Item 1. BUSINESS
Michigan Rivet Corporation ("MRC") manufactures steel fasteners, principally rivets and hinge pins, which are, in general, sold as original equipment to the automotive industry. The fasteners range in size from a diameter of 1/8 of an inch to 5/8 of an inch and are manufactured to customers' designs and specifications through wire drawing, cold extrusion, cold heading and certain secondary machining operations.
A wholly owned subsidiary of MRC, The McLaughlin Company ("McL"), manufactures a wide variety of specialized steel nuts, nut and washer assemblies and special fasteners which are sold as original equipment to the automotive industry and as standard products to a wide variety of manufacturers. The nuts range in size up to 1 inch across the flats and are manufactured through cold extrusion, cold heading, stamping, tapping and certain other secondary operations.
Both MRC's and McL's (collectively referred to as "Company") business is entirely within a single industry segment.
Manufacturing and Machining Operations
MRC purchases pickled and lubricated cold rolled steel rod ranging in diameter from 7/32 of an inch to 45/64 of an inch. Charter Steel and American Steel and Wire are the primary sources for raw material with a normal six week availability. The steel rod is forced through a wire drawer consisting of one or more dies, each of a smaller diameter than the preceding die. The rod is thereby converted into cold rolled wire.
The cold rolled wire is then fed into a cold header, either directly or after being forced through another wire drawer attached to the header. In the header the wire is first cut into slugs, which may vary in length from 1/4 of an inch to approximately five inches. These slugs are then forced or "hit" into one or more dies to produce formed steel parts. The cold headers owned by MRC generally cut and force or "hit" the slugs to size at rates of 60 to 300 "hits" per minute. The drawing and heading operations are conducted with the steel rod and wire at room temperature. Hence, the process is called "cold" heading.
Some of MRC's fasteners require secondary machining operations, which include drilling, broaching, annealing (to soften the part), tumbling (to remove burrs and other irregularities), trimming, pointing, grooving, thread-rolling, knurling and assembly. Other secondary
operations, such as plating and heat-treating, are performed on some of MRC's products by outside suppliers of such services.
McL's operations are very similar to those of MRC. Instead of purchasing cold rolled steel rod and converting it into wire through the drawing process, McL purchases the wire in a form ready to be fed into a cold header, principally from Super Steel Treating Company. McL also purchases coiled flat stock which is used in presses to manufacture floating cage nuts, clinch nuts, and washers for the nut and washer assemblies.
While MRC's manufacturing process produces little waste, McL's process produces slugs from the nut forming operation, offal from stampings and turnings from tapping. Besides tapping, other secondary operations performed by McL are washing, tumbling, locking and staking. All products manufactured by the Company are subjected to quality control review through the various stages of production.
Management believes that the Company is in substantial compliance with all existing laws and regulations pertaining to protection of the environment and does not anticipate that continued compliance will have any material effect on the Company or its operations.
Customers and Marketing
The Industry Information, which includes the names of the Company's major customers, set forth in Note 1 to the consolidated financial statements included in Item 8 of this report is incorporated herein by reference. The loss of any major domestic automobile producer as a customer would have a materially adverse effect upon the Company's business.
The production of motor vehicles is generally reduced during July and August of each year while retooling occurs to accommodate design changes for the forthcoming model year. To this extent, the automotive industry, upon which the Company is primarily dependent for its business, can be characterized as seasonal in nature. However, the Company's production of automotive parts reflects, in large part, periodic releases against customers' purchase orders that are usually spaced throughout the automotive industry's model year (July to July). A majority of the Company's orders are in the form of blanket purchase orders (some covered under long-term contracts), which allows the Company to manufacture in advance of releases knowing the product is salable for the current model year. The nature of releases against open orders make it impossible to determine the value of backlog orders.
The Company sells its fasteners primarily through its own salaried personnel sales staff and, to a lesser extent, through independent manufacturers' representatives compensated on a commission basis. The Company also markets through national distribution centers acting as distributors for standard products and agents for specialized products.
Competition
The Company operates in a highly competitive industry. The Company has no knowledge of its relative position in the general automotive parts industry. There are a number of cold heading and cold extrusion companies in Michigan which supply the automotive industry with parts similar to those produced by the Company and which are larger and have greater resources than the Company. The Company must also compete with domestic and foreign companies which manufacture similar parts for the automobile industry by methods other than cold heading and cold extrusion. There is no dominant supplier in the Company's segment of the industry. Additionally, the three major domestic automobile manufacturers have equipment in some of their plants with which they manufacture similar parts for themselves by cold heading and other methods.
Quality and price are the major factors in supplying parts to the automotive industry. Quality indexes must be maintained to be a viable source, and the Company, to date, has been able to compete successfully with other sources of the automotive parts which it makes. While the Company does not believe that it is in danger of losing any significant portion of its business to these automotive customers, no representation can be made that certain parts now made by the Company may not in the future be made by an automobile manufacturer or by a competitor of the Company, some by the methods employed by the Company.
Employees
As of December 21, 1998, the Company had approximately 289 employees, of whom 74 were salaried. Hourly employees are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America.
Other
The success of the Company's business is not dependent upon any material patents, trademarks, licenses, franchises or concessions held by it. The dollar amount spent during each of the last two fiscal years on research activities relating to the development of new products or services or the improvement of existing products or services is deemed by management to be insignificant. The Company's export sales were approximately 9.0% of net sales in Fiscal Year 1998.
Item 2.
Item 2. PROPERTIES
MRC's manufacturing plant and executive offices are located at 13201 Stephens Road, Warren, Michigan, a suburb of Detroit. There are approximately 150,000 square feet of floor space at the plant, of which 120,000 are devoted to manufacturing. The warehouse and shipping operations encompass approximately 20,000 square feet with the remainder devoted to office and administration purposes. The building, and the 7.5 acre parcel on which it is situated, are owned by MRC subject to an outstanding mortgage in the amount of $2,340,101 at October 31, 1998.
McL's manufacturing plant and executive offices are located at 1701 Standish Avenue, Petoskey, Michigan, a city 260 miles north of Detroit. There are approximately 79,000 square feet of floor space at the plant, of which 76,000 are devoted to manufacturing with the remainder being used for office and administration purposes. The building and the 5.5 acre parcel on which it is situated are owned by McL.
The Company owns all of its manufacturing plant and equipment and believes that all such plant and equipment is well maintained and suited for the purposes intended. The Company has adequate manufacturing capacity for current operations and excess capacity for future growth.
Item 3.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year to a vote of security holders.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's common stock is traded over-the-counter. The prices shown for the fiscal years ended October 31, 1998 and 1997 were obtained from a Detroit-area stock brokerage firm that effects transactions of Company stock from time to time. Quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. Trading in the registrant's stock is limited and sporadic and should not be deemed to constitute an established public trading market.
Year Ended Year Ended Oct. 31, 1998 Oct. 31, 1997 -------------- --------------- Bid Ask Bid Ask -------------- --------------- First quarter 8 11 8 9 Second quarter 11 14 7 9 Third quarter 11 15 8 10 Fourth quarter 14 18 8 10
As of December 4, 1998, there were approximately 291 holders of record of the common stock of MRC.
The Company paid dividends in Fiscal Year 1998 as follows:
Declared: December 17, 1998 Paid: January 26, 1998 12(cent)per share February 18, 1998 March 30, 1998 12(cent)per share May 19, 1998 June 22, 1998 12(cent)per share August 26, 1998 September 30, 1998 12(cent)per share
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial review presents management's discussion and analysis of financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements.
Forward-Looking Statements This discussion and analysis of financial condition and results of operations, contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.
1998 vs. 1997 Results of Operations
Net sales increased to $45,287,000 in Fiscal Year 1998, a five percent (5%) increase from net sales of $43,013,000 in Fiscal Year 1997. The net profit for Fiscal Year 1998 was $2,037,000 vs. a $1,527,000 profit for Fiscal Year 1997. The growth in sales resulted from a combination of new products, increased volume, and change in product mix. Sales to Ford, General Motors, DaimlerChrysler and their suppliers as a percent to total sales was 90% in Fiscal Year 1998 and 91% for Fiscal Year 1997.
Cost of sales as a percentage of net sales was 84% for Fiscal Year 1998 and 86% for the prior year.
Some major cost changes were as follows:
- - A reduction of $350,000 for FAS 106 accrual due to contractual and personnel changes.
- - A reduction of 23% for excess freight costs to customers and 3.4% lower tooling costs which totaled $158,000.
- - A reduction of 3.3% for raw material costs due to changes in some types used and product mix which amounted to $400,000.
Selling, general and administrative expenditures as a percentage of net sales remained at 8.3% of sales for Fiscal Year 1998 and 1997. The dollar amount was an increase of $175,000 from the prior year. This was primarily a result of increased bonus provision and write off of uncollectible accounts.
Proceeds received from the sale of obsolete and excess equipment were $696,000 in Fiscal Year 1998 and $179,000 in Fiscal Year 1997.
Interest expense decreased $13,000 from the prior year due to lower short-term notes and interest rates from the bank.
Liquidity and Capital Resources
The interest rate on $2,340,000 of the Company's Mortgage and Long Term Equipment Loan Agreements with the Company's lending institution, Comerica Bank, was at the bank's prime rate. The Revolving Credit available remains at $5,000,000 with the interest rate at equal to 25 basis points below the bank's prime rate. The Company is in compliance with all the covenants of the lending agreement.
The Company's cash decreased $568,000 from the beginning of the Fiscal Year 1998. Cash flow from operating activities was $2,153,000 in Fiscal Year 1998, due primarily to earnings, non-cash expenses for depreciation and accrued postretirement benefits. Cash of $3,110,000 was used to acquire equipment and pay short and long term debt. Cash of $306,000 was used to pay dividends to shareholders. As of October 31, 1998, the Company had $3,952,000 available under its revolving line of credit. Expenditures for additional equipment during Fiscal year 1999 are presently expected to approximate $2,300,000 which are projected to be financed from cash generated from operations and cash from the revolving credit line.
The Company is continuing to review the costs of all parts and when necessary request price adjustments from our customers. The Company has had some success, about ten percent, in attaining a few price adjustments. The Company will continue its long range capital improvements plan to upgrade major production equipment on an orderly, as needed basis and, to evaluate all current outside operations. There can be no assurance that the Company's projections will be realized.
Sales to all domestic and foreign customers are quoted at U.S. dollar currency rates, therefore eliminating any foreign currency risks.
YEAR 2000
The Year 2000 issue ("Y2K") exists because some computer programs use two digits rather that four to define the applicable year. For instance, these programs record the year 1998 as "98." Any date-sensitive software may interpret a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including a temporary inability to engage in normal business activities.
Readiness The Company has conducted an inventory and assessment of its information technology ("IT") systems and non-IT systems (such as building facilities, voice mail, telephone and other systems containing embedded microprocessors). The inventory was completed during 1997. The remediation phase and testing phases were completed during 1998.
The Company's material internal IT systems principally consist of accounting and manufacturing software applications. The Company has tested these systems and are assured that all applications are Y2K compliant.
The Company purchases products and services from third parties. The Company has sought written assurances from its material vendors and suppliers that there will be no interruption of service or acceptable
product as a result of the Y2K issue. Based in part on the assurances received or not received, throughout calendar 1999 the Company will resource work to mitigate the negative effects on the Company in the event the Y2K issue results in the unavailability of products or services. The Company cannot assure that any contingency plans will prevent product or service interruption by one or more of the Company's third party vendors or suppliers from having a material adverse effect on the Company.
Cost The Company expects the costs directly associated with its Y2K efforts to be minor and under $50,000 total.
Risks The Company may be at risk from external infrastructure failures, including electrical power, telephone, and transportation, among others. Investigation and assessment of infrastructures is beyond the scope and resources of the Company. Among the risks arising from these sources are the Company's inability to conduct business in its offices that lose electrical power or experience failure of elevator, security, HVAC or other building systems, and disruption to Company business if telephone or cellular communication is unavailable.
Contingencies The Company has developed contingency plans in regard to its internal systems, vendor/supplier issues or any of the more global infrastructure issues. The plan is to create a complete back-up file of all data and if necessary to manually transact all functions until problem is corrected.
Forward-Looking Statements The estimates regarding the costs of the Company's Y2K efforts, as well as statements regarding the potential effect of Y2K issues on the Company and the Company's plans to deal with issues or contingencies raised by Y2K issues, are forward-looking statements. These statements are subject to a number of risks and uncertainties which could cause actual costs, effects or plans to differ from the discussion above. Among these risks or uncertainties are the following:
- - difficulty in successfully identifying all hardware, software and systems which may be affected by Y2K problems or which may contain microprocessors affected by those problems;
- - difficulty in identifying all third parties whose inability to process Y2K date information may affect the Company;
- - the fact that the Company will have no control over the efforts of material vendors, suppliers and other providers to address their Y2K issues; and
- - the effect of general economic conditions on the willingness of third parties to make the expenditures necessary to address Y2K problems which may affect the Company.
Dividends
Dividends totaling forty-eight cents ($.48) per share were paid in Fiscal Year 1998.
1997 vs. 1996 Results of Operations
Net sales increased to $43,013,000 in Fiscal Year 1997, a three percent (3%) increase from net sales of $41,597,000 in Fiscal Year 1996. The net profit for Fiscal Year 1997 was $1,527,000 vs. a $1,333,000 profit for Fiscal Year 1996. The growth in sales resulted from a combination of new products, increased volume, and change in product mix. Sales to Ford, General Motors, Chrysler and their suppliers as a percent to total sales was 91% in Fiscal Year 1997 and 92% for Fiscal Year 1996.
Cost of sales as a percentage of net sales remained the same for Fiscal Year 1997 and 1996.
Some major cost changes were as follows:
- - A ten percent (10%) increase in hourly labor due to contractual rate increases and lower efficiencies.
- - Higher tooling costs due to increased costs and new job set ups.
- - Outside secondary costs were lower due to bringing operations inside at an overall savings.
- - Cost to acquire QS-9000 certification was $75,000.
Selling, general and administrative expenditures as a percentage of net sales decreased to 8.3% of sales in Fiscal Year 1997 from 8.6% in Fiscal Year 1996. The dollar amount was an increase of $28,000 from the prior year. This was primarily a result of increased commissions, salary wages and bonus provision.
Proceeds received from the sale of obsolete and excess equipment were $179,000 in Fiscal Year 1997 and $78,000 in Fiscal Year 1996.
Interest expense decreased $145,000 from the prior year due to lower short-term notes and interest rates from the bank.
Liquidity and Capital Resources
The interest rate on $2,900,000 of the Company's Mortgage and Long Term Equipment Loan Agreements was lowered by 50 basis points to equal the bank's prime rate. The Revolving Credit available remains at $5,000,000 with the interest rate reduced 25 basis points to a rate equal to 25 basis points below the bank's prime rate. The Company is in compliance with all the covenants of the lending agreement.
The Company's cash increased $119,000 from the beginning of the Fiscal Year 1997. Cash flow from operating activities increased to $3,633,000 in Fiscal Year 1997, due primarily to earnings, non-cash expenses for depreciation and accrued postretirement benefits and other current liabilities. Cash of $2,959,000 was used to acquire equipment and pay short and long term debt. Cash of $311,000 was used to pay dividends to shareholders. As of October 31, 1997, the Company had $4,800,000 available under its revolving line of credit. Expenditures for additional equipment during Fiscal year 1998 are presently expected to
approximate $2,300,000 which are projected to be financed from cash generated from operations and cash from the revolving credit line.
The Company is continuing to review the costs of all parts and when necessary request price adjustments from our customers. The Company has had some success, about ten percent, in attaining a few price adjustments. The Company will continue its long range capital improvements plan to upgrade major production equipment on an orderly, as needed basis and, to evaluate all current outside operations. There can be no assurance that the Company's projections will be realized.
Dividends
Dividends totaling forty-eight cents ($.48) per share were paid in Fiscal Year 1997 for an increase of 30% over amounts paid in Fiscal Year 1996.
1996 vs. 1995 Results of Operations
Net sales increased to $41,597,000 in Fiscal Year 1996, a six percent (6%) increase from net sales of $39,211,000 in Fiscal Year 1995. The net profit for Fiscal Year 1996 was $1,333,000 vs. a $1,630,000 profit for Fiscal Year 1995. Fiscal Year 1995 profits included life insurance proceeds. The growth in sales resulted from a combination of new products, increased volume, and change in product mix. Sales to Ford, General Motors, Chrysler and their suppliers as a percent to total sales was 92% in Fiscal Year 1996 and 1995.
Cost of sales as a percentage of net sales decreased to 85.4% in Fiscal Year 1996 from 88.0% in Fiscal Year 1995.
Some major cost changes were as follows:
- - A small reduction in hourly direct and indirect labor due to automation and better utilization of resources.
- - Lower manufacturing costs due to improved tooling and maintenance procedures.
- - The largest cost reduction came in the fringe benefit area. Workers Compensation and retiree medical accrual (FAS 106) were the areas that had significant lower costs. The lower FAS 106 accrual will continue in future years as a result of the May 1995 agreement with the Union.
Selling, general and administrative expenditures as a percentage of net sales decreased to 8.6% of sales in Fiscal Year 1996 from 8.7% in Fiscal Year 1995. The dollar amount was an increase of $145,000 from the prior year. This was primarily a result of increased sales commissions, salary wage and bonus, and Michigan Single Business Tax.
Proceeds received from the sale of excess production equipment were $78,000 in Fiscal Year 1996.
Interest expense decreased $177,000 from the prior year due to lower short-term notes and interest rate from the bank.
Liquidity and Capital Resources
The interest rate on $3,000,000 of the Company's Mortgage and Long Term Equipment Loan Agreements was lowered by .25% to prime +.5%. The Revolving Credit remains at $5,000,000 with the interest rate reduced .75% to prime. The Company is in compliance with all the Covenants of the lending agreement.
The Company's cash increased $9,000 from the beginning of the Fiscal Year 1996. Cash flow from operating activities increased to $2,320,000 in Fiscal Year 1996, due primarily to earnings and to non-cash expenses for depreciation and the accrued postretirement benefits. Cash of $2,154,000 was used to acquire equipment and pay short and long term debt. The Company paid down $309,000 on its revolving line of credit and at October 31, 1996 had $4,800,000 available under the agreement. Expenditures for additional equipment during Fiscal Year 1997 are presently expected to approximate $2,300,000, which are projected to be financed from cash generated from operations and cash from the revolving credit line.
The Company is continuing to review the costs of all parts and when necessary request price adjustments from our customers. The Company has had some success in attaining a few price adjustments in the past year. The Company will continue its long range capital improvements plan to upgrade major production equipment on an orderly, as needed basis. There can be no assurance that the Company's projections will be realized.
Dividends
Dividends totaling thirty-seven cents ($.37) per share were paid in Fiscal Year 1996 for an increase of 54% over amounts paid in Fiscal Year 1995.
Impact of Inflation
The Company maintains data on its costs which allows it to monitor the impact of changes due in part to inflation and also to other factors such as technological change. Periodically, usually on a part-by-part basis, increases in costs are reviewed and are, to the extent allowed by the Company's customers and permitted by competition, passed along as price increases.
The Company is party to an agreement with one of its major customers which requires automatic price decreases in future contract years. Although this provision will prevent the Company from passing along increases in costs related to the project, the Company believes that it will be able to absorb any such increases due to increased production efficiencies currently planned.
The Company continues to monitor controllable costs in the areas of labor, raw material, work-in-process and finished goods inventory, as
well as other suppliers of goods or services so that assets are used more productively and margins are improved.
Other
The volatility of the domestic automotive industry and the Company's reliance on this important customer base for sales causes the reported information not to be necessarily indicative of future operating results or future financial conditions for the Company.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of the end of the fiscal year, the Company has no material exposure of market risks related to currency, interest rates or otherwise.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
The information called for by the items within this part is included in the Company's 1999 Proxy Statement, and is incorporated herein by reference, as follows
Caption(s) in 1999 Proxy Statement ----------------------------------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........"Election of Directors" Item 11.
Item 11. EXECUTIVE COMPENSATION................"Executive Compensation" Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..."Security Ownership of Management" Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........."Certain Relationships and Related Transactions"
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) Financial Statements, Schedules and Exhibits
(1) and (2)--The response to this portion of Item 14 is submitted as a separate section of this report.
(3) Listing of exhibits
3.1--Articles of Incorporation - Previously filed as Exhibit 3 to the registrant's Annual Report on Form 10K for the year ended October 31, 1982 and incorporated herein by reference.
3.2--Bylaws - Previously filed as Exhibit 3 to the registrant's Annual Report on Form 10K for the year ended October 31, 1976 and incorporated herein by reference.
21--Subsidiaries of Registrant
(b) No reports on Form 8-K were filed during the last quarter of the Company's fiscal year ended October 31, 1998.
(c) Exhibits:
See Item 14(a)(3) above.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICHIGAN RIVET CORPORATION
/s/ William B. Stade ------------------------- William B. Stade President
1/22/99 ------------------------- Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of this registrant and in the capacities indicated on the 22nd day of January 1999.
/s/ William B. Stade /s/ Kermit L. Knuppenburg - ------------------------ ----------------------------- William B. Stade Kermit L. Knuppenburg Chairman of the Board, Director President and Director
/s/ Anthony W. Livorine /s/ Clark V. Stevens - ------------------------ ----------------------------- Anthony W. Livorine Clark V. Stevens Director Director
/s/ William P. Lianos /s/ Charles E. Blank - ------------------------ ---------------------------- William P. Lianos Charles E. Blank Exec. V. P. & Treasurer and Director Director (Principal Financial & Accounting Officer)
/s/ Anthony J. Caputo - ------------------------ Anthony J. Caputo Director
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1), (2), and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED OCTOBER 31, 1998
MICHIGAN RIVET CORPORATION
WARREN, MICHIGAN
FORM 10-K--ITEM 14(a)(1) and (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES
The following consolidated financial statements of Michigan Rivet Corporation and subsidiaries are included in Item 8:
Consolidated balance sheets--Years ended October 31, 1998, 1997 and
Consolidated statements of operations and retained earnings--Years ended October 31, 1998, 1997 and 1996
Consolidated statements of cash flows--Years ended October 31, 1998, 1997 and 1996
Notes to consolidated financial statements--Years ended October 31, 1998, 1997, and 1996
The following consolidated financial statement schedule of Michigan Rivet Corporation and subsidiaries is included in Item 14(d):
Schedule VIII--Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
[PLANTE & MORAN, LLP LETTERHEAD] ================================================================================
Independent Auditor's Report
To the Board of Directors and Stockholders Michigan Rivet Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Michigan Rivet Corporation and subsidiaries as of October 31, 1998, 1997 and 1996, and the related consolidated statements of income and retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Michigan Rivet Corporation and subsidiaries at October 31, 1998, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
PLANTE & MORAN, LLP
December 10, 1998
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
See Notes to Consolidated Financial Statements.
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
See Notes to Consolidated Financial Statements.
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Michigan Rivet Corporation and subsidiaries (collectively, the "Company"). Upon consolidation, significant intercompany accounts and transactions are eliminated.
DESCRIPTION OF BUSINESS - The Company is a domestic manufacturer of cold headed steel fasteners, nuts and components, principally for the automotive industry. Sales to General Motors Corporation, Ford Motor Company and DaimlerChrysler Corporation, including their suppliers, are summarized as follows:
The Company generally does not require collateral from its customers. Credit losses from automobile and related manufacturers have been minimal and within management's expectations.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for certain inventories (approximately 24 percent, 26 percent and 26 percent of consolidated inventories at October 31, 1998, 1997 and 1996, respectively) and the first-in, first-out (FIFO) method for all other inventories.
Current cost exceeded the balance sheet carrying amount of LIFO inventories by $468,000, $403,000 and $407,000 in 1998, 1997 and 1996, respectively.
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT - Properties are stated at cost and include expenditures that materially increase the useful lives of existing buildings and equipment. Expenditures for normal repairs, maintenance and production tooling are charged to operations as incurred. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets.
INCOME TAXES - Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect. Current taxes payable or refundable are based on amounts on tax returns for the year.
EMPLOYEE POSTRETIREMENT BENEFITS - The Company provides health care and life insurance benefits for certain retired employees. This plan is unfunded and benefits are paid when they are incurred by the retiree. These benefits are recognized as an expense as employees render service.
RECLASSIFICATION - Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 - DEBT
Notes payable to bank represent borrowings for working capital purposes under a $5,000,000 short-term revolving line of credit, which is renewed quarterly and bears interest at the lending institution's prime rate less .25 percent (prime was 8.0 percent at October 31, 1998). The weighted average interest rate for 1998, 1997 and 1996 was 8.47 percent, 8.59 percent and 8.99 percent, respectively. Available borrowings under this agreement are based on a percentage of eligible accounts receivable.
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 2 - DEBT (CONTINUED)
Long-term debt consists of the following obligations:
The mortgage note is payable in monthly installments of $39,757 including interest, and matures February 1, 2000. The mortgage note bears interest at the lending institution's prime rate (prime was 8.0 percent at October 31, 1998). The Company's financing agreements include covenants that require minimum levels of working capital, tangible net worth and debt to equity ratios. The agreements also require the lender's approval before cash dividends may be declared or paid.
Equipment notes payable required monthly payments of $10,174 plus interest at 9 percent and were repaid in 1998.
Maturities of long-term debt following 1998 are as follows:
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 2 - DEBT (CONTINUED)
As of October 31, 1998, substantially all of the Company's assets were mortgaged or otherwise pledged as collateral for the various debt agreements.
Cash payments for interest were $283,074, $326,493 and $473,295 in 1998, 1997 and 1996, respectively.
NOTE 3 - FEDERAL INCOME TAXES
The provision for income tax expense is as follows:
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 3 - FEDERAL INCOME TAXES (CONTINUED)
The principal components of deferred federal income tax credits are as follows:
NOTE 4 - RETIREMENT BENEFITS
PENSION PLANS - Certain employees of the Company who are members of collective bargaining units are covered by a noncontributory defined benefit pension plan. The plan provides benefits that are based on a stated amount for each year of service plus a frozen vested accrued severance benefit calculated as of August 26, 1977 for eligible employees on that date. The Company's funding policy is to make at least the minimum annual contribution required by applicable regulations.
A summary of the components of pension income for the union plan follows:
Assumptions used in accounting for the plan were as follows:
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 4 - RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the funded status and amounts recognized in the consolidated balance sheet for the union plan:
Plan assets are invested primarily in pooled equity investment funds, obligations of the U.S. government and its agencies and certain other investments.
During 1997, the plan was amended to increase the benefit levels resulting in an increase in the unrecognized prior service cost.
Certain employees participate in a Company-sponsored savings plan. Under the plan, the Company contributes a defined amount to individual employee accounts based on the respective employee's contribution. The Company contributed approximately $120,000, $60,000 and $50,000 to this plan in 1998, 1997 and 1996, respectively.
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 4 - RETIREMENT BENEFITS (CONTINUED)
In 1998, certain employees began participating in a multiemployer defined benefit plan. The Company contributed approximately $70,000 to the plan during 1998. The plan allows for withdrawal from the plan, without penalty or future liability, during the first three years of participation.
POSTRETIREMENT BENEFITS - As discussed in Note 1, the Company provides health care and life insurance benefits for certain retired employees. The Company adopted the provisions of SFAS 106 effective November 1, 1993. The Company elected to recognize the transition obligation over 20 years.
In subsequent years, the Company and its collective bargaining unit have agreed to modifications to the postretirement benefit plan. These modifications primarily related to a cap on future retiree medical insurance benefits and a change in the limit of the Company's subsidy and resulted in a reduction of the accumulated postretirement benefit obligation. This reduction has been used to reduce the transition obligation, which will be recognized prospectively over the remaining amortization period allowed by SFAS 106.
The Company recognized an expense related to postretirement benefits consisting of service cost, interest cost and transition amortization in 1998, 1997 and 1996, as follows:
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 4 - RETIREMENT BENEFITS (CONTINUED)
The amounts reported on the balance sheet at October 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 -------- -------- --------
Accumulated postretirement benefit obligation: Fully eligible active participants $ 979,963 $ 900,253 $ 1,051,138 Other active participants 710,836 896,131 957,331 Retired participants 2,302,770 2,920,002 3,207,589 ----------- ----------- -----------
Total accumulated postretirement benefit obligation 3,993,569 4,716,386 5,216,058
Unrecognized net obligation at transition (2,485,642) (2,696,908) (3,556,706) Unrecognized net gain 2,659,716 1,994,092 1,819,788 ----------- ----------- -----------
Accrued postretirement benefit cost $ 4,167,643 $ 4,013,570 $ 3,479,140 =========== =========== ===========
The Company has not funded any portion of its accumulated postretirement benefit obligation except for benefits being paid as incurred by participants. Cash paid for these benefits totaled $226,000, $202,000 and $190,000 in 1998, 1997 and 1996, respectively. The Company's estimate of the current portion of this accrued benefit is shown as a current liability.
The significant actuarial assumptions used to determine the cost to the Company at October 31, 1998 are as follows:
MICHIGAN RIVET CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998, 1997 AND 1996
NOTE 4 - RETIREMENT BENEFITS (CONTINUED)
A 1 percent increase in the health care trend rate assumptions would increase the October 31, 1998 accumulated postretirement benefit obligation by 1.1 percent and would increase the aggregate of the 1998 service and interest cost components of the net periodic postretirement benefit cost by 1.3 percent.
NOTE 5 - CONTINGENCIES
The Company is self-insured for purposes of workers' compensation insurance. Under the plan, the Company has specific stop-loss insurance for occurrences exceeding $300,000 per individual claim. The Company's authority for self-insurance is renewed yearly by the State of Michigan on January 1. The Company currently has a standby letter of credit of $200,000 pledged for potential future claims. Workers' compensation claims totaled approximately $351,000, $301,000 and $195,000 for the years ended October 31, 1998, 1997 and 1996, respectively.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the fair value of financial instruments, as well as the methods and significant assumptions used to estimate fair value, is as follows:
SHORT-TERM FINANCIAL INSTRUMENTS - The fair value of short-term financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximates the carrying amount in the accompanying consolidated financial statements due to the short maturity of such instruments.
LONG-TERM DEBT - The fair value of long-term debt approximates the carrying amount based on the current borrowing rates offered for such instruments since the current rates reflect market rates.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
A - Represents uncollectible accounts charged off, net of recoveries.
Exhibit Index -------------