-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jx1ZYVgOHVYTeGubzwtzGG3j3hUWNEvrMPHIrvL22+EMpAwe5Gm1cpeq4t4FF7fG zHNvdfxvHllw45gJuIASXA== 0000093676-02-000016.txt : 20021112 0000093676-02-000016.hdr.sgml : 20021111 20021112170139 ACCESSION NUMBER: 0000093676-02-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARRETT L S CO CENTRAL INDEX KEY: 0000093676 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 041866480 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00367 FILM NUMBER: 02817785 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-Q 1 fy03sep10q.txt 10-Q SEP 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission file number 1-367 THE L. S. STARRETT COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1866480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 121 CRESCENT STREET, ATHOL, MASSACHUSETTS 01331-1915 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 978-249-3551 Former name, address and fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. YES X NO Common Shares outstanding as of September 28, 2002: Class A Common Shares 5,199,105 Class B Common Shares 1,376,397 Page 1 of 14 THE L. S. STARRETT COMPANY CONTENTS Page No. Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Operations and Cash Flows - thirteen weeks ended September 28, 2002 and September 29, 2001 (unaudited) 3 Consolidated Balance Sheets - September 28, 2002 (unaudited) and June 29, 2002 4 Consolidated Statements of Stockholders' Equity - thirteen weeks ended September 28, 2002 and September 29, 2001 (unaudited) 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Item 4. Controls and Procedures 11 Part II. Other information: Item 1. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and reports on Form 8-K 12 SIGNATURES 12 CERTIFICATIONS 13-14 Page 2 of 14 Item 1. Financial Statements THE L. S. STARRETT COMPANY Consolidated Statements of Operations and Cash Flows (in thousands of dollars except per share data)(unaudited) 13 Weeks Ended OPERATIONS 9/28/02 9/29/01 Net sales 45,335 46,522 Cost of goods sold (36,599) (33,898) Selling and general (12,552) (11,886) Other expense (680) (392) Earnings (loss) before income taxes and cumulative effect of change in accounting principle (4,496) 346 Provision (benefit) for income taxes (1,961) 84 Earnings (loss) before cumulative effect of change in accounting principle (2,535) 262 Cumulative effect of change in accounting principle for goodwill (6,086) _______ Net earnings (loss) (8,621) 262 Basic earnings (loss) per share before cumulative effect of change in accounting principle (.39) .04 Cumulative effect of change in accounting principle (.93) Basic earnings (loss) per share (1.32) .04 Average outstanding shares used 6,551 6,472 Diluted earnings (loss) per share before cumulative effect of change in accounting principle (.39) .04 Cumulative effect of change in accounting principle (.93) Diluted earnings (loss) per share (1.32) .04 Average outstanding shares used 6,551 6,484 Dividends per share .20 .20 CASH FLOWS Cash flows from operating activities: Net earnings (loss) (8,621) 262 Noncash expenses (income): Cumulative effect of change in accounting principle 6,086 Depreciation and amortization 2,786 2,977 Deferred taxes (227) 144 Unrealized exchange losses 725 312 Retirement benefits (228) (611) Working capital changes: Receivables (1,126) 2,305 Inventories 5,929 (1,957) Other assets and liabilities 70 473 Prepaid pension cost and other (158) (17) Net cash from operations 5,236 3,888 Cash flows from investing activities: Additions to plant and equipment (736) (2,511) Short-term investments, net (3,426) 302 Net cash used in investing (4,162) (2,209) Cash flows from financing activities: Short-term borrowing, net (558) (895) Common stock issued 540 740 Treasury shares purchased (93) Dividends (1,310) (1,279) Net cash used in financing (1,328) (1,527) Effect of exchange rate changes on cash (85) (82) Net increase (decrease) in cash (339) 70 Cash, beginning of period 1,672 1,945 Cash, end of period 1,333 2,015 See notes to consolidated financial statements Page 3 of 14 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Sep. 28 June 29 2002 2002 ASSETS (unaudited) Current assets: Cash 1,333 1,672 Investments 13,672 10,479 Accounts receivable (less allowance for doubtful accounts of $1,810,000 and $1,790,000) 35,581 34,832 Inventories: Raw materials and supplies 16,196 17,228 Goods in process and finished parts 21,724 24,632 Finished goods 31,575 34,762 69,495 76,622 Prepaid expenses, taxes and other current assets 5,547 5,903 Total current assets 125,628 129,508 Property, plant and equipment, at cost (less accumulated depreciation of $80,517,000 and $79,005,000) 69,208 71,430 Cost in excess of net assets acquired (less accumulated amortization of $4,216,000 as of June 29, 2002) 6,086 Prepaid pension cost 33,985 33,651 Other assets 843 863 229,664 241,538 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 2,480 3,437 Accounts payable and accrued expenses 13,163 13,472 Accrued salaries and wages 4,068 4,163 Other 469 402 Total current liabilities 20,180 21,474 Deferred income taxes 16,075 16,012 Long-term debt 7,000 7,000 Accumulated postretirement medical benefit obligation 16,773 16,711 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,199,105 outstanding at 9/28/02, excluding 1,366,838 held in treasury; 5,147,201 outstanding at 6/29/02, excluding 1,397,659 held in treasury) 5,199 5,147 Class B Common $1 par (10,000,000 shrs. auth.; 1,376,397 outstanding at 9/28/02, excluding 332,019 held in treasury; 1,397,480 outstanding at 6/29/02, excluding 332,019 held in treasury) 1,376 1,397 Additional paid-in capital 48,367 47,858 Retained earnings reinvested and employed in the business 140,098 150,029 Accumulated other comprehensive income (loss) (25,404) (24,090) Total stockholders' equity 169,636 180,341 229,664 241,538 See notes to consolidated financial statements Page 4 of 14 THE L. S. STARRETT COMPANY Consolidated Statements of Stockholders' equity For the Thirteen Weeks Ended September 28, 2002 and September 29, 2001 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income(Loss) Total Balance June 30, 2001 6,458 45,112 156,626 (23,375) 184,821 Comprehensive income: Net earnings 262 262 Unrealized net loss on investments (145) (145) Translation loss, net (841) (841) Total comprehensive loss (724) Dividends ($.20 per share) (1,279) (1,279) Treasury shares: Purchased (5) (36) (52) (93) Issued 37 703 740 Balance September 29, 2001 6,490 45,779 155,557 (24,361) 183,465 Balance June 29, 2002 6,544 47,858 150,029 (24,090) 180,341 Comprehensive income: Net loss (8,621) (8,621) Unrealized net gain on investments 42 42 Translation loss, net (1,356) (1,356) Total comprehensive loss (9,935) Dividends ($.20 per share) (1,310) (1,310) Treasury shares: Purchased Issued 31 509 540 Balance September 28, 2002 6,575 48,367 140,098 (25,404) 169,636 See notes to consolidated financial statements Page 5 of 14 THE L. S. STARRETT COMPANY Condensed Notes to Consolidated Financial Statements In the opinion of management, the accompanying financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 28, 2002 and June 29, 2002; the results of operations and cash flows for the thirteen weeks ended September 28, 2002 and September 29, 2001; and changes in stockholders' equity for the thirteen weeks ended September 28, 2002 and September 29, 2001. The Company follows the same accounting policies in the preparation of interim statements as described in the Company's annual report filed on Form 10-K for the year ended June 29, 2002, except for the treatment of goodwill as discussed below, and these financial statements should be read in conjunction with said annual report. Certain reclassifications have been made to prior period data to conform with current year presentation. In the quarter ended September 28, 2002, shares used to compute basic and diluted loss per share are the same since the inclusion of common stock equivalents (10,569 shares) would be antidilutive. As discussed under Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company has taken reserves and charged pretax operations with $3.1 million ($.30 per share after tax) in the September 2002 quarter in connection with an investigation of its Coordinate Measuring Machine division in Mt. Airy, N.C. No assurances can be made that these reserves reflect the actual costs that will ultimately be incurred by the Company or that the Company will not need to take additional reserves. The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of June 30, 2002, the first day of fiscal 2003, and performed a transitional fair value based impairment test as of that date. As a result, a onetime, non-cash, non-operational impairment charge of $6,086,000 ($.93 per share after taxes), relating primarily to the acquisition of the Company's Evans Rule division in 1986, was recorded as of the first day of the September 2002 quarter and related amortization of $67,000 per quarter was discontinued. The charge is reflected as the cumulative effect of a change in accounting principle in the accompanying Statement of Operations and Cash Flows. There were no income taxes associated with the charge. Had the provisions of SFAS 142 been applied for the prior year's quarter ended September 29, 2001, net earning and net earnings per share would have been as follows (in thousands): Thirteen Weeks Ended 9/29/01 Net earnings as reported 262 Add back goodwill amortization 67 Proforma net earnings 329 Basic and diluted earnings per share as reported .04 Effect of SFAS 142 .01 Proforma basic and diluted earnings per share .05 Included in investments at September 28, 2002 is $2.3 million of AAA rated Puerto Rico debt obligations that have maturities greater than one year but carry the benefit of possibly reducing repatriation taxes. These investments are used as part of the Company's overall cash management and liquidity program and, under SFAS 115, are considered "available for sale." The investments themselves are liquid and carry no early redemption penalties and are, therefore, classified as current assets. Page 6 of 14 Other income (expense) is comprised of the following (in thousands): Thirteen Weeks Ended September 2002 2001 Interest income 175 157 Interest expense and commitment fees (94) (162) Realized and unrealized exchange losses (720) (428) Other (41) 41 (680) (392) Approximately 70% of all inventories are valued on the LIFO method. At September 28, 2002 and June 29, 2002, total inventories are $23,959,000 and $23,835,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): September June 2002 2002 Note payable due 12/03, 3.8% 4,000 4,000 Revolving credit agreement, 2.3% 3,000 3,000 7,000 7,000 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW OF QUARTERLY RESULTS As more fully discussed below, results for the quarter ended September 28, 2002 show the Company incurred a net loss of $8.6 million, or $1.32 per share, compared to net income of $.3 million, or $.04 per share, in the comparable quarter. A significant portion of this loss was caused by two unusual charges: the write off of $6.1 million, or $.93 per share after tax, of goodwill and a $3.1 million pretax, or $.30 per share after tax, provision in connection with a government investigation at the Company's Mt. Airy, North Carolina facility. Excluding these charges, the Company incurred a net loss for the quarter of $.6 million, or $.09 per share, compared to net income of $.3 million, or $.04 per share, in the comparable quarter of the prior year. Sales Sales for the September quarter are down 3% compared to the corresponding quarter of a year ago. Excluding intercompany sales, domestic sales are down 6% and foreign sales are up 8%. In local currency foreign sales are up 18% quarter to quarter. The decrease in domestic sales reflects the continued weak U.S. industrial manufacturing sector and lower shipments to a major consumer products customer as they rebalance their inventories. Earnings (loss) before taxes and cumulative effect of change in accounting principle Pretax earnings (loss) in the quarter, before the cumulative effect of the change in accounting principle for goodwill (adoption of SFAS 142) as previously discussed are down $4.8 million from last year's September quarter. $3.1 million pretax ($.30 per share after tax) of this decrease relates to charges taken at our Coordinate Measuring Machine (CMM) division in Mt. Airy, N.C. as further described below. Page 7 of 14 Excluding the goodwill writeoff and CMM division charges, pretax earnings are down $1.7 million. In addition to the decrease in sales, the major items causing the remaining decrease in pretax earnings are increased domestic fringe benefit costs ($.3 million), unrealized exchange losses in Brazil ($.5 million), and the effect ($1.5 million), both domestic and foreign, of production levels being well below sales as the Company continues to reduce inventories. These cost increases were partially offset by a reduction in selling and general expense, before the CMM charges discussed below, of $.8 million as well as the elimination of goodwill amortization ($.1 million). Coordinate Measuring Machine (CMM) division The Company's CMM division is presently the subject of a federal government investigation being coordinated through the Department of Justice. The division, which is located in the Company's Mt. Airy, North Carolina facility, accounted for less than 3% of the Company's net sales during fiscal 2002. The CMM division manufactures and sells coordinate measuring machines, including the Rapid Check 2 and Rapid Check 3 machines. The Company's CMMs operate with computer measurement software sold by the Company, including software sold under the "Apogee" brand name. The Company became aware of the investigation on September 5, 2002, when federal agents conducted a search of the CMM division. The government's investigation appears to be focused on the division's Rapid Check coordinate measuring machine product line and other Starrett CMMs using the Apogee software. On September 12, 2002, the Wall Street Journal published an article in which allegations that the Company had defrauded its customers and the government were attributed to Richard Parks, a former independent contractor to the Company. The article indicated that the investigation apparently was prompted by a qui tam action filed under seal in federal court in Boston, Massachusetts by Mr. Parks. The Company has not been served with a complaint in connection with any qui tam action. In response to that article, the Company denied that it defrauded its customers or the government. The Company is fully cooperating with the government in its investigation. Beginning late in calendar 2001, the Company, on its own initiative and as part of its review of its Rapid Check product line, made certain improvements to the Rapid Check machines and incorporated these improvements in new Rapid Check machines. Beginning in March 2002, the Company informed its customers of these improvements and initiated a program to replace the affected Rapid Check machines at no cost to its customers. This replacement program continues to the present time. As a result of the investigation and ongoing replacement program outlined above, the Company has taken reserves and charged pretax operations with $3.1 ($.30 per share after tax) million in the September 2002 quarter. Of this, $1.5 million has been charged to selling and general expense in the Statement of Operations and relates to professional fees, including legal. The remaining $1.6 million relates to the Rapid Check replacement program and other CMM inventory valuation expenses and appears as part of cost of goods sold in the Statement of Operations. No assurances can be made that these reserves reflect the actual costs that will ultimately be incurred by the Company or that the Company will not need to take additional reserves. Total CMM division inventories were approximately $6.5 million as of September 28, 2002. Income Taxes The effective income tax rate was 44% in the September quarter of 2002 and 24% in the prior year's corresponding quarter. The change results from a higher tax rate in Brazil this year, lower tollgate taxes in Puerto Rico, and, because pretax earnings were so close to breakeven in 2001. Page 8 of 14 Earnings (loss) per share before change in accounting principle As a result of the above factors and before the change in accounting principle (adoption of SFAS 142), the Company incurred a loss per share for the quarter of $.39 compared to income of $.04 per share a year ago. Approximately $.30 of the current quarter's after tax loss relates to the CMM division charges as discussed above. Net earnings (loss) per share after change in accounting principle Net loss per share was $1.32 in the current quarter compared to net income per share of $.04 a year ago. The additional $.93 per share loss over and above the $.39 loss referred to in the previous section is the result of adopting SFAS 142 and writing off $6.1 million in goodwill as discussed in more detail in the notes to the financial statements above. LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 9/28/02 9/29/01 Cash provided by operations 5,236 3,888 Cash used in investing activities (4,162) (2,209) Cash used in financing activities (1,328) (1,527) Despite a $2.8 million reduction in earnings (before the noncash change in accounting principle) and a $1.1 million increase in receivables (vs $2.3 decrease last year), cash provided by operations increased due to the nearly $6 million reduction in inventories during this year's quarter compared to a $2 million increase in the prior year's quarter. "Retirement benefits" under noncash expenses in the detailed cash flow statement shows the effect on operating cash flow of the Company's pension and retiree medical plans. Primarily because the Company's domestic defined benefit plan is overfunded, retirement benefits in total generated approximately $.2 million of noncash income in the current year's quarter and $.6 million in the prior year's quarter ($(.2) and $.1 million of accrual basis income (expense)). The Company's investing activities consist of expenditures for plant and equipment and the investment of cash not immediately needed for operations. Increased short-term investments offset by approximately $1.8 million less in capital expenditures accounts for the increase in investing activities. Cash flows from financing activities are primarily the payment of dividends, which tend to be quite steady from year to year. The Company requires little debt to finance day to day operations and the proceeds from the sale of stock under the various stock plans tend to be used to purchase treasury shares. The Company maintains sufficient liquidity and has the resources to fund its operations in the near term. If economic conditions do not improve and the Company continues to sustain losses, additional steps will have to be taken in order to maintain liquidity, including further workforce reductions and/or reducing or eliminating dividends. The Company maintains a $25 million line of credit but has not made significant borrowings under it. The Company has a working capital ratio of 6.2 to 1 as of September 28, 2002 and 6.0 to 1 as of June 29, 2002. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United Page 9 of 14 States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The first footnote to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended June 29, 2002 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Judgements, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable; inventory allowances; warranty and returned goods reserves; turnover, discount, and return rates used to calculate pension obligations; normal expense accruals for such things as workers compensation and employee medical expenses; and of particular importance this quarter the previously discussed charges connected with the government investigation of our CMM division. Actual results could differ from these estimates. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 This Quarterly Report on Form 10-Q as well as the 2002 Annual Report, including the President's letter to stockholders, and the quarterly shareholder earnings announcement include forward-looking statements about the Company's business, sales, expenditures, environmental regulatory compliance, foreign operations, interest rate sensitivity, debt service, liquidity and capital resources, other operating and capital requirements, and the pending government investigation. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward- looking statements, including the following risk factors: Risks Related to Government Investigation: As discussed above, the Government is currently investigating the Company's CMM division. There can be no assurance as to how long this investigation will last and what the outcome of the investigation will be and what effect, if any, the outcome of the investigation will have on the Company, its sales of CMMs and other products or its stock price. Risks Related to Technology: Although the Company's strategy includes investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors. Risks Related to the Euro: The United Kingdom has not adopted the euro and the Company's Scottish subsidiary transacts a significant amount of business with euro countries. There can be no assurance that this situation will not result in unforseen economic conditions that affect the Company's business. Indeed, the weakness of the euro as compared to the British pound has had an adverse impact on the Company's sales and margins on business done with euro countries. Risks Related to Foreign Operations: Approximately a third of the Company's sales and net assets relate to foreign operations. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes and other restrictions on distributions and payments, currency exchange rate fluctuations, political and economic instability, inflation, minimum capital requirements, and exchange controls. In particular, the Company's Brazilian operations, which constitute over half of the Company's revenues from foreign operations, can be very volatile, changing from year to year due to the political situation and economy. As a result, the future performance of the Brazilian operations is inherently unpredictable. Page 10 of 14 Risks Related to Cyclical Nature of the Industry: The market for most of the Company's products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies. Accordingly, economic weakness in the industrial manufacturing sector will result in decreased demand for the Company's products and will adversely affect performance. Economic weakness in the consumer market also impacts the Company's performance. Risks Related to Competition: The Company's business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low-wage foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures might reduce unit sales and/or adversely affect the Company's margins. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At September 2002 and June 2002, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. The Company does not enter into long-term supply contracts with either fixed prices or quantities. The Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net foreign monetary assets total approximately $4 million as of September 28, 2002. A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $12.5 million and debt of $7.3 million at September 28, 2002) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Company's fixed rate investments of $2.3 million by approximately $50,000. Item 4. Controls and Procedures Within the 90 days prior to the date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings The information under the caption "Coordinate Measuring Machine Division" in Item 2 of Part I of this Form 10-Q is hereby incorporated by reference. Page 11 of 14 Item 4. Submission of Matters to a Vote of Security Holders. (a) A regular meeting of shareholders was held on September 18, 2002. (c) 1. The following directors were elected: Abstentions Votes Votes and Broker For Withheld Non-votes A and B shares voting together: Roger U. Wellington, Jr. 16,430,422 303,747 N/A Antony McLaughlin 16,524,224 209,945 N/A 2. As more fully described in the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for said meeting, it was voted to adopt the Company's 2002 Employees' Stock Purchase Plan. There were 14,102,517 votes in favor, 1,546,579 against and 371,140 abstentions. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10e 2002 Employees' Stock Purchase Plan. 99a Certification of Douglas A. Starrett pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99b Certification of Roger U. Wellington, Jr. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on form 8-K On September 6, 2002, the Company filed a Report on Form 8-K concerning the September 5, 2002 search by federal agents of the Company's Coordinate Measuring Machine Division at its Mt. Airy, North Carolina facility. SIGNATURES Pursuant to the requirements 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. THE L. S. STARRETT COMPANY (Registrant) Date November 12, 2002 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Vice President, Treasurer and Chief Financial Officer) Date November 12, 2002 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 12 of 14 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Douglas A. Starrett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The L.S.Starrett Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 S/DOUGLAS A. STARRETT Douglas A. Starrett President and Chief Executive Officer Page 13 of 14 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Roger U. Wellington, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The L.S.Starrett Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 S/ROGER U. WELLINGTON, JR. Roger U. Wellington, Jr. Vice President, Treasurer and Chief Financial Officer Page 14 of 14 EX-10 3 espp2002.txt 2002 EMPL STK PURCH PLAN THE L.S. STARRETT COMPANY 2002 EMPLOYEES' STOCK PURCHASE PLAN (AS AMENDED) Section 1. Purpose and Scope of Plan. The L.S. Starrett Company 2002 Employees' Stock Purchase Plan (the "Plan") is intended to provide a convenient means by which eligible employees of The L.S. Starrett Company (the "Company") and of such subsidiaries of the Company as the Board of Directors of the Company may from time to time designate ("participating subsidiaries") may save regularly through voluntary, systematic payroll deductions and use such savings to purchase shares of stock of the Company ("Stock") at an option price, and thereby acquire an interest in the future of the Company. For all purposes of the Plan, the term "Stock" shall include Class A Common Stock of the Company and, to such extent (if any) as the Board of Directors of the Company may determine consistent with the purposes of the Plan, Class B Common Stock of the Company. The purpose of the Plan is to help provide personnel a nest egg for retirement. The Plan is not intended to be used as a buy and sell plan while the participant is actively employed. The Plan allows each participant to acquire shares of Stock at a favorable price to accomplish this purpose. For these purposes, the Company has established this Plan under which it will issue an aggregate of not more than 800,000 shares of Stock pursuant to the exercise of options granted only to employees who meet the eligibility requirements set forth in Section 2 hereof. Said options shall, subject to the Company's right to discontinue the Plan at its discretion at any time, be granted by the Company from time to time over a five-year period commencing with the effective date of the Plan as specified in Section 20 hereof. For purposes of the Plan, the term "subsidiary" shall mean a "subsidiary corporation" within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as it may from time to time be amended (the "Code"). Section 2. Eligible Employees. Each employee (including employee-directors) who, on a date of grant of an option hereunder, has six months or more continuous service in the employ of the Company or a participating subsidiary shall be eligible to participate in the Plan. Section 3. Term of Options. Subject to Sections 12 and 13 hereof, each option for the purchase of Stock hereunder shall, unless exercised in accordance with Section 9, expire two years from the date of its grant. Section 4. Purchase Price. The purchase price of the Stock issued pursuant to the exercise of an option granted under the Plan shall be 85% of the fair market value of the Stock at (i) the time of grant of the option or (ii) the time at which such option is exercised, whichever is less. The fair market value of the Stock shall be determined by the Company. Section 5. Number of Shares. Pursuant to any offering made by the Company, the Company shall grant to an eligible employee an option to purchase such whole number of shares of Stock as the employee may request but no employee shall be granted options permitting him or her to purchase more than 9,600 shares in the aggregate under the Plan. All such requests shall be subject to adjustment by the Company, which reserves the right to reduce on a substantially proportionate basis the number of shares which all employees have requested to purchase in the event that the number of shares of Stock then available under the Plan is insufficient to grant the total number of shares provided in such requests. Section 6. Method of Participation. Upon notice of the Company's intention to grant options pursuant to the Plan, each employee who will be eligible on the date of grant shall, within the time and in the manner specified in said notice, inform the Company of the number of shares of Stock for which he wishes to receive an option pursuant thereto. Thereafter, the Company shall grant each such employee an option in writing which shall include provisions as to the date of grant of the option, the option price, the number of shares of Stock subject to such option, the date such option shall be exercisable, and the date such option will expire. Section 7. Method of Payment. An employee who wishes to accept the terms of an option granted hereunder shall execute and deliver to the Company a payroll deduction authorization providing for the accumulation of savings equal to the maximum amount that could be required to be paid for the Stock subject to such option (determined by reference to its value on the date of grant) by means of substantially equal payroll deductions over the term of the option. For the avoidance of doubt, such payroll deduction authorization may provide for a suspension or reduction in payroll deductions during specified periods (for example, during unpaid leaves of absence or while a loan from the Company's 401(k) plan is outstanding) provided that such suspensions and reductions are made available and administered in a manner that is consistent with Section 19 below. Any employee who voluntarily terminates or withdraws his payroll deduction authorization shall be deemed to have cancelled his option and the provisions of Section 11 shall apply. If an employee's payroll deductions are temporarily discontinued because of leave of absence or temporary disability, such employee shall have the right at any time prior to the expiration of the option to pay in cash the amount by which the full purchase price of the number of shares he wishes to purchase under the option exceeds the amount paid in by payroll deductions. Notwithstanding anything herein to the contrary, an employee may make advance cash payments at any time and in any amounts but such advance cash payments shall not accelerate the exercise of the option. Section 8. Rights as a Shareholder. An employee shall not have any of the rights and privileges of a shareholder of the Company and shall not receive any dividends in respect to any shares of Stock subject to an option hereunder, unless and until he has been issued such shares. Section 9. Exercise of Options. Any option granted under the Plan shall be exercised by written notice filed with the Company at such time and in such form as the Company may prescribe. Such notice of exercise shall specify the number of shares for which such option is exercised and shall include a representation that the Stock to be issued pursuant to such exercise is being acquired for investment and not with any existing intention to resell said Stock. As soon as practicable after receipt of such notice of exercise, the Company shall apply the employee's accumulated savings and any additional cash contributions under the Plan to the purchase price of the shares under the option so exercised, shall issue and deliver such shares to the employee and shall return to him the balance, if any, of payments made by him and interest thereon in excess of the total purchase price of the shares so issued. If the Company determines that the exercise of an option or the disposition of shares following the exercise of an option could result in employment tax liability, the Company will, as a condition of exercise, make such provision as it deems necessary to provide for the remittance by the employee of employment taxes required to be paid in connection with such exercise or disposition of shares. Notwithstanding anything herein to the contrary, the Company's obligation to issue and deliver shares of Stock under the Plan shall be subject to the approval of any governmental authority required in connection with the authorization, issuance, sale or transfer of said shares and to any requirements of the New York Stock Exchange applicable thereto. Section 10. Interest. Interest shall be payable on any savings and any additional cash contributions accumulated under the Plan by an employee. Such interest shall be computed in such reasonable manner and at such reasonable rate as the Company shall determine. Section 11. Right to Cancel. An employee who holds an option under the Plan may at any time prior to his exercise thereof cancel all or any part of his option by filing a notice in writing with the Company. In the event that an employee holds more than one option, he or she may cancel any or all options so held; provided, however, that such employee must cancel said options in reverse chronological order of their dates of grant. Upon such cancellation, all payments made by the employee in respect to the cancelled portion of such option shall be returned to him or her with interest. Section 12. Termination of Employment. In the event an employee holds any option hereunder at the time his service with the Company and its Subsidiaries is terminated by his or her retirement with the consent of the employer within three months of the time such option becomes exercisable, or by his death whenever occurring, such employee or his or her legal representative may, by a writing delivered to the Company on or before the date such option is exercisable, elect either to (i) cancel any such option and receive in cash, with interest, the total amount of any savings and additional contributions accumulated in respect to such option, or (ii) pay to the Company the amount, if any, which is necessary to complete payment for the shares of Stock under option based on the maximum amount that could be required to be paid for the Stock (determined by reference to its value on the date of grant). In the event such employee or his or her legal representative does not file a written election upon such termination any outstanding option shall be treated as if an election had been filed pursuant to clause (i) above. Upon the termination of an employee's service with the Company and its subsidiaries for any other reason, any option held by him or her under the Plan shall terminate and all savings and additional contributions accumulated by the employee in respect thereto shall be returned to him or her with interest, and he or she shall have no further rights under the Plan. Section 13. Employee's Rights Not Transferable. All employees granted options under the Plan shall have the same rights and privileges, and each employee's rights and privileges under the Plan shall be exercisable during his or her lifetime only by him or her and shall not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution. In the event any employee violates the terms of this Section, any options held by him or her may be terminated by the Company and upon return to the employee of any savings and additional contributions accumulated by him or her in respect thereto, all his or her rights under the Plan shall terminate. Section 14. Employment Rights. Nothing contained in the provisions of the Plan shall be construed to give to any employee the right to be retained in the employ of the Company or any subsidiary or to interfere with the right of the Company or any subsidiary to discharge any employee at any time; nor shall it be construed to give the Company or any subsidiary the right to require any employee to remain in its employ or to interfere with an employee's right to terminate his or her employment at any time. Section 15. Change in Capitalization. In the event of any change in the outstanding Stock of the Company by reason of a stock dividend, split-up, recapitalization, merger, consolidation or other reorganization, the aggregate number and class of shares available under the Plan and the number and class of shares under option but not exercised and the option price shall be appropriately adjusted; provided, however, that no such adjustment shall be made unless the Company shall be satisfied that it will not constitute a modification of the options granted under the Plan or otherwise disqualify the Plan as an employee stock purchase plan under the provisions of Section 423 of the Code. Section 16. Administration of Plan. The Plan shall be administered by the Company, which shall have the right to determine any questions that may arise regarding the interpretation and application of the provisions of the Plan and to make, administer and interpret such rules and regulations as it shall deem necessary or advisable. Section 17. Amendment and Termination of Plan. The Company reserves the right at any time or times to amend the Plan to any extent and in any manner it may deem advisable by vote of its Board of Directors; provided, however, that any amendment relating to the aggregate number of shares which may be issued under the Plan (other than an adjustment provided for in Section 15 hereof) or the employees (or class of employees) to receive options under the Plan shall not have any force or effect unless it shall have been approved within 12 months before or after its adoption by a majority of the holders of voting stock of the Company voting in person or by proxy at a duly held meeting. The Company expects the Plan to remain in effect for the period specified in Section 1, but expressly reserves the right to withdraw, suspend or terminate the Plan prior to its normal expiration date. In connection with any such action, the Company may either continue the options and provide that they will be exercisable at the end of the period as determined under Section 3 above or provide for the exercise of such options on such earlier date as the Company may specify (in which case such earlier date will be treated as the last day that such option can be exercised under Section 3). Section 18. Approval of Stockholders. The Plan shall not have any force or effect unless it shall have been approved within 12 months before or after its adoption by the Board of Directors by a majority of the votes cast at a duly held stockholders' meeting at which a quorum representing a majority of all outstanding Stock is, either in person or by proxy, present and voting on the Plan. Section 19. Compliance with Code. Notwithstanding any other provisions of the Plan: No option shall be granted hereunder which could cause the Plan or any other options issued hereunder to fail to qualify under Section 423 of the Code. Without limiting the foregoing, all employees granted options under the Plan shall have the same rights and privileges, subject to and consistent with the provisions of Section 423(b)(5) of the Code. Any director of the Company or of a subsidiary who is not an employee of the Company or of a subsidiary, and any employee who immediately after the grant of an option to him is determined (in accordance with the provisions of Sections 423 and 424(d) of the Code) to own Stock possessing 5% or more of the total combined voting power or value of all classes of Stock of the Company or of its parent or subsidiary corporations, as defined in Section 424 of the Code, shall not be eligible to purchase Stock pursuant to the Plan. No employee shall be granted an option under the Plan that would permit his rights to purchase shares of Stock under all employee stock purchase plans of the Company and its parent and subsidiary corporations, as defined in Section 424 of the Code, to accrue at a rate that exceeds $25,000 in fair market value of such Stock (determined at the time the option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time. Section 20. Effective Date. The effective date of the Plan shall be September 18, 2002. EX-99 4 ex99aqdascert.txt DAS 906 CERT Exhibit 99a CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief executive officer of The L.S. Starrett Company (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Douglas A. Starrett Douglas A. Starrett Chief Executive Officer Dated: November 12, 2002 ex99adascert.doc -2- EX-99 5 ex99bqruwcert.txt RUW 906 CERT Exhibit 99b CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief financial officer of The L.S. Starrett Company (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Roger U. Wellington, Jr. Roger U. Wellington, Jr. Chief Financial Officer Dated: November 12, 2002 ex99bruwcert.doc -2- -----END PRIVACY-ENHANCED MESSAGE-----