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1
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, 1997
Commission File Number
1-13516
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-397362
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3350 North Kedzie, Chicago, Illinois 60618-5722
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 478-2323
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Units (One share Common Stock
and one Warrant) Not listed for trading
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The Chicago Stock Exchange,
Common Stock, $0.01 Par Value Nasdaq SmallCap Market
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The Chicago Stock Exchange,
Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market
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Securities registered pursuant to Section 12(g) of the Act:
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===============================================================================
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
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The aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of March 23, 1998, was approximately
$2,285,350.
The number of shares of registrant's Common Stock, par value of $0.01 per
share, outstanding as of March 23, 1998 was 6,769,425 shares.
(ii)
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TABLE OF CONTENTS
Page
----
PART I.................................................................. 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to Vote of Security Holders........... 14
PART II................................................................. 14
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data (in thousands, except
for per share data)......................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 20
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements With Accounting
and Financial Disclosure.................................... 24
PART III................................................................ 25
Item 10. Directors and Executive Officers of the Registrant.......... 25
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 25
Item 13. Certain Relationships and Related Transactions.............. 25
PART IV................................................................. 25
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 25
(iii)
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PART I
ITEM 1. BUSINESS (1)
GENERAL
The Company is a manufacturer and distributor of brake rotors, drums, disc
brake pads, relined brake shoes, wheel cylinders and brake hoses for the
automotive aftermarket. The Company markets approximately 50% of its product
under its UBP trademark (Universal Brake Parts) and the balance under its
customers' private labels. The Company commenced operations in 1981 as a
warehouse distributor of a wide variety of automotive aftermarket replacement
parts servicing the Chicagoland area. In the early 1990's, the Company started
shifting its focus to the brake parts segment of the business, and in the
second half of 1996 liquidated its non-brake parts warehouse distributor
business due to the lower margin and declining growth prospects of this segment
of the business. The Company manufactures disc brake rotors in its Laredo,
Texas facility and formulates and manufactures conventional as well as
integrally molded disc brake pads at its plant located in Toronto, Canada. In
October 1995, it acquired a foundry in Budapest, Hungary which presently makes
iron castings for numerous industries, but which could be capable of supplying
brake rotors for the Company's internal requirements should certain significant
additional equipment investment be made.
The Company believes it is the leading North American supplier of "value
line" brake parts (brake parts sold at prices significantly below those of
certain leading national brand name brake parts) to mass-market retailers,
traditional warehouse distributors and specialty undercar distributors. Many
of the Company's "value line" competitors specialize in only one category of
brake parts. By offering a full line of "value line" brake products, the
Company believes it has an advantage over those competitors offering "value
line" products in fewer brake part categories in light of the industry trend to
consolidate the number of suppliers.
The Company also conducts a wholesale "commodities" operation from its
headquarters in Chicago, Illinois, purchasing certain automotive replacement
parts and maintenance items in large volume, at favorable prices, and reselling
such products at slightly higher prices.
In each of the past four years, the Company has experienced significant
growth in sales of brake rotors and other brake parts. Due to overall
improvement of its brake parts business, sales in this category
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(1) Some of the statements included in Item 1, Business, and Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations may be considered to be "forward looking statements" since such
statements relate to matters which have not yet occurred. For example, phrases
such as "the Company anticipates," "believes" or "expects" indicate that it is
possible that the event anticipated, believed or expected may not occur.
Should such event not occur, then the result which the Company expected also
may not occur or occur in a different manner, which may be more or less
favorable to the Company. The Company does not undertake any obligation to
publicly release the result of any revisions to these forward looking
statements that may be made to reflect any future events or circumstances.
Readers should carefully review the items included under the subsection
Risks Affecting Forward Looking Statements and Stock Prices, as they relate to
forward looking statements, as actual results could differ materially from
those projected in the forward looking statement.
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increased by 24% during 1997 compared to 1996. No assurance can be given
that this percentage increase in sales will continue at such level in the
future. The Company currently markets its UBP Universal Brake Parts line to
warehouse distributors, mass market retailers, specialty, "under-the-car"
distributors and national franchise and chain installers located throughout the
United States and Canada, principally through the Company's salespeople,
independent sales representatives and telemarketing. The Company has been
named a primary private label brake rotor and drum supplier to several national
buying groups.
Net sales of brake rotors and other brake parts account for an
increasingly significant portion of the Company's total net sales and gross
profits. The following table sets forth, for the three years ended December
31, 1995, 1996 and 1997, net sales attributable to brake parts and all other
Company operations as a percentage of total net sales, and gross profits
attributable to sales of brake parts and sales from all other Company
operations as a percentage of total gross profits.
Year Ended December 31,
------------------------------------------------
1995 1996 1997
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% OF % OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
NET GROSS NET GROSS NET GROSS
PRODUCTS SALES PROFITS SALES PROFITS SALES PROFITS
-------- ----- ------- ----- ------- ----- -------
Brake Parts(1)........... 64% 79% 66% 81% 84% 91%
All other operations(2).. 36% 21% 34% 19% 16% 9%
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Total...............100% 100% 100% 100% 100% 100%
=== === === === === ===
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(1) Includes sales of brake rotors and drums, wheel cylinders and brake
friction products.
(2) Includes sales of automotive hard parts, maintenance products and
accessories on a warehouse distribution and wholesale basis through
December 31, 1996, and for the period from October 2, 1995 through
December 31, 1997 revenues from the Company's Hungarian foundry
operations.
In October 1995 the Company acquired the assets of Csepel Iron Foundry
Works, a producer of high quality gray iron and ductile iron casting products,
located in Budapest, Hungary. The Company manufactures iron casting products
at its Hungarian foundry primarily for the European automotive and machine tool
industries. The foundry is not presently equipped to manufacture high volume,
smaller-sized items such as brake rotors. The Company may at some time in the
future upgrade the foundry (including additional equipment purchases) to
produce iron castings for brake rotors, although the Company has no present
plans to make such upgrades. All of the foundry's sales are in Europe.
The Company's strategy is to capitalize on the increasing demand for brake
parts and the higher gross margins on sales of such brake parts by expanding
its brake parts manufacturing and distribution business. The Company
believes that it can implement its expansion strategy by: (i) gaining
additional market share of friction brake products; (ii) being a complete
"value line" brake part supplier; (iii) possibly acquiring other specialty
brake parts distributors; (iv) being a low cost producer of brake parts; (v)
increasing its SKU coverage to existing customers; and (vi) building brand
recognition through the introduction of the Company's "Ultimate" brand brake
parts (a premium product). The Company may seek additional debt or equity
financing to finance this expansion.
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As part of the Company's strategy to expand its specialty brake parts
distribution business and increase its focus on this segment, the Company has
taken the following actions:
(i) April 1995 - the Company purchased the brake rotor and drum
inventory and customer list of the passenger car division of MHD
Automotive, an Illinois-based distributor of brake parts;
(ii) June 1995 - the Company acquired the inventory and customer
list of North American Rotor, Inc., a distributor of brake drums and
rotors;
(iii) October 1995 - the Company acquired the assets of Csepel Iron
Foundry Works, with a view toward potential future upgrading in
order to eventually produce brake rotors for internal requirements;
(iv) January 1996 - the Company, which owned 50% of the outstanding
stock of UBP Friction, Inc., a Canadian-based specialty manufacturer
of brake friction parts, acquired the remaining 50% of the
outstanding capital stock;
(v) March 1996 - the Company acquired the brake parts inventory and
customer list of MPW Brake Supply of Cambridge, Massachusetts, an
aftermarket brake parts distributor on the east coast;
(vi) June 1996 - the Company acquired the assets and goodwill of
North American Friction Inc., a Canadian manufacturer of a brake
friction component used in the Company's brake friction
manufacturing process;
(vii) September 1996 - the Company substantially liquidated its
non-brake parts warehouse/distribution division which enabled the
Company to utilize the financial, warehouse and personnel resources
previously used by such division in the Company's higher margin
brake parts business. Liquidation was substantially completed by
December 31, 1996; and
(viii) November 1996 - the Company acquired all of the assets of the
MCI Automotive Division of Excel Industries which was in bankruptcy.
Inventory was acquired at values substantially less than current
market values and has been substantially sold. The Company also
acquired a substantial number of additional brake rotor patterns and
additional equipment to increase its manufacturing capacity.
The Company was incorporated in Delaware in January 1994 to act as a
holding company for its direct and indirect subsidiaries including: (i)
Universal Automotive, Inc., an Illinois corporation and the predecessor of the
Company ("Universal"); (ii) UBP Canholdings, Inc., an Ontario, Canada
corporation (which changed its name from 547647 Ontario Limited) which is the
parent of Universal Brake Parts, Inc., an Ontario, Canada corporation (which
changed its name from Aaron Automotive Industries, Inc.) (together "UBP
Canholdings") and International Discus Corporation, an Ontario, Canada
corporation ("IDC"); and (iii) UBP Hungary Inc., a Delaware corporation, which
is the parent company of UBP-Csepel Iron Foundry Kft., a Hungarian limited
liability company ("UBP Hungary"). The Company conducts all of its operations
through its subsidiaries. The Company's principal executive offices are
located at 3350 North Kedzie, Chicago, Illinois 60618-5722, and its telephone
number is (773) 478-2323. Unless the context otherwise
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requires, the term the "Company" includes Universal Automotive Industries, Inc.
and its direct and indirect subsidiaries, including its predecessor, Universal
Automotive, Inc.
INDUSTRY OVERVIEW
General
The automotive aftermarket is a mature industry undergoing rapid changes.
Over the last seven years, there has been significant consolidation at the
manufacturer and distributor level including several bankruptcies. Industry
experts believe that consolidation activity will remain at a high level over
the next several years.
The automotive aftermarket will benefit from consolidation by enjoying
improved operating efficiencies through reduction of duplicate overhead costs,
improved absorption at manufacturing plants, and reduced manufacturing costs.
Aftermarket consumers will have less leverage as the number of suppliers
diminishes. Domestic suppliers will have greater ability to compete with low
cost offshore suppliers.
Due to the rapid introduction of model changes by car manufacturers, the
number of different parts to service the vehicle population has grown
substantially. This benefits the manufacturer with the necessary capital
resources to invest in additional tooling. The aftermarket distributors are
forced to increase their inventory investment to service the timely
requirements of their customers for parts. Parts proliferation benefits those
companies in the aftermarket that are well capitalized with excellent
management information systems capabilities.
Vehicle operating systems have become increasingly complex. This factor
has led to a shrinking of the "Do It Yourself" market and a benefit to
traditional distributors and those retailers targeting commercial business.
Better installers will gain market share and car manufacturers may begin to
operate free standing repair centers.
Programmed distribution groups will have increased purchasing power.
Traditional warehouse distributors aligned with major groups will prosper as a
result of groups "all or nothing" attitude when group members support a single
manufacturer for given categories. This additional market clout will lead to
further consolidation as manufacturers' profit margins are compressed.
National wholesale and retail chains will have increased purchasing clout.
Aggressive marketing by large, well financed chains results in reduced market
prices, and an erosion of traditional warehouse distributors and jobbers
without a commercial base. These factors, in turn, fuel additional
consolidation within the industry.
Private label brands will grow and erode traditional brand name equity.
This movement favors low cost producers who operate with a "value line"
concept.
The size of the automotive aftermarket will grow as the number of vehicles
on the road constantly increases. The average age of vehicles in use is
increasing; the average age of all vehicles in 1997 was 9.3 years compared to
7.8 years in 1990. Also, the average number of miles driven per vehicle
continues to grow.
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The Company believes that consolidation and related shifts in the
automotive aftermarket offer substantial opportunity for the Company's "value
line" concept of high quality low cost replacement parts offered to a broad
cross section of the market. The Company believes that it is well positioned
to become the only acceptable full brake parts value line alternative to the
three remaining major branded suppliers in the market segments served.
Brake System Replacement Parts
The brake parts segment of the automotive after market is the segment of
the industry experiencing the most growth. While the overall market is growing
at a rate of around 2.75% per year (following the total growth in the number of
vehicles), the brake portion of the industry is enjoying growth of 5% to 6% per
year. This larger growth rate is supported by several factors increasing wear
and tear on brakes, including changes in vehicle design, improved components
(e.g., front wheel drive, semi-metallic disc pads, ABS braking system),
increased speed limits, and an overall increase in the miles driven per year.
Changes in vehicle design is the result of the introduction of front wheel
drive vehicles in 1980. The mix of front to rear braking changed over the
years from 60% front - 40% rear to as high as 85% front - 15% rear. This
equates to much higher heat on the front rotors as they are forced to do much
more of the braking, and as a result, increased wear on rotors.
The government has mandated targets for improving fuel economy and imposed
sizable taxes for not attaining such targets. Car manufacturers have
generally chosen reducing vehicle weight as the short-term method of improving
fuel economy. One of the prime targets has been the braking system which has
always been over designed and, therefore, overweight. Rotors and calipers were
reduced in size to help achieve these new weight targets, which reduces rotor
and disc pad life. Lighter weight rotors are less costly than heavier rotors,
and upon wearing down it is generally more cost effective to discard, rather
than refurbish the rotors.
Increased speed limits have increased braking system usage. Speed limits
in several states have been increased from the 55 mph of the mid 1970's to as
high as 75 in some states. This 36% increase in speed requires almost 300%
more braking power to achieve the same stopping distance. In response to these
increased demands placed on braking systems, vehicle manufacturers created
anti-lock braking systems which electronically monitor the performance of each
wheel to assure that is does not lock and skid, thus reducing the braking power
of that wheel. This system rapidly activates and releases pressure on a wheel
to keep it from locking up and skidding. This rapid action on the brake system
tends to increase wear of the brake components.
Specifications for bringing a vehicle to a complete stop from 60 mph have
been reduced from 150 feet to 90 feet. To achieve this result, car
manufacturers specify metallic brake pads which have shorter life and which, in
turn, shortens the life of the brake rotor.
Demands on the braking systems associated with these factors have
increased dramatically (300% to 500%) while the basic design of the systems has
remained relatively constant. The Company believes that the brakes category of
the automotive aftermarket will continue to grow at the 5% to 6% level well
into the next decade.
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PRODUCTS
The Company supplies a wide range of brake components to all levels of
distribution. Company owned manufacturing facilities in both the U.S. and
Canada produce brake drums and rotors as well as a full range of friction
products, primarily disc brake pads and brake shoes. The Company purchases
from unaffiliated vendors those products required to complete the product
offering. The Company is one of four basic manufacturers in North America
serving the aftermarket and the only "value line" supplier with basic
manufacturing capability. The Company's "value line" competition do not have
the breadth or scope of manufacturing capacity of the Company, and are,
therefore, subject to the competitive disadvantages inherent in dependence upon
third party suppliers.
The development of this basic manufacturing capability has positioned the
Company to compete with the established brand names in the industry.
Consolidation in the distribution and manufacturing segments of the brake
aftermarket have left customers with fewer and fewer alternatives. The Company
believes that this will offer substantial opportunities for increasing market
penetration in the future.
MARKETING AND DISTRIBUTION
Marketing
The Company currently markets products to all levels of distribution under
the name "UBP Universal Brake Parts" as well as under a number of private label
programs for large buying groups, national franchise programs and installer
chains. The long term strategy, while growing the private label program, is to
improve UBP brand recognition in the market place and position the Company's
product lines to compete with established branded products. Branded products
generally are offered by the Company's competitors at a premium price, thus
offering customers who choose UBP products substantial opportunity for improved
margin performance. This group of competitors also currently commands
approximately 55% of the total brake market, making them a prime competitive
target.
The Company employs a sales force that directs the Company's independent
sales representative network and the other brake marketing activities.
Arrangements with the Company's independent sales representatives may be
terminated at any time by either party. The Company also performs
telemarketing operations directed at national franchise and chain installers.
Distribution
United States distribution is through two distribution facilities with
the Chicago facility acting as the primary facility, and a redistribution
warehouse in Southern California. Continuing growth in the distribution
business will require additional space for the primary facility which is
scheduled to be relocated to a larger space within the Chicago area in 1998.
The California facility was upgraded in 1997 to better service the growing West
Coast distribution.
Canadian distribution is serviced through a primary facility in the
Toronto metropolitan area, with small satellite facilities servicing both the
east and west coasts. Additional space may be required in the primary
distribution facility at the end of its lease in February 1999, as the Canadian
program continues to grow. There can be no assurance that adequate space can
be procured cost effectively at the conclusion of the present lease.
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The Company conducts a wholesale commodities operation from its
headquarters facility in Chicago, Illinois, purchasing certain automotive
replacement parts and maintenance items in large volume, at favorable prices,
and reselling such products at slightly higher prices. The Company makes large
volume purchases of products on the open market, generally buying from foreign
and domestic manufacturers and other warehouse distributors, and resells such
products to other warehouse distributors, mass market retailers and jobbers.
Such operations result in gross margins that are significantly lower than gross
margins from the Company's other operations. However, they generally require
minimal resources of the Company and do contribute to overall gross profit.
There can be no assurance that future market conditions will be favorable to
the Company's wholesale commodities operations or that the Company will
continue to generate sufficient revenues or acceptable profit margins from such
wholesale operations. For the years ended December 31, 1995, 1996, and 1997,
net sales from the Company's wholesales commodities operations accounted for
approximately 16%, 15% and 7% of the Company's total net sales, respectively,
and 5%, 4% and 3% of the Company's total gross profits, respectively.
MANUFACTURING
The Laredo, Texas rotor machining facility has a current capacity of
approximately 750,000 units on a two shift basis. Through the acquisition of
Excel Industries' MCI operation in 1996, approximately 200 foundry tools were
acquired, which provided the base to manufacture approximately 260 different
part numbers representing approximately 87% of the Company's total volume in
the drum and rotor category. The Company established a relationship with
Waupaca foundry to supply raw castings as a result of its MCI acquisition.
Waupaca is the premier rotor casting vendor in North America.
The Company acquired North American Friction in 1996 to provide a basic
friction manufacturing capability. The Company now offers a full line of a
variety of friction grades in both riveted and integrally molded disc brake
pads, which are the two largest segments of the friction segment of the brake
industry.
The Hungarian foundry acquired by the Company in late 1995 is not
presently equipped to produce raw iron casting for use in the manufacture of
brake rotors. The Company would need to upgrade the foundry to produce rotors,
which the Company estimates would cost approximately $4,000,000. At present,
the Company has no plans to upgrade the foundry for this purpose. A variety of
factors, including demand for non-rotor products in Europe and the desire to
continue supplying existing foundry customers and the availability of funding
for upgrading, could limit the desirability or ability of the foundry to supply
castings to the Company.
SUPPLIERS AND RAW MATERIALS
Suppliers
Product selection and purchasing functions for the Company's U.S. brake
parts business are centralized at the Company's headquarters in Chicago,
Illinois. The Company purchases the brake part SKUs that it does not
manufacture from over a dozen suppliers located throughout the world.
Currently, the Company imports approximately 50% of its brake part inventories
(with the exception of friction products) from suppliers located in the
People's Republic of China, with the balance from various suppliers in Mexico,
Taiwan, Italy, the United States and Canada.
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Although certain suppliers may provide a majority or all of the Company's
requirements for a particular product or product subcategory, no supplier
accounted for more than 16% of the Company's U.S. total product purchases
during 1997. The Company believes that the loss of any one or more of its
suppliers would not have a material adverse effect on the Company and that
alternative sources of supply are readily available at comparable prices in all
product categories. The Company believes that its relationships with its
suppliers are good.
Tariff
The International Trade Commission ruled rotors sales from China
materially injured U.S. rotor manufacturers. As a result of this affirmative
determination, the U.S. Customs Service has imposed anti-dumping duties on
certain Chinese suppliers. The dumping duties can be reviewed yearly if
requested by a Chinese manufacturer or by a U.S. brake rotor manufacturer.
Depending on the results of the investigation, the tariff may be decreased or
increased. The dumping margins are plant specific and are retroactive to the
importer of record; however, the Company is not the importer of record for this
purpose.
Warranties
The manufacturers of automotive aftermarket products typically provide
replacement warranties, which the Company extends to its customers. In
general, the Company is able to return to its suppliers slower moving or
overstocked items for full credit, and the Company typically exercises its
discretion to extend this same policy to its customers.
Raw Materials
The main components used in the Company's brake rotor manufacturing
operations are raw iron castings. The Company primarily purchases raw castings
from Waupaca Foundry Inc. ("Waupaca"). Waupaca is the largest producer of
automotive rotor castings in North America. In addition to Waupaca, the
Company purchases castings from several foundries in Canada and one in Mexico.
The Company duplicates certain raw iron casting patterns used for the
production of its better selling brake rotors and places such patterns at
different foundries to assure a supply of the raw iron castings produced from
such patterns. Although the Company believes that it has developed good
relationships with the foundries that supply the Company's raw iron castings,
any of such foundries could discontinue producing such castings for the Company
at any time. The Company believes that the number of foundries equipped to
produce raw iron castings such as the ones used by the Company in its
manufacturing operations is limited. The loss of any major foundry as a
supplier of raw iron castings and an inability of the Company to identify new
foundries for the production of raw iron castings in a timely manner could have
a material adverse effect on the Company's business. In addition, there can be
no assurance that the foundries currently producing the Company's raw iron
castings will be able to accommodate the anticipated expansion of the Company's
manufacturing capabilities. The Company is continuously seeking to locate
additional foundries that would be suitable for the production of its raw iron
castings. The Hungarian foundry acquired by the Company is not presently
equipped to produce raw iron castings for use in the manufacture of brake
rotors and the Company has no present intention to upgrade the foundry for this
purpose.
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COMPETITION
The Company's markets are highly competitive. As a brake parts
manufacturer and distributor, the Company competes directly with other brake
part manufacturers and brake parts distributors, including Aimco (a division of
Echlin, Inc.), Raybestos/Brake Products (a division of Echlin, Inc.), Wagner
Brake Products (a division of Cooper Industries, Inc.), and Bendix (a division
of AlliedSignal Co.), as well as numerous value line distributors specializing
in one specific brake category.
The Company competes primarily on the basis of price, inventory
availability, delivery time and service. Many of the Company's competitors in
both the jobber and the specialty brake parts distribution markets are larger
and have greater capital, management and other resources than the Company. No
assurance can be given that the Company will continue to compete successfully
with such other competitors.
The Company encountered certain competition in its foundry operations
conducted in Budapest, Hungary; however, to date, the Company's manufacturing
capacity is at or near full capacity in the manufacture of iron casting
products for the European automotive and machine tool market. The Company
believes that there are fewer foundries competing in the European machine tool
die casting business than in other areas of production.
TRADEMARK
The Company believes that the UBP Universal Brake Parts label is important
to its marketing efforts and a significant portion of the Company's net sales
are derived from sales of brake parts which it markets under its UBP Universal
Brake Parts label. The UBP Universal Brake Parts trademark has been registered
with the United States Patent and Trademark Office and Canadian Trademarks
Office. There can be no assurance that prior registrations and/or uses of the
trademark (or a confusingly similar mark) do not exist in the United States, in
which case the Company might thereby be precluded from using such trademark in
the United States. The Company can offer no assurance that the Company's
trademark would be upheld if challenged or that the Company would not be
prevented from using its trademark, both of which could have an adverse effect
on the Company.
EMPLOYEES
As of December 31, 1997, the Company's 462 full-time employees (182 in the
United States, 107 in Canada and 173 in Hungary) were employed at the Company's
places of business in the United States, Canada and Hungary. Effective
December 31, 1995 the Company terminated its employee leasing agreement
pursuant to which the Company's United States employees were actually employed
by the employee leasing company and "leased" to the Company. Under this
agreement, the employee leasing company provided the Company's employees their
medical, unemployment, workmen's compensation and disability insurance through
group insurance plans maintained by the employee leasing company. The Company
now provides these benefits directly to its employees.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business, the
following may result in the Company not achieving certain results included in
any statement that may be considered a forward looking statement. The Company
cautions the reader that the following risk factors may not be exhaustive.
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EXPANSION; POSSIBLE NEED FOR ADDITIONAL FINANCING
The continued growth and financial performance of the Company will depend
in part on the Company's ability to continue to expand its business through:
(i) gaining additional market share for friction brake products; (ii) the
purchase of additional manufacturing machinery and brake rotor patterns to
increase the number of brake rotor SKUs the Company manufactures; (iii) the
possible acquisition of other brake parts manufacturers or distributors on
favorable terms; (iv) additional sales penetration of current customers; and
(v) the successful operation of the Company's Hungarian foundry facility.
While the Company regularly evaluates and discusses possible acquisitions, it
has not entered into any commitment, agreement or understanding with any
potential acquisition candidates, and there can be no assurance that it will be
successful in locating suitable acquisition candidates or that any additional
acquisitions will be consummated in the future. In addition, there can be no
assurance that any operations that may be acquired can be effectively and
profitably integrated into the Company. The Company's future results will be
affected by its ability to manage its operations and growth effectively and to
continue to obtain an adequate supply of quality brake parts on a timely and
cost-effective basis to meet the growing demand for the Company's UBP Universal
Brake Parts products. The Company can offer no assurance that any future
expansion of its operations or acquisitions will not have an adverse effect on
the Company's operating results, particularly during the periods immediately
following any such expansion or acquisition. The Company will be required to
seek additional financing to fund its expansion through acquisitions or the
upgrade of existing facilities. The Company has no current commitments or
arrangements for additional financing and there can be no assurance that
additional financing will be available on acceptable terms, or at all. The
Company may also issue Common Stock or other securities in connection with
future acquisitions, resulting in additional dilution to existing stockholders.
LEGAL PROCEEDINGS
Set forth in Item 4, Legal Proceedings below is a summary of the legal
proceedings between the Company and First National Parts Exchange, Inc. (the
"Estate"). The Company has reserved $650,000 as a loss reserve with respect to
such lawsuit. There can be no assurance that such reserve is adequate. In the
event a judgment in excess of such sum is entered in favor of the Estate, the
Company will be required to pay or bond over (on appeal) against such judgment.
There can be no assurance that the Company will have sufficient resources to
cover any judgment in excess of its resources.
BANK FINANCING
The Company has incurred significant indebtedness in connection with its
operations. As of December 31, 1997 the Company's total consolidated
indebtedness was approximately $20.7 million. A substantial portion of this
indebtedness is secured by substantially all of the Company's assets (except
the Hungarian foundry assets) and by a pledge of all of the outstanding capital
stock of the Company's subsidiaries. As a result of such indebtedness, the
Company (i) is prohibited from paying cash dividends pursuant to certain
covenants and restrictions contained in the loan agreements governing such
indebtedness, (ii) could be hindered in its efforts to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate or other purposes, and (iii) would be vulnerable to
increases in interest rates since substantially all of the Company's borrowings
are at floating rates of interest.
On July 14, 1997, the Company closed a line of credit with LaSalle
National Bank of up to $20,000,000 based on eligible accounts receivable and
inventory and a $4,450,000 term loan. The line of credit bears interest at
prime plus 0.5% per annum, subject to an ongoing option to convert to LIBOR
plus
10
14
2.5% per annum. The revolving credit facility is for an initial term
ending May 1, 1999. The term loan amortizes through May 1, 2002 and bears
interest at prime plus 0.75% per annum, with an ongoing option to convert to
LIBOR plus 2.75% per annum.
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture to
Tandem Capital, Inc. (an affiliate of Sirrom Capital Corporation) ("Tandem"),
calling for payments of interest only at 12.25% per annum through maturity.
The Company issued Tandem a warrant to purchase 450,000 shares of the Company's
common stock at an exercise price equal to 80% of the average closing bid price
of the Company's common stock for the 20 days preceding the first anniversary
of the debenture closing date. Tandem will also receive warrants to purchase
an additional 225,000 shares of common stock on the 14th of each of the
following months: August 1998; February 1999; August 1999; August 2000; and
August 2001; provided that if the debenture is prepaid before any scheduled
warrant issue date except August 1998, then all subsequent warrants will not be
issued. In each instance, the exercise price for the warrants is 80% of the
average closing bid price of the Company's common stock for the 20 days
preceding each such warrant issue date. The warrants are exercisable at any
time through the sixth anniversary of the debenture issue date. The amount
allocated to such warrants is $225,000 which approximates the amount of
increased interest the buyer would have required without a warrant feature.
DEPENDENCE UPON KEY PERSONNEL
The Company's continued success will depend to a significant degree upon
the efforts and abilities of its senior management, in particular, Yehuda Tzur,
Arvin Scott and Eric Goodman, its Chairman of the Board, President and Chief
Executive Officer, and Executive Vice President-Canadian Operations,
respectively. The loss of the services of Mr. Tzur, Mr. Scott or Mr. Goodman
could have a material adverse effect on the Company. The Company has
employment agreements with each of these individuals. The Company maintains,
and intends to continue to maintain, key man term life insurance policies
covering the life of each of Mr. Tzur, Mr. Scott and Mr. Goodman in the amount
of $1,000,000, $1,000,000, and $1,300,000-CDN, respectively, the proceeds of
which would be payable to the Company.
ACQUISITION OF HUNGARIAN FOUNDRY
In October 1995 the Company acquired the assets of Csepel Iron Foundry
Works, a producer of high quality gray iron and ductile iron casting products,
located in Budapest, Hungary. Csepel Iron Foundry Works has been a supplier of
gray iron and ductile castings to the machine tool, transport and automotive
industries in Europe for over 50 years. The Company is operating the foundry
facility in its existing location and retained the existing management and
manufacturing staff. The Company has renovated the foundry to improve its
existing manufacturing facilities. The Company can offer no assurance that its
foundry operations will be successful.
The Company's investment in the Hungarian facility involves certain
special risks not usually associated with an investment in a U.S. company,
including risks related to: (i) greater social, economic and political
uncertainty; (ii) certain restrictions on foreign investment and repatriation
of capital; (iii) exchange control regulations; (iv) currency exchange rate
fluctuations, which may increase the costs associated with conversion of the
investment principal and income from one currency to another; (v) higher rates
of inflation; (vi) greater governmental involvement in the economy; and (vii)
the application of certain environmental regulations to the foundry property.
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INSURANCE
Although the Company currently has general liability insurance for all its
operations, prior to September 1994 the Company did not have general or
products liability insurance for its brake rotor manufacturing operations. The
Company would be adversely affected if it should incur liability for a general
or products liability claim relating to an incident which occurred prior to the
time the Company obtained general and products liability coverage for its
manufacturing operations. To date, no such claim has been asserted against the
Company. In addition, the Company would be adversely affected by the
incurrence of liability which is not covered by insurance or is in excess of
policy limits.
NO DIVIDENDS
The Company does not currently intend to declare or pay any cash dividends
on the Common Stock in the foreseeable future and anticipates that earnings, if
any, will be used to finance the development and expansion of its business.
Moreover, the Company's bank lines of credit prohibit the declaration and
payment of cash dividends. Prospective investors should not expect the Company
to pay dividends on its Common Stock until such time, if any, that the Company
is able, if at all, to obtain a release of the prohibition on the payments of
dividends imposed by the terms of its credit facilities. Any payment of future
dividends and the amounts thereof will be dependent upon the Company's
earnings, financial requirements, and other factors deemed relevant by the
Company's Board of Directors, including the Company's contractual obligations.
EXERCISE OF WARRANTS
The 1,495,000 Units sold by the Company in connection with its initial
public offering ("IPO") in December 1994 were comprised of one share of Common
Stock and one Redeemable Common Stock Purchase Warrant (the "Warrants")
entitling the holder thereof to purchase one share of Common Stock at an
exercise price of $7.00 per Share, subject to certain adjustments, at any time
until December 15, 1999, unless previously redeemed. In connection with the
IPO, the Company issued warrants (the "Underwriter's Warrants") entitling the
Underwriter to purchase from the Company, at an exercise price per
Underwriter's Warrant of $7.25, up to 130,000 Units comprised of one share of
Common Stock and one Warrant. On January 24, 1996, the Underwriter and its
assignees exercised the Underwriter's Warrants then held (an aggregate of
130,000 Warrants). Based on the Underwriting Agreement, the holders of such
Underwriter's Warrants elected to exchange shares of Common Stock (78,675
shares) whose then current market value was equal to the total required
exercise price of $942,500 (130,000 units at $7.25). Thus, an additional
51,325 shares of Common Stock were issued to the Underwriter, (or certain
employees thereof, who had been assigned certain of such Underwriter's
Warrants) without any cash consideration to the Company. The exercise price of
the Underwriter's Warrants included in such units is 160% of the exercise price
($7.00) of the aforementioned warrants issued to the public (or $11.20). Such
Warrants have not yet been exercised.
For the life of the Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price for the Company's
securities without assuming the risk of ownership, with a resulting dilution in
the interest of other security holders. As long as such Warrants remain
unexercised, the terms under which the Company could obtain additional capital
may be adversely affected. Moreover, the holders of such Warrants may be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital by a new offering of its securities on
terms more favorable than those provided by such Warrants.
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ITEM 2. PROPERTIES
The following table sets forth the general location, principal uses and
approximate size of the Company's principal properties and whether such
properties are leased or owned:
====================================================================================
APPROXIMATE LEASED
AREA OR
LOCATION USE IN SQUARE FEET OWNED
- ------------------------------------------------------------------------------------
Chicago, Illinois Company headquarters, 126,000 Owned
executive and sales offices
and full-service warehouse
- ------------------------------------------------------------------------------------
Budapest, Hungary Foundry 270,000 Owned
- ------------------------------------------------------------------------------------
North York, Ontario, Canada Executive and sales offices, 46,000 Leased
brake friction parts
manufacturing and specialty
brake parts warehouse
- ------------------------------------------------------------------------------------
Los Angeles, California Specialty brake parts warehouse 33,600 Leased
- ------------------------------------------------------------------------------------
North York, Ontario, Canada Conventional and integrally 32,800 Leased
molded brake pad manufacturing
- ------------------------------------------------------------------------------------
Laredo, Texas Brake parts manufacturing 50,000 Leased
====================================================================================
The Company's headquarters facility located in Chicago, Illinois, which is
owned by the Company, is mortgaged to secure borrowing under the Company's
revolving credit facility and certain other indebtedness. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The warehouse portion of the
Company's headquarters facility (approximately 110,000 square feet) is
currently fully utilized. The Company believes that it has outgrown its
headquarters facility and is negotiating to lease a larger facility and to sell
its Chicago facility. There can be no assurance that negotiations will be
successful and a larger facility can be obtained on cost effective terms.
The Company leases the North York, Ontario executive office and warehouse
facility from an unaffiliated party for approximately $135,000 per year,
expiring in February 1999. The Company believes that the North York facility
will provide adequate capacity for the Company's currently anticipated brake
friction manufacturing operations.
The Company leases its specialty brake parts warehouse facility located in
Los Angeles, California, from an unaffiliated party for approximately $131,000
per year, expiring in August 1999. The Company leases the North York, Ontario
brake pad manufacturing facility from an unaffiliated party for approximately
$131,000 per year, expiring in June 2000.
The Company leases its Laredo, Texas manufacturing facility from an
unaffiliated party for approximately $123,000 per year, expiring in December
2000. The Company believes that this facility will provide adequate capacity
for the Company's currently anticipated brake rotor manufacturing operations.
13
17
Until June 1995, the Company leased its former Chicago headquarters (which
subsequent to May 1994 had been used only to store obsolete inventory prior to
its disposal) from a land trust operating as a partnership comprised of three
of the Company's executive officers and directors.
ITEM 3. LEGAL PROCEEDINGS
During 1995, a lawsuit was filed against the Company in the United States
Bankruptcy Court by a Trustee of the bankruptcy estate of First National Parts
Exchange, Inc. (the "Estate") with which the Company had transacted both
purchases and sales of certain automotive parts in 1992 and 1993. The Trustee
is seeking a total of $5,100,000 in damages under two claims. The largest
claim, for approximately $4,600,000, is the result of alleged "voidable
transactions" concerning transfers of product by the Debtor to the Company
without receiving "reasonably equivalent values" (as defined). The Company
recorded a provision of $650,000 in the first quarter of 1997 to reflect a
settlement agreement with the Trustee. The settlement agreement lapsed as of
July 31, 1997.
The lawsuit resulted in a trial held in the U.S. Bankruptcy Court, which
concluded in January 1998. As of March 23, 1998, no decision has yet been
rendered. While the Company believes that the provision is adequate, the
Company believes that the ultimate valuation of this matter could result in a
loss of up to $1,000,000 in excess of the amount accrued.
All other legal proceedings and actions to which the Company is a party
are of an ordinary and routine nature incidental to the operations of the
Company. The Company believes that such proceedings will not, individually or
in the aggregate, have a material adverse effect on the Company's business or
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"UVSL" and on The Chicago Stock Exchange under the symbol "UVS." The
Redeemable Common Stock Purchase Warrants are listed on the Nasdaq SmallCap
Market under the symbol "UVSLW" and on The Chicago Stock Market under the
symbol "UVSWS." The following table sets forth, for the periods indicated, the
high and low sale prices per share for the Common Stock and for the Redeemable
Common Stock Purchase Warrants as reported by the Nasdaq SmallCap Market on a
quarterly basis, for the years 1996 and 1997. The Common Stock and the
Redeemable Common Stock Purchase Warrants were initially listed on the Nasdaq
SmallCap Market and on The Chicago Stock Exchange on December 15, 1994.
14
18
COMMON STOCK
HIGH LOW
---- ---
1997
First Quarter.................................. $ 3.25 $1.82
Second Quarter................................. 3.44 1.38
Third Quarter.................................. 3.25 2.31
Fourth Quarter................................. 2.56 1.84
1996
First Quarter.................................. $12.00 $6.75
Second Quarter................................. 10.75 9.50
Third Quarter.................................. 10.25 7.62
Fourth Quarter................................. 8.00 1.25
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW
---- ---
1997
First Quarter.................................. $ .94 $ .38
Second Quarter................................. .63 .25
Third Quarter.................................. .56 .34
Fourth Quarter................................. .34 .25
1996
First Quarter.................................. $ 6.63 $4.25
Second Quarter................................. 6.50 4.50
Third Quarter.................................. 5.25 3.88
Fourth Quarter................................. 4.00 .50
As of March 23, 1998, there were approximately 850 beneficial holders of
the Common Stock.
The Company has not paid any cash dividends on its Common Stock. The
Company does not intend to declare or pay any cash dividends on the Common
Stock in the foreseeable future and anticipates that earnings, if any, will be
used to finance the development of and expansion of its business. Moreover,
the Company's bank lines of credit prohibit the declaration and payment of cash
dividends. Any payment of future dividends and the amounts thereof will be
dependent upon the Company's earnings, financial requirements, and other
factors deemed relevant by the Company's Board of Directors, including the
Company's contractual obligations. See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.
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19
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following selected financial data should be read in conjunction with
the financial statements and notes thereto and Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere in this Form 10-K. The statement of operations data for the years
ended December 31, 1997, 1996 and 1995 and the balance sheet data at December
31, 1997 and 1996 are derived from the audited financial statements of the
Company included elsewhere in this Form 10-K. The statement of operations data
for the years ended December 31, 1994 and 1993 and the balance sheet data at
December 31, 1995, 1994 and 1993 are derived from audited financial statements
not included herein. The pro forma data are based on the circumstances
described in the accompanying footnotes and the information discussed in Note 1
of the Notes to the Company's Consolidated Financial Statements.
16
20
(in thousands except for per share data)
Years Ended December 31, (1)
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales.................................... $ 61,267 $63,060 $46,815 $39,712 $33,170
Cost of sales................................ 48,251 51,785 38,748 33,405 28,248
-------- ------- ------- ------- -------
Gross profit............................... 13,016 11,275 8,067 6,307 4,922
Selling, general and administrative
expenses................................... 13,764 10,599 7,219 4,998 4,353
-------- ------- ------- ------- -------
Income (loss) from operations.............. (748) 676 848 1,309 569
-------- ------- ------- ------- -------
Other expense (income):
Provision for lawsuit settlement........... 650 0 0 0 0
Interest expense........................... 1,727 1,184 843 689 366
Loss (Gain) on disposition of assets....... 12 (44) (4) 70 0
Other...................................... 19 (70) (23) (53) (235)
-------- ------- ------- ------- -------
2,408 1,070 816 706 131
------- ------- ------- ------- -------
Income (loss) before provision for income
taxes and cumulative effect of accounting
change..................................... (3,156) (394) 32 603 438
Income tax provision (benefit) (2)........... (1,070) 99 32 129 17
-------- ------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change............................ (2,086) (493) 64 474 421
Cumulative effect of accounting change (4)... 0 0 0 47 0
-------- ------- ------- ------- -------
Net income (Loss) for period................. $ (2,086) $ (493) $ 64 $ 521 $ 421
======== ======= ====== ======= =======
Earnings per share (3):
Basic:
Net income (loss) per common share: ($0.31) ($0.07) $0.01
Weighted average number of common
shares outstanding 6,751,732 6,647,796 6,500,000
Diluted:
Net income (loss) per common share ($0.31) ($0.07) $0.01
Weighted average number of common
shares outstanding 6,751,732 6,647,796 7,129,966
Pro forma income per share (2):
Income before provision for income taxes
and cumulative effect of accounting change $ 603 $ 438
Income tax provision....................... 128 170
------- -------
Income before cumulative effect
of accounting change....................... 475 268
Cumulative effect of accounting change..... 46 0
------- -------
Net income................................... $ 521 $ 268
======= =======
Basic and Diluted Net income per common
share before cumulative effect adjustment.. $ .10 $ .07
Cumulative effect adjustment............... .01 0
------- -------
Net income (loss) per share (3)............ $ .11 $ .07
======= =======
Weighted average number of common shares
outstanding (3)............................ 4,918,630 4,078,000
========= =========
17
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-------------------------------------------
December 31, (1)
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital.............. $17,942 $14,268 $14,327 $11,630 $ 1,973
Total assets................. 36,350 38,027 26,416 23,464 11,726
Long-term debt,
less current portion....... 20,518 15,394 12,085 7,711 852
Total stockholders' equity... 7,069 8,856 8,559 8,012 2,156
- ---------------------------
(1) The financial data as of and for the year ended December 31, 1993 include
the operations of the Company and IDC. For the period from January 1,
1993 through September 30, 1993, certain Stockholders/Executive Officers
owned all of the issued and outstanding capital stock of IDC Holdings
Corporation, which owned 50% of International Discus Corporation, and the
investment in and the results of operations of International Discus
Corporation are recorded on the equity method for such period. For the
period from October 1, 1993 through December 31, 1993, IDC Holdings
Corporation owned 100% of IDC and the Company's Consolidated Financial
Statements for such period include, on a consolidated basis, the
operations of Universal and IDC. The financial data as of and for the
year ended December 31, 1994 include, on a consolidated basis, the
operations of Universal and IDC and for the period from May 1, 1994
through December 31, 1994, also include the operations of UBP
Canholdings, which was acquired by the Company effective April 30, 1994.
The financial data as of and for the year ended December 31, 1995
include, on a consolidated basis, the operations of Universal IDC and UBP
Canholdings and, for the period from October 2, 1995 through December 31,
1995, also include the operations of UBP Hungary which was acquired by
the Company effective October 2, 1995. Pro forma information for UBP
Hungary is not included because no financial statements for periods prior
to acquisition of the predecessor entity are available. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results
of Operations, and Note 1 of the Notes to the Company's Consolidated
Financial Statements.
(2) For the period beginning on and after January 1, 1992 and terminating on
April 30, 1994, Universal elected to be treated as an "S Corporation"
under the Internal Revenue Code of 1986, as amended, whereby income or
loss of the Company is allocated to its stockholders, by inclusion in
their respective individual income tax returns. Accordingly, no
liability or provision for federal income taxes is reflected for
Universal for the year ended December 31, 1993 and for the period from
January 1, 1994 through April 30, 1994. The pro forma income per share
adjustment for the years ended December 31, 1994 and 1993 reflect a
provision for federal income taxes as if the Company were a "C
Corporation" rather than an S Corporation for such periods. See Item 5,
Market for Registrant's Common Equity and Related Stockholder Matters,
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 and Note 7 of the Notes to the Company's
Consolidated Financial Statements.
(3) For the year ended December 31, 1993, shares of common stock sold within
12 months prior to the date of the Company's initial public offering for
a per share price less than the initial public offering price are
included in the calculation of net income per share as if they had been
outstanding for the entire period. For the year ended December 31, 1994,
common shares outstanding are based on the weighted average number of
shares outstanding during the year. For the years ended December 31,
1995, 1996 and 1997, "Basic Earnings per Share" is computed by dividing
net income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding during the period.
"Diluted Earnings per Share" reflects the potential dilution that could
occur if warrants and options or other contracts to issue common stock
were exercised and resulted in the issuance of additional common shares.
For the years ended December 31, 1996 and 1997, diluted earnings per
share and basic earnings per share are identical because of the losses
incurred during those years. All options and warrants are omitted from
the computation of diluted earnings (loss) per
18
22
share because the options and warrants are antidilutive when net losses
are reported. See Note 2 of the Notes to the Company's Consolidated
Financial Statements.
(4) In 1994 the Company changed its method of determining inventory costs for
financial reporting purposes to include capitalization of inbound customs
and transportation costs. The cumulative effect on prior years of this
change was $47 (net of income taxes of $29).
(5) Certain 1995 and 1994 selling, general and administrative expenses have
been reclassified to cost of sales to conform to 1996 and 1997
classifications, without affecting income from operations. Other
reclassifications of certain 1995 items have been made to conform to 1996
and 1997 classifications.
19
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a manufacturer and distributor of brake rotors, drums, disc
brake pads, relined brake shoes and wheel cylinders. The Company believes it
is the leading supplier of "value line" brake parts (brake parts sold at prices
significantly below those of certain leading national brand name brake parts)
to mass-market retailers, traditional warehouse distributors and specialty
undercar distributors in North America.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 decreased by $1,792,576 or
3% to $61,266,939 from $63,059,515 in 1996. The Company's increase in brake
sales of approximately $9,200,000 (22%) was not quite sufficient to make up for
non-brake warehouse distribution sales discontinued in 1996 and a decrease in
sales in the wholesale "commodities" operation.
Gross profit for the year ended December 31, 1997 increased by $1,741,363
or 15% to $13,016,142 from $11,274,779 in 1996. Gross profit margin increased
to 21.2% in 1997 from 17.9% in 1996. The increase in gross profit and gross
profit margin is attributable to a more favorable sales mix as the proportion
of higher margin brake sales to total sales increased in 1997 compared to 1996.
Selling, general and administrative expenses for the year ended December
31, 1997 increased to $13,763,676 from $10,599,238 in 1996 or 30%.
Approximately $2.3 million of the increase is attributable to unusual, non
recurring bad debt charges as a result of bankruptcy filings by several major
customers due to continued consolidation in the automotive aftermarket. The
remainder of the increase is due to increased variable sales expenses as brake
sales carry relatively higher variable sales costs as compared to non-brake
sales.
Income (loss) from operations for the year ended December 31, 1997
decreased $1,423,075 to a loss of $747,534 in 1997 from income of $675,541 in
1996. This decrease is due to the bad debt charges due to industry
consolidation described above, offset by higher gross profit attributable to a
higher proportion of brake parts sales to total sales than in 1996.
Other expenses for the year ended December 31, 1997 increased $1,337,985
to $2,408,238 from $1,070,253 in 1996. Interest expense increased 46% to
$1,727,373 in 1997 from $1,184,018 in 1996. This increase is due to an
increase in subordinated and bank borrowings during 1997. Total borrowings at
December 31, 1997 were $20.7 million compared to $18.8 million at December 31,
1996. The increased borrowings were used for working capital purposes to
support increased brake sales. Also the average interest rate increased due to
the 12.25% subordinated debenture issued in July 1997. Other expense also
includes a one time provision for settlement of a lawsuit as more fully
described in Note 11 of the Company's Notes to Consolidated Financial
Statements. This $650,000 pretax provision was recorded in the first quarter
of 1997.
20
24
Loss before provision for income taxes and cumulative effect of accounting
change for the year ended December 31, 1997 increased by $2,761,060 to a loss
of $3,155,772 from a loss of $394,712 in 1996. Net loss for the year ended
December 31, 1997 increased $1,592,472 to a net loss of $2,085,892 from a loss
of $394,712 in 1996. These changes result from the factors discussed above.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 increased by $16,244,688 or
35% to $63,059,515 from $46,814,827 in 1995. Such increase was due to a 60%
increase in sales in the Company's brake parts business and a full year's
revenue of the Company's Hungarian foundry which was acquired in October 1995.
This increase was achieved despite a 49% sales decrease in the Company's
non-brake parts warehouse distribution business which was liquidated in 1996.
Gross profit for the year ended December 31, 1996 increased by $3,208,112
or 40% to $11,274,779 from $8,066,667 in 1995. Gross profit margin increased
from 17.2% in 1995 to 17.9% in 1996. The increase in gross profit was attained
as sales of higher margin brake related product continued to replace sales of
discontinued non-brake warehouse distribution business and inclusion of a full
year of operations of the Company's Hungarian foundry. The increase in gross
profit margin was attained due to the fact that sales of brake related product
is at a higher margin than the sales of non brake parts which it replaced and
despite significantly lower margins reported by the Hungarian foundry.
Selling, general and administrative expenses for the year ended December
31, 1996 were $10,599,238 or a 47% increase over the 1995 year of $7,219,126.
Such increase was due primarily to: (i) an approximately $2,100,000 increase
in selling and distribution expenses of a mostly variable nature related to the
sales increase in the UBP Brake Parts business; (ii) an approximately $955,000
increase due to the inclusion of a full year's results for the Company's
Hungarian foundry; (iii) an approximately $221,000 increase due to the
acquisition in June 1996 of the North American Friction brake pad manufacturing
business; and (iv) a charge of $195,000 to increase the reserve for bad debts
to reflect collection risks associated with a certain customer.
Income from operations for the year ended December 31, 1996 decreased by
$172,000 or 20% to $675,541 from $847,541 in 1995. This decrease resulted from
an increased loss from operations for the Hungarian foundry of approximately
$572,000, which was not offset by increased income from operations in the
Company's UBP Brake Parts business.
Interest expense for the year ended December 31, 1996 increased by
$340,785 or 40% to $1,184,018 from $843,233 in 1995. Such an increase resulted
in an overall increase in the Company's borrowing under its bank line of credit
and other subordinated borrowings which were used to finance: (i) the overall
increase in sales and related increases in working capital requirements; and
(ii) purchase of equipment and improvements for the manufacturing facilities
and the Hungarian foundry. Also, subordinated borrowings bear interest at
higher rates than bank borrowings.
Income (loss) before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1996 decreased by $426,299 to
a loss of $394,712 in 1996 from income of $31,587 in 1995. Net income (loss)
for the year ended December 31, 1996 decreased by $557,670 to a net loss of
$493,420 from net income of $64,250 in 1995. These decreases resulted from the
factors discussed above.
21
25
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 increased by $7,102,698 or
18% to $46,814,827 from $39,712,129 in 1994. Such increase was due primarily
to increased sales in the Company's UBP Brake Parts distribution business. The
18% overall increase was achieved despite a 20% sales decrease in the Company's
Chicago warehouse distribution business.
Gross profit for the year ended December 31, 1995 increased by $1,759,496
or 28% to $8,066,667 from $6,307,171 in 1994. The gross profit margin
increased from 15.9% in 1994 to 17.2% in 1995. This increase is attributable
primarily to an increase in 1995 of brake part sales which generate higher
gross margins than sales of other automotive replacement parts.
Selling, general and administrative expenses for the year ended December
31, 1995 increased by $2,220,875 or 44% to $7,219,126 from $4,998,251 in 1994.
Such increase was due primarily to: (i) an approximately $1,100,000 increase
in selling and distribution expenses of a mostly variable nature related to the
sales increase in the UBP Brake Parts business; (ii) an approximately $500,000
increase due to the inclusion of UBP Canholdings' results for all of 1995,
compared to the inclusion of only eight months in 1994; (iii) an approximately
$250,000 increase in professional fees related primarily to the Company's stock
being publicly traded; (vi) an approximately $165,000 increase related to
expenses incurred by UBP Hungary, which was acquired in October, 1995; and (v)
approximately $169,000 in stock option compensation cost.
Income from operations for the year ended December 31, 1995 decreased by
$461,379 or 35% to $847,541 from $1,308,920 in 1994. This decrease resulted
from the increase in selling, general and administrative expenses.
Interest expense for the year ended December 31, 1995 increased by
$153,807 or 22% to $843,233 from $689,426 in 1994. Such increase resulted from
an increase in the Company's borrowing under its bank line of credit which was
used to finance: (i) the overall increase in sales and the related increases
in working capital requirements; and (ii) the acquisition of and improvements
at the Hungarian foundry.
Income before provision for income taxes and cumulative effect of
accounting change for the year ended December 31, 1995 decreased by $571,398 or
95% to $31,587 from $602,985 in 1994. This decrease is attributable to the
overall increase in selling, general and administrative expenses discussed
above.
Net income for the year ended December 31, 1995 decreased by $457,125 or
88% to $64,250 from $521,375 in 1994. This decrease resulted from the factors
discussed above.
CAPITAL EXPENDITURES
For the year ended December 31, 1995, capital expenditures totaled
approximately $1,983,000 consisting primarily of: (i) the acquisition of the
Hungarian foundry for approximately $960,000; (ii) the expenditure of
approximately $200,000 for improvements and renovations to the Hungarian
foundry; and (iii) approximately $700,000 for the acquisition of machinery and
new brake rotor SKU patterns for the raw iron castings used in the Company's
brake rotor manufacturing operations.
22
26
For the year ended December 31, 1996, capital expenditures totaled
approximately $3,973,000, consisting primarily of: (i) the acquisition of
brake friction manufacturing machinery and equipment for approximately
$2,300,000; (ii) the acquisition of machinery, equipment and additional brake
rotor patterns to expand the brake rotor manufacturing capacity for
approximately $600,000; and (iii) upgrade and renovation of the Hungarian
foundry for approximately $1,000,000.
For the year ended December 31, 1997, capital expenditures totaled
approximately $574,000, consisting primarily of (i) the acquisition of brake
friction manufacturing machinery and equipment and (ii) the acquisition of
machinery, equipment, and additional brake rotor patterns.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are associated with carrying
accounts receivable and maintaining inventories. The Company relies on
internally generated funds, credit made available from suppliers and senior and
subordinated lines of credit. The Company's working capital needs are
generally not seasonal in nature, although business slows down slightly during
the winter months.
The Company has incurred significant indebtedness to date in connection
with its operations. As of December 31, 1997 the Company's total consolidated
indebtedness was approximately $20.7 million. A substantial portion of this
indebtedness is secured by substantially all of the Company's assets (except
the Hungarian foundry assets) and by a pledge of all of the outstanding capital
stock of the Company's subsidiaries. As a result of such indebtedness, the
Company (i) is prohibited from paying cash dividends pursuant to certain
covenants and restrictions contained in the loan agreements governing such
indebtedness, (ii) could be hindered in its efforts to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate or other purposes, and (iii) would be vulnerable to
increases in interest rates since substantially all of the Company's borrowings
are at floating rates of interest.
On July 14, 1997, the Company closed a line of credit with LaSalle
National Bank of up to $20,000,000 based on eligible accounts receivable and
inventory and a $4,450,000 term loan. The line of credit bears interest at
prime plus 0.5% per annum, subject to an ongoing option to convert to LIBOR
plus 2.5% per annum. The revolving credit facility is for an initial term
ending May 1, 1999. The term loan amortizes through May 1, 2002 and bears
interest at a prime plus 0.75% per annum, with an ongoing to option to convert
to LIBOR plus 2.75% per annum.
On July 1, 1997, the Company sold a $4,500,000 subordinated debenture to
Tandem Capital, Inc. (an affiliate of Sirrom Capital Corporation), calling for
payments of interest only at 12.25% per annum through maturity. The Company
issued Tandem a warrant to purchase 450,000 shares of the Company's common
stock at an exercise price equal to 80% of the average closing bid price of the
Company's common stock for the 20 days preceding the first anniversary of the
debenture closing date. Tandem will also receive warrants to purchase an
additional 225,000 shares of common stock on the 14th of each of the following
months: August 1998; February 1999; August 1999; August 2000; and August 2001;
provided that if the debenture is prepaid before any scheduled warrant issue
date except August 1998, then all subsequent warrants will not be issued. In
each instance, the exercise price for the warrants is 80% of the average
closing bid price of the Company's common stock for the 20 days preceding each
such warrant issue date. The warrants are exercisable at any time through the
sixth anniversary of the debenture issue date. The amount allocated to such
warrants is $225,000 which approximates the amount of increased interest the
buyer would have required without a warrant feature.
23
27
The Company believes that cash generated from operations, borrowings under
the Company's bank line of credit and credit from its suppliers is sufficient
to fund its working capital requirements and capital expenditures through 1998.
SEASONALITY
The Company's business is slightly seasonal in nature, primarily as a
result of the impact of weather conditions on the demand for automotive
replacement parts. Historically, the Company's sales and profits have been
slightly higher in the second and third calendar quarters of each year than in
the first or fourth quarters.
EFFECTS OF INFLATION
The Company historically has been able to diminish the effects of
inflationary cost expenses through increased prices to customers and
productivity improvements. Non-inventory cost increases, such as payroll,
supplies and services, have generally been offset through price increases.
"YEAR 2000" COMPLIANCE
The Company has reviewed the computer systems and related software in use
throughout its operations that could be affected by the Year 2000 issue. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Thus, time sensitive
software may recognize a date using the digits "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations.
The Company uses software under license from various vendors. The Company has
learned that the software in use is either fully "Year 2000" compliant or, in
one instance, will be fully "Year 2000" compliant in an upgrade version to be
installed in the first half of 1998. The Company believes that the cost of
installation and testing will not have a material effect on its financial
position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by this
Item 8 are included as Part IV, Item 14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item 10 is set forth in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on June 9, 1998 (the "1998
Proxy Statement") under the sections captioned "Election of Directors,"
"Executive Officers," "Certain Information Regarding the Board of Directors"
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934,"
which sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item 11 is set forth in the Company's 1998 Proxy
Statement under the section captioned "Executive Compensation and Related
Information," which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item 12 is set forth in the Company's 1998 Proxy
Statement under the section captioned "Share Ownership of Certain Beneficial
Owners and Management," which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item 13 is set forth in the Company's 1998 Proxy
Statement under the section captioned "Certain Transactions," which section is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed:
(1) Financial Statements:
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.:
Independent Auditors' Reports ................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 .. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ............................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 ......... F-5
25
29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ............................. F-6
Notes to Consolidated Financial Statements .................... F-8
(2) Financial Statement Schedules:
Independent Auditors' Report ................................. S-2
Schedule I -- Condensed Financial Information of Registrant .. S-3
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.
3.1 Restated Certificate of Incorporation of Universal Automotive
Industries, Inc. ("UAI") (Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
3.2 Restated Bylaws of UAI (Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
4.1 Specimen Certificate for Common Stock (Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
4.2 Specimen Certificate for Warrant (Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
4.3 Form of Warrant Agreement (including form of Warrant)
(Exhibit 4.3 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
4.4 Form of Underwriter's Warrant (Exhibit 4.4 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
4.5 Restated Certificate of Incorporation of the Company
(Included as Exhibit 3.1) (Exhibit 4.5 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
4.6 Restated Bylaws of UAI (Included as Exhibit 3.2) (Exhibit 4.6
to the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.1 Form of UAI Share Option Plan (Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
26
30
10.2 Amended and Restated Loan and Security Agreement, dated May
12, 1994, between American National Bank and Trust Company of
Chicago and Universal Automotive, Inc. ("UA") (Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
10.3 Consent Agreement, dated October 12, 1994 by and between
American National Bank and Trust Company of Chicago and UAI and UA
(Exhibit 10.3 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.4 Letter Agreement, dated October 19, 1993 between Neelon
Casting Ltd. and IDC (Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.5 Collective Bargaining Agreement, effective March 12, 1994 by
and between International Discus Corporation ("IDC") and United
Steel Workers of America (Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.6 Shareholder's Agreement, dated May 5, 1994, by and between
UAI, Yehuda Tzur, Reuben Gabay, Sami Israel, Arvin Scott and Eric
Goodman (Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.7 Asset Purchase Agreement, dated April 30, 1994, by and
between UBP Canholdings Industries, Inc. and UA (without exhibits)
(Exhibit 10.8 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.8 Stock Exchange Agreement, dated May 5, 1994, by and between
UAI, and Yehuda Tzur, Reuben Gabay, Sami Israel and Arvin Scott
(Exhibit 10.9 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.9 Stock Exchange Agreement, dated April 30, 1994, by and
between UAI and Yehuda Tzur, Reuben Gabay, Sami Israel, Arvin Scott
and Eric Goodman (Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.10 Replacement Demand Note, dated May 12, 1994, in the amount
of $8,500,000 from UA to American National Bank and Trust Company of
Chicago (Exhibit 10.11 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.11 Commercial Mortgage, dated February 6, 1992, by LaSalle
National Bank as Trustee under Trust No. 10-06203-09 to American
National Bank and Trust Company of Chicago (Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
27
31
10.12 Letter Loan Agreement, dated June 4, 1993, by and between
UBP Canholdings Industries Inc. and Howard Winick (Exhibit 10.13 to
the Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10.13 Lease Agreement, dated September 12, 1989, by and between
Lion's Roar Builders Inc. and UBP Canholdings Industries Inc.
(Exhibit 10.14 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.14 Lease Agreement, dated July 29, 1993, by and between Joel
Marfield and UA (Exhibit 10.15 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.15 Lease Agreement, dated February 5, 1991, by and between Sun
Life Assurance Company of Canada and IDC (Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
10.16 Lease Agreement, dated July 16, 1992 by and between Manabal
Rochester Road and UBP Canholdings Industries Inc. (Exhibit 10.17 to
the Company's Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10.17 Lease Agreement, dated July 1, 1994, by and between Clayson
Road Industrial Park and UBP Canholdings Industries Inc. (Exhibit
10.18 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.18 Lease Agreement, dated September 1, 1994 between Newcorp
Properties Ltd. and UBP Canholdings Industries Inc. (Exhibit 10.19
to the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.19 Lease Agreement, dated June 1994, between 2800 Talman and
UA. (Exhibit 10.22 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.20 Staff Leasing Agreement, dated February 1, 1994 by and
between UA and Alternative Employment Strategies, Inc. (Exhibit
10.24 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.21 Amendment to Staff Leasing Agreement, dated September 1,
1994, by and between UA. and Alternative Employment Strategies, Inc.
(Exhibit 10.25 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.22 Merchandizing and Service Agreement, dated March 1992, by
and between UA and the Association of Muffler Dealers, Inc. (Exhibit
10.26 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.23 Employment Agreement, dated May 5, 1994, by and between UA
and Yehuda Tzur (Exhibit 10.27 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
28
32
10.24 First Amendment to Employment Agreement, dated December 14,
1994, between UA and Yehuda Tzur (Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
10.25 Employment Agreement, dated May 5, 1994, by and between UA
and Arvin Scott (Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.26 First Amendment to Employment Agreement, dated December 14,
1994, between UA and Arvin Scott (Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
10.27 Employment Agreement, dated May 5, 1994, by and between UBP
Canholdings Industries Inc. and Eric Goodman (Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
10.28 First Amendment to Employment Agreement, dated December 14,
1994, by and between UBP Canholdings Industries Inc. and Eric
Goodman (Exhibit 10.32 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.29 Employment Agreement, dated May 5, 1994 by and between UA
and Reuben Gabay (Exhibit 10.33 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.30 First Amendment to Employment Agreement, dated December 14,
1994 by and between UA and Reuben Gabay (Exhibit 10.34 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
10.31 Employment Agreement, dated May 5, 1994 by and between UA
and Sami Israel (Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10.32 First Amendment to Employment Agreement, dated December 14,
1994 by and between UA and Sami Israel (Exhibit 10.36 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
10.33 Letter Loan Agreement, dated August 31, 1994, by and between
NBD Bank, Canada and IDC, IDC Holdings Corporation, and UA (Exhibit
10.37 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.34 Demand Promissory Note, dated as of September 1, 1994 given
by UBP Canholdings Industries Inc. in favor of NBD Bank, Canada in
the principal amount of $1,250,000-CDN (Exhibit 10.40 to the
Company's Registration Statement on Form S-1 (No. 33-85162) as filed
with the SEC on October 14, 1994)*
29
33
10.35 Agreement of Purchase and Sale, dated September 30, 1993 by
and between John Corrigan, Jr. and IDC Holdings Corporation with
respect to shares in the capital stock of IDC (without schedules and
exhibits). (Exhibit 10.41 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
10.36 IDC Share Purchase Agreement, dated September 9, 1992 by and
between Seyho Investment Inc. and Douglas A. Dempsey and IDC and IDC
Holdings Corporation (without schedules and exhibits). (Exhibit
10.42 to the Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10.37 Amendment to IDC Share Purchase Agreement, dated January 6,
1993 by and between Seyho Investments Inc. and IDC and IDC Holdings
Corporation. (Exhibit 10.43 to the Company's Registration Statement
on Form S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
10.38 IDC Share Purchase Agreement, dated September 31, 1992 by
and between John Corrigan, Jr. and IDC and IDC Holdings Corporation
(without schedules and exhibits) (Exhibit 10.44 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
10.39 Commercial Mortgage, dated December 29, 1993 by UA to
American National Bank and Trust Company of Chicago (Exhibit 10.45
to the Company's Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*
10.40 Agreement, dated January 6, 1994, by and between
Kelsey-Hayes Canada Limited and UBP Canholdings Industries Inc.
(Exhibit 10.46 to the Company's Registration Statement on Form S-1
(No. 33-85162) as filed with the SEC on October 14, 1994)*
10.41 Form of Letter Consulting Agreement between UAI and
Kensington Wells Incorporated (Exhibit 10.48 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as filed with the
SEC on October 14, 1994)*
21 Subsidiaries of the Registrant
23 Consent of Altschuler Melvoin & Glasser LLP
- --------------------
* These exhibits are incorporated herein by reference to the registration
statement referenced after each exhibit next to which an asterisk appears.
+ Indicates executive compensation plans and arrangements.
(b) Reports on Form 8-K
The Company filed no reports of Form 8-K during the fourth quarter of
1997.
30
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
By: /s/ Arvin Scott
------------------------------------
Arvin Scott, Chief Executive Officer
Date: March 30, 1998
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 30, 1998
Arvin Scott
/s/ Jerome J. Hiss Chief Financial Officer (Principal
- --------------------- Financial Officer and Principal
Jerome J. Hiss Accounting Officer) March 30, 1998
/s/ Yehuda Tzur Director March 30, 1998
- ---------------------
Yehuda Tzur
/s/ Eric Goodman Director March 30, 1998
- ---------------------
Eric Goodman
/s/ Sami Israel Director March 30, 1998
- ---------------------
Sami Israel
/s/ Sheldon Robinson Director March 30, 1998
- ---------------------
Sheldon Robinson
/s/ Sol S. Weiner Director March 30, 1998
- ---------------------
Sol S. Weiner
/s/ Dennis Kessler Director March 30, 1998
- ---------------------
Dennis Kessler
31
35
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
INDEPENDENT AUDITORS' REPORT
AND FINANCIAL STATEMENTS
DECEMBER 31, 1997
[LOGO OF ALTSCHULER, MELVOIN AND GLASSER LLP]
[LETTERHEAD OF ALTSCHULER, MELVOIN AND GLASSER LLP]
36
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
FINANCIAL STATEMENTS F-2
INDEPENDENT AUDITORS' REPORT:
Consolidated Balance Sheets, December 31, 1997 and 1996
(Exhibit A) F-3
Consolidated Statements of Operations, Years Ended
December 31, 1997, 1996 and 1995 (Exhibit B) F-4
Consolidated Statements of Changes in Stockholders' Equity,
Years Ended December 31, 1997, 1996 and 1995 (Exhibit C) F-5
Consolidated Statements of Cash Flows, Years Ended
December 31, 1997, 1996 and 1995 (Exhibit D) F-6
Notes to the Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Amounts S-5
F-1
37
[LETTERHEAD OF ALTSCHULER, MELVOIN AND GLASSER LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Universal Automotive Industries, Inc.
We have audited the accompanying consolidated balance sheets of UNIVERSAL
AUTOMOTIVE INDUSTRIES, INC. as of December 31, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain of the
Company's wholly owned foreign subsidiaries (Note 1) which statements reflect
aggregate total assets of $4,099,889 and $14,090,590 as of December 31, 1997
and 1996 and aggregate total revenue of $5,446,085, $16,250,090 and $11,547,447
for the respective three years then ended. Those statements were audited by
other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for such subsidiaries is based
solely on the reports of the other auditors.
We conduct our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Universal Automotive
Industries, Inc. as of December 31, 1997 and 1996, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
March 3, 1998
[LOGO]
38
[LETTERHEAD OF ARTHUR ANDERSEN]
THIS IS THE ENGLISH TRANSLATION OF THE HUNGARIAN ORIGINAL (NOTE 0)
INDEPENDENT AUDITORS' REPORT
The English translation of the Annual Report is incomplete since the Business
Report is only available in Hungarian. We have issued the following opinion in
the complete Annual Report:
"To the quotaholder of UBP-Csepel Iron Foundry Kft.:
We have audited the accompanying balance sheet of UBP-Csepel Iron Foundry Kft.
("the Company") as at 31 December 1997, which shows total assets of HUF'000
598,107 and a retained loss for the year of HUF'000 163,184, the related
statement of operations for the year then ended and the supplement
(collectively "the financial statements") included in the Company's 1997 Annual
Report. The Annual Report, comprising the financial statements and a Business
Report, is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements based on our audit. In
addition, it is our responsibility to assess whether the accounting information
in the Business Report is consistent with that contained in the financial
statements.
We had also audited the Company's Annual Report for the year ended 31 December
1996 and issued an unqualified opinion. Reference is made to our Auditors'
Report dated 19 February 1997.
39
[ LETTERHEAD OF ARTHUR ANDERSEN ]
-2-
We conducted our audit in accordance with the International Standards on
Auditing and applicable laws and regulations in Hungary. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. Our work with
respect to the Business Report was limited to checking it within the
aforementioned scope, and did not include a review of any information other
than that drawn from the audited accounting records of the Company. We believe
that our audit provides a reasonable basis for our opinion.
This Annual Report has been prepared for the consideration of the owner at the
forthcoming Quotaholder's Meeting, and does not reflect the effects, if any, of
resolutions that might be adopted at that meeting.
In our opinion, except for the effects, if any, of resolutions that might be
adopted at the forthcoming Quotaholder's Meeting, the Annual Report has been
prepared in accordance with the provisions of the Act on Accounting and
accounting principles generally accepted in Hungary and gives a true and fair
view of the financial position of the UBP-Csepel Iron Foundry Kft. as of 31
December 1997 and of the results of its operations for the year then ended.
Without qualifying our opinion, we draw your attention to the fact that the
Company's equity, working capital and cash flow from operating activities are
negative as of 31 December 1996 and 1997. Universal Automotive Industries Inc,
the owner of UBP Hungary Inc. has declared that they will ensure the Company's
continued ability to meet its obligations.
Budapest, 13 February 1998
/s/ Walter Wacker /s/ Laszlo Bary
Walter Wacker Laszlo Bary
Arthur Andersen Audit Kft. Registered Auditor
KE-0660/96./V. KI-5504/97./XII."
40
[LETTERHEAD OF IBDO]
================================================================================
AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE DIRECTORS OF
UBP CANHOLDINGS INC.
We have audited the consolidated balance sheets of UBP Canholdings Inc. as at
December 31, 1996 and the consolidated statements of operations and retained
earnings and cash flows for the years ended December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
applicable in Canada, which do not differ significantly from those in the
United States. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
1996 and the results of its operations and its cash flows for the years ended
December 31, 1996 and 1995 in accordance with generally accepted accounting
principles.
/s/ BDO Dunwoody
BDO Dunwoody
Chartered Accountants
Hamilton, Ontario, Canada
February 28, 1997
41
Exhibit A
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
----------- -----------
Current Assets:
Cash $ 196,010 $ 63,706
Accounts receivable, trade (net of
allowance for doubtful accounts of
$1,900,455 and $463,968 in 1997 and
1996) 9,468,624 11,919,002
Inventories (Notes 2 and 3) 14,606,190 14,441,523
Income taxes refundable (Note 7) 355,439 183,049
Deferred income taxes (Note 7) 1,327,700 488,700
Prepaid expenses and other current assets 750,587 949,114
----------- -----------
26,704,550 28,045,094
----------- -----------
Property and Equipment (net of accumulated
depreciation--Notes 2 and 3) 8,473,844 8,836,272
Other Assets:
Goodwill, net of accumulated amortization of
$78,631 and $77,378 in 1997 and 1996 (Note 2) 243,996 260,581
Other assets 927,331 884,824
----------- -----------
1,171,327 1,145,405
----------- -----------
$36,349,721 $38,026,771
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 5,769,887 $ 8,583,217
Long-term indebtedness, current portion
(Note 6) 355,937 2,710,583
Subordinated notes (Note 9) 0 1,050,000
Accrued expenses and other current liabilities 2,636,479 1,432,963
----------- -----------
8,762,303 13,776,763
----------- -----------
Long-term Liabilities:
Revolving loan indebtedness (Note 5) 11,975,000 11,432,525
Long-term indebtedness, noncurrent portion
(Note 6) 4,010,563 2,710,145
Subordinated debenture (Note 4) 4,295,625 0
Deferred income taxes (Note 7) 215,877 323,213
Due to stockholders (Note 9) 21,064 927,724
----------- -----------
20,518,129 15,393,607
----------- -----------
Commitments and Contingencies (Notes 5, 8 and 11)
Stockholders' Equity (Note 1):
Preferred stock (authorized 1,000,000 shares,
$.01 par value, none issued or outstanding) 0 0
Common stock (authorized 15,000,000
shares, $.01 par value, 6,769,425
and 6,729,425 shares issued and
outstanding) 67,694 67,294
Additional paid-in capital 8,217,889 7,777,788
Retained earnings (deficit) (1,047,427) 1,038,465
Foreign currency translation adjustments (168,867) (27,146)
----------- -----------
7,069,289 8,856,401
----------- -----------
$36,349,721 $38,026,771
=========== ===========
The accompanying notes are an integral part of this statement.
F - 3
42
Exhibit B
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------- ------------
Net Sales $ 61,266,939 $ 63,059,515 $46,814,827
Cost of Sales 48,250,797 51,784,736 38,748,160
------------ ------------- ------------
Gross Profit 13,016,142 11,274,779 8,066,667
Selling, General and Administrative Expenses 13,763,676 10,599,238 7,219,126
------------ ------------- ------------
Income (Loss) from Operations (747,534) 675,541 847,541
------------ ------------- ------------
Other Expense (Income):
Provision for lawsuit settlement (Note 11 ) 650,000 0 0
Interest expense 1,727,373 1,184,018 843,233
(Gain) Loss on disposition of assets 12,266 (44,182) (4,093)
Other 18,599 (69,583) (23,186)
------------ ------------- ------------
2,408,238 1,070,253 815,954
------------ ------------- ------------
Income (Loss) before Provision (Benefit) for Income Taxes (3,155,772) (394,712) 31,587
------------ ------------- ------------
Income Tax Provision (Benefit) (Note 7):
Current (133,480) 225,613 (111,081)
Deferred (936,400) (126,905) 78,418
------------ ------------- ------------
(1,069,880) 98,708 (32,663)
------------ ------------- ------------
Net Income (Loss) $(2,085,892) $ (493,420) $64,250
============ ============= ============
Earnings per Share (Notes 2 and 13):
Basic:
Net income (loss) per common share $ (0.31) $ (0.07) $ 0.01
============ ============= ============
Weighted average number of common shares outstanding 6,751,732 6,647,796 6,500,000
============ ============= ============
Diluted:
Net income (loss) per common share $ (0.31) $ (0.07) $ 0.01
============ ============= ============
Weighted average number of common shares outstanding 6,751,732 6,647,796 7,129,966
============ ============= ============
The accompanying notes are an integral part of this statement.
F - 4
43
Exhibit C
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997 and 1996
Common Stock Additional
Shares Paid-in
Outstanding Amount Capital
------------ ------- ----------------
Balances, January 1, 1995 6,500,000 $65,000 $ 6,497,312
Net Income for 1995
Elimination of Minority Interest 309,517
Stock Options Recorded as Compensation (Note 12) 169,375
Foreign Currency Translation Adjustment
------------ ------- ----------------
Balances, December 31, 1995 6,500,000 65,000 6,976,204
Net Loss for 1996
Stock Options Recorded as Compensation (Note 12) 147,947
Exercise of Warrants and Exchange of Shares by Underwriters (Note 12) 51,325 513 ( 383)
Shares Issued as Partial Consideration for Acquisitions of Assets 137,200 1,372 305,229
Shares Issued in Lieu of Cash for Consulting/Noncompete Agreement (Note 8) 39,500 395 341,805
Exercise of Stock Options 1,400 14 6,986
Foreign Currency Translation Adjustment
------------ ------- ----------------
Balances, December 31, 1996 6,729,425 67,294 7,777,788
Net Loss for 1997
Stock Options Recorded as Compensation (Note 12) 158,097
Warrants Issued with Subordinated Debenture (Note 4) 225,000
Shares Issued in Lieu of Cash for Commissions Payable 40,000 400 57,004
Foreign Currency Translation Adjustment
------------ ------- ----------------
Balances, December 31, 1997 6,769,425 $67,694 $ 8,217,889
============ ======= ================
Foreign
Retained Currency
Earnings Translation
(Deficit) Adjustments Total
--------------- --------------- --------------
Balances, January 1, 1995 $ 1,467,635 $( 17,568) $ 8,012,379
Net Income for 1995 64,250 64,250
Elimination of Minority Interest 309,517
Stock Options Recorded as Compensation (Note 12) 169,375
Foreign Currency Translation Adjustment 3,466 3,466
--------------- --------------- --------------
Balances, December 31, 1995 1,531,885 ( 14,102) 8,558,987
Net Loss for 1996 ( 493,420) ( 493,420)
Stock Options Recorded as Compensation (Note 12) 147,947
Exercise of Warrants and Exchange of Shares by Underwriters (Note 12) 130
Shares Issued as Partial Consideration for Acquisitions of Assets 306,601
Shares Issued in Lieu of Cash for Consulting/Noncompete Agreement (Note 8) 342,200
Exercise of Stock Options 7,000
Foreign Currency Translation Adjustment ( 13,044) ( 13,044)
--------------- --------------- --------------
Balances, December 31, 1996 1,038,465 ( 27,146) 8,856,401
Net Loss for 1997 ( 2,085,892) ( 2,085,892)
Stock Options Recorded as Compensation (Note 12) 158,097
Warrants Issued with Subordinated Debenture (Note 4) 225,000
Shares Issued in Lieu of Cash for Commissions Payable 57,404
Foreign Currency Translation Adjustment ( 141,721) ( 141,721)
--------------- --------------- --------------
Balances, December 31, 1997 $( 1,047,427) $( 168,867) $ 7,069,289
=============== =============== ==============
The accompanying notes are an integral part of this statement.
F - 5
44
Exhibit D
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- ------------
Cash Flows from Operating Activities:
Net income (loss) $( 2,085,892) $( 493,420) $ 64,250
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 1,242,220 1,006,808 515,870
Provision for bad debts 2,805,837 472,732 188,015
Provision for lawsuit settlement 650,000 0 0
Other, net 20,623 ( 45,009) 2,161
Effect of exchange rate changes ( 141,721) ( 13,044) 3,466
Deferred income taxes ( 946,336) ( 126,905) 78,418
Compensation expense for stock
options 158,097 147,947 169,375
Increase (Decrease) in cash from
changes in:
Accounts receivable, trade ( 355,459) ( 3,945,104) ( 1,687,887)
Inventories ( 164,667) ( 4,079,013) ( 1,486,530)
Prepaid expenses and other
current assets ( 54,783) ( 464,432) ( 337,623)
Increase in other assets ( 309,252) ( 56,332) ( 507,609)
Accounts payable, trade ( 2,813,330) 3,732,633 ( 706,596)
Accrued expenses and other
liabilities 610,920 919,860 ( 195,367)
-------------- -------------- ------------
Net cash used in operating activities,
forward ( 1,383,743) ( 2,943,279) ( 3,900,057)
-------------- -------------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment ( 573,901) ( 3,973,180) ( 1,028,349)
Acquisition of subsidiary 0 0 ( 1,163,290)
(Increase) Decrease in advances to
partially owned entity 0 ( 141,301) 330,091
Proceeds from disposition of assets 58,361 56,988 4,248
(Increase) Decrease in cash value of life
insurance policies 0 ( 65,846) ( 41,135)
-------------- -------------- ------------
Net cash used in investing activities,
forward $ ( 515,540) $( 4,123,339) $( 1,898,435)
============== ============== =============
F - 6
45
Exhibit D, Continued
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Fiscal Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
--------------- --------------- -------------
Net cash used in operating activities,
forwarded $( 1,383,743) $( 2,943,279) $( 3,900,057)
--------------- --------------- -------------
Net cash used in investing activities,
forwarded ( 515,540) ( 4,123,339) ( 1,898,435)
--------------- --------------- -------------
Cash Flows from Financing Activities:
Net increase in revolving loan
indebtedness 542,475 2,099,941 4,146,961
Proceeds on notes payable 4,450,000 3,535,280 1,590,780
Principal payments on notes payable ( 5,504,228) ( 558,497) ( 2,386,899)
Proceeds from subordinated debentures 4,500,000 0 0
Proceeds from (Payments on)
stockholder loans, net ( 906,660) 595,353 ( 117,629)
Proceeds from (Payments on)
subordinated notes ( 1,050,000) 1,050,000 0
Issuance of common stock 0 7,130 0
--------------- --------------- -------------
Net cash provided by financing
activities 2,031,587 6,729,207 3,233,213
--------------- --------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents 132,304 ( 337,411) ( 2,565,279)
Cash and Cash Equivalents, Beginning of Year 63,706 401,117 2,966,396
--------------- --------------- -------------
Cash and Cash Equivalents, End of Year $ 196,010 $ 63,706 $ 401,117
=============== =============== =============
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for:
Interest $ 1,491,849 $ 1,151,986 $ 875,864
=============== =============== =============
Income taxes $ 75,561 $ 383,140 $ 132,903
=============== =============== =============
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Assets acquired by issuance of
stock $ 0 $ 648,801 $ 0
=============== =============== =============
Liability satisfied by issuance of
stock $ 57,404 $ 0 $ 0
=============== =============== =============
Warrants issued in connection
with debentures $ 225,000 $ 0 $ 0
=============== =============== =============
The accompanying notes are an integral part of this statement.
F - 7
46
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 1---STRUCTURE
Universal Automotive Industries, Inc. (the Company) acts as a holding company
for its direct and indirect subsidiaries which as of December 31, 1997 are as
follows:
Universal Automotive, Inc. (Universal), a United States Corporation.
Canadian Corporations:
UBP Canholdings, Inc. (Canholdings) and its wholly owned subsidiaries:
Universal Brake Parts, Inc.
International Discus Corporation (Inactive) (IDC)
UBP Hungary, Inc. (Hungary), a United States Corporation and its wholly
owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian limited
liability company, (both formed in September 1995).
On September 29, 1995, Hungary acquired assets of the Csepel Iron Foundry of
Budapest, Hungary. The acquisition was accounted for as a purchase and the
cost of the acquisition was allocated to reflect the fair value of the assets
purchased:
Inventory $ 174,226
Property and equipment 989,064
----------
Purchase price $1,163,290
==========
Supplemental unaudited pro forma information for Hungary is not included
because no financial statements for periods prior to acquisition for the
predecessor entity are available.
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Universal Automotive Industries, Inc. is engaged principally in the manufacture
and distribution of automotive brake parts operating from facilities in
Chicago, Illinois, Los Angeles, California, Laredo, Texas, and Toronto, Canada.
Sales are made throughout the United States and Canada. The Company's
Hungarian subsidiary is engaged in the manufacture of iron casting products,
primarily for the automotive and machine tool industries. All of its sales are
in Europe.
A summary of significant accounting policies is as follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
the estimates.
F - 8
47
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FOREIGN CURRENCY TRANSLATION--For Canholdings, the local currency is the
functional currency and translation adjustments are accumulated in a
separate component of stockholders' equity. In 1995, the local currency
was also the functional currency for Hungary. For 1996 and 1997, the
Company determined that the country of Hungary's economy qualifies as a
"highly inflationary economy" and thus Hungary's financial statements have
been remeasured as if the functional currency is the U.S. dollar. Such
remeasurement creates adjustments which are included in the determination
of net income (loss).
INVENTORIES--Inventories are stated at the lower of cost or market value
with cost generally determined using the weighted average method, which
approximates the first-in, first-out (FIFO) method.
DEPRECIATION--Depreciation of property and equipment has been computed
under accelerated and straight-line methods for financial reporting
purposes, and accelerated methods for income tax reporting purposes, over
the estimated useful lives of the assets.
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, 1997, there were no such instruments.
INCOME TAXES--Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the financial
statement and tax bases of assets and liabilities (Note 7).
EARNINGS PER SHARE--In the fourth quarter of 1997, the Company adopted
Financial Accounting Standards Board No. 128, "Earnings per Share" (FAS
128), which requires retroactive application to all periods presented.
Under FAS 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. "Diluted
Earnings per Share" reflects the potential dilution that could occur if
warrants and options (Note 12) or other contracts to issue common stock
were exercised and resulted in the issuance of additional common shares.
Prior period amounts have been restated to conform to the requirements of
FAS 128. See Note 13 for further details.
F - 9
48
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, other than debt instruments, closely approximates their
carrying value. Because the interest rate of the revolving loan and the
term loan with LaSalle National Bank adjusts with changes in the market
rate of interest, management believes the fair value is equivalent to the
carrying value. Management believes that the interest rate of 12.25% on
the subordinated debenture is approximately equal to the current rate
available for similar debt. Accordingly, the fair value of these
debentures approximates its carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for reporting and display of comprehensive income and its components in the
financial statements. FAS 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The
adoption of this standard is expected to have no impact on the Company's
results of operations, financial position or cash flows.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997. Financial statement disclosures for prior periods are
required to be restated. The Company has not determined what effect, if
any, the adoption of FAS 131 will have on financial statement disclosures.
NOTE 3--SELECTED FINANCIAL STATEMENT DATA
- -----------------------------------------
1997 1996
----------- -----------
Inventories:
Finished goods $12,275,151 $13,027,987
Work-in-process 240,380 229,588
Raw materials 2,090,659 1,183,948
----------- -----------
$14,606,190 $14,441,523
=========== ===========
F - 10
49
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 3--SELECTED FINANCIAL STATEMENT DATA, CONTINUED
- -----------------------------------------------------
Estimated
Lives 1997 1996
-------------------------- ----------- -----------
Property, plant and equipment:
Machinery and equipment 5 to 11 years $4,974,256 $4,929,024
Building and improvements 25 to 39 years 2,788,194 2,734,526
Land 498,835 498,835
Tools and dies 5 to 11 years 629,038 539,623
Patterns 5 to 10 years 851,298 761,717
Computer equipment 3 to 5 years 439,841 457,792
Autos and trucks 3 to 5 years 364,088 351,643
Furniture and fixtures 5 to 11 years 280,923 278,346
Leasehold improvements 5 years 360,257 219,511
----------- -----------
11,186,730 10,771,017
Less accumulated depreciation 2,712,886 1,934,745
----------- -----------
$8,473,844 $8,836,272
=========== ===========
Depreciation expense amounted to $877,968, $663,746 and $452,885, for 1997,
1996 and 1995, respectively.
Total bad debt expense included in selling, general and administrative expenses
was $2,805,837, $472,732 and $188,015 for the years ending 1997, 1996 and 1995,
respectively.
NOTE 4--SUBORDINATED DEBENTURE
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture to
Tandem Capital, Inc. (an affiliate of Sirrom Capital Corporation), calling for
payments of interest at 12.25% per annum through maturity on July 14, 2002.
The Company issued Tandem a warrant to purchase 450,000 shares of the Company's
common stock at an exercise price equal to 80% of the average closing bid price
of the Company's common stock for the 20 days preceding the first anniversary
of the debenture closing date. Tandem will also receive warrants to purchase
an additional 225,000 shares of common stock on the 14th of each of the
following months: August 1998; February 1999; August 1999; August 2000 and
August 2001; provided that if the debenture is prepaid before any scheduled
warrant issue date except August 1998 then all subsequent warrants will not be
issued. In each instance, the exercise price for the warrants is 80% of the
average closing bid price of the Company's common stock for the 20 days
preceding each such warrant issue date. The warrants are exercisable at any
time through the sixth anniversary of the debenture issue date. The amount
allocated to such warrants was $225,000 which approximates the amount of
increased interest the buyer would have required without a warrant feature.
F - 11
50
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 5--LASALLE NATIONAL BANK INDEBTEDNESS
On July 14, 1997, the Company entered into a credit agreement with LaSalle
National Bank for (a) a revolving line of credit of up to $20,000,000 based on
eligible accounts receivable and inventory and (b) a term loan in the initial
amount of $4,450,000. Proceeds from the LaSalle financing together with the
proceeds from issuance of subordinated debentures (Note 4) were used to repay
then existing indebtedness to NBD Bank, or its affiliate American National Bank
(Note 6), and to certain related parties and other individuals (Note 9).
The revolving credit facility, which is for an initial term ending May 1, 1999
bears interest of prime plus 0.5% per annum, subject to an ongoing option to
convert to LIBOR plus 2.5% per annum. The term loan is payable in monthly
principal installments of $24,722, with a balloon payment of $2,966,666 due on
May 1, 2002, and bears interest at prime plus 0.75% per annum.
At December 31, 1997 an amount of $11,975,000 was due on the revolving credit
line and an amount of $4,276,946 was due on the term loan (see Note 6).
The LaSalle agreement contains certain limitations on dividends and capital
expenditures and requires the Company to satisfy certain financial tests
concerning defined minimum tangible net worth and ratios of liabilities to
tangible net worth. At December 31, 1997, the Company was in compliance with
all loan covenants (as amended). The entire credit facility is secured by a
first lien on substantially all of the Company's North American assets. At
December 31, 1997, approximately $416,000 was available for borrowing under the
revolving credit line.
The weighted average interest rates on the aforementioned borrowings were
8.22%, 7.54% and 8.26% for the years ended December 31, 1997, 1996, and 1995,
respectively.
NOTE 6--LONG-TERM INDEBTEDNESS
1997 1996
---------- -------------
LaSalle National Bank term loan (see Note 5) $4,276,946 $ 0
Capital lease obligation (see Note 8) 89,554 130,019
Indebtedness repaid in 1997:
First mortgage loan on Chicago headquarters 0 1,186,250
Notes payable to NBD, Canada 0 1,635,723
Note payable by Canholdings in connection with loans made by individuals 0 203,749
Other installment notes, partially collateralized by certain equipment 0 893,780
Notes payable to NBD, Frankfurt 0 1,371,207
---------- -------------
Total long-term indebtedness 4,366,500 5,420,728
Less current portion 355,937 2,710,583
---------- -------------
Non current portion $4,010,563 $ 2,710,145
========== =============
F - 12
51
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 6--LONG-TERM INDEBTEDNESS, CONTINUED
The approximate aggregate maturities of the LaSalle Bank term loan are:
Year Ending
December 31 Amount
----------- ----------
1998 $ 296,664
1999 296,664
2000 296,664
2001 296,664
2002 3,090,290
----------
$4,276,946
==========
NOTE 7--INCOME TAXES
Income tax expense (benefit) consisted of the following:
1997 1996 1995
----------- ------------ -------------
Current:
Federal $ (201,700) $ 263,000 $( 105,000)
Foreign 116,520 ( 75,387) 20,919
State (48,300) 38,000 ( 27,000)
Deferred (936,400) ( 126,905) 78,418
----------- ------------ -------------
$(1,069,880) $ 98,708 $( 32,663)
=========== ============ =============
The components of the domestic net deferred tax assets are as follows:
1997 1996
----------- -------------
Deferred tax assets:
Bad debt allowance $ 705,200 $ 152,000
Reserve for lawsuit settlement 247,000 0
Variation of inventories between tax
and financial reporting purposes 168,700 185,300
Compensation expense for stock options 180,700 120,600
Other accruals 26,100 30,800
----------- -------------
Net deferred tax assets $ 1,327,700 $ 488,700
=========== =============
F - 13
52
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 7--INCOME TAXES, CONTINUED
The components of the Canadian net deferred tax liabilities at December 31,
1997 and 1996 are:
1997 1996
-------------- ------------
Deferred tax liabilities:
Depreciation differences between tax
reporting and financial reporting $ 254,777 $ 373,213
-------------- ------------
Deferred tax assets:
Tax carryforwards 0 40,500
Other 38,900 9,500
-------------- ------------
38,900 50,000
Net deferred tax liabilities $ 215,877 $ 323,213
============== ============
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to income (loss) before income tax expense
is as follows:
1997 1996 1995
----------- ------------ -------------
Income (loss) before income tax expenses:
Domestic $(2,887,136) $ 76,168 $( 598,062)
Foreign ( 268,636) ( 470,880) 629,649
----------- ------------ -------------
$(3,155,772) $( 394,712) $ 31,587
=========== ============ =============
Computed income tax expense (benefit) at
federal statutory rate $(1,073,000) $( 134,200) $ 10,700
Increase (Reduction) resulting from:
Hungary loss (tax benefit not recorded) 90,400 215,000 0
Other (including effect of different
foreign and U.S. State rates) ( 87,280) 17,908 ( 43,363)
----------- ------------ -------------
Total $(1,069,880) $ 98,708 $( 32,663)
=========== ============ =============
At December 31, 1997 and 1996, income taxes refundable consist of:
1997 1996
------------ -------------
Tax deposits in excess of taxes due $ 105,439 $ 107,137
Carryback of 1996 Canadian operating losses 0 75,912
Carryback of 1997 United States operating losses 250,000 0
------------ -------------
$ 355,439 $ 183,049
============ =============
F - 14
53
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 8--LEASES AND OTHER COMMITMENTS
The Company leases from unaffiliated parties all its facilities except for the
Chicago headquarters and Hungarian foundry both of which are owned. The lease
terms range from month-to-month to long-term leases the latest of which expires
in 2000. Annual rents for the facilities range from $123,000 to $135,000.
Until June 1995, the Company leased its former Chicago headquarters from a land
trust operating as a partnership comprised of three of the Company's
stockholders. Rent paid for such facility amounted to $58,000 for 1995.
Aggregate rent expense for all facilities was $725,392, $526,697 and $335,058
for 1997, 1996 and 1995, respectively.
The Company leases certain equipment under capital leases payable in aggregate
monthly installments of $5,300 with the latest expiring in 1999. The net book
value of such equipment under capital lease is $23,000. Certain vehicles and
equipment are also leased under operating leases, the latest expiring in 2001.
Minimum lease payments due over the remaining terms of the leases are as
follows:
Capital Operating
Leases Leases
--------- -----------
1998 $ 63,641 $ 602,813
1999 30,623 408,887
2000 0 243,795
2001 0 57,128
--------- -----------
94,264 1,312,623
Less interest portion 4,710 0
--------- -----------
$ 89,554 $ 1,312,623
========= ===========
In 1995, the Company had entered into a consulting agreement and covenant not
to compete (both expiring in 1998) with the principals of a company located in
Dallas, Texas from which the Company acquired inventory and a customer list.
In 1996, the Company satisfied the remaining unpaid balance of $342,200 by
issuing 39,500 shares of its common stock to the aforementioned individuals.
NOTE 9--RELATED-PARTY INDEBTEDNESS
Due to stockholders consists of the following at December 31, 1997 and 1996:
1997 1996
---------------------
Unsecured notes payable without interest to five original
stockholders (who are also officers and directors) due
in varying monthly installments $ 21,064 $ 157,724
Loans made in 1996 by two of the above
parties (repaid in full in 1997) 0 770,000
-------- ---------
$ 21,064 $ 927,724
======== =========
Subordinated notes owing at December 31, 1996 to company directors ($350,000)
and to four nonaffiliated individuals ($700,000) were repaid in 1997.
F - 15
54
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 10--GEOGRAPHICAL SEGMENT/MAJOR CUSTOMER DATA
The Company's operations primarily involve a single industry segment which is
the design, manufacture, sale and support of automotive brake parts. Beginning
in September 1995, the Hungarian operation involves the manufacture of iron
casting products, primarily for the automotive and machine tool industries.
Financial information, summarized by geographical area follows:
Consolidated
Domestic Canada Europe Eliminations Total
-------------- ----------- ------------- -------------- ---------------
Year ended December 31, 1997:
Total revenue:
Unaffiliated customers $ 47,787,662 $ 8,033,192 $ 5,446,085 $ 0 $ 61,266,939
Interarea transfers 1,854,003 3,347,964 0 ( 5,201,967) 0
-------------- ----------- ------------- -------------- ---------------
Total $ 49,641,665 $11,381,156 $ 5,446,085 $( 5,201,967) $ 61,266,939
============== =========== ============= ============== ===============
Income (Loss) from operations $( 917,909) $ 125,554 $ 44,821 $ 0 $( 747,534)
============== =========== ============= ============== ===============
Total assets $ 34,151,464 $ 6,358,222 $ 4,099,888 $( 8,259,853) $ 36,349,721
============== =========== ============= ============== ===============
Total export sales $ 83,318
===============
Year ended December 31, 1996:
Total revenue:
Unaffiliated customers $ 51,035,259 $ 5,973,613 $ 6,050,643 $ 0 $ 63,059,515
Interarea transfers 1,771,569 4,225,834 0 ( 5,997,403) 0
-------------- ----------- ------------- -------------- ---------------
Total $ 52,806,828 $10,199,447 $ 6,050,643 $( 5,997,403) $ 63,059,515
============== =========== ============= ============== ===============
Income (Loss) from operations $ 1,197,426 $ 129,130 $( 651,015) $ 0 $ 675,541
============== =========== ============= ============== ===============
Total assets $ 31,946,883 $ 8,331,846 $ 4,230,008 $( 6,481,966) $ 38,026,771
============== =========== ============= ============== ===============
Total export sales $ 504,692
===============
Year ended December 31, 1995:
Total revenue:
Unaffiliated customers $ 39,864,658 $ 5,600,300 $ 1,349,869 $ 0 $ 46,814,827
Interarea transfers 1,694,629 7,477,203 0 ( 9,171,832) 0
-------------- ----------- ------------- -------------- ---------------
Total
$ 41,559,287 $13,077,503 $ 1,349,869 $( 9,171,832) $ 46,814,827
============== =========== ============= ============== ===============
Income from operations $( 54,144) $ 910,753 $( 78,792) $ 69,724 $ 847,541
============== =========== ============= ============== ===============
Total assets $ 32,757,868 $ 6,524,311 $ 2,683,367 $( 15,549,711) $ 26,415,835
============== =========== ============= ============== ===============
Total export sales $ 1,098,489
===============
F - 16
55
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 10--GEOGRAPHICAL SEGMENT/MAJOR CUSTOMER DATA, CONTINUED
In 1997 and 1996, one customer accounted for 17% and 11% of total consolidated
sales and purchases from one vendor accounted for approximately 16% and 24% of
consolidated cost of sales.
NOTE 11--CONTINGENCIES
During 1995, a lawsuit was filed against the Company in the United States
Bankruptcy Court by a Trustee of the bankruptcy estate of First National Parts
Exchange, Inc. ("the Estate") with which the Company had transacted both
purchases and sales of certain automotive parts in 1992 and 1993. The Trustee
is seeking a total of $5,100,000 in damages under two claims. The largest
claim, for approximately $4,600,000 is the result of alleged "voidable
transactions" concerning transfers of product by the Debtor to the Company
without receiving "reasonably equivalent values" (as defined). The Company
recorded a provision of $650,000 in the first quarter of 1997 to reflect a
settlement agreement with the Trustee. The settlement agreement lapsed as of
July 31, 1997.
The lawsuit resulted in a trial held in the U.S. Bankruptcy Court, which
concluded in January 1998. As of March 3, 1998, no decision has yet been
rendered. While the Company believes that the provision is adequate, the
ultimate resolution of this matter could result in a loss of up to $1 million
in excess of the amount accrued.
NOTE 12--STOCK WARRANTS AND OPTIONS
The Company has outstanding 1,495,000 redeemable common stock purchase
warrants. Each warrant entitles the holder to purchase one share of the
Company's common stock at an exercise price of $7.00 per share, subject to
certain adjustments, at any time until December 15, 1999. The warrants may be
redeemed, in whole or in part, at the Company's option, if the closing bid
price of the Company's common stock exceeds 175% of the exercise price (or
$12.25 per share) for 20 consecutive trading days, as defined. Such warrants
have not been exercised or redeemed.
The underwriting agreement entered into in connection with the Company's 1994
initial public offering granted the underwriter a warrant to purchase 130,000
units (consisting of one common share and a warrant to purchase one common
share) at an exercise price of $7.25 per unit.
F-17
56
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 12--STOCK WARRANTS AND OPTIONS, CONTINUED
On January 24, 1996, these underwriter warrants were exercised. Holders
elected to exchange 78,675 shares of common stock (whose then current market
value was equal to the total required exercise price) in return for the 130,000
common shares. Thus, 51,325 shares of Company stock were issued without cash
consideration to the Company. The Company, therefore, also has outstanding
130,000 common stock purchase warrants. The exercise price of the warrants is
$11.20. Such warrants have not yet been exercised. Also, see Note 4 for
warrants issued in connection with subordinated debentures.
In connection with the acquisition of Canholdings on April 30, 1994, the
previous stockholder of Canholdings granted to each of the other Company
stockholders a nontransferable option to acquire from him for $1 that number of
shares of Company common stock that have a market value of $62,500 (Canadian),
determined as of July 1, 1998, and exercisable from and after July 1, 1998,
provided that the Company consummated an initial public offering under defined
terms. Such options expire on January 1, 1999.
In October 1994, the Company adopted a Stock Option Plan 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 300,000 shares of common stock for issuance under the Stock Option
Plan. Following is a table indicating the activity during 1997, 1996 and 1995
for such Stock Option Plan:
Weighted
Average
Stock Exercise
Options Price
-------------- ----------
Options granted in 1995 and outstanding at
December 31, 1995 $ 57,000 $ 1.07
1996:
Options granted 84,526 5.00
Options exercised (1,400) (5.00)
Options forfeited (2,100) (5.00)
-------------- ----------
Balance, December 31, 1996 138,026 $ 3.38
==========
1997:
Options granted 41,500 $ 4.86
-------------- ----------
Balance, December 31, 1997 $ 179,526 $ 3.72
============== ==========
Options exercisable, December 31, 1997 $ 80,810 $ 3.24
============== ==========
The weighted average fair values of options granted during the years ended
December 31, 1995, 1996 and 1997 were $10.75, $7.69 and $2.75, respectively.
F - 18
57
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 12--STOCK WARRANTS AND OPTIONS, CONTINUED
The following table summarizes information about outstanding and exercisable
stock options as of December 31, 1997:
Options Outstanding
Weighted- Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
-------- ----------- ----------- --------
$1.00 55,000 103 months $1.00
3.00 5,000 117 months 3.00
5.00 119,526 119 months 5.00
-----------
179,526
===========
Options Exercisable
Weighted-
Range of Average
Exercise Number Exercise
Prices Exercisable Price
-------- ----------- ---------
$1.00 33,000 $1.00
3.00 5,000 3.00
5.00 42,810 5.00
-----------
80,810
===========
Effective January 1998, 44,000 of the 55,000 options previously granted at a
$1.00 exercise price were cancelled and replaced with options to purchase
60,000 shares at 110% of market value at the date of such grant.
Compensation expense is being recorded over the respective service periods
required of the optionees, based on the difference between the grant price and
the market price of the stock on the dates of such grants, as required by APB
Opinion 25, Accounting for Stock Issued to Employees. In 1997, 1996 and 1995,
amounts of $158,097, $147,947 and $169,375, 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 Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) and
continues to account for stock options in accordance with APB Opinion 25. The
foregoing amount of compensation expense for 1997 and 1996 differs by less than
$.01 per share from that which would have been recorded using the Black-Scholes
option valuation method. Accordingly, the pro forma disclosures required by
FAS 123 have been omitted.
F - 19
58
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 13--EARNINGS PER SHARE
Diluted earnings per share for the year ended December 31, 1995 was determined
as follows:
Income Shares Per Share
------- ---------- ----------
Basic earnings per share:
Net income $64,250 $6,500,000 $ 0.01
Effect of diluted securities:
Warrants and options 0 629,966 0.00
------- ---------- ----------
Diluted earnings per share $64,250 $7,129,966 $ 0.01
======= ========== ==========
For the years ended December 31, 1996 and 1997 diluted earnings per share and
basic earnings per share are identical because of the losses incurred during
those years. All options and warrants discussed in Note 12 were omitted from
the computation of diluted earnings (loss) per share because the options and
warrants are antidilutive when net losses are reported.
F - 20
59
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 14--QUARTERLY RESULTS (UNAUDITED)
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ------------- -------------
1997:
Net sales $ 14,051,503 $17,953,416 $ 16,184,302 $ 13,077,718 $ 61,266,939
Net income (loss) ( 493,743) 328,976 ( 16,278) ( 1,904,847) ( 2,085,892)
Basic earnings (loss) per share--see below ( 0.07) 0.05 0.00 ( 0.28) ( 0.31)
1996:
Net sales 13,010,368 19,451,798 17,625,102 12,972,247 63,059,515
Net income (loss) ( 305,167) 700,984 208,278 ( 1,097,515) ( 493,420)
Basic earnings (loss) per share--see below ( 0.05) 0.10 0.03 ( 0.16) ( 0.07)
The fourth quarter of 1997 loss was attributable to a one time increase in the
bad debt reserve of approximately $2 million which related to the bankruptcy
filing of a major customer and recognition of further consolidation in the
automotive aftermarket.
1996 fourth quarter results were adversely affected by lower sales volumes due
to the phase out of the Company's traditional warehouse distribution business,
to make room for growth in the Company's higher margined brake business. The
Company also experienced higher expenses in the fourth quarter primarily due to
the charges related to the acquisitions of assets of two entities in the latter
part of 1996. A one-time pre-tax bad debt reserve charge of $195,000 was also
taken in the fourth quarter to reflect collection risks associated with a
certain customer.
Diluted earnings per share for each of the quarters presented has not been
retroactively computed under FAS 128 (see Note 2), because the effect would be
immaterial.
F - 21
60
[ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors
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 3,
1998, 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, 1997, 1996 and 1995. In our
opinion, these schedules present fairly, in all material respects, the
information required to be set forth therein.
ALTSCHULER, MELVOIN AND GLASSER LLP
/s/ Altschuler, Melvoin and Glasser LLP
- ---------------------------------------
Chicago, Illinois
March 3, 1998
61
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
INDEX TO SCHEDULES
Page
----
Independent Auditors Reports on Schedules............................... S-2
Schedule I - Condensed Financial Information of Registrants............. S-3
Schedule II -
S-1
62
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Balance Sheets (Not Consolidated)
December 31, 1997 and 1996
Assets 1997 1996
---- ----
Cash and Cash Equivalents $ 101 $ 101
Prepaid Expenses and other Assets 130 38,678
Investment in and Advances to Wholly Owned
Subsidiaries 7,069,058 8,817,622
----------- ----------
$ 7,069,289 $8,856,401
=========== ==========
Liabilities and Stockholders' Equity
Liabilities: $ 0 $ 0
----------- ----------
Stockholders' Equity:
Preferred stock (authorized 1,000,000 shares,
$.01 par value, none issued or outstanding) 0 0
Common stock (authorized 15,000,000 shares,
$.01 par value, 6,769,425 and 6,729,425
shares issued and outstanding) 67,694 67,294
Additional paid-in capital 9,180,516 8,740,415
Retained earnings (Deficit) (2,010,054) 75,838
Foreign currency translation adjustments (168,867) (27,146)
----------- ----------
7,069,289 8,856,401
----------- ----------
$ 7,069,289 $8,856,401
=========== ==========
S-2
63
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Statement of Operations and Retained Earnings (Deficit) (Not Consolidated)
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ --------- ---------
Income:
Interest income $ 0 $ 0 $ 36,921
Equity in net income (loss) of
subsidiaries (1,889,247) (309,217) 197,390
------------ --------- ---------
(1,889,247) (309,217) 234,311
------------ --------- ---------
Expenses:
Compensation expense for stock options 158,097 147,947 169,375
Miscellaneous (primarily amortization) 38,548 36,256 686
------------ --------- ---------
196,645 184,203 170,061
------------ --------- ---------
Net Income (Loss) for Period (2,085,892) (493,420) 64,250
Retained Earnings, Beginning of Period 75,838 569,258 505,008
------------ --------- ---------
Retained Earnings, (Deficit) End of
Period $(2,010,054) $ 75,838 $ 569,258
============ ========= =========
S-3
64
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Statement of Cash Flows (Not Consolidated)
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Cash from Operating Activities:
Net income (loss) $(2,085,892) $(493,420) $ 64,250
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Compensation expense for stock
options 158,097 147,947 169,375
Equity in net (income) loss of
subsidiaries 1,889,247 309,217 (197,390)
Amortization 38,548 34,561 0
Decrease in accounts payable
and other current liabilities 0 (51,787)
------------ ------------ ------------
Cash provided by (used in) operating
activities 0 (1,695) (15,552)
------------ ------------ ------------
Cash from Investing Activities:
Advances to subsidiaries (net) 0 (334,190) (2,431,592)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash
Equivalents 0 (335,885) (2,447,144)
Cash and Cash Equivalents, Beginning
of Period 101 335,986 2,783,130
------------- ------------ ------------
Cash and Cash Equivalents, End of Period $ 101 $ 101 $ 335,986
============ ============ ============
S-4
65
SCHEDULE II
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
Valuation and Qualifying Accounts
Column B Column C Column E
Balance at Charged to Balance
Column A Beginning Costs and Column D at End of
Description of Period Expense Writeoffs Period
----------- --------- --------- --------- ----------
1997:
Allowance for doubtful
accounts $ 463,968 $2,805,837 $1,369,350 $1,900,415
========== ========== ========== ==========
1996:
Allowance for doubtful
accounts $ 92,461 $ 472,732 $ 101,225 $ 463,968
========== ========== ========== ==========
1995:
Allowance for doubtful
accounts $ 151,851 $ 188,015 $ 247,405 $ 92,461
========== ========== ========== ==========
1997:
Reserve for inventory
obsolescence $ 219,836 ($2,051) $ 0 $ 217,785
========== ========== ========== ==========
1996:
Reserve for inventory
obsolescence $ 0 $ 219,836 $ 0 $ 219,836
========== ========== ========== ==========
S-5