-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kh6AmN5yUG5rSQiFel8YWnOaqFxWsz5RMi9XO47+v/v3FFTpEim8H3Usgnq75QYr OSFlEMHRCVDggZpvFtlr/A== 0001108890-04-000706.txt : 20041126 0001108890-04-000706.hdr.sgml : 20041125 20041126112008 ACCESSION NUMBER: 0001108890-04-000706 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041126 DATE AS OF CHANGE: 20041126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNUSAGA CORP CENTRAL INDEX KEY: 0000225544 STANDARD INDUSTRIAL CLASSIFICATION: PUBLIC BUILDING AND RELATED FURNITURE [2531] IRS NUMBER: 621004034 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-07795 FILM NUMBER: 041168841 BUSINESS ADDRESS: STREET 1: 3578 S VAN DYKE HWY CITY: ALMONT STATE: MI ZIP: 48003 BUSINESS PHONE: 8107988567 FORMER COMPANY: FORMER CONFORMED NAME: AMERICANADA LTD DATE OF NAME CHANGE: 19600201 10KSB 1 knusaga10ksb083104.txt PERIOD ENDED 08-31-04 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------- For fiscal year ended August 31, 2004 Commission File No 0-7795 KNUSAGA CORPORATION ---------------------------------------------------- (Exact name of Registrant as Specified in its Charter) NEVADA 38-3601122 ------------------------------ -------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 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 $001 Per Share -------------- (Title of Class) Number of shares of common stock outstanding as of August 31, 2004: 10,862,773 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. [X] Registrant's revenue for fiscal year ended August 31, 2004: $6,229,339 -1- 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, 2004, 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 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 acquired a power seat track business from ITT Electric Systems, Inc.. 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 October 2000, the Registrant entered into a joint venture (Modular Tubes Systems S.A. de C.V.) with an unrelated entity in Mexico City, Mexico. The joint venture manufactures truck tubing for Frieghtliner and Mercedes plants in Mexico. The Registrant and its partner have made equal contributions to equity and each own 50% of the joint venture. Effective May 19, 2002, the Registrant merged into its wholly-owned Nevada subsidiary. As a part of this merger, outstanding shares of the Registrant's common stock and preferred stock were converted into an equal number of shares of the subsidiary's common stock and the subsidiary's name was changed to "KnuSaga Corporation". Registrant is now a Nevada Corporation and the rights of its shareholders are governed by Nevada law. During the years ended August 31, 2004 and 2003, three and two customers accounted for 76% and 74%, respectively, of the Registrant's tubing segment net sales. One customer accounted for 64% and 62%, respectively, of tubing net sales. During the years ended August 31, 2004 and 2003, three customers accounted for 86% and 83%, respectively, of the Registrant's seat track segment net sales. Sterling Pipe & Tube, Alpha Tube and United Industries are Registrant's largest suppliers. Registrant issues periodic purchase orders to its suppliers for specific quantities on an as needed basis, which are generally for four weeks of projected requirements. Such purchase orders represent the only enforceable formal agreement between the Registrant and its suppliers. -2- The Registrant is a tier one supplier to Freightliner, Orion Bus, International, Blue Bird, and Thomas Bus 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. The Registrant's major competitors in the truck metal tube fabricating business are Tube Specialties, Ryken and Southern Tube Form. Truck suppliers compete on the basis of price, quality, technology and on-time delivery. The Registrant has continued direct marketing of these products. \ The principal customers for the Registrant's seat tracks are recreational vehicle manufacturers. During fiscal 2002 the Registrant began direct marketing of its seat track products replacing the previous distributor. R&D expenditures for the last two fiscal years were $20,852 in 2004 and $70,811 in 2003. The Registrant has 75 employees. The Registrant does not do any promotional advertising. The Registrant does not own any patents or trademarks which are material to its business. Item 2. DESCRIPTION OF PROPERTY ----------------------- 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. The Registrant leases a facility in Imlay City, MI which it uses for the production of seat tracks. The Registrant's Almont facility is encumbered by a mortgage which secures repayment of Registrant's bank indebtedness. See "Management's Discussion and Analysis - Liquidity and Capital Resources" for a description of this indebtedness. 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. -3- 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, 2004, there were approximately 1,592 shareholders of record of Registrant's common stock. 5 (c) Registrant has not paid any dividends in the past two (2) years. The Registrant is not under any legal restrictions imposed by its Articles of Incorporation, Bylaws, express covenants in loan agreements or other obligations to third parties with regard to dividend payments, although payment of dividends is indirectly limited by the Registrant's obligations in its loan agreements to maintain a minimum tangible net worth and a maximum leverage ratio of liabilities to tangible net worth. The Registrant does not anticipate the payment of any cash dividends in the foreseeable future. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ 6(a) Net sales for the fiscal year ended August 31, 2004, increased by $927,497 or 17% from the year ended August 31, 2003 as a result of improvement of the Heavy Truck market. Truck tubing sales were $4,838,512 in fiscal 2004 versus $3,766,487 in fiscal 2003, an increase of $1,072,025 or 28%. This gain is a result of an improving Heavy Truck market and the addition of a major new customer, International Truck & Engine. Sales of the seat track line of business declined to $1,390,827 in fiscal 2004 from $1,535,355 in fiscal 2003, a drop of $144,528 or 9% as a result of the loss of a customer. Cost of goods sold as a percent of sales increased to 93% in fiscal 2004 versus 92% in fiscal 2003. During fiscal 2004 improvements in operations were more than offset by steel surcharges. Selling, general, and administrative expenses in fiscal year 2004 increased $43,861 to $798,166, or 6%, compared to $754,305 in fiscal 2003, these expenses as a percent of sales dropped from 14% to 13%. In fiscal 2004 the Registrant posted a loss of $315,444 compared to a loss of $263,240 in fiscal 2003. The Truck Tubing segment improved from a loss of $534,267 in fiscal 2003 to a loss of $454,386 in fiscal 2004 or 15% with the improved volume but the sales reduction in the Seat Track segment reduced income from $170,679 in fiscal 2003 to $97,376 in fiscal 2004, a reduction of 43%. Inventories in 2004 increased $279,603, or 46%, compared to fiscal 2003 because of increased sales volume and material cost increases. -4- 6(b) Liquidity and Capital Resources ------------------------------- The Registrant has a term loan with Standard Federal Bank payable in monthly installments of $16,546, including interest at 3.25% above Libor, through May 2006. The term loan is secured by all assets of the Registrant. At August 31, 2004 the principal amount of the term loan was $301,116 and the interest rate was 5.35%. The Registrant has a $600,000 line of credit with Standard Federal Bank with interest payable monthly at said bank's prime rate plus 1%. The line of credit is payable on demand and is secured by all assets of the Registrant and the principal was due August 31,2004, but has been extended to December 15, 2004. At August 31, 2003 the outstanding balance was $599,761 and the applicable interest rate was 5.5%. FORWARD LOOKING STATEMENTS -------------------------- Certain sections of this Annual Report contain statements reflecting the Registrant's views about its future performance and constitute "forward-looking" statements" under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and, accordingly, the Registrant's actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors in the United States and abroad, including changes in general economic conditions, competitive market conditions and pricing pressures, relationships with key customers, industry consolidation of vehicle and truck suppliers, shifts in distribution, currency exchange rates and other factors discussed in the Registrant's other filings with the Securities and Exchange Commission, may affect the Registrant's performance. The Registrant undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. Supplemental Item. Controls and Procedures ----------------------- Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-KSB, the Registrant's Chief Executive Officer and Chief Financial Officer believe the Registrant's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Registrant in this report is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses. Item 7. FINANCIAL STATEMENTS -------------------- The report of independent auditors and consolidated financial statements included on pages 16 through 39 of the annual financial report for the year ended August 31, 2004 and 2003 are incorporated herein by reference. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------- No response required. -5- PART III. Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH ------------------------------------------------------------------- SECTION 16(a) OF THE EXCHANGE ACT --------------------------------- NAME AGE POSITION ---- --- -------- James G. Musser, Jr. 69 Director/President Jerry D. Luptak 82 Director/Vice President Finance and General Counsel Harold Beznos 66 Director/Secretary-Treasurer 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. MUSSER is, and has been, a Director and President of the Registrant since September 1, 1977. Since January 1, 2002, he has devoted 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 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. Items 10 and 12. EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS ------------------------------------------------- AND RELATED TRANSACTIONS. ------------------------- In the fiscal years ending August 31, 2002, 2003, and 2004 Mr. Musser was paid salaries of $75,000, $100,000, and $100,000 respectively. During the fiscal year 2002, Mr. Musser was not working full-time for the Registrant. His salary for that year was adjusted appropriately. None of the other directors or officers received any direct or indirect remuneration during the fiscal years ended August 31, 2003 and 2004, and none is anticipated in the fiscal year ending August 31, 2005. On May 15, 2002, the Registrant reached an agreement in principal with Messrs. Luptak, Musser, Beznos and Knudsen and Trusts for these individuals or their family members' benefit, to exchange indebtedness of the Registrant held by them for shares of the Registrant's common stock at a rate of $0.25 of indebtedness for each share of common stock. Other than with regard to the issuance of shares of common stock and exchange for accrued interest on August 28, 2003 as described in the next paragraph, no interest was paid by the Registrant during fiscal 2003 or 2004 on any of this indebtedness. -6-
Pursuant to this May 15, 2002 agreement, on August 28, 2003 the Registrant issued 3,687,733 shares of its common stock in exchange for principal of $380,403.10 and accrued interest of $541,540.67. Relatives of Mr. Knudsen still hold an aggregate of $26,850.00 of the Registrant's indebtedness and $64,789.50 of accrued interest, and Mr. Knudsen still holds $21,596.50 of accrued interest. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- 11(a) Title Of Name and Address of Amount and Nature of Class Beneficial Owner Beneficial Owner % of Class ----- ---------------- ---------------- ---------- Common James G Musser, Jr (1) 729,864 shares 67% Stock 7475 Pinehurst Circle Birmingham, MI 48010 Common Lorraine A Musser (1) 722,617 shares 67% Stock 7475 Pinehurst Circle Birmingham, MI 48010 Common Frieda Applebaum, as trustee of the 2,889,297 shares 266% Stock Beznos Family Irrevocable Trust U/A/D February 2, 1976(2) 31731 Northwestern Hwy Farmington Hills, MI 48334 Common Mayfair Associates Limited 2,374,711 shares 219% Stock Partnership (3) c/o 31731 Northwestern Hwy Ste 250W Farmington Hills, MI 48334 Common Bank One Trust Company, NA (4) 562,402 shares 52% Stock 611 Woodward Detroit, MI 48226 Common Jerry Luptak 793,227 shares 73% Stock c/o The Beztak Companies 31731 Northwestern Highway, Suite 250W Farmington Hills, MI 48334 Common Harold Beznos 684,541 shares 63% Stock c/o The Beztak Companies 31731 Northwestern Highway, Suite 250W Farmington Hills, MI 48334 Common Paola M Luptak Revocable Trust 552,704 shares 51% Stock c/o 4700 NW Boca Raton Blvd, 4th Floor Boca Raton, FL 33431 Common Copperfield Associates 175,000 shares 16% Stock c/o The Beztak Companies 31731 Northwestern Highway, Suite 250W Farmington Hills, MI 48334 -7-
(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) These shares are owned by a Nevada Limited Partnership of which Mayfair General Corporation, a Nevada Corporation, is the sole general partner. As the sole director of said corporation, Virginia Buell has the power to vote the stock. (4) These shares are held in a revocable trust with the BankOne of Detroit, Michigan, as Trustee with voting and investment power for the benefit of K. Peter Knudsen. 11(b) No shares of common stock of the Registrant are beneficially owned by any officers and directors of the Registrant, except Mr. James G. Musser, Jr. as listed in Item 11(a) above. As a group, the officers and directors own 2,207,632 shares of Registrant's common stock, representing 20.3% of all outstanding common stock. These shares do not include shares owned by Mr. Musser's wife as to which he disclaims beneficial ownership. Item 13 EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- 13a Financial Statement Schedules For Fiscal Years Ended August 31, 2004 and 2003 ----------------------------------------------- 1) Accountant's opinion for years ended August 31, 2004 and 2003. 2) Balance Sheet for the years ended August 31, 2004 and 2003. 3) Statement of Income for years ended August 31, 2004 and 2003. 4) Statement of Stockholder's Equity for years ended August 31, 2004 and 2003. 5) Statement of Cash Flows for years ended August 31, 2004 and 2003. 6) Notes to Financial Statements for years ended 2004 and 2003. 13b Reports on Form 8-K None 13c Exhibits 31.1 Certification of Chief Executive Officer pursuant to 18 USC ss1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002. 31.2 Certification of Chief Financial Officer pursuant to 18 USC ss1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 USC ss1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 USC ss1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002. -8- 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: /s/ Jerry Luptak ------------------------------- Jerry Luptak Vice President Dated: November 23, 2004 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: /s/ James G Musser Date: November 24 2004 ------------------------------ James G Musser Director/President (Principal Executive Officer and Controller) By: /s/ Jerry D Luptak Date: November 24, 2004 ------------------------------ Jerry D Luptak Director Vice President, Finance and General Counsel (Principal Financial Officer) By: /s/ Harold Beznos Date: November 24, 2004 ------------------------------ Harold Beznos Director Secretary-Treasurer -9- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003 -10- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS ================================================================================ ================================================================================ TABLE OF CONTENTS ----------------- Page ---- Report of Independent Registered Public Accounting Firm 12 Consolidated Balance Sheets 13-14 Consolidated Statements of Income 15 Consolidated Statements of Comprehensive Income 16 Consolidated Statements of Stockholders' Equity 17 Consolidated Statements of Cash Flows 18 Notes to Consolidated Financial Statements 19-33 ================================================================================ -11- FREEDMAN & GOLDBERG CERTIFIED PUBLIC ACCOUNTANTS A PROFESSIONAL CORPORATION ====================================== ERIC W FREEDMAN MICHAEL GOLDBERG DAVID C GRIEP JULIE A CHEEK TRI-ATRIA WILLIAM A MARSHALL 32255 NORTHWESTERN HIGHWAY, SUITE 298 AMY S JACKNOW FARMINGTON HILLS, MICHIGAN 48334 GLORIA K MOORE (248) 626-2400 FAX: (248) 626-4298 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Board of Directors KnuSaga Corporation D.B.A. Hydraulic Tubes and Fittings Almont, MI 48003 We have audited the accompanying consolidated balance sheets of KnuSaga Corporation and Subsidiary, D.B.A. Hydraulic Tubes and Fittings as of August 31, 2004 and 2003 and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years ended August 31, 2004 and 2003. 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 audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 and Subsidiary, D.B.A. Hydraulic Tubes and Fittings as of August 31, 2004 and 2003 and the results of its operations and its cash flows for the each of the years ended August 31, 2004 and 2003, in conformity with U.S. generally accepted accounting principles. Respectfully, FREEDMAN & GOLDBERG, CPA'S, P.C. /s/ Freedman & Goldberg - ---------------------------------- Freedman & Goldberg Farmington Hills, Michigan October 27, 2004 -12- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED BALANCE SHEETS ================================================================================ As of August 31, 2004 and 2003 ASSETS 2004 2003 ---------- ---------- Current Assets Cash $ 83,774 $ 49,916 Accounts Receivable - Trade, net of Allowance for Doubtful Accounts of $-0- 1,022,706 671,693 Notes Receivable 88,064 204,940 Accrued Interest Receivable 8,642 2,446 Inventories 887,308 607,705 Refundable Income Taxes 3,413 62,763 Prepaid Expenses 46,615 51,438 Deferred Tax Asset 86,500 47,600 ---------- ---------- Total Current Assets 2,227,022 1,698,501 ---------- ---------- Property, Plant and Equipment, Net 1,614,264 1,664,793 ---------- ---------- Other Assets Deposits 7,050 7,050 Investments in Other Entities 135,280 110,356 Intangible Assets, Net 71,509 60,961 ---------- ---------- Total Other Assets 213,839 178,367 ---------- ---------- Total Assets $4,055,125 $3,541,661 ========== ========== The accompanying notes are an integral part of the financial statements. ================================================================================ -13-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED BALANCE SHEETS ================================================================================================= As of August 31, 2004 and 2003 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 2003-As 2004 Restated ----------- ----------- Current Liabilities Accounts Payable - Trade $ 878,443 $ 314,409 Current Maturities of Long-Term Debt 839,789 570,007 Accrued Expenses 454,652 342,719 ----------- ----------- Total Current Liabilities 2,172,884 1,227,135 ----------- ----------- Other Liabilities Long-Term Debt - Less Current Maturities 192,391 300,859 ----------- ----------- Total Other Liabilities 192,391 300,859 ----------- ----------- Deferred Taxes 86,500 63,600 ----------- ----------- Total Liabilities 2,451,775 1,591,594 ----------- ----------- Stockholders' Equity Common Stock,$001 Par Value, 24,000,000 Shares Authorized, 10,862,773 and 10,862,773 issued and outstanding, respectively 10,863 10,863 Additional Paid-In Capital 1,522,446 1,522,446 Retained Earnings 101,314 416,758 Accumulated Other Comprehensive Income (Loss) (31,273) -0- ----------- ----------- Total Stockholders' Equity 1,603,350 1,950,067 ----------- ----------- Total Liabilities and Stockholders' Equity $ 4,055,125 $ 3,541,661 =========== =========== The accompanying notes are an integral part of the financial statements. ================================================================================================= -14-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED STATEMENTS OF INCOME =============================================================================== For the Years Ended August 31, 2004 and 2003 2004 2003 ----------- ----------- Sales, Net $ 6,229,339 $ 5,301,842 Cost of Sales 5,775,667 4,900,427 ----------- ----------- Gross Profit 453,672 401,415 Selling, General and Administrative Expenses 798,166 754,305 ----------- ----------- Operating Income (Loss) (344,494) (352,890) ----------- ----------- Other Income (Expense) Interest Income 6,196 9,431 Interest Expense (49,993) (73,214) Miscellaneous Income 5,078 13,964 Gain (Loss) on Sale of Asset 7,605 83,926 Gain on Sale of Joint Venture 18,995 -0- Income (Loss) from Joint Ventures 24,924 (44,805) ----------- ----------- Total Other Income (Expense) 12,805 (10,698) ----------- ----------- Income (Loss) Before Income Taxes (331,689) (363,588) Income Taxes Expense (Benefit) (16,245) (100,958) ----------- ----------- Income (Loss) From Continuing Operations (315,444) (262,630) Loss From Discontinued Operations, Net of Income Taxes -0- (610) =========== =========== Net Income (Loss) (315,444) $ (263,240) =========== =========== Earnings Per Share Income From Continuing Operations $ (03) $ (03) Income From Discontinued Operations 00 00 ----------- ----------- Net Income Per Share $ (03) $ (03) =========== =========== The accompanying notes are an integral part of the financial statements. ================================================================================ -15- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ================================================================================ For the Years Ended August 31, 2004 and 2003 Net Loss (Loss) $(315,444) $(263,240) Other Comprehensive Income (Loss) Minimum Pension Liability Adjustment (31,273) -0- --------- --------- Comprehensive Income (Loss) $(346,717) $(263,240) ========= ========= The accompanying notes are an integral part of the financial statements. ================================================================================ -16-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ============================================================================================== For the Years Ended August 31, 2004 and 2003 Accumulated Common Common Additional Other Stock Stock Paid-In Retained Comprehensive Shares Amount Capital Earnings Income (Loss) ---------- ---------- ---------- -------- --------- Balance, August 31, 2002 7,175,000 $ 7,175 $ 604,190 $ 679,998 $ -0- Exchange of Shareholder Debt For common stock 3,687,773 3,688 918,256 -0- -0- Net Income for the Year Ended August 31, 2003 -0- -0- -0- (263,240) -0- ---------- ---------- ---------- -------- --------- Balance, August 31, 2003 10,862,773 10,863 1,522,446 416,758 -0- Net Loss For the Year Ended August 31, 2004 -0- -0- -0- (315,444) -0- Minimum Pension Liability Adjustment -0- -0- -0- -0- (31,273) ---------- ---------- ---------- -------- --------- Balance, August 31, 2004 10,862,773 $ 10,863 $1,522,446 $ 101,314 $ (31,273) ========== ========== ========== ======== ========= The accompanying notes are an integral part of the financial statements ============================================================================================ -17-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS CONSOLIDATED STATEMENTS OF CASH FLOWS ======================================================================================= For the Years Ended August 31, 2004 and 2003 2004 2003 --------- --------- Cash Flows From Operations Net Income (Loss) From Continuing Operations $(315,444) $(262,630) Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities Bad Debts -0- 206 Depreciation and Amortization 257,412 275,516 (Gain) Loss on Sale of Asset (7,605) (83,926) (Gain) Loss on Sale of Joint Ventures (18,995) -0- (Income) Loss From Joint Venture (24,924) 44,805 (Increase) Decrease In: Accounts Receivable (351,013) 575,279 Accrued Interest Receivable (6,196) (2,446) Inventories (279,603) 92,617 Refundable Income Taxes 59,350 (62,763) Prepaid Expenses 4,823 5,961 Deferred Tax Asset (38,900) (47,600) Intangible Assets -0- (44,871) Increase (Decrease) In: Accounts Payable 564,034 (99,390) Accrued Expenses 70,112 (44,565) Deferred Taxes 22,900 6,300 --------- --------- Net Cash Provided By (Used For) Continuing Operations (64,049) 352,493 --------- --------- Net Cash Provided By (Used For) Discontinued Operations -0- (610) --------- --------- Net Cash Provided By (Used) For Operating Activities (64,049) 351,883 --------- --------- Cash Flows From Investing Activities Equipment Purchases (162,543) (72,679) Proceeds From Sale of Assets 36,500 95,109 Proceeds From Notes Receivable 174,375 96,113 Payments For Notes Receivable (38,504) (264,315) Investment in Joint Ventures -0- (357) --------- --------- Net Cash Provided By (Used For) Investing Activities 9,828 (146,129) --------- --------- Cash Flows From Financing Activities Proceeds From Debt 287,685 110,000 Principal Payments on Debt (199,606) (401,366) --------- --------- Net Cash Provided By (Used For) Financing Activities 88,079 (291,366) --------- --------- Increase (Decrease) in Cash 33,858 (85,612) Balance, September 1 49,916 135,528 --------- --------- Balance, August 31 $ 83,774 $ 49,916 ========= ========= The accompanying notes are an integral part of the financial statements. ======================================================================================= -18-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 1. Summary of Significant Accounting Policies - ---------------------------------------------------- This summary of significant accounting policies of KnuSaga Corporation and Subsidiary, 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 operates in two separate industries: 1) fabrication of tubing for the auto industry and 2) manufacturing of seat tracks for the auto industry. B. Basis of Consolidation - The consolidated financial statements include the accounts of HTF, Ltd., a wholly owned subsidiary located in Ontario, Canada. All significant intercompany accounts and transactions have been eliminated in consolidation. C. Concentration of Credit Risk - Substantially all of the accounts receivable are from three major customers from its tubing segment and three major customers from its seat track segment, 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. D. Revenues - The Company recognizes revenue from automotive tubes and seat tracks upon shipment. E. 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. F. 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 three to forty years. Depreciation charged to operations was $257,412 and $275,516 for the years ended August 31, 2004 and 2003, 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. G. 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, 2004 and 2003 consisted of the following: 2004 2003 --------- --------- Raw Material $ 436,171 $ 320,464 Work in Process 168,526 136,435 Finished Goods 282,611 150,806 --------- --------- $ 887,308 $ 607,705 --------- --------- H. In accordance with SFAS No. 144, 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 Company had no impairment of assets during the years ended August 31, 2004 and 2003. ================================================================================ -19- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 1. Summary of Significant Accounting Policies (Continued) - --------------------------------------------------------------- I. Major Suppliers - At August 31, 2004 and 2003 59% and 50%, respectively of the accounts payable - trade was to five major suppliers of aluminum and steel tubing. The Company believes there is no potential risk pertaining to the major suppliers. At August 31, 2004 and 2003, 63% and 69%, respectively of the accounts payable - trade was to five major suppliers of seat track components. J. 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. K. 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. L. Fair Value of Financial Instruments - The Company's financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, line of credit and long-term debt. The carrying value of these instruments approximates their estimated fair value. M. New Accounting Pronouncements - In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entitles - an interpretation of ARB No. 51". This interpretation addresses the consolidation of variable interest entities ("VIEs") and its intent is to achieve greater consistency and comparability of reporting between business enterprises. It defines the characteristics of a business enterprise that qualifies as a primary beneficiary of a variable interest entity. In December 2003, the FASB issued a modification to FIN 46, titled FIN 46R. FIN 46R delayed the effective date for certain entitles and also provided technical clarifications related to implementation issues. In summary, a primary beneficiary is a business enterprise that is subject to the majority of the risk of loss from the VIE, entitled to receive a majority of the VIE's residual returns, or both. The Company is required to adopt FIN No. 46 by no later than the beginning of the first period beginning after December 15, 2004. FIN No. 46 also requires certain disclosures in financial statements regardless of the date on which the VIE was created if it is reasonably possible that the business enterprises will be required to disclose the activity of the VIE once the interpretation becomes effective. The Company adopted FIN No. 46 on September 1, 2003 and determined that it did not have an impact to its financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement clarifies and defines how certain financial instruments that have both the characteristics of liabilities and equity be accounted for. Many of these instruments that were previously classified as equity will now be recorded as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and must be adopted for financial statements issued after June 15, 2003. As of December 31, 2003, the Company has not identified any financial instruments that fall within the scope of SFAS No 150, thus the adoption of SFAS No. 150 does not have a material impact on the accompanying financial statements or results of operations. In December 2003, the Securities and Exchange Commission issued SAB No. 104 "Revenue Recognition". This SAB revises or rescinds certain portions of interpretative guidance included in Topic 13 of the codification of staff accounting bulletins. These changes make SAB 104 guidance consistent with current accounting regulations promulgated under U.S. generally accepted accounting principles. The adoption of SAB No. 104 did not have a material impact on the accompanying financial statements or results of operations. -20- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 2. Prepaid Expenses The following is a detail of the prepaid expenses as of August 31, 2004 and 2003: 2004 2003 --------- ---------- Prepaid Insurance $ 39,579 $ 43,524 Prepaid Taxes 7,036 7,914 --------- ---------- Total Prepaid Expenses $ 46,615 $ 51,438 ========= ========== Note 3. Property and Equipment The major components of property and equipment are as follows: 2004 2003 ---------- ---------- Land $ 24,847 $ 24,847 Land Improvements 19,158 19,158 Buildings and Improvements 1,506,910 1,496,910 Machinery and Equipment 2,366,070 2,258,788 Furniture and Fixtures 170,655 164,061 Transportation Equipment 65,829 117,391 Obligations Under Capital Leases 208,133 134,898 ---------- ---------- 4,361,602 4,216,053 Less: Accumulated Depreciation 2,747,338 2,551,260 ---------- ---------- Net Property and Equipment $1,614,264 $1,664,793 ========== ========== Note 4. Intangible Assets Intangible assets at August 31, 2004 and 2003 consisted of the following: Amortization Amortized Intangibles Period 2004 2003 Goodwill ------------- ---------- ---------- 7 Years $ 14,000 $ 14,000 Accumulated Amortization 9,352 9,352 ---------- ---------- Balance, net 4,648 4,648 Unamortized Pension Benefit Obligation From Transition And Prior Service Cost (See Note 13) 66,861 56,313 ---------- ---------- $ 71,509 $ 60,961 ========== ========== Amortization expenses on goodwill for the years end August 31, 2004 and 2003 was $-0- and $-0-, respectively. Effective September 1, 2002, the Company adopted Statement of Financial Accounting Standards No 142, "Goodwill and Other Intangible Assets" (SFAS 142) Under SFAS 142, the Company's goodwill is deemed to have an indefinite useful life; therefore, the Company ceased amortization effective September 1, 2002. The Company determined that the carrying amount of its goodwill did not exceed its fair market and that no impairment loss on its goodwill has been realized during the years ended August 31, 2004 and 2003. -21- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 5. Accrued Expenses The following is a detail of the current accrued expenses as of August 31, 2004 and 2003. 2004 2003 --------- --------- Accrued Insurance $ 26,440 $ 21,381 Accrued Interest - Other 4,609 3,622 Accrued Interest - Related Parties 86,386 83,164 Accrued Payroll 90,880 59,959 Accrued and Withheld Payroll Taxes 32,207 15,902 Accrued Pension Benefit Cost 44,556 53,165 Accrued Minimum Pension Liability 98,134 56,313 Accrued Professional Fees 27,100 27,300 Accrued Taxes - Other 44,340 21,913 --------- --------- Total Current Accrued Expenses $ 454,652 $ 342,719 ========= ========= Note 6. Notes Receivable 2004 2003 --------- --------- Notes receivable from related companies, through common ownership at 6% per annum. The notes are unsecured and due on demand. $ 26,084 $ 164,692 Non-interest bearing note receivable from a joint venture partner. The Note is unsecured and due on demand. 399 3,224 Non-interest bearing note receivable from an unrelated entity. The note is unsecured on due no later than December 31, 2004. 61,581 -0- Non-interest bearing note receivable from a joint venture partner, net of $28,858 of loss joint venture allocated against loan - See Note 18. The Note is unsecured and due on demand. -0- 37,024 --------- --------- $ 88,064 $ 204,940 ========= ========= -22-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS =============================================================================================================== August 31, 2004 and 2003 Note 7. Notes Payable and Obligations Under Capital Leases Notes payable and obligations under capital leases consist of the following: 2004 2003 ---------- ---------- A. Notes payable - directors, officers, shareholders and their affiliates, bearing interest at 12% per annum. The notes are payable on demand and are unsecured. $ 26,850 $ 26,850 B. $600,000 Line of Credit - Bank, interest payable in monthly installments at the lender's prime rate plus 1%. Principal is due September 1, 2004. Note is secured by all the assets of the Company. The interest rate at August 31, 2004 was 5.5%. 599,761 354,761 C. Obligation Under Capital Lease - machinery, payable in monthly installments of $1,708 through April, 2009 including interest at 14.65%. Secured by the machinery. 68,126 -0- D. Obligation Under Capital Lease - machinery, payable in monthly installments of $1,282 through May, 2004 including interest at 7.88%. Secured by the machinery. -0- 11,189 E. Loan Payable - Bank, payable in monthly installments of $16,546 including, interest at 3.25% above Libor, through May 2006. The note is secured by all the assets of the Company. The interest rate at August 31, 2004 was 5.35%. 301,116 478,066 F. Note Payable - Finance Company, payable in monthly installments of $578 with no interest through September, 2008. Secured by transportation equipment. 28,327 -0- G. Note Payable - Employee, payable on demand with no interest. The note is unsecured. 8,000 -0- --------- --------- Total 1,032,180 870,866 Amounts due within one year 839,789 570,007 $ 192,391 $ 300,859 The debt and capital lease maturities for the next five years are as follows: August 31, 2005 $ 839,789 August 31, 2006 134,078 August 31, 2007 21,991 August 31, 2008 24,351 August 31, 2009 11,971 ---------- $1,032,180 ========== Interest expense for the years ended August 31, 2004 and 2003 totaled $49,993 and $73,214, respectively. Interest expense on obligations under capital leases for the years ended August 31, 2004 and 2003 was $4,059 and $1,460, respectively. Depreciation expense of equipment held under capital leases for the years ended August 31, 2004 and 2003 was $6,752 and $4,311, respectively. Note 8. Loan Covenants Under the terms of the loan agreement with the bank the Company must maintain certain restrictive financial covenants, including: 1) maintaining certain minimum levels of tangible net worth; 2) maintaining a debt leverage ratio and 3) maintaining a debt service coverage ratio. As of August 31, 2004, the Company was not in compliance with its covenants. -23-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 9. Per Share Computation Earnings per share have been calculated based on the weighted average number of shares outstanding. The weighted average number of shares used in computing net income per share was 10,862,773 and 7,205,310 for the years ended August 31, 2004 and 2003, respectively. Note 10. Income Taxes The provision for income taxes consists of the following components: 2004 2003 --------- --------- Current: Current Due (Refundable) $ (245) $ (59,658) Deferred (16,000) (41,300) --------- --------- Net Tax Expense (Benefit) $ (16,245) $(100,958) ========= ========= Differences between income taxes calculated using federal statutory income tax rate of 34% and the provision for income taxes were as follows: 2004 2003 --------- --------- Income (Loss) Before Income Taxes $(331,689) $(364,197) ========= ========= Statutory Federal Income Tax $(112,774) $(123,827) State Income Tax, Net of Federal Benefit (83) (517) Foreign Losses Not Benefited -0- 610 (Gain)Losses From Joint Ventures Not Benefited (16,478) 8,830 Non-deductible Expenses 4,729 1,484 Valuation Allowance on Deferred Tax Asset 108,200 -0- Other, Net 161 12,462 --------- --------- Total $ (16,245) $(100,958) ========= ========= During the year ended August 31, 2003, the Company incurred a net operating loss for federal income tax purposes of $289,979, which it has elected to carry-back to prior years resulting in a tax refund of $58,900. As of August 31, 2004, the Company has an unutilized net operating loss carryforwards of $529,104 which will expire as follows: August 31, 2023 $ 95,937 August 31, 2024 433,167 -------- $529,104 ======== -24- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 10. Income Taxes - (Continued) Deferred taxes are detailed as follows: 2004 2003 --------- --------- Deferred Income Tax Liability - Depreciation $ 86,500 $ 63,600 --------- --------- Deferred Income Tax Assets Accrued Expenses 13,700 15,000 Net Operating Loss Carry-forward 179,900 32,600 Valuation Allowance (108,200) -0- --------- --------- Net Deferred Income Tax Asset 86,500 47,600 --------- --------- Net Deferred Income Taxes $ -0- $ 16,000 ========= ========= The valuation allowance is evaluated at the end of each year, considering positive and negative evidence about whether the asset will be realized. At that time the allowance will either be increased or reduced; reduction would result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets will be fully utilized. The value of the deferred tax asset has been reduced due to the uncertainty the company will utilize all of its net operating loss carrforward. Note 11. Related Party Transaction As disclosed in Note 6 to the financial statements, the Company has notes receivable from related entities through common ownership. Amounts owed to the Company as of August 31, 2004 and 2003 totals $26,084 and $164,692, respectively. Accrued interest owed on these notes as of August 31, 2004 and 2003 totaled $8,642 and $2,446. Interest income accrued for the years ended August 31, 2004 and 2003 was $6,196 and $9,299, respectively. As disclosed in Note 7 to the financial statements, certain directors, officers, shareholders and their affiliates are major creditors of the Company. Amounts due as of August 31, 2004 and 2003 totaled $26,850 and $26,850, respectively. Interest accrued on these notes at August 31, 2004 and 2003 totaled $86,386 and $83,164, respectively. Interest expense accrued for the years ended August 31, 2004 and 2003 was $3,222 and $23,462, respectively. On August 28, 2003, the Company issued common stock in lieu of payment of accrued interest due and related debt. See Note 19. Note 12. Cash Flow Disclosures Interest and income taxes paid during the years ended August 31, 2004 and 2003 were as follows: 2004 2003 -------- -------- Interest $ 45,784 $ 51,911 ======== ======== Income Taxes $ 59,545 $ 64,352 ======== ======== Interest income and income taxes received during the years ended August 31, 2004 and 2003 was as follows: 2004 2003 -------- -------- Interest $ -0- $ 6,985 ======== ======== Income Taxes $ 59,595 $ -0- ======== ======== -25- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 12. Cash Flow Disclosures (Continued) During the year ended August 31, 2004, the Company acquired equipment under a capital lease in the amount of $73,235. During the year ended August 31, 2003, the Company issued 3,687,773 shares of its common stock in lieu of repayment of outstanding notes and accrued interest to certain directors, officers and shareholders amounting to $380,403 and $541,541, respectively. Note 13. 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, 2004 and 2003 was $32,528 and $36,479, respectively. Pension contributions accrued to the plan at August 31, 2004 and 2003 were $44,556 and $53,165, respectively. As of August 31, 2004 the defined benefit pension plan is funded in accordance with ERISA. The following table sets forth the plan's change in benefit obligation and plan assets, its funded status and amounts recognized in the Company's statement of financial position at August 31, 2004 and 2003. 2004 2003 --------- --------- Change in Benefit Obligation: Benefit Obligation at Beginning of Year $ 244,089 $ 278,092 Service Cost 24,296 27,727 Interest Cost 13,968 15,564 Acturial (Gain) Loss During the Year 35,371 -0- Benefits Paid (18,645) (77,294) --------- --------- Benefit Obligation at End of Year $ 299,079 $ 244,089 ========= ========= Change in Plan Assets Fair Value of Plan Assets at Beginning of Year $ 134,611 $ 177,558 Actual Return on Plan Assets (714) (1,871) Employer Contributions 41,137 36,218 Benefits Paid (18,645) (77,294) --------- --------- Fair Value of Plan Assets at End of Year $ 156,389 $ 134,611 ========= ========= 100% of plan assets are invested in short term investments of Lincoln Life Insurance Company. -26-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ======================================================================================================= August 31, 2004 and 2003 Note 13. Defined Benefit Pension Plan - (Continued) 2004 2003 -------- --------- Funded Status Projected benefit obligation for service rendered to date $ 299,079 $ 244,089 Plan assets at fair value 156,389 134,611 --------- --------- Projected benefit obligation below (in excess of) plan assets 142,690 109,478 Unrecognized net gain from past experience different from that assumed and effect of changes in assumptions (31.273) 14,265 Prior service cost not yet recognized in net periodic pension cost (41,792) (44,115) Unrecognized net obligation at date of initial application of FAS-87 (25,069) (26,463) --------- --------- (Prepaid) accrued cost $ 44,556 $ 53,165 ========= ========= Minimum Pension Liability: Projected benefit obligation below (in excess of) plan assets $ 142,690 $ 109,478 Accrued Benefit Cost (44,556) (53,165) --------- --------- Additional Minimum Pension Liability $ 98,134 $ 56,313 ========= ========= Intangible Assets: Unrecognized obligation from transition $ 25,069 $ 26,463 Unrecognized prior service cost 41,792 44,115 --------- --------- Maximum Intangible Asset $ 66,861 $ 70,578 ========= ========= Actual Intangible Asset (Lesser of Maximum Intangible Assets or Minimum Pension Liability) $ 66,861 $ 56,313 ========= ========= Amounts Recognized in Statement of Financial Position: Accrued Benefit Cost (44,556) $ (53,165) Accrued Minimum Pension Liability (98,134) (56,313) Intangible Asset 66,861 56,313 Accumulated Other Comprehensive Income 31,273 -0- --------- --------- Net Amount Recognized (44,556) $ (53,165) ========= ========= -27-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ===================================================================================================== August 31, 2004 and 2003 Note 13. Defined Benefit Pension Plan - (Continued) 2004 2003 ------- ------- Weighted -Average Assumptions as of August 31: Discount Rate 6.0% 6.5% Expected Return on Plan Assets 7.0% 7.0% ------- ------- Net pension cost for 2004 and 2003 includes the following components: Service cost - benefits earned during the period $24,296 $27,727 Interest cost on projected benefit obligation 13,968 15,564 Expected return on plan assets (9,453) (10,529) Amortization of Actuarial Gains and Net Transition Asset 3,717 3,717 ------- ------- Net periodic pension costs $32,528 $36,479 ======= ======= Benefits expected to be paid in each of the next five years and in aggregate for the five fiscal years thereafter is as follows: August 31, 2005 $ 25,000 August 31, 2006 325,000 August 31, 2007 -0- August 31, 2008 -0- August 31, 2009 -0- August 31, 2010 through 1014 -0- -------- $350,000 ======== Note 14. 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 15. Foreign Subsidiary In March 1999, the Company established HTF, Ltd., a new subsidiary, located in St. Thomas, Ontario, Canada. HTF, Ltd. services a major customer by arranging various automotive tubing parts in a specific order as requested by its customers. The parts used are manufactured and sold by KnuSaga Corporation, its parent corporation. During the year ended August 31, 2002, HTF, Ltd. closed its plant in St. Thomas and ceased operations (See Note 20). -28-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 16. Lease Obligation - -------------------------- The Company leases a facility in Imlay City, Michigan for its seat track operations. The lease requires minimum monthly payments of $4,200, in addition to property taxes, insurance and maintenance. The lease expires January, 2006. Total rents paid during the years ended August 31, 2004 and 2003 were $51,074 and $47,478, respectively. Future minimum lease obligations under all operating leases are as follows: August 31, 2005 $ 50,400 August 31, 2006 21,000 August 31, 2007 -0- August 31, 2008 -0- August 31, 2009 -0- -------- $ 71,400 ======== 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. Below is summarized segmental data for the years ended August 31, 2004 and 2003. Tubing Seat Track Total 2004 2003 2004 2002 2004 2003 ----------------------------------------------------------------------------------------- External Revenue 4,838,512 3,766,487 1,390,827 1,535,355 6,229,339 5,301,842 Intersegment Revenue 2,082 -0- 22,093 14,655 24,175 14,655 Interest Revenue 6,196 9,431 -0- -0- 6,196 9,431 Interest Expense 49,993 73,214 -0- -0- 49,993 73,214 Depreciation and Amortization 195,434 219,857 61,978 55,659 257,412 275,516 Profit (Loss) (454,386) (534,267) 97,376 170,679 (357,010) (363,588) Total Assets 3,663,587 3,043,148 366,217 498,513 4,029,804 3,541,661 Expenditures for Long-Lived 231,939 12,029 64,787 60,650 296,426 72,679 Assets Loss from Discontinued -0- (610) -0- -0- -0- (610) Operations The tubing segment derives its revenues from the sale of automotive tubing in the production process of the automobile industry. The seat track segment derives its revenues from the sale of adjustable seat tracks to recreation vehicle manufacturers and van converters. 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. During the years ended August 31, 2004 and 2003, three and two customers accounted for 76% and 74%, respectively, of the Company's tubing segment net sales. One customer accounted for 64% and 62%, respectively, of net sales. During the years ended August 31, 2004 and 2003, three customers accounted for 86% and 83%, respectively, of the Company's seat track segment net sales. -29-
KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 18. Investment in Other Entities A. In October 2000, the Company entered into a joint venture (Modular Tubes Systems S.A. de C.V., a Mexico Corporation) (MTS) with an unrelated entity in Mexico City, Mexico. The joint venture will manufacture automotive tubing primarily for Ford Motor Company. The Company owns 50% of the joint venture. During the years ended August 31, 2004 and 2003, the Company invested $-0- and $-0-, respectively. The Company accounts for its investment in MTS using the equity method of accounting. A summary of financial information for MTS is as follows: 2004 2003 --------- --------- Current Assets $ 126,351 $ 4,202 Noncurrent Assets 162,792 172,957 --------- --------- Total Assets 289,143 177,159 --------- --------- Current Liabilities 49,238 470 Noncurrent Liabilities -0- -0- --------- --------- Total Liabilities 49,238 470 --------- --------- Shareholders' Equity $ 239,905 176,689 ========= ========= Company's Equity Investment $ 128,914 $ 103,592 ========= ========= Revenues $ 108,232 $ -0- Operating Expenses 12,488 66 --------- --------- Operating Income $ 95,744 $ (66) ========= ========= Operating Cash Flow $ (11,863) $ (66) ========= ========= Net Income Available to members $ 63,312 $ (66) ========= ========= Company's Equity Income $ 31,656 $ (33) ========= ========= B. In May 2001, the Company formed a limited liability company (Sport Vehicles, LLC, a Michigan limited liability company) (SV), with the Company's president. SV manufactures kits used to modify motorcycles into Indy-style three-wheel vehicles. During the years ended August 31, 2004 and 2003, the company contributed $-0- in cash and materials. The Company has a 33% ownership. The Company accounts for its investment in SV using the equity method of accounting. A summary of financial information for SV is as follows: 2004 2003 --------- --------- Current Assets $ 15,304 $ 18,755 Noncurrent Assets -0- -0- --------- --------- Total Assets 15,304 18,755 --------- --------- Current Liabilities 1,399 3,646 Noncurrent Liabilities -0- -0- --------- --------- Total Liabilities 1,399 3,646 --------- --------- Partners' Capital 13,905 $ 15,109 ========= ========= Company's Equity Investment $ 6,367 $ 6,764 ========= ========= -30- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 18. Investment in Other Entities (Continued) 2004 2003 -------- -------- Revenues $ 47,675 $ 21,340 Cost of Goods Sold 34,267 31,325 -------- -------- Gross Profit 13,408 (9,985) -------- -------- Operating Loss $ (1,203) $(16,277) ======== ======== Operating Cash Flow $ 260 $ 1,151 ======== ======== Net Loss Available to members $ (1,203) $(16,277) ======== ======== Company's Equity Loss $ (397) $ (5,372) ======== ======== C. During the year ended August 31, 2003, the Company entered into a joint venture (Invisiguard, LLC, a Michigan limited liability company) (IVG) with an unrelated entity. IVG is testing and marketing a laminated glass product to be used in automobiles. The glass is a high intrusion projection glass which is harder to shatter compared to traditional tempered glass windows. The company has an exclusive distributor agreement with its supplier for a major automotive manufacturer. During the years ended August 31, 2004 and 2003, the company contributed $490 and $-0- in cash. In addition, the Company also loaned $25,562 and $65,881, respectively, to IVG. The Company had a 49% ownership. During the year ended August 31, 2004, the Company sold its interest in IVG and settled the amounts loaned for a total of $81,580. As of August 31, 2004, $61,580 is still outstanding and is due no later then December 31, 2004. . The Company accounts for its investment in IVG using the equity method of accounting. A summary of financial information for IVG is as follows: 2004 2003 -------- -------- Current Assets $ 6,922 Noncurrent Assets -0- -------- -------- Total Assets 6,922 -------- -------- Current Liabilities 66,325 Noncurrent Liabilities -0- -------- -------- Total Liabilities 66,325 Partners' Capital (Deficit) $(59,403) ======== ======== Company's Equity Investment N/A $ -0- ======== ======== Revenues $ -0- Cost of Goods Sold -0- -------- -------- Gross Profit -0- ======== ======== Operating Loss N/A $(59,893) ======== ======== Operating Cash Flow N/A $(65,881) ======== ======== Net Loss Available to members N/A $(59,893) ======== ======== Company's Equity Loss N/A $(29,348) ======== ======== During the year ended August 31, 2004, the Company recognized a gain of $18,995 on the sale of its interest in IVG and settlement of notes receivable. During the year ended August 31, 2003, the Company recognized $28,858 of its equity loss from IVG against its note receivable. See Note 6. -31- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 19. Conversion of Shareholder Debt to Stock As discussed in Notes 5,7 and 11, the company had outstanding as of August 31, 2002 principal and accrued interest on notes payable to various directors, officers, shareholders and their affiliates in the amounts of $407,253 and $601,242 respectively. On November 13, 2000, the company's board of directors approved in principle authorization of additional shares of common stock and issuance of shares to these directors, officers, shareholders and their affiliates in satisfaction of this debtedness. On May 15, 2002, the Company issued an exchange agreement to convert the principal and accrued interest to additional shares of common stock. On August 28, 2003, the Company issued 3,687,773 shares of its $.001 par value common stock in lieu of payment of principal and accrued interest of $380,403 and $541,541, respectively, with an effective date of May 15, 2002. In finalizing the exchange of stock, not all shareholders agreed to convert all their debt and accrued interest to stock. As of August 31, 2004 and 2003, the Company still owed $26,850 of debt and $86,386 and $83,164 of accrued interest, respectively. Note 20. Discontinued Operations During the year ended August 31, 2002, the Company's foreign subsidiary (HTF, Ltd.) discontinued its operations. This disposal has been accounted for as a discontinued operation and, accordingly, its net assets (liabilities) have been segregated from continuing operations in the accompanying consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of income and cash flows. Information relating to the discontinued operations of HTF, Ltd. for the years ended August 31, 2004 and 2003 is as follows: 2004 2003 ------- ------- Sales, net $ -0- $ -0- Cost of Sales -0- -0- ------- ------- Gross Profit -0- -0- Selling, General and Administrative Expenses -0- 610 Operating Loss -0- (610) ------- ------- Other Income (Expense) Miscellaneous Income -0- -0- Loss on Sale of Assets -0- -0- ------- ------- Total Other Income (Expense) -0- -0- ------- ------- Operating Income (Loss) $ -0- $ (610) ======= ======= There were no assets and liabilities of the discontinued operations of HTF, Ltd. included in the accompanying consolidated balance sheets as of August 31, 2004 and 2003. -32- KNUSAGA CORPORATION AND SUBSIDIARY DBA HYDRAULIC TUBES AND FITTINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ August 31, 2004 and 2003 Note 21. Subsequent Events In September 2004, the Company's line of credit agreement with the bank was extended to October 25, 2004. The Company is currently working with the bank's work-out group to repay the loan. The bank has not enforced any collection activity. During the years ended August 31, 2004 and 2003, the Company incurred net losses of $340,765 and $262,630, respectively, which is attributable to its tubing operations. In September 2004, due to these continued losses, the Company announced to its customers and employees that will be liquidating its tubing operations. Under the Company's plan of liquidation, it will continue production through December 31, 2004 to provide customers time to find new suppliers for its parts. Upon ceasing production, the Company plans to sell its machinery and equipment through an auction and put its real estate up for sale. The Company is also willing to discuss the potential sale of the tubing business with a willing buyer. The Company anticipates that it will realize enough proceeds from the sale of its assets to satisfy all of its obligations. Note 22. Going Concern Because of the factors discussed in Note 21, as well as the uncertain conditions that the Company faces relative to its plan of liquidation and lagging sales in its seat track operations, it has created an uncertainty as to the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company's successful liquidation or sale of its tubing operations and its ability to increase sales in its seat track operations. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. -33- EX-31.1 2 knusagaexhib311-083104.txt CERTIFICATION OF CEO PER SECTION 302 EXHIBIT 31.1 KNUSAGA CORPORATION CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, James G. Musser, certify that: 1. I have reviewed this annual report on Form 10-KSB of KnuSaga Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant is made known to us, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in theRegistrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 24, 2004 /s/ James G. Musser - ----------------------------- James G. Musser Chief Executive Officer EX-31.2 3 knusagaexhib312-083104.txt CERTIFICATION OF CFO PER SECTION 302 EXHIBIT 31.2 KNUSAGA CORPORATION CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, Jerry Luptak, certify that: 1. I have reviewed this annual report on Form 10-KSB of KnuSaga Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant is made known to us, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 24, 2004 /s/ Jerry Luptak - ----------------------------- Jerry Luptak Chief Financial Officer EX-32.1 4 knusagaexhib321-083104.txt CERTIFICATION OF CEO PER SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of KnuSaga Corporation ("KnuSaga") on Form 10-KSB for the period ending August 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James G. Musser, President, Chief Executive Officer of KnuSaga and a member of the Board of Directors, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly represents, the financial condition and result of operations of the Company. /s/ James G. Musser - --------------------------- James G. Musser Chief Executive Officer November 24, 2004 EX-32.2 5 knusagaexhib322-083104.txt CERTIFICATION OF CFO PER SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of KnuSaga Corporation ("KnuSaga") on Form 10-KSB for the period ending August 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry Luptak, Vice President, Finance, General Counsel, and Chief Financial Officer of KnuSaga, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly represents, the financial condition and result of operations of the Company. /s/ Jerry Luptak - --------------------------- Jerry Luptak Chief Financial Officer November 24, 2004 -----END PRIVACY-ENHANCED MESSAGE-----