EX-13 2 c03597exv13.txt ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 [CHICAGO RIVET LOGO] Chicago Rivet & Machine Co. 2005 Annual Report . . . [CHICAGO RIVET LOGO] -------------------------------------------------------------------------------- HIGHLIGHTS
------------------------------------------------------------------------------------------ 2005 2004 2003 ------------------------------------------------------------------------------------------ NET SALES AND LEASE REVENUE.................... $39,760,756 $39,232,866 $38,190,908 NET INCOME (LOSS).............................. (398,612) 1,523,434 817,527 NET INCOME (LOSS) PER SHARE.................... (.41) 1.58 .85 DIVIDENDS PER SHARE............................ .87 .72 .97 NET CASH PROVIDED BY OPERATING ACTIVITIES...... 693,152 2,320,060 3,810,415 EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT.................................... 647,162 1,359,582 641,715 WORKING CAPITAL................................ 14,839,923 15,222,262 14,020,185 TOTAL SHAREHOLDERS' EQUITY..................... 23,578,156 24,817,303 23,989,484 COMMON SHARES OUTSTANDING AT YEAR-END.......... 966,132 966,132 966,132 SHAREHOLDERS' EQUITY PER COMMON SHARE.......... 24.40 25.69 24.83
ANNUAL MEETING The annual meeting of shareholders will be held on May 9, 2006 at 10:00 a.m. at 901 Frontenac Road Naperville, Illinois Chicago Rivet & Machine Co. - 901 Frontenac Road - P.O. Box 3061 - Naperville, Illinois 60566 - Telephone: (630) 357-8500 -------------------------------------------------------------------------------- MANAGEMENT'S REPORT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS: RESULTS OF OPERATIONS The past year was one of the more difficult years in the Company's history. Although revenues within the fastener segment improved over 2004, this increase reflects a partial recovery of higher raw material costs, rather than an increase in volume. In addition, changes in our product mix had a negative impact on our bottom line. Demand within the assembly equipment segment, where we have traditionally enjoyed higher margins, continued to be weak, and this segment accounted for a smaller portion of revenues than in past years. Within the fastener segment, margins were adversely impacted by an increase in the percentage of product produced through the screw machine process -- which has traditionally generated lower margins than cold-headed parts. Results were also adversely impacted by higher than normal administrative expenses related to legal matters and compliance with the Sarbanes-Oxley Act of 2002. 2005 COMPARED TO 2004 Revenues within the fastener segment increased by nearly $1.5 million, or 4.5%, compared with the prior year. However, a change in product mix, combined with ongoing competitive pressures within our markets, which adversely impacted selling prices, contributed to the decline in gross margins within this segment. Change in product mix was the primary factor causing material costs to increase $1.3 million compared to 2004 and was also the main factor contributing to a $757,000 increase in outside processing services. Labor and fringe benefit costs increased approximately $350,000. Tooling costs increased by approximately $518,000 compared to 2004, primarily due to costs related to the manufacture of new parts used in a number of new automotive platform launches. The Company also incurred an increase of $253,000 related to costs associated with expedited delivery due to shortened customer lead-time requirements. Weak demand continued to characterize the assembly equipment segment of our business, contributing to a decline in revenues of $944,000, or 14%, compared to the prior year. We were able to reduce most manufacturing costs in direct proportion to the decline in revenues. Labor and fringe benefit costs declined by $305,000. Raw material costs were $91,000 lower than the prior year. Most other elements of cost declined as a result of lower volumes. However, the net effect of lower volume was a decline of $491,000 in gross margins. Selling and administrative expenses increased by $682,000 compared to 2004. The single largest factor affecting comparisons between this year and last is that during 2004, the Company received a refund of the Michigan single business tax that amounted to $330,000. This refund was the result of a successful appeal of the tax calculation for the prior four years. Professional fees and expenses incurred, primarily related to compliance with the Sarbanes-Oxley Act of 2002, increased by $359,000 during 2005. Legal fees increased approximately $140,000, primarily due to protracted litigation that was resolved in 2005. Bad debt expense increased $73,000, primarily in connection with the bankruptcy of certain customers. These increases were partially offset by reductions in a variety of other expenses; the most significant being a reduction in profit sharing expense of $127,000 due to the decrease in profitability and lower depreciation of office equipment of $57,000. During the fourth quarter of 2005, the Company realized a gain of $256,660 from proceeds received due to the demutualization of an insurance provider. 2004 COMPARED TO 2003 Within the fastener segment, revenues increased by 4.7%, or nearly $1.5 million. Approximately $1.0 million of this increase represents the recovery of higher material costs related to the increase in the price of steel wire and rod which are our primary raw materials. The balance of the increase is primarily due to an increase in units shipped. Increases in the price of raw materials consumed in production amounted to $1,195,000. This was partially offset by an increase of $205,000 in scrap recovery and purchase discounts. In addition, perishable tooling expense increased $244,000 due to expenses related to the initial production of a number of new parts, while wage and fringe benefit costs increased $122,000. These higher costs were partially offset by a $317,000 reduction in outside material processing costs, due to a change in product mix, and by savings of $193,000 realized by handling the majority of our routine maintenance internally, rather than outsourcing as had been the practice previously. The net effect of these changes contributed to a $693,000 improvement in gross margin for this segment compared with 2003. Revenues within the assembly equipment segment declined 5.7%, or $412,000, compared to the prior year. This change was due to lower unit volumes, which reflected lower demand for the product in this segment. Despite the reduction in volume, gross margins improved by $138,000 compared with 2003. Factors contributing to this improvement included: savings of $355,000 in wage and related benefit costs arising from reductions in the workforce undertaken in the fourth quarter of 2003; a reduction of $51,000 in material costs, primarily due to reduced volumes; and a reduction in depreciation expense of $45,000 as more equipment became fully depreciated. Selling and administrative expenses declined 3.6%, or $228,000, in 2004 compared with 2003. The largest single factor contributing to this change was a successful appeal of -------------------------------------------------------------------------------- 1 MANAGEMENT'S REPORT (Continued) -------------------------------------------------------------------------------- the Michigan single business tax paid in four prior years. The amount of this refund was $330,000. Reductions in headcount contributed to a net reduction of $127,000 in salary and fringe benefit expense. These savings were partially offset by an increase of $120,000 in profit sharing expense related to the increase in pre-tax income. DIVIDENDS In determining to pay dividends, the Board considers current profitability, the outlook for longer-term profitability, known and potential cash requirements and the overall financial condition of the Company. The Company paid four regular quarterly dividends of $.18 per share during 2005. In addition, an extra dividend of $.15 per share was paid during the second quarter of 2005, bringing the total dividend distribution to $.87 per share. On February 20, 2006, your Board of Directors declared a regular quarterly dividend of $.18 per share, payable March 20, 2006 to shareholders of record on March 3, 2006. This continues the uninterrupted record of consecutive quarterly dividends paid by the Company to its shareholders that extends over 72 years. PROPERTY, PLANT AND EQUIPMENT Total capital expenditures in 2005 were $647,162. Of the total, $460,000 was invested in building improvements, including $422,495 for new roofs at two facilities. Fastener segment equipment additions amounted to $91,000, primarily for equipment related to plating of parts and quality control. Assembly equipment segment additions totaled $36,000, with approximately $32,000 expended for equipment used to manufacture perishable tooling. The remaining additions related primarily to computer equipment and other miscellaneous equipment benefiting both operating segments. Capital investments totaled $1.4 million during 2004. Capital expenditures were concentrated within the fastener segment, where investment totaled $1.3 million. Of this total, $1.1 million was invested to purchase cold-heading machinery and related equipment used in the manufacture of fasteners. The remainder of the expenditures within the fastener segment was for various building improvements, additional waste treatment equipment required to meet environmental requirements and material handling equipment. The balance of the Company's 2004 capital expenditures covered a variety of smaller items, including computers and other office equipment. During 2003, capital expenditures amounted to $641,715, of which $535,268 was invested within the fastener segment, $89,379 was invested within the assembly equipment segment and the remainder was expended for building improvements that cannot be allocated between segments. Within the fastener segment, approximately $317,000 was invested in a new solvent-based parts cleaning system. Other expenditures were approximately $92,000 for vehicles, including $68,000 for a new delivery truck; $32,000 for in-line wire drawing equipment; some $21,000 for equipment related to quality control; with the balance expended for smaller tools and equipment and building improvements. Within the assembly equipment segment, approximately $86,000 was expended for the purchase of new equipment related to the manufacture of perishable tooling that is sold to customers. The balance was expended for building improvements and office equipment. Depreciation expense amounted to $1,703,382 in 2005, $1,757,962 in 2004, and $1,861,600 in 2003. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital declined approximately $382,000 between December 31, 2004 and December 31, 2005. The Company's holdings in cash, cash equivalents and certificates of deposit amounted to approximately $5.7 million at the end of 2005, a decline of $.5 million compared with the prior year-end. Inventories were reduced by nearly $.3 million, as higher than normal quantities on hand at the start of the year were reduced. Accounts receivable increased approximately $.5 million compared with the prior year-end, reflecting higher shipments during the latter portion of 2005 compared with the same period in 2004. The accrual for profit sharing contribution decreased $.1 million compared to the prior year, due to reduced profitability in 2005, while other accrued expenses increased $.2 million primarily due to an increase in customer deposits. The Company has a $1.0 million line of credit, which expires May 31, 2006. This line of credit remains unused. OFF-BALANCE SHEET ARRANGEMENTS The Company has not entered into, and has no current plans to enter into, any off-balance sheet financing arrangements. The following table presents a summary of the Company's contractual obligations as of December 31, 2005:
PAYMENTS DUE BY PERIOD ---------------------------------------------------- LESS MORE CONTRACTUAL THAN 1 - 3 4 - 5 THAN OBLIGATION TOTAL 1 YEAR YEARS YEARS 5 YEARS ----------- -------- -------- -------- -------- -------- Long-term Debt....... $ -- $ -- $ -- $ -- $ -- Capital Lease Obligations......... -- -- -- -- -- Operating Leases..... 68,802 28,868 39,934 -- -- Purchase Obligations......... 647,594 536,885 110,709 -- -- -------- -------- -------- -------- -------- Total................ $716,396 $565,753 $150,643 $ -- $ -- ======== ======== ======== ======== ========
-------------------------------------------------------------------------------- 2 MANAGEMENT'S REPORT (Continued) [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- Management believes that current cash, cash equivalents, operating cash flow and available line of credit will be sufficient to provide adequate working capital for the foreseeable future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2005, the Company did not have any outstanding debt. The Company did not use any derivative financial instruments during 2005. APPLICATION OF CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of revenue and expenses during the reporting period. A summary of critical accounting policies can be found in Note 1 of the financial statements. NEW ACCOUNTING STANDARDS The Company's financial statements and financial condition were not, and are not expected to be, materially impacted by new, or proposed, accounting standards. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The firm of PricewaterhouseCoopers LLP served as the Company's independent registered public accounting firm for the year ended December 31, 2004. On February 28, 2005, the Company was notified by PricewaterhouseCoopers LLP that they would not stand for re-election as the Company's independent registered public accounting firm for the year ending December 31, 2005. PricewaterhouseCoopers LLP agreed, however, to continue to serve as the Company's independent registered public accounting firm until completion of its procedures on the financial statements of the Company for the year ended December 31, 2004. On March 21, 2005, PricewaterhouseCoopers LLP completed its procedures on the financial statements of the Company for the year ended December 31, 2004, and ceased serving as the Company's independent registered public accounting firm. On March 23, 2005, the Audit Committee engaged Grant Thornton LLP to serve as the Company's independent registered public accounting firm for the year ended December 31, 2005. The reports of PricewaterhouseCoopers LLP on the Company's financial statements for the years ended December 31, 2004 and 2003 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended December 31, 2004 and 2003 and through March 21, 2005, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference thereto in its report on the Company's financial statements for such years. During the years ended December 31, 2004 and 2003 and through March 21, 2005, there were no "reportable events" (as defined in SEC Regulation S-K Item 304(a)(1)(v)). Between January 1, 2003 and the engagement of Grant Thornton LLP on March 23, 2005, neither the Company nor anyone acting on behalf of the Company consulted with Grant Thornton LLP regarding either (i) the application of accounting principles to a specified completed or contemplated transaction or the type of audit opinion that might be rendered on the Company's financial statements; as such, no written or oral advice was provided or (ii) any matter that was either the subject of a disagreement with PricewaterhouseCoopers LLP or a "reportable event." PERSONNEL On November 21, 2005, John C. Osterman, President, Chief Operating Officer and Treasurer of the Company and a member of the Company's Board of Directors, notified the Company of his intention to retire. Mr. Osterman's retirement from his positions as an officer of the Company will become effective on December 31, 2006 or such earlier date as the Company designates a replacement. In connection with his decision to retire, Mr. Osterman's term as a director will end as of the 2006 Annual Meeting of Shareholders of the Company. On February 20, 2006, the Board of Directors elected Michael J. Bourg to the position of Executive Vice President of the Company. Mr. Bourg has been an officer of the Company and an integral part of the management team since his employment in December 1998. OUTLOOK FOR 2006 Many of the challenges that contributed to poor results in 2005 remain in evidence as we begin 2006. Increasing revenues remains critical to a return to profitability and continues to be a key objective. Our primary market is dominated by the activities of the "Big Three" domestic automobile -------------------------------------------------------------------------------- 3 MANAGEMENT'S REPORT (Continued) -------------------------------------------------------------------------------- manufacturers. Unfortunately, according to published data, their 2005 domestic production declined by nearly 7%, the second, successive year-to-year decline. It is too early in the year to project what their level of operations will be for 2006. In addition, their financial condition is such that they have announced objectives to reduce the cost of the material that they purchase. This will likely result in continued pressure to reduce prices we charge for our product, while simultaneously reducing demand for domestic product as they rely more heavily on parts produced in lower cost economies. This does not auger well for our ability to obtain much needed recovery of higher raw material costs. We have made efforts to increase our sales revenues in all markets. Ongoing initiatives to have our product approved and used in foreign nameplates produced within the United States have met with some success and we plan to continue to pursue opportunities in this market. Our sales efforts will continue to emphasize value over price and will focus on more complex products used by customers for which our experience, expertise, quality and service are important factors in purchasing decisions. We anticipate that selling and administrative expenses, which have been unusually high due to costs related to litigation and compliance with the Sarbanes-Oxley Act of 2002, will be lower in 2006. On the other hand, it is likely that our customers will continue to demand reductions in prices without sacrificing quality or service. As our customers increasingly look to foreign sources to obtain product, we will be challenged to offer a level of quality and service that cannot be matched by offshore producers. In order to meet these challenges, we will continue to seek out creative solutions that help improve our operations at all levels while continuing our efforts to control operating costs. We wish to thank our customers, our employees and our shareholders for their loyalty during what has been a very difficult period for the Company. We believe that this continued support, combined with the Company's sound financial condition, will help us as we face the challenges and pursue the opportunities that the new year will bring. Respectfully, /s/ J. A. MORRISSEY /s/ JOHN C. OSTERMAN John A. Morrissey John C. Osterman Chairman President
March 23, 2006 FORWARD-LOOKING STATEMENTS This discussion contains certain "forward-looking statements" which are inherently subject to risks and uncertainties that may cause actual events to differ materially from those discussed herein. Factors which may cause such differences in events include, those disclosed under "Risk Factors" in our Annual Report on Form 10-K and in the other filings we make with the United States Securities and Exchange Commission. These factors, include among other things: conditions in the domestic automotive industry, upon which we rely for sales revenue, the intense competition in our markets, the concentration of our sales to two major customers, the price and availability of raw materials, labor relations issues, losses related to product liability, warranty and recall claims, costs relating to environmental laws and regulations, and the loss of the services of our key employees. Many of these factors are beyond our ability to control or predict. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligations to publish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. -------------------------------------------------------------------------------- 4 [CHICAGO RIVET LOGO] -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------- December 31 2005 2004 ----------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and Cash Equivalents................................. $ 4,730,837 $ 5,464,368 Certificates of Deposit................................... 1,005,000 805,000 Accounts Receivable -- Less allowances of $210,000 and $130,000, respectively................................. 5,370,611 4,867,615 Inventories............................................... 5,971,695 6,242,470 Deferred Income Taxes..................................... 560,191 554,191 Other Current Assets...................................... 232,142 219,497 ----------- ----------- Total Current Assets...................................... 17,870,476 18,153,141 Net Property, Plant and Equipment........................... 10,051,508 11,146,316 ----------- ----------- Total Assets................................................ $27,921,984 $29,299,457 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable.......................................... $ 1,452,314 $ 1,367,221 Accrued Wages and Salaries................................ 680,969 706,701 Accrued Profit Sharing Plan Contribution.................. 125,000 252,312 Other Accrued Expenses.................................... 772,270 604,645 ----------- ----------- Total Current Liabilities................................. 3,030,553 2,930,879 Deferred Income Taxes....................................... 1,313,275 1,551,275 ----------- ----------- Total Liabilities......................................... 4,343,828 4,482,154 ----------- ----------- Commitments and Contingencies (Note 10) Shareholders' Equity Preferred Stock, No Par Value, 500,000 Shares Authorized: None Outstanding....................................... -- -- Common Stock, $1.00 Par Value, 4,000,000 Shares Authorized: 1,138,096 Shares Issued.................... 1,138,096 1,138,096 Additional Paid-in Capital................................ 447,134 447,134 Retained Earnings......................................... 25,915,024 27,154,171 Treasury Stock, 171,964 Shares at cost.................... (3,922,098) (3,922,098) ----------- ----------- Total Shareholders' Equity................................ 23,578,156 24,817,303 ----------- ----------- Total Liabilities and Shareholders' Equity.................. $27,921,984 $29,299,457 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 5 [CHICAGO RIVET LOGO] -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------- For the Years Ended December 31 2005 2004 2003 ----------------------------------------------------------------------------------------------- Net Sales and Lease Revenue....................... $39,760,756 $39,232,866 $38,190,908 Cost of Goods Sold and Costs Related to Lease Revenue......................................... 34,060,469 30,954,797 30,744,104 ----------- ----------- ----------- Gross Profit...................................... 5,700,287 8,278,069 7,446,804 Selling and Administrative Expenses............... 6,723,386 6,041,045 6,269,050 ----------- ----------- ----------- Operating Income (Loss)........................... (1,023,099) 2,237,024 1,177,754 Other Income, net................................. 418,487 78,410 64,773 ----------- ----------- ----------- Income (Loss) Before Income Taxes................. (604,612) 2,315,434 1,242,527 Provision for Income Taxes........................ (206,000) 792,000 425,000 ----------- ----------- ----------- Net Income (Loss)................................. $ (398,612) $ 1,523,434 $ 817,527 =========== =========== =========== Net Income (Loss) Per Share....................... $ (.41) $ 1.58 $ .85 =========== =========== ===========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
----------------------------------------------------------------------------------------------- For the Years Ended December 31 2005 2004 2003 ----------------------------------------------------------------------------------------------- Retained Earnings at Beginning of Year............ $27,154,171 $26,326,352 $26,445,973 Net Income (Loss)................................. (398,612) 1,523,434 817,527 Cash Dividends Paid, $.87 Per Share in 2005, $.72 Per Share in 2004 and $.97 Per Share in 2003.... (840,535) (695,615) (937,148) ----------- ----------- ----------- Retained Earnings at End of Year.................. $25,915,024 $27,154,171 $26,326,352 =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 6 [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------- For the Years Ended December 31 2005 2004 2003 --------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income (Loss)..................................... $ (398,612) $ 1,523,434 $ 817,527 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization....................... 1,703,382 1,757,962 1,861,600 Net (Gain) Loss on the Sale of Properties........... 38,088 2,148 (11,405) Gain from Demutualization........................... (256,660) -- -- Deferred Income Taxes............................... (244,000) 19,000 12,000 Changes in Operating Assets and Liabilities: Accounts Receivable, net.......................... (502,996) (318,447) 445,529 Inventories....................................... 270,775 (1,008,682) 856,153 Other Current Assets.............................. (12,645) (937) 59,423 Accounts Payable.................................. 81,239 40,501 188,849 Accrued Wages and Salaries........................ (25,732) (47,693) (41,526) Accrued Profit Sharing Plan Contribution.......... (127,312) 119,069 (302,299) Other Accrued Expenses............................ 167,625 233,705 (75,436) ----------- ----------- ----------- Net Cash Provided by Operating Activities.... 693,152 2,320,060 3,810,415 ----------- ----------- ----------- Cash Flows from Investing Activities: Capital Expenditures................................ (643,308) (1,342,906) (641,715) Proceeds from the Sale of Properties................ 500 2,730 24,144 Proceeds from Demutualization....................... 256,660 -- -- Proceeds from Held-to-Maturity Securities........... 1,035,000 665,000 3,207,733 Purchases of Held-to-Maturity Securities............ (1,235,000) (1,015,000) (505,000) ----------- ----------- ----------- Net Cash (Used in) Provided by Investing Activities................................... (586,148) (1,690,176) 2,085,162 ----------- ----------- ----------- Cash Flows from Financing Activities: Payments under Term Loan Agreement.................. -- -- (1,632,760) Cash Dividends Paid................................. (840,535) (695,615) (937,148) ----------- ----------- ----------- Net Cash Used in Financing Activities.......... (840,535) (695,615) (2,569,908) ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents......................................... (733,531) (65,731) 3,325,669 Cash and Cash Equivalents: Beginning of Year................................... 5,464,368 5,530,099 2,204,430 ----------- ----------- ----------- End of Year......................................... $ 4,730,837 $ 5,464,368 $ 5,530,099 =========== =========== =========== Cash Paid During the Year for: Income Taxes........................................ $ -- $ 573,307 $ 508,213 Interest............................................ $ -- $ -- $ 20,633 Supplemental Schedule of Non-cash Investing Activities: Capital Expenditures in Accounts Payable............ $ 3,854 $ 16,676 $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 7 (CHIGAGO RIVET LOGO) -------------------------------------------------------------------------------- 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 recognized upon shipment and an allowance is provided for estimated returns and discounts based on experience in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements." Cash received by the Company prior to shipment is recorded as deferred revenue. The Company experiences a certain degree of sales returns that varies over time. In accordance with Statement of Financial Accounting Standards No. 48 ("SFAS 48"), "Revenue Recognition When Right of Return Exists," the Company is able to make a reasonable estimation of expected sales returns based upon history and as contemplated by the requirements of SFAS 48. The Company records all shipping and handling fees billed to customers as revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs." LEASE INCOME--Automatic rivet setting machines are available to customers on either a sale or lease basis. The leases are generally for a quarterly or 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 included in unearned 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 on the basis of terms that are customary within our markets to various companies doing business primarily in the automotive industry. The Company has a concentration of credit risk primarily within the automotive industry and in the Midwestern United States. The Company has established an allowance for accounts that may become uncollectible in the future. This estimated allowance is based primarily on management's evaluation of the financial condition of the customer and historical experience. The Company monitors its accounts receivable and charges to expense an amount equal to its estimate of potential credit losses. The Company considers a number of factors in determining its estimates, including the length of time its trade accounts receivable are past due, the Company's previous loss history and the customer's current ability to pay its obligation. Accounts receivable balances are charged off against the allowance when it is determined that the receivable will not be recovered. 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. INVENTORIES--Inventories are stated at the lower of cost or net realizable value, cost being determined 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 ----------------------------------------------------------------- Land improvements.......................... 15 to 25 years Buildings and improvements................. 10 to 35 years Machinery and equipment.................... 7 to 15 years Automatic rivet setting machines on lease.................................... 10 years Capitalized software costs................. 3 to 5 years Other equipment............................ 3 to 15 years
The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. 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--The Company reports segment information in accordance with Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information." FAS 131 requires that segments be -------------------------------------------------------------------------------- 8 (CHIGAGO RIVET LOGO) -------------------------------------------------------------------------------- based on the internal structure and reporting of the Company's operations. NET INCOME PER SHARE--Net income per share of common stock is based on the weighted average number of shares outstanding of 966,132 in 2005, 2004 and 2003. 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. 2--BALANCE SHEET DETAILS
2005 2004 ------------ ------------ Inventories: Raw materials................. $ 1,586,744 $ 1,693,341 Work in process............... 2,218,774 2,136,996 Finished goods................ 2,166,177 2,412,133 ----------- ----------- $ 5,971,695 $ 6,242,470 =========== =========== Net Property, Plant and Equipment: Land and improvements......... $ 1,029,035 $ 1,015,635 Buildings and improvements.... 6,251,144 5,823,984 Production equipment, leased machines and other.......... 29,163,667 29,272,638 ----------- ----------- 36,443,846 36,112,257 Accumulated depreciation...... 26,392,338 24,965,941 ----------- ----------- $10,051,508 $11,146,316 =========== =========== Other Accrued Expenses: Property taxes................ $ 115,799 $ 117,668 Unearned revenue and customer deposits.................... 339,943 113,678 All other items............... 316,528 373,299 ----------- ----------- $ 772,270 $ 604,645 =========== ===========
3--LEASED MACHINES--Lease revenue amounted to $107,298 in 2005, $107,976 in 2004 and $160,312 in 2003. 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:
2005 2004 --------- --------- Cost.................................. $246,965 $264,231 Accumulated depreciation.............. 233,873 246,589 -------- -------- Carrying value........................ $ 13,092 $ 17,642 ======== ========
4--INCOME TAXES--The provision for income tax expense (benefit) consists of the following:
2005 2004 2003 ---------- ---------- ----------- Current: Federal................ $ 38,000 $ 766,000 $ 408,000 State.................. -- 7,000 5,000 Deferred................. (244,000) 19,000 12,000 ---------- ---------- ----------- $ (206,000) $ 792,000 $ 425,000 ========== ========== ===========
The deferred tax liabilities and assets consist of the following:
2005 2004 ------------ ------------ Depreciation.................... $(1,319,998) $(1,560,071) ----------- ----------- Inventory....................... 307,912 288,775 Accrued vacation................ 176,076 163,478 Allowance for doubtful accounts...................... 72,700 45,300 Other, net...................... 10,226 65,434 ----------- ----------- 566,914 562,987 ----------- ----------- $ (753,084) $ (997,084) =========== ===========
The following is a reconciliation of the statutory federal income tax rate to the actual effective tax rate:
2005 2004 2003 ----------------- --------------- ----------------- AMOUNT % Amount % Amount % ----------------- --------------- ----------------- Expected tax at U.S. Statutory rate.............. $(206,000) (34.0) $787,000 34.0 $422,000 34.0 State taxes, net of federal benefit..................... -- -- 5,000 .2 3,000 .2 --------- ----- -------- ---- ---------- ---- Income tax expense (benefit)................... $(206,000) (34.0) $792,000 34.2 $425,000 34.2 ========= ===== ======== ==== ========== ====
5--NOTE PAYABLE--The Company has a $1 million line of credit, which expires May 31, 2006, and remained unused at December 31, 2005. 6--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. 7--PROFIT SHARING PLAN--The Company has a noncontributory profit sharing plan covering substantially all employees. Total expenses relating to the profit sharing plan amounted to approximately $125,000 in 2005, $252,000 in 2004 and $133,000 in 2003. 8--OTHER INCOME, NET--consists of the following:
2005 2004 2003 -------- -------- -------- Interest income.............. $148,049 $ 64,488 $ 72,087 Gain from demutualization.... 256,660 -- -- Interest expense............. -- -- (22,847) Other........................ 13,778 13,922 15,533 -------- -------- -------- $418,487 $ 78,410 $ 64,773 ======== ======== ========
During 2005, the Company realized a gain of $256,660 from proceeds received due to the demutualization of an insurance provider. 9--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 -------------------------------------------------------------------------------- 9 (CHIGAGO RIVET LOGO) -------------------------------------------------------------------------------- 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, 2005: Net sales and lease revenue..... $33,949,293 $5,811,463 $ -- $39,760,756 Depreciation.................... 1,519,971 104,968 78,443 1,703,382 Segment profit.................. 180,156 1,249,094 -- 1,429,250 Selling and administrative expenses....................... 2,438,571 2,438,571 Interest expense................ -- -- Interest income................. (148,049) (148,049) Gain from demutualization....... (256,660) (256,660) ------------ Loss before income taxes........ (604,612) ------------ Capital expenditures............ 451,601 35,555 160,006 647,162 Segment assets: Accounts receivable............ 4,758,839 611,772 -- 5,370,611 Inventory...................... 4,113,081 1,858,614 -- 5,971,695 Property, plant and equipment.................... 7,807,711 1,283,624 960,173 10,051,508 Other assets................... -- -- 6,528,170 6,528,170 ------------ 27,921,984 ------------ Year Ended December 31, 2004: Net sales and lease revenue $32,477,800.. $6,755,066 $ -- $39,232,866 Depreciation.................... 1,513,978 112,868 131,116 1,757,962 Segment profit.................. 2,884,308 1,648,034 -- 4,532,342 Selling and administrative expenses....................... 2,281,396 2,281,396 Interest expense................ -- -- Interest income................. (64,488) (64,488) ------------ Income before income taxes...... 2,315,434 ------------ Capital expenditures............ 1,332,122 19,774 7,686 1,359,582 Segment assets: Accounts receivable............ 4,318,921 548,694 -- 4,867,615 Inventory...................... 4,313,907 1,928,563 -- 6,242,470 Property, plant and equipment.................... 8,912,268 1,355,437 878,611 11,146,316 Other assets................... -- -- 7,043,056 7,043,056 ------------ 29,299,457 ------------ Year Ended December 31, 2003: Net sales and lease revenue..... $31,024,036 $7,166,872 $ -- $38,190,908 Depreciation.................... 1,490,592 161,200 209,808 1,861,600 Segment profit.................. 2,084,889 1,482,888 -- 3,567,777 Selling and administrative expenses....................... 2,374,490 2,374,490 Interest expense................ 22,847 22,847 Interest income................. (72,087) (72,087) ------------ Income before income taxes...... 1,242,527 ------------ Capital expenditures............ 535,268 89,379 17,068 641,715 Segment assets: Accounts receivable............ 3,836,968 712,200 -- 4,549,168 Inventory...................... 3,191,132 2,042,656 -- 5,233,788 Property, plant and equipment.................... 9,099,003 1,448,530 1,002,041 11,549,574 Other assets................... -- -- 6,805,850 6,805,850 ------------ 28,138,380 ------------
The Company does not allocate certain selling and administrative expenses for internal reporting, thus, no allocation was made for these expenses for segment disclosure purposes. Segment assets reported internally are limited to accounts receivable, 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 24, 22 and 21 percent and 13, 13 and 13 percent of consolidated revenues during 2005, 2004 and 2003, respectively. 10--COMMITMENTS AND CONTINGENCIES--The Company recorded rent expense aggregating approximately $38,000, $44,000 and $40,000 for 2005, 2004 and 2003, respectively. Total future minimum rentals at December 31, 2005 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. -------------------------------------------------------------------------------- 10 [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS To the Board of Directors and Shareholders of Chicago Rivet & Machine Co. We have audited the accompanying consolidated balance sheet of Chicago Rivet & Machine Co. and its subsidiary (the "Company") as of December 31, 2005, and the related consolidated statements of income, retained earnings and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chicago Rivet & Machine Co. and its subsidiary as of December 31, 2005 and the results of their operations, changes in retained earnings and cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Chicago, Illinois March 23, 2006 To the Board of Directors and Shareholders of Chicago Rivet & Machine Co. In our opinion, the accompanying consolidated balance sheet as of December 31, 2004 and the related consolidated statements of income, retained earnings and cash flows for each of two years in the period ended December 31, 2004 present fairly, in all material respects, the financial position of Chicago Rivet & Machine Co. and its subsidiary at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 our opinion. /s/ PricewaterhouseCoopers LLP Chicago, Illinois March 21, 2005 -------------------------------------------------------------------------------- 11 [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ---------- ---------- 2005 Net Sales and Lease Revenue............. $10,082,862 $10,064,392 $9,718,361 $9,895,141 Gross Profit......... 1,602,439 1,417,751 1,459,759 1,220,338 Net Income (Loss).... (76,765) (152,487) (169,780) 420 Per Share Data: Net Income (Loss) Per Share......... (.08) (.16) (.17) .00 Average Common Shares Outstanding....... 966,132 966,132 966,132 966,132 2004 Net Sales and Lease Revenue............. $10,168,964 $10,237,556 $9,324,695 $9,501,651 Gross Profit......... 2,022,406 2,230,568 2,154,471 1,870,624 Net Income........... 290,988 386,276 601,615 244,555 Per Share Data: Net Income Per Share............. .30 .40 .62 .26 Average Common Shares Outstanding....... 966,132 966,132 966,132 966,132 2003 Net Sales and Lease Revenue............. $10,236,463 $10,005,944 $8,831,742 $9,116,759 Gross Profit......... 2,385,529 1,929,633 1,539,172 1,592,470 Net Income........... 465,241 221,621 5,431 125,234 Per Share Data: Net Income Per Share............. .48 .23 .01 .13 Average Common Shares Outstanding....... 966,132 966,132 966,132 966,132
INFORMATION ON COMPANY'S COMMON STOCK The Company's common stock is traded on the American Stock Exchange (trading privileges only, not registered.) The ticker symbol is: CVR. At December 31, 2005, there were approximately 270 shareholders of record. The transfer agent and registrar for the Company's common stock is: Computershare Trust Company, N.A. P.O. Box 43078 Providence, Rhode Island 02940-3078 The following table 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 2005 2004 2005 2004 --------------------- ---- ---- ---------------- ---------------- First................ $.33* $.18 $32.69 $27.40 $31.70 $27.10 Second............... .18 .18 $32.25 $28.60 $29.98 $27.45 Third................ .18 .18 $29.25 $24.20 $27.50 $25.25 Fourth............... .18 .18 $24.37 $20.00 $27.61 $25.84
--------------- * Includes an extra dividend of $.15 per share. SELECTED FINANCIAL DATA
------------------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- Net Sales and Lease Revenue $39,760,756 $39,232,866 $38,190,908 $43,012,766 $40,443,010 ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes (604,612) 2,315,434 1,242,527 3,961,075 2,691,270 ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) (398,612) 1,523,434 817,527 2,604,075 1,792,270 ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Per Share (.41) 1.58 .85 2.69 1.85 ------------------------------------------------------------------------------------------------------------------------------- Dividends Per Share .87 .72 .97 .87 .97 ------------------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 966,132 966,132 966,132 966,537 967,132 ------------------------------------------------------------------------------------------------------------------------------- Working Capital 14,839,923 15,222,262 14,020,185 12,874,182 11,616,424 ------------------------------------------------------------------------------------------------------------------------------- Total Assets 27,921,984 29,299,457 28,138,380 30,088,173 29,678,013 ------------------------------------------------------------------------------------------------------------------------------- Total Debt -- -- -- 1,632,760 3,432,760 ------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity 23,578,156 24,817,303 23,989,484 24,109,105 22,372,924 -------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 12 [CHIGAGO RIVET LOGO] -------------------------------------------------------------------------------- BOARD OF DIRECTORS EDWARD L. CHOTT(a)(c)(n) Chairman of the Board and Chief Executive Officer of The Broaster Co. Beloit, Wisconsin KENT H. COONEY(a) Chief Financial Officer of Heldon Bay Limited Partnership Bigfork, Montana NIRENDU DHAR General Manager of H & L Tool Company, Inc. WILLIAM T. DIVANE, JR.(a)(c)(n) Chairman of the Board and Chief Executive Officer of Divane Bros. Electric Co. Franklin Park, Illinois GEORGE P. LYNCH(c) Attorney at Law George Patrick Lynch, Ltd. Lisle, Illinois JOHN R. MADDEN(a)(c)(e)(n) Chairman of the Board of First National Bank of La Grange La Grange, Illinois JOHN A. MORRISSEY(e) Chairman of the Board of the Company President and Director of Algonquin State Bank Algonquin, Illinois WALTER W. MORRISSEY(e) Attorney at Law Morrissey & Robinson Oakbrook Terrace, 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 MICHAEL J. BOURG Executive Vice President Controller NIRENDU DHAR General Manager of H & L Tool Company, Inc. KIMBERLY A. KIRHOFER Secretary 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 WEB SITE www.chicagorivet.com (a) Member of Audit Committee (c) Member of Compensation Committee (e) Member of Executive Committee (n) Member of Nominating Committee Chicago Rivet & Machine Co. - 901 Frontenac Road - P.O. Box 3061 - Naperville, Illinois 60566 - Telephone: (630) 357-8500 -------------------------------------------------------------------------------- [CHICAGO RIVET GRAPHIC & LETTERHEAD] --------------------------------------------------------------------------------