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EXHIBIT 13
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[CHICAGO RIVET LOGO]
Chicago Rivet & Machine Co.
1999 Annual Report
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[CHIGAGO RIVET LOGO]
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HIGHLIGHTS
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1999 1998 1997
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NET SALES AND LEASE REVENUE.................... $49,080,257 $44,938,184 $44,543,404
NET INCOME..................................... 3,454,291 3,360,480 3,861,510
NET INCOME PER SHARE........................... 3.00 2.90 3.30
DIVIDENDS PER SHARE............................ 1.07 1.12 .91
EXPENDITURES FOR PROPERTY, PLANT AND
EQUIPMENT.................................... 1,709,527 2,696,701 963,917
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT.. 1,711,721 1,498,302 1,372,415
WORKING CAPITAL................................ 12,447,590 12,302,179 13,766,681
TOTAL SHAREHOLDERS' EQUITY..................... 23,887,278 22,012,659 20,511,102
COMMON SHARES OUTSTANDING AT YEAR END.......... 1,138,096 1,153,496 1,169,296
SHAREHOLDERS' EQUITY PER COMMON SHARE.......... 20.99 19.08 17.54
APPROXIMATE NUMBER OF SHAREHOLDERS OF RECORD... 425 451 471
REGISTRAR
First Chicago Trust Company, a division of EquiServe
TRANSFER AGENT
First Chicago Trust Company, a division of EquiServe
STOCK EXCHANGE
The Company's stock is traded on the American Stock Exchange (Ticker symbol
CVR).
ANNUAL MEETING
The annual meeting of shareholders
will be held on May 9, 2000 at 10:00 a.m. at
901 Frontenac Road
Naperville, Illinois 60566
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MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[CHIGAGO RIVET LOGO]
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TO OUR SHAREHOLDERS:
RESULTS OF OPERATIONS
In most respects, 1999 was another very good year for Chicago Rivet &
Machine Co. The most important achievements include increases in revenue from
both the fastener and assembly equipment segments of our business and a
corresponding increase in net income. Other positives for the year include the
absence of any year 2000 (Y2K) issues as a result of the significant progress
toward full implementation of new information management technology and
significant investments in equipment that will enhance and expand our
manufacturing capabilities. Our financial condition remains solid, and we
believe we are well positioned to take advantage of opportunities that will
accompany the new year.
1999 COMPARED TO 1998
The Company's net sales and lease revenues increased approximately 9%,
totaling $49,080,257 in 1999, compared with $44,938,184 recorded in 1998.
Revenues within the fastener segment improved 10.5%, reflecting the strength of
the automotive industry, which represents the Company's largest market. While
revenue from sales within the assembly equipment segment improved 6.4%, lease
revenues in that segment declined compared to the prior year, which resulted in
a net increase in sales and lease revenues within the assembly equipment segment
of 5.3%. Overall, gross margins improved to $14,251,218, an increase of
approximately 7%, despite a charge of $910,000 associated with a product recall.
Selling and administrative expenses increased significantly, primarily due to
expenditures for information technology, and net income increased to $3,454,291.
The fastener segment produced the most dramatic changes compared with 1998.
Revenues within this segment increased 10.5% to $37,486,536. This increase was
largely a reflection of very strong growth in the economy in general and record
levels of production within the automotive industry. The increased volume levels
contributed to generally higher margins as fixed costs, with the exception of
depreciation, remained relatively constant compared with 1998. The strength of
the employment market contributed to increases in wage levels that slightly
exceeded the overall inflation level, and the limited availability of skilled
labor necessitated an increase in overtime expense in order to meet increased
demand within this segment of our operations. Despite the strong market
conditions prevalent throughout the year, our markets remain extremely price
competitive, and our ability to obtain price relief continued to be limited.
Fortunately, efforts to control manufacturing costs in other areas continued to
be successful, and the Company also benefited from negotiated reductions in the
costs of certain raw materials. While the fundamental performance within this
segment of our business was very successful, that success was tarnished by a
charge incurred in connection with a recall of vehicles that contained certain
non-conforming parts which were manufactured by the Company. As previously
reported, a settlement was successfully negotiated, but total costs incurred in
connection with this incident amounted to $944,000 before taxes, of which
$910,000 was charged to cost of goods sold, offsetting a portion of the positive
improvements recognized in operations.
Revenues within the assembly equipment segment, as a whole, also improved
compared with 1998. However, competitive conditions caused the Company to
occasionally accept margins below those that were enjoyed in the past, and, as a
result, the increase in revenues was slightly biased toward products with lower
margins. In addition, increases in costs of raw materials and other
manufacturing expenses nearly offset the increase in revenues. As a result, the
margin increase within this segment was minimal.
Selling and administrative expenses increased slightly over 10% compared
with the prior year. Costs incurred in connection with implementation of new
data processing systems, including efforts related to mitigating the impact of
any potential Y2K issues, amounted to nearly $500,000 during the year and
represent the primary factor contributing to the increased level of selling and
administrative expense. Increases in data communications expense and
depreciation related to the new information system added an additional $103,000
to administrative expenses. Freight and shipping expenses, associated with
increased activity levels were higher by approximately $125,000 and profit
sharing expense increased by $123,000. Bad debt expense was reduced by $94,000
and travel expense declined by $50,000. Increases in salary expenses were
partially offset by a reduction in commission expense as a larger percentage of
sales was handled by Company employees.
Interest expense during 1999 decreased approximately $120,000 compared with
1998 as the effect of higher interest rates was offset by a lower outstanding
balance on the loan. Interest income was approximately $51,000 lower than that
recorded in the prior year due to a reduction in the level of funds available
for investment in interest bearing accounts.
1998 COMPARED TO 1997
Net sales and lease revenues increased slightly compared with 1997, totaling
$44,938,184 for 1998, compared with $44,543,404 recorded during 1997. Revenues
in the fastener segment increased 3.7%, largely as a result of the robust
conditions in the automotive industry, which is the Company's primary market.
Conversely, revenues from the assembly equipment segment, which includes sale of
automatic assembly equipment, related tools and parts and
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MANAGEMENT'S DISCUSSION
(Continued)
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lease revenue, declined 7.0% compared to 1997. Several factors contributed to
the decline in revenue within the assembly equipment segment. The primary factor
was a decline in unit volume compared to 1997, which was an uncharacteristically
strong year. Also evident in 1998 was a noticeable change in product mix, with
1998 sales consisting of more lower priced equipment compared to 1997. Finally,
in order to maintain certain customer relationships, the Company responded to
competitive pricing pressures by accepting margins below those historically
associated with its products in this segment.
The positive impact from the increased level of fastener business was
largely offset by increases in wages, higher costs related to health insurance
and additional tooling expense in connection with initial production of a
variety of new fasteners. In addition, depreciation expense increased 7.4%
compared to 1997 due to increased capital expenditures. Competitive conditions
within the fastener industry, in conjunction with our major customers'
continuing policy of not accepting price increases, restricted our ability to
increase prices sufficiently to recover these higher costs. The net result is
reflected in only nominal improvement in gross profit within this segment of our
operations. The Company's investment in newer, more efficient equipment and
procedures is intended to reduce costs as well as expand capabilities, and
should lead to improved operating margins in the future.
As would be expected given the 1998's lower volume, gross profits in the
assembly equipment segment declined compared to 1997. While variable costs were
reduced in proportion to the reduced level of operations, fixed costs increased
slightly due primarily to higher wage and depreciation expense. Finally, the
competitive situation discussed above also had an adverse impact upon margins
within this segment.
Selling and administrative expenses, net of certain favorable adjustments to
environmental reserve accounts, increased 5.8% compared to 1997. Three factors
comprised the majority of this increase. First, expenses incurred in connection
with the development and implementation of new data processing software amounted
to approximately $135,000; second, bad debt expense increased by $145,000 due to
the voluntary reorganization of a certain fastener customer; and third, the
Company incurred certain state taxes, totaling $225,000, during 1998. While the
Company was subject to this same state tax in 1997, no tax liability was
incurred in that year due to certain deductions allowed in the computation of
the tax. In addition, the Company incurred higher selling expense as a result of
increased staffing designed to strengthen our presence in certain key markets. A
portion of these increased costs were offset by reductions in commission
expense, reductions in expenses related to attaining QS-9000 certification and a
reduction in profit sharing expense.
Non-operating expense declined approximately 24% compared with 1997,
primarily as a result of reduced interest expense, which decreased from $546,666
in 1997 to $376,098 during 1998. This interest expense is related to borrowing
in connection with the 1996 acquisition of H & L Tool Company, Inc. The decrease
in interest expense reflects both lower interest rates in 1998 and a lower
principal balance outstanding compared with 1997. Interest income increase
approximately 12% compared with 1997 due primarily to higher level of investment
during the year.
DIVIDENDS
The Company paid four regular quarterly dividends of $.18 per share during
1999. In addition, an extra dividend of $.35 per share was paid during the
second quarter of 1999, bringing the total dividend payout to $1.07 per share.
On February 21, 2000 your Board of Directors declared a regular quarterly
dividend of $.18 per share, payable March 20, 2000 to shareholders of record
March 3, 2000. This continues the uninterrupted record of consecutive quarterly
dividends paid by the Company to its shareholders that extends over 66 years. At
that same meeting, the Board declared an extra dividend of $.35 per share,
payable April 20, 2000 to shareholders of record, April 5, 2000.
MACHINERY & EQUIPMENT
Investments in machinery and equipment totaled $1,709,527 during 1999. Once
again, investments in new equipment related to the manufacture of fasteners
accounted for the majority of these investments and amounted to $994,000 during
the year. Investments in hardware and software related to improved information
management technology totaled $267,000. A total of $181,000 was expended for the
purchase of a variety of test and inspection equipment related to quality
control initiatives. Investments in new machine tools used in the manufacture of
assembly equipment totaled $108,000. Approximately $41,000 was invested in new
telephone equipment and the balance was expended for the purchase, or repair, of
various, smaller machine tools and building repairs.
The Company made a number of significant investments in both equipment and
building improvements during 1998. Capital expenditures totaled nearly
$2,700,000. Expenditures related to new data processing systems, including
computer hardware and software, amounted to approximately $542,000. Expenditures
for the purchase of new equipment used in the manufacture of fasteners amounted
to $1,430,000. The Company also purchased a variety of new machine tools,
material handling equipment and inspection equipment valued at approximately
$313,000. Building improvements, which included the installation of new air
compressors at one facility and a new roof at another facility, amounted to
approximately $252,000. Investment in both
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MANAGEMENT'S DISCUSSION
(Continued) [CHIGAGO RIVET LOGO]
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new equipment and rebuilding of existing equipment used to plate and heat treat
fasteners amounted to $63,000. A total of $51,000 was expended for the
construction of new automatic rivet setting equipment that is leased to
customers. The balance was expended for a variety of smaller office equipment
and for the construction of new rivet setting machines that will be used for
demonstration purposes.
During 1997, capital investments totaled $963,917. Significant expenditures
included approximately $540,000 for equipment used in the manufacture of
fasteners and assembly equipment, $117,000 for data processing and
telecommunications equipment, building improvements amounting to $87,000 and
approximately $58,000 which was invested in new equipment related to quality
control. The balance consists of investments in material handling equipment and
other miscellaneous equipment.
Depreciation expense amounted to $1,711,721 in 1999, $1,498,302 in 1998 and
$1,372,415 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Despite the significant capital investments described above, the Company's
working capital increased slightly during the year and amounted to approximately
$12.4 million at the end of 1999. Accounts receivable balances increased
somewhat compared to the prior year. This change reflects an increase in the
number of customers delaying payment beyond the agreed upon terms and does not
represent a deterioration in the quality of these receivables. Increases in
inventory balances are expected to be temporary as they reflect increased stock
levels as a hedge against potential Y2K disruptions and an additional increase
in stock levels as a safeguard against potential, but unexpected, disruptions
related to migration to new information management technology. Long-term debt
was reduced by $1.8 million as the Company continued to meet the repayment
obligations of a commercial loan obtained in connection with the 1996
acquisition of H & L Tool Company, Inc. The Company borrowed $9.0 million, on an
unsecured basis, subject to certain customary covenants. Under the terms of the
note, the Company is scheduled to repay the principal in 20 quarterly
installments of $450,000, plus interest computed on the unpaid balance at a
variable rate that is calculated under one of two methods: the London Inter Bank
Offering Rate, plus 80 basis points; or the lender's reference rate, less 75
basis points. This rate is adjusted quarterly. At year-end 1999, the rate was
approximately 6.75% and the unpaid balance of the note was $3.15 million.
In March, 2000, the Company initiated a tender offer for up to 225,000
shares of its outstanding common stock at a price between $20 and $23 per share.
Details of the offer were previously distributed to shareholders. In order to
fund this purchase, the Company has obtained a financing commitment for a term
loan of up to $9.0 million. This new borrowing will replace the existing loan
described above. The amount of the new borrowing will depend upon the amount and
price of shares tendered, and will be equal to the purchase cost of tendered
shares combined with the balance then outstanding under the existing business
loan. Under terms of the new commitment, principal payments are scheduled to be
made in quarterly installments of $450,000, together with interest computed on
the unpaid balance under one of two methods: the London Inter Bank Offering
Rate, plus 70 to 130 basis points, the specific rate to be determined quarterly
based upon certain financial ratios; or the lender's reference rate, less 25 to
50 basis points, determined quarterly depending upon certain financial ratios.
Capital expenditures are expected to total approximately $1.6 million during
2000. Management believes that this level of investment can be funded
internally; nevertheless, a $1.0 million line of credit, which was obtained from
Bank of America in connection with the acquisition, remains available to the
Company. There was no charge for this facility, which remained unused as of
December 31, 1999. The facility is scheduled to expire on May 30, 2000, but may
be extended beyond that date.
NEW ACCOUNTING STANDARDS
The Company's financial statements and financial condition were not, and are
not expected to be, materially impacted by any new, or proposed, accounting
standards.
STOCK PURCHASE PROGRAM
Terms of a stock repurchase authorization originally approved by the Board
of Directors in February of 1990, and subsequently amended to permit the
repurchase of an aggregate of 200,000 shares, provide for purchases of the
Company's common stock to be made from time to time, in the open market or in
private transactions, at prices deemed reasonable by management. Purchases under
the current repurchase authorization have amounted to 150,596 shares at an
average price of $15.27 per share. This includes the purchase of 15,400 shares
during 1999 at an average price of $22.55 per share. It is management's
intention to continue this program, provided market conditions are favorable and
funding for repurchases is available.
YEAR 2000 COMPLIANCE
We are pleased to report that no significant Y2K disruptions were incurred
by the Company, its major customers or its suppliers. As previously reported,
the Company's primary approach to preventing anticipated Y2K issues was directly
related to its efforts to install a new information management technology. While
the investment in new technology provided a solution to potential Y2K issues, it
should also yield significant improvements in day-to-day operations. It is not
possible
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MANAGEMENT'S DISCUSSION
(Continued)
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to separate the costs of this effort into segments solely related to Y2K issues
and those associated with the other benefits of this project. The total
expenditures related to information technology and other specific Y2K related
costs amounted to approximately $1.3 million through the end of 1999.
OUTLOOK FOR 2000
The coming year will bring new opportunities, along with new challenges. The
Company has repeatedly demonstrated its ability to meet the challenges that face
manufacturing concerns. With the cooperation of our employees and our valued
suppliers, we have managed to maintain profitability in the face of generally
rising manufacturing costs in a market that has become increasingly competitive
and increasingly resistant to normal efforts to pass on increased costs of doing
business. While we have been successful in the past, we recognize that future
success will require continued emphasis on cost control as well as new
initiatives. Our recent investments in manufacturing equipment and in
information technology have positioned the Company to take advantage of
opportunities as they arise and are expected to contribute toward maintaining
profitability and increasing market share. However, costs continue to increase,
most notably wages and benefits, especially health insurance costs which are
expected to increase more than $400,000 in the coming year. Energy costs have
also increased recently, however, it is too early to determine if increases in
the price of oil will manifest themselves in higher costs for other materials
and supplies. Given the government's efforts to slow the economy, the recent
increase in oil prices and the uncertainties associated with an election year,
forecasting economic activity for the coming year is extremely difficult.
Through the first two months of 2000, incoming orders have been somewhat softer
than those enjoyed in the same period in the two prior years, suggesting,
perhaps, that revenues in the coming year will not equal the record levels
recorded in 1999. Nevertheless, we believe the Company is well positioned to
meet the challenges that lie ahead and, more importantly, to take advantage of
the opportunities the future will bring. We wish to express our appreciation to
our employees, our customers and our suppliers for their contributions to the
Company's success and we gratefully acknowledge the continued loyalty and
support of our shareholders.
Respectfully,
J. A. MORRISSEY JOHN C. OSTERMAN
John A. Morrissey John C. Osterman
Chairman President
March 16, 2000
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believe," "anticipated," "expected"
and similar expressions are intended to identify "forward-looking statements,"
which statements speak only as of the date hereof. Such statements are subject
to certain risks and uncertainties which could cause actual circumstances to
differ materially from those mentioned in this discussion including, but not
limited to: (i) the ability of the Company to maintain its relationships with
its significant customers, (ii) increases in the prices of, or limitations on
the availability of, the Company's primary raw materials and (iii) a downturn in
the automotive industry, upon which the Company relies for sales revenue, and
which is cyclical and dependent on, among other things, consumer spending,
international economic conditions and regulations and policies regarding
international trade.
Readers are cautioned not to place undue reliance on these forward-looking
statements. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. In addition to the
disclosures contained herein, readers are also urged to carefully review and
consider any risks and uncertainties contained in other documents filed by the
Company with the Securities and Exchange Commission.
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[CHICAGO RIVET LOGO]
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CONSOLIDATED BALANCE SHEETS
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DECEMBER 31 1999 1998
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ASSETS
Current Assets
Cash and Cash Equivalents................................. $ 3,414,460 $ 3,181,471
Certificates of Deposit................................... 552,594 550,254
Accounts Receivable--Less allowances of $80,000 and
$70,000, respectively.................................. 6,681,659 6,483,214
Inventories............................................... 6,923,721 6,529,747
Deferred Income Taxes..................................... 695,191 691,191
Other Current Assets...................................... 245,997 235,149
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Total Current Assets...................................... 18,513,622 17,671,026
Net Property, Plant and Equipment........................... 14,107,963 14,144,755
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Total Assets................................................ $32,621,585 $31,815,781
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Note Payable........................... $ 1,800,000 $ 1,800,000
Accounts Payable.......................................... 1,498,002 1,272,462
Wages and Salaries........................................ 792,606 745,158
Contributions Due Profit Sharing Plan..................... 669,053 546,078
Other Accrued Expenses.................................... 540,718 589,335
Federal and State Income Taxes............................ 765,653 415,814
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Total Current Liabilities................................. 6,066,032 5,368,847
Note Payable................................................ 1,350,000 3,150,000
Deferred Income Taxes....................................... 1,318,275 1,284,275
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Total Liabilities......................................... 8,734,307 9,803,122
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Commitments and Contingencies (Note 12)
Shareholders' Equity
Preferred Stock, No Par Value,
500,000 Shares Authorized: None Outstanding............ -- --
Common Stock, $1.00 Par Value,
4,000,000 Shares Authorized: Issued and Outstanding
1,138,096 and 1,153,496, respectively.................. 1,138,096 1,153,496
Additional Paid-in Capital................................ 447,134 453,184
Retained Earnings......................................... 22,302,048 20,405,979
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Total Shareholders' Equity................................ 23,887,278 22,012,659
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Total Liabilities and Shareholders' Equity.................. $32,621,585 $31,815,781
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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[CHICAGO RIVET LOGO]
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CONSOLIDATED STATEMENTS OF INCOME
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For the Years Ended December 31 1999 1998 1997
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Net Sales and Lease Revenue....................... $49,080,257 $44,938,184 $44,543,404
Cost of Goods Sold and Costs Related to Lease
Revenue......................................... 34,829,039 31,622,558 30,797,023
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Gross Profit...................................... 14,251,218 13,315,626 13,746,381
Selling and Administrative Expenses............... 8,984,562 8,140,630 7,573,074
Other Income (Expenses), Net...................... (37,365) (97,516) (128,797)
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Income Before Income Taxes........................ 5,229,291 5,077,480 6,044,510
Provision for Income Taxes........................ 1,775,000 1,717,000 2,183,000
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Net Income........................................ $ 3,454,291 $ 3,360,480 $ 3,861,510
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Net Income Per Share.............................. $ 3.00 $ 2.90 $ 3.30
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CONSOLIDATED STATEMENTS OF
RETAINED EARNINGS
Retained Earnings at Beginning of Year............ $20,405,979 $18,882,418 $16,145,012
Net Income........................................ 3,454,291 3,360,480 3,861,510
Purchase of Treasury Stock........................ (325,793) (535,058) (58,259)
Cash Dividends Paid, $1.07 Per Share in 1999,
$1.12 Per Share in 1998 and $.91 Per Share in
1997............................................ (1,232,429) (1,301,861) (1,065,845)
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Retained Earnings at End of Year.................. $22,302,048 $20,405,979 $18,882,418
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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CHIGAGO RIVET LOGO
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
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Cash Flows from Operating Activities:
Net Income................................................ $ 3,454,291 $ 3,360,480 $ 3,861,510
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization........................... 1,711,721 1,498,302 1,380,763
Net Gain on the Sale of Properties...................... (6,690) (14,787) (175,059)
Deferred Income Taxes................................... 30,000 98,000 248,084
Changes in Working Capital Components:
Accounts Receivable..................................... (198,445) (820,676) (633,653)
Inventories............................................. (393,974) (175,140) 543,996
Other Current Assets.................................... (10,848) 125,299 (88,475)
Accounts Payable........................................ 225,540 (427,834) 442,592
Accrued Wages and Salaries.............................. 47,448 (27,089) 17,456
Accrued Benefit Plan Contributions...................... 122,975 (161,669) 185,469
Other Accrued Expenses.................................. (48,617) 82,282 (28,616)
Income Taxes Payable.................................... 349,839 (323,529) 320,004
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Net Cash Provided by Operating Activities........ 5,283,240 3,213,639 6,074,071
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Cash Flows from Investing Activities:
Capital Expenditures.................................... (1,709,527) (2,696,701) (963,917)
Proceeds from the Sale of Properties.................... 41,288 22,524 800,302
Proceeds from Held-to-Maturity Securities............... 6,151,774 5,831,753 4,316,492
Purchases of Held-to-Maturity Securities................ (6,154,114) (3,514,292) (6,081,987)
----------- ----------- -----------
Net Cash Used in Investing Activities............ (1,670,579) (356,716) (1,929,110)
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Cash Flows from Financing Activities:
Payments under Term Loan Agreement...................... (1,800,000) (1,800,000) (2,250,000)
Purchases of Treasury Stock............................. (347,243) (557,062) (61,333)
Cash Dividends Paid..................................... (1,232,429) (1,301,861) (1,065,845)
----------- ----------- -----------
Net Cash Used in Financing Activities............ (3,379,672) (3,658,923) (3,377,178)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents...... 232,989 (802,000) 767,783
Cash and Cash Equivalents at Beginning of Year............ 3,181,471 3,983,471 3,215,688
----------- ----------- -----------
Cash and Cash Equivalents at End of Year.................. $ 3,414,460 $ 3,181,471 $ 3,983,471
=========== =========== ===========
Cash Paid During the Year for:
Income Taxes.......................................... $ 1,395,161 $ 1,942,529 $ 1,614,913
Interest.............................................. $ 264,684 $ 458,080 $ 485,282
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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[CHIGAGO RIVET LOGO]
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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--The Company operates in the fastener industry and is in the
business of producing and selling rivets, cold-formed fasteners, screw machine
products, automatic rivet setting machines, parts and tools for such machines,
and the leasing of automatic rivet setting machines.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
PRINCIPLES OF CONSOLIDATION--The Consolidated Financial Statements include the
accounts of Chicago Rivet & Machine Co. and its wholly owned subsidiary, H & L
Tool Company, Inc. (H & L Tool). All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION--Revenues from product sales are generally recognized upon
shipment and an allowance is provided for estimated returns and discounts based
on experience.
LEASE INCOME--Automatic rivet setting machines are available to customers on
either a sale or lease basis. The leases, generally for a one-year term, are
cancelable at the option of the Company or the customer and are accounted for
under the operating method, which recognizes lease revenue over the term of the
lease. Rentals are billed in advance, and revenues attributable to future
periods are shown as unearned lease revenue in the consolidated balance sheets.
Costs related to lease revenue, other than the cost of the machines, are
expensed as incurred.
CREDIT RISK--The Company extends credit primarily on the basis of 30-day terms
to various companies doing business primarily in the automotive and appliance
industries. The Company has a concentration of credit risk primarily within the
automotive industry and in the Midwestern United States.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents and certificates of
deposit approximate fair value. The carrying amount reported for the note
payable approximates fair market value.
INVENTORIES--Inventories are stated at the lower of cost or net realizable
value, cost being determined principally by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT--Properties are stated at cost and are depreciated
over their estimated useful lives using the straight-line method for financial
reporting purposes. Accelerated methods of depreciation are used for income tax
purposes. Direct costs related to developing or obtaining software for internal
use are capitalized as property and equipment. Capitalized software costs are
amortized over the software's useful life when the software is ready for its
intended use. The estimated useful lives by asset category are:
Asset category Estimated useful life
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Land improvements........................... 15 to 25 years
Buildings and improvements.................. 10 to 35 years
Machinery and equipment..................... 9 to 12 years
Automatic rivet setting machines on lease... 10 years
Capitalized software costs.................. 3 to 5 years
Other equipment............................. 3 to 15 years
When properties are retired or sold, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss on
disposition is recognized currently. Maintenance, repairs and minor betterments
that do not improve the related asset or extend its useful life are charged to
operations as incurred.
INCOME TAXES--Deferred income taxes are determined under the asset and liability
method in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Deferred income taxes arise from temporary
differences between the income tax basis of assets and liabilities and their
reported amounts in the financial statements.
SEGMENT INFORMATION--In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." FAS 131 established new standards for
defining a Company's segments and disclosing information about them. It requires
that segments be based on the internal structure and reporting of the Company's
operations. The adoption of FAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information.
NET INCOME PER SHARE--Net income per share of common stock is based on the
weighted average number of shares outstanding of 1,151,333 in 1999, 1,159,360 in
1998 and 1,170,988 in 1997, after giving effect to a two-for-one stock split
that occurred September 19, 1997.
ESTIMATES--The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS--Certain items in 1998 have been reclassified to conform to
the presentation in 1999. These changes have no effect on the financial position
of the Company.
2--BALANCE SHEET DETAILS
1999 1998
------------ ------------
Inventories:
Raw materials................. $ 2,002,490 $ 1,656,179
Work in process............... 1,782,944 1,777,584
Finished goods................ 3,138,287 3,095,984
----------- -----------
$ 6,923,721 $ 6,529,747
=========== ===========
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8
12
[CHIGAGO RIVET LOGO]
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1999 1998
------------ ------------
Net Property, Plant and
Equipment:
Land and improvements......... $ 1,010,595 $ 1,008,901
Buildings and improvements.... 5,646,956 5,634,144
Production equipment, leased
machines and other.......... 25,239,969 23,737,405
----------- -----------
31,897,520 30,380,450
Less accumulated
depreciation................ 17,789,557 16,235,695
----------- -----------
$14,107,963 $14,144,755
=========== ===========
Other Accrued Expenses:
Property taxes................ $ 122,436 $ 100,008
Payroll taxes and
withholding................. 133,630 149,466
Interest...................... 17,876 26,652
Environmental costs........... 25,000 40,000
Commissions................... 74,836 85,039
Unearned lease revenue........ 26,115 43,267
All other items............... 140,825 144,903
----------- -----------
$ 540,718 $ 589,335
=========== ===========
3--LEASED MACHINES--Lease revenue amounted to $283,269 in 1999, $376,644 in 1998
and $330,312 in 1997. Future minimum rentals on leases beyond one year are not
significant. The cost and carrying value of leased automatic rivet setting
machines at December 31 were:
1999 1998
--------- ---------
Cost.................................. $577,932 $725,459
Accumulated depreciation.............. 512,125 610,616
-------- --------
Carrying value........................ $ 65,807 $114,843
======== ========
4--INCOME TAXES--The provision for income tax expense consists of the following:
1999 1998 1997
----------- ----------- -----------
Current
Federal............... $ 1,639,000 $ 1,492,000 $ 1,729,916
State................. 106,000 127,000 205,000
Deferred................ 30,000 98,000 248,084
----------- ----------- -----------
$ 1,775,000 $ 1,717,000 $ 2,183,000
=========== =========== ===========
The deferred tax liabilities and assets are comprised of the following:
1999 1998
------------ ------------
Depreciation.................... $(1,338,597) $(1,307,531)
----------- -----------
Inventory....................... 457,501 443,202
Accrued vacation................ 177,595 176,400
Unearned rental revenue......... 9,140 16,710
Allowance for doubtful
accounts...................... 27,800 26,110
Environmental accrual........... 8,750 15,448
Other........................... 34,727 36,577
----------- -----------
715,513 714,447
----------- -----------
$ (623,084) $ (593,084)
=========== ===========
The following is a reconciliation of the statutory federal income tax rate
to the actual effective tax rate:
1999 1998 1997
------------------ ------------------ -----------------
AMOUNT % AMOUNT % AMOUNT %
------------------ ------------------ -----------------
Expected tax at U.S.
Statutory rate......... $1,778,000 34.0 $1,726,000 34.0 $2,055,133 34.0
State taxes, net of
federal benefit........ 73,000 1.4 84,000 1.7 135,300 2.2
Other, net.............. 5,000 -- 7,000 .1 (7,433) --
Adjustment to prior year
accrual................ (81,000) (1.5) (100,000) (2.0) -- --
----------- ---- ----------- ---- ----------- ----
Income tax expense...... $1,775,000 33.9 $1,717,000 33.8 $2,183,000 36.2
=========== ==== =========== ==== =========== ====
5--NOTE PAYABLE--On November 25, 1996, in connection with the acquisition of H &
L Tool, the Company entered into a five-year unsecured term loan agreement (the
Term Loan) for $9 million, and a $1 million line of credit agreement (the Line
of Credit). The Term Loan bears interest, payable quarterly, at the Company's
option, at the reference rate of the financial institution less 75 basis points,
or the LIBOR rate plus 80 basis points, subject to certain financial covenants.
The rate was 6.75% as of December 31, 1999. Repayments of principal are made
quarterly in the amount of $450,000 through September 2001. The Line of Credit
was extended through May 30, 2000 and remained unused at December 31, 1999.
6--TREASURY STOCK TRANSACTIONS--In 1999, the Company purchased 15,400 shares of
its common stock for $347,243. In 1998, the Company purchased 15,800 shares of
its common stock for $557,062. All stock purchased was retired, the excess of
cost over par value was charged proportionately to additional paid-in capital
and retained earnings.
7--SHAREHOLDER RIGHTS AGREEMENT--On November 22, 1999, the Company adopted a
shareholder rights agreement and declared a dividend distribution of one right
for each outstanding share of Company common stock to shareholders of record at
the close of business on December 3, 1999. Each right entitles the holder, upon
occurrence of certain events, to buy one one-hundredth of a share of Series A
Junior Participating Preferred Stock at a price of $90, subject to adjustment.
The rights may only become exercisable under certain circumstances involving
acquisition of the Company's common stock, including the purchase of 10 percent
or more by any person or group. The rights will expire on December 2, 2009
unless they are extended, redeemed or exchanged.
8--PENSIONS--The Company has a noncontributory profit sharing plan covering
substantially all employees. Total expenses relating to the profit sharing plan
amounted to approximately $669,000 in 1999, $546,000 in 1998 and $627,000 in
1997.
During 1997, the Company's defined benefit pension plans were terminated
and all liabilities were satisfied.
- --------------------------------------------------------------------------------
9
13
[CHIGAGO RIVET LOGO]
- --------------------------------------------------------------------------------
9--OTHER INCOME (EXPENSE)--Other income (expense), net consists of the
following:
1999 1998 1997
---------- ---------- ----------
Gain on sale of properties
and equipment........... $ 6,690 $ 14,787 $ 175,059
Interest income........... 196,769 247,889 221,975
Interest expense.......... (255,908) (376,098) (546,666)
Amortization expense...... -- -- (8,348)
Other..................... 15,084 15,906 29,183
---------- ---------- ----------
$ (37,365) $ (97,516) $ (128,797)
========== ========== ==========
10--SEGMENT INFORMATION--The Company operates, primarily in the United States,
in two business segments as determined by its products. The fastener segment,
which comprises H & L Tool and the parent company's fastener operations,
includes rivets, cold-formed fasteners and screw-machine products. The assembly
equipment segment includes automatic rivet setting machines, parts and tools for
such machines and the leasing of automatic rivet setting machines. Information
by segment is as follows:
ASSEMBLY
FASTENER EQUIPMENT OTHER CONSOLIDATED
----------- ------------- ----------- ------------
YEAR ENDED
DECEMBER 31, 1999:
Net sales and lease
revenue............... $37,486,536 $11,593,721 $ -- $49,080,257
Depreciation........... 1,255,975 252,772 202,974 1,711,721
Segment profit......... 7,899,229 4,760,178 -- 12,659,407
Selling and administra-
tive expenses......... 7,370,977 7,370,977
Interest expense....... 255,908 255,908
Interest income........ (196,769) (196,769)
-----------
Income before income
taxes................. 5,229,291
-----------
Capital expenditures... 1,464,857 150,387 94,283 1,709,527
Segment assets:
Inventory............. 4,269,533 2,654,188 -- 6,923,721
Property, plant and
equipment........... 10,778,383 1,672,189 1,657,391 14,107,963
Other assets.......... -- -- 11,589,901 11,589,901
-----------
32,621,585
-----------
YEAR ENDED
DECEMBER 31, 1998:
Net sales and lease
revenue............... $33,931,740 $11,006,444 $ -- $44,938,184
Depreciation........... 1,148,343 213,294 136,665 1,498,302
Segment profit......... 7,073,936 4,758,406 -- 11,832,342
Selling and administra-
tive expenses......... 6,626,653 6,626,653
Interest expense....... 376,098 376,098
Interest income........ (247,889) (247,889)
-----------
Income before income
taxes................. 5,077,480
-----------
Capital expenditures... 1,992,015 229,553 475,133 2,696,701
Segment assets:
Inventory............. 3,761,580 2,768,167 -- 6,529,747
Property, plant and
equipment........... 10,588,483 1,790,190 1,766,082 14,144,755
Other assets.......... -- -- 11,141,279 11,141,279
-----------
31,815,781
-----------
ASSEMBLY
FASTENER EQUIPMENT OTHER CONSOLIDATED
----------- ------------- ----------- ------------
YEAR ENDED
DECEMBER 31, 1997:
Net sales and lease
revenue............... $32,712,820 $11,830,584 $ -- $44,543,404
Depreciation........... 1,068,940 187,708 115,767 1,372,415
Segment profit......... 7,016,647 5,404,439 -- 12,421,086
Selling and administra-
tive expenses......... 6,051,885 6,051,885
Interest expense....... 546,666 546,666
Interest income........ (221,975) (221,975)
-----------
Income before income
taxes................. 6,044,510
-----------
Capital expenditures... 533,865 291,814 138,238 963,917
Segment assets:
Inventory............. 3,698,325 2,656,282 -- 6,354,607
Property, plant and
equipment........... 9,941,054 1,609,264 1,403,775 12,954,093
Other assets.......... -- -- 13,638,760 13,638,760
-----------
32,947,460
-----------
The Company does not allocate selling and administrative expenses, except
for freight allowed and certain identifiable engineering expenses, for internal
reporting, thus, no allocation was made for segment disclosure purposes. Segment
assets reported internally are limited to inventory and long-lived assets.
Long-lived assets of one plant location are allocated between the two segments
based on estimated plant utilization as this plant serves both fastener and
assembly equipment activities. Other assets are not allocated to segments
internally and to do so would be impracticable. Sales to two customers in the
fastener segment accounted for 17, 15 and 15 percent and 11, 10 and 11 percent
of consolidated revenues during 1999, 1998 and 1997, respectively.
11--OTHER UNUSUAL ITEMS OF INCOME AND EXPENSE--Fourth quarter net income
includes the net favorable effect of certain adjustments related to inventory,
accruals and allowances of $.09, $.05 and $.16 per share, for 1999, 1998 and
1997, respectively. The 1998 adjustment includes $.09 per share related to the
reduction of accrued income taxes. The 1997 adjustment includes $.08 per share
related to the reduction in environmental reserves recorded in connection with
favorable resolution of certain environmental claims and revised liability
estimates in connection with certain other environmental claims.
12--COMMITMENTS AND CONTINGENCIES--The Company recorded rent expense aggregating
approximately $29,000, $26,000 and $27,000 for 1999, 1998 and 1997,
respectively. Total future minimum rentals at December 31, 1999 are not
significant.
The Company is, from time to time, involved in litigation, including
environmental claims, in the normal course of business. While it is not possible
at this time to establish the ultimate amount of liability with respect to
contingent liabilities, including those related to legal proceedings, management
is of the opinion that the aggregate amount of any such liabilities, for which
provision has not been made, will not have a material adverse effect on the
Company's financial position.
13--SUBSEQUENT EVENT (UNAUDITED)--Subsequent to year-end, the Company expects to
repurchase approximately 20 percent of its outstanding common stock. The Company
expects to fund this transaction through bank financing that will replace the
existing term loan agreement.
- --------------------------------------------------------------------------------
10
14
[CHIGAGO RIVET LOGO]
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Chicago Rivet & Machine Co.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, retained earnings and cash flows present
fairly, in all material respects, the financial position of Chicago Rivet &
Machine Co. and its subsidiary at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 6, 2000
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales and Lease Revenue $49,080,257 $44,938,184 $44,543,404 $22,510,953 $23,717,410
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,229,291 5,077,480 6,044,510 3,174,001 3,645,215
- -------------------------------------------------------------------------------------------------------------------------------
Net Income 3,454,291 3,360,480 3,861,510 1,948,001 2,235,215
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 3.00 2.90 3.30 1.66 1.91
- -------------------------------------------------------------------------------------------------------------------------------
Dividends Per Share 1.07 1.12 .91 .90 .88
- -------------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 1,151,333 1,159,360 1,170,988 1,171,496 1,172,944
- -------------------------------------------------------------------------------------------------------------------------------
Working Capital 12,447,590 12,302,179 13,766,681 12,040,579 12,710,825
- -------------------------------------------------------------------------------------------------------------------------------
Total Debt 3,150,000 4,950,000 6,750,000 9,000,000 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets 32,621,585 31,815,781 32,947,460 31,326,552 21,355,139
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 23,887,278 22,012,659 20,511,102 17,776,760 16,883,109
- -------------------------------------------------------------------------------------------------------------------------------
In November 1996 the Company acquired H & L Tool Company, Inc. The results
of operations for H & L Tool are included above from the date of acquisition.
- --------------------------------------------------------------------------------
11
15
[CHIGAGO RIVET LOGO]
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED):
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1999
Net Sales and Lease
Revenue............. $12,517,480 $12,933,690 $11,721,458 $11,907,629
Gross Profit......... 3,860,793 2,982,362 3,497,049 3,911,014
Net Income........... 1,152,460 481,112 816,774 1,003,945
Per Share Data:
Net Income Per
Share............. 1.00 .42 .71 .87
Average Common
Shares
Outstanding....... 1,153,496 1,152,832 1,152,139 1,147,005
1998
Net Sales and Lease
Revenue............. $11,672,949 $10,822,531 $10,331,367 $12,111,337
Gross Profit......... 3,401,609 3,194,414 3,180,502 3,539,101
Net Income........... 914,820 783,924 718,506 943,230
Per Share Data:
Net Income Per
Share............. .78 .68 .62 .82
Average Common
Shares
Outstanding....... 1,169,100 1,159,793 1,155,535 1,153,764
1997
Net Sales and Lease
Revenue............. $11,898,645 $11,564,802 $10,122,352 $10,957,605
Gross Profit......... 3,108,504 3,750,335 3,196,822 3,690,720
Net Income........... 731,983 1,070,424 704,495 1,354,608
Per Share Data:
Net Income Per
Share............. .62 .91 .60 1.17
Average Common
Shares
Outstanding....... 1,171,496 1,171,444 1,170,896 1,170,134
INFORMATION ON COMPANY'S COMMON STOCK
The Company's common stock is traded on the American Stock Exchange. The
following chart shows the dividends declared and the quarterly high and low
prices of the common stock for the last two years.
Dividends
Declared Market Range
------------------------------------------------------------------------------------
QUARTER 1999 1998 1999 1998
------- ---- ---- -------------------------------- --------------------------------
First................ $.53* $.58* $27 3/4 $23 $46 1/2 $28
Second............... .18 .18 $28 3/8 $19 1/8 $49 1/2 $32
Third................ .18 .18 $26 7/8 $20 5/8 $34 7/8 $24 3/4
Fourth............... .18 .18 $24 1/2 $21 3/8 $30 1/2 $21
- ---------------
* Includes an extra dividend of $.35 and $.40 per share for 1999 and 1998,
respectively.
- --------------------------------------------------------------------------------
12
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[CHICAGO RIVET LOGO]
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
WILLIAM T. DIVANE, JR.
President and Chairman of
Divane Bros. Electric Co.
STEPHEN L. LEVY(a)(c)
Senior Advisor to the
Chief Executive Office
Motorola Inc. (retired)
Schaumburg, Illinois
JOHN R. MADDEN(a)(c)(e)
Chairman of the Board
of Directors of
The First National Bank
of La Grange
La Grange, Illinois
JOHN A. MORRISSEY(e)
Chairman of the Board
of the Company
President & Director
Algonquin State Bank
Algonquin, Illinois
WALTER W. MORRISSEY(a)(c)(e)
Attorney at Law
Morrissey & Robinson
Oak Brook, Illinois
JOHN C. OSTERMAN(e)
President of the Company
CORPORATE OFFICERS
JOHN A. MORRISSEY
Chairman, Chief
Executive Officer
JOHN C. OSTERMAN
President, Chief Operating
Officer and Treasurer
DONALD P. LONG
Vice President--Sales
KIMBERLY A. KIRHOFER
Secretary
MICHAEL J. BOURG
Corporate Controller
CHICAGO RIVET & MACHINE CO.
ADMINISTRATIVE & SALES OFFICES
Naperville, Illinois
Norwell, Massachusetts
MANUFACTURING FACILITIES
Albia Division
Albia, Iowa
Jefferson Division
Jefferson, Iowa
Tyrone Division
Tyrone, Pennsylvania
H & L Tool Company, Inc.
Madison Heights, Michigan
(a) Member of Audit Committee
(c) Member of Compensation Committee
(e) Member of Executive Committee
Chicago Rivet & Machine Co. - 901 Frontenac Road - P.O. Box 3061 - Naperville,
Illinois 60566 - Telephone: (630) 357-8500
- --------------------------------------------------------------------------------
17
[CHICAGO RIVET LOGO]
Chicago Rivet & Machine Co. - 901 Frontenac Road - P.O. Box 3061 - Naperville,
Illinois 60566 - Telephone: (630) 357-8500