SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 October 3, 1998 or
/ / 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 0-27744
PCD Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2604950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Technology Drive,
Centennial Park,
Peabody, Massachusetts
(Address of principal executive offices)
01960-7977
(Zip Code)
Registrant's telephone number, including area code: 978-532-8800
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
----- -----
Number of shares of common stock, $0.01 par value, outstanding at
October 15, 1998: 8,413,932
<PAGE>
PCD Inc.
FORM 10-Q
FOR THE QUARTER ENDED
OCTOBER 3, 1998
FORWARD LOOKING INFORMATION
Statements in this report concerning the future revenues,
profitability, financial resources, product mix, market demand,
product development and other statements in this report concerning
the future results of operations, financial condition and business
of PCD Inc. are "forward-looking" statements as defined in the
Securities Act of 1933 and Securities Exchange Act of 1934.
Investors are cautioned that the Company's actual results in the
future may differ materially from those projected in the forward-
looking statements due to risks and uncertainties that exist in
the Company's operations and business environment, including the
Company's dependence on the integrated circuit package
interconnect and semiconductor industries, the Company's
dependence on its principal customers and independent
distributors, acquisitions and indebtedness, international sales
and operations, fluctuations in demand for the Company's products,
patent litigation involving the Company, rapid technological
evolution in the electronics industry, Year 2000 compliance and
the like.
In addition, the Company may experience unanticipated costs
or other difficulties in connection with the acquisition and
integration of a business such as Wells Electronics, Inc. The
Company's most recent filings with the Securities and Exchange
Commission, including Form 10-K, contain additional information
concerning such risk factors, and copies of these filings are
available from the Company upon request and without charge.
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PCD INC.
Consolidated Balance Sheets as of October 3, 1998 and
December 31, 1997.
Consolidated Statements of Income for the quarter and nine
months ended October 3, 1998 and September 27, 1997.
Consolidated Statements of Cash Flows for the nine months
ended October 3, 1998 and September 27, 1997.
Notes to Condensed Consolidated Financial Statements.
WELLS ELECTRONICS, INC.
Consolidated Statements of Income for the quarter and nine
months ended October 4, 1997.
Consolidated Statements of Cash Flows for the nine months
ended October 4, 1997.
Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PCD Inc.
CONSOLIDATED BALANCE SHEETS
(Condensed and unaudited)
(In thousands)
<TABLE>
<CAPTION>
10/3/98 12/31/97
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 1,054 $ 3,990
Accounts receivable, net.................. 7,686 6,804
Inventory................................. 4,965 4,796
Prepaid expenses and other current assets. 713 1,135
-------- --------
Total current assets............... 14,418 16,725
Equipment and improvements
Equipment and improvements................ 24,833 20,695
Accumulated depreciation.................. 7,457 4,852
-------- --------
Equipment and improvements, net.............. 17,376 15,843
Deferred tax asset........................... 15,085 15,335
Goodwill..................................... 59,362 61,718
Intangible assets............................ 12,716 13,539
Debt financing fees.......................... 1,613 1,800
Other assets................................. 1,774 1,632
-------- --------
Total assets....................... $122,344 $126,592
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion
of long-term debt........................ $ 19,100 $ 17,700
Accounts payable.......................... 3,164 4,213
Accrued liabilities....................... 4,521 7,444
-------- --------
Total current liabilities.......... 26,785 29,357
Long-term debt, net of current portion....... 39,700 65,300
Subordinated debenture - related party....... - 22,903
Minority interest............................ 37 37
Stockholders' equity......................... 55,822 8,995
-------- --------
Total liabilities and
stockholders' equity.......... $122,344 $126,592
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
PCD Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Condensed and unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------- -----------------
10/3/98 9/27/97 10/3/98 9/27/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales........................... $15,786 $8,077 $51,065 $21,527
Cost of sales....................... 6,625 4,150 21,572 11,140
------- ------ ------- -------
Gross profit........................ 9,161 3,927 29,493 10,387
Operating expenses.................. 3,761 1,531 11,662 4,279
Amortization........................ 1,047 - 3,142 -
------- ------ ------- -------
Income from operations.............. 4,353 2,396 14,689 6,108
Interest expense /
(other income), net............... 1,354 (290) 7,643 (826)
------- ------ ------- -------
Income before income taxes.......... 2,999 2,686 7,046 6,934
Provision for income taxes.......... 1,246 993 3,003 2,562
------- ------ ------- -------
Income before extraordinary item.... 1,753 1,693 4,043 4,372
Extraordinary item - charge for
early retirement of debt, net of
income tax benefit of $567 (Note 3) - - 888 -
------- ------ ------- -------
Net income.......................... $ 1,753 $1,693 $ 3,155 $ 4,372
======= ====== ======= =======
Basic earnings per share:
Income before extraordinary item.. $ 0.21 $ 0.28 $ 0.54 $ 0.74
Extraordinary item................ $ - $ -- $ (0.12) $ --
------- ------ ------- -------
Net income........................ $ 0.21 $ 0.28 $ 0.42 $ 0.74
======= ====== ======= =======
Diluted earnings per share
Income before extraordinary item $ 0.19 $ 0.26 $ 0.49 $ 0.66
Extraordinary item................ $ - $ -- $ (0.10) $ --
------- ------ ------- -------
Net income........................ $ 0.19 $ 0.26 $ 0.39 $ 0.66
======= ====== ======= =======
Weighted average number of
common and common equivalent
shares outstanding:
Basic.......................... 8,388 5,982 7,472 5,933
======= ====== ======= =======
Diluted........................ 9,053 6,632 8,173 6,625
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
PCD Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed and unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
10/3/98 9/27/97
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 3,155 $ 4,372
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation................................. 2,605 1,174
Amortization of deferred compensation........ 39 43
Amortization of intangible assets............ 3,430 -
Amortization of warrant...................... 2,917 -
Tax benefit from stock options exercised..... 287 561
Deferred taxes............................... 250 -
Foreign currency adjustments................. (157) -
Changes in operating assets and liabilities:
Accounts receivable........................ (882) (672)
Inventory.................................. (169) (490)
Prepaid expenses and other current assets.. 422 37
Other assets............................... (206) (20)
Accounts payable........................... (1,049) (66)
Accrued liabilities........................ (2,923) (357)
------- -------
Net cash provided by operating activities 7,719 4,582
Cash flows from investing activities:
Capital expenditures............................ (4,138) (1,616)
------- -------
Net cash used in investing activities.... (4,138) (1,616)
Cash flows from financing activities:
Payments of short-term debt..................... (2,200) -
Payments of long-term debt...................... (22,000) -
Payments of subordinated debt................... (25,000) -
Proceeds from issuance of warrant............... 5 -
Proceeds from issuance of common stock, net..... 42,565 -
Exercise of common stock options................ 113 237
------- -------
Net cash (used in) provided by financing
activities............................. (6,517) 237
------- -------
Net (decrease) increase in cash................... (2,936) 3,203
Cash and cash equivalents at beginning of period.. 3,990 20,529
------- -------
Cash and cash equivalents at end of period........ $ 1,054 $23,732
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
PCD Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(October 3, 1998 Unaudited)
Note 1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. This financial data should
be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 1997 which are
included in the Company's Form 10-K filing. Results for the
interim period presented are not necessarily indicative of
results to be anticipated for the entire year. All financial
statements subsequent to December 26, 1997 include the
acquisition of Wells Electronics, Inc. by the Company accounted
for on the purchase method of accounting and include all
adjustments necessary for a fair presentation in the interim
periods presented. All adjustments made are of a normal
recurring nature.
Note 2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for
purposes other than trading and does so to reduce its exposure to
fluctuations in interest rates. Gains and losses on hedges of
existing assets and liabilities are included in the carrying
amounts of those assets or liabilities and are ultimately
recognized in income. The amounts receivable and payable are
recorded as a current liability with realized gains or losses
recognized as adjustments to interest expense.
Under the interest rate swap contract, the Company agrees to
pay an amount equal to a specified floating rate of interest
times a notional principal amount, and to receive in return an
amount equal to a specified fixed rate of interest times the same
notional principal amount. The notional amounts of the contract
are not exchanged. No other cash payments are made unless the
contract is terminated prior to maturity, in which case the
amount paid or received in settlement is established by agreement
at the time of termination, and usually represents the net
7
<PAGE>
present value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the contract.
The interest rate swap contract is entered into with a major
financial institution in order to minimize credit risk. At
October 3, 1998, the Company was a variable rate payer of
5.65234% and received a fixed rate of 5.72% on notional amount of
$35,000,000. The fair value at October 3, 1998, was an
unfavorable $2,171.
Note 3. EXTRAORDINARY ITEM
In the second quarter of 1998, the Company incurred
additional interest expense and prepayment penalties of
$1,455,000 ($888,000 tax affected) in connection with the early
retirement of the subordinated debenture - related party.
Note 4. NET INCOME PER SHARE
The following table reconciles net income and weighted
average shares outstanding to the amounts used to calculate basic
and diluted earnings per share for each of the three and nine
month periods ended October 3, 1998 and September 27, 1997:
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------- --------- -------
<S> <C> <C> <C>
For the quarter ended October 3, 1998
Net income.................................. $1,753,000 8,388,410 $ 0.21
Assumed exercise of options (treasury method) - 664,877 -
---------- --------- ------
Diluted net income.......................... $1,753,000 9,053,287 $ 0.19
========== ========= ======
For the quarter ended September 27, 1997
Basic earnings.............................. $1,693,000 5,981,684 $ 0.28
Assumed exercise of options (treasury method) - 650,055 -
---------- --------- ------
Diluted earnings............................ $1,693,000 6,631,739 $ 0.26
========== ========= ======
For the nine month period ended October 3, 1998
Income before extraordinary item............ $4,043,000 7,472,102 $ 0.54
Assumed exercise of options (treasury method) - 700,404 -
---------- --------- ------
Diluted income before extraordinary item.... $4,043,000 8,172,506 $ 0.49
========== ========= ======
Extraordinary item.......................... $ (888,000) 7,472,102 $(0.12)
Assumed exercise of options (treasury method) - 700,404 -
---------- --------- ------
Diluted extraordinary item.................. $ (888,000) 8,172,506 $(0.10)
========== ========= ======
Net income.................................. $3,155,000 7,472,102 $ 0.42
Assumed exercise of options (treasury method) - 700,404 -
---------- --------- ------
Diluted net income.......................... $3,155,000 8,172,506 $ 0.39
========== ========= ======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------- --------- -------
<S> <C> <C> <C>
For the nine month period ended September 27, 1997
Basic earnings.............................. $4,372,000 5,932,508 $ 0.74
Assumed exercise of options (treasury method) - 692,924 -
---------- --------- ------
Diluted earnings............................ $4,372,000 6,625,432 $ 0.66
========== ========= ======
</TABLE>
During the third quarter and nine months ended October 3, 1998,
Common Stock equivalents of 64,638 and 108,025, respectively were
not included in the calculation of diluted EPS as they were anti-
dilutive.
Note 5. INVENTORY
<TABLE>
<CAPTION>
10/3/98 12/31/97
------- --------
(In Thousands)
<S> <C> <C>
Inventory:
Raw materials and finished subassemblies $3,458 $3,387
Work in process......................... 545 532
Finished goods.......................... 962 877
------ ------
Total................................. $4,965 $4,796
====== ======
</TABLE>
Note 6. NEW ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board
(FASB) adopted Statement of Financial Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its
components. Effective January 1, 1998, the Company adopted SFAS
No. 130. For the three and nine month periods ended October 3,
1998, comprehensive income was $1,659,000 and $3,061,000,
respectively. For the three and nine month periods ended
September 27, 1997, comprehensive income was $1,693,000 and
$4,372,000, respectively. The Company's other comprehensive
income consists solely of cumulative translation adjustments.
9
<PAGE>
In 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information
(FAS 131), which goes into effect in 1998. FAS 131 requires the
reporting in the financial statements of certain new additional
information about operating segments of a business. Application
of FAS 131 is not required for interim reporting in the initial
year of application. PCD is currently evaluating the impact that
FAS 131 will have on its future reporting requirements.
In 1998, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS 133),
which becomes effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. FAS 133 standardizes the
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair
value. The Company is currently evaluating the impact that FAS
133 will have on its future reporting requirements.
Note 7. LITIGATION
On August 21, 1995, the Company's wholly-owned subsidiary,
CTi Technologies, Inc. ("CTi"), filed an action in the United
States District Court for the District of Arizona against Wayne
K. Pfaff, an individual residing in Texas ("Pfaff"), and
Plastronics Socket Company, Inc., a corporation affiliated with
Pfaff, alleging and seeking a declaratory judgment that two
United States patents issued to Pfaff and relating to certain
burn-in sockets for "leadless" IC packages (the "Pfaff Leadless
Patent") and ball grid array ("BGA") IC packages (the "Pfaff BGA
Patent") (collectively, the "Pfaff Patents") are invalid and are
not infringed by CTi, the products of which include burn-in
sockets for certain "leaded" packages (including Quad Flat Paks)
(the "CTi Leaded Products") and BGA packages (the "CTi BGA
Products") (collectively, the "CTi Products"). Pfaff has filed a
counterclaim alleging that CTi infringes the Pfaff Leadless
Patent and has requested an award of damages; the counterclaim
does not allege infringement of the Pfaff BGA Patent. Pfaff has
also sought a permanent injunction against further infringement
by CTi of the Pfaff Leadless Patent. That action has been stayed
pending resolution of another action, described below, involving
the Pfaff Leadless Patent.
10
<PAGE
In litigation between Wells and Pfaff concerning the Pfaff
Leadless Patent, the United States Court of Appeals for the
Federal Circuit has found all of the individual descriptions of
the invention (the "Claims" of the patent) of the Pfaff Leadless
Patent which were at issue in that case to be invalid. The basis
for the decision of the Court of Appeals was a finding that the
invention covered by the Pfaff Leadless Patent had been "on sale"
for more than one year before the filing of a patent application.
An invention that has been "on sale" for more than one year
before the filing of the patent application may not be patented.
Certain other Claims of the patent were not at issue in the Pfaff
v. Wells case, and their validity was not decided by the Court of
Appeals, because Pfaff did not allege that products of Wells
infringed such Claims. These other Claims include design
elements not incorporated into products of Wells or CTi,
including the use of contact pins formed with a pair of parallel
blades extending from a common base. The United States Supreme
Court has accepted an appeal on the Pfaff v. Wells case, limited
to the question of whether the Pfaff Leadless Patent should have
been held invalid on the basis of the "on sale" bar if Pfaff's
invention was not "fully completed" more than one year before he
filed his patent application. On October 6, 1998, the United
States Supreme Court heard oral argument on the appeal, and could
hand down its decision at any time during the next several
months. The Supreme Court could affirm or reverse the decision
of the Court of Appeals. If the Supreme Court affirms the
decision of the Court of Appeals, the determination of invalidity
of the Claims at issue in the Pfaff v. Wells case will become
final. This determination will be binding with respect to such
Claims in the CTi v. Pfaff action in the District of Arizona.
The reasoning of the Pfaff v. Wells decision, moreover, could
support CTi's position that the remaining Claims of that patent
are invalid. This conclusion is based on the Company's belief
that the invention covered by such remaining Claims was also "on
sale" for more than one year before the date of the application
for the Pfaff Leadless Patent. If the Supreme Court reverses the
decision of the Court of Appeals, the lower courts will then
determine the validity of the Claims of the Pfaff Leadless Patent
at issue on other grounds and will determine whether the products
of Wells infringe on these Claims of the Pfaff Leadless Patent.
The Company believes, based on the advice of counsel, that
CTi and Wells have meritorious defenses against any allegations
of infringement under the Pfaff Patents, and, if necessary, CTi
and Wells will vigorously litigate their positions. There can be
no assurance, however, that the Company, CTi or Wells will
prevail in any pending or future litigation, and a final court
11
<PAGE>
determination that CTi or Wells has infringed the Pfaff Leadless
Patent could have a material adverse effect on the Company. Such
adverse effect could include, without limitation, the requirement
that CTi or Wells pay substantial damages for past infringement
and an injunction against the manufacture or sale in the United
States of such products as are found to be infringing.
12
<PAGE>
Wells Electronics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Condensed and unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
10/4/97 10/4/97
------- -------
<S> <C> <C>
Net sales.............................. $10,205 $32,021
Cost of sales.......................... 3,618 12,005
------- -------
Gross profit........................... 6,587 20,016
Operating expenses..................... 1,966 7,121
Amortization........................... 9 26
------- -------
Income from operations................. 4,612 12,869
Interest expense /(other income), net.. (292) (547)
------- -------
Income (loss) before income taxes...... 4,904 13,416
Provision for income taxes............. 2,046 4,248
------- -------
Net income (loss)...................... $ 2,858 $ 9,168
======= =======
Earnings per share..................... $365.24 $1,171.63
======= =========
Average number of shares............... 7,825 7,825
======= =======
The accompanying notes are an integral part
of the consolidated financial statements.
13
<PAGE>
Wells Electronics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed and unaudited)
(In thousands)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
10/4/97
-------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 9,168
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization................ 1,739
Foreign currency adjustments................. 2
Deferred taxes............................... 433
Changes in operating assets and liabilities:
Accounts receivable........................ (2,232)
Inventory.................................. 466
Prepaid expenses and other current assets.. 8
Other assets............................... 831
Accounts payable........................... 167
Accrued liabilities........................ 3,722
-------
Net cash provided
by operating activities................ 14,304
Cash flows from investing activities:
Capital expenditures............................ (2,861)
-------
Net cash used in investing activities.... (2,861)
Cash flows from financing activities:
Principal payments on debt...................... (1,365)
Net intercompany transfers...................... (9,493)
-------
Net cash used in financing activities.... (10,858)
-------
Net decrease in cash.............................. 585
Cash and cash equivalents at beginning of period.. 784
-------
Cash and cash equivalents at end of period........ $ 1,369
=======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
14
<PAGE>
Wells Electronics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(October 3, 1998 Unaudited)
Note 1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements
have been prepared on the basis of Wells Electronics, Inc.
historical records and do not reflect any adjustments related to
the purchase of Wells by PCD, which occurred on December 26,
1997. This financial data should be read in conjunction with the
audited financial statements and notes thereto for the period
ended December 26, 1997 which are included in the Company's Form
10-K filing.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms "Company" and "PCD," unless
otherwise indicated or the context otherwise requires, refer to
PCD Inc. and its subsidiaries, including Wells Electronics, Inc.
and its subsidiaries ("Wells"). However, all financial
information for periods ended before December 26, 1997, unless
otherwise indicated or the context otherwise requires, is for PCD
Inc. and its subsidiaries, excluding Wells and the subsidiaries
of Wells.
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
NET SALES. Net sales increased 95% to $15.8 million for the
third quarter ended October 3, 1998, from $8.1 million for the
quarter ended September 27, 1997. This change in net sales of
$7.7 million reflects the incorporation of the Wells acquisition
offset by a 21% decline in sales of the Company's (excluding
Wells) previous existing business. This decline is attributable
15
<PAGE>
to lower sales volume of development sockets to Altera and lower
overall sales volume in our industrial product line. Sales
attributable to the acquisition in the third quarter of 1998 were
$9.4 million.
Net sales for the nine months ended October 3, 1998 were $51.1
million, an increase of 137% from the comparable nine-month
period in 1997. This increase in net sales of $29.6 million
reflects the results of the incorporation of the Wells
acquisition and a 4% growth in sales of the Company's (excluding
Wells) previous existing business. Sales attributable to the
acquisition in the first nine months of 1998 were $28.6 million.
The projects recorded as in-process research and development
("IPR&D") are proceeding according to the Company's estimates and
expectations.
GROSS PROFIT. Gross profit increased to $9.2 million for the
third quarter ended October 3, 1998, from $3.9 million for the
quarter ended September 27, 1997. As a percentage of net sales,
gross margin increased to 58.0% for the quarter ended October 3,
1998 from 48.6% for the quarter ended September 27, 1997. The
improvement in the gross profit reflects the integration of the
higher margin burn-in socket product lines from the Wells
acquisition.
For the nine months ended October 3, 1998, gross profit increased
to 57.8% of net sales, or $29.5 million, from 48.3% of net sales,
or $10.4 million for the same period last year. The improvement
in the gross profit reflects the integration of the higher margin
burn-in socket product line from the Wells acquisition.
OPERATING EXPENSES. Operating expenses were $4.8 million, or
30.5% of net sales, for the third quarter ended October 3, 1998,
compared to $1.5 million, or 19.0% of net sales, for the third
quarter ended September 27, 1997. This dollar increase in
operating expenses reflects the additional costs due to the
inclusion of the Wells acquisition as well as the amortization of
intangible assets associated with the Wells acquisition of $1.0
million.
Operating expenses for the nine months ended October 3, 1998 were
$14.8 million, or 29.0% of net sales, compared to $4.3 million or
19.9% of net sales for the nine months ended September 27, 1997.
16
<PAGE>
INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and
other income, net, increased to an expense of $1.4 million in the
third quarter ended October 3, 1998 from income of $0.3 million
in the third quarter ended September 27, 1997. This increase in
interest expense is associated with the debt incurred in
connection with the Wells acquisition.
Interest expense and other income, net was an expense of $7.6
million for the nine months ended October 3, 1998 compared to
$0.8 million income for the same period, last year.
PROVISION FOR INCOME TAXES. The provision for income taxes for
the third quarter ended October 3, 1998 was $1.2 million on pre-
tax income of $3.0 million, or an effective rate of 41.5%. This
compares to 36.9% in the quarter ended September 27, 1997. The
change in the effective rate for income taxes is due to the
application of the appropriate effective tax rates for each of
the state and foreign tax jurisdictions in which the Company
operates.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the quarter ended
October 3, 1998 was $3.8 million, compared to $3.2 million in the
quarter ended September 27, 1997. These funds were sufficient to
fund the capital expenditure requirements for the third quarter
of approximately $1.5 million. The Company currently anticipates
that its capital expenditures for 1998 will be approximately $7
million, which consists primarily of purchased tooling and
equipment required to support the Company's business. The amount
of anticipated capital expenditures will frequently change based
on future changes in business plans and conditions of the Company
and changes in economic conditions.
In December 1997, the Company obtained a Senior Credit Facility
for $90 million from Fleet National Bank and other lenders (the
"Senior Credit Facility") to finance in part the Wells
acquisition. In addition, the Company obtained $25 million in
subordinated debt financing from Emerson Electric Co. ("Emerson")
pursuant to a Subordinated Debenture (the "Debenture") issued to
Emerson.
In April 1998, the Company repaid 100% of the Subordinated
Debenture. During the third quarter, the Company renegotiated
the Senior Credit Facility with Fleet Bank. As a result, the
long-term debt portion of the Senior Credit Facility, which was
17
<PAGE>
originally separated into Term Loan A and Term Loan B, was
combined into a single term loan. The interest rate premium of 50
basis points charged on Term Loan B was eliminated. The Senior
Credit Facility will terminate on or before December 31, 2003.
The Company believes its existing working capital and borrowing
capacity, coupled with the funds generated from the Company's
operations, will be sufficient to fund its anticipated working
capital, capital expenditure and debt payment requirements
through 1999. Because the Company's capital requirements cannot
be predicted with certainty, there can be no assurance that any
additional financing will be available on terms satisfactory to
the Company or not disadvantageous to the Company's stockholders.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that
were written using two digits rather than four to define the
applicable year. If the Company's computer programs with date-
sensitive functions are not Year 2000 compliant, they may
interpret a date using "00" in the year field as the Year 1900
rather than the Year 2000. This misinterpretation could result in
a system failure or miscalculations causing disruptions of
operations, including, among other things, an interruption of
design or manufacturing functions or an inability to process
transactions, send invoices or engage in similar normal business
activities until the problem is corrected.
The Company has identified its Year 2000 risk in three
categories: internal information technology ("IT") systems;
internal non-IT systems, including embedded technology such as
microcontrollers; and external noncompliance by customers and
suppliers.
INTERNAL IT SYSTEMS. The Company utilizes a significant number of
information technology systems across its entire organization,
including applications used in manufacturing, product
development, financial business systems and various
administrative functions. During 1997, the Company reviewed the
Year 2000 issue that encompassed operating and administrative
areas of the Company. The Company found that, with the exception
of the South Bend, Indiana location of Wells-CTI ("Wells-CTI
South Bend"), its information technology systems will be able to
manage and manipulate all material data involving the transition
from the year 1999 to the year 2000 without functional or data
abnormality and without inaccurate results related to such data.
During the past nine months, Wells-CTI South Bend has completed
18
<PAGE>
the modifications and testing of its information technology
systems, and the Company believes that the Wells-CTI South Bend
location is now Year 2000 compliant. The cost of the
modifications and testing at Wells-CTI South Bend was
approximately $90,000. The Company does not have a contingency
plan in place for Year 2000 failures of its internal IT systems.
If the Company has not achieved or does not timely achieve Year
2000 compliance for its major IT systems, the Year 2000 Issue
could have a material adverse effect on the financial condition,
results of operations and business of the Company.
Independent of the Year 2000 Issue and in order to improve access
to business information through common, integrated computing
systems across the Company, PCD began a worldwide information
technology systems replacement project with systems that use
programs from Oracle Corporation. The Company is in the
implementation phase for this system and is expected to be
complete by December 31, 1999.
INTERNAL NON-IT SYSTEMS, INCLUDING EMBEDDED TECHNOLOGY. The
Company is in the data-gathering phase with regard to non-IT
systems including embedded technology such as microcontrollers.
PCD is currently gathering data to assess the impact of the Year
2000 on its non-IT systems such as design, manufacturing, testing
and security, with Year 2000 compliance targeted for April 30,
1999. The Company does not at this time have sufficient data to
estimate the cost of achieving Year 2000 compliance for its non-
IT systems. If the Company is unable to achieve Year 2000
compliance for its major non-IT systems, the Year 2000 Issue
could have a material adverse effect on the financial condition,
results of operations and business of the Company. The Company
does not currently have a contingency plan in place for Year 2000
failures of its internal non-IT systems and embedded technology.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is
in the process of identifying and contacting its material
suppliers, service providers and contractors to determine the
extent of the Company's vulnerability to those third parties'
failure to remedy their own Year 2000 issues. PCD expects to
complete its assessment of that vulnerability by April 30, 1999.
To the extent that responses to Year 2000 readiness inquiries are
unsatisfactory, the Company intends to change suppliers, service
providers or contractors to those who have demonstrated Year 2000
readiness, but the Company cannot assure that it will be
successful in finding such alternative suppliers, service
providers and contractors. The Company does not currently have
19
<PAGE>
any formal information concerning the Year 2000 compliance status
of its customers but has received indications that most of its
customers are working on Year 2000 compliance. If any of the
Company's significant customers and suppliers do not successfully
and timely achieve Year 2000 compliance, and the Company is
unable to replace them with new customers or alternative
suppliers, the Company's financial condition, results of
operations and business could be materially adversely affected.
The above discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance contains forward-
looking statements within the meaning of the Securities Exchange
Act of 1934. See "Forward Looking Information." The Company's
ability to achieve Year 2000 compliance, the level of incremental
costs associated with compliance and the timing of compliance,
could be adversely impacted by, among other things, the
availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and
unanticipated problems identified in the ongoing compliance
review.
20
<PAGE>
PCD Inc.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 to the Company's Condensed Consolidated
Financial Statements (above).
Item 5. Other Information
In August 1998, the Company initiated the process of
closing the Singapore subsidiary, Wells-Pte Ltd., and
the Korean branch of the Japanese subsidiary, Wells-CTI
KK. The Company expects to complete the closure of
these operations in the fourth quarter of 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
21
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PCD INC.
(Registrant)
Dated: November 2, 1998 /s/ John L. Dwight, Jr.
---------------- ---------------------------
John L. Dwight, Jr.
Chairman of the Board, Chief
Executive Officer and
President (Principal Executive
Officer)
Dated: November 2, 1998 /s/ Mary L. Mandarino
---------------- -----------------------------
Mary L. Mandarino
Vice President, Finance and
Administration, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
22
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
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