SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 25, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended from _________ to _________
Commission File No. 0-619
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-069-1607
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2605 West Wayzata Boulevard
Long Lake, Minnesota 55356
(Address of principal executing offices) (Zip Code)
Registrant's telephone number, including area code (612) 473-1271
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock (par value $.10 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes______X______ No____________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the common shares held by non-affiliates of the
Registrant on November 11, 1996 (based upon the closing sale price of those
shares on the NASDAQ SmallCap Market System) was approximately $6,960,000.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 11, 1996 is 2,420,850.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 9, 1997 are incorporated by reference into Part III.
-------------------------------------
This form 10-K Report consists of 44 pages (including exhibits); the index to
the exhibits is set forth on page 13.
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 25, 1996
INFORMATION REQUIRED IN REPORT
PART I
Item 1. Business:
(a) General development of business:
The Company was incorporated in Minnesota in 1950 for
the purpose of performing precision contract
machining for the aerospace, communication, and
industrial markets. Several years later, the Company
focused on providing precision machining services for
the computer peripheral market. That segment of
business has since provided the major portion of
company revenues; however, machining work for the
computer-peripheral related business is declining and
other markets are expected to be of greater
importance to the Company in the future. In 1960, the
Company started development of a hydraulic motor
which was the origin of the Fluid Power Division. In
1973, the Company purchased Von Ruden Mfg. Co., a
manufacturer of transmission devices used in
agricultural and industrial applications. During
fiscal 1983, the Fluid Power Division and the
Transmission Devices Division (Von Ruden Mfg. Co.)
were physically combined into the newly named Power
Components Division.
On May 1, 1985, the Company completed the acquisition
of the manufacturing business and assets of Rogers &
Oling, Inc., which was operated as part of a
subsidiary known as Washington Scientific Industries
of California, Inc. (formerly K. Y. Rogers,
Incorporated), a California manufacturer of precision
machined parts for the computer and aerospace
industries. On June 28, 1988, the Company announced a
restructuring of the California subsidiary operations
which entailed closing one of the two manufacturing
plants in California in early fiscal 1989.
On June 17, 1988, the Company acquired all of the
outstanding stock of Advanced Custom Molders, Inc.
(ACM), a Texas manufacturer of precision molded
plastic components.
On August 25, 1989, the Company sold the Power
Components Division because the product focus of the
Division was no longer compatible with the Company's
long-term commitment to high-production, precision
contract manufacturing.
On October 1, 1991, the Company announced the
restructuring of Advanced Custom Molders which
entailed closing one of its three manufacturing
plants in early fiscal 1992. Advanced Custom Molders
had manufacturing plants in Georgetown and El Paso,
Texas.
On April 13, 1992, the Company announced the
restructuring and closing of its Covina, California
plant. Production from that plant was moved to the
Company's Minnesota plants, and the Covina plant was
closed in the fourth quarter of fiscal 1992. That
plant was closed primarily because of excess
manufacturing capacity and the Company's demonstrated
ability to reliably serve West Coast customers from
its Minnesota plants, where its technical machining
expertise is located.
As of the close of business on June 30, 1993, the
Company sold the business and substantially all of
the assets of Advanced Custom Molders, Inc. (ACM) to
Moll PlastiCrafters, L.P. ACM was sold primarily
because it did not meet profit expectations and
because WSI's contract machining business required
the attention of all the Company's resources.
On June 27, 1994, the Company announced the
consolidation of its manufacturing operations in its
Long Lake, Minnesota plant and the closing of its
Owatonna, Minnesota plant. The consolidation allowed
the Company to reduce expenses and capital employed
in the business while optimizing plant capacity and
human resources.
On October 5, 1994, the Company announced that it had
entered into an agreement for the sale of its
Owatonna property to OTC, a division of SPX
Corporation. On January 4, 1995, the Company sold its
Owatonna, Minnesota real estate to OTC, a division of
SPX Corporation, for a total cash consideration of
$1,534,000.
Contract manufacturing now constitutes the Company's
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
declining requirements in several mature computer
programs and the Company's effort to diversify its
customer and market base. Company sales to the
computer industry amounted to 54%, 34% and 14% of
total sales in fiscal 1994, 1995 and 1996,
respectively. Sales to the agricultural industry were
25% and 61% of total Company sales in fiscal years
1995 and 1996 respectively. The Company expects that
in fiscal 1997 a major portion of its sales will be
to the agricultural industry and it will continue
diversification efforts to broaden its customer and
industry base.
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. The Company's customer mix has
changed and currently its two major
customers each have a one week shutdown near
the end of the calendar year and a two week
shutdown in the summer. This will affect the
Company's production pattern until it gains
other business to fill that void.
(vi) The Company does not believe that its
business demands unusual working capital
requirements.
(vii) Sales in excess of 10 percent of fiscal 1996
consolidated revenues were made to John
Deere, $12,246,000 or 61% of Company
revenues and the Kohler Company, $2,077,000
or 10% of Company revenues.
(viii) Approximate dollar backlog at August 25,
1996 and August 27, 1995 was $5,694,000 and
$9,043,000, respectively. Backlog is not
deemed to be any more significant for the
Company than for other companies engaged in
similar businesses. The above backlog
amounts are believed to be firm, and no
appreciable amount of the backlog as of
August 25, 1996 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 25, 1996, the Registrant had 130
employees.
(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 1996, 1995, and
1994 were not significant.
Item 2. Properties:
The Company's executive offices and a production facility are
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.
The Company considers its manufacturing equipment, facilities,
and other physical properties to be suitable and adequate to
meet the requirements of its business.
Item 3. Legal Proceedings:
Registrant is not a party to any material legal proceedings,
other than ordinary routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 4A. Executive Officers of Registrant:
The following table sets forth certain other information
regarding Registrant's executive officers:
Name Age Position
George J. Martin 59 Chairman of the Board
Michael J. Pudil 48 President, Chief Executive Officer, and Director
William J. Lucke 61 Vice President, Treasurer, and Assistant Secretary
Gerald E. Magnuson 66 Secretary and Director
Mr. Martin was engaged as Chairman of the Board and interim
Chief Executive Officer following the resignation of the
former Chief Executive Officer on July 28, 1993 until Michael
J. Pudil was hired as the Company's President and Chief
Executive Officer effective November 4, 1993. Mr. Martin is a
director of the Company and previously served as the Company's
Chief Executive Officer from December 1983 to January 1985.
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 a consultant to PowCon, Incorporated.
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. Lucke has been a Vice President of the Company since 1979.
Mr. Magnuson has served as Secretary of the Company since 1961
and as a Director since 1962. He is Of Counsel to the law
firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters:
(a) The common stock of the Company is traded on the
and over-the-counter NASDAQ SmallCap Market under the
(c) symbol WSCI.
Common stock information:
Stock Price
High Low
FISCAL 1996:
First quarter $4-3/4 $3-7/8
Second quarter 4-1/4 3-7/8
Third quarter 4-3/8 3-7/8
Fourth quarter 4-3/8 3
FISCAL 1995:
First quarter $4-1/4 $2-3/4
Second quarter 3-3/4 3-1/4
Third quarter 4-3/8 3-3/8
Fourth quarter 4-3/8 3-7/8
Washington Scientific Industries common stock is
traded on the NASDAQ SmallCap Market under the symbol
"WSCI". The Company's credit agreement restricts
payment of dividends. The Company has not paid any
cash dividends since fiscal 1992 and does not
anticipate paying cash dividends in the foreseeable
future.
(b) The number of stockholders of record of the Company's
common stock as of November 11, 1996 was 730.
Item 6. Selected Financial Data:
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for number
of shares and per share information)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 20,173 $ 30,409 $ 30,823 $ 29,293 $ 44,388
Cost of products sold 18,555 27,534 28,357 28,839 39,329
----------- ---------- --------- ---------- ----------
Gross margin 1,618 2,875 2,466 454 5,059
Selling and administrative expense 2,145 2,560 2,350 3,593 3,195
Provisions for plant closing - - 704 - 1,713
Pension curtailment (gain) - (254) - - -
Real estate sale (gain) - (890) - - -
Interest and other income (658) (109) (50) (16) (203)
Interest expense 492 645 765 991 1,147
----------- ---------- --------- ---------- ----------
(Loss) earnings from continuing
operations before taxes (361) 923 (1,303) (4,114) (793)
Income (benefit) taxes 6 (22) (14) (93) (77)
----------- ----------- --------- ---------- ----------
(Loss) earnings from continuing
operations (367) 945 (1,289) (4,021) (716)
Discontinued operations - - - (1,534) (548)
----------- ---------- --------- ---------- ----------
Net (loss) earnings $ (367) $ 945 $ (1,289) $ (5,555) $ (1,264)
============ ========== ========= ========== ==========
(Loss) earnings per common
and common equivalent share:
Continuing operations $ (.15) $ .39 $ (.54) $ (1.69) $ (.30)
Discontinued operations - - - (.64) (.23)
----------- ----------- ---------- ---------- ----------
Net (loss) earnings per common
and common equivalent share: $ (.15) $ .39 $ (.54) $ (2.33) $ (.53)
=========== =========== ========= ========== ==========
Average number of common
and common equivalent
shares outstanding 2,410,837 2,446,262 2,382,401 2,382,401 2,380,401
Additional information:
Current ratio 1.87:1 1.83:1 1.07:1 .88:1 .93:1
Working capital $ 2,196 $ 2,740 $ 452 $ (922) $ (617)
Plant and equipment expenditures 809 356 118 513 684
Long-term debt 4,124 4,852 4,848 5,491 6,500
Total assets 11,573 13,265 16,434 18,696 26,533
Stockholders' equity 4,453 4,711 3,704 4,955 10,523
Stockholders' equity per share $ 1.85 $ 1.98 $ 1.55 $ 2.08 $ 4.42
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital of $2,196,000 on August 25, 1996
was down $544,000 from the same period in the prior year. The
ratio of current assets to current liabilities increased to
1.87 to 1.0 from 1.83 to 1.0 at year-end 1995.
Although the Company experienced an operating loss for the
year, cash provided by operations was $1,720,000 in fiscal
1996. Non-cash charges for depreciation and amortization and
lower accounts receivable were primarily responsible for cash
provided by operating activities. Cash provided by operations
was $2,262,000 and $1,195,000 in 1995 and 1994, respectively.
Additions to property, plant and equipment from cash were
$809,000 in fiscal 1996 compared to $356,000 in 1995 and
$118,000 in 1994. A new information system and roof
replacement were the major causes of the 1996 capital
expenditures.
Proceeds from the sale of equipment amounted to $644,000 and
primarily resulted from disposition of excess equipment
related to completed and discontinued manufacturing programs.
Comparable numbers were $1,814,000 in 1995, which included the
sale of the Company's Owatonna, Minnesota real estate, and
$412,000 in 1994.
Proceeds of $217,000 were received on a note receivable in
1996. This was the final payment from Moll PlastiCrafters L.P.
for the purchase of substantially all of the assets of
Advanced Custom Molders, Inc.
Total Company debt was $613,000 lower at August 25, 1996 than
the previous year-end. Term debt owed the bank on August 25,
1996 declined $1,054,000 to $2,736,000 while capital lease
debt increased $441,000 to $2,342,000.
At August 25, 1996 the Company did not have any credit line
debt. All debt owed the bank is secured by substantially all
of the assets of the Company.
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
1997.
RESULTS OF OPERATIONS:
Net sales of $20,173,000 decreased $10,236,000 or 33.7% from
the previous year. Sales to IBM, which historically has been
one of the Company's main customers, continued to decline
because most of the IBM programs serviced by the Company have
expired. Sales to IBM declined from $15,965,000 and $6,104,000
in 1994 and 1995, respectively to $1,449,000 in 1996. Sales to
other customers were $14,858,000 in 1994, $24,305,000 in 1995
and $18,724,000 in 1996. The lack of continued growth in
business to other customers in 1996 resulted from declining
requirements in several mature programs, customer outsourcing
decisions and lack of new business. Based on information
received from customers and recent trends, the Company
believes that 1997 sales will show moderate growth from 1996.
In fiscal 1996, the Company reported a net loss of $367,000 or
$.15 per share compared to net earnings of $945,000 or .39 per
share in 1995 and a net loss of $1,289,000 or $.54 per share
in 1994. The net loss in 1996 included a one-time gain of
$455,000 or $.18 per share from the disposition of excess
equipment related to completed and discontinued manufacturing
programs while the net income reported in 1995 included gains
of $1,144,000 or $.47 per share related to the sale of a
manufacturing facility. The net loss in 1994 included a
provision for restructuring and plant closing of $704,000 or
$.30 per share.
Gross margin on parts sold in fiscal 1996 was 8.0 percent of
sales compared to 9.5 percent of sales and 8.0 percent of
sales in 1995 and 1994, respectively. The decline in gross
margin percentage in 1996 can be primarily attributed to
reduced manufacturing activity resulting from the decisions of
two major customers to close their assembly plants during part
of the Company's fourth quarter. The gross margin was 1.7
percent of sales in the fourth quarter.
Selling and administrative expense of $2,145,000 in fiscal
1996 decreased $415,000 and $205,000 from fiscal years 1995
and 1994, respectively. The reduction can be primarily
attributed to a lower level of purchased services and employee
reductions.
Interest and other income was $549,000 higher in fiscal 1996
than 1995, and $608,000 higher than 1994 primarily because of
the gain on the disposition of excess equipment related to
completed and discontinued manufacturing programs.
Interest and other expense of $492,000 in fiscal 1996 was
$153,000 lower than 1995 and $273,000 lower than 1994 because
of lower debt levels and lower interest rates.
CAUTIONARY STATEMENT:
Statements included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, in
the letter to shareholders and elsewhere in the Annual Report,
in this report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an
authorized executive officer which are not historical or
current facts are "forward-looking statements." These
statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the
date made. The following important factors, among others, in
some cases have affected and in the future could affect the
Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed
in any forward-looking statement: (i) the Company's ability to
obtain additional manufacturing programs and retain current
programs; (ii) the loss of significant business from any one
of its current customers could have a material adverse effect
on the Company; (iii) a significant downturn in the industries
in which the Company participates, principally the
agricultural industry, could have an adverse effect on the
demand for Company services. The foregoing list should not be
construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated
or unanticipated events.
Item 8. Financial Statements and Supplementary Data:
See Consolidated Financial Statements section of this Annual
Report on Form 10-K beginning on page 16, attached hereto,
which consolidated financial statements are incorporated
herein by reference.
Quarterly earnings summary (unaudited):
Per Common
and Common
Equivalent
Shares
Net Net
Net Gross Earnings Earnings
Sales Margin (Loss) (Loss)
FISCAL 1996:
First quarter $ 5,342,474 $ 657,230 $ 54,261 $ .02
Second quarter 5,175,844 264,738 51,206 (a) .02
Third quarter 5,492,811 624,653 59,564 .02
Fourth quarter 4,162,379 71,622 (531,720) (.22)
----------- ---------- --------- -------
$20,173,508 $1,618,242 $(366,690) $ (.15)
=========== ========== ========== =======
FISCAL 1995:
First quarter $ 7,820,899 $ 355,316 $ (70,219) (b) $ (.03)
Second quarter 7,295,764 453,763 645,210 (c) .27
Third quarter 8,154,066 912,246 154,317 .07
Fourth quarter 7,138,742 1,153,530 215,765 .09
----------- ---------- --------- -------
$30,409,471 $2,874,855 $ 945,073 $ .39
=========== ========== ========== =======
(a) Includes gain from sale of equipment in the amount of $455,000.
(b) Includes pension curtailment gain in the amount of $254,419.
(c) Includes gain from sale of real estate in the amount of $890,475.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:
On January 11, 1996, the Company terminated Deloitte & Touche
LLP as its independent auditors and appointed Ernst & Young
LLP as the Company's independent auditors. The reports of
Deloitte & Touche LLP on the consolidated financial statements
of the Company for the fiscal years ended August 27, 1995 and
August 28, 1994 were unqualified and did not contain an
adverse opinion, any disclaimers, qualification or
modification as to uncertainty, audit scope, or accounting
principles. The decision to change firms was recommended by
the Audit Committee of the Board of Directors. In connection
with the audits of the consolidated financial statements of
the Company for the fiscal years ended August 27, 1995 and
August 28, 1994, and during the period commencing August 27,
1995 through January 11, 1996, there were no disagreements or
reportable events.
PART III
Pursuant to General Instruction G(3), Registrant omits Part
III, Items 10, 11, 12, and 13, except that portion of Item 10
relating to Executive Officers of the Registrant (which is
included in Part I, Item 4A), as a definitive proxy statement
will be filed with the Commission pursuant to Regulation 14(a)
within 120 days after August 25, 1996, and such information
required by such items is incorporated herein by reference
from the proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) Documents filed as part of this report:
1. Consolidated Financial Statements: Reference is
made to the Index to Consolidated Financial
Statements (page 16) hereinafter contained for all
Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
- page 32
Schedules not listed above have been omitted,
because they are either not applicable or not
material, or the required information is included
in the financial statements or related notes.
3. Exhibits.
Exhibit Page
No. Description No.
3.1 Articles of Incorporation as amended,
incorporated by reference from Exhibit
3.1 of the Registrant's Form 10-K for
the year ended August 28, 1994.
3.2 Bylaws, as amended, incorporated by
reference from Exhibit 3.2 of the
Registrant's Form 10-K for the fiscal
year ended August 30, 1987.
10.1 1981 Employee Incentive Stock Option
Plan, incorporated by reference from
Exhibit 10.3 of Registrant's Form 10-K
for the fiscal year ended August 30,
1987.
10.2 1987 Stock Option Plan, incorporated
by reference from Exhibit 10.4 of the
Registrant's Form 10-K for the fiscal
year ended August 30, 1987.
10.3 Amendment dated August 31, 1989 to the
1987 Stock Option Plan, incorporated
by reference from Exhibit 10.5 of the
Registrant's Form 10-K for the fiscal
year ended August 27, 1989.
10.4 Washington Scientific Industries, Inc. 1994
Stock Plan, incorporated by reference from
Exhibit 10.2 of the Registrant's Form 10-Q
for the quarter ended February 26, 1995.
Exhibit Page
No. Description No.
10.6 Form of Employment Agreement for
certain executive officers,
incorporated by reference from Exhibit
(c) of Registrant's Form 8-K dated
April 24, 1986.
10.7 Amendment dated June 29, 1989 to the
employment agreements between the
Registrant and certain executive
officers, incorporated by reference
from Exhibit 10.4 of Registrant's Form
10-K for the fiscal year ended August
27, 1989.
10.8 Employment (Change of Control) Agreement
between Michael J. Pudil and Registrant
dated October 18, 1995
10.9 Amended and Restated Credit and
Security Agreement between the Company
and FBS Business Finance Corporation
dated March 31, 1995, incorporated by
reference from Exhibit 10.4 of the
Registrant's Form 10-Q for the quarter
ended February 26, 1995.
10.10 First Amendment to Amended and
Restated Credit and Security Agreement
dated April 20, 1995, incorporated by
reference from Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter
ended May 28, 1995.
10.11 Waiver and Second Amendment to Amended and
Restated Credit and Security Agreement
dated October 31, 1996. 33
16 Letter regarding change in certifying
accountant incorporated by reference
to Exhibit 1 of the Company's Form 8-K
dated January 15, 1996.
23.1 Independent Auditors' Consent of Ernst & Young LLP. 42
23.2 Independent Auditors' Consent of Deloitte & Touche LLP. 43
27 Financial Data Schedule. 44
(b) Reports on Form 8-K.
None
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.
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
BY: /s/ Michael J. Pudil
--------------------------------------
Michael J. Pudil, President and
Chief Executive Officer
BY: /s/ W. J. Lucke
--------------------------------------
W. J. Lucke
Vice President and Treasurer
DATE: November 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Michael J. Pudil President, November 20, 1996
- ------------------------ Chief Executive
Michael J. Pudil Officer, Director
/s/ Paul Baszucki Director November 20, 1996
- ------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 20, 1996
- ------------------------
Melvin L. Katten
/s/ T. E. Larsen Director November 20, 1996
- ------------------------
T. E. Larsen
/s/ Gerald E. Magnuson Director November 20, 1996
- ------------------------
Gerald E. Magnuson
/s/ George J. Martin Director November 20, 1996
- ------------------------
George J. Martin
/s/ Eugene J. Mora Director November 20, 1996
- ------------------------
Eugene J. Mora
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report, Ernst & Young LLP 17
Independent Auditors' Report, Deloitte & Touche LLP 18
Consolidated Balance Sheets - August 25, 1996 and August 27, 1995 19
Consolidated Statements of Operations - Years Ended August 25, 1996,
August 27, 1995, and August 28, 1994 20
Consolidated Statements of Stockholders' Equity - Years Ended
August 25, 1996, August 27, 1995, and August 28, 1994 21
Consolidated Statements of Cash Flows - Years Ended August 25, 1996,
August 27, 1995, and August 28, 1994 22
Notes to Consolidated Financial Statements 23
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 32
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Washington Scientific Industries, Inc.
Long Lake, Minnesota
We have audited the accompanying consolidated balance sheet of Washington
Scientific Industries, Inc. and subsidiaries as of August 25, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Washington Scientific Industries, Inc. and
subsidiaries for the years ended August 27, 1995 and August 28, 1994 were
audited by other auditors whose report dated October 13, 1995 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. 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 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Washington
Scientific Industries, Inc. and subsidiaries as of August 25, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the baisc financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Minneapolis, Minnesota
October 4, 1996
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Washington Scientific Industries, Inc.
Long Lake, Minnesota
We have audited the accompanying consolidated balance sheets of Washington
Scientific Industries, Inc. and subsidiaries (the Company) as of August 27, 1995
and August 28, 1994 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. Our audit also
included the financial statement schedule listed in the index at Item 14. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 text basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 27, 1995
and August 28, 1994 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Deloitte & Touche, LLP
October 13, 1995
Minneapolis, Minnesota
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 25, 1996 AND AUGUST 27, 1995
- ------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,642,739 $ 1,260,053
Accounts receivable, less allowance for doubtful
accounts of $50,000 at August 25, 1996 and
$55,000 at August 27, 1995, respectively 1,868,942 3,735,457
Inventories - work-in-process 1,098,613 624,237
Prepaid and other current assets 123,186 411,430
----------- -----------
Total current assets 4,733,480 6,031,177
PROPERTY, PLANT, AND EQUIPMENT, at cost (Note 4):
Land 66,906 66,906
Buildings and improvements 5,019,373 4,855,952
Machinery and equipment 21,770,126 23,216,598
----------- -----------
26,856,405 28,139,456
Less accumulated depreciation 20,017,166 20,906,132
----------- -----------
Total property, plant, and equipment 6,839,239 7,233,324
OTHER LONG TERM ASSETS: 525 525
----------- -----------
$11,573,244 $13,265,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 785,602 $ 1,280,368
Notes payable (Note 3) -- --
Salaries, wages, and employee withholdings 474,107 728,946
Accrued real estate taxes 190,911 191,718
Miscellaneous accrued expenses 133,303 250,983
Current portion of long-term debt (Note 3) 953,570 838,750
----------- -----------
Total current liabilities 2,537,493 3,290,765
LONG-TERM DEBT, less current portion (Note 3) 4,124,188 4,852,216
LONG-TERM PENSION LIABILITY (Note 7) 458,502 411,213
COMMITMENTS (Note 4) -- --
STOCKHOLDERS' EQUITY (Note 5):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,420,850 and
2,384,651 shares, respectively 242,085 238,465
Capital in excess of par value 1,511,598 1,406,299
Retained earnings 2,699,378 3,066,068
----------- -----------
Total stockholders' equity 4,453,061 4,710,832
----------- -----------
$11,573,244 $13,265,026
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 25, 1996, AUGUST 27, 1995, AND AUGUST 28, 1994
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 8) $ 20,173,508 $ 30,409,471 $ 30,822,980
Cost of products sold 18,555,266 27,534,616 28,356,841
------------ ------------ ------------
Gross margin 1,618,242 2,874,855 2,466,139
Selling and administrative expense 2,144,962 2,560,407 2,349,940
Provision for restructuring and plant closings (Note 2) -- -- 704,000
Pension curtailment (gain) -- (254,419) --
Real estate sale (gain) -- (889,911) --
Interest and other income (658,158) (109,387) (49,950)
Interest expense 492,328 645,314 764,950
------------ ------------ ------------
1,979,132 1,952,004 3,768,940
------------ ------------ ------------
Profit (loss) before income taxes (360,890) 922,851 (1,302,801)
Income tax (benefit) (Note 6) 5,800 (22,222) (14,038)
------------ ------------ ------------
Net earnings (loss) $ (366,690) $ 945,073 $ (1,288,763)
============ ============ ============
Net earnings (loss) per common and
common equivalent share: $ (.15) $ .39 $ (.54)
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 2,410,837 2,446,262 2,382,401
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
CAPITAL MINIMUM TOTAL
COMMON STOCK IN EXCESS RETAINED PENSION STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS LIABILITY EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 29, 1993 2,382,401 $ 238,240 $ 1,401,165 $ 3,409,758 $ (94,317) $ 4,954,846
Net loss - - - (1,288,763) - (1,288,763)
Change in additional minimum
pension liability in excess of
prior service cost (Note 7) - - - - 37,981 37,981
----------- ---------- ------------ ------------- --------- --------------
BALANCE AT AUGUST 28, 1994 2,382,401 238,240 1,401,165 2,120,995 (56,336) 3,704,064
Net earnings - - - 945,073 - 945,073
Exercise of stock option 2,250 225 5,134 - - 5,359
Change in additional minimum
pension liability in excess of
prior service cost (Note 7) - - - - 56,336 56,336
----------- ---------- ------------ ------------- --------- -------------
BALANCE AT AUGUST 27, 1995 2,384,651 238,465 1,406,299 3,066,068 0 4,710,832
Net loss - - - (366,690) - (366,690)
Exercise of stock options 36,199 3,620 105,299 - - 108,919
----------- ---------- ------------ ------------- --------- -------------
BALANCE AT AUGUST 25, 1996 2,420,850 $ 242,085 $ 1,511,598 $ 2,699,378 $ 0 $ 4,453,061
=========== ========== ============ ============= ========= =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 25, 1996, AUGUST 27, 1995, AND AUGUST 28, 1994
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (366,690) $ 945,073 $(1,288,763)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,038,939 2,448,013 2,826,546
(Gain) on sale of property, plant, and equipment
and other assets (594,300) (763,451) (27,612)
Deferred income taxes -- (29,022)
Provision for restructuring and plant closings -- -- 704,000
Pension curtailment (gain) -- (254,419) --
Increase in pension liability 47,289 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,866,516 733,940 (324,952)
Inventories (474,375) 1,551,031 (460,393)
Other assets -- 217,402 153,923
Prepaid expenses 70,840 (273,678) (164,276)
(Decrease) increase in accounts payable and accrued expenses (868,092) (2,313,235) (223,529)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,720,127 2,261,654 1,194,944
Cash flows from investing activities:
Additions to property, plant, and equipment (809,224) (356,136) (117,621)
Proceeds from sale of equipment and other assets 644,000 1,813,746 412,464
Proceeds on note receivable 217,402 300,000 200,000
----------- ----------- -----------
Net cash provided by investing activities 52,178 1,757,610 494,843
Cash flows from financing activities:
Payments of long-term debt (1,498,539) (6,064,219) (262,847)
Net payments on line of credit -- (848,482) (1,372,477)
Placement of long-term debt -- 3,940,117 --
Issuance of common stock 108,920 5,359 --
----------- ----------- -----------
Net cash used in financing activities (1,389,619) (2,967,225) (1,635,324)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 382,686 1,052,039 54,463
Cash and cash equivalents at beginning of year 1,260,053 208,014 153,551
----------- ----------- -----------
Cash and cash equivalents at end of year: $ 1,642,739 $ 1,260,053 $ 208,014
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 509,561 $ 723,685 $ 786,324
Income taxes 5,800 3,500 5,800
Noncash investing and financing activities:
Acquisition of machinery through capital lease 885,330 1,729,600 181,016
Reversal of additional minimum pension liability:
Intangible asset -- (279,287) --
Retained earnings offset -- (56,336) (37,981)
Related deferred taxes -- (29,022) --
See notes to consolidated financial statements.
</TABLE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 25, 1996, AUGUST 27, 1995, AND AUGUST 28, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - Washington Scientific Industries, Inc. and subsidiaries'
(the Company) fiscal years represent a 52- to 53-week period ending the
last Sunday in August. Fiscal 1996, 1995 and 1994 each consisted of 52
weeks.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Washington Scientific 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.
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 $17,000 and $334,000 at
August 25, 1996 and August 27, 1995, respectively. The greater allowance
at August 27, 1995 was related to the Company's estimate of certain
specific excess inventory quantities.
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
Leasehold improvements 4 to 20 years
Automotive equipment 3 to 5 years
INCOME TAXES - The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, which requires an
asset and liability approach to financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change
during the period in deferred tax 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 principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES - Net
earnings (loss) per common and common equivalent shares has been computed
by dividing earnings (loss) by the weighted average number of common and
common equivalent shares outstanding during each period. The computed
number of common equivalent shares was 61,611 for the year ended August
27, 1995. Outstanding stock options were not considered in the fiscal
1996 and 1994 calculations as they had an antidilutive effect.
In March 1995, SFAS 121 "Accounting for the Impairment of Long-Lived
Assets" was issued, which is effective for fiscal years beginning after
December 15, 1995. The Company has not determined the impact of the new
statement on its financial statements.
In October 1995, SFAS 123 "Accounting for Stock-Based Compensation" was
issued, which is effective for fiscal years beginning after December 15,
1995. The new standard encourages companies to adopt a fair value based
method of accounting for employee stock options, but allows companies to
continue to account for those plans using the accounting prescribed by
APB Opinion 25 "Accounting for Stock Issued to Employees." The Company
will adopt the disclosure requirements of the standard in fiscal 1997 and
plans to continue accounting for stock compensation using APB 25 making
pro forma disclosures of net income and earnings per share as if the fair
value based method had been applied.
2. PROVISION FOR RESTRUCTURING AND PLANT CLOSINGS
OWATONNA - On June 27, 1994, the Company announced the closing of its
plant located in Owatonna, Minnesota and the consolidation of operations
in the Long Lake, Minnesota plant. The closing and consolidation was
completed in the first half of fiscal 1995. A provision of $704,000 was
recorded during fiscal 1994 and consisted principally of:
Equipment moves $ 348,000
Severance and relocation costs 356,000
------------
$ 704,000
============
The balance of $29,000 at August 25, 1995 was utilized during fiscal
1996 for employee relocation.
<TABLE>
<CAPTION>
3. DEBT
Long-term debt consisted of the following:
August 25, August 27,
1996 1995
<S> <C> <C>
1995 secured notes, interest at the bank's
base rate (8.25% at August 25, 1996, 8.75%
at August 27, 1995) plus 1.75 percentage points,
payable in monthly installments of $37,500 plus
interest with final payment due March 31, 1998. $ 2,736,117 $ 3,790,117
Capitalized lease obligations (Note 4) 2,341,641 1,900,849
--------------- ---------------
5,077,758 5,690,966
Less current portion 953,570 838,750
--------------- ---------------
Long-term debt $ 4,124,188 $ 4,852,216
=============== ===============
</TABLE>
During fiscal 1995, the Company refinanced its term debt and renegotiated
its line of credit with the same bank with which the Company previously
had its line of credit. The agreement requires principal payments of
$37,500 per month with the loan balance due at March 31, 1998. Interest
on the term debt is calculated at the bank's base rate (8.25 % at August
25, 1996) plus 1.75 percentage points, with payments made monthly.
Interest on the line of credit is at the bank's base rate (8.25% at
August 25, 1996) plus 1.5 percentage points, and expires March 31, 1998.
The agreement maintains secured borrowing of up to $3,000,000; however,
the Company is charged an annual unused credit line fee of 0.75%. At
August 25, 1996, and August 27, 1995 there was no balance outstanding
under this agreement.
During the years ended August 27, 1995 and August 28, 1994 the weighted
average interest rates for short term borrowings were 11.1%, and 9.6%,
respectively.
Restrictive provisions of the agreement requires, among other provisions,
that the Company (1) maintain a net worth of not less than $3,000,000,
(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 25, 1996, the Company was
in compliance with, or had obtained waivers with respect to, the various
covenants of the credit agreement.
Maturities of long-term debt, excluding the capital lease obligations,
for the years subsequent to August 25, 1996 are as follows:
Fiscal years ending August:
1997 $ 450,000
1998 2,286,117
-------------
$ 2,736,117
=============
The notes, line of credit and capital leases are collateralized by the
receivables, inventory, and property, plant, and equipment of the
Company.
4. COMMITMENTS
LEASES - Included in the consolidated balance sheet at August 25, 1996
are cost and accumulated depreciation on equipment subject to capitalized
leases of $3,175,430 and $778,274, respectively. At August 27, 1995, the
amounts were $2,290,100 and $333,580, respectively.
The present value of the net minimum payments on capital leases as of
August 25, 1996 are as follows:
Capital
Leases
Fiscal years ending August:
1997 $ 691,580
1998 690,909
1999 656,764
2000 410,325
2001 170,106
2002 170,106
2003 49,402
------------
Total minimum lease payments 2,839,192
Less amount representing interest 497,551
------------
Present value of net minimum lease payments 2,341,641
Current portion 503,570
------------
Capital lease obligation, less current portion $ 1,838,071
============
Rent expense of approximately $22,295, $245,215, and $ 412,993 has been
charged to operations for the years ended August 25, 1996, August 27,
1995, and August 28, 1994, respectively.
5. STOCKHOLDERS' EQUITY
STOCK OPTIONS - Under the 1981 employee incentive stock option plan, a
total of 225,000 shares of common stock were reserved for granting of
options to officers and key employees at a price not less than the fair
market value on the day of the grant. At August 25, 1996, no shares
remained reserved and available for grant under the plan. The outstanding
options have a five-year term from date of grant.
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. At August 25, 1996, 3,276 shares remained
reserved and available for grant under 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. At August 25, 1996, 224,000 shares remained
reserved and available for grant under the plan.
<TABLE>
<CAPTION>
Option transactions during the three years ended August 25, 1996 are
summarized as follows:
1981 Employee
Incentive 1987 Stock 1994 Stock
Option Plan Option Plan Option Plan
Average Average Average
Shares Price Shares Price Shares Price
-------- ------- -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at August 29, 1993 46,925 $ 4.81 93,250 $ 6.43 -- --
Granted -- -- 127,000 2.11 -- --
Lapsed (16,025) 4.89 (58,000) 7.33 -- --
-------- --------
Outstanding at August 28, 1994 30,900 3.10 162,250 2.72 -- --
Granted -- -- -- -- 10,000 $ 3.83
Lapsed (850) 3.25 (20,000) 6.52 -- --
Exercised -- -- (2,250) 2.38 -- --
-------- -------- ------
Outstanding at August 27, 1995 30,050 3.10 140,000 2.19 10,000 3.83
Granted -- -- 25,000 3.88 16,000 3.88
Lapsed (75) 3.25 (1,000) 3.25 -- --
Exercised (27,975) 3.14 (9,000) 2.69 -- --
-------- -------- ------
Outstanding at August 25, 1996 2,000 $ 2.50 155,000 $ 2.42 26,000 $ 3.86
======== ======= ======== ======== ====== =========
Options exercisable at August 25, 1996 2,000 136,835 10,501
======== ======== ======
</TABLE>
6. INCOME TAXES
The Company has adopted SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which
requires an asset and liability approach to financial accounting and
reporting for income taxes. Income tax expense (benefit) consisted of:
Years Ended
----------------------------------
August 25, August 27, August 28,
1996 1995 1994
-------- -------- --------
Currently payable:
Federal -- -- --
State $ 6,800 $ 5,800 $ 5,800
-------- -------- --------
5,800 6,800 5,800
Deferred:
Federal -- (29,022) (19,838)
State -- -- --
-------- -------- --------
-- (29,022) (19,838)
-------- -------- --------
Total $ 5,800 $(22,222) $(14,038)
======== ======== ========
A reconciliation of the federal income tax provision at the statutory
rate with actual taxes provided on (loss) earnings from continuing
operations is as follows:
Years Ended
------------------------
August 25, August 27, August 28,
1996 1995 1994
---- ---- ----
Ordinary federal income tax statutory rate (35.0)% 35.0% (35.0)%
Limitation on (utilization of) tax assets 34.0 (34.0) 32.5
State income taxes, net of federal income
tax benefit 1.6 0.7 0.4
Impact of graduated income tax 1.0 (1.0) 1.0
Other -- (3.1) --
---- ---- ----
Taxes provided (benefit) 1.6% (2.4)% (1.1)%
==== ==== ====
<TABLE>
<CAPTION>
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax bases of the Company's assets and
liabilities. Temporary differences, net operating loss carryforwards, and
valuation allowances comprising the net deferred taxes on the balance
sheet are as follows:
Year Ended August 25, 1996
-------------------------------------------
Assets Liabilities Total
----------- ----------- -----------
<S> <C> <C> <C>
Costs for disposal of business segment $ 2,734 $ 2,734
Accrual for vacation earned 82,924 82,924
Inventory valuation accruals 5,684 5,684
Noncompete agreement 26,742 26,742
Incurred but not reported accrual 27,880 27,880
Accounts receivable accrual 17,000 17,000
Other 68,512 $ (31,420) 37,092
----------- ----------- -----------
Current 231,476 (31,420) 200,056
Valuation allowance (200,056)
Net current $ 0
===========
Tax depreciation less than book $ (254,683) $ (254,683)
Pension accrual $ 119,485 119,485
Net operating loss carryforward 1,958,337 1,958,337
Tax credit carryforward 505,750 505,750
Contribution carryforward 5,730 5,730
----------- ----------- -----------
Noncurrent 2,589,302 (254,683) 2,334,619
Valuation Allowance (2,334,619)
-----------
Net noncurrent $ 0
===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 27, 1995
-------------------------------------------
Assets Liabilities Total
----------- ----------- -----------
<S> <C> <C> <C>
Accrual for plant closing costs $ 9,860 $ 9,860
Costs for disposal of business segment 9,068 9,068
Accrual for vacation earned 100,161 100,161
Inventory valuation accruals 113,577 113,577
Noncompete agreement 49,664 49,664
Incurred but not reported accrual 45,101 45,101
Accounts receivable accrual 18,700 18,700
Other 41,304 $ (65,020) (23,716)
----------- ----------- -----------
Current 387,435 (65,020) 322,415
Valuation allowance (322,415)
-----------
Net current $ 0
===========
Tax depreciation less than book depreciation $ (357,693) $ (357,693)
Pension accrual $ 103,407 103,407
Noncompete agreement 26,742 26,742
Net operating loss carryforward 1,840,331 1,840,331
Tax credit carryforward 505,744 505,744
Contribution carryforward 12,572 12,572
----------- ----------- -----------
Noncurrent 2,488,796 (357,693) 2,131,103
Valuation allowance (2,131,103)
-----------
Net noncurrent $ 0
===========
</TABLE>
As of August 25, 1996, the Company had federal, Minnesota, and California
state income tax net operating loss carryforwards of approximately
$5,435,000, $1,082,000, and $686,000, respectively, of which most will
expire in 2008. Also as of August 25, 1996, the Company had $454,000 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
Washington Scientific Industries, Inc. combined its two non-contributory
pension plans into one plan effective February 1, 1995, for employees who
are at least 21 years of age and have completed at least one year of
service. Benefits for the union employees are based on years of service
and a pre-established rate in the year of retirement. Benefits for
non-union employees are based on years of service and a percentage of
annual compensation in the five years preceding retirement. Plan assets
consist primarily of shares of a balanced fund offered by a major
regional bank.
During fiscal 1995, as part of the Owatonna plant restructuring, the
Owatonna employees were either terminated or transferred to the Long Lake
facility during 1995. As a result, a curtailment of the non-union
employee plan occurred during fiscal 1995, as defined in SFAS No. 88,
EMPLOYERS' ACCOUNTING FOR SETTLEMENTS AND CURTAILMENTS OF DEFINED BENEFIT
PENSION PLANS AND TERMINATION BENEFITS. The amount of the curtailment
gain was $254,419 and was reflected in the financial statements for the
year ended August 27, 1995.
<PAGE>
<TABLE>
<CAPTION>
Net periodic pension cost consisted of the following:
Years Ended
-------------------------------------
August 25, August 27, August 28,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 152,055 $ 131,866 $ 242,660
Interest cost on projected benefit obligation 461,780 413,134 423,879
Actual return on plan assets (685,255) (784,597) (252,710)
Net amortization and deferral 118,709 225,208 (241,683)
--------- --------- ---------
Net periodic pension cost $ 47,289 $ (14,389) $ 172,146
========= ========= =========
</TABLE>
The funded status of the plans and the amount recognized on the balance
sheet are as follows:
Years Ended
----------- -----------
August 25, 1996 August 27, 1995
----------- -----------
Actuarial present value of benefit obligations:
Vested benefits $ 5,646,084 $ 5,562,099
Nonvested benefits 156,723 148,326
----------- -----------
Accumulated benefit obligations 5,802,807 5,710,425
Effect of projected future compensation
increases 276,625 301,027
----------- -----------
Projected benefit obligations 6,079,432 6,011,452
Plan assets at fair value 6,731,214 6,296,909
----------- -----------
Plan assets (in excess of) less than projected
benefit obligations (651,782) (285,457)
Unrecognized net gain (loss) 1,315,227 665,414
Unrecognized prior-service cost (541,202) (348,688)
Unrecognized net transition assets 336,259 379,944
Additional minimum liability -- --
----------- -----------
Pension liability $ 458,502 $ 411,213
=========== ===========
Weighted average discount rate 7.75% 7.5%
Rate of increase in future compensation
levels, non-union employees 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.0% 9.0%
The Company's policy is to currently fund an amount to include full
current costs and amortization of the unfunded actuarial accrued
liability over the expected future service of active participants;
however, contributions are not in excess of the maximum allowable tax
deduction for the Company. Pension liability amounts expected to be
funded under this policy within one year are included in miscellaneous
accrued expenses with amounts expected to be funded in periods beyond one
year included as long-term liabilities.
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. All employees are
eligible to participate in the Company's retirement savings 401(k) plan.
The Company matches contributions up to 25% of the first 6% of employee
contributions to the plan. Further discretionary contributions are
authorized fully by the Board of Directors. Contributions charged to
operations for fiscal 1996, 1995, and 1994 were approximately $66,648,
$29,933, and $51,336, 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 1996, 1995 or 1994 as listed
below:
Fiscal Year Sales
Customer 1996 1995 1994
-------- ---- ---- ----
#1 $ 12,246,000 $ 7,546,000 $ 3,178,000
#2 $ 2,077,000 $ 2,553,000 $ 2,959,000
#3 $ 1,449,000 $ 6,104,000 $ 15,965,000
#4 $ 1,392,000 $ 3,330,000 $ 2,508,000
#5 $ 1,379,000 $ 4,340,000 $ 706,000
9. DISCONTINUED OPERATIONS
Effective June 30, 1993, the Company sold the majority of the assets and
liabilities of its plastic injection molding segment (Advanced Custom
Molders) for $4,217,400 consisting of $3,500,000 in cash and a promissory
note for $717,400 and reported such activity as a discontinued operation.
Assets of approximately $231,000 representing the note receivable and
other assets and liabilities of approximately $27,000 relating primarily
to transaction costs and rental obligations, were remaining from the
discontinued segment as of August 27, 1995.
WASHINGTON SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
BALANCE AT NET ADDITIONS BALANCE AT
BEGINNING CHARGED TO NET END OF
DESCRIPTION OF PERIOD COST AND EXPENSES DEDUCTIONS PERIOD
======== ======== ======== ========
Reserves deducted
from assets to
which it applies:
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
Year ended
August 28, 1994 $200,000 $ $109,828 $ 90,172
======== ======== ======== ========
Year ended
August 27, 1995 $ 90,172 $ $ 35,172 $ 55,000
======== ======== ======== ========
Year ended
August 25, 1996 $ 55,000 $ $ 5,000 $ 50,000
======== ======== ======== ========
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
August 28, 1994 $463,859 $ 40,054 $351,533 $152,380
======== ======== ======== ========
Year ended
August 27, 1995 $152,380 $334,051 $152,380 $334,051
======== ======== ======== ========
Year ended
August 25, 1996 $334,051 $ 16,716 $334,051 $ 16,716
======== ======== ======== ========
(1) Receivables determined to be uncollectible are charged against reserves,
net of collections on accounts previously written off.
EXHIBIT 10.11
WAIVER AND SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
THIS WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AND
SECURITY AGREEMENT (the "Amendment") is dated as of October 31, 1996 and is by
and between WASHINGTON SCIENTIFIC INDUSTRIES, INC. (the "Borrower") and FBS
BUSINESS FINANCE CORPORATION (the "Lender"). Terms not otherwise expressly
defined herein shall have the meanings set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Lender are parties to an Amended and
Restated Credit and Security Agreement, dated as of March 31, 1995 as amended by
that certain First Amendment to Amended and Restated Credit and Security
Agreement dated as of April 20,1995 (as so amended, the "Credit Agreement")
under which the Lender has agreed to make Advances to the Borrower; and
WHEREAS, the Borrower has informed the Lender of the occurrence of an
Event of Default under the Credit Agreement; and
WHEREAS, the Borrower and the Lender desire to amend the Credit Agreement
and the Lender is willing to waive the Event of Default, all as hereinafter set
forth.
NOW THEREFORE, for value received, the Borrower and the Lender agree as
follows.
ARTICLE I - AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments.
(a) Section 5.5 of the Credit Agreement is amended to read in its
entirety as follows:
5.5 Books, Records and Access. Maintain, and cause each
Subsidiary to maintain, complete and accurate books and records
(including, without limitation, records relating to Accounts
Receivable, Inventory, Equipment and other Collateral), in which
full and correct entries in conformity with GAAP shall be made of
all dealings and transactions in relation to its respective
business and activities. Cause its books and records as at the end
of any accounting period to be posted and closed not more than 15
days after the last business day of such period. Permit, and cause
each Subsidiary to permit, access by the Lender and its agents or
employees to the books and records of the Borrower and such
Subsidiary at the Borrower's or such Subsidiary's place or places
of business at intervals to be determined by the Lender and
without hindrance or delay, and permit, and cause each Subsidiary
to permit, the Lender or its agents and employees to inspect the
Borrower's Inventory and Equipment and such Subsidiary's inventory
and equipment and to inspect, audit, check and make copies and/or
extracts from the books, records, journals, orders, receipts
correspondence and other data relating to Inventory, Accounts
Receivable, chattel paper, General Intangibles, Equipment and any
other Collateral or Third Party Collateral, or to any other
transactions between the parties hereto. Any and all such
inspections and/or audits shall be at the Borrower's expense. If
no Event of Default or Unmatured Event of Default shall have
occurred and be continuing, the Lender's audit described in the
third sentence of this Section 5.5 shall be limited to no more
than three such audits in any fiscal year of Borrower; provided
however that if (i) no Event of Default or; Unmatured Event of
Default shall have occurred and be continuing, and (ii) the
average daily amount of outstanding Revolving Loans for the
immediately preceding 120 days is $100,000 or less, then the
Lender's audit described in the third sentence of this Section 5.5
shall be limited to inspection and other access as described
therein with respect to Borrower's Equipment and any Subsidiary's
equipment and all books, records, journals, orders, receipts,
correspondence, and other data relating thereto, and shall be
limited to no more than two such audits in any fiscal year of
Borrower.
(b) Supplement A to the Credit Agreement is hereby amended to read
in its entirety in the form of Supplement A attached hereto as Exhibit A.
1.2 Construction. All references in the Credit Agreement to "this
Agreement", "herein" and similar references shall be deemed to refer to the
Credit Agreement as amended by this Amendment.
ARTICLE II - DEFAULT AND WAIVER
2.1 Event of Default. Under Section 5.4 of Supplement A to the Credit
Agreement, the Borrower agreed to maintain a Cash Flow Coverage Ratio of not
less than 1.1 to 1.0. The Borrower failed to maintain the required Cash Plow
Coverage Ratio for the reporting period ending August 25,1996.
2.2 Waiver. Upon the date on which this Amendment becomes effective, the
Lender hereby waives the Borrower's Event of Default described in the preceding
Section 2.1. The waiver set forth herein shall not constitute a waiver by the
Lender of any other Event of Default or any Unmatured Event of Default, if any,
under the Credit Agreement, and shall not be, and shall not be deemed to be, a
course of action with respect thereto upon which the Borrower may rely in the
future and the Borrower hereby expressly waives any claim to such effect.
ARTICLE III- REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Amendment and to make and
maintain the Loans under the Credit Agreement as amended hereby, the Borrower
hereby warrants and represents to the Lender that it is duly authorized to
execute and deliver this Amendment, and to perform its obligations under the
Agreement as amended hereby, and that this Amendment constitutes the legal,
valid and binding obligation of the Borrower, enforceable in accordance with its
terms.
ARTICLE IV- CONDITIONS PRECEDENT
This Amendment shall become effective as of the date first set forth
above, provided, however, that the effectiveness of this Amendment is subject to
the satisfaction of each of the following conditions precedent.
4.1 Execution of Amendment and Supplement A. The Borrower and the Lender
shall have executed this Amendment and initialled Supplement A as amended
pursuant hereto.
4.2 Warranties. Before and after giving effect to this Amendment, the
representations and warranties in Article IV of the Credit Agreement shall be
true and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement. The execution by the Borrower of
this Amendment shall be deemed a representation that the Borrower has complied
with the foregoing condition.
4.3 Defaults. After giving effect to this Amendment, no Event of Default
and no Unmatured Event of Default shall have occurred and be continuing under
the Credit Agreement. The execution by the Borrower of this Amendment shall be
deemed a representation that the Borrower has complied with the foregoing
condition.
4.4 Documents. The following shall have been delivered to the Lender,
each duly executed and dated, or certified, as of the date hereof, as the case
may be:
(a) Resolutions. Certified copies of resolutions of the Board of
Directors of the Borrower authorizing or ratifying the execution,
delivery and performance, respectively, of this Amendment and other
documents (if any) provided for in this Amendment.
(b) Consents. Certified copies of all documents evidencing any
necessary corporate action, consent or governmental or regulatory
approval (if any) with respect to this Amendment.
(c) Incumbency and Signatures. A certificate of the Secretary or
an Assistant Secretary of the Borrower certifying the names of the
officer or officers of the Borrower authorized to sign this Amendment and
other documents provided for in this Amendment, together with a sample of
the true signature of each such officer.
(d) Good Standing Certificates. Certificates of good standing as
to the Borrower issued by the Secretary of State of the state in which
the Borrower is organized, and each other state in which the failure of
the Borrower to be in good standing would constitute an Adverse Event or
have a material adverse effect on the Lender's rights in any Collateral.
ARTICLE V - GENERAL
5.1 Expenses. The Borrower agrees to reimburse the Lender upon demand for
all reasonable expenses (including reasonable attorneys' fees and legal
expenses) incurred by this Lender in the preparation, negotiation and execution
of this Amendment and any other document required to be furnished herewith, and
in enforcing the obligations of the Borrower hereunder, and to pay and save the
Lender harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment hereunder,
which obligations of the Borrower shall survive any termination of the Credit
Agreement.
5.2 Counterparts. This Amendment may be executed in as many counterparts
as may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
5.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
5.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
5.5 Successors; Enforceability. This Amendment shall be binding upon
the Borrower and the Lender and their respective successors and assigns, and
shall inure to the benefit of the Borrower and the Lender and the successors and
assigns of the Lender. Except as hereby amended, the Credit Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Minneapolis, Minnesota by their respective officers thereunto duly
authorized as of the date first written above.
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
By: /s/ W. J. Lucke
----------------------------------
Title: Vice President
FBS BUSINESS FINANCE
CORPORATION
BY: /s/ Leonard H. Ramotar
----------------------------------
Title: Vice President
EXHIBIT A
SUPPLEMENT A
(Amended October 31,1996)
to
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
Dated as of MARCH 31,1995 Between
FBS BUSINESS FINANCE CORPORATION (the "Lender")
and
WASHINGTON SCIENTIFIC INDUSTRIES, INC. (the "Borrower")
1. Credit Agreement Reference. This Supplement A, as it may be amended or
modified from time to time, is a part of the Amended and Restated Credit and
Security Agreement, dated as of March 31, 1995, between the Borrower and the
Lender (together with all amendments, modifications and supplements thereto, the
"Credit Agreement"). Capitalized terms used herein which are defined in the
Credit Agreement shall have the meanings given such terms in the Credit
Agreement unless the context otherwise requires.
2. Definitions.
2.1 Revolving Credit Amount. The term "Revolving Credit Amount"
shall mean the maximum amount of Revolving Loans which the Lender will
make available to the Borrower which amount shall not exceed THREE
MILLION AND NO/100 DOLLARS ($3,000,000); provided however that the
aggregate outstanding principal balance of the Revolving Loans plus the
Letter of Credit Obligations shall not exceed the Revolving Credit
Amount.
2.2 Borrowing Base.
(a) Definition. The term "Borrowing Base" shall mean an
amount of up to 80% of the net amount (as determined by the Lender
after deduction of such reserves and allowances as the Lender
deems proper and necessary) of the Borrower's Eligible Accounts
Receivable.
(b) Lender's Rights. The Borrower agrees that nothing
contained in this Supplement A (a) shall be construed as the
Lender's agreement to resort or look to a particular type or item
of Collateral or as security for any specific Loan or advance or
in any way limit the Lender's right to resort to any or all of the
Collateral or as security for any of the Obligations, (b) shall be
deemed to limit or reduce any lien on or any security interest in
or upon any portion of the Collateral or other security for the
Obligations or (c) shall supersede Section 2.10 of the Credit
Agreement.
2.3 Letter of Credit Sublimit. The term "Letter of Credit
Sublimit" shall mean $300,000.
2.4 Termination Date. The term "Termination Date" shall mean March
31, 1998.
3. Interest; Fees.
3.1 Loans.
(a) Interest to Maturity. The unpaid principal balance of
the Revolving Loans shall bear interest to maturity at the
Reference Rate in effect from time to time plus 1.50% per annum.
The unpaid principal balance of the Term Loan shall bear interest
to maturity at the Reference Rate in effect from time to time plus
1.75% per annum.
(b) Default Rate. If any amount of the Loans is not paid
when due, whether by acceleration or otherwise, the entire unpaid
principal balance of the Loans (other than Overdraft Loans and
Over Advances) shall bear interest until paid at a rate per annum
equal to the greater of (i) the Reference Rate from time to time
in effect plus 4% or (ii) 4% above the Reference Rate in effect at
the time such amount became due.
3.2 Overdraft Loans; Over Advances. Overdraft Loans and Over
Advances shall bear interest at the rate(s) determined pursuant to
Section 2.7 or Section 2.8 of the Credit Agreement, as applicable.
3.3 Commitment Fee. The Borrower shall pay to the Lender a
commitment fee for the period from the date hereof to the date the Credit
terminates in an amount equal to.75% per annum on the average daily
Unused Revolving Credit Amount.
3.4 Letter of Credit Fees. The Borrower shall pay the Lender, or
any Affiliate, a commission on the undrawn amount of each Letter of
Credit and on each L/C Draft accepted by the Lender, or such Affiliate,
in an amount equal to 2.0% per annum.
3.5 Prepayment Fee. Upon prepayment in full of the Term Loan
pursuant to any third party refinancing of the same or in connection with
a sale of the Borrower or substantially all of its assets, the Borrower
shall pay to the Lender a prepayment fee in an amount equal to one
percent (1%) of the outstanding principal balance of the Term Loan;
provided, that if at the time of such prepayment the advance rate then
applicable to Eligible Accounts Receivable pursuant to Section 2.2(a) of
this Supplement A is less than 75%, the prepayment fee shall not be
applicable.
4. Eligible Account Receivable Requirements.
(a) For Accounts Receivable which are due and payable in full
within 30 days of the date of the invoice evidencing such Account
Receivable, such Account Receivable must not be unpaid on the date that
is 60 days after the due date. For Accounts Receivable which are due and
payable in full within 60, 90 or 120 days of the date of the invoice
evidencing such Account Receivable, such Account Receivable must not be
unpaid on the date that is 30 days after the due date.
(b) If invoices representing 10% or more of the unpaid net amount
of all Accounts Receivable from any one Account Debtor are unpaid more
than the number of days set forth in Section 4(a) above for such Accounts
Receivable, then all Accounts Receivable relating to such Account Debtor
shall cease to be Eligible Accounts Receivable.
5. Additional Covenants. From the date of the Credit Agreement and
thereafter until all of the Borrower's Obligations under the Credit Agreement
are paid in full, the Borrower agrees that, unless the Lender shall otherwise
consent in writing, it will not, and will not permit any Subsidiary to, do any
of the following:
5.1 Net Worth. Permit the Borrower's Net Worth at any time to be
less than $3,000,000.
5.2 Liabilities to Net Worth Ratio. Permit the ratio, as of the
last day of any fiscal quarter, of the Borrower's consolidated total
liabilities to the Borrower's Net Worth to exceed 4.0 to 1.0.
5.3 Capital Expenditures.
(a) Make Capital Expenditures in an amount exceeding
$3,000,000 on a consolidated basis in any fiscal year.
(b) Fund any Capital Expenditures with Revolving Loans in
an amount exceeding $1,000,000 in any fiscal year.
5.4 Cash Flow Coverage Ratio.
(a) Permit the ratio of the Borrower's EBITDA to the sum of
(i) its consolidated interest expense (including, without
limitation, imputed interest expense on Capitalized Leases) plus
(ii) mandatory principal payments on Long Term Debt, plus (iii)
income taxes actually paid during such period, to be less than (x)
0.75 to 1.0 as of November 24, 1996, for the four consecutive
fiscal quarters ending on that date and (y) 1.1 to 1.0 as of
February 23, 1997, for the four consecutive fiscal quarters ending
on that date.
(b) Subsequent to February 23, 1997, permit the ratio, as
of the last day of any fiscal quarter, of the Borrower's EBlTDA
for the four consecutive fiscal quarters ending on that date to
the sum of (a) its consolidated interest expense (including
without limitation, imputed interest expense on Capitalized
Leases,) plus (b) mandatory principal payments on Long Term Debt,
plus (c) cash Capital Expenditures not financed by Long Term Debt,
plus (d) income taxes actually paid during such period, to be less
than 1.1 to 1.0.
Borrower's Initials /s/ wjl
Lender's Initials /s/lhr
Dated as of October 31, 1996
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Form
S-8 (Nos. 2-75087, 33-19650 and 33-58565) of our report dated October 4, 1996,
with respect to the consolidated financial statements and schedule of Washington
Scientific Industries, Inc. included in the Annual Report (Form 10-K) for the
year ended August 25, 1996.
ERNST & YOUNG LLP
Minneapolis, Minnesota
November 19, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
2-75087, Registration Statement No. 33-19650 and Registration Statement No
33-58565 of Washington Scientific Industries, Inc. and subsidiaries on Form S-8
of our report dated October 13, 1995, appearing in this Annual Report on Form
10-K of Washington Scientific Industries, Inc. and subsidiaries for the year
ended August 25, 1996.
DELOITTE & TOUCHE LLP
November 18, 1996
Minneapolis, Minnesota
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-25-1996
<PERIOD-END> AUG-25-1996
<CASH> 1,642,739
<SECURITIES> 0
<RECEIVABLES> 1,918,942
<ALLOWANCES> 50,000
<INVENTORY> 1,098,613
<CURRENT-ASSETS> 4,733,481
<PP&E> 26,856,405
<DEPRECIATION> 20,017,166
<TOTAL-ASSETS> 11,573,244
<CURRENT-LIABILITIES> 2,537,494
<BONDS> 4,124,188
0
0
<COMMON> 242,085
<OTHER-SE> 4,210,976
<TOTAL-LIABILITY-AND-EQUITY> 11,573,244
<SALES> 20,173,508
<TOTAL-REVENUES> 20,173,508
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<INCOME-PRETAX> (360,890)
<INCOME-TAX> 5,800
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