<PAGE>
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 30, 1998
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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the common shares held by non-affiliates of the
Registrant on November 9, 1998 (based upon the closing sale price of those
shares on the NASDAQ National Market System) was approximately $14,998,900.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 9, 1998 is 2,448,800.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 7, 1999 are incorporated by reference into Part III.
-------------------------------------------
This form 10-K Report consists of 33 pages (including exhibits); the index to
the exhibits is set forth on page 13.
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
--------------------------------------
ANNUAL REPORT ON FORM 10-K
--------------------------
YEAR ENDED AUGUST 30, 1998
--------------------------
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
declined as a major portion of Company revenues as
machining work for agricultural related markets and
other markets have been and 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.
2
<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 14%,
5% and 7% of total sales in fiscal 1996, 1997 and 1998,
respectively. Sales to the agricultural industry were
61%, 73% and 76% of total Company sales in fiscal years
1996, 1997 and 1998, respectively. The Company expects
that in fiscal 1999 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.
3
<PAGE>
(vii) Sales in excess of 10 percent of fiscal 1998
consolidated revenues were made to John Deere in
the amount of $18,128,000 or 76% of Company
revenues.
(viii) Approximate dollar backlog at August 30, 1998,
August 31, 1997 and August 25, 1996 was
$8,831,000, $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 30, 1998 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 30, 1998, the Registrant had 106
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 1998, 1997, and
1996 were not significant. See Note 7 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.
4
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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:
<TABLE>
<CAPTION>
Name Age Position
------------------ --- ----------------------------------
<S> <C> <C>
George J. Martin 61 Chairman of the Board
Michael J. Pudil 50 President, Chief Executive Officer,
and Director
Paul D. Sheely 39 Vice President, Treasurer,
and Assistant Secretary
Gerald E. Magnuson 68 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. Sheely joined the Company in September 1998 as Vice
President of Finance. From 1996 to 1998 he served as Chief
Financial Officer of Graseby Medical, Inc., a medical device
manufacturer of volumetric infusion pumps.
Mr. Magnuson has served as Secretary of the Company since
1961 and as a Director since 1962. He is a retired partner
of the law firm of Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota.
5
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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 NASDAQ National Market System under the symbol WSCI.
(c)
COMMON STOCK INFORMATION:
<TABLE>
<CAPTION>
Stock Price
----------------------
High Low
<S> <C> <C>
FISCAL 1998:
First quarter $6-1/2 $5-1/2
Second quarter 6 4-9/16
Third quarter 7-3/4 5-1/8
Fourth quarter 8 6-3/8
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
</TABLE>
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 9, 1998 there were 633 shareholders of
record of the Company's Common Stock.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 23,948 $ 24,153 $ 20,173 $ 30,409 $ 30,823
Cost of products sold 19,547 20,495 18,555 27,534 28,357
--------- --------- --------- --------- ----------
Gross margin 4,401 3,658 1,618 2,875 2,466
Selling and administrative expense 2,453 2,329 2,145 2,560 2,350
Provisions for plant closing - - - - 704
Pension curtailment (gain) - - - (254) -
Real estate sale (gain) - - - (890) -
Interest and other income (162) (583) (658) (109) (50)
Interest expense 190 286 492 645 765
--------- --------- --------- --------- ----------
Earnings (loss) from continuing
operations before taxes 1,920 1,626 (361) 923 (1,303)
Income tax expense (benefit) 46 42 6 (22) (14)
--------- --------- --------- --------- ----------
Net earnings (loss) $ 1,874 $ 1,584 $ (367) $ 945 $ (1,289)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Basic earnings (loss)
per common share $ .77 $ .65 $ (.15) $ .39 $ (.54)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Average number of common shares 2,434 2,425 2,411 2,446 2,382
Diluted earnings (loss) per common
and dilutive potential common share $ .73 $ .64 $ (.15) $ .37 $ (.54)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Average number of common
and dilutive potential
common shares 2,555 2,482 2,411 2,575 2,382
Additional information:
Financial Data:
Working capital $ 3,239 $ 3,241 $ 2,196 $ 2,740 $ 452
Total plant and equipment additions 2,102 507 1,694 2,086 299
Long-term debt 1,802 2,671 4,124 4,852 4,848
Total assets 13,615 12,791 11,573 13,265 16,434
Cash flow from operations 3,047 2,610 1,720 2,262 1,195
Stockholders' equity 7,995 6,055 4,453 4,711 3,704
Financial Ratios:
Current ratio 1.94:1 1.90:1 1.87:1 1.83:1 1.07:1
Percentage of long term debt to equity 23% 44% 93% 103% 131%
Book value per basic common share $ 3.26 $ 2.50 $ 1.85 $ 1.98 $ 1.55
Cash interest coverage 17.2:1 9.8:1 4.4:1 4.1:1 2.5:1
</TABLE>
7
<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 $3,239,000 on August 30, 1998 reflected a
slight decrease of $2,000 from the prior year. Larger fluctuations in working
capital included an increase in accounts payable and decrease in inventory
offset by decreases in current maturities of long-term debt and miscellaneous
accrued expenses and an increase in accounts receivable. The fiscal 1998
ratio of current assets to current liabilities increased to 1.94 to 1.0 from
1.90 to 1.0 for fiscal 1997.
Cash provided by operating activities in fiscal 1998 increased to $3,047,000.
Net earnings and non-cash charges for depreciation primarily accounted for cash
provided by operating activities. Cash provided by operations was $2,610,000 in
fiscal 1997 and $1,720,000 in fiscal 1996.
Additions to property, plant and equipment from cash were $2,102,000 in fiscal
1998 compared to $507,000 in 1997 and $1,694,000 in 1996 including $1,309,000
and $885,000 of machinery acquired through capital leases in 1998 and 1996,
respectively. The major 1998 capital expenditures consisted of the acquisition
of new machinery.
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.
The Company's total debt was $1,161,000 lower at August 30, 1998 than the
previous year-end. Term debt owed the bank was paid off in fiscal 1998 while
capital lease debt increased $683,000 to $2,511,000 at August 30, 1998.
At August 30, 1998 and August 31, 1997 the Company had available a line of
credit of $1,000,000.
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 1999.
RESULTS OF OPERATIONS:
Net sales of $23,948,000 decreased $205,000 or .8% from fiscal 1997 sales of
$24,153,000 but increased $3,774,000 or 19% from fiscal 1996 sales of
$20,174,000. Sales from 1997 to 1998 remained flat as certain manufacturing
programs were completed early in fiscal 1998 and thus did not have a full years
impact on sales. The primary increase in sales from fiscal 1996 resulted from
increased sales in the agribusiness market.
In fiscal 1998, the Company reported net earnings of $1,874,000 or $.73 per
share compared to net earnings of $1,584,000 of $.64 per share in 1997 and a net
loss of $(367,000) or $(.15) per share in 1996. 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 gross margin on parts sold in fiscal 1998 was 18.4% of sales compared to
15.1% of sales and 8.0% of sales in 1997 and 1996, respectively. The increase
in gross margin in 1998 can be primarily attributed to cost
8
<PAGE>
reductions related to lower headcount, reduced depreciation expense, and
increased manufacturing efficiencies.
Selling and administrative expense of $2,453,000 in fiscal 1998 was an increase
of $123,000 and $307,000 from fiscal years 1997 and 1996, respectively. The
increase from fiscal 1996 to 1998 was related to performance based compensation,
depreciation and maintenance of new computer equipment and increased costs of
selling efforts including attendance at trade shows. The increase from fiscal
1997 to 1998 is primarily related to an increased level of purchased services
resulting from acquisition related activities.
Interest and other income of $162,000 was $421,000 lower in fiscal 1998 than
1997, and $496,000 lower than 1996 primarily due to the gain on the disposition
of excess equipment that occurred in each of those prior years.
Interest and other expense of $190,000 in fiscal 1998 was $96,000 lower than
1997 and $302,000 lower than 1996 because of lower debt levels and lower
interest rates.
Income tax expense is significantly less than the statutory amount due to the
utilization of net operating loss carryforwards in each of fiscal 1998 and 1997.
A valuation allowance was recorded against the benefit of the loss incurred in
fiscal 1996 due to the uncertainty of realization.
See Notes to Consolidated Financial Statements regarding recent accounting
standards to be adopted.
YEAR 2000 COMPLIANCE:
The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the applicable year, which may prevent such systems from
accurately processing dates ending in the year 2000 and beyond. This could
result in computer system failures or disruption of operations, including, but
not limited to, an inability to process transactions, to send and receive
electronic data, or to engage in routine business and production activities.
The Company has completed its initial assessment of all currently used computer
and network systems as well as its precision machining production equipment and
has developed a plan to correct those areas that will be affected by the year
2000 issue. The Company's plan includes replacement or upgrades of certain
computer hardware and software. The Company will utilize outside vendors to
assist in the upgrade of certain computer systems. For its precision machining
equipment, the Company has received written assurance from the equipment
manufacturers as to year 2000 compliance of their machines. The Company is also
developing a limited testing plan that will test the equipment's ability to
maintain operations in the year 2000. The Company estimates that it is 75%
complete with respect to its major computer systems and 85% complete with
respect to its precision machining equipment in its compliance programs. The
Company's goal is to be substantially year 2000 compliant by the end of fiscal
1999.
In addition to reviewing its internal systems, the Company has begun formal
communications with its significant vendors concerning Year 2000 compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an adverse
impact on the Company's operations, financial condition and results of
operations. The Company does not believe that its products involve any material
Year 2000 risks.
9
<PAGE>
The Company presently anticipates that the costs associated with addressing the
year 2000 issues compliance will not have a material adverse impact on the
Company's financial condition, results of operations or liquidity. Present
estimated costs for the Company's compliance programs are less than $25,000.
The Company anticipates that it will complete its Year 2000 assessment and
compliance programs by the end of fiscal 1999. However, there can be no
assurance the Company will be successful in implementing its programs according
to the anticipated schedule. In addition, the Company may be adversely affected
by the inability of other companies whose systems interact with the Company to
become Year 2000 compliant and by potential interruptions of utility,
communication or transportation systems as a result of Year 2000 issues.
Although it expects its internal computer and manufacturing systems to be Year
2000 compliant as described above, the Company intends to prepare a contingency
plan that will specify what it plans to do if it or important external companies
are not Year 2000 compliant in a timely manner. The Company expects to prepare
its contingency plan during calendar year 1999.
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.
10
<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):
<TABLE>
<CAPTION>
Basic Diluted
Net Gross Net Earnings Earnings
Sales Margin Earnings Per Share Per Share
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
First quarter $ 5,313,700 $ 805,076 $ 246,793 $ .11 $ .10
Second quarter 5,677,479 1,125,910 497,971 .20 .20
Third quarter 6,634,918 1,302,627 569,395 .23 .22
Fourth quarter 6,322,019 1,167,367 559,925 .23 .22
FISCAL 1997:
First quarter $ 5,590,588 $ 776,868 $ 616,788(a) $ .25 $ .25
Second quarter 5,770,920 888,703 219,048 .09 .09
Third quarter 6,673,338 1,036,850 360,026 .15 .15
Fourth quarter 6,118,243 955,901 388,201 .16 .15
</TABLE>
(a) Includes gain from sale of equipment in the amount of
$410,000.
11
<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 30, 1998, and such
information required by such items is incorporated herein by
reference from the proxy statement.
12
<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 31
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.
13
<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 Consent of Ernst & Young LLP. 32
27 Financial Data Schedule. 33
(b) Reports on Form 8-K.
None
14
<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/ Paul D. Sheely
----------------------------------
Paul D. Sheely
Vice President and Treasurer
DATE: November 20, 1998
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, Chief Executive Officer, November 20, 1998
- ----------------------- Director
Michael J. Pudil
/s/ Paul Baszucki Director November 20, 1998
- -----------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 20, 1998
- -----------------------
Melvin L. Katten
/s/ Gerald E. Magnuson Director November 20, 1998
- -----------------------
Gerald E. Magnuson
/s/ George J. Martin Director November 20, 1998
- -----------------------
George J. Martin
/s/ Eugene J. Mora Director November 20, 1998
- -----------------------
Eugene J. Mora
15
<PAGE>
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 17
Consolidated Balance Sheets - August 30, 1998 and August 31, 1997 18
Consolidated Statements of Operations - Years Ended August 30, 1998,
August 31, 1997 and August 25, 1996 19
Consolidated Statements of Stockholders' Equity - Years Ended
August 30, 1998, August 31, 1997, August 25, 1996 20
Consolidated Statements of Cash Flows - Years Ended August 30, 1998,
August 31, 1997, August 25, 1996 21
Notes to Consolidated Financial Statements 22
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 31
16
<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 30, 1998 and August
31, 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years ended August 30, 1998, August
31, 1997 and August 26, 1996. 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.
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 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 30, 1998 and August
31, 1997, and the consolidated results of their operations and their cash flows
for the years ended August 30, 1998, August 31, 1997 and August 25, 1996, 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
Minneapolis, Minnesota
October 2, 1998
17
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 30, 1998 AND AUGUST 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,697,104 $ 2,847,598
Accounts receivable, less allowance for doubtful
accounts of $25,000 at August 30, 1998 and
$50,000 at August 31, 1997, respectively 2,852,604 2,545,318
Inventories 919,418 1,356,438
Prepaid and other current assets 207,100 89,680
----------- -------------
Total current assets 6,676,226 6,839,034
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 3):
Land 66,906 66,906
Buildings and improvements 5,186,144 5,171,671
Machinery and equipment 18,378,615 16,453,028
----------- -------------
23,631,665 21,691,605
Less accumulated depreciation 16,693,157 15,739,582
----------- -------------
Total property, plant, and equipment 6,938,508 5,952,023
----------- -------------
$13,614,734 $ 12,791,057
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,535,451 $ 1,153,995
Accrued compensation and employee withholdings 709,782 681,102
Accrued real estate taxes 170,505 190,850
Miscellaneous accrued expenses 312,982 571,081
Current portion of long-term debt (Note 2) 708,949 1,000,679
----------- -------------
Total current liabilities 3,437,669 3,597,707
Long-term debt, less current portion (Note 2) 1,802,072 2,671,153
Long-term pension liability (Note 6) 380,073 467,073
COMMITMENTS (Note 3)
STOCKHOLDERS' EQUITY (Note 4):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,448,800 and 2,428,980 shares, respectively 244,880 242,898
Capital in excess of par value 1,592,515 1,528,785
Retained earnings 6,157,525 4,283,441
----------- -------------
Total stockholders' equity 7,994,920 6,055,124
----------- -------------
$13,614,734 $ 12,791,057
----------- -------------
----------- -------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997, AND AUGUST 25, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 7) $ 23,948,116 $ 24,153,089 $ 20,173,508
Cost of products sold 19,547,136 20,494,767 18,555,266
------------- ------------- ------------
Gross margin 4,400,980 3,658,322 1,618,242
Selling and administrative expense 2,452,496 2,328,808 2,144,962
Interest and other income (161,753) (583,056) (658,158)
Interest expense 190,353 286,707 492,328
------------- ------------- ------------
2,481,096 2,032,459 1,979,132
------------- ------------- ------------
Profit (loss) before income taxes 1,919,884 1,625,863 (360,890)
Income tax expense (Note 5) 45,800 41,800 5,800
------------- ------------- ------------
Net earnings (loss) $ 1,874,084 $ 1,584,063 $ (366,690)
------------- ------------- ------------
------------- ------------- ------------
Basic earnings (loss) per common share $ .77 $ .65 $ (.15)
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings per common and dilutive
potential common share $ .73 $ .64 $ (.15)
------------- ------------- ------------
------------- ------------- ------------
Weighted average number of common
shares outstanding 2,434,125 2,424,922 2,410,837
------------- ------------- ------------
------------- ------------- ------------
Weighted average number of common and
dilutive potential common shares 2,555,518 2,481,873 2,410,837
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TOTAL
--------------------- IN EXCESS RETAINED STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
------ ------ ------------ -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 27, 1995 2,384,651 $ 238,465 $1,406,299 $3,066,068 $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 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
---------- ----------- ----------- ---------- ----------
Net earnings - - - 1,874,084 1,874,084
Exercise of stock options 19,820 1,982 63,730 - 65,712
---------- ----------- ----------- ---------- ----------
BALANCE AT AUGUST 30, 1998 2,448,800 $ 244,880 $1,592,515 $6,157,525 $7,994,920
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997, AND AUGUST 25, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,874,084 $ 1,584,063 $ (366,690)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,115,529 1,365,863 2,038,939
Gain on sale of property, plant, and equipment
and other assets - (508,365) (594,300)
Increase (decrease) in pension liability (87,000) 8,571 47,289
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (307,286) (676,376) 1,866,516
Inventories 437,020 (257,825) (474,375)
Prepaid and other current assets (117,420) 34,031 70,840
(Decrease) increase in accounts payable and accrued expenses 131,692 1,013,105 (868,092)
------------- ------------ -------------
Net cash provided by operating activities 3,046,619 2,563,067 1,720,127
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (793,497) (507,002) (809,224)
Proceeds from sale of equipment and other assets - 536,720 644,000
Proceeds on note receivable - - 217,402
------------- ------------ -------------
Net cash provided by (used in) investing activities (793,497) 29,718 52,178
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (2,469,328) (1,405,926) (1,498,539)
Issuance of common stock 65,712 18,000 108,920
------------- ------------ -------------
Net cash used in financing activities (2,403,616) (1,387,926) (1,389,619)
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (150,494) 1,204,859 382,686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,847,598 1,642,739 1,260,053
------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,697,104 $ 2,847,598 $ 1,642,739
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 192,071 $ 297,123 $ 509,561
Income taxes 71,777 5,800 5,800
Noncash investing and financing activities:
Acquisition of machinery through capital lease 1,308,517 - 885,330
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997, AND AUGUST 25, 1996
- -------------------------------------------------------------------------------
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 1998 and 1996 each consisted of 52 weeks. Fiscal
1997 consisted of 53 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 $155,000 at
August 30, 1998 and August 31, 1997, respectively. Inventories consist
primarily of work-in-process.
DEPRECIATION - The cost of buildings and substantially all equipment is
being depreciated using the straight-line method. The estimated useful
lives of the assets are as follows:
Buildings and improvements 15 to 32 years
Machinery and equipment 3 to 10 years
Transportation equipment 3 to 5 years
The Company evaluates long-term assets on a periodic basis in compliance
with Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The adoption of this Statement in
fiscal 1997 did not have a material impact on the Company's financial
position, results of operations or liquidity.
INCOME TAXES - The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary differences
between the financial reporting and tax bases of assets and liabilities.
REVENUE RECOGNITION - Revenues from sales of product are recorded upon
shipment. The Company performs periodic credit evaluations of its
customers' financial condition. Credit losses relating to customers have
been minimal and within management's expectations.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the amounts
22
<PAGE>
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share, requiring dual presentation of basic earnings per share
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average shares outstanding. Diluted
earnings per share is calculated by dividing net income by the weighted
average diluted shares outstanding, which includes the dilutive effect of
options outstanding. SFAS No. 128 was adopted by the Company on August 30,
1998. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to SFAS No. 128 requirements.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB
issued Statement 130, "Reporting Comprehensive Income." Statement 130 is
effective for financial statements for fiscal years beginning after
December 15, 1997. This standard defines comprehensive income as the
changes in equity of an entity except those resulting from shareholder
transactions. All components of comprehensive income are required to be
reported in a new financial statement. The adoption of Statement 130 is not
expected to have a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 is
effective for financial statements for periods beginning after December 31,
1997. Statement 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. The
adoption of Statement 131 is not expected to have a material effect on the
Company's financial statements.
In February 1998, the FASB issued Statement 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits". Statement No. 132
modifies the disclosure requirements for pensions and other postretirement
benefits, but does not change the measurement or recognition of those
plans. Statement 132 is effective for financial statements for periods
beginning after December 15, 1997. The adoption of Statement 132 is not
expected to have a material effect on the Company's financial statements.
RECLASSIFICATION - Certain prior year items have been reclassified to
conform to the current year presentation.
23
<PAGE>
2. DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
August 30, August 31,
1998 1997
---- ----
<S> <C> <C>
Bank term debt $ - $ 1,844,117
Capitalized lease obligations (Note 3) 2,511,021 1,827,715
------------ ------------
2,511,021 3,671,832
Less current portion 708,949 1,000,679
------------ ------------
Long-term debt $ 1,802,072 $ 2,671,153
------------ ------------
------------ ------------
</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 required principal payments of $37,500
per month with the loan balance due at March 31, 2000. At August 30, 1998,
the balance of term debt was $0. Interest on the term debt is calculated
at the bank's base rate (8.5% at August 30, 1998 and August 31, 1997) plus
1.75%.
Interest on the line of credit is at the bank's base rate plus 0.5
percentage points for August 30, 1998 and August 31, 1997 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 30, 1998, and August 31, 1997 there was no balance
outstanding on the line of credit.
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 30, 1998, the Company was in
compliance with the various covenants of the credit agreement.
The notes, line of credit and capital leases are collateralized by the
receivables, inventories, and property, plant, and equipment of the
Company.
3. COMMITMENTS
LEASES - Included in the consolidated balance sheet at August 30, 1998 are
cost and accumulated depreciation on equipment subject to capitalized
leases of $4,526,435 and $1,826,568, respectively. At August 30 1997, the
amounts were $3,175,430 and $1,259,878, respectively.
24
<PAGE>
The present value of the net minimum payments on capital leases as of
August 30, 1998 is as follows:
<TABLE>
<CAPTION>
Capital
Leases
------------
<S> <C>
Fiscal years ending August:
1999 $ 898,138
2000 621,806
2001 415,292
2002 415,292
2003 294,588
Thereafter 388,453
------------
Total minimum lease payments 3,033,569
Less amount representing interest 522,548
------------
Present value of net minimum lease payments 2,511,021
Current portion 708,949
------------
Capital lease obligation, less current portion $ 1,802,072
------------
------------
</TABLE>
4. STOCK OPTIONS
STOCK OPTIONS - In fiscal 1988, the 1987 stock option plan was approved and
175,000 shares of common stock were reserved for granting of options to
officers, key employees, and directors. No shares remain available for
grant from this plan since the term of grant is limited to ten years from
the date of the plan.
In fiscal 1995, the 1994 stock option plan was approved and 250,000 shares
of common stock were reserved for granting of options to officers, key
employees, and directors. At August 30, 1998, 107,666 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 30, 1998.
25
<PAGE>
Option transactions during the three years ended August 30, 1998 are
summarized as follows:
<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 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
Granted - - - 25,000 4.75
Lapsed - - - - (9,666) 4.03
Exercised - - (12,000) 3.01 (8,334) 3.85
------- ------- --------
Outstanding at August 30, 1998 - - 128,000 $ 2.32 134,000 $ 4.58
------- ------- --------
Options exercisable at August 30, 1998 - $ - 128,000 $ 2.32 71,504 $ 4.34
------- ------- --------
------- ------- --------
</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 1998, fiscal 1997 and fiscal 1996 as set
forth in the table below. The estimated fair value of the options is
amortized to expense over the options' vesting period.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 43.9% 38.9% 38.9%
Risk free interest rate 5.5% 6.38% 6.38%
Expected term 5 years 5 years 10 years
</TABLE>
26
<PAGE>
The Company's net income and income per share would be adjusted to the pro
forma amounts as follows:
<TABLE>
<CAPTION>
Years ended
---------------------------------------------------
August 30, 1998 August 31, 1997 August 25, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Income (loss):
As reported $ 1,874,084 $ 1,584,063 $ (366,690)
Pro forma $ 1,738,962 $ 1,550,636 $ (377,938)
Income (loss) per basic common share:
As reported $ .77 $ .65 $ (.15)
Pro forma $ .71 $ .64 $ (.16)
Income (loss) per diluted common share:
As reported $ .73 $ .64 $ (.15)
Pro forma $ .68 $ .62 $ (.16)
</TABLE>
The pro forma impact is not indicative of future periods, as a result of
the phase-in provision of SFAS 123.
As of August 30, 1998, there were 113,000 options outstanding with exercise
prices between $2.00 and $2.13, 99,000 options outstanding with exercise
prices between $3.50 and $4.75, and 50,000 options outstanding with an
exercise price of $5.63. At August 30, 1998, outstanding options had a
weighted-average remaining contractual life of 6.3 years.
The number of options exercisable as of August 30, 1998, August 31, 1997
and August 25, 1996 were 199,504, 168,000, and 149,336 respectively, at
weighted average share prices of $3.04, $2.60, and $2.28 per share,
respectively.
The weighted average fair value of options granted during the years ended
August 30, 1998, August 31, 1997, and August 25, 1996 was $2.82, $2.83, and
$2.29 per share, respectively.
5. INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
August 30 August 31, August 25,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ 40,000 $ 36,000 -
State 5,800 5,800 $ 5,800
----------- ----------- ----------
$ 45,800 41,800 5,800
Deferred:
Federal - - -
State - - -
----------- ----------- ----------
Total $ 45,800 $ 41,800 $ 5,800
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
27
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
August 30, August 31, August 25,
1998 1997 1996
---- ---- ----
<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 tax benefit 0.2 0.2 1.6
Impact of graduated income tax (1.0) (1.0) 1.0
Other 2.2 2.4 -
------ ------ ------
Taxes provided 2.4% 2.6% 1.6%
------ ------ ------
------ ------ ------
</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 30, Year ended August 31,
1998 1997
---------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued liabilities $ 170,424 $ 198,232
Inventory valuation accruals 52,700 52,816
Net operating loss carryforwards 700,224 1,281,593
Tax credit carryforwards 524,599 505,750
Contribution carryforwards 55,545 5,747
Other 9,360 56,251
---------------------------------------------
1,512,852 2,100,389
DEFERRED TAX LIABILITIES
Tax depreciation less than book 259,824 184,330
---------------------------------------------
Net deferred tax assets 1,253,028 1,916,059
Valuation allowance (1,253,028) (1,916,059)
---------------------------------------------
$ - $ -
---------------------------------------------
---------------------------------------------
</TABLE>
As of August 30, 1998, the Company had federal, Minnesota, and California
state income tax net operating loss carryforwards of approximately
$2,059,000, $60,000, and $644,000, respectively, of which most will expire
in fiscal years 2008 and 2009. Also as of August 30, 1998, the Company had
$478,000 in federal alternative minimum tax (AMT) credit carryforward and
approximately $46,000 in other credit carryforward. The AMT credits are
available to offset future tax liabilities only to the extent that the
Company has regular tax liabilities in excess of AMT tax liabilities.
6. EMPLOYEE BENEFITS
The Company 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
28
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 128,068 $ 141,872 $ 152,055
Interest cost on projected benefit obligation 461,123 472,272 461,780
Actual return on plan assets (18,369) (1,502,308) (685,255)
Net amortization and deferral (657,893) 896,735 118,709
------------ ------------ -----------
Net periodic pension cost $ (87,071) $ 8,571 $ 47,289
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The funded status of the plans and the amount recognized on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
August 31, 1998 August 30, 1997
----------------- ----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 6,906,823 $ 5,989,955
Nonvested benefits 202,955 170,325
------------ --------------
Accumulated benefit obligations 7,109,778 6,160,280
Effect of projected future compensation
increases 218,397 203,575
------------ --------------
Projected benefit obligations 7,328,175 6,363,855
Plan assets at fair value 7,626,174 7,956,391
------------ --------------
Plan assets (in excess of) less than projected
benefit obligations (297,999) (1,592,536)
Unrecognized net gain (loss) 1,070,750 2,181,438
Unrecognized prior-service cost (641,638) (414,403)
Unrecognized net transition assets 248,960 292,574
------------ --------------
Pension liability $ 380,073 $ 467,073
------------ --------------
------------ --------------
Weighted average discount rate 7.00% 7.25%
Rate of increase in future compensation
levels, non-union employees 4.25% 4.25%
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.
29
<PAGE>
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 by the Board of Directors. Contributions
charged to operations for fiscal 1998, 1997 and 1996, were approximately
$51,710, $47,836, and $66,648, respectively.
7. 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 1998, 1997 or 1996 as listed below:
<TABLE>
<CAPTION>
Fiscal Year Sales
-------------------------------------------------------------------
Customer 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
#1 $ 18,128,000 $ 17,604,000 $ 12,246,000
#2 $ 1,666,000 $ 1,298,000 $ 1,449,000
#3 $ 182,000 $ 1,769,000 $ 2,077,000
#4 $ 0 $ 120,000 $ 1,392,000
#5 $ 0 $ 0 $ 1,379,000
</TABLE>
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income (loss) $ 1,874,084 $ 1,584,063 $ (366,690)
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,434,125 2,424,922 2,410,837
Effect of dilutive securities;
employee and nonemployee options 121,393 56,951 0
------------ ------------ -----------
Dilutive common shares;
denominator for diluted earnings
per share 2,555,518 2,481,873 2,410,387
Basic earnings (loss) per share $ .77 $ .65 $ (.15)
------------ ------------ -----------
------------ ------------ -----------
Dilutive earnings (loss) per share $ .73 $ .64 $ (.15)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
30
<PAGE>
WASHINGTON SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE AT NET ADDITIONS BALANCE AT
BEGINNING CHARGED TO NET END OF
DESCRIPTION OF PERIOD COST AND EXPENSES DEDUCTIONS PERIOD
----------- ---------- ------------------ ----------- -------
<S> <S> <C> <C> <C>
Reserves deducted
from assets to
which it applies:
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
Year ended
August 25, 1996 $ 55,000 $ $ 5,000 (1) $ 50,000
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Year ended
August 31, 1997 $ 50,000 $ $ $ 50,000
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Year ended
August 30, 1998 $ 50,000 $ $ 25,000 (3) $ 25,000
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
Year ended
August 25, 1996 $ 334,051 $ 16,716 $ 334,051 (2) $ 16,716
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Year ended
August 31, 1997 $ 16,716 $ 155,342 $ 16,716 (2) $ 155,342
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Year ended
August 30, 1998 $ 155,342 $ $ 342 (2) $ 155,000
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
</TABLE>
(1) Receivables determined to be uncollectible are charged against reserves,
net of collections on accounts previously written off.
(2) Write-offs of excess or obsolete inventory.
(3) Level of reserve reduced due to management assessment of exposure to
potential write-offs.
31
<PAGE>
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 2, 1998,
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 30, 1998.
ERNST & YOUNG LLP
Minneapolis, Minnesota
November 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1998
<PERIOD-END> AUG-30-1998
<CASH> 2,697,104
<SECURITIES> 0
<RECEIVABLES> 2,877,604
<ALLOWANCES> 25,000
<INVENTORY> 919,418
<CURRENT-ASSETS> 6,676,226
<PP&E> 23,631,665
<DEPRECIATION> 16,693,157
<TOTAL-ASSETS> 13,614,734
<CURRENT-LIABILITIES> 3,437,669
<BONDS> 1,802,072
0
0
<COMMON> 244,880
<OTHER-SE> 7,750,040
<TOTAL-LIABILITY-AND-EQUITY> 13,614,734
<SALES> 23,948,116
<TOTAL-REVENUES> 23,948,116
<CGS> 19,547,136
<TOTAL-COSTS> 19,547,136
<OTHER-EXPENSES> 2,290,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,353
<INCOME-PRETAX> 1,919,884
<INCOME-TAX> 45,800
<INCOME-CONTINUING> 1,874,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,874,084
<EPS-PRIMARY> .77
<EPS-DILUTED> .73
</TABLE>
