SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 1998 [_] 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 JULY 17, 1998 ----- ------------------------------- Common Stock, par value $.01 6,024,694 shares WPI GROUP, INC. INDEX ----- PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 - June 28,1998 and September 28,1997 Consolidated Statements of Income 4 - Three months ended June 28,1998 and June 29,1997 - Nine months ended June 28,1998 and June 29,1997 Consolidated Statements of Cash Flows 5 - Nine months ended June 28,1998 and June 29,1997 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 8 and Results of Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11 -2- WPI GROUP, INC. CONSOLIDATED BALANCE SHEETS September 28, June 28, 1997 1998 ------------------- ------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 678,799 $ 1,424,231 Accounts receivable - net of allowance for doubtful accounts of $1,237,000 and $1,270,000, respectively 12,173,012 17,575,469 Accounts receivable - other 249,393 304,610 Inventories 9,895,852 9,557,995 Prepaid expenses and other current assets 1,134,125 1,260,969 Prepaid income taxes 1,193,160 1,193,160 Refundable income taxes 1,816,897 1,363,048 ----------- ----------- Total current assets 27,141,238 32,679,482 PROPERTY, PLANT AND EQUIPMENT at cost, less accumulated depreciation 15,750,851 13,506,883 OTHER ASSETS 34,803,886 34,316,696 ----------- ----------- $77,695,975 $80,503,061 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ -- $ 3,000,000 Accounts payable 6,336,756 6,068,436 Accrued expenses 4,038,977 3,980,092 Accrued income taxes 249,473 1,475,263 ----------- ------------ Total current liabilities 10,625,206 14,523,791 ----------- ------------ NOTES PAYABLE TO BANK 42,000,000 37,000,000 ----------- ------------ DEFERRED INCOME TAXES 3,257,914 3,279,679 ----------- ------------ COMMITMENTS STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 20,000,000 shares, issued 5,996,737 and 6,023,994, respectively. 59,967 60,240 Additional paid-in capital 13,992,540 14,144,614 Retained earnings 7,931,562 11,264,113 Cumulative foreign currency translation adjustments (171,214) 230,624 ----------- ------------ Total stockholders' equity 21,812,855 25,699,591 ----------- ------------ $77,695,975 $ 80,503,061 =========== ============ See notes to financial statements -3- WPI GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Nine Months Ended June 29, June 28, June 29, June 28, 1997 1998 1997 1998 ----------- ----------- ----------- ----------- NET SALES $15,562,326 $24,397,485 $43,893,178 $69,494,757 COST OF GOODS SOLD 9,394,476 13,874,966 26,442,415 40,511,951 ----------- ----------- ----------- ----------- GROSS PROFIT 6,167,850 10,522,519 17,450,763 28,982,806 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Research and new product development 1,030,341 1,323,517 2,995,491 3,983,448 Selling, general and administration 3,547,753 6,426,139 9,915,704 17,670,970 ----------- ----------- ----------- ----------- Total operating expense 4,578,094 7,749,656 12,911,195 21,654,418 ----------- ----------- ----------- ----------- OPERATING INCOME 1,589,756 2,772,863 4,539,568 7,328,388 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (487,588) (771,792) (1,235,427) (2,445,588) Other, net 343,924 30,246 585,825 17,751 ----------- ----------- ----------- ----------- (143,664) (741,546) (649,602) (2,427,837) ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,446,092 2,031,317 3,889,966 4,900,551 PROVISION FOR INCOME TAXES 439,000 663,000 1,245,000 1,568,000 ----------- ----------- ----------- ----------- NET INCOME $ 1,007,092 $ 1,368,317 $ 2,644,966 $ 3,332,551 =========== =========== =========== =========== BASIC EARNINGS PER SHARE: $ 0.17 $ 0.23 $ 0.44 $ 0.55 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE: $ 0.16 $ 0.22 $ 0.43 $ 0.54 =========== =========== =========== =========== Weighted Average Common Shares 5,980,989 6,018,419 5,968,019 6,011,864 Effect of dilutive options 164,213 172,258 174,456 200,164 ----------- ----------- ----------- ----------- Adjusted Weighted Average Common Shares 6,145,202 6,190,677 6,142,475 6,212,028 =========== =========== =========== =========== See notes to financial statements -4- WPI GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended June 29, June 28, 1997 1998 --------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,644,966 $ 3,332,551 ------------ ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,184,398 4,073,770 Deferred income taxes (2,525) 21,135 Changes in current assets and liabilities net of effects of acquisition: Accounts receivable 1,084,300 (5,252,176) Accounts receivable - other 1,328,126 (54,793) Inventories (499,565) 515,345 Prepaid expenses and other current assets (702,606) 353,425 Accounts payable (1,588,068) (395,206) Accrued expenses (1,155,931) 1,070 Accrued income taxes (1,274,457) 1,211,818 ------------ ----------- Total adjustments (626,328) 474,388 ------------ ----------- Net cash provided by operating activities 2,018,638 3,806,939 ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 25,234,700 (2,000,000) Decrease in long-term liabilities (20,000) -- Proceeds from issuance of common stock 47,160 50,878 Proceeds from exercise of stock options 77,425 79,469 Tax benefit on exercise of non-statutory options 51,000 22,000 ------------ ----------- Net cash provided by (used in) financial activities 25,390,285 (1,847,653) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (3,624,410) (950,889) Proceeds from sales of property, plant and equipment -- 1,492,738 Payment of accrued acquisition costs (495,935) (133,328) Acquisition, net of cash acquired (21,737,130) -- Increase in other assets (1,795,893) (1,646,877) ------------ ----------- Net cash (used in) investing activities (27,653,368) (1,238,356) ------------ ----------- EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH 155,162 24,502 ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (89,283) 745,432 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 206,829 678,799 ------------ ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 117,546 $ 1,424,231 ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION: Income taxes paid (refunded) $ 1,392,000 $ (337,684) Interest paid 1,093,999 2,423,138 See notes to financial statements -5- WPI GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Nine Months Ended June 29, June 28, 1997 1998 ---------------- --------------- On June 20, 1997 the Company acquired the capital stock of Husky Computers, Ltd. for $16,000,000 in cash plus the assumption of agreed upon liabilities: Fair value of assets acquired $28,654,990 $ -- Cash paid and expenses incurred of $23,539,700 23,539,700 -- Liabilities assumed $ 5,115,290 $ -- =========== ============ See notes to financial statements -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The financial statements for the three months and nine months ended June 28,1998 and June 29, 1997 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 28,1997 and September 29,1996. 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 28, June 28, 1997 1998 ------------------- ------------------- Raw Materials $7,337,866 $6,948,494 Work in Process 1,083,327 1,372,587 Finished Goods 1,474,659 1,236,914 ---------- ---------- Total $9,895,852 $9,557,995 3. SUBSEQUENT EVENT On August 3, 1998, WPI Group, Inc. completed the acquisition of the ANG Instrument division from Allard Nazarian Group, Inc. The Company acquired all of the assets of the ANG Instruments division for approximately $22.75 million. ANG Instruments is a leading producer of avionics components and subsystems, inertial sensors and panel meters. On August 4, 1998, the Company announced the acquisition of the Lucas Schaevitz inertial sensor product line form the Lucas Control Systems Division of Lucas Varity, Plc for approximately $3 million. The transaction is expected to close by August 10, 1998. In conjunction with the acquisitions, the Company secured a new $75 million credit facility with Fleet Bank - NH. The new facility replaces the Company's current $45 million credit facility, also with Fleet Bank - NH. -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 June 28,1998 and the Form 10-K for the year ended September 28,1997, filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS Net sales of $24.4 million for the third quarter of fiscal 1998 increased 57% from sales of $15.6 million for the third quarter of fiscal 1997. For the first nine months of fiscal 1998, the Company reported sales of $69.5 million, 58% higher than the sales of $43.9 million for the first nine months of fiscal 1997. The increase was primarily due to the acquisition of Husky Computers Limited and improved sales in our targeted markets. Cost of sales of $13.9 million for the third quarter of fiscal 1998 resulted in a gross profit of 43%, compared to a gross profit of 40% for the same period of fiscal 1997. Cost of sales of $40.5 million for the first nine months of fiscal 1998 resulted in a gross profit of 42%, compared to a gross profit of 40% for the same period of fiscal 1997. The improvement in the Company's gross profit percentage in fiscal 1998 was primarily attributable to a change in the mix of products sold and higher sales volume discussed above. Research and new product development expenses were 5% of sales for the quarter and 6% of sales for the nine months ended June 28,1998, compared to 7% for the same three and nine month periods in fiscal 1997. The decrease in research and new product development expenses as a percentage of sales was due primarily to the higher sales volume discussed above. As a percentage of sales, selling, general and administrative expenditures were 26% and 23% for the quarters and 25% and 23% of the nine month periods ended June 28, 1998 and June 29, 1997, respectively. The increase in selling, general and administrative expenses as a percentage of sales in fiscal 1998 was primarily attributable to higher Company wide selling costs to achieve future revenue objectives. Income before provision for income taxes of $4.9 million for the nine months ended June 28, 1998 increased 26% compared to $3.9 million for the nine months ended June 29, 1997. The increase was primarily due to higher sales and higher gross margins. The year-to-date effective income tax rate for fiscals 1998 and 1997 was estimated at 32% . LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $18.2 million at June 28,1998 compared to $16.5 million at September 28,1997. During the second quarter cash flows provided from financing activities included approximately one and a half million dollars from sales of property, plant and equipment. The Company's management believes it has sufficient working capital to meet its liquidity needs. As of June 28, 1998, the Company had no material commitments for capital expenditures. -8- SEGMENT INFORMATION The Company's business segments are: Information Solutions: rugged, handheld passive and programmable terminals and computers, vehicle diagnostic information systems and decision support systems. Power Solutions: power systems, electronic lamp ballasts and solenoids. Summarized below are the Company's segment sales and operating income by business segment for the three months and nine months ended June 28, 1998 and June 29, 1997 in thousands. Three Months Ended Nine Months Ended June 29, June 28, June 29, June 28, 1997 1998 1997 1998 -------------- ------------- ------------ ------------ Net Sales Information Solutions $ 7,900 $18,588 $22,497 $52,653 Power Solutions 7,662 5,810 21,396 16,842 ------- ------- ------- ------- $15,562 $24,398 $43,893 $69,495 ======= ======= ======= ======= Operating Income Information Solutions $ 1,053 $ 3,499 $ 3,081 $ 9,070 Power Solutions 1,203 585 3,379 2,147 Corporate (a) (666) (1,311) (1,920) (3,889) ------- ------- ------- ------- $ 1,590 $ 2,773 $ 4,540 $ 7,328 ======= ======= ======= ======= (a) Includes corporate expenses and amortization of goodwill -9- 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 August 7, 1998 the Registrant filed a report on Form 8-K reporting the completion of the acquisition of the ANG Instruments division of Allard Nazarian Group, Inc. The Registrant also reported under Item 5 the acquisition of the Lucas Schaevitz product line and a new $75 million credit facility with Fleet Bank. -10- 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: August 10,1998 By: /s/Dennis M. Deegan ------------------- Dennis M. Deegan President and Chief Operating Officer Date: August 10,1998 By: /s/John W. Powers ----------------- John W. Powers Vice President and Chief Financial Officer -11-