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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 May 27, 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)
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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 [ ]
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.
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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 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
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Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MAY 27, AUGUST 27,
2001 2000
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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
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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
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$19,780,661 $23,431,665
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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
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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
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Total Stockholders' Equity 8,421,172 8,945,291
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$19,780,661 $23,431,665
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See notes to consolidated financial statements
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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
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Net earnings (loss) $ (315,234) $ 602,817 $ (524,119) $ 430,329
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Basic and diluted loss per share $ (.13) $ (.21)
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Basic earnings per share (2000 only) $ .24 $ (.17)
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Diluted earnings per share (2000 only) $ .23 $ .17
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Weighted average number of
common shares 2,465,229 2,465,229 2,465,229 2,460,897
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Weighted average number of
common and dilutive potential
common shares (2000 only) 2,567,145 2,535,726
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See notes to consolidated financial statements.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended
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May 27, May 28,
2001 2000
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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
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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
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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
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Net cash provided by (used in) financing activities (2,039,448) (2,370,294)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (125,288)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,300 131,588
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CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,300 $ 6,300
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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.
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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
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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
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May 27, May 28, May 27, May 28,
2001 2000 2001 2000
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Numerator for basic and diluted
earnings per share:
Net Earnings $ (315,234) $ 602,817 $ (524,119) $ 430,329
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Denominator:
Denominator for basic earnings
per share - weighed average shares 2,465,229 2,465,229 2,465,229 2,460,897
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Effect of dilutive securities:
Employee/Director stock options 101,916 74,829
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Dilutive potential common shares
Denominator for diluted earnings
per share-adjusted weighted shares
and assumed conversions 2,567,145 2,535,726
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Basic earnings per share $ (.13) $ .24 $ (.21) $ .17
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Diluted earnings per share $ .23 $ .17
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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.
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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
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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.
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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
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Michael J. Pudil, President & CEO
Date: July 11, 2001 /s/ Paul D. Sheely
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Paul D. Sheely, Vice President,
Finance & CFO
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