<PAGE> 1
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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, 2000
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.)
20229 NINE MILE ROAD, ST. CLAIR SHORES, MICHIGAN 48080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 810-443-4200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X} No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part 3 of this Form 10-K or any amendment to this
Form 10-K. [x]
As of September 1, 2000 the aggregate market value of the common stock of
Registrant held by non-affiliates was $23,545,004.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of September 1, 2000 is as follows:
Title of Class Number of Shares Outstanding
Common Stock, 1,041,661
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the Registrant dated September
27, 2000 has been incorporated by reference in response or partial response to
Items 10, 11, 12 and 13 in this Report.
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<PAGE> 2
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 2000 (86% and
89% in fiscal 1999 and fiscal 1998, respectively) were made either directly or
indirectly to automotive companies. The Registrant generally does not require
collateral from its customers.
While the Registrant holds a number of patents, it believes that the
successful continuation of its business is not dependent on any single patent or
group of patents, trademarks, or licenses. (The Registrant retains the rights to
certain royalties related to an exclusive license agreement with semiconductor
manufacturer Silicon Systems incorporated (SSi), whereunder SSi will produce and
market certain phonetic speech synthesizer chips under the SSi product name. The
Registrant does not consider the royalty agreement to be material to its
business.)
The OEM supplier industry is highly cyclical and, in large part,
dependent upon the overall strength of consumer demand for light trucks and
passenger cars. There can be no assurance that the automotive industry, for
which the Registrant supplies components, will not experience downturns in the
future. A decrease in overall consumer demand for motor vehicles, in general, or
specific segments, could have a material adverse effect on the Registrant's
financial condition and results of operations.
There are no practices and conditions of the Registrant or known to the
Registrant relating to working capital items which are material to an
understanding of the Registrant's business in the industry in which it competes.
The Registrant's Shareholders are aware of the Registrant's dependence
upon sales to the two largest U.S. automobile manufacturers, a condition that
has existed for at least fifty years. Although the Registrant has purchase
orders from such customers, such purchase orders generally provide for supplying
the customer's requirements for a particular model or model year rather than for
manufacturing a specific quantity of products. The loss of any one of such
customers or significant purchase orders could have a material adverse effect on
the Registrant. These customers are also able to exert considerable pressure on
component suppliers to reduce costs, improve quality and provide additional
design and engineering capabilities. There can be no assurance that the
additional costs of increased quality standards, price reductions or additional
capabilities required by such customers will not have a material adverse effect
on the financial condition or results of operations of the Registrant.
Customers comprising 10% or greater of the Registrant's net sales are
summarized as follows:
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<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Ford Motor Company............................ 42% 43% 45%
General Motors Corporation.................... 16% 17% 20%
All Others.................................... 42% 40% 35%
--- --- ---
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, 2000, 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 2000 fiscal year. The comparable backlog as of August 31, 1999
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 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 474 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 2002 and January of 2003, respectively.
Sales to customers outside the United States are not significant.
ITEM 2. DESCRIPTION OF PROPERTY.
The Registrant's industrial component parts are manufactured in six
plants located throughout Michigan.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and headers
as primary equipment. Among the items manufactured to both inch and metric
specifications are hex head bolts, connecting rod bolts, studs and flange bolts.
The 200,000 square foot plant is situated on 25 acres of land, and contains heat
treat facilities for hardening in-process parts.
The Romulus Division is housed in a 100,000 square foot plant on 13
acres of land in Romulus, Michigan. This division uses nutformers as primary
equipment to manufacture special prevailing torque locknuts. Products include
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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.
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.
The Novex Tool Division occupies a 19,000 square foot leased facility
in Brighton, Michigan. The lease expires in December, 2001. The Division
manufactures perishable tooling, primarily for the cold heading industry.
Approximately forty percent of its output is consumed by the Registrant's Big
Rapids, Romulus and Traverse City Divisions.
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 February of 1999, the Registrant began operations in a new 35,000
square foot plant in Traverse City, Michigan. The Traverse City Division
manufacturers special assemblies for automotive customers.
The Registrant's corporate offices are located in St. Clair Shores,
Michigan, where the Registrant occupies 12,000 square feet of space under a ten
year lease expiring in 2009 (renewable for two additional periods of five years
each).
Except as specifically noted to the contrary, the Registrant owns
outright all of the above described buildings, land, and production facilities.
The Registrant utilizes all of the floor space of these structures. Present
facilities are adequate to meet the needs of each division.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant has been designated by the Federal Environmental
Protection Agency (the "EPA") as a Potentially Responsible Party ("PRP") with
respect to 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
the Cemetery Dump Sites. While the Registrant denies it has engaged in disposing
of any materials at any of the sites, the Registrant 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 selected 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 Registrant has agreed to participate in the
cost of the clean-up. These costs have been paid by the Registrant 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.
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<PAGE> 5
The same PRPs have negotiated a settlement with the EPA and the
Michigan Department of Environmental Quality ("MDEQ") at the Springfield
Township site, and a Consent Decree embodying the settlement terms has been
approved and entered by the United States District Court for the Eastern
District of Michigan. Remediation costs for which the Registrant is liable under
the Consent Decree are not expected to have a material effect on the
Registrant's financial statements.
With respect to the Cemetery site, the EPA has performed a site
clean-up but has not asserted claims against any of the identified PRPs which
suggests that the evidence of involvement by such parties is weak. The
Registrant received a notice letter from a representative of the Barrels, Inc.
site PRP Group located in Lansing, Michigan indicating that "empty" drums from
the Registrant were shipped to the site. The waste allegedly shipped by the
Registrant is 3520 gallons which is equal to approximately 0.02 percent of the
total waste at the site. Since the total site costs for all parties are not
expected to exceed $10 million, the Registrant's share of the costs are not
expected to be material. No investigation has been undertaken to the
Registrant's knowledge which would identify any costs to be incurred by the
Registrant which might have a material effect on the Registrant's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Registrant's common stock is traded on the Nasdaq Small Cap Market
under the symbol FSCR.
The following table sets forth the quarterly high and low sales prices
as reported by the Nasdaq Small Cap Market. Quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
High Low High Low
---- ---- ---- ----
<S> <C> <C> <C> <C>
lst Quarter 54 45 1/4 55 46
2nd Quarter 48 1/2 42 50 44
3rd Quarter 44 1/2 39 58 46
4th Quarter 42 1/2 39 15/16 51 1/2 44
</TABLE>
At September 1, 2000, the approximate number of beneficial holders and
shareholders of record of the Registrant's common stock was 1100, based upon the
securities position listings furnished to the Registrant.
Cash dividends were declared in each of the four quarters during fiscal
2000 and fiscal 1999. Total cash dividends in fiscal 2000 were $2.30 per share
and in fiscal 1999 were $2.20 per share. The Registrant is in compliance with
covenants of its revolving credit and term loan agreement including any
restrictions on the payment of cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FIVE YEARS ENDED JUNE 30 2000 1999 1998 1997 1996
------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS (IN THOUSANDS)
Net sales................................... $ 121,811 $ 118,610 $ 106,889 $ 102,683 $ 92,794
Earnings before federal income
taxes...................................... 14,693 12,364 11,779 10,768 6,560
Federal income taxes........................ 4,941 4,158 3,952 3,593 2,169
Net earnings................................ 9,752 8,206 7,827 7,175 4,391
Depreciation and amortization............... 4,913 4,623 4,206 3,889 3,553
Capital expenditures........................ 9,978 7,779 8,367 6,872 5,682
Cash dividends declared..................... 2,467 2,390 2,173 1,304 1,195
PER SHARE DATA
Net earnings................................ $ 9.19 $ 7.56 $ 7.20 $ 6.60 $ 4.04
Cash dividends declared..................... 2.30 2.20 2.00 1.20 1.10
Book value.................................. 55.12 48.44 43.06 36.88 31.20
Average shares outstanding.................. 1,061,527 1,085,289 1,086,475 1,086,646 1,086,662
---------- ---------- --------- --------- ----------
RETURN DATA
Net earnings on net sales................... 8.0% 6.9% 7.3% 7.0% 4.7%
Net earnings on stockholders' equity........ 16.7% 15.7% 16.7% 21.2% 14.2%
FINANCIAL POSITION AT JUNE 30 (IN
THOUSANDS)
Working capital (net current assets)........ 17,205 16,657 11,981 9,436 13,613
Other assets................................ 15,481 11,647 9,526 9,022 8,566
Property, plant and equipment (net)......... 43,876 40,920 37,782 33,642 30,665
---------- --------- --------- --------- ---------
Total assets less current liabilities....... 76,562 69,224 59,289 52,100 52,844
Less:
Long-term debt............................ -- 2,100 450 600 7,960
Unfunded pension obligation............... -- 95 -- 1,526 2,977
Deferred employee compensation............ 2,076 1,226 -- -- --
Deferred taxes............................ 2,425 2,006 2,197 1,564 1,122
Employee benefits......................... 975 1,081 1,017 1,105 1,194
Postretirement benefits................... 11,747 9,865 8,211 6,746 5,250
Other liabilities......................... 803 723 634 479 440
-- -- -- -- --
Stockholders' equity (net assets)........... $ 58,536 $ 52,128 $ 46,780 $ 40,080 $ 33,901
========== ========= ========= ========= =========
</TABLE>
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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,
------------------- --------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Sales 100% 100% 100%
Gross Profit 15.6 16.1 16.7
Selling, general and
administrative expenses 5.5 5.5 5.6
Interest .1 .2 .1
Gain on sale of Steel Processing Division (2.1) - -
Earnings before federal
income taxes 12.1 10.4 11.0
Net earnings 8.0 6.9 7.3
</TABLE>
Federal Screw Works reported net sales of $121.8 million in fiscal
2000, which represented a 2.7% increase from fiscal 1999 sales of $118.6
million. Net sales for fiscal 1999 increased 10.9% from fiscal 1998 sales of
$106.9 million. Sales in both 2000 and 1999 benefitted from new automotive parts
programs and the Registrant's continued expansion in non-automotive related
markets. The number of parts shipped increased in each of the last two fiscal
years.
Gross profits decreased .5% to $19.0 million in fiscal 2000, a $.0.1
million decrease from fiscal 1999. Fiscal 1999 gross profits increased 7.3% to
$19.1 million compared to the $17.8 million level realized in 1998. The decrease
resulted primarily from 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. The concessions were higher in fiscal
2000 than in any previous year. The increase in fiscal 1999 resulted primarily
from greater sales. Material, plating and packaging costs were again stable in
2000.
Our 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. The
impact of new parts programs were again a positive factor in fiscal 2000.
The Registrant rejoined the Daimler Chrysler supply base after a
four-year absence. The receipt of orders for the 2002 and 2003 model years has
been encouraging.
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Refrigeration sales in fiscal 2000 were relatively flat. 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 are still not material.
The Registrant has not been able to increase its business with the
transplant suppliers in the current fiscal year. Again, outsourcing programs
were not a factor in fiscal 2000, as they were not in fiscal 1999 and 1998.
Despite this, the Registrant believes that these programs will continue to be a
source of significant business in the future. Fastener industry consolidations
continued in fiscal 2000, but they did not result in additional competitive
pressure.
As announced in the Registrant's third quarter report, the Registrant
sold its Steel Processing Division in January, 2000, which resulted in an
after-tax gain of approximately $1,661,000, or $1.57 per share. The Registrant
entered into a new three year collective bargaining agreement with the United
Auto Workers covering the employees of its Romulus Division. This agreement will
expire in January, 2003.
As a percentage of net sales, selling, general and administrative
expenses were 5.5% in fiscal 2000. In fiscal 1999 and fiscal 1998 these
expenses were 5.5% and 5.6% of net sales, respectively.
Interest expense decreased in fiscal 2000 as a result of a decrease in
average borrowings under the Registrant's bank credit agreement.
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 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
the Cemetery Dump Sites. While the Registrant denies it has engaged in disposing
of any materials at any of the sites, the Registrant 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 selected 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 Registrant has agreed to participate in the
cost of the clean-up. These costs have been paid by the Registrant 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 negotiated a settlement with the EPA and the
Michigan Department of Environmental Quality ("MDEQ") at the Springfield
Township site, and a Consent Decree embodying the settlement terms has been
approved and entered by the United States District Court for the Eastern
District of Michigan. Remediation costs for which the Registrant is liable under
the Consent Decree are not expected to have a material effect on the
Registrant's financial statements.
With respect to the Cemetery site, the EPA has performed a site
clean-up but has not asserted claims against any of the identified PRPs which
suggests that the evidence of involvement by such parties is weak. The
Registrant received a notice letter from a representative of the Barrels, Inc.
site PRP Group located in Lansing, Michigan indicating that "empty" drums from
the Registrant were shipped to the site. The waste allegedly shipped by the
Registrant is 3520 gallons which is equal to approximately 0.02 percent of the
total waste at the site. Since the total site costs for all parties are not
expected to exceed $10 million, the Registrant's share of the costs are not
expected to be material. No investigation has been undertaken to the
Registrant's knowledge which would identify any costs to be incurred by the
Registrant which might have a material effect on the Registrant's financial
statements.
The Registrant completed a comprehensive review of its operations
related to the "Year 2000" issue during fiscal 1998. This review included an
assessment of the Registrant's mainframe computer system, operating and
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application systems, microcomputer and office systems, facilities, and
production equipment. This review also included correspondence with major
vendors and customers. As a result of these efforts, the Registrant experienced
no Y2K problems.
DIVIDENDS
Cash dividends declared in fiscal year 2000 were $2.30 per share, $.10
more than that declared in fiscal 1999 and $.30 more than declared in fiscal
1998. The Board of directors in August, 2000, declared a $.10 per share
quarterly dividend, and an extra dividend of $1.90 per share.
LIQUIDITY AND CAPITAL RESOURCES
On October 13, 1999, the Registrant extended its Revolving Credit and
Term Loan Agreement by one year. The expiration date is October 31, 2002, and is
renewable annually for an additional year. Borrowings up to $25 million and
capital expenditures of $14 million annually are permitted. The Registrant has
the option to convert borrowings under the facility to a term note through
October 31, 2004. Payments under the term note, if the conversion option were
exercised, would be made quarterly and could extend to October 31, 2004.
Therefore, borrowings under the Revolving Credit and Term Loan Agreement, which
were zero at June 30, 2000 and $2,100,000 at June 30, 1999, are classified as
long-term debt.
Working capital at June 30, 2000 amounted to $17,205,000 as compared
to working capital of $16,657,000 at June 30, 1999. The increase resulted
primarily from an increase in accounts receivable and inventories. The increase
in accounts receivable relates primarily to strong sales in the fourth quarter
of 2000 and the timing of customer payments near year end.
During fiscal 2000, the Registrant reduced its unfunded pension
obligation to zero. This 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 5 to the financial statements, effective July 1,
1993, the Registrant adopted FASB Statement No. 106. As permitted by the
Statement, the Registrant is amortizing the present value of future health care
and life insurance benefits related to employees past service ($17,967,000 at
July 1, 1993) over a period of 20 years. The implementation of this accounting
pronouncement has no impact on the Registrant's cash flows.
Cash flows from operating activities approximated $12.9 million in
fiscal 2000. This compares to $8.5 million in 1999 and $10.5 million in 1998.
The principal components of these activities are set forth on page 11.
Capital expenditures for fiscal 2000 were $10.0 million, primarily
related to the purchase of equipment and expansion of facilities in order to
improve production efficiencies and enable the Registrant to meet increased
future demand for its products. Capital expenditures in fiscal years 1999 and
1998 were $7.8 million and $8.4 million, respectively. Expenditures for
additional equipment during fiscal 2001 are presently expected to approximate
$14.0 million, of which $4.3 million had been committed as of June 30, 2000.
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 $6.3 million in fiscal 2000.
This compares to $1.4 million used in fiscal 1999 and $2.3 million used in 1998.
Fluctuations in these activities have been influenced principally by borrowings
and repayments under the Registrant's Revolving Credit and Term Loan Agreement.
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<PAGE> 10
IMPACT OF INFLATION AND CHANGING PRICES
The Registrant passes increased costs on to customers, to the extent
permitted by competition, by increasing sales prices whenever possible. In
fiscal 2000, 1999 and 1998, the Registrant was generally unable to pass on cost
increases incurred due to competitive pressures. Sales price increases in each
of these years were insignificant.
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 Registrant's principal customers,
work stoppages, strikes and slowdowns at the Registrant's facilities and those
of its customers; adverse changes in economic conditions generally and those of
the automotive industry, specifically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Registrant's market risk is limited to interest rate risk on its revolving
credit and term loan agreement and its lease-purchase obligation. At June 30,
2000, the carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable, debt and investments approximate fair value. The
aggregate fair value of the Registrant's lease-purchase obligation approximates
its recorded amount at June 30, 2000. Accordingly, management believes this risk
is not material.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
2000 1999 1998
--------------- --------------- -------------
<S> <C> <C> <C>
Net Sales $121,811,494 $118,610,185 $106,888,711
Costs and Expenses:
Cost of products sold 102,808,332 99,486,786 89,051,350
Selling, general and administrative 6,742,353 6,554,281 5,932,572
Gain on sale of Steel Processing (2,501,122) - -
Interest 68,978 205,534 126,091
------------ ------------ ------------
107,118,541 106,246,601 95,110,013
------------ ------------ ------------
EARNINGS BEFORE FEDERAL
INCOME TAXES 14,692,953 12,363,584 11,778,698
Federal incomes taxes--Note 4:
Current 4,840,000 4,361,000 3,822,000
Deferred (credit) 101,000 (203,000) 130,000
------------ ------------ ------------
4,941,000 4,158,000 3,952,000
------------ ------------ ------------
NET EARNINGS $ 9,751,953 $ 8,205,584 $ 7,826,698
============ ============ ============
Average number of shares outstanding 1,061,527 1,085,289 1,086,475
============ ============ ============
Net earnings per share $ 9.19 $ 7.56 $ 7.20
============ ============ ============
</TABLE>
See accompanying notes
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STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
2000 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 9,752,388 $ 8,205,584 $ 7,826,698
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,916,814 4,622,864 4,206,219
Increase in cash value of life insurance (123,786) (121,956) (124,773)
Change in deferred income taxes 417,000 (203,000) 130,000
Employee benefits 1,776,301 1,718,524 1,376,040
Gain on sale of equipment (2,496,083)
Deferred retirement benefits and other (2,255,121) (569,002) (231,542)
Changes in operating assets and liabilities:
Accounts receivable (1,230,915) (3,911,552) 77,088
Inventories and prepaid expenses (234,264) (1,351,556) (2,305,571)
Accounts payable and accrued expenses 2,376,734 103,541 (479,726)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 12,899,068 8,493,447 10,474,433
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,977,646) (7,779,183) (8,366,821)
Proceeds from sale of property, plant and
equipment 4,605,775 18,513 20,144
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (5,371,871) (7,760,670) (8,346,677)
FINANCING ACTIVITIES
Additional borrowings (principal
repayments) under bank credit agreement (2,100,000) 1,850,000 250,000
Principal payments on lease-purchase
obligation (200,000) (400,000) (400,000)
Purchases of common stock (1,497,817) (488,694) (5,450)
Dividends paid (2,467,092) (2,389,656) (2,173,004)
----------- ----------- -----------
NET CASH USED IN FINANCING
ACTIVITIES (6,264,909) (1,428,350) (2,328,454)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 1,262,288 (695,573) (200,698)
Cash at beginning of year 279,306 974,879 1,175,577
----------- ----------- -----------
CASH AT END OF YEAR $ 1,541,594 $ 279,306 $ 974,879
=========== =========== ===========
</TABLE>
11
<PAGE> 13
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,541,594 $ 279,306
Accounts receivable 16,958,253 15,727,338
Inventories-Note 1:
Finished products 6,185,654 4,814,688
In-process products 6,873,045 7,210,378
Raw materials and supplies 1,955,169 2,850,877
----------- -----------
Total inventories 15,013,868 14,875,943
Prepaid expenses and other current accounts 393,605 297,266
Deferred income taxes - Note 4 956,000 958,000
----------- -----------
TOTAL CURRENT ASSETS 34,863,320 32,137,853
OTHER ASSETS
Intangible asset - Note 5 941,957 1,721,522
Cash value of life insurance 5,435,442 5,311,656
Prepaid pension costs 7,397,614 3,622,538
Miscellaneous 1,706,003 991,765
----------- -----------
15,481,016 11,647,481
PROPERTY, PLANT AND EQUIPMENT - Notes 2 and 3
Land 423,038 511,579
Buildings and improvements 11,434,760 12,771,671
Machinery and equipment 86,290,080 81,243,695
----------- -----------
98,147,878 94,526,945
Less accumulated depreciation (54,272,443) (53,606,656)
----------- -----------
43,875,435 40,920,289
----------- -----------
$94,219,771 $84,705,623
=========== ===========
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
JUNE 30
2000 1999
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,356,712 $ 4,143,363
Payroll and employee benefits 8,354,143 8,611,738
Dividend payable 103,846 108,191
Federal income taxes 38,964 585,052
Taxes, other than income taxes 1,739,706 1,802,095
Other accrued liabilities 64,597 30,795
Current maturities of long-term debt - 200,000
------------- -------------
TOTAL CURRENT LIABILITIES 17,657,968 15,481,234
LONG-TERM LIABILITIES
Long-term debt -- Note 2 - 2,100,000
Unfunded pension obligation -- Note 5 - 95,174
Deferred employee compensation -- Note 5 2,076,403 1,225,938
Deferred income taxes -- Note 4 2,425,000 2,006,000
Employee benefits 975,148 1,080,828
Postretirement benefits -- Note 5 11,746,793 9,864,806
Other liabilities 802,394 723,597
------------- -------------
18,025,738 17,096,343
STOCKHOLDERS' EQUITY -- Notes 2 and 7
Common stock, $1 par value, authorized
2,000,000 shares, 1,041,661 shares
outstanding in 2000 (1,076,162 in 1999) 1,041,661 1,076,162
Additional capital 3,269,476 3,269,476
Retained earnings 54,233,406 48,411,426
Accumulated other comprehensive income (8,478) (629,018)
------------- -------------
58,536,065 52,128,046
------------- -------------
$94,219,771 $84,705,623
============= =============
</TABLE>
See accompanying notes.
13
<PAGE> 15
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
-------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 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
Total comprehensive income 907,644 907,644
-------------
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
Net earnings for the year 8,205,584 8,205,584
Additional unrecognized pension
costs, net of taxes (38,354) (38,354)
-------------
Total comprehensive income 8,167,230
Purchase of 10,250 shares (10,250) (478,444) (488,694)
Transactions under restricted stock
bonus plans -- net 59,000 59,000
Cash dividends declared --
$2.20 per share (2,389,656) (2,389,656)
-------------- -------------- ------------- ------------ -------------
BALANCES AT JUNE 30, 1999 1,076,162 3,269,476 48,411,426 (629,018) 52,128,046
Net earnings for the year 9,752,388 9,752,388
Reduction of unrecognized pension
costs, net of taxes 629,018 629,018
Change in unrealized loss on
securities available-for-sale,
net of taxes (8,478) (8,478)
-------------
Total comprehensive income 10,372,928
Purchase of 34,501 shares (34,501) (1,463,316) (1,497,817)
Cash dividends declared --
$2.30 per share (2,467,092) (2,467,092)
-------------- -------------- ------------- ------------ -------------
BALANCES AT JUNE 30, 2000 $ 1,041,661 $ 3,269,476 $ 54,233,406 $ (8,478) $ 58,536,065
============= ============= ============= ============ =============
</TABLE>
( ) denotes deduction
See accompanying notes.
14
<PAGE> 16
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, $1,317,000 and $2,216,000 at June 30, 2000 and 1999,
respectively. The remaining inventories are costed using the first-in, first-out
(FIFO) method. If inventories valued on LIFO had been valued at current cost,
amounts reported at June 30 would have been increased by $656,000 and $582,000
in 2000 and 1999, 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.
INVESTMENTS: The Company has invested approximately $1,600,000 and $800,000 as
of June 30, 2000 and 1999, respectively, which has been designated for payment
of certain liabilities related to deferred compensation plans. In accordance
with Statement of Financial Accounting Standards No. 115 ("FASB 115") the
Company has classified all investments as "available for sale" because they are
freely tradable. As of June 30, 2000, the Company recorded a current unrealized
loss of $12,000 from its investments which is reflected in the shareholders'
equity section of the balance sheet in accordance with FASB 115.
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.
REVENUE RECOGNITION: The Company recognizes revenue when goods are shipped to
the customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At June 30, 2000, the carrying amounts
reported in the balance sheets for cash, accounts receivable, accounts payable,
debt and investments approximate fair value.
RECLASSIFICATION: Certain items in the prior year financial statements have been
reclassified to conform to the presentation used in 2000.
NOTE 2 - DEBT
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revolving credit note payable to bank $ 0 $2,100,000
Lease-purchase obligation (see Note 3), payable $200,000
semi-annually, plus interest at 7 3/4% 0 200,000
--------- ---------
0 2,300,000
Less current maturities 0 200,000
--------- ---------
$ 0 $2,100,000
========= =========
</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, 2002, the expiration
15
<PAGE> 17
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, 2004. Interest (6.56% at June 30,
2000) on 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 Company is in compliance with covenants of the revolving credit and term
loan agreement including the requirements to meet certain financial ratios.
Interest paid by the Company during fiscal 2000, fiscal 1999 and fiscal 1998
aggregated $69,000, $320,000, and $323,000, respectively.
NOTE 3 - LEASES AND OTHER COMMITMENTS
At June 30, 2000, the aggregate minimum rental commitments for various
noncancelable operating leases with initial terms of one year or more are as
follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING JUNE 30 LEASES
------------------- --------------
<S> <C>
2001 $ 917,000
2002 649,000
2003 404,000
2004 322,000
2005 277,000
---- ---------
Total minimum lease payments $2,569,000
=========
</TABLE>
Total rent expense was $1,174,000 in fiscal 2000, $1,158,000 in fiscal 1999, and
$1,035,000 in fiscal 1998.
Costs to complete the expansion of existing plant facilities and the purchase of
machinery and equipment approximated $4,338,000 at June 30, 2000.
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 (35%) to earnings
before federal income taxes follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Computed amount $5,143,000 $4,327,000 $4,123,000
Life insurance policies (79,000) (79,000) (97,000)
Other (123,000) (90,000) (74,000)
---------- ---------- ----------
Total federal income tax provision $4,941,000 $4,158,000 $3,952,000
========== ========== ==========
</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, 2000 and 1999
are as follows:
16
<PAGE> 18
<TABLE>
<CAPTION>
2000 1999
--------------- ----------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated tax depreciation $4,933,000 $4,667,000
--------- ---------
Total deferred tax liabilities 4,933,000 4,667,000
--------- ---------
Deferred tax assets:
Employee benefits 3,304,000 3,487,000
Inventory 104,000 93,000
Other 56,000 39,000
--------- ---------
Total deferred tax assets 3,464,000 3,619,000
--------- ---------
Net deferred tax liabilities $1,469,000 $1,048,000
========= =========
</TABLE>
Income taxes paid by the Company during fiscal 2000, fiscal 1999, and fiscal
1998 totaled $5,386,000, $4,881,000, and $3,358,000, respectively.
NOTE 5 - EMPLOYEE BENEFIT PLANS
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.
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.
The following tables set forth the plans' funded status at the March 31, 2000
and 1999 measurement dates:
CHANGES IN BENEFIT OBLIGATION ARE:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------------------------------------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation
at beginning of year $23,729,000 $21,439,000 $21,743,000 $20,494,000
Service cost 782,000 720,000 547,000 467,000
Interest cost 1,643,000 1,613,000 1,479,000 1,444,000
Plan Amendments 371,000 946,000 -- --
Actuarial (gain)/loss (432,000) 428,000 (826,000) 493,000
Benefits paid (1,322,000) (1,417,000) (1,242,000) (1,155,000)
--------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $24,771,000 $23,729,000 $21,701,000 $21,743,000
==============================================================================================================
</TABLE>
17
<PAGE> 19
COMPONENTS OF NET PERIODIC BENEFIT COST ARE:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
--------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 782,000 $ 720,000 $ 523,000 $ 547,000 $ 467,000 $ 373,000
Interest cost 1,643,000 1,614,000 1,460,000 1,479,000 1,444,000 1,367,000
Expected return
on assets (1,911,000) (1,966,000) (1,600,000) -- -- --
Amortization of
transition obligation 166,000 166,000 167,000 898,000 898,000 898,000
Amortization of
prior service cost 179,000 151,000 83,000 -- -- --
Amortization of
unrecognized
net (gain)/loss 52,000 26,000 70,000 -- -- (100,000)
--------------------------------------------------------------------------------------------------------------------------
Net periodic
benefit cost $ 911,000 $ 711,000 $ 703,000 $ 2,924,000 $ 2,809,000 $ 2,538,000
==========================================================================================================================
</TABLE>
CHANGES IN PLAN ASSETS ARE:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
--------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets
at beginning of year $24,661,000 $24,674,000 $ -- $ --
Actual return on assets 831,000 (216,000) -- --
Employer contribution 2,834,000 1,620,000 -- --
Benefits paid (1,322,000) (1,417,000) -- --
--------------------------------------------------------------------------------------------------------------------------
Fair value of assets at end of year $27,004,000 $24,661,000 $ -- $ --
==========================================================================================================================
</TABLE>
18
<PAGE> 20
FUNDED STATUS OF THE PLANS ARE:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status at end of
year (underfunded) $2,233,000 $ 932,000 $(21,701,000) $(21,743,000)
Unrecognized transition obligation 99,000 264,000 11,478,000 12,577,000
Unrecognized prior service cost 1,858,000 1,666,000 -- --
Unrecognized net (gain)/loss 3,208,000 2,614,000 (1,524,000) (699,000)
---------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $7,398,000 $5,476,000 $(11,747,000) $ (9,865,000)
=====================================================================================================================
Amounts recognized in the statement of financial position:
Prepaid benefit cost $7,398,000 $3,622,000 -- --
Accrued benefit liability -- (95,000) $(11,747,000) $ (9,865,000)
Intangible asset -- 996,000 -- --
Accumulated other comprehensive
income (pre-tax) -- 953,000 -- --
---------------------------------------------------------------------------------------------------------------------
Net amount recognized $7,398,000 $5,476,000 $(11,747,000) $ (9,865,000)
=====================================================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $11,856,000, $10,045,000 and $8,382,000,
respectively, as of June 30, 1999.
In accounting for pension plans, the Company used a discount rate of 7.25% in
2000, and 7.0% in 1999, a 5% rate of increase in compensation, and an 8%
expected rate of return on assets. Plan assets for these plans consist
principally of fixed income instruments, equity securities and participation in
insurance company contracts.
The weighted average discount rate used in determining the accumulated post
retirement benefit obligation at June 30, 2000 and 1999 was 7.25% and 7.0%,
respectively.
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2000. The rate was
assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter. Assumed health care cost trends have a significant effect on the
amounts reported for the health care plan. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of June 30, 2000 and 1999
by $2,347,000 and $2,523,000, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended June 30, 2000 and 1999 by $258,000 and $259,000, respectively.
The Company sponsors a supplemental executive retirement plan which covers
certain executives of the Company. The net periodic pension expense for the plan
was $634,000 and $500,000 in fiscal 2000 and 1999, respectively. The actuarial
present value of vested benefit obligations approximated $1,863,000 at June 30,
2000 and $1,073,000 at June 30, 1999, respectively. The Company has invested
$1,134,000 as of June 30, 2000 to cover obligations of the plan.
19
<PAGE> 21
The Company also sponsors a retirement plan for directors who are not employees
of the Company. The net periodic pension expense for the plan was $79,000,
$89,000, and $156,000 in fiscal 2000, 1999, and 1998, respectively. The
actuarial present value of vested benefit obligations approximated $844,000 at
June 30, 2000 and $765,000 at June 30, 1999. The plan is currently not fully
funded.
NOTE 6 - 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 2000 and 86% in fiscal
1999 were made either directly or indirectly to automotive companies.
Customers comprising 10% or greater of the Company's net sales are summarized as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Ford Motor Company 42% 43%
General Motors Corporation 16 17
All Others 42 40
------ ------
100% 100%
</TABLE>
NOTE 7 - 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 tax benefits of the
compensation deduction are credited to additional capital.
NOTE 8 - 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.
20
<PAGE> 22
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, 2000 and 1999, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Federal Screw Works at June 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
August 10, 2000
21
<PAGE> 23
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 27, 2000 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 27, 2000 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; 50
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 44
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 27, 2000 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 27, 2000 and is incorporated herein
by reference.
22
<PAGE> 24
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 27,
2000 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 Public Accounts are contained in "Item 8
Financial Statements and Supplementary Data."
FINANCIAL STATEMENTS
- Statements of Operations for the years ended June 30, 2000, 1999
and 1998
- Statements of Cash Flows for the years ended June 30, 2000, 1999
and 1998
- Balance sheets as of June 30, 2000 and 1999
- Statements of Stockholders' equity for the years ended June 30,
2000, 1999 and 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NOTES TO FINANCIAL STATEMENTS
(2) Financial Statement Schedules. The following financial statement
schedule is filed with this report, and appears on page 25.
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.
23
<PAGE> 25
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 Safran Development, L.L.C.
for the lease of the 2nd floor of 20229 Nine Mile Road, St. Clair
Shores, Michigan, effective October 26, 1999, was previously filed as
an exhibit to the Registrant's Form 10-Q for the quarter ended
September 30, 1999, and is incorporated herein by reference.
10.5+ 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, filed as an
exhibit to the Registrant's 1998 Form 10-K and incorporated herein by
reference.
27.* Financial Data Schedule.
99. Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A and
incorporated herein by reference.
* Filed with this report
24
<PAGE> 26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
(1) (2)
DESCRIPTION BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS - BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DESCRIBE END OF PERIOD
OF PERIOD EXPENSES - DESCRIBE
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Valuation allowance for
accounts receivable:
Year ended June 30, 2000 $ 50,000 $ - $ 50,000
Year ended June 30, 1999 50,000 - 50,000
Year ended June 30, 1998 50,000 - 50,000
Valuation allowance for
inventories:
Year ended June 30, 2000 $ 167,000 $ 38,000 $ 25,000(A) $ 180,000
Year ended June 30, 1999 226,000 67,000 126,000(A) 167,000
Year ended June 30, 1998 217,000 57,637 48,637(A) 226,000
</TABLE>
(A) Unsalable inventories charged off; corresponding reduction of allowance.
25
<PAGE> 27
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 27, 2000
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 27, 2000
--------------------------------------
Wade C. Plaskey
Corporate Controller
(Principal Accounting Officer)
/s/ Thomas W. Butler, Jr. September 27, 2000
--------------------------------------
Thomas W. Butler, Jr.
Director
/s/ Hugh G. Harness September 27, 2000
--------------------------------------
Hugh G. Harness
Director
/s/ F. D. Tennent September 27, 2000
--------------------------------------
F. D. Tennent
Director
/s/ W. T. ZurSchmiede, Jr. September 27, 2000
--------------------------------------
W. T. ZurSchmiede, Jr.
Director
/s/ Robert F. ZurSchmiede September 27, 2000
--------------------------------------
Robert F. ZurSchmiede
Director
/s/ Thomas ZurSchmiede September 27, 2000
--------------------------------------
Thomas ZurSchmiede
Director
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.
26
<PAGE> 28
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 Safran Development, L.L.C.
for the lease of the 2nd floor of 20229 Nine Mile Road, St. Clair
Shores, Michigan, effective October 26, 1999, was previously filed as
an exhibit to the Registrant's Form 10-Q for the quarter ended
September 30, 1999, and is incorporated herein by reference.
10.5+ 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, filed as an
exhibit to the Registrant's 1998 Form 10-K and incorporated herein by
reference.
27.* Financial Data Schedule.
99. Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders - filed by the Registrant pursuant to Regulation 14A and
incorporated herein by reference.
* Filed with this report
<PAGE> 29
Exhibit Index
---------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
