SETCO AUTOMOTIVE (NA), INC.

FINANCIAL STATEMENTS
March 31, 2016 and 2015

Members of:
American Institute of Certified Public Accountants
AICPA Center for Public Company Audit Firms
AICPA Governmental Audit Quality Center
AICPA Employee Benefit Plan Audit Quality Center
Tennessee Society of Certified Public Accountants
Kentucky Society of Certified Public Accountants

Offices in Tennessee & Kentucky

Ind

nd n A d

165 Peppers Dr.

Paris, TN 38242
Phone 731.642.0771
Fax 731.642.9795
www.atacpa.net

To the Board of Directors and Stockholders

Setco Automotive (NA), Inc.
Paris, Tennessee
We have audited the accompanying financial statements of Setco Automotive (NA), Inc. (a Delaware
corporation), which comprise the balance sheets as of March 31, 2016 and 2015, and the related statements of
operations, changes in retained earnings, and cash flows for the years then ended, and the related notes to the
financial statements.
Mana

r h F nanc a S a

Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
A d

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
qualified audit opinion.
a

dO n n

As more fully described in Note 1, E, accounting principles generally accepted in the United States of America
require that research and development expenses be expensed when incurred. Management has informed us
that these expenses are being amortized over three years in order to comply with generally accepted
accounting principles in the United Kingdom. If accounting principles generally accepted in the United States of
America had been followed for the year ended March 31, 2016, net income would increase by $240,820 and
assets as of March 31, 2016 would decrease by $355,898. For the year ended March 31, 2015, net income
would decrease by $182,340 and assets as of March 31, 2015, would decrease by $596,717.

-1-

dO n n

In our opinion, except for the effects of amortizing research and development costs as discussed in the Basis
for Qualified Opinion paragraph, the financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of Setco Automotive (NA), Inc. as of March 31, 2016 and 2015, and the
results of its operations and its cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Sincerely,

Alexander Thompson Arnold PLLC

Paris, Tennessee
May 3, 2016

-2-

SETCO AUTOMOTIVE (NA), INC.

ALANCE S EETS
March 31, 2016 and 2015

2016
ASSETS
Current assets
Cash
Accounts receivable
Inventory
Other current assets
Total current assets

Property and equipment

Land and buildings
Machinery and equipment
Total property and equipment
Less accumulated depreciation
Net property and equipment
Other assets
Deferred research and development costs
Deferred income tax asset
oodwill
Total other assets
T a a
LIA ILITIES
Current liabilities
Accounts payable
Notes payable, current portion
Accrued and withheld payroll taxes
Accrued expenses
Accrued warranty
Total current liabilities

148,070
842,085
4,289,580
67,630
5,347,365

2015

262,674
1,149,688
4,594,355
30,227
6,036,944

1,159,390
1,511,967
2,671,357
(1,553,270)
1,118,087

1,135,441
1,453,187
2,588,628
(1,449,657)
1,138,971

355,898
329,157
1,281,000
1,966,055

596,717
2,760
1,281,000
1,880,477

, 31,50

,056,3 2

770,948
3,493,518
29,383
138,115
15,000
4,446,964

934,342
3,325,887
12,598
95,021
15,000
4,382,848

Long term liabilities

Notes payable, net of current portion
Due to affiliates
Total long term liabilities
Total liabilities

51,078
2,675,390
2,726,468
7,173,432

39,183
3,019,722
3,058,905
7,441,753

STOC OL E S E UIT
Common stock
etained earnings (deficit)
Total stockholders equity

1,500,000
(241,925)
1,258,075

1,500,000
114,639
1,614,639

, 31,50

,056,3 2

T a

and

c h d r

The accompanying notes are an integral part of these financial statements.

-3-

SETCO AUTOMOTIVE (NA), INC.

STATEMENTS OF O E ATIONS
For the years ended March 31, 2016 and 2015
2016

2015

Sa

5,5

,201

100.00

Cost of sales
Material cost
Labor cost
Other manufacturing costs
Total cost of sales

2,177,375
663,876
374,117
3,215,368

39.25
11.97
6.74
57.96

3,176,493
721,666
518,264
4,416,423

41.54
9.44
6.78
57.75

2,331, 33

2.0

3,231,165

2.25

916,554
354,594
140,411
114,958
240,820
8,057
28,074
103,221
52,935
83,168
29,205
166,428
56,186
135,156
85,613
2,515,380

16.52
6.39
2.53
2.07
4.34
0.15
0.51
1.86
0.95
1.50
0.53
3.00
1.01
2.44
1.54
45.35

886,435
377,344
154,075
124,206
62,871
10,068
30,961
80,361
113,885
101,482
28,750
125,966
58,190
204,772
10,207
2,369,573

11.59
4.93
2.01
1.62
0.82
0.13
0.40
1.05
1.49
1.33
0.38
1.65
0.76
2.68
0.13
30.98

Operating expenses
Salaries and wages
Employee benefits
Payroll taxes
Depreciation
Amortization
ent
Communications
Advertising
Shipping
Taxes and licenses
Supplies
Travel
Insurance
Professional fees and outside services
Other operating expenses
Total operating expenses

,6

,5

100.00

Income (loss) from operations

(183,547)

(3.31)

861,592

11.27

Other income (expense)

Foreign exchange gain
Other income
ain on sale of fixed assets
Bad debts
Interest expense
Total other expense

75,511
3,308
3,251
(1,457)
(554,006)
(473,393)

1.36
0.06
0.06
(0.03)
(9.99)
(8.53)

63,348
18,500
(39,767)
(598,590)
(556,509)

0.83
0.24
(0.52)
(7.83)
(7.28)

Income (loss) before provision for income taxes

Provision (benefit) for income taxes

(656,940)
(300,376)

(11.84)
(5.41)

305,083
124,399

3.99
1.63

(356,56 )

(6. 3)

1 0,6

2.36

nc

The accompanying notes are an integral part of these financial statements

4-

SETCO AUTOMOTIVE (NA), INC.

STATEMENTS OF C AN ES IN ETAINE EA NIN S
For the years ended March 31, 2016 and 2015
2016
etained earnings beginning (deficit)
Net income (loss)
a n d arn n

nd n (d

c )

114,639
(356,564)
(2 1, 25)

The accompanying notes are an integral part of these financial statements

-5-

2015
$

(66,045)
180,684
11 ,63

SETCO AUTOMOTIVE (NA), INC.

STATEMENTS OF CAS FLO S
For the years ended March 31, 2016 and 2015
2016
Ca h F
r
O ra n Ac
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation
Amortization
Bad debts
Deferred income taxes
(Increase) decrease in assets
Accounts receivable
Inventory
Other current assets
Increase (decrease) in liabilities
Accounts payable
Accrued and withheld payroll taxes
Other accrued expenses
Net cash provided by operating activities

(356,564)

2015
$

180,684

114,958
240,820
1,457
(326,397)

124,206
62,871
39,767
124,399

306,146
304,775
(37,403)

41,281
62,107
30,685

(163,394)
16,785
43,094
144,277

(34,215)
(30,963)
9,501
610,323

(94,075)
(94,075)

(91,766)
(245,211)
(336,977)

Ca h F
r
F nanc n Ac
Amount borrowed
Payments on debt
Net cash used by financing activities

(164,806)
(164,806)

1,145,230
(1,263,584)
(118,354)

Incr a

(11 ,60 )

Ca h F
r
In
n Ac
Purchase of property and equipment
Deferred research and development costs
Net cash used by investing activities

(d cr a

) n ca h

Cash beginning

n ar n r a
Interest paid
Income taxes paid

107,682

262,674

Cash ending
S

15 ,

148,070

262,674

554,006

598,590

The accompanying notes are an integral part of these financial statements

-6-

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
NOTE 1
A.

SUMMA
r n En

OF SI NIFICANT ACCOUNTIN
and

Acc

OLICIES

n n

The Company sells clutches and other automotive parts throughout the world with the majority of
sales in North America.
The financial statements are prepared on the accrual method of accounting in that revenues are
recognized when earned and expenses are recognized when incurred.
. A

anc

Acc

An allowance for doubtful accounts has not been accrued at this financial statement date. The direct
write off of bad accounts is made at the end of each fiscal year. Although this practice is not in
accordance with generally accepted accounting principles it does not distort the presentation by a
material amount. For the year ended March 31, 2016, bad debts charged off were $1,457. For the
year ended March 31, 2015 bad debts charged off were $39,767.
C. In

n r

Inventories include raw material and finished goods and are stated at the lower of cost (weighted
average) or market. Manufactured finish goods inventory includes all direct costs such as labor and
materials, indirect costs related to production and a capacity charge reflecting other costs incurred at
the facility. Purchased finished goods inventory consists of clutch parts. Inventory has a salability and
obsolescence allowance based upon a historical disposal percentage. Inventory is written off in the
period in which disposal occurs.
.

r ca

Depreciation is charged against income at an amount equal to the estimated cost of usage over the
estimated life of the asset. The Company uses the straight line method of depreciation. The
estimated lives of the classes of assets are
Ca
Buildings
Machinery and equipment
E. A

a dL
39 ears
5 10 ears

esearch and development costs are amortized over three years beginning on April 1, 2013. The
amortization of research and development costs is not in accordance with generally accepted
accounting principles in the United State of America. The Company is in the process of developing
products for customers in Mexico and South America. For the year ended March 31, 2015
development costs of $245,212 were deferred and will be amortized over the next three years. For
the year ended March 31, 2014 development costs of $288,635 were deferred and will be amortized
over three years beginning with the year ended March 31, 2015. Costs of $188,613 incurred during
the year ended March 31, 2013 are being amortized over three years beginning with the year ended
March 31, 2014. No new development costs were incurred for the year ended March 31, 2016.

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
F.

d
oodwill is the excess of the purchase price of the aldex Brake Products, Inc. non core lines over
the amounts assigned to assets acquired and liabilities assumed in that purchase. oodwill is tested
annually for impairment during the fourth quarter and will be tested for impairment between annual
tests if an event occurs or circumstances change that more likely than not would indicate the carrying
amount may be impaired. As of March 31, 2016 and 2015 goodwill is not considered to be impaired.

. Inc

Ta

Income taxes are provided for the tax effects of transactions reported in the financial statements and
consist of state and federal taxes currently due plus deferred taxes related primarily to differences in
the methods of accounting for depreciation and amortization. Different lives and methods of
depreciating and amortizing certain assets are used for tax purposes than are used for financial
statement purposes.
Management has determined that the Company does not have any uncertain tax positions and
associated unrecognized benefits that materially impact the financial statements or related
disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance
that the Companys tax returns will not be challenged by the taxing authorities and that the Company
or its shareholders will not be subject to additional tax, penalties, and interest as a result of such
challenge.
. C nc n ra

Cr d

The Company maintains cash balances in multiple accounts at two banks. Any loss that would have
resulted from that risk at March 31, 2016 for the excess of the deposit liabilities reported by the banks
over the amounts that would have been covered by federal insurance. Concentrations of credit with
respect to trade receivables are limited due to the large number of customers comprising the
Companys customer base. owever, one customer accounted for 49
of the total accounts
receivable balance at March 31, 2016 and 53 of the total accounts receivable balance at March 31,
2015. Credit losses, when realized, have been within the range of the Companys expectations and,
historically, have not been significant.
I.

The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
. Ad

The Company expenses the cost of advertising and other promotional costs as incurred. None of the
expenses included any direct response advertising.
.

arran

The Company policy is to record a liability for estimated warranty expense based on the last two
years historical cost of warranty work.
8

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
L. S

n E

Management has evaluated subsequent events through May 3, 2016, the date the financial
statements were available to be issued.
NOTE 2 INVENTO IES
The following are year end inventories valued at the lower of cost or market
2016
aw material and bought out component inventory
Semi finished component stock
Store and packing material
Finished goods
Less reserve for obsolescence
Total
NOTE 3

(
$

2015

3,160,703
413,398
128,453
662,318
75,292)
4,289,580

(
$

3,400,222
433,124
138,578
697,723
75,292)
4,594,355

NOTES A A LE

Notes payable at March 31, 2016 are as follows

Lender

Principal
Balance

Interest
ate

Bank of Baroda

$ 3,476,206

7.50

Ally Financial
Ford Motor Credit
Total

28,940
39,450
$ 3,544,596

6.34
0.00

Maturity
Date

Collateral

1 31 2017 Accounts receivable,

inventory, equipment, real
estate, corporate
guarantee of Parent,
personal guarantee
of stockholder of Setco,
India
2 27 2022 2016 eep Cherokee
4 08 2019 3 Ford vehicles

Notes payable at March 31, 2015 are as follows

Lender

Principal
Balance

Interest
ate

Bank of Baroda

$ 3,312,825

7.50

Ford Motor Credit

Total

52,245
$ 3,365,070

0.00

Maturity
Date

4 10 2015 Accounts receivable,

inventory, equipment, real
estate, corporate
guarantee of Parent,
personal guarantee
of stockholder of Setco,
India
4 08 2019 3 Ford vehicles
9

Collateral

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
The Company has a $4,000,000 revolving line of credit with the Bank of Baroda. The maximum
borrowing on these notes at any time may not exceed 75 of total inventory plus trade accounts
receivable less trade accounts payable.
The following is the aggregate maturities of all long term borrowings for the next five years
2016
2017
2018
2019
2020
Later
Total
NOTE

3,493,518
17,590
17,886
5,406
5,475
4,721
3,544,596

INCOME TA ES

Provision (benefit) for income taxes consists of the following

2016
Current federal income tax
Deferred federal income tax
Tennessee excise tax
Deferred Tennessee excise tax
Total

$
(

252,787)

(
($

47,589)
300,376)

2015
$

20,776
103,623
124,399

The income tax provision is reconciled to that computed by applying statutory rates to income before
income taxes, as shown below
2016
2015
Income (loss) before income taxes
Expected federal income tax rate
Expected federal income tax
Effect of non deductible expenses
Effect of goodwill amortization
Other adjustments
State income taxes
Total

($
(
(
(
(
($

656,940)
32.42
212,980)
3,307
27,687)
15,427)
47,589)
300,376)

(
$

305,083
32.42
98,907
3,124
27,687)
29,279
20,776
124,399

Deferred tax liabilities have been provided on taxable temporary differences related to accumulated
depreciation. Deferred tax assets have been provided on taxable temporary differences related to net
operating loss carryovers. Deferred tax liabilities and assets consist of the following and have been
netted on the balance sheets
2016
2015
Deferred tax liability depreciation
Deferred tax liability research and development
Deferred tax asset net operating loss

10

83,904
150,320
563,381)

($

329,157)

($

86,755
232,242
321,757)
2,760)

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
The following is a schedule of federal and state net operating loss carryovers to March 31, 2017
ear Expiring
2028
2027
2026
Total
NOTE 5

Federal
$
599,764
281,596
367,982
$
1,249,342

CA ITAL STOC

AN T EASU

Tennessee
$
527,196
88,789
577,239
$
1,193,224

STOC

As of March 31, 2016 the Company s authorized capital stock consists of 1,500 shares of common stock
at $1,000 par value. As of March 31, 2016 and 2015 1,500 shares of common stock had been issued for
a total par value of $1,500,000.
NOTE 6

ETI EMENT LANS

On anuary 1, 2007 the Company adopted identical safe harbor 401K plans for union and non union
employees. All employees employed on anuary 1, 2007 are immediately eligible to participate.
Employees hired after that date will be eligible the first day of the month following one year of
employment if they worked at least 1,000 hours during that year. Employees are 100 vested in all
accounts. Deferrals are permitted up to the maximum amount allowed by the Internal evenue Code and
oth deferrals are also permitted. The plans permit hardship distributions under certain circumstances
and in service distributions are permitted from fully vested accounts once the participant reaches age 59
. The plans allow for a discretionary employer match contribution. There were no employer match
contributions made to the plans for the years ended March 31, 2016 and 2015.
NOTE

ELATE

A TIES

Setco Automotive (NA), Inc. is a wholly owned subsidiary of Setco Automotive (UK), LTD. Setco
Automotive (UK), LTD is a subsidiary jointly owned by Setco Automotive, LTD (20 ) and WEW oldings,
Ltd., Mauritius (80 ). As of March 31, 2016 and 2015 the Company owed the following balances to these
affiliates
2016
2015
Setco Automotive (UK), LTD
Setco Automotive, LTD
Total

2,108,758
566,632
2,675,390

$
$

2,397,395
622,327
3,019,722

The liabilities are the result of cash advances from the related companies and the purchase of inventory.
No repayment terms have been set as of March 31, 2016, and thus are considered to be long term.
Interest is paid on these notes at 12.35 per annum.
For the year ended March 31, 2016 the Company purchased $463,481 of inventory from Setco
Automotive, LTD. For the year ended March 31, 2015 the Company purchased $731,996 of inventory
from Setco Automotive, LTD. At March 31, 2016 accounts payable included $391,231 owed to Setco
Automotive, LTD. At March 31, 2015 accounts payable included $662,331 owed to Setco Automotive,
LTD.

11

SETCO AUTOMOTIVE (NA), INC.

NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
NOTE

CONCENT ATIONS

For the year ended March 31, 2016 the Company had sales to Caterpillar, Inc. and its affiliates of
$2,045,141. For the year ended March 31, 2015 the Company had sales to Caterpillar, Inc. and its
affiliates of $3,239,420.
NOTE

FAI

MA

ET VALUE OF

EAL ESTATE

As of March 31, 2016 the real estate owned by Setco Automotive (NA), Inc. was valued at $1,950,000.
That is $1,114,722 more than book value.

12