SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
/XX/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
/ /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.
---------------
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0218767
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1155 Elm Street, Manchester, New Hampshire 03101
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 627-3500
--------------
- ------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by the court.
Yes No
--- ---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Class Outstanding as of May 7, 1999
----- -----------------------------
Common Stock, par value $.01 6,048,828 shares
<PAGE>
WPI GROUP, INC.
INDEX
-----
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
- March 28,1999 and September 27,1998
Consolidated Statements of Operations 4
- Three months ended March 28,1999 and March
29,1998
- Six months ended March 28,1999 and March
29, 1998
Consolidated Statements of Cash Flows 5
- Six months ended March 28,1999 and March
29,1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 27, March 28,
1998 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 159,518 $ 63,927
Accounts receivable - net of allowance
for doubtful accounts of
$1,283,000 and $1,307,000, respectively 21,123,792 18,175,101
Accounts receivable - other 270,611 377,953
Inventories 14,188,286 14,874,038
Prepaid expenses and other current
assets 1,562,048 2,082,279
Prepaid income taxes 2,551,616 2,551,459
Refundable income taxes 620,578 211,264
------------- ------------
Total current assets 40,476,449 38,336,021
PROPERTY, PLANT AND EQUIPMENT
at cost less accumulated depreciation 15,514,291 15,082,795
OTHER ASSETS 54,132,417 53,330,488
------------- ------------
$ 110,123,157 $106,749,304
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 3,715,748 $ 4,110,293
Accounts payable 7,776,470 6,264,058
Accrued expenses 5,985,304 6,840,360
Accrued income taxes 1,672,166 710,886
------------- ------------
Total current liabilities 19,149,688 17,925,597
------------- ------------
LONG-TERM DEBT 62,638,964 62,926,438
------------- ------------
DEFERRED INCOME TAXES 3,091,995 3,097,168
------------- ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized 20,000,000 shares,
issued and outstanding 6,028,204
and 6,048,828, respectively. 60,282 60,488
Additional paid-in capital 14,169,771 14,231,383
Retained earnings 10,418,044 8,810,157
Cumulative foreign currency
translation adjustments 594,413 (301,927)
------------- ------------
Total stockholders' equity 25,242,510 22,800,101
------------- ------------
$ 110,123,157 $106,749,304
============= ============
</TABLE>
See notes to financial statements
-3-
<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 29, March 28, March 29, March 28,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $23,323,737 $22,754,691 $45,294,356 $46,952,695
COST OF GOODS SOLD 13,662,393 13,224,589 26,834,069 27,125,435
----------- ----------- ----------- -----------
GROSS PROFIT 9,661,344 9,530,102 18,460,287 19,827,260
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and new
product development 1,477,464 1,547,089 2,659,931 2,970,533
Selling, general and
administration 5,826,221 7,193,073 11,244,831 14,460,751
Restructuring costs _ 1,327,303 _ 1,750,000
----------- ----------- ----------- -----------
Total operating
expense 7,303,685 10,067,465 13,904,762 19,181,284
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 2,357,659 (537,363) 4,555,525 645,976
OTHER INCOME (EXPENSE):
Interest expense (825,122) (1,626,107) (1,673,796) (3,405,169)
Foreign currency exchange
gain (loss) (6,098) 86,586 (28,260) 233,382
Other, net 2,149 (4,525) 15,765 13,924
----------- ----------- ----------- -----------
INCOME (LOSS)BEFORE
PROVISION FOR INCOME TAXES 1,528,588 (2,081,409) 2,869,234 (2,511,887)
PROVISION (BENEFIT)FOR
INCOME TAXES 476,000 (749,000) 905,000 (904,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 1,052,588 $(1,332,409) $ 1,964,234 $(1,607,887)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS)
PER SHARE: $ 0.18 $ (0.22) $ 0.33 $ (0.27)
=========== ========== =========== ===========
DILUTED EARNINGS (LOSS)
PER SHARE: $ 0.17 $ (0.22) $ 0.32 $ (0.27)
=========== ========== =========== ===========
Weighted Average
Common Shares 6,010,938 6,044,881 6,008,606 6,037,804
Effect of
dilutive options 180,386 - 214,117 -
----------- ---------- ----------- -----------
Adjusted Weighted Average
Common Shares 6,191,324 6,044,881 6,222,723 6,037,804
=========== ========== =========== ===========
See notes to financial statements
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</TABLE>
<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Six Months Ended
March 29, March 28,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,964,234 $ (1,607,887)
------------ ------------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,615,592 3,149,131
Deferred income taxes _ 9,332
Changes in current assets and
liabilities net of effects
of acquisition:
Accounts receivable (4,819,531) 2,389,694
Accounts receivable - other (74,547) (114,968)
Inventories 134,885 (1,006,002)
Prepaid expenses and other current
assets 300,482 (162,414)
Accounts payable (260,679) (1,297,866)
Accrued expenses 204,295 1,261,497
Accrued income taxes 793,762 (852,896)
------------ ------------
Total adjustments (1,105,741) 3,375,508
------------ ------------
Net cash provided by operating
activities 858,493 1,767,621
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (1,467,000) 682,019
Proceeds from issuance of common
stock 40,528 32,399
Proceeds from exercise of stock
options 47,844 28,519
Tax benefit on exercise of non-
statutory options 22,000 900
------------ ------------
Net cash provided by (used in)
financial activities (1,356,628) 743,837
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (570,862) (1,200,018)
Proceeds from sales of property,
plant and equipment 1,492,738 -
Increase in other assets (1,034,825) (1,091,196)
Payment of accrued acquisition costs (57,282) (310,654)
------------ ------------
Net cash used for investing
activities (170,231) (2,601,868)
------------ ------------
EFFECT OF FOREIGN CURRENCY
TRANSLATION ON CASH 48,487 (5,181)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (619,879) (95,591)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 678,799 159,518
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 58,920 $ 63,927
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
INFORMATION:
Income taxes paid (refunded) $ (412,279) 107,616
Interest paid 1,612,054 2,445,253
</TABLE>
See notes to financial statements
- 5 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements for the three months and six months
ended March 28,1999 and March 29,1998 are unaudited and
include all adjustments which, in the opinion of management,
are necessary to present fairly the results of operations for
the periods then ended. All such adjustments are of a normal
recurring nature. These financial statements should be read
in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K filed with the Securities
and Exchange Commission (File No. 0-19717), which included
financial statements for the years ended September 27,1998 and
September 28,1997.
Certain prior year amounts have been reclassified to conform with
current year presentations.
The results of the Company's operations for any interim period
are not necessarily indicative of the results of the Company's
operations for any other interim period or for a full fiscal
year.
<TABLE>
2. INVENTORIES
<CAPTION>
Inventory consists of: September 27, March 28,
1998 1999
------------- -------------
<S> <C> <C>
Raw Materials $ 7,684,405 $ 8,169,788
Work in Process 4,758,535 4,882,158
Finished Goods 1,745,346 1,822,092
------------ -------------
Total $ 14,188,286 $ 14,874,038
============ =============
</TABLE>
- 6 -
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the financial statements and footnotes
contained in the Company's Form 10-Q for the period ending
March 28, 1999 and the Form 10-K for the year ended September
27, 1998, filed with the Securities and Exchange Commission.
In addition to historical information, this 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 this section. 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 Company's Annual Report on
Form 10-K where the fiscal year ended September 27, 1998.
Readers are cautioned not to place undue reliance on the forward
looking statements, which speak only as of the date of this report.
The Company undertakes no obligation to publicly release any
revisions to the forward looking statements or reflect events or
circumstancesafter the date of this document.
RESULTS OF OPERATIONS
Net sales of $22.8 million for the second quarter of fiscal
1999 decreased 2% from sales of $23.3 million for the second
quarter of fiscal 1998. For the first six months of fiscal
1999 the Company reported sales of $47.0 million, 4%
higher than sales of $45.3 million for the first six months
of fiscal 1998. The Company's net sales for the quarter and
six months ended March 28, 1999 include WPI Instruments, Inc.,
as a result of the acquisition in August 1998. The Company's
fiscal 1999 sales were negatively impacted by lower sales in
the Company's power conversion systems, electronic ballast and
handheld terminals product lines.
Cost of sales of $13.2 million for the second quarter of
fiscal 1999 resulted in a gross profit of 42%, compared to a
gross profit of 41% for the same period of fiscal 1998. Cost
of sales of $27.1 million for the first six months of fiscal
1999 resulted in a gross profit of 42%, compared to a gross
profit of 41% for the same period of fiscal 1998. The
improvement in the Company's gross profit percentage in fiscal
1999 was primarily attributable to a change in mix of products
sold.
Research and new product development expenses were 7% and 6%
of sales for the quarter and for the six months ended March
28,1999, respectively, compared to 6% of sales for the same three
and six month periods in fiscal 1998. The increase in research and new
product development expenses as a percentage of sales for the quarter
was due primarily to the decrease in sales and the acquisition of WPI
Instruments.
As a percentage of sales, selling, general and administrative
expenditures were 32% and 25% for the quarters and 31% and
25% of the six month periods ended March 28, 1999 and March
28, 1998, respectively. The increase in selling, general and
administrative expenses as a percentage of sales in fiscal
1999 is primarily attributable to the acquisition of WPI
Instruments and higher expenses incurred prior to the implementation
of the Company's consolidation and restructuring intiatives.
The Company's operating loss for the second quarter of fiscal
1999 is $.5 million compared to operating income of $2.4 million
in the second quarter of fiscal 1998. For the six months ended
March 28, 1999 and March 29, 1998 the Company's operating income
was $.6 million and $4.6 million, respectively. The decrease in
operating income was primarily due to the increase in selling,
general and administration expenses discussed above and the
restructuring costs incurred to date in connection with the
Company's reorganization of its Information Solutions and
Industrial Technology Groups.
- 7 -
<PAGE>
For the three months ended March 28, 1999 the Company's loss before
provision for income taxes is $2.1 million compared to income of
$1.5 million for the three months ended March 29, 1998. For the six
months ended March 28, 1999 the Company's loss before provision for
income taxes is $2.5 million compared to income of $2.9 million for
the six months ended March 28, 1999. The decrease for the three and
six month periods is primarily due to weaker sales and the Company's
reorganization discussed above
The Company's estimated effective combined federal and state income
tax rates, as a percentage of pre-tax income, were 36% and 32% for fiscal
1999 and 1998, respectively. The increase in the Company's fiscal 1999
estimated effective tax rates reflect a reduction in anticipated foreign
tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $20.4 million at March
28,1999 compared to $21.3 million at September 27,1998.
The Company has a $75 million credit facility with a syndication of
banks consisting of a $20 million revolving line of credit which expires
on September 30, 2003, and term notes totaling $55 million payable in
varying quarterly installments commencing on December 31, 1998, and
through September 30, 2004. The agreement contains certain restrictive
covenants, including financial covenants, one of which the Company was
not in compliance with at September 27, 1998. In December 1998, the
Company reached an agreement with the banks to waive the event of non-
compliance and amend certain terms of the agreement.
As of March 28, 1999, the Company was not in compliance with one of the
financial covenants. In May 1999, the Company reached an agreement with
the banks to waive the event of non-compliance as of March 28, 1999 and
amend certain terms of the agreement for the quarters ending June 27 and
September 26, 1999. The amendment provides interest accrued on all
borrowings is increased by 2% per annum and continues to limit the
Company's revolving credit facility borrowings to $15 million. The
amendment contains certain incentives if the Company makes an additional
principal payment of at least $20 million to the banks on or before
September 30, 1999. In addition to the payment of a fee to amend the
agreement, the Company has agreed to issue to the banks warrants to
purchase 124,000 shares of the Company's commons stock at the current
market price. The warrants are exercisable after one year for a period
of ten years. In the event the Company remits the additional principal
payment, the Company would have the option to pay the banks an additional
fee of $100,000 in lieu of granting the warrants.
The Company's management believes it has sufficient working
capital and availability on the credit facility to meet its liquidity
needs.
As of March 28, 1999, the Company had no material commitments
for capital expenditures.
- 8 -
<PAGE>
<TABLE>
RESTRUCTURING COSTS
The Company has recognized one-time restructuring charges in connection with
the consolidation and restructuring of its Information Solutions and
Industrial Technology Group operations. As part of the restructuring, the
Company has integrated and consolidated the operations and management of its
handheld computer and terminal operations into one business unit and has
consolidated and integrated the operations and management of its Industrial
Technology companies into a second business unit. In connection with the
reorganization and consolidation, WPI anticipates a net reduction of
approximately 10% of its workforce, transferring and consolidating
manufacturing into three facilities and recording a restructuring charge of
$1,750,000 during fiscal 1999. The restructuring charge and remaining
obligation as of March 28, 1999 of approximately $760,000 consists primarily
of employee severance costs. Management anticipates the cash requirements for
the remaining obligation to be relatively consistent over the next three
quarters.
The Company's restructuring activity as of March 28, 1999 is as follows
in thousands:
<CAPTION>
Initial Utilization of Reserve Remaining
Reserve Cash Non-Cash Reserve
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Severance costs $ 1,575 $ 815 $ - $ 760
Other costs 175 175 - -
------- ------- -------- ----------
Total $ 1,750 $ 990 $ - $ 760
======= ======= ======== ==========
</TABLE>
YEAR 2000
The information set forth under this caption is designated to be a "Year 2000
readiness disclosure" under the Year 2000 Information Readiness Disclosure
Act, Public Law 105-271.
WPI has established its Year 2000 Project in order to evaluate the issue of
computer software and embedded computer chips that are not able to distinguish
between the year 1900 and the year 2000. WPI's Year 2000 Project is divided
into three major sections: (1) IT systems (which examine operating systems
and business applications software); (2) External agents (which examine third
party suppliers and customers); and (3) Product issues (which involve Year
2000 issues inherent in products sold by WPI).
The IT systems section evaluates hardware and systems software. WPI has
completed its evaluation of its main internal operating systems and business
application software. As a result of this evaluation, WPI has begun the
process of implementing the necessary changes and testing its internal
systems to achieve Year 2000 compliance in this area. This process is
currently on schedule. WPI estimates that if this process stays on
schedule, IT systems are expected to be Year 2000 compliant by July 1999.
The external agents section includes the process of identifying and
prioritizing critical suppliers and customers at the direct interface level,
and communicating with them about their plans and progress in addressing the
Year 2000 problem. Year 2000 compliance issues at critical suppliers create
risks for WPI, since their inability to operate effectively could impact our
business. Evaluations of the most critical third parties have been completed.
WPI has received assurances from its critical suppliers that they are or will
be Year 2000 ready.
The product issues section includes the process of identifying any product
sold by WPI which may not be Year 2000 compliant, determining a corrective
course of action and disseminating information about Year 2000 compliance to
customers. Although most of WPI's products that have integrated software or
embedded microprocessors are Year 2000 compliant, there can be no assurances
that all of WPI's products are currently Year 2000 compliant. Detailed
- 9 -
<PAGE>
evaluations of products have been completed. These evaluations have been
followed by corrective actions and the dissemination of Year 2000 compliance
information to product users, where necessary.
Total costs associated with required IT systems modifications to become Year
2000 compliant and product issues are not expected to have a material effect
on the consolidated results of operations, cash flows or financial position
of WPI.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness
of third party suppliers and customers, WPI is unable to determine at this
time, whether the consequences of Year 2000 failure will have a material
impace on WPI's results of operations, liquidity or financial condition.
However, management believes that WPI's Year 2000 Project will significantly
reduce WPI's level of risk regarding the Year 2000 problem.
- 10 -
<PAGE>
WPI GROUP, INC.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
None
- 11 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized.
WPI GROUP, INC.
(Registrant)
Date: May 21, 1999 By:/s/John R. Allard
-----------------
John R. Allard
President and
Chief Operating Officer
Date: May 21, 1999 By:/s/John W. Powers
-----------------
John W. Powers
Vice President and
Chief Financial Officer
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WPI GROUP, INC. FOR THE SIX MONTHS ENDED MARCH 28, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-END> MAR-28-1999
<CASH> 63,927
<SECURITIES> 0
<RECEIVABLES> 19,482,101
<ALLOWANCES> 1,307,000
<INVENTORY> 14,874,038
<CURRENT-ASSETS> 38,336,021
<PP&E> 21,782,790
<DEPRECIATION> 6,699,995
<TOTAL-ASSETS> 106,749,304
<CURRENT-LIABILITIES> 17,925,597
<BONDS> 0
0
0
<COMMON> 60,488
<OTHER-SE> 22,739,613
<TOTAL-LIABILITY-AND-EQUITY> 106,749,304
<SALES> 46,952,695
<TOTAL-REVENUES> 46,952,695
<CGS> 27,125,435
<TOTAL-COSTS> 46,306,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 85,810
<INTEREST-EXPENSE> 3,405,169
<INCOME-PRETAX> (2,511,877)
<INCOME-TAX> (904,000)
<INCOME-CONTINUING> (1,607,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,607,887)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
