Universal Automotive Industries Inc. (Alsip, Illinois) has revealed the details of Wanxiang America's agreement to invest USD $2.8 million in the troubled company.

Wanxiang and its President, Pin Ni, have become well known in the bearing industry, supplying ball and roller bearings, hub assemblies and universal joints. The company manufactures bearings and assemblies to specification, in addition to its own QC brand bearings.

Running out of cash and with net tangible assets down to $186,000 (as of June 31, 2001), Universal is also facing NASDAQ delisting. The company is far short of maintaining NASDAQ's minimum net asset value $2.0 million and has been since late 2000. Universal met with the NASDAQ Delisting Panel on August 17 to present the Wanxiang investment in its delisting appeal. Wanxiang's investment is the only way Universal's net asset value is going to rise above $2 million.

Wanxiang's initial investment of $2.8 million will buy a new class of Preferred stock, convertible to 2,014,380 shares of Common. The Preferred has no dividend, but does accrue an 8% per year compounding liquidation preference. It also gives Wanxiang a long-term supply agreement along with rights of first refusal for any product sourced from China.

In addition, Wanxiang will have one-year warrants to purchase up to 800,000 shares of Common at $2.00 per share (recent trade $1.59) and another 800,000 shares of Common at the greater of $2.00 per share or 90% of the rolling average trade price. Finally, Wanxiang also receives a "default warrant" (triggered if Universal defaults on certain covenants), instantly giving Wanxiang the opportunity to purchase 2,500,000 additional shares of Common at 150% of book value or six times EBITDA.

All told, Wanxiang has the opportunity to obtain 6.1 million shares of Universal, entirely in off-market transactions of new, undiluted shares. Universal currently has 7.44 million shares outstanding, out of 15 million authorized. Insiders, however, own 68% of the shares.

Universal's insiders have also been heavy sellers over the past year, doing no buying. In total, insiders have unloaded 438,000 shares - the largest seller has been Reuben Gabay through Tamar Gabay, selling 349,500 of their 380,000 total shareholdings.

Because of the insider holdings, Wanxiang negotiated yet another protection, that if Wanxiang exercises the default warrant, Wanxiang will receive a proxy to vote the same number of shares as the company's two largest shareholders, Arvin Scott and Yehuda Tzur. Under those circumstances, Wanxiang also has right of first refusal for off-market share sales by those shareholders.

Wanxiang's initial investment of $2.8 million is contingent upon Universal successfully avoiding the delisting action. Should Wanxiang pay in the $2.8 million and Universal still be delisted, Wanxiang's investment is subject to a "put", where Universal gives Wanxiang a full refund of its investment.

Obviously, Wanxiang America is not only seeking full control of Universal, but is also focused on the idea that Universal must remain a publicly traded company or Wanxiang will abandon the deal. The structure of the investment also makes it likely Wanxiang will shortly become the controlling shareholder of Universal.

The arrangements lead to some interesting questions and conclusions about Wanxiang's long-term intentions. By seeking full control of a publicly traded U.S. company, Wanxiang is apparently setting the stage to become a publicly traded division of the parent Wanxiang Group in China. Wanxiang Group is the second-largest privately owned company in China.