================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------- Commission file number 0-1837 FEDERAL SCREW WORKS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-0533740 (State or other jurisdiction (I.R.S. Employer of Incorporation or organization) Identification No.) 20229 NINE MILE ROAD, ST. CLAIR SHORES, MICHIGAN 48080 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 586-443-4200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part 3 of this Form 10-K or any amendment to this Form 10-K. |X| As of September 3, 2002 the aggregate market value of the common stock of Registrant held by non-affiliates was $27,445,062. The number of shares outstanding of each of the Registrant's classes of common stock, as of September 3, 2002 is as follows: Title of Class Number of Shares Outstanding Common Stock, 1,218,593 $1 Par Value DOCUMENT INCORPORATED BY REFERENCE Certain information from the Proxy Statement of the Registrant dated September 24, 2002 has been incorporated by reference in response or partial response to Items 10, 11, 12 and 13 in this Report. ================================================================================ PART I ITEM 1. BUSINESS. Federal Screw Works (the "Registrant"), originally incorporated in Michigan in 1919, is a domestic manufacturer of industrial component parts, consisting of locknuts, bolts, piston pins, studs, bushings, shafts, perishable tooling and other machined, cold formed, hardened and/or ground metal parts, all of which constitute a single industry segment. The Registrant's products are manufactured at several plants and are fabricated from metal rod and bar, which are generally available at competitive prices from multiple sources. Production is in high-volume job lots to the specification of original equipment manufacturers and sold to them for incorporation into their assemblies. The majority of these sales are to manufacturers of automobiles and trucks, with the balance being mainly to manufacturers of nonautomotive durable goods. Approximately 91% of the Registrant's net sales in fiscal 2002 (85% and 89% in fiscal 2001 and fiscal 2000, respectively) were made either directly or indirectly to automotive companies. The Registrant generally does not require collateral from its customers. While the Registrant holds a number of patents, it believes that the successful continuation of its business is not dependent on any single patent or group of patents, trademarks, or licenses. (The Registrant retains the rights to certain royalties related to an exclusive license agreement with semiconductor manufacturer Silicon Systems incorporated (SSi), whereunder SSi will produce and market certain phonetic speech synthesizer chips under the SSi product name. The Registrant does not consider the royalty agreement to be material to its business.) The OEM supplier industry is highly cyclical and, in large part, dependent upon the overall strength of consumer demand for light trucks and passenger cars. There can be no assurance that the automotive industry, for which the Registrant supplies components, will not experience downturns in the future. A decrease in overall consumer demand for motor vehicles, in general, or specific segments, could have a material adverse effect on the Registrant's financial condition and results of operations. There are no practices and conditions of the Registrant or known to the Registrant relating to working capital items which are material to an understanding of the Registrant's business in the industry in which it competes. The Registrant's Shareholders are aware of the Registrant's dependence upon sales to the two largest U.S. automobile manufacturers, a condition that has existed for at least fifty years. Although the Registrant has purchase orders from such customers, such purchase orders generally provide for supplying the customer's requirements for a particular model or model year rather than for manufacturing a specific quantity of products. The loss of any one of such customers or significant purchase orders could have a material adverse effect on the Registrant. These customers are also able to exert considerable pressure on component suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. There can be no assurance that the additional costs of increased quality standards, price reductions or additional capabilities required by such customers will not have a material adverse effect on the financial condition or results of operations of the Registrant. Customers comprising 10% or greater of the Registrant's net sales are summarized as follows: 2002 2001 2000 ---- ---- ---- Ford Motor Company............................... 35% 37% 42% General Motors Corporation....................... 13% 15% 16% All Others....................................... 52% 48% 42% --- --- --- 100% 100% 100% === === === 2 Many of the Registrant's customers, and other suppliers to the Registrant's customers, are unionized, and work stoppages, slow-downs or other labor disputes experienced by, and the labor relations policies of, such customers and suppliers, could have an adverse effect on the Registrant's results of operations. As of August 31, 2002, the Registrant had an estimated backlog of firm orders amounting to approximately $12,700,000, all of which are expected to be filled within the 2003 fiscal year. The comparable backlog as of August 31, 2001 amounted to approximately $13,000,000. No material portion of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. The manufacture and sale of the Registrant's products is an extremely competitive business. Because industry statistics are not available, the Registrant is unable to accurately determine the number of its competitors, nor to state its competitive position in its principal market as a supplier of parts to automotive customers. However, the Registrant believes that it is generally considered a leading producer of its principal type of product in an estimated $650 million annual market served by approximately thirty major domestic suppliers, no one of which, or no small number of which, are dominant. The Registrant is aware, however, that there are companies making similar products, with greater sales and resources than the Registrant. The Registrant is aware that in recent years the activity of foreign competitors manufacturing similar products has increased. The quality of the product, the product's price and service to customers are the principal methods of competition. There is no assurance that the Registrant will be able to successfully compete in future periods. Research and development activity expenses during each of the last three fiscal years is not deemed material. The Registrant has experienced no material effects in complying with government environmental regulations. The Registrant presently employs approximately 443 hourly-rated and salaried personnel. The Registrant's hourly work forces at the Chelsea and Romulus facilities are unionized. The Registrant's contracts with the unions in Chelsea and Romulus expire in May of 2005 and January of 2003, respectively. Sales to customers outside the United States are not significant. ITEM 2. DESCRIPTION OF PROPERTY. The Registrant's industrial component parts are manufactured in seven plants located throughout Michigan. The Big Rapids Division in Big Rapids, Michigan, manufactures special high-strength bolts and other cold formed products using boltmakers and headers as primary equipment. Among the items manufactured to both inch and metric specifications are hex head bolts, connecting rod bolts, studs and flange bolts. The 200,000 square foot plant is situated on 25 acres of land, and contains heat treat facilities for hardening in-process parts. The Romulus Division is housed in a 100,000 square foot plant on 13 acres of land in Romulus, Michigan. This division uses nutformers as primary equipment to manufacture special prevailing torque locknuts. Products include locknuts, connecting rod nuts, and other special nut products, in both metric and inch sizes. The plant has its own furnace for heat treating in-process parts. In February of 1999, the Registrant began operations in a new 35,000 square foot plant in Traverse City, Michigan. The Traverse City Division manufacturers special assemblies for automotive customers. The parts produced at the above divisions are sold principally to the automotive market. These parts are mass produced, and most are shipped directly to car assembly plants. 3 The Novex Tool Division occupies a 19,000 square foot leased facility in Brighton, Michigan. The lease expires in December, 2004. The Division manufactures perishable tooling, primarily for the cold heading industry. Approximately forty percent of its output is consumed by the Registrant's Big Rapids, Romulus and Traverse City Divisions. Segment information for the Novex Division is immaterial to the financial information for the Registrant as a whole. The Chelsea Division is located in Chelsea, Michigan, in a plant having approximately 86,000 square feet. Primary equipment consists of automatic screw machines and rotary index machines capable of making products from 1/16 inch to 2-3/4 inches in diameter. The Chelsea Division fabricates a wide variety of precision parts including piston pins, bushings, fittings, special fasteners, valve components, sleeves, shafts, gear blanks and the like. These parts are generally produced in large volume lots and delivered direct to manufacturers of products such as compressors, automobiles, transmissions and small engines. In August, 1994, the Registrant leased a 16,000 square foot facility in Romulus to conduct engineering and manufacturing development activities. This facility, known as the Technical Center, gives the Registrant sufficient room to try out new primary and secondary equipment, tooling, and parts feeding and automation devices, as well as permitting the Registrant to rebuild recently purchased used equipment. In June of 2001, the Registrant began operations in a new 43,000 square foot plant in Boyne City, Michigan. This division provides special heat treating to other divisions of the Registrant. The Registrant's corporate offices are located in St. Clair Shores, Michigan, where the Registrant occupies 12,000 square feet of space under a ten year lease expiring in 2009 (renewable for two additional periods of five years each). Except as specifically noted to the contrary, the Registrant owns outright all of the above described buildings, land, and production facilities. The Registrant utilizes all of the floor space of these structures. Present facilities are adequate to meet the needs of each division. ITEM 3. LEGAL PROCEEDINGS. The Registrant has been designated by the Federal Environmental Protection Agency (the "EPA") as a Potentially Responsible Party ("PRP") with respect to a dump site referred to as the Cemetery Dump Site located in Oakland County, Michigan. The PRPs engaged a single transporter who illegally disposed of toxic and hazardous waste materials there in the late 1960s. While the Registrant denies it has engaged in disposing of any materials at this site, the Registrant together with other PRPs has actively participated in negotiations directed toward settlement of the EPA's claims. The EPA has performed a site clean-up but has not asserted claims against any of the identified PRPs which suggests that the evidence of involvement by such parties is weak. Also, the Registrant received a notice letter from a representative of the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that "empty" drums from the Registrant were shipped to the site. The waste allegedly shipped by the Registrant is 3520 gallons which is equal to approximately 0.02 percent of the total waste at the site. Since the total site costs for all parties are not expected to exceed $10 million, the Registrant's share of the costs are not expected to be material. No investigation has been undertaken to the Registrant's knowledge which would identify any costs to be incurred by the Registrant which might have a material effect on the Registrant's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Registrant's common stock is traded on the Nasdaq Small Cap Market under the symbol FSCR. The following table sets forth the quarterly high and low sales prices as reported by the Nasdaq Small Cap Market. Quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. 2002 2001 ----- ---- High Low High Low 1st Quarter 36.17 33.54 42.00 37.00 2nd Quarter 36.74 33.19 43.00 40.50 3rd Quarter 36.75 35.01 37.80 33.20 4th Quarter 40.31 36.00 37.00 33.70 At September 1, 2002, the approximate number of beneficial holders and shareholders of record of the Registrant's common stock was 764, based upon the securities position listings furnished to the Registrant. A cash dividend was declared in each of the four quarters during fiscal 2002. Four dividends were declared in fiscal 2001 with one declared in the first quarter, two declared in the second quarter and one declared in the fourth quarter. Total cash dividends in fiscal 2002 were $1.10 per share and in fiscal 2001 were $1.88 per share. The Registrant declared a 5 for 4 stock split on December 8, 2000 payable on April 2, 2001 as a stock dividend. The amount of cash dividends per share shown above have been retroactively adjusted to reflect the stock split. The Registrant is in compliance with covenants of its revolving credit and term loan agreement including any restrictions on the payment of cash dividends. 5 ITEM 6. SELECTED FINANCIAL DATA. FIVE YEARS ENDED JUNE 30 2002 2001 2000 1999 1998 OPERATIONS (in thousands) Net Sales $95,496 $105,912 $121,811 $118,610 $106,889 Earnings before federal income taxes 6,571 6,873 14,693 12,364 11,779 Federal income taxes 2,066 2,230 4,941 4,158 3,952 Net earnings 4,505 4,643 9,752 8,206 7,827 Depreciation and amortization 5,933 5,131 4,917 4,623 4,206 Capital expenditures 7,542 12,405 9,978 7,779 8,367 Cash dividends declared 1,402 2,447 2,467 2,390 2,173 PER SHARE DATA Net earnings $3.57 $ 3.57 $ 7.35 $ 6.05 $ 5.76 Cash dividends declared 1.10 1.88 1.84 1.76 1.60 Book value 48.52 46.50 44.12 38.42 34.45 Average shares outstanding 1,263,507 1,299,137 1,326,803 1,356,649 1,358,103 RETURN DATA Net earnings on net sales 4.7% 4.4% 8.0% 6.9% 7.3% Net earnings on stockholders' equity 7.3% 7.7% 16.7% 15.7% 16.7% FINANCIAL POSITION AT JUNE 30 (IN THOUSANDS) Working capital (net current assets) $ 20,410 $ 19,861 $ 17,205 $ 16,657 $ 11,981 Other assets 16,007 15,975 15,481 11,647 9,526 Property, plant and equipment (net) 52,729 51,143 43,876 40,920 37,782 ------ ------ ------ ------ ------ Total assets less current liabilities 89,146 86,979 76,562 69,224 59,289 Less: Long-term debt 6,340 6,735 - 2,100 450 Unfunded pension obligation - - - 95 - Deferred employee compensation 2,808 2,633 2,076 1,226 - Deferred taxes 1,868 1,940 2,425 2,006 2,197 Employee benefits 1,100 1,021 975 1,081 1,017 Post-retirement benefits 14,835 13,344 11,747 9,865 8,211 Other liabilities 891 850 803 723 634 ------ ------ ------ ------ ------ Stockholders' equity (net assets) $61,304 $ 60,456 $58,536 $52,128 $46,780 ======= ======== ======= ======= ======= The average shares outstanding and all per share amounts have been adjusted retroactively for the December 8, 2000 5 for 4 stock split. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table sets forth the percent relationship of certain items to net sales for the periods indicated: For the Years Ended June 30, ---------------------------- 2002 2001 2000 ---- ---- ---- Net Sales 100% 100% 100% Gross Profit 11.2 11.9 15.2 Selling, general and administrative expenses 6.3 5.6 5.5 Interest .2 .1 .1 Gain on sale of Steel Processing Division - - 2.1 Other income 2.2 .3 .4 Earnings before federal income taxes 6.9 6.5 12.1 Net earnings 4.7 4.4 8.0 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Federal Screw Works reported net sales of $95.5 million in fiscal 2002, which represented a 9.8% decrease from fiscal 2001 sales of $105.9 million. Net sales for fiscal 2001 decreased 13.1% from fiscal 2000 sales of $121.8 million. Sales in both 2002 and 2001 benefited from new automotive parts programs. The number of parts shipped decreased in 2002 and 2001 and increased in 2000. Gross profits decreased 15.1% to $10.7 million in fiscal 2002, a $1.9 million decrease from fiscal 2001. Fiscal 2001 gross profits decreased 31.9% to $12.6 million compared to the $18.5 million level realized in 2000. In the first six months of fiscal 2002, the Registrant experienced severe production cuts from our customers which, coupled with the demands for reduced prices, resulted in marginally profitable operating results. In the second six month period of fiscal 2002, an entirely new tone was reflected in incoming orders, which increased slightly, but resulted in far more satisfactory operating results. By the end of the fiscal year, inventories of car dealers and manufacturers had been trimmed to acceptable levels. The new division at Boyne City, Michigan, operated profitably in the second six months of the fiscal year. As a percentage of total sales, the Registrant expects to gradually ship less to automobile manufacturers and more to Tier One suppliers, reflecting the greater manufacturing responsibilities assumed by Tier One suppliers. Material, plating and packaging costs were again stable in 2002. The Registrant is dependent upon sales to the two largest U.S. automobile manufacturers, a condition that has existed for at least fifty years. The impact of new parts programs were again a positive factor in fiscal 2002. Sales to customers outside North America are increasing, but still are not material. Two years ago the Registrant rejoined the Daimler Chrysler supply base after a four year absence. The receipt of orders for the 2003, 2004 and 2005 model years continues to be encouraging. Refrigeration sales in fiscal 2002 were down slightly. As a percentage of growth, refrigeration sales growth historically has been greater than automotive sales growth. The Registrant has not been able to increase its business with the transplant suppliers in the current fiscal year. 7 Again, outsourcing programs were not a factor in fiscal 2002, which is consistent with fiscal 2001 and 2000. Despite this, the Registrant believes that these programs will be a source of significant new business in the future. Fastener industry consolidations were limited in fiscal 2002. As a percentage of net sales, selling, general and administrative expenses increased to 6.3% in fiscal 2002, as a result of a reduction in net sales. In fiscal 2001 and fiscal 2000 these expenses were 5.6% and 5.5% of net sales, respectively. Interest expense increased in fiscal 2002 because of an increase in average borrowings under the Registrant's Revolving Credit and Term Loan Agreement. Net after-tax gains from the sale of stock acquired in the demutualization of insurance companies amounted to $997,000 in the second quarter and $501,000 in the third quarter of the current fiscal year. The Registrant has been designated by the federal Environmental Protection Agency ("EPA") as a Potentially Responsible Party ("PRP") with respect to a dump site referred to as the Cemetery Dump Site located in Oakland County Michigan. The PRPs engaged a single transporter who illegally disposed of toxic and hazardous waste materials there in the late 1960s. While the Registrant denies it has engaged in disposing of any materials at this site, the Registrant together with other PRPs has actively participated in negotiations directed toward settlement of the EPA's claims. The EPA has performed a site cleanup but has not asserted claims against any of the identified PRPs which suggests that the evidence of involvement by such parties is weak. The Registrant received a notice letter from a representative of the Barrels, Inc. site PRP Group located in Lansing, Michigan indicating that "empty" drums from the Registrant were shipped to the site. The waste allegedly shipped by the Registrant is 3520 gallons which is equal to approximately 0.02 percent of the total waste at the site. Since the total site costs for all parties are not expected to exceed $10 million, the Registrant's share of the costs are not expected to be material. No investigation has been undertaken to the Registrant's knowledge which would identify any costs to be incurred by the Registrant which might have a material effect on the Registrant's financial statements. DIVIDENDS Cash dividends declared in fiscal year 2002 were $1.10 per share, $0.78 less than that declared in fiscal 2001 and $0.74 less than that declared in fiscal 2000. The Registrant declared a 5 for 4 stock split on December 8, 2000, payable as a stock dividend April 2, 2001. The dividend per share amounts have been adjusted to retroactively give effect to the stock split. The Board of Directors, in August, 2002, declared a $.10 per share quarterly dividend, and an extra dividend of $.70 per share. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities approximated $11.7 million in fiscal 2002. This compares to $6.8 million in 2001 and $12.9 million in 2000. Capital expenditures for fiscal 2002 were $7.5 million, primarily related to the purchase of equipment and expansion of facilities in order to improve production efficiencies and enable the Registrant to meet increased future demand for its products. Capital expenditures in fiscal years 2001 and 2000 were $12.4 million and $10.0 million, respectively. Expenditures for additional equipment during fiscal 2003 are presently expected to approximate $6.8 million, of which $2.0 million had been committed as of June 30, 2002. These future capital expenditures are expected to be financed from cash generated from operations and additional borrowing capacity under the Revolving Credit and Term Loan Agreement. Net cash used in financing activities was $4.1 million in fiscal 2002. This compares to $4.1 million provided by financing activities in fiscal 2001 and $6.3 million used in 2000. Fluctuations in these activities have been influenced principally by borrowings and repayments under the Registrant's Revolving Credit and Term Loan Agreement, payment of dividends and purchases of the Registrant's common stock. On October 19, 2001, the Registrant extended its Revolving Credit and Term Loan Agreement by one year. The expiration date is October 31, 2004, and is renewable annually for an additional year. Borrowings up to $25 million and capital expenditures of $16 million annually are permitted. The Registrant has the option to convert borrowings under the facility to a term note through October 31, 2006. Payments under the term note, if the conversion option were exercised, would be made quarterly and could extend to October 31, 2006. Therefore, borrowings under the 8 Revolving Credit and Term Loan Agreement, which were $6,340,000 at June 30, 2002, and $6,735,000 at June 30, 2001, are classified as long-term debt. Working capital at June 30, 2002 amounted to $20,410,000 as compared to working capital of $19,861,000 at June 30, 2001. The increase resulted primarily from an increase in inventories and accounts receivable. As discussed in Note 5 to the financial statements, effective July 1, 1993, the Registrant adopted FASB Statement No. 106. As permitted by the Statement, the Registrant is amortizing the present value of future health care and life insurance benefits related to employees' past service ($17,967,000 at July 1, 1993) over a period of 20 years. The implementation of this accounting pronouncement has no impact on the Registrant's cash flows. MARKET RISK The Registrant's long-term debt is all at current interest rates and, therefore, approximates current value but is subject to changes in interest rates. IMPACT OF INFLATION AND CHANGING PRICES The Registrant passes increased costs on to customers, to the extent permitted by competition, by increasing sales prices whenever possible. In fiscal 2002, 2001 and 2000 the Registrant was unable to pass on cost increases incurred due to competitive pressures. Sales price increases in each of these years were insignificant. CRITICAL ACCOUNTING POLICIES The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Application of these accounting principles requires the Registrant's management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The Registrant does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Registrant adopted the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. As the Registrant does not have any amounts for goodwill or indefinite lived intangible assets on its balance sheets, the adoption of No. 142 has no effect on the earnings or the financial position of the Registrant. INVESTMENTS AND MARKETABLE SECURITIES The Registrant accounts for certain of its investments under FASB 115 as securities available-for-sale. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income or loss. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. The fair value of marketable securities is based on quoted market value. The Registrant reviews its investments to determine if the value shows a decline that has been deemed other-than-temporary. Since June 30, 2001, there has been a broad decline in the public equity markets, including investments held by the Registrant. As a result, for the year ended June 30, 2002, the Registrant recorded a loss of $249,000 on 9 equity investments as a result of declines in the fair market value of certain of its equity investments deemed to be other-than-temporary. REVENUE RECOGNITION The Registrant recognizes revenue from product sales upon transfer of title, which is generally upon shipment. An estimate of reserves is recorded for anticipated returns and credit memos which will be issued on sales recognized to date. The SEC's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", provides guidance on the application of accounting principles generally accepted in the United States to selected revenue recognition issues. The Registrant has concluded its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States and SAB No. 101. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management's evaluation of the financial condition of the customer and historical experience. PRICE REDUCTIONS As of June 30, 2002, all customer price reductions have been accounted for, therefore no amounts have been accrued. INVENTORIES Inventories are stated at the lower of cost or market. Cost, determined by the last-in, first-out (LIFO) method, was used for certain raw material inventories; $967,000 and $1,221,000 at June 30, 2002 and 2001, respectively. The remaining inventories are costed using the first-in, first-out (FIFO) method. If inventories valued on LIFO had been valued at current cost, amounts reported at June 30 would have been increased by $497,000 and $636,000 in fiscal 2002 and 2001, respectively. WORKERS' COMPENSATION RESERVE The Registrant is self insured for workers' compensation claims. Losses are accrued based on an estimate of the ultimate aggregate liability for claims incurred, using certain assumptions based on the Registrant's experience under this program. At June 30, 2002 and 2001, the Registrant accrued approximately $1,097,000 and $1,335,000, respectively, included in Payroll and employee benefits. FORWARD LOOKING STATEMENTS The foregoing discussion and analysis contains a number of "forward looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended, with respect to the expectation for future periods which are subject to various uncertainties, including competition, the loss of, or reduction in business with, the Registrant's principal customers, work stoppages, strikes and slowdowns at the Registrant's facilities and those of its customers; adverse changes in economic conditions generally and those of the automotive industry, specifically. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Registrant's market risk is limited to interest rate risk on the Revolving Credit and Term Loan Agreement and its lease-purchase obligation. At June 30, 2002, the carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, debt and investments approximate fair value. Accordingly, management believes this risk is not material. 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. STATEMENTS OF OPERATIONS FEDERAL SCREW WORKS Year Ended June 30, ------------------- 2002 2001 2000 ---- ---- ---- Net Sales $ 95,496,398 $ 105,911,792 $ 121,811,494 Costs and expenses: Cost of products sold 84,834,236 93,277,594 103,307,106 Selling, general and administrative 5,970,997 5,981,751 6,742,353 Gain on sale of Steel Processing -- -- (2,501,122) Interest 235,885 49,386 68,978 Other income (2,116,115) (269,925) (498,774) ------------- ------------- ------------- 88,925,003 99,038,806 107,118,541 ------------- ------------- ------------- EARNINGS BEFORE FEDERAL INCOME TAXES 6,571,395 6,872,986 14,692,953 Federal income taxes - Note 4: Current 2,210,236 2,450,871 4,840,000 Deferred (credit) (144,236) (220,809) 100,565 ------------- ------------- ------------- 2,066,000 2,230,062 4,940,565 ------------- ------------- ------------- NET EARNINGS $ 4,505,395 $ 4,642,924 $ 9,752,388 ============= ============= ============= Average number of shares outstanding - after 1,263,507 1,299,137 1,326,803 adjustments for the five for four stock split ============= ============= ============= Net earnings per share - after adjustments $ 3.57 $ 3.57 $ 7.35 for the five for four stock split ============= ============= ============= See accompanying notes. 11 BALANCE SHEETS FEDERAL SCREW WORKS JUNE 30 2002 2001 ---- ---- ASSETS CURRENT ASSETS Cash $ 198,540 $ 97,559 Accounts receivable 14,969,850 13,825,686 Inventories - Note 1: Finished products 9,266,454 8,592,041 In-process products 6,753,775 6,769,154 Raw materials and supplies 1,506,574 1,728,175 ------------- ------------- Total inventories 17,526,803 17,089,370 Prepaid expenses and other 434,000 659,644 Deferred income taxes - Note 4 815,516 745,726 ------------- ------------- TOTAL CURRENT ASSETS 33,944,709 32,417,985 OTHER ASSETS Intangible asset 96,145 727,667 Cash value of life insurance 5,696,083 5,565,805 Prepaid pension costs 7,209,849 7,101,684 Miscellaneous 3,004,809 2,580,052 ------------- ------------- 16,006,886 15,975,208 Property, Plant and Equipment - Notes 2 and 3 Land 552,150 552,150 Buildings and improvements 14,166,282 13,988,911 Machinery and equipment 102,007,086 95,677,098 ------------- ------------- 116,725,518 110,218,159 Less accumulated depreciation (63,996,888) (59,075,351) ------------- ------------- 52,728,630 51,142,808 ------------- ------------- $ 102,680,225 $ 99,536,001 ============= ============= 12 BALANCE SHEETS (CONTINUED) FEDERAL SCREW WORKS JUNE 30 2002 2001 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 5,287,381 $ 5,057,735 Payroll and employee benefits 5,770,297 5,780,842 Dividend payable 123,425 129,857 Federal income taxes 479,183 -- Taxes, other than income taxes 1,804,132 1,534,221 Other accrued liabilities 70,141 54,102 ------------- ------------- TOTAL CURRENT LIABILITIES 13,534,559 12,556,757 LONG-TERM LIABILITIES Long-term debt - Note 2 6,340,000 6,735,000 Deferred employee compensation - Note 5 2,807,885 2,632,874 Deferred income taxes - Note 4 1,867,347 1,940,228 Employee benefits 1,100,307 1,021,290 Post-retirement benefits - Note 5 14,834,328 13,344,119 Other liabilities 891,375 850,031 ------------- ------------- 27,841,242 26,523,542 STOCKHOLDERS' EQUITY - Notes 2 and 7 Common stock, $1 par value, authorized 2,000,000 shares, 1,234,093 shares outstanding in 2002 (1,296,887 in 2001) 1,234,093 1,296,887 Additional capital 3,269,476 3,269,476 Retained earnings 56,902,914 56,001,953 Accumulated other comprehensive loss (102,059) (112,614) ------------- ------------- 61,304,424 60,455,702 ------------- ------------- $ 102,680,225 $ 99,536,001 ============= ============= See accompanying notes. 13 STATEMENTS OF STOCKHOLDERS' EQUITY FEDERAL SCREW WORKS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ACCUMULATED OTHER COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME TOTAL -------------------------------------------------------------------------------- BALANCES AT JULY 1, 1999 $ 1,076,162 $ 3,269,476 $ 48,411,426 $ (629,018) $ 52,128,046 Net earnings for the year 9,752,388 9,752,388 Reduction of unrecognized pension costs, net of taxes 629,018 629,018 Change in unrealized loss on securities available - for-sale, Net of taxes (8,478) (8,478) ------------ Total comprehensive income 10,372,928 Purchase of 34,501 shares (34,501) (1,463,316) (1,497,817) Cash dividends declared - $1.84 per share - as restated (2,467,092) (2,467,092) ------------ ----------- ------------ ------------ ------------ BALANCES AT JUNE 30, 2000 1,041,661 3,269,476 54,233,406 (8,478) 58,536,065 Net earnings for the year 4,642,924 4,642,924 Change in unrealized loss on securities available - for-sale, net of taxes (104,136) (104,136) ------------ Total comprehensive income 4,538,788 Purchase of 5,189 shares (5,189) (167,038) (172,227) Effect of stock split 260,415 (260,415) Cash dividends declared - $1.88 per share - as restated (2,446,924) (2,446,924) ------------ ----------- ------------ ------------ ------------ BALANCES AT JUNE 30, 2001 1,296,887 3,269,476 56,001,953 (112,614) 60,455,702 Net earnings for the year 4,505,395 4,505,395 Change in unrealized loss on securities available - for-sale, net of taxes 10,555 10,555 ------------ Total comprehensive income 4,515,950 Purchase of 62,794 shares (62,794) (2,201,970) (2,264,764) Cash dividends declared - $1.10 per share (1,402,464) (1,402,464) ------------ ----------- ------------ ------------ ------------ BALANCES AT JUNE 30, 2002 $ 1,234,093 $ 3,269,476 $ 56,902,914 $ (102,059) $ 61,304,424 ============ ============ ============ ============ ============ ( ) Denotes deduction. See accompanying notes. 14 STATEMENTS OF CASH FLOWS FEDERAL SCREW WORKS 2002 2001 2000 ---- ---- ---- OPERATING ACTIVITIES Net earnings $ 4,505,395 $ 4,642,924 $ 9,752,388 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 5,933,491 5,131,266 4,916,814 Increase in cash value of life insurance (130,278) (130,364) (123,786) Change in deferred federal income taxes (142,671) (274,115) 417,000 Employee and postretirement benefits 1,569,226 1,643,468 1,776,301 Loss/(Gain) on sale of equipment 17,797 - (2,496,083) Deferred retirement benefits and other 325,509 135,732 (2,255,121) Changes in operating assets and liabilities: Accounts receivable (1,144,164) 3,132,566 (1,230,915) Inventories, prepaid expenses and other (211,788) (2,341,591) (234,264) Accounts payable and accrued expenses 977,802 (5,101,130) 2,376,734 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 11,700,319 6,838,756 12,899,068 INVESTING ACTIVITIES Purchases of property, plant and equipment (7,541,710) (12,404,868) (9,977,646) Proceeds from sale of property, plant and equipment 4,600 6,229 4,605,775 ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (7,537,110) (12,398,639) (5,371,871) FINANCING ACTIVITIES Additional borrowings (principal repayments) under bank credit agreement (395,000) 6,735,000 (2,100,000) Principal payments on lease-purchase obligation -- -- (200,000) Purchases of common stock (2,264,764) (172,228) (1,497,817) Dividends paid (1,402,464) (2,446,924) (2,467,092) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) (4,062,228) 4,115,848 (6,264,909) FINANCING ACTIVITIES INCREASE (DECREASE IN CASH) 100,981 (1,444,035) 1,262,288 Cash at beginning of year 97,559 1,541,594 279,306 ------------ ------------ ------------ CASH AT END OF YEAR $ 198,540 $ 97,559 $ 1,541,594 ============ ============ ============ See accompanying notes 15 NOTES TO FINANCIAL STATEMENTS FEDERAL SCREW WORKS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES INVENTORIES: Inventories are stated at the lower of cost or market. Cost, determined by the last-in, first-out (LIFO) method, was used for certain raw material inventories, $967,000 and $1,221,000 at June 30, 2002 and 2001, respectively. The remaining inventories are costed using the first-in, first-out (FIFO) method. If inventories valued on LIFO had been valued at current cost, amounts reported at June 30 would have been increased by $497,000 and $636,000 in 2002 and 2001, respectively. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost, which includes the cost of interest which is capitalized during construction of significant additions. Provisions for depreciation are based upon the estimated useful lives of the respective assets and are computed by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. INVESTMENTS: The Registrant has invested approximately $2,850,000 and $2,400,000 as of June 30, 2002 and 2001, respectively, which has been designated for payment of certain liabilities related to deferred compensation plans. These amounts were recorded in miscellaneous assets within the balance sheets. Approximately $1,161,000, $961,000, and $728,000 of the Registrant's investments were held in equity securities, debt securities, and short-term investments, respectively, as of June 30, 2002. Approximately $1,289,000, $728,000 and $383,000 of the Registrant's investments were held in equity securities, debt securities, and short-term investments, respectively, as of June 30, 2001. Debt securities are scheduled to mature beginning in December 2005 and ending in November 2012. In accordance with Statement of Financial Accounting Standards No. 115 ("FASB 115"), the Registrant has classified all investments as "available-for-sale" because they are freely tradable. As of June 30, 2002, the Registrant recorded a decrease in unrealized loss of $11,000, net of tax, from its investments, which is reflected in the statements of shareholders' equity. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity net of applicable income taxes. Realized gains and losses and declines in value deemed to be other-than-temporary on available-for-sale securities are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. Management continually evaluates whether changes in the value of such investments should be considered other-than-temporary. Since June 30, 2001, there has been a broad decline in the public equity markets, including investments held by the Registrant. As a result, for the year ended June 30, 2002, the Registrant recorded a loss of $249,000 on equity investments as a result of declines in the fair market value of certain of its equity investments deemed to be other-than-temporary. REVENUE RECOGNITION: The Registrant recognizes revenue when title to goods transfer, generally when goods are shipped to the customer. OTHER INCOME: Included in other income is $2,180,000 as a result of the sale of stock acquired in connection with the demutualization of insurance companies. FAIR VALUE OF FINANCIAL INSTRUMENTS: At June 30, 2002, the carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable, debt and investments approximate fair value. NET INCOME PER COMMON SHARE: Net income per common share is based on weighted average number of common shares outstanding of 1,263,507 in 2002; 1,299,137 in 2001 and 1,326,803 in 2000. RECLASSIFICATION: Certain items in the prior year financial statements have been reclassified to conform to the presentation used in 2002. 16 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FEDERAL SCREW WORKS USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Actual results could differ form those estimates. NOTE 2 - DEBT Long-term debt at June 30 consists of the following: 2002 2001 ---- ---- Revolving credit note payable to bank $6,340,000 $6,735,000 Less current maturities 0 0 ---------- ---------- $6,340,000 $6,735,000 ========== ========== The Registrant has a $25,000,000 revolving credit and term loan agreement with a bank. The Registrant has the option to convert borrowings thereunder (classified as long-term debt) to a term note through October 31, 2004, the expiration date of the agreement. Payments under the term note, if the conversion option is exercised, would be made quarterly commencing three months following conversion until maturity of the term note on October 31, 2006. Interest (3.125% at June 30, 2002) on outstanding borrowings is determined based on the prime rate, or at the Registrant's option, an alternative variable market rate. The Registrant also pays a commitment fee of 3/8% on the unused portion of the revolving credit. The Registrant is in compliance with covenants of the revolving credit and term loan agreement including the requirements to meet certain financial ratios. Interest paid by the Registrant during fiscal 2002, fiscal 2001 and fiscal 2000 aggregated $353,000, $372,000, and $69,000, respectively. Interest capitalized into property, plant and equipment in fiscal 2002 and 2001 was $169,000 and $359,000, respectively. NOTE 3 - LEASES AND OTHER COMMITMENTS At June 30, 2002, the aggregate minimum rental commitments for various noncancelable operating leases with initial terms of one year or more are as follows: OPERATING YEAR ENDING JUNE 30 LEASES - ------------------- ------ 2003 $ 993,000 2004 701,000 2005 447,000 2006 360,000 2007 310,000 Thereafter 404,000 - ---------- ----------- Total minimum lease payments $3,215,000 ========== 17 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FEDERAL SCREW WORKS Total rent expense was $1,190,000 in fiscal 2002, $1,137,000 in fiscal 2001, and $1,174,000 in fiscal 2000. Costs committed to complete the expansion of existing plant facilities and the purchase of machinery and equipment approximated $2,014,000 at June 30, 2002. NOTE 4 - FEDERAL INCOME TAXES A reconciliation of the federal income tax provision to the amount computed by applying the applicable statutory federal income tax rate (34% in 2002, and in 2001 and 35% in 2000) to earnings before federal income taxes follows: 2002 2001 2000 ---- ---- ---- Computed amount $2,233,000 $2,337,000 $5,143,000 Life insurance policies (78,000) (82,000) (79,000) Other (89,000) (25,000) (123,000) ---------- ---------- ---------- Total federal income tax provision $2,066,000 $2,230,000 $4,941,000 ========== ========== ========== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Registrant`s deferred tax liabilities and assets as of June 30, 2002 and 2001 are as follows: 2002 2001 ---- ---- Deferred tax liabilities: Accelerated tax depreciation $5,969,000 $5,407,000 Other 32,000 71,000 ---------- ---------- Total deferred tax liabilities $6,001,000 $5,478,000 ---------- ---------- Deferred tax assets: Employee benefits 4,729,000 4,118,000 Inventory 220,000 168,000 ---------- ---------- Total deferred tax assets 4,949,000 4,286,000 ---------- ---------- Net deferred tax liabilities $1,052,000 $1,192,000 ========== ========== Income taxes paid by the Registrant during fiscal 2002, fiscal 2001, and fiscal 2000 totalled $1,755,000, $2,585,000, and $5,386,000, respectively. NOTE 5 - EMPLOYEE BENEFIT PLANS The Registrant sponsors three defined benefit pension plans covering substantially all employees. Benefits under two of the plans are based on negotiated rates times years of service. Under the remaining plan, benefits are based on compensation during the years immediately preceding retirement and years of service. It is the Registrant's policy to make contributions to these plans sufficient to meet minimum funding requirements of the applicable laws and regulations, plus such additional amounts, if any, as the Registrant's actuarial consultants advise to be appropriate. 18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FEDERAL SCREW WORKS In addition to providing pension benefits, the Registrant provides certain health care and life insurance benefits for retired employees. Substantially all of the Registrant's employees may become eligible for those benefits if they reach normal retirement age while working for the Registrant. The benefits are provided through certain insurance companies. The following tables set forth various information about the plans as of and at the March 31, 2002 and 2001 measurement dates: COMPONENTS OF NET PERIODIC BENEFIT COST ARE: PENSION POSTRETIREMENT BENEFITS BENEFITS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Service Cost $ 749,000 $ 777,000 $ 782,000 $ 490,000 $ 531,000 $ 547,000 Interest Cost 1,773,000 1,765,000 1,643,000 1,543,000 1,525,000 1,479,000 Expected return on assets (2,043,000) (2,069,000) (1,911,000) Amortization of transition obligation 166,000 166,000 166,000 898,000 898,000 898,000 Amortization of prior service cost 197,000 197,000 179,000 Amortization of unrecognized net loss 132,000 80,000 52,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ 974,000 $ 916,000 $ 911,000 $ 2,931,000 $ 2,954,000 $ 2,924,000 ============ ============ ============ ============ ============ ============ ==================================================================================================================================== CHANGES IN BENEFIT OBLIGATION ARE: PENSION POSTRETIREMENT BENEFITS BENEFITS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------ Benefit obligation at beginning of year $ 25,142,000 $ 24,771,000 $ 21,992,000 $ 21,701,000 Service cost 749,000 777,000 490,000 531,000 Interest cost 1,773,000 1,765,000 1,543,000 1,525,000 Plan amendments 135,000 241,000 - - Actuarial gain (419,000) (677,000) (794,000) (424,000) Benefits paid (1,255,000) (1,735,000) (1,426,000) (1,341,000) - ------------------------------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 26,125,000 $ 25,142,000 $ 21,805,000 $ 21,992,000 ============ ============ ============ ============ ==================================================================================================================================== 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FEDERAL SCREW WORKS CHANGES IN PLAN ASSETS ARE: PENSION POSTRETIREMENT BENEFITS BENEFITS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------ Fair value of assets at beginning of year $ 26,299,000 $ 27,004,000 $- $- Actual return on assets 936,000 382,000 -- -- Employer contribution 1,055,000 648,000 -- -- Benefits paid (1,255,000) (1,735,000) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Fair value of assets at end of year $27,035,000 $26,299,000 $ - $ - =========== =========== == == ==================================================================================================================================== FUNDED STATUS OF THE PLANS ARE: PENSION POSTRETIREMENT BENEFITS BENEFITS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------ Funded status at end of year (underfunded) $ 910,000 $ 1,157,000 $(21,805,000) $(21,992,000) Unrecognized transition (assets)/obligation (233,000) (94,000) 9,882,000 10,596,000 Unrecognized prior service cost 1,841,000 1,903,000 - - Unrecognized net (gain)/loss 4,692,000 4,136,000 (2,742,000) (1,948,000) - ------------------------------------------------------------------------------------------------------------------------------------ Prepaid/(accrued) benefit cost $ 7,210,000 $ 7,102,000 $(14,665,000) $(13,344,000) ============ ============ ============ ============ ==================================================================================================================================== In accounting for pension plans, the Registrant used a discount rate of 7.25% in 2002 and 2001, a 5% rate of increase in compensation, and an 8% expected rate of return on assets. Plan assets for these plans consist principally of fixed income instruments, equity securities and participation in insurance company contracts. The weighted average discount rate used in determining the accumulated postretirement benefit obligation at June 30, 2002 and 2001 was 7.25%. For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2002. The rate was assumed to decrease gradually to 5.5% for 2005 and remain at that level thereafter. Assumed health care cost trends have a significant effect on the amounts reported for the health care plan. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 2002 and 2001 by $2,302,000 and $2,312,000, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended June 30, 2002 and 2001 by $256,000 and $271,000, respectively. 20 The Registrant sponsors a supplemental executive retirement plan which covers certain executives of the Registrant. The net periodic pension expense for the plan was $807,000 and $771,000 in fiscal 2002 and 2001 respectively. The actuarial present value of vested benefit obligations approximated $2,607,000 at June 30, 2002 and $2,372,000 at NOTES TO FINANCIAL STATEMENTS (CONTINUED) FEDERAL SCREW WORKS June 30, 2001, respectively. The Registrant has invested $2,329,000 as of June 30, 2002 to cover obligations of the plan. The Registrant sponsors a retirement plan for directors who are not employees of the Registrant. The net periodic pension expense for the plan was $41,000 in fiscal 2002, $47,000 in fiscal 2001, and $79,000 in fiscal 2000. The actuarial present value of vested benefit obligations approximated $932,000 at June 30, 2002 and $891,000 at June 30, 2001. The plan is currently not fully funded. NOTE 6 - INDUSTRY INFORMATION Approximately 91% of the Registrant's net sales in fiscal 2002 and 85% in fiscal 2001 were made either directly or indirectly to automotive companies. Customers comprising 10% or greater of the Registrant's net sales are summarized as follows: 2002 2001 ---- ---- Ford Motor Company 35% 37% General Motors Corporation 13% 15% All Others 52% 48% --- --- 100% 100% NOTE 7 - LITIGATION The Registrant is involved in various legal actions arising in the normal course of business. Management, after taking into consideration legal counsel's evaluation of such actions, is of the opinion that their outcome will not have a significant effect on the Registrant's financial statements. NOTE 8 -- FOREIGN SALES Approximately 10% of the Registrant's sales are to Canadian customers. All sales terms provide for settlement in U.S. dollars. 21 Report of Independent Auditors Board of Directors Federal Screw Works We have audited the accompanying balance sheets of Federal Screw Works as of June 30, 2002 and 2001, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedule listed in Item 14(a). These financial statements and schedule are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Federal Screw Works at June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Detroit, Michigan August 8, 2002 22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information is contained under the captions "Election of Directors," "Security Ownership of Management," and "Compliance with Section 16(a) of the Exchange Act" in the Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein by reference. The following information supplements the information provided on pages 1 through 3 in the Registrant's Proxy Statement dated September 24, 2002 which is incorporated herein by reference. NAME POSITION AGE ---- -------- --- John M. O'Brien Vice President-Sales and Marketing since 1986; 52 Vice President-General Sales Manager, 1984 to 1986; General Sales Manager, 1982 to 1984; Sabbatical at Stanford University Business School, 1981 to 1982; Sales Representative, 1975 to 1981. Jeffrey M. Harness Vice President of Boyne City Division (since 2001) 46 and Vice President and General Manager of Chelsea and Brighton Divisions since 1994; Vice President and General Manager - Chelsea Division, 1992 to 1994; General Manager - Chelsea Division, 1985 to 1992; Sales Manager - Chelsea Division, 1984 to 1985; Sales Representative, 1982 to 1984; Management Trainee, 1981 to 1982; Chelsea Division Junior Buyer, 1980 to 1981. ITEM 11. EXECUTIVE COMPENSATION Information is contained under the captions "Director's Remuneration and Committees of the Board" and "Officer Compensation Policy" in the Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information is contained under the caption "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein by reference. The Registrant does not have any compensation plans under which equity securities of the Registrant are authorized for issuance. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information is contained under the caption "Certain Relationships and Related Transactions" in the Registrant's Proxy Statement dated September 24, 2002 and is incorporated herein by reference. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed with this Report or incorporated herein by reference are as follows. (1) Financial Statements. The following financial statements of the Registrant and Report of Independent Public Accountants are contained in "Item 8 Financial Statements and Supplementary Data." REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS - Statements of Operations for the years ended June 30, 2002, 2001 and 2000 - Statements of Cash Flows for the years ended June 30, 2002, 2001, and 2000 - Balance sheets as of June 30, 2002 and 2001 - Statements of Stockholders' equity for the years ended June 30, 2002, 2001 and 2000 NOTES TO FINANCIAL STATEMENTS (2) Financial Statement Schedules. The following financial statement schedule is filed with this report, and appears on page 26 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Other financial statement schedules have been omitted because they are not applicable or are not required, or the information required to be set forth therein is included in the financial statements or notes thereto. (3) Exhibits. The Exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index. Exhibits designated with a "+" symbol represent the Registrant's management contracts or compensation plans or arrangements for directors and executive officers. The following documents are filed as a part of this report. Those Exhibits previously filed and incorporated herein by reference are identified below. 3.1 Registrant's Articles of Incorporation, were filed as an exhibit to the Registrant's 1994 Form 10-K, and are incorporated herein by reference. 3.2 Registrant's By-Laws, as amended on August 29, 2002 -are filed as an exhibit to this Form 10-K. 4.1 The (municipal industrial revenue bond) guarantee agreement dated as of November 1, 1979, as previously filed, was filed as an exhibit to the Registrant's 1993 Form 10-K and is incorporated herein by reference. All waivers, amendments and modifications thereto, were filed as exhibits to the Registrant's 1989, 1993 and 1994 Forms 10-K and are incorporated herein by reference. 4.2 Revolving Credit and Term Loan Agreement by and between Registrant and Comerica Bank, dated October 24, 1995, filed as an exhibit to the Registrant's Form 10-Q for the period ended September 30, 24 1995, and incorporated herein by reference. 10.1+ Supplemental retirement agreement between the Registrant and W. T. ZurSchmiede, Jr., present Chairman of the Registrant, dated April 1, 1986 was filed as an exhibit to Registrant's 1993 Form 10-K and is incorporated by reference. 10.2+ Supplemental retirement agreement between the Registrant and Hugh G. Harness, a director and past President of the Registrant, dated December 21, 1978 and amended pursuant to an Amendment to Agreement dated October 23, 1986, as amended by an Agreement providing for the retirement and consultation of and by Mr. Harness and the Registrant dated January 7, 1994, was filed as an exhibit to Registrant's 1994 Form 10-K, and is incorporated herein by reference. 10.3 Agreement providing for the retirement and consultation of and by Mr. Harness and the Registrant dated January 7, 1994, as amended on October 25, 2001- is filed as an exhibit to this Form 10-K. 10.4+ Indemnity agreement effective September 24, 1986, which exists between the Registrant and each director, was filed as an exhibit to Registrant's 1992 Form 10-K, and is incorporated herein by reference. 10.5 Lease agreement between the Registrant and Safran Development, L.L.C. for the lease of the 2nd floor of 20229 Nine Mile Road, St. Clair Shores, Michigan, effective October 26, 1999, was previously filed as an exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1999, and is incorporated herein by reference. 10.6+ Retirement Plan for Outside Directors as amended and restated, filed as an exhibit to the Registrant's 1995 Form 10-K and incorporated herein by reference. 10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed as an exhibit to the Registrant's 1998 Form 10-K and incorporated herein by reference. 99 Proxy Statement for the Registrant's 2002 Annual Meeting of Shareholders - filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference. (b) No reports on Form 8-K have been filed by Registrant during the last quarter of the period covered by this Report. 25 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DESCRIPTION BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS - BALANCE AT BEGINNING (1) (2) DESCRIBE END OF PERIOD OF PERIOD CHARGED TO CHARGED TO COSTS AND OTHER ACCOUNTS EXPENSES - DESCRIBE - ----------------------------------------------------------------------------------------------------------------------------- Valuation allowance for accounts receivable: Year ended June 30, 2002 $ 50,000 $ - $ 50,000 Year ended June 30, 2001 50,000 - 50,000 Year ended June 30, 2000 50,000 - 50,000 Valuation allowance for inventories: Year ended June 30, 2002 $ 325,000 $ 85,000 $ 150,000(A) $ 260,000 Year ended June 30, 2001 180,000 239,000 94,000(A) 325,000 Year ended June 30, 2000 167,000 38,000 25,000(A) 180,000 (A) Unsalable inventories charged off; corresponding reduction of allowance. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FEDERAL SCREW WORKS (Registrant) By: /s/ W. T. ZurSchmiede, Jr. -------------------------------------- W. T. ZurSchmiede, Jr. Chairman, Chief Financial Officer, Secretary and Treasurer Date: September 24, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Wade C. Plaskey - -------------------------------------------- September 24, 2002 Wade C. Plaskey Corporate Controller (Principal Accounting Officer) /s/ Thomas W. Butler, Jr. - -------------------------------------------- September 24, 2002 Thomas W. Butler, Jr. Director /s/ Frank S. Galgan - -------------------------------------------- September 24, 2002 Frank S. Galgan Director /s/ Hugh G. Harness - -------------------------------------------- September 24, 2002 Hugh G. Harness Director /s/ F.D. Tennent - -------------------------------------------- September 24, 2002 F.D. Tennent Director /s/ W. T. ZurSchmiede, Jr. - -------------------------------------------- September 24, 2002 W. T. ZurSchmiede, Jr. Director /s/ Robert F. ZurSchmiede - -------------------------------------------- September 24, 2002 Robert F. ZurSchmiede Director /s/ Thomas ZurSchmiede - -------------------------------------------- September 24, 2002 Thomas ZurSchmiede Director CERTIFICATIONS CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Thomas ZurSchmiede, certify that: 1) I have reviewed this Annual Report on Form 10-K of Federal Screw Works; 2) Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3) Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this Annual Report. Date: September 24, 2002 /s/ Thomas ZurSchmiede ------------------------------------------------- Thomas ZurSchmiede, President and Chief Executive Officer - Principal Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, W.T. ZurSchmiede, Jr., certify that: 1) I have reviewed this Annual Report on Form 10-K of Federal Screw Works; 2) Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3) Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this Annual Report. Date: September 24, 2002 /s/ W.T. ZurSchmiede ------------------------------------------------- W.T. ZurSchmiede, Jr., Chairman of the Board, Chief Financial Officer, Secretary and Treasurer Principal Financial Officer EXHIBIT INDEX 3.1 Registrant's Articles of Incorporation, were filed as an exhibit to the Registrant's 1994 Form 10-K, and are incorporated herein by reference. 3.2 Registrant's By-Laws, as amended on August 29, 2002 -are filed as an exhibit to this Form 10-K. 4.1 The (municipal industrial revenue bond) guarantee agreement dated as of November 1, 1979, as previously filed, was filed as an exhibit to the Registrant's 1993 Form 10-K and is incorporated herein by reference. All waivers, amendments and modifications thereto, were filed as exhibits to the Registrant's 1989, 1993 and 1994 Forms 10-K and are incorporated herein by reference. 4.2 Revolving Credit and Term Loan Agreement by and between Registrant and Comerica Bank, dated October 24, 1995, filed as an exhibit to the Registrant's Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference. 10.1+ Supplemental retirement agreement between the Registrant and W. T. ZurSchmiede, Jr., present Chairman of the Registrant, dated April 1, 1986 was filed as an exhibit to Registrant's 1993 Form 10-K and is incorporated by reference. 10.2+ Supplemental retirement agreement between the Registrant and Hugh G. Harness, a director and past President of the Registrant, dated December 21, 1978 and amended pursuant to an Amendment to Agreement dated October 23, 1986, as amended by an Agreement providing for the retirement and consultation of and by Mr. Harness and the Registrant dated January 7, 1994, was filed as an exhibit to Registrant's 1994 Form 10-K, and is incorporated herein by reference. 10.3 Agreement providing for the retirement and consultation of and by Mr. Harness and the Registrant dated January 7, 1994, as amended on October 25, 2001- is filed as an exhibit to this Form 10-K. 10.4+ Indemnity agreement effective September 24, 1986, which exists between the Registrant and each director, was filed as an exhibit to Registrant's 1992 Form 10-K, and is incorporated herein by reference. 10.5 Lease agreement between the Registrant and Safran Development, L.L.C. for the lease of the 2nd floor of 20229 Nine Mile Road, St. Clair Shores, Michigan, effective October 26, 1999, was previously filed as an exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1999, and is incorporated herein by reference. 10.6+ Retirement Plan for Outside Directors as amended and restated, filed as an exhibit to the Registrant's 1995 Form 10-K and incorporated herein by reference. 10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed as an exhibit to the Registrant's 1998 Form 10-K and incorporated herein by reference. 99 Proxy Statement for the Registrant's 2002 Annual Meeting of Shareholders - filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference.