-----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, A4mfCxRk40uxZEVEr51cocnhpnCJO+YCZvseM68FtQnpRcGyT8/P5cbMh/t8R2ji tLb+p5p+wLsjjvkYqYyw6A== 0000093676-04-000040.txt : 20040909 0000093676-04-000040.hdr.sgml : 20040909 20040909165335 ACCESSION NUMBER: 0000093676-04-000040 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040626 FILED AS OF DATE: 20040909 DATE AS OF CHANGE: 20040909 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00367 FILM NUMBER: 041023473 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-K 1 fy0410ki.txt 10K MAIN UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (check one) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 26, 2004 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 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 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 978-249-3551 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Class A Common - $1.00 Per Share Par Value New York Stock Exchange Class B Common - $1.00 Per Share Par Value Not applicable 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 filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No ____ The Registrant had 5,360,457 and 1,288,613 shares, respectively, of its $1.00 par value Class A and B common stock outstanding on December 27, 2003. On that date, the aggregate market value of the common stock held by nonaffiliates was approximately $116,000,000. The exhibit index is located on page 34. Documents incorporated by reference Definitive Proxy Statement dated September 10, 2004 - Part III PART I Item I - Business The Company was founded in 1880 and incorporated in 1929 and is engaged in the business of manufacturing industrial, professional, and consumer products. The total number of different items made and sold by the Company exceeds 5,000. Among the items produced are precision tools, electronic gages, dial indicators, gage blocks, granite surface plates, vision systems, optical measuring projectors, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, vises, M1r lubricant, and precision ground flat stock and drill rod. Much of the Company's production is concentrated in hand measuring tools (such as micrometers, steel rules, combination squares and many other items for the individual craftsman) and precision instruments (such as vernier calipers, height gages, depth gages and measuring instruments that manufacturing companies buy for the use of their employees). These tools and instruments are sold throughout the United States and Canada and over 100 foreign countries, primarily to distributors. By far the largest consumer of these products is the metalworking industry, but other important consumers are automotive, aviation, marine and farm equipment shops, do-it-yourselfers and tradesmen such as builders, carpenters, plumbers and electricians. One retailer, Sears, accounted for approximately 12% of the Company's sales in fiscal 2004, and the Company's top three customers accounted for approximately 25% of sales. The Company expects to wind down and eventually end its relationship with W.W.Grainger, one of the three customers, during fiscal 2005. The effect this will have on total Company sales and profits is unknown since much of the Grainger business is expected to be picked up by other Company distributors, although no such assurances can be made. Most of the Company's products are made from steel purchased from steel mills. Forgings, castings, and a few small finished parts are purchased from other manufacturers. Raw materials have always been readily available to the Company and, in most cases, the Company does not rely on sole sources. In the event of unavailability of purchased materials, the Company would be adversely affected, as would its competitors. Similarly, the ability of the Company to pass along raw material price increases is dependent on the competitive situation and cannot be assured. At June 26, 2004, the Company had 2,050 employees, approximately 65% of whom were domestic. None of the Company's operations are subject to collective bargaining agreements. In general, the Company considers its relations with its employees to be excellent. Because of various stock ownership plans, Company domestic personnel hold a large share of Company stock and the Company believes that this dual role of owner-employee has been good for morale over the years. The Company is one of the largest producers of mechanics' hand measuring tools and precision instruments. In the United States, there are three other major companies and numerous small competitors in the field, including direct foreign competitors. As a result, the industry is highly competitive. During the fiscal year ended June 26, 2004, there were no material changes in the Company's competitive position. However, during recent years, the Company's revenues have been negatively affected by the general migration of manufacturing to low cost production areas, such as China, where the Company does not have a substantial market presence. In addition, margins on the Company's consumer products, such as tape measures and levels, are under constant pressure due to the increasing market dominance of the large national home and hardware retailers. In saws and precision ground flat stock, the Company in the United States competes with many manufacturers. The Company competes principally through the high quality of its products and the service it provides its customers. The market for most of the Company's products is subject to economic conditions affecting the industrial manufacturing sector, including the of capital spending by industrial companies. The operations of the Company's foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in Brazil, Scotland, and China are actively engaged in the manufacture of hacksaw and band saw blades and a limited line of precision tools and measuring tapes. Subsidiaries in Australia, Mexico and Germany are engaged in distribution of the Company's products. The Company is in the process of establishing manufacturing operations in the Dominican Republic. The Company expects its foreign subsidiaries to continue to play a significant role in its overall operations. A summary of the Company's foreign operations is contained in the footnotes to the Company's fiscal 2004 financial statements under the caption "OPERATING DATA" found in Item 8 of this Form 10-K and is hereby incorporated by reference. The Company generally fills orders from finished goods inventories on hand. Sales order backlog of the Company at any point in time is negligible. Total inventories amounted to $43.3 million at June 26, 2004, and $54.0 at June 28, 2003. The Company uses the last-in, first-out (LIFO) method of valuing most domestic inventories (approximately two thirds of all inventories). LIFO inventory amounts reported in the financial statements are approximately $20 million lower than if determined on a first-in, first-out (FIFO) basis. When appropriate, the Company applies for patent protection on new inventions and presently owns a number of patents. Its patents are considered important in the operation of the business, but no single patent is of material importance when viewed from the standpoint of its overall business. The Company relies on its continuing product research and development efforts, with less dependence on its present patent position. It has for many years maintained engineers and supporting personnel engaged in research, product development, and related activities. The expenditures for these activities during fiscal years 2004, 2003 and 2002 were approximately $3.0 million, $2.9 million, and $2.7 million, respectively, all of which was expensed in the Company's financial statements. The Company uses trademarks with respect to its products. All of its important trademarks are registered. Compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to protection of the environment is not expected to have a material effect on the capital expenditures, earnings and competitive position of the Company. Specifically, the Company has taken steps to reduce and control water discharges and air emissions. The Company's business is to a small extent seasonal, with sales and earnings generally at the lowest level during the first and third quarters of the fiscal year. Where To Find More Information The Company makes its public filings with the Securities and Exchange Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at its website, www.starrett.com, as soon as reasonably practicable after the Company files such material with the SEC. Information contained on the Company's website is not part of this report. Item 2 - Properties The Company's principal plant is located in Athol, Massachusetts on about 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet of production and storage area. An additional 9,000 square feet of leased space in Gardner, Massachusetts is considered part of this plant. The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings totaling approximately 50,000 square feet. The Company-owned facility in Mt. Airy, North Carolina consists of two buildings totaling approximately 356,000 square feet. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine/Optical Comparator Division, and Ground Flat Stock Division. The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 173,000 square foot building. In addition, this division leases 35,000 square feet of manufacturing space in Mayaguez, Puerto Rico. The Company's Exact Level Division is in the process of relocating to a 29,000 square foot facility in the Dominican Republic and its 50,000 square foot building located in Alum Bank, Pennsylvania is currently for sale. The Company's subsidiary in Itu, Brazil owns and occupies several buildings totaling 209,000 square feet. The Company's subsidiary in Jedburgh, Scotland owns and occupies a 187,000 square foot building. Its wholly owned subsidiary, which manufactures optical measuring projectors and was previously located in Skipton, England, was consolidated into the Jedburgh plant during fiscal 2004. Its 33,000 square foot building in Skipton was sold subsequent to fiscal 2004 year end. Two wholly owned subsidiaries in the Shanghai area of the People's Republic of China lease approximately 40,000 square feet and 2,000 square feet. In addition, the Company operates warehouses and/or sales-support offices in Arizona, Illinois, Georgia, Canada, Australia, Mexico, Germany, Japan, and Argentina. In the Company's opinion, all of its property, plant and equipment is in good operating condition, well maintained and adequate for its needs. Item 3 - Legal Proceedings In August 2004, the Company reached a settlement with the U.S. Department of Justice resulting in the termination of the Government's two-year investigation of the Company's Coordinate Measuring Machine (CMM) Division located in Mount Airy, North Carolina and the dismissal with prejudice of the allegations in the qui tam complaint investigated by the government. The qui tam complaint, which prompted the Government's investigation, was filed under seal in March 2002 and was brought by a former independent contractor and former employee of the Company. The Company first became aware of the Government's investigation in September 2002, when the Government searched the Company's Mount Airy facility. In recent years, the division has accounted for less than 3% of the Company's total sales. Under the terms of the settlement, the Company will pay the Government $500,000, and the Government and the qui tam relators will release the Company and its officers, directors, employees and shareholders from the causes of action in the complaint that were the subject of the Government's investigation. The Company cooperated with the Government throughout its investigation, and has agreed to settle this matter solely to avoid the delay, expense, inconvenience and uncertainty of protracted litigation. In this regard, the Company denies and contests the allegations in the complaint, denies any wrongdoing in connection with those allegations, and notes that the Government itself, notwithstanding two years of investigation, intervened in this action only for the purposes of settlement and dismissing the qui tam action as described above. In addition, the United States Attorney for the District of Massachusetts in early August 2004 informed the Company in writing that, based on the facts known to the Office of the United States Attorney, the United States Attorney's Office does not intend to seek criminal charges against the Company or its CMM Division in connection with allegations arising out of, or relating to, the manufacture, sale or service of CMMs. The Company is named as a defendant from time to time in other litigation` in the ordinary course of business that is not considered material to its financial condition or operations. Item 4 - Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 26, 2004. PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Company's Class B common stock is generally nontransferable, except to lineal descendants, and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Company has paid the same dividends thereon as have been paid on the Class A common stock since that date. On July 23, 2004, there were 1,946 registered holders of Class A common stock and 1,568 registered holders of Class B common stock. Quarter ended Dividends High Low September 2002 $ 0.20 $ 25.30 $ 15.28 December 2002 0.20 17.60 13.80 March 2003 0.20 17.10 12.45 June 2003 0.10 14.60 11.63 September 2003 0.10 15.36 12.78 December 2003 0.10 17.63 13.83 March 2004 0.10 17.36 15.05 June 2004 0.10 16.47 14.75 Summary of Stock Repurchases: A summary of the Company's repurchases of shares of its common stock for the three months ended June 26, 2004 is as follows: ISSUER PURCHASES OF EQUITY SECURITIES Shares Purchased Shares yet to be Shares Average Under Announced Purchased Under Period Purchased Price Programs Announced Programs 3/28/04- 5/1/04 none none 5/2/04- 5/29/04 none none 5/30/04- 6/26/04 none none Item 6 - Selected Financial Data Years ended in June ($000 except per share data) 2004 2003 2002 2001 2000 Net sales $179,996 $175,711 $184,346 $225,857 $235,169 Earnings (loss) before change in accounting (2,352) (4,489) (380) 8,097 11,489 Net earnings(loss) (2,352) (10,575) (380) 8,097 11,489 Basic earnings(loss)per share (.35) (1.60) (.06) 1.26 1.73 Diluted earnings(loss)per shr. (.35) (1.60) (.06) 1.25 1.73 Long-term debt 2,536 2,652 7,000 7,000 3,000 Total assets 218,924 219,740 239,097 248,532 250,418 Dividends per share 0.40 0.70 0.80 0.80 0.80 Items 7 and 7A- Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk RESULTS OF OPERATIONS 2004 versus 2003 Overview As more fully discussed below, for fiscal 2004 the Company incurred a net loss of $2.4 million, or $.35 per basic and diluted share, compared to a net loss of $10.6 million, or $1.60 per basic and diluted share, for 2003. A significant portion of the losses in both years was caused by the charges incurred in connection with the government's investigation of the CMM division and related matters discussed in more detail below: in 2004, $2.9 million after tax or $.43 per share; and in 2003, $2.3 million or $.35 per share. Fiscal 2003 also included the writeoff of $6.1 million of goodwill (as discussed in the notes to the financial statements), or $.92 per share before and after tax; and fiscal 2004 contains $.6 million after tax ($.09 per share) of relocation and closure expenses related to our Skipton, England and Alum Bank, Pennsylvania manufacturing facilities. These unusual charges were offset by LIFO inventory liquidation benefits of $1.0 million and $.6 million after tax in 2004 and 2003 ($.15 and $.09 per share). Excluding all these unusual items, the Company had pro forma net income in 2004 of $.2 million, or $.02 per share, compared to a pro forma net loss of $2.8 million, or $.42 per share, in 2003. Sales Sales for fiscal 2004 increased 2% compared to 2003. Domestic sales are down 2% and foreign sales are up 12%. In local currency, foreign sales are down 2%, because the U.S. dollar has been weakening. Although domestic sales are down for the full year comparison, the quarter to quarter trend was up in fiscal 2004 whereas the trend was down in fiscal 2003. Domestic sales in the last six months of fiscal 2004 were 10% higher than in the last six months of fiscal 2003, reflecting improvement in the U.S. industrial manufacturing sector. Loss before taxes and cumulative effect of change in accounting principle Excluding the effect in 2003 of the change in accounting principle mentioned above, the pretax losses for fiscal years 2004 and 2003 were $4.9 million and $8.1 million, respectively. Both periods contain unusual charges related to the CMM division: in the current fiscal year, $3.2 million to write down the CMM inventory to net realizable value and $1.4 million for settlement expenses and additional professional fees in connection with concluding the government investigation (see below); and, in the prior fiscal year, $3.7 million in connection with the government investigation ($2.1 million of this was charged to selling and general expense and $1.6 million to cost of sales). In addition, the Company incurred $1.0 million in fiscal 2004 for severance, training, and relocation/closure expenses related to its Skipton, England and Alum Bank, Pennsylvania manufacturing facilities. Excluding the CMM division charges in both years and the relocation expenses in 2004, the Company had pretax income of $.7 million in fiscal 2004 and a pretax loss of $4.4 million in fiscal 2003, a $5.1 million improvement. The major items causing the $5.1 million improvement were lower ($.6 million) exchange losses, primarily in Brazil, and better gross margins (26.4% compared to 22.9% or $6.3 million excluding the unusual charges as discussed above). The gross margin improvement of over 3 percentage points is due primarily to lower headcount, higher domestic production levels and associated increase in overhead absorption, and LIFO inventory liquidation benefits of $1.6 million in fiscal 2004 compared to $.9 million in fiscal 2003. These items were partially offset by higher interest expense ($.3 million) in Brazil due to borrowing in local currency and an overall $2.4 million increase in selling and general expense (excluding the expense of the government investigation) caused primarily by the effect of the weakening U.S. dollar on the translation of expenses into U.S. dollars in Scotland and Brazil. Also contributing to this $2.4 million increase in selling and general expense were higher domestic fringe benefit and insurance costs, mainly retirement. Income Taxes The effective income tax rate was 52% for fiscal 2004 and 44% for 2003. Puerto Rico tax incentives, and somewhat lower foreign income tax rates all contribute to an overall effective tax rate that is normally slightly lower than the combined U.S. state and federal rate of approximately 38%. The large change in effective rate comes about because pretax results are close enough to breakeven in both years that permanent book/tax differences and jurisdictional tax rate differentials have an exaggerated effect when converted to percentages. Because of losses, the rates are relatively high compared to our normal rate of about 35% because the least profitable operations are located in the jurisdictions with the highest tax rates. Loss per share The following table summarizes the after tax effect of the goodwill writeoff, the CMM investigation, plant relocations, and LIFO inventory liquidation benefits: 2004 2003 $000 per shr $000 per shr Net loss as reported $ (2,352) $ (0.35) $(10,575) $ (1.60) Remove unusual items: Goodwill writeoff 6,086 0.92 CMM inventory and Investigation 2,883 0.43 2,294 0.35 Plant relocations 620 0.09 Remove unusual benefits: LIFO inventory reductions (980) (0.15) (575) (0.09) Adjusted net income (loss) $ 171 $ 0.02 $ (2,770) $ (0.42) 2003 versus 2002 Overview As more fully discussed below, for fiscal 2003 the Company incurred a net loss of $10.6 million, or $1.60 per basic and diluted share, compared to a net loss of $.4 million, or $.06 per share, for 2002. A significant portion of the fiscal 2003 loss was caused by two unusual charges: the writeoff of $6.1 million, or $.92 per share before and after tax, of goodwill (as discussed in the notes to the financial statements) and a $2.3 million, or $.35 per share, after tax provision in connection with the government investigation of the Company's CMM division (see below). These 2003 charges were partially offset by LIFO inventory liquidation benefits of $.6 million after tax ($.09 per share), which did not occur in 2002. Excluding these unusual items, the Company incurred a net loss for 2003 of $2.8 million, or $.42 per share, compared to a net loss of $.4 million, or $.06 per share, in 2002. Sales Sales for 2003 decreased 5% compared to 2002. Domestic sales were down 7% and foreign sales were up 2%. In local currency, foreign sales were up 14%, primarily because of the devaluation of Brazil's currency. The decrease in domestic sales reflects the continued weak U.S. industrial manufacturing sector, particularly in the third quarter of fiscal 2003, and lower first quarter 2003 shipments to a major consumer products customer as they rebalanced their inventories. Loss before taxes and cumulative effect of change in accounting principle Results for the year, before the cumulative effect of the change in accounting principle for goodwill (see footnotes regarding adoption of SFAS 142) were down $6.9 million from 2002. $3.7 million of this decrease ($.35 per share after tax) relates to charges taken in connection with the Company's CMM division as further described below. Excluding the goodwill writeoff and CMM division charges, cost of sales was 77.1% of sales compared to 75.6% in 2002 and pretax results were down $3.2 million. The major items causing the decrease in earnings were lower sales (approximately $2.5 million), increased domestic fringe benefit and insurance costs, mainly retirement ($1.0 million), additional reserves for slow moving inventory ($.9 million) and the effect on unabsorbed overhead ($3.0 to $4.0 million) of production levels being about 15% below sales as the Company continues to reduce inventories. These cost increases were partially offset by headcount and other cost reduction measures ($3.5 million), LIFO layer liquidation profits ($.9 million) and the elimination of goodwill amortization ($.3 million). Income Taxes The effective income tax rate before goodwill writeoff was 44% for fiscal 2003 and 69% for 2002. The large change in effective rate comes about because pretax results are close enough to breakeven in both years that permanent book/tax differences and jurisdictional tax rate differentials have an exaggerated effect when converted to percentages. Because of losses, the rates are relatively high compared to our normal rate of about 35% because the least profitable operations have been in the jurisdictions with the highest tax rates. Net loss per share Basic and diluted net loss per share was $1.60 for 2003. Excluding the $.35 related to the CMM division charges and the $.92 related to the writeoff of goodwill, the net loss was $.33 per share compared to a net loss of $.06 per share a year ago. Coordinate Measuring Machine (CMM) division In August 2004, the Company reached a settlement with the U.S. Department of Justice resulting in the termination of the Government's two-year investigation of the Company's CMM Division located in Mount Airy, North Carolina and the dismissal with prejudice of the allegations in the qui tam complaint investigated by the government. The qui tam complaint, which prompted the Government's investigation, was brought by a former independent contractor and former employee of the Company. The division manufactures and sells coordinate measuring machines and accounts for less than 2% of the Company's sales. Under the terms of the settlement, the Company will pay the Government $500,000, and the Company and its officers, directors, employees and shareholders will be released from any causes of action relating to the false claims allegations in the complaint that were the subject of the Government's investigation. The Company cooperated with the Government throughout its investigation, and has agreed to settle this matter solely to avoid the delay, expense, inconvenience and uncertainty of protracted litigation. In this regard, the Company denies and contests the allegations in the complaint, denies any wrongdoing in connection with those allegations, and notes that the Government itself, notwithstanding two years of investigation, intervened in this action only for the purposes of settlement and dismissing the qui tam action as described above. As a result of the government investigation and the CMM replacement program initiated prior thereto in March 2002, the Company took reserves and charged pretax operations with $3.7 million ($.35 per share after tax) in fiscal 2003 and $1.4 million in fiscal 2004. In addition, the Company charged cost of sales and wrote down the carrying cost of its CMM inventory by $3.2 million to net realizable value in the December 2003 quarter of fiscal 2004. See the additional comments below under "Reorganization and Restructuring Plans" regarding the CMM division. Financial instrument 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 June 2004 and 2003, 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 are approximately $4 million. 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 $29.2 million and debt of $4 million at June 26, 2004) 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 approximately $2.2 million by $35,000. LIQUIDITY AND CAPITAL RESOURCES Years ended In June ($000) 2004 2003 2002 Cash provided by operations $18,899 $24,336 $17,700 Cash used in investing activities (15,757) (17,643) (10,451) Cash used in financing activities (4,114) (5,187) (7,435) Despite operating losses in 2004 and 2003, including the significant costs associated with the government's investigation of the CMM division, cash provided by operations has been positive in all periods presented. By far the biggest factor contributing to this has been the reduction in inventories that began in mid 2002, and had its most dramatic effect in fiscal 2003. "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 are currently generating approximately $.8 million of noncash income ($2.2 and $1.4 million in 2003 and 2002). On an accrual basis, retirement benefit expense (income) was approximately $.7 million in 2004, $(.4) million in 2003 and $.9 million in 2002. 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 partially offset by less capital expenditures accounts for the increase in investing activities in 2004 and 2003. Cash flows from financing activities are primarily the payment of dividends. The proceeds from the sale of stock under the various stock plans has historically been used to purchase treasury shares, although in recent years such purchases have been curtailed. Overall debt has been reduced from $12 million at the end of 2001 to $5 million at the end of 2004. Liquidity and credit arrangements The Company believes it maintains sufficient liquidity and has the resources to fund its operations in the near term. If the Company is unable to return to consistent profitability, additional steps will have to be taken in order to maintain liquidity, including plant consolidations and further workforce and dividend reductions (see "Reorganization and Restructuring Plans" section below). The Company maintains a $15 million line of credit, but has not made significant borrowings under it. Although the credit line is not currently collateralized, it is possible, based on the Company's financial performance, that in the future the Company will have to provide collateral in order to maintain the credit agreement. The Company has a working capital ratio of 5.4 to one as of June 26, 2004 and 5.9 to one as of June 28, 2003. REORGANIZATION AND RESTRUCTURING PLANS As discussed in greater detail in the Company's Form 10-Q for the quarters ended December 27, 2003 and March 28, 2004, manufacturing globalization has adversely affected the Company's customer base and competitive position, particularly in North America, as more and more products are produced in low wage countries. As a result, the Company has been rethinking almost all aspects of its business and is formulating plans to lower wage costs, consolidate operations, move the strategic focus from manufacturing location to product group and distribution channel as well as achieving the goals of enhanced marketing focus and global procurement. Although there have been and may in the future be non-recurring costs associated with these plans, Management believes it is premature to take additional charges at this time. The outlook for the CMM division is problematic. Specific actions being considered for the CMM division range from staying in the business, to outsourcing, to exiting altogether. In the December 2003 quarter, the Company wrote down its CMM inventories by $3.2 million to an estimated net realizable value of $1.0 million (see above). During fiscal 2004, the Company consolidated its Skipton, England optical comparator manufacturing into its manufacturing facility in Jedburgh, Scotland. The cost of this move, including severance costs, was approximately $800,000, which will be partially offset by a $600,000 gain on the sale of the real estate that will be reported during the first quarter of fiscal 2005. The Company has closed, and is trying to sell, its Alum Bank, Pennsylvania level manufacturing plant and is in the process of relocating the manufacturing to the Dominican Republic, where production is expected to begin in fiscal 2005. Relocation of other manufacturing capacity is also being considered. In addition, the Company has recently consolidated its consumer hardware products activities under one business unit head and created a new consumer hardware sales and marketing organization. The Company's goal is to achieve labor savings and maintain margins while satisfying the requirements of its customers with lower prices. The Company has closed one warehouse and is evaluating consolidating or eliminating others. Depending on how this capacity is replaced, this could reduce inventory requirements and save operating costs with the potential of a net gain due to the market value of the related real estate. No material costs or asset write-downs are currently expected as a result of these actions pertaining to distribution facilities. There can be no assurances that the Company will implement all these actions and that, if such actions are implemented, they will result in savings to the Company. It is also possible that the Company may need to incur additional charges in connection with these plans. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United 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 these financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; employee 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 in fiscal 2003 and 2004 the previously discussed charges connected with the government investigation of our CMM division. Actual results could differ from these estimates. The allowance for doubtful accounts and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While we believe that our allowance for doubtful accounts and sales returns is adequate, if there is a deterioration of a major customer's credit worthiness, actual defaults are higher than our previous experience, or actual future returns do not reflect historical trends, our estimates of the recoverability of the amounts due us and our sales could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase our inventory reserve and, as a result, our gross profit margin could be adversely affected. Accounting for income taxes requires estimates of our future tax liabilities. Due to timing differences in the recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, we assess the likelihood that the asset will be realized. If realization is in doubt because of uncertainty regarding future profitability or enacted tax rates, we provide a valuation allowance related to the asset. Should any significant changes in the tax law or our estimate of the necessary valuation allowance occur, we would record the impact of the change, which could have a material effect on our financial position or results of operations. Pension and postretirement medical costs and obligations are dependent on assumptions used by our actuaries in calculating such amounts. These assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates, and other factors. These assumptions are made based on a combination of external market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other companies with similar plans. Actual results that differ from our assumptions are accumulated and amortized over future periods. Significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement benefit costs and obligations. CONTRACTUAL OBLIGATIONS The following table summarizes future estimated payment obligations by period. The majority of the obligations represent commitments for production needs in the normal course of business. Payments due by period (in millions) Total <1yr. 1-3yrs. 3-5yrs. >5yrs. Long-term debt obligations $ 1.5 $ 1.5 Capital lease obligations 3.2 0.7 $ 2.5 Operating lease obligations 1.7 0.5 0.7 $ 0.4 $ 0.1 Purchase obligations 15.2 15.2 Other long-term liabilities Reflected on the balance Sheet under GAAP Total $21.6 $17.9 $ 3.2 $ 0.4 $ 0.1 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K and the Company's 2004 Annual Report to Stockholderts, including the President's letter, contains forward-looking statements about the Company's business, competition, sales, expenditures, foreign operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. 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 Reorganization: The Company continues to develop plans to consolidate and reorganize some of its manufacturing and distribution operations. There can be no assurance that the Company will be successful in these efforts or that any consolidation or reorganization will result in cost savings to the Company. The implementation of these reorganization measures may disrupt the Company's manufacturing and distribution activities, could adversely affect operations, and could result in asset impairment charges and other costs that will be recognized if and when reorganization or restructuring plans are implemented or obligations are incurred. If the Company is unable to return to consistent profitability, additional steps will have to be taken, including further plant consolidations and workforce and dividend reductions. 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 Foreign Operations: Approximately a third of the Company's sales and a quarter of 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. Risks Related to Industrial Manufacturing Sector: 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 and the general movement of manufacturing to low cost foreign countries where the Company does not have a substantial market presence. Accordingly, economic weakness in the industrial manufacturing sector may, and in some cases has, resulted in decreased demand for certain of the Company's products, which adversely affects performance. Economic weakness in the consumer market will also adversely impact the Company's performance. In the event that demand for any of the Company's products declines significantly, the Company could be required to recognize certain costs as well as asset impairment charges on long-lived assets related to those products. Risks Related to Shift in Manufacturing: The Company's primary customers are in the manufacturing business and, in particular, in the metal working industry. Manufacturing is shifting to low wage countries where the Company does not have a substantial market presence. As a result, unless the Company can penetrate these markets, the Company's sales and performance may be adversely affected. 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 tend to reduce unit sales and/or adversely affect the Company's margins. Risks Related to Customer Concentration: Sales to the Company's three biggest customers accounted for approximately 25% of revenues in fiscal 2004. The Company expects to wind down and eventually end its relationship with W.W.Grainger, one of the three customers, during fiscal 2005. The effect this will have on total Company sales and profits is unknown since much of the Grainger business is expected to be picked up by other Company distributors, although no such assurances can be made. The loss or reduction in orders by any of the remaining customers, including reductions due to market, economic or competitive conditions, or the failure of the Company to replace the Grainger sales could adversely affect business and results of operations. Indeed, the Company's major customers have, and may continue to, place pressure on the Company to reduce its prices. This pricing pressure may affect the Company's margins and revenues and could adversely affect business and results of operations. Risks Related to Insurance Coverage: The Company carries liability, property damage, workers' compensation, medical, and other insurance coverages that management considers adequate for the protection of its assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate to cover all claims and losses. Such uncovered claims and losses could have a material adverse effect on the Company. The Company self-insures for health benefits and retains risk in the form of deductibles and sublimits. Depending on the risk, deductibles can be as high as 5% of the loss or $500,000. Risk Related to Raw Material and Energy Costs: Steel is the principal raw material used in the manufacture of the Company's products. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which the Company has no control. The cost of producing the Company's products is also sensitive to the price of energy. The selling prices of the Company's products have not always increased in response to raw material, energy or other cost increases, and the Company is unable to determine to what extent, if any, it will be able to pass future cost increases through to its customers. The Company's inability to pass increased costs through to its customers could materially and adversely affect its financial condition or results of operations. Risks Related to Stock Market Performance: Although the Company's domestic defined benefit pension plan is significantly overfunded, a significant (over 30%) drop in the stock market, even if short in duration, could cause the plan to become temporarily underfunded and require the temporary reclassification of prepaid pension cost on the balance sheet from an asset to a contra equity account, thus reducing stockholders' equity and book value per share. Item 8 - Financial Statements and Supplementary Data Contents: Page Report of Independent Auditors 16 Consolidated Statements of Operations 17 Consolidated Statements of Cash Flows 18 Consolidated Balance Sheets 19 Consolidated Statements of Stockholders' Equity 20 Notes to Consolidated Financial Statements 21-29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The L.S. Starrett Company We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company and subsidiaries (the "Company") as of June 26, 2004 and June 28, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 26, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 26, 2004 and June 28, 2003, and the results of its operations and its cash flows for each of the three fiscal years in the period ended June 26, 2004, in conformity with accounting principles generally accepted in the United States of America. As more fully described in the notes to the financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142 during the year ended June 28, 2003. S/DELOITTE & TOUCHE LLP Boston, Massachusetts August 31, 2004 THE L.S. STARRETT COMPANY Consolidated Statements of Operations For the years ended in June (in thousands of dollars except per share data) 2004 2003 2002 OPERATIONS Net sales $179,996 $175,711 $184,346 Cost of goods sold (136,703) (137,036) (139,413) Selling, general and administrative expense (47,910) (46,169) (45,945) Other expense (270) (585) (217) Loss before income taxes and cumulative effect of change in accounting principle (4,887) (8,079) (1,229) Income taxes (benefit) (2,535) (3,590) (849) Loss before cumulative effect of change in accounting principle (2,352) (4,489) (380) Cumulative effect of change in accounting for goodwill (6,086) Net loss $ (2,352) $ (10,575) $ (380) Basic and diluted loss per share: Before cumulative effect of accounting change $ (0.35) $ (0.68) $ (0.06) Cumulative effect of change in accounting for goodwill (0.92) $ (0.35) $ (1.60) $ (0.06) Average outstanding shares used in the computation of basic and diluted loss per share 6,649 6,608 6,500 Dividends per share $ 0.40 $ 0.70 $ 0.80 See notes to consolidated financial statements THE L. S. STARRETT COMPANY Consolidated Statements of Cash Flows For the years ended in June (in thousands of dollars) 2004 2003 2002 Cash flows from operating activities: Net loss $ (2,352) $(10,575) $ (380) Noncash operating activities: Cumulative effect of change in accounting principle 6,086 Depreciation and amortization 10,880 10,988 11,741 Deferred taxes (3,331) (3,875) 561 Unrealized translation losses (33) 453 263 Retirement Benefits (719) (1,338) (2,170) Working capital changes: Receivables (529) 695 1,664 Inventories 11,109 22,345 7,656 Other current assets and liabilities 3,592 (841) (1,862) Prepaid pension cost and other 282 398 227 Net cash from operating activities 18,899 24,336 17,700 Cash flows from investing activities: Additions to plant and equipment (6,345) (5,860) (8,028) Increase in investments (9,412) (11,783) (2,423) Net cash used in investing activities (15,757) (17,643) (10,451) Cash flows from financing activities: Short-term borrowings (repayments), net 330 (372) (4,050) Long-term borrowings (repayments), net (1,577) (1,991) Common stock issued 423 2,453 3,598 Treasury shares purchased (632) (658) (1,796) Dividends (2,658) (4,619) (5,187) Net cash used in financing activities (4,114) (5,187) (7,435) Effect of translation rate changes on cash 149 128 (87) Net increase (decrease) in cash (823) 1,634 (273) Cash beginning of year 3,306 1,672 1,945 Cash end of year $ 2,483 $ 3,306 $ 1,672 Supplemental cash flow information: Interest paid $ 1,076 $ 848 $ 695 Taxes paid, net $ 56 $ (958) $ (725) Non-cash capital lease financing $ 3,000 See notes to consolidated financial statements THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands except share data) June 26 June 28 ASSETS 2004 2003 Current assets: Cash $ 2,483 $ 3,306 Investments 32,023 21,995 Accounts receivable (less allowance for doubtful accounts of $1,358 and $1,392) 33,434 32,175 Inventories: Raw materials and supplies 8,510 9,859 Goods in process and finished parts 16,780 20,344 Finished goods 17,987 23,832 Total inventories 43,277 54,035 Prepaid expenses, taxes and other current assets 11,534 9,703 Total current assets 122,751 121,214 Property, plant and equipment, at cost: Land 1,879 1,885 Buildings (less accumulated depreciation of $19,937 and $18,463) 20,900 21,295 Machinery and equipment (less accumulated depreciation of $80,789 and $70,719) 40,080 43,913 Total property, plant and equipment 62,859 67,093 Prepaid pension cost 32,370 30,565 Other assets 944 868 $218,924 $219,740 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 2,102 $ 3,585 Accounts payable and accrued expenses 16,205 12,859 Accrued salaries and wages 4,375 3,940 Total current liabilities 22,682 20,384 Deferred income taxes 14,214 14,696 Long-term debt 2,536 2,652 Accumulated postretirement benefit obligation 17,209 17,057 Stockholders' equity: Class A common stock $1 par (20,000,000 shrs. auth.; 5,396,679 outstanding in 2004, excluding 1,310,601 held in treasury; 5,344,033 outstanding in 2003, excluding 1,294,542 held in treasury) 5,397 5,344 Class B common stock $1 par (10,000,000 shrs. auth.; 1,250,106 outstanding in 2004, excluding 332,019 held in treasury; 1,315,489 outstanding in 2003, excluding 332,019 held in treasury) 1,250 1,315 Additional paid-in capital 49,934 49,826 Retained earnings reinvested and employed in the business 129,282 134,547 Accumulated other comprehensive income (loss) (23,580) (26,081) Total stockholders' equity 162,283 164,951 $218,924 $219,740 See notes to consolidated financial statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 2002 through 2004 (in thousands) Common Addi- Accumulated Stock Out- tional Other Com- standing Paid-in Retained prehensive ($1 Par) Capital Earnings Loss Total Balance, June 30, 2001 $ 6,458 $ 45,112 $156,626 $ (23,375) $184,821 Comprehensive loss: Net loss (380) (380) Unrealized net loss on investments (169) (169) Translation loss, net (546) (546) Total comprehensive loss (1,095) Dividends ($0.80 per share) (5,187) (5,187) Treasury shares: Purchased (87) (679) (1,030) (1,796) Issued 153 3,073 3,226 Options exercised 20 352 372 Balance, June 29, 2002 6,544 47,858 150,029 (24,090) 180,341 Comprehensive loss: Net loss (10,575) (10,575) Unrealized net gain on investments 152 152 Minimum pension liability (3,207) (3,207) Translation gain, net 1,064 1,064 Total comprehensive loss (12,566) Dividends ($0.70 per share) (4,619) (4,619) Treasury shares: Purchased (39) (331) (288) (658) Issued 142 2,159 2,301 Options exercised 12 140 152 Balance, June 28, 2003 6,659 49,826 134,547 (26,081) 164,951 Comprehensive income: Net loss (2,352) (2,352) Unrealized net loss on investments (56) (56) Minimum pension liability, net 765 765 Translation gain, net 1,792 1,792 Total comprehensive income 149 Dividends ($0.40 per share) (2,658) (2,658) Treasury shares: Purchased (40) (337) (255) (632) Issued 24 357 381 Options exercised 4 88 92 Balance, June 26, 2004 $ 6,647 $ 49,934 $129,282 $(23,580) $162,283 See notes to consolidated financial statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements SIGNIFICANT ACCOUNTING POLICIES Description of the business and principles of consolidation: The Company is in the business of manufacturing industrial, professional, and consumer measuring and cutting tools and related products. The largest consumer of these products is the metalworking industry, but others include automotive, aviation, marine, farm, do-it-yourselfers, and tradesmen such as builders, carpenters, plumbers, and electricians. The consolidated financial statements include the accounts of The L. S. Starrett Company and its subsidiaries, all of which are wholly-owned. All significant intercompany items have been eliminated. The Company's fiscal year ends on the last Saturday in June. The fiscal years of the Company's major foreign subsidiaries end in May. Certain reclassifications have been made to prior year data to conform with current year presentation. Financial instruments and derivatives: The Company's financial instruments consist primarily of current assets, except inventory, current liabilities, and long-term debt. Current assets and liabilities, except investments, are stated at cost, which approximates fair market value. Long-term debts, which are at current market interest rates, also approximate fair market value. The Company does not enter into derivative arrangements. Investments: Investments consist primarily of marketable securities such as treasury bills, certificates of deposit, municipal securities, and money market funds. The Company considers all its investments "available for sale." As such, these investments are carried at market, with unrealized temporary gains and losses recorded as a component of stockholders' equity. Included in investments at June 26, 2004 is $2.2 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 represent "core cash" and are part of the Company's overall cash management and liquidity program and, under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," are considered "available for sale." The investments themselves are highly liquid, carry no early redemption penalties, and are not designated for acquiring non-current assets. Most other investments have maturities of less than one year. Long-lived assets: Buildings and equipment are depreciated using straight- line and accelerated methods over estimated useful lives as follows: buildings 15 to 50 years, building improvements 10 to 40 years, machinery and equipment 5 to 12 years, motor vehicles 3 to 5 years, computer hardware and software 3 to 7 years. Long-lived assets are reviewed for impairment when circumstances indicate the carrying amount may not be recoverable. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Inventories: Inventories are stated at the lower of cost or market. For approximately two thirds of all inventories, cost is determined on a last- in, first-out (LIFO) basis. For all other inventories, cost is determined on a first-in, first-out (FIFO) basis. LIFO inventories are $19.9 million and $28.8 million at the end of 2004 and 2003, respectively, such amounts being approximately $20 million less than if determined on a FIFO basis. During 2004 and 2003, the Company reduced the levels of certain LIFO inventories that were carried in the aggregate at lower costs prevailing in prior years. The effect of the LIFO inventory reductions was to increase 2004 and 2003 net earnings by approximately $980,000 and $575,000, respectively, or $.15 and $.09 per share. Revenue recognition: Revenue is recognized when inventory is shipped to the customer or installed if installation is necessary. While the Company does allow its customers the right to return in certain circumstances, revenue is not deferred, but rather a reserve for sales returns is provided based on experience, which historically has not been significant. Warranty expense: The Company's warranty obligation is generally one year from shipment to the end user and is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Any such failures tend to occur soon after shipment. Historically, the Company has not incurred significant predictable warranty expense and consequently its warranty reserves are not material. In the event a material warranty liability is deemed probable, a reserve is established for the event. Income taxes: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have not been recorded on approximately $40 million of undistributed earnings of foreign subsidiaries as of June 2004 or the related unrealized translation adjustments because such amounts are considered permanently invested. In addition, it is possible that remittance taxes, if any, would be reduced by U.S. foreign tax credits. Valuation allowances are recognized if, based on the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Research and development: Research and development costs were expensed as follows: $3,048,000 in 2004, $2,929,000 in 2003 and $2,727,000 in 2002. Earnings per share (EPS): Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could share in the earnings. The Company had 13,701, 7,329 and 9,573 of potentially dilutive common shares in 2004, 2003 and 2002 resulting from shares issuable under its stock option plan. These additional shares are not used for the diluted EPS calculation in loss years. Translation of foreign currencies: Assets and liabilities are translated at exchange rates in effect on reporting dates, and income and expense items are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "accumulated other comprehensive loss" account included as part of stockholders' equity. Use of accounting estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. 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 reported amounts of sales and expenses during the reporting period. Amounts ultimately realized could differ from those estimates. CHANGE IN ACCOUNTING FOR GOODWILL 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 non-cash impairment charge of $6,086,000 ($.92 per share), relating primarily to the acquisition of the Company's Evans Rule division in 1986, was recorded as of the first day of fiscal 2003 and related amortization of $268,000 per year was discontinued. The charge is reflected as the cumulative effect of a change in accounting principle in the accompanying Statements of Operations and Cash Flows. There were no income taxes associated with the charge. Had goodwill not been amortized in the prior years, net loss and net loss per share would have been as follows (in thousands except per share data): 2004 2003 2002 Net loss as reported $ (2,352) $(10,575) $ (380) Add back goodwill amortization 268 Pro forma net loss $ (2,352) $(10,575) $ (112) Basic and diluted loss per share as reported $ (0.35) $ (1.60) $ (0.06) Pro forma basic and diluted loss per share $ (0.35) $ (1.60) $ (0.03) ACCOUNTING PRONOUNCEMENTS Effective with the beginning of the first quarter of fiscal 2004, the Company has adopted the fair value method of accounting for stock-based compensation on a prospective basis as described in SFAS 123 and 148. The Company incurred $57,000 in stock-based compensation costs in fiscal 2004. Historically, stock-based compensation has not been material. OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 2004 2003 2002 Interest income (expense), net $ (301) $ 13 $ 179 Realized and unrealized translation gains (losses), net 174 (390) (351) Other (143) (208) (45) $ (270) $ (585) $ (217) INCOME TAXES The provision for income taxes consists of the following (in thousands): 2004 2003 2002 Current: Federal $ 35 $ 50 $(1,640) Foreign 587 234 266 State 174 1 (36) Deferred (3,331) (3,875) 561 $(2,535) $(3,590) $ (849) Pretax domestic income (loss) as reportable to the IRS was $ 2,000,000, $(9,557,000) and $(3,274,000) in 2004, 2003, and 2002, respectively. A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands): 2004 2003 2002 Expected tax expense (benefit) $(1,662) $(4,816) $ (430) Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit (985) (1,126) (672) Foreign taxes, net of federal credits 2 235 163 Goodwill writeoff 2,069 Other 110 48 90 Actual tax benefit $(2,535) $(3,590) $ (849) Deferred income taxes at year end are attributable to the following (in thousands): 2004 2003 Deferred assets: Retiree medical benefits $(6,969) $(6,907) Inventories (4,200) (2,280) Domestic NOL carried forward 20 years (2,562) (3,515) Foreign NOL carried forward indefinitely (1,365) (1,165) Foreign tax credit carryforward expiring 2007-8 (2,283) (745) Other (987) (907) (18,366) (15,519) Deferred liabilities: Prepaid pension 13,497 12,928 Other employee benefits 370 540 Depreciation 6,125 7,081 Other 1,561 1,593 21,553 22,142 Valuation reserve for foreign tax credits 912 ____745 Net deferred tax liability $ 4,099 $ 7,368 Long-term portion $14,214 $14,696 EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and most of its nondomestic employees. In addition, certain domestic employees participate in an Employee Stock Ownership Plan (ESOP). Ninety percent of the actuarially determined annuity value of their ESOP shares is used to offset benefits otherwise due under the domestic defined benefit pension plan. The total cost (benefit) of all such plans for 2004, 2003 and 2002, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $140,000, $(678,000) and $(1,783,000), respectively. Under both domestic and foreign defined benefit plans, benefits are based on years of service and final average earnings. Plan assets, including those of the ESOP, consist primarily of investment grade debt obligations, marketable equity securities and shares of the Company's common stock. The measurement date for the Company's domestic pension and other benefit plans is June 30. The asset allocation of the Company's domestic pension plan is diversified, consisting primarily of investments in equity and debt securities. The Company seeks a long-term investment return that is reasonable given prevailing capital market expectations. Target allocations are 50% to 70% in equities (including 10% to 20% in Company stock), and 30% to 50% in cash and debt securities. The Company uses an expected long-term rate of return assumption of 8.0% for the domestic pension plan, and 6.9% for the nondomestic plan. In determining these assumptions, the Company considers the historical returns and expectations for future returns for each asset class as well as the target asset allocation of the pension portfolio as a whole. The table below details assets by category for the Company's domestic pension plan. These assets consist primarily of publicly traded equity and fixed income securities, including 1,015,999 shares of the Company's common stock with a fair value of $16.4 million (16% of total plan assets) at June 30, 2004 and 1,030,235 shares with a fair value of $13.3 million (14% of total plan assets) at June 30, 2003. The majority of these shares are in the Company's ESOP plan. 2004 2003 Asset category: Cash 13% 13% Equities 59% 54% Debt 28% 33% 100% 100% The status of these defined benefit plans, including the ESOP, is as follows (in thousands): 2004 2003 2002 Change in benefit obligation: Benefit obligation at beginning of year $100,829 $ 93,349 $ 83,203 Service cost 3,245 3,278 3,106 Interest cost 6,104 6,490 5,958 Participant contributions 223 219 226 Exchange rate changes 3,362 3,066 820 Benefits paid (3,836) (3,648) (3,614) Actuarial (gain) loss (4,737) (1,925) 3,650 Benefit obligation at end of year $105,190 $100,829 $ 93,349 Change in plan assets: Fair value of plan assets at beginning of year $115,191 $126,154 $128,038 Actual return on plan assets 13,931 (10,522) 633 Employer contributions 480 467 92 Participant contributions 223 219 226 Benefits paid (3,836) (3,648) (3,614) Exchange rate changes 2,701 2,521 779 Fair value of plan assets at end of year $128,690 $115,191 $126,154 Reconciliation of funded status: Funded status $ 23,500 $ 14,362 $ 32,805 Unrecognized actuarial gain 9,958 19,009 (370) Unrecognized transition asset (981) (1,922) (2,932) Unrecognized prior service cost 3,382 3,698 4,148 Prepaid pension cost $ 35,859 $ 35,147 $ 33,651 Amounts recognized in statement of financial position: Prepaid benefit cost $ 36,705 $ 36,172 $ 35,069 Accrued benefit liability (5,259) (6,606) (2,551) Intangible asset 924 999 1,133 Accumulated other comprehensive income 3,489 4,582 Prepaid pension cost $ 35,859 $ 35,147 $ 33,651 Accumulated benefit obligation at year-end for all pension plans $ 96,113 $ 92,571 $ 89,803 Year-end information for plans with accumulated benefit obligations in excess of plan assets: Projected benefit obligation $ 32,069 $ 28,832 $ 24,947 Accumulated benefit obligation 31,300 26,617 24,889 Fair value of plan assets 26,040 22,011 20,800 Components of net periodic benefit cost: Service cost $ 3,245 $ 3,278 $ 3,106 Interest cost 6,104 6,490 5,958 Expected return on plan assets (9,387) (10,271) (10,863) Amortization of prior service cost 421 408 394 Amortization of transition asset (973) (956) (937) Recognized actuarial gain 292 (58) (264) Net periodic benefit cost $ (298) $ (1,109) $ (2,606) Weighted average assumptions: Discount rate 6.25% 6.00% 7.00% Expected long-term rate of return 8.00% 8.00% 8.50% Rate of compensation increase 3.25% 3.25% 3.75% The Company provides certain medical and life insurance benefits for most retired employees in the United States. The status of these plans at year end is as follows (in thousands): 2004 2003 2002 Change in benefit obligation: Benefit obligation at beginning of year $ 17,839 $ 15,649 $ 15,197 Service cost 657 633 551 Interest cost 1,037 1,057 1,097 Plan amendments (1,360) Benefits paid (1,312) (1,047) (1,014) Actuarial (gain) loss (1,145) 1,547 (182) Benefit obligation at end of year $ 15,716 $ 17,839 $ 15,649 Reconciliation of funded status: Funded status $(15,716) $(17,839) $(15,649) Unrecognized actuarial gain 2,481 3,750 2,259 Unrecognized prior service cost (3,974) (2,968) (3,321) Accrued benefit liability $(17,209) $(17,057) $(16,711) Components of net periodic benefit cost: Service cost $ 657 $ 633 $ 551 Interest cost 1,037 1,057 1,097 Amortization of prior service cost (353) (353) (353) Recognized actuarial gain 123 56 81 Net periodic benefit cost $ 1,464 $ 1,393 $ 1,376 Weighted average assumptions: Discount rate 6.25% 6.00% 7.00% Rate of compensation increase 3.25% 3.25% 3.75% An 11.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2005. The rate was assumed to decrease gradually to 5.0% for 2014 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects (in thousands): 1% 1% Increase Decrease Effect on total of service and interest cost $ 102 $ (86) Effect on postretirement benefit obligation 778 (666) For fiscal 2005, the Company expects no contributions (required or discretionary) to the qualified domestic pension plan, $23,000 to the nonqualified domestic pension plan, $497,000 to the nondomestic pension plan, and $900,000 to the retiree medical and life insurance plan. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands): Other Fiscal year Pension Benefits 2005 $ 3,971 $ 900 2006 4,083 988 2007 4,329 1,058 2008 4,703 1,100 2009 5,022 1,167 2010-2014 27,704 6,734 In December 2003, legislation was enacted providing a Medicare prescription drug benefit beginning in 2006 and federal subsidies to employers who provide drug coverage to retirees. The Company does not expect this legislation to materially impact plan obligations, and has not reflected any potential effects of the legislation. DEBT At year end, long-term debt consists of the following (in thousands): 2004 2003 Note payable due 12/03, 4.0% $ $ 2,318 Capitalized lease obligations payable in Brazilian currency, due 2006 to 2008, 15% to 21% 3,971 3,433 Revolving credit agreement - - 3,971 5,751 Less current maturities 1,435 3,099 $ 2,536 $ 2,652 The revolving credit agreement is for $15 million, expires September 13, 2005, and requires commitment fees of .25%. Interest rates vary from LIBOR plus .5% to 2% depending on EBITDA. The Company must maintain tangible net worth of $145 million and an EBITDA (as defined) to debt service ratio of at least 1.5. Current notes payable carry interest at a rate of LIBOR plus 1% to 4%. Interest expense, prior to capitalization of interest on self- constructed assets, was $1,080,000, $761,000 and $641,000 in 2004, 2003 and 2002. Long-term debt maturities from 2006 to 2008 are as follows: $707,000, $583,000, and $1,246,000. COMMON STOCK Class B common stock is identical to Class A except that it has 10 votes per share, is generally nontransferable except to lineal descendants, cannot receive more dividends than Class A, and can be converted to Class A at any time. Class A common stock is entitled to elect 25% of the directors to be elected at each meeting with the remaining 75% being elected by Class A and Class B voting together. In addition, the Company has a stockholder rights plan to protect stockholders from attempts to acquire the Company on unfavorable terms not approved by the Board of Directors. Under certain circumstances, the plan entitles each Class A or Class B share to additional shares of the Company or an acquiring company, as defined, at a 50% discount to market. Generally, the rights will be exercisable if a person or group acquires 15% or more of the Company's outstanding shares. The rights trade together with the underlying common stock. They can be redeemed by the Company for $.01 per right and expire in 2010. Under the Company's employee stock purchase plans, the purchase price of the optioned stock is 85% of the lower of the market price on the date the option is granted or the date it is exercised. Options become exercisable exactly two years from the date of grant and expire if not exercised. Therefore, no options were exercisable at fiscal year ends. A summary of option activity is as follows: Weighted Average Exercise Shares Shares Price Available On Option At Grant For Grant Balance, June 30, 2001 73,336 $18.22 710,578 Options granted 28,191 18.06 (28,191) Options exercised ($17.77 and $18.65) (20,552) 18.11 Options canceled (32,026) 32,026 Balance, June 29, 2002 48,949 17.48 714,413 Options authorized 800,000 Options granted 82,567 13.28 (82,567) Options exercised ($13.22 and $11.10) (11,724) 12.93 Options canceled (51,720) (693,936) Balance, June 28, 2003 68,072 13.20 737,910 Options granted 36,919 12.65 (36,919) Options exercised ($12.29 and $13.26) (3,322) 12.80 Options canceled (28,122) 25,462 Balance, June 26, 2004 73,547 12.78 726,453 The following information relates to outstanding options as of June 26, 2004: Weighted average remaining life 1.1 years Weighted average fair value on grant date of options granted in: 2002 $5.00 2003 4.00 2004 3.50 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: volatility - 21% to 29%, interest - 1.5% to 3.5%, and expected lives - 2 years. CONTINGENCIES Since early fiscal 2003, the Company has been the subject of a government investigation, prompted by a qui tam action. Subsequent to the end of fiscal 2004, the investigation was settled with no finding of liability or wrongdoing. The Company has recorded what it believes will be the final addition to its reserve for this matter of approximately $1.1 million in the fourth quarter of fiscal 2004. OPERATING DATA The Company believes it has no significant concentration of credit risk as of June 26, 2004. Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. One customer accounted for approximately 12% of sales in 2004 and 14% in 2003 and 2002. The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. It manufactures over 5,000 items, including precision measuring tools, tape measures, gages and saw blades. Operating segments are identified as components of an enterprise about which separate discrete financial information is used by the chief operating decision maker in determining how to allocate assets and assess performance of the Company. The Company's operations are primarily in North America, Brazil, and the United Kingdom. Geographic information about the Company's sales and long- lived assets are as follows (in thousands): 2004 2003 2002 Sales: North America $ 123,149 $ 124,006 $ 133,895 United Kingdom 27,409 28,910 26,331 Brazil 35,756 29,630 31,559 Eliminations and other (6,318) (6,835) (7,439) Total $ 179,996 $ 175,711 $ 184,346 Long-lived assets: North America $ 80,490 $ 83,790 $ 96,163 United Kingdom 8,482 7,978 7,916 Brazil 8,501 9,446 5,857 Other 2,189 1,894 2,094 Total $ 99,662 $ 103,108 $ 112,030 QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data) (* before writeoff of $6,086 of goodwill in the September 2002 quarter) Earnings Basic Basic (Loss) Earnings Earnings Before Net (Loss) (Loss) Quarter Net Gross Income Earnings Earnings Per Per Ended Sales Profit Taxes* (Loss)* (Loss) Share* Share Sep 2002 $ 45,335 $ 8,736 $(4,496) $(2,535) $ (8,621) $(0.39) $(1.31) Dec 2002 44,828 10,342 (1,339) (641) (641) (0.09) (0.09) Mar 2003 41,525 9,162 (2,255) (1,267) (1,267) (0.19) (0.19) Jun 2003 44,023 10,435 11 (46) (46) 0.01 0.01 $175,711 $38,675 $(8,079) $(4,489) $(10,575) $(0.68) $(1.60) Sep 2003 $ 40,675 $ 9,735 $(1,950) $(1,095) $ (1,095) $(0.16) $(0.16) Dec 2003 45,420 8,392 (3,109) (1,833) (1,833) (0.28) (0.28) Mar 2004 44,945 11,928 180 444 444 0.07 0.07 Jun 2004 48,956 13,238 (8) 132 132 0.02 0.02 $179,996 $43,293 $(4,887) $(2,352) $ (2,352) $(0.35) $(0.35) The Company's Class A common stock is traded on the New York Stock Exchange. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company had no such changes in or disagreements with its independent auditors. Item 9A - Controls and Procedures The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, have evaluated the Company's disclosure controls and procedures as of June 26, 2004, and they have concluded that these controls and procedures are effective. There have been no significant changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As reported in the Company's Annual Report on Form 10-K for fiscal 2003, the Company's management and its outside auditors reported to the Audit Committee in August 2003 one reportable condition related to computer file access, which was subsequently corrected. Item 9B - Other Information None PART III Item 10 - Directors and Executive Officers of the Registrant Directors The information concerning the Directors of the Registrant is contained immediately under the heading "Election of Directors" and prior to Section A of Part I (pages 2-5) in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 13, 2004 (the "2004 Proxy Statement") as filed with the SEC, and is hereby incorporated by reference. Executive Officers of the Registrant Held Present Name Age Office Since Position Douglas A. Starrett 52 2001 President and CEO and Director Roger U. Wellington, Jr. 63 1984 Vice President, Treasurer and Chief Financial Officer and Director George B. Webber 83 1962 Vice President Webber Gage Division and Director Anthony M. Aspin 51 2000 Vice President Sales Stephen F. Walsh 58 2003 Vice President Operations Steven A. Wilcox 49 1997 Clerk Douglas A. Starrett has been President of the Company since 1995 and became CEO in 2001. Roger U. Wellington, Jr. and George B. Webber have served in the same capacities as listed above for at least the past five years. Anthony M. Aspin was previously a divisional sales manager with the Company. Stephen F. Walsh was previously president of the Silicon Carbide Division of Saint-Gobain Industrial Ceramics. Except in the case of Steven A. Wilcox, the positions listed above represent their principal occupations and employment during the last five years. Steven A. Wilcox, Clerk of the Company since 1997, has been a partner in Ropes & Gray LLP, counsel for the Company, throughout that period, and is not an employee of the Company. The President, Treasurer and Clerk hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. Code of Ethics The Company has adopted a Policy on Business Conduct and Ethics (the "Ethics Policy") applicable to all directors, officers and employees of the Company. The Code is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. The Ethics Policy as well as any waivers under the Ethics Policy granted to directors and executive officers, if any, are available on the Company's website at www.starrett.com. Stockholders may also obtain free of charge a printed copy of the Ethics Policy by writing to the Clerk of the Company at The L.S. Starrett, 121 Crescent Street, Athol, MA 01331. Item 11 - Executive Compensation The information concerning management remuneration is contained in (i) the second full paragraph on page 5, and (ii) in Sections C-G of Part I (pages 8- 14) in the Company's 2004 Proxy Statement, and is hereby incorporated by reference. Item 12 - Security Ownership of Certain Beneficial Owners and Management (a) The following table gives information about the Company's Common Stock that may be issued upon the exercise of options, warrants and rights under the Company's 2002 Employees' Stock Purchase Plan ("2002 Plan") as of June 26, 2004. The Plan was approved by stockholders at the Company's 2002 annual meeting and shares of Class A or Class B Common Stock may be issued under the Plan. Options are not issued under the Company's Employees' Stock Purchase Plan that was adopted in 1952. Number of Securities Remaining Available Number of Securities For Future Issuance to be issued Upon Ex- Weighted Average Under Equity Compen- ercise of Outstanding Exercise Price of sation Plans (Ex- Plan Options, Warrants and Outanding Options, cluding Securities Category Rights Warrants and Rights Reflected in Col (a) (a) (b) (c) Equity compensa- tion plans ap- proved by secur- ity holders 73,547 12.78 726,453 Equity compensa- tion plans not approved by se- curity holders 0 0 0 Total 73,547 12.78 726,453 (b) Security ownership of certain beneficial owners: The information concerning a more than 5% holder of any class of the Company's voting shares is contained under the heading "Security Ownership of Certain Beneficial Owners" in Section I of Part I (pages 17-18) of the Company's 2004 Proxy Statement, and is hereby incorporated by reference. (c) Security ownership of management: The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, is contained under the heading "Security Ownership of Management" in Section I of Part I (pages 15-17) in the Company's 2004 Proxy Statement, and is hereby incorporated by reference. (d) The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company. Item 13 - Certain Relationships and Related Transactions (a) Transactions with management and others: None (b) Certain business relationships: Not applicable (c) Indebtedness of management: None (d) Transactions with promoters: Not applicable Item 14 - Principal Accountant Fees and Services. The information required by this Item 14 is contained in the Audit Fee table in Section B of Part I (page 7) in the Company's 2004 Proxy Statement, and is hereby incorporated by reference. PART IV Item 5 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial statements filed in item 8 of this annual report: Consolidated Statements of Operations for each of the three years in the Period ended June 26, 2004 Consolidated Statements of Cash Flows for each of the three years in the Period ended June 26, 2004 Consolidated Balance Sheets at June 26, 2004 and June 28, 2003 Consolidated Statements of Stockholders' Equity for each of the three years in the Period Ended June 26, 2004 Notes to Consolidated Financial Statements 2. All other financial statements and schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto. 3. See Exhibit Index below. Compensatory plans or arrangements are identified by an "*." (b) The following reports on Form 8-K were filed with or furnished to the SEC in the last quarter of the period covered by this report: The Company furnished a report on Form 8-K on May 7, 2004 announcing it had issued a quarterly shareholder earnings letter for the March 2004 quarter. (c) See Exhibit Index below. (d) Not applicable. THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX 3a Restated Articles of Organization dated December 20, 1989, filed with Form 10-Q for the quarter ended December 23, 1989, are hereby incorporated by reference. 3b Bylaws as amended September 16, 1999, filed with Form 10-Q for the quarter ended September 24, 1999, are hereby incorporated by reference. 4 Second Amended and Restated Rights Agreement, dated as of March 13, 2002, between the Company and Mellon Investor Services, as Rights Agent, including Form of Common Stock Purchase Rights Certificate, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference. 10a $25,000,000 Revolving Credit Agreement dated as of June 13, 2000 (the "credit agreement"), among The L.S. Starrett Company and Fleet National Bank filed with Form 10-K for the year ended June 24, 2000 is hereby incorporated by reference. 10b Form of indemnification agreement with directors and executive officers, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference. 10c*The L.S. Starrett Company Supplemental Executive Retirement Plan, filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference. 10d*The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference. 10e 2002 Employees' Stock Purchase Plan filed with Form 10-Q for the quarter ended September 28, 2002 is hereby incorporated by reference. 10f Amendment dated April 1, 2003 to the Company's 401(k) Stock Savings Plan, filed with Form 10-K for the year ended June 28, 2003, is hereby incorporated by reference. 10g Amendment dated October 20, 2003 to the Company's 401(k) Stock Savings Plan, filed with Form 10-Q for the quarter ended September 27, 2003, is hereby incorporated by reference. 10h Amendment dated as of March 1, 2004 to the Company's Credit Agreement, filed with Form 10-Q for the quarter ended March 27, 2004, is hereby incorporated by reference. 21 Subsidiaries of the Registrant, filed herewith. 23 Independent Auditors' Consent, filed herewith. 31a Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith. 31b Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith. 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2003 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE L.S. STARRETT COMPANY (Registrant) By S/ROGER U. WELLINGTON, JR. Roger U. Wellington, Jr., Vice President, Treasurer and Chief Financial Officer Date: September 9, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: S/DOUGLAS A. STARRETT S/ANTONY MCLAUGHLIN Douglas A. Starrett, Sep. 9, 2004 Antony McLaughlin, Sep. 9, 2004 President and CEO and Director President Starrett Industria e Comercio, Ltda, Brazil S/RALPH G. LAWRENCE S/TERRY A. PIPER Ralph G. Lawrence, Sep. 9, 2004 Terry A. Piper, Sep. 9, 2004 Director Director S/RICHARD B. KENNEDY S/ROBERT L. MONTGOMERY, JR. Richard B. Kennedy, Sep. 9, 2004 Robert L. Montgomery,Jr.,Sep.9, 2004 Director Director S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Sep. 9, 2004 Roger U. Wellington,Jr., Sep.9, 2003 Chief Accounting Officer Vice President, Treasurer and CFO and Director 1 EX-21 2 ex21subs.txt SUBS THE L.S. STARRETT COMPANY AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT JUNE 26, 2004 The parent company, The L.S. Starrett Company, incorporated in Massachusetts, has the following active subsidiaries, all of which are wholly owned: Fiscal Year End Starrett Securities Corporation Incorporated in Last Sat. Massachusetts in June Evans Rule Company, Inc. Incorporated in Last Sat. New Jersey in June The L.S. Starrett Co. of Canada Incorporated in Last Sat. Limited Canada in June The L.S. Starrett Company Incorporated in May 31 Limited Scotland Starrett Industria e Incorporated in May 31 Comercio Ltda. Brazil Level Industries, Inc. Incorporated in Last Sat. Massachusetts in June Starrett Tools (Suzhou) Co., Ltd. Incorporated in Dec. 31 China Starrett Tools (Shanghai) Co., Ltd. Incorporated in Dec. 31 China The L.S. Starrett Company of Incorporated in June 30 Australia Pty. Ltd. Australia The L. S. Starrett Company of Incorporated in Dec. 31 Mexico, S.de R.L. de C.V. Mexico EX-23 3 ex23consent.txt CONSENT EXHIBIT 23 DELOITTE & TOUCHE INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-55623, 333-101162 and 333-4123 of The L.S. Starrett Company on Form S-8 of our report dated August 1, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in the accounting for goodwill and the method of evaluating potential impairment of long-lived assets) appearing in this Annual Report on Form 10-K of The L.S. Starrett Company for the year ended June 26, 2004. S/DELOITTE & TOUCHE LLP Boston, Massachusetts September 8, 2004 EX-31 4 ex31adas.txt DAS CERT EXHIBIT 31.a CERTIFICATIONS I, Douglas A. Starrett, certify that: 1. I have reviewed this Annual Report on Form 10-K of The L.S. Starrett Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Intentionally Omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2004 /s/ Douglas A. Starrett Douglas A. Starrett Chief Executive Officer EX-31 5 ex31brw.txt RWCERT EXHIBIT 31.b CERTIFICATIONS I, Roger U. Wellington, Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K of The L.S. Starrett Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Intentionally Omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2004 /s/ Roger U. Wellington, Jr. Roger U. Wellington, Jr. Chief Financial Officer EX-32 6 ex32.txt DASRWCERT Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of The L.S. Starrett Company, a Massachusetts corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Annual Report on Form 10-K for the fiscal year ended June 26, 2004 (the "Form 10-K") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 9, 2004 /s/ Douglas A. Starrett ------------------------------ Douglas A. Starrett Chief Executive Officer Date: September 9, 2004 /s/ Roger U. Wellington, Jr. ------------------------------ Roger U. Wellington, Jr. Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to The L.S. Starrett Company and will be retained by The L.S. Starrett Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----