e10qsb
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
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For the quarterly period ended February 24, 2008
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OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
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Commission File Number 0-619
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WSI Industries, Inc.
(Exact Name of Small Business Issuer, as Specified in Its Charter)
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Minnesota
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41-0691607 |
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(State or other jurisdiction of
incorporation of organization)
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(I. R. S. Employer
Identification No.) |
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213 Chelsea Road
Monticello, Minnesota
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55362 |
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(Address of principal executive offices)
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(Zip Code) |
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(763) 295-9202
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(Registrants telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 2,784,511 shares of common stock were outstanding as of March 31,
2008.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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February 24, |
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August 26, |
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2008 |
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2007 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,923,508 |
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$ |
1,626,801 |
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Accounts receivable |
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3,696,709 |
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3,054,050 |
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Inventories |
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2,279,608 |
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1,899,299 |
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Prepaid and other current assets |
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75,565 |
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154,793 |
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Deferred tax assets |
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183,839 |
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162,535 |
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Total Current Assets |
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8,159,229 |
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6,897,478 |
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Property, Plant and Equipment Net |
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5,401,896 |
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4,520,382 |
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Deferred tax assets |
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517,971 |
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954,162 |
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Goodwill and other assets, net |
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2,376,167 |
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2,379,473 |
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$ |
16,455,263 |
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$ |
14,751,495 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Trade accounts payable |
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$ |
2,389,258 |
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$ |
2,200,544 |
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Accrued compensation and employee withholdings |
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643,758 |
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680,419 |
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Other accrued expenses |
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91,023 |
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125,038 |
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Current portion of long-term debt |
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610,734 |
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518,718 |
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Total Current Liabilities |
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3,734,773 |
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3,524,719 |
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Long-term debt, less current portion |
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4,105,510 |
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3,328,694 |
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Stockholders Equity: |
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Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,765,644 and 2,731,165 shares, respectively |
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276,564 |
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273,117 |
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Deferred compensation |
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(144,921 |
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(26,577 |
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Capital in excess of par value |
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2,432,144 |
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2,214,922 |
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Retained earnings |
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6,051,193 |
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5,436,620 |
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Total Stockholders Equity |
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8,614,980 |
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7,898,082 |
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$ |
16,455,263 |
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$ |
14,751,495 |
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See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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13 weeks ended |
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26 weeks ended |
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February 24, |
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February 25, |
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February 24, |
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February 25, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
6,421,607 |
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$ |
4,440,158 |
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$ |
12,396,192 |
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$ |
8,569,537 |
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Cost of products sold |
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5,056,809 |
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3,669,393 |
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9,912,351 |
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7,087,508 |
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Gross margin |
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1,364,798 |
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770,765 |
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2,483,841 |
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1,482,029 |
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Selling and administrative expense |
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649,659 |
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510,212 |
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1,226,657 |
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972,456 |
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Gain on sale of equipment |
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(18,000 |
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(97,861 |
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(18,000 |
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Interest and other income |
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(27,791 |
) |
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(15,363 |
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(49,896 |
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(31,578 |
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Interest expense |
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77,194 |
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43,353 |
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144,261 |
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88,285 |
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Income before income taxes |
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665,736 |
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250,563 |
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1,260,680 |
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470,866 |
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Income taxes |
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233,007 |
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95,214 |
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441,238 |
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178,929 |
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Net income |
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$ |
432,729 |
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$ |
155,349 |
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$ |
819,442 |
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$ |
291,937 |
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Basic earnings per share |
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$ |
.16 |
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$ |
.06 |
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$ |
.30 |
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$ |
.11 |
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Diluted earnings per share |
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$ |
.15 |
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$ |
.06 |
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$ |
.29 |
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$ |
.11 |
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Cash dividend per share |
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$ |
.0375 |
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$ |
.0375 |
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$ |
.075 |
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$ |
.075 |
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Weighted average number of
common shares outstanding, basic |
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2,734,278 |
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2,686,567 |
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2,728,918 |
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2,683,599 |
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Weighted average number of
common shares outstanding, diluted |
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2,794,724 |
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2,717,049 |
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2,786,661 |
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2,716,213 |
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See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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26 weeks ended |
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February 24, |
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February 25, |
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2008 |
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2007 |
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Cash Flows From Operating Activities: |
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Net earnings |
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$ |
819,442 |
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$ |
291,937 |
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Adjustments to reconcile net earnings to net cash
provided by operating activities: |
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Depreciation |
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393,528 |
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227,439 |
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Amortization |
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3,306 |
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3,306 |
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Gain on sale of equipment |
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(97,861 |
) |
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(18,000 |
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Deferred taxes |
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414,887 |
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174,659 |
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Stock option compensation expense |
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68,837 |
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34,511 |
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Changes in assets and liabilities: |
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Increase in accounts receivable |
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(642,659 |
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(364,641 |
) |
Increase in inventories |
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(380,309 |
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(57,190 |
) |
Decrease in prepaid expenses |
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79,228 |
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39,518 |
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Decrease in accounts payable
and accrued expenses |
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109,441 |
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160,432 |
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Net cash provided by operations |
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767,840 |
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491,971 |
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Cash Flows From Investing Activities: |
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Proceeds from sales of equipment |
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97,861 |
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18,000 |
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Purchase of property, plant and equipment |
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(79,122 |
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(45,630 |
) |
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Net cash provided by (used in) investing activities |
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18,739 |
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(27,630 |
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Cash Flows From Financing Activities: |
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Stock options exercised |
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42,085 |
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14,405 |
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Payments of long-term debt |
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(327,088 |
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(188,129 |
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Dividends paid |
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(204,869 |
) |
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(201,364 |
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Net cash used in financing activities |
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(489,872 |
) |
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(375,088 |
) |
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Net Increase In Cash And Cash Equivalents |
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296,707 |
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89,253 |
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Cash And Cash Equivalents At Beginning Of Year |
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1,626,801 |
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1,282,717 |
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Cash And Cash Equivalents At End Of Reporting Period |
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$ |
1,923,508 |
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$ |
1,371,970 |
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Supplemental cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
144,693 |
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$ |
88,726 |
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Income taxes |
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$ |
6,552 |
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$ |
4,270 |
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Payroll withholding taxes in cashless stock option exercise |
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$ |
8,597 |
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Non cash investing and financing activities: |
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Acquisition of equipment through capital lease |
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$ |
1,195,920 |
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$ |
191,455 |
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See notes to condensed consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of February 24, 2008, the condensed consolidated statements of income for the thirteen and
twenty-six weeks ended February 24, 2008 and February 25, 2007 and the condensed consolidated statements of cash flows for the twenty-six
weeks then ended, respectively, have been prepared by the Company without audit. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all
periods presented have been made.
The condensed consolidated balance sheet at August 26, 2007 is derived from the audited consolidated balance sheet as of that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. Therefore, these condensed consolidated financial
statements should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form
10-KSB for the year ended August 26, 2007. The results of operations for interim periods are not necessarily indicative of the operating
results for the full year.
2. INVENTORIES
Inventories consist primarily of raw material, work-in-progress (WIP) and finished goods and are valued at the lower of cost or market value:
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February 24, |
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August 26, |
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2008 |
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2007 |
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Raw material |
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$ |
862,394 |
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$ |
537,033 |
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WIP |
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990,773 |
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|
963,702 |
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Finished goods |
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|
426,441 |
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|
398,564 |
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$ |
2,279,608 |
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$ |
1,899,299 |
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3. GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets consist of costs resulting from business acquisitions
which total $2,368,452 (net of accumulated amortization of $344,812 recorded prior to the
adoption of SFAS No. 142 Goodwill and Other Intangible Assets). The Company assesses the
valuation or potential impairment of its goodwill by utilizing a present value technique to
measure fair value by estimating future cash flows. The Company constructs a discounted
cash flow analysis based on various sales and cost assumptions to estimate the fair value of
the Company (which is the only reporting unit). The result of the analysis performed in the
fiscal 2007 fourth quarter did not indicate an impairment of goodwill and since that time no
events or circumstances have occurred that suggest an impairment exists. The Company will
analyze goodwill annually and more frequently should changes in events or circumstances,
including reductions in anticipated cash flows generated by our operations, occur.
The Company recorded $33,063 of deferred financing costs incurred in connection with
mortgages entered into to purchase the Companys facility in Monticello, Minnesota in May
2004. The costs are being amortized over five years on a straight-line basis with the
Company incurring $1,653 of amortization expense for the quarters ended February 24, 2008
and February 25, 2007, respectively.
6
4. DEBT AND LINE OF CREDIT:
Effective January 31, 2008, the Company renewed its revolving credit agreement in the
maximum amount of $1 million with its bank. Interest on the renewed agreement is at the
banks prime rate. It contains restrictive provisions concerning yearly capital
expenditures, a maximum debt to net worth ratio, a minimum current ratio, a minimum net
worth and a minimum debt service coverage ratio. The Company is in compliance with all of
the covenants of the agreement as of February 24, 2008. The credit agreement is secured by
all assets of the Company, expires February 1, 2009 and does not have an outstanding balance
at February 24, 2008.
5. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share:
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Thirteen weeks ended |
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Twenty- Six weeks ended |
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|
February 24, |
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|
February 25, |
|
|
February 24 |
|
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February 25, |
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|
2008 |
|
|
2007 |
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|
2008 |
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|
2007 |
|
Numerator for basic and diluted
earnings per share: |
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Net earnings |
|
$ |
432,729 |
|
|
$ |
155,349 |
|
|
$ |
819,442 |
|
|
$ |
291,937 |
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Denominator |
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Denominator for basic earnings
per share weighted average shares |
|
|
2,734,278 |
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|
2,686,567 |
|
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|
2,728,918 |
|
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|
2,683,599 |
|
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Effect of dilutive securities: |
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|
|
|
|
|
|
|
|
|
|
|
|
Employee and non-employee options |
|
|
60,446 |
|
|
|
30,482 |
|
|
|
57,743 |
|
|
|
32,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share |
|
|
2,794,724 |
|
|
|
2,717,049 |
|
|
|
2,786,661 |
|
|
|
2,716,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
.16 |
|
|
$ |
.06 |
|
|
$ |
.30 |
|
|
$ |
.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
.15 |
|
|
$ |
.06 |
|
|
$ |
.29 |
|
|
$ |
.11 |
|
|
|
|
|
|
|
|
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|
|
7
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
or
PLAN OF OPERATION
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.
The critical accounting policies and estimates followed in the preparation of the financial
information contained in this Quarterly Report on Form 10-QSB are the same as those described in
the Companys Annual Report on Form 10-KSB for the year ended August 26, 2007. Refer to the
Annual Report on Form 10-KSB for detailed information on accounting policies.
Results of Operations:
Net sales were $6,422,000 for the thirteen weeks ending February 24, 2008, an increase of 45%
or $1,981,000 from the same period of the prior year. Year-to-date sales in fiscal 2008 are
$12,396,000 compared to $8,570,000 in the prior year which also equates to a 45 % increase. Both
the quarterly and year-to-date sales increases come primarily from the addition of the Companys
energy business, which did not have significant sales until the third quarter of fiscal 2007.
Sales from the Companys recreational vehicle market amounted to $3,503,000 and $3,528,000 for
the thirteen weeks ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales
for the Companys recreational vehicle market were $7,260,000 and $6,870,000 for the twenty-six
weeks ended February 24, 2008 and February 25, 2007, respectively. Sales from the Companys ATV
market were higher than the prior year for both the quarter and year-to-date periods. Sales from
the Companys motorcycle market were lower for both the quarter and year-to-date periods in fiscal
2008 due primarily to a planned reduction in business announced in March 2007. The second half of
this planned reduction in business will commence in the Companys fiscal 2008 fourth quarter.
Sales from the Companys energy business amounted to $2,236,000 and $3,660,000 for the quarter
and twenty-six weeks ended February 24, 2008, respectively. In the prior year, the Company had
$23,000 in sales that occurred during the fiscal second quarter.
Sales from the Companys aerospace and defense markets amounted to $513,000 and $554,000 for
the quarter ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales for
the Companys aerospace and defense markets were $1,043,000 and $1,053,000 for the twenty-six weeks
ended February 24,
8
2008 and February 25, 2007, respectively. The Company believes that the changes from the
prior years sales totals are not significant.
Sales from the Companys biosciences market totaled $122,000 and $323,000 for the quarter
ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales for the
biosciences market were $293,000 and $590,000 for the twenty-six weeks ended February 24, 2008 and
February 25, 2007, respectively. As announced previously, the Company has scaled back its business
in the biosciences market and is concentrating on profitable portions of this segment.
Sales from the Companys other revenue markets are at or under 1% of total sales in the
current year and are immaterial to the Companys revenues as a whole.
Gross margin increased to 21% for the quarter ending February 24, 2008 versus 17% in the year
ago period. Year-to-date gross margins were 20% and 17% for the twenty-six week periods ending
February 24, 2008 and February 25, 2007, respectively. The increase in gross margin is
attributable to the addition of the new business as well as efficiencies generated from higher
volumes. Gross margins in the fiscal 2008 second quarter were also positively affected by a
product mix that consisted of a higher than usual value-add content.
Selling and administrative expense of $650,000 for the quarter ending February 24, 2008 was
$139,000 higher than in the prior year period due primarily to higher compensation and stock option
compensation expense. Year-to-date selling and administrative expense of $1,227,000 was $254,000
higher than the comparable prior year period due primarily to the same reasons.
Interest expense in the second quarter of fiscal 2008 was $77,000, which was $34,000 more than
the second quarter of fiscal 2007 amount of $43,000. Year-to-date interest expense for fiscal 2008
of $144,000 was higher than the prior year-to-date amount by $56,000. The higher interest costs
are as a result of the increased borrowing for investments in new equipment of approximately $2.7
million made by the Company over the past year and a half.
The Company recorded income tax expense at an effective tax rate of 35% for the quarter and
year-to-date periods ended February 24, 2008 and 38% for the quarter and year-to-date periods ended
February 25, 2007.
Liquidity and Capital Resources:
On February 24, 2008, working capital was $4,424,000 compared to $3,373,000 at August 26,
2007. The ratio of current assets to current liabilities at February 24, 2008 was 2.18 to 1.0
compared to 1.96 to 1.0 at August 26, 2007. The improvement in both measurements is attributable
to the generation of cash from operations in the Companys fiscal 2008 first two quarters as well
as an increase in the level of accounts receivable and inventories due to the increase in the
Companys overall sales.
As discussed in the Notes to Condensed Consolidated Financial Statements, the Company renewed
its $1,000,000 revolving credit agreement with its bank during the fiscal 2008 second quarter.
Interest on the new agreement is at the banks prime rate.
It is the Companys belief that its current cash balance, plus future internally generated
funds and its line of credit, will be sufficient to enable the Company to meet its working capital
requirements through the end of calendar year 2008.
9
Cautionary Statement:
Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, 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 that are not historical or current facts are forward-looking
statements. These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made and are not predictions of
actual future results.
The following risks and uncertainties, as well as others not now anticipated, in some cases
have affected, and in the future could affect, the Companys actual results and could cause the
Companys actual financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Companys ability to obtain additional manufacturing programs
and retain current programs; (ii) the Companys ability to timely and cost effectively ramp up new
programs; (iii) the loss of significant business from any one of its current customers could have
a material adverse effect on the Company; (iv) the Company was dependent upon one customer for 75%
of its revenues in fiscal year 2007 and expects that a significant portion of its future revenue
will be derived from this customer; (v) a significant downturn in the industries in which the
Company participates could have an adverse effect on the demand for Company services; (vi) our
sales are concentrated in a limited number of highly competitive industries, each with a limited
number of customers; (vii) the prices of our products are subject to a downward pressure from
customers and market pressure from competitors; (viii) the Companys ability to curtail its costs
and expenses for new manufacturing programs, commensurate with expected revenues; (ix) the
Companys ability to comply with covenants of its credit facility; (x) fluctuations in operating
results due to, among other things, changes in customer demand for our product in our manufacturing
costs and efficiencies of our operations; and (xi) a trend among our customers toward outsourcing
manufacturing to foreign operations.
The foregoing list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events.
10
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Companys Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D.
Sheely, have evaluated the Companys disclosure controls and procedures as of the end of the period
covered by this report. Based upon this review, they have concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls over Financial Reporting.
There have been no changes in internal control financial reporting that occurred during the
fiscal period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of the Company was held on January 9, 2008. Of
the 2,747,927 shares of common stock issued and outstanding and entitled to vote at
the close of business on November 13, 2007, shareholders holding 2,422,124 shares
were present at the Annual Meeting either in person or by proxy. The following
describes the matters considered by the Companys shareholders at the Annual Meeting,
as well as the results of the votes cast at the Annual Meeting:
A. To elect five (5) directors to hold office until the next Annual Meeting of
Shareholders or until their respective successors have been elected and shall
qualify.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Nominee |
|
|
|
|
|
|
|
|
|
|
|
|
Paul Baszucki |
|
For |
|
|
2,352,840 |
|
|
Withhold 69,284 |
Thomas C. Bender |
|
For |
|
|
2,353,790 |
|
|
Withhold 68,334 |
Burton F. Myers II |
|
For |
|
|
2,353,440 |
|
|
Withhold 68,684 |
Eugene J. Mora |
|
For |
|
|
2,352,064 |
|
|
Withhold 70,060 |
Michael J. Pudil |
|
For |
|
|
2,353,890 |
|
|
Withhold 68,234 |
Each director nominee was elected by the shareholders.
B. To approve amendments to the Companys 2005 Stock Plan
For 904,816 Against 80,019 Abstain 6,525 Broker non-vote 1,430,764
The shareholders approved this proposal.
C. To ratify the appointment of Schechter Dokken Kanter Andrews & Selcer Ltd as
independent auditors.
For 2,353,014 Against 13,851 Abstain 55,259
The shareholders approved the appointment.
11
ITEM 6. EXHIBITS
A. The following exhibits are included herein:
Exhibit 10.1 |
|
Amendment and Modification of Revolving Line of Credit dated January 31, 2008 between the Company and M&I Marshall & Ilsley Bank. |
|
Exhibit 31.1 |
|
Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act. |
|
Exhibit 31.2 |
|
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act. |
|
Exhibit 32 |
|
Certificate pursuant to 18 U.S.C. §1350. |
SIGNATURES
Pursuant to the requirements 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.
|
|
Date: April 4, 2008 |
/s/ Michael J. Pudil
|
|
|
Michael J. Pudil, President & CEO |
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: April 4, 2008 |
/s/ Paul D. Sheely
|
|
|
Paul D. Sheely, Vice President, Finance & CFO |
|
|
|
|
12