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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 September 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 September 30, 2004 was 12,280,532 shares.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page(s)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Operations
(Unaudited) - For the nine months ended
September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
(Unaudited) - For the nine months ended
September 30, 2004 and 2003 5
Notes to Condensed Financial Statements (Unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition 8-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Items 1 thru 5 are not applicable to the Company in this report 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 14
EXHIBIT 31.1 Certificate of Chief Executive Officer 15
EXHIBIT 31.2 Certificate of Chief Financial Officer 16
EXHIBIT 32 Certificate of Chief Executive Officer and Chief Financial Officer 17
EXHIBIT 99 Computation of Earnings Per Share 18
2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash $ 2,910,023 $ 605,211
Accounts receivable - trade, net 21,293,006 9,724,502
Inventories 32,303,957 14,875,045
Deferred income taxes 240,000 240,000
Prepaid expenses and other current assets 794,772 133,218
------------ ------------
57,541,758 25,577,976
------------ ------------
Property and equipment , net 4,037,562 3,913,867
------------ ------------
Other assets:
Goodwill, net 480,498 480,498
Due from employees 40,250 40,250
Deferred financing costs, net 1,613,536 1,932,179
Other assets 288,244 605,586
------------ ------------
2,422,528 3,058,513
------------ ------------
$ 64,001,848 $ 32,550,356
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 18,470,756 $ 9,814,785
Accrued expenses and other current liabilities 8,257,140 2,417,821
Long-term indebtedness, current portion 16,925 81,430
Convertible note, current portion 2,819,455 909,091
Subordinated debenture, current portion 786,016 60,000
------------ ------------
30,350,292 13,283,127
------------ ------------
Long-term liabilities:
Revolving line of credit 24,159,282 11,997,526
Long-term indebtedness, non-current portion 28,301 37,234
Convertible note, non-current portion 2,852,505 3,868,265
Subordinated debenture, non-current portion 0 773,120
------------ ------------
27,040,088 16,676,145
------------ ------------
Stockholders' equity:
Preferred stock (authorized 2,000,000 shares, 3,014 3,014
$.01 par value, 201,438 shares of Series A
and 100,000 shares of Series B issued and
outstanding)
Common stock (authorized 30,000,000 shares, 122,805 89,481
$.01 par value, 12,280,532 shares issued and
outstanding at September 30, 2004 and
8,948,097 at December 31, 2003)
Additional paid-in-capital 19,697,753 16,912,641
Accumulated deficit (12,659,533) (13,885,621)
Accumulated other comprehensive loss (517,421) (479,781)
Stock subscription receivable (35,150) (48,650)
------------ ------------
6,611,468 2,591,084
------------ ------------
$ 64,001,848 $ 32,550,356
============ ============
The accompanying notes are an integral part of the financial statements.
3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 26,674,735 $ 14,083,051 $ 75,911,058 $ 46,938,618
Cost of sales 24,478,257 12,176,229 68,867,231 40,648,203
------------ ------------ ------------ ------------
Gross profit 2,196,478 1,906,822 7,043,827 6,290,415
Selling, general, and administrative expenses 4,558,196 2,457,024 13,777,574 7,323,398
------------ ------------ ------------ ------------
Income (loss) from operations (2,361,718) (550,202) (6,733,747) (1,032,983)
Other expense:/(income)
Interest expense 825,812 284,816 1,936,884 772,904
Gain on valuation of assets purchased 0 0 (9,886,328) 0
Other 2,208 (22,801) (10,395) (34,283)
------------ ------------ ------------ ------------
828,020 262,015 (7,959,839) 738,621
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (3,189,738) (812,217) 1,226,092 (1,771,604)
Income tax provision 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) $ (3,189,738) $ (812,217) $ 1,226,092 $ (1,771,604)
============ ============ ============ ============
Comprehensive income (loss):
Net income (loss) $ (3,189,738) $ (812,217) $ 1,226,092 $ (1,771,604)
Other comprehensive income (loss),
Foreign currency translation adjustments (13,517) (49,549) (37,640) 308,840
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (3,203,255) $ (861,766) $ 1,188,452 $ (1,462,764)
============ ============ ============ ============
Earnings (Loss) per share:
Basic $ (0.26) $ (0.10) $ 0.11 $ (0.21)
Diluted $ (0.26) $ (0.10) $ 0.08 $ (0.21)
Weighted average number of common shares outstanding:
Basic 12,238,122 8,437,589 11,197,572 8,296,608
Common stock equivalents resulting from
Conversion of preferred stock 0 0 3,475,297 0
------------ ------------ ------------ ------------
Diluted 12,238,122 8,437,589 14,672,869 8,296,608
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements
4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income (loss) $ 1,226,092 $(1,771,604)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,935,922 885,192
Provision for bad debts 925,592 245,571
Gain on valuation of assets purchased (9,886,328) 0
Other, net 13,500 (25,000)
Changes in operating assets and liabilities:
Accounts receivable, trade (7,034,184) 426,376
Inventories 7,426,556 3,241,782
Prepaid expenses and other current assets (671,738) (525,759)
Accounts payable, trade 6,106,577 (149,230)
Accrued expenses and other current liabilities 73,380 268,164
------------ -----------
Net cash provided by (used in) operating activities 115,369 2,595,492
Cash flows for investing activities:
Payments on notes receivable 0 5,500
Purchase of certain assets of Kelsey-Hayes Company (11,571,008) 0
Purchase of property and equipment (842,455) (337,244)
------------ -----------
Net cash used in investing activities (12,413,463) (331,744)
Cash flows from financing activities:
Net increase (decrease) in revolving loan indebtedness 12,161,756 (3,514,002)
Payments on notes payable and subordinated debt (134,850) (329,202)
Proceeds from convertible debt,net 1,743,700 1,240,000
Proceeds from exercise of options 869,940 167,925
------------ -----------
Net cash (used in) provided by financing activities 14,640,546 (2,435,279)
Effect of exchange rate changes on cash (37,640) 44,074
------------ -----------
Net increase/(decrease) in cash 2,304,812 (127,457)
Cash, beginning of period 605,211 237,600
------------ -----------
Cash, end of period $ 2,910,023 $ 110,143
============ ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 931,237 $ 841,695
============ ===========
Cash paid for income taxes $ 0 $ 0
============ ===========
Supplemental disclosure of non-cash financing activities:
Issuance of warrants in connection with convertible notes $ 167,047 $ 305,336
============ ===========
Conversion of convertible notes into common stock $ 1,565,455 $ 0
============ ===========
Issuance of common stock for interest due on convertible notes $ 105,689 $ 0
============ ===========
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. Annual Report on Form 10-K for the year ended December 31, 2003. Our
auditors have not completed their review of these interim condensed financial
statements in accordance with SEC regulation S-K. This review is expected to be
completed in the near future.
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in Universal Automotive Industries, Inc. 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 our management, 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
Warrants and options issued by us are only included in the computation of
weighted average number of shares where their inclusion is not anti-dilutive.
For the three months ended September 30, 2004 and September 30, 2003 and the
nine months ended September 30, 2003, common stock equivalents are not included
in the weighted average number of shares outstanding in determining net loss per
share. For the nine months ended September 30, 2004 the fully diluted earnings
per share is based upon 2,014,380 shares of Series A Preferred and 1,000,000
shares of Series B, on an as converted basis, plus an additional 460,917 shares
of common stock into which said shares of Series A Preferred would convert as of
September 30, 2004 based upon shares of common stock issued and deemed issued
for purposes of the anti-dilution formula, with respect to the Series A
Preferred stock.
Income Taxes
For the quarters and nine months ended September 30, 2004 and 2003, no provision
for income taxes has been provided. We believe that, consistent with accounting
principles generally accepted in the United States, it is more likely that the
tax benefits associated with the balance of loss carryforwards and other
deferred tax assets will not be realized through future taxable earnings or
alternative tax strategies. Accordingly, net deferred tax assets were offset
with a valuation allowance.
3. INVENTORIES
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Finished goods $ 38,831,885 $ 12,854,089
Work in process 662,190 574,730
Raw materials 6,569,519 2,214,226
Inventory reserves (13,759,637) (768,000)
------------ ------------
$ 32,303,957 $ 14,875,045
============ ============
6
4. CONGRESS FINANCIAL INDEBTEDNESS
On January 12, 2004 we entered into a revolving line-of-credit agreement with
Congress Financial Corporation ("Congress") replacing our line of credit with
LaSalle National Bank, N.A. 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 our accounts
receivable. 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 Credit Agreement contains certain limitations on dividends and
capital expenditures and requires us to satisfy a financial test concerning
earnings before interest, taxes, depreciation and amortization (EBITDA). At
September 30, 2004, we were in compliance with these financial covenants.
5. STOCK-BASED COMPENSATION
We have elected to follow APB Opinion No. 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. We have adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended.
We have computed the pro forma disclosures required under SFAS No. 123, as
amended by SFAS No. 148, for options granted using an option-pricing model
prescribed by SFAS NO. 13. The assumptions used for grants during the periods
ended September 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, our net income would have been reduced
by approximately $127,953 to $1,098,139 for the period ended September 30, 2004
and the net loss for the period ended September 30, 2003 would have been
increased by $101,187 to $1,872,791.
6. ACQUISITION OF CERTAIN ASSETS OF KELSEY-HAYES COMPANY
On January 12, 2004 we 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 our Statement of Operations for the quarter ended March 31, 2004.
During the period ending September 30, 2004 we 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 our 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 September 30, 2004 approximately $505,000 has
been charged against this reserve.
7
Further details of the acquisition (in thousands of dollars) are as 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
September 30, 2004. There was no recorded income tax provision for the period
ended September 30, 2004, nor was a deferred tax liability recorded, because we
have net operating loss carryforwards that are expected to reduce any taxable
income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (1)
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this quarterly
report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Federal Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. Examples
of factors which could affect the Company's performance are set forth in the
Company's annual report on Form 10-K, as filed with the Securities and Exchange
Commission on April 14, 2004 under the heading "Risk Factors."
GENERAL
We are a manufacturer and distributor of brake rotors, drums, disc brake pads,
relined brake shoes, non-asbestos friction lining, clutch and chassis parts and
a complete line of hydraulic parts, including brake calipers. We are one of the
leading full-line brake and undercar parts suppliers to the North American
aftermarket. Our products are sold under our nationally recognized
Autospecialty, Power Stop and Evolution brands as well as customer specific
private labels.
8
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004 Compared To Three Months Ended September
30, 2003
Three Months Ending
---------------------------------------------- Change from 2003 to 2004
Sept 30 % of Sept 30 % of ------------------------
2004 Revenues 2003 Revenues $ %
-------- -------- -------- -------- -------- ------
Revenues
Brake Parts, Net $ 23,247 87.1% $ 10,897 77.4% $ 12,350 113.3%
Wholesale Products 3,428 12.9% 3,186 22.6% 242 7.6%
-------- ----- -------- ----- -------- ------
$ 26,675 100.0% $ 14,083 100.0% $ 12,592 89.4%
Cost of sales
Brake Parts, Net 21,355 91.9% 9,424 86.5% 11,931 126.6%
Wholesale Products 3,123 91.1% 2,753 86.4% 370 13.4%
-------- ----- -------- ----- -------- ------
24,478 91.8% 12,177 86.5% 12,301 101.0%
-------- ----- -------- ----- -------- ------
GROSS PROFIT 2,197 8.2% 1,906 13.5% 291 15.3%
Selling,general &
administrative expenses 4,559 17.1% 2,457 17.4% 2,102 85.6%
-------- ----- -------- ----- -------- ------
LOSS FROM OPERATIONS (2,362) -8.9% (551) -3.9% (1,811) 328.7%
Other income (expense)
Interest expense (826) -3.1% (285) -2.0% (541) 189.8%
Other -2 0.0% 23 0.2% (25) -108.7%
-------- ----- -------- ----- -------- ------
(828) -3.1% (262) -1.9% (566) 68.4%
INCOME (LOSS) BEFORE INCOME TA (3,190) -12.0% (813) -5.8% (2,377) NM
Income Taxes - 0.0% - 0.0% - NM
-------- ----- -------- ----- -------- ------
NET INCOME (LOSS) $ (3,190) -12.0% $ (813) -5.8% $ (2,377) NM
======== ===== ======== ===== ======== ======
(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
Net sales for the three months ended September 30, 2004 increased $12,592 or
89.4 % over the same quarter in 2003 to $26,675. The increased sales were a
result of a new customers obtained in the acquisition of certain assets of The
Kelsey-Hayes Company ("Kelsey-Hayes") of $12,350 coupled with an increase in
wholesale products of $242.
Gross profit for the three months ended September 30, 2004 is $2,197 or 8.2% of
net sales compared to $1,906 or 13.5% in the same period of 2003, an increase of
$ 291 or 15.3%. The following table details the change in gross profit for the
period.
Gross profit on higher brake parts sales volume $ 2,343
Reduced underabsorption of fixed manufacturing overheads 266
Higher distribution expenses (2,189)
Reduced gross margins on wholesale product sales (129)
---------
Net increase in gross profit $ 291
=========
Selling, general and administrative expenses of $4,559 (17.1% of net sales) for
the three months ended September 30, 2004 increased by $2,102 when compared to
$2,457 (17.4% of net sales) for the same period in 2003. The 85.6% increase was
a result of increased freight and commission costs on the higher sales levels
and an increase in administrative expenses as the administrative operations of
the Kelsey-Hayes acquisition were integrated into our operations.
Loss from operations for the three months ended September 30, 2004 increased
$1,811 to $2,362 as compared to a loss of $551 for the same period in 2003. This
increased loss relates to increased selling, general and administrative expenses
partially offset by higher gross profit dollars.
Other expense for the three months ended September 30, 2004 increased $566 to
$828 from $262 for the same period of 2003. Of this total, interest expense
increased $541 from the same period in 2003 due to increased borrowing levels on
the revolving line of credit coupled with higher interest rates.
Net loss for the three months ended September 30, 2004 increased $2,377 to
$3,190 as compared to a net loss of $813 for the same period in 2003. The
increased net loss is attributed to increased gross profit of $291 offset by
higher selling, general and administrative expenses of $2,102 and increased
other expense of $566.
10
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30,
2003
Nine months ending
------------------------------------------------- Change from 2003 to 2004
September 30 % of September 30 % of ------------------------
2004 Revenues 2003 Revenues $ %
------------ -------- ------------ -------- -------- --------
Revenues
Brake Parts, Net $ 65,449 86.2% $ 36,261 77.3% $ 29,188 80.5%
Wholesale Products 10,462 13.8% 10,678 22.7% (216) -2.0%
-------- -------- -------- -------- -------- --------
$ 75,911 100.0% $ 46,939 100.0% $ 28,972 61.7%
Cost of sales
Brake Parts, Net 59,543 91.0% 31,243 86.2% 28,300 90.6%
Wholesale Products 9,324 89.1% 9,406 88.1% (82) -0.9%
-------- -------- -------- -------- -------- --------
68,867 90.7% 40,649 86.6% 28,218 69.4%
-------- -------- -------- -------- -------- --------
GROSS PROFIT 7,044 9.3% 6,290 13.4% 754 12.0%
Selling,general &
administrative expenses 13,778 18.2% 7,323 15.6% 6,455 88.1%
-------- -------- -------- -------- -------- --------
LOSS FROM OPERATIONS (6,734) -8.9% (1,033) -2.2% (5,701) 551.9%
Other income (expense)
Interest expenses (1,937) -2.6% (773) -1.6% (1,164) 150.6%
Gain on valuation of assets 9,886 13.0% - 9,886 NM
Other 11 0.0% 34 0.1% (23) -67.6%
-------- -------- -------- -------- -------- --------
7,960 10.5% (739) -1.6% 8,699 109.3%
INCOME (LOSS) BEFORE INCOME TAXES 1,226 1.6% (1,772) -3.8% 2,998 -169.2%
Income Taxes - 0.0% - 0.0% -
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $ 1,226 1.6% $ (1,772) -3.8% $ 2,998 -169.2%
======== ======== ======== ======== ======== ========
Net sales for the nine months ended September 30, 2004 increased $28,972 or
61.7% over the same period in 2003 to $75,911. 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 $29,188 offset by a decrease in sales
of wholesale products of $216.
Gross profit for the nine months ended September 30, 2004 is $7,044 or 9.3% of
net sales compared to $6,290 or 13.4% in the same period of 2003, an increase of
$754 or 12.0%. The following table details the change in gross profit for the
period.
Gross profit on higher brake parts sales volume $ 6,000
Reduced underabsorption of fixed manufacturing overheads 338
Higher distribution expenses (5,449)
Reduced gross margins on wholesale product sales (135)
--------
Net increase in gross profit $ 754
========
11
Selling, general and administrative expenses of $13,788 or 18.2% of net sales
for the nine months ended September 30, 2004 increased by $6,455 when compared
to $7,323 or 15.6% 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 nine months ended September 30, 2004 increased
$5,701 to $6,734 as compared to a loss of $1,033 in the same period of 2003.
This increased loss relates to increased selling, general and administrative
expenses of 6,455 offset by increased gross profit of $754.
Other income for the nine months ended September 30, 2004 increased $8,699 to
$7,960 as compared to net expense of $739 in the same period 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 $1,164 and other expense net of $23.
Net income for the nine months ended September 30, 2004 was $1,226 compared to a
net loss of $1,722 for the same period 2003, an increase of $2,998. This
increase is attributed to the gain on valuation of assets purchased of $9,886
offset by decreased operating income of $5,701 and an increase in interest
expense and other income of $1,187.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities for the nine months ended September
30, 2004 was $115,369 which was primarily due to (a) net income of $1,226,091,
(b) a reduction in inventories of $7,426,556, (c) non-cash items consisting of
depreciation, amortization and provision for bad debts of $2,861,514, (d)
increase in accounts payable of $6,106,577 (e) increase in accrued expenses of
$73,381 and (f) a decrease on other, net of $13,500 offset by (g) the non-cash
gain on valuation of assets of $9,886,328 (h) an increase in accounts receivable
of $7,034,184 and (i) an increase in prepaid expenses and other assets of
$671,738.
Net cash used in investing activities was $12,413,463 which is attributable
primarily to the purchase of certain assets of The Kelsey-Hayes Company for
$11,571,008 and leasehold improvements incurred in connection with the
relocation of the rotor manufacturing facilities from Carson, CA into the Alsip,
IL facility.
Net cash provided by financing activities was $14,640,546, consisting primarily
of an increase to the revolving line of credit of $12,161,756, net proceeds from
the issuance of convertible notes of $1,743,700, exercise of warrants and
options of $869,940 offset by principal payments on notes payable and
subordinated debt of $134,850. In addition, in connection with the purchase of
certain assets of The Kelsey-Hayes Company, we collected certain purchased
accounts receivable, subject to a contractual obligation to pay over a portion
of such collections aggregating $1,750,000 as of September 30, 2004, which
proceeds have not been paid over (but are included in our accrued expenses), due
to an indemnification claim we have made under the contract whereby we have
claimed losses in excess of such amount related to certain defective inventory
and the resultant losses in business related to such inventory.
We expect to continue to finance our operations through cash flow generated from
operations, borrowings under our bank lines of credit and obtaining credit from
our suppliers, and possibly additional unsecured lines of credit.
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Future contractual obligations of the Company are as follows:
PAYMENTS DUE BY PERIOD 09/30/04
CONTRACTUAL NEXT AFTER
OBLIGATIONS TOTAL 12 MONTHS 1-3 YEARS 4 YEARS
- ----------- ----------- ---------- ----------- ----------
Revolving loan $24,159,282 0 $24,159,282 0
Subordinated debt 786,016 786,016 0 0
Convertible Debt 5,671,960 2,819,455 2,852,505 0
Capital leases 45,226 16,925 28,301 0
Operating leases 9,131,958 2,784,713 4,695,245 1,652,000
----------- ---------- ----------- ----------
Total $39,794,442 $6,407,109 $31,735,333 $1,652,000
=========== ========== =========== ==========
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in our 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 we do 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 September 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 and the term loan with Congress Financial Corporation
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.
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PART II OTHER INFORMATION
ITEMS 1 THRU 5 ARE NOT APPLICABLE TO THE COMPANY IN THIS REPORT.
ITEM 6 - EXHIBITS
(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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
/s/ ARVIN SCOTT
-----------------------------------------------
Date: November 19, 2004 Arvin Scott, Chief Executive Officer, President
(Principal Executive Officer)
/s/ ROBERT W. ZIMMER
-----------------------------------------------
Robert W. Zimmer, Chief Financial Officer
(Principal Financial Officer)
14