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 25, 2002
OR
Minnesota 41-0691607
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
18151 Territorial Road
Osseo, Minnesota 55369
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(Address of principal executing offices) (Zip Code)
Registrant's tele phone number, including area code (763) 428-4308
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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. [ ]
The aggregate market value of the common shares held by non-affiliates of the Registrant on November 11, 2002 (based upon the closing sale price of those shares on the Nasdaq SmallCap System) was approximately $3,895,000.
Number of shares outstanding of the Registrant's common stock, par value $.10 per share, as of November 11, 2002 is 2,465,229.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be held on January 9, 2003 are incorporated by reference into Part III.
This form 10-K Report consists of 46 pages (including exhibits); the index to the exhibits is set forth on page 12.
PART I
Item 1. Business
OVERVIEW
WSI Industries, Inc. (the "Company") was incorporated in Minnesota in 1950 for the purpose of performing precision contract machining for the aerospace, communication, and industrial markets. The major portion of Company revenues are derived from machining work for the aerospace/avionics industry and recreational vehicles markets.
On February 15, 1999, the Company purchased Taurus Numeric Tool, Inc. ("Taurus") 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 recreational vehicle and 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 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. 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. The buyer also assumed any remaining liabilities associated with amounts due on the non-compete and employment agreements associated with the original acquisition.
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 effort to diversify its customer and market base. Sales to the agricultural industry were 35%, 36% and 21% of total Company sales in fiscal years, 2000, 2001 and 2002, respectively. Sales to the recreational vehicle market totaled 9%, 12% and 37% in 2000, 2001 and 2002 respectively. Sales to the aerospace/avionics/defense markets totaled 12%, 19% and 17% in fiscal 2000, 2001 and 2002, respectively. Sales to the construction/power systems market totaled 20%, 19% and 10% in fiscal 2000, 2001 and 2002, respectively. With the sale of Bowman Tool assets described above, the Company is no longer in the agriculture or construction/power systems markets.
The Company has a reputation as a dependable supplier capable of meeting stringent specifications to produce quality components at high production rates. The Company has demonstrated an ability to develop sophisticated manufacturing processes and controls essential to produce precision and reliability in its products.
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 2002 consolidated sales were made to Deere & Co. and related entities in the amount of $4,119,000 or 32% of Company revenues. In fiscal 2002, sales were also made to Rockwell Collins, Inc. in the amount of $1,314,000 or 10% of Company sales, as well as to Polaris Industries Inc. in the amount of $4,781,000 or 37% of sales.
BACKLOG
Approximate dollar backlog at August 25, 2002, August 26, 2001 and August 27, 2000 was $2,634,000, $13,108,000 and $23,876,000, 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 25, 2002 is scheduled for delivery later than during the current fiscal year. A significant portion of the decrease from 2001 to 2002 relates to the sale of the Bowman Tool & Machining, Inc. assets, and the business that they corresponded to, as described in the overview section above. A major portion of the decrease from 2000 to 2001 related to the decision of one major customer to effectively consign material to the Company, thus lowering the overall sales price back to that customer of the finished product.
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 25, 2002, the Company had 40 employees, none of whom were subject to a union contract. We consider our relationship with our employees to be good.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no operations in any foreign country. In 2000, 2001 and 2002, sales to companies in Mexico amounted to $2,061,000, $2,623,000 and $703,000, respectively.
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 a production facility located in Osseo, Minnesota that houses its production and is also its headquarters. The facility is approximately 28,000 square feet and is leased until February 2003 with options to renew. Monthly rent is approximately $9,600 plus operating expenses and taxes.
The Company considers its manufacturing equipment, facilities, and other physical properties to be suitable and adequate to meet the requirements of its business.
Item 3. Legal Proceedings
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.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The common stock of the Company is traded on the Nasdaq SmallCap Market System under the symbol "WSCI."
As of November 11, 2002 there were 546 shareholders of record of the Company's common stock.
The following table sets forth, for the periods indicated, the high and low sales price information for our common stock as reported by the Nasdaq SmallCap Market.
Stock Price
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High Low
FISCAL 2002:
First quarter $ 2.900 $ 1.000
Second quarter 1.940 .900
Third quarter 2.200 1.250
Fourth quarter 1.500 1.000
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
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The Company has not paid any cash dividends since fiscal 1992 and does not anticipate payment of cash dividends in the foreseeable future.
The following table sets forth information regarding our equity compensation plans in effect as of August 25, 2002. Each of our equity compensation plans is an "employee benefit plan" as defined by Rule 405 of Regulation C of the Securities Act of 1933.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of shares of common Number of shares of common
stock to be issued upon Weighted-average exercise stock remaining available
exercise of outstanding price of outstanding for future issuance under
Plan category options, warrants and rights options, warrants and rights equity compensation plans(1)
---------------------------- ------------------------------- ----------------------------- ------------------------------
Equity compensation plans
approved by stockholders:
1987 Option Plan 109,000 $ 2.20 --
1994 Stock Plan 322,000 $ 3.30 106,166
Equity compensation plans
not approved by
stockholders:
None ___________ _____ _______
Total 431,000 $ 3.02 106,166
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(1) Excludes shares of common stock listed in the first column.
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 12,948 $ 20,877 32,157 $ 21,550 $ 23,948
Cost of products sold 11,348 17,023 26,746 18,279 19,547
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Gross margin 1,600 3,854 5,411 3,271 4,401
Selling and administrative expense 1,461 2,995 3,217 2,444 2,453
Pension curtailment (gain) - - (353) - -
Acquisition related noncompete
and consulting expense 290 550 596 134 -
Goodwill amortization - 337 296 83 -
Carrying cost of closed facility - 347 214 - -
Severance expense - - 249 - -
Fair market value impairment of equipment - 151 - - -
Loss on sale of subsidiary assets 2,506 - - - -
Interest and other income (28) (157) (472) (158) (162)
Interest expense 363 821 998 481 190
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Earnings (loss) from continuing
operations before taxes (2,992) (1,190) 666 287 1,920
Income tax expense (benefit) (2,179) 3 27 26 46
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Net earnings (loss) $ (813) $ (1,193) $ 639 $ 261 $ 1,874
=========== ========== ========= ========== ==========
Basic earnings (loss)
per share $ (.33) $ (.48) $ .26 $ .11 $ .77
=========== ========== ========= ========== ==========
Average number of common shares 2,465 2,465 2,462 2,452 2,434
Diluted earnings (loss) share $ (.33) $ (.48) $ .25 $ .10 $ .73
=========== ========== ========= ========== ==========
Average number of common
and dilutive potential
common shares 2,465 2,465 2,535 2,527 2,555
Additional information:
Financial Data:
Total plant and equipment additions $ 613 $ 513 $ 916 $ 1,238 $ 2,102
Long-term debt 1,398 4,111 9,601 10,666 1,802
Total assets 9,799 16,338 23,432 24,525 13,615
Cash flow from operations (77) 2,634 1,961 2,641 3,047
Stockholders' equity 6,939 7,752 8,945 8,264 7,995
Financial Ratios:
Current ratio 2.23:1 .78:1 1.35:1 1.27:1 1.94:1
Percentage of long term debt to equity 20% 53% 107% 129% 23%
Book value per basic common share $ 2.81 $ 3.14 $ 3.63 $ 3.37 $ 3.28
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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:
As discussed in Item 1., the Company completed the asset sale of Bowman Tool & Machining, Inc. on February 22, 2002. As a result of this transaction, the Company received approximately $3.1 million in cash, along with the buyer assuming another $3.4 million in long-term debt and capital leases. The Company used $850,000 of the cash received to payoff its term note facility with its bank. The Company also used approximately $629,000 of its cash received to pay accounts payable and accrued liabilities retained as part of the sale.
The Company's net working capital at the end of fiscal 2002 was $1,791,000 as compared to a negative $1,001,000 at the end of fiscal 2001. The improvement was due in large measure to the sale of Bowman Tool assets described above. Net working capital also improved due to the recognition of deferred tax assets (as more fully described in Note 6 of the Financial Statements), and the corresponding inclusion of $185,000 of deferred taxes in current assets. The ratio of current assets to current liabilities improved to 2.23 to 1.0 from .78 to 1.0 in the prior year.
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. Excluding those payments, the Company would have generated $552,000 of cash from operations in fiscal 2002. Cash provided from operations was $2.6 million in fiscal 2001 and $2.0 million in fiscal 2000.
Additions to property, plant and equipment were $613,000 in fiscal 2002 compared to $513,000 in 2001 and $916,000 in 2000. These amounts included $607,000, $323,000 and $433,000 of machinery acquired through capital leases in 2002, 2001 and 2000, respectively. The major 2002 capital expenditures consisted of the acquisition of new production equipment.
Proceeds from the sale of equipment amounted to $4,400 and $746,000 in fiscal 2002 and 2000, respectively. The relatively large proceeds in 2000 resulted from the sale of excess equipment derived from the shutdown of the Company's Long Lake, Minnesota facility. In fiscal 2001, the Company sold its building in Long Lake for $2.4 million.
The Company's total debt was $2.1 million at August 25, 2002 and consisted of $1.1 million of seller subordinated notes and capital lease obligations of $1.0 million. The total debt was $4.9 million lower than fiscal 2001.
Current maturities of long-term debt consist of $554,000 due February 2003 to a subordinated debt holder and $181,000 due on capital leases. The Company is presently seeking a new lending arrangement with a new bank to provide a revolving credit facility. However, should the Company not obtain a new credit arrangement, it is managements' belief that internally generated funds will be sufficient to enable the Company to meet its financial requirements during fiscal 2003.
RESULTS OF OPERATIONS:
Net sales in fiscal 2002 were $12.9 million. That is a decrease of $7.9 million or 38% from fiscal 2001. The primary reason for this was the asset sale of Bowman Tool in February 2002, and thus the inclusion of only a half-year of Bowman sales in 2002 operations. Year-on-year sales for Taurus Numeric Tool (the remaining subsidiary of WSI) increased 5% in fiscal 2002 to approximately $8.4 million from $8.0 million in 2001. This increase in sales resulted from the addition of a new product line in the recreational vehicle market offset by the decline in sales from the aerospace and avionics market due to the events of September 11, 2001.
Net sales in fiscal 2001 of $20.9 million decreased $11.3 million or 35% from fiscal 2000 sales of $32.2 million. Sales decreased in 2001 as compared to 2000 for three primary reasons. The first was the overall downturn in the economy that affected all markets served by the Company. Secondly, as mentioned in previous Quarterly Reports on Form 10-Q, a major customer made the decision to effectively 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
arrangement 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 of fiscal 2001.
The Company reported a net loss in fiscal 2002 of $813,000 or $.33 per share. Included in the results were recognition of the loss on the sale of 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.
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 2002 was 12.3% of sales compared to 18.5% in 2001 and 15.2% in 2000. The margin decreased 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. The margins 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. Year to date margins for the Taurus operation were 10.5% and 23.0% for 2002 and 2001, respectively, and were affected by the items in the preceding discussion.
The gross margin on parts sold in fiscal 2001 was 18.5% of sales compared to 16.8% of sales in 2000. Margin improved in 2001 versus 2000 despite the lower level of sales. The primary reason for this was the increased efficiencies obtained due to the closure of the Company's Long Lake, Minnesota facility which was open only part of the year in 2000. 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.
Selling and administrative expense of $1.75 million in fiscal 2002 was a decrease of $2.5 million and $2.6 million from fiscal 2001 and 2000, respectively. The decrease in 2002 was due to several factors. First, the sale of the Bowman subsidiary assets generated a savings of approximately $570,000 in the last six months of 2002. The Company's selling and administrative expense was also lower in 2002 due the Company's adoption of FAS 142 Goodwill and Intangible Assets as outlined in Note 10 of the financial statements which resulted in a reduction of amortization expense of $337,000. A third factor in the reduced expense related to the June 2001 sale of the Company's Long Lake, Minnesota facility. The Company had included in selling and administrative expense in fiscal 2001 carrying costs of the building of $345,000 while the amount in fiscal 2000 was approximately $214,000. WSI's selling and administrative costs were also lower in 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 slight decrease in selling and administrative expense in 2001 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 expense of $363,000 in fiscal 2002 was $458,000 lower than 2001 and $635,000 lower than 2000. The lower expense is a result of lower long-term debt as balances decreased from $10.8 million in 2000 (including current maturities) to $2.1 million at the end of 2002.
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 the 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 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. Subsequent to fiscal 2002, it is anticipated that the Company will record income tax expense in line with statutory rates.
See Notes to Consolidated Financial Statements regarding recent accounting standards to be adopted.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the letter to shareholders, elsewhere in the Annual Report, in the Company's Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are not predictions of actual future results. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The following risks and uncertainties, as well as others not now anticipated, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iii) a significant downturn in the industries in which the Company participates could have an adverse effect on the demand for Company services. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 8. Financial Statements and Supplementary Data:
See Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page 17, 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 2002:
First quarter $ 3,811,208 $ 440,191 $ (247,003) $ (.10) $ (.10)
Second quarter 4,653,168 534,316 (2,748,346) (1.11) (1.11)
Third quarter 2,144,586 271,486 (134,710) (.05) (.05)
Fourth quarter 2,339,106 354,151 2,317,295 .94 .94
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)
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PART III
Pursuant to General Instruction G(3), Registrant omits Part III, Items 10, 11, 12, and 13, as a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within 120 days after August 25, 2002 and such information required by such items is incorporated herein by reference from the proxy statement.
Item 14. Controls and Procedures:
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D. Sheely, have reviewed the Company's disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, these officers believe that the Company's disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls during the quarter covered by this report or from the end of the reporting period to the date of this Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report.
1. Consolidated Financial Statements: Reference is made to the Index to Consolidated
Financial Statements (page 17) hereinafter contained for all Consolidated Financial
Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts - page 32
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.
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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.
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.
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10.6 Subordinated Promissory Note dated February 15, 1999 in the
principal amount of $1,662,564 issued by the Company to
Rodney 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 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.
10.8 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 Amendment No. 1 to Employment (change in control) Agreement
between Michael J. Pudil and Registrant dated November 1, 2002.
10.11 Amendment No. 1 to Employment (change in control) Agreement
between Paul D. Sheely and Registrant dated November 1, 2002.
10.12 Board of Directors Retirment Program dated June 25, 1982
23.1 Consent of Schechter Dokken Kanter Andrews & Selcer Ltd.
23.2 Consent of Ernst & Young LLP.
99.1 Certificate pursuant to 19 U.S.C. Section 1350.
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(b) Reports of Form 8-K.
During the last quarter of the period covered by
this report, the Company filed a Form 8-K dated
August 21, 2002 reporting in Item 4 the
dismissal of Ernst & Young LLP.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WSI INDUSTRIES, INC.
BY: /s/ Michael J. Pudil
--------------------------------
Michael J. Pudil, President and
Chief Executive Officer
BY: /s/ Paul D. Sheely
--------------------------------
Paul D. Sheely
Vice President and Treasurer
DATE: November 22, 2002
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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 Chairman of the Board, President, November 22, 2002
-------------------------------------------- Chief Executive Officer, Director
Michael J. Pudil
/s/ Paul Baszucki Director November 22, 2002
--------------------------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 22, 2002
--------------------------------------------
Melvin L. Katten
/s/ George J. Martin Director November 22, 2002
--------------------------------------------
George J. Martin
/s/ Eugene J. Mora Director November 22, 2002
--------------------------------------------
Eugene J. Mora
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CERTIFICATIONS
I, Michael J. Pudil, certify that:
1. I have reviewed this annual report on Form 10-K of WSI Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer's and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 22, 2002 /s/ Michael J. Pudil
-------------------------------
Chief Executive Officer
|
I, Paul D. Sheely, certify that:
1. I have reviewed this annual report on Form 10-K of WSI Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 22, 2002 /s/ Paul D. Sheely
-----------------------------
Chief Financial Officer
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 18
Consolidated Balance Sheets - August 25, 2002 and August 26, 2001 19
Consolidated Statements of Income - Years Ended August 25, 2002,
August 26, 2001 and August 27, 2000 20
Consolidated Statements of Stockholders' Equity - Years Ended
August 25, 2002, August 26, 2001 and August 27, 2000 21 Consolidated
Statements of Cash Flows - Years Ended August 25, 2002,
August 26, 2001 August 27, 2000 22
Notes to Consolidated Financial Statements 23
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 32
|
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WSI Industries, Inc.
Osseo, Minnesota
We have audited the consolidated balance sheet of WSI, Inc. and Subsidiaries as of August 25, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. Our audit 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 financial statements and schedule based on our audit. The financial statements of WSI, Inc. and Subsidiaries and the related financial statement schedule as of August 26, 2001, and August 27, 2000 were audited by other auditors whose reports dated October 12, 2001, and October 13, 2000, expressed unqualified opinions on those financial statements and unqualified opinions on the financial statement schedule, when considered in relation to the basic financial statements taken as a whole.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WSI, Inc. and Subsidiaries as of August 25, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the 2002 related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Schechter Dokken Kanter
Andrews & Selcer Ltd
Minneapolis, Minnesota
October 8, 2002
|
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,115,922 $ 8,292
Accounts receivable, less allowance for doubtful
accounts of $10,753 and $27,500, respectively 1,154,587 1,778,969
Net Inventories 763,323 1,584,415
Prepaid and other current assets 33,990 101,879
Deferred tax assets (Note 6) 184,925 -
--------------- ---------------
Total current assets 3,252,747 3,473,555
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 4):
Machinery and equipment 5,807,136 16,779,167
Less accumulated depreciation 3,605,444 10,087,807
--------------- ---------------
Total property, plant, and equipment 2,201,692 6,691,360
DEFERRED TAX ASSETS (NOTE 6) 1,976,254 -
INTANGIBLE ASSETS (NOTE 10):
Goodwill and related acquisition costs net of
accumulated amortization of $344,812 and
$711,605 at each year-end 2,368,452 6,173,158
--------------- ---------------
$ 9,799,145 $ 16,338,073
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 465,286 $ 687,426
Accrued compensation and employee withholdings 171,025 445,693
Miscellaneous accrued expenses 90,439 425,330
Current portion of long-term debt (Note 3) 735,143 2,916,061
--------------- ---------------
Total current liabilities 1,461,893 4,474,510
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 3) 1,397,915 4,111,462
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 5,051,880 5,864,644
--------------- ---------------
Total stockholders' equity 6,939,337 7,752,101
--------------- ---------------
$ 9,799,145 $ 16,338,073
=============== ===============
|
See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
2002 2001 2000
---- ---- ----
Net sales (Note 8) $ 12,948,068 $ 20,877,181 $ 32,156,967
Cost of products sold 11,347,924 17,022,938 26,745,715
---------------- --------------- ---------------
Gross margin 1,600,144 3,854,243 5,411,252
Selling and administrative expense 1,750,883 4,228,849 4,323,892
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 -
Loss on sale of subsidiary assets 2,505,919
Interest and other income (27,838) (32,945) (76,223)
Interest expense 363,063 820,949 997,690
---------------- --------------- ---------------
4,592,027 5,044,433 4,745,108
---------------- --------------- ---------------
Income (loss) before income taxes (2,991,883) (1,190,190) 666,144
Income tax expense (benefit) (Note 6) (2,179,119) 3,000 26,900
---------------- --------------- ---------------
Net income (loss) $ (812,764) $ (1,193,190) $ 639,244
================ =============== ===============
Basic earnings (loss) per share $ (.33) $ (.48) $ .26
================ =============== ===============
Diluted earnings (loss) per share $ (.33) $ (.48) $ .25
================ =============== ===============
Weighted average number of common
shares outstanding 2,465,229 2,465,229 2,461,980
================ =============== ===============
Weighted average number dilutive
common shares outstanding 2,465,229 2,465,229 2,535,197
================ =============== ===============
|
See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
COMMON STOCK CAPITAL TOTAL
---------------------- IN EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
------ ------ ------------ -------- -------------
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
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
============ ========== =========== ========== ============
|
See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (812,764) $ (1,193,190) $ 639,244
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on sale of subsidiary 2,505,919 - -
Depreciation 1,275,688 2,049,356 2,090,316
Amortization - 337,360 291,951
Loss (gain) on sale of property, plant, and equipment
and other assets 1,430 (123,279) (393,843)
Deferred taxes (2,183,419) - -
Increase (decrease) in pension liability - - (347,437)
Fair market value impairment of equipment - 150,859 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (354,430) 1,934,229 (750,930)
Inventories 556,964 1,153,931 753,554
Prepaid and other current assets 58,981 46,327 (75,728)
(Decrease) increase in accounts payable and accrued expenses (1,125,698) (1,721,328) (245,666)
------------ ------------- -------------
Net cash provided by (used in) operating activities (77,329) 2,634,265 1,961,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (6,689) (189,928) (483,801)
Proceeds from sale of equipment and other assets 4,421 2,400,000 746,165
Purchase of subsidiaries, net of cash assumed - - (27,000)
Sale of subsidiary 3,241,790 - -
----------- ------------ ------------
Net cash provided by investing activities 3,239,522 2,210,072 235,364
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 5,379,844 13,021,304
Payments of long-term debt (2,054,563) (10,222,189) (15,385,229)
Issuance of common stock - - 41,812
----------- ------------ ------------
Net cash provided by (used in) financing activities (2,054,563) (4,842,345) (2,322,113)
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,107,630 1,992 (125,288)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,292 6,300 131,588
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,115,922 $ 8,292 $ 6,300
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 385,676 $ 846,631 $ 1,004,800
Income taxes - 7,500 32,383
Noncash investing and financing activities:
Acquisition of machinery through capital lease 606,618 322,671 432,625
Acquisition related debt - 340,600 750,000
|
See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
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 2002, 2001 and 2000 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 $517,380 and $263,272 at August 25, 2002 and August 26, 2001, respectively.
Depreciation - The cost of substantially all equipment is being depreciated using the straight-line method. The estimated useful lives of the assets are as follows:
Machinery and equipment 3 to 10 years Transportation equipment 3 years
The Company evaluates long-term assets on a periodic basis in compliance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount.
During 2001, the Company determined that some excess equipment 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 fair market value. In 2001, the Company recognized approximately $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.
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.
Reclassification - Certain prior year items have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards -- In 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The Company adopted the standards in the first quarter of fiscal 2002.
2. DIVESTITURE
On February 22, 2002, the Company completed the asset sale of one of its subsidiaries, Bowman Tool & Machining, Inc., to W. Bowman Consulting Company, an affiliate of the prior owner of Bowman. The Company received approximately $3.1 million in cash from the sale, with the buyer also assuming another $3.4 million in long-term debt (including capital leases) in exchange for substantially all the assets of Bowman Tool. The buyer also assumed any remaining liabilities associated with amounts due on the non-compete and employment agreements that were a result of the original 1999 Bowman acquisition. The Company retained approximately $629,000 in accounts payable and accrued liabilities that were not part of the sale.
The Company recognized a loss from the sale of Bowman of approximately $2.5 million. The loss consisted of the $6.7 million in cash and debt assumed offset by accounts receivable and inventory purchased of $1.25 million, net book value of property and equipment purchased of $3.8 million, goodwill also of $3.8 million as well as $350,000 of costs associated with closing the deal.
The sale was completed at the close of the last business day of the second quarter, so the consolidated statement of operations reflects six months of activity for Bowman up through that date.
3. DEBT
Long-term debt consisted of the following:
August 25, 2002 August 26, 2001
--------------- ---------------
Bank term debt $ - $ 1,142,856
Subordinated promissory note 1,108,376 3,597,256
Capitalized lease obligations (Note 4) 1,024,682 2,287,411
--------------- --------------
2,133,058 7,027,523
Less current portion 735,143 2,916,061
--------------- --------------
Long-term debt $ 1,397,915 $ 4,111,462
=============== ==============
|
With the proceeds from the Bowman sale described in Note 2, the Company paid off all amounts due under its bank credit and security agreement. At August 25, 2002, the Company did not have a bank lending arrangement.
Prior to the Bowman sale, the Company had a term note and line of credit with a bank. The agreement required principal payments of $52,381 per month with interest on the term debt calculated at the bank's base rate (6.50% at August 26, 2001) plus .75% paid monthly. Interest on the line of credit was at the base rate plus .5%. At August 26, 2001 there was no balance outstanding on the line of credit.
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%. As described in Note 2, the Bowman subordinated note was assumed by the buyer. The note in connection with the Taurus transaction is due in three equal annual installments commencing February 15, 2002. The note is subordinated to all past and future bank debt, but is collateralized by equipment.
Maturities of long-term debt, excluding capital lease obligations, for the fiscal years subsequent to August 25, 2002 are as follows:
2003 $ 554,188
2004 554,188
------------
$ 1,108,376
============
|
4. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 25, 2002 are cost and accumulated depreciation on equipment subject to capitalized leases of $1,788,730 and $857,614, respectively. At August 26, 2001, the amounts were $6,174,337 and $3,916,359, respectively. As described in Note 2, the purchaser of Bowman Tool assumed capital leases with a present value of net minimum payment of $1.5 million.
The present value of the net minimum payments on capital leases as of August 25, 2002 is as follows:
Capital
Leases
-------
Fiscal years ending August:
2003 $ 253,935
2004 253,935
2005 240,268
2006 171,936
2007 171,935
Thereafter 170,657
------------
Total minimum lease payments 1,262,666
Less amount representing interest 237,984
------------
Present value of net minimum lease payments 1,024,682
Current portion 180,955
------------
Capital lease obligation, less current portion $ 843,727
============
|
The Company leases its Taurus facility under an operating lease that expires in February 2003 with a monthly base rent of $9,640. Operating expenses and real estate taxes are paid by the Company.
The Company also leases its various storage facilities on a month-to-month basis for a monthly base rent of $1,641.
Future minimum lease payments for operating leases are:
Fiscal years ending August:
2003 $ 54,700
------------
Total minimum lease payments $ 54,700
============
|
Rent expense of approximately $286,000, $437,000, and $386,000 have been charged to operations for the years ended August 25, 2002, August 26, 2001 and August 27, 2000, 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 25, 2002, 106,166 shares remained reserved and available for grant under the plan.
Option transactions during the three years ended August 25, 2002 are summarized as follows:
1987 Stock 1994 Stock
Option Plan Option Plan
-------------------------- -----------------------
Average Average
Shares Price Shares Price
------ ---------- ---------- ---------
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
--------- ---------
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
========= =========
|
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 2002, fiscal 2001 and fiscal 2000 as set forth in the table below. The estimated fair value of the options is amortized to expense over the options' vesting period.
2002 2001 2000
---- ---- ----
Dividend yield None None None
Expected volatility 60.9% 55.7% 38.6%
Risk free interest rate 3%-4% 5.5% 6.0%
Expected term 5-10 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 25, 2002 August 26, 2001 August 27, 2000
--------------- --------------- ---------------
Net Income (loss):
As reported $ (812,764) $ (1,193,190) $ 639,244
Pro forma $ (907,449) $ (1,417,714) $ 383,094
Income (loss) per basic common share:
As reported $ (.33) $ (.48) $ .26
Pro forma $ (.37) $ (.58) $ .16
Income per diluted common share:
As reported $ (.33) $ (.48) $ .25
Pro forma $ (.37) $ (.58) $ .15
|
As of August 25, 2002, there were 93,000 options outstanding with exercise prices between $1.30 and $1.44, 147,000 options outstanding with exercise prices between $2.00 and $2.94, 56,000 shares with exercise prices between $3.00 and $3.88 and 135,000 options outstanding with exercise prices between $4.13 and $5.50. At August 25, 2002, outstanding options had a weighted-average remaining contractual life of 5 years.
The numbers of options exercisable as of August 25, 2002, August 26, 2001 and August 27, 2000 were 354,000, 348,500, and 304,920 respectively, at weighted average share prices of $3.28, $3.88, and $3.81 per share, respectively.
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Years Ended
-----------------------------------------------------------
August 25, August 26, August 27,
2002 2001 2000
---- ---- ----
Currently payable:
Federal $ - $ - $ 20,000
State 4,300 3,000 6,900
------------- ------------- -------------
4,300 3,000 26,900
Deferred:
Federal (2,090,861) - -
State (92,558) - -
------------- ------------- -------------
Total $ (2,179,119) $ 3,000 $ 26,900
============= ============= =============
|
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 25, August 26, August 29,
2002 2001 2000
---- ---- ----
Ordinary federal income tax statutory rate (35.0)% 35.0% 35.0%
Limitation on (utilization of) tax assets 35.0 (35.0) (32.0)
Change in valuation allowance (72.2) - -
State income taxes, and other (.6) .3 1.0
---------- --------- ---------
Taxes provided (72.8)% .3% 4.0
========== ========= =========
|
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:
Year ended August 25, Year ended August 26,
2002 2001
--------------------- ---------------------
DEFERRED TAX ASSETS
Accrued liabilities $ 8,388 $ 21,746
Inventory valuation accruals 175,909 89,547
Net operating loss carryforwards 1,633,467 1,043,878
Tax credit carryforwards 576,638 530,265
Other 95,613 201,118
-------------- --------------
2,490,015 1,886,554
DEFERRED TAX LIABILITIES
Tax depreciation and amortization greater than book
328,836 586,294
-------------- --------------
Net deferred tax assets 2,161,179 1,300,260
Valuation allowance - (1,300,260)
-------------- --------------
Net Deferred Tax Asset $ 2,161,179 $ -
============== ==============
|
The valuation allowance for net deferred tax assets was eliminated in 2002. The elimination was based on improved operating results in the fourth quarter of 2002, as well as projected operating results for 2003 and beyond. Correspondingly, the Company determined that it was more likely than not that it will be able to generate taxable income in the future to offset these deductions and carryforwards.
As of August 25, 2002, the Company had federal net operating loss carryforwards of approximately $4,549,000 expiring in 2009-2022. Also as of August 25, 2002, the Company had $525,000 in federal alternative minimum tax (AMT) credit carryforward and approximately $46,000 in other credit carryforward. The AMT credits are available to offset future tax liabilities only to the extent that the Company has regular tax liabilities in excess of AMT tax liabilities.
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:
Year Ended
-------------------
2000
----
Service cost - benefits earned during the year $ 128,699
Interest cost on projected benefit obligation 566,664
Actual return on plan assets (712,904)
Net amortization and deferral 24,969
-----------------
Net periodic pension cost $ 7,428
=================
|
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 2002, 2001, and 2000, were approximately $102,233, $151,383 and $146,184, respectively.
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 2002, 2001 or 2000 as listed below:
Fiscal Year Sales
----------------------------------------------------------------------
Customer 2002 2001 2000
-------- ---- ---- ----
#1 $4,782,000 $ 2,510,000 $ 3,406,000
#2 4,119,000 11,493,000 17,084,000
#3 1,314,000 2,265,000 2,970,000
#4 - 729,000 3,108,000
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9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
2002 2001 2000
---- ---- ----
Net Income (Loss) $ (812,764) $ (1,193,190) $ 639,244
============= ============= ============
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,465,229 2,465,229 2,461,980
Effect of dilutive securities;
employee and nonemployee options - - 73,217
------------- ------------- ------------
Dilutive common shares;
denominator for diluted earnings
per share 2,465,229 2,465,229 2,535,197
Basic (loss) income per share $ (.33) $ (.48) $ .26
============ ============ ============
Dilutive income (loss) per share $ (.33) $ (.48) $ .25
============ ============ ============
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10. GOODWILL AND INTANGIBLE ASSETS
In 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001 with early adoption permitted for companies with fiscal years beginning after March 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Effective with the August 27, 2001 adoption of FAS 142, goodwill is no longer amortized but is instead subject to an annual impairment test. The company has performed its transitional impairment test in conjunction with the adoption of FAS 142 and determined that no charge is warranted.
Goodwill and other intangible assets resulting from acquisitions of business and the formation of the Company consist of the following:
August 25, 2002 August 26, 2001
--------------- ---------------
Goodwill $ 2,428,264 $ 6,329,763
Less accumulated amortization 308,595 647,609
-------------- -------------
$ 2,119,669 $ 5,682,154
============== =============
Other identifiable intangibles:
Organization Costs $ 285,000 $ 555,000
Less accumulated amortization 36,217 63,996
-------------- -------------
$ 248,783 $ 491,004
============== =============
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With the sale of the Bowman assets as described in Note 2., the goodwill and organization costs related to Bowman were eliminated. Goodwill amounted to $3,901,499 with related accumulated amortization of $339,014. Organization costs were $270,000 with related accumulated amortization of $27,779.
With the adoption of FAS 142 the Company ceased amortization of goodwill as of August 27, 2001. The following table presents the results of the Company for all periods presented on a comparable basis:
Years ended
-------------------------------------------------------------
August 25, 2002 August 26, 2001 August 27,2000
----------------- ----------------- --------------
Reported net income (loss) per share $ (812,764) $ (1,193,190) $ 639,244
Add back amortization - 337,360 291,951
---------------- ---------------- -----------
Adjusted net income (loss) per share $ (812,764) $ (855,830) $ 931,195
================ ================ ===========
Diluted net income (loss) per share:
Reported net income (loss) $ (.33) $ (.48) $ .25
Goodwill amortization - .14 .12
----------------- ---------------- ----------
Adjusted net income (loss) per share $ (.33) $ (.34) $ .27
================ ================ ==========
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WSI INDUSTRIES, INC. AND SUBSIDIARIES
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 27, 2000 $ 27,500 $ 0 $ 0 $ 27,500
================= ================== ============= ==============
Year ended
August 26, 2001 $ 27,500 $ 0 $ 0 $ 27,500
================= ================== ============= ==============
Year ended
August 25, 2002 $ 27,500 $ 0 $ 16,747 $ 10,753
================= ================== ============= ==============
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
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
================= ================== ============= ==============
Year ended
August 25, 2002 $ 263,372 $ 301,327 $ 47,319 (2) $ 517,380
================= ================== ============= ==============
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(1) Write-offs of excess or obsolete inventory.
(2) Allowance written off when subsidiary was sold.
EXHIBIT 3.2
RESTATED AND AMENDED BYLAWS
OF
WSI INDUSTRIES, INC.
ARTICLE I.
Offices, Corporate Seal
Section 1. The registered office of the corporation shall be at 15250 Wayzata Boulevard, Wayzata, Minnesota 55391 and the corporation may have offices at such other places as the Board of Directors shall from time to time determine.
Section 2. The corporate seal shall be circular in form and have inscribed thereon in a circle the name of the corporation and the State in which it is incorporated and the words "Corporate Seal" within the circle.
ARTICLE II.
Meetings of Shareholders
Section 1. An Annual Meeting of the Shareholders of this Corporation entitled to vote for the election of Directors shall be held at such place within or without the State of Minnesota as the Board of Directors may determine, at such time in each calendar year beginning in 1993 as shall be fixed by the Board of Directors, at which time the shareholders voting as provided in the Articles of Incorporation shall elect by majority vote a Board of Directors for the ensuing year, and shall transact such other business as shall properly be brought before the meeting. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (ii) otherwise properly brought before the meeting by or at the direction of the Board of
Directors; or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation, not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of shareholders. Each such notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (w) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (x) the name and address of record of the shareholders proposing such business; (y) the class or series (if any) and number of shares of the corporation which are owned by the shareholder; and (z) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these Bylaws.
The holders of a majority of common shares outstanding and entitled to vote for the election of Directors at said meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, except as otherwise provided by law, by the Articles of Incorporation, or by these Bylaws. In case a quorum be not present at the annual meeting, the meeting may be adjourned to a later date. A notice of such adjournment shall be mailed to each shareholder entitled to vote, at least ten days before such adjourned meeting date, but if a quorum be present they may adjourn from day to day, as they see fit and no notice need by given.
Section 2. Except as otherwise provided by the Board of Directors, only shareholders of record at the close of business on the day prior to the date of the annual meeting shall be entitled to vote at such meeting, in person or through proxy. The appointment of proxy shall be in writing filed with the Secretary at or before the meeting.
Section 3. Special meetings of the shareholders may be called by the Secretary upon request of the Executive Committee of the corporation or a majority of the members of the Board of Directors, or upon request by shareholders as provided by law.
Section 4. There shall be mailed to each person shown by the books of the corporation to be a holder of record of voting shares at the time of mailing such notice, at his address as shown by the books of the corporation, a notice setting out the time and place of the annual meeting, which notice shall be
mailed at least ten (10) days prior thereto. There shall be mailed to each person shown by the books of the corporation to be a shareholder of record at the time of mailing such notice and entitled to receive such notice, at his address as shown by the books of the corporation, a notice setting out the time, place and object of each special meeting, which notice shall be mailed at least ten (10) days prior thereto.
Section 5. Subject to the rights of holders of any class or series of stock having a preference over the common shares as to dividends or upon liquidation, nominations for the election of Directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of Directors. However, any shareholder entitled to vote generally in the election of Directors may nominate one or more persons for election as Directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the prior year's annual meeting of shareholders. Each such notice to the Secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of such nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a Director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a Director of the corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE III.
Directors
Section 1. The business and property of the corporation shall be managed by its Board of Directors, six (6) in number. The term of each Director shall continue until the next annual meeting of the corporation and until his successor is elected and qualifies.
Section 2. A majority of the Board of Directors shall constitute a quorum for the transaction or business; provided, however, that if any vacancies exist by reason of death, resignation, or otherwise, a majority of the remaining Directors shall constitute a quorum for the filling of vacancies.
Section 3. The Directors shall meet annually immediately after the election of Directors, or as soon thereafter as is practicable, at the registered office of the corporation, or at the place the annual meeting of the stockholders was held which elected said Directors, or at such other time and place as may be fixed by the written consent of all of the Directors. No notice need be given of any regular meeting. Special meetings of the Board of Directors may be held at such place as may from time to time be fixed by resolution adopted by a majority of the whole Board of Directors or designated in the notice of waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the Chairman of the Board, President or a majority of the Board of Directors. Notice of such special meetings shall be given by the Secretary who shall give at least twenty-four (24) hours notice thereof to each Director by mail, telegraph, telephone, or in person.
Section 4. Any action which could have been taken at a meeting of the Board of Directors properly called for that purpose may be taken without a meeting if done in writing signed by all of the directors, and any such action shall be as valid and effective in all respects as if taken at a proper meeting duly called for that purpose.
ARTICLE IV.
Executive Committee
The Board of Directors may designate not more than five of their number to constitute an Executive Committee which shall have and exercise the power and authority of the Board of Directors in the management of the business and conduct of the affairs of the corporation in the interim between regular meetings of the Board of Directors. Such Executive Committee shall be subject at all times to the control and direction of the Board of Directors, and shall not do any or cause any act to be done which will personally and directly benefit any of the members of such Executive Committee.
ARTICLE V.
Officers
Section 1. The officers of this corporation shall consist of a Chairman of the Board, a President, an Executive Vice President, one or more Vice
Presidents, a Secretary, a Treasurer, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be deemed necessary by the Board of Directors. Any two officers, except those of President and Executive Vice President or Vice President, may be held by any one person.
Section 2. Officers shall be elected at the Annual Meeting of the Board of Directors or at such other times deemed advisable by the Board of Directors, and shall hold office until the next Annual Meeting of Directors and until their successors are elected and qualified. None of the officers, except the Chairman of the Board, need be a Director.
Section 3. The Chairman of the Board shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed by the Board of Directors. The President shall be the Chief Executive Officer of the corporation, shall preside at meetings of the shareholders and the directors in the absence of the Chairman of the Board or in the event there shall be no Chairman of the Board, shall make such reports to the Board of Directors as may from time to time be required or requested, shall have such duties and responsibilities as generally pertain to the office of President, and shall have such other powers and shall perform such other duties as may be from time to time assigned to him by the Board of Directors. The Vice Presidents of the corporation, including the Executive Vice President, shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred upon them by the Board of Directors. In the case of the death, resignation or disability of the President, the Executive Vice President, or if none, the Vice President who has held that office for the longest continuous period of time, shall assume the duties and responsibilities of the President until further action by the Board of Directors.
Section 4. The Secretary of the corporation shall keep a record of the meetings and proceedings of the Board of Directors and shareholders, shall have custody of the corporate seal and all other corporate records not specifically entrusted to some other officer by these Bylaws or by direction of the Board of Directors. He shall give notice of meetings as required by these Bylaws or by the Board of Directors, and shall perform such other duties as may be assigned or delegated to him by the Board of Directors.
Section 5. The Treasurer shall keep accurate accounts of all money and assets of the corporation received or disbursed. He shall deposit all money, drafts and checks in the name of and to the credit of the corporation in such banks, depositories or other financial institutions as the majority of the Board of Directors shall designate from time to time. He shall disburse the funds of the corporation as ordered by the Board of Directors or officers under direction of the Board of Directors. He shall render such accounts of the financial
condition of the corporation and its financial affairs and shall perform such other duties as may be prescribed by the Board of Directors from time to time.
ARTICLE VI.
Salaries of Officers
The salary and other compensation to the officers of the corporation shall be fixed in the first instance and shall thereafter be subject to change and amendment by the Board of Directors.
ARTICLE VII.
General Provisions
Section 1. This corporation shall be operated and managed within the scope of the purposes and powers hereof as set forth and specified in its
Articles of Incorporation.
Section 2. Shares of stock in this corporation not exceeding the authorized number thereof as specified in the Articles of Incorporation may be issued, and certificates therefor shall be authenticated by the President and Secretary upon authorization by the Board of Directors and receipt by the corporation of such consideration for such shares as shall be specified by the Board of Directors.
In the event that a bank, trust company or other similarly qualified corporation is designated and agrees to act as the registrar and transfer agent for the corporation then the signatures of the President and Secretary and the seal of the corporation may be imprinted upon the stock certificates by facsimile, and said certificates may be authenticated by signature of an authorized agent of said registrar and transfer agent. The officers of the corporation may delegate to such a transfer agent and registrar such of the duties relating to the recording and maintenance of records relating to stock and stockholders and the outstanding shares in the corporation as may be deemed expedient and convenient, approved by the Board of Directors and assumed by said registrar and transfer agent.
Section 3. The Board of Directors may establish reasonable regulations for recording transfers of shares of stock in this corporation, and may establish a date, not earlier than sixty days prior to any shareholders' meeting, as of which the shareholders entitled to vote and to participate in any shareholders' meeting shall be determined.
Section 4. Dividends and distributions to shareholders shall be paid at such times and in such amounts as may be determined by the Board of Directors consistently with applicable statutes and laws.
Section 5. From time to time, as it may deem appropriate and advantageous to the best interests of this corporation, the Board of Directors may by majority vote establish such bonus, pension, profit-sharing, stock bonus, stock purchase, stock option, or other employee incentive plans, as and for the benefit of such of the corporation's employees as it in its sole discretion shall determine.
Section 6. Each director, officer, employee and agent, past or present, of this corporation and each person who serves or may have served at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and their respective heirs, administrators and executors, shall be indemnified by this corporation in accordance with, and to the fullest extent provided by, the provisions of the Minnesota Business Corporation Act as it may from time to time be amended.
Section 7. The corporation shall be governed by the Minnesota Business Corporation Act, as amended from time to time, by its Articles of Incorporation and by these Bylaws. In matters not provided for by said Act, said Articles or the Bylaws, the corporation shall be governed by the determination of the Board of Directors, to the extent consistent with law.
ARTICLE VIII.
Adoption and Amendment
Section 1. The Board of Directors may alter or amend these Bylaws and may make or adopt additional Bylaws subject to the power of the shareholders to change or repeal the said Bylaws; provided, however, that the Board of Directors shall not make or alter any Bylaws relating to the qualifications, classifications, or terms of office of the members of the Board of Directors.
Section 2. The shareholders may alter or amend these Bylaws or may make or adopt additional Bylaws by majority vote of such shareholders at any annual meeting thereof or any special meeting called for that purpose.
EXHIBIT 10.10
AMENDMENT NO. 1 TO
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
This Amendment made as of November 1, 2002 between WSI Industries, Inc., a Minnesota corporation (hereinafter called the "Company"), and Michael J. Pudil (the "Executive").
WHEREAS, the Company and Executive entered into an Employment (Change in Control) Agreement dated as of January 11, 2001 (the "Change in Control Agreement"); and
WHEREAS, the Company and Executive desire to amend the Change in Control Agreement as provided in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereby agree as follows:
1. Section 1 of the Change in Control Agreement is hereby amended in its entirety as follows:
"1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until January 11, 2005. After January 11, 2005, this Agreement shall automatically renew for successive one-year periods unless WSI notifies the Executive of termination of the Agreement at least sixty (60) days prior to the end of the initial term or any renewal term. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 24 months from the date of the occurrence of a Change in Control."
2. All other terms of the Change in Control Agreement shall remain unchanged.
IN WITNESS WHEREOF, the Company and the Executive have executed this Amendment as of the date first written above.
WSI INDUSTRIES, INC.
By /s/ Paul Sheely
---------------------------------
Paul Sheely
Vice President-Finance
/s/ Michael J. Pudil
---------------------------------
Michael J. Pudil
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EXHIBIT 10.11
AMENDMENT NO. 1 TO
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
This Amendment made as of November 1, 2002 between WSI Industries, Inc., a Minnesota corporation (hereinafter called the "Company"), and Paul Sheely (the "Executive").
WHEREAS, the Company and Executive entered into an Employment (Change in Control) Agreement dated as of January 11, 2001 (the "Change in Control Agreement"); and
WHEREAS, the Company and Executive desire to amend the Change in Control Agreement as provided in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereby agree as follows:
3. Section 1 of the Change in Control Agreement is hereby amended in its entirety as follows:
"1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until January 11, 2005. After January 11, 2005, this Agreement shall automatically renew for successive one-year periods unless WSI notifies the Executive of termination of the Agreement at least sixty (60) days prior to the end of the initial term or any renewal term. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 12 months from the date of the occurrence of a Change in Control. Notwithstanding anything herein to the contrary, the Executive's employment shall be at all times at the will of WSI, and nothing in this Agreement shall prohibit or limit the right of WSI or Executive, prior to a Change in Control, to terminate the employment of Executive for any reason or for no reason"
4. All other terms of the Change in Control Agreement shall remain unchanged.
IN WITNESS WHEREOF, the Company and the Executive have executed this Amendment as of the date first written above.
WSI INDUSTRIES, INC.
By: /s/ Michael J. Pudil
--------------------------------
Michael J. Pudil, President
/s/ Paul Sheely
---------------------------------
Paul Sheely
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EXHIBIT 10.12
WSI INDUSTRIES, INC.
DIRECTORS RETIREMENT PROGRAM
ADOPTED BY THE BOARD OF DIRECTORS
JUNE 25, 1982
RESOLVED, that there is hereby established a Retirement Benefit Program for directors of this Corporation who have no vested interest in any other retirement plan or program of this Corporation at the time of ceasing to serve as a director subsequent to the adoption of this resolution, upon the following terms and conditions:
1. The annual amount of the benefit shall be equal to the amount of the retainer fees (as distinct from fees paid for attendance at meetings) paid to directors during the full fiscal year preceding the date the director ceases to hold that office if the director has served in that capacity fifteen years or more; the amount of the benefit shall be reduced by 5% for each year less than fifteen, but no benefit shall be paid unless the director has served in that capacity at least fie years. For purposes of calculating the retirement payment, a partial year of service as a director shall be considered a full year of service.
2. Payment of the benefit shall commence at the time the director ceases to serve as a director if age 65 or older, or at age 65 if the director ceases to serve as a director prior thereto, or at the time the director ceases to serve as a director in the event the director has become so disabled as to make continued service as a director impractical.
3. Benefits hereunder shall be payable during the lifetime of the former director, but not exceeding ten years. No payments shall be made in the event of the death of a director or former director prior to entitlement to payments hereunder.
4. Payment may be made pursuant hereto monthly, quarterly or annually as determined from time to time in the sole discretion of the Corporation.
5. Former directors who are being paid benefits hereunder shall agree to be available to the Corporation as reasonably requested for consultation and advice, including attendance at meeting of the Board of Directors or Committees thereof if requested, and shall be reimbursed in addition for out-of-pocket expenses in connection therewith. Such former directors shall also agree not to engage in any substantial activity competitive with the business of the Corporation, except that this restriction may be removed at the request of the director upon furnishing a written waiver of any further payments and benefits hereunder.
6. The Directors Retirement Program hereby established will not be terminated or modified adversely to the interest of a director or former director who is serving or has served as a director while this program is in effect, and the obligations of the Corporation hereunder shall be binding upon any successor entity or assignee of all or substantially all of the business and assets of the Corporation.
RESOLVED FURTHER, that any officers or employees of this Corporation are authorized and directed to execute and deliver any instruments and documents, and to take any action deemed necessary or appropriate in connection with these resolutions.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-75087-33-19650, 33-58565 and 333-78491) of our report dated October 8, 2002, with respect to the consolidated financial statements and schedule of WSI Industries, Inc. included in the Annual Report (Form 10-K) for the year ended August 25, 2002.
/s/ Schechter Dokken Kanter
Andrews & Selcer Ltd
Minneapolis, Minnesota
November 19, 2002
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-75087- 33-19650, 33-58565 and 333-78491) of our report dated October 12, 2001, with respect to the consolidated financial statements and schedule of WSI Industries, Inc. included in the Annual Report (Form 10-K) for the year ended August 25, 2002.
/s/ ERNST & YOUNG LLP Minneapolis, Minnesota November 19, 2002 |
EXHIBIT 99.1
CERTIFICATION
The undersigned certify pursuant to 18 U.S.C. Section 1350, that:
(1) The accompanying Annual Report on Form 10-K for the period ended August 25, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the accompanying Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 22, 2002 /s/ Michael J. Pudil
----------------------------------
Chief Executive Officer
Date: November 22, 2002 /s/ Paul D. Sheely
----------------------------------
Chief Financial Officer
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