UNIVERSAL MFG. CO.

-------------
ANNUAL REPORT
-------------

1998
----

-------------------
1964-1998
135 CONSECUTIVE
QUARTERLY DIVIDENDS
-------------------

PRESIDENT'S MESSAGE TO OUR STOCKHOLDERS

The fiscal year ended July 31, 1998, was another excellent year for
Universal Mfg. Co. For the sixth consecutive year, record sales were posted.
Earnings, the third best in the history of the Company, were $.07 per share
less than last year which was a record year.

Total sales were $19,372,976, which was a 1.5% increase from the year
before. This increase occurred despite a very soft period in the automotive
aftermarket and despite a very mild winter. Increased sales of products which
are part of Ford distribution programs accounted for the sales growth. Sales
of these products approached 7 million dollars, and accounted for 35% of the
Company's business, compared to 32% a year ago.

Earnings per share of outstanding common stock for fiscal year ended
July 31, 1998, was $1.34. This compares with $1.41 earned in 1997, and $1.39
in 1996.

Cash dividends for fiscal 1998 were $.90 per share, compared to $1.00 in
fiscal 1997, and to $.85 in 1996. The Company anticipates significant
investments in inventory and warehouse facilities in the near future. The
dividend was reduced the last two quarters to assist in the funding of these
investments.

In May, 1998, Ford Customer Service Division released their strategy for
the sale and distribution of service parts in the future. According to their
strategy, all product lines currently remanufactured and distributed as part
of the Ford Authorized Remanufacturers Agreement will be deauthorized and
replaced with parts called Ford Quality Renewal (FQR) parts, which are
remanufactured by Ford or are contract remanufactured for Ford. These FQR
parts will also replace any Ford new service parts and any Motorcraft service
parts currently available, therefore the FQR part will be the only Ford
authorized service part available.

As a result of the Ford announced strategy and subsequent revised sales
agreements with them, Universal Mfg. Co. will be distributing Motorcraft
products in addition to FQR parts and Car Care Products. We will be suppliers
with Motorcraft distributors for the Motorcraft, Car Care, and small parts
FQR business. Large assemblies like FQR engines and transmissions will be
distributed exclusively by a limited number of distributors, including
Universal Mfg. Co.

This is an opportunity to significantly increase sales volume. Since FQR
parts will be the only service parts available, the potential volume for each
product line will increase significantly. For example, the only small parts
FQR line introduced in fiscal 1998 was rack and pinion steering gears. Unit
volume increased by about 150% in the first full month FQR parts were
available. FQR product line launches scheduled in fiscal 1999 are power
steering pumps, integral steering gears, starter, alternators, and window
lift motors.

To meet the service requirements and to be competitive, we will add
several same day delivery routes in and near our metropolitan service areas.
In addition, to provide space for Motorcraft product inventory and
anticipated increased FQR product inventory, we will be expanding our
warehouse capacity either through building additions or relocation. Personnel
additions will be required at all distribution locations.

The Ford Authorized Remanufactured product lines currently being
produced at the Algona manufacturing facility will eventually be replaced by
FQR lines. Since we have the personnel, equipment, and facilities capable of
producing high quality products, a strategic plan was developed to identify
and procure alternative manufacturing opportunities for the plant. This plan
identifies remanufacturing programs for original manufacturers (including FQR
programs), independent remanufacturing programs, and non-automotive related
assembly programs for other area manufacturers. The Company is currently
aggressively pursuing this strategy, and is taking advantage of opportunities
to supply remanufactured products to other Ford Authorized Remanufacturers
during this period of transition.

Late in fiscal 1998, the Company reluctantly accepted the resignation of
Richard W. Agee as director. Mr. Agee had served as a director since 1970,
and his counsel and experience definitely will be missed, particularly his
extensive experience with the banking and financial business.

We continue to be very optimistic about the Company's future. Our
increasing involvement in Ford distribution programs should continue to
increase sales volumes. Service to Ford and Lincoln-Mercury dealerships
continues to be our most important business. However, we are seeking
additional markets to maximize the use of our manufacturing capabilities.

Management is grateful to employees, customers, suppliers, and
shareholders who have contributed to the continued success of our Company. On
a separate sheet you will find an invitation to our Annual Meeting which we
encourage you to attend.

/s/ Donald D. Heupel
Donald D. Heupel
President

ADDITIONAL INFORMATION PROVIDED BY THE COMPANY

THE COMPANY'S BUSINESS

The Company is engaged in the remanufacture and distribution of
automotive engines and automotive parts. The amounts of net sales, net
income, and total assets attributable to this business for each of the last
five fiscal years are shown under the heading "Selected Financial Data".

The following table shows the percentage of total sales over the last
three fiscal years for engines and parts:

1998 1997 1996
- -------------------------------------------------------------------------------

Automobile and Truck Engines 27% 28% 22%
Automobile and Truck Parts 73% 72% 78%

The principal markets for the Company's products are automotive dealers,
automotive remanufacturers and distributors, and automotive parts
distributors in the Midwest. The Company has no export sales business.

The following table shows the percentage of total sales by type of
product and by customer:

1998 1997 1996
- -------------------------------------------------------------------------------

Ford Authorized Remanufactured to Dealers 48% 51% 56%

Distribution Program to Dealers 35% 32% 31%

Parts to Other Ford Remanufacturers 16% 15% 11%

Miscellaneous Sales 1% 2% 2%

SELECTED FINANCIAL DATA FOR FISCAL YEARS ENDED JULY 31

1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------

Net Sales . . . . . . . . . . . . . . . . $19,372,976 $19,089,166 $17,678,542 $14,762,085 $13,118,372
Income Before Income Taxes . . . . . . . . 1,769,874 1,971,377 1,888,950 1,319,902 809,648
Estimated Income Taxes . . . . . . . . . . 680,221 818,450 754,491 501,086 329,016
Income Before Accounting Changes . . . . . 1,089,653 1,152,927 1,134,159 818,816 480,632
Cumulative Effect of Accounting Changes . . --------- --------- ---------- --------- 284,061
Net Income . . . . . . . . . . . . . . . . 1,089,653 1,152,927 1,134,159 818,816 764,693
Net Income Per Share of
Outstanding Common Stock . . . . . . . . 1.34 1.41 1.39 1.00 .94
Cash Dividends
Per Share Declared . . . . . . . . . . . .90 1.00 .85 .80 .60
Total Assets . . . . . . . . . . . . . . . $7,530,045 $6,443,524 $6,231,331 $5,453,419 $5,543,974

THE COMPANY'S STOCK

The Company's stock is traded in the over-the-counter market and is
listed on the NASDAQ Small-Cap Market under the trading symbol UFMG. As of
September 9, 1998, there were 234 holders of record of the Company's common
stock. The following table lists the dividend declarations on the Company's
stock during the last two fiscal years:

AMOUNT AMOUNT
DATE PER SHARE DATE PER SHARE
- --------------------------------------------------------------------------

October 29, 1997 $.25 October 29, 1996 $.25
January 20, 1998 .25 January 21, 1997 .25
April 20, 1998 .20 April 30, 1997 .25
July 21, 1998 .20 July 15, 1997 .25
- --------------------------------------------------------------------------
1998 TOTAL $ .90 1997 TOTAL $1.00

The high and low bid and asked prices for the Company's common stock
during the last two fiscal years are shown in the adjacent table:

HIGH LOW
- ----------------------------------------------------------------------------
CALENDAR QUARTERS BID ASKED BID ASKED

3rd Quarter 1996 13 1/2 14 3/4 10 11 3/4
4th Quarter 1996 13 1/2 15 12 1/4 10 1/2
1st Quarter 1997 12 1/2 13 7/8 12 3/8 12 3/4
2nd Quarter 1997 16 3/4 18 12 3/8 12 3/4
3rd Quarter 1997 16 17 1/2 16 17 1/2
4th Quarter 1997 17 17 1/2 15 16
1st Quarter 1998 15 3/8 16 1/4 13 3/4 15 1/2
2nd Quarter 1998 15 1/4 15 3/4 10 11

Information concerning stock prices has been obtained from The NASDAQ Stock
Market, Inc. Information concerning stock prices for fiscal years 1997 and
1998 was obtained from Kirkpatrick, Pettis, Smith, Polian, Inc., which acts
as a market maker in the Company's stock. The above quotations may reflect
inter-dealer prices and may not reflect retail mark-up, mark-down or
commission or necessarily represent actual transactions.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

In fiscal 1998, the company experienced an increase in sales of 1.5% due
to continued increases in sales of Ford Remanufactured distribution
products. In fiscal 1997, the company experienced an increase in sales of 8%
also due to continued increased sales to other Ford Authorized
Remanufacturers and increased sales of Ford Remanufactured distribution
products.

Sales to other Ford Authorized Remanufacturers increased to $3,057,983
in fiscal 1998 from $2,946,457 in fiscal 1997. Sales of Ford Remanufactured
distribution products in fiscal 1998 were $6,770,540 compared to $6,022,370
in fiscal 1997.

Unit sales increases in fiscal year 1998 were led by water pumps, with
sales of 12,854 units. This represents an increase of 4,052 units over fiscal
1997 sales of 8,802 units.

Remanufactured engine unit sales in fiscal year 1998 were 2,977, which
represents a decrease of 187 units. Engine sales in fiscal 1997 were 3,164.

Transmission unit sales increased by 326 in fiscal year 1998 to 4,109
units. Transmission sales in fiscal 1997 were 3,783 an increase of 118 over
the previous year.

Electric fuel pump unit sales decreased from 26,003 units in fiscal year
1997 to 24,274 in fiscal 1998, a decrease of 1,729.

In March, 1998, prices were reviewed but net price changes were not
significant. In February 1997, prices were reviewed and selectively increased
about 2.5%. In September 1996, water pump prices were reduced as part of a
nationwide price reduction program to increase market penetration. Prices
were reviewed in February 1996 and were selectively increased by
approximately 5%. In July 1996, brake shoe prices were reduced to adjust to
market trends.

In May, 1996, the Company and the United Auto Workers Union, which
represents the production employees, reached a new three year agreement. This
agreement provides for approximate wage increases of 2.6% each year of the
agreement.

Interest income for fiscal 1998 was $43,213; in fiscal 1997 it was
$49,109; and in fiscal 1996 it was $31,153. Investment amounts were slightly
lower during fiscal 1998 than during fiscal 1997, and available rates were
approximately equal. Investment amounts during 1997 were higher than in 1996,
and available investment rates again were approximately the same.

The following table shows the comparison for the last five fiscal years
of gross profit and selling, general and administrative expenses as a
percentage of net sales. The reduced gross margin is the result of the sales
mix changing to more Ford Remanufacturing distribution products.

GROSS PROFIT SELLING, GENERAL AND
FISCAL AS PERCENTAGE ADMINISTRATIVE EXPENSES AS
YEAR OF NET SALES PERCENTAGE OF NET SALES
- ------------------------------------------------------------------------

1994 21.6 14.6
1995 21.4 12.8
1996 21.7 11.4
1997 20.8 10.8
1998 19.8 11.0

The following table shows the changes in selected expense categories,
included within selling, general and administrative expenses, for the past
three fiscal years:

AMOUNT OF INCREASE (DECREASE)
OVER PRIOR FISCAL YEAR
FISCAL YEARS ENDED JULY 31
1998 1997 1996
- -------------------------------------------------------------------------------

Salaries and Wages (Other than
for Officers and Directors) $41,535 ($10,631) $2,700
Cost of Group Insurance
for Employees 6,663 16,799 19,778
Officers' and Directors'
Compensation (22,606) 12,032 28,173
Repairs and Maintenance
for Vehicles 20,723 8,341 (1,697)
Depreciation on Vehicles 7,316 (13) 9,453
Gas and Oil (14,135) (3,973) (3,808)
Warehouse Supplies & Expenses (10,337) (992) 2,656
Payroll Taxes 583 (910) 3,986
Advertising and Price Lists (24,028) (23,693) 19,502
Bad Debt Expenses (550) 550 (253)
Professional Services 30,238 5,342 (20,346)
Payroll Insurance (6,338) (5,624) (13,426)
Insurance-
Vehicles, Building, Contents (8,463) (365) (1,717)
Telephone (4,894) (6,572) 7,133
Utilities (2,214) 2,138 2,773
Freight 8,413 36,113 46,491

The increase in compensation other than officers and directors is due to
a key person who was an officer resigning, and being replaced by a key person
who was not an officer. The decrease in directors and officers compensation
is due to an officer's resignation. The increase in professional services is
due the retention of a consultant to assist with strategic planning, and to
legal fees associated with personnel issues. The decrease in advertising and
price lists is due to a reduction in the Ford Authorized Remanufacturers
national advertising budget, in which the Company participates.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)

Earnings per share of common stock decreased $.07 in fiscal 1998 due to
a lower gross margin and increased selling, general, and administrative
expenses. Earnings per share of common stock increased $.02 in fiscal 1997
due to increased sales volume. Earnings per share increased $.39 in fiscal
1996 due to increased sales volume and to a slight improvement in gross
margin.

The Company's ratio of current assets to current liabilities of 2.5 to 1
indicates that the Company is maintaining a reasonable level of liquidity.
Our inventories in fiscal 1998 were slightly higher than in fiscal 1997. Our
total cash and short-term investments at fiscal year-end for the past three
years were:

TOTAL OF CASH AND
FISCAL YEAR SHORT TERM INVESTMENTS
- --------------------------------------------------------------

1998 . . . . . . . . $1,234,007
1997 . . . . . . . . . $881,389
1996 . . . . . . . . . $934,072

It is anticipated that certain capital expenditures will be required to
maintain or increase the current level of business and service. Expansion or
replacement of our warehouse facilities in Des Moines, IA, Omaha, NE, and
Peoria, IL, is likely. Continued growth in Ford distribution programs and the
additions of Motorcraft parts to our product offering will require investment
in additional inventories. Management believes that some debt may be required
to make the transition to higher levels of inventory and to finance future
capital needs.

As indicated in the President's Message to Shareholders, the Ford
program for remanufacturing is being restructured. The Company is uncertain
concerning what products will be included in future remanufacturing
activities, and is in the process of implementing its strategic plan for the
future use of its remanufacturing plant.

In connection with the complaint filed by the Environmental Protection
Agency (EPA) described in Note 6 of the Notes to Consolidated Financial
Statements, the Company accrued an expense of $149,725 in fiscal 1994 to
account for cleanup costs or additional penalty as provided in the settlement
agreement with the Environmental Protection Agency (EPA). Portions of this
amount were expended in each of fiscal years 1994 and 1995.

The Company had no bank borrowings during the fiscal year ended July 31,
1998.

YEAR 2000 DISCLOSURE

Computer programs written over the past twenty-five years with a 2-digit
standard, rather than 4-digits, have caused the year 2000 predicament we are
in today. "Year fields" are assigned 2-digits instead of 4-digits in computer
software programs throughout the world. The 2-digit year standard was
employed to save expensive storage space and reduce keystrokes. The use of
2-digit years is widespread, including software programs, data files,
electronic interchange systems and micro code embedded in purchased hardware
and equipment. Like all businesses, the Company is faced with the challenges
of modifying its software, hardware, firmware, and equipment to make it
correctly store, sort, calculate, and process data before, during, and after
January 1, 2000.

In fiscal year 1998, through routine upgrades, the Company made the
computer software programs and equipment utilized at the Company's facilities
year 2000 compliant. These upgrades include, but are not limited to, the
manufacturing, financial and accounting, invoicing, production, sales, and
warehouse management systems. The Company has not incurred significant
identifiable costs as a result of the upgrade of its internal system to year
2000 compliance.

The Company is investigating the year 2000 status of the Company's
non-information/technology systems ("Non-IT Systems") which includes phones,
voice mail, heating/air conditioning, electricity, security systems, and lift
trucks. The Company expects that its Non-IT Systems will be year 2000
compliant before the end of 1999.

In addition to reviewing its internal systems, the Company is in the
process of initiating formal communications with its major outside vendors,
distributors, suppliers, customers, and freight carriers to determine whether
they are year 2000 compliant and to attempt to identify any potential issues.
The interdependent relationship between the Company and these third parties
makes the Company vulnerable to third parties' failure to remediate their own
year 2000 issues. If these third parties do not achieve year 2000 compliance
before the

YEAR 2000 DISCLOSURE (CONTINUED)

end of 1999, the Company may experience a variety of problems which may have
a material adverse effect on the Company.

To the extent the Company's vendors are not year 2000 compliant, such
vendors may fail to deliver ordered materials and products to the Company and
may fail to bill the Company properly and promptly. Consequently, the Company
may not have the correct inventory to send to its customers and may
experience a shortage of inventory. Any disruption in manufacturing services
provided by the Company as a result of year 2000 noncompliance could have a
material adverse affect on the Company's business, financial condition, and
results from operations.

Management is committed to devoting the appropriate resources to ensure
a timely year 2000 solution and will continue to test current and new
versions of the Company's computer software and equipment, and will work with
necessary third parties.

FORWARD LOOKING STATEMENT SAFE HARBOR

Statements that are not historical facts, including without limitation,
statements about our confidence, strategies, expectations and beliefs,
technologies and opportunities, industry and market segment growth, demand
and acceptance of new and existing products, and return on investments in
products and markets are forward looking statements that involve risks and
uncertainties, including, without limitation, the affect of the general
economic and market conditions, customer requirements for our products, the
continuing strength of the automotive industry, competitive pricing,
maintenance of our current momentum, weather conditions and other factors.

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
Universal Mfg. Co.:

We have audited the accompanying balance sheets of Universal Mfg. Co. as
of July 31, 1998 and 1997 and the related statements of income and retained
earnings and of cash flows for each of the three years in the period ended
July 31, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all
material respects, the financial position of Universal Mfg. Co. at July 31,
1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended July 31, 1998 in conformity with
generally accepted accounting principles.

/s/ Deloitte & Touche LLP
Des Moines, Iowa
August 31, 1998

UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
BALANCE SHEETS
- -------------------------------------------------------------------------------

ASSETS JULY 31,
----------------------------
CURRENT ASSETS: 1998 1997
---------- ---------

Cash and cash equivalents $1,234,007 $ 881,389
Accounts receivable 2,141,099 1,884,917
Inventories (Note 2) 2,611,961 2,412,712
Income taxes recoverable 23,545 23,180
Prepaid expenses 19,798 70,929
---------- ---------
Total current assets 6,030,410 5,273,127
---------- ---------
DEFERRED INCOME TAXES (NOTE 4) 24,188 44,208

LEASE RECEIVABLE (NOTE 3) - 14,041

PROPERTY - AT COST:
Land 120,499 120,499
Buildings 1,406,747 1,157,116
Machinery and equipment 1,013,923 938,466
Furniture and fixtures 264,924 208,086
Trucks and automobiles 870,579 743,530
---------- ---------
Total property 3,676,672 3,167,697
Less accumulated depreciation (2,201,225) (2,055,549)
---------- ---------
Property - net 1,475,447 1,112,148
---------- ---------
$7,530,045 $6,443,524
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $2,199,744 $1,419,725
Dividends payable 163,200 204,000
Payroll taxes 27,828 24,944
Accrued compensation 81,495 87,631
Accrued local taxes 17,570 22,269
---------- ---------
Total current liabilities 2,489,837 1,758,569
---------- ---------
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 4,206,346 3,851,093
---------- ---------
Total stockholders' equity 5,040,208 4,684,955
---------- ---------
$7,530,045 $6,443,524
---------- ---------
---------- ---------

SEE NOTES TO FINANCIAL STATEMENTS.

UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998

1998 1997 1996
----------- ----------- -----------

NET SALES $19,372,976 $19,089,166 $17,678,542

COST OF GOODS SOLD 15,532,466 15,111,618 13,836,818
----------- ----------- -----------
GROSS PROFIT 3,840,510 3,977,548 3,841,724

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,132,669 2,068,321 2,019,079
----------- ----------- -----------
INCOME FROM OPERATIONS 1,707,841 1,909,227 1,822,645

OTHER INCOME:
Interest (net) 43,213 49,109 31,153
Other 18,820 13,041 35,152
----------- ----------- -----------
Total other income 62,033 62,150 66,305
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,769,874 1,971,377 1,888,950

INCOME TAXES (Note 4) 680,221 818,450 754,491
----------- ----------- -----------
NET INCOME 1,089,653 1,152,927 1,134,459

RETAINED EARNINGS, BEGINNING OF YEAR 3,851,093 3,514,166 3,073,307

LESS CASH DIVIDENDS
($.90, $1.00, and $.85 per share in 1998, 1997 and 1996, respectively) 734,400 816,000 693,600
----------- ----------- -----------
RETAINED EARNINGS, END OF YEAR $ 4,206,346 $ 3,851,093 $ 3,514,166
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER COMMON SHARE: $ 1.34 $ 1.41 $ 1.39
----------- ----------- -----------
----------- ----------- -----------

SEE NOTES TO FINANCIAL STATEMENTS.

UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998

1998 1997 1996
--------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,089,653 $1,152,927 $1,134,459
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 196,186 190,749 184,406
Deferred income taxes 20,020 (1,879) -
Gain on sale of property (4,589) (2,459) (14,634)
Effect of changes in operating assets and liabilities:
Accounts receivable (256,182) (229,925) (235,815)
Inventories (199,249) 67,001 44,270
Income taxes recoverable (365) (23,180) 109,646
Prepaid expenses 51,131 (20,647) (12,306)
Accounts payable 780,019 (88,219) 242,231
Payroll taxes 2,884 14,405 1,227
Income taxes payable - (56,790) 56,790
Accrued compensation (6,136) (2,415) 1,711
Accrued local taxes (4,699) 8,285 (5,706)
--------- ---------- ----------
Net cash flows from operating activities 1,668,673 1,007,853 1,506,279
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 19,050 88,400 81,063
Purchases of property (559,905) (332,936) (278,534)
Proceeds from maturities of investments - - 67,597
--------- ---------- ----------
Net cash flows from investing activities (540,855) (244,536) (129,874)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (775,200) (816,000) (652,800)
--------- ---------- ----------
Net cash flows from financing activities (775,200) (816,000) (652,800)
--------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 352,618 (52,683) 723,605

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 881,389 934,072 210,467
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,234,007 $ 881,389 $ 934,072
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 662,445 $ 898,426 $ 595,805
--------- ---------- ----------
--------- ---------- ----------

SEE NOTES TO FINANCIAL STATEMENTS.

UNIVERSAL MFG. CO.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
THREE YEARS ENDED JULY 31, 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS - The Company is engaged in the business of
remanufacturing and selling on a wholesale basis remanufactured engines
and other remanufactured automotive parts for Ford, Lincoln and Mercury
automobiles and trucks. The Company is a franchised remanufacturer for
Ford Motor Company with a defined sales territory. The Company purchases
the majority of its new raw materials from Ford Motor Company.
Remanufactured engines for non-Ford vehicles are also marketed on a
limited basis. The principal markets for the Company's products are
automotive dealers and jobber supply houses. The Company has no separate
segments, major customers, foreign operations or export sales.

USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.

INVENTORIES - Inventories are stated at the lower of cost, determined on
a last-in, first-out (LIFO) method or market.

INVESTMENTS - From time-to-time the Company may make short-term
investments which are considered as either trading securities or
available for sale securities and, accordingly, are carried at fair
value in the Company's financial statements.

DEPRECIATION, MAINTENANCE, AND REPAIRS - Property is depreciated
generally as follows:

ASSETS DEPRECIATION METHOD LIVES
------ ------------------- ---------

Buildings Straight-line and declining-balance 10 - 20 years
Machinery and equipment declining-balance 7 - 10 years
Furniture and fixtures declining-balance 5 - 7 years
Trucks and automobiles declining-balance 3 - 5 years

Maintenance and repairs are charged to operations as incurred. Renewals
and betterments are capitalized and depreciated over their estimated
useful service lives. The applicable property accounts are relieved of
the cost and related accumulated depreciation upon disposition. Gains or
losses are recognized at the time of disposal.

REVENUE RECOGNITION - Sales and related cost of sales are recognized
primarily upon shipment of products.

WARRANTY - Warranty expense is based upon receipt of warranty claims and
prior historical experience.

CASH EQUIVALENTS - For purposes of the Statements of Cash Flows, the
Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.

FINANCIAL INSTRUMENTS - Cash and cash equivalents, accounts receivable
and accounts payable are short-term in nature and the values at which
they are recorded are considered to be reasonable estimates of their
fair values.

EARNINGS PER SHARE - Earnings per share have been computed on the
weighted average number of shares outstanding during the years (816,000
shares).

PENDING ACCOUNTING CHANGES - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, effective for fiscal years beginning after June 15, 1999.
The adoption of this statement is not expected to have a material impact
on the operations of the Company.

2. INVENTORIES

The major classes of inventory are as follows:

1998 1997
---------- ----------

Product core $1,169,485 $1,048,754
Raw materials 470,768 382,557
Finished engines 336,941 278,756
Finished small parts 634,767 702,645
---------- ----------
$2,611,961 $2,412,712
---------- ----------
---------- ----------

If inventories were valued at the lower of cost (first-in, first-out
method) or market, inventories would have been $5,655,407 and $5,342,795
at July 31, 1998 and 1997, respectively.

3. LEASE RECEIVABLE

On May 26, 1993, the Company, as lessor, entered into a lease agreement
with another manufacturer to lease equipment at 8% interest, for a
sixty-month period. This agreement was completed as of July 31, 1998.

4. INCOME TAXES

The provision for income taxes for the years ended July 31, 1998, 1997
and 1996 is as follows:

1998 1997 1996
-------- -------- --------

Current income taxes $660,201 $820,329 $754,491
Deferred income taxes 20,020 (1,879) -
-------- -------- --------
Income tax provision $680,221 $818,450 $754,491
-------- -------- --------
-------- -------- --------

Deferred tax assets are comprised of the following at July 31:

1998 1997
-------- --------

Depreciation $(30,480) $(13,617)
Uniform inventory capitalization 12,867 15,820
Vacation pay accruals 11,770 10,380
EPA liability 23,885 23,885
Other 6,146 7,740
-------- --------
Deferred Income taxes $24,188 $ 44,208
-------- --------
-------- --------

A reconciliation between statutory and effective tax rates is as follows:

1998 1997 1996
---------- ---------- ----------

Income before income taxes $1,769,874 $1,971,377 $1,888,950
Statutory rate 34% 34% 34%
---------- ---------- ----------
Income taxes at statutory rate 601,757 670,268 642,243
Tax effect of:
State taxes 130,074 159,387 85,320
Other - net (51,610) (11,205) 26,928
---------- ---------- ----------
Total income taxes $ 680,221 $ 818,450 $ 754,491
---------- ---------- ----------
---------- ---------- ----------

5. 401(K) PLAN

The Company has a 401(k) plan which covers all non-union employees which
was adopted January 1, 1997. Under this plan, the Company matches 100%
of employee contributions up to 3% of gross salary. The Company
matching contributions vest immediately. Total expenses under the plan
were $42,790, $20,667 and $0 for the years ended July 31, 1998, 1997 and
1996 respectively.

6. EPA PROJECT COSTS

In February, 1991, the Company was served with a complaint from the
United States Environmental Protection Agency (EPA) which contained
eight counts of alleged violations of the Resource Conservation and
Recovery Act of 1976 and the Hazardous Solid Waste Amendments of 1984.
The complaint alleged, among other things, that the Company failed to
adequately test and properly transport certain residue of hazardous
wastes which it was treating at its facility. The Company entered into
a Consent Agreement and Consent Order with the EPA dated May 6, 1994,
which provided for settlement of this complaint.

This settlement called for payment of a civil penalty of $32,955, and
for the completion of certain remedial projects, estimated to cost
$149,725. Total costs paid as of July 31, 1998 are $90,113. The
remaining amount of $59,612 is recorded as a liability in the
accompanying financial statements.

On June 10, 1998, the Company received notice from the EPA authorizing
submission of a proposal for treatment on additional contamination found
after the initial hazardous waste was removed. The EPA approved that
costs related to studies for the removal of the additional contamination
could be offset against the remaining liability, if approved. On August
6, 1998, the Company received a proposal to study the additional
contamination with an estimated cost approximating the liability at July
31, 1998.

7. CREDIT ARRANGEMENTS

The Company has revolving lines of credit with two banks totaling
$1,000,000. Advances under these revolving lines of credit bear
interest ranging from 7.75% to prime rate (8.5% at July 31, 1998). The
revolving lines of credit expire on May 22, 1999 and April 17, 1999,
respectively. As of July 31, 1998, there were no outstanding borrowings
under these revolving credit facilities.

- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------

DONALD D. HEUPEL HAROLD J. PURSLEY T. WARREN THOMPSON
President Vice President & Treasurer Secretary

- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------

RICHARD R. AGEE, Owner and General Manager HELEN ANN MCHUGH, Account Manager

Agee's Automotive Repair & Parking Caltar, Inc.

Lincoln, Nebraska Sante Fe Springs, California

DONALD D. HEUPEL, President of the Company HARRY W. MEGINNIS, Retired

Algona, Iowa Palm City, Florida

RICHARD E. MCFAYDEN, Partner THOMAS W. RASMUSSEN, Professional Consultant

Perrigrine Partners, a Real Estate & Jeff Sacks Automotive Management Group,
Investment Partnership LaJolla, California

Professor of Business and Associate Director T. WARREN THOMPSON, Commercial Real Estate Broker
of Student Services, Buena Vista University
Wahoo, Nebraska
Omaha, Nebraska

[LOGO]

UNIVERSAL MFG. CO.
405 DIAGONAL STREET
ALGONA, IOWA 50511-0190
515-295-3557