<PAGE> 1
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 29, 1999
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
WSI INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0691607
- --------------------------------------------- -------------------
(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 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 8, 1999 (based upon the closing sale price of those
shares on the NASDAQ National Market System) was approximately $8,605,000.
Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 8, 1999 is 2,458,425.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 6, 2000 are incorporated by reference into Part III.
-------------------------------------
This form 10-K Report consists of 43 pages (including exhibits); the index to
the exhibits is set forth on page 15.
<PAGE> 2
WSI INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 29, 1999
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, the aerospace industry and construction markets
have been and are expected to be of greater importance to
the Company in the future.
On February 15, 1999, the Company purchased Taurus Numeric
Tool, Inc. ("Taurus") for approximately $7.2 million, with
$5.5 million being paid in cash and bank debt and an
additional $1.7 million being in the form of a Subordinated
Promissory Note to the prior owner. Taurus is a precision
contract machining company that sells primarily to the
aerospace and avionics markets. In calendar year 1998 prior
to the acquisition, Taurus had approximately $7.6 million in
sales.
On August 6, 1999, the Company purchased Bowman Tool &
Machining, Inc. ("Bowman") for approximately $7.6 million,
with $6.8 million being paid by additional debt and $844,000
being paid in the form of a Subordinated Promissory Note to
the prior owner of Bowman. Bowman is a precision contract
machining company serving the construction industry. In the
year ended July 31, 1999 prior to the acquisition, Bowman
had approximately $8.5 million in sales.
The acquisitions were completed as a result of the Company's
publicly stated objective of diversifying the markets that
its serves.
After its fiscal year end, the Company announced that it was
consolidating all of its manufacturing operations into its
facilities at Taurus and Bowman. The consolidation would
result in the Company closing its Long Lake, Minnesota
facility. The initiative will place the Company in closer
proximity to its major customers as well as reduce its
overhead structure and optimize plant capacity.
Contract manufacturing constitutes the Company's business.
2
<PAGE> 3
(b) Financial information about industry segments:
As noted above, the Company's business is now conducted in a
single industry segment--contract manufacturing.
(c) Narrative description of the business:
(1)(i) The principal products and services of the
Company are set forth below.
The Company manufactures metal components in medium to high
volumes requiring tolerances as close as one ten-thousandth
(.0001) of an inch. These components are manufactured in
accordance with customer specifications using materials
generally purchased by the Company, but occasionally
supplied by the customer. The major markets served by the
Company have changed in the past several years because of
declining requirements in several mature computer programs
and the Company's effort to diversify its customer and
market base. Company sales to the computer industry amounted
to 5%, 7% and 6% of total sales in fiscal 1997, 1998 and
1999, respectively. Sales to the agricultural industry were
73%, 76% and 53% of total Company sales in fiscal years
1997, 1998 and 1999, respectively. Sales to the recreational
vehicle and aerospace/avionics markets totaled 13% and 12%
respectively in fiscal 1999. The Company expects that in
fiscal 2000 a much smaller portion of its sales will be to
the agricultural industry due to its recent acquisitions and
continued 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.
(vi) The Company does not believe that its business demands
unusual working capital requirements.
3
<PAGE> 4
(vii) Sales in excess of 10 percent of fiscal 1999
consolidated revenues were made to Deere & Co. in the
amount of $11,748,000 or 55% of Company revenues.
Sales were also made to Polaris Industries and
Rockwell in the amount of $2,884,000 and $2,682,000
or 13% and 12% of Company sales, respectively.
(viii) Approximate dollar backlog at August 29, 1999, August
30, 1998, and August 31, 1997 was $16,032,000,
$8,831,000, and $6,395,000, 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 29, 1999 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 29, 1999, the Registrant had 153 employees,
65 of whom were subject to a union contract.
(d) Financial information about foreign and domestic operations
and export sales:
The Company has no operations in any foreign country. The
Company's export sales in fiscal 1999, 1998, and 1997 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 leases two other production facilities that are
located in Osseo, Minnesota and Rochester, Minnesota. The
Rochester facility is approximately 38,000 square feet and is
leased for one year with options to renew. The Osseo facility is
approximately 28,000 square feet and is leased for three years
with options to renew.
4
<PAGE> 5
The Company considers its manufacturing equipment, facilities,
and other physical properties to be suitable and adequate to meet
the requirements of its business.
As stated in Item 1(a), the Company intends on closing its Long
Lake, Minnesota building which will result in the anticipated
sale of the property.
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 62 Chairman of the Board
Michael J. Pudil 51 President, Chief Executive Officer, and Director
Paul D. Sheely 40 Vice President, Treasurer, and Assistant Secretary
Gerald E. Magnuson 69 Secretary and Director
</TABLE>
Mr. Martin was engaged as Chairman of the Board on July 28, 1993
and previously served as the Company's Chief Executive Officer
from December 1983 to January 1985 and on an interim basis from
July 1993 to November 1993. Mr. Martin was the President, Chief
Executive Officer and Chairman of PowCon, Incorporated, a
manufacturer of electronic welding systems, from 1987 to October
1995. Mr. Martin now serves as an independent consultant.
Mr. Pudil was elected President, Chief Executive Officer, and a
Director of the Company on November 4, 1993. During the prior
nine years, Mr. Pudil served as General Manager and Vice
President and General Manager of the Production Division for
Remmele Engineering, Inc. Remmele Engineering is a contract
manufacturer primarily involved in machining metal.
Mr. Sheely joined the Company in September 1998 as Vice President
of Finance. From 1996 to 1998 he served as Chief Financial
Officer of Graseby Medical, Inc., a medical device manufacturer
of volumetric infusion pumps.
Mr. Magnuson has served as Secretary of the Company since 1961
and as a Director since 1962. He is a retired partner of the law
firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
5
<PAGE> 6
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 1999:
First quarter $6-11/16 $5-1/2
Second quarter 6 4-13/16
Third quarter 5-3/16 2-3/4
Fourth quarter 4-5/8 2-7/8
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
</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 8, 1999 there were 615 shareholders of
record of the Company's Common Stock.
6
<PAGE> 7
Item 6. Selected Financial Data:
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 21,550 $ 23,948 $ 24,153 $ 20,173 $ 30,409
Cost of products sold 18,279 19,547 20,495 18,555 27,534
-------- -------- -------- -------- --------
Gross margin 3,271 4,401 3,658 1,618 2,875
Selling and administrative expense 2,661 2,453 2,329 2,145 2,560
Pension curtailment (gain) -- -- -- -- (254)
Real estate sale (gain) -- -- -- -- (890)
Interest and other income (158) (162) (583) (658) (109)
Interest expense 481 190 286 492 645
-------- -------- -------- -------- --------
Earnings (loss) from continuing
operations before taxes 287 1,920 1,626 (361) 923
Income tax expense (benefit) 26 46 42 6 (22)
-------- -------- -------- -------- --------
Net earnings (loss) $ 261 $ 1,874 $ 1,584 $ (367) $ 945
======== ======== ======== ======== ========
Basic earnings (loss)
per common share $ .11 $ .77 $ .65 $ (.15) $ .39
======== ======== ======== ======== ========
Average number of common shares 2,452 2,434 2,425 2,411 2,446
Diluted earnings (loss) per common
and dilutive potential common share $ .10 $ .73 $ .64 $ (.15) $ .37
======== ======== ======== ======== ========
Average number of common
and dilutive potential
common shares 2,527 2,555 2,482 2,411 2,575
Additional information:
Financial Data:
Working capital $ 1,411 $ 3,239 $ 3,241 $ 2,196 $ 2,740
Total plant and equipment additions 1,238 2,102 507 1,694 2,086
Long-term debt 10,666 1,802 2,671 4,124 4,852
Total assets 24,525 13,615 12,791 11,573 13,265
Cash flow from operations 2,641 3,047 2,610 1,720 2,262
Stockholders' equity 8,264 7,995 6,055 4,453 4,711
Financial Ratios:
Current ratio 1.27:1 1.94:1 1.90:1 1.87:1 1.83:1
Percentage of long term debt to equity 129% 23% 44% 93% 103%
Book value per basic common share $ 3.37 $ 3.28 $ 2.50 $ 1.85 $ 1.98
</TABLE>
7
<PAGE> 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
LIQUIDITY AND CAPITAL RESOURCES:
As discussed in Item 1., the Company purchased both Taurus Numeric Tool, Inc.
and Bowman Tool & Machining, Inc. during the fiscal year. The Taurus acquisition
was valued at approximately $7.2 million, $2.3 million of which came from the
Company's cash, $3.2 from new term debt obtained from the Company's bank, and
$1.7 million from a Subordinated Promissory Note with the seller of Taurus. As a
result of the acquisition, the Company acquired approximately $2.5 million of
working capital. During the period between the date of the Taurus acquisition to
the Bowman acquisition, the Company paid down $1.5 million of the bank term debt
originally borrowed at the closing of the Taurus acquisition.
The Bowman acquisition was valued at approximately $7.6 million, $2.7 million of
which came from additional term debt from the Company's bank, $2.5 million from
a mortgage from the same bank, $1.3 million from the Company's Revolving Line of
Credit, $844,000 from a Subordinated Promissory Note to the seller of Bowman and
approximately $500,000 to be paid in Fiscal 2000 to the seller for tax
considerations. As a result of the acquisition, the Company acquired
approximately $1.2 million in working capital.
The Company's working capital of $1,411,000 on August 29, 1999 reflected a
decrease of $1,828,000 from the prior year. Larger fluctuations in working
capital of the Company's Long Lake operation included a decrease in cash and
accounts receivable along with an increase in current maturities of long-term
debt offset by an increase in inventory and a decrease in accounts payable.
Working capital was also affected by the purchase of Bowman and Taurus as
described above. The fiscal 1999 ratio of current assets to current liabilities
decreased to 1.27 to 1.0 from 1.94 to 1.0 for fiscal 1998.
Cash provided by operating activities in fiscal 1999 was $2,641,000. Non-cash
charges for depreciation and amortization as well as changes in elements of
working capital primarily accounted for the cash provided by operating
activities. Cash provided by operations was $3,047,000 in fiscal 1998 and
$2,563,000 in fiscal 1997.
Additions to property, plant and equipment were $1,238,000 in fiscal 1999
compared to $2,102,000 in 1998 and $507,000 in 1997 including $980,000 and
$1,390,000 of machinery acquired through capital leases in 1999 and 1998,
respectively. The major 1999 capital expenditures consisted of the acquisition
of new production equipment.
Proceeds from the sale of equipment amounted to $57,000 in fiscal 1999 and
$537,000 in fiscal 1997 which primarily resulted from disposition of excess
equipment related to completed and discontinued manufacturing programs.
The Company's total debt was $12,108,000 at August 29, 1999 and consisted of
$4,400,000 of bank Term Debt, a $2,500,000 mortgage, seller subordinated notes
of $2,507,000 and capital lease obligations of $2,701,000.
At August 29, 1999 and August 30, 1998 the Company had available a line of
credit of $3,000,000 and $1,000,000, respectively. At August 29, 1999, the
outstanding balance on the line was $280,000 while there was no balance owed at
August 30, 1998.
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 2000.
8
<PAGE> 9
RESULTS OF OPERATIONS:
Net sales of $21,550,000 decreased $2,398,000 or 10% from fiscal 1998 sales of
$23,948,000 and $2,603,000 or 11% from fiscal 1997 sales of $24,153,000.
However, comparable sales decreased at the Company's Long Lake operations by 24%
and 25% versus 1999 and 1998, respectively, due primarily to lower sales in the
agribusiness market. The Company also recorded sales from its acquired
subsidiaries in the amount of $3,006,000 and $423,000, for Taurus and Bowman,
respectively.
In fiscal 1999, the Company reported net earnings of $261,000 or $.10 per share
compared to net earnings of $1,874,000 or $.73 per share in 1998 and $1,584,000
or $.64 per share in 1997. 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 gross margin on parts sold in fiscal 1999 was 15.2% of sales compared to
18.4% of sales and 15.1% of sales in 1998 and 1997, respectively. The decrease
in gross margin in 1999 can be primarily attributed to volume inefficiencies
related to lower agribusiness sales offset by generally higher margins at Taurus
and Bowman.
Selling and administrative expense of $2,661,000 in fiscal 1999 was an increase
of $208,000 and $332,000 from fiscal years 1998 and 1997, respectively. For both
fiscal 1998 and 1997 the increase was related to the addition of Taurus and
Bowman expenses offset by lower performance based compensation.
Interest and other income of $158,000 was $4,000 lower in fiscal 1999 than 1998,
and $425,000 lower than 1997 primarily due to the gain on the disposition of
excess equipment that occurred in 1997.
Interest and other expense of $482,000 in fiscal 1999 was $292,000 higher than
1998 and $195,000 higher than 1997 because of higher debt levels due to the
acquisitions.
Income tax expense is significantly less than the statutory amount due to the
utilization of net operating loss carryforwards in each of fiscal 1999 and 1998
and 1997.
See Notes to Consolidated Financial Statements regarding recent accounting
standards to be adopted.
YEAR 2000 COMPLIANCE:
The Year 2000 presents potential concerns for business and consumer computing.
In addition to the well-known calculation problems with the use of 2-digit date
formats as the year changes from 1999 to 2000, the Year 2000 is a special case
leap year and in many organizations using older technology, dates were used for
special programmatic functions. The problem exists for many kinds of software
and hardware, including mainframes, mini computers, PCs, and embedded systems.
The consequences of this issue may include systems failures and business process
interruption.
At the end of fiscal 1999, all of the Company's critical and priority
manufacturing and non-manufacturing systems were determined to be already year
2000 capable, or necessary remediation (replacements, changes, upgrades or
workarounds) had been determined and unit testing and deployment had been
completed. The Company continues to work on internal systems that were not
categorized as critical or priority, and expects to have work on these systems
substantially completed by the end of calendar 2000.
The Company has also been actively working with suppliers of products and
services to determine the extent to which the suppliers' operations are year
2000 capable, and to monitor their progress toward year 2000 capability. The
Company has made inquiries of its major suppliers and has received responses to
its inquiries
9
<PAGE> 10
from 100% of critical suppliers. Follow-up activities seek to determine whether
the supplier is taking all appropriate steps to fix year 2000 problems and to be
prepared to continue functioning effectively as a supplier in accordance with
the Company's standards and requirements. As discussed below, contingency plans
are being developed to address issues should any suppliers be unable to become
year 2000 capable.
As discussed below, the Company has developed contingency plans to address
possible changes in customer order patterns due to year 2000 issues. As with the
Company's suppliers, the readiness of customers, and their suppliers, to deal
with year 2000 issues may affect their operations and their ability to order and
pay for products. The Company has surveyed its major direct customers about
their year 2000 readiness in critical areas of their operations. The results
identified certain key areas to be addressed by the customers, primarily related
to supplier readiness, including external infrastructure providers, and
contingency planning. The Company has also been communicating information about
its own readiness to customers. Communications with customers for the remainder
of 1999 will be primarily aimed at focusing customer attention on contingency
planning.
The Company believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the year 2000 problems of third
parties, the Company believes the risks are greatest with infrastructure (e.g.,
electricity supply and water and sewer service), telecommunications,
transportation supply channels and critical suppliers of materials and services.
The Company's operations are conducted in three Minnesota based facilities. Each
location relies on local private and governmental suppliers for electricity,
water, sewer and other needed supplies. Failure of an electricity grid or an
uneven supply of power, for example, would be a worst-case scenario that would
completely shut down the affected facilities. Electrical failure could also shut
down airports and other transportation facilities.
Although most sites have some back-up electrical power, the Company does not
generally maintain its own facilities that would generate sufficient electrical
or water supply for full operations. A worst-case scenario involving a critical
supplier of materials would be the partial or complete shutdown of the supplier
and its resulting inability to provide critical materials to the Company on a
timely basis. The Company does not maintain the capability to replace most
third-party materials with internal production. Where efforts to work with
critical suppliers to ensure year 2000 capability have not been successful,
contingency planning includes provisions for extra raw materials above that
needed for normal operations, scheduling the New Year's holiday to provide extra
time for recovery in the event it is needed, and duplication of production
capabilities at its various facilities. These contingency plans apply to all
Company facilities as appropriate. Because of the Company's internal Year 2000
program, the Company does not believe there is a significant risk of disruption
of operations due to malfunction of its internal systems or equipment.
10
<PAGE> 11
The Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is currently assessing scenarios and taking steps to
mitigate the impacts of various scenarios if they were to occur. Preliminary
contingency plans for critical business operations were in place by the end of
fiscal 1999. It is expected that these plans will be expanded and refined as the
Company learns more about the preparations and vulnerabilities of third parties
regarding year 2000 issues. Due to the large number of variables involved, the
Company cannot provide an estimate of the damage it might suffer if any of these
scenarios, or a combination of scenarios, were to occur.
The Company's year 2000 efforts have been undertaken largely with its existing
personnel. In some instances, consultants have been engaged to provide specific
assessment, remediation or other services. Activities with suppliers and
customers have also involved their staffs and consultants. The Company engaged a
third-party firm to assist with planning and taking the inventory of internal
computer systems.
The Company currently expects that the total cost of these programs, including
both incremental spending and redeployed resources, will be less than $25,000.
This amount has been expensed as incurred. No significant internal systems
projects are being deferred due to the year 2000 program efforts. In some
instances, the installation schedule of new software and hardware in the normal
course of business was accelerated to also afford a solution to year 2000
capability issues. In addition, the estimated cost does not include any
potential costs related to customer or other claims, or potential amounts
related to executing contingency plans, such as costs incurred as a result of an
infrastructure or supplier failure. All expected costs are based on the current
assessment of the programs and are subject to change as the programs progress.
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another party would not have a material adverse effect on
the Company's financial condition or overall trends in results of operations
through business interruption or shutdown, financial loss, reputational damage
and legal liability to third parties.
CAUTIONARY STATEMENT:
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the letter to shareholders, elsewhere in
the Annual Report, in the Company's Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements." These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Company's ability to obtain additional
manufacturing programs and retain current programs; (ii) the loss of significant
business from any one of its current customers could have a material adverse
effect on the Company; (iii) a significant downturn in the industries in which
the Company participates, principally the agricultural industry, could have an
adverse effect on the demand for Company services; (iv) the ability of the
Company to integrate its acquisitions with their current operations; (v)
successful evaluation and remediation of all year 2000 issues including, but not
limited to, internal production and non-manufacturing systems, the ability of
key suppliers to avoid year 2000 problems and general infrastructure issues. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise any
11
<PAGE> 12
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
12
<PAGE> 13
Item 8. Financial Statements and Supplementary Data:
See Consolidated Financial Statements section of this Annual
Report on Form 10-K beginning on page 19, 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 1999:
First quarter $ 5,640,708 $ 825,031 $ 276,972 $ .11 $ .11
Second quarter 3,729,158 166,007 (421,144) (.17) (.17)
Third quarter 5,989,248 955,757 57,334 .02 .02
Fourth quarter 6,190,747 1,324,574 347,903 .14 .14
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
</TABLE>
13
<PAGE> 14
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 29, 1999, and such information required by such
items is incorporated herein by reference from the proxy
statement.
14
<PAGE> 15
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
19) hereinafter contained for all Consolidated
Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts-page 35
` 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> <C>
3.1 Articles of Incorporation as amended,
incorporated by reference from Exhibit
3 of the Registrant's Form 10-Q for
the quarter ended November 29, 1998.
3.2 Bylaws, as amended. 36
10.1 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.
10.2 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.
10.3 Washington Scientific Industries, Inc.
1994 Stock Plan, incorporated by
reference from Exhibit 4.1 of the
Registrant's Form S-8 as registered on
May 14, 1999.
10.4 Employment Agreement between Michael
J. Pudil and Registrant dated November
4, 1993, is incorporated by reference
from Exhibit 10.4 of Registrant's Form
10K for the fiscal year ended August
28, 1994.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <C>
10.5 Amendment dated January 9, 1997 to the
employment agreement between the
Registrant and Michael J. Pudil
incorporated by reference from Exhibit
10 of the Registrant's Form 10-Q for the
quarter ended February 23, 1997.
10.6 Employment (Change of Control) Agreement
between Michael J. Pudil and Registrant
dated October 18, 1995 incorporated by
reference from Exhibit 10.8 of the
Registrant's Form 10-K for the year
ended August 27, 1995.
10.7 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.
10.8 Stock Purchase Agreement dated August
6, 1999, between William D. Bowman and
the Registrant incorporated by
reference from Exhibit 2.1 of Form 8-K
filed August 21, 1999.
10.9 Stock Purchase Agreement dated
February 15, 1999 between Rodney
Winter and the Registrant incorporated
by reference from Exhibit 2.1 of Form
8-K filed February 28, 1999.
10.10 Fifth Amendment to Amended and
Restated Credit and Security Agreement
dated August 6, 1999, incorporated by
reference from Exhibit 4.1 of the
Registrant's Form 8-K filed August 21,
1999.
10.11 Loan Agreement dated August 6, 1999
between Registrant and US Bank
National Association incorporated from
Exhibit 4.2 of the Registrant's Form
8-K filed August 21, 1999.
23.1 Consent of Ernst & Young LLP. 42
27 Financial Data Schedule. 43
</TABLE>
16
<PAGE> 17
(b) Reports on Form 8-K.
1. There was a Form 8-K filed August 21, 1999 describing
the Company's purchase of Bowman Tool & Machining, Inc.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WSI INDUSTRIES, INC.
BY: /s/ Michael J. Pudil
----------------------------------
Michael J. Pudil, President and
Chief Executive Officer
BY: /s/ Paul D. Sheely
----------------------------------
Paul D. Sheely
Vice President and Treasurer
DATE: November 18, 1999
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 18, 1999
- ------------------------
Michael J. Pudil Director
/s/ Paul Baszucki Director November 18, 1999
- ------------------------
Paul Baszucki
/s/ Melvin L. Katten Director November 18, 1999
- ------------------------
Melvin L. Katten
/s/ Gerald E. Magnuson Director November 18, 1999
- ------------------------
Gerald E. Magnuson
/s/ George J. Martin Director November 18, 1999
- ------------------------
George J. Martin
/s/ Eugene J. Mora Director November 18, 1999
- ------------------------
Eugene J. Mora
</TABLE>
18
<PAGE> 19
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 20
Consolidated Balance Sheets - August 29, 1999 and August 30, 1998 21
Consolidated Statements of Operations - Years Ended August 29, 1999,
August 30, 1998 and August 31, 1997 22
Consolidated Statements of Stockholders' Equity - Years Ended
August 29, 1999, August 30, 1998, August 31, 1997 23
Consolidated Statements of Cash Flows - Years Ended
August 29, 1999, August 30, 1998 August 31, 1997 24
Notes to Consolidated Financial Statements 25
SCHEDULE
Schedule II - Valuation and Qualifying Accounts 35
</TABLE>
19
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WSI Industries, Inc.
We have audited the accompanying consolidated balance sheets of WSI Industries,
Inc. and subsidiaries as of August 29, 1999 and August 30, 1998, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years ended August 29, 1999, August 30, 1998 and August 31, 1997.
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 WSI Industries,
Inc. and subsidiaries as of August 29, 1999 and August 30, 1998, and the
consolidated results of their operations and their cash flows for the years
ended August 29, 1999, August 30, 1998 and August 31, 1997, 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 6, 1999
20
<PAGE> 21
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 29, 1999 AND AUGUST 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 131,588 $ 2,697,104
Accounts receivable, less allowance for doubtful
accounts of $27,500 at August 29, 1999 and $25,000
at August 30, 1998, respectively 2,962,268 2,852,604
Inventories 3,491,900 919,418
Prepaid and other current assets 72,478 207,100
--------------- ---------------
Total current assets 6,658,234 6,676,226
PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 4):
Land 66,906 66,906
Buildings and improvements 5,198,081 5,186,144
Machinery and equipment 22,670,046 18,378,615
--------------- ---------------
27,935,033 23,631,665
Less accumulated depreciation 15,753,124 16,693,157
--------------- ---------------
Total property, plant, and equipment 12,181,909 6,938,508
INTANGIBLE ASSETS:
Goodwill and related acquisition costs 5,684,869 -
--------------- ---------------
$ 24,525,012 $ 13,614,734
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility (Note 3) $ 279,578 $ -
Trade accounts payable 1,438,324 1,535,451
Accrued compensation and employee withholdings 627,731 709,782
Accrued real estate taxes 166,709 170,505
Miscellaneous accrued expenses 549,946 312,982
Acquisition payments due 742,733 -
Current portion of long-term debt (Note 3) 1,442,199 708,949
--------------- ---------------
Total current liabilities 5,247,220 3,437,669
Long-term debt, less current portion (Note 3) 10,666,120 1,802,072
Long-term pension liability (Note 7) 347,437 380,073
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY (Note 5):
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,453,425 and
2,448,800 shares, respectively 245,343 244,880
Capital in excess of par value 1,600,302 1,592,515
Retained earnings 6,418,590 6,157,525
--------------- ---------------
Total stockholders' equity 8,264,235 7,994,920
--------------- ---------------
$ 24,525,012 $ 13,614,734
=============== ===============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ----
<S> <C> <C> <C>
Net sales (Note 8) $ 21,549,861 $ 23,948,116 $ 24,153,089
Cost of products sold 18,278,492 19,547,136 20,494,767
---------------- --------------- ---------------
Gross margin 3,271,369 4,400,980 3,658,322
Selling and administrative expense 2,660,683 2,452,496 2,328,808
Interest and other income (157,748) (161,753) (583,056)
Interest expense 481,569 190,353 286,707
---------------- --------------- ---------------
2,984,504 2,481,096 2,032,459
---------------- --------------- ---------------
Earnings before income taxes 286,865 1,919,884 1,625,863
Income tax expense (Note 6) 25,800 45,800 41,800
---------------- --------------- ---------------
Net earnings $ 261,065 $ 1,874,084 $ 1,584,063
================ ============== ===============
Basic earnings per common share $ .11 $ .77 $ .65
================ ============== ===============
Diluted earnings per common and dilutive
potential common share $ .10 $ .73 $ .64
================ ============== ===============
Weighted average number of common
shares outstanding 2,451,836 2,434,125 2,424,922
================ =============== ===============
Weighted average number of common and
dilutive potential common shares 2,527,299 2,555,518 2,481,873
================ =============== ===============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
WSI 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 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
Net earnings 261,065 261,065
Exercise of stock options 4,625 463 7,787 8,250
------------ ---------- ----------- ---------- ------------
BALANCE AT AUGUST 29, 1999 2,453,425 $ 245,343 $ 1,600,302 $6,418,590 $ 8,264,235
============ ========== =========== ========== ============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 261,065 $ 1,874,084 $ 1,584,063
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,530,523 1,115,529 1,365,863
Gain on sale of property, plant, and equipment
and other assets (48,164) - (508,365)
Increase (decrease) in pension liability (32,636) (87,000) 8,571
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,515,192 (307,286) (676,376)
Inventories (429,587) 437,020 (257,825)
Prepaid and other current assets 159,260 (117,420) 34,031
(Decrease) increase in accounts payable and accrued expenses (314,294) 131,692 1,013,105
------------ ------------ ------------
Net cash provided by operating activities 2,641,359 3,046,619 2,563,067
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (257,897) (793,497) (507,002)
Proceeds from sale of equipment and other assets 57,036 - 536,720
Purchase of subsidiaries, net of cash assumed (8,704,234) - -
------------ ------------ ------------
Net cash provided by (used in) investing activities (8,905,095) (793,497) 29,718
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 6,690,399 - -
Payments of long-term debt (3,000,429) (2,469,328) (1,405,926)
Issuance of common stock 8,250 65,712 18,000
----------- ------------ ------------
Net cash provided by (used in) financing activities 3,698,220 (2,403,616) (1,387,926)
----------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,565,516) (150,494) 1,204,859
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,697,104 2,847,598 1,642,739
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 131,588 $ 2,697,104 $ 2,847,598
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 420,874 $ 192,071 $ 297,123
Income taxes 45,361 71,777 5,800
Noncash investing and financing activities:
Acquisition of machinery through capital lease 980,250 1,308,517 -
Acquisition related debt 5,206,657
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 30, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - WSI Industries, Inc. and Subsidiaries' (the Company) fiscal
years represent a 52-to 53-week period ending the last Sunday in August.
Fiscal 1999 and 1998 each consisted of 52 weeks. Fiscal 1997 consisted of
53 weeks.
Basis of Presentation - The consolidated financial statements include the
accounts of WSI Industries, Inc. and its subsidiaries. All material
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, bank account balances and money market investments including debt
obligations issued by the U. S. Government or its agencies and corporate
obligations. Cash equivalents are carried at cost plus accrued interest
which approximates fair value.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market. Inventory costs consist of material, direct
labor, and manufacturing overhead. The Company's inventories are stated
net of valuation allowances of approximately $155,000 at August 29, 1999
and August 30, 1998. 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 when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets carrying amount.
Income Taxes - The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary differences
between the financial reporting and tax bases of assets and liabilities.
Revenue Recognition - Revenues from sales of product are recorded upon
shipment. The Company performs periodic credit evaluations of its
customers' financial condition. Credit losses relating to customers have
been minimal and within management's expectations.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
25
<PAGE> 26
Earnings per Share - Basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings
per share is computed using the combination of dilutive common share
equivalents and the weighted average number of common shares outstanding.
Stock Options - The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, but applies Accounting Principles Board
Opinion No. 25 (APB 25) and related interpretation in accounting for its
plans. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Reclassification - Certain prior year items have been reclassified to
conform to the current year presentation.
2. ACQUISITIONS
On February 15, 1999, the Company completed the acquisition of Taurus
Numeric Tool, Inc. ("Taurus") by purchasing all the shares of common
stock from its sole shareholder. The value of the transaction was
approximately $7.2 million including acquisition costs, with $5.5 million
being paid by cash and debt borrowings, and an additional $1.7 million
being in the form of a Subordinated Promissory Note to the prior owner.
The acquisition was accounted for by the purchase method.
The Taurus consideration was allocated to assets and liabilities based on
fair values as follows:
Net assets acquired $ 4,535,000
Goodwill and other intangible assets 2,713,000
-------------
$ 7,248,000
=============
On August 6, 1999, the Company completed the acquisition of Bowman Tool &
Machining, Inc. ("Bowman") by purchasing all the shares of common stock
from its sole shareholder. The value of the transaction was approximately
$7.6 million, with $6.8 million being paid by debt borrowings, and
approximately $844,000 being paid in the form of a Subordinated
Promissory Note to the prior owner. The acquisition was accounted for by
the purchase method.
The Bowman consideration was allocated to assets and liabilities based on
fair values as follows:
Net assets acquired $ 4,560,000
Goodwill and other intangible assets 3,054,000
-------------
$ 7,614,000
=============
Goodwill and other intangible assets are being amortized over their
estimated useful lives of 20 years on a straight-line basis. Amortization
for the year ended August 29, 1999 was $82,300.
The following table shows the unaudited pro forma consolidated results of
operations as if both Taurus and Bowman had been acquired as of the
beginning of the periods presented:
Unaudited Pro Forma Consolidated Results
Years Ended
----------------------------------------
August 29, 1999 August 30, 1998
--------------- ---------------
26
<PAGE> 27
Sales $ 33,802,000 $ 39,918,000
Net earnings $ 2,105,000 $ 3,879,174
Net earnings per share $ .83 $ 1.52
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for
the entire period presented. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might
have been achieved from combined operations.
3. DEBT
Long-term debt consisted of the
following:
August 29, 1999 August 30, 1998
Bank term debt $ 4,400,000 $ -
Mortgage note payable 2,500,000 -
Subordinated promissory notes 2,506,657 -
Capitalized lease obligations 2,701,662 2,511,021
(Notes 3) ------------- --------------
12,108,319 2,511,021
Less current portion 1,442,199 708,949
------------- --------------
Long-term debt 10,666,120 $ 1,802,072
============= ==============
During fiscal 1999, the Company renegotiated its term debt and its line
of credit with the same bank with which the Company previously had its
debt and line of credit. The agreement requires principal payments of
$52,381 per month on the Term Note with the agreement expiring on March
31, 2002. At August 29, 1999, the balance of term debt was $4,400,000.
Interest on the term debt is calculated at the bank's base rate (9.0% at
August 29, 1999 and 8.5% at August 30, 1998) plus .75% and is also paid
monthly.
During fiscal 1999 the Company obtained a mortgage with the same bank
that it currently has its term debt and line of credit facility. The
agreement requires monthly principal payments of $13,889. Interest on the
mortgage is calculated at the bank's base rate plus 1.0% and is paid
monthly. The entire balance is due August 6, 2004.
Interest on the line of credit is at the bank's base rate plus 0.5
percentage points for August 29, 1999. The line expires March 31, 2002.
The agreement provides for secured borrowing of up to $3,000,000;
however, the Company is charged an annual unused credit line fee of 0.5%.
At August 29, 1999, there was a balance outstanding of $279,578.
Restrictive provisions of the agreement require, among other provisions,
that the Company (1) maintain a net worth of not less than $7,000,000,
(2) maintain a ratio of liabilities to net worth not greater than 4.0 to
1.0, (3) limit capital expenditures to $3,000,000 in each fiscal year
with no more than $1,000,000 coming from its line of credit and (4)
maintain a defined cash flow coverage ratio of no less than 1.1 to 1.0.
Cash dividends are fully restricted. At August 29, 1999, the Company was
in compliance with the various covenants of the credit agreement. The
notes, line of credit and capital leases are collateralized by the
receivables, inventories, and property, plant, and equipment of the
Company. The mortgage is secured by the building in Long Lake, Minnesota.
27
<PAGE> 28
During fiscal 1999, and in connection with the acquisitions of Bowman
Tool & Machining, Inc. and Taurus Numeric Tool, Inc., the Company entered
into Subordinated Promissory Notes with the sellers of the respective
companies. The agreements call for quarterly interest payments at 7.75%.
The note in connection with the Bowman transaction is due in three equal
annual installments commencing August 6, 2002. The note in connection
with the Taurus transaction is also due in three annual installments
commencing February 15, 2002. The notes are subordinated to all bank debt
and the mortgage, but are collateralized by equipment.
Maturities of long-term debt, excluding capital lease obligations, for
the fiscal years subsequent to August 29, 1999 are as follows:
2000 $ 795,240
2001 795,240
2002 4,145,076
2003 1,002,220
2004 2,668,881
------------
$ 9,406,657
============
4. COMMITMENTS
Leases - Included in the consolidated balance sheet at August 29, 1999
are cost and accumulated depreciation on equipment subject to capitalized
leases of $5,439,045 and $2,531,647, respectively. At August 30 1998, the
amounts were $4,526,435 and $1,826,568, respectively.
The present value of the net minimum payments on capital leases as of August 29,
1999 is as follows:
Capital
Leases
Fiscal years ending August: ------------
2000 $ 803,073
2001 597,697
2002 597,697
2003 470,050
2004 427,590
Thereafter 359,848
------------
Total minimum lease payments 3,255,955
Less amount representing interest 554,293
------------
Present value of net minimum lease payments 2,701,662
Current portion 646,959
------------
Capital lease obligation, less current portion $ 2,054,703
============
The Company leases its Taurus facility under an operating lease that
expires in February 2002 with a monthly base rent of $8,900. Operating
expenses and real estate taxes are paid by the Company.
The Company also leases its Bowman facility under a lease that expires in
August, 2000 and is responsible for operating expenses and real estate
taxes. The Company also leases certain manufacturing equipment under
leases that expire in August, 2000.
Future minimum lease payments for operating leases are:
28
<PAGE> 29
Fiscal years ending August:
2000 $ 218,735
2001 106,800
2001 48,950
------------
Total minimum lease payments $ 374,485
============
Rent expense of approximately $67,000, $1,000, and $2,000 have been
charged to operations for the years ended August 29, 1999, August 30,
1998 and August 31, 1997, respectively.
5. STOCK OPTIONS
Stock Options - In fiscal 1988, the 1987 stock option plan was approved
and 175,000 shares of common stock were reserved for granting of options
to officers, key employees, and directors. No shares remain available for
grant from this plan since the term of grant is limited to ten years from
the date of the plan.
In fiscal 1995, the 1994 stock option plan was approved and 250,000
shares of common stock were reserved for granting of options to officers,
key employees, and directors. During fiscal 1999, the plan was amended to
reserve an additional 200,000 shares. At August 29, 1999, 182,666 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 29, 1999. Option
transactions during the three years ended August 29, 1999 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 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
------ ------- -------
Granted - - 125,000 4.99
Lapsed - - -
Exercised - (5,000) 2.06 -
------ -------
Options exercisable at August 29, 1999 - $ - 123,000 $ 2.33 259,000 $ 4.78
====== ======= =======
</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 1999, fiscal 1998 and fiscal
1997 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C>
Expected volatility 47.7% 43.9% 38.9%
Risk free interest rate 6.0% 5.5% 6.38%
Expected term 10 years 5 years 5 years
</TABLE>
The Company's net income and income per share would be adjusted to the pro forma
amounts as follows:
<TABLE>
<CAPTION>
Years ended
----------------------------------------------------------------
August 29, 1999 August 30, 1998 August 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Income:
As reported $ 261,065 $ 1,874,084 $ 1,584,063
Pro forma 71,632 $ 1,738,962 $ 1,550,636
Income per basic common share:
As reported $ .11 $ .77 $ .65
Pro forma $ .03 $ .71 $ .64
Income per diluted common share:
As reported $ .10 $ .73 $ .64
Pro forma $ .03 $ .68 $ .62
</TABLE>
As of August 29, 1999, there were 108,000 options outstanding with
exercise prices between $2.00 and $2.13, 149,000 options outstanding
with exercise prices between $3.00 and $4.75, and 125,000 options
outstanding with exercise prices between $5.50 and $6.13. At August 29,
1999, outstanding options had a weighted-average remaining contractual
life of 6.2 years.
The numbers of options exercisable as of August 29, 1999, August 30,
1998 and August 31, 1997 were 251,171, 199,504, and 168,000
respectively, at weighted average share prices of $3.50, $3.04, and
$2.60 per share, respectively.
The weighted average fair value of options granted during the years
ended August 29, 1999, August 30, 1998, and August 31, 1997 was $3.28,
$2.82, and $2.83 per share, respectively.
30
<PAGE> 31
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
August 29 August 30 August 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ 17,500 $ 40,000 $ 36,000
State 8,300 5,800 5,800
----------- ------------- -------------
25,800 45,800 41,800
Deferred:
Federal - - -
State - - -
----------- ------------- -------------
Total $ 25,800 $ 45,800 $ 41,800
=========== ============= =============
</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:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
August 29, August 30, August 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Ordinary federal income tax statutory rate 35.0% 35.0% 35.0%
Limitation on (utilization of) tax assets (28.9) (34.0) (34.0)
State income taxes, net of federal tax benefit 2.9 0.2 0.2
Impact of graduated income tax - (1.0) (1.0)
Other - 2.2 2.4
------------ ------------- -------------
Taxes provided 9.0% 2.4% 2.6%
============ ============ =============
</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 29, Year ended August 30,
1999 1998
---------------------------- ---------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued liabilities $ 79,841 $ 170,424
Inventory valuation accruals 52,768 52,700
Net operating loss carryforwards 604,309 700,224
Tax credit carryforwards 530,380 524,599
Pension liability 81,216 55,545
Other 34,050 9,360
---------------------------- ---------------------------
1,382,564 1,512,852
DEFERRED TAX LIABILITIES
Tax depreciation less than book 210,320 259,824
---------------------------- ---------------------------
Net deferred tax assets 1,172,244 1,253,028
Valuation allowance (1,172,244) (1,253,028)
============================ ===========================
$ - $ -
============================ ===========================
</TABLE>
As of August 29, 1999, the Company had federal and California state
income tax net operating loss carryforwards of approximately $1,761,000 and
$644,000, respectively, of which most will expire in fiscal years 2008 and 2009.
Also as of August 29, 1999, the Company had $478,000 in federal alternative
minimum
31
<PAGE> 32
tax (AMT) credit carryforward and approximately $46,000 in other credit
carryforward. The AMT credits are available to offset future tax liabilities
only to the extent that the Company has regular tax liabilities in excess of AMT
tax liabilities.
7. EMPLOYEE BENEFITS
The Company 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:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 119,314 $ 128,068 $ 141,872
Interest cost on projected benefit obligation 509,347 461,123 472,272
Actual return on plan assets (661,377) (18,369) (1,502,308)
Net amortization and deferral (1,339) (657,893) 896,735
--------------- -------------- --------------
Net periodic pension cost $ (34,055) $ (87,071) $ 8,571
=============== ============== ==============
</TABLE>
The funded status of the plans and the amount recognized on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------
August 29, 1999 August 31, 1998
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 7,601,590 $ 6,906,823
Nonvested benefits 140,629 202,955
------------ -------------
Accumulated benefit obligations 7,742,219 7,109,778
Effect of projected future compensation
increases 406,842 218,397
------------ -------------
Projected benefit obligations 8,149,061 7,328,175
Plan assets at fair value 8,674,648 7,626,174
------------ -------------
Plan assets (in excess of) less than projected
benefit obligations (525,587) (297,999)
Unrecognized net gain (loss) 1,709,719 1,070,750
Unrecognized prior-service cost (1,043,389) (641,638)
Unrecognized net transition assets 205,204 248,960
------------ -------------
Pension liability $ 345,947 $ 380,073
============ =============
Weighted average discount rate 7.00% 7.00%
Rate of increase in future compensation
levels, non-union employees 4.50% 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
32
<PAGE> 33
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.
The Company and its two operating subsidiaries, Bowman Tool & Machining,
Inc and Taurus Numeric Tool, Inc. each have their own retirement savings
401(k) plains. All employees are eligible to participate in their
respective plans. Contributions charged to operations for fiscal 1999,
1998, and 1997, were approximately $51,954, $51,710, and $47,836,
respectively.
8. INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
The Company had sales to five customers which exceeded 10 percent of
total sales during any one of fiscal years 1999, 1998, or 1997 as listed
below:
<TABLE>
<CAPTION>
Fiscal Year Sales
----------------------------------------------------------------------
Customer 1999 1998 1997
-------- ---- ---- ----
<S> <C> <C> <C>
#1 $ 11,748,000 $ 18,128,000 $ 17,604,000
#2 2,884,000 $ 1,394,000 $ 0
#3 2,682,000 $ 0 $ 0
#4 1,388,000 $ 1,666,000 $ 1,298,000
#5 549,000 $ 182,000 $ 1,769,000
</TABLE>
33
<PAGE> 34
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income (loss) $ 261,065 $ 1,874,084 $ 1,584,063
Denominator for earnings per share:
Weighted average shares;
denominator for basic earnings
per share 2,451,836 2,434,125 2,424,922
Effect of dilutive securities;
employee and nonemployee options 75,463 121,393 56,951
------------- ------------- --------------
Dilutive common shares;
denominator for diluted earnings
per share 2,527,299 2,555,518 2,481,873
Basic earnings (loss) per share $ .11 $ .77 $ .65
============ ============ ==============
Dilutive earnings (loss) per share $ .10 $ .73 $ .64
============ ============ ==============
</TABLE>
10. SUBSEQUENT EVENT
Subsequent to year-end, the Company announced plans to consolidate all
manufacturing operations into its Rochester, Minnesota (Bowman Tool) and
Osseo, Minnesota (Taurus Numeric Tool) facilities. Upon completion of the
consolidation, the current Long Lake, Minnesota facility will be closed.
Consolidation expenses including, but not limited to, severance,
relocation costs and partial plan termination of the defined benefit
pension plan will be incurred primarily in the first quarter of fiscal
2000.
34
<PAGE> 35
WSI 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> <C> <C> <C> <C>
Reserves deducted
from assets to
which it applies:
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
Year ended
August 31, 1997 $ 50,000 $ $ $ 50,000
================= ================== ============= ==============
Year ended
August 30, 1998 $ 50,000 $ $ 25,000 (2) $ 25,000
================= ================== ============= ==============
Year ended
August 29, 1999 $ 25,000 $ 2,500 (3) $ $ 27,500
================= ================== ============= ==============
ALLOWANCE FOR
EXCESS OR
OBSOLETE
INVENTORY:
Year ended
August 31, 1997 $ 16,716 $ 155,342 $ 16,716 (1) $ 155,342
================= ================== ============= ==============
Year ended
August 30, 1998 $ 155,342 $ $ 342 (1) $ 155,000
================= ================== ============= ==============
Year ended
August 29, 1999 $ 155,000 $ $ $ 155,000
================= ================== ============= ==============
</TABLE>
(1) Write-offs of excess or obsolete inventory.
(2) Level of reserve reduced due to management assessment of exposure to
potential write-offs.
(3) Additional amount assumed due to the acquisition of Taurus Numeric Tool,
Inc.
35
<PAGE> 1
EXHIBIT 3.2
RESTATED AND AMENDED BYLAWS
OF
WSI INDUSTRIES, INC.
ARTICLE I.
Offices, Corporate Seal
Section 1. The registered office of the corporation shall be at 2605
West Wayzata Boulevard, Long Lake, Minnesota 55356 and the corporation may have
offices at such other places as the Board of Directors shall from time to time
determine.
Section 2. The corporate seal shall be circular in form and have
inscribed thereon in a circle the name of the corporation and the State in which
it is incorporated and the words "Corporate Seal" within the circle.
ARTICLE II.
Meetings of Shareholders
Section 1. An Annual Meeting of the Shareholders of this Corporation
entitled to vote for the election of Directors shall be held at such place
within or without the State of Minnesota as the Board of Directors may
determine, at such time in each calendar year beginning in 1993 as shall be
fixed by the Board of Directors, at which time the shareholders voting as
provided in the Articles of Incorporation shall elect by majority vote a Board
of Directors for the ensuing year, and shall transact such other business as
shall properly be brought before the meeting. To be properly brought before the
meeting, business must be of a nature that is appropriate for consideration at
an annual meeting and must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors; (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors; or (iii) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements for business to be
properly brought before the annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the Secretary of the
corporation. To be timely, each such notice must be given, either by personal
delivery or by United States mail, postage prepaid, to the Secretary of the
corporation, not less than 45 days nor more than 75 days prior to the date on
which the corporation first mailed its proxy materials for the prior year's
annual meeting of shareholders. Each such notice to the Secretary shall set
forth as to each matter the shareholder proposes to bring before the annual
meeting (w) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting; (x) the name and address of record of the shareholders proposing such
business; (y) the class or series (if any) and number of shares of the
corporation which are owned by the shareholder; and (z) any material interest of
the shareholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be transacted at the annual meeting except in
accordance with the procedures set forth in this Article; provided, however,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting, in
accordance with these Bylaws.
The holders of a majority of common shares outstanding and entitled to
vote for the election of Directors at said meeting, present in person or
represented by proxy, shall constitute a quorum for the transaction of business,
except as otherwise provided by law, by the Articles of Incorporation, or by
these Bylaws. In case a quorum be not present at the annual meeting, the meeting
may be adjourned to a late date. A notice of such adjournment shall be mailed
to each shareholder entitled to vote, at least ten days before such adjourned.
36
<PAGE> 2
meeting date, but if a quorum be present they may adjourn from day to day, as
they see fit and no notice need by given.
Section 2. Except as otherwise provided by the Board of Directors, only
shareholders of record at the close of business on the day prior to the date of
the annual meeting shall be entitled to vote at such meeting, in person or
through proxy. The appointment of proxy shall be in writing filed with the
Secretary at or before the meeting.
Section 3. Special meetings of the shareholders may be called by the
Secretary upon request of the Executive Committee of the corporation or a
majority of the members of the Board of Directors, or upon request by
shareholders as provided by law.
Section 4. There shall be mailed to each person shown by the books of
the corporation to be a holder of record of voting shares at the time of mailing
such notice, at his address as shown by the books of the corporation, a notice
setting out the time and place of the annual meeting, which notice shall be
mailed at least ten (10) days prior thereto. There shall be mailed to each
person shown by the books of the corporation to be a shareholder of record at
the time of mailing such notice and entitled to receive such notice, at his
address as shown by the books of the corporation, a notice setting out the time,
place and object of each special meeting, which notice shall be mailed at least
ten (10) days prior thereto.
Section 5. Subject to the rights of holders of any class or series of
stock having a preference over the common shares as to dividends or upon
liquidation, nominations for the election of Directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote generally in the election of Directors. However,
any shareholder entitled to vote generally in the election of Directors may
nominate one or more persons for election as Directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the corporation not less than 45 days
nor more than 75 days prior to the date on which the corporation first mailed
its proxy materials for the prior year's annual meeting of shareholders. Each
such notice to the Secretary shall set forth: (i) the name and address of record
of the shareholder who intends to make the nomination; (ii) a representation
that the shareholder is a holder of record of shares of the corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (iii) the
name, age, business and residence addresses, and principal occupation or
employment of such nominee; (iv) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (vi) the consent of each nominee to
serve as a Director of the corporation if so elected. The corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the corporation to determine the eligibility of such proposed
nominee to serve as a Director of the corporation. The presiding officer of the
meeting may, if the facts warrant, determine that a nomination was not made in
accordance with the foregoing procedure, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE III.
Directors
Section 1. The business and property of the corporation shall be managed
by its Board of Directors, six (6) in number. The term of each Director shall
continue until the next annual meeting of the corporation and until his
successor is elected and qualifies.
37
<PAGE> 3
Section 2. A majority of the Board of Directors shall constitute a
quorum for the transaction or business; provided, however, that if any vacancies
exist by reason of death, resignation, or otherwise, a majority of the remaining
Directors shall constitute a quorum for the filling of vacancies.
Section 3. The Directors shall meet annually immediately after the
election of Directors, or as soon thereafter as is practicable, at the
registered office of the corporation, or at the place the annual meeting of the
stockholders was held which elected said Directors, or at such other time and
place as may be fixed by the written consent of all of the Directors. No notice
need be given of any regular meeting. Special meetings of the Board of Directors
may be held at such place as may from time to time be fixed by resolution
adopted by a majority of the whole Board of Directors or designated in the
notice of waiver of notice of the meeting. Special meetings of the Board of
Directors may be called by the Chairman of the Board, President or a majority of
the Board of Directors. Notice of such special meetings shall be given by the
Secretary who shall give at least twenty-four (24) hours notice thereof to each
Director by mail, telegraph, telephone, or in person.
Section 4. Any action which could have been taken at a meeting of the
Board of Directors properly called for that purpose may be taken without a
meeting if done in writing signed by all of the directors, and any such action
shall be as valid and effective in all respects as if taken at a proper meeting
duly called for that purpose.
ARTICLE IV.
Executive Committee
The Board of Directors may designate not more than five of their number
to constitute an Executive Committee which shall have and exercise the power and
authority of the Board of Directors in the management of the business and
conduct of the affairs of the corporation in the interim between regular
meetings of the Board of Directors. Such Executive Committee shall be subject at
all times to the control and direction of the Board of Directors, and shall not
do any or cause any act to be done which will personally and directly benefit
any of the members of such Executive Committee.
ARTICLE V.
Officers
Section 1. The officers of this corporation shall consist of a Chairman
of the Board, a President, an Executive Vice President, one or more Vice
Presidents, a Secretary, a Treasurer, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be deemed necessary by the
Board of Directors. Any two officers, except those of President and Executive
Vice President or Vice President, may be held by any one person.
Section 2. Officers shall be elected at the Annual Meeting of the Board
of Directors or at such other times deemed advisable by the Board of Directors,
and shall hold office until the next Annual Meeting of Directors and until their
successors are elected and qualified. None of the officers, except the Chairman
of the Board, need be a Director.
Section 3. The Chairman of the Board shall preside at all meetings of
the shareholders and directors and shall have such other duties as may be
prescribed by the Board of Directors. The President shall be the Chief Executive
Officer of the corporation, shall preside at meetings of the shareholders and
the directors in the absence of the Chairman of the Board or in the event there
shall be no Chairman of the Board, shall make
38
<PAGE> 4
such reports to the Board of Directors as may from time to time be required or
requested, shall have such duties and responsibilities as generally pertain to
the office of President, and shall have such other powers and shall perform such
other duties as may be from time to time assigned to him by the Board of
Directors. The Vice Presidents of the corporation, including the Executive Vice
President, shall each have such powers and duties as generally pertain to their
respective offices, as well as such powers and duties as from time to time may
be conferred upon them by the Board of Directors. In the case of the death,
resignation or disability of the President, the Executive Vice President, or if
none, the Vice President who has held that office for the longest continuous
period of time, shall assume the duties and responsibilities of the President
until further action by the Board of Directors.
Section 4. The Secretary of the corporation shall keep a record of the
meetings and proceedings of the Board of Directors and shareholders, shall have
custody of the corporate seal and all other corporate records not specifically
entrusted to some other officer by these Bylaws or by direction of the Board of
Directors. He shall give notice of meetings as required by these Bylaws or by
the Board of Directors, and shall perform such other duties as may be assigned
or delegated to him by the Board of Directors
Section 5. The Treasurer shall keep accurate accounts of all money and
assets of the corporation received or disbursed. He shall deposit all money,
drafts and checks in the name of and to the credit of the corporation in such
banks, depositories or other financial institutions as the majority of the Board
of Directors shall designate from time to time. He shall disburse the funds of
the corporation as ordered by the Board of Directors or officers under direction
of the Board of Directors. He shall render such accounts of the financial
condition of the corporation and its financial affairs and shall perform such
other duties as may be prescribed by the Board of Directors from time to time.
ARTICLE VI.
Salaries of Officers
The salary and other compensation to the officers of the corporation
shall be fixed in the first instance and shall thereafter be subject to change
and amendment by the Board of Directors.
ARTICLE VII.
General Provisions
Section 1. This corporation shall be operated and managed within the
scope of the purposes and powers hereof as set forth and specified in its
Articles of Incorporation.
Section 2. Shares of stock in this corporation not exceeding the
authorized number thereof as specified in the Articles of Incorporation may be
issued, and certificates therefor shall be authenticated by the President and
Secretary upon authorization by the Board of Directors and receipt by the
corporation of such consideration for such shares as shall be specified by the
Board of Directors.
In the event that a bank, trust company or other similarly qualified
corporation is designated and agrees to act as the registrar and transfer agent
for the corporation then the signatures of the President and Secretary and the
seal of the corporation may be imprinted upon the stock certificates by
facsimile, and said certificates may be authenticated by signature of an
authorized agent of said registrar and transfer agent. The officers of the
corporation may delegate to such a transfer agent and registrar such of the
duties relating to the recording and maintenance of records relating to stock
and stockholders and the outstanding shares in the corporation as may be deemed
expedient and convenient, approved by the Board of Directors and assumed by said
registrar and transfer agent.
39
<PAGE> 5
Section 3. The Board of Directors may establish reasonable regulations
for recording transfers of shares of stock in this corporation, and may
establish a date, not earlier than sixty days prior to any shareholders'
meeting, as of which the shareholders entitled to vote and to participate in any
shareholders' meeting shall be determined.
Section 4. Dividends and distributions to shareholders shall be paid at
such times and in such amounts as may be determined by the Board of Directors
consistently with applicable statutes and laws.
Section 5. From time to time, as it may deem appropriate and
advantageous to the best interests of this corporation, the Board of Directors
may by majority vote establish such bonus, pension, profit-sharing, stock bonus,
stock purchase, stock option, or other employee incentive plans, as and for the
benefit of such of the corporation's employees as it in its sole discretion
shall determine.
Section 6. Each director, officer, employee and agent, past or present,
of this corporation and each person who serves or may have served at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and their
respective heirs, administrators and executors, shall be indemnified by this
corporation in accordance with, and to the fullest extent provided by, the
provisions of the Minnesota Business Corporation Act as it may from time to time
be amended.
Section 7. The corporation shall be governed by the Minnesota Business
Corporation Act, as amended from time to time, by its Articles of Incorporation
and by these Bylaws. In matters not provided for by said Act, said Articles or
the Bylaws, the corporation shall be governed by the determination of the Board
of Directors, to the extent consistent with law.
ARTICLE VIII.
Adoption and Amendment
Section 1. The Board of Directors may alter or amend these Bylaws and
may make or adopt additional Bylaws subject to the power of the shareholders to
change or repeal the said Bylaws; provided, however, that the Board of Directors
shall not make or alter any Bylaws relating to the qualifications,
classifications, or terms of office of the members of the Board of Directors.
Section 2. The shareholders may alter or amend these Bylaws or may make
or adopt additional Bylaws by majority vote of such shareholders at any annual
meeting thereof or any special meeting called for that purpose.
Amended by the Board of Directors on November 11, 1998
Approved by the Shareholders on January 7, 1999
40
<PAGE> 1
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, 33-58565 and 333-78491) of our report dated October
6, 1999, with respect to the consolidated financial statements and schedule of
WSI Industries, Inc. included in the Annual Report (Form 10-K) for the year
ended August 29, 1999.
ERNST & YOUNG LLP
Minneapolis, Minnesota
November 15, 1999
41
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-END> AUG-29-1999
<CASH> 131,588
<SECURITIES> 0
<RECEIVABLES> 2,989,768
<ALLOWANCES> 27,500
<INVENTORY> 3,491,900
<CURRENT-ASSETS> 6,658,234
<PP&E> 27,935,033
<DEPRECIATION> 15,753,124
<TOTAL-ASSETS> 24,525,012
<CURRENT-LIABILITIES> 5,247,220
<BONDS> 10,666,120
0
0
<COMMON> 245,343
<OTHER-SE> 8,018,892
<TOTAL-LIABILITY-AND-EQUITY> 24,525,012
<SALES> 21,549,861
<TOTAL-REVENUES> 21,549,861
<CGS> 18,278,492
<TOTAL-COSTS> 2,502,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481,569
<INCOME-PRETAX> 286,865
<INCOME-TAX> 25,800
<INCOME-CONTINUING> 261,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,065
<EPS-BASIC> .11
<EPS-DILUTED> .10
</TABLE>
