SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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[X] Annual Report Pursuant To Section 13 OR 15(d) Of The SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended August 29, 2004 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.)
213 CHELSEA RD
MONTICELLO, MINNESOTA 55362
(Address of principal executing offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (763) 295-9202
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 27, 2004, the last business day of the Company's most
recently completed second quarter was approximately $6,205,000, based upon the
closing sale price on that date of $2.43 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 23, 2004 is 2,557,629.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 6, 2005 are incorporated by reference into Part III. Form 10-K
Report consists of 35 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.wsiindustries.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 (ATV and
motorcycle) 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. The
Company's operations consist entirely of the Taurus Subsidiary.
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 21% of total Company sales in fiscal year 2002. Sales to the
construction/power systems market totaled 10% in fiscal 2002. With the sale of
Bowman Tool assets described above, the Company is no longer in the agriculture
or construction/power systems markets. Sales to the recreational vehicle market
totaled 37%, 74% and 79% in fiscal 2002, 2003 and 2004 respectively. Sales to
the aerospace/avionics/defense markets totaled 17%, 15% and 14% in fiscal 2002,
2003 and 2004, respectively.
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 2004 consolidated sales were made to
Polaris Industries, Inc. and related entities in the amount of $9,107,000 or 79%
of Company revenues.
BACKLOG
Approximate dollar backlog at August 29, 2004, October 15, 2003 and August 25,
2002 was $3,091,000, $1,899,000 and $2,634,000, respectively. Backlog is not
deemed to be any more significant for the Company than for other companies
engaged in similar businesses. The October 15, 2003 backlog date and the end of
year August dates for 2004 and 2002 are believed to be comparable. The Company
believes that the level of backlog is not necessarily indicative of future
yearly sale increases or decreases.
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 29, 2004, the Company had 54 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 2004, 2003 and 2002,
sales to a customer in Mexico amounted to $360,000, $693,000 and $1,686,000,
respectively.
ITEM 2. PROPERTIES
The Company purchased an existing 49,000 square foot facility located in
Monticello, Minnesota in May 2004 to house its production and its headquarters.
The purchase price was $1.9 million and was paid for by a combination of cash
and debt. The Company is relocating its existing production facility located in
Osseo, Minnesota to the Monticello facility. The Osseo building is leased until
February 2005 with monthly rent of approximately $9,600 plus operating expenses
and taxes. The Company expects to be fully relocated by the end of its fiscal
2005 second quarter.
The Company considers its manufacturing equipment, facilities, and other
physical properties to be suitable and adequate to meet the requirements of its
business.
3
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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded on the Nasdaq SmallCap Market System
under the symbol "WSCI."
As of November 8, 2004 there were 506 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 2004:
First quarter $ 3.03 $ 2.30
Second quarter 2.87 2.27
Third quarter 4.03 2.21
Fourth quarter 3.53 2.07
FISCAL 2003:
First quarter $ 1.58 $ .60
Second quarter 1.30 .90
Third quarter 1.24 .99
Fourth quarter 3.00 1.15
The Company announced a quarterly dividend program in June 2003 and has paid a
quarterly dividend of $0.0375 for each of the six quarters thereafter, with the
last dividend being paid on November 17, 2004.
4
The following table sets forth information regarding our equity compensation
plans in effect as of August 29, 2004. 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.
Equity Compensation Plan Information
Number of shares of
Number of shares of common stock remaining
common stock to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in the first column)
------------- ----------------------- -------------------- ------------------------------
Equity compensation plans approved by
shareholders:
1987 Stock Option Plan
1994 Stock Plan 5,000 $3.88 --
376,500 $2.68 --(1)
Equity compensation plans not approved by
shareholders:
None -- -- --
Total 381,500 $2.70 --
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(1) The Company's Board of Directors has approved amendments to the Company's
1994 Stock Plan extending the term of the plan for ten years to September
29, 2014 and authorizing an additional 200,000 shares for issuance
thereunder. These amendments to the 1994 Stock Plan are subject to
approval of the Company's shareholders at the Company's 2005 Annual
Meeting of Shareholders.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Net sales $ 11,525 $ 10,793 $ 12,948 $ 20,877 32,157
Cost of products sold 10,022 8,704 11,348 17,023 ,746
-------- -------- -------- -------- --------
Gross margin 1,503 2,089 1,600 3,854 5,411
Selling and administrative expense 1,138 1,412 1,461 2,995 3,217
Pension curtailment (gain) - - - - (353)
Acquisition related noncompete
and consulting expense 47 100 290 550 596
Goodwill amortization - - - 337 296
Relocation and 2nd facility cost 239 - - 347 214
Severance expense - - - - 249
Fair market value impairment of equipment - - - 151 -
Loss on sale of subsidiary assets - - 2,506 - -
Interest and other income (90) (78) (28) (157) (472)
Interest expense 92 123 363 821 998
-------- -------- -------- -------- --------
Earnings (loss) from continuing
operations before taxes 77 532 (2,992) (1,190) 666
Income tax expense (benefit) 28 179 (2,179) 3 27
-------- -------- -------- -------- --------
Net earnings (loss) $ 49 $ 353 $ (813) $ (1,193) $ 639
======== ======== ======== ======== ========
Basic earnings (loss)
per share $ .02 $ .14 $ (.33) $ (.48) $ .26
======== ======== ======== ======== ========
Average number of common shares 2,554 2,474 2,465 2,465 2,462
Diluted earnings (loss) share $ .02 $ .14 $ (.33) $ (.48) $ .25
======== ======== ======== ======== ========
Average number of dilutive
shares 2,625 2,486 2,465 2,465 2,535
Dividends paid per share $ .15 $ .0375 $ - $ - $ -
======== ======== ======== ======== ========
Additional information:
Financial Data:
Total plant and equipment additions $ 2,745 $ 161 $ 613 $ 513 $ 916
Long-term debt 2,613 648 1,398 4,111 9,601
Total assets 11,193 9,174 9,799 16,338 23,432
Cash flow from operations 477 1,123 (77) 2,634 1,961
Stockholders' equity 7,069 7,392 6,939 7,752 8,945
Financial Ratios:
Current ratio 2.16:1 2.89:1 2.23:1 .78:1 1.35:1
Percentage of long term debt to equity 37% 9% 20% 53% 107%
Book value per basic common share $ 2.76 $ 2.90 $ 2.81 $ 3.14 $ 3.63
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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 2004 was $1,756,000 as
compared to $2,139,000 at the end of fiscal 2003. The decrease was due primarily
to the Company using cash to pay out $383,000 in dividends to its shareholders.
The ratio of current assets to current liabilities decreased to 2.16 to 1.0 from
2.89 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 Item 1 Overview. Excluding those payments, the Company would have generated
$552,000 of cash from operations in fiscal 2002.
Additions to property, plant and equipment were $2,745,000 in fiscal 2004
compared to $161,000 in 2003 and $613,000 in 2002. These amounts included
$593,000 and $607,000 of machinery acquired through capital leases in 2004 and
2002, respectively. The major addition to property plant and equipment in fiscal
2004 was the purchase of the Company's new manufacturing facility located in
Monticello, Minnesota. The purchase price was $1.9 million and was paid for by a
combination of $190,000 in cash and $1,710,000 in mortgages.
In connection with the facility acquisition, the Company renewed its revolving
line credit agreement with its 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 2004 and has never been accessed. The Company
is currently pursuing a renewal of the line beyond December 2004.
Proceeds from the sale of equipment amounted to $3,600 and $4,400 in fiscal 2003
and 2002, respectively.
The Company's total debt was $2,920,000 at August 29, 2004 that consisted of
mortgages on its building of $1,700,000 and capital lease obligations secured by
production equipment of $1,220,000. 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 $269,000 due on capital leases and $38,000 on its
mortgages. It is management's belief that internally generated funds as well as
its revolving line of credit will be sufficient to enable the Company to meet
its financial requirements during fiscal 2005.
RESULTS OF OPERATIONS:
Net sales in fiscal 2004 were $11.5 million which is an increase of $732,000 or
7% from fiscal 2003. The primary reason for the sales increase was the
improvement in sales from the Company's recreational vehicle market. Net sales
in fiscal 2003 were $10.8 million which was 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.
The Company reported net income in fiscal 2004 of $49,000. The Company's income
was negatively affected by start-up expenses in a new program in the Company's
recreational vehicle market as well as relocation expense incurred with the move
to its new Monticello, Minnesota facility. The Company estimates that it will
complete the relocation and be in one building by the end of its fiscal 2005
second quarter.
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 2004 were 13.0%, a decrease of 6.4% over fiscal 2003's
margin of 19.4% and an increase of .7% over fiscal 2002's margin of 12.3%. The
decrease in 2004's margins is largely attributable to start-up expenses of the
Company's new program in the recreational vehicle market. The fiscal 2003
increase over 2002 was due to 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.
Selling and administrative expense of $1.4 million in fiscal 2004 was a decrease
of $88,000 from fiscal 2003 and $327,000 from fiscal 2002. The decrease in
expense in fiscal 2004 was due to lower compensation costs and noncompete
payments partially offset by the relocation costs. 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.
Interest expense of $92,000 in fiscal 2004 was $31,000 lower than 2003 and
$271,000 lower than 2002. The lower expense is a result of lower average levels
of long-term debt during each fiscal year.
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 $28,000, or an effective tax rate of
36%, in 2004. The Company maintained its valuation allowance at zero during
2004. 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 estimation, would make it more likely than
not that it will fully utilize its prior loss carryforwards and tax credits.
9
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 and (iv) the expense associated with compliance with
the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, including
Section 404 of the Act relating to management's report on internal controls. In
addition, the Company is materially dependent upon one customer that represented
79% of the Company's revenue in fiscal 2004. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements section of this Annual Report on Form 10-K
beginning on page 18, 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 2004:
First quarter $ 2,806,062 $ 410,657 $ 56,370 $ .02 $ .02
Second quarter 2,615,666 408,203 55,590 .02 .02
Third quarter 3,147,009 411,461 60,745 .02 .02
Fourth quarter 2,956,098 272,304 (123,709) (.05) (.05)
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 CONTROL OVER FINANCIAL REPORTING
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.
ITEM 9B. OTHER INFORMATION
None.
PART III
Pursuant to General Instruction G (3), the Company omits Part III, Items 10, 11,
12, 13 and 14, as a definitive proxy statement will be filed with the Commission
pursuant to Regulation 14(a) within 120 days after August 29, 2004 and such
information required by such items is incorporated herein by reference from the
proxy statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
1. Consolidated Financial Statements: Reference is made to the Index to
Consolidated Financial Statements (page 16) hereinafter contained
for all Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts - page 31
Schedules not listed above have been omitted, because they are
either not applicable or not material, or the required information
is included in the financial statements or related notes.
3. Exhibits.
Exhibit
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.
10.12 Purchase Agreement dated as of March 12, 2004 between WSI Industries, Inc.
and Remmele Engineering, Inc. Incorporated by reference from Exhibit 10.1
of the Registrant's Form 8-K dated May 3, 2004.
10.13 Promissory Note dated as of May 3, 2004 by WSI Industries, Inc. as debtor
and Excel Bank Minnesota as holder in the original principal amount of
$1,360,000. Incorporated by reference from Exhibit 10.2 of the
Registrant's Form 8-K dated May 3, 2004.
10.14 Loan Agreement dated as of May 3, 2004 between WSI Industries, Inc. and
Excel Bank Minnesota. Incorporated by reference from Exhibit 10.3 of the
Registrant's Form 8-K dated May 3, 2004.
13
10.15 Promissory Note dated as of May 3, 2004 by WSI Industries, Inc. as debtor
and Monticello Economic Development Authority as holder in the original
principal amount of $350,000. Incorporated by reference from Exhibit 10.4
of the Registrant's Form 8-K dated May 3, 2004.
10.16 Loan Agreement dated as of May 3, 2004 between WSI Industries, Inc. and
the Monticello Economic Development Authority. Incorporated by reference
from Exhibit 10.5 of the Registrant's Form 8-K dated May 3, 2004.
10.17 Mortgage and Security Agreement and Fixture Financing Statement dated as
of May 3, 2004 between WSI Industries, Inc. and Excel Bank Minnesota.
Incorporated by reference from Exhibit 10.6 of the Registrant's Form 8-K
dated May 3, 2004.
10.18 Mortgage dated as of May 3, 2004 between WSI Industries, Inc. and the
Monticello Economic Development Authority. Incorporated by reference from
Exhibit 10.7 of the Registrant's Form 8-K dated May 3, 2004.
10.19 Second Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of May 3, 2004 by and
among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester,
Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.7
of the Registrant's Form 8-K dated May 3, 2004.
14.1 Code of Ethics & Business Conduct adopted by the Company on October 29,
2003. Incorporated by reference to Exhibit 14.1 of the Registrant's Annual
Report on Form 10-K for the year ended August 31, 2003.
23.1 Consent of Schechter Dokken Kanter Andrews & Selcer Ltd.
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.
14
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 23, 2004
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 23, 2004
-----------------------
Michael J. Pudil Director
/s/ Paul Baszucki Director November 23, 2004
-----------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 23, 2004
-----------------------
Melvin L. Katten
/s/ George J. Martin Director November 23, 2004
-----------------------
George J. Martin
/s/ Eugene J. Mora Director November 23, 2004
-----------------------
Eugene J. Mora
15
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 17
Consolidated Balance Sheets - August 29, 2004 and August 31, 2003 18
Consolidated Statements of Income - Years Ended August 29, 2004, August 31, 2003
and August 25, 2002 19
Consolidated Statements of Stockholders' Equity - Years Ended
August 29, 2004, August 31, 2003 and August 25, 2002 20
Consolidated Statements of Cash Flows - Years Ended August 29, 2004,
August 31, 2003 and August 25, 2002 21
Notes to Consolidated Financial Statements 22
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 31
16
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WSI Industries, Inc.
Monticello, Minnesota
We have audited the consolidated balance sheets of WSI Industries, Inc. and
Subsidiaries as of August 29, 2004 and August 31, 2003 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended August 29, 2004. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 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 29, 2004 and August 31, 2003, and
the results of its operations and its cash flows for each of the years in the
three-year period ended August 29, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule for the three years ended
August 29, 2004, 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 15, 2004
17
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 29, 2004 AND AUGUST 31, 2003
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 294,766 $ 891,218
Accounts receivable, less allowance for doubtful
accounts of $10,074 and $10,735, respectively 1,757,282 1,530,811
Net Inventories (Note 3) 923,223 606,262
Prepaid and other current assets 93,394 75,747
Deferred tax assets (Note 7) 198,225 169,387
------------ -----------
Total current assets 3,266,890 3,273,425
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 5):
Land 819,000 -
Building and improvements 1,175,297 -
Machinery and equipment 6,487,671 5,737,237
Less accumulated depreciation (4,643,058) (4,018,638)
------------ -----------
Total property, plant, and equipment 3,838,910 1,718,599
DEFERRED TAX ASSETS (NOTE 7) 1,687,931 1,813,270
INTANGIBLE ASSETS (NOTE 11):
Deferred financing costs, net of accumulated
amortization of $2,204 30,859 -
Goodwill and related acquisition costs net of
accumulated amortization of $344,812 2,368,452 2,368,452
------------ -----------
$ 11,193,042 $ 9,173,746
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 808,047 $ 403,277
Accrued compensation and employee withholdings 251,343 384,857
Miscellaneous accrued expenses 145,294 150,289
Current portion of long-term debt (Note 4) 306,588 195,720
------------ -----------
Total current liabilities 1,511,272 1,134,143
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 4) 2,613,150 648,008
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 6):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,557,629 shares and 2,551,129, respectively 255,763 255,113
Capital in excess of par value 1,837,441 1,826,901
Retained earnings 4,975,416 5,309,581
------------ -----------
Total stockholders' equity 7,068,620 7,391,595
------------ -----------
$ 11,193,042 $ 9,173,746
============ ===========
See notes to consolidated financial statements.
18
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 29, 2004, AUGUST 31, 2003 AND AUGUST 25, 2002
2004 2003 2002
---- ---- ----
Net sales (Note 9) $ 11,524,835 $ 10,792,650 $ 12,948,068
Cost of products sold 10,022,210 8,703,970 11,347,924
-------------- ------------- -------------
Gross margin 1,502,625 2,088,680 1,600,144
Selling and administrative expense 1,423,422 1,511,458 1,750,883
Loss on sale of equipment - 9,972 -
Loss on sale of subsidiary assets - - 2,505,919
Interest and other income (89,693) (87,984) (27,838)
Interest expense 92,339 123,343 363,063
-------------- ------------- -------------
1,426,068 1,556,789 4,592,027
-------------- ------------- -------------
Income (loss) before income taxes 76,557 531,891 (2,991,883)
Income tax expense (benefit) (Note 7) 27,561 178,522 (2,179,119)
-------------- ------------- -------------
Net income (loss) $ 48,996 $ 353,369 $ (812,764)
============== ============= =============
Basic earnings (loss) per share $ .02 $ .14 $ (.33)
============== ============= =============
Diluted earnings (loss) per share $ .02 $ .14 $ (.33)
============== ============= =============
Cash dividend per share $ .15 $ .0375 $ -
============== ============= =============
Weighted average number of common
shares outstanding 2,554,489 2,473,535 2,465,229
============== ============= =============
Weighted average number dilutive
common shares outstanding 2,625,238 2,485,961 2,465,229
============== ============= =============
See notes to consolidated financial statements.
19
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL TOTAL
---------------------- IN EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
------ ------ ------------ -------- ------
BALANCE AT AUGUST 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
Net earnings - - - 48,996 48,996
Exercise of stock options 6,500 650 10,540 - 11,190
Dividends paid - - - (383,161) (383,161)
--------- ---------- ------------- -------------- ---------------
BALANCE AT AUGUST 29, 2004 2,557,629 $ 255,763 $ 1,837,441 $ 4,975,416 $ 7,068,620
========= ========== ============= ============= ===============
See notes to consolidated financial statements.
20
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 29, 2004, AUGUST 31, 2003 AND AUGUST 25, 2002
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 48,996 $ 353,369 $ (812,764)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Loss on sale of subsidiary - - 2,505,919
Depreciation 624,419 630,222 1,275,688
Amortization 2,204 - -
Loss on sale of property, plant, and equipment
and other assets - 9,972 1,430
Deferred taxes 96,501 178,522 (2,183,419)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (226,471) (376,224) (354,430)
Inventories (316,961) 157,061 556,964
Prepaid and other current assets (17,647) (41,757) 58,981
(Decrease) increase in accounts payable and accrued expenses 266,261 211,673 (1,125,698)
----------- ----------- -------------
Net cash provided by (used in) operating activities 477,302 1,122,838 (77,329)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (2,151,376) (160,671) (6,689)
Proceeds from sale of equipment and other assets - 3,570 4,421
Sale of subsidiary - - 3,241,790
----------- ----------- -------------
Net cash provided by (used in) investing activities (2,151,376) (157,101) 3,239,522
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,710,000 - -
Payment of long-term debt (227,344) (1,289,330) (2,054,563)
Issuance of common stock 11,190 212,500 -
Dividends paid (383,161) (95,668) -
Deferred financing costs (33,063)
Purchase of Company stock - (17,943) -
----------- ----------- -------------
Net cash provided by (used in) financing activities 1,077,622 (1,190,441) (2,054,563)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (596,452) (224,704) 1,107,630
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 891,218 1,115,922 8,292
----------- ----------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 294,766 $ 891,218 $ 1,115,922
=========== =========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 86,484 $ 129,226 $ 385,676
Income taxes - 4,300 -
Noncash investing and financing activities:
Acquisition of machinery through capital lease 593,355 - 606,618
See notes to consolidated financial statements.
21
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 29, 2004, AUGUST 31, 2003 AND AUGUST 25, 2002
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 2004 and 2002 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 machinery and equipment, and
buildings and improvements are being depreciated using the straight-line
method. The estimated useful lives of the assets are as follows:
Machinery and equipment 3 to 10 years
Building and improvements 15 to 40 years
The Company evaluates long-term assets on a periodic basis in compliance
with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-lived Assets when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets carrying amount.
Income Taxes - The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary differences
between the financial reporting and tax bases of assets and liabilities.
Revenue Recognition - Revenues from sales of product are recorded
generally upon shipment. The Company has an agreement with a customer to
provide product on a consignment basis. In this case, revenues are
recognized when the customer notifies the Company that it has consumed the
product. 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 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.
22
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 2004, 245,000 shares of stock options
were excluded from the diluted earnings per share computation due to their
anti-dilutive effect. In fiscal 2003 and 2002, the number of shares
excluded were 184,000 and 431,000, respectively.
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.
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 $409,249 and $422,930 at
August 29, 2004 and August 31, 2003, respectively:
August 29, 2004 August 31, 2003
--------------- ---------------
Raw material $277,359 $185,785
WIP 359,432 211,188
Finished goods 286,432 209,289
-------- --------
$923,223 $606,262
======== ========
23
4. DEBT
Long-term debt consists of the following:
August 29, 2004 August 31, 2003
--------------- ---------------
Mortgages 1,699,897 -
Capitalized lease obligations (Note 5) 1,219,841 843,728
---------- ----------
2,919,738 843,728
Less current portion 306,588 195,720
---------- ----------
Long-term debt$ 2,613,150 $ 648,008
========== ==========
The Company purchased land and a building located in Monticello, Minnesota
in May 2004. In connection with the purchase, the Company entered into two
mortgages. The first mortgage was with its bank for $1,360,000 that
matures on May 1, 2014. The mortgage has an initial interest rate of 5.37%
with a provision that the rate will adjust on May 3, 2009 to a rate 2.5%
above the monthly yield on United States Treasury five-year securities.
The mortgage requires monthly principal and interest payments of $8,307
based on a 25-year amortization schedule. The mortgage is secured by all
assets of the Company.
The Company also entered into a mortgage with the City of Monticello
Economic Development Authority (EDA). The EDA mortgage is subordinated to
the bank mortgage, carries an interest rate of 2% and matures May 1, 2009.
The mortgage also requires monthly principal and interest payments of
$1,483 based on a 25-year amortization schedule.
Maturities of long-term debt are as follows:
Fiscal years ending August:
2005 $ 306,588
2006 256,227
2007 274,729
2008 262,938
2009 444,448
Thereafter 1,374,808
Line of Credit:
Concurrent with the mortgage, the Company renewed its revolving credit
agreement with the bank. 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 December 31, 2004 and has restrictive
provisions requiring minimum net worth, current and debt service coverage
ratios as well as a maximum ratio of debt to tangible net worth. At August
29, 2004, the Company was in compliance with these provisions. Interest on
any amounts borrowed under the agreement would be at the bank's base rate
(4.5% at August 29, 2004). During fiscal 2004, the Company did not access
the line.
24
5. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 29, 2004 are
cost and accumulated depreciation on equipment subject to capitalized
leases of $2,404,838 and $1,271,471 respectively. At August 31, 2003, the
amounts were $1,788,730 and $1,053,719, respectively.
The present value of the net minimum payments on capital leases as of
August 29, 2004 is as follows:
Fiscal years ending August:
2005 $ 344,235
2006 275,903
2007 275,902
2008 245,773
2009 123,463
Thereafter 180,485
-----------
Total minimum lease payments 1,445,761
Less amount representing interest 225,920
-----------
Present value of net minimum lease payments 1,219,841
Current portion 268,964
-----------
Capital lease obligation, less current portion $ 950,877
===========
The Company leases its Osseo, Minnesota facility under an operating lease
that expires in February 2005 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 November 2004 with a monthly rent of $2,013.
Future minimum lease payments for operating leases are:
Fiscal years ending August:
2005 $68,948
-------
Total minimum lease payments $64,948
=======
Rent expense of approximately $143,000, $144,000 and $286,000 have been
charged to operations for the years ended August 29, 2004, August 31, 2003
and August 25, 2002, 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 29, 2004, 49,166 shares
remained reserved and available for grant under the plan.
25
Option transactions during the three years ended August 29, 2004 are
summarized as follows:
1987 Stock 1994 Stock
Option Plan Option Plan
---------------------------- ----------------------------
Average Average
Shares Price Shares Price
------------ ------------ ------------ ------------
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 - 60,000 1.22
Lapsed - (54,000) 4.46
Exercised (100,000) 2.13 -
------------ ------------ ------------ ------------
Outstanding at August 31, 2003 9,000 3.04 328,000 2.78
Granted - 65,000 2.75
Lapsed - (14,000) 4.17
Exercised (4,000) 2.00 (2,500) 1.28
------------ ------------ ------------ ------------
Outstanding at August 29, 2004 5,000 $ 3.88 376,500 $ 2.68
============ ============ ============ ============
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 2004, fiscal 2003 and fiscal
2002 as set forth in the table below. The estimated fair value of the
options is amortized to expense over the options' vesting period.
2004 2003 2002
---------- ---------- ----------
Dividend yield 5.5% 5% None
Expected volatility 76.29% 77.47% 60.9%
Risk free interest rate 3.4%-4.2% 3.25%-4.4% 3%-4%
Expected term 5-10 years 5-10 years 5-10 years
The Company's net income and income per share would be adjusted to the pro
forma amounts as follows:
Years ended
---------------------------------------------------
August 29, 2004 August 31, 2003 August 25, 2002
--------------- --------------- ---------------
Net Income (loss):
As reported $ 48,996 $ 353,369 $ (812,764)
Less: Total Stock based compensation
expense determined under fair value
based method for all awards (76,098) (33,287) (94,685)
------------ ------------ ------------
Pro forma $ (27,102) $ 320,082 $ (907,449)
26
Income (loss) per basic common share:
As reported $ .02 $ .14 $ (.33)
Pro forma $ (.01) $ .13 $ (.37)
Income per diluted common share:
As reported $ .02 $ .14 $ (.33)
Pro forma $ (.01) $ .13 $ (.37)
As of August 29, 2004, there were 148,500 options outstanding with
exercise prices between $1.22 and $1.44, 106,000 options outstanding with
exercise prices between $2.00 and $2.94, 54,000 shares with exercise
prices between $3.00 and $3.88 and 73,000 options outstanding with
exercise prices between $4.13 and $5.50. At August 29, 2004, outstanding
options had a weighted-average remaining contractual life of 6 years.
The number of options exercisable as of August 29, 2004, August 31, 2003
and August 25, 2002 were 319,500, 270,000 and 354,000, respectively, at
weighted average share prices of $2.79, $3.11, and $3.28 per share,
respectively.
7. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Years Ended
-------------------------------------------
August 29, August 31, August 25,
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ (68,940) $ - $ -
State - - 4,300
------------ ------------ ------------
(68,940) - 4,300
Deferred:
Federal 94,501 167,437 (2,090,861)
State 2,000 11,085 (92,558)
------------ ------------ ------------
Total $ 96,501 $ 178,522 $ (2,183,419)
============ ============ ============
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 29, August 31, August 25,
2004 2003 2002
---------- ---------- ----------
Ordinary federal income tax statutory rate 34.0% 34.0% (35.0%)
Limitation on (utilization of) tax assets - - 35.0
Change in valuation allowance - - (72.2)
State income taxes net of federal tax effect 2.6 2.1 (2.1)
Other (.6) (2.5) 1.5
---------- ---------- ----------
Taxes provided 36.0% 33.6% (72.8)%
========== ========== ==========
27
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:
August 29, 2004 August 31, 2003
--------------- ---------------
DEFERRED TAX ASSETS
Accrued liabilities $ 43,815 $ 10,414
Inventory valuation accruals 139,145 143,796
Net operating loss carryforwards 1,463,242 1,497,073
Tax credit carryforwards 505,750 576,638
Other 141,794 140,382
--------------- ---------------
2,293,746 2,368,303
DEFERRED TAX LIABILITIES
Tax depreciation and amortization greater than book (407,590) (385,646)
--------------- ---------------
Net deferred tax assets 1,886,156 1,982,657
Valuation allowance - -
--------------- ---------------
Net Deferred Tax Asset $ 1,886,156 $ 1,982,657
=============== ===============
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 29, 2004, the Company had federal net operating loss
carryforwards of approximately $4,210,000 expiring in 2009-2022. Also as
of August 29, 2004, the Company had $454,000 in federal alternative
minimum tax (AMT) credit carryforward and approximately $52,000 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 2004, 2003, and 2002, were $88,788, $78,822 and
$102,233, respectively.
9. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to three customers that exceeded 10 percent of total
sales during any one of fiscal years 2004, 2003 or 2002 as listed below:
Fiscal Year Sales
---------------------------------------------------
Customer 2004 2003 2002
---------- ---------- ---------- ----------
#1 $9,107,000 $8,034,000 $4,782,000
#2 - - 4,119,000
#3 741,000 950,000 1,314,000
28
The Company had accounts receivable from its largest customer of
$1,314,000 and $1,078,000 at August 29, 2004 and August 31, 2003,
respectively.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2004 2003 2002
------------ ------------ ------------
Net Income (Loss) $ 48,996 $ 353,369 $ (812,764)
============ ============ ============
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,554,489 2,473,535 2,465,229
Effect of dilutive securities;
employee and nonemployee options 70,749 12,426 -
------------ ------------ ------------
Dilutive common shares;
denominator for diluted earnings
per share 2,625,238 2,485,961 2,465,229
============ ============ ============
Basic (loss) income per share $ .02 $ .14 $ (.33)
============ ============ ============
Dilutive income (loss) per share $ .02 $ .14 $ (.33)
============ ============ ============
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 goodwill of
$2,119,669 (net of accumulated amortization of $308,595), and organization
costs of $248,783 (net of accumulated amortization of $36,217) at each
year end.
29
The Company recorded $33,063 of deferred financing costs incurred in
connection with the mortgages described in Note 4. The costs are being
amortized over five years on a straight-line basis with the Company
incurring $6,613 per year of amortization expense over that period.
30
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 25, 2002 $ 27,500 $ 0 $ 16,747 $ 10,753
============ ============ ============ ============
Year ended August 31, 2003 $ 10,753 $ 0 $ 18 $ 10,735
============ ============ ============ ============
Year ended August 29, 2004 $ 10,735 $ 0 $ 661 $ 10,074
============ ============ ============ ============
ALLOWANCE FOR EXCESS OR OBSOLETE INVENTORY:
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
============ ============ ============ ============
Year ended August 29, 2004 $ 422,930 $ 0 $ 13,681 $ 409,249
============ ============ ============ ============
31