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 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 10, 1997 (based upon the closing sale price of those
shares on the NASDAQ SmallCap Market System) was approximately $14,270,000.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 10, 1997 is 2,428,980.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 8, 1998 are incorporated by reference into Part III.
-------------------------------------
This form 10-K Report consists of 35 pages (including exhibits); the index to
the exhibits is set forth on page 12.
<PAGE>
17
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 31, 1997
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.
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.
<PAGE>
(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 34%, 14% and 5% of
total sales in fiscal 1995, 1996 and 1997,
respectively. Sales to the agricultural industry were
25%, 61% and 73% of total Company sales in fiscal
years 1995, 1996 and 1997, respectively. The Company
expects that in fiscal 1998 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.
<PAGE>
(vii) Sales in excess of 10 percent of fiscal 1997
consolidated revenues were made to John
Deere in the amount of $17,604,000 or 73% of
Company revenues.
(viii) Approximate dollar backlog at August 31,
1997 and August 25, 1996 was $6,395,000 and
$5,694,000, 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 31, 1997 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 31, 1997, the Registrant had 114
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 1997, 1996, and
1995 were not significant. See Note 8 to the
Consolidated Financial Statements.
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
George J. Martin 60 Chairman of the Board
Michael J. Pudil 49 President, Chief Executive Officer, and Director
James J. Valento 55 Vice President, Treasurer, and Assistant Secretary
Gerald E. Magnuson 67 Secretary and Director
</TABLE>
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 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. Valento has been a Vice President of the Company since
1997. He joined the Company in 1994 as Controller. Prior to
that he was employed by NCR Corporation in management
positions in Finance, Investor Relations and Corporate Taxes.
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.
<PAGE>
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
over-the-counter and NASDAQ SmallCap Market under the symbol
WSCI.
(c)
Common stock information:
Stock Price
-----------
High Low
FISCAL 1997:
First quarter $3-1/4 $2-3/4
Second quarter 4 2-5/64
Third quarter 3-15/16 3-1/4
Fourth quarter 6 3-17/32
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
Washington Scientific's 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
payment of cash dividends in the foreseeable future.
(b) As of November 10, 1997 there were 682 stockholders
of record of the Company's Common Stock.
<PAGE>
Item 6. Selected Financial Data:
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for number
of shares and per share information)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 24,153 $ 20,173 $ 30,409 $ 30,823 $ 29,293
Cost of products sold 20,495 18,555 27,534 28,357 28,839
----------- ----------- ----------- ----------- -----------
Gross margin 3,658 1,618 2,875 2,466 454
Selling and administrative expense 2,329 2,145 2,560 2,350 3,593
Provisions for plant closing -- -- -- 704 --
Pension curtailment (gain) -- -- (254) -- --
Real estate sale (gain) -- -- (890) -- --
Interest and other income (583) (658) (109) (50) (16)
Interest expense 287 492 645 765 991
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations before taxes 1,626 (361) 923 (1,303) (4,114)
Income (benefit) taxes 42 6 (22) (14) (93)
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations 1,584 (367) 945 (1,289) (4,021)
Discontinued operations -- -- -- -- (1,534)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 1,584 $ (367) $ 945 $ (1,289) $ (5,555)
=========== =========== =========== =========== ===========
Earnings (loss) per common and common equivalent share:
Continuing operations $ .64 $ (.15) $ .39 $ (.54) $ (1.69)
Discontinued operations -- -- -- -- (.64)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per common
and common equivalent share: $ .64 $ (.15) $ .39 $ (.54) $ (2.33)
=========== =========== =========== =========== ===========
Average number of common
and common equivalent
shares outstanding 2,481,873 2,410,837 2,446,262 2,382,401 2,382,401
Cash dividends paid per share $ .00 $ .00 $ .00 $ .00 $ .00
=========== =========== =========== =========== ===========
Additional information:
Current ratio 1.90:1 1.87:1 1.83:1 1.07:1 .88:1
Working capital $ 3,241 $ 2,196 $ 2,740 $ 452 $ (922)
Total plant and equipment additions 507 1,694 2,086 299 844
Long-term debt 2,671 4,124 4,852 4,848 5,491
Total assets 12,791 11,573 13,265 16,434 18,696
Stockholders' equity 6,055 4,453 4,711 3,704 4,955
Stockholders' equity per share $ 2.49 $ 1.85 $ 1.98 $ 1.55 $ 2.08
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital of $3,241,000 on August 31, 1997
reflected an increase of $1,045,000 from the prior year. The increase
resulted primarily from cash provided by operations and the sale of
assets, offset by payments on long-term debt. The fiscal 1997 ratio of
current assets to current liabilities increased to 1.90 to 1.0 from
1.87 to 1.0 for fiscal 1996.
Cash provided by operating activities in fiscal 1997 increased to
$2,610,000. Net earnings, non-cash charges for depreciation and
increased accrued expenses primarily accounted for cash provided by
operating activities. Cash provided by operations was $1,720,000 in
fiscal 1996 and $2,262,000 in fiscal 1995.
Additions to property, plant and equipment from cash were $507,000 in
fiscal 1997 compared to $809,000 in 1996 and $356,000 in 1995. New
machinery, improvements to the computer system and the final phase of
the roof replacement were the major 1997 capital expenditures. The
Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Company has
evaluated the risks associated with the "Year 2000" problem and has
determined that the cost of addressing the Year 2000 issue will be an
immaterial event for the Company and will not affect the Company's
financial position or result of operation.
Proceeds from the sale of equipment amounted to $537,000 in fiscal 1997
and $644,000 in fiscal 1996 and primarily resulted from disposition of
excess equipment related to completed and discontinued manufacturing
programs.
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.
The Company's total debt was $1,406,000 lower at August 31, 1997 than
the previous year-end. Term debt owed the bank on August 31, 1997
declined $892,000 to $1,844,000 while capital lease debt declined
$514,000 to $1,828,000.
At August 31, 1997 and August 25, 1996 the Company did not have any
line of credit 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 1998.
RESULTS OF OPERATIONS:
Net sales of $24,153,000 increased $3,980,000 or 19.7% from fiscal 1996
sales of $20,174,000. The primary increase in sales was in the
agribusiness market.
In fiscal 1997, the Company reported net earnings of $1,584,000 or $.64
per share compared to a net loss of $(367,000) or $(.15) per share in
1996 and net earnings of $945,000 or $.39 per share in 1995.
<PAGE>
The net earnings in 1997 included a gain of $410,000 or $.17 per share
from the disposition of excess equipment related to completed or
discontinued manufacturing programs, the net loss in 1996 included a
similar gain of $455,000 or $.18 per share. 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 gross margin on parts sold in fiscal 1997 was 15.1% of sales
compared to 8.0% of sales and 9.5% of sales in 1996 and 1995,
respectively. The increase in gross margin in 1997 can be primarily
attributed to cost reductions related to lower headcount, reduced
depreciation expense, and increased manufacturing efficiencies.
Selling and administrative expense of $2,329,000 in fiscal 1997
increased $184,000 and decreased $232,000 from fiscal years 1996 and
1995, respectively. The increase was related to performance based
compensation, depreciation and maintenance of new computer equipment
and increased costs of attendance at trade shows. The decrease can be
primarily attributed to a lower level of purchased services and
employee reductions.
Interest and other income of $583,000 was $75,000 lower in fiscal 1997
than 1996, and $474,000 higher than 1995 primarily because of the gain
on the disposition of excess equipment related to completed and
discontinued manufacturing programs.
Interest and other expense of $287,000 in fiscal 1997 was $206,000
lower than 1996 and $359,000 lower than 1995 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, 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. 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.
<PAGE>
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 1997:
First quarter $ 5,590,588 $ 776,868 $ 616,788 (a) $ .25
Second quarter 5,770,920 888,703 219,048 .09
Third quarter 6,673,338 1,036,850 360,026 .15
Fourth quarter 6,118,243 955,901 308,201 .15
----------- ----------- ---------- -----
$24,153,089 $ 3,658,322 $1,584,063 $ .64
=========== =========== ========== =====
FISCAL 1996:
First quarter $ 5,342,474 $ 657,230 $ 54,261 $ .02
Second quarter 5,175,844 264,738 51,206 (b) .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)
=========== =========== ========== =====
(a) Includes gain from sale of equipment in the amount of
$410,000.
(b) Includes gain from sale of equipment in the amount of
$455,000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:
On January 11, 1996, the Company appointed Ernst & Young LLP
as the Company's independent auditors and terminated Deloitte
& Touche LLP. The report of Deloitte & Touche LLP on the
consolidated financial statements of the Company for the
fiscal year ended August 27, 1995 were unqualified and did not
contain an adverse opinion, any disclaimers, qualification or
modification as to uncertainty, audit scope, or accounting
principles. In connection with the audit of the consolidated
financial statements of the Company for the fiscal years ended
August 27, 1995 and during the period commencing August 27,
1995 through January 11, 1996, there were no disagreements or
reportable events. The decision to change firms was
recommended by the Audit Committee of the Board of Directors
<PAGE>
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 31, 1997, and such information
required by such items is incorporated herein by reference
from the proxy statement.
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
<S> <C>
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.
<PAGE>
Exhibit Page
No. Description No.
10.5 Employment Agreement between Michael
J. Pudil and Registrant dated November
4, 1993, is corporated by reference
from Exhibit 10.4 of Registrant's Form
10K for the fiscal year ended August
28, 1994.
10.6 Amendment dated January 9, 1997 to the
employment agreement between the
Registrant and Michael J. Pudil
incorporated by reference from Exhibit
10 of Registrant's Form 10-Q for the
quarter ended February 23, 1997.
10.7 Employment (Change of Control) Agreement
between Michael J. Pudil and Registrant
dated October 18, 1995
10.8 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.
10.9 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.
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. 33
23.2 Independent Auditors' Consent of Deloitte & Touche LLP. 34
27 Financial Data Schedule. 35
(b) Reports on Form 8-K.
None
</TABLE>
<PAGE>
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/ James J. Valento
James J. Valento
Vice President and Treasurer
DATE: November 20, 1997
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:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael J. Pudil President, Chief Executive Officer, November 20, 1997
- --------------------------------------------
Michael J. Pudil Director
/s/ Paul Baszucki Director November 20, 1997
- --------------------------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 20, 1997
- --------------------------------------------
Melvin L. Katten
/s/ T. E. Larsen Director November 20, 1997
- --------------------------------------------
T. E. Larsen
/s/ Gerald E. Magnuson Director November 20, 1997
- --------------------------------------------
Gerald E. Magnuson
/s/ George J. Martin Director November 20, 1997
- --------------------------------------------
George J. Martin
/s/ Eugene J. Mora Director November 20, 1997
- --------------------------------------------
Eugene J. Mora
</TABLE>
<PAGE>
INDEX TO
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report, Ernst & Young LLP 16
Independent Auditors' Report, Deloitte & Touche LLP 17
Consolidated Balance Sheets - August 31, 1997 and August 25, 1996 18
Consolidated Statements of Operations - Years Ended August 31, 1997,
August 25, 1996 and August 27, 1995 19
Consolidated Statements of Stockholders' Equity - Years Ended
August 31, 1997, August 25, 1996, August 27, 1995 20 Consolidated Statements
of Cash Flows - Years Ended August 31, 1997,
August 25, 1996, August 27, 1995 23
Notes to Consolidated Financial Statements 24
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 32
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Washington Scientific Industries, Inc.
We have audited the accompanying consolidated balance sheets of Washington
Scientific Industries, Inc. and subsidiaries as of August 31, 1997, and August
25, 1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years then ended. 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 schedule based on our audits. The consolidated
financial statements of Washington Scientific Industries, Inc. and subsidiaries
for the year ended August 27, 1995 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 1997 and 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 31, 1997
and August 25, 1996, and the consolidated results of their operations and their
cash flows for each of the years then ended, in conformity with generally
accepted accounting principles. 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
October 10, 1997
Minneapolis, Minnesota
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Washington Scientific Industries, Inc.
Long Lake, Minnesota
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Washington Scientific Industries, Inc.
and subsidiaries (the Company) for the year ended August 27, 1995. 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 audit 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of the Company for
the year ended August 27, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such 1995 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
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND AUGUST 25, 1996
- ----------------------------------------------------------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,847,598 $ 1,642,739
Accounts receivable, less allowance for doubtful
accounts of $50,000 at August 31, 1997 and
$50,000 at August 25, 1996, respectively 2,545,318 1,868,942
Inventories - work-in-process 1,356,438 1,098,613
Prepaid and other current assets 89,155 123,186
----------- -----------
Total current assets 6,838,509 4,733,480
PROPERTY, PLANT, AND EQUIPMENT, at cost (Note 4):
Land 66,906 66,906
Buildings and improvements 5,171,671 5,019,373
Machinery and equipment 16,453,028 21,770,126
----------- -----------
21,691,605 26,856,405
Less accumulated depreciation 15,739,582 20,017,166
----------- -----------
Total property, plant, and equipment 5,952,023 6,839,239
OTHER LONG TERM ASSETS: 525 525
----------- -----------
$12,791,057 $11,573,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,153,995 $ 785,602
Notes payable (Note 3) -- --
Salaries, wages, and employee withholdings 681,102 474,107
Accrued real estate taxes 190,850 190,911
Miscellaneous accrued expenses 571,081 133,303
Current portion of long-term debt (Note 3) 1,000,679 953,570
----------- -----------
Total current liabilities 3,597,707 2,537,493
LONG-TERM DEBT, less current portion (Note 3) 2,671,153 4,124,188
LONG-TERM PENSION LIABILITY (Note 7) 467,073 458,502
COMMITMENTS (Note 4) -- --
STOCKHOLDERS' EQUITY (Note 5):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,428,980 and
2,420,850 shares respectively 242,898 242,085
Capital in excess of par value 1,528,785 1,511,598
Retained earnings 4,283,441 2,699,378
----------- -----------
Total stockholders' equity 6,055,124 4,453,061
----------- -----------
$12,791,057 $11,573,244
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1997, AUGUST 25, 1996, AND AUGUST 27, 1995
- --------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (Note 8) $ 24,153,089 $ 20,173,508 $ 30,409,471
Cost of products sold 20,494,767 18,555,266 27,534,616
------------ ------------ ------------
Gross margin 3,658,322 1,618,242 2,874,855
Selling and administrative expense 2,328,808 2,144,962 2,560,407
Pension curtailment (gain) -- -- (254,419)
Real estate sale (gain) -- -- (889,911)
Interest and other income (583,056) (658,158) (109,387)
Interest expense 286,707 492,328 645,314
------------ ------------ ------------
2,032,459 1,979,132 1,952,004
------------ ------------ ------------
Profit (loss) before income taxes 1,625,863 (360,890) 922,851
Income tax (benefit) (Note 6) 41,800 5,800 (22,222)
------------ ------------ ------------
Net earnings (loss) $ 1,584,063 $ (366,690) $ 945,073
============ ============ ============
Net earnings (loss) per common and
common equivalent share: $ .64 $ (.15) $ .39
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 2,481,873 2,410,837 2,446,262
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK CAPITAL MINIMUM TOTAL
------------ IN EXCESS RETAINED PENSION STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS LIABILITY EQUITY
----------- ---------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
----------- ---------- ------------ ------------- --------- -------------
Net Earnings - - - 1,584,063 - 1,584,063
Exercise of stock options 8,130 813 17,187 - - 18,000
----------- ---------- ------------ ------------- --------- -------------
BALANCE AT AUGUST 31, 1997 2,428,980 $ 242,898 $ 1,528,785 $ 4,283,441 $ - $ 6,055,124
=========== ========== ============ ============= ========= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, AUGUST 25, 1996, AND AUGUST 27, 1995
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,584,063 $ (366,690) $ 945,073
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,365,863 2,038,939 2,448,013
(Gain) loss on sale of property, plant, and equipment
and other assets (508,365) (594,300) (763,451)
Deferred income taxes - - (29,022)
Pension curtailment (gain) - - (254,419)
Increase in pension liability 8,571 47,289 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (676,376) 1,866,516 733,940
Inventories (257,825) (474,375) 1,551,031
Other assets - - 217,402
Prepaid expenses 34,031 70,840 (273,678
(Decrease) increase in accounts payable and accrued expenses 1,060,214 (868,092) (2,313,235)
----------- ----------- -----------
Net cash provided by (used in) operating activities 2,610,176 1,720,127 2,261,654
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (507,002) (809,224) (356,136)
Proceeds from sale of equipment and other assets 536,720 644,000 1,813,746
Proceeds on note receivable - 217,402 300,000
----------- ----------- -----------
Net cash provided by investing activities 29,718 52,178 1,757,610
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,453,035) (1,498,539) (6,064,219)
Net payments on line of credit - - (848,482)
Placement of long-term debt - - 3,940,117
Issuance of common stock 18,000 108,920 5,359
----------- ----------- -----------
Net cash used in financing activities (1,435,035) (1,389,619) (2,967,225)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,204,859 382,686 1,052,039
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,642,739 1,260,053 208,014
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,847,598 $ 1,642,739 $ 1,260,053
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 297,123 $ 509,561 $ 723,685
Income taxes 5,800 5,800 3,500
Noncash investing and financing activities:
Acquisition of machinery through capital lease - 885,330 1,729,600
Reversal of additional minimum pension liability:
Intangible Asset - - (279,287)
Retained Earnings Offset - - (56,336)
Related Deferred Taxes - - (29,022)
See notes to consolidated financial statements.
</TABLE>
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, AUGUST 25, 1996, AND AUGUST 27, 1995
- --------------------------------------------------------------------------------
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 1997 consisted of 53 weeks. Fiscal 1996 and
1995 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. 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 $155,000 and $17,000 at
August 31, 1997 and August 25, 1996, respectively. The greater allowance
at August 31, 1997 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
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. The adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
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.
<PAGE>
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 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.
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 56,951 for the year ended August
31, 1997 and was 61,611 for the year ended August 27, 1995. Outstanding
stock options were not considered in the fiscal 1996 calculation as they
had an anti-dilutive effect.
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.
NEW ACCOUNTING PRONOUNCEMENT- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE, which is required to be adopted for the year
ending August 30, 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in an increase in basic
earnings per share of $.01 in each of the years ended August 31, 1997 and
August 27, 1995. There will be no impact for the year ended August 25,
1996 due to the Company incurring a net loss. The impact of Statement 128
on the calculation of fully diluted earnings per share for these years is
not expected to be material.
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.
<PAGE>
3. DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
August 31, August 25,
1997 1996
<S> <C> <C>
Bank term debt - (See additional information below) $ 1,844,117 $ 2,736,117
Capitalized lease obligations (Note 4) 1,827,715 2,341,641
----------- -----------
3,671,832 5,077,758
Less current portion 1,000,679 953,570
----------- -----------
Long-term debt $ 2,671,153 $ 4,124,188
=========== ===========
</TABLE>
During fiscal 1997, 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
$37,500 per month with the loan balance due at March 31, 2000. Interest
on the term debt is calculated at the bank's base rate (8.5% at August
31, 1997) plus 0.75 percentage points and (8.25 % at August 25, 1996)
plus 1.75 percentage points, with payments made monthly. The fair value
of the term debt is estimated to be its carrying value since the debt has
a variable interest rate.
Interest on the line of credit is at the bank's base rate (8.5% at August
31, 1997) plus 0.5 percentage points and (8.25% at August 25, 1996) plus
1.5 percentage points, and expires March 31, 2000. The agreement provides
for secured borrowing of up to $1,000,000; however, the Company is
charged an annual unused credit line fee of 0.5%. At August 31, 1997, and
August 25, 1996 there was no balance outstanding on the line of credit
under this agreement.
Restrictive provisions of the agreement require, 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 31, 1997, the Company was
in compliance with the various covenants of the credit agreement.
Maturities of long-term debt, excluding the capital lease obligations,
for the years subsequent to August 31, 1997 are as follows:
Fiscal years ending August:
1998 $ 450,000
1999 450,000
2000 944,117
-------------
$ 1,844,117
=============
The notes, line of credit and capital leases are collateralized by the
receivables, inventory, and property, plant, and equipment of the
Company.
<PAGE>
4. COMMITMENTS
LEASES - Included in the consolidated balance sheet at August 31, 1997
are cost and accumulated depreciation on equipment subject to capitalized
leases of $3,175,430 and $1,259,878, respectively. At August 25, 1996,
the amounts were $3,175,430 and $778,274, respectively.
The present value of the net minimum payments on capital leases as of
August 31, 1997 are as follows:
Capital
Leases
------------
Fiscal years ending August:
1998 $ 690,909
1999 656,764
2000 410,325
2001 170,106
2002 170,106
2003 49,402
------------
Total minimum lease payments 2,147,612
Less amount representing interest 319,897
------------
Present value of net minimum lease payments 1,827,715
Current portion 550,679
------------
Capital lease obligation, less current portion $ 1,277,036
============
Rent expense of approximately $1,783, $22,295, and $245,215 has been
charged to operations for the years ended August 31, 1997, August 25,
1996, and August 27, 1995, 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. At August 31, 1997, 11,500
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 31, 1997, 123,000 shares remained
reserved and available for grant under the plan.
No shares remain reserved, available for grant or outstanding under the
1981 employee incentive stock option plan at August 31, 1997.
Option transactions during the three years ended August 31, 1997 are
summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
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 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
Granted - - - - 101,000 4.62
Lapsed - - (8,000) 3.36 - -
Exercised (2,000) 2.50 (7,000) 2.21 - -
Outstanding at August 31, 1997 - - 140,000 $ 2.38 127,000 $ 4.46
========= ========= ========= ========= ========= =========
Options exercisable at August 31, 1997 - - 133,333 $ 2.30 34,667 $ 3.76
========= ========= ========= ========= ========= =========
</TABLE>
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 1997 and fiscal 1996: no
dividend yield, expected volatility of 38.9%, risk-free interest rate of
6.38% and expected terms of 5 and 10 years. 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:
<PAGE>
Year ended Year ended
August 31, 1997 August 25, 1996
Net Income (loss):
As reported $ 1,584,063 $ (366,690)
Pro forma $ 1,550,636 $ (377,938)
Income (loss) per common share:
As reported $ .64 $ (.15)
Pro forma $ .62 $ (.16)
The proforma impact is not indicative of future periods, as a result
of the phase-in provision of SFAS 123.
As of August 31, 1997, there were 120,000 options outstanding with
exercise prices between $2.00 and $2.44, 97,000 options outstanding
with exercise prices between $3.50 and $4.31, and 50,000 options
outstanding with an exercise price of $5.63. At August 31, 1997,
outstanding options had a weighted-average remaining contractual life
of 7.3 years.
The number of options exercisable as of August 31, 1997 and August 25,
1996 were 168,000 and 149,336, respectively, at weighted average share
prices of $2.60 and $2.28 per share, respectively.
The weighted average fair value of options granted during the years
ended August 31, 1997 and August 25, 1996 was $2.83 and $2.29 per
share, respectively.
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Years Ended
August 31, August 25, August 27,
1997 1996 1995
-------------- ------------ -------------
Currently payable:
<S> <C> <C> <C>
Federal $ 36,000 - -
State 5,800 $ 5,800 $ 6,800
-------------- ------------ -------------
41,800 5,800 6,800
Deferred:
Federal - - (29,022)
State - - -
-------------- ------------- --------------
- - (29,022)
-------------- ------------- ---------------
Total $ 41,800 $ 5,800 $ (22,222)
============== ============= ===============
</TABLE>
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:
<PAGE>
<TABLE>
<CAPTION>
Years Ended
-----------
August 31, August 25, August 27,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Ordinary federal income tax statutory rate 35.0% (35.0)% 35.0%
Limitation on (utilization of) tax assets (34.0) 34.0 (34.0)
State income taxes, net of federal income
tax benefit 0.2 1.6 0.7
Impact of graduated income tax (1.0) 1.0 (1.0)
Other 2.4 - (3.1)
---- ---- ----
Taxes provided (benefit) 2.6% 1.6% (2.4)%
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended August 31, 1997
--------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Accrual for vacation earned $ 75,833 $ 75,833
Inventory valuation accruals 52,816 52,816
Incurred but not reported accrual 55,080 55,080
Accounts receivable accrual 17,000 17,000
Other 11,739 $ (27,568) (15,829)
----------- ----------- -----------
Current 212,468 (27,568) 184,900
Valuation Allowance (184,900)
-----------
Net Current $ 0
===========
Tax depreciation less than book - $ (184,330) $ (184,330)
Pension accrual $ 122,399 122,399
Net operation loss carryforward 1,281,593 1,281,593
Tax credit carryforward 505,750 505,750
Contribution carryforward 5,747 5,747
----------- ----------- -----------
Noncurrent 1,915,489 (184,330) 1,731,159
Valuation allowance (1,731,159)
-----------
Net Noncurrent $ 0
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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) 37,0920
----------- ----------- -----------
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>
As of August 31, 1997, the Company had federal, Minnesota, and
California state income tax net operating loss carryforwards of
approximately $3,619,000, $522,000, and $644,000, respectively, of which
most will expire in 2008. Also as of August 31, 1997, 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.
Net periodic pension cost consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
Years Ended
-----------
August 31, August 25, August 27,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 141,872 $ 152,055 $131,866
Interest cost on projected benefit obligation 472,272 461,780 413,134
Actual return on plan assets (1,502,308) (685,255) (784,597)
Net amortization and deferral 896,735 118,709 225,208
--------------- -------------- --------------
Net periodic pension cost $ 8,571 $ 47,289 $ (14,389)
=============== ============== ===============
</TABLE>
The funded status of the plans and the amount recognized on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Years Ended
-----------
August 31, 1997 August 25, 1996
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 5,989,955 $ 5,646,084
Nonvested benefits 170,325 156,723
------------ -------------
Accumulated benefit obligations 6,160,280 5,802,807
Effect of projected future compensation
increases 203,575 276,625
------------ -------------
Projected benefit obligations 6,363,855 6,079,432
Plan assets at fair value 7,956,391 6,731,214
------------ -------------
Plan assets (in excess of) less than projected
benefit obligations (1,592,536) (651,782)
Unrecognized net gain (loss) 2,181,438 1,315,227
Unrecognized prior-service cost (414,403) (541,202)
Unrecognized net transition assets 292,574 336,259
Additional minimum liability - -
------------ -------------
Pension liability $ 467,073 $ 458,502
============ =============
Weighted average discount rate 7.25% 7.75%
Rate of increase in future compensation
levels, non-union employees 4.25% 4.5%
Expected long-term rate of return on
plan assets 9.0% 9.0%
</TABLE>
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
<PAGE>
charged to operations for fiscal 1997, 1996, and 1995 were
approximately $47,836, $66,648, and $29,933 respectively.
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.
NOTE 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 1997, 1996 or 1995 as listed
below:
Fiscal Year Sales
-----------------
Customer 1997 1996 1995
-------- ---- ---- ----
#1 $ 17,604,000 $ 12,246,000 $ 7,546,000
#2 $ 1,769,000 $ 2,077,000 $ 2,553,000
#3 $ 1,298,000 $ 1,449,000 $ 6,104,000
#4 $ 120,000 $ 1,392,000 $ 3,330,000
#5 $ 0 $ 1,379,000 $ 4,340,000
<PAGE>
<TABLE>
<CAPTION>
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
----------- --------- ----------------- ---------- ------
<S> <C> <C> <C>
Reserves deducted
from assets to
which it applies:
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
Year ended
August 27, 1995 $ 90,172 $ $ 35,172(1) $ 55,000
================= ================== ============= ==============
Year ended
August 25, 1996 $ 55,000 $ $ 5,000(1) $ 50,000
================= ================== ============= ==============
Year ended
August 28, 1997 $ 50,000 $ $ $ 50,000
================= ================== ============= ==============
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
August 27, 1995 $ 152,380 $ 334,051 $ 152,380(2) $ 334,051
================= ================== ============= ==============
Year ended
August 25, 1996 $ 334,051 $ 16,716 $ 334,051(2) $ 16,716
================= ================== ============= ==============
Year ended
August 28, 1997 $ 16,716 $ 155,342 $ 16,716(2) $ 155,342
================= ================== ============= ==============
</TABLE>
(1) Receivables determined to be uncollectible are charged against reserves,
net of collections on accounts previously written off.
(2) Write-off of excess or obsolete inventory.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements Form
S-8 (Nos. 2-75087, 33-19650 and 33-58565) of our report dated October 10, 1997,
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 31, 1997.
ERNST & YOUNG LLP
Minneapolis, Minnesota
November 20, 1997
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 31, 1997.
DELOITTE & TOUCHE LLP
November 20, 1997
Minneapolis, Minnesota
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 2,847,598
<SECURITIES> 0
<RECEIVABLES> 2,595,318
<ALLOWANCES> 50,000
<INVENTORY> 1,356,438
<CURRENT-ASSETS> 6,838,509
<PP&E> 21,691,605
<DEPRECIATION> 15,739,582
<TOTAL-ASSETS> 12,791,057
<CURRENT-LIABILITIES> 3,775,474
<BONDS> 2,671,153
0
0
<COMMON> 242,498
<OTHER-SE> 5,812,626
<TOTAL-LIABILITY-AND-EQUITY> 12,791,057
<SALES> 24,153,089
<TOTAL-REVENUES> 24,153,089
<CGS> 20,494,767
<TOTAL-COSTS> 20,494,767
<OTHER-EXPENSES> 1,745,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,707
<INCOME-PRETAX> 424,201
<INCOME-TAX> 41,800
<INCOME-CONTINUING> 1,584,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584,063
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.00
</TABLE>
