UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 27, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _____________________ Commission File Number 0-619 WSI Industries, Inc. (Exact Name of Small Business Issuer, as Specified in Its Charter) Minnesota 41-0691607 (State or other jurisdiction of (I. R. S. Employer incorporation of organization) Identification No.) 213 Chelsea Road Monticello, Minnesota 55362 (Address of principal executive offices) (Zip Code) (763) 295-9202 (Registrant's telephone number, including area code) ___________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark 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 X No ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,672,630 shares of common stock were outstanding as of December 31, 2005. WSI INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. -------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Condensed Consolidated Balance Sheets November 27, 2005(Unaudited) and August 28, 2005 3 Condensed Consolidated Statements of Income Thirteen weeks ended November 27, 2005 and November 28, 2004 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows Thirteen weeks ended November 27, 2005 and November 28, 2004 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION: Item 6. Exhibits 13 Signatures 13 2 Part I. Financial Information Item I. Financial Statements WSI INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) NOVEMBER 27, AUGUST 28, 2005 2005 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,580,776 $ 937,575 Accounts receivable 1,503,571 1,907,870 Inventories 1,120,221 1,017,966 Prepaid and other current assets 50,252 73,252 Deferred tax assets 145,021 121,581 ----------- ----------- Total Current Assets 4,399,841 4,058,244 ----------- ----------- Property, Plant and Equipment - Net 3,744,701 3,709,438 ----------- ----------- Deferred tax assets 1,542,754 1,675,506 ----------- ----------- Intangible assets, net 2,391,045 2,392,698 ----------- ----------- $12,078,341 $11,835,886 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 979,402 $ 881,197 Dividends payable 100,225 -- Accrued compensation and employee withholdings 345,700 479,296 Miscellaneous accrued expenses 137,207 142,074 Current portion of long-term debt 336,073 311,030 ----------- ----------- Total Current Liabilities 1,898,607 1,813,597 ----------- ----------- Long term debt, less current portion 2,807,776 2,728,456 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,672,630 shares 267,263 267,263 Capital in excess of par value 2,104,289 2,104,289 Retained earnings 5,000,406 4,922,281 ----------- ----------- Total Stockholders' Equity 7,371,958 7,293,833 ----------- ----------- $12,078,341 $11,835,886 =========== =========== See notes to condensed consolidated financial statements 3 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 13 weeks ended --------------------------- November 27, November 28, 2005 2004 ------------ ------------ Net sales $4,170,200 $3,874,041 Cost of products sold 3,446,117 3,301,119 ---------- ---------- Gross margin 724,083 572,922 Selling and administrative expense 406,944 494,362 Interest and other income (8,802) (1,467) Interest and other expense 38,279 40,003 ---------- ---------- Earnings from operations before income taxes 287,662 40,024 Income tax expense 109,312 14,409 ---------- ---------- Net earnings $ 178,350 $ 25,615 ========== ========== Basic earnings per share $ .07 $ .01 ========== ========== Diluted earnings per share $ .07 $ .01 ========== ========== Cash dividend per share declared $ .0375 $ .0375 ========== ========== Weighted average number of common shares 2,672,630 2,557,629 ========== ========== Weighted average number of common and dilutive potential common shares 2,726,181 2,618,604 ========== ========== See notes to condensed consolidated financial statements. 4 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 13 weeks ended --------------------------- November 27, November 28, 2005 2004 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 178,350 $ 25,615 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 171,643 159,544 Amortization 1,653 1,653 Deferred taxes 109,312 14,409 Changes in assets and liabilities: Decrease in accounts receivable 404,299 229,695 Increase in inventories (102,255) (151,868) Decrease in prepaid expenses 23,000 20,151 Increase (decrease) in accounts payable and accrued expenses (40,258) 229,165 ---------- --------- Net cash provided by operations 745,744 528,364 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (24,027) (18,407) ---------- --------- Net cash used in investing activities (24,027) (18,407) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt (78,516) (77,130) Dividends paid -- (95,912) ---------- --------- Net cash used in financing activities (78,516) (173,042) ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 643,201 336,915 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 937,575 294,766 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $1,580,776 $ 631,681 ========== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 38,504 $ 40,232 Income taxes $ 900 $ -- Non cash investing and financing activities: Acquisition of equipment through capital lease $ 182,879 $ -- Dividends payable $ 100,225 $ -- 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 November 27, 2005, the condensed consolidated statements of income for the thirteen weeks ended November 27, 2005 and November 28, 2004 and the condensed consolidated statements of cash flows for the thirteen 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 28, 2005 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 Company's 2005 annual report to shareholders. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. 2. DEBT AND LINE OF CREDIT: The Company has renewed its revolving credit agreement in the maximum amount of $1 million with its bank. Interest on the renewed agreement is at the bank's prime rate. It contains restrictive provisions concerning yearly capital expenditures, maximum debt to net worth and minimum current ratios, as well a minimum debt service coverage ratio. The Company is in compliance with all of the provisions. The credit agreement is secured by all non-real property assets of the Company and expires January 1, 2007. The Company purchased a new manufacturing facility and office located in Monticello, Minnesota on May 3, 2004. In order to facilitate the purchase, the Company entered into two mortgage agreements. The first mortgage was with its bank for $1,360,000 with a monthly payment of $8,307 based on a 25-year amortization schedule. Interest is at 5.37% with a provision to adjust the rate after 5 years to the monthly five-year Treasury yield plus 2.5%. The entire principal balance is due May 1, 2014. The second mortgage is with the City of Monticello Economic Development Authority (MEDA) for $350,000 with a monthly payment of $1,483 based on a 25-year amortization schedule. Interest is at 2.0%. The entire balance is due after five years on May 1, 2009. The indebtedness to the bank is secured pursuant to a mortgage and security agreement and fixture financing statement and the debt to MEDA is secured by a mortgage. 6 3. INVENTORIES Inventories consist primarily of raw material, work-in-progress (WIP) and finished goods. The following table breaks out the values in each category net of the inventory valuation allowances of $194,027 and $173,956 at November 27, 2005 and August 28, 2005, respectively. November 27, August 28, 2005 2005 ------------ ---------- Raw material $ 436,533 $ 335,798 WIP 362,633 338,219 Finished goods 321,055 343,949 ---------- ---------- $1,120,221 $1,017,966 ========== ========== The Company did not dispose of any significant inventory during the quarter ended November 27, 2005 and therefore there was no material effect on gross margin from any dispositions. 4. 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). 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 2005 fourth quarter did not show an impairment of goodwill. The Company will analyze goodwill 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 the mortgages described in Note 2. 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 November 27, 2005 and November 28, 2004, respectively. 5. EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share: Thirteen weeks ended --------------------------- November 27, November 28, 2005 2004 ------------ ------------ Numerator for earnings per share: Net earnings $ 178,350 $ 25,615 ========== ========== Denominator: Denominator for basic earnings per share - weighted average shares 2,672,630 2,557,629 Effect of dilutive securities: Employee and non-employee options 53,551 60,975 ---------- ---------- Denominator for diluted earnings per share 2,726,181 2,618,604 ========== ========== Basic earnings per share $ .07 $ .01 ========== ========== Diluted earnings per share $ .07 $ .01 ========== ========== 7 6. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and Amends SFAS No 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all shared-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is not an alternative. SFAS No. 123 (R) must be adopted no later than the first interim period for fiscal years beginning after December 15, 2005 for small business filers. We expect to adopt SFAS No. 123 (R) on August 28, 2006. SFAS No. 123 (R) permits public companies to adopt its requirements using one of two methods: a "modified prospective" approach or a "modified retrospective" approach. Under the modified prospective approach, compensation cost is recognized beginning with the effective date based on the requirements of SFAS 123 (R) for all share-based payments granted after the effective date and the requirements of SFAS No. 123 (R) for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date. The modified retrospective approach includes the requirements of the modified prospective approach but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either for all prior periods presented or prior interim periods of the year of adoption. We are evaluating which method to adopt. As permitted by SFAS No. 123, we currently account for the share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. We expect the adoption of SFAS No. 123 (R) to have an unfavorable effect on our results of operations. If we had adopted SFAS No. 123 (R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in Note 5 to our financial statements included in our Form 10-K for the year ended August 28, 2005. SFAS No. 123 (R) 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. Since we do not have the benefit of tax deductions in excess of recognized compensation cost, because of our net operating loss position, the change will have no immediate impact on our consolidated financial statements. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151") effective for fiscal years beginning after June 15, 2005, SFAS No. 151 will become effective for us on August 29, 2005, the beginning of our next fiscal year. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We believe that the adoption of SFAS No. 151 will not have a material effect on our financial position or results of operations. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATIONS Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's condensed 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. The Company believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so the Company consider these to be its critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates the Company uses in applying the critical accounting policies. Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely event that would result in materially different amounts being reported. Allowance for 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. Any excess of cost over the net realizable value of inventory components is included in the allowance for obsolete inventory. In addition, the Company determines the reserve for excess and obsolete inventory by analyzing the sales history of its inventory, sales orders on hand and indications from the Company's customers as to the future of various parts or programs. If, in the Company's determination, the inventory value has become impaired, the Company establishes an obsolescence reserve at the amount the Company estimates as the ultimate net realizable value for that inventory. The obsolescence reserve remains on the Company's books until the inventory is disposed of or sold. Actual customer requirements in any future periods are inherently uncertain and thus may differ from our estimates. If actual or expected customer requirements were significantly lower than the established reserves, the Company would record an increase to the obsolescence allowance in the period in which the Company made such a determination. The Company performs its lower of cost or market testing as well as its excess or obsolete inventory analyses, quarterly. The Company's allowance for obsolete inventory consists of the following at November 27, 2005 and August 28, 2005: November 27, 2005 August 28, 2005 ----------------- --------------- Obsolete finished goods $ 81,310 $ 85,853 Obsolete work-in-process 6,900 6,900 Cost exceeding market value 105,817 81,203 -------- -------- $194,027 $173,956 9 The Company has no specific timeline to dispose of its 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 SFAS 142 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 Company's value given its limited trading volume and its wide price fluctuations. The Company follows the guidance provided by SFAS 142 and utilizes a present value technique to measure fair value by estimating future cash flows. The major assumptions in this analysis include: (a) sales estimates for the Company in part provided with guidance from the Company's customers; and (b) material and labor costs of the Company's major programs. The Company constructs a discounted cash flow analysis based on these assumptions to estimate the fair value of the Company (which is the only reporting unit). The result of the analysis performed in the fiscal 2005 fourth quarter did not show an impairment of goodwill. 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. Deferred Taxes: The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary difference between the financial reporting and tax bases of assets and liabilities. A valuation allowance would be 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 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 Company's deferred tax assets have two major components which relate to the Company's NOL and the Company's AMT tax credit carryforwards. The Company's AMT tax credit carryforward does not expire. The Company's NOL carryforward has $870,000 expiring in fiscal year 2009, $415,000 in fiscal 2011 and $3.1 million expiring in fiscal 2021 and after. The Company believes that its current rate of growth will be sufficient to fully utilize its NOL carryforwards before they expire. However, a significant loss of a customer or a change in the Company's 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 FASB's 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 Company's price is fixed as evidenced by the purchase order; and (d) collectibility 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 have been minimal and within management's expectations. Based on management's 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 Company's sales are sometimes reduced by product returned by its customers. 10 Results of Operations: Net sales were $4,170,000 for the quarter ending November 27, 2005, an increase of 8% from the same period of the prior year. The increase was due primarily to higher sales in the Company's ATV and motorcycle recreational vehicle market. Sales from the Company's ATV and motorcycle markets amounted to $3,561,000 and $3,280,000 for the quarters ended November 27, 2005 and November 28, 2004, respectively. The 9% increase in sales came primarily from sales in the ATV market. Sales from the Company's aerospace and defense markets totaled $454,000 and $394,000 for the quarters ended November 27, 2005 and November 28, 2004, respectively. The Company believes that these increases are not as a result of significant change in a customer or product requirement, but rather as a result from a general increase in the level of business with the Company's customers in these markets. Sales from the Company's other revenue markets amounted to $155,000 and $196,000 for the quarters ended November 27, 2005 and November 28, 2004, respectively. The Company's other revenue markets consist of computer components, small engine parts and products for the biosciences industry. The decrease in sales from the fiscal 2004 first quarter to the fiscal 2005 first quarter came from decreases in sales from both the computer components and small engine parts markets, partially offset by an increase in sales to the biosciences industry. Gross margin increased to 17% for the quarter ending November 27, 2005 versus the prior year quarter of 15%. The increase is attributable to the increase in sales volume as well as efficiencies gained from operating in one facility as opposed to the two facilities the Company was operating in during the first quarter of fiscal 2005. Fiscal 2005 first quarter margins were hampered somewhat by start-up costs related to the biosciences industries components, however. Selling and administrative expense of $407,000 for the quarter ending November 27, 2005 was $87,000 lower than in the prior year. Fiscal 2005 first quarter selling and administrative expense was negatively affected by $168,000 in costs associated with the relocation of operations to the new facility in Monticello, Minnesota, as well the costs associated with maintaining the old Osseo, Minnesota building. Fiscal 2006 first quarter results were not affected by relocation costs, but were affected by an increase in payroll and benefit costs. Interest expense in the first quarter of fiscal 2006 was $38,000 compared to $40,000 in first quarter of fiscal 2005. The Company recorded income tax expense at an effective tax rate of 38% and 36% for the quarters ended November 27, 2005 and November 28, 2004, respectively. Liquidity and Capital Resources: On November 27, 2005, working capital was $2,501,000 compared to $2,245,000 at August 28, 2005. The ratio of current assets to current liabilities at November 27, 2005 was 2.32 to 1.0 compared to 2.24 to 1.0 at August 28, 2005. The improvement in both measurements is attributable to the generation of cash from operations in the Company's fiscal 2006 first quarter. The Company's cash balance increased $643,000 during the first quarter of fiscal 2006, primarily from collections of accounts receivable but also from the timing of the payment of the quarterly dividend declared during the first quarter. The dividend did not actually get paid until the first day of the Company's fiscal 2006 second quarter. 11 As discussed in the Notes to Condensed Consolidated Financial Statements, the Company renewed its $1,000,000 revolving credit facility with its bank subsequent to the end of the fiscal 2006 first quarter. Interest on the new agreement is at prime. It is the Company's 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 fiscal 2006. Cautionary Statement: Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer 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. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iii) the Company was dependent upon one customer for 84% of its revenues in fiscal year 2005 and expects that a significant portion of its future revenue will be derived from this customer; (iv) a significant downturn in the industries in which the Company participates could have an adverse effect on the demand for Company services; (v) our sales are concentrated in a limited number of highly competitive industries, each with a limited number of customers; (vi) the prices of our products are subject to downward pressure from customers and market pressure from competitors; (vii) the Company's ability to curtail its costs and expenses for new manufacturing programs, commensurate with expected revenues; (viii) the Company's ability to comply with covenants of its credit facility; (ix) fluctuations in operating results due to, among other things, changes in customer demand for our product, in our manufacturing costs and efficiently of our operations; (x) 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. 12 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D. Sheely, have evaluated the Company's 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 Company's internal control over financial reporting. PART II. OTHER INFORMATION: ITEM 6. EXHIBITS A. The following exhibits are included herein: Exhibit 10.1 Amendment and Modification of Revolving Line of Credit dated January 1, 2006 between the Company and Excel 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. Section 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: January 10, 2006 /s/ Michael J. Pudil ---------------------------------------- Michael J. Pudil, President & CEO Date: January 10, 2006 /s/ Paul D. Sheely ---------------------------------------- Paul D. Sheely, Vice President, Finance & CFO 13