Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - WSI INDUSTRIES, INC. | c24861exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - WSI INDUSTRIES, INC. | c24861exv32w1.htm |
EX-21.1 - EXHIBIT 21.1 - WSI INDUSTRIES, INC. | c24861exv21w1.htm |
EX-31.2 - EXHIBIT 31.2 - WSI INDUSTRIES, INC. | c24861exv31w2.htm |
EX-23.1 - EXHIBIT 23.1 - WSI INDUSTRIES, INC. | c24861exv23w1.htm |
EX-10.28 - EXHIBIT 10.28 - WSI INDUSTRIES, INC. | c24861exv10w28.htm |
EX-10.29 - EXHIBIT 10.29 - WSI INDUSTRIES, INC. | c24861exv10w29.htm |
EX-10.24 - EXHIBIT 10.24 - WSI INDUSTRIES, INC. | c24861exv10w24.htm |
EX-10.27 - EXHIBIT 10.27 - WSI INDUSTRIES, INC. | c24861exv10w27.htm |
EX-10.26 - EXHIBIT 10.26 - WSI INDUSTRIES, INC. | c24861exv10w26.htm |
EX-10.25 - EXHIBIT 10.25 - WSI INDUSTRIES, INC. | c24861exv10w25.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended August 28, 2011
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-00619
WSI Industries, Inc.
(Exact name of registrant specified in its charter)
Minnesota | 41-0691607 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
213 Chelsea Road, Monticello, Minnesota 55362
(Address of principal executive offices)(Zip code)
(Address of principal executive offices)(Zip code)
Issuers telephone number, including area code: (763) 295-9202
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. Yes o No þ
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 (or
for such shorter period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such filed). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated
filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one)
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant on February 25, 2011 (the business day immediately prior to the end of the registrants
second fiscal quarter) was $13,816,000 based upon the closing sale price on that date of $4.82 as
reported by The NASDAQ Capital Market.
The number of shares of the registrants common stock, $0.10 par value, outstanding as of
November 11, 2011 was 2,895,664.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Companys Annual Meeting of Shareholders to be held on
January 4, 2012, which will be filed within 120 days after the end of the fiscal year covered by
this report, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. | Description of Business. |
WSI Industries, Inc. (the Company) makes its periodic and current reports available free of
charge as soon as reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. These reports can be obtained by contacting
the Company through its website at www.wsiindustries.com.
Overview
The Company was incorporated in Minnesota in 1950 for the purpose of performing precision contract
machining for the aerospace, communication, and industrial markets. The major portions of Company
revenues are derived from machining work for the aerospace/avionics/defense industries,
recreational vehicles (ATV and motorcycle) markets, energy industry and bioscience industry.
Contract manufacturing constitutes the Companys entire business.
Products and Services
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 both purchased by the Company as well as being supplied by
our customer.
Sales and Marketing
In fiscal 2009, all areas of the Companys business were affected by the national recession and we
experienced decreases in sales of 27% versus fiscal 2008. Fiscal 2010 sales were flat as compared
to fiscal 2009 as a decrease in the energy business was equally offset by increases in sales in all
of the other industries served by the Company. In fiscal 2011, the Company experienced an
increase in sales of 33% over the prior year. The sales increase came in large part from increases
in the Companys recreational vehicle market which increased 39% over the prior year. In fiscal
2011, the Company also realized a 27% increase in its sales to the energy industry. Sales to the
recreational vehicle market totaled approximately 68%, 65% and 54% of total sales in fiscal 2011,
2010 and 2009, respectively. Sales to the energy industry totaled approximately 23%, 24% and 36%
of sales in fiscal 2011, 2010 and 2009, respectively. Sales to the aerospace/avionics/defense
markets totaled approximately 8%, 9% and 8% of total sales in fiscal 2011, 2010 and 2009,
respectively. Sales to the bioscience industry amounted to approximately 1% of total sales in
fiscal 2011 and 2% of total sales in fiscal 2010 and 2009.
The Company has a reputation as a dependable supplier 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.
Customers
Sales were made to Polaris Industries, Inc. and related entities in the amount of $16,804,000, or
67% of total Company revenues, in fiscal 2011. The Company also made sales of $4,525,000 or 18% of
total Company revenues in fiscal 2011 to National Oilwell Varco.
2
Table of Contents
Competition
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.
Research and Development; Intellectual Property
No material amount has been spent on company-sponsored research and development activities.
Patents and trademarks are not deemed significant to the Company.
Employees
At August 28, 2011, the Company had 76 full-time employees, none of whom were subject to a union
contract. We consider our relationship with our employees to be good.
Foreign and Domestic Operations and Export Sales
The Company has no operations or any significant sales in any foreign country.
Item 1A. | Risk Factors. |
In evaluating us as a company, careful consideration should be given to the following risk
factors, in addition to the other information included in this Annual Report on Form 10-K. Each of
these risk factors could adversely affect our business, operating results and/or financial
condition, as well as adversely affect the value of an investment in our common stock. In addition
to the following disclosures, please refer to the other information contained in this report,
including our consolidated financial statements and the related notes.
The economic conditions in the United States and around the world could adversely affect our
financial results. Demand for our services depends upon worldwide economic conditions, including
but not limited to overall economic growth rates, consumer spending, financing availability,
employment rates, interest rates, inflation, consumer confidence, and the profits, capital
spending, and liquidity of large OEMs that we serve. The economic recession in the markets we serve
has caused and could continue to cause our OEM customers to reduce ordering levels, resulting in
reschedules, program delays or cancelled orders of our services having an adverse effect on our
business and our financial results.
We operate in the highly competitive and fragmented contract machining industry. We compete
against many contract machining companies. We also compete with OEM in-house operations that are
continually evaluating manufacturing products internally against the advantages of outsourcing. We
may also be at a competitive disadvantage with respect to price when compared to manufacturers with
excess capacity, lower cost structures and availability of lower cost labor. The availability of
excess manufacturing capacity of our competitors also creates competitive pressure on price and
winning new business. To respond to competitive pressures, we may be required to reduce our prices
to customers or increase discounts to customers, which would result in lower gross profit margins
and decreased revenue. These factors also impact the Companys ability to obtain additional
manufacturing programs and retain our current programs.
Controlling manufacturing costs is a significant factor in operating results. The Companys
ability to manage its costs on existing manufacturing programs and its ability to curtail costs and
expenses on potential new manufacturing programs could have a significant impact on the Companys
operating results.
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A large percentage of our sales have been made to a small number of customers in a small
number of highly competitive industries, and the loss of a major customer would adversely affect
us. In fiscal years 2011, 2010 and 2009, one customer in the recreational vehicle market accounted
for 67%, 63% and 51% of our revenue, respectively. In addition, in fiscal years 2011, 2010 and
2009, one customer in the energy industry accounted for 18%, 24% and 30% of our revenue,
respectively. If there is a loss of one or more of these major customers or a significant decline
in sales to either of these major customers it could have an adverse effect on our results from
operations.
Operating results may vary significantly from period to period. We can experience significant
fluctuations in our revenue and operating results. One of the principal factors that contribute to
these fluctuations is the significant changes in our customers delivery requirements. Results of
operations in any period, therefore, should not be considered indicative of the results to be
expected for any future period. Significant fluctuations in our revenue and operating results
could also impact the Companys ability to comply with its debt covenants of its credit facilities.
Internal control over financial reporting may not prevent or detect misstatements because of
its inherent limitations. We require effective internal control over financial reporting in order
to provide reasonable assurance with respect to our financial reports and to effectively prevent
fraud. Internal control over financial reporting may not prevent or detect misstatements because of
its inherent limitations, including the circumvention or overriding of controls, or fraud.
Additionally, as of August 28, 2011, our management has concluded that our internal control over
financial reporting was not effective due to a material weakness in the areas of segregation of
duties and adequacy of personnel resulting from a staff reduction in the quarter ended May 31,
2009. Because of this material weakness in internal control over financial reporting, we may be
more susceptible to misstatements in our financial statements or incidences of fraud. However, even
effective internal controls can provide only reasonable and not absolute assurances with respect to
the preparation and fair presentation of financial statements. The market price of our common stock
has fluctuated significantly in the past and may continue in the future. The market price of our
common stock has been volatile in the past and several factors could cause the price to fluctuate
substantially in the future. These factors include quarterly fluctuations in our financial results,
customer contract awards, and general economic and political conditions in our various markets. In
addition, the stock prices of small public contract manufacturing companies have experienced
significant price and volume fluctuations that often have been unrelated to the operating
performance of such companies. This market volatility may adversely affect the market price of our
common stock.
Complying with securities laws and regulations is costly for us. Changing laws, regulations
and standards relating to corporate governance and public disclosure, including regulations
promulgated by the SEC and Nasdaq, are creating particular challenges for smaller publicly-held
companies like us. We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and the related regulations regarding our assessment of our internal control over
financial reporting have required, and will continue to require, the expenditure of significant
financial and managerial resources. In addition to Sarbanes-Oxley, we will also be required to
expend financial and managerial resources to comply with the SEC requirement that mandates that our
quarterly and yearly filings with them be in an XBRL readable format.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
4
Table of Contents
Item 2. | Properties. |
The Company purchased an existing 49,000 square foot facility located in Monticello, Minnesota in
May 2004 to house its production and its headquarters. The purchase price was $1.9 million and was
paid for by a combination of cash and debt. The Company entered into two notes evidencing the debt
used to purchase its Monticello facility that were secured by mortgages. The first note and
mortgage was to Excel Bank Minnesota (now M&I Marshall and IIsley Bank) for $1,360,000 that matures
on May 1, 2014. Effective May 3, 2009 the interest rate adjusted to a rate 2.5% above the monthly
yield on United States Treasury five-year securities. The interest rate at August 28, 2011 is 4.38%
with monthly payments of $7,637 based on a 25-year amortization schedule. The note is secured by a
mortgage and security interest in all assets of the Company.
The Company also entered into a note and mortgage with the City of Monticello, Minnesota Economic
Development Authority (MEDA). The MEDA mortgage was subordinated to the mortgage of Excel Bank
Minnesota. The note to MEDA carried an interest rate of 2% and required monthly principal and
interest payments of $1,483 based on a 25-year amortization schedule. Effective May 1, 2009, the
Company amended the note to extend the maturity date to May 1, 2011, at which time the entire
balance was paid in full.
In fiscal 2008, the Company commenced an addition to its facility to add manufacturing space. Upon
completion in early fiscal 2009, the addition added 12,500 square feet of manufacturing space. In
August 2008, the Company obtained a loan from M&I Marshall and IIsley Bank to finance this
addition. The loan was secured by certain assets of the Company and guarantees by the Companys
subsidiaries. The Company was able to draw upon the loan on a non-revolving basis through May 31,
2009 in an aggregate amount not to exceed $1,200,000. The loan required monthly payments of
interest only at the banks prime rate plus 0.50%. The loan became due and was paid in full on
June 30, 2010.
The Company considers its manufacturing equipment, facilities, and other physical properties to be
suitable and adequate to meet the requirements of its business.
Item 3. | Legal Proceedings. |
The Company is not a party to any material legal proceedings; we may be subject from time to time
ordinary routine litigation incidental to its business.
Item 4. | [Removed and Reserved.] |
5
Table of Contents
PART II
Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The common stock of the Company is traded on The NASDAQ Capital Market of the NASDAQ Stock Market,
Inc. under the symbol WSCI.
As of November 7, 2011 there were 360 shareholders of record of the Companys common stock. |
The following table sets forth, for the periods indicated, the high and low closing sales price
information for our common stock as reported by the Nasdaq Capital Market.
Stock Price | ||||||||
High | Low | |||||||
FISCAL 2011: |
||||||||
First quarter |
$ | 7.41 | $ | 3.43 | ||||
Second quarter |
6.57 | 4.50 | ||||||
Third quarter |
5.23 | 4.42 | ||||||
Fourth quarter |
7.42 | 4.82 | ||||||
FISCAL 2010: |
||||||||
First quarter |
$ | 3.22 | $ | 2.12 | ||||
Second quarter |
2.20 | 1.74 | ||||||
Third quarter |
2.52 | 1.80 | ||||||
Fourth quarter |
4.41 | 1.98 |
In fiscal year 2010, the Company did not pay a quarterly dividend during the fiscal year. In
fiscal 2011, the Company paid a quarterly cash dividend of $.04 per share in each quarter. The
Company expects to continue its quarterly dividend program, subject to its financial performance.
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Table of Contents
The following table sets forth information regarding our equity compensation plans in effect as of
August 28, 2011. Each of our equity compensation plans is an employee benefit plan as defined by
Rule 405 of Regulation C of the Securities Act of 1933.
Equity Compensation Plan Information
Number of shares of | ||||||||||||
Number of shares of | common stock remaining | |||||||||||
common stock to be | Weighted-average | available for future issuance | ||||||||||
issued upon exercise of | exercise price of | under equity compensation | ||||||||||
outstanding options, | outstanding options, | plans (excluding securities | ||||||||||
Plan category | warrants and rights | warrants and rights | reflected in the first column) | |||||||||
Equity compensation
plans approved by
shareholders: |
||||||||||||
2005 Stock Plan |
248,166 | $ | 4.16 | 226,220 | ||||||||
Total |
248,166 | $ | 4.16 | 226,220 | ||||||||
There are no outstanding equity compensation plans not approved by shareholders.
The Company made no repurchases of its common stock in fiscal year 2011.
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Table of Contents
Item 6. | Selected Financial Data |
Not applicable.
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Critical Accounting Policies and Estimates:
Managements Discussion and Analysis of Financial Condition and Results of Operations discuss our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the result of which forms the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Results may differ from these estimates due to actual outcomes being different from those on which
we based our assumptions. The estimates and judgments utilized are reviewed by management on an
ongoing basis and by the audit committee of our board of directors at the end of each quarter prior
to the public release of our financial results. We made no significant changes to our critical
accounting policies during fiscal 2011.
Application of Critical Accounting Policies:
Excess and Obsolete Inventory:
Inventories, which are composed of raw materials, work in process and finished goods, are valued at
the lower of cost or market by comparing the cost of each item in inventory to its most recent
sales price or sales order price. Inventory cost is adjusted down for any excess cost over net
realizable value of inventory components.
In addition, the Company determines whether its inventory is obsolete by analyzing the sales
history of its inventory, sales orders on hand and indications from the Companys customers as to
the future of various parts or programs. If, in the Companys determination, the inventory value
has become impaired, the Company adjusts the inventory value to the amount the Company estimates as
the ultimate net realizable value for that inventory. Actual customer requirements in any future
periods are inherently uncertain and thus may differ from our estimates. The Company performs its
lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly.
The Company has no specific timeline to dispose of its remaining obsolete inventory and intends to
sell this obsolete inventory from time to time, as market conditions allow.
Goodwill Impairment:
The Company evaluates the valuation of its goodwill according to the provisions of Accounting
Standards Codification (ASC) 350 to determine if the current value of goodwill has been impaired.
The Company believes that its stock price is not necessarily an indicator of the Companys value
given its limited trading volume and its wide price fluctuations. The Company has also adopted
Accounting Standard Update (ASU) No. 2011-08, IntangiblesGoodwill and Other (Topic 350). With
ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill
impairment to determine whether it should calculate the fair value of its reporting unit. In the
fiscal 2011 fourth quarter, the Company made its qualitative evaluation of its goodwill
considering, among other things, the overall macroeconomic conditions, industry and market
considerations, overall financial performance and other relevant company specific events. Based on
this qualitative evaluation, the Company concluded that it was more likely than not that its
goodwill was not impaired and that it wasnt required to calculate the fair value of its reporting
unit. If the Company has changes in events or circumstances, including reductions in anticipated
cash flows generated by its operations, goodwill could become impaired which would result in a
charge to earnings.
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Table of Contents
Deferred 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. A deferred tax valuation allowance is set up should the realization of any deferred
taxes become less likely than not to occur. The valuation allowance is analyzed periodically by
the Company and may result in income tax expense being different than statutory rates. The Company
has not established a valuation allowance as it believes it is more likely than not that it will
fully realize the benefit of its tax assets. Currently, the Companys deferred tax assets have two
major components which relate to the Companys net operating loss (NOL) and the Companys
alternative minimum tax (AMT) tax credit carryforwards. The Companys AMT tax credit carryforward
does not expire. The Companys NOL carryforward is approximately $2.1 million expiring in 2021 -
2029. The Company believes that given the extended time period for the NOL carryforward to expire
as well as a return to a more normal growth rate experienced prior to the economic recession of
fiscal 2009, that the Company is more likely than not to fully utilize its NOL carryforward before
it expires. However, a significant loss of a customer or a change in the Companys business could
affect the realization of the deferred tax assets. If a major program were discontinued, the
Company would immediately assess the impact of the loss of the program on the realization of the
deferred tax assets.
Revenue Recognition:
The Company considers its revenue recognition policy to fall under the guidance of FASBs
conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) The
Company has received a purchase order identifying price and delivery terms or services to be
rendered; (b) shipment has occurred, or in the case of services, after the service has been
completed; (c) the Companys price is fixed as evidenced by the purchase order; and (d)
collectability is reasonably assured. The Company continually monitors its accounts receivable for
any delinquent or slow paying accounts. The Company believes that based upon its past history with
minimal bad debt write-offs, that all accounts are collectible upon shipment or delivery of
services. Credit losses from customers have been minimal and within managements expectations.
Based on managements evaluation of uncollected accounts receivable, bad debts are provided for on
the allowance method. Accounts are considered delinquent if they are 120 days past due. If an
uncollectible account should arise during the year, it would be written-off at the point it was
determined to be uncollectible. The Company mitigates its credit risk by performing periodic
credit checks and actively pursuing past due accounts. The Company refers to net sales in its
consolidated statements of operations as the Companys sales are sometimes reduced by product
returned by its customers.
Liquidity and Capital Resources:
The Companys net working capital at the end of fiscal 2011 was $5,283,000 as compared to
$4,438,000 at the end of fiscal 2010. The increase occurred primarily from increases in cash and
accounts receivable and a decrease in current maturities of long-term debt. The ratio of current
assets to current liabilities increased to 2.54 to 1.0 at August 28, 2011 from 2.30 to 1.0 at the
end of the prior fiscal year. The Company generated $2,690,000, $1,634,000 and $1,767,000 in cash
from operations in fiscal 2011, 2010 and 2009, respectively.
In fiscal 2011 and 2009, additions to property, plant and equipment either by cash or capitalized
lease were $1,743,000 and $1,341,000, respectively. These amounts included $1,280,000 and $919,000
of machinery acquired through capital leases in fiscal 2011 and 2009, respectively. In fiscal
2010, the Company had minimal additions to property, plant and equipment, capitalizing $61,000
during the year.
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In its fiscal 2011 first quarter, the Company added two machining centers, one of which was
purchased to supplement capacity in its energy business while the other machine was bought
primarily for replacement purposes. In the Companys second and fourth quarters, the Company added
two more machining centers for new programs obtained in its energy business. In its fiscal 2009
first quarter, the Company added one machining center for its energy business. Also in fiscal
2009, the Company completed its building addition and capitalized $267,000 in cost in addition to
amounts capitalized in fiscal 2008.
On February 1, 2011, the Company renewed its revolving line of credit agreement with its bank.
Under the agreement, the Company can borrow up to $1 million. The agreement expires on February 1,
2012. No balances were owed at August 28, 2011 and August 29, 2010, and no advances were made on
the credit line during either fiscal 2011 or 2010.
In August 2008, the Company entered into an agreement with its bank to finance a building addition
to its existing manufacturing facility. The Company was able to draw upon the loan on a
non-revolving basis through May 31, 2009 in an aggregate amount not to exceed $1.2 million. The
loan required monthly payments of interest only at the banks prime rate plus 0.50%. The loan
matured on, and was paid in full on June 30, 2010.
The Companys total debt was $4,925,000 at August 28, 2011 which consisted of a mortgage on its
building of $1,124,000 and capital lease obligations secured by production equipment of $3,801,000.
Current maturities of long-term debt consist of $947,000 due on capital leases and $42,000 on its
building related debt. During fiscal 2011, the Company made principal payments on its debt of $1.3
million. It is managements belief that the combination of its current cash balance, its
internally generated funds, as well as its revolving line of credit will be sufficient to enable
the Company to meet its financial requirements during fiscal 2012.
Results of Operations:
Net sales in fiscal 2011 were $25.0 million as compared to fiscal 2010 and 2009 which were $18.8
million. The increases in the fiscal 2011 sales came primarily from a 39% increase in recreational
vehicle sales and a 27% increase in energy sales. The comparable sales in fiscal 2010 to fiscal
2009 came as a result of a decrease in the energy business offset by increases in all other
business categories.
The following is a reconciliation of sales by major market:
Fiscal 2011 | Fiscal 2010 | Fiscal 2009 | ||||||||||
Recreational vehicle |
$ | 16,969,000 | $ | 12,209,000 | $ | 10,121,000 | ||||||
Aerospace and defense |
1,886,000 | 1,633,000 | 1,507,000 | |||||||||
Energy |
5,693,000 | 4,485,000 | 6,693,000 | |||||||||
Biosciences |
337,000 | 379,000 | 351,000 | |||||||||
Other |
78,000 | 120,000 | 94,000 | |||||||||
$ | 24,963,000 | $ | 18,826,000 | $ | 18,766,000 | |||||||
The increase in sales in the recreational vehicle market in fiscal 2011 resulted from the overall
increase in demand from the Companys largest customer for the parts the Company supplies. The
increase in sales in fiscal 2010 as compared to fiscal 2009 in the recreational vehicle market
came from two factors. The first was a general overall increase in the level of demand in both the
ATV and motorcycle markets. The second contributing factor was the Company becoming the sole
source supplier on a particular part in fiscal 2010 while the part was dual sourced in fiscal 2009.
The Companys sales in its motorcycle market are predominantly with one customer. However, in
fiscal 2011, 2010 and 2009 revenues were also somewhat positively impacted by an additional
customer who contributed sales of $165,000, $287,000 and $429,000 in those three years,
respectively.
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Sales from the Companys aerospace and defense markets were up 15% in fiscal 2011 due primarily to
increased product shipments to a new customer first announced in fiscal 2010. Fiscal 2010 sales in
the aerospace and defense markets were up 8% with initial sales to that customer occurring in the
Companys fiscal fourth quarter.
Sales from the Companys energy business were up 27% in fiscal 2011 as compared to fiscal 2010 with
the increase due in large measure to sales to a new customer previously announced. The Companys
sales in its energy business decreased 33% in fiscal 2010 as compared to fiscal 2009. The Company
believes that the reduction of the volume of orders from its customers in this segment in fiscal
2010 was due to a combination of factors including the recession, tight credit conditions, lower
oil prices and a reduction in the demand of the particular type of oilfield equipment the Company
manufactures. Sales also decreased as a result of the consignment of the raw material the Company
machines in its end products as opposed to purchasing the raw material. The Company experienced in
fiscal 2010 a higher percentage of consigned raw materials in its parts which then lead to a lower
overall end sales price to its customers. This consignment of raw material effect has continued
and has also affected sales in fiscal 2011.
Sales to the Companys biosciences industry have fluctuated up and down in a $42,000 range in the
last three fiscal years. The Companys believes that these fluctuations are relatively minor and
not indicative of any change in trend of sales in this market.
The Companys sales from its other market are primarily derived from miscellaneous sales in the
computer components fields and amount to less than 1% of the Companys total sales.
The Companys gross margin decreased in fiscal 2011 to 17.8% from 19.9% in fiscal 2010. The
primary reason for the decrease were start-up expenses associated with new programs in the
Companys energy business that were incurred during the first two quarters of fiscal 2011. In
addition, a higher material and outside services content as a percent of sales in fiscal 2011 was
also a factor in the lower gross margins.
The Companys gross margin increased to 19.9% in fiscal 2010 from 12.6% in fiscal 2009. The
primary factor in the increase was that the fiscal 2009 margins were negatively affected by the
recessionary conditions in that year. The increase in gross margin in fiscal 2010 is also
partially attributable to a lower percentage of material and outside services content in product
shipped during the year. Thus, the value added sales (net sales less material and outside
services) were higher during fiscal 2010 than in fiscal 2009. So while the Companys overall sales
were virtually the same year-over-year, the Companys value added sales were up 10% in fiscal 2010
versus fiscal 2009. This increase in the volume of value added sales, in combination with cost
reduction efforts, were the primary drivers in the increase in the gross margin percentage in
fiscal 2010.
No significant sales of obsolete items occurred in fiscal 2009 through 2011 and, correspondingly,
no significant gross margin was recognized.
Selling and administrative expense in fiscal 2011 was approximately $2.8 million, an increase of
$335,000 over the fiscal 2010 amount of approximately $2.4 million. The increase in fiscal 2011
was due primarily to increased payroll costs due to headcount additions as well as increased
incentive compensation expense. Selling and administrative expense increased in fiscal 2010 versus
2009 by $199,000 to $2.4 million. The increase was due primarily to higher payroll costs. The
Company adopted ASC 718 in fiscal 2007 and recorded a non-cash stock option compensation expense of
$205,000, $211,000 and $196,000 in fiscal 2011, 2010 and fiscal 2009, respectively. In addition,
the Company incurred professional service expense in each of those three fiscal years in connection
with its analysis of internal controls over financial reporting as required by the Sarbanes-Oxley
Act.
11
Table of Contents
Interest expense in fiscal 2011 amounted to $289,000 as compared to $359,000 in fiscal 2010. The
lower expense is attributable to a lower average level of debt in fiscal 2011 as compared to fiscal
2010, with the
lower level being primarily related to the $1.2 million loan for the Companys building addition
that was paid off in the fiscal 2010 fourth quarter. Interest expense in fiscal 2010 was $57,000
lower than in fiscal 2009 as the Company did not enter into any new lending or capital lease
arrangements and paid down its debt by approximately $2.1 million during the 2010 fiscal year.
The Company recorded income taxes at an effective tax rate of 36% for fiscal 2011, 2010 and 2009,
respectively. The Company maintained its valuation allowance at zero during 2011 and 2010.
Caution Regarding Forward-Looking Statements
Statements included in this Managements Discussion and Analysis of Financial Condition and Results
of Operations, in the letter to shareholders, elsewhere in the Annual Report, in the Companys Form
10-K and in future filings by the Company with the Securities and Exchange Commission, in the
Companys 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. 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 and are not predictions of actual
future results. Forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described above under Item 1A. Risk
Factors.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 8. | Financial Statements and Supplementary Data. |
See Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page
20, attached hereto, which consolidated financial statements are incorporated herein by reference.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
12
Table of Contents
Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on that
evaluation, Michael J. Pudil, the chief executive officer, and Paul D. Sheely, the chief financial
officer, have concluded that as of August 28, 2011 our disclosure controls and procedures were not
effective because of the material weakness in internal control over financial reporting described
below. Notwithstanding the material weakness described below, we believe our consolidated
financial statements presented in this Annual Report on Form 10-K fairly represent, in all material
respects, our financial position, results of operations and cash flows for all periods presented
herein.
Changes in Internal Controls over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during
the fourth quarter ended August 28, 2011 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
The management of the Company is responsible for the preparation of the financial statements and
related financial information appearing in this Annual Report on Form 10-K. The financial
statements and notes have been prepared in conformity with accounting principles generally accepted
in the United States of America. The management of the Company also is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. A companys internal control over financial reporting is
defined as a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the issuer are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the financial statements.
Management, including the chief executive officer and chief financial officer, does not expect that
the Companys internal controls will prevent all error and all fraud. Because of its inherent
limitations, a system of internal control over financial reporting can provide only reasonable, not
absolute, assurance that the objectives of the control system are met and may not prevent or detect
misstatements. Further, over time control may become inadequate because of changes in conditions or
the degree of compliance with the policies or procedures may deteriorate.
13
Table of Contents
The Companys management hired an outside consulting firm to assist it in the evaluation of the
effectiveness of the Companys internal control over financial reporting. The Companys management
assessed the effectiveness of the Companys internal control over financial reporting as of August
28, 2011 based upon the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of
that evaluation, our management has concluded that, as of August 28, 2011, the Companys internal
control over financial
reporting was not effective due to a material weakness in the areas of segregation of duties and
adequacy of personnel resulting from a reduction in staff in its finance and accounting department
during the quarter ended May 31, 2009.
This annual report does not include an attestation report of the Companys independent registered
public accounting firm regarding internal control over financial reporting. Managements report was
not subject to attestation by the Companys independent registered public accounting firm pursuant
to rules of the Securities and Exchange Commission.
Item 9B. | Other Information. |
None.
14
Table of Contents
PART III
Pursuant to General Instruction E (3), the Company omits Part III, Items 10, 11, 12, 13 and 14, as
a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within
120 days after August 28, 2011 and such information required by such items is incorporated herein
by reference from the proxy statement.
Item 15. | Exhibits. |
(a) Documents filed as part of this report.
1. | Consolidated Financial Statements: Reference is made to the Index to Consolidated Financial Statements (page 20) hereinafter contained for all Consolidated Financial Statements. |
2. | Exhibits. | ||
Exhibit |
Exhibit | ||||
No. | Description | |||
3.1 | Restated Articles of Incorporation of WSI Industries, Inc.
Incorporated by reference from Exhibit 3 of the Registrants Form
10-Q for the quarter ended November 29, 1998. |
|||
3.2 | Restated and Amended Bylaws, as amended through January 6, 2005.
Incorporated by reference from Exhibit 3.2 of the Registrants
Form 10-K for the year ended August 28, 2005. |
|||
10.1 | WSI Industries, Inc. 1994 Stock Plan, as amended. Incorporated by
reference from Exhibit 4.1 of the Registrants Registration
Statement on Form S-8 (SEC File No. 333-78491). |
|||
10.2 | WSI Industries, Inc. 2005 Stock Plan. Incorporated by reference
from Exhibit 4.1 of the Registrants Registration Statement on
Form S-8 (SEC File No. 333-155768). |
|||
10.3 | Form of Restricted Stock Award Agreement under the Companys 2005
Stock Plan. Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated February 23, 2007. |
|||
10.4 | Form of Non-Qualified Stock Option and Stock Appreciation Rights
Agreement under the Companys 2005 Stock Plan. Incorporated by
reference to Exhibit 10.2 to the Registrants Current Report on
Form 8-K dated February 23, 2007. |
|||
10.5 | Form of Restricted Stock Bonus Award Agreement under the Companys
2005 Stock Plan. Incorporated by reference to Exhibit 10.5 to the
Registrants Annual Report on Form 10-K for the year ended August
30, 2009. |
15
Table of Contents
Exhibit | ||||
No. | Description | |||
10.6 | Board of Directors Retirement Program dated June 25, 1982.
Incorporated by reference from Exhibit 10.12 of the Registrants
Form 10-K for the year ended August 25, 2002. |
|||
10.7 | Employment Agreement dated as of October 7, 2009 by and between WSI
Industries, Inc. and Michael J. Pudil. Incorporated by reference to
Exhibit 10.4 to the Registrants Form 8-K dated October 7, 2009. |
|||
10.8 | Employment (change in control) Agreement between Paul D. Sheely and
Registrant dated January 11, 2001 incorporated by reference from
Exhibit 10.2 of the Registrants Form 10-Q for the quarter ended May
27, 2001. |
|||
10.9 | Amendment No. 1 to Employment (change in control) Agreement between
Paul D. Sheely and Registrant dated November 1, 2002. Incorporated
by reference from Exhibit 10.11 of the Registrants Form 10-K for
the year ended August 25, 2002. |
|||
10.10 | Second Amendment to Employment Change in Control Agreement dated
December 29, 2008 by and between WSI Industries, Inc. and Paul D.
Sheely. Incorporated by reference to Exhibit 10.3 to the
Registrants Form 8-K dated December 29, 2008. |
|||
10.11 | Severance Letter Agreement dated October 7, 2009 by and between WSI
Industries, Inc. and Paul D. Sheely. Incorporated by reference to
Exhibit 10.5 to the Registrants Form 8-K dated October 7, 2009. |
|||
10.12 | Employment Offer Letter dated October 5, 2009 by WSI Industries,
Inc. to Benjamin Rashleger. Incorporated by reference to Exhibit
10.1 to the Registrants Form 8-K dated October 7, 2009. |
|||
10.13 | Employment (Change In Control) Agreement dated October 12, 2009 by
and between WSI Industries, Inc. and Benjamin Rashleger.
Incorporated by reference to Exhibit 10.2 to the Registrants Form
8-K dated October 7, 2009. |
|||
10.14 | Form of Restrictive Covenant Agreement by and between WSI
Industries, Inc. and Michael J. Pudil, Paul D. Sheely and Benjamin
Rashleger. Incorporated by reference to Exhibit 10.3 to the
Registrants Form 8-K dated October 7, 2009. |
|||
10.15 | Promissory Note dated as of May 3, 2004 by WSI Industries, Inc. as
debtor and Excel Bank Minnesota as holder in the original principal
amount of $1,360,000. Incorporated by reference from Exhibit 10.2
of the Registrants Form 8-K dated May 3, 2004. |
|||
10.16 | Loan Agreement dated as of May 3, 2004 between WSI Industries, Inc.
and Excel Bank Minnesota. Incorporated by reference from Exhibit
10.3 of the Registrants Form 8-K dated May 3, 2004. |
|||
10.17 | Mortgage and Security Agreement and Fixture Financing Statement
dated as of May 3, 2004 between WSI Industries, Inc. and Excel Bank
Minnesota. Incorporated by reference from Exhibit 10.6 of the
Registrants Form 8-K dated May 3, 2004. |
16
Table of Contents
Exhibit | ||||
No. | Description | |||
10.18 | Second Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of May 3, 2004 by
and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI
Rochester, Inc. and Excel Bank Minnesota. Incorporated by reference
from Exhibit 10.8 of the Registrants Form 8-K dated May 3, 2004. |
|||
10.19 | Third Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of January 1,
2005 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc.
and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by
reference from Exhibit 10.1 of the Registrants Form 10-Q for the
quarter ended November 28, 2004. |
|||
10.20 | Fourth Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of January 1,
2006 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc.
and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by
reference from Exhibit 10.1 of the Registrants Form 10-QSB for the
quarter ended November 27, 2005. |
|||
10.21 | Fifth Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of January 1,
2007 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc.
and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by
reference from Exhibit 10.1 of the Registrants Form 10-QSB for the
quarter ended November 26, 2006. |
|||
10.22 | Sixth Amendment and Modification of Revolving Line of Credit Loan
Agreement and Reaffirmation of Guaranties dated as of January 31,
2008 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc.
and WSI Rochester, Inc. and M&I Marshall and IIsley Bank.
Incorporated by reference from Exhibit 10.1 of the Registrants Form
10-QSB for the quarter ended February 24, 2008. |
|||
10.23 | Loan agreement dated February 1, 2011 between WSI Industries, Inc.,
Taurus Numeric Tool, Inc., WSI Rochester, Inc., and M&I Marshall &
Ilsley Bank. Incorporated by reference to Exhibit 10.1 of the
Registrants Form 10-Q for the quarter ended February 27, 2011. |
|||
10.24 | Amended and Restated Revolving Credit Promissory Note dated February
1, 2011 in the principal amount of $1,000,000 by WSI Industries,
Inc. in favor of M&I Marshall & Ilsley Bank. |
|||
10.25 | Amended and Restated Security Agreement dated February 1, 2011 by
and between WSI Industries, Inc. and M&I Marshall & Ilsley Bank. |
|||
10.26 | Amended and Restated Security Agreement dated February 1, 2011 by
and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley
Bank. |
|||
10.27 | Amended and Restated Security Agreement dated February 1, 2011 by
and between WSI Rochester, Inc. and M&I Marshall & Ilsley Bank. |
17
Table of Contents
Exhibit | ||||
No. | Description | |||
10.28 | Guaranty dated February 1, 2011 by and WSI Rochester, Inc. and M&I
Marshall & Ilsley Bank |
|||
10.29 | Guaranty dated February 1, 2011 by and between Taurus Numeric Tool,
Inc. and M&I Marshall & Ilsley Bank |
|||
14.1 | Code of Ethics & Business Conduct adopted by WSI Industries, Inc. on
October 29, 2003. Incorporated by reference to Exhibit 14.1 of the
Registrants Annual Report on Form 10-K for the year ended August
31, 2003. |
|||
21.1 | Subsidiaries of the Registrant. |
|||
23.1 | Consent of Schechter Dokken Kanter Andrews & Selcer Ltd. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a)
and 15d-14(a) of the Exchange Act. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14(a)
and 15d-14(a) of the Exchange Act. |
|||
32.1 | Certification pursuant to 18 U.S.C. §1350. |
18
Table of Contents
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 | ||||
Chief Executive Officer (principal executive officer) |
||||
BY: | /s/ Paul D. Sheely | |||
Paul D. Sheely | ||||
Vice President and Treasurer (principal financial and accounting officer) |
DATE: November 17, 2011
Each person whose signature appears below hereby constitutes and appoints Michael J. Pudil and Paul
D. Sheely, and each of them, as his true and lawful attorney-in-fact and agent, with full power of
substitution, to sign on his behalf, individually and in each capacity stated below, all amendments
to this Form 10-K and to file the same, with all exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully and to all intents and
purposes as each might or could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
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
|
Chief Executive Officer and Director | November 17, 2011 | ||
/s/ Benjamin T. Rashleger
|
President, Chief Operating Officer and Director | November 17, 2011 | ||
/s/ Thomas C. Bender
|
Director | November 17, 2011 | ||
/s/ Burton F. Myers II
|
Director | November 17, 2011 | ||
/s/ James D. Hartman
|
Director | November 17, 2011 |
19
Table of Contents
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page | ||||
CONSOLIDATED FINANCIAL STATEMENTS |
||||
21 | ||||
22 | ||||
23 | ||||
24 | ||||
25 | ||||
26-35 | ||||
20
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
WSI Industries, Inc.
Monticello, Minnesota
WSI Industries, Inc.
Monticello, Minnesota
We have audited the consolidated balance sheets of WSI Industries, Inc. and Subsidiaries as of
August 28, 2011 and August 29, 2010 and the related consolidated statements of income,
stockholders equity and cash flows for each of the years in the three-year period ended August 28,
2011. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. 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 statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of WSI Industries, Inc. and Subsidiaries as
of August 28, 2011 and August 29, 2010, and the results of its operations and its cash flows for
each of the years in the three-year period ended August 28, 2011, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Schechter Dokken Kanter
Andrews & Selcer Ltd |
Minneapolis, Minnesota
November 17, 2011
November 17, 2011
21
Table of Contents
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 28, 2011 AND AUGUST 29, 2010
AUGUST 28, 2011 AND AUGUST 29, 2010
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,920,078 | $ | 2,347,113 | ||||
Accounts receivable, less allowance for doubtful
accounts of $10,074 |
3,292,227 | 3,087,087 | ||||||
Inventories (Note 2) |
2,016,325 | 2,185,283 | ||||||
Prepaid and other current assets |
227,239 | 60,686 | ||||||
Deferred tax assets (Note 6) |
254,439 | 171,713 | ||||||
Total current assets |
8,710,308 | 7,851,882 | ||||||
Property, plant, and equipment, at cost: |
||||||||
Land |
819,000 | 819,000 | ||||||
Building and improvements |
2,306,220 | 2,299,648 | ||||||
Machinery and equipment |
12,507,519 | 10,998,303 | ||||||
Less accumulated depreciation |
(8,554,678 | ) | (7,610,282 | ) | ||||
Total property, plant, and equipment |
7,078,061 | 6,506,669 | ||||||
Deferred tax assets (Note 6) |
| 258,901 | ||||||
Other assets (Note 10): |
||||||||
Goodwill and related acquisition costs |
2,368,452 | 2,368,452 | ||||||
$ | 18,156,821 | $ | 16,985,904 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 1,302,958 | $ | 1,266,641 | ||||
Accrued compensation and employee withholdings |
1,018,665 | 615,048 | ||||||
Other accrued expenses |
116,609 | 367,218 | ||||||
Current portion of long-term debt (Note 3) |
989,191 | 1,165,192 | ||||||
Total current liabilities |
3,427,423 | 3,414,099 | ||||||
Long-term debt, less current portion (Note 3) |
3,935,712 | 3,736,505 | ||||||
Deferred tax liabilities (Note 6) |
308,061 | | ||||||
Stockholders equity (Note 5): |
||||||||
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,889,567 shares and 2,888,492 respectively |
288,957 | 288,850 | ||||||
Capital in excess of par value |
3,149,674 | 2,922,048 | ||||||
Deferred compensation |
(275,106 | ) | (250,412 | ) | ||||
Retained earnings |
7,322,100 | 6,874,814 | ||||||
Total stockholders equity |
10,485,625 | 9,835,300 | ||||||
$ | 18,156,821 | $ | 16,985,904 | |||||
See notes to consolidated financial statements.
22
Table of Contents
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
2011 | 2010 | 2009 | ||||||||||
Net sales (Note 8) |
$ | 24,963,235 | $ | 18,826,498 | $ | 18,765,982 | ||||||
Cost of products sold |
20,527,925 | 15,079,679 | 16,394,530 | |||||||||
Gross margin |
4,435,310 | 3,746,819 | 2,371,452 | |||||||||
Selling and administrative expense |
2,759,493 | 2,424,651 | 2,225,914 | |||||||||
Interest and other income |
(18,640 | ) | (33,183 | ) | (22,385 | ) | ||||||
Interest expense |
289,108 | 359,269 | 416,650 | |||||||||
3,029,961 | 2,750,737 | 2,620,179 | ||||||||||
Income (loss) before income taxes |
1,405,349 | 996,082 | (248,727 | ) | ||||||||
Income taxes (benefits) (Note 6) |
505,926 | 358,589 | (89,542 | ) | ||||||||
Net income (loss) |
$ | 899,423 | $ | 637,493 | $ | (159,185 | ) | |||||
Basic earnings (loss) per share |
$ | .32 | $ | .23 | $ | (.06 | ) | |||||
Diluted earnings (loss) per share |
$ | .31 | $ | .23 | $ | (.06 | ) | |||||
Cash dividend per share |
$ | .16 | $ | | $ | .0375 | ||||||
Weighted average number of common
shares outstanding, basic |
2,825,921 | 2,801.210 | 2,789,717 | |||||||||
Weighted average number of
common shares outstanding, diluted |
2,877,064 | 2,801,210 | 2,789,717 | |||||||||
See notes to consolidated financial statements.
23
Table of Contents
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common | Capital in | Total | ||||||||||||||||||||||
Stock | Excess of | Deferred | Retained | Stockholders | ||||||||||||||||||||
Shares | Amount | Par Value | Compensation | Earnings | Equity | |||||||||||||||||||
Balance at August 31, 2008 |
2,825,358 | $ | 282,536 | $ | 2,573,797 | $ | (245,984 | ) | $ | 6,501,010 | $ | 9,111,359 | ||||||||||||
Net loss |
| | | | (159,185 | ) | (159,185 | ) | ||||||||||||||||
Restricted stock grants |
63,382 | 6,338 | 226,591 | (232,929 | ) | | | |||||||||||||||||
Restricted stock issuance |
| | (48,176 | ) | 48,176 | | | |||||||||||||||||
Stock option compensation |
| | 196,284 | | | 196,284 | ||||||||||||||||||
Restricted stock grants
not earned and payment
of withholding taxes |
(9,872 | ) | (988 | ) | (77,428 | ) | 68,876 | | (9,540 | ) | ||||||||||||||
Dividends paid |
| | | | (104,504 | ) | (104,504 | ) | ||||||||||||||||
Balance at August 30, 2009 |
2,878,868 | $ | 287,886 | $ | 2,871,068 | $ | (361,861 | ) | $ | 6,237,321 | $ | 9,034,414 | ||||||||||||
Net income |
| | | | 637,493 | 637,493 | ||||||||||||||||||
Restricted stock grants |
58,405 | 5,841 | 133,215 | (139,056 | ) | | | |||||||||||||||||
Restricted stock issuance |
| | (94,919 | ) | 94,919 | | | |||||||||||||||||
Stock option compensation |
| | 210,712 | | | 210,712 | ||||||||||||||||||
Restricted stock grants
not earned and payment
of withholding taxes |
(48,781 | ) | (4,877 | ) | (198,028 | ) | 155,586 | | (47,319 | ) | ||||||||||||||
Balance at August 29, 2010 |
2,888,492 | $ | 288,850 | $ | 2,922,048 | $ | (250,412 | ) | $ | 6,874,814 | $ | 9,835,300 | ||||||||||||
Net income |
| | | | 899,423 | 899,423 | ||||||||||||||||||
Restricted stock grants |
37,715 | 3,771 | 227,475 | (231,246 | ) | | | |||||||||||||||||
Restricted stock issuance |
| | (97,316 | ) | 97,316 | | | |||||||||||||||||
Stock option compensation |
| | 205,232 | | | 205,232 | ||||||||||||||||||
Restricted stock grants
not earned and payment
of withholding taxes |
(52,148 | ) | (5,215 | ) | (122,080 | ) | 109,236 | | (18,059 | ) | ||||||||||||||
Exercise of stock
appreciation rights and
payment of withholding
taxes |
15,508 | 1,551 | 14,315 | | | 15,866 | ||||||||||||||||||
Dividends paid |
| | | | (452,137 | ) | (452,137 | ) | ||||||||||||||||
Balance at August 28, 2011 |
2,889,567 | $ | 288,957 | $ | 3,149,674 | $ | (275,106 | ) | $ | 7,322,100 | $ | 10,485,625 | ||||||||||||
See notes to consolidated financial statements.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
2011 | 2010 | 2009 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 899,423 | $ | 637,493 | $ | (159,185 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
1,171,259 | 1,074,457 | 1,050,833 | |||||||||
Amortization of deferred financing cost |
| | 4,409 | |||||||||
Net tax (benefits) expense related to share based compensation |
(21,901 | ) | 30,496 | | ||||||||
Deferred taxes |
506,138 | 339,979 | (79,571 | ) | ||||||||
Stock option compensation |
205,232 | 210,712 | 196,284 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in: |
||||||||||||
Accounts receivable |
(205,140 | ) | (351,501 | ) | 1,017,768 | |||||||
Inventories |
168,958 | (38,752 | ) | 389,475 | ||||||||
Prepaid and other current assets |
(166,553 | ) | (8,784 | ) | 137,031 | |||||||
Increase (decrease) in accounts payable and accrued expenses |
132,720 | (259,953 | ) | (790,058 | ) | |||||||
Net cash provided by operating activities |
2,690,136 | 1,634,147 | 1,766,986 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Additions to property, plant, and equipment |
(462,588 | ) | (60,767 | ) | (421,634 | ) | ||||||
Net cash used in investing activities |
(462,588 | ) | (60,767 | ) | (421,634 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Payment of long-term debt |
(1,256,857 | ) | (2,075,723 | ) | (829,497 | ) | ||||||
Net tax benefits (expense) related to share based compensation |
21,901 | (30,496 | ) | | ||||||||
Proceeds from issuance of long-term debt |
| | 625,000 | |||||||||
Issuance of common stock |
32,510 | | | |||||||||
Dividends paid |
(452,137 | ) | | (104,504 | ) | |||||||
Net cash used in financing activities |
(1,654,583 | ) | (2,106,219 | ) | (309,001 | ) | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
572,965 | (532,839 | ) | 1,036,351 | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
2,347,113 | 2,879,952 | 1,843,601 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 2,920,078 | $ | 2,347,113 | $ | 2,879,952 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 289,274 | $ | 363,278 | $ | 413,120 | ||||||
Payroll withholding taxes in cashless stock option exercise |
56,604 | 16,823 | 9,540 | |||||||||
Income taxes |
35,641 | 15,536 | 13,762 | |||||||||
Noncash investing and financing activities: |
||||||||||||
Acquisition of machinery through capital lease |
1,280,063 | | 919,043 |
See notes to consolidated financial statements.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business Description WSI Industries, Inc. and Subsidiaries
(the Company) is involved in the precision contract metal machining
business primarily serving the recreational vehicle, energy,
aerospace/avionics and bioscience industries.
Fiscal Year WSI Industries, Inc.s fiscal years represent a 52- to
53-week period ending the last Sunday in August. Fiscal 2011, 2010
and 2009 each consisted of 52 weeks.
Basis of Presentation The consolidated financial statements include the accounts of WSI
Industries, Inc. and its subsidiaries. All material intercompany balances and transactions
have been eliminated. Our consolidated financial statements for the year ended August 28,
2011 were evaluated for subsequent events through the date it was filed with the SEC on Form
10-K.
Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits
with financial institutions and short-term, highly liquid investments with original maturities
of three months or less. At times bank balances may exceed federally insured limits and the
risk of losses related to such concentrations may have increased as a result of economic
developments, particularly with the instability in the commercial and investment banking
system. Cash equivalents are carried at cost plus accrued interest which approximates fair
value.
Inventories Inventory costs determined using the average cost method consist of material,
direct labor, and manufacturing overhead. They are valued at the lower of cost or market by
comparing the cost of each item in inventory to its most recent sales price or sales order
price. Inventory cost is adjusted down for any excess of cost over the net realizable value
of inventory components.
In addition, the Company determines whether its inventory is excess and obsolete by analyzing
the sales history of its inventory, sales orders on hand and indications from the Companys
customers as to the future of various parts or programs. If, in the Companys determination,
the inventory value has become impaired, the Company adjusts the inventory value to the amount
the Company estimates as the ultimate net realizable value for that inventory. The Company
performs its lower of cost or market testing, as well as its excess or obsolete inventory
analyses, quarterly.
Property, plant, equipment and depreciation and amortization The cost of substantially all
machinery and equipment, and buildings and improvements are being depreciated using the
straight-line method. The estimated useful lives of the assets are as follows:
Machinery and equipment |
3 to 7 years | |||
Building and improvements |
15 to 40 years |
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Long-lived Assets The Company evaluates long-term assets on a periodic basis in compliance
with Accounting Standards Codification (ASC) 360, 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. If the
undiscounted cash flows are less than the carrying amount, the impairment recognized is
measured by the amount the carrying value of the assets exceeds their fair value determined
primarily through the present value of estimated future cash flows.
Goodwill The Company assesses the valuation of its goodwill according to the provisions of
ASC 350 to determine if the current value of goodwill has been impaired. The Company has also
adopted Accounting Standard Update (ASU) No. 2011-08, IntangiblesGoodwill and Other (Topic
350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of
goodwill impairment to determine whether it should calculate the fair value of its reporting
unit. In the fiscal 2011 fourth quarter, the Company made its qualitative evaluation of its
goodwill considering, among other things, the overall macroeconomic conditions, industry and
market considerations, overall financial performance and other relevant company specific
events. Based on this qualitative evaluation, the Company concluded that it was more likely
than not that its goodwill was not impaired and that it wasnt required to calculate the fair
value of its reporting unit. If the Company has changes in events or circumstances, including
reductions in anticipated cash flows generated by our operations, goodwill could become
impaired which would result in a charge to earnings.
Income Taxes The determination of the Companys income tax-related account balances
requires the exercised of significant judgment by management. Accordingly, the Company
determines deferred tax assets and liabilities based upon the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in effect for the
year the differences are expected to affect taxable income. Management assesses the
likelihood that deferred tax assets will be recovered from future taxable income and
establishes a valuation allowance when management believes recovery is unlikely.
Revenue Recognition Revenues from sales of product are recorded generally upon shipment.
The Company considers its revenue recognition policy to fall under the guidance of FASBs
conceptual framework for revenue recognition. The Company recognizes revenue only after: (a)
the Company has received a purchase order identifying price and delivery terms or services to
be rendered; (b) shipment has occurred, or in the case of services, after the service has
been completed; (c) the Companys price is fixed as evidenced by the purchase order; and (d)
collectability is reasonably assured. The Company refers to its revenues as net sales in
its Consolidated Statements of Income as the Companys sales are reduced for any product
returned by customers.
The Company generally does not require collateral on its trade receivables. The maximum loss
that the Company would incur if a customer failed to pay amounts owed would be limited to the
recorded amount due after any allowances provided. Credit losses relating to customers have
been minimal and within managements expectations. Based on managements evaluation of
uncollected accounts receivable throughout the year, bad debts are provided for on the
allowance method. Accounts are considered delinquent if they are 120 days past due. The
Company mitigates its credit risk by performing credit checks and actively pursuing past due
accounts.
Freight costs The Company includes freight, shipping and handling costs, in the cost of
goods sold.
Use of Estimates The preparation of financial statements in conformity with U. S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Significant estimates made in those financial
statements consist of estimates related to the
impairment of goodwill, the evaluation of excess or obsolete inventory and the valuation
allowance connected to the deferred tax assets.
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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-based compensation The following information has been determined as if the
Company had accounted for its stock options under the fair value method of ASC 718. The fair
value for these options was estimated, for the purpose of determining compensation, at the
date of grant using the Black-Scholes option pricing model with the following assumptions as
set forth in the table below. The estimated fair value of the options is amortized to expense
over the options vesting period.
Date of Grant in fiscal | 2011 | 2010 | 2009 | |||
Dividend yield |
2.3%-3.25% | | | |||
Expected volatility |
77.3%-78.5% | 69.8%-70.2% | 60.8% | |||
Risk free interest rate |
1.2%-3.3% | 2.6%-3.8% | 1.6%-2.47% | |||
Expected term |
5-10 years | 5-10 years | 5-10 years |
ASC 718 also requires the benefit of tax deductions in excess of recognized compensation cost
to be reported as a financing cash flow, rather than an operating cash flow under current
accounting literature.
The Company granted shares of non-vested restricted stock to various employees during the
years ended August 28, 2011, August 29, 2010 and August 30, 2009. The grants consisted of
both outright stock grants as well as stock that could be earned in connection with the
Companys incentive compensation program should certain predetermined targets be met. Both
kinds of non-vested restricted stock vest over three years with the grantees of the restricted
stock entitled to receive dividends in additional shares of restricted stock that also vest
yearly and to voting rights for the shares. The shares are accounted for under ASC 718 as
expense over the period that they vest. The shares are also reflected in stockholders equity
as deferred compensation which is calculated at the value of the shares at the date of the
grant.
Reclassification Certain prior year items have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement to amend the accounting
and disclosure requirements on fair value measurements. This ASU limits the
highest-and-best-use measure to nonfinancial assets, permits certain financial assets and
liabilities with offsetting positions in market or counterparty credit risks to be measured at
a net basis, and provides guidance on the applicability of premiums and discounts.
Additionally, this update expands the disclosure on Level 3 inputs by requiring quantitative
disclosure of the unobservable inputs and assumptions, as well as description of the valuation
processes and the sensitivity of the fair value to changes in unobservable inputs. ASU No.
2011-04 is to be applied prospectively and is effective during interim and annual periods
beginning after December 15, 2011. The Company does not expect the adoption of this update
will have a material effect on its consolidated financial statements.
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Table of Contents
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This ASU
presents an entity with the option to present the total of comprehensive income, the
components of net
income, and the component of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of other comprehensive income along
with a total for other comprehensive income, and a total amount for comprehensive income. This
update eliminates the option to present the components of other comprehensive income as part
of the statement of changes in stockholders equity/deficit. The amendments in this update do
not change the items that must be reported in other comprehensive income or when an item of
other comprehensive income must be reclassified to net income. ASU No. 2011-05 should be
applied retrospectively and is effective for fiscal years, and interim periods within those
years, beginning after 15 December 2011. As ASU No. 2011-05 relates only to the presentation
of Comprehensive Income, the Company does not expect the adoption of this update will have a
material effect on its consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08. Intangibles and Goodwill Other (Topic
350). This ASU gives the entity the option to make a qualitative evaluation of goodwill
impairment to determine whether it should calculate the fair value of its reporting unit. The
amendments also improve previous guidance by expanding upon the examples of events and
circumstances that an entity should consider between annual impairment tests in determining
whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. Also, the amendments improve the examples of events and circumstances that an
entity having a reporting unit with a zero or negative carrying amount should consider in
determining whether to measure an impairment loss, if any, under the second step of the
goodwill impairment test. The amendments are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption
is permitted, including for annual and interim goodwill impairment tests performed as of a
date before September 15, 2011, if an entitys financial statements for the most recent annual
or interim period have not yet been issued or, for nonpublic entities, have not yet been made
available for issuance. The Company has adopted this update effective with these financial
statements.
2. | INVENTORIES |
Inventories consist primarily of raw material, work-in-process (WIP) and finished goods valued
at the lower of cost or market value:
August 28, 2011 | August 29, 2010 | |||||||
Raw material |
$ | 347,829 | $ | 584,719 | ||||
WIP |
976,879 | 939,085 | ||||||
Finished goods |
691,617 | 661,479 | ||||||
$ | 2,016,325 | $ | 2,185,283 | |||||
3. | DEBT |
Long-term debt consists of the following:
August 28, 2011 | August 29, 2010 | |||||||
Building related mortgages & term debt |
$ | 1,123,771 | $ | 1,442,676 | ||||
Capitalized lease obligations |
3,801,132 | 3,459,021 | ||||||
4,924,903 | 4,901,697 | |||||||
Less current portion |
989,191 | 1,165,192 | ||||||
Long-term debt |
$ | 3,935,712 | $ | 3,736,505 | ||||
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The Company purchased its land and building in May 2004 and at that time entered into two mortgages. The first mortgage was
with its bank for $1,360,000 that matures on May 1, 2014. The mortgage had an initial interest rate of 5.37% and required monthly
principal and interest payments of $8,307 based on a 25-year amortization schedule. Effective May 3, 2009 the interest rate
adjusted to a rate 2.5% above the monthly yield on United States Treasury five-year securities. The new interest rate is 4.38%
with monthly payments of $7,637 also based on a 25-year amortization schedule. The mortgage is secured by all assets of the
Company.
The Company also entered into a mortgage with the City of Monticello, Minnesota Economic Development Authority (MEDA). The MEDA
mortgage was subordinated to the bank mortgage, carried an interest rate of 2% and required monthly principal and interest payments
of $1,483 based on a 25-year amortization schedule. The entire balance was due May 1, 2011 and it was fully paid as of that date.
Maturities of long-term debt are as follows:
Fiscal years ending August: |
||||
2012 |
$ | 989,191 | ||
2013 |
974,537 | |||
2014 |
1,910,520 | |||
2015 |
530,723 | |||
2016 |
222,648 | |||
Thereafter |
297,284 |
Included in the consolidated balance sheet at August 28, 2011 are cost and accumulated depreciation on equipment subject to
capitalized leases of $8,852,678 and $5,221,130, respectively. At August 29, 2010, the amounts were $7,537,576 and $4,258,583,
respectively. The capital leases carry interest rates from 4.5% to 8.4% and mature from 2012 2018.
The present value of the net minimum payments on capital leases which is included in long-term debt as of August 28, 2011 is as
follows:
Fiscal years ending August: |
||||
2012 |
$ | 1,151,040 | ||
2013 |
1,073,681 | |||
2014 |
958,590 | |||
2015 |
570,940 | |||
2016 |
242,196 | |||
Thereafter |
308,660 | |||
Total minimum lease payments |
4,305,107 | |||
Less amount representing interest |
503,975 | |||
Present value of net minimum lease payments |
3,801,132 | |||
Current portion |
946,642 | |||
Capital lease obligation, less current portion |
$ | 2,854,490 | ||
Line of Credit:
The Company renewed its revolving credit agreement with its bank on February 1, 2011. Under
the agreement, the Company can borrow up to $1 million, with the loan being collateralized by
all assets of the Company. The agreement expires February 1, 2012 and has restrictive
provisions requiring minimum net worth, current and debt service coverage ratios as well as a
maximum ratio of debt to tangible net worth. At August 28, 2011, the Company was in
compliance with these provisions.
Interest on any amounts borrowed under the agreement would be at a rate equal to the London
Interbank Offered Rates (LIBOR) (.22% at August 28, 2011) plus 3.0%. However, the rate
shall never be less than 3.75%. There were no amounts outstanding related to its revolving
credit agreement at August 28, 2011 and August 29, 2010, respectively.
30
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4. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The carrying amounts of financial instruments, including cash and equivalents, receivables,
accounts payable and accrued expenses, and current maturities on long-term debt obligations
approximates fair values due to their short term nature. Interest on long-term debt is
primarily at fixed rates which do not differ significantly from approximate market rates at
August 28, 2011.
5. | STOCK-BASED COMPENSATION |
Stock Options The 1994 Stock Option Plan was approved and 450,000 shares of common stock
were reserved for granting of options to officers, key employees, and directors. The Plan
expired on September 29, 2004 and therefore no shares remain to be granted.
The 2005 Stock Option Plan was approved and 600,000 shares of common stock were reserved for
granting of options to officers, key employees and directors. The Plan has a term of 10 years
and will expire in 2015.
Stock options vest over a period of six months to three years for both stock option plans.
Option transactions during the three years ended August 28, 2011 are summarized as follows:
1994 Stock | 2005 Stock | |||||||||||||||
Option Plan | Option Plan | |||||||||||||||
Average | Average | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at August 31, 2008 |
2,000 | $ | 2.75 | 121,666 | $ | 4.35 | ||||||||||
Granted |
| | 53,000 | 3.46 | ||||||||||||
Forfeited |
(2,000 | ) | 2.75 | | | |||||||||||
Exercised |
| | | | ||||||||||||
Outstanding at August 30, 2009 |
| $ | | 174,666 | 4.08 | |||||||||||
Granted |
45,000 | 2.32 | ||||||||||||||
Forfeited |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Outstanding at August 29, 2010 |
219,666 | 3.72 | ||||||||||||||
Granted |
61,000 | 5.39 | ||||||||||||||
Forfeited |
(7,000 | ) | 4.18 | |||||||||||||
Exercised |
(25,500 | ) | 3.30 | |||||||||||||
Outstanding at August 28, 2011 |
248,166 | $ | 4.16 | |||||||||||||
Of the 25,500 stock options from the 2005 Plan that were exercised in fiscal 2011, 9,992
shares were returned to the Company to pay for the exercise price and for related payroll
withholding taxes.
The weighted fair value of options granted during the years ended August 28, 2011, August 29,
2010, and August 30, 2009 was $3.10, $1.74 and $2.34, respectively. The total intrinsic value
of options exercised for the years August 28, 2011, August 29, 2010 and August 30, 2009 was
$50,900, $0 and $0, respectively. The intrinsic value for options outstanding at August 28,
2011 was $317,922.
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Cash received from option exercises for years ended August 28, 2011. August 29, 2010 and
August 30, 2009 was $32,510, $0 and $0, respectively. The actual tax benefit realized for the
tax deductions from option exercises totaled $21,901, $0 and $0 for fiscal years 2011, 2010
and 2009, respectively.
As of August 28, 2011, there was $135,287 of total unearned compensation cost related to
option-based compensation arrangements to be recognized over an expected weighted average of 1
year.
As of August 28, 2011, there were 31,000 shares with an exercise price of $2.13, 103,166
shares with exercise prices between $3.00 and $3.47 and 114,000 options outstanding with
exercise prices between $4.93 and $6.82. At August 28, 2011, outstanding options had a
weighted-average remaining contractual life of 7 years.
The number of options exercisable as of August 28, 2011, August 29, 2010 and August 30, 2009
were 193,999, 169,999 and 115,666, respectively, at weighted average share prices of $4.02,
$3.89, and $3.30 per share, respectively. At August 28, 2011, there were 54,167 options that
had not vested.
The Company also grants non-vested restricted shares as part of the 2005 Stock Option Plan.
These shares typically vest over a three year period and sometimes contain required minimum
threshold levels before the shares are earned. Non-vested restricted share transactions
during the three years ended August 28, 2011 are as follows:
Options | Average Price | |||||||
Outstanding at August 31, 2008 |
42,375 | $ | 5.80 | |||||
Granted |
63,382 | 3.67 | ||||||
Vested |
(13,444 | ) | 5.53 | |||||
Forfeited |
(6,174 | ) | 6.93 | |||||
Outstanding at August 30, 2009 |
86,139 | 4.20 | ||||||
Granted |
58,405 | 2.38 | ||||||
Vested |
(20,129 | ) | 4.72 | |||||
Forfeited |
(41,104 | ) | 3.78 | |||||
Outstanding at August 29, 2010 |
83,311 | 3.00 | ||||||
Granted |
37,715 | 6.13 | ||||||
Vested |
(22,478 | ) | 2.46 | |||||
Forfeited |
(44,405 | ) | 4.33 | |||||
Outstanding at August 28, 2011 |
54,143 | $ | 5.08 | |||||
As of August 28, 2011, there was $95,877 in total unrecognized compensation cost related to
non-vested restricted stock compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted average period of 1 year. The total intrinsic value
of restricted stock options that vested during the year ended August 28, 2011 was $119,190.
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6. | INCOME TAXES |
Income taxes consisted of the following:
Years Ended | ||||||||||||
August 28, | August 29, | August 30, | ||||||||||
2011 | 2010 | 2009 | ||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | 15,289 | $ | | ||||||
State |
19,457 | 15,676 | (9,971 | ) | ||||||||
19,457 | 30,965 | (9,971 | ) | |||||||||
Deferred: |
||||||||||||
Federal |
486,469 | 323,378 | (72,577 | ) | ||||||||
State |
| 4,246 | (6,994 | ) | ||||||||
486,469 | 327,624 | (79,571 | ) | |||||||||
Total |
$ | 505,926 | $ | 358,589 | $ | (89,542 | ) | |||||
A reconciliation of the federal income tax provision at the statutory rate with actual taxes
provided on earnings from continuing operations is as follows:
Years Ended | ||||||||||||
August 28, | August 29, | August 30, | ||||||||||
2011 | 2010 | 2009 | ||||||||||
Ordinary federal income tax statutory rate |
34.0 | % | 34.0 | % | (34.0 | )% | ||||||
State income taxes net of federal tax effect |
2.0 | 2.0 | (2.0 | ) | ||||||||
Effective rate |
36.0 | % | 36.0 | % | (36.0 | )% | ||||||
Deferred income taxes are provided for the temporary differences between the financial
reporting and tax basis of the Companys assets and liabilities. Temporary differences, net
operating loss carryforwards, and valuation allowances comprising the net deferred taxes on
the balance sheet are as follows:
August 28, 2011 | August 29, 2010 | |||||||
Deferred Tax Assets |
||||||||
Accrued liabilities |
$ | 86,764 | $ | 78,998 | ||||
Inventory valuation adjustments |
54,026 | 26,262 | ||||||
Net operating loss carryforwards |
767,705 | 827,896 | ||||||
Tax credit carryforwards |
494,728 | 510,993 | ||||||
Stock option expense |
174,551 | 151,244 | ||||||
Other |
145,562 | 114,989 | ||||||
1,723,336 | 1,710,382 | |||||||
Deferred Tax Liabilities |
||||||||
Tax depreciation and amortization
greater than book |
(1,776,958 | ) | (1,279,768 | ) | ||||
Net deferred taxes |
$ | (53,622 | ) | $ | 430,614 | |||
Included in the balance sheet as: |
||||||||
Deferred tax assets current |
254,439 | 171,713 | ||||||
Deferred tax assets long-term |
| 258,901 | ||||||
Deferred tax liabilities long-term |
(308,061 | ) | | |||||
Net deferred taxes |
$ | (53,622 | ) | $ | 430,614 | |||
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Based on the long-term nature of its net operating loss carryforwards and the Companys recent
operating history and growth in fiscal 2011, management believes that it is more likely than
not that the Company will be able to generate taxable income in the future sufficient to
utilize these deductions and carryforwards, and accordingly no tax asset valuation allowance
is deemed necessary.
As of August 28, 2011, the Company had federal net operating loss carryforwards of
approximately $2.1 million expiring in 2021-2029. Also as of August 28, 2011, the Company had
$454,000 in federal alternative minimum tax (AMT) credit carryforward that has no expiration.
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 maintains a 401(k) retirement savings plan that all employees are eligible
to participate in as well as a profit sharing plan. Profit sharing contributions are
discretionary and are based on Company results. Contributions charged to operations for
the profit sharing plan and matching contributions for the 401(k) plan for fiscal 2011,
2010 and 2009, were $239,463, $184,037 and $137,762, respectively.
8. | INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS |
The Company had sales to two customers that exceeded 10 percent of total sales during fiscal
years 2011, 2010 and 2009 as listed below:
2011 | 2010 | 2009 | ||||||||||
Customer # 1 |
$ | 16,804,000 | $ | 11,922,000 | $ | 9,652,000 | ||||||
Customer # 2 |
$ | 4,525,000 | $ | 4,480,000 | $ | 5,680,000 |
The Company had accounts receivable from customer #1 of $1,938,000 and $2,171,000 at August
28, 2011 and August 29, 2010, respectively. The Company had accounts receivable from customer
#2 of $607,000 and $633,000 at August 28, 2011 and August 29, 2010, respectively. Realization
of these receivables, sale of inventory, and its future operations could be significantly
affected by adverse changes in the financial condition or the Companys relationship with
these customers.
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9. | EARNINGS PER SHARE |
The following table sets forth the computation of basic and diluted earnings per share:
2011 | 2010 | 2009 | ||||||||||
Net Income (loss) |
$ | 899,423 | $ | 637,493 | $ | (159,185 | ) | |||||
Denominator for earnings per share: |
||||||||||||
Weighted average shares;
denominator for basic earnings
per share |
2,825,921 | 2,801,210 | 2,789,717 | |||||||||
Effect of dilutive securities;
employee and non-employee options |
51,143 | | | |||||||||
Dilutive common shares;
denominator for diluted earnings
per share |
2,877,064 | 2,801,210 | 2,789,717 | |||||||||
Basic earnings (loss) per share |
$ | .32 | $ | .23 | $ | (.06 | ) | |||||
Dilutive earnings (loss) per share |
$ | .31 | $ | .23 | $ | (.06 | ) | |||||
10. | OTHER ASSETS |
Goodwill consists of costs resulting from business acquisitions which total $2,368,452 (net of
accumulated amortization of $344,812 recorded prior to the adoption of ASC 350 Goodwill and
Other Intangible Assets).
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