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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------
Commission file number 0-1837
FEDERAL SCREW WORKS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-0533740
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification No.)
20229 NINE MILE ROAD, ST. CLAIR SHORES, MICHIGAN 48080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 586-443-4200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
(Title of class)
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 12 months, 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 3 of this Form 10-K or any amendment to this
Form 10-K. |X|
As of September 3, 2002 the aggregate market value of the common stock of
Registrant held by non-affiliates was $27,445,062.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of September 3, 2002 is as follows:
Title of Class Number of Shares Outstanding
Common Stock, 1,218,593
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the Registrant dated September
24, 2002 has been incorporated by reference in response or partial response to
Items 10, 11, 12 and 13 in this Report.
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PART I
ITEM 1. BUSINESS.
Federal Screw Works (the "Registrant"), originally incorporated in
Michigan in 1919, is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts, perishable
tooling and other machined, cold formed, hardened and/or ground metal parts, all
of which constitute a single industry segment.
The Registrant's products are manufactured at several plants and are
fabricated from metal rod and bar, which are generally available at competitive
prices from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 91% of the Registrant's net sales in fiscal 2002 (85% and
89% in fiscal 2001 and fiscal 2000, respectively) were made either directly or
indirectly to automotive companies. The Registrant generally does not require
collateral from its customers.
While the Registrant holds a number of patents, it believes that the
successful continuation of its business is not dependent on any single patent or
group of patents, trademarks, or licenses. (The Registrant retains the rights to
certain royalties related to an exclusive license agreement with semiconductor
manufacturer Silicon Systems incorporated (SSi), whereunder SSi will produce and
market certain phonetic speech synthesizer chips under the SSi product name. The
Registrant does not consider the royalty agreement to be material to its
business.)
The OEM supplier industry is highly cyclical and, in large part,
dependent upon the overall strength of consumer demand for light trucks and
passenger cars. There can be no assurance that the automotive industry, for
which the Registrant supplies components, will not experience downturns in the
future. A decrease in overall consumer demand for motor vehicles, in general, or
specific segments, could have a material adverse effect on the Registrant's
financial condition and results of operations.
There are no practices and conditions of the Registrant or known to the
Registrant relating to working capital items which are material to an
understanding of the Registrant's business in the industry in which it competes.
The Registrant's Shareholders are aware of the Registrant's dependence
upon sales to the two largest U.S. automobile manufacturers, a condition that
has existed for at least fifty years. Although the Registrant has purchase
orders from such customers, such purchase orders generally provide for supplying
the customer's requirements for a particular model or model year rather than for
manufacturing a specific quantity of products. The loss of any one of such
customers or significant purchase orders could have a material adverse effect on
the Registrant. These customers are also able to exert considerable pressure on
component suppliers to reduce costs, improve quality and provide additional
design and engineering capabilities. There can be no assurance that the
additional costs of increased quality standards, price reductions or additional
capabilities required by such customers will not have a material adverse effect
on the financial condition or results of operations of the Registrant.
Customers comprising 10% or greater of the Registrant's net sales are
summarized as follows:
2002 2001 2000
---- ---- ----
Ford Motor Company............................... 35% 37% 42%
General Motors Corporation....................... 13% 15% 16%
All Others....................................... 52% 48% 42%
--- --- ---
100% 100% 100%
=== === ===
2
Many of the Registrant's customers, and other suppliers to the
Registrant's customers, are unionized, and work stoppages, slow-downs or other
labor disputes experienced by, and the labor relations policies of, such
customers and suppliers, could have an adverse effect on the Registrant's
results of operations.
As of August 31, 2002, the Registrant had an estimated backlog of firm
orders amounting to approximately $12,700,000, all of which are expected to be
filled within the 2003 fiscal year. The comparable backlog as of August 31, 2001
amounted to approximately $13,000,000.
No material portion of the business of the Registrant is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the Government.
The manufacture and sale of the Registrant's products is an extremely
competitive business. Because industry statistics are not available, the
Registrant is unable to accurately determine the number of its competitors, nor
to state its competitive position in its principal market as a supplier of parts
to automotive customers. However, the Registrant believes that it is generally
considered a leading producer of its principal type of product in an estimated
$650 million annual market served by approximately thirty major domestic
suppliers, no one of which, or no small number of which, are dominant. The
Registrant is aware, however, that there are companies making similar products,
with greater sales and resources than the Registrant. The Registrant is aware
that in recent years the activity of foreign competitors manufacturing similar
products has increased. The quality of the product, the product's price and
service to customers are the principal methods of competition. There is no
assurance that the Registrant will be able to successfully compete in future
periods.
Research and development activity expenses during each of the last
three fiscal years is not deemed material.
The Registrant has experienced no material effects in complying with
government environmental regulations.
The Registrant presently employs approximately 443 hourly-rated and
salaried personnel. The Registrant's hourly work forces at the Chelsea and
Romulus facilities are unionized. The Registrant's contracts with the unions in
Chelsea and Romulus expire in May of 2005 and January of 2003, respectively.
Sales to customers outside the United States are not significant.
ITEM 2. DESCRIPTION OF PROPERTY.
The Registrant's industrial component parts are manufactured in seven
plants located throughout Michigan.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and headers
as primary equipment. Among the items manufactured to both inch and metric
specifications are hex head bolts, connecting rod bolts, studs and flange bolts.
The 200,000 square foot plant is situated on 25 acres of land, and contains heat
treat facilities for hardening in-process parts.
The Romulus Division is housed in a 100,000 square foot plant on 13
acres of land in Romulus, Michigan. This division uses nutformers as primary
equipment to manufacture special prevailing torque locknuts. Products include
locknuts, connecting rod nuts, and other special nut products, in both metric
and inch sizes. The plant has its own furnace for heat treating in-process
parts.
In February of 1999, the Registrant began operations in a new 35,000
square foot plant in Traverse City, Michigan. The Traverse City Division
manufacturers special assemblies for automotive customers.
The parts produced at the above divisions are sold principally to the
automotive market. These parts are mass produced, and most are shipped directly
to car assembly plants.
3
The Novex Tool Division occupies a 19,000 square foot leased facility
in Brighton, Michigan. The lease expires in December, 2004. The Division
manufactures perishable tooling, primarily for the cold heading industry.
Approximately forty percent of its output is consumed by the Registrant's Big
Rapids, Romulus and Traverse City Divisions. Segment information for the Novex
Division is immaterial to the financial information for the Registrant as a
whole.
The Chelsea Division is located in Chelsea, Michigan, in a plant having
approximately 86,000 square feet. Primary equipment consists of automatic screw
machines and rotary index machines capable of making products from 1/16 inch to
2-3/4 inches in diameter. The Chelsea Division fabricates a wide variety of
precision parts including piston pins, bushings, fittings, special fasteners,
valve components, sleeves, shafts, gear blanks and the like. These parts are
generally produced in large volume lots and delivered direct to manufacturers of
products such as compressors, automobiles, transmissions and small engines.
In August, 1994, the Registrant leased a 16,000 square foot facility in
Romulus to conduct engineering and manufacturing development activities. This
facility, known as the Technical Center, gives the Registrant sufficient room to
try out new primary and secondary equipment, tooling, and parts feeding and
automation devices, as well as permitting the Registrant to rebuild recently
purchased used equipment.
In June of 2001, the Registrant began operations in a new 43,000 square
foot plant in Boyne City, Michigan. This division provides special heat treating
to other divisions of the Registrant.
The Registrant's corporate offices are located in St. Clair Shores,
Michigan, where the Registrant occupies 12,000 square feet of space under a ten
year lease expiring in 2009 (renewable for two additional periods of five years
each).
Except as specifically noted to the contrary, the Registrant owns
outright all of the above described buildings, land, and production facilities.
The Registrant utilizes all of the floor space of these structures. Present
facilities are adequate to meet the needs of each division.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant has been designated by the Federal Environmental
Protection Agency (the "EPA") as a Potentially Responsible Party ("PRP") with
respect to a dump site referred to as the Cemetery Dump Site located in Oakland
County, Michigan. The PRPs engaged a single transporter who illegally disposed
of toxic and hazardous waste materials there in the late 1960s. While the
Registrant denies it has engaged in disposing of any materials at this site, the
Registrant together with other PRPs has actively participated in negotiations
directed toward settlement of the EPA's claims. The EPA has performed a site
clean-up but has not asserted claims against any of the identified PRPs which
suggests that the evidence of involvement by such parties is weak.
Also, the Registrant received a notice letter from a representative of
the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that
"empty" drums from the Registrant were shipped to the site. The waste allegedly
shipped by the Registrant is 3520 gallons which is equal to approximately 0.02
percent of the total waste at the site. Since the total site costs for all
parties are not expected to exceed $10 million, the Registrant's share of the
costs are not expected to be material. No investigation has been undertaken to
the Registrant's knowledge which would identify any costs to be incurred by the
Registrant which might have a material effect on the Registrant's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Registrant's common stock is traded on the Nasdaq Small Cap Market
under the symbol FSCR.
The following table sets forth the quarterly high and low sales prices
as reported by the Nasdaq Small Cap Market. Quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
2002 2001
----- ----
High Low High Low
1st Quarter 36.17 33.54 42.00 37.00
2nd Quarter 36.74 33.19 43.00 40.50
3rd Quarter 36.75 35.01 37.80 33.20
4th Quarter 40.31 36.00 37.00 33.70
At September 1, 2002, the approximate number of beneficial holders and
shareholders of record of the Registrant's common stock was 764, based upon the
securities position listings furnished to the Registrant.
A cash dividend was declared in each of the four quarters during fiscal
2002. Four dividends were declared in fiscal 2001 with one declared in the first
quarter, two declared in the second quarter and one declared in the fourth
quarter. Total cash dividends in fiscal 2002 were $1.10 per share and in fiscal
2001 were $1.88 per share. The Registrant declared a 5 for 4 stock split on
December 8, 2000 payable on April 2, 2001 as a stock dividend. The amount of
cash dividends per share shown above have been retroactively adjusted to reflect
the stock split. The Registrant is in compliance with covenants of its revolving
credit and term loan agreement including any restrictions on the payment of cash
dividends.
5
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEARS ENDED JUNE 30 2002 2001 2000 1999 1998
OPERATIONS (in thousands)
Net Sales $95,496 $105,912 $121,811 $118,610 $106,889
Earnings before federal income taxes 6,571 6,873 14,693 12,364 11,779
Federal income taxes 2,066 2,230 4,941 4,158 3,952
Net earnings 4,505 4,643 9,752 8,206 7,827
Depreciation and amortization 5,933 5,131 4,917 4,623 4,206
Capital expenditures 7,542 12,405 9,978 7,779 8,367
Cash dividends declared 1,402 2,447 2,467 2,390 2,173
PER SHARE DATA
Net earnings $3.57 $ 3.57 $ 7.35 $ 6.05 $ 5.76
Cash dividends declared 1.10 1.88 1.84 1.76 1.60
Book value 48.52 46.50 44.12 38.42 34.45
Average shares outstanding 1,263,507 1,299,137 1,326,803 1,356,649 1,358,103
RETURN DATA
Net earnings on net sales 4.7% 4.4% 8.0% 6.9% 7.3%
Net earnings on stockholders' equity 7.3% 7.7% 16.7% 15.7% 16.7%
FINANCIAL POSITION AT JUNE 30 (IN THOUSANDS)
Working capital (net current assets) $ 20,410 $ 19,861 $ 17,205 $ 16,657 $ 11,981
Other assets 16,007 15,975 15,481 11,647 9,526
Property, plant and equipment (net) 52,729 51,143 43,876 40,920 37,782
------ ------ ------ ------ ------
Total assets less current liabilities 89,146 86,979 76,562 69,224 59,289
Less:
Long-term debt 6,340 6,735 - 2,100 450
Unfunded pension obligation - - - 95 -
Deferred employee compensation 2,808 2,633 2,076 1,226 -
Deferred taxes 1,868 1,940 2,425 2,006 2,197
Employee benefits 1,100 1,021 975 1,081 1,017
Post-retirement benefits 14,835 13,344 11,747 9,865 8,211
Other liabilities 891 850 803 723 634
------ ------ ------ ------ ------
Stockholders' equity (net assets) $61,304 $ 60,456 $58,536 $52,128 $46,780
======= ======== ======= ======= =======
The average shares outstanding and all per share amounts have been adjusted
retroactively for the December 8, 2000 5 for 4 stock split.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth the percent relationship of certain
items to net sales for the periods indicated:
For the Years Ended June 30,
----------------------------
2002 2001 2000
---- ---- ----
Net Sales 100% 100% 100%
Gross Profit 11.2 11.9 15.2
Selling, general and administrative expenses 6.3 5.6 5.5
Interest .2 .1 .1
Gain on sale of Steel Processing Division - - 2.1
Other income 2.2 .3 .4
Earnings before federal income taxes 6.9 6.5 12.1
Net earnings 4.7 4.4 8.0
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RESULTS OF OPERATIONS
Federal Screw Works reported net sales of $95.5 million in fiscal 2002, which
represented a 9.8% decrease from fiscal 2001 sales of $105.9 million. Net sales
for fiscal 2001 decreased 13.1% from fiscal 2000 sales of $121.8 million. Sales
in both 2002 and 2001 benefited from new automotive parts programs. The number
of parts shipped decreased in 2002 and 2001 and increased in 2000.
Gross profits decreased 15.1% to $10.7 million in fiscal 2002, a $1.9 million
decrease from fiscal 2001. Fiscal 2001 gross profits decreased 31.9% to $12.6
million compared to the $18.5 million level realized in 2000. In the first six
months of fiscal 2002, the Registrant experienced severe production cuts from
our customers which, coupled with the demands for reduced prices, resulted in
marginally profitable operating results. In the second six month period of
fiscal 2002, an entirely new tone was reflected in incoming orders, which
increased slightly, but resulted in far more satisfactory operating results. By
the end of the fiscal year, inventories of car dealers and manufacturers had
been trimmed to acceptable levels. The new division at Boyne City, Michigan,
operated profitably in the second six months of the fiscal year. As a percentage
of total sales, the Registrant expects to gradually ship less to automobile
manufacturers and more to Tier One suppliers, reflecting the greater
manufacturing responsibilities assumed by Tier One suppliers.
Material, plating and packaging costs were again stable in 2002.
The Registrant is dependent upon sales to the two largest U.S. automobile
manufacturers, a condition that has existed for at least fifty years. The impact
of new parts programs were again a positive factor in fiscal 2002. Sales to
customers outside North America are increasing, but still are not material. Two
years ago the Registrant rejoined the Daimler Chrysler supply base after a four
year absence. The receipt of orders for the 2003, 2004 and 2005 model years
continues to be encouraging.
Refrigeration sales in fiscal 2002 were down slightly. As a percentage of
growth, refrigeration sales growth historically has been greater than automotive
sales growth.
The Registrant has not been able to increase its business with the transplant
suppliers in the current fiscal year.
7
Again, outsourcing programs were not a factor in fiscal 2002, which is
consistent with fiscal 2001 and 2000. Despite this, the Registrant believes that
these programs will be a source of significant new business in the future.
Fastener industry consolidations were limited in fiscal 2002.
As a percentage of net sales, selling, general and administrative expenses
increased to 6.3% in fiscal 2002, as a result of a reduction in net sales. In
fiscal 2001 and fiscal 2000 these expenses were 5.6% and 5.5% of net sales,
respectively. Interest expense increased in fiscal 2002 because of an increase
in average borrowings under the Registrant's Revolving Credit and Term Loan
Agreement. Net after-tax gains from the sale of stock acquired in the
demutualization of insurance companies amounted to $997,000 in the second
quarter and $501,000 in the third quarter of the current fiscal year.
The Registrant has been designated by the federal Environmental Protection
Agency ("EPA") as a Potentially Responsible Party ("PRP") with respect to a dump
site referred to as the Cemetery Dump Site located in Oakland County Michigan.
The PRPs engaged a single transporter who illegally disposed of toxic and
hazardous waste materials there in the late 1960s. While the Registrant denies
it has engaged in disposing of any materials at this site, the Registrant
together with other PRPs has actively participated in negotiations directed
toward settlement of the EPA's claims. The EPA has performed a site cleanup but
has not asserted claims against any of the identified PRPs which suggests that
the evidence of involvement by such parties is weak.
The Registrant received a notice letter from a representative of the Barrels,
Inc. site PRP Group located in Lansing, Michigan indicating that "empty" drums
from the Registrant were shipped to the site. The waste allegedly shipped by the
Registrant is 3520 gallons which is equal to approximately 0.02 percent of the
total waste at the site. Since the total site costs for all parties are not
expected to exceed $10 million, the Registrant's share of the costs are not
expected to be material. No investigation has been undertaken to the
Registrant's knowledge which would identify any costs to be incurred by the
Registrant which might have a material effect on the Registrant's financial
statements.
DIVIDENDS
Cash dividends declared in fiscal year 2002 were $1.10 per share, $0.78 less
than that declared in fiscal 2001 and $0.74 less than that declared in fiscal
2000. The Registrant declared a 5 for 4 stock split on December 8, 2000, payable
as a stock dividend April 2, 2001. The dividend per share amounts have been
adjusted to retroactively give effect to the stock split. The Board of
Directors, in August, 2002, declared a $.10 per share quarterly dividend, and an
extra dividend of $.70 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities approximated $11.7 million in fiscal 2002.
This compares to $6.8 million in 2001 and $12.9 million in 2000. Capital
expenditures for fiscal 2002 were $7.5 million, primarily related to the
purchase of equipment and expansion of facilities in order to improve production
efficiencies and enable the Registrant to meet increased future demand for its
products. Capital expenditures in fiscal years 2001 and 2000 were $12.4 million
and $10.0 million, respectively. Expenditures for additional equipment during
fiscal 2003 are presently expected to approximate $6.8 million, of which $2.0
million had been committed as of June 30, 2002. These future capital
expenditures are expected to be financed from cash generated from operations and
additional borrowing capacity under the Revolving Credit and Term Loan
Agreement.
Net cash used in financing activities was $4.1 million in fiscal 2002. This
compares to $4.1 million provided by financing activities in fiscal 2001 and
$6.3 million used in 2000. Fluctuations in these activities have been influenced
principally by borrowings and repayments under the Registrant's Revolving Credit
and Term Loan Agreement, payment of dividends and purchases of the Registrant's
common stock.
On October 19, 2001, the Registrant extended its Revolving Credit and Term Loan
Agreement by one year. The expiration date is October 31, 2004, and is renewable
annually for an additional year. Borrowings up to $25 million and capital
expenditures of $16 million annually are permitted. The Registrant has the
option to convert borrowings under the facility to a term note through October
31, 2006. Payments under the term note, if the conversion option were exercised,
would be made quarterly and could extend to October 31, 2006. Therefore,
borrowings under the
8
Revolving Credit and Term Loan Agreement, which were $6,340,000 at June 30,
2002, and $6,735,000 at June 30, 2001, are classified as long-term debt.
Working capital at June 30, 2002 amounted to $20,410,000 as compared to working
capital of $19,861,000 at June 30, 2001. The increase resulted primarily from an
increase in inventories and accounts receivable.
As discussed in Note 5 to the financial statements, effective July 1, 1993, the
Registrant adopted FASB Statement No. 106. As permitted by the Statement, the
Registrant is amortizing the present value of future health care and life
insurance benefits related to employees' past service ($17,967,000 at July 1,
1993) over a period of 20 years. The implementation of this accounting
pronouncement has no impact on the Registrant's cash flows.
MARKET RISK
The Registrant's long-term debt is all at current interest rates and, therefore,
approximates current value but is subject to changes in interest rates.
IMPACT OF INFLATION AND CHANGING PRICES
The Registrant passes increased costs on to customers, to the extent permitted
by competition, by increasing sales prices whenever possible. In fiscal 2002,
2001 and 2000 the Registrant was unable to pass on cost increases incurred due
to competitive pressures. Sales price increases in each of these years were
insignificant.
CRITICAL ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States. Application of
these accounting principles requires the Registrant's management to make
estimates about the future resolution of existing uncertainties. As a result,
actual results could differ from these estimates. In preparing these financial
statements, management has made its best estimates and judgments of the amounts
and disclosures included in the financial statements, giving due regard to
materiality. The Registrant does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions pertaining to the accounting policies described
below.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Registrant
adopted the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2002. As the Registrant does not have
any amounts for goodwill or indefinite lived intangible assets on its balance
sheets, the adoption of No. 142 has no effect on the earnings or the financial
position of the Registrant.
INVESTMENTS AND MARKETABLE SECURITIES
The Registrant accounts for certain of its investments under FASB 115 as
securities available-for-sale. Available for sale securities are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in investment income or loss. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in investment income. The fair
value of marketable securities is based on quoted market value.
The Registrant reviews its investments to determine if the value shows a decline
that has been deemed other-than-temporary. Since June 30, 2001, there has been a
broad decline in the public equity markets, including investments held by the
Registrant. As a result, for the year ended June 30, 2002, the Registrant
recorded a loss of $249,000 on
9
equity investments as a result of declines in the fair market value of certain
of its equity investments deemed to be other-than-temporary.
REVENUE RECOGNITION
The Registrant recognizes revenue from product sales upon transfer of title,
which is generally upon shipment. An estimate of reserves is recorded for
anticipated returns and credit memos which will be issued on sales recognized to
date. The SEC's Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition", provides guidance on the application of accounting principles
generally accepted in the United States to selected revenue recognition issues.
The Registrant has concluded its revenue recognition policy is appropriate and
in accordance with accounting principles generally accepted in the United States
and SAB No. 101.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer and
historical experience.
PRICE REDUCTIONS
As of June 30, 2002, all customer price reductions have been accounted for,
therefore no amounts have been accrued.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost, determined by the
last-in, first-out (LIFO) method, was used for certain raw material inventories;
$967,000 and $1,221,000 at June 30, 2002 and 2001, respectively. The remaining
inventories are costed using the first-in, first-out (FIFO) method. If
inventories valued on LIFO had been valued at current cost, amounts reported at
June 30 would have been increased by $497,000 and $636,000 in fiscal 2002 and
2001, respectively.
WORKERS' COMPENSATION RESERVE
The Registrant is self insured for workers' compensation claims. Losses are
accrued based on an estimate of the ultimate aggregate liability for claims
incurred, using certain assumptions based on the Registrant's experience under
this program. At June 30, 2002 and 2001, the Registrant accrued approximately
$1,097,000 and $1,335,000, respectively, included in Payroll and employee
benefits.
FORWARD LOOKING STATEMENTS
The foregoing discussion and analysis contains a number of "forward looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, both as amended, with respect to the expectation for
future periods which are subject to various uncertainties, including
competition, the loss of, or reduction in business with, the Registrant's
principal customers, work stoppages, strikes and slowdowns at the Registrant's
facilities and those of its customers; adverse changes in economic conditions
generally and those of the automotive industry, specifically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Registrant's market risk is limited to interest rate risk on the Revolving
Credit and Term Loan Agreement and its lease-purchase obligation. At June 30,
2002, the carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable, debt and investments approximate fair value.
Accordingly, management believes this risk is not material.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENTS OF OPERATIONS
FEDERAL SCREW WORKS
Year Ended June 30,
-------------------
2002 2001 2000
---- ---- ----
Net Sales $ 95,496,398 $ 105,911,792 $ 121,811,494
Costs and expenses:
Cost of products sold 84,834,236 93,277,594 103,307,106
Selling, general and administrative 5,970,997 5,981,751 6,742,353
Gain on sale of Steel Processing -- -- (2,501,122)
Interest 235,885 49,386 68,978
Other income (2,116,115) (269,925) (498,774)
------------- ------------- -------------
88,925,003 99,038,806 107,118,541
------------- ------------- -------------
EARNINGS BEFORE FEDERAL INCOME TAXES 6,571,395 6,872,986 14,692,953
Federal income taxes - Note 4:
Current 2,210,236 2,450,871 4,840,000
Deferred (credit) (144,236) (220,809) 100,565
------------- ------------- -------------
2,066,000 2,230,062 4,940,565
------------- ------------- -------------
NET EARNINGS $ 4,505,395 $ 4,642,924 $ 9,752,388
============= ============= =============
Average number of shares outstanding - after 1,263,507 1,299,137 1,326,803
adjustments for the five for four stock split ============= ============= =============
Net earnings per share - after adjustments $ 3.57 $ 3.57 $ 7.35
for the five for four stock split ============= ============= =============
See accompanying notes.
11
BALANCE SHEETS
FEDERAL SCREW WORKS
JUNE 30
2002 2001
---- ----
ASSETS
CURRENT ASSETS
Cash $ 198,540 $ 97,559
Accounts receivable 14,969,850 13,825,686
Inventories - Note 1:
Finished products 9,266,454 8,592,041
In-process products 6,753,775 6,769,154
Raw materials and supplies 1,506,574 1,728,175
------------- -------------
Total inventories 17,526,803 17,089,370
Prepaid expenses and other 434,000 659,644
Deferred income taxes - Note 4 815,516 745,726
------------- -------------
TOTAL CURRENT ASSETS 33,944,709 32,417,985
OTHER ASSETS
Intangible asset 96,145 727,667
Cash value of life insurance 5,696,083 5,565,805
Prepaid pension costs 7,209,849 7,101,684
Miscellaneous 3,004,809 2,580,052
------------- -------------
16,006,886 15,975,208
Property, Plant and Equipment - Notes 2 and 3
Land 552,150 552,150
Buildings and improvements 14,166,282 13,988,911
Machinery and equipment 102,007,086 95,677,098
------------- -------------
116,725,518 110,218,159
Less accumulated depreciation (63,996,888) (59,075,351)
------------- -------------
52,728,630 51,142,808
------------- -------------
$ 102,680,225 $ 99,536,001
============= =============
12
BALANCE SHEETS (CONTINUED)
FEDERAL SCREW WORKS
JUNE 30
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,287,381 $ 5,057,735
Payroll and employee benefits 5,770,297 5,780,842
Dividend payable 123,425 129,857
Federal income taxes 479,183 --
Taxes, other than income taxes 1,804,132 1,534,221
Other accrued liabilities 70,141 54,102
------------- -------------
TOTAL CURRENT LIABILITIES 13,534,559 12,556,757
LONG-TERM LIABILITIES
Long-term debt - Note 2 6,340,000 6,735,000
Deferred employee compensation - Note 5 2,807,885 2,632,874
Deferred income taxes - Note 4 1,867,347 1,940,228
Employee benefits 1,100,307 1,021,290
Post-retirement benefits - Note 5 14,834,328 13,344,119
Other liabilities 891,375 850,031
------------- -------------
27,841,242 26,523,542
STOCKHOLDERS' EQUITY - Notes 2 and 7
Common stock, $1 par value, authorized 2,000,000 shares,
1,234,093 shares outstanding in 2002 (1,296,887
in 2001) 1,234,093 1,296,887
Additional capital 3,269,476 3,269,476
Retained earnings 56,902,914 56,001,953
Accumulated other comprehensive loss (102,059) (112,614)
------------- -------------
61,304,424 60,455,702
------------- -------------
$ 102,680,225 $ 99,536,001
============= =============
See accompanying notes.
13
STATEMENTS OF STOCKHOLDERS' EQUITY
FEDERAL SCREW WORKS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
--------------------------------------------------------------------------------
BALANCES AT JULY 1, 1999 $ 1,076,162 $ 3,269,476 $ 48,411,426 $ (629,018) $ 52,128,046
Net earnings for the year 9,752,388 9,752,388
Reduction of unrecognized pension
costs, net of taxes 629,018 629,018
Change in unrealized loss on
securities available - for-sale,
Net of taxes (8,478) (8,478)
------------
Total comprehensive income 10,372,928
Purchase of 34,501 shares (34,501) (1,463,316) (1,497,817)
Cash dividends declared -
$1.84 per share - as restated (2,467,092) (2,467,092)
------------ ----------- ------------ ------------ ------------
BALANCES AT JUNE 30, 2000 1,041,661 3,269,476 54,233,406 (8,478) 58,536,065
Net earnings for the year 4,642,924 4,642,924
Change in unrealized loss on
securities available - for-sale,
net of taxes (104,136) (104,136)
------------
Total comprehensive income 4,538,788
Purchase of 5,189 shares (5,189) (167,038) (172,227)
Effect of stock split 260,415 (260,415)
Cash dividends declared -
$1.88 per share - as restated (2,446,924) (2,446,924)
------------ ----------- ------------ ------------ ------------
BALANCES AT JUNE 30, 2001 1,296,887 3,269,476 56,001,953 (112,614) 60,455,702
Net earnings for the year 4,505,395 4,505,395
Change in unrealized loss on
securities available - for-sale,
net of taxes 10,555 10,555
------------
Total comprehensive income 4,515,950
Purchase of 62,794 shares (62,794) (2,201,970) (2,264,764)
Cash dividends declared -
$1.10 per share (1,402,464) (1,402,464)
------------ ----------- ------------ ------------ ------------
BALANCES AT JUNE 30, 2002 $ 1,234,093 $ 3,269,476 $ 56,902,914 $ (102,059) $ 61,304,424
============ ============ ============ ============ ============
( ) Denotes deduction.
See accompanying notes.
14
STATEMENTS OF CASH FLOWS
FEDERAL SCREW WORKS
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES
Net earnings $ 4,505,395 $ 4,642,924 $ 9,752,388
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,933,491 5,131,266 4,916,814
Increase in cash value of life insurance (130,278) (130,364) (123,786)
Change in deferred federal income taxes (142,671) (274,115) 417,000
Employee and postretirement benefits 1,569,226 1,643,468 1,776,301
Loss/(Gain) on sale of equipment 17,797 - (2,496,083)
Deferred retirement benefits and other 325,509 135,732 (2,255,121)
Changes in operating assets and liabilities:
Accounts receivable (1,144,164) 3,132,566 (1,230,915)
Inventories, prepaid expenses and other (211,788) (2,341,591) (234,264)
Accounts payable and accrued expenses 977,802 (5,101,130) 2,376,734
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,700,319 6,838,756 12,899,068
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,541,710) (12,404,868) (9,977,646)
Proceeds from sale of property, plant and equipment 4,600 6,229 4,605,775
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,537,110) (12,398,639) (5,371,871)
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement (395,000) 6,735,000 (2,100,000)
Principal payments on lease-purchase obligation -- -- (200,000)
Purchases of common stock (2,264,764) (172,228) (1,497,817)
Dividends paid (1,402,464) (2,446,924) (2,467,092)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) (4,062,228) 4,115,848 (6,264,909)
FINANCING ACTIVITIES
INCREASE (DECREASE IN CASH) 100,981 (1,444,035) 1,262,288
Cash at beginning of year 97,559 1,541,594 279,306
------------ ------------ ------------
CASH AT END OF YEAR $ 198,540 $ 97,559 $ 1,541,594
============ ============ ============
See accompanying notes
15
NOTES TO FINANCIAL STATEMENTS
FEDERAL SCREW WORKS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES: Inventories are stated at the lower of cost or market. Cost,
determined by the last-in, first-out (LIFO) method, was used for certain raw
material inventories, $967,000 and $1,221,000 at June 30, 2002 and 2001,
respectively. The remaining inventories are costed using the first-in, first-out
(FIFO) method. If inventories valued on LIFO had been valued at current cost,
amounts reported at June 30 would have been increased by $497,000 and $636,000
in 2002 and 2001, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost,
which includes the cost of interest which is capitalized during construction of
significant additions. Provisions for depreciation are based upon the estimated
useful lives of the respective assets and are computed by the straight-line
method for financial reporting purposes and by accelerated methods for income
tax purposes.
INVESTMENTS: The Registrant has invested approximately $2,850,000 and $2,400,000
as of June 30, 2002 and 2001, respectively, which has been designated for
payment of certain liabilities related to deferred compensation plans. These
amounts were recorded in miscellaneous assets within the balance sheets.
Approximately $1,161,000, $961,000, and $728,000 of the Registrant's investments
were held in equity securities, debt securities, and short-term investments,
respectively, as of June 30, 2002. Approximately $1,289,000, $728,000 and
$383,000 of the Registrant's investments were held in equity securities, debt
securities, and short-term investments, respectively, as of June 30, 2001. Debt
securities are scheduled to mature beginning in December 2005 and ending in
November 2012. In accordance with Statement of Financial Accounting Standards
No. 115 ("FASB 115"), the Registrant has classified all investments as
"available-for-sale" because they are freely tradable. As of June 30, 2002, the
Registrant recorded a decrease in unrealized loss of $11,000, net of tax, from
its investments, which is reflected in the statements of shareholders' equity.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity net of
applicable income taxes. Realized gains and losses and declines in value deemed
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis.
Management continually evaluates whether changes in the value of such
investments should be considered other-than-temporary. Since June 30, 2001,
there has been a broad decline in the public equity markets, including
investments held by the Registrant. As a result, for the year ended June 30,
2002, the Registrant recorded a loss of $249,000 on equity investments as a
result of declines in the fair market value of certain of its equity investments
deemed to be other-than-temporary.
REVENUE RECOGNITION: The Registrant recognizes revenue when title to goods
transfer, generally when goods are shipped to the customer.
OTHER INCOME: Included in other income is $2,180,000 as a result of the sale of
stock acquired in connection with the demutualization of insurance companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At June 30, 2002, the carrying amounts
reported in the balance sheets for cash, accounts receivable, accounts payable,
debt and investments approximate fair value.
NET INCOME PER COMMON SHARE: Net income per common share is based on weighted
average number of common shares outstanding of 1,263,507 in 2002; 1,299,137 in
2001 and 1,326,803 in 2000.
RECLASSIFICATION: Certain items in the prior year financial statements have been
reclassified to conform to the presentation used in 2002.
16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements. Actual results
could differ form those estimates.
NOTE 2 - DEBT
Long-term debt at June 30 consists of the following:
2002 2001
---- ----
Revolving credit note payable to bank $6,340,000 $6,735,000
Less current maturities 0 0
---------- ----------
$6,340,000 $6,735,000
========== ==========
The Registrant has a $25,000,000 revolving credit and term loan agreement with a
bank. The Registrant has the option to convert borrowings thereunder (classified
as long-term debt) to a term note through October 31, 2004, the expiration date
of the agreement. Payments under the term note, if the conversion option is
exercised, would be made quarterly commencing three months following conversion
until maturity of the term note on October 31, 2006. Interest (3.125% at June
30, 2002) on outstanding borrowings is determined based on the prime rate, or at
the Registrant's option, an alternative variable market rate. The Registrant
also pays a commitment fee of 3/8% on the unused portion of the revolving
credit.
The Registrant is in compliance with covenants of the revolving credit and term
loan agreement including the requirements to meet certain financial ratios.
Interest paid by the Registrant during fiscal 2002, fiscal 2001 and fiscal 2000
aggregated $353,000, $372,000, and $69,000, respectively. Interest capitalized
into property, plant and equipment in fiscal 2002 and 2001 was $169,000 and
$359,000, respectively.
NOTE 3 - LEASES AND OTHER COMMITMENTS
At June 30, 2002, the aggregate minimum rental commitments for various
noncancelable operating leases with initial terms of one year or more are as
follows:
OPERATING
YEAR ENDING JUNE 30 LEASES
- ------------------- ------
2003 $ 993,000
2004 701,000
2005 447,000
2006 360,000
2007 310,000
Thereafter 404,000
- ---------- -----------
Total minimum lease payments $3,215,000
==========
17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
Total rent expense was $1,190,000 in fiscal 2002, $1,137,000 in fiscal 2001, and
$1,174,000 in fiscal 2000.
Costs committed to complete the expansion of existing plant facilities and the
purchase of machinery and equipment approximated $2,014,000 at June 30, 2002.
NOTE 4 - FEDERAL INCOME TAXES
A reconciliation of the federal income tax provision to the amount computed by
applying the applicable statutory federal income tax rate (34% in 2002, and in
2001 and 35% in 2000) to earnings before federal income taxes follows:
2002 2001 2000
---- ---- ----
Computed amount $2,233,000 $2,337,000 $5,143,000
Life insurance policies (78,000) (82,000) (79,000)
Other (89,000) (25,000) (123,000)
---------- ---------- ----------
Total federal income tax provision $2,066,000 $2,230,000 $4,941,000
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Registrant`s deferred tax liabilities and assets as of June 30, 2002 and
2001 are as follows:
2002 2001
---- ----
Deferred tax liabilities:
Accelerated tax depreciation $5,969,000 $5,407,000
Other 32,000 71,000
---------- ----------
Total deferred tax liabilities $6,001,000 $5,478,000
---------- ----------
Deferred tax assets:
Employee benefits 4,729,000 4,118,000
Inventory 220,000 168,000
---------- ----------
Total deferred tax assets 4,949,000 4,286,000
---------- ----------
Net deferred tax liabilities $1,052,000 $1,192,000
========== ==========
Income taxes paid by the Registrant during fiscal 2002, fiscal 2001, and fiscal
2000 totalled $1,755,000, $2,585,000, and $5,386,000, respectively.
NOTE 5 - EMPLOYEE BENEFIT PLANS
The Registrant sponsors three defined benefit pension plans covering
substantially all employees. Benefits under two of the plans are based on
negotiated rates times years of service. Under the remaining plan, benefits are
based on compensation during the years immediately preceding retirement and
years of service. It is the Registrant's policy to make contributions to these
plans sufficient to meet minimum funding requirements of the applicable laws and
regulations, plus such additional amounts, if any, as the Registrant's actuarial
consultants advise to be appropriate.
18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
In addition to providing pension benefits, the Registrant provides certain
health care and life insurance benefits for retired employees. Substantially all
of the Registrant's employees may become eligible for those benefits if they
reach normal retirement age while working for the Registrant. The benefits are
provided through certain insurance companies.
The following tables set forth various information about the plans as of and at
the March 31, 2002 and 2001 measurement dates:
COMPONENTS OF NET PERIODIC BENEFIT COST ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Service Cost $ 749,000 $ 777,000 $ 782,000 $ 490,000 $ 531,000 $ 547,000
Interest Cost 1,773,000 1,765,000 1,643,000 1,543,000 1,525,000 1,479,000
Expected return
on assets (2,043,000) (2,069,000) (1,911,000)
Amortization of
transition obligation 166,000 166,000 166,000 898,000 898,000 898,000
Amortization of prior
service cost 197,000 197,000 179,000
Amortization of
unrecognized net loss 132,000 80,000 52,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 974,000 $ 916,000 $ 911,000 $ 2,931,000 $ 2,954,000 $ 2,924,000
============ ============ ============ ============ ============ ============
====================================================================================================================================
CHANGES IN BENEFIT OBLIGATION ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 25,142,000 $ 24,771,000 $ 21,992,000 $ 21,701,000
Service cost 749,000 777,000 490,000 531,000
Interest cost 1,773,000 1,765,000 1,543,000 1,525,000
Plan amendments 135,000 241,000 - -
Actuarial gain (419,000) (677,000) (794,000) (424,000)
Benefits paid (1,255,000) (1,735,000) (1,426,000) (1,341,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 26,125,000 $ 25,142,000 $ 21,805,000 $ 21,992,000
============ ============ ============ ============
====================================================================================================================================
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
CHANGES IN PLAN ASSETS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of assets
at beginning of year $ 26,299,000 $ 27,004,000 $- $-
Actual return on assets 936,000 382,000 -- --
Employer contribution 1,055,000 648,000 -- --
Benefits paid (1,255,000) (1,735,000) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of assets at end of year $27,035,000 $26,299,000 $ - $ -
=========== =========== == ==
====================================================================================================================================
FUNDED STATUS OF THE PLANS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status at end of year
(underfunded) $ 910,000 $ 1,157,000 $(21,805,000) $(21,992,000)
Unrecognized transition (assets)/obligation (233,000) (94,000) 9,882,000 10,596,000
Unrecognized prior service cost 1,841,000 1,903,000 - -
Unrecognized net (gain)/loss 4,692,000 4,136,000 (2,742,000) (1,948,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 7,210,000 $ 7,102,000 $(14,665,000) $(13,344,000)
============ ============ ============ ============
====================================================================================================================================
In accounting for pension plans, the Registrant used a discount rate of 7.25% in
2002 and 2001, a 5% rate of increase in compensation, and an 8% expected rate of
return on assets. Plan assets for these plans consist principally of fixed
income instruments, equity securities and participation in insurance company
contracts.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at June 30, 2002 and 2001 was 7.25%.
For measurement purposes, a 7.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2002. The rate was
assumed to decrease gradually to 5.5% for 2005 and remain at that level
thereafter. Assumed health care cost trends have a significant effect on the
amounts reported for the health care plan. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of June 30, 2002 and 2001
by $2,302,000 and $2,312,000, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended June 30, 2002 and 2001 by $256,000 and $271,000, respectively.
20
The Registrant sponsors a supplemental executive retirement plan which covers
certain executives of the Registrant. The net periodic pension expense for the
plan was $807,000 and $771,000 in fiscal 2002 and 2001 respectively. The
actuarial present value of vested benefit obligations approximated $2,607,000 at
June 30, 2002 and $2,372,000 at
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
June 30, 2001, respectively. The Registrant has invested $2,329,000 as of June
30, 2002 to cover obligations of the plan.
The Registrant sponsors a retirement plan for directors who are not employees of
the Registrant. The net periodic pension expense for the plan was $41,000 in
fiscal 2002, $47,000 in fiscal 2001, and $79,000 in fiscal 2000. The actuarial
present value of vested benefit obligations approximated $932,000 at June 30,
2002 and $891,000 at June 30, 2001. The plan is currently not fully funded.
NOTE 6 - INDUSTRY INFORMATION
Approximately 91% of the Registrant's net sales in fiscal 2002 and 85% in fiscal
2001 were made either directly or indirectly to automotive companies.
Customers comprising 10% or greater of the Registrant's net sales are summarized
as follows:
2002 2001
---- ----
Ford Motor Company 35% 37%
General Motors Corporation 13% 15%
All Others 52% 48%
--- ---
100% 100%
NOTE 7 - LITIGATION
The Registrant is involved in various legal actions arising in the normal course
of business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that their outcome will not have a
significant effect on the Registrant's financial statements.
NOTE 8 -- FOREIGN SALES
Approximately 10% of the Registrant's sales are to Canadian customers. All sales
terms provide for settlement in U.S. dollars.
21
Report of Independent Auditors
Board of Directors
Federal Screw Works
We have audited the accompanying balance sheets of Federal Screw Works as of
June 30, 2002 and 2001, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2002. Our audits also included the financial statement schedule listed in Item
14(a). These financial statements and schedule are the responsibility of the
Registrant's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits 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 Federal Screw Works at June 30,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
August 8, 2002
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Election of Directors,"
"Security Ownership of Management," and "Compliance with Section 16(a) of the
Exchange Act" in the Registrant's Proxy Statement dated September 24, 2002 and
is incorporated herein by reference.
The following information supplements the information provided on pages
1 through 3 in the Registrant's Proxy Statement dated September 24, 2002 which
is incorporated herein by reference.
NAME POSITION AGE
---- -------- ---
John M. O'Brien Vice President-Sales and Marketing since 1986; 52
Vice President-General Sales Manager, 1984 to
1986; General Sales Manager, 1982 to 1984;
Sabbatical at Stanford University Business School,
1981 to 1982; Sales Representative, 1975 to 1981.
Jeffrey M. Harness Vice President of Boyne City Division (since 2001) 46
and Vice President and General Manager of Chelsea
and Brighton Divisions since 1994; Vice President
and General Manager - Chelsea Division, 1992 to
1994; General Manager - Chelsea Division, 1985 to
1992; Sales Manager - Chelsea Division, 1984 to
1985; Sales Representative, 1982 to 1984;
Management Trainee, 1981 to 1982; Chelsea Division
Junior Buyer, 1980 to 1981.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the captions "Director's Remuneration
and Committees of the Board" and "Officer Compensation Policy" in the
Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is contained under the caption "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the
Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein
by reference.
The Registrant does not have any compensation plans under which equity
securities of the Registrant are authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships and
Related Transactions" in the Registrant's Proxy Statement dated September 24,
2002 and is incorporated herein by reference.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed with this Report or incorporated herein by reference are as
follows.
(1) Financial Statements. The following financial statements of the
Registrant and Report of Independent Public Accountants are contained in "Item 8
Financial Statements and Supplementary Data."
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
- Statements of Operations for the years ended June 30,
2002, 2001 and 2000
- Statements of Cash Flows for the years ended June 30,
2002, 2001, and 2000
- Balance sheets as of June 30, 2002 and 2001
- Statements of Stockholders' equity for the years
ended June 30, 2002, 2001 and 2000
NOTES TO FINANCIAL STATEMENTS
(2) Financial Statement Schedules. The following financial statement
schedule is filed with this report, and appears on page 26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Other financial statement schedules have been omitted because
they are not applicable or are not required, or the information
required to be set forth therein is included in the financial
statements or notes thereto.
(3) Exhibits. The Exhibits filed in response to Item 601 of Regulation
S-K are listed in the Exhibit Index. Exhibits designated with a "+" symbol
represent the Registrant's management contracts or compensation plans or
arrangements for directors and executive officers.
The following documents are filed as a part of this report. Those
Exhibits previously filed and incorporated herein by reference are identified
below.
3.1 Registrant's Articles of Incorporation, were filed as an exhibit to
the Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
3.2 Registrant's By-Laws, as amended on August 29, 2002 -are filed as
an exhibit to this Form 10-K.
4.1 The (municipal industrial revenue bond) guarantee agreement dated
as of November 1, 1979, as previously filed, was filed as an
exhibit to the Registrant's 1993 Form 10-K and is incorporated
herein by reference. All waivers, amendments and modifications
thereto, were filed as exhibits to the Registrant's 1989, 1993 and
1994 Forms 10-K and are incorporated herein by reference.
4.2 Revolving Credit and Term Loan Agreement by and between Registrant
and Comerica Bank, dated October 24, 1995, filed as an exhibit to
the Registrant's Form 10-Q for the period ended September 30,
24
1995, and incorporated herein by reference.
10.1+ Supplemental retirement agreement between the Registrant and W. T.
ZurSchmiede, Jr., present Chairman of the Registrant, dated April
1, 1986 was filed as an exhibit to Registrant's 1993 Form 10-K and
is incorporated by reference.
10.2+ Supplemental retirement agreement between the Registrant and Hugh
G. Harness, a director and past President of the Registrant, dated
December 21, 1978 and amended pursuant to an Amendment to Agreement
dated October 23, 1986, as amended by an Agreement providing for
the retirement and consultation of and by Mr. Harness and the
Registrant dated January 7, 1994, was filed as an exhibit to
Registrant's 1994 Form 10-K, and is incorporated herein by
reference.
10.3 Agreement providing for the retirement and consultation of and by
Mr. Harness and the Registrant dated January 7, 1994, as amended on
October 25, 2001- is filed as an exhibit to this Form 10-K.
10.4+ Indemnity agreement effective September 24, 1986, which exists
between the Registrant and each director, was filed as an exhibit
to Registrant's 1992 Form 10-K, and is incorporated herein by
reference.
10.5 Lease agreement between the Registrant and Safran Development,
L.L.C. for the lease of the 2nd floor of 20229 Nine Mile Road, St.
Clair Shores, Michigan, effective October 26, 1999, was previously
filed as an exhibit to the Registrant's Form 10-Q for the quarter
ended September 30, 1999, and is incorporated herein by reference.
10.6+ Retirement Plan for Outside Directors as amended and restated,
filed as an exhibit to the Registrant's 1995 Form 10-K and
incorporated herein by reference.
10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed as
an exhibit to the Registrant's 1998 Form 10-K and incorporated
herein by reference.
99 Proxy Statement for the Registrant's 2002 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference.
(b) No reports on Form 8-K have been filed by Registrant during the last quarter
of the period covered by this Report.
25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DESCRIPTION BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS - BALANCE AT
BEGINNING (1) (2) DESCRIBE END OF PERIOD
OF PERIOD CHARGED TO CHARGED TO
COSTS AND OTHER ACCOUNTS
EXPENSES - DESCRIBE
- -----------------------------------------------------------------------------------------------------------------------------
Valuation allowance for
accounts receivable:
Year ended June 30, 2002 $ 50,000 $ - $ 50,000
Year ended June 30, 2001 50,000 - 50,000
Year ended June 30, 2000 50,000 - 50,000
Valuation allowance for
inventories:
Year ended June 30, 2002 $ 325,000 $ 85,000 $ 150,000(A) $ 260,000
Year ended June 30, 2001 180,000 239,000 94,000(A) 325,000
Year ended June 30, 2000 167,000 38,000 25,000(A) 180,000
(A) Unsalable inventories charged off; corresponding reduction of allowance.
26
SIGNATURES
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.
FEDERAL SCREW WORKS
(Registrant)
By: /s/ W. T. ZurSchmiede, Jr.
--------------------------------------
W. T. ZurSchmiede, Jr.
Chairman, Chief Financial Officer,
Secretary and Treasurer
Date: September 24, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Wade C. Plaskey
- -------------------------------------------- September 24, 2002
Wade C. Plaskey
Corporate Controller
(Principal Accounting Officer)
/s/ Thomas W. Butler, Jr.
- -------------------------------------------- September 24, 2002
Thomas W. Butler, Jr.
Director
/s/ Frank S. Galgan
- -------------------------------------------- September 24, 2002
Frank S. Galgan
Director
/s/ Hugh G. Harness
- -------------------------------------------- September 24, 2002
Hugh G. Harness
Director
/s/ F.D. Tennent
- -------------------------------------------- September 24, 2002
F.D. Tennent
Director
/s/ W. T. ZurSchmiede, Jr.
- -------------------------------------------- September 24, 2002
W. T. ZurSchmiede, Jr.
Director
/s/ Robert F. ZurSchmiede
- -------------------------------------------- September 24, 2002
Robert F. ZurSchmiede
Director
/s/ Thomas ZurSchmiede
- -------------------------------------------- September 24, 2002
Thomas ZurSchmiede
Director
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Thomas ZurSchmiede, certify that:
1) I have reviewed this Annual Report on Form 10-K of Federal Screw
Works;
2) Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
Registrant as of, and for, the periods presented in this Annual Report.
Date: September 24, 2002
/s/ Thomas ZurSchmiede
-------------------------------------------------
Thomas ZurSchmiede, President and Chief Executive
Officer - Principal Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, W.T. ZurSchmiede, Jr., certify that:
1) I have reviewed this Annual Report on Form 10-K of Federal Screw
Works;
2) Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
Registrant as of, and for, the periods presented in this Annual Report.
Date: September 24, 2002
/s/ W.T. ZurSchmiede
-------------------------------------------------
W.T. ZurSchmiede, Jr., Chairman of the Board,
Chief Financial Officer, Secretary and Treasurer
Principal Financial Officer
EXHIBIT INDEX
3.1 Registrant's Articles of Incorporation, were filed as an exhibit to
the Registrant's 1994 Form 10-K, and are incorporated herein by
reference.
3.2 Registrant's By-Laws, as amended on August 29, 2002 -are filed as
an exhibit to this Form 10-K.
4.1 The (municipal industrial revenue bond) guarantee agreement dated
as of November 1, 1979, as previously filed, was filed as an
exhibit to the Registrant's 1993 Form 10-K and is incorporated
herein by reference. All waivers, amendments and modifications
thereto, were filed as exhibits to the Registrant's 1989, 1993 and
1994 Forms 10-K and are incorporated herein by reference.
4.2 Revolving Credit and Term Loan Agreement by and between Registrant
and Comerica Bank, dated October 24, 1995, filed as an exhibit to
the Registrant's Form 10-Q for the period ended September 30, 1995,
and incorporated herein by reference.
10.1+ Supplemental retirement agreement between the Registrant and W. T.
ZurSchmiede, Jr., present Chairman of the Registrant, dated April
1, 1986 was filed as an exhibit to Registrant's 1993 Form 10-K and
is incorporated by reference.
10.2+ Supplemental retirement agreement between the Registrant and Hugh
G. Harness, a director and past President of the Registrant, dated
December 21, 1978 and amended pursuant to an Amendment to Agreement
dated October 23, 1986, as amended by an Agreement providing for
the retirement and consultation of and by Mr. Harness and the
Registrant dated January 7, 1994, was filed as an exhibit to
Registrant's 1994 Form 10-K, and is incorporated herein by
reference.
10.3 Agreement providing for the retirement and consultation of and by
Mr. Harness and the Registrant dated January 7, 1994, as amended on
October 25, 2001- is filed as an exhibit to this Form 10-K.
10.4+ Indemnity agreement effective September 24, 1986, which exists
between the Registrant and each director, was filed as an exhibit
to Registrant's 1992 Form 10-K, and is incorporated herein by
reference.
10.5 Lease agreement between the Registrant and Safran Development,
L.L.C. for the lease of the 2nd floor of 20229 Nine Mile Road, St.
Clair Shores, Michigan, effective October 26, 1999, was previously
filed as an exhibit to the Registrant's Form 10-Q for the quarter
ended September 30, 1999, and is incorporated herein by reference.
10.6+ Retirement Plan for Outside Directors as amended and restated,
filed as an exhibit to the Registrant's 1995 Form 10-K and
incorporated herein by reference.
10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed as
an exhibit to the Registrant's 1998 Form 10-K and incorporated
herein by reference.
99 Proxy Statement for the Registrant's 2002 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference.