FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended 01-31-02 Commission File Number 0-2865
Universal Mfg, Co.
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(Exact name of Registrant as specified in its charter)
NEBRASKA 42 0733240
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(State or other jurisdiction of incorporation IRS Employer Identification No.)
organization)
405 Diagonal Street, P.O. Box 190, Algona, Iowa 50511
( Address of principal executive office)
Registrant's telephone number, including area code 515-295-3557
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Not Applicable
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares outstanding as of 10-31-01 816,000
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Common
Transitional Small Business Disclosed Format ( Check one):
Yes No X
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1.
UNIVERSAL MFG. CO.
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FORM 10-QSB
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INDEX
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Pages
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Part I Financial Information
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Item 1. Financial Statements (unaudited): 3
Consolidated Balance Sheets as of January 31, 2002
and July 31, 2001
Consolidated Statements of Loss and Retained 4
Earnings - Six Months Ended January 31, 2002
and January 27, 2001
Consolidated Statements of Cash Flows - Six Months Ended 5
January 31, 2002 and January 27, 2001
Consolidated Statements of Loss and Retained 6
Earnings - Three Months Ended January 31, 2002
And January 27, 2001
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-12
Part II Other Information
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Item 1. Legal Proceedings 13
Item 2. Changes in securities 13
Item 3. Defaults upon senior securities 13
Item 4. Submission of Matters to a vote of security holders 13
Item 5. Other information 13
Item 6. Exhibits and reports on Form 8-K 13
Signatures 14
2.
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
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January 31, July 31,
2002 2001
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ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $258,656
Accounts receivable, net of allowances
of $51,718 and $46,718, respectively 3,061,766 $3,645,445
Inventories 8,580,126 10,642,710
Prepaid expenses 47,711 48,397
Property and equipment held for sale 0 33,912
Income tax receivable 404
Deferred income taxes 334,472 293,942
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Total current assets 12,283,135 14,664,406
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PROPERTY AND EQUIPMENT:
Land 100,499 100,499
Buildings 1,844,201 1,844,201
Machinery and equipment 1,139,326 1,131,505
Furniture and fixtures 705,700 637,559
Trucks and automobiles 988,930 1,080,632
Construction-in-Progress 17,314 33,280
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Total property 4,795,970 4,827,676
Less accumulated depreciation (2,730,638) (2,574,704)
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Property and Equipment- net 2,065,332 2,252,972
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TOTAL ASSETS $14,348,467 16,917,378
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $6,239
Current portion of long-term debt $5,896,112 5,575,610
Accounts payable 2,562,024 5,266,128
Income taxes payable 44,147
Accrued compensation and payroll taxes 210,763 231,305
Accrued other 111,385 141,868
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Total current liabilities 8,780,284 11,265,297
Long-term debt, net of current portion 461,901 489,054
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Total Liabilities 9,242,185 11,754,351
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MINORITY INTEREST IN SUBSIDIARY 123,218 119,844
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STOCKHOLDERS' EQUITY
Common stock, $1 par value;
authorized, 2,000,000 shares;
issued and outstanding, 816,000 shares 816,000 816,000
Additional paid-in capital 17,862 17,862
Retained earnings 4,149,202 4,209,321
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Total Stockholders' Equity 4,983,064 5,043,183
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,348,467 $16,917,378
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3
UNIVERSAL MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (unaudited)
SIX MONTHS ENDED
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January 31, January 27,
2002 2001
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NET SALES $14,401,054 $15,428,521
COST OF GOODS SOLD 11,500,037 12,717,548
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GROSS PROFIT 2,901,017 2,710,973
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,268,942 2,688,326
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INCOME/(LOSS) FROM OPERATIONS (367,925) 22,647
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OTHER INCOME(EXPENSE):
Gain on sales of property and equipment 312,658
Interest Income 23,228
Interest Expense (171,117) (143,769)
Other Income 124,454 58,356
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Total Other Income (Expense) 265,995 (62,185)
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INCOME/(LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES (101,930) (39,538)
MINORITY INTEREST IN NET EARNINGS OF SUBSIDIARY 1,731 (2,132)
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INCOME/(LOSS) BEFORE INCOME TAXES (100,199) (41,670)
INCOME TAX BENEFIT(EXPENSE) 40,080 18,118
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NET INCOME (LOSS) (60,119) (23,552)
RETAINED EARNINGS, Beginning of period 4,209,321 4,104,713
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RETAINED EARNINGS, End of period $4,149,202 $4,081,161
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PER COMMON SHARE INFORMATION:
BASIC AND DILUTED
Loss per common share ($0.07) ($0.03)
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4
UNIVERSAL MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED
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January 31, January 27,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (60,119) $ (23,552)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 214,434 97,630
Gain on sales of property and equipment (312,658)
Deferred income taxes (40,530)
Minority interest (1,731) 2,132
Changes in operating assets and
liabilities:
Accounts receivable 583,679 158,929
Inventories 2,062,584 (2,201,530)
Income taxes receivable/payable (44,551) (20,447)
Prepaid expenses 686 19,315
Accounts payable (2,704,104) 1,204,149
Accrued expenses (51,025) 50,592
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Net cash used in operating activities (353,335) (712,782)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds fron sales of property and equipment 411,133
Cash paid to acquire Value Independent Parts (5,157,562)
Purchases of property and equipment (91,357) (619)
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Net cash provided by(used in) investing activities 319,776 (5,158,181)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (122,400)
Net increase (decrease) in bank overdrafts (6,239) 1,221,582
Payment of capital leases (25,384)
Net increase in revolving notes payable 318,733 4,329,647
LLC membership contributions received 100,000
Principal received on note receivable - officer 5,105 5,378
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Net cash provided by financing activities 292,215 5,534,207
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NET CHANGE IN CASH AND CASH EQUIVALENTS 258,656 (336,756)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0 336,756
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 258,656 $ 0
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) for income taxes $ (45,000) $ 2,290
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Cash paid for interest $ 147,856 $ 143,769
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Cash Paid to Acquire Value Independent Parts:
Assets acquired:
Inventories $3,753,288
Accounts Receivable 647,882
Property and equipment 756,392
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Total Assets Acquired $5,157,562
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5
UNIVERSAL MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (unaudited)
THREE MONTHS ENDED
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January 31, January 27,
2002 2001
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NET SALES $6,939,599 $8,677,724
COST OF GOODS SOLD 5,612,236 7,040,565
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GROSS PROFIT 1,327,363 1,637,159
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,592,761 1,605,138
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INCOME/(LOSS) FROM OPERATIONS (265,398) 32,021
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OTHER INCOME(EXPENSE):
Gain on sales of property and equipment 333,682
Interest Income 77,948
Interest Expense (88,613) (107,689)
Other Income 29,585 (10,640)
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Total Other Income (Expense) 274,654 (40,381)
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INCOME/(LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES 9,256 (8,360)
MINORITY INTEREST IN NET EARNINGS OF SUBSIDIARY 2,420 (2,067)
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INCOME/(LOSS) BEFORE INCOME TAXES 11,676 (10,427)
INCOME TAX BENEFIT(EXPENSE) (4,670) 5,958
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NET INCOME (LOSS) 7,006 (4,469)
RETAINED EARNINGS, Beginning of period 4,142,196 4,085,630
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RETAINED EARNINGS, End of period $4,149,202 $4,081,161
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PER COMMON SHARE INFORMATION:
BASIC AND DILUTED
Income(Loss) per common share $ 0.01 $ (0.01)
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6
UNIVERSAL MFG.CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim financial statements - The accompanying consolidated financial
statements of Universal Mfg. Co. and subsidiaries (Company) are unaudited. In
the opinion of the Company's management, the consolidated financial statements
include all adjustments necessary to state fairly the financial position of the
Company as of January 31, 2002 and July 31, 2001, and the results of operations
and cash flows for the three month and six month periods ended January 31, 2002,
and January 27, 2001. Certain notes and other information have been condensed or
omitted from the financial statements presented in this quarterly report on Form
10-QSB. Accordingly, these financial statements should be read in conjunction
with the Company's annual report on Form 10-KSB for the year ended July 31,
2001.
Nature of operations - Universal Manufacturing, the parent company, is engaged
in the business of remanufacturing and distribution, on a wholesale basis,
electric fuel pumps, transfer cases, calipers and other automobile parts for all
makes and models of vehicles. The principal markets for the Company's products
are automotive dealers and other automotive parts distributors located
throughout the United States. Universal Distribution LLC distributes Ford and
Motorcraft engine assemblies, transmission assemblies, and other components to
Ford Dealerships. Rainbo CO LLC dba Value Independent Parts (VIP) is a full line
distributor of AC Delco, Motorcraft and other well known manufactured auto
parts. VIP distributes to jobbers, repair shops as well as dealers.
During the year ended July 31, 1999, and continuing throughout the year ended
July 31, 2000, Ford deauthorized the remanufacturing of numerous automotive
parts which were being remanufactured by the Company. On October 1, 1998, the
Company signed a new sales agreement with Ford authorizing the Company to be a
Ford Authorized Distributor. This agreement expired December 31, 2001. Effective
August 2001, the Ford Customer Service Division advised the Company of
significant changes that will impact the existing sales agreement between Ford
and the Company. Ford announced that it expected the changes to become effective
on or about January 1, 2002.
The Company's existing sales agreement with Ford authorizes the distribution of
Ford replacement engine assemblies, transmission assemblies, and other
components to Ford and Lincoln-mercury dealerships. In addition, the current
sales agreement authorizes the distribution of Motorcraft replacement parts to
Ford and Lincoln-Mercury dealerships and independent installers. The change
required separate sales agreements for the distribution of Ford assemblies and
Motorcraft replacement parts, and Ford will no longer authorize the distribution
of both product lines from a single supplier. As a result, the Company had to
decide whether to distribute Ford assemblies or Motorcraft replacement parts and
then enter into a new sales agreement.
The decision resulted in the reduction of sales volume because the Company was
forced to surrender an entire distribution line. The Company had considered both
options, considering reduced sales volume, potential future opportunities, and
other factors and had elected to discontinue distribution of Motorcraft
replacement parts effective January 1, 2002.
7
The Company signed a new agreement effective January 1, 2002 to distribute Ford
and Motorcraft engine assemblies, transmission assemblies and other components
to Ford and Lincoln-Mercury dealerships.
Presentation - The accompanying consolidated financial statements include the
accounts of Universal Mfg. Co., and its subsidiaries, Universal Distribution LLC
and Rainbo Company LLC dba Value Independent Parts. Universal Distribution LLC
is owned 99% by Universal Mfg. CO. and 1% by the Company's President and was
established on June 30, 1999. Rainbo Company LLC was acquired September 29,
2000. All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
2. ACQUISITION
On August 31, 2000, the Company signed an agreement with Rainbo Oil Company
(Rainbo) and Rainbo's president and majority shareholder to form Rainbo Company
LLC d/b/a Value Independent Parts (Rainbo LLC). Rainbo LLC, of which the Company
and Rainbo are each 50% members, was formed for purposes of acquiring and
operating the automobile parts distribution division (VIP) of Rainbo. The
Company and Rainbo each contributed $100,000 in initial membership contributions
to capitalize Rainbo LLC. Additionally, the Company and Rainbo each loaned
$400,000 to Rainbo LLC. These unsecured loans bear interest at a fixed rate of
9.0%, payable annually, with principal due on October 1, 2005.
The net income of Rainbo LLC is to be allocated between the Company and Rainbo
Oil based on their respective ownership interests. However, currently Universal
Distribution LLC receives a management fee equal to Rainbo LLC net income. Net
losses are allocated one hundred percent to the Company. The Company can
determine whether to distribute the assets of Rainbo LLC. All distributions
shall be made according to the respective ownership interests, as defined by the
operating agreement.
On September 29, 2000, the Company, through Rainbo LLC, executed an asset
purchase agreement to acquire substantially all assets of VIP. This acquisition
was accounted for under the purchase method of accounting. Results of operations
of the acquired entity are included in the consolidated statements of operations
from the date of acquisition.
The operations of VIP have been included in the Company's consolidated financial
statements from the date of acquisition. Pro-forma results of operations for the
six month periods ended January 31, 2002 and January 27, 2001 as if the
acquisition had occurred at the beginning of each period are as follows:
8
2001 2002
Total net sales $ 16,902,172 $ 14,401,054
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Net loss $ (119,121) $ (60,119)
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Basic and diluted loss per common share $ (0.15) $ (0.07)
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3. INVENTORIES -
Inventories consist of the following as of:
January 31, July 31,
2002 2001
FIFO balance:
Product cores $ 3,899,655 $ 4,198,045
Raw materials 678,932 666,723
Finished engines 917,650 1,153,637
Finished small parts 6,504,087 8,142,820
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Total FIFO balance 12,000,324 14,161,225
LIFO reserve (2,810,861) (3,083,616)
Obsolescence reserve (609,337) (434,899)
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Total inventories $ 8,580,126 $ 10,642,710
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4. LONG-TERM DEBT
The Company has two revolving credit agreements with Firstar Bank, N.A. totaling
$6,000,000 in available borrowings. Borrowings totaling $5,850,607 as of January
31, 2002 bear interest payable monthly at variable rates equal to the bank's
prime rate or prime rate less 1.0% (effective rates at 4.75% as of January 31,
2002). During the second quarter the borrowing limit on inventory was increased
by $1,000,000. This resulted in an increase in the effective interest rate by
1.20%. The credit agreements matured January 31, 2002. The agreements have been
extended to July 31, 2002. Maximum availability under these agreements is based
on a borrowing base calculated as a percentage of eligible inventory and
accounts receivable amounts as defined by the agreements. Substantially all
assets of the Company are pledged as collateral against outstanding borrowings.
The credit agreements contain certain covenants, including but not limited to
requirements for the Company to maintain certain tangible net worth and debt to
net worth ratio amounts and limits to capital expenditures. The Company was in
compliance with all such covenants as of January 31, 2002.
9
5. EPA PROJECT COSTS
On May 6, 1994, the Company and the United States Environmental Protection
Agency (EPA) entered into a Consent Agreement and Consent Order (Agreement) to
settle a complaint filed against the Company in 1991. As required by the
Agreement, the Company immediately paid a civil penalty of $32,955 and conducted
a Supplemental Environmental Project (SEP) during July and August of 1994 which
involved sludge removal and pit cleaning at the Company's Plant at a cost of
$91,076. After the sludge was removed, additional contamination was found in
"Pit D", an enclosed underground wastewater containment under the Company's
Plant. On June 10, 1998, the Company received notice from the EPA authorizing
submission of a detailed technical proposal for an additional SEP to ascertain
information concerning environmental conditions at the Company's Plant. The EPA
notice stated that if approved, the cost of the additional SEP work could be
used to offset the remaining approximately $37,000 in deferred penalties owed by
the Company to the EPA under the Agreement. On August 6, 1998, the Company's
consultant submitted a proposed SEP plan to the EPA detailing soil sampling work
and groundwater studies to be conducted across the Plant property over a 48-week
period at an estimated cost of $62,000, yielding an anticipated $38,840 in after
tax costs to the Company for offset against the remaining deferred penalty. The
EPA approved the consultant's proposal on September 11, 1998, and the work was
completed in November of 1999 within budget. The consultant's report to the EPA
disclosed chlorinated solvent contamination in the soil and groundwater only in
the immediate area of "Pit D." The consultant recommended conversion of "Pit D"
to a groundwater sump for removal and treatment of contaminated groundwater and
continued monitoring groundwater on the Company's property to detect any
migration of the contamination. The consultant recommended against removal of
contaminated soils due to cost and access problems. To date the EPA has not
responded to the consultant's recommendations, and the Company has no
information concerning the cost or extent of any further work that EPA may
require.
6. Gain on Sale of Fixed Assets
A facility located in Omaha, NE was sold for $397,684 on January 2, 2002. The
resulting gain totaled $341,498.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Thirteen weeks ended January 31, 2002 compared to Thirteen weeks ended January
27, 2001.
Second quarter sales for the consolidated Company were approximately 20% lower
than the second quarter a year ago. Sales in Universal Distribution were
approximately 25% lower than the same quarter a year ago. Most of the sales
decline was due to elimination of the Motorcraft distribution program at the end
of November 2001. Engine and transmission sales were also weak during the second
quarter. This was due in part to the general slowdown of the economy and low
interest promotions to sell new cars. VIP sales were approximately 19% below
last year's due to a general business slowdown that started on September 11,
2001. Universal Manufacturing sales were down 18% from last year or $62,000.
Last year, there were lines still being remanufactured as part of the Ford
Authorized Remanufacturing program during the second quarter. Universal
Manufacturing started remanufacturing calipers in December 2001 with an initial
order invoiced in January 2002 offset by a stock lift from the new customer.
There was also a stock adjustment on transfer cases for a major customer and
credit issued for $92,000 during the second quarter. This reduces sales because
product is returned for credit.
Gross profit as a per cent of sales was 19.1% for the second quarter of this
year compared to 18.9% for the second quarter of last year. The gross profit for
the rest of the fiscal year is expected to remain the same as last year's. Gross
profit in the VIP segment may decrease during the third quarter of this year due
to aggressive marketing to stimulate sales. Universal Manufacturing and
Universal Distribution should maintain the same margin for the balance of the
fiscal year.
Selling, general and administrative (SG&A) expenses for the Company as a per
cent of sales was 23.0% this quarter compared to 18.5% for the corresponding
quarter last year. Costs including separation packages for laid-off employees
due to the loss of the Motorcraft business and extra labor to pack up the
Motorcraft inventory partially contributed to increase in expenses. Competition
from surrounding Ford powertrain distributors, forced the Company to offer
prepaid freight to qualifying customers on all orders. This increased expenses
in Universal Distribution and is expected to continue. In January of 2002, VIP
in Peoria moved to the Universal Distribution warehouse. Both businesses will
operate from 1 location. The moving expense was approximately $20,000. Trucks
used to deliver the Motorcraft parts were sold during the second quarter. The
warehouses in Des Moines and Omaha are actively seeking tenants to sublease
unneeded space.
11
Twenty-six weeks ended January 31,2002 compared to twenty-six weeks ended
January 27, 2001.
Revenues for the Company were down approximately 6.7% for the first six months
of this year compared to the first six months of last year. This was due to the
loss of the Motorcraft business in Universal Distribution and VIP and the slow
down in the economy since September 11, 2001.
Gross profit as a per cent of was sales was 20.1% for the first six months of
this year compared to 17.6% for the first six months of last year. The gross
profit is expected to remain around the 19% mark for the rest of this fiscal
year. This is due to the loss of the Motorcraft business and building up the
volume of remanufacturing calipers. With anticipated increased volume in selling
calipers, the cost of production per unit is expected to decrease.
SG&A was 22.7% of sales for the first six months of this year compared to 17.4%
for the same period last year. Most of the same reasons discussed above in the
thirteen week discussion apply here. Additional expenses were also incurred
during the first quarter of this year due to the installation of a new computer
system.
Accounts Receivable has decreased from the beginning of the fiscal year due to
lower sales. Inventory has also decreased from the beginning of the fiscal year
due to selling down cores from deauthorized Ford product lines and reducing the
powertrain inventory. Vendor negotiations and revising the purchasing strategies
are underway to reduce the VIP inventory.
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
make a variety of decisions that impact the reported amounts and the related
disclosures. These decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. In reaching these decisions, management applies judgment based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements in the July 31, 2001 annual report on Form
10-KSB provides a summary of the significant accounting policies followed in the
preparation of the financial statements; other footnotes describe various
elements of the financial statements and the assumptions on which specific
amounts were determined. While actual results could, in fact, differ from those
estimated at the time of preparation of the financial statements, management is
committed to preparing financial statements that incorporate accounting
principles, assumptions and estimates that promote the representational
faithfulness, verifiability, neutrality and transparency of the accounting
information included in the financial statements.
12
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS NONE
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Item 2. CHANGES IN SECURITIES NONE
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Item 3. DEFAULTS UPON SENIOR SECURITIES NONE
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Item 4. SUBMISSION OF MATTERS TO A NONE
VOTE OF SECURITY HOLDERS ----
On December 6, 2001, at the Annual Meeting of Shareholders, the
following nominees for election as Directors received the number of
votes set forth after the respective names:
For Withheld
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Richard R Agee 707,037 39,177
Richard E McFayden 705,637 40,577
Helen Ann McHugh 707,037 39,177
Thomas W Rasmussen 707,037 39,177
Item 5. Other Information NONE
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Item 6. Exhibits and reports on Form 8-k NONE
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13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
Date 3-13-02 /s/ Donald D. Heupel
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Donald D. Heupel, President and Chief Financial Officer
14.