UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-619
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Minnesota 41-0691607
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(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Wayzata, Minnesota 55391
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(Address of principal executive offices) (Zip Code)
(952) 473-1271
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
2,465,229 Common Shares were outstanding as of June 30, 2001.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets May 27, 2001(Unaudited)
and August 27, 2000 3
Consolidated Statements of Operations
Thirteen and Thirty-Nine weeks ended May 27, 2001
and May 28, 2000 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirty-Nine weeks ended May 27, 2001
and May 28, 2000 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8, 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART II. OTHER INFORMATION:
Item 7. Exhibits and Reports on Form 8-K 10
Signatures 10
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Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MAY 27, AUGUST 27,
2001 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 6,300 $ 6,300
Accounts receivable 2,071,440 3,713,198
Inventories 1,809,332 2,738,346
Prepaid and other current assets 126,477 148,206
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Total Current Assets 4,013,549 6,606,050
Property, Plant and Equipment - Net 9,574,482 10,655,696
Intangible Assets 6,192,630 6,169,919
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$19,780,661 $23,431,665
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit facility $ 23,781 $ 369,134
Trade accounts payable 988,970 2,041,089
Accrued compensation and employee withholdings 498,077 857,739
Accrued real estate taxes 125,050 151,230
Miscellaneous accrued expenses 257,572 229,719
Current portion of long-term debt 1,911,604 1,236,460
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Total Current Liabilities 3,805,054 4,885,371
Long term debt, less current portion 7,554,435 9,601,003
STOCKHOLDERS' EQUITY:
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 6,533,715 7,057,834
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Total Stockholders' Equity 8,421,172 8,945,291
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$19,780,661 $23,431,665
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See notes to consolidated financial statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended 39 weeks ended
--------------------------------- ------------------------------
May 27, May 28, May 27, May 28,
2001 2000 2001 2000
-------------- ------------- ------------ ------------
Net sales $ 5,140,495 $ 9,085,495 $ 17,086,091 $ 24,091,137
Cost of products sold 4,140,070 7,211,702 13,540,444 20,091,913
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Gross margin 1,000,425 1,873,793 3,545,647 3,999,224
Selling and administrative expense 1,111,865 1,159,232 3,419,198 3,354,778
Pension curtailment (gain) -- (121,375) -- (353,375)
Gain on sale of equipment -- -- -- (394,682)
Severance costs -- -- -- 248,507
Interest and other income -- (19,212) (17,322) (57,760)
Interest and other expense 203,794 237,231 664,890 753,327
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Earnings (loss) from operations
before income taxes (315,234) 617,917 (521,119) 448,429
Income tax expense -- 15,100 3,000 18,100
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Net earnings (loss) $ (315,234) $ 602,817 $ (524,119) $ 430,329
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Basic and diluted loss per share $ (.13) $ (.21)
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Basic earnings per share (2000 only) $ .24 $ (.17)
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Diluted earnings per share (2000 only) $ .23 $ .17
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Weighted average number of
common shares 2,465,229 2,465,229 2,465,229 2,460,897
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Weighted average number of
common and dilutive potential
common shares (2000 only) 2,567,145 2,535,726
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See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended
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May 27, May 28,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (524,119) $ 430,329
Adjustments to reconcile net earnings to net cash:
provided by operating activities:
Gain on sale of property, plant & equipment -- (394,682)
Depreciation and amortization 1,837,734 1,761,076
(Decrease) in pension liability -- (347,437)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,641,758 (779,076)
(Increase) decrease in inventories 929,014 449,831
(Increase) decrease in prepaid expenses 21,729 (52,346)
Increase (decrease) in accounts payable and
accrued expenses (1,410,108) 834,934
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Net cash provided by operations 2,496,008 1,902,629
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 746,165
Purchase of property, plant and equipment (175,960) (430,788)
Purchase of subsidiary (280,600) 27,000
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Net cash provided by (used in) investing activities (456,560) 342,377
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (2,320,048) (2,412,107)
Proceeds from issuance of long term debt 280,600 --
Issuance of common stock -- 41,813
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Net cash provided by (used in) financing activities (2,039,448) (2,370,294)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (125,288)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,300 131,588
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CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,300 $ 6,300
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 678,358 $ 760,517
Income taxes $ 7,500 $ 25,083
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 322,671 $ 432,625
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See notes to consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of May 27, 2001, the consolidated statements of operations for the thirteen weeks and thirty-nine weeks ended May 27, 2001 and May 28, 2000 and the consolidated statements of cash flows for the thirty-nine weeks then ended, respectively, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.
The balance sheet at August 27, 2000 is derived from the audited balance sheet as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2000 annual report to shareholders. The results of operations for interim periods are not necessarily indicative of the operating results for the full year.
2. BUSINESS CONSOLIDATION AND RELOCATION- PRIOR YEAR FIRST NINE MONTHS FINANCIAL IMPACT:
On September 2, 1999, the Company announced that it was closing its Long Lake, Minnesota facility and transferring all of the production to its Taurus and Bowman subsidiaries. As a result of this consolidation, the Company incurred severance costs in the first quarter of 2000 of $248,507 for employees terminated or given notice in that period. WSI was also able to sell excess production equipment in the first half of 2000 which contributed a gain on sales of $394,682. Concurrent with the consolidation decision, the Company also decided to terminate its defined benefit pension plan that resulted in a gain of $353,375.
3. DEBT AND LINE OF CREDIT:
Pursuant to the Bowman transaction, the Company amended its credit and security agreement with its bank. The amended agreement calls for a term loan in the principal amount of $4,400,000 and a revolving credit facility in the maximum amount of $3,000,000. Interest is accrued at prime plus .75% for the term loan and prime plus .50% for the revolving credit facility payable monthly. Each facility has a LIBOR rate option. The term loan is payable in equal monthly installments of $52,381 of principal commencing August 31, 1999 and matures March 31, 2002. At May 27, 2001, the outstanding balance on the term loan was $1,300,000 and $24,000 on the revolving facility. The fair value of the term debt is estimated to be its carrying value since the debt has a variable interest rate.
During fiscal 1999, the Company obtained a mortgage with the same bank that it has its term debt and line of credit facility. The agreement requires monthly principal payments of $13,889, plus interest at prime plus 1.0% and has a balance at May 27, 2001 of $2,208,000. Subsequent to the end of the third quarter the mortgage was paid off. See Footnote 5 below.
The Company also entered into Subordinated Promissory Notes with the former owners of Taurus and Bowman in the amounts of $1,663,000 and $1,875,000, respectively. In connection with the Bowman acquisition, the seller earned $280,600 on the second of two contingencies during the
second quarter of fiscal 2001. This amount is included in the $1,875,000 balance. The notes bear interest at 7.75% with interest payable quarterly. Principal payments are due in three annual equal installments commencing on February 15, 2002 for the Taurus related note and August 6, 2002 for the Bowman related note.
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earning per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per share for fiscal 2000:
13 weeks ended 39 weeks ended
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May 27, May 28, May 27, May 28,
2001 2000 2001 2000
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Numerator for basic and diluted
earnings per share:
Net Earnings $ (315,234) $ 602,817 $ (524,119) $ 430,329
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Denominator:
Denominator for basic earnings
per share - weighed average shares 2,465,229 2,465,229 2,465,229 2,460,897
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Effect of dilutive securities:
Employee/Director stock options 101,916 74,829
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Dilutive potential common shares
Denominator for diluted earnings
per share-adjusted weighted shares
and assumed conversions 2,567,145 2,535,726
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Basic earnings per share $ (.13) $ .24 $ (.21) $ .17
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Diluted earnings per share $ .23 $ .17
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5. SUBSEQUENT EVENT
On June 12, 2001, the Company sold its vacant Long Lake, Minnesota facility. The purchase price was $2.4 million with the net proceeds used to pay off the mortgage on the facility. The sale is estimated to generate a gain of approximately $137,000 in the Company's fourth quarter.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales of $5,140,000 for the quarter ending May 27, 2001 decreased 43% or $3,945,000 from the same period of the prior year. As discussed in the prior quarter's 10-Q a major customer made the decision to consign raw materials for their manufacturing program to the Company instead of WSI purchasing the material and subsequently reselling the material to the customer after manufacturing. This move to consigned inventory in combination with a softening of virtually all markets led to the lower sales level. Year to date sales of $17,086,000 were $7,005,000 or 29% less than the prior year due to the reasons described above.
Gross margin decreased to 19% as compared to 21% in the prior year quarter. The decrease is attributable to volume inefficiencies due to the lower level of sales. However, year-to-date gross margin improved to 21% versus 17% in the prior year as the prior year was affected by the consolidation efforts of closing and relocating the Long Lake, Minnesota facility operation.
Selling and administrative expense of $1,112,000 was $47,000 lower than the prior year quarter due to several offsetting items, but primarily to lower incentive compensation accrued. Year to date selling and administration expense of $3,419,000 was $64,000 higher in fiscal 2001 than fiscal 2000.
Interest and other expense decreased $33,000 for the quarter and $88,000 year to date due to the lower levels of long-term debt in Fiscal 2001 versus Fiscal 2000.
During Fiscal 2000, WSI sold excess manufacturing equipment with a net book value of $351,000 for $746,000, generating a gain of $395,000.
The Company sold its Long Lake facility subsequent to the end of the quarter (see Footnote 5). During the third quarter of fiscal 2001, the Company incurred approximately $150,000 in expense including interest related to the facility. For the first nine months of 2001, the expense was approximately $500,000.
In the thirty-nine week period ended May 27, 2001, the Company recorded a tax provision of $3,000 to cover mandatory state income taxes and federal alternative minimum taxes. The Company has not recorded the benefit of net operating losses and other net deductible temporary differences in the consolidated statement of operations due to the fact that the Company has not been able to establish that it is more likely than not that the tax benefit will be realized.
Liquidity and Capital Resources:
On May 27, 2001 working capital was $208,000 compared to $1,721,000 at August 27, 2000, a decrease of $1,513,000. The ratio of current assets to current liabilities at May 27, 2001 and August 27, 2000 was 1.05 to 1.0 and 1.35 to 1.0, respectively. The working capital decrease is attributable to a combination of lower accounts receivable and inventory due to the consigned inventory situation described previously, the overall lower level of sales and the inclusion of $550,000 into current maturities of long term debt related to the Taurus Subordinated Promissory Note Payable.
As described previously in the Notes to Consolidated Statements, the Company amended its credit and security agreement with its bank on August 6, 1999. Currently, the Company owes $1,300,000 on its term loan facility and $24,000 on its revolving facility. The revolving facility had
approximately $1,300,000 of availability at May 27, 2001. The term loan carries an interest rate at prime plus .75%. The revolver rate is at prime plus .50%.
The Company also entered into a mortgage with the same bank on August 6, 1999 as outlined in the Notes to Consolidated Statements. As of May 27, 2001, the Company owed $2,208,000 with interest paid at prime plus 1.0%. As previously discussed, the mortgage was paid in full subsequent to the end of the quarter.
As also described in the Notes, the Company entered into a subordinated promissory note with the former owner of Taurus for approximately $1,663,000. Interest is accrued at a rate of 7.75% paid quarterly. Principal payments are due in three equal annual installments commencing on February 15, 2002. The Company also has a subordinated promissory note of $1,875,000 with the former owner of Bowman. Interest is accrued at 7.75% payable quarterly with principal payments due in equal annual installments commencing August 6, 2002.
Total capitalized lease debt of $2,420,000 on May 27, 2001 was $56,000 lower than on August 27, 2000. The decrease resulted from a new capital lease of $323,000 offset by payments on the existing leases.
It is management's belief that its internally generated funds combined with the line of credit will be sufficient to enable the Company to meet its financial requirements during the next 12 months.
Cautionary Statement:
Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iii) a continuing downturn in the industries in which the Company participates, principally the agricultural industry, could have an adverse effect on the demand for Company services. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
1. Not Applicable
PART II. OTHER INFORMATION:
Item 7. Exhibits and Reports on Form 8-K:
A. Exhibit 10.1 Employment (change in control) Agreement between Michael J. Pudil and the Registrant dated January 11, 2001.
B. Exhibit 10.2 Employment (change in control) Agreement between Paul D. Sheely and the Registrant dated January 11, 2001.
C. Exhibit 10.3 Purchase Agreement between DRB #8 and Registrant incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed June 25, 2001.
SIGNATURES
Pursuant to the requirements 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.
Date: July 11, 2001 /s/ Michael J. Pudil
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Michael J. Pudil, President & CEO
Date: July 11, 2001 /s/ Paul D. Sheely
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Paul D. Sheely, Vice President,
Finance & CFO
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EXHIBIT 10.1
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
AGREEMENT made effective as of this 11th day of January, 2001 by and between WSI Industries, Inc., a Minnesota corporation with its principal offices at Wayzata, Minnesota ("WSI") and Michael J. Pudil (the "Executive").
WHEREAS, WSI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of WSI and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of WSI, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of WSI; and
WHEREAS, WSI, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of WSI and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of WSI upon the understanding that WSI will provide income security if the Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of WSI and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to WSI of the Executive in the event of a Change in Control.
THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until January 11, 2003. After January 11, 2003, 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. Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control, as set forth below.
(a) For purposes of this Agreement, a "Change in Control" of WSI shall be deemed to occur when and if any of the following occur:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of WSI representing 50% or more of the combined voting power of WSI's then outstanding securities;
(ii) there ceases to be a majority of the Board of Directors comprised of: (A) individuals who on the date hereof constituted the Board of WSI, and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened contest, including but not limited to a proxy or consent solicitation, relating to the election of directors of WSI or a settlement of such contest or consent solicitation) who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control (the individuals designated in (A) and (B) shall be referred to as the "Incumbent Directors"); or
(iii) WSI disposes of at least 75% of its assets, other than to an entity owned 50% or greater by WSI or any of its subsidiaries.
(b) A Change in Control which arises from a transaction or series of transactions which are not authorized, recommended or approved by formal action taken by a majority of the Incumbent Directors shall be referred to as an "Unapproved Change in Control." A Change in Control which has been authorized, recommended or approved by a majority of the Incumbent Directors shall be referred to as an "Approved Change in Control."
3. Termination Following Change in Control. If a Change in Control shall have occurred during the term of this Agreement and Executive's employment is thereafter terminated, Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of Executive's Death or Retirement, (B) by WSI for Cause or Disability, or (C) by Executive other than for Good Reason.
(a) Disability; Retirement. If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of Executive's duties with WSI for six consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive's duties, WSI may terminate Executive's employment for "Disability". Any question as to the existence of Executive's Disability upon which Executive and WSI cannot agree shall be determined by a qualified independent physician selected by Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive's immediate family), and approved by WSI. The determination of such physician made in writing to WSI and to Executive shall be final and conclusive for all purposes of this Agreement. Termination by Executive of Executive's employment based on "Retirement" shall mean retirement at or after the date the Executive has attained age 65.
(b) Cause. Termination by WSI of Executive's employment for "Cause" shall mean: (i) the willful and continued failure of Executive to perform his essential duties; (ii) the willful engaging by Executive in illegal conduct, or (iii) willful misconduct materially injurious to WSI, which, in the case of clause (i) and (iii), the Executive has not cured, in the sole opinion of the Board, determined in good faith, within 10 days of receipt of the Notice of Termination. An act of Executive shall not be deemed "willful" unless done or omitted to be done by Executive not in good faith and without reasonable belief that the act or omission was in WSI's best interests.
(c) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following:
(i) the assignment to Executive of any duties inconsistent with Executive's status or position with WSI, or a substantial reduction in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control;
(ii) a reduction by WSI in Executive's annual base salary in effect immediately prior to a Change in Control;
(iii) the relocation of Executive's principal executive offices to a location more than fifty miles from Executive's principal office prior to the Change in Control, except for required travel on WSI's business to an extent substantially consistent with Executive's prior business travel obligations;
(iv) the failure by WSI to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of WSI's pension, life insurance, medical, health
and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by WSI which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed at the time of the Change in Control, or the failure by WSI to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that WSI may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination;
(v) the failure of WSI to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7; or
(vi) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of subsection (e) below; for purposes of this Agreement, no such purported termination shall be effective.
(d) Voluntary Termination Deemed Good Reason. If an Unapproved Change in Control occurs, Executive may voluntarily terminate his employment for any reason during the period commencing on the 91st day following a Change in Control and ending on the 180th day following a Change in Control. Any such termination shall be deemed "Good Reason" for all purposes of this Agreement.
(e) Notice of Termination. Any purported termination of Executive's employment by WSI or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment.
(f) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean:
(i) if Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period); and
(ii) if Executive's employment is terminated pursuant to subsections (b), (c) or (d) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) or (d) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given).
(g) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party in good faith that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgement, order or decree of a court of competent jurisdiction in accordance with subsection 11(a) (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, WSI shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.
4. Compensation Upon Termination or During Disability. Following a Change in Control of WSI, as defined in subsection 2(a), upon termination of Executive's employment or during a period of Disability, Executive shall be entitled to the following benefits:
(a) During any period that Executive fails to perform full-time duties with WSI as a result of a Disability, WSI shall pay Executive the base salary of the Executive at the rate in effect at the commencement of any such period, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with WSI's insurance programs then in effect.
(b) If Executive's employment shall be terminated by WSI for Cause or by Executive other than for Good Reason or Retirement, WSI shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and WSI shall have no further obligation to Executive under this Agreement.
(c) If Executive's employment shall be terminated by WSI for Disability or by Executive for Retirement, or by reason of Death, WSI shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Executive is entitled under WSI's retirement and insurance programs then in effect.
(d) If Executive's employment by WSI shall be terminated (A) by WSI other than for Cause or Disability or (B) by Executive for Good Reason, then Executive shall be entitled to the benefits provided below:
(i) WSI shall pay Executive the Executive's full base salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given;
(ii) In lieu of any further salary payments for
periods subsequent to the Date of Termination, WSI shall pay a
severance payment (the "Severance Payment") equal to the
amount described in (A) or (B) below, whichever is applicable:
(A) if an Unapproved Change in Control occurs, 2.99 times the
average of the annual Compensation (as defined below) paid to
Executive by WSI (or any corporation ("Affiliate") affiliated
with WSI within the meaning of Section 1504 of the Internal
Revenue Code of 1986, as amended (the "Code")) for the five
calendar years (or, if Executive has been employed by WSI for
less than five years, the number of complete calendar years of
employment or portions thereof calculated on an annualized
basis) (the "Base Period") preceding the earlier of the
calendar year in which a Change in Control of WSI occurred or
the calendar year of the Date of Termination; or (B) if an
Approved Change in Control occurs, 1.5 times the average of
the annual Compensation (as defined below) for the Base
Period. Such average (including the effect of bonuses paid in
the Base Period) shall be determined in accordance with the
temporary or final regulations promulgated under Section
280G(e) of the Code. For purposes of this Section 4,
"Compensation" payable to Executive by WSI (or an Affiliate)
shall mean every type and form of compensation includable in
Executive's gross income
for federal income tax purposes for each year, shall include any voluntary salary deferral contributions to WSI's cash or deferred arrangement under the WSI profit sharing plan (the 401(k) contributions) and the WSI cafeteria plan, but shall exclude taxable compensation recognized as the result of the exercise of stock options or sale of the stocks acquired or any payments actually or constructively received with respect to a plan of deferred compensation between WSI and Executive. The Severance Payment shall be made within 60 days after the Date of Termination, or such earlier date as any required rescission period in respect of the release given by Executive under Section 5 has expired.
(iii) For the period of (A) 18 months following the Termination Date in the event of an Approved Change in Control or (B) 36 months following the Termination Date in the event of an Unapproved Change in Control, Executive shall be entitled to continue participation in the life, disability, accident and health insurance benefit plans of WSI substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. WSI and Executive shall share the cost associated with such coverage as if Executive were still actively employed by WSI. If Executive cannot be covered under any of WSI's group plans or policies, WSI shall reimburse Executive for his full cost of obtaining comparable alternative group or individual coverage elsewhere, less any contribution that Executive would have been required to make under WSI's group plans or policies. Benefits otherwise receivable by Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to WSI.
(iv) Notwithstanding the foregoing, the Severance
Payment shall be reduced to that maximum amount permitted such
that no portion of the Severance Payment, together with any
other payment or the value of any benefit received or to be
received by Executive (whether payable pursuant to the terms
of this Agreement, any other plan, agreement or arrangement
with WSI or an Affiliate) that is contingent upon a change in
control of WSI as that term is defined in Section 280G of the
Code would constitute a "parachute payment" within the meaning
of Section 280G(b)(2) of the Code or would be nondeductible
solely by reason of the application of such Section 280G. In
determining the amount of the Severance Payment, in full or as
partially reduced as the case may be, payable pursuant to this
Section 4(d), the opinion of tax counsel selected by WSI and
acceptable to Executive with respect to all issues arising in
connection with the application of Section 280G of the Code to
such payments and benefits shall be final and binding on the
parties. The Executive may elect to have the benefit
continuation under Section 4(d)(iii) reduced or eliminated
prior to any reduction of the Severance Payment.
(v) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of Executive and WSI in applying the terms of this Subsection 4(d), any portion of the Severance Payment constitutes a "parachute payments" and would result in part or all of such Severance Payment being nondeductible by WSI or its Affiliates by reason of Section 280G of the Code, then Executive shall repay to WSI upon demand an amount equal to the sum of: (1) that portion of the Severance Payment in excess of the maximum amount that could have been paid to or for the Executive's benefit without any portion constituting a "parachute payment" and being nondeductible by reason of section 280G of the Code; and (2) interest on the amount set forth in clause (1) of this sentence at the applicable Federal rate (as defined in section 1274(d) of the Code) from the date of Executive's receipt of such excess until the date of such payment.
(vi) The Severance Payment shall be in lieu of and offset the amount of any payment or other benefits to which the Executive may be entitled to in connection with the termination of employment pursuant to the provisions of WSI's Severance Pay Plan, as amended from time to time, or any successor to such policy.
(e) Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this Section 4.
(f) In addition to all other amounts payable to Executive under this Section 4, Executive shall be entitled to receive all benefits payable to the Executive under the WSI, Inc. Employee Savings Plan and any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees.
5. General Release. Executive agrees that the amounts payable to Executive under Section 4 shall be contingent upon the execution by Executive of a release agreement with WSI, which release agreement shall include language releasing and holding WSI and its affiliates, officers, directors, shareholders, employees, agents and insurers harmless from any and all claims, comply with all applicable laws and contain other provisions standard in such agreements.
6. Funding of Payments. In order to assure the performance by WSI or its successor of its obligations under this Agreement, WSI shall, no later than immediately prior to the closing of the transaction that constitutes an Unapproved Change in Control, deposit in a so-called "rabbi trust" or similar escrow arrangement an amount equal to the maximum payment that will be due the Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to WSI. If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, WSI shall remain liable for any and all payments due to Executive. In accordance with the terms of such trust, at all times during the term of this Agreement Executive shall have no rights, other than as an unsecured general creditor of WSI, to any amounts held in trust and all trust assets shall be general assets of WSI and subject to the claims of creditors of WSI. With respect to an Approved Change in Control, WSI's obligations in this Section 6 shall not be mandatory but rather shall be permissive.
7. Successors; Binding Agreement.
(a) WSI will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of WSI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that WSI would be required to perform it if no such succession had taken place. Failure of WSI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from WSI in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate.
8. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence
address of the Executive or in the case of WSI, to its principal office to the attention of each of the then directors of WSI with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
9. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.
10. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceablity of any other provision of this Agreement, which shall remain in full force and effect.
11. Arbitration and Award of Attorneys' Fees.
(a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party's receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party refuses or fails to select an arbitrator within the time therefor, the other party may do so on such refusing or failing party's behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the Executive's failure to comply with any confidentiality, non-solicit, and non-compete provisions of any agreement to which the Executive is bound will cause immediate and irreparable injury to WSI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere.
(b) In the event WSI fails to pay Executive any amounts owing to Executive under this Agreement or to provide Executive any benefits to which Executive is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, WSI shall pay the legal expenses (including reasonable attorneys' fees, court costs and other out-of-pocket expenses), incurred by Executive to enforce his rights under this Agreement and collect or obtain such amounts or benefits.
12. Confidential Information. Executive will not while this Agreement is in effect or after its expiration or termination, use, other than in connection with Executive's employment with WSI, or disclose any confidential information to any person not employed by WSI or not authorized by WSI to receive such information without the prior written consent of WSI. Executive will use reasonable and prudent care to safeguard, protect and prevent the unauthorized disclosure of confidential information. The obligations contained in this Section 12 will survive for as long as WSI in its sole judgment considers the information to be confidential information.
13. Disclosure and Assignment.
(a) Disclosure. Executive will disclose promptly in writing to WSI all inventions, improvements, discoveries and writings and other works of authorship ("works") which are conceived, made, discovered or written jointly or singly on WSI time or on Executive's time, providing the invention, improvement, discovery, writing or other work is capable of being used by WSI in the normal course of business, and all such inventions, improvements, discoveries, writings and works are hereby assigned to, and belong solely and exclusively to WSI.
(b) Assignment. Executive will sign and execute all instruments of assignment and other papers to evidence vestiture of the entire right, title, and interest in such inventions, improvements, discoveries, writings, or works in WSI, and will do all acts and sign all papers that WSI may reasonably request, relating to applications for patents, to patents, to copyrights, and to the enforcement and protection thereof. If such acts are requested and performed when Executive is not a WSI employee, WSI will pay a fee, determined by WSI, covering authorized time and expenses of Executive but no others.
(c) Limitations. Notwithstanding anything in this Section 13
to the contrary, Executive is hereby given NOTICE that the assignment
and statement of WSI ownership does not apply to any INVENTION for
which no equipment, supplies, facility or trade secret information of
WSI was used and which was developed entirely on Executive's own time,
and (1) which does not relate (i) directly to the business of WSI or
(ii) to WSI's actual or demonstrably anticipated research or
development, or (2) which does not result from any work performed by
Executive for WSI.
(d) Survival of Obligations.
(i) The obligations of this Section 13 survive the expiration or termination of this Agreement.
(ii) This Agreement, or any termination hereof, has no effect on any other Employee Agreement previously executed by Executive which remains in full force and effect. To the extent there are any conflicts between this Agreement and such other Agreement, this Agreement prevails.
(iii) Upon termination of employment, Executive will not take or retain, and will return to WSI all WSI property of any nature or kind.
14. Prior Agreement. This Agreement supersedes and replaces in its entirety all prior agreements related to a change in control of WSI, including any prior Employment (Change in Control) Agreement between WSI and Executive dated October 18, 1995. This Agreement contains the entire understanding of the parties, except for the Employment Agreement dated October 22, 1993, as amended January 9, 1997 (collectively, the "Employment Agreement") which shall remain in effect according to its terms. All references in the Employment Agreement to the Change in Control Agreement dated October 18, 1995 shall mean and refer to this Agreement. In the event of a conflict with the terms of the Employment Agreement, this Agreement shall control. There shall be no duplication of benefits on Executive's behalf in this Agreement and the Employment Agreement in the event of the termination of Executive's employment following a Change in Control.
WSI INDUSTRIES, INC.
EXHIBIT 10.2
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
AGREEMENT made effective as of this 11th day of January, 2001 by and between WSI Industries, Inc., a Minnesota corporation with its principal offices at Wayzata, Minnesota ("WSI") and Paul Sheely (the "Executive").
WHEREAS, WSI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of WSI and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of WSI, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of WSI; and
WHEREAS, WSI, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of WSI and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of WSI upon the understanding that WSI will provide income security if the Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of WSI and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to WSI of the Executive in the event of a Change in Control.
THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until January 11, 2002. After January 11, 2002, 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.
2. Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control, as set forth below.
(a) For purposes of this Agreement, a "Change in Control" of WSI shall be deemed to occur when and if any of the following occur:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of WSI representing 50% or more of the combined voting power of WSI's then outstanding securities;
(ii) there ceases to be a majority of the Board of Directors comprised of: (A) individuals who on the date hereof constituted the Board of WSI, and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened contest, including but not limited to a proxy or consent solicitation, relating to the election of directors of WSI or a settlement of such contest or consent solicitation) who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control (the individuals designated in (A) and (B) shall be referred to as the "Incumbent Directors"); or
(iii) WSI disposes of at least 75% of its assets, other than to an entity owned 50% or greater by WSI or any of its subsidiaries.
(b) A Change in Control which arises from a transaction or series of transactions which are not authorized, recommended or approved by formal action taken by a majority of the Incumbent Directors shall be referred to as an "Unapproved Change in Control." A Change in Control which has been authorized, recommended or approved by a majority of the Incumbent Directors shall be referred to as an "Approved Change in Control."
3. Termination Following Change in Control. If a Change in Control shall have occurred during the term of this Agreement and Executive's employment is thereafter terminated, Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of Executive's Death or Retirement, (B) by WSI for Cause or Disability, or (C) by Executive other than for Good Reason.
(a) Disability; Retirement. If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of Executive's duties with WSI for six consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive's duties, WSI may terminate Executive's employment for "Disability". Any question as to the existence of Executive's Disability upon which Executive and WSI cannot agree shall be determined by a qualified independent physician selected by Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive's immediate family), and approved by WSI. The determination of such physician made in writing to WSI and to Executive shall be final and conclusive for all purposes of this Agreement. Termination by Executive of Executive's employment based on "Retirement" shall mean retirement at or after the date the Executive has attained age 65.
(b) Cause. Termination by WSI of Executive's employment for "Cause" shall mean: (i) the willful and continued failure of Executive to perform his essential duties; (ii) the willful engaging by Executive in illegal conduct, or (iii) willful misconduct materially injurious to WSI, which, in the case of clause (i) and (iii), the Executive has not cured, in the sole opinion of the Board, determined in good faith, within 10 days of receipt of the Notice of Termination. An act of Executive shall not be deemed "willful" unless done or omitted to be done by Executive not in good faith and without reasonable belief that the act or omission was in WSI's best interests.
(c) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following:
(i) the assignment to Executive of any duties inconsistent with Executive's status or position with WSI, or a substantial reduction in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control;
(ii) a reduction by WSI in Executive's annual base salary in effect immediately prior to a Change in Control;
(iii) the relocation of Executive's principal executive offices to a location more than fifty miles from Executive's principal office prior to the Change in Control, except for required travel on WSI's business to an extent substantially consistent with Executive's prior business travel obligations;
(iv) the failure by WSI to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of WSI's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by WSI which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed at the time of the Change in Control, or the failure by WSI to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that WSI may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination;
(v) the failure of WSI to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7; or
(vi) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of subsection (e) below; for purposes of this Agreement, no such purported termination shall be effective.
(d) Voluntary Termination Deemed Good Reason. If an Unapproved Change in Control occurs, Executive may voluntarily terminate his employment for any reason during the period commencing on the 91st day following a Change in Control and ending on the 180th day following a Change in Control. Any such termination shall be deemed "Good Reason" for all purposes of this Agreement.
(e) Notice of Termination. Any purported termination of Executive's employment by WSI or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment.
(f) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean:
(i) if Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period); and
(ii) if Executive's employment is terminated pursuant to subsections (b), (c) or (d) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) or (d) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given).
(g) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party in good faith that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgement, order or decree of a court of competent jurisdiction in accordance with subsection 11(a) (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, WSI shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in
accordance with this subsection. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.
4. Compensation Upon Termination or During Disability. Following a Change in Control of WSI, as defined in subsection 2(a), upon termination of Executive's employment or during a period of Disability, Executive shall be entitled to the following benefits:
(a) During any period that Executive fails to perform full-time duties with WSI as a result of a Disability, WSI shall pay Executive the base salary of the Executive at the rate in effect at the commencement of any such period, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with WSI's insurance programs then in effect.
(b) If Executive's employment shall be terminated by WSI for Cause or by Executive other than for Good Reason or Retirement, WSI shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and WSI shall have no further obligation to Executive under this Agreement.
(c) If Executive's employment shall be terminated by WSI for Disability or by Executive for Retirement, or by reason of Death, WSI shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Executive is entitled under WSI's retirement and insurance programs then in effect.
(d) If Executive's employment by WSI shall be terminated (A) by WSI other than for Cause or Disability or (B) by Executive for Good Reason, then Executive shall be entitled to the benefits provided below:
(i) WSI shall pay Executive the Executive's full base salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given;
(ii) In lieu of any further salary payments for
periods subsequent to the Date of Termination, WSI shall pay a
severance payment (the "Severance Payment") equal to the
amount described in (A) or (B) below, whichever is applicable:
(A) if an Unapproved Change in Control occurs, 2.99 times the
average of the annual Compensation (as defined below) paid to
Executive by WSI (or any corporation ("Affiliate") affiliated
with WSI within the meaning of Section 1504 of the Internal
Revenue Code of 1986, as amended (the "Code")) for the five
calendar years (or, if Executive has been employed by WSI for
less than five years, the number of complete calendar years of
employment or portions thereof calculated on an annualized
basis) (the "Base Period") preceding the earlier of the
calendar year in which a Change in Control of WSI occurred or
the calendar year of the Date of Termination; or (B) if an
Approved Change in Control occurs, 1.0 times the average of
the annual Compensation (as defined below) for the Base
Period. Such average (including the effect of bonuses paid in
the Base Period) shall be determined in accordance with the
temporary or final regulations promulgated under Section
280G(e) of the Code. For purposes of this Section 4,
"Compensation" payable to Executive by WSI (or an Affiliate)
shall mean every type and form of compensation includable in
Executive's gross income for federal income tax purposes for
each year, shall include any voluntary salary deferral
contributions to WSI's cash or deferred arrangement under the
WSI profit sharing plan (the 401(k) contributions) and the WSI
cafeteria plan, but shall exclude taxable compensation
recognized as the result of the exercise of stock options or
sale of the stocks acquired or any payments actually or
constructively received with respect to a plan of deferred
compensation between WSI and Executive. The Severance Payment
shall be made within 60 days after the Date of Termination, or
such earlier date as any required rescission period in respect
of the release given by Executive under Section 5 has expired.
(iii) For the period of (A) 12 months following the Termination Date in the event of an Approved Change in Control or (B) 36 months following the Termination Date in the event of an Unapproved Change in Control, Executive shall be entitled to continue participation in the life, disability, accident and health insurance benefit plans of WSI substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. WSI and Executive shall share the cost associated with such coverage as if Executive were still actively employed by WSI. If Executive cannot be covered under any of WSI's group plans or policies, WSI shall reimburse Executive for his full cost of obtaining comparable alternative group or individual coverage elsewhere, less any contribution that Executive would have been required to make under WSI's group plans or policies. Benefits otherwise receivable by Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to WSI.
(iv) Notwithstanding the foregoing, the Severance
Payment shall be reduced to that maximum amount permitted such
that no portion of the Severance Payment, together with any
other payment or the value of any benefit received or to be
received by Executive (whether payable pursuant to the terms
of this Agreement, any other plan, agreement or arrangement
with WSI or an Affiliate) that is contingent upon a change in
control of WSI as that term is defined in Section 280G of the
Code would constitute a "parachute payment" within the meaning
of Section 280G(b)(2) of the Code or would be nondeductible
solely by reason of the application of such Section 280G. In
determining the amount of the Severance Payment, in full or as
partially reduced as the case may be, payable pursuant to this
Section 4(d), the opinion of tax counsel selected by WSI and
acceptable to Executive with respect to all issues arising in
connection with the application of Section 280G of the Code to
such payments and benefits shall be final and binding on the
parties. The Executive may elect to have the benefit
continuation under Section 4(d)(iii) reduced or eliminated
prior to any reduction of the Severance Payment.
(v) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of Executive and WSI in applying the terms of this Subsection 4(d), any portion of the Severance Payment constitutes a "parachute payments" and would result in part or all of such Severance Payment being nondeductible by WSI or its Affiliates by reason of Section 280G of the Code, then Executive shall repay to WSI upon demand an amount equal to the sum of: (1) that portion of the Severance Payment in excess of the maximum amount that could have been paid to or for the Executive's benefit without any portion constituting a "parachute payment" and being nondeductible by reason of section 280G of the Code; and (2) interest on the amount set forth in clause (1) of this sentence at the applicable Federal rate (as defined in section 1274(d) of the Code) from the date of Executive's receipt of such excess until the date of such payment.
(vi) The Severance Payment shall be in lieu of and offset the amount of any payment or other benefits to which the Executive may be entitled to in connection with the termination of employment pursuant to the provisions of WSI's Severance Pay Plan, as amended from time to time, or any successor to such policy.
(e) Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this Section 4.
(f) In addition to all other amounts payable to Executive under this Section 4, Executive shall be entitled to receive all benefits payable to the Executive under the WSI, Inc. Employee Savings Plan and any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees.
5. General Release. Executive agrees that the amounts payable to Executive under Section 4 shall be contingent upon the execution by Executive of a release agreement with WSI, which release agreement shall include language releasing and holding WSI and its affiliates, officers, directors, shareholders, employees, agents and insurers harmless from any and all claims, comply with all applicable laws and contain other provisions standard in such agreements.
6. Funding of Payments. In order to assure the performance by WSI or its successor of its obligations under this Agreement, WSI shall, no later than immediately prior to the closing of the transaction that constitutes an Unapproved Change in Control, deposit in a so-called "rabbi trust" or similar escrow arrangement an amount equal to the maximum payment that will be due the Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to WSI. If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, WSI shall remain liable for any and all payments due to Executive. In accordance with the terms of such trust, at all times during the term of this Agreement Executive shall have no rights, other than as an unsecured general creditor of WSI, to any amounts held in trust and all trust assets shall be general assets of WSI and subject to the claims of creditors of WSI. With respect to an Approved Change in Control, WSI's obligations in this Section 6 shall not be mandatory but rather shall be permissive.
7. Successors; Binding Agreement.
(a) WSI will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of WSI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that WSI would be required to perform it if no such succession had taken place. Failure of WSI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from WSI in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate.
8. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of WSI, to its principal office to the attention of each of the then directors of WSI with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
9. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.
10. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceablity of any other provision of this Agreement, which shall remain in full force and effect.
11. Arbitration and Award of Attorneys' Fees.
(a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party's receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party refuses or fails to select an arbitrator within the time therefor, the other party may do so on such refusing or failing party's behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the Executive's failure to comply with any confidentiality, non-solicit, and non-compete provisions of any agreement to which the Executive is bound will cause immediate and irreparable injury to WSI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere.
(b) In the event WSI fails to pay Executive any amounts owing to Executive under this Agreement or to provide Executive any benefits to which Executive is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, WSI shall pay the legal expenses (including reasonable attorneys' fees, court costs and other out-of-pocket expenses), incurred by Executive to enforce his rights under this Agreement and collect or obtain such amounts or benefits.
12. Confidential Information. Executive will not while this Agreement is in effect or after its expiration or termination, use, other than in connection with Executive's employment with WSI, or disclose any confidential information to any person not employed by WSI or not authorized by WSI to receive such information without the prior written consent of WSI. Executive will use reasonable and prudent care to safeguard, protect and prevent the unauthorized disclosure of confidential information. The obligations contained in this Section 12 will survive for as long as WSI in its sole judgment considers the information to be confidential information.
13. Disclosure and Assignment.
(a) Disclosure. Executive will disclose promptly in writing to WSI all inventions, improvements, discoveries and writings and other works of authorship ("works") which are conceived, made, discovered or written jointly or singly on WSI time or on Executive's time, providing the invention, improvement, discovery, writing or other work is capable of being used by WSI in the normal course of business, and all such inventions, improvements, discoveries, writings and works are hereby assigned to, and belong solely and exclusively to WSI.
(b) Assignment. Executive will sign and execute all instruments of assignment and other papers to evidence vestiture of the entire right, title, and interest in such inventions, improvements, discoveries, writings, or works in WSI, and will do all acts and sign all papers that WSI may reasonably request, relating to applications for patents, to patents, to copyrights, and to the enforcement and protection thereof. If such acts are requested and performed when Executive is not a WSI employee, WSI will pay a fee, determined by WSI, covering authorized time and expenses of Executive but no others.
(c) Limitations. Notwithstanding anything in this Section 13
to the contrary, Executive is hereby given NOTICE that the assignment
and statement of WSI ownership does not apply to any INVENTION for
which no equipment, supplies, facility or trade secret information of
WSI was used and which was developed entirely on Executive's own time,
and (1) which does not relate (i) directly to the business of WSI or
(ii) to WSI's actual or demonstrably anticipated research or
development, or (2) which does not result from any work performed by
Executive for WSI.
(d) Survival of Obligations.
(i) The obligations of this Section 13 survive the expiration or termination of this Agreement.
(ii) This Agreement, or any termination hereof, has no effect on any other Employee Agreement previously executed by Executive which remains in full force and effect. To the extent there are any conflicts between this Agreement and such other Agreement, this Agreement prevails.
(iii) Upon termination of employment, Executive will not take or retain, and will return to WSI all WSI property of any nature or kind.
14. Prior Agreement. This Agreement supersedes and replaces in its entirety all prior agreements related to a change in control of WSI.
WSI INDUSTRIES, INC.