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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 November 25, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-619
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WSI Industries, Inc.
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(Exact name of registrant, as specified in its charter)
Minnesota 41-0691607
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(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Wayzata, Minnesota 55391
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(Address of principal executive offices) (Zip Code)
(952) 473-1271
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(Registrant's telephone number, including area code)
Not Applicable
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(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
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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 December 31, 2001.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets November 25, 2001 (Unaudited)
and August 26, 2001 3
Consolidated Statements of Operations
Thirteen weeks ended November 25, 2001 and
November 26, 2000 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirteen weeks ended November 25, 2001 and
November 26, 2000 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7, 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9, 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART II. OTHER INFORMATION:
Item 3. Defaults upon Senior Securities 11
Item 7. Exhibits and Reports on Form 8-K 11
Signatures 11
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS NOVEMBER 25, AUGUST 26,
2001 2001
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,853 $ 8,292
Accounts receivable 1,701,618 1,778,969
Inventories 1,598,218 1,584,415
Prepaid and other current assets 79,940 101,879
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Total current assets 3,386,629 3,473,555
Property, plant and equipment, net 6,799,168 6,691,360
Intangible assets, net 6,173,158 6,173,158
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$ 16,358,955 $ 16,338,073
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 89,915 $ --
Trade accounts payable 867,586 687,426
Accrued compensation and employee withholdings 303,690 445,693
Miscellaneous accrued expenses 265,884 425,330
Current portion of long-term debt 2,820,015 2,916,061
------------- ------------
Total current liabilities 4,347,090 4,474,510
Long-term debt, less current portion 4,506,767 4,111,462
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,465,229 shares 246,523 246,523
Capital in excess of par value 1,640,934 1,640,934
Retained earnings 5,617,641 5,864,644
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Total stockholders' equity 7,505,098 7,752,101
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$ 16,358,955 $ 16,338,073
============= ============
See notes to consolidated financial statements.
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 weeks ended
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November 25, November 26,
2001 2000
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Net sales $ 3,811,208 $ 6,575,040
Cost of products sold 3,371,017 5,133,613
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Gross margin 440,191 1,441,427
Selling and administrative expense 547,932 1,139,174
Interest and other income (3,297) (13,037)
Interest and other expense 142,559 245,480
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Earnings (loss) from operations
before income taxes (247,003) 69,810
Income tax expense -- 3,000
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Net earnings (loss) $ (247,003) $ 66,810
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Basic earnings (loss) per share $ (.10) $ 0.03
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Diluted earnings (loss) per share $ (.10) $ 0.03
============ ============
Weighted average number of
common shares 2,465,229 2,465,229
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Weighted average number of
common and dilutive potential
common shares 2,465,229 2,510,697
============ ============
See notes to consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 weeks ended
--------------------------
November 25, November 26,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (247,003) $ 66,810
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 489,969 610,379
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 77,350 1,062,444
(Increase) decrease in inventories (13,802) 619,544
(Increase) decrease in prepaid expenses 21,939 8,248
Increase (decrease) in accounts payable and
accrued expenses (121,289) (935,553)
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Net cash provided by operations 207,164 1,431,872
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment -- (112,386)
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Net cash provided by (used in) investing activities -- (112,386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and revolving facility (208,603) (1,187,597)
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Net cash provided by (used in) financing activities (208,603) (1,187,597)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,439) 131,889
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,292 6,300
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CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,853 $ 138,189
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 143,959 $ 249,438
Income taxes $ 0 $ 7,500
NON CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of machinery through capital lease $ 606,618 $ --
See notes to consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of November 25, 2001, the
consolidated statements of operations for the thirteen weeks ended
November 25, 2001 and November 26, 2000 and the 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 balance sheet at August 26, 2001 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 2001 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:
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 and expires March
31, 2002. Interest is accrued at prime plus .75% for the term loan and
prime plus .50% for the revolving credit facility. 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. At
November 25, 2001, the outstanding balance on the term loan was $986,000
while the balance on the revolving facility was $90,000. All amounts
have been classified as current due to the agreement expiring in less
than one year. The fair value of the term debt is estimated to be its
carrying value since the debt has a variable interest rate.
The Company was not in compliance with one of its covenants in
connection with the above credit and security agreement and has received
a Notice of Default from the bank. The Company is currently working with
the bank to obtain a waiver of the violated covenant. All amounts due to
the bank under the above agreement have been classified as current
liabilities.
The Company also entered into Subordinated Promissory Notes with
both of the former owners of Taurus and Bowman in the total amount of
$3,597,000. The notes bear interest at 7.75% with interest payable
quarterly. Principal payments are due in three equal installments
commencing annually on February 15, 2002 for the Taurus related note and
August 6, 2002 for the Bowman related note.
6
With each acquisition the prior owners were able to earn
additional amounts based on various sales and profitability targets as
outlined below:
Taurus acquisition: one potential contingent payment was based on
profitability of the Taurus operation after acquisition for the period
February 15, 1999 to February 15, 2000 - no amount was earned.
Bowman acquisition: two potential contingent payments. The first
contingent payment was based on the Bowman operation attaining certain
sales levels after the acquisition during the period August 6, 1999 to
August 6, 2000 - $750,000 was earned and added to both goodwill and the
balance of the Subordinated Promissory Note. The second and last
contingent payment was based on the Bowman operation meeting certain
profitability targets for the period January 24, 2000 to January 21,
2001 - the Company calculated that approximately $340,600 was earned and
that amount was added to both goodwill and the balance of the
Subordinated Promissory Note. The contingent payment terms were detailed
in the purchase agreements and did not require continued employment of
the former principals to be earned.
3. 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:
Thirteen weeks ended
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November 25, November 26,
2001 2000
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Numerator for basic and diluted earnings
per share:
Net Earnings (loss) $ (247,003) $ 66,810
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Denominator:
Denominator for basic earnings
per share - weighed average shares 2,465,229 2,465,229
Effect of dilutive securities:
Employee/and non-employee options -- 45,468
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Dilutive common shares
Denominator for diluted earnings
per share 2,465,229 2,510,697
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Basic earnings (loss) per share $ (.10) $ 0.03
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Diluted earnings (loss) per share $ (.10) $ 0.03
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7
4. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 with early adoption permitted for companies with fiscal years
beginning after March 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. Effective with
the August 27, 2001 adoption of FAS 142, goodwill is no longer amortized but is
instead subject to an annual impairment test. The company has not yet performed
its transitional impairment test in conjunction with the adoption of FAS 142.
Goodwill and other intangible assets resulting from acquisitions of
business and the formation of the Company consist of the following:
November 25, August 26,
2001 2001
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Goodwill $6,329,763 $6,329,763
Less accumulated amortization 647,609 647,609
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$5,682,154 $5,682,154
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Other identifiable intangibles:
Organization Costs $ 555,000 $ 555,000
Less accumulated amortization 63,996 63,996
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$ 491,004 $ 491,004
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With the adoption of FAS 142 the Company ceased amortization of goodwill as
of August 27, 2001. The following table presents the results of the Company for
all periods presented on a comparable basis:
November 25, November 26,
2001 2000
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Reported net (loss)/income attributed to
common shareholder $ (247,003) $ 66,810
Add back goodwill amortization -- 82,200
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Adjusted net (loss) income attributed to
common shareholders $ (247,003) $ 149,010
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Basic and diluted net (loss) income per share:
Reported net income (loss) attributed to
common shareholders $ .03 $ (.10)
Goodwill amortization $ .03 $ --
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Adjusted net (loss) income
attributed to common shareholders $ .06 $ (.10)
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8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales were $3,811,200 for the quarter ending November 25,
2001, a decrease of 42% or $2,763,800 from the same period of the prior
year. The drop was due in large part to the continued softness in the
agriculture market, although there was a slowdown in the
aerospace/avionics markets after the events of September 11, 2001. The
Company expects the aerospace/avionics market to remain soft for the
foreseeable future.
Gross margin decreased to 12% versus 22% in the year ago period.
Gross margin was negatively affected primarily due to volume related
issues.
Selling and administrative expense of $548,000 was $591,000 lower
than in the prior year period. The amount was lower in fiscal 2002 in
part due to the carrying cost of the Long Lake, Minnesota facility
included in selling and administrative expense in fiscal 2001, but not
in fiscal 2002 as the building has been sold. The amount of the expense
included in selling and administrative expense related to the facility
in fiscal 2001 was $89,000. In fiscal 2002, the Company also reversed
$159,000 in profit sharing accrual, as it was determined that no amounts
will be paid in relation to calendar year 2001 wages. Selling and
administrative expense was also lower in fiscal 2002 due to the
elimination of goodwill amortization of $82,000 as discussed in Footnote
4.
Interest expense in fiscal 2002 was $143,000, which was $102,000
less than the fiscal 2001 amount of $245,000. The decrease was due to in
large part to the reduced levels of debt in fiscal 2002, with $ 61,000
of the decrease being directly attributable to the paid-off mortgage on
the above-mentioned Long Lake, Minnesota facility.
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 benefits
will be realized.
Liquidity and Capital Resources:
On November 25, 2001, working capital was a negative $960,000
compared to a negative $1,001,000 at August 26, 2001. The ratio of
current assets to current liabilities at November 25, 2001 and August
26, 2001 was .78 to 1.0 at the end of both periods.
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 $986,000 on its term loan
facility and $90,000 on its revolving facility. The revolving facility
had $1,599,000 of availability at November 25, 2001. The term loan
carries an interest rate at prime plus .75%. The revolver rate is at
prime plus .50%. The Company has paid down almost $3,400,000 on its term
facility since its inception in August 1999.
9
As discussed in the Notes to Consolidated Statements, the Company
was not in compliance with one of its covenants and has received a
Notice of Default from the bank. The Company is currently working with
the bank to obtain a waiver of the violated covenant, which the Company
anticipates it will receive. The Company has made all required principal
and interest payments to the bank in connection with the credit and
security agreement. All amounts owed under this agreement have been
classified as current liabilities.
As also described in the Notes, the Company entered into a
subordinated promissory note with the former owner of Taurus for
$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 $1,934,000 with the former owner of Bowman. Interest is accrued
at 7.75% payable quarterly with principal payments due in equal
installments commencing August 6, 2002.
Total capitalized lease debt of $2,744,000 on November 25, 2001
was $456,000 higher than on August 27, 2001. The increase resulted from
a new lease on equipment of $606,000 offset by payments on the existing
leases.
The Company believes that its internally generated funds will be
sufficient to make all debt payments, and that once it gets back into
compliance and obtains an extension or a new senior banking agreement,
the Company will be able to make all required subordinated debt
payments. However, there is no assurance that the current senior debt
holder or a new senior debt lender will allow the required subordinated
debt payments to be made.
Cautionary Statement:
Statements included in this Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the letter to
shareholders, in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer
which are not historical or current facts are "forward-looking
statements." These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and
are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the
future could affect the Company's actual results and could cause the
Company's actual financial performance to differ materially from that
expressed in any forward-looking statement: (i) the Company's ability to
obtain additional manufacturing programs and retain current programs;
(ii) the loss of significant business from any one of its current
customers could have a material adverse effect on the Company; (iii) a
significant downturn in the industries in which the Company
participates, principally the agricultural industry, could have an
adverse effect on the demand for Company services, (iv) the Company's
ability to obtain waivers with respect to certain covenant defaults, and
(v) the Company's ability to obtain bank financing after the current
agreement expires. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
1. Not applicable.
10
PART II. OTHER INFORMATION:
Item 3. Defaults upon Senior Securities
See Notes to Consolidated Financial Statements Footnote 2 and
Item 2 "Management Discussion of Financial Condition and Results of
Operations" regarding defaults under the Company's Credit and Security
Agreement.
Item 7. Exhibits and Reports on Form 8-K:
A. None
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 9, 2002 /s/ Michael J. Pudil
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Michael J. Pudil, President & CEO
Date: January 9, 2002 /s/ Paul D. Sheely
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Paul D. Sheely, Vice President & CFO
11