10-Q 1 0001.txt 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 June 25, 2000 / / 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 August 3, 2000 ------ --------------------------------- Common Stock, par value $.01 6,056,758 shares WPI GROUP, INC. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 - June 25, 2000 and September 26, 1999 Consolidated Statements of Operations 4 - Three months ended June 25, 2000 and June 27, 1999 - Nine months ended June 25, 2000 and June 27, 1999 Consolidated Statements of Cash Flows 5 - Nine months ended June 25, 2000 and June 27, 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 -2- WPI GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 26, June 25, 1999 2000 ------------- --------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,086,708 $ 10,354 Accounts receivable - net of allowance for doubtful accounts of $171,000 and $262,500, respectively 2,027,808 1,816,826 Accounts receivable - other 101,135 85,594 Inventories 461,893 447,369 Prepaid expenses and other current 238,550 213,409 assets Refundable income taxes 220,205 105,551 Prepaid income taxes 2,655,419 260,450 Net assets of discontinued operations 54,200,000 9,200,000 ------------ ----------- Total current assets 60,991,728 12,139,553 PROPERTY, PLANT AND EQUIPMENT at cost less accumulated depreciation 1,668,473 810,411 OTHER ASSETS 1,896,868 1,766,163 ----------- ----------- $64,557,050 $14,716,127 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank and other loans payable $69,155,487 $28,624,840 Accounts payable 1,499,103 1,984,925 Accrued expenses 2,173,763 3,049,847 ----------- ----------- Total current liabilities 72,828,353 33,659,612 ----------- ----------- DEFERRED INCOME TAXES 2,702,987 307,562 ----------- ----------- COMMITMENTS STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value; authorized 20,000,000 shares, issued and outstanding 6,050,398 and 6,056,758, respectively. 60,504 60,568 Additional paid-in capital 14,574,134 14,585,533 Retained earnings (deficit) (25,608,919) (33,897,148) ------------ ----------- Total stockholders' equity (deficit) (10,974,281) (19,251,047) ------------ ----------- $ 64,557,059 $14,716,127 ============= ===========
See notes to financial statements -3- WPI GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended June 27, June 25, June 27, June 25, 1999 2000 1999 2000 ------------ ----------- ----------- ---------- CONTINUING OPERATIONS Net Sales $ 2,618,703 $ 3,573,724 $ 9,006,981 $10,734,845 Cost of Goods Sold 1,102,943 1,409,141 3,443,409 4,265,729 Gross Profit 1,515,760 2,164,583 5,563,572 6,469,116 ------------ ----------- ----------- ------------ Operating Expenses: Research and new product development 519,200 818,748 1,472,891 2,323,483 Selling, general and administration 2,098,932 1,670,593 5,923,988 5,731,183 8 Restructuring costs - - 450,000 1,700,000 ------------ ----------- ---------- ---------- Total Operating Expenses 2,618,132 2,489,341 7,654,079 10,017,466 ------------ ------------ ---------- ---------- Operating Loss (1,102,372) (324,758) (2,090,507) (3,548,350) Other Income (Expense): Interest expense (133,297) (1,030,919) (386,625) (2,022,424) Forbearance expense - (253,500) - (538,500) Other, net 41,747 1,479 19,511 (3,955) ------------- ---------- --------- ---------- Loss before Benefit for Income Taxes (1,193,922) (1,607,698) (2,457,629) (6,113,229) Provision for Income Taxes 362,000 - - - ------------- ----------- ---------- ---------- Loss from Continuing Operations (1,555,922) (1,607,698) (2,457,621) (6,113,229) DISCONTINUED OPERATIONS Loss from discontinued operations (net of applicable income taxes) (1,692,564) - (2,865,737) - Estimated loss from disposal of discontinued operations - (615,000) - (2,175,000) --------------- ----------- ----------- ----------- Loss before cumulative effect of change in accounting principle (3,248,486) (2,222,698) (5,323,358) (8,288,229) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of applicable income taxes of $1,000,000 - - (2,822,147) - ------------ ------------ ------------ ------------ Net Loss $ (3,248,486) $ (2,222,698) $ (8,145,505) $ (8,288,229) ------------ ------------ ------------ ------------ Earnings (Loss) Per Share - Continuing Operations $ (.26) $ (.27) $ (.41) $ (1.01) (Note 3) ------------ ------------ ------------- -----------
See notes to financial statements - 4 - WPI GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended June 27, June 25, 1999 2000 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,145,505) $ (8,288,229) ------------- ------------ 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 3,846,979 1,555,722 Loss from disposal of discontinued operations - 2,175,000 Deferred income taxes 9,292 - Changes in current assets and liabilities net of effects of acquisition: Accounts receivable 4,618,742 4,327,085 Accounts receivable - other (52,531) 476,833 Inventories (3,061,493) (664,932) Prepaid expenses and other current (507,582) (21,276) assets Accounts payable 583,320 (1,853,532) Accrued expenses 208,043 794,209 Accrued income taxes (426,613) 405,439 ----------- ---------- Total adjustments 8,040,304 7,194,548 ----------- ---------- Net cash provided by (used in) operating activities (105,201) (1,093,681) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of businesses - 41,203,602 Additions to property, plant and equipment (2,150,774) (518,051) (Additions) deletions to other assets (54,972) 2,905 Payment of accrued acquisition costs (397,453) (151,945) ----------- ---------- Net cash provided by (used in) investing activities (2,603,199) 40,536,511 ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in current and long-term debt 2,564,460 (40,530,647) Proceeds from issuance of common stock 35,958 11,463 Proceeds from exercise of stock options 29,419 - Net cash provided by (used in) ---------- ----------- investing activities 2,629,837 (40,519,184) ---------- ----------- EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH (30,007) - ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (108,570) (1,076,354) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 159,518 1,086,708 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 50,948 $ 10,354 =============== ============ SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION: Income taxes paid (refunded) $ 70,246 $ (117,054) Interest paid 3,940,396 6,309,867
See notes to financial statements - 5 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The financial statements for the three months and nine months ended June 25, 2000 and June 27, 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, June 25, 1999 2000 ------------- --------------- Raw Materials $ 315,071 $ 280,164 Work in Process 27,340 56,309 Finished Goods 119,482 110,896 ------------- --------------- Total $ 461,893 $ 447,369 ============= ===============
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 June 27, June 25, June 27, June 25, 1999 2000 1999 2000 ------------- ----------- ------------- ------------ Earnings (loss) per share - basic Continued operations $ (0.26) $ (0.27) $ (0.41) $ (1.01) Discontinued operations (0.28) (0.10) (0.47) (0.36) Effect of accounting change - - (0.47) - ------------- ------------ ------------- ----------- Net loss $ (0.54)$ (0.37)$ (1.35) $ (1.37) ------------- ------------ ------------- ---------- Earnings (loss) per share - diluted Continued operations $ (0.26) $ (0.27) $ (0.41) $ (1.01) Discontinued operations (0.28) (0.10) (0.47) (0.36) Effect of accounting change - - (0.47) - ------------- ----------- ---------- --------- Net loss $ (0.54) $ (0.37) $ (1.35) $ (1.37) Weighted Average Common Shares 6,048,977 6,053,259 6,041,515 6,053,243 Effective of Dilutive Shares - - - - ------------ ------------ ----------- ---------- Adjusted Weighted Average Common Shares 6,048,977 6,053,259 6,041,515 6,053,243 ------------ ------------- ---------- ----------
- 6 - 4. RESTRUCTURING CHARGES During the nine months ended June 25, 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 nine months ended June 25, 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 June 25, 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 nine months ended June 25, 2000 (649,971) ----------- Restructuring reserve balance at June 25, 2000 $ 1,268,298 =========== 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. During the fiscal quarter ended June 25, 2000, the Company completed the sale of WPI Oyster Termiflex, Inc. and certain real estate located in the United Kingdom. The Company is also in the process of negotiating the sale of its instruments and solenoid businesses (WPI Instruments and WPI Magnetec). In connection with the completed business sales of its rugged handheld computer and terminal business units, Dynatech Corporation has proposed certain adjustments that may potentially effect the ultimate purchase price paid. The Company believes 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 $.6 million and $2.2 million in the fiscal quarter and nine months ended June 25, 2000. The losses were primarily attributable to higher than anticipated loss on the sale of its business units, 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 Continuing Operations Net sales of $3.6 million for the third quarter of fiscal 2000 increased 36.5% from sales of $2.6 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000 the Company reported sales of $10.7 million, 19.2% higher than sales of $9.0 million for the first nine 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 third quarter of fiscal 2000 resulted in a gross profit of 60.6%, compared to a gross profit of 57.9% for the same period of fiscal 1999. Cost of sales of $4.3 million for the first nine months of fiscal 2000 resulted in a gross profit of 60.3%, compared to a gross profit of 61.8% for the same period of fiscal 1999. The changes in the Company's gross profit percentage in fiscal 2000 compared to the same periods of fiscal 1999 was primarily attributable to a change in mix of products sold and decreased software licenses revenue. Research and new product development expenses were $818,000, 22.9% of sales, and $2.3 million, 21.6% of net sales, for the fiscal quarter and the nine months ended June 25, 2000, respectively. For the same fiscal quarter and nine month periods of fiscal 1999, research and new product development expenses were $519,000, 19.8% of sales, and $1.5 million, 16.4% of sales, respectively. The increase was attributed to the continued development of E-Technician, a web-based remote diagnostic platform. Selling, general and administration expenses were $1.7 million and $2.1 million for the third quarter of fiscal 2000 and 1999, respectively, and $5.9 million and $5.7 million, for the nine months of fiscal 2000 and 1999, respectively. As a percentage of sales, selling, general and administrative expenses were 46.7% and 80.2% for the fiscal 2000 and 1999 quarters, respectively, and 55.2% and 63.6% for the nine month of fiscal 2000 and 1999, respectively. The changes in selling, general and administrative expenses in fiscal 2000 are primarily attributable to a reduction in executive and administrative personnel costs offset by additional costs related to consultants and advisors incurred in connection with the debt negotiations with the bank syndicate. During the nine months ended June 25, 2000, the Company entered into various severance agreements with certain former executives. In connection with the agreements, the Company recorded a restructuring charge of $1.8 million during the nine months ended June 25, 2000, consisting primarily of the continuation of payroll and benefits payments subsequent to termination. - 8 - The Company's operating loss for the third quarter of fiscal 2000 and 1999 was ($325,000) and ($1.1) million, respectively. For the nine months ended June 25, 2000 and June 27, 1999 the Company's operating loss was ($3.5) million and ($2.1) million, respectively. The increase in the operating loss was primarily due to the increase in research and new product development costs, and the restructuring and non-recurring costs discussed above. The Company's other income (expense) was ($1.3) million for the third quarter of fiscal 2000 compared to ($92,000) in the third quarter of fiscal 1999. For the nine months ended June 25, 2000 and June 27, 1999 other income (expense) was ($2.6) million and ($367,000), respectively. The increase was due primarily to higher interest expense and $539,000 of fees incurred in connection with the execution of a forbearance agreement related to the Company's bank debt. Discontinued Operations The Company's loss from discontinued operations was ($1.7) million and ($2.9) million for the quarter and nine months ended June 27, 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 acquisition 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 $615,000 and $2.2 million for the third quarter and nine months ended June 25, 2000, respectively. The loss was primarily attributable to a higher than anticipated loss on the sales of its rugged handheld computer and terminal businesses and the operating results of the discontinued operations and higher than anticipated interest expense. Cumulative Effect of Change in Accounting Principle 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 June 25, 2000 the Company had a working capital (deficit) of ($21.5) million compared to ($11.8) million at September 26, 1999. Net cash used in operating activities totaled $1.1 million and $105,000 for the nine months ended June 25, 2000 and June 27, 1999, respectively. As of June 25, 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 certain financial covenants the Company was not in compliance with at September 27, 1998, March 28, 1999 and June 27, 1999. The Company reached an agreement with the banks to waive the events of non-compliance and amend certain terms of the credit agreement. During the current fiscal year, the Company entered into a series of forbearance agreements with the banks. Pursuant to the terms of the forbearance agreements, the Company confirmed that all outstanding borrowings were due and payable. The agreements limit the revolving credit borrowings to $6.5 million and provides that all borrowings bear interest at prime plus 5.5%. In addition, the agreements provided for the payment of forbearance and other fees totaling $538,500 to the banks. - 9 - The initial forbearance period ended March 31, 2000. Subsequently, the Company entered into a series of extensions to the forbearance agreement the most recent expired August 7, 2000. The Company has requested and is presently in the process of negotiating the terms of a loan modification agreement with the banks. There is no assurance the Company will be successful in negotiating a loan modification agreement or 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 (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 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. 3. In April 2000, the Company completed the sale of a facility located in the United Kingdom for approximately $2.1 million in cash. 4. In June 2000, the Company completed the sale of WPI Oyster Termiflex, Inc. to a private group of investors for approximately $577,000 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 its remaining debt to provide sufficient liquidity to meet its continuing working capital requirements. There is no assurance the Company will be successful in divesting the instruments and solenoid businesses, refinancing its existing debt 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 March 31, 2000. 10.2 Forbearance Agreement dated May 3, 2000. 27 Financial Data Schedule. B. Reports on Form 8-K On June 8, 2000, the Registrant filed a report under Item 2 of Form 8-K to reporting the sale of WPI Termiflex, Inc. to Warner Power, LLC. - 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: August 8, 2000 By:/s/John R. Allard ----------------- John R. Allard President and Chief Executive Officer Date: August 8, 2000 By:/s/John W. Powers ----------------- John W. Powers Vice President and Chief Financial Officer -12-