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 February 24, 2002
-------------------------------------------------
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 March 31, 2002.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets February 24, 2002(Unaudited)
and August 26, 2001 3
Consolidated Statements of Operations
Thirteen and Twenty-Six weeks ended February 24, 2002 and
February 25, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
Twenty-Six weeks ended February 24, 2002 and February 25, 2001 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
PART II. OTHER INFORMATION:
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Submission of Matters to a Vote of the Security Holders 11
Item 7. Exhibits and Reports on Form 8-K 11
Signatures 11
2
Part I. Financial Information
Item 1. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
FEBRUARY 24, AUGUST 26,
ASSETS 2002 2001
------------ -----------
Current Assets:
Cash and cash equivalents $ 2,009,360 $ 8,292
Accounts receivable 1,322,270 1,778,969
Inventories 948,433 1,584,415
Prepaid and other current assets 43,662 101,879
------------- -------------
Total Current Assets 4,323,725 3,473,555
Property, Plant and Equipment - Net 2,504,111 6,691,360
Intangible Assets 2,368,452 6,173,158
------------- -------------
$ 9,196,288 $ 16,338,073
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 953,188 $ 687,426
Accrued compensation and employee withholdings 388,250 445,693
Miscellaneous accrued expenses 331,266 425,330
Current portion of long-term debt 1,282,799 2,916,061
------------- -------------
Total Current Liabilities 2,955,503 4,474,510
Long term debt, less current portion 1,484,033 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 2,869,295 5,864,644
------------- -------------
Total Stockholders' Equity 4,756,752 7,752,101
------------- -------------
$ 9,196,288 $ 16,338,073
============= =============
See notes to consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended 26 weeks ended
--------------------------------- -------------------------------
February 24, February 25, February 24, February 25,
2002 2001 2002 2001
-------------- ------------- ------------- ------------
Net sales $ 4,653,168 $ 5,370,556 $ 8,464,376 $11,945,596
Cost of products sold 4,118,852 4,266,761 7,489,868 9,400,373
-------------- ------------- ------------- -----------
Gross margin 534,316 1,103,795 974,508 2,545,223
Selling and administrative expense 649,091 1,169,197 1,197,022 2,308,371
Loss on sale of subsidiary 2,505,920 - 2,505,920 -
Interest and other income (5,207) (5,325) (8,504) (18,362)
Interest and other expense 132,858 215,615 275,419 461,096
-------------- ------------- ------------- -----------
Earnings (loss) from operations
before income taxes (2,748,346) (275,692) (2,995,349) (205,882)
Income tax expense - - - 3,000
-------------- ------------- ------------- -----------
Net loss $ (2,748,346) $ (275,692) $ (2,995,349) $ (208,882)
============== ============= ============= ===========
Basic and diluted loss per share $ (1.11) $ (0.11) $ (1.22) $ (0.08)
============== ============ ============= ===========
Weighted average number of
common shares 2,465,229 2,465,229 2,465,229 2,465,229
============== ============ ============= ===========
See notes to consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
26 weeks ended
------------------------------
February 24, February 25,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,995,349) $ (208,882)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of subsidiary 2,505,919
Depreciation and amortization 962,419 1,226,174
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (522,113) 1,530,857
(Increase) decrease in inventories 366,488 801,228
(Increase) decrease in prepaid expenses 53,506 (21,063)
Increase (decrease) in accounts payable and
accrued expenses (190,824) (1,173,963)
------------- -------------
Net cash provided by (used in) operations 180,046 2,154,351
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 6,550 -
Purchase of property, plant and equipment - (146,398)
Purchase of subsidiary - (280,600)
Sale of subsidiary 3,235,262 -
------------- -------------
Net cash provided by (used in) investing activities 3,241,812 (426,998)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,420,790) (2,008,599)
Proceeds from issuance of long term debt - 280,600
------------- -------------
Net cash provided by (used in) financing activities (1,420,790) (1,727,999)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,001,068 (646)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,292 6,300
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 2,009,360 $ 5,654
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 266,946 $ 473,484
Income taxes $ - 7,500
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 606,618 322,671
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 February 24, 2002, the
consolidated statements of operations for the thirteen weeks and
twenty-six weeks ended February 24, 2002 and February 25, 2001 and the
consolidated statements of cash flows for the twenty-six weeks then
ended, respectively, have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods
presented have been made.
The 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. Sale of Subsidiary
On February 22, 2002, the Company completed the asset sale of
one of its subsidiaries, Bowman Tool & Machining, Inc., to W. Bowman
Consulting Company, an affiliate of the prior owner of Bowman. The
Company received approximately $3.2 million in cash from the sale, with
the buyer also assuming another $3.4 million in long-term debt as well
as purchasing $1.2 million in accounts receivable and inventory. The
buyer also assumed any remaining liabilities associated with amounts
due on the non-compete and employment agreements that were a result of
the original 1999 Bowman acquisition. The sale included substantially
all of the assets of Bowman. The Company retained approximately
$628,000 in accounts payable and accrued liabilities that were not part
of the sale.
The sale was completed at the close of the last working day of
the quarter, so the consolidated statement of operations reflect the
inclusion of the entire quarter of activity for Bowman.
Correspondingly, the balance sheet reflects the reduction of the assets
and the assumption of certain debt that were a part of the sale.
3. Debt and Line of Credit:
Pursuant to the Bowman sale, the Company paid off its credit
and security agreement with its bank. The agreement has been terminated
and no further amounts may be borrowed against it. Prior to the payoff
of the credit and security agreement, the Company had been in default
with relation to the agreement. During the quarter, the Company
obtained a waiver of the default which it paid the bank $12,500 as a
waiver fee. During the quarter interest was accrued at prime plus .75%
for the term loan and prime plus .50% for the revolving credit
facility.
6
The Company also has a Subordinated Promissory Note in
connection with a prior acquisition in the amount of $1,663,000. The
note bears interest at 7.75% payable quarterly. Principal payments are
due in three annual installments commencing February 15, 2002. However,
in connection with the default of the bank credit and security
agreement described in the previous paragraph, the Company was
prohibited from making its first payment as required on February 15,
2002. Subsequent to the end of the quarter however, the Company did
make the first payment of $554,000.
With the acquisition the prior owner was able to earn an
additional amount based on the profitability of Taurus for the period
February 15, 1999 to February 15, 2000. No amount was earned. The
contingent payment terms were detailed in the purchase agreement and
did not require continued employment of the former principal to be
earned.
WSI Industries also had a Subordinated Promissory Note in
connection with the original 1999 Bowman acquisition in the amount of
$1,935,000. With the completion of the sale back to the prior owner as
described in Note 2, the Subordinated Promissory Note was assumed by
the prior owner, and no further amounts are due.
Prior to the sale of Bowman, the Company had capitalized lease
debt totaling approximately $2.6 million. With the sale, the buyer
assumed capitalized lease debt of $1.5 million, with WSI keeping the
remaining $1.1 million. The remaining capitalized leases have monthly
payments of approximately $21,000 with principal payments due of:
Fiscal Year
-----------
Remainder of Fiscal 2002 $ 80,000
Fiscal 2003 181,000
Fiscal 2004 196,000
Fiscal 2005 198,000
Fiscal 2006 143,000
Fiscal 2007 154,000
After Fiscal 2007 153,000
-------------
Total Principal Payments $ 1,105,000
=============
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.
7
Goodwill and other intangible assets resulting from
acquisitions of business and the formation of the Company consist of
the following:
February 24, 2002 August 26, 2001
----------------- ---------------
Goodwill $ 2,428,264 $ 6,329,763
Less accumulated amortization 308,595 647,609
-------------- -------------
$ 2,119,669 $ 5,682,154
============== =============
Other identifiable intangibles:
Organization Costs $ 285,000 $ 555,000
Less accumulated amortization 36,217 63,996
-------------- -------------
$ 248,783 $ 491,004
============== =============
With the sale of the Bowman assets as described in Note 2.,
the goodwill and organization costs related to Bowman were eliminated.
Goodwill amounted to $3,901,499 with related accumulated amortization
of $339,014. Organization costs were $270,000 with related accumulated
amortization of $27,779.
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:
13 weeks ended 26 weeks ended
-------------------------------- ----------------------------------
February 24, February 25, February 24, February 25,
2002 2001 2002 2001
------------- -------------- -------------- --------------
Reported net (loss)/income
attributed to common shareholder $ (2,748,346) $ (275,692) $ (2,995,349) $ (208,882)
Add back amortization - 80,141 - $ 162,341
------------- ------------- -------------- -------------
Adjusted net (loss) income
attributed to common shareholders $ (2,748,346) $ (195,551) $ (2,995,349) $ (46,541)
============= ============= ============== =============
Basic and diluted net (loss) income per share:
Reported net income (loss)
Attributed to common shareholders $ (1.11) $ (.11) $ (1.22) $ (.08)
Goodwill amortization $ - $ .03 $ - $ .06
------------- ----------- -------------- -------------
Adjusted net (loss) income
Attributed to common shareholders $ (1.11) $ (.08) $ (1.22) $ (.02)
============= ============= =============== =============
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales of $4,653,000 for the quarter ending February 24,
2002 decreased 13% or $717,000 from the same period of the prior year.
Sales for the quarter were down compared to last year due primarily to
lower sales in the power systems market as one customer has moved some
production to Mexico, and to the agriculture market as the Company had
lost a customer that it had done business with in the prior year. Year
to date sales of $8,464,000 were $3,481,000 or 29% less than the prior
year. As discussed in the previous 10-Q's, two major customers made the
decision to consign raw materials for their manufacturing programs 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 the power system and
agriculture developments described above, led to the lower sales level
for the year to date periods.
Gross margin decreased to 11% as compared to 21% in the prior
year for the quarter. The margin decreased in large measure due to an
increase the Company made in its inventory obsolescence reserve. The
Company increased its reserve by $255,000 during the quarter to reflect
the softening of the aerospace business after the events of September
11, 2001. Had the Company not increased its reserves, its gross margin
would have been approximately 17% for the quarter. In addition to the
obsolescence issue, the Company's margins also suffered from volume
inefficiencies from the lower level of sales in the quarter.
Gross margin year to date was 12% as compared to 21% in the
year prior period. The year to date margins differed from the prior
year period for the same reasons described above.
Selling and administrative expense of $649,000 was $520,000
lower than the prior year quarter. Year to date selling and
administration expense of $1,197,000 was $1,111,000 lower in fiscal
2002 than fiscal 2001. In 2001, selling and administrative expense
included the carrying costs of the Long Lake, Minnesota building that
the Company eventually sold in June 2001. The carrying costs included
in selling and administrative expense in 2001 amounted to $230,000 for
the six-month period.
The Company's selling and administrative expense was also
lower in 2002 due the Company's adoption of FAS 142 Goodwill and Other
Intangible Assets as outlined more fully in Note 4.
WSI's selling and administrative expense was also lower in
2002 due to cost containment measures that included lower salary and
benefit costs as well as professional service expense.
Interest and other expense decreased $83,000 for the quarter
and $186,000 year to date due to the lower levels of long term debt in
Fiscal 2002 versus Fiscal 2001. A large portion of the interest expense
decrease relates to the sale of the Long Lake, Minnesota building and
the corresponding payoff of the mortgage related to the building.
Interest expense on the mortgage was included in fiscal 2000 expense up
through the sale in June.
9
In the twenty-six week period ended February 25, 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 February 24, 2002 working capital was $1,368,000 compared
to a negative $1,001,000 at August 26, 2001, an increase of $2,369,000.
The increase resulted primarily from the sale of the Bowman assets
described in Note 2 and the resulting influx of cash and current
liability reduction due to the assignment and payoff of debt. The ratio
of current assets to current liabilities at February 24, 2002 and
August 26, 2001 was 1.46 to 1.0 and .78 to 1.0, respectively.
As described previously in the Notes to Consolidated
Statements, the Company paid off its credit and security agreement with
its bank on February 22, 2002. The term loan carried an interest rate
at prime plus .75%. The revolver rate was at prime plus .50%. No
further amounts may be borrowed under the agreement.
As also described in the Notes, the Company previously 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 made its
first payment subsequent to the end of the quarter.
The Company is presently searching for a new line of credit
agreement.
It is management's belief that its internally generated funds
combined with a new line of credit will be sufficient to enable the
Company to meet its financial requirements during fiscal 2002.
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 significant downturn in the industries in which
the Company participates could have an adverse effect on the demand for
Company services; (iv) and the Company's ability to obtain new lending
agreements. The foregoing list should not be construed as exhaustive
and the Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
1. Not Applicable
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders.
A. The Annual Meeting of the Company Stockholders was held on
January 10, 2002.
B. Directors elected at that meeting were:
Paul Baszucki For 2,311,739 Against 48,590
Melvin L. Katten For 2,315,439 Against 44,890
George J. Martin For 2,315,364 Against 44,965
Eugene J. Mora For 2,311,164 Against 49,165
Michael J. Pudil For 2,311,241 Against 49,088
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: April 10, 2002 /s/ Michael J. Pudil
-------------- ---------------------------------------
Michael J. Pudil, President & CEO
Date: April 10, 2002 /s/ Paul D. Sheely
-------------- ---------------------------------------
Paul D. Sheely, Vice President,
Finance & CFO
11