(Unaudited) - for the three and nine months ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
(Unaudited) - for the nine months ended
September 30, 1998 and 1997 5
Notes to Condensed Financial Statements (Unaudited) 6 - 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7 - 9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 10
EXHIBIT II - Computation of Earnings Per Share 11
</TABLE>
2
<PAGE> 3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
Assets
<S> <C> <C>
Current Assets:
Cash $ 344,972 $ 196,010
Accounts receivable, trade 11,808,269 9,468,624
Inventories 17,971,197 14,606,190
Income taxes refundable 355,158 355,439
Deferred income taxes 1,042,297 1,327,700
Prepaid expenses and other current assets 899,306 750,587
------------ ------------
32,421,199 26,704,550
------------ ------------
Property and Equipment, net 8,298,233 8,473,844
------------ ------------
Other Assets:
Goodwill, net 312,889 243,996
Other assets 985,853 927,331
------------ ------------
1,298,742 1,171,327
------------ ------------
$ 42,018,174 $ 36,349,721
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 10,462,550 $ 5,769,887
Long-term indebtedness, current portion 328,680 355,937
Accrued expenses and other current liabilities 2,370,311 2,636,479
------------ ------------
13,161,541 8,762,303
------------ ------------
Long-term Liabilities:
Revolving loan indebtedness 13,055,000 11,975,000
12.25% subordinated debenture 4,329,375 4,295,625
Long-term indebtedness, non-current portion 3,864,843 4,010,563
Deferred income taxes 201,155 215,877
Due to stockholders 0 21,064
------------ ------------
21,450,373 20,518,129
------------ ------------
Stockholders' Equity:
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, 6,769,425 shares issued and
outstanding) 67,694 67,694
Additional paid-in-capital 8,240,980 8,217,889
Retained earnings (732,031) (1,047,427)
Foreign currency translation adjustments (170,383) (168,867)
------------ ------------
7,406,260 7,069,289
------------ ------------
$ 42,018,174 $ 36,349,721
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 16,137,125 $ 16,184,302 $ 50,135,323 $ 48,189,221
Cost of sales 12,722,478 12,708,017 39,468,850 37,772,658
------------ ------------ ------------ ------------
Gross profit 3,414,647 3,476,285 10,666,473 10,416,563
Selling, general, and administrative expenses 2,856,251 3,029,551 8,487,085 8,738,455
------------ ------------ ------------ ------------
Income from operations 558,396 446,734 2,179,388 1,678,108
------------ ------------ ------------ ------------
Other expense:
Provision for lawsuit settlement 0 0 (151,000) 650,000
Interest expense 557,653 436,429 1,606,990 1,251,649
Other (589) 37,608 91,003 4,004
------------ ------------ ------------ ------------
557,072 474,037 1,546,993 1,905,653
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 1,324 (27,303) 632,395 (227,545)
Income tax provision (benefit) 77,599 (11,025) 316,999 (46,500)
------------ ------------ ------------ ------------
Net income (loss) $ (76,275) $ (16,278) $ 315,396 $ (181,045)
============ ============ ============ ============
Comprehensive income (loss) $ (16,161) $ (8,063) $ 313,880 $ (205,966)
============ ============ ============ ============
Earnings per share:
Basic:
Net income (loss) per share $ (0.01) $ (0.00) $ 0.05 $ (0.03)
============ ============ ============ ============
Weighted average number of common shares
outstanding 6,769,425 6,769,425 6,769,425 6,745,835
============ ============ ============ ============
Diluted:
Net income (loss) per share $ (0.01) $ (0.00) $ 0.05 $ (0.03)
============ ============ ============ ============
Weighted average number of common shares
outstanding 6,769,425 6,769,425 6,771,359 6,745,835
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 315,396 $ (181,045)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 940,584 929,043
Provision for bad debts 88,126 713,462
Provision for lawsuit settlement (151,000) 650,000
Effect of exchange rate changes (1,516) (24,920)
Compensation expense for stock options 23,091 118,572
Deferred income taxes and other 304,431 (243,810)
Changes in operating assets and liabilities:
Accounts receivable, trade (2,427,771) (2,515,326)
Inventories (3,365,007) 2,497,124
Prepaid expenses and other current assets (176,165) 417,584
Other assets (356,242) (71,112)
Accounts payable, trade 4,692,660 (3,156,730)
Accrued expenses and other current liabilities (115,168) 158,559
----------- -----------
Net cash (used in) operating activities (228,581) (708,599)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment (508,416) (532,123)
----------- -----------
Net cash (used in) investing activities (508,416) (532,123)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in revolving loan indebtedness 1,080,000 (1,032,525)
Proceeds on notes payable 0 233,448
Principal (payments) on notes payable (172,977) (1,138,259)
Proceeds on 12.25% subordinated debentures 0 4,500,000
Principal (payments) on subordinated notes 0 (950,000)
Principal (payments) on loans from shareholders (21,064) (389,054)
----------- -----------
Net cash provided by financing activities 885,959 1,223,610
----------- -----------
Net increase (decrease) in cash 148,962 (17,112)
Cash, beginning of period 196,010 63,706
----------- -----------
Cash, end of period $ 344,972 $ 46,594
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,496,593 $ 1,042,397
----------- -----------
Cash paid for income taxes $ 31,315 $ 62,272
----------- -----------
Supplemental disclosure of Noncash Investing and Financing
Activities - Warrants issued to debenture holder $ 0 $ 225,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim condensed financial statements are prepared pursuant to the requirements
for reporting on Form 10-Q. Accordingly, certain disclosures accompanying annual
financial statements prepared in accordance with generally accepted accounting
principles are omitted. For additional disclosures, see the Notes to
Consolidated Financial Statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
In the opinion of management of Universal Automotive Industries, Inc. (the
"Company"), all adjustments, consisting solely of normal recurring adjustments,
necessary for the fair presentation of the financial statements for these
interim periods have been included. The current periods' results of operations
are not necessarily indicative of results which ultimately may be achieved for
the year.
2. INVENTORIES
September 30, 1998
------------------
Finished goods $ 15,604,421
Work in process 212,264
Raw materials 2,154,512
------------
$ 17,971,197
3. BASIS OF PRESENTATION
Income Taxes
The variation of the Company's effective tax rate from the federal statutory tax
rate is principally due to losses in the Company's Hungarian subsidiary for
which no tax benefits are available.
Net Income Per Share
Warrants and options issued by the Company are only included in the computation
of weighted average number of shares, where their inclusion is not
anti-dilutive. For the three months ended September 30, 1998 and 1997 and for
the nine months ended September 30, 1997, common stock equivalents are not
included in the weighted average number of shares outstanding in determining net
loss per share because their inclusion would be anti-dilutive.
4. LEGAL PROCEEDINGS
During 1995, a lawsuit was filed against the Company in the United States
Bankruptcy Court by the Trustee of the bankrupt Estate of First National Parts
Exchange, Inc. ("the Estate") with which the Company had transacted both
purchases and sales of certain automotive parts in 1992 and 1993. A total of
$5,100,000 in damages was sought. The Company recorded a provision of $650,000
in the first quarter of 1997 to reflect a settlement agreement with the Trustee.
The settlement agreement lapsed as of July 31, 1997. Trial was held, and was
concluded in January, 1998. On July 10, 1998, the U. S. Bankruptcy Court ruled
that the vast majority of the Trustee's claims were invalid. The Company's
liability for the two claims held as valid is approximately $499,000. The
Company, therefore, recorded a favorable adjustment to the provision for loss of
$151,000 (pretax) in the second quarter of 1998. The Trustee has appealed
certain portions of the judgement and the Company has appealed certain portions
of the $499,000 judgement against it, seeking a reduction of its liability.
6
<PAGE> 7
5. SUBORDINATED DEBENTURE
In connection with the sale of a $4,500,000 subordinated debenture on July 14,
1997, the Company issued a warrant to purchase 450,000 shares of the Company's
common stock at an exercise price equal to 80% of the average closing bid price
of the Company's common stock for the 20 days preceding July 14, 1998, (the
first anniversary of the debenture closing date). This warrant, therefore, is
exercisable at approximately $0.87 per share from July 14, 1998 to July 14,
2003. The debenture holder also received an additional warrant to purchase
225,000 shares on August 14, 1998 at an exercise price equal to 80% of the
average closing bid price of the Company's common stock for the twenty days
preceding the warrant issue date. Additional warrants will be issuable in five
groups through August, 2001 provided the debenture remains outstanding.
6. LASALLE NATIONAL BANK INDEBTEDNESS
The Company's credit agreement with LaSalle National Bank has an initial term
ending May 1, 1999. LaSalle National Bank has issued a new terms proposal that
includes, among other things, a termination date of May 1, 2000.
7. BARTER TRANSACTION
In the third quarter, the Company entered into a barter transaction whereby it
exchanged its right to a bankruptcy claim and certain inventory for barter
credits to be used over a four year period toward various business expenditures.
The Company valued the barter credits at the estimated fair market value of the
assets exchanged. As a result, the Company reduced its bad debt expense by
$125,000 which constitutes a recovery of the bankruptcy claim which was fully
reserved as of December 31, 1997. The Company estimates that of the $495,730
recorded as barter credits, $165,250 or one third of the credits will be used
within twelve months and therefore was classified as a current asset with the
balance classified as long-term..
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATION AND FINANCIAL CONDITION 1
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared To Three Months Ended September
30, 1997
Sales for the quarter of $16,137,125 were essentially flat as compared to
the same quarter in 1997. This result was achieved despite decreased sales to
APS, Inc., the Company's largest customer in 1997, which filed for bankruptcy in
February, 1998 and to which the Company continues to sell on a post petition
basis. The sales decrease attributable to APS, Inc. was approximately $600,000.
- --------------------------------------------------------------------------------
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.
7
<PAGE> 8
Gross profits for the three months ended September 30, 1998 were $3,414,647
or 21.2% of net sales compared to $3,476,285 or 21.5% in the same period of
1997. The gross margin percentage was slightly lower in 1998 compared to 1997
due to competitive pressures.
Selling, general and administrative expenses for the three months ended
September 30, 1998 decreased by $173,300 or 5.7% from $3,029,551 for the third
quarter of 1997 to $2,856,251. Selling, general and administrative expenses
decreased principally due to a reduction in the provision for bad debts as
described in Note 7 of Notes to Condensed Financial Statements and because of a
decrease in distribution expenses due to a changing mix of customers.
Other expense for the three months ended September 30, 1998 increased to
$557,072 from $474,037 for the same period of 1997. The increase is attributable
primarily to an increase in interest expense due to a higher average level of
borrowing during the quarter ended September 30, 1998 compared to the quarter
ended September 30, 1997.
Net loss for the three months ended September 30, 1998 was $76,275 compared
to net loss of $16,278 for the same period in 1997. This slight increase in net
loss is attributed to higher interest expense and income tax provision offset by
slightly lower selling, general and administrative expenses.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net sales for the nine months ended September 30, 1998 increased by
$1,946,102 or 4.0% to $50,135,323. The sales increase is attributable to
increased sales of brake products, primarily friction products, and sales from
non brake warehouse "commodity" business and from the Company's Hungarian gray
iron foundry.
Gross profits for the nine months ended September 30, 1998 increased
$249,910 or 4.5% to $10,666,473. The percent of gross profit for the nine month
period was 21.3% compared to 21.6% for the same 1997 period. The increase in
gross profits is due to increased sales for this nine month period offset
slightly by decreased gross profit margin due to increased competitive
pressures.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 decreased $251,370 or 2.9% to $8,487,085 from $8,738,455 for
the same period in 1997. Such decrease was due primarily to an absence of
abnormal bad debt charges as were recorded in the 1997 nine month to date
period, a reduction in the provision for bad debts recorded in the third quarter
of 1998 as described in Note 7 of Notes to Condensed Financial Statements, and
because of a slight shift in the sales mix to non brake sales which requires
less selling, general and administrative expense compared to brake sales.
Other Expense for the nine months ended September 30, 1998 decreased by
$358,660 to $1,546,993 from $1,905,653 for the same period of 1997. The decrease
is attributable to a provision for lawsuit settlement of $650,000 (pretax)
recorded in the first quarter of 1997 and a reduction in the provision in the
second quarter of 1998 as described in Note 4 to the Condensed Financial
Statements offset by (a) an increase in interest expense due primarily to higher
average borrowings during the nine months ended September 30, 1998 compared to
the same 1997 period (b) a higher interest rate with respect to the subordinated
debenture issued in July, 1997, as compared to the financing it replaced, and
(c) an increase in foreign exchange losses due to unfavorable fluctuations in
the Canadian dollar.
8
<PAGE> 9
Net income for the nine months ended September 30, 1998 was $315,396
compared to a net loss of $181,045 for the same period in 1997. This increase in
net income is due to increased sales, lower selling, general and administrative
expenses and a net lower other expense as described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September
30, 1998 was $228,581. This was due primarily to cash generated from operations
($1.52 million) which, coupled with cash generated through an increase in
accounts payable ($4.7 million), nearly offset cash required to finance growth
in accounts receivable ($2.4 million) and to increase inventories ($3.4 million)
to a level the Company considers necessary.
Net cash used in investing activities was $508,416, which is attributable
primarily to acquisition of various items of tooling and manufacturing
equipment. Net cash provided by financing activities was $885,959, consisting
primarily of borrowings under the Company's revolving credit agreement.
The Company expects to continue to finance its operations through cash flow
generated from operations, borrowings under the Company's bank lines of credit
and credit from its suppliers.
"YEAR 2000" COMPLIANCE
The Company has reviewed the computer systems and the related software in
use throughout its operations that could be affected by the Year 2000 issue. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Thus, time sensitive
software may recognize a date using the digits "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations.
The Company uses software under license from various vendors. The Company
learned that the software in use is either fully "Year 2000" compliant or, in
one instance, will be fully "Year 2000" compliant in a upgrade version to be
installed by the end of 1998. The software upgrade is provided by the software
vendor at a cost of less than $10,000. Company personnel will test the upgrade
software as to Year 2000 compliance in the first quarter of 1999. The Company
has underway a survey of major vendors as to their year 2000 compliance. The
survey is scheduled to be complete and results evaluated during January, 1999.
In a highly unlikely worst case scenario in which a portion of the Company's
computer systems fails to produce accurate data due to Year 2000, a temporary
manual/personal computer system would be used until the software is corrected or
until replacement software is installed. The Company believes that the cost of
installation and testing will not have a material effect on its financial
position or results of operations.
9
<PAGE> 10
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibit 11 - Computation of Earnings Per Share
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
/s/ ARVIN SCOTT
-----------------------------------------------
Arvin Scott, Chief Executive Officer, President
(Principal Executive Officer)
/s/ JEROME J. HISS
-----------------------------------------------
Jerome J. Hiss, Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
Date: November 13, 1998
10
<PAGE> 1
EXHIBIT II
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
BASIC NET INCOME (LOSS) PER COMMON SHARE
<S> <C> <C> <C> <C>
Net income (loss) $ (76,275) $ (16,278) $ 315,396 $ (181,045)
=========== =========== =========== ===========
Weighted average common shares outstanding 6,769,425 6,769,425 6,769,425 6,745,835
=========== =========== =========== ===========
Basic net income (loss) per common share $ (0.01) $ (0.00) $ 0.05 $ (0.03)
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) $ (76,275) $ (16,278) $ 315,396 $ (181,045)
=========== =========== =========== ===========
Weighted average common shares outstanding 6,769,425 6,769,425 6,769,425 6,745,835
Options and warrants assumed to be common stock
equivalents using treasury stock method 0 0 1,934 0
----------- ----------- ----------- -----------
Weighted average common shares outstanding, as
adjusted 6,769,425 6,769,425 6,771,359 6,745,835
=========== =========== =========== ===========
Diluted net income (loss) per common share $ (0.01) $ (0.00) $ 0.05 $ (0.03)
=========== =========== =========== ===========
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 344,972
<SECURITIES> 0
<RECEIVABLES> 11,808,269
<ALLOWANCES> 0
<INVENTORY> 17,971,197
<CURRENT-ASSETS> 32,421,199
<PP&E> 11,695,146
<DEPRECIATION> 3,396,913
<TOTAL-ASSETS> 42,018,174
<CURRENT-LIABILITIES> 13,161,541
<BONDS> 21,249,218
0
0
<COMMON> 67,694
<OTHER-SE> 7,338,566
<TOTAL-LIABILITY-AND-EQUITY> 42,018,174
<SALES> 50,135,323
<TOTAL-REVENUES> 50,135,323
<CGS> 39,468,850
<TOTAL-COSTS> 39,468,850
<OTHER-EXPENSES> 8,487,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,606,990
<INCOME-PRETAX> 632,395
<INCOME-TAX> 316,999
<INCOME-CONTINUING> 315,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315,396
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
