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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-25198
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3973627
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11859 South Central Avenue
Alsip, Illinois 60803
---------------------
(Address of principal executive offices)
(Zip Code)
(708) 293-4050
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act): Yes No X
--- ---
The number of shares of issuer's Common Stock, par value $.01 per share,
outstanding as of June 30, 2004 was 11,783,693 shares.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Operations
(Unaudited) - for the six months ended
June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
(Unaudited) - for the six months ended
June 30, 2004 and 2003 5
Notes to Condensed Financial Statements (Unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Items 1, 3 and 5 are not applicable to the Company in this report 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
EXHIBIT 31 Certification of Chief Executive Officer
EXHIBIT 31 Certification of Chief Financial Officer
EXHIBIT 32 Certification of Chief Executive Officer
and Chief Financial Officer
EXHIBIT 99 Computation of Earnings Per Share
2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited)
Assets
Current assets:
Cash $ 793,875 $ 605,211
Accounts receivable - trade, net 20,415,284 9,724,502
Inventories 33,926,000 14,875,045
Deferred income taxes 240,000 240,000
Prepaid expenses and other current assets 465,640 133,218
------------ ------------
55,840,799 25,577,976
------------ ------------
Property and equipment , net 4,177,341 3,913,867
------------ ------------
Other assets:
Goodwill, net 480,498 480,498
Due from employees 40,250 40,250
Deferred financing costs, net 2,101,171 1,932,179
Other assets 289,617 605,586
------------ ------------
2,911,536 3,058,513
------------ ------------
$ 62,929,676 $ 32,550,356
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 16,022,357 $ 9,814,785
Accrued expenses and other current liabilities 9,099,559 2,417,821
Long-term indebtedness , current portion 27,077 81,430
Convertible note, current portion 1,636,388 909,091
Subordinated debenture, current portion 201,182 60,000
------------ ------------
26,986,563 13,283,127
------------ ------------
Long-term liabilities:
Revolving line of credit 21,569,016 11,997,526
Long-term indebtedness, non-current portion 30,825 37,234
Convertible note, non-current portion 4,081,328 3,868,265
Subordinated debenture, non-current portion 600,000 773,120
------------ ------------
26,281,169 16,676,145
------------ ------------
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) 3,014 3,014
Common stock (authorized 30,000,000 shares, $.01 par value,
11,783,693 and 8,948,097 shares issued antanding as of
June 30, 2004 and December 31, 2003) 117,879 89,481
Additional paid-in-capital 19,554,400 16,912,641
Accumulated deficit (9,469,795) (13,885,621)
Accumulated other comprehensive loss (503,904) (479,781)
Stock subscription receivable (39,650) (48,650)
------------ ------------
9,661,944 2,591,084
------------ ------------
$ 62,929,676 $ 32,550,356
============ ============
3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 25,888,576 $ 17,838,657 $ 49,236,323 $ 32,855,567
Cost of sales 23,614,774 15,203,203 44,388,974 28,471,974
---------------------------------------------------------------------
Gross profit 2,273,802 2,635,454 4,847,349 4,383,593
Selling, general, and administrative expenses 4,994,806 2,374,812 9,219,378 4,866,374
---------------------------------------------------------------------
Income (loss) from operations (2,721,004) 260,642 (4,372,029) (482,781)
Other expense:
Interest expense 597,163 249,247 1,111,072 488,088
Gain on valuation of assets purchased -- (9,886,328)
Other (income) (3,688) (3,688) (12,603) (11,482)
---------------------------------------------------------------------
593,475 245,559 (8,787,859) 476,606
---------------------------------------------------------------------
Income (loss) before provision for income taxes (3,314,479) 15,083 4,415,830 (959,387)
Income tax provision 0 0 0 --
---------------------------------------------------------------------
Net income (loss) $ (3,314,479) $ 15,083 $ 4,415,830 $ (959,387)
=====================================================================
Comprehensive income (loss):
Net income (loss) $ (3,314,479) $ 15,083 $ 4,415,830 $ (959,387)
Other comprehensive income (loss),
Foreign currency translation adjustment (12,140) 290,571 (24,123) 358,389
---------------------------------------------------------------------
Comprehensive income (loss) $ (3,326,619) $ 305,654 $ 4,391,707 $ (600,998)
=====================================================================
Earnings (Loss) per share:
Basic $ (0.31) $ 0.00 $ 0.41 $ (0.12)
Diluted $ (0.31) $ 0.00 $ 0.32 $ (0.12)
Weighted average number of common shares outstanding:
Basic 10,705,778 8,224,949 10,705,778 8,224,949
Common stock equivalents resulting from
Conversion of preferred stock -- 3,014,380 3,014,380 --
Conversion of warrants and options -- 964,962 86,741 --
---------------------------------------------------------------------
Diluted 10,705,778 12,204,291 13,806,899 8,224,949
=====================================================================
The accompanying notes are an integral part of the financial statements.
4
Six Months Ended June 30,
--------------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss) $ 4,415,830 $ (959,387)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,144,755 572,464
Provision for bad debts 818,070 169,097
Gain on valuation of assets purchased (9,886,328) --
Other, net 9,000 7,500
Changes in operating assets and liabilities:
Accounts receivable, trade (5,689,925) (2,627,028)
Inventories 6,263,231 3,558,169
Prepaid expenses and other current assets (299,745) (246,625)
Other assets (38,386) --
Accounts payable, trade 2,840,445 (12,361)
Accrued expenses and other current liabilities 733,788 106,415
------------ ------------
Net cash provided by (used in) operating activities 310,735 568,244
Cash flows for investing activities:
Advances on notes receivable, net -- 9,423
Purchase of certain assets of Kelsey-Hays Company (11,571,008)
Purchase of property and equipment (661,603) (166,937)
------------ ------------
Net cash used in investing activities (12,232,611) (157,514)
Cash flows from financing activities:
Net increase (decrease) in revolving loan 9,571,490 (410,198)
indebtedness
Net Principal payments on (92,699) (219,317)
notes payable and subordinated debt
Proceeds from issuance of convertible notes, net 270,715 --
Proceeds from conversion of warrants and options 2,385,157
------------ ------------
Net cash (used in) provided by financing activities 12,134,663 (629,515)
Effect of exchange rate changes on cash (24,123) (12,562)
------------ ------------
Net decrease in cash 188,664 (231,347)
Cash, beginning of period 605,211 237,600
------------ ------------
Cash, end of period $ 793,875 $ 6,253
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 513,162 $ 531,929
============ ============
Cash paid for income taxes $ -- $ 7,403
============ ============
Supplemental disclosure of non-cash financing activities:
Issuance of warrants in connection with
convertible notes $ 167,047 --
============ ============
Conversion of convertible notes into common stock $ 1,181,359 --
============ ============
Issuance of common stock for interest due on
convertible note $ 126,068 --
============ ============
The accompanying notes are an integral part of the financial statements.
5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim condensed financial statements are prepared pursuant to the requirements
for reporting on Form 10-Q. Accordingly, certain disclosures accompanying annual
financial statements prepared in accordance with generally accepted accounting
principles are omitted. For additional disclosures, see the Notes to
Consolidated Financial Statements contained in Universal Automotive Industries,
Inc. (the "Company") Annual Report on Form 10-K for the year ended December 31,
2003.
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in Universal Automotive Industries, Inc. (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2003. 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 the opinion of management of the Company, all adjustments, consisting solely
of normal recurring adjustments, necessary for the fair presentation of the
financial statements for these interim periods have been included. The current
period's results of operations are not necessarily indicative of results, which
ultimately may be achieved for the year.
2. BASIS OF PRESENTATION
Net Loss Per Share
Common stock equivalents resulting from the conversion of preferred stock,
warrants and options issued by the Company are only included in the computation
of weighted average number of shares outstanding, when their inclusion is not
anti-dilutive. For the three months ended June 30, 2004 and the six months ended
June 30, 2003, common stock equivalents are not included in the weighted average
number of shares outstanding in determining net loss per share.
Income Taxes
For the six months ended June 30, 2004 the provision for income taxes was offset
by the benefit associated with the utilization of the tax loss carryforward. For
the six months ended June 30, 2003, no tax benefit associated with the loss
incurred has been provided as the Company believed that, consistent with
accounting principles generally accepted in the United States, it was not more
likely than not that the tax benefits associated with the balance of loss
carryforwards and other deferred tax assets will be realized through future
taxable earnings or alternative tax strategies.
3. INVENTORIES
June 30, 2004 December 31, 2003
------------- -----------------
Finished goods $28,633,282 $12,231,089
Work in process 396,958 574,730
Raw materials 4,895,750 2,069,226
----------- -----------
$33,926,000 $14,785,045
----------- -----------
6
4. CONGRESS INDEBTEDNESS
On January 12, 2004 the Company entered into a revolving line-of-credit
agreement with Congress Financial Corporation ("Congress"), replacing the
LaSalle indebtedness. The maximum available amount of the revolving
line-of-credit is $35,000,000 based on eligible accounts receivable and
inventory and is fully secured by a first lien on the inventory and the accounts
receivable of the Company. The revolving line-of-credit has a term ending
January 12, 2007 and an interest rate of prime plus .50% per annum. The line is
subject to an ongoing option to convert to LIBOR plus 2.75% per annum.
The Congress agreement contains certain limitations on dividends and capital
expenditures and requires the Company to satisfy a financial test concerning
earnings before interest, taxes, depreciation and amortization (EBITDA). At June
30, 2004, the Company was in compliance with these financial covenants.
5. STOCK-BASED COMPENSATION
The Company has elected to follow APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the stock options
granted to employees and directors. Accordingly, employee and director
compensation expense is recognized only for those options whose price is less
than fair market value at the measurement date. The Company has adopted the
disclosure-only provisions of SFAS No. 125, Accounting for Stock-Based
Compensation, as amended.
The Company has computed the pro forma disclosures required under SFAS No. 123,
as amended by SFAS No. 148, for options granted using a option-pricing model
prescribed by SFAS No. 13. The assumptions used for grants during the periods
ended June 30, 2004 and 2003 include a dividend yield of 0.0%, risk-free
interest rates of 2.50%, an option term of immediate to 10 years and a
volatility factor of 78%. Had the compensation costs for these plans been
determined consistent with SFAS No. 123, the Company's net income would have
been reduced by approximately $60,632 to $4,355,198 for the period ended June
30, 2004 and the net loss for the period ended June 30, 2003 would have been
increased by $67,458 to $1,026,845.
7. ACQUISITION OF CERTAIN ASSETS OF KELSEY-HAYES COMPANY
On January 12, 2004 the Company purchased substantially all the assets of the
Autospecialty division of Kelsey-Hayes Company, a subsidiary of TRW Automotive,
Inc ("Autospecialty"), for a total cost, including transaction fees and
expenses, of approximately $11,925,000 plus the assumption of certain
liabilities as set forth in the Purchase Agreement dated December 23, 2003
between the Company and TRW Automotive, Inc. The purchase price is subject to
certain adjustments based upon the future collection of trade accounts
receivable. Negative goodwill recorded in conjunction with the acquisition
transaction included an approximate $9.9 million non-operating, non-cash gain
reflected in Company's Statement of Operations for the quarter ended March 31,
2004.
During the period ending June 30, 2004 the Company incurred costs in connection
with the consolidation and integration of this acquisition including the closing
of two distribution centers, Itasca, Illinois and Compton, California, and the
moving of its inventories to its Alsip, Illinois and Carson, California
distribution facilities respectively. In addition the Carson, California rotor
manufacturing operation was relocated and combined into the Company's Alsip,
Illinois rotor manufacturing facility. A reserve of $700,000 was established
under the purchase method of accounting for these and other integration and
business consolidation expenditures. As of June 30, 2004 approximately $500,000
has been charged against this reserve.
7
Further details of the acquisition (in thousands of dollars) as are follows:
Tangible assets acquired $ 31,141
Liabilities assumed (8,630)
Reserve recorded (700)
--------
21,811
Purchase price 11,925
--------
Gain on valuation of assets purchased $ 9,886
========
This acquisition has been accounted for using the purchase method of accounting.
Accordingly, the allocation of the cost of the acquired assets and liabilities
has been made on the basis of the estimated fair value. The consolidated
financial statements include the operating results of each business from the
date of acquisition. The financial statements reflect the preliminary allocation
of the purchase price and contained certain subjective reserves. Accordingly, it
is expected that the purchase price allocation will be finalized upon the
realization of the acquired accounts receivable and inventory.
In conjunction with recording the acquisition using the purchase method of
accounting, the assets acquired and liabilities assumed have different bases for
income tax purposes. It is expected that the gain on the valuation of assets
purchased would not be taxable for income tax purposes until the underlying
assets acquired are sold. The gain on the valuation of assets acquired
substantially contributed to a realized net income for the period ended June 30,
2004. There was no recorded income tax provision for the period ended June 30,
2004, nor was a deferred tax liability recorded, because the Company has net
operating loss carryforwards that are expected to reduce any taxable income.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(1)
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
caliper, clutch, chassis and hydraulic parts. We believe that we are the leading
supplier of private label 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.(1)
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003
Three months ending
------------------------------------------------------ Change from 2003 to 2004
June 30 % of June 30 % of ------------------------
2004 Revenues 2003 Revenues $ %
---------- -------- --------- ---------- --------- -------
Revenues
Brake Parts, Net $ 21,893 84.6% $ 13,576 76.1% $ 8,317 61.3%
Wholesale Products 3,996 15.4% 4,263 23.9% (267) -6.3%
---------- ----- --------- ----- ------- -------
$ 25,889 100.0% $ 17,839 100.0% $ 8,050 45.1%
Cost of sales
Brake Parts, Net 20,004 91.4% 11,425 84.2% 8,579 75.1%
Wholesale Products 3,611 90.4% 3,778 88.6% (167) -4.4%
---------- ----- --------- ----- ------- -------
23,615 91.2% 15,203 85.2% 8,412 55.3%
---------- ----- --------- ----- ------- -------
GROSS PROFIT 2,274 8.8% 2,636 14.8% (362) -13.7%
Selling, general &
administrative expenses 4,995 19.3% 2,375 13.3% 2,620 110.3%
---------- ----- --------- ----- ------- -------
LOSS FROM OPERATIONS (2,721) -10.5% 261 1.5% (2,982) -1142.5%
Other income (expense)
Interest expense (597) -2.3% (250) -1.4% (347) 138.8%
Other 4 0.0% 4 0.0% -- 0.0%
---------- ----- --------- ----- ------- -------
(593) -2.3% (246) -1.4% (347) 58.5%
INCOME (LOSS) BEFORE INCOME TAXES (3,314) -12.8% 15 0.1% (3,329) NM
Income Taxes -- 0.0% -- 0.0% -- NM
---------- ----- --------- ----- ------- -------
NET INCOME (LOSS) $ (3,314) -12.8% $ 15 0.1% $(3,329) NM
========== ===== ========= ===== ======= =======
Net sales for the three months ended June 30, 2004 increased $8,050 or 45.1%
over the same quarter in 2003 to $25,889. The increase sales were a result of
the new customers obtained in the acquisition of certain assets of The
Kelsey-Hayes Company ("Kelsey-Hayes") of $8,317 offset by a decrease in sales of
wholesale products of $267.
- --------
(1) Some of the statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, may be considered to be "forward
looking statements" since such statements relate to matters which have not yet
occurred. For example, phrases such as "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 may 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.
9
Gross profit for the three months ended June 30, 2004 is $2,274 or 8.8% of net
sales compared to $2,636 or 14.8% in the same period of 2003, a decrease of $362
or 13.7%. This decrease in gross profit is a result of increased product margins
on the higher sales of brake parts of $1,783 offset by increased distribution
expenses of $1,899, increased unabsorbed manufacturing costs of $146 and a
decrease in wholesale commodity margins of $100 on the lower sales volume.
Selling, general and administrative expenses of $4,995 (19.3% of net sales) for
the three months ended June 30, 2004 increased by $2,620 when compared to $2,375
(13.3% of net sales) for the same period in 2003. This increase was a result of
costs associated with operations of the acquired Kelsey-Hayes Company assets,
increased freight costs and the amortization of certain expenses related to the
issuance of warrants in 2003.
Loss from operations for the three months ended June 30, 2004 increased $2,982
to $2,721 as compared to income from operations of $267 for the same period in
2003. This increased loss relates to increased selling, general and
administrative expenses and reduced gross profit.
Other expense for the three months ended June 30, 2004 increased $347 to $593 as
compared to loss of $246 for the same period of 2003. This increase is a result
of the increased interest expense on higher indebtedness.
Net loss for the three months ended June 30, 2004 was $3,314 compared to a net
income of $15 for the same period in 2003, a decrease of $3,329. The decrease in
net income is attributed to the decrease in gross profit of $362, higher
selling, general and administrative expenses of $2,620 and increased other
expenses of $347.
Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003
Six months ending
------------------------------------------------- Change from 2003 to 2004
June 30 % of June 30 % of ------------------------
2004 Revenues 2003 Revenues $ %
-------- ---------- -------- -------- ---------- ----------
Revenues
Brake Parts, Net $ 42,202 85.7% $ 25,364 77.2% $ 16,838 66.4%
Wholesale Products 7,034 14.3% 7,492 22.8% (458) -6.1%
-------- -------- -------- ------- -------- ------
$ 49,236 100.0% $ 32,856 100.0% $ 16,380 49.9%
Cost of sales
Brake Parts, Net 38,188 90.5% 21,819 86.0% 16,369 75.0%
Wholesale Products 6,201 88.2% 6,653 88.8% (452) -6.8%
-------- -------- -------- ------- -------- ------
44,389 90.2% 28,472 86.7% 15,917 55.9%
-------- -------- -------- ------- -------- ------
GROSS PROFIT 4,847 9.8% 4,384 13.3% 463 10.6%
Selling, general &
administrative expenses 9,219 18.7% 4,866 14.8% 4,353 89.5%
-------- -------- -------- ------- -------- ------
LOSS FROM OPERATIONS (4,372) -8.9% (482) -1.5% (3,890) 807.1%
Other income (expense)
Interest expense (1,111) -2.3% (488) -1.5% (623) 127.7%
Gain on valuation of assets 9,886 20.1% 9,886 NM
Other 13 0.0% 11 0.0% 2 18.2%
-------- -------- -------- ------- -------- ------
8,788 17.8% (477) -1.5% 9,265 105.4%
INCOME (LOSS) BEFORE INCOME TAXES 4,416 9.0% (959) -2.9% 5,375 -560.5%
Income Taxes - 0.0% - 0.0% -
-------- -------- -------- ------- -------- ------
NET INCOME (LOSS) $ 4,416 9.0% $ (959) -2.9% $ 5,375 -560.5%
======== ======== ======== ======= ======== ======
Net sales for the six months ended June 30, 2004 increased $16,380 or 49.9% over
the same period in 2003 to $49,236. The increased sales were a result of the new
customers obtained in the acquisition of certain assets of The Kelsey-Hayes
Company ("Kelsey-Hayes") of $16,838, offset by a decrease in sales of wholesale
products of $458.
Gross profit for the six months ended June 30, 2004 is $4,847 or 9.8% of net
sales compared to $4,384 or 13.3% in the same period of 2003, an increase of
$463 or 10.6%. This increase in gross profit is a result of increased product
margins on the higher sales of brake parts of $3,658, offset by increased
distribution expenses of $3,260 and a decrease in wholesale commodity margins of
$7 on the lower sales volume, partially offset by a decrease in unabsorbed
manufacturing costs of $72.
Selling, general and administrative expenses of $9,219 (18.7% of net sales) for
the six months ended June 30, 2004 increased by $4,353 when compared to $4,866
(14.8% of net sales) for the same period in 2003. This increase was a result of
costs associated with operations of the acquired Kelsey-Hayes Company assets,
increased freight costs on the higher sales levels and the amortization of
certain expenses related to the issuance of warrants in 2003.
Loss from operations for the six months ended June 30, 2004 increased $3,890 to
$4,372 as compared to a loss of $482 for the same period in 2003. This increased
loss relates to increased selling, general and administrative expenses of $4,353
offset by increased gross profit of $463.
Other income for the six months ended June 30, 2004 increased $9,265 to $8,788
as compared to net expense of $477 in the same period of 2003. This increase is
primarily a result of the gain on the valuation of assets purchased of $9,886
offset by increased interest expense of $623 on higher debt levels..
Net income for the six months ended June 30, 2004 was $4,416 compared to a net
loss of $959 for the same period in 2003, an increase of $5,375. This increase
is attributed to gain of valuation of assets purchased of $9,886 offset by
decrease in operating income of $3,890 and an increase in interest expense and
other income of $621.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 2004
was $310,735 which was primarily due to (a) net income for the period of
$4,415,830 (b) reduction in inventories of $6,263,231, (c) net increase in
accounts payable and accrued expenses of $3,574,233 (d) non-cash items
consisting of depreciation, amortization and provision for bad debts of
$1,962,825, and (e) a decrease in other assets of $9,000, offset by (f) non-cash
gain on the valuation of assets purchased from Kelsey-Hayes of $9,886,328, (g) a
increase in net trade accounts receivable of $5,689,925, and (h) an increase in
prepaid expenses and other assets of $338,131.
Net cash used in investing activities was $12,232,611, which is attributable
primarily to the purchase of certain assets of Kelsey-Hayes for $11,571,008 and
leasehold improvements incurred in connection with the relocation of the rotor
manufacturing from Carson, CA into the Alsip, IL facility.
Net cash provided by financing activities was $12,134,663, consisting primarily
of an increase to the revolving line of credit of $9,571,490, net proceeds from
the issuance of convertible notes of $270,715 and the exercise of warrants on
options of $2,385,157, offset by principal payments on notes payable and
subordinated debt of $92,699.
We expect to continue to finance our operations through cash flow generated from
operations, borrowings under our bank lines of credit and credit from our
suppliers.
11
Future contractual obligations of the Company are as follows:
- ---------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
- ---------------------------------------------------------------------------------------------
Contractual Next 12 After
Obligations Total Months 1-3 years 4 years
- ---------------------------------------------------------------------------------------------
Revolving Loan $21,569,016 $ - $21,569,016 $ -
- ---------------------------------------------------------------------------------------------
Convertible notes $ 5,717,716 1,636,388 4,081,328 -
- ---------------------------------------------------------------------------------------------
Subordinated debt $ 816,349 216,349 600,000 -
- ---------------------------------------------------------------------------------------------
Capital leases $ 57,902 27,077 30,825 -
- ---------------------------------------------------------------------------------------------
Operating leases $ 9,723,587 2,875,530 5,059,107 1,788,950
- ---------------------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in the Universal Automotive Industries, Inc. (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2003. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that our Company does not have significant exposure to market risk
associated with derivative financial instruments, other financial instruments,
or derivative commodity instruments. We previously utilized only limited
derivative financial instruments and did not use them for trading purposes and
have never used derivative commodity instruments. At June 30, 2004, there were
no such derivative instruments. The fair value of financial instruments, other
than debt instruments, closely approximates their carrying value. Because the
interest rate of the revolving loan with Congress Financial Corporation and term
loan with The Laurus Funds adjusts with the changes in the market rate of
interest, we believe that the fair value is equivalent to the carrying value.
We believe the interest rate of eight percent (8.0%) on the subordinated
debenture held by FINOVA Mezzanine Capital, Inc. is approximately equal to the
current rate available for similar debt. Accordingly, the fair value of this
debenture approximates its carrying value.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the material reliability of the financial statements and other
disclosures included in this report as well as to safeguard assets from
unauthorized use or disposition. However, no cost effective systems of internal
controls will preclude all errors and irregularities, and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our disclosure
controls and procedures under the supervision and with the participation of
management, including our chief executive officer and chief financial officer,
within 90 days prior to the filing date of the this report. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic Securities
and Exchange Commission filings. No significant changes were made to our systems
of internal controls or other factors that could significantly affect these
disclosure controls and procedures subsequent to the date of their evaluation.
12
PART II OTHER INFORMATION
Items 1, 3 and 5 are not applicable to the Company in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Stockholders of the Company was held on
June 22, 2004.
(b) The following directors were elected at the annual meeting: Arvin
Scott, M. Catherine Jaros, Dennis Kessler, Zemin Xu and Alan Zeffer.
(c) The Stockholders voted to approve the Company's 2004 Long-Term
Incentive Plan. The votes cast with respect to the 2004 Long-Term Incentive Plan
and the election of the directors are as follows:
VOTES CAST(1)
- --------------------------------------------------------------------------------
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------- --------- ------- ---------
2004 LONG-TERM INCENTIVE PLAN 8,409,760 2,860,092 0 7,000
- ------------------
(1) Includes votes of Series A Preferred Stock and Series B Preferred Stock
voting on an "as converted" basis, and allocated 2,014,380 and 1,000,000
votes, respectively, in addition to the 8,889,771 shares of common stock
represented at the meeting.
ELECTION OF DIRECTORS
VOTES VOTES
DIRECTOR RECEIVED WITHHELD
- -------- ---------- --------
Arvin Scott 11,878,750 25,400
M. Catherine Jaros 11,879,851 6,300
Dennis Kessler 11,879,851 6,300
Zemin Xu 11,866,251 19,900
Alan Zeffer 11,879,851 6,300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
- -------------- -----------------------
31.1 Certifications of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certifications of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99 Computation of Earnings Per Share
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
/s/ ARVIN SCOTT
----------------------------------------
Date: August 23, 2004 Arvin Scott, Chief Executive Officer,
President
(Principal Executive Officer)
/s/ ROBERT W. ZIMMER
----------------------------------------
Date: August 23, 2004 Robert W. Zimmer, Chief Financial
Officer
(Principal Financial & Accounting
Officer)
14