in process changes, facilities rearrangement and training associated with Lean Manufacturing initiatives, product mix, and increased U.S. dollar costs at the Company’s Mexico assembly facility. The major portion of the facility’s rearrangement was completed during the first three months of fiscal 2001, and benefits were being realized in the form of cost reduction, inventory reduction and the enhanced ability to meet continually increasing customer requirements for productivity and quality. The increased U.S. dollar costs at the Company’s Mexico assembly facility are the result of the appreciation of the Mexican peso and higher wage inflation in comparison to 1999. The inflation rate in Mexico for the 12 months ended June 2000 was approximately 10 percent while the U.S. dollar/Mexican peso exchange rate fell to approximately 9.5 in 2000, from approximately 9.8 in 1999. In addition, the average cost of zinc per pound, which the Company uses at  a rate of approximately 1 million pounds per month, increased to approximately $.55 in 2000, from approximately $.52 in 1999.  Engineering, selling and administrative expenses were $20.3 million, or 9.0 percent of net sales in 2000, compared to $20.2 million, or 10.0 percent of net sales in 1999. Fiscal 2000 expense levels reflect the favorable impact of moving the Company’s service aftermarket warehouse and distribution to the Milwaukee facility in April 1999. Also, included in current year expenses are development activities associated with new products and the Company’s globalization activities with its alliance partner, WiTTE-Velbert GmbH & Co. KG. Income from operations was $29.1 million in 2000, compared to $26.6 million in 1999, reflecting the increased sales volume as previously discussed. The effective income tax rate in 2000 was 39.0 percent compared to 38.1 percent in 1999. This is due to an increase in the state effective tax rate. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. LIQUIDITY AND  CAPITAL RESOURCES The Company generated cash from operating activities of $23.2 million in 2001 compared to $36.0 million in 2000. The reduction in the generation of cash is due to several factors including decreased sales levels as previously discussed and a reduction in accounts payable and accrued liabilities in  2001 as opposed to an increase in 2000. The changes in accounts payable and accrued liabilities each year were primarily in response to production levels and financial results. In addition, accounts receivable decreased by approximately $1.5 million at July 1, 2001, as compared to July 2, 2000, primarily due to decreased sales. Inventory balances decreased by approximately $5.7 million during the same period as a result of decreased customer vehicle production levels, company focused efforts and the 16-day strike during June 2001 at the Milwaukee facility. Capital expenditures in 2001 were  $7.5 million, compared to $9.4 million in 2000. Expenditures primarily were in support of requirements for new product programs and the upgrade and replacement of existing equipment. The Company anticipates that capital expenditures will be approximately $8 million in fiscal 2002, primarily in support  of requirements for new product programs  and the upgrade and replacement of existing equipment. The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 2,639,395 outstanding shares. A total of 2,160,026 shares have been repurchased as of July 1, 2001, at a cost of approximately $69.0 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided primarily from cash flow from operations and to a lesser extent from borrowings under existing credit facilities. The Company has a $50.0 million unsecured, revolving credit facility (the “Credit Facility”), of which $30 million expires October 31, 2001, and $20 million expires October 31, 2003. There were no outstanding borrowings under the Credit Facility at July 1, 2001. Interest on borrowings under the Credit Facility are at varying rates based, at the Company’s option, on the London Interbank offering rate, the Federal Funds Rate, or the bank’s prime rate. The Credit Facility contains various restrictive covenants including those that require the Company to maintain minimum levels for certain financial ratios such as tangible net worth, ratio of indebtedness to tangible net worth and fixed charge coverage. The Company believes that the Credit Facility will be adequate, along with cash flow from operations, to meet its anticipated capital expenditure, working capital and operating expenditure requirements.  The Company has not been significantly impacted by inflationary pressures over the last several years, except for zinc and Mexican assembly operations as noted elsewhere in this Management's Discussion and Analysis. 2001 STRATTEC Annual Report 11 MANAGEMENT’S DISCUSSION AND ANALYSIS