1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 27, 2001 --------------------------------------------- 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 registrant, as specified in its charter) Minnesota 41-0691607 ------------------------------- ------------------- (State or other jurisdiction of (I. R. S. Employer incorporation of organization) Identification No.) Wayzata, Minnesota 55391 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (952) 473-1271 ---------------------------------------------------- (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 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 [X] No [ ] 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. 2,465,229 Common Shares were outstanding as of June 30, 2001. ================================================================================ 2 WSI INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. ------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets May 27, 2001(Unaudited) and August 27, 2000 3 Consolidated Statements of Operations Thirteen and Thirty-Nine weeks ended May 27, 2001 and May 28, 2000 (Unaudited) 4 Consolidated Statements of Cash Flows Thirty-Nine weeks ended May 27, 2001 and May 28, 2000 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6, 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8, 9 Item 3. Quantitative and Qualitative Disclosure about Market Risk 10 PART II. OTHER INFORMATION: Item 7. Exhibits and Reports on Form 8-K 10 Signatures 10 2 3 Part I. Financial Information Item I. Financial Statements WSI INDUSTRIES, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) MAY 27, AUGUST 27, 2001 2000 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 6,300 $ 6,300 Accounts receivable 2,071,440 3,713,198 Inventories 1,809,332 2,738,346 Prepaid and other current assets 126,477 148,206 ----------- ----------- Total Current Assets 4,013,549 6,606,050 Property, Plant and Equipment - Net 9,574,482 10,655,696 Intangible Assets 6,192,630 6,169,919 ----------- ----------- $19,780,661 $23,431,665 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Revolving credit facility $ 23,781 $ 369,134 Trade accounts payable 988,970 2,041,089 Accrued compensation and employee withholdings 498,077 857,739 Accrued real estate taxes 125,050 151,230 Miscellaneous accrued expenses 257,572 229,719 Current portion of long-term debt 1,911,604 1,236,460 ----------- ----------- Total Current Liabilities 3,805,054 4,885,371 Long term debt, less current portion 7,554,435 9,601,003 STOCKHOLDERS' EQUITY: Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,465,229 shares 246,523 246,523 Capital in excess of par value 1,640,934 1,640,934 Retained earnings 6,533,715 7,057,834 ----------- ----------- Total Stockholders' Equity 8,421,172 8,945,291 ----------- ----------- $19,780,661 $23,431,665 =========== =========== See notes to consolidated financial statements 3 4 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 13 weeks ended 39 weeks ended --------------------------------- ------------------------------ May 27, May 28, May 27, May 28, 2001 2000 2001 2000 -------------- ------------- ------------ ------------ Net sales $ 5,140,495 $ 9,085,495 $ 17,086,091 $ 24,091,137 Cost of products sold 4,140,070 7,211,702 13,540,444 20,091,913 -------------- ------------- ------------ ------------ Gross margin 1,000,425 1,873,793 3,545,647 3,999,224 Selling and administrative expense 1,111,865 1,159,232 3,419,198 3,354,778 Pension curtailment (gain) -- (121,375) -- (353,375) Gain on sale of equipment -- -- -- (394,682) Severance costs -- -- -- 248,507 Interest and other income -- (19,212) (17,322) (57,760) Interest and other expense 203,794 237,231 664,890 753,327 -------------- ------------- ------------ ------------ Earnings (loss) from operations before income taxes (315,234) 617,917 (521,119) 448,429 Income tax expense -- 15,100 3,000 18,100 -------------- ------------- ------------ ------------ Net earnings (loss) $ (315,234) $ 602,817 $ (524,119) $ 430,329 ============== ============= ============ ============ Basic and diluted loss per share $ (.13) $ (.21) ============== ============ Basic earnings per share (2000 only) $ .24 $ (.17) ============= ============ Diluted earnings per share (2000 only) $ .23 $ .17 ============= ============ Weighted average number of common shares 2,465,229 2,465,229 2,465,229 2,460,897 ============== ============= ============ ============ Weighted average number of common and dilutive potential common shares (2000 only) 2,567,145 2,535,726 ============= ============ See notes to consolidated financial statements. 4 5 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 39 weeks ended ------------------------------- May 27, May 28, 2001 2000 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (524,119) $ 430,329 Adjustments to reconcile net earnings to net cash: provided by operating activities: Gain on sale of property, plant & equipment -- (394,682) Depreciation and amortization 1,837,734 1,761,076 (Decrease) in pension liability -- (347,437) Changes in assets and liabilities: (Increase) decrease in accounts receivable 1,641,758 (779,076) (Increase) decrease in inventories 929,014 449,831 (Increase) decrease in prepaid expenses 21,729 (52,346) Increase (decrease) in accounts payable and accrued expenses (1,410,108) 834,934 ------------- ------------ Net cash provided by operations 2,496,008 1,902,629 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment -- 746,165 Purchase of property, plant and equipment (175,960) (430,788) Purchase of subsidiary (280,600) 27,000 ------------- ------------ Net cash provided by (used in) investing activities (456,560) 342,377 CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt (2,320,048) (2,412,107) Proceeds from issuance of long term debt 280,600 -- Issuance of common stock -- 41,813 ------------- ------------ Net cash provided by (used in) financing activities (2,039,448) (2,370,294) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (125,288) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,300 131,588 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,300 $ 6,300 ============= ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 678,358 $ 760,517 Income taxes $ 7,500 $ 25,083 Noncash investing and financing activities: Acquisition of machinery through capital lease $ 322,671 $ 432,625 See notes to consolidated financial statements. 5 6 WSI INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS: The consolidated balance sheet as of May 27, 2001, the consolidated statements of operations for the thirteen weeks and thirty-nine weeks ended May 27, 2001 and May 28, 2000 and the consolidated statements of cash flows for the thirty-nine 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 balance sheet at August 27, 2000 is derived from the audited balance sheet as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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 2000 annual report to shareholders. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. 2. BUSINESS CONSOLIDATION AND RELOCATION- PRIOR YEAR FIRST NINE MONTHS FINANCIAL IMPACT: On September 2, 1999, the Company announced that it was closing its Long Lake, Minnesota facility and transferring all of the production to its Taurus and Bowman subsidiaries. As a result of this consolidation, the Company incurred severance costs in the first quarter of 2000 of $248,507 for employees terminated or given notice in that period. WSI was also able to sell excess production equipment in the first half of 2000 which contributed a gain on sales of $394,682. Concurrent with the consolidation decision, the Company also decided to terminate its defined benefit pension plan that resulted in a gain of $353,375. 3. DEBT AND LINE OF CREDIT: Pursuant to the Bowman transaction, the Company amended its credit and security agreement with its bank. The amended agreement calls for a term loan in the principal amount of $4,400,000 and a revolving credit facility in the maximum amount of $3,000,000. Interest is accrued at prime plus .75% for the term loan and prime plus .50% for the revolving credit facility payable monthly. Each facility has a LIBOR rate option. The term loan is payable in equal monthly installments of $52,381 of principal commencing August 31, 1999 and matures March 31, 2002. At May 27, 2001, the outstanding balance on the term loan was $1,300,000 and $24,000 on the revolving facility. The fair value of the term debt is estimated to be its carrying value since the debt has a variable interest rate. During fiscal 1999, the Company obtained a mortgage with the same bank that it has its term debt and line of credit facility. The agreement requires monthly principal payments of $13,889, plus interest at prime plus 1.0% and has a balance at May 27, 2001 of $2,208,000. Subsequent to the end of the third quarter the mortgage was paid off. See Footnote 5 below. The Company also entered into Subordinated Promissory Notes with the former owners of Taurus and Bowman in the amounts of $1,663,000 and $1,875,000, respectively. In connection with the Bowman acquisition, the seller earned $280,600 on the second of two contingencies during the 6 7 second quarter of fiscal 2001. This amount is included in the $1,875,000 balance. The notes bear interest at 7.75% with interest payable quarterly. Principal payments are due in three annual equal installments commencing on February 15, 2002 for the Taurus related note and August 6, 2002 for the Bowman related note. 4. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earning per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share for fiscal 2000: 13 weeks ended 39 weeks ended ---------------------------- ------------------------------ May 27, May 28, May 27, May 28, 2001 2000 2001 2000 ----------- ------------ ------------ ------------ Numerator for basic and diluted earnings per share: Net Earnings $ (315,234) $ 602,817 $ (524,119) $ 430,329 =========== ============ ============ ============ Denominator: Denominator for basic earnings per share - weighed average shares 2,465,229 2,465,229 2,465,229 2,460,897 =========== ============ Effect of dilutive securities: Employee/Director stock options 101,916 74,829 ------------ ------------ Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted shares and assumed conversions 2,567,145 2,535,726 ============ ============ Basic earnings per share $ (.13) $ .24 $ (.21) $ .17 =========== ============ ============ ============ Diluted earnings per share $ .23 $ .17 ============ ============ 5. SUBSEQUENT EVENT On June 12, 2001, the Company sold its vacant Long Lake, Minnesota facility. The purchase price was $2.4 million with the net proceeds used to pay off the mortgage on the facility. The sale is estimated to generate a gain of approximately $137,000 in the Company's fourth quarter. 7 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATIONS Results of Operations: Net sales of $5,140,000 for the quarter ending May 27, 2001 decreased 43% or $3,945,000 from the same period of the prior year. As discussed in the prior quarter's 10-Q a major customer made the decision to consign raw materials for their manufacturing program to the Company instead of WSI purchasing the material and subsequently reselling the material to the customer after manufacturing. This move to consigned inventory in combination with a softening of virtually all markets led to the lower sales level. Year to date sales of $17,086,000 were $7,005,000 or 29% less than the prior year due to the reasons described above. Gross margin decreased to 19% as compared to 21% in the prior year quarter. The decrease is attributable to volume inefficiencies due to the lower level of sales. However, year-to-date gross margin improved to 21% versus 17% in the prior year as the prior year was affected by the consolidation efforts of closing and relocating the Long Lake, Minnesota facility operation. Selling and administrative expense of $1,112,000 was $47,000 lower than the prior year quarter due to several offsetting items, but primarily to lower incentive compensation accrued. Year to date selling and administration expense of $3,419,000 was $64,000 higher in fiscal 2001 than fiscal 2000. Interest and other expense decreased $33,000 for the quarter and $88,000 year to date due to the lower levels of long-term debt in Fiscal 2001 versus Fiscal 2000. During Fiscal 2000, WSI sold excess manufacturing equipment with a net book value of $351,000 for $746,000, generating a gain of $395,000. The Company sold its Long Lake facility subsequent to the end of the quarter (see Footnote 5). During the third quarter of fiscal 2001, the Company incurred approximately $150,000 in expense including interest related to the facility. For the first nine months of 2001, the expense was approximately $500,000. In the thirty-nine week period ended May 27, 2001, the Company recorded a tax provision of $3,000 to cover mandatory state income taxes and federal alternative minimum taxes. The Company has not recorded the benefit of net operating losses and other net deductible temporary differences in the consolidated statement of operations due to the fact that the Company has not been able to establish that it is more likely than not that the tax benefit will be realized. Liquidity and Capital Resources: On May 27, 2001 working capital was $208,000 compared to $1,721,000 at August 27, 2000, a decrease of $1,513,000. The ratio of current assets to current liabilities at May 27, 2001 and August 27, 2000 was 1.05 to 1.0 and 1.35 to 1.0, respectively. The working capital decrease is attributable to a combination of lower accounts receivable and inventory due to the consigned inventory situation described previously, the overall lower level of sales and the inclusion of $550,000 into current maturities of long term debt related to the Taurus Subordinated Promissory Note Payable. As described previously in the Notes to Consolidated Statements, the Company amended its credit and security agreement with its bank on August 6, 1999. Currently, the Company owes $1,300,000 on its term loan facility and $24,000 on its revolving facility. The revolving facility had 8 9 approximately $1,300,000 of availability at May 27, 2001. The term loan carries an interest rate at prime plus .75%. The revolver rate is at prime plus .50%. The Company also entered into a mortgage with the same bank on August 6, 1999 as outlined in the Notes to Consolidated Statements. As of May 27, 2001, the Company owed $2,208,000 with interest paid at prime plus 1.0%. As previously discussed, the mortgage was paid in full subsequent to the end of the quarter. As also described in the Notes, the Company entered into a subordinated promissory note with the former owner of Taurus for approximately $1,663,000. Interest is accrued at a rate of 7.75% paid quarterly. Principal payments are due in three equal annual installments commencing on February 15, 2002. The Company also has a subordinated promissory note of $1,875,000 with the former owner of Bowman. Interest is accrued at 7.75% payable quarterly with principal payments due in equal annual installments commencing August 6, 2002. Total capitalized lease debt of $2,420,000 on May 27, 2001 was $56,000 lower than on August 27, 2000. The decrease resulted from a new capital lease of $323,000 offset by payments on the existing leases. It is management's belief that its internally generated funds combined with the line of credit will be sufficient to enable the Company to meet its financial requirements during the next 12 months. 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 which are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to obtain additional manufacturing programs and retain current programs; (ii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iii) a continuing downturn in the industries in which the Company participates, principally the agricultural industry, could have an adverse effect on the demand for Company services. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 9 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 1. Not Applicable PART II. OTHER INFORMATION: Item 7. Exhibits and Reports on Form 8-K: A. Exhibit 10.1 Employment (change in control) Agreement between Michael J. Pudil and the Registrant dated January 11, 2001. B. Exhibit 10.2 Employment (change in control) Agreement between Paul D. Sheely and the Registrant dated January 11, 2001. C. Exhibit 10.3 Purchase Agreement between DRB #8 and Registrant incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed June 25, 2001. 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: July 11, 2001 /s/ Michael J. Pudil ------------- ----------------------------------------- Michael J. Pudil, President & CEO Date: July 11, 2001 /s/ Paul D. Sheely ------------- ----------------------------------------- Paul D. Sheely, Vice President, Finance & CFO 10