UNIPARTS USA LTD. AND SUBSIDIARY Consolidated Financial ... · consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures

UNIPARTS USA LTD. AND SUBSIDIARY

Consolidated Financial Statements

With Supplementary Information

March 31, 2016 and 2015

With Independent Auditors’ Report

Uniparts USA Ltd. and Subsidiary Table of Contents March 31, 2016 and 2015 Page(s) Independent Auditors’ Report ...................................................................................................... 1-2 Financial Statements Consolidated Balance Sheets ............................................................................................................ 3 Consolidated Statements of Income .................................................................................................. 4 Consolidated Statements of Changes in Stockholder’s Equity .......................................................... 5 Consolidated Statements of Cash Flows ........................................................................................... 6 Notes to Consolidated Financial Statements .................................................................................. 7-16 Supplementary Information Consolidating Schedule - Balance Sheets ........................................................................................ 17 Consolidating Schedule - Statements of Income .............................................................................. 18

INDEPENDENT AUDITORS’ REPORT To the Shareholder, Uniparts USA Ltd.: We have audited the accompanying consolidated financial statements of Uniparts USA Ltd. and Subsidiary (collectively the “Company”) which comprise the consolidated balance sheets as of March 31, 2016 and 2015, and the related consolidated statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Uniparts USA Ltd. and Subsidiary as of March 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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Other Information Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements as a whole. The supplementary information on pages 17-18 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

June 21, 2016

Uniparts USA Ltd. and Subsidiary Consolidated Balance Sheets March 31, 2016 and 2015

The Notes to Consolidated Financial Statements are an integral part of these statements. 3

2016 2015

Assets

Current assetsCash 187,813$ 120,298$ Accounts receivable, net 4,373,506 4,683,646Inventories, net 18,873,165 18,467,476Prepaid taxes 597,870 363,748Prepaid expenses 94,396 105,686Other current assets 428,067 363,416

Total current assets 24,554,817 24,104,270

Property and equipment, net 2,964,817 2,686,600

Other assetsUnamortized debt issue costs - 36,067Goodwill 11,430,929 11,430,929

Total other assets 11,430,929 11,466,996

38,950,563$ 38,257,866$

Liabilities and Stockholder's Equity

Current liabilitiesLines of credit 8,499,111$ 8,070,328$ Accounts payable 3,350,355 5,045,416Due to related parties 1,745,627 2,073,787Accrued interest 3,938 2,240Accrued expenses 2,460,066 719,977Current portion of long-term debt 634,465 537,840Current portion of capital lease obligation 27,221 28,366

Total current liabilities 16,720,783 16,477,954

Long-term liabilitiesLong-term debt, net of current portion 1,861,527 2,046,800Capital lease obligation, net of current portion - 27,221Deferred rent 381,098 446,116Deferred gain-leaseback 230,949 298,542Deferred income taxes 1,975,717 2,130,147

Total long-term liabilities 4,449,291 4,948,826 Stockholder's equity Convertible, callable preferred stock, $10 par value, 800,000 shares authorized,

issued and outstanding. 8,000,000 8,000,000 Common stock, $10 par value, 300,000 shares authorized; 2,000 shares

issued and outstanding. 20,000 20,000 Retained earnings 9,760,489 8,811,086

17,780,489 16,831,086

38,950,563$ 38,257,866$

Uniparts USA Ltd. and Subsidiary Consolidated Statements of Income Years Ended March 31, 2016 and 2015


2016 2015

Revenue, net 60,820,970$ 71,191,062$

Cost of goods sold 54,393,601 63,959,783

Gross profit 6,427,369 7,231,279

Selling, general and administrative expenses 4,900,401 4,724,662

Income from operations 1,526,968 2,506,617

Other income (expense) Amortization of gain on dispositions of property and equipment 83,921 74,268 Loss on disposal of property and equipment (13,546) - Interest expense (351,654) (297,405)

Total other expense (281,279) (223,137) Income before income tax expense 1,245,689 2,283,480 Income tax expense (benefit) Current 450,716 527,917 Deferred (154,430) (379,853)

Total income tax expense 296,286 148,064

Net income 949,403$ 2,135,416$

Uniparts USA Ltd. and Subsidiary Consolidated Statements of Changes in Stockholder’s Equity Years Ended March 31, 2016 and 2015


Convertible,

Callable Total Preferred Common Retained Stockholder's

Stock Stock Earnings Equity

Balance, March 31, 2014 8,000,000$ 20,000$ 6,675,670$ 14,695,670$

Net income - - 2,135,416 2,135,416 Balance, March 31, 2015 8,000,000 20,000 8,811,086 16,831,086

Net income - - 949,403 949,403

Balance, March 31, 2016 8,000,000$ 20,000$ 9,760,489$ 17,780,489$

Uniparts USA Ltd. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2016 and 2015


2016 2015

Cash flows from operating activities Net income 949,403$ 2,135,416$ Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense - 25,000 Change in allowance for obsolete inventory 41,986 (36,986) Depreciation 494,596 395,201 Amortization of debt issue costs 36,067 35,976 Deferred income tax (benefit) provision (154,430) (379,853) Amortization of deferred gain on dispositions of property and equipment (67,593) (67,593) Loss on disposal of property and equipment 13,546 - Change in: Accounts receivable 310,140 (407,566) Inventories (447,675) (237,784) Prepaid taxes (234,122) 101,252 Prepaid expenses 11,290 (9,578) Other current assets (64,651) (361,877) Change in: Accounts payable (1,695,061) 218,965 Accrued interest 1,698 (607) Accrued expenses 1,740,089 (219,563) Income taxes payable - - Due to related parties (328,160) (961,975) Deferred rent (65,018) (44,716)

Net cash provided by operating activities 542,105 183,712

Cash flows from investing activities Purchase of property and equipment (340,431) (712,451)

Cash flows from financing activities Increase in debt issue costs - (27,000) Proceeds from bank borrowings on lines of credit - net 428,783 409,205 Repayment of capital lease (28,366) (27,042) Proceeds from debt - 78,209 Repayment of debt (534,576) - Net cash provided (used) by financing activities (134,159) 433,372

Net change in cash 67,515 (95,367)

Cash Beginning of year 120,298 215,665 End of year 187,813$ 120,298$

Supplemental disclosure of cash flow informationCash paid for interest 349,956$ 298,012$ Cash paid for income taxes 1,147,094$ 418,040$

Supplemental disclosure of non-cash investing activities Equipment acquired through capital expenditures debt facility 445,928$ 517,500$

Uniparts USA Ltd. and Subsidiary Notes to Consolidated Financial Statements March 31, 2016 and 2015

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1. Nature of Business The operations of Uniparts USA Ltd. and Subsidiary (collectively the “Company”) consist of the machining of

metal parts and components as well as the purchasing of machine parts from related party and third party vendors for resale. The Company sells its products primarily to agricultural and construction equipment manufacturers in the United States on credit terms the Company establishes with each customer. Uniparts India Limited (the “Ultimate Parent”) owns 100% of Uniparts USA Ltd.

2. Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of Uniparts USA Ltd. (the “Parent”) and its wholly owned subsidiary, Uniparts Olsen Inc. (the “Subsidiary”). All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with maturities of three months or less at the time of acquisition to be cash equivalents for financial statement purposes.

Accounts Receivable

Accounts receivable are uncollateralized, non-interest bearing customer obligations due under normal trade terms, usually within 30 days of services provided. Customer account balances with invoices dated over 90 days are considered delinquent. The Company applies collections of accounts receivable to specific invoices in accordance with customer specifications, or if unspecified, to the oldest outstanding invoices.

The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections, and current credit conditions. The Company will turn an account over for collection or write balances off as uncollectible based on the facts and circumstances of each situation. As of March 31, 2016 and 2015, the allowance for doubtful accounts totaled $50,000. Inventories Inventories, which consist primarily of construction, agricultural and forestry equipment parts and supplies, are stated at the lower of cost or market and are net of an allowance for obsolescence. Cost is determined using the average cost method and items are relieved from inventory on a first-in first-out basis. Market represents the lower of replacement cost or estimated net realizable value. Property and Equipment

Property and equipment is carried at cost less accumulated depreciation. Leasehold improvements are amortized over the shorter of the term of the lease or the life of the equipment. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets as follows:

Years Shop equipment 3-20 Office equipment 3-7 Computer equipment 5 Furniture and fixtures 7 Vehicle 5 Building 39 Software 5

Expenditures for maintenance and repairs are charged to expense as incurred.

Uniparts USA Ltd. and Subsidiary Notes to Consolidated Financial Statements Years Ended March 31, 2016 and 2015

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Goodwill

The Company adopted the accounting pronouncement which permits management to evaluate goodwill when internal and external factors exist which indicate that the book value of goodwill could be impaired. Prior to the adoption of the accounting pronouncement relating to goodwill, the Company recorded accumulated amortization of goodwill of $1,567,464. Management has determined that no impairment analysis was required and believes goodwill is not impaired as of March 31, 2016 and 2015.

Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted

in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in determining, among other items, accounts receivable allowances, inventory valuation (which includes allowance for obsolescence and standard labor and overhead rates capitalized in inventory), goodwill impairment, medical insurance accruals, useful lives of tangible assets, provisions for warranty costs and deferred income taxes. Actual results could differ from those estimates.

Unamortized Debt Issue Costs Debt issue costs represent costs associated with the issuance of bank term loans and are amortized to interest expense using a method which approximates the effective interest method over the terms of the related borrowing. Valuation of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Management has determined that no assessment was required for the periods presented in these consolidated financial statements. Fair Value of Financial Instruments The carrying value of financial instruments including cash, accounts receivable and accounts payable approximates fair value due to the short maturity of these instruments. Revenue Recognition The Company recognizes revenue, net of sales discounts, at the time the price is fixed or determinable, title passes to the customer, and collectability is reasonably assured which is generally when products are shipped. For a certain customer, title passes to the customer upon receipt based upon the terms of their specific agreement. Warranties Provisions for warranty costs are recognized at the date of sale of the relevant products, at management’s best estimate of the expenditure required to settle the Company’s obligation, net of warranties provided by suppliers.

Shipping and Handling Costs The Company classifies freight billed to customers as sales revenue, which is generally included in the list price to the customer, and classifies the related freight costs as cost of goods sold. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the consolidated financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income taxes result primarily from temporary differences related to accounts receivable, inventory, net property and equipment, net goodwill, accrued expenses and deferred rent for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax expense or benefit is recognized as a result of the change in the deferred tax assets or liabilities during the year.


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Income taxes are allocated between the members of the consolidated group based on their individual taxable income.

The Company has net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits associated with net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business, and other planning strategies will enable the Company to utilize the net operating loss carryforwards. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established. The Company files tax returns in the U.S. federal jurisdiction as well as various states. Furthermore, the Company has no income tax related penalties or interest for the periods reported in these consolidated financial statements. The Company has not recognized any uncertain tax positions in the consolidated financial statements at March 31, 2016 and 2015.

Effects of Recently Issued Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB") issued Accounting Standards Update 2016-02 Leases (Topic 842) (“ASU 2016-02”) to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments in ASU 2016-02 is permitted for all entities. The Company is currently evaluating the impact on the financial statements of the possible adoption of the alternative guidance in ASU 2016-02 and has not determined the potential impact of adoption at this time. In November 2015, the FASB issued Accounting Standards Update 2015-17 Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”) to provide guidance to simplify the presentation of deferred income taxes. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted. ASU 2015-17 has been adopted by the Company and applied to these consolidated financial statements. In July 2015, the FASB issued Accounting Standards Update 2015-11 Inventory – Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”) which provides accounting guidance relating to simplifying the subsequent measurement of inventory. ASU 2015-11 applies to all inventory other than that measured using last-in, first out (LIFO) or the retail inventory method. The guidance states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for nonpublic entities with a fiscal year beginning after December 15, 2016 and should be applied prospectively with earlier application permitted as of the beginning of an annual reporting period. The Company is currently evaluating the impact of applying this new guidance on their prospective consolidated financial statements. In April 2015, the FASB issued Accounting Standards Update 2015-03 Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) which provides accounting guidance relating to simplifying the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for nonpublic entities with a fiscal year beginning after December 15, 2015 and may be early adopted for financial statements that have not been previously issued. The Company is currently evaluating the impact of applying this new guidance on their prospective consolidated financial statements.


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In May 2014, the FASB issued Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) which provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. ASU 2014-09 is effective for nonpublic entities with a fiscal year beginning after December 15, 2018 and may be early adopted as of the public entity effective date of fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact of applying this new guidance on their prospective consolidated financial statements. Reclassifications Certain amounts previously reported in the 2015 financial statements have been reclassified to conform to the 2016 presentation.

3. Inventories

The composition of inventories as of March 31, 2016 is as follows: Obsolescence Net Total Allowance Amount Raw materials $ 2,327,945 $ -- $ 2,327,945 Work-in-process 1,784,103 100,000 1,684,103 Finished goods 13,475,983 250,000 13,225,983 Supplies 1,635,134 -- 1,635,134 $ 19,279,378 $ 350,000 $ 18,873,165 The composition of inventories as of March 31, 2015 is as follows: Obsolescence Net Total Allowance Amount Raw materials $ 3,149,153 $ -- $ 3,149,153 Work-in-process 3,092,007 100,000 2,992,007 Finished goods 11,015,019 208,014 10,807,005 Supplies 1,519,311 -- 1,519,311 $ 18,775,490 $ 308,014 $ 18,467,476

4. Property and Equipment

Property and equipment consist of the following for the years ended March 31: 2016 2015 Leasehold improvements $ 179,013 $ 227,184 Shop equipment 10,870,796 10,851,688 Office equipment 707,274 570,385 Computer equipment 126,673 121,773 Software 7,860 7,860 Furniture and fixtures 27,891 27,891 Building 721,608 721,608


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Land 327,609 327,609 Vehicles 237,920 228,397 13,206,644 13,084,395 Less: accumulated depreciation 10,241,827 10,397,795 Property and equipment - net $ 2,964,817 $ 2,686,600

Total depreciation expense for the years ended March 31, 2016 and 2015 was $494,596 and $395,201, respectively.

5. Risk Concentrations

Credit Risk The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash and trade accounts receivable.

The Company's largest customer accounted for approximately 84% and 85% of revenues for the years ended March 31, 2016 and 2015, respectively. Two customers accounted for approximately 74% and 70% of net accounts receivable as of March 31, 2016 and 2015, respectively. Generally, the Company does not obtain security from its customers in support of accounts receivable. Potential losses from concentrations of credit risk with respect to trade accounts receivable are considered to be limited due to the Company’s ongoing credit evaluation of its customers. Foreign Risk The Company purchases a significant amount of materials from affiliates located in India. This source of materials may be subject to unpredictable changes and delays due to legal, political, and climate conditions. See Note – 13 Related Party Transactions for further information.

6. Debt Lines of Credit

In March 2016, the Subsidiary modified its $11,000,000 revolving line of credit to extend the term of the line from March 24, 2016 to March 24, 2018. The line of credit has a variable interest rate calculated as a “floating rate” which is a "base rate" determined by LIBOR plus a variable "margin rate" based on the utilization of the line. The rate at March 31, 2016 and 2015 were approximately 2.65% and 2.60%, respectively. The line is collateralized by substantially all assets of the Subsidiary and cross-collateralized with a term loan at the Subsidiaries’ bank. The line of credit is secured by the personal assets of the President of the Company and a corporate guaranty by the Company. The Subsidiary has drawn down $4,989,425 and $4,491,532 on the line of credit as of March 31, 2016 and 2015, respectively. Interest expense relating to this line was $151,037 and $135,204 for the years ended March 31, 2016 and 2015, respectively. [2]

The Parent modified its $4,000,000 line of credit agreement to extend the maturity date to March 24, 2018. The line of credit’s interest rate is a function of the prime rate and an adjusted LIBOR. During 2016 and 2015, the interest rate on this line was approximately 2.69% and 2.40%, respectively. The line is collateralized by substantially all assets of the Parent, cross-collateralized with a term loan at the bank, and is secured by the personal guaranty of the President of the Parent. The Subsidiary has guaranteed the financial performance of the Parent’s liabilities at this institution. This line of credit had balances of $3,509,686 and $3,578,796 as of the years ended March 31, 2016 and 2015. Interest expense relating to this line was $87,579 and $72,925 for the years ended March 31, 2016 and 2015, respectively.


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Notes Payable 2016 2015

Installment loan payable to a bank, due in monthly principal installments of $30,000 through May 1, 2018. Interest is charged at a rate of 2.25% plus an adjusted LIBOR. The debt is collateralized by substantially all assets of the Subsidiary. The loan is also secured by the personal assets of the President of the Parent and a corporate guaranty by the Parent. [1] [2] $ 750,000 $ 1,110,000 Bank loan payable, due in monthly principal installments of $6,000 through March 24, 2021. Interest is charged at a rate of 2.25% plus an adjusted LIBOR. The debt is collateralized by substantially all assets of the Company, secured by the personal guaranty of the President of the Parent, and a corporate guaranty by the Subsidiary. [1] [2] 870,000 942,000 Capital expenditure $2,500,000 non-revolving note facility expiring March 24, 2020. Interest is due monthly at a rate of 2.25% plus an adjusted LIBOR. The balance as of each March 24 will be amortized over a 60 month period. All interest and principal is payable in full at the end of the 60 month term. The amount available under the note is $1,631,447. The debt is collateralized by substantially all assets of the Subsidiary. The loan is also secured by the personal assets of the President of the Parent and a corporate guaranty by the Parent. Amounts outstanding under the non-revolving note facility are as follows: Note payable of $517,500 due in monthly installments of $8,625 through March 2020 422,625 517,500 Note payable of $445,928 due in monthly installments of $7,432 through March 2021 445,928 - Note payable to bank, interest at 5.49%, with fixed monthly payments of $695, including interest, through February of 2017, collateralized by equipment. 7,439 15,140 2,495,992 2,584,640 Less: current portion (634,465) (537,840) $ 1,861,527 $ 2,046,800 [1] The referenced installment loans are held with the same financial institution. [2] In connection with the line of credit and the referenced installment loans noted above, the Company is

subject to certain restrictive and financial covenants, including limitations on additional borrowing, minimum fixed charge coverage ratio requirements, and maximum funded debt to EBITDA ratio requirements. Additionally, the Company may not redeem any of its equity interests or return any contribution to an owner other than stock dividends.


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Future annual maturities of the long-term debt: Year ending March 31: 2017 $ 634,465 2018 654,686 2019 264,686 2020 273,311 2021 668,844 $ 2,495,992 7. Capital Leases

The Subsidiary leases certain shop equipment under a capital lease. The economic substance of the lease is that the Subsidiary is financing the acquisition of the assets through the lease, and accordingly, they are recorded in the Subsidiary’s assets and liabilities. Equipment held under the capital lease is included in property and equipment. The effective interest rate of the lease is 4.79% and the lease matures on February 15, 2017.

The following is an analysis of property held under capital lease as of March 31: 2016 2015 Equipment held under capital lease $ 135,580 $ 135,580 Less: accumulated depreciation (101,687) (82,318) Equipment held under capital lease – net $ 33,893 $ 53,262 Depreciation expense for equipment held under capital lease obligations was $19,369 for the years ended March 31, 2016 and 2015. Future minimum payments required under the capital lease as of March 31, 2016, are $27,877 and are due in 2017. The interest related to the capital lease obligation is $656 and principal due under the capital lease obligation is $27,221.

8. Stockholder’s Equity Convertible, Callable Preferred Stock

All 800,000 shares of preferred stock are convertible, at the option of the holder, into shares of common stock. Each share of preferred stock may be converted into $10 worth of common stock. The number of common shares received will be based on the fair market value of common stock on the date of the conversion. The Company, at its discretion, may call preferred stock at the rate of $10 per share. There are 800,000 shares of preferred stock, $10 par value, authorized, issued and outstanding as of March 31, 2016 and 2015. Dividend rights for holders of convertible preferred stock are identical to the dividend rights of common stockholders.

Common Stock There are 300,000 shares of common stock, $10 par value, authorized, and 2,000 shares issued and outstanding as of March 31, 2016 and 2015.

Shares of common and preferred stock have identical ownership interests in the Company.


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9. Sale-Leaseback In March 2002, Olsen Engineering, LP (predecessor to Olsen Engineering, LLC) sold its operating facilities to Pin

House, LLC resulting in a loss of $648,827 to be recognized over the life of the lease in accordance with generally accepted accounting principles. The owners of Pin House, LLC owned approximately 87% of Olsen Holding, LP, the former 99% limited partner of Olsen Engineering, LP. These facilities were then leased back to Olsen. The accumulated loss recognized through March 2007 was $241,537 for Olsen. The remaining deferred loss of $407,290 will be recognized over the remaining lease period.

In August 2004, Pin House, LLC sold the operating facilities to a third party resulting in a gain of $1,505,930. In

accordance with generally accepted accounting principles, the gain on the sale-leaseback is recognized over the fifteen-year lease period. The accumulated gain recognized through March 2007 was $259,354 for Pin House, LLC. The remaining deferred gain of $1,246,576 will be recognized over the remaining lease period.

The March 31, 2007 combined financial statements reported the deferred gain of $1,246,576 from the leaseback

under Pin House. The current year financial statements for the Company reflect the reporting of the Pin House deferred gain. In addition, the deferred loss of $407,290 as of March 31, 2007 has been recorded as a reduction of the deferred gain. The net deferred gain of $839,286 is being amortized by the Company over the remaining twelve year lease term. The gain recognized for each of the years ended March 31, 2016 and 2015 is $67,593. The unrecognized deferred gain with respect to this transaction was $230,949 and $298,542 as of March 31, 2016 and 2015, respectively.

10. Commitments and Contingencies

Commitments The Subsidiary has various operating equipment leases and one building lease as of March 31, 2016. Total lease expense was approximately $718,808 and $699,100 for the years ended March 31, 2016 and 2015, respectively. Under the terms of the building lease, the Subsidiary is responsible for all repairs, maintenance, insurance, real estate taxes and utilities. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of March 31, 2016:

Year ending March 31: Equipment Building Total 2017 $ 53,177 $ 718,314 $ 771,491 2018 29,685 739,863 769,548 2019 17,475 762,059 779,534 2020 3,363 321,425 324,788 2021 1,962 - 1,962 $ 105,662 $ 2,541,661 $ 2,647,323 The Subsidiary has a standby letter of credit for $127,500 with a bank at March 31, 2016 to secure the lease for the building. At March 31, 2015, this letter of credit was $255,000. The letter of credit is secured by the Subsidiary’s assets and through guarantees by both the Parent and Subsidiary. The Company utilizes a third party warehouse to manage and store a portion of its finished goods. The warehouse agreement will expire October 31, 2017. The Company’s monthly fee varies as it is determined by space usage and hourly rates for manual laborers and warehouse managers, there is no minimum monthly storage fee. Total warehousing expense approximated $770,148 and $903,500 for the years ended March 31, 2016 and 2015, respectively. The future expenses relating to this agreement are not included in the schedule above due to its variable nature.


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Contingencies

During the year ended March 31, 2015, a major customer of the Subsidiary (the “Customer”) informed it of a warranty claim issue relating to a specific part supplied by the Subsidiary which was not properly heat treated and thus allegedly caused defects in the assembly ultimately sold by the Customer to its end users. Although the Customer had been aware of claims arising from this product for nearly one year, the Subsidiary was first notified of a potential claim in August of 2014, the amount of which was then unknown. Based upon the data provided to the Subsidiary by the Customer in 2015, the Customer experienced the majority of claims relating to this item in 2012 and 2013. The Subsidiary then recorded a liability for the amount estimated to be paid of $284,000 at March 31, 2015. In 2016, the Subsidiary settled this claim for $1,680,000 and recorded a liability for the full amount in accrued expenses. The Subsidiary outsourced this specific part for heat treating and the Subsidiary expects to be reimbursed $425,000 by its vendor. The expense, net of the reimbursement, totaling $1,255,000 has been recorded in cost of goods sold. A claim of $724,000 has been filed with the Subsidiary’s insurance provider. The Subsidiary and the Customer have agreed the first 50% of this insurance claim will be retained by the Subsidiary. Any additional insurance amount received will be remitted to the Customer not to exceed $724,000. The actual insurance recovery has not been determined by the insurance carrier and has not been recorded by the Subsidiary. The following is a reconciliation of the changes in the warranty liability as of March 31: 2016 2015

Warranty liability, beginning of year $ 284,000 $ - Warranty payments - - Warranties issued during year - 284,000 Adjustments to existing warranties 1,396,000 - Warranty liability, end of year $ 1,680,000 $ 284,000

11. Employee Benefits The Company maintains a defined contribution plan (the “Plan”) under Section 401(k) of the Internal Revenue

Code which covers substantially all regular full-time employees who have attained the defined age and service requirements.

The Plan provides for employee and discretionary employer matching contributions. Employer contributions to the

Plan for the years ended March 31, 2016 and 2015 were approximately $48,000 and $74,000, respectively. The Subsidiary is self-insured for its group health and dental plan which covers all employees of Uniparts Olsen

Inc. and their immediate families up to a maximum annual claim of $80,000 per individual with an aggregate annual ceiling of approximately $1,200,000. Insurance coverage has been obtained for claims in excess of these levels. The amount of expenses relating to the Plan totaled approximately $1,116,000 and $1,412,000 for the years ended March 31, 2016 and 2015, respectively. Claims incurred but not reported for which the Company is liable are approximately $208,000 and $185,000 as of March 31, 2016 and 2015, respectively, and are included in accrued expenses in the accompanying consolidated balance sheets.

12. Income Taxes The components of the provision for income taxes consisted of the following for the years ended March 31: 2016 2015 Current Federal $ 400,147 $ 480,684 State 50,569 47,233 450,716 527,917


16

Deferred Federal (189,271) 29,411 State 34,841 (409,264) (154,430) (379,853) Provision for income taxes $ 296,286 $ 148,064

Income tax expense differs from the amount that would be obtained by applying the Federal statutory rates to income before income tax expense because no tax benefit has been provided for non-deductible expenses, research and development credits have been used to reduce taxable income, the benefit of prior year accrual to actual deductions and state income taxes. During the year ended March 31, 2015, the Company revised the estimate for state deferred tax liabilities related to a change in estimate related to the State of Iowa’s effective tax rate. The result was a net decrease of deferred tax assets and liabilities of $453,897.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the deferred tax assets and deferred tax liabilities consist of the following amounts as of March 31:

2016 2015 Accrued expenses $ 664,042 $ 166,342 Bad debts 18,885 18,835 Inventory 304,994 232,869 Deferred rent 143,941 168,052 Deferred gain 87,230 112,461 Net operating loss carryforwards 16,802 54,200 Less: valuation allowance -- -- Goodwill (2,437,426) (2,305,958) Prepaid expenses (25,706) (19,390) Property, plant, and equipment (748,479) (557,558) Net deferred tax liability $ (1,975,717) $ (2,130,147) As of March 31, 2016, the Company had State net operating loss carryforwards of approximately $1.4 million

which will begin to expire in the fiscal year ended March 31, 2029. The Company expects to fully utilize the existing net operating losses and therefore did not establish a valuation allowance for the related tax asset as of March 31, 2016.

13. Related Party Transactions

The Company purchases materials from companies located in India that share common ownership with the Company. Payments made to these companies amounted to approximately $23,882,000 and $21,209,000 for the years ended March 31, 2016 and 2015, respectively. Additionally there is approximately $2,075,000 and $2,418,000 due to these related companies which is included in accounts payable and due to related parties as of March 31, 2016 and 2015, respectively. These amounts will be paid under normal trade terms with these affiliated companies. The Company provides minimal services to the aforementioned related companies. As of March 31, 2016 and 2015, receivables due from these companies are immaterial to the consolidated financial statements.

14. Subsequent Events The Company has evaluated subsequent events through June 21, 2016, which is the date these consolidated financial statements were available to be issued. The Company has determined that there are no events requiring recognition or disclosure in these consolidated financial statements.

SUPPLEMENTARY INFORMATION

Uniparts USA Ltd. and Subsidiary Consolidating Schedule- Balance Sheets March 31, 2016

See Independent Auditors’ Report. 17

Uniparts USA Ltd.Uniparts Olsen

Inc. CombinedEliminating

Adjustments ConsolidatedAssets

Current assetsCash 178,563$ 9,250$ 187,813$ -$ 187,813$ Accounts receivable, net 659,301 3,714,205 4,373,506 - 4,373,506 Inventories, net 5,934,504 12,938,661 18,873,165 - 18,873,165 Prepaid taxes 597,870 - 597,870 - 597,870 Prepaid expenses 13,508 80,888 94,396 - 94,396 Deferred income taxes 20,259 - 20,259 (20,259) - Other current assets 3,067 425,000 428,067 - 428,067

Total current assets 7,407,072 17,168,004 24,575,076 (20,259) 24,554,817

Property and equipment, net 1,013,976 1,950,841 2,964,817 - 2,964,817

Other assetsDue from related party - 1,434,481 1,434,481 (1,434,481) - Investment in subsidiary 8,367,665 - 8,367,665 (8,367,665) - Goodwill - 6,909,650 6,909,650 4,521,279 11,430,929

Total other assets 9,381,641 10,294,972 19,676,613 (5,280,867) 14,395,746

16,788,713$ 27,462,976$ 44,251,689$ (5,301,126)$ 38,950,563$

Liabilities and Stockholder's Equity

Current liabilitiesLines of credit 3,509,686$ 4,989,425 8,499,111$ -$ 8,499,111$ Accounts payable - 3,350,355 3,350,355 - 3,350,355 Due to related parties 3,180,108 - 3,180,108 (1,434,481) 1,745,627 Accrued interest - 3,938 3,938 - 3,938 Accrued expenses 102,574 2,357,492 2,460,066 - 2,460,066Current portion of long-term debt 81,779 552,686 634,465 - 634,465Current portion of capital lease obligation - 27,221 27,221 - 27,221

Total current liabilities 6,874,147 11,281,117 18,155,264 (1,434,481) 16,720,783

Long-term liabilitiesLong-term debt, net of current portion 795,660 1,065,867 1,861,527 - 1,861,527 Capital lease obligation, net of current portion - - - - - Deferred rent - 381,098 381,098 - 381,098 Deferred gain-leaseback - 230,949 230,949 - 230,949 Deferred income taxes - 1,995,976 1,995,976 (20,259) 1,975,717

Total long-term liabilities 795,660 3,673,890 4,469,550 (20,259) 4,449,291 Stockholder's equity

Convertible preferred stock, $10 par value, 800,000 shares authorized,issued and outstanding 8,000,000 - 8,000,000 - 8,000,000

Common stock, $10 par value, 300,000 shares authorized;2,000 shares issued and outstanding 20,000 - 20,000 - 20,000

Common stock, $1 par value, 1,224,301 shares authorized, issued and outstanding - 1,224,301 1,224,301 (1,224,301) - Additional paid-in capital - 2,680,156 2,680,156 (2,680,156) - Retained earnings 1,098,906 8,603,512 9,702,418 58,071 9,760,489

9,118,906 12,507,969 21,626,875 (3,846,386) 17,780,489

16,788,713$ 27,462,976$ 44,251,689$ (5,301,126)$ 38,950,563$

Uniparts USA Ltd. and Subsidiary Consolidating Schedule - Statements of Income Year Ended March 31, 2016

See Independent Auditors’ Report. 18

Uniparts USA Ltd. Uniparts Olsen Inc. CombinedEliminating

Adjustments Consolidated

Revenue, net 14,659,951$ 46,161,019 60,820,970$ -$ 60,820,970$

Cost of goods sold 11,452,049 42,941,552 54,393,601 - 54,393,601

Gross profit 3,207,902 3,219,467 6,427,369 - 6,427,369

Selling, general and administrative expenses 1,959,171 2,941,230 4,900,401 - 4,900,401

Income from operations 1,248,731 278,237 1,526,968 - 1,526,968

Other income (expense) Amortization of deferred gain on dispositions of property and equipment 16,328 67,593 83,921 - 83,921 Loss on disposal of property and equipment - (13,546) (13,546) - (13,546) Dividend income - - - - - Interest expense (113,069) (238,585) (351,654) - (351,654)

Total other income (expense) (96,741) (184,538) (281,279) - (281,279) Income before income tax expense 1,151,990 93,699 1,245,689 - 1,245,689 Income tax expense (benefit) Current 364,700 86,016 450,716 - 450,716 Deferred 67,774 (222,204) (154,430) - (154,430)

Total income tax expense 432,474 (136,188) 296,286 - 296,286

Net income 719,516$ 229,887$ 949,403$ -$ 949,403$

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