Item 1. Business:
(a) General development of business: --------------------------------
The Company was incorporated in Minnesota in 1950 for the purpose of performing precision contract machining for the aerospace, communication, and industrial markets. The major portion of Company revenues are derived from machining work for agricultural related markets, the aerospace industry, construction and recreational vehicles markets.
On February 15, 1999, the Company purchased Taurus Numeric Tool, Inc. ("Taurus") for approximately $7.2 million, with $5.5 million being paid in cash and bank debt and an additional $1.7 million being in the form of a Subordinated Promissory Note to the prior owner. Taurus is a precision contract machining company that sells primarily to the aerospace and avionics markets.
On August 6, 1999, the Company purchased Bowman Tool & Machining, Inc. ("Bowman") for approximately $7.6 million, with $6.8 million being paid by additional debt and $844,000 being paid in the form of a Subordinated Promissory Note to the prior owner of Bowman. An additional amount of $750,000 was earned by the seller in connection with the purchase which was added to the Promissory Note. Bowman is a precision contract machining company serving the construction industry.
The acquisitions were completed as a result of the Company's publicly stated objective of diversifying the markets that it serves.
During fiscal 2000, the Company closed its Long Lake, Minnesota facility and consolidated all of its manufacturing operations into its facilities at Taurus and Bowman in Osseo, Minnesota and Rochester, Minnesota, respectively. The initiative placed the Company in closer proximity to its major customers as well as reduced its overhead structure and optimized its plant capacity.
Contract manufacturing constitutes the Company's entire business.
(b) Financial information about industry segments: ----------------------------------------------
As noted above, the Company's business is now conducted in a single industry segment--contract manufacturing.
(c) Narrative description of the business: --------------------------------------
(1)(i) The principal products and services of the Company are set forth below.
The Company manufactures metal components in medium to high volumes requiring tolerances as close as one ten-thousandth (.0001) of an inch. These components are manufactured in accordance with customer specifications using materials generally purchased by the Company, but occasionally supplied by the customer. The major markets served by the Company have changed in the past several years because of the Company's effort to diversify its customer and market base. Sales to the agricultural industry were 76%, 53% and 35% of total Company sales in fiscal years 1998, 1999 and 2000, respectively. Sales to the recreational vehicle market totaled 13% and 9% in 1999 and 2000, respectively. Sales to the aerospace/avionics market totaled 12% and 9% in fiscal 1999 and 2000, respectively. Sales to the construction/power systems market totaled 20% in fiscal 2000.
The Company has a reputation as a dependable supplier one capable of meeting stringent specifications to produce quality components at high production rates. The Company has demonstrated an ability to develop sophisticated manufacturing processes and controls essential to produce precision and reliability in its products.
* * * * *
(ii) The Company's machining business is continually developing or modifying processes, but no new single process in development is expected to require the investment of a material amount of the assets of the Company.
(iii) Purchased materials for the Company are generally available in adequate supply.
(iv) Patents and trademarks are not deemed significant to the Company.
(v) Seasonal patterns in the Company's business are reflections of its customers seasonal patterns since the Company's business is that of a provider of manufacturing services.
(vi) The Company does not believe that its business demands unusual working capital requirements.
(vii) Sales in excess of 10 percent of fiscal 2000 consolidated sales were made to Deere & Co. and related entities in the amount of $17,084,000 or 53% of
Company revenues. Sales were also made to ZF Industries in the amount of $3,108,000 or 10% of Company revenues as well as Polaris in the amount of $3,406,000 or 11% of sales.
(viii) Approximate dollar backlog at August 27, 2000, August 29, 1999, and August 30, 1998 was $23,876,000, $16,032,000 and $8,831,000 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 27, 2000 is scheduled for delivery later than during the current fiscal year.
(ix) No material portion of the contract business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
(x) Although there are a large number of companies engaged in machining, the Company believes the number of entities with the technical capability and capacity for producing products of the class and in the volumes manufactured by the Company is relatively small. Competition is primarily based on product quality, service, timely delivery, and price.
(xi) No material amount has been spent on company-sponsored research and development activities.
(xii) No material capital expenditures for environmental control were made or are anticipated in the foreseeable future.
(xiii) At August 27, 2000, the Registrant had 109 employees, none of whom were subject to a union contract.
(d) Financial information about foreign and domestic operations and export sales: -----------------------------------------------------
The Company has no operations in any foreign country. The Company's export sales in fiscal 1999 and 1998 were not significant. In 2000, sales to companies in Mexico amounted to $2,061,000. See Note 8 to the Consolidated Financial Statements.
Item 2.
Item 2. Properties:
The Company's former executive offices and production facility were located in Long Lake, Minnesota (a western suburb of Minneapolis). The one-story, concrete block building is owned by the Company, contains approximately 182,500 square feet of floor space, and is located on approximately 25 acres of property owned by the Company and is currently listed for sale.
The Company leases two production facilities that are located in Osseo, Minnesota and Rochester, Minnesota. The Rochester facility is approximately 38,000 square feet with the lease being for six month periods with options to renew. The Osseo facility is approximately 28,000 square feet and is leased until February, 2002 with options to renew. In connection with the Rochester operation, the Company also leases approximately 15,000 square feet at a
location that primarily stores raw material. This lease is also for six month increments and is renewable.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 4A. Executive Officers of Registrant:
The following table sets forth certain other information regarding Registrant's executive officers:
Mr. Martin was engaged as Chairman of the Board on July 28, 1993 and previously served as the Company's Chief Executive Officer from December 1983 to January 1985 and on an interim basis from July 1993 to November 1993. Mr. Martin was the President, Chief Executive Officer and Chairman of PowCon, Incorporated, a manufacturer of electronic welding systems, from 1987 to October 1995. Mr. Martin now serves as an independent consultant.
Mr. Pudil was elected President, Chief Executive Officer, and a Director of the Company on November 4, 1993. During the prior nine years, Mr. Pudil served as General Manager and Vice President and General Manager of the Production Division for Remmele Engineering, Inc. Remmele Engineering is a contract manufacturer primarily involved in machining metal.
Mr. Sheely joined the Company in September 1998 as Vice President of Finance. From 1996 to 1998 he served as Chief Financial Officer of Graseby Medical, Inc., a medical device manufacturer of volumetric infusion pumps.
Mr. Magnuson has served as Secretary of the Company since 1961 and as a Director since 1962. He is a retired partner of the law firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters:
(a) The common stock of the Company is traded on the and NASDAQ Small Cap Market System under the symbol WSCI. (c)
Common stock information:
Stock Price ------------------------------- High Low
FISCAL 2000: First quarter $4-7/8 $3-1/2 Second quarter 5-5/8 3 Third quarter 6 3-5/8 Fourth quarter 5 3-3/4
FISCAL 1999: First quarter $6-11/16 $5-1/2 Second quarter 6 4-13/16 Third quarter 5-3/16 2-3/4 Fourth quarter 4-5/8 2-7/8
The Company's credit agreement restricts payment of dividends. The Company has not paid any cash dividends since fiscal 1992 and does not anticipate payment of cash dividends in the foreseeable future.
(b) As of November 13, 2000 there were 585 shareholders of record of the Company's Common Stock.
Item 6.
Item 6. Selected Financial Data:
FIVE-YEAR SUMMARY OF OPERATIONS (In thousands, except for per share information and financial ratios)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
LIQUIDITY AND CAPITAL RESOURCES:
As discussed in Item 1., the Company purchased both Taurus Numeric Tool, Inc. and Bowman Tool & Machining, Inc. during fiscal 1999.
The net result of these transactions was the addition of $4.4 million of term debt from the Company's bank, $2.5 million from a mortgage from the same bank, $1.3 million from the Company's Revolving Line of Credit, and $2.5 million from Subordinated Promissory Notes to the seller of Bowman and Taurus.
During fiscal 2000, the Company paid down $1.6 million of the term debt and $167,000 of the mortgage. Also during 2000, the seller of Bowman earned the first of two possible contingencies. Therefore, an additional $750,000 was added to his Subordinated Promissory Note Payable.
The Company's working capital of $1,721,000 on August 27, 2000 reflected an increase of $310,000 from the prior year. Larger fluctuations in working capital included an increase in accounts receivable along with a decrease in acquisition payments due offset by a decrease in inventory and an increase in accounts payable. The fiscal 2000 ratio of current assets to current liabilities increased to 1.35 to 1.0 from 1.27 to 1.0 for fiscal 1999.
Cash provided by operating activities in fiscal 2000 was $1,961,000. Non-cash charges for depreciation and amortization as well as changes in elements of working capital primarily accounted for the cash provided by operating activities. Cash provided by operations was $2,641,000 in fiscal 1999 and $3,047,000 in fiscal 1998.
Additions to property, plant and equipment were $916,000 in fiscal 2000 compared to $1,238,000 in 1999 and $2,102,000 in 1998. These amounts included $433,000, $980,000 and $1,390,000 of machinery acquired through capital leases in 2000, 1999 and 1998, respectively. The major 2000 capital expenditures consisted of the acquisition of new production equipment.
Proceeds from the sale of equipment amounted to $746,000 and $57,000 in fiscal 2000 and1999, respectively. The relatively large proceeds in 2000 resulted from the sale of excess equipment derived from the consolidation initiative.
The Company's total debt was $10,837,000 at August 27, 2000 and consisted of $2,771,000 of bank Term Debt, a $2,333,000 mortgage, seller subordinated notes of $3,257,000 and capital lease obligations of $2,476,000.
At August 27, 2000 and August 29, 1999 the Company had available a line of credit of $3,000,000. At August 27, 2000 and August 29, 1999, the outstanding balance on the line was $369,000 and $280,000, respectively.
It is managements' belief that internally generated funds combined with the line of credit will be sufficient to enable the Company to meet its financial requirements during fiscal 2001.
RESULTS OF OPERATIONS:
Net sales of $32,157,000 increased $10,607,000 or 49% from fiscal 1999 sales of $21,550,000 and $8,209,000 or 34% from fiscal 1998 sales of $23,948,000. The increase in sales was primarily due to having Taurus and Bowman operations for a full year versus 6 1/2 months and 3 weeks, respectively, in fiscal 1999.
In fiscal 2000, the Company reported net earnings of $639,000 or $.25 per share compared to net earnings of $261,000 or $.10 per share in 1999 and $1,874,000 or $.73 per share in 1998. 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 2000 was 16.8% of sales compared to 15.2% of sales and 18.4% of sales in 1999 and 1998, respectively. The increase in 2000 versus 1999 resulted from the full year effect of Taurus and Bowman with their traditionally higher margin business. Gross margin in 2000 was negatively affected by relocation and training costs associated with the consolidation initiative.
Selling and administrative expense of $4,324,000 in fiscal 2000 was an increase of $1,663,000 and $1,871,000 from fiscal years 1999 and 1998, respectively. The majority of both increases were related to the addition of Taurus and Bowman expenses.
Interest and other income of $76,000 was $81,000 lower in fiscal 2000 than 1999, and $85,000 lower than 1998 primarily due to less interest income due to lower average cash balances.
Interest and other expense of $998,000 in fiscal 2000 was $516,000 higher than 1999 and $807,000 higher than 1998 because of higher debt levels due to the acquisitions as well as the effect of having those debt levels for a full year as opposed to a partial year in 1999.
Income tax expense is significantly less than the statutory amount due to the utilization of net operating loss carryforwards in each of fiscal 2000, 1999 and 1998.
See Notes to Consolidated Financial Statements regarding recent accounting standards to be adopted.
CAUTIONARY STATEMENT:
Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the letter to shareholders, elsewhere in the Annual Report, in the Company's Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iii) a significant downturn in the industries in which the Company
participates, principally the agricultural industry, could have an adverse effect on the demand for Company services; (iv) the ability of the Company to integrate its acquisitions with their current operations. 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.
Item 8. Financial Statements and Supplementary Data:
See Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page 15, attached hereto, which consolidated financial statements are incorporated herein by reference.
Quarterly earnings summary (unaudited):
PART III
Pursuant to General Instruction G(3), Registrant omits Part III, Items 10, 11, 12, and 13, except that portion of Item 10
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) Documents filed as part of this report:
1. Consolidated Financial Statements: Reference is made to the Index to Consolidated Financial Statements (page 15) hereinafter contained for all Consolidated Financial Statements.
2. Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts - 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.
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 20, 2000
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:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page ---- CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 16 Consolidated Balance Sheets - August 27, 2000 and August 29, 1999 17 Consolidated Statements of Income - Years Ended August 27, 2000, August 29, 1999 and August 30, 1998 18 Consolidated Statements of Stockholders' Equity - Years Ended August 27, 2000, August 29, 1999, August 30, 1998 19 Consolidated Statements of Cash Flows - Years Ended August 27, 2000, August 29, 1999 August 30, 1998 20 Notes to Consolidated Financial Statements 21
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 31
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders WSI Industries, Inc.
We have audited the accompanying consolidated balance sheets of WSI Industries, Inc. and subsidiaries as of August 27, 2000 and August 29, 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended August 27, 2000, August 29, 1999 and August 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WSI Industries, Inc. and subsidiaries as of August 27, 2000 and August 29, 1999, and the consolidated results of their operations and their cash flows for the years ended August 27, 2000, August 29, 1999 and August 30, 1998 in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Minneapolis, Minnesota October 13, 2000
WSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AUGUST 27, 2000 AND AUGUST 29, 1999 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
WSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
WSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
WSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
WSI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED AUGUST 27, 2000, AUGUST 29, 1999, AND AUGUST 30, 1998 - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - WSI Industries, Inc. and Subsidiaries' (the Company) fiscal years represent a 52- to 53-week period ending the last Sunday in August. Fiscal 2000, 1999 and 1998 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 approximately $131,789 and $155,000 at August 27, 2000 and August 29, 1999, respectively. Inventories consist primarily of raw material and work-in-process.
Depreciation - The cost of buildings and substantially all equipment is being depreciated using the straight-line method. The estimated useful lives of the assets are as follows:
Buildings and improvements 15 to 32 years Machinery and equipment 3 to 10 years Transportation equipment 3 to 5 years
The Company evaluates long-term assets on a periodic basis in compliance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount.
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 generally accepted accounting principals requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Earnings per Share - Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share is computed using the combination of dilutive common share equivalents and the weighted average number of common shares outstanding.
Stock Options - The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretation in accounting for its plans. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Reclassification - Certain prior year items have been reclassified to conform to the current year presentation.
2. ACQUISITIONS
On February 15, 1999, the Company completed the acquisition of Taurus Numeric Tool, Inc. ("Taurus") by purchasing all the shares of common stock from its sole shareholder. The value of the transaction was approximately $7.2 million including acquisition costs, with $5.5 million being paid by cash and debt borrowings, and an additional $1.7 million being in the form of a Subordinated Promissory Note to the prior owner. The acquisition was accounted for by the purchase method.
The Taurus consideration was allocated to assets and liabilities based on fair values as follows:
Net assets acquired $ 4,535,000 Goodwill and other intangible assets 2,713,000 ------------- $ 7,248,000
On August 6, 1999, the Company completed the acquisition of Bowman Tool & Machining, Inc. ("Bowman") by purchasing all the shares of common stock from its sole shareholder. The value of the transaction was approximately $7.6 million, with $6.8 million being paid by debt borrowings, and approximately $844,000 being paid in the form of a Subordinated Promissory Note to the prior owner. The acquisition was accounted for by the purchase method.
The Bowman consideration was allocated to assets and liabilities based on fair values as follows:
Net assets acquired $ 4,560,000 Goodwill and other intangible assets 3,054,000 ------------- $ 7,614,000
Goodwill and other intangible assets are being amortized over their estimated useful lives of 20 years on a straight-line basis. Amortization for the years ended August 27, 2000 and August 29, 1999 was $291,950 and $82,300, respectively.
The following table shows the unaudited pro forma consolidated results of operations for fiscal 1999 as if both Taurus and Bowman had been acquired as of the beginning of that period:
Unaudited Pro Forma Consolidated Results Year Ended August 29, 1999 ---------------------------------------- Sales $ 33,802,000 Net earnings $ 2,105,000 Net earnings per share $ .83
The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire period presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might have been achieved from combined operations.
3. DEBT
Long-term debt consisted of the following:
During fiscal 1999, the Company renegotiated its term debt and its line of credit with the same bank with which the Company previously had its debt and line of credit. The agreement requires principal payments of $52,381 per month on the Term Note with the agreement expiring on March 31, 2002. Interest on the term debt is calculated at the bank's base rate (9.5% at August 27, 2000 and 8.25% at August 29, 1999) plus .75% and is also paid monthly.
During fiscal 1999 the Company obtained a mortgage with the same bank that it currently has its term debt and line of credit facility. The agreement requires monthly principal payments of $13,889. Interest on the mortgage is calculated at the bank's base rate plus 1.0% and is paid monthly. The entire balance is due August 6, 2004.
Interest on the line of credit is at the bank's base rate plus 0.5 percentage points. The line expires March 31, 2002. The agreement provides for secured borrowing of up to $3,000,000; however, the Company is charged an annual unused credit line fee of 0.5%. At August 27, 2000 and August 29, 1999, there was a balance outstanding of $369,134 and $279,578, respectively.
Restrictive provisions of the agreement require, among other provisions, that the Company (1) maintain a net worth of not less than $7,000,000, (2) maintain a ratio of liabilities to net worth not greater than 4.0 to 1.0, (3) limit capital expenditures to $3,000,000 in each fiscal year with no more than $1,000,000 coming from its line of credit and (4) maintain a defined cash flow coverage ratio of no less than 1.1 to 1.0. Cash dividends are fully restricted. At August 27, 2000 and August 29, 1999, the Company was in compliance with the various covenants of the credit agreement.
The notes, line of credit and capital leases are collateralized by the receivables, inventories, and property, plant, and equipment of the Company. The mortgage is secured by the building in Long Lake, Minnesota.
During fiscal 1999, and in connection with the acquisitions of Bowman Tool & Machining, Inc. and Taurus Numeric Tool, Inc., the Company entered into Subordinated Promissory Notes with the sellers of the respective companies. The agreements call for quarterly interest payments at 7.75%. The note in connection with the Bowman transaction is due in three equal annual installments commencing August 6, 2002. The note in connection with the Taurus transaction is also due in three equal annual installments commencing February 15, 2002. The notes are subordinated to all bank debt and the mortgage, but are collateralized by equipment. Also in connection with the acquisitions, both sellers had contingent payments that they could earn if certain sales or profitability targets were met. In fiscal 2000 the seller of Bowman met his first contingent payment and $750,000 was added to his subordinated promissory note effective August 6, 2000.
Maturities of long-term debt, excluding capital lease obligations, for the fiscal years subsequent to August 27, 2000 are as follows:
2001 $ 795,240 2002 3,395,076 2003 1,252,220 2004 2,918,881 ------------ $ 8,361,417 ============
4. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 27, 2000 are cost and accumulated depreciation on equipment subject to capitalized leases of $5,851,666 and $3,143,779, respectively. At August 29 1999, the amounts were $5,439,045 and $2,531,647, respectively.
The present value of the net minimum payments on capital leases as of August 27, 2000 is as follows:
Capital Leases Fiscal years ending August: ------------ 2001 $ 680,907 2002 680,907 2003 553,260 2004 510,801 2005 408,882 Thereafter 179,795 ------------ Total minimum lease payments 3,014,552 Less amount representing interest 538,506 ------------ Present value of net minimum lease payments 2,476,046 Current portion 441,220 ------------ Capital lease obligation, less current portion $ 2,034,826 ============
The Company leases its Taurus facility under an operating lease that expires in February, 2002 with a monthly base rent of $8,900. Operating expenses and real estate taxes are paid by the Company.
The Company also leases its Bowman facility under a lease that expires in February, 2001 for $10,000 per month and is also responsible for operating expenses and real estate taxes. The Company also rents a storage warehouse for $5,833 per month under a lease that expires in April, 2001.
The Company leases its corporate office under a lease that expires April, 2001 with a monthly base rent of $3,232. The Company also has various equipment leases that expire in 2001.
Future minimum lease payments for operating leases are:
Fiscal years ending August: 2001 $ 240,482 2002 40,980 ------------ Total minimum lease payments $ 281,462 ============
Rent expense of approximately $386,000, $67,000, and $1,000 have been charged to operations for the years ended August 27, 2000, August 29, 1999, and August 30, 1998, 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 27, 2000, 136,666 shares remained reserved and available for grant under the plan.
Option transactions during the three years ended August 27, 2000 are summarized as follows:
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 2000, fiscal 1999 and fiscal 1998 as set forth in the table below. The estimated fair value of the options is amortized to expense over the options' vesting period.
The Company's net income and income per share would be adjusted to the pro forma amounts as follows:
As of August 27, 2000, there were 108,000 options outstanding with exercise prices between $2.00 and $2.13, 186,500 options outstanding with exercise prices between $3.00 and $4.75, and 115,000 options outstanding with exercise prices between $5.50 and $6.13. At August 27, 2000, outstanding options had a weighted-average remaining contractual life of 6 years.
The numbers of options exercisable as of August 27, 2000, August 29, 1999, and August 30, 1998 were 304,920, 251,171, and 199,504 respectively, at weighted average share prices of $3.81, $3.50, and $3.04 per share, respectively.
The weighted average fair value of options granted during the years ended August 27, 2000, August 29, 1999, and August 30, 1998 was $2.39, $4.99, and $2.82 per share, respectively.
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
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:
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:
As of August 27, 2000, the Company had federal net operating loss carryforwards of approximately $1,856,000 of which most will expire in fiscal years 2008 and 2009. Also as of August 27, 2000, the Company had $478,000 in federal alternative minimum tax (AMT) credit carryforward and approximately $46,000 in other credit carryforward. The AMT credits are available to offset future tax liabilities only to the extent that the Company has regular tax liabilities in excess of AMT tax liabilities.
7. EMPLOYEE BENEFITS
The Company terminated its non-contributory pension plan effective February 1, 2000. Participants were given the choice of receiving their benefit by either taking a lump sum distribution, rolling their benefit over to another qualified plan or receiving a monthly annuity from an insurance company. At August 27, 2000 substantially all assets of the Plan had been distributed. The actual benefit obligation of the terminated plan was determined to be $8,181,915. The actual assets of the plan were $8,372,695 leaving an excess of $190,778 which was distributed to qualified participants after year end.
Net periodic pension cost consisted of the following:
The funded status of the plans and the amount recognized on the balance sheet are as follows:
The Company has a management incentive compensation plan for certain key employees designated annually by a committee of the Board of Directors. The amount of incentive compensation for eligible participants is contingent on attaining minimum pre-tax earnings and individual performance objectives.
The Company and its two operating subsidiaries, Bowman Tool & Machining, Inc and Taurus Numeric Tool, Inc. merged their retirement savings 401(k) plans into one consolidated plan effective January 1, 2000. All employees are eligible to participate. Contributions charged to operations for fiscal 2000, 1999, and 1998, were approximately $146,184, $51,954, and $51,710, respectively.
8. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to five customers which exceeded 10 percent of total sales during any one of fiscal years 2000, 1999, or 1998 as listed below:
Fiscal Year Sales ----------------------------------------------------------------------
Customer 2000 1999 1998 -------- ---- ---- ---- #1 $17,084,000 $11,748,000 $18,128,000 #2 3,406,000 2,884,000 1,394,000 #3 3,108,000 1,112,000 0 #4 2,970,000 2,682,000 0
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
WSI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
(1) Write-offs of excess or obsolete inventory.
(2) Level of reserve reduced due to management assessment of exposure to potential write-offs.
(3) Additional amount assumed due to the acquisition of Taurus Numeric Tool, Inc.