ITEM 1. BUSINESS (1)
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.
Universal Automotive Industries believes it is the market leader for value line aftermarket brake parts. We are a manufacturer and distributor of brake rotors, drums, non-asbestos disc brake pads, relined brake shoes, brake lining and hydraulic parts for the automotive aftermarket. We market approximately 50% of our product under our UBP trademark (Universal Brake Parts) and the balance under our customers' private labels. Our valued customers include traditional aftermarket distributors, national and regional auto parts retailers as well national parts and service providers. Many of our "value line" competitors specialize in only one category of brake parts. By offering a full line of "value line" brake products, we believe that we have an advantage over those competitors offering "value line" products in fewer brake part categories in light of the industry trend to consolidate the number of suppliers.
We also market a premium line of brake rotors and friction products under our Ultimate trademark. We designed the Ultimate product line to compete at the high end of the market by providing exceptional quality and features at slightly lower prices than the established premium brands. The Ultimate product line, since its launch in 1997, has experienced double digit growth. All the friction products and the majority of the rotors in the Ultimate line are manufactured at our manufacturing facilities.
Our principal executive offices are located at 11859 South Central Avenue, Alsip, Illinois 60803, and our telephone number is (708) 293-4050. Unless the context otherwise requires, the term "we" includes Universal Automotive Industries, Inc. and our direct and indirect subsidiaries, including our predecessor, Universal Automotive, Inc.
Our manufacturing assets have grown significantly over the past four years reflecting our overall marketshare growth and business philosophy. Management believes that in order to satisfy the marketplace request for maximum value, we must have the flexibility to manufacture or source product especially for brake drum and rotor products. The U.S. friction aftermarket is primarily dominated by U.S. based friction manufacturers. Overseas friction manufacturers have secured less then 5% marketshare. We are one of four U.S. based aftermarket disc brake rotor and drum manufacturers. In 2001, we moved our Laredo, Texas rotor finishing facility to Cuba, Missouri to gain cost benefits from being closer to our raw casting supplier. In 1998 we had 79,000 square feet under one roof dedicated to friction manufacturing. Today we have 157,000 square feet dedicated to friction manufacturing. Our Canadian facility achieved ISO9001:1994 Quality System Standard in 1999. We research, develop and produce friction products at our Toronto, Canada and Walkerton, Virginia manufacturing plants. Our plants only manufacture non-asbestos friction products.
We also conduct a wholesale "commodities" operation from our headquarters in Alsip, Illinois, purchasing certain automotive replacement parts and maintenance items in large volume, at favorable
- -------- (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.
prices, and reselling such products at slightly higher prices. Our commodity business has historically enjoyed annual revenues in excess of $4 million.
In December 1999, we formed a new subsidiary company named eParts eXchange, Inc. ("EPX"). EPX has built and operates a business-to-business Internet platform for worldwide buyers and sellers of automotive aftermarket parts focusing on the commodity, surplus and international trade segments. In June 2000, we completed the funding of EPX through the sale of preferred shares of EPX to a limited number of purchasers, with conversion rights into our common stock. In August 2000 the EPX web site was activated. We determined in January 2001, that we were better served by redirecting the efforts of the EPX team to augment the sales and marketing of UBP products.
The following chart illustrates our significant growth in sales of brake rotors and other brake parts.
REVENUE
Actual ($000's except %) ------------------------------------------ 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ Revenue: Brake - US $36.0 $42.0 $44.5 $55.2 $65.4 Growth % 57.0% 16.8% 5.7% 24.6% 18.5%
Non Brake 14.9 6.2 5.2 6.4 4.6 Growth % -22.6% -58.5% -15.6% 20.2% -25.8%
Total - Normalized $50.9 $48.2 $49.7 $61.6 $70.0 Growth % 25.4% -2.1% 4.4% 16.3% 13.6%
Non-Recurring 6.1 7.6 8.6 6.1 Sold Canadian Distribution 84.8% 23.8% 12.9% -28.6%
Since 1996, the year that we liquidated the non-brake parts warehouse distributor business, we have operated exclusively in the brake segment of the automotive aftermarket except for our commodity operation. We currently market our UBP Universal Brake Parts line to warehouse distributors, mass market retailers, specialty, "under-the-car" distributors and national franchise and chain installers located throughout the United States, principally through our salespeople, independent sales representatives and telemarketing. We have been named a primary private label brake rotor, drum and friction supplier to several national buying groups.
In October 1995, we acquired the assets of Csepel Iron Foundry Works, a producer of high quality gray iron and ductile iron casting products, located in Budapest, Hungary. In December 1999, we decided to exit the foundry business. In the 1999 financial statements, we wrote down the carrying value of the foundry property to its estimated net realizable value and have provided a reserve for estimated costs to dispose and estimated losses of the foundry until it is disposed or liquidated. We are marketing the foundry for sale and, should that effort not be successful, then discontinue all operations at the Hungarian foundry. We continue to operate the foundry pending sale in order to maximize net disposition value, subject to the understanding that we will not commit substantial resources to continue its operation. We believe that we will be successful in selling the foundry by no later than December 31, 2001; however, there can be no assurance that a sale will be consummated within twelve months and at a price in excess of the written down value of the foundry assets.
Our strategy is to capitalize on the increasing demand for brake parts and the higher gross margins on sales of such brake parts by expanding our brake parts manufacturing and distribution business. We believe that we can implement our expansion strategy by: (i) marketing additional brake categories to existing customers; (ii) providing "maximum value" e.g, lowest cost for highest quality, 97% fill rate and 72 hour order processing; (iii) possibly acquiring other specialty brake parts distributors; (iv) being a low cost producer of brake parts; (v) increasing our SKU coverage to existing customers; and (vi) building brand recognition through our Ultimate brand brake parts (a premium product line). We may seek additional debt or equity financing to finance this expansion.
As part of our strategy to expand our specialty brake parts distribution business and increase our focus on this segment, we have taken the following actions:
(i) April 1995 - we purchased the brake rotor and drum inventory and customer list of the passenger car division of MHD Automotive, an Illinois-based distributor of brake parts.
(ii) June 1995 - we acquired the inventory and customer list of North American Rotor, Inc., a distributor of brake drums and rotors.
(iii) October 1995 - we acquired the assets of Csepel Iron Foundry Works in Budapest, Hungary with a view toward potential future upgrading in order to eventually produce brake rotors for internal requirements.
(iv) January 1996 - we acquired the remaining 50% of the outstanding stock of UBP Friction, Inc., a Canadian-based specialty manufacturer of brake friction parts, and now own 100% of the outstanding capital stock of that company.
(v) March 1996 - we acquired the brake parts inventory and customer list of MPW Brake Supply of Cambridge, Massachusetts, an aftermarket brake parts distributor on the East Coast.
(vi) June 1996 - we acquired the assets and goodwill of North American Friction Inc., a Canadian manufacturer of a brake friction component used in our brake friction manufacturing process.
(vii) September 1996 - we substantially liquidated our non-brake parts warehouse/distribution division which enabled us to utilize the financial, warehouse and personnel resources previously used by such division in our higher margin brake parts business. We substantially completed the liquidation by December 31, 1996.
(viii) November 1996 - we acquired all of the assets of the MCI Automotive Division of Excel Industries which was in bankruptcy. We acquired the inventory at values substantially less than then current market values and we have sold substantially all such inventory. We also acquired a substantial number of additional brake rotor patterns and additional equipment to increase our manufacturing capacity.
(ix) November 1997 - we launched our premium brake category, Ultimate Brake Parts(TM).
(x) November 1999 - we purchased substantially all the assets of Total Brake Industries, Inc. of Walkerton, Virginia, which will enable us to expand our production of brake pads and brake shoes from both new and used brake cores and:
(xi) December 1999 - we decided to discontinue operations at our Csepel Iron Foundry Works in order to concentrate on our North American based operations, with operations continuing pending sale or liquidation.
(xii) April 2000 - completed realignment of Canadian friction manufacturing facilities under one roof.
(xiii) June 2000 - we completed the funding of EPX; August 2000 - EPX web site activated.
(xiv) March 2001 - completed the move of our rotor manufacturing facility to Cuba, MO. from Laredo, TX.
THE INDUSTRY
The brake parts segment of the automotive aftermarket is the segment of that industry currently experiencing the most growth. We estimate that United States brake systems aftermarket manufacturers revenues totaled $2.38 billion in 2000. While the overall market is growing at a rate of approximately 2% per year (following the total growth in the number of vehicles), the brake portion of the industry is currently enjoying growth of 4% to 5% per year. This larger growth rate is supported by several factors, including increasing wear and tear on brakes, changes in vehicle design, improved components (e.g., front wheel drive, semi-metallic disc pads and ABS braking systems), increased speed limits and an overall increase in the number of miles driven per year as well cost benefits to replace brake rotors as opposed to resurfacing.
The introduction of front wheel drive vehicles in 1980 resulted in changes in vehicle design. The mix of front to rear braking changed over the years from 60% front - 40% rear to as high as 85% front - 15% rear. This equates to much higher heat on the front rotors as they are forced to do much more of the braking, resulting in increased wear on rotors.
The government has mandated targets for improving fuel economy and imposed sizable taxes for not attaining such targets. Car manufacturers have generally chosen reducing vehicle weight as the short-term method of improving fuel economy. One of the prime targets has been the braking system which has always been over-designed and, therefore, overweight. Rotors and calipers were reduced in size to help achieve these new weight targets, which reduces rotor and disc pad life. Lighter weight rotors are less costly than heavier rotors and upon wearing down it is generally more cost effective to discard, rather than refurbish the rotors.
Increased speed limits have increased braking system usage. Speed limits in several states have been increased from the 55 mph of the mid 1970's to as high as 75 mph in some states. This 36% increase in speed requires almost 300% more braking power to achieve the same stopping distance. In response to these increased demands placed on braking systems, vehicle manufacturers created anti-lock braking systems which electronically monitor the performance of each wheel to assure that it does not lock and skid, thus reducing the braking power of that wheel. This system rapidly activates and releases pressure on a wheel to keep it from locking up and skidding. This rapid action on the brake system tends to increase wear of the brake components.
Specifications for bringing a vehicle to a complete stop from 60 mph have been reduced from 150 feet to 90 feet. To achieve this result, car manufacturers specify metallic brake pads which have shorter life and which, in turn, shorten the life of the brake rotor.
Demands on the braking systems associated with these factors have increased dramatically (300% to 500%) while the basic design of the systems has remained relatively constant. We believe that the brake category of the automotive aftermarket will continue to grow at the 4% to 5% level well into the next decade.
PRODUCTS
We supply a wide range of brake components to all levels of distribution. Our manufacturing facilities in both the U.S. and Canada produce brake drums and rotors as well as a full range of friction products, primarily disc brake pads and brake shoes. We purchase from unaffiliated vendors those products required to complete our product offering. We are one of four disc brake rotor and drum manufacturers and one of seven U.S. or Canadian based friction manufacturers with any material presence in the US aftermarket. We believe that our brake drum and rotor "value line" competitors do not have our breadth or scope of manufacturing capacity, and are, therefore, subject to the competitive disadvantages inherent in dependence upon third party suppliers.
The development of this basic manufacturing capability has positioned us to compete with the established brand names in the industry by marketing a premium line of brake rotors and friction products under its Ultimate Brake Parts(TM) label. Consolidation in the distribution and manufacturing segments of the brake aftermarket has left customers with fewer and fewer alternatives. We believe that this will offer
us substantial opportunities for increasing market penetration in the future. Although some new competitors have been formed recently in the brake drum and rotor segment, this is offset by the demise of a couple of competitors in this product segment. However, Dana and Federal-Mogul, both significantly larger companies, have substantially lowered their pricing primarily in the drum and rotor category to address market pricing from value line competitors.
MARKETING AND DISTRIBUTION
Marketing
We currently market products to all levels of distribution under the name "UBP Universal Brake Parts" as well as under a number of private label programs for large buying groups, national franchise programs and installer chains. The long term strategy, while growing the private label program, is to improve UBP brand recognition in the market place and position our product lines to compete with established branded products. Branded products generally are offered by our competitors at a premium price, thus, offering customers who choose UBP products a substantial opportunity for improved margin performance. This group of competitors also currently commands approximately 70% of the total brake market, making them a prime competitive target.
We employ a sales force that directs our independent sales representative network and the other brake marketing activities. Arrangements with our independent sales representatives may be terminated at any time by either party. We also perform telemarketing operations directed at national franchise and chain installers.
Distribution
Our 263,000 square foot Alsip, Illinois facility acts as the primary facility for our United States distribution. We also maintain a redistribution warehouse in Southern California. We upgraded our California facility in 1999 to better service our growing West Coast distribution.
We conduct a wholesale commodities operation from our headquarters facility in Alsip, Illinois, purchasing certain automotive replacement parts and maintenance items in large volume, at favorable prices, and reselling such products at slightly higher prices. We make large volume purchases of products on the open market, generally buying from foreign and domestic manufacturers and other warehouse distributors, and resell such products to other warehouse distributors, mass market retailers and jobbers. Our commodity business has experienced annual revenues in excess of $4 million. For the years ended December 31, 1998, 1999 and 2000, net sales from our wholesale commodities operations accounted for approximately 9%, 10% and 7% of our total net sales (excluding the Hungarian foundry), respectively, and 5%, 5% and 4% of our total gross profits (excluding the Hungarian foundry), respectively. In December 1999, we formed a new subsidiary company named eParts eXchange, Inc. ("EPX"). EPX built and operates a business-to-business Internet platform for worldwide buyers and sellers of automotive aftermarket parts focusing on the commodity, surplus, and international trade segments. We determined in January 2001, that we were better served by redirecting the efforts of the EPX team primarily to augment the sales and marketing of UBP products. In June 2000, we completed the funding of EPX through the sale of preferred shares of EPX. In August 2000 the EPX web site was activated.
MANUFACTURING
In 2001, we relocated the rotor machining facility from Laredo, Texas to Cuba, Missouri to be able to gain lower costs associated with being closer to our source of supply of raw castings. The Cuba facility will have a capacity of approximately 750,000 units on a two shift basis. Through the acquisition of Excel Industries' MCI operation in 1996, we acquired approximately 200 foundry tools, which provided the base to manufacture approximately 210 different part numbers representing approximately 80% of our total volume in the drum and rotor category. We established a relationship with Waupaca Foundry, Inc. ("Waupaca") to supply raw castings as a result of its MCI acquisition. Waupaca is the premier rotor casting vendor in North America.
We acquired North American Friction in 1996 to provide a basic friction manufacturing capability from a 17,000 square foot facility located in suburban Toronto, Ontario. Today, as a result of the double digit growth in the sales of friction products since we entered that market segment, North American Friction now occupies an 80,000 square foot facility in suburban Toronto, Ontario. We now offer a full line of a variety of friction grades in both riveted and integrally molded disc brake pads. North American Friction was awarded ISO 9001 certification in July 1999.
We acquired Total Brake Industries' assets in November 1999 and operate from a leased facility in Walkerton, Virginia. This facility manufactures pucks for disc brake pads and produces strip lining for the remanufacturing of brake shoes, as well as to manufacture and remanufacture brake shoes.
Our wholly-owned foundry operation in Budapest, Hungary is capable of producing complex, hand-formed castings primarily for the European market. We are marketing the foundry for sale and will discontinue operations at the foundry once a sale is completed or discontinue and liquidate the foundry if a sale is not consummated if the foundry ceases to be largely self sufficient.
SUPPLIERS AND RAW MATERIALS
Suppliers
Product selection and purchasing functions for our U.S. brake parts business are centralized at our headquarters in Alsip, Illinois. We purchase brake drums and rotors from global sources in addition to manufacturing over 700,000 brake rotors at the company U.S. plant. We source brake drums and rotors from over a dozen suppliers located throughout the world. Currently, we import approximately 70% of our brake rotor and drum inventories from suppliers located in the People's Republic of China, with the balance from various suppliers in Taiwan, Italy, the United States and Canada. The company sources less than 5% of its friction requirements. The company purchases all its hydraulic parts from several overseas suppliers.
Although certain suppliers may provide a majority or all of our requirements for a particular product or product subcategory, no supplier accounted for more than 60% of our U.S. total product purchases during 2000. We believe that the loss of any one or more of its suppliers would not have a material adverse effect on us and that alternative sources of supply are readily available at comparable prices in all product categories. We believe that our relationships with our suppliers are good.
Tariff
The International Trade Commission ruled rotors sales from China materially injured U.S. rotor manufacturers. As a result of this affirmative determination, the U.S. Customs Service has imposed anti-dumping duties on certain Chinese suppliers. The dumping duties can be reviewed yearly if requested by a Chinese manufacturer or by a U.S. brake rotor manufacturer. Depending on the results of the investigation, the tariff may be decreased or increased. The dumping 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, have been unaffected by dumping duties.
Warranties
The manufacturers of automotive aftermarket products typically provide replacement warranties or a discount in lieu of warranty. We provide replacement warranties on products sold.
Raw Materials
The main components used in our brake rotor manufacturing operations are raw iron castings. We primarily purchase raw castings from Waupaca. In addition to Waupaca, we purchase castings from several foundries in Canada.
We duplicate certain raw iron casting patterns used for the production of our better selling brake rotors and place such patterns at different foundries to assure a supply of the raw iron castings produced from such patterns. Although we believe that we have developed good relationships with the foundries that supply our raw iron castings, any of such foundries could discontinue producing such castings for us at any time. We believe that the number of foundries equipped to produce raw 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 raw iron such as the ones used by us in our manufacturing operations is limited. The loss of any major foundry as a supplier of raw iron
castings and our inability to identify new foundries for the production of raw iron castings in a timely manner could have a material adverse effect on our business. In addition, there can be no assurance that the foundries currently producing our raw 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 raw iron castings.
COMPETITION
Our markets are highly competitive. As a brake parts manufacturer and distributor, we compete directly with other brake part manufacturers and brake parts distributors, including Aimco and Raybestos Brake Products (divisions of Dana Corporation), Wagner Brake Products (a division of Federal Mogul) and Bendix (a division of General Electric), as well as numerous value line distributors specializing in one specific brake category.
We compete primarily on the basis of service, price, inventory availability, delivery time and responsiveness. Many of our competitors in both the traditional and the specialty brake parts distribution markets are larger and have greater capital, management and other resources than we have. No assurance can be given that we will continue to compete successfully with such other competitors.
TRADEMARK
We believe that our labels, UBP (Universal Brake Parts) and Ultimate are important to our marketing efforts and a significant portion of our net sales are derived from sales of brake parts which we market under them. The UBP Universal Brake Parts and Ultimate Braking Power trademarks have been registered with the United States Patent and Trademark Office and Canadian Trademarks Office. There can be no assurance that prior registrations and/or uses of the trademark (or a confusingly similar mark) do not exist in the United States, in which case we might thereby be precluded from using such trademark in the United States. We can offer no assurance that our trademark would be upheld if challenged or that we would not be prevented from using the trademark, both of which could have an adverse effect on us.
EMPLOYEES
As of December 31, 2000, we had 394 full-time employees employed at our continuing operations in North America.
RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES
In addition to those matters already set forth in Item 1, Business, the following may result in our not achieving certain results included in any statement that may be considered a forward looking statement. We caution the reader that the following risk factors may not be exhaustive.
EXPANSION; POSSIBLE NEED FOR ADDITIONAL FINANCING
Our continued growth and financial performance will depend in part on our ability to continue to expand our business through: (i) gaining additional market share for friction brake products; (ii) the purchase of additional manufacturing machinery and brake rotor patterns to increase the number of brake rotor SKUs we manufacture; (iii) the possible acquisition of other brake parts manufacturers or distributors on favorable terms; and (iv) additional sales penetration of current customers. While we regularly evaluate and discuss possible acquisitions, we have not entered into any binding agreement with any potential acquisition candidates, we cannot assure you that we will be successful in locating suitable acquisition candidates or that we will consummate any additional acquisitions in the future. In addition, we can make no assurances that any operations that we acquire will be effectively and profitably integrated into our current operations. Our future results will be affected by our ability to manage our operations and growth effectively and to continue to obtain an adequate supply of quality brake parts on a timely and cost-effective basis to meet the growing demand for our UBP Universal Brake Parts products. We can offer no assurances that any future expansion of our operations or acquisitions will not have an adverse effect on our operating results, particularly during the periods immediately following any such expansion or acquisition. We will be required to seek additional financing to fund our expansion through acquisitions or the upgrade of existing facilities. We have no current commitments or arrangements for additional financing and we can make no assurances that additional financing will be available to us 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 our existing stockholders.
LEGAL PROCEEDINGS
During 1995, a lawsuit was filed against us in the United States Bankruptcy Court (the Court) by a Trustee of the bankruptcy estate of First National Parts Exchange, Inc. with which we had transacted both purchases and sales of certain automotive parts in 1992 and 1993. We recorded a provision of $650,000 in 1997 to reflect an estimated liability for such contingency. In 1998, after a trial was concluded, the Court ruled that the vast majority of the Trustee's claims were invalid. Our liability for the claims held as valid was approximately $499,000, for which we paid approximately $198,000 in 1998. As a result, we recorded benefit for lawsuit settlement of $151,000 (pre-tax) in 1998. After all appeals were exhausted, we paid the remaining $301,000 plus interest in December, 2000.
In January 2000, a lawsuit was filed against us by the Plan Administrator for a bankrupt former customer (APS Holding Corporation) seeking recovery of alleged preferences in excess of $2,200,000. We believe that all payments received by it were in the ordinary course of business and / or were offset by merchandise transfers made by us subsequent to its receipt of the alleged preferences, and we intend to vigorously contest such allegations. Potential damages, if any, are not covered by insurance. We believe that the ultimate resolution of this matter will not have a material adverse effect on our financial position or results of operations.
BANK FINANCING
We have incurred significant indebtedness in connection with our operations. As of December 31, 2000, our total consolidated indebtedness was approximately $23 million. A substantial portion of this indebtedness is secured by substantially all of our assets (except the Hungarian foundry assets) and by a pledge of all of our subsidiaries' outstanding capital stock. As a result of such indebtedness, we: (i) are prohibited from paying cash dividends pursuant to certain covenants and restrictions contained in the loan agreements governing such indebtedness; (ii) could be hindered in our efforts to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes; and (iii) would be vulnerable to increases in interest rates since substantially all of our borrowings are at floating rates of interest.
On September 29, 1999, we completed a renewal and restructuring of its credit agreement with LaSalle Bank National Association or its subsidiaries ("LaSalle") for (a) a revolving line of credit of up to $22,000,000 based on eligible accounts receivable and inventory and (b) a term loan in the amount of $3,779,194. The term loan was reduced by $2,842,873 in October 1999 from the proceeds of the sale of our Chicago facility. The credit agreement was amended in 2000 to increase the revolving line of credit to $26,000,000. In March 2001, we were advised by LaSalle that we were not in compliance with one of our loan covenant ratios and LaSalle has increased our cost of borrowing by 100 basis points. On April 13, 2001, LaSalle informed us that it will waive such violation upon completion of required documentation which will include certain modifications to the credit agreement.
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 December 31, 2000, we have issued Finova warrants to purchase 1,350,000 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. Finova will also receive a warrant to purchase an additional 225,000 shares of common stock on August 14, 2001 except, however, that if the debenture is prepaid before the scheduled warrant issue date, then that warrant will not be issued. The warrants are 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. In September, 2000, Finova elected to use 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. Therefore, we received no cash proceeds from this transaction when the shares were issued. We will seek to either extend or refinance our Finova debt once it becomes due in 2002. Finova sought bankruptcy protection in early 2001 and most likely will be acquired by its primary creditors.
DEPENDENCE UPON KEY PERSONNEL
Our continued success will depend to a significant degree upon the efforts and abilities of our senior management, in particular, Arvin Scott, our President and Chief Executive Officer, and Yehuda Tzur, our Chairman of the Board, respectively. The loss of the services of Mr. Scott or Mr. Tzur could have a material adverse effect on us. We have employment agreements with each of these individuals. We maintain, and intend to continue to maintain, key man term life insurance policies covering the life of each of Mr. Scott or Mr. Tzur in the amount of $6,000,000 and $1,000,000, respectively, the proceeds of which would be payable to us.
INSURANCE
Although we currently have general liability insurance for all our operations, prior to September 1994 we did not have general or products liability insurance for our brake rotor manufacturing operations. We would be adversely affected if we should incur liability for a general or products liability claim relating to an incident which occurred prior to the time that we obtained general and products liability coverage for our manufacturing operations. To date, no such claim has been asserted against us. In addition, we would be adversely affected by the incurrence of liability which is not covered by insurance or is in excess of policy limits.
NO DIVIDENDS
We do not currently 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, our bank lines of credit prohibit the declaration and payment of cash dividends. Prospective investors should not expect us to pay dividends on our common stock until such time, if any, that we are able, if at all, to obtain a release of the prohibition on the payments of dividends imposed by the terms of our credit facilities. 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.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth the general location, principal uses and approximate size of our principal properties and whether such properties are leased or owned:
We lease our Alsip Distribution Center from an unaffiliated party for approximately $594,000, expiring October 31, 2004. The warehouse portion of our headquarters facility (approximately 252,000 square feet) is currently fully utilized. We lease our specialty brake parts warehouse facility located in Los Angeles, California, from an unaffiliated party for approximately $140,000 per year, expiring in August 2002.
We lease the Brampton, Ontario brake pad manufacturing facility from an unaffiliated third party for approximately $211,000 per year, expiring in February 2012.
We lease our Cuba, Missouri brake rotor manufacturing facility from an unaffiliated party for approximately $100,000 per year, expiring in December 2005. We believe that this facility will provide adequate capacity for our currently anticipated brake rotor manufacturing operations.
The Walkerton, Virginia manufacturing facility produces friction material used in the brake shoe manufacturing and remanufacturing process, pucks for disc brake pads, as well as manufacture and remanufacture brake shoes. We lease the facility from the former owner of the Total Brake Industries business acquired in November 1999 at a rate of $72,000 per year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
During 1995, a lawsuit was filed against us in the United States Bankruptcy Court (the Court) by a Trustee of the bankruptcy estate of First National Parts Exchange, Inc. with which we had transacted both purchases and sales of certain automotive parts in 1992 and 1993. We recorded a provision of $650,000 in 1997 to reflect an estimated liability for such contingency. In 1998, after a trial was concluded, the Court ruled that the vast majority of the Trustee's claims were invalid. Our liability for the claims held as valid was approximately $499,000, for which we paid approximately $198,000 in 1998. As a result, we recorded benefit for lawsuit settlement of $151,000 (pre-tax) in 1998. After all appeals were exhausted, we paid the remaining $301,000 plus interest in December, 2000.
In January 2000, a lawsuit was filed against us by the Plan Administrator for a bankrupt former customer (APS Holding Corporation) seeking recovery of alleged preferences in excess of $2,200,000. We believe that all payments received by it were in the ordinary course of business and / or were offset by merchandise transfers made by us subsequent to its receipt of the alleged preferences, and we intend to vigorously contest such allegations. Potential damages, if any, are not covered by insurance. Management believes that the ultimate resolution of this matter will not have a material adverse effect on our financial position or results of operations.
All other legal proceedings and actions to which we are a party are of an ordinary and routine nature incidental to the operations of us. We believe that such proceedings will not, individually or in the aggregate, have a material adverse effect on our business or financial condition or results of operations.
ITEM 4.
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, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the Nasdaq SmallCap Market under the symbol "UVSL" and on The Chicago Stock Exchange under the symbol "UVS." The Redeemable Common Stock Purchase Warrants (the "Warrants") are listed on the Nasdaq SmallCap Market under the symbol "UVSLW" and on The Chicago Stock Market under the symbol "UVSWS." The following table sets forth, for the periods indicated, the high and low sale prices per share for our Common Stock and for the Redeemable Common Stock Purchase Warrants as reported by the Nasdaq SmallCap Market, on a quarterly basis, for the years 1999 and 2000. Our Common Stock and the Warrants were initially listed on the Nasdaq SmallCap Market and on The Chicago Stock Exchange on December 15, 1994.
COMMON STOCK HIGH LOW ------- -------- First Quarter ...................................... $ 5.13 $ 2.03 Second Quarter ..................................... 2.94 1.47 Third Quarter ...................................... 3.06 1.75 Fourth Quarter ..................................... 2.31 1.81
First Quarter ...................................... $ 2.50 $ 1.06 Second Quarter ..................................... 2.06 1.25 Third Quarter ...................................... 2.12 1.37 Fourth Quarter ..................................... 2.56 1.59
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
HIGH LOW ------- -------- First Quarter...................................... $ 2.19 $ .34 Second Quarter..................................... 1.19 .50 Third Quarter...................................... .59 .20 Fourth Quarter..................................... .47 .22
First Quarter...................................... $ .50 $ .25 Second Quarter..................................... .53 .31 Third Quarter...................................... .59 .31 Fourth Quarter..................................... .78 .19
As of March 21, 2001, there were approximately 950 beneficial holders of our Common Stock.
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.
In December 1999, we lowered the strike price of our Warrants from $7.00 to $2.25 per share and extended the expiration of the exercise period to December 31, 2000. In December 2000, we extended the expiration of the exercise period to December 31, 2001.
In exchange for consulting services, we issued (a) in 1999 warrants to purchase 200,000 shares of common stock at exercise prices ranging from $1.4375 to $2.00 per share exercisable until 2004 and (b) in 1998 warrants to purchase 50,000 shares of common stock at an exercise price of $1.375 per share exercisable until 2003.
During the year ended December 31, 2000, we sold shares of our Common Stock (the "Shares") in transactions not registered under the Securities Act of 1933, as amended (the "Securities Act"). During August, 2000, we issued 37,500 shares to one person as payment for certain services provided to us valued at $72,675. We did not use the services of any finders or securities broker-dealers in connection with the issuance of these shares. We believe that all Shares issued in this transaction are exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.
In the summer of 2000, EPX issued $450,000 of Series A Preferred Stock to three individuals in a private transaction, representing 8.7% beneficial ownership of EPX on an as-converted basis, together with rights to exchange said shares for our common stock based on a value of $2.00 per share (i.e. one share of Company common stock for each $2.00 of capital invested for Series A Preferred). The remaining 91.3% beneficial ownership of EPX was held by us and EPX officers and directors in the form of common stock. In 2001, the holders of the Series A Preferred Stock have taken steps to convert their shares to our common stock so that EPX is anticipated to become a wholly owned subsidiary.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE 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, 2000, 1999 and 1998 and the balance sheet data at December 31, 2000 and 1999 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, 1997 and 1996 and the balance sheet data at December 31, 1997 and 1996 are derived from audited financial statements not included herein.
(1) Certain amounts reported in the 1996, 1997, and 1998 financial statements have been reclassified to conform with the 1999 and 2000 presentation without affecting previously reported income from operations.
(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. Income from operations is used as the "control number" in determining whether those potential common shares are dilutive or antidilutive. For the years ended December 31, 2000 and
December 31, 1997 diluted earnings per share and basic earnings per share are identical because the loss from continuing operations incurred during those years is antidilutive. For the years ended December 31, 1999, 1998, and 1996, there is income from continuing operations and, accordingly, the additional options and warrants are considered because their effect is dilutive. See Note 2 of the Notes to our Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are a manufacturer and distributor of brake rotors, drums, disc brake pads, relined brake shoes, non-asbestos friction lining, and a complete line of hydraulic parts. We believe that we are the leading supplier of "value line" brake parts (brake parts sold at prices significantly below those of certain leading national brand name brake parts) to mass-market retailers, traditional warehouse distributors and specialty undercar distributors in North America.
Management's discussion and analysis of financial condition and results of operations that follow are based on restated financial condition and results of operations for all years presented due to the treatment of the Company's Hungarian foundry as a discontinued business as more fully described in Note 10 to the Consolidated Financial Statements.
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 "the Company anticipates," "believes" or "expects" indicate that it is possible that the event anticipated, believed or expected may not occur. Should such event not occur, then the result which the Company expected also may not occur or occur in a different manner, which may be more or less favorable to the Company. The Company does not undertake any obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect any future event or circumstances.
RESULTS OF OPERATIONS
Year Ended December 2000 compared to the Year Ended December 31, 1999
Net sales for the year ended December 31, 2000 increased $2,289,000 or 3.4% to $70,048,000 as compared to $67,759,000 for the year ended December 31, 1999. This increase was achieved in spite of lower commodity sales ($1,782,000 reduction from 1999 levels) and the lack of Canadian distribution business sales ($6,141,000) that was sold as of December 31, 1999. Sales of US brake parts for the year ended December 31, 2000 increased $10,212,000 or 18.5% over the same 1999 period due primarily to the addition of a major new customer and increased sales of friction product.
Gross profits for the year ended December 31, 2000 decreased $681,000 or 4.8% to $13,538,000 from $14,220,000 for the same 1999 period. Included in the gross profits computation for the year ended December 31, 2000 was $353,000 and $936,000, respectively of one-time, non-recurring costs related to the realignment of the Canadian friction manufacturing facility and under absorption of manufacturing costs due to the start up of new friction manufacturing capacity in Virginia. Included in gross profits for the year ended December 31, 1999 was $1,260,000 of gross profits related to the Canadian distribution business that was sold as of December 31, 1999. Before the effects of these factors, the gross profit margin percentage of the year ended December 31, 2000 was 21.2% which was level with the 1999 percentage.
Selling, general and administrative expenses were $13,253,000, an increase of $1,344,000 or 11.3% from $11,909,000 for the same period in 1999. Included in SG&A expenses for the year ended December 31, 2000 was approximately $400,000 of costs related to the start-up of the Company's e-commerce subsidiary, eParts eXchange, Inc. and approximately $150,000 of severance payments to certain terminated employees. Included in SG&A expenses for the year ended December 31, 1999 is $1,269,000
of costs related to the Canadian distribution business that was sold as of December 31, 1999. Before the effects of these factors, SG&A expenses related to the Company's base business increased to $12,484,000 for the year ended December 31, 2000 compared to $10,640,000 in the same period of 1999. The increase was due primarily to SG&A expenses for the Virginia friction manufacturing facility which is new in 2000, SG&A expenses related to an increasing export sales, increased freight costs and additional marketing and sales costs associated with obtaining new brake business.
Other Expense for the year ended December 31, 2000 increased by $1,716,000 to $2,578,000 from $862,000 for the same period of 1999, a period which included $1,153,000 gain on the sale of fixed assets (primarily from the sale of our former Chicago warehouse and headquarters building). After excluding the effect of the one-time gain in 1999, the increase of $563,000 is attributable to higher interest expense due to higher interest rates during 2000 as compared to 1999.
The absence of a loss from discontinued operations for the year ended ended December 31, 2000 is due to the fact that the loss from the discontinued Hungarian iron foundry operation for this period of $640,000 has been charged against the reserve for such losses established as of December 31, 1999.
For the year ended December 31, 2000, the deferred tax benefit of the year's losses was offset by an increase in the deferred tax asset valuation allowance of $797,000.
For the year ended December 31, 2000, net loss from continuing operations was $2,293,000 compared to net income from continuing operations of $1,449,000 for the year ended December 31, 1999. The principal reasons for decreased profitability were (i) one-time friction manufacturing facility realignment costs, (ii) under absorption of manufacturing costs related to the start-up of new friction manufacturing capacity, (iii) start-up costs of eParts eXchange, Inc., (iv) one-time severance payments, (v) increased interest costs, and (vi) increase in the deferred tax asset valuation allowance. Total net loss for the year ended December 31, 2000 was $2,260,000 compared to a net loss of $3,287,000 for the same period in 1999.
Year Ended December 1999 compared to the Year Ended December 31, 1998
Our net sales for the year ended December 31, 1999 increased to $67,759,000 as compared to 1998 full year sales of $58,252,000, an increase of $9,507,000 or 16%. The increase in sales is due to (i) a full year of sales to customers added in 1998, especially buying groups, (ii) additional sales penetration of established customers and (iii) growth of sales of friction products and premium "Ultimate" products.
Gross profit for the year ended December 31, 1999 was $14,220,000 or 21.0% of net sales. This compares to gross profit for the same period of 1998 of $12,335,000 or 21.2%. The 15% increase to 1999 from 1998 is due to increased sales offset by one-time moving costs and higher facility costs associated with our move to a larger Chicago area distribution facility.
Our selling, general and administrative expenses for the year ended December 31, 1999 increased $1,808,000 or 18% to $11,909,000 from $10,101,000 for the same 1998 period. The increase is due mainly to expenses which increase with increases in sales (such as freight and commissions) and additional marketing and sales allowances associated with gaining additional customers.
Income from operations for the year ended December 31, 1999 increased to $2,311,000 from $2,234,000 for the year ended December 31, 1998. This increase is due to higher sales in 1999 offset by higher selling, general and administrative expenses, especially those expenses which vary with sales.
Other expenses for the year ended December 31, 1999 decreased $997,000 to $862,000 as compared to $1,859,000 for the same period of 1998. The change was due to (i) increased interest expense due to a higher average level of borrowing and higher interest rates, (ii) lack of a favorable 1998 adjustment to the lawsuit reserve, offset by (iii) recognizing in 1999 a $1,200,000 gain on the sale of our former Chicago warehouse and headquarters building.
The loss from operating the Hungarian gray iron foundry increased to $1,254,000 for the year ended December 31, 1999 from a loss of $642,000 for the same 1998 period. The increase in such loss
from discontinued operations was due primarily to the full year impact of the loss of a major customer in the fourth quarter of 1998. The Company recorded in 1999 a $3,083,000 loss on the disposal of the discontinued operations which includes a writedown of the foundry property and equipment, and a provision for estimated costs of disposition. Thus the total loss from the discontinued Hungarian foundry operation was $4,337,000. See Note 10 of the Notes to the Consolidated Financial Statements.
Net loss for the year ended December 31, 1999 increased to $3,286,000 from a loss of $181,000 for the year ended December 31, 1998. The increased loss was due to the factors discussed above, especially the provision for loss on the disposal of the discontinued Hungarian gray iron foundry.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Our net sales for the year ended December 31, 1998 increased by $2,431,000 or 4% to $58,252,000 from $55,821,000 in 1997. Sales of our core brake parts business increased by 3% compared to 1997, due to increased penetration of the friction products segment of the automotive aftermarket, rapid customer acceptance of our "Ultimate" brake products and aggressive pricing which secured new customers.
Gross profit for the year ended December 31, 1998 was $12,335,000, an increase of $354,000, or 3% greater when compared to 1997 gross profit of $11,981,000. Gross profit margin for the year ended December 31, 1998 decreased slightly to 21.2% from the 1997 level of 21.5%.
Selling, general and administrative expenses for year ended December 31, 1998 decreased to $10,101,000 from $12,774,000 in 1997 or 21%. The decrease is due principally to lower bad debt provision in 1998 compared to 1997 which included a bad debt provision for APS, Inc., once a major customer, which filed for bankruptcy in February 1998.
Income (loss) from operations for the year ended December 31, 1998 increased $3,027,000 to income of $2,234,000 from a loss of $793,000 in 1997. This increase is due to higher sales in 1998 and lower selling, general, and administrative expenses due primarily to a lower provision for bad debts in 1998.
Other expenses for the year ended December 31, 1998 decreased $244,000 to $1,859,000 from $2,103,000 in 1997. Interest expense increased $494,000 or 35% to $1,916,000 from $1,422,000 in 1997. This increase is due to increased borrowings in 1998 compared to 1997 used for working capital purposes to support increased brake sales. Other expense includes a provision for settlement of a lawsuit initially recorded in the first quarter of 1997 in the amount of $650,000 (pretax) and a reduction of $151,000 (pretax) recorded in the second quarter of 1998 reflecting the verdict rendered. The lawsuit is more fully described in our Notes to Consolidated Financial Statements.
Loss from the discontinued Hungarian foundry increased $381,000 to $642,000 in 1998 from $261,000 in 1997. The greater loss was due to significantly reduced orders in 1998 from a major customer who produced goods destined for Russia.
Net loss for the year ended December 31, 1998 decreased by $1,905,000 to a net loss of $181,000 from a loss of $2,086,000 in 1997. These changes result from the factors discussed above.
CAPITAL EXPENDITURES
For the year ended December 31, 1998, capital expenditures totaled approximately $511,000, consisting primarily of (i) the acquisition of brake friction manufacturing machinery and equipment and (ii) the acquisition of machinery, equipment, and additional brake rotor patterns.
For the year ended December 31, 1999, capital expenditures totaled approximately $1,635,000, consisting primarily of (i) the acquisition of machinery and equipment used to produce friction products, (ii) the acquisition of leaseholds and fixtures related to the new larger Alsip Corporate Distribution Center, and (iii) additional brake rotor patterns.
For the year ended December 31, 2000, capital expenditures totaled approximately $1,481,000, consisting primarily of (i) the acquisition of machinery and equipment used to produce friction products in
Walkerton, Virginia, (ii) the acquisition of leaseholds and fixtures related to the new Canadian friction manufacturing facility, and (iii) additional brake rotor patterns and tooling related to friction manufacturing.
Liquidity and Capital Resources
Our primary liquidity needs are associated with carrying accounts receivable and maintaining inventories. We rely on internally generated funds, credit made available from suppliers and senior and subordinated lines of credit. Our working capital needs are generally not seasonal in nature, although business slows down slightly during the winter months.
We have incurred significant indebtedness, to date, in connection with our operations. As of December 31, 2000, our total consolidated indebtedness was approximately $23.0 million. A substantial portion of this indebtedness is secured by substantially all of our assets (except the Hungarian foundry assets) and by a pledge of all of the outstanding capital stock of our subsidiaries. As a result of such indebtedness, we (i) are prohibited from paying cash dividends pursuant to certain covenants and restrictions contained in the loan agreements governing such indebtedness, (ii) could be hindered in our efforts to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes, and (iii) would be vulnerable to increases in interest rates since substantially all of our borrowings are at floating rates of interest.
On September 29, 1999, we completed a renewal and restructuring of our credit agreement with LaSalle Bank National Association or its subsidiaries ("LaSalle") for (a) a revolving line of credit of up to $22,000,000 based on eligible accounts receivable and inventory and (b) a term loan in the amount of $3,779,194. The term loan was reduced by $2,842,873 in October 1999 from the proceeds of the sale of our Chicago facility (See Note 3 in the Notes to Financial Statements). The credit agreement was amended in 2000 to increase the revolving line of credit to $26,000,000. In March 2001, we were advised by LaSalle that we were not in compliance with one of our loan covenant ratios and LaSalle has increased our cost of borrowing by 100 basis points. On April 13, 2001, LaSalle informed us that it will waive such violation upon completion of required documentation which will include certain modifications to the credit agreement.
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 December 31, 2000, we have issued Finova warrants to purchase 1,350,000 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. Finova will also receive a warrant to purchase an additional 225,000 shares of common stock on August 14, 2001 except, however, that if the debenture is prepaid before the scheduled warrant issue date, then that warrant will not be issued. The warrants are 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. In September, 2000, Finova elected to use 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. Therefore, we received no cash proceeds from this transaction when the shares were issued. We will seek to either extend or refinance our Finova debt once it becomes due in 2002. Finova sought bankruptcy protection in early 2001 and most likely will be acquired by its primary creditors.
We believe that cash generated from operations, borrowings under our bank line of credit and credit from our suppliers is sufficient to fund our working capital requirements and capital expenditures through 2001.
SEASONALITY
Our business is slightly seasonal in nature, primarily as a result of the impact of weather conditions on the demand for automotive replacement parts. Historically, our sales and profits have been slightly higher in the second and third calendar quarters of each year than in the first or fourth quarters.
EFFECTS OF INFLATION
We historically have been able to diminish the effects of inflationary cost expenses through increased prices to customers and productivity improvements. Non-inventory cost increases, such as payroll, supplies and services, have generally been offset through price increases.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that our Company does not have significant exposure to market risk associated with derivative financial instruments, other financial instruments, or derivative commodity instruments. We had previously utilized only limited derivative financial instruments and did not use them for trading purposes and has never used derivative commodity instruments. At December 31, 2000, there were no such derivative instruments. The fair value of financial instruments, other than debt instruments, closely approximates their carrying value. Because the interest rate of the revolving loan and the term loan with LaSalle National Bank adjusts with the changes in the market rate of interest, we believe that the fair value is equivalent to the carrying value. We believe that the interest rate of 12.25% on the subordinated debenture is approximately equal to the current rate available for similar debt. Accordingly, the fair value of this debenture approximates its carrying value.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by this Item 8 are included as Part IV, Item 14 of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item 10 is set forth in our Proxy Statement for the Annual Meeting of Stockholders to be held on June 6, 2001 (the "2001 Proxy Statement") under the sections captioned "Election of Directors," "Executive Officers," "Certain Information Regarding the Board of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934," which sections are incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item 11 is set forth in our 2001 Proxy Statement under the section captioned "Executive Compensation and Related Information," which section is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item 12 is set forth in our 2001 Proxy Statement under the section captioned "Share Ownership of Certain Beneficial Owners and Management," which section is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item 13 is set forth in our 2001 Proxy Statement under the section captioned "Certain Transactions," which section is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed: (1) Financial Statements:
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.: Independent Auditors' Report...................... Consolidated Balance Sheets as of December 31, 2000 and 1999..................................... Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.... Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998................................... Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.... to Notes to Consolidated Financial Statements........ to (2) Financial Statement Schedules: Independent Auditors' Report...................... S-1 Schedule I -- Condensed Financial Information of Registrant.................................. S-2 to S-4 Schedule II -- Valuation and Qualifying Accounts.. S-5
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3.1 Restated Certificate of Incorporation of Universal Automotive Industries, Inc. ("UAI") (Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 3.2 Restated Bylaws of UAI (Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 4.2 Specimen Certificate for Warrant (Exhibit 4.2 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)*
4.3 Form of Warrant Agreement (including form of Warrant) (Exhibit 4.3 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.1 Form of UAI Share Option Plan (Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.8 Stock Exchange Agreement, dated May 5, 1994, by and between UAI, and Yehuda Tzur, Reuben Gabay, Sami Israel and Arvin Scott (Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.9 Stock Exchange Agreement, dated April 30, 1994, by and between UAI and Yehuda Tzur, Reuben Gabay, Sami Israel, Arvin Scott and Eric Goodman (Exhibit 10.10 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.11 Commercial Mortgage, dated February 6, 1992, by LaSalle National Bank as Trustee under Trust No. 10-06203-09 to American National Bank and Trust Company of Chicago (Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.23 Employment Agreement, dated May 5, 1994, by and between UA and Yehuda Tzur (Exhibit 10.27 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.24 First Amendment to Employment Agreement, dated December 14, 1994, between UA and Yehuda Tzur (Exhibit 10.28 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.25 Employment Agreement, dated May 5, 1994, by and between UA and Arvin Scott (Exhibit 10.29 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.26 First Amendment to Employment Agreement, dated December 14, 1994, between UA and Arvin Scott (Exhibit 10.30 to the Company's Registration Statement on Form S-1 (No. 33-85162) as filed with the SEC on October 14, 1994)* 10.42 Credit Agreement by and between LaSalle National Bank and Universal Automotive Industries, Inc. dated as of July 14, 10.43 Debenture Purchase Agreement between Universal Automotive Industries, Inc. and Sirrom Capital Corporation dated July 11, 21 Subsidiaries of the Registrant 23 Consent of Altschuler Melvoin & Glasser LLP
- ---------------
* These exhibits are incorporated herein by reference to the registration statement referenced after each exhibit next to which an asterisk appears. + Indicates executive compensation plans and arrangements. (b) Reports on Form 8-K The Company filed no reports of Form 8-K during the fourth quarter of 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
By: /s/ Arvin Scott ------------------------------------ Arvin Scott, Chief Executive Officer
Date: April 16, 2001
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated and on the dates indicated.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
F - 1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Universal Automotive Industries, Inc
We have audited the accompanying consolidated balance sheets of UNIVERSAL AUTOMOTIVE INDUSTRIES, INC as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Company's discontinued Hungarian subsidiary (Notes 1 and 10) which statements reflect aggregate total assets of $1,013,087 and $1,139,535 as of December 31, 2000 and 1999. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for such subsidiaries (before estimated loss on disposal) is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Automotive Industries, Inc. as of December 31, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois March 9, 2001 (except for Note 5, which is as of April 13, 2001)
F - 2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Consolidated Balance Sheets December 31, 2000 and 1999
The accompanying notes are an integral part of this statement.
F - 3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
F - 4 UNIVERSAL AUTOMOTIVE INDUSTRIES, INC Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
F - 5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998
F - 6
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
F - 7
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 1---STRUCTURE
Universal Automotive Industries, Inc. (the Company) acts as a holding company for its wholly-owned direct and indirect subsidiaries which as of December 31, 2000 are as follows:
Universal Automotive, Inc. (Universal)
Universal Automotive of Virginia, Inc.
Universal Brake Parts, Inc. (an amalgamation of 3 Canadian corporations previously owned by the Company, two of which were inactive in 2000).
UBP Hungary, Inc. (Hungary), a United States Corporation and its wholly owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian limited liability company (See Notes 2 and 10).
eParts eXchange, Inc., E-Commerce business-to-business activity (see Note 9)
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Universal Automotive Industries, Inc. is engaged principally in the manufacture and distribution of automotive brake parts operating from leased facilities in Alsip, Illinois; Compton, California; Walkerton, Virginia; Cuba, Missouri; and Toronto, Canada. Sales are made throughout the United States. The Company's Hungarian subsidiary, engaged in the manufacture of iron casting products, is accounted for as a discontinued operation as described in Note 10.
A summary of significant accounting policies is as follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
SEGMENTS--Effective December 31, 1999, the Company's operations involve only one geographic and industry segment. As discussed in Note 10, the Company decided in December 1999 to discontinue its Hungarian operations. The continuing United States and Canadian operations are vertically integrated, and are considered part of the same industry segment and geographic segment (North America).
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION--For the Canadian corporations, the local currency is the functional currency and translation adjustments are accumulated in a separate component of stockholders' equity entitled "Accumulated Other Comprehensive Loss" (consisting solely of such translation adjustments). The financial statements of the discontinued Hungarian operation had been measured as if the functional currency was the U.S. dollar, and thus, the currency adjustments had been included in the determination of net loss (now reflected as part of the loss from discontinued operations).
F - 8
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES--Inventories are stated at the lower of cost or market value with cost generally determined using the weighted average method, which approximates the first-in, first-out (FIFO) method.
DEPRECIATION--Depreciation of property and equipment has been computed under accelerated and straight-line methods for financial reporting purposes, and accelerated methods for income tax reporting purposes, over the estimated useful lives of the assets.
COST OF SALES--The Company considers warehousing (including certain salaries, occupancy costs, supplies) and buying expenses as an integral component of cost of sales.
GOODWILL--Goodwill represents the excess of the cost of various companies acquired, over the fair value of the net assets at their respective dates of acquisition. Such goodwill is being amortized over 20 to 40 years using the straight-line method.
DERIVATIVES--The Company had previously utilized only limited derivative financial instruments and did not use them for trading purposes. At December 31, 2000 and 1999, there were no such instruments.
INCOME TAXES--Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the financial statement and tax bases of assets and liabilities reduced, where appropriate, by a valuation allowance (Note 7).
ADVERTISING--All costs associated with advertising are charged to operations by inclusion in selling, general and administrative expenses when incurred.
EARNINGS PER SHARE--The Company computes earnings per share under Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Under SFAS 128, "Basic Earnings per Share" is computed by dividing net 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 (Note 12) 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. Income from continuing operations is used as the "control number" in determining whether those potential common shares are dilutive or antidilutive. For the year ended December 31, 2000 diluted earnings per share and basic earnings per share are identical because the loss from continuing operations incurred during that year is antidilutive. For the years ended December 31, 1999 and 1998, there is income from continuing operations and, accordingly, the additional options and warrants are considered because their effect is dilutive.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 2--NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments, other than debt instruments, closely approximates their carrying value. Because the interest rate of the revolving loan and the term loan with LaSalle National Bank adjusts with changes in the market rate of interest, management believes the fair value is equivalent to the carrying value. Management believes that the interest rate of 12.25% on the subordinated debenture is approximately equal to the current rate available for similar debt. Accordingly, the fair value of these debentures approximates their carrying value.
NOTE 3--SELECTED FINANCIAL STATEMENT DATA
In October 1999, the Company's Chicago headquarters and warehouse facility were sold for net proceeds of $2,890,102 resulting in a gain of $1,199,756. See Note 8 for newly leased Chicago area facility.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 4--SUBORDINATED DEBENTURE
On July 14, 1997, the Company 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 December 31, 2000 the Company has issued Finova warrants to purchase 1,350,000 shares of the Company's common stock at exercise prices ranging from $0.83 to $1.58, based on 80% of the average closing bid price of the Company's common stock for the 20 days preceding the respective issuance dates. Finova will also receive a warrant to purchase an additional 225,000 shares of common stock on August 14, 2001 except, however, that if the debenture is prepaid before the scheduled warrant issue date, then that warrant will not be issued. The warrants are 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 the Company's common stock at an exercise price of $0.83 per share, using a "cashless" exercise provision whereby Finova received a net of 279,260 shares of common stock after surrendering 170,743 shares which had a fair market value equal to the aggregate exercise price. The Company received no cash proceeds from this transaction when such shares were issued.
NOTE 5--LASALLE INDEBTEDNESS
On September 29, 1999, the Company completed a renewal and restructuring of its credit agreement with LaSalle Bank National Association or its subsidiaries ("LaSalle") for (a) a revolving line of credit of up to $22,000,000 based on eligible accounts receivable and inventory and (b) a term loan in the amount of $3,779,194. The term loan was reduced by $2,842,873 in October 1999 from the proceeds of the sale of the Company's Chicago facility. The credit agreement was amended in 2000 to increase the revolving line of credit to $26,000,000.
The revolving credit facility, which is for an initial term ending May 1, 2002, bears interest of prime plus 0.5% per annum (changed in 2001 to prime plus 1.5% per annum--see below), subject to an ongoing option to convert to LIBOR plus 2.5% per annum. The term loan is payable in monthly principal installments of $18,705, with a balloon payment due on May 1, 2002, and bears interest at prime plus 0.75% per annum.
At December 31, 2000 and 1999, respectively, amounts of $17,264,111 and $16,764,671 were due on the revolving credit line and amounts of $655,746 and $880,206 were due on the term loan (see Note 6).
The LaSalle agreement contains certain limitations on dividends and capital expenditures and requires the Company to satisfy certain financial tests concerning defined minimum tangible net worth and fixed charge coverage. At December 31, 2000, the Company was not in compliance with one such financial covenant. On April 13, 2001, LaSalle informed the Company that it will waive such violation upon completion of required documentation which will include certain modifications to the credit agreement. On March 27, 2001, LaSalle increased the interest rate by 1% per annum, in connection with the covenant violation. The entire credit facility is secured by a first lien on substantially all of the Company's North American assets. At December 31, 2000, approximately $1,405,000 was available for borrowing under the revolving credit line.
The weighted average interest rates on the aforementioned borrowings were 10.51%, 8.19% and 8.67% for the years ended December 31, 2000, 1999, and 1998, respectively.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 6--LONG-TERM INDEBTEDNESS
In connection with the November 1999 acquisition by a newly formed subsidiary (Note 1) of certain assets of a manufacturing facility in Walkerton, Virginia, the Company is liable to the seller for $360,000, repayable in 36 monthly installments of $10,000 plus interest at the LaSalle prime rate.
The approximate aggregate maturities of all long-term indebtedness are:
NOTE 7--INCOME TAXES
Income tax expense (benefit) consisted of the following:
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 7--INCOME TAXES, CONTINUED
The components of the United States net deferred tax assets are as follows:
At December 31, 2000, the Company had a United States net operating loss carryover of approximately $2,719,000, expiring in years 2017 to 2021.
The components of the Canadian net deferred tax liabilities are:
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 7--INCOME TAXES, CONTINUED
A reconciliation of the provision for income taxes and the amount computed by applying the federal statutory rate to income (loss) from continuing operations before income tax expense is as follows:
NOTE 8--LEASES AND OTHER COMMITMENTS
The Company leases from unaffiliated parties all of its facilities including the Alsip, Illinois headquarters occupied in 1999. The lease terms range from month-to-month to long-term leases, the latest of which expires in 2012.
Aggregate rent expense for all facilities was approximately $1,415,000, $1,112,000 and $729,000 for 2000, 1999 and 1998, respectively.
The Company leases certain equipment under capital leases payable in aggregate monthly installments of $12,641 with the latest expiring in 2005. The net book value of such equipment under capital lease is $496,205 (Note 6). Certain vehicles and equipment are also leased under operating leases, the latest expiring in 2001.
Minimum operating lease payments due over the remaining terms of the leases are as follows:
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 9--MINORITY INTEREST IN SUBSIDIARY Capitalization of eParts eXchange, Inc. (Note 1) is as follows as of December 31, 2000:
The Series A Preferred was issued for total proceeds of $450,000 that is shown in the Balance Sheet as Minority Interest in Subsidiary. During the first quarter of 2001, each of the holders of such Series A Preferred stock exercised their right to convent such shares into Universal Automotive Industries, Inc. ("Universal") stock, at a ratio of one quarter share of Universal Common stock for each Series A share so converted. Accordingly, 225,000 shares of such Universal stock will be issued in 2001, and the Minority Interest in Subsidiary will be reclassified as part of Universal stockholders' equity.
NOTE 10--DISCONTINUED OPERATIONS
On December 9, 1999, the Company finalized its decision to discontinue its Hungarian operation (Notes 1 and 2). At December 31, 1999, the carrying value of the Hungarian plant and equipment was reflected at its estimated net realizable value of $800,000, resulting in a writedown of $1,583,000. The Company provided in 1999 for estimated costs of disposition of $1,500,000, including estimated losses of the discontinued operations during the disposal period. The disposition was initially expected to occur by the end of 2000. At December 31, 2000, the Company is actively engaged in attempting to sell the entire Hungarian operation and believes that it will do so by the end of 2001. Commencing in 2001, because the Company has not disposed of the Hungarian operations within one year, generally accepted accounting principles require that income or loss from such discontinued operations be included in the Statement of Earnings as a component of income (loss) from continuing operations.
The following is a summary of financial information for the Company's discontinued operations:
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 11--CONTINGENCIES
In January 2000, a lawsuit was filed against the Company by the Plan Administrator for a bankrupt former customer (APS Holding Corporation) seeking recovery of alleged preferences in excess of $2,200,000. The Company believes that all payments received by it were in the ordinary course of business and/or were offset by merchandise transfers made by the Company subsequent to its receipt of the alleged preferences, and intends to vigorously contest such allegations. Potential damages, if any, are not covered by insurance. Management believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's financial position or results of operations.
During 1995, a lawsuit was filed against the Company in the United States Bankruptcy Court (the Court) by a Trustee of the bankruptcy estate of First National Parts Exchange, Inc. with which the Company had transacted both purchases and sales of certain automotive parts in 1992 and 1993. The Company recorded a provision of $650,000 in 1997 to reflect an estimated liability for such contingency. In 1998, after a trial was concluded, the Court ruled that the vast majority of the Trustee's claims were invalid. The Company's liability for the claims held as valid was approximately $499,000, for which the Company paid approximately $198,000 in 1998. As a result, the Company recorded benefit for lawsuit settlement of $151,000 (pre-tax) in 1998. After all appeals were exhausted, the Company paid the remaining $301,000 plus interest in December 2000.
NOTE 12--STOCK WARRANTS AND OPTIONS
The Company has outstanding at December 31, 2000 1,482,500 redeemable common stock purchase warrants. When the warrants were originally issued in December 1994, (a total of 1,495,000) each warrant entitled the holder to purchase one share of the Company's common stock at an exercise price of $7.00 per share, subject to certain adjustments, at any time until December 15, 1999. Effective November 5, 1999, the Company reduced the exercise price of these warrants to $2.25 per share and extended the expiration date to December 31, 2000. Effective December 30, 2000, the Company extended the expiration date to December 31, 2001. During 2000, a total of 12,500 warrants were exercised.
In addition to the warrants discussed above and in Note 4, in exchange for consulting services the Company issued (a) in 2000 warrants to purchase 125,000 shares of the Company's common stock at exercise prices ranging from $2.00 to $2.33 per share exercisable until 2005, (b) in 1999 warrants to purchase 200,000 shares of the Company's common stock at exercise prices ranging from $1.4375 to $2.00 per share exercisable until 2004 and (c) in 1998 warrants to purchase 50,000 shares of the Company's common stock at an exercise of $1.375 per share exercisable until 2003.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 12--STOCK WARRANTS AND OPTIONS, CONTINUED
The Company maintains a Stock Option Plan (as amended and restated effective June 9, 1998) for defined key employees and others. Options granted may be either incentive stock options as specified by the Internal Revenue Code or nonstatutory options. The Company has reserved 615,000 shares of common stock for issuance under the Stock Option Plan. Following is a table indicating the activity during 2000, 1999 and 1998 for such Stock Option Plan:
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 12--STOCK WARRANTS AND OPTIONS, CONTINUED
The following table summarizes information about the outstanding and exercisable stock options as of December 31, 2000:
Options Outstanding
Options Exercisable
Compensation expense is being recorded over the respective service periods required of the optionees, based on the difference between the grant price and the market price of the stock on the dates of such grants, as required by APB Opinion 25, Accounting for Stock Issued to Employees. In 2000, 1999 and 1998, amounts of $39,600, $39,600 and $39,509, respectively, have been provided for such compensation expense (with offsetting credits to additional paid-in capital).
The Company has adopted only the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and continues to account for stock options in accordance with APB Opinion 25. The foregoing amount of compensation expense for 2000, 1999 and 1998 differs by less than $.01 per share from that which would have been recorded using the Black-Scholes option valuation method. Accordingly, the pro forma disclosures required by SFAS 123 have been omitted.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
NOTE 13--QUARTERLY RESULTS (UNAUDITED)
The fourth quarter 2000 loss was attributable to (a) significantly lower sales consistent with a sluggish automotive aftermarket (b) continued underabsorption of friction manufacturing costs for new facility and (c) severance payments to certain terminated employees.
The 1999 fourth quarter income from continuing operations was attributable to recognizing an after-tax gain of approximately $744,000 on the sale of the Company's former headquarters and warehouse facility. The fourth quarter loss from discontinued operations was due to writedowns and loss provisions related to the Company's Hungarian foundry operation as more fully described in Note 10 the financial statements.
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UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Notes to the Consolidated Financial Statements December 31, 2000 and 1999
ADDITIONAL FINANCIAL DATA INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors of Universal Automotive Industries, Inc
In connection with our audit of the consolidated financial statements of UNIVERSAL AUTOMOTIVE INDUSTRIES, INC referred to in our report dated March 9, 2001, which is included in this Form 10-K, we have also audited Schedules I and II as of and for the years ended December 31, 2000, 1999 and 1998. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois March 9, 2001
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SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Balance Sheets (Not Consolidated) December 31, 2000 and 1999
The accompanying notes are an integral part of this statement.
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Schedule I, Page 2
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Statement of Operations and Retained Earnings (Deficit) (Not Consolidated) Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
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Schedule I, Page 3
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC
Statement of Cash Flows (Not Consolidated) Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
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Schedule II
SCHEDULE II UNIVERSAL AUTOMOTIVE INDUSTRIES, INC Valuation and Qualifying Accounts Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
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