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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number
1-13516
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-397362
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3350 North Kedzie, Chicago, Illinois 60618-5722
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 478-2323
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Units (One share Common Stock
and one Warrant) Not listed for trading
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The Chicago Stock Exchange,
Common Stock, $0.01 Par Value Nasdaq SmallCap Market
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The Chicago Stock Exchange,
Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market
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Securities registered pursuant to Section 12(g) of the Act:
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None
(Title of Class)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of March 23, 1999, was approximately
$4,272,015.
The number of shares of registrant's Common Stock, par value of $0.01
per share, outstanding as of March 23, 1999 was 6,784,810 shares.
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TABLE OF CONTENTS
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Page
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PART I ................................................................................................1
Item 1. Business..............................................................................1
Item 2. Properties...........................................................................12
Item 3. Legal Proceedings....................................................................13
Item 4. Submission of Matters to Vote of Security Holders....................................13
PART II ...............................................................................................13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................13
Item 6. Selected Financial Data (in thousands, except for per share data)....................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................18
Item 8. Financial Statements and Supplementary Data..........................................22
Item 9. Changes in and Disagreements With Accounting and Financial Disclosure................22
PART III ...............................................................................................23
Item 10. Directors and Executive Officers of the Registrant...................................23
Item 11. Executive Compensation...............................................................23
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................23
Item 13. Certain Relationships and Related Transactions.......................................23
PART IV ...............................................................................................23
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................23
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(ii)
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PART I
ITEM 1. BUSINESS(1)
GENERAL
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 aftermarket. 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 believes it is the leading North American
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. Many of the Company's "value line" competitors specialize in only
one category of brake parts. By offering a full line of "value line" brake
products, 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.
The Company also markets a premium line of brake rotors and friction
products under its Ultimate trademark. The Ultimate product line is designed to
compete at the high end of the market by providing exceptional quality and
features at slightly lower prices than the established premium brands. The
Ultimate product line, since its launch in 1997 has experienced double digit
growth. All the friction product and the majority of the rotors in the Ultimate
line are manufactured at the Company's manufacturing facilities.
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
liquidated its non-brake parts warehouse distributor business due to the lower
margin and declining growth prospects of this segment of the business.
The Company is one of four U.S. based aftermarket disc brake rotor and
drum manufacturers. The Company operates a facility in Laredo, Texas, which
finishes raw rotor castings into finished products. In addition, the Company
researches and develops proprietary friction formulations that are used at
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.
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(1) Some of the statements included in Item 1, Business, and Item 7,
Management's Discussion and Analysis of Financial Conditions 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 events or circumstances.
Readers should carefully review the items included under the
subsection Risks Affecting Forward Looking Statements and Stock Prices, as they
relate to forward looking statements, as actual results could differ materially
from those projected in the forward looking statement.
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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.
The Company has experienced significant growth in sales of brake
rotors and other brake parts. Due to overall improvement of its brake parts
business, sales in this category increased by $10.9 million or 26% to $53.1
million in 1998 compared to $42.1 million in 1996, the year the non-brake parts
warehouse distributor business was liquidated. 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, specialty, "under-the-car" distributors and
national franchise and chain installers located throughout the United States and
Canada, principally through the Company's salespeople, independent sales
representatives and telemarketing. The Company has been named a primary private
label brake rotor and drum supplier to several national buying groups.
Net sales of brake parts and the related gross profit as a percentage
of total net sales and gross profit increased to 83% and 87%, respectively, in
1998 compared to 66% and 81%, respectively, in 1996, the year the non-brake
parts warehouse distribution business was liquidated.
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 such upgrades. All of the foundry's sales are in Europe.
The Company's strategy is to capitalize on the increasing demand for
brake parts and the higher gross margins on sales of such brake parts by
expanding its brake parts manufacturing and distribution business. The Company
believes that it can implement its expansion strategy by: (i) gaining additional
market share of friction brake products; (ii) being a complete "value line"
brake part supplier; (iii) possibly acquiring other specialty brake parts
distributors; (iv) being a low cost producer of brake parts; (v) increasing its
SKU coverage to existing customers; and (vi) building brand recognition through
the Company's "Ultimate" brand brake parts (a premium product line). The Company
may seek additional debt or equity financing to finance this expansion.
As part of the Company's strategy to expand its specialty brake parts
distribution business and increase its focus on this segment, the Company has
taken the following actions:
(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;
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(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;
(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 ware house/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;
(viii) November 1996 - the Company acquired all of the assets of the
MCI Automotive Division of Excel Industries which was in
bankruptcy. Inventory was acquired at values substantially
less than current market values and has been substantially
sold. The Company also acquired a substantial number of
additional brake rotor patterns and additional equipment to
increase its manufacturing capacity; and
(ix) The Company launches its premium brake category, Ultimate
Brake Parts(TM) in November, 1997.
The Company was incorporated in Delaware in January 1994 to act as a
holding company for its direct and indirect subsidiaries including: (i)
Universal Automotive, Inc., an Illinois corporation and the predecessor of the
Company ("Universal"); (ii) UBP Canholdings, Inc., an Ontario, Canada
corporation (which changed its name from 547647 Ontario Limited) which is the
parent of Universal Brake Parts, Inc., an Ontario, Canada corporation (which
changed its name from Aaron Automotive Industries, Inc.) (together, "UBP
Canholdings") and International Discus Corporation, an Ontario, Canada
corporation ("IDC"); and (iii) UBP Hungary Inc., a Delaware corporation, which
is the parent company of UBP-Csepel Iron Foundry Kft., a Hungarian limited
liability company ("UBP Hungary"). The Company conducts all of its operations
through its subsidiaries. The Company's principal executive offices are located
at 3350 North Kedzie, Chicago, Illinois 60618-5722, and its telephone number is
(773) 478-2323. Unless the context otherwise requires, the term the "Company"
includes Universal Automotive Industries, Inc. and its direct and indirect
subsidiaries, including its predecessor, Universal Automotive, Inc.
INDUSTRY OVERVIEW
General
The automotive aftermarket is a mature industry undergoing rapid
changes. Over the last seven years, there has been significant consolidation at
the manufacturer and distributor level including several bankruptcies. Industry
experts believe that consolidation activity will remain at a high level over the
next several years.
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The automotive aftermarket will benefit from consolidation by enjoying
improved operating efficiencies through reduction of duplicate overhead costs,
improved absorption at manufacturing plants and reduced manufacturing costs.
Aftermarket consumers will have less leverage as the number of suppliers
diminishes. Domestic suppliers will have greater ability to compete with low
cost offshore suppliers.
Due to the rapid introduction of model changes by car manufacturers,
the number of different parts to service the vehicle population has grown
substantially. This benefits the manufacturer with the necessary capital
resources to invest in additional tooling. The aftermarket distributors are
forced to increase their inventory investment to service the timely requirements
of their customers for parts. Parts proliferation benefits those companies in
the aftermarket that are well capitalized with excellent management information
systems capabilities.
Vehicle operating systems have become increasingly complex. This
factor has led to a shrinking of the "Do It Yourself" market and a benefit to
traditional distributors and those retailers targeting commercial business.
Better installers will gain market share and car manufacturers may begin to
operate free standing repair centers.
Programmed distribution groups will have increased purchasing power.
Traditional warehouse distributors aligned with major groups will prosper as a
result of groups' "all or nothing" attitude when group members support a single
manufacturer for given categories. This additional market power will lead to
further consolidation as manufacturers' profit margins are compressed.
National wholesale and retail chains will have increased purchasing
power. Aggressive marketing by large, well financed chains results in reduced
market prices, and an erosion of business to those traditional warehouse
distributors and jobbers without a commercial base. These factors, in turn, fuel
additional consolidation within the industry.
Management expects private label brands will grow and erode
traditional brand name equity. This movement should favor low cost producers who
operate with a "value line" concept.
The size of the automotive aftermarket will grow as the number of
vehicles on the road increases due to improved engineering and increasing costs
of vehicles. The average age of vehicles in use is increasing; the average age
of all vehicles in 1997 was 9.3 years compared to 7.8 years in 1990. Also, the
average number of miles driven per vehicle continues to grow.
The Company believes that consolidation and related shifts in the
automotive aftermarket offer substantial opportunity for the Company's "value
line" concept of high quality, low cost replacement parts offered to a broad
cross section of the market. The Company believes that it is well positioned to
become the only acceptable full brake parts value line alternative to the three
remaining major branded suppliers in the market segments served.
Brake System Replacement Parts
The brake parts segment of the automotive aftermarket is the segment
of the industry experiencing the most growth. While the overall market is
growing at a rate of around 2.75% per year (following the total growth in the
number of vehicles), the brake portion of the industry is enjoying growth of 5%
to 6% per year. This larger growth rate is supported by several factors,
including increasing wear and tear on brakes, changes in vehicle design,
improved components (e.g., front wheel drive, semi-metallic disc pads, ABS
braking systems), increased speed limits and an overall increase in the miles
driven per year.
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Changes in vehicle design are the result of the introduction of front
wheel drive vehicles in 1980. The mix of front to rear braking changed over the
years from 60% front - 40% rear to as high as 85% front - 15% rear. This equates
to much higher heat on the front rotors as they are forced to do much more of
the braking, and as a result, increased wear on rotors.
The government has mandated targets for improving fuel economy and
imposed sizable taxes for not attaining such targets. Car manufacturers have
generally chosen reducing vehicle weight as the short-term method of improving
fuel economy. One of the prime targets has been the braking system which has
always been over designed and, therefore, overweight. Rotors and calipers were
reduced in size to help achieve these new weight targets, which reduces rotor
and disc pad life. Lighter weight rotors are less costly than heavier rotors,
and upon wearing down it is generally more cost effective to discard, rather
than refurbish the rotors.
Increased speed limits have increased braking system usage. Speed
limits in several sates have been increased from the 55 mph of the mid 1970's to
as high as 75 in some states. This 36% increase in speed requires almost 300%
more braking power to achieve the same stopping distance. In response to these
increased demands placed on braking systems, vehicle manufacturers created
anti-lock braking systems which electronically monitor the performance of each
wheel to assure that is does not lock and skid, thus reducing the braking power
of that wheel. This system rapidly activates and releases pressure on a wheel to
keep it from locking up and skidding. This rapid action on the brake system
tends to increase wear of the brake components.
Specifications for bringing a vehicle to a complete stop from 60 mph
have been reduced from 150 feet to 90 feet. To achieve this result, car
manufacturers specify metallic brake pads which have shorter life and which, in
turn, shorten the life of the brake rotor.
Demands on the braking systems associated with these factors have
increased dramatically (300% to 500%) while the basic design of the systems has
remained relatively constant. The Company believes that the brakes category of
the automotive aftermarket will continue to grow at the 5% to 6% level well into
the next decade.
PRODUCTS
The Company supplies a wide range of brake components to all levels of
distribution. Company owned manufacturing facilities in both the U.S. and Canada
produce brake drums and rotors as well as a full range of friction products,
primarily disc brake pads and brake shoes. The Company purchases from
unaffiliated vendors those products required to complete the product offering.
The Company is one of four U.S. based aftermarket disc brake rotor and drum
manufacturers and the only "value line" supplier with basic manufacturing
capability. The Company's "value line" competitors do not have the breadth or
scope of manufacturing capacity of the Company, and are, therefore, subject to
the competitive disadvantages inherent in dependence upon third party suppliers.
The development of this basic manufacturing capability has positioned
the Company to compete with the established brand names in the industry by
marketing a premium line of brake rotors and friction products under its
Ultimate Brake Parts(TM) label. Consolidation in the distribution and
manufacturing segments of the brake aftermarket has left customers with fewer
and fewer alternatives. The Company believes that this will offer substantial
opportunities for increasing market penetration in the future.
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MARKETING AND DISTRIBUTION
Marketing
The Company currently markets products to all levels of distribution
under the name "UBP Universal Brake Parts" as well as under a number of private
label programs for large buying groups, national franchise programs and
installer chains. The long term strategy, while growing the private label
program, is to improve UBP brand recognition in the market place and position
the Company's product lines to compete with established branded products.
Branded products generally are offered by the Company's competitors at a premium
price, thus offering customers who choose UBP products substantial opportunity
for improved margin performance. This group of competitors also currently
commands approximately 55% of the total brake market, making them a prime
competitive target.
The Company employs a sales force that directs the Company's
independent sales representative network and the other brake marketing
activities. Arrangements with the Company's independent sales representatives
may be terminated at any time by either party. The Company also performs
telemarketing operations directed at national franchise and chain installers.
Distribution
United States distribution is through two distribution facilities with
the Chicago facility acting as the primary facility, and a redistribution
warehouse in Southern California. Continuing growth in the distribution business
will require additional space for the primary facility. Presently under
consideration is possible relocation to a larger space within the Chicago area
in 1999. The California facility was upgraded in 1997 to better service the
growing west coast distribution.
Canadian distribution is serviced through a primary facility in the
Toronto metropolitan area, with small fee warehouse facilities servicing the
west coast. A larger primary facility was leased in February 1999, to better
service the Canadian program.
The Company conducts a wholesale commodities operation from its
headquarters facility 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. The Company makes large
volume purchases of products on the open market, generally buying from foreign
and domestic manufacturers and other warehouse distributors, and resells such
products to other warehouse distributors, mass market retailers and jobbers.
Such operations result in gross margins that are significantly lower than gross
margins from the Company's other operations. However, they generally require
minimal resources of the Company and do contribute to overall gross profit.
There can be no assurance that future market conditions will be favorable to the
Company's wholesale commodities operations or that the Company will continue to
generate sufficient revenues or acceptable profit margins from such wholesale
operations. For the years ended December 31, 1996, 1997, and 1998, net sales
from the Company's wholesales commodities operations accounted for approximately
15%, 7% and 8% of the Company's total net sales, respectively, and 4%, 3% and 5%
of the Company's total gross profits, respectively.
MANUFACTURING
The Laredo, Texas rotor machining facility has a current capacity of
approximately 750,000 units on a two shift basis. Through the acquisition of
Excel Industries' MCI operation in 1996, approximately 200 foundry tools were
acquired, which provided the base to manufacture approximately 210 different
part numbers representing approximately 80% of the Company's total volume in the
drum and rotor category.
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The Company established a relationship with Waupaca Foundry, Inc. ("Waupaca") to
supply raw castings as a result of its MCI acquisition. Waupaca is the premier
rotor casting vendor in North America.
The Company acquired North American Friction in 1996 to provide a
basic friction manufacturing capability. The Company now offers a full line of a
variety of friction grades in both riveted and integrally molded disc brake
pads, which are the two largest segments of the friction segment of the brake
industry.
The Hungarian foundry acquired by the Company in late 1995 is not
presently equipped to produce raw iron casting for use in the manufacture of
brake rotors. The Company would need to upgrade the foundry to produce rotors,
which the Company estimates would cost approximately $4,000,000. At present, the
Company has no plans to upgrade the foundry for this purpose. A variety of
factors, including demand for non-rotor products in Europe and the desire to
continue supplying existing foundry customers and the availability of funding
for upgrading, could limit the desirability or ability of the foundry to supply
castings to the Company.
SUPPLIERS AND RAW MATERIALS
Suppliers
Product selection and purchasing functions for the Company's U.S.
brake parts business are centralized at the Company's headquarters in Chicago,
Illinois. The Company purchases the brake part SKUs that it does not manufacture
from over a dozen suppliers located throughout the world. Currently, the Company
imports approximately 50% of its brake part inventories from suppliers located
in the People's Republic of China, with the balance from various suppliers in
Taiwan, Italy, the United States and Canada.
Although certain suppliers may provide a majority or all of the
Company's requirements for a particular product or product subcategory, no
supplier accounted for more than 16% of the Company's U.S. total product
purchases during 1998. The Company believes that the loss of any one or more of
its suppliers would not have a material adverse effect on the Company and that
alternative sources of supply are readily available at comparable prices in all
product categories. The Company believes that its relationships with its
suppliers are good.
Tariff
The International Trade Commission ruled rotors sales from China
materially injured U.S. rotor manufacturers. As a result of this affirmative
determination, the U.S. Customs Service has imposed anti- dumping duties on
certain Chinese suppliers. The dumping duties can be reviewed yearly if
requested by a Chinese manufacturer or by a U.S. brake rotor manufacturer.
Depending on the results of the investigation, the tariff may be decreased or
increased. The dumping margins are plant specific and are retroactive to the
importer of record; however, the Company is not the importer of record for this
purpose.
Warranties
The manufacturers of automotive aftermarket products typically provide
replacement warranties, which the Company extends to its customers. In general,
the Company is able to return to its suppliers' slower moving or overstocked
items for full credit, and the Company typically exercises its discretion to
extend this same policy to its customers.
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Raw Materials
The main components used in the Company's brake rotor manufacturing
operations are raw iron castings. The Company primarily purchases raw castings
from Waupaca. Waupaca is the largest producer of automotive rotor castings in
North America. In addition to Waupaca, the Company purchases castings from
several foundries in Canada.
The Company duplicates certain raw iron casting patterns used for the
production of its better selling brake rotors and places such patterns at
different foundries to assure a supply of the raw iron castings produced from
such patterns. Although the Company believes that it has developed good
relationships with the foundries that supply the Company's raw iron castings,
any of such foundries could discontinue producing such castings for the Company
at any time. The Company believes that the number of foundries equipped to
produce raw iron castings such as the ones used by the Company in its
manufacturing operations is limited. The loss of any major foundry as a supplier
of raw iron castings and an inability of the Company to identify new foundries
for the production of raw iron castings in a timely manner could have a material
adverse effect on the Company's business. In addition, there can be no assurance
that the foundries currently producing the Company's raw iron castings will be
able to accommodate the anticipated expansion of the Company's manufacturing
capabilities. The Company is continuously seeking to locate additional foundries
that would be suitable for the production of its raw iron castings. The
Hungarian foundry acquired by the Company is not presently equipped to produce
raw iron castings for use in the manufacture of brake rotors and the Company has
no present intention to upgrade the foundry for this purpose.
COMPETITION
The Company's markets are highly competitive. As a brake parts
manufacturer and distributor, the Company competes directly with other brake
part manufacturers and brake parts distributors, including Aimco and
Raybestos/Brake Products (divisions of Dana Corporation), Wagner Brake Products
(a division of Federal Mogul) and Bendix (a division of Allied Signal Co.), as
well as numerous value line distributors specializing in one specific brake
category.
The Company competes primarily on the basis of price, inventory
availability, delivery time and service. Many of the Company's competitors in
both the jobber and the specialty brake parts distribution markets are larger
and have greater capital, management and other resources than the Company. No
assurance can be given that the Company will continue to compete successfully
with such other competitors.
The Company's foundry operations in Budapest, Hungary compete in the
European automotive and machine tool market. The foundry's largest customer has
halted orders for castings used in end product destined for ultimate sale in
Russia. The Company has been successful in replacing a portion of this volume
and believes that it will secure the balance in 1999, although there can be no
assurances that this volume will be completely replaced. The Company believes
that there are fewer foundries competing in the European machine tool die
casting business than in other areas of production.
TRADEMARK
The Company believes that its labels, UBP (Universal Brake Parts) and
Ultimate are important to its marketing efforts and a significant portion of the
Company's net sales are derived from sales of brake parts which it markets under
them. The UBP Universal Brake Parts and Ultimate Braking Power trademarks have
been registered with the United States Patent and Trademark Office and Canadian
Trademarks Office. There can be no assurance that prior registrations and/or
uses of the trademark (or a confusingly similar mark) do not exist in the United
States, in which case the Company might thereby be precluded from using
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such trademark in the United States. The Company can offer no assurance that the
Company's trademark would be upheld if challenged or that the Company would not
be prevented from using its trademark, both of which could have an adverse
effect on the Company.
EMPLOYEES
As of December 31, 1998, there were 457 full-time employees (161 in
the United States, 123 in Canada and 173 in Hungary) employed at the Company's
places of business in the United States, Canada and Hungary.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business,
the following may result in the Company not achieving certain results included
in any statement that may be considered a forward looking statement. The Company
cautions the reader that the following risk factors may not be exhaustive.
EXPANSION; POSSIBLE NEED FOR ADDITIONAL FINANCING
The continued growth and financial performance of the Company will
depend in part on the Company's ability to continue to expand its business
through: (i) gaining additional market share for friction brake products; (ii)
the purchase of additional manufacturing machinery and brake rotor patterns to
increase the number of brake rotor SKUs the Company manufactures; (iii) the
possible acquisition of other brake parts manufacturers or distributors on
favorable terms; (iv) additional sales penetration of current customers; and (v)
the successful operation of the Company's Hungarian foundry facility. While the
Company regularly evaluates and discusses possible acquisitions, it has not
entered into any binding agreement with any potential acquisition candidates,
and there can be no assurance that it will be successful in locating suitable
acquisition candidates or that any additional acquisitions will be consummated
in the future. In addition, there can be no assurance that any operations that
may be acquired can be effectively and profitably integrated into the Company.
The Company's future results will be affected by its ability to manage its
operations and growth effectively and to continue to obtain an adequate supply
of quality brake parts on a timely and cost-effective basis to meet the growing
demand for the Company's UBP Universal Brake Parts products. The Company can
offer no assurance that any future expansion of its operations or acquisitions
will not have an adverse effect on the Company's operating results, particularly
during the periods immediately following any such expansion or acquisition. The
Company will be required to seek additional financing to fund its expansion
through acquisitions or the upgrade of existing facilities. The Company has no
current commitments or arrangements for additional financing and there can be no
assurance that additional financing will be available on acceptable terms, or at
all. The Company may also issue Common Stock or other securities in connection
with future acquisitions, resulting in additional dilution to existing
stockholders.
LEGAL PROCEEDINGS
Set forth in Item 4, Legal Proceedings below is a summary of the legal
proceedings between the Company and First National Parts Exchange, Inc. (the
"Estate"). The Company has reserved $301,000 as a loss reserve with respect to
such lawsuit. There can be no assurance that such reserve is adequate. In the
event a judgment in excess of such sum is entered in favor of the Estate
pursuant to the Trustees' appeal, the Company will be required to pay or bond
over (on appeal) against such judgment. There can be no assurance that the
Company will have sufficient resources to cover any judgment in excess of its
resources.
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BANK FINANCING
The Company has incurred significant indebtedness in connection with
its operations. As of December 31, 1998 the Company's total consolidated
indebtedness was approximately $21.4 million. A substantial portion of this
indebtedness is secured by substantially all of the Company's assets (except the
Hungarian foundry assets) and by a pledge of all of the outstanding capital
stock of the Company's subsidiaries. As a result of such indebtedness, the
Company (i) is prohibited from paying cash dividends pursuant to certain
covenants and restrictions contained in the loan agreements governing such
indebtedness, (ii) could be hindered in its efforts to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate or other purposes, and (iii) would be vulnerable to
increases in interest rates since substantially all of the Company's borrowings
are at floating rates of interest.
On July 14, 1997, the Company entered into a credit agreement with
LaSalle National Bank for (i) a revolving line of credit of up to $20,000,000
based on eligible accounts receivable and inventory and (ii) a term loan in the
initial amount of $4,450,000.
The revolving credit facility, which is for an initial term ending May
1, 1999 bears interest at the bank's announced of prime rate plus 0.5% per
annum, subject to an ongoing option to convert to an interest rate at LIBOR plus
2.5% per annum. The term loan is payable in monthly principal installments of
$24,722, with a balloon payment of $2,966,666 due on May 1, 2002, and bears
interest at prime plus 0.75% per annum.
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture
to Tandem Capital, Inc. (an affiliate of Sirrom Capital Corporation and now
known as Finova Mezzanine Capital Corporation), calling for payments of interest
at 12.25% per annum through maturity on July 14, 2002. The Company issued Tandem
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 the first anniversary of the debenture
closing date, computed to be $.83 per share. On each of August 14, 1998 and
February 14, 1999, Tandem received warrants to purchase an additional 225,000
shares of common stock. Tandem will also receive warrants to purchase an
additional 225,000 shares of common stock on August 14, 1999, August 14, 2000
and August 14, 2001; provided, that if the debenture is prepaid before any
scheduled warrant issue date, than all subsequent warrants will not be issued.
In each instance, the exercise price for the warrants is 80% of the average
closing bid price of the Company's common stock for the 20 days preceding each
such warrant issue date.
DEPENDENCE UPON KEY PERSONNEL
The Company's continued success will depend to a significant degree
upon the efforts and abilities of its senior management, in particular, Arvin
Scott, its President and Chief Executive Officer, and Yehuda Tzur, its Chairman
of the Board, respectively. The loss of the services of Mr. Tzur or Mr. Scott
could have a material adverse effect on the Company. The Company has employment
agreements with each of these individuals. The Company maintains, and intends to
continue to maintain, key man term life insurance policies covering the life of
each of Mr. Tzur or Mr. Scott in the amount of $1,000,000 each, the proceeds of
which would be payable to the Company.
ACQUISITION OF HUNGARIAN FOUNDRY
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. Csepel Iron Foundry Works has been a supplier of
gray iron and ductile castings to the machine tool, transport and automotive
10
<PAGE> 13
industries in Europe for over 50 years. The Company is operating the foundry
facility in its existing location and retained the existing management and
manufacturing staff. The Company has renovated the foundry to improve its
existing manufacturing facilities. The Company can offer no assurance that its
foundry operations will not require the Company to expend a substantial amount
of funds to be successful.
The Company's investment in the Hungarian facility involves certain
special risks not usually associated with an investment in a U.S. company,
including risks related to: (i) greater social, economic and political
uncertainty and instability of its customer base; (ii) certain restrictions on
foreign investment and repatriation of capital; (iii) exchange control
regulations; (iv) currency exchange rate fluctuations, which may increase the
costs associated with conversion of the investment principal and income from one
currency to another; (v) higher rates of inflation; (vi) greater governmental
involvement in the economy; and (vii) the application of certain environmental
regulations to the foundry property.
INSURANCE
Although the Company currently has general liability insurance for all
its operations, prior to September 1994 the Company did not have general or
products liability insurance for its brake rotor manufacturing operations. The
Company would be adversely affected if it should incur liability for a general
or products liability claim relating to an incident which occurred prior to the
time the Company obtained general and products liability coverage for its
manufacturing operations. To date, no such claim has been asserted against the
Company. In addition, the Company would be adversely affected by the incurrence
of liability which is not covered by insurance or is in excess of policy limits.
NO DIVIDENDS
The Company does not currently intend to declare or pay any cash
dividends on its Common Stock in the foreseeable future and anticipates that
earnings, if any, will be used to finance the development and expansion of its
business. Moreover, the Company's bank lines of credit prohibit the declaration
and payment of cash dividends. Prospective investors should not expect the
Company to pay dividends on its Common Stock until such time, if any, that the
Company is able, if at all, to obtain a release of the prohibition on the
payments of dividends imposed by the terms of its credit facilities. Any payment
of future dividends and the amounts thereof will be dependent upon the Company's
earnings, financial requirements and other factors deemed relevant by the
Company's Board of Directors, including the Company's contractual obligations.
EXERCISE OF WARRANTS
The 1,495,000 Units sold by the Company in connection with its initial
public offering ("IPO") in December 1994 were comprised of one share of Common
Stock and one Redeemable Common Stock Purchase Warrant (the "Warrants")
entitling the holder thereof to purchase one share of Common Stock at an
exercise price of $7.00 per Share, subject to certain adjustments, at any time
until December 15, 1999, unless previously redeemed. In connection with the IPO,
the Company issued warrants (the "Underwriter's Warrants") entitling the
Underwriter to purchase from the Company, at an exercise price per Underwriter's
Warrant of $7.25, up to 130,000 Units comprised of one share of Common Stock and
one Warrant. On January 24, 1996, the Underwriter and its assignees exercised
the Underwriter's Warrants then held (an aggregate of 130,000 Warrants). Based
on the Underwriting Agreement, the holders of such Underwriter's Warrants
elected to exchange shares of Common 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 Common Stock were issued
to the Underwriter, (or certain employees thereof, who had been assigned certain
of such Underwriter's Warrants) without any cash consideration to the Company.
The
11
<PAGE> 14
exercise price of the Underwriter's 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.
For the life of the Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price for the Company's
securities without assuming the risk of ownership, with a resulting dilution in
the interest of other security holders. As long as such Warrants remain
unexercised, the terms under which the Company could obtain additional capital
may be adversely affected. Moreover, the holders of such Warrants may be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital by a new offering of its securities on
terms more favorable than those provided by such Warrants.
ITEM 2. PROPERTIES
The following table sets forth the general location, principal uses
and approximate size of the Company's principal properties and whether such
properties are leased or owned:
<TABLE>
<CAPTION>
================================================================================================
APPROXIMATE LEASED
AREA OR
LOCATION USE IN SQUARE FEET OWNED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chicago, Illinois Company headquarters, executive 126,000 Owned
and sales offices and full-service
warehouse
Budapest, Hungary Foundry 270,000 Owned
North York, Ontario, Canada Executive and sales offices, brake 46,000 Leased
shoe manufacturing and specialty
brake parts warehouse
Los Angeles, California Specialty brake parts warehouse 33,600 Leased
North York, Ontario, Canada Conventional and integrally 32,800 Leased
molded brake pad manufacturing
Laredo, Texas Brake parts manufacturing 50,000 Leased
================================================================================================
</TABLE>
The Company's headquarters facility located in Chicago, Illinois,
which is owned by the Company, is mortgaged to secure borrowing under the
Company's revolving credit facility and certain other indebtedness. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The warehouse portion of the
Company's headquarters facility (approximately 110,000 square feet) is currently
fully utilized. The Company believes that it has outgrown its headquarters
facility and is negotiating to lease a larger facility and to sell its Chicago
facility. There can be no assurance that negotiations will be successful or that
a larger facility can be obtained or leased on cost effective terms.
The Company leases the North York, Ontario executive office and
warehouse facility from an unaffiliated party for approximately $173,000 per
year, originally expiring in February 1999. This North York, Ontario lease was
renewed for approximately $180,000 per year, expiring in April, 2000 and will be
used for friction manufacturing. In February, 1999, the Company leased a 45,000
square foot facility in
12
<PAGE> 15
Mississauga, Ontario to serve as an executive office and distribution facility.
This facility is leased from an unaffiliated party for approximately $180,000
per year, expiring in December, 2002.
The Company leases its specialty brake parts warehouse facility
located in Los Angeles, California, from an unaffiliated party for approximately
$135,000 per year, expiring in August 1999. The Company leases the North York,
Ontario brake pad manufacturing facility from an unaffiliated party for
approximately $140,000 per year, expiring in June 2000.
The Company leases its Laredo, Texas manufacturing facility from an
unaffiliated party for approximately $121,500 per year, expiring in December
2000. The Company believes that this facility will provide adequate capacity for
the Company's currently anticipated brake rotor manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS
During 1995, a lawsuit was filed against the Company in the United
States Bankruptcy Court by a 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. 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.
On July 10, 1998, after a trial held in the Bankruptcy Court, the
Bankruptcy Court ruled that the vast majority of the Trustee's claims were
invalid. The Company's liability for the claims held as valid was approximately
$499,000, for which the Company paid approximately $198,000 in 1998. As a
result, the Company recorded benefit for lawsuit settlement of $151,000
(pre-tax) 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 liabilities. While the
Trustee's claim involves substantial amounts, it is the opinion of management
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's financial position or results of operations. There can
be no assurances as to the outcome of the appeal.
All other legal proceedings and actions to which the Company is a
party are of an ordinary and routine nature incidental to the operations of the
Company. The Company believes that such proceedings will not, individually or in
the aggregate, have a material adverse effect on the Company's business or
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. 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
13
<PAGE> 16
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 1997 and 1998. 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>
1998
First Quarter..................................................................... $ 1.91 $ .91
Second Quarter.................................................................... 1.50 1.00
Third Quarter..................................................................... 2.00 .75
Fourth Quarter.................................................................... 1.69 .50
1997
First Quarter..................................................................... $ 3.25 $ 1.82
Second Quarter.................................................................... 3.44 1.38
Third Quarter..................................................................... 3.25 2.31
Fourth Quarter.................................................................... 2.56 1.84
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW
---- ---
1998
First Quarter..................................................................... $ .28 $ .25
Second Quarter.................................................................... .25 .16
Third Quarter..................................................................... .25 .09
Fourth Quarter.................................................................... .19 .06
1997
First Quarter..................................................................... $ .94 $ .38
Second Quarter................................................................... .63 .25
Third Quarter.................................................................... .56 .34
Fourth Quarter................................................................... .34 .25
</TABLE>
As of March 23, 1999, 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 by the Company's Board of Directors, including the Company's
contractual obligations. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources.
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following selected financial data should be read in conjunction
with the financial statements and notes thereto and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 1998, 1997 and 1996 and the balance sheet data at
December 31, 1998 and 1997 are derived from the audited financial statements of
the Company included elsewhere in this Form 10-K. The statement of operations
data for the years ended December 31, 1995 and 1994 and the balance sheet data
at December 31, 1996, 1995 and 1994 are derived from audited financial
statements not included herein. The pro forma data are based on the
circumstances described in the accompanying footnotes.
15
<PAGE> 18
<TABLE>
<CAPTION>
(in thousands except for per share data)
Years Ended December 31, (1)
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................................... $ 63,868 $ 61,267 $ 63,060 $ 46,815 $ 39,712
Cost of sales ................................... 50,796 48,251 51,785 38,748 33,405
----------- ----------- ----------- ----------- -----------
Gross profit .................................. 13,072 13,016 11,275 8,067 6,307
Selling, general and administrative
expenses ...................................... 11,244 13,764 10,599 7,219 4,998
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ................. 1,828 (748) 676 848 1,309
----------- ----------- ----------- ----------- -----------
Other expense (income):
Provision (Benefit) for lawsuit settlement .... (151) 650 0 0 0
Interest expense .............................. 2,151 1,727 1,184 843 689
Loss (Gain) on disposition of assets .......... 0 12 (44) (4) 70
Other ......................................... 95 19 (70) (23) (53)
----------- ----------- ----------- ----------- -----------
2,095 2,408 1,070 816 706
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for income
taxes and cumulative effect of accounting
change ........................................ (267) (3,156) (394) 32 603
Income tax provision (benefit) (2) .............. (86) (1,070) 99 32 129
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change ............................... (181) (2,086) (493) 64 474
Cumulative effect of accounting change (4) ...... 0 0 0 0 47
----------- ----------- ----------- ----------- -----------
Net income (Loss) for period .................... $ (181) $ (2,086) $ (493) $ 64 $ 521
=========== =========== =========== =========== ===========
Earnings per share (3):
Basic:
Net income (loss) per common share: .... $ (0.03) $ (0.31) $ (0.07) $ 0.01
Weighted average number of common
shares outstanding ..................... 6,769,425 6,751,732 6,647,796 6,500,000
Diluted:
Net income (loss) per common share ..... $ (0.03) $ (0.31) $ (0.07) $ 0.01
Weighted average number of common
shares outstanding ..................... 6,769,425 6,751,732 6,647,796 7,129,966
Pro forma income per share (2):
Income before provision for income taxes
and cumulative effect of accounting change.... $ 603
Income tax provision........................... 128
----------
Income before cumulative effect
of accounting change.......................... 475
Cumulative effect of accounting change......... 46
----------
Net income....................................... $ 521
==========
Basic and Diluted Net income per common
share before cumulative effect adjustment...... $ .10
Cumulative effect adjustment................... .01
----------
Net income (loss) per share (3)................ $ .11
==========
Weighted average number of common shares
outstanding (3)................................ 4,918,630
==========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
------------------------------------------------------------
December 31, (1)
-------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital................................. $ 18,108 $17,980 $ 14,268 $ 14,327 $ 11,630
Total assets.................................... 38,929 37,075 38,027 26,416 23,464
Long-term liabilities, less current portion..... 21,212 20,555 17,782 12,085 7,711
Total stockholders' equity...................... 6,497 7,069 8,856 8,559 8,012
</TABLE>
(1) 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 include 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 Item 7, 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 period from January 1, 1994
through April 30, 1994. The pro forma income per share adjustment for
the year ended December 31, 1994 reflects a provision for federal
income taxes as if the Company were a "C Corporation" rather than an S
Corporation for such periods. See Item 5, Market for Registrant's
Common Equity and Related Stockholder Matters, Item 7, 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, 1994, common shares outstanding are
based on the weighted average number of shares outstanding during the
year. For the years ended December 31, 1995, 1996, 1997 and 1998,
"Basic Earnings per Share" is computed by dividing net income (loss)
available to common stockholders by the weighted average number of
shares of common stock outstanding during the period. "Diluted
Earnings per Share" reflects the potential dilution that could occur
if warrants and options or other contracts to issue common stock were
exercised and resulted in the issuance of additional common shares.
For the years ended December 31, 1996, 1997 and 1998, diluted earnings
per share and basic earnings per share are identical because of the
losses incurred during those years. All options and warrants are
omitted from the computation of diluted earnings (loss) per share
because the options and warrants are antidilutive when net losses are
reported. See Note 2 of the Notes to the Company's Consolidated
Financial Statements.
(4) 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, 1997 and
1998 classifications, without affecting income from operations. Other
reclassifications of certain 1995 items have been made to conform to
1996, 1997 and 1998 classifications.
17
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 increased by $2,601,527
or 4% to $63,868,466 from $61,266,939 in 1997. The Company's sales of the core
brake parts business increased by 3% compared to 1997, due to increased
penetration of the friction products segment of the automotive aftermarket,
rapid customer acceptance of the Company's "Ultimate" brake products and
aggressive pricing which secured new customers.
Gross profit for the year ended December 31, 1998 was $13,072,283, an
increase of $56,141, or essentially flat when compared to 1997 gross profit of
$13,016,142. Gross profit margin for the year ended December 31, 1998 decreased
to 20.5% from the 1997 level of 21.2%. This decrease is attributable to
operating the Hungarian foundry at lower levels in the fourth quarter of 1998
compared to 1997 due to reduced orders from a major foundry customer for product
destined to Russia and to aggressive pricing to attract new customers.
Selling, general and administrative expenses for year ended December
31, 1998 decreased to $11,244,410 from $13,763,676 in 1997 or 18%. The decrease
is due principally to lower bad debt provision in 1998 compared to 1997 which
included a bad debt provision for APS, Inc., once a major customer, which filed
for bankruptcy in February, 1998.
Income (loss) from operations for the year ended December 31, 1998
increased $2,575,407 to income of $1,827,873 from a loss of $747,534 in 1997.
This increase is due to higher sales in 1998 and lower selling, general, and
administrative expenses due primarily to a lower provision for bad debts in
1998.
Other expenses for the year ended December 31, 1998 decreased $313,801
to $2,094,437 from $2,408,238 in 1997. Interest expense increased $423,509 or
25% to $2,150,882 from $1,727,373 in 1997. This increase is due to increased
borrowings in 1998 compared to 1997 used for working capital purposes to support
increased brake sales. Other expense includes a provision for settlement of a
lawsuit initially recorded in the first quarter of 1997 in the amount of
$650,000 (pretax) and a reduction $151,000 (pretax) recorded in the second
quarter of 1998 reflecting the verdict rendered. The lawsuit is more fully
described in the Company's Notes to Consolidated Financial Statements.
(Loss) before provision for income taxes for the year ended December
31, 1998 decreased by $2,889,208 to a loss of $266,564 from a loss of $3,155,772
in 1997. Net loss for the year ended December 31, 1998 decreased by $1,905,249
to a net loss of $180,643 from a loss of $2,085,892 in 1997.
These changes result from the factors discussed above.
18
<PAGE> 21
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 decreased by $1,792,576
or 3% to $61,266,939 from $63,059,515 in 1996. The Company's increase in brake
sales of approximately $9,200,000 (22%) was not quite sufficient to make up for
non-brake warehouse distribution sales discontinued in 1996 and a decrease in
sales in the wholesale "commodities" operation.
Gross profit for the year ended December 31, 1997 increased by
$1,741,363 or 15% to $13,016,142 from $11,274,779 in 1996. Gross profit margin
increased to 21.2% in 1997 from 17.9% in 1996. The increase in gross profit and
gross profit margin is attributable to a more favorable sales mix as the
proportion of higher margin brake sales to total sales increased in 1997
compared to 1996.
Selling, general and administrative expenses for the year ended
December 31, 1997 increased to $13,763,676 from $10,599,238 in 1996 or 30%.
Approximately $2.3 million of the increase is attributable to unusual, non
recurring bad debt charges as a result of bankruptcy filings by several major
customers due to continued consolidation in the automotive aftermarket. The
remainder of the increase is due to increased variable sales expenses as brake
sales carry relatively higher variable sales costs as compared to non-brake
sales.
Income (loss) from operations for the year ended December 31, 1997
decreased $1,423,075 to a loss of $747,534 in 1997 from income of $675,541 in
1996. This decrease is due to the bad debt charges due to industry consolidation
described above, offset by higher gross profit attributable to a higher
proportion of brake parts sales to total sales than in 1996.
Other expenses for the year ended December 31, 1997 increased
$1,337,985 to $2,408,238 from $1,070,253 in 1996. Interest expense increased 46%
to $1,727,373 in 1997 from $1,184,018 in 1996. This increase is due to an
increase in subordinated and bank borrowings during 1997. Total borrowings at
December 31, 1997 were $20.7 million compared to $18.8 million at December 31,
1996. The increased borrowings were used for working capital purposes to support
increased brake sales. Also the average interest rate increased due to the
12.25% subordinated debenture issued in July 1997. Other expense also includes a
one time provision for settlement of a lawsuit as more fully described in Note
11 of the Company's Notes to Consolidated Financial Statements. This $650,000
pretax provision was recorded in the first quarter of 1997.
Loss before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1997 increased by $2,761,060
to a loss of $3,155,772 from a loss of $394,712 in 1996. Net loss for the year
ended December 31, 1997 increased $1,592,472 to a net loss of $2,085,892 from a
loss of $394,712 in 1996. These changes result from the factors discussed above.
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.
19
<PAGE> 22
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 expenses 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: (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.
CAPITAL EXPENDITURES
For the year 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.
For the year ended December 31, 1997, capital expenditures totaled
approximately $574,000, consisting primarily of (i) the acquisition of brake
friction manufacturing machinery and equipment and (ii) the acquisition of
machinery, equipment, and additional brake rotor patterns.
20
<PAGE> 23
For the year ended December 31, 1998, capital expenditures totaled
approximately $511,000, consisting primarily of (i) the acquisition of brake
friction manufacturing machinery and equipment and (ii) the acquisition of
machinery, equipment, and additional brake rotor patterns.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are associated with carrying
accounts receivable and maintaining inventories. The Company relies on
internally generated funds, credit made available from suppliers and senior and
subordinated lines of credit. The Company's working capital needs are generally
not seasonal in nature, although business slows down slightly during the winter
months.
The Company has incurred significant indebtedness to date in connection
with its operations. As of December 31, 1998 the Company's total consolidated
indebtedness was approximately $21.4 million. A substantial portion of this
indebtedness is secured by substantially all of the Company's assets (except the
Hungarian foundry assets) and by a pledge of all of the outstanding capital
stock of the Company's subsidiaries. As a result of such indebtedness, the
Company (i) is prohibited from paying cash dividends pursuant to certain
covenants and restrictions contained in the loan agreements governing such
indebtedness, (ii) could be hindered in its efforts to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate or other purposes, and (iii) would be vulnerable to
increases in interest rates since substantially all of the Company's borrowings
are at floating rates of interest.
On July 14, 1997, the Company closed a line of credit with LaSalle
National Bank of up to $20,000,000 based on eligible accounts receivable and
inventory and a $4,450,000 term loan. The line of credit bears interest at prime
plus 0.5% per annum, subject to an ongoing option to convert to LIBOR plus 2.5%
per annum. The revolving credit facility is for an initial term ending May 1,
1999. The term loan amortizes through May 1, 2002 and bears interest at a prime
plus 0.75% per annum, with an ongoing to option to convert to LIBOR plus 2.75%
per annum.
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture
to Tandem Capital, Inc. (an affiliate of Sirrom Capital Corporation and now
known as Finova Mezzanine Capital, Inc.), calling for payments of interest only
at 12.25% per annum through maturity on July 14, 2002. The Company issued Tandem
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 the first anniversary of the debenture
closing date, computed to be $0.83 per share. On each of August 14, 1998 and
February 14, 1999, Tandem received warrants to purchase an additional 225,000
shares of common stock. Tandem will also receive warrants to purchase an
additional 225,000 shares of common stock on the 14th of each of the following
months: August 1999; August 2000; and August 2001; provided that if the
debenture is prepaid before any scheduled warrant issue date except August 1998,
then all subsequent warrants will not be issued. In each instance, the exercise
price for the warrants is 80% of the average closing bid price of the Company's
common stock for the 20 days preceding each such warrant issue date. The
warrants are exercisable at any time through the sixth anniversary of the
debenture issue date.
The Company believes that cash generated from operations, borrowings
under the Company's bank line of credit and credit from its suppliers is
sufficient to fund its working capital requirements and capital expenditures
through 1999.
21
<PAGE> 24
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133) was issued, which the Company was required to
adopt effective January 1, 1999. SFAS 133 requires the Company to record all
derivatives on the balance sheet at fair value. Because the Company's use of
derivatives in the past has been limited, management does not believe the effect
of adopting SFAS 133 will have any material effect in its financial position or
results of operations.
"YEAR 2000" COMPLIANCE
The Company has reviewed the information technology ("IT") and non-IT
systems and related software in use throughout its operations is that could be
affected by the Year 2000 issue. The Year 2000 issue 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 miscalculation.
IT SYSTEMS
The Company has three major IT systems, the software for which has
been licensed from various IT vendors: a system that processes and controls
sales, inventory, and warehouse operations for its North American distribution
business; an accounting system for its North American business; and an
integrated business/accounting system for its Hungarian foundry.
The distribution business IT system requires a software upgrade from
the vendor to be Year 2000 compliant. The Company chose to upgrade its computer
hardware and operating system prior to installing the software upgrades to take
advantage of more efficient computer operations and robust capabilities the new
operating system offers. The new hardware and operating system has been
installed and migration to the fully Year 2000 compliant software upgrades are
scheduled to be completed by June 30, 1999. The cost of the new hardware and
operating system software is approximately $75,000. The upgrade version of the
software is provided by the vendor under a maintenance agreement.
The accounting system in use for the North American business has been
certified as Year 2000 compliant by the software publisher for the versions in
use. No additional costs are anticipated for this system.
The Year 2000 upgrade needed for the integrated business/accounting
system in use at the Hungarian foundry has been installed and has been provided
by the software vendor under a maintenance agreement.
NON-IT SYSTEMS
The Company has considered the risk that the Year 2000 issue may
adversely affect non-IT systems in use. In several instances, the provider of
outside services has certified Year 2000 compliance (i.e. banking, payroll
processing, etc.) The Company believes that the manufacturing processes are not
subject to Year 2000 risk due to the nature of the processes and machines in
use. The Company also believes that the impact of other non-IT systems not being
Year 2000 compliant would be minimal.
THIRD PARTY ISSUES
The Company is currently addressing the Year 2000 readiness of third
parties whose business interruption could have a material adverse affect on our
business. Significant vendors and customers are being surveyed to ascertain
their plans for Year 2000 readiness. The survey is planned to be complete and
results evaluated by June 30, 1999.
In a highly unlikely worst case scenario in which a portion of the
Company's computer system 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.
Despite diligent preparation, unanticipated third-party failures, more
general public infrastructure failures or failure to successfully conclude our
Year 2000 readiness efforts as planned could have a material adverse impact on
the Company's results of operations, financial condition and cash flows in 2000
and beyond.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by
this Item 8 are included as Part IV, Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item 10 is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 7, 1999 (the
"1999 Proxy Statement") under the sections captioned "Election of Directors,"
"Executive Officers," "Certain Information Regarding the Board of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," which
sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item 11 is set forth in the Company's 1999 Proxy
Statement under the section captioned "Executive Compensation and Related
Information," which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item 12 is set forth in the Company's 1999 Proxy
Statement under the section captioned "Share Ownership of Certain Beneficial
Owners and Management," which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item 13 is set forth in the Company's 1999 Proxy
Statement under the section captioned "Certain Transactions," which section is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed:
(1) Financial Statements:
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.:
<TABLE>
<S> <C>
Independent Auditors' Reports.............................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997............... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996......................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996..................... F-6
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996......................................... F-7 to F-8
Notes to Consolidated Financial Statements................................. F-9 to F-21
(2) Financial Statement Schedules:
Independent Auditors' Report............................................. S-1
Schedule I -- Condensed Financial Information of Registrant.............. S-2 to S-4
Schedule II -- Valuation and Qualifying Accounts......................... S-5
</TABLE>
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
3.1 Restated Certificate of Incorporation of Universal Automotive
Industries, Inc. ("UAI") (Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
3.2 Restated Bylaws of UAI (Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
4.1 Specimen Certificate for Common Stock (Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
4.2 Specimen Certificate for Warrant (Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
4.3 Form of Warrant Agreement (including form of Warrant) (Exhibit
4.3 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
4.4 Form of Underwriter's Warrant (Exhibit 4.4 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
4.5 Restated Certificate of Incorporation of the Company (Included
as Exhibit 3.1) (Exhibit 4.5 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
4.6 Restated Bylaws of UAI (Included as Exhibit 3.2) (Exhibit 4.6
to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.1 Form of UAI Share Option Plan (Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
24
<PAGE> 27
10.2 Amended and Restated Loan and Security Agreement, dated May 12,
1994, between American National Bank and Trust Company of
Chicago and Universal Automotive, Inc. ("UA") (Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.3 Consent Agreement, dated October 12, 1994 by and between
American National Bank and Trust Company of Chicago and UAI and
UA (Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
10.4 Letter Agreement, dated October 19, 1993 between Neelon Casting
Ltd. and IDC (Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.5 Collective Bargaining Agreement, effective March 12, 1994 by
and between International Discus Corporation ("IDC") and United
Steel Workers of America (Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
10.6 Shareholder's Agreement, dated May 5, 1994, by and between UAI,
Yehuda Tzur, Reuben Gabay, Sami Israel, Arvin Scott and Eric
Goodman (Exhibit 10.7 to the Company's Registration Statement
on Form S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
10.7 Asset Purchase Agreement, dated April 30, 1994, by and between
UBP Canholdings Industries, Inc. and UA (without exhibits)
(Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.8 Stock Exchange Agreement, dated May 5, 1994, by and between
UAI, and Yehuda Tzur, Reuben Gabay, Sami Israel and Arvin Scott
(Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.9 Stock Exchange Agreement, dated April 30, 1994, by and between
UAI and Yehuda Tzur, Reuben Gabay, Sami Israel, Arvin Scott and
Eric Goodman (Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.10 Replacement Demand Note, dated May 12, 1994, in the amount of
$8,500,000 from UA to American National Bank and Trust Company
of Chicago (Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.11 Commercial Mortgage, dated February 6, 1992, by LaSalle
National Bank as Trustee under Trust No. 10-06203-09 to
American National Bank and Trust Company of Chicago (Exhibit
10.12 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
25
<PAGE> 28
10.12 Letter Loan Agreement, dated June 4, 1993, by and between UBP
Canholdings Industries Inc. and Howard Winick (Exhibit 10.13 to
the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.13 Lease Agreement, dated September 12, 1989, by and between
Lion's Roar Builders Inc. and UBP Canholdings Industries Inc.
(Exhibit 10.14 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.14 Lease Agreement, dated July 29, 1993, by and between Joel
Marfield and UA (Exhibit 10.15 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.15 Lease Agreement, dated February 5, 1991, by and between Sun
Life Assurance Company of Canada and IDC (Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10.16 Lease Agreement, dated July 16, 1992 by and between Manabal
Rochester Road and UBP Canholdings Industries Inc. (Exhibit
10.17 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.17 Lease Agreement, dated July 1, 1994, by and between Clayson
Road Industrial Park and UBP Canholdings Industries Inc.
(Exhibit 10.18 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.18 Lease Agreement, dated September 1, 1994 between Newcorp
Properties Ltd. and UBP Canholdings Industries Inc. (Exhibit
10.19 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.19 Lease Agreement, dated June 1994, between 2800 Talman and UA.
(Exhibit 10.22 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.20 Staff Leasing Agreement, dated February 1, 1994 by and between
UA and Alternative Employment Strategies, Inc. (Exhibit 10.24
to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.21 Amendment to Staff Leasing Agreement, dated September 1, 1994,
by and between UA. and Alternative Employment Strategies, Inc.
(Exhibit 10.25 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.22 Merchandizing and Service Agreement, dated March 1992, by and
between UA and the Association of Muffler Dealers, Inc.
(Exhibit 10.26 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.23 Employment Agreement, dated May 5, 1994, by and between UA and
Yehuda Tzur (Exhibit 10.27 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
26
<PAGE> 29
10.24 First Amendment to Employment Agreement, dated December 14,
1994, between UA and Yehuda Tzur (Exhibit 10.28 to the
Company's Registration Statement on Form S-1 (No. 33- 85162) as
filed with the SEC on October 14, 1994)*
10.25 Employment Agreement, dated May 5, 1994, by and between UA and
Arvin Scott (Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.26 First Amendment to Employment Agreement, dated December 14,
1994, between UA and Arvin Scott (Exhibit 10.30 to the
Company's Registration Statement on Form S-1 (No. 33- 85162) as
filed with the SEC on October 14, 1994)*
10.27 Employment Agreement, dated May 5, 1994, by and between UBP
Canholdings Industries Inc. and Eric Goodman (Exhibit 10.31 to
the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.28 First Amendment to Employment Agreement, dated December 14,
1994, by and between UBP Canholdings Industries Inc. and Eric
Goodman (Exhibit 10.32 to the Company's Registration Statement
on Form S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
10.29 Employment Agreement, dated May 5, 1994 by and between UA and
Reuben Gabay (Exhibit 10.33 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.30 First Amendment to Employment Agreement, dated December 14,
1994 by and between UA and Reuben Gabay (Exhibit 10.34 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10.31 Employment Agreement, dated May 5, 1994 by and between UA and
Sami Israel (Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.32 First Amendment to Employment Agreement, dated December 14,
1994 by and between UA and Sami Israel (Exhibit 10.36 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.33 Letter Loan Agreement, dated August 31, 1994, by and between
NBD Bank, Canada and IDC, IDC Holdings Corporation, and UA
(Exhibit 10.37 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.34 Demand Promissory Note, dated as of September 1, 1994 given by
UBP Canholdings Industries Inc. in favor of NBD Bank, Canada in
the principal amount of $1,250,000-CDN (Exhibit 10.40 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
27
<PAGE> 30
10.35 Agreement of Purchase and Sale, dated September 30, 1993 by and
between John Corrigan, Jr. and IDC Holdings Corporation with
respect to shares in the capital stock of IDC (without
schedules and exhibits). (Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
10.36 IDC Share Purchase Agreement, dated September 9, 1992 by and
between Seyho Investment Inc. and Douglas A. Dempsey and IDC
and IDC Holdings Corporation (without schedules and exhibits).
(Exhibit 10.42 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.37 Amendment to IDC Share Purchase Agreement, dated January 6,
1993 by and between Seyho Investments Inc. and IDC and IDC
Holdings Corporation. (Exhibit 10.43 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with
the SEC on October 14, 1994)*
10.38 IDC Share Purchase Agreement, dated September 31, 1992 by and
between John Corrigan, Jr. and IDC and IDC Holdings Corporation
(without schedules and exhibits) (Exhibit 10.44 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10.39 Commercial Mortgage, dated December 29, 1993 by UA to American
National Bank and Trust Company of Chicago (Exhibit 10.45 to
the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.40 Agreement, dated January 6, 1994, by and between Kelsey-Hayes
Canada Limited and UBP Canholdings Industries Inc. (Exhibit
10.46 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.41 Form of Letter Consulting Agreement between UAI and Kensington
Wells Incorporated (Exhibit 10.48 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
21 Subsidiaries of the Registrant
23 Consent of Altschuler Melvoin & Glasser LLP
- ---------------
* These exhibits are incorporated herein by reference to the registration
statement referenced after each exhibit next to which an asterisk
appears.
+ Indicates executive compensation plans and arrangements.
(b) Reports on Form 8-K
The Company filed no reports of Form 8-K during the fourth quarter of
1998.
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
By: /s/ Arvin Scott
------------------------------------
Arvin Scott, Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Arvin Scott Chief Executive Officer, President and
- ------------------------------------ Director (Principal Executive Officer) March 30, 1999
Arvin Scott
/s/ Jerome J. Hiss Chief Financial Officer (Principal Financial
- ------------------------------------ Officer and Principal Accounting Officer) March 30, 1999
Jerome J. Hiss
/s/ Yehuda Tzur Director March 30, 1999
- ------------------------------------
Yehuda Tzur
/s/ Sami Israel Director March 30, 1999
- ------------------------------------
Sami Israel
/s/ Sheldon Robinson Director March 30, 1999
- ------------------------------------
Sheldon Robinson
/s/ Sol S. Weiner Director March 30, 1999
- -------------------------------------
Sol S. Weiner
/s/ Dennis Kessler Director March 30, 1999
- ------------------------------------
Dennis Kessler
</TABLE>
29
<PAGE> 32
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1998
FORMING A PART OF
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
<PAGE> 33
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F - 2 to F - 3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, December 31, 1998 and 1997
(Exhibit A) F - 4
Consolidated Statement of Operations, Years Ended
December 31, 1998, 1997 and 1996 (Exhibit B) F - 5
Consolidated Statements of Changes in Stockholders' Equity,
Years Ended December 31, 1998, 1997 and 1996
(Exhibit C) F - 6
Consolidated Statement of Cash Flows, Years Ended
December 31, 1998, 1997 and 1996 (Exhibit D) F - 7 to F - 8
Notes to the Financial Statements F - 9 to F - 21
ADDITIONAL FINANCIAL DATA:
Independent Auditors' Report on Schedules S - 1
Condensed Financial Information of Registrant (Schedule I) S - 2 to S - 4
Valuation and Qualifying Accounts (Schedule II) S - 5
F - 1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Universal Automotive Industries, Inc.
We have audited the accompanying consolidated balance sheets of UNIVERSAL
AUTOMOTIVE INDUSTRIES, INC. as of December 31, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain of the
Company's wholly owned foreign subsidiaries (Note 1) which statements reflect
aggregate total assets of $4,301,530 and $4,099,889 as of December 31, 1998 and
1997 and aggregate total revenue of $5,616,393, $5,446,085 and $16,250,090 for
each of the respective three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Chicago, Illinois
March 12, 1999
F - 2
<PAGE> 35
[ARTHUR ANDERSEN LETTERHEAD]
THIS IS THE ENGLISH TRANSLATION OF THE HUNGARIAN ORIGINAL (NOTE 0)
INDEPENDENT AUDITORS' 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 1998, which shows total assets of HUF'000
643,688 and a retained result for the year of HUF'000 317,422 profit, the
related statement of operations for the year then ended and the supplement
(collectively "the financial statements") included in the Company's 1998 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 have also audited the Company's Annual Report for the year ended 31 December
1997 and issued an unqualified opinion. Reference is made to our Auditors'
Report dated 13 February 1998.
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 Quotaholder's 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 Quotaholder's 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 of 31
December 1998 and of the results of its operations for the year then ended.
Budapest, 19 February 1999
(The original Hungarian language version has been signed.)
Judit Szilagyi Hajnalka Szarvas
Arthur Andersen Audit Kft. Registered Auditor
MKVK-000023 MKVK-005105
F-3
<PAGE> 36
Exhibit A
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 347,626 $ 196,010
Accounts receivable, trade (net of allowance for doubtful
accounts of $515,237 and $1,900,455 in 1998 and 1997) 10,553,136 9,468,624
Inventories (Notes 2 and 3) 16,101,634 15,294,210
Income taxes refundable (Note 7) 234,225 355,439
Deferred income taxes (Note 7) 1,062,800 1,365,000
Prepaid expenses and other current assets 1,027,198 750,587
------------ ------------
29,326,619 27,429,870
------------ ------------
Property and Equipment (net of accumulated
depreciation--Notes 2 and 3) 8,210,547 8,473,844
------------ ------------
Other Assets:
Goodwill, net of accumulated amortization of
$106,682 and $78,631 in 1998 and 1997 (Note 2) 305,945 243,996
Deferred income taxes (Note 7) 145,200 0
Other assets 940,219 927,331
------------ ------------
1,391,364 1,171,327
------------ ------------
$ 38,928,530 $ 37,075,041
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 6,910,313 $ 5,769,887
Long-term indebtedness, current portion (Note 6) 321,500 355,937
Accrued expenses and other current liabilities 3,987,300 3,324,499
------------ ------------
11,219,113 9,450,323
------------ ------------
Long-term Liabilities:
Revolving loan indebtedness (Note 5) 12,910,000 11,975,000
Long-term indebtedness, noncurrent portion (Note 6) 3,784,340 4,010,563
Subordinated debenture (Note 4) 4,340,625 4,295,625
Deferred income taxes (Note 7) 177,072 253,177
Due to stockholders (Note 9) 0 21,064
------------ ------------
21,212,037 20,555,429
------------ ------------
Commitments and Contingencies (Notes 5, 8 and 10)
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,
$0.01 par value, 6,769,425 shares issued and
outstanding) 67,694 67,694
Additional paid-in capital 8,257,398 8,217,889
Accumulated deficit (1,228,070) (1,047,427)
Accumulated other comprehensive loss (599,642) (168,867)
------------ ------------
6,497,380 7,069,289
------------ ------------
$ 38,928,530 $ 37,075,041
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F - 4
<PAGE> 37
Exhibit B
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $ 63,868,466 $ 61,266,939 $ 63,059,515
Cost of Sales 50,796,183 48,250,797 51,784,736
------------- ------------- -------------
Gross Profit 13,072,283 13,016,142 11,274,779
Selling, General and Administrative Expenses 11,244,410 13,763,676 10,599,238
------------- ------------- -------------
Income (Loss) from Operations 1,827,873 (747,534) 675,541
------------- ------------- -------------
Other Expense (Income):
Provision (Benefit) for lawsuit
settlement (Note 10) (151,000) 650,000 0
Interest expense 2,150,882 1,727,373 1,184,018
Loss (Gain) on disposition of assets 0 12,266 (44,182)
Other 94,555 18,599 (69,583)
------------- ------------- -------------
2,094,437 2,408,238 1,070,253
------------- ------------- -------------
Loss before Provision (Benefit) for Income Taxes (266,564) (3,155,772) (394,712)
------------- ------------- -------------
Income Tax Provision (Benefit) (Note 7):
Current (166,816) (133,480) 225,613
Deferred 80,895 (936,400) (126,905)
------------- ------------- -------------
(85,921) (1,069,880) 98,708
------------- ------------- -------------
Net Loss $ (180,643) $ (2,085,892) $ (493,420)
============= ============= =============
Earnings per Share (Note 2):
Basic and Diluted:
Net loss per common share $ (0.03) $ (0.31) $ (0.07)
============= ============= =============
Weighted average number of
common shares outstanding 6,769,425 6,751,732 6,647,796
============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F - 5
<PAGE> 38
Exhibit C
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid-in
Outstanding Amount Capital
-------------- ----------- -----------
<S> <C> <C> <C>
Balances, January 1, 1996 6,500,000 $ 65,000 $ 6,976,204
-------------- ----------- -----------
Comprehensive Loss for 1996:
Net loss
Other comprehensive loss, foreign currency
translation adjustment
Comprehensive Loss
Stock Options Recorded as Compensation (Note 11) 147,947
Exercise of Warrants and Exchange of Shares by Underwriters (Note 11) 51,325 513 (383)
Shares Issued as Partial Consideration for Acquisitions of Assets 137,200 1,372 305,229
Shares Issued in Lieu of Cash for Consulting/Noncompete Agreement 39,500 395 341,805
Exercise of Stock Options 1,400 14 6,986
----------- ---------- -----------
229,425 2,294 801,584
----------- ---------- -----------
Balances, December 31, 1996 6,729,425 67,294 7,777,788
----------- ---------- -----------
Comprehensive Loss for 1997:
Net loss
Other comprehensive loss, foreign currency
translation adjustment
Comprehensive Loss
Stock Options Recorded as Compensation (Note 11) 158,097
Warrants Issued with Subordinated Debenture (Note 4) 225,000
Shares Issued in Lieu of Cash for Commissions Payable 40,000 400 57,004
----------- ---------- -----------
40,000 400 440,101
----------- ---------- -----------
Balances, December 31, 1997 6,769,425 67,694 8,217,889
Comprehensive Loss for 1998:
Net loss
Other comprehensive loss, foreign currency
translation adjustment
Comprehensive Loss
Stock Options Recorded as Compensation (Note 11) 39,509
----------- ---------- -----------
Balances, December 31, 1998 6,769,425 $ 67,694 $ 8,257,398
=========== ========== ===========
Accumulated
Retained Other
Earnings Comprehensive
(Deficit) Loss Total
----------- ---------- -----------
Balances, January 1, 1996 $ 1,531,885 $ (14,102) $ 8,558,987
----------- ---------- -----------
Comprehensive Loss for 1996:
Net loss (493,420) (493,420)
Other comprehensive loss, foreign currency
translation adjustment (13,044) (13,044)
-----------
Comprehensive Loss (506,464)
-----------
Stock Options Recorded as Compensation (Note 11) 147,947
Exercise of Warrants and Exchange of Shares by Underwriters (Note 11) 130
Shares Issued as Partial Consideration for Acquisitions of Assets 306,601
Shares Issued in Lieu of Cash for Consulting/Noncompete Agreement 342,200
Exercise of Stock Options 7,000
-----------
803,878
----------- ---------- -----------
Balances, December 31, 1996 1,038,465 (27,146) 8,856,401
----------- ---------- -----------
Comprehensive Loss for 1997:
Net loss (2,085,892) (2,085,892)
Other comprehensive loss, foreign currency
translation adjustment (141,721) (141,721)
-----------
Comprehensive Loss (2,227,613)
-----------
Stock Options Recorded as Compensation (Note 11) 158,097
Warrants Issued with Subordinated Debenture (Note 4) 225,000
Shares Issued in Lieu of Cash for Commissions Payable 57,404
-----------
440,501
----------- ---------- -----------
Balances, December 31, 1997 (1,047,427) (168,867) 7,069,289
----------- ---------- -----------
Comprehensive Loss for 1998:
Net loss (180,643) (180,643)
Other comprehensive loss, foreign currency
translation adjustment (430,775) (430,775)
-----------
Comprehensive Loss (611,418)
-----------
Stock Options Recorded as Compensation (Note 11) 39,509
----------- ---------- -----------
Balances, December 31, 1998 $(1,228,070) $ (599,642) $ 6,497,380
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F - 6
<PAGE> 39
Exhibit D
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (180,643) $ (2,085,892) $ (493,420)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,115,264 1,242,220 1,006,808
Provision for bad debts 39,195 2,805,837 472,732
Provision for lawsuit settlement (151,000) 650,000 0
Other, net 45,000 20,623 (45,009)
Effect of exchange rate changes (430,775) (141,721) (13,044)
Deferred income taxes 80,895 (946,336) (126,905)
Compensation expense for stock options 39,509 158,097 147,947
Increase (Decrease) in cash from changes in:
Accounts receivable, trade (1,123,707) (355,459) (3,945,104)
Inventories (807,424) (468,075) (4,079,013)
Prepaid expenses and other current assets (155,397) (54,783) (464,432)
Increase in other assets (416,111) (309,252) (56,332)
Accounts payable, trade 1,140,426 (2,813,330) 3,732,633
Accrued expenses and other liabilities 813,798 914,328 919,860
----------- ------------ -----------
Net cash provided by (used in) operating
activities, forward 9,030 (1,383,743) (2,943,279)
----------- ------------ -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (510,691) (573,901) (3,973,180)
Proceeds from disposition of assets 0 58,361 56,988
Other 0 0 (207,147)
----------- ------------ -----------
Net cash used in investing activities,
forward $ (510,691) $ (515,540) $(4,123,339)
=========== ============ ===========
</TABLE>
F - 7
<PAGE> 40
Exhibit D, Continued
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities, forwarded $ 9,030 $ (1,383,743) $ (2,943,279)
---------- ------------ ------------
Net cash used in investing activities,
forwarded (510,691) (515,540) (4,123,339)
---------- ------------ ------------
Cash Flows from Financing Activities:
Net increase in revolving loan indebtedness 935,000 542,475 2,099,941
Proceeds on notes payable 0 4,450,000 3,535,280
Principal payments on notes payable (260,659) (5,504,228) (558,497)
Proceeds from subordinated debentures 0 4,500,000 0
Proceeds from (Payments on) stockholder loans, net (21,064) (906,660) 595,353
Proceeds from (Payments on)
subordinated notes 0 (1,050,000) 1,050,000
Issuance of common stock 0 0 7,130
---------- ------------ ------------
Net cash provided by financing activities 653,277 2,031,587 6,729,207
---------- ------------ ------------
Net Increase (Decrease) in Cash 151,616 132,304 (337,411)
Cash, Beginning of Year 196,010 63,706 401,117
---------- ------------ ------------
Cash, End of Year $ 347,626 $ 196,010 $ 63,706
========== ============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $1,983,572 $ 1,491,849 $ 1,151,986
========== ============ ============
Income taxes $ 50,000 $ 75,561 $ 383,140
========== ============ ============
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Assets acquired by issuance of stock $ 0 $ 0 $ 648,801
========== ============ ============
Liability satisfied by issuance of stock $ 0 $ 57,404 $ 0
========== ============ ============
Warrants issued in connection with debenture $ 0 $ 225,000 $ 0
========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F - 8
<PAGE> 41
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1---STRUCTURE
- ------------------
Universal Automotive Industries, Inc. (the Company) acts as a holding company
for its wholly-owned direct and indirect subsidiaries which as of December 31,
1998 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.
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 operating from facilities in Chicago,
Illinois; Los Angeles, California; Laredo, Texas; and Toronto, 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.
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
revenue 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 entitled "Accumulated Other
Comprehensive Loss" (consisting solely of such translation adjustments).
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 or 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.
F - 9
<PAGE> 42
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
- ---------------------------------------------------------------------------
CONTINUED
- ---------
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.
DERIVATIVES--The Company had previously utilized only limited derivative
financial instruments and did not use them for trading purposes. At
December 31, 1998, there were no such instruments.
INCOME TAXES--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).
ADVERTISING--All costs associated with advertising are charged to
operations by inclusion in selling, general and administrative expenses
when incurred.
RECLASSIFICATION--Certain amounts reported in the 1997 and 1996 financial
statements have been reclassified to conform with the 1998 presentation
without affecting previously reported net losses.
EARNINGS PER SHARE--The Company computes earnings per share under Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Under SFAS 128, "Basic Earnings per Share" is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. "Diluted Earnings per Share" reflects the potential
dilution that could occur if warrants and options (Note 11) or other
contracts to issue common stock were exercised and resulted in the issuance
of additional common shares. For the years ended December 31, 1998, 1997
and 1996 diluted earnings per share and basic earnings per share are
identical because of the losses incurred during those years. All options
and warrants were omitted from the computation of diluted earnings per
share because the options and warrants are antidilutive when net losses are
reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, other than debt instruments, closely approximates their
carrying value. Because the interest rate of the revolving loan and the
term loan with LaSalle National Bank adjusts with changes in the market
rate of interest, management believes the fair value is equivalent to the
carrying value. Management believes that the interest rate of 12.25% on
the subordinated debenture is approximately equal to the current rate
available for similar debt. Accordingly, the fair value of these
debentures approximates their carrying value.
F - 10
<PAGE> 43
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
- ----------------------------------------------------------------------------
CONTINUED
- ---------
ACCOUNTING CHANGE--In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires the components of comprehensive income to be disclosed in
the financial statements, and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires certain information
to be reported about operating segments on a basis consistent with the
Company's internal organizational structure. Required disclosures have
been made and prior years' information has been reclassified for the impact
of SFAS 130 and 131.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) was issued,
which the Company is required to adopt effective January 1, 1999. SFAS 133
will require the Company to record all derivatives on the balance sheet at
fair value. Because the Company's use of derivatives in the past has been
limited, management does not believe the effect of adopting SFAS 133 will
have any material effect on its financial position or results of
operations.
NOTE 3--SELECTED FINANCIAL STATEMENT DATA
- -----------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C> <C>
Inventories:
Finished goods $ 14,063,412 $ 12,275,151
Work-in-process 225,745 240,380
Raw materials 1,812,477 2,778,679
------------ ------------
$ 16,101,634 $ 15,294,210
============ ============
Estimated
Lives 1998 1997
---------- ----------- -----------
Property, plant and equipment:
Machinery and equipment 5 to 11 years $ 5,239,282 $ 4,974,256
Building and improvements 25 to 39 years 2,865,117 2,788,194
Land 498,835 498,835
Tools and dies 5 to 11 years 733,627 629,038
Patterns 5 to 10 years 879,396 851,298
Computer equipment 3 to 5 years 477,807 439,841
Autos and trucks 3 to 5 years 367,640 364,088
Furniture and fixtures 5 to 11 years 277,446 280,923
Leasehold improvements 5 years 358,276 360,257
----------- -----------
11,697,426 11,186,730
Less accumulated depreciation 3,486,879 2,712,886
----------- -----------
$ 8,210,547 $ 8,473,844
=========== ===========
</TABLE>
F - 11
<PAGE> 44
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 3--SELECTED FINANCIAL STATEMENT DATA, CONTINUED
- ----------------------------------------------------
1998 1997 1996
---------- --------- ---------
Depreciation expense $ 773,988 $ 877,968 $ 663,746
Advertising expense 299,525 136,274 191,704
NOTE 4--SUBORDINATED DEBENTURE
- ------------------------------
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture to Tandem
Capital, Inc. (an affiliate of Sirrom Capital Corporation), calling for payments
of interest at 12.25% per annum through maturity on July 14, 2002. The Company
issued Tandem a warrant to purchase 450,000 shares of the Company's common stock
at an exercise price equal to 80% of the average closing bid price of the
Company's common stock for the 20 days preceding the first anniversary of the
debenture closing date, computed to be ($.83 per share). On August 14, 1998,
Tandem received warrants to purchase an additional 225,000 shares of common
stock, and will also receive warrants to purchase an additional 225,000 shares
of common stock on: February 14, 1999, August 14, 1999, August 14, 2000 and
August 14, 2001 except, however, that if the debenture is prepaid before any
scheduled warrant issue date, then all subsequent warrants will not be issued.
In each instance, the exercise price for the warrants is 80% of the average
closing bid price of the Company's common stock for the 20 days preceding each
such warrant issue date. The warrants are exercisable at any time through the
sixth anniversary of the debenture issue date. In 1997, $225,000 was allocated
to such warrants which approximates the amount of increased interest the buyer
would have required without a warrant feature. Such amount is being amortized to
interest expense with a corresponding increase in the reported liability for
such debentures.
NOTE 5--LASALLE NATIONAL BANK INDEBTEDNESS
- ------------------------------------------
On July 14, 1997, the Company entered into a credit agreement with LaSalle
National Bank (LaSalle) for (a) a revolving line of credit of up to $20,000,000
based on eligible accounts receivable and inventory and (b) a term loan in the
initial amount of $4,450,000.
The revolving credit facility, which is for an initial term ending May 1, 1999
bears interest of prime plus 0.5% per annum, subject to an ongoing option to
convert to LIBOR plus 2.5% per annum. The term loan is payable in monthly
principal installments of $24,722, with a balloon payment of $2,966,666 due on
May 1, 2002, and bears interest at prime plus 0.75% per annum.
At December 31, 1998 and 1997, respectively, amounts of $12,910,000 and
$11,975,000 were due on the revolving credit line and amounts of $4,054,448 and
$4,276,946 were due on the term loan (see Note 6). LaSalle has informed the
Company that it intends to renew the revolving credit facility, under similar
terms, to mature subsequent to December 31, 1999 and, as such, the balance as of
December 31, 1998 has been classified as noncurrent.
The LaSalle agreement contains certain limitations on dividends and capital
expenditures and requires the Company to satisfy certain financial tests
concerning defined minimum tangible net worth and ratios of liabilities to
tangible net worth. At December 31, 1998, the Company was in compliance with
all loan covenants (or had received waivers). The entire credit facility is
secured by a first lien on substantially all of the Company's North American
assets. At December 31, 1998, approximately $1,104,000 was available for
borrowing under the revolving credit line.
The weighted average interest rates on the aforementioned borrowings were 8.67%,
8.22% and 7.54% for the years ended December 31, 1998, 1997, and 1996,
respectively.
F - 12
<PAGE> 45
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 6--LONG-TERM INDEBTEDNESS
- ------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
LaSalle National Bank term loan (see Note 5) $ 4,054,448 $ 4,276,946
Capital lease obligation (see Note 8) 51,392 89,554
------------- ------------
Total long-term indebtedness 4,105,840 4,366,500
Less current portion 321,500 355,937
------------- ------------
Noncurrent portion $ 3,784,340 $ 4,010,563
============= ============
The approximate aggregate maturities of the LaSalle term loan are:
Year Ending
December 31 Amount
----------- ------------
1999 $ 296,664
2000 296,664
2001 296,664
2002 3,164,456
------------
$ 4,054,448
============
</TABLE>
NOTE 7--INCOME TAXES
- --------------------
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- -----------
<S> <C> <C> <C>
Current:
Federal $(102,000) $ (201,700) $ 263,000
Foreign (18,616) 116,520 (75,387)
State (46,200) (48,300) 38,000
Deferred 80,895 (936,400) (126,905)
--------- ------------ ---------
$ (85,921) $ (1,069,880) $ 98,708
========= ============ =========
</TABLE>
F - 13
<PAGE> 46
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 7--INCOME TAXES, CONTINUED
- -------------------------------
The components of the domestic net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 162,100 $ 705,200
Reserve for lawsuit settlement 114,700 247,000
Variation of inventories between tax and financial
reporting purposes 100,600 168,700
Net operating loss carryforward (gross amount
$1,800,000 expiring 2018) 690,300 0
Compensation expense for stock options 195,700 180,700
Other accruals 129,400 63,400
---------- ----------
Total deferred tax assets 1,392,800 1,365,000
---------- ----------
Deferred tax liability:
Variation of depreciation between tax
and financial reporting purposes (184,800) (37,300)
---------- ----------
Net deferred tax assets (1998--$145,200 noncurrent) $1,208,000 $1,327,700
========== ==========
The components of the Canadian net deferred tax liabilities are:
1998 1997
---------- ----------
Deferred tax liabilities:
Depreciation differences between tax reporting and
financial reporting $ 311,885 $ 254,777
---------- ----------
Deferred tax assets:
Tax carryforwards 134,813 0
Other 0 38,900
---------- ----------
134,813 38,900
---------- ----------
Net deferred tax liabilities $ 177,072 $ 215,877
========== ==========
</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>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Income (loss) before income tax expense:
Domestic $ (77,147) $(2,887,136) $ 76,168
Foreign (189,417) (268,636) (470,880)
---------- ----------- ----------
$ (266,564) $(3,155,772) $ (394,712)
========== =========== ==========
Computed income tax expense (benefit) at
federal statutory rate $ (90,600) $(1,073,000) $ (134,200)
Increase (Reduction) resulting from:
Hungary loss (tax benefit not recorded) 85,500 90,400 215,000
Other (including effect of different
foreign and U.S. State rates) (80,821) (87,280) 17,908
---------- ----------- ----------
Total $ (85,921) $(1,069,880) $ 98,708
========== =========== ==========
</TABLE>
F - 14
<PAGE> 47
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 7--INCOME TAXES, CONTINUED
- -------------------------------
Income taxes refundable consist of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Tax deposits in excess of taxes due $ 48,088 $ 105,439
Carryback of Canadian operating losses 23,662 0
Carryback of State operating losses 35,475 0
Carryback of United States operating losses 127,000 250,000
------------ ------------
$ 234,225 $ 355,439
============ ============
</TABLE>
The United States entities' consolidated federal income tax returns filed for
the years 1995 and 1996 are currently under examination by the Internal Revenue
Service. No significant deficiencies are expected to result from such
examination.
NOTE 8--LEASES AND OTHER COMMITMENTS
- ------------------------------------
The Company leases from unaffiliated parties all of 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 2002. Annual rents for the facilities range from $123,000 to
$135,000.
Aggregate rent expense for all facilities was approximately $729,000, $725,000
and $527,000 for 1998, 1997 and 1996, respectively.
The Company leases certain equipment under capital leases payable in aggregate
monthly installments of $5,200 with the latest expiring in 2003. The net book
value of such equipment under capital lease is $23,000. Certain vehicles and
equipment are also leased under operating leases, the latest expiring in 2001.
Approximate minimum lease payments due over the remaining terms of the leases
are as follows:
Capital Operating
Leases Leases
-------- ----------
1999 $ 33,142 $ 715,319
2000 9,624 459,292
2001 5,582 226,956
2002 5,582 136,362
2003 3,256 0
-------- ----------
57,186 1,537,929
Less interest portion 5,794 0
-------- ----------
$ 51,392 $1,537,929
======== ==========
F - 15
<PAGE> 48
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 9--GEOGRAPHICAL SEGMENT/MAJOR CUSTOMER DATA
- ------------------------------------------------
The Company's operations primarily involve three geographic segments. The
United States and Canada operations involve the design, manufacture, sale and
support of automotive brake parts. The European operation (Hungary) 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
United States Canada Europe Eliminations Total
------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
-----------------------------
Total revenue:
Unaffiliated customers $ 48,960,113 $ 9,291,960 $ 5,616,393 $ 0 $ 63,868,466
Inter area transfers 1,789,406 4,578,027 0 (6,367,433) 0
------------- ----------- ----------- ----------- ------------
Total $ 50,749,519 $13,869,987 $ 5,616,393 $(6,367,433) $ 63,868,466
============= =========== =========== =========== ============
Income (Loss) from operations $ 1,984,984 $ 249,606 $ (406,717) $ 0 $ 1,827,873
Interest expense 1,765,074 150,542 235,266 0 2,150,882
Income (Loss) before income taxes 313,392 (278,300) (301,656) 0 (266,564)
Total assets 50,383,764 11,974,037 4,301,530 (27,730,801) 38,928,530
Capital expenditures 248,108 100,649 161,934 0 510,691
Depreciation and amortization 769,074 156,703 189,487 0 1,115,264
YEAR ENDED DECEMBER 31, 1997:
Total revenue:
Unaffiliated customers $ 47,787,662 $ 8,033,192 $ 5,446,085 $ 0 $ 61,266,939
Inter area transfers 1,854,003 3,347,964 0 (5,201,967) 0
------------- ----------- ----------- ----------- ------------
Total $ 49,641,665 $11,381,156 $ 5,446,085 $(5,201,967) $ 61,266,939
============= =========== =========== =========== ============
</TABLE>
F - 16
<PAGE> 49
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 9--GEOGRAPHICAL SEGMENT/MAJOR CUSTOMER DATA, CONTINUED
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated
United States Canada Europe Eliminations Total
------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997, CONTINUED
---------------------------------------
Income (Loss) from operations $ (917,909) $ 125,554 $ 44,821 $ 0 $ (747,534)
Interest expense 1,106,064 315,577 305,732 0 1,727,373
Loss before income taxes (2,892,113) (2,748) (260,911) 0 (3,155,772)
Total assets 34,188,764 7,046,242 4,099,888 (8,259,853) 37,075,041
Capital expenditures 409,717 86,604 77,580 0 573,901
Depreciation and amortization 605,475 443,430 193,315 0 1,242,220
YEAR ENDED DECEMBER 31, 1996:
-----------------------------
Total revenue:
Unaffiliated customers $ 51,035,259 $ 5,973,613 $ 6,050,643 $ 0 $63,059,515
Inter area transfers 1,771,569 4,225,834 0 (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) $ 0 $ 675,541
Interest expense 592,197 323,614 268,207 0 1,184,018
Income (Loss) before income taxes 356,948 162,306 (907,966) 0 (394,712)
Total assets 31,946,883 8,331,846 4,230,008 (6,841,966) 37,666,771
Capital expenditures 391,200 2,492,115 1,089,865 0 3,973,180
Depreciation and amortization 418,672 405,019 183,117 0 1,006,808
</TABLE>
In 1998 and 1997, one customer accounted for 12% and 17% of total consolidated
sales. Purchases from one vendor accounted for approximately 16% of
consolidated cost of sales in each year.
F - 17
<PAGE> 50
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 10--CONTINGENCIES
- ----------------------
During 1995, a lawsuit was filed against the Company in the United States
Bankruptcy Court (the Court) by a Trustee of the bankruptcy 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. 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.
On July 10, 1998, after a trial held in the Bankruptcy Court, the Court ruled
that the vast majority of the trustee's claims were invalid. The Company's
liability for the claims held as valid was approximately $499,000, for which the
Company paid approximately $198,000 in 1998. As a result, the Company recorded
benefit for lawsuit settlement of $151,000 (pre-tax) 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 liabilities. While the Trustee's claim involves
substantial amounts, it is the opinion of management that the ultimate
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 11--STOCK WARRANTS AND OPTIONS
- -----------------------------------
The Company has outstanding 1,495,000 redeemable common stock purchase warrants.
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 underwriting agreement entered into in connection with the Company's 1994
initial public offering granted the underwriter a warrant to purchase 130,000
units (consisting of one common share and a warrant to purchase one common
share) at an exercise price of $7.25 per unit.
On January 24, 1996, these underwriter warrants were exercised. Holders elected
to exchange 78,675 shares of common stock (whose then current market value was
equal to the total required exercise price) in return for the 130,000 common
shares and the 130,000 warrants. Thus, 51,325 shares of Company stock were
issued without cash consideration to the Company. The Company, therefore, also
has outstanding 130,000 common stock purchase warrants. The exercise price of
the warrants is $11.20. Such warrants have not yet been exercised. Also, see
Note 4 for warrants issued in connection with subordinated debentures.
F - 18
<PAGE> 51
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 11--STOCK WARRANTS AND OPTIONS, CONTINUED
- ----------------------------------------------
The Company maintains a Stock Option Plan (as amended and restated effective
June 9, 1998) 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 700,000 shares of common stock
for issuance under the Stock Option Plan. Following is a table indicating the
activity during 1998, 1997 and 1996 for such Stock Option Plan:
Weighted
Average
Stock Exercise
Options Price
------------ --------
Options granted in 1995 and outstanding at
December 31, 1995 $ 57,000 $ 1.07
1996:
Options granted 84,526 5.00
Options exercised (1,400) (5.00)
Options forfeited (2,100) (5.00)
----------
Balance, December 31, 1996 138,026 $ 3.38
=======
1997:
Options granted 41,500 $ 4.86
---------- =======
Balance, December 31, 1997 179,526 $ 3.72
=======
1998:
Options granted 213,150 $ 1.54
Options forfeited (44,700) (3.02)
Options canceled (70,000) (2.48)
----------
Balance, December 31, 1998 $ 277,976 $ 2.47
========== =======
Options exercisable, December 31, 1998 $ 137,036 $ 2.86
========== =======
The weighted average fair values of options granted during the years ended
December 31, 1996, 1997 and 1998 were $7.69, $2.75 and $1.42, respectively.
F - 19
<PAGE> 52
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 11--STOCK WARRANTS AND OPTIONS, CONTINUED
- ----------------------------------------------
The following table summarizes information about the outstanding and exercisable
stock options as of December 31, 1998:
Options Outstanding
-------------------
Weighted- Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
------------ ----------- ----------- --------
$ 1.00 11,000 91 months $ 1.00
1.09 - 1.20 114,350 113 months 1.16
2.03 - 2.23 75,600 108 months 2.22
3.00 5,000 105 months 3.00
5.00 72,026 104 months 5.00
-----------
277,976
===========
Options Exercisable
-------------------
Weighted-
Range of Average
Exercise Number Exercise
Prices Exercisable Price
------------ ----------- --------
$ 1.00 11,000 $ 1.00
1.09 - 1.20 25,080 1.16
2.03 - 2.23 51,240 2.22
3.00 5,000 3.00
5.00 44,716 5.00
-----------
137,036
===========
Effective January 1998, 44,000 of the 55,000 options previously granted at a
$1.00 exercise price were cancelled and replaced with options to purchase 60,000
shares at 110% of market value at the date of such grant.
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 1998, 1997 and 1996,
amounts of $39,509, $158,097 and $147,947, respectively, have been provided for
such compensation expense (with offsetting credits to additional paid-in
capital).
F - 20
<PAGE> 53
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 11--STOCK WARRANTS AND OPTIONS, CONTINUED
- ----------------------------------------------
The Company has adopted only the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) and continues to account for stock options in accordance with APB Opinion
25. The foregoing amount of compensation expense for 1998, 1997 and 1996
differs by less than $.01 per share 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.
NOTE 12--QUARTERLY RESULTS (UNAUDITED)
- --------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1998:
Net sales $14,524,313 $19,473,885 $16,137,125 $13,733,143 $63,868,466
Net income (loss) 42,132 349,539 (76,275) (496,039) (180,643)
Basic and diluted earnings (loss) per share 0.01 0.05 (0.01) (0.07) (0.03)
1997:
Net sales 14,051,503 17,953,416 16,184,302 13,077,718 61,266,939
Net income (loss) (493,743) 328,976 (16,278) (1,904,847) (2,085,892)
Basic and diluted earnings (loss) per share (0.07) 0.05 0.00 (0.28) (0.31)
</TABLE>
The fourth quarter 1998 loss was attributable to (a) lower operating levels at
the Hungarian foundry in such quarter due to a reduction in orders from a
customer shipping primarily to Russia and (b) aggressive pricing in North
America as part of a strategy to attract new customers.
The fourth quarter of 1997 loss was attributable to a one time increase in the
bad debt reserve of approximately $2 million which related to the bankruptcy
filing of a major customer and recognition of further consolidation in the
automotive aftermarket.
F - 21
<PAGE> 54
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors of
Universal Automotive Industries, Inc.
In connection with our audit of the consolidated financial statements of
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC. referred to in our report dated March 12,
1999 which is included in this Form 10-K, we have also audited Schedules I and
II as of and for the years ended December 31, 1998, 1997 and 1996. In our
opinion, these schedules present fairly, in all material respects, the
information required to be set forth therein.
Chicago, Illinois
March 12, 1999
S - 1
<PAGE> 55
Schedule I, Page 1
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(An S Corporation)
Balance Sheets (Not Consolidated)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------ -----------
<S> <C> <C>
Cash and Cash Equivalents $ 101 $ 101
Prepaid Expenses and Other Assets 130 130
Investment in and Advances to Wholly Owned Subsidiaries 6,497,149 7,069,058
------------ -----------
$ 6,497,380 $ 7,069,289
============ ===========
Liabilities and Stockholders' Equity
Liabilities $ 0 $ 0
------------ -----------
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 each year) 67,694 67,694
Additional paid-in capital 9,220,025 9,180,516
Retained earnings (deficit) (2,190,697) (2,010,054)
Accumulated other comprehensive loss (599,642) (168,867)
------------ -----------
6,497,380 7,069,289
------------ -----------
$ 6,497,380 $ 7,069,289
============ ===========
</TABLE>
S - 2
<PAGE> 56
Schedule I, Page 2
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(An S Corporation)
Statement of Operations and Retained Earnings (Deficit) (Not Consolidated)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Income:
Equity income (loss) of subsidiaries $ (141,134) $(1,889,247) $(309,217)
----------- ----------- ---------
(141,134) (1,889,247) (309,217)
=========== =========== =========
Expenses:
Compensation expense for stock options 39,509 158,097 147,947
Miscellaneous (primarily amortization) 0 38,548 36,256
----------- ----------- ---------
39,509 196,645 184,203
=========== =========== =========
Net Loss for Period (180,643) (2,085,892) (493,420)
Retained Earnings (Deficit), Beginning of Period (2,010,054) 75,838 569,258
----------- ----------- ---------
Retained Earnings (Deficit), End of Period $(2,190,697) $(2,010,054) $ 75,838
=========== =========== =========
</TABLE>
S - 3
<PAGE> 57
Schedule I, Page 3
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(An S Corporation)
Statement of Cash Flows (Not Consolidated)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
Cash from Operating Activities:
Net loss $(180,643) $(2,085,892) $(493,420)
Adjustments to reconcile net loss to cash
used in operating activities:
Compensation expense for stock
options 39,509 158,097 147,947
Equity in net loss of subsidiaries 141,134 1,889,247 309,217
Amortization 0 38,548 34,561
--------- ----------- ---------
Cash used in operating activities 0 0 (1,695)
--------- ----------- ---------
Cash from Investing Activities:
Advances to subsidiaries (net) 0 0 (334,190)
--------- ----------- ---------
Decrease in Cash and Cash Equivalents 0 0 (335,885)
Cash and Cash Equivalents, Beginning of Period 101 101 335,986
--------- ----------- ---------
Cash and Cash Equivalents, End of Period $ 101 $ 101 $ 101
========= =========== =========
</TABLE>
S - 4
<PAGE> 58
Schedule II
SCHEDULE II
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(An S Corporation)
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column B Column C
Balance at Charged Column E
Beginning to Costs Column D Balance at
of Period and Expense Writeoffs End of Period
------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C>
1998:
Allowance for doubtful accounts $1,900,415 $ 39,195 $1,424,373 $ 515,237
========== ========== ========== ==========
1997:
Allowance for doubtful accounts $ 463,968 $2,805,837 $1,369,350 $1,900,415
========== ========== ========== ==========
1996:
Allowance for doubtful accounts $ 92,461 $ 472,732 $ 101,225 $ 463,968
========== ========== ========== ==========
1998:
Reserve for inventory obsolescence $ 217,785 $ (59,386) $ 0 $ 158,399
========== ========== ========== ==========
1997:
Reserve for inventory obsolescence $ 219,836 $ (2,051) $ 0 $ 217,785
========== ========== ========== ==========
1996:
Reserve for inventory obsolescence $ 0 $ 219,836 $ 0 $ 219,836
========== ========== ========== ==========
</TABLE>
S - 5
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
<TABLE>
<CAPTION>
State of Name Under Which
Name Incorporation Subsidiary Does Business
- ---- ------------- ------------------------
<S> <C> <C>
UBP Universal Brake Parts
Universal Automotive, Inc. Illinois Jet Automotive
UBP Canholdings, Inc. Canada N/A
UBP Brake Parts, Inc. Canada N/A
International Discus Corporation Canada N/A
UBP Hungary, Inc. Delaware N/A
UBP Csepel Iron Foundry Hungary UBP Csepel Iron Foundry, KFT
</TABLE>
<PAGE> 1
EXHIBIT 23
[ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]
CONSENT OF ALTSCHULER, MELVOIN AND GLASSER LLP
We consent to the reference to our firm under the capiton "Experts" and to the
incorporation by reference of our report dated March 12, 1999 relating to the
consolidated financial statements and financial statement schedules of Universal
Automotive Industries, Inc. as of December 31, 1998, and for the year then
ended in the Registration Statement on Form S-8 (File No. 33-97360) as filed
with the Securities and Exchange Commission September 26, 1995.
ALTSCHULER, MELVOIN AND GLASSER LLP
Certified Public Accountants
/s/ Altschuler, Melvoin and Glasser LLP
- ---------------------------------------
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 347,626
<SECURITIES> 0
<RECEIVABLES> 11,068,373
<ALLOWANCES> 515,237
<INVENTORY> 16,101,634
<CURRENT-ASSETS> 29,326,619
<PP&E> 11,697,426
<DEPRECIATION> 3,486,879
<TOTAL-ASSETS> 38,928,530
<CURRENT-LIABILITIES> 11,219,113
<BONDS> 21,034,965
0
0
<COMMON> 67,694
<OTHER-SE> 6,429,686
<TOTAL-LIABILITY-AND-EQUITY> 38,928,530
<SALES> 63,868,466
<TOTAL-REVENUES> 63,868,466
<CGS> 50,796,183
<TOTAL-COSTS> 50,796,183
<OTHER-EXPENSES> 11,244,410
<LOSS-PROVISION> 39,195
<INTEREST-EXPENSE> 2,150,882
<INCOME-PRETAX> (266,564)
<INCOME-TAX> (85,921)
<INCOME-CONTINUING> (180,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,643)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
