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 April 1, 2000 or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 May 10,
2000: 8,587,351
PCD Inc.
FORM 10-Q
FOR THE QUARTER ENDED
APRIL 1, 2000
FORWARD LOOKING INFORMATION
Statements in this quarterly 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 the Company 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 and the like. In addition, the Company has
experienced unanticipated costs or other difficulties in connection with the
acquisition of Wells Electronics, Inc. The Company's most recent filings with
the Securities and Exchange commission, including its Annual Report on form
10-K, Quarterly Reports on Form 10-Q and Current reports on Form 8-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 April 1, 2000 and December 31, 1999.
Consolidated Statements of Income for the quarters ended April 1, 2000
and April 3, 1999.
Consolidated Statements of Cash Flows for the quarters ended April 1, 2000
and April 3, 1999.
Notes to Condensed Consolidated Financial Statements.
3
PCD Inc.
CONSOLIDATED BALANCE SHEETS
(Condensed and unaudited)
(In thousands)
4/1/00 12/31/99
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ASSETS
Current assets:
Cash and cash equivalents.......................... $ 723 $ 652
Accounts receivable, net........................... 7,631 6,831
Inventory.......................................... 5,402 5,479
Income tax refund receivable....................... 1,416 1,416
Prepaid expenses and other current assets.......... 546 674
-------- --------
Total current assets........................ 15,718 15,052
Equipment and improvements
Equipment and improvements......................... 29,645 29,089
Accumulated depreciation........................... 12,741 11,547
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Equipment and improvements, net....................... 16,904 17,542
Deferred tax asset.................................... 12,252 12,258
Goodwill.............................................. 54,736 55,506
Intangible assets..................................... 11,159 11,418
Debt financing fees................................... 1,548 1,276
Other assets.......................................... 1,631 1,734
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Total assets................................ $113,948 $114,786
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................... $ 12,500 $ 12,000
Current portion of long-term debt.................. 8,900 8,800
Accounts payable................................... 4,685 3,972
Accrued liabilities................................ 3,005 3,190
-------- --------
Total current liabilities................... 29,090 27,962
Long-term debt, net of current portion................ 26,500 28,800
Accumulated other comprehensive (loss)................ (51) (27)
Stockholders' equity.................................. 58,409 58,051
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Total liabilities and stockholders' equity.. $113,948 $114,786
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
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PCD Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Condensed and unaudited)
(In thousands, except per share data)
Quarter Ended
-----------------
4/1/00 4/3/99
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Net sales............................................. $13,905 $12,633
Cost of sales......................................... 7,722 6,379
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Gross profit.......................................... 6,183 6,254
Operating expenses.................................... 3,380 3,523
Amortization.......................................... 1,048 1,048
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Income from operations................................ 1,755 1,683
Interest expense /(other income), net................. 1,218 1,097
------- -------
Income before income taxes............................ 537 586
Provision for income taxes............................ 215 221
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Net income............................................. $ 322 $ 365
======= ======
Net income per share:
Basic............................................ $ 0.04 $ 0.04
======= ======
Diluted.......................................... $ 0.04 $ 0.04
======= ======
Weighted average number of shares outstanding
Basic............................................ 8,578 8,451
===== =====
Diluted.......................................... 9,001 9,053
===== =====
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)
Quarter Ended
-----------------
4/1/00 4/3/99
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Cash flows from operating activities:
Net income........................................... $ 322 $ 365
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation...................................... 1,191 1,062
Amortization of intangible assets................. 1,048 1,048
Amortization of debt financing costs.............. 95 59
Deferred taxes.................................... - 239
Changes in operating assets and liabilities:
Accounts receivable............................. (932) (1,138)
Inventory....................................... 56 (261)
Prepaid expenses and other current assets....... 114 (16)
Other assets.................................... (289) 18
Accounts payable................................ 763 (207)
Accrued liabilities............................. (58) (447)
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Net cash provided by operating activities..... 2,310 722
Cash flows from investing activities:
Capital expenditures................................. (554) (980)
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Net cash used in investing activities......... (554) (980)
Cash flows from financing activities:
Borrowings of short-term debt........................ 500 2,500
Payments of long-term debt........................... (2,200) (2,100)
Exercise of common stock options..................... 36 73
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Net cash provided by
(used in) financing activities............... (1,664) 473
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Net increase in cash................................... 92 215
Effect of exchange rate on cash........................ (21) (34)
Cash and cash equivalents at beginning of period....... 652 852
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Cash and cash equivalents at end of period............. $ 723 $ 1,033
======= =======
The accompanying notes are an integral part
of the consolidated financial statements.
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PCD Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(April 1, 2000 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, 1999.
Note 2. NET INCOME PER SHARE
In accordance with FAS No. 128, 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 April 1, 2000 and
April 3, 1999:
Net Income Per Share
(Loss) Shares Amount
----------- --------- -------
For the period ended April 1, 2000
Basic earnings.............................. $ 322,000 8,578,278 $ 0.04
Assumed exercise of options (treasury method) - 423,026 -
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Diluted earnings............................ $ 322,000 9,001,314 $ 0.04
========== ========= ======
For the period ended April 3, 1999
Basic earnings.............................. $ 365,000 8,450,961 $ 0.04
Assumed exercise of options (treasury method) - 601,998 -
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Diluted earnings............................ $ 365,000 9,052,959 $ 0.04
========== ========= ======
Anti-dilutive shares of 243,603 and 119,556 for the quarters ended April
1, 2000 and April 3, 1999, respectively, have been excluded from the
calculation of EPS.
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Note 3. INVENTORY
4/1/00 12/31/99
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(In Thousands)
Inventory:
Raw materials and finished subassemblies.......... $4,120 $3,803
Work in process................................... 242 308
Finished goods.................................... 1,040 1,368
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Total........................................... $5,402 $5,479
====== ======
Note 4. COMPREHENSIVE INCOME
The Company's only other comprehensive income is foreign currency
translation adjustments. For the three months ended April 1, 2000 and April
3, 1999 the Company's total comprehensive income was as follows:
Three Months Ended
------------------
4/1/00 4/3/99
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(In thousands)
Net earnings..................................... $ 322 $ 365
Other comprehensive loss, net.................... (14) (32)
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Total comprehensive earnings................ $ 308 $ 333
======= =======
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 believes FAS
133 will not have any material impact on its financial position, results of
operations and cash flows.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
8
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to
have a material impact on the Company's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the staff's view in applying generally
accepted accounting principles to selected revenue recognition issues. The
application of the guidance in SAB 101 will be required in the Company's first
quarter of the fiscal year 2001. The effects of applying this guidance will
be reported as a cumulative effect adjustment resulting from a change in
accounting principle. The Company does not expect the application to have a
material effect on their financial statements. However, the final evaluation
of SAB 101 is not yet complete.
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.
Note 7. SEGMENT INFORMATION:
THREE MONTHS ENDED
------------------
4/1/00 4/3/99
(In thousands)
SALES:
Industrial/Avionics............................. $ 4,843 $ 4,941
IC Package interconnect......................... 9,062 7,692
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Total sales................................... $ 13,905 $ 12,633
======== ========
NET INCOME (loss):
Industrial/Avionics............................. $ 573 $ 757
IC Package interconnect......................... (246) (427)
Corporate activities............................ (5) 35
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Total net income.............................. $ 322 $ 365
======== ========
4/1/00 12/31/99
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(In thousands)
ASSETS:
Industrial/Avionics............................. $ 9,199 $ 9,269
IC Package interconnect......................... 89,414 90,004
Corporate activities............................ 15,335 15,513
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Total assets.................................. $113,948 $114,786
======== ========
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 1, 2000 COMPARED TO THE QUARTER ENDED APRIL 3, 1999
NET SALES. Net sales of $13.9 million for the quarter ended April 1, 2000
increased by $1.3 million or 10.1% from net sales of $12.6 million during the
prior year quarter. The increase in sales was due to higher sales in the I/C
package interconnect business resulting in part from the recovery in the
semiconductor industry that began in 1999.
GROSS PROFIT. Gross profit was $6.2 million for the quarter ended April 1,
2000 as compared with $6.3 million during the prior year quarter. As a
percentage of revenue, gross profit was 44.5% during the quarter as compared
with 49.5% during the prior year quarter. The decline in dollar and percentage
terms during 2000 was due to a combination of selling price pressure and a
shift in product mix within certain segments of the I/C package interconnect
business.
OPERATING EXPENSES. Operating expenses include selling, general and
administrative expenses and costs of product development. Operating expenses
decreased to $3.4 million during the quarter ended April 1, 2000 from $3.5
million during the prior year quarter. The decrease was due primarily to
specific cost reductions at the Wells-CTI division implemented during 1999.
INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and other income, net
during the quarter ended April 1, 2000 was $1.2 million as compared with $1.1
million during the prior year quarter. The increase in 2000 was due to higher
borrowing costs, which were partially offset by lower debt balances.
PROVISION FOR INCOME TAXES. The provision for income taxes during the quarter
ended April 1, 2000 was 40% as compared with a provision of 38% during the
prior year quarter. The increase in 2000 is due to a projected profitable
Japanese subsidiary in 2000, which bears a higher tax rate than the Company's
U.S subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the quarter ended April 1,
2000 was $2.3 million compared to $0.7 million during the prior year quarter.
During the quarter, the Company reduced net debt by $1.7 million to $47.9
million from $49.6 million at December 31, 1999. The balance at April 1, 2000
consists of $12.5 million outstanding under the revolving line of credit and a
term loan balance of $35.4 million. Capital expenditures during the quarter
were $554,000 and are projected to be approximately $4.4 million for the year.
Capital expenditures consist primarily of purchased tooling and equipment to
support the Company's business. The amount of capital expenditures will
frequently change based on future changes in business plans, conditions of the
Company and changes in economic conditions.
The Company has experienced difficulty meeting all of the covenants under
its Senior Credit Facility. In March 2000, the Company obtained from its
lenders a waiver of compliance with certain covenants for the fourth quarter
10
of 1999. At the same time, certain covenants were amended by agreement
between the Company and its lenders through June 30, 2000. In conjunction
with the March 2000 agreement, the Company issued warrants to its lenders
covering a total of 203,949 shares of Common Stock at an exercise price of
$4.90 per share. The warrants are only exercisable if the Company does not
obtain at least $10 million of subordinated debt or other capital infusions
("Junior Capital") junior to loans under the Senior Credit Facility by June
30, 2000, or by June 30, 2000 has not entered into definitive agreements
permitting repayment of amounts outstanding under the Senior Credit Facility
by December 31, 2000. In addition, if the Company does not obtain the Junior
Capital by April 30, 2000, the Company on May 1, 2000 would pay the lenders a
fee of 0.25% of the sum of the total outstanding principal balance under the
Term Loan plus the Revolving Credit Loan Commitment. The fee would be payable
each quarter thereafter until the Junior Capital is obtained.
At April 1, 2000, 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 2000.
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 THE 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 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
11
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 have been found 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 applied the supplemental software Microsoft
developed for its Microsoft Windows NT and Microsoft Office applications at no
additional cost to the Company.
INTERNAL NON-IT SYSTEMS, INCLUDING EMBEDDED TECHNOLOGY. During 1999, the
Company completed its evaluation of all non-IT systems which included embedded
technology such as microcontrollers, and had been in contact with all
manufacturers of this equipment. As a result of this evaluation, the Company
upgraded its payroll time clocks at the Peabody, Phoenix and South Bend
facilities at a cost of approximately $20,000 and also upgraded the Peabody
facility's telephone voice mail system at a cost of approximately $6,000.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. During 1999, the
Company 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. These suppliers, service
providers and contractors have incurred no problems with their own Year 2000
issues that impacted the Company.
12
PART II
OTHER INFORMATION
Item 1. Legal Proceeding
See Note 6 to the Company's Condensed Consolidated
Financial Statements (above).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
NONE
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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: May 11, 2000 /s/ John L. Dwight, Jr.
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John L. Dwight, Jr.
Chairman of the Board, Chief
Executive Officer and
President (Principal Executive
Officer)
Dated: May 11, 2000 /s/ John J. Sheehan III
------------ ------------------------------
John J. Sheehan III
Vice President, Finance and
Administration, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
14