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 2, 1999 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 22, 1999: 8,561,735
<PAGE>
PCD Inc.
FORM 10-Q
FOR THE QUARTER ENDED
OCTOBER 2, 1999
FORWARD LOOKING INFORMATION
Statements in this report concerning the future revenues,
expenses, 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,
the Company's ability to meet its debt covenants, rapid
technological evolution in the electronics industry, Year 2000
compliance and the like.
In addition, the Company is experiencing unanticipated costs
and other difficulties in connection with the acquisition and
integration of Wells Electronics, Inc. (See Note 7). 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 2, 1999 and
December 31, 1998.
Consolidated Statements of Income for the quarter and nine
months ended October 2, 1999 and October 3, 1998.
Consolidated Statements of Cash Flows for the nine months
ended October 2, 1999 and October 3, 1998.
Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PCD Inc.
CONSOLIDATED BALANCE SHEETS
(Condensed and unaudited)
(In thousands)
<TABLE>
<CAPTION>
10/2/99 12/31/98
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 946 $ 852
Accounts receivable, net.................. 7,059 5,851
Inventory................................. 5,762 5,042
Prepaid expenses and other current assets. 543 643
-------- --------
Total current assets............... 14,310 12,388
Equipment and improvements
Equipment and improvements................ 28,600 25,569
Accumulated depreciation.................. 10,559 7,442
-------- --------
Equipment and improvements, net.............. 18,041 18,127
Deferred tax asset........................... 13,484 14,192
Goodwill..................................... 56,278 58,592
Intangible assets............................ 11,677 12,456
Debt financing fees.......................... 1,366 1,531
Other assets................................. 1,759 1,818
-------- --------
Total assets....................... $116,915 $119,104
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................... $ 11,600 $ 9,700
Current portion of long-term debt......... 8,700 8,400
Accounts payable.......................... 4,504 3,146
Accrued liabilities....................... 2,558 2,981
-------- --------
Total current liabilities.......... 27,362 24,227
Long-term debt, net of current portion....... 31,000 37,600
Accumulated other comprehensive income....... - 146
Stockholders' equity......................... 58,553 57,131
-------- --------
Total liabilities and
stockholders' equity.......... $116,915 $119,104
======== ========
</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
----------------- -----------------
10/2/99 10/3/98 10/2/99 10/3/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales........................... $13,489 $15,786 $39,332 $51,065
Cost of sales....................... 7,184 6,625 20,181 21,572
------- ------- ------- -------
Gross profit........................ 6,305 9,161 19,151 29,493
Operating expenses.................. 3,535 3,761 10,671 11,662
Restructuring charge................ 136 - 136 -
Amortization........................ 1,048 1,047 3,143 3,142
------- ------- ------- -------
Income from operations.............. 1,586 4,353 5,201 14,689
Interest expense /
(other income), net............... 1,149 1,354 3,376 7,643
------- ------- ------- -------
Income before income taxes.......... 437 2,999 1,825 7,046
Provision for income taxes.......... 155 1,246 654 3,003
------- ------- ------- -------
Income before extraordinary item.... 282 1,753 1,171 4,043
Extraordinary item - charge for
early retirement of debt, net of
income tax benefit of $567 - - - 888
------- ------- ------- -------
Net income.......................... $ 282 $ 1,753 $ 1,171 $ 3,155
======= ======= ======= =======
Basic earnings per share:
Income before extraordinary item.. $ 0.03 $ 0.21 $ 0.14 $ 0.54
Extraordinary item................ - -- - (0.12)
------- ------- ------- -------
Net income........................ $ 0.03 $ 0.21 $ 0.14 $ 0.42
======= ======= ======= =======
Diluted earnings per share
Income before extraordinary item $ 0.03 $ 0.19 $ 0.13 $ 0.49
Extraordinary item................ - -- - (0.10)
------- ------- ------- -------
Net income........................ $ 0.03 $ 0.19 $ 0.13 $ 0.39
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding:
Basic.......................... 8,559 8,388 8,507 7,472
======= ======= ======= =======
Diluted........................ 9,030 9,053 9,047 8,173
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
PCD Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed and unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
10/2/99 10/3/98
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,171 $ 3,155
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation................................. 3,218 2,607
Amortization of deferred compensation........ - 39
Amortization of intangible assets............ 3,091 3,181
Amortization of warrant...................... - 2,917
Tax benefit from stock options exercised..... 50 287
Deferred taxes............................... 721 862
Loss on disposition of property and equipment - 22
Changes in operating assets and liabilities:
Accounts receivable........................ (1,292) (1,220)
Inventory.................................. (668) (195)
Prepaid expenses and other current assets.. 121 311
Other assets............................... 70 (822)
Accounts payable........................... 1,235 (977)
Accrued liabilities........................ (467) (2,607)
------- -------
Net cash provided by operating activities 7,250 7,560
Cash flows from investing activities:
Capital expenditures............................ (3,145) (4,162)
------- -------
Net cash used in investing activities.... (3,145) (4,162)
Cash flows from financing activities:
Borrowings of short-term debt................... 1,900 1,100
Payments of long-term debt...................... (6,300) (25,300)
Payments of subordinated debt................... - (25,000)
Proceeds from issuance of warrant............... - 5
Proceeds from issuance of common stock, net..... - 42,565
Amortization of debt financing costs............ 165 183
Exercise of common stock options................ 201 113
------- -------
Net cash used in financing activities.... (4,034) (6,334)
------- -------
Net (decrease) increase in cash................... 71 (2,936)
Effect of exchange rate on cash................... 23 -
Cash and cash equivalents at beginning of period.. 852 3,990
------- -------
Cash and cash equivalents at end of period........ $ 946 $ 1,054
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
PCD Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(October 2, 1999 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. In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair
presentation. This financial data should be read in conjunction
with the audited financial statements and notes thereto for the
year ended December 31, 1998. Certain reclassifications in the
Company's Consolidated Statements of Cash Flows were made to
prior year's nine month amounts to conform with the Annual Report
presentation.
Note 2. NET INCOME PER SHARE
The following tables reconcile net income and weighted
average shares outstanding to the amounts used to calculate basic
and diluted earnings per share for each of the periods ended
October 2, 1999 and October 3, 1998:
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------- --------- -------
<S> <C> <C> <C>
For the quarter ended October 2, 1999
Basic earnings.............................. $ 282,000 8,559,106 $ 0.03
Assumed exercise of options (treasury method) - 470,740 -
---------- --------- ------
Diluted earnings............................ $ 282,000 9,029,846 $ 0.03
========== ========= ======
</TABLE>
7
<PAGE>
<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 nine month period ended October 2, 1999
Basic earnings.............................. $1,171,000 8,507,233 $ 0.14
Assumed exercise of options (treasury method) - 540,175 -
---------- --------- ------
Diluted earnings............................ $1,171,000 9,047,408 $ 0.13
========== ========= ======
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>
For the quarters ended October 2, 1999 and October 3, 1998,
anti-dilutive shares of 159,088 and 64,638, and for the nine
month periods anti-dilutive shares of 127,096 and 108,025,
respectively, have been excluded from the calculation of EPS.
Note 3. INVENTORY
10/2/99 12/31/98
------- --------
(In Thousands)
Inventory:
Raw materials and finished subassemblies $ 4,276 $3,536
Work in process......................... 413 492
Finished goods.......................... 1,073 1,014
------- ------
Total................................. $ 5,762 $5,042
======= ======
<PAGE>
Note 4. COMPREHENSIVE INCOME
The Company's only other comprehensive income is foreign
currency translation adjustments. For the three and nine months
ended October 2, 1999 and October 3, 1998 the Company's total
comprehensive income (in thousands) was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
10/2/99 10/3/98 10/2/99 10/3/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 282 $1,753 $ 1,171 $3,155
Other comprehensive income (loss), net (42) (94) (88) (94)
------ ------ ------- ------
Total comprehensive earnings (loss) $ 240 $1,659 $ 1,083 $3,061
====== ====== ======= ======
</TABLE>
Note 5. NEW ACCOUNTING STANDARDS
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 initially would have been effective for all fiscal quarters
beginning after June 15, 1999. In June 1999, the Financial
Accounting Standards Board released Statement of Financial
Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date
of FAS 133 (FAS 137). FAS 137 defers the effective date of FAS
133 until June 15, 2000. 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 operating performance.
Note 6. LITIGATION
The Company and its subsidiaries are subject to legal
proceedings arising in the ordinary course of business. On the
basis of information presently available and advice received from
legal counsel, it is the opinion of management that the
disposition or ultimate determination of such legal proceedings
will not have a material adverse effect on the Company's
consolidated financial position, its consolidated results of
operations or its consolidated cash flows.
9
<PAGE>
Note 7. RESTRUCTURING CHARGE:
During the third quarter of 1999, the Company recorded a
charge of $136,000 in connection with a previously announced
restructuring program at WELLS-CTI. During the quarter, the
Pennsylvania stamping facility was closed with operations
transferred to Peabody, MA and the Japan subsidiary of WELLS-CTI
was downsized. The $136,000 charge included employee severance
payments and all were paid during the third quarter. Additional
charges are expected to be recorded during the fourth quarter of
1999 as further actions are taken to restructure WELLS-CTI
manufacturing operations. The annualized cost savings from the
restructuring program are expected to be approximately $1.0
million.
Note 8. SEGMENT INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
10/2/99 10/3/98 10/2/99 10/3/98
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
SALES:
Industrial/Avionics......... $ 4,261 $ 4,337 $13,753 $13,784
IC Package interconnect..... 9,228 11,449 25,579 37,281
------- ------- ------- -------
Total sales............... $13,489 $15,786 $39,332 $51,065
======= ======= ======= =======
NET INCOME (loss):
Industrial/Avionics......... $ 478 $ 493 $ 1,825 $ 1,827
IC Package interconnect..... (196) 1,393 (696) 1,396
Corporate activities........ - (133) 42 (68)
------- ------- ------- -------
Total net income.......... $ 282 $ 1,753 $ 1,171 $ 3,155
======= ======= ======= =======
</TABLE>
10/2/99 12/31/98
------- --------
(In thousands)
ASSETS:
Industrial/Avionics..................... $ 8,676 $ 8,960
IC Package interconnect................. 92,758 94,140
Corporate activities.................... 15,481 16,004
-------- --------
Total assets.......................... $116,915 $119,104
======== ========
1
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO THE
QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
NET SALES. Net sales decreased 14.6% to $13.5 million for
the quarter ended October 2, 1999 from $15.8 million for the
quarter ended October 3, 1998 and decreased 23.0% to $39.3
million for the nine months ended October 2, 1999 from $51.1
million for the nine months ended October 3, 1998. This decrease
in sales was primarily due to the lower volume of shipments in
the Company's Wells-CTi division. This division's sales were $9.2
million and $25.6 million for the quarter and nine month periods
ended October 2, 1999, respectively, compared to $11.4 million
and $37.3 million for the same periods last year, respectively.
GROSS PROFIT. Gross profit decreased to $6.3 million for
the quarter and $19.2 million for the nine months ended October
2, 1999. This compares to gross profit of $9.2 million and $29.5
million for the quarter and nine months ended October 3, 1998,
respectively. As a percentage of revenues, gross profit in 1999
decreased to 46.7% and 48.7% for the third quarter and year to
date periods respectively, down from 58.0% and 57.8%,
respectively, during the same periods last year. These decreases
were due to lower sales volume, less favorable product mix,
competitive pricing pressures in segments of the burn-in market,
and the higher costs associated with the introduction of a new
product during the third quarter of 1999.
OPERATING EXPENSES AND AMORTIZATION. Operating expenses
include selling, general and administrative expenses and costs of
product development. Operating expenses decreased 6.0% to $3.5
million for the quarter ended October 2, 1999 from $3.8 million
for the quarter ended October 3, 1998. On a year-to-date basis,
operating expenses decreased 8.5% to $10.7 million for the nine
months ended October 2, 1999 from $11.7 million for the nine
months ended October 3, 1998. This decrease in operating
expenses was a result of the actions taken to reduce expenses in
response to the lower sales volume, specifically the merger of
the Company's Control Systems Interconnect division with the
Company's Industrial/Avionic division and the closure of the
Pennsylvania sales office during the first quarter of 1999. Cost
11
<PAGE>
reductions instituted during the third and fourth quarters of
1998 in the Company's Wells-CTi division also contributed to the
lower operating expenses.
RESTRUCTURING CHARGE. As indicated in "Forward Looking
Information" in this document, the Company is experiencing
unanticipated costs and other difficulties in connection with the
acquisition and integration of Wells Electronics, Inc. and as
such, during the third quarter of 1999, the Company recorded a
charge of $136,000 in connection with a previously announced
restructuring program at WELLS-CTI. During the quarter, the
Pennsylvania stamping facility was closed with operations
transferred to Peabody, MA and the Japan subsidiary of WELLS-CTI
was downsized. The $136,000 charge included employee severance
payments. Additional charges are expected to be recorded during
the fourth quarter of 1999 as further actions are taken to
restructure WELLS-CTI manufacturing operations. The annualized
cost savings from the restructuring program are expected to be
approximately $1.0 million.
INTEREST AND OTHER INCOME (EXPENSE). Interest expense and
other income, net decreased from $7.6 million for the nine months
ended October 3, 1998 to $3.4 million for the nine months ended
October 2, 1999. On a quarterly basis, interest expense and
other income, net decreased to $1.1 million for the three months
ended October 2, 1999 from $1.4 million for the three months
ended October 3, 1998. The quarterly reduction in interest
expense was due to the reduction in bank debt from $61.8 million
at July 4, 1998 to $52.4 million at July 3, 1999. The decrease
in interest expense for the nine month period was due to lower
average debt balances in 1999. The 1998 year-to-date period
included $2.3 million amortization and $600,000 interest expense
associated with the Emerson Debenture which was retired in April
1998.
PROVISION FOR INCOME TAXES. The provision for income taxes
for the quarter ended October 2, 1999 was 35.5% of pretax income
compared to 41.6% of pretax income for the quarter ended October
3, 1998. For the nine months ended October 2, 1999, the
effective tax rate was 35.8% compared to an effective rate of
42.6% for the comparable prior year period. The decrease in the
effective tax rate was due to 1999 losses incurred in our Wells-
CTi KK (Japan) operation which carries a higher effective tax
rate than the combined U.S. Federal/State effective tax rate. In
1998 Japan was profitable during the third quarter and year-to-
date periods.
1
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the nine months
ended October 2, 1999 was $7.3 million compared to $7.6 million
during the nine months ended October 3, 1998. The Company's debt
balance decreased $4.4 million during the nine month period to
$51.3 million from $55.7 million at December 31, 1998. The
balance at October 2, 1999 consists of a $11.6 million revolving
line of credit and a $39.7 million term loan. The Company
currently anticipates that its capital expenditures for 1999 will
be approximately $4.1 million, which consist primarily of
purchased tooling and equipment and expenditures for the recently
installed enterprise resource planning system ("ORACLE") required
to support the Company's business. The amount of these capital
expenditures will frequently change based on future changes in
business plans and conditions of the Company and changes in
economic conditions.
In the past, the Company has experienced difficulty meeting
all of the covenants under its Senior Credit Facility.
Accordingly, during the third quarter of 1999, certain covenants
were amended by agreement between the Company and its lenders
(see Fourth Amendment to the Loan Agreement between Fleet
National Bank and other lenders dated September 29, 1999 -
attached as exhibit 10.44 to this Form 10Q). At October 2, 1999,
the Company was in compliance with its debt covenants. There can
be no assurance, however, that the Company will be able to
maintain compliance with its debt covenants in the future, and
failure to meet such covenants would result in an event of
default under the Senior Credit Facility. To avoid an event of
default the Company would attempt to obtain waivers from its
lenders, restructure the Senior Credit Facility or secure
alternative financing. Under these scenarios, there can be no
assurance that the terms and conditions would be satisfactory to
the Company or not disadvantageous to the Company's stockholders.
Subject to the foregoing, 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.
13
<PAGE>
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. Since 1997, the Company has reviewed
the Year 2000 issue that encompassed operating and administrative
areas 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 ("ORACLE"). As
of August 3, 1999, the Company had successfully completed the
implementation of this system in its United States operations and
our Japanese implementation had been temporarily suspended. The
current Japanese systems are believed to be Year 2000 compliant.
Prior to the implementation of ORACLE, we found that our South
Bend, Indiana location required an update to their internal IT
systems and this was achieved at a cost of approximately $90,000.
The systems that required these updates were replaced by ORACLE.
During 1999, the Company had learned of potential Year 2000
problems within Microsoft Windows NT and Microsoft Office
applications. Microsoft developed patches to correct the
applications affected and the Company completed the
implementation of these patches throughout the organization
during October 1999.
14
<PAGE>
The Company has not developed a contingency plan in place
for Year 2000 failures of its internal IT systems.
INTERNAL NON-IT SYSTEMS, INCLUDING EMBEDDED TECHNOLOGY. The
Company has completed its evaluation of all non-IT systems which
include embedded technology such as microcontrollers, and has
been in contact with all manufacturers of this equipment.
Letters of compliance have been obtained from 100% of the
manufacturers except as noted below.
Payroll time clocks at the Peabody, Phoenix and South Bend
facilities require Year 2000 upgrades, which are available and
scheduled for installation by November 30, at a total cost to the
Company of approximately $10,000.
The Peabody facility telephone system requires a voice mail
upgrade. This is presently being prepared by the local service
provider and scheduled to be installed by November 30, 1999.
This is expected to cost approximately $1,000.
The aforementioned mentioned systems are not mission
critical systems. In addition, time could be summarized manually
if the situation warrants.
The Company does not currently have a contingency plan in
place for Year 2000 failures of its internal non-IT systems and
embedded technology. 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.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The
Company has contacted 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. To date, responses have been obtained from a
majority of all the Company's suppliers - including all key
suppliers - and there have been no non-compliance problems
indicated.
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
15
<PAGE>
that it will be successful in finding such alternative suppliers,
service providers and contractors. The Company presently has
alternate sources of supply on its raw materials and most
purchased components, and maintains a safety stock on single
source components. The Company does not currently have 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 (including alternate
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, management's
expectations, and expected compliance dates 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.
16
<PAGE>
PCD Inc.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the Company's Condensed Consolidated
Financial Statements (above).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.44 Fourth Amendment to Loan Agreement between Fleet
National Bank and other lenders dated September
29, 1999
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
17
<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 16, 1999 /s/ John L. Dwight, Jr.
----------------- ---------------------------
John L. Dwight, Jr.
Chairman of the Board, Chief
Executive Officer and
President (Principal Executive
Officer)
Dated: November 16, 1999 /s/ John J. Sheehan III
----------------- -----------------------------
John J. Sheehan III
Vice President, Finance and
Administration, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
18
<EXHIBIT> EXHIBIT 10.44
FOURTH AMENDMENT OF LOAN AGREEMENT
This FOURTH AMENDMENT OF LOAN AGREEMENT (this "AMENDMENT")
is made as of the 29th day of September, 1999 by and among (a)
PCD INC., a Massachusetts corporation with a principal place of
business at 2 Technology Drive, Peabody, Massachusetts 01960 (the
"BORROWER"), (b) FLEET NATIONAL BANK, a national banking
association organized under the laws of the United States and
having an office at One Federal Street, Boston, Massachusetts
02110 as a Lender and in its capacity as Agent (the "AGENT") for
itself, and for each of the other Lenders who now or hereafter
become parties to the hereinafter defined Loan Agreement and (c)
the other Lenders.
WITNESSETH:
WHEREAS, the Borrower, the Agent and the Lenders are parties
to that certain Loan Agreement, dated as of December 26, 1997, as
amended by that certain First Amendment of Loan Agreement dated
as of July 31, 1998, as further amended by that certain Second
Amendment of Loan Agreement dated as of August 31, 1998 and as
further amended by that certain Third Amendment of Loan Agreement
dated as of March 19, 1999 (as the same may be further amended
from time to time, the "LOAN AGREEMENT") pursuant to the terms of
which the Lenders made (a) a $50,000,000 Secured Term Loan A and
(b) a $20,000,000 Secured Revolving Credit Loan to the Borrower;
and
WHEREAS, capitalized terms used herein and not otherwise
defined herein shall have the meanings set forth in the Loan
Agreement; and
WHEREAS, the Borrower has requested, and the Agent and the
Lenders have agreed to make, amendments to certain financial
definitions and covenants set forth in the Loan Agreement.
NOW THEREFORE, in consideration of the mutual covenants
herein contained and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
Borrower, the Agent and the Lender hereby agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT: The Loan Agreement be and
hereby is amended in the following respects:
<PAGE>
1. The definition of "EBITDA' appearing in Section 1.1
of the Loan Agreement is hereby deleted in its entirety and the
following is substituted therefor:
"EBITDA' means, for any fiscal period, Net Income
(without taking into account any non-cash, nonrecurring
charge taken by the Borrower on or before December 31, 1997
on account of in-process research and development) plus to
the extent accounted for in Net Income, Interest Expense,
taxes, depreciation and amortization, for such period
determined on an accrual and consolidated basis, in
accordance with GAAP. EBITDA shall be calculated (excluding
however, the calculation of EBITDA for the purpose of
determining "Excess Cash Flow", in which case, the
calculation of EBITDA in the definition of "Excess Cash
Flow" shall govern) as follows: for the fiscal quarter of
the Borrower ending on March 31, 1998, EBITDA for the
Borrower fiscal quarter then ending multiplied by four (4),
for the fiscal quarter of the Borrower ending on June 30,
1998, EBITDA for the Borrower fiscal quarter then ending
plus EBITDA for the Borrower fiscal quarter immediately
preceding such quarter, multiplied by two (2), for the
fiscal quarter of the Borrower ending on September 30, 1998,
EBITDA for the Borrower fiscal quarter then ending plus
EBITDA for the two (2) Borrower fiscal quarters immediately
preceding such quarter, multiplied by one and one-third
(1.33) and, thereafter, for the rolling four Borrower fiscal
quarter period consisting of the Borrower fiscal quarter
then ending and the three immediately preceding Borrower
fiscal quarters; provided, that for the purposes of Section
5.1.10(A) only, EBITDA shall be calculated for the Borrower
fiscal quarter then ending plus EBITDA for the Borrower
fiscal quarter immediately preceding such Borrower fiscal
quarter; provided, further, that any extraordinary, non-
recurring charges incurred by the Borrower during the
Borrower's second fiscal quarter in 1998 arising solely in
connection with the acquisition by the Borrower of Wells
Electronics, Inc. on December 26, 1997 (the "Acquisition")
shall not be included in the definition of the term EBITDA
for the purposes of calculating the Borrower's financial
covenants set forth herein for the Borrower's fiscal
quarters ending on March 31, 1999, June 30, 1999 and
September 30, 1999, and provided further, that up to
$300,000 of cash and non-cash charges in the aggregate
incurred or to be incurred by the Borrower to achieve
certain cost savings, including, without limitation,
restructuring the Wells CTI assembly operation,
reducing Borrower's Japanese operations, closing the
Pennsylvania stamping facility and reducing the production
costs of memory sockets shall not be included in the
definition of EBITDA for the purposes of calculating the
Borrower's financial covenants set forth herein for the
Borrower's fiscal quarters ending September 30, 1999 and
December 31, 1999.
2. Section 5.1.10 of the Loan Agreement is hereby
amended by deleting the Borrower fiscal quarters ending
September 30, 1999 through December 31, 2000 and thereafter
2
<PAGE>
and the ratios applicable to each of such quarters, and
replacing same with the following:
"BORROWER FISCAL QUARTER(S) ENDING RATIO
December 31, 2000 1.05:1.00
March 31, 2001 1.10:1.00
June 30, 2001 1.10:1.00
September 30, 2001 and thereafter 1.15:1.00"
3. The Loan Agreement is amended by adding immediately
at the conclusion of Section 5.1.10 a new Section 5.1.10(A)
which shall read as follows:
"Section 5.1.10(A). MINIMUM EBITDA. Maintain at the end of
each fiscal quarter of the Borrower set forth below EBITDA
of not less than the amount set forth below opposite the
fiscal quarter in question, such amount to be the sum -of
EBITDA for the fiscal quarter in question plus EBITDA for
the Borrower's immediately preceding fiscal quarter:
BORROWER FISCAL QUARTER(S) ENDING EBITDA
September 30, 1999 $7,600,000
December 31, 1999 $8,100,000
March 31, 2000 $8,500,000
June 30, 2000 $9,000,000
September 30, 2000 $9,500,000"
4. SECTION 5.1.12(A) is hereby amended in its entirety
to read as follows:
"SECTION 5.1.12(A). MAXIMUM RATIO OF TOTAL INDEBTEDNESS FOR
BORROWED MONEY TO EBITDA. Maintain at the end of each fiscal
quarter of Borrower in each period set forth below a Ratio
of (i) total Indebtedness for Borrowed Money of the Borrower
and its Subsidiaries on a consolidated basis as of the last
day of such fiscal quarter to (ii) EBITDA of less than the
ratio set forth below for such period:
"BORROWER FISCAL QUARTER(S) ENDING RATIO
September 30, 1999 3.25:1.00
December 31, 1999 3.25:1.00
March 31, 2000 and thereafter 3.00:1.00"
3
<PAGE>
II. OTHER AGREEMENTS:
1. All references to the Loan Agreement in any of the
other Financing Documents, are hereby amended to refer to the
Loan Agreement, as amended by this Amendment.
2. All of the terms and provisions of this Amendment are
hereby incorporated in the Loan Agreement and the Loan Agreement
is amended accordingly. In the event that any term or condition
contained in this Amendment conflicts with, or is inconsistent
with, any provision of the Loan Agreement, as amended hereby, the
terms and conditions of this Amendment shall supersede and
control. In all other respects, the provisions of the Loan
Agreement, shall remain in full force and effect, including,
without limitation, any and all additional terms and conditions
therein which are not in conflict with the provisions of this
Amendment.
3. The Borrower hereby restates and repeats all of the
representations, warranties and covenants of the Borrower set
forth in the Loan Agreement and each of the other Financing
Documents to the same extent as if fully set forth herein and the
Borrower hereby certifies that all such representations and
warranties are true and accurate as of date hereof
4. The Borrower hereby further represents, warrants and
confirms that (a) all of the Financing Documents and the terms
thereof are hereby ratified and confirmed, (b) the Loan
Agreement, as amended hereby, and each of the other Financing
Documents are all in full force and effect and evidence the valid
and binding obligation of Borrower enforceable in accordance with
their respective terms and (c) there does not exist (i) any
Default or Event of Default, (ii) any offset or defense against
the payment or performance of any of the Indebtedness or
Obligations of the Borrower evidenced or secured by the Financing
Documents or (iii) any claim or cause of action by the Borrower
against the Agent or any Lender.
III. CONDITIONS PRECEDENT:
1. The provisions of this Fourth Amendment of Loan
Agreement and the commitment of the Lenders to make any
extensions of credit pursuant hereto are subject to the receipt
by the Agent, in form and substance approved by the Agent, of the
following, all of which shall be due to the Agent prior to the
effectiveness of this Fourth Amendment of Loan Agreement except
as where otherwise indicated:
4
<PAGE>
a. This Fourth Amendment of Loan Agreement, duly executed
on behalf of the Borrower by an officer of the Borrower
so authorized.
b. Certificates from an officer of the Borrower certifying
as to the resolutions of the directors of the Borrower
authorizing and approving this Fourth Amendment of Loan
Agreement and each of the other documents, instruments
and other documents to which the Borrower is a party and
certifying as to the names and signatures of each
officer of the Borrower authorized to execute and
deliver this Fourth Amendment of Loan Agreement and/or
such other documents on behalf of the Borrower. The
Agent and the Lenders may rely on such officer's
certificate until the Agent shall receive a further
certificate of the Borrower canceling or amending the
signatures of the officers named in such further
certificate.
c. The payment by the Borrower to the Agent of all of the
Agent's reasonable fees and out-of-pocket expenses of
legal counsel for the Agent incurred in connection with
the preparation, negotiation, execution and delivery of
this Fourth Amendment of Loan Agreement and each of the
agreements, instruments and other documents entered into
in connection herewith and therewith.
d. The payment to the Agent, for the pro rata benefit of
the Lenders, of an amendment fee of $61,800.
[SIGNATURES APPEAR ON NEXT PAGE]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first written, under seal.
WITNESS: AGENT:
FLEET NATIONAL BANK, as Agent
for the Lenders
By: /s/ Scott D. Wheelock
- -------------------- -------------------------
Scott D. Wheelock
Vice President
LENDERS:
FLEET NATIONAL BANK
By: /s/ Scott D. Wheelock
- -------------------- -------------------------
Scott D. Wheelock
Vice President
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Bruce Daniels
- -------------------- -------------------------
Bruce Daniels
Vice President
IMPERIAL BANK
By: /s/ William Sweeney
- -------------------- -------------------------
William Sweeney
Assistant Vice President
EASTERN BANK
By: /s/ Thomas F. Brady
- -------------------- -------------------------
Thomas F. Brady
Vice President
6
<PAGE>
IBJ WHITEHALL BANK & TRUST COMPANY
(formerly IBJ Schroder Bank & Trust
Company)
By: /s/ Patricia McCormack
- -------------------- -------------------------
Patricia McCormack
Director
FIRST UNION NATIONAL BANK
(Successor by merger with
Coresstates Bank, N.A.)
By: /s/ Susan T. Vitale
- -------------------- -------------------------
Susan T. Vitale
Assistant Vice President
FIRST SOURCE FINANCIAL LLP
By: FIRST SOURCE FINANCIAL,
INC., its Agent/Manager
By: /s/ Maureen Ault
- -------------------- -------------------------
Maureen Ault
Vice President
BORROWER:
PCD INC.
By: /s/ John J. Sheehan III
- -------------------- -------------------------
John J. Sheehan III
Chief Financial Officer
7
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> OCT-02-1999
<CASH> 946
<SECURITIES> 0
<RECEIVABLES> 7,408
<ALLOWANCES> 349
<INVENTORY> 5,762
<CURRENT-ASSETS> 14,310
<PP&E> 28,600
<DEPRECIATION> 10,559
<TOTAL-ASSETS> 116,915
<CURRENT-LIABILITIES> 27,362
<BONDS> 31,000
0
0
<COMMON> 85
<OTHER-SE> 58,468
<TOTAL-LIABILITY-AND-EQUITY> 116,915
<SALES> 39,332
<TOTAL-REVENUES> 39,332
<CGS> 20,181
<TOTAL-COSTS> 20,181
<OTHER-EXPENSES> 13,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,376
<INCOME-PRETAX> 1,825
<INCOME-TAX> 654
<INCOME-CONTINUING> 1,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,171
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.13
</TABLE>
