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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number
0-25198
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3973627
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
11859 South Central Street, Alsip, Illinois 60803
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 293-4050
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Units (One share Common Stock
and one Warrant) Not listed for trading
Common Stock, $0.01 Par Value Nasdaq SmallCap Market
Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market
Securities registered pursuant to Section 12(g) of the Act:
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 [ ]
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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2, of the Act) Yes[ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of June 28, 2002, was approximately
$15,619,803.
The number of shares of Registrant's Common Stock, par value of $0.01
per share, outstanding as of March 17, 2003 was 8,224,949 shares.
TABLE OF CONTENTS
PAGE
----
PART I.................................................................................................. 1
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 15
Item 3. Legal Proceedings......................................................................... 15
Item 4. Submission of Matters to Vote of Security Holders......................................... 15
PART II................................................................................................. 16
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 16
Item 6. Selected Financial Data................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 24
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................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 31
Item 13. Certain Relationships and Related Transactions........................................... 33
Item 14. Controls and Procedures.................................................................. 34
PART IV................................................................................................. 35
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 35
PART I
ITEM 1. BUSINESS (1)
OVERVIEW
Universal Automotive Industries, Inc. is a leading manufacturer and
distributor of automotive aftermarket brake parts, including brake rotors,
drums, disc brake pads, brake shoes and hydraulic parts for the estimated $2.42
billion* automotive brake part aftermarket. About 90% of our revenues come from
the sale of brake parts. The remaining 10% of our revenues come from our
wholesale commodity business in which we buy and sell fast moving automotive
parts such as spark plugs, headlights and motor oils. Typically, the margin in
the commodity business is substantially less than the brake business. We
manufacture over 90% of our friction products, 20% of our brake rotors (measured
in revenues) and purchase for resale the balance of our brake rotors and drums
and all our hydraulic parts. An estimated 75% of our sales are marketed under
our customers' private labels and the balance of our sales are marketed under
our brands including the Ultimate and UBP trademarks.
[CHART]
(1) Some of the statements included in Item 1, Business, and Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, may be considered to be "forward looking statements" since such
statements relate to matters which have not yet occurred. For example, phrases
such as "we anticipate," "believe" or "expect" indicate that it is possible that
the event anticipated, believed or expected may not occur. Should such event not
occur, then the result which we expected also may not occur or occur in a
different manner, which may be more or less favorable to us. We do not undertake
any obligation to publicly release the result of any revisions to these forward
looking statements that may be made to reflect any future events or
circumstances.
Readers should carefully review the items included under the subsection
Risks Affecting Forward Looking Statements and Stock Prices, as they relate to
forward looking statements, as actual results could differ materially from those
projected in the forward looking statement.
*According to Frost and Sullivan 2000 Report.
In December 2002, we relocated our Cuba, Missouri brake rotor
manufacturing facility, to improve our competitive position, to our Alsip,
Illinois facility. Over the last several years, there has been double digit
pricing compression on brake rotors and drums purchased from China. This pricing
compression combined with improvement in China supplied products has reduced
demand for our domestically manufactured brake rotors. We have the flexibility
to supply purchased brake rotors or internally manufactured brake rotors
depending on the customer's preference. We believe the relocation of the brake
rotor facility will enable us to operate this product line profitably at reduced
sales volume. We believe the brake rotors we manufacture in the USA are superior
in quality and value to the same parts supplied through plants located in China.
We believe that our US manufactured brake rotors "add value" to our customer
relationships and provide the Company with a competitive advantage over
competitors who are exclusively marketers of imported brake rotors and drums. We
also believe that we have improved our ability to source product in China
through our recent strategic relationship with Wanxiang America Corporation,
China's leading auto parts supplier to the OEM and aftermarket. See further
detail regarding our relationship with Wanxiang America Corporation under "Line
of Credit and Recent Financings."
1
The trend over the last year has favored growth in the private label
segment as customers choose to support their own brands. We believe there has
been a shift over the last several years, by national buying groups and
retailers, to build their brand equity as opposed to supporting the Big Three
brake manufacturing companies (Dana, Federal-Mogul and Honeywell) brands. This
shift in customer preference supports our business model. Our interests run
parallel to the customer's, since our primary focus is to support the growth of
our customers' private label. Recently, Federal-Mogul announced their intention
to acquire Honeywell's Bendix Friction Material group, thus, potentially
reducing the number of major brands brake part suppliers to two.
We have positioned ourselves as one of the only viable alternatives to
the Big Three brake companies. Our other competitors specialize primarily in one
brake category, which makes it more difficult for a customer to manage (one
supplier for each category) from a marketing, supply and inventory management
function. The success of our business model can be demonstrated through the
expansion of approved product lines with existing national buying groups such as
Parts Plus, National Pronto Association, IWDA and Independent Auto Parts
Association, in which we are an approved supplier for two or more brake
categories.
INDUSTRY BACKGROUND
BRAKING SYSTEMS - There are two primary types of braking systems for
cars and light trucks. The first is a drum brake system, in which the braking
action is created by a brake shoe being forced outward against the inside of a
rotating drum. The second, and newer, system is a disc braking system, in which
the braking action is created by two brake pads squeezing a rotor. Each vehicle
has either one drum or one rotor at each wheel. In either case, the braking is
initiated by the driver pressing a brake pedal, which causes a master cylinder
to compress fluid in the vehicle's braking system, which, in turn, causes the
fluid pressure to pass through a brake line to a hydraulic system which causes
the action of the brake shoes in a drum system or brake pads in a disc system.
DISTRIBUTION IN THE AFTERMARKET- According to the Motor & Equipment
Manufacturing Association (MEMA) aftermarket product sales of all product groups
in the United States reached $136.6 billion in 2000. MEMA believes aftermarket
sales will eventually reach $155.1 billion in 2003. The ultimate consumers for
automotive aftermarket products can be divided into two primary categories. The
first category consists of customers who choose to have their cars repaired at a
commercial service establishment, such as a service station, repair shop or car
dealer, and is known as the "installer segment." Customers in the second
category, the "do-it-yourself" segment, are those customers who choose to make
the repairs themselves.
Traditionally, many car parts have been distributed though a system
under which products are sold from manufacturers to warehouse distributors, who
then sell to "jobbers," who, in turn, sell to installers and consumers. We
believe that in recent years there has been an industry shift away from the
traditional channels of distribution toward alternative distribution channels,
including manufacturers who sell parts to mass market retailers who serve
do-it-yourself customers, and manufacturers who sell parts to warehouse
distributors, who sell directly to installers that provide repair and
installation services. We believe the traditional warehouse jobber distribution
system has suffered, and may continue to suffer, some erosion of total market
share as a result of the expansion of these alternative distribution channels,
particularly as a result of the increased presence in the marketplace of the
mass-market retailer. (e.g. Autozone, Advance Auto Parts). However, we believe
that these shifts in distribution channels will benefit us, as our principal
brake parts customers include these mass market retailers.
Frost & Sullivan estimates that sales of brake parts in the United
States' aftermarket for passenger cars, sports utility vehicles and light trucks
totaled $2.42 billion in sales in 2001, growing an estimated 4% over 2000.
We believe the demand for aftermarket brake parts, particularly value
line parts, will continue to grow because of the following factors:
- An increasing number of vehicles on the road. New car sales
were strong from 1998 through 2002; we expect vehicles sold
during this time period to require replacement parts in 2003
to 2005.
- An aging vehicle population, which creates the need for more
replacement parts. In 2001, the average age of a vehicle in
the United States was 9.6 years old.
- Increased production of front wheel drive vehicles, which
create more wear on brake parts than rear wheel drive
vehicles. Over 70% of all new vehicles are designed with front
wheel drive.
- A trend toward the use of affordable replacement brake rotors
rather than resurfacing existing rotors. Historically, due to
the high cost of new rotors, consumers and installers
generally chose to resurface brake rotors rather than purchase
replacement rotors. However, due to the availability of
lower-cost replacement rotors, in recent years, consumers and
installers are increasingly choosing to purchase replacement
rotors.
2
- Modern design innovations, including the automotive industry's
shift to the production of an increased number of
lighter-weight rotors and metallic brake pads. The newer
metallic brake pads are abrasive and wear rotor surfaces much
faster than the non-metallic pads used in the past. Lighter
weight rotors are less costly than heavier rotors, and, when
the rotors have worn down, it is generally more cost effective
to discard rather than refurbish them.
We believe the private label market category will continue to grow, as
customers are looking for the best value for their dollar, and often will not
pay extra for premium-priced products. In response to these consumer
preferences, mass-market retailers have grown in popularity and increasingly
seek to sell less expensive private label parts. In addition, we believe
distributors will increase their purchases of private label parts as a means of
improving their profit margins.
OUR GROWTH STRATEGY
Our strategy is to capitalize on the increasing demand for brake parts
by:
- Focus on marketing additional brake categories to existing
customers. (Less than 50% of our existing customers purchase
all three brake parts categories from us.)
- Leading the market by "First to Enter" late model
applications.
- Sustaining promotion of ceramic disc brake pads.
- Expanding sales to automobile manufacturers for the
aftermarket and service business; and
- Considering acquisitions of other specialty brake parts
distributors and manufacturers.
PRODUCTS
The brake parts we sell can be divided into three main categories:
drums and rotors; friction parts; and hydraulic parts. The friction category of
parts consists of brake shoes for drum systems and brake pads. Cylinders and
brake hoses are examples of hydraulic parts. We manufacture some of these parts
and act as a distributor for others. We market approximately 25% of our products
under our trademarks, Universal Brake Parts, or UBP, and to a lesser extent,
Ultimate, and the remainder under our customers' private labels. We manufacture
disc brake rotors in our Alsip, Illinois facility. In December 2002, we
relocated our Cuba, Missouri brake rotor manufacturing facility, to improve our
competitive position, to our Alsip, Illinois facility. We formulate and
manufacture disc brake pads at our North American Friction plant, located in
Toronto, Canada. Since November 2002, our Toronto facility has expanded its
product offering to include ceramic disc pads. Ceramic disc pads are a
relatively new product segment to the aftermarket without a clearly defined
market leader. Increased usage of ceramic disc brake pads at the OEM level will
continue to drive increased demand for ceramic disc pads in the aftermarket. At
our plant in Walkerton, Virginia, we manufacture brake pads, brake shoes and
drum brake lining. The hydraulic parts we sell are all purchased from suppliers.
We supply value line brake parts (i.e., parts sold at prices below
those of certain leading national brand name parts), to mass-market retailers,
traditional warehouse distributors and specialty undercar distributors in North
America. Many of our competitors specialize in only one category, such as
friction parts or drums and rotors. By offering a full line of products in
several categories, we believe we have an advantage over those competitors
offering products in fewer categories, in light of the industry trend toward
consolidation of the number of suppliers of products.
COMMODITY OPERATIONS
We conduct a wholesale product operation from our headquarters facility
in Alsip, Illinois, purchasing automotive items such as spark plugs, motor oil
and freon, in large volume, at below market prices, and reselling these products
at slightly higher prices. We make large-volume purchases of products on the
open market, generally buying from domestic and foreign manufacturers and other
warehouse distributors, and reselling these products to other warehouse
distributors, mass market retailers and jobbers. These operations, while
historically profitable, result in gross margins that are significantly lower
than gross margins from our other operations. For the years ended December 31,
2000, 2001 and 2002, excluding sales from our former Hungarian foundry, net
sales from our wholesale product operations accounted for approximately 7%, 8%
and 10%, respectively, of our total net sales, and 4%, 5% and 8%, respectively,
of our total gross profits.
3
SALES AND MARKETING
We organize our marketing operations around two principal customer
groups: traditional aftermarket warehouse distributors and mass market
retailers. We employ six full time sales personnel. Sales responsibility is
split among the sales personnel between the traditional warehouse distributors
and mass market retailers- national accounts. Our Senior Vice President of Sales
manages our independent sales representative network and other marketing
efforts. The majority of our products, approximately 75% are sold under our
customers' private brand labels. Most aftermarket distributors are members of
national buying/marketing groups, which have developed their own private brand
labels.
TRADITIONAL AFTERMARKET DISTRIBUTORS: This group consists primarily of
independent warehouse distributors who market to independently owned auto parts
stores and company owned stores. Typically, the traditional aftermarket
distributor belongs to a national buying group. Generally, these groups promote
their own private label in addition to national brands. We supply one or more
brake product lines to the following marketing groups under the groups' private
label: National Pronto Association; IAPA; APA and Aftermarket Auto Parts
Alliance. The RPM Group purchases our "UBP" and "Ultimate" brands.
MASS MARKET RETAILERS - We also supply national retailers such as
Advance Auto Parts, Discount Auto Parts and O'Reilly's under their private brand
labels. Other retailers such as Pep Boys and Murray's Discount Auto Parts
purchase brake parts from us under our "UBP" and "Ultimate" brand.
INDEPENDENT SALES REPRESENTATIVES - We believe we have retained some of
the best independent sales representatives across the country. These
representatives assist us with direct sales efforts, customer field work, trade
shows and other marketing and sales activities. These independent sales
representatives are compensated on a commission basis. Agreements with our
independent sales representatives may be terminated at any time by either party,
upon notice.
DISTRIBUTON
We seek to provide rapid delivery of a wide variety of brake parts to
our customers. We operate a 263,000 square foot distribution center at our
headquarters facility located in Alsip, Illinois. We also have a 28,200 square
foot distribution facility in Southern California. We generally are able to
fulfill customer orders quickly, as the industry demands, and, therefore,
typically do not have a large order backlog. We generally deliver orders to our
brake parts customers within four to five days from the time the order is
placed. In addition, we seek to maintain high fill rates for orders, and,
accordingly, do not generally have a large number of back orders. Customers may
place their stock orders by telephone, electronically or by facsimile.
Deliveries are made from all warehouses, almost exclusively by common carrier.
MANUFACTURING
We operate two friction plants, a 79,300 square foot disc pad plant
located in Brampton, Ontario, Canada and a 77,000 square foot brake drum lining
and brake shoe remanufacturing plant in Walkerton, Virginia. Our friction
business has experienced substantial growth, and unlike the brake rotor and drum
product group, there is no material competition from offshore friction
suppliers. We believe the barrier to entry in the friction category is
significant due to the following reasons: (i) building brand acceptance is
difficult due to safety related concerns; (ii) capital requirements are
intensive; (iii) friction formulations are usually patented or highly
classified; and (iv) the business is an art as much as a science and requires
highly experienced management. Today we have approximately 150,000 square feet
dedicated to friction manufacturing.
In 2001, we relocated our rotor machining facility from Laredo, Texas
to Cuba, Missouri, which was closer to our source of supply of castings and our
primary distribution center in Alsip, Illinois, to reduce our costs. The Cuba
facility had a capacity to machine approximately 750,000 rotors on a two-shift
basis. During the fourth quarter of 2002, the Cuba facility was closed and the
equipment and related production relocated into our Alsip, Illinois facility.
This was done to further reduce costs and to lower the break-even profit level
for this operation. At present, we have a capacity to machine approximately
300,000 rotors annually on a one-shift basis.
In 1996, we acquired North American Friction, which at the time
occupied a 17,500 square foot facility near Toronto, Ontario. Today, as a result
of significant growth in the sales of friction products since we entered that
market segment, North American Friction occupies a 79,200 square foot facility
in suburban Toronto, Ontario. We now offer a full line of friction grades in
both riveted and integrally-molded disc brake pads. North American Friction was
awarded ISO 9001 certification in July 1999.
We acquired Total Brake Industries' assets in November 1999 and operate
these assets from a 77,000 square foot leased facility in Walkerton, Virginia.
This facility remanufactures brake shoe lining and remanufactures brake shoes.
In addition, we sell drum brake shoe lining to third party customers.
4
SUPPLIERS AND RAW MATERIALS
Suppliers
We centralize product selection and purchasing functions for our
warehouse distribution business at our headquarters located in Alsip, Illinois.
Most of the drums, rotors and hydraulic parts we sell are purchased from a
variety of suppliers. We manufacture the vast majority of the friction parts
that we sell. Currently, of the drums, rotors and hydraulic parts we purchase,
approximately 70% are manufactured in the Peoples Republic of China and the
remainder in Taiwan, Italy, Canada and the United States.
In connection with a transaction under which we issued 201,438 shares
of Series A Preferred Stock to Venture Equities Management, Inc., an affiliate
of Wanxiang America Corporation and Wanxiang Group Corporation, one of the
leading manufacturers of automotive parts in the Peoples Republic of China, we
entered into a supply agreement with Wanxiang America Corporation. Under the
supply agreement, we agreed to make annual purchases of parts from Wanxiang
America Corporation totaling $5,000,000, provided the prices of the products we
purchase from Wanxiang America are substantially comparable to the prices
charged by other suppliers in the Peoples Republic of China for similar
products. In the event we do not purchase $5,000,000 in products from Wanxiang
America in a year, we are obligated under the agreement to pay Wanxiang America
20% of the difference between $5,000,000 and the amount we have paid to Wanxiang
America for products during the year. The agreement provides Wanxiang America
with a right of refusal with respect to products we seek to purchase from other
suppliers located in the Peoples Republic of China. The supply agreement has an
indefinite term, but can be terminated by Wanxiang America at any time and by us
if Wanxiang America materially fails to perform its obligations under the
agreement, or if the number of shares of our common stock underlying the shares
of Series A Preferred Stock owned by Venture Equities Management falls below a
specified level. During 2002, we purchased products with an aggregate value of
$5,400,000 from Wanxiang America.
Some of our suppliers may provide a majority or all of our requirements
for a particular product or product subcategory. However, we believe that the
loss of any one or more of our suppliers would not have a material adverse
effect on us and that alternative sources of supply are readily available at
comparable prices in all product categories. We believe that our relationships
with our suppliers are good.
The International Trade Commission has ruled that rotor sales from
China materially injured U.S. rotor manufacturers. As a result of this
determination, the U.S. Customs Service has imposed anti-dumping duties on some
Chinese suppliers. These duties can be reviewed annually if requested by a
Chinese manufacturer or by a U.S. brake rotor manufacturer and depending on the
results of the review, the tariff may be decreased or increased. The dumping
duties are plant specific and are retroactive to the importer of record.
However, we are not the importer of record for this purpose and, therefore, to
date, have not been affected by dumping duties.
Raw Materials
The main components used in our brake rotor manufacturing operations
are iron castings. We primarily purchase castings from Waupaca Foundry, Inc. The
prices of castings fluctuate based on the scrap metal and energy costs. In the
most recent three-year period, these prices have generally stayed within a range
of 10% below to 10% above the price at the beginning of the period. In addition
to Waupaca Foundry, we purchase castings from a foundry in Canada. Although we
believe that we have developed good relationships with the foundries that supply
our iron castings, any of these foundries could discontinue producing these
castings for us at any time.
We believe that the number of foundries equipped to produce iron
castings such as the ones used by us in our manufacturing operations is limited.
The loss of any major foundry as a supplier of iron castings and our inability
to identify new foundries for the production of iron castings in a timely manner
could have a material adverse effect on our business. In addition, we cannot
provide assurances that the foundries currently producing our iron castings will
be able to accommodate the anticipated expansion of our manufacturing
capabilities. We are continuously seeking to locate additional foundries that
would be suitable for the production of our iron castings.
5
CORPORATE HISTORY
Our wholly-owned subsidiary, Universal Automotive, Inc., an Illinois
corporation, began operations in 1981 as a warehouse distributor of a wide
variety of automotive aftermarket replacement parts servicing the Chicago area
market. We were incorporated in Delaware in January 1994 to act as the holding
company for several subsidiaries. In the early 1990's, we started shifting our
focus to the brake parts segment of the business, and in 1996, we elected to
discontinue our non-brake parts warehouse distributor operations due to the
lower margins and declining growth prospects of this segment of the business. We
currently conduct our business through the following subsidiaries:
- Universal Automotive, Inc.;
- Universal Brake Parts, Inc., an Ontario, Canada corporation;
and
- Universal Automotive of Virginia, Inc., a Virginia
corporation.
We have discontinued the operations of two other subsidiaries as set
forth in "Discontinued Operations" below.
Our principal executive offices are located at 11859 South Central,
Alsip, IL 60803, and our telephone number is (708) 293-4050.
DISCONTINUED OPERATIONS
We have discontinued operations in two areas in order to focus on our
core business of manufacturing and distributing brake parts. The first area in
which we have discontinued operations is that of our business-to-business online
auto parts exchange. This business was operated through a subsidiary, which we
formed in December 1999, known as eParts Exchange, Inc., or "EPX." The EPX
website was activated in August 2000; however, in January 2001 we decided to
terminate the operations of the online exchange.
The second area in which we have discontinued operations involves our
Hungarian foundry. UBP Hungary, Inc., our wholly-owned subsidiary, acquired the
assets of Csepel Iron Foundry Works, a producer of iron and iron casting
products located in Budapest Hungary, in October 1995. This business was
operated through UBP Csepel, Iron Foundry, Kft., a Hungarian corporation and
second-tier subsidiary of ours. We decided to exit the foundry business in 1999
due to continuing losses at the foundry and our belief that our stable
relationship with Waupaca Foundry eliminated the need to develop an in-house
capacity for manufacturing rotor castings. In our 1999 financial statements, we
wrote down the carrying value of the foundry property to its estimated net
realizable value. We also provided a reserve for costs of disposal and losses of
the foundry before its disposal or liquidation.
UBP Hungary, Inc., sold its ownership interest in UBP Csepel, Iron
Foundry, Kft. to Euro-Industrial Limited, LLC, as of December 31, 2001, for
$100,000, paid with a promissory note. Also in connection with the sale, several
instruments evidencing debt owed by UBP Csepel to UBP Hungary, Inc. were
replaced by a single promissory note in the amount of $728,000. Under the terms
of the promissory note for the purchase price, the $100,000 was to be paid in
quarterly installments beginning in April 2002 and ending in January 2003. This
note does not bear interest unless there is a default under the note. As of
March 15, 2003, this note was in default, as no payments have been received. The
$728,000 promissory note is to be repaid in monthly installments beginning in
November 2003 and ending in October 2006. This promissory note bears interest at
the rate of 6.5% per year. As of December 31, 2002, we have fully reserved for
amounts due under these notes. Sales of UBP Hungary, Inc. generated by its
subsidiary UBP Csepel, Iron Foundry, Kft. were $5,363,500 and $5,394,700 for the
years ending December 31, 2001 and 2000, respectively.
The amount of the gain on the sale is subject to substantial
uncertainty, because the proposed payments will be made over time and the
proposed purchaser is not well capitalized. Accordingly, we have fully reserved
the value of these notes.
COMPETITION
Our markets are highly competitive. We compete primarily on the basis
of service, quality, price, inventory availability, delivery time and
responsiveness. We offer a full line of brake parts with the exception of brake
calipers. We compete directly with other companies that offer full or multiple
product offerings as well as single category value line distributors. We believe
our complete product offering gives us an advantage over single line competitors
and, thus, provides an attractive alternative to the full line "Big Three"
competitors.
6
According to Frost & Sullivan, a leading industry analyst, the big
three brake companies, Dana Corporation (Raybestos), Federal-Mogul (Wagner Brake
Products) and Honeywell (Bendix) comprised an estimated 70% of the brake parts
aftermarket in 1999. We believe the high concentration of business among the
"Big Three" favors us for the following reasons:
1. Federal-Mogul accounts for the second largest share of the
aftermarket brake business, a 20% market share, and voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code in October
2001.
2. Honeywell, with a 10% market share, has publicly stated its desire
to divest itself of the original equipment manufacturer and aftermarket brake
business.
3. Dana Corporation's Raybestos Product line, which accounts for the
largest share of the aftermarket brake business, a 40% market share, is
estimated to be less than 10% of the company's aggregate business and,
therefore, must compete with other divisions for resources.
In addition to the above mentioned full line brake suppliers, TRW,
under its Auto Specialty brand, services an estimated $50 million in aftermarket
brake business. TRW has publicly discussed a spin-off or sale of its automotive
divisions.
It appears that among the leading full line aftermarket brake
suppliers, this is a time of uncertainty.
We also compete with single category value line friction suppliers such
as Morse Automotive and Satisfied Brake. Both companies are highly respected
competitors that each account for 10% of the friction aftermarket according to
Frost & Sullivan 2000 Report. We believe our full line offering offers an
advantage for many customers who utilize these single line competitors because
we believe that our full product line offering effectively provides products of
comparable quality, price and value.
INTELLECTUAL PROPERTY
We believe that our labels, UBP and Ultimate, are important to our
marketing efforts. The UBP and Ultimate Braking Power trademarks have been
registered with the United States Patent and Trademark Office and Canadian
Trademarks Office. We cannot provide assurance that prior registrations or uses
of these trademarks, or confusingly similar marks, do not exist in the United
States. If prior registrations or uses exist, we might be precluded from using
these trademarks in the United States. We cannot provide assurance that our
trademarks would be upheld if challenged or that we would not be prevented from
using the trademarks, either of which could have a material adverse effect on
us.
The formulations for our integrally molded brake pads, pucks and drum
brake lining are trade secrets, which we maintain as confidential information.
We believe these trade secrets to be valuable.
We could be subject to claims by others that we infringe upon their
intellectual property rights. Any litigation regarding our proprietary rights
could be costly and divert our management's attention from our operations,
result in the loss of certain of our proprietary rights or the payment of
substantial monetary damages, require us to seek licenses from third parties or
prevent us from selling our products.
EMPLOYEES
As of December 31, 2002, we had 366 full-time employees, in the
following areas:
- 186 in manufacturing;
- 142 in distribution;
- 6 in sales and marketing; and
- 32 in administration.
7
INSURANCE
We maintain insurance in amounts and with coverages and deductibles
that our management believes are adequate. The primary risks that we insure
against are professional liability, workers' compensation, personal injury,
bodily injury, property damage, business interruption and fidelity losses. We
cannot provide assurance that our insurance will adequately protect us from
potential losses and liabilities. We maintain key man term life insurance
policies covering the life of Mr. Scott in the amount of $6,000,000 and Mr. Tzur
in the amount of $1,000,000. The proceeds of these policies would be payable to
us. We paid premiums of approximately $10,000 for these key man life insurance
policies in 2002.
LINE OF CREDIT AND RECENT FINANCINGS
Line of Credit. In September 1999, we entered into a credit agreement
with LaSalle Bank National Association and one of its subsidiaries, LaSalle
Business Credit, LLC, in connection with the renewal and restructuring of a line
of credit and term loan with the bank. The original amount of the term loan,
which bears interest at the rate of prime plus .75% per year, was $3,779,194.
Our borrowing limit under our line of credit is based on a percentage of the
value of our accounts receivable and inventory, up to a current maximum of
$26,000,000. The line of credit currently bears interest at the rate of prime
plus 1.50%, subject to an option on our part, if we are not in default under the
credit agreement, to convert the interest rate to LIBOR plus 2.5%. Both the term
loan and the line of credit must be repaid by May 1, 2004. The term loan and the
line of credit are both secured by a first lien on substantially all of our
assets. As of December 31, 2002, we owed $16,949,821 under the line of credit
and $206,826 under the term loan.
The credit agreement with LaSalle Bank contains limitations on our
payment of dividends and making of capital expenditures, and requires us to
maintain compliance with financial covenants relating to, among others, defined
tangible net worth, earnings before interest taxes, depreciation and
amortization, or "EBITDA," and our fixed charge coverage ratio. At December 31,
2002, we were in compliance with these financial covenants. The entire credit
facility is secured by a first lien on substantially all of our assets. At
December 31, 2002, approximately $937,000 was available for borrowing under the
revolving credit line.
Issuance of Series A Preferred Stock to Venture Equities Management,
Inc. On August 29, 2001, we issued 201,438 shares of Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," an affiliate of Wanxiang America
Corporation, for consideration of $2,700,000, net of issuance costs of $100,000.
We used $1,000,000 of the proceeds of the Series A Preferred Stock to make the
payment to FINOVA Mezzanine Capital Inc. under the restructuring of a debenture
discussed below, and reserved an additional $500,000 to make the remaining
principal payments under the restructuring agreement. The balance of the
proceeds was used to reduce the amount outstanding on our revolving loan
indebtedness.
Wanxiang America is based in Elgin, Illinois, and is the United States
home office of Wanxiang Group Companies, a leading supplier of auto parts to the
automotive aftermarket and original equipment manufacturers based in the Peoples
Republic of China. The shares of Series A Preferred Stock are currently
convertible into a total of 2,014,380 shares of our common stock. In connection
with the purchase agreement for the Series A Preferred Stock, we also issued to
Wanxiang three warrants to purchase a total of 4,100,000 shares of our common
stock. However, one of the warrants, to purchase 2,500,000 shares of our common
stock, is only exercisable upon the occurrence of events of default specified in
the warrant.
The purchase agreement relating to the Series A Preferred Stock and
related documents contain other agreements among the parties, including:
- a registration rights agreement between us and VEMI granting
VEMI the right to register the shares of our common stock into
which the Series A Shares are convertible;
- a stockholders agreement among us, VEMI and three of our
founders, Arvin Scott, Yehuda Tzur and Sami Israel and
granting to VEMI certain rights of first refusal, a contingent
proxy as to some of the their shares and a voting agreement to
ensure two of nine board seats to VEMI's designees; and
- a supply agreement between us and Wanxiang America requiring
us to purchase a minimum quantity of product from Wanxiang
America each year and giving Wanxiang America a right of first
refusal to supply Chinese-manufactured parts on competitive
terms and conditions.
Restructuring of Subordinated Debenture held by FINOVA Mezzanine
Capital Inc. On July 14, 1997, we sold a $4,500,000 subordinated debenture to
FINOVA Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for
payments of interest at 12.25% per annum through maturity on July 14, 2002.
Through August 14, 2001, we had issued FINOVA warrants to purchase 1,575,000
shares of our common stock at exercise prices ranging from $0.83 to $1.58, based
on 80% of the average closing bid price of our common stock for the 20 days
preceding the respective issuance dates. The warrants were exercisable at any
time through the sixth anniversary of the debenture issue date. During 2000,
FINOVA elected to exercise one of its warrants to purchase 450,000
8
shares of our common stock at an exercise price of $0.83 per share, using a
"cashless" exercise provision whereby FINOVA received a net of 279,260 shares of
common stock after surrendering 170,743 shares, which had a fair market value
equal to the aggregate exercise price. We received no cash proceeds from this
transaction when such shares were issued.
On October 31, 2001, we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance to FINOVA of $2,000,000 of Series B Preferred Stock
($0.01 par value); and (iv) the amendment of the debenture to a reduced
principal balance of $1,500,000. The amendment to the debenture also reduced the
interest rate from 12.25% to 7.0% and requires us to reduce the outstanding
balance by making five $100,000 payments every 45 days beginning December 15,
2001, (for which payments were made) with a final payment of $1,000,000 due July
11, 2005. The surrendered warrants had cashless exercise features which, based
on the closing price of our common stock of $1.89 per share on the date of the
restructuring, would have allowed FINOVA to receive 322,619 shares of common
stock. This transaction resulted in an extraordinary gain of $829,714 (inclusive
of an accrual of all remaining interest to be paid of approximately $272,000)
for the year ended December 31, 2001. The Series B Preferred Stock has no fixed
dividend, entitles the holder to a liquidation preference, is redeemable at any
time at our option and is convertible into 1,000,000 shares of common stock for
which we provided FINOVA with registration rights.
RISK FACTORS
In evaluating us and our business, you should carefully consider the
following risk factors. This report contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed elsewhere in this report. The order in which the following risks
are presented is not intended to represent the magnitude of the risks described.
WE HAVE NOT EARNED PROFITS ON A CONSISTENT BASIS AND CANNOT ASSURE YOU THAT WE
WILL CONTINUE TO BE PROFITABLE.
From 1996 through 2002, we lost a total of approximately $5,350,000,
excluding losses from our Hungarian foundry and eParts eXchange operations,
which were sold as of the end of 2001. However, for the year ended December 31,
2002 we made a profit of approximately $491,000. We have a plan for continuing
profitability which involves improving our balance sheet, gaining market share
in the market for friction brake products, enhancing the efficiency of our
manufacturing operations, improving brand awareness for our products and
developing new, higher-margin friction products. See "Business -- Our Strategy."
However, we cannot assure you that this plan will succeed and, if it does not,
we may not be able to sustain profitability.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD REDUCE OUR ABILITY TO EXPAND
OUR BUSINESS AND LIMIT OUR FINANCIAL FLEXIBILITY.
We have now, and will continue to have, a significant amount of debt.
As of December 31, 2002, we had approximately $18.6 million in debt and
stockholders' equity of approximately $4.7 million. Our debt-to-equity ratio is,
therefore, approximately four times. The amount of our debt could have important
consequences to you. For example, it could:
- increase our vulnerability to general adverse economic and
industry conditions;
- require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing the
availability of our cash flow to fund capital expenditures,
product development efforts and other general corporate
requirements;
- limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
- place us at a competitive disadvantage compared to those of
our competitors who have less debt;
- limit our ability to pay dividends;
- limit, along with the financial and other restrictive
covenants relating to our debt, among other things, our
ability to borrow additional funds; and
- make it more difficult for us to complete acquisitions.
9
IF WE ARE UNABLE TO RENEW OUR LINE OF CREDIT OR IF INTEREST RATES SHOULD RISE
SIGNIFICANTLY, THIS COULD HAVE A SIGNIFICANT NEGATIVE EFFECT ON OUR FINANCIAL
CONDITION.
We have a line of credit under a credit agreement we entered into with
LaSalle Bank National Association and LaSalle Business Credit. As of December
31, 2002, we owed $16,949,821 under the line of credit. We depend significantly
on the line of credit to fund our purchases of inventory, payroll, freight
charges, commission expenses and other expenses. The line of credit is scheduled
to expire on May 1, 2004. We may not be able to renew this line of credit, or
obtain another line of credit, on similar terms, if at all. If we cannot renew
this line of credit or obtain a replacement line of credit, this will
significantly impair our ability to fund our operations. If we are able to renew
this line of credit or obtain a replacement line of credit only on less
favorable terms, the increased interest expense or other costs of the new line
of credit will make it more difficult for us to achieve profitability.
Additionally, our line of credit contains several covenants, which are tied to
our operations and certain financial ratios. Should we breach any of these
covenants, there is a potential that the lender will seek to terminate the line
of credit.
OUR ABILITY TO GROW AND IMPROVE OUR FINANCIAL PERFORMANCE DEPENDS ON FACTORS
SUCH AS OUR ABILITY TO GAIN ADDITIONAL MARKET SHARE, EXPANSION OF OUR
MANUFACTURING CAPABILITIES, POSSIBLE ACQUISITIONS OF OTHER MANUFACTURERS OR
DISTRIBUTORS AND INCREASING SALES TO EXISTING CUSTOMERS.
Our ability to grow and improve our financial performance will depend in part on
the following factors:
- our ability to gain additional market share for friction brake
products;
- the purchase of additional manufacturing machinery and brake
rotor molds to increase the different types of brake rotors we
manufacture;
- the possible acquisition of other brake parts manufacturers or
distributors on favorable terms; and
- our ability to increase sales to current customers and
maintain or increase our profit margins with them.
While we regularly evaluate and discuss possible acquisitions, we have
not entered into any commitment, agreement or understanding with any potential
acquisition candidates, and we cannot assure you that we will be successful in
locating suitable acquisition candidates or that any additional acquisitions
will be completed in the future. See Item 1, "Business -- Our Strategy." In
addition, we cannot provide any assurance that any operations that we may
acquire can be effectively and profitably integrated into our business, or that
any future expansion of our operations or acquisitions will not have a negative
effect on our operating results, particularly during the periods immediately
following any expansion or acquisition.
THE TRADING PRICE OF OUR COMMON STOCK HAS DROPPED BELOW $1.00 PER SHARE AND
TRADING IN OUR COMMON STOCK ON THE NASDAQ SMALLCAP MARKET MAY BE TERMINATED
On January 21, 2003, Nasdaq notified us that our stock price had
dropped below $1.00 per share and that if the trading price did not increase to
over $1.00 per share for a minimum of ten consecutive trading days by July 21,
2003, Nasdaq would initiate proceedings to cause our common stock to be delisted
from trading on the Nasdaq SmallCap Market. In such an event, our shares could
only be traded on the over-the counter bulletin board system. This method of
trading could significantly impair our ability to raise new capital and
adversely impede future trading of our stock.
In the event that our common stock were delisted from the Nasdaq
SmallCap Market due to low stock price, we likely would become subject to
special rules, called penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell our common stock. The rules require,
among other things, the delivery, prior to the transaction, of a disclosure
schedule required by the Securities and Exchange Commission relating to the
market for penny stocks. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Monthly statements must also be sent disclosing
recent price information.
In the event that our common stock were characterized as a penny stock,
our market liquidity could be severely affected. The regulations relating to
penny stocks could limit the ability of broker-dealers to sell our common stock
and the ability of owners of our common stock to sell shares in the secondary
market.
10
OUR ABILITY TO EXPAND OUR BUSINESS DEPENDS ON OUR OBTAINING ADDITIONAL
FINANCING, AND THERE IS NO GUARANTEE WE WILL BE ABLE TO OBTAIN THIS FINANCING.
We will be required to seek additional financing to fund any expansion
we undertake through acquisitions or the upgrade of existing facilities. We have
no current commitments or arrangements for additional financing and we cannot
assure you that additional financing will be available on acceptable terms, or
at all. We may also issue common stock or other securities in connection with
future acquisitions, resulting in additional dilution to existing stockholders.
THE AUTOMOTIVE INDUSTRY IS CYCLICAL, AND A DOWNTURN IN THE INDUSTRY COULD HAVE A
SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS.
Our business is dependent upon sales of the automotive industry, which
creates the total number of vehicles available for repair. This industry is
cyclical and has historically experienced periodic downturns. These downturns
are difficult to predict and in the past have not had an immediate impact on the
aftermarket. The primary market for replacement parts is vehicles that have been
on the road for at least five years. Although we believe that downturns in the
industry generally benefit us because they result in longer holding periods for
cars and further wear and tear on brakes, a protracted downturn in the
automotive industry could have a negative effect on the performance of the
aftermarket parts industry, in general, and our performance, in particular. Our
future performance may be harmed by automotive industry downturns.
OUR BUSINESS WILL SUFFER IF WE CANNOT SUCCESSFULLY COMPETE WITH OTHER COMPANIES
IN OUR INDUSTRY, MANY OF WHOM HAVE FAR GREATER RESOURCES THAN US.
Our markets are highly competitive. As a brake parts manufacturer and
distributor, we compete directly with other brake parts manufacturers and
distributors, including: Aimco and Raybestos Brake Products, which are divisions
of Dana Corporation; Wagner Brake Products, a division of Federal Mogul; and
Bendix, a division of Honeywell. We also compete with numerous value-line
distributors specializing in one or more specific brake categories. Many of our
competitors are larger and have greater capital, management and other resources
than we have, and we cannot assure you that we will continue to compete
successfully with these businesses.
OUR SUCCESS DEPENDS ON THE CONTINUED SERVICES OF KEY PERSONNEL.
Our continued success will depend to a significant degree upon the
efforts and abilities of our senior management, particularly Yehuda Tzur, our
Chairman of the Board, and Arvin Scott, our President and Chief Executive
Officer. If we were to lose the services of Mr. Tzur or Mr. Scott, this could
have a material adverse effect on us. We have employment agreements with Mr.
Tzur and Mr. Scott.
OUR SUPPLIES OF RAW MATERIALS AND FINISHED GOODS COULD BE DISRUPTED FOR A
VARIETY OF REASONS, AND ANY DISRUPTION WOULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
The primary components used in our brake rotor manufacturing operations
are raw iron castings. Most of the finished rotor castings are purchased from
China and most of our raw iron castings are produced by, and purchased from, one
foundry located in Wisconsin. We duplicate raw iron casting molds used for the
production of our better-selling brake rotors, and place these molds primarily
at this foundry. Although we believe that we have developed a good relationship
with this foundry, it could discontinue producing these castings for us at any
time. The number of foundries equipped to produce raw iron castings such as the
one used by us in our manufacturing operations is limited. Our inability to
identify new foundries for the production of raw iron castings in a timely
manner could have a substantial negative effect on our business.
THE IMPOSITION OF ANTI-DUMPING DUTIES ON PRODUCTS WE IMPORT FROM CHINA COULD
SUBSTANTIALLY INCREASE OUR COSTS AND HAMPER OUR EFFORTS TO ACHIEVE
PROFITABILITY.
On March 7, 1996, a petition was filed before the United States
Department of Commerce and International Trade Commission seeking the imposition
of "anti-dumping" duties on some brake drums and rotors imported from the
People's Republic of China. The International Trade Commission later ruled that
rotor sales from China materially injured United States manufacturers of rotors.
As a result of the decision by the International Trade Commission, the United
States Customs Service has imposed anti-dumping duties on several Chinese
suppliers. See Item 1, "Business -- Suppliers and Raw Materials." These duties
are specific to particular plants at which rotors are manufactured, and, to
date, none of the plants from which we purchase rotors has been subject to a
duty. However, if any of the plants from which we purchase rotors become subject
to duties, this could increase our costs of purchasing these rotors and make it
more difficult for us to achieve profitability.
11
WE ARE OBLIGATED TO PURCHASE A SUBSTANTIAL PORTION OF OUR SUPPLIES FROM WANXIANG
AMERICA CORPORATION, WHICH COULD LIMIT OUR ABILITY TO NEGOTIATE FAVORABLE TERMS
WITH OTHER SUPPLIERS.
In connection with the issuance of our Series A Preferred Stock, we
entered into a supply agreement with Wanxiang America Corporation, an affiliate
of the purchaser of the Series A Preferred Stock, which obligates us, with
certain exceptions, to purchase at least $5,000,000 worth of products each year
from Wanxiang America, provided it is able to supply the products on
substantially competitive terms. See Item 1, "Business -- Suppliers and Raw
Materials." Our obligations under this contract could have the effect of
limiting our ability to negotiate favorable terms with other suppliers.
OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SUBSTANTIAL MINORITY BLOCK OF OUR
VOTING POWER AND THEIR INTERESTS MAY BE DIFFERENT FROM YOURS AND, AS A RESULT,
YOU MAY HAVE NO EFFECTIVE VOICE IN OUR MANAGEMENT.
Our executive officers and members of our board of directors, as a
result of their ownership of common stock and options to purchase shares of our
common stock, beneficially own 3,502,800 shares, or 29.87%, of our voting stock.
See Item 12, "Security Ownership of Certain Beneficial Owners and Management."
By virtue of this ownership, these individuals can exercise control over our
business, policies and affairs and exert substantial influence over the election
of our directors, and the approval or disapproval of actions requiring a
shareholder vote. Accordingly, you may have no effective voice in our
management. This concentration of stock ownership could have the effect of
delaying or preventing, and may discourage attempts to bring about, a change in
control or the removal of our existing management. These negative effects would
become even more likely if these members of our management and board of
directors agreed to vote their shares in a similar manner as Venture Equities
Management, Inc., which, as discussed below, owns a substantial percentage of
our voting stock.
Venture Equities Management, Inc., or "VEMI," by virtue of its holding
201,438 shares of Series A Preferred Stock, currently convertible into 2,014,380
shares of our common stock, beneficially owns approximately 18% of our voting
stock assuming conversion of all preferred stock to common. In connection with
the issuance of the Series A Preferred Stock, VEMI and its affiliates were
granted numerous rights, including VEMI's right to designate two members of our
board of directors. As a result, VEMI has significant influence over decisions
on matters such as a change of control, the removal of our management or similar
matters. If VEMI agreed to vote its shares in the same manner as the members of
our management and board of directors, these shareholders would have the ability
to ensure the approval of any of these types of decisions. The calculation of
VEMI's beneficial ownership takes into account VEMI's ownership of two warrants
to acquire a total of an additional 1,600,000 shares of our common stock, which
are exercisable through August 28, 2003. However, VEMI also owns a "default
warrant" to purchase 2,500,000 shares of our common stock which would become
exercisable if any of several events of default, as defined in the default
warrant, occur. There are numerous events which would constitute an event of
default under the default warrant, and if our financial condition deteriorates
or should we fail to make timely payments on our accounts payable to Wanxiang
America Corporation, an affiliate of VEMI, or otherwise default in our supply
agreement with Wanxiang America Corporation and fail to cure the same, VEMI
could be entitled to purchase the shares underlying this warrant at a
substantial discount to the current price of our common stock. In addition, Mr.
Tzur and Mr. Scott, our two largest individual shareholders, have granted a
proxy to VEMI or its designees, which will give it power to vote their shares if
specified events of default of occur, in some cases without exercising the
default warrant. If any of these events of default occurred, and VEMI exercised
all of the warrants held by it, it could acquire approximately 40% of our voting
power, assuming exercise of the default and common stock warrants. If VEMI held
this percentage of our voting power, it could control the outcome of votes on
matters such as a change of control, the removal of our management, or similar
matters, regardless of whether it voted its shares in the same manner as our
executive officers and directors.
WE COULD BE SUBJECT TO CLAIMS BASED ON THE USE OF ASBESTOS
Brake parts have continued to evolve over the years, with substantial
improvements in product formulations over time. For example, new materials such
as ceramics have been introduced into the marketplace. In 1999, we purchased our
factory in Walkerton, Virginia, which had been using asbestos in products. We
immediately discontinued the manufacturing of asbestos disc brake pads and
continued to sell through the existing asbestos brake drum lining and raw
materials for a period of time. We are not aware of any claims having been made
at any of our facilities related to asbestos exposure, but a risk exists that
persons may seek to assert that this exposure was related to our operations,
which could subject us to liability. Additionally, persons may seek to assert
that our operation as a warehouse distributor prior to 1996 may have resulted in
the sale of products that contained asbestos.
12
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not intend to declare or pay any cash dividends on our common
stock in the foreseeable future and anticipate that earnings, if any, will be
used to finance the development and expansion of our business. Moreover,
agreements with our primary and mezzanine lenders and the certificate of
designations for our Series A Preferred Stock prohibit us from paying dividends
without the consent of these lenders and the holders of a majority of the Series
A Preferred Stock. You should not expect us to pay dividends on our common stock
until such time, if any, that we are able to obtain a release of these
prohibitions on the payments of dividends imposed by the terms of these
documents. We do not anticipate obtaining a release on these prohibitions in the
foreseeable future. Any payment of future dividends and the amounts thereof will
depend upon our earnings, financial requirements, and other factors deemed
relevant by our board of directors, including our contractual obligations.
THERE ARE NUMEROUS OUTSTANDING WARRANTS TO PURCHASE SHARES OF OUR COMMON STOCK,
WHICH COULD IMPAIR OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL ON FAVORABLE TERMS.
The 1,495,000 units we sold in connection with our initial public
offering in December 1994 were comprised of one share of common stock and one
redeemable common stock purchase warrant entitling the holder of the warrant to
purchase one share of common stock at an exercise price of $7.00 per share,
subject to certain adjustments, at any time until December 15, 1999. In December
1999, we extended the expiration date of these warrants to December 31, 2000,
and reduced their exercise price from $7.00 to $2.25 per share. We later
extended the expiration date of these warrants on four additional occasions. The
latest extension, in May 2002, changed the expiration date to September 15,
2003. As of March 15, 2003, there were 1,137,450 of these warrants outstanding.
We also have issued warrants to purchase a total of 4,100,000 shares of our
common stock to Venture Equities Management, Inc. Warrants to purchase 1,600,000
of these 4,100,000 shares are exercisable through August 28, 2003, and the
warrant to purchase the remaining 2,500,000 shares would become exercisable if
any of several events of default specified in the warrant occur. We have also
issued warrants for various other purposes, which are still outstanding. As of
March 15, 2003, there were other warrants to purchase a total of 978,500 shares
of our common stock outstanding, (in addition to the other warrants referred to
above).
OUR ABILITY TO ISSUE "BLANK CHECK" PREFERRED STOCK COULD DISCOURAGE TAKEOVER
ATTEMPTS AND, THEREFORE, CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Our certificate of incorporation authorizes the issuance of "blank
check" preferred stock with designations, rights and preferences as may be
determined from time to time by our board of directors. Accordingly, our board
of directors has the ability, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights, which
could diminish the voting power or other rights of the holders of our common
stock. We have already issued a substantial number of shares of Series A and
Series B Preferred Stock. The existing preferred stock, together with any shares
of preferred stock we may issue in the future, could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control. This possible impact on takeover attempts could cause the price of our
common stock to decline.
FUTURE SALES OF SECURITIES HELD BY OUR OFFICERS, DIRECTORS OR THE HOLDERS OF OUR
PREFERRED STOCK COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Approximately 7,196,100 of our outstanding shares of common stock which
includes 3,125,600 shares beneficially owned by officers and directors,
3,014,000 shares issuable upon conversion of preferred stock and 1,056,500
shares issuable upon exercise of outstanding warrants are "restricted
securities" under Rule 144 promulgated under the Securities Act and may not be
resold except pursuant to a registration statement effective under the
Securities Act or pursuant to an exemption from registration, including the
exemption provided by Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of other conditions, a person who has owned
restricted shares of common stock for at least one year is entitled to sell
these shares subject to the volume limitations prescribed by Rule 144. Shares
issuable upon conversion of our Series A and Series B Preferred Stock are
presently eligible for sale under Rule 144. In addition, the holders of some of
the shares issuable upon the exercise of the outstanding warrants have
registration rights, which could cause these shares to be registered under the
Securities Act of 1933, and, therefore, become freely tradable, at an earlier
date. The shares held by our officers, directors and affiliates are presently
eligible for sale under Rule 144. Future sales of shares of common stock by our
officers and directors under Rule 144, or by the holders of the Series A and B
Preferred Stock to the extent these shares are converted into the common stock,
could cause the price of our common stock to decline. Two of our officers have
filed a plan pursuant to Rule 10b5-1 of the Securities and Exchange Commission
under which they will sell of a total of 610,000 shares of our common stock by
selling a total of 10,000 shares each month. As of March 15, 2003, a total of
approximately 80,000 shares of common stock have been sold pursuant to these
plans.
13
THE MARKET FOR OUR STOCK IS LESS ACTIVE THAN THAT OF MANY OTHER STOCKS INCLUDED
IN THE NASDAQ STOCK MARKET, WHICH COULD MAKE IT DIFFICULT TO SELL SHARES WHEN
DESIRED.
Although our stock is included in the Nasdaq Stock Market, it is less
actively traded than the shares of many of the other companies included in
NASDAQ. In addition, there has been no trading in our stock or public warrants
on the Chicago Stock Exchange over the last several years and the Chicago Stock
Exchange delisted our shares of common stock and warrants effective March 22,
2002. The volume of trading in our stock on the Nasdaq SmallCap Market is
frequently low, which means that you may have difficulty selling the shares at a
time when you desire.
WE PROVIDE EXTENSIVE INDEMNIFICATION TO OUR OFFICERS AND DIRECTORS, WHICH LIMITS
OUR ABILITY TO RECOVER DAMAGES FROM OUR OFFICERS AND DIRECTORS AND COULD GREATLY
INCREASE THE COSTS TO US IN THE EVENT OF SHAREHOLDER LITIGATION.
We intend to indemnify our officers and directors to the fullest extent
permissible under the law. Under most circumstances, our officers and directors
may not be held liable to us or our shareholders for errors in judgment or other
acts or omissions in the conduct of our business unless these errors in
judgment, acts or omissions constitute fraud, gross negligence or malfeasance.
This indemnification limits our ability to recover damages from our officers and
directors in the event they cause us to suffer losses. In addition, it could
substantially increase our costs in the event of shareholder litigation.
14
ITEM 2. PROPERTIES
The following table sets forth the general location, principal uses and
approximate size of our principal properties, along with annual lease payments
and expiration of the leases:
APPROXIMATE
AREA
IN SQUARE ANNUAL LEASE LEASE
LOCATION USE FEET PAYMENTS EXPIRATION
-------- --- ----------- ------------ ----------
Alsip, Illinois Company headquarters 263,000 $763,308 October 2004
and distribution center
Walkerton, Strip lining production 77,000 $ 72,000 August 2009
Virginia and brake shoe
remanufacturing
Brampton, Brake pad 79,300 $260,000 February 2012
Ontario manufacturing
Canada
Compton, Distribution center 28,200 $172,100 August 2004
California
Cuba, Missouri Brake rotor 50,000 $100,000 December 2005
manufacturing
All of the leases on the above properties are with unaffiliated third
parties. We believe our facilities are of sufficient size to accommodate our
current employees and operations. We have no agreements, understandings or
arrangements with regard to any additional space as of the date of this
memorandum. We vacated the Cuba, Missouri facility and relocated the operations
into our Alsip, Illinois facility in December 2002. We are in negotiations with
the landlord to terminate the lease prior to its current expiration date of
December 2005.
ITEM 3. LEGAL PROCEEDINGS
All legal proceedings and actions to which we are a party are of an
ordinary and routine nature incidental to our operations. We believe that these
proceedings will not, individually or together, have a material adverse effect
on our business or financial condition or results of operations.
During 2002, we were named, along with numerous other defendants
(typically, 100 or more), in a total of 65 lawsuits in Madison County, Illinois,
and one lawsuit in Outagamie County, Wisconsin. The lawsuits named most of the
major domestic manufacturers and distributors of brake parts, among others. The
counts against us alleged negligence (Count I) and willful and wanton conduct
(Count II) regarding asbestos exposure over extended periods of time. We
referred these cases to experienced asbestos toxic tort counsel. We received
notice from the courts that all of these lawsuits, naming us a defendant and
claiming alleged liability in connection with the sale and distribution of brake
parts containing asbestos, were voluntarily dismissed without prejudice by the
plaintiffs.
On February 27, 2003, we were named as a defendant in a lawsuit filed
in St. Louis County, Missouri, making allegations similar to those made in the
lawsuits, which were dismissed. We believe this case will be dismissed during
the second quarter 2003. We believe that we have good faith defenses to the
allegations made in this cause and intend to file answers or other pleadings
denying liability in the near future. Our current liability insurance policy
does not cover asbestos related claims. We have not yet established a reserve
against potential liability with respect to these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of the year ended December 31, 2002.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is included in the Nasdaq SmallCap Market under the
symbol "UVSL." Our redeemable common stock purchase warrants are included in the
Nasdaq SmallCap Market under the symbol "UVSLW." The following table sets forth,
for the periods indicated; the high and low bid prices per share for the common
stock and the redeemable common stock purchase warrants as reported by the
Nasdaq SmallCap Market. Our common stock and redeemable common stock purchase
warrants were initially included in the Nasdaq SmallCap Market and listed on the
Chicago Stock Exchange on December 15, 1994; however, our common stock and
warrants have not traded on the Chicago Stock Exchange during the periods
indicated and the Chicago Stock Exchange advised us that it has delisted our
shares of common stock and warrants effective March 22, 2002.
COMMON STOCK
HIGH LOW
----- -----
2001
First Quarter $2.88 $1.50
Second Quarter $2.16 $1.50
Third Quarter $2.14 $1.00
Fourth Quarter $4.01 $1.30
2002
First Quarter $3.30 $2.20
Second Quarter $2.45 $1.50
Third Quarter $1.90 $0.67
Fourth Quarter $1.55 $0.68
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW
----- -----
2001
First Quarter $0.78 $0.31
Second Quarter $0.53 $0.31
Third Quarter $0.34 $0.19
Fourth Quarter $1.90 $0.17
2002
First Quarter $1.53 $0.56
Second Quarter $0.75 $0.30
Third Quarter $0.68 $0.26
Fourth Quarter $0.70 $0.06
On March 17, 2003, the last reported sale prices of our common stock
and redeemable common stock purchase warrants included on the Nasdaq SmallCap
Market were $.68 and $.10, respectively.
On April 19, 2001, we received a notice from The Nasdaq Stock Market
that we were not in compliance with a Nasdaq rule requiring that we have net
tangible assets in excess of $2,000,000 in order to maintain our inclusion in
the market. On August 17, 2001, NASDAQ conducted a hearing before its Listing
Qualifications Panel at which we presented information regarding the
then-proposed issuance of the Series A Preferred Stock. The issuance of the
Series A Preferred Stock was completed on August 30, 2001 and NASDAQ advised us
that the transaction brought us back in compliance with its net tangible assets
requirement. See "Supplemental Financial Information - Line of Credit and Recent
Financings." On October 16, 2001, NASDAQ notified us that the Listing
Qualifications Panel had ruled in favor of our continued inclusion in the Nasdaq
Stock Market.
On January 21, 2003, Nasdaq notified us that the trading price of our
common stock had dropped below $1.00 per share and that if the trading price did
not increase to over $1.00 per share for a minimum of ten consecutive trading
days by July 21, 2003, Nasdaq would initiate proceedings to cause our common
stock to be delisted from trading on the Nasdaq SmallCap Market. We have not
paid any cash dividends on our Common Stock. We do not intend to declare or pay
any cash dividends on our Common Stock in the foreseeable future and anticipate
that earnings, if any, will be used to finance the development of and expansion
of our business. Moreover, our bank lines of credit prohibit the declaration and
payment of cash dividends. Any payment of future dividends and the amounts
thereof will be dependent upon our earnings, financial requirements, and other
factors deemed relevant by our Board of Directors, including our contractual
obligations. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Each public warrant originally entitled the holder to purchase, at any
time until December 15, 1999, one share of our common stock at an exercise price
of $7.00 per share, subject to certain adjustments based upon anti-dilution
protections. In December 1999, we extended the expiration date of these warrants
to December 31, 2000, and reduced their exercise price from $7.00 to $2.25 per
16
share. We later extended the expiration date of these warrants on three
additional occasions. The latest extension, in May 2002, changed the expiration
date to September 15, 2003. The public warrants may be exercised in whole or in
part. Unless exercised, the public warrants will automatically expire on the
expiration date, unless we extend the expiration date again. During the year
ending December 31, 2002, warrants to purchase a total of 142,350 shares were
exercised, resulting in a total of $320,288 of gross proceeds to us.
During the quarter ended December 31, 2001, we issued 100,000 shares of
our Series B Preferred Stock in a transaction not registered under the
Securities Act of 1933, as amended (the "Securities Act"). The Series B
Preferred Stock was issued to FINOVA Mezzanine Capital Inc. ("FINOVA") in
connection with the restructuring of certain indebtedness, which we owed to
FINOVA. The consideration, which we received in connection with the issuance of
the Series B Preferred Stock, was a redemption of indebtedness owed to FINOVA
from $4,500,000 to $1,500,000 and reduction of the interest rate from 12.25% to
7.0%.
Also during the quarter ended December 31, 2001, we issued warrants to
purchase 450,000 shares of Common Stock to a securities broker-dealer in partial
consideration of certain services it provided to us.
We did not use the services of any finders or securities broker-dealers
in connection with the offer or sale of the Series B Preferred Stock or the
warrant to the securities broker-dealer. We believe that all offers and shares
of Series B Preferred Stock and warrants issued in the above transactions are
exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act and/or Regulation D promulgated there under.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our financial statements and notes thereto and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 2002, 2001 and 2000 and the balance sheet data at
December 31, 2002 and 2001 are derived from our audited financial statements
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 1999 and 1998 and the balance sheet data at December
31, 1999 and 1998 are derived from audited financial statements not included
herein.
17
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31, (1)
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Net sales $ 69,855 $ 71,823 $ 69,944 $ 67,752 $ 58,252
Cost of sales 57,529 61,116 57,767 54,472 46,779
----------- ---------- ---------- ---------- ----------
Gross profit $ 12,326 $ 10,707 $ 12,177 $ 13,280 $ 11,473
Selling, general and administrative expenses 10,317 10,633 11,572 10,810 9,238
Other Operating Expenses 98 792 320 160 --
Loss from Hungarian Operations 71 295 0 4,337 642
----------- ---------- ---------- ---------- ----------
Income (loss) from operations $ 1,840 $ (1,013) $ 285 $ (2,027) $ 1,593
Other expense (income):
Provision for lawsuit settlement -- -- -- -- (151)
Interest expense 1,398 2,503 2,593 2,025 1,916
(Gain) loss on disposition of assets (49) -- 110 (1,153) --
Other -- (148) (125) (10) 94
----------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and extraordinary item $ 491 $ (3,368) $ (2,293) $ (2,889) $ (266)
Income taxes -- 440 (33) 398 (86)
----------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item $ 491 $ (3,808) $ (2,260) $ (3,287) $ (180)
Extraordinary item:
Gain on debt restructuring -- 830 -- -- --
----------- ---------- ---------- ---------- ----------
Net income (loss) $ 491 $ (2,978) $ (2,260) $ (3,287) $ (180)
Issuance of preferred stock with beneficial
conversion feature and warrants -- (431) -- -- --
----------- ---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ 491 $ (3,409) $ (2,260) $ (3,287) $ (180)
=========== ========== ========== ========== ==========
Earnings per share (2):
Basic net income (loss) per common share
Before extraordinary item $ 0.06 $ (0.56) $ (0.32) $ (0.48) $ (0.03)
Extraordinary gain -- 0.11 -- -- --
----------- ---------- ---------- ---------- ----------
$ 0.06 $ (0.45) $ (0.32) $ (0.48) $ (0.03)
Dilutive net income (loss) per common share
Before extraordinary item $ 0.04 $ (0.56) $ (0.32) $ (0.48) $ (0.03)
Extraordinary gain -- 0.11 -- -- --
----------- ---------- ---------- ---------- ----------
$ 0.04 $ (0.45) $ (0.32) $ (0.48) $ (0.03)
Weighted average common shares outstanding 8,198,174 7,553,141 7,008,438 6,789,582 6,769,425
Effect of dilutive securities
Conversion of preferred stock 3,014,380
----------- ---------- ---------- ---------- ----------
11,212,554 7,553,141 7,008,438 6,789,582 6,769,425
=========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, (1)
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Working capital $ 17,187 $ 18,090 $ 16,238 $ 18,250 $ 18,108
Total assets 36,145 40,038 42,983 43,160 38,102
Long-term debt, less current portion 18,170 20,623 22,551 22,718 21,212
Total stockholders' equity 4,683 3,528 720 3,073 6,497
(1) Certain amounts reported in the 1998, 1999, 2000 and 2001 financial
statements have been reclassified to conform to the 2002 presentation.
(2) "Basic Earnings per Share" is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding
during the period. "Diluted Earnings per Share" reflects the potential
dilution that could occur if warrants and options or other contracts to
issue common stock were exercised and resulted in the issuance of
additional common shares. All options and warrants are omitted from the
computation of diluted earnings per share when net losses are reported
because the options and warrants are antidilutive. For the years ended
December 31, 2001, 2000, 1999 and 1998, diluted earnings per share
and basic earnings per share are identical because the loss from
continuing operations incurred during those years is antidilutive.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are a manufacturer and distributor of brake rotors, drums, disc
brake pads, relined brake shoes, non-asbestos friction lining, and a complete
line of hydraulic parts. We believe that we are the leading supplier of "value
line" brake parts (brake parts sold at prices below those of certain leading
national brand name brake parts) to mass-market retailers, traditional warehouse
distributors and specialty undercar distributors in North America.
Some of the statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, may be considered to be
"forward looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as "we anticipate," "believe" or
"expect" indicate that it is possible that the event anticipated, believed or
expected may not occur. Should such event not occur, then the result that we
expected also may not occur or occur in a different manner, which may be more or
less favorable to us. We do not undertake any obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future event or circumstances.
RESULTS OF OPERATIONS
Year Ended December 2002 Compared to Year Ended December 31, 2001
Net sales for the year ended December 31, 2002 decreased $1,968,000 or
2.8% to $69,855,000 as compared to $71,823,000 for the year ended December 31,
2001. This decrease was a result of the loss of a major customer through
industry consolidation of $2,894,000, price deflation in the drum and rotor
product line of approximately $1,800,000, offset by increased sales of
commodities of $1,726,000 and other sales increases of $1,000,000.
Gross profit for the year ended December 31, 2002 increased $1,619,000
or 15.1% to $12,326,000 as compared to $10,707,000 for the year ended December
31, 2001. This increase was a result of higher prices on friction products and a
delay in price reductions resulting from price deflation and cost containment
programs. Also included in the gross profit for the year ended December 31, 2002
was $965,000 and $563,000, respectively, relating to the under absorption of
manufacturing costs at the Walkerton, Virginia facility and higher than expected
production costs and inefficiencies at the Cuba, Missouri facilities. The Cuba,
Missouri rotor facility was closed in December 2002 and the operations relocated
to our existing Alsip, Illinois facility.
Selling, general and administrative expenses were $10,317,000, a
decrease of $316,000 or 3.0% from $10,633,000 for the same period in 2001. Cost
containment efforts coupled with reduced selling expenses on the lower sales
volume contributed to the positive variance.
Other operating expenses for the year ended December 31, 2002 were
$98,000, a decrease of $694,000 from $792,000 for the same period in 2001. This
decrease is primarily related to the write-off of unused barter credits in 2001
of $276,000, moving expenses in 2001 related to the relocation of the rotor
manufacturing from Laredo, Texas to Cuba, Missouri of $269,000, eParts eXchange
shutdown expenses incurred in 2001 of $113,000 and $121,000 of other items,
offset by expenses relating to the termination of the supply agreement
negotiations with Creative Friction, LLC of $ 45,000 and Michigan SBT taxes due
on prior years activities of $40,000.
Loss from Hungarian Operations decreased $224,000 to $71,000 as the net
balance on the note receivable arising from the 2001 sale of the operations was
fully reserved in 2002.
Other expenses, net for the year ended December 31, 2002 decreased by
$1,006,000 to $1,349,000 from $2,355,000 for the same period of 2001. The
decrease is due to lower interest expense affected by lower interest rates and
lower outstanding debt balances.
Since the restructuring of our debt owed to FINOVA was completed in
2001, which resulted in an extraordinary gain in 2001, there was no comparable
gain on debt restructuring in 2002.
No provision for income taxes was made in 2002. For the year ended
December 31, 2002 and 2001, the deferred tax benefit of the year's losses was
offset by an increase in deferred tax asset valuation allowance of $136,600 and
$1,142,000, respectively.
For the year ended December 31, 2002, net income was $491,000, compared
to a net loss of $2,978,000 for the year ended December 31, 2001. The principal
reasons for the increased profitability were (i) the reduction of the amount of
the net loss from the Hungarian operations of $224,000, which was sold during
2001, (ii) decreased other operating expenses relating to the absence of
relocation of the rotor manufacturing facility incurred in 2001, (iii) the
absence of the write-off of unused barter credits in 2001, (iv) the increase in
gross margins resulting from delays in pricing compression in the drum and rotor
lines and cost containment efforts, (v)
19
decrease in selling general and administrative expenses due to reduced selling
related expenses and cost containment efforts and (vi) the absence of an
increase in the deferred tax asset valuation allowance which was recorded in
2001. These amounts were partially offset by the absence of a gain of $830,000
recorded in 2001 resulting from the restructuring of the FINOVA subordinated
debt.
Year Ended December 2001 Compared to Year Ended December 31, 2000
Net sales for the year ended December 31, 2001 increased $1,879,000 or
2.7% to $71,823,000 as compared to $69,944,000 for the year ended December 31,
2000. This increase was a result of the addition of new customers and increased
sales of friction product.
Gross profits for the year ended December 31, 2001 decreased $1,470,000
or 12.1% to $10,707,000 as compared to $12,177,000 for the year ended December
31, 2000. Included in the gross profit for the year ended December 31, 2001 was
$437,000 and $373,000, respectively, relating to the under absorption of
manufacturing costs at the Walkerton, Virginia facility and the start up costs
of the new rotor manufacturing facility in Cuba, Missouri. Included in the gross
margin for the year ended December 31, 2000 was $353,000 and $936,000,
respectively, of costs related to the realignment of the Canadian friction
manufacturing facility and the start up costs of the new friction manufacturing
capacity in Virginia. Before the effects of these aforementioned items, gross
margins for the years ended December 31, 2001 and 2000 were 16.0% and 19.2%,
respectively. The 3.2% decline in gross margin is due to margin compression
experienced in the drum and rotor lines.
Selling, general and administrative expenses were $10,633,000, a
decrease of $939,000 or 8.1% from $11,572,000 for the same period in 2000.
Included in the expenses for the year ended December 31, 2000 was approximately
$566,000 of costs related to eParts eXchange, Inc. our e-commerce subsidiary,
which was shut down during this period, and $150,000 of severance payments for
certain terminated employees.
Other operating expenses for the year ended December 31, 2001 were
$792,000, an increase of $472,000 from $320,000 for the same period in 2000.
This increase of $472,000 is primarily related to the expenses of relocating the
rotor manufacturing facility to Cuba, Missouri of $282,000 and the write-off of
unused barter credits.
Loss from Hungarian operations represents the write-off of the
remaining assets of the Hungarian operation as a result of the sale of this
operation in 2001. The absence of a loss from discontinued operations for the
year ended December 31, 2000 is due to the fact that the loss from the
discontinued Hungarian iron foundry operation for this period of $640,000 has
been charged against the reserve for such losses established as of December 31,
1999.
Other expenses for the year ended December 31, 2001 decreased by
$224,000 to $2,355,000 from $2,578,000 for the same period of 2000. The decrease
is due to less interest expense due to lower interest rates offset by higher
outstanding debt balances during 2001 as compared to 2000.
Extraordinary gain on debt restructuring in 2001 of $830,000 is a
result of our restructuring of the subordinated debentures held by FINOVA.
Provision for income taxes in the amount of $440,000 was recorded in
2001, even though we incurred a loss, consisting primarily of a reduction of the
deferred tax assets established in a previous year. For the year ended December
31, 2001 and 2000, respectively, the deferred tax benefit of the year's losses
was offset by an increase in deferred tax asset valuation allowance of
$1,142,000 and $797,000.
For the year ended December 31, 2001, net loss was $2,978,000, compared
to a net loss of $2,260,000 for the year ended December 31, 2000. The principal
reasons for the decreased profitability was (i) the net loss from the Hungarian
operations of $295,000, which was sold during 2001, (ii) increased other
operating expenses relating to the relocation of the rotor manufacturing
facility, (iii) the write-off of unused barter credits, (iv) the decline in
gross margins resulting from pricing compression in the drum and rotor lines and
(v) an increase in the deferred tax asset valuation allowance. These amounts
were partially offset by a reduction in selling, general and administrative
expenses and a gain of $830,000 resulting from the restructuring of the FINOVA
subordinated debt.
Year Ended December 2000 Compared to the Year Ended December 31, 1999
Net sales for the year ended December 31, 2000 increased $2,192,000 or
3.2% to $69,944,000 as compared to $67,752,000 for the year ended December 31,
1999. This increase was achieved in spite of lower commodity sales ($1,782,000
reduction from 1999 levels) and the lack of Canadian distribution business sales
($6,141,000) that was sold as of December 31, 1999. Sales of US brake parts for
the year ended December 31, 2000 increased $10,115,000 or 18.2% over the same
1999 period due primarily to the addition of a major new customer and increased
sales of friction product.
20
Gross profits for the year ended December 31, 2000 decreased $1,103,000
or 8.3% to $12,177,000 from $13,280,000 for the year ended December 31, 1999.
Included in the gross profits computation for the year ended December 31, 2000
was $353,000 and $936,000, respectively, of costs related to the realignment of
the Canadian friction manufacturing facility and under absorption of
manufacturing costs due to the start up of new friction manufacturing capacity
in Virginia. Included in gross profits for the year ended December 31, 1999 was
$1,260,000 related to the Canadian distribution business that was sold as of
December 31, 1999. Before the effects of these factors, the gross profit margin
percentage of the year ended December 31, 2000 and 1999 was 19.2% and 19.5%,
respectively.
Selling, general and administrative expenses were $11,572,000, an
increase of $762,000 or 7.0% from $10,810,000 for the same period in 1999.
Included in SG&A expenses for the year ended December 31, 2000 was approximately
$566,000 of costs related to the start-up of our e-commerce subsidiary, eParts
eXchange, Inc. and approximately $150,000 of severance payments to certain
terminated employees. Included in SG&A expenses for the year ended December 31,
1999 is $1,269,000 of costs related to the Canadian distribution business that
was sold as of December 31, 1999. Before the effects of these factors, SG&A
expenses related to our base business increased to $10,856,000 for the year
ended December 31, 2000 compared to $9,541,000 in the same period of 1999. The
increase was due primarily to SG&A expenses for the Virginia friction
manufacturing facility, which was new in 2000, SG&A expenses related to an
increasing export sales, increased freight costs and additional marketing and
sales costs associated with obtaining new brake business.
Other operating expenses were $320,000, an increase of $160,000 from
the same period in 1999. This increase was a result of shut down expenses
related to eParts eXchange, Inc. of $200,000 coupled with the write-off of
certain barter credits, offset by moving expenses related to the relocation of
the distribution facility to Alsip, Illinois incurred during 1999.
The absence of a loss from discontinued operations for the year ended
December 31, 2000 is due to the fact that the loss from the discontinued
Hungarian iron foundry operation for this period of $640,000 has been charged
against the reserve for such losses established as of December 31, 1999.
Other expense for the year ended December 31, 2000 increased by
$1,716,000 to $2,578,000 from $862,000 for the same period of 1999, a period
which included $1,153,000 gain on the sale of fixed assets (primarily from the
sale of our former Chicago warehouse and headquarters building). After excluding
the effect of the one-time gain in 1999, the increase of $563,000 is
attributable to higher interest expense due to higher interest rates during 2000
as compared to 1999.
For the year ended December 31, 2000, the deferred tax benefit of the
year's losses was offset by an increase in the deferred tax asset valuation
allowance of $797,000.
For the year ended December 31, 2000, net loss decreased by $1,027,000
to $2,260,000 from $3,287,000 for the same period of 1999. The principal reason
for the profitability increases were (i) onetime friction manufacturing facility
realignment costs, (ii) under absorption of manufacturing costs related to the
start-up of new friction manufacturing capacity, (iii) start-up costs of eParts
eXchange, Inc., (iv) one-time severance payments, (v) increased interest costs,
(vi) increase in the deferred tax asset valuation allowance and (vii)
elimination of the loss on the discontinued Hungarian operations of $4,337,000,
offset by the $1,153,000 gain on the sale of our former Chicago warehouse
recorded in 1999.
CAPITAL EXPENDITURES
For the year ended December 31, 2002 capital expenditures totaled
approximately $605,452, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products (ii) upgrades and enhancements
to our computer systems and (iii) additional brake rotor patterns and tooling
related to brake rotor manufacturing.
For the year ended December 31, 2001, capital expenditures totaled
approximately $913,000, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products, (ii) upgrades and enhancements
to our computer systems and (iii) additional brake rotor patterns and tooling
related to brake rotor manufacturing.
For the year ended December 31, 2000, capital expenditures totaled
approximately $1,481,000, consisting primarily of (i) the acquisition of
machinery and equipment used to produce friction products in Walkerton,
Virginia, (ii) the acquisition of leaseholds and fixtures related to the new
Canadian friction manufacturing facility and (iii) additional brake rotor
patterns and tooling related to friction manufacturing.
21
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are associated with carrying accounts
receivable and maintaining inventories. We rely on internally generated funds,
credit made available from suppliers and senior and subordinated lines of
credit. Our working capital needs are generally not seasonal in nature, although
business slows down slightly during the winter months.
We have incurred significant indebtedness, to date, in connection with
our operations. As of December 31, 2002, our total consolidated indebtedness was
approximately $18,611,000. A substantial portion of this indebtedness is secured
by substantially all of our assets and by a pledge of all of the outstanding
capital stock of our subsidiaries. As a result of such indebtedness, we (i) are
prohibited from paying cash dividends pursuant to certain covenants and
restrictions contained in the loan agreements governing such indebtedness, (ii)
could be hindered in our efforts to obtain additional financing in the future
for working capital, capital expenditures, acquisitions or general corporate or
other purposes, and (iii) would be vulnerable to increases in interest rates
since substantially all of our borrowings are at floating rates of interest.
On September 29, 1999, we completed a renewal and restructuring of our
credit agreement with LaSalle Bank National Association and one of its
subsidiaries ("LaSalle") for (a) a revolving line of credit of up to $22,000,000
based on eligible accounts receivable and inventory and (b) a term loan in the
amount of $3,779,194. The term loan was reduced by $2,842,873 in October 1999
from the proceeds of the sale of our Chicago facility. The credit agreement
was amended in 2000 to increase the revolving line of credit to $26,000,000.
At December 31, 2002, we were in compliance with all financial covenants.
On July 14, 1997, we sold a $4,500,000 subordinated debenture to FINOVA
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for payments of
interest at 12.25% per annum through maturity on July 14, 2002. Through August
14, 2001, we had issued FINOVA warrants to purchase 1,575,000 shares of our
common stock at exercise prices ranging from $0.83 to $1.58, based on 80% of the
average closing bid price of our common stock for the 20 days preceding the
respective issuance dates. The warrants were exercisable at any time through the
sixth anniversary of the debenture issue date. During 2000, FINOVA elected to
exercise one of its warrants to purchase 450,000 shares of our common stock at
an exercise price of $0.83 per share, using a "cashless" exercise provision
whereby FINOVA received a net of 279,260 shares of common stock after
surrendering 170,743 shares, which had a fair market value equal to the
aggregate exercise price. We received no cash proceeds from this transaction
when such shares were issued.
On October 31, 2001, we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance to FINOVA of $2,000,000 of Series B Preferred Stock
($0.01 par value); and (iv) the amendment of the debenture to $1,500,000. The
amendment to the debenture also reduced the interest rate from 12.25 to 7.0% and
allowed us to pay the remaining balance by making five $100,000 payments every
45 days beginning December 15, 2001, (for which payments were made) with a final
payment due July 11, 2005. The surrendered warrants had cashless exercise
features which, based on the closing price of our common stock of $1.89 per
share on the date of the restructuring, would have allowed FINOVA to receive
322,619 shares of common stock. This transaction resulted in an extraordinary
gain of $829,714 (inclusive of an accrual of all remaining interest to be paid
of approximately $272,000) for the year ended December 31, 2001. The Series B
Preferred Stock has no fixed dividend, entitles the holder to a liquidation
preference, is redeemable at any time at our option and is convertible into
1,000,000 shares of common stock for which we provided FINOVA with registration
rights.
On August 29, 2001, we issued 201,438 shares of Series A Preferred
Stock ($0.01 par value) to Venture Equities Management, Inc. (VEMI) (an
affiliate of Wanxiang America Corporation - see Note 8 to our financial
statements) in exchange for $2,800,000 in cash. The Series A Preferred Stock has
no fixed dividend, entitles the holder to a liquidation preference, is
redeemable at our option subject to certain conditions, and is convertible into
2,014,380 shares of our common stock (with registration rights), subject to
certain antidilution provisions. In connection with the issuance of the Series A
Preferred Stock, we also issued to VEMI three warrants to purchase common stock.
The first and second warrants for 800,000 shares were exercisable at any time
through August 28, 2002 at an exercise price of $2.00 per share. The exercise
date for the first and second warrants was extended to August 28, 2003 and the
exercise price was increased to $2.25 per share. The third warrant for 2,500,000
shares is exercisable only upon the occurrence of events of default at an
exercise price to be determined based on a defined computation.
We believe that cash generated from operations, borrowings under our
bank line of credit, the restructuring of the FINOVA Subordinated Debt and the
issuance of preferred stock to VMEI and credit from our suppliers is sufficient
to fund our working capital requirements and capital expenditures through 2003.
22
Our future contractual obligations are as follows:
CONTRACTUAL
OBLIGATIONS NEXT AFTER
TOTAL 12 MONTHS 1-3 YEARS 4 YEARS
----------- ---------- ----------- ----------
Revolving loan $16,949,821 $ -- $16,949,821 $ --
Subordinated debt 1,194,006 84,020 1,109,986 --
Long-term debt 206,826 206,826 --
Capital leases 245,935 138,536 98,246 9,153
Other long-term
obligations 14,412 11,301 3,111 --
Operating leases 5,143,149 1,417,818 2,032,770 1,692,561
SEASONALITY
Our business is slightly seasonal in nature, primarily as a result of
the impact of weather conditions on the demand for automotive replacement parts.
Historically, our sales and profits have been slightly higher in the second and
third calendar quarters of each year than in the first or fourth quarters.
EFFECTS OF INFLATION
We historically have been able to diminish the effects of inflationary
cost expenses through increased prices to customers and productivity
improvements. Non-inventory cost increases, such as payroll, supplies and
services have generally been offset through price increases.
CRITICAL ACCOUNTING POLICIES; RECENT ACCOUNTING PRONOUNCEMENTS
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. The application of these policies may require
management to make judgments and estimates about the amounts reflected in the
financial statements. Management uses historical experience and all available
information to make these estimates and judgments, and different amounts could
be reported using different assumptions and estimates.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
No.145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 15
and Technical Corrections. SFAS No. 145 requires that certain gains and losses
on extinguishment of debt be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt. This statement
also amends SFAS No. 13, Accounting for Leases, to require that certain
modifications to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). In addition, SFAS No. 145 rescinded SFAS No. 44 Accounting for
Tangible Assets of Motor Carriers, which addressed the accounting for intangible
assets of motor carriers and made numerous technical, changes to various FASB
pronouncements. The Company will be required to adopt SFAS No. 145 on January 1,
2003, and will reclassify extraordinary items to continuing operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146, which requires that a
liability for costs associated with an exit or disposal activity be recognized
in the period in which the liability is incurred, is effective for exit and
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
146 is not expected to have a significant effect on the Company's results of
operations or it financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that we do not have significant exposure to market risk
associated with derivative financial instruments, other financial instruments or
derivative commodity instruments. We had previously utilized only limited
derivative financial instruments and did not use them for trading purposes and
have never used derivative commodity instruments. At December 31, 2002, there
were no such derivative instruments. The fair value of financial instruments,
other then debt instruments, closely approximates their carrying value. Because
the interest rate of the revolving loan and the term loan with LaSalle Bank
National Association adjusts with the changes in the market rate of interest, we
believe that the fair value is equivalent to the carrying value.
We believe that the interest rate of 7.0% on the subordinated debenture
is approximately equal to the current rate available for similar debt.
Accordingly, the fair value of this debenture approximates its carrying value.
23
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 15 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
Our Audit Committee of the board of directors annually considers and
recommends to the board the selection of our independent public accountants. As
recommended by our Audit Committee on June 20, 2002, the board of directors
decided to no longer engage Altschuler Melvoin and Glasser LLP ("AM&G") as our
independent public accountants and engaged Ernst & Young LLP to serve as our
independent public accountants for 2002.
AM&G's reports on our consolidated financial statements for the past
two years did not contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. AM&G's report on our consolidated financial statements for 2001 was
issued on March 27, 2002 containing an unqualified opinion in conjunction with
the publication of our Annual Report to Shareholders and the filing of our
Annual Report on Form 10-K.
During our two most recent fiscal years and through June 20, 2002,
there were no disagreements with AM&G on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to AM&G's satisfaction, would have cause them to make reference
to the subject matter in connection with their report on our consolidated
financial statements for such years, and there were no reportable events, as
listed in Item 304(a)(1)(v) of Regulation S-K.
During our two most recent fiscal years and through June 20, 2003, we
did not consult Ernst & Young LLP with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events listed in Items 304(a) (2)
(i) and (ii) of Regulation S-K.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our officers,
directors and key personnel as of March 15, 2003:
NAME AGE POSITION
--------------------- --- -------------------------------------------------
Yehuda Tzur.......... 50 Chairman of the Board and Director
Arvin Scott.......... 46 President, Chief Executive Officer and Director
Robert W. Zimmer..... 51 Chief Financial Officer, Secretary and Treasurer
Sami Israel.......... 61 Vice President and Director
Peter Riofski........ 48 Vice President and Controller
Zemin Xu............. 31 Director
Sheldon Robinson..... 76 Director
Dennis L. Kessler.... 64 Director
M. Catherine Jaros... 53 Director
Yehuda Tzur, Chairman of the Board. Mr. Tzur, our founder, has served
as the Chairman of our board of directors since October 1994. From 1981 to March
1996, Mr. Tzur served our President and Chief Executive Officer and of our
predecessor, Universal Automotive, Inc.
Arvin Scott, President and Chief Executive Officer. Mr. Scott has
served as our President and Chief Executive Officer since March 1996. From 1994
to March 1996, Mr. Scott served as our President and Chief Executive Officer and
of our predecessor, Universal Automotive, Inc. From 1986 to October 1994, Mr.
Scott served as our Vice President and of Universal Automotive, Inc. Mr. Scott
joined us in 1981 as a purchaser of automotive aftermarket replacement parts for
distribution in the Chicago jobber market. From 1984 to 1986, Mr. Scott served
as Vice President of an unaffiliated Chicago-based warehouse distributor, of
which he was a 50% owner.
Robert W. Zimmer, Chief Financial Officer, Secretary and Treasurer. Mr.
Zimmer joined us as our Chief Financial Officer, Secretary and Treasurer in
November 2001. Prior to joining us, Mr. Zimmer was the Chief Financial Officer,
Secretary and Treasurer of IMPAXX, Inc., an international packaging
manufacturer. Mr. Zimmer was previously the Chief Financial Officer of CFI
Industries, Inc. and Kalmus & Associates, Inc.
Sami Israel, Vice President and Director. Mr. Israel has served as our
Vice President since October 1994 and served as our Treasurer from 1984 to
October 1994. Mr. Israel has been a Director since 1984. Mr. Israel manages our
warehouse operations from our headquarters located in Alsip, Illinois.
Peter Riofski, Vice President and Controller. Mr. Riofski has served as
our Controller since April 2000 and was elected to the position of Vice
President and Controller in June 2002. Prior to joining us, Mr. Riofski was an
Audit Manager with the independent accounting firm of Blackman, Kalick and
Bartelstein, LLP
Sheldon Robinson, Director. Mr. Robinson is an owner and President of
Associated Financial Consultants, Inc. and Robinson Financial Group, Inc., which
sell insurance and investment products. Mr. Robinson has been in the insurance
business since 1963.
Dennis L. Kessler, Director. Mr. Kessler is President of Kessler
Management Consulting, LLC. Prior to February 1998, Mr. Kessler was Co-President
of Fel-Pro Incorporated, which manufactures and distributes gaskets, engine
parts and industrial chemicals. Mr. Kessler previously served in various
capacities with Fel-Pro, beginning in 1964.
M. Catherine Jaros, Director. Ms. Jaros is President of M. Catherine
Jaros Consulting and a Managing Director of DSI Investment Banking Services,
Inc. Formerly Ms. Jaros was the President/CEO of three early to mid stage
retail-focused technology companies. Prior to that Ms. Jaros spend 25 years in
senior and officer level marketing positions for Quaker Oats Inc., Kraft Foods,
Inc., The Tribune Company, Inc. and Tappan Capital Partners.,
Zemin Xu, Director. Mr. Xu is a Vice President and a director of
Venture Equities Management, Inc. From 1993 to 1998, Mr. Xu was the Deputy
General Manager of the Department of Investment at Bank of China International
Investment (Hainan) Ltd.
25
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Our bylaws provide that we will have nine directors or such other
number as is fixed by our board of directors. We currently have a board
comprised of seven members. Once elected, our directors hold office until our
next annual meeting of shareholders or until a successor has been elected and
qualified, unless they resign at some earlier time. As a result, all of our
director positions will be filled at each annual meeting.
In a stockholders' agreement entered into between us, Mr. Tzur, Mr.
Scott, Mr. Israel and Venture Equities Management, Inc., or "VEMI," in
connection with VEMI's purchase of the Series A Preferred Stock, we agreed to
take all necessary action so that our board of directors will consist of nine
members, two of whom are designated by VEMI, and that one of the individuals
designated by VEMI would be appointed as co-chairman of the board. We also
agreed that the composition of the board of directors of each of our
subsidiaries would be proportionate to that of our board, provided that at least
one VEMI designee was on the board of each of our subsidiaries, and that the
composition of any committees of our board of directors would be proportionate
to that of our board, provided that at least one VEMI designee would be on each
committee. The stockholders' agreement also provides that Mr. Tzur, Mr. Scott
and Mr. Israel will vote their shares in favor of the election of the VEMI
designees to our board of directors. The rights of VEMI with respect to the
designation of two directors will terminate at such time as the shares of our
common stock into which the shares of the Series A Preferred Stock owned by VEMI
are convertible fall below 1,007,190, which is half of the number of shares into
which the Series A Preferred Stock was convertible when it was originally
issued. VEMI has exercised its right to designate Mr. Xu and one other person as
members of our board of directors. Our board has decreased by two members due to
the retirement of Sol Weiner and the resignation of one of the two VEMI
nominees. We expect to fill Mr. Weiner's vacancy and we are waiting for a new
nominee from VEMI to fill the other vacancy.
Under the terms of a debenture purchase agreement entered into between
us and FINOVA Mezzanine Capital Inc. in July 1997, we agreed that the size of
our board of directors would be increased to nine, and that a person designated
by FINOVA Mezzanine Capital would be elected to our board of directors. We also
agreed to include a person designated by FINOVA Mezzanine Capital in the group
of nominees designated by our management in connection with director elections,
and to recommend the election of the person designated by FINOVA Mezzanine
Capital, as long as the principal amount of the debenture held by FINOVA
Mezzanine Capital was at least $1,125,000, which is 25% of the original
principal amount of the debenture. In addition, for as long as the principal
amount of the debenture owned by FINOVA Mezzanine Capital is at least
$1,125,000, if no person designated by FINOVA Mezzanine Capital was a director,
we agreed that we would invite one person designated by FINOVA Mezzanine Capital
to observe our board meetings without the right to vote, and to provide this
person with copies of all materials distributed to our directors. FINOVA
Mezzanine Capital has not exercised its right to designate a person to be
elected to our board of directors.
Our executive officers are appointed by our board on an annual basis
until their successors have been elected and qualified. Mr. Tzur is the
brother-in-law of Mr. Israel.
ITEM 11. EXECUTIVE COMPENSATION
Each director, who is not an officer or employee, other than Mr. Xu,
receives a fee of $2,500 per quarter and is reimbursed for out-of-pocket
expenses incurred in connection with attending meetings of our board of
directors. During 2002, Messers, Robinson, Kessler and Ms. Jaros each received
$10,000 in director's fees. Although we do not have a formal policy regarding
the issuance of options to directors as part of their compensation, we have
historically made an annual grant to each of our directors of options to
purchase 1,000 shares of our common stock. In 2002, we issued options to
purchase 2,500 shares of our common stock to each of Ms. Jaros, Mr. Kessler and
Mr. Robinson, all of which had exercise prices of $1.86 per share.
Audit Committee. Our audit committee consists of our three independent
directors - Mr. Robinson, Mr. Kessler and Ms. Jaros. Ms. Jaros is Chairman of
the audit committee. The duties of the audit committee are generally to
recommend and review the activities and reports of our independent auditors and
to report the results of this review to our board of directors. The audit
committee also periodically reviews the adequacy of our internal controls.
Compensation Committee. The compensation committee of our board of
directors is comprised of Ms. Jaros, Mr. Robinson and Mr. Kessler, none of whom
have ever been an officer or employee of ours. Mr. Robinson is chairman of the
compensation committee. None of our executive officers serves or has served as a
member of the board of directors or compensation committee of any entity that
has one or more of its executive officers serving on our board or compensation
committee. Before we formed the compensation committee, all compensation
decisions were made by our entire board of directors. The duties of the
compensation committee are generally to review employment, development,
reassignment and compensation matters involving corporate officers and other
executive level employees as may be appropriate including, among other things,
issues relating to salary, bonus, stock options and other incentive
arrangements.
26
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Presently, all compensation decisions relating to the salaries of
Messers Tzur, Scott and Israel (the "Named Executive Officers") are governed by
employment agreements between each of Mr. Tzur, Scott and Israel and us, which
agreements originally provided for the payment of annual base salaries of
$135,000, subject to increases or decreases, to each of such individuals in
amount as determined by either the Board of Directors or the Compensation
Committee, and periodic bonuses. Because the Named Executive Officers'
employment agreements presently control the compensation paid to such executive
officers, the Compensation Committee did not formulate policies with respect to
the Named Executive Officers' compensation during 2002.
Members of the Compensation Committee:
Sheldon Robinson M. Catherine Jaros Dennis L. Kessler
Nominating Committee. Our nominating committee consists of Mr. Scott,
who is the committee's Chairman, and Messrs. Kessler, Tzur and Israel. The
nominating committee nominates candidates for election to our board of
directors. The nominating committee did not meet during 2002.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors, executive officers and persons who own more than 10% of the
outstanding shares of our common stock file with the Securities and Exchange
Commission reports relating to their ownership of our common stock and changes
in this ownership. We are required to identify any persons subject to this
requirement who failed to file any of these reports on a timely basis. Based
solely on a review of the copies of the reports furnished to us, we believe all
of these reports were filed on a timely basis for 2002.
EMPLOYMENT AGREEMENTS
Mr. Tzur, Mr. Scott and Mr. Israel are each parties to employment
agreements with us. All of these agreements extend to May 2003, unless
terminated sooner in accordance with the provisions of the agreements, and
provide for the automatic renewal of the agreements for successive periods of
one year. The employment agreements of Mr. Tzur, Mr. Scott and Mr. Israel
currently provide for annual base salaries of $230,200, $256,985 and $143,230,
respectively, and periodic bonuses. Each employment agreement provides for a
payment of two years then salary in the event of termination of employment
without cause. Under the terms of the employment agreements, as amended, these
officers' compensation is subject to periodic adjustment by our board of
directors, or a committee of the board.
The above employment agreements contain non-competition covenants under
which Messrs. Tzur, Scott and Israel are prohibited from owning, subject to
limited exceptions, or providing specified services to, businesses similar to or
in competition with our business, during the period that these individuals are
employed under the employment agreements, and for a one-year period thereafter.
27
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the total
annual compensation paid by us to our Chief Executive Officer and each of our
other executive officers whose total cash compensation for the year ended
December 31, 2002 exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES NUMBER OF ALL OTHER
---------------------------- ---- -------- ------- OPTIONS COMPENSATION
--------- ------------
Yehuda Tzur 2002 $230,200 $25,000 (1) 50,000 $--
Chairman of the Board 2001 $212,000 25,000 $--
2000 $208,000 25,000 $--
Arvin Scott 2002 $256,985 $25,000 (1) 100,000 $--
President and Chief Executive Officer 2001 $235,000 50,000 $--
2000 $220,000 25,000 $--
Sami Israel 2002 $143,230 10,000 $--
Vice President 2001 $137,440 3,000 $--
2000 $143,220 10,000 $--
Robert W. Zimmer 2002 $160,000 $43,200 (2) -- $--
Chief Financial Officer, Secretary 2001 $ 13,333 $10,000 50,000 $--
and Treasurer (3)
(1) Amount earned in 2002 and paid in 2003.
(2) $15,000 paid in 2002 with balance paid in 2003.
(3) Mr. Zimmer was employed by us effective November 30, 2001.
The total compensation we paid to all persons who served as our
directors and executive officers in 2002, 5 persons, was $902,415.
STOCK OPTION PLAN
We maintain the Universal Automotive Industries, Inc. Share Option
Plan, which we will refer to as the "stock option plan," for the benefit of key
employees, non-employee directors, advisors, independent contractors and other
persons whom our board of directors believes are valuable to us. Options granted
under the stock option plan may be either incentive stock options, or "ISOs,"
under Section 422 of the Internal Revenue Code of 1986 or nonstatutory options,
or options which are not intended to be "incentive stock options," as defined in
Section 422 of the Code.
Our stock option plan, which was adopted by the Board of Directors on
October 13, 1994 and approved by our stockholders on October 13, 1994, is
intended to encourage ownership of our common stock by eligible persons such as
employees, officers, directors, and consultants, in order to attract these
persons or to encourage them to serve or continue to serve with us, and to
provide additional incentives for these persons to promote our success. The
stock option plan has been amended on several occasions to increase the number
of shares subject to the plan. The latest amendment increased the total shares
of common stock reserved for issuance under the stock option plan to 1,400,000.
The plan is administered by our board of directors, which may delegate its
authority to a committee.
Under our stock option plan, no ISOs may be granted after ten years
from the date of adoption and approval of the stock option plan by our board and
stockholders. The fair market value of shares of common stock with respect to
which ISOs are exercisable for the first time by any person eligible to
participate in the plan during any calendar year shall not exceed $100,000.
The exercise price per share for shares underlying each nonstatutory
option will be determined by our board of directors, which has the power to
determine eligibility to receive options and the terms of any options granted,
including the exercise price, the number of shares subject to the nonstatutory
option, the vesting schedule and the exercise period. The exercise price per
share for shares underlying all ISOs granted under the stock option plan must be
at least equal to the fair market value of a share of our common stock on the
date of the grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of our outstanding capital stock, the exercise
price per share for shares underlying any ISO granted must equal at least 110%
of the fair market value of a share of common stock covered by the ISO on the
grant date, and the ISO shall terminate not more than ten years from the grant
date.
28
Nonstatutory options must terminate not more than eleven years from the
date of grant. All options granted under the stock option plan may be exercised
over a period of time after such person leaves our employment or after death.
All options granted under the stock option plan are non-transferable.
As of March 17, 2003 the market value of our common stock, based upon
the closing price on the Nasdaq SmallCap Market, was $.68 per share. The
following table sets forth the amount of all options received, to date, by the
persons listed in the table:
NAME AMOUNT OF OPTIONS
---- -----------------
Yehuda Tzur, Chairman of the Board 181,000
Arvin Scott, President and Chief Executive Officer 367,000
Robert W. Zimmer, Chief Financial Officer, Secretary and Treasurer 50.000
Sami Israel, Vice President 33,000
Peter Riofski, Vice President and Controller 20,000
All current executive officers, as a group 651,000
All current directors who are not executive officers as a group 30,000
All employees, including all current officers who are not executive officers, as a group 239,950
a group
OPTION GRANTS
The following table sets forth information with respect to options granted to
Messrs. Tzur, Scott, Israel and Riofski during the year ended December 31, 2002
under our stock option plan.
Option Grants in 2002
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- ----------------------------------------------------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ -------------- ---------- -------- ---------
Yehuda Tzur 25,000 20.5% $3.56 1/2/2012 $111,943 $283,686
Arvin Scott 50,000 41.0% $3.56 1/2/2012 $222,866 $567,372
Sami Israel 10,000 4.1% $3.56 1/2/2012 $ 22,389 $ 56,737
Peter Riofski 10,000 4.1% $1.52 5/1/2012 $ 9,959 $ 24,225
AGGREGATED OPTION EXERCISES IN FISCAL 2002 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises during the
year ended December 31, 2002 by our executive officers and the value of these
officers' unexercised stock options as of December 31, 2002.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT 12/31/02 IN-THE-MONEY OPTIONS AT 12/31/02
SHARES --------------------------- --------------------------------
ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
Yehuda Tzur 0 0 86,000 45,000 0 0
Arvin Scott 0 0 181,000 86,000 0 0
Sami Israel 0 0 11,600 11,400 0 0
Robert Zimmer 0 0 10,0000 40,000 0 0
Peter Riofski 0 0 20,0000 17,000 0 0
29
COMPARATIVE PERFORMANCE GRAPH
The graph set forth below compares cumulative total shareholder return on
our Common Stock with the cumulative total return of the companies listed on the
Nasdaq Stock Market (U.S. Companies) ("Nasdaq Market Index") and an industry
group consisting of publicly-traded companies included in the Company's Standard
Industrial Classification Code (SIC Code 5013 - Motor Vehicle Supplies & New
Parts) (the "Industry Index") for the period from December 15, 1994 to December
31, 2001. The comparison assumes the investment of $100 in Common Stock, the
Nasdaq Market Index and the Industry Index on December 15, 1994 and the
reinvestment of all dividends. The shareholder return of each of the companies
in the Industry Index has been weighted according to market capitalization at
the beginning of each measurement period. Although most of the companies
included in the Industry Index engage in the distribution of brake parts, such
companies also engage in other lines of business.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NASDAQ MARKET INDEX AND SIC CODE INDEX
[GRAPH]
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC. 100.00 61.02 125.42 108.47 186.57 47.19
SIC CODE INDEX 100.00 95.69 72.29 77.59 119.26 112.35
NASDAQ MARKET INDEX 100.00 141.04 248.76 156.35 124.64 86.94
ASSUMES $100 INVESTED ON JANUARY 1, 1997
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2002
LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases
or redemptions; or
- any transaction from which the director derived an improper
personal benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in his or her
capacity as an officer, director, employee or other agent, regardless of whether
our bylaws would permit indemnification for the liability.
30
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
ours, we have been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
We intend to enter into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws, prior to the completion of this offering. These agreements, among other
things, will provide for indemnification for judgments, fines, settlement
amounts and expenses, including attorneys' fees incurred by any director,
executive officer or controller of ours in any action or proceeding, including
any action by us or on our behalf, arising out of the person's services as a
director, executive officer or controller of ours, or of any of our subsidiaries
or any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. The
limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may lose value to the extent we
pay the costs of settlement or damage awards against our directors and officers
under these indemnification provisions. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
in which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of our voting stock as of March 15, 2003 by:
- each director who beneficially owns shares of our voting
stock;
- each of our executive officers;
- each person that is known by us to beneficially own more than
5% of the outstanding shares of our voting stock; and
- all of our directors and executive officers as a group.
As of March 17, 2003, we had 8,224,949 shares of common stock, 201,438
shares of Series A Preferred Stock and 100,000 shares of Series B Preferred
Stock outstanding. The outstanding shares of Series A and Series B Preferred
Stock, as of March 17, 2003, were convertible into, and had voting rights
equivalent to, 3,014,380 shares of our common stock.
For purposes of the following table, a person is deemed to be the
beneficial owner of securities that can be acquired by the person within 60 days
from March 17, 2003 upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that options or warrants
that are held by the person, but not those held by any other person, and which
are exercisable within 60 days from March 17, 2003, have been exercised. Unless
otherwise indicated, we believe that all persons named in this table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them. Unless otherwise indicated, the address of each
person listed in the following table is 11859 South Central, Alsip, Illinois
60803.
31
BENEFICIAL OWNERSHIP
SHARES ISSUABLE
PURSUANT TO OPTIONS OR
WARRANTS EXERCISABLE PERCENT
WITHIN 60 DAYS OF BENEFICIALLY
NAME NUMBER OF SHARES MARCH 17, 2003 OWNED
---- ---------------- ----------------------- ------------
Venture Equities Management, Inc. 2,014,380 (1) 1,600,000 (2) 30.53%
Wanxiang America Corporation
Wanxiang Group Corporation
Arvin Scott 927,500 199,000 (3) 12.05%
Yehuda Tzur 988,600 102,000 (4) 11.71%
FINOVA Mezzanine Capital, Inc. 1,000,000 (5) 10.84%
Sami Israel 897,000 (6) 15,200 (7) 9.98%
Sheldon Robinson 100,000 (8) 19,500 (9) 1.43%
Dennis L. Kessler 115,000 (10) 7,500 (11) 1.47%
Robert W. Zimmer 6,500 10,000 (12) *
M. Catherine Jaros 1,000 (13) 3,500 (14) *
Peter Riofski -- 7,000 (15) *
Zemin Xu -- (16) -- *
All directors, and officers as a 3,035,600 363,700 (17) 29.24%
group (10 persons)
* Less than 1%
(1) Includes 201,438 shares of Series A Preferred Stock, which are
convertible into, and have voting rights equivalent to, 2,014,380
shares of our common stock. All of the shares of Series A Preferred
Stock are owned by Venture Management, Inc. Wanxiang American
Corporation and Wanxiang Group Corporation are also considered
beneficial owners of these shares. Wanxiang America Corporation and
Wanxiang Group Corporation disclaim beneficial ownership of these
shares. The address of Venture Equities Management, Inc. and Wanxiang
America Corporation is 88 Airport Road, Elgin, Illinois 60123. The
address of Wanxiang Group Corporation is Xiao Shan District, Hang Zhou,
Zhejiang, 311215, P.R. China.
(2) Consists of warrants to purchase a total of 1,600,000 shares of our
common stock owned by Venture Equities Management, Inc.
(3) Consists of 199,000 shares issuable upon the exercise of options held
by Mr. Scott.
(4) Consists of 102,000 shares issuable upon the exercise of options held
by Mr. Tzur.
(5) Consists of 100,000 shares of Series B Preferred Stock, which are
convertible into, and have voting rights equivalent to, 1,000,000
shares of our common stock. The address of FINOVA Capital is 500 Church
Street, Suite 200, Nashville, TN 37219.
(6) Includes 423,050 shares owned by Mr. Israel's spouse and children.
(7) Consists of 15,200 shares of issuable upon the exercise of options held
by Mr. Israel.
(8) Includes 100,000 shares owned by a general partnership managed by Mr.
Robinson. Mr. Robinson's address is 6633 North Sacramento, Chicago,
Illinois 60645.
(9) Consists of 19,500 shares issuable upon the exercise of options held by
Mr. Robinson.
(10) Mr. Kessler's address is 3535 Patten Road, Highland Park, Illinois
60035.
(11) Consists of 7,500 shares issuable upon the exercise of options held by
Mr. Kessler.
(12) Consists of 10,000 shares issuable upon exercise of options held by Mr.
Zimmer
(13) Ms. Jaros' address is 216 Summerfield Road, Northbrook, Illinois 60062.
(14) Consists of 3,500 shares issuable upon exercise of options held by Ms.
Jaros.
32
(15) Consist of 7,000 shares issuable upon exercise of options held by Mr.
Riofski
(16) The address of Mr. Xu is 88 Airport Drive, Elgin, Illinois 60191.
(17) Consists of 259,200 shares issuable upon the exercise of options.
As of December 31, 2002, we had the following compensation plans under which our
equity securities are authorized for issuance:
Number of securities remaining
available for future issuance
Number of securities to be issued Weighted average exercise under equity compensation plans
upon exercise of outstanding price of outstanding options, (excluding securities effected
Plan Category options, warrants and rights warrants and rights in column (a))
- ---------------------- --------------------------------- ----------------------------- ------------------------------
Equity compensation 920,950 $2.64 479,050
plans approved by
security holders
Equity compensation 0 0 0
plans not approved by
security holders
Total 920,950 $2.64 479,050
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
Other than the employment agreements described in Item 11, Executive
Compensation, and the transactions described below, since January 1, 2000 there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which we were or are to be a party in which the amount
involved exceeds $60,000, and in which any director, executive officer, holder
of more than 5% of our common stock or any member of the immediate family of any
of these people had or will have a direct or indirect material interest.
We maintain key man term life insurance policies, which we purchased
through an insurance agency of which Sheldon Robinson, one of our directors, is
an owner, covering the lives of Mr. Scott and Mr. Tzur. We paid premiums of
approximately $10,000 for these policies in 2002.
Our board of directors has approved unsecured loans to each of Yehuda
Tzur, our Chairman and Arvin Scott, our President and Chief Executive Officer.
The last advance made on these was made on September 12, 2001, and the board of
directors is prohibited from approving any future advances on these loans. As of
December 31, 2002, amounts of $191,487 and $153,808 were due from Messrs. Tzur
and Scott, respectively. The loans are due on demand and bear interest at the
applicable federal rate imposed by the Internal Revenue Service for one-year
obligations.
During 2002, we purchased material from Wanxiang America Corporation,
an affiliate of Venture Equities Management Inc., which holds all of our
outstanding Series A Preferred Stock. The aggregate amount of such purchases was
approximately $5,400,000.
We believe that the transactions described above were fair and
reasonable and on terms at least as favorable as we would expect to negotiate
with an unaffiliated third party. In the future, we intend to present all
proposed transactions between us and our officers, directors or 5% shareholders,
and affiliates, to our board of directors for consideration and approval. Any
such transaction will require approval by a majority of the directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.
STOCKHOLDERS AGREEMENT AND PROXIES
In connection with the issuance of the Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," we, Mr. Tzur, Mr. Scott, Mr.
Israel and VEMI entered into a stockholders agreement. In the stockholders
agreement Mr. Tzur, Mr. Scott and Mr. Israel agreed to vote their shares in
favor of, and we agreed to take all actions within our control so that, our
board of directors will consist of nine members, two of whom are designated by
VEMI, and that one of the individuals designated by VEMI would be appointed as
co-chairman of the board. We also agreed to take any actions within our control,
and these shareholders agreed to vote in favor of actions, needed to ensure that
the composition of the board of directors of each of our subsidiaries would be
proportionate to that of our board, provided that at least one VEMI designee was
on the board of each of our subsidiaries, and that the composition of any
committees of our board of directors would be proportionate to that of our
board, provided that at least one VEMI designee would be on each committee. The
stockholders' agreement also provides that Mr. Tzur, Mr. Scott and Mr. Israel
will vote their shares in
33
favor of the election of the VEMI designees to our board of directors. As noted
in "Directors, Executive Officers and Key Personnel" our board is currently
comprised of seven persons, including one VEMI nominee, and we remain prepared
to add a second director nominee from VEMI, when and if nominated by VEMI.
The stockholders agreement provides that if Mr. Tzur, Mr. Scott or Mr.
Israel wish to transfer their shares, they must notify VEMI of the proposed
transfer and that VEMI have the right to purchase the shares on the proposed
terms. The agreement provides a similar right to Mr. Tzur, Mr. Scott and Mr.
Israel in the event VEMI proposes to transfer its shares to one of our
competitors.
In the stockholders agreement we also granted pre-emptive rights to
VEMI which entitle VEMI, in connection with most offerings of stock or
securities convertible into stock, to purchase a number of the new securities
sufficient to enable VEMI to maintain its percentage of ownership of our voting
stock, on the most favorable terms made available to other purchasers in the
offering. The pre-emptive rights granted to VEMI do not apply to the issuance of
up to 200,000 shares of our common stock under our stock option plan to persons
who have never been directors of ours, or shares issued upon the exercise of
options or warrants outstanding on the date we issued the Series A Preferred
Stock. The provisions of the stockholders agreement with regard to the
designation of directors by VEMI and similar matters, the rights of VEMI and Mr.
Tzur, Mr. Scott and Mr. Israel to purchase stock in specified circumstances and
the pre-emptive rights granted to VEMI will terminate if the shares of our
common stock into which the shares of the Series A Preferred Stock owned by VEMI
are convertible fall below 1,007,190, which is half of the number of shares into
which the Series A Preferred Stock was convertible when it was originally
issued.
In connection with the issuance of the Series A Preferred Stock to
VEMI, Mr. Scott and Mr. Tzur both executed irrevocable proxies in favor of VEMI
or its representative. The proxies cover all the shares of our common stock
owned by Mr. Scott and Mr. Tzur, which is currently 1,916,100 shares. The
proxies effectively grant VEMI voting power over the shares owned by Mr. Tzur
and Mr. Scott if an event of default, as defined in the certificate of
designations for the Series A Preferred Stock or the Default Warrant issued to
VEMI, occurs. We purchase products from Wanxiang on a regular basis under a
supply agreement, which calls for 60 day payment terms. Periodically, depending
upon our cash position, certain of our payables to Wanxiang have exceeded 60
days, as is presently the case. Wanxiang has never declared an event of default
with regard to its default warrant as a result of the foregoing, and the default
warrant has a 30 day cure period in the event of monetary defaults. The proxies
generally give VEMI the power to vote a number of shares owned by Mr. Scott and
Mr. Tzur equal to the number of shares it acquires upon exercise of the Default
Warrant, which can only be exercised if a defined event of default occurs.
However, if the default in question stems from our breach of any provision of
the purchase agreement relating to the issuance of the Series A Preferred Stock,
the stockholders agreement described above, any of the warrants issued to VEMI,
or the supply agreement entered into with Wanxiang America Corporation, VEMI or
its designee will have the right to vote all of the shares held by Mr. Tzur and
Mr. Scott whether or not it exercises the default warrant. If a default occurs,
which grants VEMI or its designee voting rights over all of the shares and is
later cured, the voting rights will terminate after one year.
ITEM 14. CONTROL PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. The system is supported by policies and
procedures intended to ensure employees adhere to the highest standards of
personal and professional integrity. Our internal audit function monitors and
reports on the adequacy of and compliance with the internal control system, and
appropriate actions are taken to address significant control deficiencies and
other opportunities for improving the system as they are identified. However, no
cost-effective internal control system will preclude all errors and
irregularities, and management is necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our chief executive officer and chief
financial officer, within 90 days prior to the filing date of this report. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made to
our internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index of financial statements, financial statement schedules and
exhibits:
(1) Financial Statements:
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.:
Independent Auditors' Reports ....................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 ........ F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 .................................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 and 20009 ............... F-4 to F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 .................................... F-6 to F-7
Notes to Consolidated Financial Statements .......................... F-8 to F-18
(2) Financial Statement Schedule:
Schedule I -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
3(a) Restated Certificate of Incorporation of Universal
Automotive Industries, Inc. ("UAI") (Exhibit 3.1 to our
Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
3(b) Restated Bylaws of UAI (Exhibit 3.2 to our Registration
Statement on Form S-1 (No. 33- 85162) as filed with the
SEC on October 14, 1994)*
3(c) Certificate of Designations, Preferences and Rights of
Class A Preferred Stock (Exhibit 4.1 to our Form 8-K
Report as filed with the SEC on September 9, 2001)*
3(d) Certificate of Amendment to Certificate of
Designations, Preferences and Rights of Class A
Preferred Stock (Exhibit 3(d) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*
3(e) Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (Exhibit 3(e) to
our Form 10-K Annual Report filed with the SEC on April
1, 2002)*
3(f) Certificate of Amendment to Certificate of
Incorporation dated August 27, 2001 (Exhibit 3(f) to
our Form 10-K Annual Report filed with the SEC on April
1, 2002)*
4(a) Form of Warrant Agreement (including form of Warrant)
(Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*
10(a) Form of UAI Share Option Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
10(b) Amended Universal Automotive Industries, Inc. Share
Option Plan (Exhibit 10 to our Registration Statement
on Form S-8 (No. 333-67150) filed with the SEC on
August 9, 2001)*
10(c) Stock Exchange Agreement, dated May 5, 1994, by and
between UAI, and Yehuda Tzur, Reuben Gabay, Sami Israel
and Arvin Scott (Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10(d) Stock Exchange Agreement, dated April 30, 1994, by and
between UAI and Yehuda Tzur, Reuben Gabay, Sami Israel,
Arvin Scott and Eric Goodman (Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14, 1994)*
35
10(e) Employment Agreement, dated May 5, 1994, by and between
UA and Yehuda Tzur (Exhibit 10.27 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10(f) First Amendment to Employment Agreement dated December
14, 1994, between UA and Yehuda Tzur (Exhibit 10.28 to
the Company's Registration Statement on Form S-1 (No.
33- 85162) as filed with the SEC on October 14, 1994)*
10(g) Amendment to Employment Agreement dated December 14,
1994 between Universal Automotive Industries, Inc. and
Yehuda Tzur (Exhibit 10(g) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*
10(h) Employment Agreement, dated May 5, 1994, by and between
UA and Arvin Scott (Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10(i) First Amendment to Employment Agreement, dated December
14, 1994, between UA and Arvin Scott (Exhibit 10.30 to
the Company's Registration Statement on Form S-1 (No.
33- 85162) as filed with the SEC on October 14, 1994)*
10(j) Amendment to Employment Agreement dated December 14,
1994 between Universal Automotive Industries, Inc. and
Arvin Scott (Exhibit 10(j) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*
10(k) Employment Agreement, dated May 5, 1994 by and between
UA and Sami Israel (Exhibit 10.35 to the Company's
Registration Statement on Form S-1 (No. 33-85162) as
filed with the SEC on October 14, 1994)*
10(l) First Amendment to Employment\Agreement, dated December
14, 1994 by and between UA and Sami Israel (Exhibit
10.36 to the Company's Registration Statement on Form
S-1 (No. 33-85162) as filed with the SEC on October 14,
1994)*
10(m) Amendment to Employment Agreement dated December 14,
1994 between Universal Automotive Industries, Inc. and
Sami Israel (Exhibit 10(m) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*
10(n) Purchase Agreement dated August 28, 2001 between
Universal Automotive Industries, Inc. and Venture
Equities Management, Inc. (Exhibit 10.1 to our Form 8-K
Report filed with the SEC on September 9, 2001)*
10(o) VEMI Default Warrant to purchase up to 2,500,000 Shares
of Registrant's Common Stock (Exhibit 10.2 to our Form
8-K Report filed with the SEC on September 9, 2001)*
10(p) VEMI Warrant to purchase up to 800,000 Shares of
Registrant's Common Stock at $2.00 per Share (Exhibit
10.3 to our Form 8-K Report filed with the SEC on
September 9, 2001)*
10(q) VEMI Warrant to purchase up to 800,000 Shares of
Registrant's Common Stock at greater of $2.00 per Share
or 60 Day Average Market Price (Exhibit 10.4 to our
Form 8-K Report filed with the SEC on September 9,
2001)*
10(r) Registration Rights Agreement Between Registrant and
VEMI (Exhibit 10.5 to our Form 8-K Report filed with
the SEC on September 9, 2001)*
10(s) Stockholders Agreement Among VEMI, Registrant, Arvin
Scott, Yehuda Tzur and Sami Israel (Exhibit 10.6 to our
Form 8-K Report filed with the SEC on September 9,
2001)*
10(t) Supply Agreement Between Registrant and Wanxiang
America Corporation (Exhibit 10.7 to our Form 8-K
Report filed with the SEC on September 9, 2001)*
10(u) Letter Agreement Granting VEMI a "Put" Right in Event
of Failure to Obtain Nasdaq Confirmation of Net
Tangible Assets Compliance (Exhibit 10.8 to our Form
8-K Report filed with the SEC on September 9, 2001)*
10(v) Consulting Agreement between Universal Automotive
Industries, Inc. and EBI Securities Corporation dated
May 6, 1999 (Exhibit 4.1 to our Registration Statement
on Form S-3 (No. 333-45538) filed with the SEC on
September 11, 2001)*
10(w) Credit Agreement by and between LaSalle National Bank
and Universal Automotive Industries, Inc. dated as of
July 14, 1997 (Exhibit
36
10.42 to our Annual Report on Form 10-K for the year
ended December 31, 2000 filed with the SEC on April 17,
2001)*
10(x) Debenture Purchase Agreement between Universal
Automotive Industries, Inc. and Sirrom Capital
Corporation dated July 11, 1997 (Exhibit 10.42 to our
Annual Report on Form 10-K for the year ended December
31, 2000 filed with the SEC on April 17, 2001)*
10(y) Preferred Stock Agreement dated October 30, 2001 by and
between Universal Automotive Industries, Inc. and
FINOVA Mezzanine Capital, Inc. (Exhibit 10(y) to our
Form 10-K Annual Report filed with the SEC on April 1,
2002)*
10(z) Preferred Stock Voting Agreement dated December 5,
2001. (Exhibit 10(z) to our Form 10-K Annual Report
filed with the SEC on April 1, 2002)*
10(aa) First Amendment to Debenture Purchase Agreement dated
as of October 30, 2001 by and between Universal
Automotive Industries, Inc. and FINOVA Mezzanine
Capital, Inc. (Exhibit 10(aa) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*
10(ab) First Amendment to Universal Automotive Industries,
Inc. 12.25% Subordinated Debenture due July 11, 2002
(Exhibit 10(ab) to our Form 10-K Annual Report filed
with the SEC on April 1, 2002)*
10(ac) Prepayment Agreement dated as of October 30, 2001
between Universal Automotive Industries, Inc. and
FINOVA Mezzanine Capital, Inc. (Exhibit 10(ac) to our
Form 10-K Annual Report filed with the SEC on April 1,
2002)*
10(ah) Investment Banking Agreement dated as of November 30,
2001 by and between Universal Automotive Industries,
Inc. and J.P. Turner & Company, L.L.C. (Exhibit 10(ah)
to our Form 10-K Annual Report filed with the SEC on
April 1, 2002)*
10(ai) Corporate Consulting Agreement dated October 16, 2001
by and between Universal Automotive Industries, Inc.
and Schneider Securities, Inc. (Exhibit 10(ai) to our
Form 10-K Annual Report filed with the SEC on April 1,
2002)*
10(aj) Investment Banking Agreement dated May 28, 2002 by and
between Universal Automotive Industries, Inc and
Rockwell Asset Management Company, Inc.
21 Subsidiaries of the Registrant
23 Consent of Ernst and Young LLP
99.1 Certification Required by Section 906 of the
Sarbanes-Oxley Act of 2002
* These exhibits are incorporated herein by reference to the report
referenced after each exhibit next to which an asterisk appears.
+ Indicates executive compensation plans and arrangements.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
2002.
37
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: April 15, 2003
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) April 15, 2003
Arvin Scott
/s/ Robert Zimmer Chief Financial Officer (Principal Financial
- -------------------------- Officer) April 15, 2003
Robert Zimmer
/s/ Peter Riofski Vice President & Controller (Principal April 15, 2003
- -------------------------- Accounting Officer)
Peter Riofski
/s/ Yehuda Tzur
- --------------------------
Yehuda Tzur Chairman of the Board of Directors April 15, 2003
/s/ Sami Israel
- --------------------------
Sami Israel Director April 15, 2003
/s/ Sheldon Robinson
- --------------------------
Sheldon Robinson Director April 15, 2003
/s/ Zemin Xu
- --------------------------
Zemin Xu Director April 15, 2003
/s/ Dennis Kessler
- --------------------------
Dennis Kessler Director April 15, 2003
/s/ M. Catherine Jaros
- --------------------------
M. Catherine Jaros Director April 15, 2003
38
CERTIFICATIONS
I, Arvin Scott, certify that:
I have reviewed this annual report on Form 10-K of Universal Automotive
Industries, Inc.;
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Arvin Scott
--------------------------------------
Arvin Scott
Chief Executive Officer
See also the certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which is also attached to this report.
CERTIFICATIONS
I, Robert W. Zimmer, certify that:
I have reviewed this annual report on Form 10-K of Universal Automotive
Industries, Inc.;
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Robert W. Zimmer
------------------------------------
Robert W. Zimmer
Chief Financial Officer
See also the certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which is also attached to this report.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
TABLE OF CONTENTS
DECEMBER 31, 2002 AND 2001
PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Equity F-4 to F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to the Consolidated Financial Statements F-8 to F-18
SUPPLEMENTARY INFORMATION
Valuation and Qualifying Accounts
(Schedule I) S-1
INDEPENDENT AUDITORS' REPORT
Board of Directors of Universal Automotive Industries, Inc.
We have audited the accompanying consolidated balance sheet of Universal
Automotive Industries, Inc. as of December 31, 2002, and the related
consolidated statement of operations, changes in stockholders' equity and cash
flows for the period then ended. Our audit also included the financial statement
schedule for 2002 listed in the Index of item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, 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, 2002 and the
consolidated results of their operations and cash flows for the period then
ended, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule for 2002, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
March 14, 2003
Chicago, Illinois
INDEPENDENT AUDITORS' REPORT
Board of Directors of Universal Automotive Industries, Inc.
We have audited the accompanying consolidated balance sheet of Universal
Automotive Industries, Inc. as of December 31, 2001, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of the Company's Hungarian
subsidiary (Notes 1 and 14) which statements reflect aggregate total assets of
$0 as of December 31, 2001. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for such subsidiary (before estimated loss on disposal) is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Universal Automotive
Industries, Inc. as of December 31, 2001, and the consolidated results
of their operations and cash flows for each of the two years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
March 27, 2002
F-1
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
Current assets
Cash $ 237,600 $ 976,585
Accounts receivable, trade (net of allowance for doubtful accounts of $464,725
and $404,039 in 2002 and 2001) 12,702,701 15,789,886
Inventories 17,051,952 16,417,009
Deferred income taxes 240,000 240,000
Prepaid expenses and other current assets 215,987 486,293
------------ ------------
30,448,240 33,909,773
------------ ------------
Property and equipment - net of accumulated depreciation 4,175,208 4,728,034
------------ ------------
Other assets
Goodwill (net of accumulated amortization of $373,245 in 2002 and 2001 480,498 480,498
Due from stockholders 345,296 320,929
Other assets 695,542 598,609
------------ ------------
1,521,336 1,400,036
------------ ------------
$ 36,144,784 $ 40,037,843
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, trade $ 10,212,291 $ 11,446,262
Accrued expenses and other current liabilities 2,608,466 3,502,078
Subordinated debenture, current portion 84,020 492,226
Long-term indebtedness, current portion 356,663 379,120
------------ ------------
13,261,440 15,819,686
------------ ------------
Long-term liabilities
Revolving line of credit 16,949,821 19,021,873
Long-term indebtedness, noncurrent portion 110,510 421,269
Subordinated debenture, noncurrent portion 1,109,986 1,179,986
Deferred rent expense 30,419 67,522
------------ ------------
18,200,736 20,690,650
------------ ------------
Stockholders' equity
Preferred stock (authorized 2,000,000 shares, $0.01 par value, 201,438
shares of series A and 100,000 shares of series B issued and outstanding in
2002 and 2001) 3,014 3,014
Common stock (authorized 30,000,000 shares, $0.01 par value, 8,224,949
and 7,939,599 shares issued and outstanding in 2002 and 2001) 82,249 79,394
Additional paid-in capital 15,208,441 14,583,947
Accumulated deficit (9,644,606) (10,136,023)
Accumulated other comprehensive loss (904,340) (882,825)
Stock subscription receivable (62,150) (120,000)
------------ ------------
4,682,608 3,527,507
------------ ------------
$ 36,144,784 $ 40,037,843
============ ============
See accompanying notes.
F-2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Net sales $ 69,855,578 $ 71,823,135 $ 69,944,023
Cost of sales 57,529,134 61,116,436 57,767,138
------------ ------------ ------------
GROSS PROFIT 12,326,444 10,706,699 12,176,885
Selling, general and administrative 10,316,646 10,632,782 11,571,752
Other operating expenses 98,423 792,555 320,000
Loss from Hungarian operations 71,239 294,897 --
------------ ------------ ------------
10,486,308 11,720,234 11,891,752
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,840,136 (1,013,535) 285,133
Other (income) expense:
Interest expense 1,398,017 2,503,383 2,593,656
(Gain) loss on disposition of assets -- -- 109,624
Other (49,298) (148,950) (124,853)
------------ ------------ ------------
1,348,719 2,354,433 2,578,427
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM
491,417 (3,367,968) (2,293,294)
Income taxes
Current -- 12,623 --
Deferred -- 427,800 (33,351)
------------ ------------ ------------
-- 440,423 (33,351)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 491,417 (3,808,391) (2,259,943)
Extraordinary item - gain on debt restructuring -- 829,714 --
------------ ------------ ------------
NET INCOME (LOSS) 491,417 (2,978,677) (2,259,943)
Issuance of preferred stock with beneficial conversion
feature and warrants -- (430,614) --
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS $ 491,417 $ (3,409,291) $ (2,259,943)
============ ============ ============
Earnings (loss) per share
Basic net income (loss) per common share
Before extraordinary item $ 0.06 $ (0.56) $ (0.32)
Extraordinary gain -- 0.11 --
------------ ------------ ------------
$ 0.06 $ (0.45) $ (0.32)
============ ============ ============
Diluted net income (loss) per common share
Before extraordinary item $ 0.04 $ (0.56) $ (0.32)
Extraordinary gain -- 0.11 --
------------ ------------ ------------
$ 0.04 $ (0.45) $ (0.32)
============ ============ ============
See accompanying notes.
F-3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
PREFERRED STOCK COMMON STOCK
------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ----------- -----------
Balance January 1, 2000 $ -- 6,829,310 $ 68,293
---------- ---------- ----------- -----------
Comprehensive loss for 2000
Net loss
Foreign currency translation adjustments
Comprehensive loss
Stock options recorded as compensation
Warrants exercised 291,760 2,917
Stock options exercised 85,000 850
Shares for services 37,500 375
---------- ---------- ----------- -----------
Balance, December 31, 2000 -- -- 7,243,570 72,435
---------- ---------- ----------- -----------
Comprehensive loss for 2001
Net loss
Foreign currency translation adjustments
Comprehensive loss
Common stock and stock options recorded
as compensation 20,300 203
Common stock and warrants issued for services 20,000 200
Series A preferred stock issued with beneficial
conversion (net of issuance costs of $100,000) 201,438 2,014
Redemption of common stock and warrants (279,260) (2,793)
Series B preferred stock issued 100,000 1,000
Conversion of minority interest 225,000 2,250
Warrants and options exercised 375,300 3,753
Common stock issued in satisfaction of
obligation 334,689 3,346
---------- ---------- ----------- -----------
Balance, December 31, 2001 301,438 3,014 7,939,599 79,394
---------- ---------- ----------- -----------
Comprehensive income for 2002
Net income
Foreign currency translation adjustments
Comprehensive income
Warrants and options exercised 285,350 2,855
Services rendered as payment of stock
subscription receivable
Forfeiture of short swing profits by officer
Stock compensation
---------- ---------- ----------- -----------
Balance December 31, 2002 301,438 $ 3,014 8,224,949 $ 82,249
---------- ---------- ----------- -----------
See accompanying notes
F-4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONAL OTHER STOCK
PAID-IN ACCUMULATED COMPREHENSIVE SUBSCRIPTION
CAPITAL DEFICIT LOSS RECEIVABLE TOTAL
-------------- ------------- -------------- ------------ -------------
Balance January 1, 2000 $ 8,413,978 $ (4,514,672) $ (894,423) $ -- $ 3,073,176
-------------- ------------- -------------- ------------ -------------
Comprehensive loss for 2000
Net loss (2,259,942) (2,259,942)
Foreign currency translation adjustments (354,522) (354,522)
-------------
Comprehensive loss (2,614,464)
Stock options recorded as compensation 39,600 39,600
Warrants exercised 25,208 28,125
Stock options exercised 119,650 120,500
Shares for services 72,300 72,675
-------------- ------------- -------------- ------------ -------------
Balance, December 31, 2000 8,670,736 (6,774,614) (1,248,945) 719,612
-------------- ------------- -------------- ------------ -------------
Comprehensive loss for 2001
Net loss (2,978,677) (2,978,677)
Foreign currency translation adjustments 366,120 366,120
-------------
Comprehensive loss (2,612,557)
Common stock and stock options recorded
as compensation 78,484 78,687
Common stock and warrants issued for services 114,993 115,193
Series A preferred stock issued with beneficial
conversion (net of issuance costs of
$100,000) 3,080,718 (382,732) 2,700,000
Redemption of common stock and warrants (1,134,758) (1,137,551)
Series B preferred stock issued 1,999,000 2,000,000
Conversion of minority interest 447,750 450,000
Warrants and options exercised 730,370 (120,000) 614,123
Common stock issued in satisfaction of
obligation 596,654 600,000
-------------- ------------- -------------- ------------ -------------
Balance, December 31, 2001 14,583,947 (10,136,023) (882,825) (120,000) 3,527,507
-------------- ------------- -------------- ------------ -------------
Comprehensive income for 2002
Net income 491,417 491,417
Foreign currency translation adjustments (21,515) (21,515)
-------------
Comprehensive income 469,902
Warrants and options exercised 598,769 601,624
Services rendered as payment of stock
subscription receivable 57,850 57,850
Forfeiture of short swing profits by officer 5,925 5,925
Stock compensation 19,800 19,800
-------------- ------------- -------------- ------------ -------------
Balance December 31, 2002 $ 15,208,441 $ (9,644,606) $ (904,340) $ (62,150) $ 4,682,608
-------------- ------------- -------------- ------------ -------------
F-5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net Income (loss) $ 491,417 $(2,978,677) $(2,259,943)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities
Depreciation and amortization 1,400,314 1,319,047 1,388,669
Loss on sale of property and equipment -- -- 109,624
Extraordinary gain -- (829,714) --
Provision for bad debts 139,055 606,433 489,045
Other, net -- 45,452 45,000
Deferred income taxes -- 427,800 (41,560)
Compensation expense for stock options 19,800 78,687 39,600
Stock issued for services -- 115,193 72,675
Stock subscription receivable paid through the
exchange of services 57,850 -- --
Changes in
Accounts receivable, trade 3,017,356 (1,900,611) 768,475
Inventories (634,943) 2,881,476 (1,805,942)
Prepaid expenses and other current assets (365,176) 373,030 297,807
Net assets of Hungarian operations -- 152,926 (513,391)
Other assets (273,206) 109,137 (368,841)
Accounts payable, trade (1,233,971) (2,578,147) 3,832,902
Accrued expenses and other liabilities (456,975) 165,018 (817,584)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,161,521 (2,012,950) 1,236,536
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (568,699) (913,221) (1,481,163)
Proceeds from disposition of assets -- -- 10,000
Advances to stockholders (24,367) (62,209) --
Increase in investments (10,000) -- --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (603,066) (975,430) (1,471,163)
----------- ----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in revolving loan indebtedness (2,072,052) 1,757,762 499,439
Principal payments on notes payable, net (811,422) (529,167) (488,246)
Forfeiture of short swing profits by officer 5,925 -- --
Proceeds from issuance of preferred stock of subsidiary -- -- 450,000
Proceeds from issuance of preferred stock -- 2,800,000 --
Redemption of common stock and warrants -- (1,000,000) --
Proceeds from issuance of common stock from
exercise of warrants and options 601,624 614,123 148,625
Stock issuance costs -- (100,000) --
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,275,925) 3,542,718 609,818
----------- ----------- -----------
Effect of exchange rate changes on cash (21,515) 366,120 (354,522)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH (738,985) 920,458 20,669
CASH
Beginning of year 976,585 56,127 35,457
----------- ----------- -----------
END OF YEAR $ 237,600 $ 976,585 $ 56,126
=========== =========== ===========
See accompanying notes.
F-6
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 1,529,195 $ 2,384,122 $ 2,577,954
============ ============ ============
Income taxes paid $ 7,173 $ 12,978 $ 32,015
============ ============ ============
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Liabilities satisfied by issuance of
common stock $ -- $ 600,000 $ 72,675
============ ============ ============
Subordinated debt satisfied by
issuance of Series B preferred stock $ -- $ 2,000,000 $ --
============ ============ ============
Conversion of minority interest into
common stock $ -- $ 450,000 $ --
============ ============ ============
See accompanying notes.
F-7
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 STRUCTURE
Universal Automotive Industries, Inc. (the Company) acts as a holding company
for its wholly-owned direct and indirect subsidiaries, which, as of December 31,
2002, are as follows:
Universal Automotive, Inc. (Universal)
Universal Automotive of Virginia, Inc.
Universal Brake Parts, Inc. (an amalgamation of 3 Canadian corporations
previously owned by the Company, two of which were inactive in 2001).
UBP Hungary, Inc. (Hungary), a United States Corporation and its wholly
owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian limited
liability company (see Notes 2 and 14).
eParts eXchange, Inc., E-Commerce business-to-business activity (see Note
13).
NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Universal Automotive Industries, Inc. is engaged principally in the manufacture
and distribution of automotive brake parts and operates from leased facilities
in Alsip, Illinois; Compton, California; Walkerton, Virginia; Cuba, Missouri
(closed effective December 31, 2002) ; and Toronto, Canada. Sales are made
throughout the United States. The Company's Hungarian subsidiary, which was
engaged in the manufacture of iron casting products, was sold during 2001 as
described in Note 14.
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.
SEGMENT--The United States and Canadian operations are vertically
integrated, and are considered part of the same industry segment and
geographic segment (North America).
REVENUE RECOGNITION--Revenues are recognized at the time of shipment to the
customer, which is generally when title passes. The sales incentives
provided to customers in the amount of $99,935, $493,828, and $104,183 for
2002, 2001 and 2000, respectively, have been reflected as a reduction of
revenue in the period the sales incentives were earned.
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION--The functional currency for the Company's
foreign operation is the applicable local currency. Accordingly, all
balance sheets accounts have been translated using the exchange rate in
effect at the balance sheet date and income statement amounts have been
translated at the average exchange rate for the year. The translation
adjustments resulting from the changes in the exchange rate have been
reported as a separate component of stockholders equity. The effect of
foreign transaction gains and losses, which were reported in income, were
not material for the periods presented.
CASH--The Company considers all highly liquid investments with a maturity
of three months or less to be cash equivalents. At times during the year,
the Company maintains cash balances in excess of insured limits.
INVENTORIES--Inventories are stated at the lower of cost or market with
cost generally determined using the weighted average method, which
approximates the first-in, first-out (FIFO) method. Consideration is given
to deterioration, obsolescence and other factors in evaluating the
estimated market value of inventory based upon management judgment and
available information.
PROPERTY AND EQUIPMENT--Property and equipment, including amounts
capitalized under capital leases, are stated at cost less accumulated
depreciation. Depreciation is computed under accelerated and straight-line
methods. Depreciation and amortization expense was $1,121,523, $1,181,998
and $1,123,033 for the years ended December 31, 2002, 2001 and 2000,
respectively.
F-8
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
COST OF SALES--The Company considers warehousing (including certain
salaries, occupancy costs and supplies) and buying expenses as an integral
component of cost of sales.
GOODWILL--On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which eliminates the amortization of goodwill and instead requires
that goodwill be tested for impairment at least annually. Transitional
impairment tests of goodwill made by the Company during the quarter ended
March 31, 2002 and annual impairment tests did not require adjustment to
the carrying value of its goodwill. The amortization of goodwill in 2001
and 2000 in the amount of $29,490 and $47,383, respectively, did not have a
significant effect on the results of operations or earnings per share.
Income (loss) from operations would have been $(984,045) and $332,516 in
2001 and 2000, respectively, without the effects of amortization of
goodwill. This compares to the recorded $(1,013,535) and $285,133 income
(loss) from operations for the same period, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS--In the event that facts and circumstances
indicate that the cost of any long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation were
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow is required.
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. Deferred income tax assets and
liabilities are determined based on the financial statement and tax bases
of assets and liabilities reduced, where appropriate, by a valuation
allowance (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, other than debt instruments, closely approximates their
carrying value. Because the interest rate of the revolving loan and the
term loan with LaSalle National Bank adjusts with changes in the market
rate of interest, management believes the fair value is equivalent to the
carrying value. Management believes that the interest rate of 7.00 percent
on the subordinated debenture is approximately equal to the current rate
available for similar debt. Accordingly, the fair value of these debentures
approximates their carrying value.
ADVERTISING--All costs associated with advertising are charged to
operations when incurred. Advertising expense was $349,171, $548,146 and
$174,624 for the years ended December 31, 2002, 2001 and 2000,
respectively.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform to the 2002 presentation without affecting previously reported
results.
NEW ACCOUNTING STANDARDS--In April 2002, the Financial Accounting Standards
Board ("FASB") issued No.145, Rescission of FASB No. 4, 44 and 64,
Amendment of FASB Statement No. 15 and Technical Corrections. SFAS No. 145
requires that certain gains and losses on extinguishment of debt be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt. This statement also amends
SFAS No. 13, Accounting for Leases, to require that certain modifications
to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary
obligor (or guarantor). In addition, SFAS No. 145 rescinded SFAS No. 44
Accounting for Tangible Assets of Motor Carriers, which addressed the
accounting for intangible assets of motor carriers and made numerous
technical, changes to various FASB pronouncements. The Company will be
required to adopt SFAS No. 145 on January 1, 2003, and will reclassify
extraordinary items to continuing operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146, which requires that a
liability for costs associated with an exit or disposal activity be
recognized in the period in which the liability is incurred, is effective
for exit and disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a significant effect on
the Company's results of operations or it financial position.
F-9
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 3 INVENTORIES
Inventories consist of the following:
2002 2001
----------- -----------
Finished goods $13,815,563 $12,057,191
Work-in-progress 510,264 888,742
Raw materials 2,726,125 3,471,076
----------- -----------
$17,051,952 $16,417,009
=========== ===========
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
DEPRECIABLE
2002 2001 LIVES
------------ ------------ ------------
Machinery & equipment $ 6,387,406 $ 6,046,893 5 - 11
Tools and dies 1,143,837 1,064,457 5 - 11
Patterns 1,346,247 1,331,247 5 - 10
Computer equipment 1,105,464 974,119 3 - 5
Automobiles and trucks 289,237 289,237 3 - 5
Furniture and fixtures 379,874 366,694 5 - 11
Leasehold inprovements 385,757 313,384 5 - 9
Construction in progress 66,100 112,564 -
------------ ------------
$ 11,103,922 $ 10,498,595
Accumulated depreciation (6,928,714) (5,770,561)
------------ ------------
$ 4,175,208 $ 4,728,034
------------ ------------
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows:
DECEMBER 31,
------------------------------
2002 2001
---------- ----------
Accrued rebates $ 805,413 $ 982,344
Core liability -- 1,095,041
Other 1,803,503 1,424,693
---------- ----------
$2,608,466 $3,502,078
---------- ----------
NOTE 6 OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
DECEMBER 31,
--------------------------------------------
2002 2001 2000
-------- -------- --------
Expired barter credits $ -- $275,730 $120,000
eParts eXchange shut down expense -- 113,577 200,000
Inventory writedown -- 121,431 --
Moving expenses 13,298 281,817 --
Terminated deal expenses 45,125 -- --
Prior year's Michigan SBT Tax 40,000 -- --
-------- -------- --------
$ 98,423 $792,555 $320,000
-------- -------- --------
F-10
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 7 DUE FROM STOCKHOLDERS
Amounts due from stockholders represent advances made to certain stockholders
who are also executives of the Company as well as the related accrued and unpaid
interest. The advances bear interest at nine percent per annum and are due on
demand. Interest income from these advances amounted to $24,367, $22,209 and
$21,458 for 2002, 2001 and 2000, respectively.
NOTE 8 SUBORDINATED DEBENTURE AND PREFERRED STOCK
On July 14, 1997, the Company sold a $4,500,000 subordinated debenture to Finova
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.), which required payments
of interest at 12.25 percent per annum through maturity on July 14, 2002.
Through August 14, 2001, the Company had issued Finova warrants to purchase
1,575,000 shares of the Company's common stock at exercise prices ranging from
$0.83 to $1.58, based on 80 percent of the average closing bid price of the
Company's common stock for the 20 days preceding the respective issuance dates.
The warrants were exercisable at any time through the sixth anniversary of the
debenture issue date. During 2000, Finova elected to exercise warrants to
purchase 450,000 shares of the Company's common stock at an exercise price of
$0.83 per share, using a "cashless" exercise provision whereby Finova received a
net of 279,260 shares of common stock after surrendering 170,743 shares, which
had a fair market value equal to the aggregate exercise price. The Company
received no cash proceeds from this transaction when such shares were issued.
On October 31, 2001, the Company completed a restructuring of the $4,500,000
subordinated debt held by Finova. The restructuring resulted in the following:
(i) Finova surrendered to the Company all of its holdings in the Company's
common stock and warrants (279,260 shares and warrants to purchase an additional
1,125,000 shares at prices ranging from $1.12 to $1.58 per share); (ii) the
Company's payment of $1,000,000 to Finova; (iii) issuance to Finova of
$2,000,000 of series B preferred stock ($0.01 par value); and (iv) the
adjustment for the amount due on the debenture to $1,500,000. The interest rate
was reduced from 12.25 percent to 7.0 percent and the Company was allowed to pay
the remaining balance by making five $100,000 payments every 45 days beginning
December 15, 2001 with a final payment of $1,000,000 due July 11, 2005. This
transaction has been accounted for as a troubled debt restructuring and resulted
in an extraordinary gain of $829,714 (inclusive of an accrual of all remaining
interest to be paid of approximately $272,000) for the year ended December 31,
2001. The series B preferred stock has no fixed dividend, entitles the holder to
a liquidation preference, is redeemable at any time at the Company's option and
is convertible into 1,000,000 shares of common stock for which the Company
provided Finova with registration rights.
On August 29, 2001, the Company issued 201,438 shares of series A preferred
stock ($0.01 par value) to Venture Equities Management, Inc. (VEMI) (an
affiliate of Wanxiang America Corporation) in exchange for $2,800,000 in cash.
The series A preferred stock has no fixed dividend, entitles the holder to a
liquidation preference, is redeemable at the Company's option subject to certain
conditions, and is convertible into 2,014,380 shares of the Company's common
stock (with registration rights), subject to certain antidilution provisions. In
connection with the issuance of the series A preferred stock, the Company also
issued to VEMI three warrants to purchase common stock: the first and second
warrants for 800,000 shares each are exercisable at any time through August 28,
2003 at an exercise price of $2.25 per share; the third warrant for 2,500,000
shares is exercisable only upon the occurrence of events of default at an
exercise price to be determined based on a defined computation. The costs
related to the issuance of the preferred stock amounted to approximately
$100,000.
NOTE 9 LASALLE INDEBTEDNESS
The Company has a credit agreement with LaSalle Bank National Association or its
subsidiaries ("LaSalle") for a term loan and revolving line of credit of up to
$26,000,000 based on eligible accounts receivable and inventory.
The revolving line of credit has a term ending May 1, 2004 and an interest rate
of prime plus 1.5% per annum. During 2001, the interest rate was changed from
prime plus 0.5 percent per annum. The line of credit is subject to an ongoing
option to convert to LIBOR plus 2.5 percent per annum. The term loan is payable
in monthly principal installments of $18,705 and bears interest at prime plus
0.75 percent per annum.
F-11
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 9 LASALLE INDEBTEDNESS (CONTINUED)
The LaSalle agreement contains certain limitations on dividends and capital
expenditures and requires the Company to satisfy certain financial tests
concerning earnings before interest, taxes depreciation and amortization
(EBITDA), defined minimum tangible net worth and debt service coverage. At
December 31, 2002, the Company was in compliance with these financial covenants.
The entire credit facility is secured by a first lien on substantially all of
the Company's North American assets.
At December 31, 2002, approximately $937,000 was available for borrowing under
the revolving credit line.
The weighted average interest rates on the aforementioned revolving credit
facility borrowings were 5.70 percent, 8.68 percent and 10.51 percent for the
years ended December 31, 2002, 2001, and 2000, respectively.
NOTE 10 LONG-TERM INDEBTEDNESS
Long-term indebtedness is summarized as follows:
2002 2001
------------ ------------
LaSalle term loan (see Note 9) $ 206,826 $ 431,281
Capital lease obligation (see Note 12) 245,935 347,915
Vehicle acquisition loans 14,412 21,193
------------ ------------
$ 467,173 $ 800,389
Current portion 356,663 379,120
------------ ------------
Noncurrent portion $ 110,510 $ 421,269
============ ============
The approximate aggregate maturities of all long-term indebtedness are:
SUBORDINATED REVOLVING
DEBENTURE LINE OF CREDIT
PER ABOVE (NOTE 8) (NOTE 9) TOTAL
------------ ------------ -------------- ------------
2003 $ 368,324 $ 84,020 $ -- $ 452,344
2004 81,712 70,000 16,949,821 17,101,533
2005 10,578 1,039,986 -- 1,050,564
2006 11,346 -- -- 11,346
2007 9,153 -- -- 9,153
------------ ------------ ------------ ------------
481,113 1,194,006 16,949,821 18,624,940
Interest Portion (13,940) -- -- (13,940)
------------ ------------ ------------ ------------
$ 467,173 $ 1,194,006 $ 16,949,821 $ 18,611,000
------------ ------------ ------------ ------------
F-12
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 11 INCOME TAXES
The components of the net deferred tax assets are as follows:
2002 2001
------------- -------------
Tax benefits upon future liquidation of Hungarian subsidiary $ 193,400 $ 193,400
Allowance for doubtful accounts 179,731 241,700
Inventories 166,431 223,600
Net operating loss carryforward -U.S 3,068,755 2,891,100
Net operating loss carryforward -Canada 323,067 427,500
Compensation expense for stock options 240,800 240,800
Other accruals 202,400 202,400
---------- ----------
Gross deferred tax asset 4,374,584 4,420,500
---------- ----------
Deferred tax liability - principally depreciation
U.S (242,634) (314,700)
Canada (521,792) (632,000)
---------- ----------
Gross deferred tax liability (764,426) (946,700)
---------- ----------
Net deferred tax assets 3,610,158 3,473,800
Valuation allowance (3,370,158) (3,233,800)
---------- ----------
Net deferred tax asset $ 240,000 $ 240,000
========== ==========
At December 31, 2002, the Company had a U.S. Federal net operating loss
carryforward of approximately $ 9,200,000, expiring in years 2017 to 2021.
The Company believes that, consistent with accounting principles generally
accepted in the United States, it is more likely than not that the tax benefits
associated with the balance of loss carryforwards and other deferred tax assets
will be realized through future taxable earnings or alternative tax strategies.
A reconciliation of the provision for income taxes and the amounts computed by
applying the federal statutory rate to income (loss) from continuing operations
before income tax expense is as follows:
2002 2001 2000
----------- ----------- -----------
Income (loss) from continuing operations before income tax expense
United States $ 335,688 $(2,694,454) $(2,111,900)
Canada 155,729 156,200 (181,394)
----------- ----------- -----------
$ 491,417 $(2,538,254) $(2,293,294)
=========== =========== ===========
Computed income tax expense (benefit) at federal statutory rate $ 166,389 $ (863,000) $ (779,720)
State income taxes (20,000) (101,500) (91,700)
Increase (decrease) in valuation allowance (136,358) 1,141,600 797,200
Other (10,031) 263,323 40,869
----------- ----------- -----------
$ -- $ 440,423 $ (33,351)
----------- ----------- -----------
F-13
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 12 LEASES
The Company leases all of its facilities from unaffiliated parties. The lease
terms range from month-to-month to long-term leases, the latest of which expires
in 2012.
Aggregate rent expense for all facilities was approximately $1,980,000,
$1,978,000, and $1,415,000 for 2002, 2001 and 2000, respectively.
The Company leases certain equipment under a capital lease payable in aggregate
monthly installments of $13,077 through 2005. The net book value of such
equipment under capital lease is $261,143 and $359,681 at December 31, 2002 and
2001, respectively. (see Note 10).
Minimum operating lease payments due over the remaining terms of the leases are
as follows:
OPERATING
LEASES
-------------
2003 $ 1,417,818
2004 1,168,506
2005 507,925
2006 356,339
2007 348,587
Thereafter 1,343,974
-------------
$ 5,143,149
=============
NOTE 13 PREFERRED STOCK OF SUBSIDIARY
In December 1999, the Company formed eParts eXchange, Inc. ("EPX"). EPX operated
a business-to-business e-commerce Internet platform for worldwide buyers and
sellers of automotive aftermarket parts focusing on the commodity, surplus and
international trade segments. In June 2000, the funding of EPX was completed
through the sale of $450,000 of its preferred shares with conversion rights into
the Company's common stock. In January 2001, the Company determined that it was
better served by redirecting the efforts of EPX to augment the sales and
marketing of Universal's products. As a result, the Company closed the website
and the remaining employees were permanently reassigned to Universal's
distribution business. During 2001, the preferred shares of EPX were converted
into 225,000 shares of the Company's common stock.
NOTE 14 HUNGARIAN OPERATIONS
On December 9, 1999, the Company decided to discontinue its Hungarian operation.
At December 31, 1999, the carrying value of the Hungarian plant and equipment
was adjusted to its estimated net realizable value of $800,000, resulting in a
write-down of $1,583,000. In 1999, the Company provided for estimated costs of
disposition of $1,500,000, including estimated losses of the Hungarian
operations during the disposal period. The disposition was initially expected to
occur by the end of 2000. Commencing in 2001, because the Company had not
disposed of the Hungarian operations within one year, accounting principles
generally accepted in the United States require that income or loss from such
discontinued operations be included in the statement of operations as a
component of income (loss) from continuing operations.
The Company's subsidiary, UBP Hungary, Inc., sold its ownership interest in UBP
Csepel Iron Foundry, Kft to Euro-Industrial Limited, LLC (an unrelated third
party) as of December 31, 2001, for a $100,000 promissory note. Also in
connection with the sale, several instruments evidencing debt owed by UBP Csepel
to UBP Hungary were replaced by a single promissory note in the amount of
$728,000. The $100,000 note is paid in quarterly installments beginning April
2002 and ending January 2003. This note does not bear interest unless there is a
default. As of December 31, 2002, this note was in default. The $728,000
promissory note is to be repaid in monthly installments beginning in November
2003 and ending in October 2006. This promissory note bears interest at the rate
of 6.5 percent per year. Due to the uncertainty of the collectibility of these
promissory notes, a reserve of $828,000 has been recorded.
F-14
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 15 COMMITMENTS AND CONTINGENCIES
In connection with the issuance of series A preferred stock in August 2001 (see
Note 8), the Company entered into a supply agreement with Wanxiang. Under the
supply agreement, the Company agreed to make annual purchases of parts from
Wanxiang totaling $5,000,000, as long as the prices of the products purchased
from Wanxiang are substantially comparable to the prices charged by other
suppliers in the Peoples Republic of China for similar products. In the event
the Company does not purchase $5,000,000 in products from Wanxiang in a year,
the Company is obligated under the agreement to pay Wanxiang 20 percent of the
difference between $5,000,000 and the amount the Company has purchased during
the year. The agreement provides Wanxiang with a right of refusal with respect
to products it seeks to purchase from other suppliers located in the Peoples
Republic of China. The supply agreement has an indefinite term, but can be
terminated by Wanxiang at any time and by the Company if Wanxiang materially
fails to perform its obligations under the agreement, or if the number of shares
of the Company's common stock underlying the shares of series A preferred stock
owned by VEMI falls below a specified level. During the years ended December 31,
2002 and 2001, the Company purchased approximately $5,400,000 and $565,000 of
products from Wanxiang, respectively.
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately covered by insurance, or, if not covered, would not
have a material effect on the Company's financial position, results of
operations or liquidity.
NOTE 16 STOCK WARRANTS AND OPTIONS
At December 31, 2002, the Company had 1,137,450 redeemable common stock purchase
warrants outstanding with an exercise price of $2.25 per share, expiring in
September 15, 2003. A total of 142,350 and 202,700 of these warrants were
exercised during 2002 and 2001, respectively.
In addition to the warrants discussed above and in Note 8, in exchange for
consulting services the Company issued (a) warrants to purchase 215,000 shares
of the Company's common stock at exercise prices ranging from $ $2.50 to $3.00
per share in 2002 that are exercisable until 2005 (60,000 shares with an
exercise price of $3.00 were forfeited as termination damages under the
consulting services agreement), (b) warrants to purchase 456,500 shares of the
Company's common stock at exercise prices ranging from $1.62 to $3.74 per share
in 2001 that are exercisable until 2004, (c) warrants to purchase 325,000 shares
of the Company's common stock at exercise prices ranging from $2.00 to $2.75 per
share in 2000 that are exercisable until 2005 (40,000 shares exercised in 2002
at $2,50 per share and 60,000 shares exercised in 2001 at $2.00 per share), (d)
warrants to purchase 200,000 shares of the Company's common stock at exercise
prices ranging from $1.4375 to $2.00 per share in 1999 that are exercisable
until 2004 (40,000 shares exercised in 2002 at $2,00 per share, 100,000 and
60,000 shares exercised in 2001 at $1.4375 and $2.00 per share, respectively)
and (e) warrants to purchase 50,000 shares of the Company's common stock at an
exercise of $1.375 per share in 1998 that are exercisable until 2003 (25,000
shares exercised in 2002 at $1.375 per share). In connection with the exercise
of the warrant for 60,000 shares in 2001, the Company recorded stock
subscription receivable in the amount of $120,000.
The Company maintains a Stock Option Plan for key employees and others. Options
granted may be either incentive stock options as specified by the Internal
Revenue Code or nonstatutory options. The Company has reserved 1,400,000 shares
of common stock for issuance under the Stock Option Plan.
F-15
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 16 STOCK WARRANTS AND OPTIONS (CONTINUED)
Following is a table indicating the activity during 2002, 2001 and 2000 for such
WEIGHTED
STOCK AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Options outstanding at December 31, 1999 576,676 $ 2.17
Options granted 125,000 2.40
Options exercised (85,300) 1.42
Options forfeited (53,276) 1.77
---------- ----------
Balance, December 31, 2000 563,100 2.35
Options granted 224,350 2.32
Options exercised (12,900) 2.13
Options forfeited (24,250) 2.09
---------- ----------
Balance, December 31, 2001 750,300 2.37
Options granted 244,150 3.32
Options exercised (15,500) 2.28
Options forfeited (58,000) 2.02
---------- ----------
Balance, December 31, 2002 920,950 2.64
The following table summarizes information about the outstanding and exercisable
stock options as of December 31, 2002:
OUTSTANDING EXERCISABLE
------------------------------------------ ------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- -------------- ----------- ---------- ------------ -------------
$ 1.00 - 1.98 157,800 76 months $ 1.38 104,500 $ 1.31
2.00 - 2.66 461,950 84 months $ 2.33 207,430 $ 2.31
3.00 - 3.56 235,700 105 months $ 3.08 13,000 $ 3.06
$5.00 65,500 51 months $ 5.00 65,500 $ 5.00
------------ ----------
920,950 390,430
============ ==========
Compensation expense is being recorded over the respective vesting periods,
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 2002, 2001 and 2000, amounts of $19,800,
$39,600 and $39,600, respectively, have been provided for such compensation
expense.
The Company has adopted only the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), and continues to account for stock options in accordance with APB Opinion
25. The foregoing amount of compensation expense differs by less than $.01 per
share from that which would have been recorded using the Black-Scholes option
valuation method. Accordingly, the pro forma disclosures required by SFAS 123
have been omitted.
F-16
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 17 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
YEAR ENDING DECEMBER 31,
------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
BASIC NET INCOME (LOSS) PER COMMON SHARE
Numerator:
Income (loss) from continuing operations before
extraordinary item $ 491,417 $(4,239,005) $(2,259,943)
Denominator:
Weighted average common shares outstanding 8,198,174 7,553,141 7,008,438
Effective of dilutive securities
Conversion of preferred stock 3,014,380 -- --
----------- ----------- -----------
Denominator for diluted earnings per common share 11,212,554 7,553,141 7,008,438
=========== =========== ===========
Basic net income (loss) per common share $ 0.06 $ (0.56) $ (0.32)
Diluted net income (loss) per common share $ 0.04 $ (0.56) $ (0.32)
F-17
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 18 QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER YEAR
------------ ----------- ------------ ------------ ------------
2002
Net sales $ 17,644,317 $20,424,405 $ 17,146,536 $ 14,640,320 $ 69,855,578
Income (loss) from operations 517,300 1,241,138 351,169 (269,471) 1,840,136
Income (loss) before provision 151,911 517,225 11,985 (189,704) 491,417
for income taxes
Net income (loss) 151,911 517,225 11,985 (189,704) 491,417
Basic earnings (loss) per share 0.02 0.06 -- (0.02) 0.06
Fully diluted earnings (loss) 0.01 0.05 -- (0.02) 0.04
per share
2001
Net sales $ 16,028,365 $19,999,491 $ 18,160,436 $ 17,634,843 $ 71,823,135
Income (loss) from operations (472,553) 745,772 62,531 (1,349,285) (1,013,535)
Income (loss) before (1,074,427) 192,750 (429,435) (2,056,856) (3,367,968)
provisions for income taxes
and extraordinary gain
Net income (loss) (1,084,927) 202,750 (429,435) (1,667,065) (2,978,677)
Basic and diluted earnings (0.15) 0.03 (0.06) (0.27) (0.45)
(loss) per share
2000
Net sales $ 17,502,604 $19,995,593 $ 18,940,835 $ 13,504,991 $ 69,944,023
Income (loss) from operations 600,839 879,648 179,723 (1,375,077) 285,133
Income (loss) before provision 89,310 224,658 (496,455) (2,110,806) (2,293,293)
for income taxes
Net income (loss) 57,010 121,058 (331,555) (2,106,455) (2,259,943)
Basic and diluted earnings 0.09 0.06 (0.02) (0.43) (0.32)
(loss) per share
The fourth quarter 2002 loss was attributable to (a) significantly lower sales
consistent with a sluggish automotive aftermarket and (b) under absorption of
manufacturing costs.
The fourth quarter 2001 loss was attributable to (a) certain other expenses as
further detailed in Note 6, (b) marketing allowances granted to a new customer,
(c) year-end adjustments to inventory reserves and (d) under absorption of fixed
manufacturing costs resulting from reduced facility output.
The fourth quarter 2000 loss was attributable to (a) significantly lower sales
consistent with a sluggish automotive aftermarket, (b) continued under
absorption of friction manufacturing costs for new facility and (c) severance
payments to certain terminated employees.
F-18
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COLUMN B COLUMN C
BALANCE AT CHARGED COLUMN E
BEGINNING TO COSTS COLUMN D BALANCE AT
OF PERIOD AND EXPENSE WRITE-OFFS END OF PERIOD
Allowance for doubtful accounts 2002 $ 404,039 $ 68,829 $ 9,143 $ 464,725
=========== =========== ========= ===========
Allowance for doubtful accounts 2001 $ 608,624 $ 555,210 $ 759,795 $ 404,039
=========== =========== ========= ===========
Allowance for doubtful accounts 2000 $ 429,319 $ 489,045 $ 309,740 $ 608,624
=========== =========== ========= ===========
Reserve for inventory obsolescence 2002 $ 215,301 $ 236,310 $ 94,061 $ 357,550
=========== =========== ========= ===========
Reserve for inventory obsolescence 2001 $ 331,927 $ (116,626) $ - $ 215,301
=========== =========== ========= ===========
Reserve for inventory obsolescence 2000 $ 544,500 $ (212,573) $ - $ 331,927
=========== =========== ========= ===========
Valuation allowance for deferred
income taxes 2002 $ 3,233,800 $ 135,358 $ - $ 3,370,158
=========== =========== ========= ===========
Valuation allowance for deferred
income taxes 2001 $ 2,092,200 $1,141,600 $ - $ 3,233,800
=========== =========== ========= ===========
Valuation allowance for deferred
income taxes 2000 $ 1,295,000 $ 797,200 $ - $ 2,092,200
=========== =========== ========= ===========
S-1