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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 August 27, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period ended from _________ to _________
Commission File No. 0-619
WSI INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0691607
- --------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15250 Wayzata Boulevard
Wayzata, Minnesota 55391
- --------------------------------------------- --------------------------------
(Address of principal executing offices) (Zip Code)
Registrant's telephone number, including area code (952) 473-1271
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common stock (par value $.10 per share)
---------------------------------------
(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, 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 (ss.229.405 of this chapter) 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. [ ]
The aggregate market value of the common shares held by non-affiliates of the
Registrant on November 13, 2000 (based upon the closing sale price of those
shares on the NASDAQ National Market System) was approximately $7,550,000.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 13, 2000 is 2,465,229.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 11, 2001 are incorporated by reference into Part III.
-------------------------------------
This form 10-K Report consists of 33 pages (including exhibits); the index to
the exhibits is set forth on page 12.
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WSI INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 27, 2000
INFORMATION REQUIRED IN REPORT
PART I
Item 1. Business:
(a) General development of business:
--------------------------------
The Company was incorporated in Minnesota in 1950 for
the purpose of performing precision contract
machining for the aerospace, communication, and
industrial markets. The major portion of Company
revenues are derived from machining work for
agricultural related markets, the aerospace industry,
construction and recreational vehicles markets.
On February 15, 1999, the Company purchased Taurus
Numeric Tool, Inc. ("Taurus") for approximately $7.2
million, with $5.5 million being paid in cash and
bank debt and an additional $1.7 million being in the
form of a Subordinated Promissory Note to the prior
owner. Taurus is a precision contract machining
company that sells primarily to the aerospace and
avionics markets.
On August 6, 1999, the Company purchased Bowman Tool
& Machining, Inc. ("Bowman") for approximately $7.6
million, with $6.8 million being paid by additional
debt and $844,000 being paid in the form of a
Subordinated Promissory Note to the prior owner of
Bowman. An additional amount of $750,000 was earned
by the seller in connection with the purchase which
was added to the Promissory Note. Bowman is a
precision contract machining company serving the
construction industry.
The acquisitions were completed as a result of the
Company's publicly stated objective of diversifying
the markets that it serves.
During fiscal 2000, the Company closed its Long Lake,
Minnesota facility and consolidated all of its
manufacturing operations into its facilities at
Taurus and Bowman in Osseo, Minnesota and Rochester,
Minnesota, respectively. The initiative placed the
Company in closer proximity to its major customers as
well as reduced its overhead structure and optimized
its plant capacity.
Contract manufacturing constitutes the Company's
entire business.
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(b) Financial information about industry segments:
----------------------------------------------
As noted above, the Company's business is now
conducted in a single industry segment--contract
manufacturing.
(c) Narrative description of the business:
--------------------------------------
(1)(i) The principal products and services of the
Company are set forth below.
The Company manufactures metal components in medium
to high volumes requiring tolerances as close as one
ten-thousandth (.0001) of an inch. These components
are manufactured in accordance with customer
specifications using materials generally purchased by
the Company, but occasionally supplied by the
customer. The major markets served by the Company
have changed in the past several years because of the
Company's effort to diversify its customer and market
base. Sales to the agricultural industry were 76%,
53% and 35% of total Company sales in fiscal years
1998, 1999 and 2000, respectively. Sales to the
recreational vehicle market totaled 13% and 9% in
1999 and 2000, respectively. Sales to the
aerospace/avionics market totaled 12% and 9% in
fiscal 1999 and 2000, respectively. Sales to the
construction/power systems market totaled 20% in
fiscal 2000.
The Company has a reputation as a dependable supplier
one capable of meeting stringent specifications to
produce quality components at high production rates.
The Company has demonstrated an ability to develop
sophisticated manufacturing processes and controls
essential to produce precision and reliability in its
products.
* * * * *
(ii) The Company's machining business is
continually developing or modifying
processes, but no new single process in
development is expected to require the
investment of a material amount of the
assets of the Company.
(iii) Purchased materials for the Company are
generally available in adequate supply.
(iv) Patents and trademarks are not deemed
significant to the Company.
(v) Seasonal patterns in the Company's business
are reflections of its customers seasonal
patterns since the Company's business is
that of a provider of manufacturing
services.
(vi) The Company does not believe that its
business demands unusual working capital
requirements.
(vii) Sales in excess of 10 percent of fiscal 2000
consolidated sales were made to Deere & Co.
and related entities in the amount of
$17,084,000 or 53% of
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Company revenues. Sales were also made to ZF
Industries in the amount of $3,108,000 or
10% of Company revenues as well as Polaris
in the amount of $3,406,000 or 11% of sales.
(viii) Approximate dollar backlog at August 27,
2000, August 29, 1999, and August 30, 1998
was $23,876,000, $16,032,000 and $8,831,000
respectively. Backlog is not deemed to be
any more significant for the Company than
for other companies engaged in similar
businesses. The above backlog amounts are
believed to be firm, and no appreciable
amount of the backlog as of August 27, 2000
is scheduled for delivery later than during
the current fiscal year.
(ix) No material portion of the contract business
is subject to renegotiation of profits or
termination of contracts or subcontracts at
the election of the government.
(x) Although there are a large number of
companies engaged in machining, the Company
believes the number of entities with the
technical capability and capacity for
producing products of the class and in the
volumes manufactured by the Company is
relatively small. Competition is primarily
based on product quality, service, timely
delivery, and price.
(xi) No material amount has been spent on
company-sponsored research and development
activities.
(xii) No material capital expenditures for
environmental control were made or are
anticipated in the foreseeable future.
(xiii) At August 27, 2000, the Registrant had 109
employees, none of whom were subject to a
union contract.
(d) Financial information about foreign and domestic
operations and export sales:
-----------------------------------------------------
The Company has no operations in any foreign country.
The Company's export sales in fiscal 1999 and 1998
were not significant. In 2000, sales to companies in
Mexico amounted to $2,061,000. See Note 8 to the
Consolidated Financial Statements.
Item 2. Properties:
The Company's former executive offices and production facility
were located in Long Lake, Minnesota (a western suburb of
Minneapolis). The one-story, concrete block building is owned
by the Company, contains approximately 182,500 square feet of
floor space, and is located on approximately 25 acres of
property owned by the Company and is currently listed for
sale.
The Company leases two production facilities that are located
in Osseo, Minnesota and Rochester, Minnesota. The Rochester
facility is approximately 38,000 square feet with the lease
being for six month periods with options to renew. The Osseo
facility is approximately 28,000 square feet and is leased
until February, 2002 with options to renew. In connection with
the Rochester operation, the Company also leases approximately
15,000 square feet at a
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location that primarily stores raw material. This lease is
also for six month increments and is renewable.
The Company considers its manufacturing equipment, facilities,
and other physical properties to be suitable and adequate to
meet the requirements of its business.
Item 3. Legal Proceedings:
Registrant is not a party to any material legal proceedings,
other than ordinary routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 4A. Executive Officers of Registrant:
The following table sets forth certain other information
regarding Registrant's executive officers:
Name Age Position
---------------------- --- ------------------------------------------------------
George J. Martin 63 Chairman of the Board
Michael J. Pudil 52 President, Chief Executive Officer, and Director
Paul D. Sheely 41 Vice President, Treasurer, and Assistant Secretary
Gerald E. Magnuson 70 Secretary and Director
Mr. Martin was engaged as Chairman of the Board on July 28,
1993 and previously served as the Company's Chief Executive
Officer from December 1983 to January 1985 and on an interim
basis from July 1993 to November 1993. Mr. Martin was the
President, Chief Executive Officer and Chairman of PowCon,
Incorporated, a manufacturer of electronic welding systems,
from 1987 to October 1995. Mr. Martin now serves as an
independent consultant.
Mr. Pudil was elected President, Chief Executive Officer, and
a Director of the Company on November 4, 1993. During the
prior nine years, Mr. Pudil served as General Manager and Vice
President and General Manager of the Production Division for
Remmele Engineering, Inc. Remmele Engineering is a contract
manufacturer primarily involved in machining metal.
Mr. Sheely joined the Company in September 1998 as Vice
President of Finance. From 1996 to 1998 he served as Chief
Financial Officer of Graseby Medical, Inc., a medical device
manufacturer of volumetric infusion pumps.
Mr. Magnuson has served as Secretary of the Company since 1961
and as a Director since 1962. He is a retired partner of the
law firm of Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters:
(a) The common stock of the Company is traded on the
and NASDAQ Small Cap Market System under the symbol WSCI.
(c)
Common stock information:
Stock Price
-------------------------------
High Low
FISCAL 2000:
First quarter $4-7/8 $3-1/2
Second quarter 5-5/8 3
Third quarter 6 3-5/8
Fourth quarter 5 3-3/4
FISCAL 1999:
First quarter $6-11/16 $5-1/2
Second quarter 6 4-13/16
Third quarter 5-3/16 2-3/4
Fourth quarter 4-5/8 2-7/8
The Company's credit agreement restricts payment of
dividends. The Company has not paid any cash
dividends since fiscal 1992 and does not anticipate
payment of cash dividends in the foreseeable future.
(b) As of November 13, 2000 there were 585 shareholders
of record of the Company's Common Stock.
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Item 6. Selected Financial Data:
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 32,157 $ 21,550 $ 23,948 $ 24,153 $ 20,173
Cost of products sold 26,746 18,279 19,547 20,495 18,555
----------- ---------- --------- ---------- ----------
Gross margin 5,411 3,271 4,401 3,658 1,618
Selling and administrative expense 4,572 2,661 2,453 2,329 2,145
Pension curtailment (gain) (353) - - - -
Interest and other income (472) (158) (162) (583) (658)
Interest expense 998 481 190 286 492
----------- ---------- --------- ---------- ----------
Earnings (loss) from continuing
operations before taxes 666 287 1,920 1,626 (361)
Income tax expense 27 26 46 42 6
----------- ---------- --------- ---------- ----------
Net earnings (loss) $ 639 $ 261 $ 1,874 $ 1,584 $ (367)
=========== ========== ========= ========== ===========
Basic earnings (loss)
per common share $ .26 $ .11 $ .77 $ .65 $ (.15)
=========== ========== ========= ========== ===========
Average number of common shares 2,462 2,452 2,434 2,425 2,411
Diluted earnings (loss) per common
and dilutive potential common share $ .25 $ .10 $ .73 $ .64 $ (.15)
=========== ========== ========= ========== ===========
Average number of common
and dilutive potential
common shares 2,535 2,527 2,555 2,482 2,411
Additional information:
Financial Data:
Working capital $ 1,721 $ 1,411 $ 3,239 $ 3,241 $ 2,196
Total plant and equipment additions 916 1,238 2,102 507 1,694
Long-term debt 9,601 10,666 1,802 2,671 4,124
Total assets 23,432 24,525 13,615 12,791 11,573
Cash flow from operations 1,961 2,641 3,047 2,610 1,720
Stockholders' equity 8,945 8,264 7,995 6,055 4,453
Financial Ratios:
Current ratio 1.35:1 1.27:1 1.94:1 1.90:1 1.87:1
Percentage of long term debt to equity 107% 129% 23% 44% 93%
Book value per basic common share $ 3.63 $ 3.37 $ 3.28 $ 2.50 $ 1.85
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
LIQUIDITY AND CAPITAL RESOURCES:
As discussed in Item 1., the Company purchased both Taurus Numeric Tool, Inc.
and Bowman Tool & Machining, Inc. during fiscal 1999.
The net result of these transactions was the addition of $4.4 million of term
debt from the Company's bank, $2.5 million from a mortgage from the same bank,
$1.3 million from the Company's Revolving Line of Credit, and $2.5 million from
Subordinated Promissory Notes to the seller of Bowman and Taurus.
During fiscal 2000, the Company paid down $1.6 million of the term debt and
$167,000 of the mortgage. Also during 2000, the seller of Bowman earned the
first of two possible contingencies. Therefore, an additional $750,000 was added
to his Subordinated Promissory Note Payable.
The Company's working capital of $1,721,000 on August 27, 2000 reflected an
increase of $310,000 from the prior year. Larger fluctuations in working capital
included an increase in accounts receivable along with a decrease in acquisition
payments due offset by a decrease in inventory and an increase in accounts
payable. The fiscal 2000 ratio of current assets to current liabilities
increased to 1.35 to 1.0 from 1.27 to 1.0 for fiscal 1999.
Cash provided by operating activities in fiscal 2000 was $1,961,000. Non-cash
charges for depreciation and amortization as well as changes in elements of
working capital primarily accounted for the cash provided by operating
activities. Cash provided by operations was $2,641,000 in fiscal 1999 and
$3,047,000 in fiscal 1998.
Additions to property, plant and equipment were $916,000 in fiscal 2000 compared
to $1,238,000 in 1999 and $2,102,000 in 1998. These amounts included $433,000,
$980,000 and $1,390,000 of machinery acquired through capital leases in 2000,
1999 and 1998, respectively. The major 2000 capital expenditures consisted of
the acquisition of new production equipment.
Proceeds from the sale of equipment amounted to $746,000 and $57,000 in fiscal
2000 and1999, respectively. The relatively large proceeds in 2000 resulted from
the sale of excess equipment derived from the consolidation initiative.
The Company's total debt was $10,837,000 at August 27, 2000 and consisted of
$2,771,000 of bank Term Debt, a $2,333,000 mortgage, seller subordinated notes
of $3,257,000 and capital lease obligations of $2,476,000.
At August 27, 2000 and August 29, 1999 the Company had available a line of
credit of $3,000,000. At August 27, 2000 and August 29, 1999, the outstanding
balance on the line was $369,000 and $280,000, respectively.
It is managements' belief that internally generated funds combined with the line
of credit will be sufficient to enable the Company to meet its financial
requirements during fiscal 2001.
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RESULTS OF OPERATIONS:
Net sales of $32,157,000 increased $10,607,000 or 49% from fiscal 1999 sales of
$21,550,000 and $8,209,000 or 34% from fiscal 1998 sales of $23,948,000. The
increase in sales was primarily due to having Taurus and Bowman operations for a
full year versus 6 1/2 months and 3 weeks, respectively, in fiscal 1999.
In fiscal 2000, the Company reported net earnings of $639,000 or $.25 per share
compared to net earnings of $261,000 or $.10 per share in 1999 and $1,874,000 or
$.73 per share in 1998. The net earnings in fiscal 2000 included a gain from the
termination of the Company's defined pension plan of $354,000, a gain on the
sale of excess equipment of $395,000, and $248,000 in severance costs paid to
employees affected by the Long Lake plant shutdown.
The gross margin on parts sold in fiscal 2000 was 16.8% of sales compared to
15.2% of sales and 18.4% of sales in 1999 and 1998, respectively. The increase
in 2000 versus 1999 resulted from the full year effect of Taurus and Bowman with
their traditionally higher margin business. Gross margin in 2000 was negatively
affected by relocation and training costs associated with the consolidation
initiative.
Selling and administrative expense of $4,324,000 in fiscal 2000 was an increase
of $1,663,000 and $1,871,000 from fiscal years 1999 and 1998, respectively. The
majority of both increases were related to the addition of Taurus and Bowman
expenses.
Interest and other income of $76,000 was $81,000 lower in fiscal 2000 than 1999,
and $85,000 lower than 1998 primarily due to less interest income due to lower
average cash balances.
Interest and other expense of $998,000 in fiscal 2000 was $516,000 higher than
1999 and $807,000 higher than 1998 because of higher debt levels due to the
acquisitions as well as the effect of having those debt levels for a full year
as opposed to a partial year in 1999.
Income tax expense is significantly less than the statutory amount due to the
utilization of net operating loss carryforwards in each of fiscal 2000, 1999 and
1998.
See Notes to Consolidated Financial Statements regarding recent accounting
standards to be adopted.
CAUTIONARY STATEMENT:
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the letter to shareholders, elsewhere in
the Annual Report, in the Company's Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements." These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Company's ability to obtain additional
manufacturing programs and retain current programs; (ii) the loss of significant
business from any one of its current customers could have a material adverse
effect on the Company; (iii) a significant downturn in the industries in which
the Company
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participates, principally the agricultural industry, could have an adverse
effect on the demand for Company services; (iv) the ability of the Company to
integrate its acquisitions with their current operations. The foregoing list
should not be construed as exhaustive and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Item 8. Financial Statements and Supplementary Data:
See Consolidated Financial Statements section of this Annual
Report on Form 10-K beginning on page 15, attached hereto,
which consolidated financial statements are incorporated
herein by reference.
Quarterly earnings summary (unaudited):
Basic Diluted
Net Gross Net Earnings Earnings
Sales Margin Earnings Per Share Per Share
FISCAL 2000:
First quarter $ 7,294,952 $1,027,357 $ 50,674 $ .02 $ .02
Second quarter 7,710,690 1,098,074 (223,164) (.09) (.09)
Third quarter 9,085,495 1,873,792 602,817 .24 .23
Fourth quarter 8,065,830 1,412,028 208,917 .08 .08
FISCAL 1999:
First quarter $ 5,640,708 $ 825,031 $ 276,972 $ .11 $ .11
Second quarter 3,729,158 166,007 (421,144) (.17) (.17)
Third quarter 5,989,248 955,757 57,334 .02 .02
Fourth quarter 6,190,747 1,324,574 347,903 .14 .14
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PART III
Pursuant to General Instruction G(3), Registrant omits Part
III, Items 10, 11, 12, and 13, except that portion of Item 10
relating to Executive Officers of the Registrant (which is
included in Part I, Item 4A), as a definitive proxy statement
will be filed with the Commission pursuant to Regulation 14(a)
within 120 days after August 27, 2000, and such information
required by such items is incorporated herein by reference
from the proxy statement.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) Documents filed as part of this report:
1. Consolidated Financial Statements: Reference is
made to the Index to Consolidated Financial
Statements (page 15) hereinafter contained for all
Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts -
page 31
Schedules not listed above have been omitted,
because they are either not applicable or not
material, or the required information is included
in the financial statements or related notes.
3. Exhibits.
Exhibit Page
No. Description No.
---------- -------------------------------------------------------- ------------
3.1 Articles of Incorporation as amended,
incorporated by reference from Exhibit
3 of the Registrant's Form 10-Q for
the quarter ended November 29, 1998.
3.2 Bylaws, as amended, incorporated by
reference from exhibit 3.2 of the
Registrant's Form 10-K for the year
ended August 29, 1999.
10.1 1987 Stock Option Plan, incorporated
by reference from Exhibit 10.4 of the
Registrant's Form 10-K for the fiscal
year ended August 30, 1987.
10.2 Amendment dated August 31, 1989 to the
1987 Stock Option Plan, incorporated
by reference from Exhibit 10.5 of the
Registrant's Form 10-K for the fiscal
year ended August 27, 1989.
10.3 Washington Scientific Industries, Inc.
1994 Stock Plan, incorporated by
reference from Exhibit 4.1 of the
Registrant's Form S-8 as registered on
May 14, 1999.
10.4 Employment Agreement between Michael
J. Pudil and Registrant dated November
4, 1993, is incorporated by reference
from Exhibit 10.4 of Registrant's Form
10K for the fiscal year ended August
28, 1994.
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Exhibit Page
No. Description No.
---------- -------------------------------------------------------- ------------
10.5 Amendment dated January 9, 1997 to the
employment agreement between the
Registrant and Michael J. Pudil
incorporated by reference from Exhibit
10 of the Registrant's Form 10-Q for
the quarter ended February 23, 1997.
10.6 Employment (Change of Control) Agreement
between Michael J. Pudil and the Registrant
dated October 18, 1995 incorporated by
reference from Exhibit 10.8 of the
Registrant's Form 10-K for the year
ended August 27, 1995.
10.7 Amended and Restated Credit and
Security Agreement between the Company
and FBS Business Finance Corporation
dated March 31, 1995, incorporated by
reference from Exhibit 10.4 of the
Registrant's Form 10-Q for the quarter
ended February 26, 1995.
10.8 Stock Purchase Agreement dated August
6, 1999, between William D. Bowman and
the Registrant incorporated by
reference from Exhibit 2.1 of Form 8-K
filed August 21, 1999.
10.9 Stock Purchase Agreement dated
February 15, 1999 between Rodney
Winter and the Registrant incorporated
by reference from Exhibit 2.1 of Form
8-K filed February 28, 1999.
10.10 Fifth Amendment to Amended and
Restated Credit and Security Agreement
dated August 6, 1999, incorporated by
reference from Exhibit 4.1 of the
Registrant's Form 8-K filed August 21,
1999.
10.11 Loan Agreement dated August 6, 1999
between Registrant and US Bank
National Association incorporated from
Exhibit 4.2 of the Registrant's Form
8-K filed August 21, 1999.
23.1 Consent of Ernst & Young LLP. 32
27 Financial Data Schedule. 33
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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.
WSI INDUSTRIES, INC.
BY: /s/ Michael J. Pudil
-------------------------------------
Michael J. Pudil, President and
Chief Executive Officer
BY: /s/ Paul D. Sheely
-------------------------------------
Paul D. Sheely
Vice President and Treasurer
DATE: November 20, 2000
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 dates indicated:
Signature Title Date
--------- ----- ----
/s/ Michael J. Pudil President, Chief Executive Officer, November 20, 2000
- --------------------------------------------
Michael J. Pudil Director
/s/ Paul Baszucki Director November 20, 2000
- --------------------------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 20, 2000
- --------------------------------------------
Melvin L. Katten
/s/ Gerald E. Magnuson Director November 20, 2000
- --------------------------------------------
Gerald E. Magnuson
/s/ George J. Martin Director November 20, 2000
- --------------------------------------------
George J. Martin
/s/ Eugene J. Mora Director November 20, 2000
- --------------------------------------------
Eugene J. Mora
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INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 16
Consolidated Balance Sheets - August 27, 2000 and August 29, 1999 17
Consolidated Statements of Income - Years Ended August 27, 2000,
August 29, 1999 and August 30, 1998 18
Consolidated Statements of Stockholders' Equity - Years Ended
August 27, 2000, August 29, 1999, August 30, 1998 19
Consolidated Statements of Cash Flows - Years Ended August 27, 2000,
August 29, 1999 August 30, 1998 20
Notes to Consolidated Financial Statements 21
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 31
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WSI Industries, Inc.
We have audited the accompanying consolidated balance sheets of WSI Industries,
Inc. and subsidiaries as of August 27, 2000 and August 29, 1999, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended August 27, 2000, August 29, 1999 and August 30, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WSI Industries,
Inc. and subsidiaries as of August 27, 2000 and August 29, 1999, and the
consolidated results of their operations and their cash flows for the years
ended August 27, 2000, August 29, 1999 and August 30, 1998 in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
ERNST & YOUNG LLP
Minneapolis, Minnesota
October 13, 2000
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 27, 2000 AND AUGUST 29, 1999
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,300 $ 131,588
Accounts receivable, less allowance for doubtful
accounts of $27,500 at each year-end 3,713,198 2,962,268
Inventories 2,738,346 3,491,900
Prepaid and other current assets 148,206 72,478
--------------- ---------------
Total current assets 6,606,050 6,658,234
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 4):
Land 66,906 66,906
Buildings and improvements 5,198,081 5,198,081
Machinery and equipment 16,347,768 22,670,046
--------------- ---------------
21,612,755 27,935,033
Less accumulated depreciation 10,957,059 15,753,124
--------------- ---------------
Total property, plant, and equipment 10,655,696 12,181,909
INTANGIBLE ASSETS:
Goodwill and related acquisition costs 6,169,919 5,684,869
--------------- ---------------
$ 23,431,665 $ 24,525,012
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 3) $ 369,134 $ 279,578
Trade accounts payable 2,041,089 1,438,324
Accrued compensation and employee withholdings 857,739 627,731
Accrued real estate taxes 151,230 166,709
Miscellaneous accrued expenses 229,719 549,946
Acquisition payments due - 742,733
Current portion of long-term debt (Note 3) 1,236,460 1,442,199
--------------- ---------
Total current liabilities 4,885,371 5,247,220
Long-term debt, less current portion (Note 3) 9,601,003 10,666,120
Long-term pension liability (Note 7) - 347,437
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY (Note 5):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,465,229 and
2,453,425 shares, respectively 246,523 245,343
Capital in excess of par value 1,640,934 1,600,302
Retained earnings 7,057,834 6,418,590
--------------- ---------------
Total stockholders' equity 8,945,291 8,264,235
--------------- ---------------
$ 23,431,665 $ 24,525,012
=============== ===============
See notes to consolidated financial statements.
17
18
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Net sales (Note 8) $ 32,156,967 $ 21,549,861 $ 23,948,116
Cost of products sold 26,745,715 18,278,492 19,547,136
---------------- --------------- ---------------
Gross margin 5,411,252 3,271,369 4,400,980
Selling and administrative expense 4,323,892 2,660,683 2,452,496
Pension curtailment (gain) (353,375) - -
Gain on sale of equipment (395,382) - -
Severance costs 248,506 - -
Interest and other income (76,223) (157,748) (161,753)
Interest expense 997,690 481,569 190,353
---------------- --------------- ---------------
4,745,108 2,984,504 2,481,096
---------------- --------------- ---------------
Income before income taxes 666,144 286,865 1,919,884
Income tax expense (Note 6) 26,900 25,800 45,800
---------------- --------------- ---------------
Net income $ 639,244 $ 261,065 $ 1,874,084
================ =============== ===============
Basic earnings per share $ .26 $ .11 $ .77
=============== =============== ===============
Diluted earnings per share $ .25 $ .10 $ .73
=============== =============== ===============
Weighted average number of common
shares outstanding 2,461,980 2,451,836 2,434,125
================ =============== ===============
Weighted average number dilutive
common shares outstanding 2,535,197 2,527,299 2,555,518
================ =============== ===============
See notes to consolidated financial statements.
18
19
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK CAPITAL TOTAL
---------------------- IN EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
------ ------ ------------ --------- -------------
BALANCE AT AUGUST 31, 1997 2,428,980 $ 242,898 $ 1,528,785 $4,283,441 $ 6,055,124
Net earnings 1,874,084 1,874,084
Exercise of stock options 19,820 1,982 63,730 65,712
------------ ---------- ----------- ---------- ------------
BALANCE AT AUGUST 30, 1998 2,448,800 244,880 1,592,515 6,157,525 7,994,920
Net earnings 261,065 261,065
Exercise of stock options 4,625 463 7,787 8,250
------------ ---------- ----------- ---------- ------------
BALANCE AT AUGUST 29, 1999 2,453,425 245,343 1,600,302 6,418,590 8,264,235
Net earnings 639,244 639,244
Exercise of stock options 11,804 1,180 40,632 41,812
------------ ---------- ----------- ---------- ------------
BALANCE AT AUGUST 27, 2000 2,465,229 $ 246,523 $ 1,640,934 $7,057,834 $ 8,945,291
============ ========== =========== ========== ============
See notes to consolidated financial statements.
19
20
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 639,244 $ 261,065 $ 1,874,084
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,382,267 1,530,523 1,115,529
Gain on sale of property, plant, and equipment
and other assets (393,843) (48,164) -
Increase (decrease) in pension liability (347,437) (32,636) (87,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (750,930) 1,515,192 (307,286)
Inventories 753,554 (429,587) 437,020
Prepaid and other current assets (75,728) 159,260 (117,420)
(Decrease) increase in accounts payable and accrued expenses (245,666) (314,294) 131,692
------------ ------------- ------------
Net cash provided by operating activities 1,961,461 2,641,359 3,046,619
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (483,801) (257,897) (793,497)
Proceeds from sale of equipment and other assets 746,165 57,036 -
Purchase of subsidiaries, net of cash assumed (27,000) (8,704,234) -
------------ ----------- ------------
Net cash provided by (used in) investing activities 235,364 (8,905,095) (793,497)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 13,021,304 6,690,399 -
Payments of long-term debt (15,385,229) (3,000,429) (2,469,328)
Issuance of common stock 41,812 8,250 65,712
----------- ------------ ------------
Net cash provided by (used in) financing activities 2,322,113 3,698,220 (2,403,616)
----------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (125,288) (2,565,516) (150,494)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131,588 2,697,104 2,847,598
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,300 $ 131,588 $ 2,697,104
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,004,800 $ 420,874 $ 192,071
Income taxes 32,383 45,361 71,777
Noncash investing and financing activities:
Acquisition of machinery through capital lease 432,625 980,250 1,308,517
Acquisition related debt 750,000 5,206,657
See notes to consolidated financial statements.
20
21
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - WSI Industries, Inc. and Subsidiaries' (the Company) fiscal
years represent a 52- to 53-week period ending the last Sunday in August.
Fiscal 2000, 1999 and 1998 each consisted of 52 weeks.
Basis of Presentation - The consolidated financial statements include the
accounts of WSI Industries, Inc. and its subsidiaries. All material
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, bank account balances and money market investments including debt
obligations issued by the U. S. Government or its agencies and corporate
obligations. Cash equivalents are carried at cost plus accrued interest
which approximates fair value.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market. Inventory costs consist of material, direct
labor, and manufacturing overhead. The Company's inventories are stated
net of valuation allowances of approximately $131,789 and $155,000 at
August 27, 2000 and August 29, 1999, respectively. Inventories consist
primarily of raw material and work-in-process.
Depreciation - The cost of buildings and substantially all equipment is
being depreciated using the straight-line method. The estimated useful
lives of the assets are as follows:
Buildings and improvements 15 to 32 years
Machinery and equipment 3 to 10 years
Transportation equipment 3 to 5 years
The Company evaluates long-term assets on a periodic basis in compliance
with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-lived Assets when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets carrying amount.
Income Taxes - The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary differences
between the financial reporting and tax bases of assets and liabilities.
Revenue Recognition - Revenues from sales of product are recorded upon
shipment. The Company performs periodic credit evaluations of its
customers' financial condition. Credit losses relating to customers have
been minimal and within management's expectations.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
21
22
Earnings per Share - Basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings
per share is computed using the combination of dilutive common share
equivalents and the weighted average number of common shares outstanding.
Stock Options - The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, but applies Accounting Principles Board
Opinion No. 25 (APB 25) and related interpretation in accounting for its
plans. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Reclassification - Certain prior year items have been reclassified to
conform to the current year presentation.
2. ACQUISITIONS
On February 15, 1999, the Company completed the acquisition of Taurus
Numeric Tool, Inc. ("Taurus") by purchasing all the shares of common
stock from its sole shareholder. The value of the transaction was
approximately $7.2 million including acquisition costs, with $5.5 million
being paid by cash and debt borrowings, and an additional $1.7 million
being in the form of a Subordinated Promissory Note to the prior owner.
The acquisition was accounted for by the purchase method.
The Taurus consideration was allocated to assets and liabilities based on
fair values as follows:
Net assets acquired $ 4,535,000
Goodwill and other intangible assets 2,713,000
-------------
$ 7,248,000
On August 6, 1999, the Company completed the acquisition of Bowman Tool &
Machining, Inc. ("Bowman") by purchasing all the shares of common stock
from its sole shareholder. The value of the transaction was approximately
$7.6 million, with $6.8 million being paid by debt borrowings, and
approximately $844,000 being paid in the form of a Subordinated
Promissory Note to the prior owner. The acquisition was accounted for by
the purchase method.
The Bowman consideration was allocated to assets and liabilities based on
fair values as follows:
Net assets acquired $ 4,560,000
Goodwill and other intangible assets 3,054,000
-------------
$ 7,614,000
Goodwill and other intangible assets are being amortized over their
estimated useful lives of 20 years on a straight-line basis. Amortization
for the years ended August 27, 2000 and August 29, 1999 was $291,950 and
$82,300, respectively.
The following table shows the unaudited pro forma consolidated results of
operations for fiscal 1999 as if both Taurus and Bowman had been acquired
as of the beginning of that period:
22
23
Unaudited Pro Forma Consolidated Results
Year Ended August 29, 1999
----------------------------------------
Sales $ 33,802,000
Net earnings $ 2,105,000
Net earnings per share $ .83
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for
the entire period presented. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might
have been achieved from combined operations.
3. DEBT
Long-term debt consisted of the following:
August 27, 2000 August 29, 1999
--------------- ---------------
Bank term debt $ 2,771,428 $ 4,400,000
Mortgage note payable 2,333,332 2,500,000
Subordinated promissory notes 3,256,657 2,506,657
Capitalized lease obligations (Note 3) 2,476,046 2,701,662
------------- --------------
10,837,463 12,108,319
Less current portion 1,236,460 1,442,199
------------- --------------
Long-term debt $ 9,601,003 $ 10,666,120
============= ==============
During fiscal 1999, the Company renegotiated its term debt and its line
of credit with the same bank with which the Company previously had its
debt and line of credit. The agreement requires principal payments of
$52,381 per month on the Term Note with the agreement expiring on March
31, 2002. Interest on the term debt is calculated at the bank's base rate
(9.5% at August 27, 2000 and 8.25% at August 29, 1999) plus .75% and is
also paid monthly.
During fiscal 1999 the Company obtained a mortgage with the same bank
that it currently has its term debt and line of credit facility. The
agreement requires monthly principal payments of $13,889. Interest on the
mortgage is calculated at the bank's base rate plus 1.0% and is paid
monthly. The entire balance is due August 6, 2004.
Interest on the line of credit is at the bank's base rate plus 0.5
percentage points. The line expires March 31, 2002. The agreement
provides for secured borrowing of up to $3,000,000; however, the Company
is charged an annual unused credit line fee of 0.5%. At August 27, 2000
and August 29, 1999, there was a balance outstanding of $369,134 and
$279,578, respectively.
Restrictive provisions of the agreement require, among other provisions,
that the Company (1) maintain a net worth of not less than $7,000,000,
(2) maintain a ratio of liabilities to net worth not greater than 4.0 to
1.0, (3) limit capital expenditures to $3,000,000 in each fiscal year
with no more than $1,000,000 coming from its line of credit and (4)
maintain a defined cash flow coverage ratio of no less than 1.1 to 1.0.
Cash dividends are fully restricted. At August 27, 2000 and August 29,
1999, the Company was in compliance with the various covenants of the
credit agreement.
23
24
The notes, line of credit and capital leases are collateralized by the
receivables, inventories, and property, plant, and equipment of the
Company. The mortgage is secured by the building in Long Lake, Minnesota.
During fiscal 1999, and in connection with the acquisitions of Bowman
Tool & Machining, Inc. and Taurus Numeric Tool, Inc., the Company entered
into Subordinated Promissory Notes with the sellers of the respective
companies. The agreements call for quarterly interest payments at 7.75%.
The note in connection with the Bowman transaction is due in three equal
annual installments commencing August 6, 2002. The note in connection
with the Taurus transaction is also due in three equal annual
installments commencing February 15, 2002. The notes are subordinated to
all bank debt and the mortgage, but are collateralized by equipment. Also
in connection with the acquisitions, both sellers had contingent payments
that they could earn if certain sales or profitability targets were met.
In fiscal 2000 the seller of Bowman met his first contingent payment and
$750,000 was added to his subordinated promissory note effective August
6, 2000.
Maturities of long-term debt, excluding capital lease obligations, for
the fiscal years subsequent to August 27, 2000 are as follows:
2001 $ 795,240
2002 3,395,076
2003 1,252,220
2004 2,918,881
------------
$ 8,361,417
============
4. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 27, 2000
are cost and accumulated depreciation on equipment subject to capitalized
leases of $5,851,666 and $3,143,779, respectively. At August 29 1999, the
amounts were $5,439,045 and $2,531,647, respectively.
The present value of the net minimum payments on capital leases as of
August 27, 2000 is as follows:
Capital
Leases
Fiscal years ending August: ------------
2001 $ 680,907
2002 680,907
2003 553,260
2004 510,801
2005 408,882
Thereafter 179,795
------------
Total minimum lease payments 3,014,552
Less amount representing interest 538,506
------------
Present value of net minimum lease payments 2,476,046
Current portion 441,220
------------
Capital lease obligation, less current portion $ 2,034,826
============
24
25
The Company leases its Taurus facility under an operating lease that
expires in February, 2002 with a monthly base rent of $8,900. Operating
expenses and real estate taxes are paid by the Company.
The Company also leases its Bowman facility under a lease that expires in
February, 2001 for $10,000 per month and is also responsible for
operating expenses and real estate taxes. The Company also rents a
storage warehouse for $5,833 per month under a lease that expires in
April, 2001.
The Company leases its corporate office under a lease that expires April,
2001 with a monthly base rent of $3,232. The Company also has various
equipment leases that expire in 2001.
Future minimum lease payments for operating leases are:
Fiscal years ending August:
2001 $ 240,482
2002 40,980
------------
Total minimum lease payments $ 281,462
============
Rent expense of approximately $386,000, $67,000, and $1,000 have been
charged to operations for the years ended August 27, 2000, August 29,
1999, and August 30, 1998, respectively.
5. STOCK OPTIONS
Stock Options - In fiscal 1988, the 1987 stock option plan was approved
and 175,000 shares of common stock were reserved for granting of options
to officers, key employees, and directors. No shares remain available for
grant from this plan since the term of grant is limited to ten years from
the date of the plan.
In fiscal 1995, the 1994 stock option plan was approved and 250,000
shares of common stock were reserved for granting of options to officers,
key employees, and directors. During fiscal 1999, the plan was amended to
reserve an additional 200,000 shares. At August 27, 2000, 136,666 shares
remained reserved and available for grant under the plan.
Option transactions during the three years ended August 27, 2000 are
summarized as follows:
1987 Stock 1994 Stock
Option Plan Option Plan
-------------------------- -----------------------
Average Average
Shares Price Shares Price
-------- ------- ------- -------
Outstanding at August 31, 1997 140,000 $ 2.38 127,000 $ 4.46
Granted - 25,000 4.75
Lapsed - - (9,666) 4.03
Exercised (12,000) 3.01 (8,334) 3.85
-------- --------
Outstanding at August 30, 1998 128,000 2.32 134,000 4.58
Granted - 125,000 4.99
Lapsed - -
Exercised (5,000) 2.06 -
-------- --------
Outstanding at August 29, 1999 123,000 2.33 259,000 4.78
Granted - 55,000 4.13
Lapsed (5,000) 3.63 (9,000) 4.56
Exercised - (13,500) 3.62
-------- --------
Outstanding at August 27, 2000 118,000 $ 2.26 291,500 $ 4.71
======== ========
25
26
The following pro forma information has been determined as if the
Company had accounted for its stock options under the fair value method
of SFAS 123. The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model with the following
assumptions for grants issued during fiscal 2000, fiscal 1999 and fiscal
1998 as set forth in the table below. The estimated fair value of the
options is amortized to expense over the options' vesting period.
2000 1999 1998
---- ---- ----
Dividend yield None None None
Expected volatility 38.6% 47.7% 43.9%
Risk free interest rate 6.0% 6.0% 5.5%
Expected term 10 years 10 years 5 years
The Company's net income and income per share would be adjusted to the
pro forma amounts as follows:
Years ended
-------------------------------------------------------------------
August 27, 2000 August 29, 1999 August 30, 1998
--------------- --------------- ---------------
Net Income:
As reported $ 639,244 $ 261,065 $ 1,874,084
Pro forma 383,094 $ 71,632 $ 1,738,962
Income per basic common share:
As reported $ .26 $ .11 $ .77
Pro forma $ .16 $ .03 $ .71
Income per diluted common share:
As reported $ .25 $ .10 $ .73
Pro forma $ .15 $ .03 $ .68
As of August 27, 2000, there were 108,000 options outstanding with
exercise prices between $2.00 and $2.13, 186,500 options outstanding
with exercise prices between $3.00 and $4.75, and 115,000 options
outstanding with exercise prices between $5.50 and $6.13. At August 27,
2000, outstanding options had a weighted-average remaining contractual
life of 6 years.
The numbers of options exercisable as of August 27, 2000, August 29,
1999, and August 30, 1998 were 304,920, 251,171, and 199,504
respectively, at weighted average share prices of $3.81, $3.50, and
$3.04 per share, respectively.
The weighted average fair value of options granted during the years
ended August 27, 2000, August 29, 1999, and August 30, 1998 was $2.39,
$4.99, and $2.82 per share, respectively.
26
27
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Years Ended
-------------------------------------------------------
August 27, August 29, August 30,
2000 1999 1998
---- ---- ----
Currently payable:
Federal $ 20,000 $ 17,500 $ 40,000
State 6,900 8,300 5,800
----------- ------------- -------------
26,900 25,800 45,800
Deferred:
Federal - - -
State - - -
----------- ------------- -------------
Total $ 26,900 $ 25,800 $ 45,800
=========== ============= =============
A reconciliation of the federal income tax provision at the statutory
rate with actual taxes provided on (loss) earnings from continuing
operations is as follows:
Years Ended
------------------------------------------------
August 27, August 29, August 30,
2000 1999 1998
---- ---- ----
Ordinary federal income tax statutory rate 35.0% 35.0% 35.0%
Limitation on (utilization of) tax assets (32.0) (28.9) (34.0)
State income taxes, net of federal tax benefit 1.0 2.9 0.2
Impact of graduated income tax - - (1.0)
Other - - 2.2
--------- ---------- --------
Taxes provided 4.0% 9.0% 2.4
========= ========== ========
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax bases of the Company's assets and
liabilities. Temporary differences, net operating loss carryforwards, and
valuation allowances comprising the net deferred taxes on the balance
sheet are as follows:
Year ended August 29, Year ended August 29, 1999
2000
---------------------------- ---------------------------
DEFERRED TAX ASSETS
Accrued liabilities $ 31,098 $ 79,841
Inventory valuation accruals 44,808 52,768
Net operating loss carryforwards 633,987 604,309
Tax credit carryforwards 530,265 530,380
Pension liability - 81,216
Other 136,238 34,050
---------------------------- ---------------------------
1,376,396 1,382,564
DEFERRED TAX LIABILITIES
Tax depreciation greater than book 460,279 210,320
---------------------------- ---------------------------
Net deferred tax assets 916,117 1,172,244
Valuation allowance (916,117) (1,172,244)
---------------------------- ---------------------------
$ - $ -
============================ ===========================
27
28
As of August 27, 2000, the Company had federal net operating loss
carryforwards of approximately $1,856,000 of which most will expire in
fiscal years 2008 and 2009. Also as of August 27, 2000, the Company had
$478,000 in federal alternative minimum tax (AMT) credit carryforward and
approximately $46,000 in other credit carryforward. The AMT credits are
available to offset future tax liabilities only to the extent that the
Company has regular tax liabilities in excess of AMT tax liabilities.
7. EMPLOYEE BENEFITS
The Company terminated its non-contributory pension plan effective
February 1, 2000. Participants were given the choice of receiving their
benefit by either taking a lump sum distribution, rolling their benefit
over to another qualified plan or receiving a monthly annuity from an
insurance company. At August 27, 2000 substantially all assets of the
Plan had been distributed. The actual benefit obligation of the
terminated plan was determined to be $8,181,915. The actual assets of the
plan were $8,372,695 leaving an excess of $190,778 which was distributed
to qualified participants after year end.
Net periodic pension cost consisted of the following:
Years Ended
--------------------------------------------------
2000 1999 1998
---- ---- ----
Service cost - benefits earned during the year $ 128,699 $ 119,314 $ 128,068
Interest cost on projected benefit obligation 566,664 509,347 461,123
Actual return on plan assets (712,904) (661,377) (18,369)
Net amortization and deferral 24,969 (1,339) (657,893)
--------------- --------------- ---------------
Net periodic pension cost $ 7,428 $ (34,055) $ (87,071)
=============== =============== ===============
The funded status of the plans and the amount recognized on the balance
sheet are as follows:
Year Ended
August 29, 1999
-------------------
Actuarial present value of benefit obligations:
Vested benefits $ 7,601,590
Nonvested benefits 140,629
----------------
Accumulated benefit obligations 7,742,219
Effect of projected future compensation
increases 406,842
----------------
Projected benefit obligations 8,149,061
Plan assets at fair value 8,674,648
----------------
Plan assets (in excess of) less than projected
benefit obligations (525,587)
Unrecognized net gain (loss) 1,709,719
Unrecognized prior-service cost (1,043,389)
Unrecognized net transition assets 205,204
----------------
Pension liability $ 345,947
================
Weighted average discount rat 7.00%
Rate of increase in future compensation
levels, non-union employees 4.50%
Expected long-term rate of return on
plan assets 9.0%
28
29
The Company has a management incentive compensation plan for certain key
employees designated annually by a committee of the Board of Directors.
The amount of incentive compensation for eligible participants is
contingent on attaining minimum pre-tax earnings and individual
performance objectives.
The Company and its two operating subsidiaries, Bowman Tool & Machining,
Inc and Taurus Numeric Tool, Inc. merged their retirement savings 401(k)
plans into one consolidated plan effective January 1, 2000. All employees
are eligible to participate. Contributions charged to operations for
fiscal 2000, 1999, and 1998, were approximately $146,184, $51,954, and
$51,710, respectively.
8. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to five customers which exceeded 10 percent of
total sales during any one of fiscal years 2000, 1999, or 1998 as listed
below:
Fiscal Year Sales
----------------------------------------------------------------------
Customer 2000 1999 1998
-------- ---- ---- ----
#1 $17,084,000 $11,748,000 $18,128,000
#2 3,406,000 2,884,000 1,394,000
#3 3,108,000 1,112,000 0
#4 2,970,000 2,682,000 0
29
30
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
---- ---- ----
Net Income $ 639,244 $ 261,065 $ 1,874,084
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,461,980 2,451,836 2,434,125
Effect of dilutive securities;
employee and nonemployee options 73,217 75,463 121,393
------------- ------------ --------------
Dilutive common shares;
denominator for diluted earnings
per share 2,535,197 2,527,299 2,555,518
Basic income per share $ .26 $ .11 $ .77
============= ============ ============
Dilutive income per share $ .25 $ .10 $ .73
============= ============ ============
30
31
WSI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
BALANCE AT NET ADDITIONS BALANCE AT
BEGINNING CHARGED TO NET END OF
DESCRIPTION OF PERIOD COST AND EXPENSES DEDUCTIONS PERIOD
----------- ---------- ----------------- ----------- -----------
Reserves deducted from
assets to which it applies:
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
Year ended
August 30, 1998 $ 50,000 $ 0 $ 25,000 (2) $ 25,000
================= ================== ============= ==============
Year ended
August 29, 1999 $ 25,000 $ 2,500 (3) $ 0 $ 27,500
================= ================== ============= ==============
Year ended
August 27, 2000 $ 27,500 $ 0 $ 0 $ 27,500
================= ================== ============= ==============
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
August 30, 1998 $ 155,342 $ 0 $ 342 (1) $ 155,000
================= ================== ============= ==============
Year ended
August 29, 1999 $ 155,000 $ 0 $ 0 $ 155,000
================= ================== ============= ==============
Year ended
August 27, 2000 $ 155,000 $ 74,717 $ 97,928 (1) $ 131,789
================= ================== ============= ==============
(1) Write-offs of excess or obsolete inventory.
(2) Level of reserve reduced due to management assessment of exposure to
potential write-offs.
(3) Additional amount assumed due to the acquisition of Taurus Numeric Tool,
Inc.
31