1 EXHIBIT 13.1 1999 STRATTEC ANNUAL REPORT COMPANY DESCRIPTION BASIC BUSINESS STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related security products for major automotive manufacturers. Our products are shipped to customer locations in the [LOGO] United States, Canada, Mexico, Europe and South America, and we provide full service and aftermarket support. We also supply products for the heavy truck, recreational vehicle, marine and industrial markets, as well as precision die castings for the transportation, security and recreational products industries. HISTORY STRATTEC formerly was a division of Briggs & Stratton Corporation. On February 27, 1995, STRATTEC was spun-off from Briggs & Stratton through a tax-free distribution to the then existing Briggs shareholders. STRATTEC received substantially all of the assets related to the lock and key business owned by Briggs & Stratton. Starting as a division of Briggs & Stratton, and continuing today as a totally separate and independent company, we have a history in the automotive lock manufacturing business spanning more than 80 years. We have also been in the zinc die casting business for approximately 70 years. STRATTEC has been the world's largest producer of automotive locks [PHOTO] and keys since the late 1920s, and we currently maintain a dominant share of the North American markets for these products. PRODUCTS Our principal products are locks and keys for cars and trucks. A typical automobile contains a set of five locks: a steering column/ignition lock, a glove box lock, two front door locks [PHOTO] and a deck lid (trunk) lock. Pickup trucks typically use three to four locks, while sport utility vehicles and vans use five to seven locks. Some vehicles have additional locks for under-floor compartments or folding rear seat latches. T-top locks, spare tire locks, burglar alarm 4 2 1999 STRATTEC ANNUAL REPORT locks and door locks with illuminated faces are also offered as options. Usually two keys are provided with each vehicle lockset. [PHOTO] STRATTEC produces locks with simple electrical switch devices and more sophisticated devices, such as resistive elements, radio frequency identification (RFID) elements and Hall Effect sensors. The primary focus of these added electronics is increased security and reliability. Electronics will play an important and ever-increasing role in the [PHOTO] future of our security-related products. MARKETS We are a direct supplier of OEM auto and light truck manufacturers, over-the-road heavy truck manufacturers and recreational vehicle manufacturers, as well as other transportation-related manufacturers. For the 1999 model year, we enjoyed a 66.4% market share in the North American automotive industry, supplying locks and keys for approximately 90% of General Motor's production, 65% of Ford's, and 99% of DaimlerChrysler's production. We also are an OEM components supplier to a wide array of smaller industrial manufacturers. Direct sales to various OEMs represent approximately 82% of our total sales. The remainder of the company's revenue is received [PHOTO] primarily through sales to the OEM service channels, and the locksmith aftermarket. Sales to General Motors, Ford and DaimlerChrysler are coordinated through our direct sales personnel located in our Detroit-area office. Sales are also partially facilitated through daily interaction between our application engineers located in Detroit and customer engineering departments. Sales to other OEM customers are accomplished through a combination of our own sales personnel and manufacturer representative agencies. STRATTEC's products are supported by an extensive staff of experienced lock engineers. This staff, which includes product design, quality and manufacturing engineers, is capable of providing complete 5 3 1999 STRATTEC ANNUAL REPORT COMPANY DESCRIPTION design, development and testing services of new products for our customers. This staff is also available for customer problem solving, warranty analysis and other activities [PHOTO] that arise during a product's life cycle. Our customers receive after-sales support in the form of special field service kits, service manuals, and specific in-plant production repair programs. The majority of our OEM products are sold in North America. However, our dominance in the North American market translates into a world market share of around 21%, making STRATTEC the largest producer of automotive locks and keys in the world. While a modest amount of exporting is done to automotive assembly plants in Europe and South America, we are in the process of expanding our presence in these markets through collaborative agreements with lock manufacturers in those regions. [PHOTO] OEM service and replacement parts are sold to the OEM's own service operations. In addition, we distribute our components and security products to the automotive aftermarket through approximately 75 authorized wholesale distributors, as well as other marketers and users of component parts, including export customers. These aftermarket activities are serviced through a new warehousing operation integral to our Milwaukee headquarters and manufacturing facility. CUSTOMER FOCUS Since the majority of the company's sales are to the "Big Three" North American automotive manufacturers, STRATTEC is organized to assure that our activities are focused on these major customers and their associated entities. We have customer-focused teams for General Motors/Delphi, for Ford, and for Daimler Chrysler/Mitsubishi. A fourth team handles our industrial and service customers, including such heavy truck manufacturers as Peterbilt, Kenworth, Mack, Freightliner, Navistar, and GM Volvo. Each of the four teams possesses all of the necessary disciplines required to meet their customers' 6 4 1999 STRATTEC ANNUAL REPORT [PHOTO] needs. Leading each team's efforts are Product Business Managers who handle the overall coordination of various product programs. The Product Business Managers work closely with their team's quality engineers, cost engineers, purchasing agents, internal and external customer service representatives, [GRAPHIC] service manager, and engineering manager. The engineering manager in turn helps coordinate the efforts of design engineers, product and process engineers, component engineers, and electrical engineers. STRATTEC uses a formalized product development process to identify and meet customer needs in the shortest possible time. By creating and following this streamlined development system, we shorten product lead times, tighten our response to market changes, and provide our customers with the optimum value solution to their security requirements. STRATTEC is also QS-9000/ISO 9001 certified. This means we embrace the philosophy that quality should exist not only in the finished product, but in every step of our process as well. OPERATIONS The majority of the components that go into our lock products are manufactured at our main facility and headquarters in Milwaukee, Wisconsin. This facility also makes zinc die cast components for other manufacturers. Lock [PHOTO] assembly is performed at the Milwaukee location and at our primary assembly facility, located in Juarez, Mexico. ADVANCED DEVELOPMENT Research and development activities are centered around a dedicated research engineering staff we call [PHOTO] our Advanced Development Group. 7 5 1999 STRATTEC ANNUAL REPORT COMPANY DESCRIPTION This Group has the responsibility for developing future products and processes that will keep us in the forefront of the markets we serve. Among other things, we are pursuing mechanical as well as electronic products to [PHOTO] increase security, modularization of related components, and new manufacturing processes to reduce costs for ourselves and our customers. CYCLICAL NATURE OF THE BUSINESS The manufacturing of components used in automobiles is driven by the normal peaks and valleys associated with the automotive industry. Typically, the months of July and August are relatively slow while summer vacation shut-downs and model year changeover occur at the automotive assembly plants. September volumes increase rapidly as the new model year begins. This volume strength continues through October and into early November. As the holiday and winter seasons approach, the demand for automobiles slows. March usually brings a major sales and production increase, which then continues through most of June. This results in our first fiscal quarter (ending in September) sales and operating results typically being our weakest, with the remaining quarters being more consistent. ECONOMIC VALUE COMMITMENT The underlying philosophy of our business, and the means by which we measure our performance, is Economic Value Added (EVA(R)). Simply stated, economic value is created when our business enterprise yields a return greater than the cost of capital we and our shareholders have invested in STRATTEC. The amount by which our return exceeds the cost of our capital is EVA(R). In line with this philosophy, EVA(R) bonus plans are in effect for our associates and our outside directors as an incentive to help positively drive the business. STRATTEC's significant market share is the result of an eight-decade-long commitment to creating quality products and systems that are responsive to changing needs. As technologies advance and markets grow, STRATTEC retains that commitment to meeting and exceeding the expectations of our customers, and providing economic value to our shareholders. 8 6 1999 STRATTEC ANNUAL REPORT VEHICLE LIST 2000 VEHICLES We're proud of the quality vehicles that use STRATTEC components. They include over-the-road trucks like Peterbilt, Kenworth, Mack, Freightliner, Navistar and GM Volvo. Recreational vehicles like Winnebago, Coachmen, Jayco and Fleetwood. And the following model year 2000 cars and light trucks: [PHOTO] CARS Buick Century Chrysler LHS Mitsubishi Galant Buick Regal Chrysler Sebring Convertible Oldsmobile Alero Cadillac Eldorado Dodge Intrepid Oldsmobile Intrigue Chevrolet Camaro Dodge Neon Plymouth Breeze Chevrolet Cavalier Dodge Stratus Plymouth Neon Chevrolet Corvette Dodge Viper Plymouth Prowler Chevrolet Impala Ford Taurus Pontiac Firebird Chevrolet Lumina General Motors EV1 Pontiac Grand Am Chevrolet Malibu Jaguar S-Type Pontiac Grand Prix Chevrolet Monte Carlo Lincoln Continental Pontiac Sunfire Chrysler Cirrus Lincoln LS Saturn LS Chrysler Concorde Mercury Sable Chrysler 300M Mitsubishi Eclipse LIGHT TRUCKS, VANS AND SPORT UTILITY VEHICLES Cadillac Escalade Dodge Ram Van/Wagon Isuzu Hombre Pickup Chevrolet Astro Ford Excursion Jeep Cherokee Chevrolet Blazer Ford Expedition Jeep Grand Cherokee Chevrolet Silverado Pickup Ford Explorer Jeep Wrangler Chevrolet Express Ford F-Series Pickup Lincoln Navigator Chevrolet S-10 Pickup Ford Ranger Pickup Mazda B-Series Pickup Chevrolet Suburban GMC Envoy Mercury Mountaineer Chevrolet Tahoe GMC Denali Mercury Villager Chevrolet Venture GMC Jimmy Nissan Quest Chrysler Town & Country GMC Safari Oldsmobile Bravada Dodge Caravan/Grand Caravan GMC Savana Oldsmobile Silhouette Dodge Dakota Pickup GMC Sierra Pickup Plymouth Voyager/ Dodge Durango GMC Sonoma Pickup Grand Voyager Dodge Ramcharger GMC Yukon Pontiac Montana Dodge Ram Pickup GMC Yukon XL 9 7 1999 STRATTEC ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS The following Discussion and Analysis should be read in conjunction with the Company's Financial Statements and Notes thereto. Unless otherwise indicated, all references to years refer to fiscal years. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Net sales were $202.6 million in 1999, an increase of 8 percent compared to net sales of $186.8 million in 1998. Sales to DaimlerChrysler Corporation increased $5.0 million or 19 percent. Sales to the Ford Motor Company increased $6.1 million or 13 percent. Sales to these customers increased primarily due to increased unit production by these customers and a more favorable product mix. Sales to General Motors Corporation were relatively consistent with the prior year levels. Labor disruptions at General Motors Corporation reduced sales to this customer by an estimated $3 million during both fiscal 1999 (first quarter) and 1998 (fourth quarter). General Motors Corporation completed its spin-off of Delphi Automotive Systems in May 1999. Sales to Delphi Automotive Systems totaled $2.8 million in the month of June 1999 and were previously reported as sales to General Motors Corporation. The Company also began production volume shipments totaling approximately $2.2 million to Mitsubishi Motor Manufacturing of America early in the current fiscal year in support of the launch of the 1999 Gallant. This is the Company's initial program with Mitsubishi. Gross profit as a percentage of net sales was 23.1 percent in 1999 compared to 21.4 percent in 1998. Several factors contributed to the improvement in gross profit margins, including increased production volumes resulting in more favorable absorption of fixed overhead costs and a favorable mix of higher margin products. The prior year included a charge of $750,000 related to cash payments to the Company's represented employees upon ratification of a new collective bargaining agreement. Additional improvement in gross profit margins resulted from the cost of zinc, which the Company uses at a rate of approximately 1 million pounds per month, being substantially lower in the current year as compared to the prior year. The average price per pound was approximately $.52 in fiscal 1999 compared to approximately $.68 in fiscal 1998. Also contributing to the improved gross profit margin was the devaluation of the Mexican peso during the first quarter of the current fiscal year which resulted in lower U.S. dollar costs for the Mexican assembly operation. The rate of inflation in Mexico during the 12 months ended September 1998 was approximately 14 percent. However, the average U.S. dollar/Mexican peso exchange rate increased to approximately 9.50 in the first quarter of the current fiscal year from approximately 7.85 in the first quarter of the prior year. Engineering, selling and administrative expenses were $20.2 million, or 10.0 percent of net sales in 1999, compared to $18.9 million, or 10.1 percent of net sales in 1998. The increase was primarily related to the addition of associates to support current and future programs and the related recruiting and relocation costs. Income from operations was $26.6 million in 1999, compared to $21.0 million in 1998, reflecting the increased sales volume and improved gross margin as previously discussed above. The effective income tax rate in fiscal 1999 was 38.1 percent compared to 37.0 percent in fiscal 1998. The increase is due to an increase in the federal statutory tax rate resulting from higher net income levels as well as an increase in the state effective tax rate. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Net sales were $186.8 million in 1998, an increase of 17 percent compared to net sales of $159.1 million in 1997. The sales increase is primarily due to increased sales to all three of the Company's largest customers in the current year compared to prior year levels, with General Motors Corporation increasing $16.4 million or 23 percent, DaimlerChrysler Corporation increasing $5.0 million or 24 percent, and Ford Motor Company increasing $2.5 million or 6 percent. Sales growth was primarily due to higher value mechanical and electro-mechanical content. Increased sales to DaimlerChrysler Corporation also reflect that company's higher vehicle production schedule in the last six months of fiscal 1998 compared to the prior year period. Labor disruptions at General Motors Corporation operations reduced sales to this customer by an estimated $3 million during the current year fourth quarter and by an estimated $2 million during the second quarter of fiscal 1997. Gross profit as a percentage of net sales was 21.4 percent in 1998 compared to 20.9 percent in 1997. Gross profit margins improved compared to the prior year due to 10 8 1999 STRATTEC ANNUAL REPORT decreased scrap and premium freight costs. The gross profit margin was negatively impacted by a $750,000 charge during the current year as a result of cash payments to the Company's represented employees upon ratification of a new collective bargaining agreement. During the first six months of 1998, the cost of zinc, which the Company uses at a rate of approximately 1 million to 1.2 million pounds per month, remained significantly above prior year levels, increasing to an average of approximately $.74 per pound in the six months ended December 28, 1997, from an average of $.53 per pound in the six months ended December 29, 1996, resulting in a negative impact on gross profit margins. The cost of zinc declined in the second quarter of fiscal 1998 after increasing dramatically over the previous 12 months. Gross profit margins were also negatively impacted as inflationary cost pressures in Mexico over the past 30 months have resulted in higher U.S. dollar costs. The rate of inflation in Mexico during the six months ended June 28, 1998, and during calendar 1997 and 1996 was approximately 8, 16 and 28 percent, respectively. The U.S. dollar/Mexican peso exchange rate remained relatively stable during this period with devaluation during the period September 1997 through June 1998. The exchange rate ranged from approximately 7.40 to 7.90 pesos to the dollar during the period January 1996 through September 1997, and from approximately 7.80 to 9.00 pesos to the dollar during the period October 1997 through June 28, 1998. Engineering, selling and administrative expenses were $18.9 million, or 10.1 percent of net sales in 1998, compared to $17.7 million, or 11.1 percent of net sales in 1997. Engineering expenses increased approximately $700,000 primarily in support of new programs. Selling and marketing expenses increased approximately $200,000 primarily due to increased costs for commissions and promotional items. Administrative expenses increased approximately $300,000, primarily due to increased costs to recruit salaried employees. Income from operations was $21.0 million in 1998, compared to $15.6 million in 1997, reflecting the increased sales volume and improved gross margin as previously discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company generated cash from operating activities of $27.5 million in 1999 compared to $26.0 million in 1998. The increased generation of cash is due to several factors, including increased sales and operating profit levels as previously discussed and increases in accounts payable and accrued liabilities in support of increased production activities. In addition, the Company's investment in accounts receivable increased by approximately $10.8 million at June 27, 1999, as compared to June 28, 1998, primarily due to an increase in outstanding billings for customer tooling and higher sales levels in the current quarter as compared to the fourth quarter of fiscal 1998. During June 1998, labor disruptions at General Motors Corporation reduced sales by approximately $3 million. Inventories decreased by approximately $1.2 million at June 27, 1999, as compared to June 28, 1998, due to decreased sales during June 1998 resulting from the labor disruptions at General Motors Corporation. Capital expenditures in 1999 were $8.8 million, compared to $7.5 million in 1998. Expenditures were primarily in support of requirements for new product programs and the upgrade and replacement of equipment. The Company anticipates that capital expenditures will be approximately $9 million to $10 million in fiscal 2000, primarily in support of requirements for new product programs and the upgrade and replacement of equipment. The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 889,395 outstanding shares. A total of 383,000 shares have been repurchased as of June 27,1999, at a cost of approximately $9.2 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations and borrowings under existing credit facilities. The Company has a $25.0 million unsecured, revolving credit facility (the "Credit Facility"). There were no outstanding borrowings under the Credit Facility at June 27, 1999. Interest on borrowings under the Credit Facility are at varying rates based, at the Company's option, on the London Interbank offering rate, the Federal Funds Rate, or the bank's prime rate. The Credit Facility contains various restrictive covenants including covenants that require the Company to maintain minimum levels for certain financial ratios such as tangible net worth, ratio of indebtedness to tangible net worth and fixed charge coverage. The Company believes that the Credit Facility will be adequate, along with cash flow from operations, to meet its anticipated capital expenditure, working capital and operating expenditure requirements. The Company has not been significantly impacted by inflationary pressures over the 11 9 1999 STRATTEC ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS last several years, except for zinc and Mexican assembly operations as noted elsewhere in this Management's Discussion and Analysis. OTHER The Company's Year 2000 readiness project has been ongoing since late 1997. The project addresses operating systems, the manufacturing operations, customers and suppliers. As of June 27, 1999, the Company's operating systems have been fully updated to Year 2000 compliant versions. The Year 2000 compliant versions are currently in use throughout the Company. Tests have been performed in which transaction dates were set forward past January 1, 2000. These test transactions were accurately processed. The Company plans to continue testing and retesting throughout the remainder of the calendar year. Verification that all equipment used in the manufacturing operations is Year 2000 compliant has been completed. A Year 2000 readiness questionnaire has been distributed to all suppliers and a risk analysis has been prepared for each supplier based on the completed questionnaires. On-site assessments have been and continue to be performed for all high risk suppliers. Based on the results on on-site assessments, alternate sources will be identified as necessary. The Company is instituting contingency planning. The Company will limit employee vacations during late 1999 and early 2000, and the information systems department will be staffed over the millennium weekend. A chain of command is being established to respond to unforeseen events and to ensure that personnel will be available to handle issues that may arise. Despite the Company's efforts, there is no guarantee or assurance that all Year 2000 problems will be uncovered. The Company is participating in a program coordinated by the Automotive Industries Action Group ("AIAG"), a group sponsored and supported by General Motors Corporation, DaimlerChrysler Corporation and the Ford Motor Company. Based upon the guidelines of a Year 2000 Readiness Self-Assessment, developed by the AIAG, the Company is classified as a low risk supplier in relation to Year 2000 compliance. The Company implemented a new business information system in February 1997. No significant modifications to the software to be compliant with the requirements to process transactions in the Year 2000 were required. Therefore, the Company's cost to become Year 2000 compliant was not material to its financial condition or results of operations. MEXICAN OPERATIONS The Company has assembly operations in Juarez, Mexico. Since December 28, 1998, and prior to December 30, 1996, the functional currency of the Mexican operation has been the Mexican peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company's net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency Translation." During the period December 30, 1996, to December 27, 1998, the functional currency of the Mexican operation was the U.S. dollar, as Mexico was then considered to be a highly inflationary economy in accordance with SFAS No. 52. The effect of currency fluctuations in the remeasurement process was included in the determination of income. The effect of the December 28, 1998 functional currency change was not material to the financial results of the company. PROSPECTIVE INFORMATION A number of the matters and subject areas discussed in this Annual Report that are not historical or current facts deal with potential future circumstances and developments. These include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company's expectations and beliefs, and similar matters discussed in the Company's Management's Discussion and Analysis and Letter to Our Shareholders. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience. The Company's business, operations and financial performance are subject to certain risks and uncertainties which could result in material differences in actual results from the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular, relating to the automotive industry, consumer demand for the Company's and its customers products, competitive and technological developments, foreign currency fluctuations, Year 2000 compliance issues and costs of operations. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Annual Report and the Company undertakes no obligation to publically update such forward-looking statements to reflect subsequent events or circumstances. 12 10 1999 STRATTEC ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) Years Ended --------------------------------------------------------------- June 27, 1999 June 28, 1998 June 29, 1997 --------------- ------------- -------------- NET SALES $ 202,625 $ 186,805 $ 159,054 Cost of goods sold 155,821 146,865 125,735 --------- --------- --------- GROSS PROFIT 46,804 39,940 33,319 Engineering, selling, and administrative expenses 20,191 18,925 17,684 --------- --------- --------- INCOME FROM OPERATIONS 26,613 21,015 15,635 Interest income 1,132 351 4 Interest expense - (19) (214) Other income (expense), net (239) 73 125 --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES 27,506 21,420 15,550 Provision for income taxes 10,491 7,931 5,730 --------- --------- --------- NET INCOME $ 17,015 $ 13,489 $ 9,820 ========= ========= ========= EARNINGS PER SHARE: BASIC $ 3.02 $ 2.36 $ 1.72 ========= ========= ========= DILUTED $ 2.94 $ 2.30 $ 1.70 ========= ========= ========= The accompanying notes are an integral part of these consolidated statements. 13 11 1999 STRATTEC ANNUAL REPORT CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) June 27, 1999 June 28, 1998 ----------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 28,611 $ 14,754 Receivables, less allowance for doubtful accounts of $250 at June 27, 1999, and June 28, 1998 36,063 25,301 Inventories 13,804 14,962 Customer tooling in progress 3,758 8,692 Future income tax benefits 2,525 2,218 Other current assets 2,522 2,131 --------- --------- Total current assets 87,283 68,058 PROPERTY, PLANT, AND EQUIPMENT, NET 40,911 39,940 --------- --------- $ 128,194 $ 107,998 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 17,386 $ 12,457 Accrued liabilities: Payroll and benefits 9,961 8,170 Environmental 2,820 2,873 Income taxes 201 307 Other 2,054 1,298 --------- --------- Total current liabilities 32,422 25,105 DEFERRED INCOME TAXES 512 357 BORROWINGS UNDER REVOLVING CREDIT FACILITY - - ACCRUED PENSION OBLIGATIONS 8,669 8,289 ACCRUED POSTRETIREMENT OBLIGATIONS 4,246 3,849 SHAREHOLDERS' EQUITY Common stock, authorized 12,000,000 shares $.01 par value, issued 5,945,298 shares at June 27, 1999, and 5,877,150 shares at June 28, 1998 59 59 Capital in excess of par value 43,999 42,489 Retained earnings 49,451 32,436 Accumulated other comprehensive loss (2,081) (1,863) Less: Treasury stock, at cost (378,788 shares at June 27, 1999 and 152,307 shares at June 28, 1998) (9,083) (2,723) --------- --------- Total shareholders' equity 82,345 70,398 --------- --------- $ 128,194 $ 107,998 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets. 14 12 1999 STRATTEC ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY (IN THOUSANDS) Accumulated Capital in Other Common Excess of Retained Comprehensive Treasury Comprehensive Stock Par Value Earnings Loss Stock Income ---------- ---------- --------- ------------- -------- ------------ BALANCE, JUNE 30, 1996 $ 58 $ 40,909 $ 9,127 $ (1,796) - Net income - - 9,820 - - $ 9,820 Translation adjustments - - - (67) - (67) -------- Comprehensive income $ 9,753 ======== Purchase of common stock - - - - (2,143) Exercise of stock options, including tax benefit - 185 - - - -------- -------- -------- -------- -------- BALANCE, JUNE 29, 1997 58 41,094 18,947 (1,863) (2,143) Net income - - 13,489 - - $ 13,489 Translation adjustments - - - - - - -------- Comprehensive income $ 13,489 ======== Purchase of common stock - - - - (591) Exercise of stock options, including tax benefit 1 1,395 - - 11 -------- -------- -------- -------- -------- BALANCE, JUNE 28, 1998 59 42,489 32,436 (1,863) (2,723) Net income - - 17,015 - - $ 17,015 Translation adjustments - - - (218) - (218) -------- Comprehensive income $ 16,797 ======== Purchase of common stock - - - - (6,416) Exercise of stock options, including tax benefit - 1,510 - - 56 -------- -------- -------- -------- -------- BALANCE, JUNE 27, 1999 $ 59 $ 43,999 $ 49,451 $ (2,081) $ (9,083) ======== ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated statements. 15 13 1999 STRATTEC ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years Ended ------------------------------------------------ June 27, 1999 June 28, 1998 June 29, 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $17,015 $13,489 $ 9,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,107 6,776 5,639 Loss on disposition of property, plant and equipment 463 168 171 Change in operating assets and liabilities: (Increase) decrease in receivables (10,788) 4,330 (10,897) (Increase) decrease in inventories 1,158 (83) (1,473) (Increase) decrease in other assets 4,203 (1,891) 1,421 Increase in accounts payable and accrued liabilities 8,311 3,216 1,459 Other, net 54 (54) (50) ------- ------- -------- Net cash provided by operating activities 27,523 25,951 6,090 ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (8,831) (7,450) (7,972) Proceeds received on sale of property, plant and equipment 15 70 196 ------- ------- -------- Net cash used in investing activities (8,816) (7,380) (7,776) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from (payments of) borrowings under revolving credit facility - (5,037) 3,607 Purchase of common stock (6,416) (591) (2,143) Exercise of stock options 1,566 1,407 185 ------- ------- -------- Net cash provided by (used in) financing activities (4,850) (4,221) 1,649 ------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,857 14,350 (37) CASH AND CASH EQUIVALENTS Beginning of year 14,754 404 441 ------- ------- -------- End of year $28,611 $14,754 $ 404 ======= ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ 9,882 $ 7,482 $ 4,984 Interest paid - 19 227 The accompanying notes are an integral part of these consolidated statements. 16 14 1999 STRATTEC ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES STRATTEC SECURITY CORPORATION (the "Company") designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related security products for automotive manufacturers. The significant accounting policies followed by the Company in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with generally accepted accounting principles. PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The accompanying financial statements reflect the consolidated results of the company, its wholly owned Mexican subsidiary, and its foreign sales corporation. Certain amounts previously reported have been reclassified to conform to the June 27, 1999, presentation. These reclassifications have no effect on previously reported net income or retained earnings. FISCAL YEAR: The Company's fiscal year ends on the Sunday nearest June 30. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments does not materially differ from their carrying values. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all short-term investments with an original maturity of three months or less. INVENTORIES: Inventories are stated at cost, which does not exceed market. The last-in, first-out (LIFO) method was used for determining the cost of the inventories at the end of each period. Inventories consist of the following (thousands of dollars): June 27, June 28, 1999 1998 -------- -------- Finished products $ 4,439 $ 5,114 Work in process 11,145 11,204 Raw materials 774 1,179 LIFO adjustment (2,554) (2,535) -------- -------- $ 13,804 $ 14,962 ======== ======== CUSTOMER TOOLING IN PROGRESS: The Company accumulates its costs for development of certain tooling used in component production and assembly. The costs, which are primarily from third-party tool vendors, are accumulated on the Company's balance sheet. These amounts then are billed to the customer upon formal acceptance by the customer of products produced with the individual tool. PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated at cost, and depreciation is computed using the straight-line method over the following estimated useful lives: Expected Classification Useful Lives - -------------------------- --------------------- Land improvements 20 years Buildings and improvements 20 to 35 years Machinery and equipment 3 to 10 years Property, plant, and equipment consist of the following (thousands of dollars): June 27, June 28, 1999 1998 -------- -------- Land $ 1,236 $ 855 Buildings and improvements 10,836 9,819 Machinery and equipment 69,447 64,523 -------- -------- 81,519 75,197 Less: accumulated depreciation (40,608) (35,257) -------- -------- $40,911 $ 39,940 ======== ======== Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. RESEARCH AND DEVELOPMENT COSTS: Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. FOREIGN CURRENCY TRANSLATION: Since December 28, 1998, and prior to December 30, 1996, the functional currency of the Mexican operation has been the Mexican peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company's net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency Translation." During the period December 30 1996, to December 27, 1998, the functional currency of the Mexican operation was the U.S. dollar, as Mexico then was considered to be a highly inflationary economy in accordance with SFAS No. 52. The effect of currency fluctuations in the remeasurement process was included in the determination of net income during this period. 17 15 1999 STRATTEC ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS The effect of the December 28, 1998 functional currency change was not material to the financial results of the company. ACCUMULATED OTHER COMPREHENSIVE LOSS: The only component of accumulated other comprehensive loss is cumulative translation adjustments. Deferred taxes have not been provided for the translation adjustments in accordance with SFAS No. 109, "Accounting for Income Taxes." REVENUE RECOGNITION: Revenue is recognized upon the shipment of products, net of estimated costs of returns and allowances. SEGMENT REPORTING: SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in 1997. This statement establishes standards for the manner in which public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Since the Company operates in a single business segment, this Statement has no impact on reporting requirements of the Company. DERIVATIVE INSTRUMENTS: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in 1998. The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 15, 2000. The Company currently does not hold any such derivative instruments and does not expect this statement to have an impact on future financial statements. REVOLVING CREDIT FACILITY The Company has a $25 million unsecured, revolving credit facility (the "Credit Facility"), which expires October 31, 2001. Interest on borrowings under the Credit Facility are at varying rates based, at the Company's option, on the London Interbank Offering Rate, the Federal Funds Rate, or the bank's prime rate. There were no outstanding borrowings at June 27, 1999, or June 28, 1998. The weighted average interest rate on the revolving credit borrowings was 6.2 percent for the year ended June 28, 1998. There were no borrowings under the credit facility during the year ended June 27, 1999. The Credit Facility contains various restrictive covenants that require the Company to maintain minimum levels for certain financial ratios, including tangible net worth, ratio of indebtedness to tangible net worth and fixed charge coverage. ENVIRONMENTAL MATTER In 1995, the Company recorded a provision of $3.0 million for estimated costs to remediate a site at the Company's Milwaukee facility contaminated by a solvent spill, which occurred in 1985. The Company continues to monitor and evaluate the site and believes, based upon findings-to-date and known environmental regulations, that the environmental reserve at June 27, 1999, is adequate. INCOME TAXES The provision for income taxes consists of the following (thousands of dollars): 1999 1998 1997 ---- ---- ---- Currently payable: Federal $ 8,106 $5,576 $4,469 State 1,976 1,323 1,037 Foreign 416 471 43 ------- ------ ------ 10,498 7,370 5,549 Deferred taxes (7) 561 181 ------- ------ ------ $10,491 $7,931 $5,730 ======= ====== ====== A reconciliation of the U.S. statutory tax rates to the effective tax rates follows: 1999 1998 1997 ---- ---- ---- U.S. statutory rate 35.0% 34.8% 34.4% State taxes, net of federal tax benefit 4.7 4.4 4.4 Foreign rate differential .3 .4 (.8) Other (1.9) (2.6) (1.2) ---- ---- ---- 38.1% 37.0% 36.8% ==== ==== ==== The components of deferred tax assets and (liabilities) are as follows (thousands of dollars): June 27, June 28, 1999 1998 ------- -------- Future income tax benefits: Customer tooling $ 195 $ 156 Payroll-related accruals 499 410 Environmental reserve 1,100 1,121 Other 731 531 ------- ------- $ 2,525 $ 2,218 ======= ======= Deferred income taxes: Accrued pension obligations $ 3,381 $ 3,233 Accumulated depreciation (5,549) (5,091) Postretirement obligations 1,656 1,501 ------- ------- ($ 512) ($ 357) ======= ======= Foreign income before the provision for income taxes was not significant for each of the years indicated. 18 16 NOTES TO FINANCIAL STATEMENTS 1999 STRATTEC ANNUAL REPORT RETIREMENT PLANS AND POSTRETIREMENT COSTS The Company has a noncontributory defined benefit pension plan covering substantially all U.S. associates. Benefits are based on years of service and final average compensation. The Company's policy is to fund at least the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities. The Company recognizes the expected cost of retiree health care and life insurance benefits during the years that the associates render service. The postretirement health care and life insurance plans are unfunded. The following tables summarize the pension and postretirement plans' income and expense, actuarial assumptions, and funded status for the years indicated (thousands of dollars): Pension Postretirement Benefits Benefits ------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $26,189 $21,624 $ 3,882 $ 3,092 Service cost 1,380 1,206 206 169 Interest cost 1,948 1,664 289 238 Amendments - 75 - - Actuarial loss 226 2,058 238 383 Benefits paid (556) (438) (115) - ------- ------- ------- ------- Benefit obligation at end of year $29,187 $26,189 $ 4,500 $ 3,882 ======= ======= ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $26,364 $22,194 - - Actual return on plan assets 2,551 4,585 - - Employer contributions 818 23 115 53 Benefits paid (556) (438) (115) (53) ------- ------- ------ ------- Fair value of plan assets at end of year 29,177 26,364 - - ======= ======= ====== ======= Funded status (10) 175 (4,500) (3,882) Unrecognized net gain (7,869) (7,535) (13) (250) Unrecognized prior service cost 7 18 260 275 Unrecognized net transition asset (797) (947) 7 8 ------- ------- ------- ------- Accrued benefit cost $(8,669) $(8,289) $(4,246) $(3,849) ======= ======= ======= ======= Pension Postretirement Benefits Benefits ----------------- ----------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 ----------------- ----------------- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 7.25% 7.5% 7.25% 7.5% Expected return on plan assets 8.5% 8.5% n/a n/a Rate of compensation increases 4.0% 4.0% n/a n/a For measurement purposes, a 6 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999; the rate was assumed to remain at that level thereafter. Pension Postretirement Benefits Benefits ------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 1,380 $ 1,206 $ 206 $ 169 Interest cost 1,948 1,664 289 238 Expected return on plan assets (1,905) (1,705) - - Amortization of prior service cost 12 7 16 - Amortization of unrecognized net gain (86) (171) - (9) Amortization of unrecognized net asset (150) (150) 1 1 ------- -------- ------ ------ Net periodic benefit cost $ 1,199 $ 851 $ 512 $ 399 ======= ======== ====== ====== The health care cost trend assumption has a significant effect on the amounts reported. A 1% change in the health care cost trend rates would have the following effects (thousands of dollars): 1% Increase 1% Decrease ----------- ----------- Effect on total of service and interest cost components $ 82 ($ 68) Effect on Postretirement benefit obligation $632 ($404) All U.S. associates of the Company may participate in a 401(k) Plan. The Company contributes a fixed percentage of up to the first 6 percent of eligible compensation that a participant contributes to the plan. The Company's contributions totaled approximately $635,000 in 1999, $548,000 in 1998 and $487,000 in 1997. 19 17 1999 STRATTEC ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS SHAREHOLDERS' EQUITY The Company has 12,000,000 shares of authorized common stock, par value $.01 per share, with 5,566,510 and 5,724,843 shares issued and outstanding at June 27, 1999, and June 28, 1998, respectively. Holders of Company common stock are entitled to one vote for each share on all matters voted on by shareholders. On February 27, 1995, one common stock purchase right (a "right") was distributed for each share of the Company's common stock outstanding. The rights are not currently exercisable, but would entitle shareholders to buy one-half of one share of the Company's common stock at an exercise price of $30 per share if certain events occurred relating to the acquisition or attempted acquisition of 20 percent or more of the outstanding shares. The rights expire in the year 2005, unless redeemed or exchanged by the Company earlier. The Board of Directors of the Company authorized a stock repurchase program to buy back up to 889,395 outstanding shares. As of June 27, 1999, 383,000 shares have been repurchased at a cost of $9,150,000. EARNINGS PER SHARE (EPS) A reconciliation of the components of the basic and diluted per share computations follows (thousands of dollars, except per share amounts): 1999 ------------------------------------ Net Per-Share Income Shares Amount ------ ------ --------- Basic EPS $17,015 5,639 $3.02 ===== Stock Options 152 ----- Diluted EPS $17,015 5,791 $2.94 ===== ===== 1998 ------------------------------------ Net Per-Share Income Shares Amount ------ ------ --------- Basic EPS $13,489 5,708 $2.36 ===== Stock Options 155 ----- Diluted EPS $13,489 5,863 $2.30 ===== ===== 1997 ------------------------------------ Net Per-Share Income Shares Amount ------ ------ --------- Basic EPS $9,820 5,716 $1.72 ===== Stock Options 69 ----- Diluted EPS $9,820 5,785 $1.70 ===== ===== Options to purchase the following shares of common stock were outstanding as of each date indicated but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares: Shares Exercise Price ------ -------------- June 27, 1999 80,000 $37.88 5,000 $32.13 80,000 $31.98 5,000 $30.81 June 28, 1998 80,000 $31.98 5,000 $31.63 June 29, 1997 77,135 $19.68 76,393 $19.28 STOCK OPTION AND PURCHASE PLANS The Company maintains an omnibus stock incentive plan, which provides for the granting of stock options. The Board of Directors has designated 1,200,000 shares of the Company's common stock available for grant under the plan at a price not less than the fair market value on the date the option is granted. Options become exercisable as determined at the date of grant by a committee of the Board of Directors and expire 5 to 10 years after the date of grant unless an earlier expiration date is set at the time of grant. Weighted Average Exercise Shares Price ------ -------- Balance as of June 30, 1996 471,393 $13.15 Granted 157,135 $18.17 Exercised 13,750 $11.75 Terminated 15,889 $15.01 ------- Balance June 29, 1997 598,889 $14.45 ------- Granted 95,000 $31.06 Exercised 78,000 $12.67 ------- Balance at June 28, 1998 615,889 $17.23 ------- Granted 110,070 $35.44 Exercised 68,148 $15.40 Terminated 20,303 $25.76 ------- Balance at June 27, 1999 637,508 $20.30 ======= Exercisable as of June 27, 1999 378,106 $13.16 Available for grant as of June 27, 1999 402,594 20 18 1999 STRATTEC ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS During 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by the statement, the Company will continue to account for its stock-based compensation plans in accordance with APB Opinion No. 25 and related Interpretations. Accordingly, no compensation cost related to these plans was charged against earnings in 1999, 1998, and 1997. Had compensation cost for these plans been determined consistent with SFAS No. 123, the pro forma impact on earnings per share would have been as follows (thousands of dollars): June 27, June 28, June 29, 1999 1998 1997 -------- -------- -------- Net income As reported $17,015 $13,489 $9,820 Pro forma $16,464 $13,057 $9,655 Basic earnings per share As reported $ 3.02 $ 2.36 $ 1.72 Pro forma $ 2.92 $ 2.29 $ 1.69 Diluted earnings per share As reported $ 2.94 $ 2.30 $ 1.70 Pro forma $ 2.85 $ 2.24 $ 1.69 The fair value of each option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting compensation cost was amortized over the vesting period. The grant date fair values and assumptions used to determine such impact are as follows: Options Granted During 1999 1998 1997 ---- ---- ---- Weighted average grant date fair value $35.44 $31.06 $18.17 Assumptions: Risk free interest rates 5.33% 6.07% 6.54% Expected volatility 29.09% 30.10% 32.11% Expected term (in years) 5.75 5.75 5.5 The range of options outstanding as of June 27, 1999, is as follows: Weighted Weighted Average Number of Average Remaining Options Exercise Price Contractual Price Range Outstanding/ Outstanding/ Life per Share Exercisable Exercisable (in years) ------------- --------------- -------------- ----------- $11.75-$17.05 310,900/310,900 $12.40/$12.40 5.9 $19.28-$23.63 142,251/ 67,206 $19.77/$19.60 2.2 Over $27.63 184,357/ - $34.04/ - 4.4 --------------- -------------- ----------- 637,508/378,106 $20.30/$13.68 4.7 =============== ============== =========== The Company has an Employee Stock Purchase plan to provide substantially all U. S. full-time associates an opportunity to purchase shares of its common stock through payroll deductions. A participant may contribute a maximum of $5,200 per calendar year to the plan. On the last day of each month, participant account balances are used to purchase shares of stock at the average of the highest and lowest reported sales prices of a share of the Company's common stock on the NASDAQ National Market. A total of 100,000 shares may be issued under the plan. A total of 3,519 shares were issued from treasury stock under the plan at an average price of $28.79 during fiscal 1999. A total of 95,788 shares are available for purchase under the plan as of June 27, 1999. EXPORT SALES Export sales are summarized below (thousands of dollars): Export Sales Percent of Net Sales ------------ -------------------- 1999 $27,233 13% 1998 $22,330 12% 1997 $17,179 11% These sales were primarily to vehicle manufacturing plants in Canada and Mexico. SALES TO LARGEST CUSTOMERS Sales to the Company's largest customers were as follows (thousands of dollars and percent of total net sales): 1999 1998 1997 Sales % Sales % Sales % ----------- ----------- ----------- General Motors Corporation $ 88,938 44% $ 86,721 46% $ 70,347 44% Ford Motor Company 52,241 26% 46,136 25% 43,617 27% DaimlerChrysler Corporation 30,757 15% 25,966 14% 21,000 13% ----------- ----------- ----------- $171,936 85% $158,823 85% $134,964 85% ======== == ======== == ======== == 21 19 1999 STRATTEC ANNUAL REPORT ACCOUNTANTS AND MANAGEMENT REPORTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF STRATTEC SECURITY CORPORATION: We have audited the accompanying consolidated balance sheets of STRATTEC SECURITY CORPORATION and subsidiaries, as of June 27, 1999, and June 28, 1998, and the related consolidated statements of income, changes in equity and cash flows for each of the three years in the period ended June 27, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STRATTEC SECURITY CORPORATION and subsidiaries as of June 27, 1999, and June 28, 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 27, 1999, in conformity with generally accepted accounting principles. /s/ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin July 29, 1999 REPORT OF MANAGEMENT The management of STRATTEC SECURITY CORPORATION is responsible for the fair presentation and integrity of the financial statements and other information contained in this Annual Report. We rely on a system of internal financial controls to meet the responsibility of providing financial statements. The system provides reasonable assurances that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the financial statements are prepared in accordance with generally accepted accounting principles, including amounts based upon management's best estimates and judgments. The financial statements for each of the years covered in this Annual Report have been audited by independent auditors, who have provided an independent assessment as to the fairness of the financial statements. The Audit Committee of the Board of Directors meets with management and the independent auditors to review the results of their work and to satisfy itself that their responsibilities are being properly discharged. The independent auditors have full and free access to the Audit Committee and have discussions with the committee regarding appropriate matters, with and without management present. /s/Harold M. Stratton II /s/ John Cahill /s/Patrick J. Hansen Harold M. Stratton II John G. Cahill Patrick J. Hansen Chairman and President and Vice President and Chief Executive Officer Chief Operating Officer Chief Financial Officer 22 20 1999 STRATTEC ANNUAL REPORT FINANCIAL SUMMARY FIVE-YEAR FINANCIAL SUMMARY For all periods after February 26, 1995, the financial data reflect the consolidated results of the Company and its wholly owned subsidiaries. For all periods prior to February 27, 1995, the financial data reflect the combined results of the Technologies Business of Briggs & Stratton Corporation ("Briggs"). On February 27, 1995 Briggs transferred substantially all of the assets, related debt and liabilities of its Technologies Business to the Company, which was previously formed as a wholly owned subsidiary of Briggs in order to receive the distribution (the "Distribution"). The information below should be read in conjunction with "Management's Discussion and Analysis," and the Financial Statements and Notes thereto included elsewhere herein. The following data are in thousands of dollars except per share amounts. Fiscal Years ------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- INCOME STATEMENT DATA Net sales $202,625 $186,805 $159,054 $139,745 $110,372 Gross profit 46,804 39,940 33,319 29,231 27,893 Engineering, selling, and administrative expenses 20,191 18,925 17,684 16,632 13,847 Environmental charges - - - - 3,000 -------- -------- -------- -------- -------- Income from operations 26,613 21,015 15,635 12,599 11,046 Interest income 1,132 351 4 22 16 Interest expense - (19) (214) (363) (12) Other income (expense), net (239) 73 125 286 83 -------- -------- -------- -------- -------- Income before taxes 27,506 21,420 15,550 12,544 11,133 Provision for income taxes 10,491 7,931 5,730 4,830 4,657 -------- -------- -------- -------- -------- Net income $ 17,015 $ 13,489 $ 9,820 $ 7,714 $ 6,476 ======== ======== ======== ======== ======== Earnings per share (a): Basic $ 3.02 $ 2.36 $ 1.72 $ 1.33 - Diluted $ 2.94 $ 2.30 $ 1.70 $ 1.32 - BALANCE SHEET DATA Net working capital $ 54,861 $ 42,953 $ 32,399 $ 21,181 $ 18,978 Total assets 128,194 107,998 95,669 82,818 70,103 Long-term liabilities 12,915 12,138 16,000 10,937 8,198 Equity 82,345 70,398 56,093 48,298 40,943 (a)Earnings per share is presented for fiscal years subsequent to the Distribution. QUARTERLY FINANCIAL DATA (UNAUDITED) Earnings Market Price Per Share Per Share --------------- Quarter Net Sales Gross Profit Net Income Basic Diluted High Low ------- --------- ------------ ---------- ---------------- ------ ----- 1999 First $ 40,362 $ 8,835 $ 2,813 $ .49 $ .48 32 1/4 25 3/4 Second 54,529 12,373 4,662 .83 .81 31 3/4 20 Third 51,220 12,071 4,471 .79 .77 33 7/8 27 3/4 Fourth 56,514 13,525 5,069 .91 .88 37 3/8 26 -------- -------- ------- ----- ----- TOTAL $202,625 $ 46,804 $17,015 $3.02 $2.94 ======== ======== ======= ===== ===== 1998 First $ 42,868 $ 8,488 $ 2,398 $ .42 $ .41 28 1/4 19 1/2 Second 49,722 10,142 3,433 .60 .59 30 1/4 23 Third 47,420 10,623 3,835 .67 .65 29 1/4 25 Fourth 46,795 10,687 3,823 .67 .65 33 1/4 27 -------- -------- ------- ----- ----- TOTAL $186,805 $ 39,940 $13,489 $2.36 $2.30 ======== ======== ======= ===== ===== Shareholders of record at June 27, 1999, were 4,654. 23