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 July 4, 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
July 22, 1998: 8,363,932
<PAGE>
PCD Inc.
FORM 10-Q
FOR THE QUARTER ENDED
JULY 4, 1998
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 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 July 4, 1998 and
December 31, 1997.
Consolidated Statements of Income for the quarter and six
months ended July 4, 1998 and June 28, 1997.
Consolidated Statements of Cash Flows for the six months
ended July 4, 1998 and June 28, 1997.
Notes to Condensed Consolidated Financial Statements.
WELLS ELECTRONICS, INC.
Consolidated Statements of Income for the quarter and six
months ended July 5, 1997.
Consolidated Statements of Cash Flows for the six months
ended July 5, 1997.
Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PCD Inc.
CONSOLIDATED BALANCE SHEETS
(Condensed and unaudited)
(In thousands)
<TABLE>
<CAPTION>
7/4/98 12/31/97
------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 1,677 $ 3,990
Accounts receivable, net.................. 6,797 6,804
Inventory................................. 4,840 4,796
Prepaid expenses and other current assets. 713 1,135
-------- --------
Total current assets............... 14,027 16,725
Equipment and improvements
Equipment and improvements................ 23,383 20,695
Accumulated depreciation.................. 6,566 4,852
-------- --------
Equipment and improvements, net.............. 16,817 15,843
Deferred tax asset........................... 15,277 15,335
Goodwill..................................... 60,176 61,718
Intangible assets............................ 12,929 13,539
Debt financing fees.......................... 1,672 1,800
Other assets................................. 1,798 1,632
-------- --------
Total assets....................... $122,696 $126,592
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion
of long-term debt........................ $ 16,300 $ 17,700
Accounts payable.......................... 2,878 4,213
Accrued liabilities....................... 4,096 7,444
-------- --------
Total current liabilities.......... 23,274 29,357
Long-term debt, net of current portion....... 45,495 65,300
Subordinated debenture - related party....... - 22,903
Minority interest............................ 37 37
Stockholders' equity......................... 53,890 8,995
-------- --------
Total liabilities and
stockholders' equity.......... $122,696 $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 Six Months Ended
----------------- ----------------
7/4/98 6/28/97 7/4/98 6/28/97
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales........................... $18,553 $7,233 $35,279 $13,450
Cost of sales....................... 7,706 3,726 14,947 6,990
------- ------ ------- -------
Gross profit........................ 10,847 3,507 20,332 6,460
Operating expenses.................. 4,139 1,392 7,901 2,748
Amortization........................ 1,024 - 2,095 -
------- ------ ------- -------
Income from operations.............. 5,684 2,115 10,336 3,712
Interest expense /
(other income), net............... 1,627 (275) 6,289 (536)
------- ------ ------- -------
Income before income taxes.......... 4,057 2,390 4,047 4,248
Provision for income taxes.......... 1,740 886 1,757 1,569
------- ------ ------- -------
Income before extraordinary item.... 2,317 1,504 2,290 2,679
Extraordinary item - charge for
early retirement of debt, net of
income tax benefit of $567 (Note 3) 888 - 888 -
------- ------ ------- -------
Net income.......................... $ 1,429 $1,504 $ 1,402 $ 2,679
======= ====== ======= =======
Basic earnings per share:
Income before extraordinary item.. $ 0.29 $ 0.25 $ 0.33 $ 0.45
Extraordinary item................ $ (0.11) $ -- $ (0.13) $ --
------- ------ ------- -------
Net income........................ $ 0.18 $ 0.25 $ 0.20 $ 0.45
======= ====== ======= =======
Diluted earnings per share
Income before extraordinary item $ 0.27 $ 0.23 $ 0.30 $ 0.41
Extraordinary item................ $ (0.10) $ -- $ (0.12) $ --
------- ------ ------- -------
Net income........................ $ 0.17 $ 0.23 $ 0.18 $ 0.41
======= ====== ======= =======
Weighted average number of
common and common equivalent
shares outstanding:
Basic.......................... 7,888 5,929 7,021 5,908
======= ====== ======= =======
Diluted........................ 8,597 6,602 7,739 6,600
======= ====== ======= =======
</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>
Six Months Ended
------------------
7/4/98 6/28/97
------ -------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,402 $ 2,679
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation................................. 1,714 752
Amortization of deferred compensation........ 28 29
Amortization of intangible assets............ 2,314 -
Amortization of warrant...................... 2,917 -
Tax benefit from stock options exercised..... 19 286
Deferred taxes............................... 58 -
Changes in operating assets and liabilities:
Accounts receivable........................ 7 (1,383)
Inventory.................................. (44) (303)
Prepaid expenses and other current assets.. 422 1
Other assets............................... (200) (23)
Accounts payable........................... (1,335) (138)
Accrued liabilities........................ (3,348) (468)
------- -------
Net cash provided by operating activities 3,954 1,432
Cash flows from investing activities:
Capital expenditures............................ (2,688) (949)
------- -------
Net cash used in investing activities.... (2,688) (949)
Cash flows from financing activities:
Payments of short-term debt..................... (1,500) -
Payments of long-term debt...................... (19,705) -
Payments of subordinated debt................... (25,000) -
Proceeds from issuance of warrant............... 5 -
Proceeds from issuance of common stock, net..... 42,567 -
Exercise of common stock options................ 54 129
------- -------
Net cash (used in) provided by financing
activities............................. (3,579) 129
------- -------
Net (decrease) increase in cash................... (2,313) 612
Cash and cash equivalents at beginning of period.. 3,990 20,529
------- -------
Cash and cash equivalents at end of period........ $ 1,677 $21,141
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
PCD Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(July 4, 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 July
4, 1998, the Company was a variable rate payer of 5.6875% and
received a fixed rate of 5.72% on notional amount of $35,000,000.
The fair value at July 4, 1998, was an unfavorable $980.
Note 3. EXTRAORDINARY ITEM
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 six
month periods ended July 4, 1998 and June 28, 1997:
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------- --------- -------
<S> <C> <C> <C>
For the quarter ended July 4, 1998
Income before extraordinary item............ $2,317,000 7,887,993 $ 0.29
Assumed exercise of options (treasury method) - 708,995 -
---------- --------- ------
Diluted income before extraordinary item.... $2,317,000 8,596,988 $ 0.27
========== ========= ======
Extraordinary item.......................... $ (888,000) 7,887,993 $(0.11)
Assumed exercise of options (treasury method) - 708,995 -
---------- --------- ------
Diluted extraordinary item.................. $ (888,000) 8,596,988 $(0.10)
========== ========= ======
Net income.................................. $1,429,000 7,887,993 $ 0.18
Assumed exercise of options (treasury method) - 708,995 -
---------- --------- ------
Diluted net income.......................... $1,429,000 8,596,988 $ 0.17
========== ========= ======
For the quarter ended June 28, 1997
Basic earnings.............................. $1,504,000 5,929,476 $ 0.25
Assumed exercise of options (treasury method) - 672,205 -
---------- --------- ------
Diluted earnings............................ $1,504,000 6,601,681 $ 0.23
========== ========= ======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------- --------- -------
<S> <C> <C> <C>
For the six month period ended July 4, 1998
Income before extraordinary item............ $2,290,000 7,021,457 $ 0.33
Assumed exercise of options (treasury method) - 717,369 -
---------- --------- ------
Diluted income before extraordinary item.... $2,290,000 7,738,826 $ 0.30
========== ========= ======
Extraordinary item.......................... $ (888,000) 7,021,457 $(0.13)
Assumed exercise of options (treasury method) - 717,369 -
---------- --------- ------
Diluted extraordinary item.................. $ (888,000) 7,738,826 $(0.12)
========== ========= ======
Net income.................................. $1,402,000 7,021,457 $ 0.20
Assumed exercise of options (treasury method) - 717,369 -
---------- --------- ------
Diluted net income.......................... $1,402,000 7,738,826 $ 0.18
========== ========= ======
For the six month period ended June 28, 1997
Basic earnings.............................. $2,679,000 5,907,508 $ 0.45
Assumed exercise of options (treasury method) - 692,536 -
---------- --------- ------
Diluted earnings............................ $2,679,000 6,600,044 $ 0.41
========== ========= ======
</TABLE>
Note 5. INVENTORY
<TABLE>
<CAPTION>
7/4/98 12/31/97
------ --------
(In Thousands)
<S> <C> <C>
Inventory:
Raw materials and finished subassemblies $3,377 $3,387
Work in process......................... 450 532
Finished goods.......................... 1,013 877
------ ------
Total................................. $4,840 $4,796
====== ======
</TABLE>
9
<PAGE>
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 six month periods ended July 4, 1998,
comprehensive income was $1,474,000 and $1,401,000, respectively.
For the three and six month periods ended June 28, 1997,
comprehensive income was $1,504,000 and $2,679,000, respectively.
The Company's other comprehensive income consists solely of
cumulative translation adjustments.
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. CURRENT EVENT
On April 22, 1998, the Company completed a public offering
of 2,000,000 shares of Common Stock at $20 per share. On May 6,
1998, pursuant to the exercise of the Underwriters' over-
allotment option, the Company sold an additional 300,000 shares
of Common Stock at $20 per share. The proceeds of the offering
were used to pay off the $25 million subordinated debenture and a
portion of the Senior Bank financing.
10
<PAGE>
Note 8. 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.
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
11
<PAGE>
filed his patent application. 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
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 Six Months Ended
------------- ----------------
7/5/97 7/5/97
------- -------
<S> <C> <C>
Net sales.............................. $12,079 $21,816
Cost of sales.......................... 4,811 8,387
------- -------
Gross profit........................... 7,268 13,429
Operating expenses..................... 2,577 4,618
Amortization........................... 145 291
------- -------
Income from operations................. 4,546 8,520
Interest expense /(other income), net.. 4 8
------- -------
Income (loss) before income taxes...... 4,542 8,512
Provision for income taxes............. 1,230 2,202
------- -------
Net income (loss)...................... $ 3,312 $ 6,310
======= =======
Earnings per share..................... $423.26 $806.39
======= =======
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>
Six Months Ended
----------------
7/5/97
-------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,310
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization................ 1,119
Foreign currency adjustments................. 277
Deferred taxes............................... 433
Changes in operating assets and liabilities:
Accounts receivable........................ (3,588)
Inventory.................................. 215
Prepaid expenses and other current assets.. (221)
Other assets............................... 829
Accounts payable........................... 236
Accrued liabilities........................ 2,921
-------
Net cash provided
by operating activities................ 8,531
Cash flows from investing activities:
Capital expenditures............................ (2,090)
-------
Net cash used in investing activities.... (2,090)
Cash flows from financing activities:
Principal payments on debt...................... (1,352)
Net intercompany transfers...................... (5,630)
-------
Net cash used in financing activities.... (6,982)
-------
Net decrease in cash.............................. (541)
Cash and cash equivalents at beginning of period.. 784
-------
Cash and cash equivalents at end of period........ $ 243
=======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
14
<PAGE>
Wells Electronics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(July 4, 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.
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED JULY 4, 1998 COMPARED TO THE QUARTER
AND SIX MONTHS ENDED JUNE 28, 1997
NET SALES. Net sales increased 157% to $18.6 million for the
quarter ended July 4, 1998, from $7.2 million for the quarter
ended June 28, 1997. This change in net sales of $11.4 million
reflects the results of the incorporation of the Wells and an 8%
growth in revenue of the Company's (excluding Wells) pre-
acquisition business. Sales attributable to the acquisition in
the second quarter of 1998 were $10.7 million.
15
<PAGE>
Net sales for the six months ended July 4, 1998 were $35.3
million, an increase of 162% from the comparable six month period
in 1997. This increase in net sales of $21.8 million reflects the
results of the incorporation of the Wells acquisition and a 16%
growth in sales of the Company's (excluding Wells) previous
existing business. Sales attributable to the acquisition in the
first six months of 1998 were $19.7 million. The technologies
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 $10.8 million for the
quarter ended July 4, 1998, from $3.5 million for the quarter
ended June 28, 1997. As a percentage of net sales, gross margin
increased to 58.5% for the quarter ended July 4, 1998 from 48.5%
for the quarter ended June 28, 1997. The improvement in the gross
profit reflects the integration of the higher margin burn-in
socket product line from the Wells acquisition.
For the six months ended July 4, 1998, gross profit increased to
57.6% of net sales, or $20.3 million, from 48.0% of net sales, or
$6.5 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 $5.2 million, or
27.8% of net sales, for the quarter ended July 4, 1998, compared
to $1.4 million, or 19.2% of net sales, for the quarter ended
June 28, 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 six months ended July 4, 1998 were
$10.0 million, or 28.3% of net sales, compared to $2.7 million or
20.4% of net sales for the six months ended June 28, 1997.
INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and
other income, net, increased to an expense of $1.6 million in the
quarter ended July 4, 1998 from income of $0.3 million in the
quarter ended June 28, 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 $6.3
million for the six months ended July 4, 1998 compared to $0.5
million income for the same period, last year.
16
<PAGE>
PROVISION FOR INCOME TAXES. The provision for income taxes for
the quarter ended July 4, 1998 was $1.7 million on pre-tax income
of $4.1 million, or an effective rate of 43%. This compares to
37% in the quarter ended June 28, 1997. The change in the
effective rate income taxes is due to the application of the
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
July 4, 1998 was $2.4 million, compared to $0.9 million in the
quarter ended June 28, 1997. These funds were sufficient to fund
the capital expenditure requirements for the second quarter of
approximately $1.9 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 these 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
"Subordinated Debenture") issued to Emerson.
On April 22, 1998, the Company completed a public offering
of 2,000,000 shares of Common Stock at $20 per share and with the
net proceeds, repaid 100% of the Subordinated Debenture and a
portion of the outstanding balance on its Senior Credit Facility.
On May 6, 1998, pursuant to the exercise of the Underwriters'
over-allotment option, the Company sold an additional 300,000
shares of Common Stock at $20 per share. The net proceeds from
the sale these shares were used to pay down an additional portion
of the Senior Credit Facility. As the Subordinated Debenture and
all outstanding interest was repaid prior to December 31, 1998,
375,000 shares of the 525,000 share Common Stock Purchase Warrant
issued in connection with the Subordinated Debenture will not
become exercisable.
In addition to the above financing transactions, the Company
used $1.5 million of its available cash to pay down a portion of
17
<PAGE>
the Revolving Line of Credit. The balance of this credit facility
at the end of the second quarter was $11.5.
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.
18
<PAGE>
PCD Inc.
PART II
OTHER INFORMATION
Item 1. Legal Proceeding
See Note 8 to the Company's Condensed Consolidated
Financial Statements (above).
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company on
June 5, 1998, the following votes were taken:
Two directors were elected to hold office for a three
year term expiring in the year 2001.
<TABLE>
<CAPTION>
Shares Voted Shares
------------------- not
Director For Withheld voted
----------------- --------- -------- -------
<S> <C> <C> <C>
C. Wayne Griffith 5,669,389 18,600 362,693
John E. Stuart 5,669,389 18,600 362,693
</TABLE>
The following directors will continue in office until
the years specified:
Term expires
------------
John L. Dwight, Jr. 1999
Theodore C. York 1999
Hal F. Faught 2000
The 1998 Employee Stock Purchase Plan was approved (a
copy has been previously filed and is incorporated in
this report by reference):
Shares Voted Abstentions
------------------------------ and broker
For Against Withheld non-votes
--------- ------- -------- -----------
5,652,239 4,600 31,150 362,693
1
<PAGE>
Item 5. OTHER INFORMATION
On June 5, 1998, the Company's wholly-owned
subsidiary, PCD Control Systems, Inc. change its name
to PCD Control Systems Interconnect, Inc. On July 31,
1998, the Company's wholly-owned Subsidiary, CTi
Technologies, Inc. was merged into Wells Electronics,
Inc. and concurrently Wells Electronics, Inc. changed
its name to WELLS-CTI, Inc.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on
January 9, 1998 and amended and filed on March 11 and 24,
and April 20, 1998. This report included: a) a description
of the Company's acquisition on December 26, 1997 of Wells
Electronics, Inc., b) the Financial Statements of Wells
Electronics, Inc., c) Pro Forma Condensed Consolidated
Statements of Operations for the Year Ended December 31,
1997, and d) information pertaining to the financing
obtained to finance the acquisition.
20
<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: August 3, 1998 /s/ John L. Dwight, Jr.
-------------- ---------------------------
John L. Dwight, Jr.
Chairman of the Board, Chief
Executive Officer and
President (Principal Executive
Officer)
Dated: August 3, 1998 /s/ Mary L. Mandarino
-------------- -----------------------------
Mary L. Mandarino
Vice President, Finance and
Administration, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
21
<EXHIBIT> EXHIBIT 21.1
SUBSIDIARIES OF PCD INC.
PCD Control Systems Interconnect, Inc., a Massachusetts
corporation
PCD USVI, Inc., a United States Virgin Islands corporation
WELLS-CTI, Inc., an Indiana corporation
SUBSIDIARIES OF WELLS-CTI, INC.
Wells-CTI Kabushiki Kaisha, a Japanese corporation
Wells International Corporation, Inc., an Indiana corporation
SUBSIDIARIES OF WELLS INTERNATIONAL CORPORATION, INC.
Wells Electronics Asia Pte. Ltd., a Singapore limited
liability company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY TO REFERENCE TO SUCH FINANCIAL INFORMATION
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-04-1998
<CASH> 1,677
<SECURITIES> 0
<RECEIVABLES> 7,113
<ALLOWANCES> 316
<INVENTORY> 4,840
<CURRENT-ASSETS> 14,027
<PP&E> 23,383
<DEPRECIATION> 6,566
<TOTAL-ASSETS> 122,696
<CURRENT-LIABILITIES> 23,274
<BONDS> 45,495
0
0
<COMMON> 84
<OTHER-SE> 53,806
<TOTAL-LIABILITY-AND-EQUITY> 122,696
<SALES> 35,279
<TOTAL-REVENUES> 35,279
<CGS> 14,947
<TOTAL-COSTS> 14,947
<OTHER-EXPENSES> 9,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,621
<INCOME-PRETAX> 4,047
<INCOME-TAX> 1,757
<INCOME-CONTINUING> 2,290
<DISCONTINUED> 0
<EXTRAORDINARY> (888)
<CHANGES> 0
<NET-INCOME> 1,402
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.18
</TABLE>
