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 December 26, 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)
Check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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
---- ----
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by the court.
Yes No
---- ----
Applicable only to corporate issuers:
State 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 January , 2000
----- ----------------------------------
Common Stock, par value $.01 6,051,963 shares
<PAGE>
WPI GROUP, INC.
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
- December 26,1999 and September 26,1999
Consolidated Statements of Income 4
- Three months ended December 26,1999
and December 27,1998
Consolidated Statements of Cash Flows 5
- Three months ended December 26,1999
and December 27,1998
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
-2-
<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 26, December 26,
1999 1999
------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,086,708 $ 141,689
Accounts receivable - net of
allowance for doubtful accounts of
$171,000 at September 26, 1999 and
December 26, 1999 2,027,808 2,037,419
Accounts receivable - other 101,135 96,927
Inventories 461,893 454,246
Prepaid expenses and other current
assets 238,550 275,288
Refundable income taxes 220,205 222,605
Prepaid income taxes 2,655,419 2,655,419
Net assets of discontinued operations 54,200,000 45,362,000
------------- ------------
Total current assets 60,991,718 51,245,593
PROPERTY, PLANT AND EQUIPMENT
at cost, less accumulated
depreciation 1,668,473 1,531,265
OTHER ASSETS 1,896,868 1,854,267
------------- ------------
$ 64,557,059 $ 54,631,125
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of long-term debt $ 69,155,487 $ 59,312,810
Accounts payable 1,499,103 1,763,368
Accrued expenses 2,173,763 4,774,958
------------- ------------
Total current liabilities 72,828,353 65,851,136
------------- ------------
LONG-TERM DEBT - -
------------- ------------
DEFERRED INCOME TAXES 2,702,987 2,702,987
------------- ------------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued and outstanding 6,050,398
and 6,051,963, respectively. 60,504 60,518
Additional paid-in capital 14,574,134 14,577,164
Accumulated deficit (25,608,919) (28,560,680)
------------- ------------
Total stockholders' equity (deficit) (10,974,281) (13,922,998)
------------- ------------
$ 64,557,059 $ 54,631,125
============= ============
</TABLE>
See notes to financial statements
-3-
<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended
December 27, December 26,
1998 1999
------------ ------------
<S> <C> <C>
CONTINUING OPERATIONS
Net Sales $ 3,110,319 $ 3,573,068
Cost Of Goods Sold 1,117,284 1,434,461
------------ ------------
Gross Profit 1,993,035 2,138,607
------------ ------------
Operating expenses:
Research and new product development 475,318 682,569
Selling, general and administration 1,787,550 2,225,190
Restructuring costs - 1,640,000
------------ -----------
Total Operating Expenses 2,262,868 4,547,779
------------ -----------
Operating Loss (269,833) (2,409,152)
Other Income (Expense):
Interest expense (132,354) (252,334)
Forbearance expense - (285,000)
Other, net (34,584) (5,275)
------------ -----------
Loss Before Provision (Benefit)for
Income Taxes (436,771) (2,951,761)
Provision (Benefit) for Income Taxes (95,000) -
------------ -----------
Loss from Continuing Operations $ (341,771) $(2,951,761)
DISCONTINUED OPERATIONS
Loss from Discontinued Operations
(net of applicable income taxes of $60,000) (216,494) -
------------ -----------
Loss Before Cumulative Effect of Change in
Accounting Principle (558,265) (2,951,761)
CUMULATIVE EFFECT OF CHANGE IN ACCCOUNTING
PRINCIPLE (net of applicable income taxes of
$1,000,000) (2,822,147) -
------------ -----------
NET LOSS $ (3,380,412) $(2,991,539)
============ ===========
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.06) $ (0.49)
Discontinued operations (0.03) -
Effect of accounting change (0.47) -
------------ -----------
Net loss $ (0.56) $ (0.49)
============ ===========
Weighted Average Common Shares 6,030,804 6,050,608
Effect of Dilutive Options - -
------------ -----------
Adjusted Weighted Average
Common Shares 6,030,804 6,050,608
============ ===========
</TABLE>
See notes to financial statements
- 4 -
<PAGE>
<TABLE>
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
December 27, December 26,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,380,412) $ (2,951,761)
Adjustments to reconcile net income
to net cash provided by (used in)operating
activities:
Cumulative effect of change in
accounting principle 2,822,147 -
Depreciation and amortization 1,280,964 795,465
Deferred income taxes 9,815 1,589
Changes in current assets and
liabilities net of effect of businesses
divested:
Accounts receivable 753,362 3,074,810
Accounts receivable - other (9,137) 321,054
Inventories (1,116,733) (1,346,374)
Prepaid expenses and other current assets (562,691) (286,520)
Accounts payable (1,013,029) 18,002
Accrued expenses (728,050) 2,520,657
Accrued income taxes (36,743) 447,280
------------ ------------
Total adjustments 1,399,905 5,545,964
------------ ------------
Net cash provided by (used in) operating
activities (1,980,507) 2,594,203
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of discontinued
operations, net of - 7,083,254
Additions to property, plant and
equipment (712,529) (188,525)
Additions to other assets (24,396) -
Payments of accrued acquisition
costs (211,041) (89,032)
------------ ------------
Net cash provided by (used in)investing
activities (947,966) 6,805,697
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt 2,797,285 -
Payments of debt - (9,842,677)
Proceeds from issuance of common
stock 25,799 3,044
Proceeds from exercise of stock
options 6,400 -
------------ ------------
Net cash provided by (used in )financial
activities 2,829,484 (9,839,633)
------------ ------------
EFFECT OF FOREIGN CURRENCY TRANSLATION
ON CASH (13,229) 31,102
------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (112,218) (408,631)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 159,518 550,320
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 47,300 $ 141,689
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
INFORMATION:
Income taxes paid $ 55,000 $ -
Interest paid 1,325,605 2,910,879
</TABLE>
See notes to financial statements
- 5 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements for the three months ended
December 26, 1999 and December 27,1998 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
26,1999 and September 27,1998.
Certain prior year amounts have been reclassified to
conform with current year presentation.
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.
2. INVENTORIES
<TABLE>
<CAPTION>
September 26, December 26,
1999 1999
------------- ------------
Inventory consists of:
<S> <C> <C>
Raw Materials $ 315,071 $ 326,580
Work in Process 27,340 -
Finished Goods 119,482 127,666
------------- ------------
Total $ 461,893 $ 454,246
============= ============
</TABLE>
3. EARNINGS (LOSS) PER SHARE
<TABLE>
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated:
<CAPTION>
December 27, December 26,
1998 1999
------------ ------------
<S> <C> <C> <C> <C>
Earnings (loss) per share - basic
Continuing operations $ (0.06) $ (0.49)
Discontinued operations (0.03) -
Effect of accounting change (0.47) -
------------ ------------
Net (loss) $ (0.56) $ (0.49)
<S> <C> <C> <C> <C>
Earnings (loss) per share - diluted
Continuing operations $ (0.06) $ (0.49)
Discontinued operations (0.03) -
Effect of accounting change (0.47) -
------------ ------------
Net (loss) $ (0.56) $ (0.49)
Weighted Average Common Shares 6,030,804 6,050,608
Effect of Dilutive Options - -
------------ ------------
Adjusted Weighted Average Common
Shares 6,030,804 6,050,608
============ ============
</TABLE>
- 6 -
<PAGE>
4. RESTRUCTURING CHARGES
During the three months ended December 26, 1999, the Company entered into
a severance agreement with two former executives. In connection with the
agreements, the Company recorded a restructuring charge of $1,640,000,
consisting primarily of the continuation of payroll and benefits
subsequent to termination. Of the total restructuring charge, $190,000
and $1,450,000 will be paid over a nine-month period ending June 2000
and a five-year period ending December 2004, respectively. In addition,
during the three months ended December 26, 1999, the Company paid
approximately $91,000 in connection with a severance agreement entered
into during the fiscal year ended September 26, 1999 with a former
executive.
<TABLE>
The Company's restructuring activity during the quarter ending December
26, 1999 is as follows:
<CAPTION>
<S> <C> <C>
Restructuring reserve balance at
September 26, 1999 $ 148,269
Employee severance costs accrued
and charged to expense 1,640,000
Charges against reserve for the three
months ended December 26, 1999 (255,438)
-----------
Restructuring reserve balance at
December 26, 1999 $ 1,532,831
===========
</TABLE>
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<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
December 26, 1999 and the Form 10-K for the year ended
September 26, 1999, 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 26, 1999. Readers are cautioned not to place
undue reliance on the forward looking statements which speak
as of the date of this report only. 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
Net sales of $3.6 million for the first quarter of
fiscal 2000 increased 14.9% from sales of $3.1 million for
the first quarter of fiscal 1999. The increase was due to
growth in shipments to the Company's primary target markets.
Cost of sales of $1.4 million for the first quarter of
fiscal 2000 resulted in a gross profit of 59.9%, compared to
a gross profit of 64.1% for the same period of fiscal 1999.
The decrease in the Company's gross profit percentage in
fiscal 2000 was primarily attributable to a change in the mix
of products sold and decreased software licenses revenue.
Research and new product development expenses increased to
$683,000, compared to $475,000 for the same three month
period in fiscal 1999. The increase was attributed to the
development of E-Technician, a web-based remote diagnostic
platform. Research and new product development expenses were
19.1% and 15.3% of net sales for the quarters ended December 26,
1999 and December 27, 1998, respectively.
As a percentage of net sales, selling, general and
administrative expenditures were 62.3% and 57.5% for the
quarters ended December 26, 1999 and December 27, 1998,
respectively. Actual expenditures increased to $2.3
million from $1.8 million for the first quarter of fiscal
1999. The increase in selling, general and administrative
expenses of sales in fiscal 2000 was primarily
attributable to the costs related to consultants and advisors
incurred in connection with debt negotiations with the bank syndicate.
During the first fiscal quarter of fiscal 2000, the Company entered
into severance agreements with two former executives. In connection
with the agreements, the Company recorded a restructuring charge of
$1.6 million, consisting primarily of the continuation of payroll
and benefits subsequent to termination.
Operating loss for the first quarter of fiscal 2000
increased to $2.4 million from $270,000 for the
first quarter of fiscal 1999. The increase in the operating
loss was primarily due to the increase in selling, general
and administration expenses discussed above and the
restructuring and non-recurring costs.
Other income (expense) increased to ($543,000) in 1999 from
($167,000) in 1998. The increase was due primarily to an
increase in interest expense on debt and a $285,000 fee incurred
in connection with the execution of a forbearance agreement related
to the Company's bank debt.
The Company's loss from discontinued operations was ($216,000)
in 1998. The loss was a result of the increased costs and
operating expenses as a result of the acquisition of WPI Instruments
- 8 -
<PAGE>
in August 1998, lower sales in the Company's rugged handheld
computer and terminal, power conversion and electronic ballasts
businesses and higher interest expense from additional borrowings
and higher interest rates.
As of September 28, 1998, in accordance with the statement of
position 98-5 "Reporting on the Cost of Start-Up Activities,"
the Company changed its method of accounting for deferred product
enhancement costs to expense these costs as incurred. As a result,
the Company recognized a cumulative effect of a change in accounting
principle of $2,822,000, net of taxes of $1,000,000.
LIQUIDITY AND CAPITAL RESOURCES
As of December 26, 1999, the Company had a working capital (deficit)
of ($14.6) million compared to ($11.8) million at September 27, 1998.
Net cash provided by (used in) operating activiites totaled $2.6 million
in 1999 and ($2.0) million in 1998.
As of December 26, 1999, the Company had no material commitments
for capital expenditures.
In August 1998, the Company entered into a $75 million credit facility
with a syndication of banks, consisting of a $20 million revolving line
of credit which was to expire 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 credit facility
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 and June 27, 1999 the Company was not in compliance
with two of the financial covenants contained in the credit agreement.
The Company reached an agreement with the banks to waive the event of
non-compliance as of March 28, 1999 and June 27, 1999 up to and until
October 1, 1999 and to amend certain terms of the agreement. In relevant
part, the terms of the amendment increases the interest accrued on all
borrowings by 2% per annum and limits the revolving credit borrowings
to $14.8 million, the amount of the Company's current revolving credit
borrowings. In addition to the payment of a fee to amend the agreement,
the Company agreed to issue to the banks warrants to purchase 124,000
shares of the Company's common stock at $2.75 per share. The warrants
are exercisable after one year for a period of ten years.
As of October 1, 1999 the Company was not in compliance with the terms of
the credit agreement as amended. Accordingly, the aggregate bank debt
totaling $67,356,000 is callable by the bank and was classified as
current in the consolidated balance sheet as of September 26, 1999.
The Company has entered into a forbearance agreement with the banks.
Pursuant to the terms of the forbearance agreement, the Company has
confirmed that all outstanding borrowings are due and payable. The
agreement limits the revolving credit borrowings to $12.5 million
and provides that all borrowings bear interest at prime plus 5.5%.
It also provides for the payment of a $250,000 forbearance fee to the
bank group and requires conditions of continued forbearance of the
following things, among others: consummation of the sale of the rugged
handheld computers and terminals business; execute a letter of intent with
a potential purchaser of the instruments and solenoids business; and
the development of an action plan to reduce the Company's expenses.
The forbearance period is the earlier of March 31, 2000 or any default
under terms of the forbearance agreement.
During its fiscal 1999, the Company adopted and is in the process of
implementing a restructing plan intended to focus on its MPSI business
unit (the provider of vehicle diagnostic systems). In connection
therewith:
1. The Company decided to divest itself of its Industrial Technology
Group segment. In December 1999, the Company completed the sale
of its industrial power conversion systems and electronic ballast
business (WPI Power Systems and WPI Electronics) to a private group
of investors for approximately $9.3 million in cash plus the
assumption of certain liabilities. The Company is also in the
process of seeking a buyer for its instruments and solenoid businesses
(WPI Instruments and WPI Magnetec) . Substantially all of the
proceeds for the completed sale were applied to the outstanding
bank debt.
- 9 -
<PAGE>
2. The Company is in the process of negotiating the sale of its
rugged handheld computer and terminal business units (WPI Husky
Technology and WPI Oyster Termiflex/MicroPalm) and expects the
transaction to be concluded sometime in the first calendar quarter
of 2000. Also during its fiscal 1999 te Company decided to terminate
the software development operations of its expert systems business
(WPI DecisionKey).
The Company's intention is to utilize the cash generated from the
divestitures of its businesses to repay a significant portion of the
existing bank debt. Thereafter, the Company intends to refinance the
remaining debt to provide sufficient liquidity to satisfy its continuing
working capital requirements. There is no assurance the Company will be
successful in divesting its businesses or that the funding will be available
to execute the plan.
If the Company is unable to successfully complete the divestiture
transactions, renegotiate its bank agreements or obtain additional funding,
the cash from operations may not be sufficient to cover short-term or long-
term liquidity requirements.
- 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
On December 21, 1999, the Registrant filed a report under
Item 5 of Form 8-K to announce the major restructuring of
its operations, the resignation of Michael Foster as
Chairman and CEO, the appointment of John Allard, President
and COO to the additional role of CEO and to name Steven
Shulman and Paul Giovacchini as Non-Executive Chairman and
Vice Chairman. The Registrant also reported the completion
of the sale of its Warner-based WPI Power Systems, Inc. and
WPI Electronics, Inc. to Warner Power, LLC.
On December 22, 1999, the Registrant filed a report under
Item 2 of Form 8-K reporting the completion of the sale of
WPI Power Systems, Inc. and WPI Electronics, Inc. to Warner
Power, LLC.
- 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: February 22, 2000 By:/s/John R. Allard
------------------
John R. Allard
President, Chief Operating Officer
and Chief Executive Officer
Date: February 22, 2000 By:/s/John W. Powers
------------------
John W. Powers
Vice President and
Chief Financial Officer
- 12 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM THE FINANCIAL
STATEMENTS OF WPI GROUP, INC. FOR THE THREE MONTHS ENDED DECEMBER 26, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-24-2000
<PERIOD-END> DEC-26-1999
<CASH> 141,689
<SECURITIES> 0
<RECEIVABLES> 2,208,419
<ALLOWANCES> 171,000
<INVENTORY> 454,246
<CURRENT-ASSETS> 51,245,593
<PP&E> 2,617,380
<DEPRECIATION> 1,086,115
<TOTAL-ASSETS> 54,631,125
<CURRENT-LIABILITIES> 65,851,136
<BONDS> 0
0
0
<COMMON> 60,518
<OTHER-SE> (13,983,516)
<TOTAL-LIABILITY-AND-EQUITY> 54,631,125
<SALES> 3,573,068
<TOTAL-REVENUES> 3,573,068
<CGS> 1,434,461
<TOTAL-COSTS> 1,434,461
<OTHER-EXPENSES> 4,838,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252,334
<INCOME-PRETAX> (2,951,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,951,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,951,761)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
</TABLE>
