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, 1998 Commission File No. 0-7795
KNUSAGA CORPORATION
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 62-1004034
- --------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
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, 1998: 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 29
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, 1998,
Registrant was engaged in the fabrication and sale of steel, aluminum and copper
tubes for use in the truck industry and power seat tracks for the automotive
aftermarket.
During said fiscal year, Registrant shipped some 800 different parts to
the truck market 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 1998, Registrant purchased the assets of a seat track
business from ITT Electric Systems, Inc. at a total cost of $314,000. Equipment
and tooling was moved from the ITT facility in Rochester, NY to a facility
leased by the Registrant in Imlay City, MI during January of 1998 and production
of the seat track began in February of 1998.
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
Page 2 of 29
3
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.
The principle customer for Registrant's air intake, exhaust and
radiator tubes was 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 was Nova Bus, which
accounted for 7% of Registrant's sales for said products during said fiscal
year. In the fiscal year ending August 31, 1998 a new product, seat tracks,
accounted for 27% of sales. Ford accounted for 59% of tube sales and a new
customer, Freightliner Corporation, accounted for 19% of tube sales in the
fiscal year ending August 31, 1998.
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, Freightliner, and Volvo
and deals with each on a just-in-time inventory basis from a rolling ten to
fifteen working day firm shipping schedule.
The Registrant's customers issue purchase orders to the Registrant for
specific parts. As with Registrant's purchase orders to its vendors, customer
purchase orders 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.
The principal customers for the Registrant's seat tracks are
recreational vehicle manufacturers. The Registrant uses three distributors
located in Indiana, Texas and California to market the product.
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 $185,000 in 1998, $60,000 in 1997, and $75,000 in 1996.
The Registrant has 85 employees.
Page 3 of 29
4
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.
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. The Registrant also leases a facility in Imlay City, MI which it
uses for the production of seat tracks.
Registrant owns certain fabricating equipment, which is used for the
fabrication of steel, aluminum, and copper tubes and certain assembly equipment
and tooling which is used for the production of power seat tracks.
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, 1998, 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 29
5
1 Item 6. SELECTED FINANCIAL DATA.
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
FIVE YEAR SUMMARY OF OPERATIONS
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------------------------
From Operations
Net Sales $1,499,548 $9,566,217 $8,177,943 $9,473,273 $8,891,679
Other Income, Net 377,420 17,703 5,538 $ 347,098 $ 83,875
Unusual or Nonrecurring Items -0- -0- -0- -0- -0-
Cost of Sales 1,289,321 8,092,147 7,342,353 $7,443,903 $7,960,423
Selling, General & Administrative Expenses 324,124 843,211 671,457 $ 973,503 $ 918,497
Interest Expense 44,873 157,065 196,346 $ 162,191 $ 153,616
Income Taxes 107,000 124,846 ( 27,733) $ 315,203 $ (38,508)
Income (Loss) From Continuing Operations 111,650 366,651 1,058 $ 925,571 $ (18,474)
Income (Loss) Before Extraordinary Items 111,650 349,417 1,058 $ 925,571 $ (18,474)
Extraordinary Items 107,000 24,555 -0- -0- -0-
Net Income (Loss) Applicable to Common Stock 218,650 373,968 1,058 $ 925,571 $ (18,474)
Per Share of Common Stock:
Income (Loss) Before Extraordinary Item .03 .05 .00 .13 .00
Extraordinary Item .02 .00 .00 0 0
--------------- ------------------------------ --------------- -----------
Net Income (Loss) $ .05 $ .05 $ .00 .13 .00
--------------- ------------------------------ --------------- -----------
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 7,175,000 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 29
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, 1998, decreased by
$581,594 or 6.1% from the year ended August 31, 1997, which sales had increased
by $1,295,330 or 15.8% from the prior fiscal year. The change in sales for
fiscal year 1998 was a result of the following factors.
In the tubing sector of the Registrant's business, the Ford Kentucky
Truck Plant accounted for 75% of sales. At that plant Ford operated two assembly
lines which received tubing from the Registrant, one for Medium Trucks and the
second for Heavy Trucks. In November of 1997 Ford discontinued production of
Medium Trucks at the plant. Ford did not resume production of Medium Trucks in
Mexico until March of 1998. In December of 1997 Ford discontinued production of
Heavy Trucks at the plant and sold the Heavy Truck business to Freightliner
Corporation. Freightliner did not resume production at their St. Thomas, Ontario
plant until March of 1998. The Registrant continues to supply the same parts for
the medium and heavy trucks after these changes, however there was an
interruption in production from November 1997 until March of 1998. The former
Ford Heavy Truck is now marketed by Freightliner under the Sterling brand name.
The seat track as a new line of business provided $2,410,865 of
additional sales in the February through August 1998 partially offsetting the
decline in the tubing business.
Cost of goods sold for sales in fiscal year 1998 increased to 89.5% as
a result of unabsorbed overhead during the November 1997 to March 1998 period.
This compares to 78.6% in the fiscal year 1997 and 89.8% in the fiscal year
1996. Selling, general, and administrative expenses in fiscal year 1998 declined
by $55,006 as a result of manpower reductions during the low production period
which was only slightly offset by increased sales , general and administrative
expenses for the seat track business.
The events of fiscal 1998 reduced the Registrant's sales concentration
with Ford from 87% in fiscal 1997 to 43% in fiscal 1998. Freightliner sales were
14% of sales but reflect only 6 months of shipments. Seat track sales were 27%
of sales. Seat track sales are dispersed among a large number of end users.
7(b) Liquidity and Capital Resources. The Registrant's working capital
position declined in fiscal year 1998 to $313,823 on August 31, 1998, from a
working capital position of $565,348 on August 31, 1997, and a working capital
position of $90,843 on August 31, 1996. The reduction in working capital for
fiscal 1998 is largely the result of reduced activity in the tubing section of
the business.
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,
1998, the outstanding principal balance of both notes was $268,232 and the
applicable interest rate was 9.5%.
Page 6 of 29
7
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 .5% over the lender's prime rate and is secured by all
assets of Registrant. At August 31, 1998, the outstanding principal balance was
$93,334 and the applicable interest rate was 9.5%.
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 1999. At August 31, 1998, the outstanding balance was $773,762 and
the applicable interest rate was 9.5%
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 13 through 29 of the annual financial
report for the year ended August 31, 1998 and 1997 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
----- --- --------
James G. Musser, Jr. 63 Director/President
Jerry D. Luptak 76 Director/Vice President Finance and
General Counsel
Harold Beznos 60 Director/Secretary-Treasurer
J. Ted Beebe 68 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 2, 1998. Mr. Semon E. Knudsen , a director and Chairman of the
Board since September 1 of 1977 died July 6, 1998.
The following outlines the past and present occupations and business
experience of the executive officers of the Registrant.
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.
Page 7 of 29
8
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 2% of his time per month
to the business affairs of the Registrant.
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 1% 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 100% of his time 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, 1998, Mr. Musser was paid
$100,000 in salary and Mr. Beebe was paid $56,250 in salary. None of the other
directors or officers received any direct or indirect remuneration during the
fiscal year ended August 31, 1998, and none is anticipated in the fiscal year
ending August 31, 1999.
Messrs. Beznos, Knudsen Trust, 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, 1998, 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
Trust, and Luptak bearing an annual interest rate of 12% and having a combined
unpaid principal balance at August 31, 1998, 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,
1998, 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
Page 8 of 29
9
Common Lorraine A. Musser (1) 722,617 shares 10.3%
Stock 7475 Pinehurst Circle Direct
Birmingham, MI 48010
Common Leslie, Samuel and 1,449,137 shares 20.7%
Stock Lauren Beznos (2) trust beneficiary
31731 Northwestern Hwy.
Farmington Hills, MI 48334
Common Paola M. Luptak (3) 1,463,109 shares 20.9%
Stock 2295 Corporate Blvd, N.W. Direct
Boca Raton, Florida 33431
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 Trust (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 former 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 former
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, prior to the July 6, 1998 death of S.
E. Knudsen, directly and indirectly own 6,615,725 shares of Registrant's common
stock, representing 94.5% of all outstanding common stock. Following the death
of S. E. Knudsen, as a group the officers and directors directly and indirectly
own 5,166,588 shares of Registrant's stock representing 73.8% of all outstanding
common stock.
Page 9 of 29
10
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K
14a. Financial Statement Schedules
For Fiscal Years Ended August 31, 1998 and 1997
1) Accountant's opinion for years ended August 31, 1998 and 1997.
2) Balance Sheet for the years ended August 31, 1998 and 1997.
3) Statement of Income for years ended August 31, 1998 and 1997.
4) Statement of Stockholder's Equity for years ended August 31,
1998 and 1997.
5) Statement of Cash Flows for years ended August 31, 1998 and
1997.
6) Notes to Financial Statements for years ended 1998 and 1997.
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: February 5, 1999
-------------------------------
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: James G. Musser Date: February 5, 1999
--------------------------------------- ----------------
Director/President
(Principal Executive Officer and
Controller)
By: Jerry D. Luptak Date: February 5, 1999
--------------------------------------- ----------------
Director
Vice President, Finance and
General Counsel
(Principal Financial Officer)
Page 10 of 29
11
By: Harold Beznos Date: February 5, 1999
--------------------------------------- ----------------
Director Secretary-Treasurer
By: J. Ted Beebe Date: February 5, 1999
--------------------------------------- ----------------
Executive Vice President
Page 11 of 29
12
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 1998 AND 1997
Page 12 of 29
13
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
================================================================================
================================================================================
TABLE OF CONTENTS
================================================================================
PAGE
----
Independent Auditors' Report..................................................14
Balance Sheet..............................................................15-16
Statement of Income...........................................................17
Statement of Stockholders' Equity.............................................18
Statement of Cash Flows.......................................................19
Notes to Financial Statements..............................................20-29
Page 13 of 29
14
[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, 1998 and 1997 and the related
statement of income, stockholder's equity, and cash flows for the years ended
August 31, 1998 and 1997. 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, 1998 and 1997 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
Certified Public Accountants
Farmington Hills, Michigan
October 29, 1998
Represented worldwide as a member firm of the International Association of
Local Public Accountants
--------------------------------------------------------------------------
Page 14 of 29
15
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
BALANCE SHEET
================================================================================
As of August 31, 1998 and 1997
ASSETS
1998 1997
---------------------------------
Current Assets
Cash $ 364,881 $ 276,294
Accounts Receivable - Trade, Net of Allowance for Doubtful Accounts of
$-0- 1,029,669 1,425,344
Accounts Receivable - Other -0- 200
Note Receivable - Officer 94,143 94,143
Inventories 568,708 573,452
Prepaid Expenses 247,009 185,467
.........................................................................................................................
Total Current Assets 2,304,410 2,554,900
.........................................................................................................................
Property and Equipment, Net 2,412,733 2,091,277
.........................................................................................................................
Other Assets
Deposits 9,696 2,646
Intangible Assets, Net 12,664 -0-
.........................................................................................................................
Total Other Assets 22,360 2,646
.........................................................................................................................
Total Assets $ 4,739,503 $ 4,648,823
=========================================================================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
Page 15 of 29
16
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
BALANCE SHEET
================================================================================
As of August 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---------------------------------
Current Liabilities
Accounts Payable - Trade $ 764,882 $ 693,670
Current Maturities of Long-Term Debt 1,026,634 869,611
Accrued Expenses 199,071 426,271
........................................................................................................................
Total Current Liabilities 1,990,587 1,989,552
........................................................................................................................
Other Liabilities
Accrued Expenses - Non current 563,670 604,900
Long-Term Debt - Less Current Maturities 924,111 774,762
........................................................................................................................
Total Other Liabilities 1,487,781 1,379,662
........................................................................................................................
Total Liabilities 3,478,368 3,369,214
........................................................................................................................
Stockholders' Equity
Common Stock, $.01 Par Value, 7,000,000 Shares Authorized, 7,000,000,
Shares Issued and Outstanding
Preferred Stock, Class A, 4% Non-Cumulative Non-Voting, Each Share 70,000 70,000
Convertible into One Share of Common Stock, Par Value $.01, Stated
Value $1.00, 500,000 Shares Authorized, 175,000 Shares Issued and
Outstanding
Additional Paid-In Capital
Retained Earnings 175,000 175,000
366,365 366,365
649,770 668,244
........................................................................................................................
Total Stockholders' Equity 1,261,135 1,279,609
........................................................................................................................
Total Liabilities and Stockholders' Equity $ 4,739,503 $ 4,648,823
========================================================================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
Page 16 of 29
17
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF INCOME
================================================================================
For the Years Ended August 31, 1998 and 1997
1998 1997
---------- ----------
Sales, Net $8,891,679 $9,473,273
Cost of Sales 7,960,423 7,443,903
.......................................................................................................................
Gross Profit 931,256 2,029,370
Selling, General and Administrative Expenses 918,497 973,503
.......................................................................................................................
Operating Income 12,759 1,055,867
.......................................................................................................................
Other Income (Expense)
Interest Income -0- 398
Interest Expense ( 153,616) ( 162,191)
Miscellaneous Income 2,265 346,048
Gain on Sale of Asset ( 8,390) 652
Forgiveness of Debt 90,000 -0-
.......................................................................................................................
Total Other Income (Expense) ( 69,741) 184,907
.......................................................................................................................
Income Before Income Taxes ( 56,982) 1,240,774
Income Taxes (Refundable) ( 38,508) 315,203
.......................................................................................................................
Net Income $( 18,474) $ 925,571
=======================================================================================================================
Net Income Per Share $( .00) $ .13
=======================================================================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
Page 17 of 29
18
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
For the Years Ended August 31, 1998 and 1997
Retained
Additional Earnings
Common Preferred Paid-In (Accumulated
Stock Stock Capital Deficit)
-------------------------------------------------------------
Balance, September 1, 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
Net Income (Loss) for the Year Ended August 31, 1998 -0- -0- -0- ( 18,474)
........................................................................................................................
Balance, August 31, 1998 $ 70,000 $ 175,000 $ 366,365 $ 649,770
========================================================================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
Page 18 of 29
19
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
STATEMENT OF CASH FLOWS
================================================================================
For the Years Ended August 31, 1998 and 1997
1998 1997
-------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operations
Net Income (Loss) $ ( 18,474) $ 925,571
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities
Depreciation and Amortization 263,511 232,731
(Gain) Loss on Sale of Asset 8,390 ( 652)
Forgiveness of Debt ( 90,000) -0-
(Increase) Decrease In:
Accounts Receivable 395,875 ( 372,368)
Accrued Interest Receivable -0- 839
Inventories 4,744 ( 67,249)
Prepaid Expenses ( 61,542) ( 24,888)
Deposits ( 7,050) 2,929
Increase (Decrease) In:
Accounts Payable 71,212 73,718
Accrued Expenses ( 178,430) ( 39,683)
.........................................................................................................................
Net Cash Provided By Operating Activities 388,236 730,948
.........................................................................................................................
Cash Flows From Investing Activities
Equipment Purchases ( 301,519) ( 199,755)
Purchase of Seat Track Business ( 314,000) -0-
Proceeds From Sale of Assets 9,500 2,000
Proceeds From Notes Receivable -0- 27,955
Payments For Notes Receivable -0- ( 71,143)
.........................................................................................................................
Net Cash Used By Investing Activities ( 606,019) ( 240,943)
.........................................................................................................................
Cash Flows From Financing Activities
Proceeds From Debt 1,893,328 910,000
Principal Payments on Debt (1,586,958) (1,157,731)
.........................................................................................................................
Net Cash Provided By (Used in) Financing
Activities 306,370 ( 247,731)
.........................................................................................................................
Increase (Decrease) in Cash 88,587 242,274
Balance, September 1 276,294 34,020
.........................................................................................................................
Balance, August 31 $ 364,881 $ 276,294
=========================================================================================================================
The accompanying notes are an integral part of the financial statements.
================================================================================
Page 19 of 29
20
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
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 - Knusaga Corporation's operations relate
mainly to the fabrication of tubing for the auto industry. In January,
1998 the Company began manufacturing seat tracks for the auto industry.
Substantially all of the accounts receivable are from three 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 and seat tracks 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 $262,175 and
$232,731 for the years ended August 31, 1998 and 1997, 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, 1998 and 1997 consisted of the
following:
1998 1997
---------------------------------
Raw Material $ 371,763 $ 350,806
Work in Process 123,804 181,481
Finished Goods 73,141 41,165
.................................
$ 568,708 $ 573,452
=================================
- --------------------------------------------------------------------------------
Page 20 of 29
21
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
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, 1998 and 1997 26% and 52%,
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.
At August 31, 1998 and 1997, 36% and 0%, respectively of the accounts
payable - trade was to two major suppliers of seat track components.
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. Intangible Assets - Finders fee associated with the acquisition of
the seat track business amortized over seven years on a straight-line
basis. At August 31, 1998 and 1997, accumulated amortization is $1,336
and $-0-, respectively.
- --------------------------------------------------------------------------------
Page 21 of 29
22
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 2. PREPAID EXPENSES
The following is a detail of the prepaid expenses as of August 31, 1998 and
1997:
1998 1997
..................................
Prepaid Insurance $ 39,173 $ 39,617
Prepaid Taxes 207,836 145,850
..................................
Total Prepaid Expenses $ 247,009 $ 185,467
==================================
NOTE 3. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows:
1998 1997
------------------------------
Land $ 24,847 $ 24,847
Land Improvements 10,230 10,230
Buildings and Improvements 1,436,165 1,369,011
Machinery and Equipment 1,673,055 1,208,374
Furniture and Fixtures 131,198 123,153
Transportation Equipment 130,446 132,245
Obligations Under Capital Leases 207,115 207,115
Equipment Under Construction 63,455 44,475
..............................
3,676,511 3,119,450
Less: Accumulated Depreciation 1,263,778 1,028,173
..............................
Net Property and Equipment $2,412,733 $2,091,277
==============================
NOTE 4. ACCRUED EXPENSES
The following is a detail of the current accrued expenses as of August 31,
1998 and 1997.
1998 1997
------------------------------
Accrued Insurance $ 10,762 $ 8,319
Accrued Interest - Other 11,289 6,101
Accrued Payroll 98,927 147,977
Accrued and Withheld Payroll Taxes 10,553 138,017
Accrued Pension 28,802 37,720
401K Withholdings -0- 4,917
Accrued Professional Fees 28,200 28,200
Accrued Taxes 10,538 55,020
..............................
Total Current Accrued Expenses $ 199,071 $ 426,271
==============================
- --------------------------------------------------------------------------------
Page 22 of 29
23
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 4. CONTINUED
The following is a detail of the non-current accrued expenses as of August 31,
1998 and 1997:
1998 1997
-------------------------------
Accrued Interest - Shareholders $ 420,387 $ 371,617
Accrued Payroll - Officers 143,283 143,283
Accrued Engineering Expenses -0- 90,000
...............................
Total Non-Current Accrued Expenses $ 563,670 $ 604,900
===============================
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.
NOTE 5. NOTES RECEIVABLE
1998 1997
-------------------------------
Non-interest bearing note receivable from an officer/stockholder. The note
is unsecured and due on demand.
$ 94,143 $ 94,143
-------------------------------
NOTE 6. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
Notes payable and obligations under capital leases consist of the
following:
1998 1997
------------------------------
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. 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, 1998 was 9.5%.
25,930 129,683
C. 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, 1998 was 9.5%.
242,302 316,871
D. 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, 1998
was 9.5%.
93,334 133,334
- --------------------------------------------------------------------------------
Page 23 of 29
24
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 6. CONTINUED
E. Line of Credit - Bank, interest payable in monthly installments at .5%
over lender's prime rate. Principal is due January 1, 19998. Note is
secured by all assets of the Company. The interest rate at August 31, 1998
was 9.0%.
773,762 630,000
F. Loan Payable - Bank, payable in monthly installments of $6,383 plus
interest at .5% over lender's prime rate, through January, 2002. The note
is secured by all the assets of the Company. The interest rate at August
31, 1998 was 9.0%.
261,683 -0-
G. Loan Payable - Bank, payable in monthly installments of $2,249 plus
interest at .5% over the lender's prime rate through April, 2003. The note
is secured by all the assets of the Company. The interest rate at August
31, 1998 was 9.0%.
125,954 -0-
H. Loan Payable - Bank, payable in monthly installments of $244 plus
interest at .5% over lender's prime rate through August, 2003. The loan is
secured all assets of Company. The interest rate at August 31, 1998 was
9.0%.
14,667 -0-
I. Obligation Under Capital Lease - machinery, payable in monthly
installments of $573, through November 1998, including interest at 17.3%.
Secured by the machinery.
1,125 7,275
J. Obligation Under Capital Lease - improvements, payable in monthly
installments of $628, through November 1998, including interest at 8.17%.
Secured by the improvements.
1,860 8,929
K. Loan Payable - Bank, payable in monthly installments of $731, through
December 1998, including interest at 8.49%. Secured by an automobile.
2,875 11,028
..............................
Total 1,950,745 1,644,373
Amounts due within one year 1,026,634 869,611
..............................
$ 924,111 $ 774,762
==============================
- --------------------------------------------------------------------------------
Page 24 of 29
25
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 6. CONTINUED
The debt and lease maturities for the next five years are as follows:
August 31, 1999 $ 1,026,634
August 31, 2000 628,340
August 31, 2001 194,420
August 31, 2002 80,415
August 31, 2003 20,936
...........
$ 1,950,745
===========
Interest expense for the years ended August 31, 1998 and 1997 totaled
$153,616, and $162,191, respectively.
Interest expense on obligations under capital leases for the years ended
August 31, 1998 and 1997 was $1,081 and $4,667, respectively. Depreciation
expense of equipment held under capital leases for the years ended August
31, 1998 and 1997 was $26,723 for each year.
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, 1998, the Company was in default of its loan covenant
regarding debt service coverage.
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 25 of 29
26
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following components:
1998 1997
--------------------------------
Current:
Tax Due (Refundable) $( 38,508) $ 329,071
Tax (Benefit) Recovery of Investment Tax Credits -0- ( 13,868)
................................
Net Tax Expense (Recovery) $( 38,508) $ 315,203
================================
Deferred taxes are detailed as follows:
1998 1997
---------------------------------
Deferred Income Tax Liability - Depreciation $ 59,655 $ 41,826
.....................................................................................................
Deferred Income Tax Assets
Accrued Expenses 65,221 64,469
Valuation Allowance ( 5,565) ( 22,643)
.....................................................................................................
Net Deferred Income Tax Asset 59,655 41,826
.....................................................................................................
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 TRANSACTION
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, 1998 and 1997 totaled $407,253.
Interest accrued on these notes at August 31, 1998 and 1997 totaled
$420,387 and $371,617, respectively. Interest expense accrued for the years
ended August 31, 1998 and 1997 was $48,770 and $51,288, respectively.
NOTE 11. CASH FlOW DISCLOSURES
Interest and income taxes paid for the years ended August 31, 1998 and 1997
were as follows:
1998 1997
---------------------------------
Interest $ 99,658 $ 116,312
=================================
Income Taxes $ 21,000 $ 444,300
=================================
Income tax refunds received during the years ended August 31, 1998 and 1997
was $-0- and $16,647, respectively.
- --------------------------------------------------------------------------------
Page 26 of 29
27
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
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,
1998 and 1997 was $28,802 and $37,720, respectively. Pension contributions
due to the plan at August 31, 1998 and 1997 were $30,000 and $49,460,
respectively. As of August 31, 1998 the defined benefit pension plan is
funded in accordance with ERISA.
The following table sets forth the plan's funded and amounts recognized in
the Company's statement of financial position at August 31, 1998 and 1997.
1998 1997
----------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $154,220
and $124,051, respectively.
$ 181,450 $ 143,126
........................................................................................................................
Projected benefit obligation for service rendered to date.
181,450 182,428
Plan assets at fair value 172,968 135,413
........................................................................................................................
Projected benefit obligation in excess of plan assets.
8,482 47,015
Unrecognized net gain from past experience different from that assumed and
effect of changes in assumptions.
76,365 1,662
Prior service cost not yet recognized in net periodic pension cost
( 22,612) ( 11,193)
Unrecognized net obligation at date of initial application of FAS-87
( 33,433) ( 34,827)
........................................................................................................................
(Prepaid) accrued cost $ 28,802 $ 2,657
========================================================================================================================
Net pension cost for 1998 and 1997 includes the following components:
Service cost - benefits earned during the period $ 31,725 $ 28,692
Interest cost on projected benefit obligation 9,173 6,486
Interest cost due to late quarterly contributions
-0- -0-
Actual return on plan assets ( 597) ( 26,417)
Amortization of Actuarial Gains and Net Transition Asset
( 11,499) 21,649
........................................................................................................................
Net periodic pension costs $ 28,802 $ 30,410
========================================================================================================================
- --------------------------------------------------------------------------------
Page 27 of 29
28
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
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.
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.
NOTE 15. PURCHASE OF SEAT TRACK BUSINESS
In January, 1998, the Company purchased the assets of ITT Automotive
Electric Systems, Inc.'s seat track business. The total cost of the assets
acquired was $300,000. In addition, the Company paid a third party $14,000
as a fee for organizing the transaction. The purchase price has been
allocated to the assets purchased on estimated fair market value of assets
acquired as follows:
Equipment $ 100,000
Tooling 200,000
Intangible Assets 14,000
...........
$ 314,000
===========
NOTE 16. LEASE OBLIGATION
In February, 1998, the Company began leasing a facility in Imlay, Michigan
for its seat track operations. The lease requires minimum monthly payments
of $3,721 in addition to property taxes, insurance and maintenance. The
lease expires January, 2003.
Total rent paid during the year ended August 31, 1998 was $25,458.
Future minimum lease obligations under all operating leases are as follows:
August 31, 1999 $ 44,643
August 31, 2000 44,643
August 31, 2001 44,643
August 31, 2002 44,643
August 31, 2003 18,605
...........
$ 197,177
===========
- --------------------------------------------------------------------------------
Page 28 of 29
29
KNUSAGA CORPORATION
D.B.A. HYDRAULIC TUBES AND FITTINGS
NOTES TO FINANCIAL STATEMENTS
================================================================================
August 31, 1998 and 1997
NOTE 17. SEGMENTAL DATA
The Company's operations are classified into two principal reportable
segments that provide different products or services. Separate management
of each segment is required because each business unit is subject to
different marketing, production and technology strategies. The Company has
elected to adopt early application of SFAS 131 - Segmented Reporting. Below
is summarized segmental data for the year ended August 31, 1998.
Tubing Seat Track Total
External Revenue $ 6,480,814 $ 2,410,865 $ 8,891,679
Intersegment Revenue -0- -0- -0-
Gross Profit 599,804 331,452 931,256
Interest Revenue -0- -0- -0-
Interest Expense 131,216 22,400 153,616
Depreciation & Amortization 238,869 24,642 263,511
Operating Income (Loss) ( 213,252) 226,011 12,759
Forgiveness of Debt 90,000 -0- 90,000
Income Taxes (Benefit) ( 100,808) 62,300 ( 38,508)
Net Income (Loss) ( 159,802) 141,328 ( 18,474)
Total Assets 3,926,718 812,785 4,739,503
Expenditures of Long-Lived Assets 272,110 343,409 615,519
The tubing segment derives its revenues from the sale of automotive tubing
and fittings in the production process of the automobile industry. The seat
track segment derives its revenues from the sale of adjustable seat tracks
for use in the post production market.
During the year ended August 31, 1997, the company's operations were 100%
related to its tubing segment.
The Company maintains separate records for each segment. The accounting
policies applied by each of the segments are the same as those used by the
Company in general.
Net sales to Ford Motor Company from its tubing segment totaled $4,112,714
and $8,259,061 of the Company's net sales for the years ended August 31,
1998 and 1997, respectively. Net sales to Freightliner from its tubing
segment totaled $1,248,991 and $-0- of the Company's net sales for the
years ended August 31, 1998 and 1997, respectively. Net sales to SDI from
its seat track segment totaled $2,360,400 and $-0- of the Company's net
sales for the years ended August 31, 1998 and 1997, respectively.
NOTE 18. FORGIVENESS OF DEBT
On August 31, 1998, the Company was forgiven its debt owed to Travel Products in
the amount of $90,000. This amount was for engineering services provided to the
company during the year ended August 31, 1994. This amount was previously shown
as accrued engineering expenses prior to the year ended August 31, 1998.
- --------------------------------------------------------------------------------
Page 29 of 29
30
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule