1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended August 31, 1997 Commission File No. 0-7795
KNUSAGA CORPORATION
-----------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 62-1004034
- ---------------------------------- --------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation ororganization)
3578 S. Van Dyke, Almont, Michigan 48003
- --------------------------------------------------------------------------------
(Address of Principal Executive Office and Zip Code)
Registrant's telephone number, including area code: (810) 798-2402
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
-----------------------------------------------
(Title of Class)
Number of shares outstanding as of August 31, 1997: 7,000,000
Market value of shares held by non-affiliates not available due to lack of
market for stock.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_____]
Page 1 of 37
2
PART I
Item 1. DESCRIPTION OF BUSINESS.
Knusaga Corporation ("Registrant") was originally incorporated in the
State of Delaware on May 28, 1971. As of its fiscal year ended August 31,
1997, Registrant was engaged in the fabrication and sale of steel, aluminum and
copper tubes for use in the truck industry. During said fiscal year,
Registrant shipped some 800 different parts which consisted of various air
intake, exhaust and radiator tubes for medium and large over-the-road trucks.
Registrant acquired this line of business on September 1, 1994, from a group of
Registrant's shareholders through an issuance of 2,601,753 shares of its common
stock for all of the issued and outstanding stock of Hydraulic Tubes and
Fittings, Inc., a closely held Michigan corporation, followed by a merger of
Hydraulic Tubes and Fittings, Inc., into Registrant. At the time of said
acquisition, the shareholders of Hydraulic Tubes and Fittings, Inc.,
collectively owned 91.26% of the issued and outstanding common stock of
Registrant. Following said acquisition, said shareholders' ownership of
Registrant's common stock increased to 94.51%.
In January of 1995, Registrant discontinued its business of selling a seat
unit that was convertible into a bed suitable for use in full size automotive
vans as a result of the loss of its business with Chrysler Corporation
("Chrysler"), which was its sole original equipment customer for said item.
The convertible seat unit consisted of two bench seats plus a collapsible
dinette table, and the bench seats were convertible so that in addition to a
forward position they could be adjusted for use as a bed, lounge, or dinette
set.
Registrant had also previously sold a seat unit convertible to a bed for
use in mini vans. The unit consisted of a single seat unit which folded out to
a bed by moving one handle. The Registrant replaced this convertible seat unit
for use in mini vans, which it has supplied to Chrysler since 1985, with a new
design starting in the 1992 model year. During the 1992 through 1994 model
years. Registrant supplied its new mini van convertible seat unit to Magna
International Company ("Magna"), who completed the trim on each such unit and
then supplied the finished product directly to Chrysler. Registrant's sale of
this mini van convertible seat ended in June of 1994 with the end of Chrysler's
1994 mini van model year production.
During its fiscal year ended August 31, 1995, Registrant also received
royalty payments totaling $128,290 from Magna for a component (a seat riser)
which Magna produced and supplied to Chrysler under a patent licensed from the
Registrant, beginning with the 1992 model year. The royalty payments from
Magna for the use of the patent ended in May of 1995 as a result of Chrysler's
introduction of its redesigned mini vans.
Page 2 of 37
3
The principal customer for Registrant's air intake, exhaust and radiator
tubes is Ford Motor Company ("Ford"), which accounted for 87% of Registrant's
sales for said products during its fiscal year ended August 31, 1997. Of
those sales, 76% were for parts to be used as original equipment on flat bed,
stake and semi tractor trucks and 11% were for parts to be used as replacement
parts. Registrant's second biggest customer is Nova Bus, which accounted for
7% of Registrant's sales for said products during said fiscal year.
Service Steel, Michigan Extrude Aluminum and United Industries are
Registrant's three largest suppliers. Registrant issues periodic purchase
orders to its suppliers for specific quantities on an as needed basis, which
for purchases from Michigan Extrude Aluminum and United Industries are
generally for six to eight week projected requirements. Such purchase orders
represent the only enforceable formal agreement between the Registrant and its
suppliers.
The Registrant is a tier one supplier to Ford and deals with Ford on a
just-in-time inventory basis, that is, the Registrant ships daily to Ford's
schedule. Ford gives the Registrant a rolling ten to fifteen working day firm
shipping schedule.
Ford and Registrant's other customers issue purchase orders to the
Registrant for specific parts. As with Registrant's purchase orders to its
vendors, Ford's purchase orders and the purchase orders of Registrant's other
customers represent the only enforceable formal agreement between the
Registrant and each company with respect to Registrant's products.
Registrant's firm order backlog is just ten to fifteen working days.
There are several competitors in the truck metal tube fabricating
business, with Northern Tube being Registrant's major competitor for Ford's
medium and large over-the-road truck tube business. Truck suppliers compete on
the basis of price, quality, technology and on-time delivery.
Research and development ("R&D") expenditures were made to Travel
Products. Originally the Registrant paid Travel Products a 3% royalty, but for
the past several years the Registrant has been paying Travel Products a monthly
fee for R&D work with adjustments for extra work. R&D expenditures for the
last three fiscal years were $60,000 in 1997, $75,000 in 1996, and $75,000 in
1995.
The Registrant has 107 employees.
The Registrant does not do any promotional advertising. The Registrant
does not own any patents or trademarks other than the patent relating to the
seat riser discussed above. This patent expires in September, 2006.
Page 3 of 37
4
Item 2. DESCRIPTION OF PROPERTIES
The Registrant owns a manufacturing building with attached office space
and an attached warehouse located on 10 acres of land at 3578 South Van Dyke
Road, Almont, Michigan. Registrant had previously been leasing office space in
said facility from Hydraulic Tubes and Fittings, Inc., and acquired ownership
of the entire facility when Hydraulic Tubes and Fittings, Inc., was merged into
the Registrant.
Registrant owns certain fabricating equipment, which is used for the
fabrication of steel, aluminum, and copper tubes.
Item 3. LEGAL PROCEEDINGS
Registrant is not currently involved in any pending material litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
--------------------------------------------
RELATED SECURITY HOLDING MATTERS
--------------------------------
5 (a) The principal market for the Registrant's common stock is the
over-the-counter market. Due to the infrequent trading of Registrant's stock,
no quotations are available.
5 (b) As of August 31, 1997, there were approximately 1,592 shareholders
of Registrant's common stock.
5 (c) Registrant has not paid any dividends in the past two (2) years.
This failure to pay dividends is due solely to financial considerations. The
Registrant is not under any legal restrictions imposed by its Articles of
Incorporation, Bylaws, convenants to loan agreements or other obligations to
third parties with regard to dividend payments.
Page 4 of 37
5
Item 6. SELECTED FINANCIAL DATA.
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
FIVE YEAR SUMMARY OF OPERATIONS
==========================================================================================================================
-------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------
From Operations
Net Sales $1,182,305 $1,499,548 $9,566,217 $8,177,943 $9,473,273
Other Income, Net 268,947 377,420 17,703 5,538 $ 347,098
Unusual or Nonrecurring Items -0- -0- -0- -0- -0-
Cost of Sales 1,078,288 1,289,321 8,092,147 7,342,353 $7,443,903
Selling, General & Administrative Expenses 464,292 324,124 843,211 671,457 $ 973,503
Interest Expense 57,872 44,873 157,065 196,346 $ 162,191
Income Taxes -0- 107,000 124,846 (27,733) $ 315,203
Income (Loss) From Continuing Operations (149,200) 111,650 366,651 1,058 $ 925,571
Income (Loss) Before Extraordinary Items (149,200) 111,650 349,417 1,058 $ 925,571
Extraordinary Items -0- 107,000 24,555 -0- -0-
Net Income (Loss) Applicable to Common Stock (149,200) 218,650 373,968 1,058 $ 925,571
Per Share of Common Stock:
Income (Loss) Before Extraordinary Item (.03) .03 .05 .00 .13
Extraordinary Item .00 .02 .00 .00 0
Net Income (Loss) $ (.03) $ .05 $ .05 $ .00 .13
-------------------------------------------------------------------
Dividends Per Share Declared on Common Stock (1) -0- -0- -0- -0- -0-
Average Number of Common and Common Equivalent ===================================================================
Shares Used in Determining per Share Amounts (2) 4,573,247 4,573,247 7,175,000 7,175,000 7,175,000
(1) The Company has not paid dividends on its outstanding common stock nor
Class A preferred stock during the past five years.
(2) Income (Loss) per share has been calculated based on weighted average
shares outstanding. The 4% preferred stock is a common stock equivalent.
Page 5 of 37
6
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------------------------------------------------------------
AND RESULTS OF OPERATIONS
------------------------------------------------------------
7(a) Net sales for the fiscal year ended August 31, 1997, increased
$1,295,330, or 15.8% from the year ended August 31, 1996, which sales had
decreased by $1,388,274, or 14.5% from the prior fiscal year. The increase in
sales for fiscal year 1997 was a result of an increase in the number of heavy
duty trucks manufactured by Registrant's customers. The decrease in sales for
fiscal year ended 1996 from the previous year is a result of an overall decline
of heavy duty trucks sold in the truck industry.
Cost of goods sold for sales in fiscal year 1997 decreased to 78.6% as a
percentage of sales as compared to 89.8% in the fiscal year 1996, and 84.6% in
fiscal year 1995 due to a decline in material costs with increased sales volume
with the same fixed costs. Selling, general, and administrative expenses in
fiscal year 1997 increased by $302,046, and increased as a percentage of sales
to 10.3% as compared to 8.2% in fiscal year 1996 and 8.8% in 1995. This
increase in expenses is due to the increase in salaries and the 1997 Michigan
Single Business Tax. Expenses that increased were officers' salaries $124,260,
Single Business Tax $109,300, Legal and Professional $40,499, office supplies
$7,277, property taxes $5,422, depreciation $5,892 and computer operation
expense $6,706. The Registrant's income of $925,571 in fiscal year of 1997
compared to income of $1,058 in fiscal year 1996 is due to the decline of
variable costs with increased sales volume in 1997.
For the year ended August 31, 1997, Ford sales of $8,259,061 amounted to
87% of total sales. This trend is expected to continue in the future.
7(b) Liquidity and Capital Resources. The Registrant's working capital
position improved in fiscal year 1997 to a positive $565,348 on August 31,
1997, from a working capital position of a positive $90,843 on August 31, 1996,
and a negative $602,297 on August 31, 1995. The increase in working capital
for fiscal 1997 is largely the result of increases in deposits of $242,274 and
accounts receivable of $372,168, and an increase in accounts payable - trade of
$73,718, and prepaid expenses of $24,888.
A loan payable to Michigan National Bank matured in October of 1994 at
which time the remaining principle was refinanced into two term loans with
maturity dates of October 1998 and October 2001, bearing interest at 1% over
the lender's prime rate and secured by all assets of the Registrant. At August
31, 1997, the outstanding principal balance of both notes was $446,554 and the
applicable interest rate was 9.25%.
A third loan payable to Michigan Bank was created on December 6, 1995, to
finance equipment purchases. Said loan has a maturity date of December 6,
2000, bears interest at 1% over the lender's prime rate and is secured by all
assets of Registrant. At August 31, 1997, the outstanding principal balance
was $133,334 and the applicable interest rate was 9.25%.
Page 6 of 37
7
Registrant has a line of credit with Michigan National Bank with interest
payable in monthly installments at 1% over said bank's prime rate. The note is
secured by all assets of the Registrant and the principle is due in January of
1998. At August 31, 1997, the outstanding balance was $630,000 and the
applicable interest rate was 9.25%
The Registrant does not have any material commitment for capital
expenditures in the current year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements
included on pages 11 through 37 of the annual financial report for the year
ended August 31, 1997, 1996, and 1995 are incorporated herein by reference.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
No response required.
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE POSITION
- -------------------- --- -----------------------------------------------------
Semon E. Knudsen 85 Director/Chairman of the Board
James G. Musser, Jr. 62 Director/President
Jerry D. Luptak 75 Director/Vice President Finance and General Counsel
Harold Beznos 59 Director/Secretary-Treasurer
J. Ted Beebe 67 Executive Vice President
The directors were elected in March, 1978 at the annual stockholders
meeting to serve until their successors are duly elected and qualified.
Because Registrant has not had another stockholders meeting, the directors have
continued to act in their present capacities as directors of Registrant. The
officers were appointed by the Board of Directors by Unanimous Written Consent
effective March 3, 1997.
The following outlines the past and present occupations and business
experience of the executive officers of the Registrant.
MR. KNUDSEN is, and has been, a Director and Chairman of the Board of
the Registrant since September 1, 1977. Mr. Knudsen is also a director of
First National Bank of Palm Beach.
MR. MUSSER is, and has been, a Director and President of the
Registrant since September 1, 1977. He devotes 100% of his time per month
to the business affairs of the Registrant.
MR. LUPTAK has served in his present capacities with the
Registrant since September 1, 1977. Currently, and for more than five
years, he has been Chairman of the Board and Chief Executive Officer
(formerly President) of Armada Corporation, a manufacturer of metal alloys,
and has been actively engaged in real estate development including
multifamily residential, single family residential, retail and office
buildings. He devotes approximately ____% of his time per month to the
business affairs of the Registrant.
Page 7 of 37
8
MR. BEZNOS has served in his present capacities with the Registrant
since September 1, 1977. Currently, and for more than five years, he has
been actively engaged in real estate development including multifamily,
residential, single family residential, retail and office buildings. He
devotes approximately ____% of his time per month to the business affairs
of the Registrant.
MR. BEEBE has been the Executive Vice President of the Registrant
since November, 1979. He devotes 8 days per month to the business affairs
of the Registrant.
Items 11
and 13. MANAGEMENT REMUNERATIONS AND CERTAIN RELATIONSHIPS
--------------------------------------------------
AND RELATED TRANSACTIONS.
-------------------------
In the fiscal year ended August 31, 1997, Mr. Musser was paid $97,740 in
salary, a bonus of $62,371, and $243,333 in deferred salary. Mr. Beebe was
paid $26,994 in salary and a deferred salary of $56,667. None of the other
directors or officers received any direct or indirect remuneration during the
fiscal year ended August 31, 1997, and none is anticipated in the fiscal year
ending August 31, 1998.
Messrs. Beznos, Knudsen, Luptak, and Musser have collectively made working
capital loans to the Corporation. These loans are payable on demand and are
represented by a noted bearing an annual interest rate of 12%, with principal
and interest originally payable June, 1990. The outstanding principal balance
on this note at August 31, 1997, was $165,836. As a result of the merger of
Hydraulic Tubes and Fittings, Inc., into Registrant, it assumed the obligation
for repayment of demand loans payable to Messrs. Beznos, Knudsen, and Luptak
bearing an annual interest rate of 12% and having a combined unpaid principal
balance at August 31, 1997, of $141,417.
In March and April of 1990, Jay A. Fishman, as Trustee of the Paola M.
Luptak Irrevocable Trust U/A/D August 20, 1970, and Frieda Applebaum, as
Trustee of the Beznos Family Irrevocable Trust U/A/D February 2, 1976, each
loaned $50,000 to the Registrant as working capital in return for which they
each received a note bearing an annual interest rate of 12%, with principal and
interest payable on demand. The principal balance of these notes at August 31,
1997, was $50,000 each. The beneficiaries of each trust are beneficial
shareholders of the Registrant and are related to certain officers and
directors of the Registrants.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS.
-------------------------------------------------------------
12(a)
Title
of Name and Address of Amount and Nature of
Class Beneficial Owner Beneficial Owner % of Class
- ------ --------------------------- ------------------------------- ----------
Common James G. Musser, Jr. (1) 726,520 shares 10.4%
Stock 7475 Pinehurst Circle Direct
Birmingham, MI 48010
Common Lorraine A. Musser (1) 722.617 shares 10.3%
Stock 7475 Pinehurst Circle Direct
Birmingham, MI 48010
Page 8 of 37
9
Common Leslie, Samuel and 1,449,137 shares trust 20.7%
Stock Lauren Beznos (2) beneficiary
31731 Northwestern Hwy.
Farmington Hills, MI 48334
Paola M. Luptak (3)
Common 19115 Fox Landing Drive 1,463,109 shares 20.9%
Stock Boca Raton, Florida 33434 Direct
Common K. Peter Knudsen (4) 562,402 shares 8.0%
Stock 29757 Somerset Drive trust beneficiary
Perrysburg, Ohio 43551
Common J. Ted Beebe 805,205 shares 11.5%
Stock 22515 Sunnydale Direct
St. Clair Shores, MI 48081
Common Jerry D. Luptak (3) 1,463,109 shares 20.9%
Stock 19115 Fox Landing Drive Indirect
Boca Raton, Florida 33434
Common Harold Beznos (2) 1,449,137 shares 20.7%
Stock 31731 Northwestern Hwy. Indirect
Farmington Hills, MI 48334
Common Semon E. Knudsen (4) (5) 1,449,137 shares 20.7%
Stock 1965 N. Woodward Ave. Indirect
Bloomfield Hills, MI 48304
(1) Lorraine A. Musser is the wife of James G. Musser, Jr.
(2) These shares are held in an irrevocable trust with Frieda
Applebaum as Trustee with voting and investment power for the benefit
of Leslie Beznos, Samual Beznos and Lauren Beznos, who are the
daughter, son and niece, respectively, of Harold Beznos, a director
and officer of the Registrant.
(3) Paola M. Luptak is the daughter of Jerry D. Luptak, a director
and officer of the Registrant.
(4) These shares are held in a revocable trust with the NBD Bank of
Detroit, Michigan, as Trustee with voting and investment power for the
benefit of K. Peter Knudsen. Mr. Knudsen is the son of Semon E.
Knudsen, a director and officer of the Registrant.
(5) Judith K. Christie, Lisa K. Flint, and Kristina K. Gregg directly
own 295,245, 295,245, and 296,245 shares of common stock,
respectively, and are daughters of Semon E. Knudsen, a director and
officer of the Registrant.
12(b) No shares of common stock of the Registrant are owned by any
officers and directors of the Registrant, except Mr. James G. Musser,
Jr. and Mr. J. Ted Beebe as listed in Item 12(a) above.
As a group, the officers and directors directly and indirectly own 6,615,725
shares of Registrant's common stock, representing 94.5% of all outstanding
common stock.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K
-----------------------------------------------------------
14a. Financial Statement Schedules
For Fiscal Years Ended August 31, 1997, 1996, and 1995
-----------------------------------------------------------
1) Accountant's opinion for years ended August 31, 1997, 1996,
and 1995.
Page 9 of 37
10
2) Balance Sheet for the years ended August 31, 1997, 1996, and 1995.
3) Statement of Income for years ended August 31, 1997, 1996, and 1995.
4) Statement of Stockholder's Equity for years ended August 31, 1997,
1996, and 1995.
5) Statement of Cash Flows for years ended August 31, 1997, 1996, and
1995.
6) Notes to Financial Statements for years ended 1997, 1996, and 1995.
14b. Reports on Form 8-K
-------------------
None
14c. Exhibits
--------
Article 5 Financial Data Schedule
Pursuant to the requirements of Section 13 or 15(d) 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.
KNUSAGA CORPORATION
By: Jerry Luptak
------------------
Vice President
Dated: January 5, 1998
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
By: Semon E. Knudsen
-------------------------------
Director Date: January 5, 1998
Chairman of the Board ---------------
By: James G. Musser Date: January 5, 1998
------------------------------- ---------------
Director/President
(Principal Executive Officer
and Controller)
By: Jerry D. Luptak Date: January 5, 1998
------------------------------- ---------------
Director
Vice President, Finance and
General Counsel
(Principal Financial Officer)
By: Harold Beznos Date: January 5, 1998
------------------------------- ---------------
Director Secretary-Treasurer
By: J. Ted Beebe Date: January 5, 1998
------------------------------- ---------------
Executive Vice President
Page 10 of 37
11
[FREEDMAN & GOLDBERG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Knusaga Corporation
D.B.A. Hydraulic Tubes and Fittings
Almont, MI 48003
We have audited the accompanying balance sheets of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1997 and 1996 and the related
statement of income, stockholder's equity, and cash flows for the years ended
August 31, 1997 and 1996. 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 assessment of the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1997 and 1996 and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Respectfully,
Freedman & Goldberg
- -------------------
Freedman & Goldberg
Certified Public Accountants
Farmington Hills, Michigan
November 5, 1997
Page 11 of 37
12
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
BALANCE SHEET
================================================================================
AS OF AUGUST 31, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
Current Assets
Cash $ 276,294 $ 34,020
Accounts Receivable - Trade, Net of Allowance for
Doubtful Accounts of $-0- 1,425,344 1,053,176
Accounts Receivable - Other 200 -0-
Note Receivable - Officer 94,143 50,955
Accrued Interest Receivable -0- 839
Inventories 573,452 506,203
Prepaid Expenses 185,467 160,579
Total Current Assets 2,554,900 1,805,772
Property and Equipment, Net 2,091,277 2,097,937
Other Assets
Deposits 2,646 5,575
Assets Held for Resale -0- 27,663
Total Other Assets 2,646 33,238
Total Assets $4,648,823 $3,936,947
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 12 of 37
13
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
BALANCE SHEET
================================================================================
AS OF AUGUST 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------------------
Current Liabilities
Accounts Payable - Trade $ 693,670 $ 619,952
Current Maturities of Long-Term Debt 869,611 877,737
Accrued Expenses 426,271 217,241
Total Current Liabilities 1,989,552 1,714,930
Other Liabilities
Accrued Expenses - Non current 604,900 853,612
Long-Term Debt - Less Current Maturities 774,762 1,014,367
Total Other Liabilities 1,379,662 1,867,979
Total Liabilities 3,369,214 3,582,909
Stockholders' Equity
Common Stock, $.01 Par Value, 7,000,000 Shares
Authorized, 7,000,000, Shares Issued and
Outstanding 70,000 70,000
Preferred Stock, Class A, 4% Non-Cumulative
Non-Voting, Each Share Convertible into One Share
of Common Stock, Par Value $.01, Stated Value
$1.00, 500,000 Shares Authorized, 175,000 Shares
Issued and Outstanding 175,000 175,000
Additional Paid-In Capital 366,365 366,365
Retained Earnings (Accumulated Deficit) 668,244 (257,327)
Total Stockholders' Equity 1,279,609 354,038
Total Liabilities and Stockholders' Equity
(Deficit) $4,648,823 $3,936,947
==============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 13 of 37
14
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF INCOME
================================================================================
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
1997 1996
-----------------------
Sales, Net $9,473,273 $8,177,943
Cost of Sales 7,443,903 7,342,353
Gross Profit 2,029,370 835,590
Selling, General and Administrative Expenses 973,503 671,457
Operating Income 1,055,867 164,133
Other Income (Expense)
Interest Income 398 839
Interest Expense (162,191) (196,346)
Miscellaneous Income 346,048 3,738
Gain on Sale of Asset 652 961
Total Other Income (Expense) 184,907 (190,808)
Income Before Income Taxes 1,240,774 (26,675)
Income Taxes (Refundable) 315,203 (27,733)
Net Income $ 925,571 $ 1,058
==============================================================================
Net Income Per Share $ .13 $ -0-
==============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 14 of 37
15
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
Additional Retained Earnings
Common Preferred Paid-In (Accumulated
Stock Stock Capital Deficit)
------------------------------------------------------------------
Balance, September 1, 1995 $70,000 $175,000 $366,365 $(258,385)
Net Income For the Year
Ended August 31, 1996 -0- -0- -0- 1,058
Balance, August 31, 1996 70,000 175,000 366,365 (257,327)
Net Income for the Year
Ended August 31, 1997 -0- -0- -0- 925,571
Balance, August 31, 1997 $70,000 $175,000 $366,365 $ 668,244
=======================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 15 of 37
16
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF CASH FLOWS
================================================================================
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
1997 1996
- ------------------------------------------------------------------------------
Cash Flows From Operations
Net Income $ 925,571 $ 1,058
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities
Depreciation and Amortization 232,731 194,523
(Gain) Loss on Sale of Asset (652) (961)
(Increase) Decrease In:
Accounts Receivable (372,368) 213,065
Accrued Interest Receivable 839 (839)
Inventories (67,249) 72,509
Prepaid Expenses (24,888) (30,513)
Asset Held For Resale -0- (380)
Deposits 2,929 (60)
Increase (Decrease) In:
Accounts Payable 73,718 (141,153)
Accrued Expenses (39,683) (95,867)
Net Cash Provided By Operating Activities 730,948 211,382
Cash Flows From Investing Activities
Equipment Purchases (199,755) (360,500)
Proceeds From Sale of Assets 2,000 3,500
Proceeds From Notes Receivable 27,955 -0-
Payments For Notes Receivable (71,143) (50,955)
Net Cash Used By Investing Activities (240,943) (407,955)
Cash Flows From Financing Activities
Proceeds From Debt 910,000 1,139,999
Principal Payments on Debt (1,157,731) (1,007,808)
Net Cash Provided By (Used in) Financing
Activities (247,731) 132,191
Increase (Decrease) in Cash 242,274 (64,382)
Balance, September 1 34,020 98,402
Balance, August 31 $ 276,294 $ 34,020
==============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 16 of 37
17
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Knusaga Corporation,
D.B.A. Hydraulic Tubes and Fittings (the Company) is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is responsible
for their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently applied
in the preparation of the financial statements.
A. Nature of Operations/Major Customers - Knusaga Corporation's operations
relate mainly to the manufacturing of automotive tubes and fittings for
the auto industry, with a majority of sales to Ford Motor Company.
For the years ended August 31, 1997 and 1996 Ford Motor Company sales of
$8,259,061 and $7,111,000 amounted to 87% and 87% of total sales,
respectively. This trend is expected to continue in the future.
Substantially all of the accounts receivable are from the major customers,
which potentially subjects the Company to concentration of credit risk.
All receivables are due within thirty days and are unsecured. It is the
Company's policy not to require collateral.
B. Revenues - The Company recognizes revenue from automotive tubes and
fittings upon shipment.
C. For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
D. Property, Equipment and Related Depreciation - Property and equipment
are recorded at cost. Depreciation is computed by the straight-line
method for financial reporting purposes and accelerated methods for tax
reporting purposes. Estimated lives range from five to forty years.
Depreciation charged to operations was $232,731 and $194,523 for the years
ended August 31, 1997 and 1996, respectively. When properties are disposed
of, the related costs and accumulated depreciation are removed from the
respective accounts and any gain or loss on disposition is recognized
currently. Maintenance and repairs which do not improve or extend the
lives of assets are expensed as incurred.
E. Inventories - Inventories are stated at lower of cost or market. Cost
is determined on the first-in, first-out (FIFO) basis. Inventory
classifications as of August 31, 1997 and 1996 consisted of the following:
1997 1996
---------------------
Raw Material $350,806 $277,054
Work in Process 181,481 183,979
Finished Goods 41,165 45,170
$573,452 $506,203
=====================
Page 17 of 37
18
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 1. CONTINUED
F. Impairment of Long-Lived Assets - In March 1995, the Financial
Accounting Standards Board issued Statements of Financial Accounting
Standards ("SFAS") No. 121, "Accounting For the Impairment of Long-Lived
Assets and For Long-Lived Assets To Be Disposed Of". SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of.
In accordance with SFAS No. 121, the Company reviews its long-lived
assets, including property and equipment, goodwill and other identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the
assets. Impairment is measured at fair value. The adoption of SFAS No.
121 had no effect on the Company's consolidated financial statements.
G. Major Suppliers - At August 31, 1997 and 1996 52% and 58%, respectively
of the accounts payable - trade was to four major suppliers of aluminum
and steel tubing. The Company believes there is no potential credit risk
pertaining to the major suppliers.
H. 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 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.
I. Income Taxes - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes," which requires
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
J. Reclassifications - Certain amounts in the 1996 financial statements
have been reclassified to conform with the 1997 presentation.
NOTE 2. PREPAID EXPENSES
The following is a detail of the prepaid expenses as of August 31, 1997 and
1996:
1997 1996
---------------------
Prepaid Insurance $ 39,617 $ 88,312
Prepaid Taxes 145,850 72,267
Total Prepaid Expenses $185,467 $160,579
=====================
Page 18 of 37
19
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 3. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows:
1997 1996
-----------------------
Land $ 24,847 $ 24,847
Land Improvements 10,230 10,230
Buildings and Improvements 1,369,011 1,352,872
Machinery and Equipment 1,208,374 1,118,007
Furniture and Fixtures 123,153 111,090
Transportation Equipment 132,245 70,062
Obligations Under Capital Leases 207,115 207,115
Equipment Under Construction 44,475 -0-
3,119,450 2,894,223
Less: Accumulated Depreciation 1,028,173 796,286
Net Property and Equipment $2,091,277 $2,097,937
=======================
NOTE 4. ACCRUED EXPENSES
The following is a detail of the curreaccrued expenses as of August 31,
1997 and 1996.
1997 1996
--------------------
Accrued Insurance $ 8,319 $ 44,084
Accrued Interest - Other 6,101 11,510
Accrued Payroll 147,977 82,306
Accrued and Withheld Payroll Taxes 138,017 10,621
Accrued Pension 37,720 22,859
401K Withholdings 4,917 4,222
Accrued Professional Fees 28,200 33,409
Accrued Taxes 55,020 8,230
Total Current Accrued Expenses $426,271 $217,241
====================
The following is a detail of the non-current accrued expenses as of August 31,
1997 and 1996:
1997 1996
--------------------
Accrued Interest - Shareholders $371,617 $320,329
Accrued Payroll - Officers 143,283 443,283
Accrued Engineering Expenses 90,000 90,000
Total Non-Current Accrued Expenses $604,900 $853,612
====================
Per the loan covenants with the bank, the Company cannot pay the accrued
payroll - officers and engineering expenses shown as non-current without the
bank's permission. Management does not anticipate paying the above expenses
within one year.
Page 19 of 37
20
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 5. NOTES RECEIVABLE
1997 1996
--------------------
Non-interest bearing note receivable from an
officer/stockholder. The note is unsecured and due on
demand. $94,143 $50,955
====================
The balance of the note receivable from the officer at August 31, 1996 has been
restated at $50,995 versus $27,955 as previously disclosed. The difference of
$23,000 was previously shown as a note receivable from an unrelated company.
NOTE 6. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
Notes payable and obligations under capital leases consist of the following:
1997 1996
---------- ----------
A. Notes payable - directors, officers, and
shareholders, bearing interest at 12% per annum. The
notes are payable on demand and are unsecured. Loans
totaling $265,000 have been subordinated to the bank. $407,253 $407,253
B. Non-interest bearing note payable, replacing prior
years' accrued royalties. Payments on note are
contingent upon the Company reporting a positive net
worth. -0- 20,284
C. Loan Payable - Bank, payable in monthly installments
of $8,646 plus interest at 1% over the lender's prime
rate, through October, 1998. The note is secured by
all the assets of the Company. The interest rate at
August 31, 1997 was 9.5%. 129,683 233,434
D. Loan Payable - Bank, payable in monthly installments
of $6,214 plus interest at 1% over the lender's prime
rate through October, 2001. The note is secured by all
the assets of the Company. The interest rate at August
31, 1997 was 9.5%. 316,871 391,438
E. Loan Payable - Bank, payable in monthly installments
of $3,333 plus interest at 1% over lender's prime rate
through December, 2000. The loan is secured by all
assets of the Company. The interest rate at August 31,
1997 was 9.5%. 133,334 173,333
F. Line of Credit - Bank, interest payable in monthly
installments at 1% over lender's prime rate. Principal
is due January 1, 1998. Note is secured by all assets
of the Company. The interest rate at August 31, 1997
was 9.5%. 630,000 592,000
Page 20 of 37
21
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 6. CONTINUED
G. Obligation Under Capital Lease - equipment, payable
in monthly installments of $187, through February 1997,
including interest at 15.3%. Secured by the equipment. -0- 900
H. Obligation Under Capital Lease - equipment, payable
in monthly installments of $1,292, through July 1997,
including interest at 18.0%. Secured by the equipment. -0- 13,096
I. Obligation Under Capital Lease - equipment, payable
in monthly installments of $331, through July 1997,
including interest at 20.7%. Secured by the equipment. -0- 3,038
J. Obligation Under Capital Lease - equipment, payable
in monthly installments of $363, through July 1997,
including interest at 20.4%. Secured by the equipment. -0- 3,339
K. Obligation Under Capital Lease - machinery, payable
in monthly installments of $532, through April 1997,
including interest at 19.4%. Secured by the machinery. -0- 3,031
L. Obligation Under Capital Lease - machinery, payable
in monthly installments of $573, through November 1998,
including interest at 17.3%. Secured by the machinery. 7,275 12,518
M. Obligation Under Capital Lease - machinery, payable
in monthly installments of $444, through September
1997, including interest at 19.2%. Secured by the
machinery. -0- 4,477
N. Obligation Under Capital Lease - improvements,
payable in monthly installments of $628, through
November 1998, including interest at 8.17%. Secured by
the improvements. 8,929 15,445
O. Loan Payable - Bank, payable in monthly installments
of $731, through December 1998, including interest at
8.49%. Secured by an automobile. 11,028 18,518
Total 1,644,373 1,892,104
Amounts due within one year 869,611 877,737
$ 774,762 $1,014,367
=======================
Page 21 of 37
22
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 6. CONTINUED
The debt and lease maturities for the next five years are as follows:
August 31, 1998 $ 869,611
August 31, 1999 553,608
August 31, 2000 114,568
August 31, 2001 87,901
August 31, 2002 18,685
$1,644,373
==========
Interest expense for the years ended August 31, 1997 and 1996 totaled
$162,191, and $196,346, respectively.
Interest expense on obligations under capital leases for the years ended
August 31, 1997 and 1996 was $4,667 and $11,788, respectively. Depreciation
expense of equipment held under capital leases for the years ended August 31,
1997 and 1996 was $26,723 and $26,722, respectively.
Although notes payable to directors, officers, and shareholders totaling
$407,253 are due upon demand, they have been classified as non current as the
Company does not expect to pay these balances within the next fiscal year.
NOTE 7. LOAN COVENANTS
Under the terms of the loan agreement with the bank the Company must maintain
the following covenants:
1. Maintain a current ratio of not less than 1.00 to 1.00
2. Maintain a net worth plus subordinated debt of not less than
$650,000.
3. Maintain a ratio of total liabilities to net worth plus subordinated
debt of not more than 5 to 1.
4. Maintain a debt service coverage ratio of not less than 1.25 to 1.
As of August 31, 1997, the Company was in compliance with its loan covenants.
NOTE 8. PER SHARE COMPUTATION
Earnings per share have been calculated based on the weighted average number
of shares outstanding. The 4% preferred stock is considered a common
equivalent. The number of shares used in computing net income per share was
7,175,000.
Page 22 of 37
23
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following components:
1997 1996
----------------------
Current:
Tax Due (Refundable) $329,071 $(41,601)
Tax (Benefit) Recovery of Investment Tax Credits (13,868) 13,868
Net Tax Expense (Recovery) $315,203 $(27,733)
======================
Deferred taxes are detailed as follows:
1997 1996
----------------------
Deferred Income Tax Liability - Depreciation $ 41,826 $ 28,492
Deferred Income Tax Assets
Accrued Expenses 64,469 160,443
Valuation Allowance (22,643) (131,951)
======================
Net Deferred Income Tax Asset 41,826 28,492
Net Deferred Income Taxes $ -0- $ -0-
===========================================================================
The valuation allowance was estimated to offset the deferred tax asset
because it is uncertain that the company will ever realize the tax benefit.
During the year ended August 31, 1997 the Company utilized investment credits
totaling $13,868 to offset its current year federal income taxes.
NOTE 10. RELATED PARTY TRANSACTIONS
A. Notes Payable
As disclosed in Note 6 to the financial statements, certain stockholders
and officers are major creditors of the Company. Amounts due to the
stockholders and officers as of August 31, 1997 and 1996 totaled $407,253.
Interest accrued on these notes at August 31, 1997 and 1996 totaled
$371,617 and $320,329, respectively. Interest expense accrued for the
years ended August 31, 1997 and 1996 was $51,288 and $48,770,
respectively.
B. Asset Held for Resale
During the year ended August 31, 1995, the Company purchased an airplane
for $27,283 from a related party. It was the Company's intent to sell the
airplane back to the related party within six months after the year ended
August 31, 1995. During the year ended August 31, 1996, the Company
capitalized $380 of expenses related to the airplane. During the year
ended August 31, 1997 the Company decided not to sell the airplane and put
the asset in service for use by the Company. $27,633 has been
reclassified to transportation equipment.
Page 23 of 37
24
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 11. CASH FLOW DISCLOSURES
Interest and income taxes paid for the years ended August 31, 1997 and 1996
were as follows:
1997 1996
---------------------
Interest $116,312 $146,039
=====================
Income Taxes $444,300 $ 25,000
=====================
Non-Cash Investing Activities
Property Acquired Under Capital
Lease $ -0- $ 21,452
=====================
Debt Financing For Purchase of
Auto $ -0- $ 23,172
=====================
Income tax refunds received during the years ended August 31, 1997 and 1996
was $16,647 and $26,845, respectively.
NOTE 12. DEFINED BENEFIT PENSION PLAN
The Company sponsors a defined benefit pension plan that covers substantially
all employees of the Company. The inception of the plan was January 1, 1992,
with a fiscal year end of August 31. The plan calls for benefits to be paid
to eligible employees at retirement based upon years of service with the
Company. Contributions to the plan reflect benefits attributed to employees'
services to date, as well as services expected to be earned in the future.
Pension expense for the years ended August 31, 1997 and 1996 was $37,720 and
$22,859, respectively. Pension contributions due to the plan at August 31,
1997 and 1996 were $49,460 and $22,859, respectively. As of August 31, 1997
the defined benefit pension plan is funded in accordance with ERISA.
Page 24 of 37
25
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 12. CONTINUED
The following table sets forth the plan's funded and amounts recognized in
the Company's statement of financial position at August 31, 1997 and 1996.
1997 1996
----------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$124,051 and $79,658, respectively. $143,126 $ 99,372
Projected benefit obligation for service rendered to date. 182,428 99,704
Plan assets at fair value 135,413 78,264
Projected benefit obligation in excess of plan assets. 47,015 21,440
Unrecognized net gain from past experience different from that
assumed and effect of changes in assumptions. 1,662 21,626
Prior service cost not yet recognized in net periodic pension cost (11,193) -0-
Unrecognized net obligation at date of initial application of FAS-87 (34,827) (36,221)
(Prepaid) accrued cost $ 2,657 $ (6,845)
===============================================================================================
Net pension cost for 1997 and 1996 includes the following components:
Service cost - benefits earned during the period $ 28,692 $ 28,496
Interest cost on projected benefit obligation 6,486 5,272
Interest cost due to late quarterly contributions -0- -0-
Actual return on plan assets (26,417) (7,627)
Amortization of Actuarial Gains and Net Transition Asset 21,649 4,966
Net periodic pension costs $ 30,410 $ 31,107
===============================================================================================
NOTE 13. 401K PROFIT SHARING PLAN
The Company sponsors a 401K profit sharing plan that covers all employees of
the Company. The plan allows eligible employees to withhold amounts from
their pay on a pre-tax basis and invest in self directed investment accounts.
The company has no obligation to make any contributions to the plan.
Page 25 of 37
26
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1997 and 1996
NOTE 14. SETTLEMENT AGREEMENT
During the year ended August 31, 1997, the Company reached a settlement with
Chrysler Corporation regarding the production of a van seat line which was
discontinued during the year ended August 31, 1995. The settlement is for
reimbursements of costs incurred by the Company in preparation of the
production volumes promised by Chrysler Corporation which were never
realized. The amount of this settlement was $350,000 and is included in
miscellaneous income on the statement of income for the year ended August 31,
1997.
Page 26 of 37
27
[FREEDMAN & GOLDBERG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Knusaga Corporation
D.B.A. Hydraulic Tubes and Fittings
Almont, MI 48003
We have audited the accompanying balance sheet of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1995, and the related statement
of income, statement of changes in stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 assessment of the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1995 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary schedules on pages 12 through
17 are presented for purposes of additional analysis and are not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Respectfully,
/s/ Freedman & Goldberg
- -----------------------
Freedman & Goldberg
Certified Public Accountants
Farmington Hills, Michigan
November 28, 1995
Page 27 of 37
28
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
BALANCE SHEET
================================================================================
AS OF AUGUST 31, 1995
ASSETS
Current Assets
Cash $ 98,402
Accounts Receivable - Trade, Net 1,246,241
Accounts Receivable - Other 20,000
Inventories 578,712
Prepaid Expenses 130,066
Total Current Assets $2,073,421
Property and Equipment, Net 1,874,680
Other Assets
Deposits 20,710
Assets Held for Resale 27,283
Total Other Assets 47,993
Total Assets $3,996,094
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 761,105
Current Maturities of Long-Term Debt 907,893
Accrued Expenses 1,166,720
Total Current Liabilities $2,835,718
Long-Term Debt - Less Current Maturities 807,396
Total Liabilities 3,643,114
Stockholders' Deficit
Common Stock, $.01 Par Value,
7,000,000 Shares Authorized,
7,000,000 Shares Issued and Outstanding 70,000
Preferred Stock, Class A, 4% Non-Cumulative
Non-Voting, Each Share Convertible into
One Share of Common Stock, Par Value $.01,
Stated Value $1.00, 500,000 Shares Authorized,
175,000 Shares Issued and Outstanding 175,000
Additional Paid-In Capital 366,365
Accumulated Deficit (258,385)
Total Stockholders' Equity 352,980
Total Liabilities and Stockholders' Equity $3,996,094
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 28 of 37
29
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF INCOME
================================================================================
FOR THE YEAR ENDED AUGUST 31, 1995
Sales, Net $9,566,217
Cost of Sales 8,092,147
Gross Profit 1,474,070
Selling, General and Administrative Expenses 843,211
Operating Income 630,859
Other Income (Expense)
Interest Expense $(157,065)
Miscellaneous Income 13,516
Gain on Sale of Asset 4,187
Total Other Income (Expense) $ (139,362)
Income Before Income Taxes 491,497
Income Taxes 124,846
Net Income From Continuing Operations 366,651
Discontinued Operations:
Loss from operations of van seat production
disposed of (net of income tax benefits of $8,900) (17,234)
Net Income Before Extraordinary Items 349,417
Extraordinary Items:
Loss of disposal of equipment for van seat
production (net of income tax benefit of $11,600) (22,649)
Utilization of operating loss carryforward 47,200
Net of Extraordinary Items 24,551
Net Income $ 373,968
===============================================================================
Net Income Per Share $ .05
===============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 29 of 37
30
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
FOR THE YEAR ENDED AUGUST 31, 1995
Common Additional Paid- Accumulated
Stock Preferred Stock In Capital Deficit
-----------------------------------------------------------------------
Balance, September 1,
1994, as Previously Reported $43,982 $175,000 $242,384 $(577,576)
Adjustment in Connection
with Pooling of Interests 26,018 -0- 123,981 (54,777)
Balance, September 1, 1994,
as Restated 70,000 175,000 366,365 (632,353)
Net Income -0- -0- -0- 373,968
Balance, August 31, 1995 $70,000 $175,000 $366,365 $(258,385)
=====================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 30 of 37
31
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF CASH FLOWS
================================================================================
FOR THE YEAR ENDED AUGUST 31, 1995
- -----------------------------------------------------------------------------
Cash Flows From Operations
Net Income $ 373,968
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation and Amortization 161,916
Extraordinary Item - Loss on Disposal of
Equipment 34,249
Gain on Sale of Asset (4,187)
(Increase) Decrease In:
Accounts Receivable 215,117
Inventories 6,338
Prepaid Expenses (70,348)
Asset Held For Resale (27,283)
Deposits 2,265
Increase (Decrease) In:
Accounts Payable (185,041)
Accrued Expenses (103,227)
Net Cash Provided By Operating
Activities $ 403,767
Cash Flows From Investing Activities
Equipment Purchases (296,705)
Proceeds From Sale of Assets 55,100
Net Cash Used By Investing Activities (241,605)
Cash Flows From Financing Activities
Principal Payments on Debt (83,705)
Increase in Cash 78,457
Balance, September 1, 1994, as Previously Reported 15,868
Adjustment in Connection with Pooling of Interests 4,077
Balance, September 1, 1994, as Restated 19,945
Balance, August 31, 1995 $ 98,402
==============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
Page 31 of 37
32
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
AUGUST 31, 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings (the Company) is presented to assist in
understanding the Company's financial statements. The financial statements and
notes are representations of the Company's management who is responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently applied in
the preparation of the financial statements.
A. Nature of Operations/Major Customers - Knusaga Corporation's operations
relate mainly to the manufacturing of automotive tubes and fittings for the
auto industry, with a majority of sales to Ford Motor Company.
For the year ended August 31, 1995, Ford Motor Company sales of $8,715,466
amounted to 91% of total sales. This trend is expected to continue in the
future.
Substantially all of the accounts receivable are from the major customers,
which potentially subjects the Company to concentration of credit risk. All
receivables are due within thirty days and are unsecured. It is the Company's
policy not to require collateral.
B. Property, Equipment and Related Depreciation - Property and equipment are
recorded at cost. Depreciation is computed by the straight-line method for
financial reporting purposes and accelerated methods for tax reporting
purposes. Depreciation charged to operations was $161,460 for the year ended
August 31, 1995. When properties are disposed of, the related costs and
accumulated depreciation are removed from the respective accounts and any gain
or loss on disposition is recognized currently. Maintenance and repairs which
do not improve or extend the lives of assets are expensed as incurred.
C. Inventories - Inventories are stated at lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) basis. Inventory classifications
as of August 31, 1995 consisted of the following:
Raw Material $281,614
Work in Process 229,948
Finished Goods 67,150
$578,712
========
D. Royalty Income - In January 1991, Knusaga entered into a royalty agreement
with Integram Seating for patented seat risers. Integram pays Knusaga
royalties for seat risers sold by Integram at a rate of 9.46% of each unit
sold. The agreement ended on July 31, 1995, or on such date as Integram
ceases to use the risers. Integram discontinued the use of the patented seat
risers in May, 1995.
Royalty income for the year ended August 31, 1995, was $128,390 which is
included in the discontinued operations - loss from operations of van seat
production disposed of. See Note 13 for details.
E. Major Supplier - At August 31, 1995, 61% of the accounts payable - trade,
was to a major supplier. The Company believes there is no potential credit
risk pertaining to the major supplier.
Page 32 of 37
33
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
AUGUST 31, 1995
NOTE 2. LOAN COSTS
Costs incurred in connection with the Company's securing of a loan from
Michigan National Bank in October, 1989 are being amortized on a straight line
basis over the term of the loan. Amortization expense totaled $456 for the
year ended August 31, 1995.
NOTE 3. PREPAID EXPENSES
The following is a detail of the prepaid expenses as of August 31, 1995:
Prepaid Insurance $100,910
Prepaid Taxes 29,156
Total Prepaid Expenses $130,066
========
NOTE 4. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows:
Land $ 24,847
Land Improvements 10,230
Buildings 1,293,605
Machinery and Equipment 846,478
Furniture and Fixtures 72,607
Autos and Truck 58,909
Obligations Under Capital Leases 185,663
2,492,339
Less: Accumulated Depreciation 617,659
Net Property and Equipment $1,874,680
==========
NOTE 5. ACCRUED EXPENSES
The following is a detail of the accrued expenses as of August 31, 1995.
Accrued Insurance $ 71,845
Accrued Interest - Shareholders 271,628
Accrued Interest - Other 9,904
Accrued Payroll 569,860
Accrued Pension 12,131
Accrued Professional Fees 22,225
Accrued Research & Development Expenses 90,000
Accrued Taxes 119,127
Total Accrued Expenses $1,166,720
==========
Page 33 of 37
34
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
AUGUST 31, 1995
NOTE 6. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
Notes payable and obligations under capital leases consist of the following:
A. Notes payable - directors, officers, and shareholders, bearing
interest at annual rates of 10% to 12%. The notes are payable on
demand and are unsecured. $407,253
B. Non-interest bearing note payable, replacing prior years'
accrued royalties. Payments on note are contingent upon the
Company reporting a positive net worth. 35,284
C. Loan Payable - Bank, payable in monthly installments of $24,300
through October 1994, including interest at 1 1/2% over Michigan
National Bank's prime rate. The note matured October, 1994 at
which time the remaining principle was refinanced into two term
loans with maturity dates of October 1998, and October 2001,
including interest at 1% over the lender's prime rate. The note
is secured by all the assets of the Company. The interest rate
at August 31, 1995 was 9.75%. 803,192
D. Line of Credit - Bank, interest payable in monthly installments
at 1% over Michigan National Bank's prime rate. Principal is due
October, 1995. Note is secured by all assets of the Company. The
interest rate at August 31, 1995 was 9.75%. 390,000
E. Obligation Under Capital Lease - machinery, payable in monthly
installments of $1,395, through November 1995, including interest
at 13.6%. Secured by the machinery. 2,712
F. Obligation Under Capital Lease - equipment, payable in monthly
installments of $187, through February 1997, including interest at
15.3%. Secured by the equipment. 2,842
G. Obligation Under Capital Lease - machinery, payable in monthly
installments of $681, through November 1995, including interest at
15.6%. Secured by the machinery. 1,994
H. Obligation Under Capital Lease - equipment, payable in monthly
installments of $1,292, through July 1997, including interest at
18.0%. Secured by the equipment. 25,287
I. Obligation Under Capital Lease - equipment, payable in monthly
installments of $331, through July 1997, including interest at
20.7%. Secured by the equipment. 6,101
J. Obligation Under Capital Lease - equipment, payable in monthly
installments of $363, through July 1997, including interest at
20.4%. Secured by the equipment. 6,713
K. Obligation Under Capital Lease - machinery, payable in monthly
installments of $532, through April 1997, including interest at
19.4%. Secured by the machinery. 8,325
L. Obligation Under Capital Lease - machinery, payable in monthly
installments of $573, through November 1998, including interest at
17.3%. Secured by the machinery. 16,990
Page 34 of 37
35
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
AUGUST 31, 1995
M. Obligation Under Capital Lease - machinery, payable in monthly
installments of $444, through July 1997, including interest at
19.2%. Secured by the machinery. 8,596
Total 1,715,289
Amounts due within one year 907,893
$ 807,396
==========
The debt and lease maturities for the next five years are as follows:
August 31, 1996 $ 907,893
August 31, 1997 352,792
August 31, 1998 184,389
August 31, 1999 180,303
August 31, 2000 89,912
$1,715,289
==========
Interest expense for the year ended August 31, 1995 totaled $157,065.
Interest expense included in the loss from operations of van seat
production disposed of totaled $33,019 for the year ended August 31, 1995.
Although notes payable to directors, officers, and shareholders
totaling $407,253 are due upon demand, $105,836 have been classified as non
current as the Company does not expect to pay these balances within the next
fiscal year.
NOTE 7. PER SHARE COMPUTATION
Earnings per share for 1995 have been calculated based on the weighted
average number of shares outstanding. The 4% preferred stock is considered a
common equivalent. The number of shares used in computing net income per
share was 7,175,000.
NOTE 8. RELATED PARTY TRANSACTIONS
A. Notes Payable
As disclosed in Note 6 to the financial statements, certain
stockholders and officers are major creditors of the Company. Amounts due to
the stockholders and officers as of August 31, 1995 totaled $407,253.
Interest accrued on these notes at August 31, 1995 totaled $271,559.
Interest paid for the year ended August 31, 1995 was $-0-.
B. Asset Held for Resale
The Company purchased an airplane for $27,283 from a related party. It
is the Company's intent to sell the airplane back to the related party within
six months after the year ended August 31, 1995.
NOTE 9. RESEARCH AND DEVELOPMENT EXPENSES
The amounts expensed as research and development expenses for the year
ended August 31, 1995 was $75,000.
Page 35 of 37
36
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
AUGUST 31, 1995
NOTE 10. CASH FLOW DISCLOSURES
Interest and income taxes paid for the year ended August 31, 1995 were as
follows:
Interest $142,840
========
Income Taxes $ 64,000
========
Non-Cash Investing Activities
Property Acquired Under Capital Lease $ 12,330
========
Proceeds Due From Sale of Asset $ 20,000
========
NOTE 11. DEFINED BENEFIT PENSION PLAN
The Company sponsors a defined benefit pension plan that cover all employees of
the Company. The inception of the plan was January 1, 1992, with a fiscal year
end of August 31. The plan calls for benefits to be paid to eligible employees
at retirement based upon years of service with the Company. Contributions to
the plan reflect benefits attributed to employees' services to date, as well as
services expected to be earned in the future. Pension expense for the year
ended August 31, 1995 was $12,131. Pension contributions due to the plan at
August 31, 1995 were $12,131. As of August 31, 1995 the defined benefit
pension plan is funded in accordance with ERISA.
NOTE 12. COMPANY MERGER
On September 1, 1994, the Company acquired Hydraulic Tubes and Fittings, Inc.
in a business combination accounted for as a pooling of interests. Hydraulic
Tubes and Fittings, Inc. which engages in the manufacturing of automotive
tubing for the auto industry became a wholly owned subsidiary of the Company
through the exchange of 2,601,753 shares of the Company's common stock for all
of the outstanding stock of Hydraulic Tubes and Fittings, Inc. Hydraulic Tubes
and Fittings, Inc. outstanding stock was then effectively canceled. The
accompanying financial statements for the year ended August 31, 1995 are based
on the assumptions that the companies were combined for the full year.
NOTE 13. EXTRAORDINARY ITEMS\DISCONTINUED OPERATIONS
A. As described in Note 12, on September 1, 1994, Hydraulic Tubes and Fittings,
Inc. was acquired in a business combination accounted for as a pooling of
interests. In January, 1995, the Knusaga Corporation's van seat production was
discontinued by Chrysler Corporation. The results of operation from the van
seat production is shown as a loss from discontinued operations of $17,234 (net
of income tax benefit of $8,900).
Net sales of the van seat production for the year ended August 31, 1995 were
$203,284. This amount is not included in net sales in the accompanying income
statement.
B. For the year ended August 31, 1995, the Company reported as an extraordinary
item a loss of $22,649 (net of income tax benefit of $11,600) on disposal of
equipment from van seat production. Equipment was sold for $70,000 and all
other equipment disposed of was scrapped.
C. As of August 31, 1994, the Corporation utilized a net operating loss
carryover of $138,758 available to offset federal taxable income. The net tax
benefit of $47,200 was reported as an extraordinary item.
In addition, the Corporation utilized investment tax credits aggregating
$23,699 for the year ended August 31, 1995.
Page 36 of 37
37
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule