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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 26, 2001
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 (I.R.S. Employer
incorporation 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 12, 2001 (based upon the closing sale price of those
shares on the NASDAQ Small Cap System) was approximately $3,057,000.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 12, 2001 is 2,465,229.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 10, 2002 are incorporated by reference into Part III.
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This form 10-K Report consists of 55 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 26, 2001
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 $1,090,600 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.
2
(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 53%, 35% and 36% of total Company sales in
fiscal years 1999, 2000 and 2001, respectively. Sales to
the recreational vehicle market totaled 13%, 9% and 12% in
1999, 2000 and 2001 respectively. Sales to the
aerospace/avionics/defense market totaled 14%, 12% and 19%
in fiscal 1999, 2000 and 2001, respectively. Sales to the
construction/power systems market totaled 20% and 19% in
fiscal 2000 and 2001, respectivly.
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.
* * * * *
(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.
3
(vii) Sales in excess of 10 percent of fiscal 2001
consolidated sales were made to Deere & Co. and
related entities in the amount of $11,493,000 or
55% of Company revenues. Sales were also made to
Rockwell in the amount of $2,265,000 or 11% of
Company revenues as well as Polaris in the amount
of $2,510,000 or 12% of sales.
(viii) Approximate dollar backlog at August 26, 2001,
August 27, 2000, and August 29, 1999 was
$13,108,000, $23,876,000 and $16,032,000
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 26,
2001 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 26, 2001, the Registrant had 80
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 were not
significant. In 2000 and 2001, sales to companies in
Mexico amounted to $2,061,000 and $2,623,000,
respectively. 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 property was sold in June 2001 for
approximately $2.4 million.
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 on a month-to-month basis
approximately 4,000 square feet at a location that primarily
stores excess tooling.
4
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 64 Chairman of the Board
Michael J. Pudil 53 President, Chief Executive Officer, and Director
Paul D. Sheely 42 Vice President, Treasurer, and Assistant Secretary
Gerald E. Magnuson 71 Secretary
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 from 1962 to 2001. He is a retired partner of
the law firm of Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota.
5
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 2001:
First quarter $ 4.500 $ 2.250
Second quarter 3.313 1.813
Third quarter 3.313 1.560
Fourth quarter 2.370 1.600
FISCAL 2000:
First quarter $ 4.875 $ 3.500
Second quarter 5.625 3.000
Third quarter 6.000 3.625
Fourth quarter 5.000 3.750
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 12, 2001 there were 552 shareholders of
record of the Company's Common Stock.
6
Item 6. Selected Financial Data:
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $ 20,877 32,157 $ 21,550 $ 23,948 $ 24,153
Cost of products sold 17,023 26,746 18,279 19,547 20,495
--------- -------- -------- -------- --------
Gross margin 3,854 5,411 3,271 4,401 3,658
Selling and administrative expense 2,995 3,217 2,444 2,453 2,329
Pension curtailment (gain) -- (353) -- -- --
Acquisition related noncompete
and consulting expense 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 -- -- -- --
Interest and other income (157) (472) (158) (162) (583)
Interest expense 821 998 481 190 286
--------- -------- -------- -------- --------
Earnings (loss) from continuing
operations before taxes (1,190) 666 287 1,920 1,626
Income tax expense 3 27 26 46 42
--------- -------- -------- -------- --------
Net earnings (loss) $ (1,193) $ 639 $ 261 $ 1,874 $ 1,584
========= ======== ======== ======== ========
Basic earnings (loss)
per common share $ (.48) $ .26 $ .11 $ .77 $ .65
========= ======== ======== ======== ========
Average number of common shares 2,465 2,462 2,452 2,434 2,425
Diluted earnings (loss) per common
and dilutive potential common share $ (.48) $ .25 $ .10 $ .73 $ .64
========= ======== ======== ======== ========
Average number of common
and dilutive potential
common shares 2,465 2,535 2,527 2,555 2,482
Additional information:
Financial Data:
Total plant and equipment additions $ 513 $ 916 $ 1,238 $ 2,102 $ 507
Long-term debt 4,111 9,601 10,666 1,802 2,671
Total assets 16,338 23,432 24,525 13,615 12,791
Cash flow from operations 2,634 1,961 2,641 3,047 2,610
Stockholders' equity 7,752 8,945 8,264 7,995 6,055
EBIDTA 2,017 4,046 2,299 3,225 3,278
Financial Ratios:
Current ratio .78:1 1.35:1 1.27:1 1.94:1 1.90:1
Percentage of long term debt to equity 53% 107% 129% 23% 44%
Book value per basic common share $ 3.14 $ 3.63 $ 3.37 $ 3.28 $ 2.50
7
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.
During fiscal 2001, the Company paid down an additional $1.6 million of the term
debt. The Company also sold its Long Lake, Minnesota property for approximately
$2.4 million, the proceeds from which paid off the balance on the mortgage of
$2.3 million. Also during fiscal 2001, the seller of Bowman partially earned the
last of two possible contingencies. The Company calculated the amount to be
$340,600, which was added to his Subordinated Promissory Note Payable.
The Company's negative working capital of $1,001,000 on August 26, 2001
reflected a decrease of $2.7 million from the prior year. The major item that
caused the decrease in working capital was the reclassification of one-third of
the Subordinated Promissory Notes Payable into current maturities as those
amounts will be due in fiscal 2002. The current portion of Subordinated Notes
amounted to approximately $1.2 million in fiscal 2001. The entire amount of the
bank term debt was classified as current as that agreement expires in March
2002. Other decreases in working capital were caused by lower accounts
receivable and inventories partially offset by lower accounts payable and
accrued compensation. The fiscal 2001 ratio of current assets to current
liabilities decreased to .78 to 1.0 from 1.35 to 1.0 for fiscal 2000.
Cash provided by operating activities in fiscal 2001 was $2.6 million. Non-cash
charges for depreciation and amortization as well as a decrease in working
capital primarily accounted for the cash provided by operating activities. Cash
provided by operations was $2.0 million in fiscal 2000 and $2.6 million in
fiscal 1999.
Additions to property, plant and equipment were $513,000 in fiscal 2001 compared
to $916,000 in 2000 and $1,238,000 in 1999. These amounts included $323,000,
$433,000 and $980,000 of machinery acquired through capital leases in 2001, 2000
and 1999, respectively. The major 2001 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. As
mentioned previously, the Company sold its Long Lake, Minnesota property for
$2.4 million in fiscal 2001.
The Company's total debt was $7 million at August 26, 2001 and consisted of $1.1
million of bank term debt, seller subordinated notes of $3.6 million and capital
lease obligations of $2.3 million. The total debt was $3.8 million lower that
fiscal 2000.
8
At August 26, 2001 and August 27, 2000 the Company had available a line of
credit of $3,000,000. At August 27, 2000, the outstanding balance on the line
was $369,000 with no balance at August 26, 2001. At August 26, 2001, the maximum
amount available to borrow on the line of credit was approximately $1.1 million.
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 2002.
RESULTS OF OPERATIONS:
Net sales of $20.9 million decreased $11.3 million or 35% from fiscal 2000 sales
of $32.2 million and 673,000 or 3% from fiscal 1999 sales of $21.5 million.
Sales decreased in 2001 as compared to 2000 for three primary reasons. The first
was the overall downturn in the economy affected all markets served by the
Company. Secondly, as mentioned in previous 10-Q's, a major customer made the
decision to effectvely consign raw materials for its manufacturing programs to
the Company instead of WSI purchasing the material and subsequently reselling
the material after manufacture. This consignment thus resulted in lower sales to
that customer. The last reason for the decreased in sales was the loss of a
larger customer at the end of the second quarter.
The sales decrease in 2001 versus 1999 would have been approximately equivalent
to the 2001/2000 comparison had Bowman and Taurus been included in 1999 for the
full fiscal year. However, Taurus was acquired in the middle of fiscal 1999
while Bowman was acquired at the end of fiscal 1999.
In fiscal 2001, the Company reported a net loss of $1.2 million or $.48 per
share compared to net earnings of $639,000 or $.25 per share in 2000 and
$261,000 or .10 per share in 1999. 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 2001 was 18.5% of sales compared to
16.8% of sales and 15.2% of sales in 2000 and 1999, respectively. Margin
improved in 2001 versus 2000 and 1999 despite the lower level of sales. The
primary reason for this was the increased efficiencies obtained at the new
Taurus and Bowman manufacturing plants as compared to the Company's Long Lake,
Minnesota facility which was open a partial year in 2000 and a full year in
1999. Fiscal 2001 gross margin was hampered as the year went on and the level of
sales softened - gross margin in the first quarter was 21.9% versus 8.1% in the
fourth quarter. Gross margin in 2000 was negatively affected by relocation and
training costs associated with the consolidation initiative.
Selling and administrative expense of $4.2 million in fiscal 2001 was a decrease
of $95,000 and an increase of $1.6 million from fiscal years 2000 and 1999,
respectively. The 2001 versus 1999 increase was related to the addition of
Taurus and Bowman expenses for a full year. The 2001 slight decrease versus 2000
was a combination of lower incentive compensation and profit sharing partially
offset by the carrying cost of the Long Lake building being included in selling
and administrative expense for a longer period in 2001 versus 2000.
Interest and other income of $33,000 was $43,000 lower in fiscal 2001 than 2000,
and $125,000 lower than 1999 primarily due to less interest income due to lower
average cash balances.
9
Interest and other expense of $820,000 in fiscal 2001 was $177,000 lower than
2000 and $339,000 higher than 1999. The lower interest in 2001 versus 2000 was
due to the lower level of debt during the year as compared to the prior year.
The interest expense was higher versus 1999 as the acquisition debt did not
appear on the balance sheet until after the middle of 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 and 1999.
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 participates, principally the agricultural industry, could have an
adverse effect on the demand for Company services. 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.
10
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 2001:
First quarter $6,575,040 $1,441,427 $ 66,810 $ .03 $ .03
Second quarter 5,370,556 1,103,795 (275,692) (.11) (.11)
Third quarter 5,140,495 1,000,425 (315,234) (.13) (.13)
Fourth quarter 3,791,090 308,596 (669,074) (.27) (.27)
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 1,412,029 208,917 .08 .08
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 26, 2001 and such information required by such items
is incorporated herein by reference from the proxy statement.
11
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 17) 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 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.
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.
12
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 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.
10.7 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.
10.8 Employment (change in control) Agreement
between Michael J. Pudil and Registrant dated
January 11, 2001 incorporated by reference
from Exhibit 10.1 of the Registrants Form
10-Q for the quarter ended May 27, 2001.
10.9 Employment (change in control) Agreement
between Paul D. Sheely and Registrant dated
January 11, 2001 incorporated by reference
from Exhibit 10.2 of the Registrants Form
10-Q for the quarter ended May 27, 2001.
10.10 Purchase Agreement between DRB#8 and
Registrant incorporated by reference from
Exhibit 10.1 of the Registrants Form 8-K
filed June 25, 2001.
10.11 Sixth Amendment to Amended and Restated Credit
Agreement dated April 1, 2000.
23.1 Consent of Ernst & Young LLP.
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 19, 2001
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 19, 2001
- ------------------------------------- Director
Michael J. Pudil
/s/ Paul Baszucki Director November 19, 2001
- -------------------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 19, 2001
- -------------------------------------
Melvin L. Katten
/s/ George J. Martin Director November 19, 2001
- -------------------------------------
George J. Martin
/s/ Eugene J. Mora Director November 19, 2001
- -------------------------------------
Eugene J. Mora
14
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 16
Consolidated Balance Sheets - August 26, 2001 and August 27, 2000 17
Consolidated Statements of Income - Years Ended August 26, 2001,
August 27, 2000 and August 29, 1999 18
Consolidated Statements of Stockholders' Equity - Years Ended
August 26, 2001, August 27, 2000 and August 29, 1999 19 Consolidated
Statements of Cash Flows - Years Ended August 26, 2001,
August 27, 2000 August 29, 1999 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.
We have audited the accompanying consolidated balance sheets of WSI Industries,
Inc. and subsidiaries as of August 26, 2001 and August 27, 2000, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended August 26, 2001, August 27, 2000 and August 29, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule 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 26, 2001 and August 27, 2000, and the
consolidated results of their operations and their cash flows for the years
ended August 26, 2001, August 27, 2000 and August 29, 1999 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 12, 2001
16
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 26, 2001 AND AUGUST 27, 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,292 $ 6,300
Accounts receivable, less allowance for doubtful
accounts of $27,500 at each year-end 1,778,969 3,713,198
Inventories 1,584,415 2,738,346
Prepaid and other current assets 101,879 148,206
------------- ------------
Total current assets 3,473,555 6,606,050
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 4):
Land -- 66,906
Buildings and improvements -- 5,198,081
Machinery and equipment 16,779,167 16,347,768
------------- ------------
16,779,167 21,612,755
Less accumulated depreciation 10,087,807 10,957,059
------------- ------------
Total property, plant, and equipment 6,691,360 10,655,696
INTANGIBLE ASSETS:
Goodwill and related acquisition costs net of
accumulated amortization of $711,605 and
$374,244 at each year-end 6,173,158 6,169,919
------------- ------------
$ 16,338,073 $ 23,431,665
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 3) $ -- $ 369,134
Trade accounts payable 687,426 2,041,089
Accrued compensation and employee withholdings 445,693 857,739
Accrued real estate taxes -- 151,230
Miscellaneous accrued expenses 425,330 229,719
Current portion of long-term debt (Note 3) 2,916,061 1,236,460
------------- ------------
Total current liabilities 4,474,510 4,885,371
Long-term debt, less current portion (Note 3) 4,111,462 9,601,003
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 shares 246,523 246,523
Capital in excess of par value 1,640,934 1,640,934
Retained earnings 5,864,644 7,057,834
------------- ------------
Total stockholders' equity 7,752,101 8,945,291
------------- ------------
$ 16,338,073 $ 23,431,665
============= ============
See notes to consolidated financial statements.
17
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 26, 2001, AUGUST 27, 2000 AND AUGUST 29, 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Net sales (Note 8) $ 20,877,181 $ 32,156,967 $ 21,549,861
Cost of products sold 17,022,938 26,745,715 18,278,492
------------ ------------ -------------
Gross margin 3,854,243 5,411,252 3,271,369
Selling and administrative expense 4,228,849 4,323,892 2,660,683
Pension curtailment (gain) -- (353,375) --
Gain on sale of equipment and building (123,279) (395,382) --
Severance costs -- 248,506 --
Fair market value impairment of equipment 150,859 -- --
Interest and other income (32,945) (76,223) (157,748)
Interest expense 820,949 997,690 481,569
------------ ------------ -------------
5,044,433 4,745,108 2,984,504
------------ ------------ -------------
Income (loss) before income taxes (1,190,190) 666,144 286,865
Income tax expense (Note 6) 3,000 26,900 25,800
------------ ------------ -------------
Net income (loss) $ (1,193,190) $ 639,244 $ 261,065
============ ============ =============
Basic earnings (loss) per share $ (.48) $ .26 $ .11
============ ============ =============
Diluted earnings (loss) per share $ (.48) $ .25 $ .10
============ ============ =============
Weighted average number of common
shares outstanding 2,465,229 2,461,980 2,451,836
============ ============ =============
Weighted average number dilutive
common shares outstanding 2,465,229 2,535,197 2,527,299
============ ============ =============
See notes to consolidated financial statements.
18
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CAPITAL TOTAL
COMMON STOCK IN EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
--------- --------- ------------ ---------- -------------
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
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
========== ======== ========== ========== ==========
See notes to consolidated financial statements.
19
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 26, 2001, AUGUST 27, 2000 AND AUGUST 29, 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,193,190) $ 639,244 $ 261,065
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,386,716 2,382,267 1,530,523
Gain on sale of property, plant, and equipment
and other assets (123,279) (393,843) (48,164)
Increase (decrease) in pension liability -- (347,437) (32,636)
Fair market value impairment of equipment 150,859 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,934,229 (750,930) 1,515,192
Inventories 1,153,931 753,554 (429,587)
Prepaid and other current assets 46,327 (75,728) 159,260
(Decrease) increase in accounts payable
and accrued expenses (1,721,328) (245,666) (314,294)
----------- ---------- ----------
Net cash provided by operating activities 2,634,265 1,961,461 2,641,359
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (189,928) (483,801) (257,897)
Proceeds from sale of equipment and other assets 2,400,000 746,165 57,036
Purchase of subsidiaries, net of cash assumed -- (27,000) (8,704,234)
--------- ---------- -----------
Net cash provided by (used in) investing
activities 2,210,072 235,364 (8,905,095)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 5,379,844 13,021,304 6,690,399
Payments of long-term debt (10,222,189) (15,385,229) (3,000,429)
Issuance of common stock -- 41,812 8,250
----------- ----------- -----------
Net cash provided by (used in) financing activities (4,842,345) (2,322,113) 3,698,220
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,992 (125,288) (2,565,516)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,300 131,588 2,697,104
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,292 $ 6,300 $ 131,588
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 846,631 $ 1,004,800 $ 420,874
Income taxes 7,500 32,383 45,361
Noncash investing and financing activities:
Acquisition of machinery through capital lease 322,671 432,625 980,250
Acquisition related debt 340,600 750,000 5,206,657
See notes to consolidated financial statements.
20
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 26, 2001, AUGUST 27, 2000 AND AUGUST 29, 1999
- --------------------------------------------------------------------------------
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 2001, 2000 and 1999 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 $263,372 and $131,789 at August 26, 2001
and August 27, 2000, respectively.
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.
During 2001, the Company determined that some excess equipment that is
currently on consignment to be sold was worth less than its net book
value. The Company has written the book value of the related equipment to
its estimated net realizable value. In 2001, the Company recognized
$150,000 in expense related to this impairment.
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.
21
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.
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.
Recently Issued Accounting Standards - In July 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 will adopt the
standards in the first quarter of fiscal 2002. The Company has determined
the impact of Statement 142 will be a reduction of $344,000 per year in
amortization expense.
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.
22
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
===========
In fiscal 2001, 2000 and 1999, contingent payments were earned in the
amount of $1,090,000 and were included in goodwill.
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 26, 2001, August 27, 2000 and August 29, 1999
was $337,361, $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:
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 26, 2001 August 27, 2000
--------------- ---------------
Bank term debt $ 1,142,856 $ 2,771,428
Mortgage note payable -- 2,333,332
Subordinated promissory notes 3,597,256 3,256,657
Capitalized lease obligations (Note 4) 2,287,411 2,476,046
----------- -----------
7,027,523 10,837,463
Less current portion 2,916,061 1,236,460
----------- -----------
Long-term debt $ 4,111,462 $ 9,601,003
=========== ===========
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 (6.50% at
August 26, 2001 and 9.50% at August 27, 2000) plus .75% and is also paid
monthly.
During fiscal 1999, the Company obtained a mortgage with the same bank
with which it currently has its term debt and line of credit facility. The
agreement required monthly principal payments of $13,889. Interest on the
mortgage was calculated at the bank's base rate plus 1.0% and was paid
monthly. The entire balance was paid off June 12, 2001 after the sale of
the building securing the mortgage.
23
Interest on the line of credit is at the bank's base rate plus 0.5
percentage points (6.5% at August 26, 2001). 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 26, 2001 there was no balance outstanding.
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 26, 2001 and August 27, 2000,
the Company was in compliance with the various covenants of the credit
agreement.
The notes, line of credit and capital leases are collateralized by the
receivables, inventories, and property, plant, and equipment of the
Company.
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,
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. In fiscal 2001, the
Company calculated that the seller of Bowman earned an additional $340,600
which was added to his subordinated promissory note effective January 21,
2001.
Maturities of long-term debt, excluding capital lease obligations, for the
fiscal years subsequent to August 26, 2001 are as follows:
2002 $2,341,942
2003 1,199,086
2004 1,199,084
----------
$4,740,112
==========
4. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 26, 2001 are
cost and accumulated depreciation on equipment subject to capitalized
leases of $6,174,337 and $3,916,359, respectively. At August 27, 2000, the
amounts were $5,851,666 and $3,143,779, respectively.
24
The present value of the net minimum payments on capital leases as of
August 26, 2001 is as follows:
Capital
Leases
----------
Fiscal years ending August:
2002 $ 742,227
2003 614,580
2004 572,121
2005 470,201
2006 178,707
Thereafter 165,333
----------
Total minimum lease payments 2,743,169
Less amount representing interest 455,758
----------
Present value of net minimum lease payments 2,287,411
Current portion 574,119
----------
Capital lease obligation, less current portion $1,713,292
==========
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, 2002 for $10,000 per month and is also responsible for operating
expenses and real estate taxes. The Company also rents a storage warehouse
on a month-to-month basis for $2,750 per month.
The Company leases its corporate office on a month-to-month basis with 60
days notice required, for a monthly base rent of $3,685. The Company also
has various equipment leases that expire in 2002.
Future minimum lease payments for operating leases are:
Fiscal years ending August:
2002 $ 101,100
----------
Total minimum lease payments $ 101,100
==========
Rent expense of approximately $437,000, $386,000, and $67,000 have been
charged to operations for the years ended August 26, 2001, August 27, 2000
and August 29, 1999, 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 26, 2001, 111,666 shares
remained reserved and available for grant under the plan.
25
Option transactions during the three years ended August 26, 2001 are
summarized as follows:
1987 Stock 1994 Stock
Option Plan Option Plan
-------------------- -----------------
Average Average
Shares Price Shares Price
------ -------- ------ -------
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
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
======= ========
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 2001, fiscal 2000 and fiscal
1999 as set forth in the table below. The estimated fair value of the
options is amortized to expense over the options' vesting period.
2001 2000 1999
---- ---- ----
Dividend yield None None None
Expected volatility 55.7% 38.6% 47.7%
Risk free interest rate 5.5% 6.0% 6.0%
Expected term 10 years 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 26, 2001 August 27, 2000 August 29, 1999
--------------- --------------- ---------------
Net Income (loss):
As reported $(1,193,190) $ 639,244 $ 261,065
Pro forma $(1,417,714) $ 383,094 $ 71,632
Income (loss) per basic common share:
As reported $ (.48) $ .26 $ .11
Pro forma $ (.58) $ .16 $ .03
Income per diluted common share:
As reported $ (.48) $ .25 $ .10
Pro forma $ (.58) $ .15 $ .03
26
As of August 26, 2001, there were 152,000 options outstanding with
exercise prices between $2.00 and $2.94, 165,500 options outstanding with
exercise prices between $3.00 and $4.75, and 108,000 options outstanding
with exercise prices between $5.50 and $6.13. At August 26, 2001,
outstanding options had a weighted-average remaining contractual life of 5
years.
The numbers of options exercisable as of August 26, 2001, August 27, 2000
and August 29, 1999 were 348,500, 304,920, and 251,171 respectively, at
weighted average share prices of $3.88, $3.81, and $3.50 per share,
respectively.
The weighted average fair value of options granted during the years ended
August 26, 2001, August 27, 2000 and August 29, 1999 was $2.97, $2.39, and
$4.99 per share, respectively.
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Years Ended
-----------------------------------------------
August 26, August 27, August 29,
2001 2000 1999
---- ---- ----
Currently payable:
Federal $ -- $ 20,000 $ 17,500
State 3,000 6,900 8,300
--------- ---------- ----------
3,000 26,900 25,800
Deferred:
Federal -- -- --
State -- -- --
--------- ---------- ----------
Total $ 3,000 $ 26,900 $ 25,800
========= ========== ==========
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,
2001 2000 1999
---- ---- ----
Ordinary federal income tax statutory rate (35.0)% 35.0 35.0%
Limitation on (utilization of) tax assets 35.0 (32.0) (28.9)
State income taxes, net of federal tax benefit .3 1.0 2.9
------- ------- -------
Taxes provided .3% 4.0% 9.0
======= ======= =======
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:
27
Year ended Year ended
August 26, 2001 August 27, 2000
--------------- ---------------
DEFERRED TAX ASSETS
Accrued liabilities $ 21,746 $ 31,098
Inventory valuation accruals 89,547 44,808
Net operating loss carryforwards 1,043,878 633,987
Tax credit carryforwards 530,265 530,265
Other 201,118 136,238
-------------- ---------------
1,886,554 1,376,396
DEFERRED TAX LIABILITIES
Tax depreciation and amortization
greater than book 586,294 460,279
-------------- ---------------
Net deferred tax assets 1,300,260 916,117
Valuation allowance (1,300,260) (916,117)
-------------- ---------------
$ -- $ --
============== ===============
As of August 26, 2001, the Company had federal net operating loss
carryforwards of approximately $2,963,000 of which $1,324,000 will expire
in fiscal years 2008 and 2009, $415,000 in 2011 and $1,106,000 in 2016.
Also as of August 26, 2001, 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 26, 2001 all assets of the Plan had been
distributed.
Net periodic pension cost consisted of the following:
Years Ended
----------------------------
2000 1999
---- ----
Service cost - benefits earned during the year $ 128,699 $ 119,314
Interest cost on projected benefit obligation 566,664 509,347
Actual return on plan assets (712,904) (661,377)
Net amortization and deferral 24,969 (1,339)
----------- -----------
Net periodic pension cost $ 7,428 $ (34,055)
=========== ===========
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 2001, 2000, and 1999, were approximately $151,383, $146,184 and
$51,954, respectively.
28
8. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to four customers which exceeded 10 percent of total
sales during any one of fiscal years 2001, 2000 or 1999 as listed below:
Fiscal Year Sales
----------------------------------------------------------
Customer 2001 2000 1999
-------- ---- ---- ----
#1 $11,493,000 $17,084,000 $11,748,000
#2 2,510,000 3,406,000 2,884,000
#3 2,265,000 2,970,000 2,682,000
#4 729,000 3,108,000 1,112,000
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2001 2000 1999
---- ---- ----
Net Income (Loss) $(1,193,190) $ 639,244 $ 261,065
=========== =========== ===========
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,465,229 2,461,980 2,451,836
Effect of dilutive securities;
employee and nonemployee options -- 73,217 75,463
----------- ----------- -----------
Dilutive common shares;
denominator for diluted earnings
per share 2,465,229 2,535,197 2,527,299
Basic (loss) income per share $ (.48) $ .26 $ .11
=========== =========== ===========
Dilutive income (loss) per share $ (.48) $ .25 $ .10
=========== =========== ===========
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 29, 1999 $ 25,000 $ 2,500(2) $ 0 $ 27,500
============ ============ ========= ============
Year ended
August 27, 2000 $ 27,500 $ 0 $ 0 $ 27,500
============ ============ ========= ============
Year ended
August 26, 2001 $ 27,500 $ 0 $ 0 $ 27,500
============ ============ ========= ============
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
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
============ ============ ======== ===========
Year ended
August 26, 2001 $ 131,789 $ 131,583 $ 0(1) $ 263,372
============ ============ ======== ===========
- ----------
(1) Write-offs of excess or obsolete inventory.
(2) Additional amount assumed due to the acquisition of Taurus Numeric Tool,
Inc.
30