<PAGE>
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 30, 1999
------------------------------------------------
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.)
Long Lake, Minnesota 55356
_______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(612) 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.
2,453,425 Common Shares were outstanding as of June 30, 1999.
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets May 30, 1999 (Unaudited)
and August 30, 1998 3
Consolidated Statements of Operations
Thirteen and Thirty-nine weeks ended May 30, 1999 and
Thirteen and Thirty-nine weeks ended May 31, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirty-nine weeks ended May 30, 1999 and Thirty-nine weeks
ended May 31, 1998 (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, 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION:
Item 5. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
<PAGE>
Part I. Financial Information
ITEM I. FINANCIAL STATEMENTS
-----------------------------
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 30, August 30,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 0 $ 2,697,104
Accounts receivable 2,446,749 2,852,604
Inventories 3,399,280 919,418
Prepaid and other current assets 108,039 207,100
------------- --------------
Total Current Assets 5,954,068 6,676,226
Property, Plant and Equipment - Net 9,159,067 6,938,508
Intangible Assets 2,573,313 0
------------- --------------
$ 17,686,448 $13,614,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,014,016 $ 1,535,451
Accrued compensation and employee withholdings 543,608 434,582
Miscellaneous accrued expenses 618,083 758,687
Current portion of long-term debt 1,120,394 708,949
------------- --------------
Total Current Liabilities 3,296,101 3,437,669
Long term debt, less current portion 6,117,355 1,802,072
Long term pension liability 356,660 380,073
Stockholders' Equity:
Common stock issued, 2,453,425 and
2,448,800 shares respectively 245,343 244,880
Capital in excess of par value 1,600,301 1,592,515
Retained earnings 6,070,688 6,157,525
------------- --------------
Total Stockholders' Equity 7,916,332 7,994,920
------------- --------------
$ 17,686,448 $ 13,614,734
============= ==============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
------------------------------- --------------------------------
May 30, May 31, May 30, May 31,
1999 1998 1999 1998
--------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 5,989,247 $ 6,634,918 $ 15,359,113 $ 17,626,097
Cost of products sold 5,033,490 5,332,291 13,412,318 14,392,484
------------- ------------- -------------- ---------------
Gross margin 955,757 1,302,627 1,946,795 3,233,613
Selling and administrative expense 729,191 704,627 1,851,490 1,835,118
Interest and other income (5,286) (37,324) (137,952) (83,639)
Interest and other expense 177,218 51,929 304,295 137,175
------------- ------------- -------------- ---------------
Earnings from operations
before income taxes 54,634 583,395 (71,038) 1,344,959
Income tax expense (2,700) 14,000 15,800 30,800
-------------- ------------- -------------- ---------------
Net earnings $ 57,334 $ 569,395 $ (86,838) $ 1,314,159
============= ============= =============== ===============
Basic earnings per share $ 0.02 $ 0.23 $ (0.04) $ 0.54
============= ============= =============== ===============
Diluted earnings per share $ 0.02 $ 0.22 $ (0.03) $ 0.52
============= ============= =============== ===============
Weighted average number of
common shares 2,453,425 2,435,466 2,451,307 2,432,310
========= ========= ========= =========
Weighted average number of
common and dilutive potential
common shares 2,522,801 2,569,320 2,540,934 2,546,935
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 weeks ended
-------------------------------
May 30, May 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (86,838) $ 1,314,159
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of property, plant & equipment (38,858) -
Depreciation and amortization 1,057,660 851,000
(Decrease) in pension liability (23,413) (65,250)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,149,669 (346,519)
(Increase) decrease in inventories (680,521) 161,623
(Increase) decrease in prepaid expenses 104,869 (68,566)
Increase (decrease) in accounts payable and
accrued expenses (1,193,867) 920,387
-------------- -------------
Net cash provided by operations 288,701 2,766,834
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 47,730 -
Purchase of property, plant and equipment (230,038) (749,276)
Purchase of subsidiary (net of cash acquired) (6,533,324) -
----------- -------------
Net cash provided by (used in) investing activities (6,715,632) (749,276)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,094,623) (889,596)
Proceeds from issuance of long term debt 4,816,200 -
Issuance of common stock 8,250 14,250
------------- -------------
Net cash provided by (used in) financing activities 3,729,827 (875,346)
------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,697,104) 1,142,212
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,697,104 2,847,598
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 0 $ 3,989,810
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 282,773 $ 138,175
Income taxes $ 33,561 $ 51,027
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 980,250 $ 870,022
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of May 30, 1999, the
consolidated statements of operations for the thirteen weeks and
thirty-nine weeks ended May 30, 1999 and May 31, 1998 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 30, 1998 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 1998 annual report to
shareholders. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Effective February 15, 1999, the Company acquired Taurus
Numeric Tool, Inc. ("Taurus") in a stock purchase transaction using
cash on hand, borrowings from a bank and subordinated debt from the
previous owner. Accordingly, the balance sheet as of May 30, 1999 and
statements of operations and cash flows of Taurus have been
consolidated for the period from February 15, 1999 to May 30, 1999 into
WSI Industries, Inc.
2 BUSINESS ACQUISITION
On February 15, 1999, the Company acquired Taurus Numeric
Tool, Inc. for the purchase price of $ 5 million cash plus $1,616,175
paid in the form of a Subordinated Promissory Note subject to
adjustment based on the February 15, 1999 closing balance sheet. An
additional undetermined amount not to exceed $1 million in the form of
a contingent Subordinated Promissory Note will be payable based upon
the operating income of Taurus during the twelve-month period
subsequent to the acquisition. For financial statement purposes, the
acquisition has been accounted for under the purchase method of
accounting with the excess of the purchase price over the fair value of
the net tangible assets acquired recorded as intangible assets which
are being amortized over 20 years. The following unaudited pro forma
information presents a summary of consolidated results of operations of
the Company and Taurus as if the acquisition had occurred at the
beginning of fiscal 1998, with pro forma adjustments to give effect to
amortization of goodwill and other intangible assets, depreciation
expense on the fair value of property, plant and equipment and interest
expense on acquisition debt, together with the related income tax
effects assuming that Taurus would be able to utilize the available WSI
Net Operating Loss.
6
<PAGE>
<TABLE>
<CAPTION>
39 weeks ended May
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue $18,860,000 $23,292,000
=========== ===========
Net Income $ 658,000 $ 1,844,000
=========== ===========
Earnings per share $ .26 $ .72
=========== ===========
</TABLE>
The unaudited pro forma condensed combined financial
information above is not necessarily indicative of what actual results
would have been had the acquisition occurred at the date indicated or
indicative of the results that may be expected for the full year ended
August 29, 1999.
3. DEBT AND LINE OF CREDIT:
------------------------
Pursuant to the Taurus 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 $3,200,000 and a
revolving credit facility in the maximum amount of $3,000,000. Interest
is accrued at prime plus .50% for the term loan and prime plus .25% for
the revolving credit facility. Each facility has a LIBOR rate option.
The term loan shall mature and is payable in equal monthly installments
of $38,096 of principal commencing August 31, 1999. At May 30, 1999,
the outstanding balance on the term loan was $2,700,000 while there was
no outstanding balance 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.
The Company also entered into a Subordinated Promissory Note
with the former owner of Taurus of $1,616,175 (subject to final
adjustment based on the February 15, 1999 closing balance sheet). The
note bears interest at 7.75% with interest payable quarterly. Principal
payments are due in three equal installments commencing annually on
February 15, 2002.
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.
7
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
--------------------------- ----------------------------
May 30, May 31, May 30, May 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net Earnings $57,334 $569,395 $(86,838) $1,314,159
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighed average shares 2,453,425 2,435,466 2,451,307 2,432,310
Effect of dilutive securities:
Employee/Director stock options 69,376 133,854 89,627 114,625
---------- ---------- ---------- ----------
Dilutive potential common shares
Denominator for diluted earnings
per share-adjusted weighted shares
and assumed conversions 2,522,801 2,569,320 2,540,934 2,546,935
========== ========== ========== ==========
Basic earnings per share $ (.02) $ 0.23 $ (.04) $ 0.54
========== ========== ========== ==========
Diluted earnings per share $ (.02) $ 0.22 $ (.03) $ 0.52
========== ========== ========= ==========
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
and
---
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS:
- ----------------------
Net sales of $5,989,000 for the quarter ending May 30, 1999
consisted of $1,393,000 of sales from Taurus Numeric Tool and
$4,596,000 from pre-acquisition WSI customers. The pre-acquisition
sales decreased $2,039,000 or 31% from the third quarter of the prior
year in large measure attributable to recessionary forces in the
agribusiness market. Net sales for the thirty-nine weeks ended May 30,
1999 decreased $2,267,000 or 13% from the same period of fiscal 1998
again in large part due to the agribusiness market offset by new sales
generated from Taurus.
Gross margin declined to 16.0% of sales in the third quarter
of fiscal 1999 compared to 19.6% in the prior year's third quarter. The
first three quarters of fiscal 1999 gross margin declined to 12.7%
compared to the prior year's gross margin of 18.3%. The lower gross
margins resulted primarily from volume inefficiencies created by the
lower quarterly and year to date sales and the mix of products sold to
pre-acquisition WSI customers.
Selling and administrative expense of $729,000 was $24,000
higher than the third quarter of the prior year and the first
three-quarter's $1,852,000 was $17,000 higher than last year. The
amounts were higher due to the addition of Taurus selling and
administrative expense offset by lower outside professional service
fees and compensation expense.
Interest and other income was $32,000 lower than the
comparable quarter of the prior year due to lower cash balances which
generated less interest income. The first thirty nine weeks of fiscal
1999 was $55,000 higher than the comparable period of fiscal 1998 due
to miscellaneous equipment sales.
Interest and other expense increased $125,000 in the third
quarter of fiscal 1999 and $167,000 in the first three quarters of
fiscal 1999 versus the comparable periods of the prior year due to
interest costs incurred from the Taurus acquisition and higher
capitalized lease debt balances.
In the first three-quarters of fiscal 1999, the Company
recorded $16,000 of mandatory state income 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 benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
On May 30, 1999 working capital was $2,658,000 compared to
$3,238,000 at August 30, 1998, a decrease of $580,000, due primarily to
a reduction in cash, pre-acquisition accounts receivable and an
increase in current portion of long term debt due to the Taurus
acquisition offset by the addition of Taurus' working capital. The
ratio of current assets to current liabilities at May 30, 1999 and
August 30, 1998 was 1.81 to 1.0 and 1.94 to 1.0, respectively.
9
<PAGE>
As described previously in the Notes to Consolidated
Statements, the Company amended its credit and security agreement with
its bank. Currently, the Company owes $2,700,000 on its term loan
facility but does not have a balance due on its revolving facility.
As also described in the Notes, the Company entered into a
subordinated promissory note with the former owner of Taurus for
approximately $1,616,175 (subject to adjustment). 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.
Long-term capitalized lease debt of $2,161,000 on May 30, 1999
was $359,000 higher than on August 30, 1998. The Company entered into
new capital lease arrangements amounting to $980,000 in the first half
of 1999.
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 fiscal 1999.
YEAR 2000 COMPLIANCE:
The Year 2000 issue is the result of computer systems that use
two digits rather than four to define the applicable year, which may
prevent such systems from accurately processing dates ending in the
year 2000 and beyond. This could result in computer system failures or
disruption of operations, including, but not limited to, an inability
to process transactions, to send and receive electronic data, or to
engage in routine business and production activities.
The Company has completed its initial assessment of all
currently used computer and network systems as well as its precision
machining production equipment and has developed a plan to correct
those areas that will be affected by the year 2000 issue. The Company's
plan includes replacement or upgrades of certain computer hardware and
software. The Company will utilize outside vendors to assist in the
upgrade of certain computer systems. For its precision machining
equipment, the Company has received written assurance from the
equipment manufacturers as to year 2000 compliance of their machines.
The Company has also tested its manufacturing equipment by rolling the
date forward to the year 2000 and has experienced no difficulties. The
Company estimates that it is 80% complete with respect to its major
computer systems and 95% complete with respect to its precision
machining equipment in its compliance programs. The Company's goal is
to be substantially Year 2000 compliant by the end of fiscal 1999.
In addition to reviewing its internal systems, the Company has
begun formal communications with its significant vendors concerning
Year 2000 compliance and has received an 85% response rate. There can
be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an
adverse impact on the Company's operations, financial condition and
results of operations. The Company does not believe that its products
involve any material Year 2000 risks.
The Company presently anticipates that the costs associated
with addressing the year 2000 issues compliance will not have a
material adverse impact on the Company's financial condition, results
of operations or liquidity. Present estimated costs for the Company's
compliance programs are less than $25,000.
10
<PAGE>
The Company anticipates that it will complete its Year 2000
assessment and compliance programs by the end of fiscal 1999. However,
there can be no assurance the Company will be successful in
implementing its programs according to the anticipated schedule. In
addition, the Company may be adversely affected by the inability of
other companies whose systems interact with the Company to become Year
2000 compliant and by potential interruptions of utility, communication
or transportation systems as a result of Year 2000 issues.
Although it expects its internal computer and manufacturing
systems to be Year 2000 compliant as described above, the Company is
preparing a contingency plan that will specify what it plans to do if
it or important external companies are not Year 2000 compliant in a
timely manner. The Company expects to prepare its contingency plan
during calendar year 1999.
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, principally the agricultural industry, could
have an adverse effect on the demand for Company services; (iv) Year
2000 issues which may result in computer system failures or disruption
of operations including engaging in routine business activities. 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.
11
<PAGE>
PART II. OTHER INFORMATION:
Item 5. EXHIBITS AND REPORTS ON FORM 8-K:
A. Exhibit 27. Financial Data Schedule, Q3, Fiscal 1999
B. There was a form 8-K filed effective July 13, 1999
describing the Company's agreement in principle to acquire
Bowman Tool and Machining, Inc.
C. There was a Form 8-K\A filed effective April 30, 1999
describing the Company's purchase of Taurus Numeric Tool
and corresponding other events.
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 14, 1999 /s/ Michael J. Pudil
------------- -----------------------------------------------
Michael J. Pudil, President & CEO
Date: July 14, 1999 /s/ Paul D. Sheely
------------- -----------------------------------------------
Paul D. Sheely, Vice President, Finance & CFO
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-END> MAY-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,474,249
<ALLOWANCES> 27,500
<INVENTORY> 3,399,280
<CURRENT-ASSETS> 5,954,068
<PP&E> 24,487,334
<DEPRECIATION> 15,328,267
<TOTAL-ASSETS> 17,686,448
<CURRENT-LIABILITIES> 3,296,101
<BONDS> 6,117,355
0
0
<COMMON> 245,343
<OTHER-SE> 7,670,989
<TOTAL-LIABILITY-AND-EQUITY> 17,686,448
<SALES> 5,989,247
<TOTAL-REVENUES> 5,989,247
<CGS> 5,033,490
<TOTAL-COSTS> 5,033,490
<OTHER-EXPENSES> 723,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177,218
<INCOME-PRETAX> 54,634
<INCOME-TAX> (2,700)
<INCOME-CONTINUING> 57,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,334
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
