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 26, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the transition period from to .
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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
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
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- --------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
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
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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 4, 2000
----- -----------------------------
Common Stock, par value $.01 6,056,548 shares
WPI GROUP, INC.
INDEX
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PART I - FINANCIAL INFORMATION Page No.
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
- March 26,2000 and September 26,1999
Consolidated Statements of Operations 4
- Three months ended March 26,2000 and March
28,1999
- Six months ended March 26,2000 and March
28, 1999
Consolidated Statements of Cash Flows 5
- Six months ended March 26,2000 and March
28,1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
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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WPI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 26, March 26,
1999 2000
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(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,086,708 $ 52,153
Accounts receivable - net of allowance
for doubtful accounts
of $171,000 and $250,000, respectively 2,027,808 1,991,306
Accounts receivable - other 101,135 87,052
Inventories 461,893 437,685
Prepaid expenses and other current 238,550 266,564
assets
Refundable income taxes 220,205 105,551
Prepaid income taxes 2,655,419 2,655,875
Net assets of discontinued operations 54,200,000 12,250,000
------------ ------------
Total current assets 60,991,718 17,846,186
PROPERTY, PLANT AND EQUIPMENT
at cost less accumulated depreciation 1,668,473 996,028
OTHER ASSETS 1,896,868 1,811,667
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$ 64,557,059 $ 20,653,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 69,155,487 $ 30,025,863
Accounts payable 1,499,103 1,918,038
Accrued expenses 2,173,763 3,035,632
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Total current liabilities 72,828,353 34,979,533
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LONG-TERM DEBT - -
------------ ------------
DEFERRED INCOME TAXES 2,702,987 2,702,987
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized 20,000,000 shares,
issued and outstanding 6,050,398
and 6,056,548, respectively. 60,504 60,565
Additional paid-in capital 14,574,134 14,585,246
Retained earnings (deficit) (25,608,919) (31,674,450)
------------ ------------
Total stockholders' equity (deficit) (10,974,281) (17,028,639)
------------ ------------
$ 64,557,059 $ 20,653,881
============ ============
See notes to financial statements
-3-
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
March 28, March 26, March 28, March 26,
1999 2000 1999 2000
------------ ------------ ------------ ----------
CONTINUING OPERATIONS
Net Sales $ 3,277,959 $ 3,588,053 $ 6,388,278 $ 7,161,121
Cost of Goods Sold 1,223,182 1,422,127 2,340,466 2,855,588
----------- ----------- ----------- -----------
Gross Profit 2,054,777 2,165,926 4,047,812 4,304,533
----------- ----------- ----------- -----------
Operating Expenses:
Research and new 478,373 822,168 953,691 1,504,735
product development
Selling, general and
administration 1,785,906 2,028,200 3,632,256 4,253,390
Restructuring costs 450,000 130,000 450,000 1,770,000
------------ ----------- ------------ ----------
Total Operating
Expenses 2,714,279 2,980,366 5,035,947 7,528,125
------------ ----------- ------------ ----------
Operating Loss (659,502) (814,440) (988,135) (3,223,592)
Other Income (Expense):
Interest expense (120,975) (739,171) (253,329) (991,505)
Forbearance expense - - - (285,000)
Other, net (12,348) (159) (22,236) (5,434)
------------ ----------- ----------- ----------
Loss Before Benefit for
Income Taxes (768,129) (1,553,770) (1,263,700) (4,505,531)
Benefit for Income Taxes (254,000) - (362,000) -
------------ ------------ ----------- -----------
Loss from Continuing
Operations (514,129) (1,553,770) (901,700) (4,505,531)
DISCONTINUED OPERATIONS
Loss from discontinued
operations (net of
applicable income taxes) (1,002,478) - (1,173,172) -
Estimated loss from
disposal of discontinued
operations - (1,560,000) - (1,560,000)
------------ ----------- ------------ ----------
Loss before cumulative
effect of change in
accounting principle (1,516,607) (3,113,770) (2,074,872) (6,065,531)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
net of applicable income
taxes of $1,000,000 - - (2,822,147) -
------------ ----------- ----------- -----------
NET LOSS $ (1,516,607) $(3,113,770) $(4,897,019) $(6,065,531)
Earnings (Loss) Per Share
- Continuing Operations
(Note 3) $ (.09) $ (.26) $ (.15) $ (.74)
------------ ----------- ----------- -----------
See notes to financial statements
- 4 -
WPI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
March 28, March 26,
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,897,019) $ (6,065,531)
------------- -------------
Adjustments to reconcile net income
to net cash
Provided by operating activities:
Cumulative effect of change in
accounting principle 2,822,147 -
Depreciation and amortization 2,557,252 1,285,934
Loss from disposal of discontinued
operations - 1,560,000
Deferred income taxes 9,332 -
Changes in current assets and
liabilities net of effects
of acquisition:
Accounts receivable 2,389,694 4,164,420
Accounts receivable - other (114,968) (258,915)
Inventories (1,006,002) (540,759)
Prepaid expenses and other current (162,414) (54,294)
assets
Accounts payable (1,297,866) (1,536,929)
Accrued expenses 1,261,497 753,014
Accrued income taxes (852,896) 405,436
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Total adjustments 5,605,776 5,777,910
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Net cash provided by operating activities 708,757 (287,621)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses - 39,367,083
Additions to property, plant and (1,200,018) (310,112)
equipment
Increase in other assets (32,333) -
Payment of accrued acquisition costs (310,654) (149,066)
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Net cash used for investing (1,543,005) 38,907,905
activities ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in current and 682,019 (39,129,624)
long-term debt
Proceeds from issuance of common 32,400 11,173
stock
Proceeds from exercise of stock 29,419 -
options ------------- -------------
Net cash used for investing 743,838 (39,118,451)
activities ------------- -------------
EFFECT OF FOREIGN CURRENCY TRANSLATION
ON CASH (5,181) -
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (95,591) (498,167)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 159,518 550,320
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 63,927 $ 52,153
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
INFORMATION:
Income taxes paid (refunded) $ 107,616 $ (117,054)
Interest paid 2,445,253 5,480,641
See notes to financial statements
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements for the three months and six months
ended March 26,2000 and March 28,1999 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
Inventory consists of: September 26, March 26,
1999 2000
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Raw Materials $ 315,071 $ 299,588
Work in Process 27,340 30,888
Finished Goods 119,482 107,209
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Total $ 461,893 $ 437,685
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3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and
diluted earnings (loss) per share for the periods indicated:
Three Months Ended Six Months Ended
March 28, March 26, March 28, March 26,
1999 2000 1999 2000
------------ ----------- ------------ ------------
Earnings (loss per
share - basic)
Continued operations $ (0.09) $ (0.26) $ (0.15)$ (0.74)
Discontinued
operations (0.17) (0.26) (0.19) (0.26)
Effect of
accounting change - - (0.47) -
----------- ----------- ------------ -----------
Net loss $ (0.25) $ (0.52) $ (0.81) $ (1.00)
----------- ---------- ------------ -----------
Earnings (loss) per
share - diluted
Continued operations $ (0.09) $ (0.26) $ (0.15) $ (0.74)
Discontinued
operations (0.17) (0.26) (0.19) (0.26)
Effect of
accounting change - - (0.47) -
----------- ---------- ---------- -----------
Net loss $ (0.25) $ (0.52) $ (0.81) $ (1.00)
----------- ---------- ---------- ----------
Weighted Average
Common Shares 6,044,881 6,052,568 6,037,804 6,051,579
Effect of Dilutive
Options - - - -
Adjusted Weighted Average
Common Shares 6,044,881 6,052,568 6,037,804 6,051,579
---------- ----------- ---------- -----------
- 6 -
4. RESTRUCTURING CHARGES
During the six months ended March 26, 2000, the Company
entered into a severance agreement with certain former
executives and officers. In connection with the agreements,
the Company recorded a restructuring charge of $1,770,000,
consisting primarily of the continuation of payroll and
benefits subsequent to termination. Of the total
restructuring charge, $320,000 will be paid over various periods
ending August 2000. The remaining $1,450,000 will be paid over
a five-year period ending December 2004 in connection with the
terms of a former executive's severance agreement. In addition,
during the six months ended March 26, 2000, 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.
The Company's restructuring activity during the six-month
period ending March 26, 2000 is as follows:
Restructuring reserve balance at
September 26, 1999 $ 148,269
Employee severance costs accrued
and charged to expense 1,770,000
Charges against reserve for the
six months ended March 26, 2000 (518,470)
-----------
Restructuring reserve balance at
March 26, 2000 $ 1,399,799
===========
5. DISCONTINUED OPERATIONS
During its fiscal 1999, the Company adopted and is in the process of
implementing a restructuring plan intended to focus on its MPSI
business unit (a provider of vehicle diagnostic systems). In connection
therewith, 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
businesses (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. In February 2000, the Company completed the sale of
its rugged handheld computer and terminal business units (WPI Husky
Technology and WPI Oyster Termiflex, Ltd.) to Dynatech Corporation, for
approximately $35 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).
In connection with the completed business sales described above, the
buyers have proposed certain adjustments that may potentially effect
the ultimate purchase price paid. The Company believes there are
certain incorrect assumptions made by the buyers and that the ultimate
settlement of these matters will not materially impact the accompanying
financial statements.
The Company recognized an estimated loss on disposal of discontinued
operations of approximately $1.6 million in the second quarter of fiscal
2000. The loss was primarily attributable to higher than anticipated
loss on the sale of its rugged handheld computer and terminal business
units and the operating results of the discontinued operations and
higher than anticipated interest expense in the second quarter of
fiscal 2000.
- 7 -
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 26, 2000 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
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 circumstances after
the date of this document.
RESULTS OF OPERATIONS
Net sales of $3.6 million for the second quarter of fiscal
2000 increased 9.5% from sales of $3.3 million for the second
quarter of fiscal 1999. For the first six months of fiscal
2000 the Company reported sales of $7.2 million, 12.1% higher
than sales of $6.4 million for the first six months 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 second quarter of fiscal
2000 resulted in a gross profit of 60.4%, compared to a gross
profit of 62.7% for the same period of fiscal 1999. Cost of
sales of $2.9 million for the first six months of fiscal 2000
resulted in a gross profit of 60.1%, compared to a gross
profit of 63.4% 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 mix of products
sold and decreased software licenses revenue.
Research and new product development expenses were $822,000,
22.9% of sales, and $1,505,000, 21.0% of net sales, for the
fiscal quarter and the six months ended March 26, 2000,
respectively. For the same fiscal quarter and six month periods of
fiscal 1999, research and new product development expenses
were $478,000, 14.6% of sales, and $954,000, 14.9% of sales,
respectively. The increase was attributed to the development E-
Technician, a web-based remote diagnostic platform.
Selling, general and administration expenses were $2.0 million
and $1.8 million for the second quarter of fiscal 2000 and 1999,
respectively, and $4.3 million and $3.6 million, for the six months of
fiscal 2000 and 1999, respectively. As a percentage of sales,
selling, general and administrative expenditures were 56.5%
and 54.5% for the fiscal 2000 and 1999 quarters, respectively,
and 59.4% and 56.9% for the six month of fiscal 2000 and 1999,
respectively. The increase in selling, general and
administrative expenses in fiscal 2000 is primarily
attributable to the costs related to consultants and advisors
incurred in connection with the debt negotiations with the
bank syndicate.
During the six months ended March 26, 2000, the Company
entered into severance agreements with certain former
executives and officers. In connection with the agreements, the
Company recorded a restructuring charge of $130,000 and $1.6 million
for the quarter and six months ended March 26, 2000, respectively,
consisting primarily of the continuation of payroll and benefits
subsequent to termination.
The Company's operating loss for the second quarter of fiscal
2000 and 1999 was ($814,000) and ($660,000), respectively.
For the six months ended March 26, 2000 and March 28, 1999 the
Company's operating loss was ($3.2) million and ($1.0) million,
respectively.
- 8 -
The increase in the operating loss was primarily to the
increase in research and new product development costs and the
restructuring and non-recurring costs discussed above.
The Compnay's other income (expense) was ($739,000) for the
second quarter of fiscal 2000 compared to ($109,000) in the
second quarter of fiscal 1999. For the six months
ended March 26, 2000 and March 28, 1999 other income (expense)
was ($1.3) million and ($276,000), respectively. The increase was
due primarily to higher interest expense and $285,000 of fees 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 ($1.0) million
and ($1.2) million for the quarter and six months ended March 28,
1999. The loss was the result of lower sales in the Company's
rugged handheld computer and terminal, power conversion and
electronic ballasts businesses, increased costs and operating
expenses as a result of the acquisiton of WPI Instruments in
August 1998, and higher interest expense from additional
borrowings and higher interest rates.
The Company recognized an estimated loss on disposal of discontinued
operations of $1.6 million for the second quarter of fiscal 2000.
The loss was primarily attributable to a higher than anticipated loss
on the sales of its rugged handheld computer and terminal businesses and
results of operation of the discontinued operations and higher
than anticipated interest expense.
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 March 26, 2000 the Company had a working capital
(deficit) of ($17.1) million compared to ($11.8) million at
September 26, 1999. Net cash provided by (used in) operating
activities totaled ($288,000) and $709,000 for the six months ended
March 26, 2000 and March 28, 1999, respectively.
As of March 26, 2000, 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 approximately $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. The terms of the amendment
increased the interest accrued on all borrowings by 2% per
annum and limited the revolving credit borrowings to $14.8 million,
the amount of the Company's current revolving credit borrowings
at the time. In addition to the payment of a fee to amend the
agreement, the Company issued 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 was callable by
the bank and, accordingly, was classified as current in the
consolidated balance sheet as of September 26, 1999.
- 9 -
In January 2000, the Company 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 $6.5 million and provides that all borrowings
bear interest at prime plus 5.5%. It also provided for the
payment of a $250,000 forbearance fee to the bank group. As additional
conditions of continued forbearance the agreement provided for:
consummation of the sale of the rugged handheld computers and
terminals business; the Company seek a potential purchaser of the
instruments and solenoids business; and the development of an action
plan to reduce the Company's expenses. The initial forbearance period
ended March 31, 2000. The forbearance agreement was extended to May 3,
2000 and required an additional $100,000 forbearance fee. The
Company has requested and is presently in the process of
negotiating the terms of further extension of the forbearance
agreement with the banks. There is no assurance the Company will be
successful in negotiating a further extension of a forbearance agreement
with the banks.
During its fiscal 1999, the Company adopted and is in the
process of implementing a restructuring plan intended to focus
on its MPSI business unit (a 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 businesses
(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).
2. On February 22, 2000, the Company completed the sale of
its rugged handheld computer and terminal business
units (WPI Husky Technology and WPI Oyster Termiflex,
Ltd.) to Dynatech Corporation, for approximately $35
million in cash plus the assumption of certain
liabilities.
The Company utilized the cash generated from the divestitures
of the businesses to repay a significant portion of the existing
bank debt and to support the Companies' operations. 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 instruments and solenoid businesses,
or that sufficient funding will be available to execute the
present business plan.
If the Company is unable to successfully complete the
sale of its net assets of discontinued operations, renegotiate its
bank agreements and obtain additional funding, the cash from operations
will not be sufficient to cover short-term or long-term
liquidity requirements.
- 10-
WPI GROUP, INC.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Forbearance Agreement dated January 24, 2000.
27 Financial Data Schedule.
B. Reports on Form 8-K
On February 25, 2000, the Registrant filed a report
under Item 5 of Form 8-K to announce the completion
of the sale of its UK-based WPI Husky Technology
business to Dynatech Corporation.
On February 29, 2000, the Registrant filed a report
under Item 2 of Form 8-K reporting the completion of
the sale of WPI Husky Technology, Inc. to Dynatech
Corporation.
- 11-
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 10, 2000 By:/s/John R. Allard
-----------------
John R. Allard
President and
Chief Executive Officer
Date: May 10, 2000 By:/s/John W. Powers
-----------------
John W. Powers
Vice President and
Chief Financial Officer
-12-