-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHjSmqQxMHcrsHayrXAsV9iHJG8OefNS9QIGXheNYVTEf6gWP8+3XJClXdfaMY0V ZMKRot5t/CxXzi5ENdbUOg== 0001007594-98-000022.txt : 19981103 0001007594-98-000022.hdr.sgml : 19981103 ACCESSION NUMBER: 0001007594-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PCD INC CENTRAL INDEX KEY: 0001007594 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 042604950 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27744 FILM NUMBER: 98735874 BUSINESS ADDRESS: STREET 1: TWO TECHNOLOGY DR STREET 2: CENTENNIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 5085328800 MAIL ADDRESS: STREET 1: 2 TECHNOLOGY DRIVE CITY: PEABODY STATE: MA ZIP: 01960 10-Q 1 AUDIT LETTER 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 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 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 PCD Inc. CONSOLIDATED BALANCE SHEETS (Condensed and unaudited) (In thousands)
10/3/98 12/31/97 ------- -------- 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 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 PCD Inc. CONSOLIDATED STATEMENTS OF INCOME (Condensed and unaudited) (In thousands, except per share data)
Quarter Ended Nine Months Ended ----------------- ----------------- 10/3/98 9/27/97 10/3/98 9/27/97 ------- ------- ------- ------- 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 ======= ====== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 5 PCD Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed and unaudited) (In thousands)
Nine Months Ended ------------------ 10/3/98 9/27/97 ------- ------- 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 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 6 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 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:
Per Share Net Income Shares Amount ----------- --------- ------- 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 ========== ========= ======
8
Per Share Net Income Shares Amount ----------- --------- ------- 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 ========== ========= ======
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
10/3/98 12/31/97 ------- -------- (In Thousands) Inventory: Raw materials and finished subassemblies $3,458 $3,387 Work in process......................... 545 532 Finished goods.......................... 962 877 ------ ------ Total................................. $4,965 $4,796 ====== ======
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 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 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 Wells Electronics, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Condensed and unaudited) (In thousands, except share data)
Quarter Ended Nine Months Ended ------------- ----------------- 10/4/97 10/4/97 ------- ------- 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 Wells Electronics, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed and unaudited) (In thousands)
Nine Months Ended ----------------- 10/4/97 ------- 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 =======
The accompanying notes are an integral part of the consolidated financial statements. 14 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 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 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 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 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 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 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 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 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY TO REFERENCE TO SUCH FINANCIAL INFORMATION 1,000 9-MOS DEC-31-1998 OCT-03-1998 1054 0 8012 326 4965 14418 24833 7457 122344 26785 39700 0 0 84 55738 122344 51065 51065 21572 21572 14804 0 7643 7046 3003 4043 0 888 0 3155 0.49 0.39
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