<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 29, 1998
----------------------------------------------
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
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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
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(Address of principal executive offices) (Zip Code)
(612) 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
------ ------
</TABLE>
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.
2,449,800 Common Shares were outstanding as of December 31, 1998.
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WSI INDUSTRIES, INC.
AND SUBSIDIARY
INDEX
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<CAPTION>
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets November 29, 1998 (Unaudited)
and August 30, 1998 3
Consolidated Statements of Operations
Thirteen weeks ended November 29, 1998 and
November 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirteen weeks ended November 29, 1998 and
November 30, 1997 (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, 10
PART II. OTHER INFORMATION:
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WSI INDUSTRIES, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
NOVEMBER 29, AUGUST 30,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
- --------
Current Assets:
Cash and cash equivalents $2,616,481 $2,697,104
Accounts receivable 2,498,249 2,852,604
Inventories 970,993 919,418
Prepaid and other current assets 139,128 207,100
---------- ----------
Total Current Assets 6,224,851 6,676,226
Property, Plant and Equipment -- Net 7,568,605 6,938,508
----------- -----------
$13,793,456 $13,614,734
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable 1,125,194 1,535,451
Accrued compensation and employee withholdings 382,670 434,582
Miscellaneous accrued expenses 448,110 758,687
Current portion of long-term debt 816,455 708,949
----------- -----------
Total Current Liabilities 2,772,429 3,437,669
Long-term Debt, less current portion 2,374,739 1,802,072
Long-term Pension Liability 374,397 380,073
Stockholders' Equity:
Common stock issued and
outstanding, 2,448,800 shares 244,880 244,880
Capital in excess of par value 1,592,515 1,592,515
Retained earnings 6,434,496 6,157,525
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Total Stockholders' Equity 8,271,891 7,994,920
----------- -----------
$13,793,456 $13,614,734
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----------- -----------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
-------------------------------
November 29, November 30,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $5,640,708 $5,313,700
Cost of products sold 4,815,677 4,508,624
------------ ------------
Gross margin 825,031 805,076
Selling and administrative expense 543,638 526,139
Interest and other income (67,071) (21,456)
Interest and other expense 59,692 44,600
------------ ------------
Earnings from operations
before income taxes 288,772 255,793
Income tax expense 11,800 9,000
------------ ------------
Net earnings $276,972 $246,793
------------ ------------
------------ ------------
Basic earnings per share $0.11 $0.10
------------ ------------
------------ ------------
Diluted earnings per share $0.11 $0.10
------------ ------------
------------ ------------
Weighted average number of common
shares outstanding 2,448,800 2,428,980
------------ ------------
------------ ------------
Weighted average number of common and
dilutive potential common shares 2,552,053 2,544,227
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
------------------------------
November 29, November 30,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $276,972 $246,793
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of property, plant & equipment (2,605) -
Depreciation and amortization 317,990 279,000
(Decrease) in pension liability (5,676) (21,750)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 354,355 (168,303)
(Increase) in inventories (51,575) (11,709)
Decrease in prepaid expenses 67,971 17,901
Increase (decrease) in accounts payable and
accrued expenses (769,247) 44,751
------------ -----------
Net cash provided by operating activities 188,185 386,683
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 2,605 -
Purchases of property, plant & equipment (89,587) (487,156)
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Net cash provided by (used in) investing activities (86,982) (487,156)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (181,826) 73,077
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Net cash provided by (used in) financing activities (181,826) 73,077
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (80,623) (27,396)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,697,104 2,847,598
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $2,616,481 $2,820,202
------------ -----------
------------ -----------
Supplemental cash flow information:
Cash paid during the period for:
Interest $59,631 $44,579
Income taxes $6,000 $27,250
Noncash investing and financing activities:
Acquisition of machinery through capital lease $858,500 -
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
WSI INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of November 29, 1998, the
consolidated statements of operations for the thirteen weeks ended November
29, 1998 and November 30, 1997 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 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.
2. 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.
6
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The following table sets forth the computation of basic and diluted earnings per
share:
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<CAPTION>
Thirteen weeks ended
-----------------------------
November 29, November 30,
1998 1997
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Numerator for basic and diluted
earnings per share:
Net Earnings $ 276,972 $ 246,793
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Denominator:
Denominator for basic earnings
per share - weighed average shares 2,448,800 2,428,980
Effect of dilutive securities:
Employee/and non-employee options 103,253 115,247
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Dilutive common shares
Denominator for diluted earnings
per share 2,552,053 2,544,227
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Basic earnings per share $ 0.11 $ 0.10
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Diluted earnings per share $ 0.11 $ 0.10
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</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $5,641,000 for the quarter ending November 29, 1998
increased $327,000 or 6% from the same period of the prior year. Sales
growth resulted from an increase in sales in the recreational vehicle
market.
Gross margin remained steady at 15% in comparison to the year ago
period. Gross margin is lower than the full year 1998 rate of 18% due
primarily to higher depreciation costs and larger than anticipated
equipment repair and maintenance expenditures.
Selling and administrative expense was $544,000 in the period as
compared to $526,000 in the prior year period. Both period's expenses
represented about 10% of sales in their respective years.
Interest and other income was $46,000 higher than the comparable
period of the prior year due to increased interest income from a higher
average money market investment balance.
Interest and other expense increased $15,000 in the period versus the
year prior due to the addition of $859,000 of capital leases.
In the thirteen week period ended November 29, 1998, the Company
recorded a tax provision of $11,800 to cover mandatory state income taxes
and federal alternative minimum taxes, and was able to recognize the
benefit of a portion of its net operating loss carry-forwards. 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 29, 1998 working capital was $3,452,000 compared to
$3,238,000 at August 30, 1998, an increase of $214,000, due primarily to
lower accrued compensation. The ratio of current assets to current
liabilities at November 29, 1998 and August 30, 1998 was 2.25 to 1.0 and
1.94 to 1.0, respectively.
Cash provided from operating activities was $188,000 in the current
period versus $387,000 in the prior year. The decrease resulted primarily
from the level of accounts receivable at the end of each period as compared
to the levels at the beginning of each fiscal year.
8
<PAGE>
Long term debt increased $573,000 to $2,375,000 at November 29, 1998
as compared to August 30, 1998. The increase resulted from new machinery
and equipment acquired via capital lease during the period.
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 is also developing a limited
testing plan that will test the equipment's ability to maintain operations
in the year 2000. The Company estimates that it is 75% complete with
respect to its major computer systems and 85% 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. 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.
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.
9
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Although it expects its internal computer and manufacturing systems to
be Year 2000 compliant as described above, the Company intends to prepare 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 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; (iiii) 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.
10
<PAGE>
PART II. OTHER INFORMATION:
Item 5. OTHER INFORMATION
At the Company's annual meeting on January 7, 1999, the shareholders
approved a change in the Company's legal name to WSI Industries, Inc. The
change was adopted as the general public and the contract machining
industry refer to the Company as WSI and Washington Scientific was no
longer descriptive of the business. The Company's new CUSIP number is
92932Q 10 2. At the annual meeting the Company also proposed an amendment
to the articles of incorporation to authorize "blank check" preferred
stock. This item did not receive the necessary shareholder votes for
approval.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
A. Exhibit 3 Restated Articles of Incorporation
B. Exhibit 27 Financial Data Schedule, Q1, Fiscal 1999
C. There were no reports on Form 8-K for the thirteen weeks
ended November 29, 1998.
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.
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<S> <C>
Date: January 12, 1999 /s/ Michael J. Pudil
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Michael J. Pudil, President & CEO
Date: January 12, 1999 /s/ Paul D. Sheely
---------------- -----------------------------------
Paul D. Sheely, Vice President & CFO
</TABLE>
<PAGE>
Exhibit 3
RESTATED ARTICLES OF INCORPORATION
OF
WSI INDUSTRIES, INC.
1. The name of this corporation shall be WSI Industries, Inc.
2. The purposes of this corporation shall be as follows:
(a) General manufacturing.
(b) To represent other manufacturers.
(c) To engage in research engineering.
(d) To buy, sell, rent or lease or otherwise acquire and dispose of
real and personal properties for the conduct of the business of
the corporation.
(e) To borrow money for any of the purposes of this corporation, and
to issue bonds or notes, or other obligations therefor, either
secured or unsecured.
3. The period of the duration of this corporation shall be perpetual.
4. The location and post office address of the registered office of this
corporation in Minnesota is 2605 West Wayzata Boulevard, Long Lake, Minnesota.
5. (a) The total authorized number of shares is ten million (10,000,000),
all of which shall be common shares of ten cents ($.10) par value each. The
common shares of the corporation shall entitle the holder thereof to one vote
per share upon all questions coming before the shareholders of the corporation
at any shareholder meeting.
(b) The shareholders of this corporation shall have no pre-emptive
right to subscribe to any issue of shares of this corporation now or hereafter
made.
<PAGE>
6. The amount of stated capital of this corporation is One Hundred Three
Thousand Four Hundred Eight ($103,408.00) Dollars [as of December 7, 1960].
7. The names and post office addresses and terms of office of the present
Board of Directors are as follows [as of December 7, 1960]:
<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS TERM OF OFFICE
<S> <C> <C>
William A. Andres 13111 Wayzata Boulevard Until annual meeting
Minneapolis, Minnesota
Warren G. Christianson Le Center, Minnesota Until annual meeting
J. Russell Duncan 130 - 9th Avenue South Until annual meeting
Hopkins, Minnesota
Frank W. Griswold 1706 Linden Avenue Until annual meeting
Minneapolis, Minnesota
Eugene W. Kulesh 13111 Wayzata Boulevard Until annual meeting
Minneapolis, Minnesota
Reginald S. Lanier 13111 Wayzata Boulevard Until annual meeting
Minneapolis, Minnesota
Earl R. Larson 1010 Midland Bank Building Until annual meeting
Minneapolis, Minnesota
Laurence D. McCann 115 South Seventh Street Until annual meeting
Minneapolis, Minnesota
John P. Robinson 133 South Seventh Street Until annual meeting
Minneapolis, Minnesota
Arnold J. Ryden First National Bank Building Until annual meeting
Minneapolis, Minnesota
James S. Sidwell 13111 Wayzata Boulevard Until annual meeting
Minneapolis, Minnesota
</TABLE>
2
<PAGE>
8. The Board of Directors shall have authority to make and alter the
By-Laws of this corporation subject to the power of the shareholders to
change or repeal such By-Laws.
9. The holders of a majority of the outstanding shares shall have
power to amend the Articles of Incorporation of this corporation or
consolidate or merge this corporation with another corporation at any annual
meeting of the stockholders or at any special meeting of the stockholders
called for that purpose.
10. The Board of this corporation shall have authority to accept or
reject subscriptions for shares made after incorporation and may grant rights
to convert any securities of this corporation into shares of any class or
classes or grant options to purchase or subscribe for shares of any class or
classes.
11. No director of this corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the
Minnesota Statutes; (iv) for any transaction from which the director derived
any improper personal benefit; or (v) for any act or omission occurring prior
to the date when this provision becomes effective.
The provisions of this Section 11 shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability of a director
which has not been eliminated by the provisions of this Section 11.
If the Minnesota Statutes hereafter are amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of this
3
<PAGE>
Corporation shall be eliminated or limited to the fullest extent permitted by
the Minnesota Statutes, as so amended.
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-END> NOV-29-1998
<CASH> 2,616,481
<SECURITIES> 0
<RECEIVABLES> 2,523,249
<ALLOWANCES> 25,000
<INVENTORY> 970,993
<CURRENT-ASSETS> 6,224,851
<PP&E> 24,579,752
<DEPRECIATION> 17,011,147
<TOTAL-ASSETS> 13,793,456
<CURRENT-LIABILITIES> 2,772,429
<BONDS> 2,374,739
0
0
<COMMON> 244,880
<OTHER-SE> 8,027,011
<TOTAL-LIABILITY-AND-EQUITY> 13,793,456
<SALES> 5,640,708
<TOTAL-REVENUES> 5,640,708
<CGS> 4,815,677
<TOTAL-COSTS> 4,815,677
<OTHER-EXPENSES> 476,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,692
<INCOME-PRETAX> 288,772
<INCOME-TAX> 11,800
<INCOME-CONTINUING> 276,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,972
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
