17 2001 STRATTEC Annual Report NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property, Plant, and Equipment: STRATTEC SECURITY CORPORATION (the “Company”) designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related access-control products for North American and global automotive manufacturers. The significant accounting policies followed by the Company in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States. Principles of Consolidation and Presentation: The accompanying financial statements reflect the consolidated results of the Company, its wholly owned Mexican subsidiary, and its foreign sales corporation. Certain amounts previously reported have been reclassified to conform to the July 1, 2001, presentation. These reclassifications have no effect on previously reported net income or retained earnings. Fiscal Year:  The Company’s fiscal year ends on the Sunday nearest June 30. The years ended July 1, 2001, July 2, 2000, and June 27, 1999 are comprised of 52, 53 and 52 weeks, respectively. Use of Estimates:  The preparation of 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Fair Value of Financial Instruments: The fair value of financial instruments does not materially differ from their carrying values. Cash and Cash Equivalents:  Cash and cash equivalents include all short-term investments with an original maturity of three months or less. Inventories:  Inventories are stated at cost, which does not exceed market. The last-in, first-out (LIFO) method was used for determining the cost of the inventories at the end of each period. Inventories consist of the following (thousands of dollars): July 1, July 2, 2001 2000 Finished products $1,737 $3,630 Work in process 8,456 12,374 Raw materials 594 1,054 LIFO adjustment (2,182) (2,716) $8,605 $14,342 Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. Revenue Recognition:  Revenue is recognized upon the shipment of products, net  of estimated costs of returns and allowances. Research and Development Costs: Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. Foreign Currency Translation:  Since December 28, 1998, the functional currency of  the Mexican operation has been the Mexican  peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company’s net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, “Foreign Currency Translation.”  Customer Tooling in Progress:  The Company accumulates its costs for development  of certain tooling used in component production and assembly. The costs, which are primarily from third-party tool vendors, are accumulated on the Company’s balance sheet. These amounts are then billed to the customer upon formal acceptance by the customer of products produced with the individual tool. Property, plant, and equipment are stated at cost, and depreciation is computed using the straight-line method over the following estimated useful lives: Property, plant, and equipment consist of the following (thousands of dollars): Expected Classification Useful Lives Land improvements 20 years Buildings and improvements 20 to 35 years Machinery and equipment 3 to 10 years July 1, July 2, 2001 2000 Land $1,389 $1,317 Buildings and improvements$ 11,780 11,205 Machinery and equipment 82,939 77,390 96,108 89,912 Less: accumulated  depreciation (54,257) (47,531) $41,851 $42,381