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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 28, 1997
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 0-19717
WPI GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New Hampshire 02-0218767
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1155 Elm Street, Manchester, New Hampshire 03101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (603) 627-3500
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
past 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ]
As of December 8, 1997, the aggregate market value of the 5,268,635
outstanding shares of voting stock held by non-affiliates of the registrant
was $41,158,576.
As of December 8, 1997, 6,007,247 shares of the Registrant's Common Stock,
par value $.01 per share, were issued and outstanding.
Documents Incorporated by Reference
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Portions of the following documents are incorporated by reference in this
report on Form 10-K:
1) Annual Report to Shareholders for fiscal year ended September 28,1997
(Part II).
2) Proxy Statement dated January 9, 1998 for the Registrant's Annual
Shareholder's Meeting to be held on February 10, 1998 (Part III).
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PART I
Item 1. Description of Business
General
WPI Group, Inc. ("WPI" or the "Company") designs, manufactures and markets
high value added information and power solutions products used in mission
critical systems for a wide range of applications. WPI operates through two
business units: The Information Solutions Group and the Power Solutions
Group. The Information Solutions Group is a leading manufacturer of rugged
handheld computers and terminals designed to function under harsh
environmental conditions. Unlike conventional computer equipment, WPI's
computers and terminals can function after a 10 foot drop to concrete, total
immersion in water, exposure to extreme temperatures as well as dust
and other harmful agents and can operate for up to 30 hours on a single
battery charge. WPI's products are used in a variety of applications such as
vehicle monitoring and maintenance, utility field service and factory
automation. The Power Solutions Group produces three distinct product lines:
Industrial Power Conversion Systems (heavy duty power supplies used in
elevators and semiconductor and thermal processing equipment); Electronic
Ballasts (small specialized power supplies that power lamps used in medical
equipment, multimedia projectors and lighting systems); and Precision
Solenoids (electro-mechanical devices which are incorporated into cameras,
printers and other products).
The Information Solutions Group's product line consists of three types of
handheld devices: terminals, sold under the Oyster/Termiflex and MPSI brand
names; handheld computers, sold under the Husky and MicroPalm brand names;
and laptop computers, sold under the Husky and MPSI brand names. WPI sells
these products through a direct sales force, value-added resellers ("VARs")
and distributors primarily to original equipment manufacturers ("OEMs") and
end-users.
The Power Solutions Group manufactures highly engineered electrical and
electronic equipment and electro-mechanical devices which are typically
mission critical components designed into larger systems. These systems are
used in products as diverse as elevators, semiconductor processing and
thermal processing, specialty lamps, cameras, printers and computer
equipment. WPI sells its Power Solutions Group products through a direct
sales force and independent sales representatives, primarily to OEMs and
end-users.
WPI was incorporated in New Hampshire in 1948 and its corporate headquarters
are located at 1155 Elm Street, Manchester, New Hampshire 03101. Its
telephone number is (603) 627-3500.
Growth Strategy
WPI employs an aggressive growth strategy focused on internal expansion and
growth through acquisitions. The following are key elements of WPI's
strategy:
- - Expansion Into New Vertical Markets. The rugged handheld market is
composed of a series of discrete vertical markets focused on application
software, such as utility meter reading or vehicle maintenance. The WPI
salesforce works closely with OEMs, VARs and end-users to identify niche
market applications and develops products, driven from existing technology
when possible, to meet customer requirements in these markets. By
collaborating with software suppliers or in some cases supplying the
software itself, WPI works aggressively to increase the number of vertical
markets into which its rugged handheld products are sold.
- - Penetration of Existing Vertical Markets. Once WPI has developed a
specific market application, it works to expand its market penetration
through strategic alliances with OEMs, VARs and distributors who are market
leaders within their industries. For example, WPI sells its hardware and
vehicle maintenance software to the trucking industry through SPX
Corporation, one of the largest suppliers
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of vehicle service solutions in North America. WPI also increases its
penetration of the markets it serves by collaborating with its existing
customers to design and manufacture specialized products, driven from
existing technology when possible, to meet its customers' individual needs
on a cost-effective and timely basis.
- - Leverage of Existing Customer Relationships. WPI's substantial
applications and engineering expertise positions it to capitalize on the
trend among manufacturers to rely more heavily on specialized component
providers for key value-added components and services. WPI strives to
become an integral part of the customer's product development activities
and an exclusive or preferred supplier to the customer over the product
life cycle. By bringing its extensive engineering capabilities to the
development effort, WPI is able to design creative solutions for its
customers' product requirements, maximize the performance features and
functionality of the components it sells and shorten the time-to-market for
new product introductions, allowing its customers to focus on their core
technologies and rationalize their production activities.
- - Emphasis on Product Value. WPI designs its products for efficient and
low-cost manufacturing and structures its manufacturing operations to
achieve low manufacturing costs while maintaining maximum production
flexibility. By manufacturing products with "dock to stock" reliability,
WPI enables its customers to minimize costly and time consuming in-house
inspections and to bring their products to market as quickly and
cost-effectively as possible. Moreover, WPI products must perform
consistently over the product's life cycle. Its ability to design and
manufacture highly reliable, cost-effective products on a timely basis
gives WPI a competitive advantage.
- - Strict Profit Center Management. While WPI's corporate management team
provides overall guidance, strategic direction and administrative support.
In addition, group vice presidents have responsibility for the day-to-day
operations of its two business units and supervision of their respective
managers. WPI operates each business unit as a largely autonomous separate
profit center which is held accountable for achieving its financial goals.
WPI believes that this profit center approach to management increases its
responsiveness to changes in the market place and its customers'
requirements and contributes to the Company's ability to grow profitably.
- - Acquisitions. Since 1993, WPI has acquired six companies. Management
analyzes each acquisition opportunity using a stringent set of criteria,
including its fit with existing operations, opportunities for product line
enhancements and rationalizations, facilities consolidation and marketing
leverage. For example, the acquisition of Husky in June 1997 enabled the
Information Solutions Group to reduce the number of manufacturing
facilities, reduce operating overhead and increase sales capacity by
offering WPI's products through Husky's European sales offices. WPI
intends to aggressively pursue acquisitions which will expand and enhance
its existing products and sales and service capabilities as well as provide
entry into new vertical markets.
Acquisitions
In October 1993, WPI acquired the solenoid product line from Magnetec
Corporation ("Magnetec"). Magnetec had been a supplier of standard and
custom linear actuators to the industry for more than two decades. The
Magnetec product line complemented the product offerings and manufacturing
capabilities of WPI's Power Solutions Group.
In May 1994, WPI completed the acquisition of all of the outstanding stock of
Termiflex Corporation, a Merrimack, New Hampshire-based manufacturer of
rugged hand-held and panel-mounted programmable terminals. The acquisition
allowed WPI to expand into the rapidly growing market for industrial
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information solutions. Later that year, in September 1994, WPI acquired all
of the outstanding stock of Micro Palm Computers, Inc. ("Micro Palm"), a
Clearwater, Florida-based manufacturer of rugged, DOS/386 compatible
hand-held PCs designed for use in hostile, field-based applications. Micro
Palm's operations were moved to Termiflex's New Hampshire facility in 1994.
In November 1995, WPI acquired all of the outstanding stock of Micro
Processor Systems, Inc. ("MPSI"), a Michigan-based manufacturer of diagnostic
and information-related systems and equipment, including Windows-Registered
Trademark--based computers, for the automotive and heavy duty vehicle
industries. In addition to the expansion of its hardware offerings, the
acquisition of MPSI gave WPI significant capabilities in the development of
advanced diagnostic and decision support software as well as a significant
presence in the growing market for information systems in the transportation
industry.
In July 1996, WPI acquired all of the outstanding stock of Oyster Terminals
Limited ("Oyster"), a United Kingdom - based manufacturer of rugged hand-held
programmable terminals, including RF terminals, used in a variety of
industries. Oyster is widely-known in Europe and the United States for the
wide variety of options available on its standard terminals and for its
ability to customize for unique applications.
In June 1997, WPI completed the acquisition of Husky Computers Limited.
Based in the United Kingdom with locations throughout Europe and the United
States, Husky is a leading producer of rugged handheld computers used in
utility meter reading, geotechnical, field service and other applications.
Products
Information Solutions
WPI's Information Solutions Group designs, manufactures and markets rugged
handheld terminals, PCs and laptop computers for a variety of applications
worldwide. The designation "rugged" signifies that the products are capable
of withstanding levels of impact, moisture, dust and temperature range in
excess of the design tolerances of conventional handheld terminals and
computers. For example, WPI's products are designed to endure up to a ten
foot drop to concrete, submersion in water indefinitely, temperature ranges
from minus 20 degrees to 140 degrees Fahrenheit and exposure to heavy dust
and other harmful agents. Because these characteristics are most useful in
non-office locations such as construction sites, service vehicles, garages,
forests and other remote locations where electric power is often unavailable,
WPI's products are battery-operated and designed to run up to 30 hours on a
single battery charge. WPI achieves these performance characteristics through
a combination of proprietary design techniques and the use of special
components. Special shock-resistant internal suspensions, together with
casings of high impact plastics or light weight magnesium, shield the circuit
boards and other components from severe impacts.
WPI's rugged handheld product line is divided into three main categories:
PCs: The handheld PCs are rugged DOS-based, fully programmable computers
with alpha/numeric keyboards and displays, internal memory and modems that
perform sophisticated data collection and other computing functions. Rugged
handheld PCs are used in applications which require equipment that is
portable, flexible, able to collect and process large amounts of data and,
perhaps most importantly, rugged and reliable enough to ensure the absolute
safety and integrity of the data being collected, whatever the field
conditions might be. They are used for many applications, including
over-the-road vehicle management, meter reading, oil and gas production,
surveying and forestry.
Laptop Computers: These rugged devices are Windows-Registered
Trademark--based systems with full function displays. WPI's rugged laptop
computers are specifically designed for use in the field. Although they have
the same computing power, flexibility and connectivity as a conventional
laptop computer, WPI's laptops, unlike conventional equipment, can withstand
knocks, dust, dampness and temperature shocks. Moreover, while
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a conventional computer might have a battery life of 2 to 3 hours, WPI's
laptops can last up to 10 hours on a single charge. They are used in
applications which require a full function computer and the absolute safety
and integrity of data in all field conditions. WPI's rugged laptop computers
are used in many applications, including field service engineering, mapping,
geographic information processing and "scene of incident" reporting.
Terminals: These devices are designed to be either passive terminals with
functionality limited to simple data input or programmable terminals capable
of performing low level data processing. The rugged, passive terminals have
easily customizable displays, keypads, colors and cables, and are found in
many commercial and industrial settings. The programmable terminals have
expanded memory, larger displays, RF and infrared communications
capabilities, and can serve as gateways to networks. They are used in many
applications, including portable theater lighting controls, environmental
monitoring and setup of industrial inkjet printers.
In addition to the three WPI rugged handheld product lines, WPI offers
diagnostic and decision support software, ranging from application cartridges
with connectivity and diagnostic support for particular vehicles to powerful
database building tools incorporated with expert "reasoning agents" that
support solving maintenance and service problems and decision making. WPI
has developed programs for the maintenance and monitoring of autos,
construction equipment and agricultural vehicles.
Power Solutions
WPI's Power Solutions Group designs, manufactures and sells three lines of
power products: Industrial power conversion systems, electronic ballasts and
precision solenoids. All three product lines are highly engineered
application-critical components that are designed into larger systems.
Typically, WPI engineers will work closely with a customer during the design
of the customer's system. This high degree of customer involvement results
in WPI's products being designed into the system, often making WPI a sole
source or preferred supplier. The Power Solutions Group contains the
original product line on which WPI was founded. The predecessor company to
WPI entered the industrial transformer business in 1948, the electronic
ballast business in 1983 and the precision solenoid business in 1993, with
the acquisition of the Magnetec product line.
Industrial Power Conversion Systems. These systems are large power supplies
that are sold for industrial applications. Power supplies are specialized
electrical devices that are used to control, condition, convert or alter an
electrical current within a larger electrically powered system. These
functions include converting alternating current to direct current,
controlling the wave form of a current and changing the voltage of a current.
The largest current market for WPI's power conversion systems is the
high-rise elevator market. WPI's systems are used in both new elevator
construction and modernization of existing elevators. The second largest
market is the thermal processing industry. Customers are manufacturers of
high temperature furnaces used for heat treating, crystal growing and
material processing. WPI's power conversion systems regulate the power
applied to the furnace heating elements, allowing for control of the furnace
temperature. Other applications include industrial microwave ovens, plasma
cutting equipment and electronic test equipment.
Electronic Ballasts. These products are specialized power supplies used to
ignite and power high intensity arc lamps. Arc lamps provide approximately
five times the light intensity of filament incandescent lamps and are used in
a variety of medical and commercial applications, including medical
endoscopes, multimedia projection, entertainment lighting and high intensity
discharge ("HID") commercial lighting. An arc lamp is a sealed glass bulb
containing gases or metal vapors and electrodes. Upon application of high
voltage by the ballast, an arc is ignited between the electrodes, resulting
in the ionization of the gas or vapor and the emission of light. Following
ignition, the ballast maintains constant power to assure consistent light
intensity. WPI's electronic ballasts are used to power metal halide, mercury
vapor, high pressure sodium and xenon arc lamps.
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Precision Solenoids. These products convert electrical energy into linear
mechanical motion. When electrical power is applied to a solenoid, its
plunger moves, either pulling or pushing a load a predetermined distance to
accomplish a repetitive function as part of a larger system. WPI's solenoids
are used in a variety of commercial and industrial applications, including
instant camera shutter controls, dot matrix printer heads, printer paper
cutters, banking ATMs, door locks, blood gas analyzers, ground fault circuit
interrupters and aircraft air supply controls.
Customers
For Fiscal 1997, one customer represented 11% of WPI's net sales. For Fiscal
1996, two customers accounted for 11% and 10%, respectively, of WPI's net
sales. For 1995, one of these customers accounted for 12% of WPI's net sales.
Sales and Marketing
WPI's marketing efforts are directed at identifying emerging markets for its
products. WPI's cooperative marketing efforts and design capabilities often
result in long-term customer relationships and have contributed to a stable
customer base. Further, such cooperative efforts enable WPI to identify new
product opportunities and participate in new product specifications as they
are determined. Other marketing efforts include market research, lead
generation, production and distribution of WPI's product literature, trade
shows and advertising.
Sales and marketing of rugged handheld hardware and software is carried out
by a group of approximately 65 employees. The sales force operates out of
offices in the United States, the United Kingdom, France, Germany and Sweden.
Information Solutions Group products are sold directly to OEMs, end-users,
VARs and distributors. A typical end-user utilizes WPI's products for
specific applications rather than general computing purposes. Accordingly,
applications software is an integral part of the rugged handheld hardware
products and is an important part of the sale. WPI has focused its sales
efforts on a number of vertical markets where it sells its own applications
software, on VARs that supply the applications software and on sophisticated
end-users that develop their own application software.
WPI's Power Solutions Group products are sold through approximately 25 sales
and marketing employees and approximately 25 manufacturers' representatives
throughout North America and, to a lesser extent, in Europe. Because of the
technical nature of the products and WPI's emphasis on custom-design and
development, the Company relies on its engineering staff to support sales
efforts. Applications engineers are available to discuss new applications,
technical matters and customer needs with existing and potential customers.
WPI's sales force works closely with its marketing group to follow up on
sales leads and with the product development team to develop cost-effective
solutions to its customers' requirements. To complement these activities,
the customer service staff interfaces with customers regarding delivery
schedules and monitors customer satisfaction.
Manufacturing and Raw Materials
WPI manufactures nearly 100% of its products. The Company generally operates
its manufacturing facilities one shift per day, five days per week. WPI uses
many different raw materials in its manufacturing processes. However, WPI is
not dependent on any one or several raw materials used in its manufacturing.
WPI has multiple sources for each raw material used in the manufacture of its
products and is not dependent on any one or group of its vendors for its raw
material purchases.
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Backlog
WPI manufactures its products against orders from customers. Backlog is
comprised of orders for products that have scheduled shipment dates within 12
months. Some orders in WPI's backlog may be canceled under certain
conditions, although cancellation rarely occurs. As of September 28, 1997,
WPI had a backlog of approximately $16,915,000, compared with a total backlog
of approximately $11,978,000 at September 29, 1996. Management believes that
all of WPI's backlog at September 28, 1997 will be shipped in the 12 months
following that date. Because many of its contracts are performed within
short time periods after receipt of an order, WPI does not believe that the
level of its backlog is a meaningful predictor of its future results.
Product Development
WPI believes that its commitment to product development in its Information
Solutions and Power Solutions groups is a critical element of its strategy
aimed at exploiting niche markets for each group's products. WPI's product
development activities are focused on the design of products identified by
both its customers and its sales and marketing groups. A key element of
WPI's product development activities is the expansion of product offerings
based on its existing technologies. WPI charged to operations approximately
$1,509,000, $2,940,000 and $4,005,000 for new product development
in Fiscal 1995, 1996 and 1997, respectively. Expenditures on new
product development represented 5.8%, 6.2% and 6.4% of net revenues in Fiscal
1995, 1996 and 1997, respectively.
Patents and Proprietary Information
WPI has a number of United States and foreign patents on certain products.
WPI also relies on trade secrets, in-house expertise and technological
advancement to maintain its competitive position.
WPI does not believe patent protection to be significant to its current
operations. However, WPI considers its patents to be a strong deterrent
against unauthorized copying of its products and key product attributes. WPI
believes in vigorously protecting its rights under its patents.
Similarly, WPI and its subsidiaries have certain registered trademarks, none
of which is considered significant to current operations.
Competition
Although WPI believes it is one of the leading manufacturers and distributors
of certain of its products, the industries in which WPI competes are highly
competitive. WPI competes with a relatively small number of full-line
national manufacturers and a much larger number of regional manufacturers and
manufacturers with limited product lines. WPI believes that competition is
largely based on, among other things, price, quality, breadth of product
lines, distribution capabilities (including quick delivery times) and
customer service. Certain of WPI's competitors are larger and have greater
financial, technical and marketing resources than the Company. In certain
circumstances, due primarily to factors such as freight rates, quick delivery
times and customer preference for local suppliers, certain manufacturers and
suppliers may have a competitive advantage over WPI in a given geographic
region. WPI believes that its size provides it with certain advantages of
scale in both distribution and production relative to its competitors. In
addition, WPI believes that it competes effectively by offering superior
customer service.
Information Solutions Group
The major competitive factors in the programmable and DOS-based hand-held
terminals and computer markets are portability, product performance, the
ability to customize the unit to a customer's specific needs, customer
support and ruggedness. WPI has several competitors in specified niche
markets. Certain of the Company's competitors in the data entry terminal
market have developed terminals to complement their own product lines. Many
of WPI's potential customers for
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handheld terminals and control panels now satisfy their needs by designing
and producing their own units. Management believes that WPI competes
effectively in this market by offering products that are rugged and easily
customized and by providing excellent customer service.
Currently, WPI's diagnostic systems and related software are sold primarily to
the transportation industry. The major competitive factors in this market
include product features, portability, product knowledge and customer service.
WPI has a number of competitors in certain segments of the transportation
market. Management believes that WPI competes effectively in these markets by
offering innovative, rugged and portable products and by providing excellent
customer service.
Power Solutions Group
WPI has a number of competitors in the markets for industrial power
conversion systems. The major competitive factors in the markets for
industrial power conversion systems are applications knowledge, product
reliability, fully integrated design and manufacturing, delivery schedule,
performance features and cost. Management believes that WPI competes
effectively in these markets by offering high quality products, applications
expertise, superior customer service and quick delivery.
WPI has some competition in the market for ballasts in endoscopes and
multimedia projectors incorporating metal halide and xenon arc lamps. In
addition, some of WPI's potential customers for electronic ballasts now
satisfy their needs by designing and producing their own units. The Company's
principal sources of competition in the metal halide lamp ballast market
outside of endoscopes and multimedia projection are manufacturers of magnetic
lamp ballasts and, to a more limited extent, certain manufacturers of
electronic ballasts. In such applications where cost is a more important
factor, magnetic lamp ballasts are often preferred over electronic ballasts.
In each of these markets, WPI believes that it competes favorably against its
competitors by offering quality, reliability and solutions tailored to its
customers' unique needs.
WPI has several established competitors in the market for solenoids, some of
which are larger, and some of which are smaller, than WPI. WPI believes that,
in these markets, it competes favorably against its competitors by offering
high quality,dependable products, superior engineering expertise, and
inovative, custom-tailored solutions.
Employees
As of December 15, 1997, WPI employed approximately 650 people, 400 of whom
work in manufacturing, 75 of whom work in administration, 90 of whom work in
product development and 90 of whom work in sales and marketing. None of the
Company's employees is represented by a union, and management believes that
the Company's employee relations are good.
Item 2. Description of Property
Properties
The Company currently owns and operates properties located in Warner, New
Hampshire and Cwmbran, United Kingdom. The Warner property is comprised of
approximately 80,000 square feet of modern facilities used primarily for the
manufacture of Power Solutions Group products. The Cwmbran property is
comprised of approximately 26,000 square feet of manufacturing facilities to
produce handheld terminals. The Company leases approximately 17,000 square
feet of modern manufacturing facilities in Sterling Heights, Michigan to
produce diagnostic tools and 40,000 square feet of manufacturing facilities
in Coventry, United Kingdom to produce handheld and laptop computers. The
Company leases approximately 12,000 square feet of office space in
Manchester, New Hampshire which houses its corporate offices. In addition,
the Company leases office space in six locations in the United States,
France, Germany and Sweden for use by its sales and service staff. WPI
believes that its existing space is adequate for its current needs.
Regulatory Matters
The Company is subject to regulation under various and changing federal,
state, local and foreign laws and regulations relating to the environment and
to employee safety and health. These environmental laws and regulations
govern the generation, storage, transportation, disposal and emission of
various
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substances. Permits are required for operation of the Company's business and
these permits are subject to renewal, modification and, in certain
circumstances, revocation. The Company believes that it is in substantial
compliance with such laws and permitting requirements. The Company is also
subject to regulation under various and changing federal, state, local and
foreign laws and regulations which allow regulatory authorities to compel (or
seek reimbursement for) cleanup of environmental contamination at its own
sites and at facilities where its waste is or has been disposed.
The Company expects to incur on-going capital and operating costs to maintain
compliance with currently applicable environmental laws and regulations. The
Company does not expect such costs, in the aggregate, to be material to its
financial condition, results of operations or liquidity.
Item 3. Legal Proceedings
The Company is not a party to any litigation that in management's opinion
would have a material adverse effect upon the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The information required by this item is incorporated herein by reference to
the information captioned "Shareholder Information" on page 27 of the
Registrant's Annual report to Shareholders for the fiscal year ended
September 28, 1997 (the "1997 Annual Report").
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is incorporated herein by reference to
the information captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 13 and 14 of the 1997 Annual
Report.
Item 7. Financial Statements and Supplementary Data
The financial statements of the Registrant required by this item are
incorporated herein by reference to pages 15 through 26 of the 1997 Annual
Report.
Part III
Item 9. Directors and Executive Officers of the Registrant
(a) Directors. The information with respect to directors required by this
item is incorporated herein by reference to pages 4, 5 and 6 of the
Registrant's Proxy Statement dated January 9, 1998 for the annual
shareholders meeting to be held on February 10, 1998 (the "1998 Proxy
Statement").
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(b) Executive Officers. The information with respect to executive officers
required by this item is set forth below:
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
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Michael Foster 62 Chairman of the Board of Directors and Chief
Executive Officer
Dennis Deegan 53 President and Chief Operating Officer
John Powers 40 Vice President and Chief Financial Officer
Dr. John Allen 45 Vice President, Power Solutions Group
Karen Hebert 37 Vice President, Human Resources
Timothy Jones 53 Vice President, Information Solutions Group
Michael Tule 36 Vice President, General Counsel and Secretary
Michael Foster, Chairman of the Board of Directors and Chief Executive
Officer, led the leveraged buy-out of the Company from Walker Magnetics
Group, Inc. in October 1988.
Dennis Deegan has served as President and Chief Operating Officer of the
Company since June 1996. From October 1988 to June 1996, Mr. Deegan served
as Executive Vice President, Treasurer and Chief Financial Officer.
John Powers has been Vice President and Chief Financial Officer of WPI since
February 1997. From August 1993 to February 1997, he was the Chief Financial
Officer of Janco Companies, a manufacturer of medical and electronic
products. From October 1987 to August 1993, he was a principal of Smith,
Batchelder & Rugg, a certified public accounting firm.
Dr. John Allen has served as Vice President, Power Solutions Group since
November 1995. From August 1995 he served as Corporate Vice President of
Planning and Development. From December of 1994 to August 1995, he served
as Director of Planning and Development. From 1985 to December 1994, Dr.
Allen was President of his own consulting firm, Allen Associates.
Karen Hebert has served as Vice President of Human Resources since August
1995. From November 1993 to August 1995, she served as Director of Human
Resources. From 1987 until 1993, Ms. Hebert served as Manager of Human
Resources with the Company.
Timothy Jones has served as Vice President, Information Solutions Group since
November 1995. From September 1995 to November 1995, Mr. Jones served as
Assistant to the Chairman. From 1993 to 1995, Mr. Jones was President of
Ionic Fuel Technology, Inc.. From 1991 to 1995, Mr. Jones was President of
Plume & Atwood, Inc..
Michael Tule has served as Vice President and General Counsel of the Company
since March 1996. Mr. Tule has served as Secretary since December 1994.
From 1987 to 1996, Mr. Tule was an attorney at McLane, Graf, Raulerson &
Middleton, Professional Association.
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Item 10. Executive Compensation
The information required under this item is incorporated herein by reference
to pages 6 through 9 of the 1998 Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to
pages 3 and 4 of the 1998 Proxy Statement.
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of the Report:
(1) Financial Statements of the Registrant and Report of Independent
Public Accountants thereon incorporated herein by reference to
pages 15 through 26 of the 1997 Annual Report.
Consolidated Balance Sheets, September 28, 1997 and September 29,
1996.
Consolidated Statements of Income for the Years Ended September
28, 1997, September 29, 1996 and September 24, 1995.
Consolidated Statements of Stockholders' Equity for the Years
Ended September 28, 1997, September 29, 1996 and September 24,
1995.
Consolidated Statements of Cash Flows for the Years Ended
September 28, 1997, September 29, 1996 and September 24, 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(2) Exhibits:
Incorporated by reference to the Exhibit Index at the end of this
report.
(b) The Registrant has filed the following reports on Form 8-K since the
beginning of the quarter ended September 28, 1997:
On September 8, 1997 the Registrant filed Amendment No. 1 to
Form 8-K dated June 25, 1997. In that report, the Registrant
reported the acquisition of Husky Computers Limited. The
amendment contained the financial statements required by
Regulation S-X as follows:
Husky Computers Combined Financial Statements as of
December 31, 1996 and 1995.
Pro Forma Combined Financial Statements for WPI Group,
Inc. and Husky Computers as of September 29, 1996 and
June 29, 1997.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf of the undersigned, thereunto duly authorized.
WPI GROUP, INC.
December 18, 1997 By:/s/Michael Foster
-----------------
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Michael Foster Director, Chairman December 18, 1997
Michael Foster and Chief Executive Officer
(Principal Executive Officer)
/s/Dennis Deegan Director, President and December 18, 1997
- ---------------- Chief Operating Officer
Dennis Deegan
/s/ John Powers Vice President and December 18, 1997
- ---------------- Chief Financial Officer
John Powers (Principal Financial and
Accounting Officer)
/s/ Stephen Carlotti Director December 18, 1997
- --------------------
Stephen Carlotti
/s/Peter Danforth Director December 18, 1997
- --------------------
Peter Danforth
/s/Paul Giovacchini Director December 18, 1997
- --------------------
Paul Giovacchini
/s/Irving Gutin Director December 18, 1997
- --------------------
Irving Gutin
/s/ Robert McCray Director December 18, 1997
- --------------------
Robert McCray
/s/ Steven Shulman Director December 18, 1997
- --------------------
Steven Shulman
/s/Bernard Tenenbaum Director December 18, 1997
- --------------------
Bernard Tenenbaum
-12-
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*) are
filed herewith. The exhibits not designated have been previously filed with
the Commission and are incorporated herein by reference to the documents
indicated following the descriptions of such exhibits.
<TABLE>
<CAPTION>
PAGE NO.
EXHIBIT NO. DESCRIPTION OF PAPER FILING
- --------------- ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the
Company are incorporated by reference to Exhibit 3.1 to the
Registrant's Report on Form 10-KSB for the year ended
September 29, 1996.
3.2 Bylaws of the Company are incorporated by reference to
Exhibit 3.2 of the Registrant's Registration Statement on
Form S-4 filed with the Commission on February 22, 1994,
Registration No. 33-75656.
10.1 Asset Purchase Agreement, dated September 28, 1993 among WPI
Group, Inc. and Magnetec Corporation and Tridex Corporation,
previously filed and incorporated by reference to
Registrant's report on Form 10-KSB for the year ended
September 26, 1993.
10.2 Agreement and Plan of Merger, dated as of January 27, 1994,
by and between WPI Group, Inc. and Termiflex Corporation,
previously filed and incorporated by reference to Exhibit
28.11 of Registrant's report on Form 8-K filed on September
30, 1994.
10.3 Agreement and Plan of Merger, dated August 31, 1994, by and
between WPI Group, Inc. and Micro Palm Computers, Inc.,
previously filed and incorporated by reference to Exhibit
28.11 of Registrant's report on Form 8-K filed on September
30, 1994.
10.4 Stock Purchase Agreement, dated November 7, 1995 between WPI
Group, Inc. and IVHS Technologies, Inc., previously filed
and incorporated by reference to Exhibit 28.13 of
Registrant's report on Form 8-K, dated November 10, 1995.
10.5 Share Purchase Agreement dated July 16, 1996 by and between
WPI Group (U.K.) and D.R. Watkins and others, previously
filed and incorporated by reference to Exhibit 28.15 in
Registrant's Report on Form 8-K, dated July 16, 1996.
10.6 Agreement for the sale and purchase of the share capital of
Husky Computers Limited, Husky Computers, Inc. and Husky
Computers GmbH, previously filed and incorporated by
reference to Exhibit 4.12 in Registrant's report on Form 8-K
dated June 25, 1997.
10.7 Walker Power, Inc. Employee Stock Purchase Plan and Bonus
Award Plan adopted May 7, 1992, previously filed and
incorporated by reference to Exhibit 28.1 of Registrant's
Registration on Form S-8 filed on June 1, 1992, Registration
No. 33-48285.
10.8 Termiflex Corporation 1981 Employee Incentive Stock Option
Plan, previously filed and incorporated by reference to
Exhibit 10.1 of the Termiflex Registration Statement No.
2-85910-B on Form S-8.
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
EXHIBIT NO. DESCRIPTION OF PAPER FILING
- --------------- ----------- ----------------
<S> <C> <C>
10.9 The 1992 Stock Option Plan for Directors of Micro Palm
Computers, Inc., previously filed and incorporated by
reference to Exhibit 99.4 of the Registrant's Registration
Statement on Form S-8 filed February 28, 1996, Registration
No. 333-1696.
10.10 WPI Group, Inc. Change in Control Plan adopted December 15,
1995, previously filed and incorporated by reference to
Exhibit 10.8 to the Registrant's Report on Form 10-KSB for
the year ended September 29, 1996.
10.11 WPI Group, Inc. 1997 Employee Stock Purchase Plan and Bonus
Award Plan, each adopted on February 12, 1997, previously
filed and incorporated by reference to Exhibit 99 to the
Registrant's Registration on Form S-8 filed June 3, 1997
Registration No. 333-28335.
10.12 WPI Group, Inc. 1997 Equity Incentive Plan, adopted June 10,
1997, as amended on December 12, 1997, previously filed and
incorporated by reference to Exhibit A of the Registrant's
Proxy Statement dated January 9, 1998.
10.13 Noncompetition agreement, dated January 17, 1994, by and
between WPI Group, Inc. and William E. Fletcher, previously
filed and incorporated by reference to Exhibit 10.7 of the
Registrant's report on Form 10-KSB for the year ended
September 25, 1996.
10.14 Lease agreement, dated October 7, 1994, by and between WPI
Group, Inc. and State Mutual Life Assurance Company of
America, previously filed and incorporated by reference to
Exhibit 10.9 of the Registrant's report on Form 10-KSB for
the year ended September 24, 1995.
10.15 WPI Group, Inc. 1995 Stock Option Plan, adopted June 6,
1995, previously filed and incorporated by reference to
Exhibit 10.10 of Registrant's report on Form 10-KSB for the
year ended September 24, 1995.
10.16 Commercial Loan Agreement, dated October 24, 1995,
previously filed and incorporated by reference to Exhibit
4.9 of the Registrant's Report on Form 10-KSB for the year
ended September 24, 1995.
10.17 First Amendment dated March 20, 1996 to Commercial Loan
Agreement dated October 24, 1995, previously filed and
incorporated by reference to Exhibit 4.4 of the Registrant's
Report on Form 10-KSB for the year ended September 29, 1996.
10.18 Second Amendment dated July 12, 1996 to Commercial Loan
Agreement dated October 24, 1995, previously filed and
incorporated by reference to Exhibit 4.6 of the Registrant's
Report on Form 10-KSB for the year ended September 29, 1996.
10.19 Third Amendment dated February 27, 1997 to Commercial Loan
Agreement dated October 24, 1995 is incorporated by
reference to Registrant's report on Form 10-Q for the period
ended March 30, 1997.
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
EXHIBIT NO. DESCRIPTION OF PAPER FILING
- --------------- ----------- ----------------
<S> <C> <C>
10.20 Revolving Line of Credit Promissory Note dated February 27,
1997, replacement to Revolving Line of Credit Promissory
Note dated July 12, 1996, previously filed and incorporated
by reference to Exhibit 4.1 of the Registrant's Report on
Form 8-K for the period ended March 30, 1997.
10.21 Fourth Amendment dated June 20, 1997 to Commercial Loan
Agreement dated October 24, 1997, previously filed and
incorporated by reference to Exhibit 4.13 in Registrant's
Report on Form 8-K dated June 25, 1996.
10.22 Promissory Note dated June 20, 1997, previously filed and
incorporated by reference to Exhibit 4.14 in Registrant's
Report on Form 8-K dated June 25, 1997.
10.23 Stock Pledge and Security Agreement dated June 20, 1997,
previously filed and incorporated by reference to Exhibit
4.15 in Registrant's Report on Form 8-K dated June 25, 1997.
* 13 Portions of the 1997 Annual Report.
* 21 List of subsidiaries of the Registrant as of September 28,
1997.
* 23 Consent of Arthur Andersen LLP.
* 27 Financial Data Schedule.
</TABLE>
-15-
<PAGE>
Exhibit 13
CORPORATE INFORMATION
CORPORATE OFFICERS
Michael Foster
Chairman and Chief Executive Officer
Dennis Deegan
President and Chief Operating Officer
John Powers
Vice President and Chief Financial Officer
Dr. John Allen
Vice President, Power Solutions Group
Karen Hebert
Vice President, Human Resources
Timothy Jones
Vice President, Information Solutions Group
Michael Tule
Vice President, General Counsel and Secretary
INFORMATION SOLUTIONS GROUP
WPI DecisionKey, Inc. WPI Husky Computers, Inc
Manchester, NH Clearwater, FL
WPI Husky Computers, Ltd. WPI Husky Computers GmbH
Rungis Cedex, France Lohmar, Germany
WPI Husky Computers, Ltd. WPI Husky Computers, Ltd.
Lidkoping, Sweden Coventry, U.K.
WPI Micro Processor Systems, Inc. WPI Oyster Termiflex, Inc.
Sterling Heights, MI Manchester, NH
WPI Oyster Termiflex, Ltd.
Cwmbran, U.K.
POWER SOLUTIONS GROUP
WPI Electronics, Inc. WPI Magnetec, Inc.
Warner, NH Warner, NH
WPI Power Systems, Inc.
Warner, NH
-16-
<PAGE>
BOARD OF DIRECTORS
Michael Foster
Chairman and Chief Executive Officer
WPI Group, Inc.
Dennis Deegan
President and Chief Operating Officer
WPI Group, Inc.
Stephen Carlotti
Partner
Hinckley, Allen & Snyder
Peter Danforth
General Partner
Kearsarge Ventures, Ltd.
Paul Giovacchini
Senior Investment Manager
Seacoast Capital Corporation
Irving Gutin
Senior Vice President
Tyco International (U.S.), Inc.
Robert McCray
President
Valvcon Corporation
Steven Shulman
Principal
The Hampton Group
Bernard Tenenbaum
President
Children's Leisure Products Group
The Jordan Company
AUDITORS
Arthur Andersen LLP
225 Franklin Street
Boston, MA 02110
-17-
<PAGE>
SHAREHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR
Boston Equiserve
150 Royall Street
Canton, MA 02021
Telephone: (617) 575-2000
INVESTOR RELATIONS CONTACT
Michele M. Normandin
Investor Relations
WPI Group, Inc.
1155 Elm Street
Manchester, NH 03101
Telephone: (603) 627-3500
FORM 10-K
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K, exclusive of Exhibits, is available without charge
upon written request to Michele Normandin, Investor Relations, WPI Group,
Inc., 1155 Elm Street, Manchester, NH 03101, Telephone (603) 627-3500 FAX
(603) 627-3150
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders is scheduled for February 10, 1998 at
10:00 a.m. at the WPI Group, Inc. Corporate Headquarters, 1155 Elm Street,
Manchester, NH 03101.
-18-
<PAGE>
STOCK PROFILE AND ACTIVITY
The Company's common stock is traded on the NASDAQ National Market System
under the symbol WPIC. Set forth below for each quarter of its last 2 fiscal
years indicated are the high and low sale prices for WPI Group, Inc. common
stock.
1997 1996
FISCAL QUARTER HIGH LOW HIGH LOW
- -------------- ---- --- ---- ---
First................ $ 8 1/4 $6 1/8 $ 4 1/8 $ 2 1/2
Second............... $10 1/2 $6 5/8 $ 7 1/8 $ 3 5/8
Third................ $ 9 $6 1/8 $13 3/8 $ 7 1/4
Fourth............... $12 5/8 $8 1/8 $10 5/8 $ 6
The number of shareholders of record on December 8, 1997 was approximately
3,400. No dividends have been paid on the common stock to date, and the
Company does not expect to pay cash dividends in the foreseeable future.
-19-
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This review should be read in conjunction with the consolidated
financial statements and related notes beginning on page 16 of this annual
report. In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers should carefully
review the risks described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by the Company in 1998. Readers are
cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Annual Report. The Company
undertakes no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date
of this document.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 32% to $62.5 million in 1997 from $47.5 million in 1996.
The increase was due primarily to the inclusion of a full year of sales from
WPI Oyster Terminals, Ltd., the addition of Husky Computers, Ltd.'s sales
following the June 20, 1997 acquisition and internal growth.
Gross profit in 1997 increased 39% to $24.9 million from $17.9 million in
1996. As a percentage of sales, gross profit grew to 40% from 38% in 1996.
The increase was due primarily to the change in product mix.
Research and new product development expenses increased 36% to $4.0 million
in 1997 from $2.9 million in 1996. As a percentage of sales, research and new
product development expenses were 6% in both years. The increase was due
primarily to the acquisitions discussed above and additions to engineering
staff for new products that support internal growth.
Selling, general and administration expenses increased 57% to $16.9 million
in 1997 compared to $10.8 million in 1996. As a percentage of sales, selling,
general and administration expenses increased to 27% from 23% in 1996. The
increase was primarily due to expenses incurred in connection with the
acquisition of Husky Computers, Ltd., expenses incurred in the realignment
of WPI's Information Solutions Group and certain other expenses including the
increase in reserves related to litigation concerning the collection of two
outstanding receivables.
Operating income decreased 21% to $3.3 million from $4.2 million in 1996. The
decrease in operating income was primarily due to an increase in expenses
incurred in connection with the acquisition of Husky Computers, Ltd.,
expenses incurred in the realignment of WPI's Information Solutions Group and
certain other expenses including the increase in reserves related to
litigation concerning the collection of two outstanding receivables.
Other income (expense) increased to ($1.4 million) in 1997 from ($.4 million)
in 1996. The increase was due primarily to an increase in interest expense on
debt related to the acquisitions discussed above. Other income consists
primarily of income from the surrender of a lease by the lessee related to a
building acquired in 1997.
Income before provision for income taxes decreased to $2.0 million in 1997
compared to $3.7 million in 1996. The decrease was primarily due to the
acquisition, restructuring and other expenses discussed above.
The Company's consolidated income tax rates, as a percentage of pre-tax
income, were 43% and 33% for 1997 and 1996, respectively. The increase in
1997 was a result of higher foreign income and nondeductible goodwill.
-20-
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 84% to $47.5 million in 1996 from $25.9 million in 1995.
The increase was due primarily to internal growth and the sales from Micro
Processor Systems, Inc. and Oyster Terminals, Ltd. acquired November 1995 and
July 1996, respectively.
Gross profit in 1996 increased 81% to $17.9 million from $9.9 million in
1995. As a percentage of sales, gross profit remained constant compared to
1995, at 38%. Total gross profit increased due to the increase in revenues
discussed above.
Research and new product development expenses increased 95% to $2.9 million
in 1996 from $1.5 million in 1995. The increase was due primarily to the
acquisitions discussed above and additions to engineering staff for new
products that support internal growth.
Selling, general and administration expenses increased 63% to $10.8 million
in 1996 compared to $6.6 million in 1995. During 1996, selling, general and
administration expenses decreased to 23% of sales from 26% of sales in 1995.
The decrease was due to improved cost control and efficiency in operations,
and a favorable impact from the acquisitions discussed above.
Operating income increased 134% to $4.2 million compared to $1.8 million in
1995. The increase was due to increased sales, stable gross profits and the
changes in operating expenses discussed above.
Income before provision for income taxes more than doubled in 1996 to $3.7
million compared to $1.8 million in 1995. As a percentage of net sales,
income before provision for income taxes increased from 7% of sales in 1995
to 8% of sales in 1996.
The Company's income tax rates, as a percentage of pre-tax income, were 33%
and 34% for 1996 and 1995, respectively. The decrease in the 1996 tax rate
reflects increased DISC benefits resulting from increased international sales.
On December 29, 1995, the Company had a fire at its Warner facility. The
Company continued operations from temporary quarters and, on March 1, 1996,
employees returned to a new facility. As of September 29, 1996, the Company
has recorded a gain related to insurance recoveries, which is included in
other income (expense). In addition to the insurance recoveries related to
the property damage and related expenses, including those associated with
expedited construction under winter conditions, the Company has been
reimbursed by its insurance carrier for business interruption costs that have
been offset in cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1997, the Company had working capital of $16.5 million
versus $12.2 million at September 29, 1996. Net cash provided by operating
activities totaled $7.4 million in 1997 and $2.2 million in 1996.
As of September 28, 1997, the Company had no material commitments for capital
expenditures.
The Company has a $45 million credit facility with a bank consisting of a $30
million revolving line of credit which expires on March 31, 1999 and a $15
million term note payable in equal quarterly installments of $750,000
commencing on October 1, 1998 and maturing on March 31, 2002. At September
28, 1997 the Company's borrowing under the credit facility totaled $42
million. The agreement contains certain restrictive covenants, including
financial covenants, all of which the Company was in compliance with at
September 28, 1997.
The Company believes that its existing sources of liquidity and anticipated
cash flow from operations will satisfy the Company's working capital and
capital expenditure requirements for the foreseeable future.
-21-
<PAGE>
INFLATION
The Company does not believe that inflation has had a significant impact on
its results of operations in the last two years.
YEAR 2000
Management has performed a preliminary review of the modifications necessary
to update the information systems capabilities to process data and
transactions in the year 2000. Based on this preliminary review, management
believes the costs associated with the year 2000 modifications will not have
a material impact on the Company's results of operations or financial
position.
-22-
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO WPI GROUP, INC.:
We have audited the accompanying consolidated balance sheets of WPI Group,
Inc. (a New Hampshire corporation) and subsidiaries as of September 28, 1997
and September 29, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 28, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of WPI Group, Inc. and subsidiaries as of September 28, 1997 and September
29, 1996, and the results of their operations and their cash flows for each
of the three years in the period ended September 28, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 24, 1997
-23-
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997
1. Business and Summary of Significant Accounting Policies
Business - WPI Group, Inc. (the "Company") designs, manufactures and markets
high valued added information and power solutions products used for a wide
range of applications. The Company operates through two business units: The
Information Solutions Group and the Power Solutions Group. The Information
Solutions Group consists of WPI Termiflex/Micro Palm, WPI Oyster Terminals,
WPI Micro Processor Systems (MPSI), WPI DecisionKey and WPI Husky Computers
- -providers of computers, terminals, software and information-related
services. The Power Solutions Group consists of WPI Electronics, WPI Magnetec
and WPI Power Systems - all providers of solutions that deal with the
application of power.
Basis of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Fiscal Year-end - The Company operates on a 52- to 53- week fiscal year
ending on the last Sunday in September.
Revenue Recognition - Sales are recorded when products are shipped or when
services are performed. The Company provides for estimated warranty costs at
the time of shipment. Arrangements to deliver software or software systems
which require significant production, modification or customization are
accounted for on a percentage of completion. Revenue is recognized in the
proportion that the cost of milestones achieved bear to the total estimated
costs of the project at completion. Losses, if any, are provided for in the
period in which the loss is determined.
Management Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Management is not aware of any specific concentrations that could
cause a severe impact to its operations.
Cash and Cash Equivalents - For the purposes of the consolidated statements
of cash flows, the Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments - The carrying amounts reported on the
balance sheet for cash, receivables, payables, accrued expenses and debt
approximate fair value.
Concentration of Credit Risk - The Company's exposure to concentrations of
credit risk relates primarily to trade accounts receivable. Such exposure is
limited due to the large number of customers and their industry and
geographic dispersion. The Company controls credit risk by performing
ongoing credit evaluations of its customers' financial condition. As of
September 28, 1997, the Company has recognized additional reserves relating to
litigation concerning the collection of certain outstanding receivables.
Inventories - Inventories are stated at the lower of cost (principally
first-in, first-out method) or market and include materials, labor and
manufacturing overhead.
-24-
<PAGE>
Inventories consist of:
1997 1996
---- ----
Raw materials.................... $7,337,866 $4,360,602
Work in process.................. 1,083,327 1,986,821
Finished goods................... 1,474,659 721,073
---------- ----------
$9,895,852 $7,068,496
---------- ----------
---------- ----------
Property, Plant and Equipment - Property, plant and equipment are recorded at
cost. Expenditures for maintenance, repairs and renewals are charged to
expense as incurred whereas major betterments are capitalized as additions to
property, plant and equipment. The provision for depreciation and
amortization has been calculated using the straight-line method over the
assets estimated useful lives.
The components of property, plant and equipment and their estimated useful
lives are as follows:
USEFUL LIFE 1997 1996
----------- ---- ----
Construction in progress......... -- $ 106,578 $ 96,432
Land and land improvements....... 15 575,702 439,336
Buildings and improvements....... 39 6,245,060 4,421,935
Machinery and equipment.......... 7 5,760,280 3,450,652
Tooling and dies................. 3 - 7 2,002,894 1,031,328
Office equipment................. 5 - 7 3,023,844 1,602,309
Equipment under capital leases... 5 643,176 9,740
---------- -----------
18,357,534 11,051,732
Less: accumulated depreciation.. (2,606,683) (1,603,974)
---------- ----------
$15,750,851 $9,447,758
---------- ----------
---------- ----------
Goodwill - The excess of the purchase price over the fair value of net assets
acquired in an acquisition (goodwill) is included in other assets in the
accompanying consolidated balance sheets and is being amortized over 5 to 25
years on a straight-line basis. The Company periodically evaluates the
existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected undiscounted net cash flows of the related
business unit. The purchase accounting is subject to future refinement: the
impact of which would be adjusted to goodwill. Goodwill (net of accumulated
amortization) was approximately $30,914,000 and $17,629,000 at the end of
1997 and 1996, respectively. Amortization of goodwill amounted to
approximately $971,000, $526,000 and $193,000 for 1997, 1996 and 1995,
respectively.
Deferred Product Enhancement Costs - Deferred product enhancement costs
represent incremental direct costs specifically identified with the
adaptation and enhancement of existing commercial products to meet the needs
of specifically identified customers. Such costs are amortized on a
straight-line basis over the estimated economic useful lives of the related
products which presently do not exceed five years. Periodically the Company
evaluates each product on a number of factors, including customer
projections of ongoing business, including projected units for the following
year when available and includes our customers' evaluation of the state of
the technology and estimated stage of the life cycle of the product. The
Company also reviews sales during the previous year and the future gross
margin analysis projections of the product. The amortization of these costs
are included in cost of sales and amounted to approximately $640,000,
$394,000 and $258,000 for 1997, 1996 and 1995, respectively. The table set
forth below details the costs and accumulated amortization for deferred
product enhancement costs:
1997 1996
---- ----
Deferred product enhancement costs......... $4,066,491 $2,452,682
Less: accumulated amortization............. (1,174,601) (860,240)
----------- -----------
$2,891,890 $1,592,442
----------- -----------
----------- -----------
-25-
<PAGE>
Software Development Costs - In accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed," the Company capitalizes
certain software development costs. Capitalization of software development
costs begins upon the establishment of technological feasibility and ceases
when the product is ready for release. Research and development costs
incurred prior to the establishment of technological feasibility are charged
to research and new product development expense. Development costs associated
with product enhancements that extend the life of the original product or
significantly improve the marketability of the original product are also
capitalized upon technological feasibility. Amortization of capitalized
software development costs begins when the product is available for release
to customers. Amortization is provided on a product-by-product basis, using
the greater of the anticipated future revenue stream or straight-line method
over the economic life of the product, initially estimated at two years. The
Company capitalized approximately $792,000 and $132,000 of software
development costs in 1997 and 1996, respectively. Amortization of software
development, calculated using the straight-line method, amounted to
approximately $94,000 in 1997.
Long-Lived Assets - The Company has adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intagibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
The adoption of SFAS No. 121 did not have a material impact on the Company's
financial statements.
Income Taxes - In accordance with SFAS No. 109, "Accounting for Income
Taxes," the Company recognizes deferred income taxes based on the expected
future tax consequences of differences between the financial statement basis
and tax basis of assets and liabilities calculated using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Net Income Per Share - Net income per share data are computed using the
weighted average number of shares of common and common equivalent shares
outstanding, during the year. Common equivalent shares reflect stock
options which have been included in the computation using the treasury stock
method only when their effects are dilutive.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." This statement modifies disclosure requirements for
companies required to report earnings per share (EPS) to include
presentations of Basic EPS (which includes no dilution of common stock
equivalents) and, if applicable, Diluted EPS (which reflects the potential
dilution of common stock equivalents). The statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The adoption of this statement will not have a
material impact on the Company's financial statements.
Foreign Currency Translation - Assets and liabilities of the Company's
foreign operations are translated at year-end exchange rates. Net sales and
expenses are translated at the average rates prevailing during the year.
Balance sheet translation gains and losses are reflected as a separate
component of stockholders' equity. Foreign currency gains and losses arising
from transactions are reflected in net income.
Reclassifications - Certain prior year amounts have been reclassified to
conform with current year presentation.
-26-
<PAGE>
2. Other Assets
Other assets consist of:
1997 1996
---- ----
Goodwill............................... $32,643,323 $18,387,820
Deferred product enhancement costs..... 4,066,491 2,452,682
Non-compete agreement.................. 275,000 275,000
Software development costs............. 923,772 131,592
Other.................................. 165,840 128,322
----------- -----------
38,074,426 21,375,416
Less: accumulated amortization......... (3,270,540) (1,805,842)
----------- -----------
$34,803,886 $19,569,574
----------- -----------
----------- -----------
3. Notes Payable
On June 20, 1997, the Company amended its existing bank credit agreement.
The amended credit agreement consists of two components. The first is a
$30,000,000 revolving line of credit which expires on March 31, 1999, at
which time all line of credit borrowings are due and payable. Borrowing
on the line of credit aggregated $27,000,000 at September 28, 1997. The
second component is a $15,000,000 term loan payable in equal quarterly
installments of $750,000 commencing on October 1, 1998 and maturing on
March 31, 2002. As of September 28, 1997, aggregate borrowings under the
bank credit agreement totaled $42,000,000. Interest on the line of credit
and term loan borrowing is payable monthly at the prime rate or at the
Company's option, the Eurodollar-based rate, 8.5% and 7.3%, respectively,
as of September 28, 1997. The Company is required to pay an annual
commitment fee equal to 0.2% of the unused line of credit. The agreement
contains certain restrictive covenants, including financial covenants
related to minimum levels of net worth, interest coverage,
recapitalization ratios and earnings all of which the Company is in
compliance with at September 28, 1997. The agreement limits the Company's
ability to incur additional indebtedness and pay dividends. The minimum
scheduled principal payments on the bank debt outstanding as of
September 28, 1997 for the fiscal years 1998 through 2002 are as follows:
$0; $30,000,000; $3,000,000; $3,000,000; and $6,000,000.
4. Accrued Expenses
Accrued expenses consist of:
1997 1996
---- ----
Payroll and related amounts...... $ 906,075 $ 851,899
Warranty......................... 1,032,066 447,650
Acquisition related.............. 286,226 622,763
Deferred revenue................. 326,896 1,084,896
Leases........................... 576,499 --
Interest......................... 359,801 166,755
Other............................ 551,414 290,201
--------- ---------
$4,038,977 $3,464,164
--------- ---------
--------- ---------
-27-
<PAGE>
5. Income Taxes
The components of federal and state income taxes are as follows:
1997 1996 1995
---- ---- ----
Current:
Federal................... $ -- $ 900,000 $ (45,000)
State..................... -- 156,000 25,000
Foreign................... 22,000 124,000 --
------- --------- -----------
22,000 1,180,000 (20,000)
------- --------- -----------
Deferred:
Federal................... 263,000 41,000 511,000
State..................... 36,000 6,000 109,000
Foreign................... 534,000 -- --
------- --------- -----------
833,000 47,000 620,000
------- --------- -----------
$ 855,000 1,227,000 $ 600,000
------- --------- -----------
------- --------- -----------
A reconciliation of income taxes at the federal statutory rate of 34% to income
taxes at the Company's effective tax rate is as follows:
1997 1996 1995
---- ---- ----
Income tax at 34% of income
before provision for income taxes $ 670,000 $ 1,274,000 $ 597,000
State income tax
(net of effect of federal tax) 61,000 173,000 88,000
DISC Benefit....................... (228,000) (289,000) (122,000)
Goodwill Amortization.............. 247,000 88,000 49,000
Net foreign dividend............... 170,000 -- --
Other.............................. (65,000) (19,000) (12,000)
---------- ------------- ----------
Total provision for income taxes... $ 855,000 $ 1,227,000 $ 600,000
---------- ------------- ----------
---------- ------------- ----------
The approximate income tax effect of temporary differences comprising the
deferred tax assets and liabilities are as follows:
1997 1996
---- ----
Prepaid
Inventory related................. $ 248,000 $ 600,000
Bad debt reserve.................. 436,000 82,000
Warranty reserve.................. 203,000 175,000
Alternative minimum tax........... 41,000 101,000
Payroll related................... 172,000 74,000
Acquisition costs................. 451,000 --
Other............................. 93,000 72,000
--------- ----------
1,644,000 1,104,000
Valuation allowance................ (451,000) --
--------- ----------
$1,193,000 $1,104,000
--------- ----------
--------- ----------
-28-
<PAGE>
Deferred
Tax in excess of book depreciation $ 1,618,000 $ 606,000
DISC deferral..................... 280,000 280,000
Goodwill.......................... 480,000 550,000
Deferred enhancement costs........ 548,000 472,000
Deferred software development..... 255,000 --
Other............................. 77,000 46,000
----------- ----------
$ 3,258,000 $ 1,954,000
----------- ----------
----------- ----------
The valuation allowance relates to the uncertainty surrounding the
realization of the tax benefits attributable to purchase accounting reserves.
The $451,000 will be used to reduce goodwill when any portion of the related
deferred tax asset is recognized, on a consolidated basis.
The Company's subsidiary, WPI Micro Palm, Inc., which was acquired on
September 23, 1994, had net operating loss carryforwards of approximately
$2,874,000, the utilization of which is limited to approximately $126,000
annually as a result of the acquisition. The Company has not recorded any
deferred tax assets for these net operating loss carryforwards because their
future utilization is uncertain. The realization of these net operating loss
carryforwards are accounted for as a reduction of goodwill.
6. Common Stock
A) Stock Option Plans
The Company has stock option plans for selected officers, key employees and
directors. Under these plans, options may be granted at a price equal to at
least the fair market value at the date of the grant. Options granted under
the plans are exercisable at various dates as specified in the underlying
option agreement. The options automatically expire upon termination of
employment with the Company.
A summary of stock option activity for each of the three years in the period
ended September 28, 1997, is as follows:
SHARES UNDER WEIGHTED-AVERAGE
OPTION EXERCISE PRICE
------------ ----------------
Outstanding, September 25, 1994 300,780 $ 2.11
Exercised.................. (44,130) 2.37
Terminated................. (58,800) 2.88
Granted.................... 167,550 3.67
-------- -------
Outstanding, September 24, 1995 365,400 2.68
Exercised.................. (218,017) 1.99
Terminated................. (22,167) 2.84
Granted.................... 189,730 4.18
-------- -------
Outstanding, September 29, 1996 314,946 4.02
Exercised.................. (41,750) 2.87
Terminated................. (19,500) 7.07
Granted.................... 276,000 6.66
-------- -------
Outstanding, September 28, 1997 529,696 $ 5.38
-------- -------
-------- -------
-29-
<PAGE>
The following is a summary of options outstanding and exercisable at
September 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 9/28/97 CONTRACTUAL LIFE EXERCISE PRICE AT 9/28/97 EXERCISE PRICE
- --------------- ------------ ---------------- ---------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$2.00 to $4.50 161,416 7.5 years $2.87 131,999 $2.84
$4.50 to $6.50 318,780 8.8 6.25 78,610 6.13
$6.50 to $9.00 49,500 9.4 7.96 9,500 7.07
------------ -----------
529,696 8.5 5.38 220,109 4.20
------------ -----------
------------ -----------
</TABLE>
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation,"which sets forth a fair value based
method of recognizing stock- based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to
account for its stock- based compensation plans. Had compensation for the
stock option plans been determined using the fair value at the grant dates
for awards under those plans, consistent with the guidelines of SFAS No. 123,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts listed below:
1997 1996
---- ----
Pro forma net income.......... $789,260 $2,462,748
Pro forma earnings per share.. $0.13 $0.41
Consistent with SFAS 123, pro forma net income and earnings per share have
not been calculated for options granted prior to September 24, 1995. Pro
forma compensation cost may not be representative of that to be expected in
future years.
The weighted average fair value of options granted was $3.65 for options
granted during 1997 and $1.60 for options granted during 1996. The values
were estimated on the date of grant using the Black-Sholes option pricing
model with the following weighted average assumptions used for grants in 1997
and 1996, respectively; risk-free interest rates ranging from 5.75% to 7.05%,
expected dividend yield of 0% for both periods, expected options lives of 5
years for both years and expected volatilities ranging from 43.0% to 49.5%.
B) WPI Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") adopted by
the Board of Directors on May 7, 1992 expired on May 31, 1997 and on June 1,
1997, the 1997 Employee Stock Purchase Plan began. The Purchase Plan is a
qualified stock purchase plan under the Internal Revenue Code covering all
employees of the Company, who are neither executive officers of the Company,
participants in the Company's Executive Stock Plan, nor owners of (or who
would become owners of ) 5% of the Company's stock. Eligible employees can
purchase shares on a quarterly basis on December 15, March 15, June 15 and
September 15. The minimum purchase amount is 10 shares per quarter to a
maximum of 400 shares per year. The purchase price of the shares is 93% of
the average of the closing prices of the common stock during the period of 5
trading days ending on the purchase date. An aggregate of 30,000 shares were
reserved for issuance under the 1997 Purchase Plan. At September 28, 1997,
1,870 and 13,839 shares had been purchased under the 1997 and original
Purchase Plan, respectively.
-30-
<PAGE>
C) WPI Stock Bonus Award Plan
The Company's Stock Bonus Award Plan (the "Bonus Plan") adopted by the Board
of Directors on May 7, 1992 expired on May 31, 1997 and on June 1, 1997 the
1997 Stock Bonus Award Plan began. Employees of the Company who are neither
executive officers of the Company, nor participants in the Company's
Executive Stock Plan are eligible to participate in the Bonus Plan. The
Bonus Plan allows for the award of shares of the Company's common stock.
Awards under the Bonus Plan are made at the discretion of the Chief Executive
Officer to employees who have demonstrated outstanding performance and
commitment in their employment with the Company. An aggregate of 20,000
shares were reserved for issuance under the 1997 Bonus Plan. As of September
28, 1997, a total of 0 and 18,595 shares had been awarded under the Company's
1997 and original Bonus Plans, respectively. The compensation expense related
to these awards is not significant.
7. Employee Benefits
A) Post Retirement Benefits
The Company has no obligation for post-retirement benefits.
B) WPI 401k Plan
In 1990, the Company established a Profit-Sharing 401(k) Plan for the benefit
of eligible United States employees whereby the Company matches a portion of
the employees' contributions to the plan. The Company currently matches 50%
of the first 4% of employees contributions. The Company's expense relating
to this plan amounted to approximately $213,000, $150,000 and $109,000 for
the years ended September 28, 1997, September 29, 1996 and September 24,
1995, respectively.
8. Significant Customers
The Company markets its products to customers in diversified industries in
the United States and Europe. For the year ended September 28, 1997, one
customer accounted for 11% of total Company sales. For the year ended
September 29, 1996, two customers accounted for 11% and 10% respectively, of
total Company sales. For the year ended September 24, 1995, one customer
accounted for 12% of the total company sales.
9. Acquisitions
On June 20, 1997, a subsidiary of the Company acquired all the outstanding
capital stock of Husky Computers, Ltd., a manufacturer of handheld computers.
The purchase price consisted of approximately $21.8 million in cash plus
assumed liabilities and expenses totaling $5.9 million. The acquisition was
accounted for using the purchase method. Accordingly, the purchase price was
allocated to assets acquired based on their estimated fair values of $13.4
million and goodwill of $14.3 million which is being amortized on a
straight-line basis over 25 years.
The Company's balance sheet at September 28, 1997 includes estimates of the
fair value of assets and liabilities acquired, based upon preliminary
studies. Resolution of any contingencies that exist at acquisition date may
result in adjustments to goodwill, if appropriate, and are not expected to be
material.
The following summarized, unaudited pro forma results of operations for the
years ended September 28, 1997, September 29, 1996 and September 24, 1995,
assume the acquisitions of Husky Computers, Ltd., Micro Processor Systems,
Inc. and Oyster Terminals, Ltd. occurred as of the beginning of the
respective periods (dollars in thousands except per share amounts):
PRO FORMA: 1997 1996 1995
- ---------- ---- ---- ----
Net Sales.................. $ 85,503 $ 87,721 $ 72,399
Net Income (Loss).......... (378) 1,414 (172)
Net Income (Loss) per share (0.06) 0.24 (.03)
-31-
<PAGE>
The unaudited pro forma results are not necessarily indicative of either
actual results of operations that would have occurred had the acquisitions
been made at the beginning of the periods shown or future results.
10. Commitments
The Company leases certain buildings, office space, machinery and equipment,
and vehicles under various lease agreements which expire at various dates
over the next five years.
As of September 28, 1997, the aggregate future minimum lease commitments
under operating and capital leases obligations are as follows:
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ----------- --------- --------
1998 .................................... $1,133,000 $ 268,000
1999 .................................... 944,000 227,000
2000 .................................... 714,000 119,000
2001 .................................... 514,000 2,000
2002 .................................... 125,000 --
---------- ----------
Total minimum lease payments............. $3,430,000 616,000
----------
----------
Less amount representing interest....... 40,000
----------
Present value of total minimum lease payments $ 576,000
----------
----------
Total rent expense charged to operations for 1997, 1996 and 1995 totaled
approximately $634,000, $110,000 and $92,000, respectively.
11. Restructuring Costs
In the fourth quarter of 1997, the Company incurred certain restructuring
costs totaling approximately $726,000 as a result of the realignment of
certain handheld terminal product lines of the Information Solutions Group.
The costs were incurred in connection with the consolidation of manufacturing
facilities, reduction in the number of employees and merger of sales offices.
This restructuring of the operations was completed within the quarter.
On November 21, 1997 the Company entered into a purchase and sales agreement
for the sale of the production and sales facility located in Merrimack, NH.
The sale is expected to be executed prior to December 31, 1997, but in no
event later than January 31, 1998. The Company does not expect the sale of
the building to have a material effect on the results of operations.
12. Other, Net
During 1997, the Company recognized income of approximately $512,000 in
connection with the surrender of a lease by the lessee related to a building
acquired in 1997.
On December 29, 1995, the Company had a fire at its Warner, N.H. facility.
The Company has recorded a gain of approximately $111,000 and $364,000 in
1997 and 1996, respectively, related to insurance recoveries, which is
included in other income, net. In addition to the insurance recoveries
related to the property damage and related expenses, including those
associated with expedited construction under winter conditions, the Company
was reimbursed in 1996 by the insurance carrier for business interruption
costs of approximately $1,200,000 that have been offset in cost of sales.
-32-
<PAGE>
13. Business Segment and Geographical Information
The Company's business segments are:
- Information Solutions: rugged handheld passive and programmable
terminals and computers, vehicle diagnostic information systems,
and decision support software.
- Power Solutions: power systems, electronics and solenoids
Business Segment Information
(in thousands)
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
Net Sales:
Information Solutions.......... $35,546 $20,427
Power Solutions................ 26,937 27,071
------------- -------------
62,483 47,498
------------- -------------
Operating Income:
Information Solutions.......... 2,840 3,413
Power Solutions................ 3,839 4,160
Corporate (a).................. (3,355) (3,378)
------------- -------------
3,324 4,195
------------- -------------
Identifiable Assets:
Information Solutions.......... 30,593 15,966
Power Solutions................ 12,209 13,348
Corporate (b).................. 34,894 21,361
------------- -------------
77,696 50,675
------------- -------------
Capital Expenditures:
Information Solutions.......... 3,054 399
Power Solutions................ 635 1,818
Corporate...................... 224 115
------------- -------------
3,913 2,332
------------- -------------
Depreciation and Amortization:
Information Solutions......... 1,447 579
Power Solutions............... 871 859
Corporate..................... 1,091 549
------------- -------------
$3,409 $1,987
------------- -------------
Geographical Segment Information (from point of manufacture)
(in thousands)
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------- -------------
Net Sales:
United States (c)............. $50,917 $46,042
Europe........................ 11,566 1,456
------------- -------------
62,483 47,498
------------- -------------
Operating Income:
United States................. 4,521 6,990
Europe........................ 2,158 583
Corporate (a)................. (3,355) (3,378)
------------- -------------
3,324 4,195
------------- -------------
Identifiable Assets:
United States................. 25,943 26,167
Europe........................ 16,859 3,147
Corporate (b)................. 34,894 21,361
------------- -------------
$77,696 $50,675
------------- -------------
(a) Includes corporate expenses and amortization of goodwill.
(b) Primarily cash, prepaid and refundable income taxes, corporate prepaid
expenses, other assets, property and equipment at the Company's corporate
offices.
(c) Includes export sales of $6,510, and $7,449 in 1997 and 1996,
respectively.
-33-
<PAGE>
14. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information for the years ended September 28, 1997
and September 29, 1996 is as follows:
(in thousands, except earnings per share)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1997
- ----
Net sales............... $14,109 $14,222 $15,562 $ 18,590
Gross profit............ 5,580 5,703 6,168 7,481
Net income (loss)....... 776 862 1,007 (1,529)
Earnings (loss)per share 0.13 0.14 0.16 (0.25)
1996
- ----
Net sales............... $ 9,606 $10,742 $12,655 $ 14,495
Gross profit............ 3,800 4,355 4,763 5,000
Net income.............. 516 608 651 746
Earnings per share...... 0.09 0.10 0.11 0.12
-34-
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 28,1997 AND SEPTEMBER 29, 1996 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................................................... $ 678,799 $ 206,829
Accounts receivable-net of allowance for doubtful accounts of $1,237,000 and
$244,300 in 1997 and 1996, respectively...................................... 12,173,012 10,881,315
Accounts receivable-other...................................................... 249,393 1,618,873
Inventories.................................................................... 9,895,852 7,068,496
Prepaid expenses and other current assets...................................... 1,134,125 230,509
Prepaid income taxes........................................................... 1,193,160 1,103,840
Refundable income taxes........................................................ 1,816,897 547,750
------------- -------------
Total current assets......................................................... 27,141,238 21,657,612
------------- -------------
Property, Plant and Equipment, at cost, less accumulated depreciation.............. 15,750,851 9,447,758
Other Assets....................................................................... 34,803,886 19,569,574
------------- -------------
$ 77,695,975 $ 50,674,944
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................... $ 6,336,756 $ 4,265,217
Accrued expenses............................................................... 4,038,977 3,464,164
Accrued income taxes........................................................... 249,473 1,772,630
------------- -------------
Total current liabilities.................................................... 10,625,206 9,502,011
------------- -------------
------------- -------------
Note Payable to Bank............................................................... 42,000,000 18,650,000
Non-compete Agreement Payable...................................................... -- 20,000
Deferred Income Taxes.............................................................. 3,257,914 1,954,287
------------- -------------
Commitments
Stockholders' Equity
Common stock, $.01 par value; authorized 20,000,000 shares in 1997; issued and
outstanding 5,996,737 and 5,947,922 shares in 1997 and 1996, respectively.... 59,967 59,479
Additional paid-in capital......................................................... 13,992,540 13,658,604
Retained earnings.................................................................. 7,931,562 6,815,801
Cumulative foreign currency translation adjustments................................ (171,214) 14,762
------------- -------------
Total stockholders' equity................................................... 21,812,855 20,548,646
------------- -------------
$ 77,695,975 $ 50,674,944
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 28, 1997, September 29, 1996 and
September 24, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales........................................................... $ 62,483,388 $ 47,498,058 $ 25,855,790
Cost of Sales....................................................... 37,551,545 29,580,058 15,959,216
------------- ------------- -------------
Gross Profit........................................................ 24,931,843 17,918,000 9,896,574
------------- ------------- -------------
Operating Expenses:
Research and new product development.............................. 4,005,281 2,939,984 1,508,942
Selling, general and administration............................... 16,877,096 10,783,030 6,597,060
Restructuring costs............................................... 725,540 -- --
------------- ------------- -------------
Total operating expenses........................................ 21,607,917 13,723,014 8,106,002
------------- ------------- -------------
Operating Income.................................................... 3,323,926 4,194,986 1,790,572
Other Income (Expense):
Interest income................................................... 20,005 18,377 22,386
Interest expense.................................................. (2,016,210) (694,370) (129,981)
Other, net........................................................ 643,040 229,197 72,141
------------- ------------- -------------
Income Before Provision for Income Taxes............................ 1,970,761 3,748,190 1,755,118
Provision for Income Taxes.......................................... 855,000 1,227,000 600,000
------------- ------------- -------------
Net Income.......................................................... $ 1,115,761 $ 2,521,190 $ 1,155,118
------------- ------------- -------------
------------- ------------- -------------
Net Income Per Share................................................ $ 0.18 $ 0.42 $ 0.20
------------- ------------- -------------
------------- ------------- -------------
Weighted Average Common Shares and Common Equivalent Shares
Outstanding....................................................... 6,197,708 6,001,438 5,822,906
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 28, 1997, September 29, 1996 and September 24,
1995
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL FOREIGN CURRENCY
--------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
---------- --------- ------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance
September 25, 1994.............. 5,775,641 $ 57,757 $ 13,258,053 $ 3,139,493 $ -- $ 16,455,303
Employee stock purchase plan........ 2,130 21 5,194 -- -- 5,215
Stock bonus plan.................... 3,170 32 9,204 -- -- 9,236
Exercise of stock options........... 27,538 275 61,358 -- -- 61,633
Repurchase and retirement of common
stock............................. (120,629) (1,207) (374,163) -- -- (375,370)
Net income.......................... -- -- -- 1,155,118 -- 1,155,118
---------- --------- ------------- ------------ ---------------- -------------
Balance
September 24, 1995.............. 5,687,850 $ 56,878 $ 12,959,646 $ 4,294,611 $ -- $ 17,311,135
Employee stock purchase plan........ 4,085 41 25,416 -- 25,457
Stock bonus plan.................... 5,170 52 19,074 -- -- 19,126
Exercise of stock options and
warrants.......................... 250,817 2,508 496,468 -- -- 498,976
Income tax benefit from stock
options exercised................. -- -- 158,000 -- -- 158,000
Foreign currency translation........ -- -- -- -- 14,762 14,762
Net income.......................... -- -- -- 2,521,190 -- 2,521,190
---------- --------- ------------- ------------ ---------------- -------------
Balance
September 29, 1996.............. 5,947,922 $ 59,479 $ 13,658,604 $ 6,815,801 $ 14,762 $ 20,548,646
Employee stock purchase plan........ 2,865 29 23,488 -- -- 23,517
Stock bonus plan.................... 4,525 45 34,186 -- -- 34,231
Exercise of stock options .......... 41,425 414 117,262 -- -- 117,676
Income tax benefit from stock
options exercised................. -- -- 89,000 -- -- 89,000
Non-employee compensation stock
options........................... -- -- 70,000 -- -- 70,000
Foreign currency translation........ -- -- -- -- (185,976) (185,976)
Net income.......................... -- -- -- 1,115,761 -- 1,115,761
---------- --------- ------------- ------------ ---------------- -------------
Balance
September 28, 1997.............. 5,996,737 $ 59,967 $ 13,992,540 $ 7,931,562 $ (171,214) $ 21,812,855
---------- --------- ------------- ------------ ---------------- -------------
---------- --------- ------------- ------------ ---------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WPI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 28, 1997, September 29,1996 and
September 24, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income........................................................... $ 1,115,761 $ 2,521,190 $1,155,118
------------- ------------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 3,409,364 1,986,612 1,285,463
Deferred income taxes................................................ 1,303,627 569,613 620,000
Non-cash compensation................................................ 104,231 19,126 9,236
Changes in current assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................................. 2,896,916 (3,888,310) (674,217)
Accounts receivable-other............................................ 1,369,480 (1,464,498) (85,468)
Inventories.......................................................... 1,733,357 178,270 (644,615)
Prepaid expenses and other current assets............................ 52,521 32,267 (40,196)
Prepaid income taxes................................................. (89,320) (55,115) 202,680
Refundable income taxes.............................................. (1,269,147) (446,657) 42,907
Accounts payable..................................................... (500,407) 1,280,236 193,084
Accrued expenses..................................................... (1,357,394) 850,561 (411,619)
Accrued income taxes................................................. (1,372,724) 569,033 (52,502)
------------- ------------- ----------
Total adjustments.................................................. 6,280,504 (368,862) 444,753
------------- ------------- ----------
Net cash provided by operating activities.......................... 7,396,265 2,152,328 1,599,871
------------- ------------- ----------
Cash Flows From Financing Activities:
Increase in notes payable to bank.................................... 23,350,000 15,607,225 1,123,308
Decrease in long-term liabilities.................................... (20,000) (3,190,000) --
Repurchase of common stock........................................... -- -- (375,370)
Proceeds from exercise of stock options.............................. 117,676 498,976 61,633
Issuance of common stock............................................. 23,517 25,457 5,215
Payments on notes payable............................................ -- -- (833,054)
Tax benefit on exercise of non-statutory options..................... 89,000 158,000 --
------------- ------------- ----------
Net cash provided by (used in) financing activities................ 23,560,193 13,099,658 (18,268)
------------- ------------- ----------
Cash Flows From Investing Activities:
Additions to property, plant and equipment........................... (3,912,522) (2,332,051) (855,912)
Additions to other assets............................................ (2,911,010) (671,025) (623,453)
Acquisitions, net of cash acquired................................... (22,039,007) (10,994,215) --
Payments of accrued acquisition costs................................ (1,435,973) (1,092,292) (717,500)
------------- ------------- ----------
Net cash used in investing activities.............................. (30,298,512) (15,089,583) (2,196,865)
------------- ------------- ----------
Effect of Foreign Currency Translation on Cash......................... (185,976) 14,762 --
Net Increase (Decrease) in Cash and Cash Equivalents................... 471,970 177,165 (615,262)
Cash and Cash Equivalents, Beginning of Year........................... 206,829 29,664 644,926
------------- ------------- ----------
Cash and Cash Equivalents, End of Year................................. $ 678,799 $ 206,829 $ 29,664
------------- ------------- ----------
------------- ------------- ----------
Supplemental Disclosure of Cash Flow
Information:
Income taxes paid (refunded)......................................... $ 2,644,700 $ 439,081 $ (38,941)
Interest paid........................................................ 1,906,915 688,585 117,533
------------- ------------- ----------
Supplemental Disclosure of Non-Cash
Investing Activities:
Summary of entities acquired:
Fair value of assets acquired...................................... $ 27,754,666 $ 21,858,037 $ --
Cash paid.......................................................... (21,811,753) (11,475,317) --
------------- ------------- ----------
Liabilities assumed................................................ $ 5,942,913 $ 10,382,720 $ --
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant Place of Incorporation
- ------------------------------ -----------------------
WPI Electronics, Inc. New Hampshire
WPI Magnetec, Inc. New Hampshire
WPI Power Systems, Inc. New Hampshire
WPI Oyster Termiflex, Inc. New Hampshire
WPI Terimflex International Sales, Inc. Massachusetts
WPI DecisionKey, Inc. New Hampshire
WPI Micro Palm, Inc. New Hampshire
WPI Micro Processor Systems, Inc. New Hampshire
WPI Oyster Termiflex Limited England and Wales
WPI Oyster Terminals, Inc. New Hampshire
WPI UK Holding, Inc. New Hampshire
WPI UK Holding II, Inc. New Hampshire
WPI Group (U.K.) England and Wales
WPI Husky Computers, Inc. Florida
WPI Husky Computers Limited England and Wales
WPI Husky Computers GmbH Germany
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated November 24, 1997 in this form 10-K for the year ended
September 24, 1997, into the Company's previously filed Registration
Statements (File Nos. 33-48285, 33-88012, 33-80912, 33-85137, 333-28335 and
333-1696).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 18, 1997
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INCOME INFORMATION EXTRACTED FROM THE
REGISTRANTS INCOME STATEMENT FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997 AND
REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 28, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 678,799
<SECURITIES> 0
<RECEIVABLES> 12,173,012
<ALLOWANCES> 1,237,000
<INVENTORY> 9,895,852
<CURRENT-ASSETS> 27,141,238
<PP&E> 18,357,534
<DEPRECIATION> 2,606,683
<TOTAL-ASSETS> 77,695,975
<CURRENT-LIABILITIES> 10,625,206
<BONDS> 0
0
0
<COMMON> 59,967
<OTHER-SE> 21,752,888
<TOTAL-LIABILITY-AND-EQUITY> 77,695,975
<SALES> 62,483,388
<TOTAL-REVENUES> 62,483,388
<CGS> 37,551,545
<TOTAL-COSTS> 59,159,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 999,260
<INTEREST-EXPENSE> 2,016,210
<INCOME-PRETAX> 1,970,761
<INCOME-TAX> 855,000
<INCOME-CONTINUING> 1,115,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,115,761
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0
</TABLE>
