<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

        For fiscal year ended August 31, 1998 Commission File No. 0-7795

                               KNUSAGA CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as Specified in its Charter)

            DELAWARE                                    62-1004034
---------------------------------        ---------------------------------------
(State or other jurisdiction             (I.R.S. Employer Identification Number)
of incorporation or organization)

                    3578 S. Van Dyke, Almont, Michigan 48003
                    ----------------------------------------
              (Address of Principal Executive Office and Zip Code)

Registrant's telephone number, including area code: (810) 798-2402
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $.01 Per Share
                     --------------------------------------
                                (Title of Class)

Number of shares outstanding as of August 31, 1998:  7,000,000

Market value of shares held by non-affiliates not available due to lack of
market for stock.

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                         Yes  X          No 
                             ---            ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_____]



                                  Page 1 of 29
<PAGE>   2


                                     PART I

Item 1.   DESCRIPTION OF BUSINESS.

         Knusaga Corporation ("Registrant") was originally incorporated in the
State of Delaware on May 28, 1971. As of its fiscal year ended August 31, 1998,
Registrant was engaged in the fabrication and sale of steel, aluminum and copper
tubes for use in the truck industry and power seat tracks for the automotive
aftermarket.

         During said fiscal year, Registrant shipped some 800 different parts to
the truck market which consisted of various air intake, exhaust and radiator
tubes for medium and large over-the-road trucks. Registrant acquired this line
of business on September 1, 1994, from a group of Registrant's shareholders
through an issuance of 2,601,753 shares of its common stock for all of the
issued and outstanding stock of Hydraulic Tubes and Fittings, Inc., a closely
held Michigan corporation, followed by a merger of Hydraulic Tubes and Fittings,
Inc., into Registrant. At the time of said acquisition, the shareholders of
Hydraulic Tubes and Fittings, Inc., collectively owned 91.26% of the issued and
outstanding common stock of Registrant. Following said acquisition, said
shareholders' ownership of Registrant's common stock increased to 94.51%.

         In January of 1998, Registrant purchased the assets of a seat track
business from ITT Electric Systems, Inc. at a total cost of $314,000. Equipment
and tooling was moved from the ITT facility in Rochester, NY to a facility
leased by the Registrant in Imlay City, MI during January of 1998 and production
of the seat track began in February of 1998.

         In January of 1995, Registrant discontinued its business of selling a
seat unit that was convertible into a bed suitable for use in full size
automotive vans as a result of the loss of its business with Chrysler
Corporation ("Chrysler"), which was its sole original equipment customer for
said item. The convertible seat unit consisted of two bench seats plus a
collapsible dinette table, and the bench seats were convertible so that in
addition to a forward position they could be adjusted for use as a bed, lounge,
or dinette set.

         Registrant had also previously sold a seat unit convertible to a bed
for use in mini vans. The unit consisted of a single seat unit which folded out
to a bed by moving one handle. The Registrant replaced this convertible seat
unit for use in mini vans, which it has supplied to Chrysler since 1985, with a
new design starting in the 1992 model year. During the 1992 through 1994 model
years. Registrant supplied its new mini van convertible seat unit to Magna
International Company ("Magna"), who completed the trim on each such unit and
then supplied the finished product directly to Chrysler. Registrant's sale of
this mini van convertible seat ended in June of 1994 with the end of Chrysler's
1994 mini van model year production.

         During its fiscal year ended August 31, 1995, Registrant also received
royalty payments totaling $128,290 from Magna for a component (a seat riser)
which Magna produced and supplied to Chrysler under a patent licensed from the



                                  Page 2 of 29
<PAGE>   3

Registrant, beginning with the 1992 model year. The royalty payments from Magna
for the use of the patent ended in May of 1995 as a result of Chrysler's
introduction of its redesigned mini vans.

         The principle customer for Registrant's air intake, exhaust and
radiator tubes was Ford Motor Company ("Ford"), which accounted for 87% of
Registrant's sales for said products during its fiscal year ended August 31,
1997. Of those sales, 76% were for parts to be used as original equipment on
flat bed, stake and semi tractor trucks and 11% were for parts to be used as
replacement parts. Registrant's second biggest customer was Nova Bus, which
accounted for 7% of Registrant's sales for said products during said fiscal
year. In the fiscal year ending August 31, 1998 a new product, seat tracks,
accounted for 27% of sales. Ford accounted for 59% of tube sales and a new
customer, Freightliner Corporation, accounted for 19% of tube sales in the
fiscal year ending August 31, 1998.

         Service Steel, Michigan Extrude Aluminum and United Industries are
Registrant's three largest suppliers. Registrant issues periodic purchase orders
to its suppliers for specific quantities on an as needed basis, which for
purchases from Michigan Extrude Aluminum and United Industries are generally for
six to eight week projected requirements. Such purchase orders represent the
only enforceable formal agreement between the Registrant and its suppliers.

         The Registrant is a tier one supplier to Ford, Freightliner, and Volvo
and deals with each on a just-in-time inventory basis from a rolling ten to
fifteen working day firm shipping schedule.

         The Registrant's customers issue purchase orders to the Registrant for
specific parts. As with Registrant's purchase orders to its vendors, customer
purchase orders represent the only enforceable formal agreement between the
Registrant and each company with respect to Registrant's products.

         Registrant's firm order backlog is just ten to fifteen working days.

         There are several competitors in the truck metal tube fabricating
business, with Northern Tube being Registrant's major competitor for Ford's
medium and large over-the-road truck tube business. Truck suppliers compete on
the basis of price, quality, technology and on-time delivery.

         The principal customers for the Registrant's seat tracks are
recreational vehicle manufacturers. The Registrant uses three distributors
located in Indiana, Texas and California to market the product.

         Research and development ("R&D") expenditures were made to Travel
Products. Originally the Registrant paid Travel Products a 3% royalty, but for
the past several years the Registrant has been paying Travel Products a monthly
fee for R&D work with adjustments for extra work. R&D expenditures for the last
three fiscal years were $185,000 in 1998, $60,000 in 1997, and $75,000 in 1996.

         The Registrant has 85 employees.



                                  Page 3 of 29
<PAGE>   4
         The Registrant does not do any promotional advertising. The Registrant
does not own any patents or trademarks other than the patent relating to the
seat riser discussed above. This patent expires in September, 2006.

Item 2.   DESCRIPTION OF PROPERTIES

         The Registrant owns a manufacturing building with attached office space
and an attached warehouse located on 10 acres of land at 3578 South Van Dyke
Road, Almont, Michigan. Registrant had previously been leasing office space in
said facility from Hydraulic Tubes and Fittings, Inc., and acquired ownership of
the entire facility when Hydraulic Tubes and Fittings, Inc., was merged into the
Registrant. The Registrant also leases a facility in Imlay City, MI which it
uses for the production of seat tracks.

         Registrant owns certain fabricating equipment, which is used for the
fabrication of steel, aluminum, and copper tubes and certain assembly equipment
and tooling which is used for the production of power seat tracks.

Item 3.   LEGAL PROCEEDINGS

         Registrant is not currently involved in any pending material
litigation.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

                                     PART II

Item 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND 
          RELATED SECURITY HOLDING MATTERS

       5 (a) The principal market for the Registrant's common stock is the
over-the-counter market. Due to the infrequent trading of Registrant's stock, no
quotations are available.

       5 (b) As of August 31, 1998, there were approximately 1,592
shareholders of Registrant's common stock.


       5 (c) Registrant has not paid any dividends in the past two (2) years.
This failure to pay dividends is due solely to financial considerations. The
Registrant is not under any legal restrictions imposed by its Articles of
Incorporation, Bylaws, convenants to loan agreements or other obligations to
third parties with regard to dividend payments.





                                  Page 4 of 29
<PAGE>   5




1 Item 6. SELECTED FINANCIAL DATA.                                              
                                                                                
                                                                                



<TABLE>
<CAPTION>
                                                                                      KNUSAGA CORPORATION
                                                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                                               FIVE YEAR SUMMARY OF OPERATIONS

                                                       --------------------------------------------------------------------------
                                                            1994            1995           1996            1997            1998
                                                       --------------------------------------------------------------------------
From Operations
<S>                                                      <C>             <C>            <C>             <C>            <C>       
     Net Sales                                           $1,499,548      $9,566,217     $8,177,943      $9,473,273     $8,891,679
     Other Income, Net                                      377,420          17,703          5,538      $  347,098     $   83,875
     Unusual or Nonrecurring Items                           -0-             -0-            -0-             -0-            -0-
     Cost of Sales                                        1,289,321       8,092,147      7,342,353      $7,443,903     $7,960,423
     Selling, General & Administrative Expenses             324,124         843,211        671,457      $  973,503     $  918,497
     Interest Expense                                        44,873         157,065        196,346      $  162,191     $  153,616
     Income Taxes                                           107,000         124,846       ( 27,733)     $  315,203     $  (38,508)
     Income (Loss) From Continuing Operations               111,650         366,651          1,058      $  925,571     $  (18,474)

Income (Loss) Before Extraordinary Items                    111,650         349,417          1,058      $  925,571     $  (18,474)
Extraordinary Items                                         107,000          24,555        -0-             -0-              -0-
Net Income (Loss) Applicable to Common Stock                218,650         373,968          1,058      $  925,571     $  (18,474)

Per Share of Common Stock:
     Income (Loss) Before Extraordinary Item                    .03             .05            .00             .13            .00
     Extraordinary Item                                         .02             .00            .00               0              0
                                                       --------------- ------------------------------ --------------- -----------
     Net Income (Loss)                                 $        .05      $      .05     $      .00             .13            .00
                                                       --------------- ------------------------------ --------------- -----------
Dividends Per Share Declared on Common Stock (1)             -0-             -0-           -0-             -0-              -0-
Average Number of Common and Common Equivalent
     Shares Used in Determining per Share Amounts (2)     4,573,247       7,175,000      7,175,000       7,175,000      7,175,000

</TABLE>


(1) The Company has not paid dividends on its outstanding common stock nor
Class A preferred stock during the past five years.

(2) Income (Loss) per share has been calculated based on weighted average shares
outstanding. The 4% preferred stock is a common stock equivalent.






                                  Page 5 of 29
<PAGE>   6


Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS

         7(a) Net sales for the fiscal year ended August 31, 1998, decreased by
$581,594 or 6.1% from the year ended August 31, 1997, which sales had increased
by $1,295,330 or 15.8% from the prior fiscal year. The change in sales for
fiscal year 1998 was a result of the following factors.

         In the tubing sector of the Registrant's business, the Ford Kentucky
Truck Plant accounted for 75% of sales. At that plant Ford operated two assembly
lines which received tubing from the Registrant, one for Medium Trucks and the
second for Heavy Trucks. In November of 1997 Ford discontinued production of
Medium Trucks at the plant. Ford did not resume production of Medium Trucks in
Mexico until March of 1998. In December of 1997 Ford discontinued production of
Heavy Trucks at the plant and sold the Heavy Truck business to Freightliner
Corporation. Freightliner did not resume production at their St. Thomas, Ontario
plant until March of 1998. The Registrant continues to supply the same parts for
the medium and heavy trucks after these changes, however there was an
interruption in production from November 1997 until March of 1998. The former
Ford Heavy Truck is now marketed by Freightliner under the Sterling brand name.

         The seat track as a new line of business provided $2,410,865 of
additional sales in the February through August 1998 partially offsetting the
decline in the tubing business.

         Cost of goods sold for sales in fiscal year 1998 increased to 89.5% as
a result of unabsorbed overhead during the November 1997 to March 1998 period.
This compares to 78.6% in the fiscal year 1997 and 89.8% in the fiscal year
1996. Selling, general, and administrative expenses in fiscal year 1998 declined
by $55,006 as a result of manpower reductions during the low production period
which was only slightly offset by increased sales , general and administrative
expenses for the seat track business.

       The events of fiscal 1998 reduced the Registrant's sales concentration
with Ford from 87% in fiscal 1997 to 43% in fiscal 1998. Freightliner sales were
14% of sales but reflect only 6 months of shipments. Seat track sales were 27%
of sales. Seat track sales are dispersed among a large number of end users.

       7(b) Liquidity and Capital Resources. The Registrant's working capital
position declined in fiscal year 1998 to $313,823 on August 31, 1998, from a
working capital position of $565,348 on August 31, 1997, and a working capital
position of $90,843 on August 31, 1996. The reduction in working capital for
fiscal 1998 is largely the result of reduced activity in the tubing section of
the business.

       A loan payable to Michigan National Bank matured in October of 1994 at
which time the remaining principle was refinanced into two term loans with
maturity dates of October 1998 and October 2001, bearing interest at 1% over the
lender's prime rate and secured by all assets of the Registrant. At August 31,
1998, the outstanding principal balance of both notes was $268,232 and the
applicable interest rate was 9.5%.




                                  Page 6 of 29
<PAGE>   7
         A third loan payable to Michigan Bank was created on December 6, 1995,
to finance equipment purchases. Said loan has a maturity date of December 6,
2000, bears interest at .5% over the lender's prime rate and is secured by all
assets of Registrant. At August 31, 1998, the outstanding principal balance was
$93,334 and the applicable interest rate was 9.5%.

         Registrant has a line of credit with Michigan National Bank with
interest payable in monthly installments at 1% over said bank's prime rate. The
note is secured by all assets of the Registrant and the principle is due in
January of 1999. At August 31, 1998, the outstanding balance was $773,762 and
the applicable interest rate was 9.5%

         The Registrant does not have any material commitment for capital
expenditures in the current year.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The report of independent auditors and consolidated financial
         statements included on pages 13 through 29 of the annual financial
         report for the year ended August 31, 1998 and 1997 are incorporated
         herein by reference.

Item 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

         No response required.

                                    PART III.

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


<TABLE>
<CAPTION>

                      NAME                  AGE                        POSITION
                     -----                  ---                        --------

<S>                                          <C>          <C>
           James G. Musser, Jr.              63                   Director/President
           Jerry D. Luptak                   76           Director/Vice President Finance and
                                                                    General Counsel
           Harold Beznos                     60              Director/Secretary-Treasurer
           J. Ted Beebe                      68                Executive Vice President

</TABLE>


         The directors were elected in March, 1978 at the annual stockholders
meeting to serve until their successors are duly elected and qualified. Because
Registrant has not had another stockholders meeting, the directors have
continued to act in their present capacities as directors of Registrant. The
officers were appointed by the Board of Directors by Unanimous Written Consent
effective March 2, 1998. Mr. Semon E. Knudsen , a director and Chairman of the
Board since September 1 of 1977 died July 6, 1998.

         The following outlines the past and present occupations and business
experience of the executive officers of the Registrant.

               MR. MUSSER is, and has been, a Director and President of the
         Registrant since September 1, 1977. He devotes 100% of his time per
         month to the business affairs of the Registrant.



                                  Page 7 of 29
<PAGE>   8


               MR. LUPTAK has served in his present capacities with the
         Registrant since September 1, 1977. Currently, and for more than five
         years, he has been Chairman of the Board and Chief Executive Officer
         (formerly President) of Armada Corporation, a manufacturer of metal
         alloys, and has been actively engaged in real estate development
         including multifamily residential, single family residential, retail
         and office buildings. He devotes approximately 2% of his time per month
         to the business affairs of the Registrant.

               MR. BEZNOS has served in his present capacities with the
         Registrant since September 1, 1977. Currently, and for more than five
         years, he has been actively engaged in real estate development
         including multifamily, residential, single family residential, retail
         and office buildings. He devotes approximately 1% of his time per month
         to the business affairs of the Registrant.

               MR. BEEBE has been the Executive Vice President of the
         Registrant since November, 1979. He devotes 100% of his time per month
         to the business affairs of the Registrant.


Items 11
and 13.    MANAGEMENT REMUNERATIONS AND CERTAIN RELATIONSHIPS 
           AND RELATED TRANSACTIONS.

         In the fiscal year ended August 31, 1998, Mr. Musser was paid
$100,000 in salary and Mr. Beebe was paid $56,250 in salary. None of the other
directors or officers received any direct or indirect remuneration during the
fiscal year ended August 31, 1998, and none is anticipated in the fiscal year
ending August 31, 1999.

         Messrs. Beznos, Knudsen Trust, Luptak, and Musser have collectively
made working capital loans to the Corporation. These loans are payable on demand
and are represented by a noted bearing an annual interest rate of 12%, with
principal and interest originally payable June, 1990. The outstanding principal
balance on this note at August 31, 1998, was $165,836. As a result of the merger
of Hydraulic Tubes and Fittings, Inc., into Registrant, it assumed the
obligation for repayment of demand loans payable to Messrs. Beznos, Knudsen
Trust, and Luptak bearing an annual interest rate of 12% and having a combined
unpaid principal balance at August 31, 1998, of $141,417.

         In March and April of 1990, Jay A. Fishman, as Trustee of the Paola M.
Luptak Irrevocable Trust U/A/D August 20, 1970, and Frieda Applebaum, as Trustee
of the Beznos Family Irrevocable Trust U/A/D February 2, 1976, each loaned
$50,000 to the Registrant as working capital in return for which they each
received a note bearing an annual interest rate of 12%, with principal and
interest payable on demand. The principal balance of these notes at August 31,
1998, was $50,000 each. The beneficiaries of each trust are beneficial
shareholders of the Registrant and are related to certain officers and directors
of the Registrants.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS. 
         12(a)

<TABLE>
<CAPTION>

            Title
              of                         Name and Address of           Amount and Nature of
            Class                         Beneficial Owner               Beneficial Owner              % of Class
            -----                         ----------------               ----------------              ----------

<S>                             <C>                                    <C>                                <C>
            Common              James G. Musser, Jr. (1)               726,520 shares                     10.4%
            Stock               7475 Pinehurst Circle                  Direct
                                Birmingham, MI  48010

</TABLE>

                                  Page 8 of 29
<PAGE>   9


<TABLE>

<S>                             <C>                                    <C>                                <C>
            Common              Lorraine A. Musser  (1)                722,617 shares                     10.3%
            Stock               7475 Pinehurst Circle                  Direct
                                Birmingham, MI  48010

            Common              Leslie, Samuel and                     1,449,137 shares                   20.7%
            Stock               Lauren Beznos (2)                      trust beneficiary
                                31731 Northwestern Hwy.
                                Farmington Hills, MI 48334

            Common              Paola M. Luptak (3)                    1,463,109 shares                   20.9%
            Stock               2295 Corporate Blvd, N.W.              Direct
                                Boca Raton, Florida 33431

            Common              K. Peter Knudsen (4)                   562,402 shares                     8.0%
            Stock               29757 Somerset Drive                   trust beneficiary
                                Perrysburg, Ohio 43551

            Common              J. Ted Beebe                           805,205 shares                     11.5%
            Stock               22515 Sunnydale                        Direct
                                St. Clair Shores, MI  48081

            Common              Jerry D. Luptak (3)                    1,463,109 shares                   20.9%
            Stock               19115 Fox Landing Drive                Indirect
                                Boca Raton, Florida 33434

            Common              Harold Beznos (2)                      1,449,137 shares                   20.7%
            Stock               31731 Northwestern Hwy.                Indirect
                                Farmington Hills, MI  48334

            Common              Semon E. Knudsen Trust (4) (5)         1,449,137 shares                   20.7%
            Stock               1965 N. Woodward Ave.                  Indirect
                                Bloomfield Hills, MI  48304

</TABLE>

       (1)    Lorraine A. Musser is the wife of James G. Musser, Jr.

       (2)    These shares are held in an irrevocable trust with Frieda
              Applebaum as Trustee with voting and investment power for the
              benefit of Leslie Beznos, Samual Beznos and Lauren Beznos, who are
              the daughter, son and niece, respectively, of Harold Beznos, a
              director and officer of the Registrant.

       (3)    Paola M. Luptak is the daughter of Jerry D. Luptak, a director 
              and officer of the Registrant.

       (4)    These shares are held in a revocable trust with the NBD Bank of
              Detroit, Michigan, as Trustee with voting and investment power for
              the benefit of K. Peter Knudsen. Mr. Knudsen is the son of Semon
              E. Knudsen, a former director and officer of the Registrant.

       (5)    Judith K. Christie, Lisa K. Flint, and Kristina K. Gregg directly
              own 295,245, 295,245, and 296,245 shares of common stock,
              respectively, and are daughters of Semon E. Knudsen, a former
              director and officer of the Registrant.

       12(b)  No shares of common stock of the Registrant are owned by any
              officers and directors of the Registrant, except Mr. James G. 
              Musser, Jr. and Mr. J. Ted Beebe as listed in Item 12(a) above.

As a group, the officers and directors, prior to the July 6, 1998 death of  S.
E. Knudsen, directly and indirectly own 6,615,725 shares of Registrant's common
stock, representing 94.5% of all outstanding common stock.  Following the death
of  S. E. Knudsen, as a group the officers and directors directly and indirectly
own 5,166,588 shares of Registrant's stock representing 73.8% of all outstanding
common stock.



                                 Page 9 of 29
<PAGE>   10


  Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K

       14a.  Financial Statement Schedules

             For Fiscal Years Ended August 31, 1998 and 1997

             1)  Accountant's opinion for years ended August 31, 1998 and 1997.

             2)  Balance Sheet for the years ended August 31, 1998 and 1997.

             3)  Statement of Income for years ended August 31, 1998 and 1997.

             4)  Statement of Stockholder's Equity for years ended August 31, 
                 1998 and  1997.

             5) Statement of Cash Flows for years ended August 31, 1998 and
             1997. 

             6) Notes to Financial Statements for years ended 1998 and 1997.

       14b.  Reports on Form 8-K

             None

       14c.  Exhibits

             Article 5 Financial Data Schedule

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
  Exchange Act of 1934, the Registrant has duly caused this report to be signed
  on its behalf by the undersigned, thereunto duly authorized.

                                           KNUSAGA CORPORATION



                                           By:         Jerry Luptak
                                              ----------------------------------
                                                      Vice President


                                           Dated: February 5, 1999
                                                 -------------------------------

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
  report has been signed by the following persons on behalf of the Registrant
  and in the capacities and on the date indicated:



By:    James G. Musser                              Date:   February 5, 1999
       ---------------------------------------              ----------------
       Director/President
       (Principal Executive Officer and
       Controller)


By:    Jerry D. Luptak                              Date:   February 5, 1999
       ---------------------------------------              ----------------
       Director
       Vice President, Finance and
       General Counsel
       (Principal Financial Officer)



                                 Page 10 of 29
<PAGE>   11


By:    Harold Beznos                                Date:   February 5, 1999
       ---------------------------------------              ----------------
       Director Secretary-Treasurer

By:    J. Ted Beebe                                 Date:   February 5, 1999
       ---------------------------------------              ----------------
       Executive Vice President




                                 Page 11 of 29
<PAGE>   12














                               KNUSAGA CORPORATION
                       D.B.A. HYDRAULIC TUBES AND FITTINGS

                              FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED
                            AUGUST 31, 1998 AND 1997








                                 Page 12 of 29
<PAGE>   13



                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
================================================================================


================================================================================
                                TABLE OF CONTENTS
================================================================================

                                                                            PAGE
                                                                            ----




Independent Auditors' Report..................................................14

Balance Sheet..............................................................15-16

Statement of Income...........................................................17

Statement of Stockholders' Equity.............................................18

Statement of Cash Flows.......................................................19

Notes to Financial Statements..............................................20-29
















                                 Page 13 of 29
<PAGE>   14



                       [FREEDMAN & GOLDBERG LETTERHEAD]
================================================================================








                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Knusaga Corporation
D.B.A. Hydraulic Tubes and Fittings
Almont, MI  48003

We have audited the accompanying balance sheets of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1998 and 1997 and the related
statement of income, stockholder's equity, and cash flows for the years ended
August 31, 1998 and 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessment of the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Knusaga Corporation, D.B.A.
Hydraulic Tubes and Fittings as of August 31, 1998 and 1997 and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

Respectfully,



---------------------------------------
Freedman & Goldberg
Certified Public Accountants

Farmington Hills, Michigan
October 29, 1998



    Represented worldwide as a member firm of the International Association of
    Local Public Accountants
    --------------------------------------------------------------------------




                                 Page 14 of 29
<PAGE>   15


                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                                   BALANCE SHEET
================================================================================

                                                  As of August 31, 1998 and 1997




                                     ASSETS

<TABLE>
<CAPTION>
                                                                                               1998                  1997
                                                                                        ---------------------------------
<S>                                                                                     <C>                   <C>        
 Current Assets
      Cash                                                                              $   364,881           $   276,294
      Accounts Receivable - Trade, Net of Allowance for Doubtful Accounts of
         $-0-                                                                             1,029,669             1,425,344
      Accounts Receivable - Other                                                               -0-                   200
      Note Receivable - Officer                                                              94,143                94,143
      Inventories                                                                           568,708               573,452
      Prepaid Expenses                                                                      247,009               185,467
 .........................................................................................................................
      Total Current Assets                                                                2,304,410             2,554,900
 .........................................................................................................................
 Property and Equipment, Net                                                              2,412,733             2,091,277
 .........................................................................................................................
 Other Assets
      Deposits                                                                                9,696                 2,646
      Intangible Assets, Net                                                                 12,664                   -0-
 .........................................................................................................................
      Total Other Assets                                                                     22,360                 2,646
 .........................................................................................................................
          Total Assets                                                                  $ 4,739,503           $ 4,648,823
=========================================================================================================================
</TABLE>

























The accompanying notes are an integral part of the financial statements.
================================================================================


                                  Page 15 of 29

<PAGE>   16

                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                                   BALANCE SHEET
================================================================================

                                                  As of August 31, 1998 and 1997











                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                           1998                 1997
                                                                                       ---------------------------------
<S>                                                                                    <C>                   <C>        
Current Liabilities
     Accounts Payable - Trade                                                          $   764,882           $   693,670
     Current Maturities of Long-Term Debt                                                1,026,634               869,611
     Accrued Expenses                                                                      199,071               426,271
 ........................................................................................................................
     Total Current Liabilities                                                           1,990,587             1,989,552
 ........................................................................................................................
Other Liabilities
     Accrued Expenses - Non current                                                        563,670               604,900
     Long-Term Debt - Less Current Maturities                                              924,111               774,762
 ........................................................................................................................
     Total Other Liabilities                                                             1,487,781             1,379,662
 ........................................................................................................................
         Total Liabilities                                                               3,478,368             3,369,214
 ........................................................................................................................
Stockholders' Equity
     Common Stock, $.01 Par Value, 7,000,000 Shares Authorized, 7,000,000,
        Shares Issued and Outstanding
     Preferred Stock, Class A, 4% Non-Cumulative Non-Voting, Each Share                     70,000                70,000
        Convertible into One Share of Common Stock, Par Value $.01, Stated
        Value $1.00, 500,000 Shares Authorized, 175,000 Shares Issued and
        Outstanding
     Additional Paid-In Capital
     Retained Earnings                                                                     175,000               175,000
                                                                                           366,365               366,365
                                                                                           649,770               668,244
 ........................................................................................................................
     Total Stockholders' Equity                                                          1,261,135             1,279,609
 ........................................................................................................................
         Total Liabilities and Stockholders' Equity                                    $ 4,739,503           $ 4,648,823
========================================================================================================================
</TABLE>








The accompanying notes are an integral part of the financial statements.
================================================================================


                                  Page 16 of 29

<PAGE>   17


                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                             STATEMENT OF INCOME
================================================================================

                                    For the Years Ended August 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                                                           1998                  1997
                                                                                        ----------            ----------
<S>                                                                                     <C>                   <C>       
 Sales, Net                                                                             $8,891,679            $9,473,273
 Cost of Sales                                                                           7,960,423             7,443,903
 .......................................................................................................................
 Gross Profit                                                                              931,256             2,029,370
 Selling, General and Administrative Expenses                                              918,497               973,503
 .......................................................................................................................
 Operating Income                                                                           12,759             1,055,867
 .......................................................................................................................
 Other Income (Expense)
     Interest Income                                                                           -0-                   398
     Interest Expense                                                                    ( 153,616)           (  162,191)
     Miscellaneous Income                                                                    2,265               346,048
     Gain on Sale of Asset                                                               (   8,390)                  652
     Forgiveness of Debt                                                                    90,000                   -0-
 .......................................................................................................................
      Total Other Income (Expense)                                                       (  69,741)              184,907
 .......................................................................................................................
 Income Before Income Taxes                                                              (  56,982)            1,240,774
 Income Taxes (Refundable)                                                               (  38,508)              315,203
 .......................................................................................................................
 Net Income                                                                             $(  18,474)         $    925,571
 =======================================================================================================================


 Net Income Per Share                                                                   $(     .00)         $        .13
 =======================================================================================================================
</TABLE>















The accompanying notes are an integral part of the financial statements.
================================================================================


                                  Page 17 of 29

<PAGE>   18


                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                               STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================

                                    For the Years Ended August 31, 1998 and 1997



<TABLE>
<CAPTION>
                                                                                                                   Retained
                                                                                                 Additional        Earnings
                                                                   Common        Preferred        Paid-In        (Accumulated
                                                                    Stock          Stock          Capital          Deficit)
                                                                -------------------------------------------------------------

<S>                                                             <C>             <C>              <C>               <C>       
    Balance, September 1, 1996                                  $  70,000       $ 175,000        $ 366,365         $(257,327)

    Net Income For the Year Ended August 31, 1997                     -0-             -0-              -0-           925,571
    ........................................................................................................................

    Balance, August 31, 1997                                       70,000         175,000          366,365           668,244

    Net Income (Loss) for the Year Ended August 31, 1998              -0-             -0-              -0-          ( 18,474)
    ........................................................................................................................

    Balance, August 31, 1998                                    $  70,000       $ 175,000        $ 366,365         $ 649,770
    ========================================================================================================================
</TABLE>








The accompanying notes are an integral part of the financial statements.
================================================================================



                                 Page 18 of 29
<PAGE>   19


                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                         STATEMENT OF CASH FLOWS
================================================================================

                                    For the Years Ended August 31, 1998 and 1997



<TABLE>
<CAPTION>
                                                                                                1998                  1997
  -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                     <C>        
  Cash Flows From Operations
      Net Income (Loss)                                                                 $ (   18,474)           $   925,571
      Adjustments to Reconcile Net Income to Net Cash
        Provided By Operating Activities
       Depreciation and Amortization                                                         263,511                232,731
       (Gain) Loss on Sale of Asset                                                            8,390             (      652)
       Forgiveness of Debt                                                                (   90,000)                   -0-
       (Increase) Decrease In:
         Accounts Receivable                                                                 395,875             (  372,368)
         Accrued Interest Receivable                                                             -0-                    839
         Inventories                                                                           4,744             (   67,249)
         Prepaid Expenses                                                                 (   61,542)            (   24,888)
         Deposits                                                                         (    7,050)                 2,929
       Increase (Decrease) In:
         Accounts Payable                                                                     71,212                 73,718
         Accrued Expenses                                                                 (  178,430)            (   39,683)
  .........................................................................................................................
       Net Cash Provided By Operating Activities                                             388,236                730,948
  .........................................................................................................................
  Cash Flows From Investing Activities
      Equipment Purchases                                                                 (  301,519)            (  199,755)
      Purchase of Seat Track Business                                                     (  314,000)                   -0-
      Proceeds From Sale of Assets                                                             9,500                  2,000
      Proceeds From Notes Receivable                                                             -0-                 27,955
      Payments For Notes Receivable                                                              -0-             (   71,143)
  .........................................................................................................................
           Net Cash Used By Investing Activities                                          (  606,019)            (  240,943)
  .........................................................................................................................
  Cash Flows From Financing Activities
      Proceeds From Debt                                                                   1,893,328                910,000
      Principal Payments on Debt                                                          (1,586,958)            (1,157,731)
  .........................................................................................................................
       Net Cash Provided By (Used in) Financing
           Activities                                                                        306,370             (  247,731)
  .........................................................................................................................

  Increase (Decrease) in Cash                                                                 88,587                242,274
  Balance, September 1                                                                       276,294                 34,020
  .........................................................................................................................
  Balance, August 31                                                                     $   364,881            $   276,294
  =========================================================================================================================
</TABLE>








The accompanying notes are an integral part of the financial statements.
================================================================================



                                 Page 19 of 29
<PAGE>   20


                                                             KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


Note 1.  Summary of Significant Accounting Policies

     This summary of significant accounting policies of Knusaga Corporation,
     D.B.A. Hydraulic Tubes and Fittings (the Company) is presented to assist in
     understanding the Company's financial statements. The financial statements
     and notes are representations of the Company's management who is
     responsible for their integrity and objectivity. These accounting policies
     conform to generally accepted accounting principles and have been
     consistently applied in the preparation of the financial statements.

         A. Nature of Operations - Knusaga Corporation's operations relate
         mainly to the fabrication of tubing for the auto industry. In January,
         1998 the Company began manufacturing seat tracks for the auto industry.

         Substantially all of the accounts receivable are from three major
         customers, which potentially subjects the Company to concentration of
         credit risk. All receivables are due within thirty days and are
         unsecured. It is the Company's policy not to require collateral.

         B. Revenues - The Company recognizes revenue from automotive tubes and
         fittings and seat tracks upon shipment.

         C. For purposes of the statement of cash flows, the Company considers
         all short-term debt securities purchased with a maturity of three
         months or less to be cash equivalents.

         D. Property, Equipment and Related Depreciation - Property and
         equipment are recorded at cost. Depreciation is computed by the
         straight-line method for financial reporting purposes and accelerated
         methods for tax reporting purposes. Estimated lives range from five to
         forty years. Depreciation charged to operations was $262,175 and
         $232,731 for the years ended August 31, 1998 and 1997, respectively.
         When properties are disposed of, the related costs and accumulated
         depreciation are removed from the respective accounts and any gain or
         loss on disposition is recognized currently. Maintenance and repairs
         which do not improve or extend the lives of assets are expensed as
         incurred.

         E. Inventories - Inventories are stated at lower of cost or market.
         Cost is determined on the first-in, first-out (FIFO) basis. Inventory
         classifications as of August 31, 1998 and 1997 consisted of the
         following:

<TABLE>
<CAPTION>
                                               1998                  1997     
                                        ---------------------------------
<S>                                     <C>                   <C>             
                    Raw Material        $   371,763           $   350,806     
                    Work in Process         123,804               181,481     
                    Finished Goods           73,141                41,165     
                                        .................................
                                        $   568,708           $   573,452     
                                        =================================
</TABLE>
                    




--------------------------------------------------------------------------------
                                  Page 20 of 29
<PAGE>   21

                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


    NOTE 1.  CONTINUED

         F. Impairment of Long-Lived Assets - In March 1995, the Financial
         Accounting Standards Board issued Statements of Financial Accounting
         Standards ("SFAS") No. 121, "Accounting For the Impairment of
         Long-Lived Assets and For Long-Lived Assets To Be Disposed Of". SFAS
         No. 121 establishes accounting standards for the impairment of
         long-lived assets, certain identifiable intangibles, and goodwill
         related to those assets to be held and used, and for long-lived assets
         and certain identifiable intangibles to be disposed of.

         In accordance with SFAS No. 121, the Company reviews its long-lived
         assets, including property and equipment, goodwill and other
         identifiable intangibles for impairment whenever events or changes in
         circumstances indicate that the carrying amount of the assets may not
         be fully recoverable. To determine recoverability of its long-lived
         assets, the Company evaluates the probability that future undiscounted
         net cash flows, without interest charges, will be less than the
         carrying amount of the assets. Impairment is measured at fair value.
         The adoption of SFAS No. 121 had no effect on the Company's
         consolidated financial statements.

         G. Major Suppliers - At August 31, 1998 and 1997 26% and 52%,
         respectively of the accounts payable - trade was to four major
         suppliers of aluminum and steel tubing. The Company believes there is
         no potential credit risk pertaining to the major suppliers.

         At August 31, 1998 and 1997, 36% and 0%, respectively of the accounts
         payable - trade was to two major suppliers of seat track components.

         H. Use of Estimates - The preparation of financial statements in
         conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosure of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from those estimates.

         I. Income Taxes - The Company accounts for income taxes under the
         provisions of SFAS No. 109, "Accounting for Income Taxes," which
         requires recognition of deferred tax assets and liabilities for the
         expected future tax consequences of events that have been included in
         the Company's consolidated financial statements or tax returns. Under
         this method, deferred tax assets and liabilities are determined based
         on the differences between the financial accounting and tax basis of
         assets and liabilities using enacted tax rates in effect for the year
         in which the differences are expected to reverse.

         J. Intangible Assets - Finders fee associated with the acquisition of
         the seat track business amortized over seven years on a straight-line
         basis. At August 31, 1998 and 1997, accumulated amortization is $1,336
         and $-0-, respectively.







--------------------------------------------------------------------------------

                                 Page 21 of 29
<PAGE>   22
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 2.  PREPAID EXPENSES

     The following is a detail of the prepaid expenses as of August 31, 1998 and
1997:


<TABLE>
<CAPTION>
                                                           1998                   1997
                                                    ..................................
<S>                                                 <C>                    <C>        
               Prepaid Insurance                    $    39,173            $    39,617
               Prepaid Taxes                            207,836                145,850
                                                    ..................................
                        Total Prepaid Expenses      $   247,009            $   185,467
                                                    ==================================
</TABLE>
               
NOTE 3.  PROPERTY AND EQUIPMENT

     The major components of property and equipment are as follows:

 
<TABLE>
<CAPTION>
                                                                 1998                1997
                                                           ------------------------------
<S>                                                        <C>                 <C>       
               Land                                        $   24,847          $   24,847
               Land Improvements                               10,230              10,230
               Buildings and Improvements                   1,436,165           1,369,011
               Machinery and Equipment                      1,673,055           1,208,374
               Furniture and Fixtures                         131,198             123,153
               Transportation Equipment                       130,446             132,245
               Obligations Under Capital Leases               207,115             207,115
               Equipment Under Construction                    63,455              44,475
                                                           ..............................
                                                            3,676,511           3,119,450
               Less:  Accumulated Depreciation              1,263,778           1,028,173
                                                           ..............................
               Net Property and Equipment                  $2,412,733          $2,091,277
                                                           ==============================
</TABLE>

NOTE 4.  ACCRUED EXPENSES

     The following is a detail of the current accrued expenses as of August 31,
1998 and 1997.

<TABLE>
<CAPTION>
                                                                 1998                1997
                                                           ------------------------------
<S>                                                        <C>                 <C>       
               Accrued Insurance                           $   10,762          $    8,319
               Accrued Interest - Other                        11,289               6,101
               Accrued Payroll                                 98,927             147,977
               Accrued and Withheld Payroll Taxes              10,553             138,017
               Accrued Pension                                 28,802              37,720
               401K Withholdings                                  -0-               4,917
               Accrued Professional Fees                       28,200              28,200
               Accrued Taxes                                   10,538              55,020
                                                           ..............................
               Total Current Accrued Expenses              $  199,071          $  426,271
                                                           ==============================
</TABLE>
               

--------------------------------------------------------------------------------

                                 Page 22 of 29

<PAGE>   23
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 4.  CONTINUED

The following is a detail of the non-current accrued expenses as of August 31,
1998 and 1997:

<TABLE>
<CAPTION>
                                                                        1998                 1997
                                                                  -------------------------------
<S>                                                               <C>                  <C>       
               Accrued Interest - Shareholders                    $  420,387           $  371,617
               Accrued Payroll - Officers                            143,283              143,283
               Accrued Engineering Expenses                              -0-               90,000
                                                                  ...............................
                        Total Non-Current Accrued Expenses        $  563,670           $  604,900
                                                                  ===============================
</TABLE>
               
     Per the loan covenants with the bank, the Company cannot pay the accrued
     payroll - officers and engineering expenses shown as non-current without
     the bank's permission. Management does not anticipate paying the above
     expenses within one year.

NOTE 5.  NOTES RECEIVABLE

<TABLE>
<CAPTION>
                                                                                            1998                 1997
                                                                                      -------------------------------
<S>                                                                                   <C>                  <C>       
     Non-interest bearing note receivable from an officer/stockholder. The note
     is unsecured and due on demand.
                                                                                      $   94,143           $   94,143
                                                                                      -------------------------------

NOTE 6.  NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES

     Notes payable and obligations under capital leases consist of the
     following:

                                                                                            1998                1997
                                                                                      ------------------------------
     A. Notes payable - directors, officers, and shareholders, bearing interest
     at 12% per annum. The notes are payable on demand and are unsecured. Loans
     totaling $265,000 have been subordinated to the bank.

                                                                                      $  407,253          $  407,253

     B. Loan Payable - Bank, payable in monthly installments of $8,646 plus
     interest at 1% over the lender's prime rate, through October, 1998. The
     note is secured by all the assets of the Company. The interest rate at
     August 31, 1998 was 9.5%.
                                                                                          25,930             129,683

     C. Loan Payable - Bank, payable in monthly installments of $6,214 plus
     interest at 1% over the lender's prime rate through October, 2001. The note
     is secured by all the assets of the Company. The interest rate at August
     31, 1998 was 9.5%.
                                                                                         242,302             316,871

     D. Loan Payable - Bank, payable in monthly installments of $3,333 plus
     interest at 1% over lender's prime rate through December, 2000. The loan is
     secured by all assets of the Company. The interest rate at August 31, 1998
     was 9.5%.
                                                                                          93,334             133,334
</TABLE>



--------------------------------------------------------------------------------

                                 Page 23 of 29

<PAGE>   24
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 6.  CONTINUED

<TABLE>
<CAPTION>
<S>                                                                                   <C>                 <C>       
     E. Line of Credit - Bank, interest payable in monthly installments at .5%
     over lender's prime rate. Principal is due January 1, 19998. Note is
     secured by all assets of the Company. The interest rate at August 31, 1998
     was 9.0%.
                                                                                         773,762             630,000

     F. Loan Payable - Bank, payable in monthly installments of $6,383 plus
     interest at .5% over lender's prime rate, through January, 2002. The note
     is secured by all the assets of the Company. The interest rate at August
     31, 1998 was 9.0%.
                                                                                         261,683                 -0-

     G. Loan Payable - Bank, payable in monthly installments of $2,249 plus
     interest at .5% over the lender's prime rate through April, 2003. The note
     is secured by all the assets of the Company. The interest rate at August
     31, 1998 was 9.0%.
                                                                                         125,954                 -0-

     H. Loan Payable - Bank, payable in monthly installments of $244 plus
     interest at .5% over lender's prime rate through August, 2003. The loan is
     secured all assets of Company. The interest rate at August 31, 1998 was
     9.0%.
                                                                                          14,667                 -0-

     I. Obligation Under Capital Lease - machinery, payable in monthly
     installments of $573, through November 1998, including interest at 17.3%.
     Secured by the machinery.
                                                                                           1,125               7,275

     J. Obligation Under Capital Lease - improvements, payable in monthly
     installments of $628, through November 1998, including interest at 8.17%.
     Secured by the improvements.
                                                                                           1,860               8,929

     K. Loan Payable - Bank, payable in monthly installments of $731, through
     December 1998, including interest at 8.49%. Secured by an automobile.
                                                                                           2,875              11,028
                                                                                      ..............................
           Total                                                                       1,950,745           1,644,373
           Amounts due within one year                                                 1,026,634             869,611
                                                                                      ..............................
                                                                                      $  924,111          $  774,762
                                                                                      ==============================
</TABLE>


--------------------------------------------------------------------------------

                                 Page 24 of 29


<PAGE>   25
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 6.  CONTINUED

     The debt and lease maturities for the next five years are as follows:

<TABLE>
<CAPTION>
<S>                      <C>                            <C>           
                         August 31, 1999                $ 1,026,634   
                         August 31, 2000                    628,340   
                         August 31, 2001                    194,420   
                         August 31, 2002                     80,415   
                         August 31, 2003                     20,936   
                                                        ...........
                                                        $ 1,950,745   
                                                        ===========
</TABLE>
                         
     Interest expense for the years ended August 31, 1998 and 1997 totaled
     $153,616, and $162,191, respectively.

     Interest expense on obligations under capital leases for the years ended
     August 31, 1998 and 1997 was $1,081 and $4,667, respectively. Depreciation
     expense of equipment held under capital leases for the years ended August
     31, 1998 and 1997 was $26,723 for each year.

     Although notes payable to directors, officers, and shareholders totaling
     $407,253 are due upon demand, they have been classified as non current as
     the Company does not expect to pay these balances within the next fiscal
     year.

NOTE 7.  LOAN COVENANTS

     Under the terms of the loan agreement with the bank the Company must
     maintain the following covenants:

     1. Maintain a current ratio of not less than 1.00 to 1.00

     2. Maintain a net worth plus subordinated debt of not less than $650,000.

     3. Maintain a ratio of total liabilities to net worth plus subordinated
        debt of not more than 5 to 1.

     4. Maintain a debt service coverage ratio of not less than 1.25 to 1.

     As of August 31, 1998, the Company was in default of its loan covenant
     regarding debt service coverage.

NOTE 8.  PER SHaRE COMPUTATION

     Earnings per share have been calculated based on the weighted average
     number of shares outstanding. The 4% preferred stock is considered a common
     equivalent. The number of shares used in computing net income per share was
     7,175,000.





--------------------------------------------------------------------------------

                                 Page 25 of 29
<PAGE>   26
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 9.  INCOME TAXES

     The provision for income taxes consists of the following components:

<TABLE>
<CAPTION>
                                                                               1998                  1997  
                                                                         --------------------------------  
<S>                                                                      <C>                  <C>
     Current:                                                                                              
              Tax Due (Refundable)                                       $(   38,508)         $   329,071  
              Tax (Benefit) Recovery of Investment Tax Credits                   -0-           (   13,868) 
                                                                         ................................  
                       Net Tax Expense (Recovery)                        $(   38,508)         $   315,203  
                                                                         ================================  
                                                                                                           
          Deferred taxes are detailed as follows:                                                          
                                                                                                           
                                                                                1998                  1997 
                                                                         --------------------------------- 
     Deferred Income Tax Liability - Depreciation                        $    59,655          $     41,826 
     ..................................................................................................... 
     Deferred Income Tax Assets                                                                            
          Accrued Expenses                                                    65,221                64,469 
     Valuation Allowance                                                  (    5,565)           (   22,643)
     ..................................................................................................... 
     Net Deferred Income Tax Asset                                            59,655                41,826 
     ..................................................................................................... 
     Net Deferred Income Taxes                                           $       -0-          $        -0- 
     ===================================================================================================== 
</TABLE>
     
     The valuation allowance was estimated to offset the deferred tax asset
     because it is uncertain that the company will ever realize the tax benefit.

     During the year ended August 31, 1997 the Company utilized investment
     credits totaling $13,868 to offset its current year federal income taxes.

NOTE 10.  RELATED PARTY TRANSACTION

     As disclosed in Note 6 to the financial statements, certain stockholders
     and officers are major creditors of the Company. Amounts due to the
     stockholders and officers as of August 31, 1998 and 1997 totaled $407,253.
     Interest accrued on these notes at August 31, 1998 and 1997 totaled
     $420,387 and $371,617, respectively. Interest expense accrued for the years
     ended August 31, 1998 and 1997 was $48,770 and $51,288, respectively.

NOTE 11. CASH FlOW DISCLOSURES

     Interest and income taxes paid for the years ended August 31, 1998 and 1997
were as follows:

<TABLE>
<CAPTION>
                                                     1998                  1997
                                              ---------------------------------
<S>                                           <C>                   <C>        
     Interest                                 $    99,658           $   116,312
                                              =================================
     Income Taxes                             $    21,000           $   444,300
                                              =================================
</TABLE>

     Income tax refunds received during the years ended August 31, 1998 and 1997
     was $-0- and $16,647, respectively.




--------------------------------------------------------------------------------

                                 Page 26 of 29
<PAGE>   27
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 12. DEFINED BENEFIT PENSION PLAN

     The Company sponsors a defined benefit pension plan that covers
     substantially all employees of the Company. The inception of the plan was
     January 1, 1992, with a fiscal year end of August 31. The plan calls for
     benefits to be paid to eligible employees at retirement based upon years of
     service with the Company. Contributions to the plan reflect benefits
     attributed to employees' services to date, as well as services expected to
     be earned in the future. Pension expense for the years ended August 31,
     1998 and 1997 was $28,802 and $37,720, respectively. Pension contributions
     due to the plan at August 31, 1998 and 1997 were $30,000 and $49,460,
     respectively. As of August 31, 1998 the defined benefit pension plan is
     funded in accordance with ERISA.

     The following table sets forth the plan's funded and amounts recognized in
     the Company's statement of financial position at August 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                                             1998                   1997
                                                                                      ----------------------------------
<S>                                                                                   <C>                    <C>        
Actuarial present value of benefit obligations:
     Accumulated benefit obligations, including vested benefits of $154,220 
         and $124,051, respectively.
                                                                                      $   181,450            $   143,126
 ........................................................................................................................
Projected benefit obligation for service rendered to date.
                                                                                          181,450                182,428
Plan assets at fair value                                                                 172,968                135,413
 ........................................................................................................................
Projected benefit obligation in excess of plan assets.
                                                                                            8,482                 47,015
Unrecognized net gain from past experience different from that assumed and
     effect of changes in assumptions.
                                                                                           76,365                  1,662
Prior service cost not yet recognized in net periodic pension cost
                                                                                        (  22,612)            (   11,193)
Unrecognized net obligation at date of initial application of FAS-87
                                                                                        (  33,433)            (   34,827)
 ........................................................................................................................
(Prepaid) accrued cost                                                                $    28,802            $     2,657
========================================================================================================================

Net pension cost for 1998 and 1997 includes the following components:
     Service cost - benefits earned during the period                                 $    31,725            $    28,692
     Interest cost on projected benefit obligation                                          9,173                  6,486
     Interest cost due to late quarterly contributions
                                                                                              -0-                    -0-
     Actual return on plan assets                                                       (     597)            (   26,417)
     Amortization of Actuarial Gains and Net Transition Asset
                                                                                        (  11,499)                21,649
 ........................................................................................................................
Net periodic pension costs                                                            $    28,802            $    30,410
========================================================================================================================
</TABLE>






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                                 Page 27 of 29
<PAGE>   28
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 13.  401K PROFIT SHARING PLAN

     The Company sponsors a 401K profit sharing plan that covers all employees
     of the Company. The plan allows eligible employees to withhold amounts from
     their pay on a pre-tax basis and invest in self directed investment
     accounts. The company has no obligation to make any contributions to the
     plan.

NOTE 14.  SETTLEMENT AGREEMENT

     During the year ended August 31, 1997, the Company reached a settlement
     with Chrysler Corporation regarding the production of a van seat line which
     was discontinued during the year ended August 31, 1995. The settlement is
     for reimbursements of costs incurred by the Company in preparation of the
     production volumes promised by Chrysler Corporation which were never
     realized. The amount of this settlement was $350,000 and is included in
     miscellaneous income on the statement of income for the year ended August
     31, 1997.

NOTE 15.  PURCHASE OF SEAT TRACK BUSINESS

     In January, 1998, the Company purchased the assets of ITT Automotive
     Electric Systems, Inc.'s seat track business. The total cost of the assets
     acquired was $300,000. In addition, the Company paid a third party $14,000
     as a fee for organizing the transaction. The purchase price has been
     allocated to the assets purchased on estimated fair market value of assets
     acquired as follows:

<TABLE>
<S>                                                      <C>           
                              Equipment                  $   100,000   
                              Tooling                        200,000   
                              Intangible Assets               14,000   
                                                         ...........
                                                         $   314,000   
                                                         ===========
</TABLE>
                              
NOTE 16.  LEASE OBLIGATION

     In February, 1998, the Company began leasing a facility in Imlay, Michigan
     for its seat track operations. The lease requires minimum monthly payments
     of $3,721 in addition to property taxes, insurance and maintenance. The
     lease expires January, 2003.

Total rent paid during the year ended August 31, 1998 was $25,458.

Future minimum lease obligations under all operating leases are as follows:

<TABLE>
<S>                                                      <C>           
                              August 31, 1999            $    44,643   
                              August 31, 2000                 44,643   
                              August 31, 2001                 44,643   
                              August 31, 2002                 44,643   
                              August 31, 2003                 18,605   
                                                         ...........
                                                         $   197,177   
                                                         ===========
</TABLE>
                              

--------------------------------------------------------------------------------

                                 Page 28 of 29
<PAGE>   29
                                                            KNUSAGA CORPORATION
                                             D.B.A. HYDRAULIC TUBES AND FITTINGS
                                                   NOTES TO FINANCIAL STATEMENTS
================================================================================

                                                        August 31, 1998 and 1997


NOTE 17.  SEGMENTAL DATA

     The Company's operations are classified into two principal reportable
     segments that provide different products or services. Separate management
     of each segment is required because each business unit is subject to
     different marketing, production and technology strategies. The Company has
     elected to adopt early application of SFAS 131 - Segmented Reporting. Below
     is summarized segmental data for the year ended August 31, 1998.



<TABLE>
<CAPTION>
                                                        Tubing            Seat Track                 Total  
<S>                                                <C>                   <C>                   <C>          
     External Revenue                              $ 6,480,814           $ 2,410,865           $ 8,891,679  
     Intersegment Revenue                                  -0-                   -0-                   -0-  
     Gross Profit                                      599,804               331,452               931,256  
     Interest Revenue                                      -0-                   -0-                   -0-  
     Interest Expense                                  131,216                22,400               153,616  
     Depreciation & Amortization                       238,869                24,642               263,511  
     Operating Income (Loss)                        (  213,252)              226,011                12,759  
     Forgiveness of Debt                                90,000                   -0-                90,000  
     Income Taxes (Benefit)                         (  100,808)               62,300            (   38,508) 
     Net Income (Loss)                              (  159,802)              141,328            (   18,474) 
     Total Assets                                    3,926,718               812,785             4,739,503  
     Expenditures of Long-Lived Assets                 272,110               343,409               615,519  
</TABLE>
     

     The tubing segment derives its revenues from the sale of automotive tubing
     and fittings in the production process of the automobile industry. The seat
     track segment derives its revenues from the sale of adjustable seat tracks
     for use in the post production market.

     During the year ended August 31, 1997, the company's operations were 100%
     related to its tubing segment.

     The Company maintains separate records for each segment. The accounting
     policies applied by each of the segments are the same as those used by the
     Company in general.

     Net sales to Ford Motor Company from its tubing segment totaled $4,112,714
     and $8,259,061 of the Company's net sales for the years ended August 31,
     1998 and 1997, respectively. Net sales to Freightliner from its tubing
     segment totaled $1,248,991 and $-0- of the Company's net sales for the
     years ended August 31, 1998 and 1997, respectively. Net sales to SDI from
     its seat track segment totaled $2,360,400 and $-0- of the Company's net
     sales for the years ended August 31, 1998 and 1997, respectively.

NOTE 18.  FORGIVENESS OF DEBT

On August 31, 1998, the Company was forgiven its debt owed to Travel Products in
the amount of $90,000. This amount was for engineering services provided to the
company during the year ended August 31, 1994. This amount was previously shown
as accrued engineering expenses prior to the year ended August 31, 1998.






--------------------------------------------------------------------------------

                                 Page 29 of 29
<PAGE>   30


                                 Exhibit Index
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.                   Description
-----------                   -----------
<S>                           <C>
     27                       Financial Data Schedule

</TABLE>