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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-2
(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, 2003
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 000-1837
FEDERAL SCREW WORKS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-0533740
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
20229 NINE MILE ROAD, ST. CLAIR SHORES, MICHIGAN 48080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-5).
Yes [ ] No [X]
As of December 31, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the common stock
of the registrant held by non-affiliates, based on $37.75 per share (the last
sale price for the common stock on such date as reported on the Nasdaq SmallCap
Market(SM)) was $23,042,298. For purposes of this computation only, all
executive officers, directors and 10% beneficial owners of the Registrant are
assumed to be affiliates.
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The number of shares outstanding of each of the Registrant's classes of common
stock, as of April 8, 2004, is as follows:
Title of Class Number of Shares Outstanding
Common Stock, 1,421,595
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the Registrant dated September
23, 2003 has been incorporated by reference in response or partial response to
Part III, Items 10, 11, 12 and 13 in this Report.
EXPLANATORY NOTE
We are filing this amendment No. 2 to our Annual Report on Form 10-K
originally filed with the Securities and Exchange Commission on September 26,
2003, and first amended on March 25, 2004, solely for the purpose of re-filing
Exhibits 31.1 and 31.2. Except as specifically indicated herein, no other
information included in our Annual Report on Form 10-K is amended by this Form
10-K/A-2.
PART I
ITEM 1. BUSINESS.
Federal Screw Works (the "Company"), originally incorporated in
Michigan in 1919, is a domestic manufacturer of industrial component parts,
consisting of locknuts, bolts, piston pins, studs, bushings, shafts and other
machined, cold formed, hardened and/or ground metal parts, all of which
constitute a single industry segment.
The Company's products are manufactured at several plants and are
fabricated from metal rod and bar, which are generally available at competitive
prices from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 93% of the Company's net sales in fiscal 2003 (91% and
85% in fiscal 2002 and fiscal 2001, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers.
While the Company 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 Company 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
Company does not consider the royalty agreement to be material to its business.)
The OEM supplier industry is highly cyclical and, in large part,
dependent upon the overall strength of consumer demand for light trucks and
passenger cars. There can be no assurance that the automotive industry, for
which the Company supplies components, will not experience downturns in the
future. A decrease in overall consumer demand for motor vehicles in general, or
specific segments, could have a material adverse effect on the Company's
financial condition and results of operations.
The Company is dependent upon sales to the two largest U.S. automobile
manufacturers, a condition that has existed for over fifty years. Although the
Company 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 Company. 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 Company.
Customers comprising 10% or greater of the Company's net sales are
summarized as follows:
2003 2002 2001
---- ---- ----
Ford Motor Company............................... 34% 35% 37%
TRW Automotive................................... 14% 11% 8%
General Motors Corporation....................... 12% 13% 15%
All Others....................................... 40% 41% 40%
--- --- ---
100% 100% 100%
=== === ===
Many of the Company's customers, and other suppliers to the Company'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 Company's results of operations.
2
As of August 31, 2003, the Company had an estimated backlog of firm
orders amounting to approximately $12,350,000, all of which are expected to be
filled within the 2004 fiscal year. The comparable backlog as of August 31, 2002
amounted to approximately $12,700,000.
The manufacture and sale of the Company's products is an extremely
competitive business. Because industry statistics are not available, the Company
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 Company believes that it is generally
considered a leading producer of its principal type of product in an annual
market, which the Company estimates to be $650 million, served by approximately
thirty major domestic suppliers, no one of which, or no small number of which,
are dominant. The Company is aware, however, that there are companies making
similar products, with greater sales and resources than the Company. The Company
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 Company 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 Company has experienced no material effects in complying with
government environmental regulations.
The Company presently employs 422 hourly-rated and salaried personnel.
The Company's hourly work forces at the Chelsea and Romulus facilities are
unionized. The Company's contracts with the unions in Chelsea and Romulus expire
in May of 2005 and January of 2007, respectively.
Sales to customers outside the United States are not significant.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's industrial component parts are manufactured in seven
plants located throughout Michigan. A brief description of each division
follows.
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 Company began operations in a new 35,000
square foot plant in Traverse City, Michigan. This division manufactures special
assemblies for our 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, 2004. The division
manufactures perishable tooling, primarily for the cold heading industry.
Approximately thirty percent of its output is consumed by the Company's Big
Rapids, Romulus and Traverse City Divisions.
The Chelsea Division is located in Chelsea, Michigan, in a plant having
approximately 86,000 square feet. Primary equipment consists of automatic screw
machines and rotary index machines capable of making products
3
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 Company 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 Company sufficient room to
try out new primary and secondary equipment, tooling, and parts feeding and
automation devices, as well as permitting the Company to rebuild recently
purchased used equipment.
In June of 2001, the Company began operations in a new 43,000 square
foot plant in Boyne City, Michigan. This division manufactures machined products
for the refrigeration and automotive industries.
The Company's corporate offices are located at 20229 Nine Mile Road,
St. Clair Shores, an eastern suburb of Detroit. The Company occupies 12,000
square feet of space under a ten year lease expiring in 2009 (renewable for two
additional periods of five years each).
The Company owns outright all of the above described buildings, land
and production facilities except as specifically noted to the contrary. The
Company utilizes all of the floor space of these structures. Present facilities
are adequate to meet the needs of each respective division.
ITEM 3. LEGAL PROCEEDINGS.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The persons listed below are currently executive officers of the
Company.
NAME POSITION AGE
---- -------- ---
Thomas ZurSchmiede Chief Executive Officer since 2002; President of 52
the Company since 1994; Vice President -- Big
Rapids Division, 1988 -- 1994; Vice President --
Corporate Development, 1984 -- 1988; Director of
Corporate Development, 1983 -- 1984, all of the
Company.
Robert F. ZurSchmiede Executive Vice President and Chief Operating 50
Officer since 2002; Vice President -- Traverse
City Division in 1999 and Romulus Division of the
Company 1986 to 2002; Vice President and General
Manager of the Romulus Division, 1984 to 1986;
Assistant General Manager of the Romulus Division,
1983 to 1984; Assistant Manufacturing Manager,
Romulus Division, 1982 to 1983, all of the
Company.
W.T. ZurSchmiede, Jr. Chairman of the Board, Chief Financial Officer and 77
Secretary since 2002; Chairman of the Board and
Chief Executive Officer of the Company, 1978 to
2002; Chief Financial Officer, Secretary and
Treasurer, 1988 to 2002; President and Chief
Executive Officer of the Company, 1970 to 1978.
John M. O'Brien Vice President-Sales and Marketing since 1986; 53
Vice President-General Sales Manager, 1984 to
1986; General Sales Manager, 1982 to 1984;
4
Sabbatical at Stanford University Business School,
1981 to 1982; Sales Representative, 1975 to 1981,
all of the Company.
Jeffrey M. Harness Vice President of Boyne City Division (since 2001) 47
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, all of the Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq SmallCap 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(SM). Quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions. All per share amounts have been
adjusted retroactively for the February 14, 2003 five-for-four stock split.
2003 2002
---- ----
High Low High Low
---- --- ---- ---
1st Quarter 33.24 30.76 28.94 26.83
2nd Quarter 33.60 31.40 29.39 26.55
3rd Quarter 34.24 32.14 29.40 28.01
4th Quarter 38.00 33.75 32.25 28.80
At September 2, 2003, there were approximately 737 holders of record of
the Company's common stock.
For a discussion of dividends declared by the Company for the two most
recent fiscal years, please see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Dividends."
The Company does not have any compensation plans under which equity
securities of the Company are authorized for issuance.
5
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEARS ENDED JUNE 30 2003 2002 2001 2000 1999
OPERATIONS (in thousands)
Net Sales $ 95,378 $ 95,496 $ 105,912 $ 121,811 $ 118,610
Earnings before federal income taxes 4,905 6,571 6,873 14,693 12,364
Federal income taxes 1,602 2,066 2,230 4,941 4,158
Net earnings 3,303 4,505 4,643 9,752 8,206
Depreciation and amortization 6,548 5,933 5,131 4,913 4,623
Capital expenditures 5,722 7,542 12,405 9,978 7,779
Cash dividends declared 1,392 1,402 2,447 2,467 2,390
PER SHARE DATA
Net earnings $ 2.22 $ 2.89 $ 2.91 $ 6.01 $ 4.97
Cash dividends declared 0.92 0.88 1.50 1.47 1.41
Book value 37.04 39.34 37.92 36.09 31.56
Average shares outstanding 1,487,942 1,558,479 1,594,109 1,621,775 1,651,621
RETURN DATA
Net earnings on net sales 3.5% 4.7% 4.4% 8.0% 6.9%
Net earnings on stockholders' equity 6.0% 7.3% 7.7% 16.7% 15.7%
FINANCIAL POSITION AT JUNE 30 (IN THOUSANDS)
Working capital (net current assets) $ 18,904 $ 20,410 $ 19,861 $ 17,205 $ 16,657
Other assets 12,058 16,007 15,975 15,481 11,647
Property, plant and equipment (net) 51,894 52,729 51,143 43,876 40,920
---------- ---------- ---------- ---------- ----------
Total assets less current liabilities 82,856 89,146 86,979 76,562 69,224
Less:
Long-term debt 5,680 6,340 6,735 - 2,100
Unfunded pension obligation - - - - 95
Deferred employee compensation 3,208 2,808 2,633 2,076 1,226
Deferred taxes 544 1,868 1,940 2,425 2,006
Employee benefits 1,035 1,100 1,021 975 1,081
Post-retirement benefits 16,347 14,835 13,344 11,747 9,865
Other liabilities 927 891 850 803 723
---------- ---------- ---------- ---------- ----------
Stockholders' equity (net assets) $ 55,115 $ 61,304 $ 60,456 $ 58,536 $ 52,128
========== ========== ========== ========== ==========
The average shares outstanding and all per share amounts have been adjusted
retroactively for the February 14, 2003 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,
----------------------------
2003 2002 2001
---- ---- ----
Net Sales 100 % 100 % 100 %
Gross Profit 11.3 11.2 11.9
Selling, general and administrative expenses 6.1 6.3 5.6
Interest .2 .2 .1
Other income .1 2.2 .3
Earnings before federal income taxes 5.1 6.9 6.5
Net earnings 3.5 4.7 4.4
Federal Screw Works reported net sales of $95.4 million in fiscal 2003,
which represented a 0.1% decrease from fiscal 2002 sales of $95.5 million. Net
sales for fiscal 2002 decreased 9.8% from fiscal 2001 sales of $105.9 million.
There were no significant changes in sales in fiscal 2003 from fiscal 2002. The
decrease in 2002 was the result of lower demand from our customers.
Gross profits increased slightly to $10.8 million in fiscal 2003, a
$0.1 million increase from fiscal 2002. While sales for the year were
approximately equal to the previous year, the Company's net earnings exclusive
of the special gains from the sale of insurance stocks last year were up 9.8%.
The increase of $295,000 is attributable to improved productivity and cost
reductions in manufacturing and administrative expense. This occurred despite
pressure from most of our customers for price reductions. Fiscal 2002 gross
profits decreased 15.1% to $10.7 million compared to the $12.6 million level
realized in 2001. This decrease is attributable to the reduction of $10.4
million in net sales.
As a percentage of total sales, the Company expects to gradually ship
less to automobile manufacturers and more to Tier One suppliers, reflecting the
greater manufacturing responsibilities assumed by Tier One suppliers. At this
date, it is impossible to quantify the future effect of this trend and,
secondly, to quantify our gradual shift in business from the automobile
manufacturers to the major automobile supplier companies.
The Company is dependent upon sales to the two largest U.S. automobile
manufacturers, a condition that has existed for over fifty years. Although the
Company 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 Company. 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 Company.
Three years ago the Company rejoined the DaimlerChrysler supply base
after a four year absence. Sales to DaimlerChrysler, although not material, are
gradually increasing. In addition, the Company received orders in fiscal 2003
from several new customers which management believes will result in new business
in 2004 and 2005. The receipt of orders for the 2004, 2005 and 2006 model years
continues to be encouraging.
Refrigeration sales in fiscal 2003, which approximated 6% of total
sales, were level with the prior fiscal year. Refrigeration sales in fiscal 2002
decreased to 6.2% of total sales, from 7.2% of total sales in fiscal 2001. As
7
a percentage of growth, refrigeration sales growth historically has been greater
than automotive sales growth. This has not been the case for the past four
years.
The Company has not been able to increase its business with the Asian
and European transplant suppliers in either of the past two fiscal years. Again,
outsourcing programs were not a factor in fiscal 2003, which is consistent with
fiscal 2002 and 2001. Despite this, the Company believes that these programs
will be a source of significant new business in the future.
As a percentage of net sales, selling, general and administrative
expenses were 6.1% in fiscal 2003. In fiscal 2002 and fiscal 2001 these expenses
were 6.3% and 5.6% of net sales, respectively. Interest expense decreased in
fiscal 2003 because of a decrease in short term interest rates under the
Company's Revolving Credit and Term Loan Agreement. Interest expense increased
in fiscal 2002 because of an increase in average borrowings under the agreement.
Included in Other Income for fiscal 2002 is $2,180,000, which the
Company received as a result of the sale of stock acquired in connection with
the demutualization of insurance companies. The net after-tax gains from these
transactions were $997,000 in the second quarter and $501,000 in the third
quarter of fiscal 2002.
ENVIRONMENTAL
The Company's management has determined that a material loss resulting
from environmental matters is not reasonably possible.
DIVIDENDS
Cash dividends declared in fiscal year 2003 were $0.92 per share, $0.04
more than that declared in fiscal 2002 and $0.58 less than that declared in
fiscal 2001. The Company declared a 5 for 4 stock split on February 14, 2003,
payable as a stock dividend April 1, 2003. The dividend per share amounts have
been adjusted to retroactively give effect to the stock split. The Board of
Directors, in August 2003, declared a $0.10 per share quarterly dividend, and an
extra dividend of $0.30 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities approximated $11.1 million in
fiscal 2003. This compares to $11.7 million in 2002 and $6.8 million in 2001.
Capital expenditures for fiscal 2003 were $5.7 million, primarily
related to the purchase of equipment and expansion of facilities in order to
improve production efficiencies and enable the Company to meet increased future
demand for its products. Capital expenditures in fiscal years 2002 and 2001 were
$7.5 million and $12.4 million, respectively. Expenditures for additional
equipment during fiscal 2004 are presently expected to approximate $6.0 million,
of which $2.9 million had been committed as of June 30, 2003. 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 $5.1 million in fiscal 2003.
This compares to $4.1 million used in financing activities in fiscal 2002 and
$4.1 million provided by financing activities in 2001. Fluctuations in these
activities have been influenced principally by borrowings and repayments under
the Company's Revolving Credit and Term Loan Agreement.
On October 7, 2002, the Company extended its Revolving Credit and Term
Loan Agreement by one year. The expiration date for this agreement is now
October 31, 2005, and is renewable annually for an additional year. Borrowings
up to $25 million and capital expenditures of $16 million annually are permitted
under the agreement. The Company 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, 2007. Therefore, borrowings under the Revolving Credit and
Term Loan Agreement, which were $5,680,000 at June 30, 2003, and $6,340,000 at
June 30, 2002, are classified as long-term debt.
8
Working capital at June 30, 2003, amounted to $18,904,000 as compared
to working capital of $20,410,000 at June 30, 2002. The decrease resulted
primarily from a decrease in inventories. Inventories were reduced to reflect
lower demand from our automotive customers and also to reflect the elimination
of strike banks required earlier but no longer necessary with the signing of a
new four year contract with the employees of our Romulus Division effective
February 1, 2003.
Statement of Financial Accounting Standards (SFAS) No. 87 requires
recognition of a minimum liability for those pension plans with accumulated
benefit obligations in excess of the fair values of plan assets at the Company's
measurement date of March 31, 2003. Accordingly, in the fourth quarter of fiscal
2003, the Company recorded a non-cash charge of $5,080,000, after-tax, related
to the additional minimum liability for certain underfunded pension plans which
increased Accumulated Other Comprehensive Loss in Shareholders' Equity. Pension
funding requirements are not affected by the recording of this charge. Further,
the charge did not impact net income, and will reverse should the fair value of
the pension plans' assets again exceed the accumulated benefit obligations at
March 31, 2004. In an effort to increase the plan assets of the qualified
pension plans, the Company contributed $2,850,000 to the plans' funding in the
fourth quarter of fiscal 2003.
As discussed in Note 6 to the financial statements, effective July 1,
1993, the Company adopted SFAS No. 106. As permitted by the Statement, the
Company is amortizing the present value of future health care and life insurance
benefits related to employees' past service ($17,967,000 at July 1, 1993) over a
period of 20 years. The implementation of this accounting pronouncement has no
impact on the Company's cash flows.
MARKET RISK
The Company's long-term debt is all at current interest rates and,
therefore, approximates fair value but is subject to changes in interest rates.
IMPACT OF INFLATION AND CHANGING PRICES
The Company passes increased costs on to customers, to the extent
permitted by competition, by increasing sales prices whenever possible. In
fiscal 2003, 2002 and 2001 the Company 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 Company'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 Company 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 are no longer amortized but are subject
to annual impairment tests in accordance with the Statements. Other intangible
assets continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. As the Company
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 Company.
9
INVESTMENTS AND MARKETABLE SECURITIES
The Company accounts for certain of its investments under SFAS No. 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 Company 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 Federal Screw Works. As a result, for the years ended June 30, 2003 and
2002, Federal Screw Works recorded a loss of $88,000 and $249,000, respectively,
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 Company recognizes revenue from product sales when goods are
shipped and title has transferred to the customer. For one of its customers,
product is shipped to the customer's warehouse and title transfers and revenue
is recognized when this customer consumes the goods from its warehouse and
notifies us. The annual revenue from this customer represents 1.3% of total
sales. An estimated reserve is recorded for anticipated returns and credit memos
which will be issued on sales recognized to date. The Company has several
product lines, but only one reportable segment. Providing revenues from each
product line or each group of product lines is impracticable. 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 Company 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, 2003 and 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; $785,000 and $967,000 at June 30, 2003 and 2002, 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 $499,000 and $497,000 in fiscal 2003 and
2002, respectively.
WORKERS' COMPENSATION RESERVE
The Company 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 Company's experience under this
program. At June 30, 2003 and 2002, the Company accrued approximately $809,000
and $1,097,000, respectively, included in Payroll and Employee Benefits. Workers
compensation expense was $140,000 in fiscal 2003. This compares to $387,000 in
2002 and $277,000 in 2001. The expense will vary year to year, depending on the
number and severity of injuries incurred.
10
FORWARD LOOKING STATEMENTS
Certain information in this Annual Report on Form 10-K contains
"forward looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934, both as amended, including with respect
to expectations for future periods, which are subject to various uncertainties
which could cause actual results to differ materially from those in the forward
looking statements, including, but not limited to, increased competition; the
loss of, or reduction in business with, the Company's principal customers; the
impact of additional costs of increased quality standards, price reductions or
additional capabilities required by the Company's principal customers; work
stoppages, strikes, slowdowns at the Company's facilities and those of its
customers; changes in, or cancellation of, orders received for future model
years; and adverse changes in economic conditions generally and those in the
automotive industry, specifically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's long-term debt is all at current interest rates and, therefore,
approximates fair value, but is subject to changes in interest rates.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENTS OF INCOME
FEDERAL SCREW WORKS
Year Ended June 30,
-------------------
2003 2002 2001
---- ---- ----
Net Sales $ 95,378,392 $ 95,496,398 $ 105,911,792
Costs and expenses:
Cost of products sold 84,554,748 84,834,236 93,277,594
Selling, general and administrative 5,817,075 5,970,997 5,981,751
Interest 210,821 235,885 49,386
Other income (109,129) (2,116,115) (269,925)
------------- ------------- -------------
90,473,515 88,925,003 99,038,806
------------- ------------- -------------
EARNINGS BEFORE FEDERAL INCOME TAXES 4,904,877 6,571,395 6,872,986
Federal income taxes - Note 5:
Current 854,313 2,210,236 2,450,871
Deferred (credit) 747,687 (144,236) (220,809)
------------- ------------- -------------
1,602,000 2,066,000 2,230,062
------------- ------------- -------------
NET EARNINGS $ 3,302,877 $ 4,505,395 $ 4,642,924
============= ============= =============
Average number of shares outstanding -- after
adjustments for the five for four stock split 1,487,942 1,558,479 1,594,109
============= ============= =============
Net earnings per share -- after adjustments
for the five for four stock split $ 2.22 $ 2.89 $ 2.91
============= ============= =============
The average shares outstanding and all per share amounts have been adjusted
retroactively for the February 14, 2003 5 for 4 stock split.
See accompanying notes.
12
BALANCE SHEETS
FEDERAL SCREW WORKS
JUNE 30
2003 2002
---- ----
ASSETS
CURRENT ASSETS
Cash $ 415,797 $ 198,540
Accounts receivable 14,095,869 14,969,850
Inventories -- Note 1:
Finished products 6,619,098 9,266,454
In-process products 6,777,341 6,753,775
Raw materials and supplies 1,175,460 1,506,574
------------- -------------
Total inventories 14,571,899 17,526,803
Prepaid expenses and other 566,626 434,000
Deferred income taxes - Note 5 858,727 815,516
------------- -------------
TOTAL CURRENT ASSETS 30,508,918 33,944,709
OTHER ASSETS
Intangible asset -- Note 6 1,701,520 96,145
Cash value of life insurance 5,824,908 5,696,083
Prepaid pension costs 831,827 7,209,849
Miscellaneous 3,700,189 3,004,809
------------- -------------
12,058,444 16,006,886
PROPERTY, PLANT AND EQUIPMENT -- NOTES 3 AND 4
Land 552,150 552,150
Buildings and improvements 14,183,780 14,166,282
Machinery and equipment 107,333,492 102,007,086
------------- -------------
122,069,422 116,725,518
Less accumulated depreciation (70,175,675) (63,996,888)
------------- -------------
51,893,747 52,728,630
------------- -------------
$ 94,461,109 $ 102,680,225
============= =============
13
BALANCE SHEETS (CONTINUED)
FEDERAL SCREW WORKS
JUNE 30
2003 2002
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,317,841 $ 5,287,381
Payroll and employee benefits 5,447,283 5,770,297
Dividend payable 145,547 123,425
Federal income taxes - 479,183
Taxes, other than income taxes 1,599,726 1,804,132
Other accrued liabilities 94,455 70,141
------------- -------------
TOTAL CURRENT LIABILITIES 11,604,852 13,534,559
LONG-TERM LIABILITIES
Long-term debt -- Note 3 5,680,000 6,340,000
Deferred employee compensation -- Note 6 3,208,393 2,807,885
Deferred income taxes -- Note 5 543,909 1,867,347
Employee benefits 1,035,452 1,100,307
Post-retirement benefits -- Note 6 16,346,603 14,834,328
Other liabilities 927,242 891,375
------------- -------------
27,741,599 27,841,242
STOCKHOLDERS' EQUITY -- Notes 2, 9 and 10
Common stock, $1 par value, authorized 2,000,000 shares,
1,450,465 shares outstanding in 2003 (1,529,065 in
2002, as restated) 1,450,465 1,529,065
Additional capital 3,269,476 3,269,476
Retained earnings 55,515,392 56,607,942
Accumulated other comprehensive loss (5,120,675) (102,059)
------------- -------------
55,114,658 61,304,424
------------- -------------
$ 94,461,109 $ 102,680,225
============= =============
See accompanying notes.
14
STATEMENTS OF STOCKHOLDERS' EQUITY
FEDERAL SCREW WORKS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS TOTAL
--------------------------------------------------------------------------------
BALANCES AT JULY 1, 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 -
$1.50 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 -
$0.88 per share -- as restated (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
Net earnings for the year 3,302,877 3,302,877
Change in unrealized loss on
securities available -- for-sale,
net of taxes 61,615 61,615
Minimum pension liability, net of
$2,502,203 tax effect (5,080,231) (5,080,231)
------------
Total comprehensive loss (1,715,739)
Purchase of 78,600 shares (78,600) (3,003,440) (3,082,040)
Effect of stock split 294,972 (294,972) -
Cash dividends declared -
$0.92 per share -- as restated (1,391,987) (1,391,987)
------------ ------------ ------------ -------------- ------------
BALANCES AT JUNE 30, 2003 $ 1,450,465 $ 3,269,476 $ 55,515,392 $ (5,120,675) $ 55,114,658
============ ============ ============ ============== ============
( ) Denotes deduction.
See accompanying notes.
15
STATEMENTS OF CASH FLOWS
FEDERAL SCREW WORKS
YEAR ENDED JUNE 30,
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net earnings $ 3,302,877 $ 4,505,395 $ 4,642,924
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 6,548,170 5,933,491 5,131,266
Increase in cash value of life insurance (128,825) (130,278) (130,364)
Change in deferred federal income taxes (1,366,649) (142,671) (274,115)
Employee and postretirement benefits 1,447,420 1,569,226 1,643,468
Loss on sale of equipment 8,599 17,797 -
Deferred retirement benefits and other (504,973) 325,509 135,732
Changes in operating assets and liabilities:
Accounts receivable 873,981 (1,144,164) 3,132,566
Inventories, prepaid expenses and other 2,822,278 (211,788) (2,341,591)
Accounts payable and accrued expenses (1,929,708) 977,802 (5,101,130)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,073,170 11,700,319 6,838,756
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,721,886) (7,541,710) (12,404,868)
Proceeds from sale of property, plant and equipment - 4,600 6,229
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (5,721,886) (7,537,110) (12,398,639)
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement (660,000) (395,000) 6,735,000
Principal payments on lease-purchase obligation - - -
Purchases of common stock (3,082,040) (2,264,764) (172,228)
Dividends paid (1,391,987) (1,402,464) (2,446,924)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) (5,134,027) (4,062,228) 4,115,848
FINANCING ACTIVITIES
INCREASE (DECREASE IN CASH) 217,257 100,981 (1,444,035)
Cash at beginning of year 198,540 97,559 1,541,594
------------ ------------ ------------
CASH AT END OF YEAR $ 415,797 $ 198,540 $ 97,559
============ ============ ============
See accompanying notes.
16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, $785,000 and $967,000 at June 30, 2003 and 2002,
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, $499,000 and $497,000
in 2003 and 2002, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost,
which includes the cost of interest which is capitalized during construction of
significant additions. Provisions for depreciation are based upon the estimated
useful lives of the respective assets and are computed by the straight-line
method for financial reporting purposes and by accelerated methods for income
tax purposes.
INVESTMENTS: In accordance with Statement of Financial Accounting Standards No.
115 ("SFAS 115") the Company has classified all investments as "available for
sale" because they are freely tradable. 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.
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 Company recognizes revenue from product sales when
goods are shipped and title has transferred to the customer.
ACCOUNTS RECEIVABLE: Accounts receivable have been reduced by an allowance for
amounts that may become uncollectible in the future. This estimated provision is
based on management's periodic evaluation and other pertinent factors including
the financial condition of the customer.
OTHER INCOME: Included in other income for the year ended June 30, 2002 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, 2003, 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 2003.
NET INCOME PER COMMON SHARE: Net income per common share is based on the
weighted average number of common shares outstanding of 1,487,942 in 2003,
1,558,479 in 2002, as restated, and 1,594,109 in 2001, as restated.
NOTE 2 - MARKETABLE SECURITIES
The Company has invested approximately $3,532,000 and $2,850,000 as of June 30,
2003 and 2002, 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 Sheet. The fair value of
approximately $1,380,000, $1,086,000, and $1,066,000 of the Company's
investments were held in equity securities, debt securities, and short-term
investments, respectively, as of June 30, 2003. Approximately $1,161,000,
$961,000 and $728,000 of the Company's investments were held in equity
securities, debt securities, and short-term investments, respectively, as of
June 30, 2002. Debt securities were scheduled to mature beginning in December
2005 and ending in November 2012.
17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
For the year ended June 30, 2003 and 2002, the Company recorded a current
unrealized gain of $62,000 (net of $32,000 tax effect) and $11,000 (net of
$5,000 tax effect), respectively, from its equity investments, which is
reflected in the shareholders' equity section of the balance sheet in accordance
with SFAS No. 115. The balance of the unrecognized loss at June 30, 2003 and
2002 was $40,000 and $102,000, respectively.
Management continually evaluates whether changes in the value of such
investments should be considered to be other-than-temporary. Since June 30,
2001, there has been a broad decline in the public equity markets, including
investments held by Federal Screw Works. As a result, for the years ended June
30, 2003 and 2002, Federal Screw Works recorded a loss of $88,000 and $249,000,
respectively, 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.
NOTE 3 - DEBT
Long-term debt at June 30 consists of the following:
2003 2002
---- ----
Revolving credit note payable to bank $5,680,000 $6,340,000
Less current maturities 0 0
---------- ----------
$5,680,000 $6,340,000
========== ==========
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified as
long-term debt) to a term note through October 31, 2005, 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, 2007. Interest (2.4375% at June
30, 2003) on outstanding borrowings is determined based on the prime rate, or at
the Company's option, an alternative variable market rate. The Company also pays
a commitment fee of 3/8% on the unused portion of the revolving credit.
The Company is in compliance with covenants of the revolving credit and term
loan agreement including the requirements to meet certain financial ratios.
Interest paid by the Company during fiscal 2003, fiscal 2002 and fiscal 2001
aggregated $245,000, $353,000, and $372,000, respectively. Interest capitalized
into property, plant and equipment in fiscal 2003 and 2002 was $73,000 and
$169,000, respectively.
NOTE 4 - LEASES AND OTHER COMMITMENTS
At June 30, 2003, 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
- ------------------- ------
2004 $ 877,000
2005 609,000
2006 440,000
2007 357,000
2008 289,000
Thereafter 134,000
- ---------- ----------
Total minimum lease payments $2,706,000
==========
Total rent expense was $1,181,000 in fiscal 2003, $1,190,000 in fiscal 2002, and
$1,137,000 in fiscal 2001.
18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
Costs committed to complete the expansion of existing plant facilities and the
purchase of machinery and equipment approximated $2,877,000 at June 30, 2003.
NOTE 5 - 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 2003, 2002,
and 2001) to earnings before federal income taxes follows:
2003 2002 2001
---- ---- ----
Computed amount $ 1,668,000 $ 2,233,000 $ 2,337,000
Life insurance policies (73,000) (78,000) (82,000)
Other 7,000 (89,000) (25,000)
----------- ----------- -----------
Total federal income tax
provision $ 1,602,000 $ 2,066,000 $ 2,230,000
=========== =========== ===========
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 Company's deferred tax liabilities and assets as of June 30, 2003 and 2002
are as follows:
2003 2002
---- ----
Deferred tax liabilities:
Accelerated tax depreciation $ 7,241,000 $ 5,969,000
Other 112,000 32,000
----------- -----------
Total deferred tax liabilities $ 7,353,000 $ 6,001,000
----------- -----------
Deferred tax assets:
Employee benefits 4,766,000 4,729,000
Minimum pension liability 2,502,000 -
Inventory 400,000 220,000
----------- -----------
Total deferred tax assets 7,668,000 4,949,000
----------- -----------
Net deferred tax (assets) liabilities $ (315,000) $ 1,052,000
=========== ===========
Income taxes paid by the Company during 2003, 2002, and 2001 totaled $985,000,
$1,755,000 and $2,585,000, respectively.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company sponsors three defined benefit pension plans covering substantially
all employees. Benefits under two of the plans are based on negotiated rates
times years of service. Under the remaining plan, benefits are based on
compensation during the years immediately preceding retirement and years of
service. It is the Company's policy to make contributions to these plans
sufficient to meet minimum funding requirements of the applicable laws and
regulations, plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate.
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. Substantially all of the
Company's employees may become eligible for those benefits if they reach normal
retirement age while working for the Company. The benefits are provided through
certain insurance companies.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
The Company uses a measurement date of March 31 and June 30 for purposes of
valuing its obligations related to pension benefits and postretirement benefits,
respectively. The following tables set forth the plans' funded status at the
2003 and 2002 measurement dates:
CHANGES IN BENEFIT OBLIGATION ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Benefit obligation at beginning of year $ 26,125,000 $ 25,142,000 $ 21,805,000 $ 21,992,000
Service cost 745,000 749,000 482,000 490,000
Interest cost 1,844,000 1,773,000 1,475,000 1,543,000
Plan amendments 53,000 135,000 (430,000) -
Actuarial gain 2,816,000 (419,000) 4,688,000 (794,000)
Benefits paid (1,757,000) (1,255,000) (1,234,000) (1,426,000)
Curtailments 11,000 - - -
Special termination benefits 16,000 - - -
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 29,853,000 $ 26,125,000 $ 26,786,000 $ 21,805,000
============ ============ ============ ============
CHANGES IN PLAN ASSETS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------------------------ ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Fair value of assets
at beginning of year $ 26,507,000 $ 25,866,000 $ - $ -
Actual return on assets (913,000) 936,000 - -
Employer contribution 1,357,000 960,000 - -
Benefits paid (1,757,000) (1,255,000) - -
------------ ------------ ------------ ------------
Fair value of assets at end of year $ 25,194,000 $ 26,507,000 $ - $ -
============ ============ ============ ============
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
FUNDED STATUS OF THE PLANS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Funded status at end of year
(underfunded) $ (4,659,000) $ 383,000 $(26,786,000) $(21,805,000)
Unrecognized transition (assets)/obligation (119,000) (233,000) 8,554,000 9,882,000
Unrecognized prior service cost 1,471,000 1,841,000 - -
Unrecognized net (gain)/loss 10,340,000 4,692,000 2,040,000 (2,742,000)
Employer contributions paid between
measurement date and fiscal year-end 2,853,000 527,000 - -
------------ ------------ ------------ ------------
Prepaid/(accrued) benefit cost $ 9,886,000 $ 7,210,000 $(16,192,000) $(14,665,000)
============ ============ ============ ============
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Pension asset $ 832,000 $ 7,210,000 - -
Accrued benefit cost - - $(16,192,000) $(14,665,000)
Intangible asset 1,472,000 - - -
Accumulated other comprehensive loss
(net of tax) 5,080,000 -
Deferred income taxes 2,502,000 -
------------ ------------ ------------ ------------
Net amount recognized $ 9,886,000 $ 7,210,000 $(16,192,000) $(14,665,000)
============ ============ ============ ============
The Company recorded an additional minimum pension liability of $9,054,000 as of
June 30, 2003 representing the amount required to bring the Company's recorded
pension liability to equal the excess of the accumulated benefit obligation over
fair value of plan assets for the applicable plans. An intangible pension asset
of $1,472,000 as of June 30, 2003 was recorded to the extent of the plans'
unrecognized prior service cost. The difference between the additional minimum
pension liability and intangible pension asset was included as other
comprehensive loss of $5,080,000 net of income tax benefit of $2,502,000 for the
year ended June 30, 2003.
In accounting for pension plans, the Company used a discount rate of 6.50% in
2003 and 7.25% in 2002, 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. One of the plans also includes 15,156 shares of
Federal Screw Works common stock which had a market value of $550,163 at June
30, 2003.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
The weighted average discount rate used in determining the accumulated post
retirement benefit obligation was 6.0% and 7.25% at June 30, 2003 and 2002,
respectively.
Assumed health care cost inflation is based on an initial rate of 11.0%
decreasing to an ultimate rate of 5.5% in 2013. 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, 2003 and 2002 by
$2,888,000 and $2,302,000, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended June 30, 2003, 2002 and 2001 by $247,000, $256,000, and $271,000,
respectively.
THE COMPONENTS OF NET PERIODIC BENEFIT COST ARE AS FOLLOWS:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------------------------------------- -------------------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Service Cost $ 745,000 $ 749,000 $ 777,000 $ 482,000 $ 490,000 $ 531,000
Interest Cost 1,844,000 1,773,000 1,765,000 1,475,000 1,543,000 1,525,000
Expected return
on assets (2,104,000) (2,043,000) (2,069,000)
Amortization of
transition obligation (114,000) 166,000 166,000 898,000 898,000 898,000
Amortization of prior
service cost 242,000 197,000 197,000
Amortization of
unrecognized net loss 185,000 132,000 80,000 (94,000)
---------- ---------- ---------- ---------- ---------- ----------
Net periodic benefit cost $ 798,000 $ 974,000 $ 916,000 $2,761,000 $2,931,000 $2,954,000
========== ========== ========== ========== ========== ==========
The Company sponsors a supplemental executive retirement plan, which covers
certain executives of the company. The net periodic pension expense for the plan
was $722,000, $807,000, and $771,000 in fiscal 2003, 2002, and 2001,
respectively. The actuarial present value of vested benefit obligations
approximated $3,009,000 at June 30, 2003 and $2,607,000 at June 30, 2002,
respectively. The Company had invested $2,898,000 and $2,329,000 as of June 30,
2003 and 2002, respectively, to cover obligations of the plan.
The Company sponsors a retirement plan for directors who are not employees of
the Company. The net periodic pension expense for the plan was $36,000 in fiscal
2003, $41,000 in fiscal 2002, and $47,000 in fiscal 2001. The actuarial present
value of vested benefit obligations approximated $968,000 at June 30, 2003 and
$932,000 at June 30, 2002. The Company had invested $657,000 and $520,000 as of
June 30, 2003 and 2002, respectively, to cover obligations of the plan.
NOTE 7 - INDUSTRY INFORMATION
Approximately 93% of the Company's net sales in fiscal 2003, 91% in fiscal 2002
and 85% in fiscal 2001 were made either directly or indirectly to automotive
companies.
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
Customers comprising 10% or greater of the Company's net sales are summarized as
follows:
2003 2002 2001
---- ---- ----
Ford Motor Company........................ 34% 35% 37%
TRW Automotive............................ 14% 11% 8%
General Motors Corporation................ 12% 13% 15%
All Others................................ 40% 41% 40%
---- ---- ----
100% 100% 100%
==== ==== ====
Approximately 19% of the Company's sales are to Canadian customers. All sales
terms provide for payment in U.S. dollars.
The Company operates in one reportable segment, and has not disclosed revenues
by product line or groups of similar product lines, as it is impracticable to do
so.
NOTE 8 - LITIGATION
The Company is involved in various legal actions arising in the normal course of
business. Management, after taking into consideration legal counsel's evaluation
of such actions, is of the opinion that their outcome will not have a
significant effect on the Company's financial statements.
NOTE 9 - STOCK DIVIDEND
The Company declared a 5 for 4 stock split on February 14, 2003, payable as a
stock dividend April 1, 2003. All per share amounts have been adjusted to
retroactively give effect to the stock split.
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
2003 2002 2001
---- ---- ----
Net earnings $ 3,302,877 $ 4,505,395 $ 4,642,924
Unrealized gains (losses) on securities
available-for-sale, net of taxes 61,615 10,555 (104,136)
Minimum pension liability, net of taxes (5,080,231) - -
------------ ------------ ------------
Total comprehensive income (loss) $ (1,715,739) $ 4,515,950 $ 4,538,788
============ ============ ============
The components of accumulated comprehensive loss are as follows:
2003 2002
---- ----
Unrealized loss on securities available-
for-sale, net of taxes $ 40,444 $ 102,059
Minimum pension liability, net of taxes 5,080,231 -
------------ ------------
Total comprehensive loss $ 5,120,675 $ 102,059
============ ============
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
NOTE 11 -- QUARTERLY OPERATING RESULTS (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
1ST 2ND 3RD 4TH FOR THE
QUARTER QUARTER QUARTER QUARTER YEAR
--------------------------------------------------------------
2003
Net sales $23,180 $22,990 $25,146 $24,062 $95,378
Gross profit 2,362 1,800 3,147 3,514 10,823
Net earnings 461 122 908 1,812 3,303
Net earnings per share 0.31 0.08 0.61 1.22 2.22
Cash dividends per share 0.64 0.08 0.10 0.10 0.92
2002
Net sales $21,518 $22,243 $24,910 $26,825 $95,496
Gross profit 1,421 1,027 3,653 4,561 10,662
Net earnings 37 442 1,621 2,405 4,505
Net earnings per share 0.02 0.29 1.04 1.54 2.89
Cash dividends per share 0.64 0.08 0.08 0.08 0.88
Net earnings for the fourth quarter of 2003 and 2002 were favorably affected by
year end adjustments, principally inventory ($360,766, net of tax, or $0.24 per
share and $720,969, net of tax, or $0.46 per share, respectively).
All per share amounts have been adjusted retroactively for the February 14,
2003, five for four stock split.
24
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, 2003 and 2002, and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 15(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,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2003, 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 6, 2003
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-5 of the Securities Exchange Act of 1934. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that, as
of June 30, 2003, the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company required
to be disclosed in the Company's periodic SEC reports. There have been no
significant changes in the Company's internal controls or in other factors which
could significantly affect internal controls subsequent to the date the company
carried out its evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 Company Proxy Statement dated September 23, 2003 and is
incorporated herein by reference. Information contained in Part I, Item 4A of
this document under the caption "Executive officers of the Company" is also
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the captions "Director's Remuneration
and Committees of the Board" and "Officer Compensation Policy" in the Company's
Proxy Statement dated September 23, 2003 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
Company's Proxy Statement dated September 23, 2003 and is incorporated herein by
reference.
The Company does not have any compensation plans under which equity
securities of the Company are authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement dated September 23, 2003
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Inapplicable.
26
PART IV
ITEM 15. 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
Company 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,
2003, 2002 and 2001
- Statements of Cash Flows for the years ended June 30,
2003, 2002, and 2001
- Balance Sheets as of June 30, 2003 and 2002
- Statements of Stockholders' Equity for the years
ended June 30, 2003, 2002 and 2001
NOTES TO FINANCIAL STATEMENTS
(2) Financial Statement Schedules. The following financial statement
schedule is filed with this report, and appears on page 29.
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 attached to this report. The Exhibit Index
is incorporated herein by reference.
(b) On April 30, 2003, the Company furnished information regarding its financial
results for the quarter ending March 31, 2003 under Items 7 and 9 of Form 8-K,
as required pursuant to Item 12.
27
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, 2003 $ 50,000 $ 29,000 $ 29,000(A) $ 50,000
Year ended June 30, 2002 50,000 - 50,000
Year ended June 30, 2001 50,000 - 50,000
Valuation allowance for
inventories:
Year ended June 30, 2003 $ 260,000 $ 130,000 $ 90,000(B) $ 300,000
Year ended June 30, 2002 325,000 85,000 150,000(B) 260,000
Year ended June 30, 2001 180,000 239,000 94,000(B) 325,000
(A) Uncollectible accounts receivable charged off; corresponding reduction of
allowance.
(B) Unsalable inventories charged off; corresponding reduction of allowance.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amendment No.2 to be
signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL SCREW WORKS
(Company)
By: /s/ W. T. ZurSchmiede, Jr.
-------------------------------------
W. T. ZurSchmiede, Jr.
Chairman, Chief Financial Officer
and Secretary
Date: April 14,2004
29
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated by reference. Each
management contract or compensatory plan or arrangement filed as an exhibit to
this report is identified below with a "+" symbol after the exhibit number. The
Company's SEC file number is 000-01837.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Company's Articles of Incorporation, were filed as an exhibit
to the Company's 1994 Form 10-K, and are incorporated herein
by reference.
3.2 Company's By-Laws, as amended on August 29, 2002 were filed as
an exhibit to the Company's 2002 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 Company's 1993 Form 10-K and is
incorporated herein by reference. All waivers, amendments and
modifications thereto, were filed as exhibits to the Company'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 the
Company and Comerica Bank, dated October 24, 1995, filed as an
exhibit to the Company's Form 10-Q for the period ended
September 30, 1995, and incorporated herein by reference.
4.3 One year extension of Revolving Credit and Term Loan Agreement
by and between the Company and Comerica Bank, dated October 7,
2002, filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 2002, and incorporated herein by
reference.
10.1+ Supplemental retirement agreement between the Company and W.
T. ZurSchmiede, Jr., present Chairman of the Company, dated
April 1, 1986 was filed as an exhibit to Company's 1993 Form
10-K and is incorporated by reference.
10.2+ Supplemental retirement agreement between the Company and Hugh
G. Harness, a director and past President of the Company,
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 Company dated January 7, 1994, was
filed as an exhibit to Company'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 Company dated January 7, 1994, as
amended on October 25, 2001, was filed as an exhibit to the
Company's 2002 Form 10-K, and is incorporated herein by
reference.
10.4+ Indemnity agreement effective September 24, 1986, which exists
between the Company and each director, was filed as an exhibit
to Company's 1992 Form 10-K, and is incorporated herein by
reference.
10.5 Lease agreement between the Company 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 Company'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 Company's 1995 Form 10-K and
incorporated herein by reference.
30
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed
as an exhibit to the Company's 1998 Form 10-K and incorporated
herein by reference.
31.1 Certification of the Chief Executive Officer of Company, dated
April 14, 2004, relating to the Company's 2003 Form 10-K,
filed herewith.
31.2 Certification of the Chief Financial Officer of Company, dated
April 14, 2004, relating to the Company's 2003 Form 10-K,
filed herewith.
32.1 Certification of Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
31