-----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, NRsiCCtjWfYMGed1Cw+3yPymNwax96bZsWqQb1JTxFFKCpC6B3wi3dRyhZnEyjIy cuNbOttwGDrbU9XB/mD1Eg== 0000093676-98-000006.txt : 19980924 0000093676-98-000006.hdr.sgml : 19980924 ACCESSION NUMBER: 0000093676-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARRETT L S CO CENTRAL INDEX KEY: 0000093676 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 042756926 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00367 FILM NUMBER: 98713091 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended JUNE 27, 1998 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 The Registrant had 5,181,967 and 1,699,050 shares, respectively, of its $1.00 par value Class A and B common stock outstanding on July 24, 1998. On that date, the aggregate market value of the common stock held by nonaffiliates was approximately $260,000,000. The exhibit index is located on page 25. Documents incorporated by reference Proxy Statement dated August 12, 1998 - 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, tape measures, levels, electronic gages, dial indicators, gage blocks, digital readout measuring tools, granite surface plates, optical measuring projectors, coordinate measuring machines, vises, M1 lubricant, hacksaw blades, hole saws, band saw blades, jig saw blades, reciprocating saw blades, and precision ground flat stock. 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 through 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-your-selfers and tradesmen such as builders, carpenters, plumbers and electricians. 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 27, 1998, the Company had 2,783 employees, approximately 70% of whom are 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 this dual role of owner-employee has been good for morale. 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 27, 1998, there were no material changes in the Company's competitive position. During recent years, changes in the volume of sales of the Company have, in general, corresponded with changes throughout the industry. 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. Sales order backlog of the Company at any point in time is negligible. The operations of the Company's foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in Brazil and Scotland, as well as a newly established subsidiary in China, are actively engaged in the manufacture of hacksaw and band saw blades and a limited line of precision tools and measuring tapes. 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 1998 financial statements found in item 8 of this Form 10K and is hereby incorporated by reference. The Company generally fills orders from finished goods inventories on hand; total inventories amounted to approximately $73,777,000 at June 27, 1998, and $75,846,000 at June 28, 1997. The Company uses the last-in, first-out (LIFO) method of valuing most inventories, which results in more realistic operating costs and profits. Inventory amounts are approximately $23,998,000 and $24,790,000 lower, respectively, than if determined on a first-in, first-out (FIFO) basis. The Company does apply 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 1998, 1997 and 1996 were approximately $3,406,000, $3,073,000 and $3,472,000, 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 some extent seasonal, with sales and earnings generally at the lowest level during the first quarter of the fiscal year. 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. The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings containing approximately 50,000 square feet. The Company-owned facility in Mt. Airy, North Carolina has approximately 252,000 square feet, including 18,000 square feet added in fiscal 1998. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine Division, Optical Comparator Division and Ground Flat Stock Division. This plant is subject to a mortgage collateralizing a $1,500,000 Industrial Revenue Bond. The Company's Advanced Technology Division, located in Gardner, Massachusetts, occupies about 9,000 square feet of leased facilities. The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 166,000 square foot building, including 30,000 square feet added in fiscal 1998. In addition, this division leases 45,000 square feet of manufacturing space in Mayaguez, Puerto Rico. The Company's Exact Level Division is located in Alum Bank, Pennsylvania and owns and occupies a 50,000 square foot building. The Company's Brazil subsidiary owns and occupies several buildings totaling 209,000 square feet. The Company's Scotland subsidiary owns and occupies a 187,000 square foot building and also a 33,000 square foot building in Skipton, England, where its wholly owned subsidiary manufactures optical measuring projectors. A second wholly owned subsidiary located in Skipton performs calibration services and leases about 4,000 square feet. A subsidiary in Mississauga, Canada owns and occupies a 25,000 square foot building. A wholly owned subsidiary established in the People's Republic of China during fiscal 1998 leases approximately 40,000 square feet. In addition, the Company owns and operates warehouses/sales offices in Glendale, Arizona and Elmhurst, Illinois; and leases a 6,000 square foot sales support office in Atlanta, Georgia. 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 The Company is not involved in any material pending legal proceedings. 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 27, 1998. Executive Officers of the Registrant The information under the caption Executive Officers of the Registrant in item 10 of this Form 10K is hereby incorporated by reference. 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 Registrant'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 Registrant has paid the same dividends thereon as have been paid on the Class A common stock since that date. At July 24, 1998, there were 2,328 registered holders of Class A common stock and 1,745 registered holders of Class B common stock. Quarter ended Dividends High Low September 1996 0.18 $ 25.75 $ 22.75 December 1996 0.18 29.00 23.75 March 1997 0.18 31.25 27.50 June 1997 0.18 32.00 28.13 September 1997 0.19 36.56 30.25 December 1997 0.19 39.94 36.00 March 1998 0.19 40.13 32.56 June 1998 0.20 40.81 37.06 Item 6 - Selected Financial Data Years ended in June ($000 except per share data) 1998 1997 1996 1995 1994 Net sales $262,340 $250,503 $235,467 $214,215 $180,178 Net earnings 23,009 19,859 17,331 13,487 9,041 Basic earnings per share 3.34 2.84 2.45 1.91 1.28 Diluted earnings per share 3.33 2.84 2.45 1.91 1.28 Long-term debt 3,900 6,500 7,100 8,700 10,843 Total assets 250,263 238,746 227,312 213,940 198,032 Dividends per share 0.77 0.72 0.72 0.69 0.68 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS SALES Sales increased 5% in fiscal 1998 following a 6% increase in fiscal 1997. Domestic sales accounted for most of the increase in the current as well as the prior year as a result of continued good economic conditions in our industry. Foreign sales, however, have increased only slightly during the past two years. The strong British pound has been adversely affecting Scotland's business both in terms of export pricing and domestic import competition. In Brazil, high real interest rates and a recessionary economy have held sales back, particularly in the current year. The weakening of Brazil's currency caused the local currency sales increase to be reduced by about 10 percentage points in both 1998 and 1997 after conversion to U.S. dollars. EARNINGS BEFORE TAXES Pretax earnings are up 14% for the year. This follows a 15% increase in 1997. Cost of sales was about 67.5% in 1998, 68% in 1997, and 68.5% in 1996. The improvement in these rates is consistent with added manufacturing efficiencies and increased production levels, particularly in domestic operations where pretax earnings are up 26% this year and were up 15% last year. On the foreign side, the strong pound mentioned above had a significant negative effect on margins and was primarily responsible for a 20% drop in foreign pretax earnings. In 1997, reductions in selling and general wages in Brazil enabled our foreign pretax earnings to increase 14% despite level sales. INCOME TAXES The effective tax rate is 33% in 1998 compared to 34% in both 1997 and 1996. Tax-exempt interest on short-term investments in municipal bonds, Puerto Rico tax incentives and somewhat lower foreign income tax rates all contribute to an overall effective tax rate that is slightly lower than the combined U.S. state and federal statutory rate. However, as taxable income has increased in the past several years, the effect of these items has diminished. In addition, the overall effective rate has been favorably impacted by lower rates in Brazil starting in 1996. Although the statutory rate in Brazil is now comparable to the U.S. federal rate, nonrecurring permanent differences between book and taxable income for dividends paid to the U.S. in 1998 and 1997 and local monetary correction adjustments in 1996 reduced the Brazilian effective tax rate substantially when reported in U.S. dollars. NET EARNINGS As a result of the above, net earnings were up 16% in fiscal 1998 when compared to 1997 and 1997 net earnings were up 15% when compared to 1996. 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 many risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At June 1997 and 1998, 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 engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net monetary assets in Scotland and Brazil are approximately $11 million and $2 million, respectively. Inflation in Brazil has decreased to less than 10% today from over 2000% in 1994 when their current economic plan was initiated. As a consequence, their economy ceased to be considered hyperinflationary as of January 1998. YEAR 2000 The well publicized year 2000 problem, which is common to most corporations, is associated with the inability of computer systems to process date related information beyond the year 2000. The Company does not currently anticipate any material disruption of its operations as a result of any failure by the Company to be year 2000 compliant. If, however, the Company, its customers or its suppliers are unable to achieve year 2000 compliance, the potential exists for the Company's business and results of operations to be adversely affected. Worldwide, the Company has four major computer systems that are used in the areas of manufacturing, sales and accounting. Two use third party packages that the Company believes are or, through vendor upgrades, will be year 2000 compliant. The other two systems are in the process of being converted to third party packages that the Company believes are already compliant. The Company expects to complete the reasonably necessary remediation of its significant systems by the end of fiscal 1999 and has not incurred, and does not expect to incur, significant additional separately identifiable costs in order to make its computer systems year 2000 compliant. In the event the Company's planned upgrades and modifications fail to bring any of these major systems into Year 2000 compliance or fail to do so in a timely manner, the Company will have to adopt contingency plans to deal with any resulting disruptions in its business. The Company employs certain manufacturing processes that utilize computer controlled manufacturing equipment. The Company believes such equipment is year 2000 compliant to the extent reasonably necessary but has not completed its testing of such equipment. In the event the Company determines that such equipment cannot readily be made year 2OOO compliant, it believes it can revert to the manual processes previously employed or outsource such work. The Company is also in the process of investigating the status of other systems with respect to year 2000 compliance such as phone, fax, heating/air conditioning, and electricity and believes they will be year 2000 compliant to the extent reasonably necessary before the end of 1999. The Company is utilizing internal resources for this purpose and does not expect to incur significant separately identifiable costs. In addition to reviewing its own systems, the Company has polled or is in the process of polling its significant customers and vendors to get assurance that they are year 2000 compliant and to attempt to identify potential issues. To the extent such assurance is not received, appropriate contingency plans will be developed and implemented. At this time, the Company is not aware of significant problems. If the Company's customers and vendors do not achieve year 2000 compliance before the end of 1999, the Company could experience a variety of problems that might have a material adverse effect on the Company's business and results of operations. For example, customers might lose EDI capability or vendors might fail to deliver, but most foreseeable problems can be overcome by reverting to phone, fax, mail and other manual procedures. It should be noted that the Company outsources very little other than raw steel and is not dependent on single source suppliers. In addition it has no customer accounting for more than ten percent of sales. LIQUIDITY AND CAPITAL RESOURCES Years ended In June ($000) 1998 1997 1996 Cash provided by operations $28,713 $23,516 $15,171 Cash used in investing activities (15,838) (13,310) (10,744) Cash used in financing activities (12,203) (8,563) (5,588) Effect of translation rate changes on cash (20) (7) (11) Increase (decrease) in cash $ 652 $ 1,636 $(1,172) Cash flows from operating activities increased $5 million in 1998 primarily due to the increase in net earnings of $3 million, and increases in levels of non cash charges for depreciation, amortization and deferred taxes of $3 million. In total, the change in prepaid pension and other assets and the components of working capital remained about the same in 1998, whereas 1997 saw a considerable slowdown in the rate of inventory increase as compared to 1996. The Company's investing activities consist mainly of expenditures for property, plant and equipment and the investment of cash not immediately needed for operations. Plant expenditures of $16.1 million in 1998 are ahead of the $14.0 million and $11.6 million experienced in 1997 and 1996, which are more typical years, but the Company anticipates similar levels of capital expenditures in the near term due to startup operations in China and major system software and hardware changes. Cash flows from financing activities are primarily the payment of dividends, which tend to be quite steady from year to year. The Company requires little debt to finance day to day operations and the proceeds from the sale of stock under the various stock plans tend to be used to purchase treasury shares. Treasury share purchases were $5.3 million in 1998 compared to $7.1 million in 1997 and $4.7 million in 1996. The Company maintains sufficient liquidity and has the resources to fund its operations under current business conditions. The Company maintains two lines of credit as discussed in the notes to the financial statements. The Company has not made significant borrowings under these lines during the past three years. The lines were used primarily to finance acquisitions. The Company continues to maintain a strong financial position with a working capital ratio of 5.9 to l as of June 27, 1998 and 5.3 to 1 as of June 28, 1997. Cash not immediately required for working capital is invested in high grade money market instruments with maturities generally less than one year (however, see the notes to the financial statements regarding investments in Puerto Rico). Certain cash and investment balances of foreign subsidiaries may not be repatriated without adverse tax consequences and in certain cases may be subject to regulatory restriction. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income includes, in addition to net income, several other items that current accounting standards require to be recognized outside of net income such as unrealized investment gains and losses and currency translation adjustments. The standard requires disclosure of the components of comprehensive income as well as their accumulated balances. The Company intends to display comprehensive income in the Consolidated Statements of Stockholders' Equity beginning in fiscal 1999. In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," replacing SFAS No.14 and its amendments. The new standard requires disclosure of information about operating segments, products, major customers and activities in different geographic areas. The basis for determining operating segments is the same as is used by the Company's chief operating decision maker. The Company intends to adopt SFAS No.131 in fiscal 1999. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 This Item, as well as other portions of this document and the 1998 Annual Report, including the Chairman's letter to stockholders, include forward- looking statements about the Company's business, sales, expenditures, Year 2000 compliance, environmental regulatory compliance, foreign operations, 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 Year 2000 Issues: The Company continues to explore whether and to what extent its computer and other systems will be disrupted at the turn of the century as a result of the widely-publicized dating system flaw inherent in many computer systems. While the Company is in the process of upgrading and modifying its systems in order to address the Year 2000 issue, there can be no assurance that the Company's existing systems will be upgraded or modified in time to remedy the Year 2000 issue or that the Company's computer systems will not be disrupted upon the turn of the century. Any disruption of the Company's business due to the Year 2000 issue, whether caused by the Company's systems or those of any of its suppliers, customers, banks, lenders, or insurers, could have a material adverse effect on the Company's financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000." Risks Related to Technology: Although the Company's strategy includes significant 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 Adoption of the Euro: Beginning January 1, 1999, a new currency (the Euro) will be created and will generally be required to be used to conduct business in Europe . The eleven participating European countries will phase in the use of the Euro until June 30, 2002 at which time the national currencies of the participating countries will cease to exist and all transactions will be settled in the Euro. Although the United Kingdom is not currently a Euro country, the Company's Scottish subsidiary does a significant amount of business with Euro countries. Management believes it has the necessary systems and business processes to deal with what is, in effect, one more foreign currency, but there can be no assurance that there will not be unforeseen economic effects of this change that might affect the Company's sales or margins on business done with Euro countries. Risks Related to Foreign Operations: For the period ended June 27, 1998, approximately 30% of the Company's sales were derived from foreign operations and, as of June 27, 1998, approximately 30% of the Company's net assets were located outside the United States. 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 in emerging markets, 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 Cyclical Nature of the Industry: The market for the Company's products is subject to general economic conditions, including the level of capital spending by industrial companies. As such, recessionary forces decrease demand for the Company's products and adversely affect performance. Risks Related to Competition: The Company's business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low-wage foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures might reduce unit sales and/or adversely affect the Company's margins. Item 8 - Financial Statements and Supplementary Data Contents: Page Report of Independent Auditors 11 Consolidated Statements of Earnings and Cash Flows 12 Consolidated Balance Sheets 13 Consolidated Statements of Stockholders' Equity 14 Notes to Consolidated Financial Statements 15-21 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Directors of The L.S. Starrett Company We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company and subsidiaries as of June 27, 1998 and June 28, 1997, and the related consolidated statements of earnings, cash flows and changes in stockholders' equity for each of the three years in the period ended June 27, 1998. 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 generally accepted auditing standards. 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 and subsidiaries as of June 27, 1998 and June 28, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 27, 1998, in conformity with generally accepted accounting principles. S/DELOITTE & TOUCHE LLP Boston, Massachusetts July 31, 1998 THE L.S. STARRETT COMPANY Consolidated Statements of Earnings and Cash Flows For the years ended in June (in thousands of dollars except per share data) 1998 1997 1996 EARNINGS Net sales $262,340 $250,503 $235,467 Cost of goods sold (176,591) (170,035) (161,238) Selling, general and administrative expense (53,433) (51,941) (49,567) Other income and expense 1,806 1,532 1,490 Earnings before income taxes 34,122 30,059 26,152 Income taxes 11,113 10,200 8,821 Net earnings $ 23,009 $ 19,859 $ 17,331 Basic earnings per share, based on average outstanding shares of 6,888,854, 6,991,810 and 7,057,675 $ 3.34 $ 2.84 $ 2.45 Diluted earnings per share, based on average outstanding shares of 6,902,950, 7,003,138 and 7,069,119 $ 3.33 $ 2.84 $ 2.45 CASH FLOWS Cash flows from operating activities: Net earnings $ 23,009 $ 19,859 $ 17,331 Noncash expenses: Depreciation and amortization 10,727 9,799 9,268 Deferred taxes 1,945 (439) 10 Unrealized translation losses 154 134 99 Working capital changes: Receivables (4,506) 1,619 564 Inventories 1,518 (4,821) (14,289) Other current assets and liabilities (1,016) (1,962) 1,040 Prepaid pension and other (3,118) (673) 1,148 Net cash from operating activities 28,713 23,516 15,171 Cash flows from investing activities: Additions to plant and equipment (16,148) (13,999) (11,609) Decrease in investments 310 689 865 Net cash used in investing activities (15,838) (13,310) (10,744) Cash flows from financing activities: Short-term borrowing, net (2,609) 411 2,599 Debt repayments, net (2,600) (600) (1,600) Common stock issued 3,590 3,691 3,130 Treasury shares purchased (5,286) (7,054) (4,656) Dividends (5,298) (5,011) (5,061) Net cash used in financing activities (12,203) (8,563) (5,588) Effect of translation rate changes on cash (20) (7) (11) Net increase (decrease) in cash 652 1,636 (1,172) Cash beginning of year 3,053 1,417 2,589 Cash end of year $ 3,705 $ 3,053 $ 1,417 Supplemental cash flow information: Interest paid $ 684 $ 839 $ 870 Taxes paid $ 12,519 $ 11,572 $ 9,289 See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) June 27 June 28 ASSETS 1998 1997 Current assets: Cash $ 3,705 $ 3,053 Investments 27,115 27,389 Accounts receivable (less allowance for doubtful accounts of $2,450,000 and $1,877,000) 40,764 36,625 Inventories 73,777 75,846 Prepaid expenses and other current assets 5,335 4,682 Total current assets 150,696 147,595 Property, plant and equipment, at cost: Land 1,862 1,945 Buildings (less accumulated depreciation of $17,014,000 and $16,447,000) 24,314 23,499 Machinery and equipment (less accumulated depreciation of $49,178,000 and $44,328,000) 42,642 38,657 Total property, plant and equipment 68,818 64,101 Cost in excess of net assets acquired (less accumu- lated amortization of $3,896,000 and $3,514,000) 7,484 7,772 Prepaid pension cost 22,035 18,928 Other assets 1,230 350 $250,263 $238,746 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 1,001 $ 3,610 Accounts payable and accrued expenses 14,371 13,205 Accrued salaries and wages 8,059 6,628 Taxes payable 1,475 3,927 Employee deposits for stock purchase plan 528 434 Total current liabilities 25,434 27,804 Deferred income taxes 9,367 8,247 Long-term debt 3,900 6,500 Accumulated postretirement benefit obligation 16,268 15,730 Stockholders' equity: Class A common stock $1 par (20,000,000 shrs. auth.; 5,193,904 outstanding in 1998, excluding 1,045,731 held in treasury; 5,038,013 outstanding in 1997, excluding 995,943 held in treasury 5,194 5,038 Class B Common Stock $1 par (10,000,000 shrs. auth.; 1,703,434 outstanding in 1998, excluding 274,283 held in treasury; 1,905,606 outstanding in 1997, excluding 260,283 held in treasury 1,703 1,906 Additional paid-in capital 41,263 38,730 Retained earnings reinvested and employed in the business 151,317 137,788 Foreign currency translation adjustment (4,479) (3,155) Other equity adjustments 296 158 Total stockholders' equity 195,294 180,465 $250,263 $238,746 See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 1996 through 1998 (in thousands) Common Addi- Equity Adjustments Stock Out- tional Currency standing Paid-in Retained Trans- ($1 Par) Capital Earnings lation Other Total Balance, 6/24/95 $ 7,117 $34,610 $119,506 $(4,147) $ (257) $156,829 Net earnings 17,331 17,331 Dividends ($0.72) (5,061) (5,061) Treasury shares: Purchased (197) (955) (3,504) (4,656) Issued 120 2,730 2,850 Options exercised 15 265 280 Unrealized net gains on investments 281 281 Translation loss,net (569) (569) Balance, 6/29/96 7,055 36,650 128,272 (4,716) 24 167,285 Net earnings 19,859 19,859 Dividends ($0.72) (5,011) (5,011) Treasury shares: Purchased (255) (1,467) (5,332) (7,054) Issued 116 3,057 3,173 Options exercised 28 490 518 Unrealized net gains on investments 134 134 Translation gain,net 1,561 1,561 Balance, 6/28/97 6,944 38,730 137,788 (3,155) 158 180,465 Net earnings 23,009 23,009 Dividends ($0.77) (5,298) (5,298) Treasury shares: Purchased (152) (952) (4,182) (5,286) Issued 88 3,144 3,232 Options exercised 17 341 358 Unrealized net gains on investments 138 138 Translation loss,net (1,324) (1,324) Balance, 6/27/98 $ 6,897 $41,263 $151,317 $(4,479) $ 296 $ 195,294 See Notes to Consolidated Financial Statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of The L. S. Starrett Company and subsidiaries, a manu- facturer of industrial, professional and consumer products. All subsidiaries are wholly-owned and all significant intercompany items have been eliminated. The Company's fiscal year ends on the last Saturday in June. Results for fiscal 1996 include 53 weeks compared to 52 weeks in 1997 and 1998. The fiscal years of the Company's foreign subsidiaries end in May. Fair market value of financial instruments: The Company's financial instruments consist primarily of current assets, current liabilities, and long-term debt. Current assets, except inventories (see Inventories) and except short-term investments, and current liabilities 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 purchase derivative financial instruments. Investments: Investments consist primarily of marketable securities, including treasury bills, certificates of deposit and municipal securities. The Company considers all its investments "available for sale." As such, these investments are carried at market, which approximates cost, with unrealized temporary gains and losses recorded as a component of stockholders' equity. Included in investments at June 27, 1998 is $7.9 million of liquid AAA rated Puerto Rico debt obligations. These investments were made for the purpose of reducing repatriation taxes and have maturities of up to ten years. 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. Costs in excess of net assets acquired are being amortized on a straight-line basis over 5 to 40 years. Inventories: Inventories are stated at the lower of cost or market. For approximately 70% 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 $44,397,000 and $44,743,000 at the end of 1998 and 1997, respectively, such amounts being $23,998,000 and $24,790,000 less than if determined on a FIFO basis. Total inventories at year end are as follows (in thousands): Goods in Pro- cess and Raw Materials Finished Goods Finished Parts and Supplies Total 1998 $30,199 $25,825 $17,753 $73,777 1997 32,374 26,698 16,774 75,846 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 undistributed earnings of foreign subsidiaries (approximately $50,000,000 at June 1998) or the related unrealized translation adjustments because such amounts are considered permanently invested and, if remitted, the resulting taxes would be offset by foreign tax credits. Research and development: Research and development costs were expensed as follows: $3,406,000 in 1998, $3,073,000 in 1997 and $3,472,000 in 1996. Earnings per share: The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per share," in fiscal 1998. 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 14,096, 11,328 and 11,444 of additional potential common shares in 1998, 1997 and 1996 resulting from shares issuable under its stock option plan. Translation of foreign currencies: Assets and liabilities are translated at exchange rates in effect on reporting dates, and income and expenses are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "foreign currency translation adjustment" account included as part of stockholders' equity. Prior to January 1, 1998, the translation method used by the Company's subsidiary in Brazil, which until then had been considered a hyperinflationary country, was the same except that inventories and plant and the related charges to cost of sales and depreciation expense were translated at rates in effect at the time the assets were purchased, and the resulting translation gains and losses were included in the determination of net earnings. Use of accounting estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 1998 1997 1996 Interest income $ 2,747 $ 2,118 $ 1,889 Interest expense and commitment fees (820) (784) (917) Realized and unrealized translation gains and losses (339) (225) (140) Other 218 423 658 $ 1,806 $ 1,532 $ 1,490 INCOME TAXES The provision for income taxes consists of the following (in thousands): 1998 1997 1996 Current: Federal $ 5,780 $ 6,146 $ 5,058 Foreign 2,454 2,926 2,385 State 934 1,567 1,368 Deferred 1,945 (439) 10 $11,113 $10,200 $ 8,821 Pretax domestic income was $26,876,000, $22,096,000 and $19,169,000 in 1998, 1997 and 1996, respectively. A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands): 1998 1997 1996 Expected tax expense $11,943 $10,520 $ 9,153 Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit 108 178 219 Foreign taxes, net of federal credits (604) (476) (437) Nontaxable investment income (120) (115) (151) Other (214) 93 37 Actual tax expense $11,113 $10,200 $ 8,821 Deferred income taxes at year end are attributable to the following (in thousands): 1998 1997 Deferred assets: Retiree medical benefits $(6,643) $(6,425) Inventories (1,296) (1,799) Other (1,366) (1,431) (9,305) (9,655) Deferred liabilities: Prepaid pension 9,059 7,771 Other employee benefits 659 511 Depreciation 6,087 6,164 Other 884 761 16,689 15,207 Current portion (1,983) (2,695) Long-term portion $ 9,367 $ 8,247 EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and approximately half 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 retirement benefits otherwise due under the domestic noncontributory defined benefit pension plan. The total cost (benefit) of all such plans for 1998, 1997 and 1996, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $(1,588,000), $(405,000) and $(87,000), 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 approximately 1,050,000 shares of the Company's common stock. The cost of these defined benefit plans, including the ESOP, consists of the following components (in thousands): 1998 1997 1996 Cost of benefits earned during current year $ 2,389 $ 2,376 $ 2,238 Interest on projected benefit obligation 5,771 5,425 3,330 Actual return on assets (22,500) (17,834) (12,349) Net amortization and deferral 11,241 8,291 5,830 $(3,099) $(1,742) $ (951) The plans' funded status at year end is as follows (in thousands): 1998 1997 Vested accumulated benefit obligation $78,912 $72,500 Nonvested accumulated benefit obligation 277 164 Effect of future compensation increases 8,053 8,265 Projected benefit obligation 87,242 80,929 Plan assets at fair market value 148,861 129,292 Funded status 61,619 48,363 Unrecognized portion of net assets 39,584 29,435 Prepaid pension cost $22,035 $18,928 The assumed discount rate and rate of increase in compensation used in determining the projected benefit obligation are 7% and 5%, respectively, for the domestic plan and 8.5% and 6.5% for the foreign plan. The assumed long-term rate of return on plan assets is 7.5% for the domestic plan and 8.5% for the foreign plan. Less than 25% of the assets and obligations reflected in the table above relate to the foreign plan. 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): 1998 1997 Accumulated postretirement benefit obligation: Retirees $ 6,614 $ 6,506 Active plan participants 11,083 9,614 Unrecognized loss (1,429) (390) Accumulated postretirement benefit obligation accrued $16,268 $15,730 Postretirement benefit expense consists of the following (in thousands): 1998 1997 1996 Service cost $ 498 $ 494 $ 490 Interest cost 1,170 1,126 1,096 Amortization cost 27 $ 1,668 $ 1,620 $ 1,613 The Company's portion of the annual rate of increase in the per capita cost of covered benefits is assumed to be 2%. A one percentage point increase in the assumed cost escalation rate would increase the accumulated benefit obligation by $1.2 million and the annual expense by $150,000. A discount rate of 7.5% was used in determining the accumulated benefit obligation. DEBT At year end, long-term debt consists of the following (in thousands): 1998 1997 Industrial revenue bond $ 1,500 $ 2,100 Revolving credit agreement 3,000 5,000 4,500 7,100 Less current maturities 600 600 $ 3,900 $ 6,500 The industrial revenue bond is collateralized by the Company's plant in Mt. Airy, North Carolina. Principal is payable in semiannual installments of $300,000. Interest is at 92% of the 90 day CD rate (5.1% at June 27, 1998). The revolving credit agreement consists of a $10,000,000 line due March 30, 1999 under which there were no borrowings at June 27, 1998 and a $10,000,000 line due March 30, 2000. The credit agreement is with two banks and requires commitment and other fees of .3%. Interest rates vary, but approximate LIBOR plus .33% (5.9% as of June 27, 1998). All debt agreements contain financial covenants, the most restrictive of which is that at June 27, 1998 the Company must have tangible net worth of $152,000,000. Annual principal payments on debt are required as follows: 1999, $600,000; 2000, $3,600,000; 2001 $300,000. Current notes payable carry interest at a rate of LIBOR plus 4%. 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, adopted in 1990, 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 the year 2000. The Company accounts for stock based compensation under the provisions of Accounting Principles Board Opinion No. 25. Under the Company's 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 are exercisable at the end of 1998, 1997, or 1996. A summary of option activity is as follows: Weighted Average Exercise Shares Shares Price Available On Option At Grant For Grant Balance, June 24, 1995 59,911 $18.90 711,857 Options granted 32,793 20.56 (32,793) Options exercised ($19.34 and $19.02) (14,548) 19.18 Options canceled (15,804) 15,804 Balance, June 29, 1996 62,352 19.45 694,868 Options granted 38,709 24.21 (38,709) Options exercised ($17.75 and ($19.55)(28,368) 18.29 Options canceled (19,359) 19,359 Balance, June 28, 1997 53,334 22.92 675,518 Options authorized 800,000 Options granted 26,457 32.14 (26,457) Options exercised ($19.45 and $21.89) (17,507) 20.49 Options canceled (16,484) (670,715) Balance, June 27, 1998 45,800 $27.96 778,346 At June 27, 1998, a total of 824,146 shares of common stock are reserved for issuance under the plans. The following information relates to outstanding options as of June 27, 1998 Weighted Average Exercise Price $27.96 Weighted Average Remaining Life 1.1 years Weighted Average fair value on grant date of options granted in: 1996 $6.00 1997 7.50 1998 9.50 The fair value of each option grant was estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions: volatility - 14% to 17%, interest - 5.5% to 6.2%, and expected lives - 2 years. The pro forma, after tax effect of any compensation costs related to implementation of and ongoing use of SFAS No. 123, "Accounting for Stock Based Compensation," is as follows: 1998 $150,000, 1997 $125,000 and 1996 $75,000, or approximately $.02, $.02, and $.01 per share. In addition 632,641 shares of common stock are reserved for the Company's 401(k) plan at June 27, 1998. Since inception in 1986, 865,668 Class A and 44,155 Class B shares have been issued under this plan. OPERATING DATA The Company believes it has no significant concentration of credit risk as of June 27, 1998. Trade receivables are disbursed among a large number of retailers, distributors and industrial accounts in many countries. The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. Revenues, operating income and identifiable assets of the Company's domestic and foreign operations are summarized in the table below. Operating income is computed exclusive of other income and expense and income taxes. Transfers are recorded at normal selling price for finished goods and at cost plus a percentage to cover expenses for finished parts, work in process and raw materials. Eliminations relate to investments in subsidiaries and intercompany transactions and balances. Elimina- Consoli- Domestic Foreign tions dated 1998: Sales $185,407 $ 76,933 $262,340 Intercompany transfers 2,518 9,632 $(12,150) Revenues 187,925 86,565 (12,150) 262,340 Operating income 26,002 6,314 32,316 Identifiable assets 189,969 71,098 (10,804) 250,263 Net assets 142,278 60,800 (7,784) 195,294 1997: Sales $174,801 $ 75,702 $250,503 Intercompany transfers 2,439 8,862 $(11,301) Revenues 177,240 84,564 (11,301) 250,503 Operating income 20,268 8,259 28,527 Identifiable assets 176,754 71,058 (9,066) 238,746 Net assets 128,739 57,804 (6,078) 180,465 1996: Sales $161,175 $ 74,292 $235,467 Intercompany transfers 2,076 8,320 $(10,396) Revenues 163,251 82,612 (10,396) 235,467 Operating income 17,034 7,628 24,662 Identifiable assets 167,015 70,699 (10,402) 227,312 Net assets 120,227 53,745 (6,687) 167,285 The significant foreign operations of the Company are located in Scotland and Brazil. These two locations accounted for approximately the following percentages of the indicated foreign information listed above: 1998 1997 1996 Scotland Brazil Scotland Brazil Scotland Brazil Revenues 38% 62% 40% 60% 41% 59% Operating income 38% 66% 62% 38% 69 31% Identifiable assets 52% 46% 51% 49% 46% 54% QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data) Earnings Basic Before Earnings Net Gross Income Net Per Quarter Ended Sales Profit Taxes Earnings Share September 1996 $58,636 $18,066 $ 6,185 $ 4,042 $ 0.57 December 1996 64,587 20,689 8,486 5,678 0.81 March 1997 60,489 18,439 6,328 4,251 0.61 June 1997 66,791 23,274 9,060 5,888 0.85 $250,503 $80,468 $30,059 $19,859 $ 2.84 September 1997 $65,213 $20,734 $ 8,400 $ 5,413 $ 0.78 December 1997 68,637 23,266 9,432 6,392 0.93 March 1998 61,195 19,878 7,437 4,994 0.72 June 1998 67,295 21,871 8,853 6,210 0.91 $262,340 $85,749 $34,122 $23,009 $ 3.34 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. PART III Item 10 - Directors and Executive Officers of the Registrant Directors The information concerning the Directors of the Registrant is contained on pages 1 through 4 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 16, 1998, and is hereby incorporated by reference. Executive Officers of the Registrant Held Present Name Age Office Since Position Douglas R. Starrett 78 1995 Chairman and CEO and Director Douglas A. Starrett 46 1995 President and Director George B. Webber 77 1962 Vice President Webber Gage Division and Director James S. Carey 47 1997 Vice President Sales Roger U. Wellington, Jr. 57 1984 Treasurer and Chief Financial Officer and Director Steven A. Wilcox 43 1998 Clerk George B. Webber and Roger U. Wellington, Jr. have served in the same capacities as listed above for at least the past five years. Douglas R. Starrett was previously President of the Company. Douglas A. Starrett (son of Douglas R. Starrett) was previously Executive Vice President of the Company. James S. Carey was previously Midwest Sales Manager of the Company. Except in the case of Steven Wilcox, the positions listed above represent their principal occupations and employment during the last five years. Steven Wilcox, elected clerk in 1997, has been a partner in Ropes & Gray, counsel for the Company, throughout that period. 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 director or executive officer during the past five years. Item 11 - Executive Compensation The information concerning management remuneration is contained on pages 4 through 10 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 16, 1998 and, except for the information under the caption "Compensation Committee Report," is hereby incorporated by reference. Item 12 - Security Ownership of Certain Beneficial Owners and Management (a) 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 on page 4 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 16, 1998, and is hereby incorporated by reference. (b) 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 on pages 2 and 3 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 16, 1998, and is hereby incorporated by reference. (c) 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 PART IV Item 14 - 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 Earnings and Cash Flows for the Three Years in the Period ended June 27, 1998 Consolidated Balance Sheets at June 27, 1998 and June 28,1997 Consolidated Statements of Stockholders' Equity for the Three Years in the Period Ended June 27, 1998 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 on page 25. (b) There were no reports on Form 8-K filed in the last quarter of the period covered by this report. (c) See Exhibit Index below on page 25. (d) Not applicable. THE L.S. STARRETT COMPANY AND SUBSIDIARIES EXHIBIT INDEX (3i) 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. (3ii) Bylaws as amended September 21, 1994, filed with Form 10-K for the year ended June 24, 1995, are hereby incorporated by reference. (4a) Loan Agreement and related documents, relative to $7,500,000 Industrial Revenue Bond financing dated as of September 1, 1985, between The Surry County Industrial Facilities and Pollution Control Financing Authority and The L.S. Starrett Company will be furnished to the Commission upon request. (4b) Common Stock Rights Agreement, dated as of June 6, 1990, between the Company and The First National Bank of Boston, as Rights Agent, including Form of Common Stock Purchase Rights Certificate and Summary Common Stock Purchase Rights, filed on June 13, 1990 with the Company's Form 8-A, are hereby incorporated by reference. (10a) $20,000,000 Amended and Restated Credit Agreement dated as of March 31, 1995, among The L.S. Starrett Company, The First National Bank of Boston and Wachovia Bank of Georgia, N.A. will be furnished to the Commission upon request. (21) Subsidiaries of the Registrant. See page 26. (23) Independent Auditors' Consent. See page 27. (27) Financial Data Schedule submitted herewith in electronic format. Exhibit 21 THE L.S. STARRETT COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT JUNE 27, 1998 The parent company, The L.S. Starrett Company, incorporated in Massachusetts, has the following 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 International Incorporated in Last Sat. Company Barbados 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 Exhibit 23 INDEPENDENT AUDITORS' CONSENT The L.S. Starrett Company We consent to the incorporation by reference in the Registration Statements No. 33-55623 and No. 333-12997 of The L.S. Starrett Company, both on Form S-8, of our report dated July 31, 1998, appearing in the Annual Report on Form 10-K of The L.S. Starrett Company for the year ended June 27, 1998. S/DELOITTE & TOUCHE LLP Boston, Massachusetts September 16, 1998 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., Treasurer and Chief Financial Officer Date: September 16, 1998 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 R. STARRETT S/DOUGLAS A. STARRETT Douglas R. Starrett, Sept. 16, 1998 Douglas A. Starrett, Sept. 16, 1998 Chairman and CEO and Director President and Director S/ANDREW B. SIDES, JR. S/WILLIAM S. HURLEY Andrew B. Sides, Jr., Sept. 16, 1998 William S. Hurley, Sept. 16, 1998 Director Director S/RICHARD B. KENNEDY S/GEORGE B. WEBBER Richard B. Kennedy, Sept. 16, 1998 George B. Webber, Sept. 16, 1998 Director Vice President Webber Gage Division and Director S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Sept. 16, 1998 Roger U. Wellington,Jr.,Sept.16, 1998 Chief Accounting Officer Treasurer and Chief Financial Officer and Director EX-27 2
5 1,000 YEAR JUN-27-1998 JUN-27-1998 3,705 27,115 43,214 2,450 73,777 150,696 135,010 66,192 250,263 25,434 3,900 0 0 6,897 188,397 250,263 262,340 262,340 176,591 176,591 0 0 820 34,122 11,113 23,009 0 0 0 23,009 3.34 3.33
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