ITEM 1. BUSINESS.
Federal Screw Works (the "Registrant"), originally incorporated in Michigan in 1919, is a domestic manufacturer of industrial component parts, consisting of locknuts, bolts, piston pins, studs, bushings, shafts, perishable tooling and other machined, cold formed, hardened and/or ground metal parts, all of which constitute a single industry segment.
The Registrant's products are manufactured at several plants and are fabricated from metal rod and bar, which are generally available at competitive prices from multiple sources. Production is in high-volume job lots to the specification of original equipment manufacturers and sold to them for incorporation into their assemblies. The majority of these sales are to manufacturers of automobiles and trucks, with the balance being mainly to manufacturers of nonautomotive durable goods.
Approximately 85% of the Registrant's net sales in fiscal 2001 (89% and 86% in fiscal 2000 and fiscal 1999, 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:
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, 2001, the Registrant had an estimated backlog of firm orders amounting to approximately $13,000,000, all of which are expected to be filled within the 2001 fiscal year. The comparable backlog as of August 31, 2000 amounted to approximately $14,500,000.
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 478 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Registrant's industrial component parts are manufactured in seven plants located throughout Michigan.
The Big Rapids Division in Big Rapids, Michigan, manufactures special high-strength bolts and other cold formed products using boltmakers and headers as primary equipment. Among the items manufactured to both inch and metric specifications are hex head bolts, connecting rod bolts, studs and flange bolts. The 200,000 square foot plant is situated on 25 acres of land, and contains heat treat facilities for hardening in-process parts.
The Romulus Division is housed in a 100,000 square foot plant on 13 acres of land in Romulus, Michigan. This division uses nutformers as primary equipment to manufacture special prevailing torque locknuts. Products include
locknuts, connecting rod nuts, and other special nut products, in both metric and inch sizes. The plant has its own furnace for heat treating in-process parts.
In February of 1999, the Registrant began operations in a new 35,000 square foot plant in Traverse City, Michigan. The Traverse City Division manufacturers special assemblies for automotive customers.
The parts produced at the above divisions are sold principally to the automotive market. These parts are mass produced, and most are shipped directly to car assembly plants.
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. Segment information for the Novex Division is immaterial to the financial information for the Registrant as a whole.
The Chelsea Division is located in Chelsea, Michigan, in a plant having approximately 86,000 square feet. Primary equipment consists of automatic screw machines and rotary index machines capable of making products from 1/16 inch to 2-3/4 inches in diameter. The Chelsea Division fabricates a wide variety of precision parts including piston pins, bushings, fittings, special fasteners, valve components, sleeves, shafts, gear blanks and the like. These parts are generally produced in large volume lots and delivered direct to manufacturers of products such as compressors, automobiles, transmissions and small engines.
In August, 1994, the Registrant leased a 16,000 square foot facility in Romulus to conduct engineering and manufacturing development activities. This facility, known as the Technical Center, gives the Registrant sufficient room to try out new primary and secondary equipment, tooling, and parts feeding and automation devices, as well as permitting the Registrant to rebuild recently purchased used equipment.
In June of 2001, the Registrant began operations in a new 43,000 square foot plant in Boyne City, Michigan. This division will provide special heat treating to other divisions of the Registrant.
The Registrant's corporate offices are located in St. Clair Shores, Michigan, where the Registrant occupies 12,000 square feet of space under a ten year lease expiring in 2009 (renewable for two additional periods of five years each).
Except as specifically noted to the contrary, the Registrant owns outright all of the above described buildings, land, and production facilities. The Registrant utilizes all of the floor space of these structures. Present facilities are adequate to meet the needs of each division.
ITEM 3.
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.
Consent Decrees were entered by the United Stated District Court for the Eastern District of Michigan for the Rose Township and Springfield Township sites and the Registrant has paid its share of the clean up costs for those sites and no additional costs are expected.
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.
Also, the Registrant received a notice letter from a representative of the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that "empty" drums from the Registrant were shipped to the site. The waste allegedly shipped by the Registrant is 3520 gallons which is equal to approximately 0.02 percent of the total waste at the site. Since the total site costs for all parties are not expected to exceed $10 million, the Registrant's share of the costs are not expected to be material. No investigation has been undertaken to the Registrant's knowledge which would identify any costs to be incurred by the Registrant which might have a material effect on the Registrant's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
PART II
ITEM 5.
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.
At September 1, 2001, the approximate number of beneficial holders and shareholders of record of the Registrant's common stock was 891, based upon the securities position listings furnished to the Registrant.
Four cash dividends were declared in fiscal 2001 with one declared in the first quarter, two declared in the second quarter and one declared in the fourth quarter. A cash dividend was declared in each of the four quarters during fiscal 2000. Total cash dividends in fiscal 2001 were $1.88 per share and in fiscal 2000 were $1.84 per share. The Registrant declared a 5 for 4 stock split on December 8, 2001 payable on April 2, 2001 as a stock dividend. The amount of cash dividends per share shown above have been retroactively adjusted to reflect the stock split. The Registrant is in compliance with covenants of its revolving credit and term loan agreement including any restrictions on the payment of cash dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The average shares outstanding and all per share amounts have been adjusted retroactively for the December 8, 2000 5 for 4 stock split.
ITEM 7.
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:
Federal Screw Works reported net sales of $105.9 million in fiscal 2001, which represented a 13.1% decrease from fiscal 2000 sales of $121.8 million. Net sales for fiscal 2000 increased 2.7% from fiscal 1999 sales of $118.6 million. Sales in both 2001 and 2000 benefited from new automotive parts programs. The number of parts shipped decreased in 2001 and increased in 2000 and 1999.
Gross profits decreased 32.1% to $12.9 million in fiscal 2001, a $6.1 million decrease from fiscal 2000. Fiscal 2000 gross profits decreased 0.5% to $19.0 million compared to the $19.1 million level realized in 1999. Significant factors in the decrease were large production cutbacks from the vast majority of customers, the still increasing and unrelenting reductions in prices forced by customers, and startup costs at our new facility at Boyne City, Michigan. The decrease in fiscal 2000 resulted primarily from price concessions required by our customers.
Material, plating and packaging costs were again stable in 2001.
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. The impact of new parts programs were again a positive factor in fiscal 2001. Last year the Registrant rejoined the Daimler-Chrysler supply base after a four year absence. The receipt of orders for the 2002, 2003 and 2004 model years continues to be encouraging. In addition the Registrant was pleased to receive orders from several new customers which should result in significant new business in 2003 and 2004.
Refrigeration sales in fiscal 2001 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 still are 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 2001, as they were not in fiscal 2000 and 1999. Despite this, the Registrant believes that these programs will be a source of significant new business in the future. Fastener industry consolidations continued in fiscal 2001, resulting in additional competitive pressure.
As announced in our third quarter report in fiscal 2000, the Registrant sold its Steel Processing Division in January, 2000, which resulted in an after-tax gain of approximately $1,661,000, or $1.25 per share.
As a percentage of net sales, selling, general and administrative expenses were 5.6% in fiscal 2001. In fiscal 2000 and fiscal 1999 these expenses were 5.5% of net sales. Gross interest expense increased in fiscal 2001 because of an increase in average borrowings under the Registrant's bank credit agreement due to the construction of our new facility at Boyne City. Net interest expense decreased due to a significant portion of interest being capitalized into property, plant and equipment.
The Registrant 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 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 participating PRPs have resolved the EPA's claim for the Springfield Township and Rose Township sites by entering into a Consent Decree. The Registrant has paid its share of the clean up costs and no additional costs are expected.
With respect to the Cemetery site, the EPA has performed a site cleanup but has not asserted claims against any of the identified PRPs which suggests that the evidence of involvement by such parties is weak.
The Registrant received a notice letter from a representative of the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that "empty" drums from the Registrant were shipped to the site. The waste allegedly shipped by the Registrant is 3520 gallons which is equal to approximately 0.02 percent of the total waste at the site. Since the total site costs for all parties are not expected to exceed $10 million, the Registrant's share of the costs are not expected to be material. No investigation has been undertaken to the Registrant's knowledge which would identify any costs to be incurred by the Registrant which might have a material effect on the Registrant's financial statements.
DIVIDENDS
Cash dividends declared in fiscal year 2001 were $1.88 per share, $0.04 more than that declared in fiscal 2000 and $0.12 more than that declared in fiscal 1999. The Registrant declared a 5 for 4 stock split on December 8, 2000, payable as a stock dividend April 2, 2001. All per share amounts have been adjusted to retroactively give effect to the stock split. The Board of Directors, in August, 2001, declared a $.10 per share quarterly dividend, and an extra dividend of $0.70 per share.
LIQUIDITY AND CAPITAL RESOURCES
On October 18, 2000, the Registrant extended its Revolving Credit and Term Loan Agreement by one year. The expiration date is October 31, 2003, and is renewable annually for an additional year. Borrowings up to $25 million and capital expenditures of $16 million annually are permitted. The Registrant has the option to convert borrowings under the facility to a term note through October 31, 2005. Payments under the term note, if the conversion option were exercised, would be made quarterly and could extend to October 31. 2005. Therefore, borrowings under the Revolving Credit and Term Loan Agreement, which were $6,735,000 at June 30, 2001, and zero at June 30, 2000, are classified as long-term debt.
Working capital at June 30, 2001 amounted to $19,861,000 as compared to working capital of $17,205,000 at June 30, 2000. The increase resulted primarily from an increase in inventories and a decrease in accounts payable.
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.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets " effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Registrant will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. During fiscal 2002, the Registrant will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets and has not yet determined what the effect of these tests will be on the earnings and financial position of the Registrant. The Registrant does not expect the adoption of this accounting standard to have a significant effect on the financial statements.
Cash flows from operating activities approximated $6.8 million in fiscal 2001. This compares to $12.9 million in 2000 and $8.5 million in 1999.
Capital expenditures for fiscal 2001 were $12.4 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 2000 and 1999 were $10.0 million and $7.8 million, respectively. Expenditures for additional equipment during fiscal 2002 are presently expected to approximate $6.3 million, of which $3.5 million had been committed as of June 30, 2001. 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 provided by financing activities was $4.1 million in fiscal 2001. This compares to $6.3 million used in fiscal 2000 and $1.4 million used in 1999. Fluctuations in these activities have been influenced principally by borrowings and repayments under the Registrant's Revolving Credit and Term Loan Agreement.
MARKET RISK
The Registrant's long-term debt is all at current interest rates and, therefore, approximates current value but is subject to changes in interest rates.
IMPACT OF INFLATION AND CHANGING PRICES
The Registrant passes increased costs on to customers, to the extent permitted by competition, by increasing sales prices whenever possible. In fiscal 2001, 2000 and 1999 the Registrant was 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 the expectation for future periods which are subject to various uncertainties, including competition, the loss of, or reduction in business
with, the Registrant's principal customers, work stoppages, strikes and slowdowns at the Registrant's facilities and those of its customers; adverse changes in economic conditions generally and those of the automotive industry, specifically.
ITEM 7A.
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, 2001, the carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, debt and investments approximate fair value. Accordingly, management believes this risk is not material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENT OF OPERATIONS
See accompanying notes.
BALANCE SHEETS
See accompanying notes.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
( ) Denotes deduction. See accompanying notes.
STATEMENTS OF CASH FLOWS
See accompanying notes
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, $1,221,000 and $1,317,000 at June 30, 2001 and 2000, 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 $636,000 and $656,000 in 2001 and 2000, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost, which includes the cost of interest which is capitalized during construction of significant additions. Provisions for depreciation are based upon the estimated useful lives of the respective assets and are computed by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes.
INVESTMENTS: The Registrant has invested approximately $2,400,000 and $1,600,000 as of June 30, 2001 and 2000, 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 Registrant has classified all investments as "available for sale" because they are freely tradable. As of June 30, 2001, the Registrant recorded a current unrealized loss of $104,000, net of tax, 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
REVENUE RECOGNITION: The Registrant recognizes revenue when goods are shipped to the customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At June 30, 2001, 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 2001.
NET INCOME PER COMMON SHARE: Net income per common share is based on the weighted average number of common shares outstanding of 1,299,137 in 2001; 1,326,803 in 2000 and 1,356,649 in 1999. The Registrant has no potentially dilutive securities.
NOTE 2 - DEBT
Long-term debt at June 30 consists of the following:
The Registrant has a $25,000,000 revolving credit and term loan agreement with a bank. The Registrant has the option to convert borrowings thereunder (classified as long-term debt) to a term note through October 31, 2003, 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, 2005. Interest (5.31% at June 30, 2001) on outstanding borrowings is determined based on the prime rate, or at the Registrant's option, an alternative variable market rate. The Registrant also pays a commitment fee of 3/8% on the unused portion of the revolving credit.
The Registrant is in compliance with covenants of the revolving credit and term loan agreement including the requirements to meet certain financial ratios.
Interest paid by the Registrant during fiscal 2001, fiscal 2000 and fiscal 1999 aggregated $372,000, $69,000, and $320,000, respectively. Interest capitalized into property, plant and equipment in fiscal 2001 was $359,000.
NOTE 3 - LEASES AND OTHER COMMITMENTS
At June 30, 2001, the aggregate minimum rental commitments for various noncancelable operating leases with initial terms of one year or more are as follows:
Total rent expense was $1,137,000 in fiscal 2001, $1,174,000 in fiscal 2000, and $1,158,000 in fiscal 1999.
Costs to complete the expansion of existing plant facilities and the purchase of machinery and equipment approximated $4,626,000 at June 30, 2001.
NOTE 4 - FEDERAL INCOME TAXES
A reconciliation of the federal income tax provision to the amount computed by applying the applicable statutory federal income tax rate (34% in 2001, 35% in 2000 and 1999) to earnings before federal income taxes follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Registrant 's deferred tax liabilities and assets as of June 30, 2001 and 2000 are as follows:
Income taxes paid by the Registrant during fiscal 2001, fiscal 2000, and fiscal 1999 totalled $2,585,000, $5,386,000, and $4,881,000, respectively.
NOTE 5 - EMPLOYEE BENEFIT PLANS
The Registrant sponsors three defined benefit pension plans covering substantially all employees. Benefits under two of the plans are based on negotiated rates times years of service. Under the remaining plan, benefits are based on compensation during the years immediately preceding retirement and years of service. It is the Registrant's policy to make contributions to these plans sufficient to meet minimum funding requirements of the applicable laws and regulations, plus such additional amounts, if any, as the Registrant's actuarial consultants advise to be appropriate.
In addition to providing pension benefits, the Registrant provides certain health care and life insurance benefits for retired employees. Substantially all of the Registrant's employees may become eligible for those benefits if they reach normal retirement age while working for the Registrant. The benefits are provided through certain insurance companies.
The following tables set forth the plans' funded status at the March 31, 2001 and 2000 measurement dates:
Changes in benefit obligation are:
COMPONENTS OF NET PERIODIC BENEFIT COST ARE:
CHANGES IN PLAN ASSETS ARE:
FUNDED STATUS OF THE PLANS ARE:
In accounting for pension plans, the Registrant used a discount rate of 7.25% in 2001 and 2000, 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, 2001 and 2000 was 7.25%.
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2001. The rate was assumed to decrease gradually to 5.5% for 2005 and remain at that level thereafter. Assumed health care cost trends have a significant effect on the amounts reported for the health care plan. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 2001 and 2000 by $2,312,000 and $2,347,000, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended June 30, 2001 and 2000 by $271,000 and $258,000, 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 $771,000 and $634,000 in fiscal 2001 and 2000 respectively. The actuarial present value of vested benefit obligations approximated $2,372,000 at June 30, 2001 and $1,863,000 at June 30, 2000, respectively. The Registrant has invested $1,931,000 as of June 30, 20001 to cover obligations of the plan.
The Registrant also sponsors a retirement plan for directors who are not employees of the Registrant. The net periodic pension expense for the plan was $47,000, $79,000, and $89,000 in fiscal 2001, 2000, and 1999, respectively. The actuarial present value of vested benefit obligations approximated $891,000 at June 30, 2001 and $844,000 at June 30, 2000. The plan is currently not fully funded.
NOTE 6 - INDUSTRY INFORMATION
Approximately 85% of the Registrant's net sales in fiscal 2001 and 89% in fiscal 2000 were made either directly or indirectly to automotive companies.
Customers comprising 10% or greater of the Registrant's net sales are summarized as follows:
NOTE 7 - RESTRICTED STOCK BONUS PLAN
The Registrant 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 Registrant is involved in various legal actions arising in the normal course of business. Management, after taking into consideration legal counsel's evaluation of such actions, is of the opinion that their outcome will note have a significant effect on the Registrant's financial statements.
NOTE 9 - FOREIGN SALES
Approximately 10% of the Registrant's sales are to Canadian customers. All sales terms provide for settlement in U.S. dollars.
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, 2001 and 2000, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, 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 LP
Detroit, Michigan [August 10, 2001]
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10.
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, 2001 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, 2001 which is incorporated herein by reference.
ITEM 11.
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, 2001 and is incorporated herein by reference.
ITEM 12.
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, 2001 and is incorporated herein by reference.
ITEM 13.
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, 2001 and is incorporated herein by reference.
PART IV
ITEM 14.
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."
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
- Statements of Operations for the years ended June 30, 2001, 2000 and 1999
- Statements of Cash Flows for the years ended June 30, 2001, 2000, and 1999
- Balance sheets as of June 30, 2001 and 2000
- Statements of Stockholders' equity for the years ended June 30, 2001, 2000 and 1999
NOTES TO FINANCIAL STATEMENTS
(2) Financial Statement Schedules. The following financial statement schedule is filed with this report, and appears on page 24.
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.
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 (municipal industrial revenue bond) guarantee agreement dated as of November 1, 1979, as previously filed, was filed as an exhibit to the Registrant's 1993 Form 10-K and is incorporated herein by reference. All waivers, amendments and modifications thereto, were filed as exhibits to the Registrant's 1989, 1993 and 1994 Forms 10-K and are incorporated herein by reference.
4.2 Revolving Credit and Term Loan Agreement by and between Registrant and Comerica Bank, dated October 24, 1995, filed as an exhibit to the Registrant's Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.
10.1+ Supplemental retirement agreement between the Registrant and W. T. ZurSchmiede, Jr., present Chairman of the Registrant, dated April 1, 1986 was filed as an exhibit to Registrant's 1993 Form 10-K and is incorporated by reference.
10.2+ Supplemental retirement agreement between the Registrant and Hugh G. Harness, a director and past President of the Registrant, dated December 21, 1978 and amended pursuant to an Amendment to Agreement dated October 23, 1986, 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.
99. Proxy Statement for the Registrant's 2001 Annual Meeting of Shareholders - filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(A) Unsalable inventories charged off; corresponding reduction of allowance.
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, 2001
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, 2001 ------------------------------------------- Wade C. Plaskey Corporate Controller (Principal Accounting Officer)
/s/ Thomas W. Butler, Jr. September 27, 2001 ------------------------------------------- Thomas W. Butler, Jr. Director
/s/ Frank S. Galgan September 27, 2001 ------------------------------------------- Frank S. Galgan Director
/s/ Hugh G. Harness September 27, 2001 ------------------------------------------- Hugh G. Harness Director
/s/ F. D. Tennent September 27, 2001 ------------------------------------------- F. D. Tennent Director
/s/ W. T. ZurSchmiede, Jr. September 27, 2001 ------------------------------------------- W. T. ZurSchmiede, Jr. Director
/s/ Robert F. ZurSchmiede September 27, 2001 ------------------------------------------- Robert F. ZurSchmiede Director
/s/ Thomas ZurSchmiede September 27, 2001 ------------------------------------------- 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.
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.
99. Proxy Statement for the Registrant's 2001 Annual Meeting of Shareholders - filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference.