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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, 2001
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number
0-25198
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3973627
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(State of Incorporation) (IRS Employer Identification No.)
11859 South Central Street, Alsip, Illinois 60803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 293-4050
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Units (One share Common Stock
and one Warrant) Not listed for trading
- ----------------------------------------- --------------------------------
Common Stock, $0.01 Par Value Nasdaq SmallCap Market
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Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market
- ----------------------------------------- --------------------------------
Securities registered pursuant to Section 12(g) of the Act:
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 | |
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. | |
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 15, 2002, was approximately
$21,785,515.
The number of shares of Registrant's Common Stock, par value of $0.01 per
share, outstanding as of March 15, 2002 was 8,220,949 shares.
TABLE OF CONTENTS
Page
----
PART I............................................................................................ 1
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 19
Item 3. Legal Proceedings................................................................ 19
Item 4. Submission of Matters to Vote of Security Holders................................ 19
PART II........................................................................................... 20
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............ 20
Item 6. Selected Financial Data.......................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................ 30
Item 8. Financial Statements and Supplementary Data...................................... 30
Item 9. Changes in and Disagreements With Accounting and Financial Disclosure............ 31
PART III.......................................................................................... 31
Item 10. Directors and Executive Officers of the Registrant............................... 31
Item 11. Executive Compensation........................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 39
Item 13. Certain Relationships and Related Transactions................................... 41
PART IV........................................................................................... 43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 43
PART I
ITEM 1. BUSINESS(1)
OVERVIEW
Our primary business is the manufacturing and marketing of brake parts,
including brake rotors, drums, disc brake pads, brake shoes and hydraulic parts
for the estimated 2.3 billion * dollar automotive brake part aftermarket. About
90% of our revenues come from the sale of brake parts. The remaining 7% of our
revenues come from our wholesale commodity business in which we buy and sell
fast moving automotive parts such as spark plugs, headlights, motor oils, etc.
Typically, the margin in the commodity business is substantially less then the
brake business. We manufacture over 90% of our friction products, 40% of brake
drums and rotors (measured in revenues) and market the balance of our brake
rotors, drums and all our hydraulic parts. An estimated 75% of our sales are
marketed under our customer's private labels and the balance of our sales under
our brands i.e. Ultimate and UBP trademarks.
REVENUES*
[PIE CHART]
Drums and Rotors 61%
Friction 30%
Commodities 7%
Hydraulics 2%
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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 "we anticipate," "believe" or "expect" indicate that it is possible that
the event anticipated, believed or expected may not occur. Should such event not
occur, then the result which we expected also may not occur or occur in a
different manner, which may be more or less favorable to us. We do 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.
*According to Frost and Sullivan 2000 Report.
1
We operate two friction plants, an 83,000 square foot disc pad plant
located in Brampton, Ontario and a 70,000 square foot brake drum lining and
brake shoe remanufacturing plant in Walkerton, Virginia. Our friction business
has experienced substantial growth since we acquired our first friction plant in
September 1996. Unlike the brake rotor and drum product group, there is no
material competition from offshore friction suppliers. We believe the barrier to
entry in the friction category is significant due to the following reasons: (i)
building brand acceptance is difficult due to safety related concerns; (ii)
capital requirements are intensive; (iii) friction formulations are usually
patented or highly classified; and (iv) the business is an art as much as a
science and requires highly experienced management. Our first plant in 1996 was
located in a 17,500 square foot facility. Today we have 140,000 square feet
dedicated to the friction manufacturing business. To further supplement growth
in this category, we recently entered into a letter of intent with Creative
Friction, LLC ("Creative Friction"), a manufacturer of ceramic and high
performance disc pads, regarding a strategic alliance under which we will have
the exclusive purchasing rights to buy product from Creative Friction, subject
to certain terms and conditions and to obtain an option to purchase its assets.
We operate a 50,000 square foot brake rotor manufacturing plant in Cuba,
Missouri. We believe that in order to satisfy the customer's request for maximum
quality at the most competitive economics, we must have the flexibility to
manufacture or source brake rotors and drums. We believe the brake rotors we
manufacture in the USA are superior in quality and value to the same parts
supplied through plants located in China. We believe that our US manufactured
brake rotors "add value" to our customer relationships and are provided with a
competitive edge over competitors who are exclusively marketers of brake drums
and rotors. We also believe that we have improved our ability to source product
in China through our recent strategic relationship with Wanxiang America
Corporation, China's leading auto parts supplier to the OEM and aftermarket. See
further detail regarding our relationship with Wanxiang America Corporation
under "Line of Credit and Recent Financings."
The trend over the last year has favored growth in the private label
segment as customers choose to support their own brands. We believe there has
been a shift over the last several years by national buying groups and retailers
to build their brand equity as opposed to supporting the Big Three (Dana,
Federal-Mogul and Honeywell) brands. This shift in customer preference supports
our business model. Our interests run parallel to the customer's since our
primary focus is to support our customer's private label as opposed to building
market share for our brand.
We have positioned ourselves as one of the only viable alternatives to the
Big Three brake companies. Our other competitors specialize primarily in one
brake category which makes it more difficult for a customer to manage (one
supplier for each category) from a marketing, supply and inventory management
function. The success of our business model can be demonstrated through the
expansion of approved product lines with existing national buying groups such as
Parts Plus, National Pronto Association and Independent Auto Parts Association,
in which we are an approved supplier for two or more brake categories.
INDUSTRY BACKGROUND
Braking Systems. There are two primary types of braking systems for cars
and light trucks. The first is a drum brake system, in which the braking action
is created by a brake shoe being forced outward against the inside of a rotating
drum. The second, and newer, system is a disc braking system, in which the
braking
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action is created by two brake pads squeezing a rotor. Each vehicle has either
one drum or one rotor at each wheel. In either case, the braking is initiated by
the driver's pressing a brake pedal, which causes a master cylinder to compress
fluid in the vehicle's braking system, which, in turn, causes the fluid pressure
to pass through a brake line to a hydraulic system which causes the action of
the brake shoes in a drum system or brake pads in a disc system.
Distribution in the Aftermarket. The ultimate consumers for automotive
aftermarket products can be divided into two primary categories. The first
category consists of customers who choose to have their cars repaired at a
commercial service establishment, such as a service station, repair shop or car
dealer, and is known as the "installer segment." Customers in the second
category, the "do-it-yourself" segment, are those customers who choose to make
the repairs themselves.
Traditionally, many car parts have been distributed though a system under
which products are sold from manufacturers to warehouse distributors, who then
sell to "jobbers," who in turn sell to installers and consumers. We believe that
in recent years there has been an industry shift away from the traditional
channels of distribution toward alternative distribution channels, including
manufacturers who sell parts to mass market retailers who serve do-it-yourself
customers, and manufacturers who sell parts to warehouse distributors, who sell
directly to installers that provide repair and installation services. We believe
the traditional warehouse jobber distribution system has suffered, and may
continue to suffer, some erosion of total market share as a result of the
expansion of these alternative distribution channels, particularly as a result
of the increased presence in the marketplace of the mass-market retailer.
However, we believe that these shifts in distribution channels will benefit us,
as our principal brake parts customers include these mass market retailers.
Frost & Sullivan estimates that sales of brake parts in the United States'
aftermarket for passenger cars, sports utility vehicles and light trucks totaled
$2.34 billion in sales in 1999. This market grew by an estimated 4% in 1999,
according to Frost & Sullivan.
We believe the demand for aftermarket brake parts, particularly value line
parts, will continue to grow because of the following factors:
- An increasing number of vehicles on the road. New car sales were
strong from 1998 through 2000; we expect vehicles sold during this
time period to require replacement parts in 2003 to 2005.
- An aging vehicle population, which creates the need for more
replacement parts. In 1999 the average age of a vehicle in the
United States was 9.3 years old.
- Increased production of front wheel drive vehicles, which create
more wear on brake parts than rear wheel drive vehicles. Over 70% of
all new vehicles are designed with front wheel drive.
- A trend toward the use of affordable replacement brake rotors rather
than resurfacing existing rotors. Historically, due to the high cost
of new rotors, consumers and installers generally chose to resurface
brake rotors rather than purchase replacement rotors. However, due
to the availability of lower-cost replacement rotors, in
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recent years, consumers and installers are increasingly choosing to
purchase replacement rotors.
- Modern design innovations, including the automotive industry's shift
to the production of an increased number of lighter-weight rotors
and metallic brake pads. The newer metallic brake pads are abrasive
and wear rotor surfaces much faster than the non-metallic pads used
in the past. Lighter weight rotors are less costly than heavier
rotors, and, when the rotors have worn down, it is generally more
cost effective to discard rather than refurbish them.
We believe the private label market category will continue to grow, as
customers are looking for the best value for their dollar, and often will not
pay extra for premium-priced products. In response to these consumer
preferences, mass-market retailers have grown in popularity and increasingly
seek to sell private label parts. In addition, we believe distributors will
increase their purchases of private label parts as a means of improving their
profit margins.
OUR STRATEGY
Our strategy is to capitalize on the increasing demand for brake parts by
expanding our brake parts manufacturing and distribution business. We believe
that we can implement our expansion strategy by:
- Leveraging our existing customer base by marketing additional
brake categories and new premium friction products;
- Continuing to address the growing demand for customers' private
labels across all of our product lines;
- Providing "maximum value," i.e., the highest quality for the lowest
cost;
- Considering acquisitions of other specialty brake parts
distributors;
- Building further brand recognition through our line of Ultimate
brand brake parts, which is a premium product line; and
- Launch a ceramic disc brake pad product either through our strategic
alliance with Creative Friction, LLC or through internal product
development.
PRODUCTS
The brake parts we sell can be divided into three main categories: drums
and rotors; friction parts; and hydraulic parts. The friction category of
parts consists of brake shoes for drum systems and brake pads for disc systems.
Cylinders and brake hoses are examples of hydraulic parts. We manufacture some
of these parts and act as a distributor for others. We market approximately 25%
of our products under our trademarks, Universal Brake Parts, or UBP, and to a
lesser extent, Ultimate, and the remainder under our customers' private labels.
We manufacture disc brake rotors in our Cuba, Missouri facility, and formulate
and manufacture disc brake pads at our North American Friction plant, located in
Toronto, Canada. At our plant in Walkerton, Virginia, we manufacture brake pads,
brake shoes and drum brake lining. The hydraulic parts we sell are all purchased
from suppliers.
4
We supply value line brake parts, i.e., parts sold at prices below those
of certain leading national brand name parts, to mass-market retailers,
traditional warehouse distributors and specialty undercar distributors in North
America. Many of our competitors specialize in only one category, such as
friction parts or drums and rotors. By offering a full line of products in
several categories, we believe we have an advantage over those competitors
offering products in fewer categories, in light of the industry trend towards
consolidation of the number of suppliers of products.
WHOLESALE PRODUCT OPERATION
We conduct a wholesale product operation from our headquarters facility in
Alsip, Illinois, purchasing automotive items such as spark plugs, motor oil and
freon, in large volume, at below market prices, and reselling these products at
slightly higher prices. We make large-volume purchases of products on the open
market, generally buying from domestic and foreign manufacturers and other
warehouse distributors, and reselling these products to other warehouse
distributors, mass market retailers and jobbers. These operations, while
historically profitable, result in gross margins that are significantly lower
than gross margins from our other operations. For the years ended December 31,
1999, 2000 and 2001, excluding sales from our Hungarian foundry, net sales from
our wholesale product operations accounted for approximately 10%, 7% and 8%,
respectively, of our total net sales, and 5%, 4% and 5%, respectively, of our
total gross profits.
MARKETING AND DISTRIBUTION
Marketing
We organize our marketing operations around two principal customer groups:
traditional aftermarket warehouse distributors and mass market retailers.
Private Label Brake Parts Customers. The majority of our products, 75%,
are sold under our customers' private brand label. Most aftermarket
distributors are members of national buying/marketing groups and have developed
their own private brand labels.
We supply one or more brake product lines to the following marketing
groups under the group's private label: National Pronto Association; IAPA; APA
and Aftermarket Auto Parts Alliance. We also supply national retailers such as
Advance Auto Parts, Discount Auto Parts and O'Reilly's under their private
brand label.
UBP Branded Product Customers. Customers such as Pep Boys, Murray's
Discount Auto Parts and the RPM Group purchase brake parts from us under our
"UBP" or "Ultimate" branded labels.
National Franchise and Chain Installers. We market brake parts, most of
which are private label, to national franchise and chain installers, through
telemarketing operations conducted from our headquarters facility located in
Alsip, Illinois. In some cases, national franchise and chain installers, or
dealer associations of which they are members, negotiate supply contracts with
preferred suppliers and either encourage or require their franchisees or members
to purchase from the preferred suppliers. We are a preferred supplier to Meineke
Shops.
Sales/Marketing. We employ five full-time sales personnel and a director
of marketing. Our Senior Vice President of Sales manages our independent sales
representative network and other marketing efforts.
We believe we have retained some of the best independent sales
representatives across the country. These representatives assist us with
direct sales effort, customer field work, trade shows and other marketing and
sales activities. These independent sales representatives are compensated on a
commission basis. Agreements with our independent sales representatives may be
terminated at any time by either party, upon notice.
5
Distribution
We seek to provide rapid delivery of a wide variety of brake parts to our
customers. We operate a 263,000 square foot distribution center at our
headquarters facility located in Alsip, Illinois. We also have a 28,000 square
foot distribution facility in Southern California. We generally are able to
fulfill customer orders quickly, as the industry demands, and, therefore,
typically do not have a large order backlog. We generally deliver orders to our
brake parts customers within four to five days from the time the order is
placed. In addition, we seek to maintain high fill rates for orders, and,
accordingly, do not generally have a large number of back orders. Customers may
place their stock orders by telephone, electronically or by facsimile.
Deliveries are made from all warehouses, almost exclusively by common carrier.
MANUFACTURING
In 2001, we relocated our rotor machining facility from Laredo, Texas to
Cuba, Missouri, which is closer to our source of supply of castings and our
primary distribution center in Alsip, Illinois, to reduce our costs. The Cuba
facility has a capacity to machine approximately 750,000 rotors on a two-shift
basis.
In 1996, we acquired North American Friction, which at the time occupied a
17,000 square foot facility near Toronto, Ontario. Today, as a result of
significant growth in the sales of friction products since we entered that
market segment, North American Friction occupies an 79,000 square foot facility
in suburban Toronto, Ontario. We now offer a full line of friction grades in
both riveted and integrally-molded disc brake pads. North American Friction was
awarded ISO 9001 certification in July 1999.
We acquired Total Brake Industries' assets in November 1999 and operate
these assets from a 77,000 square foot leased facility in Walkerton, Virginia.
This facility remanufactures brake shoes and brake shoe lining for use in this
remanufacturing process. In addition, we sell drum brake shoe lining to third
party customers. We are considering outsourcing the remanufacturing of brake
shoes to an entity in China through our relationship with Wanxiang Group
Corporation which we believe will significantly reduce our cost of
remanufacturing. As the result of a letter of intent we signed in December 2001,
which is summarized in "Suppliers and Raw Materials" below, we are in
negotiations to obtain an option to acquire exclusivity on all production and an
option to acquire all of the assets of Creative Friction, LLC, a manufacturer of
high-end ceramic disc brake pads located in Phoenix, Arizona.
SUPPLIERS AND RAW MATERIALS
Suppliers
We centralize product selection and purchasing functions for our warehouse
distribution business at our headquarters located in Alsip, Illinois. Most of
the drums, rotors and hydraulic parts we sell are purchased from a variety of
suppliers. We manufacture the vast majority of the friction parts that we sell.
Currently, of the drums, rotors and hydraulic parts we purchase, approximately
70% are manufactured in the Peoples Republic of China and the remainder in
Taiwan, Italy, Canada and the United States.
6
In connection with a transaction under which we issued 201,438 shares of
Series A Preferred Stock to Venture Equities Management, Inc., an affiliate of
Wanxiang America Corporation and Wanxiang Group Corporation, one of the leading
manufacturers of automotive parts in the Peoples Republic of China, we entered
into a supply agreement with Wanxiang America Corporation. Under the supply
agreement, we agreed to make annual purchases of parts from Wanxiang America
Corporation totaling $5,000,000, provided the prices of the products we purchase
from Wanxiang America are substantially comparable to the prices charged by
other suppliers in the Peoples Republic of China for similar products. In the
event we do not purchase $5,000,000 in products from Wanxiang America in a year,
we are obligated under the agreement to pay Wanxiang America 20% of the
difference between $5,000,000 and the amount we have paid to Wanxiang America
for products during the year. The agreement provides Wanxiang America with a
right of refusal with respect to products we seek to purchase from other
suppliers located in the Peoples Republic of China. The supply agreement has an
indefinite term, but can be terminated by Wanxiang America at any time and by us
if Wanxiang America materially fails to perform its obligations under the
agreement, or if the number of shares of our common stock underlying the shares
of Series A Preferred Stock owned by Venture Equities Management falls below a
specified level.
On December 17, 2001, we entered into a non-binding letter of intent with
Creative Friction, LLC, a manufacturer of disc brake pads located in Phoenix,
Arizona, with regard to a manufacturing supply agreement. Creative Friction
operates a new, state-of-the-art facility which is fully automated and which
uses proprietary German manufacturing technology designed to service both the
original equipment market and the aftermarket. In connection with the execution
of the letter of intent, we agreed to issue to Creative Friction 37,500 shares
of our common stock, having a value at the time of approximately $137,000, in
exchange for an agreement on the part of Creative Friction to negotiate
exclusively with us between the date of the letter of intent and February 22,
2002. This agreement has been subsequently extended until April 1, 2002.
Some of our suppliers may provide a majority or all of our requirements
for a particular product or product subcategory. However, we believe that the
loss of any one or more of our suppliers would not have a material adverse
effect on us and that alternative sources of supply are readily available at
comparable prices in all product categories. We believe that our relationships
with our suppliers are good.
The International Trade Commission has ruled that rotor sales from China
materially injured U.S. rotor manufacturers. As a result of this determination,
the U.S. Customs Service has imposed anti-dumping duties on some Chinese
suppliers. These duties can be reviewed annually if requested by a Chinese
manufacturer or by a U.S. brake rotor manufacturer and depending on the results
of the review, the tariff may be decreased or increased. The dumping duties are
plant specific and are retroactive to the importer of record. However, we are
not the importer of record for this purpose and, therefore to date have not been
affected by dumping duties.
Raw Materials
The main components used in our brake rotor manufacturing operations are
iron castings. We primarily purchase castings from Waupaca Foundry, Inc.
The prices of castings fluctuate based on the scrap metal and energy costs. In
the most recent three-year period, these prices have generally stayed within a
range of 10% below to 10% above the price at the beginning of the period. In
addition to Waupaca Foundry, we purchase castings from a foundry in Canada.
Although we believe that we have
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developed good relationships with the foundries that supply our iron castings,
any of these foundries could discontinue producing these castings for us at any
time.
We believe that the number of foundries equipped to produce iron castings
such as the ones used by us in our manufacturing operations is limited. The loss
of any major foundry as a supplier of iron castings and our inability to
identify new foundries for the production of iron castings in a timely manner
could have a material adverse effect on our business. In addition, we cannot
assure you that the foundries currently producing our iron castings will be able
to accommodate the anticipated expansion of our manufacturing capabilities. We
are continuously seeking to locate additional foundries that would be suitable
for the production of our iron castings.
CORPORATE HISTORY
Our wholly-owned subsidiary, Universal Automotive, Inc., an Illinois
corporation, began operations in 1981 as a warehouse distributor of a wide
variety of automotive aftermarket replacement parts servicing the Chicagoland
area. We were incorporated in Delaware in January 1994 to act as the holding
company for several subsidiaries. In the early 1990's, we started shifting our
focus to the brake parts segment of the business, and in 1996 we elected to
discontinue our non-brake parts warehouse distributor operations due to the
lower margins and declining growth prospects of this segment of the business. We
currently conduct our business through the following subsidiaries:
- Universal Automotive, Inc.;
- Universal Brake Parts, Inc., an Ontario, Canada corporation; and
- Universal Automotive of Virginia, Inc., a Virginia corporation.
We have discontinued the operations of two other subsidiaries. The first
is eParts eXchange, Inc., which was unsuccessful in developing a
business-to-business online exchange for automotive aftermarket parts. We have
consolidated the telemarketing and outbound e-mail operations of eParts eXchange
into our core business. The second subsidiary is UBP Hungary, Inc., a Delaware
corporation, which we own and which owned UBP Csepel Iron Foundry, Kft., a
Hungarian corporation, which operates a foundry in Budapest, Hungary. We sold
our ownership interest in UBP Csepel as of December 31, 2001. See "Business --
Discontinued Operations." Our principal executive offices are located at 11859
South Central, Alsip, IL 60803, and our telephone number is (708) 293-4050.
DISCONTINUED OPERATIONS
We have discontinued operations in two areas in order to focus on our core
business of manufacturing and distributing brake parts. The first area in which
we have discontinued operations is that of our business-to-business online auto
parts exchange. This business has been operated through a subsidiary which we
formed in December 1999 known as eParts Exchange, Inc., or "EPX." The EPX
website was activated in August 2000. However, in January 2001 we decided to
terminate the operations of the online exchange.
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The second area in which we have discontinued operations involves our
Hungarian foundry. UBP Hungary, Inc., our wholly-owned subsidiary, acquired the
assets of Csepel Iron Foundry Works, a producer of iron and iron casting
products located in Budapest Hungary, in October 1995. This business was
operated through UBP Csepel, Iron Foundry, Kft., a Hungarian corporation and
second-tier subsidiary of ours. We decided to exit the foundry business in 1999
due to continuing losses at the foundry and our belief that our stable
relationship with Waupaca Foundry eliminated the need to develop an in-house
capacity for manufacturing rotor castings. In our 1999 financial statements, we
wrote down the carrying value of the foundry property to its estimated net
realizable value. We also provided a reserve for costs of disposal and losses of
the foundry before its disposal or liquidation.
Our subsidiary, UBP Hungary, Inc., sold its ownership interest in UBP
Csepel, Iron Foundry, Kft. to Euro-Industrial Limited, LLC, as of December 31,
2001, for $100,000, paid with a promissory note. Also in connection with the
sale, several instruments evidencing debt owed by UBP Csepel to UBP Hungary, our
subsidiary, were replaced by a single promissory note in the amount of $728,000.
Under the terms of the promissory note for the purchase price, the $100,000 is
to be paid in quarterly installments beginning in April 2002 and ending in
January 2003. This note does not bear interest unless there is a default under
the note. The $728,000 promissory note is to be repaid in monthly installments
beginning in November 2003 and ending in October 2006. This promissory note
bears interest at the rate of 6.5% per year.
The amount of the gain on the sale is subject to substantial uncertainty,
because the proposed payments will be made over time and the proposed purchaser
is not well capitalized. Accordingly, we have discounted the value of the note
and are carrying it on our balance sheet at a value of approximately $72,000.
COMPETITION
Our markets are highly competitive and we compete primarily on the basis
of service, price, inventory availability, delivery time and responsiveness. We
offer a full line of brake parts with the exception of brake calipers. We
compete directly with other companies that offer full or multiple product
offerings as well as single category value line distributors. We believe our
complete product offering gives us an advantage over single line competitors
and, thus, an attractive alternative to the full line "Big Three" competitors.
According to Frost & Sullivan, a leading industry analyst, the big three
brake companies, Dana Corporation (Raybestos), Federal-Mogul (Wagner Brake
Products) and Honeywell (Bendix) comprised an estimated 70% of the brake parts
aftermarket in 1999. We believe the high concentration of business among the
big three favors the Company for the following reasons:
1. Federal-Mogul accounts for the second largest share of the aftermarket
brake business, a 20% market share, and voluntarily filed for protection under
Chapter 11 of the United States Bankruptcy Code in October 2001.
2. Honeywell, a 10% market share, has publicly stated its desire to divest
itself of the original equipment manufacturer and aftermarket brake business.
3. Dana Corporation's Raybestos Product line, which accounts for the
largest share of the aftermarket brake business, a 40% market share, is
estimated to be less than 10% of the company's aggregate business and,
therefore, must compete with other divisions for resources.
In addition to the above mentioned full line brake suppliers, TRW, under
its AutoSpecialty brand, services an estimated $50 million in aftermarket brake
business. TRW has publicly discussed a spin-off or sale of its automotive
divisions.
It appears that among the leading full line aftermarket brake suppliers,
this is a time of uncertainty.
We also compete with single category value line friction suppliers such
as Morse Automotive and Satisfied Brake. Both companies are highly respected
competitors that account for 5% to 8%, respectively, of the friction
aftermarket according to Frost & Sullivan. We believe our full line offering
offers an advantage for many customers who utilize these single line
competitors through our full product line offering while effectively competing
with products of equal quality, price and value.
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INTELLECTUAL PROPERTY
We believe that our labels, UBP and Ultimate, are important to our
marketing efforts. The UBP and Ultimate Braking Power trademarks have been
registered with the United States Patent and Trademark Office and Canadian
Trademarks Office. We cannot assure you that prior registrations or uses of
these trademarks, or confusingly similar marks, do not exist in the United
States. If prior registrations or uses exist, we might be precluded from using
these trademarks in the United States. We cannot assure you that our trademarks
would be upheld if challenged or that we would not be prevented from using the
trademarks, either of which could have a material adverse effect on us.
The formulations for our integrally molded brake pads, pucks and drum
brake lining are trade secrets, which we maintain as confidential information.
We believe these trade secrets to be valuable.
We could be subject to claims by others that we infringe upon their
intellectual property rights. Any litigation regarding our proprietary rights
could be costly and divert our management's attention from our operations,
result in the loss of certain of our proprietary rights or the payment of
substantial monetary damages, require us to seek licenses from third parties or
prevent us from selling our products.
EMPLOYEES
As of December 31, 2001, we had 403 full-time employees, in the following
areas:
- 239 in manufacturing;
- 133 in distribution;
- 14 in sales and marketing; and
- 17 in administration.
INSURANCE
We maintain insurance in amounts and with coverages and deductibles that
our management believes are adequate. The primary risks that we insure against
are professional liability, workers' compensation, personal injury, bodily
injury, property damage, business interruption and fidelity losses. We cannot
assure you that our insurance will adequately protect us from potential losses
and liabilities. We maintain key man term life insurance policies covering the
life of Mr. Scott in the amount of $6,000,000 and Mr. Tzur in the amount of
$1,000,000. The proceeds of these policies would be payable to us. We paid
premiums of approximately $10,000 for these key man life insurance policies in
2001.
LINE OF CREDIT AND RECENT FINANCINGS
Line of Credit. In September 1999, we entered into a credit agreement with
LaSalle Bank National Association and one of its subsidiaries in connection with
the renewal and restructuring of a line of credit and term loan with the bank.
The original amount of the term loan which bears interest at the rate of prime
plus .75% per year, was $3,779,194. Our borrowing limit under our line of credit
is based on a percentage
10
of the value of our accounts receivable and inventory, up to a current maximum
of $26,000,000. The line of credit currently bears interest at the rate of prime
plus 1.50%, subject to an option on our part, if we are not in default under the
credit agreement, to convert the interest rate to LIBOR plus 2.5%. Both the term
loan and the line of credit must be repaid by May 1, 2003. The term loan and the
line of credit are both secured by a first lien on substantially all of our
North American assets. As of December 31, 2001, we owed $19,021,873 under the
line of credit and $431,281 under the term loan.
The credit agreement with LaSalle Bank contains limitations on our payment
of dividends and making of capital expenditures, and requires us to maintain
compliance with financial covenants relating to, among others, defined tangible
net worth, earnings before interest taxes, depreciation and amortization, or
"EBITDA," and our fixed charge coverage ratio. At December 31, 2001, we were not
in compliance with certain of these financial covenants. Subsequent to December
31, 2001, LaSalle informed us that it will waive such violation upon completion
of required documentation which will include certain modifications to the credit
agreement and extend the revolving credit facility to May 31, 2003. The entire
credit facility is secured by a first lien on substantially all of our North
American assets. At December 31, 2001, approximately $1,540,000 was available
for borrowing under the revolving credit line.
Issuance of Series A Preferred Stock to Venture Equities Management, Inc.
On August 29, 2001, we issued 201,438 shares of Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," an affiliate of Wanxiang America
Corporation, for consideration of $2,800,000. We used $1,000,000 of the proceeds
of the Series A Preferred Stock to make the payment to FINOVA Mezzanine Capital
Inc. under the restructuring of a debenture discussed below, and reserved an
additional $500,000 to make the remaining principal payments under the
restructuring agreement. The balance of the proceeds were used to reduce the
amount outstanding on our revolving loan indebtedness.
Wanxiang America is based in Elgin, Illinois, and is the United States
home office of Wanxiang Group Companies, a leading supplier of auto parts, to
the automotive aftermarket and original equipment manufacturers based in the
Peoples Republic of China. The shares of Series A Preferred Stock are currently
convertible into a total of 2,014,380 shares of our common stock. In connection
with the purchase agreement for the Series A Preferred Stock, we also issued to
Wanxiang three warrants to purchase a total of 4,100,000 shares of our common
stock. However, one of the warrants, to purchase 2,500,000 shares of our common
stock, is only exercisable upon the occurrence of events of default specified in
the warrant.
The purchase agreement relating to the Series A Preferred Stock and
related documents contain other agreements among the parties, including:
- a registration rights agreement between us and VEMI granting VEMI
the right to register the shares of our common stock into which the
Series A Shares are convertible;
- a stockholders agreement among us, VEMI and three of our founders,
Arvin Scott, Yehuda Tzur and Sami Israel, granting to VEMI certain
rights of first refusal, a contingent proxy as to some of the
founders' shares and a voting agreement to ensure two of nine board
seats to VEMI's designees; and
- a supply agreement between us and Wanxiang America requiring us to
purchase a minimum quantity of product from Wanxiang America each
year and giving Wanxiang America a right of first refusal to supply
Chinese-manufactured parts on competitive terms and conditions.
11
Restructuring of Subordinated Debenture held by FINOVA Mezzanine Capital
Inc. On July 14, 1997, we sold a $4,500,000 subordinated debenture to FINOVA
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for payments of
interest at 12.25 percent per annum through maturity on July 14, 2002. Through
August 14, 2001 we had issued FINOVA warrants to purchase 1,575,000 shares of
our common stock at exercise prices ranging from $0.83 to $1.58, based on 80% of
the average closing bid price of our common stock for the 20 days preceding the
respective issuance dates. The warrants were exercisable at any time through the
sixth anniversary of the debenture issue date. During 2000, FINOVA elected to
exercise one of its warrants to purchase 450,000 shares of our common stock at
an exercise price of $0.83 per share, using a "cashless" exercise provision
whereby FINOVA received a net of 279,260 shares of common stock after
surrendering 170,743 shares which had a fair market value equal to the aggregate
exercise price. We received no cash proceeds from this transaction when such
shares were issued.
On October 31, 2001 we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance to FINOVA of $2,000,000 of Series B Preferred Stock
($0.01 par value); and (iv) the amendment of the debenture to $1,500,000. The
amendment to the debenture also reduced the interest rate from 12.25% to 7.0%
and requires us to reduce the outstanding balance by making five $100,000
payments every 45 days beginning December 15, 2001 with a final payment of
$1,000,000 due July 11, 2005. The surrendered warrants had cashless exercise
features which, based on the closing price of our common stock of $1.89 per
share on the date of the restructuring, would have allowed FINOVA to receive
322,619 shares of common stock. This transaction resulted in an extraordinary
gain of $829,714 (inclusive of an accrual of all remaining interest to be paid
of approximately $272,000) for the year ended December 31, 2001. The Series B
Preferred Stock has no fixed dividend, entitles the holder to a liquidation
preference, is redeemable at any time at our option and is convertible into
1,000,000 shares of common stock for which we provided FINOVA with registration
rights.
RISK FACTORS
In evaluating us and our business, you should carefully consider the
following risk factors. This report contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed elsewhere in this report. The order in which the following risks
are presented is not intended to represent the magnitude of the risks described.
WE HAVE NOT EARNED PROFITS AND CANNOT ASSURE YOU THAT WE WILL BECOME PROFITABLE.
From 1996 through 2001 we lost a total of approximately $5,750,000,
excluding losses from our Hungarian foundry and eParts eXchange operations,
which were sold as of the end of 2001. We have a plan for achieving
profitability which involves improving our balance sheet, gaining market share
in the market for friction brake products, enhancing the efficiency of our
manufacturing operations, improving brand awareness for our products and
developing new, higher-margin friction products. See "Business -- Our Strategy."
However, we cannot assure you that this plan will succeed and, if it does not,
we may not achieve profitability.
12
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD REDUCE OUR ABILITY TO EXPAND
OUR BUSINESS AND LIMIT OUR FINANCIAL FLEXIBILITY.
We have now, and will continue to have after the offering, a significant
amount of debt. As of December 31, 2001, giving effect to the restructuring of a
subordinated debenture held by FINOVA Mezzanine Capital Inc. and the sale of our
second-tier subsidiary which operated a foundry in Hungary, we had approximately
$21.5 million in debt and stockholders' equity of approximately $3.5 million.
Our debt-to-equity ratio was therefore approximately 6.14:1. The amount of our
debt could have important consequences to you. For example, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the
availability of our cash flow to fund capital expenditures, product
development efforts and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- place us at a competitive disadvantage compared to those of our
competitors who have less debt;
- limit our ability to pay dividends;
- limit, along with the financial and other restrictive covenants
relating to our debt, among other things, our ability to borrow
additional funds; and
- make it more difficult for us to complete acquisitions.
IF WE ARE UNABLE TO RENEW OUR LINE OF CREDIT, THIS COULD HAVE A SIGNIFICANT
NEGATIVE EFFECT ON OUR FINANCIAL CONDITION.
We have a line of credit under a credit agreement we entered into with
LaSalle Bank National Association and LaSalle Business Credit. As of December
31, 2001, we owed $19,021,873 under the line of credit. We depend significantly
on the line of credit to fund our purchases of inventory, payroll, freight
charges, commission expenses and other expenses. The line of credit is scheduled
to expire on May 1, 2003. We may not be able to renew this line of credit, or
obtain another line of credit, on similar terms, if at all. If we cannot renew
this line of credit or obtain a replacement line of credit, this will
significantly impair our ability to fund our operations. If we are able to renew
this line of credit or obtain a replacement line of credit only on less
favorable terms, the increased interest expense or other costs of the new line
of credit will make it more difficult for us to achieve profitability.
OUR ABILITY TO GROW AND IMPROVE OUR FINANCIAL PERFORMANCE DEPENDS ON FACTORS
SUCH AS OUR ABILITY TO GAIN ADDITIONAL MARKET SHARE, EXPANSION OF OUR
MANUFACTURING CAPABILITIES, POSSIBLE ACQUISITIONS OF OTHER MANUFACTURERS OR
DISTRIBUTORS AND INCREASING SALES TO EXISTING CUSTOMERS.
13
Our ability to grow and improve our financial performance will depend in
part on the following factors:
- our ability to gain additional market share for friction brake
products;
- the purchase of additional manufacturing machinery and brake rotor
molds to increase the different types of brake rotors we
manufacture;
- the possible acquisition of other brake parts manufacturers or
distributors on favorable terms; and
- our ability to increase sales to current customers.
While we regularly evaluate and discuss possible acquisitions, we have not
entered into any commitment, agreement or understanding with any potential
acquisition candidates, and we cannot assure you that we will be successful in
locating suitable acquisition candidates or that any additional acquisitions
will be completed in the future. See Item 1, "Business -- Our Strategy." In
addition, we cannot assure you that any operations that we may acquire can be
effectively and profitably integrated into our business, or that any future
expansion of our operations or acquisitions will not have a negative effect on
our operating results, particularly during the periods immediately following any
expansion or acquisition.
OUR ABILITY TO EXPAND OUR BUSINESS DEPENDS ON OUR OBTAINING ADDITIONAL
FINANCING, AND THERE IS NO GUARANTEE WE WILL BE ABLE TO OBTAIN THIS FINANCING.
We will be required to seek additional financing to fund any expansion we
undertake through acquisitions or the upgrade of existing facilities. We have no
current commitments or arrangements for additional financing other than this
offering, and we cannot assure you that additional financing will be available
on acceptable terms, or at all. We may also issue common stock or other
securities in connection with future acquisitions, resulting in additional
dilution to existing stockholders.
THE AUTOMOTIVE INDUSTRY IS CYCLICAL, AND A DOWNTURN IN THE INDUSTRY COULD HAVE A
SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS.
Our business is dependent upon sales of the automotive industry, which
creates the total number of vehicles available for repair. This industry is
cyclical and has historically experienced periodic downturns. These downturns
are difficult to predict and in the past have not had an immediate impact on the
aftermarket. The primary market for replacement parts is vehicles that have been
on the road for at least five years. Although we believe that downturns in the
industry generally benefit us because they result in longer holding periods for
cars and further wear and tear on brakes, a protracted downturn in the
automotive industry could have a negative effect on the performance of the
aftermarket parts industry in general and our performance in particular. Our
future performance may be harmed by automotive industry downturns.
14
OUR BUSINESS WILL SUFFER IF WE CANNOT SUCCESSFULLY COMPETE WITH OTHER COMPANIES
IN OUR INDUSTRY, MANY OF WHOM HAVE FAR GREATER RESOURCES THAN US.
Our markets are highly competitive. As a brake parts manufacturer and
distributor, we compete directly with other brake parts manufacturers and
distributors, including: Aimco and Raybestos Brake Products, which are divisions
of Dana Corporation; Wagner Brake Products, a division of Federal Mogul; and
Bendix, a division of Honeywell. We also compete with numerous value line
distributors specializing in one or more specific brake categories. Many of our
competitors are larger and have greater capital, management and other resources
than we have, and we cannot assure you that we will continue to compete
successfully with these businesses.
OUR SUCCESS DEPENDS ON THE CONTINUED SERVICES OF KEY PERSONNEL.
Our continued success will depend to a significant degree upon the efforts
and abilities of our senior management, particularly Yehuda Tzur, our Chairman
of the Board, and Arvin Scott, our President and Chief Executive Officer. If we
were to lose the services of Mr. Tzur or Mr. Scott, this could have a material
adverse effect on us. We have employment agreements with Mr. Tzur and Mr. Scott.
OUR SUPPLIES OF RAW MATERIALS AND FINISHED GOODS COULD BE DISRUPTED FOR A
VARIETY OF REASONS, AND ANY DISRUPTION WOULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
The primary components used in our brake rotor manufacturing operations
are raw iron castings. Most of the finished rotor castings are purchased from
China and most of our raw iron castings are produced by, and purchased from, one
foundry located in Wisconsin. We duplicate raw iron casting molds used for the
production of our better-selling brake rotors, and place these molds primarily
at this foundry. Although we believe that we have developed a good relationship
with this foundry, it could discontinue producing these castings for us at any
time. The number of foundries equipped to produce raw iron castings such as the
one used by us in our manufacturing operations is limited. Our inability to
identify new foundries for the production of raw iron castings in a timely
manner could have a substantial negative effect on our business.
THE IMPOSITION OF ANTI-DUMPING DUTIES ON PRODUCTS WE IMPORT FROM CHINA COULD
SUBSTANTIALLY INCREASE OUR COSTS AND HAMPER OUR EFFORTS TO ACHIEVE
PROFITABILITY.
On March 7, 1996, a petition was filed before the United States Department
of Commerce and International Trade Commission seeking the imposition of
"anti-dumping" duties on some brake drums and rotors imported from the People's
Republic of China. The International Trade Commission later ruled that rotor
sales from China materially injured United States manufacturers of rotors. As a
result of the decision by the International Trade Commission, the United States
Customs Service has imposed anti-dumping duties on several Chinese suppliers.
See Item 1, "Business -- Suppliers and Raw Materials." These duties are specific
to particular plants at which rotors are manufactured, and to date none of the
plants from which we purchase rotors has been subject to a duty. However, if any
of the plants from which we purchase rotors become subject to duties, this could
increase our costs of purchasing these rotors and make it more difficult for us
to achieve profitability.
15
WE ARE OBLIGATED TO PURCHASE A SUBSTANTIAL PORTION OF OUR SUPPLIES FROM WANXIANG
AMERICA CORPORATION, WHICH COULD LIMIT OUR ABILITY TO NEGOTIATE FAVORABLE TERMS
WITH OTHER SUPPLIERS.
In connection with the issuance of our Series A Preferred Stock, we
entered into a supply agreement with Wanxiang America Corporation, an affiliate
of the purchaser of the Series A Preferred Stock, which obligates us, with
certain exceptions, to purchase at least $5,000,000 worth of products each year
from Wanxiang America, provided it is able to supply the products on
substantially competitive terms. See Item 1, "Business -- Suppliers and Raw
Materials." Our obligations under this contract could have the effect of
limiting our ability to negotiate favorable terms with other suppliers.
OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SUBSTANTIAL MINORITY BLOCK OF OUR
VOTING POWER AND THEIR INTERESTS MAY BE DIFFERENT FROM YOURS AND, AS A RESULT,
YOU MAY HAVE NO EFFECTIVE VOICE IN OUR MANAGEMENT.
Our executive officers and members of our board of directors, as a result
of their ownership of common stock and options to purchase shares of our common
stock, beneficially own 3,598,350 shares, or 31.43%, of our voting stock. See
Item 12, "Security Ownership of Certain Beneficial Owners and Management." By
virtue of this ownership, these individuals can exercise control over our
business, policies and affairs and exert substantial influence over the election
of our directors, and the approval or disapproval of actions requiring a
shareholder vote. Accordingly, you may have no effective voice in our
management. This concentration of stock ownership could have the effect of
delaying or preventing, and may discourage attempts to bring about, a change in
control or the removal of our existing management. These negative effects would
become even more likely if these members of our management and board of
directors agreed to vote their shares in a similar manner as Venture Equities
Management, Inc. which, as discussed below, owns a substantial percentage of our
voting stock.
Venture Equities Management, Inc., or "VEMI," by virtue of its holding
201,438 shares of Series A Preferred Stock, currently convertible into 2,014,380
shares of our common stock, beneficially owns 28.26% of our voting stock. In
connection with the issuance of the Series A Preferred Stock, VEMI and its
affiliates were granted numerous rights, including VEMI's right to designate two
members of our board of directors. As a result, VEMI has significant influence
over decisions on matters such as a change of control, the removal of our
management or similar matters. If VEMI agreed to vote its shares in the same
manner as the members of our management and board of directors, these
shareholders would have the ability to ensure the approval of any of these types
of decisions. The calculation of VEMI's beneficial ownership takes into account
VEMI's ownership of two warrants to acquire a total of an additional 1,600,000
shares of our common stock, which are exercisable through August 28, 2002.
However, VEMI also owns a "default warrant" to purchase 2,500,000 shares of our
common stock which would become exercisable if any of several events of default,
as defined in the default warrant, occur. There are numerous events which would
constitute an event of default under the default warrant, and if our financial
condition deteriorates VEMI could be entitled to purchase the shares underlying
this warrant at a substantial discount to the current price of our common stock.
In addition, Mr. Tzur and Mr. Scott, our two largest individual shareholders,
have granted a proxy to VEMI or its designees which will give it power to vote
their shares if specified events of default of occur, in some cases without
exercising the default warrant. If any of these events of default occurred, and
VEMI exercised all of the warrants held by it, it could acquire almost 53% of
our voting power. If VEMI held this percentage of our voting power, it could
control the outcome of votes on matters such as a change of control, the removal
of our management, or similar matters, regardless of whether it voted its shares
in the same manner as our executive officers and directors.
16
WE COULD BE SUBJECT TO CLAIMS BASED ON THE USE OF ASBESTOS TO MANUFACTURE BRAKE
PARTS IN OUR VIRGINIA PLANT.
Brake parts have continued to evolve over the years, with substantial
improvements in product formulations over time. For example, new materials such
as ceramics have been introduced into the marketplace. In 1999, our factory in
Walkerton, Virginia, which had been using asbestos in products, converted to a
non-asbestos formulation. We are not aware of any claims having been made at any
of our facilities related to asbestos exposure, but a risk exists that persons
may seek to assert that this exposure was related to our operations, which could
subject us to liability.
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not intend to declare or pay any cash dividends on our common stock
in the foreseeable future and anticipate that earnings, if any, will be used to
finance the development and expansion of our business. Moreover, agreements with
our primary and mezzanine lenders and the certificate of designations for our
Series A Preferred Stock prohibit us from paying dividends without the consent
of these lenders and the holders of a majority of the Series A Preferred Stock.
You should not expect us to pay dividends on our common stock until such time,
if any, that we are able to obtain a release of these prohibitions on the
payments of dividends imposed by the terms of these documents. We do not
anticipate obtaining a release on these prohibitions in the foreseeable future.
Any payment of future dividends and the amounts thereof will depend upon our
earnings, financial requirements, and other factors deemed relevant by our board
of directors, including our contractual obligations.
THERE ARE NUMEROUS OUTSTANDING WARRANTS TO PURCHASE SHARES OF OUR COMMON STOCK,
WHICH COULD IMPAIR OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL ON FAVORABLE TERMS.
The 1,495,000 units we sold in connection with our initial public offering
in December 1994 were comprised of one share of common stock and one redeemable
common stock purchase warrant entitling the holder of the warrant 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. In December 1999, we
extended the expiration date of these warrants to December 31, 2000, and reduced
their exercise price from $7.00 to $2.25 per share. We later extended the
expiration date of these warrants on three additional occasions. The latest
extension, in January 2002, changed the expiration date to July 15, 2002. As of
March 15, 2002, there were 1,137,450 of these warrants outstanding. We also have
issued warrants to purchase a total of 4,100,000 shares of our common stock to
Venture Equities Management, Inc. Warrants to purchase 1,600,000 of these
4,100,000 shares are exercisable through August 28, 2002, and the warrant to
purchase the remaining 2,500,000 shares would become exercisable if any of
several events of default specified in the warrant occur. We have also issued
warrants for various other purposes which are still outstanding. As of March 15,
2002, there are warrants to purchase a total of 3,560,950 shares of our common
stock which are outstanding.
In addition to the warrants currently outstanding, in connection with a
pending private offering of units comprised of one share of common stock and one
warrant to purchase one-half share of common stock, we will issue additional
warrants to unit purchasers and the placement agents in such offering. For the
life of the warrants the holders of the warrants are given the opportunity to
profit from a rise in the market price for our securities without assuming the
risk of ownership, with a resulting dilution in the interest of other security
holders. As long as these warrants remain unexercised, the terms under which we
could obtain additional capital may be inhibited. Moreover, the holders of the
warrants may be expected to exercise them
17
at a time when we would, in all likelihood, be able to obtain any needed capital
by a new offering of our securities on terms more favorable than those provided
by the warrants.
OUR ABILITY TO ISSUE "BLANK CHECK" PREFERRED STOCK COULD DISCOURAGE TAKEOVER
ATTEMPTS AND, THEREFORE, CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Our certificate of incorporation authorizes the issuance of "blank check"
preferred stock with designations, rights and preferences as may be determined
from time to time by our board of directors. Accordingly, our board of directors
has the ability, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could diminish
the voting power or other rights of the holders of our common stock. We have
already issued a substantial number of shares of Series A and Series B Preferred
Stock. The existing preferred stock, together with any shares of preferred stock
we may issue in the future, could be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control. This
possible impact on takeover attempts could cause the price of our common stock
to decline.
FUTURE SALES OF SECURITIES HELD BY OUR OFFICERS, DIRECTORS OR THE HOLDERS OF OUR
PREFERRED STOCK COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Approximately 6,353,530 of our outstanding shares of common stock,
including shares issuable upon conversion of preferred stock, are "restricted
securities" under Rule 144 promulgated under the Securities Act and may not be
resold except pursuant to a registration statement effective under the
Securities Act or pursuant to an exemption from registration, including the
exemption provided by Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of other conditions, a person who has owned
restricted shares of common stock for at least one year is entitled to sell
these shares subject to the volume limitations prescribed by Rule 144. Shares
issuable upon conversion of our Series A and Series B Preferred Stock are not
presently eligible for sale under Rule 144, but will be on August 28, 2002 and
October 30, 2002, respectively. In addition, the holders of these shares have
registration rights which could cause these shares to be registered under the
Securities Act of 1933, and therefore become freely tradeable, at an earlier
date. The shares held by our officers, directors and affiliates are presently
eligible for sale under Rule 144. Future sales of shares of common stock by our
officers and directors under Rule 144, or by the holders of the Series A and B
Preferred Stock to the extent these shares are converted into the common stock,
could cause the price of our common stock to decline. Two of our officers have
filed a plan pursuant to Rule 10b5-1 of the Securities and Exchange Commission
under which they will sell of a total of 610,000 shares of our common stock by
selling a total of 10,000 shares each month.
THE MARKET FOR OUR STOCK IS LESS ACTIVE THAN THAT OF MANY OTHER STOCKS INCLUDED
IN THE NASDAQ STOCK MARKET, WHICH COULD MAKE IT DIFFICULT TO SELL SHARES WHEN
DESIRED.
Although our stock is included in the Nasdaq Stock Market, it is less
actively traded than the shares of many of the other companies included in
Nasdaq. In addition, there has been no trading in our stock or public warrants
on the Chicago Stock Exchange over the last several years and the Chicago Stock
Exchange has advised us that it has delisted our shares of common stock and
warrants effective March 22, 2002. The volume of trading in our stock on the
Nasdaq SmallCap Market is frequently low, which means that you may have
difficulty selling the shares at a time when you desire.
18
WE PROVIDE EXTENSIVE INDEMNIFICATION TO OUR OFFICERS AND DIRECTORS, WHICH LIMITS
OUR ABILITY TO RECOVER DAMAGES FROM OUR OFFICERS AND DIRECTORS AND COULD GREATLY
INCREASE THE COSTS TO US IN THE EVENT OF SHAREHOLDER LITIGATION.
We intend to indemnify our officers and directors to the fullest extent
permissible under the law. Under most circumstances, our officers and directors
may not be held liable to us or our shareholders for errors in judgment or other
acts or omissions in the conduct of our business unless these errors in
judgment, acts or omissions constitute fraud, gross negligence or malfeasance.
This indemnification limits our ability to recover damages from our officers and
directors in the event they cause us to suffer losses. In addition, it could
substantially increase our costs in the event of shareholder litigation.
ITEM 2. PROPERTIES
The following table sets forth the general location, principal uses and
approximate size of our principal properties, along with annual lease payments
and expiration of the leases:
Approximate
Area Annual Lease Lease
Location Use In Square Feet Payments Expiration
- ---------------- ------------------------ -------------- ------------- ----------
Alsip, Illinois Company headquarters 263,000 $763,308 October 2004
and distribution center
Walkerton, Strip lining production 77,000 $ 72,000 August 2009
Virginia and brake shoe
remanufacturing
Brampton, Brake pad 79,300 $211,000 February 2012
Ontario manufacturing
Canada
Compton, Distribution center 28,200 $146,000 August 2004
California
Cuba, Missouri Brake rotor 50,000 $100,000 December 2005
manufacturing
All of the leases on the above properties are with unaffiliated third
parties. We believe our facilities are of sufficient size to accommodate our
current employees and operations. We have no agreements, understandings or
arrangements with regard to any additional space as of the date of this
memorandum.
ITEM 3. LEGAL PROCEEDINGS
All legal proceedings and actions to which we are a party are of an
ordinary and routine nature incidental to our operations. We believe that these
proceedings will not, individually or together, have a material adverse effect
on our business or financial condition or results of operations.
19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is included in the Nasdaq SmallCap Market under the
symbol "UVSL." Our redeemable common stock purchase warrants are included in the
Nasdaq SmallCap Market under the symbol "UVSLW."The following table sets forth,
for the periods indicated, the high and low bid prices per share for the common
stock and the redeemable common stock purchase warrants as reported by the
Nasdaq SmallCap Market. Our common stock and redeemable common stock purchase
warrants were initially included in the Nasdaq SmallCap Market and listed on the
Chicago Stock Exchange on December 15, 1994; however, our common stock and
warrants have not traded on the Chicago Stock Exchange during the periods
indicated and the Chicago Stock Exchange has advised us that it has delisted our
shares of common stock and warrants effective March 22, 2002.
COMMON STOCK
HIGH LOW
---- ---
2000
First Quarter $4.13 $2.06
Second Quarter 2.50 1.50
Third Quarter 2.81 1.75
Fourth Quarter 2.19 1.81
2001
First Quarter $2.88 $1.50
Second Quarter 2.16 1.50
Third Quarter 2.14 1.00
Fourth Quarter 4.01 1.30
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW
---- ---
2000
First Quarter $1.75 $0.34
Second Quarter 1.19 0.50
Third Quarter 0.56 0.22
Fourth Quarter 0.44 0.22
20
2001
First Quarter $0.78 $0.31
Second Quarter 0.53 0.31
Third Quarter 0.34 0.19
Fourth Quarter 1.90 0.17
On March 15, 2002, the last reported sale prices of our common stock and
redeemable common stock purchase warrants included on the Nasdaq SmallCap Market
were $2.65 and $.77, respectively.
On April 19, 2001, we received a notice from The Nasdaq Stock Market that
we were not in compliance with a Nasdaq rule requiring that we have net tangible
assets in excess of $2,000,000 in order to maintain our inclusion in the market.
On August 17, 2001, Nasdaq conducted a hearing before its Listing Qualifications
Panel at which we presented information which we believed justified our
continued inclusion in the stock market, including the details of the
then-proposed issuance of the Series A Preferred Stock. The issuance of the
Series A Preferred Stock was completed on August 30, 2001. See "Supplemental
Financial Information - Line of Credit and Recent Financings." On October 16,
2001, Nasdaq notified us that the Listing Qualifications Panel had ruled in
favor of our continued inclusion in the Nasdaq Stock Market.
We have not paid any cash dividends on our Common Stock. We do not intend
to declare or pay any cash dividends on our Common Stock in the foreseeable
future and anticipate that earnings, if any, will be used to finance the
development of and expansion of our business. Moreover, our 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 our earnings, financial
requirements, and other factors deemed relevant by our Board of Directors,
including our contractual obligations. See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.
Each public warrant originally entitled the holder to purchase, at any
time until December 15, 1999, one share of our common stock at an exercise price
of $7.00 per share, subject to certain adjustments based upon anti-dilution
protections. In December 1999, we extended the expiration date of these warrants
to December 31, 2000, and reduced their exercise price from $7.00 to $2.25 per
share. We later extended the expiration date of these warrants on three
additional occasions. The latest extension, in January 2002, changed the
expiration date to July 15, 2002. The public warrants may be exercised in whole
or in part. Unless exercised, the public warrants will automatically expire on
the expiration date, unless we extend the expiration date again. As of March 15,
2002, warrants to purchase a total of 357,550 shares were exercised, resulting
in a total of $804,488 of gross proceeds to us.
During the quarter ended December 31, 2001, we issued 100,000 shares of
our Series B Preferred Stock in a transaction not registered under the
Securities Act of 1933, as amended (the "Securities Act"). The Series B
Preferred Stock was issued to FINOVA Mezzanine Capital Inc. ("FINOVA") in
connection with the restructuring of certain indebtedness which we owed to
FINOVA. The consideration which we received in connection with the issuance of
the Series B Preferred Stock was a redemption of indebtedness owed to FINOVA
from $4,500,000 to $1,500,000 and reduction of the interest rate from 12.25% to
7.0%.
Also during the quarter ended December 31, 2001, we issued warrants to
purchase 450,000 shares of Common Stock to a securities broker-dealer in partial
consideration of certain services to us.
21
We did not use the services of any finders or securities broker-dealers in
connection with the offer or sale of the Series B Preferred Stock or the warrant
to the securities broker-dealer. We believe that all offers and shares of Series
B Preferred Stock and warrants issued in the above transactions are exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our 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, 2001, 2000 and 1999 and the balance sheet data at December 31, 2001 and 2000
are derived from our audited financial statements included elsewhere in this
Form 10-K. The statement of operations data for the years ended December 31,
1998 and 1997 and the balance sheet data at December 31, 1998 and 1997 are
derived from audited financial statements not included herein. The pro forma
data are based on the circumstances described in the accompanying footnotes.
22
(in thousands except for per share data)
Years Ended December 31, (1)
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales ..................................... $ 71,823 $ 69,944 $ 67,752 $ 58,252 $ 55,821
Cost of sales ................................. 59,352 56,510 53,540 45,917 43,840
----------- ----------- ----------- ----------- -----------
Gross profit ................................ $ 12,471 $ 13,434 $ 14,212 $ 12,335 $ 11,981
Selling, General and Administrative Expenses .. 12,397 12,829 11,742 10,101 12,773
Other Operating Expenses ...................... 792 320 160 0 0
Loss from Hungarian Operations ................ 295 0 4,337 642 261
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ................. $ (1,013) $ 285 $ (2,027) $ 1,592 $ (1,053)
Other expense (income):
Provision for lawsuit settlement ............ 0 0 0 (151) 650
Interest expense ............................ 2,503 2,593 2,025 1,916 1,422
Loss (Gain) on disposition of assets ........ 0 110 (1,153) 0 (12)
Other ....................................... (148) (125) (10) 94 19
----------- ----------- ----------- ----------- -----------
Loss before provision (benefit) for
income taxes and extraordinary gain ......... $ (3,368) $ (2,293) $ (2,889) $ (267) $ (3,156)
Income tax provision (benefit) ................ 440 (33) 398 (86) (1,070)
----------- ----------- ----------- ----------- -----------
Loss before extraordinary gain ................ $ (3,808) $ (2,260) $ (3,287) $ (181) $ (2,086)
Extraordinary Item:
Gain on debt restructuring .................... 830 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ (2,978) $ (2,260) $ (3,287) $ (181) $ (2,086)
Issuance of preferred stock with beneficial
conversion feature and warrants ............. (431) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net less available to common stockholders ..... $ (3,409) $ (2,260) $ (3,287) $ (181) $ (2,086)
=========== =========== =========== =========== ===========
Earnings per share (2):
Basic and diluted:
Before extraordinary item ................... $ (0.56) $ (0.32) $ (0.48) $ (0.03) $ (0.31)
Extraordinary gain .......................... 0.11 0 0 0 0
----------- ----------- ----------- ----------- -----------
$ (0.45) $ (0.32) $ (0.48) $ (0.03) $ (0.31)
Weighted average number of common shares
outstanding ................................. 7,553,141 7,008,438 6,789,582 6,769,425 6,751,732
=========== =========== =========== =========== ===========
December 31, (1)
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital ............................. $ 18,023 $ 16,238 $ 18,250 $ 18,108 $ 17,980
Total assets ................................ 40,038 42,983 43,160 38,102 36,501
Long-term debt, less current portion ........ 20,623 22,551 22,718 21,212 20,555
Total stockholders' equity .................. 3,528 720 3,073 6,497 7,069
- ----------
(1) Certain amounts reported in the 1997, 1998, 1999 and 2000 financial
statements have been reclassified to conform with the 2001 presentation.
(2) "Basic Earnings per Share" is computed by dividing net income (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 or other contracts to issue
common stock were exercised and resulted in the issuance of additional
common shares. All options and warrants are omitted from the computation
of diluted earnings per share when net losses are reported because the
options and warrants are antidilutive. For the years ended December 31,
2001, 2000 and December 31,
23
1997 diluted earnings per share and basic earnings per share are identical
because the loss from continuing operations incurred during those years is
antidilutive. See Note 2 of the Notes to our Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are a manufacturer and distributor of brake rotors, drums, disc brake
pads, relined brake shoes, non-asbestos friction lining, and a complete line of
hydraulic parts. We believe that we are the leading supplier of "value line"
brake parts (brake parts sold at prices below those of certain leading national
brand name brake parts) to mass-market retailers, traditional warehouse
distributors and specialty undercar distributors in North America.
Some of the statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, may be considered to be "forward
looking statements" since such statements relate to matters which have not yet
occurred. For example, phrases such as "we anticipate," "believe" or "expect"
indicate that it is possible that the event anticipated, believed or expected
may not occur. Should such event not occur, then the result which we expected
also may not occur or occur in a different manner, which may be more or less
favorable to us. We do not undertake any obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect any future event or circumstances.
RESULTS OF OPERATIONS
Year Ended December 2001 Compared to Year Ended December 31, 2000
Net sales for the year ended December 31, 2001 increased $1,879,000 or
2.7% to $71,823,000 as compared to $69,944,000 for the year ended December 31,
2000. This increase was a result of the addition of new customers and increased
sales of friction product.
Gross profits for the year ended December 31, 2001 decreased $963,000 or
7.2% to $12,471,000 as compared to $13,434,000 for the year ended December 31,
2000. Included in the gross profit for the year ended December 31, 2001 was
$437,000 and $373,000, respectively, relating to the under absorption of
manufacturing costs at the Walkerton, Virginia facility and the start up costs
of the new rotor manufacturing facility in Cuba, Missouri. Included in the gross
margin for the year ended December 31, 2000 was $353,000 and $936,000,
respectively, of one-time, non-recurring costs related to the realignment of the
Canadian friction manufacturing facility and the start up costs of the new
friction manufacturing capacity in Virginia. Before the effects of these
aforementioned items, gross margins for the years ended December 31, 2001 and
2000 were 18.5% and 21.0%, respectively. The 2.50% decline in gross margin is
due to pricing compression experienced in the drum and rotor lines.
24
Selling, general and administrative expenses were $12,397,000, a decrease
of $432,000 or 3.4% from $12,829,000 for the same period in 2000. Included in
the expenses for the year ended December 31, 2000 was approximately $200,000 of
costs related to eParts eXchange, Inc. our e-commerce subsidiary, which was shut
down during this period, and $150,000 of severance payments for certain
terminated employees.
Other operating expenses for the year ended December 31, 2001 were
$792,000, an increase of $472,000 from $320,000 for the same period in 2000.
This increase of $472,000 is primarily related to the expenses of relocating the
rotor manufacturing facility to Cuba, Missouri of $282,000 and the write-off of
unused barter credits.
Loss from Hungarian operations represents the write-off of the remaining
assets of the Hungarian operation as a result of the sale of this operation in
2001. The absence of a loss from discontinued operations for the year ended
December 31, 2000 is due to the fact that the loss from the discontinued
Hungarian iron foundry operation for this period of $640,000 has been charged
against the reserve for such losses established as of December 31, 1999.
Other expenses for the year ended December 31, 2001 decreased by $225,000
to $2,354,000 from $2,578,000 for the same period of 2000. The decrease is due
to less interest expense due to lower interest rates offset by higher
outstanding debt balances during 2001 as compared to 2000.
Extraordinary gain on debt restructuring in 2001 of $830,000 is a result
of our restructuring of the subordinated debentures held by FINOVA.
Provision for income taxes in the amount of $440,000 was recorded in 2001,
even though we incurred a loss, consisting primarily of a reduction of the
deferred tax assets established in a previous year. For the year ended December
31, 2001 and 2000, respectively, the deferred tax benefit of the year's losses
was offset by an increase in deferred tax asset valuation allowance of
$1,142,000 and $797,00.
For the year ended December 31, 2001, net loss was $2,979,000, compared to
a net loss of $2,260,000 for the year ended December 31, 2000. The principal
reasons for the decreased profitability was (i) the net loss from the Hungarian
operations of $295,000, which was sold during 2001, (ii) increased other
operating expenses relating to the relocation of the rotor manufacturing
facility, (iii) the write-off of unused barter credits, (iv) the decline in
gross margins resulting from pricing compression in the drum and rotor lines and
(v) an increase in the deferred tax asset valuation allowance. These amounts
were partially offset by a reduction in selling, general and administrative
expenses and a gain of $830,000 resulting from the restructuring of the FINOVA
subordinated debt.
Year Ended December 2000 Compared to the Year Ended December 31, 1999
Net sales for the year ended December 31, 2000 increased $2,192,000 or
3.2% to $69,944,000 as compared to $67,752,000 for the year ended December 31,
1999. This increase was achieved in spite of lower commodity sales ($1,782,000
reduction from 1999 levels) and the lack of Canadian distribution business sales
($6,141,000) that was sold as of December 31, 1999. Sales of US brake parts for
the year ended December 31, 2000 increased $10,115,000 or 18.2% over the same
1999 period due primarily to the addition of a major new customer and increased
sales of friction product.
25
Gross profits for the year ended December 31, 2000 decreased $779,000 or
5.5% to $13,434,000 from $14,212,000 for the same 1999 period. Included in the
gross profits computation for the year ended December 31, 2000 was $353,000 and
$936,000, respectively, of one-time, non-recurring costs related to the
realignment of the Canadian friction manufacturing facility and under absorption
of manufacturing costs due to the start up of new friction manufacturing
capacity in Virginia. Included in gross profits for the year ended December 31,
1999 was $1,260,000 of gross profits related to the Canadian distribution
business that was sold as of December 31, 1999. Before the effects of these
factors, the gross profit margin percentage of the year ended December 31, 2000
was 21.0% which was level with the 1999 percentage.
Selling, general and administrative expenses were $12,829,000, an increase
of $1,087,000 or 9.3% from $11,742,000 for the same period in 1999. Included in
SG&A expenses for the year ended December 31, 2000 was approximately $200,000 of
costs related to the start-up of our e-commerce subsidiary, eParts eXchange,
Inc. and approximately $150,000 of severance payments to certain terminated
employees. Included in SG&A expenses for the year ended December 31, 1999 is
$1,269,000 of costs related to the Canadian distribution business that was sold
as of December 31, 1999. Before the effects of these factors, SG&A expenses
related to our base business increased to $12,479,000 for the year ended
December 31, 2000 compared to $10,473,000 in the same period of 1999. The
increase was due primarily to SG&A expenses for the Virginia friction
manufacturing facility which is new in 2000, SG&A expenses related to an
increasing export sales, increased freight costs and additional marketing and
sales costs associated with obtaining new brake business.
Other operating expenses were $320,000, an increase of $160,000 from the
same period in 1999. This increase was a result of shut down expenses related to
eParts eXchange, Inc. of $200,000 coupled with the write-off of certain barter
credits, offset by moving expenses related to the relocation of the distribution
facility to Alsip, Illinois incurred during 1999.
The absence of a loss from discontinued operations for the year ended
December 31, 2000 is due to the fact that the loss from the discontinued
Hungarian iron foundry operation for this period of $640,000 has been charged
against the reserve for such losses established as of December 31, 1999.
Other expense for the year ended December 31, 2000 increased by $1,716,000
to $2,578,000 from $862,000 for the same period of 1999, a period which included
$1,153,000 gain on the sale of fixed assets (primarily from the sale of our
former Chicago warehouse and headquarters building). After excluding the effect
of the one-time gain in 1999, the increase of $569,000 is attributable to higher
interest expense due to higher interest rates during 2000 as compared to 1999.
For the year ended December 31, 2000, the deferred tax benefit of the
year's losses was offset by an increase in the deferred tax asset valuation
allowance of $797,000.
For the year ended December 31, 2000, net loss decreased by $1,027,000 to
$2,260,000 from $3,287,000 for the same period of 1999. The principal reason for
the profitability increases were (i) onetime friction manufacturing facility
realignment costs, (ii) under absorption of manufacturing costs related to the
start-up of new friction manufacturing capacity, (iii) start-up costs of eParts
eXchange, Inc., (iv) one-time severance payments, (v) increased interest costs,
(vi) increase in the deferred tax asset valuation allowance and (vii)
elimination of the loss on the discontinued Hungarian operations of $4,337,000,
offset by the $1,200,000 gain on the sale of our former Chicago warehouse
recorded in 1999.
26
Year Ended December 1999 compared to the Year Ended December 31, 1998
Net sales for the year ended December 31, 1999 increased to $67,752,000,
as compared to 1998 full year sales of $58,252,000, an increase of $9,500,000 or
16.3%. The increase in sales is due to (i) a full year of sales to customers
added in 1998, especially buying groups, (ii) additional sales penetration of
established customers and (iii) growth of sales of friction products and premium
"Ultimate" products.
Gross profit for the year ended December 31, 1999 increased $1,877,000 or
15.2% to $14,212,000 as compared to $12,335,000 from the same period in 1999.
This increase in gross profit is due to the increased sales in 1999 over 1998.
Our selling, general and administrative expenses for the year ended
December 31, 1999 increased $1,641,000 or 16.2% to $11,742,000 from $10,101,000
for the same 1998 period. The increase is due mainly to expenses directly
related to the increased in sales (such as freight and commissions) and
additional marketing allowances associated with gaining additional customers.
Other operating expenses increased to $160,000 relating to the costs
associated with the move for our Chicago warehouse facility to Alsip, Illinois.
The loss from operating the Hungarian iron foundry increased to $4,337,000
for the year ended December 31, 1999 from a loss of $642,000 for the same 1998
period. The increase in such loss from discontinued operations was due primarily
to the full year impact of the loss of a major customer in the fourth quarter of
1998 and the recording of a $3,083,000 loss on the disposal of the discontinued
operations which includes a writedown of the foundry property and equipment, and
a provision for estimated costs of disposition. See Note 11 of the Notes to the
Consolidated Financial Statements
Other expenses for the year ended December 31, 1999 decreased $997,000 to
$862,000 as compared to $1,859,000 for the same period of 1998. The change was
due to (i) increased interest expense due to a higher average level of borrowing
and higher interest rates, (ii) lack of a favorable 1998 adjustment to the
lawsuit reserve, offset by (iii) recognizing in 1999 a $1,153,000 gain on the
sale of our former Chicago warehouse and headquarters building.
Net loss for the year ended December 31, 1999 increased to $3,287,000 from
a loss of $181,000 for the year ended December 31, 1998. The increased loss was
due to the factors discussed above, especially the provision for loss on the
disposal of the discontinued Hungarian iron foundry.
CAPITAL EXPENDITURES
For the year ended December 31, 2001, capital expenditures totaled
approximately $913,000, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products (ii) upgrades and enhancements
to our computer systems and (iii) additional brake rotor patterns and tooling
related to brake rotor manufacturing.
For the year ended December 31, 2000, capital expenditures totaled
approximately $1,481,000, consisting primarily of (i) the acquisition of
machinery and equipment used to produce friction products in Walkerton,
Virginia, (ii) the acquisition of leaseholds and fixtures related to the new
Canadian friction manufacturing facility, and (iii) additional brake rotor
patterns and tooling related to friction manufacturing.
27
For the year ended December 31, 1999, capital expenditures totaled
approximately $1,635,000, consisting primarily of (i) the acquisition of
machinery and equipment used to produce friction products, (ii) the acquisition
of leaseholds and fixtures related to the new larger Alsip Corporate
Distribution Center, and (iii) additional brake rotor patterns.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are associated with carrying accounts
receivable and maintaining inventories. We rely on internally generated funds,
credit made available from suppliers and senior and subordinated lines of
credit. Our working capital needs are generally not seasonal in nature, although
business slows down slightly during the winter months.
We have incurred significant indebtedness, to date, in connection with our
operations. As of December 31, 2001, our total consolidated indebtedness was
approximately $21.5 million. A substantial portion of this indebtedness is
secured by substantially all of our assets and by a pledge of all of the
outstanding capital stock of our subsidiaries. As a result of such indebtedness,
we (i) are prohibited from paying cash dividends pursuant to certain covenants
and restrictions contained in the loan agreements governing such indebtedness,
(ii) could be hindered in our 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 our borrowings are at floating rates
of interest.
On September 29, 1999, we completed a renewal and restructuring of our
credit agreement with LaSalle Bank National Association or its subsidiaries
("LaSalle") for (a) a revolving line of credit of up to $22,000,000 based on
eligible accounts receivable and inventory and (b) a term loan in the amount of
$3,779,194. The term loan was reduced by $2,842,873 in October 1999 from the
proceeds of the sale of our Chicago facility (See Note 3 in the Notes to
Financial Statements). The credit agreement was amended in 2000 to increase the
revolving line of credit to $26,000,000. At December 31, 2001, we were not in
compliance with certain financial covenants and LaSalle has informed us that it
will waive such violation upon completion of required documentation which will
include extending the revolving credit agreement to May 31, 2003.
On July 14, 1997, we sold a $4,500,000 subordinated debenture to FINOVA
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for payments of
interest at 12.25% per annum through maturity on July 14, 2002. Through August
14, 2001 we had issued FINOVA warrants to purchase 1,575,000 shares of our
common stock at exercise prices ranging from $0.83 to $1.58, based on 80% of the
average closing bid price of our common stock for the 20 days preceding the
respective issuance dates. The warrants were exercisable at any time through the
sixth anniversary of the debenture issue date. During 2000, FINOVA elected to
exercise one of its warrants to purchase 450,000 shares of our common stock at
an exercise price of $0.83 per share, using a "cashless" exercise provision
whereby FINOVA received a net of 279,260 shares of common stock after
surrendering 170,743 shares which had a fair market value equal to the aggregate
exercise price. We received no cash proceeds from this transaction when such
shares were issued.
On October 31, 2001 we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance
28
to FINOVA of $2,000,000 of Series B Preferred Stock ($0.01 par value); and (iv)
the amendment of the debenture to $1,500,000. The amendment to the debenture
also reduced the interest rate form 12.25 to 7.0% and allows us to pay the
remaining balance by making five $100,000 payments every 45 days beginning
December 15, 2001 with a final payment due July 11, 2005. The surrendered
warrants had cashless exercise features which, based on the closing price of our
common stock of $1.89 per share on the date of the restructuring, would have
allowed FINOVA to receive 322,619 shares of common stock. This transaction
resulted in an extraordinary gain of $829,714 (inclusive of an accrual of all
remaining interest to be paid of approximately $272,000) for the year ended
December 31, 2001. The Series B Preferred Stock has no fixed dividend, entitles
the holder to a liquidation preference, is redeemable at any time at our option
and is convertible into 1,000,000 shares of common stock for which we provided
FINOVA with registration rights.
On August 29, 2001, we issued 201,438 shares of Series A Preferred Stock
($0.01 par value) to Venture Equities Management, Inc. (VEMI) (an affiliate of
Wanxiang America Corporation - see Note 12 to our financial statements) in
exchange for $2,800,000 in cash. The Series A Preferred Stock has no fixed
dividend, entitles the holder to a liquidation preference, is redeemable at our
option subject to certain conditions, and is convertible into 2,014,380 shares
of our common stock (with registration rights), subject to certain antidilution
provisions. In connection with the issuance of the Series A Preferred Stock, we
also issued to VEMI three warrants to purchase common stock: the first and
second warrants for 800,000 shares each are exercisable at any time through
August 28, 2002 at an exercise price of $2.00 per share; the third warrant for
2,500,000 shares is exercisable only upon the occurrence of events of default at
an exercise price to be determined based on a defined computation.
We believe that cash generated from operations, borrowings under our bank
line of credit, the restructuring of the FINOVA Subordinated Debt and the
issuance of preferred stock to VMEI and credit from our suppliers is sufficient
to fund our working capital requirements and capital expenditures through 2002.
SEASONALITY
Our business is slightly seasonal in nature, primarily as a result of the
impact of weather conditions on the demand for automotive replacement parts.
Historically, our 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
We historically have 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.
CRITICAL ACCOUNTING POLICIES; RECENT ACCOUNTING PRONOUNCEMENTS
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. The application of these policies may
require management to make judgments and estimates about the amounts reflected
in the financial statements. Management uses historical experience and all
available information to make these estimates and judgments, and different
amounts could be reported using different assumptions and estimates.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires all business combinations to be accounted for using the
purchase method of accounting and is effective for all business combinations
initiated after June 30, 2001. Under SFAS 142, we are no longer required to
amortize goodwill and other intangible assets with
29
indefinite lives, but will be subject to periodic testing for impairment.
Effective January 1, 2002, we will have adopted SFAS 142 and are evaluating the
effect that such adoption may have on our consolidated results of operations and
financial position. However, we expect that a substantial amount of its
intangible assets will no longer be amortized.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143"). SFAS 143 establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its
associated asset cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. We plan to adopt SFAS 143 effective January 1, 2003. We have
not determined the effect of adopting SFAS 143 on results of operations or
financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.
SFAS 144 superseded Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. We
have adopted SFAS 144 effective January 1, 2002 and do not expect that the
adoption will have a material impact on its consolidated results of operations
and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that we do not have significant exposure to market risk
associated with derivative financial instruments, other financial instruments or
derivative commodity instruments. We had previously utilized only limited
derivative financial instruments and did not use them for trading purposes and
have never used derivative commodity instruments. At December 31, 2001, there
were no such derivative instruments. The fair value of financial instruments,
other then debt instruments, closely approximates their carrying value. Because
the interest rate of the revolving loan and the term loan with LaSalle Bank
National Association adjusts with the changes in the market rate of interest, we
believe that the fair value is equivalent to the carrying value.
We believe that the interest rate of 7.0% on the subordinated debenture is
approximately equal to the current rate available for similar debt. Accordingly,
the fair value of this debenture approximates its carrying value.
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.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our officers,
directors and key personnel as of March 15, 2002:
NAME AGE POSITION
- ---- --- --------
Yehuda Tzur ..................... 49 Chairman of the Board and Director
Arvin Scott...................... 45 President, Chief Executive Officer and Director
Robert W. Zimmer................. 50 Chief Financial Officer, Secretary and Treasurer
Sami Israel...................... 60 Vice President and Director
Sol S. Weiner.................... 82 Director
Sheldon Robinson................. 75 Director
Dennis L. Kessler................ 63 Director
M. Catherine Jaros............... 52 Director
Zemin Xu......................... 30 Director
Feng Dong........................ 40 Co-Chair of the Board and Director
Yehuda Tzur, Chairman of the Board. Mr. Tzur, our founder, has served as
the Chairman of our board of directors since October 1994. From 1981 to March
1996, Mr. Tzur served as the President and Chief Executive Officer of our
predecessor, Universal Automotive, Inc., and of us.
Arvin Scott, President and Chief Executive Officer. Mr. Scott has served
as our President and Chief Executive Officer since March 1996. From 1994 to
March 1996, Mr. Scott served as the President and Chief Executive Officer of our
predecessor, Universal Automotive, Inc., and of us. From 1986 to October 1994,
Mr. Scott served as Vice President of Universal Automotive, Inc. and of us. Mr.
Scott joined us in 1981 as a purchaser of automotive aftermarket replacement
parts for distribution in the Chicago jobber market. From 1984 to 1986, Mr.
Scott served as Vice President of an unaffiliated Chicago-based warehouse
distributor, of which he was a 50% owner.
Robert W. Zimmer, Chief Financial Officer. Mr. Zimmer joined us as our
Chief Financial Officer in November 2001. Prior to joining us, Mr. Zimmer was
the Chief Financial Officer, Secretary and Treasurer of IMPAXX, Inc., an
international packaging manufacturer. Mr. Zimmer was previously the Chief
Financial Officer of CFI Industries, Inc. and Kalmus & Associates, Inc.
31
Sami Israel, Director. Mr. Israel has served as our Vice President since
October 1994 and served as our Treasurer from 1984 to October 1994. Mr. Israel
has been a Director since 1984. Mr. Israel manages our shipping and receiving
operations from our headquarters located in Alsip, Illinois.
Sol. S. Weiner, Director. Mr. Weiner is a private investor and currently
is a Director of Comtech Telecommunications, Inc.
Sheldon Robinson, Director. Mr. Robinson is an owner and President of
Associated Financial Consultants, Inc. and Robinson Financial Group, Inc., which
sell insurance and investment products. Mr. Robinson has been in the insurance
business since 1963.
Dennis L. Kessler, Director. Mr. Kessler is President of Kessler
Management Consulting, LLC. Prior to February 1998, Mr. Kessler was Co-President
of Fel-Pro Incorporated, which manufactures and distributes gaskets, engine
parts and industrial chemicals. Mr. Kessler previously served in various
capacities with Fel-Pro, beginning in 1964.
M. Catherine Jaros, Director. Ms. Jaros operates M. Catherine Jaros
Consulting, a business development, marketing and e-strategy consulting firm.
From February 2001 to October 2001 Ms. Jaros was Chief Executive Officer of
Display Edge Technology, Inc., which provides electronic shelf labels and other
shelf edge products for the retail industry. From 1999 to 2000, Ms. Jaros was
president of Starbelly.com, Inc. which specialized in business to business
shipping on demand. From 1998 to 1999 Ms. Jaros was acting president and a
director of Kriti Interactive Media, Inc. which provided strategic, financial
and customer development oversight on behalf of an investment group. From 1992
to 1997, Ms. Jaros was Vice-President, Marketing and Strategy, for the Tribune
Company. Ms. Jaros has held various positions involving marketing and business
development since 1973.
Zemin Xu, Director. Mr. Xu is a Vice President and a director of Venture
Equities Management, Inc. From 1993 to 1998, Mr. Xu was the Deputy General
Manager of the Department of Investment at Bank of China International
Investment (Hainan) Ltd.
Feng Dong, Director. Mr. Dong was a project manager at Wanxiang America
Corporation from 1997 to 2000. From 1995 to 1997, Mr. Dong was the director of
International Finance at Wanxiang Group Companies.
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Our bylaws provide that we will have nine directors or such other number
as is fixed by our board of directors. We currently have a board comprised of
nine members. Once elected, our directors hold office until our next annual
meeting of shareholders or until a successor has been elected and qualified,
unless they resign at some earlier time. As a result, all of our director
positions will be filled at each annual meeting.
In a stockholders' agreement entered into between us, Mr. Tzur, Mr. Scott,
Mr. Israel and Venture Equities Management, Inc., or "VEMI," in connection with
VEMI's purchase of the Series A Preferred Stock, we agreed to take all necessary
action so that our board of directors will consist of nine members, two of whom
are designated by VEMI, and that one of the individuals designated by VEMI would
be appointed as co-chairman of the board. We also agreed that the composition of
the board of directors of each of our subsidiaries would be proportionate to
that of our board, provided that at least one VEMI designee was on
32
the board of each of our subsidiaries, and that the composition of any
committees of our board of directors would be proportionate to that of our
board, provided that at least one VEMI designee would be on each committee. The
stockholders' agreement also provides that Mr. Tzur, Mr. Scott and Mr. Israel
will vote their shares in favor of the election of the VEMI designees to our
board of directors. The rights of VEMI with respect to the designation of two
directors will terminate at such time as the shares of our common stock into
which the shares of the Series A Preferred Stock owned by VEMI are convertible
fall below 1,007,190, which is half of the number of shares into which the
Series A Preferred Stock was convertible when it was originally issued. VEMI has
exercised its right to designate Mr. Xu and Mr. Dong as members of our board of
directors.
Under the terms of a debenture purchase agreement entered into between us
and FINOVA Mezzanine Capital Inc. in July 1997, we agreed that the size of our
board of directors would be increased to nine, and that a person designated by
FINOVA Mezzanine Capital would be elected to our board of directors. We also
agreed to include a person designated by FINOVA Mezzanine Capital in the group
of nominees designated by our management in connection with director elections,
and to recommend the election of the person designated by FINOVA Mezzanine
Capital, as long as the principal amount of the debenture held by FINOVA
Mezzanine Capital was at least $1,125,000, which is 25% of the original
principal amount of the debenture. In addition, for as long as the principal
amount of the debenture owned by FINOVA Mezzanine Capital is at least
$1,125,000, if no person designated by FINOVA Mezzanine Capital was a director,
we agreed that we would invite one person designated by FINOVA Mezzanine Capital
to observe our board meetings without the right to vote, and to provide this
person with copies of all materials distributed to our directors. FINOVA
Mezzanine Capital has not exercised its right to designate a person to be
elected to our board of directors.
Our executive officers are appointed by our board on an annual basis until
their successors have been elected and qualified. Mr. Tzur is the brother-in-law
of Mr. Israel.
ITEM 11. EXECUTIVE COMPENSATION
Each director, other than Messrs. Xu and Dong, who is not an officer or
employee receives a fee of $2,500 per quarter and is reimbursed for
out-of-pocket expenses incurred in connection with attending meetings of our
board of directors. During 2001, Messrs. Weiner, Robinson and Kessler and Ms.
Jaros each received $10,000 in directors fees. Although we do not have a formal
policy regarding the issuance of options to directors as part of their
compensation, we have historically made an annual grant to each of our directors
of options to purchase 1,000 shares of our common stock. In 2001 we issued
options to purchase 1,000 shares of our common stock to each of Ms. Jaros, Mr.
Kessler, Mr. Robinson and Mr. Weiner, all of which had exercise prices of $1.95
per share.
Audit Committee. Our audit committee consists of our four independent
directors - Mr. Robinson, Mr. Kessler, Mr. Weiner and Ms. Jaros. Mr. Weiner is
Chairman of the audit committee. The duties of the audit committee are generally
to recommend and review the activities and reports of our independent auditors
and to report the results of this review to our board of directors. The audit
committee also periodically reviews the adequacy of our internal controls.
Compensation Committee. The compensation committee of our board of
directors is comprised of Messrs. Robinson, Weiner and Kessler, none of whom
have ever been an officer or employee of ours. Mr. Robinson is chairman of the
compensation committee. None of our executive officers serves or has served
33
as a member of the board of directors or compensation committee of any entity
that has one or more of its executive officers serving on our board or
compensation committee. Before we formed the compensation committee, all
compensation decisions were made by our entire board of directors. The duties of
the compensation committee are generally to review employment, development,
reassignment and compensation matters involving corporate officers and other
executive level employees as may be appropriate including, among other things,
issues relating to salary, bonus, stock options and other incentive
arrangements.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Presently, all compensation decisions relating to the salaries of the
Named Executive Officers are governed by employment agreements between each of
Mr. Tzur, Scott and Israel and us, which agreements originally provided for the
payment of annual base salaries of $135,000, subject to increases or decreases,
to each of such individuals in amount as determined by either the Board of
Directors or the Compensation Committee, and periodic bonuses. Because the Named
Executive Officers' employment agreements presently control the compensation
paid to such executive officers, the Compensation Committee did not formulate
policies with respect to the Named Executive Officers' compensation during 2001.
Members of the Compensation Committee:
Sheldon Robinson Sol S. Weiner Dennis L. Kessler
Nominating Committee. Our nominating committee consists of Mr. Scott, who
is the committee's Chairman, and Messrs. Kessler, Tzur and Israel. The
nominating committee nominates candidates for election to our board of
directors. The nominating committee did not meet during 2001.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors, executive officers and persons who own more than 10% of the
outstanding shares of our common stock file with the Securities and Exchange
Commission reports relating to their ownership of our common stock and changes
in this ownership. We are required to identify any persons subject to this
requirement who failed to file any of these reports on a timely basis. Based
solely on a review of the copies of the reports furnished to us, we believe all
of these reports were filed on a timely basis for 2001 except for a Form 3 filed
on behalf of M. Catherine Jaros.
EMPLOYMENT AGREEMENTS
Mr. Tzur, Mr. Scott and Mr. Israel are each parties to employment
agreements with us. All of these agreements extend to May 2002, unless
terminated sooner in accordance with the provisions of the agreements, and
provide for the automatic renewal of the agreements for successive periods of
one year. The employment agreements of Mr. Tzur, Mr. Scott and Mr. Israel
currently provide for annual base salaries of $230,432, $257,250 and $143,220,
respectively, and periodic bonuses. Each employment agreement provides for a
payment of two years then salary in the event of termination of employment
without cause. Under the terms of the employment agreements, as amended, these
officers' compensation is subject to periodic adjustment by our board of
directors, or a committee of the board.
The above employment agreements contain non-competition covenants under
which Messrs. Tzur, Scott and Israel are prohibited from owning, subject to
limited exceptions, or providing specified services to, businesses similar to or
in competition with our business, during the period that these individuals are
employed under the employment agreements, and for a one-year period thereafter.
34
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the total
annual compensation paid by us to our Chief Executive Officer and each of our
other executive officers whose total cash compensation for the year ended
December 31, 2000 exceeded $100,000:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES NUMBER OF OPTIONS COMPENSATION
- --------------------------- ---- ------ ------- ----------------- ------------
Yehuda Tzur................................ 2001 $212,000 -- 25,000 --
Chairman of the Board 2000 $208,000 $25,000 25,000 --
1999 $190,000 -- 30,000 --
Arvin Scott................................ 2001 $235,000 -- 50,000 --
President and Chief Executive Officer 2000 $220,000 $25,000 25,000 --
1999 $200,000 -- 40,000 --
Sami Israel................................ 2001 $137,440 -- 3,000 --
Vice President 2000 $143,220 $7,000 10,000 --
1999 $139,050 -- 5,000 --
Jerome J. Hiss............................ 2001 $131,200 -- -- --
Chief Financial Officer and Secretary (1) 2000 $111,300 $14,500 12,000 --
1999 $106,000 -- 12,000 --
(1) Mr. Hiss was employed by us until November 2001.
The total compensation we paid to all persons who served as our directors
and executive officers in 2001, eleven persons, was $768,000.
STOCK OPTION PLAN
We maintain the Universal Automotive Industries, Inc. Share Option Plan,
which we will refer to as the "stock option plan," for the benefit of key
employees, non-employee directors, advisors, independent contractors and other
persons whom our board of directors believes are valuable to us. Options granted
under the stock option plan may be either incentive stock options, or "ISOs,"
under Section 422 of the Internal Revenue Code of 1986 or nonstatutory options,
or options which are not intended to be "incentive stock options," as defined in
Section 422 of the Code.
Our stock option plan, which was adopted by the Board of Directors on
October 13, 1994 and approved by our stockholders on October 13, 1994, is
intended to encourage ownership of our common stock by eligible persons such as
employees, officers, directors, and consultants, in order to attract these
persons or to encourage them to serve or continue to serve with us, and to
provide additional incentives for these persons to promote our success. The
stock option plan has been amended on several occasions to increase the number
of shares subject to the plan. The latest amendment increased the total shares
of common stock reserved for issuance under the stock option plan to 1,400,000.
The plan is administered by our board of directors, which may delegate its
authority to a committee.
35
Under our stock option plan, no ISOs may be granted after ten years from
the date of adoption and approval of the stock option plan by our board and
stockholders. The fair market value of shares of common stock with respect to
which ISOs are exercisable for the first time by any person eligible to
participate in the plan during any calendar year shall not exceed $100,000.
The exercise price per share for shares underlying each nonstatutory
option will be determined by our board of directors, which has the power to
determine eligibility to receive options and the terms of any options granted,
including the exercise price, the number of shares subject to the nonstatutory
option, the vesting schedule and the exercise period. The exercise price per
share for shares underlying all ISOs granted under the stock option plan must be
at least equal to the fair market value of a share of our common stock on the
date of the grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of our outstanding capital stock, the exercise
price per share for shares underlying any ISO granted must equal at least 110%
of the fair market value of a share of common stock covered by the ISO on the
grant date, and the ISO shall terminate not more than ten years from the grant
date.
Nonstatutory options must terminate not more than eleven years from the
date of grant. All options granted under the stock option plan may be exercised
over a period of time after such person leaves our employment or after death.
All options granted under the stock option plan are non-transferable.
As of March 15, 2002 the market value of our common stock, based upon
the closing price on the Nasdaq SmallCap Market, was $2.65 per share. The
following table sets forth the amount of all options received, to date, by the
persons listed in the table:
Name Amount of Options
---- -----------------
Yehuda Tzur, Chairman of the Board 181,000
Arvin Scott, President and Chief Executive Officer 367,000
Sami Israel, Vice-President 33,000
Robert W. Zimmer, Chief Financial Officer, Treasurer and 50,000
Secretary
All current executive officers, as a group 631,000
All current directors who are not executive officers, as a
group 20,000
-------
All employees, including all current officers who are not
executive officers, as a group 288,550
=======
OPTION GRANTS
The following table sets forth information with respect to options granted
to Messrs. Tzur, Scott, Israel and Zimmer during the year ended December 31,
2001 under our stock option plan. We did not grant any stock appreciation rights
during the year.
36
Option Grants in 2001
Potential Realized Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------- ----------------------------
Number of % of Total
Securities Options Granted Exercise
Underlying to Employees Price Expiration
Name Options Granted in Fiscal Year (per Share) Date 5% ($) 10% ($)
- ---- --------------- --------------- ----------- ----------- ------ -------
Yehuda Tzur 25,000 11.1% $2.41 1/5/2011 $28,932 $ 81,757
Arvin Scott 50,000 22.3% $2.41 1/5/2011 $57,864 $163,514
Sami Israel 3,000 1.3% $2.19 1/5/2011 $ 4,132 $ 10,480
Robert Zimmer 50,000 22.3% $2.66 11/28/2011 $83,642 $211,968
AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises during
the year ended December 31, 2001 by our executive officers and the value of
these officers' unexercised stock options as of December 31, 2001.
Number of Unexercised Value of Unexercised
Options at 12/31/01 In-the-Money Options at 12/31/01
----------------------------- --------------------------------
Shares
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
Yehuda Tzur 0 0 64,800 66,200 56,728 79,507
Arvin Scott 0 0 139,800 127,200 179,900 159,042
Sami Israel 0 0 7,000 16,000 10,980 20,120
Robert Zimmer 0 0 0 50,000 0 39,000
COMPARATIVE PERFORMANCE GRAPH
The graph set forth below compares cumulative total shareholder return on
our Common Stock with the cumulative total return of the companies listed on the
Nasdaq Stock Market (U.S. Companies) ("Nasdaq Market Index") and an industry
group consisting of publicly-traded companies included in the Company's Standard
Industrial Classification Code (SIC Code 5013 - Motor Vehicle Supplies & New
Parts) (the "Industry Index") for the period from December 15, 1994 to December
31, 2001. The comparison assumes the investment of $100 in Common Stock, the
Nasdaq Market Index and the Industry Index on December 15, 1994 and the
reinvestment of all dividends. The shareholder return of each of the companies
in the Industry Index has been weighted according to market capitalization at
the beginning of each measurement period. Although most of the companies
included in the Industry Index engage in the distribution of brake parts, such
companies also engage in other lines of business.
37
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NASDAQ MARKET INDEX AND SIC CODE INDEX
[PERFORMANCE CHART]
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC 100.00 89.40 54.55 112.12 96.97 166.79
SIC CODE INDEX 100.00 106.72 102.12 77.15 82.81 127.27
NASDAQ MARKET INDEX 100.00 122.32 172.52 304.29 191.25 152.46
ASSUMES $100 INVESTED ON JANUARY 1, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2001
LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that
38
indemnification under our bylaws covers at least negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in his or her capacity as an officer, director, employee or
other agent, regardless of whether our bylaws would permit indemnification for
the liability.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
ours, we have been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
We intend to enter into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws, prior to the completion of this offering. These agreements, among other
things, will provide for indemnification for judgments, fines, settlement
amounts and expenses, including attorneys' fees incurred by any director,
executive officer or controller of ours in any action or proceeding, including
any action by us or on our behalf, arising out of the person's services as a
director, executive officer or controller of ours, or of any of our subsidiaries
or any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. The
limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may lose value to the extent we
pay the costs of settlement or damage awards against our directors and officers
under these indemnification provisions. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
in which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of our voting stock as of March 15, 2002 by:
- each director who beneficially owns shares of our voting stock;
- each of our executive officers;
- each person that is known by us to beneficially own more than 5% of
the outstanding shares of our voting stock; and
- all of our directors and executive officers as a group.
As of March 15, 2002, we had 8,220,949 shares of common stock, 201,438
shares of Series A Preferred Stock and 100,000 shares of Series B Preferred
Stock outstanding. The outstanding shares of Series A and Series B Preferred
Stock, as of March 15, 2002, were convertible into, and had voting rights
equivalent to, 3,014,380 shares of our common stock.
39
For purposes of the following table, a person is deemed to be the
beneficial owner of securities that can be acquired by the person within 60 days
from March 15, 2002 upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that options or warrants
that are held by the person, but not those held by any other person, and which
are exercisable within 60 days from March 15, 2002, have been exercised. Unless
otherwise indicated, we believe that all persons named in this table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them. Unless otherwise indicated, the address of each
person listed in the following table is 11859 South Central, Alsip, Illinois
60803.
Beneficial Ownership Before Offering
------------------------------------
Shares Issuable
Pursuant to Options
or Warrants
Exercisable Within
60 Days of
Name Number of Shares March 15, 2002 Percent Beneficially Owned
- ---- ---------------- -------------- --------------------------
Venture Equities Management, Inc. 2,014,380(1) 1,600,000(2) 28.15%
Wanxiang America Corporation
Wanxiang Group Corporation
Arvin Scott 981,150 154,800(3) 9.97%
Yehuda Tzur 1,045,000 74,800(4) 9.90%
FINOVA Mezzanine Capital, Inc. 1,000,000 8.90%
Sami Israel 941,000(6) 9,600(7) 8.45%
Sol S. Weiner 156,000(8) 7,000(9) 1.44%
Sheldon Robinson 115,000(10) 7,000(11) 1.08%
Dennis L. Kessler 100,000(12) 5,000(13) *
Robert W. Zimmer 0 0 *
M. Catherine Jaros (14) 0 1,000(15) *
Feng Dong(16) 0 0 *
Zemin Xu(15) 0 0 *
All directors, and officers as a 3,338,150 259,200(17) 31.30%
group (10 persons)
- -----------
* less than one percent
(1) Includes 201,438 shares of Series A Preferred Stock which are convertible
into, and have voting rights equivalent to, 2,014,380 shares of our common
stock. All of the shares of Series A Preferred Stock are owned by Venture
Management, Inc. Wanxiang American Corporation and Wanxiang Group
Corporation are also considered beneficial owners of these shares.
Wanxiang America Corporation and Wanxiang Group Corporation disclaim
beneficial ownership of these shares. The address of Venture Equities
Management, Inc.
40
and Wanxiang America Corporation is 88 Airport Road, Elgin, Illinois
60123. The address of Wanxiang Group Corporation is Xiaoshan District,
Hangzhou, Zhejiang, 311215, P.R. China.
(2) Consists of warrants to purchase a total of 1,600,000 shares of our common
stock owned by Venture Equities Management, Inc.
(3) Consists of 154,800 shares issuable upon the exercise of options held by
Mr. Scott.
(4) Consists of 74,800 shares issuable upon the exercise of options held by
Mr. Tzur.
(5) Consists of 100,000 shares of Series B Preferred Stock which are
convertible into, and have voting rights equivalent to, 1,000,000 shares
of our common stock. The address of FINOVA Capital is 500 Church Street,
Suite 200, Nashville, TN 37219.
(6) Includes 467,050 shares owned by Mr. Israel's spouse and children.
(7) Consists of 6,000 shares of issuable upon the exercise of options held by
Mr. Israel.
(8) Includes 6,000 shares owned by Mr. Weiner's spouse. Mr. Weiner's address
is 101 Hamilton Avenue, Evanston, Illinois 60202.
(9) Consists of 7,000 shares issuable upon the exercise of options held by Mr.
Weiner.
(10) Includes 100,000 shares owned by a general partnership managed by Mr.
Robinson. Mr. Robinson's address is 6633 North Sacramento, Chicago,
Illinois 60645.
(11) Consists of 16,000 shares issuable upon the exercise of options held by
Mr. Robinson.
(12) Mr. Kessler's address is 170 Lakeside Place, Highland Park, Illinois
60035.
(13) Consists of 4,000 shares issuable upon the exercise of options held by Mr.
Kessler.
(14) Ms. Jaros' address is 216 Summerfield Road, Northbrook, Illinois 60062.
(15) Consists of 1,000 shares issuable upon exercise of options held by Ms.
Jaros.
(16) The address of each of Messrs. Dong and Xu is 1226 Michael Drive, Suite
B-1, Wood Dale, Illinois 60191.
(17) Consists of 259,200 shares issuable upon the exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
Other than the employment agreements described in Item 11, Executive
Compensation, and the transactions described below, since January 1, 2000 there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which we were or are to be a party in which the amount
involved exceeds $60,000, and in which any director, executive officer, holder
of more than 5% of our common stock or any member of the immediate family of any
of these people had or will have a direct or indirect material interest.
41
We maintain key man term life insurance policies which we purchased
through an insurance agency of which Sheldon Robinson, one of our directors, is
an owner, covering the lives of Mr. Scott and Mr. Tzur. We paid premiums of
approximately $10,000 for these policies in 2001.
Our board of directors has approved unsecured loans to each of Yehuda
Tzur, our Chairman and Arvin Scott, our President and Chief Executive Officer.
As of December 31, 2001, amounts of $177,500 and $136,200 were due from Messrs.
Tzur and Scott, respectively. The loans are due on demand and bear interest at
the applicable federal rate imposed by the Internal Revenue Service for one-year
obligations.
During late 2000 and early 2001, each of Messrs. Kessler and Weiner
exchanged 200,000 shares of preferred stock of eParts eXchange, Inc., which is
one of our subsidiaries, for 50,000 shares of our common stock. The exchange
ratio for the eParts eXchange preferred stock is the same for all persons who
exchanged their eParts eXchange preferred stock for our common stock.
During 2001, we purchased material from Wanxiang America Corporation, an
affiliate of Venture Equities Management Inc., which holds all of our
outstanding Series A Preferred Stock. The aggregate amount of such purchases was
approximately $565,000.
We believe that the transactions described above were fair and reasonable
and on terms at least as favorable as we would expect to negotiate with an
unaffiliated third party. In the future, we intend to present all proposed
transactions between us and our officers, directors or 5% shareholders, and
affiliates, to our board of directors for consideration and approval. Any such
transaction will require approval by a majority of the directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.
STOCKHOLDERS AGREEMENT AND PROXIES
In connection with the issuance of the Series A Preferred Stock to Venture
Equities Management, Inc., or "VEMI," we, Mr. Tzur, Mr. Scott, Mr. Israel and
VEMI entered into a stockholders agreement. In the stockholders agreement Mr.
Tzur, Mr. Scott and Mr. Israel agreed to vote their shares in favor of, and we
agreed to take all actions within our control so that, our board of directors
will consist of nine members, two of whom are designated by VEMI, and that one
of the individuals designated by VEMI would be appointed as co-chairman of the
board. We also agreed to take any actions within our control, and these
shareholders agreed to vote in favor of actions, needed to ensure that the
composition of the board of directors of each of our subsidiaries would be
proportionate to that of our board, provided that at least one VEMI designee was
on the board of each of our subsidiaries, and that the composition of any
committees of our board of directors would be proportionate to that of our
board, provided that at least one VEMI designee would be on each committee. The
stockholders' agreement also provides that Mr. Tzur, Mr. Scott and Mr. Israel
will vote their shares in favor of the election of the VEMI designees to our
board of directors.
The stockholders agreement provides that if Mr. Tzur, Mr. Scott or Mr.
Israel wish to transfer their shares, they must notify VEMI of the proposed
transfer, and that VEMI has the right to purchase the shares on the proposed
terms. The agreement provides a similar right to Mr. Tzur, Mr. Scott and Mr.
Israel in the event VEMI proposes to transfer its shares to a competitor of
ours.
In the stockholders agreement we also granted pre-emptive rights to VEMI
which entitle VEMI, in connection with most offerings of stock or securities
convertible into stock, to purchase a number of the new
42
securities sufficient to enable VEMI to maintain its percentage of ownership of
our voting stock, on the most favorable terms made available to other purchasers
in the offering. The pre-emptive rights granted to VEMI do not apply to the
issuance of up to 200,000 shares of our common stock under our stock option plan
to persons who have never been directors of ours, or shares issued upon the
exercise of options or warrants outstanding on the date we issued the Series A
Preferred Stock. The provisions of the stockholders agreement with regard to the
designation of directors by VEMI and similar matters, the rights of VEMI and Mr.
Tzur, Mr. Scott and Mr. Israel to purchase stock in specified circumstances and
the pre-emptive rights granted to VEMI will terminate if the shares of our
common stock into which the shares of the Series A Preferred Stock owned by VEMI
are convertible fall below 1,007,190, which is half of the number of shares into
which the Series A Preferred Stock was convertible when it was originally
issued.
In connection with the issuance of the Series A Preferred Stock to VEMI,
Mr. Scott and Mr. Tzur both executed irrevocable proxies in favor of VEMI or its
representative. The proxies cover all the shares of our common stock owned by
Mr. Scott and Mr. Tzur, which is currently 2,027,150 shares. The proxies
effectively grant VEMI voting power over the shares owned by Mr. Tzur and Mr.
Scott if an event of default, as defined in the certificate of designations for
the Series A Preferred Stock or the Default Warrant issued to VEMI, occurs. The
proxies generally give VEMI the power to vote a number of shares owned by Mr.
Scott and Mr. Tzur equal to the number of shares it acquires upon exercise of
the Default Warrant, which can only be exercised if a defined event of default
occurs. However, if the default in question stems from our breach of any
provision of the purchase agreement relating to the issuance of the Series A
Preferred Stock, the stockholders agreement described above, any of the warrants
issued to VEMI, or the supply agreement entered into with Wanxiang America
Corporation, VEMI or its designee will have the right to vote all of the shares
held by Mr. Tzur and Mr. Scott whether or not it exercises the default warrant.
If a default occurs which grants VEMI or its designee voting rights over all of
the shares and is later cured, the voting rights will terminate after one year.
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.:
Independent Auditors' Reports.................................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000..................... F-2 to F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999............................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999........................... F-5 to F-6
43
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999............................................... 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
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(a) Restated Certificate of Incorporation of Universal Automotive
Industries, Inc. ("UAI") (Exhibit 3.1 to our Registration Statement
on Form S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
3(b) Restated Bylaws of UAI (Exhibit 3.2 to our Registration Statement
on Form S-1 (No. 33- 85162) as filed with the SEC on October 14,
1994)*
3(c) Certificate of Designations, Preferences and Rights of Class A
Preferred Stock (Exhibit 4.1 to our Form 8-K Report as filed with
the SEC on September 9, 2001)*
3(d) Certificate of Amendment to Certificate of Designations,
Preferences and Rights of Class A Preferred Stock
3(e) Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock
3(f) Certificate of Amendment to Certificate of Incorporation dated
August 27, 2001
4(a) 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)*
10(a) 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)*
10(b) Amended Universal Automotive Industries, Inc. Share Option Plan
(Exhibit 10 to our Registration Statement on Form S-8 (No.
333-67150) filed with the SEC on August 9, 2001)*
10(c) 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)*
44
10(d) 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(e) 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)*
10(f) 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(g) Amendment to Employment Agreement dated December 14, 1994 between
Universal Automotive Industries, Inc. and Yehuda Tzur
10(h) 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(i) 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(j) Amendment to Employment Agreement dated December 14, 1994 between
Universal Automotive Industries, Inc. and Arvin Scott
10(k) 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(l) 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(m) Amendment to Employment Agreement dated December 14, 1994 between
Universal Automotive Industries, Inc. and Sami Israel
10(n) Purchase Agreement dated August 28, 2001 between Universal
Automotive Industries, Inc. and Venture Equities Management, Inc.
(Exhibit 10.1 to our Form 8-K Report filed with the SEC on
September 9, 2001)*
10(o) VEMI Default Warrant to purchase up to 2,500,000 Shares of
Registrant's Common Stock (Exhibit 10.2 to our Form 8-K Report
filed with the SEC on September 9, 2001)*
10(p) VEMI Warrant to purchase up to 800,000 Shares of Registrant's
Common Stock at $2.00 per Share (Exhibit 10.3 to our Form 8-K
Report filed with the SEC on September 9, 2001)*
45
10(q) VEMI Warrant to purchase up to 800,000 Shares of Registrant's
Common Stock at greater of $2.00 per Share or 60 Day Average Market
Price (Exhibit 10.4 to our Form 8-K Report filed with the SEC on
September 9, 2001)*
10(r) Registration Rights Agreement Between Registrant and VEMI (Exhibit
10.5 to our Form 8-K Report filed with the SEC on September 9,
2001)*
10(s) Stockholders Agreement Among VEMI, Registrant, Arvin Scott, Yehuda
Tzur and Sami Israel (Exhibit 10.6 to our Form 8-K Report filed
with the SEC on September 9, 2001)*
10(t) Supply Agreement Between Registrant and Wanxiang America
Corporation (Exhibit 10.7 to our Form 8-K Report filed with the SEC
on September 9, 2001)*
10(u) Letter Agreement Granting VEMI a "Put" Right in Event of Failure to
Obtain Nasdaq Confirmation of Net Tangible Assets Compliance
(Exhibit 10.8 to our Form 8-K Report filed with the SEC on
September 9, 2001)*
10(v) Consulting Agreement between Universal Automotive Industries, Inc.
and EBI Securities Corporation dated May 6, 1999 (Exhibit 4.1 to
our Registration Statement on Form S-3 (No. 333-45538) filed with
the SEC on September 11, 2001)*
10(w) Credit Agreement by and between LaSalle National Bank and Universal
Automotive Industries, Inc. dated as of July 14, 1997 (Exhibit
10.42 to our Annual Report on Form 10-K for the year ended December
31, 2000 filed with the SEC on April 17, 2001)*
10(x) Debenture Purchase Agreement between Universal Automotive
Industries, Inc. and Sirrom Capital Corporation dated July 11, 1997
(Exhibit 10.42 to our Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the SEC on April 17, 2001)*
10(y) Preferred Stock Agreement dated October 30, 2001 by and between
Universal Automotive Industries, Inc. and FINOVA Mezzanine Capital,
Inc.
10(z) Preferred Stock Voting Agreement dated December 5, 2001.
10(aa) First Amendment to Debenture Purchase Agreement dated as of October
30, 2001 by and between Universal Automotive Industries, Inc. and
FINOVA Mezzanine Capital, Inc.
10(ab) First Amendment to Universal Automotive Industries, Inc. 12.25%
Subordinated Debenture due July 11, 2002
10(ac) Prepayment Agreement dated as of October 30, 2001 between Universal
Automotive Industries, Inc. and FINOVA Mezzanine Capital, Inc.
10(ad) Form of Warrant in Connection with Universal Automotive Industries,
Inc.'s February 25, 2002 Private Offering
46
10(ae) Form of Registration Rights Agreement in Connection with Universal
Automotive Industries, Inc.'s February 25, 2002 Private Offering
10(af) Warrant to Placement Agent in Connection with Universal Automotive
Industries, Inc.'s February 25, 2002 Private Warrant
10(ag) Registration Rights Agreement to Placement Agent in Connection with
Universal Automotive Industries, Inc.'s February 25, 2002 Private
Warrant
10(ah) Investment Banking Agreement dated as of November 30, 2001 by and
between Universal Automotive Industries, Inc. and J.P. Turner &
Company, L.L.C.
10(ai) Corporate Consulting Agreement dated October 16, 2001 by and
between Universal Automotive Industries, Inc. and Schneider
Securities, Inc.
21 Subsidiaries of the Registrant
23 Consent of Altschuler Melvoin & Glasser LLP
- ----------
* These exhibits are incorporated herein by reference to the report
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 a reports of Form 8-K during the fourth quarter of 2001
on October 11, 2001 wherein it disclosed information under Item 5. Other
Information Included as exhibits to this Form 8-K were unaudited Consolidated
Balance Sheets as of August 31, 2001, Consolidated Statements of Operations for
the Two and Eight Months Ended August 31, 2001, Consolidated Statements of Cash
Flow for the Eight Months Ended August 31, 2001 and Notes thereto.
47
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 29, 2002
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.
Signatures Title Date
---------- ----- ----
/s/ Arvin Scott Chief Executive Officer, President and
- ------------------------------- Director (Principal Executive Officer) March 29, 2002
Arvin Scott
/s/ Robert Zimmer Chief Financial Officer (Principal Financial
- ------------------------------- Officer) March 29, 2002
Robert Zimmer
/s/ Yehuda Tzur Director March 29, 2002
- -------------------------------
Yehuda Tzur
/s/ Sami Israel Director March 29, 2002
- -------------------------------
Sami Israel
/s/ Sheldon Robinson Director March 29, 2002
- -------------------------------
Sheldon Robinson
/s/ Sol S. Weiner Director March 29, 2002
- -------------------------------
Sol S. Weiner
/s/ Dennis Kessler Director March 29, 2002
- -------------------------------
Dennis Kessler
/s/ M. Catherine Jaros Director March 29, 2002
- -------------------------------
M. Catherine Jaros
/s/ Zemin Xu Director March 29, 2002
- -------------------------------
Zemin Xu
/s/ Feng Dong Director March 29, 2002
- -------------------------------
Feng Dong
48
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
TABLE OF CONTENTS
DECEMBER 31, 2001, 2000 AND 1999
Page
INDEPENDENT AUDITORS' REPORT F - 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F - 2 to F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Changes in Stockholders' Equity F - 5 to F - 6
Consolidated Statements of Cash Flows F - 7 to F - 8
Notes to the Consolidated Financial Statements F - 9 to F - 21
SUPPLEMENTARY INFORMATION
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
INDEPENDENT AUDITORS' REPORT
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, 2001 and 2000, 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, 2001. 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 the Company's Hungarian
subsidiary (Notes 1 and 11) which statements reflect aggregate total assets of
$0 and $1,013,087 as of December 31, 2001 and 2000, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for such
subsidiary (before estimated loss on disposal) is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
March 27, 2002
F - 1
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
ASSETS
Current assets
Cash $ 976,585 $ 56,127
Accounts receivable, trade (net of allowance for doubtful accounts of
$635,931 and $608,624 in 2001 and 2000) 15,789,886 14,495,708
Inventories 16,417,009 19,298,485
Deferred income taxes 240,000 578,000
Prepaid expenses and other current assets 486,293 859,323
Net current assets of Hungarian operations 213,087
----------- -----------
33,909,773 35,500,730
----------- -----------
Property and equipment - net of accumulated depreciation 4,728,034 4,996,811
----------- -----------
Property and equipment - Hungarian operations -- 800,000
----------- -----------
Other assets
Goodwill (net of accumulated amortization of $373,245 and $343,755
in 2001 and 2000) 480,498 521,690
Deferred income taxes 89,800
Due from stockholders 320,929 258,720
Other assets 598,609 815,305
----------- -----------
1,400,036 1,685,515
----------- -----------
$40,037,843 $42,983,056
=========== ===========
See accompanying notes. F - 2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, trade $ 11,446,262 $ 14,524,409
Subordinated debenture, current portion 492,226
Long-term indebtedness, current portion 379,120 473,405
Accrued expenses and other current liabilities 3,569,600 3,404,582
Estimated loss on disposal of Hungarian operations 860,161
------------ ------------
15,887,208 19,262,557
------------ ------------
Long-term liabilities
Revolving loan indebtedness 19,021,873 17,264,111
Long-term indebtedness, noncurrent portion 421,269 856,151
Subordinated debenture, noncurrent portion 1,179,986 4,430,625
------------ ------------
20,623,128 22,550,887
------------ ------------
Minority interest -- 450,000
------------ ------------
Stockholders' equity
Preferred stock (authorized 2,000,000 shares, $0.01 par value,
201,438 shares of series A and 100,000 shares of series B
issued and outstanding in 2001) 3,014
Common stock (authorized 30,000,000 shares,_$0.01 par value,
7,939,599 and 7,243,570 shares_issued and outstanding in 2001 and 2000) 79,394 72,435
Additional paid-in capital 14,583,947 8,670,736
Accumulated deficit (10,136,023) (6,774,614)
Accumulated other comprehensive loss (882,825) (1,248,945)
Stock subscription receivable (120,000)
------------ ------------
3,527,507 719,612
------------ ------------
$ 40,037,843 $ 42,983,056
============ ============
See accompanying notes. F - 3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Net sales $ 71,823,135 $ 69,944,023 $ 67,752,249
Cost of sales 59,351,782 56,509,811 53,539,565
------------ ------------ ------------
GROSS PROFIT 12,471,353 13,434,212 14,212,684
------------ ------------ ------------
Selling, general and administrative 12,397,436 12,829,079 11,741,821
Other operating expenses 792,555 320,000 160,300
Loss from Hungarian operations 294,897 4,337,109
------------ ------------ ------------
13,484,888 13,149,079 16,239,230
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,013,535) 285,133 (2,026,546)
------------ ------------ ------------
Other (income) expense
Interest expense 2,503,383 2,593,656 2,025,125
(Gain) loss on disposition of assets 109,624 (1,153,454)
Other (148,950) (124,853) (9,806)
------------ ------------ ------------
2,354,433 2,578,427 861,865
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (3,367,968) (2,293,294) (2,888,411)
------------ ------------ ------------
Income taxes
Current 12,623 (6,471)
Deferred 427,800 (33,351) 404,662
------------ ------------ ------------
440,423 (33,351) 398,191
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (3,808,391) (2,259,943) (3,286,602)
Extraordinary item - gain on debt restructuring (net
of taxes of $0) 829,714
------------ ------------ ------------
NET LOSS (2,978,677) (2,259,943) (3,286,602)
Issuance of preferred stock with beneficial conversion
feature and warrants (430,614)
------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (3,409,291) $ (2,259,943) $ (3,286,602)
============ ============ ============
Earnings (loss) per share
Basic and diluted
Before extraordinary item $ (0.56) $ (0.32) $ (0.48)
Extraordinary gain 0.11
------------ ------------ ------------
$ (0.45) $ (0.32) $ (0.48)
============ ============ ============
Weighted average number of common
shares outstanding
Basic and diluted 7,553,141 7,008,438 6,789,582
============ ============ ============
See accompanying notes. F - 4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Preferred Stock Common Stock
--------------------------- ----------------------
Shares Shares
Outstanding Amount Outstanding Amount
----------- ------ ----------- ------
Balance, January 1, 1999 -- $ -- 6,769,425 $ 67,694
Comprehensive loss for January 1, 1999
Net loss
Other comprehensive loss,
foreign currency translation
adjustment
Comprehensive loss
Stock options recorded as
compensation
Shares issued for services 59,885 599
----------- ----------- --------- --------
Balance, December 31, 1999 -- -- 6,829,310 68,293
Comprehensive loss for 2000
Net loss
Other comprehensive loss,
foreign currency
translation adjustment
Comprehensive loss
Stock options recorded as
compensation 39,600
Warrants exercised 291,760 2,917
Stock options exercised 85,000 850
Shares issued for services 37,500 375
----------- ----------- --------- --------
Balance, December 31, 2000 -- -- 7,243,570 72,435
Accumulated
Additional Other Stock
Paid-In Accumulated Comprehensive Subscription
Capital Deficit Loss Receivable Total
----------- ----------- ------------- ------------ ----------
Balance, January 1, 1999 $8,257,398 $(1,228,070) $ (599,642) $ -- $6,497,380
----------
Comprehensive loss for January 1, 1999
Net loss (3,286,602) (3,286,602)
Other comprehensive loss,
foreign currency translation
adjustment (294,781) (294,781)
----------
Comprehensive loss (3,581,383)
----------
Stock options recorded as
compensation 39,600 39,600
Shares issued for services 116,980 117,579
---------- ----------- ----------- ---------- ----------
Balance, December 31, 1999 8,413,978 (4,514,672) (894,423) -- 3,073,176
----------
Comprehensive loss for 2000
Net loss (2,259,942) (2,259,942)
Other comprehensive loss,
foreign currency
translation adjustment (354,522) (354,522)
----------
Comprehensive loss (2,614,464)
----------
Stock options recorded as
compensation 39,600 39,600
Warrants exercised 25,208 28,125
Stock options exercised 119,650 120,500
Shares issued for services 72,300 72,675
---------- ----------- ----------- ---------- ----------
Balance, December 31, 2000 8,670,736 (6,774,614) (1,248,945) -- 719,612
See accompanying notes. F - 5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Preferred Stock Common Stock
------------------------ --------------------------
Shares Shares
Outstanding Amount Outstanding Amount
----------- ------ ----------- ------
Comprehensive loss for 2001
Net loss -- $ -- -- $ --
Other comprehensive loss,
foreign currency
translation adjustment
Comprehensive loss
Common stock and stock options
recorded as compensation 20,300 203
Common stock and warrants
issued for services 20,000 200
Series A preferred stock issued
with beneficial conversion
(net of issuance costs of
$100,000) 201,400 2,014
Redemption of common stock
and warrants (279,260) (2,793)
Series B preferred stock issued 100,000 1,000
Conversion of minority interest 225,000 2,250
Warrants and options exercised 375,300 3,753
Common stock issued in
satisfaction of obligations 334,689 3,346
------- --------- --------- -----------
BALANCE, DECEMBER 31, 2001 301,400 $ 3,014 7,939,599 $ 79,394
======= ========= ========= ===========
Accumulated
Additional Other Stock
Paid-In Accumulated Comprehensive Subscriptions
Capital Deficit Loss Receivable Total
----------- ----------- ------------- ------------- -----------
Comprehensive loss for 2001
Net loss $ -- $ (2,978,677) $ -- $ -- $(2,978,677)
Other comprehensive loss,
foreign currency
translation adjustment 366,120 366,120
-----------
Comprehensive loss (2,612,557)
-----------
Common stock and stock options
recorded as compensation 78,484 78,687
Common stock and warrants
issued for services 114,993 115,193
Series A preferred stock issued
with beneficial conversion
(net of issuance costs of
$100,000) 3,080,718 (382,732) 2,700,000
Redemption of common stock
and warrants (1,134,758) (1,137,551)
Series B preferred stock issued 1,999,000 2,000,000
Conversion of minority interest 447,750 450,000
Warrants and options exercised 730,370 (120,000) 614,123
Common stock issued in
satisfaction of obligations 596,654 600,000
----------- ------------ ----------- --------- -----------
BALANCE, DECEMBER 31, 2001 $14,583,947 $(10,136,023) $ (882,825) $(120,000) $ 3,527,507
=========== ============ =========== ========= ===========
See accompanying notes. F - 6
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(2,978,677) $(2,259,942) $(3,286,602)
Depreciation and amortization 1,319,047 1,388,669 1,117,341
(Gain) loss on sale of property and equipment 109,624 (1,153,454)
Extraordinary gain (829,714)
Provision for bad debts 606,433 489,045 426,868
Other, net 45,452 45,000 45,000
Deferred income taxes 427,800 (41,560) 404,662
Compensation expense for stock options 78,687 39,600 39,600
Stock issued for services 115,193 72,675 117,579
Changes in
Accounts receivable, trade (1,900,611) 768,475 (6,350,670)
Inventories 2,881,476 (1,805,942) (2,531,435)
Prepaid expenses and other current assets 373,030 297,807 (117,338)
Net assets of Hungarian operations 152,926 (513,391) 3,655,656
Other assets 109,137 (368,841) (198,748)
Accounts payable, trade (2,578,147) 3,832,902 4,350,294
Accrued expenses and other liabilities 165,018 (817,584) 938,497
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (2,012,950) 1,236,537 (2,542,750)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (913,221) (1,481,163) (1,635,335)
Proceeds from disposition of assets 10,000 2,950,102
Advances to stockholders (62,209) (237,262)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (975,430) (1,471,163) 1,077,505
----------- ----------- -----------
FINANCING ACTIVITIES
Net increase in revolving loan indebtedness 1,757,762 499,439 3,854,671
Proceeds on notes payable 941,792
Principal payments on notes payable (529,167) (488,246) (3,229,830)
Proceeds from issuance of preferred stock of
subsidiary 450,000
Proceeds from issuance of preferred stock 2,800,000
Redemption of common stock and warrants (1,000,000)
Proceeds from issuance of common stock from
exercise of warrants and options 614,123 148,625
Stock issuance costs (100,000)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,542,718 609,818 1,566,633
----------- ----------- -----------
Effect of exchange rate changes on cash 366,120 (354,522) (294,781)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 920,458 20,670 (193,393)
CASH
Beginning of year 56,127 35,457 228,850
----------- ----------- -----------
END OF YEAR $ 976,585 $ 56,127 $ 35,457
=========== =========== ===========
See accompanying notes. F - 7
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $2,384,122 $2,577,954 $2,053,220
========== ========== ==========
Income taxes paid $ 12,978 $ 32,015 $ --
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Liabilities satisfied by issuance of common stock $ 600,000 $ 72,675 $ 117,579
========== ========== ==========
Debt incurred in connection with acquisition of Virginia
assets $ -- $ -- $ 360,000
========== ========== ==========
Subordinated debt satisfied by issuance of Series B
Preferred Stock $2,000,000 $ -- $ --
========== ========== ==========
Conversion of minority interest into common stock $ 450,000 $ -- $ --
========== ========== ==========
See accompanying notes. F - 8
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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,
2001 are as follows:
Universal Automotive, Inc. (Universal)
Universal Automotive of Virginia, Inc.
Universal Brake Parts, Inc. (an amalgamation of 3 Canadian corporations
previously owned by the Company, two of which were inactive in 2001).
UBP Hungary, Inc. (Hungary), a United States Corporation and its wholly
owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian limited
liability company (See Notes 2 and 11).
eParts eXchange, Inc., E-Commerce business-to-business activity (see Note
10)
NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Universal Automotive Industries, Inc. is engaged principally in the manufacture
and distribution of automotive brake parts operating from leased facilities in
Alsip, Illinois; Compton, California; Walkerton, Virginia; Cuba, Missouri; and
Toronto, Canada. Sales are made throughout the United States. The Company's
Hungarian subsidiary, engaged in the manufacture of iron casting products, was
sold during 2001 as described in Note 10.
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.
SEGMENTS--The Company's operations involve only one geographic and
industry segment. As discussed in Note 11, the Company sold its Hungarian
operations. The continuing United States and Canadian operations are
vertically integrated, and are considered part of the same industry
segment and geographic segment (North America).
REVENUE RECOGNITION--The Company recognizes revenue in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Sales incentives provided
to customers in the amount of $493,828, $104,183 and $7,109 for 2001, 2000
and 1999, respectively, have been reflected as a reduction of revenue.
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 those estimates.
FOREIGN CURRENCY TRANSLATION--For the Canadian corporations, 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 financial statements of the Hungarian
operation had been measured as if the functional currency was the U.S.
dollar, and thus, the currency adjustments had been included in the
determination of net loss (now reflected as part of the loss from
Hungarian operations).
F - 9
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH--The Company considers all highly liquid investments with a maturity
of three months or less to be cash equivalents. At times during the year,
the Company maintains cash balances in excess of insured limits.
INVENTORIES--Inventories are stated at the lower of cost or market value
with cost generally determined using the weighted average method, which
approximates the first-in, first-out (FIFO) method.
DEPRECIATION--Depreciation of property and equipment has been computed
under accelerated and straight-line methods for financial reporting
purposes, and accelerated methods for income tax reporting purposes, over
the estimated useful lives of the assets.
COST OF SALES--The Company considers warehousing (including certain
salaries, occupancy costs, supplies) and buying expenses as an integral
component of cost of sales.
GOODWILL--Goodwill represents the excess of the cost of various companies
acquired, over the fair value of the net assets at their respective dates
of acquisition. Such goodwill is being amortized over 20 to 40 years using
the straight-line method.
DERIVATIVES--The Company had previously utilized only limited derivative
financial instruments and did not use them for trading purposes. At
December 31, 2001 and 2000, there were no such instruments.
IMPAIRMENT OF LONG-LIVED ASSETS--In the event that facts and circumstances
indicate that the cost of any long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
writedown to market value or discounted cash flow is required. No such
impairment writedown was required for each of the three years in the
period ending December 31, 2001.
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 reduced, where
appropriate, by a valuation allowance (Note 8).
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 7.00 percent
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.
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 2000 and 1999 financial
statements have been reclassified to conform with the 2001 presentation
without affecting previously reported net losses.
F - 10
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding during the
period. In arriving at the net income (loss) available to common
stockholders, preferred stock dividends (including deemed dividends) of
$430,614 were deducted for the year ended December 31, 2001. "Diluted
Earnings per Share" reflects the potential dilution that could occur if
warrants and options (Note 13) or other contracts to issue common stock
were exercised and resulted in the issuance of additional common shares.
All options and warrants are omitted from the computation of diluted
earnings per share when net losses are reported because the options and
warrants are antidilutive. For the years ended December 31, 2001, 2000,
and 1999, diluted earnings per share and basic earnings per share are
identical because of the losses incurred during those years.
RECENT ACCOUNTING PRONOUNCEMENTS-- In July 2001, the FASB issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS
141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations to be accounted for using the purchase method of accounting
and is effective for all business combinations initiated after June 30,
2001. Under SFAS 142, the Company is no longer required to amortize
goodwill and other intangible assets with indefinite lives, but will be
subject to periodic testing for impairment. Effective January 1, 2002, the
Company will adopt SFAS 142 and is evaluating the effect that such
adoption may have on its consolidated results of operations and financial
position. However, the Company expects that a substantial amount of its
intangible assets will no longer be amortized.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations Associated with the
Retirement of Long-Lived Assets" ("SFAS 143"). SFAS 143 establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset cost. It also provides
accounting guidance for legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 is effective in fiscal years
beginning after June 15, 2002, with early adoption permitted. The Company
plans to adopt SFAS 143 effective January 1, 2003. The Company has not
determined the effect of adopting SFAS 143 on results of operations or
financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting
model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS 144 superseded Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The provisions of SFAS
144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively.
The Company plans to adopt SFAS 144 effective January 1, 2002 and does not
expect that the adoption will have a material impact on its consolidated
results of operations and financial position.
F - 11
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 3 SELECTED FINANCIAL STATEMENT DATA
2001 2000
------------ ------------
Inventories
Finished goods $ 12,057,191 $ 15,717,915
Work-in-process 888,742 94,928
Raw materials 3,471,076 3,485,642
------------ ------------
$ 16,417,009 $ 19,298,485
============ ============
Depreciable
2001 2000 Lives
------------ ------------ -----------
Property, plant and equipment
Machinery and equipment $ 6,046,893 $ 5,611,254 5 - 11
Tools and dies 1,064,457 991,064 5 - 11
Patterns 1,331,247 1,277,982 5 - 10
Computer equipment 974,119 882,694 3 - 5
Automobiles and trucks 289,237 305,598 3 - 5
Furniture and fixtures 366,694 379,286 5 - 11
Leasehold improvements 313,384 316,667 5
Construction in progress 112,564
------------ ------------
10,498,595 9,764,545
Accumulated depreciation (5,770,561) (4,767,734)
------------ ------------
$ 4,728,034 $ 4,996,811
============ ============
2001 2000 1999
------------ ------------ ------------
Depreciation expense $ 1,181,998 $ 1,123,033 $ 927,651
Advertising expense 548,146 174,624 300,825
Other operating expenses
Expired barter credits $ 275,730 $ 120,000 $ --
eParts eXchange shut down expenses 113,577 200,000
Moving expenses 281,817 160,300
Other 121,431
------------ ------------ ------------
$ 792,555 $ 320,000 $ 160,300
============ ============ ============
NOTE 4 DUE FROM STOCKHOLDERS
Amounts due from stockholders represents advances made to certain stockholders,
who are also executives of the Company, and related unpaid interest. The
advances bear interest at 9 percent per annum and are due on demand. Interest
income from these advances amounted to $22,209, $21,458 and $0 for 2001, 2000
and 1999, respectively.
F - 12
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 5 SUBORDINATED DEBENTURE AND PREFERRED STOCK
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture to Finova
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for payments of
interest at 12.25 percent per annum through maturity on July 14, 2002. Through
August 14, 2001 the Company had issued Finova warrants to purchase 1,575,000
shares of the Company's common stock at exercise prices ranging from $0.83 to
$1.58, based on 80 percent of the average closing bid price of the Company's
common stock for the 20 days preceding the respective issuance dates. The
warrants were exercisable at any time through the sixth anniversary of the
debenture issue date. During 2000, Finova elected to exercise one of its
warrants to purchase 450,000 shares of the Company's common stock at an exercise
price of $0.83 per share, using a "cashless" exercise provision whereby Finova
received a net of 279,260 shares of common stock after surrendering 170,743
shares which had a fair market value equal to the aggregate exercise price. The
Company received no cash proceeds from this transaction when such shares were
issued.
On October 31, 2001 the Company completed a restructuring of the $4,500,000
subordinated debt held by Finova. The restructuring resulted in the following:
(i) Finova surrendered to the Company all of its holdings in the Company's
common stock and warrants (279,260 shares and warrants to purchase an additional
1,125,000 shares at prices ranging from $1.12 to $1.58 per share); (ii) the
Company's payment of $1,000,000 to Finova; (iii) issuance to Finova of
$2,000,000 of series B preferred stock ($0.01 par value); and (iv) the amendment
of the debenture to $1,500,000. The amendment to the debenture also reduced the
interest rate form 12.25 percent to 7.0 percent and allows the Company to pay
the remaining balance by making five $100,000 payments every 45 days beginning
December 15, 2001 with a final payment due July 11, 2005. The surrendered
warrants had cashless exercise features which, based on the closing price of the
Company's common stock of $1.89 per share on the date of the restructuring,
would have allowed Finova to receive 322,619 shares of common stock. This
transaction has been accounted for as a troubled debt restructuring and resulted
in an extraordinary gain of $829,714 (inclusive of an accrual of all remaining
interest to be paid of approximately $272,000) for the year ended December 31,
2001. The series B preferred stock has no fixed dividend, entitles the holder to
a liquidation preference, is redeemable at any time at the Company's option and
is convertible into 1,000,000 shares of common stock for which the Company
provided Finova with registration rights.
On August 29, 2001, the Company issued 201,438 shares of series A preferred
stock ($0.01 par value) to Venture Equities Management, Inc. (VEMI) (an
affiliate of Wanxiang America Corporation - Note 12) in exchange for $2,800,000
in cash. The series A preferred stock has no fixed dividend, entitles the holder
to a liquidation preference, is redeemable at the Company's option subject to
certain conditions, and is convertible into 2,014,380 shares of the Company's
common stock (with registration rights), subject to certain antidilution
provisions. In connection with the issuance of the series A preferred stock, the
Company also issued to VEMI three warrants to purchase common stock: the first
and second warrants for 800,000 shares each are exercisable at any time through
August 28, 2002 at an exercise price of $2.00 per share; the third warrant for
2,500,000 shares is exercisable only upon the occurrence of events of default at
an exercise price to be determined based on a defined computation. The costs
related to the issuance of the preferred stock amounted to approximately
$100,000.
F - 13
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 6 LASALLE INDEBTEDNESS
On September 29, 1999, the Company completed a renewal and restructuring of its
credit agreement with LaSalle Bank National Association or its subsidiaries
("LaSalle") for (a) a revolving line of credit of up to $22,000,000 based on
eligible accounts receivable and inventory and (b) a term loan in the amount of
$3,779,194. The term loan was reduced by $2,842,873 in October 1999 from the
proceeds of the sale of the Company's Chicago facility. The credit agreement was
amended in 2000 to increase the revolving line of credit to $26,000,000.
The revolving credit facility, which is for an initial term ending May 1, 2002,
bears interest of prime plus 0.5 percent per annum (changed in 2001 to prime
plus 1.5 percent per annum), subject to an ongoing option to convert to LIBOR
plus 2.5 percent per annum. The term loan is payable in monthly principal
installments of $18,705, with a balloon payment due on May 1, 2003, and bears
interest at prime plus 0.75 percent per annum.
At December 31, 2001 and 2000, respectively, amounts of $19,021,873 and
$17,264,111 were due on the revolving credit line and amounts of $431,281 and
$655,746 were due on the term loan (see Note 7).
The LaSalle agreement contains certain limitations on dividends and capital
expenditures and requires the Company to satisfy certain financial tests
concerning earnings before interest, taxes depreciation and amortization
(EBITDA), defined minimum tangible net worth and debt service coverage. At
December 31, 2001, the Company was not in compliance with certain of these
financial covenants. On March 27, 2002, LaSalle informed the Company that it
will waive such violations upon completion of required documentation which will
include certain modifications to the credit agreement and extend the revolving
credit facility to May 31, 2003. The entire credit facility is secured by a
first lien on substantially all of the Company's North American assets. At
December 31, 2001, approximately $1,540,000 was available for borrowing under
the revolving credit line.
The weighted average interest rates on the aforementioned revolving credit
facility borrowings were 8.68 percent, 10.51 percent and 8.19 percent for the
years ended December 31, 2001, 2000, and 1999, respectively.
NOTE 7 LONG-TERM INDEBTEDNESS
2001 2000
---------- ----------
LaSalle term loan (see Note 5) $ 431,281 $ 655,746
Amounts due under Asset Purchase Agreement 212,963
Capital lease obligation (see Note 8) 347,915 429,011
Vehicle acquisition loans 21,193 31,836
---------- ----------
800,389 1,329,556
Current portion 379,120 473,405
---------- ----------
Noncurrent portion $ 421,269 $ 856,151
========== ==========
F - 14
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 7 LONG-TERM INDEBTEDNESS, CONTINUED
The approximate aggregate maturities of all long-term indebtedness are:
Subordinated Revolving
Debenture Line of Credit
Per Above (Note 5) (Note 6) Total
----------- ------------ --------------- ------------
2002 $ 402,613 $ 492,226 $ -- $ 894,839
2003 362,276 19,021,873 19,384,149
2004 73,348 73,348
2005 125 1,179,986 1,180,111
----------- ------------ ------------ ------------
838,362 1,672,212 19,021,873 21,532,447
Interest portion (37,973) (37,973)
----------- ------------ ------------ ------------
$ 800,389 $ 1,672,212 $ 19,021,873 $ 21,494,474
=========== ============ ============ ============
NOTE 8 INCOME TAXES
The components of the net deferred tax assets are as follows:
2001 2000
----------- -----------
Deferred tax asset - U.S.
Tax benefits upon future liquidation of Hungarian
subsidiary $ 193,400 $ 1,295,000
Bad debt allowance 241,700 231,200
Variation of inventories between tax and financial
reporting purposes 223,600 252,500
Net operating loss carryforward 2,891,100 1,033,200
Compensation expense for stock options 240,800 225,800
Other accruals 202,400 232,500
----------- -----------
3,993,000 3,270,200
Net operating loss carryforward - Canada 427,500 263,900
----------- -----------
Gross deferred tax asset 4,420,500 3,534,100
----------- -----------
Deferred tax liability -
depreciation temporary
differences
U.S (314,700) (293,000)
Canada (632,000) (481,100)
----------- -----------
Gross deferred tax liability (946,700) (774,100)
----------- -----------
Net deferred tax assets 3,473,800 2,760,000
Valuation allowance (3,233,800) (2,092,200)
----------- -----------
$ 240,000 $ 667,800
=========== ===========
Current $ 240,000 $ 578,000
Noncurrent 89,800
----------- -----------
$ 240,000 $ 667,800
=========== ===========
F - 15
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 8 INCOME TAXES, CONTINUED
At December 31, 2001, the Company had a United States net operating loss
carryover of approximately $7,608,000, expiring in years 2017 to 2021.
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to income (loss) from continuing operations
before income tax expense is as follows:
2001 2000 1999
----------- ----------- -----------
Income (loss) from operations before_income tax expense
United States $(2,694,500) $(2,111,900) $ 1,210,100
Canadian 156,200 (181,400) 238,600
----------- ----------- -----------
$(2,538,300) $(2,293,300) $ 1,448,700
=========== =========== ===========
Computed income tax expense (benefit) at federal
statutory rate $ (863,000) $ (779,720) $ 492,558
State income taxes (101,500) (91,700) 57,900
Increase in valuation allowance for deferred tax
benefit 1,141,600 797,200
Variation resulting from effect of different Canadian
and U.S. rates and permanent differences 263,323 (2,667) (157,267)
----------- ----------- -----------
$ 440,423 $ (76,887) $ 393,191
=========== =========== ===========
NOTE 9 LEASES AND OTHER COMMITMENTS
The Company leases from unaffiliated parties all of its facilities including the
Alsip, Illinois headquarters occupied in 1999. The lease terms range from
month-to-month to long-term leases, the latest of which expires in 2012.
Aggregate rent expense for all facilities was approximately $1,978,000,
$1,415,000 and $1,112,000 for 2001, 2000 and 1999, respectively.
The Company leases certain equipment under capital leases payable in aggregate
monthly installments of $14,089 with the latest expiring in 2005. The net book
value of such equipment under capital lease is $359,681 (Note 7). Certain
vehicles and equipment are also leased under operating leases, the latest
expiring in 2003.
F - 16
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 9 LEASES AND OTHER COMMITMENTS, CONTINUED
Minimum operating lease payments due over the remaining terms of the leases are
as follows:
Operating
Leases
-----------
2002 $ 1,634,000
2003 1,395,000
2004 1,175,000
2005 511,000
2006 362,000
Thereafter 1,456,000
-----------
$ 6,533,000
===========
NOTE 10 MINORITY INTEREST IN SUBSIDIARY
In December 1999, a new subsidiary company named eParts eXchange, Inc. ("EPX")
was formed. EPX built and ran a business-to-business e-commerce Internet
platform (www.goepx.com) for worldwide buyers and sellers of automotive
aftermarket parts focusing on the commodity, surplus and international trade
segments. In June 2000, the funding of EPX was completed through the sale of
$450,000 of preferred shares of EPX to a limited number of purchasers, with
conversion rights into the Company's common stock, who represented the minority
interest in EPX. During 2001, the preferred shares of EPX were converted into
225,000 shares of the Company's common stock. In January 2001, the Company
determined that it was better served by redirecting the efforts of the EPX team
to augment the sales and marketing of Universal's products. As a result, the
Company closed the website and remaining employees were permanently reassigned
to Universal's distribution business.
Capitalization of eParts eXchange, Inc. (Note 1) is as follows as of December
31, 2001:
Shares
Issued Percent
---------- -------
Common, par $.00001, issued to
Universal Automotive Industries, Inc. $7,000,000 74%
Officers and directors 2,500,000 26
NOTE 11 HUNGARIAN OPERATIONS
On December 9, 1999, the Company finalized its decision to discontinue its
Hungarian operation. At December 31, 1999, the carrying value of the Hungarian
plant and equipment was reflected at its estimated net realizable value of
$800,000, resulting in a writedown of $1,583,000. The Company provided in 1999
for estimated costs of disposition of $1,500,000, including estimated losses of
the Hungarian operations during the disposal period. The disposition was
initially expected to occur by the end of 2000. Commencing in 2001, because the
Company had not disposed of the Hungarian operations within one year, generally
accepted accounting principles require that income or loss from such
discontinued operations be included in the statement of operations as a
component of income (loss) from continuing operations.
F - 17
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 11 HUNGARIAN OPERATIONS, CONTINUED
The Company's subsidiary, UBP Hungary, Inc., sold its ownership interest in UBP
Csepel Iron Foundry, Kft to Euro-Industrial Limited, LLC (an unrelated third
party), as of December 31, 2001, for $100,000, paid with a single promissory
note. Also in connection with the sale, several instruments evidencing debt owed
by UBP Csepel to UBP Hungary were replaced by a single promissory note in the
amount of $728,000. Under the terms of the promissory note for the purchase
price, the $100,000 is to be paid in quarterly installments beginning April 2002
and ending January 2003. This note does not bear interest unless there is a
default under the note. The $728,000 promissory note is to be repaid in monthly
installments beginning in November 2003 and ending in October 2006. This
promissory note bears interest at the rate of 6.5 percent per year. Due to the
uncertainty of the collectibility of these promissory notes, a reserve of
$756,274 has been established. The net realizable amount of $71,726 is included
in other assets.
NOTE 12 COMMITMENTS AND CONTINGENCIES
In connection with the issuance of series A preferred stock (Note 5) the Company
entered into a supply agreement with Wanxiang. Under the supply agreement, the
Company agreed to make annual purchases of parts from Wanxiang totaling
$5,000,000, provided the prices of the products the Company purchases from
Wanxiang are substantially comparable to the prices charged by other suppliers
in the Peoples Republic of China for similar products. In the event the Company
does not purchase $5,000,000 in products from Wanxiang in a year, the Company is
obligated under the agreement to pay Wanxiang 20 percent of the difference
between $5,000,000 and the amount the Company has paid to Wanxiang for products
during the year. The agreement provides Wanxiang with a right of refusal with
respect to products it seeks to purchase from other suppliers located in the
Peoples Republic of China. The supply agreement has an indefinite term, but can
be terminated by Wanxiang at any time, and by the Company if Wanxiang materially
fails to perform its obligations under the agreement, or if the number of shares
of the Company's common stock underlying the shares of series A preferred stock
owned by VEMI falls below a specified level. During the year ended December 31,
2001 the Company purchased approximately $565,000 of products from Wanxiang.
On December 17, 2001, the Company entered into a nonbinding letter of intent
with Creative Friction, LLC ("Creative"), a manufacturer of disc brake pads,
with the express purpose of entering into a long-term supply agreement. As an
inducement for Creative Friction, LLC to negotiate exclusively with the Company,
the Company issued $137,800 worth of its common stock to Creative Friction, LLC
in 2002. The term of the exclusivity period expires April 1, 2002 unless
extended by mutual consent of both parties.
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately covered by insurance, or, if not so covered, are
without merit or are of such kind or involve such amounts that unfavorable
disposition would not have a material effect on the Company's financial
position, results of operations or liquidity.
F - 18
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 13 STOCK WARRANTS AND OPTIONS
The Company has outstanding at December 31, 2001, 1,279,800 redeemable common
stock purchase warrants. When the warrants were originally issued in December
1994, (a total of 1,495,000) each warrant entitled 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. Effective
November 5, 1999, the Company reduced the exercise price of these warrants to
$2.25 per share. The expiration date of these warrants has been extended to July
15, 2002. A total of 202,700 and 12,500 warrants were exercised during 2001 and
2000, respectively.
In addition to the warrants discussed above and in Note 5, in exchange for
consulting services the Company issued (a) in 2001 warrants to purchase 456,500
shares of the Company's common stock at exercise prices ranging from $1.62 to
$3.74 per share exercisable until 2004, (b) in 2000 warrants to purchase 325,000
shares of the Company's common stock at exercise prices ranging from $2.00 to
$2.75 per share exercisable until 2005 (60,000 shares exercised in 2001 at $2.00
per share), (b) in 1999 warrants to purchase 200,000 shares of the Company's
common stock at exercise prices ranging from $1.4375 to $2.00 per share
exercisable until 2004 (100,000 and 60,000 shares exercised in 2001 at $1.4375
and $2.00 per share, respectively) and (c) in 1998 warrants to purchase 50,000
shares of the Company's common stock at an exercise of $1.375 per share
exercisable until 2003. In connection with the exercise of the warrant for
60,000 shares in 2001 ((b) above), the Company issued the common stock and
reflected a stock subscription receivable in the amount of $120,000.
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 1,400,000 shares of common stock
for issuance under the Stock Option Plan. Following is a table indicating the
activity during 2001, 2000 and 1999 for such Stock Option Plan:
Weighted
Stock Average
Options Exercise Price
--------- --------------
Options outstanding at December 31, 1998 277,976 $ 2.47
1999
Options granted 303,500 1.88
Options forfeited (4,800) (1.90)
-------
Balance, December 31, 1999 576,676 2.18
2000
Options granted 125,000 2.40
Options exercised (85,300) (1.42)
Options forfeited (53,276) (1.77)
-------
Balance, December 31, 2000 563,100 2.37
2001
Options granted 224,350 2.32
Options exercised (12,900) (1.13)
Options forfeited (24,250) (2.09)
-------
Balance, December 31, 2001 750,300 $ 2.37
======= ========
Options exercisable, December 2001 297,210 $ 2.62
======= ========
F - 19
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 13 STOCK WARRANTS AND OPTIONS, CONTINUED
The following table summarizes information about the outstanding and exercisable
stock options as of December 31, 2001:
OPTIONS OUTSTANDING
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- ------------- ----------- ------------ -----------
$ 1.00 - 1.98 161,050 83 months $ 1.38
2.00 - 2.66 498,750 96 months 2.33
3.00 - 3.19 25,000 93 months 3.08
5.00 65,500 68 months 5.00
-------
750,300
=======
OPTIONS EXERCISABLE
Weighted-
Average
Exercise Number Exercise
Prices Outstanding Price
- ------------- ----------- -----------
$ 1.00 - 1.98 85,190 $ 1.29
2.00 - 2.66 137,520 2.28
3.00 - 3.19 9,000 3.04
5.00 65,500 5.00
-------
297,210
=======
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 2001, 2000 and 1999,
amounts of $39,600, $39,600 and $39,600, respectively, have been provided for
such compensation expense (with offsetting credits to additional paid-in
capital).
The Company has adopted only the disclosure provisions of 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 2001, 2000 and 1999 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.
F - 20
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 14 QUARTERLY RESULTS (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ------------ ------------
2001
Net sales $ 16,028,365 $19,999,491 $ 18,160,436 $ 17,634,843 $ 71,823,135
Income (loss) from operations (472,553) 745,772 62,531 (1,349,285) (1,013,535)
Income (loss) before provisions for income taxes and
extraordinary gain (1,074,427) 192,750 (429,435) (2,056,856) (3,367,968)
Net income (loss) (1,084,927) 202,750 (429,435) (1,667,065) (2,978,677)
Basic and diluted earnings (loss) per share (0.15) 0.03 (0.06) (0.27) (0.45)
2000
Net sales $ 17,502,604 $19,995,593 $ 18,940,835 $ 13,609,174 $ 69,944,023
Income (loss) from operations 600,839 879,648 179,723 (1,375,077) 285,133
Income (loss) before provision for income taxes 89,310 224,658 (496,455) (2,110,807) (2,293,294)
Net income (loss) 57,010 121,058 (331,555) (2,106,455) (2,259,943)
Basic and diluted earnings (loss) per share 0.09 0.06 (0.02) (0.43) (0.32)
The fourth quarter 2001 loss was attributable to (a) certain other expenses as
further detailed in Note 3, (b) marketing allowances granted to a new customer,
(c) year-end adjustments to inventory reserves and (d) underabsorption of fixed
manufacturing costs resulting from reduced facility output.
The fourth quarter 2000 loss was attributable to (a) significantly lower sales
consistent with a sluggish automotive aftermarket (b) continued underabsorption
of friction manufacturing costs for new facility and (c) severance payments to
certain terminated employees.
See accompanying notes. F - 21
SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
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 27,
2002, 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, 2001, 2000 and 1999. In our
opinion, these schedules present fairly, in all material respects, the
information required to be set forth therein.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
March 27, 2002
S-1
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (SCHEDULE I)
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ -----------
ASSETS
Cash $ 101 $ 101
Prepaid expenses and other assets 130 130
Investment in and advances to wholly owned subsidiaries 3,527,276 719,381
------------ -----------
$ 3,527,507 $ 719,612
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- $ --
------------ -----------
Stockholders' equity:
Preferred stock (authorized 2,000,000 shares, $.01 par value, 201,438
shares of series A and 100,000 shares of series B issued and
outstanding in 2001) 3,014
Common stock (authorized 30,000,000 shares, $.01 par value 7,939,599
and 7,243,570 shares issued and outstanding in 2001 and
2000, respectively) 79,394 72,435
Additional paid-in capital 15,043,842 9,633,363
Accumulated deficit (10,715,918) (7,737,241)
Accumulated other comprehensive loss (882,825) (1,248,945)
------------ -----------
3,527,507 719,612
------------ -----------
$ 3,527,507 $ 719,612
============ ===========
S-2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (SCHEDULE I), CONTINUED
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 1999
Income
Equity in net loss of subsidiaries $ (2,899,990) $(2,220,342) $(3,247,002)
------------ ----------- -----------
(2,899,990) (2,220,342) (3,247,002)
------------ ----------- -----------
Expenses
Compensation expense for stock options 78,687 39,600 39,600
------------ ----------- -----------
78,687 39,600 39,600
------------ ----------- -----------
Net loss for period (2,978,677) (2,259,942) (3,286,602)
Accumulated deficit
Beginning of period (7,737,241) (5,477,299) (2,190,697)
------------ ----------- -----------
END OF PERIOD $(10,715,918) $(7,737,241) $(5,477,299)
============ =========== ===========
S-3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (SCHEDULE I), CONTINUED
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(2,978,677) $(2,259,942) $(3,286,602)
Compensation expense for stock options 78,687 39,600 39,600
Equity in net loss of subsidiaries 2,899,990 2,220,342 3,247,002
----------- ----------- -----------
NET ASSETS PROVIDED BY OPERATING ACTIVITIES -- -- --
CASH
Beginning of period 101 101 101
----------- ----------- -----------
END OF PERIOD $ 101 $ 101 $ 101
=========== =========== ===========
S-4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
YEARS ENDED DECEMBER 31, 2001 AND 2000
Column B Column C
Balance at Charged Column E
Beginning to Costs Column D Balance at
of Period and Expense Writeoffs End of Period
---------- ----------- --------- -------------
2001:
Allowance for doubtful accounts $ 608,624 $ 606,433 $579,126 $ 635,931
========== =========== ======== ==========
2000:
Allowance for doubtful accounts $ 429,319 $ 489,045 $309,740 $ 608,624
========== =========== ======== ==========
1999:
Allowance for doubtful accounts $ 493,729 $ 426,868 $491,278 $ 429,319
========== =========== ======== ==========
2001:
Reserve for inventory obsolescence $ 331,927 $ (82,999) $ -- $ 248,928
========== =========== ======== ==========
2000:
Reserve for inventory obsolescence $ 544,500 $ (212,573) $ -- $ 331,927
========== =========== ======== ==========
1999:
Reserve for inventory obsolescence $ 158,399 $ 386,101 $ -- $ 544,500
========== =========== ======== ==========
2001:
Valuation allowance for deferred income taxes $2,092,200 $ 1,141,600 $ -- $3,233,800
========== =========== ======== ==========
2000:
Valuation allowance for deferred income taxes $1,295,000 $ 797,200 $ -- $2,092,200
========== =========== ======== ==========
1999:
Valuation allowance for deferred income taxes $ -- $ 1,295,000 $ -- $1,295,000
========== =========== ======== ==========
S-5