UNIVERSAL AUTOMOTIVE INDUSTRIES INC /DE/ - 10-K Annual Report

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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, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

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
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (708) 293-4050

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value Nasdaq SmallCap Market
- ----------------------------- ----------------------
(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. | |

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 as of
March 31, 2004, was approximately $16,231,722.

The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sale price of the Common Stock on March
31, 2004 as reported on the Nasdaq SmallCap Market, was approximately
$11,857,678. Common Stock held by officers, directors and each person who owns
10% or more of the outstanding Common Stock have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

The number of shares of Registrant's Common Stock, par value of $0.01
per share, outstanding as of March 31, 2004 was 10,893,773 shares.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS(1)

OVERVIEW

Our primary business is the manufacturing and marketing of brake and
undercar parts, including brake rotors, brake drums, disc brake pads,
remanufactured brake shoes, remanufactured calipers, new clutch kits, suspension
and hydraulic parts for the North American Automotive aftermarket. Since the
recent acquisition of certain North American assets of TRW Automotive's
Kelsey-Hayes Company subsidiary in January 2004, which approximately doubled our
size, we have expanded our breadth of brake and undercar parts and most
importantly added such well established brands such as Powerstop, ValuMaxx and
Autospeciality to our recognized Ultimate, Evolution and UBP brands.(1) We have
entered into a licensing agreement for the use of the TRW trademark for premium
quality brake rotors and drums and a supply agreement for TRW suspension parts.
The branding campaign reflects management's desire to add value through
increasing brand awareness and assisting our customers gain meaningful revenue
growth with the professional installer. We have expanded our parts availability
from under 10,000 parts to over 40,000 parts in the brake and undercar product
segment. This product and brand extension has transformed us from a private
label provider of brake parts to a complete brake and undercar parts provider
with industry respected brands and market leading private label capabilities,
therefore, enabling customers to consolidate all their brake and undercar parts
requirements with one supplier. We manufacture over 90% of our friction
products, 40% of our brake rotors (measured in revenues), remanufacture 100% of
our brake calipers and purchase for resale the balance of our brake and undercar
products from respected manufacturers throughout the world. An estimated 50% of
our sales are marketed under our customers' private labels and the balance of
our sales under our brands including the Autospeciality, Powerstop, ValuMaxx,
Ultimate and UBP trademarks. Twenty percent of our 2003 revenues come from our
wholesale products business in which we buy and sell fast moving automotive
parts such as spark plugs, headlights and motor oils. In prior years, sales of
wholesale products amounted to approximately ten percent of our total revenues.
Typically, the margin in the commodity business is substantially less than the
brake business.

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.

We operate two friction plants, an 83,000 square foot disc pad plant
located in Brampton, Ontario and a 70,000 square foot brake drum lining and
brake shoe remanufacturing plant in Walkerton, Virginia. Our friction business
has experienced substantial growth since we acquired our first friction plant in
September 1996. Unlike the brake rotor and drum product group, there is no
material competition from offshore friction suppliers. In 2003, several friction
suppliers based in Mainland China entered the North American aftermarket with an
economy line of disc brake pads. We believe Chinese manufactured friction will
gradually increase its marketshare with economy level products. We believe the
barrier to entry in the premium 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 product
foundation and production is an art as much as a science and requires highly
experienced management. Our first plant in 1996 was located in a 17,500 square
foot facility. Today we have 140,000 square feet dedicated to the friction
manufacturing business. In November 2002, we launched our Evolution line of
ceramic disc pads, developed by our research team at our Brampton, Ontario
facility. Our Evolution disc pads are targeted at the professional installer.
Parts Plus, Inc, a leading aftermarket programmed distribution group with over
2,000 Parts Plus stores and Car Care centers,

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(1) Some of the statements included in Item 1, Business, and Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, may be considered to be "forward looking statements" since such
statements relate to matters which have not yet occurred. For example,
phrases such as "we anticipate," "believe" or "expect" indicate that it is
possible that the event anticipated, believed or expected may not occur.
Should such event not occur, then the result which we expected also may not
occur or occur in a different manner, which may be more or less favorable to
us. We do not undertake any obligation to publicly release the result of any
revisions to these forward looking statements that may be made to reflect
any future events or circumstances.

selected Evolution ceramic disc pads as their Parts Plus Ceramic disc pad line
in October 2003. Ceramic disc pad sales exceeded $1 million dollars in 2003 and
are expected to double in 2004.

We operate a state of the art brake rotor manufacturing plant at our
Alsip, Illinois facility. We recently completed the relocation of the
Kelsey-Hayes brake rotor plant from Carson, California to our Alsip facility.
The consolidation of the two plants has eliminated and/or reduced redundant
labor and certain fixed costs. We primarily manufacture brake rotors for our
branded product offering. We believe that in order to satisfy the customer's
request for maximum quality at the most competitive economics, we must have the
flexibility to manufacture or source (primarily from China) brake rotors and
drums. We believe the brake rotors we manufacture in the USA are superior in
quality and value to the same parts supplied through plants located in China and
"add value" to our customer relationships, providing us with a competitive edge
over competitors who are exclusively marketers of imported brake drums and
rotors. We also believe that we have improved our ability to source product in
China through our 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."

We acquired our brake caliper manufacturing business in the
Kelsey-Hayes transaction. The brake caliper manufacturing plant is operated out
of our Carson, California distribution center, formerly operated by Kelsey-Hayes
Company. Calipers are used in the disc braking system. We offer semi-loaded and
loaded calipers; loaded calipers are calipers that include the disc pads and
associated hardware.

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) and their brands.
However, the addition of our new brands will enable us to service that segment
of the automotive aftermarket that desires nationally respected and trusted,
branded product.

With the additional product lines, product line coverage and respected
brands we have positioned ourselves as one of the only full line 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. We believe there are substantial new growth opportunities by the way
of cross selling related to the recent acquisition. Our customer base has more
then doubled in number and our product line offering has increased, offering
opportunities for new sales initiatives. We are hopeful of selling the new
product lines acquired in the Kelsey-Hayes transaction to existing customers
such as Parts Plus, National Pronto Association and Independent Auto Parts
Association, in which we are an approved supplier for two or more brake
categories.

INDUSTRY BACKGROUND

Braking Systems. There are two primary types of braking systems for
cars and light trucks. The first is a drum brake system, in which the braking
action is created by a brake shoe being forced outward against the inside of a
rotating drum. The second, and newer, system is a disc braking system, in which
the braking 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 cylinder which causes
the action of the brake shoes in a drum system or brake pads in a disc system.

Distribution in the Aftermarket. The ultimate consumers for automotive
aftermarket products can be divided into two primary categories. The first
category consists of customers who choose to have their cars repaired at a
commercial service establishment, such as a service station, repair shop or car
dealer, and is known as the "installer segment." Customers in the second
category, the "do-it-yourself" segment, are those customers who choose to make
the repairs themselves.

Traditionally, many car parts have been distributed though a system
under which products are sold from manufacturers to warehouse distributors, who
then sell to "jobbers," who, in turn, sell to installers and consumers. We
believe that in recent years there has been an industry shift away from the
traditional channels of distribution

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toward alternative distribution channels, including manufacturers who sell parts
to mass market retailers who serve do-it-yourself customers, and manufacturers
who sell parts to warehouse distributors, who sell directly to installers that
provide repair and installation services. We believe the traditional warehouse
jobber distribution system has suffered, and may continue to suffer, some
erosion of total market share as a result of the expansion of these alternative
distribution channels, particularly as a result of the increased presence in the
marketplace of the mass-market retailer. However, we believe that these shifts
in distribution channels will benefit us, as our principal brake parts customers
include these mass market retailers.

Frost & Sullivan estimates that sales of brake parts in the United
States' aftermarket for passenger cars, sports utility vehicles and light trucks
totaled $1.8 billion measured at manufacturer's level in 2002. This market grew
by an estimated 4% in 2002, according to Frost & Sullivan.

We believe the demand for aftermarket brake parts, will continue to
grow because of the following factors:

o An increasing number of vehicles on the road. New car sales
were strong from 1998 through 2003; we expect vehicles sold
during this time period to require replacement parts in 2004
to 2006.

o An aging vehicle population, which creates the need for more
replacement parts. The average age of light vehicles has been
increasing since 1999. In 2004 the average age of a light
vehicle is forecasted at 8.76 years according to Frost &
Sullivan.

o 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.

o 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.

o 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.

OUR GROWTH STRATEGY

Our strategy is to capitalize on the increasing demand for brake and
undercar parts by being a highly focused competitive preferred brake parts
supplier to the Automotive Aftermarket excelling in quality and delivery. We
will distinguish ourselves by being first to market, and providing solutions to
problematic applications.

o Selling more product to our more then 500 customers by
marketing additional brake and undercar categories, with the
objective of becoming our customer's sole or primary source
for their branded and private label brake and undercar
requirements.

o New product launches. We believe that products can be improved
to perform better then the original equipment part; our focus
is to deliver outstanding new products with feature and
benefits that exceed our competition and the original
equipment part.

o Expansion of our high performance Powerstop products. Sales of
high margin Powerstop products to sport and tuner car markets
offer new and exciting growth opportunities.

o Adding value by growing brand equity. We are targeting sales
to the professional installer markets.

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o Continuing to address the growing demand for customers'
private labels across all of our product lines.

o Considering the acquisition of other specialty brake parts
distributors and manufacturers.

PRODUCTS

The brake parts we sell can be divided into two main categories: brake
system and undercar parts. The brake system parts consists of friction,
hydraulic and rotating parts (brake rotor and drum parts). The undercar parts
consist of clutches and suspension parts. The friction category of parts
consists of brake shoes for drum systems and brake pads for disc systems.
Cylinders, brake calipers and brake hoses are examples of hydraulic parts. We
manufacture some of these parts and act as a distributor for others. We
manufacture disc brake rotors in our Alsip, Illinois facility. The Kelsey-Hayes
rotor manufacturing plant was closed in December 2003 and production was moved
to our Alsip, Illinois facility during the first quarter of 2003. We formulate
and manufacture disc brake pads at our plant, located in Brampton, Ontario,
Canada. At our plant in Walkerton, Virginia, we manufacture, brake shoes and
drum brake lining. Calipers are remanufactured in our Carson, California plant.
The remaining hydraulic parts we sell are all purchased from suppliers.

We also offer a line of high performance brake parts marketed under our
Powerstop brand. The Powerstop offering includes slotted and drilled brake
rotors (manufactured in our Alsip, Illinois facility), PowerStop extreme
performance disc pads and brake calipers. These products are primarily sold to
specialty performance distributors who in turn sell them directly to the
consumer. In the future we intend to expand our Powerstop product offering with
additional brake and undercar performance products.

We now supply a complete line of branded and private label brake and
undercar 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.

WHOLESALE PRODUCT OPERATION

We conduct a wholesale product operation from our headquarters facility
in Alsip, Illinois, purchasing automotive items such as spark plugs, motor oil
and freon, in large volume, at below market prices, and reselling these products
at slightly higher prices. We make large-volume purchases of products on the
open market, generally buying from domestic and foreign manufacturers and other
warehouse distributors, and reselling these products to other warehouse
distributors, mass market retailers and jobbers. These operations, while
historically profitable, result in gross margins that are significantly lower
than gross margins from our brake part operation. For the years ended December
31, 2003, 2002 and 2001, excluding sales from our former Hungarian foundry, net
sales from our wholesale product operations accounted for approximately 22%, 10%
and 8%, respectively, of our total net sales, and 23%, 8% and 5%, respectively,
of our total gross profits.

MARKETING AND DISTRIBUTION

Marketing

We organize our marketing operations around two principal customer
groups: traditional aftermarket warehouse distributors and mass market
retailers.

Private Label Brake Parts Customers. We are one of the industry's
leading providers of private label brake and undercar products, approximately
50%, are sold under our customers' private brand labels. Most aftermarket
distributors are members of national buying/marketing groups and have developed
their own private brand labels.

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We supply one or more brake product lines to the following marketing
groups under the group's private label: National Pronto Association; IAPA; APA;
and Parts Plus, Inc. We also supply national retailers such as Advance Auto
Parts under their private brand labels.

Branded Product Customers. Branded products are primarily targeted at
the professional installer customer. We are building brand awareness through
trade magazine promotions, training clinics and world class products.

Sales/Marketing. Our Vice President of Sales manages our independent
sales representative network through nine full time sales personnel. A Vice
President-Marketing manages our marketing and product branding efforts.

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 varying periods of notice dependent
on the contract.

Distribution

We believe we offer the quickest delivery service of any full-line
national brake and undercar supplier in the US aftermarket through three
strategically located distribution centers. We service our Midwest customers
from a 263,000 square foot distribution center at our headquarters facility
located in Alsip, Illinois. Our East coast customers are serviced from the
former Kelsey-Hayes 88,000 square foot Parsippany, NJ warehouse. We service our
West Coast customers from the former Kelsey-Hayes 192,000 square foot
distribution facility in Carson, California. We consolidated our former 28,000
square foot southern California warehouse into the Kelsey-Hayes facility in
March of 2004. 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 ship orders to our brake parts customers within 72 hours days from
the time the order is placed. In addition, we seek to maintain high fill rates
for orders, and, accordingly, do not generally have a large number of back
orders. Customers may place their stock orders by telephone, electronically or
by facsimile. Deliveries are made from all warehouses, almost exclusively by
common carrier.

MANUFACTURING

In the first quarter of 2004, in order to reduce costs, we relocated
the former Kelsey-Hayes rotor machining facility from Carson, California to our
Alsip, Illinois facility, which was closer to our castings supplier. 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 17,000 square foot facility near Toronto, Ontario. Today, as a result
of significant growth in the sales of friction products since we entered that
market segment this operation currently occupies a 79,000 square foot facility
in suburban Toronto, Ontario. We now offer a full line of friction grades in
both riveted and integrally-molded disc brake pads. We were awarded ISO 9001
certification in July 1999 and BEEP (Brake Effectiveness Evaluation Procedure)
certification in 2003. BEEP is becoming the industry benchmark to assess
friction material performance.

We acquired the Total Brake Industries assets in November 1999 and
operate these assets from a 77,000 square foot leased facility in Walkerton,
Virginia. This facility remanufactures brake shoes and brake shoe lining for use
in this remanufacturing process. In addition, we sell drum brake shoe lining to
third party customers.

We acquired the brake caliper manufacturing business from Kelsey-Hayes
in January 2004. The brake caliper manufacturing plant is operated out of our
Carson, California distribution center formerly operated by Kelsey-Hayes. This
plant remanufactures brake calipers. Calipers are used in the disc braking
system. We offer semi loaded and loaded calipers; loaded calipers are calipers
that include the disc pads and associated hardware.

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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 and rotors 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 purchased from
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 2003 we fulfilled our purchase
requirements with Wanxiang. None of our suppliers provide a majority or all of
our requirements for a particular product or product subcategory.

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.,
based in Wisconsin. 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.

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

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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. In January 2004, we began to operate the wholesale products operation
under a new wholly owned subsidiary, The Automotive Commodity Connection, Inc.
We currently conduct our business through the following subsidiaries:

o Universal Automotive, Inc.;

o Universal Brake Parts, Inc., an Ontario, Canada corporation;

o Universal Automotive of Virginia, Inc., a Virginia
corporation; and

o The Automotive Commodity Connection, Inc., an Illinois
corporation.

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 the operations of two other subsidiaries. The
first is eParts eXchange, Inc., which was discontinued in 2001 and which was
unsuccessful in developing a business-to-business online exchange for automotive
aftermarket parts. We have consolidated the telemarketing and outbound e-mail
operations of eParts eXchange into our core business. The second subsidiary is
UBP Hungary, Inc., a Delaware corporation, which we own and which owned UBP
Csepel Iron Foundry, Kft., a Hungarian corporation, which operates a foundry in
Budapest, Hungary. We sold our ownership interest in UBP Csepel as of December
31, 2001. 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. We wrote-off the balance of this investment in 2003.
See "Business -- Discontinued Operations."

COMPETITION

Our markets are highly competitive. We compete primarily on the basis
of service, price, inventory availability, delivery time and responsiveness. We
offer a full line of brake and undercar parts. 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.

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 2002. We believe the high concentration of business among the
"Big Three" favors us for the following reasons:

1. Dana Corporation has publicly stated its desire to divest itself of
its $2.5 aftermarket business which includes its Raybestos brake product line,
which accounts for the largest share of the aftermarket brake business, a 40%
market share. The president of the Raybestos brake business resigned earlier in
2003. He joined an aftermarket remanufacturer and subsequently has been joined
by other key executives of the Raybestos brake business.

2. 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.

3. Honeywell, with a 10% market share, has had their original equipment
and aftermarket brake business for sale for the last three years, has now stated
the business is not for sale.

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It appears that among the leading full line aftermarket brake
suppliers, this is a time of uncertainty.

We also compete with single category value line friction suppliers such
as Morse Automotive and Satisfied Brake. Both companies are highly respected
competitors that account for 5% to 8%, respectively, of the friction aftermarket
according to Frost & Sullivan 2002 Report. We believe our full line offering
offers an advantage for many customers who utilize these single line competitors
through our full product line offering while effectively competing with products
we believe are of comparable quality, price and value.

INTELLECTUAL PROPERTY

We believe that our historic 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. The Powerstop, ValuMaxx and Autospeciality brands, acquired
from Kelsey-Hayes, and our license of the TRW brand in certain applications,
also represent trademarks that have been federally registered. 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, 2003, we had 234 full-time employees, in the
following areas:

o 121 in manufacturing;

o 71 in distribution;

o 10 in sales and marketing; and

o 32 in administration.

With the acquisition of certain assets of Kelsey-Hayes, our full time
employment as of April 1, 2004 totaled approximately 440 employees.

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 2003.

8

LINE OF CREDIT AND RECENT FINANCINGS

Line of Credit. The Company had a credit agreement with LaSalle Bank
National Association or its subsidiaries ("LaSalle") for a revolving line of
credit of up to $22,000,000 based on eligible accounts receivable and inventory.
The weighted average interest rates on the aforementioned revolving credit
facility borrowings were 5.04 percent, 5.70 percent, and 8.68 percent for the
years ended December 31, 2003, 2002, and 2001, respectively.

The revolving line of credit had a term ending May 1, 2005 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. A term loan
was payable in monthly principal installments of $18,705 and bore interest at
prime plus 0.75 percent per annum.

The LaSalle agreement contained certain limitations on dividends and
capital expenditures and requires the Company to satisfy a certain financial
test concerning defined minimum tangible net worth. The entire credit facility
was secured by a first lien on the inventory and accounts receivable of the
Company.

At December 31, 2003, approximately $269,000 was available for
borrowing under the revolving credit line. On January 12, 2004 the LaSalle
credit facility was replaced with a new credit facility from Congress Financial
Corporation ("Congress").

In connection with the purchase of certain assets of Kelsey Hayes
Company, we entered into a revolving line-of-credit agreement with Congress,
replacing the LaSalle indebtedness. The revolving line-of-credit is for up to
$35,000,000 based on eligible accounts receivable and inventory. The revolving
line-of-credit has a term ending January 12, 2007 and an interest rate of prime
plus .50% per annum. The line is subject to an on-going option to convert to
LIBOR plus 2.75% per annum.

The Congress agreement contains certain limitations on dividends and
capital expenditures and requires the Company to satisfy a financial test
concerning earnings before interest, taxes, depreciation and amortization
(EBITDA). The revolving line-of-credit is fully secured by a first lien on the
inventory and the accounts receivable of the Company.

Issuance of Convertible Notes to Global Capital Funding Group, L.P. On
July 3, 2003 we sold a $1,550,000 unsecured convertible note to Global Capital
Funding Group, L.P. (Global). This note was sold at a discounted amount of
$1,240,000 and is due July 2005. This note provides, among other provisions, for
voluntary conversion at the option of the noteholder. The conversion price is
equal to the greater of the weighted average sales price for the ten business
days immediately prior to the date of conversion or $0.35. We will issue a total
of 1,139,706 shares if the conversion price is at $1.36 per share, which was the
costing price on December 31, 2003; however, we will issue a total of
approximately 4,430,000 shares if this note is exercised at a conversion price
of $0.35 per share. We will not know the exact conversion price until we receive
a request for conversion. In connection with the issuance of this note, the
investor received a warrant to purchase 250,000 shares of our common stock. The
common stock purchase warrant may be exercised at any time and is valid for five
years from the date of issuance at an exercise price of $1.20 per share. In
addition to the common stock purchase warrant issued to Global, we also issued
to a financial advisor a common stock purchase warrant for 200,000 shares of our
common stock. This warrant may be exercised at any time and is valid for five
years from the date of issuance at an exercise price of $1.16 per share. These
warrants were valued at $124,853 and were recorded as a deferred financing fee.
Total fees and expenses paid in cash were $163,250 and have been recorded as
deferred financing fees. These costs will be amortized over the term of the
note. As of December 31, 2003, the unamortized deferred financing fees related
to this transaction are $292,505.

On November 26, 2003 we issued an unsecured convertible note in the
original amount of $1,200,000 to Global Capital Funding Group, L.P. (Global II -
an affiliate of Global) for an aggregate price received at closing of $960,000.
The note provides for a lump sum payment of $1,200,000 on November 26, 2005. In
addition the note contains a voluntary conversion at the option of the note
holder at a conversion price of the lesser of $3.00 per share or of 95% of the
volume weighted average sales price for 10 trading days immediately prior to the
notice date of conversion except than in no event will the conversion price be
less than $0.35 per share. We also issued 250,000 warrants to Global II and
50,000 warrants to a financial advisor. The Global II warrants are exercisable
over five

9

years at a price of $1.92 per share. The warrants issued to the financial
advisor are exercisable over five years at $1.90 per share. The warrants were
valued at $106,300 and were recorded as a deferred financing fee. Cash fees and
expenses of $110,500 were incurred in connection with securing this loan and
were also recorded as a deferred financing fee. These deferred financing fees
are being amortized over the term of the note. As of December 31, 2003, the
unamortized deferred financing fees related to this transaction are $216,800.

On January 15, 2004 we issued an unsecured convertible note in the face
amount of $300,000 to GCA Strategic Investment Fund Ltd, an affiliate of Global
Capital Funding Group , L.P. for aggregate proceeds received at closing of
$240,000. The note provides for a lump sum payment of $300,000 on January 15,
2006. In addition the note contains a voluntary conversion at the option of the
note holder at a conversion price of the lesser of $3.00 per share or 95% of the
volume weighted average selling price for the 10 trading days immediately prior
to the notice date of conversion except that in no event will the conversion
price be less than $0.35 per share.

Issuance of Secured Convertible Notes to Laurus Master Funds, Ltd. On
October 31, 2003 we issued a secured convertible note to Laurus Master Funds
Ltd. (Laurus) in the principal amount of $2,500,000 which is payable in 33 equal
monthly installments beginning January 31, 2004 and is secured by a first lien
on our fixed assets. Interest is payable at the prime rate plus two percent
(6.0% as of December 31, 2003). The note provides that payments of principal and
interest may, at our sole option, be made in cash or shares of our common stock.
The payment of principal and interest may be made in our common stock if the
closing price for the five trading days preceding the payment date is at least
$1.30 per share. The conversion price was reduced from $1.39 to $1.30 per share
effective January 9, 2004. If our common stock is not $1.30 per share for the
five days preceding the payment date then the conversion price will be 90% of
the lowest closing price for the 22 trading days prior to the payment date, with
a floor conversion price of $0.50 per share. If the payment of principal and
interest is made in cash, then the amount due will be 103% of the amount which
would otherwise be due. We also issued 350,000 warrants to Laurus and 312,500
warrants to a financial advisor. The Laurus warrants are exercisable over five
years at a price of $1.60 to $2.02 per share. The warrants issued to the
financial advisor are exercisable over five years at $1.60 per share. The
warrants were valued at $206,347 and were recorded as a deferred financing fee.
Cash fees and expenses of $393,650 were incurred in connection with securing
this loan and were also recorded as a deferred financing fee. These deferred
financing fees are being amortized over the term of the note. As of December 31,
2003, the unamortized deferred financing fees related to this transaction are
$583,345. The indebtedness under the Laurus note was increased to $4,500,000 in
the aggregate in January 2004 simultaneous with the closing of the Congress
Financial Corporation loan.

On January 9, 2004 the Company issued a secured convertible note to
Laurus Master Funds Ltd. (Laurus) in the principle amount of $2,000,000 which is
payable in 33 equal monthly installments beginning April 1, 2004 and is secured
by a first lien on the fixed assets of the Company, including the fixed assets
acquired in connection with the acquisition of certain assets of the Kelsey
Hayes Company. Interest is payable at the prime rate plus two percent (6.0% as
of January 9, 2004). The note provides that payments of principal and interest
may, at our sole option, be made in cash or shares of our common stock. The
payment of principal and interest may be made in our common stock if the closing
price for the five trading days preceding the payment date is at least $1.30 per
share. If our common stock is not $1.30 per share for the five days preceding
the payment date then the conversion price will be 90% of the lowest closing
price for the 22 trading days prior to the payment date, with a floor conversion
price of $0.50 per share. If the payment of principal and interest is made in
cash then the amount due will be 103% of the amount which would otherwise be
due. We also issued 280,000 warrants to Laurus and 250,500 warrants to a
financial advisor. The Laurus warrants are exercisable over five years at a
price of $1.60 to $2.01 per share. The warrants issued to the financial advisor
are exercisable over five years at $1.76 per share.

Issuance of Series A Preferred Stock to Venture Equities Management,
Inc. On August 29, 2001, we issued 201,438 shares of Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," an affiliate of Wanxiang America
Corporation, for consideration of $2,800,000. We used $1,000,000 of the proceeds
of the Series A Preferred Stock to make the payment to FINOVA Mezzanine Capital
Inc. under the restructuring of a debenture discussed below, and reserved an
additional $500,000 to make the remaining principal payments under the
restructuring agreement. The balance of the proceeds were used to reduce the
amount outstanding on our revolving loan indebtedness.

10

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, subject to
increase on a weighted average anti-dilution basis with respect to stock and
stock equivalent issuances below $1.39 per share. 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. Two
of these warrants, exercisable for 1,600,000 shares in the aggregate, have
lapsed. The remaining warrant, 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:

o a registration rights agreement pursuant to which we have now
registered shares of our common stock into which the Series A Shares
are convertible (before anti-dilution adjustments);

o a stockholders agreement among us, VEMI and three of our founders,
Arvin Scott, Yehuda Tzur and Sami Israel, granting to VEMI certain
rights of first refusal, a contingent proxy as to some of the founders'
shares and a voting agreement to ensure two of nine board seats to
VEMI's designees; and

o 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 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 required us to reduce the outstanding
balance by $500,000 over time, which payments have been 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 ordinary 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.

11

In connection with our financings with Global and Laurus, we further
amended the FINOVA credit agreement to provide as follows:

o On October 8, 2003 as an inducement for Finova to approve the
additional financing from Global Capital Funding Group, L.P.
the Company paid a consent fee of $50,000, capitalized as a
deferred financing cost.

o On October 31, 2003 as an inducement for Finova to approve the
additional financing from Laurus Master Funds, we amended the
subordinated debenture. This amendment resulted in the
following: (i) our payment of $250,000; (ii) the interest rate
increase from 7.0 percent to 8.0 percent; (iii) monthly
installment payments of $25,000 beginning January 1, 2005
through July 1, 2005; (iv) a final payment of $575,000 on July
11, 2005; and (v) our payment of a consent fee of $12,000,
capitalized as a deferred financing cost.

AVAILABLE INFORMATION

We file reports with the Securities and Exchange Commission ("SEC"),
including annual reports on Form 10-K, quarterly reports on Form 10-Q, and other
reports from time to time. The public may read and copy any materials filed with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer
and the SEC maintains an Internet site at www.sec.gov that contains the reports,
proxy and information statements, and other information filed electronically.
Our website address is www.universalbrake.com. We make available free of charge
through our website our Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on our website is not part of
this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this report.

RISK FACTORS

In evaluating us and our business, you should carefully consider the
following risk factors. This report contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed elsewhere in this report. The order in which the following risks
are presented is not intended to represent the magnitude of the risks described.

WE HAVE NOT EARNED PROFITS AND CANNOT ASSURE YOU THAT WE WILL BECOME PROFITABLE.

From 1996 through 2003, we lost a total of approximately $13,900,000,
including losses from our Hungarian foundry and eParts eXchange operations,
which were sold as of the end of 2001. Although 2002 was a profitable year, we
incurred losses in excess of $4,200,000 in 2003. We have a plan for achieving
profitability which involves improving our balance sheet, gaining market share
in the market for friction brake products, enhancing the efficiency of our
manufacturing operations, improving brand awareness for our products and
developing new, higher-margin friction products. See "Business - Our Strategy."
However, we cannot assure you that this plan will succeed and, if it does not,
we may not achieve or 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, 2003, giving effect to the restructuring of a subordinated
debenture held by FINOVA Mezzanine Capital Inc. and the new debt issued to
Laurus and Global, we had approximately $17.7 million in debt, and stockholders'
equity of approximately $2.6 million. Our debt-to-equity ratio was therefore
approximately seven times. In connection with the Kelsey-Hayes acquisition we
acquired significant assets by increasing our borrowings through a combination
of a significantly larger line of credit with Congress Financial and a series of
convertible debt financings with two

12

separate lenders, which significantly increased our leverage and debt to equity
ratio. The amount of our debt could have important consequences to you. For
example, it could:

o increase our vulnerability to general adverse economic and
industry conditions;

o 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;

o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;

o place us at a competitive disadvantage compared to those of
our competitors who have less debt;

o limit our ability to pay dividends;

o limit, along with the financial and other restrictive
covenants relating to our debt, among other things, our
ability to borrow additional funds; and

o make it more difficult for us to complete acquisitions.

IF WE ARE UNABLE TO MAINTAIN OUR LINE OF CREDIT OR SERVICE OUR CONVERTIBLE DEBT,
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
Congress Financial Corporation. 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 January 12,
2007. 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 line of credit with Congress Financial Corporation and our loan
agreements with our three convertible debt lenders and with FINOVA all have
cross default provisions, as well as affirmative and negative covenants, which
require consent for certain actions and prohibit certain other actions without
their consent. We must use great caution to ensure that none of these negative
or affirmative covenants are triggered, to avoid default under all the loans.
This may in certain instances restrict the scope of our activities, to the
extent we are unable to obtain the lenders' consent.

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:

o our ability to gain additional market share for friction brake
products;

o the purchase of additional manufacturing machinery and brake
rotor molds to increase the different types of brake rotors
we manufacture;

13

o the possible acquisition of other brake parts manufacturers or
distributors on favorable terms; and

o 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 assure 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.

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. We were able to maintain our Nasdaq
listing due to a subsequent rise in our stock price; however, there is an
ongoing risk of delisting should our stock price decline in the future. We may
also be subject to a risk of Nasdaq delisting if we fail to maintain a minimum
net worth of at least $2,500,000 and the value of the public float on our common
stock is less than $35,000,000. In the event of a delisting, our shares could
only be traded on 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 addition, it could result in increased dilution
to shareholders, due to the rights of our convertible note lenders to convert
their loans into an increasing number of shares linked to declines in share
price.

In the event that our common stock was delisted from the Nasdaq
SmallCap Market, we likely would become subject to special rules, called penny
stock rules that 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 both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.

In the event that our common stock becomes 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.

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

14

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, including
Morse Automotive and Satisfied Brake. 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.

We have historically sourced most of our finished product imports of
drums and rotors from China. In 2003, our largest supplier of drums and rotors
experienced a fire, which resulted in a disruption of supply of product, and our
second largest supplier also experienced problems in timely delivery of product
to us, which adversely impacted our ability to fill orders and resulted in the
loss of certain customers. Since that time, we have resumed purchases from these
suppliers and taken steps to ensure that similar supply chain interruption will
not occur in the future; however, there can be no absolute assurances that this
will be the case. We have regained certain of the lost customers and have also
developed new customers; however, this supply chain interruption had a
significant impact on 2003 operations.

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,

15

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.

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 a significant minority percentage 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 (subject to anti-dilution adjustment rights),
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. 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 a significant minority percentage 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 acquired
from Total Brake Industries a factory in Walkerton, Virginia, pursuant to an
asset purchase agreement.

16

Prior to the acquisition, products manufactured at the facility contained
asbestos. Shortly following the acquisition, we converted our product
formulation to a non-asbestos formulation and since that time no products
manufactured at the factory contain asbestos. 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.

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 AND CONVERSION RIGHTS TO PURCHASE SHARES
OF OUR COMMON STOCK, WHICH COULD IMPAIR OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL
ON FAVORABLE TERMS.

Venture Equities Management, Inc.'s warrant to purchase 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 December 31, 2003, there were other warrants to
purchase a total of 3,318,302 shares of our common stock outstanding, (in
addition to the other warrants referred to above). In connection with the
financing of the Kelsey-Hayes asset acquisition we have issued significant sums
of convertible debt with conversion prices tied in certain instances to our
common stock market price, and with significant additional dilution possible in
the event of decline in such price; such lenders also received certain warrants
to purchase our common stock. In addition, placement agents involved in the
placement of such debt, as well as other investment advisors to us have been
issued significant additional warrants, which if exercised could result in
substantial dilution.

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.

The shares beneficially owned by officers and directors, 3,014,000
shares issuable upon conversion of preferred stock (subject to possible
increased due to anti-dilution adjustment) and shares issuable upon exercise of
outstanding warrants (except to the extent the shares underlying the same are
already registered by us) 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

17

A and Series B Preferred Stock are presently eligible for sale under Rule 144
(and we have also registered the shares into which they are convertible pursuant
to registration statements filed in 2003) and, therefore, may become freely
tradeable, at an earlier date. In addition, the shares issuable to the holders
of our convertible debt have the right to convert the principal and interest
owing under their loans into registered common stock, and the holders of
warrants associated with the placement of such debt also have conversion rights
into equity. 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.

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 SmallCap Market, it is
less actively traded than the shares of many of the other companies included in
Nasdaq. 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.

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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:

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
document. In February, 2004, we moved our Compton, California inventory into the
Carson, California facility. We are presently in negotiation for a long-term
extension of our Alsip, Illinois lease.

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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 received notice from the court that this
lawsuit, naming us as a defendant and claiming alleged liability in connection
with the sale and distribution of brake parts containing asbestos, was
voluntarily dismissed without prejudice by the plaintiff.

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, 2003.

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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." We had issued warrants in connection with our initial public
offering which had been registered (and quoted under the symbol "UVSLW") but all
such warrants have since either been exercised or lapsed, due to their
expiration.

As of March 31, 2004, there were 545 holders of our common stock. 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.

COMMON STOCK

REDEEMABLE COMMON STOCK PURCHASE WARRANTS

On March 31, 2004, the last reported sale prices of our common stock
and included on the Nasdaq SmallCap Market was $1.49. Our redeemable stock
purchase warrants expired on January 31, 2004.

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 of the
then-proposed issuance of the Series A Preferred Stock. The issuance of the
Series A Preferred Stock was completed on August 30, 2001 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

21

delisted from trading on the Nasdaq SmallCap Market. The stock price
subsequently rose above $1.00 per share for ten consecutive trading days and the
Nasdaq delisting issue was thereby terminated.

We have not paid any cash dividends on our Common Stock. We do not
intend to declare or pay any cash dividends on our Common Stock in the
foreseeable future and anticipate that earnings, if any, will be used to finance
the development of and expansion of our business. Moreover, our bank lines of
credit prohibit the declaration and payment of cash dividends. Any payment of
future dividends and the amounts thereof will be dependent upon our earnings,
financial requirements, and other factors deemed relevant by our Board of
Directors, including our contractual obligations. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.

Each public warrant originally entitled the holder to purchase, at any
time until December 15, 1999, one share of our common stock at an exercise price
of $7.00 per share, subject to certain adjustments based upon anti-dilution
protections. In December 1999, we extended the expiration date of these warrants
to December 31, 2000, and reduced their exercise price from $7.00 to $2.25 per
share. We later extended the expiration date of these warrants on three
additional occasions. The latest extension, in May 2002, changed the expiration
date to August 15, 2003. On June 2, 2003 the Company reduced the price on these
warrants to $0.50 per share from $2.25 per share and extended the expiration
date to August 15, 2003. On July 28, 2003 the Company further extended the
expiration date of the warrants to January 31, 2004. A total of 393,148 and
142,350 of these warrants were exercised during 2003 and 2002, respectively
providing total proceeds of $196,574 and $320,287.50, respectively.

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%. This indebtedness has been further reduced as set forth in "Restructuring
of Subordinated Debenture held by FINOVA Mezzanine Capital, Inc."

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 thereunder.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with our financial statements and notes thereto and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 2003, 2002 and 2001 and the balance sheet data at
December 31, 2003 and 2002 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, 2000 and 1999 and the balance sheet data at December
31, 2001, 2000 and 1999 are derived from audited financial statements not
included herein. The pro forma data are based on the circumstances described in
the accompanying footnotes.

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,

(1) Certain amounts reported in the 1999, 2000 and 2001 financial
statements have been reclassified to conform with the 2003
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, 2003, 2001, 2000 and 1999 diluted earnings per share and

23

basic earnings per share are identical because the loss from continuing
operations incurred during those years is antidilutive. See Note 2 of
the Notes to our Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Our primary business is the manufacturing and marketing of brake and
undercar parts, including brake rotors, brake drums, disc brake pads, brake
shoes, remanufactured calipers, new clutch kits, suspension and hydraulic parts
for the North American Automotive aftermarket. Since the recent acquisition of
certain North American assets of TRW Automotive's Kelsey-Hayes Company
subsidiary in January 2004, which approximately doubled our size, we have
expanded our breadth of brake and undercar parts and most importantly added such
well established brands such as Powerstop, ValuMaxx and Autospeciality to our
recognized Ultimate, Evolution and UBP brands.

Some of the statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, may be considered to be
"forward looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as "we anticipate," "believe" or
"expect" indicate that it is possible that the event anticipated, believed or
expected may not occur. Should such event not occur, then the result which we
expected also may not occur or occur in a different manner, which may be more or
less favorable to us. We do not undertake any obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect any future event or circumstances.

RESULTS OF OPERATIONS

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

The following table sets forth our selected operations data for the years ended
December 31, 2003 and 2002. This data should be read in conjunction with our
financial statements in Item 8 of this Form 10-K.

24

(All numbers in thousands)

The decrease in net sales for the year ended December 31, 2003 as
compared with the year ended December 31, 2002 was a result of a sharp, rapid
decline in sales that resulted from a major supply chain interruption which
occurred during the second quarter of the year. This was partially offset by a
$7,000 increase in the revenues generated by the wholesale commodity products
operation.

The decrease in gross profits for the year ended December 31, 2003 was
a result of lower sales revenues and an increase in the cost of the Company's
Canadian manufactured friction products due to the decline in the U.S. dollars
exchange rate as compared to the Canadian dollar. The exchange rate decline
served to increase product cost by approximately $850 (USD).

Selling, general and administrative expenses were lower as a result of
reduced commissions and reduced freight on the lower sales volume and cost
containment efforts over the same period in 2002.

The increase in other operating expenses for the year ended December
31, 2003 as compared with the same period in 2002 is primarily related to
expenses relating to lease costs on the abandoned Cuba, MO facility offset by
the absence of certain expenses incurred during 2002.

There was no loss from Hungarian operations in 2003 due to the write
off of the net balance on the note receivable recorded during 2002.

The increase in other expenses for the year ended December 31, 2003 for
the same period of 2002 is due to the non-cash costs associated with the
issuance and re-pricing of warrants, a full reserve against the shareholder
notes and the absence of a gain of the disposition of assets incurred during
2002 partially offset by lower interest costs on lower outstanding debt
balances.

25

No adjustment was made in 2003 for the amount of our provision for
taxes. For the year ended December 31, 2003 and 2002, the deferred tax benefit
of the year's losses was offset by an increase in deferred tax asset valuation
allowance.

The net income earned in the year ended December 31, 2003 compared to a
net loss for the year ended December 31, 2002 resulted primarily from::

o lower gross margins resulting from lower sales of brake parts of
approximately $4.6 million partially offset by an increase in gross
margin on the increase revenues of the wholesale products operation of
approximately $700,000;

o increase in the cost of friction products due to exchange rate
differences of approximately $850,000;

o decrease in selling, general and administrative expenses of
approximately $900,000 primarily due to reduced commissions on lower
sales of brake parts;

o lower interest costs due to lower outstanding borrowings;

o the non-cash expense of $648,000 relating to the issuance and
re-pricing of warrants and options and,

o increase in reserve requirement on the shareholder notes.

26

The following table sets forth our selected operations data for the
years ended December 31, 2002 and 2001. This data should be read in conjunction
with our financial statements in Item 8 of this Form 10-K.

(All amounts in thousands)

The decrease in net sales for the year ended December 31, 2002 as
compared to the year ended December 31, 2001 was a result of price deflation in
the drum and rotor product lines and the loss of several customers through the
consolidation which has affected the aftermarket business. (e.g. major market
customers is acquired by a chain which does not buy from us.)

The increase in gross profits for the year ended December 31, 2002 as
compared to the year ended December 31, 2001 was a result of higher prices on
friction products and a delay in price reductions resulting from price
deflation. 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.

The decrease in selling, general and administrative expenses in the
twelve months ended December 31, 2002 as compared to the same period in 2001
resulted from cost containment efforts coupled with reduced selling expenses on
the lower sales volume.

The decrease in other operating expenses for the year ended December
31, 2002 as compared to the same period in 2001 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
$114,000 and $122,000 of other items, offset by expenses

27

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.

The decrease in loss from Hungarian Operations resulted from the net
balance on the note receivable arising from the 2001 sale of the operations was
fully reserved in 2002.

The decrease in other expenses for the year ended December 31, 2002
from the same period of 2001 is due to lower interest expense effected 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 ordinary gain in 2001, there was no comparable gain
on debt restructuring in 2002.

No adjustment was made in 2002 for the amount of our provision for
taxes. 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 $136,358 and $797,00, respectively.

The attainment of net income in 2002, compared to a net loss of
$2,978,000 for the year ended December 31, 2001, resulted primarily from:

o the absence of the net loss from the Hungarian operations of
$224,000, which was sold during 2001;

o decreased other oper