1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 28, 1998. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-25150 STRATTEC SECURITY CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) WISCONSIN 39-1804239 --------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 3333 WEST GOOD HOPE ROAD, MILWAUKEE, WI 53209 --------------------------------------------- (Address of principal executive offices) (414) 247-3333 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------- ------------------------------------ N/A N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) 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. [x]Yes [ ]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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of August 19, 1998 was approximately $165,646,000 (based upon the last reported sale price of the Common Stock at August 19, 1998 on the NASDAQ National Market). On August 19, 1998, there were outstanding 5,721,858 shares of $.01 par value Common Stock. Documents Incorporated by Reference Part of the Form 10-K into which incorporated Document ----------------------- -------- Portions of the Annual Report to Shareholders for the fiscal year ended June 28, 1998. I, II, IV Portions of the Proxy Statement dated September 9, 1998, for the Annual Meeting of Shareholders to be held on October 22, 1998. III
2 PART I ITEM 1. BUSINESS The information set forth under "Company Description" which appears on pages 4 through 8 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. For information as to export sales, see the information set forth under "Export Sales" included on page 22 of the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. EMERGING TECHNOLOGIES New electronic technologies are expected to become increasingly important in future product designs. These technologies may include radio frequency transmission and receiving, Hall effects sensing, optical reading and sensing, and custom integrated circuit technology. Further advancements with respect to RFID applications such as encrypted signals and rolling codes are anticipated. Specific applications of certain of these technologies began in prior model years. Application will occur in both OEM and aftermarket products. In connection with the development of these technologies, the Company intends to utilize strategic alliances and/or strategic sourcing with respect to certain components in order to remain competitive from both a cost and quality standpoint. SOURCES AND AVAILABILITY OF RAW MATERIALS The primary raw materials used by the Company are high-grade zinc and brass. These materials are generally available from a number of suppliers, but the Company has chosen to concentrate its sourcing with one primary vendor for each commodity. The Company believes its sources for raw materials are very reliable and adequate for its needs. The Company has not experienced any significant long term supply problems in its operations and does not anticipate any significant supply problems in the foreseeable future. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY The Company believes that the success of its business will not only result from the technical competence, creativity and marketing abilities of its employees but also from the protection of its intellectual property through patents, trademarks and copyrights. As part of its ongoing research, development and manufacturing activities, the Company has a policy of seeking patents on new products, processes and improvements when appropriate. The Company owns 25 issued United States patents, with expirations occurring between 1999 and 2016. Although, in the aggregate, the patents discussed above are of considerable importance to the manufacturing and marketing of many of its products, the Company does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole, except for the STRATTEC and STRATTEC with logo trademarks. The Company also relies upon trade secret protection for its confidential and proprietary information. The Company maintains confidentiality agreements with its key executives. In addition, the Company enters into confidentiality agreements with selected suppliers, consultants and associates as appropriate to evaluate new products or business relationships pertinent to the success of the Company. However, there can be no assurance that others will not independently obtain similar information and techniques or otherwise gain access to the Company's trade secrets or that the Company can effectively protect its trade secrets. DEPENDENCE UPON SIGNIFICANT CUSTOMERS A very significant portion of the Company's annual sales are to General Motors Corporation, Ford Motor Company and Chrysler Corporation. In fiscal years 1998, 1997 and 1996, these three customers accounted for 85%, 85% and 82% respectively, of the Company's total net sales. The Company began production volume shipments of locksets to the Ford Motor Company during fiscal year 1996. Further information regarding sales to the Company's largest customers is set forth under "Sales to Largest Customers" included on page 22 of the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference.
3 The products sold to these customers are model specific, fitting only certain defined applications. Consequently, the Company is highly dependent on its major customers for their business, and on these customers' ability to produce and sell vehicles which utilize the Company's products. The Company has enjoyed relationships with General Motors Corporation, Chrysler Corporation and Ford Motor Company in the past, and expects to do so in the future. However, a significant change in the purchasing practices of, or a significant loss of volume from, one or more of these customers could have a detrimental effect on the Company's financial performance. SALES AND MARKETING The Company provides its customers with engineered locksets, which are unique to specific vehicles. Any given vehicle will typically take 1 to 3 years of development and engineering design time prior to being offered to the public. The locksets are designed concurrently with the vehicle. Therefore, commitment to the Company as the production source occurs 1 to 3 years prior to the start of production. The typical process used by the "Big Three" automotive manufacturers in selecting a lock supplier is to offer the business opportunity to the Company and various of the Company's competitors. Each competitor will pursue the opportunity, doing its best to provide the customer with the most attractive proposal. Price pressure is strong during this process but once an agreement is reached, the price is fixed for each year of the product program. Typically, price reductions resulting from productivity improvement by the Company are included in the contract and are estimated in evaluating each of these opportunities by the Company. A blanket purchase order, a contract indicating a specified part will be supplied at a specified price during a defined time period, is issued by customers for each model year and releases, quantity commitments, are made to that purchase order for weekly deliveries to the customer. As a consequence and because the Company is a "Just-in-Time" supplier to the automotive industry, it does not maintain a backlog of orders in the classic sense for future production and shipment. COMPETITION The Company competes with domestic and foreign-based competitors on the basis of custom product design, engineering support, quality, delivery and price. While the number of direct competitors is currently relatively small, the auto manufacturers actively encourage competition between potential suppliers. Although the Company may not be the lowest cost producer, it has a dominant share of the North American market because of its ability to provide a beneficial combination of price, quality and technical support. In order to reduce lockset production costs while still offering a wide range of technical support, the Company utilizes assembly operations in Mexico, which results in lower labor costs as compared to the United States. As locks become more sophisticated and involve additional electronics, competitors with specific electronic expertise may emerge to challenge the Company. RESEARCH AND DEVELOPMENT The Company engages in research and development activities pertinent to the automotive security industry. A major area of focus for research is the expanding role of electronic interlocks and modes of communicating authorization data between consumers and vehicles. Development activities include new products, applications and product performance improvement. In addition, specialized data collection equipment is developed to facilitate increased product development efficiency and continuous quality improvements. For fiscal years 1998, 1997, and 1996, the Company spent $2,979,000, $2,713,000, and $2,772,000, respectively, on research and development. The Company believes that, historically, it has committed sufficient resources to research and development and anticipates increasing such expenditures in the future as required to support additional product programs associated with both existing and new customers. Patents are pursued and will continue to be pursued as appropriate to protect the Company's interests resulting from these activities.
4 CUSTOMER TOOLING An important aspect of the Company's production processes is customer program specific assembly lines and production tooling. In general, capital equipment acquired by the Company for customer product programs is recognized as a long-term asset and depreciated. Tooling for these same programs, obtained primarily from third party tool suppliers, is accumulated as a current asset on the Company's balance sheet and rebilled to the customer upon formal product approval from the customer. For certain products, the Company retains ownership of both the equipment and tooling. Recovery of these costs occurs over the life of the program through the piece price. See Notes to Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. ENVIRONMENTAL COMPLIANCE As is the case with other manufacturers, the Company is subject to federal, state, local and foreign laws and other legal requirements relating to the generation, storage, transport, treatment and disposal of materials as a result of its lock and key manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended), the Clean Water Act of 1990 (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company believes that its existing environmental management policies and procedures are adequate and it has no current plans for substantial capital expenditures in the environmental area. Contamination existing at the Company's Milwaukee site from an underground waste coolant storage tank and a former above-ground solvent storage tank, located on the east side of the facility, will be remediated in accordance with federal, state and local requirements. The Company does not currently anticipate any materially adverse impact on its results of operations, financial condition or competitive position as a result of compliance with federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company's business and there is no assurance that material liabilities or charges could not arise. EMPLOYEES At June 28, 1998, the Company had approximately 2,680 full-time employees, of which approximately 515 or 19 percent, were represented by a labor union. ITEM 2. PROPERTIES The Company has two manufacturing plants, one warehouse, two distribution centers, and a sales office. These facilities are described as follows: <TABLE> <CAPTION> LOCATION TYPE SQ. FT. OWNED OR LEASED -------- ---- ------- --------------- <S> <C> <C> <C> Milwaukee, Wisconsin Headquarters and General Offices; Component Manufacturing and Assembly.......................... 352,000 Owned Juarez, Chihuahua Mexico Subsidiary Offices and Assembly..................... 97,000 Owned Somerset, New Jersey Service Parts Distribution.......................... 6,500 Leased* Carpenteria, California Service Parts Distribution.......................... 4,000 Leased* El Paso, Texas Finished Goods Warehouse............................ 12,500 Leased** Troy, Michigan Sales Office for Detroit Area....................... 3,000 Leased** </TABLE> - ------------- * Leased floor space within a warehouse facility. ** Leased unit within a complex. The Company believes that both of its production facilities are adequate for the foreseeable future.
5 ITEM 3. LEGAL PROCEEDINGS In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 1998. EXECUTIVE OFFICERS OF REGISTRANT The names, ages and positions of all executive officers of the Company as of the date of this filing are listed below, together with their business experience during the past five years. Executive officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of shareholders. There are no family relationships among any of the executive officers of the Company, nor any arrangements or understanding between any such officer and another person pursuant to which he was appointed as an executive officer. NAME, AGE AND POSITION BUSINESS EXPERIENCE - --------------------- ------------------- Harold M. Stratton II, 50 President and Chief Executive Officer of the Corporation since 1994. Vice President of Briggs & Stratton Corporation and General Manager of the Technologies Division of Briggs & Stratton Corporation from 1989 to 1995. John G. Cahill, 41 Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Corporation since 1994. Vice President, Chief Financial Officer, Secretary and Treasurer, Johnson Worldwide Associates, Inc. (manufacturer and marketer of recreational and marking systems products) 1992 to 1994 and Corporate Controller from 1989 to 1992. Michael R. Elliott, 42 Vice President - Sales and Marketing of the Company since 1994. Vice President - Marketing and Sales of the Technologies Division since 1993. Vice President - Corporate Development of Iverness Casting Group (a producer of castings and injection molded products) from 1991 to 1992. Vice President - Sales and Marketing of Iverness Casting Group from 1990 to 1991. Sales, Marketing and Planning Manager of the AC Rochester Division of General Motors Corporation (an automotive manufacturer) from 1988 to 1990. Gerald L. Peebles, 55 Vice President and General Manager of STRATTEC de Mexico - since 1997. Vice President - Operations of the Company 1995 - 1997. Vice President - Operations of the Technologies Division since 1994. Operations Manager - Juarez Plant of the Technologies Division from 1990 to 1994. Plant Manager - Juarez Plant of the Technologies Division from 1988 to 1990. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth in the "Quarterly Financial Data" section appearing on page 24 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference.
6 The Company does not intend to pay cash dividends on the Company Common Stock in the foreseeable future; rather, it is currently anticipated that Company earnings will be retained for use in its business. The future payment of dividends will depend on business decisions that will be made by the Board of Directors from time to time based on the results of operations and financial condition of the Company and such other business considerations as the Board of Directors considers relevant. The Company's revolving credit agreement contains restrictions on the payment of dividends. See Notes to Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under "Five Year Financial Summary" which appears on page 24 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under "Management's Discussion and Analysis" which appears on pages 10 through 12 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company did not hold any market risk sensitive instruments during the period covered by this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, together with the report thereon of Arthur Andersen LLP dated July 30, 1998, which appear on pages 13 through 23 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Financial Data (unaudited) which appears on page 24 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on pages 2, 3 and 5 of the Company's Proxy Statement, dated September 9, 1998, under "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information on pages 7 through 14 of the Company's Proxy Statement, dated September 9, 1998, under "Executive Compensation" and "Compensation of Directors" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information on pages 3 through 5 of the Company's Proxy Statement, dated September 9, 1998, under "Security Ownership" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on pages 7 through 14 of the Company's Proxy Statement, dated September 9, 1998, under "Executive Compensation" is incorporated herein by reference.
7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as part of this Report (1) Financial Statements - The following financial statements of the Company, included on pages 13 through 23 of the Company's 1998 Annual Report to Shareholders, are incorporated by reference in Item 8. Report of Independent Public Accountants Balance Sheets - as of June 28, 1998 and June 29, 1997 Statements of Income - years ended June 28, 1998, June 29, 1997 and June 30, 1996 Statements of Changes in Equity - years ended June 28, 1998, June 29, 1997 and June 30, 1996 Statements of Cash Flows - years ended June 28, 1998, June 29, 1997 and June 30, 1996 Notes to Financial Statements (2) Financial Statement Schedules Page in this Form 10-K Report ---------------- Report of Independent Public Accountants 8 Schedule II - Valuation and Qualifying Accounts 9 All other schedules have been omitted because they are not applicable or are not required, or because the required information has been included in the Financial Statements or Notes thereto. (3) Exhibits. See "Exhibit Index" beginning on page 11. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of fiscal 1998.
8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in the STRATTEC SECURITY CORPORATION Annual Report to Shareholders incorporated by reference in this Form 10-K and have issued our report thereon dated July 30, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, July 30, 1998.
9 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Balance, Provision Payments Balance, Beginning Charged to and Accounts End of of Year Profit & Loss Written Off Year ------- ------------- ----------- ---- <S> <C> <C> <C> <C> Year ended June 28, 1998 Allowance for doubtful accounts $250 $0 $0 $250 ==== == == ==== Year ended June 29, 1997 Allowance for doubtful accounts $250 $0 $0 $250 ==== == == ==== Year ended June 30, 1996 Allowance for doubtful accounts $250 $0 $0 $250 ==== == == ==== </TABLE>
10 SIGNATURES Pursuant to the requirements of Section 13 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. STRATTEC SECURITY CORPORATION By: /s/ Harold M. Stratton II ---------------------------- Harold M. Stratton II, President and Chief Executive Officer Date: August 25, 1998 Pursuant to the requirement 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 dates indicated. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <C> <C> <C> /s/ Harold M. Stratton II President, Chief Executive Officer August 25, 1998 - ------------------------------- and Director Harold M. Stratton II /s/ John G. Cahill Executive Vice President, August 25, 1998 - ------------------------------- Chief Financial Officer, John G. Cahill Treasurer, Secretary & Director /s/ Frank J. Krejci Director August 25, 1998 - ------------------------------- Frank J. Krejci /s/ Michael J. Koss Director August 25, 1998 - ------------------------------- Michael J. Koss /s/ Robert Feitler Director August 25, 1998 - ------------------------------- Robert Feitler </TABLE>
11 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K <TABLE> <CAPTION> Page Number in Sequential Numbering of all Form 10-K and Exhibit Exhibit Pages - ------- ------------- <S> <C> <C> 3.1 (2) Amended and Restated Articles of Incorporation of the Company * 3.2 (2) By-laws of the Company * 4.1 (2) Rights Agreement between the Company and Firstar Trust Company, as Rights Agent * 4.2 (3) Revolving Credit Agreement dated as of February 27, 1995 by and between the Company * and M&I Bank, together with Revolving Credit Note 10.1 (5) STRATTEC SECURITY CORPORATION Stock Incentive Plan * 10.2 (4) Employment Agreements between the Company and the identified executive officers * 10.3 (1) Change In Control Agreement between the Company and the identified executive officers * 10.4 (1) Contribution Agreement, Plan and Agreement of Reorganization and * Distribution between The Briggs & Stratton Corporation ("Briggs") and the Company, dated as of February 27, 1995 (the "Contribution Agreement") 10.5 (1) Quit Claim Deed dated as of February 27, 1995 * 10.6 (1) General Assignment, Assumption and Agreement Regarding Litigation, Claims and * Other Liabilities between Briggs and the Company, dated as of February 27, 1995 10.7 (1) Transitional Trademark Use and License Agreement between Briggs and the Company, * dated as of February 27, 1995 10.8 (1) Insurance Matters Agreement between Briggs and the Company, dated as of * February 27, 1995 10.9 (1) Employee Benefits and Compensation Agreement between Briggs and the Company, dated * as of February 27, 1995 10.10 (1) Tax Sharing and Indemnification Agreement between Briggs and the * Company, dated as of February 27, 1995 10.11 (1) Interim Administrative Services Agreement between Briggs and the * Company, dated as of February 27, 1995 10.12 (1) Confidentially and Nondisclosure Agreement between Briggs and the Company, dated as of February 27, 1995 * 10.13 (1) Assignments of Patents dated as of February 27, 1995 * 10.14 (1) Supply Agreement between Briggs and the Company, dated as of February 27, 1995 * 10.15 (4) STRATTEC SECURITY CORPORATION Economic Value Added Plan for Executive * Officers and Senior Managers 13.1 Annual Report to Shareholders for the year ended June 28, 1998 13 </TABLE>
12 <TABLE> <CAPTION> Page Number in Sequential Numbering of all Form 10-K and Exhibit Exhibit Pages - ------- ------------- <S> <C> 21 (1) Subsidiaries of the Company * 23 Consent of Independent Public Accountants dated September 9, 1998 34 27 Financial Data Schedule 35 </TABLE> - ----------------------- (1) Incorporated by reference from Amendment No. 1 to the Form 10 filed on January 20, 1995. (2) Incorporated by reference from Amendment No. 2 to the Form 10 filed on February 6, 1995. (3) Incorporated by reference form the April 2, 1995 Form 10-Q filed on May 17, 1995. (4) Incorporated by reference from the July 2, 1995 Form 10-K filed on September 14, 1995. (5) Incorporated by reference from the Proxy Statement for the 1997 Annual Meeting of Shareholders filed on September 10, 1997.