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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, 1998
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 of (I.R.S. Employer
Incorporation or organization) Identification No.)
535 Griswold, Suite 2400, Detroit, Michigan 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 313-963-2323
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 1, 1998, the aggregate market value of the common stock of
Registrant held by non-affiliates was $33,229,764.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of September 1, 1998, is as follows:
Title of Class Number of Shares Outstanding
Common Stock, 1,086,412
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the Registrant dated
September 25, 1998 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 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 89% of the Registrant's net sales in fiscal 1998 (90%
and 91% in fiscal 1997 and fiscal 1996, 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 Company 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 Company'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.
1
<PAGE>
Customers comprising 10% or greater of the Registrant's net sales
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Ford Motor Company ........... 45% 47% 48%
General Motors Corporation ... 20% 20% 22%
All Others ................... 35% 33% 30%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
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, 1998, the Registrant had an estimated backlog of
firm orders amounting to approximately $14,500,000, all of which are expected
to be filled within the 1999 fiscal year. The comparable backlog as of August
31, 1997 amounted to approximately $15,000,000.
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 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.
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 514 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 1999 and January of 2000,
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 six
plants located throughout lower 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
2
<PAGE>
is situated on 25 acres of land, and contains heat treat facilities for
hardening in-process parts. The annealing and pickling of the steel used at
Big Rapids is generally performed at the Romulus Steel Processing Division.
The Romulus Division is housed in a 100,000 square foot plant on 22
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. Annealing and pickling of the steel coils used in manufacturing nut
products are performed by the adjacent Romulus Steel Processing Division.
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.
Steel rod annealing, pickling and drawing facilities are provided at
the 38,000 square foot Romulus Steel Processing Division plant on a tract of
land it shares with the Romulus Division. A significant amount of the output
of this facility is converted to finished products by the Registrant's bolt
and nut making operations. Excess capacity is used to process steel rod
belonging to other companies, mainly in the cold heading industry.
The Brighton Division occupies a 19,000 square foot leased facility
in Brighton, Michigan. The lease expires in December, 1998. The Division
manufactures perishable tooling, primarily for the cold heading industry.
More than one-half of its output is consumed by the Registrant's Romulus and
Big Rapids Divisions.
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 July, 1998, the Registrant entered into a $1.4 million contract
for the construction of a new manufacturing plant in Traverse City, Michigan.
The Registrant's corporate offices are located in the Buhl Building
in downtown Detroit, where the Registrant occupies 12,000 square feet of
space under a five year lease expiring in 1999 (renewable for an additional 5
years).
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 three related dump sites. The sites are located in Oakland County,
Michigan, and are referred to as the Springfield Township, the Rose Township
and the Cemetery Dump Sites. While the Registrant denies it has engaged in
disposing of any materials at any of the sites, the Company together with
eleven other PRPs has actively participated in negotiations directed toward
settling the EPA's claims.
3
<PAGE>
With respect to the Rose Township Site, the Registrant has agreed to
participate in funding clean-up of the site by paying a share of the clean-up
costs which the Registrant does not consider to be material. This share has
been assumed primarily because of the large transactional costs expected to
be incurred in defending the lawsuit against the PRPs which would have been
filed by the Environmental Protection Agency if the matter had not been
settled voluntarily.
The Registrant and eleven other PRPs have signed a Consent Decree
and adopted a Remedial Action Plan which has been filed in, and approved by,
the U.S. District Court for the Eastern District of Michigan. The Complaint
instituting the court proceeding was filed September 19, 1989. The Registrant
paid $300,000 as its share of the settlement that was reached with the EPA
pursuant to the Consent Decree. The principal parties are the United States
of America, the State of Michigan, and the PRPs. On appeal, the Consent
Decree has been affirmed by the United States Court of Appeals for the Sixth
Circuit. The allocation of the responsibility to fund the Remedial Action
Plan among the participating PRPs is set out in a written Agreement to which
the Registrant is also a party. Settlements with two of the Registrant's
insurers resulted in coverage for in excess of one half of the Registrant's
share.
The settling defendants have submitted to the United States
Environmental Protection Agency comments regarding a soil vapor extraction
system report which the PRPs submitted after a pilot study at the Site. The
EPA has accepted the substitution of soil vapor extraction for soil flushing
as the remedial action approach, and the approach is now being implemented.
No significant effect on the site clean-up is anticipated and the Registrant
does not expect to pay any costs beyond its original contribution.
The Registrant and other Rose Township PRPs have been notified by
the EPA of potential liability at another site located in Springfield
Township, Oakland County, Michigan. The PRPs have reached agreement with the
EPA on the terms of a settlement which provides for the remediation of the
Springfield Township site. Remediation costs for which the Registrant may
become liable are not expected to have a material effect on the Registrant's
financial statements. The Registrant has reached agreement with the other
PRPs involved with this site to settle all remaining identified claims for a
cost to the Registrant of $173,000. The Registrant has previously paid
$48,000 as its share of an interim response action. The Registrant has also
paid a total of $41,000 to settle cost reimbursement claims for this site and
the Rose Township Site that were asserted by the Michigan Department of
Environmental Quality.
With respect to the Cemetery Dump Site, the EPA has performed a site
cleanup, but has not asserted claims against any of the identified PRPs.
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 notification
and associated correspondence received by the Registrant indicates that it is
responsible for a total of 64 "empty" drums at this site. The total number of
drums shown in the correspondence as having been received by the site is
18,775,853. Since total site costs are estimated at somewhat less than $10
million and because the majority of the drums are associated with parties
that are cooperating with the Michigan Department of Environmental Quality,
the Registrant believes that its share will be relatively small, i.e., $1,000
or less.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
4
<PAGE>
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 bid
quotations as reported by the Nasdaq National Market for periods prior to
March 17, 1998, and quarterly high and low bid quotations as reported by the
Nasdaq Small Cap Market after such date. Quotations after March 18, 1998
reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
lst Quarter 61 45 29-1/4 25-1/4
2nd Quarter 62 46 30-1/2 27-1/2
3rd Quarter through 3/17/98 59 53-1/2 40 29
3rd Quarter from 3/18/98 57 57
4th Quarter 59 49-1/2 47 37-3/4
</TABLE>
At September 1, 1998, the approximate number of beneficial holders
and shareholders of record of the Registrant's common stock was 950, based
upon the securities position listings furnished to the Registrant.
Cash dividends were declared in each of the four quarters during
fiscal 1998 and fiscal 1997. Total cash dividends in fiscal 1998 were $2.00
per share and in fiscal 1997 were $1.20 per share. The Registrant is in
compliance with covenants of its revolving credit and term loan agreement and
its lease-purchase obligation including restrictions on the payment of cash
dividends.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Five Years Ended June 30 1998 1997 1996 1995 1994
------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations (in thousands)
Net sales ........................... $ 106,889 $ 102,683 $ 92,794 $ 90,503 $ 80,713
Earnings before federal income
taxes ............................. 11,779 10,768 6,560 6,388 4,030
Federal income taxes ................ 3,952 3,593 2,169 2,147 1,308
Net earnings ........................ 7,827 7,175 4,391 4,241 2,722
Depreciation and amortization ....... 4,206 3,889 3,553 3,135 2,709
Capital expenditures ................ 8,367 6,872 5,682 7,443 6,169
Cash dividends declared ............. 2,173 1,304 1,195 870 653
Per share data
Net earnings ........................ $ 7.20 $ 6.60 $ 4.04 $ 3.90 $ 2.50
Cash dividends declared ............. 2.00 1.20 1.10 .80 .60
Book value .......................... 43.06 36.88 31.20 28.49 25.25
Average shares outstanding .......... 1,086,475 1,086,646 1,086,662 1,086,954 1,087,955
---------- ---------- ---------- ---------- ----------
Return data
Net earnings on net sales ........... 7.3% 7.0% 4.7% 4.7% 3.4%
Net earnings on stockholders' equity 16.7% 21.2% 14.2% 15.4% 10.5%
Financial position at June 30 (in
thousands)
Working capital (net current assets) $ 11,981 $ 9,436 $ 13,613 $ 12,538 $ 9,141
Other assets ........................ 9,526 9,022 8,566 8,327 8,038
Property, plant and equipment (net) 37,782 33,642 30,665 28,613 24,367
---------- ---------- ---------- ---------- ----------
Total assets less current liabilities 59,289 52,100 52,844 49,478 41,546
Less:
Long-term debt .................... 450 600 7,960 8,700 6,020
Unfunded pension obligation ....... 0 1,526 2,977 3,400 4,049
Deferred taxes .................... 2,197 1,564 1,122 1,047 604
Employee benefits ................. 1,017 1,105 1,194 1,324 1,418
Postretirement benefits ........... 8,211 6,746 5,250 3,744 1,880
Other liabilities ................. 634 479 440 306 111
---------- ---------- ---------- ---------- ----------
Stockholders' equity (net assets) ... $ 46,780 $ 40,080 $ 33,901 $ 30,957 $ 27,464
========== ========== ========== ========== ==========
</TABLE>
6
<PAGE>
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:
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales 100% 100% 100%
Gross Profit 16.7 16.6 12.9
Selling, general and
administrative expenses 5.6 5.8 4.9
Interest .1 .4 .9
Earnings before federal
income taxes 11.0 10.5 7.1
Net earnings 7.3 7.0 4.7
</TABLE>
Federal Screw Works reported net sales of $106.9 million in fiscal
1998, which represented a 4.1% increase from fiscal 1997 sales of $102.7
million. Net sales for fiscal 1997 increased 10.7% from fiscal 1996 sales of
$92.8 million. Sales in both 1998 and 1997 benefitted from new automotive
parts programs. The number of parts shipped increased in each of the last two
fiscal years.
Gross profits increased 4.1% to $17.8 million in fiscal 1998, a $0.7
million increase from fiscal 1997. Fiscal 1997 gross profits increased 42.4%
to $17.1 million compared to the $12.0 million level realized in 1996. The
increases resulted primarily from greater sales and increased manufacturing
efficiency, offset in part by price concessions which continued to be
required by our customers. These concessions are a part of the competitive
environment and will be with us for the foreseeable future. Other negative
factors affecting 1998 profits included a reduction in refrigeration sales
caused by the cool summer of 1997 and eight work stoppages against one of our
largest customers culminating in the 54 day strike which began June 4.
Material, plating and packaging costs were stable in 1998.
Our Shareholders are aware of the Company'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. The impact of new parts programs were again a major factor in
fiscal 1998.
7
<PAGE>
Although as indicated above, refrigeration sales were down in fiscal
1998, we anticipate that this industry should return to its normal growth
patterns in the new fiscal year, perhaps accented by the very hot weather
during the current summer. As a percentage of growth, refrigeration sales
growth historically has been greater than automotive sales growth. Sales to
customers outside North America are increasing, but still are not material.
As mentioned in our 1996 annual report, the Company began production
shipments through a Tier I supplier to a transplant automobile manufacturer
in 1997. These were joined by shipments through a Tier I supplier to a second
transplant manufacturer in fiscal 1998. Shipments to Tier I automotive
suppliers continue to increase. It is our expectation that shipments to Tier
I suppliers will grow steadily in the next few years. Also, the Company
believes that outsourcing by certain of its major customers will continue to
be a positive factor, although new outsourcing programs were not important in
fiscal 1998. Significant consolidations did occur in the fastener industry in
fiscal 1998, but the Company did not experience any additional competitive
pressure from these consolidations or from transplant fastener suppliers.
As a percentage of net sales, selling, general and administrative
expenses were reduced to 5.6% in fiscal 1998. In fiscal 1997 and fiscal 1996
these expenses were 5.8% and 4.9% of net sales, respectively.
Interest expense continues to decrease as a result of reductions in
the Company's lease purchase obligations and reductions in average borrowings
under the company's bank credit agreement.
The Company has been designated by the federal Environmental
Protection Agency ("EPA") as a Potentially Responsible Party ("PRP") with
respect to three related dump sites. The sites are related in that the PRPs
engaged a single transporter who illegally disposed of toxic and hazardous
waste materials there in the late 1960s. The sites are located in Oakland
County, Michigan, and are referred to as the Springfield Township, the Rose
Township and Cemetery Dump Sites. While the Company denies it has engaged in
disposing of any materials at any of the sites, the Company, together with
eleven other PRPs, has actively participated in negotiations directed toward
settlement of the EPA's claims. The Rose Township Site was the first site
elected by the EPA for remediation. The participating PRPs were successful in
negotiating a Consent Decree which was approved by the United States District
Court for the Eastern District of Michigan under which the Company has agreed
to participate in the cost of the clean up. These costs have been paid by the
Company and no additional costs are expected. The State of Michigan appealed
the Consent Decree to the United States Court of Appeals for the Sixth
Circuit which affirmed entry of the Decree.
The same PRPs have actively been engaged in negotiations with the
EPA and the Michigan Department of Environmental Quality ("MDEQ") in an
effort to agree upon mutually acceptable remediation parameters for the
Springfield Township site. During 1998, an agreement was reached with EPA and
the MDEQ and a Consent Decree embodying the settlement terms has been lodged
with the U.S. District Court for the Eastern District of Michigan. The
Consent Decree is expected to be entered by the court in the near future.
Remediation costs for which the Company is liable are not expected to have a
material effect on the Company's financial statements. With respect to the
Cemetery Dump Site, the EPA has performed the 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 Company received a
notice letter from a representative of the Barrels, Inc. site PRP Group
located in Lansing, Michigan indicating that "empty" drums from the Company
were shipped to the site. The waste allegedly shipped by the Company
contained "empty" drums with an estimated volume of 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
Company's share of the
8
<PAGE>
costs are not expected to be material. No investigation has been undertaken
to the Company's knowledge which would identify any costs to be incurred by
the Company which might have a material effect on the Company's financial
statements.
Year 2000 Matters
The Company completed a comprehensive review of its operations
related to the "Year 2000" issue during fiscal 1998. This review included an
assessment of the Company's mainframe computer system, operating and
application systems, microcomputer and office systems, facilities, and
production equipment. This review also included correspondence with major
vendors and customers. Management believes it has identified those systems
that could be affected by the "Year 2000" issue. The Company has implemented
a plan to resolve these issues and expects to complete the plan and the
related testing by December 31, 1998.
During the fiscal year ended June 30, 1998, the Company installed a
new mainframe computer system and operating system that are "Year 2000"
compliant. Implementation and testing of mainframe applications is ongoing
and is expected to be completed by December 31, 1998. The Company believes
that, with modification of its existing computer systems and updates by
vendors in the ordinary course of business, the "Year 2000" issue will not
pose significant operational problems of the Company's computer systems.
However, if such modifications are not made, or are not completed timely, the
"Year 2000" issue could have a material impact on the operations of the
Company.
The Company has developed contingency plans for its significant
operations and is continuously monitoring the progress toward the established
"Year 2000" plan. These plans include preliminary discussions with the
Company's primary software vendors to replace critical applications that may
become inoperable as a result of the "Year 2000" issue. The Company may
increase inventory levels to insure that supplies are not interrupted.
The total "Year 2000" project cost is estimated at approximately
$400,000, which includes estimated costs to be incurred to acquire upgraded
software that will be capitalized. It is anticipated that these costs will be
paid for with cash from operations.
Dividends
Cash dividends declared in fiscal year 1998 were $2.00 per share,
$.80 more than that declared in fiscal 1997 and $.90 more than that declared
in fiscal 1996. The Board of directors in August, 1998, declared a $.10 per
share quarterly dividend, and an extra dividend of $1.80 per share.
Liquidity and Capital Resources
On October 15, 1997, the Company extended its Revolving Credit and
Term Loan Agreement by one year. The expiration date is October 31, 2000, and
is renewable annually for an additional year. Borrowings up to $25 million
and capital expenditures of $10 million annually are permitted. The Company
has the option to covert borrowings under the facility to a term note through
October 31, 2000. Payments under the term note, if the conversion option were
exercised, would be made quarterly and could extend to October 31, 2002.
Therefore, borrowings under the Revolving Credit and Term Loan Agreement,
which were $250,000 at June 30, 1998 and zero at June 30, 1997, are
classified as long-term debt.
9
<PAGE>
Working capital at June 30, 1998 amounted to $11,981,000 as compared
to working capital of $9,436,000 at June 30, 1997. The increase resulted
primarily from an increase in inventories.
During 1998, the Company reduced its unfunded pension obligation to
zero. This also had the effect of reducing the intangible pension asset and
the unrecognized pension cost component of stockholders' equity. Prepaid
pension costs increased accordingly.
As discussed in Note 6 to the financial statements, effective July
1, 1993, the Company adopted FASB Statement No. 106. As permitted by the
Statement, the Company 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 Company's cash flows.
Cash flows from operating activities approximated $10.5 million in
fiscal 1998. This compares to $15.9 million in 1997 and $7.9 million in 1996.
The principal components of these activities are set forth on page 13.
Capital expenditures for fiscal 1998 were $8.4 million, primarily
related to the purchase of equipment and expansion of facilities in order to
improve production efficiencies and enable the Company to meet increased
future demand for its products. Capital expenditures in fiscal years 1997 and
1996 were $6.9 million and $5.7 million, respectively. Expenditures for
additional equipment during fiscal 1999 are presently expected to approximate
$7.2 million, of which $0.7 million had been committed as of June 30, 1998.
These future capital expenditures are expected to be financed from cash
generated from operations and additional borrowing capacity under the bank
credit agreement.
Net cash used in financing activities was $2.3 million in fiscal
1998. This compares to $8.7 million used in fiscal 1997 and $1.9 million used
in 1996. Fluctuations in these activities have been influenced principally by
borrowings and repayments under the Company's Revolving Credit and Term Loan
Agreement.
Impact of Inflation and Changing Prices
The Company passes increased costs on to customers, to the extent
permitted by competition, by increasing sales prices whenever possible. In
fiscal 1998, 1997 and 1996 the Company was generally unable to pass on cost
increases incurred due to competitive pressures. Sales price increases in
each of these years were insignificant.
Impact of New Accounting Standards
During 1998, the Company adopted "Statements of Financial Accounting
Standards No. 128, Earnings Per Share; No. 129, Disclosure of Information
About Capital Structure; No. 130, Reporting Comprehensive Income and No. 131,
Disclosures About Segments of an Enterprise and Related Information," with no
material impact to the Company's financial statements.
During 1998, the Financial Accounting Standards Board issued several new
accounting standards: "Statements of Financial Accounting Standards No. 132,
Employers' Disclosures about Pensions and Other
10
<PAGE>
Postretirement Benefits, and No. 133, Accounting for Derivative Instruments
and Hedging Activities." The adoption of these standards will not have a
material effect on the Company's financial statements.
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
expectations for future periods which are subject to various uncertainties,
including competition, the loss of, or reduction in business with, the
Company's principal customers, work stoppages, strikes and slowdowns at the
Company's facilities and those of its customers; adverse changes in economic
conditions generally and those of the automotive industry, specifically.
11
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $106,888,711 $102,682,635 $ 92,794,306
Costs and expenses:
Cost of products sold 89,051,350 85,595,893 80,792,936
Selling, general and administrative 5,932,572 5,907,223 4,593,135
Interest 126,091 411,906 847,736
------------ ------------ ------------
95,110,013 91,915,022 86,233,807
------------ ------------ ------------
EARNINGS BEFORE FEDERAL
INCOME TAXES 11,778,698 10,767,613 6,560,499
Federal income taxes -- Note 4:
Current 3,822,000 3,393,000 1,845,000
Deferred 130,000 200,000 324,000
------------ ------------ ------------
3,952,000 3,593,000 2,169,000
------------ ------------ ------------
NET EARNINGS $ 7,826,698 $ 7,174,613 $ 4,391,499
============ ============ ============
Average number of shares
outstanding 1,086,475 1,086,646 1,086,662
============ ============= ============
Net earnings per share $ 7.20 $ 6.60 $ 4.04
============ ============= ============
<FN>
See accompanying notes.
</TABLE>
12
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 7,826,698 $ 7,174,613 $ 4,391,499
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,206,219 3,889,199 3,553,461
Increase in cash value of life insurance (124,773) (176,040) (158,519)
Change in deferred income taxes 130,000 200,000 324,000
Employee benefits 1,376,040 1,407,050 1,375,456
Amortization of restricted stock 24,717 47,132
Other (231,542) (1,316,435) (873,493)
Changes in operating assets and liabilities:
Accounts receivable 77,088 (1,011,172) (643,734)
Inventories and prepaid expenses (2,305,571) 1,197,275 924,940
Accounts payable and accrued expenses (479,726) 4,541,338 (1,013,883)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 10,474,433 15,930,545 7,926,859
INVESTING ACTIVITIES
Purchases of property, plant and equipment (8,366,821) (6,871,700) (5,682,326)
Proceeds from sale of property, plant
and equipment 20,144 5,182 77,437
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (8,346,677) (6,866,518) (5,604,889)
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement 250,000 (6,960,000) (340,000)
Principal payments on lease-purchase
obligation (400,000) (400,000) (400,000)
Purchases of common stock (5,450) (6,000)
Dividends paid (2,173,004) (1,303,994) (1,195,328)
------------ ------------ ------------
NET CASH USED IN FINANCING
ACTIVITIES (2,328,454) (8,669,994) (1,935,328)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (200,698) 394,033 386,642
Cash at beginning of year 1,175,577 781,544 394,902
------------ ------------ ------------
CASH AT END OF YEAR $ 974,879 $ 1,175,577 $ 781,544
============ ============ ============
<FN>
See accompanying notes.
</TABLE>
13
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash $ 974,879 $ 1,175,577
Accounts receivable 11,815,786 11,892,874
Inventories -- Note 1:
Finished products 4,642,260 3,871,909
In-process products 6,065,010 5,017,646
Raw materials and supplies 2,377,014 2,350,300
----------- -----------
Total inventories 13,084,284 11,239,855
Prepaid expenses and other current accounts 737,369 276,227
Deferred income taxes -- Note 4 946,000 909,000
----------- -----------
TOTAL CURRENT ASSETS 27,558,318 25,493,533
Other Assets
Intangible pension asset -- Note 5 960,718 2,549,667
Cash value of life insurance 5,189,700 5,064,927
Prepaid pension costs 3,051,506 1,184,174
Miscellaneous 323,753 223,209
----------- -----------
9,525,677 9,021,977
Property, Plant and Equipment -- Notes 2 and 3
Land 334,850 334,850
Buildings and improvements 11,105,493 9,080,584
Machinery and equipment 75,715,606 69,932,906
----------- -----------
87,155,949 79,348,340
Less accumulated depreciation 49,373,466 45,706,315
----------- -----------
37,782,483 33,642,025
----------- -----------
$74,866,478 $68,157,535
=========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
June 30
1998 1997
------------ ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 4,812,392 $ 5,393,944
Payroll and employee benefits 7,558,926 7,072,584
Dividend payable 108,641 108,651
Federal income taxes 1,170,774 848,739
Taxes, other than income taxes 1,396,314 1,429,692
Accrued pension contributions 64,777 428,719
Other accrued liabilities 65,869 375,090
Current maturities of long-term debt 400,000 400,000
------------ ------------
TOTAL CURRENT LIABILITIES 15,577,693 16,057,419
Long-Term Liabilities
Long-term debt -- Note 2 450,000 600,000
Unfunded pension obligation -- Note 5 1,526,114
Deferred income taxes -- Note 4 2,197,000 1,564,000
Employee benefits 1,016,560 1,104,582
Postretirement benefits -- Note 6 8,210,550 6,746,488
Other liabilities 634,509 478,654
------------ ------------
12,508,619 12,019,838
Stockholders' Equity -- Notes 2 and 8
Common stock, $1 par value, authorized
2,000,000 shares, 1,086,412 shares
outstanding (1,086,512 in 1997) 1,086,412 1,086,512
Additional capital 3,210,476 3,066,476
Retained earnings 43,073,942 37,425,598
Other comprehensive income (590,664) (1,498,308)
------------ ------------
46,780,166 40,080,278
------------ ------------
$ 74,866,478 $ 68,157,535
============ ============
<FN>
See accompanying notes.
</TABLE>
15
<PAGE>
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended June 30, 1998, 1997 and 1996
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1995 $ 1,086,662 $ 2,772,628 $ 28,364,643 $ (1,266,801) $ 30,957,132
Net earnings for the year 4,391,499 4,391,499
Unrecognized pension costs,
net of taxes (397,650) (397,650)
------------
Total comprehensive income 3,993,849
Transactions under restricted
stock bonus
plans -- net 145,131 145,131
Cash dividends declared --
$1.10 per share (1,195,328) (1,195,328)
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 1996 1,086,662 2,917,759 31,560,814 (1,664,451) 33,900,784
Net earnings for the year 7,174,613 7,174,613
Reduction of unrecognized
pension costs, net of taxes 166,143 166,143
------------
Total comprehensive income 7,340,756
Purchase of 150 shares (150) (5,850) (6,000)
Transactions under restricted
stock bonus plans -- net 148,717 148,717
Cash dividends declared --
$1.20 per share (1,303,979) (1,303,979)
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 1997 1,086,512 3,066,476 37,425,598 (1,498,308) 40,080,278
Net earnings for the year 7,826,698 7,826,698
Reduction of unrecognized
pension costs, net of taxes 907,644 907,644
------------
Total comprehensive income 8,734,342
Purchase of 100 shares (100) (5,350) (5,450)
Transactions under restricted
stock bonus plans-- net 144,000 144,000
Cash dividends declared --
$2.00 per share (2,173,004) (2,173,004)
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 1998 $ 1,086,412 $ 3,210,476 $ 43,073,942 $ (590,664) $ 46,780,166
============ ============ ============ ============ ============
<FN>
( ) Denotes deduction.
See accompanying notes.
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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, $1,578,000 and $1,683,000 at June 30, 1998 and 1997,
respectively. The remaining inventories are costed using the first-in,
first-out (FIFO) method. If inventories had been valued at current cost,
amounts reported at June 30 would have been increased by $633,000 and
$675,000 in 1998 and 1997, respectively.
Property, Plant and Equipment: Property, plant and equipment is 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.
Income Taxes: Income taxes have been provided using the liability method.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
Note 2 - Debt
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving credit note payable to bank $ 250,000 $ --
Lease-purchase obligation (see Note 3), payable
$200,000 semiannually, plus interest at 7 3/4% 600,000 1,000,000
---------- ----------
850,000 1,000,000
Less current maturities 400,000 400,000
---------- ----------
$ 450,000 $ 600,000
========== ==========
</TABLE>
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified
as long-term debt) to a term note through October 31, 2000, 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, 2002. Interest
(8.5% at June 30, 1998) on
17
<PAGE>
outstanding borrowings is determined based on the prime rate, or at the
Company's option, an alternative variable market rate. The Company also pays
a commitment fee of 3/8% on the unused portion of the revolving credit. The
aggregate fair value of the Company's lease-purchase obligation approximates
its recorded amount at June 30, 1998.
The Company is in compliance with covenants of the revolving credit and term
loan agreement and the lease-purchase obligation including restrictions on
payment of cash dividends. Retained earnings of $12,444,000 are free of
restriction at June 30, 1998.
Interest paid by the Company during fiscal 1998, fiscal 1997 and fiscal 1996
aggregated $323,000, $503,000, and $945,000, respectively.
Note 3 - Leases and Other Commitments
The Company acquired one of its manufacturing facilities under a
lease-purchase agreement with a municipality, and $600,000 of remaining
outstanding Industrial Revenue Bond financing is guaranteed by the Company at
June 30, 1998.
At June 30, 1998, the aggregate minimum rental commitments for the Industrial
Revenue Bond lease-purchase obligation and various noncancelable operating
leases with initial terms of one year or more are as follows:
<TABLE>
<CAPTION>
Lease-
Purchase Operating
Year ending June 30 Obligation Leases
---------- ----------
<S> <C> <C>
1999 $ 438,750 $ 737,000
2000 207,750 483,000
2001 252,000
2002 122,000
2003 52,000
---------
Total minimum lease payments $ 646,500 $1,646,000
==========
Amounts representing interest 46,500
---------
Present value of net minimum lease payments $ 600,000
=========
</TABLE>
Total rent expense (exclusive of the lease-purchase obligation) was
$1,035,000 in fiscal 1998, $911,000 in fiscal 1997, and $866,000 in fiscal
1996.
18
<PAGE>
Costs to complete the expansion of plant facilities and the purchase of
machinery and equipment approximated $660,000 at June 30, 1998.
Subsequent to June 30, 1998, the Company entered into a $1.4 million contract
for the construction of a new manufacturing plant.
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%) to
earnings before federal income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed amount $ 4,005,000 $ 3,661,000 $ 2,231,000
Life Insurance policies (97,000) (94,000) (90,000)
Other 44,000 26,000 28,000
----------- ----------- -----------
Total federal income tax provision $ 3,952,000 $ 3,593,000 $ 2,169,000
=========== =========== ===========
</TABLE>
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 Company's deferred tax liabilities and assets as of June
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accelerated tax depreciation $4,231,000 $3,825,000
---------- ----------
Total deferred tax liabilities 4,231,000 3,825,000
---------- ----------
Deferred tax assets:
Employee benefits 2,776,000 2,942,000
Inventory 152,000 121,000
Other 52,000 107,000
---------- ----------
Total deferred tax assets 2,980,000 3,170,000
---------- ----------
Net deferred tax liabilities $1,251,000 $ 655,000
========== ==========
</TABLE>
Income taxes paid by the Company during fiscal 1998, fiscal 1997, and fiscal
1996 totaled $3,358,000, $2,835,000 and $1,685,000, respectively.
19
<PAGE>
Note 5 - Employee Benefits
The Company 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 Company'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 Company's
actuarial consultants advise to be appropriate. Plan assets for these plans
consist principally of fixed income instruments, equity securities and
participation in insurance company contracts. A summary of the components of
net pension expense for these plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 523,000 $ 478,000 $ 408,000
Interest cost 1,460,000 1,375,000 1,328,000
Actual return on plan assets (4,586,000) (1,780,000) (2,415,000)
Net amortization and deferral 3,306,000 706,000 1,494,000
----------- ----------- -----------
$ 703,000 $ 779,000 $ 815,000
=========== =========== ===========
</TABLE>
20
<PAGE>
In accounting for pension plans, the Company used a discount rate of 7.25% in
1998, and 7.75% in 1997 and 1996, a 5% rate of increase in compensation, and
an 8% expected rate of return on assets. The following table sets forth the
plans' funded status at the March 31, 1998 and 1997 measurement dates:
<TABLE>
<CAPTION>
Plans for Which Plans for Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value of
vested benefit obligations $ 14,576,000 $ 5,127,000 $ 5,122,000 $ 12,815,000
============ ============ ============ ============
Actuarial present value of
accumulated benefit obligations $ 14,817,000 $ 5,179,000 $ 5,294,000 $ 13,171,000
============ ============ ============ ============
Plan assets at fair value $ 19,571,000 $ 8,791,000 $ 5,102,000 $ 10,543,000
Projected benefit obligations 16,144,000 6,326,000 5,294,000 13,171,000
------------ ------------ ------------ ------------
Excess (deficiency) of assets
over projected benefit obligations 3,427,000 2,465,000 (192,000) (2,628,000)
Unrecognized net (gain)/loss (866,000) (330,000) 895,000 2,270,000
Unrecognized prior service cost 539,000 (102,000) 332,000 1,056,000
Unrecognized net (asset)
liability at transition (48,000) (849,000) 756,000 2,269,000
Additional liability
recognized under the
minimum liability provisions (1,855,000) (4,922,000)
------------ ------------ ------------ ------------
Net pension asset (liability) $ 3,052,000 $ 1,184,000 $ (64,000) $ (1,955,000)
============ ============ ============ ============
</TABLE>
The Company sponsors a retirement plan for directors who are not employees of
the Company. The net periodic pension expense for the plan was $156,000,
$39,000 and $150,000 in fiscal 1998, 1997 and 1996, respectively. The
actuarial present value of vested benefit obligations approximated $676,000
at June 30, 1998 and $514,000 at June 30, 1997. The plan is currently not
fully funded.
Note 6 - Other Postretirement Benefits
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees may become eligible for those benefits if they
reach normal retirement age while working for the Company. The benefits are
provided through certain insurance companies.
21
<PAGE>
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's financial statements:
<TABLE>
<CAPTION>
June 30
1998 1997
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(10,355,000) $ (9,703,000)
Fully eligible active plan participants (2,846,000) (2,234,000)
Other active plan participants (7,293,000) (5,686,000)
------------ ------------
(20,494,000) (17,623,000)
Unrecognized net gain (1,193,000) (3,497,000)
Unrecognized transition obligation 13,476,000 14,374,000
------------ ------------
Accrued postretirement benefit cost $ (8,211,000) $ (6,746,000)
============ ============
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net periodic postretirement
benefit costs includes
the following components:
Service cost $ 373,000 $ 330,000 $ 344,000
Interests cost 1,367,000 1,362,000 1,315,000
Amortization of transition obligation
over 20 years 898,000 898,000 898,000
Amortization of unrecognized gain (100,000) (119,000) (123,000)
----------- ----------- -----------
Net periodic postretirement benefit cost $ 2,538,000 $ 2,471,000 $ 2,434,000
=========== =========== ===========
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is 8.0% for fiscal
1999 and 8.5% for fiscal year 1998 and is assumed to decrease gradually to
5.5% for 20004 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. 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, 1998 and 1997, by $2,303,000 and
$1,829,000, respectively, and the aggregate of the service and interest cost
components of net period postretirement benefit cost for the year ended June
30, 1998, by $226,000.
The weighted average discount rate used in determining the accumulated post
retirement benefit obligation at June 30, 1998 and 1997 was 7.25% and 8%,
respectively.
22
<PAGE>
Note 7 - Industry Information
Federal Screw Works is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single business segment. The Company'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 89% of the Company's net sales in fiscal 1998 (90% and 91% in
fiscal 1997 and fiscal 1996, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers. Customers comprising 10% or greater of the
Company's net sales are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Ford Motor Company 45% 47% 48%
General Motors Corporation 20% 20% 22%
All Others 35% 33% 30%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Sales to customers outside the United States are not significant.
Note 8 - Restricted Stock Bonus Plan
The Company maintains a restricted stock bonus plan for certain key
employees. Shares issued under the plan are subject to certain restrictions
which lapse generally over a period of six to ten years from date of grant.
The market value of shares issued, considered to be compensation, is being
charged to operations over the periods during which the restrictions lapse.
The additional capital accounts reflect the tax benefits of the compensation
deduction.
Note 9 - Litigation
The Company 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 Company's financial statements.
23
<PAGE>
Note 10 - Impact of New Accounting Standards
During 1998, the Company adopted "Statements of Financial Accounting
Standards No. 128, Earnings Per Share; No. 129, Disclosure of Information
About Capital Structure; No. 130, Reporting Comprehensive Income and No. 131,
Disclosures About Segments of an Enterprise and Related Information," with no
material impact to the Company's financial statements.
During 1998, the Financial Accounting Standards Board issued several new
accounting standards: "Statements of Financial Accounting Standards No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits, and
No. 133, Accounting for Derivative Instruments and Hedging Activities." The
adoption of these standards will not have a material effect on the Company's
financial statements.
24
<PAGE>
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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company'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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes 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, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. 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.
Ernst & Young LLP
Detroit, Michigan
August 10, 1998
25
<PAGE>
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 25, 1998
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 25,
1998 which is incorporated herein by reference.
<TABLE>
<CAPTION>
Name Position Age
---- -------- ---
<S> <C> <C>
John M. O'Brien........ Vice President-Sales and Marketing since 1986; 48
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 and General Manager - Chelsea 42
Division and Brighton Division 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.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the captions "Directors Remuneration
and Committees of the Board" and "Executive Compensation" in the Registrant's
Proxy Statement dated September 25, 1998 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 25, 1998 and is incorporated
herein by reference.
26
<PAGE>
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
25, 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The following financial statements of
the Registrant and Report of Independent Auditors are contained in "Item 8
Financial Statements and Supplementary Data."
Financial Statements
- Statements of Operations for the years ended
June 30, 1998, 1997 and 1996
- Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996
- Balance sheets as of June 30, 1998 and 1997
- Statements of Stockholders' equity for the years ended
June 30, 1998, 1997 and 1996
Report of Independent Auditors
Notes to Financial Statements
(2) Financial Statement Schedules. The following financial statement
schedule is filed with this report, and appears on page 30.
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.
(b) No reports on Form 8-K have been filed by Registrant during the
last quarter of the period covered by this Report.
The following documents are filed as a part of this report. Those
Exhibits previously filed and incorporated herein by reference are identified
below.
27
<PAGE>
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 were filed as an exhibit to Registrant's 1989
Form 10-K and are incorporated herein by reference.
4.1 The lease-purchase contract dated as of November 1, 1979 between the
City of Big Rapids, Michigan and Federal Screw Works was filed as an
exhibit to Registrant's 1993 Form 10-K and is incorporated herein by
reference.
4.2 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.
4.3 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, together with an Agreement providing for the
retirement and consultation of and by Mr. Harness and the Registrant
dated January 7, 1994, attached to which as Exhibits B and C were
agreements further amending the supplemental retirement agreement,
were filed as an exhibit to Registrant's 1994 Form 10-K, and are
incorporated herein by reference.
10.3+ 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.
10.4 Lease agreement between the Registrant and Equitable Life Assurance
Society of the United States for the lease of the 24th floor of the
Buhl Building, Detroit, Michigan, effective January 1, 1995, was
previously filed as an exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1995, and is incorporated herein by
reference.
10.5+ 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.
10.6* Supplemental Executive Retirement Plan dated July, 1998.
27.* Financial Data Schedule.
28
<PAGE>
99. Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A
and incorporated herein by reference.
* Filed with this report
29
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------
(2)
(1) Charged to
Balance at Charged to Other
Beginning Costs and Accounts - Deductions - Balance at
of Period Expenses Describe Describe End of Period
---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Valuation allowance for
accounts receivable:
Year ended June 30, 1998 $ 50,000 $ -- -- $ 50,000
Year ended June 30, 1997 25,000 25,000 -- 50,000
Year ended June 30, 1996 25,000 -- -- 25,000
Valuation allowance for
inventories:
Year ended June 30, 1998 $217,000 $ 57,637 $ 48,637(A) $226,000
Year ended June 30, 1997 284,000 178,586 245,586(A) 217,000
Year ended June 30, 1996 275,000 210,092 201,092(A) 284,000
<FN>
(A) Unsalable inventories charged off; corresponding reduction of allowance.
</TABLE>
30
<PAGE>
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 and Chief Executive
Officer, Chief Financial Officer,
Secretary and Treasurer
Date: September 18, 1998
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 18, 1998
- ----------------------------------
Wade C. Plaskey
Corporate Controller
(Principal Accounting Officer)
/s/ Thomas W. Butler, Jr. September 18, 1998
- ----------------------------------
Thomas W. Butler, Jr.
Director
/s/ Hugh G. Harness September 18, 1998
- ----------------------------------
Hugh G. Harness
Director
/s/ F. D. Tennent September 18, 1998
- ----------------------------------
F. D. Tennent
Director
/s/ W. T. ZurSchmiede, Jr. September 18, 1998
- ----------------------------------
W. T. ZurSchmiede, Jr.
Director
/s/ Robert F. ZurSchmiede September 18, 1998
- ----------------------------------
Robert F. ZurSchmiede
Director
/s/ Thomas ZurSchmiede September 18, 1998
- ----------------------------------
Thomas ZurSchmiede
Director
BH\175376.7
ID\ DMC
31
<PAGE>
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 were filed as an exhibit to Registrant's 1989
Form 10-K and are incorporated herein by reference.
4.1 The lease-purchase contract dated as of November 1, 1979 between the
City of Big Rapids, Michigan and Federal Screw Works was filed as an
exhibit to Registrant's 1993 Form 10-K and is incorporated herein by
reference.
4.2 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.
4.3 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, together with an Agreement providing for the
retirement and consultation of and by Mr. Harness and the Registrant
dated January 7, 1994, attached to which as Exhibits B and C were
agreements further amending the supplemental retirement agreement,
were filed as an exhibit to Registrant's 1994 Form 10-K, and are
incorporated herein by reference.
10.3+ 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.
10.4 Lease agreement between the Registrant and Equitable Life Assurance
Society of the United States for the lease of the 24th floor of the
Buhl Building, Detroit, Michigan, effective January 1, 1995, was
previously filed as an exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1995, and is incorporated herein by
reference.
10.5+ 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.
10.6* Supplemental Executive Retirement Plan dated July, 1998.
27.* Financial Data Schedule.
99. Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A and
incorporated herein by reference.
* Filed with this report
32
EXHIBIT 10.6
=============================================================================
FEDERAL SCREW WORKS
Supplemental Executive Retirement Plan ("SERP")
July 1998
=============================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
PREAMBLE....................................................................1
ARTICLE I - DEFINITIONS.....................................................2
1.1 Basic Pension Benefit.....................................2
1.2 Beneficiary...............................................2
1.3 Board of Directors........................................2
1.4 Change in Control.........................................2
1.5 Code......................................................2
1.6 Compensation..............................................2
1.7 Compensation Committee....................................2
1.8 Early Retirement Benefit..................................3
1.9 Eligible Employee.........................................3
1.10 Employee..................................................3
1.11 Employer..................................................3
1.12 ERISA.....................................................3
1.13 Executive Bonus...........................................3
1.14 Fiscal Year...............................................3
1.15 Former Employee...........................................3
1.16 Installment Payments......................................3
1.17 Lump Sum..................................................3
1.18 Normal Retirement Date....................................3
1.19 Normal Retirement Benefit.................................3
1.20 Participant...............................................4
1.21 Pension Plan..............................................4
1.22 Permanent Disability Benefit..............................4
1.23 Plan Year.................................................4
1.24 Rabbi Trust...............................................4
1.25 Retirement................................................4
1.26 Termination Benefit.......................................4
1.27 Trustee...................................................4
1.28 Unrestricted Base Compensation............................4
1.29 Unrestricted Pension Benefit..............................4
1.30 Unrestricted Total Compensation...........................4
1.31 Vested....................................................4
ARTICLE II - ELIGIBILITY....................................................5
2.1 Eligibility...............................................5
2.2 Time of Participation.....................................5
ARTICLE III - BENEFITS......................................................5
3.1 Benefits - In General.....................................5
3.2 Pension Plan Supplemental Benefits........................5
3.3 Forfeiture................................................6
-i-
<PAGE>
Page
----
ARTICLE IV - VESTING........................................................7
4.1 Vesting - In General......................................7
4.2 Vesting on Termination of the SERP........................7
ARTICLE V - DISTRIBUTION OF BENEFITS........................................7
5.1 Timing and Forms of Benefit Payment.......................7
5.2 Elective Benefit Options..................................8
5.3 Death Benefits Option.....................................8
5.4 Tax Withholding...........................................9
5.5 Other....................................................10
ARTICLE VI - FUNDING.......................................................10
6.1 Unfunded Plan............................................10
6.2 Rabbi Trust..............................................10
ARTICLE VII - PLAN ADMINISTRATION..........................................11
7.1 General Duty.............................................11
7.2 Compensation Committee's General Powers,
Rights and Duties........................................11
7.3 Indemnification of Administrator.........................12
7.4 Claims and Procedure.....................................12
7.5 Furnishing Information or Providing Other Reports........13
7.6 No Fiduciary Relationship................................13
ARTICLE VIII - AMENDMENT AND DISCONTINUANCE................................13
ARTICLE IX - GENERAL PROVISIONS............................................14
9.1 Employment Rights........................................14
9.2 Interests Not Transferable...............................14
9.3 Facility of Payment......................................14
9.4 Gender and Number........................................15
9.5 Controlling State Law....................................15
9.6 Severability.............................................15
9.7 Statutory References.....................................15
9.8 Headings.................................................15
9.9 Action by FSW............................................15
-ii-
<PAGE>
FEDERAL SCREW WORKS
Supplemental Executive Retirement Plan
PREAMBLE
WHEREAS, the Employee Retirement Income Security Act of 1974 ("ERISA")
requires that limits be set on the maximum contributions and benefits which
may be made to or paid from a tax-qualified retirement plan on behalf of or
to a Participant in such a plan; and
WHEREAS, the Federal Screw Works Salaried Employees' Pension Plan ("Pension
Plan"), as amended and restated July 1, 1989, includes benefit limitations
imposed by Section 415 and Section 401(a)(17) of the Internal Revenue Code;
and
WHEREAS, Federal Screw Works ("FSW") intends to adopt this nonqualified
retirement benefit plan effective July 1, 1998, so that a Participant may
accrue benefits that cannot be delivered under the Pension Plan due to the
limits placed on the benefit amounts by Sections 401(a)(17), 101(a)(4),
414(s) and 415 and related sections of the Internal Revenue Code of 1986, as
may be amended from time to time.
NOW, THEREFORE, Federal adopts the Federal Screw Works Supplemental Executive
Retirement Plan ("SERP") for certain employees who participate in the Pension
Plan (the "Participants") for the purpose of providing an opportunity for
Participants to receive pension benefits which cannot be paid under the
Pension Plan because of the restrictions imposed by ERISA and the Internal
Revenue Code of 1986. Federal promises to pay the benefits defined herein to
each Participant, or on his or her behalf to his or her heirs, personal
representatives or beneficiaries, subject to the terms and conditions
specified hereinafter.
ARTICLE I - DEFINITIONS
<PAGE>
1.1 "Basic Pension Benefit" means the monthly benefit to be
paid to a Participant from the Pension Plan.
1.2 "Beneficiary" means any person(s) designated in writing by
a Participant to receive payment under the SERP in the
event of the Participant's death. In the event the
Participant is married and has designated no other
beneficiary (or if the designated beneficiary has
predeceased the Participant), Beneficiary shall mean the
participant's spouse. In the event the Participant is not
married at death and has designated no beneficiary (or if
the designated beneficiary has predeceased the
Participant). Beneficiary shall mean the Participant's
estate.
1.3 "Board of Directors" means the Board of Directors of
Federal Screw Works.
1.4 "Change in Control" means (a) the acquisition within a
twelve month period by any one person, or more than one
person acting as a group, of ownership of stock of the
Employer possessing 20% or more of the total voting power
of stock of the Employer, or (b) the replacement of the
majority of the members of the Employer's Board of
Directors within a twelve month period which is not
endorsed by a majority of the members of the Employer's
Board of Directors prior to the date of the appointment or
election. Ownership shall include all shares directly or
indirectly owned by a person or group of persons and any
such person or group of persons shall be deemed to own
shares which such person or group has the right to acquire
through the exercise of any option, warrant or night or
otherwise and all shares as to which such person or group
of persons or any of them, directly or indirectly. have or
share voting power or investment power or both.
1.5 "Code" means the Internal Revenue Code of 1986, as amended.
1.6 "Compensation" means Participant's base compensation as
defined in Section 1.13 of the Pension Plan.
1.7 "Compensation Committee" means the Compensation Committee
appointed by the Board of Directors to act on behalf of
FSW.
1.8 "Early Retirement Benefit" means the monthly benefit a
Participant is entitled to receive as determined under
Sections 3.5 and any other relevant sections of the Pension
Plan.
1.9 "Eligible Employee" means an Employee who is (or was) among
a select group of management or highly compensated
employees of FSW.
1.10 "Employee" means any individual employed by FSW.
1.11 "Employer" means Federal Screw Works. Such term includes
all corporations which comprise a "controlled group of
corporations" as defined in Section 414(b) of the Code, of
which Federal Screw Works is a member.
1.12 "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
2
<PAGE>
1.13 "Executive Bonus" means the annual bonus paid based upon
the financial performance of FSW. Compensation Committee
shall determine if any bonus qualifies as an Executive
Bonus for purposes of the SERP.
1.14 "Fiscal Year" means the period beginning on the first day
of July and ending on the last day in June of the following
calendar year.
1.15 "Former Employee" means any individual formerly employed
by FSW.
1.16 "Installment Payments" means a series of equal annual
payments, paid for a period of 10 years, equal to the
present value of the monthly Normal, Early, or Permanent
Disability Retirement Benefit as provided in Section 3.2.
In calculating the annual payments, the same assumptions
used to calculate lump sum distributions from the Pension
Plan shall be used. The annual payments shall include
interest at the same rate used to calculate the present
value of the benefit.
1.17 "Lump Sum" means a single sum payment equal to the present
value of the monthly Normal, Early, or Permanent Disability
Retirement Benefit as provided in Section 3.2. In
calculating the single sum amount, the same assumptions
used to calculate lump sum distributions from the Pension
Plan shall be used.
1.18 "Normal Retirement Date" means the first day of the month
coincident or next following a Participant's 65th birthday.
1.19 "Normal Retirement Benefit" means the monthly benefit a
Participant is entitled to receive as determined under
Sections 3.2, 3.3 and any other relevant sections of the
Pension Plan.
1.20 "Participant" means an Eligible Employee who, by reason of
his or her responsibilities with FSW, is selected by the
Compensation Committee to participate in the SERP.
1.21 "Pension Plan" means the Federal Screw Works Salaried
Employees' Pension Plan, as amended from time to time.
1.22 "Permanent Disability Benefit" means the monthly benefit a
Participant is entitled to receive as determined under
Section 3.6 and any other relevant sections of the Pension
Plan.
1.23 "Plan Year" means the Fiscal Year.
1.24 "Rabbi Trust" means an employer grantor trust established
to hold contributions to the SERP, pursuant to the Federal
Screw Works Trust Agreement, attached as Exhibit A of the
SERP.
1.25 "Retirement" means a Participant's termination of
employment with FSW on or after his or her Normal
Retirement Date.
1.26 "Termination Benefit" means the monthly benefit a
Participant is entitled to receive as determined under
Section 3.4 and any other relevant sections of the Pension
Plan.
3
<PAGE>
1.27 "Trustee" means the person(s) or organization designated as
the Trustee of the Rabbi Trust.
1.28 "Unrestricted Base Compensation" means Compensation without
regard to the limitations imposed under Code Section
401(a)(17).
1.29 "Unrestricted Pension Benefit" means the monthly Normal,
Early, Termination, Permanent Disability Retirement, or
Pre-Retirement Death Benefit, whichever is applicable,
determined under the formulas of the Pension Plan except
that the Unrestricted Total Compensation will be used
instead of Compensation as defined under the Pension Plan.
In no event shall the Unrestricted Pension Benefit exceed
175% of the benefit amount as calculated using the
Unrestricted Base Compensation.
1.30 "Unrestricted Total Compensation" means Unrestricted Base
Compensation plus the Executive Bonus in each of the
previous ten plan years.
1.31 "Vested" means the nonforfeitable portion of a
Participant's account.
ARTICLE II - ELIGIBILITY
2.1 Eligibility
Any Eligible Employee of FSW who is selected by the Compensation
Committee and approved by the Board of Directors shall be eligible
to participate in the SERP.
2.2 Time of Participation
Once selected, the Eligible Employee will become a Participant and
begin accruing benefits at the time specified by the Compensation
Committee.
ARTICLE III - BENEFITS
3.1 Benefits - In General
All Participants and Beneficiaries selected by the Compensation
Committee pursuant to Article II and whose benefits under the
Pension Plan are limited, directly or indirectly, by Sections
401(a)(17), 401(a)(4), 414(s) or 415 and related sections of the
Code, shall be eligible to receive benefits pursuant to the SERP. In
no event shall a Participant or Beneficiary who is not entitled to
benefits under the Pension Plan be eligible for, or receive,
benefits from the SERP.
3.2 Pension Plan Supplemental Benefits
Normal Retirement Benefit
Upon the Retirement of a Participant, as provided under the Pension
Plan, such Participant shall be entitled to a monthly benefit equal
in amount to his Unrestricted Pension Benefit less the Basic Pension
Benefit.
4
<PAGE>
Early Retirement Benefit
Upon the Early Retirement of a Participant, as provided under the
Pension Plan, such Participant shall be entitled to a monthly
benefit equal to his Unrestricted Pension Benefit less the Basic
Pension Benefit.
Permanent Disability Benefit
If a Participant terminates employment on account of his disability
and is entitled to receive a Permanent Disability Benefit, as
provided under the Pension Plan, such Participant shall be entitled
to a monthly benefit equal to his Unrestricted Pension Benefit less
the Basic Pension Benefit.
Termination Benefit
If a Participant terminates employment with FSW and is entitled to a
deferred vested benefit provided under the Pension Plan, such a
Participant shall be entitled to a monthly benefit equal to his
Unrestricted Pension Benefit less the Basic Pension Plan Benefit.
Pre-Retirement Death Benefit
Upon the death of a Participant whose Beneficiary is eligible for a
Pre-Retirement Death Benefit under the Pension Plan, the
Participant's Beneficiary shall be entitled to a monthly benefit
equal to the Pre-Retirement Death Benefit determined in accordance
with the provisions of the Pension Plan without regard to the
limitations under Code Section 401(a)(17), 401(a)(4), 414(s) or Code
Section 415 less the Basic Pension Benefit as converted actuarially
to the Pre-Retirement Death Benefit under the Pension Plan.
3.3 Forfeiture
Notwithstanding anything herein contained to the contrary, no
payment of any then unpaid installment of supplemental retirement
benefits provided herein shall be made and all rights under the SERP
to receive payments thereof shall be forfeited if any of the
following events occur:
A. Employee engages in any activity or conduct which in the
reasonable opinion of the Board of Directors is
significantly competitive with FSW, unless otherwise
approved by such Board of Directors, either while employed
or for a period of time specified by the Board of
Directors; or
B. Employee engages in acts or omissions constituting
dishonesty, intentional breach of fiduciary obligation or
intentional wrongdoing, in each case that results in
substantial harm to the business or property of FSW; or
C. Employee is convicted of a serious felony involving
significant moral turpitude while employed.
5
<PAGE>
ARTICLE IV - VESTING
4.1 Vesting - In General
Subject to the right of FSW to discontinue the SERP, as provided in
Article VIII hereof, a Participant shall have a nonforfeitable
interest in benefits payable under the SERP to the same extent the
Participant is vested in his or her benefits under the Pension Plan.
Should a Participant terminate employment before becoming fully
vested, the Board of Directors shall have the discretion to
immediately vest all benefits accrued by the Participant under the
SERP.
4.2 Vesting on Termination of the SERP
Notwithstanding the above, in the event the SERP is terminated by
the Board of Directors, all Participants who are actively employed
by FSW on the date the SERP is terminated shall be immediately
vested in their benefit under the SERP.
ARTICLE V - DISTRIBUTION OF BENEFITS
5.1 Timing and Forms of Benefit Payment
The retirement benefit payable under Section 3.2 shall commence at
such time as the benefit payable under the Pension Plan would be
paid (i.e., at the Annuity Starting Date as defined in the Pension
Plan).
The benefit provided under Section 3.2 shall be paid in the same
form as provided under the Pension Plan, except as provided in
Sections 5.2 and 5.3. For this purpose, the Pension Plan
distribution options include:
o Life annuity with a 10 year period certain
feature (Section 6.1(a) of the Pension Plan)
o Qualified Joint and Survivor Annuity (Section
6.1(b) of the Pension Plan)
o Joint and Survivor Annuity - 100% (Section 6.1(c)
of the Pension Plan)
Except as provided in Section 5.2 herein, the Lump Sum distribution
option of Section 6.1(d) of the Pension Plan shall not apply. If the
Participant makes a qualifying election under Section 6.1(d) of the
Pension Plan and has not made a qualifying Lump Sum or Installment
Payment election under Section 5.2, then his benefit under this SERP
shall be paid as a life annuity with a 10 year period certain
feature.
The monthly benefit under this SERP shall be calculated using the
same assumptions used to calculate the benefit provided under the
Pension Plan, except that the age of the beneficiaries designated
for this SERP benefit may be different in calculating the monthly
joint and survivor annuities.
5.2 Elective Benefit Options
6
<PAGE>
In lieu of receiving the retirement benefits provided in Section 3.2
in the same form as provided under the Pension Plan, the Participant
may elect to receive his or her benefit in one of two alternative
forms:
o Lump Sum (as defined in Section 1.17)
o Installment Payments (as defined in Section 1.16)
Such election must be made by the Participant at least one year
prior to the Annuity Starting Date as provided in the Pension Plan,
otherwise such election will not be valid and any earlier timely
election will be recognized. If no election is made, the Participant
will receive his benefit as provided in Section 5.1. The participant
may change his election from time to time as long as such election
is made at least one year prior to the Annuity Starting Date.
If a Lump Sum is elected, it shall be paid at such time as the first
monthly benefit payment is made under the Pension Plan (the Annuity
Starting Date).
If Installment Payments are elected, the first annual installment
shall commence with the first monthly benefit payment under the
Pension Plan (the Annuity Starting Date).
5.3 Death Benefits Option
Notwithstanding the above, or any provisions of the Pension Plan, in
the event of the death of the Participant, the following death
benefits shall apply:
A. If the Participant had retired and is receiving his SERP
benefit in the form of a life annuity with a 10 year period
certain feature, then the designated Beneficiary shall
receive the present value of the balance (if any) of the 10
year payments, plus interest, over a period to be
determined by the Employer, but which shall not exceed
three years.
B. If the Participant had retired and is currently receiving
his SERP benefit in the form of a joint and survivor
annuity - 50%, then the designated Beneficiary will receive
the present value of the balance of the joint and survivor
- 50% payments, plus interest, over a period to be
determined by the Employer, but which shall not exceed
three years.
C. If the Participant had retired and is currently receiving
his SERP benefit in the form of a joint and survivor
annuity - 100%, then the designated Beneficiary shall
receive the present value of the balance of the joint and
survivor - 100% payments, plus interest, over a period to
be determined by the Employer, but which shall not exceed
three years.
D. If the Participant was either currently employed or had
terminated employment, but had not reached his Annuity
Starting Date, then the designated Beneficiary shall
receive the present value of the SERP benefits (assuming
the participant had retired on the date of his death and
elected a joint and survivor - 100% annuity), plus
interest, over a period to be determined by the Employer,
but which shall not exceed three years.
7
<PAGE>
E. If the Participant had retired and was already paid a SERP
benefit in a Lump Sum, then the designated Beneficiary is
not entitled to any additional benefit under the SERP.
F. If the Participant had retired and was receiving SERP
benefits in Installment Payments, then the designated
Beneficiary will receive the present value of the balance
of the annual installments, plus interest, over a period to
be determined by the Employer, but which shall not exceed
three years.
5.4 Tax Withholding
With respect to any benefit payments under the SERP, FSW shall make
all appropriate income tax withholdings; however, the Participant
will be solely liable for any and all income taxes applicable on
such benefit payments.
The benefits which accrue under the SERP are subject to FICA taxes
(which include the Old-Age, Survivors and Disability Insurance tax
and/or Medicare tax, as the case may be) which may become due before
the benefits are actually paid as provided under Code Section
3121(v)(2) and related IRS regulations.
To ensure proper compliance with these regulations, FSW will
calculate the amount of FICA tax when it becomes due and notify the
Participant of the amount of his or her share of such tax. FSW will
remit the entire tax to the IRS and arrange for the collection of
the Participant's share of the tax from the Participant. The
Participant will be solely liable for his or her share of FICA taxes
on benefits accrued under the SERP.
5.5 Other
Notwithstanding any other provisions of the SERP, if any amounts
held in Trust are found, due to the creation or operation of Trust,
in a final decision by a court of competent jurisdiction, or under a
"determination" by the Internal Revenue Service in a closing
agreement in audit or a final refund disposition (within the meaning
of Section 1313(a) of Internal Revenue Code of 1986, as amended), to
have been includable in the gross income of a Participant or
Beneficiary prior to payment of such amounts from Trust, the trustee
for the Trust shall, as soon as practicable, pay to such Participant
or Beneficiary an amount equal to the amount determined to have been
includable in gross income in such determination, and shall
accordingly reduce the Participant's or Beneficiary's future
benefits payable under the SERP. The trustee shall not make any
distribution to a Participant or Beneficiary pursuant to this
paragraph 5.3 unless it has received a copy of the written
determination described above together with any legal opinion which
it may request as to the applicability thereof.
ARTICLE VI - FUNDING
6.1 Unfunded Plan
Benefits under the SERP shall be paid from FSW's general assets. The
SERP shall be administered as an unfunded plan which is maintained
primarily for the purpose of providing deferred compensation "for a
select group of management or highly compensated employees" as set
forth in Sections 201(2), 301(3), and 401(a)(1) of the Act, and is
not
8
<PAGE>
intended to meet the qualification requirements of Section 401 of
the Code. Any assets set aside by FSW for the purpose of paying
benefits under the SERP shall not be deemed to be the property of
the Participant and shall be subject to claims of creditors of FSW.
No participant or beneficiary shall have any claim against, right
to, or security or other interest in, any fund, account or asset of
FSW from which any payment under the SERP may be made.
6.2 Rabbi Trust
FSW shall establish the Rabbi Trust and make contributions to it for
the purpose of providing a source of funds to meet the liabilities
of the SERP. Contributions to the Rabbi Trust shall be made by FSW
annually in an amount equal to the annual expense related to the
SERP for the year required to be reported in FSW's financial
statements under generally accepted accounting principles as
determined by FSW's actuary using the same assumptions used in such
expense reporting for the Pension Plan. However, no contribution
shall be required if the fair value of the assets in the Rabbi Trust
at the beginning of the SERP's Plan Year exceeds the present value
of all future payments under the SERP accrued at the beginning of
the SERP Plan Year and calculated pursuant to the same assumptions
used to calculate lump sum distributions from the Pension Plan.
Contributions to the Rabbi Trust shall be made no later than the
last day of the Plan Year, to which they relate, but any year's
contribution may be deferred up to two years in the event FSW
experiences extreme financial difficulty as determined by the Board
of Directors.
In the event of a Change in Control, FSW shall be required to make
additional contributions (if any) to the Rabbi Trust within 30 days
of the date of the Change in Control and annually thereafter within
90 days after the end of each Plan Year, such that the fair value of
the assets in the Rabbi Trust are sufficient to fund the present
value of all future payments under the SERP accrued at the end of
the Plan Year and calculated pursuant to the same assumptions used
to calculate lump sum distributions from the Pension Plan. Any
assets set aside in the Rabbi Trust shall not be deemed to be the
property of the Participant and shall be subject to claims of the
creditors of FSW. No Participant or Beneficiary shall have any claim
against, right to, or security or other interest in, any fund,
account or asset of FSW from which any payment under the SERP may be
made.
ARTICLE VII - PLAN ADMINISTRATION
7.1 General Duty
The SERP shall be administered by the Compensation Committee.
Members of the Compensation Committee shall be appointed by the
Board of Directors and shall serve in such capacity until
resignation or removal by the Board of Directors. It shall be the
principal duty of the Compensation Committee to determine that the
provisions of the SERP are carried out in accordance with its terms,
for the exclusive benefit of persons entitled to participate in the
SERP.
7.2 Compensation Committee's General Powers, Rights and Duties
The Compensation Committee shall have full power to administer the
SERP in all of its details, subject to the applicable requirements
of law. For this purpose, the Compensation
9
<PAGE>
Committee has the powers, rights and duties specifically stated in
the SERP, including, but not limited to, the following powers,
rights and duties:
(a) to determine all questions arising under the SERP,
including the power to determine the rights or eligibility
of Employees or Participants and any other persons, and the
amounts of their contributions or benefits under the SERP,
to interpret the SERP, and to remedy ambiguities,
inconsistencies or omissions;
(b) to adopt such rules of procedure and regulations, including
the establishment of any claims procedure that may be
required by law, or as in its opinion may be necessary for
the proper and efficient administration of the SERP and as
are consistent with the SERP;
(c) to direct payments or distributions from the SERP in
accordance with the provisions of the SERP;
(d) to develop such information as may be required by it for
tax or other purposes as respects the SERP; and
(e) to employ agents, attorneys, accountants or other persons
(who also may be employed by FSW), and allocate or delegate
to them such powers, rights and duties as the Compensation
Committee may consider necessary or advisable to properly
carry out the administration of the SERP.
The Compensation Committee's decision in any matter involving the
interpretation and application of the SERP shall be final and
binding. In the event the Compensation Committee is deciding any
issue under the SERP which could affect the form or timing of the
payment of deferred compensation under the SERP to a Participant who
is a member of the Compensation Committee, then such member shall
not vote or otherwise decide on such issue. All questions or
interpretations shall be governed by the local laws of the state of
Michigan unless specifically pre-empted by ERISA.
7.3 Indemnification of Administrator
FSW agrees to indemnify and to defend to the fullest extent
permitted by law any Employee serving as a delegate or agent of the
Compensation Committee (including any Employee or former Employee
who is serving or formerly served as a delegate or agent of the
Compensation Committee) against all liabilities, damages, costs and
expenses (including attorney's fees and amounts paid in settlement
of any claims approved by FSW) occasioned by any act or omission to
act in connection with the SERP, if such act or omission is or was
in good faith.
7.4 Claims and Procedure
Any person claiming a benefit under the SERP shall present the
request to the Compensation Committee in writing, which shall
respond in writing as soon as may be feasible. If the claim is
denied, the Compensation Committee's written notice of the denial
shall state the reasons for the denial, with specific references to
the relevant provisions of the SERP, a description of any additional
information necessary, and an explanation of the review procedures
available. Any person whose claim for benefits is denied may request
review by
10
<PAGE>
written notice to the Compensation Committee. The Compensation
Committee may, but shall not be required to grant the claimant a
hearing. The decision on review shall be made by the Compensation
Committee within 60 days, and the Compensation Committee shall
provide a written report on its decision, stating the reasons and
the relevant provisions of the SERP. The Compensation Committee's
decisions on review shall be final and shall bind all parties
concerned.
7.5 Furnishing Information or Providing Other Reports
The Compensation Committee shall provide Participants with: (a) a
description of the SERP and, (b) such other information or notices
as required by the ERISA or other applicable law. After payment by
the Participant of a reasonable charge, which charge may be waived
by the Compensation Committee, the Compensation Committee shall
provide the Participant with a copy of the SERP upon written request
by the Participant. The Compensation Committee shall also file with
government authorities any reports or returns required.
7.6 No Fiduciary Relationship
Nothing in the SERP document and no action taken pursuant to the
provisions hereof shall be deemed to create a fiduciary relationship
between any Employee, Participant or Beneficiary, any member of the
Compensation Committee or any shareholder of FSW. Neither the
Compensation Committee, its members nor FSW shall have any liability
for actions or omissions in the interpretation or administration of
the SERP, unless those actions or omissions constitute willful
wrongful acts or the absence of good faith.
ARTICLE VIII - AMENDMENT AND DISCONTINUANCE
FSW hereby reserves the right and power, by action of its Board of
Directors, to amend, suspend or terminate the SERP in whole or in
part, at any time. However, in no event shall FSW have the right to
eliminate or reduce any benefit which has been vested or become
nonforfeitable under the SERP, subject to Article IV hereof.
In the event the SERP is terminated, the Board of Directors may
accelerate the payment of all benefits payable under the SERP without
the consent of the affected Participants, their designated
Beneficiaries or any other person claiming through a Participant. In
such event, the present value of future payments accrued under
Section 3.2 calculated pursuant to the same assumptions used to
calculate lump sum distributions from the Pension Plan shall be paid
to the Participant, or his Beneficiary, if applicable, in lieu of any
future benefit payments under the SERP.
ARTICLE IX - GENERAL PROVISIONS
9.1 Employment Rights
The SERP does not constitute a contract of employment, and
participation in the SERP will not give any Participant the right to
be retained in the employ of FSW nor any right or claim to any
benefit under the SERP, unless such right or claim has specifically
accrued under the terms of the SERP.
11
<PAGE>
9.2 Interests Not Transferable
Except as may be required by law, including the FSW income and
employment tax withholding provisions of the Code, or of an
applicable state's income tax act, the interests of Participants and
their Beneficiaries under the SERP are not subject to the claims of
their creditors and may not be voluntarily or involuntarily sold,
transferred, alienated, assigned or encumbered.
Nothing herein shall be deemed to grant to any Employee, Participant
or Beneficiary any ownership or equity interest in FSW or any right
or option to acquire any such interest. Any rights created under the
SERP shall be unsecured contractual rights of Participants and their
Beneficiaries.
9.3 Facility of Payment
When a Participant entitled to benefits under the SERP is under a
legal disability, or, in the Compensation Committee's opinion, is in
any way incapacitated so as to be unable to manage his financial
affairs, the Compensation Committee may direct that the benefits to
which such Participant otherwise would be entitled shall be made to
such Participant's legal representative, or to such other person or
persons as the Compensation Committee may direct the application of
such benefits for the benefit of such Participant. Any payment made
in accordance with the provisions of this Section shall be a full
and complete discharge of any liability for such payment.
9.4 Gender and Number
Where the context permits, words denoting the masculine gender shall
include the feminine gender, the singular shall include the plural,
and the plural shall include the singular.
9.5 Controlling State Law
To the extent not superseded by the laws of the United States, the
laws of the state of Michigan shall be controlling in all matters
relating to the SERP.
9.6 Severability
In case any provisions of the SERP shall be held illegal or invalid
for any reason, such illegality or invalidity, shall not affect the
remaining provisions of the SERP, and the SERP shall be construed
and enforced as if such illegal and invalid provisions had never
been set forth in the SERP.
9.7 Statutory References
All references to the Code and ERISA include reference to any
comparable or succeeding provisions of any legislation which amends,
supplements or replaces such section or subsection.
9.8 Headings
12
<PAGE>
Section headings and titles are for reference only. In the event of
a conflict between a title and the content of a section, the content
of the section shall control.
9.9 Action by FSW
Any action to be performed by FSW under the SERP shall be by
resolution of its Compensation Committee, by a duly authorized
committee of its Compensation Committee, or by a person or persons
authorized by resolution of its Compensation Committee or by
resolution of such committee.
Executed this 26 day of August, 1998.
FEDERAL SCREW WORKS
/s/ Marlene P. Selby By: /s/ W. T. Zurschmiede, Jr.
- -------------------- -------------------------------
Witness
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE
PERIOD ENDING JUNE 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> $975
<SECURITIES> 0
<RECEIVABLES> 11,816
<ALLOWANCES> 0
<INVENTORY> 13,084
<CURRENT-ASSETS> 27,558
<PP&E> 87,156
<DEPRECIATION> 49,373
<TOTAL-ASSETS> 74,866
<CURRENT-LIABILITIES> 15,578
<BONDS> 200
<COMMON> 1,086
0
0
<OTHER-SE> 45,694
<TOTAL-LIABILITY-AND-EQUITY> 74,866
<SALES> 106,889
<TOTAL-REVENUES> 106,889
<CGS> 89,051
<TOTAL-COSTS> 94,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 11,779
<INCOME-TAX> 3,952
<INCOME-CONTINUING> 7,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,827
<EPS-PRIMARY> 7.20
<EPS-DILUTED> 7.20
</TABLE>
