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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended August 31, 2003 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended from _________ to _________
Commission File No. 000-00619
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.)
18151 TERRITORIAL ROAD
OSSEO, MINNESOTA 55369
(Address of principal executing offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (763) 428-4308
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 (Section 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
----- -----
The aggregate market value of the common shares held by non-affiliates of the
Registrant on February 21, 2003, the last business day of the Company's most
recently completed second quarter was approximately $2,588,000, based upon the
closing sale price on that date of $1.05 as reported by the Nasdaq SmallCap
System.
Number of shares outstanding of the Company's common stock, par value $.10 per
share, as of November 26, 2003 is 2,551,129.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 8, 2004 are incorporated by reference into Part III.
----------
This form 10-K Report consists of 46 pages (including exhibits); the index to
the exhibits is set forth on page 12.
PART I
ITEM 1. BUSINESS
WSI Industries, Inc. (the "Company") makes its periodic and current
reports available free of charge as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission at www.wsci.com.
OVERVIEW
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 the aerospace/avionics industry and recreational vehicles markets.
On February 15, 1999, the Company purchased Taurus Numeric Tool, Inc.
("Taurus"). Taurus is a precision contract machining company that sells
primarily to the recreational vehicle and aerospace and avionics markets.
On August 6, 1999, the Company purchased Bowman Tool & Machining, Inc.
("Bowman"). Bowman is a precision contract machining company serving the
agriculture and construction industries. On February 22, 2002, the Company
completed the asset sale of Bowman Tool & Machining, Inc. to an affiliate of the
prior owner.
Contract manufacturing constitutes the Company's entire business.
PRODUCTS AND SERVICES
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.
SALES AND MARKETING
The major markets served by the Company have changed in the past several years
because of the Company's decision to sell the Bowman division in fiscal 2002 and
concentrate its focus on its Taurus operation. Sales to the agricultural
industry were 36% and 21% of total Company sales in fiscal years 2001 and 2002,
respectively. Sales to the recreational vehicle market totaled 12%, 37% and 74%
in fiscal 2001, 2002 and 2003 respectively. Sales to the
aerospace/avionics/defense markets totaled 19%, 17% and 15% in fiscal 2001, 2002
and 2003, respectively. Sales to the construction/power systems market totaled
19% and 10% in fiscal 2001 and 2002, respectively. With the sale of Bowman Tool
assets described above, the Company is no longer in the agriculture or
construction/power systems markets.
The Company has a reputation as a dependable supplier 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.
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SEASONALITY
Seasonal patterns in the Company's business are reflections of the Company's
customers seasonal patterns since the Company's business is that of a provider
of manufacturing services.
CUSTOMERS
Sales in excess of 10 percent of fiscal 2003 consolidated sales were made to
Polaris Industries, Inc. and related entities in the amount of $8,034,000 or 74%
of Company revenues.
BACKLOG
Approximate dollar backlog at October 15, 2003, August 25, 2002 and August 26,
2001 was $1,899,000, $2,634,000 and $13,108,000 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 October 15, 2003 is
scheduled for delivery later than during the current fiscal year. The October
15, 2003 backlog date and the end of year August dates for 2002 and 2001 are
believed to be comparable. Backlog continues to decrease from year to year as
customer order schedules are tighter. The decrease in the level of backlog is
not indicative of future yearly sale increases or decreases. In addition a
significant portion of the decrease from 2001 to 2002 relates to the sale of the
Bowman Tool assets, and the business that they corresponded to, as described in
the overview section above.
COMPETITION
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.
RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY
No material amount has been spent on company-sponsored research and development
activities. Patents and trademarks are not deemed significant to the Company.
EMPLOYEES
At August 31, 2003, the Company had 40 employees, none of whom were subject to a
union contract. We consider our relationship with our employees to be good.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no operations in any foreign country. In 2003, 2002 and 2001,
sales to companies in Mexico amounted to $693,000, $1,686,000 and $2,623,000,
respectively.
ITEM 2. PROPERTIES
The Company leases a production facility located in Osseo, Minnesota that houses
its production and is
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also its headquarters. The facility is approximately 28,000 square feet and is
leased until February 2004 with an option to renew for an additional year.
Monthly rent is approximately $9,600 plus operating expenses and taxes.
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
The Company 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the Nasdaq SmallCap Market System
under the symbol "WSCI."
As of November 10, 2003 there were 521 shareholders of record of the Company's
common stock.
The following table sets forth, for the periods indicated, the high and low
closing sales price information for our common stock as reported by the Nasdaq
SmallCap Market.
Stock Price
--------------------------------
High Low
FISCAL 2003:
First quarter $ 1.58 $ .60
Second quarter 1.30 .90
Third quarter 1.24 .99
Fourth quarter 3.00 1.15
FISCAL 2002:
First quarter $ 2.90 $ 1.00
Second quarter 1.94 .90
Third quarter 2.20 1.25
Fourth quarter 1.50 1.00
The Company announced a quarterly dividend program in June 2003 of $.0375 per
share. The first dividend was paid August 8, 2003. A second dividend of $.0375
per share was paid November 14, 2003.
4
The following table sets forth information regarding our equity compensation
plans in effect as of August 31, 2003. Each of our equity compensation plans is
an "employee benefit plan" as defined by Rule 405 of Regulation C of the
Securities Act of 1933.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of shares of common Number of shares of common
stock to be issued upon Weighted-average exercise stock remaining available
exercise of outstanding price of outstanding for future issuance under
Plan category options, warrants and rights options, warrants and rights equity compensation plans(1)
-------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by
stockholders:
1987 Option Plan 9,000 $ 3.04 --
1994 Stock Plan 326,000 $ 2.78 102,166
Equity compensation
plans not approved by
stockholders:
None
-------- ------- ---------
Total 335,000 $ 2.79 102,166
(1) Excludes shares of common stock listed in the first column.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Net sales $ 10,793 $ 12,948 $ 20,877 32,157 $ 21,550
Cost of products sold 8,704 11,348 17,023 26,746 18,279
---------- ---------- ---------- ---------- ----------
Gross margin 2,089 1,600 3,854 5,411 3,271
Selling and administrative expense 1,412 1,461 2,995 3,217 2,444
Pension curtailment (gain) -- -- -- (353) --
Acquisition related noncompete
and consulting expense 100 290 550 596 134
Goodwill amortization -- -- 337 296 83
Carrying cost of closed facility -- -- 347 214 --
Severance expense -- -- -- 249 --
Fair market value impairment of equipment -- -- 151 -- --
Loss on sale of subsidiary assets -- 2,506 -- -- --
Interest and other income (78) (28) (157) (472) (158)
Interest expense 123 363 821 998 481
---------- ---------- ---------- ---------- ----------
Earnings (loss) from continuing
operations before taxes 532 (2,992) (1,190) 666 287
Income tax expense (benefit) 179 (2,179) 3 27 26
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 353 $ (813) $ (1,193) $ 639 $ 261
========== ========== ========== ========== ==========
Basic earnings (loss)
per share $ .14 $ (.33) $ (.48) $ .26 $ .11
========== ========== ========== ========== ==========
Average number of common shares 2,474 2,465 2,465 2,462 2,452
Diluted earnings (loss) share $ .14 $ (.33) $ (.48) $ .25 $ .10
========== ========== ========== ========== ==========
Average number of common
and dilutive potential
common shares 2,486 2,465 2,465 2,535 2,527
Additional information:
Financial Data:
Total plant and equipment additions $ 161 $ 613 $ 513 $ 916 $ 1,238
Long-term debt 648 1,398 4,111 9,601 10,666
Total assets 9,174 9,799 16,338 23,432 24,525
Cash flow from operations 1,123 (77) 2,634 1,961 2,641
Stockholders' equity 7,392 6,939 7,752 8,945 8,264
Financial Ratios:
Current ratio 2.89:1 2.23:1 .78:1 1.35:1 1.27:1
Percentage of long term debt to equity 9% 20% 53% 107% 129%
Book value per basic common share $ 2.90 $ 2.81 $ 3.14 $ 3.63 $ 3.37
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities.
We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our
financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we used in applying the critical accounting
policies. Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely event that would result in materially
different amounts being reported.
Allowance for Excess and Obsolete Inventory:
Inventories, which are composed of raw materials, work in process and finished
goods, are valued at the lower of cost or market. On a periodic basis, the
Company analyzes the level of inventory on hand, its cost in relation to market
value and estimated customer requirements to determine whether write-downs for
excess or obsolete inventory are required. Actual customer requirements in any
future periods are inherently uncertain and thus may differ from our estimates.
If actual or expected requirements were significantly greater or lower than the
established reserves, we would record a reduction or increase to the
obsolescence allowance in the period in which we made such a determination.
Goodwill Impairment:
The Company evaluates the valuation of its goodwill according to the provisions
of SFAS 142 to determine if the current value of goodwill has been impaired. To
do this the Company determines the discounted present value of anticipated cash
flows based on anticipated results of operations for the coming years. If we
have changes in events or circumstances, including reductions in anticipated
cash flows generated by our operations, goodwill could become impaired which
would result in a charge to earnings.
Deferred Taxes:
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary difference between the financial
reporting and tax bases of assets and liabilities. A valuation allowance would
be set up should the realization of any deferred taxes become less likely than
not to occur. The valuation allowance is analyzed periodically by the Company
and may result in income tax expense different than statutory rates.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's net working capital at the end of fiscal 2003 was $2,139,000 as
compared to $1,791,000 at the end of fiscal 2002. The improvement was due in
large measure to the Company generating $1.1 million in cash in fiscal 2003, and
using those funds to pay down debt. The ratio of current assets to current
liabilities improved to 2.89 to 1.0 from 2.23 to 1.0 in the prior year.
7
In fiscal 2002, the Company's cash provided from operations was a negative
$77,000, but included in that total were Bowman accounts payable and accrued
liabilities of $629,000 that were retained as part of the asset sale described
in the next paragraph. Excluding those payments, the Company would have
generated $552,000 of cash from operations in fiscal 2002. Cash provided from
operations was $2.6 million in fiscal 2001.
As discussed in Item 1, the Company completed the asset sale of Bowman Tool &
Machining, Inc. on February 22, 2002. As a result of this transaction in fiscal
2002, the Company received approximately $3.1 million in cash, along with the
buyer assuming another $3.4 million in long-term debt consisting of capital
leases. The Company used $850,000 of the cash received to payoff its term note
facility with its bank. The Company also used approximately $629,000 of its cash
received to pay accounts payable and accrued liabilities retained as part of the
sale.
Additions to property, plant and equipment were $161,000 in fiscal 2003 compared
to $613,000 in 2002 and $513,000 in 2001. These amounts included $607,000 and
$323,000 of machinery acquired through capital leases in 2002 and 2001,
respectively. The major 2003 capital expenditures consisted of the acquisition
of new production equipment.
Proceeds from the sale of equipment amounted to $3,600 and $4,400 in fiscal 2003
and 2002, respectively. In fiscal 2001, the Company sold its building in Long
Lake, Minnesota for $2.4 million.
The Company obtained a new revolving line credit agreement during fiscal 2003
with a bank. Under the agreement, the Company can borrow up to $1 million
depending on the level of accounts receivable and raw material. The agreement
expires in December 2003 and has never been accessed.
The Company's total debt was $844,000 at August 31, 2003 that consisted of
capital lease obligations secured by production equipment. In fiscal 2003, the
Company elected to payoff its seller subordinated note early. In connection with
the prepayment, the Company received a $28,000 discount from the note holder.
Current maturities of long-term debt consist of $196,000 due on capital leases.
It is managements' belief that internally generated funds will be sufficient to
enable the Company to meet its financial requirements during fiscal 2004, even
if the Company does not renew its revolving line of credit. However, the Company
intends on pursuing a renewal of the line.
RESULTS OF OPERATIONS:
Net sales in fiscal 2003 were $10.8 million which is a decrease of $2.2 million
or 17% from fiscal 2002. The primary reason for the decrease was the asset sale
of Bowman Tool in February 2002, and thus the inclusion of a half-year of Bowman
sales in 2002 operations. Year-on-year sales for Taurus Numeric Tool (the
remaining subsidiary of WSI) increased 28% in fiscal 2003 from approximately
$8.4 million in fiscal 2002. This increase in sales resulted from increases in
volume in the recreational vehicle market offset by the decline in sales from
the aerospace and avionics market.
Net sales in fiscal 2002 were $12.9 million which is a decrease of $7.9 million
or 38% from fiscal 2001. The primary reason for this was the asset sale of
Bowman Tool in February 2002, and thus the inclusion of only a half-year of
Bowman sales in 2002 operations. Year-on-year sales for Taurus increased 5% in
fiscal 2002 to approximately $8.4 million from $8.0 million in 2001. This
increase in sales resulted from the addition of a new product line in the
recreational vehicle market offset by the decline in sales from the aerospace
and avionics market due to the events of September 11, 2001.
8
The Company reported net income of $353,000 or $.14 per diluted share in fiscal
2003. The Company reported a net loss in fiscal 2002 of $813,000 or $.33 per
share. Included in the 2002 results were recognition of the loss on the sale of
the Bowman assets of $2.5 million and an income tax benefit of approximately
$2.2 million. Excluding these two items, the Company incurred a loss from
operations of $486,000.
Gross margins in fiscal 2003 were 19.4%, an increase of 7.1% over fiscal 2002's
margin of 12.3% and .9% over fiscal 2001's margin of 18.5%. The improvement in
2003's margins is largely attributable to increased volume efficiencies. Fiscal
2002 margins were hampered in large measure due to volume inefficiencies related
to the softness of the aerospace/avionics markets and, correspondingly, due to
the non-aerospace/avionics business consisting of higher material content
products. Margins in 2002 were also affected by a $255,000 increase in the
Company's inventory obsolescence reserve made in the second quarter due to the
softening of the aerospace/avionics business. Margins for the Taurus operation
only were 10.5% and 23.0% for 2002 and 2001, respectively, and were affected by
the items in the preceding discussion.
Selling and administrative expense of $1.5 million in fiscal 2003 was a decrease
of $239,000 from fiscal 2002 and $2.7 million from fiscal 2001. The decrease in
selling and administrative expense in fiscal 2003 was due in part to the
inclusion in fiscal 2002 of six months of Bowman administrative expense. WSI's
selling and administrative costs were also lower in both 2003 and 2002 due to
cost containment measures including reductions in wages and benefits,
professional services and cost savings due to the consolidation efforts that
were a result of the sale of the Bowman Tool subsidiary assets. The Company's
fiscal 2003 fourth quarter selling and administrative expense was negatively
affected by a $48,000 charge related to an environmental claim relating to an
incident that occurred in 1983 involving a subsidiary of the Company that no
longer exists. The Company's selling and administrative expense was also lower
in 2002 due to the Company's adoption of FAS 142 Goodwill and Intangible Assets
as outlined in Note 11 of the financial statements which resulted in a reduction
of amortization expense of $337,000 versus 2001.
Interest expense of $123,000 in fiscal 2003 was $240,000 lower than 2002 and
$698,000 lower than 2001. The lower expense is a result of overall lower levels
of long-term debt.
In 2001, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets, effective for fiscal years beginning after December 15,
2001 with early adoption permitted for companies with fiscal years beginning
after March 15, 2001. The Company adopted the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
2002. Effective with the August 27, 2001 adoption of FAS 142, goodwill is no
longer amortized but is instead subject to an annual impairment test. The
Company has performed its transitional impairment test in conjunction with its
adoption of FAS 142 and determined that no charge is warranted. The Company's
primary method of estimating goodwill impairment consisted of a discounted cash
flow analysis based on the Company's best estimate of future operations, taking
into account variations that might occur with different levels of business.
The Company recorded income tax expense of $179,000, or an effective tax rate of
34%, in 2003. The Company maintained its valuation allowance at zero during
2003. The Company recognized an income tax benefit of $2.2 million in fiscal
2002. Prior to 2002, the Company recorded a valuation allowance for the full
amount of the deferred tax assets. The valuation allowance was eliminated in
2002 based on the operating results from the fourth quarter and projections for
upcoming years that, in the Company's
9
estimation, would make it more likely than not that it will fully utilize its
prior loss carryforwards and tax credits.
See Notes to Consolidated Financial Statements regarding recent accounting
standards to be adopted.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
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. 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 and are not predictions of
actual future results. Forward-looking statements 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 following
risks and uncertainties, as well as others not now anticipated, 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 participates could have an adverse effect on the
demand for Company services. In addition, the Company is materially dependent
upon one customer that represented 74% of the Company's revenue in fiscal 2003.
The loss of this customer or a significant reduction in business from this
customer will have a material adverse effect on the Company. 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.
10
QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Basic Diluted
Net Gross Net Earnings Earnings
Sales Margin Earnings Per Share Per Share
FISCAL 2003:
First quarter $ 2,434,293 $ 461,463 $ 38,650 $ .02 $ .02
Second quarter 2,359,109 411,835 67,926 .03 .03
Third quarter 3,051,583 615,707 145,942 .06 .06
Fourth quarter 2,947,665 599,675 100,851 .04 .04
FISCAL 2002:
First quarter $ 3,811,208 $ 440,191 $ (247,003) $ (.10) $ (.10)
Second quarter 4,653,168 534,316 (2,748,346) (1.11) (1.11)
Third quarter 2,144,586 271,486 (134,710) (.05) (.05)
Fourth quarter 2,339,106 354,151 2,317,295 .94 .94
PART III
Pursuant to General Instruction G (3), the Company omits Part III, Items 10, 11,
12, and 13, as a definitive proxy statement will be filed with the Commission
pursuant to Regulation 14(a) within 120 days after August 31, 2003 and such
information required by such items is incorporated herein by reference from the
proxy statement.
ITEM 14. CONTROLS AND PROCEDURES:
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Michael J. Pudil, and Chief Financial
Officer, Paul D. Sheely, have evaluated the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
review, they have concluded that these controls and procedures are effective in
ensuring that material information related to the Company is made known to them
by others within the Company.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in internal control financial reporting
that occurred during the fiscal period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
11
PART IV
ITEM 15. 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 30
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
No. Description
------- --------------------------------------------
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 25, 2002.
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.
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.
12
10.6 Lease Agreement dated February 15, 1999
between Taurus Numeric Tool, Inc. and Rodney
and Reba Winter as included in the Stock
Purchase Agreement between Rodney Winter and
the Registrant, incorporated by reference
from Exhibit 2.1 of Form 8-K filed February
28,1999.
10.7 Employment (change in control) Agreement
between Michael J. Pudil and Registrant
dated January 11, 2001 incorporated by
reference from Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended
May 27, 2001.
10.8 Employment (change in control) Agreement
between Paul D. Sheely and Registrant dated
January 11, 2001 incorporated by reference
from Exhibit 10.2 of the Registrant's Form
10-Q for the quarter ended May 27, 2001.
10.9 Amendment No. 1 to Employment (change in
control) Agreement between Michael J. Pudil
and Registrant dated November 1, 2002.
Incorporated by reference from Exhibit 10.10
of the Registrant's Form 10-K for the year
ended August 25, 2002.
10.10 Amendment No. 1 to Employment (change in
control) Agreement between Paul D. Sheely
and Registrant dated November 1, 2002.
Incorporated by reference from Exhibit 10.11
of the Registrant's Form 10-K for the year
ended August 25, 2002.
10.11 Board of Directors Retirement Program dated
June 25, 1982. Incorporated by reference
from Exhibit 10.12 of the Registrant's Form
10-K for the year ended August 25, 2002.
14.1 Code of Ethics & Business Conduct adopted by
the Company on October 29, 2003.
23.1 Consent of Schechter Dokken Kanter Andrews &
Selcer Ltd.
23.2 Consent of Ernst & Young LLP.
31.1 Certification of Chief Executive Officer
pursuant to Rules 13a-14 and 15d-14 of the
Exchange Act.
31.2 Certification of Chief Financial Officer
pursuant to Rules 13a-14 and 15d-14 of the
Exchange Act.
32.1 Certificate pursuant to 18 U.S.C. Section
1350.
(b) Reports of Form 8-K.
During the last quarter of the period covered by this
report, the Company filed a Form 8-K dated June 27,
2003 reporting its third quarter earnings.
13
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 26, 2003
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 26, 2003
- -------------------------------------------- Director
Michael J. Pudil
/s/ Paul Baszucki Director November 26, 2003
- --------------------------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 26, 2003
- --------------------------------------------
Melvin L. Katten
/s/ George J. Martin Director November 26, 2003
- --------------------------------------------
George J. Martin
/s/ Eugene J. Mora Director November 26, 2003
- --------------------------------------------
Eugene J. Mora
/s/ Michael N. Taglich Chairman of the Board, Director November 26, 2003
- --------------------------------------------
Michael N. Taglich
14
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 16
Consolidated Balance Sheets - August 31, 2003 and August 25, 2002 17
Consolidated Statements of Income - Years Ended August 31, 2003,
August 25, 2002 and August 26, 2001 18
Consolidated Statements of Stockholders' Equity - Years Ended
August 31, 2003, August 25, 2002 and August 26, 2001 19
Consolidated Statements of Cash Flows - Years Ended August 31, 2003,
August 25, 2002 and August 26, 2001 20
Notes to Consolidated Financial Statements 21
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 30
15
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WSI Industries, Inc.
Osseo, Minnesota
We have audited the consolidated balance sheets of WSI Industries, Inc. and
Subsidiaries as of August 31, 2003 and August 25, 2002 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 15 (a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits. The
financial statements of WSI Industries, Inc. and Subsidiaries and the related
financial statement schedule as of August 26, 2001, were audited by other
auditors whose report dated October 12, 2001, expressed an unqualified opinion
on those financial statements and an unqualified opinion on the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of WSI Industries, Inc. and Subsidiaries as of August 31, 2003 and
August 25, 2002, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the 2003 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.
/s/ Schechter Dokken Kanter
Andrews & Selcer Ltd
Minneapolis, Minnesota
October 9, 2003
16
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2003 AND AUGUST 25, 2002
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 891,218 $ 1,115,922
Accounts receivable, less allowance for doubtful
accounts of $10,735 and $10,753, respectively 1,530,811 1,154,587
Net Inventories (Note 3) 606,262 763,323
Prepaid and other current assets 75,747 33,990
Deferred tax assets (Note 7) 169,387 184,925
------------ ------------
Total current assets 3,273,425 3,252,747
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 5):
Machinery and equipment 5,737,237 5,807,136
Less accumulated depreciation (4,018,638) (3,605,444)
------------ ------------
Total property, plant, and equipment 1,718,599 2,201,692
DEFERRED TAX ASSETS (NOTE 7) 1,813,270 1,976,254
INTANGIBLE ASSETS (NOTE 11):
Goodwill and related acquisition costs net of
accumulated amortization of $344,812 2,368,452 2,368,452
------------ ------------
$ 9,173,746 $ 9,799,145
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 403,277 $ 465,286
Accrued compensation and employee withholdings 384,857 171,025
Miscellaneous accrued expenses 150,289 90,439
Current portion of long-term debt (Note 4) 195,720 735,143
------------ ------------
Total current liabilities 1,134,143 1,461,893
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 4) 648,008 1,397,915
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 6):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,551,129 shares and 2,465,229, respectively 255,113 246,523
Capital in excess of par value 1,826,901 1,640,934
Retained earnings 5,309,581 5,051,880
------------ ------------
Total stockholders' equity 7,391,595 6,939,337
------------ ------------
$ 9,173,746 $ 9,799,145
============ ============
See notes to consolidated financial statements.
17
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 2003, AUGUST 25, 2002 AND AUGUST 26, 2001
- --------------------------------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Net sales (Note 9) $ 10,792,650 $ 12,948,068 $ 20,877,181
Cost of products sold 8,703,970 11,347,924 17,022,938
--------------- --------------- ---------------
Gross margin 2,088,680 1,600,144 3,854,243
Selling and administrative expense 1,511,458 1,750,883 4,228,849
Loss (gain) on sale of equipment and building 9,972 -- (123,279)
Fair market value impairment of equipment -- -- 150,859
Loss on sale of subsidiary assets -- 2,505,919 --
Interest and other income (87,984) (27,838) (32,945)
Interest expense 123,343 363,063 820,949
--------------- --------------- ---------------
1,556,789 4,592,027 5,044,433
--------------- --------------- ---------------
Income (loss) before income taxes 531,891 (2,991,883) (1,190,190)
Income tax expense (benefit) (Note 7) 178,522 (2,179,119) 3,000
--------------- --------------- ---------------
Net income (loss) $ 353,369 $ (812,764) $ (1,193,190)
=============== =============== ===============
Basic earnings (loss) per share $ .14 $ (.33) $ (.48)
=============== =============== ===============
Diluted earnings (loss) per share $ .14 $ (.33) $ (.48)
=============== =============== ===============
Weighted average number of common
shares outstanding 2,473,535 2,465,229 2,465,229
=============== =============== ===============
Weighted average number dilutive
common shares outstanding 2,485,961 2,465,229 2,465,229
=============== =============== ===============
See notes to consolidated financial statements.
18
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 27, 2000 2,465,229 $ 246,523 $ 1,640,934 $ 7,057,834 $ 8,945,291
Net loss -- -- -- (1,193,190) (1,193,190)
------------ ------------ ------------ ------------ ------------
BALANCE AT AUGUST 26, 2001 2,465,229 $ 246,523 $ 1,640,934 $ 5,864,644 $ 7,752,101
Net loss -- -- -- (812,764) (812,764)
------------ ------------ ------------ ------------ ------------
BALANCE AT AUGUST 25, 2002 2,465,229 $ 246,523 $ 1,640,934 $ 5,051,880 $ 6,939,337
Net earnings -- -- -- 353,369 353,369
Exercise of stock options 100,000 10,000 202,500 -- 212,500
Dividends paid -- -- -- (95,668) (95,668)
Repurchase of shares (14,100) (1,410) (16,533) -- (17,943)
------------ ------------ ------------ ------------ ------------
BALANCE AT AUGUST 31, 2003 2,551,129 $ 255,113 $ 1,826,901 $ 5,309,581 $ 7,391,595
============ ============ ============ ============ ============
See notes to consolidated financial statements.
19
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2003, AUGUST 25, 2002 AND AUGUST 26, 2001
- --------------------------------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 353,369 $ (812,764) $ (1,193,190)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Loss on sale of subsidiary -- 2,505,919 --
Depreciation 630,222 1,275,688 2,049,356
Amortization -- -- 337,360
Loss (gain) on sale of property, plant, and equipment
and other assets 9,972 1,430 (123,279)
Deferred taxes 178,522 (2,183,419) --
Fair market value impairment of equipment -- -- 150,859
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (376,224) (354,430) 1,934,229
Inventories 157,061 556,964 1,153,931
Prepaid and other current assets (41,757) 58,981 46,327
(Decrease) increase in accounts payable and accrued expenses 211,673 (1,125,698) (1,721,328)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 1,122,838 (77,329) 2,634,265
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (160,671) (6,689) (189,928)
Proceeds from sale of equipment and other assets 3,570 4,421 2,400,000
Sale of subsidiary -- 3,241,790 --
--------------- --------------- ---------------
Net cash provided by (used in) investing activities (157,101) 3,239,522 2,210,072
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt -- -- 5,379,844
Payment of long-term debt (1,289,330) (2,054,563) (10,222,189)
Issuance of common stock 212,500 -- --
Dividends paid (95,668) -- --
Purchase of Company stock (17,943) -- --
--------------- --------------- ---------------
Net cash used in financing activities (1,190,441) (2,054,563) (4,842,345)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (224,704) 1,107,630 1,992
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,115,922 8,292 6,300
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 891,218 $ 1,115,922 $ 8,292
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 129,226 $ 385,676 $ 846,631
Income taxes 4,300 -- 7,500
Noncash investing and financing activities:
Acquisition of machinery through capital lease -- 606,618 322,671
Acquisition related debt -- -- 340,600
See notes to consolidated financial statements.
20
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2003, AUGUST 25, 2002 AND AUGUST 26, 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description - WSI Industries, Inc. is involved in the
precision contract metal machining business primarily serving the
recreational vehicle, aerospace/avionics and computer industries.
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 2003 consisted of 53 weeks while fiscal 2002 and 2001
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. At times bank balances exceed federally insured
limits. 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.
Depreciation - The cost of substantially all equipment is being
depreciated using the straight-line method. The estimated useful lives
of the assets are as follows:
Machinery and equipment 3 to 10 years
Transportation equipment 3 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.
During 2001, the Company determined that some excess equipment was
worth less than its net book value. At that time the Company made an
adjustment to record the book value of the related equipment down to
its estimated fair market value. In 2001, the Company recognized
approximately $150,000 in expense related to this impairment. The
Company has since disposed of the equipment.
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. Credit losses relating to customers have been minimal and
within management's expectations. Based on management's evaluation of
uncollected accounts receivable at the end of each year, bad debts are
21
provided for on the allowance method. Accounts are considered
delinquent if they are 120 days past due. The Company mitigates its
credit risk by performing credit checks and actively pursuing past due
accounts.
Use of Estimates - The preparation of financial statements in
conformity with U. S. generally accepted accounting principles 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. Significant estimates made
in those financial statements consist of estimates related to the
impairment of goodwill as well as to the valuation allowance connected
to the deferred tax assets.
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. In fiscal
2003, 184,000 shares of stock options were excluded from the diluted
earnings per share computation due to their anti-dilutive effect.
Recently Issued Accounting Standards - In 2001, the FASB issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".
These standards change the accounting for business combinations by,
among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with an indefinite
useful life created by business combinations accounted for using the
purchase method of accounting. Instead, goodwill and intangible assets
deemed to have an indefinite useful life will be subject to an annual
review for impairment. The Company adopted the standards in the first
quarter of fiscal 2002.
2. DIVESTITURE
On February 22, 2002, the Company completed the asset sale of one of
its subsidiaries, Bowman Tool & Machining, Inc., to W. Bowman
Consulting Company, an affiliate of the prior owner of Bowman. The
Company received approximately $3.1 million in cash from the sale, with
the buyer also assuming another $3.4 million in long-term debt
(including capital leases) in exchange for substantially all the assets
of Bowman Tool. The buyer also assumed any remaining liabilities
associated with amounts due on the non-compete and employment
agreements that were a result of the original 1999 Bowman acquisition.
The Company retained approximately $629,000 in accounts payable and
accrued liabilities that were not part of the sale.
The Company recognized a loss from the sale of Bowman of approximately
$2.5 million. The loss consisted of the $6.7 million in cash and debt
assumed offset by accounts receivable and inventory purchased of $1.25
million, net book value of property and equipment purchased of $3.8
million, goodwill also of $3.8 million as well as $350,000 of costs
associated with closing the deal.
The sale was completed at the close of the last business day of the
second quarter of fiscal 2002 so the consolidated statement of
operations and cash flows reflect six months of activity for Bowman in
fiscal 2002.
22
3. INVENTORIES
Inventories consist primarily of raw material, work-in-process (WIP)
and finished goods. The following table breaks out the values in each
category net of the inventory valuation allowances of $422,930 and
$517,380 at August 31, 2003 and August 25, 2002, respectively:
August 31, 2003 August 25, 2002
--------------- ---------------
Raw material $ 185,785 $ 135,241
WIP 211,188 285,639
Finished goods 209,289 342,443
--------------- ---------------
$ 606,262 $ 763,323
=============== ===============
4. DEBT
Long-term debt consisted of the following:
August 31, 2003 August 25, 2002
--------------- ---------------
Subordinated promissory note -- 1,108,376
Capitalized lease obligations (Note 5) 843,728 1,024,682
--------------- ---------------
843,728 2,133,058
Less current portion 195,720 735,143
--------------- ---------------
Long-term debt $ 648,008 $ 1,397,915
=============== ===============
The Company obtained a new revolving credit agreement with a bank
during fiscal 2003. Under the agreement, the Company can borrow up to
$1 million, with the loan being collateralized by all assets of the
Company. The agreement expires January 1, 2004 and has restrictive
provisions requiring a minimum net worth and current ratio, and a
maximum ratio of debt to tangible net worth. At August 31, 2003, the
Company was in compliance with these provisions. Interest on any
amounts borrowed under the agreement would be at the bank's base rate
(4.0% at August 31, 2003) plus .25%. During fiscal 2003, the Company
did not access the line.
In connection with the acquisition of Taurus Numeric Tool, Inc., the
Company entered into a Subordinated Promissory Note with the seller of
Taurus. The agreement called for quarterly interest payments at 7.75%.
The note was due in three equal annual installments commencing February
15, 2002. During fiscal 2003, the company elected to payoff the Note.
In connection with the prepayment, the Company negotiated a reduction
of the principal due in the amount of $27,700. This amount is included
in "Interest and other income" in the Consolidated Statements of
Income.
5. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 31, 2003
are cost and accumulated depreciation on equipment subject to
capitalized leases of $1,788,730 and $1,053,719 respectively. At August
25, 2002, the amounts were $1,788,730 and $857,614, respectively. As
described in Note 2, the purchaser of Bowman Tool assumed capital
leases with a present value of net minimum payment of $1.5 million.
The present value of the net minimum payments on capital leases as of
August 31, 2003 is as follows:
23
Fiscal years ending August:
2004 $ 253,935
2005 240,268
2006 171,936
2007 171,935
2008 152,221
Thereafter 18,436
------------
Total minimum lease payments 1,008,731
Less amount representing interest 165,003
------------
Present value of net minimum lease payments 843,728
Current portion 195,720
------------
Capital lease obligation, less current portion $ 648,008
============
The Company leases its Taurus facility under an operating lease that
expires in February 2004 with a monthly base rent of $9,640. Operating
expenses and real estate taxes are paid by the Company.
The Company also leases a storage facility under an operating lease
that expires in May 2004 with a monthly rent of $2,013.
Future minimum lease payments for operating leases are:
Fiscal years ending August:
2004 $ 71,383
------------
Total minimum lease payments $ 71,383
============
Rent expense of approximately $144,000, $286,000 and $437,000 have been
charged to operations for the years ended August 31, 2003, August 25,
2002 and August 26, 2001, respectively.
6. 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 31,
2003, 102,166 shares remained reserved and available for grant under
the plan.
Option transactions during the three years ended August 31, 2003 are
summarized as follows:
24
1987 Stock 1994 Stock
Option Plan Option Plan
----------------------------------- -----------------------------------
Average Average
Shares Price Shares Price
------------ ------------ ------------ ------------
Outstanding at August 27, 2000 118,000 2.26 291,500 4.71
Granted 59,000 2.97
Lapsed (9,000) 2.60 (34,000) 4.23
------------ ------------
Outstanding at August 26, 2001 109,000 2.20 316,500 4.44
------------ ------------
Granted -- 103,000 1.43
Lapsed or Cancelled -- (97,500) 5.04
------------ ------------
Outstanding at August 25, 2002 109,000 2.20 322,000 3.30
------------ ------------
Granted -- 58,000 1.22
Lapsed -- (54,000) 4.46
Exercised (100,000) 2.13 --
------------ ------------ ------------ ------------
Outstanding at August 31, 2003 9,000 $ 3.04 326,000 $ 2.78
============ ============ ============ ============
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 2003, fiscal 2002
and fiscal 2001 as set forth in the table below. The estimated fair
value of the options is amortized to expense over the options' vesting
period.
2003 2002 2001
---------- ---------- ----------
Dividend yield 5% None None
Expected volatility 77.47% 60.9% 55.7%
Risk free interest rate 3.25%-4.4% 3%-4% 5.5%
Expected term 5-10 years 5-10 years 10 years
The Company's net income and income per share would be adjusted to the
pro forma amounts as follows:
Years ended
-----------------------------------------------------------------
August 31, 2003 August 25, 2002 August 26, 2001
--------------- --------------- ---------------
Net Income (loss):
As reported $ 353,369 $ (812,764) $ (1,193,190)
Less: Total Stock based compensation
expense determined under fair value
based method for all awards (33,287) (94,685) (224,524)
-------------- -------------- --------------
Pro forma $ 320,082 $ (907,449) $ (1,417,714)
Income (loss) per basic common share:
As reported $ .14 $ (.33) $ (.48)
Pro forma $ .13 $ (.37) $ (.58)
Income per diluted common share:
As reported $ .14 $ (.33) $ (.48)
Pro forma $ .13 $ (.37) $ (.58)
25
As of August 31, 2003, there were 151,000 options outstanding with
exercise prices between $1.22 and $1.44, 47,000 options outstanding
with exercise prices between $2.00 and $2.94, 56,000 shares with
exercise prices between $3.00 and $3.88 and 81,000 options outstanding
with exercise prices between $4.13 and $5.50. At August 31, 2003,
outstanding options had a weighted-average remaining contractual life
of 5 years.
The numbers of options exercisable as of August 31, 2003, August 25,
2002 and August 26, 2001 were 270,000, 354,000 and 348,500,
respectively, at weighted average share prices of $3.11, $3.28, and
$3.88 per share, respectively.
7. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Years Ended
------------------------------------------------------------------
August 31, August 25, August 26,
2003 2002 2001
--------------- --------------- ---------------
Currently payable:
Federal $ -- $ -- $ --
State -- 4,300 3,000
--------------- --------------- ---------------
-- 4,300 3,000
Deferred:
Federal 167,437 (2,090,861) --
State 11,085 (92,558) --
--------------- --------------- ---------------
Total $ 178,522 $ (2,179,119) $ 3,000
=============== =============== ===============
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 31, August 25, August 26,
2003 2002 2001
---------- ---------- ----------
Ordinary federal income tax statutory rate 34.0% (35.0%) (35.0%)
Limitation on (utilization of) tax assets -- 35.0 35.0
Change in valuation allowance -- (72.2) --
State income taxes net of federal tax effect 2.1 (2.1) (2.1)
Other (2.5) 1.5 2.4
-------- -------- --------
Taxes provided 33.6% (72.8)% .3%
======== ======== ========
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:
26
August 31, 2003 August 25, 2002
--------------- ---------------
DEFERRED TAX ASSETS
Accrued liabilities $ 10,414 $ 8,388
Inventory valuation accruals 143,796 175,909
Net operating loss carryforwards 1,497,073 1,633,467
Tax credit carryforwards 576,638 576,638
Other 140,382 95,613
------------ ------------
2,368,303 2,490,015
DEFERRED TAX LIABILITIES
Tax depreciation and amortization greater than book
385,646 328,836
------------ ------------
Net deferred tax assets 1,982,657 2,161,179
Valuation allowance -- --
------------ ------------
Net Deferred Tax Asset $ 1,982,657 $ 2,161,179
============ ============
The valuation allowance for net deferred tax assets was eliminated in
2002. The elimination was based on improved operating results in the
fourth quarter of 2002, as well as projected operating results for 2003
and beyond. Correspondingly, the Company determined that it was more
likely than not that it will be able to generate taxable income in the
future to offset these deductions and carryforwards.
As of August 31, 2003, the Company had federal net operating loss
carryforwards of approximately $4,180,000 expiring in 2009-2022. Also
as of August 31, 2003, the Company had $525,000 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.
8. EMPLOYEE BENEFITS
The Company maintains a 401(k) profit sharing and retirement savings
plan that all employees are eligible to participate in. Contributions
charged to operations for fiscal 2003, 2002, and 2001, were $78,822,
$102,233 and $151,383, respectively.
9. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to three customers which exceeded 10 percent of
total sales during any one of fiscal years 2003, 2002 or 2001 as listed
below:
Fiscal Year Sales
----------------------------------------------------------------------
Customer 2003 2002 2001
-------- ------------ ------------- -------------
#1 $ 8,034,000 $ 4,782,000 $ 2,510,000
#2 - 4,119,000 11,493,000
#3 950,000 1,314,000 2,265,000
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
27
2003 2002 2001
--------------- --------------- ---------------
Net Income (Loss) $ 353,369 $ (812,764) $ (1,193,190)
=============== =============== ===============
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,473,535 2,465,229 2,465,229
Effect of dilutive securities;
employee and nonemployee options 12,426 -- --
--------------- --------------- ---------------
Dilutive common shares;
denominator for diluted earnings
per share 2,485,961 2,465,229 2,465,229
=============== =============== ===============
Basic (loss) income per share $ .14 $ (.33) $ (.48)
=============== =============== ===============
Dilutive income (loss) per share $ .14 $ (.33) $ (.48)
=============== =============== ===============
11. GOODWILL AND INTANGIBLE ASSETS
In 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for
companies with fiscal years beginning after March 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002.
Effective with the August 27, 2001 adoption of FAS 142, goodwill is no
longer amortized but is instead subject to an annual impairment test.
The company has performed its transitional impairment test in
conjunction with the adoption of FAS 142 and determined that no charge
is warranted.
Goodwill and other intangible assets resulting from acquisitions of
business and the formation of the Company consist of the following:
August 31, 2003 August 25, 2002
--------------- ---------------
Goodwill $ 2,428,264 $ 2,428,264
Less accumulated amortization 308,595 308,595
------------- -------------
$ 2,119,669 $ 2,119,669
============= =============
Other identifiable intangibles:
Organization Costs $ 285,000 $ 285,000
Less accumulated amortization 36,217 36,217
------------- -------------
$ 248,783 $ 248,783
============= =============
28
With the sale of the Bowman assets as described in Note 2, the goodwill
and organization costs related to Bowman were eliminated. Goodwill
amounted to $3,901,499 with related accumulated amortization of
$339,014. Organization costs were $270,000 with related accumulated
amortization of $27,779.
With the adoption of FAS 142 the Company ceased amortization of
goodwill as of August 27, 2001. The following table presents the
results of the Company for all periods presented on a comparable basis:
Years ended
------------------------------------------------------------------
August 31, 2003 August 25, 2002 August 26,2001
--------------- --------------- ---------------
Reported net income (loss) per share $ 353,369 $ (812,764) $ (1,193,190)
Add back amortization -- -- 337,360
--------------- --------------- ---------------
Adjusted net income (loss) per share $ 353,369 $ (812,764) $ (855,830)
=============== =============== ===============
Diluted net income (loss) per share:
Reported net income (loss) $ .14 $ (.33) $ (.48)
Goodwill amortization -- -- .13
--------------- --------------- ---------------
Adjusted net income (loss) per share $ .14 $ (.33) $ (.35)
=============== =============== ===============
29
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 26, 2001 $ 27,500 $ 0 $ 0 $ 27,500
========== ========== ========== ==========
Year ended
August 25, 2002 $ 27,500 $ 0 $ 16,747 $ 10,753
========== ========== ========== ==========
Year ended
August 31, 2003 $ 10,753 $ 0 $ 18 $ 10,735
========== ========== ========== ==========
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
August 26, 2001 $ 131,789 $ 131,583 $ 0 $ 263,372
========== ========== ========== ==========
Year ended
August 25, 2002 $ 263,372 $ 301,327 $ 47,319 $ 517,380
========== ========== ========== ==========
Year ended
August 31, 2003 $ 517,380 $ 0 $ 94,450 $ 422,930
========== ========== ========== ==========
30